Change Agent - Issue 36

"Looking for a poster child for old-economy industries that are stuck in the headlights?"

When I was 12 years old, I was arrested on the trading floor of the New York Stock Exchange. Okay, I wasn't really arrested. But a genuinely big security officer with huge, beefy hands grabbed me, detained me, and kept me in a conference room until my father, a hotshot with a publicly traded company in the aerospace industry, rescued me.

Apparently, there was a bunch of valuable stuff just lying around at the stock exchange. In those days, millions of dollars' worth of transactions were being handled by the NYSE every day, and all of those transactions were manual.

Of course, 27 years later, the scene at the exchange is totally different. Now billions of dollars' worth of transactions are being handled, and only most of them are manual.

Naturally, this is only a parable — but one that applies to a scarily large number of companies, maybe even to yours. Looking for a poster child for old-economy industries that are stuck in the headlights? The New York Stock Exchange's manual-transaction process is paralyzed in the road, just waiting for a monstrous 18-wheeler to mow it down.

Think for a minute about the NYSE's new-economy sibling, the NASDAQ exchange. Here's how the NASDAQ works: You place an order with a broker (either by computer or by "old-fashioned" phone). Your order is then entered into a computer, where it waits until an offer is made by someone who wants to sell what you're buying or buy what you're selling. The computer matches your order with the offer and an exchange is made.

The NASDAQ has no "floor" — no ringing bells, no piles of paper, no overstressed traders with silly jackets and hoarse voices, no scenes of people waving their arms and flailing about, trying to attract somebody's attention.

The Island ECN Inc., which handles about 10% of all NASDAQ-listed stock trades, runs its entire operation from a single Dell computer, which is hooked up to thousands of smaller computers that preprocess its data. How efficient is that method? Well, the Island charges a whopping one-tenth of one cent for each share traded. I guess it makes its money in volume.

In response to the NASDAQ's approach, the NYSE has its own strategy: Move to a bigger trading floor.

Now, there are some benefits to moving to a bigger trading floor. A bigger trading floor is going to enable human "specialists" to interact with more buyers and more sellers. A bigger trading floor is probably going to give panic-stricken CNBC reporters a place to stand while they report on the madness that takes place on location, from "right here on the floor of the exchange." But there's also one thing that a bigger trading floor isn't going to do: It won't do anything to forestall the imminent demise of the NYSE.

Please don't misunderstand me. The people who run the NYSE may be rich, but they're not stupid. They're acting in a perfectly reasonable and an utterly rational way — a way that many top businesspeople emulate every day. But, ultimately, the people who run the NYSE are acting in a way that is guaranteed to bring about the doom of their exchange.

The NYSE is owned by its member companies. Basically, it's a very profitable cooperative, in which companies that own seats on the exchange also own the exchange itself. Some of those companies are big fish, and others are small fry. But they all have the same thing in mind: making money by doing what they did the day before. In many ways, your company is probably similar — staffed with people who have worked really hard to get to where they are, and who, quite frankly, would like to relax and make a good living, at least for a little while.

Sooner or later, the well-being of every business comes down to the people who own it and the people who work for it. In most cases, companies that are large and successful are owned and run by well-meaning folks who aren't in a hurry to change the status quo. Think about it: If you were the sort of person who liked changing the status quo, why would you go to work for a company where the "quo is status"?

How can you tell if your company is on the same path as the NYSE? Here are a few questions for you to consider. Answer them, and you'll find out just where your company stands — in the middle of the road, waiting to become roadkill, or in the fast lane, heading for the future.

 

  1. Do discussions about change within your company begin with questions like, How much will this cost?, What will the downside be?, What will this do to our stock price?, or What's our competition doing? instead of beginning with the important question: What's the opportunity here?
  2. Do changes — both big and small — need to be approved by managers who are not aware of what is state of the art or of what changes are being wrought by your company's competition or by other industries?
  3. Are your company's stakeholders (or owners, or employees) rewarded for squeezing incremental profits from the status quo, or is there a significant advantage to their focusing on the long term (more than six months)?
  4. Do the best people at all levels and from all functions of your company leave to start their own companies, regardless of how much money they are offered to stay?

 

And, if you need another diagnostic, check your company's mood: One of the biggest symptoms of inevitable doom is grouchiness. After avoiding change for years and years, old companies that suddenly wake up from a comfortable slumber can be pretty grouchy, which leads them to take desperate measures.

Corporate grouchiness can take several forms, but two are most likely. One form is a complete and resounding denial that changes happening in the industry are real. To a grouch, changes in a business environment are nothing more than bubbles. And once those bubbles start to pop, the upstarts will get their come-uppance. The second, and even more dangerous, form is an attempt to take profits while the profit-taking is good. This latter approach allows a company's big guys to make their numbers look great while they eat their seed corn. By ceasing to invest in the future, it's quite easy to make today's numbers look good. And, hey, if your ship is going down, it might as well go down in style!

However, the biggest danger faced by companies that are under assault by change agents isn't either of those grouchiness symptoms; it's the power trip. Market leaders go on power trips all the time. They get used to having market power — to dictating where people shop, or how authors publish their books, or how consumers get phone service.

The music industry is going through a phase like this right now. Since the days of Thomas Edison, the music business has thrived on a model that says that the contribution of a musician is worth about 10% of the price that a consumer pays for a record. The rest of the money goes toward a record's packaging, its polycarbonate, its shipping, the record company's risk, remodeling the record company's offices, the retailers' profit, limousines, lavish parties, and expensive designer water that is served with fancy lunches at the Four Seasons. Oh, and the record company's profit.

When consumers switched from buying LPS to buying CDs, record companies panicked. In retrospect, it's not really clear why they panicked — but they did. The result was that CDs were priced at more than $10 (up from $7 for an LP 15 years ago), even though it costs virtually the same, if not less, to make a CD.

This was a triumph for everyone involved. Many say that the switch to CDs saved the record business. By doubling the price, they were able to create more money for every single person along the line — including the musicians.

When you're paying up to $15 for a CD, you don't really notice the dollar that goes to the recording artist. Or you don't mind spending that last dollar, because, after all, that's why you're buying a CD in the first place — to support the artist, not to support Tower Records or your local CD-pressing plant.

But then along comes the Internet and MP3 and Napster. Suddenly, the $10 that paid for all of those lavish extras and perks is gone. Suddenly, the only money that really needs to get spent is that last dollar. Suddenly, instead of jacking up the price when a new format comes along, record companies are faced with the very chilling prospect of watching the price drop all the way down to zero when a new medium gets established.

Like most companies in similar situations, though, record companies aren't rushing back to their conference rooms to figure out a brand-new way to do business, a whole new way to perform their function — bringing great music to people who want to pay for it. Instead, they're doing what companies of every stripe have been doing for generations. When faced with a threat, companies "insist," as in, "I insist that you do business this way! I insist!" They fall back on old tools, because they've forgotten how to earn power. They threaten their suppliers. They threaten their consumers. They threaten the companies that are reinventing the industry. They insist!

The problem, of course, is that markets find their own equilibrium. Insisting, denying, pretending, demanding — none of these postures will change the fact that customers and offerings will find each other. Faced with attractive alternatives, consumers find a way to get to those alternatives ... regardless of what old, power-happy companies do or say. Wishing that change agents will go away won't change a thing: It just makes business less fun for all of us.

Fortunately, it's not too late for most companies to wake themselves up. There's still a chance for companies to admit that fundamental rules of the game are changing and that they've either got to make a move or prepare to lose.

Even better, you have every right to vote with your feet. If you're investing your time and energy in a company that's asleep, then it's time to leave. The opportunity cost of staying with a dying giant is huge indeed: Staying put will cost you money, energy, enthusiasm, and joy.

As for me, I'm headed back to the stock exchange. I hear that it still offers tours to the public. Who knows? Maybe I can grab some stocks on my way out.

Seth Godin (sgodin@fastcompany.com) is the author of " Permission Marketing: Turning Strangers into Friends, and Friends into Customers (Simon & Schuster, 1999) and the founder of Yoyodyne Entertainment.

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