5 Young Millionaires Instigating Innovation

 

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Dissatisfaction is one of the hallmarks of youth culture. Everything sucks, right?

Some young people just accept this as fact, toeing the line and sinking into a state of inertia and apathy. But then there are the others, those audacious ones who set out to shake things up--sometimes with dizzying success.

Every year we profile high-earning entrepreneurs who are 30 or younger. This time around, we've come up with a group of revolutionaries who are truly disrupting their respective industries. Whether it's turning the entrenched cell phone service model on its head, reinventing the time-honored (yet unwieldy) real-estate transaction or reimagining audio equipment in an affordable and sustainable way, these young businesspeople had the creativity, smarts and cojones to find--and capitalize on--solutions to nagging obstacles they faced.

These young entrepreneurs are not only doing what they love, they are raking in the proceeds. And if some of them seem a bit cocky, a bit punk--well, they've earned that right. They fought back and won. A bit of braggadocio comes with the territory.

Young Millionaires »

Telecom

Young Entrepreneur Challenges the Way Americans Think About Their Cellphones

In the fall of 2004, when 18-year-old Pakistani squash champion Ahmed Khattak arrived at Yale to play for the university and take advantage of a full academic scholarship, his first priority was to buy a cell phone to call his family back home. Read More »

Mobile

Big Claims Aim to Boost Business at Mobile App Startup

Chaotic Moon is the most experienced, innovative and awesome mobile studio out there--according to Chaotic Moon, that is. Over-the-top boasts and tongue-in-cheek self-affirmations are plastered across the Austin, Texas, startup's website, proclaiming its unrivaled mastery over all phases of mobile software development... Read More »

Product Design

OrigAudio Hits It Big With Fold and Play Recycled Speakers

A mere three months after Jason Lucash and Mike Szymczak started their company OrigAudio, they hit the jackpot. It was November 2009, and out of the blue, Time magazine called about featuring their Fold and Play Recycled Speakers among its "Best Inventions of 2009." Read More »

Sustainability

Two Young Entrepreneurs Get Their Hands Dirty With Urban Farming

Nikhil Arora, 25, and Alejandro Velez, 24, didn't plan on being mushroom farmers. In 2009, during their last semester at the University of California, Berkeley, Arora lined up a corporate consulting job and Velez nabbed one in investment banking... Read More »

Software

Tech Startup Aims to Make Real Estate Transactions Easier

In real estate, signing on the dotted line is never really as simple as that. For brokers, it involves driving back and forth, lugging around a briefcase full of paperwork, tracking down unresponsive clients--and a whole lot of "who has what?" panic... Read More »

This article was originally published in the September 2012 print edition of Entrepreneur with the headline: Youth in Revolt. via entrepreneur.com

 

Innovation Is Not the Holy Grail - Christian Selos annd Johanna Muir

Every year, hundreds of new innovation books are published with well-meaning and intriguing recommendations for managers and organizations. They tout such innovation success factors as a risk-taking culture, inspired leadership, and openness to outside ideas. An increasingly impatient social sector sees innovation as the holy grail of progress. This impatience stems in part from the perception that decades of traditional global development efforts are lost years, with billions of dollars spent and too little to show for them. The scale of poverty-related challenges and the growing levels of global inequality drive a sense of urgency and a frustration with old development recipes. These challenges—this crisis, if you will—have legitimized a collective quest for new solutions—innovations!

With the focus on innovation has come a tendency to adopt the language of markets and business, such as social ventures, hybrid business models, and impact investing. But while the innovation language has been adopted, the existing organizational and managerial knowledge base on innovation has remained largely unengaged. Applied studies tend to treat innovation primarily as an outcome and therefore imply that social innovation occurs when desired outcomes such as positive social change can be observed. Meanwhile, organizations that are the main locus of innovation activities are mostly treated as a black box and we know little about how social innovation develops within these organizations.

Moreover, although much social innovation research has explored the entrepreneurial establishment of new social organizations, much less is known about the ability of already established organizations to innovate continuously. This is an important white space—because significant funds have become available for innovation, but the ability of smaller, younger organizations to absorb large funds is limited. Generating impact also depends on the ability of organizations to operate and innovate at the scale of the underlying social problems. The capacity of established organizations to keep innovating, therefore, is central to understanding the link between innovation and social progress.

In a recent project with the Rockefeller Foundation,¹ we explored what enables organizational capacity for continuous innovation in established social sector organizations that operate at an efficient scale delivering products and services. We undertook a literature review of the mainstream organizational and management literature on this topic, and we were amazed by both the magnitude of this research stream and the insights we gained. First, we found that both long-term evidence from studies of social sector organizations and recent empirical evidence challenge the mantra that more innovation is better. Second, we found that many of the assumptions about innovations in the social sector may be misleading. And third, we discovered that pushing innovation can stifle progress just as much as it can enable it.

No Easy Answers from Innovation Research

Thousands of scholarly and practitioner papers were published on innovation in the last two decades alone. Although our knowledge of many organizational and contextual aspects of innovation has grown tremendously, meta-reviews synthesizing innovation studies consistently lament the fragmented nature of innovation research. “The most consistent theme found in the organizational innovation literature is that its research results have been inconsistent,” stated one researcher, and it is “low in explanatory power and thus offers little guidance to practitioners.”² This does not mean that the literature is irrelevant. Rather, it means that we need to question how we use this knowledge to inform practice. Easy recipes in the form of “three steps to better innovation,” often at the core of popular innovation books, are not justified, no matter how tempting they may be or how plausible they may sound. Innovation is a complex process and depends on the unique constellation of many organizational and external factors in a particular context. Serious engagement with existing organizational theories and knowledge requires that we deal with innovation in all its complexity, and case by case. Likewise, understanding or promoting innovation in organizations should force us to reflect not only on the potential factors that might make innovation work, but also on the many negative organizational and contextual factors that prevent innovation or the realization of its expected outcomes.

From our in-depth review of the literature, we became concerned that widely held assumptions about social innovation are not grounded in established theoretical perspectives and may be misleading. We believe three oversights contribute to a tendency to concurrently overrate and undervalue innovation and to downplay the difficulties of enabling innovation in social sector organizations.

First, innovation is often perceived as a development shortcut; thus innovation becomes overrated. The tremendous value that is created by incremental improvements of the core, routine activities of social sector organizations gets sidelined. Therefore pushing innovation at the expense of strengthening more routine activities may actually destroy rather than create value.

Second, innovation in social sector organizations often has little external impact to show when it is enacted in unpredictable environments. Even proven innovations often fail when transferred to a different context. Yet the cumulative learning from failures may be tremendously valuable in understanding how a particular context ticks. This potentially builds and strengthens an organization’s capacity for productive innovation over time. In other words, if we evaluate innovation primarily by its outcome in the form of external impact, we may undervalue the positive internal organizational impact that comes from learning from failed innovation.

Third, the hoped-for success factors for innovation that researchers and consultants have identified ignore the power of negative organizational factors, such as bad leadership, dysfunctional teams, and overambitious production goals.

These pathologies can make the implementation of innovations nearly impossible. Consequently, a naive trust in innovation success factors leads to underappreciating the difficulties of making organizations more innovative, and it may generate innovation failures by pushing the wrong factors.

Overrating the Value of Innovation

Everyone talks about rock these days; the problem is they forget about the roll.—Keith Richards

Most of the value that established social sector organizations create comes from their core, routine activities perfected over time. Efficiently producing and providing standard products and services creates tremendous value, particularly in places with widespread poverty. Demand for the basics of life is high, and markets where organizations compete to serve the poor are often inefficient or nonexistent. For organizations that have found a working model in a particular context, efforts toward predictable, incremental improvements—exploiting what an organization knows how to do well, rather than developing innovations, exploring new activities, or creating new knowledge—may generate superior outcomes over time.

The Aravind Eye Care Hospital provides a vivid illustration to support this claim.³ Since its founding in 1976 as an 11-bed hospital in Madurai, India, Aravind has pursued its mission to eradicate needless blindness, centering on one chief intervention: cataract surgery. Aravind resisted temptations to scale up to a full-service ophthalmologic hospital, although other ophthalmologic problems are widespread in India. Instead, it focused on improving its specialization and keeping it cost-efficient. Today Aravind runs six Indian hospitals that perform more than 300,000 eye surgeries annually, fighting preventable blindness at the same scale at which it occurs in India.

Aravind’s road to becoming the world largest eye hospital was marked by a disciplined approach to developing a system based on routines, improving practices continuously, and investing profits to build additional capacity. The dedication to standardization, the provision of real-time performance measures, and the focus on incremental improvements has driven operational productivity. Aravind uses “eye camps” for fast and efficient scanning of potential rural patients, transporting groups of patients needing surgical procedures to the main hospital and then back to their villages.

Strict task specialization at every level of the organizational hierarchy—reminiscent of Adam Smith’s pin factory—enables steep learning curves and focused skill development. A doctor at Aravind performs more than 2,000 surgeries per year compared to an average of about 200 in Indian hospitals. This productivity is based on deep competencies, which result in cost savings that enable treating two-thirds of the poorest patients free. Yet Aravind still earns sufficient income to enable expansion. Aravind’s high productivity is also based on careful evaluation of practices, enabling incremental improvements over long periods of time. Further, the strength of Aravind’s organizational culture has grown with its productivity successes.

What motivates eye doctors, a scarce resource in India, as well as nurses and other employees to work in this environment are the unique learning opportunities, the unmatched levels of surgical productivity, and Aravind’s proven and reliable ability to help the poor. Routines and competencies constantly push the frontier of Aravind’s best practices. Meticulous screening of what does and does not work allows for small adaptations of routines and practices, which rapidly spread across the six hospitals. The hospitals are perfect replicas of the original Aravind hospital, which enables sharing best practices by eliminating variation in organizational context.

Yet Aravind has had losses as well as wins. To quickly grow the number of cataract surgeries and to meet the ambitious goal of reaching 1 million eye surgeries per year by 2015, Aravind in 2005 started to experiment with new organizational models that forged partnerships with existing or new hospitals that agreed to use Aravind’s best practices. Despite an intense training and monitoring period involving experienced Aravind doctors, this “Managed Care” program was stopped after five years. The routines developed at and continuously improved upon and nurtured by Aravind could not be transferred fully to partner hospitals because of differing organizational contexts.

Aravind’s example underscores that relentless attention to incremental improvements lies at the core of an organization’s ability to build capacity and to make an impact on a scale appropriate to the social problem being addressed. Unpredictable innovation activities always compete with predictable core routines for scarce organizational resources, such as staff time and money. There needs to be a healthy balance between the allocation of resources among core activities, which enable predictable improvements and innovations, and the allocation of resources that lead to unpredictable results.

The example of Aravind also underscores that many poverty-related and persistent problems may not need innovative solutions but rather require committed long-term engagement that enables steady and less risky progress. In environments of widespread poverty where innovation is not triggered by changes in customer wants, new technological advances, or harsh competition, progress and impact may come more from dedication and routine work. Unfortunately, dedication and routine work do not have the sexiness factor of innovation.

Oddly, it is often the scarcity of organizational resources in established social sector organizations that legitimizes the argument for more innovation. But this argument is based on a wrong and dangerous assumption that innovation creates more bang for the buck and constitutes a development shortcut, solving big problems faster. In addition, social progress often depends on changing ways of organizing and the norms, habits, and beliefs of people. For example, social progress is difficult unless the roles and rights of women in rural communities change and values such as accountability, responsibility, and long-term commitment are institutionalized. This requires patience, direct engagement with the poor, and dedication that challenges organizations to remain motivated and focused.

We claim that the prevailing innovation discourse may push organizations toward adopting innovative practices, when actually more incremental developmental practices would produce more value over time.

Undervaluing Failed Innovation

The best way to understand a complex system is by interfering with it.—William Starbuck

The outcomes of innovative actions in a complex social world are inherently unpredictable. Even in business organizations that operate in established and predictable institutional environments where success is evaluated primarily by achieving quantifiable economic objectives, innovation often fails. Social sector organizations that tackle the challenges of poverty typically operate in uncertain and often hostile institutional environments. And they usually balance multiple economic and social objectives. As a result, the positive and negative outcomes of innovation are even harder to predict and evaluate. Productive social innovation thus relies heavily on trial and error and organizational learning. And despite high error rates and little positive impact long term, innovation as experimentation is often an essential prerequisite to continuous social innovation.

The history of Gram Vikas, an Indian nonprofit and world leader in water and sanitation, is a great example of innovation from failure. In 1971, a group of Indian students organized the Young Students’ Movement for Development (YSMD) and moved to the state of Orissa to serve victims of a devastating cyclone and to promote equality and inclusive development. The student-activists’ first attempt at innovation was to use lift irrigation systems to help local farmers pump water from the rivers of the Orissa delta region, so that they could grow more than one crop per year. The richer landowners of the region at first agreed to donate land to jump-start the student project. But once they saw the increased yields and potential profits that resulted from the irrigation system, they took back the land. Gram Vikas (which was known as YSMD until 1979) failed to achieve its goal of creating collective village landholdings and thus ensuring a basic livelihood for poor farmers in Orissa. Yet this failed instance of innovation was critical for the young organization’s understanding of local power structures and poverty.

Indeed, the irrigation failure informed its next experiment: the introduction of cow tending and dairy production to extremely poor and marginalized communities. In 1976, Gram Vikas joined a nationwide effort to develop a network of small-scale dairies that would form cooperatives and help producers retain more profits from their efforts. The dairy grid was seen as a chief development instrument in rural areas over the next decades. But after only one year, Gram Vikas realized that dairying was not going to work. “It did not take long to realize that dairying was neither feasible nor what was needed urgently for the people of the area,” said Joe Madiath, founder of Gram Vikas, in a 2005 interview. “There was no infrastructure or any kind of veterinary support. … We [also] felt that we were more concerned about the animals, the repayment of the loan, the sale of milk, etc., than about the people and their acceptance of a new way of keeping cows. We perhaps overmanaged the scheme for the people, with the result that they never really got sufficiently involved, and soon most of them opted to sell the cows.”

Although Gram Vikas decided to abandon the intervention, the process of experimenting in remote villages and being exposed to the customs and realities of adivasis (tribal villagers) surfaced a chief reason for the villagers’ poor health and poverty: lack of sanitation. With financial support from international development organizations such as the Swiss Development Agency, Gram Vikas’s Rural Health and Environment Programme was launched in the early 1990s. Systematic learning from a series of earlier development interventions, such as building biogas plants in remote villages, allowed Gram Vikas to build the capabilities and outreach needed to implement health-related initiatives at a large scale. Today Gram Vikas brings water and sanitation to more than 1,000 villages and 66,000 families in Orissa. Its programs help empower communities to construct, manage, and maintain their own sanitation facilities as well as to launch development initiatives that improve community health and quality of life.

The story of Gram Vikas shows that innovation as experimentation can be a major mechanism for progress. Although the error rate of this type of innovation is high, experimentation that leads to innovation failures can slowly improve an organization’s understanding of how a particular environment ticks. Experimentation can enable social sector organizations to find ways to remove or work around hurdles and to create slow but continuous and crucial progress. Although productive innovation does not always translate into desired outcomes or impact, systematic learning and building of a knowledge base about what works and what does not constitutes an important indicator for an organization’s capacity to innovate.

We claim that evaluating the innovation performance of organizations primarily based on positive outcomes may stifle the risky experimentation necessary for progress in difficult and unpredictable environments.

Underappreciating the Difficulty of Innovation

A very high percentage of nonprofit and government innovation occurs against the odds, brought forth in organizations that are hostile to change.—Paul Light

The focus on outcomes and impact in the social innovation literature implies that the organizational side of social innovation is trivial and can be enacted by just doing the right things. The impatience with making fast progress has fueled a hunt for the critical success factors that can drive more innovation in organizations. Yet from our literature review, this perspective has serious flaws. Hundreds of factors within and external to organizations have been identified that directly or indirectly affect the characteristics and dynamics of innovation. Productive innovation therefore depends on the constellation of a large number of enabling organizational and contextual factors. But even a single negative factor, such as a shortsighted leader or a culture that is hostile to change, may prevent innovation.

The consequences of negative factors often fall into two main realms. First, in some organizations too many bad ideas are pursued, and this is coupled with an inability to learn from or act on the resulting failures; then, when little value is created, collective cynicism lowers the chance that future ideas will be enacted with sufficient support, motivation, and commitment. Second, in some organizations, too few good ideas get developed into innovative new activities, new operating and management processes, or new products and services; ambitions and expectations are reduced and creative ways are devised to justify the status quo.

There is no shortage of anecdotal evidence of this problem. We all have lamented the lack of new ideas and innovation in bureaucracies on both the funding and project implementation sides. And we have bemoaned the failed doctrines of traditional development organizations, driven by a belief that progress comes from following recipes developed in the Western world and involving large-scale financial and technical support from consultants and project managers who lack local commitment or have limited understanding of local contexts.

A more recent example of this problem may be several CEOs’ fascination with Muhammad Yunus, founder of Grameen Bank and winner of the 2006 Nobel Peace Prize. Yunus acknowledges that his idea to use the efficiency of multinational corporations to eliminate poverty faster has appealed to many people in the corporate sector. Since 2007, companies such as Danone, Veolia, Intel, Adidas, and BASF have embraced this idea and marched into Bangladesh to build innovative new “social businesses.” Unfortunately, the CEOs involved have largely failed to explain the rationales for these innovations and to communicate concrete expectations for their companies or for social progress in Bangladesh.

Yunus recounted in 2007 how the Grameen-Danone partnership developed. “The idea of the company,” he wrote on his website, “was born over just a casual lunch I had with Franck Riboud, chairman and CEO of Groupe Danone, a large French corporation, a world leader in dairy products. It took just that time for me to convince him that an investment in a social business is a worthwhile thing for Danone shareholders. Even though it will not give any personal dividend to them, he agreed to the proposition even before I fully explained it to him.”⁴

Is it that successful Western companies and their CEOs suffer from excessive organizational optimism—a feeling that their advanced competencies ought to be valuable in dealing with widespread poverty? Yet if organizations strategize this way, bad innovation decisions are usually the consequence. We and other researchers⁵ find it questionable whether productive innovation can be expected when CEO decisions trump a thorough and realistic analysis of the complexities, challenges, and time scales involved in doing “business with the poor.”

Organizational research has unearthed a large number of cognitive, normative, and political factors that can stifle innovation or derail innovation processes.⁶ We therefore are frustrated that pushing innovation based on simple recipes and success factors is still the prevailing dogma of organizational leaders, consultancies, and prescriptive research papers. It reminds us of the frantic hunt for the next miracle diet guaranteeing weight loss in seven days. We strongly believe that unless leaders engage in an honest and critical diagnosis and evaluation of negative organizational factors and innovation hurdles, the well-meaning recommendations provided by the innovation literature may not have much impact.

We claim that pushing innovation success factors while disregarding prevailing organizational hurdles may create negative outcomes and stifle innovation performance.

Implications for Social Innovation

The focus on positive outcomes that legitimize innovation for social sector organizations has generated a bewildering and confusing set of descriptions of what innovation is and how to achieve it. These descriptions and prescriptions stifle progress, because knowledge fails to accumulate and the assumptions underlying terms such as social innovation are questionable.

It is time to move from innovation as an ideology to innovation as a process—a transition that might be less glamorous but will be more productive. From studying existing research on organizational innovation and from our own research on the subject, we have distilled six recommendations for productive innovation in social sector organizations:

1. Treat innovation as a process, not primarily as an outcome. Efforts to explicitly link the characteristics and dynamics of organizational innovation to its consequences provide valuable evidence for decision making and enable organizations to identify areas for productive support as well as to fine-tune interventions and resource provision strategies.
2. Treat innovation as an independent variable, and reflect on multiple positive and negative outcomes during the innovation process. The focus on innovation within organizations enables an accurate assessment of the internal and external dimension of value created by innovation activities.
3. Recognize that innovation processes integrate different organizational and external factors. These factors include individuals (e.g., idea creation), groups (e.g., idea evaluation), organizations (e.g., resource allocation and formalization of new activities), and contexts (e.g., external power structures or collaboration partners). Evaluating innovation requires consideration of several levels of analysis concurrently.
4. Understand the prevailing cognitive, normative, and political dimensions within organizations to determine how they might enable or stifle innovation. This could allow younger organizations to better monitor and suppress emerging negative innovation factors and increase their learning and innovation capacity. And it could allow more mature organizations to develop more focused organizational redesigns, to rejuvenate processes, and to legitimize tough but necessary decisions.
5. Capture insights from successful and unsuccessful innovations in organizations over time. This approach to social innovation trumps prevailing approaches that generalize innovation factors based on static snapshots across organizations or based on single observations of innovation events. It also tests for the presence or absence of an important enabler of innovation: organizational learning.
6. Reflect on the differences in innovation processes, influencing factors, and outcomes across different cultures and geographies rather than on general innovation factors. We know very little about such innovation-related factors as creativity, idea evaluation, and learning in organizations as they apply to non-Western settings.

These recommendations should enable social sector organizations, their stakeholders, and researchers to develop analytical models and tools to unearth negative factors that prevent productive innovation. Similarly, funders who carefully think through the implications outlined in this article may find ways to escape over-supporting fashionable innovation initiatives and under-supporting promising but difficult innovation efforts, particularly those in complex environments where formulas for social progress have not yet been found.

Finally, our process approach to social innovation is an attempt to swing the pendulum back from the supply side of social innovation to the demand side of social innovation. Glorifying innovation as “the” solution to social and environmental needs and problems has led to well-intended efforts to increase the population of social innovators and entrepreneurs. This certainly has its merits, but it has come with a detriment to investments in established social sector organizations that operate at scale and that create value mainly through incremental improvements. Our hope is that an increased emphasis on innovation as a process will help avoid bad social sector investments and thwart unproductive debates about quick fixes to entrenched social problems.

The authors wish to thank the Rockefeller Foundation for financial support of our research on innovation, and the Stanford Center on Philanthropy and Civil Society for hosting our work.

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via ssireview.org

 

Not all innovations are equal - Is radical innovation a thing of the past? - Excellence In Innovation

It is a rash commentator who calls the end of history. Such declarations, as Francis Fukuyama discovered, tend to be made on the eve of wrenching change. Even so, despite the mass of management thinking forced between hard covers and carpet-bombed weekly on to cowering readers, it is hard to identify radical innovations from the past decade and tempting to think great breakthroughs are no longer possible.

Plenty of thinkers would beg to differ. Ten years after Good to Great was published, Jim Collins is back as co-author of a new book, Great by Choice , touted as “groundbreaking” despite its derivative-sounding title. Michael Porter believes “creating shared value” will mark a turning point in economic history, though critics claim his latest idea is corporate social responsibility under a new guise. Gary Hamel, meanwhile, is promoting the open-access Management Innovation eXchange – “the MIX”, an online clearing house for management ideas – as the vehicle for nothing less than a reinvention of the discipline.

In May, Prof Hamel blogged that “the emerging ‘social technologies’ of Web 2.0 are likely to transform the work of management root and branch”. He laid down an “e-gauntlet” to organisations to share ideas about how they were becoming “more adaptable, innovative, inspiring and accountable”. A few cynics have fallen into the MIX (though the contributor who offered a lapidary contribution headlined “innovation sucks” seems to have disappeared from the site). But the winners of the first phase of the prize mostly defy scepticism – mainly because the improvements they propose seem to be working in practice.

My favourites? Dutch civil servants have beaten bureaucracy to share spare office space, improving collaboration and cutting costs. Morning Star, a Californian tomato-processor with no formal hierarchy, has put online the “colleague letters of understanding” it uses instead of job contracts. Individuals outline their “commitments”; colleagues review and rate how they have fulfilled them. Stanford University’s James Fishkin is pioneering a better way for complex organisations to consult diverse groups of stakeholders – the “deliberative corporation” – and reach well-informed decisions, unskewed by accidental bias or special pleading.

The rhetoric of the seven winning pitches – or “hacks” as the MIX annoyingly insists on calling them – is lofty. Rite-Solutions, an employee-owned software company, says its “innovation engine” to make every member of staff feel more relevant is “provoking and aligning individual brilliance toward collective genius”. But none of these winners offers a root and branch transformation. Best Buy’s initiative has led to better in-store signage at the electronics retailer; the one from Essilor, which makes spectacle lenses, has improved training. Very few winners come from organisations in the fast-developing markets of Asia or Latin America. Only a minority – including Morning Star and Rite-Solutions – upend the traditional corporate structure. Cemex, the Mexican cement company, says its internal collaboration platform was the response to “challenges set by the CEO and executive committee” – about as top-down as you can get.

Lenny Mendonça of McKinsey, co-sponsor of the prize, says that with “technology outpacing traditional vehicles” for such ideas (books, academic journals), one aim was to provide a forum for new ideas that might not otherwise get aired. It is early days, more challenges are planned, and it is no bad thing to make a series of small bets.

Prof Hamel says the pace of change is putting pressure on organisations to make more radical changes. New tools allow companies to exploit collective wisdom in unprecedented ways, and younger workers – the “digital natives” – are impatient with old hierarchies and value systems. “I would be willing to stake my reputation that we will see more dramatic change in the way management is organised in the next 10 years than we’ve seen in the last 60 or 70,” he told me last week.

But while I’d be happy to be proved wrong, I think the technology fuelling these small-scale improvements makes a “eureka” moment less likely. As in product innovation, the fact that managers can identify, share and match advances, favours rapid evolution, rather than revolution, with best practice continuously revised and improved. Progress, yes: but more by leapfrog than by giant leap. andrew.hill@ft.com

You may read this article by my friend Andrew Hill via ft.com

via excellenceininnovationblog.posterous.com

Chairman & CEO of Illy Coffee, Andrea Illy, on sustainability and business strategy

How To Survive The Crisis and Lead Through Uncertainty

The range of possible futures confronting business is great. Companies that nurture flexibility, awareness, and resiliency are more likely to survive the crisis, and even to prosper.

 

The future of capitalism is here, and it’s not what any of us expected. With breathtaking speed, in the autumn of 2008 the credit markets ceased functioning normally, governments around the world began nationalizing financial systems and considering bailouts of other troubled industries, and major independent US investment banks disappeared or became bank holding companies. Meanwhile, currency values, as well as oil and other commodity prices, lurched wildly, while housing prices in Spain, the United Kingdom, the United States, and elsewhere continued to slide.

As consumers batten down the hatches and the global economy slows, senior executives confront a more profoundly uncertain business environment than most of them have ever faced. Uncertainty surrounds not only the downturn’s depth and duration—though these are decidedly big unknowns—but also the very future of a global economic order until recently characterized by free-flowing capital and trade and by ever-deepening economic ties. A few months ago, the only challenges to this global system seemed to be external ones like climate change, terrorism, and war. Now, every day brings news that makes all of us wonder if the system itself will survive.

The task of business leaders must be to overcome the paralysis that dooms any organization and to begin shaping the future. One starting point is to take stock of what they do know about their industries and the surrounding economic environment; such an understanding will probably suggest needed changes in strategy. Even then, enormous uncertainty will remain, particularly about how governments will behave and how the global real economy and financial system will interact. All these factors, taken together, will determine whether we face just a few declining quarters, a severe global recession, or something in between.

Uncertainty of this magnitude will leave some leaders lost in the fog. To avoid impulsive, uncoordinated, and ultimately ineffective responses, companies must evaluate an unusually broad set of macroeconomic outcomes and strategic responses and then act to make themselves more flexible, aware, and resilient.

Strengthening these organizational muscles will allow companies not only to survive but also to seize the extraordinary opportunities that arise during periods of vast uncertainty. It was during the recessionary 1870s that Rockefeller and Carnegie began grabbing dominant positions in the emerging oil and steel industries by taking advantage of new refining and steel production technologies and of the weakness of competitors. A century later, also in a difficult economy, Warren Buffett converted a struggling textile company called Berkshire Hathaway into a source of funds for far-flung investments.

What we know

The financial electricity that drives our global economy is not working well. Turning it back on isn’t just a matter of flicking a switch, as central banks and governments have tried to do by providing liquidity, guaranteeing debt, and injecting capital into banks. We must repair the grid itself significantly, and this will require coordinated global action.

By the grid, we mean the global capital market, which evolved over a 35 year period following the breakdown of the Bretton Woods accord, in the 1970s. No one designed the global capital market, but it has been a boon to humanity, stimulating globalization and growth by enabling the free international flow of capital and trade. The financial crisis of 2008 severely damaged this useful system. Through greed, neglect, or ignorance, the participants abused it until they broke some of its basic mechanisms.

The implications are far reaching. Most obviously, congestion in the global capital market is exacerbating the US domestic credit crisis. That crisis has spread globally, hitting Europe especially hard. Banks until recently have been scrambling for deposits to replace sources of funding such as direct-issue commercial paper, medium-term notes, and asset-backed paper. The search for deposits is required to finance existing loans, and borrowers will need significantly more of them because all but the strongest have, like the banks, lost access to the securities markets. The US government, in particular, has aggressively tried to address this problem through huge liquidity programs, such as the purchase of mortgage- and other asset-backed securities. But it remains to be seen how effective those efforts will be in mitigating the credit crunch.

The global capital market crisis worsens this credit crunch by sending into reverse the dynamic of cross-border investment and trade flows. A dollar of capital must finance every dollar of trade, so the global capital market has stimulated the international exchange of goods and services. It has facilitated cross-border investments—in intellectual property, talent, brands, and networks—that help economies and companies grow and profit, and it has enabled the companies that make such investments to repatriate their profits. In short, global integration and growth will revive only if the global capital market does. Yet it has sustained a body blow that will have repercussions for years, even if international leaders make the necessary long-term adjustments.

The changing role of government

Since September 2008, governments have assumed a dramatically expanded role in financial markets. Policy makers have gone to great lengths to stabilize them, to support individual companies whose failure might pose systemic risks, and to prevent a deep economic downturn. We can expect higher tax rates to pay for these moves, as well as for the reregulation of finance and many other sectors. In short, governments will have their hand in industry to an extent few imagined possible only recently.

That’s not all. Protectionism and nationalism will probably feature more prominently in policy debates. We may see not only old-style populist anger against business, high executive compensation, and layoffs but also the emergence of authoritarian populist movements. Already-dilatory trade discussions will encounter renewed resistance. Although greater global coordination is sorely needed, national political pressures will make it hard to achieve. All this will constrain some business activities but also opens the door to new ventures that depend upon collaboration between the public and private sectors.

Deleveraging

The cheap credit of the past few years most likely won’t return for a long time. For many households, this will mean reducing consumption and postponing retirement; for financial institutions—increasingly, bank holding companies—much higher capital requirements, less freedom to operate and innovate, and probably lower profitability; for governments, even more limited resources for health care, education, pensions, infrastructure, the environment, and security; and for corporations, a different role for capital. More broadly, for many companies the high returns and rapid growth of recent years rested on cheap credit, so deleveraging means that expectations of baseline profitability and economic growth, as well as shareholder returns, must all be seriously recalibrated.

New business models and industry restructuring

Companies engaging with the capital markets will encounter funders who are less tolerant of risk, a reduced ability to hedge it, and greater volatility. Hardest hit will be business models premised on high leverage, consumer credit, large customer-financing operations, or high levels of working capital. Businesses with long or inflexible production cycles or very long-term investment requirements will find it especially difficult to manage their funding. Some won’t make it, so industries will restructure. Corporate leaders already recognize this: in a McKinsey Quarterlyexecutive survey launched the day after the US presidential election, 54 percent of the respondents expected their industries to consolidate.

These are all truths we know. They require a significant shift in thinking about government as a stakeholder, the value talent creates when it is harder to leverage, how to conserve capital, and strategies for sound risk taking—among other things.

What we don’t know

Yet there is much that we don’t know, and won’t for some time: how well will governments work together to develop effective regulatory, trade, fiscal, and monetary policies; what will these responses mean for the long-term health of the global capital market; how will its health or weakness influence the pace and extent of change in areas such as the economic role of government, financial leverage, and business models; and what will all this imply for globalization and economic growth?

Although these questions won’t be answered in the short or even the medium term, decisions made in the immediate future are critical, for they will influence how well organizations manage themselves now and compete over the longer haul. The winners will be companies that make thoughtful choices—despite the complexity, confusion, and uncertainty—by assessing alternative scenarios honestly, considering their implications, and preparing accordingly.

In particular, organizations must think expansively about the possibilities. Even in more normal times, the range of outcomes most companies consider is too narrow. The assumptions used for budgeting and business planning are often modest variations on baseline projections whose major assumptions often are not presented explicitly. Many such budgets and plans are soon overtaken by events. In good times, that matters little because companies continually adapt to the environment, and budgets usually build in conservative assumptions so managers can beat their numbers.

But these are not normal times: the range of potential outcomes—the uncertainty surrounding the global credit crisis and the global recession—is so large that many companies may not survive. We can capture this wide range of outcomes in four scenarios. 

 

 

This research, focusing on the United States, the center of the storm, suggests that if capital markets rebound quickly, GDP would be 2.9 percentage points lower than it would have been if trend growth had continued over the next two years. If financial markets take longer to recover, as the middle two scenarios envision, US GDP growth could fall 4.7 to 6.7 percentage points from trend over the same period. At the “long freeze” end of the spectrum, Japan’s “lost decade” shaved 18 percentage points from GDP compared with its previous growth trend.

Regenerated global momentum

In the most optimistic scenario, government action revives the global credit system—the massive stimulus packages and aggressive monetary policies already adopted keep the global recession from lasting very long or being very deep. Globalization stays on course: trade and capital flows resume quickly, and the developed and emerging economies continue to integrate as confidence rebounds quickly.

Battered but resilient

In the second scenario, government-wrought improvements in the global credit and capital market are more than offset—for 18 months or more—by the impact of the global recession, which leads to further credit losses and to distrust of cross-border counterparties. Although the recession could be longer and deeper than any in the past 70 years, government action works, and the global capital and credit markets gradually recover. Global confidence, though shaken, does rebound, and trade and capital flows revive moderately. Globalization slowly gets back on course.

Stalled globalization

In the third scenario, the global recession is significant, but its intensity varies greatly from nation to nation—in particular, China and the United States prove surprisingly resilient. The integration of the world’s economies, however, stalls as continuing fear of counterparties makes the global capital market less integrated. Trade flows and capital flows decline and then stagnate. The regulatory regime holds the system together, but various governments overregulate lending and risk, so the world’s banking system becomes “oversafe.” Credit remains expensive and hard to get. As attitudes become more defensive and nationalistic, growth is relatively slow.

The long freeze

Under the final scenario, the global recession lasts more than five years (as Japan’s did in the 1990s) because of ineffective regulatory, fiscal, and monetary policy. Economies everywhere stagnate; overregulation and fear keep the global credit and capital markets closed. Trade and capital flows continue to decline for years as globalization goes into reverse, and the psychology of nations becomes much more defensive and nationalistic.

Leading through uncertainty

These descriptions are intentionally stylized to enliven them; many permutations are possible. Scenarios for any company and industry should of course be tailored to individual circumstances. What we hope to illustrate is the importance for strategists of considering previously unthinkable outcomes, such as the rollback of globalization. Unappealing as three of the four scenarios may be, any company that sets its strategy without taking all of them into account is flying blind.

So executives need a way of operating that’s suited to the most uncertain business environment since the 1930s. They need greater flexibility to create strategic and tactical options they can use defensively and offensively as conditions change. They need a sharper awareness of their own and their competitors’ positions. And they need to make their organizations more resilient.

Most companies acted immediately in the autumn of 2008 when credit markets locked up: they cut discretionary spending, slowed investment, managed cash flows aggressively, laid off employees, shored up financing sources, and built capital by cutting dividends, raising equity, and so forth. While prudent, these actions probably won’t produce the short-term earnings that analysts expect, at least for most companies. In fact, it’s time they abandoned the idea that they can reliably deliver predictable earnings. Quarterly performance is no longer the objective, which must now be to ensure the long-term survival and health of the enterprise.

More flexible

Companies must now take a more flexible approach to planning: each of them should develop several coherent, multipronged strategic-action plans, not just one. Every plan should embrace all of the functions, business units, and geographies of a company and show how it can make the most of a specific economic environment.

These plans can’t be academic exercises; executives must be ready to pursue any of them—quickly—as the future unfolds. In fact, the broad range of plausible outcomes in today’s business environment calls for a “just in time” approach to strategy setting, risk taking, and resource allocation by senior executives. A company’s 10 to 20 top managers, for example, might have weekly or even daily “all hands on deck” meetings to exchange information and make fast operational decisions.

Greater flexibility also means developing as many options as possible that can be exercised either when trigger events occur or the future becomes more certain. Often, options will be offensive moves. Which acquisitions could be attractive on what terms, for instance, and how much capital and management capacity would be required? What new products best fit different scenarios? If one or more major competitors should falter, how will the company react? In which markets can it gain share?

As companies prepare for such opportunities, they should also create options to maintain good health under difficult circumstances. If capital market breakdowns make global sourcing too risky, for example, companies that restructure their supply chains quickly will be in much better shape. If changes in the global economy could make a certain kind of business unit obsolete, it’s critical to finish all the preparatory work needed to sell it before every company with that kind of unit reaches the same conclusion.

A crisis tends to surface options—such as how to slash structural costs while minimizing damage to long-term competitiveness—that organizations ordinarily wouldn’t consider. Unless executives evaluate their options early on, they could later find themselves moving with too little information or preparation and therefore make faulty decisions, delay action, or forgo options altogether.

More aware

As problems with credit destroy and remake business models and market volatility whipsaws valuations, companies desperately need to understand how their revenues, costs, profits, cash flows, risks, and balance sheets will fare under different scenarios. With that information, executives can plan for the worst even as they hope for the best. If the recession lasted more than five years, for example, could the company survive? Is it prepared for the bankruptcy of major customers? Could it halve capital spending quickly? The answers should help companies to be better prepared and to recognize, as early as possible, which scenario is developing. That is critical knowledge in a crisis, when lead times disappear quickly and companies can seize the initiative only if they act before the entire world understands the probable outcome.

Better business intelligence promotes faster, more effective decision making as well. Companies can often gain insights into the potential moves of competitors by weighing news reports about their activities, stock analyst reports, and private information gathered by talking to customers and suppliers. Such intelligence is always important; in a crisis it can make the difference between missing opportunities to buy distressed assets and leaping in to snare them.

To get this kind of business intelligence, companies need a network, typically led by someone with strong support from the top. This executive’s mandate should include creating “eyes and ears” across businesses and geographies in particular areas of focus (such as the competition’s response to the crisis), as well as gathering and exchanging information. A network is critical because information is most useful if it moves not just vertically, up and down the organization, but also horizontally. Salespeople in a network, for example, should exchange knowledge about what’s working in economically distressed regions so that employees can help each other.

Assembling bits of information, facts, and anecdotes helps companies to make sense of what’s happening in an industry. Say, for example, that a supplier says it has no difficulties with funding, though first-hand knowledge from other sources indicates that the company is struggling to meet its payroll. Such warnings can allow executives to get a full picture much more quickly than they could by sitting in their offices and interacting only with direct subordinates.

More resilient

A crisis is a chance to break ingrained structures and behaviors that sap the productivity and effectiveness of many organizations. Such moves aren’t a short-term crisis response—they often take a year or more to pay dividends—but are valuable in any scenario and could help a company survive if hard times persist. Although employees may dislike this approach, most will understand why management aims to make the organization more effective.

This may, for example, be the time to destroy the vertical organizational structures, retrofitted with ad hoc and matrix overlays, that encumber companies large and small. Such structures can burden professionals with several competing bosses. Internecine battles and unclear decisions are common. Turf wars between product, sales, and geographic managers kill promising projects. Searches for information aren’t productive, and countless hours are wasted on pointless e-mails, telephone calls, and meetings.

Experience shows that streamlining an organization to define roles and the way those who hold them collaborate can greatly improve its effectiveness and decision making. When jobs must be eliminated, the cuts mostly reduce unproductive complexity rather than valuable work. As Matthew Guthridge, John R. McPherson, and William J. Wolf point out in “Smart cost-cutting in the downturn: Upgrading talent” (available on December 4), Cisco took that approach in shedding 8,500 jobs in 2001. When the company redesigned roles and responsibilities to improve cooperation among functions and reduce duplication of effort, talented employees were more satisfied in a more collaborative workplace.

In fact, many functional areas offer big opportunities: greater effectiveness, lower fixed costs, freed-up capital, and reduced risk. This could be the moment to redefine and reprioritize the use of IT to increase its impact and cut its cost. Other companies could seize the moment to control inventory; to reexamine their cash flow management, including payments and receivables; or to change the mix of marketing vehicles and sales models in response to the rising cost of traditional media and the growing effectiveness of new ones. 

As customer preferences change, competitors falter, opportunities to gain distressed assets emerge, and governments shift from crisis control to economic stimulus, the next year or two will probably produce new laggards, leaders, and industry dynamics. The future will belong to companies whose senior executives remain calm, carefully assess their options, and nurture the flexibility, awareness, and resiliency needed to deal with whatever the world throws at them.   

 

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Armstrong and the tenuous nature of heroism - Zeno Franco

Editor's note: Zeno Franco is an assistant professor in the department of Family & Community Medicine at the Medical College of Wisconsin. He studies the social psychology of heroic action and disaster management and is a former U.S. Department of Homeland Security Fellow. He is a research adviser for the Heroic Imagination Project, an organization that teaches people how to overcome the natural human tendency to watch and wait in moments of crisis.

(CNN) -- We have many heroes: historic figures who battled for freedom, a man who jumps on the railway tracks to save someone from certain death, a whistle-blower who identifies corruption in government or industry. While these forms of heroism focus on a willingness to take risks in the service of other people or noble ideals, the most ancient notion of heroism focuses on humanity's ability to transcend its own physical limitations.

Occasionally, there is a man or woman who appears to be almost superhuman in strength and physical ability. The Greeks had Achilles and Athena. Up until yesterday, we had Lance Armstrong.

It is unlikely that we will ever know the truth about Lance Armstrong's situation -- was it truly a heroic journey, battling his own body's limits to demonstrate the pinnacle of human capability -- despite the intense personal costs of competing in the Tour de France? Or was it a tainted attempt to win glory? And why can't it ever be simple -- why can't we have a hero who is beyond reproach?

Cyclists say 'good riddance'

As a researcher who focuses on heroic action and the ascription of heroic status, I know that heroism is rarely simple. In fact, in a paper that I authored with my colleagues Kathy Blau and Dr. Philip Zimbardo, we argued that heroism is fundamentally paradoxical.

Zero Franco

First, the action of heroism is typically an intensely private and personal endeavor, even when these actions are taken under the glaring spotlight of the media; but the ascription of heroic status is a fundamentally public activity -- the personal actions taken by one individual are observed and interpreted by others, rightly or wrongly.

If we consider the possibility that Armstrong's 500-plus drug tests were negative as an indicator that he never doped, this is an incredible testament not just to his physical strength, but his moral fortitude. If this is the case, he was able to resist an ongoing temptation that occurred in private, after all the cameras where off and the fans had gone home.

This brings us to our second paradox. It is human nature to at once hunger for and elevate exemplars of heroism, while we simultaneously often want to negate the actual actions of a real hero. One of the implications of our research is that all forms of heroism result in some level of controversy; seeing someone run into a burning building to save another may look heroic to one bystander but foolish to another.

Lance Armstrong faces lifetime ban

A lot rides on the outcome. If a woman who goes into a building is successful in rescuing the trapped victim in the inferno, she is a hero. But if she fails, or she is injured, the risk she took is seen as having been too great, even though the actual risk calculus she took in the moment of action does not change.

A snapshot of Lance Armstrong's future

Can the USADA strip Armstrong's titles?

Cycling: Armstrong faces ban, titles' loss

Moreover, someone willing to act heroically fundamentally challenges our own notions of ourselves. Heroes are, in some ways, subtly dangerous to our sense of social order. Even though they are human, just like the rest of us, their actions are outside of the normal human experience.

If there is a whistleblower in our office -- even if his or her motives are noble -- it is human nature to search for an alternative explanation. Maybe this person was really disgruntled at the boss. With Lance Armstrong, there is a natural tendency, perhaps in all of us, to say, "See, I told you so, no one could be that good."

The sad part of Armstrong's story -- of the titles being stripped away -- is that we lose either way. If he did dope, it is just another example in a recent string of high-profile heroic failures. Joe Paterno's career, built up over many years of good decisions, was washed away by an incident he should have acted on. The captain of the Costa Concordia's momentary lapse led to the deaths of 32 people; abandoning ship before his passengers led to his disgrace.

But if Armstrong didn't dope, it won't matter. The news cycles will have already done their work. There is doubt now, and that is often the beginning of the end of our willingness to attach the word "hero" to someone in our own minds.

We have lost a figure who was willing to challenge the limits of human performance, to show us what we are truly capable of if we put everything we have into accomplishing a seemingly insurmountable goal. Armstrong's story of setbacks and triumphs brought us closer to the essence of the human endeavor.

What's behind the Armstrong headlines?

While it is easy to say that one slip-up means someone can't be hero, it is also important for us to remember that negating all of this person's actions over a few mistakes also lets us off the hook. No hero is without flaws. None of us is. But if we allow ourselves the luxury of saying, "See, he's just like the rest of us," we no longer have to challenge ourselves to perform at the limits of our own personal capability.

via cnn.com

 

Turnaround Strategy - How to Overcome Strategic Inertia: Tips from two leaders

Frameworks abound for developing corporate strategy. But there’s no textbook or theory that explains how to deliver on that strategy by shifting capital, talent, and other scarce resources from one part of a business to another. One reason is that the moves each organization must make at any point in time are unique. Another is that different senior executives have different roles to play. But that’s not to say companies can’t learn from one another—in fact, understanding the broad range of reallocation challenges faced by different executives sheds valuable light on common pitfalls and the decision-making processes for sidestepping them.

Featured here are perspectives from two different industries and corners of the C-suite. Guy Elliott, the CFO of Rio Tinto, one of the world’s biggest mining companies, discusses how it decides when and how to place its bets. And Andreas Kramvis, who heads Honeywell Performance Materials and Technologies, provides insight from a business unit perspective and outlines his novel approach to bringing strategy and resources into alignment.

 

Guy Elliott has been the CFO of Rio Tinto—one of the world’s most diversified mining companies, with operations on six continents and net assets of roughly $60 billion—since 2002.

 

Prioritizing projects and regions

We start from the proposition that we are not strategic capital allocators; we are bottom-up capital allocators. We invest not by choosing the commodity in which to put money but by choosing theproject in which to put money. For example, we observed that 80 percent of the money in the copper world is made by 20 percent or less of the world’s copper mines. Our objective is for all of our mines in all of our products to be in that 20 percent because we think we’re particularly good at running large, long-life, low-cost mines.

Historically, we have not been particularly worried about which product is “in,” because in the short to medium run, copper mines may do better than nickel, or iron ore may do worse than aluminum. But on a 50-year horizon, it’s much less clear that one metal is better than another. It’s certainly true that one may have higher demand than another, but what really matters is the difference between supply and demand, and supply can often overshoot demand. The point of departure for us has been bottom-up: geologically and infrastructure driven. Is this deposit capable of being, over a long period, a low-cost, expandable operation in its industry? If it is, let’s allocate capital to it.

There’s another dimension to this, beyond just looking at our portfolio in project terms. You can also look at it as a jurisdiction portfolio. For example, a very high percentage of assets in our portfolio—approaching half—are in Australia, and about 40 percent are in North America and Europe, mostly in Canada. And then we have about 10 percent in emerging markets. As we look for new opportunities, they’re mostly in emerging markets. So that 10 percent will enlarge over time, but we need to think a bit more about the political risk and the management challenge of emerging markets versus what we might call “safer” jurisdictions.

Rebalancing the portfolio

In the middle of the last decade, we had a relatively diversified portfolio. But we then started investing heavily in what looked to be the most interesting business—iron ore, which had very high margins that have since risen even more. We also made a very big acquisition in aluminum and, as a consequence, ended up with a very lopsided portfolio: skewed toward iron ore in terms of profit and toward aluminum in terms of investment of capital. That’s caused the beta of the company to rise.

The portfolio bias toward iron ore has been very beneficial, of course. But it has unnerved investors a bit because they can’t believe the good times are going to continue forever. So we are beginning to ask ourselves questions about whether we should take action to “correct” that portfolio bias. And it’s very difficult. We could stop further investments in iron ore. But if we did that, we would be turning our back on some of the highest-return, lowest-risk investments we can make. So that looks like a perverse course of action. We also could sell some iron ore assets, but why would you sell some of your best businesses unless you really were clever enough to know precisely when the top of the cycle was? And even then, would you get the right price, given present market conditions?

Related to this is an essential part of our strategy: we don’t like to hedge. We think there are natural hedges within the portfolio. In simple terms, when the iron ore price is high, the Australian dollar is high; and when the iron ore price is low, the Australian dollar is low. Our margins are protected to some extent by this natural hedge because our costs are chiefly denominated in Australian dollars. However, there is a new phenomenon that is of concern. As Europe struggles, the currencies of countries such as Australia and Canada have become safe havens and behave differently than they have in the past. So our natural hedge may not be quite as secure as it used to be. The other imperfection of a nonhedging strategy is that from time to time, you have to make decisions about building something or buying or selling something, and that’s implicitly a hedging decision.

Of course, we can’t avoid it, because we need to replenish our growth pipeline continuously, as well as winnow our portfolio. But we don’t do it with great enthusiasm, because it involves market timing and, if we could do that well, we wouldn’t bother running a mining business; we’d just be a trading business. We did major acquisitions in 1989, 1995, and 2000 that have created many, many billions of dollars in value. But of course we didn’t buy everything at the bottom or sell everything at the top. One major acquisition—Alcan, in 2007—was strategically in line with what we were trying to do, since it was a low-cost, long-life, expandable business. But it was at the top of a cycle, which turned down immediately after we bought it. With the benefit of hindsight, we paid far too much for it in an auction.

Ensuring investment discipline

We institute checks and balances to manage internal lobbying. We have something called the Investment Committee, which approves sizable investments of any kind and consists of the chief executive, me, the head of technology and innovation, and the head of business services. In other words, it does not contain any of the divisional heads. The plan is that this committee has enough data to have a dispassionate discussion about an investment. Independence is essential: if it’s lost, we’re lost. Separation of powers is important. Is the committee completely immune to lobbying and strong characters? Of course it isn’t. But the discipline and the checks and balances are there.

In addition to that, we have two other disciplines. One of them is the information the committee gets. This committee receives three pieces of paper. We get the recommendation of the project proponent. Then we have an evaluation group that does a critique of the commercial and financial stuff, and a technical and environmental critique. We try to take the passion out of the debate.

The second discipline is a postinvestment review. After a period of some years, we go back to the original proposal and calculate what the return has been, which original estimates were wrong, which challenge was underestimated, what came out better than expected. From numerous postinvestment reviews we learn what we tend to get wrong and what we tend to get right. That’s an important discipline in any capital-intensive company because otherwise you don’t learn from your mistakes. For us it’s particularly important. We invest a few billion dollars in year one, and that makes or breaks our returns on that project for the next 50 years. The upfront decision is critical, since there are endless people who in their enthusiasm say, “Well, there’s a big strategic merit to this project that overrides the returns,” or “Don’t worry about these risks—we must be big in Brazil,” or “We must be in the nickel business,” or whatever it is.

Finally, our experience is that regular investments—as opposed to one-offs—succeed better. That’s also true of divestments. It’s the same principle as time–cost averaging. Successful investors don’t buy their whole stake at once and sit on it. They move into it gradually and, when they want to sell, move out of it gradually. In an ideal world, that’s how I would like to invest, even though, of course, that’s not possible in a big acquisition or disposal.

About the Authors

This commentary is based on an interview with Stephen Hall, a director in McKinsey’s London office; and Dan Lovallo, a professor at the University of Sydney Business School, a senior research fellow at the Institute for Business Innovation at the University of California, Berkeley, and an adviser to McKinsey.

 

Andreas C. Kramvis is the president and CEO of Honeywell Performance Materials and Technologies, which has recorded double-digit margin improvements for each of the past six years. He is the author of Transforming the Corporation: Running a Successful Business in the 21st Century (Randolph Publishing, September 2011).

 

Resource allocation at the business unit level

When you are in a business unit, you are much closer to your markets than the corporate entity is. Your knowledge of how to invest should be much sharper as well. Through rapid reallocation of your existing resources, you should be able to capitalize on opportunities more quickly than if you needed to apply for funds through a corporate capital process. The last thing you want to do is go hat in hand to corporate asking for capital when your businesses are not running well.

What I emphasize to teams is that if a business performs well, it will get all the capital it needs from the company, and then some. You need to turn the problem on its head and say there really never is a shortage of capital—there is a shortage of returns. If you achieve high returns, money will chase you.

There are plenty of opportunities to reallocate resources and create short-term opportunities to drive higher returns. You might have a plant that is outdated or pockets of investment dollars in areas that are no longer relevant. In one of my previous jobs, we had a very large plant that was uncompetitive, but the company kept putting money into it rather than pursuing the next technology. We stopped making those investments and diverted those funds to the new technologies; in a short period of time, we were able to supplant those operations with a state-of-the-art plant that had better cycle times, less waste, lower costs, and a greater ability to roll out innovative products. In other words, we funded the new plant ourselves by using funds that were previously being applied to areas without an upside.

Beyond capital

Most people think that reallocation only means the reallocation of capital. Granted, this is important. At the same time, I also like to think about the reallocation of people and mindshare. Believe it or not, the latter type of reallocation has the biggest impact.

A company that fails to organize its people the right way is most likely to require what you might call “hard reallocations,” such as divestments or portfolio overhauls. Reorienting people is difficult, but that’s what makes it so important to focus on. Moving your best managers, researchers, salespeople, and so on from low-growth or failing businesses to areas with higher growth and profit potential can be one of your most effective levers as a business leader.

Myriad issues stand in the way of achieving a dynamic reallocation. You can throw the whole management book at this and it may not suffice. Culture and organizational politics can stand in the way; so can sheer inertia. Managers can be as slow to change as their organizations, and misperceptions of what is important to them can linger for a long time, despite strong evidence to the contrary. You could even have the wrong business model in place, which means your processes are wrong and your ability to make good decisions is seriously impaired.

Shifting resources one ‘decision week’ at a time

To ensure that your organization is constantly reallocating resources from weak areas to promising ones, you need a systematic operating method. Most companies have a rhythm of meetings and performance reviews but spend much of their time looking in the rearview mirror: What was last month’s performance? What was last year’s performance? I believe you need to impose an operating mechanism that reallocates resources in real time and that educates your organization and instills core capabilities.

One operating mechanism I’ve found helpful is something I call “business decision week.”¹ We run BDW ten times a year, and we take its name seriously: decisions are actually made on the spot in real time. Attendance is mandatory for my direct-leadership team. Confidentiality limits the number of people who can be in attendance at some sessions, but for others there is no reason not to have a large number of managers listen in. The discussions are lively, and listening in can be a great learning opportunity.

I will not take a meeting outside BDW to discuss a project requiring capital approvals. Similarly, I will not take a separate meeting about resources for a new project involving research and development. Having one-off meetings and decisions would waste a lot of time and defeat the objective of this open system, in which all the key people must be present and comment on the matter at hand.

Business decision week forces my leadership team to look out the windshield. What are the biggest opportunities we should concentrate on? What capabilities do we need in order to pursue them? Where are our people wasting time, and where should they be spending more time today? How about in six months? We try to place management time and focus on areas where we can grow, rather than focusing on firefighting and activities with low potential.

I often think of BDW as analogous to the processor of a computer: the know-how it instills is the software. By building know-how, business decision weeks grow increasingly productive, and they enhance the organization’s ability to prepare for future challenges.

An example of how BDW helped my current business was in rethinking the engineering processes to help us understand the costs and risks involved in major capital projects. We started our discussions with a desire to reach a common vocabulary and set of metrics, so that each month, our business leaders could fully understand where our engineering resources were being applied. With each passing month, the discussion grew more sophisticated—we turned our attention toward reallocation of these resources to achieve the most critical objectives faster and discussion of which capabilities we will most need in the future. Now we’re focusing our attention on the biggest projects: the construction of new plants around the world. This is a significant undertaking, and one we would not have been prepared for without having both the processor and the software of business decision week in place. via McKinsey Q 

¹ For more on business decision week, see chapter four in Andreas C. Kramvis, Transforming the Corporation: Running a Successful Business in the 21st Century, New Orleans, Louisiana: Randolph Publishing, September 2011; or visit TransformingTheCorporation.com.