Trajectory Management: Leading a Business Over Time

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Trajectory Management Leading a Business Over Time Paul Strebel

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Trajectory Management

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Trajectory Management Leading a Business Over Time Paul Strebel

Copyright © 2003

John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex PO19 8SQ, England Telephone (+44) 1243 779777 Email (for orders and customer service enquiries): [email protected] Visit our Home Page on www.wileyeurope.com or www.wiley.com

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For Biffie, Chris and Heidi

Contents

Preface Acknowledgements Introduction

xi xv 1

Part I: Succeeding under Differing Conditions

15

1.

17

Which Governance Roles? Dealing with governance constraints 20 Focused versus broad governance view 22 Monitoring versus involved governance 25 Driving governance roles for some common conditions Adapting to and shaping governance conditions 30 Dynamic governance lessons 36

2.

27

Which Leadership Styles? Dealing with leadership constraints 39 Fast versus deliberate leadership 42 Top-down versus bottom-up leadership 44 Driving leadership styles for some common conditions Adapting to and shaping leadership conditions 51 Dynamic leadership lessons 53

37

46

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3.

CONTENTS

Which Organizational Modes? Dealing with organizational constraints 57 Flexibility versus control 61 Entrepreneurship versus collaboration 62 Driving organizational modes for some common conditions Adapting to and shaping organizational conditions 66 Dynamic organizational lessons 70

4.

55

63

Which Business Models?

72

Dealing with business model constraints 74 Product/market innovation versus value chain efficiency 75 Basic versus integrated business models 75 Driving innovation models for some common conditions 77 Driving efficiency models for some common conditions 79 Adapting to and shaping value-creating conditions 82 Dynamic business model lessons 92

Part II: Shaping a Successful Trajectory

95

5.

97

Assess the Present: Trajectory Diagnosis Today’s trajectory: what elements? Which drivers? 98 Do the driving behaviours match the trajectory conditions? Is the trajectory viable? 103 Questions for trajectory diagnosis 104

6.

101

Anticipate the Future: Competitive Scenarios

106

What kinds of evolutionary pattern are apparent in the industry? 107 What forces are shaping the evolution of the industry? 110 What are the competitive scenarios for mobile phone makers? 112 Which business models will dominate? 117 How can the cultural barriers to proactive scenario development be broken down? 119 Lessons for anticipating the future 121

7.

Close the Gap: Tomorrow’s Trajectory Tomorrow’s trajectory: innovation or efficiency oriented? 123 Tomorrow’s trajectory: top-down or bottom-up alignment? 125

122

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Tomorrow’s trajectory: common driver configurations 126 Closing the gap between today and tomorrow: sustain or switch drivers? 129 Questions for tomorrow’s trajectory profile 131

8.

Sustaining Trajectory Drivers: The Right Management System

132

Leveraging the drivers with the right portfolio of strategic initiatives 134 Balancing the trajectory with the right management system that supports both innovation and efficiency 136 High-speed process for fast evolution 138 Internal market for incremental variety creation 140 Task force management for irregular evolution 142 Intensive processes for competitive fitness 143 Lessons for sustaining trajectory drivers 145

9.

Switching Trajectory Drivers: The Right Change Path

147

Urgency, resistance, resources and risk determine the right change path 149 Prepared path: switch the drivers to already existing business elements 151 Incremental path: when time and resources permit, develop new drivers step-by-step 154 Radical path: move fast to get new drivers and rapidly integrate 158 Lessons for switching trajectory drivers 161

10. Winning Repeatedly Over Time Energize people with the mission, vision and values 164 Build an anticipatory organization 165 Develop foresight to reinvent the drivers periodically 169 Develop trajectory insight to get the right timing for switching Become an evolutionary leader 175 Lessons for winning repeatedly 178

Notes Bibliography Index

163

170

179 188 197

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Preface

The continual search for universal best practice, for what makes for excellence, for enduring firms, for the best change management obscures the different situations we face in reality. Reading the bestsellers, attending the seminars, you are exhorted to follow the one true way: empower people on the frontline, design flexible organizations, go for growth options and, more recently, go back to basics. Putting everything to the test of universal best practice hardly encourages us to be sensitive to different situations, to the particular conditions we face, and how they change over time. To work effectively, best practice has to be adapted to the specific situation a business is facing. Because the business and its environment are continually evolving, best practice also has to be adapted to the times. What matters is the right managerial practice, exploiting the right business drivers to adapt to and shape the conditions facing a business over time. The irony is that the importance of differing conditions is well known, laid out in great detail in the academic management literature. Certain links between a business and the conditions it is facing are pervasive enough to provide a practical framework for determining the right practice for a particular situation. Why, then, does the popular discussion of managerial practice create the impression that there is one best way of doing things regardless of the conditions and the timing?

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The main reason for the gap between popular discussion and management literature is the extreme fragmentation of the latter across different subdisciplines. There is industrial organization literature, strategy literature, organizational behaviour literature, change management literature, and so on. Each field has its own terminology, referring, for example, to the need for fit with the environment (strategy literature), the importance of different contingencies (organizational literature), the role of endowment and institutional constraints (economics literature) or the need for leadership adapted to the situation (leadership literature). Even within a subdiscipline the literature can be very confusing, with a wide range of contradictory, prescriptive advice. In the strategy area, for example, Henry Mintzberg and his colleagues recently reviewed 10 different strands of strategy literature in a book with the subtitle ‘A guided tour through the wilds of strategic management’. The way conditions affect a business is complicated and the subject of intense ongoing debate, with many possible links proposed between the conditions and the right managerial practice; for example, the complexity of the business environment affects the right choice of organizational control and flexibility. Yet even in the same industry, companies organize themselves differently, with each facing a unique set of conditions. Little wonder that, against our better judgement, we prefer the simplicity and clear advice associated with the ‘one true way’ represented by the advocates of universal best practice. In contrast to the literature, this book presents a holistic approach to governance, leadership, organization and business models, with a practical framework including change management for how to succeed under differing conditions over time. The book cuts to what matters in managerial behaviour over time: before deciding what practice to deploy, one has to diagnose not only the current managerial behaviour, but also the particular situation the business is facing and how the behaviour and conditions are evolving, then manage the behaviours and shape the business conditions. This book emerged from executive courses designed to help managers succeed under differing conditions. My first pedagogical approach to the topic was to ask participants to discuss how a business tends to shift between a number of archetypes, or classic configurations, over its life and relate this to their experience. They always responded forcefully that the notion of an all-encompassing business

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archetype was too simplistic to describe reality. In a business of any size there is a range of elements from various archetypes: a mix of governance roles, leadership styles, organizational modes and business models, spread across the organizational units. Although a business certainly comprises a mix of elements, at any point in time, a particular governance role, leadership style, organizational mode and business model tend to be dominant, in the sense that they drive decision making with respect to resource allocation. These business drivers and related managerial behaviour have to match the conditions the business is facing. Since the driving behaviours and conditions change over time, it is useful to have labels to describe the path they take and their configuration at any point in time. If the path the drivers and conditions take is defined as the trajectory of the business, then their configuration at any moment can be called the trajectory profile. In other words, the trajectory is the way the business drivers and conditions develop over time and the trajectory profile is the set of particular driving behaviours and conditions at any moment. However, the conditions facing the business cannot be taken as given. In sharp contrast to biological evolution, leaders are constantly trying to shape the conditions they face. Leaders not only manage the internal business situation, they also shape the external environment by trying to influence it (for example, by attacking competitors, helping customers use their offering, integrating the delivery systems of suppliers or lobbying governments). Or they can decide to reposition the business in a different environment. One of the key questions in trajectory management is whether to sustain the existing trajectory or to switch to new drivers. Indeed, my earlier work on industry breakpoints and change management describes how to exploit and trigger shifts in the industry environment on the one hand and manage the transition on the other hand. The first part of this book is based on a synthesis – not a compilation or review – of the literature in several subdisciplines of management. This meant selecting those business variables most sensitive to particular conditions. In this I was guided by the main streams of literature on business and its conditions, the frequency with which different authors refer to the same or similar variables, as well as my consulting and executive education experience. Among numerous examples of various aspects of trajectory management, I

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PREFACE

shall use especially the experience of Nokia, Sony and Microsoft, whose trajectories with very different histories are converging on the mobile Internet. Managers, consultants, other practitioners and students can use the book either as a guide to the fundamental principles of right managerial practice under differing conditions, by concentrating on Part I, or as a guide to managing the trajectory of a business over time, by focusing on Part II. If you are a reader with significant managerial experience, you may want to use the principles to put your experience into context before diagnosing where your business is today and whether to sustain its trajectory or, if it is facing a crisis or opportunity, how to switch the drivers and prepare the ground for winning repeatedly over time.

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Acknowledgements

This book is built on three pillars of existing work. The first pillar includes work on the right business practice for differing conditions. This can be traced back to Max Weber, one of the founders of sociology, who in the early 20th century described how religious and economic practice shapes the way business organizations are designed and operate. In the 1940s, Kurt Lewin showed how the forces of change and resistance affect the right approach to the leadership of change. In the 1960s, Lawrence and Lorsch examined how resource availability and complexity in the environment affect organizations, while in the 1970s, Mintzberg and Miller compiled the most important links between business conditions and the right management practice. In the 1980s, Blanchard developed situational leadership, and Tushman and Romanelli put together a set of principles of organizational evolution. The second pillar is the work on recurring patterns in the way economies and industries evolve over time. This goes back to Joseph Schumpeter’s observation in the 1930s that economic growth comes in great waves powered by new technologies, on which shorter business cycles are imposed. Walter Rostow, who argued that economies often develop in a commonly occurring sequence of different phases, followed him in the 1950s. And in the 1980s, James Utterback showed how industries develop through periods dominated first by product innovation and later by process innovation. These recurring

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patterns provide the basis for the creation of economic and industry scenarios, which were pioneered on a systematic basis in the 1970s by strategists at Royal Dutch/Shell. The third pillar of work looks at business and organizational archetypes, or configurations, common to different phases of economic and industry development. The pioneer here in the early 1960s was Alfred Chandler, the economic historian, who delineated the way business organizations tend to evolve through four distinct phases over the life of an industry. Rumelt followed him in the early 1970s, showing how strategy and structure are linked and change over time, while in the late 1970s, Miles and Snow described four classic business approaches, which vary in their potential for value creation during an industry’s life cycle. In the 1980s, Mintzberg and Miller separately enlarged the number of archetypes to seven and ten, respectively, while also looking at how companies periodically transit between them. In a more personal way, I have been influenced by the work of numerous colleagues at IMD (International Institute of Management Development in Lausanne, Switzerland), in particular, Jay Galbraith’s idea that different organizational dimensions tend to dominate decision making at different times; Fred Neubauer’s work on the role of the board and the power balance with management; Peter Killing on leading change under varying degrees of urgency; Dan Denison on organization under differing conditions; Andy Boynton on how knowledge shapes business models; Tom Malnight on must-win battles; Bala Chakravarthy and Peter Lorange on sustaining growth; and Bill George, the former CEO of Medtronic, on how to win repeatedly over time. I am also indebted to my clients and IMD’s executive participants, who have provided the practical testing ground for what it takes to win under differing business conditions. Their feedback over time has been crucial in framing the key factors that must be considered. Although sometimes disguised for reasons of confidentiality, their contribution has been key. While writing the book, the background work and unwavering enthusiasm of my research associate, Anne-Valérie Ohlsson, made it easier to get through the periods when I doubted that such a wide set of issues could be integrated usefully. Lindsay McTeague edited the book and smoothed out the language. At Wiley, the insight of

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Claire Plimmer and her team was key in positioning the book in the marketplace. Finally, but certainly not least, the Sandoz Family Foundation provided financial support through the Sandoz Chair at IMD.

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Introduction

Trajectory management is about leading a business over time. It’s about putting the right drivers in place to exploit the business conditions. It’s about anticipating how those conditions might change. It’s about altering the conditions, especially internally, to support new business drivers. It’s about shaping the trajectory – the path drivers and conditions take – to win repeatedly over time. What are these drivers? They are the dominant approach associated with governance, leadership, organization and the business model. A business of any significant size has a variety of these, but at any one point in time, to avoid confusion and pursue a direction, a single governance role, leadership style, organizational mode and business model tend to dominate in decision making and resource allocation. These dominant elements are what this book calls the business drivers; and the managerial behaviours associated with them are the driving behaviours. The key question is which of the various elements in the business should be driving? The answer depends on the particular conditions the manager is facing, both externally and internally. These determine the managerial context. A lot of work, documented in the management literature, has already been done looking into the conditions that are critical in determining the right driving behaviours. This work can be summarized with the set of external and internal conditions shown in Table 1 for each of the business drivers.

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Table 1 Business drivers and related conditions Business drivers

External conditions

Internal conditions

Dominant governance role Dominant leadership style Dominant organizational mode Dominant business model

Externalities and stakeholders Change urgency Complexity of environment Value-creating opportunities

Managerial power Employee openness Available resources Distinctive capabilities

The internal conditions reflect the way the business has developed in the past, because the history of the business affects the power held by management and the openness of employees to change, as well as the available resources and distinctive capabilities. The external conditions reflect the business environment, but the environment is continually changing, which means that management has to always have an eye on the future. Trajectory management calls for specific managerial behaviour, which moves the business from its particular past reflected in the internal conditions, to its future captured by the external conditions. The business drivers have to fit both the external and internal conditions. Management must ensure that the driving governance role of the board not only deals with the non-market issues (externalities) that shape the agendas of the business stakeholders, but also complements its own power and competence; it has to acquire a driving leadership style that not only takes account of the change urgency, but also works with the prevailing readiness of employees; it has to install a driving mode of organization that not only deals with the complexity of the business environment, but also reflects the available resources; it has to put in place a driving business model that not only exploits and shapes value-creating opportunities, but also builds on the distinctive capabilities of the business.

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Why focus on these issues and not others? One of the earliest management theorists, Henri Fayol, described the activities of management in terms of planning, organization, motivation and control. Little has changed since his study in the early twentieth century, apart from the terminology. Planning is about how to put the right business model in place. Organization is about design and culture. Motivation is about people and about leadership. Control is about governance on different levels.1 What about the different functions in the business, such as marketing, operations, purchasing and finance? Why not focus on these? The reason is that business functions evolve in an interdependent way as components of the same business model influenced mainly by economic forces. By contrast, the different elements in Table 1 evolve in part independently because they are subject to very different conditions. As a result, they are only loosely coupled together. The same driving governance role can be associated successfully with various leadership styles, the same driving leadership style with various organizational modes; the same driving organizational mode can support a range of business models. Over time, the drivers, whatever their configuration, as well as the conditions facing the business and its performance trace out a path. This path is the trajectory of the business.2 The trajectory can be visualized with a graph of a performance variable and described by the way the business drivers and conditions evolve over time. The trajectory is only viable when the drivers fit the conditions and are aligned to support value creation. When managerial behaviour does not reflect the right drivers for the conditions, the trajectory is not sustainable. As an example, let’s look, in the late 1990s, at the mobile phone division of Ericsson, one of the world’s leading telecom equipment manufacturers. Its trajectory can be visualized with a graph of net income, shown in Figure 1. As shown in the graph, in mid-2000, Ericsson’s mobile phone division started running into severe difficulties. Only a few years earlier, in 1997/98, when Sven-Christer Nilsson took over as CEO from Lars Ramqvist, Ericsson had almost 20% of the rapidly growing worldwide market for mobile phones. However, demand dropped dramatically

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Ericsson net income 1990–2001 (SEK millions) 25,000 20,000 15,000 10,000 5,000 – –5,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

–10,000 –15,000 –20,000

Trajectory Profile Point

–25,000

Figure 1 Net income representation of Ericsson’s mobile phone trajectory in the 1990s

in 2000/2001, at the same time that new competitors making similar standard phones entered the market. This drove down the price and moved the attractive margins to phones with different features and design. Ericsson had such a high cost structure and was so engineering driven that it could not adapt to the emerging demand for lower prices and more variety. The behaviour embedded in its business model was out of sync with the new business conditions. The shift in the profitable part of the market away from the standard phone, albeit high technology, towards differentiated design and features meant that the available opportunities had evolved beyond what Ericsson’s business model could exploit. Ericsson’s capabilities had not evolved beyond what was needed for a volume efficiency model; the sales people, for example, had little clue how to acquire new market segments. As a result, its market share started dropping rapidly. At the same time, Ericsson’s organization in country and functional fiefdoms, plus the high-cost Swedish location with strong unions, made it difficult to reengineer its processes to get a low cost edge. A country and functional organization had driven growth during the boom years up to 1997/98, with the organizational units developing independent cultures of their own, which meant that they were not inclined to cooperate in developing common processes. Industry

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cost leadership for Ericsson would have required increasing cooperation across the functions and countries, something that the fragmented internal culture could not support. Indeed, the internal organizational conditions made it impossible for Ericsson to adapt. Management tried to apply a classic top-down approach to cost reduction. But owing to the dominance of engineering, they could not change the culture and, without cultural change, they could not achieve a turnaround. One round of cost reduction led to another, with each one sapping the morale of what, only a few years before, had been a proud organization. The employees became increasingly resistant to further restructuring, performance suffered and the urgency for radical change became more pressing. In effect, the leadership style was completely disconnected from the internal conditions. Tensions increased between the top managers and the board. In July 1999, Sven-Christer Nilsson was replaced by the previous CEO, Lars Ramqvist, who in turn handed over the reins to Kurt Hellström at the end of 2000. Despite restructuring, he could not turn the business around, in part because of the deeply engrained engineering culture and the phone division’s lack of ability in incremental product innovation. The continuing losses, in turn, made the board insist on positive cash flow and immediate shareholder value creation, which made it impossible to invest in building a differentiating capability. The driving governance role of the board was now dysfunctional and not aligned with the value-creating need for incremental innovation in mobile phones. As this example illustrates, the task of leading and changing a business is hugely challenging because each of the business drivers – each with its own environment – evolves in a different way. Ideally, the drivers should be aligned both with one another and with the prevailing conditions to create value, but owing to different internal and external conditions for each of the driving elements, management can lose control. Clashes then follow, sometimes generating turbulence and upheaval. Ericsson’s management not only had no influence over the external conditions it was facing but it had also lost control over conditions inside the company. The clash in the governance roles at Ericsson came from the competition for power and influence between management and various board members; for the leadership style, the clash

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was between the urgency of change and the psychology of resistance in the company; for the organization, the clash was between fewer financial resources, more complex market segments and the internal culture of fiefdoms; finally, for the business model, the clash was between the economics of differentiated innovation and the missing internal distinctiveness. Getting back on a value-creating trajectory would have required, first, a diagnosis of the trajectory conditions and, then, an assessment of the gap between the actual and right behaviour for those conditions to judge whether a switch in business drivers was needed.

Identify the right driving behaviours to succeed under differing conditions How can one identify the right driving behaviours? By describing the conditions and making the link with the right behaviours. The extremes of the variables that we shall be using for the conditions, with the corresponding right behaviours, are shown side by side in Figure 2.

Governance conditions

Governance behaviours

Efficient rules

Externalities

Focused

Broad view

Effective power

Ineffective

Monitoring

Involved

Leadership conditions

Leadership behaviours

Low urgency

High urgency

Deliberate

Fast

Employees closed

Open to change

Top-down

Bottom-up

Organizational conditions

Organizational behaviours

Business simplicity

Complexity

Controlled

Flexible

Resource scarcity

Availability

Collaborative

Entrepreneurial

Business model conditions Convergent opportunities Early distinctiveness

Business model behaviours Divergent

Advanced

Efficient

Innovative

Basic

Integrated

Figure 2 Profile variables for conditions and right matching behaviours

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These links between conditions and the right behaviours will be made in Part I, with one chapter on each type of business driver. To determine the right driving behaviours for a particular situation, first you have to diagnose the prevailing conditions, which can be summarized using the left-hand side of Figure 2 as the basis for a conditions profile chart. For example, Figure 3 shows the conditions profile for Ericsson mobile phones in 2001. Ericsson was operating in an environment with evolving regulation dealing with externalities like the distribution of telecom bandwidths and the health implications of mobile phones, while the distribution of power at the top between the CEO and the board was frequently ineffective when it came to execution. Hence the positioning of the asterisks relating to governance conditions on the right-hand side of Figure 3. This captures both the strength of externalities and the ineffectiveness of management. In terms of the psychology of the leadership conditions, Ericsson’s mobile phone business was facing increasingly high change urgency outside, with employees inside protected by unions who were closed to any change involving a shift away from the status quo. Hence, the location of the asterisks on the right- and left-hand sides of the corresponding lines in Figure 3. The conditions shaping the organization reflected the trend outside towards more complex market segmentation, with scarce human

Governance conditions Efficient rules Effective power Leadership conditions Low urgency Employees closed Organizational conditions Environmental simplicity Resource scarcity Business model conditions Convergent opportunities Early distinctiveness

----------------------------------------*---- Externalities ----------------------------------*---------- Ineffective ----------------------------------------*---- High urgency -----*--------------------------------------- Open to change ----------------------------------------*---- Complexity -----*--------------------------------------- Availability ----------------------------------------*---- Divergent -----------*?-------------------------------- Advanced

Figure 3 Conditions profile for Ericsson mobile phones in 2001

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resources inside for differentiation owing to the engineering culture, as well as scarce financial resources because of the losses and declining share price. The business model opportunities were moving towards more divergence, in the form of incrementally differentiated phones, and away from opportunities for efficiency because competitors were taking market share. However, the internal capabilities for supporting incremental innovation were only at a rudimentary stage of development, if they existed at all. Even worse, because the company had been unable to develop a low cost edge, it lacked a distinctive capability of any kind. Hence, the question mark against distinctive capability. With the conditions profile as a reference, the right driving behaviours can be obtained from the matching behaviours in Figure 2. The (*) signs in Figure 4 represent the right behaviours that fit the conditions profile of Ericsson’s phone division trajectory in 2001. The (+) signs in Figure 4 represent the actual driving behaviours of the phone division. The arrows in this figure highlight the gap between actual and right behaviours. The actual driving behaviours of Ericsson’s board were governance focused on financial performance with strong monitoring. In an attempt to lower costs, the dominant leadership style of management was deliberate and top-down in its approach to motivation. In parallel, the organization, with its fiefdoms, was control oriented with Governance role Focused view Monitoring Leadership style Deliberate Top-down Organizational mode Controlled Collaborative Business model Efficient Basic

----+ ----+

*---- Broad view *---------- Involved

----+ *---- Fast ----*+--------------------------------------- Bottom-up ----+ ----* ----+ ----*?

*---- Flexible +------------------------------- Entrepreneurial *---- Innovative +--------------------------- Integrated

Figure 4 Profile gap between Ericsson’s mobile actual (+) and right (*) driving behaviours in 2001

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attempts at collaboration to increase efficiency. The business model was still oriented towards efficiency, with a dominant offering that remained basic even if it was technically advanced. Comparison of the actual with the right behaviours highlights the gap which had to be closed to succeed in the new context. On all the external variables, the behaviour of Ericsson’s mobile phone business was opposite to the right practice for the new external conditions: a broad, not a focused, governance view was called for to deal with the externalities; fast, not deliberate, execution to respond to the urgency for change; flexible, not controlled, organization to adapt to the business complexity; and an emphasis on innovation, rather than efficiency, to exploit the increasing demand for divergent variety. A mismatch between external conditions and driving behaviours was bad enough, but the problem did not stop there. It went much deeper. Actual behaviours reflected disastrous internal conditions: board monitoring with ineffective management, top-down leadership for employees who were closed to change, collaboration for utilization of scarce resources and a basic business model constrained by the lack of distinctive capability, all of which made it extremely difficult for top management to change the drivers. The business was locked into a doomed trajectory. To avoid an involuntary breakpoint, something radical had to be done. To survive, management had to switch to a trajectory with more viable conditions and behaviours. The gap between the conditions and the behaviour profiles shows that it was not merely a matter of installing a new driving business model, as challenging as that might have been. It also meant a new driving governance role, new organizational modes and, not least, a radical change in the driving leadership style to break through the cultural resistance and deal with the change urgency for innovation.

Sustain – or switch – the drivers to shape a successful trajectory A trajectory is viable when its conditions include distinctive capabilities with value-creating opportunities, when the behaviour of the drivers fits the conditions, and when the drivers are aligned to support

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value creation. The trajectory of Ericsson’s mobile phone business had none of these. A radical switch in drivers was needed to develop a well-aligned, value-creating trajectory. Shaping a successful value-creating trajectory requires answers to the following questions, which are addressed in detail in Part II: • • • • • •

Where are we with today’s trajectory? What does the future hold in terms of possible scenarios? How do we close the gap between today and tomorrow? Should we sustain the current trajectory? Should we switch to new drivers? And how do we win repeatedly over time?

Looking at today’s trajectory, what business elements do we have? Which of them are driving? Do the current drivers fully exploit the prevailing conditions? Is the existing trajectory viable? The contrast between the behaviour profiles of the Ericsson mobile phone trajectory and that of its main competitor, Nokia, will be used to highlight the fundamental differences in their viability. Looking to the future, competitive scenarios provide an anticipatory approach to assessing tomorrow’s opportunities and highlight the kind of business models likely to be important. Insight from scenarios provides the basis for proactive adaptation to, and shaping of, both the drivers and conditions. In the case of Ericsson’s mobile phone division, competitive scenarios kept pointing to the continuing ascent of Nokia, combined with the uncertainty surrounding the transition to new third-generation wireless technology. To close the gap between today and tomorrow, what kind of drivers will be needed? Is a winning trajectory for tomorrow more likely to be innovation or efficiency driven; top-down or bottom-up in its internal alignment? Unstable trajectories have to be rebalanced to sustain performance, or the business needs a switch to new drivers. Sustaining the existing trajectory calls, first, for a portfolio of strategic initiatives to rebalance and leverage the existing business drivers. But creating, selecting and implementing these initiatives does not happen by itself. It calls also for a management system to guide the evolution of the portfolio in the desired direction, a management system that fits the way the conditions are evolving. To obtain the best possible conditions, management has to manage the internal

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conditions proactively and, where possible, shape the external ones, by interacting with stakeholders and positioning the business to build on its distinctive capabilities. Switching drivers may call for a deep transformation, not only shifting the driving roles to a different business model, but also a new organizational mode involving a new culture, leadership style and, possibly, governance role. Urgency, resistance, resource availability and risk are key to deciding on the right switching path. Unless these forces indicate otherwise, the least risky path is a prepared one, based on a shift of the driving roles to already existing business elements. When time and resources permit, the next most desirable path is an incremental one involving a step-by-step development of the new business drivers. However, when time is of the essence, you have to take a radical path, moving fast to put new drivers in place, often by integrating a major acquisition or merger. This last kind of rapid transformational change is notoriously difficult to pull off, because it requires the conditions fast enough to support the new drivers. After the market share of Ericsson’s phone division had dropped to 5% in 2001 and the business was still without a relevant distinctive capability, Ericsson’s board and top management decided that a radical switching path was needed to stop the cash flow drain. Ericsson opted to spin the phone division off into a new joint venture with Sony, which had the complementary capability of product differentiation in consumer markets that Ericsson lacked. At the time of writing however, the Sony Ericsson joint venture had yet to make a profit. The fate of the Sony Ericsson joint venture is an example of how difficult it is to alter internal conditions, like employee openness, fast enough to succeed on a radical path. Winning repeatedly requires maintaining ongoing employee motivation, not only when sustaining but also when switching drivers. Ongoing motivation to energize and mobilize employees calls for focus on a mission, vision and values that go beyond purely financial objectives. Knowing when to switch trajectory drivers, in the context of the mission and values, calls for the ability to reinvent your own leadership priorities, coupled with an organization that anticipates the future, and sensitivity to the speed with which you can develop new conditions, especially distinctive capabilities. Repeatedly successful switching calls for an ability to reinvent the business drivers in sync with evolving conditions. However,

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reinvention can only be done periodically, because even with good learning skills, it takes time and disciplined persistence to reshape a trajectory. Business leaders should do what is right for longer-term value creation, select only a very limited number of new driver configurations and see switching through to completion.

Roadmap for reading this book Before proceeding with the chapters that follow, you might want to revisit the Contents, which lists the main subheadings in each chapter to give you a sense of what to expect. The next four chapters that follow in Part I describe the principles of right managerial practice under differing conditions for the four basic business elements: governance roles (Chapter 1), leadership styles (Chapter 2), organizational modes (Chapter 3) and business models (Chapter 4). Each chapter describes common examples of driving behaviour, as well as how to select the drivers for differing conditions. The sequence of chapters in Part I reflects the typical influence of the four types of driver on the evolution of a business. The board sets the stage for the chief executive and the top team; the top leadership shapes change processes, as well as the organizational design and, over time, the culture, all of which have a big influence on the business model that is chosen. By contrast, the sequence of chapters in Part II reflects the typical sequence of logical analysis needed to support managerial intervention. First, assess today’s trajectory using the principles of right practice from Part I and a holistic description of trajectories (Chapter 5). Then look over the horizon with scenarios to try and anticipate future conditions (Chapter 6), building on the discussions in Part I about how drivers often shift over time. Thereafter comes the choice about tomorrow’s drivers (Chapter 7). If the drivers are to remain the same, they have to be sustained with the appropriate management system for the prevailing conditions (Chapter 8). If, however, new driving behaviours are required, a choice must be made between three classic paths – prepared, incremental and radical – for switching drivers (Chapter 9). Finally, the different elements of trajectory management have to be

INTRODUCTION

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integrated into an overall approach for winning repeatedly over time (Chapter 10). Throughout the book, the last section of each chapter lists the main lessons for managerial practice from the chapter, providing a quick overview of the take-home messages.

Questions on drivers and conditions 1. What is trajectory management? The trajectory of a business is defined by the way the driving behaviour, the particular conditions the business faces and its performance evolve over time. Trajectory management involves identifying and installing the right drivers for differing conditions, and either sustaining them or switching drivers to shape and exploit changing conditions. 2. What are the drivers? The drivers are those business elements (governance roles, leadership styles, organizational dimensions including subcultures, business models) that during any period are dominant in decision making and conflict resolution. 3. What are the conditions? The conditions are those external factors (externalities and stakeholders, change urgency, complexity of the environment and value-creating opportunities) and internal factors (managerial power, employee readiness, available resources and distinctive capabilities) that shape the value creation of the business. 4. How can you identify the right drivers for particular conditions? By evaluating the prevailing business conditions and applying the principles of right practice, presented in italic type at relevant points in Part I, to determine the corresponding managerial behaviour. 5. What is involved in sustaining and switching drivers? Before deciding whether it is more appropriate to sustain or switch trajectory drivers, you need to assess the state of today’s trajectory. Sustaining the existing trajectory calls for a portfolio of strategic initiatives to rebalance and leverage the existing business drivers and a management system to guide the evolution of the portfolio in the desired direction. Switching involves not only shifting to different drivers, but also positioning the business and shaping conditions to support the new drivers.

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6. How can you win repeatedly over time? By becoming an evolutionary manager, who can reinvent the leadership priorities periodically, develop the foresight from scenarios to know when to sustain – and when to switch – drivers, and have enough insight into the development of the trajectory to mobilize employees and get the timing right.

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Part I

Succeeding under Differing Conditions

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1 Which Governance Roles?

Governance involves directing, controlling and accounting for the business at the highest level with the board, or other superiors,1 and the top management team.2 The top team cannot succeed in leading the business without its superiors providing an appropriate leadership framework with the right governance roles. This first chapter looks at governance roles and how the driving role has to change over time. In an ideal world of competitive markets and transparent information, there would be no need for governance apart from that provided by the legal system and market processes: the markets would penalize and weed out – with declining share prices and takeovers – executives who tried to manipulate their business in any way adverse to long-term value creation. Everything affecting value creation, including things like pollution, would be priced and, hence, rewarded by the markets in line with their additional contribution to value creation. In this world, if managers maximized economic value (the difference between projected revenues and the market cost of all the resources used), they also would maximize social welfare, provided the market captured everything and no one could manipulate decision making with monopoly power. But, as we all know, the real world is far from ideal. We need governance to deal with the things that fall outside the markets, as well as those who would manipulate decisions in their own interests.

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In 1904, William Crapo Durant, a successful horse carriage engineer, started acquiring small motor companies and parts manufacturers. He called his company General Motors (GM) and ran his growing portfolio with a few assistants and secretaries.3 In 1910, a decline in sales growth forced him into the hands of banks, which gave him a $15 million loan, but only in exchange for governing control. Fortunately, the market picked up, GM’s stock price took off and, in 1915, Durant was able to take back control from the banks, with the help of fresh equity financing from, among others, Pierre du Pont, one of the owners of the DuPont chemical company. Du Pont joined GM’s board as unofficial chairman to protect his investment. Durant was a brilliant dealmaker with drive and imagination, but a disorganized manager. Du Pont tried to play a counselling role and help him put in some of the discipline and other structures that had proved their worth at DuPont. But Durant rebuffed him. From his point of view, the board was merely a legal necessity, GM was his company and he was going to run it himself. Du Pont was forced mainly into an auditing role, demanding monthly balance sheets that he did not always receive. GM’s growth meant it was continually short of cash, so du Pont was able to increase his ownership gradually and, in 1917, when the car market slowed during World War I, du Pont gained control of the board, but left Durant in charge of operations. Durant started another acquisition drive, buying up suppliers and increasing production. When the post-war recession hit, Durant tried to prop up GM’s share price by borrowing cash and buying shares – so much so that he and the company were soon both on the verge of financial collapse. In 1921, du Pont forced Durant to resign, took over as president and recapitalized GM with his own funds and financing from J.P. Morgan. Sensing the management skills of a certain Alfred Sloan, du Pont brought him onto the management team and eventually handed over the presidency to him in 1923, but stayed on as chairman. During this dramatic switch in GM’s trajectory, du Pont was very much in charge, steering the company through the transition. Going beyond the standard Model T produced by Ford, GM’s major competitor, Sloan revolutionized both the company and the industry. He reorganized the company into five divisions, producing cars of different styles and designs. In view of du Pont’s investment in GM, his experience as transitional president and his continuing role as

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chairman, it is inevitable that he counselled Sloan in his early days as CEO. However, as Sloan found his feet, du Pont had to become less involved, giving Sloan the space needed for the transformation. Indeed, Sloan was so successful that by the time du Pont retired as chairman in 1928, GM was America’s number one car company. As GM went from strength to strength through World War II and beyond, its president in 1952, Charlie Wilson, felt powerful enough to make his famous quote to the US Armed Services Committee: ‘What’s good for the country is good for General Motors, and what’s good for General Motors is good for the country.’ Top management had become so powerful that the only real role left for the board was one of passive auditing. This became more and more apparent in the decades that followed as conditions changed and GM failed completely to respond. In the early 1960s, when GM’s Chevrolet Corvair started spinning out of control on high-speed turns, the finance department refused to allow the Chevrolet division to add a $15 stabilizer to each car. As a result, the consumer advocate, Ralph Nader, set up ‘Campaign GM’, calling for corporate accountability. The company failed to react for almost 10 years. Finally, following a board meeting in 1970, GM half-heartedly responded with two new committees, the appointment of an air pollution expert, and its first black director on the board. But when the Japanese began making serious inroads into the US market after the oil crisis of the early seventies, GM again failed to respond, apart from seeking import protection together with other carmakers. When GM finally woke up in the 1980s, it spent $90 billion on new high technology and acquisitions, but could not digest it all organizationally; for example, it took a year to train workers for the Hamtranck plant in Michigan – on new software which was incomplete and far from user-friendly. In another example, the acquisition of the Texas-based EDS (Electronic Data Services, headed by Ross Perot) turned into a disastrous clash of corporate cultures that ended in an expensive buyout of Perot’s stake in GM. During this period the board was no more than a rubber stamp for the ideas and plans of the CEO, Roger Smith. ‘Roger Smith kept the board on a very short leash. He withheld key financial data and budget allocation proposals until the day before the meetings and sometimes distributed them minutes before the participants convened.’ 4

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However, the bad publicity from the Perot affair and five straight quarterly losses, for a total of $5.8 billion, from June 1990 to September 1991 finally jolted the board into action. In April 1992, the board removed the new CEO, Robert Stempel, from the position of chairman of the executive committee and his associate, Lloyd Reuss, from the board and his position as head of North American Operations. Stempel ‘became the first GM chief executive in more than 70 years to lose control of his board’.5 Continuing ‘to reflect on the wisest course for assuring the most effective leadership for the corporation’, the board took on a steering role: in October it asked Stempel to resign as CEO and chairman of the board and then split the two positions between Jack Smith as chief executive and John Smale as chairman. After this revolution, throughout Jack Smith’s tenure as CEO in the 1990s, GM’s board retained a broad supervisory role and became one of the opinion leaders in corporate governance reform with a major study on best board practice. The board’s more active role and better top management meant that GM was gradually able to turn itself around in the late 1990s and early 2000s, especially under the new CEO, Richard Wagoner. In early 2003, GM was the lowest cost producer of the American big three automakers (ahead of Ford and DaimlerChrysler) and not far behind Toyota and Honda, but the company still had huge health care and pension obligations to 360,000 retired workers worth several billion dollars annually.6 With the story of GM’s board as a backdrop, this chapter looks at the right governance roles under differing conditions, using the following headings as pointers: • • • • • •

Dealing with governance constraints Focused versus broad governance view Monitoring versus involved governance Driving governance roles for some common conditions Adapting to and shaping governance conditions Dynamic governance lessons

Dealing with governance constraints Political, legal and economic conditions dictate the rules of the governance game. These are the laws and regulations that firms have to

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abide by, such as board specifications in terms of the mix, roles and financial independence of non-executive board members in the Anglo-Saxon world, or the separation of the board from management and the requirements for employee representation in northern Europe. Tax and regulatory regimes put additional constraints on the governance of value creation and distribution: environmental policy, antitrust legislation, affirmative action policies, hiring limits on foreigners, special taxes and so on. The macro conditions also shape the values, beliefs and behaviours of the elites that form boards of directors and make up the ranks of chief executives. Boards are typically a reflection of the influence of the CEO and his or her senior management team. Early in a company’s life cycle, the CEO is among the founders of the company, giving him or her a uniquely strong position in governance structures typically formed from a group of friends and acquaintances. Even at later stages, with board participation determined by invitation, board members tend to represent a boys’ club membership of industry colleagues and friends. In many parts of the world where markets are weaker or less well regulated, families and/or the state monopolize most businesses. But even in well-regulated markets, certain families and institutions have greater influence than others. In Germany, in addition to families, banks still have a disproportionate role, stemming from the financing they provided after World War II. In Japan, the banks and elites run the Keiretsu.7 In France, the graduates of the Grandes Ecoles have great influence. The same is true to a lesser extent of Oxbridge alumni in the UK and the graduates of the top schools in the USA. In each of the large urban centres of business in the developed economies, there is a variable group of top executives who sit on one another’s boards. Governance conditions change relatively slowly over time in response to shifts in the political environment and in the valuecreating fortunes of the business. In the USA, in the wake of recent corporate scandals, new accounting oversight legislation has been signed into law, requiring that executives personally certify the quality of financial disclosures and that auditors be hired by companies’ audit committees. The New York Stock Exchange (NYSE) has new rules requiring listed companies to have a majority of independent directors with no material relationship with the company, who have to meet separately from directors who are members of management.8

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But codes of best practice are of little worth if boards do not adapt their behaviour to the governance conditions.9 Two broad streams of research deal with the real world need for different governance roles. Sociologists10 explore the role and impact of business on society, especially the relationships between companies and other stakeholder groups. Markets do not capture the full impact of business; in particular, they do not price certain inputs and outputs of the business (socalled externalities, such as the impact of companies’ activities on society at large). Thus regulations and governance are needed to deal with the effect of externalities, often promoted by stakeholder groups. Economists11 explore how shareholders can get managers to run the company in the owners’ interests, with appropriate incentives. However, because markets are not efficient and information can never be fully transparent, managerial monopolies on power are widespread. Inside the company, top managers pursue power and wealth; outside the company, directors, stakeholders, regulators, unions, NGOs and government want influence. Each side inevitably tries to exploit the governance system to its advantage. However, since managers can use their monopoly on power and their access to inside information to manipulate the business to their advantage, governance is needed to deal with the concentration of managerial power. In other words, we need governance to deal with externalities and managerial power, to ensure that when companies maximize their economic value, they contribute to the overall welfare of society.12 The sections that follow make the link between externalities and the governance view, and between managerial effectiveness and board involvement, links that were introduced in the Introduction and are reproduced in Figure 1.1.

Focused versus broad governance view Factors that are excluded or ignored have a habit of coming back to haunt a business. When the market and its surrounding regulations Governance conditions Efficient rules Externalities Effective power Ineffective

Right governance behaviours Focused Broad view Monitoring Involved

Figure 1.1 Governance conditions and right behaviours

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function well, all the factors relevant for success are apparent either in market prices or in the regulations. When this is not the case, the governance system should close the gap by considering everything that affects the long-run success of the business. As GM became one of America’s largest companies, the board should have taken an increasingly active supervisory role, with the broadest possible view of GM’s impact on society at large and the potential repercussions. When the problems with the Corvair appeared, safety was not part of the executive decision-making calculus, and not even on the board’s radar screen. Safety issues should have been internalized and not left as an externality that could come back to haunt the company. But internalizing everything can be expensive; it is often not in the short-term profit interests of the key players, as shown by GM’s finance department’s response to the $15 stabilizing bar. Moreover, it is often unclear which unpriced factors are important for long-run success. For example, ethics and transparency were not in the shortterm profit interests of many companies in the 1990s; the external impact on society of a lack of ethics and transparency has only become apparent to some companies post-Enron, as a result of the public outcry and regulatory changes. Yet there are a number of contexts with externalities that successful competitors in many industries are addressing of their own accord. These include: • • • •

emerging markets; markets in transition; markets with influential NGOs; societies that value ethics and transparency.

Success in emerging markets requires a broader view of management’s mandate than in the developed world. Many essential inputs may be missing or not of the required quality: the legal system may be inadequate; government services may be unreliable; bribery and corruption may be commonplace; employees with the required skills may not be available; the electricity supply may not be reliable; infrastructure such as roads may be inadequate; suppliers may not have the finances and equipment needed to produce to the specifications needed, and so on. Local rules of corporate governance are needed to encourage

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management to address the inadequacies in their external environment. Successful global companies like Nestlé and Nokia not only are patient financially when they enter an emerging market, such as China, but also manage their local supply chains and infrastructure. They support their local suppliers with financing, technology and management expertise. They invest in the local communities where their plants are located, providing education and social services. They rule out bribery, because they know it will come back to undermine their legitimacy in the longer run, even though it may not be in their short-term local interest. Markets in transition, such as newly deregulated markets or markets created by new technology, also require a broader governance perspective than that dictated by short-term market forces. Enron’s collapse was partly due to woefully inadequate governance procedures for dealing with the long-term risk in the new derivative markets the company created. While Enron was mispricing the long-term risks it was taking on, some of its customers in the deregulated electricity market in the USA skimped on investing in new capacity and faced an embarrassing series of power outages. Similarly, the private railway companies that emerged after deregulation in the UK skimped on investing in safety and paid the price with a series of fatal accidents. In these examples, the governance system was too narrowly focused on short-term profits and ignored the longer-term impact of inadequate risk management and investment. Influential NGOs often emerge in response to the negative impact on society of externalities not priced by the market, or covered by what they believe is inadequate regulation. The GM campaign, instigated by Ralph Nader, which developed into an automobile safety lobby, is one such example. The existence of NGOs is a signal that companies need to broaden their governance perspective to include the corresponding externalities in their governance practice.13 Nestlé, for example, took many years to get the measure of the NGOs focusing on the effect of powdered milk on pregnant mothers. Shell completely missed the power of the NGOs protesting the proposed disposal of the Brent Spar platform. Even when the NGOs are technically wrong about the issues they are pushing, as was arguably the case in the last two examples, they represent non-market forces that need to be incorporated into governance deliberations.

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Ethics and transparency are important externalities in any business. Dealing with these externalities requires the board to define a sufficiently broad mandate for itself, including independent oversight of strategic direction, risk management and societal impact. To get the broad view, companies, like Sun Microsystems, have moved towards a majority of outsiders on their board. To get the independent oversight, Disney, GE and others have organized independent leadership of their outside directors. Others, like AT&T and Kimberly Clark, have ensured that financial experts sit on their boards’ audit committees.14 Overall, when the externalities are represented by pressure groups, contact with and understanding of their activity is important. Indeed, corporate governance can be defined as ‘the relationship among various participants in determining the direction and performance of corporations consistent with the public good’.15 Conversely, in well-regulated, competitive markets, which by definition have few externalities, the governance system should not be overcomplicated with broad perspectives, but concentrate on performance details. Right practice: externalities and governance roles When externalities are important, with critical factors not priced by the markets or covered by regulation, the driving governance role should reflect a long-term, broad view of corporate performance; by contrast, when the markets and regulation are efficient, the driving governance role should emphasize a focused view of corporate performance.

Monitoring versus involved governance When power is effective, there is the ever-present risk that it will be exploited to distort value creation and distribution for personal gain, rather than be used in the long-term interests of the business. Decision makers, especially CEOs, tend to develop a monopoly on certain kinds of information, contacts and resources – both financial and human; in particular, the information needed to shape the direction of the business and assess its long-term value, which results in the temptation to profit from it personally. This does not mean that effective power is bad for value creation. On the contrary, effective leadership goes hand-in-hand with effective

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decision-making power. The common belief has long been that involving too many players in the process of decision making leads to confusion and decline. Somebody has to be in charge to provide direction and ensure effective execution of an organization’s purpose. To balance the concentration of power needed for effective decision making, organizations function with a set of rules and regulations, providing those at the top with a constrained monopoly on organizational power. One way for the board to channel the power of management is to design executive incentive systems linked to a clear set of performance measures.16 The difficulty is in setting up boards that are both effective and sufficiently independent to avoid abuse of the incentive systems and manipulation of the performance indicators by top executives. The power balance between the CEO and the board varies with the personalities involved, their background, experience, relationships and network, their involvement in the hiring and evaluation of the CEO and the recruitment of non-executive board members.17 The evidence is that ‘CEOs with weak boards of directors are compensated more than CEOs with powerful boards’.18 Two extreme examples: between 1999 and 2001, Gary Winnick pocketed $512 million while Global Crossing was collapsing; Kenneth Lay took home $247 million over the same period while Enron was misleading investors and employees. The slide of GM’s board into a completely passive role, in which it performed not even a minimum of auditing, is a graphic example of the danger of growing CEO power. When the mercurial Ross Perot became GM’s largest shareholder after the automotive company acquired EDS, the power balance on the board was dramatically altered. But Perot alone could not shake the other board members out of their comfortable passivity. It took $5.8 billion of losses to do that. In most dramatic corporate failures, including GM’s, it turns out that the board failed to supervise an increasingly powerful CEO. Whatever the reason for the existence of powerful decision makers, the right governance practice is one that balances managerial power with complementary board power. When the chief executive is effective and accumulates power, the board has to play a strong monitoring role. By contrast, when leadership is ineffective, as in transition periods, or when the power of the management team is dysfunctional,

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the right board practice is to be heavily involved in key strategic decisions. Right practice: managerial power and governance roles The governance roles have to balance the power of managers with the power of the board: effective chief executives have to be balanced by a board with a powerful monitoring role; ineffective management needs a powerful board that gets involved in key decisions.

Driving governance roles for some common conditions The right governance roles depend on the prevailing external and internal conditions, in particular, the importance of externalities and the effectiveness of managerial power. The principles of right practice highlighted above point to the driving governance behaviours and roles shown in Figure 1.2 and discussed below.

Effective power Monitoring

Auditing

Supervising

Efficient rules Focused

Externalities Broad view Counselling

Steering

Ineffective Involved

Figure 1.2 Governance conditions, behaviours and the right driving roles

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Supervising role: emphasizing strategy, risk management and social responsibility for important externalities and effective management This is the driving role that GM’s board played in the 1990s and should have played throughout the post-World War II period. When managerial power is concentrated in a strong CEO with the right skills, the board cannot get heavily involved without creating unnecessary tension in the governance system. Yet it has to play a strong monitoring role to ensure that the CEO has a viable strategic approach to value creation and distribution, as well as to risk management. When there are important externalities, the board has to take a broad view in its monitoring, to track non-market effects, especially in terms of what influences social responsibility. This defines the supervising role: strong and broad monitoring of the way management conducts the business. A supervising role is appropriate for large powerful companies with strong management and a multitude of important effects on society outside the markets. The supervisory role is especially important when big moves or big bets are being considered; it makes sense for high-risk businesses with strong personalities involved in deal-making and large investments. A responsible board can only sign off on these kinds of decision after a big-picture assessment of their possible impacts.

Auditing role: emphasizing performance measurement for few externalities and effective management When markets are competitive and regulations efficient, the appropriate driving role of the board with an effective top management is to focus on monitoring performance. In addition, the board has to monitor the distribution of value between the managers and the stakeholders. Driving governance behaviour of this type corresponds to an auditing role. Although auditing is always one of the essential governance roles, a driving auditing role is appropriate when a strong management is undertaking few outside projects, but rather getting its house into shape internally. It also makes sense for governing relatively stable

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businesses where the large up-front investment has already been made and management is effective. This is the role that Pierre du Pont was forced into when Durant refused his counsel, but, given Durant’s ineffectiveness as a manager, du Pont’s auditing role was not enough to prevent recurring liquidity crises.

Steering role: emphasizing ethics, transparency, compensation and succession for important externalities and ineffective management This is the driving role that GM’s board played during two critical transition periods: when du Pont first replaced Durant and then himself with Sloan; and, many decades later in the early 1990s, when the board insisted on much more aggressive cost reduction and removed Stempel first as chairman and then as CEO. When management is ineffective, and the business is affected by non-market factors, or is operating in virgin business territory with little or no rules of the game, the board has to get involved with a broad view beyond the markets to ensure that all key factors are included in management’s decisions. The steering role involves helping management develop the rules of the game – what could and can be done, what should be done in terms of ethics and transparency – while taking the lead on CEO compensation and succession planning. A steering role facilitates adaptation to unfamiliar environments, such as setting up new businesses with new managers in new markets. Alternatively, when the business is in serious trouble without strong management, the board needs to play the steering role in repositioning the business and divesting non-core activities.

Counselling role: emphasizing advising and coaching for few externalities and ineffective management This is the driving role du Pont wanted to play when he joined GM’s board in 1915 and was rebuffed by Durant, the role he did play when he handed the reins of chief executive over to Sloan, and the role the board played right after appointing Jack Smith to turn the

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company around with Smale as chairman in the early 1990s. It is the driving role all boards should play after appointing a new CEO, whether from inside or outside the company. When managerial power is diffuse and management divided or ineffective for whatever reason, the board has to be involved in key decisions because it is ultimately responsible for the direction of the company. When there are few externalities and the business is relatively disconnected from the environment, the board can restrict its involvement more exclusively to the business, coaching and advising management on key decisions. This is the counselling role. A driving counselling role makes sense, in start-ups in particular, where the founders are often inexperienced in management and the business is so small that it is relatively independent of non-market factors in the business environment.

Adapting to and shaping governance conditions The right governance drivers do not remain static, but evolve over time with changes in the externalities in the market, in the regulatory framework and the internal concentration of effective power. For successful value creation, leaders have to anticipate these changes and adapt to or shape the new conditions. Awareness of basic patterns in the evolution of governance conditions is key to developing the foresight needed for adapting to and shaping the governance conditions. These patterns are associated with the: • • • •

CEO cycle; business cycle; political cycle; technological trends.

CEO cycle and governance roles Most businesses go through different phases of governance as the business grows and CEOs come and go. They might start with an owner manager structure, in which the entrepreneur is the dominant decision maker, then move through several rounds of financing, which

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bring in new powerful decision makers in the form of venture capitalists and other investors from the capital markets. The decision to go for financing creates a discontinuity in the governance system that often puts the original owners under pressure to accept venture capitalists with a counselling-type board role. When the company goes public, it is exposed to new pressure groups among the public shareholders and is required to comply with the legal framework, calling for a new governance structure, into which the original owners again have to fit (if they retain either ownership or management links with the company). At this stage, the governance system has to incorporate the interests of the new outside shareholders by building procedures to monitor performance carefully with an auditing role. The appointment of a new chief executive is a major event in the governance life of a company. This is one of the moments when the board plays an especially fateful steering role. Recent research19 suggests that when choosing a new CEO, board members are heavily influenced by their own management experience. Since board members come from different corporate and industry environments, possibly with little in common with the company whose board they are on, the chances are high that there will be a misfit between the new CEO and the company, followed by an upheaval in the governance roles. Once the chief executive is installed, the relationship between him or her and the board is key to the way the governance practices evolve. Does the board or the CEO make the rules of the game? New CEOs are much more likely to be influenced by the opinions of the board, which should emphasize a counselling role. Not surprisingly, strong, successful CEOs have the upper hand, and easily consolidate their power, which can tempt them to abuse it. To counterbalance the CEO’s power without blocking him or her, the board has to shift the driving governance behaviour towards an auditing role. As the business grows, mergers and acquisitions often combine different governance structures and value-creating models. The integration of the separate entities is a sensitive period, when the governance system has not fully captured the externalities or aligned the monopoly decision makers on both sides of the merger. Sometimes this period extends indefinitely; the governance roles are never redefined to take account of the new situation and become the hidden

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reason for the failure of the integration process. To help resolve and integrate conflicting managerial interests, the board has to emphasize its supervising role. Expansion often raises issues of transparency with respect to the financial markets, as well as ethical issues in foreign markets. When these moves succeed, if not before, CEO compensation becomes an issue. When performance declines, succession is at the top of the agenda. All these issues call for a steering role. Over time, the driving role of the board should shift with the fluctuating power of the CEO and the importance of externalities (see Figure 1.3 for a possible pattern of shifts during the tenure of a CEO). In brief, a new CEO should benefit from advice and coaching – a counselling governance role – when he or she arrives. Once the CEO has worked his or her way into the company, the driving board role has to shift to monitoring the performance of the CEO and the company – an auditing governance role. When the CEO starts branching out into growth, expansion and acquisitions, the driving board role has to shift to supervising the overall strategy, risk management and societal impact – a supervising role. Finally, when the CEO starts running into trouble the aboard has to emphasize a steering role. Effective power Strong monitoring

Auditing (Performance measurement)

2.

3. Supervising (Strategy, societal impact, risk management)

Efficient rules Detailed view

Externalities Broad view

1. Counselling (Advising, coaching)

4.

Steering (Ethics, transparency, compensation, succession)

Ineffective power Involved

Figure 1.3 Possible shifts in governance conditions and drivers during the tenure of a CEO

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Business cycle and governance roles When fluctuating growth and interest rates affect the ability of a company to service its debt, the balance of power in the governance system shifts from shareholders to bankers and creditors. This happened to GM during the 1910 slowdown, when Durant had to sacrifice governance control to the banks in order to get the financing needed to keep the company afloat. With increased influence, bankers may force decisions on the company that are counterproductive for long-term value creation. Bankers do not see the same externalities that managers see affecting the business; they take a short-term view of a cyclical business, or refuse to value longer-term strategic options. Under these conditions, the bankers become monopoly decision makers who do not support the value-creating model of the company. A company’s exposure to the banks’ monopoly decision making is greatest during economic downturns: when profits drop, banks become more sensitive to risky debt and pull the plug on companies deemed to have excessive debt. Almost all financial disasters that end in bankruptcy are associated with excessive debt. Although the shenanigans of their CEOs have received most of the publicity, big names such as Swissair, Global Crossing, WorldCom and the others collapsed because of underlying economic causes: too much debt generated while pursuing unrealistic growth. The ensuing bankruptcy, or liquidation, produces a period of great uncertainty in the governance system, as the various classes of claimant to the available assets try to protect themselves. To avoid a passive auditing role dependent on financial institutions, the board has to ensure that management does not give institutions monopoly decision-making power by exceeding the company’s debt capacity. Debt financing should not exceed the maximum debt that the company can service in bad times, without endangering access to refinancing and profitable new investment.

Political cycle and governance roles Modern market societies display a rough pattern of oscillating emphasis between collective action and individual freedom.20 Governments

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are advised to deal with recessionary crises by increasing individual freedom in order to encourage more entrepreneurship, risk taking and higher growth, as was the case in the 1990s. If boards don’t play a stronger supervisory role, the excesses associated with higher growth erode social cohesion, resulting in fragmentation and some form of crisis. The crisis, in turn, produces regulatory reforms and more state intervention. But the decline of individualism eventually leads to little, if any, longer-term growth. Depending on the nature of their governance structures, companies are influenced to a greater or lesser degree by the shifting emphasis on individual freedom and collective action, deregulation and subsequent regulatory reform. The regulatory changes are designed to force boards to incorporate externalities, in their decision making and to rein in the activities of self-serving managers. But when growth declines, boards may have to encourage more managerial initiative with a hands off auditing role. The recession of the 1970s, after the oil crisis, affected the demand for cars strongly. The whole western world entered a more psychologically defensive and conservative period. Reeling from rapidly growing Japanese imports, the auto industry – instead of streamlining its processes and cutting costs – went to the government for protection. Instead of encouraging more initiative, boards supported management in going for import quotas that did not address the underlying problem of declining competitiveness.

Technology trends and governance roles In today’s transition to what some call the Information Age, different forms of influence on corporate governance are emerging. The industrial era saw the widespread emergence of governance based on distributed shareholdings in order to procure financing for factories. Today, networks and alliances are developing to cope with the rapid development of new technology and the increasing pace of new product development, competition and organizational change. In particular, as better information permeates society, we see increasing consumer and investor organization via the Internet and larger networks of loosely connected associations. The total number

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of registered international NGOs increased from 5,000 in 1990 to close to 30,000 at the end of the decade, but these new pressure groups and the effects of the new technology are not yet reflected in governance systems. With different constituencies attempting to gain more control, uncertainty prevails about the right approach to governance. To take just one example, UK Company Law Reform includes a recommendation that the ‘annual report “provide a discussion and analysis of the performance of the business and the main trends and factors underlying the results and likely to affect performance in the future, so as to enable users to assess the strategies adopted by the business and the potential for successfully achieving them.” At the same time, annual reports are now expected to cover the environmental and social policies of companies and their impact on society.’21 The bottom line is that corporate leaders have to shape the evolution of the governance system in response to the shifting power balance between the board and the CEO, as well as the changing importance of externalities and their related stakeholders. Right practice: evolution of the driving governance role The driving governance role should evolve to support the development of corporate value creation, with special attention to externalities during periods of business discontinuity, and to power concentration during periods of management continuity. This requires periodic self-evaluation by the board,22 based on ongoing dialogue and confrontation of the issues, to see whether the distribution of power between top management and the board is appropriately balanced and the right governance roles are driving board deliberations and supporting the value-creating model of the business in sync with the forces of change in the business environment. Actual examples include Motorola, Computer Associates, Disney and Charles Schwab, which have all introduced formal evaluation of their board directors.

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Dynamic governance lessons 1. Balance managerial power with the role of the board. A financially independent board with strong monitoring power is needed to balance strong effective management; the board also has to get more involved in making key decisions when management is ineffective. 2. Deal proactively with externalities and their stakeholders. The board must adapt its orientation proactively to take into account important externalities (inputs and outputs not priced by the market or covered by regulations) and their stakeholders when key decisions are made about value creation and distribution. 3. Use the common governance roles to assess the board’s practice. The four role archetypes of counselling, auditing, steering and supervising provide a basis for assessing the range of the board’s governance practice, as well as which role is driving and whether it is consistent with the governance conditions. 4. Shape the evolution of the governance drivers over the CEO cycle. Adapt the role and power of the board: to shifting conditions and the shifting power of management – especially (1) during discontinuities that throw up new externalities and stakeholder issues; and (2) in response to continuity that increases the power of management. 5. Limit the power of financial institutions over the business cycle with prudent risk management. To limit the power of bankers and creditors, do not take on more debt than can be serviced in bad times without endangering investment or refinancing. 6. Avoid overreacting to swings in the political cycle. Political swings are rarely in sync with the long-run value-creating needs of an individual business. Avoid going for easy governance solutions that will backfire in the long run. 7. Anticipate pressure from new technology on governance practice. The Internet has increased the power of stakeholder groups, often in the form of NGOs, and the crisis in corporate governance has increased the demand for transparency and accountability, both of which are likely to lead to experiments involving new approaches to governance. However, the bottom line will always be to fashion governance roles that enhance value creation by avoiding uncontrolled power centres and incorporating the impact of the business on society.

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2 Which Leadership Styles?

Leadership requires both the ability to define a desirable future (vision) and make it happen (execution). The real test of leadership is in executing the vision. Execution is about making things happen, motivating employees to implement the vision, managing change rather than the status quo, and moving the organization from one set of business drivers to another. The way this is done – and therefore the way change is managed – reflects the leadership style. This chapter focuses on the execution side of leadership1 and the leadership conditions, which most books on leadership ignore – whether they discuss three, six or eight key steps to successful implementation. Adopting differing styles for differing conditions is one of the critical success factors in successful leadership. In the late 1980s, after the merger between Asea of Sweden and Brown Boveri of Switzerland, Percy Barnevik was putting together one of the world’s largest engineering equipment companies. He moved quickly, with a top down style, to appoint the heads of each combined product/market business around the globe. Speed, even at the risk of some errors, was essential to lower the uncertainty. Each product/ market head was given maximum autonomy to increase profits and growth. They reported to their own Asea Brown Boveri (ABB) board comprising product line and country business representatives. Once the new organization was in place, Barnevik shifted to a more bottom-up catalytic approach. He kept corporate bureaucracy

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to a minimum (the head office staffed with only 200 people attracted lots of media attention) and encouraged competition and entrepreneurship among the business heads. This catalytic style and fast-moving adaptive organization of entrepreneurs was a big success. ABB grew from revenues of $17.6 billion in 1988 to $33.8 billion in 1996 and from operating earnings of $543 million to $2.1 billion over the same period. Percy Barnevik became one of Europe’s and, indeed, the world’s best-known CEOs. But the forces of change were shifting. The world of electrical equipment and power generation was deregulating and cross-border competition was on the increase. ABB’s highly fragmented product/ market businesses started encroaching on one another’s turf and, even worse, they had increasing difficulty competing with more integrated competitors, like General Electric, for continental or global contracts. When Goran Lindahl took over as CEO from Barnevik (who became chairman of the board) in 1999, they announced a new direction: ‘ABB is transforming its business portfolio, expanding in higher value businesses based on intellectual capital, focused on software, intelligent products and complete service solutions . . . ABB’s transformation to a knowledge company positions it for growth in the new global economy.’ 2 Power generation – once ABB’s core – was divested along with the railway equipment and nuclear power businesses. With Barnevik still there as chairman, and in the face of strong resistance, Lindahl switched to a new business segment organization, but he made few changes in the top management team. Continuing infighting between those who bought the new vision, and wanted to consolidate the organization behind the new strategy, and the country barons, who did not want to give up power, made it impossible to reorganize effectively. Lindahl’s task force approach made little progress. After earnings surprises and poor results in 2000, Lindahl was forced to step down, a classic example of a CEO with a new strategy who could not deliver on his commitments. With ABB as the background, this chapter looks at the conditions that affect leadership styles: • Dealing with leadership constraints • Fast versus deliberate leadership • Top-down versus bottom-up leadership

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• Driving leadership styles for some common conditions • Adapting to and shaping leadership conditions • Dynamic leadership lessons

Dealing with leadership constraints The scope for leadership is constrained by the mandate provided by the board, or management superiors, by the leader’s personal preferences and competency, and by the starting conditions that reflect the recent history of the business. The sections below look at how to deal with these constraints: • Develop a clear mandate on the governance level • Complement your personality and style • Start with the existing conditions.

Develop a clear mandate on the governance level More often than not, deep change reshuffles the power at the top. Those who are negatively affected resist, which is a normal part of all change. But if the change leader does not have the necessary power base to prevail, he or she will find themselves at the mercy of those who want to maintain the status quo, with unpleasant consequences. This was Lindahl’s trap at ABB; with Barnevik as chairman, he did not have the power to make the sweeping changes needed in the top team. The change leader must be confident that he or she has the organizational legitimacy – in the form of a clear mandate from the board – to do what has to be done. This means having a leadership understanding with your boss based on clear objectives and rules of leadership: vision and values (things central to the leader’s view of the world and his or her management style); the dimensions of power and freedom to act; how risks will be managed; and performance criteria and rewards.3 Sometimes, the mandate from above may not be available. The board or senior management may be divided. Here, the leader must

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judge whether it makes sense to take a calculated risk, putting his or her neck on the line, and try to make the change happen, thereby swinging the whole organization around. This can be done successfully: for example, at the biggest bank in Slovenia, right after the cession from Yugoslavia, the new finance authorities were unable to provide a full commitment to change, but the new CEO took the reins anyway. After the first few months, during which the power struggle could have gone either way, the new CEO was able finally to squeeze the old guard out by promoting young managers from below.

Complement your personality and style When the going gets tough, as it inevitably does during transformations, people all have a tendency to fall back on their preferred management style, the style that has worked for them in the past. Their preferred styles are shaped by their personalities and experience, things they cannot alter. Unfortunately, what the transformation requires may be something that the leader is unable to offer, which limits his or her ability to manage change. A directive style, for example, although appropriate for crisis management, can be a disaster for stimulating innovation. There are two choices here. First, you can try to adapt your style. In the short run, it looks awkward, is not very convincing, and consequently not very effective. In the longer run, it can be done with great personal discipline, as Jack Welch demonstrated in his much publicized career at GE, going from ‘Neutron Jack’ in his early years as CEO in the 1980s, to ‘Gardener Jack’, someone obsessed with values and nurturing his executives at the end of the 1990s. Second, you can bring people on to the management team with the style that is appropriate for the context. Thus, when turning around the ailing UK retailer Asda, in the early 1990s, the new CEO, Archie Norman, put his natural commander style to good use in the early top-down phase of the turnaround. But when it came to transforming the culture, he complemented his commander style by hiring a natural coach, in the person of Alan Leighton, to join the team as marketing director and process facilitator.

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Start with the internal conditions People only commit to change if it is attractive or beneficial to them. It is no use painting a vision and expecting people to jump to fulfil it. You have to build a bridge from the present to the future – one that they can see themselves crossing. Thus, effective change paths start with a process that is grounded in the present context. The bridge to the future is built with compelling value-creating logic, plus the resources and time to deal with the anticipated obstacles, and clarity about how people will fit into the vision. Trying to transform an organization and its culture is not to be undertaken lightly. In surveys looking at the success rate of change initiatives, roughly two-thirds of the respondents said they did not work when culture was involved, or were, at best, only partially successful.4 A failed cultural transformation generates widespread cynicism and steadfast reluctance to try it a second time. When Jörgen Centerman, the head of the Automation business, became the new CEO of ABB after Lindahl, he restructured the top team and soon announced a sweeping reorganization. ABB was to change from a business segment to a customer-centric organization: with four downstream divisions, made up of account teams serving the large global customers in utility, oil and gas, consumer and industrial markets; and two upstream platform divisions, concentrating on automation and power technology. However, consolidating the thousands of business units around the world into business areas and divisions was not easy. Some business areas had two people at headquarters running 50 business units around the world. In addition, the new account teams were short on customer consulting expertise and lacked contact with local customers. To sort out the details, Centerman and his team appointed task forces. But they took time to report, the uncertainty on the front line grew, and the old country organization people often remained the best contact for customers. In trying to leap to the new organization, Centerman failed, and was brought down to earth by the pervasiveness and deep roots of Barnevik’s old decentralized business unit culture. Greater attention to the internal conditions would have been needed to build the bridge from the old to new culture. Overall, the critical leadership conditions are the external urgency of change and the internal resistance. As early as the 1940s, Kurt

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Lewin pointed out that these are the two essential conditions that shape the leadership of change – the external and internal forces of change.5 Since then, one body of literature has developed on what is known as situational leadership – how to lead people with differing resistance or willingness to change.6 Another stream of research has focused on how to manage under differing degrees of external pressure to change.7 We now bring these two perspectives on leadership together to look at which leadership styles and implementation processes should be dominant under different conditions. The sections below discuss fast versus deliberate, and top-down versus bottom-up, leadership. They explain the link between urgency, resistance and the right leadership behaviours, shown in Figure 2.1.

Fast versus deliberate leadership The pressure for change is reflected in the performance of the business, both actual and anticipated. A useful indicator of urgency is corporate performance over time, measured in terms of a financial variable like profits that is as objective as possible, as well as a forwardlooking measure, like the rate of innovation or new orders over time. Four different conditions linked to performance are worth discussing.8 The first condition is continuing growth – increasingly successful financial performance, plus positive expectations based on the forward-looking indicators. In this context, the leadership challenges are acquiring and developing the resources to sustain the growth and developing the organizational infrastructure to support the growth. The key is to capitalize on the growth opportunity. Generally in a growth environment there is little time before competitors catch up or customers change, and you have to move fast to get the organization up to speed. The change urgency is usually high and fast leadership behaviour is needed.

Leadership conditions Low urgency High urgency Employees closed Open to change

Right leadership behaviours Deliberate Fast Top-down Bottom-up

Figure 2.1 Leadership conditions and right behaviours

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The second condition is anticipatory. The historical financial performance has been strong, but the forward-looking indicators are flashing red. If nothing is done, performance will decline. This is the most challenging performance context for leading change, because most people cannot see why they should change: how do they know that those proposing change are not pursuing their own agenda? Past success is indeed one of the biggest obstacles to change. Management has a huge task in building and communicating the case for change. Since the financial performance is still strong and time is available, the change urgency is relatively low and deliberate leadership is appropriate. The third condition is reactive. Tangible difficulties are apparent – financial performance has started to decline and the forward-looking indicators portend worse to come. Yet many will argue that, looking at the big picture, things are not necessarily that bad; the decline in performance is a temporary bump in the road; the company cannot afford to chop and change every time it runs up against a few problems. One of the big leadership challenges is to determine how much time is really available and what change management tactics are appropriate. How rapidly are things deteriorating? If some time is available, management can still use deliberate tactics for bringing people on board. Provided the urgency is not too high, deliberate leadership is called for. Finally, the fourth condition corresponds to a crisis, where, if nothing is done, the business will be in serious difficulty, its survival threatened. There are usually serious blockages to change, otherwise the situation would not have reached crisis proportions, but on the positive side, most people can see the urgent need for change. You have to move fast to overcome any resistance, exploit the support for change and take the necessary steps to save the viable parts of the business. The high urgency requires fast leadership. When Lindahl took over at ABB, the company’s performance was flat and declining – a condition where reactive change was required. Deliberate, more incremental change was still possible. But by the time Centerman took charge four years later, the situation had not improved. When ABB ran into problems with litigation over asbestos boilers designed many years before by Combustion Engineering (acquired by Barnevik in 1988) and then hit a liquidity crunch in 2002, the company was in a crisis situation. Fast radical action was essential. Centerman’s task force approach was too slow.

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Looking at these conditions and leadership behaviours, the underlying variable is the change urgency. The following summarizes the right leadership practice for differing degrees of urgency. Right practice: urgency and leadership styles When the urgency is high, either to exploit an opportunity or deal with a threat, implementation must be fast; when the urgency is low, a deliberate approach can be taken.

Top-down versus bottom-up leadership Everyone has his or her own response to change, which is shaped not so much by personality as by the potential impact of the change on the person. Since it is impossible for leaders in larger organizations to anticipate every employee’s response, it is useful to cluster the likely responses into a few basic categories. The widely used approach of situational leadership describes how followers, with varying needs for direction and a supporting relationship, determine the right leadership style. One variation of situational leadership looks at whether the responses to change are likely to be active or passive (whether people are willing and confident about the change, or unwilling and insecure) and whether the individual ability to benefit from change is positive or negative (whether people have the knowledge, experience and skills to adapt, or not). Clustering people’s responses to change produces the leadership requirements sketched out below.9 The change agents are critical to the change effort. They have the energy needed to help launch the change; their personal histories show they are willing and confident enough to actively support change. Most importantly, they will benefit because they have the necessary knowledge, experience and skills. The change agents are the people who can propose initiatives, lead task forces to define the details of the change, facilitate the processes to involve others, or otherwise lead the implementation effort. What they require is the challenge from management to stretch themselves and demonstrate what they can do. The bystanders sit on the fence, watching what is happening without committing. Although they may benefit from the change,

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they are insecure, sceptical and unconvinced it will work. Bystanders are often worried about the logic of the change, having many questions and all sorts of reasons why it is unlikely to work. You have to sell the impeccable logic of the change to them, soliciting their opinions, asking them to collaborate in fleshing out details. Often, the bottom line for bystanders is ‘How is this going to create value and what is in it for me?’ For the traditionalists, the change is negative because they lack the necessary knowledge, experience and skills. Typically, they may have contributed to the company’s past success, but are not impressed by new challenges or logic. However, with some prodding they may be willing to participate, in particular if they are shown that the bridges to the past are gone. Traditionalists have to be integrated into teams and other structures that are part of the new organization, with training and coaching to close their ability gap and help them participate in creating the future. You have to find new roles for them in the reality of the new organization emerging from the change. The resistors are dangerous for management. Knowing that the change will not benefit them, and lacking what is needed to participate, they want to block the process or roll it back. Resistors are active in rallying some of the traditionalists and bystanders to their cause; if they succeed, the change initiative will fail. Resistors may have some useful inputs, if they can be converted; but conversion takes time and effort that are in short supply during high pressure execution. Indeed, most business leaders say they waited too long to deal with resistors. Resistors have to be confronted sooner rather than later, either to buy into the change or buy out of the company. At ABB, traditionalists and resistors undermined the change efforts of both Lindahl and Centerman. Ideally, after gaining the board’s backing when he took the job, Lindahl should have confronted the resistors on the top team early on. Centerman did this, but then started running into the blocking tactics of traditionalists and resistors lower down, where they were less visible. Part of this was due to the slow approach to making the appointments, providing the training and setting up key parameters, like transfer prices. As a result, the resistors on the front line were not forced out. Summarizing the leadership style required to deal with the different response types, we can say that if traditionalists and resistors dominate the organization, it is not ready for change. Management has

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to act top-down to deal with their resistance and confront them with the choice of buying in, or out.10 By contrast, organizations with a critical mass of change agents and convertible bystanders are ready for change. Management can delegate and involve them in driving the change bottom-up.11 This is consistent with the following general principle about the right practice for managing resistance. Right practice: readiness and leadership styles When employee readiness for change is low, management has to lead change top-down; when the readiness is high, management can stimulate change bottom-up.

Driving leadership styles for some common conditions There are four basic leadership styles,12 which depend on the external conditions of urgency for change and the internal conditions of employee resistance to change (see Figure 2.2). In describing the right practice in each case, we shall assume that the leadership team has already been put together.

Commander style: exercising top-down direction to deal with high urgency for change and employee resistance When both the forces of change and resistance are strong, management has to move fast in a top-down way. This is typically the case in a crisis, although it also occurs when the leadership sees a valuecreating opportunity that the organization is not ready to pursue. Barnevik was in the latter situation after the merger between Asea and Brown Boveri in 1988. He had to move fast to capitalize on the benefits of the merger, but most of his people wanted to keep the changes in their lives to a minimum. Both the urgency and resistance were high. Barnevik moved quickly top-down, in commander style, to make the necessary appointments and put the new organization in place. The more common context for top-down direction is a crisis. The first step in managing a crisis is ensuring that everyone recognizes

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Employees closed Top-down

Chairman

Commander

Low urgency Deliberate

High urgency Fast Coach

Catalyst

Open to change Bottom-up

Figure 2.2 Common leadership conditions, behaviours and the right driving styles

the urgency of the situation – especially those directly implicated. Developing a shared sense of urgency typically involves shock treatment to unblock the situation. Shock treatment may take the form of firing key managers, bringing in new managers or restructuring the organization – possibly with a divestment, outsourcing or the like. Executing a top-down process is like conducting a military campaign. Ideally, the process is driven by explaining and communicating very clear objectives, often involving profits and cash flow. The key people have clear tasks linked to the objectives. The implementation process is highly structured, tightly managed, and moves fast, with people being told how they should proceed. There is frequent monitoring of progress towards the objectives. If people have to be fired, this should be linked in a transparent way to previous performance and current objectives. Resistors must be dealt with early to prevent them from getting in the way of fast execution. In addition, to maintain the morale of key employees who have other options, you must provide a longer-term vision of the future after the turnaround. The right leadership style is that of a commander, who can determine what has to be done and how, and communicate this to the

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organization. This directive style is most suited to dealing with resistors, who have to be told in no uncertain terms what they have to do and how to proceed if they want to stay on board. The commander has to explain to the change agents and bystanders that they cannot have as much say in the agenda as they might like, owing to the need for fast, focused action. He or she also has to ensure that sufficient support is provided to help the traditionalists come on board. The most common danger in a turnaround is sinking morale and the loss of good people. However, the biggest danger is that the commander pursues the wrong objective and takes the whole organization over a cliff, hence the importance of good governance oversight.

Chairman style: deploying task forces for low urgency and employee resistance Low urgency and employee resistance mean that the direction is not obvious. The right approach is to enroll the few change agents in task forces in order to sort out the details of the change direction, or set up the implementation process. Task force change starts with management convincing enough change agents of the importance and urgency of the issues at hand, then appointing the task forces and giving them clear mandates. When numerous task forces are involved, a steering committee should orchestrate and monitor the task force activity, providing resources, people and money, as well as a timeline for the tasks. This requires explaining the role of the task forces to the rest of the organization, so that they release resources where necessary and do not block the activity. Once the task forces have done their job, the change process has to be rolled out through the rest of the organization. The right leadership style is that of a chairman, good at orchestrating and keeping the task forces on track, selling the need for them to the organization, and managing the resource support and training during rollout. This style is suited to bringing the traditionalists on board, people who need task redefinition and personal support. Selling skills are critical in persuading the change agents to accept the mandates for the task forces and the bystanders to support the rollout. However, the chairman has to steel him or herself to deal with the resistors before they start undermining the task forces or the rollout.

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The most common danger is task force pollution – too many task forces which result from lack of closure of old task forces as well as new ones without adequate support. The other related danger is no – or weak – rollout. The task force report is filed away and the effort wasted, something everyone remembers the next time it is tried. At ABB, Lindahl used task forces, which made sense because the conditions were those of moderate urgency with strong resistance. But the task forces were not sold strongly to the organization and many of the key power brokers never really accepted them. When his time came, Centerman also deployed task forces, but he was facing greater urgency. The task forces were too slow in reporting back. Valuable time and credibility were lost. Given the urgency he was facing, Centerman should have used more top-down directives to put the key elements of the new organization in place, since everyone understood the urgency and was waiting for action.

Coach style: encouraging widespread participation for low urgency and employees open to change When the change drivers are still weak, but the organization is open, management has both the time and potential support to involve a lot of people in a widespread effort. Yet low urgency for change means a lack of clarity about what has to be done. Creating a shared sense of urgency and direction is a big challenge. Widespread participative change typically starts with the top leadership developing a new vision for the business. This is often accompanied by a statement of values and objectives, justified with facts, scenarios and analysis including the behaviour of customers, competitors, suppliers and employees – all intended to create the basis for developing a shared sense of urgency. The new vision is cascaded down through the organization, level by level, in workshops, seminars and conferences involving increasingly large circles of people. Each circle discusses the urgency of the situation and works out the implications for its level, based on what the level above has committed to do. When new capabilities are central to the new vision, new process development and training are important parts of the cascade. The big danger in widespread participative change is that it gets sidetracked in endless meetings with no visible value creation. The

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process drives out the results. There is too much handholding and facilitation and not enough focus on business objectives. A disciplined, tightly managed process focused on measurable targets is essential to avoid this trap. The ‘how’ must be given, leaving the ‘what’ open for each level to determine for itself. The right management style is that of a coach – collaborative, good at facilitation and working with people, but with a disciplined focus on results. This style appeals to bystanders who are able to change but want to be convinced with facts, dialogue and involvement. By contrast, the change agents have to be restrained so they do not run away with the process. And the traditionalists need help with more task definition. More dangerously, the resistors have a forum in which to impose their agenda. So the leadership team must not only be good at working with people, but also strong enough to block the resistors’ agenda and confront them when they get out of hand.

Catalyst style: stimulating bottom-up initiatives for high urgency and employees open to change When the urgency for change is high and the organization is open, management can move fast to unleash the organization and stimulate bottom-up initiatives. Although this can happen in a crisis once the blockage to change has been removed, it occurs most commonly in rapid growth environments, which is the case discussed here. The key to instilling a sense of urgency in an open organization is removing the blockages. In growth environments this typically has to do with incentives and rewards. A widely used approach is to challenge change agents with a new incentive system based on stretch targets. Alternatively, if people are not aware of the opportunities, they must be exposed directly to them through contact with the change forces, often represented by the customers or other external players. Those in charge have to provide an overall framework for the bottom-up initiatives, a broad vision to indicate what kinds of initiatives fit in with the business objectives, while leaving the nature of the initiatives and how they are to be implemented open. The internal entrepreneurs need access to people, ideas and money, through an open organizational design. A simple, clear approval process for potential initiatives is important: the appraisal stages and

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milestones from idea to prototype to launch need to be clearly defined, along with monitoring and support. Most important is a performance appraisal system that provides room for honest failure: those with honest failures should not be fired, but rather applauded and encouraged to try again. The right leadership style is that of a catalyst, an inspirational leader, who can stimulate people to take the risk of launching a bottom-up initiative, despite the low odds of success. This style obviously appeals to change agents who are able and willing to step up to the frontline. It tends to leave bystanders unconvinced, at least initially, until the process gathers momentum. Traditionalists do not become involved, and resistors wait for failures and the opportunity to pull the plug. The big danger is confusion, with too many projects and a lack of proper control. In the worst case, a rogue project can pull the whole business over the edge, as Nick Leeson did in 1995 in Singapore with Barings Bank, then the oldest bank in the UK. Hence, the importance of stimulating bottom-up initiatives within a well-defined framework, clearly understood by everyone. The underlying theme in these four basic change processes is the way in which the driving leadership style is determined mainly by the forces of change, but has to be adapted to deal with the forces of resistance.13 This points to the following right practice about the driving leadership style. Right practice: change conditions and leadership styles The external pressure for change largely determines the right driving style, but the different responses to change within the company and the evolution of the forces of change and resistance also need to be taken into account.

Adapting to and shaping leadership conditions Leading a business through ongoing change calls for continuous vigilance to keep it on track. Otherwise, it drifts off under the influence of forces managers cannot control, swallowed up by inertia or taken over by the narrow interests of one of the parties involved. Most

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change projects, close to two-thirds by some accounts, fall into the drifting category; they achieve some temporary improvement, but cannot sustain it.14 Key to sustainable change is the relentless pursuit of objectives with a series of change processes that reflect and shape the evolving conditions. Because change management affects the conditions – both the readiness of the organization and the urgency for further change – the driving leadership style and change processes have to be sequenced in a way that takes into account their impact on the prevailing conditions and moves the business towards the desired business drivers. Most successful large change efforts use all four of the basic change processes in different parts of the organization at different points. However, two sequences of driving leadership styles and change processes are particularly common: an incremental path (as shown in Figure 2.3) and a radical path. The incremental change path often starts with top-down direction to deal with a threat to the business and reduce the pressure sufficiently to give task forces the time to sort out the new trajectory. The main implementation is then done with widespread participation

Employees closed Top-down

Chairman 2. Task force change

1. Commander Top-down direction

Low urgency Deliberate

High urgency Fast 3. Coach Widespread participation

4.

Catalyst Bottom-up initiatives

Open to change Bottom-up

Figure 2.3 Possible shifts in conditions, the driving leadership style and change processes on an incremental path

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to get maximum involvement and open the organization up, followed by incentives and systems to encourage bottom-up initiatives. Because he lacked the legitimacy for top-down directive change, Lindahl started with task forces at ABB. However, he could not go any further because he also lacked support lower down to involve more people in a widespread participative effort. Centerman used topdown directives to clean out the top management team, followed by task forces to work on the implementation approaches, and widespread involvement in large meetings and conferences of the top 200. But since he misjudged the depth of cultural change required, results were slow in coming, especially relative to the faster pace of change in the environment. The dot.com meltdown, the recession and the asbestos litigation exacerbated the weak results. After increasing differences with the ABB chairman, Jürgen Dornmann, Centerman left in mid-2002 and Dornmann took over as CEO. The incremental path, with its heavy reliance on the slow processes of task forces and widespread participative change, could not keep up. By contrast, the radical change path often starts with a task force to redesign a process15 or refine the details of what has to be done. The results are then driven through the organization top-down. Once the organization has been shaken up, however, the top-down process has to be complemented with systems and incentives to encourage people on the frontline to take the initiative further. Barnevik used a radical path when he put the ABB merger together: he drove the change down to the frontline by setting up governance and organizational systems to encourage entrepreneurship.

Dynamic leadership lessons 1. Get a clear mandate and support. Make sure you have organizational legitimacy – in the form of a clear mandate or the ability to operate without it – together with enough political support and change agents to implement the vision. 2. Start with the internal conditions. To succeed, change has to start with the existing culture; people evaluate what’s in it for them relative to their starting point. To win support, the change has to offer them something more than they could achieve without participating.

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3. Complement your style to fit the conditions. Adapting personal style is more easily said than done; rather, bring people on to the management team with a style that is appropriate for the context. 4. When resistance is strong, use a top-down approach. To deal with resistors, confront them: either buy in or get out. To bring traditionalists on board, offer them new roles in the new organization, with the necessary training and support, and ‘burn the bridges to the past’. By contrast, when change agents and bystanders dominate, there is less resistance and a more bottom-up approach can be employed to enlist their support. 5. When the urgency is high, move fast. When performance is bad, management does not have the luxury of trying things out with task forces, or taking the time to get everybody on board. Conversely, when time is available, it can be used to take a more deliberate approach to change. 6. Adapt the driving leadership style and change processes to the evolving conditions. At various times during ongoing change, the leadership team will have to play the role of commander, chairman, coach and catalyst, with related change processes, to suit differing conditions.

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3 Which Organizational Modes?

Few things are more certain in organizational life than the oscillations between centralization and decentralization, and between collaboration and entrepreneurship. How much centralization or vertical control from the top should there be over the levels below in the organization? How much collaboration or horizontal integration should there be between parts of the organization on the same level? The right choice depends on the conditions facing the organization. Differing conditions call for differing organizations. At Nokia, when Kari Kairamo became CEO in 1986, the Finnish company was a conglomerate of decentralized, divisional power centres in forestry, rubber, cable and electronics. Kairamo set about transforming Nokia into an international, high growth technology company, with numerous acquisitions in electronics, such as Salora, the TV maker. Simultaneously, to deal with the rapidly evolving electronics industry, he began to decentralize further within the divisions, loosening control and dismantling the internal hierarchies to encourage greater flexibility. And in the decentralized units, he promoted teamwork and collaboration to improve efficiency. But in 1988, Nokia’s acquisitions in the crowded, mature TV market turned into a disaster that nearly sank the company. In December of that year, Kairamo, facing intensifying pressure, committed suicide. The new CEO, Simo Vuorilehto, was a tough-minded engineer. He began to tighten control, cut costs and restructure the company

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by selling off non-strategic assets. Finland was hit by a deep recession following the collapse of the Soviet Union and Nokia struggled to survive. Disagreements surfaced over the future of the lossmaking mobile electronics division. Some bankers on the board wanted to get rid of it, but Jorma Ollila, the head of the division, believed – like Kairamo before him – it was the key to the future. Eventually, the board sided with Ollila and he was appointed CEO in 1992. Ollila saw Kairamo’s heritage of decentralized teamwork as especially critical for survival and growth in the complex, fast-moving mobile phone and telecom equipment divisions. Both divisions began to benefit hugely from the spread of the GSM1 mobile standard, while consumer electronics (TVs) continued to bleed large losses. On May 12, 1994, at a board meeting in Hong Kong, Ollila announced the aim of becoming the global champion in mobile phones and divesting all the other businesses (cables, cable machinery, tyres, industrial electronics, consumer electronics and power). But in 1995, the mobile phone division ran into growth problems related to logistics, quality control and budgeting. To correct things, the organization had to shift from decentralized teams to centralized roles in the production and supply chain. In 1996, the inventory cycle was reduced from 154 to 68 days, thus halving inventory costs per handset. Production times and production line efficiency improved dramatically in the years that followed. The number of parts per unit declined sharply. And in 1997, top management control of the operations in Asia Pacific and the Americas was increased to ‘improve the utilization of the group’s know how in telecommunications, streamline the decision-making process, and improve the ability to take regional characteristics into account’.2 The late 1990s were golden years as the market for Nokia’s phones boomed. But by 2002, the wheel had turned again, following the recession, the collapse of the telecom market, the emergence of new competitors – like Samsung and Qualcomm – and the intensifying competition for control of the software platform for mobile devices. To deal with the complexity and uncertainty, Matti Alahuhta, the divisional head of mobile phones, split product development and marketing into eight customer-facing units, focusing on different segments, such as imaging, media applications and business applications. These units were supported by global platforms upstream, for

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communication technology, mobile software, logistics, purchasing and manufacturing. This chapter discusses the following topics, using examples from Nokia and other companies to highlight salient points: • • • • • •

Dealing with organizational constraints Flexibility versus control Entrepreneurship versus collaboration Driving organizational modes for some common conditions Adapting to and shaping organizational conditions Dynamic organizational lessons

Dealing with organizational constraints Organizations have two sides to them: the formal and the informal. The formal organization is made up of the structure (decision-making authority and accountability), processes (systems and controls) and incentives (performance assessment and rewards). The informal organization, or its culture, is made up of the shared values (right and wrong), beliefs (truths and falsehoods) and behaviour (routines and rituals) of its members – a huge repository of tacit knowledge.3 The culture, or informal organization, is very difficult to change, because it is heavily influenced by history. To deal with constraints imposed by natural, industry, and organizational history, leaders are advised to: • focus on institutions and individuals, not national clichés; • adapt to the constraints of industry culture; • shape the organizational culture over time.

Focus on institutions and individuals, not national clichés Managers live with the national cultures of the people in their organizations. The commonalities in life experience cause people to see the world in a certain way. This common experience represents a form of ‘collective mental programming’4 that is reflected in a people’s culture – their values, beliefs and behaviour – and embedded in their

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institutions. The institutions, including the family and religious, educational, political and other organizational relationships, in turn, reinforce the ways of thinking and behaving that people bring into the organization. What can you do about the organizational impact of national culture? The first step is to avoid the use of clichés or stereotypes about people’s preferences in trying to understand a culture. Focus instead on the institutional details in the people’s background. Institutions have the advantage that they are a concrete reality that exists in everyday life.5 They can be observed, documented and described in detail. When making an acquisition in a foreign country, for example, the acquirer should focus on the institutional specifics of the target company’s immediate environment, rather than on cultural clichés about assumed preferences. Doing so would have saved Daimler and Chrysler a lot of surprises and disappointments when the two companies merged in 1998. The Chrysler people assumed that the Germans were straightforward, not inclined to subtlety or to masking their intentions. If the Americans had instead focused on the background of the Daimler CEO, Jürgen Schrempp, his political independence and his long stay in South Africa, they would have known that he did not fit the German stereotype at all. With this in mind, they might have given more weight to their suspicions that Schrempp did not mean it when he said the deal would be a merger of equals. Conversely, the Daimler people assumed that Americans, and therefore Chrysler, would be flexible and adaptable. If they had focused on Chrysler’s inflexible business model, based on very high fixed costs relative to variable costs, they might have anticipated that Chrysler’s profits would evaporate when demand dropped. The second step in dealing with national cultures is to realize that there are huge variations in values, beliefs and behaviour between individuals. Consequently, companies with strong internal cultures of their own can usually find enough people in a particular geographic environment whose preferences fit their corporate culture. To succeed in different local environments, focus on recruiting the right people rather than on making major adaptations to corporate culture. Nokia, for example, no matter where it is, insists on certain core values – like teamwork and modesty – that come from their Finnish origins. Even in the New World, where these values are less common, the company finds more than enough individuals who fit the Nokia culture.

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Adapt to the constraints of industry culture Every industry has its own cultural particularities. The culture of an industry is shaped by its value-creating activities, what people do during their work days, and by the dominant professional education of the people in the industry. Take the engineering profession, which attracts those who are good at sober, factual analysis and whose education reinforces related values, beliefs and behaviour. In engineering industries, like telecom equipment, sober, factual analysis is not only central to engineering design but also part of management behaviour. By contrast, the movie and music industries attract those who thrive on glamour and stardom. In the movie industry, dramatic roles are not only part of the product but also part of management life. When Steve Ross’s company, Kinney, took over Warner Brothers in 1969, Ross acquired a business that ‘offered him everything he might want: seemingly infinite vistas of business possibility, astronomical compensation, entrée to a glamorous star-studded world. And it was, moreover, a business where his instinct with people – cultivating them, catering to them, winning their favour – would be extraordinarily, even uniquely, useful.’6 However, the culture of an industry can become a problem when the industry starts evolving rapidly and the business model has to change. Reorganizing an engineering company from selling black boxes to multimedia services requires a major cultural shift. The driving organizational mode has to shift from the functions – like engineering design, manufacturing and distribution – to market segment units, capable of managing diverse talent and relationships and selecting potential winning applications and blockbusters for fickle consumers. The mobile phone makers and telecom operators, no matter how well they are run, face a huge organizational challenge the closer they move toward multimedia services.

Shape the organizational culture over time Over time, leaders affect the culture of their organizations with the subtle, deep impact of their style. The extroverted leader who is in constant direct contact with employees, encouraging people to speak

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out and rewarding those who do, gradually persuades a growing number of people to do the same – or quietly leave. The introverted leader who is constantly in his or her office pouring over the numbers, and who talks only to direct reports, soon encourages others to retreat into their organizational silos and focus exclusively on the bottom line. The narcissistic leader who wants all the limelight and cannot take criticism soon encourages others to disengage from the company emotionally.7 The longer a leadership style persists, the more it impregnates the culture of the organization and the more difficult it is for a successor to put a new culture in place, particularly when the national and industry cultures support the old style. When the old culture dominates, it limits the scope of successful organizational design. In the early 1990s, when Sony Europa was facing declining growth, increasing competition, increasing costs and pan-European purchasing by its large customers, it decided to move from the decentralized country organization – which had been key to its success in Europe – to shared services and five centralized product groups responsible for profits. Although there had been some consultation, the announcement of the reorganization came as a big shock to the country managers. They saw the move as a major redistribution of power away from them to the product group managers at the centre. The first director of Central Marketing Europe resigned in frustration at all the infighting. His successor, the UK country manager, then rolled many of the changes back, in particular moving profit responsibility back to the countries. The old country culture frustrated the reorganization. In the longer run, changing the organizational drivers is one of the ways leaders can consciously shape the informal side of the organization. Over time, the organizational drivers that support value creation help to change the organization’s culture: rules for decision making, processes used for implementation and the rewards people earn gradually affect their behaviour, beliefs and, ultimately, their personal working values. The critical question is what are the right drivers, the right organizational behaviours vertically between levels in the organization and horizontally between organizational units on the same level. Psychologists’ and social psychologists’ research has linked the vertical tension between control from the top and flexibility on the frontline to the complexity in the business environment: the greater

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the environment complexity, the greater the need for organizational flexibility. In parallel, economists and sociologists have linked the horizontal tension between collaboration and entrepreneurship to the competition for resources: when resources are scarce, more collaboration is needed. And those studying organizational behaviour have synthesized the two perspectives. At least three different research teams have arrived at essentially the same synthesis that we use in this chapter.8 These key links between organizational conditions and right behaviour are shown in Figure 3.1 and explained in more detail below.

Flexibility versus control Each level in an organization tries to maximize its freedom relative to the other levels. Maximum freedom from the levels above reduces the obligation to contribute to the larger objectives. When pushed to the extreme, the shirking of collective obligation can lead to the dissolution of the larger organization. Conversely, maximum control from above over the levels below leads to manipulation of the organization by those at the top; in extreme cases, manipulation destroys the commitment from the lower levels, making it impossible for the organization to adapt and survive. The right degree of vertical coordination between the extremes of maximum freedom and maximum control depends on the complexity of the threats and opportunities. In simple environments, where it is clear what has to be done, focused organizations with control win; they can concentrate resources and pursue the objective relentlessly. In complex, uncertain environments, flexibility is essential to deal with the future as it unfolds; the freedom to experiment and explore what works is key to success. At Nokia, to deal with the fast-moving electronics industry in the mid-1980s and, later, the emerging market for mobile data services in the 2000s, first Kairamo and then Alahuhta

Organizational conditions Business simplicity Complexity Resource scarcity Availability

Right organizational behaviours Controlled Flexible Collaboration Entrepreneurship

Figure 3.1 Organizational conditions and right behaviours

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decentralized and loosened control to provide more flexibility and encourage innovation. This discussion points to the following general right practice about vertical coordination. Right practice: environment complexity and organizational modes When the environment is not complex, the driving organizational behaviour should embody control with tight coordination; in the presence of high complexity, the driving organizational behaviour should embody flexibility with loose coordination. However, complexity varies with the eye of the beholder. Managers choose how to interpret the world around them and position the business, especially during discontinuities. Some people see a clear opportunity for shaping the environment in the midst of a discontinuity, whereas others see only threats and uncertainty. In other words, the right organizational behaviour depends on the perceived complexity of the environment.

Entrepreneurship versus collaboration The evolutionary view of organizations is that the survivors do the best job of allocating scarce resources to attractive value-creating opportunities.9 Thus, the best organizational design and culture for a particular situation are a function of the nature and availability of the organization’s resources. In the business world, when resources are scarce, the first challenge is to acquire more of the resources that are critical for value creation.10 When markets are efficient, companies pay more for these scarce resources up to the point where they can no longer create enough additional value to cover the cost. But corporate resources include both the tangible and the intangible: technology, finances and installed product base; talent, relationships and image. The intangible items, in particular, are often not available on the market, and difficult to come by.

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When resources are scarce and cannot be acquired, the challenge is to use the existing resources as effectively as possible, with organizational behaviour based on a collaborative culture, grounded in disciplined processes. For example, when Nokia ran into logistics problems in the mid-1990s that increased costs, it moved to install processes for worldwide support services. By contrast, in organizations where resources are not a major constraint, the challenge is to find new value-creating opportunities for the resources. Companies that are successful in this environment have organizational behaviour that favours entrepreneurship with opportunistic decision making, open processes and an individualistic culture. This type of behaviour is needed, for example, when new market segments start opening up after standardization of an offering – as was the case when the GSM standard emerged for mobile phones. Companies like Nokia, which combine resource richness with entrepreneurial behaviour, are well positioned to define and exploit the new segments as they emerge. The following right practice applies about resource scarcity and the degree of collaboration. Right practice: resource scarcity and organizational modes When resources are scarce, the driving organizational behaviour should favour internal collaboration; when resources are readily available, the driving organizational behaviour should favour entrepreneurship.

Driving organizational modes for some common conditions Several organizational designs and their accompanying cultures appear repeatedly in the literature with varying terminology – sometimes connected to slightly different contextual labels – but with the same basic dimensions we have just discussed.11 The right driving modes for some common organizational conditions are shown in Figure 3.2 and described below.

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Low complexity Controlled

Centralized roles

Divisional power

Resource scarcity Collaborative

Availability Entrepreneurial

Interconnected teams

Network of entrepreneurs

High complexity Flexible

Figure 3.2 Common organizational conditions, behaviours and the right driving modes

Network of entrepreneurs: exploiting a wealth of resources in a complex environment To take advantage of plentiful resources in a complex environment, people on the frontline must be given the freedom to figure out where the opportunities are and to go for them. Authority and accountability should be pushed down the organization as far as possible and decisions made independently of other units. Control should be light, exercised by monitoring for exceptions. Adaptability and change go naturally with this flexible entrepreneurial mode. Typically, it involves a network of loosely linked entrepreneurs motivated to show what they can accomplish. They are good at innovation and growth, identifying ideas with market potential, acquiring the resources, and making a business out of it all. Decentralized entrepreneurship is associated with some start-ups, high growth outfits, key account managers and outsourced activities. At Nokia, the new customer-oriented units set up in 2002 are an example of this type.

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Divisional power: exploiting a wealth of resources in a simple environment When resources are plentiful with little uncertainty or complexity in the environment, focusing the resources on the opportunities creates the most value. Power over resources should be vested in a limited number of entrepreneurs with the authority to direct how the opportunities should be exploited. Control is exercised through personal relationships between the CEO and his or her entrepreneurial champions, who set the direction and achieve targets through delegation and follow-up. The result is centralized entrepreneurship, often seen in the growth period after standardization and in dominant companies in mature industries: an organization of powerful divisional leaders competing for the best performance. During their international growth phases, both Sony and Nokia relied on divisional power, in the form of powerful country managers to drive the expansion of the business.

Centralized roles: dealing with scarce resources in a simple environment When resources are scarce and the environment is straightforward and simple, the available resources have to be used as frugally as possible on the few available opportunities. Decision making and execution have to be centralized to ensure the most economical use of the resources. Planning has to be well organized and control detailed, with little room for flexibility on the frontline. Monitoring and coordinating are strong roles. The result is centralized collaboration: the streamlining associated with cost reduction, the highly efficient execution associated with functional organizations in stable environments, and the standardized production designed to obtain global efficiency. This is the driving organizational mode that Nokia designed upstream in the mid-1990s to increase the efficiency of manufacturing and logistics and create global hardware and software platforms.

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Interconnected teams: dealing with scarce resources in a complex environment When resources are scarce in a complex environment, top management cannot possibly figure out the best way of deploying the resources alone. They have to encourage people on the frontline to collaborate in using the limited resources to figure out how value can be created. Authority has to be pushed down to the individual team level, to encourage flexibility, with accountability shared across overlapping or matrix teams. Team building, participative decisions and conflict resolution are key to making the organization work. The result is the decentralized internal collaboration associated with some high-tech start-ups and ongoing incremental improvement in more mature organizations. The Japanese Kaizen or total quality management, and the Nokia culture created by Kairamo in the late 1980s and early 1990s, are examples of this mode.

Adapting to and shaping organizational conditions There are at least two patterns in the evolution of organizational modes. The first, design oscillations, is very common and visible over relatively short periods of a few years. The second, organizational life cycles, is less regular and more organization specific.12

Anticipate the crises associated with organizational oscillations Organizational drivers eventually create conditions that lead to their demise. Too much entrepreneurship becomes a liability when times get tough and resources shrink and, conversely, too much collaboration stifles entrepreneurship and growth when resources become plentiful. Similarly, too much flexibility becomes dysfunctional when more focus is needed; too much control is out of place when more innovation is called for.

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Each of the common organizational modes can be associated with an equally common crisis that signals the end of its dominance and the impending shift to another driver.13 Networks of entrepreneurs eventually run into a crisis of leadership when the network expands too far and fast without counterbalancing coordination. Centralized roles tend to result in a crisis of autonomy as frontline decision makers find it impossible to adapt to the particularities of the changing conditions they face. Divisional power brokers eventually accumulate so much individual power that they become prone to infighting and impossible to control. Interconnected teams may require so many coordinating mechanisms that they get bogged down in too much red tape. Nokia, as we saw earlier, was highly decentralized with an interconnected team organization in the mid-1990s. But this made it too slow moving with too many countervailing decision makers who could not cope with the growth rate, and it ran into a logistics crisis. The more centralized organization that followed as a driver in the late 1990s was successful for a while but eventually stifled frontline decision making and could not adapt fast enough to the emergence of mobile data services in 2002. The most recent driving mode, a network of entrepreneurial business units serving different segments, will also eventually run into problems – most probably a crisis of coordination and leadership – but hopefully for Nokia, not before it has satisfied the need for faster innovation that drove its installation.

Shift the organizational driver to support value creation in each phase of the organization’s life Although each organization has a unique life cycle, there are sequences of development that are relatively common.14 One such sequence is shown in Figure 3.3 and described below using Microsoft as an example. Most businesses start out with an organic network of entrepreneurs in their pioneering phase of business development. They are highly entrepreneurial and experimental, informal, with ad hoc processes, no systems, little codified information and loosely articulated incentives. The limited decision-making structure is centred on the critical capability in the value-creating process – entrepreneurial effort. Microsoft was this way in its early days in the 1970s: loosely

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Low complexity Controlled Centralized roles Functions Platforms

2. 6.

Divisional power Country organizations Product divisions

3.

Resource scarcity Collaborative

Availability Entrepreneurial

Interconnected teams Processes

4.

1. 5.

Network of entrepreneurs Business development Key account management

High complexity Flexible

Figure 3.3 Possible shifts in organizational conditions, drivers and phases during an organization’s life

structured, antibureaucratic, with a small-team culture and Bill Gates overseeing everything.15 The transition to volume efficiency requires the development of mass production and distribution capabilities. These new capabilities call for decision making by the functions in centralized roles. With little uncertainty about how value is to be created, the coordination is focused and tight, with codified standards, processes and systems, and well-articulated volume and cost-based performance targets and incentives. At Microsoft, some order in the start-up chaos was essential for further growth. In 1983, the company was reorganized from an entrepreneurial network to an organization with centralized roles, split into functions, with applications under Gates and systems under Steve Ballmer. To improve quality control, the software developers under Gates were separated from the software testers under Ballmer. The next stage in the life cycle often requires a marketing capability to support differentiation. Decentralization into product or country divisions with divisional power driving decision making is typical of this phase. The processes, systems and incentives are linked to

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market-based performance indicators and the control from the centre is typically one on one, in order to encourage entrepreneurial behaviour to exploit the emerging segments. At Microsoft, divisions were put in place when Mike Maples joined from IBM in 1988. He found an organization with important gaps: project management was hopeless, people were taken from one project to support another; quality control was still very weak (Word 3.0 for Macintosh was shipped with almost 700 bugs in it). To straighten things out, Maples wanted smaller groups working on specific, leading products; these groups were to define and then redefine their processes for software development, testing and project management. Focus on the value created by product groups was key. To achieve this, he formed new business units comprising all the people responsible for a particular product. And then, in 1990, he split the Applications Division into five business groups, each an independent profit centre. Microsoft now had a classic divisional organization. The duplication and lack of control generated by powerful divisions often prompts a move to interconnected teams. The duplication and lack of collaboration between multiple upstream development and production facilities hamper value creation. In the pursuit of greater efficiency, processes are introduced to facilitate the sharing of development and production facilities across the divisions. Interconnected teams might be set up to manage the processes that nurture continual efficiency improvements, for example, while the divisions maintain the market or product orientation. Within a few years of divisionalization at Microsoft, it was already apparent that the organization could not handle the huge diversity in terms of financial reporting, procurement and HR practices. Microsoft had no idea how much money it was really making or losing on divisionalized purchasing – or how many people it really employed. But Microsoft did not shift the organizational driver to processes and interconnected teams right away. Instead, it tried strengthening the centralized functions to manage these issues, as well as marketing, sales and support, and product development. However, together with divisional power, the centralized functional roles created a more complex unwieldy organization. This structure persisted until 2002. Then, in frustration, Gates handed over the CEO reins to Ballmer, who quickly switched the organizational driver to processes and interconnected teams.16

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The power and incentive conflicts between the axes of a complex structure sometimes lead to interconnected teams being replaced by an internal network of entrepreneurs. This is typical of a move to a solutions-based offering, where key account managers lead customeroriented teams from different parts of the organization. But the integration problems across the old internal boundaries make these network structures very fragile. People are torn between the requirements of markets, products, processes and customers. One way of solving the problem is to complement the downstream network facing the customers, with efficient production upstream, based on centralized roles. The red thread in this story of business organization is the periodic addition of a new organizational driver to deal with bottlenecks and/or support a new value-creating opportunity. Each new driver becomes the dominant axis of decision making to maximize value creation. Existing elements are usually still important for value creation – even if they are less critical – and, hence, require ongoing management. In other words, the organization has to be managed on multiple dimensions, each requiring a different degree of coordination depending on its contribution to value creation.17 The following applies about the right design practice. Right practice: value creation and organizational modes During each phase of the development of the business, the organizational driver should be shifted to support value creation, and the other organizational elements should be sufficiently managed to maintain their contribution to value creation.

Dynamic organizational lessons 1. Lead within the existing organizational culture in the short run; shape it for the longer run. Organizational culture is deeply rooted and cannot be changed rapidly – except in crisis situations during which many employees leave – but only shaped over the longer run with new organizational drivers that support the valuecreating opportunities.

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2. Focus on institutions and individuals, not the clichés of national culture. When organizing globally, it is important not to be sidetracked by clichés about national cultural differences, but rather to find the individuals wherever you are that fit your corporate culture. 3. Shift the driving organizational behaviour towards entrepreneurship when resources are readily available, towards collaboration when they are scarce. To maximize the return on available resources, they have to be aggressively deployed, which is where entrepreneurial behaviour comes in; by contrast, when resources are scarce, they have to be carefully used and shared, which is where collaboration becomes critical. 4. Decentralize and increase flexibility to deal with complex environments; centralize control and focus to exploit simple contexts. Complexity cannot be dealt with from the top alone. People on the frontline understand far better what is going on and therefore need flexibility and a mandate to respond effectively. By contrast, simpler contexts provide the opening for a more focused organization. 5. Watch for strains in the existing organization to time the shifts in the driving organizational behaviour. The strains that inevitably build up in any organization over time provide a leading indicator of impending organizational crises. Owing to the slow nature of cultural change, being forewarned is key to adapting in time. 6. Shift the driving behaviour to support value creation during each phase of the organization’s life. As value-creating opportunities shift over time, so the organizational driver has to be shifted to support the newly critical capabilities, while still managing the other organizational elements to maintain their contribution to value creation.

4 Which Business Models?

The primary factor in deciding on the driving business model is how much value it will create. In the 1990s, growth and innovation were the best practices for value creation. By contrast, for the current, slow growth decade, we have rediscovered the basics: keeping costs down, the importance of efficiency and discipline. None of this is new, but it highlights the fundamental principle that the driving business model must be adapted to the value-creating conditions. During the years of economic reconstruction and growth after World War II, when Sony was created, the consumer electronics industry did not really exist apart from the radio business. The founders, Masaru Ibuka and Akio Morita, ran a typically pioneering type of business model. Their products were experimental: all-wave radios, rice cookers, voltmeters and electrically-heated cushions; their customers were early adopters, people willing to experiment with new products; and their operations consisted of highly flexible job-shops.1 After their first big successes with tape recorders and transistors in the 1950s, the ability to deliver high volumes efficiently became key to profitable growth. Sony had to standardize products and processes, and develop the other capabilities needed for mass production and volume efficiency. Expansion overseas, especially in the US, exposed Sony to different consumer wants and distributor behaviour. Delmonico, Sony’s first

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US distributor, wanted to sell a cheaper version of Sony’s new transistor TV and unilaterally cut the price for the 1959 Christmas season. This was in keeping with its belief that Japan exported relatively cheap products. Morita immediately terminated Delmonico’s distribution agreement, which was an expensive process, and started Sony’s own US subsidiary. He believed Sony had to position itself as a high-end producer from the start. To do so, Sony had to develop a business model capable of differentiating between geographic markets. When Norio Ohga took the helm in 1982, he took this much further. He said engineers should no longer run the company – it should be market focused, not only geographically but also with respect to other possible segments. Thus Sony moved from being an engineering company focused on products to one focused on customer needs, with a much greater emphasis on product/market innovation through brand building and marketing. Yet, when Nobuyuki Idei took over as CEO in 1995, Sony was losing money as a result of the mismanagement of two acquisitions made in the late 1980s: CBS Records and Columbia Pictures. Idei started focusing on shareholder return and value chain efficiency. He gave the business units clear profit and loss responsibilities, centralized some activities, closed factories, fired employees and, most importantly, hired John Calley to discipline and turn around the freewheeling US media businesses. After posting a $2.5 billion loss in 1995, Sony came back with profits of $2.6 billion in 1997. Overall, the Sony story highlights the way in which periods of product/market innovation and value chain efficiency tend to succeed one another as business models in response to changing economic forces and evolving internal capabilities. To determine the right business models for different conditions, this chapter looks at: • • • • • •

Dealing with business model constraints Product/market innovation versus value chain efficiency Basic versus integrated business models Driving innovation models for some common conditions Adapting to and shaping value-creating conditions Dynamic business model lessons

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Dealing with business model constraints The strongest formal constraints on value creation are legal and regulatory, which can sometimes be influenced by lobbying. The lobbies of declining industries in the developed world are especially effective at offsetting their declining competitiveness with subsidies, tariffs and other protection. However, social opinion is increasingly powerful as a constraint on lobbying, represented by the media and NGOs. No one in business expected that public opinion would be so strongly opposed to genetically modified crops – hailed as one of the biggest breakthroughs in agriculture – and which scientists say are completely safe. Yet, early involvement of stakeholders can make a difference. After Morita terminated Delmonico’s distribution agreement in 1960, Sony became the first Japanese company to open its own US subsidiary, unfurling the Japanese flag on Manhattan’s Fifth Avenue, a highly symbolic gesture post-World War II. To get there, Sony had been present in the US market for many years with attractive, quality products that built its brand image in the mind of consumers and Morita had patiently nurtured contacts at the highest levels in both business and government. Beyond the legal and social, the most important constraints on value creation are competition for opportunities and the availability of distinctive capabilities. But capitalizing on these is the essence of strategy. Two main streams of research dominate the strategy literature: strategic positioning concentrates on how to obtain a competitive advantage in terms of opportunities, with a superior portfolio of products and markets and/or by improving value chain efficiency,2 and capabilities research focuses on how to create a sustainable advantage by converting accessible resources and partnerships into distinctive capabilities.3 These two streams come together in the study of how business models shift over time: the way the value-creating process evolves with new capabilities supporting new combinations of products, markets and value chain delivery systems. The sections below on product/market innovation versus value chain efficiency and on basic versus integrated business models explain the link shown in Figure 4.1 between the conditions and the right business model behaviours.

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Business model conditions Convergent opportunities Divergent Early distinctiveness Advanced

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Right business model behaviours Efficient Innovative Basic Integrated

Figure 4.1 Business model conditions and right behaviours

Product/market innovation versus value chain efficiency Two overall types of opportunity dominate: variety creation in terms of new products and markets, and competitive selection of the fittest in terms of improved value chain efficiency. Some conditions, such as economic growth and diverging competitive offerings, favour value creation; other conditions, such as economic recession and converging competitive offerings, favour selection of the fittest.4 Exploiting a trend towards more divergence requires a driving business model based on product/market innovation. Alternatively, when the trend is towards convergence, the right practice is to shift the driving business model towards value chain efficiency. This is not to say that innovation and efficiency are not both important – indeed, larger companies have a portfolio of business models covering both – but rather that the dominant opportunities vary over time. The following principle of right practice applies. Right practice: opportunities and business models Economic upswings and industry forces that support variety creation, like diverging competitive offerings, create opportunities for product/market innovation; economic downswings and industry forces that result in survival of the fittest, like converging competitive offerings, create opportunities for value chain efficiency.

Basic versus integrated business models The main internal condition determining the driving business model is the stage of distinctive capability development. Capabilities cannot

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be conjured up by decree; they take time to develop, in terms of mindset, competence and culture. Even if acquired, they cannot be quickly integrated into a parent organization that has no related experience. Learning internally by trial and error or from the successful practice of others involves the incremental acquisition of new beliefs, behaviours, routines, practices and processes over the life cycle of the underlying technology or fundamental service proposition. The conditions associated with the stage of capability development can be captured by the following question: Is the portfolio of distinctive capabilities in an early, intermediate or advanced phase of development? This suggests the following right practice. Right practice: distinctive capabilities and business models The development stage of a distinctive capability – early, intermediate or advanced – suggests the most suitable driving business model – basic, augmented or integrated.

Advanced distinctiveness Integrated value chain, integrated offering Platform efficiency

Solutions innovation

Process efficiency Convergent opportunities Value chain efficiency

Intermediate distinctiveness

Volume efficiency

Divergent Product/market innovation

Differentiating innovation Pioneering innovation

Early distinctiveness Basic value chain, basic offering

Figure 4.2 Value creating conditions, behaviours and the right driving business models

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Driving innovation models for some common conditions Product/market innovation is all about new value propositions, innovating with respect to the product/service offering and/or the market segment and target customers. As shown in Figure 4.2 and discussed below, there are at least three different sets of conditions for product/ market innovation, depending on the development stage of the distinctive capability: pioneering innovation supported by early distinctiveness; differentiating innovation supported by intermediate distinctiveness; and, later on, solutions innovation supported by advanced distinctiveness.5

Pioneering innovation: for divergence based on early distinctiveness History shows that the first pioneering innovation of a new industry often occurs during severe economic downturns, when the returns on other business activity are so low that it is attractive to take the risks of pioneering.6 Once the initial prototypes have emerged, however, a flurry of imitative pioneering typically takes place during economic upturns, when there is a larger pool of potential customers who have the resources and inclination to experiment, as early adopters, with the use of the product. During the pioneering phase, many small new entrants jump into the game, trying to figure out the nature of the new products and/or services. Pioneering typically generates a swarm of new start-ups, like during the birth of the railway, automobile, radio, PC and, most recently, dot.com industries. This was the business model that characterized Sony’s operations after it started. During these early days, it is impossible to predict how the development of the new offering will evolve, and the risks of betting on the wrong product development path are high. The right business model for this fluid environment is a light, highly flexible job-shop capable of producing numerous prototypes, with craft-type operations easily adaptable to unexpected market developments. The objective is to find a niche of early adopters, whose feedback will help in the further refinement of the product.

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To increase their chances of survival, the players have to hedge their development efforts with numerous low cost partnerships and alliances. Larger players – that can afford it – try to reduce the risk of pioneering by setting up a new venture organization, putting together a portfolio of numerous independent new product initiatives. Since the pioneering model is so different from the other business models described below, the new venture organization has to be run completely separately from the mainstream organization. But when a new venture succeeds and grows up, it raises the challenge of how to integrate it back in, to take advantage of synergies with the mainstream.

Differentiating innovation: for divergence based on intermediate distinctiveness This type of innovation happens when enough knowledge has accumulated to segment and serve the market with different offerings and when enough customers have learnt about the basic offering, are tired of the same thing and looking for something more tailored to their needs. Economic growth supports these conditions because more people have the resources to pay for differentiation that suits their wants. The right business model for differentiating innovation embodies adaptation and augmentation of the basic offering for new market segments, with different design, functionality, image and/or quality. Separate divisions are often needed to serve the various segments. Above all, the business model has to be market driven to identify the segments and understand what the different customers want. In consumer markets, successful brands become the key to success. For example, differentiating innovation has been one of Sony’s driving business models, in particular when it penetrated the European and US markets. This type of innovation was also a major source of opportunities for value creation in the auto and electrical equipment industries in the 1960s, in the PC industry in the late 1980s, in the business software and mobile phone industries in the 1990s, and is the driving model today in many consumer goods industries.

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Solutions-based innovation: for divergence based on advanced distinctiveness As the industry matures, suppliers learn more and more about how their customers use their products and services and can offer cuttingedge advice on how to integrate their products and services into the customers’ activities. Customers, conversely, to remain distinctive, have to concentrate on their core and may outsource peripheral activities. Rather than buying different components and services separately, they start looking for an integrated package to obtain faster, more seamless supply and reduce their transaction costs and the need for in-house specialists. Because the suppliers know more about best practice than individual customers, they can offer them solutions to application problems, including not only products and services but also problem solving and implementation based on the experience of other customers. Problem solving for the customer is a key component of the solutions value proposition, which demands upfront consulting to diagnose the customers’ needs and figure out exactly what configuration of products and services they require. Delivery of the integrated package of products and services is only possible with a network organization. This provides integration across the boundaries of business silos with multi-business project teams – essential for effective combination of the different pieces of the package, as well as for ongoing service. Leading practitioners of the solutions model can be found in service industries (for example financial services), as well as later on in the life cycle of industries, such as information technology, when the players try to provide total solutions combining consulting, hardware, software and services.

Driving efficiency models for some common conditions Survival of the fittest becomes a priority during economic downturns, when demand drops and prices fall or when product/market innovation dries up and offerings converge. As shown in Figure 4.2 and

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discussed below, there are at least three different sets of conditions associated with value chain management, depending on different levels of distinctive capability for delivering higher volumes, improving process efficiency and achieving platform efficiency.

Volume efficiency: based on convergent opportunities and early distinctiveness After innovation has run its course, when competitive offerings become more and more alike, they often converge into a de facto standard. At this stage, competitors can focus on increasing value chain efficiency because there is little risk that improvements will be wasted on an offering that is still rapidly evolving. The big opportunity is to lower costs and increase volumes by breaking into a mass market with a much more attractive value/price proposition. The right business model is based on a dominant design that the market understands and wants, one that provides the basis for a standardized offering that can be delivered at a competitive cost, using standard parts, systems and procedures for mass production. Selling, general and administrative costs are kept to a minimum by focusing on high volume promotion and distribution channels. The classic case of high volume efficiency was Ford’s standardized Model T, accompanied by the introduction of the assembly line and mass production. Similar approaches to increased efficiency occur in most industries once a standard emerges – as it did with Sony in the 1950s for transistors and tape recorders – or when the value proposition periodically degenerates into a commodity – as we can see today in the surviving dot.com portals.

Process efficiency: based on convergent opportunities and intermediate distinctiveness Whenever there are a large number of steps and/or many players involved in the value chain and delivery system, there is typically scope for improvements in process efficiency, especially after periods of rapid growth involving product differentiation and the multiplication of delivery systems. Introducing shared internal services and

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systems to eliminate duplication and process reengineering to streamline the value chain can reduce costs. The right business model is one designed to provide better quality and service at more competitive prices, through continual improvement of the customer relationship, supply chain and order delivery processes. Integrating suppliers and distributors into the company’s value chain is key to both the streamlining of processes to lower costs, and to the improvement of quality and service through better design and execution. A second key element is involving employees in the continual improvement process via total quality management, six sigma and related approaches.7 The classic exemplars of cost reduction through process efficiency are Japanese companies like Toyota, Canon and Sony with their Kaizen approach. In response to this Japanese approach of incremental improvement, with ongoing employee participation, US consultants introduced big step process reengineering in the early 1990s. After a big one-time improvement, however, process reengineering often grinds to a halt when employees are not challenged to continue looking for better ways of doing things.

Platform efficiency: based on convergent opportunities and advanced distinctiveness Serving large, global customers or market segments with varying, complex, local needs is a huge challenge. When customers (or consumers) are spread out geographically, using different combinations of products and services at their different sites (or personally), the cost of delivering an ongoing tailored solution at each site (or to each individual) can become prohibitive. Historically, local subsidiaries served multinationals (or consumers) in each country. More recently, new telecommunications and information technology have facilitated the emergence of a new business model to deliver value propositions that are globally efficient. The value proposition involves ongoing, real time delivery of a locally tailored solution for each of the customer’s sites (or a continual stream of new innovations for each segment of consumers8). Upstream, this requires regional production platforms and centres of competence to produce component modules of the value proposition

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with world-class volume efficiency. Downstream customer-oriented divisions use process efficiency to come up with cost-effective, tailored solutions (or deliver the stream of product innovations to distributed sites). Information systems help to provide the interface between the upstream platforms and the downstream customization and innovation, by supporting rapid reconfiguration of the value proposition to satisfy evolving local needs. Overlapping extranets between suppliers and customers provide online learning for the business: externally about what the customer wants and internally about how to satisfy those wants. Today, leadership in an increasing number of industries is based on the platform efficiency model: Bosch provides integrated automotive subsystems to the large car manufacturers; Maersk handles the global logistics in terms of door-to-door supply and distribution for large multinationals; Federal Express does the same for smaller items requiring rapid delivery; Citibank provides integrated financial services tailored to the global and local needs of its large clients.

Adapting to and shaping value-creating conditions Oscillations and life cycle stages are two recurring threads implicit in the above discussion of driving business models, but they are not cast in stone. What they provide is a basis for scenario building to anticipate the future (see Chapter 6).

Anticipate oscillations in value-creating opportunities The most basic pattern in the evolution of value creation is the oscillation between product/market innovation and value chain efficiency. On the product/market innovation side there is an emphasis on specialization, product innovation, differentiation and vertical industry integration. On the value chain efficiency side, the emphasis is more on commodity offerings, process innovation,9 cost leadership10 and horizontal modularization.11 The product/market innovation phase is characterized by incremental innovation and differentiation, often with proprietary systems,

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and a vertically integrated value chain. Specialization runs out of steam when innovation declines, the competitive offerings look more and more alike, and customers perceive less and less real differentiation. The value chain efficiency phase, by contrast, is characterized by standardization, economies of scale and scope, and competition for survival of the fittest in terms of efficiency. The value chain during the commodity phase is often fragmented into separate industries, each working on a different modular part of the offering and dominated by a different player. The commodity phase comes to an end when customers become restless with the commodity offering and competitors and new entrants start experimenting with new offerings.

Anticipate the phases in the evolution of business models The evolution of business models is driven by continual learning on the part of competitors, customers and suppliers about how to add perceived value to the product or service and lower its total cost. This evolution results in continually increasing sophistication that reflects the accumulation of capabilities over time. For example, the product/market innovation model often goes through phases of basic pioneering, differentiation and, later on, solutions as competitors and customers learn more about how to use the product. Similarly, the value chain efficiency model often goes through phases that emphasize high volume followed by improved processes and finally global platforms. The product/market innovation models described above are part of a natural learning sequence that often appears in practice – if it is not interrupted by an external discontinuity. After pioneering establishes the characteristics of the basic offering, companies competing in the industry learn how to differentiate the base product to satisfy the needs of different market segments. Then, if there are large customers using a variety of the differentiated offerings, companies in the industry begin looking for ways to cater to these customers’ unique set of needs. They design customized, global solutions, enhancing the basic product offering with services and consulting. The value chain efficiency models are also part of a natural learning sequence about how to lower the costs of production, delivery and use. Once a basic offering is established, it becomes possible to settle

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on a dominant design as the basis for standardization, driving down cost, and facilitating the move to volume delivery. Later, when the standard process has been used to deliver different offerings to different segments without special adaptation, opportunities for process improvement emerge. Efficient processes facilitate a streamlining of the value chain, as well as integration of upstream and downstream activities into the business model. Finally, the business model based on platforms starts to make the most economic sense when complex solutions, comprising a range of components, products and services, have to be delivered cost-effectively. Combining the phases in the evolution of business models with the oscillations in value-creating opportunities suggests the following possible sequence of shifts in the driving business model shown in Figure 4.3. The sequence of business models shown in the figure is merely an example. It is by no means inevitable that the driving business models move continually towards more advanced capabilities. New product breakthroughs could disrupt the sequence at any point, shifting it back to a previously dominant business model. Thus, in the car industry, after a long period of domination by process

Advanced distinctiveness Integrated Platforms Solutions Process Convergent opportunities Value chain efficiency

Divergent Product/market innovation Differentiation

Volume Pioneering Early distinctiveness Basic

Figure 4.3 Possible shifts in value-creating conditions and driving business models

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efficiency, roadsters, Sport Utility Vehicles (SUVs) and minivans reestablished differentiating innovation as the dominant value-creating model, with process efficiency still important to keep down costs. The idealized sequence of business models in Figure 4.3 can be interpreted as a series of three successive oscillations between specialization and commodity, based on an increasingly developed offering: the first specialization phase involves pioneering innovation followed by a commodity phase based on volume efficiency; the second specialization phase involves differentiating innovation followed by a commodity-like phase based on process efficiency; the third specialization phase involves solutions innovation followed by a commoditylike phase based on platform efficiency.

Anticipate and shape industry breakpoints Shifts between driving business models create breakpoints12 in the industry’s development, marked by a new value proposition that is so superior in terms of the customer’s perceived value and/or the delivered cost that it changes the rules of the competitive game. Market shares and, often, the industry’s growth rate shift sharply, new players enter the game and older competitors adapt – or die. But breakpoints are not all equal. There are different conditions and right practice, depending on what triggers the discontinuity and how competitors break through to a new business model. New technology for a breakthrough with pioneering innovation From time to time, a massive burst of innovation in technology creates a cluster of new industries and restructures old ones, producing what Schumpeter called ‘Creative Destruction’.13 These bursts cause fundamental breakpoints that mark the transition between industry life cycles and generate huge productivity gains. The first industrial breakthrough was driven by the introduction of textile machinery and water- and steam-powered factories in Great Britain in the late 18th century; over 40 years, between 1800 and 1840, the price of spun cotton declined an average of 3% annually. Coal, steel and the railways powered the second industrial wave, which industrialized the European and North American continents and resulted in a 3% annual decrease in the price of rail freight

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between 1850 and 1890. The third industrial wave, starting approximately in the 1890s, saw the emergence of electricity, automobile and chemical companies, some of which are still household names today, like General Electric, Philips Electronics, the American and German car companies, and chemical companies like DuPont, Bayer and BASF. Once again, there was a huge increase in productivity, reflected in the 11% annual reduction in the price of cars between 1919 and 1925. The fourth industrial wave involved natural gas, aircraft and electronics. The price of air transport declined by 5% annually between 1935 and 1950. And today, we are experiencing the computer and first phases of the biotech wave; unit computing costs declined by a phenomenal 30% per year from 1970 to 2000. These fundamental breakpoints put enormous pressure on the players in existing industries, because technological breakthroughs typically occur off the radar screens of the existing players.14 The performance of new technology is actually often inferior to what exists already, with players and economics initially being quite different and scorned by those in the existing market. Yet technology opens up a new market of customers who are first intrigued and then satisfied by what the new technology can offer. Gradually, the new technology progresses to a stage where it suddenly provides enough value to satisfy most of the market at a cost that is much more attractive than the old technology. At this point, the whole market rapidly switches to the new value proposition and the old technology is effectively dead. Existing players can only participate by hedging their bets with a portfolio of pioneering new venture options. Pioneering innovation, however, can take on a symbolic life of its own, beyond the point where any real innovation is taking place, as happened during the dot.com boom. The more the euphoria built up, the more detached the industry became from reality and the more susceptible it was to collapse. Those who do not hedge their bets are badly burned; those who control the core that remains, often an industry standard, go on to dominate the industry that emerges from the crash. Standardization for a breakthrough with volume efficiency Developing an industry standard is one of the most dramatic ways of triggering an industry breakpoint. During the build-up, the leading

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competitors push their proposed standard, trying to attract as much competitor, supplier and customer support as possible. The industry hangs in suspense while the market makes its mind up about which offering is superior. A key criterion for this is the attractiveness of the full package of complementary products and services needed to use the offering. Once the market’s preference emerges, the winning player soars on, while the others scramble to adapt – or collapse. There are classic examples of players losing out in the standardization race by trying to standardize too soon, before pioneering innovation has run out of steam, as in the case of Texas Instruments making huge investments for the production of a standard digital watch that was soon made obsolete by Seiko’s better standard. Or by not putting together a complete offering, as in the case of Sony not providing software titles for its Betamax video recorder. Or Philips continuing to perfect the basic offering for too long and completely missing the standardization with its video recorder. The right practice is to keep your options open by experimenting discreetly with the competing standard while pushing your own. Effective lobbying can be key to putting the regulatory framework in place for a standard. For example, Sony’s first big pocket radio breakthrough came after it obtained the transistor licence from Western Electric. That required a year lobbying the Japanese Ministry of Trade and Industry for permission to remit the $25,000 licence fee required by Western Electric. In another example, Nokia’s board and senior management, as well as Finland’s political establishment, together with telecommunications operators and other equipment manufacturers, played an essential role in getting the European Commission to embrace the Global System for Mobile Technology (GSM) as a pan-European initiative to promote regional harmonization among cellular networks.15 Today, the emerging mobile Internet is generating intense competition between the personal computer, consumer-electronics and telecom industries to create the standard for mobile services to access information, communicate and engage in simple commerce and leisure activities. Sony, Nokia, Microsoft, and players like Samsung, Motorola and the new entrant, Qualcomm, each with innumerable partners, are engaged in an intense battle over which standards will prevail for the software and hardware sides of the mobile Internet.

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Incremental new products for a breakthrough with differentiating innovation Breakpoints created by differentiating innovation tend to be more gradual, caused by the cumulative effect of a stream of incremental product innovations. Sony’s breakthrough to number one worldwide in consumer electronics was driven by the development of what turned out to be periodic blockbusters, created from promising new products supported by ongoing incremental innovation. Top management itself often championed new product concepts by carefully selecting and challenging small task forces and design teams to produce prototypes with step-by-step creative engineering. Morita himself championed the Walkman to the point of overriding the objections of sales and marketing. ‘We always have an image of how an ideal product would look and perform in our minds . . . with exact specifications, including a target price.’16 A stream of incremental follow-up innovations to satisfy different customer wants boosted promising new products into blockbusters. ‘Once the prototypes are developed, our marketing is quite flexible. We are prepared to launch new products into the market when the need arises.’17 After launching the Walkman in 1979, for example, Sony immediately expanded the range by making improvements and introducing new variants. By the late 1980s, Sony had 85 Walkman models on offer and the Walkman had a 40% market share of portable tape players in the US and 50% in Japan. Reinventing the offering for a breakthrough with process efficiency Competitors can create breakpoints by identifying new target markets, reinventing the offering for them and redefining the value chain to eliminate all non-essentials.18 Classic examples include Southwest Airlines targeting people who drive long distances by car and offering them cheaper, faster, point-to-point air travel over the same routes. Another is IKEA, the Swedish furniture manufacturer, which turned the economics of the furniture business upside down by targeting young families, redefining the core elements of the value chain to be design, logistics, the shopping experience and the facilitation of do-it-yourself assembly, while outsourcing all other activities. More recently, the Spanish companies Mango and Zara have reinvented the retail clothing value chain, putting incrementally new collections on the shop floor every three weeks, using information management and wholly owned production.19 And the world leaders

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in mass catering – the British-based Compass; in security – the Swedish-based Securitas; and in facility cleaning – the Danish-based ISS, have figured out how to take overhead out of the delivery of basic services by streamlining control and pushing profit responsibility right down to the front line.20 In response, existing players have to follow suit or define a niche market. Customer consulting for a breakthrough with solutions innovation Triggering a breakpoint with solutions innovation has to start with the customer’s problems and work back into the company, putting together the best possible combination of concepts, products and services, even if they have to be brought in from competitors. As Lou Gerstner put it, a few months after arriving at IBM: ‘We’re going to build this company from the customer back, not from the company out.’21 A dedicated customer-centric unit, housing the key account managers, is needed to bundle the products, services and consulting. At IBM, rather than breaking the company apart into 13 loosely linked ‘Baby Blues’ as suggested by John Akers, the previous CEO, Gerstner decided to capitalize on IBM’s research and full range of computer competencies. He challenged the computer services division to deliver integrated solutions, based on open architecture and compatibility, incorporating the best products available in the market, even if that meant dealing with competitors like Sun Microsystems, Oracle and Microsoft. Capitalizing on the networking trend introduced by the Internet, IBM’s Global Services launched its e-business concept for corporate customers in 1997. This triggered an industry breakpoint and Global Services grew from 7,600 people in 1992 to 150,000 in 2002, with revenues of about $30 billion. Solving the customer’s business problems requires putting together a solution concept for which the customer is willing to pay, as if dealing with a consulting company. Unless customers are willing to pay for the solution concept itself, and do not see it merely as a free service, you have not graduated to the solutions model. Even IBM, after its huge success in delivering e-business services during the 1990s, was not content with the solutions and services it provided. In 2002, it bought PWC Consulting to further boost its consulting power. Modularization for a breakthrough with platform efficiency Numerous big players are trying for a breakthrough with platform efficiency; few have succeeded. Highly efficient platforms upstream,

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producing modular parts of the value proposition, have to be integrated with a customer-centric organization downstream, capable of delivering solutions, or innovation streams, that satisfy the local needs of the global client or market segment. When Ferdinand Piech took over as CEO of Volkswagen in 1993, he inherited factories that were not even breaking even when fully utilized – a cost disadvantage relative to Japanese competitors of €2,500 per car; declining market share; and a $1 billion loss. Like Gerstner at IBM, Piech capitalized on Volkswagen’s distinctive capabilities, its product know-how, reputation and brand, and its global reach. He opted for a platform strategy, despite the risk that, as at General Motors, it would produce cars with different names that looked and drove alike. But Piech saw the platform strategy through to its logical conclusion.22 Upstream, Piech created four manufacturing platforms, with their managers and the purchasing subsystem managers reporting directly to him, so that he could ensure that the platforms really did deliver lower costs (purchasing made up 62% of the cost of goods sold). By contrast, downstream, he kept the brands distinct. To encourage innovation and open competition between the brands, Piech gave the brand managers profit responsibility with the freedom to make product line and services, design and marketing decisions, based on independent product development and global and local distribution systems. But Piech insisted that at least 60% of the car cost had to come from common parts produced by the platforms. While the upstream platforms were lowering costs, the downstream entrepreneurs were creating new excitement, innovation and identities around their brands. The combination created a virtuous cycle of design and feature innovation, as well as higher margins, followed by more investment upstream and more effective marketing downstream. By 2001, Volkswagen was the market leader in Europe, China and South America, and the world’s fourth largest car company, with profits of €2.9 billion on sales of €88.5 billion. Cost leadership for a breakthrough with industry consolidation At the end of a technology life cycle, industries often go through a restructuring phase. Restructuring is typically triggered by sudden shifts in the economic climate. Recessions in particular sort out the

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strong from the weak.23 Market leaders, which have higher returns on investment, are in a strong position to use aggressive pricing, marketing and sometimes acquisitions to further dominate their weaker rivals. This is exactly what Dell and Wal-Mart did during the 2001 recession, using their low cost business models to reinforce their market leadership.24 Previous recessions also shifted the value-creating advantage away from business models based on product/market innovation towards those based on value chain efficiency. The classic case is that of the oil price crisis of the 1970s. Shell had run its scenario on higher oil prices and moved much more rapidly than the other oil majors to take advantage of the new situation. In the auto industry, the Japanese had been developing smaller, fuel-efficient cars for their local market, which the West initially scorned. When the oil crisis struck, they suddenly had efficient, good quality cars at attractive prices. But that was not all. They had developed a new business model based on process efficiency that took Westerners several decades to understand and duplicate. In the absence of a severe recession, the evolution of the industry may be blocked by some players’ refusal to adapt to declining demand. This may happen in mature industries, when longer-run demand declines and excess capacity appears, or in highly cyclical industries, such as real estate, where low barriers to entry and easy debt financing attract too many players during the upswing. The ensuing price war continues as players try to resist restructuring by drawing on reserves, cross-subsidizing, appealing to public opinion and looking for government protection. They persist until the pressure reaches a point where they can no longer hold on. Suddenly, they capitulate and the industry consolidates. The consolidation of fragmented industries under the impact of recession, deregulation, globalization and economic free trade areas, produces frequent examples of resistance to restructuring suddenly collapsing. When other strategies for value creation dry up, cost leadership must be adopted early on. If cost leadership cannot be achieved alone, consolidation with other players should be explored well before the final shakeout occurs. The cost leaders restructure the industry; the other players disappear. These examples of how to exploit industry breakpoints are consistent with the following right practice.

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Right practice: industry breakpoints and business models Anticipating industry breakpoints provides first movers with an opportunity to change the competitive rules by introducing a new business model, but the attendant risk cannot be ignored. Although, in general, first movers who trigger industry breakpoints have an opportunity to shape industry practice to their advantage, significant risks remain.25 Enron, which launched new derivative markets, proceeded as if these risks did not exist; Swissair, which tried to unbundle the air travel business into airline and support service companies, ignored the implementation risks. Both paid for the omission with their existence. (See Chapter 9 for the right practice in switching business drivers.)

Dynamic business model lessons 1. Adapt the driving business model to exploit relevant opportunities. Economic upswings and industry forces that support competitor divergence generate opportunities mainly for product/market innovation; economic downswings and industry forces that result in convergence create opportunities mainly for value chain efficiency. 2. Adapt product/market innovation models to the stage of customer learning. As customers and competitors learn more about how the offering works, the opportunities for product/market innovation tend to shift from pioneering development, to differentiating market segmentation and, finally, solutions integration. 3. Adapt value chain efficiency models to the stage of learning in the value chain. As suppliers and partners learn more about how to produce, deliver and service an offering, the opportunities for value chain efficiency tend to shift from volume production, to process improvement and, ultimately, platform efficiency. 4. Anticipate industry oscillations and breakpoints. The periodic industry oscillation between an emphasis on product/market innovation and value chain efficiency is marked by common indicators: loss-

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making competitors and restless customers mark the end of an efficiency period and signal a possible shift to more innovation and integration; pointless differentiation and increasing price consciousness mark the end of an innovative period and signal a possible shift to more efficiency and modularization. 5. Build a portfolio of capabilities. To capitalize on industry breakpoints and facilitate shifts in the business trajectory, develop new capabilities early to lay the foundation for new business models: – new technology for pioneering innovation; – standardization for volume efficiency; – incremental innovation for differentiating innovation; – continual improvement for process efficiency; – consulting integration for solutions innovation; – modularization for platform efficiency; – cost leadership for industry consolidation.

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Part II

Shaping a Successful Trajectory

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5 Assess the Present: Trajectory Diagnosis

Trajectory diagnosis calls for a holistic assessment of the business drivers – in terms of the governance, leadership, organizational and business model elements – critical to successful implementation, as well as an appraisal of the particular conditions facing the business. How do the business elements fit together? Do they take advantage of the prevailing conditions? The governance role, leadership style, organizational mode and business model are not separate, but part of an organic whole; they do not exist in isolation, but in close symbiosis with the environment. When they are not aligned and are out of sync with the prevailing conditions, the trajectory is doomed. This was the case with Ericsson’s mobile phone division in 2001, in strong contrast to Nokia’s phone division, as we shall see in this chapter. Trajectory diagnosis addresses the following questions: • • • •

Today’s trajectory: What elements? Which drivers? Do the driving behaviours match the trajectory conditions? Is the trajectory viable? Questions for trajectory diagnosis

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Today’s trajectory: what elements? Which drivers? The chapters in Part I describe the common business elements that are listed in Table 5.1. Although these are by no means the only ones, they provide a useful checklist, together with their descriptions in the earlier chapters, for determining what elements are present in today’s trajectory. The key question is which of the business elements are playing the lead roles in decision making, dominating when there is a conflict – in short, driving the trajectory? Table 5.2 lists questions you can use to determine the driving behaviours, based on the principles of right practice developed in Part I. When answering these questions, some managers say they need both alternatives and strive for a balance between each pair. Of course, all businesses need both. But Table 5.1 Common business elements Element

Description

Governance roles

Counselling (coaching, advising) Steering (ethics, transparency, compensation, succession) Supervising (strategy, risk management, social responsibility) Auditing (financial performance)

Leadership styles

Commander with top-down directives Chairman with task forces Coach with widespread participation Catalyst with bottom-up initiatives

Organizational modes

Centralized roles Divisional power Interconnected teams Networked entrepreneurs

Business models

Pioneering innovation Differentiating innovation Solutions innovation Volume efficiency Process efficiency Platform efficiency

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this still begs the question of whether the balance is always constant, or whether it is adapted over time to differing conditions and, right now, under today’s conditions, which behaviours are dominant? Applying these questions to the behaviour of Nokia and Ericsson in 2001 produces the profiles of driving behaviours shown in Figure 5.1. These behaviour profiles correspond to the drivers for the Nokia and Ericsson mobile phone divisions shown in Table 5.3. Nokia had a supervisory type board whose dominant role was broad and monitoring, which fit the managerial power concentrated at the top in a team of five people, which had been stable for many years. By contrast, Ericsson’s board kept trying to find a strong CEO who could wield effective power; they preferred an auditor type role with a narrow focus, which was not conducive to picking up external signals.

Table 5.2 Questions to determine the driving behaviours Element

Questions

Governance roles

Is the dominant board perspective focused on financial performance, or a broad view that incorporates externalities? Is the board deeply involved in management or is it playing a monitoring role? In terms of decision making, is the dominant approach deliberate and thorough or fast and intuitive? In terms of value creation, is the dominant source of initiatives top-down or bottom-up? Are the organizational design and culture dominated more by control or flexibility? Are the design and culture dominated more by collaboration or entrepreneurship? Is the uniqueness of the dominant value proposition centred more on the efficiency of the value chain and delivery system, or on product, service and market innovation? Is the dominant value proposition and value chain based on a basic, augmented or highly integrated business model?

Leadership styles

Organizational modes

Business models

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Governance role Detailed ----E---------------------------------N----Monitoring ----E, N------------------------------------Leadership style Deliberate ----E---------------------------------N----Top-down ----E---------------------------------N----Organizational mode Controlled ----E---------------------------------N----Collaborative -----------E------N------------------------Business model Efficient ----E-----------------------N--------------Basic -----------E--------------------------N-----

Broad Involved Fast Bottom-up Flexible Entrepreneurial Innovative Integrated

Figure 5.1 Behaviour profiles for Nokia and Ericsson mobile phones in 2001

Nokia’s driving leadership style was catalytic, dominated by the pursuit of fast growth, especially from the bottom up. Rather than merely reacting, Nokia’s leaders used the company’s smaller size to create an ongoing sense of urgency to move fast, using bottom-up initiatives to exploit the Kairamo heritage of openness to change. By contrast, in an organization closed to change, Ericsson’s leaders were forced to employ a commander style of classic, deliberate, top-down approaches to restructuring, which slowed change initiatives in other areas. Nokia’s driving organizational mode was interconnected teams evolved to encourage collaborative bottom-up initiatives, loosely coordinated within a tight framework of values that put a premium on action; the collaborative spirit was good for husbanding the scarce talent, especially software engineers. Ericsson had centralized roles, Table 5.3 Business drivers for Nokia and Ericsson mobile phones in 2001

Governance role Leadership style Organizational mode Business models

Nokia’s drivers

Ericsson’s drivers

Supervising (strategy, social responsibility) Catalytic Bottom-up initiatives Interconnected teams Differentiated innovation and platform efficiency

Auditing (financial performance) Commander Top-down directives Centralized roles Volume efficiency

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tightly run from the top, with forced collaboration on the frontline. This led to frequent misunderstandings, which did not help in managing costs. In terms of dominant business model, Nokia was centred on differentiating innovation downstream, complemented by platform efficiency upstream, with an integrated value proposition. Ericsson was continually struggling to satisfy its investors with increased volume efficiency. Not that Nokia ignored efficiency, or that Ericsson did not try to innovate, but rather that their driving business models were markedly different.

Do the driving behaviours match the trajectory conditions? Looking at the behavioural profiles, it is clear that Nokia and Ericsson were pursuing two very different business trajectories within the same industry. Which of them had behaviours that were better adapted to the conditions? The principles of right practice embody the questions in Table 5.4, which you can ask in order to define the business conditions. Table 5.4 Questions to determine the business conditions Element Governance conditions

Questions

Are the markets and regulations efficient, or are there important externalities? Is managerial power effective, or ineffective? Leadership conditions ls time available for change and execution, or is there high urgency? Are employees and the culture more closed to change and execution, or open? Organizational conditions Is the business environment characterized by simplicity, or complexity? Are the necessary resources (talent and funding) scarce, or available? Business model conditions Does the potential for value creation involve competitively convergent or divergent opportunities? Do the distinctive capabilities reflect an early, intermediate or advanced stage of development?

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Applying these questions to the external and internal conditions facing Nokia and Ericsson in 2001 produces the profiles of conditions shown in Figure 5.2. Nokia and Ericsson faced similar external conditions: regulatory and safety issues (externalities); the fast evolution of the industry (high urgency); shifting segmentation (complexity); and driving opportunities that were mainly associated with the pioneering in mobile data services (divergence). However, the profile of Nokia’s driving behaviours in Figure 5.1 matched the profile of external conditions in Figure 5.2, whereas Ericsson’s behaviours were way out of line. The two companies had very different internal conditions: Ericsson had ineffective power at the top, employees increasingly closed to the repeated attempts at downsizing, scarce resources owing to the poor performance, and lack of a clear distinctive capability. These internal conditions made it very difficult for Ericsson to alter, or switch, its business drivers. (For the overall gap between Ericsson’s actual, and the right behaviours for the conditions, see Figure 4 in the Introduction.) By contrast, Nokia had effective power at the top, employees who were open to change, easy access to funding – but a shortage of software engineers. Nokia also had a highly distinctive branding and marketing capability, as well as a leading, low cost capability based on highly efficient processes. The very different internal conditions

Governance conditions Efficient rules Effective power Leadership conditions Low urgency Closed to change Organizational conditions Environment simplicity Resource scarcity Business model conditions Convergent opportunities Early distinctiveness

-------------------------------------E, N---- Externalities --------N----------------------E------------ Ineffective -------------------------------------E, N---- High urgency -----E---------------------------------N---- Open to change -------------------------------------E, N---- Complexity -----E------N------------------------------- Availability -------------------------------------E, N---- Divergent ---------------E(?)--------------------N---- Advanced

Figure 5.2 Conditions profiles for Nokia and Ericsson mobile phones in 2001

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that the Ericsson and Nokia managements faced had profound implications for the viability of their respective trajectories.

Is the trajectory viable? There are some 250 possible configurations of trajectory drivers (based on eight different variables describing the conditions, each with at least two alternative states). However, only some of these represent a sustainable, value-creating configuration of business drivers. For a trajectory to be viable, the conditions must include growth opportunities based on distinctive capabilities and driving behaviours that match the conditions and are mutually reinforcing (see Figure 5.3). Ericsson had a weak business model because it did not have a distinctive capability that could be deployed to exploit the dominant value-creating opportunities. Its engineering was world class, but a high cost structure made it difficult to go for a volume or process leadership position, and it did not have the marketing capability to exploit the opportunities in segment differentiation. But Ericsson had even greater problems because its driving behaviours did not fit the external trajectory conditions: its board had to focus on detailed financial issues when it should have been looking at broader strategic and regulatory issues; its leadership style was deliberate – not nearly fast enough to cope with the rapidly evolving competition; its organization was too controlled and lacked the flexibility required to adapt to the complex marketplace; and its business model was driven by efficiency rather than innovation. To make matters worse, Ericsson’s problem was even deeper because its behaviours reinforced internal conditions that froze a doomed trajectory in place: the monitoring approach of the board • Positive value-creating potential (conditions that include growth

opportunities based on distinctive capabilities) • Behaviour profile matches conditions profile (behaviour of the drivers

fits the conditions) • Internal alignment (driving governance role, leadership style and

organizational mode support the driving business model and are mutually reinforcing) Figure 5.3 Characteristics of a viable trajectory

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together with the top-down leadership style caused, first, a narrow cost reduction focus that made it impossible to sense and translate what was going on in the market; second, repeated restructurings that increased the resistance to change; third, capabilities that drifted further and further away from the value-creating opportunities; and, fourth, weak performance that drained away and hindered access to financial resources. By contrast, the drivers at Nokia not only matched the external conditions but also reinforced a value-creating alignment of internal conditions. Nokia’s new GPRS phone variations were exactly what customers were looking for at the time: it had bottom-up alignment, with an organization that was flexible enough to interpret what was going on in the market, what its clients wanted and what that meant for product development. Frontline teams drove Nokia’s downstream innovation, starting with creative segmentation, based on lifestyle, design and technology adoption patterns, as well as local promotion of Nokia’s brand, reflecting the corporate values of listening to the customer, a consistent look and feel to the mobile phones, and the communication of personalized design. Nokia could respond to the market because its people were open to change – the result of a bottom-up leadership style with wideopen dialogue before decisions were made – followed by a focus on implementation once decisions had been taken. This leadership style worked, because the governance system (CEO, his team and the board) was not dominated by a single person, but united behind the values inherited from the Kairamo era and a clear vision: to become the leader in mobile data services.

Questions for trajectory diagnosis 1. What are the business elements and drivers that define today’s trajectory? The common business elements described in Part I can be used as a basis for describing the portfolio of elements in today’s trajectory. The principles of right practice in Part I embody questions that can be asked to determine the driving behaviours and, hence, which drivers define today’s trajectory. 2. Do the drivers match the conditions? The principles of right practice also provide questions to determine the trajectory conditions,

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which can then be matched with the behaviour of the drivers. It is important to distinguish between the external conditions that describe the business environment and the conditions that describe the internal forces determining the internal alignment of the trajectory. 3. Is the trajectory viable? A trajectory is viable when it has conditions with positive value-creating potential, the behaviours of the drivers match the conditions, and the conditions and behaviours reinforce one another internally and support the driving business model.

6 Anticipate the Future: Competitive Scenarios

Anticipating the future is key to shaping a successful trajectory. To decide on the right behaviours, in particular whether to sustain or switch drivers, managers have to take a view on how conditions might evolve, especially in fast-moving industries. In the early 1990s, Jorma Ollila and his top team of five staked the future of Nokia on the emerging mobile phone market and the switch from analogue to digital telephony; in the early 2000s, they were betting on the mobile Internet and the switch from narrow to broadband. In the first instance, they had to completely rethink Nokia’s focus, selling off businesses that had been part of Nokia for a hundred years; in the second instance, they found themselves at the centre of three converging industries that made anticipating the future even more tricky, with new formidable competitors, like Microsoft, new entrants, like Qualcomm, and new technologies like Wi-fi and UWB (ultra wide band). Nokia’s top managers frequently talk about the importance of trying to anticipate the future. ‘One of the things that gives me the most satisfaction is putting in place actions to take advantage of future developments, and then seeing those become reality,’ noted Matti Alahuhta, the head of Nokia Mobile Phones.1 Alahuhta wrote a doctoral thesis in the early 1990s on the topic of Global growth strategies for high technology challengers, in which he suggested a number of critical growth determinants. These included the need to exploit

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industry shifts, enter markets early, repeatedly re-segment rapidly growing markets and, outside the core business, nurture new ventures and make small acquisitions in related areas, all of which call for a view on how the industry will develop. This chapter looks at how to develop industry scenarios2 as a basis for anticipating which business models are likely to dominate; while Chapter 7 discusses what this means for tomorrow’s business drivers. Starting with the commonly recurring sequences in an industry’s evolution, which is a good starting point for scenario development, this chapter explores the following: • What kinds of evolutionary patterns are apparent in the industry (in terms of technology eras, the evolution of business models and value-creating oscillations)? • What forces are shaping the evolution of the industry? • What are the competitive scenarios for mobile phone makers? • Which business models will dominate? • How can the cultural barriers to proactive scenario development be broken down? • Lessons for anticipating the future As an example, we shall use the situation in the mobile Internet, or more accurately, the mobile data services industry at the beginning of 2003. The industry was evolving rapidly, so when you read this, it may look a lot different from what it did when this piece was written. Nevertheless, the situation at the beginning of 2003 provides a good context for illustrating the development of scenarios based on the patterns of movement in the industry.

What kinds of evolutionary patterns are apparent in the industry? Where is the industry in terms of technological eras? To get a sense of the current industry era, one has to look back at the previous eras. The telecommunications industry emerged in the early 20th century as a breakpoint in the development of the telegraph

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industry. At first, the telephone was called a ‘talking telegraph’, until people began to see that it led to an explosion of interpersonal communication at a distance. Hundreds of small local telecom operators emerged in the US and Europe, but they had difficulty switching calls until a standard was imposed. When the standard emerged, it led to rapid consolidation, as the more efficient players grew and bought out the others. Regulations, introduced to prevent price fixing by the dominant operators, froze the industry into place for several decades, marked by relatively little technological advance. On the manufacturing side, the industry also gradually consolidated until only a few large players were left; the huge upfront investments suggested that only the largest could survive. At the end of the 1980s, the consensus was that smaller telecom manufacturers like Nokia would soon disappear.3 The arrival of digital telephony, which spawned the mobile phone, marked a breakpoint into a new era based on a new technology wave with numerous competing potential standards. It developed fastest in Scandinavia, with its sparse population spread over huge distances, because the governments quickly agreed on a common standard. This standard spread around the world, except for the US, and led to the telecoms boom of the 1990s. At the beginning of 2003, the mobile telephone industry was clearly going through another fundamental breakpoint, this time between the narrow and broadband technology eras. It was being reshaped as the mobile Internet, or mobile data services industry, which reflected a partial convergence between the telecom, consumer electronics, software and Internet portal industries.

Where is the industry in terms of the evolution of business models? The big mobile players from the start were Nokia and Ericsson in Europe and Motorola in the US. Owing to the rapidly evolving technology, no one was able to monopolize the market during the first generation of Global System for Mobile Communications (GSM) technology and other competing approaches in the US and Japan. Once the second generation GSM was adopted as a standard, first in Europe and then elsewhere, the question on the economic level

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was who would be able to ride it best. The early business models of pioneering innovation soon yielded a mobile phone standard and evolved into volume efficiency models. The odds were on those with the largest financial resources, because of the traditionally large investments required for telecoms. Ericsson and Motorola, with their big telecom equipment divisions, kept improving their mobile phone hardware in the context of their volume efficiency models. Nokia, being smaller overall, moved to differentiating innovation, betting that the mobile phone could be branded as a consumer good. It bet on continuous innovation of shapes, colours, features and ease of use, supported by massive advertising. Ericsson and Motorola bet on volume efficiency and benefited from fast market growth in 1997/98, with Ericsson capturing almost 20% of the worldwide market. But when the market shifted to a demand for more variety, Ericsson and Motorola could not break out of the volume efficiency mindset. By sticking to what they did best, they started dropping market share and handed the market growth to Nokia. The collapse of telecoms at the end of the decade marked the beginning of the end of the second generation GSM technology, with demand dropping during the 2001/2002 recession. Nokia, with more than a third of the worldwide market for mobile phones, versus 16% for Motorola and less than 5% for Ericsson, found itself the biggest player, defending itself against newcomers. At the beginning of 2003, all the characteristics of pioneering innovation for a new industry life cycle were present: a confusing array of products and services; new and old competitors adding more new offerings; uncertainty over standards; almost nobody making money on their new offerings.

Where is the industry in terms of value creating oscillations? There were several oscillations during the 1990s between product/ market innovation and value chain efficiency as the business models evolved in classic fashion from pioneering innovation to standardized volume efficiency and then to innovative differentiation and, finally, process efficiency in the latter part of the decade. These swings

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occurred in a very bullish macro environment, driven mainly by the internal dynamics of the industry. The collapse of the telecom market, in the wake of the dot.com crash and the global economic slowdown, dramatically changed the speed of the industry’s evolution. Suddenly, there was huge overcapacity in the new optical fibre telecom lines, and the telecom operators could not service the massive debt they had taken on to finance infrastructure and third generation (3G) mobile phone licences. Despite continuing technical advances in both mobile phones and networks, there was too much overhang from the 1990s and not enough demand to drive the industry forward. But in the gloom of early 2003, new transition technologies, like General Packet Radio Service (GPRS), were signalling an oscillating swing back to variety creation.

What forces are shaping the evolution of the industry? Overall, it was clear that the mobile phone industry was entering a new era of mobile Internet services: it was starting the first pioneering oscillation in the life cycle of 3G technology with experimental new product and service launches. Even as people tried to figure out what the basic value proposition would be, it was also clear that the mobile Internet represented a dramatic extension of the value-creating scope of the mobile telecom industry: from voice communication, the industry was moving to offer the exchange of multimedia content (messages, email, music, photos), downloading of content from the web, and the opportunity to do transactions over the Internet. But the mobile Internet was turning out to be quite different from the fixed-line Internet. The much smaller screens on handheld devices made them completely unsuitable for surfing the Internet. Users wanted prepackaged content specially tailored to small screens and customized to their needs. Possibilities included location-based services, like restaurant reservations, purchasing tickets for local entertainment, etc. Indeed, calling it the mobile Internet may turn out to be as much of a misnomer as calling the telephone the talking telegraph early in the last century. At the beginning of 2003, the strongest consumer trend was not the downloading of content, but person-to-person exchange of voice

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and text messages and, increasingly, photos and other multimedia messaging. Growing business uses included the synchronization of calendars and contacts, the monitoring of equipment at a distance, the mobile connection of people to corporate intranets, team members and supervisors, and so on. On the technology front, there were numerous competing telecom standards: the old GSM technology in Europe, Japan and most of the world; several standards in the US, but mainly Code Division for Multiple Access (CDMA) technology; and the new 3G technology, with high compatibility and bandwidth that holds the promise of a worldwide standard for data-rich communication. Intense battles were raging on both the hardware and software fronts: on the hardware front, between two versions of 3G technology – WCDMA, supported by a large Nokia-led coalition, and CDMA2000, controlled by Qualcomm; on the software front, between the Symbian operating system, favoured by the Europeans, and Microsoft’s Windows CE. In addition, for short-distance local area networking, Europe was pioneering Bluetooth and the US Wi-fi. Mobile phone configurations were also proliferating, supported by the mobile phone as a base in Europe and personal digital assistants as the base in the US. Few, if any, competitors, either among the phone makers or the operators, were making money on the new products, which is typical of the pioneering phase of a new technology life cycle. The industry was at the breakpoint in oscillation between pioneering and volume efficiency, with the battle over the standards for mobile data services occupying centre stage. The biggest uncertainty was which of the champions representing the industries competing for the mobile Internet would dominate? Would it be the telecom operators who control the access to and payment from users? The telecom and mobile phone manufacturers who understand the intricacies of wireless communication and mobile telephony? The consumer electronics people who know how to design and market entertainment devices? A software giant, like Microsoft, which can integrate operating systems? Internet portals that know how to interpret and package data? Media companies that produce the entertainment people want? One or more of these could dominate the mobile Internet. Each deserves a scenario to explore what the circumstances and implications of their possible dominance might be on the mobile phone makers.

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What are the competitive scenarios for mobile phone makers? Operators dominate This is an open scenario in which regional and one or two global operators, like DoCoMo and Vodafone, are in the driver’s seat. To deal with the huge debt they rack up buying 3G licences, most operators withdraw and consolidate in their home regions, where they control customer billing and payment, where they understand local preferences and how to select the content that will sell. The hardware, software and content parts of the value chain are competitive and open in the sense that no one has a controlling standard. None of the big pretenders from other industries is able to get a lock on the industry. The individual operators adapt their value proposition to the preferences of their local customer base, with a total service offering of retailing, billing and content aggregation. On the global level, segments coalesce around different needs, for example golfers, business people, students, etc. This scenario obviously provides the local operators with numerous value-creating opportunities as they learn how to stimulate and satisfy more local needs. Owing to its fragmentation, the industry is flexibly organized with multiple alliances involving telecom equipment and content providers; the opportunities for the other players depend on their ability to participate in the alliances and provide differentiating features. The mobile phone makers need collaborative process skills on the frontline to make the alliances work with the operators and to lower costs, as well as continual incremental innovation to come up with features that consumers desire and the operators want. This points to process efficiency and differentiating innovation as the most favoured business models, the winners among the mobile phone makers being those who offer the operators the best value-creating relationships. As such, must-win battles in this scenario include both the ability to create strong operator alliances externally and incremental product innovation capabilities internally.

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Mobile phone manufacturers dominate In this scenario, the Symbian operating system emerges as the standard software platform for multimedia mobile phones; with Nokia, as the main sponsor, in a very strong position, but challenged by Qualcomm with its alternative 3G technology. Content is readily available and the operators are hamstrung by so much debt that they have little choice other than to let the manufacturers take the lead. Separate global market segments open up for mobile, service and content offerings tailored to the preferences of the young multimediaoriented population, independent professionals, the corporate market, emerging low income markets, and so on. The importance of games and other entertainment gives those with innovative, user-friendly mobile phones, like the Nokia picture phone, an edge in certain segments. Other handheld device makers, such as Palm, may carve out niches of their own, partly eating into the dominance of the mobile phone makers. The gradual rollout of 3G gives Samsung and Qualcomm an advantage in areas like the US, where CDMA2000 dominates, and Nokia the advantage with WCDMA elsewhere. The industry structure is oligopolistic, with the most competitive players continually eyeing one another, trying to steal a march on the others wherever possible – which makes for a very flexible, open system of shifting alliances with operators and content providers. The rules of the game are typical of an oligopoly, with evolving, implicit agreements that are made and then broken when the main players push for competitive advantage independently. This scenario gives the mobile phone manufacturers numerous opportunities to carve out segments they can call their own. As the main sponsor of the software standard, Nokia consolidates its position as industry leader, while others move fast to adapt to the shifting growth opportunities. The key battle is ensuring that the software standard is accepted worldwide in the various user and geographic segments, especially in the high growth Chinese market. In terms of winning business models, this points to pioneering innovation prior to the emergence of 3G standards. Once a standard is established, volume efficiency with customer-driven differentiation will take over. Must-win battles in this scenario are achieving a competitive standard on as large a scale as possible and managing stakeholder relations worldwide.

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Microsoft dominates In this scenario, Microsoft sorts out the bugs in its Smartphone 2002 operating system, reduces the memory and processing power it requires, signs on more manufacturers and operators, and indirectly draws on the millions of Windows programmers to finally win the mobile software battle. Nokia, with its multi-company initiative based on the Symbian operating system, the Series 60 mobile software platform and Sun’s Java applications software with web browsing and multimedia, does not have enough focus or resources – in particular applications programmers – in its network to compete. With its increasing dominance on the software side, Microsoft pulls more and more mobile users over to its MSN instant messaging service, thereby also siphoning profits out of the pockets of the operators. The value proposition, combining Microsoft software and Intel’s chips, is to provide a series of chip templates for the makers of mobile devices and designers of wireless applications.4 This avoids the design of customized hardware for different mobile applications. The target customers, both manufacturers and operators, have decreasing bargaining power as the Wintel mobile platform spreads. The business model for Microsoft is one of increasing returns on economies of scale as the network of Wintel users expands. Microsoft and Intel, true to their style in the desktop market, monopolize the bargaining power in the industry and dominate change. Downstream from Microsoft, the industry is highly competitive in its organization and individualistic, in many ways resembling the PC industry of the 1990s. The US Justice Department and the EU Commission could become critical to the chances of other players sharing the profits. Since they are gradually being reduced to commodity manufacturers and logistics providers, the opportunities for the mobile phone makers are the most meagre in this scenario. The winners will be those phone makers that can excel at logistics and value chain management, like Dell Computer did in the computer industry. The dominant business models will be process efficiency and solutions innovation, for a customized response to the telecom market. A key must-win battle in this scenario is clearly attaining value chain efficiency.

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Mobile portals dominate In this scenario, the i-mode practice in Japan, of paying lump sum subscription fees rather than a small charge for every byte of information accessed, spreads to the rest of the world. Mobile portals (content aggregators), like Virgin Mobile, DoCoMo, Genie (owned by British Telecom), T-Motion (owned by Deutsche Telekom) and others, gather increasing numbers of subscribers. In addition, PC portals like Yahoo!, media companies and, possibly, banking portals become mobile virtual network operators (MVNOs). In this business model, the value proposition is packaged mobile content tailored to the preferences of different market segments and niches. The value chain involves existing network operators selling network airtime to the MVNOs, which are better at catering to the market segments. Since the MVNO branded content drives demand, they boost the overall amount of traffic, but have to share revenues with the network operators. Over time, as they pick up more market share, the MVNOs gradually turn the operators’ networks into dumb pipes of information. Industry power in this scenario is diffused between the MVNOs themselves and the other players in the value chain. The industry is flexibly organized in shifting, collaborative, value chain alliances. These change frequently and quickly – as mobile content evolves with user tastes – in patterns that resemble the media industry’s continual motion of alliances. The phone makers are gradually reduced to being the manufacturers of price-sensitive telecom equipment. But owing to the fragmentation between the MVNOs and the competition between them and the operators, the large phone manufacturers have more bargaining power here than they do in either the Microsoft or operator-dominated scenarios. They can play the MVNOs and operators off against one another with offerings of complete mobile infrastructure solutions. The dominant business model will be solutions innovation to provide real value for their MVNO customers. In this scenario, the must-win battle will be offering operator solutions.

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Horizontal fragmentation If the classic sequence in oscillating patterns holds, then a likely scenario involves the horizontal fragmentation of the industry after it leaves the pioneering phase. This scenario involves a mix of the other scenarios outlined above, with different types of player dominating different parts of the value chain of activities: a dominant software player, a dominant phone maker or two, dominant global and regional operators (depending on how the dominant standard spreads), dominant global and regional portals. Also increasingly possible is a fragmentation of technology standards between local area networking and long distance telecommunications. For the phone makers like Nokia, the big question is whether they can continue to make profits in more than one activity and basic technology. Can they compete successfully and simultaneously in hardware, software, services and content, as well as in local and long distance technology? If the computer industry experience is any guide, it all depends on whether there will be customers who will value the integrated solutions offering that an integrated manufacturer can offer. IBM’s transition to the world’s largest information services provider is the best model for mobile phone makers pursuing an integrated value proposition. However, the mobile Internet differs from the computer industry, where new start-ups carved out pieces of the value chain by focusing on a single activity. Strong, existing players from several related industries covet the mobile Internet: telecom, computer chips, software, consumer electronics and media. In addition, everyone is aware of how start-ups grabbed chunks of the value chain in the computer industry from sleeping incumbents. The large players in the mobile Internet are actively monitoring and buying stakes in promising startups. Significantly, the current pioneering phase of the mobile Internet is dominated mostly by well-known names. Yet as the industry passes through standardization to volume efficiency, start-up ambushes cannot be excluded. Will Wi-Fi evolve from a local networking technology into longer distance telecommunications? Will Qualcomm be the Nokia of the 2000s? Qualcomm scored an early success in rolling out its CDMA2000 1X technology with Japan’s number two mobile carrier, KDDI. Not only Nokia but also DoCoMo, thought to be unassailable in Japan, suddenly has a

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relative newcomer on its heels. Qualcomm has the advantage that its CDMA2000 technology is working, whereas WCDMA is having teething problems. Conversely, in Europe, Nokia has the advantage because 3G licences are technology specific, linked to its WCDMA, which means that operators cannot switch technologies without violating the terms of their licences.5 But, there is increasing competition from new entrants at the low cost end of the market as well; for example, Asian manufacturers – all based in Taiwan – like DBTEL, BenQ, High Tech Computer Corp. and Compal Electronics, some using Microsoft’s Smartphone 2002 software. As the industry evolves, a big question is how the large competitors will avoid having size and inertia get in the way of fast moves. Pioneering innovation to dominate at least one activity in the value chain and process efficiency to link with the other players upstream and downstream are likely to be driving business models. Possibilities include spin-offs and special alliances to focus on different parts of the value chain, like the Sony Ericsson joint venture aimed at combining Ericsson’s mobile phone capabilities with Sony’s entertainment competencies. Another possibility involves the focused customer segment divisions that Nokia is deploying. All have numerous opportunities and face multiple risks, in a period when the foundation of future corporate fortunes will be made or broken. The must-win battles in this scenario will be dominating one activity and managing value chain relationships.

Which business models will dominate? Shaping a trajectory requires choice; the same trajectory cannot possibly accommodate all possible scenarios without losing its focus. This does not mean that different business drivers are not possible in various parts of the business, but rather that overall coherence is essential if distinctive capabilities are to be strengthened and maintained. Reviewing the scenarios and their favoured business models, it is crucial to look for commonalities that can provide potential leverage no matter which scenario unfolds. As an illustration of the potential range of models and contexts, Table 6.1 lists the dominant business models and ‘must-win-battles’ 6 for each of the mobile phone scenarios outlined above. Although it is impossible to say

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Table 6.1 Scenarios and business models in the mobile phone industry Scenario

Business models for mobile phone makers

Must-win battles6 for mobile phone makers

Operator

Process efficiency Differentiating innovation

Operator alliances Incremental product innovation

Mobile phone

Volume efficiency Differentiating innovation

Competitive standard Stakeholder relations

Microsoft

Process efficiency Solutions innovation

Value chain efficiency

Mobile portals (MVNO)

Solutions innovation

Operator solutions

Horizontal fragmentation Pioneering innovation Process efficiency

Dominating one activity Value chain management

which scenarios will prevail (reality is likely to be some mix of them), differing conditions across the phases of the technology’s development will favour different driving business models. As long as the pioneering phase of the mobile data services industry persists, pioneering and differentiating innovation will dominate the industry. The existing successful GSM technology, especially its more recent high-speed GPRS version, will not suddenly disappear, but, with differentiating innovation aimed at new applications, like picture phones and other tailored mobile phones, will be centre stage during the transition to the 3G technology. Nokia, with its strong brand and applications-oriented organization, is likely to dominate the early transition phase. Top-down decisions by the main contenders will be decisive in the battle for the software and hardware standards, as well as the ensuing implementation: Microsoft’s Smartphone versus Nokia’s Series 60 software, and Qualcomm’s CDMA2000 versus WCDMA. Here, the ability to sign up large operators and indeed national regulators, like the Chinese and Indians, will be key. Effective stakeholder relations will be critical to success. Once the new standards take root, the battleground will shift to market share acquisition and survival of the fittest in delivering high volumes efficiently at competitive prices. For the mobile phone makers, the key to value creation will be to dominate the mobile

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phone and mobile network technology, backed up by state-of-the-art volume manufacturing and logistics efficiency. Later, the dominant business models probably will shift to differentiating innovation, plus process efficiency, with speed and rapid response to the evolving technological possibilities and market segmentation. The winners over time will be those who can master the challenge of nurturing both product/market innovation and value chain efficiency cultures simultaneously in different parts of their organizations and shift the drivers between the two as value-creating opportunities warrant. Doing so will require proactive scenario planning that is highly sensitive to shifting industry developments.

How can the cultural barriers to proactive scenario development be broken down? Ongoing scenario development demands a culture of strategic thinking that is open and flexible, without sacrificing the ability to focus. For real impact, scenarios cannot emerge from the head of the CEO or one of his or her lieutenants alone. The key decision makers have to be involved in a culture of ongoing learning about what is happening in the industry and company, a culture open to negative news from the frontline, a culture that can tolerate wide-open dialogue on any issue from anyone, that can even support a constructive fight over what matters. Corporate cultures are often dysfunctional; they block the out-ofthe-box thinking at the heart of scenario planning. Indeed, the business drivers tend to dominate the thinking. In addition, in all but the smallest organizations, there are different subcultures in different parts of the organization. If these subcultures are not managed to facilitate the exchange of ideas, scenario planning becomes impossible. The functional staff of a business have their own cultures that reflect differences in education and the nature of their tasks. The marketing culture, for example, is quite different from that of the finance function; one is creative and loose, the other focused and controlled. The contrast in attitude and interest between the functions leads to their working at cross-purposes. Cultural clashes can be particularly acute when the members of the top team personalize the cultural differences between different parts of the organization.

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The leader has to ensure that all parties understand the architecture of the business, the necessary complementarities in the roles of the different players. Then the variety of perspectives can be used to good advantage as the material for wide-ranging dialogue prior to decision making. Cultural clashes between business units with different business models can be especially enervating. To create value within the same company, there has to be some synergy between the units, which can be leveraged, despite the difference in cultures. This challenge comes into sharp focus when companies shift to solutions innovation, which requires working across business unit boundaries to deliver an integrated value proposition for customers. If cultural clashes gain the upper hand, the solutions business model is untenable, especially when top management, owing to its own formative experience, is so imbued with the culture of one of the business units that it does not see the separate needs of the other units. The antidote to cultural barriers at the top is shared scenario planning that leads to a shared sense of urgency, shared understanding of what has to be done and a shared commitment to action. Nokia, for example, encourages wide-open dialogue about the future, including an officially recognized bubbling-up process for innovative ideas. Employees have even been known to persist with an idea when told to stop; indeed, that’s how the Nokia Communicator came to life. Fortune magazine has called Nokia the ‘least hierarchical big company on the world . . . . It’s often profoundly unclear who’s in charge.’7 The lack of hierarchy means that top management is very closely involved with frontline initiatives. The lack of pretentiousness and the informality of the culture make it easy for frontline managers to access the top team, including the CEO, Jorma Ollila. Ollila also spends time every year in Silicon Valley to keep in touch with Nokia-owned start-ups. Ongoing scenario development is part of the everyday culture at Nokia, which makes it possible for the company to continually try to anticipate the future of the industry and pick out the business drivers that are likely to be important tomorrow.

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Lessons for anticipating the future 1. Existing trajectory momentum is part of the key to the future. The existing technology era, business model phase and value creating oscillation represent the present on which future developments will be built, or from which breakpoints will emerge. 2. Micro and macro forces will shape the evolution of existing business patterns. Customer, competitor, technological, economical and regulatory trends provide forces and constraints that point to the way existing patterns may evolve and new ones emerge. 3. Different types of competitor will dominate – depending on how conditions develop – and shape the conditions for the others. The initiative and entrepreneurship of individual competitors will play a major, if not the decisive, role in creating the trajectory conditions for others. One of the most fruitful bases for scenario development is through the eyes of different competitors, shedding light on the world they would like to create. 4. Look for commonalities in trajectory conditions across scenarios. Scenarios usually produce a wide range of possible trajectory conditions. Commonalities in terms of business models and potential sequencing over time are key to reducing this variety to meaningful proportions. 5. Break down internal cultural barriers to ongoing scenario development. Dealing with fast-moving environments demands constant updating of existing scenarios and the periodic development of new ones. Developing a shared habit of scenario development, especially among top management, is key to breaking down the internal tunnel vision and cultural conflicts that blind organizations to the future.

7 Close the Gap: Tomorrow’s Trajectory

Closing the gap between the present and the future calls for a choice about tomorrow’s business drivers. Will they be the same as today’s or will new drivers be needed? Of the many possible trajectory profiles, this chapter selects some of the most common configurations to illustrate the principles of making a choice about tomorrow’s drivers. The limited number of possibilities looked at in this chapter should in no way limit your own choice. Indeed, the very purpose of trajectory management is to select drivers that fit the specific business conditions. With some of the most common trajectory configurations in mind, Chapter 7 looks at how to determine the drivers needed to close the gap between managerial behaviour and tomorrow’s conditions: • • • •

Tomorrow’s trajectory: innovation or efficiency oriented? Tomorrow’s trajectory: top-down or bottom-up alignment? Tomorrow’s trajectory: common driver configurations Closing the gap between today and tomorrow: sustain or switch drivers? • Questions for tomorrow’s trajectory profile

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Tomorrow’s trajectory: innovation or efficiency oriented? Looking forward through the lens of industry scenarios, the first challenge is to distinguish between profiles of possible external trajectory conditions. The most important distinction is usually generated by the basic oscillation between product/market innovation and value chain efficiency. Table 7.1 lists the external conditions often associated with innovation- and efficiency-oriented business models. The external conditions that favour innovation include variety, such as new technology, new markets, restless customers; complexity that encourages experimentation; urgency for innovative change; and imperfect competition. The external conditions that support efficiency include efficient markets and regulations; a simple business environment in terms of market opportunities; and pressure on prices that favours competitive fitness. In the early 1990s, the GSM mobile phone industry went through a phase dominated by trajectories driven by volume efficiency. The prevailing conditions were similar to those listed in the left-hand column of Table 7.1: strong competition in the marketplace and intelligent regulations in Europe created governance conditions with efficient rules of the game; the leadership urgency was to capture the rapidly expanding market opened up by the GSM standard; the standard itself greatly simplified the product/market landscape; qualified talent was scarce; and competition centered on converging growth opportunities. In the second half of the 1990s, opportunities for innovation via market segmentation and differentiation with different phone designs, colours and features emerged. The prevailing conditions were similar Table 7.1 External conditions commonly supporting efficiency and innovation

Governance conditions Leadership conditions Organizational conditions Business model conditions

Value chain efficiency

Product/market innovation

Efficient rules Urgency Business simplicity Convergent opportunities

Externalities Urgency Complexity Divergence

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to those listed in the right-hand column of Table 7.1: as the market for GSM phones opened up outside Europe, in Asia and the US, the regulatory environment became fluid with more externalities; consumer restlessness and lack of brand loyalty created urgency for new products; the new segments were part of a more complex business environment; all of which put a premium on diverging variety creation. The external conditions associated with innovation and efficiency can be linked to leading indicators, such as those shown in Table 7.2. Emerging new market segments and/or new technology point to greater future complexity in the business environment, thereby favouring innovation. By contrast, excessive complexity and mature technology that customers are less and less willing to pay for often signals an impending shift to efficiency-based business drivers. Experimentation and diverging offerings are signs of increasing variety creation that favour innovation, while declining innovation and converging offerings point to an increasing advantage for efficiency. Finally, increasing value chain integration is a sign of a shift towards more innovation, more things the markets are not capturing (externalities) that are better done in-house and, vice versa, when value chain specialization points to more opportunities for efficiency through outsourcing and partnering. Early in 2003, the mobile phone industry was characterized by shifting market segments, new broadband technology, services software and experimentation with diverging offerings, all signs pointing towards the increasing domination of innovation-based business models. Indeed, the scenarios in Chapter 6 suggested that pioneering innovation would be critical to mastering the new broadband technology. But the first signs of value chain specialization were already Table 7.2 Leading trend indicators for efficiency and innovation in the mobile phone industry Value chain efficiency

Product/market innovation

Excess complexity Mature technology Declining innovation Converging offerings Value chain specialization

New segments New technology Experimentation Diverging offerings Value chain integration

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emerging with the entry of players like Qualcomm, Microsoft and low-cost manufacturers in Asia, which suggested that efficiencyoriented business models could soon compete for dominance. In brief, the winning trajectories for mobile phone makers would be innovation oriented in the short run and, probably, standards dominated and efficiency oriented in the longer run.

Tomorrow’s trajectory: top-down or bottom-up alignment? The second challenge in looking ahead is to distinguish between profiles of possible internal trajectory conditions. Here, one of the most important distinctions is between internal conditions that will align the business drivers either top-down, when the energy for business initiatives comes from the top, or bottom-up, when the energy comes from the frontline. Table 7.3 shows common driver configurations associated with top-down and bottom-up alignment. Top-down alignment calls for effective power at the top; it’s especially needed when employees are closed to change. The top-down leadership styles that deal with strong resistance to change are the commander with directives and the chairman with task forces. These styles and change processes call for relatively strong organizational control, like that associated with centralized roles and divisional power. The business models that depend most heavily on initiatives taken at the top are volume and platform efficiency, where top management has to decide on the nature and degree of standardization, or modularization; also differentiating innovation where top Table 7.3 Internal alignment of business drivers Driver

Top-down alignment

Leadership style Commander or chairman Organizational mode Centralized roles or divisional power Business model Volume, platform efficiency or differentiated innovation

Bottom-up alignment Coach or catalyst Interconnected teams or networked entrepreneurs Pioneering, solutions innovation or process efficiency

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business unit leaders have to take the initiative in catering to different market segments. By contrast, bottom-up alignment calls for readily available resources and people who are open to change and willing to take initiative on the frontline. The bottom-up leadership styles that mobilize employees are the coach with widespread participation and the catalyst with frontline initiatives. These styles and change processes require decentralized, flexible organizational modes, such as interconnected teams and networked entrepreneurs. The business models that depend on bottom-up initiatives are pioneering and solutions innovation, where frontline champions who are close to the innovation opportunities have to take the lead; as well as process efficiency which depends on the continual improvement initiatives of employees. The driving business models associated with the scenarios in Chapter 6 indicate whether the new trajectory should be aligned primarily top-down or bottom-up. In the mobile phone industry, the importance of pioneering innovation suggested that bottom-up alignment would dominate in the short run, followed by top-down alignment for volume efficiency and differentiating innovation in the longer run.

Tomorrow’s trajectory: common driver configurations With a prediction of the business model orientation and the internal alignment, one can narrow down the possible driver configurations. The combination of business model orientation – either product/ market innovation or value chain efficiency – and internal alignment – either top-down or bottom-up – points to four common configurations that are worth looking at in more detail because they are reference points for tomorrow’s trajectory.

Bottom-up innovation For the mobile phone companies in early 2003, the anticipated dominance of pioneering innovation and bottom-up alignment prior to

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the emergence of 3G hardware and software standards pointed to a driver configuration for bottom-up innovation, like that in Table 7.4. To achieve bottom-up growth from innovation potential often requires a pioneering or solutions model, driven by a network of frontline entrepreneurs, mobilized by a catalytic leadership style and, preferably, a board with a steering emphasis based on an involved, broad view. For Nokia, it meant maintaining bottom-up alignment, but changing from interconnected teams to networked entrepreneurs; that is, from more collaborative to more entrepreneurial frontline behaviour. It also meant keeping an innovation orientation, but shifting from incremental differentiation to more fundamental pioneering. For Ericsson, the switch in trajectory profile was much more dramatic, with changes needed in all the drivers, from efficiency to innovation, and in internal alignment, from top-down to bottom-up.

Top-down efficiency Once the new hardware and software standards emerge in the mobile phone industry, a driver configuration based on volume or platform efficiency with top-down alignment will probably be needed to win the battle for market share in mobile data services. A driver configuration of this type is shown in Table 7.5. Apart from centralization for an industry breakthrough based on new standards, this driver configuration is also associated with the opposite conditions of cost reduction and restructuring that call for top-down direction. Indeed, this was essentially the trajectory on which Ericsson found itself for most of the later 1990s: top-down alignment aimed at increased efficiency, with conditions shaped by strong competition, scarce resources and survival of the fittest. Table 7.4 Bottom-up innovation drivers Element

Driver

Governance role Leadership style Organizational mode Business model

Steering Catalyst with bottom-up initiatives Networked entrepreneurs Pioneering, solutions innovation

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Table 7.5 Top-down efficiency drivers Element

Driver

Governance role Leadership style Organizational mode Business model

Auditing (financial performance) Chairman with task forces Centralized roles Volume efficiency, platform efficiency

Top-down innovation Innovation driven from the top with concentrated decision-making power, combined with leadership discipline, simplicity of innovation focus and advanced capabilities, is characteristic of the driver configuration shown in Table 7.6. This is the trajectory that Sony and Microsoft have been so good at nurturing and exploiting, which repeatedly allowed Morita and Gates to drive path-breaking innovations through their organizations into blockbuster products. The best known examples are the Walkman at Sony and Windows at Microsoft; in both cases, charismatic leaders insisted and succeeded, despite so-called frontline experts who did not think it could be done. These winning calls had to reflect judgements about the external conditions favouring innovation, and the need to align the internal effort top-down to make it happen.

Bottom-up efficiency This is the driver configuration required for continual frontline initiatives that increase efficiency and improve processes. The core is a Table 7.6 Top-down innovation drivers Element

Driver

Governance role Leadership style Organizational mode Business model

Supervising Commander with directives Divisional power Differentiating innovation

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Table 7.7 Bottom-up efficiency drivers Element

Driver

Governance role Leadership style Organizational mode Business model

Counselling Coaching with widespread participation Interconnected teams Process efficiency

bottom-up, team-based approach, with a coaching style, a culture of widespread participation and, preferably, a counselling governance role to complement the coaching throughout the organization (see Table 7.7).

Closing the gap between today and tomorrow: sustain or switch drivers? The key question here is whether tomorrow’s drivers will be the same as today’s, in which case the current trajectory configuration can be sustained with appropriate initiatives, or whether the drivers have to change to exploit new external conditions. Switching may involve a deep transformation, shaping new internal conditions to support a new leadership style and culture, a new driving organizational mode, and/or a new and business model. New drivers are called for by the: • organizational crises and phases in the organization’s life described in Chapter 3; • business model shifts and industry breakpoints described in Chapter 4. Both types of condition call for a fundamental change in the nature of the business trajectory. The organizational crisis at Ericsson mobile phones, highlighted by the huge profile gap between the behaviours and conditions portrayed in Chapter 5, made a switch in drivers imperative. All the more so, when one takes into account the breakpoint in the industry described in Chapter 6 and the driver configurations for tomorrow depicted in this chapter.

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By contrast, the temporary need to balance the driving business model with either a product/market innovation or a value chain efficiency initiative involves sustaining the existing configuration of drivers. When Nokia emphasized process efficiency initiatives in the mid-1990s to deal with its logistical problems, it was not changing the drivers, but sustaining the existing trajectory with a temporary efficiency booster. Later, Nokia too had to deal with the emerging industry breakpoint. At the beginning of 2002, Nokia switched driver configurations in its mobile phone division, when it created new, more independent business units downstream. These units focused on application segments – with networked entrepreneurs – rewarded to come up with pioneering breakthroughs for the various segments, rather than the incremental differentiation – through interconnected teams – of the old trajectory. To truly succeed, this called for new supporting conditions – employees open to a new customer and client-oriented culture, focused on discrete segments, capable of sensing and developing not only the products but also the mobile services that a variety of different market segments were looking for. Was Nokia in a position to shape the industry? Less so than in the late 1990s. Although it had most of the necessary capabilities, it still lacked a proven 3G hardware capability (the intermediate GPRS technology was increasingly successful, but WCDMA had not yet developed the operating track record that CDMA2000 was establishing). With the battle over competing 3G hardware and software standards still undecided and the differences between the competing technologies unclear in the marketplace, Nokia could not resolve the uncertainty by imposing its standard, but had to adapt to the rapidly evolving events. Hence it decided to switch the trajectory configuration to bottom-up innovation, by splitting the mobile phone division into smaller, more flexible business units, which could respond rapidly and creatively to emerging customer preferences and technological developments. For Ericsson, by contrast, not only was the gap between today’s and tomorrow’s trajectory large, but the rate of change in the business environment was also faster than the company’s internal rate of change; its management was unable to correct the completely dysfunctional, internal trajectory conditions. It had little choice other than to switch trajectories by accepting Sony’s offer for a Sony Ericsson

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joint venture. Yet, at the beginning of 2003, it was not clear whether the joint venture would succeed. Although Sony Ericsson had quickly come up with the successful T68 mobile phone with colour screen for the top end of the market, it did not have sufficient volume and process efficiency to make profits. The question was how long the parent companies would be willing to support the joint venture.

Questions for tomorrow’s trajectory profile 1. Will tomorrow’s trajectory be oriented towards product/market innovation or value chain efficiency? The conditions and leading indicators that commonly accompany product/market innovation, on the one hand, and value chain efficiency, on the other hand, can be used to assess the likely business model orientation of tomorrow’s trajectory. 2. Will tomorrow’s trajectory be aligned top-down or bottom-up? The business model drivers associated with tomorrow’s scenarios suggest what kind of alignment of driving behaviours will be necessary. 3. Which of the common driver configurations provides a reference point for tomorrow’s trajectory? Four common configurations provide references for determining the appropriate drivers for tomorrow’s trajectory. Actual trajectories, whatever their configuration, should be based on drivers that are consistent with tomorrow’s anticipated conditions. 4. To close the gap between today and tomorrow, can today’s drivers be sustained or must they be switched? When tomorrow’s drivers differ from today’s, the trajectory configuration must be switched to put the new drivers into place. When the existing drivers can be carried forward, the existing trajectory can be sustained with appropriate initiatives.

8 Sustaining Trajectory Drivers: The Right Management System

Sustaining a trajectory requires support for the existing drivers over an extended period of time. This calls for a mix of strategic initiatives that not only supports the driving business model, but also complements it with other initiatives for either product/market innovation or value chain efficiency, depending on how the conditions are evolving. To execute the right strategic initiatives and maintain the right balance in initiatives, the trajectory must be supported by the right management system that integrates the drivers into a viable trajectory. To first stabilize and then sustain the trajectory of the German airline Lufthansa, pre- and post-privatization, Jürgen Weber, the CEO, installed a frontline culture of task forces. They focused on one package of initiatives at a time to boost performance, mainly in terms of efficiency with lower costs, but also, from time to time, product innovation with customer service. When he took over as CEO of the then ailing Lufthansa in 1991, Weber’s first task was to secure financing from the banks. After two months on the job, he called the top 50 managers together for a fourday retreat. Having identified some 130 urgent issues, they appointed task forces to come up with solutions to each of the issues, but made line managers responsible for implementation. To act as a review board for progress on the projects, 15 managers were appointed to a steering committee of facilitators, coaches and controllers.

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Weber was hyperactive selling the need for change to the ground staff, cabin personnel and pilots: he ran several ‘town meetings’ involving 1,000 employees each time to explain what was happening, field questions and take the temperature of the organization. The top 50 met for a second and a third time to review progress, and thereafter a rotating group of 50 checked results. Between 1990 and 1995, most of the change projects to cut costs and improve efficiency were implemented successfully, through restructuring and decentralization. Weber knew it was not enough. More had to be done to prepare for privatization. In 1995, he introduced an initiative called Programme Efficiency, which cut the costs per seat kilometre from 18.5 to 15 pfennig. In 1996, he turned everyone’s attention to customer satisfaction with a programme of Operational Excellence designed to improve the offering with service and punctuality. In the spring of 1997, Lufthansa created the Star Alliance with SAS and other partners and, at the end of that year, the airline was privatized, making its first public offering of equity shares. Weber kept the initiatives coming. Online booking was introduced with the ‘e-Viation’ programme and, in May 2001, he put the focus back on efficiency with the Process Efficiency programme. Results were slow in materializing. Then September 11, 2001 hit and created a new sense of urgency. Lufthansa withstood the crisis in air travel much better than most and emerged as one of Europe’s and the world’s strongest competitors. Over the course of 2001, €440 million of savings had been achieved. The company went from revenues of €8.2 billion in 1991 to €15.2 billion in 2000 and €16.7 billion in 2001, with operating cash flow of €0.9 billion in 1991, €2.1 billion in 2000 and €1.7 billion in 2001. To get there, Weber had installed a trajectory configuration of efficiency with top-down alignment, complemented by periodic product improvement initiatives. With this example in mind, this chapter looks at: • Leveraging the drivers with the right portfolio of strategic initiatives • Balancing the trajectory with the right management system that supports both innovation and efficiency, for example, with: • High-speed process for fast evolution • Internal market for incremental variety creation • Task force management for irregular evolution

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• Intensive processes for competitive fitness • Lessons for sustaining a trajectory

Leveraging the drivers with the right portfolio of strategic initiatives Building on strength is the core concept in strategic value creation. Growth can only add value if it leverages existing distinctive capabilities or creates new ones. But this requires supporting the existing drivers proactively, resisting opportunities not based on strength. It requires stopping and divesting activities that do not build on or stretch those strengths. The courage to make choices and focus the necessary resources on the chosen priorities is at the heart of sustaining a trajectory. Yet, in today’s world of uncertainty and multiple alternatives, managers often try to hedge their bets by doing too many things. Managers say they have to deal with uncertainty and opportunities, but they introduce so many programmes that they overwhelm their people with initiative after initiative. The list of ongoing projects grows longer and longer – only infrequently are projects cut – and they keep changing direction to the point where people can no longer figure out what to focus on. Effort is fragmented and rising cynicism eats away at people’s commitment. Managing a portfolio of strategic initiatives1 starts with a classification of all the new business opportunities, must-win battles, major projects, organizational changes and so on, according to their valuecreating potential and implementation risk. In my experience, this is best done qualitatively in open discussion by the management team. Disagreement among members of the team about these assessments often reveals a lot about their individual commitments to the various initiatives and provides a healthy clearing of the air before agreeing on the priorities. Six different categories of initiatives can be distinguished, as illustrated in Figure 8.1. Golden opportunities are initiatives with high value-creating potential and a relatively small implementation risk, low hanging fruit on the initiative tree that have to be part of any priority set. Typically these have just emerged or have been blocked by an obstacle easily removed once the team commits. Sure moves have good value-creating

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Big bets

Experiments

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Figure 8.1 Portfolio of strategic initiatives

potential, with implementation risk that can be managed by committed management. Business as usual initiatives are those needed to be in the industry game, but with very little competitive advantage. Experiments take up relatively few resources, have highly uncertain value-creating potential and high implementation risk, but are key to developing strategic options for the future. By contrast, a Big bet has high value-creating potential, but requires a large investment of resources and faces an implementation gap fraught with risk. If the implementation risk of a big bet is closed successfully, it becomes a golden opportunity; when unsuccessful and not stopped, it risks becoming a black hole. Black holes suck in resources insatiably, without creating any significant value, and must be cut mercilessly. To leverage the drivers, assess the portfolio of initiatives in terms: • Focus: are there sufficient golden opportunities and sure moves that support the mission and the vision? The key to leverage is building on the distinctive capabilities to align the activities in the value chain (upstream and downstream) with the value proposition (the benefits and costs to the customer over the life of the offering) and the valuable customers (those with whom money can be made).2

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• Risk: is the portfolio exposed to weaknesses and other negative outcomes, which if they occur simultaneously, could put the business in jeopardy? Can weaknesses be offset with other initiatives? • Balance: is the balance right between projects supporting the existing drivers and those providing flexibility for the future? Can the balance be enhanced with innovation or efficiency initiatives?

Balancing the trajectory with the right management system that supports both innovation and efficiency Creating, selecting and retaining the initiatives that leverage the distinctive capabilities does not happen by itself. It requires a management system to guide the evolution of the portfolio in the desired direction, while allowing for incremental adaptation to the evolutionary conditions. The management system integrates the driving governance role, leadership style, organizational mode and business model into an implementation process appropriate to the particular evolutionary conditions. The persistent pursuit of a coherent management system knits together a fabric of policies and routines that becomes the organizational culture, the centre of gravity that gives the trajectory its stability, preventing it from being driven off course by transitory changes in conditions. Developing the right management system to balance the trajectory with complementary initiatives in order to support both innovation and efficiency, as needed, is key.3 An exclusive focus on either innovation or efficiency often leads to excess and makes it difficult to adapt when the conditions shift. Often, the choice of sticking to one or the other cannot be sustained for long without destabilizing the trajectory. The example of Oticon, the Danish hearing aid company, is a case in point. Television reporters from CNN and the BBC, business writers and the press on both sides of the Atlantic were in raptures about CEO Lars Kolind’s dramatic move to stimulate bottom-up innovation initiatives. He had everyone give up their jobs, move to a new paperless office building and then figure out on their own who should be

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doing what and who should be in charge, without any input from the top.4 The result, widely known as the ‘spaghetti organization’, was a network of rotating, customer-driven, project teams that came up with powerful new products. But, 18 months later, conflicts between the teams over resources – both people and money – and the duplication of effort were putting increasing pressure on costs. A new financial director, Niels Jacobsen, was appointed to bring costs under control. He stabilized the company. Sales quadrupled from Danish Kroner 477 million in 1991 to Danish Kronor 1.6 billion in 1998, while profits moved from a loss to Danish Kroner 173 million during the same period. However, when Kolind stepped down and Jacobsen took over as CEO in 1998, he dismantled the spaghetti organization. Too expensive, he said, and not enough results.5 Similar problems of excess and lack of adaptability occur when the focus is exclusively on efficiency and cost control. In efficiencyoriented business models, the inability to decide what should be cut, and what should not, often results in uniform cost cutting and headcount reduction that saps morale, hollows out the organization and results in business anaemia. Blindness to the way in which a thousand small cuts destroy a business and, then, the lack of a vision to provide hope for the future can be fatal. A sustained trajectory has a basic configuration – created by a management system that provides cohesion with shared rules of the organizational game – centered either around product/market innovation or value chain efficiency. It also has the ability to periodically brings complementary strategic initiatives into play to boost performance. Common sustainable trajectories, based on the basic configurations described in Chapter 7, together with complementary performance boosters, are listed in Table 8.1. Each of these combinations depends on a different management system, appropriate for different evolutionary conditions. These combinations of basic configurations and performance boosters create a trajectory that can be sustained for longer than a trajectory with the basic configuration alone. Whereas the basic configurations persist, the value-creating conditions may evolve, calling for an additional booster of innovation, or efficiency. Many evolutionary patterns are possible. However, to illustrate, we will

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Table 8.1 Management systems for common evolutionary conditions Evolutionary conditions

Management system

Basic configuration

Performance boosters

Fast evolution Variety creation Irregular evolution Competitive fitness

High-speed process Internal market Task force management Intensive processes

Top-down innovation Bottom-up innovation Top-down efficiency Bottom-up efficiency

Efficiency Efficiency Innovation Innovation

concentrate on four common types of evolutionary condition. These are: fast evolution, variety creation, irregular evolution and competitive fitness.

High-speed process for fast evolution When industries evolve rapidly, for example owing to the fast development of high technology, the winners are those competitors that can create and adapt most quickly to the emerging opportunities. Top management directly stimulates frontline innovation, closely follows its progress, quickly gives special attention and additional support to the most promising projects, and weighs in with initiatives of its own, especially when more efficiency is called for. This amounts to a strategy process of decision making in real time and at high speed. Frontline managers propose; top management disposes. Whereas frontline managers are encouraged to propose initiatives, top management decides which initiatives should be backed and which should be cut. The high-speed strategy process6 allows top management to mediate between initiatives generated autonomously on the frontline and those triggered by the actions of top management.7 This managerial involvement speeds up the selection and retention process, but makes it dependent mainly on the judgement of the people at the top. Face-to-face contact between people on the frontline and at the top is key for fast innovation and adaptation. The frontline innovation champions are often the heads of divisions or business units, who are competing with one another to capture the market and create the future. However, in a rapidly evolving environment, the multiple options created by energized innovation champions can quickly

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degenerate into gridlock if top management does not execute with cohesion and have the confidence to provide focus, as well as the necessary efficiency boosters (such as task forces designed to streamline operations). Typical trajectory drivers are listed in Table 8.2. A high-speed strategy process is built on a mission-oriented culture, often centred on a charismatic leader, who spurs the organization on towards changing the rules of the industry game with big moves. The stakes can be high; hence the need for a board with a broad perspective, to make sure the risks are assessed, yet detached enough to give the CEO room to do the shaping, while making sure he or she is aligned with the interests of the business. Ferdinand Piech installed a high-speed strategy process to sustain the Volkswagen trajectory in the 1990s. First, he created seven centralized task forces to streamline purchasing and four production platform teams under his direct control to cut costs. Then he gave the divisional brand managers the freedom and challenge to innovate, compete and create unique personalities for their brands, which they did with distinct images, design, promotion and distribution: for Audi, the image was ‘Challenging the conventional’; for Bentley, ‘Gentleman’s sporty touring car’; for Seat, ‘Automotive emotion’; for Lamborghini, ‘Uncompromising sports car’; for VW, ‘The benchmark for automotive values’. Although the competition between them became quite intense, it was always within well-defined limits, with strict percentage quotas for required business with the upstream platforms and purchasing groups, and periodic shared cost reduction initiatives. All key decisions were made fast in real time, within the circle of brand, platform and purchasing managers. This was a highspeed strategy process driven by frequent face-to-face contact with Piech, who made the critical decisions while continually prodding and challenging his managers. Table 8.2 Top-down innovation with efficiency boosters for fast evolution Element

Driver

Governance role Leadership style Organizational mode

Supervising, strong monitoring with a broad perspective Commander with directives Divisional power with a high-speed strategy process for innovation and periodic efficiency initiatives Differentiating innovation

Business model

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Internal market for incremental variety creation When most value is created through customer-driven innovation, for example in markets that are emerging and growing fast, or in service industries like consulting and accounting, or with business models like pioneering and solutions innovation, the right practice is to inspire the people on the frontline to go for it. They must be encouraged to develop initiatives bottom-up, by getting customer input on new products, discussing prototypes with suppliers, running simulations, trying new products out as soon as possible, and perfecting them in the marketplace with lead customers. Top management has to launch periodic efficiency boosters in order to sustain the trajectory. Typical drivers for this kind of trajectory are listed in Table 8.3. For internal entrepreneurs to come up with the growth initiatives that capitalize on the opportunity for value creation, they need access to internal markets for business ideas, human talent and financial resources. The role of the strategy process is to guide the evolution of the portfolio of strategic initiatives,8 not to propose or select initiatives, but to provide the framework and infrastructure for the internal markets, so that they can respond to what customers want and the way internal capabilities evolve. A typical internal market process provides for three types of internal exchange between supply and demand.9 Employees are free to propose business initiatives to satisfy customers, which creates a ‘market’ for ideas in the form of frequent exchanges between employee developers and customers. Project teams draw members from the functional expertise centres, which creates a ‘market’ for talent from the Table 8.3 Bottom-up innovation with efficiency boosters for incremental variety creation Element

Driver

Governance role Leadership style Organizational mode

Steering, involved with a broad perspective Catalytic with bottom-up initiatives Networked entrepreneurs with an internal market for innovation and periodic top-down efficency initiatives Pioneering or solutions innovation

Business model

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interaction between project leaders and managers of the expertise centres. A management committee screens the projects to ensure that they fall within the strategic guidelines and approves requests for funding, which creates a ‘market’ for financing between project leaders and the management committee. The management committee usually also arbitrates resourcing conflicts and pulls the plug on projects that are not performing. Hoffman La Roche, a Swiss pharmaceutical company, has many elements of an internal market system at work, especially on the innovation and research side. According to Franz Humer, the CEO. ‘There is no relationship between pharmaceutical research productivity and size. What matters is expertise, speed and fast communication.’ 10 Roche spends $4 billion annually on research, mainly in six research centres, each containing no more than 800 to 1,200 people, active in seven therapy areas that support number one worldwide market positions in diagnostics, biotech (through the ownership of Genentech), oncology, AIDS and hepatitis (the last three including the subsidiaries Syntex and Boehringer Mannheim). To ensure the exchange and sharing of ideas between research and the marketplace, the research teams are cross-functional, interdisciplinary groups that bring together basic R&D, product development and marketing people. The talent is drawn from expertise centres, both in-house and externally, through wholly owned but separately managed subsidiaries. Strategic alliances, project groups spun off into small start-ups on which Roche maintains a product option, and numerous licensing deals with other companies, in which Roche can shape the research agenda, further add to the talent pool. A global information system for the sharing of ideas, research results and the location of expertise, provides the infrastructure for these internal idea and talent markets. Funding is negotiated through the interaction between the research leaders, the laboratory, subsidiary or alliance managers, and head office. The key challenge in managing what Humer calls ‘Roche’s Research Cosmos, a network company’, is getting the balance right between the parts: between the main group and the subsidiaries, between the in-house R&D and the alliances, between control and flexibility. The internal markets are not free; to work effectively, they need a carefully tuned set of guidelines, rules and, not least, incentives.

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Task force management for irregular evolution When the industry is evolving irregularly in fits and starts, for example, during restructuring and consolidation, sustaining a trajectory involves supporting the bottom line with sure moves, as well as ensuring that the requirements for business as usual are in place. The emphasis has to be on profitability with must-win battles of efficiency improvement and lowest costs. In addition to restructuring, this kind of trajectory is often associated with the introduction of volume efficiency or, later on, platform efficiency. However, the introduction of a standard or of global platforms, while maintaining low cost leadership, requires periodic innovation and redefinition of the value proposition. As a result, the frontline culture of efficiency improvement through task force management from the top has to be complemented with innovation boosters (see Table 8.4). In an environment of cost reductions, limited resources and few opportunities, top management has to take charge. The CEO and staff at the top of the company have to nurture the initiatives chosen, implement them top-down with task forces and controlled collaboration to ensure that the trajectory does not veer off the tracks, but remains focused on the improvement objectives. The precariousness of the situation does not permit the luxury of wide-open dialogue. There is even less room for leaving the decisions up to a more Darwinian type of process or the guided evolution of initiatives. For better or worse, top management has to come up with the initiatives, make the decisions on which ones to cut, and orchestrate the implementation. This top-down way of managing the Table 8.4 Top-down efficiency with innovation boosters for restructuring Element

Driver

Governance role Leadership style Organizational mode

Auditing, strong monitoring with detailed perspective Chairman with task forces Centralized roles with task force management for efficiency and periodic innovation initiatives Volume efficiency, platform efficiency

Business model

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portfolio of initiatives depends heavily on the foresight and insight of the chairman and the team at the top. At Lufthansa, Jürgen Weber used ongoing task force management, orchestrated from the top down, first to turn around and then to sustain the airline’s trajectory. The first 130 or so task force projects were all about turnaround. A number of other programmes followed: the Programme Efficiency to further reduce costs per seat kilometre; the Operational Excellence booster to improve service and reliability; the innovation oriented e-Viation booster for online reservations, and the Process Efficiency initiative. All these projects were initiated from the top. The big question in 2002 was whether top management should try to encourage more of a bottom-up approach to new initiatives in the future. But this would have meant changing the frontline culture and, in effect, switching trajectories.

Intensive processes for competitive fitness When competitive fitness is the game, top management has to go for continual improvement to maximize the performance of the business, based on process discipline to drive focus through the organization. The corresponding trajectory drivers are shown below in Table 8.5. Continual improvement and adaptation from the bottom up rests on a human relations model of organizational design. It involves flexible collaboration and disciplined processes, based on crossfunctional teams in the middle of the organizational hierarchy,

Table 8.5 Bottom-up efficiency with innovation boosters for competitive fitness Element

Driver

Governance role Leadership style Organizational mode

Counselling, involved with detailed perspective Coach with widespread participation Interconnected teams with intensive processes for continual improvement and periodic top-down innovation initiatives Process efficiency

Business model

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employing tightly controlled screening criteria and performance indicators to manage the selection and retention of initiatives. As a complement, periodic product development or focused acquisitions are essential to adapt the offering to evolving customer wants and exploit market opportunities. The ‘operating system’ that Jack Welch had installed by the end of his reign at General Electric (GE) provides a good example of bottom-up efficiency with innovation boosters. (By contrast, in the first years after he became CEO, the process was heavily top-down.) The call from the top for focus, personal stretch targets, frontline efficiency initiatives and the development of leadership talent were the hallmarks of the GE approach by the time he stepped down.11 GE was famous for relentless process improvement: ‘It’s not what you do, it’s the way you do it.’12 Over his 20 years at the helm, Welch installed a series of processes that cumulatively produced dramatic improvements in productivity: streamlined organization and strategic planning, feedback from the frontline in ‘Workout’ sessions, shared best practices across both internal and external boundaries, the organization-wide quality improvement programme ‘Six Sigma’, e-business in the value chain, and relentless talent development, including eye-catching practices like taking out the bottom 10% of people in performance on all levels every year, and young Internet mentors for senior executives. GE’s management system comprises four intensive processes.13 The execution process starts in January with an ‘initiative launch’ attended by the 600 top operating managers, focusing mainly on efficiency but also including innovative moves. This is followed by ‘intense energizing of initiatives across businesses’ and a Corporate Executive Council (CEC) review of early learning, including customer reactions. An online survey of 11,000 employees follows at the end of the first quarter to check whether they have internalized the new initiative yet, whether customers feel it, resources are sufficient, the messages clear and credible. The talent review cycle, or people process, starts in the second quarter with leadership performance reviews at the business locations looking at the level of commitment and talent on the initiatives, ranking of executives, and decisions on promotion, reward and removal. At the end of the quarter, the CEC meeting reviews initiative best practice, initiative leadership and customer impact.

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The third quarter starts with the kick-off of the one-to-three-year strategic planning process, with analysis of the economic and competitive environment, the earnings outlook, and initiatives updates and resource requirements. August sees the informal exchange of ideas at the corporate and business levels, based on ‘wide-open dialogue by anybody on anything’. At the September meeting of the CEC, best practices are presented from outside the company, plus from the initiatives, together with the customer impact of the initiatives. The fourth quarter is marked by the operating control process, with the top 150 officers looking at the focus of the following year’s operating plans, role model executives presenting initiative successes and an ‘All business dialogue: What have we learned?’. All the business leaders present individual business operating plans, including the economic outlook and initiative stretch targets. Finally, in December, the CEC reviews individual business initiative highlights and puts the agenda together for the January meeting of operating managers. The striking thing about the GE system is the continual emphasis throughout the year on managing the portfolio of initiatives and on leadership performance, while the more common strategic planning and operating control processes are restricted to the second half of the year.

Lessons for sustaining trajectory drivers 1. Leverage the distinctive capabilities with the right portfolio of strategic initiatives. To stabilize a trajectory one must ensure that resources are not being sapped by Black holes, or too many Business as usual initiatives, and that the portfolio is not overloaded with high risk Experiments, or Big bets, but contains enough Golden opportunities and Sure moves to provide the desired value creation. 2. Product/market innovation or value chain efficiency alone can be destabilizing. For sustainability, the strategic portfolio must contain a balance of innovation-oriented and efficiency-oriented initiatives. Exclusive focus on one or the other leads to excess and blocks adaptation to the evolution of value-creating opportunities. 3. The management system must support the basic trajectory configuration, as well as complementary boosters. A management system anchored in a dominant frontline culture (either mainly top-down

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or bottom-up, and oriented mainly towards either efficiency or innovation) is essential for coherent management of strategic initiatives, but it must be flexible enough to support booster initiatives that complement the dominant business model. Fast evolution calls for a high-speed strategy process. When the environment is shifting rapidly, generating new opportunities and creating pressure for fast strategic decisions, you have to deploy a high-speed strategy process restricted to top management and the key frontline managers to ensure both flexibility and a fast response. The uncertainty and lack of time makes a bias towards innovation and speed essential, while allowing for periodic efficiency initiatives. Irregular evolution calls for task force management. When the industry is restructuring, a top-down directive culture and management system based on efficiency-oriented task forces is called for, while providing for periodic innovation initiatives to fill out the future vision. Incremental variety creation calls for an internal market. Exploiting incremental opportunities for variety creation and innovation calls for an ‘internal market’, as an intermediary between the outside opportunities and the internal talent and resources. Since top managers cannot possibly respond personally to all the emerging opportunities, you have to provide bottom-up processes and forums for the exchange of ideas, talent and financing, while managing the portfolio of initiatives and reserving the scope for periodic efficiency initiatives. Competitive fitness calls for intensive processes. In more mature markets subject to ongoing price pressure, the winners put in processes that encourage bottom-up efficiency and improvement initiatives, while allowing for periodic innovation. Process discipline and persistence are among the hallmarks of those that succeed.

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9 Switching Trajectory Drivers: The Right Change Path

Switching trajectories is about changing the drivers of the business, putting new business elements in the dominant roles. When the new drivers have to be created from scratch, switching calls for a deep transformation involving not only new behaviours, but also shaping the internal business conditions that support them. In these cases, especially, management had better know what it is getting into. At a January 1998 meeting of the Microsoft board during which Bill Gates talked more and more emotionally about the difficulty of his job, it was clear in hindsight that Microsoft needed a switch in drivers. According to long-time director, David F. Marquardt, ‘He was really distraught. He was at his wits’ end.’1 ‘This job is too hard for anybody,’2 Gates told the board. The sales of Microsoft’s two biggest blockbusters – the Windows operating system and the Office applications programs – were slowing with the decline in PC sales, and entry into new markets, like interactive TV and mobile phones, was proving more difficult than expected. However, Gates then did something few CEOs have the selfawareness and confidence to do. He handed over the top job to his best friend and management colleague, Steve Ballmer, first making him president and, after 18 months, chief executive. The transition was not smooth. Gates had to struggle with himself to give up authority. Staff meetings sometimes deteriorated into ‘shouting matches’. However, after a year, things began to settle down.

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Ballmer jumped into his new role with characteristic energy, completely reorganizing Microsoft around customer groups to get the product developers to really respond to the end-users. But the result of this radical switch was confusion and a near disaster because the new organization clashed with the internal conditions, especially ingrained behaviours. Developers were not used to coordinating across customer divisions and the improvement of products like Windows almost came to a standstill. After seeing the consequences, talking to executives at other companies and reading voraciously, Ballmer realized he had to reorganize Microsoft, not in customer groups, but in product groups. In a second radical switch, he created seven distinct product groups with separate profit and loss and balance sheet responsibility. This was a first at Microsoft, which until then had been managed centrally. With the new organization in place, Ballmer and the top executives came up with a new mission statement: ‘To enable people and businesses throughout the world to realize their full potential.’ This went beyond the previous mission – of software for any device anywhere – to include the way in which Microsoft built relationships with customers and stakeholders. A new values statement highlighted honesty, integrity and respect for customers, partners and others in the industry. In keeping with the new organizational way, Microsoft settled multiple legal cases, especially the anti-trust case with the US Justice Department, and initiated new contacts with other players in Silicon Valley. To make it real internally, Ballmer issued a call to a new way of working in a June 6, 2002 memo to all 50,000 employees, a new way of ‘Realizing Potential’. Ballmer put in place a new management system based on intensive processes. He introduced the ‘rhythm of the business’ cycle, starting with seven days of business plan reviews. This was followed the next quarter by a meeting of the top vicepresidents to look at the organization and talent development, and then later brainstorming meetings to identify new opportunities and, after the customer satisfaction survey, a review of the new initiatives. In parallel, Ballmer created ‘management sync weeks’ every quarter to coordinate strategy across the company between the executive staff and board members. To manage performance, Microsoft introduced a number of processes applied in other companies: a 360-degree review of leadership skills taken from Procter & Gamble, and a

SWITCHING

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process to identify and train top talent used by GE. Those who did not fit in were asked to leave. Ballmer took a fast radical path toward switching trajectory drivers, which initially failed; but this opened the organization to change, so he could make a second radical switch that succeeded. With the Microsoft story as one of the examples, this chapter looks at how: • Urgency, resistance, resources and risk determine the right change path and then at examples of the three classic paths: • Prepared path: switch the drivers to already existing business elements • Incremental path: when time and resources permit, develop new drivers step-by-step • Radical path: move fast to get new drivers and rapidly integrate • Lessons on switching trajectory drivers

Urgency, resistance, resources and risk determine the right change path The failure of Ballmer’s first customer-oriented organization at Microsoft illustrates the danger of making big bets to switch trajectories without testing the bet with pilot projects. Few managers would be naïve enough to launch a new product simultaneously in all their markets without trying it first in focus groups and test markets. Yet, top managers regularly bet the entire company by completely reorganizing or taking on massive acquisitions and mergers without the slightest real test experience of whether it will work or not. Imperial Chemical Industries (ICI) took a big bet approach when it restructured its business portfolio by divesting its heavy chemical divisions to acquire specialty chemical businesses. However, as ICI discovered, the risk is that the big bet can cost more than the divestment brings in, leaving the company with limited resources. Fortunately for Microsoft, Ballmer was quick to see the problems and backtrack, willing to try something else. In this, as chairman, Gates no doubt kept him on his toes. Once he figured out the right organization for Microsoft, Ballmer moved rapidly to negotiate the switch in drivers from a dominant configuration of top-down innovation to more bottom-up efficiency. The drive for innovation from Gates was still very much present, but the new emphasis was on process efficiency.

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The right change path depends on the time and resources required and the risk associated with the alternatives. Although performance was weaker, Microsoft had the time to test organizational alternatives for switching its trajectory. Ballmer could have formed horizontal customer group teams, as well as product group teams, without immediately making either of them the dominant decision-making dimension. He then could have looked at the interaction between the two new dimensions and the existing functional organization, especially the product development process, before deciding on the new driving business model and organizational mode. The ideal way of switching trajectories is to shift the drivers to business elements that already exist, what we call a prepared path. On this path, the capabilities needed to support the new drivers are already in place. The organization has completed the time-consuming and resource-intensive development of these capabilities earlier on. All that remains is to escalate the decision-making importance of the newly chosen drivers and downgrade the importance of those currently playing the dominant role. When the desired elements and capabilities do not exist inside the company, they have to be developed internally or acquired externally. This is the classic make or buy decision, albeit including soft issues like skills, processes and culture. An incremental path to developing new drivers internally is generally preferable, because, owing to the frequent competition for desirable acquisitions, buyers often find themselves paying a premium that goes to the sellers. In addition, people often underestimate the difficulty of making a big move, like integrating a large acquisition, because they idealize the benefits and cannot easily assess the impact. The time and resources needed to develop capabilities step-by-step internally are much easier to estimate and control. However, when time is of the essence, a radical path based on a rapid big move, like a major acquisition, may be necessary. Yet the question should always be asked: will the cost of the move really be less than the cost of taking the time to develop the drivers step-bystep and can the necessary internal conditions be created in time? Let’s look at the three basic switching paths in turn: • the prepared path • the incremental path • the radical path.

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Prepared path: switch the drivers to already existing business elements Putting existing business elements into the driving role, rather than acquiring them, has been the basis for some of the most successful trajectory switches. The experience and capabilities already exist inhouse, so the risk of organizational rejection is much smaller. Within three months of arriving at IBM, Lou Gerstner had decided to make the relatively small computer services unit (7,200 employees out of 302,000 in 1992) into the driving force of a new customerdriven organization. He abandoned the attempted switch to a federation of 13 loosely linked autonomous divisions initiated by his predecessor, John Akers. Gerstner gave computer services the mandate to move to a solutions-based business model, from servicing IBM’s machines and software for clients to selling ‘bundles of hardware, software, consulting and maintenance to manage business processes like manufacturing, purchasing, or marketing’.3 Providing a broader offering was a stretch, but doable – the computer services people already had process experts in-house helping with the software. The new emphasis on an integrated offering meant that, relative to the specialists like Intel and Microsoft, IBM could turn the apparent disadvantage of being one of the few remaining integrated computer companies into a competitive advantage. But Gerstner pointed out that concentrating on integrated solutions meant moving from proprietary to open systems: ‘All of IBM’s software would run on major competitive hardware, and all of IBM’s hardware would support competitive software.’ 4 Some saw this as a revolution in attitude, ‘an incredible bomb’, for a company that, apart from the introduction of the PC, had relied almost exclusively on technology developed in-house. However, for the computer services division this was a natural consequence of listening more intensively to its customers’ needs. In addition, computer services was to be ‘product agnostic’, selling the best equipment available on the market, even if it came from fierce competitors like Oracle, Sun Microsystems and even Microsoft. Becoming product agnostic was not too difficult either – it was what their customers really wanted. What was new was that they became

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the drivers of IBM’s business model, its relationships with its customers, the stimulus for new hardware and software development. Not surprisingly, there was resistance from the existing product line and country managers, who sensed they were no longer in the driving seat. This became obvious when Gerstner appointed key players, including outsiders, to head up newly created industry services groups, focusing on the integrated needs of different clients. Over time, market-based transfer pricing, strong regional leaders and project rankings helped reduce the inevitable conflicts over resource allocation between the product and solutions divisions. The product and country managers became internal suppliers to the industry groups. Those who could not take it had to leave. When the Internet exploded in the mid-1990s, it played to IBM’s strengths, because it favoured a network model of computing, with the centre of gravity moving away from the PC to the big data servers that IBM offered. All sorts of hardware and software had to be connected to the global network, for which IBM was uniquely positioned with its services division and extensive offerings. ‘Here was a chance for IBM to lead again. We were able to articulate a role for IBM in the networked world that spoke of the value of all we did.’ 5 In 1995, Gerstner formed the Internet division and, in 1997, IBM introduced ‘e-business’. The rest is the history of the phenomenal growth in IBM’s services business over the 1990s.

Top-down 1. 2.

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Coaching style Align elements 4. with widespread participative management Deliberate

Figure 9.1 Switching on a prepared path

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Commander style Change the condtions Switch drivers

Catalytic style Initiatives from new drivers

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Reviewing the story of IBM’s switch to a services and solutions business model, several key steps along the way stand out as general markers that can be found in the experience of other companies switching trajectory drivers on a prepared path. A typical sequence of moves on a prepared path is shown in Figure 9.1. Since new business elements are already in place, the resistance to change is manageable. However, there is a need to deal top-down with the culture, attitudes and resistance of the previously dominant players, by shifting the locus of responsibility. Once the primary role has been shifted to the new drivers, management can call for bottom-up initiatives from the new frontline and embed the new culture with widespread participative programmes for the other business elements. The following are the key steps.

1. Create a shared sense of urgency, by using a commander style to change hostile conditions Eliminate black holes that are sucking up resources without producing any real value added by closing, divesting and freeing up resources for more profitable use. Trying to fix, instead of closing, dead-end businesses sends the wrong signal and runs the risk of wasting scarce resources. At IBM, before switching trajectories, Gerstner had to finish the cost cutting that was under way, closing additional plants and cutting 35,000 more jobs.

2. Communicate the switch to the new drivers by changing the organizational and decision-making priorities In a company known for its detailed strategic blueprints and elaborate organizational charts, Gerstner announced that ‘the last thing IBM needs now is a vision’; instead, it was going to be driven by the marketplace. It was not going to be broken up. The focus would be on delivering integrated solutions. To make the point, he abolished the strategic blueprints, the beautiful organization charts, and he told the top managers they had to own IBM stock and radically extended the stock options plan. Then, the old computer services

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unit was reborn as IBM Global Services, owning the primary customer contact and the mandate to drive the integrated solutions business.

3. Reinforce the new trajectory with a catalytic style calling for bottom-up initiatives from the new organization Gerstner gave his blessing to middle-level corporate entrepreneurs who, building on IBM’s success at the Atlanta Olympics,6 wanted to pioneer Internet applications for the company. This, in turn, led to the formation of the Internet division. In another example, Gerstner also let top managers set up a stand-alone division for software with its own sales force.

4. Align the other elements with participative horizontal management The business elements playing secondary roles must also be aligned, typically with teams, meetings and conferences. In IBM’s case, this was necessary for the products, functions, processes and so on. When a new wave of opportunities is developing, competitors, like IBM, with the right business elements can catch the wave early and shape the rules of the industry game. When the Internet wave appeared in the early 1990s, Gerstner and his team had the presence of mind to see that IBM had the right offering and integrated technology solutions model in place. IBM rode the wave beautifully to a $30 billion new business by the end of the decade.

Incremental path: when time and resources permit, develop new drivers step-by-step To switch trajectories when the requisite business elements are not available in-house, an incremental path is usually preferable to a radical one. This option develops new drivers with a task force approach and rolls out the change with widespread participation, which provides more time for people to adapt, making it easier to obtain frontline commitment later on. But time and resources,

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especially access to the necessary human talent, must be available. And management must be disciplined enough to persist with an incremental approach and not allow themselves to be tempted to try to speed things up artificially by switching to top-down directives. The story of Asda, the UK food retailer – acquired since by WalMart – provides a well-documented example of incremental trajectory switching.7 In the early 1990s, Asda was running into problems with its strategy of diversification and repositioning from the lower to the upper end of the market, all exacerbated by remote management and increasing bureaucracy. The new CEO, Archie Norman, dealt with the financial crisis first by firing the CFO, stopping all investment, freezing pay increases and selling undeveloped sites and non-core activities. He also streamlined the management structure, changed responsibilities and reduced the number of staff. Then Norman set up a strategy task force to develop a three-year recovery plan and a new mission statement, which signalled a return to Asda’s original roots as a discounter with low prices, abundant displays and clear communication of consumer value. Pilot projects to redesign three stores were set up and, after initial resistance from the store and regional managers had been dealt with, rolled out across the chain. In the third phase, Norman and his team initiated a new ‘Asda Way’ of working, based on teamwork, continual improvement and loving the customers. Recruiting, training and developing the right people became key; every individual had to understand how he or she fitted in. Numerous programmes – including problem-solving groups, sharing of best store practice, face-to-face meetings and feedback between managers, employees and customers – created the internal conditions needed to support the continuous improvement effort. All of this put a lot of change pressure on the store managers, many of whom had to be replaced. Finally, Norman revamped the compensation system to give everyone access to stock options and discounted shares as part of a move to encourage people to take initiatives on their own. By the time Wal-Mart acquired Asda, performance and the share price had grown dramatically. The acquisition was well worth it. In Wal-Mart’s campaign of internationalization, otherwise plagued by numerous problems of adaptation to local needs, Asda has turned out to be one of the big successes.

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The Asda story under Archie Norman reflects a shift from a trajectory dominated by a business model of differentiating innovation, with a divisional organization and a chairman-style leadership, to one dominated by volume and then process efficiency, a functional organization and a commander-style leadership personified by Norman. Alan Leighton, the new marketing director, then followed with a coaching-style leadership. The key steps on an incremental path to switching trajectories are shown in Figure 9.2 and summarized below.

1. Create a shared sense of urgency, if necessary, by changing hostile conditions Divesting black holes is often the first critical step on an incremental path, because it releases resources for developing the new drivers. At Asda, this was a matter of first stopping the cash flow drain, disposing of non-core businesses and streamlining the management structure.

2. Launch task force initiatives with chairman-style orchestration to develop the required new elements Building the new business elements and related capabilities incrementally not only allows for experimentation and discovery of the

Top-down

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Chairman style Develop new 2. elements Install new 3. drivers

Commander style 1. Change the conditions

Coaching style 4. Widespread participation in new way of working

5. Catalytic style Accelerate with frontline initiatives

Deliberate

Figure 9.2 Switching on an incremental path

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most suitable drivers, but limits the risks to a series of small steps that do not over-commit the whole business. There are several ways of developing new business elements in step 2: the in-house approach (adopted by Asda), through partnerships, or small acquisitions. It is vital to explain what is going on to the rest of the organization, and to provide the task forces with clear mandates, adequate resources and steering. At Asda, the strategy task force produced the new strategy of low price, customer-attentive stores and the pilot projects translated it into a new business model for the stores. Clearly, the outlays and risks during in-house development can be controlled more closely, but the existing culture and dominant drivers are a big threat to in-house development projects, as Asda found out when its regional and store managers opposed the new store concept.

3. Once the new elements are sufficiently developed to take the driving role, clearly communicate the new direction, make the switch and manage the responses to the change At Asda, the pilots were very successful (sales up 25% to 40%) and the new model was widely communicated, but senior management forgot to provide new roles for the regional managers and train the store managers to become coaches and orchestrators, rather than commanders of the people on the shop floor. As a result, the regional and store managers resisted the rollout of the new store model, forcing top management to communicate the direction again. Senior management also had to deal with the resistance, asking many of the store and regional managers to leave.

4. Lock in the new trajectory with widespread participation in the new culture and a coaching style to support the new way of working Deep transformations often come apart when the internal conditions needed for the business model, organizational mode or leadership processes are ignored. The new ‘Asda Way’ of working and the

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continuous improvement programmes were critical for the customerattentive side of the new Asda store model.

5. Use a catalytic style to stimulate bottom-up initiatives in the newly designated drivers Once the new drivers become clear to people on the frontline, loosening the guidelines, in effect empowering and enabling people, can sustain individual innovation and initiative further, so that more intrapreneurs emerge and succeed. The new compensation and performance system at Asda was designed with this intention, but the Wal-Mart takeover interrupted its effect.

Radical path: move fast to get new drivers and rapidly integrate A radical path to trajectory switching involves a fast, big move to develop new drivers, either internally or through a major acquisition or merger. Doing it internally means putting new conditions in place, especially assembling resources and importing new ideas and practice into a major reorganization, which is a huge challenge. Doing it externally means integrating a large acquisition or merger into the existing conditions, an equally huge challenge. Either way, if the implementation risk is high – as it almost inevitably is – a radical path involves a big bet. At Microsoft, Ballmer took a radical reorganization path towards an efficiency-based trajectory and soon ran into some major problems. Without risk management and the right conditions, a radical path can take the whole company over the cliff, as has become evident in the aftermath of the exuberant years of the 1990s. Numerous big names went bust, or came close to it, due to major debt-financed investments that were impossible to digest: Global Crossing, WorldCom, Qwest, Tyco, Xerox, ABB, Vivendi, Kirsch, Kvaerner and Deutsche Telecom all made more radical moves than they could handle in the downturn and collapsed. The unavoidable lesson is that a radical path should never be taken without appropriate risk management. This may take

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the form of limited diversification, strategic alternatives, sharing risk with partners, reserves to absorb risk, and flexibility to avoid risk, especially the possibility of reversing course. Luckily, Ballmer at Microsoft saw his organizational error early on and Gates gave him the opportunity to backtrack. Like the other paths, a radical path should start with a preparation of the necessary conditions. When this is well managed, task forces are used to analyse the new context, select the right drivers and targets, do the due diligence, test the drivers and put contingency plans in place. Only when they understand what they are taking on and have prepared accordingly should top management proceed to communicate the new direction and make the big move. The integration challenge follows, with empowerment of the new frontline, then alignment of the change by driving it through the rest of the organization with widespread horizontal management. These steps are shown in Figure 9.3 and discussed below. The advantage of the radical path is its speed and impact. The full power of top management takes direct action to drive change. The radical path tends to work best in situations with low complexity, where it is reasonably clear what has to be done to switch trajectories, and when power is sufficiently concentrated at the top to deal quickly with potential resistance. The following are the key steps.

Top-down

Bottom-up

Chairman style Testing of new 2. elements

Commander style 1. Change the conditions 3. Switch drivers

Coaching style 5. Align with other elements with widespread participation

4. Catalytic style Stimulate fast frontline initiatives

Deliberate

Figure 9.3 Switching on a radical path

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1. Create a shared sense of urgency by changing hostile conditions At Microsoft, there were no big black holes and resources were plentiful enough. Nevertheless, Gates’ attempt at combining differentiating innovation with centralized management had created the tension and pressure for change at the top. Frustrated with the difficulty of trying to combine centralization and differentiated divisions, Gates handed the CEO role over to Ballmer, who immediately tried to change the conditions by decentralizing to develop a customer service capability. This caught employee attention and built expectancy for even greater change.

2. Deploy task forces to identify the critical drivers and enabling conditions Change agents with problem-solving and implementation skills have to work with top management to define and test the new trajectory drivers. This is the critical step that Ballmer missed; he would have been better advised to experiment incrementally with different dominant business models and organizational forms. Yet Ballmer is not alone. Many CEO commander types prefer to move fast on a radical path, but do not have the inclination to do the preparatory work needed to install the right enabling conditions.

3. Command the shifts to the new driving roles and deal with resistors To counter the negative motivational effects in the speed and early top-down nature of a radical path, senior managers have to actively sell the new trajectory and explain the process. Inevitably, there will be resistors. Usually, there is neither the time nor energy available to convert them; they must quickly be confronted to buy into change, or buy out of the company (Chapter 2). Once Ballmer had figured out that the appropriate organizational driver should be product groups, he moved with the top team to develop a new vision, values, performance measurement and incen-

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tives, and issued the company-wide call for a new way of realizing potential. A number of high profile people who did not agree had to go, like Richard Belluzo, then head of Microsoft’s Consumer and Commerce Group.

4. Use a catalytic style to create organizational space for bottom-up initiatives from the new frontline Within the broad direction of the new trajectory, frontline initiatives must be stimulated to drive the new business model forward. Ballmer not only made the new product division heads responsible for the full performance of their businesses, he also gave them much more freedom than had been the case in the past.

5. Coaching and widespread participation is key to embedding the enabling conditions and aligning the business elements This is where Ballmer’s array of new processes came in, getting people to work in a new way, marking the cultural difference between the old and new trajectories. Possibly the biggest challenge with a radical path is to build real commitment on the frontline to sustain the change, because top-down change always faces an uphill battle to win the minds and hearts of people. The new organization has to be put in place quickly with clear lines of decision making to remove the uncertainty as soon as possible. Quick wins and high profile success stories are a must, as well as performance measurement, training and support for individual change, and incentives. However, not everyone will embrace the fast pace: it is important to accept that the radical path is likely to leave many bystander and traditionalist casualties on the way.

Lessons for switching trajectory drivers 1. Create a sense of urgency by changing hostile conditions. If you eliminate hostile conditions, like black holes and clear out the other

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problems with the existing trajectory, this frees up resources and helps to create a sense of real change. Test the critical assumptions about the new conditions and drivers. The assumptions about the new conditions and drivers must be thoroughly evaluated, and where possible tested, before exposing the business to the risks associated with switching drivers. Ideally, switch the driving roles to already existing business elements. The chances of successfully switching can be dramatically increased by building the new drivers on existing elements, instead of introducing a new business model, organizational mode, leadership style and/or governance role from outside or building them from scratch internally. When time and resources permit, develop the new trajectory drivers step-by-step, learning as you go. The learning that accompanies the incremental development of new drivers in-house makes it easier to integrate them with existing elements and avoid the cultural clash of acquisitions, which can easily destabilize new drivers. Manage the risk when taking a radical path to switching. To contain the implementation risks on a radical path, the risks have to be managed with a range of techniques: internally with techniques like related diversification, strategic alternatives, reserves to absorb risk and flexibility to avoid the risk; and externally with insurance, partnering and lobbying for competitively efficient rules of the game. Be prepared to deploy a variety of leadership styles and change processes as the switching path unfolds. When switching involves fundamental change, it usually demands a full sequence of leadership styles (commander, chairman, coach and catalyst) and change processes to deal with the evolving situation and bring different players on board. Alignment across the drivers after switching is key to sustaining the new trajectory. On switching drivers, special attention must be given to aligning the new driving business model, organizational mode, leadership style and governance role, while still managing the other business elements, albeit less intensively.

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10 Winning Repeatedly Over Time

When Bill George, the ex-CEO and chairman of Medtronic, the world’s largest medical technology company, talks about the way he led the company to ten years of spectacular growth averaging 18% per year during the 1990s, his personal touch, practical language, quiet determination and managerial discipline come shining through. When Jack Welch, the ex-CEO and chairman of GE, talks about how he led GE through two decades of high-powered growth, his enormous energy, evocative language, confidence and managerial focus are equally impressive. One can hardly imagine two more different styles: Welch’s was more in fashion during the exuberant 1990s; George’s style is more appreciated by the sober 2000s. Some might say today that George’s represents a higher level of leadership, more dedicated to the organization. But Welch’s 20 years at GE, albeit more controversial now, cannot seriously be regarded as a lower level of leadership. What is incontrovertible is that both were enormously successful in their very different ways. And what is common to both styles is that each was true to his personality. Each was genuine and real in his unique way. Comparing the approaches of George and Welch,1 other commonalities stand out, especially how to: • Energize people with the mission, vision and values • Build an anticipatory organization

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Develop foresight to reinvent the drivers periodically Develop trajectory insight to get the right for switching timing Become an evolutionary leader Lessons for winning repeatedly

What is essential for successful trajectories over time – as these leaders show – is ensuring the continual alignment of the business drivers, not only internally but also with the rapidly evolving external conditions, repeatedly shaping them.

Energize people with the mission, vision and values ‘How can companies achieve superior customer service year after year for 10, 15, or 20 years? . . . Mission driven and values centered,’ is how Bill George summarizes the answer, ‘by inspiring employees with a purpose and a mission that motivate them to achieve superior performance in serving their customers. That is what turns on the vast majority of employees.’2 People of all cultures are energized by the opportunity to grow personally by being part of a larger winning purpose that goes beyond the immediate value of their services in the marketplace. All the successful business leaders have figured out that the only way to sustain great performance over time is to make people the heart of the value-creating model. ‘It is all about people,’3 giving them a purpose, with a winning business mission that connects them to their customers. The corporate mission creates winning value provided that: it builds on strength, a distinctive capability that allows the company to earn above average returns on its investments; it is expressed in terms of a driving business model that exploits the related opportunities in the marketplace; it is supported by the internal business conditions; and it is accompanied by a vision that stretches people to go beyond what they would merely do to earn their way. But this only works if people do not waste time and energy fighting over differences in style and approach, if they share the same values about how to work together. ‘Objectives do not get you there. Values do . . . we have a values card. The numbers are the ticket to the

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game. You get promoted on your values.’4 Comparing Welch’s comments over 20 years of interviews, it is striking how over time he ratcheted up the importance attached to shared values. The other striking thing is the amount of time all the successful leaders spend energizing and managing their people. Most would say at least 50% of their time is spent on people issues: ‘we agonize over the pipeline. Do we have enough good talent to fill the pipeline, to cover our needs for tomorrow?’ ‘Our true “core competency” today is not manufacturing or services, but the global recruiting and nurturing of the world’s best people and the cultivation in them of an insatiable desire to learn, to stretch and to do things better every day . . . Values and behaviours are what produce those performance numbers . . . . We have to remove the managers who do not share the values, but deliver the numbers, because they have the power, by themselves, to destroy the open, informal, trust-based culture that we need to win today and tomorrow . . . . This requires rigorous discipline in evaluating, and total candour in dealing with, everyone in the organization.’5 The best explanation for how Welch was able to create so much value with such a diverse conglomerate as GE for so long is that he was one of the best coaches and teachers of top managers of his era. GE’s top managers were worth much more with him as coach than they would have been alone with an independent board. That is certainly what the financial markets seemed to be saying when they regularly increased the value of the companies hiring his top managers as CEOs by up to 20% on the announcement of the appointments.

Build an anticipatory organization Even motivated employees can only win over time if they are continually probing the future and learning on many dimensions. An anticipatory organization is one with multiple business models and organizational modes as channels for exploring new strategic options and exchanging best practice both internally and externally. Numerous anticipatory learning channels are possible. One set6 is associated with the innovation and efficiency business models discussed in Chapter 4.

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Spontaneous innovation (pioneering model) Some companies have turned the stimulation of spontaneous innovation from the bottom-up into a fine art. At Medtronic, the Quest programme gave employees seed money up to an annual maximum of $50,000 if their proposals for new products, technologies or processes were accepted. A widely cited example is the group of engineers who came up with the Champion heart pacemaker, a super low cost product launched successfully in China, that forced the company to optimize all its design and manufacturing processes for cost savings.7

Directed innovation (differentiation model) Top management shapes the innovation process with R&D investment and a well-defined process for converting ideas originating in the labs into new offerings. At Medtronic, George believed in substantial investment in R&D: ‘you have to flood the product pipeline continuously. You have to fund R&D consistently – financial crunch or not.’8 At any one time, the R&D people were working on five generations of products, which allowed the company to get 70% of its revenues from products introduced in the last two years.

Process-driven learning (process efficiency model) At its heart, this is Kaizen, the Japanese-inspired capability developed by Toyota, Canon and others that involves the entire workforce in continual improvement; and more recently, Six Sigma, which spreads process-driven learning throughout the company. The central ideas are Deming’s problem-solving cycle – plan-do-check-analyze – and the Japanese penchant for concentrating on people and processes rather than organization. Process-driven learning evaluates and rewards everyone from the bottom to the top of the company, not merely on the basis of their output but also in terms of their ability to improve what they are doing and help others to improve. Process-driven learning – driven incrementally from the bottom-up – is supported by top management involvement, detailed planning, self-management and

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mutual monitoring. GE has taken this approach to new heights by combining its process-based management system with rigorous recruiting, performance appraisal and talent management.

Cross-boundary learning (solutions model) Intense value-creating relationships across boundaries, both internally and externally, are also a powerful source of innovative learning. At GE, developing a ‘boundaryless’ organization was one of Jack Welch’s major initiatives: ‘Years ago, Toyota taught us asset management. Wal-Mart introduced us to Quick Market Intelligence. Allied Signal and Motorola got us started on our enormous Six Sigma initiative. More recently, Trilogy, Cisco and Oracle helped us begin the digitization of GE . . . . The rewarded behavior has changed from being the exclusive originator of an idea – to more importantly, finding a better idea and eagerly sharing it across the business and the entire Company.’9 Internally, for example, metallurgy technology from the Aircraft Engines division sparked innovation in Power Systems; digitization from Medical Systems led to innovation in Industrial Systems and Capital Services; just-in-time delivery from Plastics was transferred to Mortgage Insurance and every other business. Similarly, Medtronic formed alliances with universities, research laboratories and smaller firms and made about 30 deals annually to obtain the rights to new technology and intellectual property. When the Internet took off, it entered into alliances with companies like Microsoft, Dell, Cisco and IBM for information and communications technology designed to provide information for patients and education for physicians, as well as link patients and implanted devices with their doctors and clinics. For success, external partnerships have to be carefully structured and managed, because they bring risks of their own. This is especially true during implementation, when differing objectives, expectations, cultures and implementation styles between the partners provide ample opportunity for discord. Added to this is the continually evolving nature of the partnership, which subtly alters the balance between the partners. The starting balance of power and value-adding contributions do not last very long and, consequently, the relationship has to be recalibrated repeatedly.

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Acquisition-driven learning The acquisition of smaller companies, followed by a disciplined integration process, can be a highly effective way of learning and building new capabilities, as illustrated by the success of GE in growing its business. As part of its internationalization drive, GE spent $9 billion on 50 acquisitions in Europe between 1989 and 1995, and $15 billion in Japan in a six-month period. In 1997 alone, as part of its move into services, GE made 20 service-related acquisitions and joint ventures. To prevent the mainstream culture from snuffing out the entrepreneurial spirit of smaller acquisitions, GE developed a well-honed process for integrating the start-ups into its organization. This began with special acquisition groups that screened target firms for their compatibility with GE’s culture and the potential for a rapid financial return, and then managed the integration process. Starting in the mid-1980s, Medtronic made almost 20 acquisitions over the following 10 years to strengthen existing businesses and to enter the cardiac surgery and neurology markets. The results from many of the acquisitions were not satisfactory. Only when Medtronic put in a disciplined acquisition and integration process did things improve. In 1998 and 1999, Medtronic spent $9.4 billion on seven major acquisitions. Deals were only done if the target fit Medtronic’s strategy and had a lower price/earnings (P/E) ratio, had either a leading market position or offered needed capabilities, and Medtronic understood the target’s customers, technology and/or distribution.10 The differences between the Medtronic and GE approaches to anticipatory learning reflect the differences in their trajectories. With newer technologies, Medtronic under Bill George was mainly on an innovation trajectory. It was only natural that Medtronic put more emphasis than GE on learning through spontaneous and directed innovation. By contrast, with older technologies, GE at the end of Jack Welch’s tenure was mainly on an efficiency trajectory. So GE put more emphasis on process-based learning. Although both companies used cross-boundary learning and smaller acquisitions, the objective for Medtronic was mainly to obtain new products and technology and enter new markets while for GE it was to enter new markets and develop new processes.

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Develop foresight to reinvent the drivers periodically Capitalizing on the flexibility of their companies, both Bill George and Jack Welch reinvented their business drivers every four or five years while they were at the helm. Both men used a variety of mechanisms and processes to generate the foresight and develop the scenarios needed (see Chapter 6) to achieve the right focus and timing for business reinvention. Both executives redefined markets in the broadest sensible way to include all potential customers and raise the bar for market share targets. George applied a stretch target of at least 15% growth for each of Medtronic’s businesses to force people ‘to look at untapped opportunities’. They would also keep something in reserve relative to what they promised Wall Street, so that even in adverse conditions they could draw on growth initiatives. Welch did not set stretch targets himself, he challenged people with large incentives to set stretch targets of their own. Both men used open dialogue, feedback meetings, brainstorming and task forces to test and stretch the definition of the business. Towards the end of his term, George led a strategy task force to create a new ‘Vision 2010’, based on the scenario that new technology would revolutionize the health care system by giving patients and customers a much greater say in managing their own health. The task force concluded that Medtronic should become ‘the world’s leading medical technology company, providing lifelong solutions for people with chronic disease’.11 For Welch, informality was the key to ‘wide-open dialogue on any topic from anybody’. A mid-level training class, for example, pointed out that the famous GE objective of being number one or two was shrinking people’s definition of their markets; Welch reacted immediately, asking all managers to redefine their markets so they would have less than 10% share. But Welch went well beyond wide-open dialogue. GE’s strategy playbook for the business heads was structured around current market trends, competitor activities and a three-year competitive scenario. In addition, every quarter, GE’s Business Management Course made recommendations to the Corporate Executive Council. Twice a year, top management reviewed the economic outlook and customer

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feedback. From July through September, the focus was on the industry environment, informal idea exchanges at the corporate and business levels, external and internal best practices, and customer responses, all designed to keep GE’s people on top of value-creating opportunities.

Develop trajectory insight to get the right timing for switching In addition to foresight about where the industry and macro environment might be going, reinventing the company calls for insight about the internal business conditions – where the company is in building and accumulating new business capabilities – in order to time the switching of trajectory drivers. Reviewing George’s 10-year record at Medtronic and Welch’s 20 years at GE, it is possible to pick out the timing of the main trajectory switches. The conditions of the macro economy, industry and/or company performance were the key triggers.

Medtronic’s switches in trajectory drivers When he took over Medtronic after the recession in early 1991, George initiated a growth drive with diversification from pacemakers into other products for cardiovascular disease. As growth slowed in 1993/94 owing to the uncertainty surrounding the discussions on health care reform, so George shifted the emphasis to cost reduction, taking out management layers and product costs. When the world economy picked up in the mid-1990s, Medtronic’s attention turned to global expansion. Its growth picked up sharply and profits jumped 57% in 1996, as a result of its lower costs. However, growth slowed again in 1997/98, as regulators delayed approval of its new defibrillator and Medtronic pushed the upper limits in its share of what were mainly slow growth markets. To accelerate the growth rate again, George opted for acquisitions to take Medtronic into higher growth markets like spinal surgery and interventional cardiology. Following Medtronic’s patchy record with previous acquisitions, going for these large takeovers called for a good dose of strategic confidence.

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Finally, at the height of the dot.com boom, George spearheaded the strategic visioning project to examine the convergence of medical and information technologies and ‘transform Medtronic from a product-centric to an information-centric organization’.12 This was supported by alliances to obtain information, communication and other technology. These switches in Medtronic’s trajectory drivers are summarized in Figure 10.1, which distinguishes between driving business models based primarily on product/market innovation and those based primarily on value chain efficiency. It is important to remember that the driving business models are not the only ones at work. During George’s tenure at Medtronic, in addition to the driving business models listed in Figure 10.1, there was also ongoing pioneering innovation, like that encouraged by the Quest programme, but it was not the dominant business model.13 Process efficiency was also important in Medtronic’s plants and their relationships with suppliers. Yet, when cost reduction dominated in 1993/94, the driver was mainly traditional headcount reduction and activity consolidation aimed at achieving volume efficiency. Product/ market innovation Towards chronic disease management Catalytic style Internal network Networked entrepreneurs Solutions innovation

Cost reduction Commander style High speed process Centralized roles Volume efficiency

Global expansion Chairman style Task force management Divisional power Differentiating innovation

Cardiovascular diversification Chairman style Task force management Divisional power Differentiating innovation

Value chain efficiency

Figure 10.1 Medtronic’s switches in trajectory drivers

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For most of the 1990s, Medtronic was on a differentiating innovation trajectory with a task force-based management system. The first phase of cardiovascular diversification built on the market image and position in pacemakers. Then, in the mid-1990s, Medtronic switched to volume efficiency. Cost reduction was not only a response to the decline in growth but also created new conditions – the low cost base for the third phase objective of global leadership and differentiating innovation in cardiovascular devices. Finally, in the early 2000s, the goal of chronic disease management systems was designed to capitalize on new information technology to take the company into the solutions business. Note that this last switch towards solutions for chronic disease management is much more fundamental and challenging than earlier switches in drivers; it requires completely new conditions and behaviours – a different kind of sales and distribution system, as well as working across the internal boundaries between the product divisions.

GE’s switches in trajectory drivers When Welch took over as CEO of GE in 1981, the US economy was in recession, with the highest unemployment rates since the Depression. All GE businesses that were not first or second in their industry had to be fixed, closed or sold. (Between 1981 and 1990, more than 200 businesses were sold for a total of over $11 billion.14) Welch changed the informal conditions. He threw out strategic planning and replaced it with ‘real time planning’ based on five key questions about market dynamics and competition. And the organization was streamlined radically from nine hierarchical levels to four, taking out 59,000 salaried and 64,000 hourly positions. Special emphasis was placed on recruiting the right people and measuring their performance. As the economy picked up in the mid-1980s, Welch began to challenge his executives about their global market share: from then on, being first or second as a business would be evaluated in terms of world market position. In the late 1980s, GE took advantage of the downturns in Europe and Asia to buy billions of dollars worth of plants, facilities and acquisitions. At the same time, Welch and Jim Baughman, director of management development, started the

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‘Workout sessions’, during which top management would present a challenge and respond immediately to the feedback from groups of 100 or so employees. Welch also got Michael Frazier, the head of business development, to start the Best Practices programme for learning from other companies. For leadership development, the emphasis shifted from measuring performance to requiring that managers live the values of speed, simplicity and self-confidence. In 1994, after the economy had more than recovered from the Gulf War recession, but GE’s traditional hardware products were only growing slowly, Welch started the drive for higher margin, productrelated services. He asked his vice-chairman to set up a Services Council for the sharing of related ideas between managers, while the company acquired service businesses and joint ventures. This was the period when Welch introduced the objective of a boundaryless company and stretch targets to motivate individual performance. ‘Budgets enervate,’ he said, ‘stretch energizes.’ Managers still had to hit basic targets, but they got big bonuses and stock options if they hit their own higher stretch targets. In the latter 1990s, when economic growth picked up even further, GE employees indicated through a survey that they were unhappy with the quality of its products and processes. At the same time, Welch learned from his old friend, Larry Bossidy of Allied Signal, how Motorola’s Six Sigma quality programme could dramatically lower costs, while improving quality and productivity. Over the next few years, Six Sigma projects became central to GE’s portfolio of initiatives. Leadership motivation was updated with a focus on attracting and retaining the ‘A players’ who had the four Es of ‘energy . . . , ability to energize others, the edge . . . to make tough calls, and execution to turn vision into results’.15 Finally, at the height of the dot.com boom in 1999, Welch launched GE’s e-business initiative. Every unit had to set up a fulltime team, called ‘destroyyourbusiness.com’, with the mission to redefine the business model before somebody else did, and all senior executives had to appoint a younger colleague to mentor them in the use of the Internet. Figure 10.2 summarizes these switches in GE’s corporate trajectory drivers during Welch’s reign along the two value-creating axes of product/market innovation and value chain efficiency. Looking at GE’s driver switches while Welch was in charge shows two shifts that

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Product/ market innovation e-Business Coaching Intensive processes Interconnected teams Pioneering innovation

Six Sigma and A team Coaching Intensive processes Interconnected teams Process efficiency Services and boundaryless Chairman Task force management Divisional power Product differentiation Globalization and Workout Chairman Task force management Divisional power Market differentiation Restructuring (#1,2) Commander High speed process Centralized roles Volume efficiency Value chain efficiency

Figure 10.2 GE’s switches in trajectory drivers

involved switches in all the trajectory drivers and two lesser ones concerned with changes in the driving business model. When Welch took over, he unleashed a tornado of restructuring. He was the commander, moving very fast, managing from the centre, demanding greater efficiency and profitability. Once the restructuring was basically over, Welch, smarting under the label of ‘Neutron Jack’, made a deep trajectory switch, moving increasingly into a chairman leadership style, with more emphasis on values, orchestrating the Workout

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and Best Practices task forces, shifting more of the decision making to his key managers, and motivating them to expand their businesses into different markets around the world. Later, when he shifted the driving business model from globalization and market differentiation to product differentiation with services, the switch was not as deep because the leadership style, management system and organization did not change fundamentally. By contrast, the introduction of the Six Sigma initiative unleashed a deep trajectory shift. Not only did the driving business model change from differentiation to process efficiency, but this also demanded an increasing delegation of initiative from the leading managers to interconnected teams on the frontline. It also requires a more intensive process-based management system and a much stronger coaching style, led by Welch’s coaching of his top managers. Finally, when Welch introduced the e-business initiative, he shifted the driving business model, but left the rest of the trajectory unchanged. One of the things that stands out in both the Medtronic and GE examples is that the trajectory switches did not happen very often: both companies insisted on making each switch in drivers and conditions stick, sustaining the new trajectory and exploiting it to the full over several years.

Become an evolutionary leader To shape a successful trajectory, to anticipate, adapt to, and shape the business conditions and put the right drivers in place, you have to become an evolutionary leader. This starts with credibility and knowing who you are. In today’s world of rapid global communication, business leaders have nowhere to hide. Analysts, regulators, NGOs, board members, employees – all are looking for clues as to how the business is doing and what its prospects are. And they watch customer reactions and continually communicate with one another. To retain credibility and legitimacy, leaders have to tell the same true basic story to all constituencies. The imperative for transparency and integrity goes beyond the stories; it also demands genuine behaviour. People learn how to put on masks to deal with different situations. Yet, when the masks are too far from their real selves, the tension begins to show in artificial

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behaviour. Far better for people to play to their strengths – whether they are an individual, part of a company or football team. You have to understand who you are, your personality and your preferred style. Commanders are most comfortable and effective when they can be directive, coaches when they can help people develop, and so on. Being true to yourself as a leader works best. This also means understanding when your preferred style is wrong for the conditions. To deal with unwanted situations that do not fit your style, you can modify and adapt your preferred approach, with practice and relentless determination. Looking back at Welch’s 20 years at GE, with written and video material, one can see his evolution from ‘Neutron Jack’, the commander focused on turning GE around in the early years by fixing, closing or selling every business that was not number one or two in its market, to Jack the coach and catalyst in the later years, focused on building a ‘global learning company’. In his own words, ‘. . . in the early years, I was much more hands on, nuts and bolts, figuring out which parts of the portfolio to scratch and keep. Today, I see my role as a gardener walking around with a can of fertilizer in one hand and a jug of water in the other . . . getting the flowers to grow.’16 It is not that his basic personality changed – Welch was still a commander deep down, but he had learned with time how to motivate people with a stretch culture. Most important was Welch’s total dedication to GE (he avoided the Washington circuit and the boards of other companies), his determination to do what was right for GE and, then, GE’s stellar performance, which gave him the time to learn and adapt his style. If the situation demands a big stretch rapidly, with little time for personal learning, you will be better off bringing someone else onto your team to complement you with the appropriate style. Archie Norman, the CEO of Asda, the UK retailer discussed in Chapter 9, was very much an analytical commander type. However, as the Asda change path evolved quickly towards widespread participation, he had the self-awareness to appoint a coach, Alan Leighton, to his team to help develop and embed a new way of working. In going for their personal stretch targets, CEOs, in particular, have to avoid temptation. One temptation is to try to make the company his or her servant. ‘The CEO must become the servant of the company and not the other way around.’17 Another temptation

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is to try to impress the analysts, to succumb to the ‘tyranny of quarterly earnings’, to do everything to hit pre-announced quarterly earnings targets, thereby putting oneself and the company at the mercy of the analysts. A final temptation, perhaps the most difficult for competitive successful people to resist, is the ‘tyranny imposed from within’, the craving for success, ‘delivering record results at whatever cost (even self-deception) to continue the celebration’, which makes the CEO the slave of public opinion.18 To avoid temptation, the CEO, like everyone else, must focus on the long-run trajectory of the company. To evolve appropriately, win repeatedly over time and shape a successful trajectory, the business leader has to master three challenges. The first is to become a four-dimensional leader, with insight into the business conditions and drivers; the governance roles, leadership styles, organizational modes, and business models. This also requires awareness of the fit between drivers and conditions, based on a deep understanding of the principles of right practice, described in Chapters 1 to 4. The second challenge is to become a visionary leader, with the foresight to anticipate how the conditioning forces may evolve and the insight into what that means for the trajectory. Should you sustain and leverage the current drivers? Or should you reinvent the business and switch by developing new drivers and conditions? This requires you to avoid the temptations presented by analysts and public opinion, to distinguish between artificial and real need for change, to master the art of scenario building and trajectory diagnosis, to pick up signals and anticipate the future, as described in Chapters 5, 6 and 7. The third challenge is to develop execution-oriented leadership, by building a company that can exploit changing business conditions. The courage to act is essential, along with the discipline to master the implementation processes and drive change through to completion, as described in Chapters 8 and 9. This means building a continually evolving portfolio – a dynamic mix of business elements – switching the drivers and, not least, evolving your leadership style to take advantage of and shape new conditions repeaedly, as described in this last chapter.

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Lessons for winning repeatedly 1. Energize people with the mission, vision and values. Motivate employees for sustained superior performance by giving them a corporate mission that goes beyond the bottom line and connects them to the customers. 2. Build an anticipatory organization. Continually expand the portfolio of anticipatory learning channels to include spontaneous innovation, directed innovation, process-driven learning, cross-boundary learning and acquisition-driven learning. 3. Develop the foresight needed to know when a trajectory switch may be needed. Use wide-open dialogue, brainstorming, scenarios, feedback from frontline employees and customers, regular idea exchange in the strategic planning cycle, and sensitivity to soft signals and events to generate the foresight needed to anticipate the future. 4. Develop insight into the available business elements and conditions to know how much of a trajectory switch is possible. Understanding where the company, employees, customers and value chain partners are in their mastery of business elements and conditions is key to the successful acquisition of new drivers and supporting conditions. 5. Periodically reinvent the trajectory in response to new conditions and corporate performance. When the existing trajectory starts running out of value-creating potential and corporate performance declines, or when the forces conditioning the trajectory shift, or when opportunities emerge, reinvent the company by switching to new drivers and supporting conditions. 6. Persist in making the new trajectory stick by sustaining it and exploiting the value-creating potential. Discipline and persistence in sustaining new drivers are key to getting the full value-creating potential out of a trajectory and avoiding overly frequent switches that destabilize it. 7. Become an evolutionary leader. Adapt your leadership style to the evolving needs of the trajectory. When a big stretch in style is called for, without time for learning, bring people with the required style onto your team. 8. Be your true self; avoid self-deception. Avoid becoming a slave either to analysts and quarterly earnings or to public opinion and your own success. Do what is right for the trajectory in the long-term.

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Notes

Introduction 1 One history of management thought even suggests that these activities are characteristic of all organizations; see Wren, D. (1994) The evolution of management thought (p. 10). Chichester: John Wiley & Sons, Ltd/Inc. 2 Danny Miller in 1990 used the word ‘trajectories’ in a similar way to describe four common company paths that move from success to failure; Miller, D. (1990) The Icarus paradox. New York: Harper Business.

Chapter 1 1 Although this chapter discusses the roles of the corporate board, the same roles apply to the internal governance (control) of a business unit within a company. 2 Neubauer, F.F. and Demb, A. (1992) The corporate board: confronting the paradoxes. Oxford: Oxford University Press. 3 The story of the GM board is taken primarily from Monks, R. and Minow, N. (Eds) (1995) Corporate governance, 2nd edition (pp. 299–337). London: Blackwell; Chandler, A.D. and Salisbury, S. (1971) Pierre S. du Pont and the making of the modern corporation. New York: Harper & Row. 4 Taylor, A. (1992) What’s ahead for GM’s new team. Fortune, 30 November, p. 59. 5 White, J.B. and Ingrassia, P. (1992) Eminence Grise: behind revolt at GM, Lawyer Ira Millstein helped call the shots. Wall Street Journal, 13 April, p. A1.

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6 Welch, D. and Kerwin, K. (2003) Rick Wagoner’s game plan. Business Week, 10 February, pp. 41–46. 7 A network of affiliated companies that form a tight-knit alliance to work toward each other’s mutual success. An intricate web of relationships that links banks, manufacturers, suppliers and distributors to the Japanese government. 8 Aschman, J.A., Kimpel, J.D. and Worrel, D.C. (2002) Corporate governance alert – new corporate governance rules compared: NYSE vs. NASDAQ. Baker & Daniels Newsstand, Business & Finance, special edition. 9 Indeed, ‘Recent failures of corporate governance [in 2001] are all the more disturbing because they come at the end of a period [during the nineties] of unprecedented attention to the concept. High-powered working groups in almost every developed economy have created corporate governance codes, spelt out best practice and sought to impose appropriate board structures.’ Taken from: Giving meaning to the codes of best practice. Financial Times, 19 February. 10 For an integrated perspective that puts social responsibility in the foreground, see Monks, R. and Minow, N. (Eds) (1995) Corporate governance, 2nd edition. Oxford: Blackwell. 11 A key article is that by Jensen, M. and Meckling, W. (1976) Theory of the firm: managerial behaviour, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. 12 Jensen, M. (2000) Value maximization, stakeholder theory, and the corporate objective function. In: M. Beer and N. Nohria (Eds), Breaking the code of change, Boston: Harvard Business School Press. 13 Steger, U. et al. (2002) Moving business/industry towards sustainable consumption: the role of NGOs. European Management Journal, 20(2), 109–127. 14 Reform: business gets religion. Business Week, 3 February, 32–33. 15 Monks, R. (1998) The emperor’s nightingale: restoring the integrity of the corporation (p. 4). Oxford: Capstone. 16 Executive performance measures are usually linked to value creation. See, for example, Martin, J.D. et al. (2000) Value based management: the corporate response to the shareholder revolution. London: Oxford University Press. 17 Lank, A. and Neubauer, F.-F. (1998) The power balance between board and management. In: F.-F. Neubauer and A. Lank (Eds), The family business: its governance for sustainability, Chapter 3. Basingstoke: Macmillan. 18 Elloumi, F. and Gueyie, J.-P. (2001) CEO compensation, IOS (investment opportunity set) and the role of corporate governance. Corporate Governance, 1(2), 23–33. 19 Westphal, J.D. and Fredrickson, J.W. (2001) Who directs strategic change? Director experience, the selection of new CEOs, and change in corporate strategy. Strategic Management Journal, 22, 1113–1137. 20 Traugott, M. (Ed.) (1995) Repertoires and cycles of collective action. Durham, NC: Duke University Press; Schumpeter, J. (1989) Essays: on entrepreneurs, innovations, business cycles and the evolution of capitalism. Piscataway, NJ: Transaction Publishers.

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21 Cadbury, A. (2001) Where is corporate governance heading? Presentation at International Corporate Governance Award Ceremony, 25 October, London. Also, Cadbury, A. (2002) Corporate governance and chairmanship – a personal view. Oxford: Oxford University Press. 22 Neubauer, F.F. and Demb, A. (1997) The corporate board: confronting the paradoxes, Chapter 7. Kiev: Ochobe.

Chapter 2 1 See Chapter 6, for the visioning side of leadership. 2 ABB Group Annual Report 1999, p. 3. 3 Strebel, P. (1998) The change pact: building commitment to ongoing change. London: Financial Times Pitman Publishing. 4 An inside job, A. T. Kearney survey in The Economist, 13 July, 2000. 5 Lewin, K. (1947) Frontiers in group dynamics. Human Relations, 1, 5–41. 6 Fiedler, F.E. (1976) A theory of leadership effectiveness. New York: McGrawHill; House, F.J. (1971) A path–goal theory of leadership effectiveness. Administrative Science Quarterly, September, 321–338; Hersey, P. and Blanchard, K. (1988) Management of organizational behavior, 5th edition. Englewood Cliffs, NJ: Prentice Hall. 7 Fry, J.N. and Killing, P.K. (1999) Strategic analysis and action, 2nd edition, Chapter 2. Englewood Cliffs, NJ: Prentice Hall; Allaire, Y. and Firsirotu, M. (1985) How to implement radical strategies in large organizations. Sloan Management Review, Spring, 19–34. 8 Fry, J.N and Killing, P.K. (1999) Strategic analysis and action, 2nd edition, Chapter 12. Englewood Cliffs, NJ: Prentice Hall. They present a performance curve and describe three of the four conditions: anticipatory change, reactive change, and crisis change. 9 Strebel, P. (1998) The change pact: building commitment to ongoing change. London: Financial Times Pitman Publishing. 10 For a top-down approach to change management, see Kotter, J.P. (1995) Leading change: why transformation efforts fail. Harvard Business Review, March–April, 59–67. 11 For a bottom-up approach to change management, see Beer, M., Eisenstat, R.A. and Spector, B. (1990) Why change programs don’t produce change. Harvard Business Review, November–December, 158–166. 12 Strebel, P. (1998) The change pact: building commitment to ongoing change. London: Financial Times Pitman Publishing. 13 Gibbons, P.T. (1992) Impacts of organizational evolution on leadership roles and behaviours. Human Relations, 45(1), 1–18. 14 An inside job, A.T. Kearney survey in The Economist, 13 July, 2000. 15 Hammer, M. and Champy, J. (1993) Reengineering the corporation: a manifesto for business revolution. New York: Harper Business.

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Chapter 3 1 Global System for Mobile Communications. In 1982, the European Conference of Postal and Telecommunications Administrations (CEPT) agreed to develop a common standard for mobile communication, called GSM. Supported by Nordic countries and Holland, CEPT created Groupe Special Mobile, a new standards group with a mandate to specify radiotelephony systems for Europe. 2 Jorma Ollila, quoted in Haikio, M. (2001) Nokia: the inside story (p. 187). Helsinki: Edita. 3 Mead, M. (2001) Coming of age in Samoa. London: Harper Collins; LeviStrauss, C. (2000) Structural anthropology. New York: Basic Books. 4 Hofstede, G. (1991) Cultures and organizations: software of the mind. New York: McGraw-Hill. 5 Strebel, P. (in press) Institutional details are critical in cross-border mergers. In: P. Morosini and U. Steger (Eds), Managing complex mergers: real world lessons in implementing successful cross-cultural M&As. London: Financial Times Prentice Hall. 6 Bruck, C. (1994) Master of the game: Steve Ross and the creation of Time Warner (p. 58). New York: Penguin Books. 7 Wood, J. (2000) The irrational side of managerial decision-making. IMD Perspective for Managers, 7, 1–14; Kets de Vries, M. (2001) Struggling with the demon: perspectives on individual and organizational irrationality. Madison, CT: Psychosocial Press. 8 Lawrence, P.R. and Lorsch, J.W. (1986) Organization and environment. Boston: Harvard Business School Press; Quinn, R.E. (1988) Beyond rational management (p. 86). San Francisco: Jossey-Bass, p.86; Denison, D.R. (1990) Corporate culture and organizational effectiveness. New York: John Wiley & Sons, Ltd/Inc.; Trompenaars, F. and Hampden-Turner, C. (2001) 21 leaders for the 21st century: how innovative leaders manage in the digital age. New York: McGraw-Hill; Lawrence, P.R. and Dyer, D. (1983) Renewing American industry. New York: Free Press. 9 Straw, B.M. and Cummings, L.L. (Eds) (1990) The evolution and adaptation of organizations. Connecticut: JAI Press Inc. 10 Lawrence, P.R. and Dyer, D. (1984) Renewing American industry. New York: Free Press. 11 Quinn, R.E. (1988) Beyond rational management (p. 86). San Francisco: Jossey-Bass; Denison, D.R. (1990) Corporate culture and organizational effectiveness. New York: John Wiley & Sons, Ltd/Inc.; Trompenaars, F. and Hampden-Turner, C. (2001) 21 leaders for the 21st century: how innovative leaders manage in the digital age. New York: McGraw-Hill. 12 Adizes, I. (1990) Corporate life cycles. New York: Prentice Hall; Nadler, D. (1997) Competing by design: the power of organization architecture, 2nd edition. London: Oxford University Press. 13 Greiner, L. (1972) Evolution and revolutions as organizations grow. Harvard Business Review, July/August, 41.

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14 One of the most widely known is that pioneered by Alfred. D. Chandler, Jr. (1962) Strategy and structure: chapters in the history of industrial enterprise. Cambridge, MA: MIT Press. For a creative recent perspective linked to an ecological model of industry development, see Hurst, D. (1996) Exploring the eco-cycle. Transformation, Autumn(10), 16–23. 15 Cusumano, M.A and Selby, R.W. (1995) Microsoft secrets: how the world’s most powerful software company creates technology, shapes markets and manages people. New York: Free Press. 16 See Chapter 9 for the continuation of the Microsoft story. 17 Galbraith, J. (2000) Reconfigurable organization. In: N. Nohria and M. Beer (Eds), Breaking the change code. Boston: Harvard Business School Press.

Chapter 4 1 Nathan, J. (1999) Sony: the private life. London: HarperCollins Business. 2 Porter, M. (1980) Competitive strategy: techniques for analysing industries and competitors. New York: Free Press; Porter, M. (1985) Competitive advantage: creating and sustaining superior performance. New York: Free Press; Wernerfelt, B. (1984) A resource based view of the firm. Strategic Management Journal, 5, 171–180; Prahalad, C.K. and Hamel, G. (1990) The core competence of the corporation. Harvard Business Review, May–June, 79–91. 3 Dosi, G., Nelson, R.R. and Winter, S.G. (Eds) (2000) The Nature and dynamics of organizational capabilities. Oxford: Oxford University Press. 4 Nelson, R.R. and Winter, G.S. (1985) An evolutionary theory of economic change. Cambridge, MA: Harvard University Press. 5 Strebel, P. (Ed.) (2000) Focused energy: mastering bottom-up organization, Chapter 10. Chichester: John Wiley & Sons, Ltd/Inc. 6 Mensch, G.O. (1975) Stalemate in technology: innovations overcome the depression. Cambridge, MA: Ballinger Publishing Company; Schumpeter, J. (1984) Capitalism, socialism and democracy. London: HarperCollins. 7 Pande, P.S, Neuman, R.P. and Cavanagh, R.R. (2000) The six sigma way: how GE, Motorola, and other top companies are honing their performance. New York: McGraw-Hill Trade; Pascale, R.T. and Athos, A.G. (1981) The art of Japanese management: applications for American executives. New York: Warner Books. 8 Carlos Cordon, professor at IMD, has proposed a business model based on platforms upstream to support a continuous flow of incremental innovation for different market segments downstream to explain the success of new clothing retailers like Zara and Mango (2002). 9 Utterback, J.M. (1996) Mastering the dynamics of innovation. Cambridge, MA: Harvard Business School Press. 10 Porter, M. (1980) Competitive strategy: techniques for analysing industries and competitors. New York: Free Press.

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11 Fine, C.H. (1998) Clockspeed: winning industry control in the age of temporary advantage. London: Little, Brown and Company. 12 Strebel, P. (1992) Breakpoints: how managers exploit radical business change. Boston, MA: Harvard Business School Press. 13 Schumpeter, J.A. (1975) Capitalism, socialism and democracy [originally published 1942] (pp. 82–85). New York: HarperCollins. 14 Christensen, C.M. (1997) The innovator’s dilemma: when new technologies cause great firms to fail. Boston, MA: Harvard Business School Press. 15 Steinbock, D. (2001) The Nokia revolution: the story of an extraordinary company that transformed an industry (p. 110). New York: Amacom. 16 Ohsone, K. (1998) Innovations in management: the case of the Walkman. Sony Innovation in Management Series, 1, 3–21. 17 Ohsone, K. (1998) Innovations in management: the case of the Walkman. Sony Innovation in Management Series, 1, 3–21. 18 Brandenburger, A. and Nalebuff, B.J. (1997) Co-opetition. New York: Doubleday. 19 Carlos Cordon. Zara and Mango business model. 20 Waldemar, S. et al. (2003) Winning at service: lessons from service leaders. Chichester: John Wiley & Sons, Ltd/Inc. 21 Lohr, S. (2002) He loves to win, at IBM he did. New York Times, 10 March. 22 Raedler, G. and Kubes, J. (2001) Globalizing Volkswagen: creating excellence on all fronts. IMD Case Study, IMD-3-0912. 23 Geroski, P. and Gregg, P. (1998) Coping with recession: UK company performance in adversity. Cambridge: Cambridge University Press. 24 Hindle, T. (2002) A survey of management. The Economist, 9 March. 25 Courtney, H. (2001) 20/20 foresight: crafting strategy in an uncertain world. Boston, MA: Harvard Business School Press.

Chapter 6 1 Quote by Matti Alahuhta in a taped interview with Xavier Gilbert of IMD, 1998. 2 Schwartz, P. (1991) The art of the long view. New York: Currency/Doubleday. Pierre Wack introduced scenario-based planning at Shell and was head of Business Environment in Royal Dutch/Shell Group Planning from 1971 to 1981. See also Wack, P. (1985) Scenarios: shooting the rapids. Harvard Business Review, 63(6), 139–151. 3 Standage, T. (2001) A survey of the mobile internet: the internet untethered. The Economist, 13 October. 4 Clarke, N. (2002) Microsoft-Nokia mobile ‘holy war’. International Herald Tribune, 15 March; Reinhardt, A. (2002) Will Microsoft overplay its wireless hand? Business Week, 11 March, 30. 5 Time for plan B: a technological escape-hatch exists for Europe’s troubled mobile operators, but they are not allowed to use it. The Economist, 26 September, 67–68.

NOTES

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6 Concept developed by Tom Malnight, professor at IMD, and Sylvia de Volge of Hey Consulting; IMD/Unilever programme, 2000. 7 Fox, J. (2000) Nokia’s secret code. Fortune, 1 May.

Chapter 8 1 Strebel, P. (2001) Strategic roadmapping, a presentation to the Breakthrough Program for Senior Executives, IMD International; for a similar approach, see Bryan, L.L. (2002) Just-in-time strategy for a turbulent world. McKinsey Quarterly, Special edition: Risk and Resilience, 17–27. 2 Kumar, N. (in press) Marketing Strategy. Cambridge, MA: Harvard Business School Press. 3 Strebel, P. (1988) Rebalancing the organization: key to outpacing the competition. IMD Perspectives for Managers, 3; Chakravarthy, B. and Lorange, P. (2002) Network organizations for ultra-rapid growth. In: F.J. Contractor and P. Lorange, P. (Eds), Cooperative strategies and alliances (pp. 641–665). Amsterdam: Pergamon Press. 4 Lovas, B. and Ghoshal, S. (1998) Strategy as guided evolution. Insead Working Paper; Gould, R.M. (1994) Revolution at Oticon A/S: the spaghetti organization. IMD Case Study, IMD-4-0235. 5 Borring, A.G. (1999) Opgör med Kolind’s Kaos [Uproar at Kolind’s chaos]. Börsens NyhedsMagasin, 28, 14–22. 6 Strebel, P. (2001) High speed strategy in large companies. In: S. Crainer and D. Dearlove (Eds), Financial Times handbook of management, 2nd edition (pp. 269–279). Indianapolis: Financial Times Prentice Hall. 7 Bower, J.L. (1996) Research on strategy process: a personal perspective. Strategy Process Conference, Harvard Business School; Burgelman, R.A. (1983) A model of the interaction of strategic behavior, corporate context, and the concept of strategy. Academy of Management Review, 8, 61–70. 8 Lovas, B. and Ghoshal, S. (1998) Strategy as guided evolution. Insead Working Paper. 9 Hamel, G. (1999) Bringing Silicon Valley inside. Harvard Business Review, 1 September. 10 Humer, F. (2002) CEO roundtable presentation. IMD, November. 11 Welch, J. (2000) The GE operating system. GE Annual Report, 8–9. 12 Welch, J. (2001) Jack: straight from the gut. New York: Warner Books. 13 Welch, J. (2000) The GE operating system. GE Annual Report.

Chapter 9 1 Greene, J., Hamm, S. and Kerstetter, J. (2002) Ballmer’s Microsoft. Business Week, 17 June, 84–90.

186

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2 Greene, J., Hamm, S. and Kerstetter, J. (2002) Ballmer’s Microsoft. Business Week, 17 June, 84–90. 3 Lohr, S. (2002) He loves to win, at IBM he did. New York Times, 10 March. 4 Lohr, S. (2002) He loves to win, at IBM he did. New York Times, 10 March. 5 Lohr, S. (2002) He loves to win, at IBM he did. New York Times, 10 March. 6 IBM ensured that it was recognized, through publicity, as the technology provider of the games, and designer of what was then the world’s largest website. 7 Beer, M. (1998). Asda (A), (A1), (B), and (C). Harvard Business School Case Study, ref. 9–498–005; see also, Beer, M and Nohria, N. (2000) Cracking the code of change. Harvard Business Review, 1 May.

Chapter 10 1 George, B. (in press) Authentic leadership. San Francisco, CA: Jossey-Bass; Welch, J. (2001) Jack: straight from the gut. New York: Warner Books. 2 George, B. (2001) Medtronic’s chairman William George on how missiondriven companies create long-term shareholder value. Academy of Management Executive, 15(4), 39–47. 3 Bartlett, C. (2000) GE compilation: Jack Welch 1981–1999. Videotape edited by C. Bartlett, Harvard Business School, ref. 9-300-511. 4 Welch, J. (2001) Jack: straight from the gut. New York: Warner Books. 5 Welch, J., Immelt, J., Dammerman, D. and Wright, R.C. (2000) To our customers, share owners and employees. GE Annual Report, 1–7. 6 Strebel, P. (1995) Creating industry breakpoints: changing the rules of the game. Long Range Planning, 28(2), 11–20. 7 Govinder, N. and Chakravarthy, B. (2002) Medtronic: keeping pace. IMD Case Study, IMD-3-1030, abridged. 8 Govinder, N. and Chakravarthy, B. (2002) Medtronic: keeping pace. IMD Case Study, IMD-3-1030, abridged. 9 Welch, J., Immelt, J., Dammerman, D. and Wright, R.C. (2000) To our customers, share owners and employees. GE Annual Report, 1–7. 10 Govinder, N. and Chakravarthy, B. (2002) Medtronic: keeping pace. IMD Case Study, IMD-3-1030, abridged. 11 Govinder, N. and Chakravarthy, B. (2002) Medtronic: keeping pace. IMD Case Study, IMD-3-1030, abridged. 12 Govinder, N. and Chakravarthy, B. (2002) Medtronic: keeping pace, IMD Case Study, IMD-3-1030, abridged. 13 Figures 10.1 and 10.2 show the different trajectory configuarations over time for Medtronic and GE in terms of the driving leadership style, management system, organizational mode and business model. The driving governance roles are not shown because they cannot be determined from the available public information. 14 Bartlett, C. and Wozny, M. (2002) GE’s two-decade transformation: Jack Welch’s leadership. Harvard Business School Case Study, 9-399-150, 4 January.

NOTES

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15 Bartlett, C. and Wozny, M. (2002) GE’s two-decade transformation: Jack Welch’s leadership. Harvard Business School Case Study, 9-399-150, 4 January. 16 Bartlett, C. (2000) GE compilation: Jack Welch 1981–1999. Videotape edited by Christopher Bartlett, Harvard Business School, ref no. 9-300-511. 17 Brabeck, P. (2002) CEO roundtable. IMD International, Lausanne, Switzerland, 1 November. 18 Vasella, D. (2002) Temptation is all around us. Fortune, 18 November, 67–71.

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Index

acquisition-driven learning 168 air transport 86 Akers, John 89, 151 Alahuhta, Matti 56, 61, 106 Allied Signal 167, 173 anticipating the future 106–21 anticipatory organization 165–8 Asda 40, 155–8, 176 Asea 37, 46 Asea Brown Boveri (ABB) 37–8, 39, 41, 43, 45, 49, 53, 158 AT&T 25 Audi 139 auditing role 28–9 Baby Blues 89 Ballmer, Steve 68, 69, 147–9, 150, 158–61 Barings Bank 51 Barnevik, Percy 37–8, 39, 41, 43, 46, 53 BASF 86 Baughman, Jim 172 Bayer 86 BBC 136 Belluzo, Richard 161 BenQ 117

Bentley 139 best practice, codes of 22 Betamax 87 big bet 135 big step process reengineering 81 black holes 135 Bluetooth 111 boards 21–2 power balance 26 self-evaluation 35 Boehringer 141 Bosch 82 Bossidy, Larry 173 bottom-up alignment 125–6 bottom-up efficiency 128–9 bottom-up innovation 126–7 breakpoints, industry 85–92 breakthrough, cost leadership for 90–2 Brent Spar platform 24 bribery 23–4 British Telecom 115 Brown Boveri 37, 46 business as usual initiatives 135 business conditions, questions determining 101 business development, phase of 67

198

INDEX

business elements 98–101 business model basic vs integrated 75–6 constraints 74 in mobile phone industry 117–19 bystanders 44–5 Calley, John 73 ‘Campaign GM’ 19 Canon 81, 166 catalyst style of leadership 50–1, 158, 161 Centerman, Jörgen 41, 43, 45, 53 centralized role 70 chairman style of leadership 48–9 change agents 44 change management 52 change path, right, determining 149–50 change processes 52 change, response to 44–6 bystanders 44–5 change agents 44 resistors 45 traditionalists 45 chief executive officers (CEOs) 176–7 power balance 26 role of 21, 32 Chrysler 58 Cisco 167 Citibank 82 CNN 136 coach style of leadership 49–50 Code Division for Multiple Access (CDMA) technology 111 CDMA2000 111, 113, 117, 130 IX technology 116 codes of best practice 22 collaboration 62–3 collective mental programming 57 Columbia Pictures 73 Combustion Engineering 43 commander style of leadership 46–8, 176 commodity 85

commodity offerings 82 commodity phase 83 Compal Electronics 117 Compass 89 competitive fitness 143–5 competitive scenarios for mobile phone makers 112–17 horizontal fragmentation 116–17 manufacturers dominate 113 Microsoft dominates 114 mobile portals dominate 115 operators dominate 112 Computer Associates 35 conditions, matching behaviours under 6–9 constraints business model 74 governance 20–5 industry culture 59 leadership 39–42 organizational 57–61 cost leadership 82 for breakthrough 90–2 counselling role 29–30 Creative Destruction 85 crisis anticipation 66–7 cross-boundary learning 167 CSB Records 73 culture barriers 119–20 industry, constraints of 59 national 58 organizational, over time, shaping 59–61 team 66, 67 Daimler 58 DaimlerChrysler 20 DBTEL 117 decentralization into divisions 68–9 entrepreneurship 64 decision making 25–6 Dell Computer 91, 114, 167 Delmonico 72–3, 74 Deming 166

INDEX

1111 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7111 8 9 20111 1 2 3 4 5 6 7 8 9 30 1 2 34 35 36 7 8 9 40111

destroyyourbusiness.com 173 Deutsche Telekom 115, 158 differentiation 66, 68, 83, 85, 166 directed innovation 166 directive style 40 Disney 25, 35 distinctive capabilities 76 divisional power 65, 68 DoCoMo 112, 115, 116 Dornmann, Jürgen 53 dot.coms 53, 86, 110 drivers, business 98–101 definition 1 external conditions 2 interconnections between 3 internal conditions 2 related conditions 2 shifts in 67–70 switching 10–12 driving behaviours, matching conditions to 6–9 driving governance role, evolution of 35 driving leadership style 52 driving modes 63–6 du Pont, Pierre 18, 19, 29 DuPont chemical company 18, 86 Durant, William Crapo 18, 29, 33 efficiency models 79–82 Electronic Data Services (EDS) 19, 26 employee, ongoing motivation of 11 Enron 24, 26, 92 entrepreneurship 62–3 network 64, 67, 70 environmental complexity and organizational modes 62 Ericsson 3–6, 97, 108, 109, 127, 129, 130 actual vs right driving behaviours 8–9 conditions profile 7 driving behaviours 99, 100–1 external and internal conditions 102–3, 103–4

199

net income (1990s) 4 switch in drivers 10, 11 ethics 23, 25 evolution of business models 83–5 patterns of 107–10 execution-oriented leadership 177 experiments 135 external conditions, efficiency, innovation and 123, 124 externalities 32 and governance roles 25 extroverted leader 59–60 Fayol, Henri 3 Federal Express 82 flexibility vs control 61–2 Ford 20 Model T 18, 80 four-dimensional leader 177 Frazier, Michael 173 frontline innovation 138 Gates, Bill 68, 69, 128, 147, 149–50, 159, 160 Genentech 141 General Electric (GE) 25, 38, 40, 86, 149, 163, 167–70, 176 Corporate Executive Council (CEC) 144–5 ‘Six Stigma’ programme 144 switches in trajectory drivers 172–5 General Motors (GM) 18–20, 24, 33, 90 board, passive role 26 Chevrolet Corvair 19, 23 supervising role 28 General Packet Radio Service (GPRS) 110, 118, 130 Genie 115 George, Bill 163, 164, 166, 168, 169, 170–2 Gerstner, Lou 89, 90, 151–4 Global Crossing 26, 33, 158

200

INDEX

Global System for Mobile technology (GSM) 63, 87, 108, 109, 111, 118, 123, 124 mobile standard 56 golden opportunities 134 governance conditions and right behaviours 22 focused vs broad view 22–5 governance conditions, adapting to and shaping 30–5 business cycle and governance roles 33 CEO cycle and governance roles 30–2 political cycle and governance roles 33–4 technology trends and governance roles 34–5 governance constraints 20–5 governance roles 17–35 driving for common conditions 27–30 externalities and 25 managerial power 27 monitoring vs involved 25–7 Gulf War 173 Hellström, Kurt 5 High Tech Computer Corp. 117 high-speed strategy process 138 Hoffman La Roche 141 Honda 20 horizontal fragmentation 116–17 horizontal modularization 82 horizontal tension 61 Humer, Franz 141 IBM 69, 89, 90, 116, 151–4, 167 Global Services 89, 154 Ibuka, Masaru 72 Idei, Nobuyuki 73 IKEA 88 i-mode practice 115 Imperial Chemical Industries (ICI) 149

incremental path 150, 154–8 incremental variety creation 140–1 industry breakpoints 92 industry culture, constraints of 59 industry standard 85–7 innovation models differentiating 78 pioneering innovation 77–8 solutions-based 79 integrity 175 Intel 114, 151 introverted leader 60 ISS 89 Jacobsen, Niels 137 Kairamo, Kari 55, 56, 61, 66, 100, 104 Kaizen 66, 81, 166 KDDI 116 Keiretsu 21 key account managers 70 Kimberly Clark 25 Kinney 59 Kirsch 158 Kolind, Lars 136, 137 Kvaerner 158 Lamborghini 139 Lay, Kenneth 26 leadership fast vs deliberate 42–4 top-down vs bottom-up 44–6 leadership conditions adapting to and shaping 51–3 anticipatory 43 crisis 43 growth 42 reactive 43 leadership constraints 39–42 leadership styles 46–51 Leeson, Nick 51 Leighton, Alan 40, 156, 176 Lewin, Kurt 41–2 life cycle stages 82–5

INDEX

1111 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7111 8 9 20111 1 2 3 4 5 6 7 8 9 30 1 2 34 35 36 7 8 9 40111

Lindahl, Goran 38, 39, 41, 43, 45, 49, 53 lobbying 74 Lufthansa 132 e-Viation programme 133 Operational Execellence 133, 143 Process Efficiency 133, 143 Programme Efficiency 133, 143 Maersk 82 managerial power and governance roles 27 Mango 88 Maples, Mike 69 market segmentation 123 Marquardt, David F. 147 Medtronic 163, 166–9, 175 Quest programme 166 switches in trajectory drivers 170–2 Microsoft 106, 115, 125, 167 innovation 87, 89 MSN instant messaging service 114 sequences of development 67–9 Smartphone 2002 114, 117, 118 switching drivers/trajectories 147–9, 151, 158–60 top-down innovation at 128 Windows 128 Windows CE 111 mission 164–5 mobile Internet 34, 87, 106, 108, 110–11 mobile virtual network operators (MVNOs) 115 Morgan, J.P. 18 Morita, Akio 72, 73, 88, 128 Motorola 35, 87, 108, 109, 167 Six Sigma initiative 166, 167, 173 must-win-battles 117 Nader, Ralph 19, 24 narcissistic leader 60 national culture 58

201

Nestlé 24 network of entrepreneurs 64, 67, 70 New York Stock Exchange (NYSE) 21 NGOs 23, 24 Nilsson, Sven-Christer 3, 5 Nokia 10, 24, 97, 111, 116, 117 core values 58 culture 120 divisional power 65 driving behaviours 99, 100–1 entrepreneurial behaviour 63, 64 external and internal conditions 102–3, 104 flexibility at 61 industry standardization and 87 innovations 106, 108, 109 organizational mode 55–7 picture phone 113 Series 60 software 114, 118 switching drivers 130 team culture 66, 67 Nokia Communicator 120 Norman, Archie 40, 155–6, 176 Ohga, Norio 73 oil crisis 91 Ollila, Jorma 56, 106, 120 Oracle 89, 151, 167 organizational conditions adapting to and shaping 66–70 centralized roles 65 crisis anticipation 66–7 divisional power 65 driving modes 63–6 interconnected teams 66 network of entrepreneurs 64 shifts in drivers 67–70 organizational constraints 57–61 organizational culture over time, shaping 59–61 oscillations 82–3, 85 Oticon 136–7 Palm 113 Perot, Ross 19, 20, 26

202

INDEX

Philips Electronics 86, 87 Piech, Ferdinand 90, 139 pioneering 83, 166 platform efficiency 81–2, 89–90 pollution 17 prepared path 150, 151–4 process-driven learning 166–7 process efficiency 80–1, 82, 85, 166–7 process improvement 84 process innovation 82 Procter & Gamble 148 product/market innovation models 83 PWC Consulting 89 Qualcomm 56, 87, 106, 111, 113, 116, 117, 125 CDMA2000 118 quality control 68 Quick Market Intelligence 167 Qwest 158 radar 86 radical path 150, 158–61 Ramqvist, Lars 3, 5 readiness for change 46 recession 34, 91 resistance 149–50 resistors 45 resource scarcity 63 Reuss, Lloyd 20 right change path 149–50 right practice 25 risk management 24, 25 rollout, lack of 49 Ross, Steve 59 safety 23, 24 Samsung 56, 87, 113 SAS 133 Schrempp, Jürgen 58 Schumpeter 85 Schwab, Charles 35 Seat 139 Securitas 89

Seiko 87 September 11 133 Shell 24, 91 shock treatment 47 situational leadership 42, 44 Sloan, Alfred 18–19, 29 Smale, John 20, 30 Smith, Jack 20, 29 Smith, Roger 19 social opinion 74 social welfare 17 societal impact 25 solutions innovation 85, 167 Sony 11, 65, 72–4 innovation 77, 78, 80, 81, 87, 88, 128 Walkman 88 Sony Ericsson joint venture 11, 117, 130–1 T68 mobile phone 131 Sony Europa 60 Southwest Airlines 88 specialization 85 spontaneous innovation 166 Sport Utility Vehicles (SUVs) 85 standardization 85–7 Star Alliance 133 steering role 29, 32 Stempel, Robert 20,29 strategic direction 25 Sun Microsystems 25, 89, 151 Java applications software 114 supervising role 28 sure moves 134–5 sustainable trajectories 137, 138 Swissair 33, 92 switching, timing for 170–5 Symbian operating system 111, 113, 114 Syntex 141 task force management 142–3 task force pollution 49 teams, interconnected 66, 69 Texas Instruments 87

INDEX

1111 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7111 8 9 20111 1 2 3 4 5 6 7 8 9 30 1 2 34 35 36 7 8 9 40111

third generation (3G) technology 110, 111, 112, 113, 117, 118, 127, 130 T-Motion 115 top-down 47 alignment 125–6 direction 46 efficiency 127–8 innovation 128 total quality management 66 Toyota 20, 81, 166, 167 traditionalists 45 trajectory, definition 3 trajectory diagnosis 97–121 trajectory viability 103–4 transparency 23, 25, 32, 175 Trilogy 167 Tyco 158 UK Company Law Reform 35 urgency 42, 44, 47, 149–50, 153, 156, 160 UWB (ultra wide band) 106 value chain efficiency 74, 75 efficiency models 83–5 value creation 17, 35, 67–70, 72 oscillations 109–10 values 164–5 vertical tension 60–1

203

Virgin Mobile 115 vision 164–5 visionary leader 177 Vivendi 158 Vodafone 112 Volkswagen 90, 139 volume delivery 84 volume efficiency 4, 68, 80, 82, 85 Vuorilehto, Simo 55–6 Wagoner, Richard 20 Walkman 128 Wal-Mart 91, 155, 158, 167 Warner Brothers 59 WCDMA 111, 113, 117, 118, 130 Weber, Jürgen 132–3, 143 Welch, Jack 40, 144, 163, 165, 167–70, 172–5, 176 Western Electric 87 Wi-fi 106, 111, 116 Wilson, Charlie 19 Winnick, Gary 26 Wintel mobile platform spreads 114 WorldCom 33, 158 Xerox 158 Yahoo! 115 Zara 88