The Pope and the core business
The new pope, Francis I. was off to a good start when he first addressed thousands of people on the St. Peter’s square. So far so good, but the real challenges are still ahead: the sexual abuse scandal, the reform of the Curia, a drop in the number of followers in Europe, and growing competition from evangelical churches in Latin America, Africa and Asia.
In a recent issue the "Economist" suggests that the Catholic Church should concentrate on its core business spirituality and drop other activities to deal with the multiple challenges. The Vatican Bank, for example, should be closed according to the business magazine.
Core business good, diversification bad! This advice should sound familiar to many companies. And indeed, many follow this strategy. Throughout Europe and the US, the level of diversification decreased significantly during the past two decades, according to a recent study I conducted with Julia Hautz from University of Innsbruck and Michael Mayer from the University of Bath (not yet published).
Still, a narrow focus is not always the right answer. Here are four reasons when a broad portfolio may make sense:
So should the Catholic Church actually concentrate on its core business? The competition follows a different strategy: Rapidly growing evangelical churches offer their members in developing countries a ‘full service package’. Finances, child care, education and job search as well as spiritual guidance are all covered. If Francis I. does not want to lose (further) markets share, he has to offer the same. From a 'customer's’ perspective diversification not refocus is the way to go.
Monday 18th March 2013
This blog was originally published in the German Harvard Business Manager .
Can companies learn from military warfare?
After I completed high school I spent a year in the Austrian Army, doing an officer’s training course. The fact that I was a first lieutenant and deputy commander of a 42 men platoon turned out to be a neat argument in several job interviews. For example it helped me to get an internship with the United Nations in New York - where I met my wife. While this alone clearly justified a year of ‘blood, tears, and sweat’ I always wondered whether companies can really learn from the military?
There have been a string of business articles and books providing examples from warfare (see for example Hans Hinterhuber’s excellent article on what strategists can learn from the Prussian general Moltke ) but I could not help wondering whether the challenges are really comparable. While businesses build flexible organizations with the intention to make a profit, armies seem to be hierarchical creatures that swallow rather than produce money.
Today, Sir Robert Fry visited my Executive MBA class at Warwick Business School. After serving as Deputy Commander of the Coalition Forces in Iraq (i.e. the top British soldier there) he was in charge of HP’s 3 billion US$ defence business in Europe and the Middle East. His experience puts him in a unique position to answer my question.
His answer is a clear yes. In essence generals and CEOs both need to be aware of the means (resources) and ends (goals) and how they achieve these ends with the available means (implementation). Simple but not easy to achieve! While there are differences in terms of timing (only a small amount of time is spent in actually battle while competition is permanent for businesses) and the stakes involved (in business you might lose a few million but when you get things wrong on the battlefield, people die) activities for both the army and business are fundamentally shaped by ever changing networks of alliances and competitors. Motivation is also derived in a similar manner, as people attempt to achieve something for a group they identify with regardless whether this is a regiment, a company, a political party, or a family.
I think Sir Robert has a point – which leaves us with tons of interesting examples and the question what exactly we can learn. Just one quick example: When soldiers return from a mission, the US Army systematically runs them through a debriefing exercise asking four questions.
1) What did we set out to do?
Few businesses devote substantial resources to capture experience. To avoid the reinvention of the wheel and the repetition of mistakes they could learn from the US Army and systematically collect (and share) lessons learnt.
Monday 10th September 2012
Ignore the best, learn from the second best
At the age of 10 I joined the local gymnastics team in Niederndorf, a village in the Austrian Alps. I was not the top gymnast in my team but still good enough to make it to the state-wide competition. This is where it ended though. Athletes from the state capital and one other village were no match for me and my teammates. Occasionally we had practise sessions with these top teams. Each time I had great hope to pick up new tricks, learn a new routine. And each time I came home disappointed. There I was, training with the best guys in the state seemingly unable to learn from them! What a bummer.
This does not mean that I was entirely incapable of improvement. While I was training in Niederndorf I was able to greatly enhance my performance over the years. I – and my fellow teammates – particularly benefitted from one boy who was slightly above the crest. Observing him closely and getting hints from him (and our coach explaining how he did things) enabled me to eventually do such impressive things like somersaults in the air (I know this might not sound too impressive when you watch the Olympics but believe me the local girls thought this was cool).
A recent article by Chengwei Liu, a colleague at Warwick Business School, and Jerker Denrell, a professor at Oxford Saïd Business School, helped me to better understand what went on at the time. Using simulation models they are able to show that more often than not circumstances rather than skills explain complete outliers. For example Bill Gates might have been unusually talented but the fact that he could easily do some programming at a time when less than 0.01% of the population had to a computer, the financial support he could gain due to his upper-class background, and his mother’s personal ties with the chairman of IBM would still leave almost everyone unable to copy him.
In other words it was quite unlikely that I could learn from the top athletes in the state capital. They had training facilities we could not match, substantially more training time (in our local club we had to share the facilities with other teams and therefore limited time in the gym), and regular exposure to older, more experienced athletes.
Most entrepreneurs face a similar disappointment as I did as a boy. They try to model themselves after the likes of Bill Gates and Richard Branson only to realise that they will never match them. As it turns out the more promising approach is to learn from those closer to home. Chengwei and Jerker suggest that you are better off learning from the second best. An interesting idea!
Monday 9th July 2012
Is the UK car industry recession proof?
While the UK is slipping back into recession the island’s car industry is doing well. GM for example announced that new Astra will be built in Ellesmere Port and Jaguar Land Rover increased its profits by 35% compared to last year. An industry that has been in decline for decades is making a comeback. Referring to this as a surprise is an understatement.
To discover the reasons for this change in fortune a 2009 report by the New Automotive Innovation and Growth Team – an industry led project facilitated by the Department for Business, Enterprise and Regulatory Reform – turns out to be helpful.
According to the2009 report the main strength of the UK car industry is labour flexibility. This still holds today. GM for example cites it as one of the main reasons why the new Astra will be built in the UK.
The report also highlights three major weaknesses. The first is high labour costs compared to other car manufacturing nations in Europe. While a weakening Euro might even put more pressure on UK labour costs, increasing automation of the production process actually means that labour costs constitute a smaller portion of the overall costs every year. In short high labour costs probably hurt the UK car industry less today than a few years ago.
The second major weakness according to the 2009 report is a lack of skilled labour. Here the recession is likely to be a blessing. Other than for example, Germany, the car industry in the UK is not a preferred employer for engineers. If these engineers can’t find a job in industries hit hard by recession, however, they’re likely to turn to the car industry. In other words more skilled labour is available today.
Finally, the 2009 report criticises tough environmental regulations in the UK. Here the circumstances also changed dramatically. As regulations get tougher elsewhere and issues such as climate change are high on the agenda of customers yesterday’s disadvantage is today’s advantage. The UK car industry is a step ahead of many of its competitors.
It’s hard to say whether the UK car industry is entirely recession proof. Competing in an industry with considerable over-capacity is not exactly reassuring but changing circumstances are reason enough to be optimistic.
Monday, 25th June 2012
Prison Entrepreneurship Program
Most people would look for future entrepreneurs at Harvard or Stanford. Not Catherine Rohr. Eight years ago the former Wall Street investor decided to go to prison. Not as an inmate (as many would expect of a Wall Street banker) but in the search of entrepreneurial talent. While unconventional, it makes perfect sense to target drug dealers and gang members. Their experiences might be outside the law but they have a good understanding of competition, profitability, risk management, and distribution. After all, underestimating your competitor could possibly mean that your life is on the line, not just your job.
What inmates lack is the right incentives, networks, and tools to earn an honest living. Starting off as a business plan competition Catherine’s initiative quickly turned into a regular program combining classes and mentoring sessions. Connecting the inmates to 400 executives and 200 business plan advisors proved to be a winning concept: 700 inmates graduated from the Prison Entrepreneurship Program so far. Only 5% reoffended within 3 years compared to a 25% Texas average. 100% of those who were released from prison found a job within 90 days, taking an average of just 26 days. And the taxpayer saves about $50,000 per inmate.
Did you ever consider looking for entrepreneurs in unusual places? To learn more about the ‘prison entrepreneurship program’ take a look at http://www.prisonentrepreneurship.org/.
Thursday, 3rd May 2012
Did you ever ask a job applicant whether he or she has courage? My bet is that you have not. You might have asked a question like: ‘Can you tell me a story where you successfully lead a team.’ But arguably the candidate would be courageous to tell you a story of real courage at that point in time.
Most companies are not so sure whether they really like courage. It might result in people doing things that are not in line with company policy. It might result in whistle blowing. It is in short unpredictable what courageous people do. At the same time some of the most astonishing achievements can be traced to individuals who were prepared to take great personal risk.
H. R. McMaster is such a person. In 2005 he was in charge of the 3rd Armored Cavalry Regiment in Tal Afar in Iraq. He and his man were based outside the city and were supposed to secure it through regular patrols. This was a losing strategy and McMaster knew it. Although this was against the instructions from the generals he decided to station his solders in the city. He also engaged with the local sheiks. Within a short period of time things started to turn around. Locals were less afraid to co-operate with the Americans as they no longer left the city defenceless at night. McMaster was passed over for promotion several times as he was known as a trouble maker but he was soon copied by others. When General Petraeus took over the command in Iraq he applied this approach on a broader scale and managed to drive back the insurgents.
Courage is greatly undervalued in organizations. To hear more about H. R. McMaster, listen to Tim Harford’s talk at TEDxWarwick . And do not forget to ask your next candidate to tell you a story of personal courage.
Tuesday 28th February 2012
Don’t underestimate your opponent: how Rock N’ Roll beat Tipper Gore and the Senate
In 1985 the daughter of Senator Al Gore listened to Prince’s new album ‘Purple Rain’. With great horror Al’s wife Tipper noticed that one of the songs was about female masturbation. She decided to do something about this and together with other ‘Washington wives’ founded the Parents Music Resource Center (PMRC). They managed to convince the Senate to hold a public ‘porn rock’ hearing (one cannot fail but wonder whether family ties came into play).
The plan for Tipper and her followers seemed simple enough. Get a few rock and roll stars in front of the committee. They will make shocking and outrageous statements, hopefully also provide a timely drug or alcohol scandal and the concerned public will cry for legislation which a sympathetic Senate committee will be happy to provide.
Things started to look good when Dee Snider, the front man of the heavy metal band Twisted Sister, entered the hearing looking his part. With long unruly hair he walked in with a swagger, wearing a tight sleeveless t-shirt and washed-out jeans. Sitting down he took out a crumpled piece of paper from the back pocket of his jeans. But as soon as he opened his mouth, everything changed. Dee Snider turned out to be a Christian father who did not drink nor smoke. His statement was not outrageous and incoherent, but a powerful and witty defence of ‘freedom of speech’. At the end of the hearing Tipper Gore looked like an uptight housewife who deliberately read sexual meaning into a song Dee Snider wrote about friend’s surgery. Legislation of the kind envisioned by the PMRC never materialised.
Both the PMRC and the senate committee had made a fatal mistake: they underestimated their opponent. This is a common mistake. Hillary Clinton for example did not expect Barack Obama to stand much of chance initially. In business CNN never saw Al-Jazeera coming and mobile phone manufacturers famously underestimated Apple. My advice: carefully assess the resources of your opponents. Do not judge a book by its cover! And while you do so, listen to ‘We’re Not Gonna Take It ’ the Twisted Sister song which was not popular in the Gore household.
Saturday 18th February 2012
HBR’s not so audacious idea: paying businesses to keep people out of prison
Imagine the following scenario: you have a toothache and as a result of it a massive headache. Instead of getting the tooth extracted you decide to take an aspirin to treat the headache. Not very smart is it?
Eric Schmidt’s idea of reducing the American prison population is somewhat similar to taking an Aspirin. In a Harvard Business Review list of Audacious Ideas he suggests that the government should float bonds to finance social programs for inmates run by companies and community groups. If the programs show a meaningful impact such as a reduction of repeat offences, the investors would get a premium. In principle this sounds like a neat suggestion. There are, however, fantastic social programs in place already. Some of them much more audacious than providing money for a little bit of education. The Prison Entrepreneurship Program for example builds on the assumption that criminals, especially former gang leaders, are great entrepreneurs. All it needs is redirecting their energy into legitimate causes. After all, running a drug ring requires skills to keep rough competitors at bay, organize a supply network, and do so without being caught by the police. Business leaders and academics run the holistic MBA-style program which results in a recidivism rate of less than 10%.
Still, even such fascinating programs cannot change the fundamentals: 1% of all American adults are in prison right now. Some of them for very minor reasons, and yes, if you are poor and black or Latino your chances are much higher to do time! Prison, however, is a tough place. To survive you need to become more violent than before. In short, not the intended effect.
So here is my audacious idea, a way to treat the toothache directly: change the law. No need to lock up people for carrying a little bit of Marijuana or ‘sexting’ between high school kids. There are better ways to deal with them.
Monday 6th February 2012
Don’t be too clever for your own good – Bayern München
Bayern München is a formidable force not only on the football1 field but also in terms of marketing. Usually that is. Last week they scored an ‘own goal’.
In an attempt to get more Facebook ‘likes’ and hence a direct connection to fans the PR department thought of a clever little publicity stunt. Bayern announced a spectacular transfer. The presentation of the new star would take place at 2pm on Thursday exclusively on Facebook. In order to join the fun, fans had to first ‘like’ the page. As it turned out, there was no transfer. The ‘new’ star was the fan. Within 30 minutes more than 1400 angry comments were posted.
It’s tempting to seek publicity through clever little stunts. My advice: be very careful how you do this. Never, ever use your customer. No one likes to be taken for a ride. The same is true for friends and business partners. I recently received an email from a friend who copied in a large group of his friends. I knew that this would be a perfect target audience for the type of work I do. So there was some temptation to send a message promoting my book. Most of them would probably not have minded. At the same time I knew, I would abuse the address list of my friend. Obviously I did not send a message. It was simply the right thing to do but it also makes sense from a business perspective. A little bit of attention is simply not worth endangering the strong tie with a good friend or business partner.
1 for my US friends, this is soccer
Sunday 29th January 2012
When companies are hit by the gales of creative distruction, times are tough. Kodak is certainly experiencing this at the moment. They used to make millions from selling film. In 1996 its revenues peaked at nearly US$ 16 billion and in 1999 they declared profits of US$ 2.5 billion. Since then not only has their film business become obsolete but customers have moved beyond digital cameras using their smartphones instead. In 2011 Kodak lost US$ 222 million on revenues of 6.2 billion. Rumours of imminent bankruptcy abound.
So what are the options for Kodak to avoid ultimate distraction (mind you, I am not suggesting Chapter 11 bankruptcy protection)?
Option 1: the Fuji model. The Japanese arch-rival was in a similar position with a strong near monopoly in the home market however facing trouble once the world switched to digital. In the early 2000s a combination of aggressive cost cutting and diversification saved the firm. Using its expertise in anti-oxidants Fuji for example built a successful cosmetics business. My gut feeling is that it is too late for Kodak to apply this strategy. Successful diversification would require sizeable acquisitions. Kodak has neither cash nor a strong share price to finance this.
Option 2: the legal model. Kodak has a huge portfolio of intellectual property. Although the company did not succeed in building substantial new businesses out of them they might still be valuable. If Kodak is able to prove that others infringed on their patents big settlements are possible. To that end they are currently suing Apple and HTC. While this strategy might provide some breathing space it is no ultimate solution to the question how Kodak can build a new business and generate money in the long run.
Option 3: the niche model. Ron Adner from the Tuck Business School and Daniel Snow from Brigham Young University suggest that firms can stick to old technologies and look for new environments where these are still valuable. For example when Japanese quartz watches started to invade the mass market Swiss watchmakers continued to thrive in a smaller niche market for mechanical watches. In the case of Kodak this implies a substantial downsizing. Kodak will no longer be a giant but it might survive. A possible route could be digital printing, a business that the firm started to build on in the past few years.
Kodak seems to be destined for its last Kodak moment. If they want any chance to defy the odds I would suggest a combination of legal settlements and profitable niche strategy.
Sunday 16th January
The present value of history
In finance the net present value is commonly used to determine how much value an investment or project adds. Using the same logic, we can contemplate how much value we gain from taking history seriously. Many of you might be inclined to see no value at all. Holding on to the past might simply prevent us from facing new challenges. Investigating your corporation’s history is also potentially costly. Sure enough, but then there is also George Santayana’s notion that ‘those who cannot remember the past are condemned to repeat it’.
George David Smith and Laurence E. Steadman, from the Winthrop Group , raise two important points in a widely regarded 1981 Harvard Business Review article. First, they argue that history is an important diagnostic tool. Firms evolve over time and some practices and processes today seem outdated. Nonetheless it is important to understand them before you toss them out of the window. This is not simply a nice theoretical exercise. Particularly in large firms change is controversial. Introducing change without taking the existing culture and tradition into account is a recipe for disaster. For example when Edzard Reuter became the leader of Daimler in 1987 he wanted to establish a technology conglomerate. Among others he added an arms business. This did not play well with proud car manufacturers. Not surprisingly the different divisions never cooperated fully and the envisioned synergies never materialised.
Secondly, Prof. Smith and Prof. Steadman point to the motivational value of history. As an Austrian I can proudly point to the cultural heritage bestowed by the likes of Mozart, Haydn, or Klimt. In a similar manner firms can draw on their heritage to motivate employees and inspire customers. Siemens for example continues to draw attention to the pioneering role of its founder Werner von Siemens. Glaxo can use the memory of the commercial genius of Alec Nathan to fire up its sales force.
Not all events in history will be of motivational value. In fact, some will be downright embarrassing. And you might consider burying them in the past. In my own research it became apparent that these mistakes are probably the most valuable attribute of history. Make sure that you remember your mistakes and do not repeat them. For example HSBC had funding problems in its early days, lacking sufficient access to the London Market. They created a secondary board in London to deal with the issue. Most importantly they learned that they need to combine access to capital in London with access to customers in Hong Kong.
As you start the New Year, your eyes are on the future. As you prepare to compete, do not forget to leverage your own history!
Thursday 5th January 2012
Saving health care – an idea from India
With the primaries just around the corner there will be increasing attention on health care, one of the most controversial topics in US politics. It is rather obvious that costs will continue to rise (to put it mildly) as the population continues to age and medicine becomes more sophisticated (and expensive).
So far the focus was on the demand side. In an advanced economy like the US it is indeed an embarrassment when large groups are uninsured. Proponents of universal health care also argue that the system as a whole will be more affordable once more people (including the young and healthy ones who currently might decide that they don’t need insurance) participate. On the cost side pharmaceuticals and to a smaller extent hospitals received some heat for making big bucks. More generic drugs could reduce spending though there might also be less incentive for firms to invest in innovation. Both attempts to increase the number of participants and to reduce costs through cheaper drugs are likely to do some good but won’t be enough to handle the underlying demographic challenge.
A radically new approach that might save healthcare is currently being pioneered in India: mass production. Yes, you read correctly, Henry Ford is making a comeback in the person of Devi Shetty. Dr. Shetty introduced economies of scale to medicine. His flagship Narayana Hrudayalaya Hospital has a capacity of 1000 beds compared to an average of 160 in a typical US hospital. In 2008 his 42 cardiac surgeons performed 3,174 cardiac bypass surgeries, more than twice as many as the Cleveland Clinic, the U.S. leader. Dr. Shetty himself has performed over 15,000 heart operations to date. While scale reduces costs it somewhat surprisingly also increases quality. Due to the high volume of operations doctors are able to specialise on specific types of cardiac surgery. According to The Economist the success rates in Dr. Shetty’s hospital are comparable to top US hospitals. The price tag is quite different though. While you would pay between 20,000 and 100,000 US$ for open heart surgery in the US you will get the same treatment for 2,000 US$ in India.
Few innovations had such a profound impact on manufacturing as mass production. In late 19th century Germany, a car was worth about the same as a villa in Berlin’s most expensive suburb. Prices started to crumble quickly when Henry Ford introduced assembly lines and today most people in the West can afford a vehicle. Economies of scale might do the same in medicine. Sure, it seems a bit farfetched at the moment but Dr. Shetty is showing the way.
Sunday 4th December 2011
Can trust replace a contract?
Contracts are costly. We need to hire a lawyer (or have an in-house legal department) and even more crucially we need to spend considerable time going through the details. Recently I started to work on a project for a large company. Before we started we set up a Non-disclosure agreement (NDA). While all individuals involved in the project had a clear understanding what we wanted, we took almost a year to sort out the details once the lawyers got involved. Could we have done without a contract and simply worked together because we trust each other?
In many emerging markets people work with each other purely based on trust. For example if you want to send a car to Kenya today my advice would be to use the Somali networks. Not only is it the cheapest way but you can also be sure it arrives. These networks are entirely based on trust and sometimes family ties. Alternatively if you send your car through an established logistics company you will get an elaborate contract, pay an arm and a leg, and still can’t be sure whether your car will arrive in one piece. For example I once organised an aid transport where 50 new pairs of sneakers got ‘lost’.
Are things different in the West though? After all in many emerging economies legal institutions are weak and people know that they have no choice but trust each other. Well, imagine for a moment that I breach the contract with the company I started to work with and share sensitive information with competitors. Of course they can take me to court but the damage is done already. Even if they take away my entire personal wealth this is not going to make up for any noticeable losses. In fact they could also bankrupt me without any contract in place by simply dragging out court room proceedings until I can no longer pay my lawyers. As I am aware of this, a contract does not result in additional deterrence. So what it boils down to is common interest and trust – no matter whether there is a contract or not.
To cover our back internally we will of course continue to draw up nice contracts when we work with someone outside the firm. In reality trust is what really matters. In fact I have worked with other individuals in the company mentioned above without having a contract. These days there is a stronger American influence noticeable – a possible reason for setting up a NDA this time.
Wednesday 30th November 2011
Strategy lessons from David and Goliath: Do what others can’t do
In 1 Samuel 17 the Bible provides an important insight for strategists. The Israelites faced the Philistine army in the Valley of Elah. For forty days the Philistine giant Goliath came out once a day mocking the Israelites. None of them dared to face him. One day the young David was sent by his father to bring food to his brothers at the front line. He saw Goliath and decided that he wants to fight. Although King Saul discouraged him David did not falter. The two unequal opponents faced each other. The seasoned fighter Goliath in heavy armoury, his massive sword and spear in hand against the teenage David dressed in a simple tunic, carrying his shepherd's staff, slingshot and a pouch full of stones. In fact David seemed even more vulnerable as he had refused to wear the armour and helmet that Saul had provided for him. As Goliath now started to run towards him he took a stone from his pouch and slung it at him. He struck the giant on his forehead, killing him in an instant. David then went over, took his sword, cut of Goliath’s head and showed it to the Philistines. They ran in fear.
David had a profound understanding of his own weakness and turned it into a strength. He knew that he would never be able to withstand a blow from Goliath. Helmet and armour would only slow him down and take away his one vital advantage, to act before his opponent reached him.
Understanding your own weaknesses and turning them into strengths can also provide unexpected advantages as you face your competitors today. When TomTom started to offer GPS systems it knew that competitors like Siemens were ahead in terms of technology. So they targeted downmarket consumers which were less demanding. Siemens was not able to do so as their lead customers in the automobile industry were dead against sharing this technology with mass market consumers.
Devi Shetty is India’s most celebrated heart surgeon. He is fully aware that he is neither able to meet the technology of US hospitals nor will he find enough patients to pay between US$ 20,000 and 100,000 for open-heart surgery. So he decided to pursue a different strategy: mass-production. Together with his team of 40-odd cardiologists he performs around 600 operations a week. This is a far call from the personal attention you receive in the US but specialisation pays off. Dr. Shetty and his team operate for US$ 2,000 and have success rates as good as Americas top hospitals.
Think about your own weaknesses and how you can turn them into advantages!
Tuesday 15th November 2011
5 ways to annoy your customers – why you might not care but how your competitors will benefit
‘Customer is king’ – Really? It is also costly to meet the desires of your customers and at times it might make sense not to make them feel like kings. Here are 5 ways you might annoy them and a few thoughts why you might or might not care.
Share your own worst customer moments on my Facebook site .
Sunday 6th November 2011
Investors watch out for these red states
Did you ever wonder whether it really matters who is in government? Of course if the governor happens to be a personal friend of yours this might be helpful. Particularly in developing economies where procedures to award contracts are less stringent, there is ample evidence that political connections make a difference. But let’s not be fooled, personal ties of politicians are relevant everywhere.
Less obvious is whether there is a measurable impact that goes beyond a small network of friends. I came across an interesting piece of research by Aviad Pe’er and Oliver Gottschlag that might help us to answer this question. They compiled a large dataset of leverage buyout deals between 1980 and 2000 and tested whether their performance differs in red (Republican) and blue (Democrat) states. More precisely they measured whether a state voted red or blue in the last presidential election. In red states there were significantly more leverage buyout deals and these deals were more successful. On top of this they measure what happens when a state changes, i.e. a state which voted Republican at the previous election turns blue or a state that votes Democrat at the previous election turns red. Interestingly there is a measurable effect that goes beyond simply being Democrat or Republican. The number of deals goes down in states newly won by the Democrats and the remaining deals are less successful.
In short Aviad and Oliver show that the political climate makes a difference. Democrats are more committed to employees, unions, the environment, and community issues while Republicans have a strong affiliation with business.
With a presidential election around the corner this is very timely information. If you are a private equity investor, you probably want to vote for a Republican candidate. Not surprisingly the industry is a large contributor to the Grand Old Party. On the other hand, if you are concerned about jobs, you are probably in better hands with the Democrats. After all Private Equity Funds are mostly concerned with short term value increase – often achieved through job cuts!
Friday 28th October 2011
Apple after Steve JobsWas Steve Jobs a great leader? For millions of Apple fans this is almost a blasphemous question. Of course Steve was a great leader. He developed the world’s first commercially successful small computer in 1984. After being ousted by evil number crunchers Apple entered a period of darkness. Only when the white knight returned in 1996 things became right again. He gave the world the iPod, iPhone, and iPad, revolutionizing three industries.
I am sounding almost a little cynical here. This might not be quite appropriate considering Steve Jobs very real achievements. But I am trying to make a point. Was it really Steve Jobs that made all of this possible? Or did the media (and Apple) create a large than life figure?
From a marketing perspective there is little doubt that Steve mattered a great deal. Who cared for tablet computers before he told people they need this? I still think it is not particularly useful but many people were convinced otherwise because they believed Steve.
From a product development and technology perspective, he probably mattered much less. He has been ill for several years and the Apple machine continued to run smoothly throughout this period. New ideas emerged and successful products were launched.
Now the hour of truth has arrived. For the sake of both Apple and Steve Jobs I hope that he was less important than the media makes us believe. Truly great corporations do not rely on a single individual. And truly great leaders create systems that function without them.
If you want to build a successful business, no need to read the biography of Steve Jobs. Your time is better spent talking to your employees, creating many superstars rather than following one.
Tuesday 9th October 2011
Almost great – the tragic tale of Daimler
Daimler should be a darling of the stock market. 2011 the German car manufacturer sold more cars than ever before. Profit margins of 9% and a strong position in Asia’s growing markets provides promising reading for investors. Still, they don´t seem to be keen. The shares of its old nemesis BMW have done substantially better in the past 12 months - despite Daimler’s higher profit margins. What’s going on?
Max Warburton, an auto analyst at Bernstein Research, asked ten large investment houses why Daimler is so unpopular. He identifies three problems. First, Daimler’s competitors are a better bet. They seem to grow faster, cut costs more aggressively, and provide more promising future strategies. Second, Daimler’s communication with investors does not work. Although its management is always happy to talk – which is good – they also make mistakes. For example announcements are corrected quite frequently. Finally, investors don’t like Daimler’s own investment strategy. And this is where they reveal their real issue: they do not trust Daimler.
This is not entirely surprising. Daimler was meant to be great. In our study of long-living corporations we calculated total shareholder return for 50 years. Daimler was among the top for the first 40 years. Then Edzard Reuter took over and tried to turn the car manufacturer into a far-flung conglomerate. Jürgen Schrempp followed with global ambitions. He wasted billions when he acquired Chrysler. Daimler’s current boss, Dieter Zetschke, was part of Jürgen Schrempp’s team. He was in fact trying to turn Chrysler around. Although he did a reasonable job, he is nonetheless a constant reminder that Daimler has been on the wrong side of the road for more than two decades.
What Max Warburton’s little survey really tells us is that history matters! There is not much that Daimler can do at the moment. They have to continue along the current track. A few more years of decent returns, a slightly more conservative approach towards communication (telling less is often better), and a management team that is not linked to the Schrempp era will probably do the trick.
Tuesday 4th October 2011
When your competitors can’t hurt you do it yourself - Netflix
The core message from my research on long-term success is that companies need to be intelligently conservative. This means that they do not ignore their core strengths, traditions, and established businesses when they try to adapt to changes in the market place. Netflix demonstrates what happens when you ignore this advice. From a July peak of $299 the share price went down to $129.
What happened? Netflix had happy customers. For $9.99 they were able to rent DVDs through the post as well as watching movies and shows online. On September 1st Netflix decided to charge new prices: $7.99 for mail order or streaming and $15.98 if you want both. Angry customers jammed the firm’s switchboard and flooded its Facebook page. And things got worse. As it turns out the new prices are only a prelude to separating the DVD renting and online streaming business. Netflix thinks the future is online streaming. That’s probably right. But not necessarily Netflix’s future!
For many movies Netflix has to wait between 8 and 9 years before it can start streaming them. My guess is that most people won’t wait around for that long to watch the latest blockbuster.
The DVD renting business on the other hand enjoys great legal protection. Hollywood studios have to make them available for Netflix roughly four months after they appeared in the cinema. Over the years Netflix also build a fast library of movies and developed an efficient logistics system. Combining latest movies on DVD with older content online for a good price turned Netflix into a company hard to beat.
As Netflix prepare itself for an online future they decided to ignore its core strength. An intelligently conservative company would continue to run the tried and tested model while slowly extending the online reach until the time is ripe for a full migration. Netflix, however, decided to make life easier for its competitors.Saturday 24th September 2011
The danger of choosing innovation champions
Companies across the globe are trying hard to stimulate innovation. Today I had a conversation with a country chairman of a large defence contractor that highlighted a danger that many leaders might not be aware of.
Not too long ago he decided to celebrate exceptional projects, ‘innovation champions’ so to speak. His intention was to show that he cared about innovation and foster the sharing of best practices. He was hoping that this would lead to many other projects achieving similar innovation success. Seems like a great idea! Unfortunately there was a side effect he did not anticipate. Once he chose a particular project, everyone in the organization dropped what they were working on, trying to replicate the exemplary one. This is quite obviously counterproductive. Other than efficiency, exploration is ‘allergic’ to streamlining and one-size-fits-all approaches. Creative ideas emerge in unpredictable ways. Different approaches within an organisation stimulate conversations that might lead to something new and exciting. In short the country chairman achieved the opposite of what he wanted, a climate that prevented a thousands flowers from blooming.
He quickly dropped his initiatives. The lesson for leaders: highlighting ‘most innovative’ projects can easily stop an organization from innovating (unless you are able to make sure that other teams continue work along different trajectories).
Monday 12th September 2011
The beauty of indirect payment
Last week I went on a safari with family and friends. On the way to Amboseli National Park the tour operator stopped at a Maasai village. After parting with a ‘tip’ of US$ 20 each, we were treated to a Maasai dance and a visit to their village. Even if you have never come to Kenya, you can probably imagine what it was like. Ever attended a Greek sirtaki, a Turkish belly dance, or a Tyrolean night? While I don’t intend to discuss the cultural value of such events, most people would agree that they don’t want to part with US$ 20 for this. In our group some decided not to attend while curiosity got the better side of most. They did not really regret their decision but the ‘tip’ left a sour taste in their mouth. The feeling of having been ripped off became stronger once they found out that some people had refused to pay US$ 20 and got in for half price.
This is a tricky situation for such Maasai “villages” that would like to rip off tourists but also have to avoid that word gets round and future visitors refuse to take part. A trip to my native Tyrol (Austria) might provide a solution. Most villages put up Tyrolean nights, where grown men dress up in leather pants and jump around hitting their thighs. The difference to the Maasai dance: it is free! Or better to say tourists think it is free. What really happens is that hotels have to pay a membership fee to the local tourism board which sponsors these shows. The hotels in turn will factor these costs into the pricing of rooms, food, and drinks. In other words, the tourists still pay but they don’t know it.
In the US the pharmaceutical industry benefits from a similar system. When you go to the doctor you want to get the most effective medicine. As your insurance will cover the costs, you don’t care about costs. Most of us don’t connect increasing insurance premiums with our own behaviour. Perfect for pharmaceutical companies!
If you can think of a way to provide your customers with a product or service they don’t pay for directly, I suggest you go for it. Certainly the Maasai could work with the National Tourism Board and National parks or even more easily connect with tour operators and local safari lodges.
Saturday 3rd September 2011
‘Do-gooders’ should endorse sweatshop
There are many things that keep executives at Nike, Adidas, or Puma awake at night. Surely, one of them is the release of yet another documentary linking them to a sweatshop somewhere in China, Vietnam, or Bangladesh. So they try to put policies in place to ensure better working conditions. Seems sensible. But for all the do-gooders in the West who watch the documentary and lament about the horrible multinationals afterwards, there is some news: sweatshops are good for developing countries.
While the conditions are often heart-breaking, we need to bear in mind that people work there voluntarily. Sweatshops are considered good places to work. Consider some of the alternatives: scavenging on a city dump, selling fruits on the street, or prostitution. The romantic notion of staying back at the rural home also does not live up to its image. On the contrary rural areas are the toughest ones to scrape a living from.
The strongest argument for the endorsement of sweatshops though is what it means for the economy in the long run. Tim Harford (you should read his book The Undercover Economist) points at South Korea. The multinationals first arrived attracted by the cheap labour cost – i.e. the sweatshops. But as more and more of them followed they had to compete for the best workers through higher salaries. South Koreans now had an incentive to invest in education while previously a degree did not get them a better job. Governments also benefit as the formal sector of the economy can be taxed much easier, allowing them to invest in education etc. In short, the arrival of sweatshops is the first step that points at economic prosperity. Today South Korea is a high technology power and a typical worker earns 5 times as much as his father did 35 years ago (and yes, this is inflation adjusted).
So if you are concerned about developing countries, call Nike today and ask them to open another sweatshop.
Monday 15th August 2011
Co-CEOs: promising management innovation or bound to fail?
Last Monday Deutsche Bank appointed Anshu Jain and Jürgen Fitschen as successors of Josef Ackermann. As two CEOs are rather unusual, this prompts the question whether this is a promising management innovation or a recipe for disaster.
The downsides are obvious. Having two rather than one person in charge can lead to internal division and disruptive power struggles. Shareholders and customers might be wondering who is really speaking for the company. In short, transparency can be an issue.
The potential benefits are less obvious but equally compelling. Firms are becoming ever more global and technically complex. It is hard to find a leader to deliver both political connections and technical expertise. Deutsche argues that Indian born Mr. Jain is an experienced investment banker – where the bulk of the profits are generated – while German Mr. Fitschen is able to navigate the political institutions of Germany.
Whether this is also a practical solution can be determined by a brief trip into history. In a study of corporations succeeding for more than 100 years I noticed that a distinguishing factor was their ability to choose leaders willing to understand their own limitations. In some cases this meant two or even more leaders on the top.
In the mid-19th century, for example, the two brothers Edouard and Léon de Lafarge formed a talented team at their family cement company. While Edouard was a dynamic and entrepreneurial businessman, his brother was a diligent technician who made sure the company kept up to date with technology developments. At other times Lafarge even resorted to an old Roman concept, the triumvirate. In the 1970s the combination of three different talents allowed them to embark on a process of internationalization and diversification while other cement producers were hit very hard by the oil crisis. Another example is Shell. On paper the company had two leaders, one in Britain and the other in the Netherlands. In reality there was actually an entire committee of managing directors taking collective decisions. While outsider never liked it this was crucial to become the most cunning political player in this industry. A decisive advantage when governments hand out the right to look for oil.
While the examples from history do not rule out complications, they illustrate that co-CEOs can do a great job. Particularly for companies that require strong political connections and a particular form of technical expertise at the top, this might be a promising management innovation.Sunday 31st July 2011
How innovative are Forbes’ ‘Most Innovative Companies’? Some not that much!
With the entire craze about innovation it was only a matter of time before we get a list of the world’s most innovative companies. Forbes published one based on a new book by Jeffrey Dyer, Hal Gregersen, and Clayton Christensen. Considering the stature of the three I would have expected a ‘solid’ ranking. By that I mean a ranking based on a method that really captures innovation. Unfortunately that is not the case.
Forbes’ innovation premium is calculated by comparing the Net Present Values of Cash flows (i.e. value of existing business) with the market capitalisation. The assumption is that investors bid up the stock value if they expect future innovation results. For two reasons this does not work. First, investors do not necessarily know what innovations companies work on. Often firms keep this secret to avoid competitors from copying their ideas. Second, investors bid up stocks for many reasons not related to innovation such as brand value, future competition, or economic environment. For example the market cap of an oil firm is going up when investors expect a crisis in the Middle East. For those oil companies having large reserves in politically safe countries the stock price is going to sore even more.
So how does Forbes’ list hold up when using other measures of innovation? Not very well! The most widely used measurement is patents. I ranked Forbes’ ‘Most Innovative Companies’ according to the number of patents they published in 2011 so far. The ranking is fundamentally different (for those into statistics, the correlation is -0.1285). Not much changes if I weigh the patents according to company size (correlation is -0.2043).
Patents are not an ideal measurement either as some innovations are difficult to patent (e.g. process innovation). This means that some industries patent much more than others. But even within a particular industry the Forbes ranking turns out to be flawed. Take Henkel, Procter & Gamble, and Unilever. According to the Forbes list, P&G is much more innovative than Unilever and Henkel comes last. Looking at patents P&G is still better than the other two but they are much closer together and Henkel has more patents than Unilever.
While alternative measures of innovation such as the number of new products introduced or patent citations (i.e. how often a patent is cited) might not produce exactly the same results, my crude patent count shows that Forbes’ list simply does not work. This does not undermine the book of Dyer and his colleagues as the companies on the list are probably all pretty innovative, but calling Salesforce.com the world’s most innovative company is a bit of a stretch.
Sunday 24th July 2011
Harry Potter, what’s next?
The Harry Potter brand is worth more than US$ 15 billion. It made J.K. Rowling the first billionaire author and continues to delight everyone getting a piece of the bounty. With the last movie of the Harry Potter series currently breaking box office records across the world it seems obvious what’s next: sky high profits from DVD sales, video games, and hundreds of merchandise products. But despite the magic of Harry Potter all these products have a shelf life. The really interesting question is how Harry Potter can be turned into a sustainable success?
The answer might come from Walt Disney. The defining character of Walt Disney was Mickey Mouse. In order to keep the character alive Disney continued to add new stories and also redefine the character slightly to respond to the taste of a particular period. For example in 2009 the company started to emphasize his mischievous and adventures side more. J.K. Rowling could follow this route and no doubt countless people are trying to encourage her to write more Harry Potter books. Right now she is probably not interested - which does not mean that this is ruled out indefinitely.
The second option for the Harry Potter brand is brand extension. Walt Disney introduced numerous new characters over the year which all fit the ‘happy family appeal’ of the company’s core. Many were introduced to the audience by first appearing along Micky Mouse. This could easily be done with Harry Potter. Sirius Black for example has a devoted fan base which J.K. Rowling honoured with a ‘fan site award’. Such characters could become the centre of new stories and movies.
Finally - and linked to the first two options - the creation of a dedicated theme park is a promising option to extend the life of Harry Potter. There is already a successful ‘Wizarding World of Harry Potter’ as part of a Universal Studio theme park in Orlando. Walt Disney’s theme parks offer a more cohesive experience though. They are dedicated to one brand. This seems a more promising long-term strategy for a park but would require additional characters and stories to provide a diverse experience dedicated to magic.
Whether any of these options will be pursued depend to a large extent on J.K Rowling. She might be happy to enjoy the unique success of Harry Potter and devout her energy to other adventures. She is after all an author, while Walt Disney was primarily the founder of a company.
Sunday17th July 2011
How to kill a business school – a European drama
No matter which league table you open, US business schools (or those run according to the US model) are on top. While Europeans sometimes point out that most of these rankings are produced by US publishers, the facts are undeniable. US b-schools produce the most cited research, the highest paid graduates, and the most visible business gurus.
So how does the US model work? For starters b-schools enjoy great autonomy from the universities they are associated with, allowing them to find solutions suitable for their market. Faculty concentrates most of their energy on research but is also expected to deliver top notch teaching (cutting edge knowledge delivered in an entertaining way). What they don’t (or hardly) do is administration and marketing. This is done by an army of professionals (roughly 2 to 3 times as many as faculty) who are both much better in this and cheaper than faculty. Considering that research has the highest impact on the reputation of a school (followed by teaching) this division of labour makes a lot of sense.
Some European schools have copied this model and became part of the global elite. The majority though remains average. The core issue is organizational. Universities in Europe are for the most part very centralised. The assumption is that all university departments should be run the same way. Admittedly there is some beauty in this as it rests on the assumption that all subjects are of the same importance. In reality it means that central University administration dictates terms to b-schools which make them uncompetitive. Faculty resources are wasted by forcing them to take substantial administrative roles, faculty pay (though higher than in other departments) is uncompetitive resulting in a brain drain, and administration as well as marketing remain weak as there is simply not enough staff.
Providing European b-schools with autonomy would not solve all their issues overnight. In many places the most senior faculty members grew up in system where administration was (not explicitly but de facto) more important than research. Autonomy would, however, provide b-schools with the ability to introduce incentive structures necessary to attract top faculty and build more service oriented institutions. A sure way to kill Europe’s business schools is for central university administration (and even worse politicians) to continue to interfere.
Sunday 10th July 2011
When to fire a star – Fox News says good bye to Glenn Beck
Finding stars is not easy. Once you manage to hire one and start counting the additional revenue coming in, the last thing on your mind is firing him or her. Still, in some cases you have no choice if you want to avoid long-term damages. Glenn Beck was such a case for Fox news.
This week Glenn Beck had his last show on Fox News. No doubt his many fans will miss him dearly. At his peak in early 2010 he averaged 2.9 million viewers every day. Although his ratings went down he continued to lead his time slot with 1.86 million. Although Fox is unlikely to find a replacement with similar ratings in the near future the network made the right decision.
Mr. Beck’s brand of populist conservatism seemed a good fit with Fox initially. But as the star found his footing, his theatrical performances increasingly catered to the fringes. When Glenn Beck announced that Obama had a ‘deep-seated hatred for white people’ 400 advertisers told Fox that they no longer wanted their commercials on his show.
While Glenn Beck’s personal brand continues to be strong, it is obvious that he does not fit Fox’s mission to set a widely appealing conservative agenda. To avoid long-term damage to its own brand, Fox had to fire Glenn Beck.
Stars can demand special treatment but they still need to meet the basic test for all employees: do they help the company as a whole to become stronger. For example you might have a sales rep who is popular with his customers but his sexist behaviour is a potential time bomb for the company. Better to part ways – something the French Socialists should bare in mind as some supporters of Dominique Strauss Khan call for him to run in the presidential election.
Sunday 3rd July 2011
Can a Mormon lead the country?
Religion can be a powerful force in American politics. Particularly for the Republicans. The support of evangelical Christians was crucial for George W. Bush and Ronald Regan. When John F. Kennedy ran as the Democratic candidate in 1960 Republican’s asked whether he would be loyal to the Pope or the American people. Ironically, this time round religion has come back to bite the Grand Old Party. Two of their strongest candidates, Mitt Romney (the current front runner) and Jon Huntsman are both Mormons.
While most American’s know little about the Mormon’s beyond their former ties to polygamy, they remain sceptical. According to a Gallup poll, 22% would not vote for a Mormon for president, even if he is a representative of their own party.
Democrats might be quite pleased with this. They should not. In a memorable speech to the Greater Houston Ministerial Association JFK made it clear that the real losers would be the American people if millions would be barred from the highest office simply because of their religion. This should be true for Mormons today as much as it was for Catholics in 1960.
The real question is what Mitt Romney and Jon Huntsman stand for. Admittedly this might be difficult to find out with Mitt Romney changing his own position according to the latest opinion poll and Huntsman’s obvious opportunism (he was Obama’s ambassador to China and now wants to disagree with the president on many fundamental issues) but in both cases this is not a matter of religious affiliation. There is no indication that either of them had difficulties to separate state and religion in their previous jobs.
In short, if you think a Mormon should not be elected as president of the United States of America, take a look at the first Amendment. However, if you think that Mitt Romney and Jon Huntsman are not the right men to lead this country, I could not agree more.
Sunday 26th June 2011
Junior consultants – thanks but no thanks
I taught undergrads for many years. Talking with them about their future career plans the smartest and hardest working ones often want to become consultants. Not really surprising, considering the prestige and pay that comes with a job at McKinsey, Boston Consulting Group, or Bain!
Consulting firms are equally eager to hire them. Again, not really surprising. On average a junior consultant working for the Boston Consulting Group makes US$ 124,000 and probably generates fees around 400,000.
But what about those who foot the bill, the companies seeking advice? Is a junior consultant adding any value for them? The answer depends on their objective. If the management team already knows what they want but need data to back up their argument, a junior consultant certainly can do the job. Let’s assume a company needs to lay off 500 employees to stay in business but is expecting a fight with the unions. A report from a top consulting firm suggesting a reduction of the head count by 1,000 allows the managers room to negotiate and eventually arrive on the always envisioned 500.
The story is quite different if the management team is in search of a new strategy. The last thing they need is a young busybody fresh out of college who tells them how to run their company. Brain power matters – and yes, junior consultants have that – but experience matters even more. The ability to understand a company is challenging enough for an outsider but impossible for those without experience and industry insights. If you are looking for a replication of tested frameworks and established textbook knowledge you should buy yourself a book. That’s cheaper. A particular problem for junior consultants is the inability to understand how their ideas can be implemented. I have seen slide packs that looked wonderful if those implementing them think like consultants and have no problem burning the midnight oil in the office. The reality is that this is not likely to happen (unless the client is a consulting firm as well). Not surprisingly many strategic plans are collecting dust in the drawer of the CEO instead of generating profit.
Bottom line, if you hire a consultancy, it’s okay if they bring along a junior for the type of project where you already know what you want. If you hire them to develop a new strategy, refuse to pay for the juniors. You are not responsible for their training.
Tuesday, 7th June 2011
How businesses can benefit from immigrants
Immigration is a hot topic. In many countries (sadly also in my native Austria) the focus is on safety and security. Let’s try to be a little more American today and focus on opportunities. Here is a list of how businesses can benefit from immigration:
Monday, 30th May 2011
The IPO scam: How big banks screw entrepreneurs
Imagine the following scenario: you want to sell your house and hire an agent to help you. The agent contacts a trusted investor whom he worked with over the years and convinces you that after some tough negotiations he was able to secure a price of $200,000. You agree to sell. The next morning the investor sells the house you previously owned for $369,000 (using the same agent). How would you feel about your agent?
This is what happened to LinkedIn this week. Bank of America and Morgan Stanley, the underwriters of the IPO, convinced them to float at $45 a share. It then sold at this price to trusted investors the evening before the IPO. Less than 24 hours later LinkedIn traded at $83. Being a trusted client of BOFA and Morgan provided a return of 84% at the expense of LinkedIn original shareholders including its founder Reid Hoffman.
I acknowledge that selling a house is not quite the same as an IPO. The successful marketing of BOFA and Morgan should be rewarded handsomely. But than a 7% IPO fee seems handsome already. The main reason why banks seem to get away with screwing the entrepreneurs is a myth they created over the years: an IPO needs to be a phenomenal success on its first few days on the market. Sure, selling below IPO price would be an issue but clearly an 84% mark-up is not required to receive some positive press coverage. Either the banks are incompetent or they deliberately keep the price low. Neither is flattering for them.
So what can entrepreneurs do? Admittedly it would be difficult for most to stand up to the banks. But LinkedIn was in a position to do so. Everyone knows that both individual and institutional investors are eager to get their hands on the ‘social media’ phenomenon. So it was rather obvious that this is going to fly right now (leaving aside the question whether it will crash later). In addition LinkedIn could h0ave waited for other social media firms to IPO first. This would have provided them with a clearer picture of the market. When Microsoft floated 25 years ago it did so only two years after arch rivals Lotus and Ashton-Tate and they put up a tough fight with their underwriters to secure a higher IPO price. It did not hurt them then and we all know of the phenomenal growth story that followed.
Sunday, 22nd May 2011
How resilient are Fortune’s ‘Most Admired Companies’?
No big surprises among this year’s ‘Most Admired Companies’. And there should not be any. It simply confirms that most of us take a view similar to the 4000 experts and executives Fortune surveyed to compile the list. But can we learn from the most admired companies? Well, it depends. If you are interested in short-term performance the answer is certainly yes, if you are looking for resilience and long-term success you might want to be cautious. Only nine companies continuously ranked among the 20 most admired in the past 5 years.
In order to predict how companies achieve resilience and long-term success a better approach is to investigate companies with a continuously strong financial track record. As previous research has shown financial success in the previous years is the best predictor whether you end up on the ‘Most admired’ list. Consequently, a resilient ‘most admired’ list can be built by investigating long-term financial performance.
So once you have a list of resilient companies, what can you learn from them? Over the past 6 years I studied companies which significantly outperformed the stock market over the past 50 year and compared them with a second group of less exemplary corporations. This is how the great distinguished themselves from the good:
- Exploit before you explore: The tension in managing growth between leveraging existing assets versus developing new ones is well known. Great companies have a clear priority: exploitation.
Should you hire a Navy SEAL?
Not surprisingly interest in the Navy SEALS increased substantially after they got Osama bin Laden (alias Gironimo). The successful completion of a difficult operation highlights the efficiency and professionalism of the US Navy's Special Operation Force. You might even wonder whether you should hire one these elite soldiers.
If you are Xe Services LLC (formerly known as Blackwater) the answer is obvious but what about a traditional manufacturer? My guess is that a Navy SEAL is unlikely to be an ideal fit. Translating some of the skills is difficult while others that are bound to matter in most industries today are not developed in a military setting.
Let’s start with an often cited strength of military men and women: leadership skills. Being in charge of a SEAL unit definitely requires the ability to lead under extreme conditions. Clearly this should enable them to lead a team elsewhere. Not really. For instance, in a manufacturing setting hierarchies are less clear and resistance from other members of a team are likely to be more pronounced in situations where immediate action is not required to stay alive.
What is increasingly important though is creativity and innovation. Neither is of particular value when you try to storm a compound where Osama bin Laden is hiding. In other words a Navy SEAL is not likely to be big on ‘dreaming’ and discussing of ideas.
Despite my concerns that skills from an elite military unit cannot be translated into a civilian context I am aware that many former military personnel (including SEALS) are highly successful business people. My superficial impression is that they excell in jobs where execution was key and their determination to get things done played to their advantage. And of course there is always the option to work for a defence contractor.Sunday, 9th May 2011
Borussia Dortmund the poor German Champion
"Football is a simple game; 22 men chase a ball for 90 minutes and at the end, the Germans win."1 But who wins in Germany? On Saturday Borussia Dortmund took home this year’s title. You would expect that the owners are sitting on a gold mine. Far from it! Six years ago the club narrowly avoided bankruptcy. Although the financial situation improved considerably (thanks to the strong performance of the team), Borussia still lost US$ 9m last year. And while the share price climbed considerably in the past few months it is less than half of what it was worth on the first day of trading.
Borrussia symbolizes a familiar paradox. The world’s most popular sport generates tons of money but many clubs have difficulties to make ends meet. My proposal: Americanisation of European football.
I am not proposing to distort the ‘beautiful game’ (Only God knows why anybody would call a game football when people carry the ball most of the time!) but to learn a few tricks from how the NFL operates. The NFL is different in two important ways. First, the teams agree on a salary cap that limits how much each of them can spend on player’s salary. This prevents the payment of unrealistic sums commonly dished out for stars in European football. Second, the team owners share about 70% of their revenues. This levels the playing field, creating a more competitive league. It also increases their bargaining power when the league negotiates with sponsors and suppliers.
The NFL approach works. According to Forbes magazine, NFL teams’ values rose 171% between 1999 and 2009. Even those in less attractive local markets do well. Surely the NFL strategy would improve the balance sheet of poor Champions like Borussia Dortmund.
1 Gary Lineker, July 4, 1990 (after playing for England in a World Cup semi-final against Germany that was lost after a penalty shootout)
Sunday, 1st May 2011
The world is not flat
In a thoughtful new book Pankaj Ghemawat from IESE Business School demonstrates that the world is not quite as flat as Tom Friedman made us believe. For example only 2% of all students take a degree outside their home country, 80% of the internet traffic never crosses a border, a mere 7% of S&P 500 directors are foreigners, and no more than 1% of all US corporations have foreign operations.
Although globalisation might be on the rise it’s by far not as advanced as we imagine. In many ways it was higher prior to the Second World War. Far-flung networks of ethnic Greeks, Scots, Chinese, Jews, and others crisscrossed national borders at ease at a time when no passports and visas existed. In a 2006 Harvard Business Review article Geoffrey Jones argued that the rise of nationalism concentrated our minds on the importance of corporate nationality. A brief look at the recent triumph of the right-wing ‘True Fins’ at a Finish election should be a sufficient reminder that not much has changed since.
For corporations this has important implications. In order to compete successfully they need to be responsive to nationality. The very best manage to create strong local identities. Ask someone in the US whether Shell is a US company and the likely answer is yes. Shell is British Dutch but it sure helps to be seen as playing for the home team. Global efficiency is important but national borders are real and as a corporation you need to be aware of this!
Friday, 22nd April 2011
Why CSR will die
It’s hard to find a company not undergoing a CSR initiative these days. Some companies produce reports any NGO could be proud off. Cleary the impression is that CSR is here to stay.
I am not so sure. Don’t get me wrong, it is great that companies care about the environment and society. I simply don’t think they do. Firms are primarily interested in profits.
In order to stay profitable companies need to ensure that their strategy fits the business environment they operate in. And this is exactly why CSR is so popular at the moment. Customers, politicians, the media, etc. expect that firms display corporate social responsibility. So they oblige with some programs and a few fancy brochures.
Eventually the public’s attention will move to other topics and CSR will be shelved like other management fashions before. Not that this will make much of a difference to the environment or society as a whole.Saturday, 16th April 2011
Why product failure can be a blessing in disguise
Admittedly it sounds bonkers, but failing products can be a blessing in disguise. Of course this is not true in general, but it makes perfect sense when it serves to remind customers that the existing product range is perfect for them.
Probably the best example for this is opera business. Take a look at the program schedule of the Metropolitan Opera House . Tosca, Rigoletto, Die Walkure, and other established pieces dominate. In the current season the only two operas by less known composers will be Satyagraha by Philip Glass and Wozzeck by Alban Berg. Undoubtedly it will be harder to fill the Met on the evenings when they are scheduled. But as part of the annual program they are very important. As the regulars leave the opera after a modern performance many of them are likely to note ‘Nice enough but Verdi is still the best’. With the help of Satyagraha and Wozzeck the Met is therefore able to assure its customers that they are not missing out on anything when they come for their regular dose of Verdi.
There are few cities with several opera houses. So the main competition is substitute products or abstinence. Consequently, it is important to reassure customers from time to time that they are doing the right thing. This is also the case in other consumer markets where you have little direct competition but substitutes are available. Taking this perspective, Coca Cola’s failure to make Vanilla Coke a hit product looks less like a disaster. All those who took a sip can now feel content that the original Coke is still the best!
Saturday, 9th April 2011
The power of cuteness – learning from the Girl Scout's cookies business
The Girl Scouts are a force to reckon with, particularly when you are in the cookie business. Each year the US organization sells $700 million worth of thin mints, shortbread and the like.
The basic idea is straight forward: girl scouts sell cookies in order to finance their activities. In the 1920s and 30s girls baked simple sugar cookies together with their mothers, rapped them in wax paper bags, and then sold them door to door. Today the cookies are produced by licensed bakeries and the girls take care of sales. Non-profit organizations and businesses in general can probably learn a few tricks from Girl Scouts of the USA.
The core lesson has to do with the sales operation. In the Girl Scouts the sales force is perfectly aligned with the goals of the cookie sale. Actually the alignment goes beyond the sales force, as the social environment of the girls tend to be champions of the cause too. On their website the organization states that the girls will develop five essential skills: goal setting, decision making, money management, people skills, and business ethics. Although I am not quite sure how they develop the last one, the overall story is appealing to parents. Their kids will learn useful skills and support good causes. Fantastic! For the girls there are additional incentives, mainly badges. They are also involved in deciding which cause the bulk of the money goes too. This is a model that can be adopted by other NGOs. Separating fund raising from decisions concerning the deployment of funds reduces motivation. Don’t do it! For businesses the lesson is a different one. Hiring people who have a passion for your industry and products will make a difference. An 18 year old guy who spends every spare minute reading and dreaming about cars would probably make a great car dealer but may not necessarily be the right person to sell concert tickets.
The second lesson from the Girl Scouts relates to their persistent use of the same business approach. Although new business models and management fads enter the market each year the Girl Scouts have stuck with a simple idea. While they have made some important changes – notably outsourcing production, introduction of new types of cookies, and more stringent rules about pricing and revenue sharing – the core of their business model did not change: relatives, friends, and neighbours don’t know how to say no to a little girl. When they are asked to purchase a box of cookies for US$ 3.50 they will simply fetch their wallet. For 90 years the Girl Scouts have had a business model powered by ‘cuteness’. The business model will be different for other NGOs and businesses, but they too should be careful before they change theirs. There is no need for fancy new models and ideas just because your business model is old and simple. Don’t change without a solid reason to do so. Find your equivalent to the ‘power of cuteness’ and stick with it!Sunday, 3rd April 2011
Sticking out – how small businesses get noticed
For small businesses one of the major challenges is getting noticed. Armed with a fantastic product they expect customers to find them. More often than not they are disappointed when no one turns up on their doorstep.
I recently watched Josef Zotter, a successful chocolate entrepreneur sharing some of his ideas and experiences on ‘Willkommen Österreich’, the Austrian equivalent of Jon Stewart’s Daily Show. Here is my interpretation of what small businesses can learn from the eccentric Austrian:
The overall lesson we can learn from Josef Zotter seems clear: be a bit cheeky. I would add, also enjoy a ‘Nutti Frutti’ chocolate bar while you do so.Sunday, 27th March 2011
Doing business in Africa
I am currently planning a holiday to Kenya. As Tunisia, then Egypt, and finally Libya erupted, some friends who were to join got worried. Is a trip to Africa too dangerous? Businesses might also ask whether a ‘trip’ to Africa is sensible.
Clearly there are obstacles: political risk, corruption, inadequate infrastructure to name a few. Still, Africa is also full of opportunities. According to a McKinsey report GDP is expected to grow by more than 60% in the next 10 years. Consumer spending will be US$ 1.4 trillion and 128 million households will have discretionary income by 2020. The Economist predicts that in the next 5 years 7 of the 10 fastest growing economies will be in Africa. In other words, the macro-economic conditions can hardly be better.
Considering the complexity of many markets and the weak institutions, companies can greatly increase their odds by finding the right local partner. A local partner will know which suppliers are reliable, what customers really want, and how to battle with bureaucrats. It’s no coincidence that one of Africa’s hottest products, M-Pesa (a system which allows customers to transfer money via mobile phone without having a bank account) was developed by Vodafone together with Safaricom, a Kenyan partner. While Vodafone might have the technical edge, it does not understand the market and hence would not even have spotted the opportunity. Within a few years M-Pesa grew to 2 million transactions every day and expansion is planned into several countries.
My friends booked their flights, maybe a few executives want to join and discover that Africa offers more than a beautiful landscape.
Sunday, 20th March 2011
In early 2009 Google set out in a quest to find the perfect boss (see NY Times today). Collecting 10,000 observations across 100 variables, this is what they came up with (starting with the most important point): Eight Habits of Highly Effective Google Managers.
Well, the list makes sense but was it necessary to spend that much time and effort on a list that hardly moves beyond leadership 101? For two reasons the answer is yes. First, the list provides one surprise from a Google perspective. Technical skills are really not that important. Not the best of the geeks should be in charge but the person who provides the best support for the geeks. That resonates well with my own research. Bosses in companies displaying long-term success were primarily great listeners and communicators while action was limited and less important.
Second, data is necessary to convince managers at Google that the ‘8 habits’ are sensible. This is quite typical for most large corporations. Managers are used to dealing with numbers. If HR comes along and tells them that sales figures will drop if they do not care about the career progression of their employees their first question will be: Where is the evidence? Evidence from outside the organization won’t do the job, particularly in Google which styles itself as a radically different company.
Google claims that things are changing as a result of their research. Coaches help those lagging behind to become better bosses. It should be interesting to test the performance of the new ‘Google bosses’ next year.Sunday, 13th March 2011
Should you hire a ‘Charlie Sheen’?
Not so long ago there was little doubt in Hollywood and Paris, that stars are a core ingredient of business success. After Charlie Sheen called the producer of his ‘Two and a Half Men’ hit show a ‘charlatan’ and Christian Dior’s star designer John Galliano’s declared ‘I love Hitler’, executives are not quite so sure.
Still, not only in the worlds of film and fashion are firms relying on their stars. NBA teams are dishing out hefty sums for the likes of Kobe Bryant and LeBron James based on the assumption that a small group of stars makes the difference. In research and academia, for example, studies point out that some scientists are many times more productive than others. Large numbers of average performers are not able to compensate for their contribution. In other words, you don’t seem to have a choice but hire your ‘Charlie Sheen’. There are three important considerations though.
Consideration #1: Think hard before you hire a star. HBS professor Boris Groysberg studied the performance of star analysts and discovered that their performance declines dramatically when they change firm. Their skills do not travel as well as one might expect since their magic depends on familiar systems and support.
Consideration #2: Stars never dance alone. New product development is a team effort. Frank Rothaermel and Drew Hess from Georgia Tech and University of Virginia show that star scientists no longer have a statistically significant effect on innovation output when staff scientists are accounted for. This implies that stars cannot unleash their potential without the support of staff scientists.
Consideration #3: Stars are not for the faint hearted. People are prepared to follow stars without second guessing their ideas. This can lead to great triumph but equally to huge blunders. In other words, performance variance increases. In my own work I show that charismatic superstar CEOs can pose a great risk to long-term success as they have the power to destroy what previous generations built step by step.
Bottom line, stars can be great for your business if you consider carefully how and where you use them. Even Charlie Sheen will make us laugh again in another show in the near future. And the executives who hired him might laugh as well (at least for a while).Sunday, 6th March 2011
Boeing’s nationality bonus
Last week the US Air Force awarded a US$ 35 billion contract to replace its aging aerial fuel tankers to Boeing. This was a rather dramatic turn of events, considering that an earlier bid was won by Europe’s EADS in 2008. As analysts point out the rematch was won by Boeing once the Air Force preference shifted. Although EADS offered a larger plane for a lower price, operating costs for Boeing’s plane were lower. As estimations this time were based on 40 rather than 25 years, this was decisive.
I think the analysts miss the point. Boeing won the contract not because of economics but because of nationality. Sure, according to the new rules Boeing was ahead. But the important question is why the rules were changed in a way that suited the US firm. The US has not fully recovered from the recession and job creation is high on the national agenda. Although EADS was committed to building the planes in the US, creating thousands of jobs in the South, it is a European company. For politicians, announcing American jobs created by an American company building American planes simply sounds better. The Boeing-EADS battle highlights a fact that businesses should never forget: nationality matters.
EADS lost the bidding before it even began. Of course, it could not change the fact that it is a European organization. Nonetheless, companies are able to become part of the local national fabric. Ask an American whether Shell is a US company and the likely answer is yes. The Anglo-Dutch oil giant has operated in the States since 1912. It created a structure where country organizations had great leeway. This allowed Shell US to act almost like an independent US company. Although globalisation in recent years sometimes created the impression that strong local presence and independence is no longer required, the Boeing case is a reminder that nationality still matters. I would advice EADS to follow BAE Systems’ lead. In the US, similar to Shell’s approach the British firm positions itself as proudly American. Admittedly the French led EADS might find this a tough act to follow.Sunday, 27h February 2011
Oscar nightIn seven days we will know which film takes home this year’s Best Picture Award. The favourites are ‘The King’s speech’ and ‘The Social Network’. But does it really matter? The artistic quality of many past winners has been questionable. As numerous award ceremonies compete for the spotlight the future of the Academy Awards might be under threat.
Leaving artistic value aside, things are looking good. Ratings are holding up very well. Last year 41.62 million watched the ceremony in America alone. This is just slightly below the average historic rating – a solid performance in today’s fragmented media market. From a producer’s perspective the award is also highly relevant. According to IBIS World, a research firm, following the nomination for Best Picture, box office sales increased by 22%. The eventual win brought another increase of 15% - a grand total of 24 million US$ in terms of revenues.
The future is less certain though. This is connected to an underlying trend in the film industry. Bollywood and Nollywood both produce more movies than Hollywood. While 10 years ago box office revenues were roughly equal in North America and the rest of the world, they are now twice as big outside the US. This globalisation is likely to accelerate as emerging markets build new cinema infrastructure.
With non-US markets growing, other award ceremonies undoubtedly will receive more attention. A scenario where India’s IIFA Awards outshine Oscar nights seems far off but not entirely impossible. To reserve the top spot the Academy has only one option: internationalise. Having only one out of 24 rewards for foreign films is simply not sufficient. Why not introduce ‘Best Nollywood’ and ‘Best Bollywood Picture’? Surely an audience from more than 200 countries would value this more than the ‘Best Sound Mixing Award’.Sunday, 20h February 2011
Nokia is not dead yet!When Nokia announced its partnership with Microsoft this week its share price fell and commentators were not exactly celebrating the new ‘marriage’. The consensus seemed to be that Apple and RIM will continue to squeeze Nokia out of the smart phone market and emerging market competitors will soon create a sizeable dent in Nokia’s developing world business.
I think these negative comments are premature. Sure, Nokia is under pressure and did not do well with lucrative smart phones. But this is not the first time the Finish firm is in a tight spot. Nokia’s cable business – its cash cow – for instance was heavily dependent on trade with the former Soviet Union. When the Soviet Union collapsed the entire firm was thus in serious trouble. Nonetheless, it managed to turn around as its mobile phone business excelled.
There is no reason to assume that Nokia can’t do it again. It has a dedicated work force in a country that consistently occupies the top spot in education rankings. Nokia’s market share continues to be the envy of its competitors. In the world’s fast growing emerging markets its position is particularly strong. And being somewhat late in the smart phone market is not necessarily an issue as second movers often excel.
Whether a full turnaround can be achieved will of course depend on how the new partnership with Microsoft works out. Microsoft is certainly a formidable partner. Web browsers and game consoles are just two examples where the company came from behind only to surprise its competitors. Stephen Elop, a former Microsoft executive in charge of Nokia, should be in a good position to facilitate the co-operation. In addition, both companies have worked well with partners in the past (Nokia for example with Siemens and Microsoft with Intel). I don’t think Nokia is dead yet!Sunday, 13th February 2011
The German Miracle (Wirtschaftwunder) is back! While the rest of the developed world is still battling the ghosts of the economic crisis, Germany’s economy grew by 3.6% last year. So what is different in Germany and what can others learn from the Germans?
Partly, Germany seems to be lucky (something familiar to many opponents of the German soccer team during World Cup games). German companies happen to build the type of products that currently enjoy high demand in BRIC countries: machinery for the shop floor and luxury products such as Mercedes for the newly rich. Geographic location is also perfect, enabling car manufacturers for instance to use cheap but highly capable labour in nearby Slovakia to build some of its components.
This, however, is not the whole story. The backbone of Germany’s economy is the Mittelstand (medium sized companies) who use a simple but powerful recipe for success. They concentrate on a niche market and diligently build a world market leadership position. Many of them enjoy market shares above 50%! During the economic crisis they did not reduce their work force but used a government program to reduce working hours. Now, as demand is back up, they are able to respond quickly.
Personally, I also think that the German Mittelstand companies in many ways reflect the characteristics I saw in Enduring Success Companies. Kärcher, a producer of cleaning equipment, for example, concentrates on incremental innovation meeting its customer needs rather than championing breakthrough innovation (exploit before you explore); has built a diversified portfolio encompassing more than 2500 products to meet any possible cleaning needs; and has gradually internationalized into 40 countries (diversify into related products and markets). The company has also followed a conservative growth policy, generating most of the required capital internally (be conservative in your finances) and in the past the family was prepared to bring in external managers when they noticed that they did not have the capacity to lead (leaders and owners put the company’s interest first).
German firms can also rely on some of the best trained workers in the world. A combination of education and a tradition of apprenticeship reaching back to the Middle Ages, creates a labour force that (and I admit this is a very subjective personal observation) is more diligent, reliable, and has a stronger commitment to quality than anywhere else. Try meeting up with five friends from different countries and I bet you, the German will be the first to arrive!Sunday, 6th February 2011
Can Al Jazeera beat CNN?
As dramatic events are unfolding in Egypt, I find myself turning to Al Jazeera for 24/7 live coverage. This is a new experience. In the past when countries went to war, revolutions shook established regimes, or election night reached high drama, CNN was the station of choice.
Partly my choice is a pragmatic one, as Al Jazeera is offering live footage over the internet, while CNN only provides clips. Partly, though, this is because Al Jazeera seems to get better access to events on the ground. Admittedly, Al Jazeera is playing on home turf – the Arab World – while CNN is an outsider.
I am probably not the only one having this experience. I wonder if Al Jazeera is slowly creating a greater audience than CNN.
If you are reading this in the US, this might appear like a peculiar observation. CNN can with some credibility claim to be the ‘most trusted name in news’ (a CNN slogan) while Al Jazeera has often been at the centre of controversies. In the news business, this is not necessarily a bad thing though. In the US domestic market, Fox news is not only the most controversial channel, but also the one with the highest ratings. For Al Jazeera this might also be true as 60% of the 4-5 million weekly viewers of its website come from the US.
There are three more reasons why CNN should be worried. First, in many emerging media markets Al Jazeera’s brand is equal if not stronger than CNN. Second, as the Middle East is likely to remain the hottest news item for years to come, the superior access of Al Jazeera is a source of competitive advantage. Third, CNN depends on income from advertising, while Al Jazeera can always rely on the Emir of Qatar’s check book.
So what can CNN do? Simply copying the Al Jazeera model is not an option, as the style and coverage is unlikely to appeal to its core audience. The best choice is probably a response taken by other businesses faced with a disruptive new product: creating a separate entity which is able to target the non-core audience. In CNN’s case this would mean a small outlet, using a different brand, in a location outside the US (e.g. the Middle East) which is not restrained by the dominant culture, established processes, and budget expectations at the center. Acquiring another channel or finding a partner in such markets are appealing options.
As it stands CNN is still clearly ahead of Al Jazeera, reaching 265 compared to 100 million households. Nonetheless, the question whether Al Jazeera can beat CNN seems not as far reached as it did a few years ago.Sunday, 30th January 2011
Response from the Reindeer Dad
I am sure most of you came across Amy Chua’s “Battle Hymn of the Tiger Mother” at some point last week. If you have not, take a look at a NY Times article by the author. Ms. Chua claims that Chinese children do better in school (and life) because their mothers are prepared to be tougher, stricter, and readier to be loathed by their children when they force them to study day and night.
As I’m about to become a father myself, I am naturally interested in ideas related to parenting.
Even if I was guaranteed that my child would become a Nobel Laureate I would not follow Ms. Chua’s parenting advice. Still, like all parents I obviously want my child to do well. So I did a bit of research on alternative models. Partly, Ms. Chua can claim some credibility due to the recent success of Shanghai in the PISA study, which compares high school kids’ reading, maths, and science skills from different countries. Another country that has consistently performed well over the years is Finland.
So how do the Finns bring up their children? Seems that at the very heart of it is not the notion of competition (which Ms. Chua values so much) but trust! Finnish children have the fewest number of class hours in the developed world. Their time at home is not a high pressure learning environment. No, parents and teachers stimulate the curiosity of the children. The strongest kids in class are teamed up with the weakest, fostering their ability to communicate – a skill that is bound to be useful when they grow up.
This seems perfect. No need to introduce Marine style parenting to ensure future success for my child. I have decided, I'd rather be a reindeer dad than a tiger dad.Saturday, 22nd January 2011
From Russia with Love? BP’s deal with Rosneft
On Friday BP revealed a deal which gives Rosneft, a Russian state-owned oil company, a 5% stake in the firm. In turn BP will increase its stake in the Russian firm from 1.3% to 10.8%. This opens new exciting prospects off the coast of Siberia and beneath the Arctic shelf but also triggers backlash from US politicians just days after the Deepwater Horizon commission released its report on the Gulf of Mexico disaster.
Was this a smart move by BP?
I am inclined to say yes. The undeniable truth about the oil industry is an increasing shift of power from oil majors to oil producing countries (and their national oil companies). When the Italian oil company ENI started to offer better deals to oil exporting countries in the 1950s, established players and Western politicians cried foul, but ENI was able to grow into a major oil company. Today access to oil is becoming more and more difficult for companies like BP. Close partnerships with national oil companies are a crucial success factor. The public pressure BP faces in the US since the Gulf of Mexico disaster should be no reason to ignore this long-term development in the industry. If anything, the troubles in the US are an additional reason to find new opportunities elsewhere, including Russia.
For BP there is, however, a source of concern that received less attention than the outcry of US politicians: Russia. At the moment it seems all love and happiness. With the close involvement of David Cameron and Vladimir Putin the outcry from billionaire shareholders in BP’s other Russian venture, TNK-BP, can probably be ignored – for the moment. But BP has its bruises from earlier encounters. In 2008 Bob Dudley, BP’s CEO, had his visa invoked following a bitter dispute with local Russian partners.
The Kremlin is always prepared to use its oil resources for political ends. With the new deal BP might have become less dependent on the US and gained some protection against potential take-overs, but also increased its dependency on Russia. It remains to be seen how that plays out in the long run.
My advice to BP: Diversify further into other oil regions and don’t depend on Russian ‘love’ too much (a principle of Enduring Success).
Sunday, 16th January 2011
How ‘geography’ matters? OR Why great companies should welcome a tough business environment
On Friday I watched ‘Guns, Germs, and Steel’, a fascinating documentary based on a book by Jared Diamond. The documentary tries to answer an apparently simple question: why did some societies prosper while others were left behind throughout history? Jared Diamond puts it down to geography. While I was watching, I started to wonder, whether the fate of companies is also determined by their geography, i.e. the environment they do business in.
Keeping the struggle of past couple of years in mind, this certainly seems to be the case. B-school staples also seem to hit the same note. No strategy course is complete without Michael Porter’s Five Forces model explaining that competitive advantage depends on industry barriers.
This is not the whole story though. Think of the oil industry. In that past few years even the most hopeless oil companies was likely to boom with oil prices reaching record levels (consistently over US$40 since 2005). But – and this is important – in the 1990s when prices were below US$20, the best oil companies were doing good business as well. They built the resources and strengthened their capabilities (such as superior technology capabilities) to handle a tough environment while the others did not. I would even argue that good companies should welcome a challenging environment as this provides them with an opportunity to distinguish themselves from the weaker folks.
Coming back to Jared Diamond’s documentary, I actually think he would agree with me. Despite the importance of geography he argues at the very end that this should not be understood as a deterministic view of the world. Tropical Malaysia and Singapore for example put programmes into place to eradicate malaria, proving that you can manage the forces of geography if you understand them.
Sunday, 9th January 2011
The Oprah Winfrey Network – will it succeed?
After 25 years the Oprah Winfrey Show is in its final season. No need to despair for fans. They will be able to enjoy even more of Oprah on her own channel. But what about the business side of Oprah’s bold move from ABC to cable?
On the surface the closure of the highest-rated talk show in American television history seems questionable. Nonetheless a number of important basics have been covered. First, Oprah can leverage her powerful brand. With hundreds of channels, viewers are often overwhelmed and many could turn to the trusted host who selects programs for them. Second, Oprah has shown that she can build new businesses based on her strong brand. O-magazine, for instance, was launched in 2000 and has a subscriber base of 2.5 million. Third, Oprah has learnt from past mistakes (an ability I identified as a crucial factor for enduring success in my research). Her previous half-hearted engagement in Oxygen, another TV channel, soon went South. This time the closure of her old show, suggests that commitment won’t be an issue. Finally, Oprah seems to understand her own limitations, bringing other stars into the program but most importantly partnering with Discovery Channel that funds the venture and adds its complementary expertise to the table.
Whether these resources will be sufficient will depend on two factors outside the control of Oprah. Will people continue to watch TV? This seems a foolish question today but probably newspaper and magazine publishers did not see the internet coming either. And if people continue to watch TV the question is whether there will be a premium on pre-selected programs ala Oprah.
Sunday, 2nd January 2011
Can unrelated diversification be a good idea?
Investors don’t like conglomerates. Scholars agree. The performance-diversification linkage has been one of the most studied subjects in strategy over the past few decades. While firms can leverage their resources when they diversify into related (meaning similar) industries, the costs associated with managing the complexity of widely different industries quickly outweighs the benefits of new revenues. Nonetheless we occasionally come across this odd creature, the successful conglomerate. Think GE, Virgin, or Tata. This presents us with an interesting question: are there special circumstances where unrelated diversification makes sense?
I can think of three. Let’s start with the obvious: institutional context. In many developing economies success is determined by political connections and access to capital. This suggests that for firms like Tata it makes perfect sense to increase their scope. While specialist firms might be able to develop better products they will have a much harder time to master the bureaucratic jungle of India compared to Tata. The second reason why some firms might consider conglomeration is related to ownership structure. In a study I conducted with Michael Mayer and Julia Hautz, we found that a high number of conglomerates such as LVMH or Virgin are family owned. That makes perfect sense. For most of these families the majority of their wealth is tied up in their company. To avoid the full blast of industry specific risks, they diversify. Investment funds do the same by spreading their money across different firms in different industries. As families do not have that option, they broaden the scope of their company. Finally, I think that some companies have unique resources that can be leveraged in many different industries. Virgin for example has a brand that works well across a range of industries with mass consumers. Under the leadership of Richard Branson the company developed a model where small units enjoy great independence and entrepreneurial spirit (it helps that many managers hold stakes in the business they lead) while at the same time they benefit from the strong brand and access to cash when they are ready to scale up. Virgin also manages to keep its own costs down by partnering. In a number of businesses they struck a deal where the partner puts up most of the money and Virgin contributes the brand.
So if you are doing business in the developing world, are family owned, or have a unique set of resources that work across many different industries, unrelated diversification might work for you. But be careful, this is the exception and not the rule.
Sunday, 19 December 2010
Is Apple intelligently conservative?
A couple weeks ago I was teaching an Executive MBA class. One group used my Principles of Enduring Success to analyse Apple's strategy. I thought it is worth writing a few lines about this. The initial impression is that Apple is anything but intelligently conservative.There seem to be only two ways to interpret this. Either my principles are no longer valid orApple will face problems in the long run. Considering its phenominal success over the past few years most people would put their money on Apple rather than my principles.
There is, however, one alternative. Apple could be more in line with my propositions once we look more carefully.
Let's start with Principle 1: Exploitation comes before Exploration. Although Apple is known for cutting edge products the underlying technology is less noble. What Apple really excels in is packaging them in an attractive way and convincing the world that they need their beautiful products. Arguably a clear case of a company that takes exploitation most serious. Apple is also considerably more conservative in its finances (Principle 2) than might be expected. It's solvency ratio (i.e. the ability to repay debt) is higher than for most of its competitors save Google (a company that I would also expect to achieve sustainable success). Principle 3, learning from mistakes, is harder to judge. In the late 1980s and early 1990s one of their most costly mistakes has been an obsession to develop everything in-house. Only after they accepted Windows as an operating system did things start to turn around. Today, Apple seems to be open to sensible partnering options. The Apps store is a powerful example of what can happen if you allow independent developers into your system. On Principle 4, diversifying into related businesses, Apple is a clear yes. They evolved from a computer manufacturer by adding first the ipod and later the iphone to their portfolio. Lastly, whether change processes are done in a culturally sensitive way (Principle 5) can simply not be judged by an outside observer.
So it seems like you don't have to decide whether Apple got it right or my research provides useful insights. There is, however, one aspect of the Apple model which makes me feel uncomfortable. My research indicates that companies did not rely too strongly on a single charismatic leader. Apple on the other hand does. Can we imagine the company without Steve Jobs? What will happen after Steve Jobs? If the company cannot come up with a compelling answer it might be in for a rough period.Saturday, 11 December 2010
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