Harari: Resist 'commoditization' to succeed in business
In the copycat economy, even the best businesses must innovate or perish.
Thatís the message University of San Francisco professor Oren Harari will deliver during the keynote speech at Wednesdayís ďManufacturing MattersĒ conference in Milwaukee.
Harari, a 57-year-old management consultant and author of ďBreak From The Pack,Ē will discuss the homogenizing effects globalization is having on American business. He also promises to deliver a rousing call to resist what he calls the "commoditization" of the market.
Harari also will make recommendations about what business leaders can do to to position their organizations for competitive success iand sustain competitive advantage through strategic audacity, "organizational lunacy" and a disciplined approach to leadership.
WisBusiness editor Brian Clark spoke to Harari recently.
Brian Clark: What is the danger that ďcommoditizationĒ poses to American business?
Oren Harari: Itís a perfect storm of at least three major forces: One is increasingly deregulated markets. Another is increased globalization and the third is increased technological advances. Put them together and itís an explosion that changes the rules of business.
You have more players jumping in, lowered barriers, greater ease of tracking competitors and simpler reverse engineering. That yields what I call the twin foundations of the copycat economy: imitation and commoditization. You have ďme tooĒ products and services. The symptoms of commoditization are pinched margins and customers demanding lower prices.
Clark: Is that sort of a Wal-Mart effect?
Harari: Iím urging companies to do the opposite. In my book, I talk about Wal-Mart, Dell and JetBlue. Companies like that build their entire organization trying to accelerate commoditization. They do a good job of that.
But for most companies, thatís not a viable option. You want to do reduce your cost structure dramatically with, perhaps, radical digitalization, outsourcing, restructuring and so forth. But the real issue is how do you -- in a world where everyoneís products and services get imitated and commoditized at an accelerating rate -- break from the pack.
You must continually decommoditize and deimitate yourself Ė if those are real words. That is the strategic challenge. If you can do that, you are not as much boxed in by price wars. In fact, you can often charge a premium because you have buzz and excitement. You also attract the best talent and investors follow
Clark: What can leaders of organizations do to make their companies stand out?
Harari: Well, small companies canít do it by acting like large companies because if they do, the big ones will kill them with scale and marketing reach. Small companies can compete, though, because of their flexibility and ability to act quickly.
They must make customers see real price value for what they do. Iíll be talking a lot about what small, privately held firms can do. Really, though, that is the challenge for almost all businesses.
Clark: Are you familiar with Midwest Air here in Wisconsin and the hostile takeover attempt that AirTran, a low-cost airline out of Florida, is attempting? Midwest has distinguished itself with its service and chocolate chip cookies. But the shareholders may sell if AirTran eventually offers enough money.
Harari: Yes, Iím sure they will. I have a chapter in my book called ďConsolidate for Cool.Ē The data shows that a large majority of big mergers that you read about in the headlines end up destroying shareholder value because they are done for the wrong reason. They are not doing it to make something more exciting or to create advances in products of customer service or for innovation. They are done to increase volume or territory or scale.
Fundamentally that looks good on paper and analysts buy the argument. Investment bankers donít care because they make money one way or the other. But the track record sucks. And often the big companies gobbling up the small ones grossly overpay. I donít know the details of this, but often you have one dinosaur who canít figure out how to do anything interesting, so they try to buy success. But you canít buy success. If that were true, the most successful companies would be serial acquirers. With a few notable exceptions, they do the worst of all.
Clark: In your book, you talk about Willie Nelson and Madonna breaking from the pack. Can you explain that?
Harari: If you follow their careers, they have done that repeatedly. My point is that you can learn from them. Examples would be Toyota and IBM. Madonna has reinvented herself by looking at what is out there on the horizon that isnít a trend yet, but will make an impact down the road. She then leaves her current market offerings, even though they are successful, and builds and monopolizes on the emerging trends.
Another example is Apple Computer. The trends were out there, even in the late '80s and early '90s. People were trading songs online, using 28K modems. It was no economic force to be reckoned with, so music companies ignored it. But it kept on growing. Music companies then circled the wagons to protect existing cash flow and sent out attack lawyers to arrest 12-year-old girls who were downloading songs off the Web. Those trends, though, were strong. And Apple understood this would grow to be conventional wisdom and would change the rules of the game.
They said, letís shape that trend and attack it and own it an innovate around it to become the standard. Thatís what Willie Nelson and Madonna have done through their careers. For Apple, the rest is history with the iPod and the iTunes platform. I point out in the book that Toyota has done the same thing with hybrid technologies while Ford and GM were actually ahead of Toyota, but they stepped back and decided not to do much until there was a real market demand. But Toyota, however, said by the time there is that demand, another company will already have planted the flag and raised customers' expectations. They saw the trends of energy prices going up and more concern about the environment and global warming. They said, "Letís be the ones who aggressively monopolize what will one day be conventional wisdom."
At first people think itís crazy because it is beyond the pack. But then it is the reality. Willie Nelson did this in the '70s with his outlaw brand of music as an alternative to rhinestone cowboy music. But he didnít invent that. However, he and his friends took that model and innovated around it and owned it before it became imitated and commoditized. Thatís why Madonna is so successful, whether you like her or not. If you look at her numbers, they are amazing.
Clark: Have you looked at any Wisconsin companies? Harley-Davidson for example.
Harari: Yes, Harley is an exceptional company. I think most companies would be ecstatic to have customers tattoo the corporate logo on their (backsides). A decade or so ago, they began attracting not only traditional bikers but doctors and lawyers.
First of all, they had to radically improve the quality of their machines. Thatís because it used to be that even new Harleys in showrooms had cardboard under them because they leaked.
Even to hold their market against Japanese imports, they had to have a zero-defect policy. At the same time, they radically reconfigured their internal culture and workforce to move away from a top-down control assembly line to self-managed work teams and a lot of participation on how to improve quality, speed and cost efficiency.
They also built their marketing on the Harley Owners Groups or HOGs, so that when you buy a Harley, you join a particular community. They made it clear it wasnít just Hell's Angels or people who had 25 hours a day to tinker with their bikes. The ďbuy AmericanĒ sentiment helped, though I think that was kind of minor because in a globalized environment, if Harleys were bad or boring or undifferentiated machines, they would not sell. The auto industry shows that over and over.
Their big decision, however, was to create an experience that they said was different than riding a Honda, Yamaha or BMW. Harleys sound different and are part of a rich history. Even a 50-year-old accountant can get on one and feel that he is a real bad boy who is tough, free and adventurous. That was the brilliance of it. They also did not overly dilute the brand. Demand always exceeded supply. Harley has kept meticulous control over its growth.
Clark: How about Trek bicycles and that companyís association with Tour de France winner Lance Armstrong?
Harari: Itís the same sort of thing. They have done very well with him as their spokesman. My son even has one of their bikes. And they make good ones. The question is, what can you do to make yourself different and special and exciting in the marketplace? Once you do that, you can capitalize on scale and scope and reach Ė the things that traditionalists like to point out are the predictors of competitive success. But the key thing is to differentiate yourself in a way that matters to customers. Then you can grow, but you still must evolve.
Clark: What will your advice be to Wisconsin manufacturing companies that make widgets that are needed but not very sexy? How do they stand out from the pack?
Harari: What I will be doing in my speech is throwing out ideas. But I donít think there is any one blueprint or almost everyone would be doing it. Companies have to ask themselves what they do that would clearly make them stand out from other suppliers of this same widget. And what is it that they can do that matters to the corporate customer they are selling to.
Lowering your price might be part of the discussion, but the real issue is how they increase the attractiveness of what they provide. That might be with the nature of the product, service, options, customization or somehow making their customersí lives easier. A lot of large customers of small suppliers are facing enormous pressures, so if you can help simplify things for them, that would be a key. If you just wait for orders and respond with a good product at a reasonable price, you may well ultimately be in serious trouble, too.
Clark: What should companies not do?
Harari: They should not perceive themselves as unsexy and boring providers of products and services. Their job is to make what they do and/or the experience the customer has a valuable or exciting process. The minute businesses say they are in a mature market and what they do is easily replicable and there is nothing they can do about it because there is foreign competition with a lower cost structure and their customers are constantly beating us down to reduce prices Ė well, they are either dead or dying.
Thatís because there are other companies that will innovate above ground with products and services. And will radically innovate underground by cutting costs and supply chain management and they will be able to be to quickly come up with innovations and transform themselves.
Clark: Any last thoughts?
Harari: Today the size and history and track record of a company is less of a predictor of future success than it ever has been before. There are a lot of good large companies, but a lot of big companies have failed miserably.
In fact, if you look at a list of Fortune 500 firms from the 1980s, a lot of them had disappeared by the year 2000. And many of those that remain are in serious trouble Ė like GM, Kodak or United Airlines, which is just crawling out of bankruptcy.
Size is no longer an issue. The real issue is can you appreciate the realities of the copycat economy and can you gear your strategic thinking, your execution and your leadership about ways to decommoditize and deimitate what you provide. If you do that, you can grow in a healthy way and make sensible decisions about everything from marketing to judicious acquisitions.
Then you can confront the realities of the copycat economy in an imaginative way. Any organization or any industry can do this. But if they fail to do it, others will leave beat them. And they can come from anywhere around the world.
Four years ago, windows imported from China were not even on the radar for domestic manufacturers. Today, they are 30 to 40 percent of the market and growing rapidly because they offer significantly lower prices and (as the U.S. trade association whispers to me) very good quality. To match the Chinese, though, they canít just cut prices or they will be eaten alive.