Innovation & Change

Change and Commitment

The International Isle of Man TT (Tourist Trophy) Race is an annual motorcycle sport event run on the Isle of Man in May or June of most years since its inaugural race in 1907. It is still billed in popular culture as one of the oldest and most dangerous motorsport events in the world, with over 250 fatalities in its history. On the 20 March 1954, when Honda Motor Company was still a small company and less than eight years old, Soichiro Honda made the following announcement to his employees:

“Since I was a small child, one of my dreams has been to compete in motor vehicle races all over the world… I have reached the firm decision to enter the TT Races next year. I will fabricate a 250 cc racer for this race, and as the representative of our Honda Motor Co., I will send it out into the spotlight of the world. I am confident that this vehicle can reach speeds exceeding 180 km/h… I address all employees!
Let us bring together the full strength of Honda Motor Co. to win through to this glorious achievement. The future of Honda Motor Co. depends on this, and the burden rests on your shoulders. I want you to turn your surging enthusiasm to this task, endure every trial, and press through with all the minute demands of work and research, making this your own chosen path. The advances made by Honda Motor Co. are the growth you achieve as human beings, and your growth is what assures our Honda Motor Co. its future.
With this, I announce my determination, and pledge with you that I will put my entire heart and soul, and turn all my creativity and skills to the task of entering the TT Races and winning them. This I affirm.”
(Source: Honda Motor Company)

Opposition by the Japanese Government and difficulties in conforming to TT rules and regulations delayed Honda’s entry until 1958. In that year, Honda won the manufacturer’s prize.

Westley and Mintzberg (1991) differentiate between the different styles of those who spearhead fundamental change. There are idealistic visionaries like Benjamin Franklin. There are entrepreneurs like Soichiro Honda. And there are the transformers who transform existing companies and their products or services from the inside, such as Lee Iacocca and Jan Carlzon of SAS (the Scandinavian Airlines System). The word intrapreneur has been coined to describe those people exhibiting similar behaviours to entrepreneurs but who work within an organisation. Pinchot (1986) offers ten guidelines aimed at circumventing the bureaucracy and getting things done in large organisations:

  1. Come to work each day willing to be fired.
  2. Circumvent any orders aimed at stopping your dream.
  3. Do any job needed to make your project work, regardless of your job description.
  4. Find people to help you.
  5. Follow your intuition about the people you choose, and work only with the best.
  6. Work underground as long as you can – publicity triggers the corporate immune system.
  7. Never bet on a race unless you are running in it.
  8. Remember it is easier to ask for forgiveness than for permission.
  9. Be true to your goals, but be realistic about the ways to achieve them.
  10. Honour your sponsors.

Innovation in Large Companies

The model for organisationally separate development units was Lockheed’s Skunk Works – a product development team established in Burbank, California during WWII to develop innovative new military aircrafts. Today, Lockheed Martin’s Center for Innovation is known as the ‘Lighthouse’ because of the iconic 40 foot recreation of a 19th Century Lighthouse located inside the Center’s expansive atrium. The Lighthouse draws upon the maritime history of Hampton Roads and is a daily reminder that the Center serves as a beacon for explorers on the pathway to innovation.

The Lockheed A-12 was a reconnaissance aircraft built for the United States Central Intelligence Agency (CIA) by Lockheed’s ‘Skunk Works’. The aircraft was designated A-12, the 12th in a series of internal design efforts for ‘Archangel’, the aircraft’s internal code name. Since the Skunk Works program, a number of companies have used advanced development programs in satellite units in order to develop new organisational capabilites:

  • IBM developed its PC at a new unit led by Bill Lowe and located in Florida, a thousand miles from IBM’s headquarters in New York.
  • Xerox’s Palo Alto Research Center (PARC) pioneered many of the technologies that formed the basis of the microcomputer revolution of the 1980’s and 1990’s. However, these were put on the road to success much easier by nearby competitors, such as HP, Apple, Microsoft, and Sun Microsystems than it was to be absorbed by Xerox’s east coast establishment.

When Your Competitive Advantage Walks Out the Door: Gucci and Cavalli

Chairman Domenico De Sole and Vice Chairman Tom Ford had masterminded Gucci’s transformation from a near-bankrupt family firm with an over-diversified brand into one of the hottest fashion houses at the turn of the millennium. As creative director, Tom Ford had established Gucci as a style leader and hired young designers. De Sole’s astute leadership had instituted careful planning and financial discipline, and built Gucci’s expansion in Asia and global presence.

In September 2001, French retailer Pinault Printemps Redoute (PPR) agreed to acquire Gucci Group. In November 2003, the managers and shareholders of the two companies were stunned to learn that De Sole and Ford would be leaving Gucci in April 2004. How great a blow was the departure of the duo to PPR? In theory, a new CEO and a new creative director could be hired. In practice, however, talent of the sort of De Sole and Ford was hard to find; especially a combination of CEO and designer who could collaborate around a shared vision.

The stock market’s reaction was ominous. Gucci was worth US$ 1.2 billion less without De Sole and Ford.

Just this week, Roberto Cavalli CEO Gian Giacomo Ferraris has initiated a comprehensive reorganisation of the company, including store closures and severe cuts to global headcount as Peter Dundas exits. The Italian label will be closing its Milan operations and transferring all functions to its offices in Florence. Production and logistics will be rationalised and the company will close, relocate and sell stores across its retail network. Cavalli, which currently employs 672 people, will eliminate 200 positions. Ferraris expects the company to return to operating profitability in 2018. Roberto Cavalli, like many other luxury brands, faces a challenging climate. In 2015, the global market for personal luxury goods grew to €253 billion (about $284 billion), up only 1 percent on the previous year in real growth terms, according to Bain & Company, a global consulting firm.

Articles in the Financial Times during November 5 – 8, 2003
Business of Fashion]

Motorcycle Myopia

During the 1960s, BSA was the leading motorcycle manufacturer in Britain (Triumph, BSA), while Harley-Davidson was the leader in the U.S. Both markets experienced increased import penetration from Japan. Given the emphasis by Honda, Suzuki, and Yamaha on smaller motorcycles, the Japanese challenge was largely underestimated. Eric Turner, chairman of BSA Ltd., commented in 1965:

The success of Honda, Suzuki, and Yamaha has been jolly good for us. People start out by buying one of the low-priced Japanese jobs. They get to enjoy the fun and exhilaration of the open road and they frequently end up buying one of our more powerful and expensive machines.

Similar complacency was expressed by William Davidson, president of Harley-Davidson:

Basically, we do not believe in the lightweight market. We believe that motorcycles are sports vehicles, not transportation vehicles. Even if a man says he bought a motorcycle for transportation, it’s generally for leisure time use. The lightweight motorcycle is only supplemental. Back around World War I, a number of companies came out with lightweight bikes. We came out with one ourselves. We came out with another in 1947 and it just didn’t go anywhere. We have seen what happens to these small sizes.

By the end of the 1970s, BSA and Triumph had ceased production and Harley-Davidson was barely surviving. The world motorcycle industry, including the large bike segments, was dominated by the Japanese.

Pascale (1983) Honda (A), Harvard Business School Case No. 9-384-049
Advertising Age (1965) Issue December 27
Forbes (1966) Issue September 15]

Distressed Debt at CS

Credit Suisse Group AG Chief Executive Officer Tidjane Thiam said the firm’s traders had ramped up holdings of distressed debt and other illiquid positions without many senior leaders’ knowledge, helping lead to a first-quarter loss in the markets business.

“This wasn’t clear to me, it wasn’t clear to my CFO and to many people inside the bank” when the firm laid out a strategy in October, Thiam said Wednesday in a Bloomberg Television interview. “There needs to be a cultural change because it’s completely unacceptable,” adding that there had been “consequences” for some employees.

The bank’s holdings of distressed debts, leveraged loans and securitised products, including collateralised loan obligations, triggered $258 million of writedowns this year through March 11, after $495 million of losses in the fourth quarter, according to a presentation. The bank said it sold off a quarter of its distressed holdings and more than half of its CLO positions and is exiting some of those businesses.

Trading revenue may drop 40 percent to 45 percent in the first quarter, the bank said. The drop could have been worse, as Thiam said he found out about the positions in January and moved to limit the damage. If he had known the extent of the issues in October, the plans he laid out at that time would have been affected, he said.

“A lot of the problems in the investment bank have been that people have been trying to generate revenue at all costs,” Thiam said in a Bloomberg television interview. “People were reluctant to reduce it because it would’ve exposed their cost problem.”

[Source: Bloomberg, March 23, 2016]