The Business Book

MAKING MONEY WORK 149 We find that whole “netbooks.” In 2009, global netbook Warren Buffett communities suddenly sales rose by 72 percent. The herd instinct of businesses such as Dell Generally considered the fix their minds upon was to produce their own netbook. most successful investor of the one object, and go mad At Apple, by contrast, boss Steve 20th century, Warren Edward Jobs announced that “the problem Buffett was born on August in its pursuit. with netbooks is that they’re not 30 in 1930 in Omaha, NE. He Charles MacKay better than anything.” He worked demonstrated an early ability to develop a superior alternative to with mathematics and was its share of smartphone sales netbooks—the iPad. By mid 2013 able to add large columns collapsed to around 3 percent in the the iPad had sold more than 145 of numbers in his head. His first quarter of 2013. Throughout this million units and the original father was a stockbroker period, Nokia was desperately trying makers of netbooks (Taiwan’s Asus) and congressman. to catch up with Apple’s iPhone— had halted production completely. but doing no more than throwing Buffett began investing new products at the problem, instead Those who ignore the herd can at the age of 11. He started of taking a deep strategic breath apply cool logic to their situation several small businesses and deciding what innovations and think ahead to possible future while still a teenager, before might earn it a stake of the market. scenarios. The herd tends to think going to the universities of that tomorrow will mean more and Pennsylvania, Nebraska, and The contrast between Nokia’s more of today. Those who ignore Columbia to study business. In behavior and that of Apple’s could the herd can identify fundamentals 1956 he formed the company not be greater. In 2008 and 2009 that persist over time, while looking Buffett Partnership, where his the big trend in mobile computing toward what might be different investment successes led to was away from laptops and toward tomorrow. As US entrepreneur Sam his nickname, “the Oracle Walton advised, it often makes of Omaha.” In 2006 he sense to “swim upstream.” ■ announced that he would be giving his entire fortune to The success of the iPad reflected charity. In 2012 his net worth Apple’s resolve to develop a superior was estimated at $44 billion. alternative to the “netbook.” Companies like Apple and Samsung need to be Key works ahead of the herd, not behind it. 2001 The Essays of Warren Buffett: Lessons for Corporate America (with Lawrence A Cunningham) 2013 The Essays of Warren Buffett: Lessons for Corporate America, Third Edition (with Lawrence A Cunningham)

150 DEBT IS THE WORST POVERTY LEVERAGE AND EXCESS RISK IN CONTEXT I n 2012, US theoretical noted the importance that central physicist Mark Buchanan banks (and governments) place on FOCUS wrote Forecast, a book inflation, interest rates, exchange Managing risk detailing his investigations into rates, and consumer confidence. He the workings of the economy. In was puzzled by the absence of one KEY DATES assessing the variables that affect variable that had proved a central 1970–2008 Banks in economic growth and decline, he factor in past extremes of boom and developed countries double the ratio of loans that they Increasing leverage Decreasing leverage issue compared to the value allows companies to... allows companies to... of money they hold. ...focus on growth and ...focus on increasing profit 2002 The Global Executive convert short-term debt through minimizing costs Forum report on the collapse into long-term loans... of the Enron corporation says and repay long-term loans... that “the genius of Enron was infinite leverage.” ...and pay increased ...and issue more shares. dividends to shareholders. 2007–08 Increasing numbers of people access credit to finance mortgages, but later default on their loans. Global financial markets collapse. 2013 The UK government forces banks to publish their leverage ratios. Among the highest leveraged is Barclays, which has loans worth 35 times its (equity) capital base. However, it can leave However, the company businesses vulnerable may fall behind rivals to cash-flow problems. who can boost growth through higher leverage.

MAKING MONEY WORK 151 See also: Who bears the risk? 138–45 ■ Profit versus cash flow 152–53 ■ The leveraged buy-out Maximize return on equity 155 ■ The private equity model 156–57 In a leveraged buy-out, a Borrowing on credit cards can lead use of complex financial products business is acquired by a to financial ruin. In 2007–08 many (also based around leveraging), company or group of homeowners borrowed on credit to pay and the financial system crashed. individuals using a large their mortgages, but had insufficient amount of borrowed money, income to meet loan repayments. Leverage carries similar risks most often from bank loans or for businesses. During good times, bonds (interest-bearing loans bust—leverage. This is a measure of when demand is rising and profit that are used to raise capital). indebtedness, or the extent to which margins are high, borrowing capital Typically, the buy-out may be people or companies finance their to finance extra growth may seem paid for with a ratio of around future by borrowing money. Society an attractive means to boost profits. 90 percent debt to 10 percent and business had ignored the But leaders often ignore the equity, and the assets for the warning of UK historian Thomas increase in risk that accompanies loans are those of the company Fuller: “debt is the worst poverty.” an increase in borrowings. Paying being acquired. In other words, back debt is not optional (unlike the the theory is that the debt is When high leverage is payment of dividends, for example). later repaid by money raised widespread in the economy—as Highly leveraged businesses can from the acquired business. occurs when lots of people borrow suddenly find that their high levels Leveraged buy-out investment large amounts of money—the of debt are no longer serviced by companies are today known as degree of debt can create a short- sales. The borrowings that had private-equity companies. term boom. But this often comes driven profits can begin, instead, at the cost of a subsequent bust. to drive the company into severe In the 1980s, leveraged cash-flow problems. buy-outs became notorious, Taking risks as some acquirers used a The financial crisis of 2007–08 was Broadly speaking, it is wise to borrowing ratio level of 100 largely caused by high leverage. restrict borrowings to around 25 percent, and the interest Individuals borrowed large amounts to 35 percent of the total long-term levels on debt repayment on credit cards and took out 100 capital employed in the business. were so large that cash flows percent mortgages, both against Any higher than 50 percent is crashed and companies went inadequate levels of income. When regarded as carrying too high a risk bankrupt. More recently, a the debts could not be met and level for a normal business. After $2.85 billion leveraged buy-out house prices fell, huge numbers all, while the directors need to aim and subsequent restructure of people defaulted on their debts. for maximum profits, they are also was used to rescue struggling The equally highly leveraged banks responsible for the long-term health US film-production giant stumbled; their problems were of the business, together with Metro-Goldwyn-Mayer (MGM). made worse by the large-scale the welfare and security of staff, customers, and suppliers. ■ When you combine ignorance and leverage, you get some pretty interesting results. Warren Buffett US investor (1930–)

152 CASH IS KING PROFIT VERSUS CASH FLOW IN CONTEXT F or new businesses, fast- practice it can lead to a huge growing companies, and in cash shortfall. For example, if a FOCUS times of recession, cash is construction business links its Financial management king. In other words, profit takes a costs to the time when the finished back seat, while cash flow becomes houses are ready for purchase, KEY DATES the critical factor. In accounting, it has ignored the huge cash 1957 John Meyer and Ed Kuh profit is an abstract concept based outflows that are incurred during publish “The Investment on matching costs to the revenues the building process, and might Decision,” the first study to generated within a period of run out of cash before the houses look at cash flow and trading. This sounds fine, but in are sold. When times are good, a investment in businesses. In times of economic Companies with weak 1987 The US Financial stability companies focus cash flow operate by Accounting Standard Board on profit; credit is cheap using supplier credit (FASB) introduces a new requirement: companies must and readily available. and overdrafts. now complete an annual “statement of cash flows” in But in times of recession, relying addition to a balance sheet, on credit is dangerous. income statement, and retained earnings statement. 2013 The UK’s Co-operative Bank abandons its plans to purchase 632 branches of Lloyds Bank, because it has insufficient cash to buy the business and run the branches. Cash is king.

MAKING MONEY WORK 153 See also: How fast to grow 44–45 ■ Investment and dividends 126–27 ■ Making money from money 128–29 ■ Leverage and excess risk 150–51 ■ Maximize return on equity 155 ■ Balancing long- versus short-termism 190–91 company may rely on dipping into A business receives a $24,000 order, and has to plough cash into an overdraft to make up for a cash making the goods. By week six, $20,000 has been spent by the company; shortfall. But when times are tough, the customer is invoiced, but is not required to pay until week 13. This a reliance on the bank may be too means the company faces serious negative cash flow for 12 to 13 weeks. risky. A business needs to manage its finances well enough to avoid 10 periods of negative cash flow. 5 How good companies fail $0000s 0 Profit Cash is a constant pressure for -5 $4,000 every new business. Even if the company keeps to its start-up -10 Deliver and budget, it takes time for trading invoice to reach a high enough level to generate positive cash flows. For -15 example, a sports’ equipment store may take three years to -20 build up the regular clientele that will enable it to start making -25 money. Until then, the business 1 2 3 4 5 6 7 8 9 10 11 12 13 14 faces negative cash flow. So it WEEKS is crucial for new businesses to prioritize cash flow from the flow problems can also cause well- admitted that its overall financial beginning. This may mean established companies to stumble stability had been seriously leasing equipment, or buying it and even collapse. In 1998, South undermined by a new reliance secondhand rather than new, and Korea’s Daewoo Group encountered on borrowings, but insisted that choosing suppliers that provide growing problems because of it was a brief moment of crisis. the same credit period as the store “increasing difficulties in arranging Despite being one of the largest gives to its customers, even if these working capital and investment conglomerates in the world, the suppliers cost a little more. Cash- funds.” The group had been group collapsed the following year aggressively expanding, and due to massive cash shortfalls. ■ Money scams US investment advisor and of these early customers led Farmers buying livestock at market financier Bernard Madoff was them to recommend the scheme, must—like many business owners— sentenced to 150 years in prison which then continued to pay pay up front. Costs, such as feed and in 2009 following a money earlier investors with the cash storage, will mount before they see a scam that is believed to have put into the company by return on their investment. led to about $18 billion of losses subsequent investors. to investors. Although hailed as a distinguished and expert This type of financial pyramid financier, capable of generating is able to stay afloat as long very high returns for investors, as sufficient numbers of new Madoff was in fact responsible savers put cash into the scheme. for running a “Ponzi scheme,” in If the flow of funds dries up, which cash from new investors the scheme collapses. Madoff’s is used to pay generous returns scam collapsed due to a loss of to earlier investors. The delight investor confidence following the 2008 financial crisis.

154 ONLY WHEN THE TIDE GOES OUT DO YOU DISCOVER WHO’S BEEN SWIMMING NAKED OFF-BALANCE-SHEET RISK IN CONTEXT T he balance sheet is a Enron used off- balance-sheet snapshot of a company’s accounting to hide overvalued assets FOCUS assets and liabilities and in subsidiary businesses. Its financial Financial risk should show any financial risks that records continued to look perfect even a company is facing. Yet in reality, as it spiraled toward bankruptcy. KEY DATES not all of the company’s liabilities 1992 Terry Smith publishes appear there. This means that when Off-balance-sheet finance has been Accounting for Growth, an calculating the debts of a business, increasingly used by governments insider exposé of accounting it may not be possible to account for in recent decades. In China, the practices in big businesses. everything. This was the case when National Audit Office has warned Enron failed in 2001, and it was also that local government may have as 2001 The spectacular collapse true for the Western retailers and much as three times its official debt of Enron shows that practices banks that struggled from 2007–08. of $600 billion in off-balance-sheet such as off-balance-sheet unofficial debt. This will add accounting are not just Operating off balance sheet greatly to future interest charges— obscure talking points. was at the heart of the 2011 scandal and may carry significant risk if at Japanese camera company China experiences a credit crunch 2010 Lehman Brothers bank Olympus. To hide poor management similar to that in the US and is revealed to have used “Repo decisions, such as overpaying in Europe from 2007–08 onwards. ■ 105” and “Repo 108” repurchase takeover bids, the board set up transactions to temporarily unconsolidated subsidiaries to hold remove some loans and the transactions that were causing investments from its balance losses. As unconsolidated losses, the sheet for 7 to 10 days, creating figures did not have to appear in the a misleading picture of its its annual accounts. Analysts and activities and value. auditors should have spotted that something was wrong when profits 2011 UK care provider appeared “healthy” while cash was Southern Cross collapses due draining out of the business. But to off-balance-sheet debts to nothing was spotted until new CEO the value of $8 (£5) billion. Michael Woodford blew the whistle. See also: Play by the rules 120–23 ■ Accountability and governance 130–31 ■ Who bears the risk? 138–45 ■ Leverage and excess risk 150–51

MAKING MONEY WORK 155 RETURN ON EQUITY IS A FINANCIAL GOAL THAT CAN BECOME AN OWN GOAL MAXIMIZE RETURN ON EQUITY IN CONTEXT M any stockmarket analysts shareholders’ equity in the two regard “return on equity” companies creates a misleading FOCUS (ROE) as a vital measure picture. Toyota has a huge balance Business goals and risks of business success. ROE measures sheet with high shareholder equity, profit as a percentage of the share- bolstered by decades of high profits. KEY DATES holder’s equity on the balance sheet. GM’s bankruptcy in 2009 had 1978 Legendary investor This “equity” is comprised of share wiped out its reserves, leaving it Warren Buffett claims that ROE capital (capital raised from selling with a small equity base. GM’s high is not likely to stray from a level shares) and reserves (the company’s ROE was largely due to its collapse of 12 percent for very long. accumulated, retained profit). and US government bailout. 1995: The Warren Buffett Way ROE is affected by trading In the 2000s, many banks cut by Robert Hagstrom introduces conditions. Still recovering from their balance sheets through “share the public to Buffett’s approach a tsunami and floods, Toyota buybacks.” Cash was used to buy to investment, including the achieved an ROE of 3.9 percent in shares back from shareholders, importance he places on ROE. 2012. Rival General Motors (GM), reducing the equity at the bottom unaffected by the natural disasters, of the formula. This increased the 1997 The US’s S&P (Standard managed 16.7 percent. Based on ROE, but led to a risky capital and Poor) index of industrial its ROE, GM appeared to be four to structure. By maximizing ROE, companies reveals an average five times better at generating profit the banks left too little cash to deal ROE of 22 percent. from shareholders’ investment. with the 2007–08 financial crash. ■ 2012 Among international A misleading measure ROE is calculated by dividing profit by clothing retailers, ROE varies As an indicator of investment average shareholder equity. The higher from 40 percent at Gap and potential, ROE can be problematic. the figure, the more efficient the company 39 percent at H&M, to -139 The percentage outcome is a is at generating shareholder returns. percent at American Apparel. function of two things: how high Based on its ROE alone, the profit is, and how low the ROE Profit x 100 American Apparel should no shareholders’ equity is. Toyota (%) = longer exist in its current form. and GM both made a similar pretax Average profit in 2012, but the amount of shareholder equity See also: Investment and dividends 126–27 ■ Accountability and governance 130–31 ■ Who bears the risk? 138–45 ■ Ignoring the herd 146–49

156 AS THE ROLE OF PRIVATE EQUITY HAS GROWN, SO HAVE THE RISKS IT POSES THE PRIVATE EQUITY MODEL IN CONTEXT At first, private equity came S ome economists believe only from large investors that “private equity” is FOCUS wanting long-term gains. misnamed, since it is a Profit and risk model based on debt, not equity But in the 1980s, smaller (the value of assets owned outright KEY DATES investors used leveraging by an individual or company). 1959 Fairchild Semiconductors, and debt to buy companies. Private equity involves “leveraging” the first venture-capital-funded a balance sheet by loading debt onto start-up, is created. This type of private equity the business. This is similar to the requires high short-term controversial practice of “leveraged 1978 US investment group profit (to service debts). buy-outs” (LBO), in which a KKR pays $380 million to take company is acquired using a high manufacturer Houdaille Long-term opportunities percentage of borrowed funds, Industries Inc. private; this is are likely to be overlooked loading it with a high level of debt. probably the first private- equity transaction. in favor of short-term profit. Such levels of debt pose inherent risk, as US politician Jack 1988 KKR buys conglomorate As the role of private Reed highlighted. Pressure on RJR Nabisco for $25 billion in equity has grown, so managers increases—good profits the biggest private-equity have the risks it poses. are necessary in order to minimize purchase the world has interest charges on the company’s yet seen. debt. The theory is that this forces managers to perform better, but 2006–07 A peak year for critics claim that a company run on private equity—in the US the private-equity model is likely to alone, private equity maximize short-term profit at the companies buy 654 cost of long-term business growth. companies for a total of around $375 billion. Less pressure, more focus To its supporters, the main strength of the private-equity model is in what it removes. First, it removes the regular profit pressure from shareholders that is faced by bosses of a publicly traded company. For

MAKING MONEY WORK 157 See also: Beating the odds at start-up 20–21 ■ Who bears the risk? 138–45 ■ Leverage and excess risk 150–51 ■ Balancing long- versus short-termism 190–91 example, in 2012, the US decisions and strategy. In the long Alec Gores department-store chain JC Penney term, there are two critical questions was given a facelift and a new, more about private equity: does it produce Perhaps the richest private- upmarket strategy. A sharp a better profit performance? And is equity businessman in the downturn in sales forced a quick it better for the long-term success of world, Alec Gores’s personal rethink, including firing the the business, taking into account fortune was estimated at recently hired CEO. Short-term innovation, staff commitment, and $1.9 billion in 2013. Gores underperformance is unacceptable customer satisfaction? was born in Israel in 1953 to to a public company, and can even a Greek father and Lebanese attract the attention of private-equity In 2013, a combined study by mother. He emigrated to the investors seeking new acquisitions. three UK universities found that a US in 1968, where he attended company’s performance falls after high school in Michigan. The second strength of the being subject to a private-equity private-equity model is said to be buyout, based on profits and After earning a degree the focus it provides. The boards of employment levels. The research in computer studies from publicly traded companies often showed that four years after a Western Michigan University, direct a diverse range of businesses. private-equity purchase, revenue he founded a computer retail For example, in 2012, the Sumitomo per employee rose from $190,000 to business (Executive Business Corporation of Japan sold a 50 $252,000, while in a control group it Systems) selling computers percent stake in its Jupiter Shopping increased from $190,000 to $295,000. from his basement in 1978. Channel subsidiary to US private- However, other studies have Within seven years, he equity group Bain Capital. This suggested the opposite—that employed more than 200 effectively separated Jupiter from private equity boosts profits—so the people. Gores sold the company Sumitomo, ensuring that the research is inconclusive. for $2 million at the age of 33 Jupiter directors could focus on just and used the capital to start one area of business. This enabled It might seem that when “private the Gores Group in 1987. them to play a more hands-on role in equity” is used as a term to describe debt-fueled growth, years of success The Gores Group private- Jupiter Shopping Channel is Japan’s can be followed by spectacular equity fund specialized in most popular television shopping losses. However, the majority of acquiring and operating company. Now 50 percent privately companies making private-equity undervalued and under- owned, it benefits from an increased purchases are institutional performing noncore businesses focus on call-center efficiency. investors, who want to invest large from major corporations, and sums of money over long periods. ■ turning them into profitable concerns. These included loss-making divisions from large companies, including Mattel and Hewlett-Packard. Since its founding, the company has acquired more than 80 businesses.

158 ASSIGN COSTS ACCORDING TO THE RESOURCES CONSUMED ACTIVITY-BASED COSTING IN CONTEXT C ost accounting seeks to (such as utilities). According to determine a company’s Professor David Myddelton of FOCUS costs of production by Cranfield School of Management Costs and efficiency measuring direct costs (such in the UK, the inherent inaccuracy as raw materials) and adding an of this method often means that KEY DATES estimate of overhead or fixed costs companies know far less than they 1911 F. W. Taylor—one of the first management “gurus”— Activity-based accounting calculates the writes The Principles of actual overhead cost of products and services. Scientific Management. In it, he suggests methods for These are exact, so the company is able creating an accurate to calculate accurate unit costs. costing model. This accuracy allows the company to make good 1971 US professor George decisions about how best to use resources. Staubus writes Activity Costing and Input-Output Accounting. His book encourages interest in activity-based costing among US manufacturers. 1987 US business experts Robert Kaplan and Robin Cooper define activity-based costing in their book, Accounting and Management. Assign costs according to the resources consumed.

MAKING MONEY WORK 159 See also: Play by the rules 120–23 ■ Profit versus cash flow 152–53 ■ Good and bad strategy 184–85 ■ The value chain 216–17 ■ Product portfolio 250–55 ■ Benefitting from “big data” 316–17 should about their costs. They that the cost of making a chocolate Keeping of costs with may be relatively clear about product, for example, is not “about a reasonable degree of direct costs, but vague about 65 cents,” but exactly “59 cents.” accuracy can be made a the overhead costs that should matter of very great profit be attributed to specific products. This level of accuracy tends The commercial consequence of to be especially important when to the company. this is that a business may allocate considering nonstandard products, F. W. Taylor marketing spending to a product such as the completion of a special that is not very profitable. In the order of merchandise for the Brazil calculations, a company can long run, a business that makes Olympics in 2016. Activity-based calculate the total direct and wrong decisions like this will costing might show that the costs indirect costs for a product or struggle to keep up with its rivals. associated with this special order service. By dividing these costs are higher than they would be for by the quantity produced, an Activity-based accounting standard products. This would help accurate unit cost can be obtained. Ideally, an accounting system the business to set the right prices The company can then establish measures every aspect of every for the Olympic items. reliable break-even points, identify transaction and decision related to the products with the profit margins a particular product or service. The To perform effective activity- that make them worth backing (with most effective way of achieving this based costing, a company needs advertising support, perhaps), and is through activity-based costing. to: first, identify all the direct and allow clear comparisons for making Whereas traditional accounting indirect activities and resources; sound investment decisions. ■ systems estimate the overheads second, determine the costs per (perhaps by assuming that every indirect activity; and third, identify unit produced at a factory should the “cost drivers” for each activity. A have the same share of the total cost driver is a factor that influences overhead bill), activity-based costing or creates costs. For example, a is much more precise: it breaks bank teller has many activities— down the overhead costs to find out when measuring the cost driver which activities create which costs. of an activity such as handling This allows the company to realize incoming checks, the bank should figure out how long the teller spends on this task alone. From these three Frederick Winslow Born in 1856 in Philadelphia, decide what to produce. His Taylor PA, F. W. Taylor trained as a belief was that if accounting mechanical engineer. He later information is to be valuable, became famous for his study it must be useful, timely, of “Scientific Management,” and formed into comparable which was based on the idea statements, so that progress that effective management is (or decline) can be identified a science with clearly defined quickly. F. W. Taylor died of laws. Taylor was also known as pneumonia in 1915 at 59. the “father” of cost accounting. Key works In the late 19th century, he established new accounting 1911 The Principles of Scientific systems involving the “monthly Management determination of unit costs.” 1919 Two Papers on Scientific He highlighted the value of cost Management: A Piece-rate data as information that managers System and Notes on Belting could use to set prices and

WORKIN A VISION STRATEGY AND OPERATIONS

G WITH

162 INTRODUCTION I n Lewis Carroll’s Alice in but it should also involve identifying when sales of its BlackBerry Wonderland the Cheshire cat which actions not to take. Strategy smartphones fell sharply—bosses tells Alice that if you don’t know is also vital for companies who had failed to anticipate Apple’s where you are going, “it doesn’t want to lead the market—most do more advanced iPhone. matter which way you go.” This is so by offering a product or service a trap that businesses must avoid— that is either the cheapest or the Keeping a balance the starting point for any new best. There are numerous business Companies should always balance venture is having a goal and there models and theories that can be long- and short-term objectives. must be a clear strategy as to how followed to devise a successful The board must keep the long-term to get there. It is also essential to strategy. Leading US strategist vision in sight, but in the short term have a vision of what success will be Michael Porter, for example, has they need to make decisions that like once that goal has been reached. provided organizations with ideas allow them to create enough profit This vision must be shared and to help them analyze their market, to stay in business—a precarious understood by everyone so that the understand the competitive forces balancing act, particularly in an company has a common objective. at play, and position themselves for uncertain world. It is impossible competitive advantage. to predict what the future will Following a vision bring, so executives often use Making decisions about a good Once the board of a company has scenario planning by asking business strategy starts with critical agreed a strategic direction, it must “what if?” questions. Assessing the analysis, such as SWOT analysis, be prepared to change course if the likelihood of unwanted events does need arises—but always keeping not remove uncertainty, but it does Determine that the thing the original vision in mind. In help to avoid complete surprises. can and shall be done, addition, business leaders should and then we shall be on continual alert for changes in The trend of diversification into find the way. the external environment. Avoiding unrelated businesses has declined Abraham Lincoln complacency is crucial, since the recently, and companies now focus pace of business and change is on the core business. Management US former president (1809–65) constantly increasing. Competition experts C. K. Prahalad and Gary is fierce, and companies must Hamel argued that a company’s innovate if they want to stay at the ability to consolidate its strengths top and avoid being overtaken or into core competencies can provide becoming outdated. There are a competitive edge over rivals. many examples of companies who failured to do this, such as Research Flexibility in Motion (now known as BlackBerry Globalization, technology, and a Ltd), the Canadian technology changing world order have made company whose business suffered business far more complex.

WORKING WITH A VISION 163 Hierarchical structures tend to to manage chaos and use it as an or at a kitchen table. The important be inflexible, so the emphasis opportunity to grow and refresh thing is that companies should not today is on nonhierarchical the business. only offer what people want, but structures, empowering people, also make it easy for consumers and teamwork. Flexible businesses Business today to reach them online. ensure that everyone is involved Business may be complex in the and can adapt swiftly to change. modern world, but it has never In addition to this is the overall Such organizations collaborate been more interesting or exciting. importance of ethics. “Profit at any with external partners, rather than Physical size no longer equates cost” is no longer an acceptable merely transact with them, thus with success. The Internet changed maxim. There is growing regulation encouraging shared learning. US everything—now small can be on financial reporting and on issues scholar Peter Senge introduced beautiful. Businesses that spring such as bribery. Today’s consumers the concept of the “Learning up offering customized products are increasingly demanding and Organization,” whereby a company in niche markets are often able to discerning: they want to know facilitates the learning of its compete effectively in the global how raw materials are sourced, employees and is able to transform economy. Some of today’s most how products are made, and how itself on a continual basis. Control successful businesses started with the company impacts the by management is replaced by just one person, often in a garage environment. Some companies leadership and direction. have policies and procedures in You have to have vision. It’s place to help create an ethical Organizations with a learning got to be a vision you culture. In this way, employees culture and a shared vision enable know what standards are expected. people with different functions to articulate clearly and forcefully And yet there are still numerous work together to develop ideas, on every occasion. You can’t cases of corporate tax avoidance, make decisions, and create new blow an uncertain trumpet. price-fixing through collusion, and products and services more quickly. excessive risk taking. These issues Staff act as a group of entrepreneurs Father Theodore persist because individuals are rather than as paid employees. Being Hesburgh often motivated by personal gain. able to learn from failure requires a High-profile cases include the 2008 culture in which people are not US priest and scholar (1917–) collapse of the US financial-services criticized for mistakes, since this organization Lehman Brothers early impairs initiative and new ideas. in the global economic crisis. Companies have to learn not However, many of the examples just to deal with chaos but to in this chapter suggest that thrive. In the ever-changing companies who hold a clear vision environment of the 21st-century’s and do the right thing, in the right digital economy, companies have way, are most likely to succeed. ■

164 TURN EVERY DISASTER INTO AN OPPORTUNITY LEARNING FROM FAILURE IN CONTEXT When a company performs an activity, it gains experience. FOCUS Management thinking The company implements The experience gained these better methods provides useful feedback, KEY DATES and approaches in c.560 BCE Chinese philosopher new projects. whether the activity Lao Tzu says that failure is the succeeded or not. foundation of success and the means by which it is achieved. The company must analyze the feedback to find out what could be done 1960s Soichiro Honda, founder differently and better. of the Honda Motor Company, says that “success can only be Every disaster is an opportunity for learning. achieved through repeated failure and introspection.” T here are many stories of inventor James Dyson produced success built on failure: more than 5,000 prototypes before 1983 Apple Computer Inc. the US inventor Thomas he came up with a successful releases the Lisa computer. Edison failed to register patents bagless vacuum cleaner. Success It is a commercial failure, for his ticker tape machine so felt for entrepreneurs always involves but plays a vital role in the compelled to continue inventing, trial and error, and resilience. US development of the Apple Mac. eventually perfecting the industrialist J. D. Rockefeller, the incandescent light bulb. British world’s first dollar-billionaire, looked 1992 US management professor Sim Sitkin introduces the idea of “intelligent failure” in Learning Through Failure: The Strategy of Small Losses.

WORKING WITH A VISION 165 See also: Managing risk 40–41 ■ Luck (and how to get lucky) 42 ■ Reinventing and adapting 52–57 ■ Creativity and invention 72–73 ■ Beware the yes-men 74–75 ■ Thinking outside the box 88–89 ■ The learning organization 202–07 to “turn every disaster into an this principle into their culture. US I have not failed. opportunity.” As the world turned corporation 3M, for example, allows I’ve just found 10,000 ways to electric lighting from kerosene oil technical staff to allocate 15 percent lamps, his business was threatened. of their time to experimenting with that won’t work. However, he quickly saw the ideas, understanding that there will Thomas A. Edison potential of Ford’s automobile and be occasional winners (such as the realized that oil could just as easily Post-it Note) along with the US inventor (1847–1931) be converted to gasoline as repeated failures. kerosene. His fortune rocketed. The world’s third-largest retailer, Recognizing error, cutting Tesco, opened its Fresh & Easy Constant learning losses, spotting new opportunities, stores in the US in 2007. After six Personal experience is recognized and changing course is a test of years and $2.27 billion in costs, as the way individuals learn, and it leadership and also sends out a it admitted failure and pulled out. is much the same for organizations; positive message to those who The stores were unsuccessful they gain knowledge and capability work in the organization. It requires because Tesco misjudged the from corporate experience. The rational, unemotional thought that shopping habits of its target pace of change in the global market focuses on the costs and benefits customers. Chairman Richard means that constant improvement of changing direction. Broadbent said they had learned has become the norm. The greatest the value of remaining open- challenge, however, is for In the mid-1980s, the Coca-Cola minded about projects. Flexibility, companies to recognize failure and Company decided to replace its feedback, and fast response are key learn from it. In order to do this, an original formula with a sweeter to finding a new path via failure. ■ organization needs to build a product: New Coke. In the US, this culture in which people are not prompted consumer protests. The criticized or penalized for mistakes, company learned that US consumers but are actively encouraged to gain were protective of Coca-Cola and useful insights from them. felt unhappy about any tampering with the recipe. The CEO quickly Some companies recognize that reintroduced the original formula as it is only through failure that Coke Classic. By responding quickly, success can be found, and build he grasped an opportunity for significant publicity; sales soared. J. D. Rockefeller John Davidson Rockefeller was exclusive deal with the railroad born in 1839 in Richford, NY. company to transport his oil, At age 16, he took a job as an putting all his competitors out assistant bookkeeper with a of business. Standard Oil gained commission-merchants business. a monopoly position first in Just four years later, he set up Cleveland and then in the US. his own, similar company with In 1902 his monopoly in refining, a partner: it grossed $450,000 transporting, and marketing oil in the first year. He then opened made headline news and the his first oil refinery in 1863, company was broken up by the founding Standard Oil. US Supreme Court in 1911. Rockefeller’s business interests Rockefeller then became the made him the richest person in world’s greatest philanthropist, the world at the time, but his giving away around $350 practices were unpopular. million, and setting up many Realizing the value of effective charitable institutes. He died distribution, he arranged an in 1937, at 97 years old.

166 IN CONTEXT IF I HAD ASKED FOCUS PEOPLE WHAT Market leaders THEY WANTED, THEY WOULD HAVE KEY DATES SAID FASTER HORSES 1780s British inventor Richard Arkwright devises a complete LEADING THE MARKET mechanized system for the production of yarn on an industrialized scale. 1860s US general Nathan Bedford Forrest claims the key to military success is “to get there first with the most men.” 1989 Dutch businessman Arie de Geus suggests that a company’s only sustainable competitive advantage is its ability to learn faster than its competitors. 1994 Al Ries and Jack Trout publish The 22 Immutable Laws of Marketing, in which they outline the advantages of being first to market. B usiness logic often dictates: hold back; let someone else go first, incur the costs, and make mistakes. But there are many examples of significant advantages for companies first off the mark. A company that leads the way into a new market gains a competitive advantage, which might enable it to dominate over the long term. Richard Arkwright, the inventor of the modern factory system, is an example. He devised the first complete mechanized system for the spinning of cotton yarn in the 18th century in Britain. His patents were overturned just five years after they were filed, but his head start ensured that he

WORKING WITH A VISION 167 See also: Stand out in the market 28–31 ■ Gaining an edge 32–39 ■ Balancing long- versus short-termism 190–91 ■ The value chain 216–17 Consumers do not When a company innovate—they are happy introduces a totally new with a better version of concept, it creates a new an existing product. market and is “first” in consumers’ minds. Even if competition The company gains Henry Ford arrives, consumers the competitive continue to associate Henry Ford was born in the first company with advantage of being Michigan, US, in 1863. He was first to market. always fascinated by the concept. machines, and as a child built rudimentary steam engines. A company that leads the way He left school at 15 to work on can dominate the market. his father’s farm, but in 1879 he moved to Detroit to work as continued to dominate the market. using a moving assembly line to an apprentice at the Michigan The knowledge he had gained reduce production costs. By 1918, Car Company, which made enabled him to improve his water- Ford Motor Company was the clear railroad cars. He moved home powered spinning frame. leader in the US automobile market for a while, and did several —the Model T made up half of all engineering jobs, before Moving ahead cars in the US. Ford continued to returning to Detroit to work as Henry Ford did not invent the lead the market until the mid-1930s. an engineer for the Edison automobile, but he did develop the Illuminating Company. first affordable car for middle-class Moving ahead of others in a Americans at the beginning of the market involves risk. By taking the At the same time, Ford 20th century. Most people had never initiative—with an innovative began to make a gasoline- aspired to owning a car because product, new technology, lower driven car, Thin Lizzie, in his they were seen as a luxury item for prices, better distribution, garden shed. He persuaded a the wealthy, and, as Ford said at promotional offers, or forceful group of businessmen to back the time, most people would have advertising campaigns—a company him, but a lack of experience been happier with “a faster horse.” creates an opportunity to seize the led to business failure—twice. leadership position. Organizations His third business—the Ford Ford, like Arkwright, succeeded may seek such an advantage Motor Company—was formed because of a technical edge. His because their strategy and in 1903. Its first car, the Model idea was that of mass production, approach is always to lead into ❯❯ A, was followed by several other models until the company struck gold with the Model T: “a motorcar for the multitude.” By 1925 Ford was producing 10,000 cars every 24 hours, producing 60 percent of the US’s total output of cars. His last great innovation—at the age of 69—was the V8 engine. He died in 1947.

168 LEADING THE MARKET Yarn spinning was the first activity to become entirely mechanized. The British government restricted export of this technology, maintaining its first-mover advantage for as long as possible. a new market, such as Gillette, the superior products. Sony is one In 1979 Sony introduced the Sony men’s grooming business, with its example of a technology company Walkman, the first portable music- long-held policy to be the “first to that led the market for around 20 listening device. Just as Ford had get it right.” Some companies years, until competition from new changed the way people traveled, choose not to do this; Samsung, for technology arrived. Sony changed music-listening example, aims to be a fast follower, habits—and lifestyles. Its launch having learned from competitors. Sony’s corporate philosophy is coincided with the aerobics craze, built on “doing things that no one and millions used the Walkman First-mover advantage else is willing to do.” The business to add music to their exercise Being first to market gives a was set up in the ruins of Tokyo workouts. Between 1987 and 1997, company “first-mover advantage,” after World War II, and the founder the height of the Walkman’s which can be long-lasting or Ibuka Masaru was determined to popularity, the number of people short-lived. Long-term advantage develop leading-edge products and starting to walk as exercise brings durable benefits, either by get them to market faster than the increased by 30 percent, according creating an entirely new market, competition. This idea became a to Time magazine. Sony sold 200 or by improving a company’s personal obsession for Ibuka and million of their portable cassette market share over a long period. his successor, Morita Akio. players, and by 1986 the word Companies that succeed in “Walkman” had entered the Oxford building long-term advantage It’s not the consumers’ English Dictionary. often dominate their product job to know what categories for many years. Hoover they want. The Walkman evolved from and Post-it Notes, for example, Steve Jobs cassette to CD technology, and were so successful in their market consumers were happy with their sectors that their brand names US former CEO of Apple (1955–2011) portable music players until 2001, have become generic terms. when Apple CEO Steve Jobs said: “The coolest thing about the iPod Short-term advantage typically is that your whole music library fits occurs because it is based on new in your pocket.” So began a new technology. Today, innovation is industry, based on portable digital exceptionally fast in many sectors, music, and dominated by market- with increasingly shorter gaps leader Apple. between new introductions and Being first is everything Leading the way often depends on the product being embraced by “early adopters”—consumers who are willing to pay a price premium to be the first to own something. This happened with the launch of Apple’s iPhone in the summer of 2007. Even though the price was reduced a few months after launch, those who had bought at the higher launch price did not resent it due to the cachet of being at the forefront of the latest trends and fashion.

WORKING WITH A VISION 169 As long as products remain the only fighting a product battle rooted in The key to success for one of their kind available, the reality. But consumers are not Sony, and to everything company that is first to market has a concerned with reality; they make in business … is never monopoly position; this means it can purchases based on perception. set the price, establish loyalty, and “Being first in the mind is everything to follow the others. build a reputation before competitors in marketing. Being first into the Ibuka Masaru catch up. When competition does marketplace is important only to the arrive, the first-mover still has the extent that it allows you to get into Japanese co-founder of Sony advantage, because it has the mind first,” say Ries and Trout. (1908–99) established itself. This is generally the case even when subsequent The car in front an environmentally friendly driving products are better than the first. Japanese car manufacturer Toyota option. Second, creating a hybrid car tries to be first to market, and would increase access to new and It’s all in the mind imparts this message in the minds existing markets, such as the US, Al Ries and Jack Trout, authors of of consumers with the slogan: “The where emissions legislation would The 22 Immutable Laws of car in front is a Toyota.” Toyota was favor a hybrid car. Third, it would Marketing, developed a theory of the first company to introduce a enhance Toyota’s image, because of why the first company to market hybrid car—with an engine drawing its clear message of the company’s can continue to dominate. They power from both gas and electricity commitment to environmental proposed that the customer’s —to market. Its Prius went on protection, while at the same time perception of where a product or sale in Japan in 1997. Several generating excitement about service sits in the market is of manufacturers were considering Toyota’s new products and the utmost importance, claiming that the concept of a hybrid car in the company‘s innovative capabilities. “it is better to be first than it is to 1980s, but combining an internal be better.” It is easier to get into the combustion engine and an electric The Prius went on sale consumers’ minds first than to motor required significant worldwide in 2001, and more than dislodge a product or service from investment. Despite this, Toyota ten years later Toyota continued their minds and convince them that knew that if they could lead the to lead the hybrid market. The Prius your company has a better product. way, there would be a number of was the top-selling car in California Ries and Trout argued that most advantages for the company. First, in 2012, giving Toyota a 21.1 marketing stems from the Toyota would gain early-adopter percent market share, compared to assumption that companies are consumers who were looking for closest rival Honda’s 12.5 percent. Although other companies, such as Ford and Nissan, have now developed their own hybrid models, Toyota’s first move into the market continues to yield benefits in an ever-growing market. ■ The Prius gas-electric hybrid has won a sizable share of the low-emissions market for Toyota. The company was willing to invest significant development funds in return for a market-leading position.

170 THE MAIN THING TO REMEMBER IS, THE MAIN THING IS THE MAIN THING PROTECT THE CORE BUSINESS IN CONTEXT Businesses are usually This skill gives the very good at one company a competitive FOCUS Business strategy thing, such as making advantage. computer chips. KEY DATES 1900s–1950s Growth of ...the core business may If the company diversifies large, vertically integrated begin to fail. into noncore businesses or corporations that control and own their assets, requiring outsources some complex and multilayered functions to unreliable management structures. third parties... 1950s–1990s Organizations begin to expand by acquiring The main thing to remember is, unrelated businesses. the main thing is the main thing. 1990 Business experts T he expression “Jack of all on using that advantage rather than C. K. Prahalad and Gary Hamel trades” refers to someone branching out with something new. introduce the idea of “core who can do many things, The core business is the “main competencies” in their but is not particularly good at any thing” at the heart of a company’s Harvard Business Review one thing. Unless a company is able operation, and organizations must article “The Core Competence to maximize its competitive remember that “the main thing is of the Corporation”. advantage over its competitors, the the main thing,” according to same can also be true in the world Brigadier General Gary Huffman 1995 US companies start to of business. Success usually relies of the US Army. When a company outsource functions to companies “offshore,” such as businesses located in India. 2000s Companies begin to sell off unrelated businesses to refocus on their core.

WORKING WITH A VISION 171 See also: Study the competition 24–27 ■ Stand out in the market 28–31 ■ Gaining an edge 32–39 ■ Porter’s generic strategies 178–83 ■ Why takeovers disappoint 186–87 ■ The MABA matrix 192–93 is struggling to win sales for its some companies decided to McDonald’s acquired several food core product, it may be tempting “outsource”—contracting a business chains, such as Donatos Pizzeria, during to consider diversifying, but this activity to an outside company— the 1990s in an attempt to enter new often ends up being a distraction. peripheral activities that they had market sectors. In 2003, it sold them to previously performed internally. refocus on its core business—burgers. During the second half of the The trend of outsourcing gathered 20th century, there was a trend momentum as companies realized internal functions and customer for companies to acquire unrelated they could cut their business back interaction. Outsourcing is useful businesses. Gillette, a leader in to the core and achieve leaner, more for lesser functions, but only as long razors, bought PaperMate pens; efficient, cost-effective operations. as it works well—if it fails, it can Dalgety, which made Homepride adversely affect the core business. Flour, acquired a pig-breeding For example, a company that company; and Cadbury, best known manufactures refrigerators may Whenever companies outsource for candy, took control of Schweppes decide that its core business is or acquire a separate business to beverage business. The trend began simply the design, manufacture, take over a peripheral function, it is to turn in 2003, when McDonald’s and marketing of those refrigerators. vital that management take steps began to sell off diverse restaurant It might outsource delivery (which it to protect the “main thing.” Any chains it had acquired, including sees as not adding value), and its secondary units or third parties a pizza brand purchased during the information technology (IT) needs must be fully aligned with the vision 1990s. This was because it wanted (which it views as a specialized and values of the organization. ■ to focus on its core business: function). In the short term, handing McDonald’s. Other companies over these activities to a third party soon began to divest unrelated would seem to make sense. But in businesses to protect the core. the long term, it could be a mistake. Delivery might be an important part Understanding the core of customers’ perceptions of the The theory behind selling secondary product, and the business could interests is that the business should suffer if the outsourced delivery focus its energy and resources on company is unreliable. Similarly, what it is good at. This idea was IT is increasingly integral to the taken further during the 1990s, when success of a business, both for Core competencies If you cannot be the best An organization has a particular Prahalad and Hamel describe in the world at your core set of diverse production skills the corporation as a tree. business, then your core and individual technologies. Its roots are its unique These are its core competencies, competencies, and from these business absolutely according to business experts roots grow the organization’s cannot form the basis C. K. Prahalad and Gary Hamel. core products, which in turn of a great company. Unlike physical assets, which nourish separate business units. inevitably deteriorate over From these business units come Jim Collins time, competencies become the end products. The idea of enhanced, because they are core competencies can be used US business expert (1958–) applied and shared. They are to identify those things within strengthened by involvement, an organization that are not communication, and a shared “at the core,” which might be commitment to working across a distraction, consuming a an organization’s boundaries. company’s valuable resources.

YOU DON’T NEED A HUGE COMPANY JUST A COMPUTER AND A PART-TIME PERSON SMALL IS BEAUTIFUL



174 SMALL IS BEAUTIFUL IN CONTEXT W hen British computer world’s largest search engine. scientist Tim Berners- By 2013, Google employed 30,000 FOCUS Lee harnessed the people worldwide, of whom around Internet business Internet to develop the World Wide 53 percent worked in research and Web, he was simply creating a development, which may explain KEY DATES way of sharing information. It was the company’s phenomenal growth. 1974 US computer scientists not viewed as a money-making Vent Cerf and Bob Kahn exercise. However, the Internet’s Doing business on the web design the first Transmission disruptive power soon became clear: As two-way communication over Control Program, enabling it would change business and our the Internet became a reality computers to talk to each other. way of life, enabling commerce to during the 1990s, organizations be conducted by a profusion of began to see the potential offered 1977 The first electronic mail individuals and organizations. by the new e-commerce platform. (“email”) is sent, via the US The first books were sold online Department of Defense’s Early search engines were in 1992, and in 1994 Pizza Hut in ARPANET. invented as an increasing amount Santa Cruz, California enabled of information became available on people to order a pizza delivery 1991 The World Wide Web the web. Larry Page and Sergey via the Internet. (WWW), the first widely Brin, two US computer science accessible system to share students, designed a search engine The idea of online selling took off data files via the Internet, is that could quickly search all the in 1995 when Jeff Bezos dispatched released by Tim Berners-Lee. available documents and generate the first book sold by Amazon.com, highly relevant results. In then located in his Seattle garage. 1993 Netscape launches September 1998 they set up a Around the same time, software Mosaic, the first commercial work space in a friend’s garage and programmer Pierre Omidyar was Internet browser. opened a bank account in the name starting a simple website called of Google Inc. The soon-to-be giant AuctionWeb from his San Jose 2013 More than two million company began, as Page said, with living room. The first product he third-party sellers use Amazon no more than “a computer and a posted for sale was a broken laser to reach their customers. part-time person.” pointer. It sold for $14.83. Omidyar recognized the Internet’s power to Within a year Google had 40 reach individual customers, employees, and in June 2000 anywhere in the world, when he announced its first billion-URL checked whether the buyer index, making it officially the Larry Page Born in 1973 in Michigan, created a search engine called Lawrence (Larry) Page was BackRub, which operated on exposed to computer technology Stanford servers until it outgrew at an early age; his father was a their capacity. The pair worked pioneer in computer science and together on a bigger and better his mother taught computer version, which they named programming. Page studied Google after the mathematical engineering at the University of term “Googol”—the number 1 Michigan and then completed a followed by 100 zeros. Page and Masters in computer engineering Brin were jointly awarded the at Stanford University. Marconi Prize in 2004, and Page was elected to the US National On his first visit to the campus, Academy of Engineering in Page was shown around by fellow 2004. Today Google is the postgraduate student Sergey Brin, world’s most popular search who would later be the co-founder engine, handling more than 5 of Google. During a research billion search queries every day. project in 1997, Page and Brin

WORKING WITH A VISION 175 See also: Beating the odds at start-up 20–21 ■ How fast to grow 44–45 ■ The weightless start-up 62–63 ■ Creativity and invention 72–73 ■ The long tail 212–13 ■ M-commerce 276–77 ■ Feedback and innovation 312–13 A seller in Japan can A buyer in India source and sell a blue, wants to buy a green, customized widget. customized widget. The Internet connects buyers You don’t need a and sellers, and manufacturers huge company, just and suppliers; it acts as a global a computer and a marketplace. part-time person. A seller in Poland can A buyer in France source and sell a green, wants to buy a blue, customized widget. customized widget. understood that the pointer was an auction service, eBay sees itself Before the existence of the Internet, broken. The buyer assured him that as in the business of linking users, if someone wanted to sell their he was a collector of broken laser not selling them things. products, a physical presence was pointers. One year later, with two necessary: a store, market stall, or full-time employees, the soon-to-be- Starting small going door-to-door. Generally, the renamed eBay sold goods to the Both eBay and Amazon started bigger the presence, the more value of $7.2 million. By acting as small, and their platforms have successful the business. Success ❯❯ empowered countless other small A business succeeds not businesses around the world. Their In the pre-Internet age, vast numbers because it is long established pioneering use of the Internet of people were often necessary for changed the way that businesses administration. The combined power or because it is big, but and consumers interact, putting of computing and the Internet changed because there are men and buyers and sellers in touch with organizational structures forever. one another in a way that had not women in it who live it, been possible before. Amazon and sleep it, dream it. eBay demonstrate the power of the J. W. Marriott idea that “small is beautiful.” Anyone can sell products from their US businessman (1932–) platforms, from individuals selling unique items to “power sellers” who set up virtual stores, either within the platform or linked to it. In the online marketplace the same opportunities exist for every business, whether large or small.

176 SMALL IS BEAUTIFUL In the digital, networked economy, people can work anywhere, at any time. This shift in working habits is changing the face of business environments and staff distribution. purchase; cost and speed of delivery are critical too. Free shipping and free returns are attractive incentives to purchase. Time of delivery is also important: retailers who can offer one-hour time slots and deliver beyond the traditional working day gain a competitive edge. Customer service is more important than ever. in retail, for example, traditionally Today, however, the Internet is free Feedback is king relied on a prominent store on a and technology prices are relatively Whatever the goods being sold, town’s main street, where the inexpensive. Cloud computing— they must be of the quality stated, retailer could attract the largest whereby organizations share virtual because feedback on the Internet number of customers through the infrastructure, software, and can have a powerful effect on the door. Companies often depended storage —has enabled small market. For hotels and restaurants, on a large sales force, who visited businesses to have access to the feedback and ratings by customers customers to build relationships. power of integrated networks and are now the norm, and many Businesses held significant computing at a very low cost, and consumers base their purchasing amounts of stock in warehouses, with no use of physical space. decisions on other people’s and had a large office staff to take comments. A well-run, small, phone calls and handle paperwork. Just as scale is no barrier to family-owned hotel, which focuses That has all changed. success, neither is geography. on excellent service and delighting A small business can now reach its guests, can build a reputation as Consumers can now find retailers customers all over the world just the number one place to stay in a large or small via the Internet from a as effectively as a large one. It is particular town—ahead of a big laptop, smartphone, or tablet. The possible to live on one side of the chain hotel—because of review physical scale of a business no longer globe and sell items from an entirely websites such as Trip Advisor. correlates with success. Many different continent. The introduction businesses no longer need large of PayPal in 2000 allowed simple The Internet is really offices. Paperwork has diminished, payment and money transfers in a about highly specialized while online communication—email, wide range of currencies via the instant messaging, and social media Internet, furthering opportunities information, highly —allows sole-traders and employed for small companies to operate as specialized targeting. people alike to work remotely, from global e-commerce businesses. home, anywhere in the world. Eric Schmidt Competing with giants Large companies used to be With an increasing choice of goods US former CEO of Google more competitive than small and services available online for (1955–) companies because they had better consumers, small businesses must economies of scale (the cost offer something more than the giants advantages that enterprises obtain in order to compete. Price is critical due to size). When computers were because consumers can easily first developed, this continued to be compare prices online. But it is not true, because large, costly servers the only factor that affects an online were required for file storage.

WORKING WITH A VISION 177 Small businesses can receive market information just as quickly as large companies thanks to the Internet, but due to their size are often better placed to respond quickly and adapt to changes in demand, supply niche products, and deliver a more personalized approach. The Web does not just connect machines, it connects people. Sir Tim Berners-Lee UK inventor of the World Wide Web (1955–) Organizations recognize the power Large Small Online of feedback and often encourage market customers to post comments business business information online. Fashion retailers, furniture manufacturers, and retail stores— offerings. People wanting to buy a Although small businesses can even dental and medical practices spare part for an old car, or a rare thrive on the Internet through their —invite customers to comment on edition of a book, can search and own websites, many now use portal and share their experiences. Small buy from anywhere in the world. websites as a “store window” to companies benefit from this trend, reach a wider audience. The British since their personal service is more Small companies can also thrive company Not on the High Street is likely to generate positive reviews. through customization. Digital one such portal. Started by two methods of production and online working mothers as a marketplace A more personal service retailing enable narrowly targeted for personalized creative items, it The Internet has removed the goods and services to be profitable. launched in 2006 with 100 small “middle man” from many areas of Customized production of a single businesses (many of them women business. The travel industry is one item is possible—from personalized working at home). In 2013, the example, since travelers can now books, mugs, and clothing to business had grown to include book direct with airlines. Another customized cars, furniture, and 1,600 partners and had a turnover example is the book industry, where even houses, which can be of more than $23 million. authors can self-publish via the designed and tailored online. Internet, taking their fiction straight Not on the High Street is to readers without the need for Customers can get exactly the successful because it combines the literary agents or big publishing item they want, delivered at the idea of personalized products with houses. The runaway success Fifty right time and at a price they are an awareness of the producer, giving Shades of Grey by E.L. James began willing to pay. Websites offering buyers the chance to select a local life as a free ebook on the Internet. personalized printed items are maker. Although it promotes global small businesses with software trade, the Internet can enable a very Previously, mass production and that allows consumers to approve personal form of communication limited space in brick-and-mortar the final design and send it straight between buyer and seller, regardless stores dictated the range of goods to print, so employees are only of size or scale. ■ a business could stock. Now, small needed for packing and shipping. businesses selling niche products or services can thrive because the Internet connects them to consumers looking for exactly these

DON’T GET CAUGHT IN THE MIDDLE PORTER’S GENERIC STRATEGIES



180 PORTER’S GENERIC STRATEGIES IN CONTEXT Companies need to find a competitive advantage. They can do this by offering customers... FOCUS Business strategy ...the cheapest ...a product or service product or service that is outstandingly KEY DATES on the market. This is good in some way. 1776 UK economist Adam the strategy of cost Smith introduces the concept This is the strategy of comparative advantage, leadership. of differentiation. where one party has the ability to produce a particular good or Be the cheapest or the best; service at a lower marginal don’t get caught in the middle. cost than another. 1960 US economist Theodore Levitt says that rather than finding a customer for their existing product, businesses should find out what customers want, and produce it for them. 1985 Michael Porter publishes Competitive Advantage. 2005 Professors W. Chan Kim and Renée Mauborgne recommend a “blue ocean” strategy for generating growth and profits, in which new demand is created in an uncontested market space. C onsumers have choice. his idea in Competitive Advantage: strategy,” offering a specialized And different consumers Creating and Sustaining Superior service in a niche market. This will choose differently— Performance (1985). Porter used a position can be applied to both some like to pay the most for the four-celled matrix to represent the of the initial generic strategies, luxurious option, while others will four different generic strategies resulting in a cost-focus strategy always opt for the cheapest. in his theory. (where the company aims to be Companies recognize this and cheapest within a niche market) or a pitch their business at a particular Companies generally choose differentiation-focus strategy (where group of consumers. This is between two generic strategies: the company offers unique products because it is never wise for a either “cost leadership,” where they or services within a niche market). company to be caught between aim to be the cheapest in the groups of customers. market; or “differentiation,” where Cost-leadership strategy they create unique products or Companies pursuing a cost- Harvard Business School services. However, there is another leadership strategy have two professor Michael Porter proposed element that can be added to these options. They can choose to sell “generic strategies” for gaining two generic strategies: a company products at average industry prices competitive advantage, explaining might choose to pursue a “focus

WORKING WITH A VISION 181 See also: Gaining an edge 32–39 ■ Leading the market 166–69 ■ Good and bad strategy 184–85 ■ The MABA matrix 192–93 ■ Porter’s five forces 212–15 ■ The value chain 216–17 Once stuck in the middle, leadership have to be confident that This strategy is more appropriate in it usually takes time they can both achieve the number markets where products are not and sustained effort to one position, and also maintain it. price sensitive, and customers’ Several requirements must be met needs are typically underserved. It extricate the company from to achieve this, including: a low also means being able to satisfy this unenviable position. cost base (across labor, materials, those needs in ways that are Michael Porter and facilities); efficient technology; difficult to copy. efficient purchasing; well-organized to earn a greater margin than and cost-effective distribution; and Bose Systems is a company that competitors; or sell at below industry access to capital for any required pursues a differentiation strategy. prices to gain more market share. investment, to keep costs down. A privately owned US audio Some supermarkets, such as German electronics company, it consistently retailer Aldi and UK company Tesco, These low-cost principles are reinvests profits to fund innovation. take the low-price approach to cost not exclusive to any one company, Customer-focused research has led leadership. They achieve this by however, and the risk is that they to Bose’s dominant position; their purchasing large volumes from close- are easily replicated. Companies noise-canceling headphones and relationship suppliers, and offer the pursuing a cost-leadership strategy stylish speakers have become customer “deep discounts.” Their have to build in continuous aspirational items. slogans— Tesco’s “Every little helps” improvement in all their processes to and Aldi’s “Like brands, only ensure the company can keep costs The approach to differentiation cheaper”—convey their drive to pass below those of other competitors. will vary according to the products savings on to the consumer. and services, and the nature of the Differentiation strategy particular industry, but typically Porter suggests that to pursue a A company that pursues a involves additional features and cost-leadership strategy, a company differentiation strategy has to make functionality, enhanced durability, has to be the leader in terms of cost markedly different products or and better customer service. in their industry or market, rather services from competitors, so they Companies that choose to pursue than be among a group of low-cost have greater appeal to consumers. this strategy require certain producers, because this makes fundamentals in place, including ❯❯ them vulnerable. With fierce competition there is always the chance for other low-cost producers to reduce prices, and so take market share. Companies that choose cost Bose Systems is an audio specialist that pursues a differentiation strategy. It distinguishes itself from competitors through research and development, which results in innovative technology.

182 PORTER’S GENERIC STRATEGIES good research and development, an Whichever focus a company Every company competing innovative culture, and the ability to chooses, it must do so on the basis in an industry has a deliver consistently high-quality that it can successfully compete competitive strategy, products or services. This needs to on the strength of a particular be supported by effective marketing, ability or competence that will whether explicit or implicit. so that the differentiation is help it in its chosen market niche. Michael Porter positioned and communicated to If the company aims for cost customers. Brand image is integral, leadership in a niche market, for offers only a few routes. Airlines and is often strengthened by the example, it has to be based on tend to focus on a particular group nature of the differentiation. distinctive relationships that have of travelers as an effective way of been developed with specialized achieving competitive advantage in Focus strategy suppliers. If the company goes for a crowded market, for example by Companies pursuing a focus differentiation in a niche market, offering discounted travel or a more strategy choose a particular niche on the other hand, it has to be on luxurious traveling experience. market. They have to understand the the strength of a deep understanding dynamics of that market and the of customer needs. However, a Low-cost, Ireland-based airline unique needs of customers within it, company that chooses to focus on Ryanair has championed the idea and then develop either low-cost or a small market segment because of cost leadership, and describes well-specified products or services. it is too small to serve the larger itself as “Europe’s only ultralow They also tend to serve their market risks being sidelined by cost carrier.” The notion of a low- customers well, and so build strong bigger companies with distinctive cost airline was pioneered by brand loyalty. This makes their abilities, which enable them to Texas-based Southwest Airlines, particular market segment less better position their offerings. and Ryanair followed with similar attractive to potential new entrants. principles: use a single plane type Airline strategies to keep costs down, constantly Ferrari is an example of a The airline industry illustrates review overheads, turn aircraft company in a niche market that has Porter’s idea. Consumers have a around as quickly as possible, and chosen to differentiate itself. The choice when they book an airline do not offer a loyalty plan. company targets the limited high- ticket. They can choose between a performance sports-car segment, no-frills airline or a more expensive Ryanair bought 100 Boeing 737- and its cars are differentiated operator offering better service, 800 passenger jets at a significant through high-spec design, high- quality, and comfort. There may also discount in 2002. Starting with performance, and the company’s be a third option: a small airline that newer, more fuel-efficient planes Grand Prix association. than many rivals, Ryanair could afford to fill its planes with COMPETITIVE SCOPE Cost leadership Differentiation Porter’s generic passengers buying low-price tickets. Niche markets Large markets business strategies However, Ryanair could make a Cost focus Differentiation fall within two basic profit because passengers would also focus categories: lowest spend money on areas such as cost or marked on-board food and hotel reservations. differentiation. Companies can Ryanair is able to increase profits choose between year after year since it continually these approaches looks for ways to keep costs down whether they are and charge customers for extras. small or large, and whether they are operating in broad target markets, or niche ones. Lowest cost Markedly different SOURCE OF COMPETITIVE ADVANTAGE

WORKING WITH A VISION 183 Singapore Airlines’ customer service ethic is personified by “The Singapore Girl,” who portrays the idea of Asian hospitality. Her image has become a successful brand icon. These include being the first airline Singapore Airlines recognizes that around service excellence mean to implement baggage charges; innovation is short-lived in the that customers are more than working to eliminate the need for airline industry. New features and happy to pay a premium price. check-in desks (by offering online ideas can easily be copied by other check-in facilities); and charging for airlines, so it continues to invest Porter’s generic business options such as seat reservation heavily in innovation and technology strategies can be used by any and priority boarding. This as an integral part of achieving its company to achieve a competitive consistent search for new ways to differentiation strategy. The airline advantage. However, the transform costs is the essence of runs a comprehensive and rigorous competitive environment consists the cost-leadership strategy. In the training program for cabin- and of more than just present rivals; 12 months ending March 31, 2013, flight-crew to ensure the customer’s changes in the industry and Ryanair transported nearly 80 in-flight experience is consistently environment add to a constantly million passengers and announced excellent. The success of its brand changing business context. For this record profits of $753 million, strategy and its entire positioning reason, strategy choice must be despite a rise in fuel costs. regularly reviewed and checked. ■ Singapore Airlines (SIA) by contrast, pursues a differentiation strategy. The brand’s major drivers are groundbreaking technology, innovation, quality, and excellent customer service. It maintains the youngest fleet of aircraft among major air carriers, and keeps to a stringent policy of replacing older aircraft with newer, better models. SIA has always been first to take delivery of new aircraft types. Ice cream with a difference Ben & Jerry’s ice cream is now part Quirky flavor names—such as Consumers are prepared to of the Unilever brand, but continues Imagine Whirled Peace, Chubby pay a premium price because to use the differentiation strategy it Hubby, and Brownie Chew of the ice cream’s all-natural, adopted to become a market leader. Gooder—set Ben & Jerry’s ice high-quality ingredients and creams apart. Ben Cohen and innovative flavors—months of Jerry Greenfield started the research go into perfecting the company in 1978 and wanted it to taste. The company’s strategy to be alternative. According to Jerry, differentiate itself from the “if it’s not fun, why do it?” Ben competition extends beyond the claims to have no sense of taste, product. The organization is so he relied on texture (what he active in social campaigns such called “mouth feel”)—big chunks as gay marriage, buys only from of added ingredients such as fruit, fair-trade suppliers, and chocolate, or cookies therefore considers environmental aspects became the brand’s signature. in production and delivery.

184 THE ESSENCE OF STRATEGY IS CHOOSING WHAT NOT TO DO GOOD AND BAD STRATEGY IN CONTEXT S trategy is a concept with Kodak failed to recognize that its roots in military history, film-based photography was effectively FOCUS when army generals planned “what not to do.” Choosing to move away Strategic thinking campaigns of war. Today, it is an from this area could have made Kodak overused and often misunderstood a market leader in digital technology. KEY DATES word in business theory. Put 1960s Strategic planning simply, strategy is the way a and may involve painful decisions. grows in popularity, and is business gets from where it is to It should result in a strategy based enthusiastically adopted in the where it wants to be; it involves on clear goals that capitalizes on new field of management identifying the choices that must the company’s strengths and can consultancy. be made to overcome the obstacles be flexible if external factors change. that lie in the way. Often, choosing 1962 Alfred Chandler’s what not to do is as important as Bad strategy often goes hand in Strategy and Structure sets out what to do. Strategy guru Michael hand with setting a simplistic goal a model in which a company’s Porter first drew attention to this in or vision. Leaders in organizations structure matches its strategy, 1985, then specifically explored it in may use powerful rhetoric about not vice versa. his 1996 article “What is Strategy?” “winning” to motivate staff, but empty goals are easy to set— 1985 Michael Porter’s For businesses, it is just as formulating the strategy required to Competitive Advantage possible to follow bad strategy achieve them is much more difficult. redefines business thinking as good. Richard Rumelt’s Good Executives bent on pursuing a bad on competition, repopularizing Strategy/Bad Strategy (2012) strategy will ignore problems and the ailing field of strategic explained that good strategy thinking in the process. should emerge out of an analysis of the company itself, and its goals. 1990s/2000s Strategy is SWOT analysis (strengths, increasingly practiced as a weaknesses, opportunities, and continuous process by all in a threats) is one of the most popular business, not just by those at systems for such audits, and to be boardroom level. Nokia says effective it should be conducted that strategy should be “a daily among middle managers and part of a manager’s activity.” people across the organization, not just those at the top. Good strategy requires analysis of the competition and any threats to the organization,

WORKING WITH A VISION 185 See also: Protect the core business 170–71 ■ Avoiding complacency 194–201 ■ Richard Rumelt Porter’s five forces 212–15 ■ The value chain 216–17 Professor Richard Rumelt Company A sets out to ...its strengths, (1942–) studied electrical define its strategy for the such as quality of engineering at the University coming years. It conducts manufacturing... of California, Berkeley, before analysis to understand... going on to receive a doctorate in business administration ...its opportunities, ...its weaknesses, from Harvard Business School such as developing new such as manufacturing in 1972. He worked as a products or going into capacity or the availability systems engineer at NASA’s Jet Propulsion Laboratories different markets... of skilled labor... while also serving on the faculty of Harvard Business ...and its threats, Company A must School. In 1976 he joined such as the strength of the set clear goals and the Anderson School of competition, or shortage decide where to focus Management at the University of California, where he has of raw materials. its efforts. remained ever since, rising to become Professor of Business and Society. From 1993 to 1996 he taught at INSEAD, the leading French business school at Fontainebleau, near Paris. Rumelt also works as a consultant to several companies and governments. The essence of strategy is choosing Key works what not to do. 1982 Diversity and Profitability be blinded to the choices available. digital camera, but the senior 1991 How Much Does Industry Rather than making tough decisions, management of Kodak ignored the Matter? they will try to accommodate a opportunity presented by this new 2012 Good Strategy/Bad multitude of conflicting demands technology. They believed they Strategy and interests to stick to a plan. were in the chemistry-based film Managers in these circumstances business and were not prepared to Good strategy honestly risk following old ideas and paths “kill the golden goose.” Executives acknowledges the that no longer work, rather than failed to see that digital photography leading with new ones. would make film redundant and challenges being faced challenge their near-monopoly and provides an approach Film is dead business. Japanese company The demise of Kodak is a prime Fujifilm, however, recognized the to overcoming them. example of a company following threat and diversified successfully. Richard Rumelt bad strategy. Founded in 1890, by Kodak began its shift to digital the 1970s Kodak was the US market cameras too late, as smartphones leader in the photographic sector, and tablets replaced cameras. with nearly 90 percent of the film The senior executives’ inability to and camera market. It was rated as make the tough decision to change one of the world’s top brands. In course led to the company being 1975 Kodak engineers invented the declared bankrupt in 2012. ■

186   Soytnheerrglyieasnd Why Takeovers Disappoint in context C ompanies have to grow in scale: overhead costs are shared order to survive. One way and money can be saved from focus to make an organization increased buying power. Fixed Mergers and takeovers bigger is to buy (acquire) another costs can also be reduced because and make it part of the original the combined business needs less Key Dates company. Alternatively, two staff in functions such as finance, 1890–1905 The first “takeover businesses can agree to merge, human resources, and marketing, wave” occurs in the US and forming another organization than the two separate entities. Europe, triggered by an with an entirely new identity. The Companies’ also buy businesses to economic depression and purpose of an acquisition or merger acquire new technology, reach new new legislation. is often to increase shareholder markets, or increase distribution. value beyond the sum of the two 1960s Abraham Maslow companies. These benefits are Corporate divorce applies the idea of “synergy” known as “synergy”; the concept In practice, takeovers and mergers to the way that employees in being that one plus one equals three. are rarely marriages made in heaven, organizations work together. a fact underlined by Harold Geneen The reasons for two businesses in the books he co-authored in 1997 2001 US companies AOL and joining together might seem and 1999 on the pretence of synergy. Time Warner merge in a deal compelling. The new, combined Mergers can fail to deliver the value worth $182 billion. It does not company increases sales, market promised, with one plus one often work out, and in 2009 the share, and revenue. It should also equaling less than two. There are companies become separate be a more efficient operation. Bigger many reasons for failure. Hidden entities. companies also enjoy economies of 2007 In the US alone, 144 Synergy is the takeover deals worth more additional value that than $1 billion take place. is created when two business units are 2009 Only 35 takeover deals joined. A holy grail in worth more than $1 billion business circles, take place in the US. academics Campbell and Goold concluded that “synergy initiatives often fall short of management’s expectations”.

working with a vision 187 See also: The Greiner curve 58–61 ■ Organizing teams and talent 80–85 ■ Organizational culture 104–09 ■ Protect the core business 170–71 Company A Company A Company B makes widgets agrees to buy makes widgets and sells them in Company B. The and sells them in legal processes the north. are completed. the south. Company A has New company Company B has Harold Geneen a formal, “AB” is formed an informal, democratic Harold Geneen was born in hierarchical from two culture where Dorset, UK, in 1910, but his culture with companies with staff forms teams parents emigrated soon after highly defined mismatching to match skills his birth and he was raised roles and levels of in the US. He studied management. cultures. to projects. accounting at NYU (New York University) and went on to The new company does not deliver synergy. become a highly successful Takeovers disappoint. businessman in the US. He is best known as the father problems might be discovered after motor markets. The new company, of the conglomerate concept, the deal is done because of the DaimlerChrysler, was dubbed a where a large corporation is limitations on sharing commercially “merger of equals.” But the reality created from seemingly sensitive information prior to was a classic culture clash. Daimler unrelated businesses. In 1959 common ownership. The focus at was a formal, hierarchical he became president and CEO the time of the deal is often on the organization, while Chrysler favored of International Telephone and event of joining together rather than a more team-oriented approach. Telegraph Corporation (ITT), planning what will happen next. Chrysler operated in a market and grew the company from Effective integration requires quick, where low price and catchy design a medium-sized business to a courageous decision making so that were important; high-end Daimler multinational conglomerate. time and momentum are not lost. was focused on quality and luxury. His 18-year tenure included However, the most common 350 acquisitions and mergers reason for failure is that the two Chrysler executives felt in more than 80 different organizations have different undermined in the new alliance countries, including Sheraton approaches and lack synergy. because Daimler tried to dictate Hotels in the US, and the terms on which the new telecommunications In 1998, German car producer business should work and to place companies in Europe and Daimler-Benz bought US its people in key positions. The Brazil. Despite his success and automotive business Chrysler for result was a costly corporate wealth, he was known for his $38 billion. The logic seemed divorce with Daimler-Benz selling no-nonsense values and plain obvious: create a trans-Atlantic Chrysler to a private-equity firm for talking. He died in 1997. powerhouse that would dominate a mere $7 billion in 2007. ■ Key works 1997 The Synergy Myth (with Brent Bowers) 1999 Synergy and Other Lies (with Brent Bowers)

188 THE CHINESE WORD “CRISIS” IS COMPOSED OF TWO CHARACTERS: “DANGER” AND “OPPORTUNITY” CRISIS MANAGEMENT IN CONTEXT M ankind has faced crises affect businesses across the world. throughout history, from Digital, 24/7 communication means FOCUS natural disasters to man- that news travels far and fast. The Business crises made calamities. Businesses face result is that crises may seem to similar crises—internal or external be more prevalent than they were KEY DATES events can pose major threats to during the predigital age. 1987 Ian Mitroff, Paul the organization. Unpredictable in Shrivastava, and Firdaus nature, they require quick decision Responding to crisis Udwadia publish the paper making and action from leaders. The random nature of crises means “Effective Crisis Management.” that they can strike anywhere. Globalization has increased the Typical crises include technological 1988 Shrivastava, Mitroff, complexity of the business world, failure; employee actions, from Danny Miller, and Anil Miglani so an event in one country can say that organizational crisis requires an interdisciplinary A company develops a An unpredictable, approach, using psychological, crisis management major crisis hits the technological-structural and plan covering “who, what, company, requiring social-political perspectives. when, where, and how” for immediate decisions and the first critical hours. 1995 A. Gonzalez-Herrero and actions. C. Pratt suggest a model for crisis management: diagnosis The crisis is effectively Leadership takes of impending trouble; decision managed and, if possible, control and puts the and actions; implementation of crisis management change; and monitoring. turned into an opportunity. plan into action. 2000s Business continuity planning is introduced to deal with terrorism and major technology failure. 2010s Social media allows a crisis to be publicized rapidly, often to a company’s detriment.

WORKING WITH A VISION 189 See also: Managing risk 40–41 ■ Hubris and nemesis 100–03 ■ Learning from Supplier roles in crisis failure 164–65 ■ Contingency planning 210 ■ Coping with chaos 220–21 In their article “The Toyota be minimized and its reputation Group and the Aisin Fire,” even enhanced. As president John authors Toshihiro Nishiguchi F Kennedy said, “in Chinese, the and Alexandre Beaudet word ‘crisis’ is composed of two demonstrated the importance characters—one represents danger of supplier relationships and one represents opportunity.” during a crisis. In 1997, a fire at the plant of one of Toyota’s Tylenol was the top pain reliever Handling a crisis most trusted suppliers, Aisin in the US when it was hit by a crisis: In 1982, Johnson & Johnson reacted Seiki, threatened to halt lethally contaminated capsules. Over to a crisis effectively when Tylenol Toyota-group operations for 30 million bottles were recalled at huge pain-relief capsules sold in the weeks. Aisin Seiki was the cost, but consumer faith was retained. Chicago, IL, area had been laced sole source for a small but with cyanide. The company recalled crucial part used in all Toyota walkouts to fraud; sudden supplier the product, stopped advertising, and vehicles. Only two or three loss or rising prices in raw materials; reintroduced Tylenol in a triple-seal, days’ worth of stock was on and environmental disasters. Every tamper-resistant package. The hand. Toyota’s manufacturing crisis has the potential to damage public felt reassured by the move, plants shut down but were a company’s profits and reputation. and once again trusted the product. reopened after only two days. The extent to which it is able to The recovery was achieved withstand a crisis and limit the At around the same time, another through an immediate and damage is determined by its ability US company tried to contain a largely self-organized effort to respond fast and appropriately. similar crisis using a very different by companies from within and approach. A woman returned a jar outside the Toyota group, who Planning and decisions of Gerber Product’s baby food to set up alternative production Effective crisis management her local supermarket, saying that sites. The collaborative effort involves careful planning, so that if it contained a shard of glass. of more than 200 companies a crisis strikes it can be addressed Gerber ran laboratory tests and was orchestrated with limited in a calm, professional way. This found nothing; the store had lost direct control from Toyota involves quickly establishing the the shard, and the company and with no haggling over “who, what, when, where, and how” decided there was no problem on technical proprietary rights of the crisis within the critical first its production line. However, or financial compensation. few hours. Any crisis—no matter customers in 30 different states how small—is newsworthy, so a then said they too had found glass Effective crisis management company’s public response must in the baby food. The company is a never-ending process, be fast. Public perception affects could find no evidence to support not an event with a consumer trust. these claims, so announced that beginning and an end. they were “being had” by people Ian Mitroff, Leadership during a crisis is wanting to file false liability claims. Paul Shrivastava, particularly important, since swift, They did not recall any products. Firdaus Udwadia effective decision making is critical. Public confidence in the company Every company recognizes that if it fell; some states demanded other handles a crisis well, damage can Gerber products be removed from stores. Although the company’s position was evidence-based, it seemed callously indifferent to the welfare of babies. It lost sight of the essential rule in any crisis: always show commitment to the safety and well-being of your consumers. ■

190 YOU CAN’T GROW LONG-TERM IF YOU CAN’T EAT SHORT-TERM BALANCING LONG- VERSUS SHORT-TERMISM IN CONTEXT If a company only If a company only thinks short-term... thinks long-term... FOCUS Managing objectives ...about immediate issues ...about new products, with customers, wages, new markets, innovation, KEY DATES suppliers, and staff... 1938 US author F. Scott and growth... Fitzgerald writes that “intelligence is the ability ...it becomes outdated ...it runs out of capital to hold two opposed ideas in and creates no new to fund investment. the mind at the same time, opportunities for growth. and still retain the ability to function.” Successful companies have to balance short-term 1994 US business experts James Collins and Jerry and long-term thinking. Porras publish Built To Last: Successful Habits of A successful business has to a company’s sole focus is on new Visionary Companies. balance two different time prospects, it will soon become horizons: short-term and unprofitable. As Jack Welch, CEO of 2009 In The Opposable Mind, long-term. In the short term, a GE, said: “You can’t grow long-term Canadian business professor company needs cash to pay its wages if you can’t eat short-term. Anybody Roger Martin claims that and bills. But if it focuses too much on can manage short. Anybody can great business leaders are able the immedate present, it risks manage long. Balancing those two to use “integrative thinking” to missing opportunities. Conversely, if things is what management is.” creatively resolve the tension in opposing ideas and models.

WORKING WITH A VISION 191 See also: Take the second step 43 ■ How fast to grow 44–45 ■ Effective leadership 78–79 ■ Investment and dividends 126–27 ■ Accountability and governance 130–31 ■ Profit versus cash flow 152–53 In 1994, James Collins and Jerry Today JCB is the third-largest Preserve Porras studied companies such as manufacturer of earth-moving the core General Electric, Marriott, and 3M machinery in the world, with 22 that had been in business for more factories in Europe, Asia, and North Stimulate than a century and that consistently and South America. Bamford can progress outperformed the stock market. invest when and where he chooses. They used the Chinese yin-yang He decided to invest in India by The yin-yang symbol reflects sign—symbolizing complementary opening a factory in 1978, a long- the dual nature of visionary companies, opposites—to explain how term prospect that paid off; JCB according to Collins and Porras. They successful businesses maintain is now market leader there. In 2012, suggest replacing the “tyranny of the control of both the short- and long- JCB opened a factory in Brazil. ‘OR’” with the “genius of the ‘AND.’” term. The organizations they studied were able to manage Unlike many CEOs, who hold a in the business, without regard to contradictory ideas at the same post for a few years then move on, the impact on long-term prospects. time, by focusing on “both … and Bamford saw that balancing the This happened in 2013 at Apple. …” rather than “either … or …” short- and long-term is critical. His They also demonstrated the dual focus has paid off: despite the To ensure the right balance concept by performing well both in worldwide recession, JCB sales between short- and long-term, the short-term and in the long-term. grew 40 percent in 2011 and topped companies often split planning £2.75 ($4.3) billion in 2012. responsibility between different Public and private management teams. This allows In a private limited company (Ltd), In contrast, a typical public the organization to manage the managers can plan for different limited company (plc), owned by immediate operation, while looking time horizons without scrutiny from shareholders and quoted on a stock ahead for growth and innovation. ■ shareholders. Sir Anthony Bamford, exchange, is under greater scrutiny. for example, runs JCB, a privately These investors look for returns, owned British company. JCB was in the form of dividends, on an started by his father, Joseph Cyril annual basis. This can become a Bamford, who began making strategic issue, since institutional agricultural tipping trailers in 1945. shareholders may put pressure on directors of limited companies to return cash, rather than to reinvest Jack Welch Born in 1935, John F. Welch followed the GE ethic of studied chemical engineering at constant change and striving the University of Massachusetts, to do better. In 1999, Fortune then gained an MSc and PhD in magazine named him Manager chemical engineering from the of the Century, and the University of Illinois. In 1960, he Financial Times claimed he joined General Electric (GE), rising was one of the three most to become the company’s admired business leaders in the chairman and CEO from 1981 until world. He founded the Jack his retirement in 2001. During this Welch Management Institute at time, Welch increased the value Strayer University, US, in 2009. of the business from $13 billion to several-hundred billion. His Key works management skills became legendary; he had little time for 2001 Jack: Straight from the Gut bureaucracy and managers were (with John A Byrne) given free reign as long as they 2005 Winning

192 MARKET ATTRACTIVENESS,  BUSINESS ATTRACTIVENESS THE MABA MATRIX IN CONTEXT An organization must A consistent method for allocate capital between a company to identify FOCUS its different business units, where to invest, and Business strategy where to cut back, is or to different products. KEY DATES to analyze... Early 1970s The Boston Consulting Group develops the ...Business ...Market Attractiveness Growth-share matrix to help Attractiveness (the (the size of the market, its companies decide how to competitive strength allocate resources to products of the unit or product in growth potential, and or business units on the basis pricing), and... of their relative market shares that market). and growth rates. Using the MABA matrix can help a company plot the relative 1970s McKinsey & Company profitability of its business units or products. consultants develops the MABA matrix. U ntil the mid-20th century, develop frameworks to address the many businesses were new complexity. One such model 1979 Michael Porter develops simple companies selling to arise during the early 1970s was the Five Forces model to one product. However, from around MABA—the market attractiveness/ enable companies to 1950, large corporations emerged, business attractiveness framework. analyze the structure of which were divided into business It is also known as the GE-McKinsey their industry and develop units. It was difficult to manage nine-box framework and the a more profitable position. these different units profitably, so GE-McKinsey Matrix, because management consultants began to it was developed by consulting 2000 The Market-Activated Corporate Strategy (MACS) framework is introduced by McKinsey to measure each business unit’s stand-alone value within the corporation and health for sale.

WORKING WITH A VISION 193 See also: Study the competition 24–27 ■ Protect the core business 170–71 ■ Good and bad strategy 184–85 ■ Porter’s five forces 212–15 ■ The value chain 216–17 ■ Product portfolio 250–55 ■ Ansoff’s matrix 256–57 company McKinsey & Company MARKET ATTRACTIVENESS GROW— GROW— HOLD— The MABA matrix for conglomerate General Electric, Low Medium High invest and invest and invest provides a means which had 150 business units. of identifying which grow grow selectively if business units should The MABA matrix is a cash allows be grown, held at their systematic, consistent method for current level, or sold. a decentralized corporation to decide GROW— HOLD— HARVEST Those at the top left of how to share its capital among the invest and invest for cash, the matrix have a high various business units by assessing then sell business and market each unit’s profitability and market grow selectively if attractiveness, and position. Past methods of budget cash allows should be grown. Those allocation relied on each business in the center have unit’s forecasts for growth and HOLD— HARVEST HARVEST medium ratings for both profitability, which were subject to invest for cash, for cash, factors, and may warrant error. Although designed for large then sell then sell selective investment. companies, the matrix can also be selectively if Those at the bottom used by smaller companies to assess cash allows right have low scores for the strength of a product line or both factors, and should brands, rather than business units. High Medium Low be harvested for cash, and sold or liquidated. BUSINESS ATTRACTIVENESS Using the matrix matrix according to their market determining where to invest to The matrix allows a company to and business attractiveness. This yield the highest growth. Over judge each business unit on two sorts units into three categories: the years, the criteria for assessing factors to determine its future those that should be “grown” industry attractiveness and success: the attractiveness of its through investment, “held” (invested competitive strength have grown industry or market, and the business in selectively), and “harvested” for more sophisticated. But even today, unit’s competitive strength within cash and either sold or liquidated. most large organizations with a that industry. Market attractiveness formal approach to modeling their is rated according to the market Sorting units into these three businesses use the MABA matrix size, growth rate, profitability, categories provides a starting point or one of its derivatives. ■ and level of competition. Business for strategic analysis, and for attractiveness is rated according to the unit or product’s current Why Kraft gobbled up Cadbury and growth level of market share, its brand strength, and its profit When Illinois-based Kraft potential for growth elsewhere margins relative to rivals. Foods bought British chocolate in the world. In the first half of manufacturer Cadbury for more 2009 alone, 69 percent of By plotting the attractiveness than $19 billion in 2010, it was Cadbury’s sales growth came of an industry on one axis and the because it saw Cadbury’s from emerging markets. The competitive position of a business competitive strength in an British company offered Kraft unit in that industry along the attractive industry. Cadbury greater access to these markets, other, large corporations can would be positioned at the top including the BRIC economies— compare the strengths of diverse left of the MABA matrix. Kraft Brazil, Russia, India, and China. business units. The matrix was already the world’s second- Cadbury also had some of the condenses the value-creation biggest food business with world’s leading chocolate, potential of multiple business strong brands of its own, but candy, and chewing gum units into a single, digestible chart. it was generating 80 percent of brands. Cadbury’s Chocolate, its sales from the US and it was for example, was already a Each business unit or product eager to capitalize on the leading brand in India. must be evaluated, using data analysis, and placed within the

Only sthue pravrainvoeid Avoiding Complacency



196 AVOIDING COMPLACENCY IN CONTEXT I t is often easier for people A strategic inflection point is outside a company to spot a time in the life of a business FOCUS complacency than it is for those Business change inside; executives are sometimes when its fundamentals are blind to it until their company about to change. KEY DATES plunges into a downward spiral. Andy Grove 1979 Michael Porter writes Research in Motion (RIM), How Competitive Forces Shape manufacturer of the once-iconic framed by five questions (see Strategy, saying that managers BlackBerry, developed the idea of below), and became the title of one must always be aware of what sending and receiving emails on of Grove’s books. Grove had fled the the competition is doing. mobile phones, and their innovation communist regime in Hungary, and helped them to become the market learned from a young age that 1994 In The Empty Raincoat: leader. However, RIM rested on its paranoia could be a useful survival Making Sense of the Future, success instead of continuing to skill. Many years later, when he Charles Handy uses a graph innovate, and did not notice or joined Intel, he transferred the skills to illustrate how organizations foresee the direction in which of watching out for himself to have to be alert and respond Apple’s products were developing. monitoring the company, steering to threats. The rival technology company’s it safely through a series of threats. iPhone delivered mobile emails and a 1996 Andy Grove writes Only range of other features. RIM quickly Strategic inflection point the Paranoid Survive. went from being the market leader Every business faces change. into a period of decline, because it Occasionally change can be massive, 2010 In The Black Swan: had become complacent instead and positions once taken for granted The Impact of the Highly of remaining alert to technological can shift dramatically. Grove calls Improbable, Nassim Nicholas change, or threats from competitors. Taleb explains that we cannot predict the future from the It is human nature to relax when past, so must expect (and things are going well, but history prepare for) the unexpected. shows this is the very moment to be wary. Former CEO of Intel, Andy Grove, believes that “Success breeds complacency. Complacency breeds failure. Only the paranoid survive.” The latter phrase was Grove’s Five Questions Do you Is your old rival Are you Is everyone Where would think your no longer the relying on a talking about you point a competition complementary someone new? gun if you has changed? biggest company to make threat? your company had one? attractive? Only the paranoid survive.

WORKING WITH A VISION 197 See also: Reinventing and adapting 52–57 ■ Changing the game 92–99 ■ Hubris and nemesis 100–03 ■ Learning from failure 164–65 ■ Porter’s five forces 212–15 ■ Coping with chaos 220–21 ■ Forecasting 278–79 ■ Feedback and innovation 312–13 such a moment a “strategic inflection A strategic inflection point is the point at which a point.” This is not necessarily a single point in time, but it is usually major change (such as the arrival of the Internet) takes accompanied by a noticeable period of unrest within the organization. It place in the competitive environment. If the company may be initiated by changes in the external environment, or by new recognizes it and adjusts, the company may soar; if it Business goes on competition, and senior managers ignores the change, the company will decline. to new heights are often among the last to notice what is happening. Inflection point Intel’s first strategic inflection The arrival of new point came when Japanese technology, new companies began to produce better- industry regulations, or quality, lower-cost memory chips a change in customer than US companies in the 1980s. values or preferences It took Grove three years and huge losses to realize that only through Business declines rethinking and repositioning could Intel again become a market leader. 10X change complement a company’s own to be alert to such major change—a In the 1970s, US professor Michael product or service by adding value “10X” change—because it requires Porter summarized five competitive to mutual customers; for example, a fundamental change in strategy. forces that face companies: software products complement Depending on the actions leaders competition, substitute products, those produced by computer take at this point, the change can new entrants, suppliers, and buyers. hardware manufacturers. either take the organization to new Grove added a sixth force: heights or send it spiraling down complementary products. This Grove describes all these forces into oblivion. The important thing is the impact of other businesses as “a steady wind,” but if one force for leaders is to discern between that sell a product or service that becomes ten times stronger it acts expected change and profound more like a typhoon. Leaders have change, when the balance of forces shifts from old to new. In his book, Grove uses the example of the growth of the Internet. The Internet was a “10X” change for every company, but some failed to recognize its force or were complacent and did not take action to exploit it. Many companies in the book industry were guilty of these failures—even those who had been extremely ❯❯ The Intel Corporation in California, US, became the world’s largest computer-chip maker under Andy Grove’s leadership. He encouraged employees to bring him bad news.

198 AVOIDING COMPLACENCY It is not the strongest trends. They may also have a team white; unless you traveled to of the species that survive, responsible for risk management, Australia and chanced upon a black which covers far more than swan. Taleb used the metaphor of nor the most intelligent, operational risks (such as safety). the black swan to discuss major but the one most In recent times, such teams tend scientific discoveries and historical to monitor far-reaching global events. These “black swan events” responsive to change. concerns, including weather combine low predictability and high Leon C. Megginson extremes resulting from climate impact. Examples include the 9/11 change, political change, and terrorist attacks in the US and the US management professor (1921–2010) human-rights issues. stock market crash of 1987. Taleb states that companies can never proactive. In 1974, US company Successful negotiation of change predict black swan events, but they Barnes & Noble was the first relies not just on scanning the do need to build robustness against bookseller to advertise on television, environment, but also making sense potential negative eventualities, in 1975 it was the first to discount of the incoming information. Senior and be ready to exploit positive ones. books, and in 1989 it opened a executives need to be particularly “book superstore.” Its innovations wary of understanding events and Listening to the front line helped it to hold a large share of the making decisions based solely on Grove claimed that business data retail market. By 1995 it had 358 data or past events. In The Black (like white swans) is relevant only book superstores—but by 1996, the Swan: The Impact of the Highly to the company’s past, and cannot Internet had changed everything. Improbable, Nassim Nicholas Taleb be used to predict the future. He Amazon—a master at Internet explains how individuals, suggests that when searching for selling—suddenly outstripped it in businesses, and governments place clues about how to deal with the sales and market valuation. too much weight on the odds that future, executives should look past events will be repeated. elsewhere, such as scrutinizing Forecasting the future from the any misalignment between the past ignores the fact that the future company’s strategy statements holds different possibilities, as yet and its strategy actions. What is unseen. For example, if you have the difference between what the only ever seen white swans, you company says it is planning to do, might assume that all swans are Staying alert Points of sizable change are hard to spot, so executives must constantly scan the horizon, like a ship’s watchmen looking for an iceberg that could sink the business. Companies today use many different approaches to monitor the competition and market. Typically, a large organization employs a team of people to scrutinize the company’s sales, compare them to the competition, and analyze market Black swans are rare but they do exist, which comes as something of a surprise to people who have only seen white ones. This demonstrates the error of basing predictions on past experiences.