Quite a few of you asked for more information about this book. In
particular, you asked about Hartung’s “Phoenix Principle” — his
prescription for avoiding the stagnation and eventual disintegration
that are the near-inevitable consequence of business success.
To understand the Phoenix Principle, you first have to understand
three of Hartung’s core concepts. The first is that to sustain rapid
growth, companies create “success formulas.” A success formula, while
including such niceties as strategy and tactics, starts with the notion
of identity — the definition of who we are.
When all employees know who we are, they are better equipped to efficiently make decisions that will help move the company forward.
The second core concept is “lock-in.” Lock-in is what companies do
to enforce their success formulas, using a combination of
organizational structure, systems, incentives, enforcement, and culture
to prevent deviations.
Success formulas and lock-in are the keys to winning … until market
conditions change. Then, lock-ins prevent companies from adapting,
because that’s precisely what they’re designed to do — keep them
pointed in the direction that once was right, but isn’t anymore.
It’s inversion of purpose: Lock-ins, which should be tools for
implementing the right success formula, instead replace profitable
growth with the success formula as the definition of effective
management.
The third core concept is “white space” — unexploited opportunities
in the marketplace, which smart business leaders are able to identify
and pursue. In Hartung’s view, the key to sustainable business success
is to identify white spaces and go after them. To do so, business
leaders have to change their success formulas, and then to disrupt the
lock-ins that would otherwise force course “corrections” back to the
original corporate identity, strategy, and tactics.
This is the Phoenix Principle.
So far, so good. Hartung’s analysis is acute. He gets better,
recommending that since lock-ins make companies predictable, you should
exploit those of your competitors. It’s great advice, and a perfect
account of, for example, how Microsoft rolled right over Novell with
its introduction of Windows NT Server.
Hartung recommends casting a very wide net in the search for white
space. He admires, for example, Singer, for selling off its sewing
machine business entirely to become a defense contractor, avoiding
competition with low-labor-cost foreign manufacturers.
This is where we part company. I know of too many companies that
made equivalent Phoenix-Principle attempts and failed … not because
they stubbornly defended their existing success formulas, or didn’t
disrupt their lock-ins, but because of something more basic, which is
that …
Most new business ventures fail. Choosing to pursue a brand-new
white space that has nothing to do with the current success formula is
equivalent to starting a new business venture, and I personally know
plenty of cases where new-white-space-ventures simply turned out to be
worse ideas than they originally seemed.
There’s a certain post hoc ergo propter hoc property to
some of Hartung’s examples. For example, he lauds General Electric’s
1970s decision to sell off its computer business, its leaders
recognizing the impossibility of competing head-to-head with IBM. GE
certainly succeeded by diverting its attention to other ventures, but
the computer industry had plenty of white space left in the 1970s, and
companies like Digital, Data General, and Control Data took huge
advantage of it.
And puzzlingly, Hartung criticizes Kodak’s decision to avoid
competing with Nikon, Canon, Sony and Panasonic in digital photography
while ignoring its Phoenix-Principle-like exploration of white spaces
in digital imaging, document management, coatings, gelatins, and
sensors.
My opinion: Singer’s defense-industry-as-white-space is a poor model to follow.
Companies shouldn’t abandon their success formulas. They should, as
Kodak did, reformulate them in ways that take maximum advantage of one
or more existing strengths.
Hartung lauds Apple for entering the music business with the iPod and its iTunes store. But Apple actually created the iPod, then iTunes.
The sequencing was crucial. The iPod took full advantage of Apple’s
user interface mastery and ability to design seriously cool products.
iTunes took full advantage of Apple’s iPod customer base. Both were
flank attacks on moribund markets (portable music players and music
distribution) with predictable competitors.
That’s the ticket to ongoing success: Use leverage and flank
attacks. Find an industry whose players are playing defense and apply
strengths you have and they don’t.
Their responses will be predictable — Hartung explains why with precision — and predictable competitors are easy to beat.
