09 Jun 10 Interview: The Perfect Storm

Many businesses face the prospect of a “perfect storm”.

For those in the insurance industry, this is a combination of catastrophe losses followed by the challenges of a “W” shaped recession that could bring social upheaval and political change in many countries that we have historically considered as “stable entities”.

But the perfect storm is not limited to the insurance sector – it could sweep across all sectors in many developed economies and reshape the business landscape.

I talk more about the perfect storm and what it means for business in this interview which includes findings from the research project I conducted with Cass Business School and the Chartered Insurance Institute:

Tags: insurance industry, insurance sector, perfect storm, recession

01 Jun 10 Challenging the Tenets of Management: #1 Shareholder value

The maximisation of shareholder value has been hailed over the last decade as managements’ central and ultimate driving mission or purpose in life. On the surface, it’s one that makes sense too. The shareholders are the ultimate owners of an organization, so the maximisation a business’s financial value (variously defined to include dividends, capital gains, proceeds from buy-back programs and other payouts*) to shareholders should be managers’ primary objective.

Or should it?

Over recent weeks and months the concept of shareholder value maximisation as one of managements’ “holy grails” has come under attack. Even Jack Welch, largely attributed as being the founding father of the school of the shareholder value maximisation movement, has taken a pot shot at it saying “on the face of it, shareholder value is the dumbest idea in the world.”[1] [2].

The CEO of Unilever, Paul Polman, added to the debate[3] when he stated that he was driven primarily by the customer saying “I’m not driven and I don’t drive this business model by driving shareholder value …” This led some to re-assert the dominance of the shareholder value focus[4] and others to question if it was indeed possible to focus on both the customer and shareholders[5].  Others note from research that a total and exclusive focus on shareholder value creation can produce highly questionable decision-making[6].

Stefan Stern[5] probably identifies the route cause of the current dilemma by pointing out that the real danger of focusing upon shareholder value creation is when one takes a short-term focus and decisions are centred upon immediate value maximisation for shareholders as opposed to long-term value creation.   If a long-term view is held, then this reinforces the view that the day-to-day job of management is to build a great business. And if you have a great business then by definition you will be maximising shareholder value in the long-run[7].

But does the argument end here?

Well, the answer to this question depends upon how capitalism is defined. Or, should I say, is being redefined. One of the products of the Great Recession is that the locus of power, in terms of who the architects of capitalism will be, is shifting. And if we look at recent events in Europe, the speed of the handover may be faster than most of us expected. New emerging powers are jockeying for position.

It may be worth reflecting upon the following words of President Lula of Brazil at the end of the second BRIC summit[8] earlier this year:

“The real baptism by fire of the group [the BRICs – Brazil, Russia, India and China] occurred during the financial crisis of the past two years … the sound response of the four countries to the crisis of the developed world opened up new alternatives to the shabby dogma inherited from the past.

The collapse of financial markets revealed the failure of paradigms previously considered to be unquestionable. Truths about market deregulation collapsed. The ideal of a minimal state also collapsed. The easing of labor rights is no longer a mantra to fight unemployment.

When all these orthodoxies collapsed, the visible hand of the state protected the economic system from the failure created by the invisible hand of the market.

While some of the major countries let speculative excesses flourish, BRIC countries promoted growth focused on work and prudence.”

These words could well give us a snapshot of the capitalism of the future. A definition that recognises not only the long-term but also the dominant interests of more than one stakeholder. It is a future that could be rushing our way and events such as the oil spill disaster in the Gulf of Mexico may well be powerful catalysts.

The problem is that many of the tools that we use now – such as the balanced scorecard – may not be geared to help us to take both the long view and the multi-stakeholder perspective.  So here are some questions to consider when looking at your organisation’s approach to performance management:

• What is the time horizon?
• Does the approach focus on just one year or are there longer-term goals?
  
• Is there a focus on developing long-term enduring benefits for stakeholders?
• Is the ULTIMATE focus just one one stakeholder (usually shareholders)?
• Are outcomes for other stakeholders included? If we look at the above quotation we can identify three further stakeholders – employees, regulators and society in general.

References
[1] S. Stern, “Personal Goods – Unilever warning on ‘shareholder value’,” FT.com, Apr. 2010.
[2] F. Guerrera, “Welch condemns share price focus,” FT.com, Mar. 2010.
[3] S. Stern, “The Monday Interview – Outsider in a hurry to shake up Unilever,” FT.com, Apr. 2010.
[4] K. Lever, “Letters – Misunderstanding shareholder value,” FT.com, Apr. 2010.
[5] S. Stern, “Judgment Call: How can you focus on both customer and shareholder?,” FT.com, Apr. 2010.
[6] L. Heracleous and L.L. Lan, “The Myth of Shareholder Capitalism,” Harvard Business Review, 2010, April, p. 24.
[7] D. Reece, “Professor John Kay on why the direct approach doesn’t pay,” Telegraph.co.uk, Mar. 2010.
[8] L. da Silva, “Brazilian President Lula: BRIC countries must forge a transparent system of global governance,” The Christian Science Monitor, Apr. 2010.

* See http://www.investorwords.com/5960/shareholder_value.html

Tags: capitalism, shareholder value creation, shareholders

10 May 10 Strategy Past, Strategy Future

A bacon sandwich, toast, marmalade and coffee.  The perfect start to a Sunday morning.  Then the business section of The Sunday Times flipped open to reveal, in two separate articles, a possible picture of strategy past and strategy in the future.

Tom Bowers’ article Browne’s legacy of cost cutting stored up barrels of trouble[1] paints a sorry picture of the potential long-term effects of cost-cutting and outsourcing (in this case, the use of contractors). To many, cost reduction and the associated use of outsourcing have been essential (in some cases arguably the only) elements of corporate strategy. Certainly, the 1990s and the first decade of the 21st century wear these now indelible strategic hallmarks.

In the same section, another article, Andrew Davidson’s interview with Vineet Nayar[2], reveals a different approach to strategy-making. Nayar points to the real “value zone” as being the point where employees and customers meet. Using this observation, Nayar’s approach is to build advantage through the competences of employees. Indeed, Nayar goes as far as to say “Employee First, Customer Second” – breaking that long-held rule that “the customer comes first”.

Two different perspectives on the source of competitive advantage. One marking the past – one marking the future?

References
[1] Bower, Tom Browne’s legacy of cost cutting stored up barrels of trouble. Sunday Times. May 9, 2010.
[2] Davidson, Andrew The Andrew Davidson Interview: Vineet Nayar. Sunday Times. May 9, 2010.

Tags: competences, competitive advantage, outsourcing issues, outsourcing problems, strategy

03 Mar 10 Toyota and the Organizational Life-Cycle

The Concept
Hearing of the Toyota debacle reminded me of the organizational life-cycle, an often over-looked tool in the management armoury.

The reports of Toyota’s problems[1], [2] indicate that organizations do have problems when they grow and evolve. But are these problems predictable? Can research help us?

The answer to these questions is “yes”, in the form of a concept called the organizational life-cycle.

I am surprised that the organizational life-cycle concept is not more widely used. In my experience, it can act as an effective tool to forewarn managers of current and impending problems inside their organizations.

The concept that organizations, like human beings, progress through a predictable life-cycle, has been put forward by a range of academic researchers including Danny Miller[3] and Larry Greiner[4]. The only difference between organizations and human beings is that the former, if managed properly, do not have to die! It is however, a pity about the latter. We will have a wait for a breakthrough in the field of genetic research. But back to organizations.

The phases of the organizational life-cycle, as it is generally represented, are shown in Illustration 1 below.

The value of the tool is that each stage of the life-cycle presents managers and their organizations, with particular problems. Knowing which stage your organization is in, and what may be in store within the next life-cycle stage, can therefore be most helpful.

A Diagnostic Tool
The problems presented by each life-cycle stage (based upon my own experience and research) are as follows:

Stage #1: Birth.
Innovation flourishes but the potential causes of a premature organizational death are:

(I) Poor marketing. It is one thing developing a new, potentially winning product. A completely different skill set is needed to bring it successfully to market. Frequently new start-ups are great at innovation, but poor at marketing.

(II) Cash flow. The old chestnut. New ventures are strongly cash-flow negative. All too frequently managers are over-optimistic when it comes to the timing of sales and therefore inwards cash-flows.

(III) Leadership – can the innovator – now usually the CEO – lead as well as innovate?

Stage #2: Growth.
The focus is on developing market share and gaining a substantial foothold before any rival new entrants do. But real issues are:

(a) Formalizing systems, processes and roles.
(b) Maintaining service levels as the organization grows rapidly.
(b) Quality management.
(c) Delegation.

The challenge is to move from a fast moving small business to one that can rapidly absorb market share.

But if not tackled, these above challenges can lead to “the crisis of control”.

Stage #3: Maturity.
Market share has been built. Priorities change to maintaining stability and maximising returns before either (i) demand ebbs away or (ii) new entrants force prices and returns down. These pressures tend to encourage an inwards, as opposed to an outwards focus. Innovation moves away from major offering enhancements to cost control and process innovation.

The dangers are:

(a) Losing contact with developments in the real outside world, slowness of response to major changes.
(b) Increasing distance between top-level management and customer-facing staff.
(c) Over-reliance upon “the strategies that worked before”.

Stage #4: Decline.
Typically, the organization retreats to defend the market sector where it originally built its fortunes. It “returns to the womb”. Revenues fall. The organization reacts to changes in the outside world as opposed to predicting them.

The organization follows established industry “strategy recipes”. Anything more than incremental changes to products and processes is frowned upon.

Leaders see the outside world still as it was in the organization’s heyday.

When an organization is this position there are only two routes that can be followed:

• Revival. A massive change effort, usually accompanied by a wholesale change in top management. Or

• Death: Failure to change brings the obvious consequences.

A Lesson
If there is one lesson to be learnt it is through answering the question:

“When is the best time to fundamentally challenge the assumptions that drive our business?”

Waiting until the organization is in the decline phase is, in reality, just too late. The scale of change required is difficult to comprehend. And, at best, the chances of success are 50:50.

It is far better to challenge the business’s key underlying assumptions at an earlier point. Challenging assumptions and beliefs is far better done in the first stages of Maturity. Leaving it any later means that values, beliefs, attitudes and perceptions become hard-wired into the organization’s fabric.

References
[1] Simon, B and Kirchgaessner, S Toyota ‘lost way’ in rapid expansion, Financial Times, February 24, 2010.
[2] Simon, B LaHood voices concerns over Toyota culture, Financial Times, February 24, 2010.
[3] D. Miller and P. Friesen, “A longitudinal study of the corporate life cycle,” Management Science, vol. 30, 1984, pp. 1164-1183.
[4] L. Grenier, “Evolution and Evolution as Organizations Grow,” Harvard Business Review, 1972.

Tags: life cycle, organizational life cycle

02 Mar 10 Globalization: A picture of a fragmented world

“Localization not globalization” is one of my major trends to watch out for.  A harmonious, integrated global business world isn’t a done deal yet.

So if the world did split, what might it look like?

An article in the current issue of The World Today[1] may give us some important pointers and at least an initial map to debate – especially for those readers worried about the long-term viability of their now geographically stretched value chains. This article centres upon oil supply and presents a map with four zones that may be a useful starting point for thinking about the structure of a new world.  The zones are:

Zone #1: Atlantic. Broadly, the US, South America, Europe and Atlantic or Western Africa.
Zone #2: Middle East. Potentially extending into Southern Russia.
Zone #3: Asia-Pacific. Including Australia.
Zone #4: Russia and Central Asia.

If energy supplies prove to be the “root of all evil”, then these are interesting Zones to watch.

Even more interestingly, Zone #1 – Atlantic - is less dependent upon oil from outside the Zone (54% of supplies come from countries within the Zone). However, only 22% of Zone 3’s supplies (Asia-Pacific) come from countries within that Zone.

And that brings us to another interesting point, or, for the scenario planners out there, a shaping event. Around 2030 the Asia-Pacific Zone will start to have to look for oil sources outside its traditional supplier – Zone #2 – Middle East. It will have to look towards Zone #4 and interestingly, Western Africa.

Some food for thought and debate I hope.

Reference
[1] J. Mitchell, “New Oil Axis,” The World Today, vol. 66, 2010, pp. 9-11.

Tags: global business world, oil supply, value chains

25 Feb 10 Why the next war will be the war of influence

It has always struck me as strange that when nations fight wars to extend their sphere of influence, they resort to destroying their opponent’s economic resources. The task then is one of investment to build something out of the rubble.

Well, this could all change.

The first thing that we have to do is to ask ourselves what will be behind the next confrontation? What will drive nations (or blocs) to come face-to-face?

The answer (in my book) is access to natural resources in the form of:

• Energy

• Raw materials

• Food and

• Water

So the issue, from a national perspective, is extending the sphere of influence.

Interestingly, this article[1] describes what could possibly have happened – in terms of influence over EU decision-making – if China had bolstered Greece’s crumbling finances.

For the first time in Generation X’s memory, we are facing a (potential) rival that will be wealthier in economic terms than the West is.

Interesting food for thought, if like me, you’re interested in the shape of the future world.

Reference
[1] F. Godemont, “Has the EU escaped a Chinese rescue?,” European Council on Foreign Relations, Feb. 2010.

Tags: economic resources, greece, natural resources

16 Feb 10 Consumer Repletion: An emerging trend?

The results of a recently published study[1] may signal a distinct shift in consumer tastes and preferences. This study of purchasing behaviour – in the field of consumer electronics – signals a greater interest in “basic” product features rather than more exotic elements. The survey offers three explanations:

• Customers being “over-served”
• An increasing tendency to value “lifestyle” features – such as size and
• The impact of comparison sites.

But possibly there is a third reason – emerging consumer repletion (mentioned in my trends to watch in 2010) – a diminishing appetite for the next new technology product as wallets tighten, the brand-based culture starts to wane and experiences with family and friends replace luxuries at the top of the discretionary spend list.

Reference
[1] A. Dua, L. Hersch, and M. Sivanandam, “Consumer electronics gets back to basics,” McKinsey Quarterly, Oct. 2009.

Tags: consumer tastes, experiences

15 Feb 10 Be careful in what you take for granted

Especially when it comes to assumptions that underpin your business and its strategy.  Most businesses have assumed that (a) global warming is happening and (b) we are approaching an energy supply crisis.

In the past two days both of these tenets have been challenged:

Firstly, a report challenging global warming[1] (observing that many weather stations that were once in rural areas now find themselves next to airports or urban developments so naturally recorded temperatures will rise).  Secondly, we have an observation that our ability to innovate and find new energy sources will outstrip increasing demands for energy[2].

In a changing world be careful in what you take for granted.  It will probably change.  Remember the unbounded spread of capitalism?

References
[1] Leake, J. The world may not be warming, say scientists. Sunday Times 14 February 2010.
[2] Worstall, T. The problem with calling an end to the world. Adam Smith Institute. 15 February 2010.

Tags: capitalism, energy supply, global warming

11 Feb 10 What do Greece, Google, China and NPT have in common?

So how are:

(a) The emerging sovereign debt crisis in Greece
(b) Google’s disagreement with China
(c) The 2010 Non-Proliferation Treaty Review Conference (due to start on 30th April)

linked together?

Well, they are all what I call “shaping events“.

The big question in every business leader’s mind must be “Will Globalization really work, or will we return to a divided world?”

Shaping events are events that we know, with a reasonable degree of certainty, will come to fruition. When they do, we can see the reaction. And the world’s reaction will give us powerful clues as to which way the world is moving and how business and private lives may change.

Other examples of shaping events are

• Emerging food shortages
• An energy supply crisis
• Aging populations in the developed economies
• The success of Nato’s military operations in Afghanistan.

There are more, and tracking shaping events in a world that is in a state of flux is now a critical activity for any business – as important as tracking your competitors.

Tags: globalization, scenarios, shaping events

10 Feb 10 Giving customers a treat

An article in the Financial Times “Customers more cautious and choosy” [1] provides some interesting pointers for businesses in the developed world facing the prospect of either a painfully slow economic recovery or the dreaded “W” double dip.  The lessons, which come specifically from consumer markets are:

(1) In times where sources of capital are difficult to find, focus on organic growth. This means brushing off marketing, sales and importantly innovation skills. We are talking here about external innovation capabilities (new products, new services, new customer experiences and new markets) not innovation in reducing the cost of internal processes where there has been so much focus over the last decade.

(2) Maintain a broad choice of products and services.

(3) Give your customers a treat. Remember that consumers like a treat even in the worst of times. The cosmetics brand Revlon was, after all, conceived in the Great Depression of the 1930s.

(4) Think very strongly about how you can extend existing offerings (products and services) to other markets. This applies importantly to your core competences as well (the skills, knowledge and experience that makes your business different).

I would like to return to point (3) – Give your customers a treat. You may say that in consumer markets this is all very good, but how can this be applied in the business to business marketplace? Well, treats for commercial customers may come in enabling them to:

(a) Innovate to enable organic growth (the importance of which we have noted above).
(b) Reduce costs in their value chain
(c) Enhance the skills of their staff when training budgets are tight.

Try this exercise. Draw out your business’s value chain (basically a flow chart showing how each function – including “overhead” functions – add value). Now draw out your customer’s value chain. Think how your value chain can add to your customer’s value chain by answering these questions:

(i) How can we help them achieve organic growth?
(ii) How can we help reduce costs?
(iii) How can we help to increase their skills?

The result may be some interesting ideas for “treats”.

References
[1] Groom, B. Customers more cautious and choosy. Financial Times February 8, 2010

Tags: double dip, economic recovery, innovation capabilities