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Disparities between financial and factory-level productivity measures exist at many manufacturing facilities. Better alignment can improve efficiency, pricing, and product strategies.

The CEO was coming to visit, and the senior plant manager at a large biotech production facility was uneasy. The latest numbers from the Finance Department hadn’t been good: the plant’s labor costs were rising, while margins were slumping. When the CEO asked what was going wrong, the manager could only describe his difficulties getting his hands around the problems.

As he explained, standard accounting measures based on the cost of goods sold meant that he couldn’t tell for sure whether margins were declining because fluctuating production volumes were reducing operating efficiency or because variations in the mix of high- and low-margin products were bringing down the plant’s average margins—or both. He thought the numbers should be better, given his knowledge of what was happening on the plant floor, but he had no way to dig into the operating details to explain quarter-on-quarter changes in productivity. That would require a much finer-grained understanding of the many components of product costs. The CEO gave the plant executive three months—until the next operating review—to come up with a better answer.

The plant manager knew he faced a devil of a time parsing the many activities of the biotech facility. For starters, the plant had seven distinct production areas and thousands of stock-keeping units (SKUs). In one laboratory-like section, PhDs mixed customized chemical products by hand. Elsewhere, fermentation and cracking lines processed biologic inputs. In another wing, staffers surveyed a continuous stream of capsules and vials as they passed through a fully automated production line. An assembly line for medical instruments occupied one wing; other areas housed testing and packaging lines. Some product families had hundreds of SKUs because of slight differences in key ingredients or concentrations. Swings in the monthly volumes and mix of production compounded the difficulty of pinpointing cost problems.

Imprecise cost accounting and its distortions

This plant was complex, but its problems are common. The issues facing its managers resemble those bedeviling myriad processes used in the fabrication of semiconductors, the production of specialty chemicals, and other applications with thousands of SKUs and complex production environments. Similarly, in our experience many managers who oversee shop floors consider traditional cost-of-goods-sold accounting—the widely used measure of operational performance—a blunt instrument. Fixed costs for capital equipment and inventory charges, for example, are averaged across SKU groups, masking changes in variable costs. When products are scrapped, that could often be due to poor forecasts by the marketing and sales functions, an issue that should be recognized in productivity measures. In most factories, multiple products often pass through the same production lines and share the same workers, making true cost assignments difficult, so the averages applied distort the true cost picture. Volume and mix swings accentuate the problem. Finally, when output volumes rise or fall, costs often don’t follow in lockstep, since there’s a time lag in consuming inventory.

The effects of getting measurements wrong can be substantial. Without good cost data, it’s hard to decide how to price products or even how much to produce. A hazy understanding of which production areas in a plant perform poorly leads to bad investment decisions. Multiplied across a large corporation’s manufacturing footprint, even minor plant-level miscalculations can have a significant impact. That’s a serious handicap in the current economic climate, since slower growth and more intense competition put a premium on operating efficiency. In plants we have examined, true costs vary from those assigned by traditional cost-accounting methods by 30 to 100 percent.

A new basis for measuring costs

The plant manager, knowing that he had no time to waste, quickly put together a team of experts, from a variety of functions, with the best knowledge of the plant’s processes and costs. The members of the team divided up the tasks facing it. Some undertook full-day fact-finding missions across the plant to get a more detailed understanding of the way processes flowed and the production staff was configured. Others pored over data on the cost of materials, labor, scrap, and overhead. After two months, the group had a plan for tackling the issues.

Clearly, the key was developing a radically detailed understanding of what happened to costs as the product mix and volumes shifted. The team mapped out three steps to accomplish this goal. First, it would define new product pathways and subpathways—granular “factories within factories” that made it possible to assign costs more accurately. Next, using a regression analysis of historical data, the team would detail cost drivers for each subpathway, an analysis based on past relationships between input costs and output produced. Finally, to account for dissimilar products, as well as for changes in the product mix and volumes, the team would define standardized “manufacturing units” (see below) that would allow productivity to be measured across time periods.

Using pathways to fine-tune product segments

The team grouped the plant’s product lines into pathways according to their common characteristics, such as the types of workers handling them and the processes used to manufacture them. In some cases, different pathways share labor or machinery. These high-level pathways, for example, separated biologics from chemical solutions and from instrument assembly. To delineate costs clearly, each pathway had its own measure of output: grams of gel for biologics, milliliters for chemicals, and pieces for instruments. The result was a set of distinct product families, each comprising several narrowly focused lines that shared common traits.

Building profiles of cost drivers

The next step was to identify cost drivers for each subpathway to help estimate input costs by the amount of output produced. Team members mined data on materials, labor, capital costs, scrapping charges, and other costs for each subpathway’s finely tuned production units. The team used statistical estimates to build these profiles, because materials and labor costs don’t rise and fall in linear fashion as output changes. (A 15 percent increase in the output of chemical solutions, for example, raises total hourly wages by only 10 percent, thanks to scale economies.) To estimate these cost and volume relationships, the team performed hundreds of regression analyses on historical cost data.

With the pathways and information on cost drivers in place, the factory team could accurately assign the amounts of chemical and biological compounds, labor inputs, and in-process scrap that went into, say, the creation of a vial. Take the example of a shop floor area that processed both vials of chemicals and biologic capsules. Traditional accounting averaged labor costs for this area across all the biologic and chemical products that passed through the line; only minor adjustments were made for variations in the mix or in volumes. The new data on cost drivers, by contrast, made it possible to measure labor costs down to a fraction of a penny for each of the more precisely defined product pathways.

Standardize output with manufacturing units

These new metrics gave a highly accurate picture of how costs varied within each pathway when volumes or the product mix changed. But the team still had no way to get a broad picture of productivity fluctuations across the entire facility and across time periods as mixes and volumes changed. This was an apples-and-oranges problem: as the mix of vials and capsules fluctuated, there was no meaningful way to add vials measured in milliliters to capsules measured in grams across time periods to get a baseline output figure.

With pathway and cost driver analysis, the team could assess productivity change across periods by modeling the predicted production costs of each pathway and comparing them with actual incurred costs. To solve the apples-and-oranges problem, the team denominated these input costs in standardized manufacturing units, which allowed costs at the most granular levels to be rolled up to pathways and, critically, to the site level. This approach provided the big picture on costs and changes in productivity (for a before-and-after example, see the interactive exhibit, “Product pathways reveal true costs”).

Product pathways reveal true costs

Pathways and standardized manufacturing units reveal how costs vary when volumes or product mix change.

Here’s an illustration. In a base quarter, the biologics pathway might produce 1,000 grams of gel at an expected cost of $500 (in direct and indirect labor), the chemicals pathway 500 milliliters at an expected cost of $1,000 (also in direct and indirect labor). The computation assigns a value of 1 manufacturing unit for every $50 in production costs, so the first pathway earned 10 manufacturing units ($500 divided by 50), the second pathway 20 ($1,000 divided by $50), for a total of 30 manufacturing units. If in a subsequent quarter, the actual cost of producing 1,000 grams of gel fell to $450, the cost per manufacturing unit would fall to $45, from $50—for a productivity gain of 10 percent. Similarly, changes in total costs in other pathways can be compared with regression-expected costs and the totals rolled up across pathways for a view of overall productivity change at a site.

Applying the lessons

At the next quarterly meeting with the CEO, the new metrics were in force. Repeating the pattern of past meetings, the Finance Department reported numbers that seemed to show persistent problems. Labor costs and the number of labor hours worked had fallen, indicating a falloff in business. Meanwhile, raw-material inputs had skyrocketed. Using the newly developed pathway cost numbers, however, the plant executive showed that production volumes rose substantially in the instruments line but had dropped significantly for chemicals. The production of instruments involves high costs for materials but not much for labor—the exact opposite of the pattern for chemical products. That explained how the cost of goods sold could climb in the face of declining hours.

What about productivity? An analysis based on manufacturing units showed that it had risen by 5 percent. While the product mix had shifted substantially, total output, as measured by manufacturing units, had risen by 3 percent; the inputs used to produce those manufacturing units had fallen by 2 percent.

	oggle Sidebar

The CEO incorporated the new metrics into company-wide reporting practices, and the gaps between operations and financial-performance measures diminished across the organization. A clearer picture of product margins allowed management to drop a range of poorly performing SKUs and to shift resources to higher-margin products. A more detailed understanding of costs led the company to realize further economies by shifting some production to sites where higher volumes would help absorb high fixed costs. The new measures also entered the company’s performance dashboards, and factory managers began tracking leading indicators of productivity, such as in-process materials scrap and labor utilization rates, on a daily basis.

In the wake of the recession, the demand for increased operating efficiency remains high. But disparities between financial and plant measures of costs and productivity exist at many manufacturing facilities. A better alignment, based on the enhanced gathering and analysis of data, can improve efficiency and provide a stronger foundation for pricing and product strategies.

About the Authors

Jon Duane is a director in McKinsey’s Silicon Valley office, where Nazgol Moussavi is a consultant and Nick Santhanam is a principal.

The authors would like to acknowledge the contributions of Susan Ringus, an alumnus of the Pittsburgh office, to the development of this article.

 

Source

McKinsey

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Performance●Productivity●Profit

Even in these tumultuous times, strategic planning doesn’t have to be an exercise in anxiety—or futility.

APRIL 2010 • Renée Dye, Olivier Sibony, and S. Patrick Viguerie

Source: Strategy Practice & McKinsey Quarterly

Strategic-planning season has arrived for many companies, and it couldn’t be more different than it has been in years past. Gone are the days of linear trend-extrapolation exercises that produce base, upside, and downside cases. Strategists, now facing the most profoundly uncertain times in their careers, are creating disaster scenarios that would have been unthinkable until recently and making the preservation of cash integral to their strategies.

Most strategists we know are avoiding the obvious mistakes, such as planning as usual or, conversely, eliminating essential strategy-development activities or even strategic planning itself. Nonetheless, strategists remain deeply—and understandably—concerned that the priorities emerging from the annual planning rituals won’t address the demands of today’s tumultuous environment.

These are uncharted waters, and no one has a clear map for sailing through them. It’s clear that scenario planning, a well-established technique for coping with uncertainty, should play a critical role this year, but executing successfully has never been as challenging as it is now. Most companies will have to consider more variables and involve more decision makers than they have in the past. Strategists will also need to place a greater emphasis on measurement—the only way to recognize when changing conditions merit quick strategic adjustments. Finally, the focus on new or surprising scenarios shouldn’t obscure relevant long-term trends or devalue important existing strategies.

Be realistic about scenario planning

In a highly uncertain environment, the advantages of scenario planning are clear: since no one base case can be regarded as probable, it’s necessary to develop plans on the assumption that several different futures are possible and to focus attention on the underlying drivers of uncertainty.

Today’s pervasive uncertainty complicates scenario-planning efforts: the number of variables at play—and the range of plausible outcomes—have exploded in the past year. Consider, for example, the predicament of an industrial supplier that is not only heavily exposed to commercial and residential real estate but also has many government customers. For this company, the critical uncertainties include the direction of the commercial-credit and mortgage markets, housing prices, tax revenues, and government stimulus spending. Different outcomes for each of these uncertainties produce vastly different paths for the business. Since the heart of scenario planning—crafting a number of strategies for different outcomes—has become significantly more complex,¹ strategists should prepare for a more demanding process of gathering information, exploring possibilities, and plain old hard thinking.

Senior executives outside the strategic-planning group—even those accustomed to developing scenarios—may find the diversity and complexity of this year’s scenarios bewildering. It’s critical to bring such executives into the process early: for example, by kicking off the planning process with a scenario-development exercise involving the full senior team. Similarly, as the process of reviewing business units gets under way, a company can inculcate an appreciation of the threats it faces and of its collective strategic response by inviting executives from a number of divisions to participate in the proceedings—rather than hold one-off events between the senior team and the leader of each individual unit.

Intensify monitoring

Depending on how events unfold, the industrial supplier mentioned above could make radically different moves. If the commercial and residential real-estate markets stabilized, it could expect reduced sales within those channels until the economy rebounded, but its business model would remain fundamentally the same. If those markets softened further, the bulk of the company’s market opportunity, for the foreseeable future, would lie in infrastructure investments underwritten by government stimulus spending. In that case, the company would need to redeploy its sales resources to government-oriented business and focus on maximizing sales there.

The company’s strategy, in short, must account for many more contingencies than it has until recently. Since the effectiveness of such a strategy depends on an organization’s ability to adjust rapidly as the fog starts to lift, managers must identify and intensively monitor key indicators suggesting which scenario might unfold. For the industrial supplier, some of the most important indicators are sales of new and existing homes, foreclosure rates, mortgage interest rates, new building starts, and announcements of “shovel ready” government projects. Of course, the company’s managers always followed such indicators, but the strategic-planning process typically collapsed their potential variations into average market growth forecasts. Given the present heightened uncertainty, however, the strategy group decomposed the average forecast into its individual elements to make the possible outcome for each of the indicators more transparent and to monitor them in greater detail.

There’s no occasion like the strategic-planning process to get a fix on such indicators—a fix that should also help companies make ongoing budget decisions in real time. That’s critical, because it makes no sense to set each operating unit’s budget allocation at the start of the fiscal year if cash is tight and corporate executives expect to dole it out carefully as plans become less uncertain. What companies need now is a dynamic “pay as you go” resource allocation process that conserves cash and encourages adherence to the strategic road map laid out in scenario planning.

This year’s planning process should also generate unusually specific plans to monitor the performance of suppliers, customers, and competitors. As we’ve seen in the past six months, the most entrenched incumbents can plunge into financial distress with dizzying speed. Early intelligence helps companies to recognize when they should negotiate more favorable supply terms, line up alternatives to risky suppliers, offer kinder credit terms to critical customers, accelerate collections from faltering ones, or scoop up all or part of vulnerable competitors. Leading indicators of distress include such familiar signals as delinquent accounts payable, downgraded debt ratings, large share price declines, late inventory deliveries, or lower-quality goods or materials. These signs, though all too familiar to operating managers, are typically addressed in an ad hoc way, not in the strategic-planning process. This year is different.

Look beyond the crisis

Given the vastness of the economic change now under way, the temptation for many planners will be to gaze, mesmerized, at the unfolding crisis. That’s a mistake, for at least two reasons.

First, devastating as the current downturn may be, it cannot roll back fundamental market trends—such as the aging of consumers in Europe and North America or the continued economic development of Brazil, China, India, and Russia—which will continue to create strategic opportunities and threats. Managers must focus their eyes—and resources—on these trends no matter what happens.

Second, planners who become fixated on current economic events run the risk of overlooking a core responsibility: evaluating the effectiveness of current strategies. Although the crisis may force companies to suspend or redirect some of them, others will remain relevant even in the changed environment. This year’s strategic-planning process is a time to encourage managers to sort out which current strategies the crisis has helped, hurt, or failed to affect and to ensure that a system and metrics are in place to track their performance. While all this may sound like common sense, extreme uncertainty makes it easy to overlook.

One company that’s staying the course is McDonald’s, which has profited in the downturn from its low-cost menu items and is enjoying its most robust same-store sales growth in years. Meanwhile, senior management has remained focused on longer-term strategies involving expensive store renovations, operational overhauls, high-end coffee products, and healthful menu options. Managers elsewhere can learn valuable lessons from the company’s efforts to benefit from the current circumstances while sticking to longer-term strategies and the underlying trends (such as healthier lifestyles) that they reflect.

Despite the challenging times, this year’s strategic-planning process need not be an exercise in anxiety or futility. Developing scenarios in greater depth, monitoring strategies more rigorously, and remaining focused on the long term will all help strategists boost the odds of creating plans that can lead their companies through the turbulence.

Executives are concerned that a new focus on near-term challenges may cause this year’s planning process to overlook long-term trends or preexisting strategies, according to the results of a McKinsey Quarterly survey on strategic planning.²

More than 80 percent of executives say their strategic-planning processes look different this year compared with last. The change executives say has been most significant is the adoption of a more rigorous approach to approving projects and capital spending, presumably with an eye toward managing cash carefully. Other significant changes include the creation of strategies that are more dynamic, focus on the short term, and that include more analyses.

Scenario planning is becoming a leading part of the process. Over 50 percent of respondents say scenario planning either is playing a bigger role in their companies’ strategic planning this year or has been newly added to the process. And when asked to write in the element of their planning processes that has been most valuable in helping them cope with this year’s uncertain environment, more executives mention scenario planning than anything else. Nearly 60 percent of the respondents say their companies are monitoring progress against their strategic plans more frequently this year. Over 80 percent of respondents are assessing the progress of their strategic plans at least quarterly, with 50 percent doing so at least once a month.

In short, many strategists seem to be rapidly adjusting their planning processes to cope with the changed economic environment. Important as these adjustments may be, their nature also raise a major question in the minds of many strategists: is the crisis atmosphere undermining focus on all but the immediate future? More than 50 percent of executives, in fact, express worry about not striking the right balance between near-term challenges and long-term strategic priorities. The perennial challenge of striking this balance has become particularly acute this year.

Source: McKinsey

Here are some interesting insights from Linda Naiman - Creativity at Work, she has some fantastic networks...

Innovation Practices for Leaders

The revolution taking place in design — as it emerges from its traditional role of serving commerce — to a role of leading, shaping and directing the way we live and work, presents tremendous opportunities for leaders in business and government. CEOs of major corporations are now applying design principles to strategy and innovation. The success rate for innovation dramatically improves when it is designed.

P&G is using design-thinking to change its culture. Leadership is listening, learning, and deploying; cross-functional teams are cracking vexing problems across its business landscape; and visualization, prototyping, and iteration are facilitating communication internally and with customers like never before. (BusinessWeek July 28, 2008)

A design mind-set is not problem-focused, it’s solution focused, and action oriented. The purpose of design, ultimately, is to improve quality of life. Empathy is key to design success.

From a design point of view, truly innovative products speak to their users' emotions, according to Yves Behar (Fast Company 2004), who designs radical innovations to well established consumer products for companies such as Nike and Toshiba. It's the emotional connection you make with employees and customers that wins their loyalty.

The design way of thinking can be applied to systems, situations, procedures, protocols, and innovation. We can design the way we lead, manage, create and innovate

The power of thousands of individuals acting en masse has become a weapon of war. While politicians, revolutionaries, and totalitarian governments have long known how to send crowds of protesters to the streets to parade in front of the television cameras, the new trend is to mobilize forces over the Internet to engage in the equivalent of mass online protests. In some case the results can be humorous. In others, not. Remember Mr. Splashy Pants? In an attempt to garner sympathy for its cause Green Peace posted a poll to choose a name for a whale. A call to the members of Reddit , the hugely popular social bookmarking site, was put out. It read:

Greenpeace are having a vote to name a whale they have ‘adopted’. All the options are the names of ancient gods of the sea. And then there’s ‘Mister Splashy Pants’. Please vote ‘Mister Splashy Pants’.

Green Peace demonstrated extremely good humor in accepting the results of over 100,000 votes for “Mr. Splashy Pants” for the humpback whale they were tracking via satellite.

During the US Presidential elections of 2008 any online poll was quickly inundated with votes derived from a call to arms by the followers of one candidate or the other with Ron Paul, the small government libertarian, usually winning out because of his appeal to the tech-savvy.

Alexader Putin, Prime Minister of Russia, has learned to use crowdsourcing to orchestrate massive Denial of Service attacks capable of shutting off an entire country’s ability to access the Internet. Included in his growing list of successful attacks are Estonia 2007, Lithuania 2007, Ukraine 2007, Georgia 2008, and Kyrgystan 2009. Putin commands a youth group called the Nashi, which meet every summer for fresh air, exercise and indoctrination. When it comes time to spread a little trouble Putin has an operative post instructions for downloading tools for spewing web requests along with a list of targets. Nashi, and Putin followers then download the tools and kick off the targeted attacks. DDoS by crowdsourcing. The beauty is that this technique provides a shield of plausible deniability. This was not Russia it was a bunch of patriots that were angry at [insert justification here].

During the recent military action in Gaza attacks against Israeli and American web sites became the most recent example of a crowd sourced cyber attack. Dozens of attackers systematically defaced over 800 web sites with pro-Hamas messages, many of them depicting gruesome images of dead babies and wounded civilians. Among the sites attacked were Israeli news sites, government servers, and even hospitals that were treating Palestinian casualties of the Gaza war. (Hamas supporters hack into Hadera hospital Web site)

Every age brings its new methods of warfare. The Romans perfected field combat with foot soldiers. Napoleon developed modern staffing for command and control combined with the science of logistics for re-supply, and the use of canon batteries. World War I saw the introduction of poison gas and mechanized armies. World War II introduced aviation, missiles, and rockets to the mix. Vietnam was the most tragic example of the use of guerrilla warfare to vanquish the techniques and technology of World War II era armies. The so-called war on terror is seeing the rise of cells, suicide bombers, and IED’s as effective weapons.

While defacing websites and disabling government communication vehicles such as the Ministry of Foreign Affairs site of the Georgian government have not yet been recognized as warfare, it is apparent that networks, which have had an immeasurable positive impact on communication, commerce, and social interaction, are also vulnerable to attacks. Attacks on and across networks will become the defining innovation of future wars.

The motivation for using a disbursed and large group of non-professionals in a cyber attack are both political and technical. Political advantage arises from the plausible deniability. China still maintains the fiction that attacks against the Pentagon, France, Germany, India, Australia, and New Zealand that emanated from within its borders are the acts of unaffiliated young hackers. Even now Russia does not accept responsibilities for attacks against Estonia, Lithuania, Ukraine or Georgia. Russia, perhaps the most accomplished country at manipulating world opinion, continues to deny all responsibility for its well orchestrated attacks that have not only brought down the immediate targets, such as web sites of government agencies, but have effectively brought Internet traffic to a halt in the targeted regions.

The technical advantage of crowd sourcing cyber attacks comes from the difficulty in defending against a massively distributed flood of requests sent against a web site or web resource such as DNS. Hackers have been exploring and refining the techniques of Distributed Denial of Service for two decades. The earliest denial of service attack was a simple ping flood. Anyone with a fast computer running Unix could execute a simple command that would generate ping packets, small one way communications used by network monitoring products to check to see if a host is still responding, to completely tie up the resources of the target computer or even completely clog its network connection. Ping floods are simple to defend against. A single rule in a router or firewall between the attacker and the target can block all pings.

There are, however, some packets that cannot be simply blocked at the firewall. Packets associated with the normal operation of the attacked web site or other type of server have to be let through. In the case of a website there is the TCP packet that initiates a connection between a browser and a web server, the SYN packet. When a web server receives a SYN packet it begins a three way handshake and waits for a response. An attacker simply sends millions of SYN packets which ties up the web server to the point where it cannot accept any more connections. While effective defenses have been developed for blocking SYN floods it still means deploying special equipment in the network path. Another type of attack, the GET flood, mimics thousands of web browsers requesting pages. This type of attack makes the web server work at maximum capacity serving up its pages and effectively prevents legitimate traffic from getting through.

Flood attacks using SYN and GET can be blocked if the source is known. Once again, just block all traffic from a specific IP address. It did not take long for hackers to develop techniques for distributing their attacks among hundreds, thousands and potentially millions of attacking hosts. These are the most effective attack techniques known, and can be very expensive to counter. The winner is usually the one with the most available bandwidth. So, when Russian sources attack small, recently networked countries, like Estonia and Georgia, they will inevitably win.

There are two ways to create an army of attacking hosts. Hackers have been “recruiting” hosts by spreading malware that surreptitiously infects a computer and enlists it in a network that can be controlled from a central point and commanded to launch an attack against a target at the whim of the owner of the army of what are called “bots”. These “bot armies” are available for hire and have been used to threaten and launch attacks, most famously against online gambling sites. In those instances the motivation was extortion. The other way is crowd sourcing whereby a large group of constituents, such as Putin’s Nashi, or Hamas members, or Israelis, are provided with software downloads and instructed how to attack the targeted web sites or infrastructure.

Just prior to its invasion of South Ossitia, the Georgian province, attack software was made available at stopgeorgia.com a web site traceable to the nefarious Russian Business Network, which in turn has been linked to ex-KGB operatives. The site also included a list of targets at which to direct the attacks in Georgia. It appears that traffic normally routed through Turkey to Georgia was also blocked.

While Russia continues to scoff at allegations that it engaged in cyber attacks the fact remains that a weapon was used to great advantage for Russia during a military operation. The almost plausible deniability afforded Russia by crowd sourcing is one of its advantages.

Source: Crowdsourcing Log

From the Dec/Jan 09 issue of Fast Company magazine comes a great article about Cisco. Several paragraphs of note including:

Get ready for the upturn. “What’s our vision for where this industry is going with or without us?” That, [CEO John Cambers] says, is a five-year horizon. “What is our differentiated strategy within that vision?” That’s a two- to four-year plan. “How are we going to execute in the next 12 to 18 months?”

Chambers is convinced that the role of the CEO has to morph. He recalls a lesson he learned working for An Wang of Wang Laboratories, whom he has often called one of the smartest people he’s ever known: “One person cannot anticipate a market transition. At Wang, we transitioned four times, but we missed the fifth, from mini computers to PC and software. If you don’t catch them [all], you leave your company behind.”

It is Ron Ricci’s (Cisco VP) job to translate Chambers’s ideas into action — as he puts it, “I’m John’s scaling machine” — and he was the chief architect with Chambers of the new quasi-socialist Cisco. They were inspired in part, Ricci says, by management guru Gary Hamel’s ideas about the need to democratize strategy and distribute leadership in order to stimulate innovation.

(11min 34) Click on “Play” to hear the podcast or click “Get It” to download.

You’ve made it so far in your career without an MBA. Is now the time to work for one, or are you too old?

Today on BTalk Australia Phil Dobbie talks to John Edwards, the Director of Marketing and Communications at the Macquarie Graduate School of Management, about what you can hope to gain by putting in the study hours halfway through your career.

Download the podcast here

Thanks to BNet

* How does the Balanced Scorecard (BSC) improve corporate governance?
* Does customer profitability increase using the BSC?
* Can BSC measures reduce the gap between strategy and execution?
* Does the BSC work in testing strategy?

How can the Balanced Scorecard improve corporate governance?

Working Paper: Improving Corporate Governance with the Balanced Scorecard

The authors review the key roles of corporate boards and recommend a
Balanced Scorecard approach to help boards work smarter, not harder.

Key concepts include:

* Reforms such as Sarbanes-Oxley have increased the amount of work
that boards need to do. A Balanced Scorecard approach can help boards
use their limited time effectively.
* An enterprise strategy map and enterprise Balanced Scorecard
should be the primary documents distributed to the board in advance of
meetings.

Does customer profitability increase using the BSC?

A Balanced Scorecard Approach To Measure Customer Profitability

Happy customers are good, but profitable customers are much better. In
this article, professor and Balanced Scorecard guru Robert S. Kaplan
introduces BSC Customer Profitability Metrics. From Balanced Scorecard
Report.

Key concepts include:

* In their zeal to delight customers, some companies actually lose
money with them by becoming customer-obsessed rather than
customer-focused.
* The BSC adds a metric that summarizes customer profitability.
* The ability to measure profitability at the individual customer
level allows companies to consider new customer profitability metrics
such as "percentage of unprofitable customers."

Can BSC measures reduce the gap between strategy and execution?

The Office of Strategy Management

Many organizations suffer a disconnect between strategy formulation
and its execution. The answer? HBS professor Robert S. Kaplan and
colleague Andrew Pateman argue for the creation of a new corporate
office.

Key concepts include:

* There is a persistent gap between the strategic goals that
organizations set for themselves and the results they achieve.
* An office of strategy management is intended to close that gap.
At the corporate level of an organization, it oversees all
strategy-related activities—from formulation to execution. It is
typically an outgrowth of a Balanced Scorecard program.
* The purpose of an OSM is to unlock value by making strategy
execution a distinct and recognized competency in an organization.

Does the BSC work in testing strategy?

Working Paper: Testing Strategy with Multiple Performance Measures
Evidence from a Balanced Scorecard at Store24

To what extent do Balanced Scorecards provide useful information for
testing and validating an organization's strategy? Analyzing Balanced
Scorecard data from Store24—a privately held convenience store
retailer in New England—this study investigates whether, when, and how
information about problems with the firm's strategy was captured in
the multiple performance measures of its Balanced Scorecard.

Key concepts include:

* Store24's Balanced Scorecard contained useful and timely
information for detecting problems in its strategy.
* The results also suggest that Store24 executives eventually
learned about problems with the strategy despite a lack of reliance on
such formal analysis.
* Analysis of the Balanced Scorecard could have yielded more
timely information as well as more detail on why the strategy was not
working as planned.
* Multiple measures in a Balanced Scorecard might systematically
be used to test how well different drivers of performance are working
to achieve strategic objectives and superior financial performance

A new book by Kaplan and David P. Norton aims to make strategy a
continual process. The Execution Premium: Linking Strategy to
Operations for Competitive Advantage shows managers how to weave
organizational principles into a more effective management system that
respects the differences between strategy and operations yet
integrates them in a powerful way. Kaplan and Norton introduced the
Balanced Scorecard, a performance measurement system, in 1992. The
Execution Premium is their fifth book as coauthors.

Kaplan recently explained the ideas behind The Execution Premium and
how they bridge the common divide between strategy and operations.

Martha Lagace: What particular issues around execution need to be
better addressed in business?

Robert Kaplan: There are two key issues. First is leadership. Without
strong visionary leadership, no strategy will be executed effectively.

The second key issue is to recognize that strategy and operations (or
tactics) are both important but they are different. The normal course
of events is for companies to focus on day-to-day operations and
short-term problem solving. Management meetings focus on fighting
fires and fixing problems. Often little time and few resources get
committed to strategic issues.

We don't advocate abandoning an intense focus on operations and their
improvement. But we do advocate planning strategy, not just describing
it as important. The senior management team needs to have regular,
probably monthly, meetings that focus only on strategy. We describe in
the book the different roles, frequencies, participants, and agendas
for operational review meetings and strategy review meetings. We open
the book with a great quote often but perhaps inaccurately attributed
to Sun Tzu in The Art of War: "Strategy without tactics is the long
road to victory; tactics without strategy is the noise before defeat."
This quote highlights the importance of integrating strategy and
operations, a central theme in our strategy execution system.

Q: What are typical challenges and pitfalls when linking strategy with
operations? Why is a formal strategy execution system valuable?

A: One challenge or pitfall is that few companies align their
operational improvement activities to strategic priorities. Many
companies today are practicing Total Quality Management, Six Sigma, or
other continuous improvement activities. But these are done across the
organization with no sense of priorities or impact from process
improvements. Consequently, much effort does not show up in tangible
results. Companies need a formal process for using strategic
objectives to set priorities for where operational improvements can
have the largest impact on strategy execution. We note that quality
and process improvement programs are like teaching people how to fish.
Strategy maps and scorecards teach people where to fish.

Another pitfall occurs when budgeting and financial planning are done
separately from strategic planning. We advocate that the operational
plan and budget be driven from the revenue targets in the strategic
plan. In The Execution Premium, we describe how a time-driven
activity-based cost model provides the previously missing link between
the revenue growth targets in a strategic plan and the authorization
for spending to supply the quantities of resource capacity that are
necessary to fulfill the sales and production needs of the strategic
plan. Without this coupling, operational plans either provide too
little or too much capacity for the strategic plan.

A third challenge is that most management meetings get consumed with
discussions about short-term operational and tactical issues. It is
important to meet to discuss and solve operational problems. But
companies err when they devote all their time together for
fire-fighting and coping with near-term issues. The formal strategy
execution system schedules strategy review meetings at a different
time from operational review meetings. In that way, each meeting has
its own frequency, agenda, information system, and participation, as
best meets the goals for that meeting.

Q: Given the proliferation of tools, how should management choose the
right one to formulate strategy and improve operations?

A: We don't have a preferred position on strategy formulation
methodologies. We have seen each approach lead to success in different
circumstances. If, for example, the company has low capital
utilization, then some use of a value-based management approach would
help to define a financial strategy. If the company does not have a
distinctive brand or market presence, a focus on identifying an
attractive customer segment, such as through Harvard University
professor Michael Porter's positioning framework, W. Chan Kim and
Renee Mauborgne's Blue Ocean approach, or C. K. Prahalad and V.
Ramaswany's customer co-creation process might prove most relevant.

If the company has distinctive capabilities in important business
processes— operations management, customer data mining, or product
features and innovation—that are superior to or not possessed by
competitors, then the resource-based view and identification of core
competencies are effective frameworks for strategy formulation. If the
company has a great human capital base, with skilled, experienced, and
highly motivated employees, then striving to create a learning
organization and encouraging emergent strategies to be proposed can
identify promising new strategic approaches.

While we are agnostic with respect to which strategy methodology a
company uses to arrive at its strategy, we do believe that creating a
strategy map and scorecard for that strategy is the logical and proven
next step for putting the strategy into action. That is why we have
placed strategy analysis and formulation as Stage 1 of our management
system, with planning and translating the strategy as Stage 2.

We take the same position with the various operational improvement
methodologies. We don't want to be caught debating the relative merits
and shortcomings of TQM, Six Sigma, lean management, and
reengineering. We do believe, however, that these methodologies are
most effectively applied to the strategic processes identified in a
company's strategy map and scorecard. That is why we place planning
operations in Stage 4 of the management system, downstream from the
Stage 2 processes of translating and planning the strategy. You can't
focus on the critical processes for improvement until they have been
identified in the strategic planning and translation stage.

Q: What is an Office of Strategy Management, and why is it necessary
in a company?

A: The OSM is analogous to a military general's chief of staff. The
general is responsible and accountable for developing the strategy to
win wars and battles. But a general almost always has a
chief-of-staff, often several ranks junior, who leverages the
general's time and attention. The chief-of-staff does not create
strategy or operational tactics and has no authority or accountability
for its execution. A chief-of-staff schedules the general's meetings,
ensures that the appropriate people show up at the meeting, attends
and takes notes at the meeting, and follows up after the meeting to
ensure that the actions decided upon are carried out. The
chief-of-staff leverages the general's time by making sure that all
the information, people, and follow-up are in place for the general's
strategy and tactics to be effectively executed. We recommend that a
similar, but expanded, set of tasks be carried out by a small cadre of
professionals to orchestrate the various strategy management processes
for the executive team.

The Office of Strategy Management has multiple roles and
responsibilities. First, as an architect, the OSM designs and embeds
any missing strategy and operational management processes into the
six-stage strategy execution system. The OSM ensures that all the
planning, execution, and feedback processes are in place, and that
they are linked together in a closed loop system.

The OSM also serves as the process owner for several strategy and
operational management processes, such as those to develop the
strategy, translate the strategy, and orchestrate the senior
management strategy review meetings. Many of these processes are new
to the organization. Since they cross existing business and functional
organizational lines, it is natural for the OSM to be their owner.
Assigning responsibilities for their execution to the OSM fills a gap
in management practice without infringing on the current
responsibilities of any existing department or function.

Finally, the OSM is the integrator of many existing activities. This
aspect is challenging because organizational and functional units
already have primary responsibility for processes such as budgeting,
communications, human resources planning and performance management,
IT planning, initiative management, and best practice sharing. The OSM
must work with the existing owners of these processes to ensure they
become aligned to the strategy.

Q: What is the role of leadership in sound execution?

A: While not an explicit part of any of the six strategy execution
stages (described below), executive leadership pervades every stage of
the management system. Throughout The Execution Premium, we describe
organizations that have successfully implemented their strategies.
They operate in varied regions and industries, including
manufacturing, financial services, consumer services, nonprofit,
educational, and public sector. Their strategies differ; some produce
low-cost commodity products and services, others deliver complete
solutions to their customer, and still others innovate with
high-technology products. About the only common element all these
diverse successful strategy implementers have in common is exceptional
and visionary leadership. In every example, the unit's CEO led the
case for change and understood the importance of communicating the
vision and strategy to every employee. Without such strong leadership
at the top, even the comprehensive management system we introduce in
this book cannot deliver breakthrough performance.

In fact, leadership is so important to the strategy management system
that we make a rather bold claim that leadership is both necessary and
sufficient for successful strategy execution. The necessary condition
comes from our experience with the more than one hundred enterprises
around the world who have become members of the Balanced Scorecard
Hall of Fame. In every instance, the CEO of the organizational unit
implementing the new strategy management system led the processes to
develop the strategy and oversee its implementation. No organization
reporting success with the strategy management system had an unengaged
or passive leader.

For Stage 1, the CEO leads the change agenda and drives it from the
top to reinforce the mission, values and vision. Leadership sets the
ambitious vision and stretch targets. In Stage 2, the executive leader
validates the strategy map as an expression of the strategy
articulated in Stage 1 and challenges the organization with stretch
targets that take all employees outside their comfort zones. In Stage
3, leadership drives alignment of organizational units and is
essential for communicating vision, values, and strategy to all
employees. Leadership, in Stage 4, supports the cross-organizational
unit process improvements. In Stage 5, the leader's openness and skill
in running the strategy management review meeting determines its
effectiveness for fine-tuning the strategy throughout the year. And in
Stage 6 the leader must allow even a well-formulated and executed
strategy to be challenged in light of new external circumstances, data
collected about the performance of the existing strategy, and new
suggestions from employees throughout the organization. Being willing
to welcome and subject existing business strategies to fact-based
challenges is one of the hallmarks of effective leadership.

Our sufficiency claim, however, is even bolder. The management
processes we describe in The Execution Premium give an effective
leader a framework for effective strategy execution. None of the six
stages in the management system is simple or brief. But collectively,
the management processes in the six stages provide leaders with a
comprehensive, proven system for managing the development, planning,
implementation, review, and adaptation of their strategies.

We believe that our 18 years of observation and work with enterprises
in all sectors and regions of the world has led to an emerging science
of strategy execution. Each of the six stages in the strategy
management system is doable, especially when guided by a senior
strategy management office. The one component we cannot provide a
blueprint for is visionary and effective leadership. That is why we
have come to believe that executive leadership is now both necessary
and sufficient for successful strategy implementation.

Q: You have written four other books touching on the Balanced
Scorecard (BSC). How has your thinking and your work with this
innovation evolved along the way?

A: Our thinking has really evolved from performance measurement, the
focus of our first Harvard Business Review article and the first half
of the original Balanced Scorecard book, to using the BSC as the
cornerstone of a comprehensive management system to help enterprises
execute their strategies. We learned early that the BSC was much more
than just a better performance measurement system; it can become the
basis for a new strategy management system.

Our second book, The Strategy-Focused Organization, identified the
five principles we saw successful companies using with the BSC for
strategy management: Mobilize, Translate, Align, Motivate, and Govern.
In the next three books, including our most recent book, The Execution
Premium, we went into more depth in these principles. Strategy Maps
focused on principle #2, translate. We described and illustrated how
strategy maps and scorecards could be customized to many different
strategies. The fourth book, Alignment, described principle #3, how to
create and capture corporate synergies through vertical and horizontal
alignment of business and support units. The fourth book also
contained material on principle #4, aligning and motivating employees
for strategy execution in their business or support units.

Our most recent book started out as an in-depth articulation of
principle #5, governing to make strategy a continual process." But
along the way, my coauthor Dave Norton and I realized that this book
was really a synthesis of all our prior work. It encapsulates the
latest development in the other four strategy-focused organization
principles and integrates them into a comprehensive closed-loop
management system that links strategy and operations. Beyond
integrating all our prior work, the new book also integrates a wide
range of other proven management tools, including mission and vision
statements, strategy formulation, target-setting, dynamic budgeting
and resource allocation, process improvement, quality methodologies
(Six Sigma, lean management, catchball), dashboards, the learning
organization, analytics, and emergent strategies.

Q: What's next for you?

A: I have recently become sensitive to a gap in our strategy map/BSC
framework by not paying sufficient attention to enterprise risk
management (ERM). Obviously, many large financial institutions,
despite having risk management departments, have suffered massive
losses from failure to understand the risks they took on. All
companies, not just financial ones, need to have better methods to
assess and monitor their risks. Quantifying financial, operating,
technological, and strategic risk is far from trivial, and much needs
to be learned to make enterprise risk management more effective. Risk
management also requires effective systems for internal control,
management control, and governance.

ERM objectives and metrics could certainly have a home in the
financial BSC perspective for increasing and sustain shareholder
value, along with the traditional objectives of revenue growth and
productivity improvements. And companies should have objectives in the
process perspective to manage and mitigate the risks associated with
their strategies. I am persuaded that embedding risk management
objectives in strategy maps and scorecards should be a high priority
for where increases in knowledge and professional expertise could add
substantial value to an organization. And reviews of a company's risk
position should be part of the monthly strategy review meetings. I
plan to spend some time in the next few years exploring this issue and
hoping to make some progress.

by Steve Kemper

Steve Kemper was given complete behind-the-scenes access to Dean Kamen
and the Segway design team during development of the much-hyped "human
transporter." The result: A new book, Code Name Ginger. Here's an
excerpt. —Ed.

Evidently, he's always late, said Aileen Lee, John Doerr's associate.
It was almost 8:30 A.M., half an hour after the meeting was supposed
to start, and everyone in the locked and guarded ballroom was still
waiting for Steve Jobs. The December 8 meeting at the Hyatt Regency
near the San Francisco airport had been Doerr's idea. He wanted Dean
to brainstorm about Ginger with him and some friends, including Jobs
and Jeff Bezos. The three billionaires could spare only a couple of
hours, so Doerr's request required a long trip for a short meeting.

Brian Toohey didn't mind. Barely settled in as Ginger's new vice
president of regulatory affairs, he was still dazzled by Dean's roster
of acquaintances and it was worth some inconvenience to meet these
West Coast business icons. Tim Adams and Mike Ferry felt a bit more
jaded and exasperated. Traveling to and from San Francisco chopped two
days out of a schedule with no fat in it. Tim and Mike also suspected,
as did Dean, that Doerr was setting them up for an ambush on his home
turf. But all of them also realized that people who invest $38 million
sometimes need their hands held, so Tim, Mike, and Brian had each put
together a PowerPoint presentation for what Tim called "another dog
and pony show."
You have a product so revolutionary, you'll have no problem selling
it. The question is, are people going to be allowed to use it?
—Jeff Bezos

In addition to Jobs and Bezos, their audience would include Bob
Tuttle, Dean's top lieutenant; Michael Schmertzler, representing the
$38 million investment of Credit Suisse First Boston; Bill Sahlman,
professor of entrepreneurial studies at Harvard Business School and
the yenta who had introduced Dean to Doerr and other investors; and
Vern Loucks, a minor investor in Ginger as well as a board member.
Schmertzler had changed his mind about not coming, probably because of
his evergreen suspicions of Doerr.

Brian, keyed up, got to the ballroom early to check the audiovisual
equipment. By the time the others arrived, he had filled the screen
with a giant photo of Dean, wearing jeans and sitting on an iBOT,
smiling widely as he shook President Clinton's hand in the Oval
Office.

The smile was missing as Dean pushed a tall hotel luggage carrier into
the ballroom. The carrier held a couple of large black duffels, oddly
protuberant, and some taped-up cardboard boxes, including an old Apple
computer box. Dean instructed the security guard to lock the ballroom
doors and not to let anyone enter without permission from someone
inside.

When the doors were locked, he opened the duffels and the boxes,
removed a couple of chassis and control shafts, and assembled two D1
Gingers using a screwdriver and hex wrenches. He finished in ten
minutes, turned one on, and began tearing around the ballroom, looking
happier with every revolution. Jeff Bezos arrived. Dean zipped up to
him, stopping sharply at his shoe tips. Bezos didn't flinch.

"See how much I trust you?" said Bezos.

"Is that good judgment?" said Dean.

Bezos claimed the other Ginger, and his laugh soon gusted through the
ballroom. Doerr entered wearing casual clothes and old sneakers. Dean
surrendered his Ginger to him. Everyone was having too much fun to
mind Jobs's tardiness.

Dean didn't mind either, for other reasons. He had flown his jet to
San Francisco yesterday, carrying the Gingers. A limo hired by Doerr
had whisked him and the machines to Jobs's house, where the two of
them spent the afternoon. Jobs did most of the talking. Ranting,
really, about Ginger's design. So Dean more or less knew what Jobs was
going to say today and wasn't in a great hurry to have the Ginger guys
hear it.

The others were so intent on Ginger that they didn't notice Jobs walk
in. He was dressed even more casually than Dean, in sneakers, a black
turtleneck, and Levi's in which a white pocket poked out of a big
front hole. There was a hole in his wallet pocket, too. Within a
couple of minutes, after some quick introductions, everyone settled
around the big square table, Jobs at one corner, flanked by Dean and
Doerr.

"Good morning to everyone," said Tim, smiling at the front of the
table. "Before we start, we'd like to ask you to hold your questions
until after each presentation."

"Yeah, right!" snorted Bezos, followed by that honking laugh.

"Otherwise we might as well not be here," said Jobs.

"How long is your presentation?" asked Doerr. "Each pitch is about ten minutes."

"I can't do that," said Jobs. "I'm not built that way. So if you want
me to leave, I will, but I can't just sit here."

Tim studied Jobs for a moment, then turned to the screen and put up a
spec sheet about Metro and Pro. "As you can see—" began Tim.

"Let's talk about the bigger question," interrupted Jobs. "Why two machines?"

"We've talked about that," said Tim, "and we think—"
I think [the design] sucks. Its shape is not innovative, it's not
elegant and it doesn't feel anthropomorphic.
—Steve Jobs

"Because I see a big problem here," said Jobs. "I was thinking about
it all night. I couldn't sleep after Dean came over." There were notes
scribbled on the palm of his hand. He explained his experience with
the iMac, how there were four models now but he had launched with just
one color to give his designers, salespeople, and the public an
absolute focus. He had waited seven months to introduce the other
models. Bezos and Doerr nodded as he spoke.

"You're sure your market is upscale consumers for transportation?" said Jobs.

"Yes, but we know that's a risk for us," said Tim, "because we could
be perceived as a toy or a fad."

If they charged a few thousand dollars for the Metro and it was a hit,
said Jobs, they could come out with the Pro later and charge double
for industrial and military uses.

Tim's eyebrows shot up approvingly. He looked at Dean, whose face was
a mask, so he turned elsewhere. "Mike?" he said, looking at Mike Ferry
for a marketing opinion.

"It's a good point," said Mike, giving his usual noncommittal response.

"What does everyone think about the design?" asked Doerr, switching subjects.

"What do you think?" said Jobs to Tim. It was a challenge, not a question.

"I think it's coming along," said Tim, "though we expect—" "I think it
sucks!" said Jobs.

His vehemence made Tim pause. "Why?" he asked, a bit stiffly.

"It just does."

"In what sense?" said Tim, getting his feet back under him. "Give me a clue."

"Its shape is not innovative, it's not elegant, it doesn't feel
anthropomorphic," said Jobs, ticking off three of his design mantras.

"You have this incredibly innovative machine but it looks very
traditional." The last word delivered like a stab. Doug Field and
Scott Waters would have felt the wound; they admired Apple's design
sense. Dean's intuition not to bring Doug had been right. "There are
design firms out there that could come up with things we've never
thought of," Jobs continued, "things that would make you shit in your
pants."

There wasn't much to say to that, so after a pause Tim began again:
"Well, let's keep going, because we don't have much time today to-"
"We do have time," said Doerr curtly, changing his own ground rules.
"We want to get Steve's and Jeff's ideas."

"The problem at this point is lead time in our schedule," said Tim.
Jobs snapped his head from Doerr on one side to Dean on the other, as
if he'd been slapped. "That's backwards," he said, his voice rising.

"Screw the lead times. You don't have a great product yet! I know burn
rates are important, but you'll only get one shot at this, and if you
blow it, it's over." Agitated, he turned to Bezos. "Jeff, what do you
think?"

"I think we'd do a disservice to the machine if we didn't give a great
design firm a chance," said Bezos in a calm, soft voice, trying to
lower the volume. "I think Steve is right—that as he so elegantly put
it, they could do things that would make us shit in our pants." Jobs
grunted.

After another pause, Tim moved on to the issue of service, determined
to move ahead despite the punches coming at him. Within two sentences,
Jobs was on him again. Tim put up his next slide, about the new plant,
but again Jobs came at him with a flurry of half-insolent questions.
Where are you building a plant? Why are you building a plant? Why are
you manufacturing the machine yourselves?

Partly, explained Tim, because giving our code to someone else would
be a great risk. Not a good reason, in Jobs's view, because the code
could easily be reverse-engineered. No it couldn't, said Tim. Could,
said Jobs. He added that Tim should be spending money and management
time on other things, especially since there was no way he could
convince any world-class manufacturing and procurement people to move
to New Hampshire, for God's sake, his tone implying that only
slow-witted rubes could bear such a place. Dean lifted an eyebrow.

"We have an adequate staff", said Tim defensively, but it sounded as
weak as the adjective. Tim had lost control of the meeting. That was
probably Doerr's plan all along. Dean sat silently, offering no help
or defense as Jobs rampaged through Tim's presentation.

Brian Toohey spoke next, on the regulatory obstacles Ginger would face
and how he intended to overcome them. Brian was a big, burly man who
knew how to boom his voice, which may explain why he got two minutes
into his spiel before Jobs began interrupting. Doerr suggested that
instead of going through each slide, everyone should "take a study
hall and read the deck" that Brian had handed out, then ask questions.
Bezos had already read it, so he started chatting quietly (for him)
with Dean.

"Jeff, have you read the entire deck?" said Doerr in a schoolmaster's voice.

"Yes, John, I have," said Bezos, amused.

When the study hall ended, Bezos held up Brian's handout. "I think
this plan is dead on arrival," he said. "The U.S.A. is too hostile."
The "car guys" were going to lobby against Ginger and they were going
to win.

"No they're not," said Brian, smiling.

Bezos suggested starting slow, using one city or country as an
experimental station. Once Ginger's benefits were clear, the company
would have a wedge to pound into U.S. regulations. The perfect place
to begin, thought Bezos, was Singapore. "You only have to convince one
guy, the philosopher king, and then you have four million people to
test it."

Vern Loucks, who had been quietly watching the fireworks up to this
point, said, "You mean Gob Click Tong. He's not a king, he's the prime
minister. I can get us in to see him if we want to do that," he added.

Michael Schmertzler hadn't said much. Now he asked when they should
instigate a strategic leak to arouse interest in the product.

But Jobs was still shaking his head at Bezos's suggestion. Because of
the Internet, he said, slow was no longer possible. People would learn
about Ginger in a flash of bits and bytes, and would want one now. So
a small launch in a foreign place was foolish, because if the machine
was unavailable in the United States, the company would blow its
chance for $100 million of free publicity in its biggest market. Plus,
Singapore was a nest of pirates, and the company would end up spending
a fortune fighting them. If the company wanted a slow, controlled
launch, better to start on a handful of U.S. college campuses.

"If you show this to Hennessy," Jobs said to Doerr, referring to John
L. Hennessy, president of Stanford University and a world-class
engineer, "he'll shit in his pants." Evidently Hennessy did that more
readily than Jobs did. "And if you offer to give him a hundred of them
if he'll run a safety study and a usage study, that's a done deal in
ten minutes," continued Jobs. "You do that at ten colleges and maybe
at Disney, so people can see them but not buy them."

But he warned that even this sort of slow launch was filled with
dangers. If one stupid kid at Stanford hurt himself using a Ginger and
then announced online that the machine sucked, the company was sunk,
because there was no way to control that or counter it if people
couldn't ride one for themselves. With a big fast launch, on the other
hand, a few malcontents wouldn't be heard above the general hoopla. "I
understand the appeal of a slow burn," he concluded, "but personally
I'm a big-bang guy." For the first time that day he smiled. "The risk
with a fast burn," he continued, "is that it exposes you to your
enemies. You're going to need a lot of money to fight thieves."

"We have a few things they can't get," said Dean. "Specialty
components with only one source."

"They'll figure out a way around that," said Jobs.

"I've spent nine years looking," said Dean, "and I don't think so."

"I think the emphasis of this conversation is wrong," said Bezos. "You
have a product so revolutionary, you'll have no problem selling it.
The question is, are people going to be allowed to use it?"

Jobs said he lived seven minutes from a grocery and wasn't sure he
would use Ginger to get there. Bezos agreed. Schmertzler wondered if
it might be wiser to start with commercial sales. Bezos liked the
idea—it was safer and could give the business a solid foundation for
growth.

By then it was 10:30. Bezos and Jobs had to leave. As they stood, Dean
rose too. He had been almost silent, listening to Jobs like everyone
else. Now he thanked Jobs and Bezos for coming. "This is the most
energetic discussion we've ever had," he said, "and like all good
energetic discussions it leaves you with more questions than answers,
and leaves you questioning everything you thought you knew." He
paused. "And that's good."