StrategyWorld.org: Strategy, Leadership & Execution

Seeing Your Customers

Says Erich Joachimsthaler:

“The goal of customer advantage is to identify and develop innovations — products and services, new business models, go-to-market models, marketing programs, and service configurations — that fit into and change customers’ lives, are relevant to the everyday challenges customers face, and create transformational customer experiences.”

In his Strategy + Business article, Joachimsthaler finds that if a company is truly to innovate time and again, and is to achieve profitable growth and create customer advantage, it must do three things:

Understand the people it is trying to serve as individuals, apart from any connection or interaction with the company. That is, the company must be able to temporarily let go of its current business strategies, products, and brands as it observes how people (not just customers and potential customers) go about their daily routines.
Know how to go beyond its own perimeters of product, markets, and competencies; let go of and challenge the assumptions, common practices, and golden rules of doing business still held today and go beyond what it has learned from consumers. Only then can the company conceive of entirely new opportunities by innovating across customer behavior. It must know how to define the spaces of greatest opportunity that others have yet to imagine.
See itself from the outside in and formulate strategies around people’s behaviors, not just seek to satisfy consumer needs and desires or customer requirements. The company must execute activation plans that engage consumers and seamlessly fit innovations into their behaviors so that they absorb and assimilate them. It must create transformational life experiences, not just communicate features and benefits.

Sounds like he’s been reading John Hagel’s work in the late 90s. Except he focuses on just one of the three types of businesses Hagel describes in “Unbundling the Corporation.”

May 13th, 2007 at 07:02am Christian Sarkar

5 Burning Questions

How Do You Link Innovation Strategy with Execution?
Can You Create an Innovative Culture or Simply the Conditions for It to Emerge?
Can Customers Lead Breakthrough Innovation?
How Do You Leverage Global Talent Pools for Innovation?
Can “Average” Companies be Innovation Leaders?

Answers in October >>

May 13th, 2007 at 04:37am Christian Sarkar

Circuit City: Paying for Stupidity

At the beginning of April StrategyWorld pointed out Circuit City’s foolish strategy to fire experienced employees to cut costs.

Now it’s time to fire the decisionmakers who came up with this bright idea.

According to the Washington Post:

“…the Richmond electronics retailer says it expects to post a first-quarter loss next month, and analysts are blaming the job cuts.

The company, which on Monday also revised its outlook for the first half of its fiscal year ending Feb. 29, 2008, cited poor sales of large flat-panel and projection televisions. Analysts said Circuit City had cast off some of its most experienced and successful people and was losing business to competitors who have better-trained employees.”

Will they never learn?

Perhaps they need to attend our FAST strategy webinar… although I doubt anything can help this kind of blindness.

Speaking of ethics, how about Duke’s cheating scandal?

Listen to this:

A survey released last year by Rutgers University professor Don McCabe showed 56 percent of MBA students acknowledged cheating in 2005. In other fields, 47 percent of graduate students said they cheated.

Note: these were graduate students, not undergrads.

May 2nd, 2007 at 01:01pm Christian Sarkar

John Hagel: FAST Strategy

When I work with senior executives, they express a real conflict: they know strategy is important (strategy, like IT, does matter) but they have a growing sense that traditional approaches to strategy are simply not up to the challenge of coping with increasingly uncertain business environments. What to do?

EDITOR’s NOTE: see our webinar with John Hagel on May 9th: “FAST Strategy: How to Get Results in Disruptive Markets”

My first piece of advice: throw out two basic tenets of business strategy. First, reject the notion that strategy is sequential – that detailed strategic blueprints need to be laid out before a company can proceed with operational implementation. Secondly, abandon the traditional strategy view that the relevant time frame for strategic planning is a five-year horizon.

My second piece of advice: implement a FAST approach to strategy. FAST in this case is an acronym for Focus, Accelerate, Strengthen and Tie it all together. This approach urges executives to move along parallel paths, operating on two very different time horizons: one horizon takes a five to ten year view of the business and the second horizon zooms in to a much more tactical six to twelve month view of the business. The one to five year horizon that is so loved by traditional business strategists actually receives very little attention in the FAST approach.

Focus is the key activity on the five to ten year horizon. This requires senior management to develop a common view on two key questions for their business. Five to ten years from now, what will the markets that we participate in look like? Then, what kind of business we will need to have in order to continue to create value in these markets? Unlike strategic approaches of the past, Focus does not require management to develop a detailed view of the future, but it does require management to develop a clear, high level view specific enough to help the company make important near-term choices.

To illustrate the high level nature of the view of the future, look at Microsoft. Back in the late 1970’s Bill Gates defined a Focus for Microsoft that could be summed up in two sentences. First, computing power is inexorably moving from centralized mainframes to desktop computers. Second, to be successful in the future, a computer company will need to “own” the desktop. Simple and succinct, yet specific enough that it helped Microsoft to answer the unexpected call it got from IBM to help IBM develop an operating system for a new desktop computer it was developing, rather than the twenty other calls it undoubtedly received on that same day. This Focus helped to guide the company for two decades. It only began to need retooling in the late 1990’s as the advent of the Internet set into motion fundamentally new forces.

On the six to twelve month horizon, Accelerate and Strengthen are the key requirements. By Accelerate, I mean identifying a few key operating initiatives that have the potential to significantly accelerate the movement of the company towards the long-term Focus. Once these initiatives are identified and agreed upon by senior management, the question is what can be done to help these initiatives increase their impact over the next six to twelve months? Management needs to set aggressive and measurable operating performance objectives for these initiatives over the next six to twelve months.

On the same time horizon, Strengthen also comes into play. Here, management needs to ask, what are the major organizational obstacles that are preventing us from moving even faster to achieve our operational objectives? Then the question becomes, what can be done over the next six to twelve months to “de-bottleneck” the organization and strengthen our organizational capabilities so that we can move even faster in the next six to twelve month cycle?

Tie it all together integrates these three streams of activities. The key to success with the FAST strategy is to frequently iterate back and forth across these two time horizons and refine efforts on all streams based on the results of efforts to date. The near-term operating initiatives will provide management with much more information regarding both the market place and the capabilities of the company. This should help to refine the longer-term Focus view. In turn, this refined Focus view will be helpful in selecting and shaping the next wave of near-term operating and organizational initiatives. Senior management must actively monitor progress on all three streams and play an active role in shaping initiatives and setting objectives.

The FAST strategy approach respects the need for both near-term performance and longer-term direction, learning and adaptation. It favors incrementalism but recognizes that, without direction, incrementalism will inevitably sub-optimize relative to longer-term opportunities. Properly focused, incrementalism provides significant advantages relative to more tempting “big bang” transformational initiatives:

Provides clear, near-term operational performance metrics to assess progress
Focuses management on delivery of significant near-term operating results consistent with longer-term direction
Enhances ability to fund major strategic thrusts by emphasizing the need for tangible returns early – initiatives potentially become self-funding
Helps to build organizational support for longer-term direction by demonstrating tangible returns quickly while at the same time helping to neutralize opposition
Accelerates organizational learning by providing clear metrics and creating rapid performance feedback loops
Strengthens ability to adapt based on new information gained from near-term operational and organizational initiatives

Few companies today have adopted anything like a FAST strategy approach. You can use five questions to determine whether a company is pursuing this approach:

Does senior management have a common view of what their markets will look like five to ten years from now and what the implications are for the kind of company they will need to develop? Some of the common issues companies confront here are:

Management avoids the issue entirely, claiming that the future is too uncertain
Management aims too low, under-estimating the amount of change that will occur and the size of the opportunities (and challenges) created by this change
Management fails to align around a common view – if interviewed individually, senior executives would offer very different views of the long-term requirements for success

Has this view of the future been adequately communicated throughout the organization? Some of the common issues at this level are:

Management under-invests in communication of the long-term view
Management fails to make this long-term view tangible to the organization by not offering specific examples of how near-term choices will be affected
Management communicates through the ranks rather than directly to the rank and file, leading to divergent and confused views as the message becomes distorted with each level of communication

Is there sufficient focus in the near-term on a few (3-5) high-impact operating initiatives that, over the next six to twelve months, can materially accelerate the company’s movement towards the long-term destination? Common challenges here are:

Management supports too many near-term operational initiatives, in part as “insurance” against uncertainty, with the result that initiatives are under-resourced and rarely achieve the impact anticipated
Near-term operational initiatives are not clearly tied to the long-term destination
Explicit six to twelve month operating performance objectives are not established

Is senior management identifying and addressing major organizational obstacles that prevent even more rapid movement towards the long-term destination? Some of the issues here are:

Organizational changes rarely tied to high impact operating initiatives
Explicit six to twelve month performance objectives are not established – how will management know whether the organizational changes are having the desired impact?

Are there systematic processes to assess near-term operating performance relative to the requirements defined by the longer-term destination? One of the most frequent issues here is:

Operating performance rarely assessed systematically in terms of implications for long-term direction

The FAST strategy approach provides a robust framework for incremental innovation. It offers a useful context for understanding how to create strategic advantage through sustained innovation in business practices enabled by IT capabilities. It also helps us to understand the deep business significance of the emergence of a much more flexible distributed service architecture. This new IT architecture will help businesses to accelerate their near-term operational initiatives even further. In doing so, it will provide a solid foundation for radical incrementalism.

EDITOR’s NOTE: For more on FAST Strategy, see our webinar with John Hagel on May 9th: “FAST Strategy: How to Get Results in Disruptive Markets”

April 28th, 2007 at 12:02am John Hagel

John Hagel: FAST STRATEGY webinar

“What if everything you learned about business strategy is WRONG?”

Why, then it’s time to sign-up for John Hagel’s webinar on FAST Strategy presented by StrategyWorld.org.

In this webinar John reveals why the basic principles of traditional strategy - the principles still taught at most business schools and company executive education programs - are wrong:

· WRONG: Develop a detailed strategy before moving to operational implementation
· WRONG: Focus on a one to five year time horizon to develop robust strategies.
· WRONG: Pursue a portfolio approach to business initiatives to cope with growing uncertainty.
· WRONG: Strategy is a specialized discipline that needs to be pursued by experts.

The alternative? FAST Strategy.

John shows us how some of the most successful companies in the world maintain their advantages, and we can begin to synthesize a new approach to strategy, an approach called FAST strategy.

This approach integrates four elements in an innovative way:

· Focus - building alignment around a long term, five to ten year destination.
· Accelerate - ensuring that the highest impact operational initiatives over the next six to twelve months receive a critical mass of resources
· Strengthen - designing organizational initiatives that can be implemented over a six to twelve month period to address key bottlenecks preventing the firm from moving even more rapidly.
· Tie it together - effectively integrating the first three elements in ways that speed up learning and enhance performance.

Here’s our pitch:

Some of the world’s most successful companies use John Hagel’s thinking to guide them as they navigate the turbulent waters of business competition. Don’t you think you owe it to yourself and your company to find out how they do it? For the price of a plane ticket, you can. And you don’t have to leave the comfort of your office. Mark your calendar, hold your calls, and join our webinar.

PS- space is limited, so please sign up and reserve your seat.

April 22nd, 2007 at 03:44pm Christian Sarkar

Susan Webber: Management’s Great Obsession

Corporate America is obsessed with numbers.

Analyst meetings focus on earnings expectations, revenue growth and margins rather than business fundamentals. PowerPoint presentations look naked if they lack charts and graphs to buttress their message. Lofty corporate mission statements are often trumped by pressure to “hit the targets.” Job applicants are advised to stress tangible achievements, and above all, to quantify them. And the ultimate sign of a trend past its sell-by date: a January 2006 Business Week cover story, “Math Will Rock Your World”.

This love affair with figures increasingly looks like an addiction. Numbers serve to analyze, justify, and communicate. But numbers are abstractions. When they begin to assume a reality of their own, independent of the reality they are meant to represent, it is time to take warning, as some are. When McKinsey surveyed over 1000 directors of public companies in 2005, the majority made it clear they wanted to hear less about financial results and more about things not so readily quantified, like strategy, risks, leadership development, organizational issues, and markets.

We believe it is time for business managers to recognize the limitations of metrics. Mind you, we are not saying that metrics and measurement are bad things. A well structured performance measurement system is essential to the well being of large enterprises.

Nevertheless, quantitative measures can be and frequently are used naively. It is all too easy to abdicate judgment to the output of a model or scorecard. And even when measurements are recognized to be incomplete, the reflex is often to make the model more elaborate, when other approaches would yield more insight.

Metrics presuppose that situations are orderly, predictable, and rational. When that tenet collides with realities that are chaotic, non-linear, and subject to the force of personalities, that faith – the belief in the sanctity of numbers –often trumps seemingly irrefutable facts.

In an ideal world, we’d be able to offer a roadmap for the proper use of metrics –what should be measured and when, what are the best ways to measure, how should they be interpreted? But it isn’t simply space constraints that get in the way of this objective. Whether quantitative measures are beneficial or not depends less on the measurement themselves and more on how they are integrated into decision processes. Quick and dirty calculations can be helpful if users understand their limitations, and very precise models can be dangerous if given undue credence.

We’d like to give a broad overview of the problem, with the hope of making you better able to recognize when your metrics might be giving an incomplete or misleading picture, and offer some remedies.

Why We Love Numbers
Math-based techniques have led to important advances in business. Indeed, modern commerce would be impossible without them. But history demonstrates that a good thing can be taken to excess.

Frederick Taylor, whose 1911 “Principles of Scientific Management” inaugurated time and motion studies and job descriptions, accelerated the development of large scale manufacturing enterprises. Henry Ford not only created process engineering, and with it, the assembly line out of his search for efficiency, but his drive to achieve mass production and economies of scale in turn fostered administrative innovations like logistics planning, standard operating procedures, and functional administration design.

But Taylorism also unwittingly devalued workers, in effect treating them as machines. Some scholars believe that this dehumanization of the workplace strengthened and radicalized the union movement, a development that plagued industry for the next fifty years. Similarly, some companies took the Fordist pursuit of scale economies to the point where they lost strategic flexibility. Coca Cola, for example, built up a sizeable inventory of its distinctive 6 oz bottles in the 1930s, and was unable to respond when a struggling, twice bankrupt Pepsi was able to sell a 12 oz drink for a nickel by using recycled beer bottles.

Other techniques we simply applied too broadly. For example, during the heyday of econometrics in the 1970s, most large companies had an in-house econometrist and had a penchant for modeling problems, when simple back of the envelope calculations would often suffice.

We have a cultural bias in favor of science and mathematics. We see numbers as “hard” outputs: objective, reliable, repeatable, verifiable. But most management data are not as firm as, say, your company’s stock price at the close of trading. Even if we understand those limitations intellectually, we somehow lose that perspective when we wrestle with figures.

In fact, we have not only a romanticized view of management information but also of science itself. We attribute to science a rigor and degree of accuracy that would give scientists pause, and this cognitive bias has been repeatedly discusses in scientific literature. For example, in 1961, Michael Scriven called “inaccuracy” the key attribute of physical laws because, “its almost universal presence is a kind of unadmitted shocking fact like the Emperor’s nakedness and needs to be pointed out if we are to get a true picture of the role of laws.” Mind you, this article refers to fields we regard as scientifically mature, such as Newtonian physics. His arguments have been taken further in Professor Nancy Cartwright’s “How the Laws of Physics Lie”.

Matters that laymen would think are well settled, like what constitutes the nature of proof, are open questions. In addition, statistical inferences, which are the type of analysis commonly used in business, are not conclusive. First, even under the best of circumstances, measurements are not perfectly accurate. Second, the sample chosen for study may not truly represent the population as a whole. Third, correlation is not causation: there may be other factors at work, and the ones we have focused on may be secondary or even incidental (recall how ulcers were once believed to be caused by diet and stress?)

Since scientific findings are less solid than many of us would like to believe, it is prudent to regard management “findings” with a healthy dose of skepticism.

Common Mistakes
Since metrics provide a window for viewing our world, how can we recognize when the glass is clouded?

While this list is illustrative rather than exhaustive, watch for:

Focusing on numbers rather than behaviors. In the management information game, “how much” is easy to capture, when “how” can be more illuminating. Too often, companies unwittingly mimic the drunk looking for his lost keys under the streetlight, because that is where he can see well, rather than where he lost them.

Take R&D spending. It is an article of faith that companies should increase their R&D budgets if they want more new products. Yet a 2006 survey by Booz Allen of the top 1000 corporations, measured by their R&D spending, found “no discernible statistical relationship between R&D spending levels and nearly all measures of business success, including sales growth, gross profit, operating margin, enterprise profit, market capitalization, or total shareholder return.” Michael Schrage, a researcher at MIT and an expert on innovation and modeling, argues in a recent Financial Times article that R&D spending is similarly unrelated to innovation. He cites examples such as Reckitt Benckiser, the Anglo-Dutch cleaning products company, and Illinois Tool Works, both of which spend only 1% of sales on R&D (versus a US average of 4.5% and a European figure of 3.3%) when each is considered a highly innovative organization. Schrage also cites Apple Computer, whose R&D spending of 5.9% of revenues, considerably lags the industry norm of 7.6%. Conversely, GM has spend more on R&D over the last 25 years than any company on the earth, and its flirtation with bankruptcy shows how little this outlay has produced.

Framing the problem incorrectly. Sometimes mistakes are glaringly obvious, once they are pointed out. A financial services company regularly surveyed its network partners on their customer satisfaction, measured by ratings on various attributes of the service, and then would try to improve the low scores. However, no one had bothered to ascertain which aspects of service were important to these partners. As a result, considerable effort had been spent improving low ratings that didn’t bother the partners.

Or, since businessmen often compare competitive struggles to combat, consider a military example, the Vietnam War. Two key measures used to measure progress were the “body count”, meaning enemy deaths, and “hamlets under GVN (government of Viet Nam) control”.

The US saw the problem in conventional warfare terms, of gaining territory and thinning the enemy’s ranks. But this viewpoint turned out to be woefully misguided.

First, the body count totals were often exaggerated, sometimes by a considerable margin. Second, we didn’t know who we were killing. Were they really VC, or local sympathizers, or just civilians caught in the crossfire? The more we killed non-combatants, the more we alienated the population and facilitated VC recruitment. Third, and probably most important, we entirely misunderstood the nature of the war. The North Vietnamese saw it as a war of liberation, to eject yet another colonial power. The Vietnamese will had been hugely underestimated, and indicators of it were ignored. For instance, Rand experts who dealt with prisoner interrogation material from World War II, Korea, and Eastern Europe, had never seen interviews like the ones of VC, and concluded that unlike other opponents, they could not be coerced.

Thus, the body counts were relevant only to measure the progress towards exterminating the entire population.

If possible, the “hamlets under control” stats were even more dubious, These figures were reported by the GVN, which obviously wanted to maintain US sponsorship. Yet the US government took these reports at face value, ignoring objections of experienced US operatives.

These measures allowed the command structure to assert that the North Vietnamese effort was on the verge of collapse, until the Tet Offensive of 1968 dramatically demonstrated otherwise, shattering the belief that the US could win the war.

Overlooking perverse incentives and feedback loops. In 1975, Steven Kerr, former president of the Academy of Management, and most recently the Chief Learning Officer of Goldman Sachs, wrote the classic, “On the Folly of Rewarding A, While Hoping for B”. The article describes a range of “fouled up” incentive systems in athletics, academia, medicine, the military, and business.

Kerr lists the causes of these misguided incentives, two of which are particularly germane. The first is “fascination with an ‘objective’ criterion”. While managers like simple, quantifiable standards, they tend to work only in areas where the activities are highly predictable, and break down elsewhere. Second is “overemphasis on highly visible behaviors”, which tends to encourage individual action at the expense of activities like creativity and team building, which are hard to observe.

For instance, there has been a great deal of tooth-gnashing about the corporate fixation with quarterly earnings targets, which are objective, to the detriment of long-term competitiveness, which is harder to assess.

A 2005 McKinsey article, “Building the Healthy Corporation”, describes how some companies have responded by developing scorecards for “performance and health”. It recommends general measures in five areas, with particular emphasis on metrics.

Although the article sets forth a coherent, wide ranging program, it nevertheless runs the risk of being inadequate to the task. In simple terms, a problem that may have started with metrics is not necessarily solvable through metrics, or even metrics plus exhortation.

The article gives CEOs the hope that if they retool their systems and encourage siloized managers to play together, they can redirect their managers’ actions. And normally, that would be a good assumption. But in this case, the “health” program has two major hurdles to overcome. First, most of the health measures will be seen as soft, even if they are quantified (what does it mean to raise customer satisfaction from 3.2 to 3.5? What is that worth?), and as we discussed earlier, “soft” measures are generally taken less seriously than “hard” ones, like costs. Second, placating Wall Street has become an overarching objective in corporate America, reinforced daily in the business press. Even thought the article advocates educating analysts to the payoff to be gained by paying attention to these metrics, that sort of persuasion is an uphill battle. Similarly, the McKinsey piece also recommends cultivating new investors, ones more long-term oriented. Short of going private, it is hard to see how to put that into effect.

No middle level manager is going to do things differently unless he gets an unambiguous signal from the top, like Costco’s rejection of analyst calls to extract more short-term profit. Until top management demonstrates that it will not slavishly bow to the dictates of the financial community, its efforts to persuade the ranks otherwise are likely to fail.

Another danger is feedback loops. Measurement systems are often self-referential, and participants can, sometimes innocently, game the system. The seeming unending rise of CEO pay shows how this process operates.

You know the drill: a compensation survey determines what “comparable” CEOs earn, and then the CEO’s package is set in reference to this universe. But several perverse factors are at work. First, just as the children at Lake Woebegone are all above average, so too are boards reluctant to have their CEO paid in the bottom quartile or half. So there is a mechanism in place, that has clearly been operating quite effectively, to keep moving the averages upward, despite the fact that the evidence is weak to non-existent of any correlation between CEO pay and performance.

Why does this persist? One culprit is the social dynamic among the directors and the compensation consultants. But a contributing factor is that CEO pay is “market” pay, and “market” data is seen as objective, even virtuous. But this notion quickly breaks down. In a real market, such a price rise would fuel a search for substitutes, which in this case would be dark horse candidates, like business unit managers that might have delivered great performance but be wanting in polish (Liz Claiborne’s CEO Paul Charron, who had neither CEO nor apparel experience before he took the helm is the exception that proves the rule) . Similarly, few boards are willing to consider whether their CEO could really get a similar package anywhere else.

Misreading the data. Even when you have the right metrics, you may not interpret them correctly. And since this happens to the best and the brightest, it can certainly happen to you.

You may recall that LTCM debacle in 1998: a high-flying bond trading firm with the best analytical talent in the industry, including two Nobel laureates, had to be bailed out by a consortium of banks to prevent wide-scale disruption of the financial markets. Although there are different views of why the firm collapsed (the big reason is that it began to trade in markets in which it had limited experience), some argue that it was a “perfect storm” that perhaps no one could have anticipated. A more jaundiced and persuasive view is that their models assumed a normal distribution of events (a bell curve), when in fact markets often exhibit both an asymmetrical distribution and “fat tails” (meaning events “far” from the mean in a statistical sense have a greater likelihood of happening than assumed by a normal distribution). Given the huge bets they were taking in unfamiliar waters, it would have seemed a reasonable precaution to have stress tested their models using other distributions of events.

A 2006 article by Malcolm Gladwell discusses how various organizational and social issues have remained unsolved because the remedies assumed a normal distribution, when in fact the problem had a “power law” distribution (think of it as 80/20 on steroids). For example, the LAPD studied complaints of the use of excessive force. They had expected to see the complaints broadly distributed across the entire force, which would suggest that more training and better procedures were the answer. Much to its surprise, it found instead that the complaints were concentrated among a very few officers. The solution was to fire them, or at the very least, get them off the street.

Another factor is cognitive bias. The field of behavioral finance has analyzed the many ways that people fail to deal rationally with numbers. One phenomenon is anchoring. Individuals’ estimates are influenced by random suggestion. In one famous experiment, a roulette wheel generated an illustrative, and clearly arbitrary, value when participants were asked to estimate the percentage of countries in the United Nations that are in Africa. High numbers on the wheel elicited considerably higher guesses.

Or consider a more relevant illustration: acquisitions. Inevitably, the discussion of the pending deal revolves around the projections. The financial model assumes a reality of its own. Anything that isn’t incorporated in the model is implicitly assumed away.

Buyers continue to use this approach despite evidence that it produces bad outcomes. Depending on which study you choose, every analysis of mergers says that most fail (typical estimates are in the 60 to 75% range), and the buyer overpaying is the most frequent cause. Yet the “anchor” of the forecasts is powerful, and woefully difficult to dislodge.

Some Suggestions
The most important change a senior executive can make is a shift in mindset, to regard figures as a useful input rather than gospel. It helps to recognize when these quantitative measures are most valid (e.g., when applied to discrete processes that can be measured objectively, such as transaction processing) and when they are more tenuous. To reinforce a healthy skepticism:

Perform retrospective reviews. While post mortems are standard practice in sport and in medicine, they are virtually non-existent in business. A noteworthy exception: a major financial institution is analyzing the results of its bonus and promotion process to see if they in fact reward the behaviors that senor management believes they are rewarding.

Most companies would learn a great deal if, for instance, they looked at all their capital investment decisions from, say, 1999 to 2002 (both the projects approved and the ones turned down) to see which decisions were good, which were not so astute, and what if anything could have been done to improve the decision process.

Question the logic. Too often, managers are reluctant to ask how certain analyses were derived for fear of appearing ignorant. Yet it is important to inquire, particularly for one-off studies, what analytic methods were used, and what assumptions were implicit in the use of that methodology. For example, a regression analysis assumes a linear relationship between the variables. What if the relationship is actually a step function? Trying to fit a regression to the data would produce misleading results. Similarly, “real options” have become popular as a way of valuing investment opportunities. But option valuation is a tricky business. According to Black-Scholes, some variables, such as the length of the option and the implied volatility, have a significant impact on the option price. It is critical to understand the rationale for the use of the chosen values and run sensitivity analyses around those assumptions.

If you don’t’ have the appetite for this line of inquiry, engage someone with strong advanced math skills, such as a doctoral candidate in applied mathematics, to serve as a house skeptic.

Probe the data. As noted before, all data are not created equal. Generally speaking, the most reliable are ones of physical activity. Financial and accounting data are less solid, and metrics on consumer behavior are even more tricky. It is notoriously difficult to ascertain whether and why consumers will buy a product, since their responses are very much influenced by the test environment. Anyone who has done survey research, for example, will confirm that results can be skewed significantly by how the question is phrased. Similarly, researchers have found that when consumers are given a taste test and asked to rate, say, which salsa they like best, their answers are completely different if they are asked to rate the various attributes (spiciness, texture, etc.) and then say which they prefer. In a bizarre analogy to the Heisenberg uncertainty principle, the act of making the consumer explain why he likes a product shifts his choice.

And probably the most slippery data of all is personnel assessments, where most large companies force subjective, and despite their efforts, not very comparable information into tidy grids and rankings. (Doubters should read Patrick D. Larkey’s, and Jonathan P. Caulkiins’ 1992 paper, “All Above Average, and Other Unintended Consequences of Performance Appraisal Systems”, a provocative and well documented indictment).

The remedy, particularly for important decisions, is to understand the factual underpinnings and be willing to invest in additional research. For example, New Coke was considered a shoe in because it scored so well on sip tests compared to other colas. But consumers don’t buy soda in sips, they buy entire cans, and sip tests favor sweeter drinks. New Coke bombed because many target customers found it to be cloying. Had Coca Cola used multiple approaches to vet New Coke’s consumer appeal, they may well have surfaced its shortcomings.

Be alert to new information. A persistent mistake is attachment to an old perception of a situation (another manifestation of anchoring). Although it is fashionable to blame lumbering corporate reporting systems that filter out bad news, this tendency to dismiss new data is a well documented individual behavior. Recall Thomas Kuhn’s The Structure of Scientific Revolutions: scientists who grew up with an old paradigm simply could not accept a new model. A whole generation had to die out before a new theory, no matter how well proven, became widely accepted.

How can you overcome this cognitive inertia? By demonstrating keen interest in new developments, and fostering that attitude in others. The tried and true approach of talking directly to customers is invaluable. It also helps to ask front line staff often about trends and developments they see, and encourage them to pass them along. You will get a lot of noise along with some choice nuggets, but in this case, the discipline of cultivating awareness and mental flexibility is as important as any bits of intelligence you glean.

Consult your gut. A recent study published in the journal Science found that for complex decisions (defined in this study as involving 12 variables, versus 4 for the “simple” decision) unconscious decision processes yielded much better results than trying to reason it out. Our rational mind can comprehend a limited amount of data, while our unconscious processes, honed over thousands of years of evolution, are better at dealing with complicated situations. In these cases, studying the data and sleeping on it produces demonstrable better choices.

* * *

An overreliance on metrics can lead to “knowing the price of everything and the value of nothing.” Take heed: that is how Oscar Wilde defined a cynic, and cynicism is not viewed favorably in most organizations.

Yet American corporations have for some time been engaged in what can well be described as cynical behavior: taking aggressive accounting measures, engaging in short-term expediencies to improve results, too often displaying little concern for the impact of their actions on employees and communities. Now it is no doubt a stretch to blame these actions on the use of numbers. But the two do seem to go hand in hand.

Management is the art of making decisions in the face of uncertainty. Statistics and analysis can help us understand the nature of that uncertainty and dimension the risks we are taking. But they can also provide false comfort and engender undue confidence. Perhaps the biggest obstacle to giving up the metrics habit is that it will require executives to acknowledge their limitations.

April 21st, 2007 at 04:55am Susan Webber

Lee Iacocca on Leadership

Lee Iacocca, former Republican?

That’s the verdict if you read the excerpt from his new book on leadership:
Where Have All the Leaders Gone?

Iacocca’s book describes the “Nine Cs of Leadership”:

- Curiosity
- Creativity
- Communication
- Character
- Courage
- Conviction
- Charisma
- Competence
- Common Sense

Wait, there’s more: the ability to deal with a Crisis

Maybe Iacocca ought to go buy Chrysler.

The book is written in his unmistakable voice:

Am I the only guy in this country who’s fed up with what’s happening? Where the hell is our outrage? We should be screaming bloody murder. We’ve got a gang of clueless bozos steering our ship of state right over a cliff, we’ve got corporate gangsters stealing us blind, and we can’t even clean up after a hurricane much less build a hybrid car. But instead of getting mad, everyone sits around and nods their heads when the politicians say, “Stay the course.”

He’s right. Much more here >>

April 14th, 2007 at 06:18pm Christian Sarkar

Dumbing Down: A Strategy for Circuit City?

Here’s an interesting article from Knowledge@Wharton:

Short-Circuited: Cutting Jobs as Corporate Strategy

Apparently, Circuit City announced on March 28 that it cut 3,400 jobs, or 7% of its workforce, effective that day, because the salespeople were paid “well above the market-based salary range for their role.”

The folks at Wharton are not impressed:

“That’s the most cynical thing I’ve heard about in a long time,” says Peter Cappelli, management professor and director of the Center for Human Resources at Wharton. “I like to think I’m cynical, but sometimes it’s hard to keep up.”

Another risk is that a downsizing company can get rid of people whose knowledge and experience are vital. Wharton management professor Daniel A. Levinthal points out that Circuit City’s decision to cut 3,400 veteran sales people “sounds like a massive de-skilling” of the company. Since the people who will be hired to replace the laid-off workers probably will not know the merchandise as well as the workers who were dismissed, customers who want to know how to set up a high-definition TV or why one music player is better than another might not receive the best advice.

If this is the case, Circuit City might have a hard time differentiating itself from its competitors. “These new people will be order takers and have less knowledge [about the merchandise],” says Levinthal. “Circuit City would now be competing against e-commerce because it’s become similar to e-commerce and lost its differentiation as a bricks and mortar store.”

Say goodbye to Circuit City. They are stuck between Wal-Mart and Amazon.com, and this latest move will accelerate their demise.

At the core, this is a failure of imagination. But it may also represent the end of a whole slew of similar companies, in the retail industry (and not necessarily just in high tech).

So what might they have done? Suggestions?

Perhaps they should check to see if their leadership is paid “well above the market-based salary range for their role.”

1 comment April 5th, 2007 at 04:11am Christian Sarkar

The Competitive Advantage Assessment: Can Your Company Compete?

In 4 Sources of Advantage, authors Peter S. Cohan and Barry Unger tell us that technology leaders create success cycles by the way they perform four critical business processes – which they call “the four sources of advantage.”

The four processes are:

- Entrepreneurial leadership
- Open technology
- Boundaryless product development
- Disciplined resource allocation

So where does your company stand? If you’re seeking to accelerate your company’s, take this self-assessment and find out: [hint - A is good, B is bad]

Entrepreneurial leadership

1. Hiring
A. Hires engineers with strong technical skills and keen business sense; or
B. Hires engineers with strong technical skills and limited business sense.

2. Self-driven research
A. Gives engineers, say 10 per cent to 20 percent, of their time to work on projects they choose; or
B. Requires engineers to work exclusively on manager-directed projects.

3. Publishing
A. Allows engineers to publish current research in peer reviewed publications after appropriate patent disclosures have been made; or
B. Requires engineers to keep their research company confidential.

4. Peer recognition
A. Holds annual celebrations for engineers who develop innovative products; or
B. “Rewards” engineers who innovate by letting them keep their jobs.

5. Culture
A. Uses culture and supporting measurement and reward systems to emphasise how society benefits from its products; or
B. Uses culture and supporting measurement and reward systems to focus on enhancing shareholder value.

Open technology

6. Speed to market
A. Acquires companies or licenses technology to obtain rapid access to products its customers want to buy; or
B. Uses only internally developed technology to develop new products.

7. Customer perspective
A. Builds technologies that create customer value; or
B. Builds technologies that satisfy executive requirements.

Boundaryless product development

8. Cross-functional teams
A. Uses cross-functional teams of, say, engineering, manufacturing, sales, marketing, finance, and early
adopter customers, to design new products; or
B. Uses its engineering department to design new products.

9. Prototypes
A. Uses cross-functional team input to build new product prototypes; or
B. Manufactures product based solely on engineering blueprints.

10. Fast feedback
A. Redesigns prototypes using feedback from early adopter customers, manufacturing, and other functions; or
B. Redesigns products only after they’re out in the market.

Disciplined resource allocation

11. Timing discipline
A. Creates strong incentives to meet project milestones; or
B. Lets product development deadlines slide.

12. Expected value discipline
A. Validates development projects’ expected value (EV) via continuously updated market research and kills them if their EV goes negative; or
B. Once their budget has been set, sticks with development projects.

13. Learning discipline
A. Allocates resources and shares learning through control systems that measure competitive performance; or
B. Rewards those who tell the CEO what the CEO wants to hear and fires those who contradict the CEO.

14. Renewal discipline
A. Develops a deep bench of management talent; or
B. Dismisses ambitious managers to protect the CEO.

March 5th, 2007 at 03:34pm Christian Sarkar

The Quick Fix Postal Solution: Fix Long Waits by Removing Clocks

The US Postal Service has taken customer service to the next level of incompetence.

Instead of fixing the problem - the long wait in line - it has decided to work on perception instead: 37,000 post offices across the country have removed their wall clocks from retail areas.

This as part of a “retail standardization program” launched last year.

A spokesman for the U.S. Postal Service says: “We want people to focus on postal service and not the clock.”

The USPS seems to have lost track of what it means to build a positive customer experience.

USPS Customers know that the USPS is not as fast as FedEx, for example, and they don’t expect to be. They’re not using the USPS for efficiency but for cost.

So what’s the big deal? My research tells me that the clock is a fundamental part of the checkout experience - whether you’re in a grocery store or the post office. And not having a clock actually makes the perception of service quality go down, not up.

Says service guru Leonard Berry, “It’s silly, I guess they think people don’t have watches.”

March 5th, 2007 at 02:53pm Christian Sarkar

David Maister: Are We In This Together? The Preconditions For Strategy

Managers build their plans and strategies on the assumption that people in their firm are ready and willing to be team players, acting collectively to create or achieve something in the future.

The truth, however, is that these attitudes cannot be assumed to exist. In fact, they may even be relatively scarce. In many firms — perhaps even most — these preconditions for strategy may not exist.

It is hard to identify and create buy-in for what “we” (i.e., the firm) should do if there is no strong sense of “we” — a mutual commitment and sense of group loyalty and cohesiveness. Similarly, it can be meaningless if the members of the firm are not committed to go on a journey together into the future.

This was brought home to me when I was facilitating a strategy discussion in an industry that has a long tradition of hiring, celebrating and rewarding stars — individualistic, solo operators. As we discussed the investments and initiatives necessary to pull off the strategy identified by management, one of the ‘players’ in the room asked: “Why would I want to do this. What’s in it for me?”

It must be immediately recognized that having this thought is normal. The industry I was working with is only unusual in the (refreshing?) willingness of people in this business to actually say things like this out loud.

In other industries and professions, they just think it all the time, without actually saying it!

As we worked through the issues, it became increasingly clear that there were major differences among the people in the room, the key players in the company, whose participation and collaboration would be essential to pull off ANY strategy.

The issue was not the specifics of the proposed strategy. What came through clearly was that no commitment to each other — or to their joint future — existed.

The differences among them were based on what seemed to be some inherent personality characteristics, or at least some strongly-held preferences, on two key dimensions — their desire to be engaged in a joint, mutually-dependent enterprise (collaboration) and the time frame they wanted to apply to their decision-making (future-orientation).

On the first dimension, there were people who actively wanted to be part of a team, with joint accountabilities, responsibilities, and rewards. They wanted to be part of something.

However, not everyone in the room fit this category. Many others freely admitted that they were most comfortable (and would seek out) situations where they could be independent — judged on their own individual merits and accomplishments, without being tied to the performance of others.

The second dimension we explored was time-frame. Some people had an appetite for high-investment, future-oriented strategies. They were willing to defer (if necessary) some immediate gratification in order to invest — to get the chance to reap higher rewards in the future. Others are reluctant to invest, even in their own future. They prefer to focus on “winning today,” letting tomorrow take care of itself.

Combining these two dimensions led to the identification of four kinds of preferences that individuals (and companies) have.

Type 1 is the solo operator who values independence, wants to make little investment in the future, but is willing to bet on his (or her) ability to catch fresh meat each and every day. I call this the Mountain Lion approach. “Pay me for what I do today (or this year.)”
Type 2 is the individual who prefers to act in coordination with others, but doesn’t like to invest (or defer gratification) too much. I call these people (collectively) the Wolf-Pack. “If we act together we can kill bigger animals, but it had better pay off soon or I’m joining another Pack!”

Types 1 and 2 may be unwilling to invest or “bet on the future” for a variety of reasons, including risk aversion.

Type 3 is the individual who wants to be independent, but is interested in building for the future by investing time and resources to get somewhere new. Such people remind me of Beavers building dams to provide a home for their (own) family.
Type 4 are individuals who want to be part of something bigger than they can accomplish alone, and have the patience, the ambition and the will to help the collective organization invest in that future.

I call this group “The Human Race” since one of the rare things about Homo Sapiens that differentiates it (at least in scale) from other species is its ability to act collectively to build and develop. (It’s called civilization.)

Note, however, that Type 4 could also be a description of an Ant Community or Beehive, where individuals slave for the benefit of the community, suppressing and subsuming their own identity within the whole. (This interpretation is most likely to be applied, naturally, by those who do not place themselves in this category.)

	Capture Rewards for Short-Term Performance	Build For the Future
Interdependent Team Players	Wolf Pack	Humans (or Ant Farm)
Independent Solos	Mountain Lions	Beavers

I don’t have a precise metric to measure the differing orientations described here, but I have found two proxy questions to be useful.

On the issue of independence versus team-play, I ask people whether, in general, they would prefer rewards in their organization to be based (compared to the current arrangements) a little more on individual performance or a little more on joint rewards for joint performance.

I then ask whether, compared to the current arrangements, people would like their firm to invest more in its future, even if this meant they would have to accept less current income in the form of salaries and current bonuses.

These two (imprecise) questions tend to cause people to reflect on their true preferences. The underlying issue is not really about pay schemes, but phrasing the questions this way tends to crystallize the issues for many people.

In exploring these orientations, I frequently use secret voting machines which allow people to express their views while remaining anonymous.

I ask people in the group which of these four preferences best described their own, personal desired way of behaving. (At this point you may wish to pause and guess what percent of all your colleagues would place themselves, by preference, in each category.)

In this particular company where I first explored the model, all four groups were well represented, although only 10 to 20 percent put themselves in the “I want to be part of something bigger than me that is working to build for the future.”

Thirty to forty percent put themselves in the “solo-short-term” (Mountain Lion) category, with approximately twenty to thirty percent each of the “team-play short term” (Wolf Pack) and “solo builder” (Beaver) categories.

I don’t know if the fact that only 10 to 20 percent of key players wanting to be “team-play builders” strikes you as low, or matches your experience, but it leads to an interesting question: what do you think the chances are of melding people that describe themselves that way into an institution that has a differentiated reputation?

My own conclusion, then and now, is clear. An organization that had these proportions might succeed through individual, entrepreneurial activities, but it would be quite literally incapable of having a company strategy. For example, no common reputation or differentiation could be achieved in the competition either for clients or talent. Firm leaders that tried to develop and implement company strategies would be wasting their time.

In applying this model and conducting these votes numerous times in other firms, it has been revealing how much diversity is exposed among people who had previously thought of themselves of members of, and loyal to, their firm.

They may indeed, be loyal, but their desires and preferences differ so much on the key dimensions that, in many cases, no strategy can accommodate the diversity of preferences among the members of the group.

The mixture of preferences may place very severe limits on what an organization can achieve. While there may be some logic and merit in like-minded people banding together, (whether they be Mountain Lions, Wolves, Beavers or Humans) an organization made up of an unmanaged mix of such types is unlikely to function well.

If a majority of the key people really DON’T want to act collectively in building for the future, it is meaningless to develop plans as if they did.

In spite of this, very few people or organizations have frank and open discussions about this kind of thing. The preconditions for strategy are rarely surfaced and examined, possibly because the implications of discovering a disparity of preferences can be very scary and disruptive.

It is important to note that it is not required that a majority choose the “team-play building” preference.

A group of people who all identify themselves as preferring to operate as “independent short-term” players can succeed in many businesses. (See for example, the discussion of “Hunters and Farmers” in my 1993 book Managing the Professional Service Firm.) Many businesses can be, and are, constructed around “star players” rewarded for their short-term results.

Similarly, a Wolf Pack can achieve something that is called “strategy” and can align its recruiting, systems, rewards around a strategy of collaborative short-term actions, if that’s what everyone wants.

However, without a majority of key players committed to collaboration and investment in the future, it is unlikely that most of what is usually considered to be firm-level strategy can really be accomplished. Before discussing their plans, firms need to uncover whether their people really want to go on a journey — any journey — together.

Dealing with Diversity

If you were to conduct this poll in your organization (asking people either to place themselves in one of the four categories, or to estimate what percentage of their colleagues they would place in each group), what choices would you have if you found that you had a broad diversity of preferences?

I can think of the following (theoretical) options.

Option One: Try to Accommodate Differences

Is it possible to find different roles for people, so that individualists and short-term players can be accommodated by playing specific roles in the organization without compromising the commitment and determination of the majority?

This would clearly be very desirable if it were to prove practical. It would require the least disruption to the status quo.

Manufacturing corporations have different activities (such as sales, production, or finance) which may require different attributes, so the question arises as to whether other organizations, such as professional service firms, can also accommodate different orientations?

I believe that this may be possible, but not by allowing people of different orientations to play the same role in the organization. There may be differences between the desirable characteristics of those in sales and those in production, but I doubt that much variety can be acceptable within one of these groups.

If one sales person (or team) is taking a collaborative, building approach, is it acceptable for another to act in an independent, short-term fashion? If the answer is yes, it would be hard to see what is meant by saying the organization has a strategy!

The only way I’ve really seen “biodiversity” work in the real world is if different species are kept away from each other and do not compete for the same resources.

That means the wolf-pack is a completely separate department (preferably in a separate building) than the mountain lions who have their own “deal” (privileges, responsibilities, metrics). It is necessary to keep one group away from the others if they are to co-exist!

On my blog Passion, People & Principles, Brit Stickney wondered whether short-term individualists can be convinced to join the group effort. He asked:

How can we articulate to our colleagues that the team approach is in their individual best interest?

Even, or especially, if only, 10 to 20% of individuals want to be part of “something bigger” to build for the future, it is critical to be able to articulate to each team member why their role within the will help them individually. It may be possible to be persuasive that by relying on and working with others, they will be able to achieve their personal goals.

Personally, I’m not sure I share Brit’s hope in this area. Is it really possible to get short-term individualists to “do the right thing” for the company’s long-term bests interests either through persuasion, systems, or setting individual goals that further corporate goals?

I am increasingly skeptical that this traditional “managerial systems” approach can be made to work.

In my experience, the whole thing falls apart when we try to mush them all together and pretend that everyone is measured and rewarded on the same things, that everyone has the same performance standards and everyone plays the same role.

Ultimately, the hope that (too much) biodiversity can be accommodated may be impossible to achieve. I doubt that you can have a random, equal mixture of all types and make it work well.

Option Two: Work To Change People’s Orientation

The second choice for dealing with biodiversity is to try and affect people’s orientations. One way that MAY be possible to accomplish this is to craft a sufficiently compelling vision for the future, so that even those who do not start off with an initial preference for team play or investment are willing to “sign on.”

The potential success of this option will turn on one critical question. Are people’s orientations relatively fixed, based on underlying personalities and preferences? Or can they either change with time, or be made dependent upon specific circumstances?

The answer is important. If people’s orientation toward teamwork and time-horizon is context-specific (i.e., dependent upon the particular team and strategies being proposed), then there is hope that some process of building commitment to a strategy can successfully forge collective action even from those initially unwilling.

However, if there is a relatively sizable fixed component in people’s attitudes, then no strategic planning process can be successful. The choices will either be to abandon strategy, or to separate from those who do not wish to enter upon the journey together.

My own hypothesis is that the fixed component in many people’s personalities is relatively high. People really do differ as to how they want to live their lives. Solo operators rarely develop a preference for team play, and people who want immediate gratification rarely develop the patience to sacrifice even a portion of today for an uncertain future — especially if they have to make that investment in conjunction with (and be dependent on) others.

In this view, it is not the clarity or the glamor of the vision that affects people’s lack of buy-in to collective, future-oriented strategy, but their willingness to participate in strategy at all.

Another hypothesis that emerges from this is that it will be hard, if not impossible, to reconcile differences through pay schemes: it will be hard to change working behaviors based on deep personal preferences through the clever construction of incentive schemes.

If this is correct, people who do not match the basic orientation of the company should either be in or be out of your organization depending upon what it wants to accomplish. Companies, according to this point of view, must achieve a consistent philosophy by being careful about the kind of people they bring into their organization.

This alternative was phrased well by Brit Stickney:

First we must define what our “Super Bowl” is — what we wish to accomplish. Second, we should define what wins and losses are. And finally we should find the players that can help us (and want to) win games and reach the Super Bowl.

I think this way of framing the challenge is closer to the real problem that organizations face. But notice, Brit’s proposition suggests that organizations must “find the players that can help us (and want to) win games and reach the Super Bowl.” This suggests a degree of selectivity that many organizations fail to reach.

It is not easy, but it can be done. It is very encouraging, I have found, to discover how many people will, in fact, choose to accept a well-articulated philosophy, even if it is not the ideal one they might have chosen for themselves.

In spite of what I have argued above, the relatively “fixed” component of people’s collaborative and future-orientation is not COMPLETELY determinative.

If the firm is prepared to bring the issues of collaboration and future-orientation to the surface, and (through some open process) ask participants to commit themselves explicitly to a joint, building future, then significant degrees of buy-in can be obtained.

Options Three and Four: Split Up or Cover Up

The consensus-building approach does not always work. As Antoine Henry de Frahan asked on my blog:

How would you manage a situation when the firm has been in existence for a long time and is finding it impossible to define a coherent strategy because there is no consensus on the partnership model in the first place? I see two options: business as usual (which actually means inertia) or split. Is there any third way?

If people truly differ in their orientations and objectives, it may become necessary to ask those who are not prepared to commit collaboratively to the joint venture to separate from the organization.

This is the strategy advocated by Jim Collins in his book Good to Great, where he asserts that one of the primary keys to success is “getting the right people on and off the bus,” a conclusion that I share.

This sounds tough, brutal, scary and risky, and it is all of those things. Notice, the argument is NOT that doing this is unconditionally necessary. Rather, the argument is that it must be done if an organization is going to be capable of having a strategy — any strategy.

The fourth alternative is, by far, the most common: avoidance of the issue, papering over the differences, ignoring the problem, or (worse and most common), complaining all the time that everybody wants different things, and nothing gets done.

This does not necessarily lead to disaster (particularly since it is so common). However, it will almost certainly prevent the organization from making any strategic shifts.

It is commonly observed that the biggest problem with developing strategy is implementation. It may be the case that the problem is more profound — that the members of the organization have insufficient commitment to each other — or their mutual future — to pull off ANY strategy.

In a world in which many organizations have been put together with mergers, acquisitions and extensive use of lateral hires, the underlying problem may grow in importance, rather than diminish.

March 5th, 2007 at 04:35am David Maister

A.G. Lafley and Jeffrey Immelt on Innovation

How do you deliver and sustain profitable growth?

That’s the key challenge shared by Procter & Gamble’s A.G. Lafley and GE’s Jeffrey Immelt.

Writes Fortune’s Geoff Colvin:

“To meet P&G’s growth targets, Lafley has to find about $7 billion of new revenue this year, equivalent to a company the size of Barry Diller’s IAC/Interactive. At GE, Immelt has to find about $15 billion of new revenue, equal to the size of Nike. And if they succeed, of course, they’ll have to turn around and find even more next year.”

So what’s the secret formula?

Both CEOs have “reformatted their companies’ fundamental approaches to cultivating change and innovation.”

Colvin finds out more in this insightful interview:

Immelt: “The initiative we’re driving now is organic growth. If that’s your initiative, it doesn’t make sense to be training people exactly the same way you trained them in the past. So we identified about 15 companies that had grown at three times the rate of GDP, and asked what they had in common. It was five things: external focus, decisiveness, inclusiveness, risk taking and domain expertise. So we reoriented the way we evaluate and train along those lines. We just recently added leadership, innovation and growth, which is basically oriented around teams. This is the first team training we’ve done in ten or 15 years.”

Lafley: “We made innovations in two areas. First was in the leadership training we felt we would need for the 21st century. We have an inspirational leadership program that is highly individualized for handpicked managers. They’re nominated by business leaders or functional leaders, and I pick them. A big chunk of it is about personal development. We also have a general-manager program, right before or right after you become a general manager. And then we have an executive-leadership program for individuals headed to be a president or a group president. It’s pretty intense.

“The other thing we pushed at - and Jeff and I talked about this - is, How do we get a global leadership team. Some 55 percent of our business today is outside the U.S., so my top leadership team for the first time in our history is now up to half non-Americans. We pushed really hard to get there. It makes for a very different discussion when we get together for our quarterly or semester meetings. I think we’re a lot more challenging of each other.”

Other insights:

Immelt on China: “China - we just got a big order from the Ministry of Rail. I got it on a Sunday - the whole ministry is working all day on a Sunday. I believe in quality of worklife and all that stuff, but that’s the competition.”

Lafley on Globalization: “Lafley: One of the challenges for the business community broadly is to articulate in a simple way the benefits of globalization and then face head-on the fact that there will be some disruption. When a company like GE or P&G has plants to shut down, we have a pretty enlightened program for handling retraining and early retirements, so employees have the best chance to have a good income and a good life. We do need to be a little more creative in that area because there are a lot of instances that doesn’t happen. But I don’t think it’s for lack of funding or because there aren’t opportunities somewhere in the economy. Our employment rate is still the envy of the world.”

Read the interview >>

February 20th, 2007 at 02:50pm Christian Sarkar

Marshall Goldsmith: The Best Advice I Ever Received

Like many young Ph.D. students, while I studied at UCLA, I was deeply impressed with my own intelligence, wisdom and profound insights into the human condition. I consistently amazed myself with my ability to judge others and see what they were doing wrong.

Dr. Fred Case was both my dissertation adviser and boss. My dissertation was connected with a consulting project with that involved the city government of Los Angeles. At the time, Case was not only a professor at UCLA, but also head of the Los Angeles City Planning Commission. At this point in my career, he was clearly the most important person in my professional life. He had done amazing work to help the city become a better place, and also was doing a lot to help me.

Although he was generally upbeat, one day Case seemed annoyed. “Marshall, what is the problem with you?” he growled. “I’m getting feedback from some people at City Hall that you are coming across as negative, angry and judgmental. What’s going on?”

“You can’t believe how inefficient the city government is,” I ranted. I then gave several examples of how taxpayers’ money was not being used in the way I thought it should. I was convinced that the city could be a much better place if the leaders would just listen to me.

“What a stunning breakthrough,” Case sarcastically remarked. “You, Marshall Goldsmith, have discovered that our city government is inefficient. I hate to tell you this, Marshall, but my barber down on the corner figured this out several years ago. What else is bothering you?”

Undeterred by this temporary setback, I angrily proceeded to point out several minor examples of behavior that could be classified as favoritism toward rich political benefactors.

Case was now laughing. “Stunning breakthrough number two,” he said. “Your profound investigative skills have led to the discovery that politicians may give more attention to their major campaign contributors than to people who support their opponents. I’m sorry to report that my barber has also known this for years. I’m afraid that we can’t give you a Ph.D. for this level of insight.”

As he looked at me, his face showed the wisdom that can only come from years of experience. “I know that you think that I may be old and behind the times,” he said, “but I’ve been working down there at City Hall for years. Did it ever dawn on you that even though I may be slow, perhaps even I have figured some of this stuff out?”

Then he delivered the advice I will never forget: “Marshall, you are becoming a pain in the butt. You are not helping the people who are supposed to be your clients. You are not helping me, and you are not helping yourself. I am going to give you two options: Option A: Continue to be angry, negative and judgmental. If you chose this option, you will be fired, you probably will never graduate, and you may have wasted the last four years of your life. Option B: Start having some fun. Keep trying to make a constructive difference, but do it in a way that is positive for you and the people around you.

“My advice is this: You are young. Life is short. Start having fun. What option are you going to choose, son?”

I finally laughed and replied, “Dr. Case, I think it is time for me to start having some fun!”

He smiled knowingly and said, “You are a wise young man.”

Most of my life is spent working with leaders in huge organizations. It doesn’t take a genius to figure out that things are not always as efficient as they could be. Almost every employee has made this discovery. It also doesn’t take a genius to learn that people are occasionally more interested in their own advancement than the welfare of the company. Most employees have already figured this out as well.

I learned a great lesson from Case. Real leaders are not people who can point out what is wrong. Almost anyone can do that. Real leaders are people who can make things better.

Case’s coaching didn’t just help me get a Ph.D. and become a better consultant. He helped me have a better life, and his advice can help you too. First, think about your own behavior at work. Are you communicating a sense of joy and enthusiasm to the people around you, or are you spending too much time in the role of angry, judgmental critic? Second, do you have any co-workers who are acting like I did? Are you just getting annoyed with them, or are you trying to help them in same way that Case helped me? If you haven’t been trying to help them, why not give it a shot? Perhaps they’ll write a story about you someday.

Editor’s note: Marshall Goldsmith’s latest book has been the #1 business bestseller over the past month, as tracked by the New York Times, Wall Street Journal, and USA Today.

1 comment February 18th, 2007 at 05:53pm Marshall Goldsmith

The Coming Disruption of the Auto-Market

One Billion New Automobiles!

Bill Jackson and Vikas Sehgal from Booz Allen Hamilton warn executives in the ailing auto industry about emerging trends which will change their future:

1) Social mobility: for the first time residents of remote villages in India and China will be able to reach urban centers in a half-day’s travel

2) Environmental Impact: Manufacturers in India and China will likely develop indigenous technologies at lower cost, making the cars more affordable but still meeting emission norms (they will lag behind Western emission standards by a couple of years, but this will be a competitive advantage!).

3) The Expanding Lower-End Market: The requirements in China and India are far different from the West. Take the $4,500 Maruti Alto, for example.

4) The Learning Model in Emerging Markets: The basic vehicle model of the emerging economies could be adapted for other nations, offering fuel efficiency and unprecedented low prices, with a few extra tweaks like the additional safety features that established markets require. China and India are honing their products in the Middle East, Africa, and Eastern Europe.

Jackson and Sehgal warn:

“Recent history suggests that many Western automakers will fail to respond effectively. U.S. manufacturers have focused on large cars and trucks, and European car companies have focused on performance. Both groups have thus missed opportunities to develop economical cars with high fuel efficiency and the selling point of reducing dependence on foreign oil.

“If all the current automotive trends accelerate, many companies will see their value chains overhauled, not just in the auto industry but in every sector. Nations around the world will suffer the consequences of increased pollution and greater global competition for fuel. And the automobile as a product will be transformed. Those manufacturers and suppliers that start planning now for a new wave of upstart competition will be the most likely to thrive in the next automotive environment.”

What will Ford and Chrysler do?

Download the article here >>

For those of you who think this is simply an issue for the auto industry, think again. The $100 PC is here, Dell.

1 comment February 16th, 2007 at 04:07pm Christian Sarkar

Doug Smith: Putting Shareholders First? Wrong!

Joe Nocera of the The NY Times recently visited the annual Corporate Social Responsibility conference and came away dazzled by the paradoxes. The contradictions would have been hard to miss. For example, what must Joe have wondered as he spoke to Exxon Mobil’s and Chevron’s corporate social responsibility representative the week following the Stern Report catalogue of the catastrophic risks of continuing to treat environmental damage as an externality. Ditto for Pfizer’s ‘do-gooder’ who, as a person undoubtedly seeks to better human kind and cannot be held individually accountable for his company’s maniacal focus on bottom line practices such as kick-back like rewards for doctors who push Pfizer products, research and development trials conducted without objective oversight, campaign funding to politicians who support extending legalized monopoly, product development efforts aimed at minor improvements over fundamental innovation, and marketing campaigns that draw attention away from health risks while misleading consumers about the actual costs of new drugs.

Ditto for Ford Motor Company — whose advertising mantras for years and years (e.g. “No Boundaries”) use the imagery of pristine environmental experiences to push gas guzzling SUVs. Or, how about General Electric? Having fouled the Hudson River for decades, GE poured tens millions of dollars into delaying court-ordered cleanup and miselading the public about it’s actions because, from a shareholder point of view, the costs incurred in delay outweighed the costs of the clean up. McDonalds? The same week it’s representative chatted about the company’s sense of social responsibilty at the NY City confab, McDonalds was also funding the effort to fight a NY City ordinance banning transfats.

The list could go on. Joe could not avoid the paradoxes. When, for example, the McDonald’s rep claimed corporate social responsibility is “core to the way we do business”, Joe noted: “You could wonder about that.”

Nocera picked up this theme again in his conclusion. Having ceaselessly breathed in paradox and contradiction, Joe opined that for companies to become substantively responsible — as opposed to PR-oriented “responsible” — would demand all responsible values become core to those companies’ business models.

Hurrah for Joe! He is dead on correct. Now, Joe, go back, re-read and re-think this declarative statement you make earlier in the article:

“Do shareholders come first — above other stakeholders (another favorite buzzword at the conference… encompassing customers, employees, activists and so on)? Of course.”

Joe, Joe, Joe. There can never — never — be fundamental change to the core business models if shareholders come first and their concerns are the trump card of any discussion. Never.

But, Joe, listen up carefully. This last comment does not reflect today’s either/or orthodoxy. The orthodoxy embedded in your all-too-facile “of course”. The orthodoxy that insists that either the shareholder comes first. Or the shareholder comes last.

No. The shareholder cannot come last. We saw a long run of the poor consequences from the 1950s through the 1980s of what happens when the shareholder came last. We must pursue shareholder value. We must celebrate shareholder value.

But we must not make shareholder value the trump card of all human affairs conducted by business — especially if we, as I think we should, choose capitalism as an essential philosophy for the well being of the planet.

Joe, if you are to help us change the core business models then you’ve got to erase your robocall “Of course” about the primacy of shareholder value. You’ve got to think again and somehow, some way discover the more profound declaration that the shareholder, like other core constituencies, must abide in equivalency of importance. The shareholder does not come first. Nor does the customer come first. Nor does the employee come first.

The shareholder does not come last. Nor does the customer come last. Nor does the employee come last.

Sustainable and ethical corporations must shift their core business models to this formulation: “Shareholders provide opportunities to the people of the enterprise and their partners to deliver both value and values to customers who generate returns to shareholders who provide opportunities to the people of the enterprise and their partners to deliver both value and values to customers who generate returns to shareholders who….. and on and on.”

That is an ethical and sustainable scorecard. And it reflects this unprecedented and undeniable fact of the 21st century human condition: we live in a world of markets, networks, organizations, friends and families in which our organizations are the new communities that determine the fate of our planet. Our primary ethical challenge can only be met when organizations reintegrate our legitimate concern for value with our equally legitimate concern for other values. Failing this, our most dominant organizations — for-profit enterprises — will continue putting value first and, thereby, continue propelling our global society toward social, environmental, political and economic disasters.

Joe, consider only this illogical aspect of your all-too-easy-and-orthodox “of course”: Who are these shareholders who come first? I’m imagining you are a shareholder. But, let me ask this, are you a customer? Are you an employee?

Put differently, does Joe Nocera the human being come first? Or, do your concerns only matter to the extent that you happen to own stock in one more enterprises?

Should we put one of our dominant shared roles (investor) above the other dominant shared roles of our new age of human kind (employee, customer, family member, friend)? And where does that leave the extraordinary number of folks on this planet who are not investors?

Joe, if we wish to take your constructive insight about changing core business models as an essential condition to the fate of this planet, then we must move beyond either/or-ism to both/and. We must not elevate any role to trump card status while also avoiding subordinating any role as a last concern.

We must learn to practice the new golden rule: “As employees do unto others as customers, investors, family members and friends what we would have them do as employees to us as customers, investors, family members and friends.”

When the employees and executives of Chevron, Exxon Mobil, Pfizer, Ford, General Electric and McDonalds begin practicing this golden rule in earnest, we’ll all witness social responsibility (as well as environmental, medical, legal, political, technical, family, spiritual and economic responsibility) blended into the daily lives of those who make, sell, distribute and service the many good things we depend on for leading our lives.

We will experience and have good things to have that are truly ‘good’.

1 comment February 14th, 2007 at 03:14pm Doug Smith

John Hagel: Internet Strategy - Red Ocean or Blue Ocean?

The management shuffle announced by Yahoo recently is only the latest evidence of strategy decay that pervades the leading ranks of the Internet business world. Yahoo says it made the changes to allow the company to move faster.Fine, but in what direction do they want to move? What does Yahoo! want to be when it grows up? And what does that imply for what it will choose not to do?In our celebrity culture, we love to focus on people. Decker gained, Rosensweig is out, Braun is out, Semel’s still there, Yang’s mentioned, but where’s Filo and who the Hell is going to head up the audience group (and why can’t Yahoo find anyone internally to take this on)?

People matter, of course, but in this context strategy matters even more. Faster movement is dangerous if you have no sense of direction. It just means you do more things more quickly, spreading that peanut butter even more thinly. To paraphrase an old quote by Casey Stengel: “if you don’t know where you are going, you will never get there.”

And let’s not just single out Yahoo. I have a growing sense that all the major Internet players – Google, MSN, Amazon, Ebay and AOL – have lost their sense of direction and differentiation. Rather than carving out and rapidly enhancing areas of distinctive advantage, these major players appear to be leaping like lemmings into the red ocean.

Here are some of the red flags that give me cause for concern:

Rather than helping people to connect more effectively with resources across the Web, they all seem increasingly focused on aggregating their own resources.

They are becoming more and more obsessed with advertising revenue and risk losing focus on what is required to add more value to users. Advertising revenue is a dangerous narcotic – it shifts you more and more into a vendor mindset rather than a user mindset.

They are investing large sums of money on infrastructure, further diverting time and attention away from development of new services for users (infrastructure services like Amazon’s EC2 and S3 are a very different business).

They seem to be looking more and more at each other and trying to replicate each other’s services rather than focusing on the user and trying to be truly innovative in terms of new services.

Now, this growing homogenization of the leadership ranks might be understandable if the Internet were a maturing business arena. Given the rapid and sustained pace of innovation in the underlying technology, the rapid growth of usage, the continuing shift of spending to the Internet and the proliferation of new businesses created on the Internet, I find it hard to characterize this space as “maturing” – my sense is that it is still in its infancy.

Some observers have even begun to hail the emergence of “Internet conglomerates” as the wave of the future. Looking from the outside in, one can make explicit the assumptions that seem to be driving the investments, business initiatives and strategies of these leaders. These assumptions seem to converge on this view of the future: leading companies will be vertically integrated and horizontally integrated, offering a broad range of their own resources to users who will “settle” into their spaces. Certainly, the strategies of these companies seem to assume that Internet conglomerates are the wave of the future. Is this really the way the Internet will evolve as a business platform?

As I have written in Harvard Business Review, I believe that a quite different future will unfold, marked by a distinctive process of unbundling and re-bundling of firms. This perspective suggests that all the Internet leaders confront the same difficult choices that more traditional companies also face. Over time, will these companies choose to be customer relationship businesses, product innovation and commercialization businesses or infrastructure management businesses? None of the Internet leaders appear prepared to confront these choices yet.

Of course, there’s another interpretation of the initiatives pursued by the Internet leaders. They may be explicitly avoiding any view of the future and instead spreading their bets across many initiatives in the hope that some of these bets will pay off while others will prove to be dead-ends. Nick Carr refers to this as the spaghetti strategy – “throw a lot of stuff against the wall and see what sticks.”

As uncertainty increases, this has become the preferred “strategy” of many companies, not just in the Internet sphere. While strategy used to be viewed as the discipline of making choices, this approach proudly rejects the need to make any choices. It is a particularly seductive approach for large companies with lots of resources.

And yet this approach stands in sharp contrast to the strategies that enabled the Internet leaders to carve out their leadership positions in the first place. Unlike the thousands of other dot.com start-ups that embraced hustle as strategy and speed without direction, the founders of these companies started with a very clear, even though high-level, long-term destination in mind. It helped them to make difficult choices in the near-term and to launch waves of initiatives that cumulatively built very large and successful businesses. It has stood them very well in the first decade of their business.

In my own work, I use a FAST strategy methodology. It emphasizes the need to have a clear, but high-level view of a long-term destination while in parallel focusing on a limited number of high impact initiatives in the operations and organization that can accelerate movement towards this destination. What the Internet leaders seem to have lost is any distinctive long-term view of what kind of business they will need to build to remain successful in a rapidly evolving business landscape.

People can be moved in and out of executive positions. Large, high visibility acquisitions can be announced. “Strategic” relationships across leading companies can be negotiated. But without a clear and differentiated sense of long-term direction, all of these initiatives will make for good newspaper copy, but count for little in terms of sustained value creation.

February 2nd, 2007 at 08:26pm John Hagel

Marshall Goldsmith’s Book Hits #1

StrategyWorld.org is proud to announce that Marshall Goldsmith’s latest book, What Got You Here Won’t Get You There: How Successful People Become Even More Successful, is the #1 best selling business book in the United States (as ranked by both the Wall Street Journal and USA Today).

Congratulations, Marshall! We’re going to have some excerpts from the book here shortly, so stay tuned.

January 31st, 2007 at 03:57pm Christian Sarkar

William Dunk: Free Association

Back in 1999, Peter Drucker wrote about “The Real Meaning of the Merger Boom.” In a punchy essay for the Conference Board’s Annual Report, the guru for all gurus proclaimed, “there is no merger boom today.” End of story.

In fact, he made clear that “in total dollar volume,” it was a zero sum game. De-mergers, unnoticed, were equal to the mergers. Moreover, “the majority of today’s mergers are defensive, the majority of yesterday’s were offensive.” If anything, this has simply become more the case in 2006 and 2007. For example, the major auto companies, so enamored of mergers for a while, have now taken to joint ventures. Many, many mergers today are consolidation plays, tactical efforts to hang on in dying businesses, pulling together wounded enterprises that think they can afford heart surgery when they are large enough to pay the bill.

Drucker could have gone on to point out that history is littered with mergers that subtracted value for shareholders and society. Even the wave of industry consolidations that have taken place from 2000-2007 may in the end prove strategically short-sighted –investments in dying industries without regard to tomorrow.

“The truly important developments in corporate and economic structure today are not the mergers and de-mergers. They are, largely unnoticed or at least unreported, new and different ways of corporate structure, corporate growth, and corporate strategy….the real boom has been in alliances of all kinds, such as partnerships, a big business buying a minority stake in a small one, cooperative agreements in research or marketing, joint ventures, and, often, ‘handshake agreements’ with few formal and legally binding controls behind them.”

Drucker spotted the real boom – alliances. But an utter fascination with the doings of Wall Street, even in our highest political councils, has distracted all of us, riveting us on merger headlines and concealing from us this deep enduring trend of our time.

The most adroit of a new breed of global chief executive gets it. Such is Carlos Ghosn who turned around Japan’s Nissan Auto, peeling away layers of fat instead of adding extraneous divisions. He went from massive losses to $7 billion in profits and wiped out $23 billion of debt. Nissan’s 11% operating profit margin has made it the most profitable of the world’s big automakers (See Economist, February 26, 2005, p. 66). Now to head Renault as well, Ghosn has said that the power of the alliance between them lies “in its respect for the identities of the two companies, and on the other, in the necessity of developing synergies.” If Nissan had been fused with Renault, failure would have followed.

We ourselves are very aware of the negatives that crop up with mergers. It was only a short time after Allegheny Airlines absorbed PSA and Piedmont Airlines (both better companies than it incidentally) that the combined market value of the three added up to less than the value of each of the components prior to their homogenization. This unhappy trinity, once known as Agony Airlines to wags in the Northeast, has since become the teetering bankrupt U.S. Airways, affectionately called UseLess Airways by its passengers. After many false re-starts, it is hoped that America West’s management, which took over U.S. Air, can run the new combined airline to better effect.

As well, one can not overestimate the size of the merger friction costs imposed by investment bankers, lawyers, and accountants who created and distorted this and other stillborn combinations. Reduced friction costs for continuing operations have traditionally been the excuse for bloated business combinations and expensive asset bases, but this does not at all account for the absolutely horrendous sunk costs imposed by middlemen in the merger/de-merger process. In fact, the mechanics of mergering themselves often distort the shape of the resulting enterprise, creating a lumbering creature nobody envisioned. But the financial and strategic costs that lard the merger process are well obscured by the middlemen and their sales people who make such a good living off of such transactions.

There are broad conceptual reasons as well why a collaborative model free of hierarchy and legalistic strictures is productive of much more economic value. With increasing amounts of the work to be done by corporations in advanced economies consisting of knowledge and professional services chores involving far different workflows, the fuel for business activity consists of pockets of intelligence that are broadly distributed throughout the world, often outside the corporation. One cannot accumulate the human resources one needs to play on a global scale within one’s walls. Organizations need to tap into a multitude of other organizations. And they need to avail themselves of workers strewn about the globe—some in outsourcing companies and others entirely on their own.

Charles Handy finds that “many organizations have more people working outside them than they have inside them.” Furthermore, “only about half the working population is working inside an organization.” The successful company, with perhaps only 20% of its workforce on its own payrolls, has to learn to virtually coordinate companies and independent workers who are bound to it by no more than a handshake. Handy chats about this brave new world in “The Future of Work in a Changing World” in an interview with Aurora Online.

For the past 10 years the goal of our own staff has been to divine the rules of the road for the still emerging collaborative enterprise. In every way, they fly in the face of all the dogmas we laid out for the corporation in the 20^th century. For this reason, the postulates of collaboration are usually counter-intuitive. Consider here just two examples:

Rule 1: At best the chief executive should be a fish out of water. Take a look at Nissan. Carlos Ghosn was born in Brazil in a Lebanese immigrant family, then had a French education first in Lebanon and later at the Ecole Polytechnique where he studied engineering. For openers he turned around Michelin, the tire company, in Brazil to begin with, then in America. He went on to become a cost-cutter at Renault. Louis Schweitzer, the very original business mind who headed up Renault, posted him to Nissan with little in-France business experience and not even a smidgeon of Japanese grounding in his system. But he was effective because he could bring a pan-global outsider’s objectivity to Nissan. He succeeded in part because he was an alien from outer space. He was the stranger who could see what makes the natives tick and who had no sentimental ties to sever as he cleaned house.

Rule 2: The best alliances are very, very unlikely. For instance, Kirin Beer, once the IBM of the Japanese beer business, came to George Rathmann of Amgen as he was getting ready to ramp up production of Epogen. It contributed its fermentation production techniques to the biotech company, as well as a slug of capital. Rathmann has since acknowledged that its role was central to the growth of Amgen into a multi-billion dollar company. Most likely, a start up will find that the process knowledge it really needs lies 10,000 miles away in a dramatically different industry and in a vastly different culture. But, of course, the Japanese bring special skills and excellence to manufacturing which is why, as we used to say, that the American dream got interrupted by the Japanese clock radio.

Alliances are best, then, if they overcome all the inbreeding tendencies of conventional businessmen. The dynamics of mergerdom tend to preclude such unlikely alliances.

What’s at issue here is how to devise an organizational model that encourages rapid, insistent global learning by an organization. As we have said elsewhere in “Better Learning Networks,” (see item #187) researchers at the Santa Fe Institute have come to understand that there is an optimal coupling within an organization that encourages learning. It is simply too hard for knowledge to interpenetrate an organization where the bonds are made of steel rather than nervous tissue.

Those who think about software systems have come up with the same insight in respect to information systems. Ubiquity interviewed us about collaboration a while back. There we reference an article by John Seely Brown and John Hagel called “The Joy of Flex” in which they said, “”Loose coupling makes it easier to improvise without worrying about disruptions elsewhere in the system.” While hardwired systems afford short-term cost advantages, they are costly in the end, since they cannot accommodate the disruptions imposed by global realities. Likewise, we would contend, merged companies achieve a rigidity that is antagonistic to agile behavior.

If alliances are the fluid organizational form that should dominate our business activity, many head-in-the-sand executives don’t know it. Squabblers debate about the value of strategic alliances and how to make them work. This is all rather academic. Alliances are very much a fact of life in our lean business society, and so the only option for the business generalissimo is to saddle up the horse and see if he can ride this new kind of stallion.

Well, the future is always a bit uncomfortable until it is past.

1 comment January 29th, 2007 at 05:33am William Dunk

Laurence Haughton: Where Nardelli Went Wrong

Now that Bob Nardelli is out at the Home Depot the armchair quarterbacks and hindsight pundits are full of theories about “the fatal flaws” and the “mental errors” that caused his sour (albeit lucrative) exit.I think they all (so far) have missed the most significant factor. It wasn’t primarily that Nardelli’s “political” skills were lacking or that his strategy was wrong ( or even the curse of Six Sigma). In fact at the root of his predicament was something that most people would call a strength not a weakness. (And it’s a strength you, Bob, and I probably share).

The big reason Nardelli was, from the beginning, never going to win at Home Depot was that he recognizes the need for change very quickly and acts on it.

I know that seems contradictory so let me explain.

In the late 1990s I spent almost five years writing and researching the reasons that companies move too slow. One of the biggest obstacles I had to address was the powerful urge to hold on to the status quo and the incredible unwillingness among many people to let go.

As a result I, along with a lot of other executives, worked on strategies to open up when hearing new ideas and to embrace change more quickly. From what I’ve read Nardelli had done much the same during his tenure at GE.

But as the experts explain, “good things often have unintended (negative) consequences.”

What unintended consequence comes from learning to recognize the need for change quickly and act without delay? It’s often a huge blind spot.

Many early adapters and fast acting managers have a hard time imagining that others do not see what they see and they therefore radically misinterpret or underestimate what it will take to get the majority of their associates to buy-in.

From the beginning there were signs that Nardelli didn’t have enough buy-in at the Home Depot. People in the stores were whispering, “Nardelli has no retail background” and “The board is paying him too much money.” “He doesn’t get it,” senior executives grumbled, “Everything he’s doing is counter-culture.” Even Wall Street didn’t buy-in. “The market’s getting saturated,” one expert wrote. “I wouldn’t be in a rush to buy it [Home Depot’s stock].” (This was at a time that Nardelli’s turnaround efforts were barely off the drawing board.)

Now as someone who embraced change and acted quickly in the past Nardelli saw these people sitting on their hands and making negative comments and decided that was proof positive that they were the wrong people for the new situation.

And he was partly right. About 20 percent of the average company won’t ever pitch in and try new ideas or innovations.

But that leaves a large group of people who may be right for the job but who stay on the fence longer that the leaders expect. They look like immovable resisters, but they’re not. They are simply more average folks, people who need to see that the change is safe and likely to succeed before they will give a strategy their buy-in.

This is the critical lesson I’ve learned in the last three years as I’ve been researching the art of execution. Not enough buy-in one of the four big reasons why half of all the best laid plans fail. But it’s not callousness or stupidity that causes executives to underestimate the challenge and assume the worst. It’s that many of us have the eyes of the early adapter. We’ve opened our minds to what we see as an obvious need for change. And we assume that resistance is irrational (or sinister). We lose good people and take a big step back. In the end that causes us to miss our announced milestones and disappoint our stakeholders.

So now we have an opportunity to learn from the mistakes of another (a great way to gain experience for cheap). Here’s the lesson: Every well thought out strategy need an equally well thought out plan to get enough buy-in. That plan starts with realizing that everyone isn’t like us. Many are slower to buy-in. But if they see the path is safe and likely to succeed they will (also) follow through.

January 8th, 2007 at 02:25am Laurence Haughton

Vijay Govindarajan: Strategy as Transformation

Senior executives need simple, but very powerful frameworks that help them to think strategically, and to align people in the organization through the use of a common strategic language.

The three box thinking model is an example of a framework that I use to facilitate strategic thinking and alignment.

Actions companies take belong in one of three boxes:

Box 1 — manage the present;
Box 2 — selectively abandon the past; and
Box 3 — create the future.

Box 1 is about improving current businesses. Box 2 and Box 3 are about breakout performance and growth.

Many organizations restrict their strategic thinking to Box 1. This tendency has been particularly acute in the past two to three years, as most leaders have emphasized reducing costs and improving margins in their current businesses.

But strategy cannot be just about what an organization needs to do to secure profits for the next year. Strategy must encompass Box 2 and Box 3. It must be about what a company needs to do to sustain leadership for the next ten years. In fact, the central task of an organization’s leaders is to balance managing the present with creating the future. Examples of successful Box 2 and Box 3 initiatives include: Dell’s direct model in the PC industry, Wal-Mart’s transformation of the discount retailing industry, Apple’s introduction of iPod, and Southwest Airlines’ revolution in the airline industry.

Organizations that operate within a short timeframe base their actions on the assumption that their industry is stable and static. But it takes years for large organizations to change directions. If you take this into account, change is rapid and nonlinear. For instance, nanotechnology and genetic engineering are revolutionizing the pharmaceutical and semiconductor industries. Globalization is opening doors to emerging economies, such as India and China, and billions of customers with vast unmet needs. Once-distinct industries, such as mass-media entertainment, telephony, and computing, are converging. Rapidly escalating concerns about security and the environment are creating unforeseen markets. And other, more subtle changes are important as well, such as the trend toward more empowered customers, the aging population in the developed world, and the rising middle class in the developing world.

As a result of these forces, companies find their strategies need almost constant reinvention because the old assumptions are no longer valid, or the previous strategy has been imitated and commoditized by competitors, or changes in the industry environment offer unanticipated opportunities. The only way to stay ahead is to innovate.

Part of the job of executives is to make money with the current strategy. That is the challenge in Box 1. Part of their job is to make up for the decay and commoditization of strategy. That is the challenge in Box 2 and Box 3.

Too many companies ignore these two boxes until it is too late.

January 4th, 2007 at 04:00am Vijay Govindarajan

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