When success leads to failure

When I was around 10 years old, I watched a “black and white” film on the BBC that for some reason remained a lingering memory all my life even though I cannot remember the title or the actors.

The story was about a group of aristocrats and their butler  who went on a cruise, the ship ran into trouble and started to sink, the group escaped by lifeboat and ended up on a deserted island.

The butler   was the only person who had any survival skills and over time roles reversed, with the butler taking charge and giving the orders and the various aristocrats carrying them out.  The women in the party would compete ( this film was made in the 50’s) for the affection of the butler, he became the respected chief of the group.

One day a ship was seen sailing by and spotted those on the island, they sent a rescue boat to collect the party.  Seeing that the people would be rescued, the butler discarded his chieften outfit and  quickly dressed in his butler clothes (which he had not worn since his first few days on the island ). Reverting immediately in form and in behaviour as a submissive man-servant of the group, the group in turn treated him as a servant.

No member of the group acknowledged to the rescue party that it was the butler who had kept them alive all this time.

I remember at the time feeling quite sorry for the Butler who had evidently done a great job leading the team.

Thinking about that film today, there was another angle that was less obvious at the time and less to do with a commentary on the British class system .  The aristocrats were unable to adapt ( at least fast enough to stay alive) to such a major change in their environment, they were the wrong people to lead.  The ways of working that they had taken for granted were no longer relevant in this new world.

In his seminal book, “The innovators dilemma” Clayton Christiansen touches on on organisations failing to change and survive not because they were irrational, but because they deployed rational and successful ways of working to a context where the environment was changing in a way neither their customers  nor themselves appreciated – until it was too late.

Imagine an organisation which has had a long run of success – it has all the leadership and processes in place to optimise and grow.  It has survived through various economic cycles. It has barriers to entry and competitive advantages that it has built over time. Past results show rising profits.

Is it possible that over time the leadership of this organisation have become a bit like those aristocrats?  Different  in that they are hardworking.  Similar in taking for granted the environment they find themselves in, unquestioning of the ways of working, a shared view of what and who  is important and how things work.

How would such a leadership team respond to a fundamental change in its industry with new  entrants cannibalising its margins ?   More importantly if they are best placed to respond, why did they not foresee that the “barbarians” would turn up and prepare earlier ?

The greatest risk successful organisations run is that they create a culture that is far too adapted to the status quo and their historical success makes them subconsciously arrogant and less likely listen to contrary views, even though the self perception is one of open mindedness and humility.

When the change comes, as it inevitably will- it is these organisations who will find it most difficult to adapt, precisely because the have been so successful in the past and despite having on paper ;greater advantages than the competition.

Did the Luddites have a point ?

The Luddites were a movement of skilled weavers ( 1811 -1816) who protested against the rise of machinery that would render their jobs obsolete.

They attacked mills and machinery and the British Government had to deploy soldiers to supress the movement, as well as enact draconian legal measures such as the Frame Breaking Act of 1812 which made the death penalty available.

The word “Luddite” today is often a derogatory term to describe people as anti-technology and anti-progress.

But…did the Luddites have a point? Would their position be much more relevant today than it ever was?

Let’s explore an alternative view:

Conventional wisdom says that automation creates other types of jobs and that in the long term technology is nothing to worry about, indeed a good thing as it releases humans from drudgery and mundane work – but the nature and trajectory of some types of technology today mean that this may no longer be true.

What happens when automation combines with Artificial Intelligence (AI)  to replace both mind and body in the delivery of work?   What place is the human in such a system, beyond just a check and guide?

The “new work” for humans may never replace in the necessary volume and speed the “old work” being lost as AI is a competitor for all types of work.   The winners could be few in numbers and the losers many, driving greater inequality and continued loss of status for those losing out.

Given progress is unlikely to slow, how should society adapt to the changes to come?

Governments will need to think radically as to how current approaches to tax, the treatment of capital and economic policy should change, so society can not only cope but thrive in a  “post work” world.

Competitive Disadvantage

Question : Will investments in technology to improve productivity and reduce costs result in increased profitability ?

Answer : Probably not

More often than not, investments in technology that are commonly available to your competition are defensive decisions to prevent a competitive disadvantage.

Here is a story to illustrate this:

Imagine you are the owner of a textile manufacturing business, you are in competition with a number of others who produce cloth of various types for the clothing industry. Your business is very labour intensive.

You have a highly trained workforce who are very accurate with their work, this reputation give you a good market share and your customers pay you a premium because your low error rate means they don’t have the hassle of returning large amounts of badly worked cloth.

One day a group of investors come in to your office and make an attractive offer for your company.

“No thanks” you say. ” I have built a process and trained my workforce over decades to produce cloth with the lowest error rate in the industry. Customers pay a premium for my cloth because they know what they receive can go into their process without extensive checking and rework, this is my competitive advantage which I can keep building on. Customer who appreciate my low error rate barely switch suppliers”

Your market is a very competitive market , cost control is critical for you to stay in business as price competition is fierce. One day a technology company turns up and says they have built a very reliable and accurate machine that can replace your people and work 24 hours a day, and therefore deliver you a “competitive advantage” by increasing quality and quantity and further reducing errors.

The numbers they show you are amazing – they say that based on the average price you have achieved over the last 3 years, you can double your profits and the machine can pay for itself in just 6 months ! ” A no brainer, giving you huge competitive advantage” says the smooth salesman.

You take your cheque book out and pay for the machine, the implementation process is very successful and the marketing promises turn out to be true. You say some tearful goodbyes to your loyal workers, you look forward to the road to riches that the new technology will bring…………..

Meanwhile, our friendly technology company has gone on to sell its machine to all your competitors and given the same “competitive advantage” to everybody. If anything there is a glut in the market due to all the overproduction that has come from people being a little too enthusiastic with their machines, this forces everybody to lower their prices, there is no premium on offer for reduced error rates as all the competition has the same performance. Margins narrow dramatically and you feel lucky if you can achieve the same margins you did before the technology company came knocking on the door.

Back in the offices of the Technology company they are having a strategy meeting, the CEO says:

“We have a large customer base for our Version 1.0 Enterprise Textile Machine well done everyone great sales work, our strategy is going to be that we will introduce Version 2.0 which will be even more productive and accurate ………”

Sales of Version 2.0 go very well, especially as the customer finds that maintenance support for Version 1.0 is going to be phased out. The CEO comes on the cover of Forbes magazine lauding his success in fusing technology and robotics.

Meanwhile a review of your business case for purchasing the machine makes disturbing reading. Overall gross margins are lower than when you first bought the machine and so are volumes , the cost of the machine turns out to have a significantly longer pay back period, and even that is uncertain.

However, you satisfy yourself that the decision was the right one, after all if you didn’t buy the machine you would have been at a “competitive disadvantage” and would not have been able to compete with others who had the machine.

You pick up the phone to the investors who offered to buy your company earlier in the hope that the offer is still on the table….

“We’ve changed our mind, we are interested in investments with endurable competitive advantage” says the investors spokesman “There is no difference between the attributes of your product and that of your competitors, your customers can switch between suppliers at very short notice, you are beholden to spending large amounts of capital expenditure to technology providers to keep up with continuous upgrades so that you don’t incur a competitive disadvantage. The returns you can now achieve in your business are marginal, we are not interested”

Technology tends to erode rather than enhance competitive advantage, investment decisions in technology need to be combined with fresh thinking on how to compete in order to deliver value.

Bad Change

“Change or die” , “The threat of disruption is only around the corner and will bring down great businesses” , “Don’t have your head in the sand and lose your competitive capability” The encouragement for change is all around us.

It’s not only organisations with their heads in the sand that can suffer from collective self delusion, those undergoing change can suffer from it too. One of the most devastating examples was the Great Chinese Famine which occurred during 1959 -1961 which is said to have cost over 30 million in lives, this coincided with several change policies instituted by the Chinese government during the “Great Leap Forward”.

A contributor to the famine was said to be changes in traditional crop planting practices. It was assumed that the distances between competing crops in proven traditional agricultural methods were too wide and that yields could be increased several fold by planting more densely.

This “common sense” and “compelling case for change” in agricultural practices turned out to be a total disaster with substantial declines in harvests, it became “bad change”.

This was further exacerbated by the hiding of the true effect of this policy failure from those in charge and the misreporting of yields. When the truth was finally realised, catastrophic damage had been done.

Less seriously, the demise of industry giants such as GEC Marconi is a testament to ill thought out change and an absence of challenge until it is too late.

Successful change requires honest communication. Paradoxically it is not dishonesty that stops people from communicating but the bias built into the way our brains work, we tend to ignore or treat as anomalies signals that don’t confirm our view of the world. This bias becomes hard wired if we were the ones who have made the decisions in the first place. That is why you often see intelligent people ( and indeed Organisations and Governments ) persisting in a course of action that does not seem rational from a disinterested view point. That is also why those in the midst of “bad change” cannot spot it themselves.

Mature organisations understand this and will seek out independent feedback.