Q&A: Francis McInerney, Doomsday Prophet & Turnaround Artist

Francis McInerney's new book, Panasonic: The largest corporate restructuring in history, looks at the successful turnaround of Matsushita, a global giant known to many as Panasonic. McInerney is a management consultant with an uncanny ability to frame complex issues in the simplest terms of customers and value.

I've known Francis for 20 years and he is one of the great thinkers.

He accurately foresaw and published the reasons for the downfall of AT&T and the implosion of the telecom sector years before it happened.  I wanted to learn about the turnaround of Matsushita and Francis's role in it.

Q: Can you describe the scene at Matsushita as you saw the conglomerate in the mid '90s and touch on what put the company in that position? Maybe compare it to some U.S. or global corporations that have been in trouble that people are familiar with, like IBM pre-Gerstner or AT&T in the '90s, or even Sony today.

The problem at Matsushita was that everything was a problem.  If you can name an operation, any operation from accounting to sales, you can be sure that it was messed up from one end to the other. 

You can put all of these under one umbrella: institutionalized isolation from customers.  For example, to name a few things:

- half a dozen public companies used the Panasonic name and had no common strategy.
- several of these competed against each other.
- there was no customer contact outside Japan and no system for getting it.
- sales people worldwide were supposed to force-feed distributors with products designed in Japanese factories but for which there was no clear demand.
- given these four points, there was no brand.
- the entire edifice from pencil sharpeners to factory automation equipment and semiconductors was supported by one hit product at at time, like VHS, then DVD etc.
- the company had no dominant share in any market except batteries.
- the wireless division, a big success in Japan, refused to sell in North America and missed the cellular rush.
- when the hits stopped coming, the poor financials in all the other areas were immediately exposed.
- the company was caught in a huge legacy trap -- too many long-cycled analog products in a short-cycled, computer-driven age where price-performance is everything.
- morale was terrible.
- management was frozen, like deer in the headlights.

I was asked by the Japanese press to explain what went right.  I turned over my business card to the blank back side and said there was too much space there to write it down. Big Shokku.

At IBM, by contrast, Gerstner had three powerful things going for him:

1. IBM's sales DNA was still there and could be restored.
2. IBM was in only one business, computers.
3. Processing demand was, and is still, growing as are the applications for processors.

In addition, the bulk of sackings at IBM preceded him.  The IBM brand was not dead or even close to it.  Unlike Kirk Nakamura at Matsushita in 2000, Gerstner had a lot of CEO experience and took a decade to get the job done at IBM.  The company was also smaller than Matsushita when he came on board.  So, smaller, simpler, sales DNA, and more time.

AT&T got into trouble and never got out of it.

Sony has yet to begin to change.

Q: What would your advice be for Sony CEO Howard Stringer?

My advice to Howard Stringer is simple:  set the inputs of cash conversion -- days in inventory, receivables, and payables -- in advance, and force the company's divisions to meet those numbers.  Set inventory days, for example, at 20 by the end of two quarters.  Then, half way to the goal, reset them to 10 by the end of the first year,  at the end of the two years make sure that inventory days are equal to Apple's -- four. Success for Sony would be to look like Apple.

Doing this will force to the surface all the structural challenges Sony faces.  But, it will put the onus on the business heads, not Stringer, to fix these fast.  In the Japanese system those who resist can easily be invited to ply their trade elsewhere.

Even so, getting to where Apple is now in two years is enormously risky.  At Apple's current growth rate it will be as large as Sony in only eight quarters or so and with a product/service portfolio a fraction as large.  Stringer should expect this to be very hard and that he will meet with strong resistance.

Q:  Today Matsushita has dramatically improved. How was it that Matsushita CEO Kirk Nakamura was able to proceed with this dramatic transformation without dishonoring the achievements of the company's founder Konosuke Matsushita, a brilliant self-made man who had literally written the book on the company?

My concept was to remind people of what Konosuke did:  constantly redesign the company using whatever means were available to get physically closer to his customers than were his competitors.  This effectively gave permission to Kirk to do the same thing using today's IT.  Kirk thus painted himself as being more like the founder, not less.   When I go to Japan, people constantly thank me for reviving the founder's vision.

Q: What are the parallels that apply in corporate America, because this "ossification" problem as you describe is certainly not a unique Japanese experience, is it?

Ossification in the U.S. is rarely founder-driven in the way it can be in Japan.  Take the auto industry.  The problem is the same as it was for Matsushita:  institutionalized isolation from customers.  But this has nothing to do with Sloan or Ford.  It has to do with state franchise laws that make it it illegal for the car companies to do in retail what Apple did.  As a result, all the talk in the press is about largely irrelevant issues like labor and health care costs.  This is not to say these are not important.  But without firm control of cash wait states, you have no way of knowing if they are important and if they are, how important they are.

From this I have derived a new rule:  The purpose of all businesses is to use the latest IT to eliminate the wait states of cash in the system.  This holds from the medieval fairs of Europe to the Internet.  It is what every successful operation from Ryan Air to Apple and Wal-Mart is focussed on.  And on what GM and so many other ossified companies around the world are not focussed.

Of the large telecom carriers still in business, most are access carriers.  Verizon had many opportunities to use my system but the complexities of blending managements from three companies in succession  -- NYNEX, Bell ATlantic, and GTE --  with competing agendas made my views a minor item in the scheme of things.  The same can be said of the new AT&T.

I don't advise BT Group and Comcast.  But they are stellar performers and fit my model well.

Interestingly, Lucent spent the last two years of its independence tightly focused on my principles and had begun to turn its core financials around. With Alcatel, this will no longer be possible because of the policy requirements of the French government.

Q: I don't want to do you an injustice by oversimplifying the soccer ball business model that you brought to Matsushita. It is heavily influenced by the cash operating principles pioneered by Dell. Can you expand on it, as applied at Matsushita?

Actually, the model is very simple.  It says that the faster you turn a sale into cash without burning up your supply chain (by jury-rigging your payables) the faster your operations must be.  Since speed comes before size in determining cash generating capability, and therefore whether or not you can scale up profitably Wal-Mart style,  your cash conversion cycle is your critical management tool.

The implications of the model, however, are far from simple.  My own text on how to use it runs over 200 pages and covers everything from manufacturing operations to brand and M&A due diligence.

One example:  If you use cash conversion data as an input to management decisions -- set inventory days in advance the way you set IC yields in advance on a production line -- rather than as end of pipe data that comes as a result of other factors, you immediately expose all the places in your operation where cash literally stops moving.   The application of the latest IT in identifying and eliminating these cash wait states is extremely complex and impacts everything from sourcing at one end of the value chain to customer service at the other.  The result of managing these data to very fine tolerances is Brand Superiority, the ability to affect outcomes in your markets

Once you successfully apply IT to cash conversion, moreover, you can pound slower competition for years, regardless of your size, or theirs.  This was Dell's major insight and it allowed the company to inhale all the operating free cash flow in its markets with impunity for a full decade until others started to catch up.  DEC, then Compaq, and almost HP imploded under the strain.

The model says, therefore, that you can take on, and destroy, companies many times larger than your own, if your cash wait states are significantly fewer.  Simply put, cash wait states are destiny.

Regardless of all other things -- industry, market, geography, size of company -- operations with few cash wait states look hollow:  all their operations and assets are on their surfaces, as it were, where they interact with customers directly.  Like all spheres, these companies -- I call them Soccer Balls because of their architectures -- are topologically flat. 

This makes them super responsive to changes in market conditions, almost to the point of appearing to anticipate the future.  They cannot, of course, but for those farther back in the pack, this appearance can be quite convincing. "How does Jobs do it?"

Q: Was there any situation where Matsushita faced the tough decision to disrupt itself, or in your words, to disintermediate itself?

The darkest days for Matsushita came during the tech stock crash of 2001 that set sales back seven years -- about $7.5 billion -- and wracked up losses almost as large.  The company came close to bankruptcy and the shock to everyone who worked for it, an icon of stability in Japan, is hard for us in the West to grasp.  This shock enabled senior management to rip through the fabric of the company with a scythe.

Q: The book is about the dramatic turnaround of Matsushita. In your career, you had close relations with senior executives at Lucent, at AT&T, at BellSouth, Qwest, Worldcom, at Nortel etc., in fact at virtually every major player in the global telecom industry, many of which today are shadows of their former selves. Why is this not the story of the dramatic turnaround of AT&T or Lucent?

This is a hard question to answer. 

It is easy to say why Kirk Nakamura picked up on my thesis.  His company was in deep trouble as was his country.  He liked the idea and it made sense to him.  It was logical.  He did not have a lot of time and had to act quickly. What he read in my first book, Beating Japan, in 1994 were proof points enough for him.

But why did so many in telecom not use my system?  All the major players in the industry certainly had access to the idea. 

It's hard to remember now, but all were doing very well during the period from the break up of the Bell System to the crash of 2001 -- just short of two decades -- and none saw the need for radical change, regardless of how logical. I remember being thanked at Siemens for "thinking outside the box" and asking myself what the hell box these guys were looking at.

It takes a very strong CEO and a sense of real crisis to make such moves.  Michael Dell and Steve Jobs, for example.  And John Chambers when he took over Cisco.

When the crisis hit telecom in 2001, many companies were wiped out or shrank to the point of vanishing.  Others merged.  There were frauds.  Some cases, like Qwest, are still before the courts.  The whole generation of management that I had spent a career cultivating simply vanished.  To their replacements, I may have seemed too much associated with the Ancien Régime. 

Unlike Dell, Jobs, and Chambers, none had the advantage of market growth on which to ride the structural changes I advocate. 

At Siemens, which was unusually stable during the entire '82-'06 period, most of the people I knew are in jail or have been arrested in recent months for a widespread bribery scandal.  So, that stability appears to have been bought.  My focus on identifying and managing the touch points of cash in a business would have exposed too much and put these executives at risk.  So it was a non-starter. 

Q: What books are you reading these days?

Richelieu by Philippe Erlanger
De la culture en Amérique by Frédéric Martel
Les Gaules, by Alain Ferdiére

I know this may look odd, but as I get longer in the tooth I've decided to stop reading English and see if I can't turn my second language into something approximating real fluency.