TELECOM Digest OnLine - Sorted: Management and Innovation

Management and Innovation

Lisa Hancock (
1 Nov 2004 13:33:20 -0800

[I created a separate subject and post to discuss a different issue]

w_tom <> wrote

> Remember what happens to companies who don't innovate. Any Baby
> Bell that uses the bean counter concepts of cost controls is doomed
> just like Western Union and AT&T. AT&T and Western Union both were
> dead center in a wonderful future -- and instead failed to innovate
> their core business.

As mentioned in my other post, hindsight is 20/20 and it's easy to
criticize past managements for "failing to innovate". But the issue
is not so simple, and people must realize that.

Western Union's core business -- record message transmission --
became obsolete with the advent of cheap long distance service
in the 1960s. In the 1950s and earlier, long distance telephone
calls were extremely expensive and telegrams were cheaper. But
once LD rates dropped, a phone call cost the same and was both
faster and more efficient (two way conversation). With money
transfers, the widespread advent of everyday people having
credit cards eliminated much of that need. So, Western Union's
"core businesses" were obsolete (and this was even before cheap faxes).

WU was further hampered by adverse regulatory actions which
favored AT&T at WU's expense and by a tough labor situation.
WU was blocked from going into potentially profitable businesses.

There was nothing WU for "innovate" when the core business itself was
obsolete. The only choice WU had was to go into entirely new lines of
business. [This is only a brief summary of WU's issues.]

Over the years, there have been some companies that have done just
that -- doing things today that are a far cry from their past. There
is today a big convenience store chain that was once an iron maker,
for example. I don't call that "innovation".

The truth is that in many cases, management most certainly wanted to
innovate and had the correct direction in mind. However, legal,
regulatory, labor, or other external constraints blocked them from
doing what they wanted. Western Union had severe regulatory
restraints. Actually, the Baby Bells were blocked by regulation from
doing some things they're doing today.

Let's look at Sears and Montgomery Ward. At the end of WW II, Sears
invested in suburban expansion, Montgomery Ward expected a recession.
Historically, M/W was correct because recessions occured after wars
and the Great Depression preceeded WW II. But M/W turned out to be
wrong and Sears correct.

Let's look at the Penn Central: Many people blame its management for
the bankruptcy, feeling if there was more "innovation" the company
would have survived. But the truth is that the Penn Central did try
to improve things and innovate but that wasn't enough to save it. It
faced drastically changed business conditions in its service
territory. But government regulation and labor laws blocked
management from meeting those challenges. Subsequently, the laws were
changed but it was too late for the PC. BTW, the PC was criticized
for going away from its "core business", but its other investments
were what carried it.

Let's look at domestic steel, which died in the 1980s and mgmt is
blamed. But in the 1970s, steel got him with a simultaneous triple
whammy: 1) Drastic increases in pollution control laws that were
extremely expensive to comply, 2) drastic increases in the cost of
energy, and 3) drastic reduction in demand as a result of foreign
competition of both raw steel and finished goods (like cars) and
cheaper substitute materials. It should be noted that until this
triple whammy hit, demand for domestic steel had been very strong and
growing since WW II.

The result was way too much high-cost capacity for low demand, and
many steel companies went bankrupt. Thousands of steel workers lost
their jobs. There was certainly some things steel management could
have done differently, but that would've only made things slightly
better and wouldn't have changed the big picture.

Now this is not to say management is always blameless. There are many
examples of where management simply blew it (why some supermarket
chains flourish while others languish). Sometimes management clings
to a past or charges headstrong to a future that no one else sees or
agrees with. Sometimes innovation -- the way an outsider sees it --
isn't as easy as it looks.

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