Change Agent - Issue 39

"Gear shops are no longer the engine of our economy."

Last year, I needed some gears to use as props for a fancy presentation that I was going to give. Not just the kind of motorized toy gears that you can buy at a toy store, but real metal gears. Where do you go when you want to buy metal gears? I found a place by using a low-tech tool: the Yellow Pages. As it turns out, there is a gear shop (with a name like Acme Gears or Mr. Gears or whatever) just a couple of blocks from my house.

I got there at 7 AM and found a 100-square-foot shack with a little sign out front. I opened the heavy metal door and saw a little room with a floor that was covered with metal shavings, dust, and grime. A three-year-old calendar hung on the wall. And a huge gear-making machine filled the room. Operating the massive mechanism was an enormous guy with one hand and a big grin. There was no doubt that he had been making gears all of his life and that his shop was organized, optimized, and experienced at the art of making beautiful brass gears. I didn't want to ask if a gear-making accident had led to his injury, but I did get the gears of my dreams and a vivid memory of what the inside of a gear-making factory looks like.

I left the factory and drove to my office, where I was struck by what I saw as I walked in: row after row of cubicles. Every cubicle had a telephone, a chair, and a PC. That was it. Except for some folks who worked in the mail room, every person in the company used precisely the same tools to do their job. There was no way to tell what our company made — or, for that matter, if we made anything.

Here was a business that looked as if it could be in just about any line of business. And my guess is that your business looks similar. You might be in the chemicals business, the glass business, or the media business, but odds are your office has a phone, a PC, and a window — just like the office of Jack Welch or Steve Jobs or the struggling entrepreneur down the street.

So what business are you in? Years ago, this was every consultant's catchphrase. The best way for a consultant to start a conversation and to get a new client was to ask a CEO that question — and then to watch her squirm. So you think that you're in the cork business? You think that you make money selling corks to vineyards for wine bottles? Nonsense! You're in the liquid-containment business! You need to establish new ways to leverage your liquid-containment expertise — dikes, maybe, or semipermeable osmotic barriers for exotic-gas chromatography experiments.

Big companies, little companies, smart companies — they all fell into the trap of coming up with ever-more-vague descriptions of what they did. "We enable health-care professionals to thrive." No, actually, you make gauze. But nice try.

Why bother with vague mission statements and product-line descriptions? Consultants aren't entirely evil, you know. They did this to help executives see beyond the factory floor and realize that the factory could be leveraged. There were new markets and new opportunities out there for U.S. Widgets, but you weren't going to find them if you kept obsessing about replicating your current clients.

That was factory-driven strategy: We have a factory, therefore we're in the business of making a lot of stuff in that factory. Mr. Gears didn't get any bigger because his factory couldn't get any bigger. He was a one-man shop and happy about it. But most leaders who focus on growth end up focusing on how to make more stuff in the factories that they've got — and then on how to build more factories.

Only after satisfying that urge do executives consider whether they can actually sell enough of their stuff into a new market to keep the factory busy. One company that I worked with made very high-end aerospace parts using high-tolerance machinery and exotic materials, and it sold those parts to the military-industrial complex. We're talking rocket ships and missiles. The company's CEO then made the mystical decision that the ski industry really needed a ski binding built to the same specs. The company used the same factory to make the world's best (and its most expensive) ski bindings. Of course, the venture failed, but that CEO did a good job of following the factory-first mantra.

So what does all of this have to do with a gear shop?

Gear shops are no longer the engine of our economy. The rows and rows of PCs and cubicles in your office now make the world hum. Suddenly, factory-driven strategies make no sense at all. Just because you are currently in the business of providing real-time box-office data to the horse-racing industry does not mean that you need to stay in that business. Other than your brand and your relationships with customers, your only asset may be the smart people who work in your office. And those smart people are totally and completely able to adjust to a fundamentally different kind of business within a week.

Let me prove it with a simple thought experiment. If your company hit the wall and fired all of its employees tomorrow morning, how long would it take your smartest and most-driven people to find a new job? And how likely is it that their new jobs would be in precisely the same business as yours?

Let's face it: Marketing people know how to market. Biz-dev people know how to biz dev. Salespeople know how to sell. "What business are you in?" now becomes a loaded question. And the answer to that question ought to be, "Whatever business maximizes long-term stakeholder value." Period, as Tom Peters would say.

Let's say, for example, that you've got a team of 40 smart people working in a venture-backed startup. You've got $6 million in the bank, and your new product launch is a dud. Nobody wants online laundromats, as it turns out, and so e-laundry.com isn't working. What happens next is that most companies assume that they gotta keep going: "Hey, we've invested all this time and money, it would be way too much trouble to throw this idea out and start over."

Uh, wrong answer.

You've got $6 million, a smart team of people who know and like each other, and desperate venture capitalists. What business are you in? If you're in the business of long-term stakeholder value, you've got only one obvious choice: Shut down the laundromat, fire your two employees who have nothing but laundry-specific knowledge, keep the rest of the smart folks, and start over. Now you're in a totally different business — and, hopefully, a better one.

Redefining your business becomes far more important (and far more troubling) when we look at how companies that have been around for a long time define their future. There's a huge imperative to grow, especially among public companies, but it's pretty obvious that a company is not going to see rapid growth by introducing yet another laundry detergent or yet another soft-drink flavor.

When faced with the need to grow, combined with the challenge of the Net and with new competitors who are hell-bent on destroying your core business, the obvious strategy is to drop a few million dollars on some e-consulting firm and to have it build a Web presence for you. You want that consultant to "e-enable your e-commerce initiative" (or, to put it in English, to take your business and move it lock, stock, and barrel to the Web).

That strategy almost always fails. It's based on factory-centric thinking, on a CEO who decides that your company knows only how to manufacture the shoes or chemicals or hats or strategy consulting that it does — and that you know only that too. What a waste. Because when the Web strategy doesn't work, all of those smart people who came together will disperse. All of the intellectual capital that had been attracted to your company's moment in the sun will go away. All of those PCs and cubicles have to get sold at auction.

Years ago, business was like the opera — lots of costumes, expensive sets, complicated scripts in various languages. Once a group of performers decided to put on an opera, they were stuck with it. There was too much invested to quit. The goal was to sell every seat to every single performance and then hope you made money.

Today the rules are different. You're not running an opera company, you're running a repertory theater — with talented actors, each able to play many different roles, with minimal sets, with no musical numbers, but maybe with some improv. If a show bombs, it only takes a few days to strike the set and put on a new production.

If you've got a bunch of smart people and some capital, why not figure out the very best business to be in and then go and be in that business? Companies like Bain & Co., GE, Microsoft, P&G, and Yahoo! are known for attracting, motivating, and keeping really smart people. But only a few such companies know how to use their existing assets and their market power to create new businesses.

I'm not suggesting that your brand or your customer relationships are worthless. Far from it. What is clear to me, though, is that brands and relationships have both natural rhythms and scale — and that trying to grow those brands and relationships any faster or bigger than they want to grow is dangerous. Instead, why not build a new set of assets right next to your old set?

After my first year at Stanford Business School, I went to see Jim Levy, then-president of Activision Inc., which, at the time, was arguably one of the fastest-growing companies in the history of the world. Activision made games for the Atari 2600 game system and was rolling in dough. I wanted to work for Levy for the summer.

My bold proposal: "Hey, you've got all this cash and all these smart marketers and programmers. Why not go into the computer-game business? You can dominate the PC the way that you dominate the Atari 2600."

Looking back 25 years (yikes, that's a long time ago), that wasn't such a bold proposal. After all, the PC market was only an inch or two away from the market that Activision was already in. But Levy disagreed with my proposition and almost had me removed from his office by force. He told me, "We're in the cartridge business — and those machines use floppy disks. Forget it."

So, as you go back to your desk and then try to manipulate that spreadsheet one more time, in order to demonstrate how your widget company is going to make a go of it online, why not try creating a totally different spreadsheet? The new one could show how eight of your smartest people, if armed with capital and with marketing smarts, could build a spritely, profitable, brand-new business right next to your widget division.

Who knows? Maybe the next new-business success story will come out of your cubicle.

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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