More Than Innovation Adaptability is The New Competitive Advantage

Globalization, new technologies, and greater transparency have combined to upend the business environment and give many CEOs a deep sense of unease. Just look at the numbers. Since 1980 the volatility of business operating margins, largely static since the 1950s, has more than doubled, as has the size of the gap between winners (companies with high operating margins) and losers (those with low ones).

Market leadership is even more precarious. The percentage of companies falling out of the top three rankings in their industry increased from 2% in 1960 to 14% in 2008. What’s more, market leadership is proving to be an increasingly dubious prize: The once strong correlation between profitability and industry share is now almost nonexistent in some sectors. According to our calculation, the probability that the market share leader is also the profitability leader declined from 34% in 1950 to just 7% in 2007. And it has become virtually impossible for some executives even to clearly identify in what industry and with which companies they’re competing.

All this uncertainty poses a tremendous challenge for strategy making. That’s because traditional approaches to strategy—though often seen as the answer to change and uncertainty—actually assume a relatively stable and predictable world.

Think about it. The goal of most strategies is to build an enduring (and implicitly static) competitive advantage by establishing clever market positioning (dominant scale or an attractive niche) or assembling the right capabilities and competencies for making or delivering an offering (doing what the company does well). Companies undertake periodic strategy reviews and set direction and organizational structure on the basis of an analysis of their industry and some forecast of how it will evolve.

But given the new level of uncertainty, many companies are starting to ask:

• How can we apply frameworks that are based on scale or position when we can go from market leader one year to follower the next? 

• When it’s unclear where one industry ends and another begins, how do we even measure position? 

• When the environment is so unpredictable, how can we apply the traditional forecasting and analysis that are at the heart of strategic planning? 

• When we’re overwhelmed with changing information, how can our managers pick up the right signals to understand and harness change? 

• When change is so rapid, how can a one-year—or, worse, five-year—planning cycle stay relevant?

The answers these companies are coming up with point in a consistent direction. Sustainable competitive advantage no longer arises exclusively from position, scale, and first-order capabilities in producing or delivering an offering. All those are essentially static. So where does it come from? Increasingly, managers are finding that it stems from the “second-order” organizational capabilities that foster rapid adaptation. Instead of being really good at doing some particular thing, companies must be really good at learning how to do new things.

Those that thrive are quick to read and act on signals of change. They have worked out how to experiment rapidly, frequently, and economically—not only with products and services but also with business models, processes, and strategies. They have built up skills in managing complex multi-stakeholder systems in an increasingly interconnected world. Perhaps most important, they have learned to unlock their greatest resources—the people who work for them. In the following pages we’ll look at how companies at the leading edge are using these four organizational capabilities to attain adaptive advantage. We’ll also discuss the implications of this fundamental strategic shift for large, established corporations, many of which have built their operations around scale and efficiency—sources of advantage that rely on an essentially stable environment.

A pattern similar to that illustrated in the exhibit above can be observed in many other industries.Learn more here.

The Ability to Read and Act on Signals

In order to adapt, a company must have its antennae tuned to signals of change from the external environment, decode them, and quickly act to refine or reinvent its business model and even reshape the information landscape of its industry.

Think back to when Stirling Moss was winning Formula One car races: The car and the driver determined who won. But today the sport is as much about processing complex signals and making adaptive decisions as about mechanics and driving prowess. Hundreds of sensors are built into the cars; race teams continuously collect and process data on several thousand variables—ranging from weather and road conditions to engine rpm and the angles of curves—and feed them into dynamic simulation models that guide the drivers’ split-second decisions. A telemetric innovation by one team can instantly raise the bar for all.

In this information-saturated age, when complex, varying signals may be available simultaneously to all players, adaptive companies must similarly rely on sophisticated point-of-sale systems to ensure that they acquire the right information. And they must apply advanced data-mining technologies to recognize relevant patterns in it.

For example, a leading media company that was suffering from a high rate of customer churn revamped its analytic approach to customer data, applying “neural network” technologies in order to understand patterns of customer loss. The company found hidden relationships among the variables that were driving churn and launched retention campaigns targeting at-risk customers. The accuracy rate in predicting churn was an impressive 75% to 90%—a huge benefit, given that every percentage point in churn reduction added millions of dollars to the bottom line.

Companies are also leveraging their signal-reading capabilities to make operational interventions in real time, bypassing slow-moving decision hierarchies. The UK-based grocery retailer Tesco continually performs detailed analyses of the purchase patterns of the more than 13 million members of its loyalty-card program. Its findings enable Tesco to customize offerings for each store and each customer segment and provide early warning of shifts in customer behavior. They also supported the development of Tesco’s hugely successful online platform, which has extended the company’s business model, enabling Tesco to become a store without walls and to offer a broader range of products and services, including media and financial services. To put the icing on the cake, instead of being purely a cost center, the rich databases and analytical capabilities produce a stream of direct revenue: For a fee, Tesco allows other enterprises to access its technologies and insights.

Google is another example. It uses algorithms to update the position of an ad on the basis of the ad’s relevance to an individual search or website as well as the advertiser’s bids on key words. The more relevant an ad, the higher the click-through rate—and because advertisers pay per click, this means more revenue for Google. By linking its advertising data directly to its operations, Google can respond to changing ad conditions on a split-second basis, without the intervention of human decision makers.

The Ability to Experiment

That which cannot be deduced or forecast can often be discovered through experimentation. Of course, all companies use some form of experimentation to develop and test new products and services. Yet the traditional approaches can be costly and time-consuming, and may saddle the organization with an unreasonable burden of complexity. Furthermore, research based on consumers’ perceptions is often a remarkably poor predictor of success. The real world is an expensive medium for experimentation, and failed market-facing tests and pilots may jeopardize a company’s brand and reputation.

To overcome these barriers, a growing number of adaptive competitors are using an array of new approaches and technologies, especially in virtual environments, to generate, test, and replicate a larger number of innovative ideas faster, at lower cost, and with less risk than their rivals can. Procter & Gamble is a case in point. Through its Connect + Develop model, it leverages InnoCentive and other open-innovation networks to solve technical design problems. It uses a walk-in, 3-D virtual store to run experiments that are quicker and cheaper than traditional market tests. And by employing Vocalpoint and other online user communities, it can introduce and test products with friendly audiences before a full launch. In 2008 alone, 10 highly skilled employees were able to generate some 10,000 design simulations, enabling the completion in hours of mock-ups that might once have taken weeks. More than 80% of P&G’s new-business initiatives now make use of its growing virtual toolbox.

In addition to changing the way in which they conduct experiments, companies need to broaden the scope of their experimentation. Traditionally, the focus has been on a company’s offerings—essentially new products and services. But in an increasingly turbulent environment, business models, strategies, and routines can also become obsolete quickly and unpredictably. Adaptive companies therefore use experimentation far more broadly than their rivals do. We’ve seen that Tesco illustrates the power of experimenting with business models as well as with product range.

Ikea, like Tesco, leverages existing assets and capabilities to experiment with business models. After the company entered Russia, managers noticed that whenever it opened a store, the value of nearby real estate increased dramatically. So Ikea decided to explore two business models simultaneously: retailing through its stores and capturing the appreciation in real estate values through mall development. It now makes more profit in Russia from developing and operating malls than from its traditional retail business.

Finally, experimentation necessarily produces failure. Adaptive companies are very tolerant of failure, even to the point of celebrating it. For example, the software company Intuit, which has been extremely successful at using adaptive approaches to grow new businesses, launched a marketing campaign in 2005 to reach young tax filers through a website called rockyourrefund.com. The site offered discounts at Expedia and Best Buy and the opportunity to get tax refunds in the form of prepaid gift cards. The campaign was a flop, and practically no one used the site. The amount of money involved was negligible—“almost a rounding error,” says Rick Jensen, the vice president of product management for Intuit’s consumer tax division. But the marketing team documented what it had learned from the failure and won an award from company chairman Scott Cook, who said, “It is only a failure if we fail to get the learning.”

The Ability to Manage Complex Multicompany Systems

Signal detection and experimentation require a company to think beyond its own boundaries and perhaps to work more closely and smartly with customers and suppliers. This flies somewhat in the face of the unspoken assumption that the unit of analysis for strategy is a single company or business unit.

With an increasing amount of economic activity occurring beyond corporate boundaries—through outsourcing, offshoring, value nets, value ecosystems, peer production, and the like—we need to think about strategies not only for individual companies but also for dynamic business systems. Increasingly, industry structure is better characterized as competing webs or ecosystems of codependent companies than as a handful of competitors producing similar goods and services and working on a stable, distant, and transactional basis with their suppliers and customers.

In such an environment advantage will flow to those companies that can create effective strategies at the network or system level. Adaptive companies are therefore learning how to push activities outside the company without benefiting competitors and how to design and evolve strategies for networks without necessarily being able to rely on strong control mechanisms.

Typically, adaptive companies manage their ecosystems by using common standards to foster interaction with minimal barriers. They generate trust among participants—for example, by enabling people to interact frequently and by providing transparency and rating systems that serve as “reputational currency.” Toyota’s automotive supply pyramids, with their kanban and kaizen feedback mechanisms, are early examples of adaptive systems. EBay’s complex network of sellers and buyers is another; the company relies on seller ratings and online payment systems to support the online marketplace.

If the experience curve and the scale curve were the key indicators of success, Nokia would still be leading the smartphone market; it had the advantage of being an early mover and the market share leader with a strong cost position. But Nokia was attacked by an entirely diff erent kind of competitor: Apple’s adaptive system of suppliers, telecom partnerships, and numerous independent application developers, created to support the iPhone. Google’s Android operating system, too, capitalized on a broad array of hardware partners and application developers. The ability to bring together the assets and capabilities of so many entities allowed these smartphone entrants to leapfrog the experience curve and become new market leaders in record time. As Stephen Elop, Nokia’s CEO, wrote in a memo to his staff , “Our competitors aren’t taking our market share with devices; they are taking our market share with an entire ecosystem.” Through broader signal detection, parallel innovation, superior flexibility, and rapid mobilization, multicompany systems can enhance the adaptiveness of individual companies.

The Ability to Mobilize

Adaptation is necessarily local in nature—somebody experiments first at a particular place and time. It is also necessarily global in nature, because if the experiment succeeds, it will be communicated, selected, amplified, and refined. Organizations therefore need to create environments that encourage the knowledge flow, diversity, autonomy, risk taking, sharing, and flexibility on which adaptation thrives. Contrary to classical strategic thinking, strategy follows organization in adaptive companies.

A flexible structure and the dispersal of decision rights are powerful levers for increasing adaptability. Typically, adaptive companies have replaced permanent silos and functions with modular units that freely communicate and recombine according to the situation at hand. To reinforce this framework, it is helpful to have weak or competing power structures and a culture of constructive conflict and dissent. Cisco is one company that has made this transformation. Early on, it relied on a hierarchical, customercentric organization to become a leader in the market for network switches and routers. More recently the CEO, John Chambers, has created a novel management structure of cross-functional councils and boards to facilitate moves into developing countries and 30 adjacent and diverse markets (ranging from health care to sports) with greater agility than would previously have been possible.

As they create more-fluid structures, adaptive companies drive decision making down to the front lines, allowing the people most likely to detect changes in the environment to respond quickly and proactively. For example, at Whole Foods the basic organizational unit is the team, and each store has about eight teams. Team leaders—not national buyers—decide what to stock. Teams have veto power over new hires. They are encouraged to buy from local growers that meet the company’s quality and sustainability standards. And they are rewarded for their performance with bonuses based on store profitability over the previous four weeks.

Creating decentralized, fluid, and even competing organizational structures destroys the big advantage of a rigid hierarchy, which is that everyone knows precisely what he or she should be doing. An adaptive organization can’t expect to succeed unless it provides people with some substitute for that certainty. What’s needed is some simple, generative rules to facilitate interaction, help people make trade-offs, and set the boundaries within which they can make decisions.

For example, Netflix values nine core behaviors and skills in its employees: judgment, communication, impact, curiosity, innovation, courage, passion, honesty, and selflessness. The company’s executives believe that a great workplace is full of “stunning colleagues” who embody these qualities; thus the Netflix model is to “increase employee freedom as we grow, rather than limit it, to continue to attract and nourish innovative people, so we have a better chance of long-term continued success.” Consistent with this philosophy, Netflix has only two types of rules: those designed to prevent irrevocable disaster and those designed to prevent moral, ethical, and legal issues. It has no vacation policy and does no tracking of time—the company’s focus is on what needs to get done, not how many hours or days are worked. As the Netflix “Reference Guide on Our Freedom & Responsibility Culture” puts it, “Avoid Chaos as you grow with Ever More High Performance People—not with Rules.”

The Challenge for Big Business

Becoming an adaptive competitor can be difficult, especially for large, established organizations. Typically, these companies are oriented toward managing scale and efficiency, and their hierarchical structures and fixed routines lack the diversity and flexibility needed for rapid learning and change. Such management paradigms die hard, especially when they have historically been the basis for success.

However, several tactics have proved effective at fostering adaptive advantage even in established companies. To the managers involved, they may look like nothing more than an extension of business as usual, but in fact they create a context in which adaptive capabilities can thrive. If you are the CEO of a large company that wants to be more adaptive, challenge your managers to:

Look at the mavericks. Fast-changing industries are characterized by the presence of disruptive mavericks—often entirely new players, sometimes from other sectors. Ask your managers to shift their focus from traditional competitors’ moves to what the new players are doing and to think of ways to insure your company against this new competition or neutralize its effect. They should also look at what’s happening in adjacent or analogous industries and markets and ask, “What if this happened in mine?” Although pattern recognition is harder in an uncertain environment and can easily be obstructed by entrenched beliefs and narrow industry definitions, it has tremendous competitive value.

Identify and address the uncertainties. Get your managers to put aside the traditional single-business forecast and instead examine the risks and uncertainties that could significantly affect the company. This simple extension of the familiar long-range strategy exercise can force people to realize what they don’t yet know and to address it. Your organization needs to distinguish “false knowns” (questionable but firmly held assumptions) from “underexploited knowns” (megatrends you may recognize and perhaps have even acted on, but without sufficient speed or emphasis) and “unknown unknowns” (intrinsic uncertainties that you can prepare for only by hedging your bets).

Put an initiative on every risk. Most companies have a portfolio of strategic initiatives. It should become the engine that drives your organization into adaptability—and it can, with a couple of simple enhancements. First, every significant source of uncertainty should be addressed with an initiative. Depending on the nature of the uncertainty, the goal of the initiative may be responding to a neglected business trend, creating options for responding to it down the line, or simply learning more about it. In managing these initiatives, your company should be as disciplined with metrics, time frames, and responsibilities as it would be for the product portfolio or the operating plan.

Examine multiple alternatives. In a stable environment it is sufficient to improve what already exists or to examine single change proposals. The simple step of requiring that every change proposal be accompanied by several alternatives not only surfaces a more varied and powerful set of moves, but also legitimizes and fosters cognitive diversity and organizational flexibility.

Increase the clock speed. The speed of adaptation is a function of the cycle time of decision making. In a fast-moving environment, companies need to accelerate change by making annual planning processes lighter and more frequent and sometimes by making episodic processes continual.

---

The adaptive approach is no universal panacea. If your industry is stable and relatively predictable, you may be better off sticking to the traditional sources of advantage. But if your competitive reality is uncertain and rapidly changing, as is true in an increasing number of industries, you need a dynamic and sustainable way to stay ahead. Your survival may depend on building an organization that can exploit the four capabilities behind what we think of as adaptive advantage. via BCG

This article originally appeared in the Harvard Business Review and is republished here with permission.

 

 

Innovation & Competitive Advantage - How a Young Fashion Designer Stands Out in a Crowded Market

 

When Rebecca Minkoff co-founded a New York-based luxury handbags company in 2005, her goal was to develop a high-quality product that was both practical and sexy. What she didn't expect -- especially in the competitive fashion industry -- was that sales would rise so quickly.

Revenues at Rebecca Minkoff LLC jumped to $17.5 million in 2010 from $5.5 million in 2008, according to the Women Presidents' Organization (WPO), which ranked Rebecca Minkoff No. 6 on its recently released Top 50 Fastest-Growing Women-Led Companies annual list.

"We came out at a time when contemporary bags were hot and exciting," says Minkoff, who is 30 and also the youngest business owner on the WPO list. "We definitely rode that momentum and learned how to build a business along the way."

Minkoff's journey into the fashion business started when, at age 18, she moved from St. Petersburg, Fla., to Manhattan and landed an internship at fashion-design house Craig Taylor. She worked closely with the CEO "who took me under her wing and taught me about the whole business," Minkoff says.

By the time she left the company in 2001, Minkoff was already working on her own designs. Her first taste of national recognition came when actress Jenna Elfman -- best known for her starring role in the TV sitcom Dharma and Greg -- wore an "I Love New York" T-shirt Minkoff designed on the Jay Leno show. After the appearance, retailers began calling and Minkoff spent the next six months "sewing T-shirts on my living-room floor."

Although Minkoff continued designing, starting a full-fledged company was daunting. So, her older brother, Uri, who had founded a small handful of health-care and technology startups, joined her, and the duo officially launched Rebecca Minkoff LLC in 2005. Minkoff serves as creative director, while Uri is CEO. The company's first prototype was a leather satchel Minkoff called the "Morning After Bag."

"I envisioned a bag that you'd want to take with you on late nights out when you weren't sure where you'd wind up or when you'd come home the next morning," she says.

Rebecca Minkoff's "Morning After Bag."

The $500 bag struck a chord with consumers -- including celebrities such as Lindsay Lohan and Hayden Panettiere. Minkoff's line has expanded beyond handbags to include accessories and women's apparel, which are sold in 300 U.S. retail stores -- such as Nordstrom, Bloomingdales and Saks Fifth Avenue. This spring, the 30-person company launched a new division called Ben Minkoff, named for Minkoff's grandfather, which manufactures and sells men's bags and accessories. 

How to Break into a Crowded Industry
Minkoff's fast-track growth is particularly notable because she found success in an already crowded and fiercely competitive fashion industry. While the number of fashion-design houses has decreased 2.3 percent annually since 2005, industry revenues have been growing 0.6 percent per year, giving the remaining players an increasingly bigger piece of the market, according to IBISWorld, a market-research firm based in Los Angeles.

Here, Minkoff shares her top three tips for launching a business in a competitive industry:

1. Be unique. Piggybacking on an existing product or service usually won't get your business noticed in competitive markets, Minkoff says. Yours should fill a need and stand out from the competition. "I created a line for what I wanted to wear -- and what I saw there was a lack of in the market -- in terms of design and function at an affordable price," she says.
2. Know your price point. Regardless of the industry, customers want a quality product for a great price, Minkoff says. Setting an appropriate price for a product or service is crucial.

   Minkoff learned that lesson after she downgraded the leather for a particular handbag without lowering the retail price. "I didn't put a tag on it saying it was made with this other type of leather, but the bag didn't look the same, and my customers knew it," she says. "We recognized that immediately when sales for the item didn't perform." Talk to us about our 28 day program to strengthen your innovation capabilities to drive growth.  

3. Listen and respond. Establishing communication with customers and making them feel a part of the decision-making process has been important to Minkoff's success. She connects with her 23,000 Twitter followers and more than 16,000 Facebook fans. In 2009, Minkoff launched Minkette, an online forum for customers to share thoughts about the brand.

   "If someone writes in and tells us the strap on a particular bag isn't long enough to wear in the winter when she's wearing a coat, we'll make the bag with a longer strap the next season," Minkoff says. "My customers know I'm listening and responding." via entrepreneur.com

   Consulting, Speaking & Coaching. Driving Growth through Innovation  

   Innothink Group is a strategic management and innovation consultancy. Where many consulting firms are reluctant to bear risks or tie their rewards to project outcomes, we decided to build a better model. We align our success with yours. We’re outcome obsessed, outcome paid, putting over a third of our fees at risk subject o hitting predetermined milestones. More than a guarantee we wanted from the outset to create true partnerships. 

   For speaking, coaching or consulting inquiries contact: 

   CEO Jim Woods

   +1 719- 649-4118

    

    

 

Homeboy Industries Reboots The Lives Of Tattooed Former Gangbangers, And Even One CEO | Co.Exist

One Sunday late last summer, just after Mass, Father Gregory Boyle took a drive through Boyle Heights, the East Los Angeles neighborhood where he has lived for 26 years. That they share a name, the priest and his neighborhood, is a coincidence. Word simply came from the archdiocese one day that a parish in Boyle Heights, one of the poorest in L.A., was without a priest. On this day, though, it seemed fitting. People beamed when they saw Boyle’s old Toyota turn up their street. Families leaned out of their houses and waved. Alone, he was a parade. Tough young men rushed to the curb to rest tattooed forearms against his open window. "Mijo!" Boyle greeted them, slapping hands and bumping fists. Around the corner, a giant, faded mural stretched nearly half a city block. Painted a story high, beside an Aztec pyramid, were the solemn faces of César Chávez, Martin Luther King Jr., Emiliano Zapata, and a smiling Gregory Boyle.

Noe Cruz used to be a gang member. Today he works at Homeboy’s bakery. Photo by Melissa Gordon

Editor’s Note

See many more pictures of Homeboy Industries and its clients in the slide show above.

When he arrived in Boyle Heights, back in the 1980s, Boyle began preaching at Dolores Mission, a little yellow church with a Spanish-tile roof and a hardy old tree by the door, a statue of Mary nestled where its two trunks diverge. At night, he would walk. No one knew what to make of this at first. The young men who lingered on the corners stayed aloof. Police stopped him outside a housing project, assuming he was there for drugs. But whenever guys would get beaten up or shot, he would visit them in the hospital. He had an ear for the neighborhood’s slang, and he adopted it as his own. And he was a Jesuit priest, in a neighborhood where gang members were mostly Latino. ("They’ll be running from the police, and they’ll still cross themselves when they pass a church," Boyle jokes.) Once, he came upon a brawl, still the largest he has ever seen--50 or 60 men, with baseball bats, blocking four lanes of traffic. He ran into the middle of the mob, bellowing, "Put down the motherfucking bats!" The men stood down, shocked. "It was like the parting of the Red Sea," Boyle recalled, chuckling. "They said, 'G . . . you cursed!'"

Eventually, some neighbors pooled their money and bought him a bicycle, so his walks, which seemed to have a calming effect, might cover more ground. After that, they would see the priest just about every night, pedaling through the projects.

It occurred to Boyle during those rides that the biggest problem facing his community was the lack of work--especially for young men who had spent time in prison--and, by extension, a pervasive sense of hopelessness. So he started looking for jobs for the men. When he couldn’t find nearly enough, he decided to create some. In 1992, with a large donation from a movie producer, Boyle took over a small, shuttered bakery and founded Homeboy Industries.

At Homeboy’s L.A. headquarters you’ll find the Homegirl Cafe, which serves breakfast, lunch, and Saturday brunch. It’s also the workplace of dozens of homies. Photo by Melissa Golden

By 2010, Homeboy was the country’s largest gang-intervention program, employing hundreds of felons--Boyle calls them his "homies"--at a cafe, a silk-screen shop, and other small businesses, and offering services such as free tattoo removal, GED classes, and counseling to thousands more. Boyle had become famous, even by Los Angeles standards. (Periodically, tourists will peer into his office and snap his picture, or ask him to sign a copy of his 2010 best-selling book, Tattoos on the Heart: The Power of Boundless Compassion.) Still, he remained Father G, addressing his employees as "son" and "kiddo," "dawg" and "mijo," and marrying them, and baptizing their children--and, sometimes, burying them. He stayed in the same room in Boyle Heights, a converted garage of a Jesuit group house, with just enough room for a mattress on the floor and a shelf for his books. And he still gave his cell-phone number to every hard case he met. "Blow it up," he says, and they do.

Boyle describes Homeboy as a place of miracles. More than a few times, that has extended to its finances. Once, a day or two away from failing to make payroll, Boyle found an elderly woman at his door with a paper bag full of cash, thousands and thousands of dollars. In those days, Homeboy was small enough that a bag of cash could cover a shortfall. But by 2010, it had an operating budget of nearly $10 million, and its cash reserves had been dwindling for months.

On a Thursday just after lunch, two years ago this month, employees filled Homeboy’s lobby, and the stairway, and peered down over the railing from the second floor. They grew quiet. Boyle told them that Homeboy was out of money. Most of them were going to lose their jobs. And he wept.

Bruce Karatz read about those layoffs in the paper. He was at his weekend home in Malibu, with his wife, Lilly Tartikoff, the widow of former NBC Entertainment president Brandon Tartikoff. (Karatz’s previous wife, his second, was Sandra Lee, the Food Network personality.) Karatz had plenty of time to read the paper. Too much time, for his liking.

Three weeks earlier, a jury had found him guilty of four felonies. It was possible the judge would sentence him only to parole. It was also possible that, at 64, he could spend the rest of his life in federal prison. He would not know for months.

Bruce Karatz used to be the CEO of KB Home. He’s not at Homeboy, which he has helped put on firmer financial footing. Photo by Melissa Golden.

From 1986 to 2006, Karatz was CEO of KB Home, cofounded in the 1950s by a young accountant named Eli Broad. Karatz grew Broad’s first company into one of the world’s largest home builders. During Karatz’s time at the helm, KB Home increased home sales by nearly 1,000%, bringing in $9.4 billion in revenue in 2005, his last full year as CEO. For his efforts, Karatz paid himself a staggering amount. In his final year at KB Home, he made, by Forbes's count, $135.53 million.

Then came the investigation. In 2006, the Securities and Exchange Commission began to crack down on the practice of backdating stock options. Karatz’s board found irregularities with stock transfers he’d authorized, worth roughly $36 million. He was fired, and the SEC opened a criminal investigation. Ultimately, in April of 2010, a jury cleared him of intentionally manipulating stocks but found him guilty of obscuring the accounting, a felony.

"We ought to share a common anguish over the crisis that threatens to cripple Homeboy Industries," columnist Tim Rutten wrote in the Los Angeles Times a few weeks later. Then Rutten quoted former L.A. mayor Richard Riordan, a wealthy man and a Homeboy supporter: "There’s no question Greg Boyle is a saint, but even saints need good businessmen."

Karatz had never thought much about incarceration, until recently, or about gangs. But he was a businessman, and he was anxious for something to do, something to keep him from dwelling on his future. Oddly enough, he had plans to meet Riordan later that morning for a bike ride up the coast.

The next day, Carol Biondi’s cell phone rang. Biondi, a longtime Homeboy board member and the wife of Frank Biondi, the former Viacom CEO, was in a Las Vegas boutique, shopping with Edythe Broad, Eli’s wife. It was the former mayor calling. He wanted to introduce Karatz to Homeboy.

You can now find Homeboy-branded chips and salsa at Ralph’s stores in Los Angeles. Sales could generate $500,000 in revenue for Homeboy this year. Photo by Melissa Golden.

I paid a visit to Homeboy last summer. Sunlight filled the lobby. Dozens of young men, and some women, sat in rows or loitered outside. Most were garishly tattooed. Boyle appeared, and the men gathered around him, three or four deep, for a hug, or a whispered blessing: "You are exactly what God had in mind when he made you." Karatz sat nearby, thumbing at his BlackBerry, in trim gray jeans and a dark sport coat. He had been coming in pretty much every day now, for more than a year.

Karatz and a small group of social workers, finance people, and supervisor-level homies piled into Boyle’s office for a meeting. One of the supervisors, Kyle Shoaf, had called to say that he’d be late. His car had been towed, which was an especially big deal because he’d been living in it, a fact that shocked everyone.

Conversation turned to a woman whom conversation often turned to. She is unstable and, years ago, had failed to hold a Homeboy job, but still, she showed up most days. A few months earlier, she had charged one of Boyle’s supervisors with a baseball bat--a boulder of a man who brushed off the incident, as did Boyle, who figured if she was actually looking to hurt someone, she would have picked a softer target. Then, yesterday, she had punched the receptionist in the face. This was more serious. "Her lady left her, and she’s sad," Boyle said, sympathetically. Most of the violence he sees, he chalks up to hurt and depression.

There was also business to discuss. A large foundation, the California Endowment, was planning to convert an old hospital building into a community center and offered Boyle the industrial kitchen--a 35,000-square-foot space, larger than Homeboy’s entire headquarters.

"I think we say yes," Boyle said. "Absolutely."

"But to do what?" Karatz asked.

"Well . . ." Boyle said.

Veronica Vargas, Homeboy’s director of operations, spoke up: "This would probably add another $1.5 million to our operating budget."

"A year from now," Boyle said.

(Shoaf came in quietly and took a seat.)

"But where will the revenue come from?" Karatz said.

"We don’t need to say how we’ll use the space, or what our plan is. Eventually we’ll need that," Boyle said. "All we need is a yes."

"And that is the spirit that built Homeboy," Karatz said. Everyone laughed.

"It has brought us to the brink many times," Boyle admitted.

Back in the summer of 2010, during the first few weeks after the layoffs, Homeboy’s normally teeming lobby had been quiet. Word had gotten out that Homeboy had no jobs to offer. If Boyle ever doubted what made Homeboy work, that empty lobby settled it for him. People hope for jobs, and that hope lures them in. But hope expires quickly in Boyle’s experience; without encouragement, people return to the life they know. He had to start hiring again.

Boyle, Karatz, and a few Homeboy board members met with their largest donors, who were deeply unsettled that a grantee of Homeboy’s stature could be so close to insolvency. ("I put Father Greg in the category of two or three supremely magical people I’ve met in my life," said Robert K. Ross, the California Endowment’s president.) But once they began to look at Homeboy’s numbers, the crisis made sense.

For years, Boyle operated out of a small storefront near Dolores Mission. He moved Homeboy into big, new headquarters in October 2007. The economy was already beginning to collapse. Los Angeles County’s unemployment rate climbed from 4.9% in mid-2007 to more than 13% in mid-2010, among the highest in the nation. Homeboy has never kept good data on job placement outside the organization, but the staff could feel the difference. Men and women with felony records became virtually unemployable, and Homeboy went from seeing a few thousand clients a year to 8,000, 10,000, 12,000. Its payroll ballooned to more than 400 workers, mostly entry-level homies, and Boyle handed out cash when people struggled to buy food or pay bills. "It was like dinner at my house, when I was growing up," he said. "If somebody showed up, throw some more water in the soup."

Homeboy raised $6.8 million in 2009, but it spent $11.3 million, and was on pace to spend more in 2010. Even with a little more than $2 million a year in business revenue, Homeboy was operating at around a $2 million deficit.

The woman who punched the receptionist had returned. Alone with Boyle in his office, she paced frantically. "I didn’t touch nobody!" she shouted. Typically, people crowd Boyle’s door, hoping to catch his eye and steal a moment with him, but everyone kept their distance. Karatz put his jacket over his shoulder, slid on a pair of big designer sunglasses, and stepped out to check on a new Homeboy business down the street.

When Karatz first reported for work two years ago, Boyle had no idea who he was--just that Karatz was rich and a friend of the former mayor. Boyle is not one to Google people. His impression of who you are seems only marginally informed by what you have done. As for Karatz’s felony conviction, which Boyle discovered a few weeks later, he said: "Everyone is a lot more than the worst thing they ever did. This place is about redemption and restoration."

Boyle found Karatz a desk alongside three fundraisers in the tiny, crowded development office. (They later moved him to a nearby cubicle. "He was reeeaaally loud on the phone," one of the women said.) Homeboy’s foundation funders seemed ready to offer a bailout. Karatz helped draft a basic financial plan--mostly, cutting Homeboy’s payroll and services to a level of funding it could reasonably expect to raise--and hustled for donations from friends and acquaintances. He also pushed, successfully, for a new chief financial officer, one with a finance background.

Some 65% of ex-cons in California are back in jail within three years. Cost per adult prisoner, per year: $46,700

Karatz was especially intrigued by Homeboy’s businesses. Boyle had never planned to offer free tattoo removal. But when he kept failing to find a job for a young man with an especially unfortunate tattoo (fuck the world, on his forehead), he found a doctor who could erase it. Homeboy’s businesses were born in much the same way. Boyle opened Homeboy Bakery because a bakery across the street had closed. "If it had been an upholstery shop, we would have opened Homeboy Upholstery," he said. From Boyle’s perspective, Homeboy was primarily in the business of hiring people: "We don’t hire homies to bake bread. We bake bread to hire homies."

Karatz, though, thought Boyle had the makings of a real food brand. "Homeboy has a very strong logo," he said. "And I’m a big believer in authenticity. Homeboy is real. If you’re in downtown L.A., you can come to Homeboy, have tacos in the cafe, you’ll be served by homegirls who are just out of prison." Homeboy would always depend on philanthropy and government contracts, but building its businesses could be just as good as traditional fundraising, maybe better. "If we just have our hand out," Karatz said, "I think it’s very dangerous."

We don’t hire homies to bake bread. We bake bread to hire homies.

The large supermarket chain Ralph’s had invited Homegirl Cafe to sell its salsa in the deli section of a downtown store. The store sold out every morning, and Ralph’s was interested in taking the salsa into other stores, but the conversation had stalled. Karatz called Ralph’s and said he wanted to develop labels and packaging and push Homeboy Salsa into every Ralph’s in the region. He wanted more flavors, too, and a line of tortilla chips.

Last January, four flavors of Homeboy Salsa and a new line of Homeboy-branded chips rolled out at 250 Ralph’s locations. (A $50,000 donation from Ralph’s helped cover some startup costs; Karatz wrote personal checks for the rest.) In a matter of weeks, Homeboy Salsa and Homeboy Tortilla Strips were the chain’s top-selling deli items. "He used to be on the board of Kroger, which owns Ralph’s," said Vargas, the director of operations. "Bruce calls, and all of a sudden, things are moving fast!"

Karatz spotted another opportunity in a request for proposal from the city. For years, a tiny, dilapidated coffee business on the second floor of City Hall had been the only shop in the building. It was closing, and the city wanted a new vendor. "To have Homeboy as the only place to eat at City Hall, all the movers and shakers walking by, on their way to meet the mayor," Karatz said, "I thought, 'This is very cool.'" Homegirl Cafe could stock it each morning with premade sandwiches. It would be a simple, straightforward business.

Karatz got a well-known local architect, Mark Rios, to agree to design the space. But he still needed to find around $400,000 to get the shop built and open, and Homeboy wasn’t in any position to borrow. A few weeks later, he was at his desk when one of Homeboy’s fundraisers, a few feet away, hung up the phone. Someone named Jesse Bonderman had just donated $5,000 to pay for holiday turkeys and gifts.

"Bonderman?" Karatz said.

"Do you know him?" she asked.

"No. But there’s a guy named David Bonderman who is a founding partner of TPG, one of the world’s largest private-equity firms." He asked for the phone number. "Lo and behold, it’s David Bonderman’s son. I told him, 'I have a big idea for you,'" Karatz said. A few days later, Jesse Bonderman donated $400,000. Homeboy Diner opened last June.

"Bruce!" said a heavily tattooed guy behind the register at the diner, as Karatz approached. The space looks like a national chain, with black-and-white photographs of homies framed against lime-green walls, printed with a repeating Homeboy logo. Homeboy chips and salsa are on display.

This was something new for Homeboy, building new business lines as an actual business would. And Karatz saw opportunities everywhere.

Homeboy offers to its clients free tattoo removal, often an essential step to shedding gang life and entering the workforce. Photo by Melissa Golden

Before he arrived, Homeboy agreed to license its name to a concession company that was bidding to open restaurants at Los Angeles International Airport. The company proposed some sort of Homeboy eatery in exchange for a donation and a share of revenue. Boyle was grateful for the revenue, but Karatz got excited about the business. He pushed for display cases to advertise Homeboy’s grocery line, merchandise sales, and design features that could market Homeboy’s mission to the millions of people who walk by. The restaurant will open this summer. He has also been in conversations with Harry Morton, owner of the Viper Room and the son of Hard Rock Cafe cofounder Peter Morton, to bankroll a Homeboy bar and grill in Hollywood, near the ArcLight Theater. He hired a director of businesses, who has pitched a second Homeboy Diner and bid to take over the cafeteria in a large government building. And he developed prototypes for three flavors of Homeboy salad dressing.

Not everything has worked. Karatz struggled to get better results from Homeboy’s bakery, which he identified as their most challenging small business. He has eased back on plans to take Homeboy’s grocery line national. And steep shelving fees have halted, for now, his plans to introduce salad dressing. Still, according to Karatz, proceeds from licensing the chips and salsa are on pace to net the organization $500,000 this year. On every sign and every label: "jobs not jails."

When Karatz received his sentence in November 2010, some people wondered if his months at Homeboy had bought leniency. "It was smart for him, and it was smart for us," concedes Boyle’s deputy, a former homie named Hector Verdugo. But the judge’s sentencing statement emphasized that Karatz had not caused shareholders or the company to lose money, and that Karatz himself had lost a lot--more than $175 million, between penalties, repayments, and benefits he forfeited upon his firing. The court sentenced Karatz to eight months of home confinement, five years of probation, and 2,000 hours of community service, which Boyle could supervise. Karatz’s sentence was essentially to keep working at Homeboy.

"Have you talked to Kyle?" Karatz asked me after our diner visit. He was referring to Shoaf, the supervisor who came in late after his car got towed. "He showed up this morning. Didn’t have a long face on. I told him, 'If I still had my company, I would hire you in a second.'"

Karatz has felt that way about many of the men and women he has met at Homeboy, and that has surprised him. After a few months, he began interviewing job applicants as part of Homeboy’s selection committee, and although he has nagged Boyle about hiring too many people, he votes yes after interviews more than anyone else. "It’s something that I never thought about before," Karatz said. "This whole population that I never knew--I never knew one person, much less hundreds--who have a devil of a time reentering society." Even the company that approached Homeboy about licensing its name for an airport restaurant never imagined homies would actually work there. "They said they weren’t sure the airport was going to allow homies to make it through TSA control and get a badge," Karatz said. "I said, 'You tell me how many people you’ll hire. I know the head of the airport commission. Let me go to work on that.' " He added: "I don’t think it has to do with security."

In her book The New Jim Crow, Ohio State University law professor Michelle Alexander counts all the ways that felons, even those arrested for minor drug offenses, end up excluded from productive life. Depending on where they live, they can lose, forever, the right to vote, to serve on a jury, to receive professional licenses, and to qualify for food stamps and even financial aid for college. Alexander points to recent research by the National Employment Law Center that found Craigslist job postings for warehouse workers and pizza-delivery drivers that explicitly bar anyone who has committed a felony from applying. In Ohio, where Alexander lives, a felon can even be denied a barber’s license.

"You should talk to Kyle," Boyle told me.

I found him in Homeboy’s crowded lobby, running interference at Boyle’s office door. Shoaf is tall and broad-shouldered, with a steady, thoughtful manner and an easy charm. He grew up on a Crip block, and got pulled in early. At 18, he was arrested for assault. He spent most of the next 10 years in and out of prison.

No one thing prompted him to change. He was just tired of the life he had. But he needed a job. All day, he would look for openings and fill out applications. Each time, he would check a box, admitting that he had committed a felony. Nobody called. Finally, filling out an application to work in the deli at Ralph’s, he stared at the felony box. And he left it blank. He got the job.

For a long time, he was afraid to tell his parole officer. He actually missed parole meetings, he said, because he was working, and made up excuses. Finally, he explained. His parole officer asked if his boss knew he had committed a felony, and he confessed that she didn’t.

"He went to Ralph’s," Shoaf said. "He said, 'Did you know Kyle lied about committing a felony?' My boss was fine with it. I was one of her best workers. She was about to move me to register. So my PO went over her head, to corporate. And they fired me."

He woke up the next day angry and embarrassed. He packed up his things and left his halfway house. A few weeks later, his parole officer sent him back to jail. And he would be sent back again--for a technical violation, Shoaf said--after he began working at Homeboy in January 2010.

"The day you get out, you have your job back," Boyle told him. Soon after Shoaf returned, he earned his promotion, one of only a handful of homies to make supervisor.

But he was sleeping in his car now. He had been living with his girlfriend. Then they broke up. For the first few nights, he slept on a friend’s couch while trying to save up for a security deposit for an apartment. The guy and his girlfriend, though, they argued a lot. One night, the guy put his hands on her, and Shoaf stepped between them--and the guy swung at him, and they grappled. After everyone else calmed down, Shoaf panicked. He had been sent back to prison for far less. He decided it wasn’t safe to stay with friends.

So every night, after work, he drove to a Burger King parking lot, reclined his seat, and tried his best to sleep. Every morning, he stopped at a friend’s apartment just long enough to iron his shirt.

"People go, 'Oh my God, it must be so hard.' And I just think: I’ve died and gone to heaven. This is the most joyful place. I wouldn’t trade my life for anybody’s," says Boyle, in his office at Homeboy HQ. Photo by Melissa Golden

One Saturday, I went with Boyle to a girls’ probation camp, for Mass. Around two dozen teenagers, wearing matching green T-shirts and black, shapeless shorts, filed into a room that looks just like a school classroom, except the bulletin boards remind the girls not to throw gang signs and to think about self-control.

Boyle told a funny parable about facing fears, which involved being chased by dogs, back when he was "a new booty priest." Then he told the story of a 19-year-old boy who showed up at Homeboy looking for $50. After some prying, the boy admitted he wanted to buy fireworks.

"I’m not giving you money to buy fireworks," Boyle told him.

"Well, I guess my baby girl isn’t going to have a Fourth of July . . ." the boy said. Boyle spoke the boy’s lines in a mopey voice.

"How old is she?" Boyle asked.

"Three months," the boy said. Boyle’s teenage flock giggled.

"Three months? Just wave your lighter in front of her face, she won’t know the difference!" Boyle said.

The room erupted, the girls rocking in their chairs with laughter.

When the boy got up to leave, Boyle gave him the money. "Go get your explosion on," he said.

There was a theological point: "I always have a funny story at communion time that underscores that no one is perfect, and that communion is not for perfect people but for hungry people," Boyle told me. But that probably matters less than this: The girls were rapt. After Mass, they came to him and lingered as long as they could. He spoke to each one in turn, as if she were his favorite niece: "You are so much more than the worst thing you’ve ever done." He asked when they were getting out and gave them all his card, with his cell-phone number. "Come see me," he said. "We have jobs."

Back at Homeboy, young people kept arriving in Boyle’s office straight from prison, looking for work or money. "Have you eaten anything today?" Boyle asked a skinny, dull-eyed teenager. The boy shook his head. Boyle reached across the desk, slipping him a folded twenty in a handshake, and then squeezed his fist, instead of bumping it.

Boyle looked out into the lobby. "My God, where do all these people come from?" he said.

There are 1.6 million people in U.S. prisons, and very few are in for life. The rest have to go somewhere, and do something. In California, 65% end up reincarcerated within three years, at an average annual cost of $46,700 per adult prisoner--and much more for Division of Juvenile Justice inmates. The recession has forced states to think about ways to reduce their prison rolls. In October, California began an 18-month process of cutting its state-prison population by 33,000, in part by transferring responsibility for some inmates to county authorities. Other states are watching closely.

Homeboy is on solid financial footing now. Its 2012 budget is roughly $14 million; about $8 million of that will come from foundations and private donors, $2 million from government contracts, and $4 million from business revenue--almost double what Homeboy’s ventures earned in 2009. Recently, Boyle promoted the finance director Karatz hired to a newly empowered COO post that will report directly to the board if Homeboy’s budget becomes precarious again. But head count is also back up to more than 380 employees. The job market has made it harder than ever for homies to graduate to regular employers, and Boyle believes Homeboy must continue to hire, so the payroll grows.

Boyle also continues to give cash to people who show up in need, and to pay for things he could never get a budget line for, despite his board’s entreaties to stop. The woman who punched the receptionist? Boyle gave her $200 the next day, when he learned she had been kicked out of her place and had no money, and nowhere to go. His receptionist hugged her. "We are all she has," Boyle said. He gives away nearly his entire salary, and when his wallet is empty, he writes Homeboy checks. "You have the power to remove me," he has told his board. "He is going to help his kids by any means necessary," said Ross, of the California Endowment. "For someone with as big and as authentic a heart as he has, he’s no political neophyte."

One day, Karatz said, Boyle pulled him aside. "Bruce, I know you don’t believe this, but I believe that a supreme force sent you to me," he said. "You’re right. I don’t believe you," Karatz said, and laughed. "But I would not be so bold to say I know how the world works."

"It’s been interesting," Boyle told me. "We’ve butted heads from here till Tuesday. But it’s nice, I actually enjoy it. The day won’t ever come when I could run GE, but Bruce could. And the day won’t ever come when Bruce could run Homeboy, but I have great affection for him. Because he gets who our people are, and he’s moved by them."

It was nearly dark. There was just one person left for Boyle to see. She had been waiting for hours. Shoaf brought her in and lingered for a moment. "Can I borrow the van?" he asked sheepishly. He left with the keys, of course.

"You don’t know me," the woman began. Her hair was pulled back into a thin braid that fell to the middle of her back. Her face was hard, opaque. "When my daughter was growing up, I was never able to put new clothes on her for school, not one time," she said. Her voice started to shake a bit, but she kept going. Her daughter was grown now, with her own kids. The woman had started at Homeboy two weeks ago, as a janitor, and today, she got her first paycheck.

"I told my daughter I’m going to buy her kids an outfit for school," she said. She tried to continue, but she started to cry, and then sob, her whole body shaking. "I wanted to thank you," she said, struggling to speak. "I’m going to tell her how you helped me."

"No," Boyle said. "No, tell her you did it. You did it."

A version of this article appears in the May 2012 issue of Fast Company.

via fastcoexist.com

 

Speaking  

As the CEO and founder of InnoThink Group, Jim can help your organization enhance the strategic innovation and competitiveness of your business policy and strategy, with an emphasis on increasing top line growth.  

 If you’re interested in having Jim speak at your next event, simply use this form to send us your details and speaking requirements, and we’ll be in touch shortly. Or you may call us at 719-649-4118. 

 

Touch-enabled wall paint converts skin contact into electronics control

On/Off paint is a conductive wall treatment that enables touch control of various home electronic devices.

19th March 2012 in Life Hacks, Style & Design.

Now that we’ve seen whispering windows, motion-sensing walls and device-charging furniture, it doesn’t seem surprising to come across touch-enabled wall paint for the home. Sure enough, Nicolas Triboulot, Laurent Grapin and Thibault Thomas of Quark Design have come up with On/Off paint, a conductive wall treatment that can enable touch control of various home electronic devices.

On/Off paint is grayish in color and is designed to serve as an undercoat on virtually any medium beneath traditional paints or wallpapers. Once applied, it enables touch-based control of electronic devices such as lamps or alarms. Including both paint and a hidden electronic device, the On/Off system is expected to hit the market this year, according to a report on e-lab, while Futura-Sciences reports that prices will be between 30 and 40 euros per liter.

On/Off paint could potentially remove the need for light switches around the home, controlling virtually any kind of electronic device and even acting as a dimmer switch when users touch with different pressures. Tech-savvy entrepreneurs: one to get involved in?

via springwise.com

Speaking 

As the CEO and founder of InnoThink Group, Jim can help your organization enhance the strategic innovation and competitiveness of your business policy and strategy, with an emphasis on increasing top line growth. 

 If you’re interested in having Jim speak at your next event, simply use this form to send us your details and speaking requirements, and we’ll be in touch shortly. Or you may call us at 719-649-4118.