Jan 182013
 

When developed economies slumped as a result of the financial meltdown which began in 2007, companies everywhere scrambled frantically to find new markets for their goods and services. Overnight, “emerging” markets (developing nations) became everyone’s target.

By the time of the crash, it was already clear that a massive economic shift was under way from the West to the East, and that future global growth would come more from developing nations rather than the established powerhouses: the U.S., Europe, and Japan.

From the earliest days of global trade, the lure of foreign customers in strange places has been a strong one. Following World War II, innovative technologies and logistics systems, the spread of democracy, and the increasing wealth of billions of the world’s citizens have led to fabulous opportunities for companies selling everything from cement to soap, from food to financial services. But it’s really only been in the past 30-odd years that emerging market mania has taken hold.

Ted Levitt at Harvard Business School alerted companies in 1983 to “The globalization of markets,” and the opportunities in marketing across borders. Jim O’Neill, chief economist at Goldman Sachs coined the catchy terms “BRICs” (Brazil, Russia, India, China) and “the next 11” (Mexico, Turkey, Egypt, Iran, Nigeria, Bangladesh, Indonesia, South Korea, Pakistan, the Philippines, and Vietnam). C.K. Prahalad wrote about “the fortune at the bottom of the pyramid.” New York Times columnist Tom Friedman’s books, The Lexus and The Olive Tree (1999) and The World is Flat (2005), were best-sellers. Many other observers spewed out analyses, reports, articles, and books on the same topic. And it gets hyped to the hilt at the World Economic Forum’s annual Davos get-together.

Growth in rich countries remains sluggish. All evidence suggests that developing countries are where companies will find the sales they need. So competition there will become increasingly hostile, and the demand for fresh thinking on it will rise fast.

But there are some realities that cannot be ignored.

A LITTLE THEORY GOES A LONG WAY

Interest in emerging markets has brought with it an outpouring of views on the attractions of specific countries and what it takes to succeed in them. Usually, these are couched in stirring tales of how this or that entrepreneur beat the odds to make a fortune in some poverty-stricken place; how companies from India, Mexico, or South Africa became admired multinationals; and how firms in rich countries found opportunities in poor ones. Much of what’s on offer is entertaining and even inspiring, but contributes little to a theory of emerging market strategy.

The need for advice on how to crack emerging markets is a big one, and its growth is explosive. So we shouldn’t be surprised if zealous researchers and managers underplay what is already known, and what expansionary firms have learned over many decades—even centuries. Breakthroughs are always more seductive than “the basics.”

A few experts have provided useful insights about emerging market strategy. But by and large, efforts to produce useful concepts or tools specific to this field have been less than fruitful, and will continue to disappoint.

As with other areas of management, there’s only so much that can be said. There will be some incremental advances, but executives should not expect revolutionary new models or frameworks. Those in the advice business will add most value by providing information about particular countries and sectors (context), and what it takes to win in them, rather than about strategy itself (concepts).

THE GLOBALIZATION OF … MANAGEMENT

As I pointed out in a previous post, virtually every market for everything is today an emerging market, in the sense that conditions are in flux, the future is unclear, competitive intensity is high, and the rules of the game are evolving. Strategies and business models that once worked well can quickly become recipes for failure, so both must be adjusted or maybe reinvented to meet new circumstances.

But it also means that whether you’re doing business in Europe or the U.S., or trying to get moving in Malawi or Myanmar, many of the challenges are fundamentally alike. And solutions to them will be much the same, too.

The principles of management that produce results are similar across industries. They’re also similar across countries. It may be fashionable to suggest otherwise, but the evidence is clear.

Management know-how has not only been commoditized, it has also been globalized. So instead of wasting time trying to reinvent this wheel, you can focus on the really hard work of getting to know the market you’re aiming at, and figuring out how to apply the best practices within it.

CONTEXT IS EVERYTHING

The first and most important question every firm must answer when it ventures into new territory is, How will we fit in? This is the make-or-break issue. Deep local knowledge makes all the difference. Personal relationships count for a lot. Most executives who’ve worked in developing markets talk about their steep learning curve, the time it took to gain traction there.

Wherever in the world you do business, you have to be wise to politics, culture, and economics; to the structure and character of whatever market you’re in; to customer expectations and behaviour; and to what competitors are doing. But in developing countries, three issues demand particular attention.

First, there’s the fact that “things don’t work”—or at least not as they do in developed nations. Companies are dogged by what Tarun Khanna and Krishna G. Palepu have termed “institutional voids”: poor infrastructure, dodgy regulation, weak capital markets, lousy services, a lack of skills, and much else. Unhelpful bureaucrats make things worse. Corruption may be a huge problem (although it also occurs in even the most advanced nations). Protecting intellectual property can be a nightmare.

Second, is the difficulty in connecting sellers and buyers. Informal trade is probably the norm; business ecosystems are ill-formed. There’s little information about customers or competitors. Promotions, logistics, and support all present hurdles.

Third, is the management of people. Individuals with appropriate capabilities and experience are in short supply. Productivity, quality, and customer service are not their priorities. They’re unfamiliar with sophisticated working methods. They have to be introduced to a host of new ideas—roles and responsibilities, technical systems, performance management, communication, disciplinary processes, and so on. So foreign executives need to be firm and persistent in providing new direction, while at the same time acutely conscious of local custom.

None of this should be under-estimated. No one should imagine that building a business in a developing country is a cake-walk. It’s folly to believe you can simply charge out of New York and set up shop in New Delhi.

Joburg and Lagos may both be in Africa, but South African managers who think they can easily crack the Nigerian market because “We are African, we understand Africa,” are in for a shock. Success in one country in Africa, Asia, or Latin America is no guarantee of success in others in the same region, let alone elsewhere. Sony’s notion of “glocalization”—”think global, and act local”—is as valid today as it was when it was coined about three decades ago.

Emerging markets—in the sense of developing markets in developing countries—offer exciting prospects for many firms. They differ in many ways from developed markets, but managers should not hope for fantastic new theories for entering them or competing in them. Instead, they need to do their homework, strike a careful balance between importing ideas that worked elsewhere and developing new ones, and recognize that as outsiders they have special responsibilities towards their hosts.

Strategy is always a learning process, and even more so in emerging markets. But emphasis needs to be on learning about these places, not about new strategy concepts or management tools.

IN SUMMARY

Success in these markets depends, more than anything, on putting the right people on the ground with all the support they need.

They should balance a core set of strategic principles and a proven management approach with a sensitivity to local attitudes, customs, and behaviours, and always be respectful of these.

They should understand the importance of local knowledge, and never stop searching for new insights.

And most importantly, they should couple these practical actions with a preparedness to do what it takes to fit in (within reason) and the determination to improvise through difficulties.

Tony Manning_Essentials for emerging market success

A CHECKLIST TO GET YOU GOING
  1. Mindset matters. Given the hurdles you’ll face, you and your people have to really, really, really want to try. You have to be bold, you have to be able to adapt, and you’ll need both courage and perseverance. Above all, you’ll need to be resourceful—your ability to “make a plan” will be constantly tested.
  2. Appoint people who’ll be happy there. Living in Luanda or Laos is not like living in Los Angeles or London. It can be tough. Especially on families. Everyone can’t do it. So give them every chance to understand what they’re taking on, and all the encouragement and support they’ll need.
  3. Go “where the warm armpits are.” As Ted Levitt liked to say, there’s only one way to really understand any market, and that’s to go there and immerse yourself in it. To watch the locals and listen to them. To get to know what turns them on and off, and to learn how things work.
  4. Remember the first principles. Just as focus, value, and costs must be your mantra in developed markets, so they must guide your every action in emerging markets.
  5. Explore, experiment and learn fast. No matter how you prepare, no matter how good your initial information seems to be, and no matter how carefully you think through your strategy, you will get things wrong. This is a fact of life in any market, and especially so in developing ones.
  6. Get stakeholders on your side. You have to gain the support of government, communities, workers—the same array of players you deal with in your home market. But in emerging markets you probably have to work much harder to educate people about business in general and your business in particular. They have to understand not just what you expect of them, but what you can do for them. “Out there,” they can make or break you.
  7. Develop local partnerships. In some countries, they may be mandatory. In many, they’re necessary to open doors, smooth your entry, build alliances, and facilitate your growth. Their knowledge, experience, and contacts can be invaluable and make the difference between success and failure.
  8. Clear values, no compromises. While adaptability is critical, you have to be certain about how you need to behave and what you will and will not do, or you’ll be jerked around constantly—and a sitting duck for crazy demands and corruption. So set the rules early, or someone with another agenda will set them for you.
  9. Be willing to build your own infrastructure. This may mean anything from a shopping centre to a power plant or a water purification facility, roads or runways, a sewage system, accommodation for your staff, or schools and clinics for communities. It could mean offering to train local officials or upgrade their IT systems. Or it could mean working closely with PR or advertising agencies, or other service suppliers, to develop their capacity.
  10. Try, try, and try again. Cracking an emerging market is not a quick process. It’ll take most companies a lot longer than they expect, and cost far more. If you don’t go in for the long haul, you’re wasting your time. If you can’t keep picking yourself up, and adjusting your strategy, you may as well stay at home.
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  •  18/01/2013
Dec 012012
 

Disruption must surely be the hottest strategy concept of the past decade. But it is less of a breakthrough than it’s made out to be. And it may unnecessarily impede your strategic thinking.

The idea grew out of a study by Joseph Bower and Clayton Christensen, both professors at Harvard Business School, which saw light in a 1995 Harvard Business Review article titled “Disruptive Technologies, Catching The Wave.” It was subsequently moulded into a theory by Christensen, making him a superstar and spawning many books and articles by him and others. Thanks to determined promotion, it’s now a term you hear in almost every management discussion—though it’s seldom used as precisely as Christensen proposes.

The gospel according to Christensen goes like this:

In their quest for the most profitable customers, companies innovate and improve aggressively—and give customers more than they need or will pay for. And the more intently they listen to their customers, the more they up their game and sustain that gap.

While they focus on the next-generation performance needs of the most attractive customers, guerilla competitors sneak in under their price umbrella and target less attractive customers who’re being overlooked, ignored or under-served. The upstarts ask, “Who is not getting attention?” “What is value to those customers?”

The customers they aim at aren’t in the market for state-of-the-art products. So these firms can ditch the bells and whistles and keep costs and prices low.

Initially, the leaders don’t see a threat. The challengers are of no appeal to their best customers and aren’t chasing them anyway. Those customers they do lure are likely to be ones who always want a deal, are satisfied with “good enough” offerings, and won’t be missed.

But this is just a lull before the storm. Quite soon, more mainstream customers are tempted by the no-frills competitors. They need to forego some of the “value” they’ve grown used to, but what they get does the job—plus it’s easier to use, more convenient, and more affordable. So it offers them value, albeit not the kind they’ve been used to.

Many established players have been hurt this way—think clothing, airlines, steel, medical devices, consumer electronics, autos, and so on. But then they make things worse for themselves.

In an effort to counter competitors who won’t play by their rules, they typically race even faster up the value path. They invest even more in innovation and pile on features and benefits. But in their efforts to stay ahead of their enemies, they also stay ahead of their customers; and the cost of their overkill forces them to keep hiking their prices.

Some customers stick with them because they don’t mind paying more for products that they perceive to be at the leading edge. But the pool gets smaller. And the harder these firms try to hang on to their traditional business, the more they lock themselves into their “superior” strategy—and the worse things get for them.

FEW OPTIONS

If the leader wishes to retain its low-end customers, it has three options:

  1. Pump up its promotional activities, to hopefully persuade those customers to stay loyal.
  2. Keep offering the same products, but at a lower price.
  3. Eliminate some features and benefits, and cut prices.

The problem with Option 1 is that if customers learn that a competitor’s low-end offering is OK and costs less, some will leave. No amount of hype will convince them to keep paying top dollar for “value” they don’t need.

Option 2 may keep customers coming back, but margins will take a hit and buyers who’d paid the higher price will feel they ‘d been screwed.

Option 3 will result in the loss of top-end customers. The company will cannibalize itself. By offering less and tacitly admitting to customers that they’ve been paying too much, it’ll drive them into the arms of cheaper competitors.

Faced with these unpalatable choices, and trying desperately to evade the pesky newcomers, firms tend to even more doggedly pursue their current customers—whose numbers keep shrinking. Meanwhile, their low-priced competitors improve their offerings, hone their processes, and become more and more dangerous. And as their sales and profits grow, they can afford to intensify their advance.

Market-leading firms attained their dominance by focusing on an attractive target market and working furiously to satisfy it. They have a lot invested in their current strategy—money, resources, capabilities, relationships, processes—and are weighed down by these sunk costs. But even more by their mindset. So they can’t suddenly or easily change. Newcomers, on the other hand, have little baggage and can switch tack with relative ease.

OLD INSIGHTS REPACKAGED

Following Christensen’s thinking over the years, it’s hard to avoid a sense of deja vu. Even a quick glance back into the history of management thought makes it hard not to conclude that much of his “theory” is to be found in Marketing 101 and Strategy 101. And that it’s not all it’s cracked up to be.

Take, for example, the notion of “the job to be done”—a Christensen favourite that’s sure to crop up in any discussion about disruption. This is, in fact, one of the oldest ideas in the marketing playbook.

So old, in fact, that it’s impossible to pin down its origin. But I suspect it gained explicit understanding in the 1930s, thanks to a famous American sales trainer named Elmer Wheeler who coined the phrase, “Don’t sell the steak—sell the sizzle.” His point was that it’s not a chunk of meat that customers want, it’s the pleasure that goes with it: the sizzle and aroma from the barbecue, companionship and fun with family and friends, and so on. This lesson has been drummed into copywriters and sales people for years.

In “Marketing Myopia,” a HBR article that won the 1960 McKinsey Award, Ted Levitt made the then-provocative case that too many companies limited their growth by defining their industries too narrowly, and by being more concerned with what their products could do than what their customers want done. Discussing the oil industry, for example, he noted: “People do not buy gasoline. They cannot see it, taste it, feel it, appreciate it, or really test it. What they buy is the right to continue driving their cars.”

Peter Drucker told us in his 1973 book Management: Tasks, Responsibilities, Practices:“The customer never buys a product. By definition the customer buys the satisfaction of a want.”

Levitt echoed this in his 1983 book The Marketing Imagination, writing that “people don’t buy things but buy solutions.” To illustrate his point, he recycled a quote from one Leo McGinneva, who’d said that when people buy a quarter-inch drill, “they don’t want quarter-inch bits; they want quarter-inch holes.” (Something another marketing guru, Philip Kotler, had said in 1980.) Levitt also observed that “The customer may actually want and expect less.” (My italics.)

Within months of his book appearing, Levitt also published an article in HBR titled “The Globalization of Markets.” The basic argument was that by stripping away the features and benefits that made products particularly appropriate for particular markets, firms could sell them to many more customers across the world. Citing the example of Japanese firms, he said: “They have discovered the one great thing all markets have in common—an overwhelming desire for dependable, world-standard modernity in all things, at aggressively low prices. In response, they deliver irresistible value everywhere, attracting people with products that market-research technocrats described with superficial certainty as being unsuitable and uncompetitive….”

And what about Christensen’s observation that the more closely firms listen to customers, and the harder they work to deliver what those customers say they’d like, the more likely they are to offer too much? Or that to compete with disruptors, the leader should spin off a totally separate business unit?

Nothing new here, either. This, and much else that he says, has been written about for decades. That disruption, as described by Christensen, has become such a fetish is a sad indictment of academic thought and management practice.

DEFINE “DISRUPTION” WITH CARE

The theory of disruptive strategy that so many people swoon over offers a very narrow view of how market disruption may occur, which firms are disruptors, or what disruptive strategy might be.

Can you possibly argue that Apple, say, is not a disrupter, because it sells beautiful, innovative products at high-end prices? (No “good enough” thinking here!)

And what would you say about Elon Musk’s award-winning Tesla S car? Or Woolworths, Nando’s peri-peri chicken, Discovery Health’s Vitality programme, Emirates airline, or Reckitt and Coleman’s household products?

By Christensen’s criteria, none of these deserves to be called “disruptor.” These products are all excellent, and priced accordingly. Their target market is not the “bottom of the pyramid.” Cheaper, “good enough” options are available from other firms.

But all have challenged convention and redefined their categories. And surely, that’s what disruption means.

The fact that some of these big names may face competitors who offer “good enough” products doesn’t shift the disruptor label from them to those upstarts. To split hairs about an arbitrary interpretation of what a word means is ridiculous.

Christensen has chosen one interpretation of what disruption means, and made it his own. He has focused on one strategic formula which highlights a very serious threat to market leaders, and also offers challengers a way to take them on. But no established firm should imagine it’ll be bulletproof if it follows his advice exclusively. Neither should any ambitious attacker close off strategic possibilities. Most managers would do better with a broader definition.

To disrupt something is to overturn the order of things. So how could you do that? Surely, not only by offering cheaper but “good enough” products to customers who’ve previously been ignored or overlooked.

The reality is that, in most markets, there are many ways to compete, many ways to upend convention. So strategic thinking should be about creating possibilities, not shutting them down. It should be about understanding the many ways you could be toppled, not just one.

If there’s one important thing all the chatter about disruption has achieved, it’s to focus managers’ attention on the three most critical strategy questions: who is your customer, what is value to them, and how will you deliver it? (Though you have to ask what else they’ve been thinking about!)

And yes, Christensen has added many examples of why this matters and some advice on making the most of your answers.

But three, five, or 25 years from now, will we look back on the Christensen era as a disruptive one in the annals of strategic thought, or one in which we woke up and went back to basics?

As Levitt said, “Man lives not by bread alone, but mostly by catchwords.” So it’s important to pick those catchwords with care, and to be clear about what they mean and how they might be applied.

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  •  01/12/2012
Apr 202012
 

Governments and business everywhere live in a state of tension. Neither behaves exactly as the other would wish. They have different agendas and different ways of meeting their goals. They need each other, but mostly don’t like each other.

In some countries, they do work reasonably well together. Some governments do try hard to create a business-friendly environment. But more often, the relationship is an uneasy one.

When a prominent business leader speaks out against his government—and more so in a country like South Africa, still struggling to escape its past, and where politicians are prickly and many are socialist or harbor deep anti-business feelings—he needs to think carefully about what will follow. The outcome is unlikely to be what he wishes for. The response from those he’s criticized will be defensive and angry. His peers in business will duck for cover. His own business may be negatively affected.

This is exactly what we now see unfolding in the drama between Reuel Khoza, non-executive chairman of Nedbank, and the ANC-led government of South Africa.

Khoza lit the match with this comment in his chairman’s statement in Nedbank’s latest (2011) annual report:

“UPHOLDING OUR CONSTITUTION

“SA is widely recognised for its liberal and enlightened constitution, yet we observe the emergence of a strange breed of leaders who are determined to undermine the rule of law and override the constitution. Our political leadership’s moral quotient is degenerating and we are fast losing the checks and balances that are necessary to prevent a recurrence of the past. This is not the accountable democracy for which generations suffered and fought.

“The integrity, health, socioeconomic soundness and prosperity of SA is the collective responsibility of all citizens, corporate or individual. We have a duty to build and develop this nation and to call to book the putative leaders who, due to sheer incapacity to deal with the complexity of 21st century governance and leadership, cannot lead.

“We have a duty to insist on strict adherence to the institutional forms that underpin our young democracy.”

The ANC/government immediately struck back at Khoza. The attacks—labelled in the media as “boorish,” “hypersentive,” “paranoid,” “personal,” “inappropriate,” and “illogical”—ensured that the matter got wide publicity, and may have done more damage to SA than anything he’d said. Various commentators called for open and polite discussion of the issues he’d raised. Khoza visited the ANC’s headquarters to discuss the matter, and the movement issued a statement afterward, saying:

“We are happy that this interaction took part in a cordial atmosphere and was fruitful.

“The meeting resolved what was perceived as a stand-off and addressed a variety of issues related to governance and business leadership.

“We are encouraged that a variety of options in terms of engagement were considered. The meeting resolved that there will be more meaningful interaction between the two parties in future.”

OK. And what now? What might “more meaningful interaction” mean? Is all forgiven? Has Khoza’s message been given short shrift or taken to heart?

Will there be further chats…or actual changes of leadership…more careful recruitment of future leaders…leadership development programs…? Is Khoza now going to back down and pretend he didn’t really mean what he said? Or will he repeat it the next time some journalist asks him if he was serious? How will he deal with questions about this matter that will surely be lobbed at him when next he speaks at a conference?

While all this was happening, Garth Griffin, outgoing chairman of Absa, wrote in his own bank’s annual report that SA needed less talk, more action. Then Nicky Newton-King, CEO of the Johannesburg Securities exchange (JSE), told the Cape Town Press Club that investors wanted certainty from markets, but Khoza’s views reflected uncertainty about the direction of South Africa’s policies.

Some people saw these as signs that “business” was starting to speak out, and hoped for more.  But that’s not been the case.

While there were murmurs from the corporate sector about government being wrong to expect business to stick to business and stay out of politics, hardly anyone said Khoza was right. That was left to “outsiders” like Institute of Race Relations CEO John Kane-Berman, the indomitable Business Day letter writer, Dr Lucas Ntyintyane, and the CEO of the SA Chamber of Commerce and Industry.

Massmart CEO Grant Pattison saw Khoza’s comment as having hit a nerve because it was “too close to the truth.” But when the Sunday Times sought comment from other captains of industry, most became unavailable or refused to speak.

Corporate SA has once again been cowed.

SO WHAT EXACTLY HAS BEEN ACHIEVED?

Reuel Khoza was brave to do what he did. He stuck his head above the parapet to say what many other people think. Nick Binedell, dean of the Gordon Institute of Business Science (GIBS) said he was “a bit provocative” but “should be commended for getting the debate out in the open.”

The political climate in SA has soured badly in recent years. The national conversation has become toxic, uncivil and destructive—and will get more so in the months ahead of the ANC’s December policy conference at Mangaung, as power struggles intensify. Politicians and bureaucrats worldwide get slammed for their behavior, but ours are drawing more and more negative attention.

Relations between government and business have never been good since the 1994 transition, and are marked by mutual suspicion and distrust. While government struggles to deliver on its mandate, and desperately needs business investment and assistance, too many of its policies, actions, and words add up to a different message and have the opposite effect.

One objective of the Nedbank Group strategy is, “Becoming the public sector bank of choice.” But the threat has been made that the ANC might need to review its dealings with the bank, and with ANC cadres so firmly entrenched across the public sector, this doesn’t even need to become a formal position to have some impact.

Nedbank also aims to become the leader in business banking, and its retail unit has been performing well. But again, in both of these areas, ANC supporters may be turned off by Khoza’s criticism.

Although he opened his chairman’s statement by emphasizing the importance of sound corporate governance, Khoza then waded into risky territory—in the name of his company. Strange, given that one of Nedbank’s “Deep green aspirations” is to be “worldclass at managing risk.” And that in the risk management review in the annual report, it states:

“Nedbank Group has a strong risk culture and follows worldclass enterprisewide risk management, which aligns strategy, policies, people, processes, technology and business intelligence in order to evaluate, manage and optimise the opportunities, threats and uncertainties the group may face in its ongoing efforts to maximise sustainable shareholder value.”

So what risks has Khoza exposed the bank to? Did Old Mutual, Nedbank’s parent, know this was coming—and what was their view about it? Did Nedbank’s board have advance warning—and what inputs did the members make? Who else in the bank saw the statement before it was published?

QUESTIONS FOR THE FUTURE

Past experience has shown the ANC/government to be extremely sensitive to business statements it doesn’t like. So if one thing was guaranteed in this case, it was that the response to Khoza’s opinion would not be calm, respectful, or kind. He pulled no punches, and the fact that he had been close to the Mbeki administration was probably an added irritant.

However, some of the country’s political leaders may think carefully about what he said, and may even try to change their ways and try to get people around them to change, too.

South Africa badly needs all hands on deck, and government and business to work together to create the much vaunted “better life for all.” Now, that is either much more or much less likely. Much depends on whether government is able to tone down its anti-business signals, convince business that it really does value it, and do whatever is needed to make SA a good place to do business. Without that context, business will always be reluctant to invest, create jobs, or contribute in all the other ways that it can.

So here we have an interesting case study for business leaders—and for business schools. With some difficult questions:

  1. What should characterize the relationship between government and business?
  2. How freely and openly should business speak about national affairs?
  3. Should business leaders speak out personally, and under the banner of their firms, or should they leave comment to the organizations that represent them (chambers of commerce, Business Unity South Africa, the Black Business Council, the Black Management Forum, etc.)?
  4. Should they engage publicly with government about contentious matters, or should they do it behind closed doors?
  5. How should companies evaluate the risks of making statements critical of government?
  6. How should they manage the flak that flies when things go badly?

We live in testing, touchy times. Creating a “burning platform” might be the only way to get some things done, but it can also take you down. This saga could have a happy ending. It would be a pity if it ended in tears.

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  •  20/04/2012
Apr 162012
 

Managing a business of any size is a hell of a job. The world is a complex and dangerous place. Change is constant. There are surprises around every corner. And there’s unending pressure to perform through good times and bad.

Companies are complex, too. And the bigger they get, the more complex they become. Coordinating their efforts was always a challenge. But today, many firms sprawl across the world, so there are facilities, people, and many other factors to worry about. Just-in-time production, a growing amount of outsourced work, and intricate networks of suppliers all add logistical challenges. Relations with governments and regulators are of increasing concern. Investors, analysts, unions, environmentalists, lobbyists, and a host of other stakeholders all demand attention. And of course, there’s always the need to drive innovation, improvement, and cost cutting; to adopt new technologies and ways of delivering world class quality, productivity, and customer service; and to survive the daily deluge of seemingly trivial matters which may quickly explode.

Executives face a stream of dilemmas with no easy answers. Their to-do lists keep getting longer. They’re torn this way and that by people with competing agendas, and bogged down by meetings, video conferences, phone calls, e-mails, and so on. Many of them also have grueling travel schedules. Time is their scarcest resource.

It goes without saying that any war on complexity must be fought with a determined drive for simplicity. That in itself must be an ongoing effort with targets, projects, champions, regular reviews, and whatever else it might take. But on its own, it’s not enough. For there’s an over-arching problem of managers themselves creating conditions in which complexity flourishes. They introduce ideas and activities that often don’t line up, won’t produce the results they expect, and lead to unnecessary work, waste, and costs—all as a result of how they manage.

With few exceptions, they’d do well to ask themselves:

Why they so readily make life even more difficult, with management ideas, practices, and tools that in theory should help them, but in reality make little sense?

Why they keep searching for new answers to their management questions, when the answers they need are probably already well known?

Why they develop strategies that are either too vague to be useful, or too complex to explain?

Why they’re such suckers for buzzwords and bullshit when they have so much on their plates, and so many people expecting guidance from them? 

These are questions that have bothered me for the past 30-odd years. During this time, I’ve read countless management books, scholarly journals, and popular articles, and talked to many of the most prominent thinkers in the field, trying to learn three things:

  1. How should firms compete?
  2. What causes some succeed over the long term, and others to fail?
  3. Why do some executives produce better results than others?

You’d think by now the answers would be clear and widely accepted. But apparently not. For the quest for new ones is accelerating, not slowing. Or, at least, the amount of stuff published on these matters is growing by the second. And someone is grabbing all those books off airport bookstands!

Whatever you want to know, a Google search will instantly yield tens of thousands, if not millions, of links to possible answers. Authors of business books and articles slice and dice management issues into ever narrower opinion. The internet gives voice to anyone and everyone who has anything to say about strategy, structure, organizational behavior, people management, change management, analytics, leadership, IT, systems thinking, six sigma, values, culture, presentation skills, or whatever.

With all this “expertise” to hand, it’s little wonder that firms are jammed up by initiatives, or that managers are totally shell-shocked from being bombarded with information and advice about their world and their craft. The exploding volume of management flim-flam has made managing increasingly difficult.

Executives get in their own way because they’re always looking for another answer to their management questions—a quick fix or “silver bullet”—when the answers they need are right under their noses. And to compound their problems, they radically over-complicate things, and cause much of the mess and muddle that bogs things down. They also continually introduce new initiatives—or allow others to do so—while seeing few to a sensible end. And even as the pile deepens, they chop and change their priorities so fast that their people haven’t a clue what’s going on or what they should focus on.

Put differently, only by getting back to basics, simplifying things, lightening your load, and sticking to one view of how to manage will you ever make the progress you want.

I’m willing to bet that, right now:

  • you’re using management-speak that you don’t fully understand
  • your strategy is a mystery to many or maybe most of your people (and possibly to you, too!)
  • you struggle to turn your strategy into action
  • your priorities are not really what you should be focusing on
  • your people are doing things for reasons that aren’t clear to them, and don’t make sense to them
  • they’re expected to use tools that they don’t grasp
  • there are too many projects in your firm, many of which should never have been started, and many others past their sell-by date
  • quite soon, you’ll latch onto some new management idea, and launch a flurry of new initiatives to replace the ones you haven’t properly finished
  • there is a better, simpler way to get the results you want.

Sound crazy? A lot of nonsense? Well, think about this:

  1. When I ask company employees or participants in my business school classes why their firms’ strategies don’t work, the number one reason is, “We don’t know what the strategy is.” Many say, “We don’t have a strategy” (they probably do, but no one told them or they just weren’t paying attention).
  2. Companies love strategy documents. And usually, the thicker the better. I read these things for a living, and when I get to the end of many of them I have no idea who is supposed to do what. They’re heavy on detail that should have been left on a functional manager’s desk. A clutter of thoughts, lack of logic, poor structure, big words, and long sentences make them murky. So they say too much, but explain too little.
  3. Management tools are mostly not all they’re cracked up to be. They’re as fashionable as hemlines. As Bain Consulting’s periodic tools survey shows, usage and satisfaction scores go up and down. Besides, very few tools are truly new, based on sound research, or proven across industries, companies, or even functions; and what works at one time, in one set of conditions, may not work when things change. The catchy language that management “thinkers” use to draw attention to their recipes should be cause for suspicion.
  4. When a new tool is adopted, others that are already in place tend to stay there. So the pile grows. Each new idea creates a blast of activity, and sucks time, attention, and money from others. It becomes a nightmare trying to figure where to focus, how to integrate all this work, and what comes first, second, or third. And it becomes impossible to know which intervention caused what result.
  5. Explaining strategy is a never-ending job. I once heard a senior manager ask former GE chairman Jack Welch, “How often do you have to tell people what your strategy is?” Said Welch: “You have to explain it, and explain it, and explain it, and explain it, and explain it, until you drive yourself crazy. Because nobody is paying attention!”

So where to from here?

For starters, clarify your own point of view about what you’re trying to do. Think of strategy as the frame through which people see your company’s future. What exactly do they need to know? Answer: not much. In fact, the four things here tell the whole story.

Framing your strategy – keep it simple, or you won’t make it work!

Get this story right, and you have a good chance of success. Get it wrong, and you make a really bad start. So keep it simple. Keep it short. Cut to the chase. Maybe, at last, your team will get the message.

And what comes next?

First, a few tools, carefully chosen, well understood, and relentlessly applied so you and your people become expert in their use. (I’ll talk more about these in a future post.) Toss out anything you don’t really, really, really understand; anything you can’t use properly; anything that doesn’t produce the results you expect. And any duplicates.

Second, make a list of all the initiatives currently in your organization. (Some will be in use, others just lurking somewhere, and probably at some cost.) Ask: what do we really need to do? Which of these initiatives helps us? What should we kill right away? Then, zap as many as you can, fast, and slam the door on new ones.

Third, keep reminding yourself—and drum it into your colleagues—that whatever approaches, methods, models,tools,  or processes you go for, all work hinges on conversation. On what you talk about, how you do that, and who you involve. So make sure you talk about the right things, in the right way, to the right people.

Above all, understand that everything follows from your point of view. And the surest way to cut complexity is by avoiding it in the first place with your ideas about managing.

Life is hard. Managing is one of the toughest jobs around. There’s no point in making it harder for yourself.

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  •  16/04/2012
Apr 042012
 

When Samsung announced in mid-2010 that to grow its business in Africa, it would design products specifically for Africa, it confirmed two facts about global competition today:

  1. As growth in developed markets gets more difficult, firms must seek and exploit opportunities in developing markets.
  2. To succeed there, they need to “act local.”

Explaining Samsung’s plan, George Ferreira, COO of Samsung Electronics SA, said:

“In line with our key value of co-prosperity, coupled with our business and development sector partnerships, we have a vision of developing technology that is built in Africa, for Africa, by Africa”…We will over the next few years be allocating more local R&D investment for further local product planning, design and development.”

A press release from the company added:

“Samsung have undertaken extensive research and development (R&D) to develop technology innovations, specific to the African consumers’ needs. These include, TVs with built in power surge protectors, triple protector technology for air conditioners to ensure durability, power surge protection and safeguarding against high temperatures and humidity, deep foam washing machines that are 70% energy efficient – saving up to 30% water use, dura-cool refrigerators with cool pack – allowing the refrigerators to stay cool without power, as well as dual-sim technology and long battery life phones with battery standby times of up to 25 days.”

According to a report on Moneyweb, “The electronics group hopes to attract the African market with a range of television and refrigeration products that are designed to withstand power surges, dust particles and humidity and camera and camcorders that are designed to take “better” pictures of dark toned people.”

In one example of how it will pursue its strategy, Samsung has teamed up with the University of Cape Town (UCT) in South Africa and Strathmore University in Kenya to develop unique mobile phone applications for Africa. Such collaboration is sure to yield ideas that the company wouldn’t develop on its own, and to speed up the time-to-market process.

However, what the electronics giant did not say was that innovations in developing markets may prove valuable in developed markets (a process known as “reverse innovation” or “frugal innovation”). This has been the experience of companies producing products as diverse as soap, tractors, and medical scanners. And innovations may include not just new products, but also processes and business models.

Innovations from developing markets give firms new opportunities in developed markets by providing simpler, cheaper products

Reverse innovation will be one of the most important trends of coming years. It opens many new opportunities for developing markets and for the companies and innovators in them. And it provides new reasons to go to places you weren’t really sold on, to invest there, and to make a deliberate effort to learn whatever you can from being there.

Champion of the movement is V.J. Govindarajan, professor of international business at Tuck School of Business at Dartmouth College, and the first professor in residence and chief innovation consultant at General Electric. His October 2009 Harvard Business Review article, “How GE is disrupting itself,” co-authored with GE chairman and CEO Jeff Immelt and Chris Trimble, another Tuck faculty member, won the McKinsey Award. His new book, Reverse Innovation (co-authored again with Trimble), will probably draw similar praise—and stoke interest in the concept. They provide many examples of how firms have gone about it, plus advice for those who want to.

In an interview with [email protected] (April 2, 2012), Govindarajan explained some of the rationale behind the concept:

The fundamental driver of reverse innovation is the income gap that exists between emerging markets and the developed countries. The per capita income of India, for instance, is about US$3,000, whereas it is about $50,000 in the U.S. There is no way to design a product for the American mass market and then simply adapt it and hope to capture middle India. You need to innovate for India, not simply export to India. Buyers in poor countries demand solutions on an entirely different price-performance curve. They demand new, high-tech solutions that deliver ultra-low costs and “good enough” quality.”

“Poor countries will become R&D labs for breakthrough innovations in diverse fields as housing, transportation, energy, health care, entertainment, telecommunications, financial services, clean water and many more.

Reverse innovation has the potential to transform wealth in the world. Growth in developed countries has slowed down. Much of the growth is now in developing countries. The 2008 financial crisis and the more recent debt crisis [in Europe] have only exacerbated this situation. As such, we are likely to see the center of gravity for innovation shifting from rich to poor countries.”

Questions to ask now:

  • What will developing countries do to promote not just their market opportunities, but also their innovation opportunities?
  • What will local firms in those countries do to take advantage of this trend?
  • How will local universities and other potential partners respond?
  • How can you exploit this idea?

The entire world is a learning laboratory. No place has a monopoly on ideas. Today, it’s foolish—and potentially costly and risky as well—to be myopic.

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  •  04/04/2012
Mar 282012
 

If there’s one topic that gets more than its share of airtime today, it’s the shift in economic power from West to East, and the importance of emerging markets to companies seeking growth. This had to happen given that more than half the world’s population lives in those regions and have recently joined the mainstream of commerce. Three-and-a-half billion new customers are not be be sneezed at.

The Great Recession has given new urgency to capturing those shoppers. Hypercompetition affects all but a few industries, and managers everywhere are in a dogfight over customers. Sales have slowed in the big developed markets—the U.S., Europe, and Japan—so must be found elsewhere. Asia, Latin America, Africa, and central Europe now look particularly attractive.

Not too long ago, developed countries ran surpluses, while developing ones ran deficits. Now, the picture is largely reversed: many developing nations run surpluses and export capital, while developed ones have racked up huge deficits. And whereas infrastructure in many developed nations is in a sorry state, developing nations are spending vast sums on it. They’re also becoming more amenable to foreign investment, sucking up resources from everywhere, and rapidly advancing up the competitiveness ranks.

A key message from the World Economic Forum’s January 2012 Davos shindig was that emerging markets are where many firms will find their future growth. This is hardly news, as we’ve heard the same thing from countless commentators for at least the past 30 years. But repeating it yet again will surely spur more executives to leave their comfort zones and venture into new territory.

Before they rush ahead and do this, though, they should think hard about what it might mean. They should beware of doing it while starving the opportunities that exist where they already operate. They should be careful not to overlook the treasure that’s right under their noses in their own backyards. And they should ask themselves a critical question:

“Are the ‘developed markets’ we think we know not in fact ‘emerging markets’ that we need to learn about fast?”

A BRIEF LOOK BACKWARDS

The term “emerging markets” was coined in the early 1980s by Antoine Van Achtmael, an economist at the World Bank’s International Financial Corporation, to draw attention to investment opportunities in low- to middle-income countries. Then, after the Berlin Wall fell and eastern Europe opened up, and as southeast Asia began its own economic revolution, things started to get interesting.

Democracy and consumerism spread and firms became increasingly keen on globalization. They started to shift from focusing purely on exports to setting up their own facilities across the world. New technologies made it easier for them to coordinate complex networks of suppliers; and new logistical systems enabled them to move raw materials, components, and finished products swiftly to wherever they were needed.

In 2001, Jim O’Neill, chief economist at Goldman Sachs (he’s now chairman of Goldman Sachs Asset Management) invented the “BRICs” acronym—Brazil, Russia, India, China. These four populous and economically ambitious countries, he said, would propel the growth of the global economy in coming decades. So they offered huge opportunities for both investment and business.

That story got wide coverage and created a lot of interest. Then, in 2002, two business school academics, C.K. Prahalad and Stuart L. Hart, added both impetus and an important insight to it with an article in Strategy+Business which they seductively titled, “The fortune at the bottom of the pyramid.” Their unremarkable observation was that the populations of poor countries comprised a few wealthy people at the top of the pile, and untold millions mired in poverty at the bottom. Individually, the bottom lot had little spending power; but taken together, they made up an attractive target.

In 2005, O’Neill’s team sought to identify another group of developing countries that would follow the BRICs closely, and came up with the “Next Eleven,” or N-11—Bangladesh, Egypt, Indonesia, Iran, South Korea, Mexico, Nigeria, Pakistan, the Philippines, Turkey, and Vietnam.

Six years later, O’Neill decided that “emerging markets” was no longer the right label for the BRICs or four of the N-11—Indonesia, South Korea, Mexico, and Turkey. “These are now countries with largely sound government debt and deficit positions, robust trading networks, and huge numbers of people all moving steadily up the economic ladder,” he says (Jim O’Neill, The Growth Map, New York: Portfolio/Penguin, 2011). “I decided that a more accurate term would be “Growth Markets.”

This new language of “BRICs” and “BOP” (bottom of the pyramid), of the “N-11” and “growth markets,” has provided plenty of inspiration for new ventures. Executives trot the terms out at every opportunity. Companies that not long ago were nervous about operating in backward and unfamiliar places are now trying it. And every day there are more good reasons to do so.

The spread of industrialization is creating a new global middle class. Angola, Estonia, Cambodia, and Argentina are exploding with newly affluent shoppers.  More and more people, including large numbers are women, are finding steady employment. Income and education levels are rising in one country after another. Medical advances and healthier living mean more ageing people (many with savings, welfare support, or even pensions). And at the same time, new media, new distribution processes, and new branding strategies are changing buyers’ behaviour and encouraging them to experiment, shop around, and flaunt what they buy—and in the process, to keep moving the marketing goalposts.

These markets are a complex mix of young and old, rich and poor, sophisticated and unsophisticated consumers, who buy both branded goods and commodities. They’re mostly served by local businesses, but increasingly by outsiders, too. Their attraction is that they bulge with potential customers who’ve largely been overlooked or underserved. And a big plus is that competition may not be as tough as in developed markets.

There is absolutely no doubt about it: the BRICs and the N-11 merit close attention. As do many even less developed countries. And there’s a case for moving fast, for in no time at all the fight for customers in all these places will intensify.

But companies should not ignore the opportunities in their traditional markets. For that’s where they’re comfortable and where they earn the bulk of their profits today. That’s also where they are most vulnerable right now.

Customers in rich countries like the U.S., Europe, Britain, Japan, and Sweden have a lot of spending to do. Losing them will come at a heavy cost.

EVERYTHING IS UNFAMILIAR, EVERYWHERE
Anyone contemplating a foray into developing countries should consider two facts:
  1. Doing business there will be harder than you think.
  2. It will distract you and divert resources from where your priorities should be and where your best opportunities may lie—in the developed markets you already know.

Developing countries might look exciting, but they present a host of major problems: political interference, bureaucratic blockages, institutional voids, poor or nonexistent infrastructure, lousy services, entrenched social traditions, widespread poverty, health issues, security, crime, and corruption. Key skills are in short supply. Many industries are immature, and often hard to break into because of vested interests or old relationships. Supply chains are unreliable. Distribution channels and media are not what they should be. Protecting intellectual capital is a nightmare. Customers must be taught the value of new products and services, and companies must learn how to deliver them. So altogether, getting things done may be extremely difficult—especially for executives used to places where things work.

But look at the changes under way in developed countries. In virtually every market for every kind of product or service, the game of business is being turned on its head. “The new normal” is not “the old normal.” Conditions have changed in untold ways, and there’s novelty all around.

There are new political realities, new regulation, new infrastructure. Populations are ageing, shrinking, and moving; and migrants are radically changing their structure, language, beliefs, and habits. Old ways of life are giving way to new ones. Competition is hotting up and new strategies are making old ones obsolete. Technology makes possible new offerings and new ways of reaching and satisfying customers. And just as in developing nations, there are new customers with new needs, values, expectations, and behaviour.

Today, in the most advanced markets, there’s probably not a company whose managers can say, “Nothing has changed for us in the past decade or two.” Neither would they be smart to think, “There aren’t any major changes ahead, so we don’t have to do anything drastic.”

The reality is that selling almost anything, to almost anyone, anywhere in the world is a brand new challenge.

Few products or services—or the companies that sell them—have made it into this new era without significant innovation. Further progress will demand even more of it.

Yesterday’s business models can’t be expected to deliver the same results as they used to. The shelf-life of today’s models is limited. A tweak here or there will undoubtedly help some companies do better, but sooner or later more radical change will be vital. And for growing numbers of firms, the time for that is right now.

It’s time for a strategy reset!

INDUSTRIES IN TURMOIL

To make the point, some examples:

  • Think media—where’s it headed? Do newspapers have a future (and what about the paper industry and the printing press manufacturers that serve it”) What further impact will technology have on it? Where are social media taking us? What about “citizen journalism”? How will the widespread availability of ultra-fast wi-fi change things?  What’s the future of television in an age of Tivo, PVRs, and streaming video?
  • Think photography—How will cell phones with high-resolution still and video cameras affect makers of stand-alone digital cameras? What breakthroughs lie ahead in lens technologies, sensors, and storage devices? What new post-processing software is on the way?
  • Think laptop computers—who needs them when tablets are so handy? What might they be used for tomorrow? What will new processors and memory technologies enable them to do? How much smaller can they get, and how much sharper and brighter can their screens become? What new battery technologies can we expect? How will applications be sold?
  • Think fast-moving consumer goods—what’s going on with formulas, packaging, distribution, promotions, pricing, recycling? What will be the impact of new health concerns? How important will store brands become?
  • Think autos—how much smarter, lighter, more economical, and safe will they become? What new energy systems can we expect (and what is the prospect for “green” cars?) Where will vehicles be produced? What further mergers and acquisitions can we expect, and how will they alter the industry’s structure? How will traffic congestion be managed, and what might that mean for vehicle makers?
  • Think clothing—what are the fashion trends to watch … and what can be ignored? What new fabrics are coming? What new production technologies lie ahead, and where will garments be made?  How much more time can be cut between design and in-store display? What will be the future role of haute couture and fashion shows?
  • Think retail—what shopping trends are emerging, and what might be next? What are the prospects for online sales, and what changes will we see in that area? What’s the outlook for malls … big discounters … speciality retailers … small independent stores? What new stock control systems are down the line? How will customers pay?

These questions address just a few of the changes already under way. And of course, there’s also the impact of new regulation, of environmentalism, and  of a host of other factors that are restructuring the business landscape. So this you can be sure of: there’s massive change to come. The market you’ve come to know so well—whatever sector you’re in— is not the one you’ll play in tomorrow.

Much of what we though we understood about “developed” markets is no longer useful. Almost all of them are today, in effect, emerging markets. Not in the sense of being poor and backward, but rather in the sense of taking shape, of not being fully understood, and whose potential is unclear.

This process has been under way for some time. Buyers of everything have been learning about new ways to satisfy their needs and wants, communicate and participate, enjoy and express themselves, and shop and pay. They’ve discovered that just as quality should be a “taken-for-granted” fact, so should low price. They’ve taken to buying portfolios of products and services, some bearing names like Louis Vuitton, Ford, Swatch, Tumi, Gap, Hyundai, or Samsung, and many with names you’ve never heard of, but offering “good enough” design, feel, durability, and so on—often at rock-bottom prices.

Recently, the spread of financial trouble has had a dramatic impact on customer behaviour. Collapsing asset prices, government austerity programs, and rising unemployment have forced shoppers to save rather than spend. Companies serving them have had to do the same. So prices and costs have become more important than ever. Buying down is the new norm. “Frugality” is today’s reality.

 HOW (AND WHERE) WILL YOU COMPETE TOMORROW?

Dramatic changes are under way in even the richest, most developed parts of the world. They present both breathtaking opportunities and deadly threats to virtually every business. And the one thing you can be sure of is that the situation will get more challenging.

Today, there’s no shortage of new market possibilities. The growth prospects offered by what we call emerging markets are phenomenal. But developed markets are the most important markets for most major companies today—as they will be tomorrow.

Your traditional competitors are not the only ones you should worry about. You’re probably surrounded by upstarts from down the road. Emerging market multinationals are swarming into rich nations fast and aggressively to eat the lunch of local champions. Protecting yourself in your backyard is getting harder by the minute—but doing so is imperative. This is a turf war you shouldn’t lose.

So how will you compete tomorrow? Which customers should you focus on? What do you need to learn about them (what do they value?… how, when, and where do they shop?… what media do they use?… what influences their decisions?) How should you reach them? What should you promise them? What kind of business model do you need to capture and keep them?

For many firms, developing countries are where the future lies. But think before you label those “emerging” and the ones you’re in right now “developed,” “traditional,” or “mature.” There are obviously differences, but here’s what’s the same everywhere:

  1. The rules of tomorrow’s game aren’t clear.
  2. You don’t understand them.
  3. They will keep changing.
  4. You will face more competition—and more hostile competitors from all over the world—than you think.

Developing regions that you don’t know may look extremely appealing. But the ones you’re familiar with—those where you trade now, that you see as “developed,” and that maybe bore you—have their own possibilities. However, to take advantage of them, you need to start by accepting that you don’t really understand them, and then spend the time getting to know them from scratch.

Every market is now an emerging market. We’re all feeling our way into the future.

WHAT”S YOUR NEXT MOVE?

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  •  28/03/2012
Mar 222012
 

In my March 17 blog about the resignation of Greg Smith from Goldman Sachs, I predicted the story would become a big one. According to the Wall Street Journal, Smith’s Op-Ed missile in the New York Times drew three million page views by the afternoon of publication. It quickly trended in the top ten messages on Twitter. My Google search for “goldman sachs, greg smith” this morning yielded 44,300,000 pages. The infosphere is humming over the matter.

Smith has drawn heaps of praise for the way he showed Goldman the middle finger. But while he has lots of admirers, many of them citing other examples of huffy employees spilling their guts on the way out the door, he’s also drawn a surprising amount of criticism—and not just from business commentators or other hard-core capitalists. Populist, anti-business sentiment clearly has its limits.

Meanwhile, Goldman is reviewing Smith’s claims, and searching its email records for “muppets,” to identify employees who insulted clients and handed its detractors a soundbite from hell. It’ll also look for other offensive terms, but hasn’t said what will happen to staff who used them. (In America, “muppet” was popularized by the hit TV show of that name featuring Miss Piggy, Kermit the Frog, and other cuddly characters. In Britain, it’s a label for stupid, gullible people.)

The debate is on.

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  •  22/03/2012
Mar 172012
 

When Greg Smith, a 33-year-old London-based Goldman Sachs executive director published reasons for his resignation in the New York Times on March 14, he was scathing in his criticism. In a knife-to-the-heart Op-Ed piece heavy on praise for himself, he wrote:

“…I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.”

“…culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief”…

“It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as ‘muppets,’ sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s Work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding.

“I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.”

Andy Rosenthal, the Times editorial page editor, told The Huffington Post that Smith had approached them about writing the article. “We checked him out,” he said. “…the whole idea of Op-Ed is to generate debate and discussion, so the more, the better.” The article has certainly generated plenty of both. Its all over the internet and according to BloombergBusinessWeek, book agents and publishers are keen to sign a deal with him.

THE FIRST RESPONSE

According to the NYT, Smith’s “wake up call to the directors” exploded “like a bomb” within Goldman. “He just took a howitzer and blew the entire firm away,” said one observer. Within a day, investors stripped $2.15bn from the bank’s value.

As happens in this age of instant opinions, citizen journalism, and social media, the story “went viral.” The public and the media quickly added fuel to the fire with a mixture of praise and condemnation. Smith was variously described as “brave,” “reckless,” “foolish,” “disgruntled,” and “disloyal.” The fact that he’d held back his resignation until he’d been paid his $500,000 bonus for 2011 drew snide jabs. But journalists who dug into his background and talked to people who knew him when he was growing up in South Africa reported that he had a reputation for integrity.

A Bloomberg News item in the San Franscisco Chronicle tackled Smith for his naiveté, implicitly supporting Goldman and saying what many business leaders no doubt thought:

“It must have been a terrible shock when Smith concluded that Goldman actually was primarily about making money. He spares us the sordid details, but apparently it took more than a decade for the scales to finally fall from his eyes…

“We have some advice for Smith, as well as the thousands of college students who apply to work at Goldman Sachs each year: If you want to dedicate your life to serving humanity, do not go to work for Goldman Sachs. That’s not its function, and it never will be. Go to work for Goldman Sachs if you wish to work hard and get paid more than you deserve even so. (Or if you want to make your living selling derivatives but don’t know what a derivative is, as Smith concedes in passing that he didn’t at first.)”

Forbes columnist argues that this event is a mere a storm in a teacup, and says the excitement over it will soon blow away:

“So what should our reaction to this be? No, not as clients of the firm, that’s obvious. Similarly for the management, what they need to change is obvious. But what should we, the people out here in the public and political square be trying to do about the company?

“Nothing of course, we should be doing nothing at all. For one of the great joys of this mixed capitalism and free markets system is that mistakes like those allegedly being made by Goldman Sachs are self-limiting, indeed, self-correcting.”

Of course, Goldman—the target of much criticism in the past few years—quickly denied Smith’s accusations:

We were disappointed to read the assertions by this individual that do not reflect our values, our culture and how the vast majority of people at Goldman think about the firm and the work it does on behalf of our clients.”

WHAT’S NEXT?

So where do things go from here? How will Goldman deal with Smith and the continuing fallout? What does this drama mean for other banks—and, indeed, for other companies of any kind? (And let’s not forget to ask, how will Smith’s career be affected?)

Unfortunately for banks, they’ve made themselves a juicy target for outrage. When Smith’s article appeared, a lot of people probably thought to themselves—or said to others: “I knew it. Here we go again. Scumbag bankers. Can’t trust them an inch. Bastards got bailed out, but keep stealing our money!” So what’s likely out in the “public and political square” is that this story will get so much airtime it will be impossible to ignore. The media will continue to make a feast of it. Politicians and regulators will seize the chance to sound off, and maybe try to force change. The anti-capitalist, anti-business crowd will jam the infosphere and the profit motive will take another beating. Smith’s act will become a popular dinner table topic, the stuff of business school class debates, and a trigger for massive introspection at both Goldman and other firms.

Business leaders need to tread carefully through this minefield. The CEO of Morgan Stanley told his staff not to circulate the Smith piece. Jamie Dimon, CEO of JP Morgan Chase & Co., sent word to his people that they should continue to act in the above-board way they always had. In a widely-publicized e-mail, he warned:

I want to be clear that I don’t want anyone here to seek advantage from a competitor’s alleged issues or hearsay—ever. It’s not the way we do business.”

You can bet the bosses of other financial institutions have sent similar messages to their staff and clients, and will spend a lot of time and money trying to distance themselves from the blast and confirm that they’re above reproach. And you can bet that a lot of people, from spin doctors to corporate governance gurus, from HR executives to career coaches, from management consultants to IT security experts, will hop onto the bandwagon and make new work for themselves.

Make no mistake, this event has huge implications. It affects not just financial institutions, but all of business.

THE DIFFICULTY OF PROTECTING A REPUTATION WHEN YOU CAN’T PROTECT SECRETS

One of the most important social trends of the past half century has been the move towards openness and transparency. That’s a very good thing. But it doesn’t make life easy for business.

Windows to the internal workings of organizations are being forced wide open. Largely as a result of scandals at Enron, Anderson, and many other firms, corporate governance has become a growth industry. Firms are required to provide more and more information about themselves. They face a growing number of regulators and a growing tide of regulation, vigilant law enforcement agencies, and courts that are under pressure to impose severe sanctions for shenanigans.

News-hungry media are quick to spot wrongdoing. Consumer hotlines not only give disgruntled customers a voice, but also make it likely that one complaint will trigger a shitstorm of others. Facebook, Twitter, YouTube, blogs, e-mail, instant messaging, and other social media make it increasingly hard to keep anything under wraps, and easy to be a critic or spread dirt. And reasonableness, objectivity, balance, and truth do not always prevail.

Wikileaks, has created awful problems for governments, the military, corporates, and individuals by splashing confidential material all over the internet. A growing community of criminal hackers break into government and business databases, and don’t hesitate to fraudulently use credit card details or post personal information on the web.

Whistleblowers like Greg Smith have long been a concern to employers. But if once they were vilified, they’re now encouraged, protected, applauded, and rewarded—true social heroes. Their motives don’t matter; the fact that they’re insiders, and therefore must know what’s going on, gives their views credibility and clout. And in a verbal war between a whistleblower and a company’s leaders, the underdog invariably wins most sympathy and support.

Dealing with anonymous attackers is no easy task. Fighting back when your attacker is a valued member of your team, apparently with nothing to gain by opening up—and apparently of unquestionable integrity, too—may be worse.  The reputational damage that follows leaks is hard to contain or fix. A carefully-crafted image that has taken years to establish can be shredded in an instant.

VALUES DON’T GUARANTEE “GOOD” BEHAVIOUR

Surveys show that public trust in companies and their executives is at an all-time low. The trust level in many teams is also nowhere near where it should be. So what now? Do you demand that your new hires all sign confidentiality agreements? (And how enforceable are those, and do you really want to explain yourself in court?) Do you require the same of the people you already employ? How do you deal with those who refuse? How do you deal with violators?

According to Smith, Goldman has a culture problem. He has just provided the culture-change crowd with new inspiration—and a new promotional drum to beat.

One of their favorite tools is values. “Values-based management” (not the same thing as value management) or “managing by values” is a hot fad, and thanks to Smith, just got hotter. The theory is that if you spell out how you expect your people to behave, they’ll stay on the straight and narrow, be nice to each other, bust a gut for customers, and produce innovations galore. But that’s a very big “if.” And anxious executives should beware: changing culture is never easy and always slow, and values are no silver bullet. So while we’re in for a noisy debate about all this, and opportunists will make pots of money peddling “new” ways to make things better, don’t expect miracles.

Most values statements include the same handful of terms—”integrity,” “respect,” “innovation,” “service,” “responsibility,” “teamwork,” “accountability.” Yet precisely what these mean is often open to interpretation. And you have to ask: if this guff  features so strongly in business books and leadership courses, if so much prominence is given to it in company documents and presentations and on office walls, and if it’s discussed so often and so seriously in team-building sessions and strategy workshops, why is “walking the talk” so uncommon?

The first reason is that it’s damned difficult. (The 10 Commandments haven’t done too well, have they?) It’s one thing to say that companies would solve many of their problems if they “just did the right thing,” but it’s quite another to actually do it. Values that sound so right when you adopt them are almost certain to clash with future circumstances, and what then? How much “flexibility” should you tolerate? When and how should you bend the rules? After all, values can’t be cast in stone … or can they? Should everyone be allowed to bend them, or just a special few?

The second reason is that all too often the very people who espouse a set of values are the ones who violate them. And are seen to violate them. They set a bad example—”Do what I say, not what I do.” Perhaps they never really believed in those values in the first place, but needed something to improve their company’s performance and thought a values statement might do the trick. Or maybe they were just humouring the HR department. Or they just wanted to be seen to be standing for the right things and to be in tune with the latest management thinking.

Individual and groups all have values of one sort or another. These may be either implicit or explicit. But it’s sheer delusion to think that merely drafting an explicit set of values will keep a company out of trouble. Take another look at Goldman’s response to Greg Smith:

“We were disappointed to read the assertions by this individual that DO NOT REFLECT OUR VALUES…”

This begs several questions: What exactly are those values? How were they defined and how are they communicated? Who champions them? How rigorously does the firm test itself against them? What sanctions exist for violating them?

It also illustrates the high probability of mixed messages about this very central, very potent subject. Leaders do not always send consistent signals. People interpret things differently. And they misinterpret things very easily.

For all the value in  values, there’s also a risk in making a big deal of them. When you tell your team that you expect them to adhere to a certain code, every word immediately becomes a potential rod for your own back. From the minute you utter them, the people around you listen, watch, and wait: “Oh yes … let’s see if she really means this.” And if you’re not 100% resolute and consistent in your own behaviour, their response will be, “If she was so serious about those values, but then didn’t stick to them, what else is she not being honest about? How can I trust her about anything?”

DID SMITH DO THE RIGHT THING?

It’s easy to be critical of corporate behaviour—and much of it deserves major criticism. Whistleblowers do have an important role to play in exposing corporate misdemeanors and ensuring that executives are held to account. But while Smith complains that “It makes me ill how callously people talk about ripping their clients off,” he also admits, “I don’t know of any illegal behaviour…” No doubt, we’ll hear more about that. Meanwhile, several clients have commented on the internet that they use Goldman because it gets results for them.

Smith spent 12 years at Goldman, in New York and London, so had plenty of time to choose to leave. For at least a decade he “recruited and mentored candidates through our grueling interview process”—most likely in the last 10 years of his career there, not the first. So how was he able to suppress his growing disgust at Goldman’s ethos and its leaders, and what did he tell those young people? Why did he agree to keep selling something he abhorred?

In his essay, he makes a strong effort to establish his own bona fides, but doesn’t say whether he ever spoke up before he savaged the hand that fed him. We’re left to guess whether the practices that caused his disappointment in Goldman in any way helped him earn his bonuses.

Smith isn’t the first person to leave a firm in a public huff. He won’t be the last. But his use of the New York Times to strike at his employer was a particularly spiteful move.

The Greg Smith/Goldman Sachs case is a special one in many ways, and the story is a work in progress. It has a long, long way to run.

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  •  17/03/2012
Mar 092012
 

In these uncertain times, the value of strategy is often questioned by anxious executives. Is there any point in having a strategy, they wonder, when conditions change so fast and it’s so hard to be sure what might happen next? What’s the best way to make strategy? Can we still reply on the process we’ve always used, or is there some new way to go about it? Are we wasting our time on long-term plans when we’d be better off just tackling what’s on our agenda right now? Should we spend less time trying to fine-tune our strategy, and more on building our capabilities and honing our ability to flex and adapt as things change around us?

While different companies and consultants may go about developing strategy in slightly different ways, every management team needs to ask and answer three fundamental questions:

  1. What’s happening around us, and what might happen next?
  2. What are we trying to achieve?
  3. How shall we go about it?

To help answer these questions, firms may commission market studies, gather detailed competitor information, conduct benchmarking exercises, or create future scenarios. Many default to a SWOT exercise (but wind up listing most of the same strengths, weaknesses, opportunities, and threats that they wrote up last time around!) Some are fans of Michael Porter’s “five-forces” or “value chain” analysis. Others prefer to talk about “core competences” or “capabilities,” or about finding a “blue ocean” in which they’ll happily have no competition.

A lot of companies do much of the work internally, perhaps using off-site retreats for focused debate. Many hire consultants to do the grunt work, guide their discussions, and provide an outsider’s perspectives—and hopefully some fresh insights. Or they bring in economists, political analysts, demographers, trend watchers, or functional experts to enhance their understanding of the environment and their industry.

Invariably, the end result is some kind of document. Answers to those three questions should—but don’t always—provide the basis for allocating resources and developing budgets. (Strategizing and budgeting don’t always sit easily together!)

Of course, you might ask any number of other questions to enhance your strategy discussion. There are many tools, developed by very smart people, to help you. But these three questions are the ones that matter. If you avoid them or treat them carelessly, you’ll be sorry.

Now, let’s consider them from a slightly different perspective, and using slightly different language. Let’s look at a model that will help you shape your future agenda … and your business.

THE 3Cs OF COMPETITIVE ADVANTAGE

Almost always, when CEOs brief me for a strategy assignment, they start by telling me, “Our business is different.” Then they spell out their situation and challenges in much the same way as others in quite different firms and industries have done. So I’ve heard the same script over and over.

While it’s true that businesses are different, there are many similarities, too. There is a common story. Whether you sell hot dogs or passenger jets, luxury goods or financial services, there’s a core set of issues you just have to think about. I call them the 3Cs. They are:

  1. Your operating context (external and internal)
  2. The concepts that shape your thinking and that you use to manage your business
  3. How you conduct your affairs.

The 3Cs are the foundations of strategy

  • Your external context is largely out of your control. It’s the hand you’ve been dealt. You might be able to influence parts of it, but never all of it. But you have to fit into it, so the best you can do is adapt to what’s happening around you. Your internal context, on the other hand, is something you can mould and change. You can shape both the culture and climate in your firm. You can choose the people you hire; what processes, systems, and technologies to use; and what kind of working conditions to create.
  • Concepts help us make sense of things. They help us cut through complexity and make things simple enough to understand. So we have concepts of how the world works. Of how businesses should work (business models). Of how we can make them work (management ideas, philosophies, and tools). And of what a business might look like in 3, 5, or 35 years.
  • Conduct is about what we do and how we do it. It’s our behaviour—as individuals or a team—at work and towards each other. And towards customers, competitors, investors, government, unions, and other stakeholders. It also describes the processes, systems, and technologies we use, and how we deal with matters ranging from discipline to customer service, from quality and productivity to innovation and acquisitions.
MANAGERS TEND TO PUT CONCEPTS FIRST … BUT NOT ALWAYS THE MOST IMPORTANT ONES

In my experience, most companies spend most of their time thinking about concepts. But instead of dreaming up new ideas about how to compete, and designing new business models, they flail around in search of the latest tools—most of which turn out to be fads—that may save their skin. Too often, they have no idea whether they have a hammer or a saw in their hands, and no clue about using either. Besides, they fail to master whichever new “thing” they fall for, or to entrench it in their organizations. And when it doesn’t work quite as they expected, they dump it and dash after something even sexier. So it’s little wonder that they make less progress than they’d like.

Competing for tomorrow’s customers involves many factors, and management concepts (ideas, philosophies, and tools) are critical. But first you need a business concept—a point of view about how best to compete. For without a clear model, map, or blueprint, you’ll not only struggle to make sensible decisions, you’ll also fail to focus and integrate your activities. And it will be impossible to choose the right management concepts.

Today, one industry after another is being transformed by companies inventing new ways of creating and capturing value. The boundaries between sectors are blurring and even disappearing. There are overlaps everywhere. Suddenly, yesterday’s friends are eating each other’s lunch.

Executives who understand the “new normal” and the need for “business unusual,” are frantically clawing their way into the future. They’re cooking up new business models to make old ones irrelevant. And because it’s happening on so many fronts, and so fast, the shelf life of these models is shrinking—which, in turn, leads to even more frenetic activity.

Upstart firms with no baggage pose an obvious threat because they’re not encumbered by installed infrastructure, sunk costs, or deeply ingrained beliefs and habits. Their founders are usually determined to turn convention on its head, and to raise the customer service bar from day one. Their focus is on creating new concepts of business, rather than tweaking old ones with some new-fangled management tool.

Established firms can be even more dangerous, simply because they are established. They’ve survived good times and bad and periodically reinvented themselves. They know how things work in their sector, so they don’t have to figure that out from scratch. They have deep skills and valuable relationships, and their delivery mechanisms are in place. They have a presence and a reputation in the marketplace, so customers know what they offer and how to find them. And they can afford to conduct research, experiment, explore—and make mistakes.

IT’S WHAT YOU DO THAT COUNTS, NOT WHAT YOU SAY

Concepts are clearly important. You need a mental picture of how your industry works and how best to compete in it.  You also need to understand what management ideas are available, which are best for you, and how to use them.

But it’s equally important to understand how your company should act (its conduct) and to make that behavior a way of life. (This was highlighted for me in a discussion with Willie Pietersen, professor of strategy at Columbia Business School. At that time I was focusing on context and concepts. He pointed out that there was a missing factor—conduct—that could make all the difference. For that, I thank him.)

Strategy does matter. In fact, it matters more today than ever. But it has limitations. The whole notion of “sustainable advantage,” the core idea in most strategy books, is under siege.

Because we live in an information age, it’s easier than ever to find out what you need to know about markets, customers, competitors, and so forth. At the same time, executives are taught more or less the same things in business schools, read the same books and journals, attend the same conferences, and network with peers in their industry and with analysts and journalists who watch it.  And companies belong to the same industry bodies, hire the same consultants, recruit  each other’s people, buy from common suppliers, and—increasingly—collaborate with their competitors.

The result: there are very few secrets, and even the most closely-guarded of strategies is unlikely to stay under wraps for long. Breakthrough ideas and strategic shifts in one company are quickly noted, decoded, and adopted by others. Sustainable advantage is a fine ideal, but the reality for most firms is that the best they can hope for is a series of unsustainable advantages.

Harvard strategy guru Michael Porter advises that companies should avoid “running the same race” as their competitors, and rather “run a different race.” The theory is sound, but in practice that’s mostly a pipe-dream. Like it or not, you’re going to wind up running the same race as your enemies. And it’ll happen faster than you think.

Staying ahead of the game today depends increasingly on the ability of your organization to constantly adjust its conduct to fit your changing context. Or, as I tell my clients, to run faster than the other guy.

The external environment is where companies usually focus their search for opportunities. But as I’ve already said, “in-the-box” thinking may be even more profitable than “out-of-the-box thinking. For the internal environment is where things go right or wrong, where external opportunities are captured or squandered, and where you can score some quick wins and build some long-term advantages.

THE NEW BUSINESS ARENA

Concepts and conduct deserve attention. But whatever you do in those areas will only pay off if it fits your context—your zeitgeist, or the “spirit of your time.” Without a deep understanding of the environment around you, and of the context inside your firm in which your people work, you will never design the most appropriate business model, choose the most suitable management tools, or settle on the most appropriate behaviours.

The astonishing changes that are now taking place around the world, in every aspect of our lives, have profound implications for business. This is a time to reset your strategy. To dissect it, put it under a microscope, and think long and hard about what you see. And then to make whatever changes might be needed.

But first, you need to know more about the context in which you do business. You need to understand the trends that affect you, and the players who influence your organization in one way or another. You need to review your assumptions about politics, the economy, society, technology, customers, and competitors, and other “stakeholders.” And you need to keep testing those assumptions, embracing new information and insights, and  sharing them with your colleagues.

Starting today, make it an obsession to understand your context. Change the way you spend your time to make this your priority. Talk about it in every conversation. And watch how soon you start to see new possibilities, and your team gets the message that change must be normal.

A NEW AGENDA FOR EXECUTIVE DEVELOPMENT

For the past 100-odd years, most management and leadership programmes have focused on skills development. In the future, they’ll need to redirect their attention from management concepts (ideas, philosophies, tools) to concepts of business (business model design) and to the context of business (the environment in which business gets done).

The fact is, there is just a handful of management concepts that matter, and they can be taught very quickly; after that, practice has to kick in. The real challenge for tomorrow’s leaders is to know about new business models, and to know how to create them. And for that, they need to have a deep understanding of the world around them.

This will be a big shift, so I’ll have more to say about it in a future blog post!

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  •  09/03/2012
Feb 282012
 

Like many other countries today, South Africa has an awful unemployment problem. But ours is not a new problem. For too long it has simply been denied, and only recently has it become a “big issue.” Now, there’s panic in the land.

As other countries are discovering, disaffected young people who have no hope are extremely dangerous. So it’s in everyone’s interests to do everything possible to deal with the matter. Government must play a key role, not just in employing people and providing a welfare net for those who don’t find jobs, but also in creating a policy and regulatory environment that makes hiring people a good idea. And business, naturally, has a huge part to play too.

Here is a speech I made at a graduation ceremony at the University of Johannesburg on September 29, 2009, which, hopefully, will trigger some reflection … and action.

 

Tony Manning

Graduation Address

University of Johannesburg 

September 29, 2009

Good afternoon, and thank you for inviting me to be here today.

Let me begin by congratulating you on your achievement. I can only imagine the hard work and sacrifice that has brought you to this graduation. I’m very proud to be part of your celebration.

Obviously, when you invite someone to talk at an event like this, you expect them to tell you something interesting or useful or entertaining. But I’d like to start by asking you a question. One that I hope you’ll think hard about in days and weeks to come.

The question is this: what are you going to do to make a difference in this world?

It’s especially important to ask that right now, for the world is in a delicate and dangerous state.

A year ago, Lehmann Brothers collapsed, and the global financial system went into meltdown. Research by some economists shows that on many indicators, the crisis we’re still working through is worse than the Great Depression 60 years ago.

There are massive challenges ahead. As Jeffrey Immelt, the chairman of General Electric has said, this a time of “reset” in which organizations, institutions, systems, processes and values are being turned on their heads. Ideas and deeply-held beliefs about everything from capitalism to climate change, from consumerism to corporate governance—and yes, business education too—are all under the microscope.

But I’d like to focus on just one issue.

Exactly five years ago, in September of 2004, I wrote an article in Business Day headlined, “What if unemployment can’t be fixed?” The former editor of a major newspaper suggested in a letter to the paper that I was being racist—the same tactic now used so quickly when someone doesn’t like what you say.

But consider where we are now.

Some jobs were created as growth improved after 1994. But there weren’t enough of them, given the increase in population, to soak up the new job seekers. So while the unemployment level came down, it remained stubbornly high.

When ASGISA was announced with much fanfare in February 2006, the intention was to light a fuse under the economy in order to halve poverty and unemployment by 2014. And for a brief moment, we happily rode the wave of an international economic super-cycle that was like nothing anyone had seen before.

But then, along with just about everyone else’s, our economy dived from strong positive growth into negative territory. And right now, we’re bumping along, with many things just getting less worse rather than really better.

Even as pressures grow for government to add to an already long list of things to do and expensive promises to meet, Finance Minister Pravin Gordhan warns that the tax take is in a nosedive and the budget deficit is rising fast. Economists see growth in the next few years hovering at perhaps 3% to 4% rather than the 6%-plus ASGISA goal.

This year, anywhere from 250 000 to 475 000 jobs have been lost, depending on which survey you use. And while there is now quite a lot of chatter about “green shoots” of recovery, there are also worrying signs that when it does come, it’s likely to be weaker than we’d wish.

Globally, massive long-term unemployment will plague societies for years. Add this burden to exploding government debt, weak consumer spending, and massive overcapacity in many industries, and there’s a very good prospect of a recovery that’s not V-shaped or U-shaped, but W-shaped – in other words, some short-term good news followed by another sharp slump.

For many years, I have made the point in books and speeches that manufacturing will never be the job-creation miracle it was expected to be. So it’s no surprise that we now hear Ebrahim Patel, the Minister of Economic Development, warning that this country could become de-industrialised. That risk will grow as aggressive foreign companies appear on our doorstep and chase after our local customers in their efforts to recover from this recession.  It really is a dog-eat dog world, and the fight will be deadly.

Other sectors of the South African economy—tourism and commodity exports particularly—will take up some of the slack. Infrastructure spending is a timely boon. The FIFA 2010 Football World Cup will undoubtedly give us a boost. But the harsh fact is that in this knowledge age, South Africa is not making the progress it should in creating knowledge work and knowledge workers. At the same time, we’re stuck with a legacy of many millions of people who simply aren’t equipped to get or hold a job in the information age. And we have a basic education system which has been labeled a toxic mess, and which will not produce those workers—perhaps for decades.

The bottom line is that for all the promises, plans, and grand intentions that fly about, we’ll struggle to grow this economy as fast as we must to lift people out of poverty and create a better life for all.

Which brings me to the critical point.

A few months back, Johnny Steinberg wrote an article in Business Day in which he commented on a UCT study of young people in three communities around Cape Town. He noted especially how very hopeful they were of a bright future. This, in the face of the harsh reality that most will be disappointed, frustrated, and deeply angered by their inability to ever escape their lives of perhaps not-so-quiet desperation.

Then about two weeks ago, Brian Whittaker, the Chief Executive of the Business Trust, picked up on that article, and in an article of his own in the same paper said this:

“… leaders are going to have to build a shared understanding of where we want to go as a nation and lead their constituencies to places they would not go on their own.

“For business leadership, this means coming to terms with the fact that the building of a prosperous nation requires simultaneous attention to growth inequality and poverty.”

And he posed this question: “…if we expect those who have the least to defer their demand for a better life, what will those of us who have prospered in this land give in return?”

What indeed? This is the big question—our elephant in the room. The Development Indicators report released last week by the Presidency  paints a disappointing picture of our fight against poverty. As Professor Haroon Bhorat commented, South Africa is “the most consistently unequal society in the world.”

The 2009 Budget Review reports that government spending on social protection shot up from R72.3bn in 2005/06 to R118.1bn this year. About 13.4 million people rely on grants. We are entrenching dependence, poverty, inequality, and exclusion.

Pre-empting other commentators, I ended my 2004 article by saying, “As a matter of extreme urgency, leaders in all sectors need to consider not just how to create jobs, but also how to deal with a society in which expectations are high and jobs do not come. There are dangers ahead, and we are denying them.”

So back to my question: what are you going to do to make a difference in this world? This should be the question that keeps you awake at night.

Many years ago, Marshall McLuhan, a famous media expert, coined the term “global village.” In his book, Understanding Media, which became a best-seller long before anyone imagined the Internet and cellphones, he made the point that courtesy of new media “none of us can any longer think of ourselves as passengers on Spaceship Earth; all of us are crew.” And so it is with Spaceship South Africa—all of us are crew.

You are among the fortunate few, educated to succeed in a modern economy.  You are our best and brightest, our hope for the future. The choice now is whether to be just another passenger on Spaceship South Africa … or one of the crew.

 

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  •  28/02/2012
Feb 282012
 

What on earth is going on? Just what is the outlook for the world economy? Are there better times ahead … or will things get worse? Are we entering a new recovery phase … or are we in for a protracted period of little or no growth? Or are we on the edge of an abyss? What should companies plan for?

Opinions are all over the place. The signals are mixed, and making sense of them isn’t easy (and this is such an important issue, that everyone and his dog has an opinion on it!)

UNDERESTIMATING THE CHALLENGE

When the global economy hit the skids in 2008, few people saw real trouble ahead. Fewer still saw lasting trouble. Most “experts” forecast a quick turnaround. After all, wasn’t the subprime problem in the US an isolated one, affecting just a small sector of that country’s property market? Weren’t the major economies of the world “decoupled” from each other, so that cracks in one wouldn’t appear elsewhere? Hadn’t central banks worked out how to run things smoothly and avoid sudden ups and downs? And weren’t we, in any event, all in the midst of a “long boom” which would last for decades, narrow the global poverty gap, and enable billions of people to enjoy a better life?

Of course, there were reasons to imagine that a temporary glitch would not lead to long-term pain. And of course, most people wanted to believe that everything was OK, and that soon conditions would return to normal.

But as things got steadily worse, opinions began to diverge. Some pundits argued that the trend would be V-shaped, with a short, sharp downturn followed by a rapid upturn. Others said it would be U-shaped: sharply down, bumping along the bottom for a while, then sharply up. Or perhaps a “bathtub” shape, with more time on the bottom. Or, worst of all, W-shaped, with a quick recovery followed just as fast by another nosedive. Even now, there are arguments about which of these is right, and whether or not the world is on the brink of a dreaded double-dip recession—or, God forbid!—a fully-fledged depression. So every day we’re treated to talking heads on business TV channels arguing vehemently for one view or another. And to widespread confusion.

Looking back, it’s clear that most economists misread what was to come. Optimists outnumbered pessimists by a wide margin. Most growth forecasts were too high. And even now, the human tendency to pounce on the positive and brush aside the negative continues to shape opinion.

A TROUBLING PICTURE

What’s ahead for the world economy depends primarily on what happens in just three places: the United States, Europe, and China. But it could also be impacted by events that are already unfolding elsewhere—in the Middle East, Afghanistan, Pakistan, Nigeria, Somalia, and so on. And given the recent surge in natural calamities, more “black swan” disruptions should not surprise us—but they will.

In a sharp downward revision, the World Bank recently forecast global economic growth of 2.5% this year, down from a June estimate of 3.6%. The Euro area may contract by 0.3%, down from a previous estimate of a 1.8% gain. The U.S. growth outlook was cut to 2.2% from 2.9%. The forecast for China was unchanged, at 8.4%—though the Chinese government has since cut its own forecast for the medium-to-long term to 7.5%.

Growth will be uneven. High-income economies are expected to grow by 1.4% this year, down from a June estimate of 2.7 percent while emerging economies will grow by 5.4%. However, there is many a slip twixt cup and lip, and predictions have been ratcheted down so fast recently that it makes sense to be edgy. Besides, there’s a risk that turmoil in the Eurozone and problems elsewhere will feed on each other, leading to a worse outlook for everyone.

The U.S. economy appears to be gaining steam: Consumer confidence is the highest in a year. January jobless claims were down for the third month in a row (albeit largely because a growing number of unemployed people have given up searching for work). Car sales have been accelerating for some time, as evidenced by General Motors’ announcement of a record $9.7 billion annual profit. On February 21, the Dow rose above 13 000 for the first time since 2008 (it’s up more than 60% on Obama’s watch). Companies are flush with cash, and some are starting to rebuild inventories.

But all is not well in the world’s largest economy. Gas prices are going up, and eating into household budgets. There has been no net increase in jobs for a decade, even though the population has grown. Wages and benefits are being cut. Home sales and prices keep falling, and a third of homeowners owe more on their mortgages than their houses are worth.

As USA Today reported on January 9, the nation’s debt of more than $15 trillion is now as big as the entire economy, and  growing faster. (The economy would have to expand by 6% a year to keep up!) President Obama’s budget sees debt of more than $26 trillion by 2022. And it’s sobering to reflect that Greece, Iceland, Ireland, Japan, Italy, and Portugal are the only advanced nations whose whose debts are bigger than their economies.

As if this sorry state of affairs were not worrying enough, political gridlock and a pandering to special interests is preventing necessary changes. Election-year rhetoric doesn’t help either. But whoever is sworn in as President in November faces the stark reality of that debt bomb, and will have to act fast and brutally to have any hope of dealing with it.

China, too, has hit a bump in the road (though many observers quip, “Which country wouldn’t welcome a drop in GDP growth to only 8% or so?”) It suits us to think it’ll keep powering ahead, because so much rides on that happening. But a slowdown has been in the making for a while, which could be worse than the World Bank thinks; some bearish analysts say growth of only 5% or 6% is likely.

Foreign direct investment into China has fallen sharply. Overseas customers are spending less, and Chinese exports are taking strain. A property bubble is inflating. Rising wage rates are starting to affect competitiveness, and Chinese companies are relocating manufacturing operations to other, lower-cost Asian countries. Social unrest has been spreading, and there are fears of more of it as new job seekers surge to the cities and many firms cut back on hiring.

However, Robert Zoellick, outgoing President of the World Bank, sees “a soft landing” for China. And Jim O’Neill, Chairman of Goldman Sachs Asset Management and author of The Growth Map, an excellent book on the rise of the BRIC nations, reminds us that “in the 6 weeks of 2012 so far, China will have created the equivalent of 1/2 another Greece.”

The Chinese central bank has just cut the level of reserves required of the country’s banks, to enable them to lend more easily. A range of other interventions is likely. In addition, China is under pressure to make much needed structural changes to its economy in coming years, and will surely tackle some of them. It will also continue its massive infrastructural spend, and keep importing raw materials. And its manufacturers will keep moving relentlessly up the value curve, churning out more high value-added products—at prices foreign competitors can’t match. So the 800-pound Asian gorilla will continue to grow at a good lick, and to play an increasingly pivotal role in the world economy.

And then there’s Europe—the elephant in the room. The region which has the rest of the world holding its collective breath.

According to the European Commission, the Eurozone is now in “mild recession.” Eight European economies will shrink in 2012—the double-dip we’ve been warned about. Better performance is possible, but it hinges on real progress in repairing the continent’s finances. And there’s no certainty this will happen.

For more than two years, Greece has been a nasty boil that should have been lanced and cleaned out decisively. But Europe is still kicking that can down the road. Doing as little as possible as late as possible to defer the inevitable. Pretending that if Greece gets a helping hand, it won’t default and leave the Eurozone, unleashing a wave of trouble across the continent—and the world. And imposing increasingly onerous conditions on a country that’s already on its knees, with truly pitiful prospects of lifting itself up.

Europe’s finance ministers have agreed to a second bailout package of $171 billion (€130 billion) by 2014, with private investors “voluntarily” writing off $53.3 billion of their Greek bonds (half of that country’s  private sector debt). In return, Greece must cut its budget deficit to 120.5% of GDP by 2020.

The architects of this charade are banking on Greek politicians being able to deliver their side of the bargain, and on voters in the countries Greece now relies on agreeing to all this. They’re hoping against hope, too, that the promise of yet another chunk of cash—which had to start flowing by March 20 to avoid Greece going bankrupt—will persuade rioting Greeks to get off the streets, accept even more crushing hardships for the next couple of decades, forget about state jobs for life, become successful entrepreneurs soon enough to buy their next meal, and rise past the humiliation of it all. Oh, and keep their money in Greece and pay their taxes!

While the Greek parliament has OK’d the deal, that’s just the beginning. Previous promises to reform came to nothing. Perhaps it’ll be different this time, because it’s clear there will be no quick or easy fix. But citizens will get angrier as life gets tougher for them. Igniting growth in Greece will be a very long, very hard slog. A Citigroup report warns that Greece is in for a long depression, and that its debt-to-GDP ratio will hit 160% by 2020, rather than the intended 120.5%. So there will come a time—quite soon—when the nasty truth has to be faced that Greece has to default, has to abandon the Euro, and has to paddle its own canoe.

The assumptions on which this bailout is based are daft. The chances that another bailout won’t be necessary are about zero. There’s a lot of agony to come—not least for the European banks that have been coerced into taking an ugly short-term “haircut” rather than face the prospect of losing everything. No one is sure just how bad the pain will be, but it will be bad. And it will be widely shared. And it will last a long time.

And that’s just Greece. There’s also Italy, Spain, Ireland, and Portugal. They’re all limping along on the edge of catastrophe, and a default by any of them would have worldwide repercussions that would be much worse than the Lehman effect. Their chances of simultaneously slashing their budgets and growing out of trouble are not good. So chances of further defaults—and resulting contagion—are high.

RE-THINKING ECONOMICS

The world is in the midst of a great economic experiment whose outcome is entirely uncertain. Capitalism is under siege. Governments are becoming more interventionist. Economists are rethinking their favorite theories. The Keynes vs. Heyek debate has a long way to run. The full impact of government stimulus efforts on the one hand, and austerity programmes on the other, is yet to be felt and understood.

So far, opinions are mixed. Nobel Prize-winning economist Paul Krugman, a long-time critic of the austerity camp, argues in his New York Times column of February 19 that things have been made worse than necessary “by the way Europe’s leaders, and more broadly its policy elite, substituted moralizing for analysis, fantasies for the lessons history.” Unfortunately, he adds, “the confidence fairy has failed to show up.”

In similar vein, Mohamed El-Erian, CEO of PIMCO, the largest US bond trader, warns that the lessons of Argentina a decade ago are being ignored by the financiers and politicians dealing with the Greek crisis today. Instead of boosting confidence, austerity measures in Argentina caused citizens to empty their bank accounts and spurred capital flight. The government failed to meet its policy commitments, social and political pressures mounted, and the country defaulted in December 2001.

But consider Britain—a clear leader in the austerity stakes. As David Smith points out in London’s Sunday Times of February 26, it’s on course to undershoot its £127 billion borrowing needs for 2011-12—perhaps by as much as £10 billion. Car manufacturers boosted production by 15.6% in January, compared to the same month a year ago. The CBI says export orders are well up on long-term averages. Austerity measures have not yet fully kicked in, but an analysis by Goldman Sachs says last year took the big hit.

To complicate matters, this high-stakes economic experiment is being conducted in a laboratory where scientists are coming and going, opinions are divided, political games are being played in the hallways, and surrounding societies are in spasms of anxiety. And it’s happening in a time of great change, when an array of major events is unfolding with the potential to throw even the best of plans off course and to radically affect our future.

Can you cut your way to growth? Will disgruntled citizens give governments the leeway to do their thing? What will become of the unemployed masses?

The world is undergoing a radical reset, not a minor tweak. There are no easy answers.

CRITICAL CHANGES ADD UNCERTAINTY

High unemployment has become a structural reality across the globe. Countless millions of people will never have a job in their lives—or get a new one. Countless millions will either retire later than they intend, or have to forget about retiring at all. Demographic shifts are altering the shape of societies: in some countries, the population is growing and young; in others, it’s slowing and old. Almost everywhere, people are streaming from rural areas towards towns and cities in the greatest migration ever.

The early promise of the “Arab spring” has given way to deep concerns about what comes next in the Middle East, and how events there will spill over into other regions. Iraq is still not at peace with itself. Afghanistan appears to be unravelling, and the Taliban are resurgent. Libya and Egypt are a mess. Syria is an unmitigated disaster. Iran’s obstinate stance over nuclear power could result in oil prices going through the roof and a nuclear race in its neighborhood (it also raises two questions with awful consequences: will Israel bomb first, or will Iran get a bomb first?)

Meanwhile, Nigeria is being torn apart by Boko Haram terror attacks and political strife. Terrorism is a growing threat in Kenya. Somali pirates are causing problems for shipping along Africa’s east coast, and hostage-taking is a growth industry. In major cities around the globe, the “Occupy” movement is already affecting views about the role and responsibilities of both both government and business, about social inequality, and about executive pay—debates that will surely intensify.

Coming months will see elections and possible leadership changes in some of the world’s most important countries. Outcomes of this year’s elections in Russia, France, and the United States are uncertain. In China, a succession process is under way with Vice-President Xi Jinping look set to to take the top job.

Other countries, too, have leadership issues. North Korea has just confirmed a 28-year-old, untested but belligerent new dictator, who is keen to prove himself.  Venezuela’s Hugo Chavez has cancer and may not be in office too much longer. Robert Mugabe will cling to power in Zimbabwe if his health holds up, no doubt to do further damage to his beautiful country. And South Africa will have a fractious year, as the ruling ANC gears up for its July policy conference and December elective conference, and politicians vie for power and tenders.

At the same time, extraordinary breakthroughs in technology are transforming industries, enabling companies to operate in new ways, and changing customers’ lives. Cyber-crime and attacks are becoming more plentiful, frequent, costly, and disruptive. And there’s growing pressure to deal with climate change.

In a year when Charles Dickens is being celebrated, his words from A Tale of Two Cities (1859) ring truer than ever:

It was the best of times,
It was the worst of times,
It was the age of wisdom,
It was the age of foolishness,
It was the epoch of belief,
It was the epoch of incredulity,
It was the spring of hope,
It was the winter of despair,
We had everything before us,
We had nothing before us,
We were all going direct to heaven,
We were all going direct the other way

BUSINESS IMPLICATIONS

So what does the future hold for business? Here’s what I think matters most:

  1. Tough economic times will be with us for many years. This truly is an age of frugality. But population and productivity growth will enable some countries and regions to do exceptionally well, and they’ll provide great opportunities for others.
  2. We can see quite a lot of what lies ahead, but not all of it, and there will be surprises. Companies need to strengthen their sensing capabilities and spend more time making sense of what they see. They also need to strike a careful balance between investments and activities that are “fixed” and those that are flexible, and develop the mindset and the processes that make swift change possible.
  3. Competition in virtually every industry is escalating at an astonishing rate. Companies everywhere are desperate to sell stuff to anyone they can—and selling anything is getting harder. They’re innovating and hustling as never before. If you blink, they’ll eat your lunch.
  4. Every market is an emerging market. The rules of the game are changing everywhere. They’re turned upside down by new customers, new customer behaviours, new competitors, new distribution possibilities, new regulations, new social trends, new media, etc., etc.
  5. Offering “good enough” products or services (a popular new mantra) might get you into a market, but it won’t give you an edge for long. As competitors drive value up and costs down, customer perceptions of “value” change rapidly. If you don’t keep making a difference that matters you just won’t stay in business.
  6. Business needs to keep rethinking its role and responsibilities in society. Companies need to create value for an array of stakeholders, not just for their shareholders.
  7. If your company is not fighting fit for this new world, you need to shape up fast. There really is no time to waste.
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  •  28/02/2012
Feb 092012
 

As a voracious reader of business books and journals, I’ve become increasingly jaded and disillusioned. I’ve spent countless hours over the past quarter century searching for insights, concepts, and tools that might really change things. Yet for all the hype that “management” gives rise to and is prone to, most of what I’ve seen is just more of the same, repackaged for a new time and possibly a new audience. Some of it is vaguely interesting. A good deal of it is just plain nonsense.

For all the efforts of academics, consultants, executives, and writers, there’s been surprisingly little progress in the field of management thinking. A handful of concepts cooked up 30, 40, 50 – or even close to 100 years ago – are still the ones that matter; and they are the core of what now gets touted as “new,” “breakthrough,” or “revolutionary.”

The DuPont chart, a tool for thinking about how companies create wealth, appeared almost a century ago. Fifty-odd years ago, Peter Drucker noted that every company needs to answer three questions: 1) who is the customer? 2) what is value to that customer? and 3) how can we deliver it? And around the same time, the human resources school of organizational behavior gathered momentum with its message that people are the most important resource, and treating them well is smarter than treating them badly. So what has changed? Answer: nothing. What better advice is on offer? Answer: none. These long-in-the-tooth ideas remain the bedrock of today’s “freshest” management thinking. Again and again, they’re tarted up for a new audience by management’s “thought leaders.”

Of course, there will be howls of protest at this view. After all, a lot of people have a lot riding on the world being eager to hear what they have to say – and being willing to pay for it. But one thing I’ve learned about management is that we have a very good idea of what works. Get these few things right, and you have a chance of success; get them wrong, and you’re roadkill. Another lesson is that there are no silver bullets in business. And in this time of great change, we really can’t afford to keep reinventing the wheel or flailing around for answers that don’t exist.

There are three possible tests of the value of any new insight or concept: 1) how useful it is to busy, practicing managers; 2) whether it advances our understanding of a particular topic such as strategy, leadership, change management, customer service, or operations; or 3) whether it becomes a catalyst for further investigation and thought. By these tests, very little of what’s dished up is worthwhile.

This is alarming, given that management is the discipline at the very centre of human affairs. The one that makes pretty much everything happen. That makes businesses competitive and schools, hospitals, and armies effective. That makes cities, ships, trains, power stations, and much else work. And that drives innovation and progress.

You’d think that, by now, we’d have figured out how to manage things. That we’d have settled on a set of core principles and a proven set of practices. But we haven’t. Instead, we keep on searching. And searching…

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  •  09/02/2012