Bidding Review: Macro-environment, Disruptions, Business Performance
Over the last several months we've been hammering away at various aspects of business 
performance from individual companies to whole industries to structural trends and disruptive changes in the macro-environment. Before going on to finish some deep dives we figured it was time to pause for an inventory and survey of some key results, findings and concepts. The graphic is our Table of Contents - or more accurately a structured inventory of the topics we repeatedly turn to because we think these are the key elements that MUST always be kept in mind when evaluating a business and it's performance. A downloadable PDF version is available by clicking on the highlight.
When we inventory the actual posts in key topics the major themes are the series on Corporate 
Governance and Social Responsibility - at which so many have failed so badly, obviously including the Finance Industry which is worsening a bad situation by denial, the Auto Industry going down the Maelstrom it created and taking the livelihoods and lives of so many with it but also many others. Which leads naturally to questions and assessments of Enterprise Performance - which was the focal topic of the last post so we won't repeat our and BCG's indictments. A key strategic issue is the scope and scale of disruption - not just within the firm but at the Industry, Economy and Geo-political levels; and how badly most are prepared or preparing for the multiple cusp points we're all going to be crossing over in the next few years. The downloadable PDF version of this inventory is also available by clicking on the highlight. Sadly we confess that the blue-highlighted titles which should take you to a post don't since we haven't figured out the technique/technology that well. In the inventory though you'll find pointers back at key exemplars of companies who are adapting (WMT, GE) and industries who are struggling or worse. Including Autos and Finance but also, and perhaps surprisingly, Technology.
Guidance From the Master
In the rest of this post we want to spend some time focusing on key concepts and arguments that have accumulated in all those posts, starting with core principles that should guide business performance but don't appear to. For those principles we've looked to our own work and techniques, Warren Buffett and, most especially Peter Drucker. When Prof. Drucker passed a few years ago the WSJ had a nice review of some recent survey work and gifted us with this summary of his key arguments (from which we think at least two key ones are missing but we'll circle back later). Now we've also taken the liberty of creating a collection of this and other principles as well as other key charts from these posts that is also downloadable. In it you'll find major graphics on Principles (Drucker, Buffett, ours), the composite mantra of "situationally aware" business management that monitors and acts on Geo-politics, Structural Changes, Economic Cycles and Enterprise Performance. Consider that a Table of Contents which has some key charts in each area. For example on industry structural change (Autos, Finance, Energy, Technology) and on a blueprint for analyzing business performance, based on our BizzXceleration Framework. That starts with simple questions and heads toward the engineering assessment tools. "Elements of Business Performance" is downloadable - happy reading.
Situational Awareness: Monitoring the Environment
The accompanying graphic is probably pretty terrible by Edward Tufte's standards let alone by Seth Godin's. Sorry about that but our key message is not so much as the specific content as trying to show all the things in one ideographic composite that a business must monitor and act on. The "Elements" download actually has the separate components plus additional ones so if you want to dissect them, again, dload the file. After all if you actually hired a consultant to do the work and customize it for your situation it'd cost a lot of money :) ! These are the major domains in which the world is under-going major structural changes, and only one of them is under the control of management. They are, moving around the clock, the Geo-political Macro-environment, the Economic Crisis, Structural Changes in industries and the nature of business and the key components of the integrated and performing enterprise.
Welcome to the Storm: Scope and Scale of Disruption
Just to put a point on it, flat-footed as most have been caught, you have to wonder how many 
executives, investors or other stakeholders are really thinking about how many things are changing by how much. We've tried to map out what's going on in this graphic to illustrate those points. Most management teams have grown up with a lot of churn and turmoil inside their firms but it's been a long-time indeed since this many things have been disrupted this much, this fast. We've defined five levels of disruption that are going on simultaneously: 1) within the firm, 2) the need for treating the firm as a whole, not just piece-parts, 3) industry and sector changes, 4) worldwide economic changes and 5) geo-political changes. It's a sad fact that most efforts, such as they are, are confined to #1 and ignore the other, and more important four ! AT least IOHO !!
Business Performance and the Whole Enterprise
Like we said the key between things that can't be controlled but must nonetheless be managed to 
is the way the firm faces these changes. To wrap-up the introduction let's return to the words of the Master on what the primary tasks of management should be. It doesn't get any clearer than that, does it ? Management is charged with turning the component parts of the enterprise into a whole that's more than the mere sum of the parts. Ask yourself, for example, why the USA Olympic Basketball Team did so well this last Olympics and so poorly in '04 ? It's because the latter was a collection of individual stars who played their own game for their own advantage. The former was a team where every player was focused on the performance of the entire time. The results tell the story. The same is true of the enterprise. But that was just one tournament - a business is much bigger than a sports team and exists for a lot longer. No decision taken today can exclusively focus on today's best advantage, nor on tomorrow's. Each decision must act to maximize the sustainable performance of the enterprise on a balance between the short- and long-runs. The fact that Detroit is now a black hole of subsidies, job losses and collapsing local economies as expedient short-term decisions bring home the consequences of ignoring the long-term impacts would seem to prove the argument.
After the break you'll find some more key exhibits along with discussions on several of these key points, if not all of them. But the bottomline here is that we are crossing over the boundaries into an era of the biggest changes in the macro-environment and performance requirements in many decades. A crossing which will impact us all and one for which we're seeing little concern or preparation.
We hope you find this summary, wrap-up and interpretation helpful. It's the end-result of several months of work here and, taken all together, we hope it provides a useful toolkit for evaluating business performance in turbulent times.
...continued after the break.
Environmental Changes: Geo-politics and Industry Structure
In the "changes composite" two of the quadrants were concerned with geo-political factors and another was concerned with industry and business changes. On the former we've used the 4-quadrant environment chart several times so we won't go back into it but do want to review the industry structure chart, at right. Now we went thru a detailed chunk by chunk discussion earlier [Disruption vs Innovation: Change, Response, Resilience] so our apologies is if this brief. The things to bear in mind here is that our modern economy has been shaped entirely by the rise of large business enterprises which have been the creators of our present prosperity. How well they function is crucial to the healt of society as a whole. Yet this position of structural dominance really only dates from the 1870s or so, at best. The center block shows the major evolutions in key industries and innovations along with the forms of business organization that went with them. The top chunk traces out the various sub-trends in business operations over the last decades while the bottom one looks ahead to the kinds of environment and innovations that are likely. Something very interesting to note but if you match up the periods of the industry changes to major periods in the stock market they're highly correlated.
Business Cycle Outlook
As much time as we've spent dissecting the business cycle, economic data and the economic outlook we probably don't need to dive back in too heavily here, right ? However here's a relative recent version of the business cycle with the alternatives and likely pathways laid out. The rapid V for vapid recovery scenario is one with the rest of the extinct memes while the 2nd Great Depression also appears to be fading. The lessons remain what they are and have been though: 1) We haven't reached bottom, only starting slowing down, 2) there's a long-way to start growing again, 3) this will be a very weak, sustained and fragile recovery and 4) nobody's prepared for it because, for some reason, they don't see it this way or are locked into denial.
Mindsets, Tactics & Resiliences
With so much changing so profoundly and rapidly it all boils down to how executive leadership responds to the changes around them; in other words how do they see the world and what filters do they use to interpret it. This is really a time for re-thinking business models, strategies and core value propositions. And then translating those re-thinkings into fundamental changes in functional capabilities.The sad fact is that the necessary mental re-building, which precedes the actual activities in the real world, seems to be badly lagging behind events in all too many cases.
Case in point would be the results of recent BCG survey work, which we reviewed earlier, but is 
worldwide across all industries and many different-sized companies and about six+ weeks old at this time. Judging from these results the "proper" response was anticipation, preparation and execution. Actual response was ignorance, denial, panic, meat-axe and it's still going on. If you look at the second panel of this composite which traces out the response being prioritized by these companies the primary emphasis is on short-term responsiveness, not long-term re-positioning. It'd be nice to have a little more detail but a survey doesn't lend itself to that approach. Necessarily cost cutting and revenue maintainence are high priorities. From the results it would appear that re-prioritizing capital investments, continuing to support R&D, ensuring the viability of the supplier network and similar strategic positioning initiatives are getting short-shrift. Yet for those companies that have gone into this crisis with strong operations, good controls, good balance sheets and, in the best cases, already been re-factoring themselves, this is an unparalleled opportunity to gain a major jump competitively. Just as a case in point we'd suggest that, despite some serious re-structuring efforts by Immelt at GE, he too long protected the Capital division and became over-reliant on it but is now in a political position, internally and with his board, to finally begin building the GE he's have liked to. Of course he's spent most of the last decade un-doing Jack Welsh's legacies. Bear that in mind.
Thinking Whole Enterprise
If we translate Drucker's Principles into specific guidelines that can serve as an initial checklist of things to think about and timeframes in which to think about them we end up with something like this construct. HPQ just had it's earnings announcement and call today. It'd be a very interesting exercise to go thru that call, line by line and division by division and ask each of these questions for each timeframe. For example PCs are down - what are you going to do in the next 10 months to maintain revenues, profits and market position ? That's essentially an operational improvement question. Then what are you going to do in the next 10 quarters ? Go into new new geographies, explore new distribution channels or introduce new products ? And what about the next 10 years ? In other words where do you envision the PC business going in that timeframe ? If the answer is that's to far away to be clear and too hard and fuzzy to investigate what are you doing to dig into it ? We'll offer up a gratis recommendation even - the form factor and functionality of the PC needs to be radically changed ! Are we right or wrong ? We think we're right but that's not as important as the question of whether or not HP is investigating alternatives. One only has to look at the work that Apple did beginning with Jobs' return and the re-design of the Mac and the subsequent iPod/iTunes to iPhone migration to get an example of how it should be done. Or consider what Lenovo has been exploring in the Chinese PC market. If you'd like to see this approach applied to the Finance Industry or the Auto Industry just click on the highlighted names.
Final Word and Case Theory
Let's wrap this whole chain of argument up by coming back to Drucker's basic principles which we'll summarize as: 1) create value by focusing on innovation and marketing, 2) make the work productive and the worker effective, 3) set measurable and commitable goals and control to them, 4) be aware of and manage your social responsibilities, 5) monitor and manage the impacts of the external environment and, finally, 6) act to optimize the balance between the parts and the whole along with the trade-off between the long- and short-terms. We leads us to this little "Theory of the Case". If you'd like to see this approach applied to the poster child of non-performance and malfesance, at least in a conceptual way, here's the chart for the Finance Industry.
Comments
I'm inspired to do a constructive (the value of the adjective to be decided later) critique of this post. This will take some time and this comment area is likely to have insufficient richness of function for the task at hand.
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Excellent, I'll look forward to it then. Do what you can and we'll re-visit venue and format.
Posted by: James Drogan | May 21, 2009 11:07 AM