Leadership Lessons

Your Product May Be Excellent, But Is There A Market For It?

July 24, 2019 by Nagesh Belludi 1 Comment

Akio Morita, the visionary co-founder of Sony, liked to tell a story about recognizing opportunities and shaping them into business concepts.

Two shoe salesmen … find themselves in a rustic backward part of Africa. The first salesman wires back to his head office: “There is no prospect of sales. Natives do not wear shoes!” The other salesman wires: “No one wears shoes here. We can dominate the market. Send all possible stock.”

Morita, along with his co-founder Masaru Ibuka, was a genius at creating consumer products for which no obvious demand existed, and then generating demand for them. Sony’s hits included such iconic products as a hand-held transistor radio, the Walkman portable audio cassette player, the Diskman portable compact disk player, and the Betamax videocassette recorder.

Products Lost in Translation

As the following case studies will illustrate, many companies haven’t had Sony’s luck in launching products that can stir up demand.

In each case in point, deeply ingrained cultural attitudes affected how consumers failed to embrace products introduced into their respective markets.

Case Study #1: Nestlé’s Paloma Iced Tea in India

Marketing and Product Introduction Failure: Nestle's Paloma Iced Tea in India When Swiss packaged food-multinational Nestlé introduced Paloma iced tea in India in the ’80s, Nestlé’s market assessment was that the Indian beverage market was ready for an iced tea variety.

Sure thing, folks in India love tea. They consume it multiple times a day. However, they must have it hot—even in the heat of the summer. Street-side tea vendors are a familiar sight in India. Huddled around the chaiwalas are patrons sipping hot tea and relishing a savory samosa or a saccharine jalebi.

It’s no wonder, then, that, despite all the marketing efforts, Paloma turned out to be a debacle. Nestlé withdrew the product within a year.

Case Study #2: Kellogg’s Cornflakes in India

The American packaged foods multinational Kellogg’s failed in its initial introduction of cornflakes into the Indian market in the mid ’90s. Kellogg’s quickly realized that its products were alien to Indians’ consumption habits—accustomed to traditional hot, spicy, and heavy grub, the Indians felt hungry after eating a bowl of sweet cornflakes for breakfast. In addition, they poured hot milk over cornflakes rendering them soggy and less appetizing.

Case Study #3: Oreo Cookies in China

Marketing and Product Introduction Case Study: Oreo Green-tea Ice Cream Cookies in China When Kraft Foods, launched Oreo in China in 1996, America’s best-loved sandwich cookie didn’t fare very well. Executives in Kraft’s Chicago headquarters expected to just drop the American cookie into the Chinese market and watch it fly off shelves.

Chinese consumers found that Oreos were too sweet. The ritual of twisting open Oreo cookies, licking the cream inside, and then dunking it in milk before enjoying them was considered a “strangely American habit.”

Not until Kraft’s local Chinese leaders developed a local concept—a wafer format in subtler flavors such as green-tea ice cream—did Oreo become popular.

Idea for Impact: Your expertise may not translate in unfamiliar and foreign markets

In marketing, if success is all about understanding the consumers, you must be grounded in the reality of their lives to be able to understand their priorities.

Don’t assume that what makes a product successful in one market will be a winning formula in other markets as well.
Make products resonate with local cultures by contextualizing the products and tailoring them for local preferences.
Use small-scale testing to make sure your product can sway buyers.

Microsoft’s Resurgence Story: Book Summary of CEO Satya Nadella’s ‘Hit Refresh’

July 10, 2019 by Nagesh Belludi Leave a Comment

Leader as Sense-Maker and Cultural Curator

Microsoft CEO Satya Nadella is an exemplar of a leader as sense-maker. He has revitalized how Microsoft’s strategy, mission, and culture connect people, products, and services—inside and outside his company.

Nadella has a success story to tell, and his Hit Refresh: The Quest to Rediscover Microsoft’s Soul and Imagine a Better Future for Everyone (2017, with two co-authors) highlights how he is a different kind of leader transforming Microsoft into a different kind of company.

Hit Refresh‘s broad objective is to lay out a vision for the future of the company. The book is aimed at people who work at or with Microsoft. Many employees were given a special imprint of book with Nadella’s faux-handwritten annotations in the margins and highlighted snippets.

The book’s narrative arc shifts from a personal memoir to a management how-to, and then to technological futurism. The latter—and perhaps the least interesting—portion features Nadella’s forethoughts on artificial intelligence, augmented reality, and quantum computing, as well as their socio-economic implications.

Satya Nadella Shook Things Up by De-Ballmering Microsoft

Nadella took Microsoft’s reins in February 2014 after long-time CEO Steve Ballmer resigned in August 2013. Under Nadella’s watch, Microsoft quickly became more open and more nimble as an organization. Its cloud computing, Office 365, and gaming platform franchises are all running remarkably well.

Microsoft pivoted its business model around subscription products that produce recurrent revenue. It acquired Mojang (creator of the popular Minecraft videogame title,) LinkedIn, and GitHub. It ditched Nokia and embraced open source software—it’s even including a Linux kernel in a future Windows release.

Today one of my top priorities is to make sure that our billion customers, no matter which phone or platform they choose to use, have their needs met so that we continue to grow. To do that, sometimes we have to bury the hatchet with old rivals, pursue surprising new partnerships, and revive longstanding relationships. Over the years we’ve developed the maturity to become more obsessed with customer needs, thereby learning to coexist and compete.

Satya Nadella and Microsoft's Transformation Story

A Renewed Sense of Purpose: The Leader’s Tone Steers the Organizational Culture

Hit Refresh‘s foremost take-away is how the tone at the top sets an organization’s guiding values. Properly contemplated, propagated, and nurtured, Nadella’s approach became the foundation upon which the culture of Microsoft has been remade.

With “the C in CEO is for curator of culture,” Nadella’s dominant mission has been to recreate Microsoft’s underlying beliefs, values, and expectations in the eyes of its employees, business partners, customers, investors, and the society. This culture is to be consistent within Microsoft and characterize all the discernable patterns of behavior across the organization.

When I was named Microsoft’s third CEO in February 2014, I told employees that renewing our company’s culture would be my highest priority. I told them I was committed to ruthlessly removing barriers to innovation so we could get back to what we all joined the company to do—to make a difference in the world.

Nadella’s playbook has consisted of challenging complacency, instituting a “growth mindset,” being open-minded enough to welcome new technology and collaborate with Microsoft’s traditional competitors (“frenemies,”) and shifting from a “know it all” to a “learn it all” mindset.

I had essentially asked employees to identify their innermost passions and to connect them in some way to our new mission and culture. In so doing, we would transform our company and change the world.

“Driven by a Sense of Empathy and a Desire to Empower Others”

Satya Nadella Says wife Anu and their children's challenges taught him empathy Core to Nadella’s framework is his conviction that individuals are wired to have empathy. “The alchemy of purpose, innovation, and empathy” is indispensible “not only for creating harmony within organizations but also for creating products that resonate.”

Nadella describes how caring for a special-needs child and his wife Anu’s sacrifices for the family made him become conscious of the significance of empathy. Specifically, Anu helped him recast these setbacks as opportunities to expand his worldview.

Being a husband and a father has taken me on an emotional journey. It has helped me develop a deeper understanding of people of all abilities and of what love and human ingenuity can accomplish. … It’s just that life’s experience has helped me build a growing sense of empathy for an ever-widening circle of people. … My passion is to put empathy at the center of everything I pursue—from the products we launch, to the new markets we enter, to the employees, customers, and partners we work with.

The most interesting section of Hit Refresh is Nadella’s personal journey growing up in India, migrating to America, and working his way up the career ladder at Microsoft. The only child of a Sanskrit scholar and a civil servant, Nadella was hooked on cricket (it taught him how to compete vigorously, the virtue of working in teams, and the importance of leadership direction.)

Recommendation: Satya Nadella’s Hit Refresh is a satisfactory first take on his remarkable revamp of the culture of a company that had become set in its ways. Microsoft’s transformation has been nothing short of dramatic—there’s a lot more to be done and written about.

Leadership Lessons from Lee Kuan Yew, Singapore’s Founding Father

June 24, 2019 by Nagesh Belludi 1 Comment

Almost all leaders take office with an ambitious vision for their country or their organization, but only a few ever succeed in transforming that vision into reality. Lee Kuan Yew (1923–2015,) the architect of modern Singapore, was one of them.

Leadership Lessons from Lee Kuan Yew, Singapore's Founding Father

Lee was one of the most competent leaders the world has ever seen. An incorruptible Cambridge-educated lawyer, he was an autocratic pragmatist—a strong-willed, visionary leader who “got it done.” Under his leadership, Singapore metamorphosed itself from a tropical backwater with few natural resources to a first-world metropolis in just one generation. Today, Singapore’s per-capita GDP in terms of Purchasing Power Parity is the third highest in the world.

There is also a darker side to the Singapore story, however. The island-nation’s prosperity came at the cost of a rather authoritarian style of government that sometimes infringed on civil liberties. In a 1986 National Day Rally, Lee defended,

I am often accused of interfering in the private lives of citizens. Yes, if I did not, had I not done that, we wouldn’t be here today. And I say without the slightest remorse, that we wouldn’t be here, we would not have made economic progress, if we had not intervened on very personal matters—who your neighbour is, how you live, the noise you make, how you spit, or what language you use. We decide what is right. Never mind what the people think.

Singapore is not quite a dictatorship, but neither is it a full democracy. Its political system is skewed to let Lee’s party dominate the country’s polity. In an interview with CNN’s Fareed Zakaria, Lee asserted, “It is not the business of the government to enable the opposition party to overturn us.”

A vast majority of Singaporeans today will overlook these civil-liberty concerns in the context of the country’s socio-political stability, public security, world-leading and affordable healthcare, free education, good housing for all, and high employment.

Singapore’s spectacular success is accepted as evidence, sometimes lamentably as justification, as with Rwanda’s Paul Kagame, that a vibrant economy and sustained prosperity could blossom only under a totalitarian government. Singapore’s achievement is not likely replicable in its entirety elsewhere.

Over the last several months, I’ve read a few biographies and evaluations of Lee and his political leadership, including the memoirs The Singapore Story: From Third World to First (1998) and One Man’s View of the World (2013.) Here are a few key leadership lessons that Lee had to teach.

Vision, structure, and determination are paramount to efficacious leadership. Lee was a brilliant, clear-eyed, far-sighted statesman. Singapore’s political stability, rapid economic growth, and its raising affluence between 1959 and 1990 were not accidental, but the result of his dynamic leadership and disciplined social engineering. In The Singapore Story (1998,) he writes, “The task of the leaders must be to provide or create for them a strong framework within which they can learn, work hard, be productive and be rewarded accordingly. And this is not easy to achieve.”

Leadership entails tough, unpopular decisions. Lee was not afraid of being out of favor. “I have never been overconcerned or obsessed with opinion polls or popularity polls. I think a leader who is, is a weak leader. If you are concerned with whether your rating will go up or down, then you are not a leader. You are just catching the wind … you will go where the wind is blowing. And that’s not what I am in this for.” He famously forbade the sale of chewing gum to keep Singapore’s streets clean. He maintained capital punishment and caning. Singapore’s vandalism rules drew worldwide attention in 1994 when American teenager Michael Fay was caned for damaging cars and public property, in spite of appeals for clemency from the US media and government, including then-President Bill Clinton.

The litmus test of great leadership is results that matter. Many take issue with Lee’s methods, but few dispute the results he achieved. He was a pragmatist with devotion to no particular ideology. He once contemplated, “I was never a prisoner of any [socio-political] theory. What guided me were reason and reality. The acid test I applied to every theory or scheme was: Would it work?” and “The acid test is in performance, not promises.”

Nurture a meritocracy. Lee’s commitment to meritocracy is a hallmark of Singapore’s national identity—social mobility is rooted in hard work and contribution regardless of ethnic differences. He devoted resources to cultivate an excellent education and health system, and developed a high-quality teacher workforce—all to maximize people’s potential. According to Lee Kuan Yew: The Man and His Ideas (1998,) he wrote, “It is possible to create a society in which everybody is given not equal rewards, but equal opportunities, and where rewards vary not in accordance with the ownership of property, but with the worth of a person’s contribution to that society. In other words, society should make it worth people’s while to give their best to the country. This is the way to progress.” In recent years, though, the debate over rising social inequality has led to some reproach of Singapore’s meritocracy.

Attract and retain superior talent; pay them well. A key contributor to the wealth, stability, efficiency, and cleanliness of Singapore is its civil service—it’s one of the most proficient and least corrupt bureaucracies in the world. The government’s transparent policies have been a powerful enticement for people, businesses, and investments. Singapore has some of the highest paid civil servants in the world. The country is not content to let its top graduates all go straight to the private sector, so it pays what it takes to get them. Prime Minister Goh Chok Tong, Lee’s immediate successor, told Singapore’s parliament on 3-Dec-1993, “If we do not pay ministers adequately, we will get inadequate ministers. If you pay peanuts, you will get monkeys for your ministers. The people will suffer, not the monkeys.”

One’s accomplishments become one’s legacy. Having a broad picture of the effect you want to have on the world will help you pinpoint the actions necessary to achieve it. Explaining his legacy, Lee wrote in Hard Truths to Keep Singapore Going (2011,) “I have spent my life, so much of it, building up this country. There’s nothing more that I need to do. At the end of the day, what have I got? A successful Singapore. What have I given up? My life.”

To judge leaders by their methods alone is to underrate their successes. While considering Lee’s legacy, one needs to acknowledge his achievements while refusing to close one’s eyes to certain lapses. Lee’s many critics considered him authoritarian—he imposed media restrictions and used detention without trial and defamation suits to quash critics of his government. Discussing a political opponent in Lee Kuan Yew: The Man and His Ideas (1998,) Lee justified, “If you are a troublemaker, it’s our job to politically destroy you. … Everybody knows that in my bag I have a hatchet, and a very sharp one. You take me on, I take my hatchet, we meet in the cul-de-sac. That’s the way I had to survive in the past.” Lee was unapologetic about his heavy-handed style of governing, seeing it as necessitous to get Singapore to where it got.

Make Friends Now with the People You’ll Need Later

June 10, 2019 by Nagesh Belludi Leave a Comment

Addison Schonland of the commercial aerospace consulting firm AirInsight describes how the 737 MAX hullabaloos have exposed shortfalls in Boeing’s crisis communications and public relations:

The MAX crisis demonstrated to everyone in aerospace media how poorly Boeing was prepared for the recent crashes. More importantly, Boeing was unprepared for the onslaught of information that started to flow freely after the crashes. … In the absence of communications from Boeing, subject matter experts, whether highly qualified or not, become media stars overnight. An information vacuum cannot exist in today’s 24-hour news cycle and the Internet. The demand for information is great, and somebody will fill the vacuum.

The fact that Boeing had to clam up about the crashes for legal reasons is well understood. But the lack of transparency about design decisions, how the company made trade-off choices when creating the MAX, and issues related to the certification process left Boeing exposed.

Boeing Crisis Management and Public Relations Shortfalls: Leadership Lessons from the 737 Max Disaster Rival Airbus has traditionally reached out and established relationships with the aerospace media:

Airbus spends a lot of money once per year inviting the media to an event it calls “Innovation Days”. A week ago, at the most recent event, there were 130 media members from almost every country. Airbus briefed the media on both their products and plans …. Airbus provided access to the key leaders so attendees could speak with them and ask questions, with unrestricted Q&As with C-Suite executives who stayed for a substantial period of time.

Airbus clearly has an ROI. From the perspective of an attendee, and having attended several, is that the media comes away from the event informed. But more importantly, attendees feel they understand what Airbus is doing.

Airbus, through these events, communicates with the trade and news media. This communication provides attendees with, de minimis, a sympathetic view. If Airbus had suffered the two crashes, we believe the press would not have attacked the company the same way it has Boeing.

Schonland highlights how such a web of relationships becomes indispensable during a crisis, whether the crisis is self-inflicted or caused by external events:

By not being more open Boeing has helped create a gap between itself and much of the media. … Boeing has lost any control of the [737 MAX disaster] story. Whatever Boeing does provide now is seen as biased and self-serving—there is little goodwill from the media. When [Boeing CEO] Dennis Muilenburg goes on television for the rare interview, he does not come across as well as he might. Why is that? Because everything he says is now filtered through a non-sympathetic, hyper-critical lens.

Boeing needs to invest in the small army of trade and press media that cover the industry—not just a handful of selectees. This small army provides crucial perspective en masse during a crisis and fills the vacuum with educated views and perspective.

Businesses that fail to develop such goodwill or simply lose their way with regard to public relations become vulnerable to condemnation and backlash. This can result in a wide-ranging loss of credibility, as has transpired with Boeing and its leadership.

Idea for Impact: Invest in formal and informal relationships with key external constituents who can help your business—and personal—interests. The Guanxi tradition in the Chinese culture has it just about right in placing a huge emphasis on building social capital through relationships. From Wikipedia,

At its most basic, guanxi describes a personal connection between two people in which one is able to prevail upon another to perform a favor or service, or be prevailed upon, that is, one’s standing with another. … Guanxi can also be used to describe a network of contacts, which an individual can call upon when something needs to be done, and through which he or she can exert influence on behalf of another.

At the Fringes of Cost Management: Summary of Bob Fifer’s ‘How to Double Your Profits in 6 Months or Less’

April 24, 2019 by Nagesh Belludi Leave a Comment

3G Capital’s Playbook: Look at EVERYTHING—There are No Sacred Cows in Cost-Cutting

Brazilian private equity firm 3G Capital's Playbook for Cost-Cutting: Zero-based Budgeting During the past decade, the achievements of the Brazil-based private equity group 3G Capital have drawn attention to the aggressive cost cutting methods outlined in management consultant Bob Fifer’s How to Double Your Profits in 6 Months or Less (1995.)

3G has raised the profitability of its acquired businesses by sacking thousands of workers, shutting down factories, simplifying operations—even using cheaper ingredients. In Israel, the 3G-controlled Heinz was forced to rebrand its iconic ketchup as “tomato seasoning” after a cost cutting-inspired shift to GMO-derived constituents. 3G’s playbook, however, encourages increasing budgets for strategically important business functions—for instance, Kraft Heinz has increasingly expanded spending on advertising and product improvement.

At every 3G-run company—Anheuser-Busch InBev, SABMiller, Heinz, Kraft Foods, Burger King, Tim Hortons, Popeyes,—the “zero-based budgeting” accounting tool forces managers to justify all claims on their organizations’ financial resources. As I noted in a previous article, this method forces managers to justify every line item on a team’s budget as if it were new a claim for an entirely new project, instead of merely being carried over from the prior year:

Zero-base budgeting advocates say that it detects inflated budgets and unearths cost savings by focusing on priorities rather than simply relying on the precedent. Managers secure a tighter focus on operations by justifying each line-item in their budgets, thereby reducing the money they allocate to the lowest level possible. Managers can also contrast competing claims on their ever-scarce financial resources and therefore shift funds to more impactful projects.

How to Double Your Profits has become a must-read for all managers affected by any 3G deal. This obscure book, purportedly written in just 15 hours, was also a favorite of such business luminaries as Sanford Weill (of Citigroup,) Bob Lipp (Travelers Insurance,) and Jack Welch (General Electric.)

3G’s methods have upended an entire industry known for characteristically lower profit margins. The specter of being acquired by 3G has forced Unilever, General Mills, J.M. Smucker, Nestle, Pilgrim’s Pride, Phillip Morris, and other consumer staples companies to implement sweeping cost cutting programs.

Every Expense is Evaluated to Be Cutback Unless It Contributes Directly to the Bottom Line

How to Double Your Profits obsesses about cutting costs by any and all means possible. Every corporate resource is a cost-center that must be pared down to the bone—unless it’s a strategic function. When it comes to marketing, for example, the author recommends outspending the competition in both good and bad times.

Seventy-eight brief chapters (“steps”) deal with every possible drain on time, money, and people in the modern corporation: reducing layers of management, cutting the amount of time managers spend in meetings, shrinking corporate expense accounts, eliminating first-class air tickets, getting rid of pointless reports, and so on.

Focus on profits. “We’re here to make a profit. In fact, we’re here to make as much profit as we possibly can. Profit is the most accurate, most all-encompassing measure of whether we truly are the best. … Profits benefit all of us … when the profits slow down, we all suffer.”
Run a true meritocracy. Set expectations about how performance will be measured and what rewards will accrue to what levels of performance. “Within any level or group of employees, there must be wide disparities in salary, tied to demonstrable differences in performance and contribution to the bottom line.”
Avoid paralysis by analysis, make decisions faster. “Superb managers are instinctual, making the right decision most of the time based on limited data. The quantification that less-skilled managers insist upon is in fact illusory: They wind up making decisions based upon that which can be quantified rather than that which is important. Most of the critical variables in any business decision can only be judged and evaluated based on experience and instinct, not quantified.”

Much of the advice is effective, if predictable, but some suggestions are clearly crooked:

Step 24 / Declare Freezes and Cuts: “Send a letter declaring an across-the board 3% reduction to suppliers. Make sure the letter is from someone high up and intimidating….(after getting the bill) deduct 3% from the bill and say, ‘Didn’t you read my CEO’s letter? Are you trying to get me fired? “
Step 37 / Accounts Payable: “Never pay a bill until the supplier asks for it at least twice. You’ll be surprised: A few suppliers will take as much as two years before they finally get around to asking for their money.”

But Then Again, There is only so Much Fat to Cut out: The Crisis at Kraft Heinz

When discharged without due forethought, elements of Fifer’s cost-cutting mindset could lead to corporate myopia and an utter disregard for such intangible assets as human capital, brand value, and corporate philanthropy.

Certainly, in businesses with substantial cost inefficiencies and bloat, cost-cutting can produce considerable gains in profits, but even with these firms, gains will be time-limited, because there is only so much fat to cut out.

Cost Cutting and The Crisis at Kraft Heinz Aggressive cost-cutting has been blamed for the recent travails at Kraft Heinz. Over the last three years, Kraft Heinz’s fading return on invested capital and decreasing sales point toward a leadership team that has been giving precedence to near-term cash flows to the detriment of its long-term competitive position (“moat.”)

With the expansion of cut-price private-label brands, consumers are no longer remaining devoted to brands like they once did. Kraft Heinz’s roster of products is less appealing to customers than it used to be, and cost cutting hasn’t helped—Kraft Heinz has invested just 2%–3% of its sales on brand spending, as against 7%–9% at comparable consumer goods companies.

Recommendation: Fast Read ‘How to Double Your Profits’

Bob Fifer’s How to Double Your Profits in 6 Months or Less, even if out-of-date and brash in style, could help drive systematic cost-consciousness in large firms that have bloated cost structures in the hypercompetitive business environments.

Entrepreneurs, managers, and employees will find in How to Double Your Profits many ideas for establishing a culture where every employee feels liable for adding value to the organization’s bottom line. The key takeaway lessons are:

Determine which costs are strategic (costs that bring in business and improve the bottom line) and over-invest in those processes as long as they are effective, i.e. producing better results. “Place the burden of proof on justifying costs, not on eliminating them.”
Avoid over-quantifying and over-analyzing processes and results, particularly when the extra precision will not have any bearing on business decision-making.
Consider business processes as a means to an end—a focus on business results should trump a focus on business processes. In other words, focus single-mindedly on business results.

Complement with Francisco Souza Homem de Mello’s The 3G Way (2014) and Cristiane Correa’s Dream Big (2014)—informative books on 3G written by Brazilian business journalists who’ve covered 3G and its founders over the years. Warren Buffett, who regularly teams up with 3G Capital, recommends these books.

Creativity by Imitation: How to Steal Others’ Ideas and Innovate

October 22, 2018 by Nagesh Belludi Leave a Comment

Innovation by Imitation: Many Innovations Come from the Outside---How Henry Ford Developed the Moving Assembly Line for the Model T

Emulating others’ ideas is an underappreciated learning tool. Many creative innovators set forth as remarkably astute mimics of others. “Good artists copy, great artists steal,” prods a creator’s maxim often misattributed to Picasso.

Imitation is a leading pathway to business innovation, even if being an imitator is anchored by a sense of derision. Ever more businesses are nicking great ideas wherever they can obtain them—in their own industries or beyond. Hospitals have adapted safety and efficiency procedures from the military and the airline industry. Aircraft manufacturers have adopted the car industry’s lean supply chain management concepts. Ritz-Carlton, the luxury chain of hotels and resorts, runs the Ritz-Carlton Leadership Center that has helped trained its legendary cult of customer service and employee empowerment best practices to managers from companies across industries.

Creativity by Taking Existing Ideas: Applying Them in a New Context

The most prominent example of innovating by imitation is Ford’s development of the automobile assembly line—a system Henry Ford copied (and improved) from the Chicago meat processing business.

Innovation by Imitation: Genesis of the Moving Assembly Line Henry Ford’s relentless ambition to build his Model T a high-volume-low-cost automobile, together with his engineering knowledge and manufacturing experience provided the leadership and creative environment that nurtured the development of the moving mechanical assembly line. Today, the moving assembly line is the epitome of manufacturing. Almost everything that is now industrially manufactured—automobiles, aircrafts, toys, furniture, food—passes down assembly lines before landing in our homes and offices.

The genesis of the moving assembly line is in the American agricultural products industry. During the late 18th century, the movement of grains changed from hand labor to belts and later moving hoppers.

Innovation by Imitation: Many Innovations Come from the Outside

Innovation by Imitation: Chicago Slaughter Houses Pioneered the Moving Disassembly Line Before Henry Ford Started His Assembly Line By 1873, Chicago’s meat-processing industry adapted belts and hoppers to transform beef and pork production into a standardized, mechanized, and centralized business. After cows and pigs travelled to their fate in train cars from farms throughout the Midwest, they were dropped into hoppers and killed. Conveyor belts then moved carcasses past meat cutters, who progressively removed various sections of the animal, cut them into appropriate sizes, and repackaged and dispatched processed meat across the United States.

The meat processors’ task was disassembly (as opposed to putting together automobile parts in Ford’s plants.) Each worker had a specific, specialized job. Production moved swiftly. The American writer Upton Sinclair famously described this industry’s ghastly working conditions in his acclaimed novel The Jungle and said, “They use everything about the hog except the squeal.”

Chicago Slaughter Houses Were the Pioneers of the Moving Disassembly Line Before Henry Ford Started His Assembly Line

In the early 1900s, when Henry Ford wanted to keep Model T production up with demand and lower the price, Ford’s team explored other industries and found four ideas that could advance their goal: interchangeable parts, continuous flow, division of labor, and cutting wasted effort. Ford’s engineers visited Swift & Company’s Slaughterhouse in Chicago and decided to adopt the “disassembly line” method to build automobiles.

The introduction of the moving assembly line process in 1913 enabled increased production up to 1,000 Model Ts a day and decreased assembly time from 13 hours to 93 minutes. Additional refinement of the process, thanks to reliable precision equipment and standardized shop practices, shortened production time radically: within a few years, a new Model T rolled off the assembly line every 24 seconds. First produced in 1908, the Model T kept the same design until the final one—serial number 15,000,000 rolled off the line in 1927.

Auschwitz-Birkenau and Victims of the Holocaust

Sadly, just as Henry Ford copied the Chicago meat processing and perfected the moving assembly line, the Nazi apparatus copied Ford’s methods of mass production to massacre six million people. While Midwestern butchers processed the livestock carcasses, the Nazis systematically handled corpses of the victims of the Holocaust. Nazi operatives removed victims’ hair, clothing, shoes, gold teeth, hairbrushes, glasses, suitcases, and anything of value to be repurposed for the Reich. The atrocities of this inexpressibly shocking disaster are on display at the train tracks and the museums of Auschwitz-Birkenau, Poland.

Formal Strategic-Benchmarking Programs

Smart businesses have formal strategic-benchmarking programs to achieve significant efficiency improvements: they pinpoint the strategic capabilities that matter most to their businesses, seek out companies or businesses that currently manage those capabilities best, and try to copy and deploy those capabilities as rapidly as possible. But time is of the essence for the success of these undertakings, as the management guru Tom Peters warns,

I hate Benchmarking! Benchmarking is stupid! Why is it stupid? Because we pick the current industry leader and then we launch a five-year program, the goal of which is to be as good as whoever was best five years ago, five years from now. Which to me is not an Olympian aspiration.

Imitation is a Key Characteristic of Highly Creative People: The Case of Steve Jobs Copying from Xerox

One of the key characteristics of highly creative people is their exposure to and experience with working in several related domains. They are very good at crossing domain boundaries, relating their creativeness in new and perhaps unexpected ways, and adapting knowledge into new domains. The following case of one of history’s most famous innovators illustrates this distinguishing characteristic.

Steve Jobs of Apple introduced the revolutionary Lisa computer in 1983. It featured such innovations as the graphical user interface, a mouse, and document-centric computing. Jobs had taken—and refined—all these inventions from Xerox’s PARC research labs and introduced by Xerox on its commercially-unsuccessful Alto and Star computers in 1981. The biographer Walter Isaacson writes in his best-selling Steve Jobs: “The Apple raid on Xerox PARC is sometimes described as one of the biggest heists in the chronicles of industry.” Isaacson cites Jobs: “Picasso had a saying—‘good artists copy, great artists steal’—and we have always been shameless about stealing great ideas… They [Xerox management] were copier-heads who had no clue about what a computer could do… Xerox could have owned the entire computer industry.”

Innovation by Imitation: Steve Jobs of Apple copied Xerox's PARC innovations in graphical user interface, a mouse, and document-centric computing

Idea for Impact: Borrow Ideas from Others and Combine Them with Your Own Creativity

Interestingly, many “benchmarking” exercises in the world of business—even academia—do not come “top-down” out of strategy. In other words, innovations by imitation are typically not driven from the top down. Instead, they materialize from everyday operational challenges—those painful experiences that send managers scuttling for solutions in a hurry.

Look outside your industry. To improve your creativity, try spending time researching other smart companies—even those outside of your industry. Learning directly from other companies is a useful, underutilized form of research for finding ways to improve performance.

Attend to developments at your competitors and in other industries. Look for potential opportunities that have been discovered elsewhere. Avoid the “not invented here” syndrome—don’t reject other’s great ideas. Keep an open mind.

I Admire Business Leaders Who’re Frugal to an Extreme

October 4, 2018 by Nagesh Belludi Leave a Comment

Business Leaders Who're Frugal to an Extreme Business folks are rarely frugal, especially when they’re on their clients’ dime or using nameless stockholders’ funds.

I admire businesspeople and companies that are frugal to an extreme and are obsessed with reducing waste. Here are three prominent examples of leaders who’ve successfully inculcated frugality in their companies’ cultures.

Walmart founder Sam Walton was famously frugal and lived a humble life right up until his death. He drove a red 1985 Ford pickup and said, “What am I supposed to haul my dogs around in, a Rolls-Royce?” On business trips, Walton required Walmart’s buyers to lodge two to a hotel room, eat in family diners, and even bring pens from the hotel rooms for use at “home office.” One of their travel goals was to limit expenses to less than 1% of their purchases. Walmart did not have a corporate jet until they had $40 billion in sales. Walton wrote in his biographical Made in America: My Story (1992; my summary,) “A lot of what goes on these days with high-flying companies and these overpaid CEO’s, who’re really just looting from the top and aren’t watching out for anybody but themselves, really upsets me. It’s one of the main things wrong with American business today.”

Amazon is obsessed with reducing waste. From the very beginning, founder Jeff Bezos built a company focused on providing value in terms of prices and customer service. A micromanager, Bezos audited all corporate expenses when the company was much smaller and reproved everything not warranted for delivering value to customers—no first-class travel for executives, no color printers, office desks made from wooden doors, etc.

Thriftiness is at the heart of the Brazilian private-equity group 3G‘s operating model. 3G is notorious for pressing the zero-base budgeting method of cutting operating costs at companies it acquires. Julie MacIntosh’s Dethroning the King (2010) has an interesting story about 3G-run InBev CEO Carlos Brito‘s first visit to Anheuser-Busch’s St. Louis headquarters after InBev purchased the American brewer in 2008:

To honor Brito’s visit and pay him the respect it felt he deserved as the soon-to-be new chief, Anheuser-Busch arranged for him to stay in a suite at the cushy Ritz-Carlton. The Ritz wasn’t Brito’s style, though, especially since he was just about to start indoctrinating Anheuser-Busch’s staffers to InBev’s frugal way of life. He had flown commercial into St. Louis from New York’s LaGuardia Airport.

He had someone call back and say, “No, no no, I’ve already reserved a room at such and such a place—like the Holiday Inn,” said one InBev insider. “I think that’s when it probably, for the first time, hit home in St. Louis that things were going to be different.” Rather than hitching a town car or helicoptering in to Anheuser-Busch headquarters from his hotel on Tuesday morning, Brito accepted a ride from [Anheuser-Busch President] Dave Peacock.

While on the subject of leaders and indulgence, I’d like to mention private jets, those symbols of corporate indulgence. Corporate jets were famously ridiculed when the CEOs of General Motors, Ford, and Chrysler flew them to Washington DC to seek government bailouts in 2008. General Electric’s former CEO Jeff Immelt‘s was disparaged recently for flying around the world with a needless “backup jet” in case something happened to the corporate plane he was using. But a corporate jet isn’t an indulgence for a big company, it is a business necessity. Having used corporate jets during a previous job, I can swear that flying commercial is relatively counterproductive and costly. In the 1990s, Warren Buffett, the poster boy of thriftiness, reluctantly bought a private plane. He christened it “The Indefensible,” but within a few years, renamed it “The Indispensable.”

The Dramatic Fall of Theranos and Elizabeth Holmes: Summary of John Carreyrou’s “Bad Blood”

September 10, 2018 by Nagesh Belludi Leave a Comment

The Fall of Theranos and Elizabeth Holmes

Bad Blood: Secrets and Lies in a Silicon Valley Startup (2018) is Wall Street Journal investigative reporter John Carreyrou’s remarkable exposé on Theranos, the former high-flying Silicon Valley tech startup founded by Elizabeth Holmes.

Theranos formally dissolved last week after a high-profile scandal revealed that the company not only deceived investors, but also risked the health of thousands of patients.

A Gripping Narrative, A Charismatic CEO, and A Big Fraud

In 2015, Theranos was one of Silicon Valley’s superstars. Valued at some $9 billion, Theranos claimed an out-and-out disruption of the $73-billion-a-year blood testing industry. Elizabeth Holmes pitched a revolutionary technology that could perform multiple tests on a few drops of capillary blood drawn by a minimally invasive finger prick, instead of the conventional—and much dreaded—venipuncture needle method.

The Story of Theranos and Elizabeth Holmes received much adulation by the media Theranos has its origins in 2004, when the brilliant Holmes, then a 19-year old Stanford sophomore, dropped out of college to start the company. Her missionary narrative swayed just about everyone to believe in the potential she touted.

Over the years, Theranos attracted a $1 billion investment, an illustrious board of directors, influential business partners (Walgreens, Safeway, Cleveland Clinic,) and significant amounts of adulation by the media—all of this lent credence to Holmes’s undertaking. She was celebrated as the youngest, self-made female billionaire in the world.

Nobody Asked the Hard Questions

Theranos’s castle in the air started to crumble in October 2015, when Carreyrou’s first Wall Street Journal article reported that the company was embellishing the potential of Theranos’s technology. Based on past employees’ disclosures, the article also cast serious doubts on the reliability of Theranos’s science. Behind the scenes, Theranos performed a majority of its blood tests with commercial analyzers purchased from other companies.

The persistent question in Carreyrou’s Bad Blood is how the many smart people who funded, endorsed, defended, and wrote about this company never set aside their confidence in Holmes’s persuasions and looked beyond her claim of “30 tests from one drop of blood.”

Without much independent due diligence, Theranos’s supporters possibly assumed that everyone else had checked out the company, its founders, and its science. Theranos got away with its actions for as long as it did because no one could conceive of the idea that the business would simply lie as much as it did.

The Story of Theranos and Elizabeth Holmes Appeared so Promising That Everybody Wanted it to Be True

Bad Blood also draws attention to Silicon Valley’s many failings, including the cult of the celebrity founder. Holmes’s smoke and mirrors was enabled by the notion of a “stealth mode” in which many Silicon Valley startups operate to protect their intellectual property. Theranos never proved that its testing technology really worked. It was performing tests on patients without having published peer-reviewed studies, getting FDA certification, or carrying out external evaluation by medical experts.

Carreyrou acknowledges that Holmes’s initial intentions were honorable, even if naïve. What triggered Holmes’s downfall was the characteristic entrepreneurial “fake it till you make it” ethos—it inhibited her from conceding early on that her ambitions were simply not viable.

When things didn’t go as intended, Holmes exploited the power of storytelling to get everyone to buy into her tales. She continued to believe that the reality of the technology would catch up with her vision in the future. Trapped in a web of hyperbole and overpromises, Holmes and her associate (as well as then-lover) Sunny Balwani operated a culture of fear and intimidation at Theranos. They went as far as hiring superstar lawyers to threaten and silence employees and anyone else who dared to challenge the company or expose its deficiencies.

Book Recommendation: Bad Blood is a Must-Read

Every inventor, entrepreneur, investor, and businessperson should read Bad Blood. It’s a fascinating and meticulously researched report of personal and corporate ambition unraveled by dishonesty. This page-turner is a New York Times bestseller and is expected to be made into a movie.

Beware of Key-Person Dependency Risk

September 7, 2018 by Nagesh Belludi

Beware of Key-Person Dependency Risk

Key-Person Dependency Risk is the threat posed by an organization or a team’s over-reliance on one or a few individuals.

The key-person has sole custody of some critical institutional knowledge, creativity, reputation, or experience that makes him indispensable to the organization’s business continuity and its future performance. If he/she should leave, the organization suffers the loss of that valued standing and expertise.

Small businesses and start-ups are especially exposed to key-person dependency risk. Tesla, for example, faces a colossal key-man risk—its fate is linked closely to the actions of founder-CEO Elon Musk, who has come under scrutiny lately.

Much of Berkshire Hathaway’s performance over the decades has been based on CEO Warren Buffett’s reputation and his ability to wring remarkable deals from companies in duress. There’s a great deal of prestige in selling one’s business to Buffett. He is irreplaceable; given his remarkable long-term record of accomplishment, it is important that much of what he has built over the years remains intact once he is gone. Buffett has built a strong culture that is likely to endure.

Key Employees are Not Only Assets, but also Large Contingent Liabilities

The most famous “key man” of all time was Apple’s Steve Jobs. Not only was he closely linked to his company’s identity, but he also played a singular role in building Apple into the global consumer-technology powerhouse that it is. Jobs had steered Apple’s culture in a desired direction and groomed his handpicked management team to sustain Apple’s inventive culture after he was gone. Tim Cook, the operations genius who became Apple’s CEO after Jobs died in 2011, has led the company to new heights.

The basic solution to key-person dependency risk is to identify and document critical knowledge of the organization. (Capturing tacit knowledge is not easy when it resides “in the key-person’s head.”) Organizations must also focus on cross-training and succession planning to identify and enable others to develop and perform the same tasks as the key-person.

Idea for Impact: No employee should be indispensable. A well-managed company is never dependent upon the performance of one or a few individuals. As well, no employee should be allowed to hoard knowledge, relationships, or resources to achieve job security.

How to Value, Price, and Buy a Small Business [Book Summary]

June 26, 2018 by Nagesh Belludi Leave a Comment

Beyond the capital markets and startups, I’ve been exploring buying a suitable small business to invest in and operate. To inform myself with the process of searching and valuing privately-held establishments, I recently perused Richard Ruback and Royce Yudkoff‘s resourceful HBR Guide to Buying a Small Business: Think Big, Buy Small, Own Your Own Company (2017.)

The authors of this HBR Guide teach a popular Harvard Business School class on “acquisition entrepreneurship.” Their curriculum trains self-employment-inclined MBA students to search, negotiate, and buy an established business and become an entrepreneur-CEO within a year or two.

According to the authors, MBA students are drawn to their class by the prospect of a meaningful leadership responsibility earlier in their careers, as opposed to slowly climbing the corporate ladder or taking on the great risk of starting a company from scratch and establishing a viable business model.

The first section of the HBR Guide to Buying a Small Business can help you decide if entrepreneurship is a good match to your temperament, lifestyle, work-experience, and career ambitions. The largest part of the book provides a comprehensive roadmap for all aspects of acquiring a business—bankrolling the search process, deal-sourcing, managing risk, organizing equity- and debt-financing, running due diligence processes, structuring the purchase, and closing the deal. The final section of the book discusses changing the leadership over and transitioning into operating management.

Reflection: Is Acquisition Entrepreneurship Right for You?

Self-employment is not for everyone. Entrepreneurs need to be smart, driven, business-savvy, self-motivated, strategic, resilient, persuasive, and be able to deal with uncertainty.
On top of the challenges of self-employment, acquiring and operating a small-business will require reaching out, projecting self-confidence, and persuading people you don’t know—business brokers, financiers, investors, regulators, sellers, employees, and customers.
During your exploration of what business to buy, you’ll have to quickly learn about unfamiliar industries, markets, and companies. As a leader, you must be able to develop cross-functional expertise quickly.

Searching: A Full-time Job in Itself

Plan to commit full-time for six months to two years to raise funds from financiers, identify and vet potential acquisition targets, and negotiate with sellers on a realistic purchase price. Afterward, plan for no less than three more months to perform due diligence and complete the transaction.
“When you are seeking out a business to buy, you might face months when you work 12 hours a day and simply not find a desirable prospect. It’s a frustrating experience with lots of effort and no reward.”
Arrange for debt and equity financing from potential backers and risk-sharing partners. Contact affluent folks in your network and investors who specialize in small-businesses. The networks of people you bring together to help your mission can also lend a hand during the deal making and the due diligence processes.
To find potential businesses to buy, try reaching out directly to businesses whose owners may be inclined to sell. Engage small business brokers (there’re some 3,000 small business brokers and intermediaries in North America,) or comb through databases of small businesses for sale.
For potential sellers, look for business owners who, after building their firms over the decades, are approaching retirement and don’t have an inheritor interested in running the business. Many aging business owners are determined to ensure that their businesses live on.

Seek Enduringly Profitable Businesses: Recurring Customers and Predictable Revenue

Look for “enduringly profitable businesses”—stable, slow-growth companies in dull-and-boring industries (such as sandblasting, equipment maintenance, industrial repair and overhaul, window-cleaning, service-providers) in small, defensible niche markets.
Seek businesses whose business-to-business customers are unlikely to switch vendors because the product or service their customers buy isn’t a big part of the costs of their business. Consequently, they’re not motivated to shop around for lower-cost vendors and squeeze margins.
Focus on businesses with yearly revenues of $5 million to $15 million and cash flows of $750,000 to $3 million.
Avoid promising start-ups and risky turnaround opportunities; “it is tempting to imagine buying a troubled business or one with uneven performance, because the purchase price would be very low. But we strongly advise against it, because you’ll have to reinvent the business model and doing so is a very difficult and risky endeavor. Instead, buy a profitable business with an established model for success—one that is profitable year after year.”
Avoid high-growth businesses because “high growth means that your new customers will quickly outnumber your existing ones. Because new customers bring new demands, there are many ways to get in trouble. New customers are, well, new; they have no loyalty to the company and no history. High growth requires great management effort. It also absorbs money rapidly, and raising that money puts a strain on the business and its owner. A rapidly growing firm also attracts competitors, which see the expanding market and the opportunity to attract new customers. So, in a high-growth business, you could work hard and still fail if you cannot keep pace with your competitors. And even if your business survives, you might find that competition has forced you to sell at low prices, so you enjoy little financial reward after all. Making this all the harder, the seller will demand a much higher price for a business that has the potential to grow quickly.”
Avoid technology-driven companies (they face shifting customer needs and therefore demand constant reinvention,) cyclical business, and businesses with well-established competitors.
Small business-owners usually don’t hire large consulting firms or investment banks to sell their businesses. Their businesses are too small to appeal to private equity firms. “We think it makes sense to buy a business with between $750,000 and $2.0 million in annual pretax profits. … At the upper end of our size range—$2 million or more in profitability—we find that institutional investors, like smaller private-equity firms, start to become interested and that competition raises the purchase price, reducing the financial benefits of owning the business.”
“EBITDA margin (EBITDA/revenue) ≥ 20% for services and manufacturing or 15% for distribution and wholesale”

A Checklist for Enduringly Profitable Businesses

Initial Filters:

Is the prospect consistently profitable?

Is it an established business instead of a startup or turnaround?

Is it in the right size range?

Is it located in a place you are willing to live?

Do you have the skills to manage it?

Does it fit your lifestyle?

Deeper Filters:

Is the prospect enduringly profitable?

Is the owner serious about selling the business?

Seek Enduringly Profitable Businesses: Recurring Customers and Predictable Revenue

Valuing the Company and Negotiating a Deal

Use the company’s past financial information to project future earnings and your return on investment. Then decide on how much you should pay for a small business: “You’ll need to base the offer price on the general range of 3x–5x EBITDA.” Adjust the multiple for profit margins and growth prospects.
Run a primary due diligence—“a focused period of rapid learning in preparation for making an offer. This is when you’ll test the seller’s initial claims and verify the information that has made the business appealing to you. … You’re looking for any reason that you might not want to acquire this business.”
Finance using equity and debt. “Visit banks and approach your investor network to raise money for the acquisition. You should be prepared to provide information about the business and its industry, details on the due diligence that you’ve done, your financial projections, and the deal terms that you are proposing.”
Once your offer has been accepted after negotiations, run a confirmatory due diligence “in which the company’s records will be fully open to you. You will typically have around 90 days to work with your accountant and attorney to check for any inconsistencies and red flags. … This can be an extremely nerve-racking time for both the buyer and the seller, so it’s important to be patient and calm.”

Transitioning into Leadership and Emphasizing Business-as-Usual

As part of the negotiated deal, try to get the seller to stick around for 3 to 6 months to help you in the transition.
“After closing the sale, you should focus on four tasks: introducing yourself to all your managers and employees, meeting with external stakeholders, communicating the transition plan to everyone, and taking control of your cash flow.”
“The most common trouble for small firms under new owners is running out of cash. … So set up a process whereby you approve all payments before they go out, and review your accounts-receivable balances at least weekly. You should also implement a 90-day rolling cash-flow forecast.”
Meet with all the constituencies and reassure them that they won’t see any immediate changes. Lay emphasis on “your overarching goals for the company—for example, excellent customer service, commitment to quality, a satisfying work environment—and encourage people to stay focused on their work.”
Visit every major customer as soon as you can. Keep your ears open for ideas to improve your product- and service-offerings.
Don’t make any big changes early on, get to know the business, and be very respectful of all the constituents—they know more about the business than you do.

Recommendation: Read ‘HBR Guide to Buying a Small Business’ for a Very Good Introduction on How to Buy and Organize Finance for a Business

Richard Ruback and Royce Yudkoff’s HBR Guide to Buying a Small Business is excellent manual for prospective entrepreneurs, employees of small businesses, financiers, and value-seeking investors. You will also become acquainted about interactions with bankers, brokers, sellers, accountants, and attorneys you meet while searching for a business to buy.

Leadership Lessons

Products Lost in Translation

Case Study #1: Nestlé’s Paloma Iced Tea in India

Case Study #2: Kellogg’s Cornflakes in India

Case Study #3: Oreo Cookies in China

Idea for Impact: Your expertise may not translate in unfamiliar and foreign markets

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Satya Nadella Shook Things Up by De-Ballmering Microsoft

A Renewed Sense of Purpose: The Leader’s Tone Steers the Organizational Culture

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3G Capital’s Playbook: Look at EVERYTHING—There are No Sacred Cows in Cost-Cutting

Every Expense is Evaluated to Be Cutback Unless It Contributes Directly to the Bottom Line

But Then Again, There is only so Much Fat to Cut out: The Crisis at Kraft Heinz

Recommendation: Fast Read ‘How to Double Your Profits’

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Innovation by Imitation: Many Innovations Come from the Outside

Chicago Slaughter Houses Were the Pioneers of the Moving Disassembly Line Before Henry Ford Started His Assembly Line

Formal Strategic-Benchmarking Programs

Imitation is a Key Characteristic of Highly Creative People: The Case of Steve Jobs Copying from Xerox

Idea for Impact: Borrow Ideas from Others and Combine Them with Your Own Creativity

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A Gripping Narrative, A Charismatic CEO, and A Big Fraud

Nobody Asked the Hard Questions

The Story of Theranos and Elizabeth Holmes Appeared so Promising That Everybody Wanted it to Be True

Book Recommendation: Bad Blood is a Must-Read

Wondering what to read next?

Key Employees are Not Only Assets, but also Large Contingent Liabilities

Wondering what to read next?

Reflection: Is Acquisition Entrepreneurship Right for You?

Searching: A Full-time Job in Itself

Seek Enduringly Profitable Businesses: Recurring Customers and Predictable Revenue

A Checklist for Enduringly Profitable Businesses

Valuing the Company and Negotiating a Deal

Transitioning into Leadership and Emphasizing Business-as-Usual

Recommendation: Read ‘HBR Guide to Buying a Small Business’ for a Very Good Introduction on How to Buy and Organize Finance for a Business

Wondering what to read next?