Saturday, May 13, 2006

Losing self-control.

Fuzzy maths
May 11th 2006 | SAN FRANCISCO
From The Economist print edition

In a few short years, Google has turned from a simple and popular company into a complicated and controversial one

MATHEMATICALLY confident drivers stuck in the usual jam on highway 101 through Silicon Valley were recently able to pass time contemplating a billboard that read: “{first 10-digit prime found in consecutive digits of e}.com.” The number in question, 7427466391, is a sequence that starts at the 101st digit of e, a constant that is the base of the natural logarithm. The select few who worked this out and made it to the right website then encountered a “harder” riddle. Solving it led to another web page where they were finally invited to submit their curriculum vitae.

If a billboard can capture the soul of a company, this one did, because the anonymous advertiser was Google, whose main product is the world's most popular internet search engine. With its presumptuous humour, its mathematical obsessions, its easy, arrogant belief that it is the natural home for geniuses, the billboard spoke of a company that thinks it has taken its rightful place as the leader of the technology industry, a position occupied for the past 15 years by Microsoft.

In tone, the billboard was “googley”, as the firm's employees like to say. That adjective, says one spokeswoman, evokes a “humble, cosmopolitan, different, toned-down” classiness. A good demonstration of googley-ness came in the speeches at a conference in Las Vegas this year. Whereas the bosses of other technology companies welcomed the audience into the auditorium with flashing lights and blasting rock music, Google played Bach's Brandenburg Concerto Number Three and had a thought puzzle waiting on every seat. The billboard was also googley in that, like Google's home page, it had visual simplicity that belied the sophistication of its content. To outsiders, however, googley-ness often implies audacious ambition, a missionary calling to improve the world and the equation of nerdiness with virtue.

The main symptom of this, prominently displayed on the billboard, is a deification of mathematics. Google constantly leaves numerical puns and riddles for those who care to look in the right places. When it filed the regulatory documents for its stockmarket listing in 2004, it said that it planned to raise $2,718,281,828, which is $e billion to the nearest dollar. A year later, it filed again to sell another batch of shares—precisely 14,159,265, which represents the first eight digits after the decimal in the number pi (3.14159265).

The mathematics comes from the founders, Sergey Brin and Larry Page. The Russian-born Mr Brin is the son of a professor of statistics and probability and a mother who works at NASA; Mr Page is the son of two computer-science teachers. The breakthrough that made their search engine so popular was the realisation that the chaos of the internet had an implicit mathematical order. By counting, weighting and calculating the link structures between web pages, Messrs Page and Brin were able to return search results more relevant than those of any other search engine.

So far, they have maintained this superiority. Danny Sullivan, the editor of Search Engine Watch, an online industry newsletter, ranks Google as the best search engine, Yahoo! as second-best, Ask (the re-named Ask Jeeves) third, and Microsoft's MSN last among the big four. Google's share of searches has gone up almost every month of the past year. Including those on AOL, an internet portal that uses Google's search technology, Google had half of all searches in March. Excluding AOL, the figure was 43%. This is why people “google”—rather than, say, “yahoo”—their driving directions, dates and recipes.

Mathematical prowess is also behind the other half of Google's success: its ability to turn all those searches into money. Unlike software companies such as Microsoft which get most of their revenues from licence fees, Google is primarily an advertising agency. It does not sell the usual sort of advertising, in which an advertiser places a display on a page and pays per thousand visitor “impressions” (views): it has perfected the more efficient genre of “pay-per-click” advertising. It places little text advertisements (“sponsored links”) on a page in an order determined by auction among the advertisers. But these advertisers pay only once an internet user actually clicks on their links (thereby expressing an interest in buying). This works best on the pages of search results, which account for over half of the firm's revenues, because the users' keywords allow Google to place relevant advertisements on the page. But it also works on other web pages, such as blogs or newspaper articles, that sign up to be part of Google's “network”.

The world brain

These two interlocking “engines”—the search algorithms coupled with the advertising algorithms—are the motor that powers Google's growth in revenues ($6.1 billion last year) and profits ($1.5 billion), as well as its $117 billion market capitalisation. Its horsepower is the reason why Andy Bechtolsheim, Google's first investor (as well as a co-founder of Sun Microsystems, a big computer-maker) still holds on to all his shares in the firm. It's all about advertisers “bidding up the keywords” in Google's auctions, he says. “How far this thing could go, nobody can say.”

Since its stockmarket debut, however, Google has been adding new and often quite different products to this twin engine. It now owns Picasa, which makes software to edit digital photos on computers; Orkut, a social-networking site popular mainly in Brazil; and Blogger, which lets people start an online journal. It also offers free software for instant-messaging and internet telephony, for searching on the desktop computers of users, for (virtually) flying around the Earth, for keeping computers free of viruses, for uploading and sharing videos, and for creating web pages. It has a free e-mail program and calendar. It recently bought a firm called Writely, which lets people create and save text documents (much as Microsoft's Word does) online rather than on their own computers. Google is also scanning books in several large libraries to make them searchable. It is preparing to offer free wireless internet access in San Francisco and perhaps other cities, and dabbling in radio advertising. And that is only the start of a long list.

Whether these are arbitrary distractions or not depends on one's point of view. For Messrs Brin and Page, they make mathematical sense. Mr Brin (“the strategy guy”) has calculated that Google's engineers should spend 70% of their time on core products (ie, the search and advertising engines), 20% on relevant but tangential products, and 10% on wild fun that might or might not lead to a product. The result is that lots of tiny teams are working on all sorts of projects, the most promising ones of which end up on the prestigious “top 100” list that Mr Page (“the product guy”) spends a lot of his time on. Most of the items on that list in theory have something to do with Google's mission, which is “to organise the world's information”. Scanning and indexing books, for instance, brings offline information online.

The outside world increasingly sees it differently. Among Google fans, the company has come to epitomise the more mature (ie, post-bust) internet generation, which goes by the marketing cliché “Web 2.0” (see article). In this context, it is assumed to be working on absolutely everything simultaneously, and every new product announcement, no matter how trivial, is greeted as a tiny step toward an eventual world-changing transformation.

At a minimum, this hypothetical transformation would consist of moving computation and data off people's personal computers and on to the network—ie, Google's servers. Other names for this scenario are the “GDrive” or the “Google grid” that the company is allegedly working on, meaning free (but ultimately advertising-supported) copious online storage and possibly free internet access. Free storage threatens Microsoft, because its software dominates personal computers rather than the internet; free access threatens other internet-access providers.

At a maximum, the transformation goes quite a bit further. George Dyson, a futurist who has spent time at Google, thinks that the company ultimately intends to link all these digital synapses created by its users into what H.G. Wells, a British science-fiction writer, once called the “world brain”. Google, Mr Dyson thinks, wants to fulfil the geeks' dream of creating “artificial intelligence”. Passing the so-called “Turing test”, created by Alan Turing, a British mathematician, to determine whether a machine can be said to be able to think, would be the ultimate reward.

From primes to share prices

But many who deal with Google in their daily lives are getting fed up with such grandiose notions. Google's shares, after nearly quintupling since they began trading, have fallen in recent months. Pip Coburn, an investment strategist, says that “Google was a simple story at one point: online ads on top of the most popular search mechanism on the planet. Simple. But now it is pretty much a mess and to get the stock going again, the company may need to work on its own simplicity so as to match the simplicity of the Google home page itself.”

Mr Sullivan of Search Engine Watch says Google has become distracted. “Oh, give me a break,” he wrote in his blog after yet another product announcement. “A break from Google going in yet another direction when there is so much stuff they haven't finished, gotten right or need to fix.” He points to a rule in Google's corporate philosophy that “it's best to do one thing really, really well,” and suggests that the company is “doing 100 different things rather than one thing really, really well.”

Google is thus starting to look a bit as Microsoft did a decade ago, with one strength (Windows for Microsoft, search for Google) and a string of mediocre “me-too” products. Google Video, for instance, was supposed to become an online marketplace for video clips, both personal and business, but has been overtaken by YouTube, a start-up that is a few months old but already has four times as much video traffic. Google News, where the stories are, characteristically, chosen by mathematical algorithms rather than by editors, perennially lags behind Yahoo! News, with its old-fashioned human touch. Google's instant-messaging software is tiny compared with AOL's, Yahoo!'s and MSN's.

Google is beginning to resemble the old Microsoft in another way, too. A decade ago, Microsoft stood accused of stifling innovation, because entrepreneurs would stay away from any area of technology in which it showed any interest. Google, whose slogan is “Don't be evil”, hates this comparison and wants to think of itself as ventilating rather than stifling the ecosystem of developers and entrepreneurs. “I don't see how they can say that,” says an entrepreneur and competitor who is too afraid of unspecified consequences to speak on the record. Like most of Silicon Valley these days, he finds Google's slogan ridiculous, because “we're not evil either, we just don't go around saying it.”

Entrepreneurs like him are getting annoyed by Google's seemingly endless “betas”, also known as “technical previews”, when new products are not yet officially launched but available, ostensibly for testing and review. Traditionally, beta reviews were meant to last weeks or months and were targeted at testers who would find and report bugs. Google seems to use betas as dogs sprinkle trees—so that rivals know where it is. Google News recently graduated out of its beta after about four years.

In fairness, Google's role today is more complex than Microsoft's was in the 1990s, when start-ups often hoped to “exit” by listing their shares on the stockmarket, and were occasionally expunged by Microsoft before they got there. Today, start-ups (such as Writely, Picasa, Orkut and Urchin) often use Google (or the other internet titans) as the exit, selling themselves to the big guy. It works for individuals too. Paul Rademacher is a software engineer who last year came up with a clever way of combining Google's interactive maps with other websites. Google hired him.

To Google's initial surprise and subsequent chagrin (is it not enough to vow never to be evil?), it alienates more groups of people as it enters more areas of modern life. It appeared to be genuinely taken aback that some book publishers oppose its plan to scan their books and make them searchable. Google also seemed surprised when privacy advocates voiced concerns over its practice of placing advertisements in contextually related e-mail messages on its webmail service, and again this year when it announced a Chinese version that censors the search results.

Slowly, the company is realising that it is so important that it may not be able to control the ramifications of its own actions. “As more and more data builds up in the company's disk farms,” says Edward Felten, an expert on computer privacy at Princeton University, “the temptation to be evil only increases. Even if the company itself stays non-evil, its data trove will be a massive temptation for others to do evil.” In a world of rogue employees, intruders and accidents, he says, Google could be “one or two privacy disasters away from becoming just another internet company”.

Such concerns are forcing Messrs Brin and Page, still in their early 30s, and Eric Schmidt, whom they hired as chief executive and who is in his early 50s, to behave increasingly like a “normal” company. Google recently sent its first lobbyists to Washington, DC. Its decision to build an “evil scale” to help it devise its China strategy was more unusual, but its hiring of Al Gore, a former American vice-president, to aid the process, was just the kind of thing that old-fashioned empire-building firms do all the time.

Other companies are reacting in traditional ways to Google's dominance. Former rivals, such as eBay, Yahoo! and Microsoft, are exploring alliances to counter its influence. When Microsoft tried to buy AOL from its parent, Time Warner, Google's Mr Schmidt flew in for talks that led to Google taking a defensive stake in AOL, thus keeping it out of Microsoft's and Yahoo!'s reach. In response, Microsoft has contemplated buying all or part of Yahoo!, and has recently announced a vague but large increase in research spending which amounts to an arms race. Google is now alleging that Microsoft is unfairly steering users of its web browser to MSN for searches, and is preparing to dispatch lawyers to keep Microsoft in check.

Google thus finds itself at a defining moment. There are plenty of people within the company who want it to play the power game. “The folks who are closest to Larry and Sergey are very, very worried about Microsoft, as well they should be,” says John Battelle, the author of a blog and a book on Google. Yet the company's founders themselves may not be prepared to drop their idealism and their faith in their own mathematical genius. They have always wanted to succeed by being good and doing good. “Never once did we consider buying a big company,” says David Krane, Google's 84th employee, by way of example. It would not be googley. It would, he says, be “yuck”.

The original modern performance artist.

From Commentary Magazine.

The Escape Artist

Bette Howland

During these last decades the interest in professional fasting has markedly diminished. . . . We live in a different world now.

—Franz Kafka, “A Hunger Artist”

A photograph of Harry Houdini in middle age. Handsome Houdini: the dignified nose, the shapely lips. His forehead is bold, his hair thinning, white at the temples, wizard-winged over the ears. Sternly he frowns at you, arms crossed, sleeves pushed back. Houdini rolled up his sleeves when he got down to work, to show he was hiding nothing there; but he’s not working now. He stands before bookshelves in frock coat and clerical collar, a watch on his vest, a pin in his lapel—emblem of one of his many fraternal organizations. He was a great civic booster, in the American way.

What kind of picture is this? Not Houdini the showman, the publicity-hound; it’s too intimate for that. This could be a self-portrait: citizen Houdini, preacher, professor, judge. Except for the hands: tough skin, prehensile thumbs, the wrists linked by a charm-bracelet padlock on a single chain.

Houdini was a founding member of the Rabbis’ Sons Theatrical Benevolent Association—singers, composers, comedians, movie moguls, from rabbinical families going back many generations. In America it took only one; the New World was not for the unworldly, and these rabbis’ sons had little learning. Here the fathers became the children and the children the fathers, the breadwinners. This was what Reb Yidel Pankower, the Hebrew teacher in Henry Roth’s classic Call It Sleep, lamented as the “sidewalk and gutter generation.” In later generations, parents might speak Yiddish as a private language, bittersweet. In immigrant families, the children possessed the sweet secret tongue—the language of the streets, but the words were magic: open Sesame. Here everyone was an upstart, starting from scratch. Jews did not have to be a people apart.

For some rabbis’ or cantors’ sons—the Gershwins, the Berlins, the Jolsons, the Zukors and Selznicks, the brothers Warner and Shubert—this released an explosion of energy. Houdini came before most of them—his family spoke German, not Yiddish—and he exhibited the energy in a literal, physical form. He could do what magicians do: pluck coins from thin air and rabbits from hats, swallow packets of sewing needles and spin them out neatly threaded. At a clap of his hands elephants disappeared; he walked through brick walls. A magic trick is a magic trick; an escape is a success story. Houdini made the Escape uniquely his own.

Any version of the story will likely commit errors of fact; so much is fable. That’s the way he wanted it. Houdini was his own biographer. Take the one about him as a messenger boy, coming home late one winter night. It’s Christmas eve, he’s covered with snow, the cupboard is bare. “Shake me,” he tells his mother. “Shake me, I’m magic.” He gives a shimmy, and coins—tips he’s collected all the long day—come clattering down from his cap and jacket, and roll, glittering, over the floor. Is it true? Did it happen, this first and best of all magic tricks? Trust the tale: Houdini made it come true.

During his lifetime, few knew the name he was born with—Erik Weisz/Erich Weiss—let alone where or when. For the record, it was Budapest, 1874. He was four when he came to America—his first escape. His father, a Reform rabbi, led a small new congregation in, of all places, Appleton, Wisconsin. The name is an idyll. Years later, Houdini would dream of seeing his parents as he’d seen them then, sitting and drinking coffee under a tree.

But Rabbi Weiss was not reformed enough for the Jews of leafy little Appleton. The family moved to Milwaukee, where they fared no better; the eldest son, a half-brother, died of TB. At eight, Houdini was peddling papers and shining shoes; at twelve, he hopped a freight car and lit out for Texas, hoping to send money home. He dropped his mother a postcard to let her know. For the rabbi’s son, not yet of bar-mitzvah age, this rite of passage was a private enterprise.

Things didn’t pan out, and the following year found him with his father in New York; the rabbi, as usual, was looking for work. If only the father could have had some of the son’s luck, but that’s how it was. The new exodus, the great wave from Eastern Europe, was well under way; the lifted lamp, the Golden Door. Hebrew teachers were a dime a dozen, and fewer and fewer rabbis seemed needed for more and more Jews. They’d landed in the New World at last, and Appleton was only a dream.

Between the two of them they managed to scrape up funds to send for the rest. It was 1888, the year of the Great Blizzard, snowdrifts taller than telegraph poles; by now there were six children, and things went from bad to worse. Houdini would never talk much about those hard times, “too painful to recall,” but this was when he began doing card tricks and sleight of hand, passing the hat for “throw” money.

Though his two older brothers must have contributed to the family larder, it was clear from the start which son was the one full of beans. He was eighteen when his father died—miserably, of tongue cancer—and soon afterward he left his job as a necktie-cutter and set out to make his name in magic, the name that would stand for the thing.

There is something you need to know about Houdini’s escapes: no one actually saw him do them. At least, not at first. These were deeds done in the dark. A committee from the audience might be summoned onstage to search him from head to toe—his wiry hair, the soles of his feet; poking in his ears, prying under his tongue. Not for nothing had Houdini learned to swallow needles. They inspected the props—handcuffs, leg-irons, padlocks, chains—and when they’d made sure all was kosher, Houdini would retire to a cabinet, his “ghost house”; a curtain was drawn around it, and the audience would wait. And wait. They sweated it out in their seats. Time passed, watches ticked away, and the band played on.

Audiences are so polite. They assume that a trick doesn’t begin until the preparations are through. But the preparation—the stage business—is the trick. By the time the boxes were locked, the cabinets closed, the curtains drawn, it was all over. Houdini could emerge at his leisure, shackles intact, his methods a mystery, leaving no clue.

Was this entertainment, or an ordeal? How to explain such emotion—cheers, standing ovations, tears of joy and relief, Houdini swept from the stage and borne through the streets? People aren’t dumb. Some must have suspected that inside his cabinet, behind his curtain, Houdini was getting a little assistance: tricks, gimmicks, lock-picks, keys. Feats even more difficult, performed in plain sight, would not catch on until a later phase of his career—and of his relation with his public. But Houdini was already standing magic on its head: for speed, struggle; for ease, anxiety; for mastery, risk and the possibility of failure. In the intimacy of the vaudeville stage, his audiences became his accomplices. He was doing things the hard way, and they were on his side.

And he had done things the hard way. The 1890’s were hard times—strikes, riots, deep economic depression; no time for a young green apprentice to break into show business. Teamed up with friends, then his brother, and at last his wife, Bess, Houdini took what he could get. Beer gardens, dime museums, traveling circuses, medicine shows, carnival midways; performing a dozen times a day—magic tricks, mind-reading acts, song and dance, Punch and Judy skits, comedy routines; sharing billing with fan dancers, sword swallowers, snake-oil salesmen, giants, midgets, tattooed men, bearded ladies. In a pinch he peddled miracle cures, tooted horns in parades, and carried on as the Wild Man in a Cage.

Shows folded, troupes disbanded, managers absconded with funds, when funds there were. The Houdinis found themselves stranded in the small towns of America. They must both have looked like runaways, Houdini with peach-fuzz cheeks and elevator shoes, Bess shy-eyed and bow-lipped and too small to find costumes that fit. “What the hell d’ya think I’m running here,” a manager bawled— “a kindergarten?” When things got bad, Houdini sold his magic tricks, a practice he would continue in his days of fame and fortune; and when they got worse, he vowed to call it quits.

But the truth is, he’d found a home with this wandering tribe. He liked to say he’d made his debut in the circus, at the age of nine, in a school chum’s backyard in Milwaukee, swinging by his heels from a trapeze. Erie, he called himself, Prince of the Air. He was, he ever would be, the daring young man on the flying trapeze.

Bess told of an incident soon after their marriage. He was twenty, she was sixteen—or eighteen. She was a schoolgirl sheltered by a strict Catholic mother—or herself half of a singing duo. They met at a birthday party where she was a chaperoned guest and Houdini the paid entertainment—or on Coney Island, where both were playing, introduced by his brother, stage name Hardeen. It depends on whom you ask. She’d known him for two weeks. Late one night, after the show, Houdini invites his bride and his brother out for a stroll; they halt in the middle of a bridge. Swift dark water, church bells tolling the hour, clouds obscuring the moon. The stage is set. At the last stroke of midnight he raises their two hands in his. They must swear to be true to him; never to betray him; to pledge their loyalty to him unto death and carry his secrets with them to the grave.

Suspense. Sensation. Sentiment. The three S’s of melodrama, and the story of his life.

A break came with a substitution trick. One partner is tied in a sack and locked in a box; the other steps behind a screen. The next thing you know, lo and behold! the one in the box steps out from the screen and the other is discovered locked in the box. The Houdinis had it down to three seconds. The old switch got a fanciful new name, “Metamorphosis.” This may have suggested the idea of combining locks and boxes.

Houdini would say he could recall the works of every lock he ever picked, and that was probably no boast; he understood the yin/yang of locks and keys. He found in them a calling: studying, tinkering, acquiring whatever devices he could get his hands on. His competitiveness made him a cutthroat collector, and his accumulation of books, artifacts, memorabilia—on magic, theater, crime, and the occult—threatened finally to turn the Houdinis out of house and home. And home, by then, was a four-story mansion.

Magicians had done handcuff releases before; no one had tried to make them the main event. Houdini tried, and did not at first succeed. He was doing too many, too fast; he made it look easy—like magic. Escape wasn’t yet an act; Houdini wasn’t yet Houdini.

Meanwhile he courted police stations wherever he played, offering to test their wares. It was good publicity, and free. Stripped, searched, handcuffed, padlocked, chained to iron bars—often in “a nude condition”—as the stage bills read, nothing can hold houdini. In time, notices for the lock-picker/safe-cracker/jail-breaker would include publicity puffs from official guardians of law and order around the country and across the sea: the Tombs, Scotland Yard, the famous prison-fortresses of Europe, cells of notorious criminals and notable assassins. Once, after freeing himself, and having a little time on his hands, he raced through a jail—this was Murderer’s Row—picking locks with the greatest of ease. So startled were the prisoners at this sudden apparition, a naked man turning them out of their cells, that they let him switch them around and lock them back up. It was “Metamorphosis” again.

the challenge act

bring your own handcuffs

The essence of showmanship is upping the ante. Houdini was offering a reward—fifty bucks, no small potatoes in those days—to anyone who could produce a lock that would stump him. This too wasn’t exactly new, but when Houdini said challenge, he meant challenge: contest, conquest, was his life’s blood. He was discovering himself, the Houdini in him—the dare, double-dare, and double-double-dare.

Publicity shots of the time show a compact, muscle-bound young man, in little more than a loincloth, strung like a Christmas tree with the hardware of his trade. Chains hang from his neck, wind around his arms, twist through his legs, anchored here and there by heavy-duty padlocks and iron weights, the more the merrier. Hands manacled in front of him, he crouches like a diver, ready to spring. (The shackles were mostly ornaments, and the crouching diving stance afforded enough slack to start his escape.)

For all the decorations, Houdini’s trademark was his hair. Kinky Jewish hair, erupting from his head sidewise, off-center, in two uneven humps, almost horns. Cartoonists loved it: the sign of the sorcerer, his electric-charged energies. Not all of his escapes would be Challenge Acts, but from now on they would always be challenges.

At the turn of the century, the Houdinis embarked for England and the Old World, without bookings, without blessings. As an “escapologist” and a one-man show, he’d worked his way up from the bottom of the bill to a headliner on the vaudeville circuit, making as much as $400 a week. But this was not his idea of success—success beyond his wildest dreams. The wind was in his sails. He was twenty-six years old, and half his life was over.

It didn’t take long before Houdini was packing them in, a blockbuster, sold-out houses, engagements extended wherever he played: England, the continent, the crowned heads and capitals of Europe. Managers fought over him. In Germany the Polizei stood by, watching a publicity stunt in a park, then arrested him for walking on the grass. How could he not succeed? These were places where they took their locks and boxes seriously. The tour would last five years.

Houdini impersonators popped up. Haudyni, Nordini, Mourdini—even a Miss Undina, with veils, and a modest Miss Lincoln in knickers, middy blouse, and sober black stockings, wary of adding cheesecake to chains. Leave it to Houdini to pluck his own rival out of his hat. He cabled his brother, the magician Hardeen: “Come over, the apples are ripe.” Here was the Houdini imitator to end all Houdini imitators; not only was he equipped with Houdini’s set-ups, and in on Houdini’s secrets, he was Houdini’s own flesh and blood. All his rivals were second-hand. His feats might be duplicated, might even be surpassed; they could never be equaled. Only Houdini could be a Houdini.

He was the New World’s new man: the little guy, the challenger, an American jack-in-the-box wild and woolly as his hair. There was a strange symmetry here: an immigrant Jew exported to the Old World as the spirit of the new. Once again, he’d lit out for the territory.

It is worth noting that, until this tour, he had never run into anti-Semitism, not in America—though he would. He was unprepared for its pervasiveness in Europe, so casual, so virulent. And then there was Russia, in a class by itself. It was 1903, the year of the Kishinev pogrom, when, in the words of Hayyim Nahman Bialik’s great poem, “the slaughter came with the spring.” So this was the Old Country. Feted by royalty, showered with gifts, the rabbi’s son left Russia with a sense of escape even he had never felt, and he never went back there again.

Houdini had left home a minor music-hall entertainer; he returned a figure of fame—a Name, with the New World still to conquer. Until the Great War, this would be the pattern. He preferred touring abroad, where bookings were longer and the accommodations better; but he had to set foot on native ground or, he said, his work would suffer. It sounds hifalutin, but it was fact. He needed the competition. He was setting up a rivalry between his two worlds—a rivalry, ever escalating, with himself. Who else was there?

Houdini’s story was a melodrama in three acts, and the second was about to begin.

Packing crates, steamer trunks, bank vaults, beer barrels; steel boilers riveted shut; the carcass of a “sea monster” washed ashore (who thought that one up?); a gigantic football trotted up the aisle by husky linemen; a barred and metal-plated carette, a jail cell on wheels, transporting the luckless and the desperate to Siberia. A street rhyme summed it up: “The great handcuff king/Who wriggles to freedom/From any old thing.” Where the emphasis before had been on suspense, now it was sensation. Each return engagement had to knock ’em dead, with contraptions more elaborate and far-fetched. The apparatus for his celebrated Water Torture Cell required a freight car. The new note was in the new vocabulary:

houdini’s death-defying mystery

failure means a drowning death

If upping the ante is the essence of showmanship, it’s also the imperative. Houdini was tiring of locks and boxes. Now he was performing on stage in full view, without cabinets and curtains, without picks and gimmicks. These were real restraints, real punishments, real tortures—some of them devised for real people. With a magic trick you know you’re being fooled, you just can’t see how it’s done. Now audiences saw how it was done—at length, and in excruciating detail.

The theater itself was too confining, just another box. He wanted more room, greater challenges, bigger crowds. Crowds especially. In publicity stunts, all the world was his stage prop. The Upside Down Straitjacket Escape: Houdini, arms strapped across his chest, dangling head first from the roofs of tall buildings. The Manacled Bridge Jump: Houdini handcuffed and chained, like the Dying Slave, hurtling himself into murky waters. His expanded bare chest, stubborn stocky bowlegs (both helped with the slack), goofy untamed hair: Houdini returning to his circus roots—acrobat, contortionist, high-wire act, and, it must be said, something of the sideshow freak. There are no escape clauses in escape acts; now the risk was the act.

And they came; by the thousands, the tens of thousands. Bridges and riverbanks stampeded with spectators; traffic marooned in streets paved with hats. They weren’t the raucous roaring crowds of the circus, or fans rooting for their champion on the vaudeville stage. They were mobs, there to see Houdini dead or alive—and either way it was a winning situation.

Houdini’s career by this point recalls Kafka’s tale, “A Hunger Artist.” The Hunger Artist lives in a zoo. Fasting is his art. Once upon a time he was a star attraction, touring the world with his act. In town after town everyone turned out to marvel at his feats and cheer him on. His contract limited the length of his fasts, and a chalkboard tracked the days. As the end approached, they came from near and far to keep silent vigil at his cage. (Sound absurd? How about sitting and staring at a curtain for however long it took? Audiences in the Midwest were said to be the most patient.)

But crowds are fickle; overnight they lose interest. What did they care about fasting? the Hunger Artist asks. Now, ignored by crowds and keepers alike, he can fast to his heart’s content. Because he has to fast, because he can’t help it; he had never found the food he liked. At last the Hunger Artist achieves perfection: he dies. Even as he’s swept up, straw and all, a new star is taking his place: a young panther whose “noble body seemed to carry freedom around with it, too.”

Of all of Kafka’s Jewish parables, “A Hunger Artist” might be the most Kafkaesque, expressing the longing for health, simple pleasures, and a normal life. Not the panther is the rival here, but the crowds. Everyone knows feeding time is the biggest sensation at the zoo. This could also be a fable of failing celebrity.

The war cut Houdini off from half his public and his revenues; in Germany alone he had been booked five years in advance. He was still one of the most famous men in the world, the highest paid performer in vaudeville, a household word. His name appeared in advertising endorsements, popular sheet music, children’s ditties, and, eventually, the dictionary: “Houdinize: To release or extri-cate oneself (from confinement, bonds, or the like).”

Turned down by the draft—he was in his forties—Houdini went all out for the war effort, organizing another charitable brotherhood, becoming a top fund-raiser at Liberty Bond rallies, entertaining the troops with patriotic extravaganzas featuring live eagles flapping out of hats, five-dollar gold pieces flung to the doughboys. All this on his own dime. It was inevitable that he should take a flier in Hollywood, venue of the rabbis’ sons and their wildest dreams. What were The Perils of Pauline but Houdinizing?

Immigrant Jews, who had seen the possibilities of mass production for mass markets in the garment industry, had been no less quick to see the future in mass entertainment. They were the masses. From serials to feature films, to his own production company, starring in his own scripts (he kept a sweatshop of writers busy with his ideas), to investing in the latest technology, to planning a chain of movie houses, soon Houdini was dreaming of empire.

What went wrong? He might have been the greatest mogul of them all, but there was only one role for him. Putting on weight, losing his hair, as poker-faced in the clinches as in feats of derring-do, he was no matinee idol. But that wasn’t the trouble. The movies, which suspended reality, made moot the suspension of disbelief. The medium was the magic. Not everyone could be a Valentino, but anyone could be a Houdini.

There remained one more act, another metamorphosis—the trick the rabbi’s son always had up his sleeve.

a magician among the spirits

Houdini was a street kid. His formal schooling probably stopped when he hopped that freight car. It took years to get rid of his sidewalk-and-gutter speech, and he may never have rid himself of a sense of contradiction as a not quite literate Jew. But few men have had his guts and his smarts and fewer still his acquaintance with the run of human types, from crooks and con men to kings and queens. He learned the most at the bottom.

The hustlers he’d known took advantage of human nature—greed. The spirit mediums were taking advantage of grief.

Tables tipping, chairs thumping, banjos and tambourines floating in air, gauzy ghosts, mediums drooling messy ectoplasm (known in the trade as “geek effects”) and chatting up the dead—the spirits were nothing if not practical jokers. No one could fall for such slapstick and fakery and things that go bump in the night. No one but the bereaved, longing to hear again from their loved ones, to be told they weren’t lost and gone for good, only waiting on the Other Side. The war had decimated a generation of the young; a worldwide flu epidemic, following hard after, killed many times more. The apples were ripe. Never was there an audience more willing to suspend disbelief.

Houdini had been a medium and mind-reader himself, quitting when he realized that people actually believed he could do what the spirit mediums said they did. He knew their tricks—they were his own; it was all a lot of Houdinizing. He was king of handcuffs, master of manacles, monarch of leg shackles, the greatest escape artist of all time; Houdinizing was his game. And as for supernatural powers, though there were those who swore he had them, Houdini was not one to settle for second billing.

Testifying at legislative hearings, lecturing at universities, investigating on scientific panels (“It takes a flim-flammer to catch a flim-flammer”), exposing spirit techniques in his own stage routines—no one ever said Houdini wasn’t competitive. The Lord had delivered them into his hands. But there was more to it than that. More than a mockery of magic, the spirit act was a mockery of mourning, a mockery of the dead. And grief was sacrosanct to Houdini.

When his mother was alive, he would lay his ear to her comfortable bosom and listen to her heart; when she died, he visited Machpelah Cemetery, New York’s necropolis, every chance he got and knelt to lay his ear to her grave. Granted, sentimentality is a form of exhibitionism, and there was a staginess in all his relations, as if they were publicity stunts. And he was always attracted to places of confinement. In his mind-reading days he had done his legwork checking out inscriptions on local tombstones; in his travels he made a point of visiting the final resting places of once-famous magicians and—usually with a photographer handy—planting wreaths on graves. Solemn-faced, he posed against these maudlin backdrops, all in black, his hat over his heart.

But this is when it all came out. For taking on the spirit mediums, Houdini was called a Red, an agent of the Pope, a kike, a sheeny, “a low-minded Jew,” and received many threats. America was in a fervor of nativism. The golden door was shut. There were quotas on immigrants, quotas on rabbis’ sons. The spirits will get after you.

Maybe you know the end of the story. It was the fall of 1926 and the tour was off to a bad start. In Providence, Bess came down with ptomaine poisoning; in Albany, Houdini fractured an ankle being lowered into the Water Torture Cell. Resting backstage in Montreal, he received a couple of students from McGill, where he’d lectured on superstition. Enter another student, nervously talkative. Was it true that Houdini’s cast-iron belly could withstand any blow? Would he mind giving a demonstration? Houdini had never made any such claim, but neither did he ignore a challenge. As he began to rise, the young man—much younger, and much bigger—came out swinging, blows so deliberate, so vengeful, the other two barely managed to drag him away.

Houdini gave his performance in pain and passed a terrible night on the train to Detroit. The doctor summoned by Bess insisted that he be hospitalized. But the house was sold out, a crowd would be waiting, and crowds were fickle. The show must go on. Questions about his death may never be laid to rest, but this much is known: Houdini gave his last act in a high fever, with a broken ankle and a burst appendix.

“Houdini’s secret,” Bess would say, “was Houdini.”

What was the food Houdini craved?

Ascetic Houdini, who neither smoked nor drank, who slept no more than four or five hours a night, was always in training, testing his body, torturing it, he said. Swallowing and regurgitating billiard balls to strengthen his throat muscles; submerged in coffins underwater to study slowing his heartbeat and holding his breath; immersed in bathtubs of ice to inure himself to cold. It takes a lot of practice to make a little magic. Prince of the Air, Wild Man in a Cage, Daredevil Houdini, whose noble body carried its freedom around with it: he could be the Hunger Artist and the panther both.

The escape act is also a disappearing act. How did he get away with it? This suggests what, now, can no more than be suggested: the force of his personality.

Many photos, a few film clips, a rare recording of his voice—but where’s the magic without the magician? We live in a different world now. There have been some interesting books about Houdini; it would be hard to write a dull one. The earlier tend to hagiography, those more recent to psychological speculation about the Dark Side of Houdini. What was he escaping from? His dream of seeing his parents under the tree becomes Houdini witnessing the primal scene, and the escape is Houdini acting out his fear of death. True, the wags on the vaudeville circuit long before were touting his act as “The Death and Resurrection Show.” But that was an in-joke, the shoptalk of show biz. The larger truth is that Houdini took the escape act as far as he could go without becoming the Hunger Artist.

Besides, who needs unconscious motivations? Houdini was all up front. He was an expression—a phenomenon—of his times, the extreme that raises the particular to the level of the general. The very peculiarity of his act tells us that. And he was an American phenomenon. How would he have fared as a German Self-Liberator? Or a Russian? On his Russian tour, an officer in full regalia stomped onstage and stopped the show. The audience sat in stony silence, the manager made himself scarce. The officer was a blueblood—and who was this little Jew? The magician knew the spell to make this joker disappear. “I’m a millionaire,” he said. America was the challenge act—and the magic charm.

As between failure and death, the operative word for Houdini had to be failure. Failure was poverty, failure was hunger, failure was humiliation. The rabbis’ sons knew it well: failure in America was real failure. He presented, as Jews often do, a test case: the mandate of the melting pot. His life was a spectacularly successful solution to the immigrant dilemma, the tragedy of the fathers, the liberty of the sons.

And that dream, that tree? Who can fail to sense the longing for the days of his dead parents’ happiness; for the only piece of childhood he ever had; for the cost, the loss, the garden of Appleton? Not as a collector, but as a son, fulfilling a pledge, Houdini tried to buy back the sacred books his father had sold off in those bitter last years. And wherever he found himself on the anniversary of his father’s death, in whatever farflung place, he sought out a synagogue where, wrapped in a prayer shawl, he could recite the mourner’s kaddish. Metamorphosis comes at a price.

He died on Halloween. He had promised—circumstances permitting—to return, or send some message from the Other Side. And if Houdini couldn’t do it, who could? For ten years Bess kept the vigil, seated in a circle, holdings hands tightly grasping hers—like a medium in one of those séances Houdini had so zealously denounced. But there would be no return engagement; there would be no more magic.

And yet in one of his last photographs something of the sort seems to have happened. There is aging Houdini, in greasepaint, eyebrows stenciled, lips rouged, his arms bared above the elbow, his bald forehead gleaming. He stands inside a hoop slung across his shoulder, its paper cover a shattered sunburst. His hand extends in a practiced flourish. The spangle of the Big Top. Someone, something, has just jumped through. But who? Where? No one’s there. Only Houdini, the ringmaster, presenting Houdini.

Looking for questions, not solutions.

Most professionals, by definition, are problem solvers. Therein may lie the problem.

Investors, on the other hand, are opportunity seekers.


The Problem With Problem Solvers

Rich Karlgaard
940 words
8 May 2006
Volume 177 Issue 10
(c) 2006 Forbes Inc.

What mysterious magnetic force binds Tom Tancredo, the border-enforcing Colorado congressman, to Al Gore, the Earth saver? What suddenly glues Charles Schumer, with his 100% rating from Americans for Democratic Action, to Lindsey Graham, who scores only 20% from the liberal group? What odd knot ties Rod Dreher, the writer and granola conservative, to Pat Buchanan, the brawling America Firster?

The answer: an obsession with present-day problems.

Problem solvers are the loudest voices in American politics today. They are creating a new political fault line that is ripping through both political parties with the force of the 1906 San Francisco earthquake. On one side are voters whose natural optimism leads them to seek opportunity in their lives. Because change is what produces opportunity, the faster the future arrives--with all its weird new technology, disruptive economic models and shifting alliances--the more opportunity there will be.

The other voter bloc is feeling motion sickness and wants to slow things down. The most effective way to delay the future is to drop everything and go about the business of solving today's problems, real or imagined.

This new divide was predicted in 1998 in a book that deserves to be a bestseller today. Called The Future and Its Enemies, it was written by Virginia Postrel, who was then the editor at the libertarian magazine Reason.

Postrel wrote: "How we feel about the evolving future tells us who we are as individuals and as a civilization: Do we search for stasis--a regulated, engineered world? Or do we embrace dynamism--a world of constant creation, discovery, and competition? Do we value stability and control, or evolution and learning? Do we think that progress requires a central blueprint, or do we see it as a decentralized, evolutionary process? Do we consider mistakes permanent disasters, or the correctable by-products of experimentation? Do we crave predictability, or relish surprise? These two poles, stasis and dynamism, increasingly define our political, intellectual, and cultural landscape. The central question of our time is what to do about the future. And that question creates a deep divide."

Don't Fix Typewriters--Invent Word Processors

Postrel's dynamists, or, as I call them, "opportunity seekers," love charging into the unknown future. They trust that things will work out if people are free to work and create, using capital that is free to seek a return. Opportunity seekers, in fact, are bored by static problem solving. This does not mean they are shirkers. It's just that they'd rather invent word processors than fix typewriters.

Problem solvers, on the other hand, see failure everywhere. They will grind away at a problem, even subsidizing past efforts that have never worked well and probably never will. Problem solvers tend to resist forward motion until all present-day problems are gone. Problem solvers get irritated--a stern bunch they are--when they see others frivolously seeking opportunity. Ronald Reagan and Bill Clinton were opportunity seekers by nature. Al Gore and Hillary Clinton are problem solvers. George W. Bush is an opportunity seeker who has surrounded himself with problem solvers.

Starting with Ronald Reagan's election in 1980, Republicans have presented themselves as opportunity seekers. Theirs has been the party that favors lower taxes and less regulation, school choice and business without speed bumps. Even in the social arena, a sphere in which Democrats are supposed to be the innovators and Republicans the blockers, a more careful look shows the opposite to be true. Republican-tinged evangelical churches saw the opportunity to save souls. As a by-product of soul-saving, they have fed and clothed more of the world's poor than have most government-backed aid agencies.

Americans Want Optimism

Republicans will continue to win elections if they appeal to opportunity seekers. They'll get trounced if they overreact to today's polls and decide they must trade their opportunity-seeking philosophy for problem solving. America wants its political leaders to be optimistic about the future. We want to be shown the possibilities and opportunities--bold races to the moon, shining cities on a hill and bridges to the future. Politicians lose when they focus on problems.

Tom Tancredo wants to do what it takes to solve the problem of illegal immigration. Do what it takes? A big fence and then what, Congressman? Pat Buchanan wants a 20% tariff on all foreign goods. Does Mr. Buchanan even stop to think about what the enforcement costs of that would be, not to mention the opportunities thereby lost?

My Dell desktop computer is illustrative. Conceived in Texas, it consists of a frame built in China, a screen made in Taiwan, a micro-processor designed in Oregon, memory chips produced in China and assembly work done in Malaysia, with the software sent over from a Seattle suburb. The whole kit and kaboodle was shipped back to the U.S. on a jumbo jet built in Washington State and operated by an outfit from Tennessee. Each day Dell creates opportunity for millions of people--employees, customers and suppliers--around the world.

But that "around the world" bit annoys people like Pat Buchanan and reborn protectionist Lou Dobbs. They see global trade as a problem to be solved.

Countries that abandon the spirit of opportunity to focus on problems are countries that have seen their best days. May that not happen to us.

Starting out.

About That First Job

Rich Karlgaard
1019 words
22 May 2006
Volume 177 Issue 11
(c) 2006 Forbes Inc.

This question always comes up at the end of a speech: "Given the dizzying pace of change in the economy, what careers should my kids pursue?"

I always chuckle. The question is legitimate, of course, but the fact that I am being asked it is a bit funny, if you know me. In college, let alone high school, I had no clue as to what I wanted to do once I graduated. All I cared about was sports, track-and-field especially. That I wound up working for a magazine might have been predictable--might have been--from my twin passions at the time, Sports Illustrated and Track & Field News. I would read and reread each new issue to the point of memorization. At the library I shirked my homework and pored over old bound volumes of these magazines. Forget Mark Twain and Ernest Hemingway. The best American writer was sportswriter Dan Jenkins.

As a result of this goofballing, I graduated with low Bs and was clueless about careers. College friends headed off to law school, med school, divinity school and I headed off to a security guard agency. My first job was to show up at 5:00 p.m., relieve the receptionist and sit in the lobby until midnight. It was there that I discovered the prose of H.L. Mencken and George Orwell. And lively contemporary writers, too, such as Tom Wolfe, George Gilder and P.J. O'Rourke. They were nothing like the sour postmodernists I had been force-fed in college.

The written word, I had come to appreciate (on my own and rather late), was everything. So here is my first piece of advice to parents: Get your kids to fall in love with reading. It doesn't matter what the writing is. What's key is that the kids claim it as their own. I know scholars who were intellectually awakened as teenagers by Playboy magazine interviews. Those are great interviews. A few years ago a neighbor's kid was struggling in high school, despite an IQ score in the nosebleed zone. His passions were golf and basketball. "Fire the tutors," I told his mother. "Buy him subscriptions to Sports Illustrated and Golf magazines." She did. The boy was awakened. Now he works for Lehman Brothers in London.

Find the Right Mentors

Passion, like energy, is vital. Of course, passion must be captured and directed in order to accomplish actual work. And it needs a mechanism to express itself, just as a waterfall needs a turbine wheel to make electricity. In the realm of school the best teachers and coaches know how to direct their students' passion and energy. But careers don't work that way. In the world of jobs and careers the student must find the mentor.

The mentor needn't be a boss. The mentor doesn't even have to know he's been selected as a mentor. Throughout my career, I've never told my mentors they were my mentors. I picked mentors because they had something I needed to learn. From one of my bosses I learned how to match a jacket, shirt and tie. He always looked sharp; I wanted to look sharp, too, so I quietly observed the color of his clothing, the knot of his tie, the amount of shirt cuff showing. Sounds trivial and even silly, but it helped me and gave me confidence.

For several years during the mid-1980s I worked for myself, making brochures for technology companies. I sublet space from a pal who ran a consulting firm. I marveled at how this guy could sell six-figure consulting packages while I was stuck in a four-figure piecemeal world. So I studied my friend. I would sneakily stand outside his office while he was on the phone schmoozing a client. I would read draft memos and proposals found by the copy machine. I was literally picking the guy's knowledge and methods off the floor.

Another mentor, unaware he was chosen, was William F. Buckley Jr. One day in 1986 a friend got a call to pick up Buckley at the airport. He invited me along. Buckley, in town to debate George McGovern, was eager to learn about Silicon Valley. We brain-dumped all that we knew, and he nodded. And then he asked: "Is there a magazine that covers this?" Well, no, we said. "Maybe you should start one," he said. Two years later we did. My goal for Upside magazine was to marry a Dan Jenkins prose style with the subjects of technology startups and IPOs. And so to change the world, as Buckley had done with National Review.

Think Like an Owner

My last piece of advice is for your kid to learn to think like an owner. Your kid will get that first job and report to a foreman or a middle manager or someone lower on the totem pole. The company's big-picture goals may be blotted out by the narrower demands of the boss. Maybe the boss just wants to upstage a rival or knock off early for golf.

This is a dangerous time for the young careerist. It's when destructive habits can be learned. The worst of these mental habits is: restricting one's vision to the internal view of the company--that organizations and jobs exist for their own preservation. Actually, they exist to keep a customer and make a profit. This ownership view can get lost in the bureaucracy. I've seen too many talented people in their 40s and 50s who are stuck in their organizations, deeply frustrated. Ask them what they do, and you get a boring, task-oriented job description such as an h.r. department might write.

Even if your first job is sweeping floors, think like an owner.

Friday, May 12, 2006

The beginning of the end of the middle?

Death in the Middle: Why Consumers Seek Value at the Top and Bottom of Markets

"In the U.S. and around the world, the consumer markets are bifurcating into two fast-growing pools of spending," writes author Michael J. Silverstein in his new book, Treasure Hunt: Inside the Mind of the New Consumer. "At the high end, consumers are trading up, paying a premium for high-quality, emotionally rich, high-margin products and services. At the low end, consumers are relentlessly trading down, spending as little as possible to buy basic, low-cost goods and services." Between both piles lies a vast range of mediocre, medium-range products that Silverstein claims is doomed to decline. What implications does this have for companies and their brands? David Reibstein, a Wharton professor of marketing, discussed that question with Silverstein, a senior vice president of The Boston Consulting Group.

Reibstein: How did this book come to be written?

Silverstein: Three and a half years ago, I co-authored a book with Neil Fiske called Trading Up: Why consumers Want New Luxury Goods... and How Companies Create Them. Trading Up is the story of how middle-class consumers around the world are buying products at 50% to 200% price premiums in categories like homes, cars, vacations and food. We call these new luxury goods. Following the release of that book, we began doing a lot of work helping companies understand this premium segmentation. It's a very rich opportunity, with more than $600 billion in sales in the U.S. in homes, transportation, dining, travel, food and beverages, personal products and services apparel, and home goods.

I spoke with some 10,000 people during the past couple of years. Many people would come to me after my presentations and say, "We loved Trading Up, we think it's very insightful, but it's only half the story. You didn't get it all." So I listened. Most of the people approaching me were women, who were heavily into purchasing and acquisition of goods and taking care of their families and very interested in maximizing their budget. The part of the story that they said we missed in Trading Up was basically the trading down side. It was true that consumers were trading up to premium products, but they were also trading down to low-cost products and services, and avoiding the boredom and low value that increasingly characterize the middle. This polarization was reshaping the consumer goods market.

Two years ago, we began our second wave of major research around trading down. We looked at how consumers spent their money, as they traded up or down. We asked in what categories consumers were trading down and why. We also looked at differences across households, by gender, age, income, and geography. We made it a global research project and looked at Europe, Asia and the U.S.

We came to the conclusion that trading up and trading down were big opportunities for companies and for consumers. The amount of spending on trading down was approximately twice the amount of trading up. Both ends of the market offered huge opportunities. Markets were bifurcating, which meant that the top and bottom were growing and the middle was in horrible decline -- and that is creating quite a few casualties. In every category we looked at -- and we studied 30 of them in detail -- there was this war. The war was for this consumer to either trade up or down or to evacuate. In the car business for example, the middle market has shrunk by 12 market-share points. In the television market, it has shrunk by 40 points. In the U.S. washer market, the middle market has declined by 16 points, and on and on.

Those findings led to this book, Treasure Hunt. We thought about calling it Trading Down, but in fact from a consumer's point of view, it's not really trading down. It is about consumers living a rich, balanced life, being careful with their money, and buying a handful of products where they trade up and others where they trade down.

It's about consumers comparing, contrasting, experimenting and bargaining. It's about relentless behavior that is primarily female. It's about the female head of a household operating in many situations like a purchasing agent, separating truth from charade, and marketing claims from real benefits. It is a powerful force in the global economy, creating both opportunity and threat.

Reibstein: We do see growth at the top and at the bottom. But it's not like the middle has gone away.

Silverstein: The middle is still very large, but it is declining. If the bottom end of the market is at $1.2 trillion and the high end at about $600 billion, the middle market is around $1.5 trillion. If you believe what our research suggests, the middle is going to decline at 5% or 6% a year over the next five years. The top is going to grow at 10% to 12% and the bottom is going to grow at 5% or 6%. If you are in the middle, that amount of volume loss can be devastating. It fundamentally requires you to shut plants, change your overhead structure, and get out of categories. A big company that is facing this death in the middle is Kraft, which we have referenced in the book. Fundamentally this is in the cheese category. Consumers are buying private label cheeses that are 20% to 25% less expensive than the Kraft brand, or they are buying expensive romance cheeses, imported from Europe, for which they pay $12 to $15 a pound.

Reibstein: That is what I find fascinating -- the implications of your research for specific brands. What do they need to do to either get with the program or get out of the way?

Silverstein: Well, we can talk some more about Kraft. If Kraft awakens -- and it is a sleeping giant -- it will realize that cheese is a very positive category that consumers love and crave. What they are looking for are companies that provide them with a product that has ease of use and convenience. In the shredded cheese category, there is Sargento -- and it is doing very well, thank you -- Kraft has basically given that market to them. In the car category, BMW has less than a 2% global share, but its market value is higher than General Motors, Ford and Chrysler combined.

Reibstein: Take a company like P&G. What are the implications of your research for some of their best-selling brands?

Silverstein: Well, what is interesting about P&G is that they recognized there was a phenomenon happening called "trading up." It was the largest single company buyer of that book, by the way, according to Amazon. P&G has basically gone through every one of its categories and said, "How can we add new value, how can we innovate, how can we get underneath the needs of the consumer and basically change the category representation?"

A good example would be Oil of Olay. If you remember, back in 1980 Oil of Olay sold in a little bottle for about 22¢ an ounce. It had one form -- you did a little dab on your skin and that was it. If you were to go to the drugstore today, you would actually see that Oil of Olay is a section. It looks at all the different skin care problems that women have and says, "We have a solution -- and it's a value-added solution." Another example is the Oil of Olay Daily Facial. It's not really a facial; it's a pad with a special ingredient. They charge $1.50 for it, and the woman says to herself, as she is applying the product, "God, I'm going to be beautiful tomorrow!" She feels more beautiful and she feels like she is taking care of herself.

This has been a systematic process at P&G. It has happened across all categories. They've done it with Tide, in dishwashing soap, the whole product line. Now, they've bought Gillette, and that is probably the most expert company in doing this for men. I don't know whether you've seen the fusion blade -- it is supposed to prevent you from being cut to pieces.

Reibstein: Crest has introduced a product called Crest Vivid White. They've done it under the Crest name, which is the premium toothpaste brand, so this is exactly what you are talking about. Still, the vast majority of their volume is in the middle market. Even though the market may be getting bifurcated, as you say, I think that it is really important to get across that the middle still exists. While it is shrinking relative to the other areas, it still represents a huge portion of the overall market.

Silverstein: It does, but it's huge and declining...and that really is the problem. We do a tracking study with consumers, and we asked a standing panel of approximately 2,000 households how are they feeling and what are they doing. We received some really incredible results. These numbers are not intuitive: 72% of consumers feel in control of their finances; 73% are saving money every month; 70% believe that they will be better off and have higher income in the future; and half, a full half, believe that they enjoy a higher standard of living as a result of their smart shopping behavior. Some 92% of people tell their friends when they get a great deal, and only 8% pretend that they paid full price. In terms of this exploration of the market, consumers say treasure hunting is exciting, fun and makes them happy.

Reibstein: Have you spent any time with the people at Costco? What is interesting to me is that they describe their store experience as a treasure hunt. It is interesting that they use the exact terminology you are using.

Silverstein: I did not know that specifically, but consumers believe that cheap is good. They realize that being a savvy shopper is important and that they can contribute to their savings rate by buying better goods cheaper, and many of them use Costco. Costco is a fantastic treasure hunt store -- it's about trading up and trading down, under one roof. It's one of the few retailers in the world that can do it. It hooks people in and they end up actually spending their savings back into the store.

We have done shop-alongs with consumers in Costco. During the shop-along, the consumer knows what she wants to spend -- $200. She has a list of items she wants to buy: meat, canned goods, frozen items, paper products, and some drinks. Then it sort of clicks in her head that she has spent $180 and that was at least 10% less than if she had bought these products at a supermarket. So she pats herself on the back and says, "I can go to the wine section and buy that $20 bottle of Kendall- Jackson that I've never given myself."

Personally, it's an experience -- the treasure hunt at Costco. We have a home in Naples, Florida, and there is a Costco just down the road from us. I went there with my wife on a Sunday afternoon. They sell a great pumpkin pie for $5.99, and we went just to pick up a couple of pies. I dropped her off. The parking lot was crowded; it was a real scene. About 10 minutes later, I walked into the store. She was standing there with a cart and putting in a piece of art. I looked at her and said, "What are you doing?" She said, "Well, they have original prints here. This one is a Miro." So instead of buying just two pumpkin pies, we bought the two pumpkin pies and one Miro.

Reibstein: We hear so much about micro-segments. First of all, segmentation is alive and well, but it might be going down -- even eventually getting to a segment of one.

Silverstein: I don't think that the segment of one is dead, but it is very difficult to execute.

Reibstein: Let me interrupt before you jump there. I don't want to dwell on whether we can implement the segment of one or not. Let us focus on the concept of segments. While it's hard to implement segments of one, lots of people have thought about multi-segments. I'm wondering if, when we talk about the bifurcation, that gets us away from thinking about the refinement of segmentation and into thinking that there are these two large groups at the top and bottom of the consumer market. Help me think through some of that.

Silverstein: Well, our book has a series of individual consumer stories -- and even consumers of the same age, income and demographics trade up and down in different categories. That is a big finding.

We also find that a small group of users tries the dominant share of volume. It's 10/80 as a typical representation -- 10% of the users are trying to get 80% of the volume in these trade-up and trade-down categories. They are very heavy users, almost daily users. We call them the "apostles" -- and they basically help a brand. They cause you to put your arm around your buddy and say, "You ought to try this." We are talking about a big movement in the economy in terms of trade up and trade down.

Within each individual category, there is a daily battle and it is: "Are you going to win me?" Am I going to buy Kellogg's cereal or General Mills' cereal? If I'm going to buy Kellogg's cereal, you will have to tell me why. So, I'm agreeing with you that segmentation is the way to go. It's about concentration of resources against a small number of like users, with like habits and like habituation. It's about creating programs that cause them to affiliate and to connect.

Reibstein: It's very clear to me that we have customers who jump from one group to the next, and that you are not always in one segment. What I was wondering is if your research takes us down the path of saying, "Don't think about segments any more."

Silverstein: What our research strongly suggests is that we should think about and understand the heavy users and their purchase pathway. What got them to that position? What are the drivers of their future behavior? How do you hold on to them? How do you get them to embrace your brand and to recommend your brand? That is an off-shoot of segmentation. I think a lot of people do big graphic segmentation studies. Frankly, I have found them not worthless, but not helpful either.

Reibstein: I find them worse than not helpful, because I think sometimes they can be distractive.

Silverstein: For big companies, they basically become red herrings. But on the other hand, all our research says that there is an age, gender, and income segmentation that is possible in most categories. The last time I was at Wharton, I gave a presentation. There were 650 kids in the room, it was in one of the big halls, it was fun and they were great kids. One of them said to me, "So what do I buy?" I looked him straight in the eye and said, "Well, I can tell you that you trade up in electronics, that you are looking for a big screen TV, and that you have two iPods. One is in your pocket and one is at home." I basically laid out everything about how he spends his money.

For affluent, educated young men, you can define quite precisely what categories of goods they are buying. What we have found is that for almost every age, geography and gender, you can figure out what's hot, and what's not and why.

A good example of somebody who applied segmentation with fantastic results is Lew Frankfort at Coach. The company was spun out from Sara Lee when they decided that they wanted to get a more structured group of brands. Sara Lee had about $500 million in sales, and Lew had run their sports apparel business in the Carolinas. He wasn't an expert in pocketbooks, but he went to the Coach store on Madison Avenue and he watched the traffic. He saw how women thought about handbags, accessories and purses. And then he began to do some research to figure out for his core consumer -- how many items did she buy a year? And the answer was, she basically bought one purse a year.

One purse a year for $200 is a nice little business, but it's not a growth business. So he asked himself, "How many dresses do they buy? How many skirts do they buy? How many times do they go shopping?" He then decided that he needed to provide a range of fashion and make personal accessories a fashion business. He said, "I need to create excitement, energy and drive traffic. I need to make sure that when she goes to the mall, that she goes to my store." And that is what he did.

For his core consumer, the number of pocketbooks and purses purchased each year has increased from 1 to 4.4. This is one of the most dramatic stories out there in retail. He has gone from $500 million in sales to $1.7 billion, and his gross margin is 76.5%. His market value is about $14 billion. It's all about concentration: He has three core consumer segments to whom he appeals. The first is young, fashionable women who want to have a purse or a pocketbook to match every outfit. Second, there are older, more professional women who actually don't like to buy clothes any more because they're size 14 or 16, and they know that they're not going to get compliments, but they know they will get compliments on the new bag they are carrying. And third, there are the suburban women who shop at his factory outlets and want to buy a product that is classic, well-designed and highly durable, at a bargain.

Reibstein: One thing I couldn't help but think about while listening to you was C. K. Prahalad's book, The Fortune at the Bottom of the Pyramid.

Silverstein: I have read it, and it is a good book. There is a big difference, though. I mean, he is talking mostly about the third world.

Reibstein: That's right, which is why I wanted to ask you to relate what you have done to his book. Also, how much is the phenomenon that you are talking about U.S. specific vs. global?

Silverstein: Our books are totally different. Prahalad's book is about opportunities in the third world. I think that it is an interesting book, but it is somewhat unproven that in fact you can make a lot of money at the bottom of the pyramid. The only company that I know that really makes a fortune is Unilever. It is one of the most profitable and most interesting companies in the world, but a very unique company. The vast majority of the companies selling bottom of the pyramid goods in China are breaking even or only slightly profitable.

This phenomenon of the middle class is a global phenomenon. It is largely in the western world where you have those who have earned their way to higher incomes through education. This was an important finding in both Trading Up and Treasure Hunt, that education is the primary driver of real income growth. And you have populations that are savvy and sophisticated about buying products. They are the kind of people who go to the internet and research products before they buy them.

In fact, we see the emergence of what we call the SKU buyer. These consumers are buying a specific stock keeping unit, and they are looking to acquire it at the lowest possible price. They know they want to buy a BMW 330I, its product characteristics, what attracts them to the car, and what their current car is worth. When they go to the dealer, they have a print-out that they show the salesperson and they tell him, "This is the price."

This is happening all over the world; it is not only a U.S. phenomenon. In Mexico, 2% to 5% of the population has some money to spend on highly branded new luxury goods, they're doing it, it's a nice little market and it's grown rapidly. And I believe that over the next 20 years it will grow dramatically. You're going to see consumers move from very low subsistence incomes to low cost incomes and you'll see a tremendous boom in the middle market in Mexico, for example.

Reibstein: This is basically my last question. Are you going to end up suggesting that what companies need to do is that they need to be developing products for the tails? Is that where the growth is, sort of the phenomena of what you described that P&G is doing?

Silverstein: There are two choices that companies have. If you're in the middle market, you have to understand that you fundamentally can't do both things. You have to decide who you are and whom you serve. It's very much the Warren Buffett model of running a company, which is to delay or reduce spending and focus in on delivery of a very successful pricing formula. That's one way. The other way is to turn up the heat on innovation and to think about the emotional characteristics of consumer needs and to give them goods that they can crave, goods that will allow them to celebrate their lives and celebrate their success.

Reibstein: I think that this is a very compelling story. Any final thoughts?

Silverstein: I think the most important thing is the optimism and sense of success that consumers feel as a result of this phenomenon. And you don't see this very much in the popular press. If you read the New York Times you may think that Americans are angry and dissatisfied with their lives and they don't save a dime. I think that our research actually says that they are really very optimistic about the future.

In the book we have a character named Sarah. Sarah has a propensity to drop into tears in a second. But we spent about 14 hours interviewing her and watching her in her home. She is an incredibly devoted mother, loves her three girls, loves her husband and is happy in her suburban life. She thinks that all of the three girls are going to be college educated and will go on to graduate school. They will have come from a home where there's a lot of love and lots of support. If there is anything that the girls really need they will get it. And this is on the combined income of her and her husband.

He is a school teacher and she is a part-time nurse and their combined family income is right around $100,000. They live in a house that has a $325,000 value and they have a $240,000 mortgage -- but they make the budget balance every month. They go on vacations, they buy things, they buy durable goods, and they keep their cars in good repair. He has a couple of hobbies. I think that Treasure Hunt is a celebration of how happy and fulfilled the low-cost consumer is. And you don't read about that, you don't get that sense. In fact, they view themselves as in the driver's seat and in charge.

Sunday, May 07, 2006

Growing, once a behemoth.

The perpetual dilemma facing growth companies.

CREATING NEW GROWTH PLATFORMS , By: Laurie, Donald L., Doz, Yves L., Sheer, Claude P.
Harvard Business Review, May 2006, Vol. 84, Issue 5

For most companies, there's a big difference between the growth markets expect of them and the growth they can deliver through new product development or acquisition. Top managers can close the gap by identifying and populating families of strategic opportunity.

SOONER OR LATER, most corporations reach a point where their ability to generate growth internally falls well short of the growth rates expected by the board and CEO and demanded by investors. Companies entering the Fortune 50 averaged 9% to 20% growth rates in revenues during the five years prior to entering this elite group and 29% the year they entered - often via a large acquisition. Unfortunately, 93% of these companies never achieved revenue growth levels above 2% again. The equity markets were completely unforgiving: The companies' share prices fell by an average of 61% following these collapses.

To some extent, these businesses have all been victims of their own successes. They were able to sustain high growth rates for a long time because they happened to be in high-growth industries. But once the growth rates of their industries slowed, their business units could no longer deliver the performance investors had come to take for granted. In some cases, organizations tried to kick-start growth at the unit level by extending business models to areas where they did not fit well or by developing business models the companies were unable to operate. More often, companies have resorted to acquisition. But this strategy has had a discouraging track record. Over time, 65% of acquisitions have destroyed more value than they create. As the CEO of one corporation we worked with noted: "We have a history of making wrong purchases, of paying too much, and of ineffective integration that fails to deliver anticipated performance. In the past, instead of adding value, these activities have squeezed out funds required for internal growth." Although acquisition plays an important role in any growth strategy, acquisition cannot substitute for growth.

So where does new growth come from, real, profitable, strategic growth that leverages the corporation's capabilities and know-how? For the past 12 years, Oyster International has been researching and advising companies on this issue. With the support of researchers at Harvard Business School and Insead, and in particular Professor D. Quinn Mills, we instituted a research project titled "The CEO Agenda and Growth." We identified and approached 24 companies that had achieved significant organic growth and interviewed their CEOs, chief strategists, heads of R&D, CFOs, and line managers who had delivered material growth to their companies. We asked these executives and managers the same basic question: "Where does your growth come from?" And we found a consistent pattern in their answers. All the companies grew by creating what we call new growth platforms (NGPs) on which they could build families of products, services, and businesses and extend their capabilities into multiple new domains. The platforms provided a framework in which acquisitions served less as a direct driver of growth and more as a way of acquiring specific capabilities, assets, and market knowledge. These are not small, fledgling ventures that might be funded by a business unit or an encouraging executive. The scale of the platforms is strategic and material to the corporation.

As we shall demonstrate, identifying NGP opportunities calls for executives to challenge conventional wisdom. The companies we studied all had top management teams deeply committed to the idea that NGP innovation was very different from traditional product or service innovation. They set up independent, senior-level units with a standing responsibility to create NGPs, and their CEOs spent as much as 50% of their time working with these units. The payoff has been spectacular and lasting. (The Minneapolis-based medical devices company Medtronic is a case in point. From 1985 to 2004, the company grew revenues at 18% per year, earnings at a CAGR of 20%, and market capitalization at 30% per year.)

Platforms Are Different

Possibilities for forming new growth platforms arise when forces of change - such as new or converging technologies, changing regulatory environments, or social pressures - create the opportunity to satisfy some unmet or latent customer need. (See the exhibit "What Is a New Growth Platform?") When a corporation identifies a potential NGP, it can assemble the right portfolio of capabilities, business processes, systems, and assets that are required to deliver products and services that satisfy these customer needs.

Some of the capabilities needed for an NGP come from redeploying the talent and technology that the company already has. STMicroelectronics is applying the microfluidics capabilities it developed in working with Hewlett-Packard on ink-jet cartridges to blood-testing equipment for consumer use.

Capabilities can also come from the company's external networks through, for example, technology-licensing agreements and strategic partnerships. Once the company has listed the technologies and other capabilities it can access internally or through its partners, it needs to consider what capabilities it must obtain through acquisition. Inverness Medical Innovations, for example, realized that the intradermal needle technology of Integ, a small company that manufactured blood glucose handsets, could be applied to its diabetes testing products. Inverness purchased the company, identified ten of the 40 employees whose skills recommended them for further work on Inverness's diabetes testing products, and focused them on this work. The remaining 30 employees were let go, and the acquired company was shut down. In other cases, a company may possess a technological capability but will have to acquire the production or distribution assets to exploit it.

The number of potential platforms that could be developed to satisfy unmet customer needs is usually much larger than most companies realize. In large measure that's because senior managers are used to thinking in terms of developing a particular product or service to beat the competition or acquiring a company to provide a product or service complementary to the existing lines. Managers hardly ever look at their capabilities with a view to creating a whole new family of products or services that meet customer needs that the company has never before addressed. But this approach is precisely what distinguishes the high-growth companies we studied.

That's not to say that the two kinds of innovation are unrelated. Indeed, in the early stages, it can be difficult to see a difference between a new product or service and a new platform. That's because many new platforms start as product or service ideas. The differences in managerial mind-sets become clear as the idea develops. Parcel delivery giant UPS's creation of its Service Parts Logistics (SPL) unit is a good example. Since the early 1900s, UPS has specialized in small-parcel delivery. In the mid-1990s, UPS CEO Oz Nelson realized that the industry was maturing and that UPS and competitors FedEx and the U.S. Postal Service could anticipate only lower (GDP-level) growth rates. He identified a growth gap of $1 billion in revenue and framed the challenges as needs for "new strategic positioning" and "new growth platforms."

To deliver on his challenges, he established an organization of direct reports. He realized that his commitment would be only one of the components necessary for success: "I had always had the attitude of bringing smart, credible people on board. They teach me how to solve the problem; I help them be effective." An NGP group was formed and eventually was led by Mike Eskew, a senior operating executive who would later become the CEO. The group was composed of a team of senior people who had diverse backgrounds, credibility within the organization, and the strength to frame and address issues that cut across business and political interests. One team member had been involved in transforming UPS's IT and communications infrastructure; another had been involved in the start-up and building of the UPS airline. Membership in this group was not a job for up-and-coming middle managers or innovative misfits. It was for mature and accomplished executives curious and dissatisfied with the status quo.

The team knew that, on a basic level, the company was in the package delivery business, but the team pushed beyond that definition. "Who are we?" the team kept asking. "We know we deliver packages, but we are also a technology company, an airline (the ninth largest airline worldwide), an insurance company, and one of the largest purchasers of railcar capacity in the world." This led to another question: "What are our capabilities, know-how, and assets?" The team concluded that UPS's strengths were its unique market position of providing the physical connection between buyer and seller, as well as operational excellence, network planning, and global infrastructure. Once the team reached that understanding, it started to identify the trends that could shape opportunities in UPS's various market spaces in which the company searched for customers' unmet needs. The group found, for instance, that customers needed to understand and control the flow of goods during transport. The enabler was technology that could globally integrate information, transportation, and payment.

At this point, one of UPS's customers approached the company with a problem. A major PC manufacturer's customer service representatives routinely received calls that required them to send PC boards and chips to users. Initially, the users were satisfied with two-day delivery; then they wanted one-day and then same-day - some-times within two to four hours. This was challenging: The PC manufacturer managed four shipping locations in the United States, four in Europe, and two in Asia, and the work involved overseeing central stock, field stock, transfer, and returns. The reps simply couldn't manage the various activities and deliver in the reduced demand time, so they turned to UPS.

The team saw that this project represented an opportunity to use existing capabilities to enter a new type of business: managing the flow of goods for UPS customers. So the team met with the PC company to understand the computer industry value chain from customer calls to inventory and logistics management to installation at the customer location. The team identified which activities the PC company wanted to manage and which it was willing to outsource. Out of those conversations the UPS team developed a solution, in the form of SPL (Service Parts Logistics), a unit that would initially operate within UPS's NGP unit. The team engaged in a very systematic stock taking of UPS's portfolio of existing capabilities and assets as well as those it would have to acquire or otherwise obtain to create SPL.(See the exhibit "Assembling Capabilities at UPS.") The aim was to retain SPL within NGP while it prototyped and market-tested its offering. Once SPL had proved its execution capabilities and reached critical mass, it could be established as a new operating unit or integrated into a UPS core business (in this case, the latter occurred).

As UPS began testing the new service, the team noticed that SPL often had to send several machine parts to solve a problem that customer service couldn't precisely identify. This discovery led UPS to recognize an opportunity: It could use the unused parts that would be returned to inventory, as well as the one replaced part that would be refurbished. Then, through learning from customers and matching UPS capabilities to opportunities, the NGP team evolved further in its thinking about the services UPS could provide. Why not provision parts on behalf of customers from other manufacturers? Or beyond that, why not take over managing inventory for these clients' customer service divisions? UPS realized that it could aggregate components in its supply chain - creating a warehouse in action - to minimize the inventory that its customers had to carry and reduce the steps in the supply chain. In solving one PC company's customer service problem, UPS had developed a highly leveraged industry solution that was relevant for logistics management for every major PC manufacturer.

Once the capabilities of SPL were solid, the NGP team started looking for applications and opportunities to offer the same kind of supply chain management services to other industries with similar issues. The next target was the medical research and health care supplies business, which also needed to quickly transport goods that might be needed on very short notice (for example, blood and tissue samples). Once again, the team carefully inventoried the skills and assets it had for serving this market. That led to the acquisition of Livingston, a company that dealt with Drug Enforcement Agency and FDA regulation and the freezers and vaults required to maintain medical supplies and tissue cultures in transit.

Today, the SPL business has taken a leadership position in the emerging $3.2 trillion market for outsourced logistics management. Better yet, through the SPL project, UPS has institutionalized the capabilities and skills for identifying and developing opportunities for NGPs, which currently represent a potential $6 billion per year in profitable revenues.

Platforms as Business Models

UPS is not the only company that explicitly looks for platforms rather than products. Originally, Medtronic was highly focused on pacemakers, but under former CEO Bill George and current CEO Art Collins, it has leveraged its market knowledge and capabilities to establish broad platforms for products assisting in the treatment of cardiovascular, neurological, and spinal diseases, as well as diabetes. Branded consumer goods manufacturer Procter & Gamble has also cottoned on to the platform concept. In 2000, within six months of becoming CEO, A.G. Lafley established FutureWorks, a stand-alone business unit whose charter is to build growth platforms for P&G and search for opportunities between and beyond the scope of existing business units. Although these and the other companies we studied and worked with differ in specifics, they approach the challenge of platform focus in remarkably consistent ways. Specifically, they:

Put credible chief growth officers in charge. In every successful case we observed, the head of an NGP unit, or chief growth officer (CGO as we called him or her), was a future contender for the CEO position or a unique senior executive with credibility, organizational skill, and a deep interest in opportunities beyond the current mix of businesses. These executives typically had a sense of curiosity, an external focus, and authority to act. UPS's Mike Eskew, as we noted, subsequently became CEO. At Medtronic, physician Glen Nelson was also vice chairman and responsible for research and development, strategy, mergers and acquisitions, corporate venture initiatives, and new business/platform development. One company we worked with looked at three candidates for the job. Two of them were leaders of core business units, and the third was a senior manager who had been president of three venture-backed businesses, the most recent one having been acquired by this company. NGP leaders also had close relationships with their CEOs, which made other executives take more notice of the units. Medtronic's Nelson, and then-COO Collins, were both part of the office of the CEO at Medtronic. Lafley handpicked a young general manager, Dan Rajczak, to lead FutureWorks. Rajczak had worked in Asia when Lafley was running that regional business.

Believe that the team is more important than the idea. Many executives take the view, "Show me a good idea and I will build a team around it." But most, by our count, only see a good idea every few years, and most are not good judges of what they'd need to make it work. That's not to say that plenty of new ideas don't exist. They do, but they are often underdeveloped or unrecognizable as potential successful businesses. To identify and develop them, you cannot rely on the smarts of a single senior executive; you need an organized and empowered team in place. Think back to UPS. A critical point of that story was that Eskew's team was established to develop a pipeline of new growth platforms over time in order to become a long-term strategic partner for growth in areas beyond the scope and reach of the business units. It was not an innovation group established to pursue ideas on an ad hoc basis. Indeed, concurrent with SPL, the team was hard at work conceiving six other platforms, each with a potential comparable to SPL.

The NGP team should consist of three or four senior executives who not only possess a thorough understanding of the company's markets and operations but who are also entrepreneurial and have experience in building new businesses. They should have the ability and authority to make big decisions quickly on major investments such as acquisitions, and they should be able to advise the operating managers they recruit for the individual businesses created on the platform. CEO Ron Zwanziger explains it from an Inverness perspective: "We like people who see the future and make connections. It's an attitude we want throughout the business. We don't want a production manager cutting costs and driving efficiencies that take away the manufacturing flexibility we need as we develop a new platform for the future."

Have NGP units that are independent and embedded. NGP units are both independent from and highly dependent on the corporation's existing businesses, bureaucracy, way of working, and related norms and rules. They have to be independent because looking for NGP opportunities requires a longer performance horizon than a typical business unit has and an ability to step out of an existing business model and culture. When the potential for an Implantable Cardioverter Defibrillator was first recognized at Medtronic, Nelson and Bobby Griffin, president of the pacemaker business unit, knew that, for the technology to be successfully developed and commercialized, it would have to be split off as an independent business unit and led by a high-potential manager. This move allowed the new ICD technology to develop without as much pressure to deliver short-term financial results and without oversight of traditional approaches in the pacemaker organization. It also required a collaborative relationship with the pacemaker unit because much of the technology resided there. As president of both divisions, Griffin could referee and enable functional interaction, resource allocation, and priority setting. At the same time Nelson could use his authority to champion the organization structure and allocation of resources while making certain this small unit received the same level of attention as the larger units by the office of the CEO. "It didn't lack for sunshine," he explained.

Too often, the business unit's priority is to deliver the annual plan, which means increasing productivity; that is, reducing cost while pursuing predictable, iterative growth such as product-line extensions, geographical expansion, and acquisitions of closely related businesses. Today, implantable defibrillators provide 25% of Medtronic's revenues. While a strong measure of freedom is important, an NGP unit must be well embedded in the corporation in order to identify and use existing knowledge, IP, processes, and assets. Although the important strategic thinking capabilities are often resident at corporate headquarters, the comprehensive knowledge about customer problems and how these might be resolved are inevitably embedded deep within the organization in people with full-time day jobs. To tap into talent and information successfully, the unit must be closely tied to and have credibility within the company. It won't take long for experienced operating managers to realize that the support functions (HR, IT, finance, and legal, for instance) that have a mandate to ensure consistency across the business may have difficulty supporting an NGP unit with a significantly different mission.

Guarantee financial independence. Top management needs to ensure that the financing for an NGP unit is not crowded out by the core business-unit demands. Nothing is more soul destroying for a small, dedicated NGP unit than having to put in six to eight weeks a year to competing in the annual budget cycle against business units with budgets in the hundred million- or billion-dollar range. Financial planners looking for savings in the annual budget cycle inevitably challenge the unit's resource requirements: "Can't they use our corporate strategy people rather than have a dedicated person? Can't they wait until they have a platform before we assign an NGP executive to the group? Do they really need a dedicated venture and acquisition person?" And although some business-unit executives see the NGP unit as another horse in the race, others find it threatening to their authority and a waste of resources they believe would be better deployed in established units that know their customers' needs. Typically, therefore, we found that, in successful companies, investment capital - for the unit and the new products or businesses within the new platforms it identified - was separated from the budget and operated as a discretionary enterprise growth fund of some kind. The fund investments were authorized by the investment committee or a representative group within the executive team office. P&G's FutureWorks and the new platform opportunities it identifies are funded by P&G's Corporate Innovation Fund, which is managed by the CEO, CTO, and CFO. Every CEO we know who developed growth platforms describes the initial investment as "peanuts" when compared with the value created. They all recall, however, the agony of early budget debates. In every case, the CEO's personal intervention provided budget air cover during the early years.

Systematize the NGP creation process. Successful NGP companies like UPS, P&G, Medtronic, and Inverness had all systematically defined the processes of NGP creation and the roles of the various participants. The CEO framed the challenge. The executive team selected the CGO, created the unit, established the mission, identified new domains, and took stock of core capabilities. The NGP team shaped the new platforms, identified capabilities to be assembled, and noted potential acquisitions. Together, they determined the roles and way of working with the core business. This careful attention to articulating the process of platform innovation and related activities is important not only for ensuring that NGP creation becomes a continuous activity but also because it builds companywide commitment to the very idea of NGPs. Unless the activities involved in creating platforms are well defined, talented line managers will never buy into the idea that NGP innovation needs to be separate from the incremental innovation that their units already undertake. They need to understand the implications and rules of engagement for cross-unit collaboration and "what this means to me in my area of responsibility."

Leading Platform Growth

Oz Nelson of UPS observes: "If a CEO didn't comment on poor package handling, workers and supervisors might conclude everything must be all right. The same holds true for the long-term future of the company. The CEO needs to believe the work is important, establish business innovation as a priority, take the best people with him, become engrossed in the work, and feel that he will learn and the answers will come."

Nelson's point is that while CEOs do not head up NGP units, their relationships with those units are critical to their success. For a start, at companies that have successfully created NGPs, the CEO has always set and framed the growth challenge. At UPS, Nelson took the lead in identifying the revenue gap between the sum of the business-unit plans and the goals established by the board of directors, CEO, and executive team. That forced the board and other executives to more carefully evaluate and compare different paths to growth. Could they fill the revenue gap by allocating the business units more investment dollars or by acquiring adjacent businesses, or did the company really need new platforms? And if the company needed a unit to develop platforms, what should be its goals and resource needs?

The CEOs of NGP companies always make sure that they and their senior managers spend time with customers. Medtronic's Bill George, for example, would visit hospital laboratories to understand the problems researchers were addressing and explore the potential solutions. To bring customers into the planning process, George changed the format of management review meetings from all-day internal discussions about numbers and performance issues to a one-hour review, which was followed by the management team leaving the office to visit customers. He once told his CFO: "I know you know finance. I want you to understand how doctors use our products with patients - that means you have to spend time in the field."

Most important, the CEO needs to be an active participant in the NGP unit's discussions, not just the person the unit reports to. The best platform CEOs bring insight to frame and reframe the opportunities and mobilize their own personal networks to help the NGP team do the same. As Jim Tobin, CEO of medical device maker Boston Scientific observes: "Fifty percent of my time goes to new platform growth; 50% goes to current operational management. You have to have a maniacal focus on growth," he says. "And I was the Chief Maniac." Tobin claims to understand less than 20% of what he terms "science talk." But his active involvement, experience, and insights have been key factors in the company's success: Since his appointment in 1999, revenues have doubled.

The most common trap for CEOs is to focus on the performance and morale of the large core businesses. Often these businesses are operating in fiercely competitive environments. Many CEOs see themselves as generals responsible for rallying the troops, so they spend a lot of time in the field doing just that. One of the CEOs we followed closely over a six-month period spent no time at all with his company's customers. After half-day business-unit review meetings, he would arrange to meet the next-level managers. It wasn't until we arranged two days of meetings with leading-edge technologists at MIT, Stanford, and the Max Planck Institute that he had any contact with external thought leaders in his industry. Much of his time was taken up by a sector or business unit that was underperforming and, he believed, required his active leadership in the turnaround. In addition, considerable time was devoted to reviewing and approving (or not) potential acquisitions of competitors and adjacent markets. The primary driver in each acquisition decision was the company's ability to achieve operating efficiencies - a necessary but very different line of thought than acquisitions developed in a new growth platform strategy that leverages capabilities. This CEO did establish a growth platform team but found it difficult to explain the work of the group in the context of the corporate vision and mission.

We're not saying that the growth initiatives and performance problems of core business units aren't important. They are. But if CEOs are to be serious about closing the growth gap, they will have to be willing to leave those responsibilities to others. Like Lafley and Tobin, Medtronic's George spent more than 50% of his time on platform-based growth. We asked him whether he would advise CEOs of struggling companies to do the same. Without hesitation, he replied, "Wouldn't it be more important to spend even more time on new-platform growth in that situation? Otherwise, how would you ever get out of the problem?" To free up his time to work with Glen Nelson and the rest of the Medtronic NGP team, Bill George relied heavily on then-COO Art Collins who took on bottom-line responsibility for the operating performance of the five business units. UPS's Oz Nelson similarly relied on his head of operations, Jim Kelly: "He kept me informed about day-to-day performance and major issues. That allowed me to devote about 50% of my time to the development and implementation of UPS's new platform growth opportunities."


Process-driven companies invest many millions of dollars in HR, supply chain, and other operating processes in the quest for continuous improvement. By contrast, astonishingly little investment and attention goes into processes for developing growth platforms or institutionalizing capabilities. Yet, for many companies, the enterprise growth gap is large and growing, and it cannot be closed through periodic innovation initiatives or incremental improvements to core processes. As a result, their innovations languish at the one-product or single business level and never take on the scale and scope of a platform. Gil Cloyd, chief technology officer of P&G, explains: "Now when we identify a new product opportunity, we examine it through the new platform lens. We are looking for the products, services, or businesses that can be created from this innovation that we had not yet begun to consider. By doing that we accelerate time to market and generate hundreds of millions of dollars in additional revenue."