First, a few pages of history *

*Did you know that IBM, GE, Wal-Mart, Dell, and Southwest Airlines were referenced in 1,304 of the most recent 2,000 Harvard Business Review articles? 2 Holy crap! That’s excessive. In his book The Breakthrough Company, Keith McFarland asked, “Does it stand to reason, however, that just 5 firms account for 50% of the business knowledge created over the past 80 years?” Accordingly, Exploiting Chaos departs from normality to bring you examples applicable to both big businesses and new ventures.

Prior to the Great Depression, the only cereal brand that mattered was Post. After your great-grandfather silenced the piercing bells of his wind-up alarm clock, he savored the delicious taste of Post Grape- Nuts. Launched in 1897, the cereal dominated the marketplace leading up to the 1930s.

As the Great Depression tightened its angry claws on America, Post found itself hungry for cash. The prominent cereal maker assumed they “owned” the market. How could anyone stop lusting for Grape-Nuts? Accordingly, advertising budgets were cut to weather the storm.

As the managers of Post reclined in their rawhide chairs, bracing for a slow economy, a hungry tiger lurked in the shadows. That tiger was the Kellogg Company. Their mascot, Tony the Tiger, had not yet appeared, but his insatiable spirit was already born.

While Post retreated, Kellogg doubled their ad spend.3 In 1933 their campaigns introduced slogans like “Snap! Crackle! Pop!”4 and “You’ll feel better” 5: motivational mantras during a gloomy era. The investment paid off. Americans loved the message and sales began to grow. Kellogg’s became the go-to pick for breakfast cereal and your great-grandfather abandoned his beloved Post Grape-Nuts.

Sadly, the grape nuts didn’t help these men prevent the Great Depression.

In Coriolanus, Shakespeare wrote, “when the sea was calm all boats alike / Show’d mastership in floating.” Unfortunately, the seas are no longer calm. This will cause some ships to sink, but opportunity does not go away. People still buy things, they just become more particular about what they need.

During the Great Depression, unemployment soared to 25%, 15,000 banks failed, and Wall Street was no longer a place of glamour. Four dreadful months into this depression, Henry R. Luce launched a pricey magazine titled Fortune. At $1 an issue, the cover price surpassed the cost of a functional wool sweater. Seemingly bad timing.

Eight years later, Fortune had grown its subscriber base to 460,000 people. By 1937 the magazine reported an annual profit of $500,000. Scaled for inflation, that amounts to more than 7 million modern-day dollars. That’s a lot of wool sweaters.

Kellogg Professor Andrew J. Razeghi suggests, “Fortune worked for the very same reason that all great new products work: it made a uniquely relevant contribution to its customers’ lives (period).”6 Fortune was more than just a publication. It was a glimpse into the boardrooms of those that survived; Fortune was an answer.

Eras of change give birth to unconventional ideas. In 1913 R.J. Reynolds rolled out one of these ideas: the prepackaged cigarette. There was widespread belief that this idea would fail; after all, the act of rolling cigarettes was part of a seductive ritual for many smokers. Would people trade quality and tradition for cheaply packaged goods and convenience?

Undaunted, Reynolds created a marketing machine to birth his new idea. The company launched their new product with one of the first major “teaser” campaigns in American history. Their mysterious slogan, “the camels are coming,” bubbled throughout the media.

The camels are coming? What the hell does that mean?

When the product first hit shelves, a circus camel named “Old Joe” was escorted through city streets to hand out free cigarettes. Within a year, Reynolds sold 425 million packs, making his idea the most remarkable breakthrough in the history of consumer products. For the next 15 years, nothing seemed more rewarding than the puff of a seemingly healthy unfiltered Camel cigarette. “Is enjoyment good for you? You bet it is.” Today this advertising copy seems preposterous, but the success story is eye opening.

Organizations are inclined to protect what they acquire. This leads breakthrough companies to create the sort of structure that inhibits change. Structure distances us from the pulse of pop culture. Intoxicated by his own success, R.J. Reynolds lost touch with the trends in marketing. In the 1920s advertising became psychological. Unregulated marketers played on fear.

Listerine mouthwash warned, “Halitosis makes you unpopular.” Hoover Vacuums worried, “Dirty Rugs Are Dangerous—How Do You Clean Yours?”7 Seriously, how dangerous can carpet really be?

With a supercharged ad budget, Camel’s rival, Lucky Strike, combined Hollywood aspirations with the pervasive fear of getting fat. Their ads showcased celebrities who touted cigarettes as the “modern way to diet!” They advised, “Light a lucky when fattening sweets tempt you.”

Their aggressive strategy puffed a cloud of smoke into Camel’s unquestioned lead. Lucky Strike became the #1 brand by 1929, and shortly afterward, Camel dropped again, to #3.8

Then the Great Depression began.

Most innovation anecdotes celebrate the triumph of the underdog. This adds fuel to the common misconception that people in large organizations cannot revive the dwindling fire of their heritage. However, with brand recognition and deep pockets, monolithic organizations are better equipped to enter new markets, they just lack the adaptive mindset to facilitate entrepreneurial change.

In 1930 fallen market shares and the Great Depression gave R.J. Reynolds an opportunity to spark change. They began to experiment with fear marketing, claiming, “More Doctors Smoke Camels Than Any Other Cigarettes.” Sounds healthy to me. In a time when health impacts were less known, the message created subconscious fear: if doctors only smoke Camels, should I be worried about my brand?

Lucky Strike countered with, “20,679 physicians say ‘Luckies are less irritating.’”

It didn’t matter. By this time R.J. Reynolds was a step ahead.

In 1933 Camel started using athletes to associate their image with vitality. Superstar jocks endorsed, “They don’t get your wind,”

“It takes healthy nerves… to win the World Series,” and “21 out of 23 St. Louis Cardinals Smoke Camels!”

By 1935, the once-aging giant had reclaimed its #1 position.

The world of business is in a constant state of evolution. Great organizations fade. Fast-moving start-ups step into their place. In The Innovator’s Dilemma, Clay Christensen studied the evolution of the disk drive industry, where leaps in technology led to physically smaller hard drives.9 This caused nerds around the world to rejoice. Also, it exemplified the difficulty of change.

In theory, the leap from one size to the next doesn’t seem monumental. You might expect the same leaders to remain over time. However, when the world changed, leaders lost their place.

Leaders in the Disk Drive Market:
1980 - 14" Drives Contol Data, IBM, Memorex
1984 - 8" Drives Shugart, Micropolis, Priam
1988 - 6¼" Drives Seagate, Miniscribe, Maxtor
1993 - 3½" Drives Conner, Quantum, Maxtor
1995 0 2½" Drives Prairetek, Quantum, Conner

If the disk drive industry is simple, the semiconductor market is complex. Semiconductors are so difficult to make that the leading players boast billion-dollar research budgets.

These budgets are supposed to create barriers to entry, barriers that protect the giants while preventing new companies from entering the market. However, just like in the simple disk drive market, shifts in technology cause new leaders to emerge.10

Leaders in the Computer Chip Market: 1955 - Vacuum Tubes RCA, Sylvania, General Electric
1955 - Transistors Hughes, Transitron, Philco
1965 - Semiconductors Texas Instruments, Fairchild, Motorola
1975 - Integrated Circuits Texas Instruments, Fairchild, National
1985 - VLSI Circuits Motorola, Texas Instruments, NEC
1995 - Submicron Intel, NEC, Motorola

RCA, for example, was once double the size of IBM. They were rockstars in the vacuum tube market, but apparently people don’t buy vacuum tubes anymore. RCA struggled with change, and eventually, the company was displaced. (Mental note: stop selling vacuum tubes.)

There are no industries or professions immune to the effects of disruptive change, the sort of change that enables new business models and topples corporate tycoons. Our generation is fundamentally reinventing the way human beings interact.

Broadcast Television… … … Viral Videos

Newspapers… … … Blogs

Album Sales… … … Concert Tours

Physical Stores… … … e-Commerce

Advertising… … … Shockvertising

America… … … China

Japan… … … India

New York… … … Moscow

Men… … … Women

Email… … … Social Media

Phone Calls… … … Facebook Status Updates

Public Libraries… … … Wikipedia

Classroom Method… … … Virtual Learning

Recruiting… … … Offshore Outsourcing

Medical Doctors… … … Nurse Practitioners

Accountants… … … Online Filing

Lawyers Online… … … Legal Forms

Loan Officers… … … Automated Lending

Oil on Canvas… … … Digital Imagery

Studio Photography… … … Photoshopping

Viral videos, e-commerce the blogosphere, email, social media, crowd sourcing, and a lack of self-censorship: these are the shifts toppling major corporations today.

The sneaky thing is that these shifts are not happening overnight; rather, they are slowly creeping up on us.

It’s kind of like boiling a frog.

If you place a frog into a pot of boiling water, he’ll immediately hop out. And he’ll be pissed off. If you place a frog into a pot of lukewarm water and slowly dial up the heat, he will keep swimming until he’s boiled alive. Like us, the frog is more sensitive to shocking change. If change is moderate, urgency becomes less apparent. Before we know it—hey, what’s that smell?—we’re cooked.

Peter Drucker, regarded as the father of modern management, noted the following at age 94: “We now accept the fact that learning is a lifelong process of keeping abreast of change. And the most pressing task is to teach people how to learn.”11