bizzXceleration: Performance, Value and Profit

By this point it should be absolutely clear that we're facing many challenges, collectively and individually, to recover from a brush with near-death. It should be even clearer from out earlier discussions that our present troubles are the accumulated result of the last three decades of not-so-benign neglect, wishful thinking and refusal to face facts. Equally clear should be the notion that this next decade will a challenging one with no financial leverage to bubble us out of our troubles. We're going to have fix this old fashioned way - by earning it. There are two fundamental directions we need to pursue. One is making the enterprise perform as it ought, the subject of the last post (Dealing With the Brave New World: Resilience vs. Sclerosis).

The other is that we need to find, develop, create and deliver new sources of value, also discussed in a previous post (A Bit of Xmas Cheer: Innovation As The Future). On reflection and discussion it occurred to us that we didn't lay down enough detail to get specific and convincing so we're going to re-visit the subject of innovation in some depth. And do so from the perspective of how to make it happen, not why it's such a good thing. The New Year is traditionally when we look ahead with some hope to a better future but what is faith without execution? Let us therefore "Make It So". (Christmas Wishes: Peace, Prosperity and Performance).

 Re-visiting Innovation

So what is Innovation? And how does it work...or should it in our idealized fantasy world? The last Innovation post wrestled with the first - Innovation is NOT invention, nor is it clever people sitting around making incremental improvements in existing products. It is the creation of new value. Two things happen in general regarding I-discussions. First off the more trouble an organization is in the louder the arm-waving about. Followed by a lack of delivery - no resources, no commitments, too much rules-as-usual. NB: Innovation is not measured by the size of the R&D budget. Those are inputs. What we're concerned with it outcomes. The other thing that happens is that everyone stands around and talks about changing the mindset - building a new culture. Well culture is important but again it's not Innovation.

Continue reading "Renewing the Enterprise 1: the Proper Management of Innovation" »

Posted by dblwyo at 01:05 PM | Permalink | Comments (1)

The last several posts might have struck you as a bit depressing. The next in order might have been a year-endish survey and summary of the markets but given performance over the last decade we didn't really want to head into Christmas Day with that on your or our minds. Instead we're going to pick up the thread of business performance and concentrate on the future and what we think are some reasons for optimism. At least guarded optimism. Though we're going to start with a bit of a down note by adding one more chart to the the chain of argument on the long-term economic challenges we're facing. Our optimism rests on the notion of Innovation, which we've covered before. The challenges are indeed daunting and long-standing but we've faced worse, on both the enterprise and total economy levels. So what rays of light are there for this optimistic season?

GDP: Potential vs. Actual

We'll let's start with one semi-final note of a darker hue and compare GDP Potential with Actual over the post-WW2 period. Potential GDP is the level of growth that we could reasonably expect if the economy was efficiently and effectively operating so that all resources were fully employed. The CBO makes continuous estimates of this number and does a pretty good job - it is if nothing else an excellent benchmark to start with.

The top chart shows GDP Potential (dark blue) vs. Actual (light blue) since 1950, as well as the difference between them. First off, in case you had any doubt as to the real depth of this Great Recession, this ought to put them totally to rest. We've never been any farther below potential in six decades than now.

Continue reading "A Bit of Xmas Cheer: Innovation As The Future" »

Posted by dblwyo at 01:32 PM | Permalink | Comments (0)

We're going to focus on innovation - what it is, how it works, it's role in business performance and broader trends and implications for the economy and society. Including the notion of how to judge it as a stakeholder. As it happens this is a theme we've been striking for some time and we'll review the previous discussions later on. The gist of our hammerings are threefold:

1) Innovation is widely and broadly mispercieved - all to often being viewed as an isolated pocket of activity and not as the broad multi-function, multi-process and cross-enterprise set of inter-linked activities it needs to be.

2) Innovation is generally not well handled - most businesses will give lip service to the need for innovation but when push comes to shove they'll cut the resources devoted to it. Given that they've already been doing it badly that may not be such a bad short-term idea but it's going to leave them terribly positioned for the foreseeable future.

3) Performance and competitive pressures are going to see an accelerating macro-scale series of on-going disruptions from the functional to the company to the industry to the economy-wide scales for decades to come. Failures to grasp the widespread disruptions that are entrain will lead to the kind of "penalties" that the Auto Industry is paying, the Finance Industry paid and will keep on paying and will hit every other single industry in the developed world. The times they are indeed a'changing.

Needless to say, with these recurrent themes in mind, we were absolutely tickled to see Business Week (long a loud and informed champion of good design and innovation) publishing a story a couple of weeks ago on the failures of innovation over the last decade. The graphic is borrowed from that story and nicely illustrates the point; and if you have trouble believing it then ask youself why 'ol Larry-boy at Oracle has been feverishly consolidating things, why MSFT hasn't made any major breakthrus or why the pharmaceutical industry suddenly tipped over into hard times about 6+ years ago (again something we've been arm-waving about for a long time).

Re-Imaging the Airstream: Imagination in Action

While we were contemplating this post we ran across another TED Talk on the designer who helped to re-imagine the Airstream Trailer for this century instead of the last one. His engagement started out as an exercise to showcase how laminates could be re-thought for the interior. What he found was that the Airstream, originally conceived as a forward-looking icon of the open-road, freedom and innovation had received the interior of a '50s mountain-cabin. Not bad in and of itself but not consistent with the supposed strategic theme; and not likely to appeal to new markets, like active sports enthusiasts. Thereby locking Airstream into its old and dying marketspace. By (literally) taking the trailer down to bedrock they were able to build a prototype that reimagined the interior and then use to that to re-imagine a whole new and modern trailer with a completely re-thought interior that was consistent, appealing and which created new value for new markets. There are some real lessons here that everybody who buys into our basis thesis needs to pay attention....or join the roadkill. (Chris Deam Re-imagines the Airstream)

Innovation As-Is vs Should-Be: Going to the Movies

 One of the interesting things the movie industry has started doing is loading up the DVDs they sell with all sorts of special features giving you the back-story on how the thing was conceived, developed and delivered. The first time we really paid deep attention was listening to all this was for Sky Captain and the World of Tomorrow but since then we've made a special effort for every major movie that interests us. The preeminent example is Pixar and it's string of hits. Two things we'd point out about all that, perhaps three. First, they've proven that they can keep it up time after time. Second, do you think it was an accident that (maturity aside) that after Jobs went back to Apple his long-standing interest in good design and innovation took a couple of quantum leaps ? And third (something we gleaned from listening to the 2nd disc of the Ratatouille DVD set) the recent string from the Incredible to Cars to Up was conceived years ago at a restaurant lunch meeting and sketched on napkins. A familiar process for anybody who's ever had the joy and terror of playing on the bleeding edge. Of course from napkin to delivery to sales is a long....long way.

The graphic compresses the long discussions in a couple of prior posts and also captures 25+ years of sustained experience in trying to move from how it's typically done poorly to how it should be done well. Based on that experience we guarantee that anybody who manages to get this blueprint in place will start having some real impacts and will, in fact, be able to create a sustainable habit of innovation. Contrawise you can use the blueprint as a diagnostic of failures. If you were to go back and re-visit the various movies that have been wildly successful you'll find these arguments supported. You might, for example, compare and contrast Lord of the Rings with King Kong with typical run-of-the-mill summer thriller. Or consider Pixar or the Harry Potter series as other examples.

All too often what you find in companies doing the lip service thing is that at some point in their history somebody had a bright idea that's thrown over the wall to Development and if it sticks (in the marketplace) all well and good. After the original idea is turned into a product more or less then Marketing is called in to put lipstick and ribbons on a pig and it's handed over to Sales to push into the customer base. Over a period of time this becomes embedded in the corporate culture and feature after feature that creates no appreciable new value from the customer's view is stuffed out there. Two major problems exist on this level. First, invention is NOT innovation. Innovation turns invention into new products and services that create incremental new value, not move beyond the 80/20 cutoff point of death. Second, the transom-throwing is a Vegas crapshoot that's playing a numbers game. There's always going to be elements of uncertainty but you can change the odds in your favor dramatically by doing it right.

Doing it right starts with understanding customer and market needs, wants, desires, values and characteristics. Stop me when the failures of Detroit come to mind. Let me stop  you if they don't but pick your industry. THEN the original problem identification goes thru a Design phase where the market-based, problem-solving goals are translated into product characteristics. Think about the LofR - Tolkien had a magnificent concept based on his life experiences and a lifetime of work in mythology and languages. That got us into the Design stage with the books if you would. Then the script-writing team spent years, literally, taking the books down to the next level of developmental detail. The extended edition DVD discussions on the subject are, IOHO, worth the price of the set for this alone. They're also worth it for the discussion of how special effects, weapons and fighting, horsemanship, filming, production design, etc., etc. etc. were all brought together in a synergistic blend of functions into a cohesive cross-functional development and delivery team. And serve as a model for how real, deliverable innovation should be being done by business or any other organization that needs to create new value.

Innovation Is A Team Sport

That highlights another major facet and the review of the LofR DVD will flesh it out if you pay attention and really think about what you're hearing. Innovation is not the result of any single innovater or even a small core. It's the result of a team scaled to the size of the problem with a wide and appropriate range of skills all working together.

Before we run on we suggest you run out and read Car: A Drama of the American Workplace by Mary Walton which discusses the design and development of the Taurus that save Ford when it first came out. A book that Ford tried to kill eventually after providing unprecedented access but perfectly illustrating our points - large and small. As well as Twenty-First-Century Jet: The Making and Marketing of the Boeing 777 by Karl Sabbagh about Boeing's creation of the 777. Guess who the Program Manager was for that and what he's doing now ? Now the graphic is adapted from the Technology business and it's worked for us for a long time; and contrawise killed us when we couldn't get the required executive support. But if you check out those books you can map what Ford did and doesn't and what Boeing did and still does (consider the Dreamliner) to the framework.

A Closing Thought: Tsunami's of Disruption

 Just a brief closing thought, having run on at great length longer than intended. As the world continuse to go thru massive re-alignments, new countries enter the mainstream of the developed world and make their own moves up the value-add ladder of innovation we're all going to face continuous disruptions. We can no longer count on the occasional miracle to save us, our jobs, our companies or our socieities. On the other hand we've coasted for almost sixty years on the innovations that came out of WW2. Isn't it about time to do it again ? In any case the choices are not to avoid the problem - only how we deal with it. The graphic is from an earlier post that walks thru all this in some detail AND provides the evidence to back it up.

In the readings below you'll find some are on general principles and practices while others are on specific cases. We recommend, highly, at least skimmin them ! We don't have the space to walk thru each reading and map it to this discussion but that'll be an interesting exercise for the reader, right ? :) More to the point we've collected ALL the prior posts in a single downloadable PDF file and included this one as well. In that file you'll find extended discussions on each of the major components as well as discussions of P&G, examples from Apple to Yahoo to MSFT to the Auto, Energy and other industries and lots of tools you can "borrow". The various posts also give you the URLs for the on-line posts which we recommend if you want the background details. Our estimate is that there's a collection of 20-30 pp. of short paragraph excerpts you might be interested in: Innovation: From Aha to Development to Delivery

Two Cases of Innovation Thinking

Just ran across two outstanding interviews on Charlie Rose that bear on the topics at hand. The first with Ivan Seidenberg of Verizon and the second with Jeff Immelt of GE. Why should you watch - well we started talking about something we called the Theory of the Case (Beyond Specifics to Principles: Business Performance Principles & Outlooks) where you had to think about balancing today and the future as well as operations and strategy. Both are exemplars of that. Seidenberg not just for Verizon's strategic move after FIOs, it's fibre-optic network, but for what he has to say about the future of telecommunications. Immelt for his assessment of the industries and regions that one has to be positioned in for today and tomorrow. Both also come down heavily on corporate social involvement and responsiblity, another of our "pounded" themes. The graphic is taken from our recent dissection of the Automotive Industry while the embedded title is from an earlier discussion of business performance, though not the first introduction of the idea. In any case we really recommend, and hope, you listen to these interviews careful. And then apply some notions like these to diagnosing what you're hearing. It'll be worth your while IOHO ! :)

Continue reading "Run For Daylight: Innovation, Innovation, Innovation (Adds)" »

Posted by dblwyo at 06:00 PM | Permalink | Comments (0)

Maybe an alternative and less exalted title would be value, focus, clarity, execution and integrity; all the virtues that a business enterprise should possess and few have repeatedly demonstrated during the drunken debaucheries of the last three decades. Case in point of course being GM's BK declaration with the accompany diagnostic litanies of the accumulated consequences of denial, avoidance, missteps and pretending the wolf is NOT at the door. Sadly when business executives fail this miserably the collateral damage for employees, communities, suppliers, lenders, investors and society as a whole are serious. Last post we waltzed thru several key industries so serve as examples of bad and good performance, aside from the current easy target of Finance, to remind us that these issues aren't limited to Wall St. nor Detroit. They are widespread and endemic. The questions, as always, boil down to who's swimming naked and who's a good swimmer. Now we're going to focus on some of the general requirements and principles starting with the classic - know when there's a rip tide and learn to deal with it. Put another way - don't ignore or deny economic realities. With Fri's GDP update verses Mon's startling market rally we'd have to say denial is currently the triumphant sentiment. Just to set the stage the chart shows YoY% changes in real GDP vs annualized QtQ changes. The latter is what the headlines report but the former is what you should be looking at to understand the trends, patterns and turning points. The headlines told us the Q4 GDP change was -6.3% and Q1 was -5.8%. Wow, let's party. The YoY numbers were -0.9 and -2.5%, respectively. Hmmm, let's not and batten down the hatches instead.

Facing Realities: Brave New Worlds

One of the more fascinating surveys that floated around was the readership of the business and financial news over the last couple of years. The "trade" press covered this evolving crisis fairly well yet, by and large, nobody paid any attention. Last week David Brooks the NYT OpEd columnist devoted a column to the kind of CEO's we're going to need in this new environment with David Brooks: In Praise of Dullness.Now as it happens we don't agree with all his points but that he covers it at all is noteworthy and that he's fairly accurate is important. What we need from CEOs is not flash but execution. What we'd add is that that execution cannot be the repeated execution of what's no longer working but has to be what will work in the new world we're facing. Yesterday the BEA also updated it's data on corporate profits and we extended our recent look see at the nature of profits as a result. For decades they rose in lockstep with GDP until the leverage deliriums of this decade. When you break it down it turns out that the real economy companies had a "slight" proft bubble as they curtailed hiring and capital investing but the real "magic", stretching back to the beginnings of de-regulation, was in the Finance Industry. That tells us two major things on the deepest structural level. First, the Finance Industry of the future will look nothing like that of the last three decades. Second, the regular OpCos (operating companies) need to re-think how they run themselves just about as badly. The question is will they ? We'll take up Finance some other time and focus now on "real business" performance challenges.

Key Principles Re-visited

We've spent some time comparing our approach to Buffett's and Drucker's as well as inventorying, from time-to-time, the headline exemplars of good, indifferent and bad performance. From that work we point back to this chart that combines Drucker's Fundamental Principles and the Theory of the Case. The readings section covers stories on the environment, key functions, leadership failures, human resource development and leadership changes for the future. Paul McCulley of PIMCO points out that things aren't going to get much better until 2010 and Jeff Immelt looks ahead to a business environment where performance will be challenged for many years to come; as we've just said and been saying. In the HR section we particularly want to point you a recent HBR article by our friend Bob Sutton on "How to Be a Good Boss in a Bad Economy". Superb article on the attributes in a crisis of excellent leadership - with which we have two major quibbles. Bob's checklist of ToDo's are representative of what these guys should have been doing all along, not just in a crisis they contributed to. But worse, the need to "Cowboy UP" is going to be with us for a long time. In the section on continuing leadership failures you'll find some evidence on how likely that is while in the final section you'll find some countervailing evidence of "green shoots" that may be the first indicators of the revival of management practices as we'd like to know them. You might want to pay attention to the review of Jim Collins' new book wherein he says, "hubris born of success; undisciplined pursuit of more; denial of risk and peril; grasping for salvation with a quick, big solution; and capitulation to irrelevance or death — offer a kind of instant autopsy for an economy on the stretcher. He writes that he’s come to see institutional decline as a “staged disease” The points being that the companies you're looking for are the ones who have answers instead of question marks.

Devil's Details: From Function to Synergy

We'll also point back to a simple chart that provides a conceptual illustration of how all the piece parts of the enterprise need to work together. When Michael Lewis wrote Moneyball: The Art of Winning an Unfair Game he not only documented a revolution in sports management that finally took the BoSox to two World Series titles after a multi-decade drought he started a conversation on performance management in general that's still going on. In discussion and theory, if not in actual practice. The graphic actually speaks to several of those key points: 1) it inventories each of the major functions that are essential for performance then 2) illustrates the linkages between them and their order (first basemen play first base and need those skills after all but also need to have the rest of the infield to work with) and 3) the performance of the whole enterprise is NOT just paying to much for each function, or not enough as the case may be. It IS about making all the pieces work together in the context of the whole.

In the readings you'll find selected stories on:

1) understanding how to think about telling the marketplace and your customers the right story, illustrated here by the lizard-brain messages implicit in various choices, but more broadly illustrative of the need to think about telling a true, accurate, honest story that represents real capabilities and puts the customer's needs and wants at the center of go-to-market strategies.

2) understanding and managing the realities of core operational capabilities, here illustrated with a discussion of the realities of manufacturing but also intended to make the point that core functional excellence is central to long-term business performance. Whether you make software, build cars (ahem), run retail stores or deliver packages real performance for real requirements is at the center of who and what you are. A notion that's been lost and neglected for a long time but one that the prosperers will see return to center stage in the future.

3) making sure the critical operating support functions, logistics and supply chain managment for example, meet and exceed to the requirements of the core, whether it's plants, stores or distribution operations. For almost four decades these functions have been the most sadly neglected of all yet they offer the most strategic promise for improvement. It's as if the Celtics got themselves a great center, two outstanding guards, a decent power forward and then, having spent their available salary budget decided to cut corners and recruit a junoir college player who was competent but not the kind of resource needed for the rest of the team to play up to their full potentials. Like we said and will keep repeating - performance is a team result, not a collection of individual players. There's a reason the US Men's basketball team got it's butts kicked in Athens and did so well in Beijing.

4) and another trip to the cesspit of technology management wherein the perennial lament of a continuing gap between IT and business receives yet more confirmation. Aside from logistics IT is the one major function of the enterprise that touches all others and influences their individual performance and also controls their ability to integrate with the other key functions as well as adapt to the future. Yet for decade after decade this same lament keeps getting repeated with not end in sight. We think there are two fundamental problems - Tech guys are fascinated by bright shiny things and tend to trap themselves in their silos. On the other hand Business guys are even more responsible because they're repeatedly failed to step up and provide the necessary adult supervision. The companies who have figured out how to bridge that gap are the same list of usual suspects from WMT to Fedex to Scwab who keep getting cited as strategic users of IT. Now where's the rest of the world ?

To try and pull this all together we're arguing that times are going to stay challenging for a long time, that effective responses to these challenges still seem to be all to missing in action and there's a checklist, a blueprint, of what to look for in potentially high-performing enterprises.

AND those are the ones you want to be on the lookout for !

Continue reading "Beyond Specifics to Principles: Business Performance Principles & Outlooks" »

Posted by dblwyo at 03:24 PM | Permalink | Comments (0)

For a lot of reasons this is a post we'd very much prefer to not write but feel we have to because of the crisis, the deep-seated structural changes that it will require and the major re-thinkings of corporate culture that are mandatory for survivorship. The difference between winners and losers in this maelstrom will not just be logical examinations or disciplined execution but will require executives to adopt new behaviors. The question is will they ? There was a rather bitterly amusing New York magazine story (excerpted below) on the backlash in the Finance Industry recently that details the inability of members of that community to come to grips with those adaptations. The problem seems to be that the last 20-30 years of abberational profits are being taken as the norm and the culture expects to be paid as they have been. Instead of how they will be ! What was particularly striking is that the blog post that drew our attention used the accompanying picture from our favorite cigar and single malt bar, though you have to look at the background...not the eye-candy. We wonder however whether the foreground are professionals in what service industry ?

Re-Considering JR, Values and Performance

Back in the day we used to not watch Dallas as the soap opera never appealed to us and the dissing of business really turned us off. Our experience then, and to a large extent now, is that most people and most executives in business are competent, bright, and want to do well and also do good. The complete antithesis of JR. Unfortunately we then got Enron, WCOM, etc. etc. And now we have the complete dysfunctional breakdown of a major industry....which is also the only industry among them all which is systemically critical to the health of the economy and of society for that matter. The question for us (which in this case means me, you and the rest of America) is does this man speak for the preponderance of business executives or not ? On that answer rests the future of economic health and social development. The stakes couldn't be more serious. Our answer was absolutely not. In 2000 it became there are too many exceptions but the rule was still in favor of the Roman virtues. Now ? Well, unfortunately time will tell. And based on how the Finance Industry's culture is reacting the signs aren't that encouraging. On the other hand there are clear examples of leaders who have stepped up the plate, faced the challenges and positioned their companies for the future. From HPQ to WMT to P&G to MickeyD's. The bottomline here is that the principles of fundamental business performance require good ethics and a sense of social responsibility.

Why You Care: Profits and Economic Futures

 To understand both how important this is and how aberrational the last decade has been take a look at this composite graphic (concatenating several points we've made before). The top sub-chart shows Profits and Wages as shares of GDP (Profits on the left). Except for the Tech Bubble wages were in a long-term secular decline but Profits "bubbled" up enormously  because businesses weren't hiring or investing in this weak recovery. That's going to get worse. The second and third sub-chart shows the shares of profits (% of GDP again) going to "normal" business, Finance and International business. Normal operations didn't get out of line and took a big hit beginning in '06 (Fortune tells us today that profits are the worst in the history of the F500 listing) while int'l, as you'd expect shows an uptick. But Finance...ah Finance ! It went from 1% to 2% to 3% of GDP in three decades. Now tell me what value-add for the economy and society as a whole was created here ? In general Finance is a critical industry but has it been innovative and value-creating that it's profits should have been gone up 100% every decade ? And in particular in this last one ? The evidence would seem to indicate not. Structurally, if for no other reasons, we'd see a future for the Industry were profits return to the more justifiable 1% figure. That'll be a shock to a lot of folks won't it ?

Earnings Performance and Outlooks

The big debate in this bear rally has been on the earnings outlook, which is how long-term trends in the economy are reflected in the quarterly headlines. This graphic pretty well captures a part of the problem. As Fortune points out earnings so far are as dismal as they've ever been and looking to get worse. Even worse the outlook is for a sustained period of continued under-performance and lowered valuations (something we've been harping on a lot and for a long time. Aside from recent postings continuing to dissect this little problem we provide excerpts from two postings from almost a year ago in the readings that illustrate how long these challenges have been clearly visible).

Business Performance

Business performance comes from delivering on five key elements both separately and as a whole. No one can be taken in isolation. The responsibility for making all the moving parts synch up lies with executive leadership at the top and management as a whole. For businesses to do well in this crisis management must step up to these responsibilities on several dimensions and balance them out. Our favorite guru of gurus puts it much better of course. That would be our boy Mr. Drucker:

"A manager's job should be based on a task that has to be done - one that makes a visible and, if possible, measurable contribution to the success of enterprise. A manager's job exists because the task facing the enterprise demands it's existence - and for not other reason."

"A manager has two specific tasks. The first is creation of a true whole that is larger than the sum of the its parts, a productive entity that turns out more than the sum of the resources put into it. The manager must simultaneously ask two double-barreled questions: What better business performance is needed and what does this require of what activities ? And: what better performance are activities capable of and what improvement in the business results will they make possible ?"

"The second major specific task of the manager is to harmonize in every decision and action the requirements of the immediate and long-range future. He cannot sacrifice either without endangering the enterprise".

The Social Consequences

As the recent Tax Tea Parties show there is an enormous amount of public anger at the failures of management leadership to serve either the interests of their companies, of their stakeholders, including employees, business partners and investors, and of society as a whole. A few years ago Jared Diamon published an interesting follow-up book to his earlier "Guns, Germs and Steel" that asked what enabled societies to survive, adapt and prosper or fail...he titled it "Collapse". In this recent PBS interview he boils it down...the biggest cause of failure is the failure of leadership to act for more than their own narrow self-interest. In some circles they call that a failure of fiduciary responsibility.

As Wuzu said to Fojian in "Zen Lessons: the Art of Leadership" :

"As a leader it is essential to be generous with the community while being frugal with oneself. As for the rest, the petty matters, do not be concerned with them.

When you give people tasks, probe them deeply to see if they are sincere. When you choose your words, take the most serious. Leaders are naturally honored when their words are taken seriously; the community is naturally impressed when people are chosen for their sincerity.

When you are honorable, the community obeys even if you are not stern; when the community is impressed, things get done even if no orders are given. The wise and the stupid each naturally convey their minds, small and great each exert their effort.

This is more than ten thousand times better than those who hold on by authoritarian power and those who cannot help following them, oppressed by compulsion"

That was written over 1200 years ago yet still seems more than relevant today. But these measures who would you judge is leading well and how not ? On those answers rest your decisions.

UPDATES: Why It Matters

 We just added a whole slew of other readings excerpts using the Finance Industry, sadly, as our whipping boy. What triggered this recent massive rally in the markets was the belief that the Markets and the Finance Industry were beginning to self-repair and see some daylight. Only it turns out that a) they were engaged in deeply deceptive reporting (we'd use other words but why bother) and b) that really is a giant freight train loaded with explosives, not daylight. All of the banks are experiencing huge increases in defaults and losses in their main lines of business. And doing their best to continue mis-leading the investing public. On every test of leadership, public faith and confidence and good business practice we have to judge the last six weeks an abysmal failure. Both Wuzu and Drucker would be sadly and terribly disapppointed...not least because this is both stupid and unecessary self-inflicted damage. But check out the readings for yourselves. Start with Jim Jubak's vidclip and move on to the slew of stories dissecting the disaster.

Continue reading "Leaders, Leadership & Culture: Crisis, Values and Perfomance (Updates)" »

Posted by dblwyo at 07:06 PM | Permalink | Comments (0)

Back when Yellowstone Park experienced an unprecedented set of fires that threatened to rage out of control I was vacationing there and was allowed to drive into the Park on the theory that things were serious but under control. On trying to return we found the road's had been closed and we had to go many miles and hours around to get back to our start point. At the time there was enormous debate about letting the fires go, management philosophy and how best to manage forests and parks. Now forest fires are a natural part of long-term forest ecology and some species can't even re-produce properly without the fires to spawn their seedlings. Sort of like Schumpeter's "Creative Destruction" ? What made these fires so controversial and dangerous, as we found out, was that for decades all fires had been prevented and a lot of deadwood and downfall had accumulated which made any major fire likely to run out of control. We're in a similar situation now in the economy and  while the fires appear to be being managed, so far, they could still run out of control. But whatever else happens the existing businesses, industries and structures are going to be swept away. Stop and think about that for a minute...every business you know of MUST re-think itself for a new ecological environment that it's not prepared for. Here's another thing to think about, as we've argued before, given the number of businesses who were caught flat-footed and are not reacting very constructively what are the chances that these kind of deep structural re-thinkings are going to happen and be implemented ? The answers to those questions will seperate the sheep from the goats....or the survivors from the road-kills !

And We Care Because: Profits, Earnings & Valuations

Several friends continuously challenge me about translating the rather "abstract and erudite" discussions of big picture trends to specific implications. The last post on the Economy and Markets provided more evidence that the mis-interpretation of reality continues; which means that the level of preparation continues to lag requirements. It was preceeded by a series of posts on the Finance Industry that traced out the consequences of ignoring the big picture, structural breakdowns and error-filled mindsets (here, here, here and here). What we're really saying is that you are going to see similar impacts across all industries and enterprises; albeit more slowly and more disguised for a while. The accompanying graphic is a rather complex composite that tries to translate those hidden decisions into long-term observables. On the left hand side you see the links between Profits (national income accounts), Earnings (S&P) and the SP500 index. We are in the worst decline in profits in, literally, about three or more generations ! The right hand side takes a look at long-term valuations. The top sub-chart shows PE Ratios from 1936 to now with the average for the entire period (yellow) and the average thru 1990 (red). Notice that valuations shot way....weigh....weigh...way over the central average in the late '90s ! Neither bode well for the capex outlook (think Technology !), a return to growth and profitability nor for valuations and prices. In fact PEs tend to over-shoot as they correct as the bottom sub-chart shows. The red line traces out the cumulative difference between the 1936-1990 average and the PE that year. Notice how truly out-of-balance we've got and remain. In other words not only will PEs be structurally lower in all likelihood, not only will they likely over-shoot but we have an unprecedented excess to work off !!! (What does that say about all the non-hiring and deferred capital spending that went into stock buybacks over the last several years ? Not a display of good business judgment at the very least !).

Mindsets and Mis-Perceptions: Re-Thinking the Business Model

In the readings we start with some intersting links on buybacks and a key message from Warren about earning your sales and then segue into a selected set of representative examples of performance from the US Post Office (on the verge of BK) to IBM (laying off people) to Zara's (growing) to set up the two big sections. One is a spate of recent stories on how mindsets influence and control decision-making and why listening to the loudest leads to the largest problems. The final section is a spectrum of readings on how to actually think about the coming firestorm and samples from business model re-thinkings to operations and go-to-market to IT, Human Resources and Innovation. One of the most interesting in the re-mapping the mindset is from a recent oped by Bob Shiller who traces out the mental mindsets that led to this current crisis, their historical precedents and the continuing dangers we face in finding new paths forward. While Bob is talking very big picture re-apply that to the enterprise level as well ! We borrowed the graphic from his piece because it nicely captures how the mental models control decision-making. And how bad ones lead to bad decisions; in this case the financial implosions. The next question then becomes what are the mental models being used by business executives and other leaders to understand the situations they face.

V = Sum(Pi X Gi): Bernoulli's Principles NOT

Back in 2005 Dan Gilbert of Harvard gave a fascinating  TED talk on expectations and judgment (click thru to watch - you'll be startled and rewarded) where he talked about why humans are so bad at making effective decisions in complex situations. He started with a formula from a Dutch genius, Daniel Bernoulli, who in 1738 told us how to make correct decisions in all possible situations. Roughly translated the expected value of a set of decisions is the sum of the products of the odds of an outcome and the payoff, or gain, of a particular outcome. Prof. Gilbert then proceeds to trace thru how mis-judgments, expectations biases and simple rules of thum lead to so many bad results. Going beyond his arguments the situation is made worse because the odds and outcomes are inter-dependent. A decision to loosen capital requirements by the regulators for example leads to greater leverage and risk-taking by bankers which in turn leads to increased risk, lower odds of a favorable outcome and catastrophe when the Black Swans land. Especially when the swans ain't; that is when the actual outcomes were knowable ahead of time but their likelihood was misjudged.

Old Principles and New Conclusions

Businesses are run by folks making decisions based on their own rules of thumb accumulated thru lifetimes of experience. Rules of Thumb work very well when they do and are disasters when they don't. A Business Model is a kind of meta-rule that talks about how the enterprise expects to make money by creating and providing value to it's target customers. The success of that business model critically depends on the key functions being well executed, from Sales, Marketing and Customer Service to Manufacturing, Logistics and Procurement to HR, IT and Finance. Each of those functions is built up over time thru accumulated experience and policies and procedures employed are the rules of thumb that determine how an enterprise performs. Now RofT are great when the model of how things work is accurate. But humans grew up on the savannas of Africa where things remained the same for millenia, you met few new faces and fewer new things that disrupted the old, patterned order. Simple rules of thumb work and worked. Now we're in a world where all the old patterns are disrupted, the old rules of thumb need to be re-thought and re-worked and new ones created. On the fly, under enormous pressure and correctly. When too many changes come to fast most of us freeze up. Which is what's happening to many business and other leaders (Good Boats, Good Captains: Applying the Investment Mantra for Profit).

Here's your bottom-line question: how are business leaders doing on re-thinking...the environment, the business model, the operating functions and the ways they lead and run their companies ?

The ones who successfully answer those questions will be the survivors. The rest will be roadkill. Right now the roadkills would appear to be more common than the resilient adapters and adopters. But the innovators (Disruption vs Innovation: Change, Response, Resilience) who can create new answers and rules of thumb will be the ones you want to work for, invest in and do deals with. And evidence of new rules of thumb being formed is how you want to pick them. Some are in fact making the necessary adjustments and serve as good examples not just for their industry but for how to adopt and adapt in this brave new world. But it's a damm lot of hard, detailed work as well as strategic re-thinking (WMT as Exemplar II: Diving Into the Details of the Retail Enterprise).

Continue reading "Firestorms and Re-Thinkings: Business Performance vs Business-as-Usual" »

Posted by dblwyo at 08:49 AM | Permalink | Comments (1)

This post is something of a bookend for the last one (Good Boats, Good Captains: Applying the Investment Mantra for Profit) which dealt with screening and analyzing companies that are likely to do well. If it wasn't perfectly clear a critical factor is the honesty, integrity and leadership of management, particularly the executive team as a whole. Here we're going to dive a tad deeply into the consequences and causes of bad management. In the readings we use the terrible example of the sturm und drang over Wall Street bonuses as our jumping off point for a deeper exploration of executive leadership. Make no mistake about it - it's a critical factor, Wall St. as a whole with some major exceptions violated both fundamental principles and their own long-term self-interest and broke the rules of social responsibility. A strong, even harsh conclusion ? Perhaps but we think if you'll follow us thru on the arguments the logic is worth considering. And matters as much to you as a tribesman voting on who will be the tribal warchief and take responsibility for his life. The cartoon, drawn from this week's Economist on the implosion of Bear captures the situation without further discussion IOHO.

Predators vs Prey: a Balanced Ecology

We entitle this post Predator vs Prey because the thinking in population biology and ecology that describes the interactions between predators and prey nice represents the inter-actions between aggressive pursuit of profit and a focus on careful, cautious focus on value. Think of the blind pursuit of profit, in the short-term, as being the rough equivalent of a predator species so blinded by kill-lust that it reducess the prey species below a sustainble minimum. These charts are drawn from the Wikpedia discussion of the Volterra-Lotke equations on P-P interactions; one of the first and sustained excusions into mathematical biology and still in use today to some extent. The top chart shows how the cycles in population of the two species interact over time. Whan the prey population gets too large because there predator species is too small there is a population explosion followed by a surge in predators. In other words when the picking's get too easy the predators get more aggressive. The problem of course, say in the second compnent, is that if the population of prety falls below minimal levels the population won't renew itself and the entire system collapses. Hmm...making more sense now.

Looking for the Balance

In any human socionomic ecology most folks would like to have a decent job (fair day's work for a fair wage) but the system as a whole requires people who are willing to be both aggressive and step up and take responsibility for companies and other organizations and institutions. For a healthy institution or a healthy total system the two populations need to be in some sort of balance or excess complacency will collapse it while excess aggression will destroy it. The key driving questions are the tradeoffs between Interests and and Focus (or timeframe). Most folks can get away with most of their efforts directed in the short-term and their own narrow self-interests. I like to think of us as Hobbits. Then there are those who focus on the Big Picture, that is on broad interests but don't inject a strong sense of reality into their thinking. Contrawise there are those who's focus is stricly on their own short-term self-interest and aggressive and responsible behavior seques into excess predation. What's required is a large enough portion of the population who aggressively pursue a broader set of interests. This is the group one would choose executives from - those prepared to act in the institution's broad interests, balance them against their own immediate gains and be prepared to sacrifice for longevity, stability and prosperity.

Leadership is NOT an Accident

Lest you think we're talking out of our hat on this we point you to the feel-good story of the year - the landing of Flight 1549 in the Hudson. We've all come to know, at this point, how much of a miracle that was. But if you click on the graphic you'll be treated to a 2 minute simulation that plays out in real-time to give you an idea of just how little time these guys had to make the right decisions in no time at all. That capability was not created by accident but was the result of years of training, experience, thinking things thru and preparing for that one moment when it was all on the line. In crisis we all react as we're trained, whatever the source of the training. (The graphics didn't turn out as well as we hoped; it if won't "fly" for you try clicking here for the Flight1549 Simulation).

Ecological Stewardship

Several years ago Peter Drucker published what we think is the greatest management book of all time (Management: Tasks, Responsibilities, Practices ). Despite it's being published in 1973 it's diagnosis of what's required of management and executive leadership is a prescient diagnosis of the failures we're all victims of over these last several years. Drucker puts forward a simple list of critical task for Managment.

1. Make the work productive

That is lay it out logically and efficiently and make sure it's effective. How would you rate the Finance Industry given the disaster's we'll be suffering thru for years to come ? Given that the last decade's worth of profits have been destroyed and the viability of many nameplate firms is gone we'd say an ungentlemanly D- would be generous.

2. Make the worker effective

My friend Bob Sutton wrote a great book(The No Asshole Rule: Building a Civilized Workplace and Surviving One That Isn't ) last year which has resonated with a lot of folks. Given that what Drucker is talking about is the socio-psychological aspects of the workplace environment Bob wouldn't have been able to write that book if many deserved a gentleman's C. Yet the list of firms who create worker-friendly environments also tends to be the list of firms who perform well. Given how notorious the Finance Industry is for terrible workplace environments where it's dog eat dog and devil take the hindmost an F- seems appropriate.

3. Take Social Responsibility

And by this Drucker doesn't mean something namby-pamby like "Save the Whales". Instead he means that Management are also members of the larger society and have a responsibility to see that it prospers, not just the firm. Instead he focuses on those things that an enterprise or other institution can do. If you work in a Hospital or University is the institution taking care of the legitimate interests of all it's constituents and stakeholder ? If you work for a private enterprise that  enterprise still exists within a social matrix - is it acting responsibly ? Better by far to be proactive in solving problems before society as a whole decides to solve them for you because your benefit is grossly exceeded by your damage. One example he uses is Theodore Vail and the definition of ATT's purposes. Vail made absolutely sure that instead of becoming a regulated business that the company was respectful of the general public interest. On this, there being no grade lower than F-, we've probably reached the point where the Finance Industry is expelled from school for bad behavior. And their reward is going to be a new regulatory regime imposed on them over their protests. A sound awareness of the socionomic ecology would have had the Industry stepping forward early and forcefully to develop workable and responsible regulatory behavior and institutions. Instead we've gone thru the Tech Bust, Enron and WCOM and the near-death of Western Civilization in the last two years.

Drucker published this magnum opus in 1973. Sadly almost none of it's concepts and prescriptions have seen the light of day. As Ye Sow, So Shall Ye Reap !

And just in case you think we're making to strong a case or exaggerating it we offer up this refresh of the High-frequency economic data we've used so many times before. Without going into detail we'll just say that a terrible economic situation appears to have crossed over yet another tipping point into really serious problems.

The bottomline point here, to come full-circle, is that responsible, statesmanlike stewardship of the Company or Institution will determine who indeed are the "Good Captains and Good Ships" you want to go storm sailing on !

Continue reading "Predator Prey Symbiosis: Crisis, Leadership and Values" »

Posted by dblwyo at 06:06 PM | Permalink | Comments (1)

Our normal sequence would call for taking up the market situation but that's not only too depressing, for several reasons, but Sun. seems more suited to reflection on big issues. So we're going to focus on Innovation. Now hopefully some previous posts have established the motivation for that, and they're listed below the break, but in discussing sad, not so sad and good stores about business performance a couple of themes emerged. One of course was good execution and another was balancing strategy with operations. But if you review some of the readings sustainable long-term performance, by which we mean growth in revenue, profits and earnings, also requires adaptability and invention. Innovation in other words. And when you look at the examples from HPQ to P&G you can see where this is all born out. And conversely when you look at the sad stories where the counter-examples also support the argument.

But in case you need more more convincing or, better yet, you'd like to see it explained by somebody with a real track record of both sustained performance and sustained change management we'll point you at the recent appearance of A.G. Lafley on Charlie Rose. IOHO this ought to be required listening in every MBA program and executive suite in the country. As well as by every analyst mistaking this quarter for infinity and beyond. Another interesting exercise is look over the recently published list of the Fortune 1000 and see who ranks where by revenue, profit and return. You'll have to do some eyeball work as the story behind the ranking won't just jump out but a couple of themes emerge. One of course is energy and hot commodities. Another is folks who've been franchises and moats, e.g. WMT and MSFT, who continue to enjoy the fruits of the legacy for now. But you'll also find some of our exemplars moving up those ranks as well. The other thing you'll notice is that ten years it was all about "technology" per se. Now it's about changing the way you do business, bring products to market and is beginning to appear across leaders in all industries.

There's a lot of confusion about innovation, especially as distinct from invention and raw R&D. We define Innovation as the ability to create new products, services and business models that deliver value to the customer profitably. And sustain that over a period of time. Enterprises that can do this are rare but they are the ones who'll do more than merely prosper in the coming storms. And notice some of the subtleties. Innovation is not number of patents, % of revenue spent on R&D or any of those similar metrics. Heck, by those measurements Ford is an innovative company. But what has it to show for it ? Or the Auto Industry in general.

We were happy to hear Mr. Lafley not only has a similar view but is very eloquent both on how hard it is and how important. But also on how becoming an innovative company requires a fundamental change in every aspect of the company. In other words this is NOT about what happens in the lab but the ability to look at the market, develop new products, make them and then delivery them. And then repeat.

After the break we'll share some of the conceptual framework we've developed over the last several years for what's required, what the typical problems are and what an integrated approach to innovation should look like. At the end of the day this matters to investors, stakeholders, employees and any other related party because the closer a company gets to these "Should-Be" ideals the more likely it'll be on the list in another ten years, or 20...or 30 or....well you pick your horizon. One warning note - right now US companies have something of an advantage in this business "software" but our friends in China, India and elsewhere know that and are taking steps to improve their own capabilities. 

Continue reading "Sailing Into the Storm: From Execution to Innovation" »

Posted by dblwyo at 03:56 PM | Permalink | Comments (0)

Several posts here have explored the relationship between enterprise performance and the human environment. The argument is that the better people are treated the better they will perform for the company by taking care of customers and its' interests. Now my biases in this case are shaped by both my management experience and my earliest working experience at Fedex who's motto was/is "People, Service, Profit". And they backed it up - the three policy manuals around which the company governed itself were the People, Service and Profit manuals. Compensation and promotability were determined by effectiveness in people management and they've found since their beginnings that people are the key to service which is their whole reason for existence (& pricing and profit : ).

That said, at the same time, people are definitely not all perfect. In fact my experience has been that out of any ten person team normally assembled you're lucky to get one star solid performer, three decent ones and a lot of folks who'd like to be more than they work or are capable of. And further everybody's in denial about this from both sides - both bad bosses and bad employees. With all due respect to HR's due processes they aren't taken very seriously in general.

But, I'm more convinced than ever that good HR is a mandantory strategic performance requirement and excellent HR is a competitive differentiator.

UPDATE (8/1): Seth Godin has two interesting post on toxicities among bosses and employees that are short, sweet and to the point. To which I'd add, my point here, toxic behavior is not rational (this is a family blog so scruples prevent putting it more strongly). 

Continue reading "Aholes, Shirkers and Performance: a Draft People Principles Policy" »

Posted by dblwyo at 07:41 AM | Permalink | Comments (1)

Earlier, back when we were focused on what makes a company tick rather than all these sidetrips into understanding the economic environment, we took at look at the heretical notion of treating people as strategic assets (People & Performance:Assets or Fungible Commodities ? ). There we made the following argument and asked the key question:

Have you ever stopped to wonder why everyone who works for an effective startup is excited and works long hours at 120% efforts levels. Sure, some of it is the wealth prospects and some of it's the challenge. But a lot of it's the fundamental satisfaction we all get from doing good work that is worth doing and makes a difference.

The real question is why don't we manage our organizations to maximize total performance by managing people as assets ?

We came to that critical concern by looking at Home Depot's performance under Bob Nardelli and the continuing challenges they face in improving morale and customer service - which are critical to maintaining and improving performance for them. Particularly in view of the rolling and roiling housing market and their earnings performance (more later - I promise). The critical challenge, or question, is this: how should you run a company to get the best long-term performance and value ? And then how should you treat your employees ?

All organizations and social groups need to work thru these challenges - and they all do one way or another. One of the most interesting historical answers to that challenge was found by 17th century pirates (hat tip EconomistsView ).

Continue reading "Aaargh, Captain Ye Best Take Care of the Crew" »

Posted by dblwyo at 02:52 AM | Permalink | Comments (0)

It's long been a truism that 'people are our most important asset' but anybody with a little bit of real-world experience has plenty of ground to question that. If you want some interesting evidence follow an old colleague's advice and read a Dilbert book from cover-to-cover, if you can. Amusing one cartoon at a time but taken as a series deadly depressing. Many things are embedded and embodied there but one of the keys is this fundamental question:

Are people truly assets or are they consumbles that're easily replaced ?

Now if people were really and truly assets we'd apply the rigors of capital budgeting, discounted cash-flow analysis and IRR assessments. Despite the unhappy reactions I've gotten to that suggestion stop and think about it for a while: we look at capital over it's total lifetime, understand that regular maintenance and upkeep is required and the total life-cycle costs and benefits do NOT happen with one fell swoop. Why can't we apply the same logic to people.

Continue reading "People & Performance:Assets or Fungible Commodities ?" »

Posted by dblwyo at 05:09 PM | Permalink | Comments (2)