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Streamline Training & Documentation
Streamline Training & Documentation
Thursday, February 25, 2010
Alfred Sloan's Memoir VIII: The Great Depression
The trauma of the Great Depression was intense in the auto industry. Alfred Sloan's response was to re-emphasize the importance of having a strong and agile central policy-making capability, even as policy execution remained the responsibility of the individual GM divisions.
As Sloan recalls in Chapter 10 of My Years with General Motors, The automobile industry in the United States and Canada dropped from a production of about 5.6 million cars and trucks, worth about $5.1 billion at retail, in 1929, to about 1.4 million units, worth about $1.1 billion in 1932. That was lower than any year since the war year 1918.
Thanks to the financial and operating controls, the development of which I have described in earlier chapters, General Motors did not approach disaster as it had in the 1920-21 slump. We made an orderly step-by-step retreat in all matters, including wage and salary reductions. Sales by our United States and Canadian plants dropped to 526,000 cars and trucks in 1932 as compared with about 1.9 million in 1929, a tremendous drop (72 per cent) when you consider the many expenses that are fixed. That we fared relatively better than the industry is shown by the fact that our share of the market increased from 34 per cent in 1929 to 38 per cent in 1932, the trough year of the depression. Our profits dropped from about $248 million in 1929 to $165,000 in 1932, still in the black, thanks mainly to our financial-control procedures. In 1932 we were operating at less than 30 per cent of capacity.
[. . .]
... Inevitably when an industrial enterprise is shaken with such a force as we met at the onset of the great depression, there has to be confusion. In November 1933 I began to write again on the subject of new policies, beginning at the beginning, on the subject of policy itself. I said:
I feel that this [policy] phase of the general organization problem is of particular importance to General Motors, not because of its size particularly but on account of the nature of its business, subject as it is, to what I might term "rapid changes". In other words, I contend a unit of the automotive industry has far less "coasting ability", I might term it, than units in most any other industry that might be selected for comparison. As I analyze our picture, looking forward into the future, our success or, let me say, the maintenance of our position, absolutely depends upon the ability of our organization to lay down a strategy as will enable us to forecast the rapid changes that are taking place and will continue to take place in the various activities in which we are interested, involving all the functional divisions within such activities, and to provide for those changes with sufficient rapidity.
In making this statement I am not minimizing in any sense, the importance of effectively and economically carrying out such policies as may be adopted — I am simply trying to emphasize the point that the policy phase is of vital concern because, unless we can, with reasonable intelligence, meet this issue — no matter how able an administrative set-up [i.e., policy execution set-up] we may have, it is limited in its opportunity to function. I might add further, that looking forward I feel that we have got to more aggressively deal with that phase of our problems than we have in the past. It is going to be harder to maintain both our competitive position and our profit position. We can not afford to take the time in the future that we have in the past to make up our minds what we should do with respect to changes in trends which are having an influence on our position ...
My main purpose in the memorandum from which the above passages are taken was to reassert the purely policy-making role of the Executive Committee.
Alfred Sloan's Memoir IV: Introduction of the Pontiac
The post from day before yesterday quoted Alfred Sloan's explanation of how General Motors formalized its policy of producing "a line of cars in each price area, from the lowest price up to one for a strictly high-grade quantity-production car."
A "market segmentation price ladder" of General Motors models from 1925/26: a Cadillac sedan, a Chevrolet touring car, a first-year Pontiac coupe, a Buick touring car, and an Oldsmobile sedan. (www.cnet.com.au)
As Sloan goes on to explain in Chapter 9 of My Years with General Motors, the corporation's management recognized in 1924 that there was too big a price gap between their $510 Chevrolet touring car and their $750 Olds touring car. GM decided to introduce a new make, the Pontiac, to fill this gap. [The gap] was big enough to constitute a volume demand [from prospective auto buyers] and thereby to accommodate, on top of Chevrolet, a competitor against whom we then had no counter. It was therefore an important gap to fill both offensively and defensively; offensively because there was a market demand to be satisfied there, and defensively because competitive cars could come in there and come down on Chevrolet as we planned for Chevrolet to come down on Ford. On this reasoning, we made one of the most important decisions in the history of General Motors, namely to fill the gap above Chevrolet with a brand-new car with a new six-cylinder engine. We had come to believe from an engineering standpoint that the future favored sixes and eights. However, to make the strategy effective, it would be necessary to fill the gap with a car that also had some volume economies. Otherwise, because the new car would draw some volume away from Chevrolet, reducing its economies, a loss would result for both cars. We concluded, therefore, that the new car must be designed in physical co-ordination with Chevrolet so as to share Chevrolet's economies and vice versa.
[. . .]
... the Pontiac represented the first important advance in co-ordinating the physical product in manufacturing. Physical co-ordination in one form or another is, of course, the first principle of mass production, but at that time it was widely supposed, from the example of the Model T, that mass production on a grand scale required a uniform product. The Pontiac, co-ordinated in part with a car in another price class, was to demonstrate that mass production of automobiles could be reconciled with variety in product. This was again the opposite of the old Ford concept, which we persistently met and opposed at every turn. For General Motors, with its five basic price classes by car makes and several subclasses of models, the implication of the Pontiac idea was very great for the whole line. If the cars in the higher-price classes could benefit from the volume economies of the lower-price classes, the advantages of mass production could be extended to the whole car line.
[. . .]
The Pontiac went on the market on schedule for the model year 1926 with the coach priced at $825, that is, about halfway between the Chevrolet coach, priced at $645, and the Olds coach, priced at $950; and the gap in our car line was closed.
Note that Sloan also briefly addresses the gap in 1924 between the $1295 Buick "6" touring car and the $2985 Cadillac touring car. This gap was filled by the Cadillac La Salle, which was introduced in 1927, its base model priced at $2685, or about $700 less than the Cadillac seven-person sedan.
In the spring of 1921, General Motors' Executive Committee created a special committee to study the company's de facto product policy and make any recommendations that might seem advisable for adjusting it. As Alfred Sloan explains in Chapter 4 of My Years with General Motors, The product policy we proposed is the one for which General Motors has now long been known. We said first that the corporation should produce a line of cars in each price area, from the lowest price up to one for a strictly high-grade quantity-production car, but we would not get into the fancy-price field with small production; second, that the price steps should not be such as to leave wide gaps in the line and yet ... great enough to keep their number within reason, so that the greatest advantage of quantity production could be secured
[. . .]
The core of the [GM] product policy lies in its concept of mass-producing a full line of cars graded upward in quality and price [with Chevrolet at the low end and Cadillac at the top]. This principle supplied the first element in differentiating the General Motors concept of the market from that of the old Ford Model T concept. Concretely, the General Motors concept provided the strategy for putting Chevrolet into competition with the Model T. Without this policy of ours, Mr. Ford would not have had any competition in his chosen field at that time.
In 1921 Ford had about 60 percent of the total car and truck market in units, and Chevrolet had about 4 per cent. With Ford in almost complete possession of the low-price field, it would have been suicidal to compete with him head on. No conceivable amount of capital short of the United States Treasury could have sustained the losses required to take volume away from him at his own game. The strategy we devised was to take a bite from the top of his position, conceived as a price class, and in this way build up Chevrolet volume on a profitable basis. In later years, as the consumer upgraded his [automobile] preference, the new General Motors policy was to become critically attuned to the course of American history.
As a follow-on to yesterday's post concerning coping with uncertainty, I'd call attention to an article in today's Wall Street Journal reporting on companies' declining confidence in the value of strategic planning.
According to reporters Joann Lublin and Dana Mattioli, instead of trying to look ahead and plan for a "likely" future, companies are striving for "increased flexibiliy and accelerated decision making" — decision making that has a pronounced element of opportunism.
It has become evident to the companies in question that they need to respond more quickly to changes in customer demand, so they have begun updating operating budgets more frequently — often monthly rather than quarterly. And they have been thinking in terms of scenarios and spinning out ideas for how they can position themselves to respond adaptively to changes in the business environment.
The Winter 2010 issue of the MIT Sloan Management Review has an excellent article addressing the issue of how businesses can best cope with uncertainty.
Uncertainty concerning events whose probability distribution is known
Uncertainty concerning events whose probability distribution cannot be known
The authors note that even in the case of events with a known probability distribution, it is generally impossible to know when a low probability event will occur. The situation is even more nebulous for the second type of uncertainty, since even the frequencies of possible events are unknown.
Since forecasting in an uncertain world leaves the key question, "When will the Big One hit?" unanswered, the authors argue that a business should de-emphasize forecasting exercises and instead prepare for the future by developing plans for handling various scenarios, including quite extreme, if rare, situations.
The authors recommend a technique they call "future-perfect thinking." They offer this example:
Assume you’re the CEO of a major airline, and in order to formulate your corporate strategy, you need to forecast oil prices for the next five years.
First, imagine that five years have already passed. You’re now able to look back on what happened over that period. It turns out that oil prices have been quite low and stable over the “past” five years, which was a great benefit to the airline (and your career). However, instead of just enjoying that imaginary good luck, explain — or tell the story of — how such favorable circumstances came about. What were the particular economic and geopolitical events that contributed to the low, stable oil prices?
Now, take a second trip forward five years on the time machine. This time, however, when you look back at oil prices, you are exasperated. All you see is mayhem: a period of steep and highly volatile prices that made running the airline almost impossible. Once again, explain what happened. What were the particular economic and geopolitical events that led to that painful scenario?
If you do that kind of exercise a few times, focusing on the realms of your own experience, you’ll start to develop a feeling for different futures and the fact that they are all plausible. ... [T]hough there is no formal technique for converting plausibility into probability, you can use your new insights to develop appropriate risk protection strategies. That is the essence of future-perfect thinking. It involves harnessing the clarity of hindsight to develop more vivid pictures of the future.
The affinity of future-perfect thinking to scenario planning is apparent.
The American Press Institute, a training organization for journalists founded at Columbia University in 1946, has in recent years been giving focused attention to investigating what sort of viable future newspapers can create for themselves.
API's Newspaper Next initiative, launched in 2006, "provides the industry with new business models, non-traditional ways to see opportunities that produce sustainable growth, and ways to reshape organizations for consistent innovation."
The Newspaper Next project team worked with Innosight, headed by Clayton Christensen, a professor at Harvard Business School, to develop a recommended approach to innovation for newspapers. The "job to be done" is one of the central concepts of the Innosight approach. The thinking is that
... customers don't buy products, they hire them to get important jobs done. Understanding the jobs that customers care about but can't adequately get done with existing products can point to new paths for growth. ... One challenge for the newspaper industry is that many of the information-related jobs that people used to hire newspapers to get done are now done better by emerging competitors.
Newspaper Next developed three one-page interview forms that newspapers can use to identify the "jobs" they can profitably do for their customers — consumers and businesses.
The questions suggested for consumers — readers and prospective readers — are:
What are some things (for example, related to local information) that you have most trouble trying to do at the moment?
Why and when do you typically seek to do this?
Where did you look for help? Describe the process you followed.
What frustrated you most?
Describe a perfect solution. What will it do?
What are the emotions that the perfect solution would make you feel ("emotional hiring criteria")?
The suggested questions for businesses — currently served by newspapers mostly through advertising — are:
How do you make money?
What are the things about running your business that keep you up at night?
What are some things ("jobs") that you are having problems getting done?
Under what circumstances do you usually try to do these things?
What do you currently use to help you?
What other options have you considered? Why did you use or reject these?
How would you describe the perfect solution?
What are the most important characteristics of this solution?
There is also a questionnaire for employees with these suggested questions:
What are some things that customers have asked us to do in the past that we could not do?
What types of customers typically ask us for this?
Why couldn't we deliver what they wanted?
What alternatives did they use instead?
How well did these alternatives meet their needs?
What would the perfect solution for them look like?
What would be the most important characteristics ("hiring criteria") of this solution?
Newspaper Next preaches what they call their "gospel":
Innovation requires structure and resources. Companies hoping to transition from the old, monolithic newspaper business model to a diverse and growing portfolio of products need to create clear innovation processes and allocate resources to support promising projects.
Though not all industries will necessarily be best off if their companies focus their innovation efforts on developing "a diverse and growing portfolio of products," the Innosight approach to innovation, and specifically the sorts of questions suggested for customers and employees, can provide a model for how to get headed down a productive path toward long-term growth.
One of the more useful articles that has come my way from McKinsey & Co. appeared this month. Charles Roxburgh, a director in McKinsey's London office, writes about "The Use and Abuse of Scenarios."
The article is around pages and well worth reading in its entirety. As a sample of what you'll find, I'll note the don'ts Roxburgh discusses:
Don't become paralyzed, unable to act because you don't know which of the possible scenarios you've defined you should plan for. Roxburgh's advice is "to pick the scenario whose outcome seems most likely and to base a plan upon that scenario. It should be buttressed with clear contingenices if another scenario — or one that hasn't been imagined — begins to emerge instead."
Don't let scenarios muddy communications. Instead of sharing all the scenarios with employees, "communicate a single, bold goal convincingly."
Don't rely on an excessively narrow set of outcomes. You need to think through how you will respond if and when an unlikely scenario comes to pass. For instance, Roxburgh advises, "When the economy is heading into a downturn, pessimistic scenarios should always be pushed beyond what feels comfortable. When the economy has entered the downturn, there is a need for scenarios that may seem unreasonably optimistic."
Don't chop the tails off the distribution. "Because the risk of an event is equal to its probability times its magnitude, a low-probability event can still be disastrous if its effects are large enough."
Don't discard scenarios too quickly. Scenarios do need to be revised as the environment and circumstances change. Roxburgh recommends swapping in a new scenario whenever an existing one is dropped because it has lost relevance.
Don't use scenarios when uncertainty is too great. Sometimes uncertainty is so high that it is simply impossible to build reliable scenarios.
Don't use a single variable. "At least two variables should be used to construct scenarios — and the variables must not be dependent, or in reality there will be just one spectrum."
The final portion of Roxburgh's article offers do's — Rosburgh's suggested rules of thumb. For example:
The scenario that is highest in probability should always be identified, and that ought to become the base case. If that proves impossible, it should at least be feasible to fashion a “central” case — but there must be crystal clarity about the degree of certainty attached to it, the alternatives, and the resilience of any strategy to those alternatives.
For a view of scenario planning complementary to Roxburgh's (cited in an earlier post), you can go here.
Productivity is in the news these days as people take note that it is rising impressively in the US even as unemployment remains high. What lies behind the ability of companies to maintain needed output levels with fewer employees?
One known source of productivity gains is investment in information technology. But some companies do markedly better in realizing productivity gains from IT than others. Why?
Erik Brynjolfsson, a professor at MIT's Sloan School of Management and Director of the MIT Center for Digital Business, and Adam Saunders, a lecturer at UPenn's Wharton School, have been investigating this question. The answer they offer in a recently published book is that
companies with the highest level of returns to their technology investment are doing more than just buying technology; they are inventing new forms of organizational capital to become digital organizations. These innovations include a cluster of organizational and business-process changes, including broader sharing of information, decentralized decision-making, linking pay and promotions to performance, pruning of non-core products and processes, and greater investments in training and education.
You can access the introduction and first chapter of Brynjolfsson and Saunders' book here.
[Earlier reference to the points Brynjolfsson and Saunders make in their book can be found in a post from July of last year. Brynjolfsson's views (along with those of co-auther Andrew McAfee) concerning measurement of economic activity that improves on the standard GDP measure are discussed in a post from last month.]
Michael D. Watkins on Managing Business Transitions
In the January 2009 issue of the Harvard Business Review, Michael D. Watkins, a one-time business professor and now chairman of Genesis Advisers, lays out a robust approach for leaders to follow in handling various business transitions, such as getting a start-up off the ground, or overseeing a distressed company's turnaround.
"Picking the Right Transition Strategy" explains Watkins' STARS framework, which outlines the challenges and opportunities inherent in five types of business transition. In addition to start-ups and turnarounds (S and T), STARS covers situations of accelerated growth (a company entering a period of rapid expansion), realignment (a company facing the need to significantly adjust its strategy in order to remain successful), and sustaining success (an executive taking over a company whose previous leader was highly effective).
Watkins spells out the full details of the STARS framework in his recently published book, Your Next Move: The Leader's Guide to Successfully Navigating Major Career Transitions. The HBR article focuses on a case study that illustrates how one senior executive, with conscious deliberation, handled a pair of assignments quite differently because the first was a turnaround, while the second was a realignment.
The case example highlights the fact that the same fundamental principles which "will ease your transition and increase your odds of long-term leadership success" come into play in all situations, but must be applied in ways specific to the particular type of transition involved. The fundamental principles are (in edited form):
Organize to learn about the business — Figure out what you most need to learn, from whom, and how you can accelerate the learning process.
Define the new strategic intent for the organization — Develop and communicate a compelling vision for what the organization will become. Outline a clear strategy for achieving the vision.
Establish priorities — Identify a few vital goals and pursue them vigorously. Think about what you need to have accomplished by the end of your first year in your new position.
Build your leadership team — Evaluate the team you inherited. When bringing new members onto the team, aim for a balance between people from inside and outside the organization.
Secure early wins — Think through how you plan to "arrive" in the new organization. Find ways to build personal credibility and energize the ranks.
Create supporting alliances — Identify how the organization really works and who has influence. Create key coalitions in support of your initiatives.
In parallel with the above principles relating to managing organizational change, Watkins addresses the "pillars of self-management" that someone assuming a leadership role must embrace in order to adapt personally, as needed:
Enhance self-awareness — In particular, know the leadership style that you adopt most reflexively, and be prepared to set it aside for a more suitable style if the particular transition you're managing requires that.
Exercise personal discipline — Ask yourself what behaviors with which you are particularly comfortable, you should now be doing less of; and what behaviors that you don't much enjoy, you should now be doing more of.
Build complementary teams — Get people to help you who have strengths that offset your weaker points.
You can listen to Watkins discuss much of this material in the 9:24 video below, in which he is interviewed by Sarah Green, an editor at harvardbusiness.org. Watkins also talks about on-boarding and about how you can help your family adjust to changes they have to make (e.g., moving to a new city) because of your new role.
Blythe McGarvie on Business Performance Management
The CFO Project is a periodic publication of Montgomery Research that offers "ideas, points of view, vendor profiles, and company case studies" that launched in October 2002. Three volumes have been published so far:
Competitive Financial Operations (2002) — "designed to provide insights for finance executives interested in creating transaction processing and performance reporting solutions that are efficient and effective on a global scale."
Business Analytics and Performance Management (2003 – the only volume, so far, with a distinctive title) — "focused on targeting value opportunities, improving performance management capabilities, and delivering analytics to drive improved results across geographies, business units, and customer segments."
Competitive Financial Operations: The CFO Project (2007) — explores "the way CFOs are managing [the] tricky balancing act between serving as internal 'traffic cop' and forward-thinking business leader" and presents "expertise on corporate governance, risk management, achieving compliance and transparency, business planning, executive compensation and more."
The papers are available online to anyone who registers for a membership or subscription.
The only item I can personally vouch for is an excellent four-page case study (pdf) that I encountered a few days ago and was quite taken with. Blythe J.McGarvie, currently CEO of LIF [Leadership for International Finance] Group, writes about her experience over thirty years with the gradual maturation of tools and techniques of business performance management (BPM).
As you would expect of an expert in accounting and finance, McGarvie evaluates advances in the technology and techniques available to finance departments in terms of how substantial has been their impact on capacity for analysis and effective decision-making. She identifies several stages in her own experience with advances in BPM:
Integration of reporting and planning, which enabled companies "to determine which products and customers were driving — or dragging — profitability." This, in turn, enabled better decision-making concerning how to improve the profitability of particular products and customers.
Making the budgeting process a bona fide planning process, i.e., "budgeting became a more integrated, holistic and foundational business management exercise. Strategy was determined through the budgeting processes, and compensation incentives were married to business objectives."
Integration of the operating and capital budgeting processes, so that managers were forced to take the cost of capital into account in making spending decisions. This is the economic value added (EVA) concept.
Extending BPM beyond finance, e.g., by using BPM techniques to improve inventory management in retail operations. McGarvie describes how Hannaford Supermarkets built a detailed model — broken down by product and category — of their revenue and costs. The model enabled granular measurement of product and category profitability, an advance that "changed the way the store managers ordered inventory and how they did business."
The above is a drastic condensation of what McGarvie has to say in her case study. Reading the whole thing is highly recommended.
A complete listing of the CFO Project white papers is here. A list of "solutions," organized by topic, is here. A list of all the case studies is here. Note that these three types of content are not mutually exclusive.
C.K. Prahalad on Managing in a Volatile Market Environment
You can get an overview of the thinking of C.K. Prahalad (Ross School of Business at the University of Michigan) concerning how firms should gird themselves to deal with a volatile market environment by reading the one-page column he wrote for the September 21 issue of BusinessWeek.
Prahalad's central point is that in today's environment firms must structure themselves so they are able to operate with agility — and they must do so in a way that, however paradoxical it may sound, is compatible with maintaining a consistent strategy.
When you read the column, you will see the steps Prahalad would have firms take to protect themselves from the risks associated with volatility, such as conserving cash, converting fixed costs to variable costs, and focusing on core competencies. I would call particular attention to his comments on the type of human resource management that is required in order to have a flexible workforce:
To better handle the constant project turnover, employees are cross-trained in many different skills. This requires an arsenal of training programs. Employees are regularly tested, and the hallmark of the best of them is the ability to learn quickly.
Having this much flexibility in a staff, and within each staffer, forces these companies to equip their managers with instant access to data on what each employee can do and where they are — physically and in terms of the finish date of their current assignment. All employees know they will be moved from one assignment to another, and in many cases across the world. It becomes the cultural expectation.
There is a clear affinity between what Prahalad is saying here, and the nature of needed employee capabilities and qualities in a "post-Fordist" organization discussed in last Tuesday's post.
Schwartz outlines the scenario planning process by working through an example in which an aerospace engineer gets the process started by deciding that the question in need of investigation is "How can I future-proof my career over the next five years?"
Schwartz then outlines the five steps in the process:
List driving forces.
What variables, trends, and events could change the aerospace industry? Which are fairly certain? Which are uncertain? Which are the two most important uncertainties?
Using the two most important uncertainties, make a scenario grid showing four possible futures.
Imagine possible futures and write them up like news stories.
What could happen over the next five years?
Brainstorm implications. Then devise suitable strategies and tactics for coping with each of the futures you've imagined.
Track indicators so that you recognize when a particular future is emerging.
Schwartz closes by noting that if none of the futures you've imagined comes true, "You can always reevaluate you sense of the forces at play and rework the grid to reflect reality more accurately."
On July 22, Knowledge@Wharton published an excellent overview of how scenario planning can help companies maintain a state of preparedness despite the uncertainties that figure so prominently in today's business environment.
My own copy of the article is so heavily highlighted that I know it's something I must recommend reading in its entirety — it's only about four pages. I'll simply highlight two main themes:
Scenario planning is a way of gaining strategic flexibility in the face of an uncertain future.
"... some companies ...have developed a competitive advantage by leveraging scenario planning — first in stimulating discussion about potential outcomes arising from the swirling mix of trends shaping the world, and then in establishing monitoring mechanisms to identify which scenario is starting to unfold. In the end, the major objectives for these companies are to minimize surprises and to consistently anticipate — and act on — major emerging opportunities and challenges, ahead of competitors."
The leaders of a company need to be directly involved in the scenario planning process so that they are forced to examine their assumptions about how the world works and to experience what's involved in analyzing data with an open mind.
The artcle quotes Kristel Van der Elst, head of the scenario planning team at the World Economic Forum: "You end up changing how people think. The long-term benefit is that you open up people's minds ..."
If you'd like to take a look at the sample set of scenarios cited in the article, you can find the paper in question — "Scenarios for the Downturn & Rebound," by Rob-Jan de Jong and Paul J.H. Schoemaker — here (pdf).
In April 2008, three HP employees and four employees of Jump Associates1presented (pdf) to a conference in Paris the story of HP's approach to measuring the contribution of design to achieving the business goals of new-product design projects.
The bottom line:
A well-designed measurement system can serve as both a catalyst for stronger collaboration between all the stakeholders in an organization's product development process and a compass for creative teams to make sure they're heading in the right direction.
The central tool HP uses is something they call the D3 Matrix, illustrated in the graphic below.
Column 1: Goals related to the development process Column 2: Goals related to HP's portfolio of products Column 3: Goals that are row-specific
Each cell in the matrix "represents a strategic design goal that can be pursued on a project." The foundation is the set of goals in the bottom row, which relate to striving to simplify by:
making the development process more efficient
improving the user experience over a range of products in HP's portfolio
optimizing the supply chain in a way that doesn't detract from the user experience
The second tier of goals relates to designing products in a way that further differentiates HP from its competition by:
addressing unmet customer needs with compelling solutions
coordinating groups of products so they work together better
building customers' emotional connection with HP (the "Wow" factor)
Finally, the top tier captures goals relating to using design to innovate by:
cultivating new growth prospects
creating a balanced portfolio of innovations that foster both short-term and long-term success
creating proprietary assets that provide HP with a sustainable competitive advantage
The authors explain that HP has learned quite a bit about how to make sure their approach to design measurement actually works. They offer five best-practice tips — stay focused on your goals, base your metrics on your goals, communicate using a common language, use real-time input to monitor your progress, narrate and illustrate your story — which they explain with admirable clarity.
It is well worth one's time to read the commentary on these tips. A key point is that
for these practices to thrive and become an integral part of a business, they need to operate within a process that's structured enough to drive towards larger strategic business goals while remaining flexible enough to enable exploration, creativity and discovery. Measurement tools can't replace good design judgment. Instead they should add structure to discussions about the value of design.
__________ 1 The presentation was titled "The Holy Grail of Design Measurement." The authors from HP were Deborah Mrazek, Sam Lucente, and Steve Sato; the authors from Jump Associates were Adam Menter, Conrad Wai, Katherine Wakid, and Philip Hartley. They were speaking at the International DMI Education Conference, whose 2008 theme was "Design Thinking: New Challenges for Designers, Managers and Organizations." DMI is the Design Management Institute.
Continuing my periodic citation of work by Jeffrey Pfeffer (most recently here), one of my favorite business academics, let me recommend reading the two-page piece he has in the July-August issue of the Harvard Business Review.
"Shareholders First? Not So Fast ..." deals with today's renewed appreciation of the value of considering all stakeholders in business planning and decision-making. Pfeffer argues:
In the 1950s and 1960s, the stakeholder was king. CEOs saw their role as one of balancing the interests of the various groups that touched their companies — customers, employees, suppliers, shareholders, and the community at large. This reflected the executives' sophisticated understanding not only of their role as stewards of the valuable resources entrusted to them but also of their own enlightened self-interest: Each of these groups was essential for organizational success. What was true then is even more so today, in an age of knowledge work, outsourcing, global supply chains, and activist interest groups.
Pfeffer goes on to say that
opinions on deregulation, finance, time horizons, and the wisdom of corporate leaders are all shifting, and the logic for putting the creation of shareholder wealth ahead of the creation of stakeholder-value is rightfully under fire.
To build profitability and productivity, enlightened managers are
implementing high-commitment work practices. These include investing in training, decentralizing decision making, and having pay be contingent on organizational, not just individual, performance. Other sources [of research] show the benefits companies reap from customer loyalty and high levels of customer satisfaction.
Pfeffer points to the increased prominence of balanced scorecards and other assessment tools as evidence that companies using such tools recognize the suboptimality of focusing exclusively on financial metrics.
Of particular interest to people in the training field, are Pfeffer's repeated references the the importance of employee training in implementing strategies that embody a balancing of stakeholders' interests.
The Treasury Board of Canada Secretariat has developed a tool that organizations can use to assess their degree of maturity in practicing results-based management. The graphic below summarizes the model on which the tool is based.
The Managing for Results (MFR) model, with its five supporting elements
In addition to the "pivotal characteristic" of Using Results to Manage, the MFR model includes five supporting elements (whose definitions have been edited in the list below):
Commitment to results — Focus on organizational leadership and its support for MFR, on the implementing capacity of the organization, on reinforcement of the values of MFR, and on the inclusion of MFR in evaluating managers' performance.
Questions to ask:
To what extent is your organization using results information to manage and adjust ongoing operations, strategic plans, policies and resources?
To what extent is there tangible support from management for building and strengthening MFR practices?
To what extent is MFR-related training available to managers and staff throughout the organization?
To what extent do the appraisal systems in your organization relate individual accomplishments to outcomes?
To what extent do your organization's values and ethics reflect a focus on outcomes?
Results-based strategic planning — Results should be linked to high-level organizational objectives and should guide design of operational processes. Managing for results should also be linked to risk management.
Questions to ask:
To what extent is there a linkage between immediate and intermediate outcomes and the organization's strategic outcomes?
To what extent are horizontal initiatives reflected in your organization's strategic plans?
To what extent is risk management systematically practised in your organization and linked to outcomes?
Operational/business planning — Focus on performance expectations and how these align with the organization's outcomes. The expectations should include outputs and outcomes, wherever possible.
Question to ask:
To what extent does your business plan specify organization-wide performance expectations that are clear, concrete and time-bound?
Measuring results — Data collection should include outcomes, not just inputs, activities and outputs. Measurement should be linked to planning and reporting, and cost should be integrated with results measurement. Note that the evaluation role is also a key part of the development of a measurement strategy.
Questions to ask:
To what extent do you measure outcomes?
How easy is it to relate these measurements to financial measures? How often is this linking done?
To what extent is evaluation integrated into the management of programs and policies?
Reporting on results — Focus on the integration of external reporting with actual practices and results within the organization.
Questions to ask:
To what extent are the results data used for internal managing and for external reporting?
How consistent is the information used for managing with the information reported externally?
The assessment tool is essentially a rubric that describes five levels of maturity, which the Secretariat refers to as transition stages:
Awareness
Exploration
Transition
Full implementation
Continuous learning
The self-assessment tool is available in MSWord and pdf formats.
M&A Activities of Companies Based in Developing Countries
The literature on economic development gives considerable attention to the means of technology transfer between developed and developing counries. There is an instructive case study of one such mechanism in the May issue of the Harvard Business Review.
Nirmalya Kumar, a professor of marketing at the London Business School, writes about how the India aluminum company Hindalco has used cross-border acquisitions to obtain competencies, technology, and knowledge it needs in order to carry out its strategy of becoming a strong global enterprise, manufacturing both basic and value-added products. This competency-driven rationale for acquisitions is a distinct contrast to the synergies-and-cost-reduction rationale that generally lies behind acquisitions made by companies based in developed countries.
Kumar lays out an eight-year timeline of what he calls the "M&A competency stairway" that Hindalco has gradually climbed in order to build the "industry-related skills and M&A techniques" it needed to pursue ever more challenging acquisition targets. The stairway has five steps so far:
Starting small, Hindalco acquired two Indian companies, Indal and Annapurna Foils, in 2000. Competencies gained:
How to bid for, negotiate with, and integrate companies in India
How to manage a large customer-focused, value-added products business
How to turn around a small Indian company (Annapurna) in receivership
In 2003, Hindalco acquired the Nifty and Mount Gordon mines in Australia. Competencies gained:
How to take over, turn around, and operate companies in a developed market
How to list companies on a stock exchange abroad and manage investor relations
In 2005, Hindalco acquired the St. Anne Nackawic Pulp Mill in Canada. Competencies gained:
How to manage a global supply chain as a a buyer and a seller
How to manage price fluctuations and foreign exchange risks across countries
In 2006, Hindalco acquired Minacs Worldwide in Canada. Competencies gained:
How to acquire assimilate, and delist a company in North America
How to manage a large, HR-intensive multinational operation
Finally, in 2007, Hindalco acquired Novelis North America, a company more than twice its size. Kumar acknowledges that the jury is out on how this latest acquisition will fare, both because it is so recent and because of the current depressed market conditions that Hindalco, along with everyone else in the aluminum industry, is coping with. In any case, it seems safe to say, as Kumar does, that Hindalco could not have tackled such a large acquisition without the competencies built through previous, smaller-scale acquisitions.
Kumar offers this summary of Hindalco's M&A strategy:
Making aluminum at competitive prices requires economics of scale, process skills, and cheap raw materials. Selling value-added aluminum products demands attention to quality, service, and brands; product development skills; and a knack for forging customer relationships — capabilities that Hindalco didn't possess [prior to 2000]. To learn them, it decided to acquire the leading downstream companies: Indal in India and Novelis overseas. The objective was to gain new competencies — not to get big fast or to reduce costs.
Note that, because the rationale is building competency, acquisition programs like that of Hindalco do not involve wholesale replacement of the management of acquired companies. Also, they have a long-term focus, as opposed to a focus on realizing profits quickly through cost-cutting.
The Cambridge-based advertising agency PJA has drawn up a scorecard (pdf) for its business development efforts that can serve as a model for other agencies and as a discussion-starter for companies in any industry that want to systematically improve their approach to bringing in new customers.
The scorecard has five sections:
The Plan
Positioning
The Pipeline
The Pitch
Perception/Reputation
Within each section are three or four items to be used in assessing the current quality of business development efforts. For example, the items in the Positioning section are:
We have a positioning statement
A majority of agency staffers can summarize agency positioning
Our positioning deliberately excludes market categories or capabilities that are not areas of strength
The assessment is on a scale of 1 to 5:
1 "Not on your life" 2 "We have some work to do" 3 "I'd give us a solid 'C' " 4 "Pretty damned sure" 5 "Absolutely"
Obviously, you can adopt your own labels for the rating scale if the cutesy agency lingo doesn't appeal.
For a straightforward approach to allowing employees scope for exercising their intelligence and creative talents, while controlling risks associated with empowerment, you can look to the "levers of control" framework put forward by Robert Simons, a professor at Harvard Business School.
Simons recommends adopting four types of control system so that employees can "initiate process improvements and new ways of responding to customers' needs — but in a controlled way." The four types of control system are:
Diagnostic control systems — The traditional approach of checking performance against plan by monitoring critical performance outcomes, such as sales and profits.
Belief systems — Communication of your company's core values and its mission in a way that inspires employees' commitment and motivates them to "search for new ways of creating value." Simons notes, "In the absence of clearly articulated core values, [employees] are often forced to make assumptions about what constitutes acceptable behavior in the many different, unpredictable circumstances they encounter."
Boundary systems — Ground rules for operations, and limits on the types of opportunities that employees are allowed to pursue. Simons argues that empowerment only works if you refrain from making lots of rules about what employees must do, and instead specify what they may not do. For instance, departures from ethical behavior should be clearly verboten. A company will probably also want to specify types of business it does not want to get involved in (perhaps because of lack of needed competencies), and/or types of customers it does not care to serve. Simons argues, "Boundary systems are especially critical in those businesses in which a reputation built on trust is a key competitive asset."
Interactive control systems — The "formal information systems that managers use to involve themselves regularly and personally in the decisions of subordinates." In practice, this means regular face-to-face discussion between senior managers and subordinates to assess emerging information and new ideas that may or may not indicate a need to revamp the company's strategy and action plans. Managers are looking to "identify specific vulnerabilities, opportunities, and the source of any problems that require proactive responses." The sorts of questions to explore are What has changed since our last forecast? Why? What are we going to do about it?
Note that the combination of belief systems and boundary systems effectively define the domain within which employees are encouraged to actively seek profitable innovations.
Xavier de Souza Briggs on "Getting Things Implemented"
If you want a compact, rich introduction to the issues organizations must manage in order to devise and implement strategies that produce valuable outcomes, you will be well-served by working through the materials Xavier de Souza Briggs put together for a week-long course he delivered this January, just before taking a two-year leave from his MIT faculty appointment in urban studies and planning, to become Associate Director for General Government Programs at the US Office of Management and Budget.
Creating public value, and The craft of political management (negotiation and coalition building)
Basic questions that need to be addressed: "What is worth implementing [What produces value?] and why? How does one go from concept to capacity and then 'production'? ... How to get things done responsibly and ethically when decisions cannot simply be imposed, downward and in a straightforward way, in a hierarchy?" Briggs emphasizes, "We want to be able to distinguish strong ideas, weakly implemented from bad ideas. These distinctions are often not easy to make — but are hugely important for the support we can build for good ideas."
Developing and changing organizational strategy
Here Briggs is talking about devising the means for accomplishing the organization's agreed mission. "The overall [strategic] challenge (and opportunity) is a powerful alignment: Lining up the value-creating idea with what the environment will support and what the organization (or team or alliance) is actually capable of producing." A key lesson: "There's no substitute for organized capacity, beyond any charismatic, smart, or otherwise talented individual."
Strategic collaboration (partnerships and alliances), and Performance management
Some key lessons about collaboration: "Effective collaboration often demands that implementers play a wide variety of roles well (strategic, operational, mobilization-focused, etc.)." "Collaboratives evolve through stages, navigated jointly: agreeing on a problem, developing strategy, implementing ('co-producing' change)." "Collaboratives can have wider ripple effects (political participation, policy reform, etc.)."
The key lesson about performance management: "Systems of performance measures and rules and incentives coupled with them ('management') should align with broader strategies."
Core elements of operating capacity: organizational structure (e.g., by function, by customer segment), operational processes (mapped so as to highlight, e.g., bottlenecks), human resources
Key lessons: Organizational restructuring "invites resistance, requires political capital, proof of concept, supportive coalitions, etc." "Strategic human resource management addresses flows ([employee] entry, development, exit) and targets (motivation, reward, performance)."
Thinking like an implementer, and Leadership (especially, leading change)
A key lesson: An effective implementer recognizes implementation issues (e.g., lack of funding, lack of operating capacity, opportunities for delivering more value, etc.) and develops skill in generating strategic options for addressing the issues.
Some core leadership concepts: exercising leadership vs. exercising authority; technical challenges (well-defined problems with known solutions) vs. adaptive challenges (fuzzy problems, unknown solutions); leadership styles; the need for a repertoire of various elements of emotional intelligence. Exercising leadership "is particularly important for motivating adaptation and risk taking, and thus deep change, in how implementation systems work."
Please note that the above outline greatly condenses and simplifies what Briggs teaches. To get a fuller account of the principles he espouses, you can download pdf files of his lecture notes and study questions here. Briggs's materials are a model of accessibility and practical expertise, structured in a way that requires students to think about the assigned readings (including a number of case studies) in critical fashion.
Each section of the course (generally, two sections per session) ends with a summary of take-away lessons. For example the first lesson from the first session is that "having a goal is not the same as having a clear, actionable value proposition." A related lesson is that "Effective implementers must often help to define ends (value propositions), not just political or operational means."
The course concluded with a take-home exam which, in keeping with the rest of Briggs's materials, places the emphasis squarely on critical thinking and intelligent application of the concepts covered in the class ("value creation, political management, organizational strategy, collaboration, performance management, organizational design and process redesign, human resource management"). Briggs emphasizes quality, not quantity, in students' responses to the seven "word problems" he sets, as you can see by reading through his instructions for the exam and the sample solutions he provides (pdf files).
