How far is my company away from failure? The question itself sounds like an admission of inadequacy. The confident manager surely doesn't walk around waiting for nemesis to strike. Rather, confident people strut the stage like a colossus, with all the certainty, say, of Bill Gates. The question, though, was inspired by Gates, who observed that 'Microsoft is always just two years away from failure.' This wasn't self-deprecation, but sober analysis.
One of management's trustiest tools is the SWOT analysis. You take a calm, cool look at the organisation's Strengths, Weaknesses, Opportunities and Threats. Then you seek to capitalise on the Strengths, Eliminate the Weaknesses, seize the best Opportunities and counter the Threats. Could the magnificent success of Microsoft, with its 90% gross margin and $9 billion of cash, really be threatened? In a brilliant study in Worldlink magazine, Howard Anderson has shown that the answer is Yes - a dozen times over. Although the threats are specific to the software industry, they are also generic.
Try them on your own firm:
1. Could newcomers (including breakaways from your own company) create damaging competition?
2. Is there an equally powerful force in the market which could muscle into your territory?
3. Is there a rival technology or other differentiator which could come out on top?
4. Are you weak compared to the competition in a key market segment?
5. Is the market developing in ways that favour competitors more than you?
6. Could your customers takes major sources of revenue away?
7. Is there a major area in the market where you lag rather than lead?
8. Does a competitor have a stronger hold on your biggest customers?
9. Is there a growing market where you are being left behind?
10. Are there environmental/regulatory threats?
11. Could unsuspected challenge arrive from outside the existing industry?
12. Is your market too broad for all threats to be safely covered?
AN INTIMIDATING LIST
The thirteenth question, of course, is whether, if any of the dozen apply to your business, you are doing anything effective to counter the Threat or, better still, to convert Threat into true Opportunity. It's an intimidating list, even for mighty Microsoft, especially when you see the names of its leading enemies: Sun Microsystems, the big banks, Cisco, Compaq, Netscape, Oracle, SAP and IBM. The latter giant provides Anderson with his starting point. Could what happened to IBM afflict Microsoft? His company, The Yankee Group, had been deeply impressed by the Strengths deployed by IBM in 1982 - and not surprisingly.
IBM led in every important market of the time: mainframes, communications, mainframe storage, mincomputers, and personal computers. It earned more profit than the next nine computer firms generated in total sales, spending more on R&D than they made in earnings. The Yankee Group concluded that IBM was therefore invulnerable - yet the giant was about to embark on a prolonged slide that, amazingly, leaves its market value lagging behind both Microsoft and Intel, and by no small margin, either. IBM's $86 billion of mid-1997 market capitalisation compares to $149 billion for Microsoft and $124 billion for Intel: IBM should plainly have held on to its old strategic investment in the latter. How could the Yankee Group's assessment be so spectacularly wrong?
In the first place, never concentrate just on your own or anybody else's Strengths. That's highly dangerous, partly because they can so easily turn into Weaknesses. Thus IBM's domination of mainframes, and dependence on them for the bulk of its profits, became an incubus as the market moved away to the PCs from which Intel and Microsoft drew their super-growth. The latter's similar domination and dependence in PC operating systems almost moved from Strength to Weakness as the Internet took off - and Gates was much nearer than his 'two years away from failure' when, with a mighty effort, he reversed engines and poured billions into Net, software probably just in time.
Second, market share and leadership by size are not strongpoints in themselves. In PCs, Compaq was able to exploit a world share of around 3% far more effectively than IBM, which had three times the market. The issue is how the market share, whether leading or not, has been achieved and sustained. Is the product or service perceived as superior? Is it cheaper? Is the distribution more effective? Is the cost level lower? Is speed-to-market faster? Are customer requirements met more accurately?
REACTION IN CRISIS
In the case of Compaq v IBM, curiously enough, the answers were all negative. Compaq had no significant advantage in product, distribution, costs, price, speed-to-market or customer satisfaction. But in the money-losing crisis into which Compaq suddenly plunged, it reacted radically on every point to create a stronger platform than its rival. The cost ratio, for instance, came down from 31% to 12.5% - an astonishing performance - as new products were launched at high speed, and the premium price policy was abandoned in favour of leading price levels downwards.
The key Strengths at Compaq were therefore intangibles, as were the Weaknesses at IBM. The smaller company was able to react and reform at speed; the larger could only react slowly and reluctantly. So the Yankee Group's second error was to concentrate on static Strengths, which are the results of past performance, rather than analysing the factors which will govern performance in the future. Even IBM's massively higher R&D spending was irrelevant in this context - the quantum of expenditure was less important than the uses to which its results were being put. The Yankee research consequently missed the low rate of conversion of R&D into saleable products - clearly shown, for example, by the strange RISC saga.
IBM's discovery of Reduced Instruction Set Computing, primarily the work of a technologist named John Cooke, was potentially a big winner, since it much enhances the performance of smaller computers. IBM, though, didn't use its own discovery in a work-station until 1990 - three years after Sun Microsystems and twice as long after RISC's availability. How could such absurdity be allowed? The explanation is that RISC was resisted by people who were dedicated to extending the 360-370 mainframe architecture. That's a perfect (or imperfect) example of how Strength turns into Weakness. Exactly the same mindset also allowed Compaq to seize the advantage, and a market share of nearly one third. in client-servers, powerful PCs which serve networks.
The resilience which IBM's rivals have shown, compared to their opponent's fateful conservatism, rests on people. In any industry today, the brighest and best employees are aware that their own SWOT analysis could lead to breakaway. They could stay with the company and develop their ideas within its embrace. But fragmented markets and booming stock prices, coupled with increasingly plentiful venture capital, offer a constant temptation.
Keeping people one by one, buying them off, so to speak, is no solution. The company has to create a culture that's so attractive, so hard to leave, that the retention rate will remain very high. In other words, Putting People First has to be the base strategy. An unhappy workforce is both a Weakness and a Threat - as British Airways has recently found. Its resurgence was founded on a programme actually called Putting People First - but, after a pilots' strike threat last year, in late June cabin crew and ground staff were equally alienated.
Look at what Fortune magazine calls the 'four-pronged approach' adopted by chief executive Bob Ayling, and the missing element is immediately obvious:
1. Develop a marketing plan with universal appeal
2. Help employees understand the company's global vision
3. Benchmark off mistakes that others have made in the past
4. Select the right partners for joint ventures overseas.
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