Axioms are not Self Evident Truths

In geography, the old axiom was: “The world is flat.”  It looks flat, so everyone thought it was flat.  No longer.  Ever since Nicholas Copernicus the flat world has become round.  Now it seems the space is curved.

The basic axiom of business today is: “The better product or service will win in the marketplace.”  An axiom is a truth so self-evident it does not need to be proved.  Everybody knows an axiom is true.  Everybody knows the better product will win.  Unfortunately, nobody ever questions an axiom, nobody ever discusses an axiom, nobody ever talks about what everybody knows.  Only controversies get discussed.  Axioms get ignored.  As a result, over time an axiom becomes invisible.  The purpose of this article is to question the basic business axiom.

In business, since everybody knows the better product (or service) will win, companies around the world search for ways to make their products better.  The search leads to quality.  And of course, in any discussion, quality and Japan are considered to be synonymous.  Without a doubt.  Yet, for the past decade, Japan has suffered substantial economic woes.  The stockmarket is down, unemployment is up, and the average Japanese consumer is feeling the pain of a declining standard of living.  What happened to Japan?

The truth is that large Japanese companies, for the most part, make everything (naturally of quality) except money.  And if one does not make money, one cannot pay off one’s bank loans.  And if one cannot pay off one’s bank loans, the banks are in trouble.  And if the banks are in trouble, a country’s economy is in trouble!  But of course, as always, there are exceptions.  Sony, perhaps the most powerful Japanese brand, had a net profit margin of 3 percent in 2002.  Toyota, Honda and Nissan also managed to do relatively well with net profit margins in the range of 5 to 6 percent.  But remember, these are the odd cases.

Anyone in business knows that, ultimately, competitive products tend to be similar owing to ethical competitive benchmarking or otherwise.  The differences in quality, if they exist at all, are difficult to measure.  The differences in ‘perception’, however, are substantial and much easier to measure.  I therefore believe that the objective of any ambitious company should be to improve the ‘quality perceptions’ of the goods and services it sells.  Please do not misunderstand me.  There is nothing wrong with managing for quality.  There is no reason why a company should not try to build the highest quality into every product it sells.  Sometimes that includes making changes in the manufacturing process itself.  It stands to reason that companies must emphasize quality internally.  Or else, employees will think that management does not care about quality.  But building a quality product or service and building a quality perception are two different things. 

In our personal lives if one has a heart problem, one winds up in the office of a specialist medical doctor, a cardiologist.  Similarly, a dermatologist for a skin problem, and an ophthalmologist for an eye problem.  Everybody knows a specialist knows more about his or her specialty than a general practitioner does.  Whether it is true or not does not really matter.  The perception is the reality.  The same is true in business. 

As I understand it, when you focus a company, you improve its quality perception.  When you unfocus a company, you do the opposite.  You undermine its quality perception.  Sony, Toyota, Honda and Nissan are focused Japanese companies.  Microsoft, Intel, Coca-Cola, Ford and many more are focused American companies.  Their quality perception is undisputed.

Specialization drives quality.  Buyers know this.  But sellers often forget.  Otherwise why would companies fall all over themselves trying to become generalists when the power lies in specialization?  Over the past decade we have seen numerous specialist Indian business houses ride the misadventure of unfocused diversification.  Ultimately they bled to death.  Simultaneously, others that adopted the focused route, are today perceived to be quality benchmarks… TCS, Infosys, HDFC, Ranbaxy, Wockhardt, Amul, to name a few.

In India, as in the rest of the world, General Electric is one of the most admired companies.  Contrary to the earlier discussion, General Electric is a large American company that is both unfocused and highly profitable.  So what’s the explanation?  Well, when your company is 111 year old, when your company is one of the largest companies in the world, when your businesses are either number one or number two in their fields, when your company avoids tomorrow-type businesses where competition would kill them, nothing should stop you from using the General Electric strategy.  Six Sigma et al.