Cranfield University – Embed Project
Transcript of Audio Interview
Professor Joe Nellis on Winning the Future: A Business Overview
SM
Hello this is Cranfield University podcast. I am Steve Macaulay and I
am interviewing Professor Joe Nellis on his article Winning the Future:
A Business Overview. Now Joe, one of the things that people are
concerned about is the future. Managers are having to work with it
every day, but they are also having to deal with the present and that
can take a lot of their time. One of the things that you did in the article
was to look at past winners and then go on to look at people that are
looking ahead and what they are doing. So lets start with the past,
looking back who were the winners and why were they winners?
JN
Rather than specify who the winners are because there are so many of
them, let’s describe what they look like. If we go back to the sixties it
was quite obvious that if you were a manufacturing company, a large
manufacturing company, you could make money because it was a time
of building, a time of construction and government contracts were very
popular. So if I can just capture physical production companies in the
sixties were clearly the winners in that decade, but if I take you forward
to the seventies, we have the emergence of Japanese companies as it
were teaching us how to become winners. I think that was more
about recognising the importance of efficiency and productivity, and so
they brought with them and they taught us the importance of
automation, etc – process in terms of manufacturing. If I move to the
eighties there was quite a big change in the characteristics of winning
organisations. There was a surge in the service sector, in particular
banking and financial services and I think what we saw there was a
rush towards brand as being the difference between winners and
losers. I guess that reflects the growing importance of consumers
with respect to brand. If I then move the nineties, I think we have
seen some remarkable developments. We have seen winners such
as Tescos come from nowhere to becoming a world brand – I suppose
Walmart being the early example of that – and what I would describe
as being the reason why winners have emerged in the nineties or their
characteristics, is because they have identified something different,
they have understood the importance of economies of scale, but for
me they have understood the importance of the economies of scope
and by that I mean they have identified what they are good at and they
have leveraged off that, so for example, Tescos is clearly good at
retailing – the question is what can they retail? And they can retail
almost anything they want to retail because they are good at retailing.
A very simplistic view, I accept that, but that goes hand in hand with
the importance of the customer, recognising what the customer wants,
the customer is king – and on top of all of that, of course, I think
winning companies in the last decade, the 1990s, also appreciated the
importance of technology – not physical technology, but technology in
terms of understanding the customer, information management,
leveraging off their asset which was information. I have tried to give
you a very simplistic overview, and a very rapid overview of the last
three or four decades, clearly it is not a discrete set of time periods –
there is continuum there in terms winning the past.
SM
Now most managers are experiencing change first hand. In your role
in international economics you have got quite a privileged view really
of looking at the key trends that are driving change. What do you see
are the main ones?
JN
Well, at the top of the agenda is this word globalisation. We are
seeing in a relatively short time period changes in the global economy
and global business environment that we could never have imagined in
the past. The timescale is the issue, for example, the rebalancing of
the world economy, the flood of capital and wealth from the West to
the East – particularly, of course, China and India – so I think we are
seeing a scale of change and speed of change that we could not have
imagined in the time period that has taken place and that has created
a whole new set of dynamics, including new markets all over the world
– globalisation – new consumers, new competitors of course and we
are feeling the pressure of that in the Western world, particularly in
manufacturing. New assets – the physical product, the R&D within
that, well in a sense technology transfer has made it possible for that
asset to be transferred all over the world and that is creating new
business models, new ways of looking at how we run businesses, who
our customers are. So I think really this has highlighted a dynamic, a
speed of change that I don’t think any manager twenty years ago could
have visualised today and that really highlights the importance
therefore of recognising where we are, recognising the speed of
change, recognising the challenges of change and then on that basis
identifying what winning the future looks like.
SM
Now, if I am an average manager, I have got enough on my plate
looking at today and keeping up with the competition and although
some of these big picture things that you are talking about are
important, it is maybe easy to overlook those. What recipe would you
apply that enables people to win the future, to look ahead?
JN
Gosh, difficult question to answer of course, but it is one we have to
ask and attempt to answer it. Let me answer it indirectly this way.
Let’s visualise a company that has been successful and knows why it
is successful – let’s assume that success has been based on quality.
I will take an example – let’s think of the top range cars, quality cars,
which are clearly positioned at the high end of the market with
premium prices, which obviously justifies or supports differentiation
strategy – but how many of us today would buy a car that doesn’t
work? Quality is no longer a differentiation. I would describe it as a
commodity and so in terms of winning the future, if you are relying on
as it were, your old source of competitive advantage, ie, quality, then
you have really got to assess whether or not that is sustainable.
Another example would be airlines. Ten years ago you can imagine
being offered two airline tickets, one with a major carrier going from
London to Paris £300, another one offering you a ticket at £5. You
almost certainly wouldn’t have chosen the £5 ticket because you
wouldn’t be sure of landing, you would doubt whether you could get an
airline ticket at £5. Today, we now have airline tickets being sold for
zero price and nobody expects the plane to crash – or we hope it won’t
crash. So safety is no longer a measure of differentiation – it is a
commodity. So in terms of really answering your question, what
companies have to ask themselves is, is the source of our past
success sustainable in the future? And I would ask them to challenge
everything they do, right throughout the organisation and in particular I
would ask them to ask their staff for ideas, new voices, new
perspectives, new business models, new ways of looking at their
business. For example, we will all remember ten years ago if you
could have bought one of the latest mobile phones it would have cost
you in the region of £300, £400, £500. Today in this country and in
most Western countries the price of a mobile phone is zero, you don’t
pay anything for it. Can you imagine ten years ago working for a
company that relied on selling mobile phones, suggesting let’s give
them for free – they would think you were crazy, but today they are
free because the business model has changed and we now spend a
lot more money on telephone calls. So really what I am asking a
company to do is, is to think is their model sustainable, the way in
which they generate profits, the type of customers, the type of
products, the way they sell them and challenge the market, is to
challenge it, not for the sake of changing it just for the sake of
changing it, but to ask is this sustainable? And I think in that context
they might be surprised – they might wake to the reality that there
challenges that they don’t yet know about. And I think that applies
right across the board and that has given rise to some new ideas,
some new ways of thinking about business models and one of these
has of course become known as Blue Ocean Strategy or Blue Ocean
Thinking.
SM
Now, I have heard about that, but I don’t really know very much about
it. Those words I have heard, and its in your article – Blue Ocean,
Red Ocean. These sound great terms, tell me more about it.
JN
Well let’s first of all be very clear, they are only terms. They are
meant to provoke, to stimulate our imagination about our business
models. Let’s clarify that. Nice words, but what do they mean – that
is the real issue. Let me clarify Red Ocean. That is simple, Red
Ocean is where the sharks are eating each other, that is the world we
are seeing today. Its always been the case, but we have now got
more and more crowded market places, more and more suppliers
trying to serve an existing customer base.
SM
So Red Ocean is where many companies are now?
JN
All companies by definition – where margins are getting tighter,
competition is becoming more aggressive, there is a war going on for
market share. Its market share within a given market. Blue Ocean is
very different. Let me paraphrase it like this – how much money, how
much business could you generate if you could create a need that
people don’t yet know they need? And if you are the one that creates
that need, how much could you generate in terms of profit, revenue
and market?
SM
I mean that sounds wonderful – its sounds maybe if I may say so, a bit
academic in the sense that your average manager looking at this
would say wouldn’t that be wonderful, but how on earth do I do that.
JN
Well, very simple, the alternative word would be innovation, which is
perhaps a more meaningful phrase. Let me give you a very, very
simple example just to (a) create some amusement, but also to
graphically demonstrate how successful this can be. Twenty years
ago the market for washed packaged salad was zero, it didn’t exist.
Today that market is a multi billion dollar market around the world and
what it has done, it has created a need that we didn’t know we needed.
Did we really need to buy washed salad? Well, you try and reverse
that today and you will discover you would not be able to reverse that,
so you have created a market out of nothing. Other trivial examples,
electric toothbrushes, for example, I didn’t know I needed electricity to
wash my teeth, but where is the profit in that? The profit is now in the
replacement heads – it’s a huge margin. We now have razor blades
that went from one blade to six blades, now with batteries. But once
you create that need for this innovative product, people will tend not to
reverse their needs because they get used to it. But let’s just span
into bigger aspects of this. I mentioned the mobile phone, by
changing the business model we have created a need for mobile
phones and for communication that we could never have imagined.
What is the youngest child that you know has a mobile phone? I
suspect you will tell me it’s five or six. Remove that mobile phone and
see what happens – you have a problem. Even children now believe
they need this. So what we have seen is innovation, not only in the
product, but also in the way it is being sold, the business model, the
profit streams and we have created something now which is now
almost indispensable. You go on a train from London to Bedford to
Cranfield, you will discover many people have two mobile phones – I
often wonder who they are talking to – is it their wife, or is it somebody
else at the same time. So we are now seeing needs that we could not
possibly have – well by definition – known about in the past, but once
you do this, once you create that need, then I think the momentum is
impressive. Perhaps one of the oldest examples at least in the last
twenty years is Post It paper. Who would have thought that a glue
that didn’t stick would become almost an indispensable product in
every secretary’s office. So what I would like people to think about is
not that this is difficult, but actually it is easy to do it and the secret is to
unlock that innovation in organisations and if I could capture that with a
concept in every organisation, and within every organisation and every
individual, there is what I refer to as a creative gap. Let me define that
very clearly. The creative gap is the gap between the profits you
make and the profits you could make – or in not for profit
organisations, the performance you achieve or the performance you
could achieve. So ask that question – have you got a gap? And the
answer is yes. The challenge is how do you close that gap and that is
part of what Blue Ocean is trying to do.
SM
That is very interesting – what I would like to do is to say if you were to
have, you know, the whites of the eyes of the UK’s top senior
managers in here, right now and they would say to you, well, so what?
What are the implications of this? What would you say to them?
JN
Implications – let me identify those perhaps in terms of what I have
called five new business realities. So the implications of this will
emerge if you can identify what the new realities are you are facing
and then challenge the organisation. For example, I would like all
organisations to recognise that customers are not a market share, they
are a franchise. Imagine you have franchise which is a licence to
operate today, but tomorrow it can be removed. Think of how you
would treat your customers if they were a franchise and you could
loose them tomorrow – that is a mindset, but that will change
organisational thinking. Secondly, by definition, if you can reduce
costs, you should reduce costs to be more efficient, so that is a given,
but have you really thought about what it is that makes you successful,
what is your core competency? And can you leverage off that? That
is what I mean by economies of scope. That is the second point – so
do you really understand what makes you successful? And unless we
ask that question, then we will never be able to leverage off it. Thirdly,
you need to recognise that markets are becoming more and more and
more fragmented, so an offering to a market segment in the past may
not be appropriate in the future, because that segment may be now
several different fragments. People want more and more individuality.
That leads to my fourth thought, or reality, is that there is a massive
shift from the emphasis on mass production to what is now called
mass customisation. That may be a perception, but if you can get
your customers to feel that they are getting personal attention,
personal products, then I think you have got a success to build on.
For example Dell, you build your own computer as you order it, Toyota
cars are built to order to a certain extent, as opposed to the mass
production – all the same colour, every day. And last but not least,
which is a bit of a play on words, there is no question that in the past
the emphasis on product technology has been a success factor. The
better the technology, the bigger the advantage you have got. But
technology is now transferable across the world. I would like
companies not to think about product technology, but what I call
market technology. What I mean by that is – it’s a play on words I
said – its to spend more time on understanding the mechanics of the
market, what the market is thinking, how it behaves, what its needs
are, what its future needs will be to create new markets? That takes a
lot of effort and time, so how we achieve that of course, is a good
question. I think you first of all have to recognise that have you got
the right people in the organisation to help you think that way? If
organisations recruit people who look like the existing staff, we are
simply cloning the existing models. Companies like Microsoft I think
are very good at identifying the importance of attracting people with
different mindsets. So, if you need more creativity to think through
these issues, you need more creative people, but if you are in the
business of - the IT business – that doesn’t mean you need more
computer programmers, or if you are in financial services, you don’t
need more accountants or more financial people – you need people
who are more creative. People such as artists, linguists, musicians –
they tend to think differently, so if you need a different business model,
consider your recruitment strategies and are you recruiting people who
perhaps think differently from the way you think as a means to
achieving some of this Blue Ocean thinking.
SM
Great, well thank you very much Professor Nellis. I think what you
have done is given a very challenging agenda for the future and a very
practical one to move forward.
JN
Thank you.
© Cranfield University 2008