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
Monday, August 27, 2012
Not all innovations are equal - Is radical innovation a thing of the past? - Excellence In Innovation
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. 
Provocative. Engaging. Riveting. Memorable. HIRE JIM WOODS TO SPEAK WITH YOUR ORAGANIZATION.
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Saturday, August 25, 2012
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?
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 FrancoFirst, 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.
Friday, August 24, 2012
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.
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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).
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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.
Tom Peters - Big-Firm Innovation: Good Luck!
My columns are meant to help practicing managers. Yet when it comes to innovation, especially in big firms, I am stymied.
Strategy analyst Mike Kami says that Sears, Roebuck's "brand new" 1988 strategy is a carbon copy of its 1973 and 1983 "brand new" strategies. Nothing much seems to happen. And it's been 10 months since IBM's latest "radical" reorganization. We can expect another momentous upheaval any day, once again aimed at speeding up innovation.
In the 1985 book, Final Cut, the story of how conglomerate Transamerica concocted the all-time movie disaster, "Heaven's Gate," author Steven Bach cites screenwriter William Goldman's chief observation about Hollywood: "NOBODY KNOWS ANYTHING." I'd argue for putting Goldman's line on a plaque to be hung behind the desk of every big-firm executive involved with innovation.
Final Cut recently kept me up until 4:00 a.m. It does a top- notch job of capturing the day-to-day process of innovating in sizable firms. Bach was the head of production, later fired, for Transamerica's United Artists subsidiary. (The "Heaven's Gate" fiasco led to the dismantling of UA.)
Political considerations caused a dozen miscues. For starters, Bach failed to express the depth of his initial reservations about the project. As the newly appointed co-head of production, he didn't want to begin by shooting down his new colleague's pet project. Subsequently, standard big-company doctoring of bad news led to repeated false optimism. And then there was the equally standard lack of consequences following adverse outcomes; deadline slip after deadline slip led only to frenzied meetings, never decisive action.
But the biggest UA problem was money. Not too little, but too much. UA liked big bets; and Transamerica had very deep pockets. The brakes were never applied, and UA repeatedly stood idly by as Director Michael Cimino indulged his every over-done whim.
The woes resulting from Transamerica's too-deep pockets is almost interchangeable with the saga of Xerox's personal-computer blunder, described in gory detail by Douglas Smith and Robert Alexander in their new book, Fumbling the Future: How Xerox Invented, Then Ignored, the First Personal Computer.
Xerox's Palo Alto Research Center (PARC) is a lovely lab in a lovely setting, the compelling vision of then-Xerox chairman, Peter McColough. PARC was staffed with brilliant minds and awash in cash. Product after pioneering product was conceived at PARC. However, Xerox's Connecticut-headquarters team was preoccupied with turning back the challenge of IBM and Kodak, then Minolta and Canon in the copier business. PARC blissfully trundled on in pursuit of a dream -- an expensive toy, which someday would deliver. But someday never seemed to come. Visitors to PARC, like Apple's Steve Jobs, got turned on by what they saw. Jobs' exposure to Xerox's overcomplicated, overexpensive Star system gave him essential ideas for the Macintosh.
The book's epilogue tells the story best, listing the current occupations of former standouts at PARC: One founded GRiD Systems, the successful lap-top computer producer; two founded pioneering Metaphor Computer. A trio are senior officials at Apple Computer, and a score more are in key posts at Digital Equipment, Microsoft, et al.
In another book of the same genre, Fast Forward: Hollywood, the Japanese and the VCR Wars, author James Lardner lays out every pathetic detail surrounding the failure of RCA, Bell & Howell and a host of other big outfits to come up with a commercially successful VCR. The villains are the same: big-firm politics; too much money; too little accountability; grandiose plans; too much complication; too big a bet.
This series of books, mostly about failure, occasionally about success (Tracy Kidder's classic Soul of a New Machine), warrant more attention than the numerous management texts that lay out the ABCs of managing innovation.
Maybe the term "managing innovation" is part of the problem. It implies the possibility of rules and the reign of rationality. But innovation is hopelessly messy. Any honest recounting of either a simple or a complex innovation project reveals 10,000 unexpected twists and turns -- from problems with the science to the vagaries of getting customers to use anything new.
In fact, even the success tales are ultimately discouraging. Soul of a New Machine, for instance, documents the exploits of Data General's renegade group that developed a save-the-company mini- computer, after the firm's rich, central lab flopped. But the book mainly reveals the most unlikely set of circumstances that led to this rare success; replication would be all but impossible.
Ideas for managers? Autonomy for business units. Short deadlines. Low budgets. Lots of tries. Focus on small markets. Customers involved from the start. Would-be champions selected for passion and persistence more than for organizational or technical skills. These suggestions have merit, but even the track record of those who have tried them all is disheartening.
In the end, Goldman's advice -- NOBODY KNOWS ANYTHING -- may be the best starting point. Acknowledging the frightful innovation pitfalls and giving up dreams of the perfect innovation checklist or the "right" inspiring vision are big steps toward dealing realistically with the top management problem of our age: big- firm innovation in an increasingly ambiguous, crowded and fast- moving world.
1988 TPG Communications.
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