Chapter Seven
Ninjas Break the Rules

UNLIKE THEIR FEUDAL COUNTERPARTS LIKE THE FLASHY SAMURAI, ninjas were not constrained by Bushido—the “way of the warrior.” Similar to the chivalric code that governed the conduct of European knights, Bushido defined the terms of both an honorable life and an honorable death—two concepts not particularly valued by the ninja.

In our modern parlance, we would say ninjas were significantly more “results oriented” in their approach to tactical challenges. In fact, while we think of the two classes of fighters as being separate and at odds with each other, at times they had to work together. The samurai, honor-bound by Bushido, could not accomplish certain tasks. Instead, they had the ninjas do it for them.

Bushido, like most chivalric codes, was a considerably good thing. We appreciate when people carrying swords and riding around on horses feel some constraints regarding keeping the peace and protecting the weak (even if the code allowed the samurai to cut down any commoners who insulted them).

On the other hand, a rigid adherence to traditional methods is a huge hindrance to innovative problem solving. Once “the way it’s always been done” stops working, a ninja innovator doesn’t hesitate to try new things.

In the case of premodern Japan, it was precisely this lack of openness to new ideas that dropped the insular island so far behind the comparatively open Western world by the 1800s. Perhaps if the ruling class had welcomed a few more ninjas, Commodore Perry’s gunships wouldn’t have wreaked such havoc upon their arrival.

California: Not a Ninja State

SPEAKING OF PLACES THAT need a good wake-up call, LET’S look at California.

California is home to hundreds of the world’s most innovative technology companies. More than 10 percent of the Fortune 500 calls California home, with heavyweights like Apple, Cisco, Google, HP, and Intel topping the list. Facebook started at Harvard, but you’ll find its corporate headquarters in Menlo Park, California. Even large technology companies that aren’t based in California end up having a significant presence there. Washington-based Microsoft operates a Silicon Valley campus that is the company’s second-largest facility. More than two thousand Microsoft employees work in the state.

California also remains the start-up capital of the world. Start-ups in California routinely pull in 40 to 50 percent of all venture capital funds invested in the United States.1 Entrepreneurs know where the money and talent are concentrated, so many of the best and brightest flock to Silicon Valley or the Southern California megalopolis to develop and launch their ideas. This in turn draws in more investors in a self-perpetuating and virtuous cycle.

So why in 2011 did the state rank fiftieth in the nation in the category of new business creation?2 And how can a state with such a dynamic business community sustain an unemployment rate over 10 percent, among the highest in the nation?

For starters, in many ways California is resting on its laurels. Silicon Valley became what it is today because of its proximity to Stanford University. Around the middle of the last century, Stanford administrators pursued a strategy of sending out the school’s exceedingly bright students into the surrounding area to build their tech companies—mostly as a way to counter the East’s dominance in business and industry. The strategy worked, which meant that if one wanted to start or work at a tech company, Silicon Valley (as opposed to New York or Chicago) was the place to go. Like a snowball rolling down the hill, this trend became an avalanche by the time computers had reached the stage of consumer interest—the 1970s.

Even today, if one wants to hobnob with the smartest techies in the world, one goes to Silicon Valley. That’s where the technical, financial, and structural advantages continue to be. But for how long? The state’s politicians quickly began to view California’s success as a birthright—something inherent in the state’s DNA—and so they went to work sucking the state dry. But there is no law of nature—well, except for the weather perhaps—that says California must be the center of the tech solar system. Indeed, if recent trends persist, it might, in a few short years, be as distant as Pluto.

For years California’s state government never met a tax it didn’t love and a regulation it wouldn’t approve. For almost a decade, Chief Executive magazine has ranked California as the worst state in which to conduct business, pointing to excessive government regulation of businesses as one of the key reasons the state fared so miserably. This isn’t an outlier, as California ends up on the bottom of the rankings for virtually any group that evaluates states on their business-friendliness.

Whole companies meanwhile are fleeing the state for more friendly climates. Northrop Grumman left in 2011, meaning Southern California is now no longer home to even a single major military contractor (many of the jobs did stay behind). Nissan North America relocated to Nashville, Tennessee. As for the companies that haven’t left yet, they have already made decisions about investing and hiring in other states, leaving California out in the cold. According to one measure, 254 major California companies shifted significant numbers of jobs or investments out of the state in 2011.3

These departures and realignments are showing up in the employment numbers. From January 2008 through January 2012, the state lost more than 850,000 private-sector jobs, easily the worst showing of any state.4 And it’s not just because the state is so big; only seven states had a higher percentage of jobs lost.

California’s tax burden is high, but the effects of overregulation can be even more crippling to business success. The California state legislature commissioned a study in 2009 that found government regulation costs the state a staggering $500 billion per year—almost one-fourth of California’s entire gross state product.

The necessity of dealing with all these regulations has spawned a cottage industry of lawyers and consultants who help large corporations stay on the right side of the law. For California employers it’s an added cost of doing business. Unfortunately, for small businesses with lower profit margins, these additional costs can be the difference between making payroll and going out of business. Compliance and opportunity costs inflicted by complex regulations cost small-business owners thousands of dollars each year—money that could be invested back into their businesses and the local economy.

The consumer electronics industry has battled out-of-control California state environmental regulators for years, even though we share their goals and have spent billions of research and development dollars on products that can perform better with fewer environmental impacts.

I’ll give you an example. California law mandates a balance between the benefits and burdens of new regulations for consumer products by requiring that new rules “not result in any added total costs to the consumer over the designed life of the appliances.” However, for the last six years, the California Energy Commission (CEC) has evaded these requirements by simply gaming their analyses and relying on obsolete data—in an industry where change happens literally overnight—and by using unrealistic assumptions. This systematic bias allows the CEC to claim phantom energy savings will reduce operating costs, netting out higher product prices on everything from battery chargers to televisions.

As mentioned, the oddest thing about California’s incessant thirst for new regulations is that so much of what the state government does is totally unnecessary. The consumer electronics industry is already at the forefront of energy efficiency and sustainability, because our customers want batteries that last longer and products that cost less to operate.

Among the industry’s existing sustainability programs are eCycling initiatives, green product standards, and efforts to educate the public on energy efficiency trends and opportunities. These innovative, proven approaches have resulted in significant energy savings over the years. As a result of innovation, competition, and the federal government’s Energy Star program, the amount of electricity needed to power an LCD television set fell 63 percent from 2003 to 2010. Unlike the CEC’s energy-usage mandates, Energy Star is an innovation-friendly program that encourages both competition and consumer choice.

The CEC recently gave itself permission to pursue new regulations for a wide range of high-tech consumer products and IT equipment, including computers, displays, game consoles, imaging equipment, servers, and set-top boxes. It doesn’t matter to the CEC that successful energy-efficiency programs are already in place for all of these product categories; its motivation is purely increased control and the result is unnecessarily higher costs for manufacturers, retailers, and distributors.

There is some hope on the horizon, as the California legislature considered a bill in 2012 that would have curbed these sorts of abuses, specifying, among other requirements, that the CEC would have to rely on the most current data available for all proposed regulations and would have more flexibility to eliminate unnecessary and outdated regulations.5 This being California, environmental and electric utility lobbyists killed the legislation as it was about to pass at the end of the 2012 session. It is incredible that environmental groups and utilities opposed legislation that would lead to more meaningful and rigorous rule-making yielding real, not phony, energy savings, but this is sadly true. The Natural Resources Defense Council (NRDC), for example, simply does not care about science or good analysis as long as it can push new restrictions on technology. Moreover, a few California legislators reflexively do whatever the NRDC wants, and thus California continues to wear the crown of idiocy as the worst state in which to do business—science be damned.

It is not only technology manufacturers who feel the brunt of California’s overzealous regulation. California is also home to many of the nation’s top video game companies. Yet the state passed a law banning the sale of certain video games to minors, despite the fact that video games now carry parental warning labels. Thankfully the Supreme Court threw out the law on First Amendment grounds, ruling that a state could no more ban the sale of a video game than it could the sale of a book or other piece of artistic expression. (In a rare example of justice and common sense, California also was required to reimburse nearly a million dollars in legal fees to the winners.)

As California does everything it can to hamstring the private sector, it lavishes money on the public sector. The state is home to a huge population of unionized government employees who believe large defined-benefit packages, ever-higher salaries, and restrictive work rules are their birthright—even as their neighbors in the private sector are getting squeezed on all sides. California’s unfunded liabilities for state and local pension systems are at a choking $500 billion. Between 1999 and 2012, pension costs grew 11.4 percent a year.6

The scariest aspect of California’s state government is that its only accountability seems to be to itself. For years, the union representing prison guards has pushed for legislation that would increase prison populations. California had some 150,000 inmates in state prisons, although that number has dropped since the state began pushing low-level offenders into local jails to comply with a U.S. Supreme Court mandate to reduce overcrowding.7 (By comparison, Greece, which has a similar population and significant social challenges of its own, has only about 12,000 people locked up.) Prisons still account for about 9 percent of California’s budget.

California violates ninja rules. Even in the face of clear and present danger to its budget, bond rating, and corporate climate, the state’s government has refused to adapt to change. The state legislature continues to favor the minority of union workers and trial lawyers who together impose absurd costs on business and on taxpayers.

Once a primary driver of U.S. prosperity, with its technological wizardry, booming ports, and heavy industry, California is quickly becoming the weight that brings down the rest of the country. Somehow, with only 12 percent of the U.S. population, California manages to be home to one-third of all Americans receiving welfare. More, in 2012, it owed the federal government over $9 billion for unemployment payments—more than another 47 states owed collectively!

To date, California has stayed afloat through a combination of federal bailout funds, budget gimmicks, and other quick fixes, hoping that in the long run things will get back to the old normal. They won’t. The world has changed, and California needs to change with it if it’s going to again become the type of place that rewards success and welcomes great businesses and citizens who value their liberty.

California’s saving graces are its phenomenal beauty, lengthy coastline, and delightful weather. People will always want to live there. But like a person gifted with tremendous beauty, California cannot subsist—much less flourish—on its physical appeal alone. It needs to cut programs, draw down the government workforce, and reduce taxes and rules that smother business. Restricting spurious lawsuits and eliminating programs redundant to federal efforts would lift even more of the burden off taxpayers and employers. The state could take an immediate first step toward fiscal sanity by cutting its enormous prison population through a combination of pardons and legal changes for victimless crimes.

As a final note, the smartest leader in the world cannot manage California to fiscal health without the support of a legislature willing to make fundamental change. Until and unless that happens, California will continue its long descent from past glory.

There’s No Such Thing as Too Big to Succeed

ONE OF THE EXCUSES PEOPLE USE TO EXPLAIN AWAY THE PROBLEMS of governance in California is the state’s size. The same excuse gets made for companies. This is bunk.

Large corporations do face unique challenges, starting with the fact that they are, well, big. A great product idea that might be developed and released for testing in a week at a small Web start-up might never get past the first round of approvals at a large technology company. Middle managers often avoid advocating for anything that might be risky and could jeopardize their careers. Good ideas routinely get squelched on their way to top leadership.

Big companies also frequently exhibit the slavish adherence to tradition that prevented the modernization of Japan up to the nineteenth century. Companies become big because they have a great idea and figure out how to push that plan as far as it can go. Once they reach that point, it takes another big idea to get to the next level. However, a company built around one concept throws up all kinds of hurdles to and prejudices against things that are not part of the tradition of the company. Big organizations are also often siloed. Engineers and marketing people in one area of the business will integrate with resources above and below their own, but they may never talk to their counterparts in other divisions of the company. When new ideas require expertise or buy-in from other departments, turf wars and logistical problems can derail even the best proposals. Internal communication is a constant challenge.

A quick look at technology history demonstrates how rare it is for a large, successful company to start something entirely new. No big broadcaster started a cable company. No cable company started a satellite dish company. None of these companies created a freestanding Internet service.

Even recently successful, innovative companies have failed to successfully grab opportunities. Microsoft did not create Google. Google did not create Facebook. Facebook did not create Twitter or Groupon. Those companies almost certainly won’t generate whatever comes next. Every day, especially in the Internet sphere, where barriers to entry are low, existing companies very rarely invent a compelling new service.

Executives at large companies are not stupid. They recognize that the bigger the company, the more difficult it is to start a new business. Half the world’s corporate-retreat centers would go out of business if business leaders stopped trying to figure out how to break into new areas.

One solution favored by many large-company leaders is to create special teams of people whose sole function is to bring forth new ideas and make sure the ideas do not get killed by the corporate bureaucracy. To execute on new ideas, these “skunkworks” operations have their own personnel, financing, and incentives.

Another important strategy is growth by acquisition. If it’s hard for large companies to innovate in-house, they can just outsource that function by scouting for and then acquiring smaller companies that are already active in an area identified for future expansion.

Companies typically go through a “make-or-buy” analysis to determine whether it is better and less costly in terms of money and time to develop new capabilities through acquisition rather than try to build a new operating business unit. The acquisition of Instagram by Facebook for $1 billion in 2012 reflected Facebook’s desire to quickly enter the area of social photography.

Overall, growth by acquisition is far easier to describe than accomplish. Cisco is one company that has been masterful in this regard. Its CEO, John Chambers, has been especially skilled in the difficult art of integrating acquired companies into Cisco’s corporate culture and operations.

It’s not only a matter of size; sometimes it’s a matter of being hungry or having a corporate culture that can embrace something new. Sometimes, successful company leaders are distracted by intense competition or challenges they face from government—which investigates and penalizes them for their success. This seems to happen more frequently in the United States each year.

The challenge of success is that it means everyone wants to go after you, and even though you may be number one, you feel like you’re being attacked from all sides. There simply is not enough bandwidth among top executives for them to focus on expanding their businesses into totally new areas, especially when the financial community does not reward them for investing in products and services outside their traditional scope. Such investments are often viewed as coming directly off the bottom line and, moreover, likely to fail, given the track record of big-company innovations.

At CEA, I’m constantly worried about whether we’re falling victim to the same hierarchical, stilted thinking that affects so many large organizations. How can we make the International CES more exciting year after year? Are we doing all we can to protect and advance our members? Where are our weaknesses, our flaws? What gaping holes do our competitors see that we do not?

To guard against these concerns, I employ an age-old tactic: the brainstorming session, which is simply a meeting where anyone can present an idea without judgment. Sometimes these ideas generate discussion for clarification, sometimes they’re scrapped, and sometimes they produce even better ideas.

The beauty of a brainstorming session is that the participants usually are excited and energized by the process. They feel like they’re part of the organization’s success because their voices are heard. Also, they realize that no one has a monopoly on good ideas. They realize that ideas stem from a group of energized and committed colleagues who help build the respect and cohesion of the group. Most significantly, almost anyone can initiate or lead a brainstorming session. Recently we had a gap in senior management and the middle manager simply convened a brainstorming session to focus on a specific challenge. She had quietly and competently worked in the organization for many years and did not stand out. After the session, in which many top executives participated, I think many of us looked at her with greater respect because she convened and led a meeting that would likely be the pivot point for our success on a major project.

Brainstorming for us is a critical tool that ensures that we get the best ideas out on the table. Its success as a tool depends on the willingness of the participants to engage, present new ideas, and take risks. Brainstorming isn’t the only way to keep your enterprise nimble and elastic, but it does foster a variety of qualities required of every ninja company: the ability to think creatively, an engagement with all employees, and a fundamental belief that we don’t have it all figured out yet.

Ninjas Recognize the Status Quo Is Always Short-Term

CORPORATIONS MAY NOT BE PEOPLE, BUT THEY ARE MADE UP OF people—and people are funny. Our brains and our experiences tell us that things always change. Yet our instinct is always to preserve the status quo. We try to forget that we age, as do our parents and grandparents. The natural cycle of life is that we lose people we love, too often after barely taking the time to appreciate them in the present. We remember them as if they were alive and often regret the unasked questions and unspoken emotions. And of course in the future the cycle will repeat. We will lose others and perhaps have new regrets. But for some reason, we resist change rather than embrace the fact that the nature of life, of Earth, and of our condition is one of change. How we react to the change not only measures our adaptability but also determines our happiness.

Companies are exactly the same. I am always amazed how much corporate planning assumes the status quo. We will analyze market trends and look for opportunities to introduce new products or services, but then we forget that our competitors are looking at the same trends and considering the same decisions. In the consumer electronics space, any hot new trend is followed immediately by several competitors, each of whom sees the new trend and assumes no one else will. Dozens of new competitors with similar products often shake out to very few. Too many companies lose money by rolling out “me too” products rather than taking a risk, doing something different, or figuring out a variation that gives the product a unique selling proposition.

The tablet market is the best recent example. Any number of hardware manufacturers had introduced tablets, but none had caught on before Apple cracked the code with the original iPad in April 2010. Since that time, more than fifty companies have introduced or demonstrated tablets, most at the International CES. Yet Apple continues to dominate, and only a few competitors are still standing. Were the companies who ventured into the tablet market savvy ninjas or were they simply trying to chase a winner?

Given the inevitability of changes in the status quo, every company at some point has to make fundamental changes in strategy to survive. Once-great brands like Eastman Kodak, Circuit City, and Coleco all fell by the wayside after they couldn’t figure out how to adapt to new realities.

Yet consider a couple of companies that fundamentally changed and are still household names:

Motorola started making car radios in the 1930s, during the height of the Great Depression (innovation can slow, but it never stops). It invented walkie-talkies, including the backpack model still famous today from so many World War II movies. It developed radios for NASA, including the system used by Neil Armstrong and Buzz Aldrin on the surface of the moon. As times changed, it branched out into set-top boxes, emergency communications systems, and of course, mobile phones, where it created two of the three most iconic modern handsets, the StarTAC and the Razr. (We’ll give the iPhone top billing for now.)

Motorola focused on communications, but until recently it had consistently managed to stay abreast of the competition by agilely identifying where technology and the market was headed. Motorola split into two companies in January 2011, with Google quickly snapping up the mobile handset side of the business in a $12.5 billion cash deal.

I mentioned IBM in chapter 1, but the company’s storied history bears repeating here. IBM began as a “business machine” company and as technology evolved, it shifted to punch cards and huge mainframe computers. It dabbled in personal computers in the 1980s but never found a way to make enough money on the low-margin consumer market, despite some great innovations, including biometric control and the great center-keyboard mouse—a close friend to business flyers everywhere.

By the end of 1993, IBM was in deep trouble, having lost $16 billion in the three previous years. In an unusual move, the company hired an outside CEO, Louis Gerstner, who developed an entirely new direction for IBM as a high-margin service provider and systems integrator. The company has continued an aggressive move into software. By 2015, IBM expects half of its profits to come from that segment.8

Innovation by Design

IN A SPECTACULAR FORMER CHRISTIAN SCIENCE CHURCH OVERLOOKING Cleveland, the business innovation company Nottingham Spirk quietly develops new products for hundreds of consumer and medical product companies. Despite the fact that most people have never heard of them, Nottingham Spirk is behind many of the products we use every day.

John Nottingham and John Spirk are true ninja innovators. Since launching the firm in 1972, the two Johns have seen the company receive more than nine hundred patents through a development process that prioritizes openness, speed, and buildability.

The out-of-the-box ninja innovation of its founders is reflected in the company’s location. Most businesses don’t take up space in former churches. But Nottingham Spirk’s leaders saw opportunity in an abandoned, aging, but architecturally significant church. Nottingham Spirk’s leaders made an innovative proposal: They would acquire the church and renovate it into a world-class innovation center in exchange for historic-preservation tax credits to help fund the project. Nottingham Spirk brilliantly kept its word and renovated the church with awe-inspiring results.

Today, innovation at Nottingham Spirk occurs in a huge sanctuary with a soaring ceiling and a magnificent five-thousand-pipe organ. The engineering and extensive prototyping is accomplished in the former Sunday school on the lower levels. Consumers are often brought into the Innovation Center’s insights lab, where needs are uncovered and the project team is inspired by their stories. The open circular plan and stacking of floors encourages communication and propels project momentum.

Similarly, the management structure is unconventionally flat, and job titles are irrelevant. Everyone, from the most senior designers and engineers to the newest college interns, works shoulder to shoulder in teams, and most serve on more than one team at a time. All are not only encouraged but expected to speak up, and all opinions are valued.

The whole process works because Nottingham Spirk’s culture embraces the entire creative process, including the frustrating parts. No one is chastised for following a seemingly promising lead to a dead end. Experiments that fail and ideas that don’t pan out are valued for the lessons they impart—lessons that may save time and money on future client engagements.

If this sounds too good to be true, consider the company’s extraordinary forty-year track record. Odds are good that you’ve used one or more of the consumer products they’ve brought to market, including the Dirt Devil line, the Swiffer SweeperVac, the Spinbrush, the Axe pocket aerosol can, the Sherwin-Williams Twist & Pour plastic paint container, the Arm & Hammer Fridge Fresh, or the Scotts Snap fertilizer spreader. You may have encountered their specialty retail displays, like the personalized M&M printer or the Country Pure Chiller, the first countertop refrigeration unit. And if you haven’t already, you may experience one of the company’s medical devices, like the UroSense, the CardioInsight ECVUE vest, or the revolutionary HealthSpot Care4 Station, a sci-fi-like advance in convenient and cost-effective doctor-patient interaction.

Ninjas Play Chaos with Their Competition

I’LL CLOSE THIS CHAPTER WILL ONE LAST STORY FROM THE CONSUMER electronics space. Twenty or so years ago, we were in the midst of an intense battle between two different camcorder formats. The two were running neck and neck in consumer sentiment, and the continual battle to produce the smallest, highest-quality camera was on.

That year, at the International CES in Las Vegas, Sanyo displayed an astoundingly tiny camcorder enclosed in glass at its exhibit. Throughout the four days of the show, crowds swarmed that transparent enclosure to take pictures of the amazing device. Competitors were blown away by something that represented a huge step forward in terms of engineering.

After the show, I asked a friend at Sanyo how in the world they had gotten their camera so small. His response: They hadn’t. The “camcorder” didn’t even work. Sanyo just wanted to mess with their competitors.

Simply by having an unexplained, impressive-looking prototype in a glass case, Sanyo became the talk of the show and threw product-development teams across the world into fits of consternation. Ninjas think outside the box—perplexing competitors through a head fake is both fair and clever.