Specialize and diversify your product – but correctly
Although plants and animals use fundamentally different strategies, the above polarization is evident there as well. Evolution gave rise to numerous specialists, with parasites being one of the most extreme examples. They live inside the host body, and when that host dies, the parasite is doomed. Non-specialists, on the other hand, such as the “omnivores” that can feed on many different kinds of prey, are in a better position. If one source of food is lost, they can simply concentrate on another. The wild boar, whose diet ranges from small animals to roots to fruit, is a classical example.
Personally, I was directly confronted with this issue at two quite different localities. The first was on the remote Galapagos Islands in the Pacific, where we followed the footsteps of Charles Darwin on the barren lava islands and were the first to explore its underwater world. The second was during a management seminar in Freudenstadt, Germany, where I lectured on the Energon Theory and ethology: in the evening, at the bar, one of the participants came up to me and said: “Mr. Hass, I can leave this seminar earlier because my problem has already been solved.”
This seminar was one in a series tailored to advanced EKS-program participants. Most wanted to refresh their memories or had strayed from the EKS principles and were not quite sure when and why. I was responsible for day 1 of the 4-day seminar, and the EKS-specialist Heinz-Gernot Nieter, who saw a connection between EKS and Christian thought, used the second and third days to recapitulate the key guidelines of the program. Wolfgang Mewes himself used the fourth day to report on the latest developments and to discuss practical issues raised by the participants. I also had to leave on the second day, and the gentleman I had met at the bar offered to drive me to the airport in Stuttgart. The day before, he had been particularly interested to hear what I had to say about the Galapagos finches that Darwin had made so famous, but I had no idea what part of my talk had sparked the decisive insight and I never got the opportunity to ask him.
Three years later I was invited to lecture at the Kärcher company in Winnenden near Stuttgart. Mr. Roland Kamm, the CEO, gave me a hearty welcome – he was the man at the bar! I asked him spontaneously what part of my talk had opened his eyes three years ago. His answer: “At that time our annual turnover had increased from ca. 20 million to 190 million DM ($10 million to $95 million) over five years, but then stagnated for two years. This was the reason I attended the Freudenstadt meeting. Since then, thanks to Darwin’s finches, our turnover has increased to 280 million DM and is still climbing.”
The details were fascinating. Kärcher was founded in 1935 by Alfred Kärcher, an engineer who manufactured electric heaters, plunger heating elements, and special heating devices for industry. After the war, high-pressure steam cleaners and high-speed steam generators became their key products. After Mr. Kärcher’s death in 1959, the company, which had grown to 250 employees, was capably led by Mrs. Kärcher. In 1968 she decided to hand over the reigns to a new CEO. This new managing director was very profit oriented and had little faith that the two above products could guarantee the company’s future. He told his engineers, one of whom was Mr. Kamm: “We need new ideas, new products, and anyone who comes up with a good idea receives a bonus!”. This triggered a phase of extreme diversification. In addition to its standard products, the company began to manufacture thermal oil heaters, polyester resin construction formworks, plastic gravestone moulds, the first artificial kidney, plastic riding elephants that were set up in front of department stores and that rocked back and forth when children inserted a few coins, a double-hulled boat … “but the most glaring move was to take over a piano stool factory. Those were very heady days but otherwise a rather dark chapter in company’s history.”
In 1971, Mrs. Kärcher again took over as top manager and in 1974 passed this responsibility on to Mr. Kamm, who had discovered the EKS program through Gernot Nieter and who brought this period of diversification to a close. A central EKS maxim is: “Instead of doing many things with moderate success, it is better to produce one excellent product”. After careful consideration, Kamm decided to concentrate of steam-jet cleaners and gradually restructured the other production lines toward this goal. “Up until 1980 he boosted annual turnover from 24 to 209 million DM with this product and cornered 50% of the world market. “Then we entered a phase of stagnation. My problem at the time was to decide whether to go for the remaining world market share or to offer our loyal customers an increasingly differentiated range of items to fill their basic cleaning needs. Upon returning from the Freudenstadt meeting my mind had been made up: we would do both. The first step was to change the company’s image. The new motto became “Kärcher: cleaning is our business”.
What does this have to do with Darwin’s finches? Darwin, who was a both a theologist and biologist, participated in the circumnavigation of the globe by the British survey ship “Beagle” from 1832 to 1837. At the Galapagos Islands he made the discoveries and gained the inspiration that convinced him that all organisms, including humans, stem from common ancestors. The comprehensive evidence he collected there enabled him to firmly establish the theory of evolution, which others before him had already espoused. What so astounded him on this remote volcanic island chain was the large number of different species that lived, almost within sight of one another, on the individual islands. Each island had its own turtles and thrashers, its own finches, and its own plants. The bible interpretation at the time was that every plant and animal species was the result of a separate act of creation and therefore immutable. Darwin asked himself why precisely these small, barren islands should have enjoyed such a large portion of the creative force. Other species colonized the expanse of entire continents and, here, on these few lava heaps projecting from the sea, the Creator’s fantasy had spawned an enormous range of ever new species with different features? Why did these species show clear affinities to the American continent, some 900 km away – and not with the Cap Verde islands that were also volcanic and offered virtually identical conditions for the fauna and flora?
This was particularly visible in the finches. They inhabited all of the islands in the chain. No less than 13 different species had developed, each of which had a differently shaped beak and also used it differently. One finch hammered trees like a woodpecker, another had a powerful beak capable of cracking open hard seeds. The beak of a third species resembled that of a parrot, the fourth that of a starling. The fifth species had a warbler’s beak. There was only one logical explanation. At some point, mainland finches had ended up on the islands, perhaps carried off course by storm winds. Since they encountered no other bird competitors, they began to specialize in feeding types normally represented by other birds. This is much like someone who is confined to a narrow business sector in his or her home country but, in a new, undeveloped country, immediately recognizes and pursues dozens of different job opportunities simply because no competitors impose restraints. Darwin clearly recognized that not all the progeny of a particular species are alike. He also knew that certain characteristics were hereditary. On the Galapagos Islands, nature showed Darwin how, in the smallest of settings, the great variety of animals and plants had arisen. Hereditary changes that somehow improved life conditions were automatically passed on (Fig. 18). This led to ever new “species”, and these were subsequently also replaced if something better came along. Darwin held it entirely possible that all living organisms on our planet – including humans – arose from the same early ancestors.
Fig. 18: Tapping “niches”. In birds, the shape and strength of
the bill is decisive in determining which prey can be taken in certain
areas. Bio-sociology has devoted considerable effort to determining the
optimal prey for the various configurations using cost-benefit comparisons.
The diagram shows the highest profitability in terms of prey size and the
time required for capture for white wagtails searching for flies. These
and others studies clearly show how animals rationalize their predatory
activity and how new niches are tapped through structural changes. After
J.R. Krebs and N.B. Davis 1978.
(Behandlungszeit in cal/s...handling time in cal/s, Beutelänge in mm...Prey length in mm)
My lecture had stressed Darwin’s finches in order to demonstrate that available food resources and other living conditions ultimately decide what can survive and reproduce. From this perspective, nature itself breeds the organs and behavior control mechanisms that are most suited for the respective habitat. The situation is no different in the business world. Here, demand also decides which suppliers prevail, grow and multiply themselves.
Ronald Kamm viewed Kärchner’s high-pressure steam cleaners as the “ancestral finch” that broke into and conquered a new market. If he had simply “cleaned out” the entire business and cornered the entire market, growth would have inevitably stagnated. “Finches with their slightly modified beaks”, however, were able to pursue previously untapped opportunities. Cleaning problems need to be solved everywhere, and the correct strategy was to combine specially adapted machinery with long-term experience and know-how.
The next step was to go out into the field, for example to visit farms and determine precisely how barns and animals were being cleaned. The farmers were more than happy to provide the necessary feedback by pointing out their difficulties. Company representatives then analyzed the various problems involved in commercial cleaning (i.e. buildings), in cleaning textiles (rugs, upholstered furniture etc.), and examined cleaning problems that plagued trade and industry. Finally, Kamm’s team studied the transport industry, from bicycles to tractors, from haulage businesses to motor caravans. Car dealers were approached about the number of cleaning jobs they had to do, and Kamm discovered that his company could handle 70% of these in the framework of a package deal. Kärcher then proceeded to develop 300 models of cleaning devices, each adapted to a specific need, much like the finches had done on the Galapagos Islands. “In those countries where we already had loyal long-term clients, where we already had one foot in the door with our high-pressure steam cleaners (the “ancestral finch”), we followed up with an increasingly differentiated palette of products for their basic cleaning needs.” Germany was prime target area. “In Austria we achieved the greatest per capita turnover – here is where our fine-tuned “finch’s beak” penetrated every nook and cranny.” In the meantime, annual turnover has surpassed the $300 million mark. Success at its best!
There is a lesson to be learned from diversification. In one unusual example, a course participant told Mews about a coffee roaster who had specialized in high-volume consumers such as company canteens. He used sales representatives to sell coffee in 5 kg packages – initially with great success. Then, the competition became stiffer, ultimately forcing the sales staff to accept orders for as little as one package. At a commission of $1.80 per package, it became increasingly difficult to make a living, and the roaster found it increasingly difficult to hire employees.
Mewes: “At that point, the coffee roaster began to redefine himself more as the problem-solver for a particular target group than as a mere supplier. Instead of simply delivering coffee, but began to address the full range of difficulties that coffee drinkers encountered in companies and businesses. This proved to be an eye-opener. Corporate kitchens were having problems at every level: the encrusted hotplates, the dirty cups, the dented pots, the coffee stains, the recriminations, the wasted time, and, more importantly, the murky brews that passed as good coffee.”
In order to help alleviate these problems, the man searched for a heavy-duty coffee machine that could handle the job. He then no longer only sold the coffee, but also provided the optimal machines for this group of customers. Because even the best of machines eventually become dirty and furred, he introduced a regular service and maintenance plan. Through his many contacts, he recognized that hiring personnel to make and serve the coffee was becoming increasingly expensive. At the same time, unattended coffee machines were wasteful and inefficient. “He found coin-operated coffee machines to be the answer to these problems, a system which raised the issue of financing…”.
This development culminated in a package deal that included not only coffee machines, coin-operated dispensers, a service package, coffee, tea, mineral water, carbonated beverages and other drinks, but also provided disposable dishware, ready-made cakes and pies, wastebaskets, waste disposal systems, etc. – in each case tailored to the specific business partner. “Any company that wants to offer its employees refreshments need simply provide a free corner and pay the monthly fee: it can say goodbye to all other problems related with coffee drinking in the corporate environment. And the solution is better and cheaper than any in-house solution.” This strategy allowed the former coffee roaster to avoid the stress in the increasingly competitive sector, and earnings rose to an average of $900 per customer and year. The average customer remained his client for 4.5 years. For them, the coffee and other refreshments were fresher, the service more reliable, customer satisfaction unparalleled, and employee morale improved. “His sales staff received $200 as a one-time bonus for each new client. The resulting drain on profits fell by half and the representatives still earned more – on average $2500 per month. The clients felt relieved to have this problem off their backs, but in reality they were more tightly bound to the “coffee man” than ever because the underlying problem remained and no one else was available to handle it better.”
Unfortunately, you can’t learn this type of business strategy in any school. Are the above cases simply examples of extreme diversification? From our perspective, demand is being met by a package deal that solves several interrelated facets: the solution becomes the actual product. This transition from selling goods and services to becoming a problem-solver requires considerable restructuring. At one time, home gardeners bought their seeds from a seed shop, their garden chairs from a furniture store, and the garden gnome at a hardware store. Today, stores operating under the motto “Everything for your garden” offer these and virtually all other garden-related items under one roof. The customers save time and can make better decisions. Rather than selling wares based on their materials, the palette becomes customer-oriented and provides a comprehensive solution.
Nixdorf and others, for example, have gone far beyond merely selling hardware and software. Today they tailor the optimum software for the customer’s needs, train the customer in the operating procedures, work out financing details, and deliver the optimal furniture configurations for the new systems. In the banking business, computers have not only fundamentally changed underlying processes and functions, but have actually begun to architecturally design new generations of banks. This does not mean that computer companies need to diversify in odd directions by opening up cabinetmaker’s shops and architecture bureaus. Rather, the strategy is to mediate useful additional services that reduce internal friction and enable the delivered systems to operate at full potential. Shoppers who go to a Swiss “Migros” supermarket appear to be confronted with an extreme form of diversification, when it in fact represents a highly perfected specialization on customer demand. Many small businesses were initially affected, but have since entered into a beneficial symbiosis with these retail giants. How? Either because such supermarkets need reliable suppliers, or because the small businesses then specialize in customers who demand high-quality products or refuse to be seen in supermarkets. In the USA, buying up shaky companies and putting them back on their feet by improving management and restructuring their business plans has become a very successful venture. These leaner companies are then sold for a profit. Superficially, most of them appear to be extremely different from one another and the firm doing the restructuring may appear to be highly overextended. In reality they are extremely specialized, i.e. on restructuring the disfunctional core element of other companies. The firm applies the same know-how and guidelines to straighten these disfunctions out.
Plant and animal evolution is based on similar interrelationships and principles. For example, the “digestive helpers” that help termites and many other animals (including cattle) to break down the food they eat. The size relationships in these symbioses reflect those of the small supplier and supermarket cited above. In both cases a smaller organism, whether it resides in the body of another or fulfils its function independently, becomes an essential element in the larger organism’s body. It helps that organism tap new sources of energy, which can be interpreted as diversification. In multicellular organisms, the crucial organs such as plastids (which help plants photosynthesize) or mitochondria (which enable animals to exploit the energy they consume) are now thought to have originated from parasites or symbionts that long ago migrated into the cells and ultimately became organs. The evolutionary history of these organelles was reconstructed based on the fact that their reproductive mechanisms are independent of cell division. In this sense, these highly specialized units are much like the management installed by an outside company, providing the impetus for diversification in many directions. From another perspective, they resemble the furniture that Nixdorf might deliver to a bank – the result of a diversification that ultimately promotes specialization.
The business strategy applied by Mr. Kamm is equally applicable to any sector of business. The first step is to draw on your practical experience, to find your true calling. Jumping headlong into some new sector is a recipe for disaster. This approach needs to be incorporated into today’s upbringing and education systems. Get the big picture, arrive at a careful decision, then specialize. The basic steps outlined in the chapter “3rd Consequence” can help define the goals. Being competitive means gaining broad experience and abilities in some promising sector – usually a full-time job. Only after successful breaking into the market and establishing an image – much like Kärcher did with its high-pressure steam cleaners – can the third step be taken, namely expanding the product range. Again, as correctly pointed out by Mewes, don’t overstep the framework conditions in your sector. Clearly, not every new venture will go smoothly. Radical adjustments, combined with renewed specialization and subsequent diversification, are often advisable. Finding a balance between your career and private life is also crucial, as we will discuss later.
All the above is equally valid for employees or companies. In the past, company size was a decisive factor: large companies excelled in mass production and research, the smaller ones were more flexible and adapted better to individual customers. This left room for symbioses in various subsectors. For example, smaller businesses could cooperate with automobile giants by customizing cars to meet the needs of individual professions (physicians, film producers, carpenters, etc). Both partners benefited from this arrangement. Automobile factories cannot deal with individual customers, and the customizer effectively broadens that company’s product line. By modifying the cars for a fair price, the neighborhood customizing shop can successfully grab its share of the market. This led to many small “one-man” businesses with only minimal means of production: they swiftly adapted to customer demand by putting together the appropriate partners and suppliers. Gerd Häuser, whose lambskin jacket business was discussed earlier, is a good example of such a highly adaptive approach. Today, computer are steadily eroding the respective advantages and disadvantages of small versus large businesses.
CAD and CAM (Computer Aided Design and Computer Aided Manufacturing) have introduced “flexible automation” even in large companies, a strategy enabling them to enter previously inaccessible market niches. Such computer-supported systems are now standard in mechanical engineering firms and the metalware industry, in the electrical and in the wood-processing industry, boosting international competitiveness. Despite these developments, the OBS consequence remains valid: both specialization and diversification are crucial, if the timing is right.
How does the psychosplit influence this polarization?
A look at the menu of any restaurant reveals that our ancestors had both a plant and animal diet. The biologist would say we are “omnivores” rather than specialists like mosquitoes or parasites. This explains why so many different foods taste good to us and why our “gastronomic culture” devotes enormous energies to tickling our palette with ever more refined creations and seasonings. The fact that we enjoy eating in good company is a special feature that underlines our social cohesion – and also shows that diversification is important even in our small daily pleasures. We associate eating with conviviality, stimulating discussions, a flirt, or good background music; in oriental feasts, this might be topped off with dance performances and other entertainment.
The psychosplit made us into semi-predators by automatically triggered our innate predatory instincts whenever we encounter someone or something that indirectly helps feed us – a customer, an employer, or simply money. This spark has also jumped to a behavior we employ to heighten our pleasure, and that prompts us to spread ourselves thin businesswise. I am referring to our well-developed sense of curiosity. It motivated many of the “additional organs” we produced and tested. It also explains our keen interest in the latest news (newspapers, radio, TV, etc.), in new experiences (tourism, polygamy), and in acquiring new physical aptitudes (sports and hobbies).
From the Optimal Business Strategy (OBS) perspective, the EKS is entirely correct to stress the importance of specialization on all fronts. And the psychosplit makes it all the more understandable. Human behavior shows a genetically anchored tendency to stray from chosen tasks, to be distracted by innate impulses and environmental inputs. Being “obsessed” with a particular idea, particularly when that activity yields no clear benefits, appears to unique to the human stage of evolution and is bolstered by our “additional organs”. We certainly cannot observe this phenomenon in monkey, apes or other “higher” mammal groups. This tendency, much like other instincts, is part of our genetic makeup and has become hypertrophied, i.e. highly exaggerated, in certain individuals. The result? Some people pursue a particular problem with a one-track mind, and the rest of the world is often still one step behind. Long after that person has died, the idea may be revived and ultimately become a source of human progress.
Two additional facts deserve mention before we leave Darwin’ finches and Kärcher’s company.
In a curious twist of fate, the high-pressure steam cleaner with which Kärcher conquered the US market had actually been invented as a steam-jet cleaner in 1925 in the USA. Mr. Kamm explained that, “after the war, the US occupying forces in the Stuttgart area were equipped with this machinery, which was unknown in Europe at the time. Some of the units had to be repaired and ended up in Kärcher’s shop. As an engineer, he quickly realized that he could build a much better product. In 1950 the first machine rolled off the production line. The system was successively perfected with German thoroughness and industriousness, and increased sales volumes allowed prices to drop from year to year. With this weapon, with this finch, we returned to the US. In the original home turf of high-pressure steam cleaners, technological progress had stagnated: the US model continued to operate at one-third the power and twice the price of the European competition. It was no easy task to break into the market because we were virtual unknowns and because high-pressure steam cleaners had a severe image problem. Our guarantee and maintenance package along with other sales strategies quickly won over potential customers. We very rapidly advanced to Nr. 1 status in every market we approached.”
As mentioned earlier, the evolutionary path of plants and animals is also lined with such detours. The swimbladder of modern fishes developed from the early lungs of those fishes that once conquered land. The auditory ossicles of our inner ear (hammer, incus, stapes) – so important for our musical listening pleasure – represent the gill arches of ancestral fishes, which had become superfluous and highly reduced in land animals43.
As far as the Galapagos finches are concerned, Darwin missed a peculiar feature in the woodpecker finch Cactospiza pallida – a feature that was first studied in detail by Eibl-Eibesfeldt and Kurt Sielmann in the aftermath of our underwater expeditions to these islands. In his book “Principles of comparative ethology”, Eibl-Eibesfeldt writes: “ The bird uses its powerful beak to tear the bark from twigs, thereby exposing the tunnels of insect larvae. Unfortunately, this species lacks the long tongue with which European woodpeckers extract the larvae. It solves the problem by using a tool. Once the tunnels are exposed, it picks up a cactus needle, holds it lengthwise in its beak, and pokes the insect out. It can also break small twiglets into the correct shape, essentially fashioning its own tool”44.
Can the term “additional organ” be applied to the cactus needle or to the modified twiglet when the woodpecker finch uses it to obtain prey? Isn’t the spider’s net, which its body secretes but which is not a permanent fixture, a crucial, artificially fashioned predatory organ? Does the dam that beavers construct to retain water – or the termite mound as a protective organ for the colony – not belong to these animals merely because they are not permanently attached and do not consist of cells? And what about a bird’s nest – a fundamental organ for brooding eggs?
Animals produce such additional organs based on hereditary
behavior control mechanisms, whereas humans use their greater understanding
of cause-and-effect to deliberately produce such “extensions of the body”.
Abstractly seen, every type of career and every business is actually a
“spider’s web”, designed to obtain food, i.e. to gain the energy we all
fundamentally need. Spiders obtain their food by predatory actions; in
business, humans do the same via transactions. The degree to which we should
specialize or diversify depends on the respective spatio-temporal
setting. The psychosplit tends to motivate us to pursue a variety of activities
in order to satisfy our innate security needs. “More pillars hold up the
house better”. The most opportune strategy is to breach the competitors’
defenses at some clearly defined point and to build customer trust and
loyalty there. This can then serve as the fundament to create a more diversified
pallet of products that better address the customers’ problems.
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