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THE

BUSINESS
BOOK
THE
BUSINESS
BOOK
London, new York, MeLbourne,
Munich, and deLhi

DK jAcKet designer First American edition, 2014


Laura Brim
senior editor published in the United states by
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contributors
ian marcouse, consultant editor denry machin
Ian Marcousé lectures in business and economics education at Denry Machin is an associate tutor at Keele University, UK,
the Institute of Education in London. He has written a host of and is working at doctoral research on the application of business
business text books for A-level and BTEC students, including thinking within education. He also works for Harrow International
the popular A–Z Business Studies handbooks, and is the founder Management Services as projects manager, assisting in the
and director of A–Z Business Training Ltd. development of Harrow School’s presence in Asia. He is the author
of several business books, journals, and magazine articles.
PhiliPPa anderson
nigel watson
Philippa Anderson is a communications consultant and business
writer who has authored articles, magazine features, and books on Nigel Watson has taught business and economics for A-Level and
numerous aspects of business, from market research to leadership. International Baccalaureate students for 25 years. He has authored
She also provides communications consultancy for multinational and co-authored books and magazine articles in both subjects.
firms, including 3M, Anglo American, and Coca-Cola.

alexandra black
Alexandra Black studied business communications before
embarking on a writing career that led her to Japan and stints
with financial newspaper group Nikkei Inc. and investment bank
J. P. Morgan. She later worked for a direct marketing publisher in
Sydney, Australia, before moving to Cambridge, UK. She writes
on a range of subjects, from business to history and fashion.
CONTENTS
10 INTRODUCTION 58 Without continuous
growth and progress,
success has no meaning
The Greiner curve
START SMALL,
THINK BIG 62 If you believe in
something, work nights
STARTING AND GROWING 32 Be first or be better and weekends—it won’t
THE BUSINESS Gaining an edge feel like work
The weightless start-up
40 Put all your eggs in one
20 If you can dream it, basket, and then watch
you can do it that basket
Beating the odds at
start-up
Managing risk LIGHTING THE FIRE
42 Luck is a dividend of LEADERSHIP AND HUMAN
22 There’s a gap in the sweat. The more you RESOURCES
market, but is there sweat, the luckier you get
a market in the gap? Luck (and how to get lucky)
Finding a profitable niche 68 Managers do things right,
43 Broaden your vision, and leaders do the right thing
24 You can learn all you maintain stability while Leading well
need to know about the advancing forward
competition’s operation Take the second step 70 None of us is as smart
by looking in his as all of us
garbage cans 44 Nothing great is The value of teams
Study the competition created suddenly
How fast to grow 72 Innovation must be
28 The secret of business is invasive and perpetual:
to know something that 46 The role of the CEO is to everyone, everywhere,
nobody else knows enable people to excel all of the time
Stand out in the market From entrepreneur to leader Creativity and invention

48 Chains of habit are too 74 Dissent adds spice,


light to be felt until spirit, and an
they are too heavy to invigorating quality
be broken Beware the yes-men
Keep evolving business
practice 76 No great manager or
leader ever fell from
52 A corporation is a living heaven
organism; it has to Gods of management
continue to shed its skin
Reinventing and adapting
78 A leader is one who 112 Management is a practice
knows the way, goes the where art, science, and
way, and shows the way craft meet
Effective leadership Mintzberg’s management
roles
80 Teamwork is the fuel
that allows common 114 A camel is a horse
people to attain designed by committee
uncommon results Avoid groupthink
Organizing teams and talent 132 Make the best quality
115 The art of thinking of goods at the lowest
86 Leaders allow great independently, together cost, paying the highest
people to do the work The value of diversity wages possible
they were born to do Your workers are your
Make the most of your talent customers

88 The way forward may 138 Utilize OPM—Other


not be to go forward MAKING MONEY People’s Money
Thinking outside the box
WORK Who bears the risk?

90 The more a person MANAGING FINANCES 146 Swim upstream. Go the


can do, the more you other way. Ignore the
can motivate them conventional wisdom
Is money the motivator? 120 Do not let yourself be Ignoring the herd
involved in a fraudulent
92 Be an enzyme—a catalyst business Play by the rules 150 Debt is the worst poverty
for change Leverage and excess risk
Changing the game 124 Executive officers must
be free from avarice 152 Cash is king
100 The worst disease that Profit before perks Profit versus cash flow
afflicts executives is
egotism Hubris and nemesis 126 If wealth is placed where 154 Only when the tide goes
it bears interest, it comes out do you discover who’s
104 Culture is the way in back to you redoubled been swimming naked
which a group of people Investment and dividends Off-balance-sheet risk
solves problems
Organizational culture 128 Borrow short, lend long 155 Return on equity is a
Making money from money financial goal that can
110 Emotional intelligence become an own goal
is the intersection of 130 The interests of the Maximize return on equity
heart and head shareholders are our own
Develop emotional Accountability and 156 As the role of private
intelligence governance equity has grown, so have
the risks it poses
The private equity model

158 Assign costs according to


the resources consumed
Activity-based costing
186 Synergy and other lies 218 If you don’t know
Why takeovers disappoint where you are, a map
won’t help
188 The Chinese word “crisis” The capability maturity
is composed of two model
characters: “danger”
and “opportunity” 220 Chaos brings uneasiness,
Crisis management but it also allows for
creativity and growth
190 You can’t grow long-term Coping with chaos
if you can’t eat short-term
Balancing long- versus 222 Always do what is right.
short-termism It will gratify half of
mankind and astonish
192 Market Attractiveness, the other
WORKING WITH Business Attractiveness
The MABA matrix
Morality in business

A VISION 194 Only the paranoid survive


223 There is no such thing as
a minor lapse in integrity
STRATEGY AND Avoiding complacency Collusion
OPERATIONS
202 To excel, tap into people’s 224 Make it easier to do
capacity to learn the right thing and
164 Turn every disaster into The learning organization much harder to do the
an opportunity wrong thing
Learning from failure 208 The future of business is Creating an ethical culture
selling less of more
166 If I had asked people what The long tail
they wanted, they would
have said faster horses
Leading the market
210 To be an optimist ...
have a contingency SUCCESSFUL
170 The main thing to
plan for when all hell
breaks loose
SELLING
remember is, the main Contingency planning MARKETING MANAGEMENT
thing is the main thing
Protect the core business 211 Plans are useless, but
planning is indispensable 232 Marketing is far too
172 You don’t need a huge Scenario planning important to leave to the
company, just a computer marketing department
and a part-time person 212 The strongest The marketing model
Small is beautiful competitive forces
determine the profitability 234 Know the customer so
178 Don’t get caught in of an industry well that the product fits
the middle Porter’s five forces them and sells itself
Porter’s generic strategies Understanding the market
216 If you don’t have a
184 The essence of strategy competitive advantage, 242 Attention, Interest,
is choosing what not to do don’t compete Desire, Action
Good and bad strategy The value chain The AIDA model
244 Marketing myopia 278 Trying to predict the 312 Your most unhappy
Focus on the future market future is like driving customers are your
with no lights looking greatest source of
250 The cash cow is the out of the back window learning
beating heart of the Forecasting Feedback and innovation
organization
Product portfolio 280 Product, Place, Price, 314 Technology is the great
Promotion Marketing mix growling engine of change
256 Expanding away from The right technology
your core has risks;
diversification doubles 316 Without big data, you are
them Ansoff’s matrix
DELIVERING THE blind and deaf and in the
middle of a highway
258 If you’re different, you
will stand out
GOODS Benefitting from “big data”

Creating a brand PRODUCTION AND 318 Put the product into


POSTPRODUCTION the customer’s hands—
264 There is only one boss: it will speak for itself
the customer Quality sells
Make your customers 288 See how much, not how
love you little, you can give for 324 The desire to own
a dollar something a little better,
268 Whitewashing, but with Maximize customer benefits a little sooner than
a green brush necessary
Greenwash 290 Costs do not exist to be Planned obsolescence
calculated. Costs exist to
270 People want companies be reduced 326 Time is money
to believe in something Lean production Time-based management
beyond maximizing
profits The appeal of ethics 294 If the pie’s not big enough, 328 A project without a
make a bigger pie critical path is like a ship
271 Everybody likes Fulfilling demand without a rudder
something extra for Critical path analysis
nothing 296 Eliminate unnecessary
Promotions and incentives steps Simplify processes 330 Taking the best from
the best Benchmarking
272 In good times people 300 Every gain through the
want to advertise; in bad elimination of waste is
times they have to gold in the mine
Why advertise? Juran’s production ideal
332 DIRECTORY
274 Make your thinking as 302 Machines, facilities,
funny as possible and people should work
Generating buzz together to add value
340 GLOSSARY
Kaizen
276 E-commerce is becoming 344 INDEX
mobile commerce 310 Learning and innovation
M-commerce go hand in hand
Applying and testing ideas 351 ACKNOWLEDGMENTS
INTRODU
CTION
12 INTRODUCTION

F
rom the time that goods of scale—that production costs fall increasingly international—
and services began to be as more items are produced. Money environment businesses needed
traded in early civilizations, gave rise to the concept of “value different, and more rigorous,
people have been thinking about added”—selling an item for more processes and structures. The
business. The emergence of than it cost to produce. Even when geographic scope and ever-growing
specialized producers and the use barter was the norm, producers still size of these evolving businesses
of money as a means of exchange knew it was advantageous to lower required new levels of coordination
were methods by which individuals costs and raise the value of goods. and communication—in short,
and societies could, in modern Today’s companies may use different businesses needed management.
terms, gain a “business edge.” The technologies and trade on a global
ancient Egyptians, the Mayans, the scale, but the essence of business Managing production
Greeks, and the Romans all knew has changed little in millennia. The initial focus of the new breed
that wealth creation through the of manager was on production.
mechanism of commerce was An era of change As manufacturing moved from
fundamental to the acquisition of However, the study of business as individual craftsmen to machinery,
power, and formed the base on an activity in its own right emerged and as ever-greater scale was
which civilization could prosper. relatively recently. The terms required, theorists such as Henri
The lessons of the early traders “manager” and “management” did Fayol examined ever-more-efficient
resonate even today. Specialism not appear in the English language ways of operating. The theories
revealed the benefits of economies until the late 16th century. In his of Scientific Management, chiefly
1977 text The Visible Hand, Dr. formulated by Frederick Taylor,
Alfred Chandler divided business suggested that there was “one best
history into two periods: pre-1850 way” to perform a task. Businesses
and post-1850. Before 1850 local, were organized by precise routines,
family-owned firms dominated the and the role of the worker was simply
The art of administration business environment. With to supervise and “feed” machinery,
commerce operating on a relatively as though they were part of it. With
is as old as the
small scale, little thought was given the advent of production lines
human race. to the wider disciplines of business. in the early 1900s, business was
Edward D. Jones The growth of the railroads in characterized by standardization
US investment banker
(1893–1982) the mid-1800s, followed by the and mass production.
Industrial Revolution, enabled While Henry Ford’s Model T car
businesses to grow beyond the is seen as a major accomplishment
immediate gaze of friends or family, of industrialization, Ford also
and outside the immediate locale. remarked “why is it every time I ask
To prosper in this new—and for a pair of hands, they come with
INTRODUCTION 13

a brain attached?” Output may have were able to make use of computers the means to reach a mass
increased, but so too did conflict to help solve operational problems. audience. Businesses had always
between management and staff. Human relations were not forgotten, used advertising to inform
Working conditions were poor and but in management thinking, customers about products and to
businesses ignored the sociological measurability returned to the fore. persuade them to buy, but mass
context of work—productivity media provided the platform for
mattered more than people. Global brands a new, and much broader, field—
The postwar period saw the marketing. In the 1940s US
Studying people growth of multinationals and advertising executive Rosser Reeves
In the 1920s a new influence on conglomerates—businesses with promoted the value of a Unique
business thinking emerged—the multiple and diverse interests Selling Proposition. By the 1960s,
Human Relations Movement of across the globe. The war had made marketing methods had shifted
behavioral studies. Through the the world seem smaller, and had from simply telling customers about
work of psychologists Elton Mayo paved the way for the global brand. products to listening to what
and Abraham Maslow, businesses These newly emerging global customers wanted, and adapting
began to recognize the value of brands grew as a result of a media products and services to suit that.
human relations. Workers were no revolution—television, magazines, Initially, marketing had its critics.
longer seen as simply “cogs in the and newspapers gave businesses In the early 1960s hype about the
machine,” but as individuals with product became more important
unique needs. Managers still than quality, and customers grew
focused on efficiency, but realized dissatisfied with empty claims.
that workers were more productive This, and competition from
when their social and emotional Japanese manufacturers, had
needs were taken care of. For the Entrepreneurship is about Western companies embracing a
first time, job design, workplace survival, which nurtures new form of business thinking:
environments, teamwork, creative thinking. Business Total Quality Management (TQM)
remuneration, and nonfinancial is not financial science, it’s and Zero Defects management.
benefits were all considered Guided by management theorists,
about trading—buying
important to staff motivation. such as W. Edwards Demming and
In the period following World
and selling. Philip B. Crosby, quality was seen
War II, business practice shifted
Anita Roddick as the responsibility of the entire
UK entrepreneur (1942–2007)
again. Wartime innovation had company, not just those on the
yielded significant technological production line. Combining Human
advances that could be applied Relations thinking and the
to commerce. Managers began to customer-focused approach of
utilize quantitative analysis, and marketing, many companies ❯❯
14 INTRODUCTION

adopted the Japanese philosophy of the conditions for business growth, 2000s heralded a new era for
kaizen: “continuous improvement of and the correct positioning of business. While early hype led to
everything, by everyone.” Staff at products within their market, were the failure of many online start-ups
all levels was tasked with improving considered key to business strategy. in the dot-com bubble of 1997 to
processes and products through Moreover, what distinguished these 2000, the successful e-commerce
“quality circles.” While TQM is no gurus from their predecessors—who pioneers laid the foundations for a
longer the buzzword it once was, had tended to focus on operational business landscape that would be
quality remains important. The issues—was a focus on leadership dominated by innovation. From
modern iteration of TQM is Six itself. For example, Charles Handy’s high-tech garage start-ups—such
Sigma, an approach to process The Empty Raincoat revealed the as Hewlett-Packard and Apple—
improvement that was developed paradoxes of leadership, and to the websites, mobile apps, and
by Motorola in 1986 and adapted by acknowledged the vulnerabilities social-media forums of the modern
Jack Welch during his time as CEO and fragilities of the managers business environment, technology
of General Electric. themselves. Leadership in the is increasingly vital for business.
context of business, these writers The explosion of new
Gurus and thinkers recognized, is no easy undertaking. businesses thanks to technology
Business history itself emerged also helped to expand the
as a topic of study in the 1970s. Digital pioneering availability of finance. During the
Dr. Alfred Chandler progressed Just as television and mass media 1980s and 1990s finance had grown
the study of business history from had done before, the growth of the into a distinct discipline. Corporate
the purely descriptive to the Internet in the 1990s and early mergers and high-profile takeovers
analytical—his course at Harvard became a way for businesses to
Business School stressed the grow beyond their operational
importance of organizational limits; leverage joined marketing
capabilities, technological and strategy as part of the
innovation, and continuous management lexicon. In the late
learning. Taking their cue from Business can be a source 1990s this expanded to venture
Chandler, in the 1980s and 1990s capital: the funding of small
of progressive change.
management experts—such as companies by profit-seeking
Michael Porter, Igor Ansoff,
Jerry Greenfield investors. The risk of starting and
US businessman, co-founder of Ben
Rosabeth Moss Kanter, Henry and Jerry’s ice cream (1951–) running a business remains, but
Mintzberg, and Peter Drucker— the opportunities afforded by
encouraged businesses to consider technology and easier access to
their environments, to consider finance have made taking the first
the needs of people, and to remain step a little easier. With micro-
adaptable to change. Maintaining finance, and the support of online
INTRODUCTION 15

networks and communities of like- for example, may be “the world’s Business is a fascinating subject.
minded people dispensing factory,” but its home-grown It surrounds us and affects us daily.
business advice, enterprise has companies are also starting to A walk down the street, a wander
never been more entrepreneurial. represent a threat to Western around a supermarket, an Internet
Recent business thinking has businesses. As the global recession search on almost any topic will
brought diversity and social of 2007–08 and ongoing economic reveal commerce in its many and
responsibility to the fore. Businesses uncertainty have proven, business varied forms. At its core business
are encouraged, and increasingly in the 21st century is increasingly is, and always has been, about
required by law, to employ people more interdependent and more survival and surplus—about the
from diverse backgrounds and to challenging than ever before. advancement of self and of society.
act in an ethical manner, wherever Starting a business might be easier, As the world continues to open
they operate in the world. but to survive entrepreneurs need up, and as opportunities for
Businesses such Nike and Adidas the tenacity to take an idea to enterprise multiply, an interest
require suppliers to prove that labor market, the business acumen to in business has never been more
conditions in their factories meet turn a good plan into a profitable relevant, or more exciting. Moreover,
required standards. Sustainability, enterprise, and the financial skill to for those with entrepreneurial
recycling, diversity, and maintain success. spirit, business has never been
environmentalism have entered more rewarding. ■
business thinking alongside Continual change
strategic management and risk. For centuries social, political, and
technological factors have forced
New horizons companies and individuals to
If business thinking has shifted, create new ways of generating
so too has the nature of business profits. Whether bartering goods Business, more than any other
itself. Where once a company was with a neighboring village or occupation, is a continual
constrained by its locality, today seeking ways to make profits from dealing with the future; it
the opportunities are truly global. social networking, business is a continual calculation,
Globalization does, however, mean thinking has changed, shifted, and
an instinctive exercise
that business is more competitive evolved to mirror the wants and
than ever. Emerging markets are needs of the societies whose wealth
in foresight.
creating new opportunities and it creates. Sometimes, as in the
Henry R. Luce
US magazine publisher (1898–1967)
new threats. They may be able to 2008 financial crisis, business failed
outsource production to low-cost in its efforts. In other examples—the
countries, but as their economies legacy of Apple’s game-changing
grow, these emerging nations are products, for example—companies
breeding new competition. China, have been spectacularly successful.
START S
THINK B
STARTING AND
GROWING THE
BUSINESS
MALL,
IG
18 INTRODUCTION

A
ll businesses start from the and that they have the skills and find a profitable niche—to succeed,
same point: an idea. It is knowledge to turn the original companies need to do something
what happens to that idea concept into a successful business. different in order to stand out in
that determines business success. It follows that the idea must the market. The strategy for most
According to Entrepreneur be profitable. Sometimes, an idea companies is to differentiate; this
magazine, nearly half of all new may look great on paper, but turn means demonstrating to customers
start-ups fail within the first three out to be uncommercial when put that they offer something that is not
years. Beating the odds at start-up into practice. Determining whether available from competitors—a
is tough. First and foremost an idea, an idea has potential requires a Unique or Emotional Selling
no matter how good, must be study of the competition and the Proposition (USP or ESP).
combined with entrepreneurial relevant market. Who is competing Such attempts to stand out are
spirit, defined as the willingness for customers’ time and money? everywhere. Every business, and
to take risk. Without entrepreneurial Are these competitors selling at every stage of production, from
spirit a great idea might never be directly competitive products or raw-material extraction to after-
pursued. Not all ideas are good possible substitutes? How are sales service, tries to distinguish
ones though; it would be a foolish competitors perceived in the its products or services from all
entrepreneur who rushed a product market? How big is the market? others. Walk into any bookstore,
to market without careful thought, Most markets are increasingly for example, and you will see
research, and detailed planning. global, crowded, and competitive. countless examples of books, often
Risk might be inherent in business Few companies are lucky enough to on the same topic, using design,
enterprise, but successful style, and even size (large or small)
entrepreneurs are those who are to stand out from the competition.
not only willing to take risks, but Gaining an edge often depends
are also able to manage risk. on one of two things: being first
into a new market niche, or being
Realistic propositions The only thing worse different from the competition. For
Having an idea is the first step— than starting something example, in 1995 eBay was first
the next hurdle is finance. Some and failing … is not into the online auction market,
start-ups require very little capital, and has dominated it ever since.
starting something.
and a few require none at all. Similarly, Volvo was first to identify
However, many require significant
Seth Godin the opportunity for luxury bus sales
US entrepreneur (1960–)
backing, and most will need to seek in India, and has enjoyed healthy
funding at some stage in the sales. In contrast, Facebook was by
growth process. An entrepreneur no means the first social network,
must be able to convince financial but it is the most successful; its
backers that the concept is valid edge was having a better product.
START SMALL, THINK BIG 19

Once a company is established, the second step of employing struggle to make the necessary
the challenge shifts: the objective people who are neither family nor changes; some try and fail, while
now is to maintain sales and grow previously known friends. This is others decide to remain small.
in the short- and long-term. the start of a move from entrepreneur
to leader, and it requires a new set Finding a balance
Adapting to survive of skills, as new demands are placed Determining how fast to grow is,
Long-term business survival on the business founders. Where therefore, a balance of the founder’s
depends upon the company once energy, ideas, and passion skills and desires. But in order to
constantly reinventing and were enough, evolving businesses survive, the idea must be unique
adapting itself in order to remain require the development of formal enough to define its own niche, and
ahead of the competition. In systems, procedures, and processes. the individual or group behind it
dynamic markets, which are In short, they require management. must demonstrate entrepreneurial
growing and evolving all the time, Founders must develop delegation, spirit. They need the flexibility to
the idea on which the company communication, and coordination adapt the idea—and themselves—
was founded may become irrelevant skills, or they must employ people as business and market pressures
over time, and rivals will almost who have them. demand. Luck will play a part, but
certainly copy it. The ecosystem As Larry Greiner described in it is the balance of these factors
in which a business operates is his 1972 paper, “Evolution and that determines whether a small
rarely, if ever, static. Corporations Revolution as Organizations Grow”, start-up becomes a giant. ■
exist in these ecosystems as living as a business grows, the demands
organisms that must adapt to on it change. The Greiner Curve is
survive. In their 2013 book, a graphic that shows how the initial
Reinventing Giants, Bill Fischer, stages of growth rely on individual
Umberto Lago, and Fang Liu noted initiative, and that evolving ad-hoc
that the Chinese home appliances business practice into sustainable When you have to prove
company Haier had reinvented and successful growth can only be the value of your ideas by
itself at least three times in the achieved by experienced people persuading other people to
past 30 years. In contrast, Kodak, and rigorous systems. Professional pay for them, it clears out an
a US giant of the 20th century, was management, as opposed to
awful lot of woolly thinking.
slow to react to the rise of digital entrepreneurial spirit, becomes
photography, and went bankrupt. essential to business evolution.
Tim O’Reilly
Irish entrepreneur (1954–)
Moreover, just as the enterprise Some leaders, such as Bill Gates
must adapt, so too must the owner. and Steve Jobs, for example, are
Most businesses start small, and able to make the transition from
remain small. Few entrepreneurs entrepreneurial founder to corporate
are willing or know how to take leader. Many others, however,
20

IF YOU CAN
DREAM IT,
YOU CAN DO IT
BEATING THE ODDS AT START-UP

IN CONTEXT
FOCUS ...a good idea allied to ...an entrepreneurial spirit:
Business start-ups a great business plan. a willingness to take risks.
KEY DATES
18th century The term
“entrepreneur” is used to
describe someone who is
willing to risk buying at
certain prices and selling Beating the odds at
at uncertain prices. start-up requires...
1946 Professor Arthur Cole
writes An Approach to
Entrepreneurship, sparking
interest in the phenomenon.
2005 The micro-finance,
nonprofit site Kiva.com ...business acumen to ...determination to
launches to make small loans put the plan into action. deal with setbacks.
to very small businesses.
2009 Crowdfunding websites,
such as Kickstarter.com, allow
individuals to provide funding

T
for businesses. he reasons for starting a holds true for some, pursuing the
business are many. Some dream is risky. Those who attempt
2013 A study by Ross Levine people dream of being their it must have the entrepreneurial
and Yona Rubinstein finds that own boss—of turning their hobby spirit to fearlessly quit a well-paid
as teenagers, many successful into a profitable enterprise, of job, go it alone, and face a future
entrepreneurs exhibited expressing their creativity, or of filled with uncertainty. Others
aggressive behavior, broke the being richly rewarded for their hard might need a push; often being laid
rules, and got into trouble. work. Although Walt Disney’s maxim off (and its associated lump-sum
“if you can dream it, you can do it” payment) can be a springboard.
START SMALL, THINK BIG 21
See also: Finding a profitable niche 22–23 ■ Managing risk 40–41 ■ Luck (and how to get lucky) 42 ■ Take the second
step 43 ■ From entrepreneur to leader 46–47 ■ Learning from failure 164–65 ■ Small is beautiful 172–77

Younger entrepreneurs are In recent years, securing finance


increasingly a part of the start-up for start-ups has become a little
scenario. They may have gained easier. Many governments offer
the necessary skills for business by loan plans or grants. Entrepreneurs
their early twenties, and enjoy the with big ideas can access large
excitement and freedom of running funds of money and managerial Sustaining a business is
their own venture. support from venture capitalists, a hell of a lot of hard work,
whose sole purpose is to incubate and staying hungry is half
Keeping the faith start-ups. For smaller start-ups, and the battle.
While the reasons for start-up may for people with very little of their Wendy Tan White
vary, what all entrepreneurs have in own capital, micro-loans and UK business executive (1970–)
common is the willingness to take crowdfunding finance—such as
risks. Few entrepreneurs get it right that offered by Kickstarter.com—
first time—it takes resilience and are increasingly popular.
tenacity to keep going in the face
of failure, and it takes perseverance The business plan
to remain positive when customers, The key to securing financing is
banks, and financial backers a business plan. A good plan will failure is a lack of cash. While
repeatedly say “no.” Faith in the outline the idea itself, detail any loan capital can help for a while,
idea is essential. While some start- supporting market research, eventually a business must fund
ups require very little capital, most describe operational and marketing its operations from revenue. A good
require funding during their early activities, and give financial business plan will analyze future
growth phases. A business owner predictions. The plan should also cash flows and identify any
must be able to convince banks, outline a strategy for long-term potential shortfalls.
or other financial backers, that their growth and identify contingencies Beating the odds at start-up is
concept is valid and that they have (alternative ideas or markets) if defined by the tenacity to take an
the skills to turn the idea into a things do not go as planned. idea to market, the ability to secure
profitable venture, even though Most importantly, a good sufficient finance, and the business
this may take some time. It took business plan will acknowledge acumen to turn a good plan into a
Amazon six years to make a profit. that the biggest reason for business long-term, profitable enterprise. ■

“Tony” Fernandes Tan Sri Anthony “Tony” Fernandes  in the company’s tagline: “Now
was born in Kuala Lumpur in 1964 everyone can fly.” One year after
to an Indian father and Malaysian his takeover, the airline had
mother. He went to school in cleared its debts of $11 million
England and graduated from and had broken even. Fernandes
the London School of Economics estimates that around 50
(LSE) in 1987. He worked briefly percent of its travelers are
for Richard Branson at Virgin first-time flyers. The company
Records as a financial controller is now widely regarded as the
before becoming Southeast Asia world’s best low-cost airline.
Vice President for Warner Music In 2007 Fernandes founded
Group in 1992. In 2001, Fernandes Tune Hotels, a low-cost hotel
left Warner to go it alone. He chain that promises “Five-star
mortgaged his home to raise beds at one-star prices.” He
the finance needed to buy the advises potential entrepreneurs
struggling young airline, AirAsia. to “dream the impossible. Never
His low-cost strategy was clear take no for an answer.”
22

THERE’S A GAP IN
THE MARKET, BUT
IS THERE A MARKET
IN THE GAP?
FINDING A PROFITABLE NICHE

F
inding a space in the
IN CONTEXT Many markets are crowded, market that is unchallenged
with multiple sellers chasing by competition is the Holy
FOCUS
the same customers. Grail of positioning strategy.
Positioning strategy
Unfortunately these spaces—
KEY DATES known as market gaps—are often
1950s and 60s Markets are illusive, and the benefits of finding
dominated by large companies one are often equally illusory.
offering mass-produced items, For these sellers, competition Although competition is a fact of
such as Coca-Cola. Choice is lowers profitability. life, it makes business difficult,
limited, but the scope for contributing to an ever-downward
products targeted at new pressure on prices, ever-rising costs
sectors of the market is high. (such as the funding of new product
development and marketing), and an
1970s and 80s Markets incessant need to outmaneuver and
Market gaps—a new product or
become more segmented as outsmart rivals. In contrast, the
sector of the market—offer the
companys generate new enticing prospect of healthy benefits of finding a market gap—a
products and market them profitability. small niche segment of a market that
toward narrower groups. is unfettered by competition—are
obvious: greater control over prices,
1990s and 2000s Companies lower costs, and improved profits.
and brands position themselves The identification of a market
ever-more aggressively and gap, combined with a dose of
distinctively in the But does the gap contain entrepreneurial spirit, is often all
overcrowded marketplace. enough business
that is needed to launch a new
to generate a profit?
2010s Finding and sustaining business. In 2006, Twitter founder
market niches is assisted by Jack Dorsey combined short-form
the promotional capabilities communication with social media,
providing a service that no one else
of the Internet, which allow
had spotted. Free to most users,
“one-to-one” marketing and There’s a gap in the revenue comes from companies who
customization of products. market, but is there a pay for promotional tweets and
market in the gap? profiles: Twitter earned advertising
revenues of $582 million in 2013.
START SMALL, THINK BIG 23
See also: Stand out in the market 28–31 ■ Gaining an edge 32–39 ■ Reinventing and adapting 52–57 ■ Porter’s generic
strategies 178–83 ■ Good and bad strategy 184–85 ■ The value chain 216–17 ■ Marketing mix 280–83

Not all gaps are lucrative, however. Snapple’s positioning in the UNIQUE
The Amphicar, for instance, was an crowded US beverage marketplace
amphibious car produced in the was the key to its success. By
focusing on a niche healthy product
1960s for US consumers who wanted and marketing itself as a quirky
to drive on roads and rivers. It was a company, Snapple was able to
quirky novelty, but the market was wrestle a large market share Snapple
too small to be profitable. This was (indicated here by circle size)
also true for bottled water for pets— from its rivals.
launched in the US in 1994, Thirsty
Cat! and Thirsty Dog! failed to
entice pet owners. Arizona
UNHEALTHY OceanSpray HEALTHY

A sustainable niche
Lipton
Snapple, the manufacturer of healthy
tea and juice drinks, is a company
that has successfully found a Nestea
sustainable and profitable niche. A
glance at the beverage counter of
any supermarket reveals that dozens MAINSTREAM
of brands compete for sales. Many
companies have failed in this ultra- natural ingredients. Its founders ran one sitting. Distribution was through
competitive market: for example, a health store in Manhattan, and the small, inner-city stores where
Pepsi tried to capture a nonexistent company used the slogan: “100% customers could “grab-and-go.”
market for morning cola with its Natural.” Snapple targeted students, These tactics helped to secure a
short-lived, high-caffeine drink, AM. commuters, and lunch-time office profitable and sustainable niche,
Success for Snapple came from workers with a new healthy “snack” distinguishing Snapple from its
positioning the product as a unique drink, combining its Unique Selling rivals in the 1980s and 1990s. In 1994
brand—Snapple was one of the first Proposition (USP) with irreverent sales peaked at $674 million.
companies to manufacture juices marketing and small bottles that Unoccupied market territory can
and drinks made completely from were designed to be consumed in present major opportunities for
companies, but the challenge lies in
Snapple identifying which gaps are profitable
and which are traps. During the
A contraction of the words vision that led to falling sales, 1990s, many companies became
“snappy” and “apple,” Snapple was sold to Triarc in 1997 for excited about the potential of the
was launched in 1978 by $300 million. Triarc then sold “green” market, across a whole range
Unadulterated Food Products the Snapple brand to Cadbury of goods. But this market has failed
Inc. The company was founded Schweppes for $1.45 billion in to materialize in any profitable way.
in 1972 by Arnold Greenberg, September 2000, with a further This marks one of the potential
Leonard Marsh, and Hyman deal in May 2008 seeing Snapple pitfalls in identifying market gaps
Golden in New York, US. become part of what is now the based on market research:
Such was the popularity of Dr Pepper Snapple Group. sometimes consumers have strong
Snapple that the company has Marketed as “Made From the attitudes or opinions on trends or
been subject to numerous Best Stuff on Earth,” Snapple’s
issues—such as ecology—that they
buyouts. Unadulterated was unusual blends of ready-to-drink
purchased by Quaker Oats for teas, juice drinks, and waters are disinclined to consider when
$1.7 billion in 1994 but, are sold in more than 80 purchasing products, especially if
following differences in strategic countries around the world. they affect cost. Many market gaps,
it seems, are tempting, but illusory. ■
24
IN CONTEXT

YOU CAN LEARN ALL FOCUS


Analytical tools

YOU NEED TO KNOW KEY DATES


1950s Harvard academics

ABOUT THE COMPETITION’S George Smith and C. Roland


Christensen develop tools to

OPERATION BY LOOKING analyze companies and


competition.

IN HIS GARBAGE CANS 1960s US management


consultant Albert Humphrey
leads a research project that
STUDY THE COMPETITION yields SOFT analysis, the
forerunner to his later
SWOT analysis.
1982 US professor Heinz
Weihrich develops the TOWS
matrix which uses the threats
to a company as the starting
point for formulating strategy.
2006 Japanese academics
Shinno, Yoshioka, Marpaung,
and Hachiga develop computer
software that combines SWOT
analysis with AHP (Analytic
Hierarchy Process).

W
hether a company is
long established or in its
start-up phase, a key
strategic issue is its competitive
advantage—the factor that gives it
an edge over its competitors. The
only way to establish, understand,
and protect competitive advantage
is to study the competition. Who is
competing with the company for its
customers’ time and money? Do
they sell competitive products or
potential substitutes? What are their
strengths and weaknesses? How
are they perceived in the market?
For Ray Kroc, the US entrepreneur
behind the success of fast-food
chain McDonalds, this reportedly
involved inspecting competitors’
START SMALL, THINK BIG 25
See also: Stand out in the market 28–31 ■ Gaining an edge 32–39 ■ Thinking outside the box 88–89 ■ Leading the market
166–69 ■ Porter’s generic strategies 178–83 ■ The MABA matrix 192–93 ■ Porter’s five forces 212–15

Strengths (S).
...key internal factors,
such as:

Weaknesses (W).
SWOT analysis helps
a company analyze
its position by
focusing on...
Opportunities (O).
...key external factors,
such as:

Threats (T).

trash. But there is a range of more courses. It is a creative tool that included, the deeper the analysis
conventional tools to help companies allows managers to assess a and the more useful the findings.
to understand themselves, their company’s current position, and to However, there are limitations. While
markets, and their competition. imagine possible future positions. a company may be able to judge its
internal weaknesses and strengths
SWOT analysis A practical tool accurately, projections about future
The most popular such tool is When well-executed, a SWOT events and trends (which will affect
SWOT analysis. Created by US analysis should inform strategic opportunities and threats) are
management consultant Albert planning and decision-making. It always subject to error. Different
Humphrey in 1966, it is used to allows a company to identify what stakeholders will also be privy to
identify internal strengths (S) and it does better than rivals (or vice different levels of information about
weaknesses (W), and to analyze versa), what changes it may need to a company’s activities, and therefore
external opportunities (O) and make to minimize threats, and what its current position. Balance is key; ❯❯
threats (T). Internal factors that can opportunities may give the company
be considered as either strengths or competitive advantage. The key to
weaknesses include: the experience strategic fit is to make sure that the
and expertise of management; the company’s internal and external
skill of a work force; product quality; environments match: its internal
the company’s financial health; and strengths must be aligned with the If you go exactly where
the strength of its brand. External external opportunities. Any internal
your competitors are,
factors that might be opportunities weaknesses should be addressed
or threats include market growth; so as to minimize the extent of
you’re dead.
new technologies; barriers to external threat.
Thorsten Heins
German-Canadian former CEO
entering markets; overseas sales When undertaking a SWOT of Blackberry (1957–)
potential; and changing customer analysis, the views of staff and
demographics and preferences. even customers can be included—
SWOT analysis is widely used it should provide an opportunity to
by businesses of all types, and it is solicit views from all stakeholders.
a staple of business management The greater the number of views
26 STUDY THE COMPETITION
senior managers may have a full is “market mapping” (also known as “leisure.” Additional factors could
view of the company, but their “perceptual mapping”). Market maps include the item’s price (high vs.
perspective needs to be informed are diagrams that represent a market low), quality of production (high
by alternative views from all levels and the placement of products within vs. low), stylish vs. conservative,
of the organization. that market, providing a visual or durable vs. disposable. Two of
As with all business tools, the means of studying the competition. these dimensions, or opposing
factor that governs the success of The process is useful both internally pairs, are then plotted onto a
SWOT analysis is whether or not (to help an organization understand horizontal or vertical axis.
it leads to action. Even the most its own products) and externally (to Based on market research or the
comprehensive analysis is useless chart how consumers perceive the knowledge of managers, all of the
unless its findings are translated brand in relation to the competition). products within a particular market
into well-conceived plans, new To draw up a market map, a can be plotted onto the map. The
processes, and better performance. company identifies several consumer market share of each product can
purchase-decision factors that be represented by the size of its
Market mapping stand in opposition to one another. corresponding image on the map,
A slightly narrower but more In the fashion market, an example but more often, analysts choose to
sophisticated tool for analyzing a might include “technology” vs. simply make a rough sketch of the
company’s position and competition “fashion,” and “performance” vs. market, ignoring market size.
A company may choose to
compile several market maps, each
Market mapping plots opposing qualities of products
along two axes. By identifying the two main oppositional of which depicts a different set of
factors for any product, it is easy to see gaps in the market. variables, and then analyze them—
individually and in combination—
to gain an overall view of the
PERFORMANCE company’s position in the market.
Speedo

TYR
Finding the gap
The goal of market mapping is
to identify opportunities where a
ZXU company can differentiate itself
Market gap? from its competitors. These are
areas where the company offers
Adidas unique value, and they can be used
Nike O’Neill
to inform marketing messages. The
map will also reveal overcrowded
Puma
Quicksilver segments, which signify
Slazenger heightened competitive threat.
For a new start-up, a market
TECHNOLOGY Ripcurl Billabong FASHION map can be used to identify a
viable gap in the market—a good
place to position a company when
it is struggling to establish itself.
Market gap? Established businesses can use
Gottex market mapping combined with
SWOT analysis to discover
H&M opportunities and decide whether
the company has the strengths to
Bravissimo exploit one of those opportunities.
The market map helps to inform
Tommy Hilfiger the strategy (the need to reposition
LEISURE a product away from competitors’
START SMALL, THINK BIG 27
The apparel market is a competitive
sector with a host of finely delineated
fashion brands. Speedo’s market
positioning is built around producing
high-performance, technical products.

based on such data, even though


managers may disagree, the market
map cannot be “wrong”—it simply
represents, for better or worse,
how the brand is perceived. The
challenge for management is to use
the map, and knowledge of internal
strengths and weaknesses, to plan
the appropriate strategic response.
Both SWOT analysis and market
mapping allow a company to better
understand itself, its market, and,
offerings, for example) and the Perceived as a technical most importantly, the competition.
tactics (moving from conservative performance product, Speedo, Equally, being aware of weaknesses
to sporty, for example) that will for example, needs to ensure that can help avoid costly strategic
help the company to achieve its marketing reflects that view; mistakes, such as producing overly
that strategic goal. a campaign that promotes Speedo ambitious products or making an
Market analysis such as this may, as a fashionable label would risk entry into a crowded market
for example, have helped luxury confusing customers and could position. An appreciation of the
Singaporean tea shop TWG Tea damage the brand. opportunities and threats of the
to identify an opportunity in the The key to successful market market, and the relative and
market. Launched in 2008, TWG mapping is market research. While shifting positions of competing
targets a slightly older, wealthier it can be useful to compare internal products, is essential to long-term
customer base than coffee shops and external perceptions of a successful strategic planning. To
and other “lifestyle” cafés. TWG product, and the products of the plan where you are going, it helps
has opened new locations across competition, it is the customers’ to know where you are—and where
the world, based on studying the views that matter most. When your competitors are too. ■
competition, identifying a market
gap, and designing its products Albert Humphrey leaders and politicians. He also
and services to fill that gap. undertook research to identify
Born in 1926, Albert Humphrey why corporate planning failed,
Internal focus was educated at the University by holding interviews with more
As a company grows it might of Illinois, US, and at the than 5,000 executives at over
choose to draw up a map including Massachusetts Institute of 1,100 companies. As a result of
just its own products. Analysis of Technology (MIT), where he the findings, he invented SOFT
the results can help identify any gained a master’s degree in analysis: “what is good in the
overlap between different products Chemical Engineering. He later present is Satisfactory, good in
(informing decisions about which went on to earn an MBA the future is an Opportunity; bad
products to drop, and which to from Harvard University. While in the present is a Fault, and bad
working with the Stanford in the future is a Threat.” Fault
concentrate research and
Research Institute (now SRI was later softened to the more
development and marketing spend,
International) between 1960 and acceptable Weaknesses, and
for example). It can also be used Satisfactory became Strengths.
1970, Humphrey came up with
to ensure that the company’s the Stakeholder Concept, which The now-ubiquitous acronym
marketing message stays on track, has since been used by business SWOT was born.
helping to avoid strategic drift.
28
IN CONTEXT

THE SECRET OF FOCUS


Differentiation
KEY DATES

BUSINESS IS TO 1933 US economist Edward


Chamberlin’s Theory of

KNOW SOMETHING
Monopolistic Competition
describes differentiation as
a means for a company to

THAT NOBODY charge more for its products or


services by distinguishing
them from the competition.

ELSE KNOWS
STAND OUT IN THE MARKET
1940s The concept of the
Unique Selling Proposition
(USP) is put forward by Rosser
Reeves, advertising executive
at New York advertising
agency Ted Bates, Inc.
2003 US marketing professor
Philip Kotler outlines the need
for USPs to be superseded by
Emotional Selling Propositions
(ESPs) in his book Marketing
Insights from A to Z.

F
ew businesses enjoy the
privileges of monopoly
power in their chosen
fields of operation. Most markets
are increasingly global, increasingly
crowded and, therefore, increasingly
competitive. In order to achieve
commercial success companies
need to do something different—as
Greek shipping magnate Aristotle
Onassis recommended, they need
to “know something that nobody
else knows” in order to stand out
from the competition.

Unique Selling Propositions


Faced with competition, the
strategy for most companies is to
differentiate. This involves offering
START SMALL, THINK BIG 29
See also: Finding a profitable niche 22–23 ■ Gaining an edge 32–39 ■ Reinventing and adapting 52–57 ■ Porter’s generic
strategies 178–83 ■ Good and bad strategy 184–85 ■ The value chain 216–17

To achieve success, ...which requires


Few companies enjoy the
especially in its early differentiation in product,
monopoly privileges
stages of growth, a service, process, or
afforded by market gaps.
company must stand out... marketing.

Enduring difference
Only then will companies But difference can
can only be maintained
truly stand out in be easily copied
through a Unique
the market. by competitors.
Selling Proposition.

customers something that the prices and protects profitability; the design and functionality of Nike
competition cannot or does not and it can give businesses the and Adidas sneakers are distinct,
offer—a Unique Selling Proposition competitive advantage needed the differences are so small that
(USP). The concept was developed to stand out in the market. they amount to only a marginal
by US advertising executive Rosser difference in performance. The
Reeves in the 1940s to represent The challenge of difference products’ differences are, however,
the key point of dramatic difference By definition, not all products can magnified in the perception of the
that makes a product salable at a be unique. Differentiation is costly, consumer through marketing and
price higher than rival products. time consuming, and difficult to the power of branding—uniqueness
Tangible USPs are hard to acquire achieve, and functional differences is achieved through brand imagery,
and hard to copy, which is what are quickly copied—“me-too” promotion, and sponsorship.
makes them unique. strategies are commonplace. Apple achieved differentiation in
Companies must distinguish Touchscreen technology was the fledgling digital-music market by
their product or service from the introduced to the cell-phone market combining easy-to-use software ❯❯
competition at every stage of as a point of differentiation for
production—from raw material Apple’s iPhone, but is now a feature
extraction to after-sales service. of most smartphones.
Products such as Nespresso coffee- Differentiation often does not
makers and Crocs footwear, and remain a point of difference for long.
service providers such as majority With functional uniqueness There is no such thing
Asian-owned hotel group Tune being so elusive, marketing guru as a commodity.
Hotels, are all heavily differentiated, Philip Kotler suggested that All goods and services
each having a strong USP. companies focus instead on an
are differentiable.
The primary benefit of Emotional Selling Proposition (ESP).
uniqueness, however it is achieved, In other words, that the task of
Theodore Levitt
US economist (1925–2006)
is greater customer loyalty and marketing is to generate an
increased flexibility in pricing. emotional connection to the brand
Differentiation guards products that is so strong that customers
and services from low-priced perceive difference from the
competition; it justifies higher competition. For example, while
30 STAND OUT IN THE MARKET
with well-designed hardware and a eye of celebrities (a jacket worn expanding its reach—to stand out
user interface that integrated the by soccer player David Beckham from the crowd, while welcoming
two. The product itself—the iPod became one of its best-selling those crowds into its stores.
portable music device—was products, and Beckham himself Differentiation can occur at any
functionally little different than became an unoffical talisman of the point in the value chain. Standing
existing MP3 players, but combined brand), providing free publicity. out is not limited to products or
with the iTunes software to create a Superdry focused on offering services—it can occur in any
unique customer experience. This clothing with a fashionably tailored number of internal processes
experience is Apple’s ESP, which the fit and attention to detail (even down that translate into an improved
company promoted with its “Think to garment stitching). Worn by off- customer experience. Swedish
Different” advertising campaign. duty office workers, students, sports furniture retailer IKEA, for
stars, and celebrities alike, the example, differentiates itself not
Standing out brand was able to appeal to a broad only through contemporary design
One company that has achieved customer base. Most differentiation and low prices, but through the
uniqueness is the British fashion strategies involve targeting one entire customer retail experience.
label Superdry, which has grown to segment of the market; Superdry The company’s low prices are
include more than 300 stores in chose to target them all. The brand’s achieved, in part, through its self-
Europe, Asia, North and South unique blend of fashion with ease of picking and self-assembly retail
America, and South Africa. Drawing wear, comfort with style, and the model—the customer experience
a novel, international influence from presence of mysterious but involves picking products from the
Japanese graphics and vintage meaningless Japanese writing, company’s vast showrooms and
Americana, combined with the has proved a difficult mix for warehouses and then, once they
values of British tailoring, Superdry competitors to replicate. have transported the goods home,
quickly established a strong position assembling the furniture.
in the hypercompetitive clothing Maintaining uniqueness Even the way IKEA “guides”
market from its launch in 2004. The As many companies discover, shoppers on a one-way, defined
business started life in university popularity can be the enemy of route through its showrooms is
towns across the UK, a positioning difference. While Superdry clothing unique. While this tactic encourages
that gave the brand a youthful has become increasingly spontaneous purchases, it also
appeal. Despite limited advertising ubiquitous around the world, its helps to reinforce IKEA’s points of
and abstaining from celebrity uniqueness and difference have difference—customers are exposed
endorsements, Superdry’s popularity declined. The challenge for to predesigned rooms and
rapidly grew. The company’s Superdry, like all companies, is to furniture layouts that emphasize
distinctive look quickly caught the protect its uniqueness while also the brand’s contemporary style.
Price is kept low since fewer store
assistants are required to direct
customers around the store.

Different but the same


Paradoxically, familiarity can also
be a source of differentiation. The
entire McDonald’s organization
revolves around providing almost
identical fast-food products, with
the same service, in identical

Fashion label Superdry is a young


company that has successfully carved
out market share. Rapid growth since its
founding in 2004 is thanks in part to a
highly differentiated, faux-vintage look.
START SMALL, THINK BIG 31
Differentiation is not so important High sales
when a company’s products match Rosser Reeves
the desires of the customer Low sales
and do not overlap with the High scope for US advertising executive
competition. Although the differentiation Rosser Reeves (1910–84)
risks might be high, held the maxim that an
differentiation is most What your company advertisement should show off
effective when your does well the value of a product, not the
products are popular,
cleverness of the copywriter.
but overlap with those
of the competition. After a brief spell at the
University of Virginia, from
where he was expelled for
drunken misconduct, Reeves
worked as a journalist and
then copywriter before joining
What the What your advertising agency Ted Bates,
consumer competitors Inc. in New York in 1940. His
wants do well exceptional talent saw him rise
to become Chairman of the
company in 1955. He is credited
with redefining television
advertising and, among many
others, for formulating slogans
such as “It melts in your
restaurants the world over. This every point of contact—difference mouth, not in your hand” for
familiarity differentiates has to be believable, and it is only chocolate confectionary brand
McDonald’s from unknown local believable if it is dependable. M&Ms. Reeves’s Unique
offerings, and from other global Selling Proposition, first
competitors who cannot maintain Sustaining differentiation outlined in the 1940s, was
the same degree of consistency Once established, uniqueness— described in his 1961 book
across their operating territories. whether functional or emotional— Reality of Advertising. Such
In a market in which rival requires nurturing and protecting. was his impact on the
companies promote the uniqueness Standing out from the crowd is a advertising industry that his
of their products in ever-louder and constant battle that is fought in the legacy lives on long after his
more complex ways, consumers hearts and minds of the company’s death—his pioneering style of
leadership was the inspiration
have become increasingly savvy staff, as well as customers. As legal
for the lead character in US
when it comes to distinguishing clashes between rivals—such as
television series Mad Men.
reality from rhetoric. While Apple and Samsung—demonstrate,
differences do not have to be uniqueness might also have to be
tangible—the evidence shows that contested in the courtroom.
an Emotional Selling Proposition Every industry has leaders and
(ESP) is often enough—the followers—what separates them is
challenge for businesses is that that the leaders are usually those
points of differentiation do have to with the most defensible points of
be genuine and believable. differentiation. Whether in features In order to be irreplaceable one
Developing an emotional connection and functionality, brand image, must always be different.
with the customer requires that the service, process, speed, or
Coco Chanel
differentiation is understood and convenience, uniqueness must be French fashion designer (1881–1971)
consistently delivered throughout established and communicated for
the organization. Well-defined core a company and its offerings to stand
principles that celebrate a out in the market. The key to long-
company’s uniqueness should lasting success is making that
inform the customer experience at differentiation sustainable. ■
32

BE FIRST OR BE
BETTER
GAINING AN EDGE
33
34 GAINING AN EDGE

IN CONTEXT
First-movers have no competition and have the potential
FOCUS to become market leaders...
Competitive advantage
KEY DATES
1988 US scholars David
Montgomery and Marvin
Lieberman write “First-Mover ...but unless the market is static, and technological
Advantage,” outlining the innovation is limited, the risk of failure is high.
competitive advantages
of being first to market.
1995 Amazon.com launches,
the first of a new breed of
online retailers.
Later entrants enter a recognized market and
1997–2000 Adopting the know what mistakes to avoid.
“be first” mantra, dot-com
companies race to market;
many fail when the promised
advantages do not materialize.
1998 Montgomery and
Lieberman question their They stand to benefit most in a rapidly changing market,
original findings in their paper, in which technological innovation is advanced.
“First-Mover (Dis)Advantages.”
2001 Amazon.com returns
its first profit. The company’s
first-mover advantages were
significant, but a good business In order to gain an edge,
model mattered more. either be first, or be better.

I
f you need to buy a book business to enter the online retail competitive edge in the market,
online, which website do market, establishing its brand a business needs either to be first,
you visit first? If you want to name, and building a loyal or it needs to be better.
research the author of the book, customer base. Google, by contrast,
which search engine do you use? was by no means first. When Market pioneers
The answers, most probably, are Google launched in 1998, the The benefits of being first into a
Amazon and Google, respectively. market was already dominated by market are known as “first-mover
Such is the dominance of these two several large players; Google’s edge advantage,” a term popularized in
Internet giants that their names came from offering a superior 1988 by Stanford Business School
define their respective markets. product—not only was it faster, but professor David Montgomery and
Both organizations have a it produced more accurate search his co-author, Marvin Lieberman.
significant edge in the markets results than any of its competitors. Although introduced a decade
they lead, but they achieved that Getting into a market first has previously, Montgomery and
dominance by different means. significant advantages, but there Lieberman’s idea took particular
Amazon, launched in 1995, gained are also benefits to being second. hold during the dot-com bubble
its advantage by being the first The key is that in order to gain a between 1997 and 2000. Spurred
START SMALL, THINK BIG 35
See also: Beating the odds at start-up 20–21 ■ Stand out in the market 28–31 ■ How fast to grow 44–45 ■ The Greiner
curve 58–61 ■ Creativity and invention 72–73 ■ Changing the game 92–99 ■ Balancing long- versus short-termism 190–91

Amazon.com was a first-mover


in the online retail market. It has
dominated the industry since its
launch in 1995, creating strong brand
recognition and a loyal customer base.

access beneficial terms with key


suppliers (who may also be eager to
enter the new market). Additionally,
first-movers may be able to build
switching costs into their product,
making it expensive or inconvenient
for customers to switch to a rival
offering once an initial purchase
has been made. Gillette, for example,
having invented the safety razor in
1901, has consistently leveraged its
first-mover advantage to create new
products, such as a “shaving system”
on by the example of Amazon, a brand name strongly linked to that combines cheap handles with
businesses spent millions pitching the market itself. First-movers also expensive razor blades.
themselves headlong into new have more time than later entrants
online markets. Conventional to perfect processes and systems, Market strategies
wisdom was that being first and to accumulate market In the case of Amazon.com, first-
ensured that the company’s brand knowledge. They can also secure mover advantage consisted of a
name became synonymous with advantageous physical locations combination of factors. In the newly
that segment, and that early market (a prime location on a main street emerging e-commerce market,
dominance would create barriers to of a city, for example), secure the customers were eager to try online
entry for subsequent competition. employment of talented staff, or purchasing, and Amazon was well
In the end, however, placed to exploit this growing
overspending, overhype, and curiosity. Books represented a small
overreaching into markets where and safe initial purchase, and
little demand existed was the Amazon’s simple web design made
downfall of many fledgling dot-coms. buying easy and enjoyable. Early
With notable exceptions, businesses sales enabled the organization to
found that promised returns were First-mover advantages adapt and perfect its systems,
not being realized and funds quickly accrue when a company and to adjust its website to match
ran short—and for many of these gains a first-mover opportunity customer needs—adding, for
first-movers, failure followed. (through proficiency or luck) example, its OneClick ordering
and is able to maintain an system to enable purchases
First-mover advantage edge despite subsequent entry. without entering payment details.
Being first out of the block David Montgomery and Amazon was also able to build
undoubtedly has its advantages, Marvin Lieberman distribution systems that ensured
and in the case of the dot-coms, quick and reliable delivery of its
those advantages were exaggerated products. Although competitors
to the extreme. First-movers often could replicate these systems,
enjoy premium prices, capture customers already trusted
significant market share, and have Amazon, and the brand loyalty ❯❯
36 GAINING AN EDGE
research has indicated that from entering a proven market.
significant advantages accrue They are also able to avoid costly
to market pioneers, which can be investment in risky and potentially
directly attributable to the timing flawed processes or technologies;
of entry. The irony is that in a first-movers, by contrast, may have
retrospective paper that appeared accrued significant “sunk costs”
in 1998, “First-Mover (Dis) (past investment) in old, less-
Advantages,” Montgomery and efficient technologies, and may be
Lieberman themselves backed off less able to adapt as the industry
their original claims concerning matures. Followers can enter at
the benefits of being the first to the point at which technology
enter a market. and processes are relatively well
Building on the work of, among established, with both cost and
others, US academics Peter Golder risks being lower.
and Gerard Tellis in 1993, Followers may have to fight
Montgomery and Lieberman’s 1998 to overcome the first-movers’
paper questioned the entire notion brand loyalty, but simply offering
of first-mover advantage. In their a superior product that better
research, Golder and Tellis had addresses customer needs is
found that almost half the first- often sufficient to secure a market.
Gillette invented the safety razor movers in their sample of 500 Brand recognition is one thing,
in 1901 and later consolidated its brands, in 50 product categories, but technical and product superiority
first-mover advantage by developing a failed. Moreover, they found that can give that all-important
“shaving system” that made it difficult there were few cases where later competitive edge. Moreover, with
for customers to switch brands.
entrants had not become profitable investment costs being much
or even dominant players—in fact, lower, followers often have surplus
the organization enjoyed created their research identified that the cash to use on marketing, thereby
significant emotional switching failure rate for first-movers was offsetting the branding advantages
costs; even today, Amazon enjoys 47 percent, compared to only of the first-mover.
the benefits of this trust and loyalty, 8 percent for fast followers. When Google, for example,
and almost a third of all US book entered the Internet search
sales are made via Amazon.com. Learning from mistakes business in 1998, the market was
A recent example of how The challenge for first-movers is dominated by the likes of Yahoo,
important first-mover advantage that the market is often unproven; Lycos, and AltaVista, all of whom
remains are the “patent wars” industry pioneers leap into the had established customer bases
contested between most of the dark without fully understanding and brand recognition. However,
leading smartphone makers customer needs or market Google was able to learn from the
(including Apple, Samsung, and dynamics. First-movers often
HTC). Patents help a company to launch untried products onto
defend technological advantage. In unsuspecting customers; and it is
the hypercompetitive smartphone rare that they get it right first time.
industry, being first to market with Large companies may be able to
a new technological feature offers take the losses of such early-market Good artists copy;
critical, albeit short-term, advantage. entry mistakes; small companies, great artists steal.
In an industry in which consumers’ on the other hand, may soon find
Steve Jobs
switching costs are high, even that their cash is running out and US former CEO of Apple (1955–2011)
short-term advantages can have their tenuous business models
a significant impact on revenue. are collapsing.
Since the publication of Later entrants have the
Montgomery and Lieberman’s advantage of learning from the
original paper in 1988, academic mistakes of the first-movers, and
START SMALL, THINK BIG 37
Us.) The online clothing retailer of this new market. But success
boo.com is an example of a first- is not guaranteed—a 2012 study
mover that had technological revealed that on average, 65
superiority, but was ahead of its percent of users delete apps within
time—the site was too resource- 90 days of installing them.
If later entrants can leapfrog heavy for most consumers’ slow
pioneers, companies could be Internet connections. Launched in Timing is everything
better off entering late. 1999, boo.com went into receivership The reason a first-mover does
Peter Golder and the following year—being first is not always yield its promised
Gerard Tellis not a guarantee of success if the advantages is that much depends
basic business model is flawed. on timing, and therefore luck. In
Despite the evidence presented their 2005 paper, “The Half-Truth
by Golder and Tellis, and examples of First-Mover Advantage,” US
such as Google, it remains the case business scholars Fernando Suarez
that first-mover advantage has and Gianvito Lanzolla identified
captured corporate imagination. technological innovation and the
mistakes of these earlier entrants Mirroring the earlier dot-com gold speed at which the market is
and, quite simply, build a better rush, the recent boom in the market developing as crucial in
product. The organization realized for web-based smartphone- and determining whether or not being
that with so much information on tablet-accessed applications (the a first-mover is advantageous.
the Internet people wanted search “app” market) is fueled by a desire Their findings suggest that
results that were comprehensive to be first. Thousands of apps have when a market is slow-moving and
and relevant; the various market launched in the hope of staking technological evolution is limited,
incumbents offered a variety of their claims on lucrative segments first-mover advantage can be ❯❯
systems for filtering search results,
but Google was able to take the
best of these systems and build
its own unique algorithm that led 80
73
to market dominance.
Launched just
First-mover failures two years later,
There are numerous examples in Commodore’s
corporate history of first-movers “fast-follower” GUI
SHAREHOLDER RETURN (%)

computer yielded a 36
that were unable to achieve or shareholder return
maintain a competitive advantage. of 80 percent.
Famous failures in the online
sphere include Friends Reunited
and MySpace. Although both
companies still exist, their first- Apple Lisa (1983)
mover advantage was not sufficient Apple’s pioneering
GUI computer was a Commodore Amiga (1985)
to offset the might (and product commercial failure,
superiority) of Facebook. Similarly, with a shareholder IBM Personal System/2 (1987)
eToys.com, launched in 1999, was return of -61 percent. HP (1989)
one of a new breed of online retailers,
but first-mover advantage was not -61
enough to sustain the business and Being the first-mover in a new, untried market
the company declared bankruptcy does not always result in success. Apple’s Lisa was
the first computer with a Graphical User Interface
in 2001—by coincidence, the same (GUI)—a version of which now forms the user
year that Amazon started to sell interface of every computer, smartphone, and
toys. (Resurrected some years later, digital device—yet sales were far exceeded by
etoys.com is now owned by Toys R later offerings from Commodore, IBM, and HP.
38 GAINING AN EDGE
significant. They give the example have enjoyed short-lived advantage
of the market for vacuum cleaners, but in dynamic markets such an
and, in particular, of the long-term advantage is rarely durable. Even
market leader, Hoover. Until the Apple, who enjoyed significant
relatively recent introduction of early-entrant advantage in the
Dyson cleaners, the market was smartphone market with the If you do things well,
benign and technological iPhone, is not immune from first- do them better.
advancement slow. Having been mover disadvantage. Competitors, Anita Roddick
first to market in 1908, Hoover Samsung in particular, were able UK entrepreneur (1942–2007)
enjoyed several decades of to listen to customer complaints
advantage—an advantage that about iPhones, analyze customer
was (and, in some places, still is) needs, and produce products with
reflected in the widespread use of features and functionality welcomed
the company’s brand name as the by the market. Apple, locked into
verb “to hoover.” previous technology iterations, took
In other industries, however, time to react and iPhone sales importantly, the organization
where technological change or suffered as a result. insists on a deep understanding of
market evolution is rapid, first- customer needs in any market they
movers are often at a disadvantage. Customer needs enter. In other words, they would
The first search engines are To gain an edge, therefore, you do rather enter mature markets than
examples of businesses that had not always need to be first. Indeed, be first into new ones.
too much invested in early US multinational Procter & Gamble, The company values long-term
iterations of a technology to keep for example, prefers only to enter relationships with its customers
up with the rapid pace of change. those markets in which it can and suppliers; its view of innovation
Early advantage quickly establish a strong number one or is different from small companies
becomes obsolete in changeable number two position over the long- who, in attempting to capture
markets. As the market evolves, term—rarely is this achieved in a market share, strive to gain an
later entrants are those that seem blind rush to be first. edge through the introduction of
to be cutting edge, offering Procter & Gamble seeks disruptive technology—innovative
innovative features that build on markets that are demographically technology that seeks to destabilize
the market-knowledge as well as and structurally attractive, with the existing market. Procter &
learning from the mistakes of the lower capital requirements, and Gamble, perhaps heeding the
first-mover. The first-mover may higher margins. But most research, considers such strategies
to be short-lived. They realize that
overly rapid innovation runs the risk
of cannibalizing their own sales
and reducing the returns on new
product investment. In the market
for disposable baby diapers, for
example, Procter & Gamble was
more than ten years behind the first
mover. The company’s now famous
Pampers brand was launched in
1961, following some way behind
Johnson & Johnson’s Chux brand,

The PalmPilot, launched in 1997, was


a successful fast-follower product. It
followed Apple’s unsuccessful Newton,
which was the first personal digital
assistant (PDA) to enter the market.
START SMALL, THINK BIG 39
which was launched in 1949. At company’s products or services to foothold in the market. But as
the time, disposable diapers were that market, and its ability to research shows, second-movers,
a new innovation, and customers deliver on brand promises. Both and their followers, may sometimes
were wary of their use. Procter & these factors can have a profound be in an advantageous position.
Gamble waited until customers had impact on long-term viability and Learning from the mistakes of early
come to accept the product before business success. entrants, they frequently offer
entering the market. Moreover, they Amazon may have enjoyed superior products at lower prices.
spent nearly five years researching lasting first-mover advantage, but With the aid of skillful marketing,
and addressing each of the major that alone is insufficient to account these benefits can be leveraged to
problems with Chux and developed for its phenomenal success. Amazon offset the advantages enjoyed by
a product that was more absorbent, leverages its first-mover advantage first-movers. To become a market
had lower leakage, was more into a sustainable competitive edge; leader, a business needs either to
comfortable for the baby, offered its website is continually made be first, and impressive, or it needs
two sizes, and could be produced easier to use, it offers a range of to be better. The companies we
at a significantly lower cost. Today, complimentary products, and it remember, the Amazons and the
Forbes magazine lists Pampers as continues to drive down costs, Googles, are those that were either
one of the world’s most powerful enabling it to offer market-beating first or better—the ones we forget
brands, valued at over $8.5 billion, prices. Most notably, Amazon did are those that had no edge at all. ■
with the diapers being purchased not return a profit until 2001—the
by 25 million consumers in over 100 company spent its earlier years
countries. By contrast, Chux was building a better product. The
phased out by Johnson & Johnson foundations of success may have
in the 1970s due to shrinking sales. been laid by first-mover advantage,
but Amazon’s edge has been built on To suffer the penalty of
Securing a foothold long-term good business practice. too much haste, which is
In reality, then, while it is readily First-movers undoubtedly have a too little speed.
assumed that speed is good when natural competitive edge. Whether
Plato
entering a market, gaining an edge it is a lasting impression on Greek philosopher (429–347 BCE)
might depend less on timing than it customers, strong brand recognition,
does on appropriateness. Whether a high switching costs, control of
company is first, second, or last to scarce resources, or the advantages
market is important; but it is less of experience, that edge can help
important than the suitability of a to secure a strong, and long-term,

Jeff Bezos Born on January 12, 1964 in As with many Internet start-
Albuquerque, New Mexico, US, ups, Bezos, with just a handful
Jeff Bezos had an early love of of employees, created the new
science and computers. He business in his garage; but as
studied computer science and operations grew, they moved
electrical engineering at Princeton into a small house. The Amazon.
University, and graduated summa com site was launched officially
cum laude in 1986. on July 16, 1995. Amazon
Bezos started his career on became a public limited
Wall Street, and by 1990 had company in 1997; the company’s
become the youngest senior first year of profit was 2001.
vice-president at the investment Today, Bezos is listed by Forbes
company D. E. Shaw. Four years magazine as one of the wealthiest
later, in 1994, he quit his lucrative people in the US; and Amazon
job to open Amazon.com, the stands as one of the biggest
online book retailer—he was global success stories in the
barely 30 years old at the time. history of the Internet.
40

PUT ALL YOUR EGGS


IN ONE BASKET,
AND THEN WATCH
THAT BASKET
MANAGING RISK

E
ntrepreneurs are defined failure of new products, or damage
IN CONTEXT by their willingness to bear to the brand or a manager’s
risk—particularly the risk of reputation. Whatever the level or
FOCUS
business failure. This is especially type, however, risk is something
Risk management
true for those starting new that all businesses need to be
KEY DATES companies, because more than half aware of and manage carefully.
1932 The American Risk of start-ups fail within the first five US businessman Andrew Carnegie
and Insurance Association years. Lesser risks in established was pondering these issues when
is established. businesses include the possible he suggested that in terms of
1963 Robert Mehr and Bob
Hedges publish Risk
Management in the Business
Enterprise, claiming that the Risk is an inevitable part But it can be quantified
objective of risk management of business. and action taken...
is to maximize a company’s
productive efficiency.
1970s Inflation and changes
to the international monetary
system (the ending of the
Bretton Woods agreement) Part of this process involves
increase commercial risks. ...through oversight and
deciding what level of risk
good management.
is “acceptable”...
1987 Merrill Lynch becomes
the first bank to open a
risk-management department.
2011 The US Financial Crisis
Inquiry Commission says that
the 2008 financial crisis was ...and where to place the Managing risk is a
caused partly by financial risk—on all the “eggs in the strategic process, balancing
companies “taking on too basket,” or just one? cost against reward.
much risk.”
START SMALL, THINK BIG 41
See also: How fast to grow 44–45 ■ Hubris and nemesis 100–103 ■ Who bears the risk? 138–45 ■ Leverage and excess risk
150–51 ■ Off-balance-sheet risk 154 ■ Avoiding complacency 194–201 ■ Contingency planning 210 ■ Scenario planning 211

managing risk, it might be best there is a risk that interest rates will
to put all your eggs in one basket, rise, and repayments will become
then watch that basket. too burdensome to afford. Start-ups
From the collapse of Lehman that rely on overseas trade are also
Brothers (2008), to BP’s Deepwater exposed to exchange-rate risk.
Horizon disaster (2010), events of Moreover, new businesses in It’s impossible that
the early 21st century fundamentally particular may be exposed to the the improbable will
changed how organizations risk of operating in only one market. never happen.
perceive risk. Companies now think Whereas large companies often Emil Gumbel
in terms of two factors: oversight diversify their operations to spread German statistician (1891–1966)
and management. “Risk oversight” risk, the success of small companies
is how a company’s owners govern is often linked to the success of one
the processes for identifying, idea (the original genesis for the
prioritizing, and managing critical start-up) or one geographic region,
risks, and for ensuring that these such as the local area. A decline
processes are continually reviewed. in that market or area can lead
“Risk management” refers to the to failure. It is essential that new At its heart, risk is a strategic
detailed procedures and policies businesses are mindful of market issue. Business owners must
for avoiding or reducing risks. changes, and position themselves carefully weigh the operational risk
to adapt to those changes. of start-up, or the risks of a new
Inherent risks The Instagram image-sharing product or new project, against
Risk is inherent in all business social-media application, for example, potential profits or losses—in other
activity. Start-ups, for example, face started life as a location-based words, the strategic consequences
the risk of too few customers, and service called Burbn. Faced with of action vs. inaction. Risk must be
therefore insufficient revenue to competition, the business changed quantified and managed; and it
cover costs. There is also the risk track into image-sharing. Had poses a constant strategic challenge.
that a competitor will copy the Instagram not reacted to the risks, Fortune favors the brave, but with
company’s idea, and perhaps offer a and been savvy enough to diversify people’s lives and the success of the
better alternative. When a company its offering (regularly adding new business at stake, caution cannot
has borrowed money from a bank features), it may not have survived. simply be thrown to the wind. ■

In deep water
Even large and diverse who examined the disaster
organizations can find it hard to claimed that BP had prioritized
successfully balance risk against financial return over operational
potential financial reward. On risk. Chief executive Tony
April 20, 2010, Deepwater Horizon, Hayward, who took the post
an offshore oil rig chartered by in 2007, had suggested that the
British Petroleum (BP), exploded, organization’s poor performance
killing 11 workers and spilling at the time was due to excessive
tens of thousands of barrels of caution. Coupled with
crude oil into the Gulf of Mexico. increasing pressure from
The incident was blamed on shareholders for better returns,
BP’s Deepwater Horizon incident management failure to adequately the bullish approach that
led to huge fines and US government quantify and manage risk; the followed led to significant cost
monitoring of its safety practices and official hearing cited a culture cutting and, eventually, risk-
ethics for four years. of “every dollar counts.” Analysts management failures.
42

LUCK IS A DIVIDEND
OF SWEAT. THE MORE
YOU SWEAT, THE
LUCKIER YOU GET
LUCK (AND HOW TO GET LUCKY)

L
uck is usually regarded
IN CONTEXT as something over which
businesses have no control.
FOCUS
Yet, as McDonald’s CEO Ray Kroc
Maximizing opportunity
said, “the more you sweat, the
KEY DATES luckier you get,” suggesting that luck The first rule of luck in
1974 3M employee Art Fry can be created. The reality is that business is that you should
uses the adhesive developed— both are true. As global markets persevere in doing the right
and rejected as defective—by become more volatile and less thing. Opportunities will
a colleague six years earlier predictable, luck plays an inevitable come your way if you do.
to attach a bookmark in his part in business success. Launch a Ronald Cohen
hymnbook. This chance usage start-up at the same time as a rival UK venture capitalist (1945–)
leads to the Post-it Note. and it may be luck that determines
who succeeds, and who fails.
2009 A Harvard Business
Review article “Are ‘Great’ Making your own luck
Companies Just Lucky?” A well-considered business plan is
reports that in only half of the designed to dispense with reliance
287 high-performing companies on luck. A good idea, underpinned market conditions. In other words,
surveyed could success be by detailed market research and what might seem like luck is often
attributed to distinguishable solid financial planning, may help the result of planning. Take the
practices or features of the a start-up to ride the whims of the famous example of 3M Post-it Notes.
organizations themselves. market. A good plan charts a course The invention of a reusable glue was
of action in turbulent markets, accidental, but it was business
2013 Five years’ hard work protects against the unknown, insight that turned the lucky
yields music group Daft Punk’s and prepares the company discovery into a commercial success.
aptly titled song “Get Lucky”. A for contingencies. With so many variables, luck is
result of industry collaboration, In addition, a well-conceived plan likely to play a part in the survival of
market research, and strong can ensure that a company is in a a start-up. But a good plan reduces
marketing and publicity, the position to benefit from favorable how much luck a company needs. ■
song’s commercial success
demonstrates the value of See also: Beating the odds at start-up 20–21 ■ Gaining an edge 32–39 ■

business planning. Understanding the market 234–41 ■ Forecasting 278–79


START SMALL, THINK BIG 43

BROADEN YOUR VISION,


AND MAINTAIN
STABILITY WHILE
ADVANCING FORWARD
TAKE THE SECOND STEP

T
he business landscape may Entrepreneurial spirit is defined
IN CONTEXT appear to be dominated by as the willingness to take risks.
corporate goliaths, but the Business owners who do aspire to
FOCUS
reality is that small businesses growth must be willing to take the
Expanding the business
outnumber large companies by a risky but important second step.
KEY DATES significant margin. In fact, most For most small-business owners,
1800 French cotton businesses never grow beyond the this means employing the first
manufacturer Jean-Baptiste scope of the owner—they start small nonfamily member and beginning
Say popularizes the term and stay small. In the US, more than to acquire the necessary leadership
“entrepreneur,” which is taken 99 percent of companies employ and management skills to scale the
from the French for the verb fewer than 500 people. In 2012, business and manage the people,
“to undertake.” there were almost 5 million small systems, and processes. ■
businesses (with fewer than 49
1999 Chinese business employees), but only 6,000 companies
magnate Li Ka-shing employing more than 250 people.
underlines the importance of Aspiration, or its lack, is a key
vision for business growth, factor for small-scale companies.
stating “Broaden your vision, Many small-business owners are
and maintain stability whilst content with the lifestyle the
advancing forward.” business allows them, and have
no desire for growth. But he biggest
2011 The Lean Startup by reason for a lack of growth is finance.
US technology entrepreneur Growth requires access to capital,
Eric Ries encourages new which is difficult and expensive
businesses to utilize resources to access for small companies.
as efficiently as possible to Moreover, unlimited liability means
Large businesses might appear to be
encourage growth. that an owner’s personal assets towering oaks, but most have acornlike
2011 The number of active (such as the family home) are at beginnings. A common difference
risk if the business fails—a risk between them and companies that stay
entrepreneurs in mature
that many are unwilling to take. small is the willingness to take risks.
countries grows by about 20 
percent, reflecting job losses
See also: Beating the odds at start-up 20–21 ■ Managing risk 40–41 ■ The
due to the economic downturn.
Greiner curve 58–61 ■ Who bears the risk? 138–45 ■ Small is beautiful 172–77
44

NOTHING GREAT
IS CREATED
SUDDENLY
HOW FAST TO GROW

IN CONTEXT
FOCUS
Business growth “Grow or die”
When the market
thinking can lead
is growing, a company
KEY DATES to overtrading and
must grow too...
1970s McKinsey & Company business failure.
consultants develop the MABA
matrix to help conglomerates
decide which divisions to
grow, and how quickly.
2001 Neil Churchill—professor
at INSEAD business school,
France and John Mullins—
professor at London Business
School, UK—write How Fast
...but that growth
Can Your Company Afford to Nothing great is must be balanced
Grow, introducing the self- created suddenly. and controlled.
financeable growth rate (SFG).
2002 Toyota announces plans
to be the world’s largest car
producer. Eight years later, after
recalling more than 8 million
cars due to quality issues, it

O
ne reason many new is to balance income with
admits to growing too fast. businesses fail is, perhaps expenditure, ensuring that there
2012 Edward Hess writes surprisingly, because they is sufficient cash to meet the rising
Grow to Greatness: Smart grow too fast. Excessively rapid costs of the business.
Growth for Entrepreneurial growth can cause companies to In 2001, business professors Neil
Businesses, describing growth overreach their ability to fund Churchill and John Mullins created
growth: they simply run out of cash a formula for calculating the pace at
as recurring change.
to pay for day-to-day operations. which a company can expand from
A major challenge for any manager internal financing alone. Known
START SMALL, THINK BIG 45
See also: Managing risk 40–41 ■ Luck (and how to get lucky) 42 ■ The Greiner curve 58–61 ■ Hubris and nemesis 100–03
■Profit versus cash flow 152–53 ■ Small is beautiful 172–77 ■ The MABA matrix 192–93

as the self-financeable growth Each of these “levers” helps to


rate (SFG), it helps managers to generate the cash needed to fuel
strike the right balance between faster growth.
consuming and generating cash. As a young start-up business,
It does this by measuring three the fashion brand Superdry enjoyed
things: the amount of time a phenomenal growth. From its
company’s money is tied up in inception in the UK in 2004, the
inventory before the company has company rapidly added new stores
paid for its goods or services; the throughout the world. In 2012,
amount of money needed to finance however, after several profit
each dollar of sales; and the amount warnings, it became clear that
of cash that is generated by each Superdry had become a victim of
dollar of sales. its own success. Critics suggested
that the brand was so focused on
Sustainable growth growth that it had forgotten its
When accurately applied, the fashion roots, failing to update The fate of the exploding Helix
SFG formula determines the rate products on a seasonal basis. Other Nebula resembles the decline of a
at which a company can sustain reasons for the decline included company that has expanded too rapidly:
growth through only the revenues supply issues, accounting mistakes, after using up all its energy resources,
the star collapses on itself and dies.
it generates—without needing to and an inability to react quickly
approach external funding agencies enough to fierce competition. In
for more cash. Essentially, it a tacit acknowledgement that processes and people, eventually
predicts a sustainable growth rate excessive growth was to blame, the destroying its value and even
and helps to avoid overtrading. company announced plans to leading the company to grow
When a market is growing faster review its new store openings. and die.” Growth is not a strategy,
than a company’s SFG, Churchill Business-growth expert Edward he claims, but a complex change
and Mullins identified three ways Hess suggests that growth can add process, which requires the right
for managers to exploit the growth value to a company, but if it is not mindset, the right procedures,
opportunity: speed up cash flow; properly managed, it can “stress a experimentation, and an enabling
reduce costs; or raise prices. business’s culture, controls, environment. ■

Edward Hess always linear. Contrary to the


dictum that companies must
A graduate of the universities of “grow or die,” he suggests that
Florida, Virginia, and New York, they are likely to “grow and die.”
Edward Hess has been teaching Hess is the author of ten
A profitable company and working in the world of books and more than 100
that tries to grow too business for more than 30 years. practitioner articles and case
fast can run out of cash— He began his career at the oil studies. He is currently professor
even if its products are company Atlantic Richfield of business administration at
great successes. Company, and later became the University of Virginia, US.
Neil Churchill and a senior executive at several
John Mullins other leading US organizations, Key works
including Arthur Andersen.
Hess specializes in business 2006 The Search for Organic
growth, and especially in Growth
debunking the “myths” that 2010 Smart Growth
growth is always good and 2012 Grow to Greatness
46

THE ROLE OF THE


CEO IS TO ENABLE
PEOPLE TO EXCEL
FROM ENTREPRENEUR TO LEADER

IN CONTEXT
Entrepreneurship is
FOCUS As a business grows, needed to spark a
Business growth its demands change. business into life, but...
KEY DATES
1972 Professor Larry Greiner
suggests the various stages of
business growth are preceded
by crisis, the first being a
crisis of leadership. ...and leadership skills ...management discipline
are required to maintain is required to support
2001 Leadership and change long-term growth. that growth...
expert John Kotter writes the
paper “What Leaders Really
Do.” Published in Harvard
Business Review, it draws a
distinction between the roles
of manager and leader. Founders must adjust ...and make the
2008 Indian business scholar from being the sole decision- transition from
Bala Chakravarthy and maker to delegating... entrepreneur to leader.
Norwegian economist Peter
Lorange’s paper “Driving
Renewal: The Entrepreneur-
Manager” is published in

I
n the early days of a new co-ordinate a growing enterprise.
Journal of Business Strategy. In business the most valuable Some entrepreneurs are able to
it, the authors calls for a new skill a founder can have is make the transition to leadership
breed of entrepreneurship entrepreneurship—the vision to successfully, while others struggle.
in management, in order to identify opportunities, and the An Ernst & Young report in 2011
manage business renewal. willingness to take risks. But as the identified entrepreneurs as people
business grows, demands change. who are nonconformist, driven and
Disciplined management skills and tenacious, passionate and focused,
corporate expertise are required to with an opportunist mind-set.
START SMALL, THINK BIG 47
See also: Take the second step 43 ■ The Greiner curve 58–61 ■ Leading well 68–69 ■ Effective leadership 78–79 ■

Develop emotional intelligence 110–11 ■ Mintzberg’s management roles 112–13 ■ The value chain 216–17

Other studies report entrepreneurs staying still. His company launched


as mavericks, unafraid of failure and in 1998 with a low-cost airline,
driven by a passion for success. easyJet, and now includes more
While there is some overlap, absent than 20 “easy” businesses that
from these findings are the traits operate on a similar low-cost model.
that define good leaders and Haji-Ioannou has shown an aptitude The function of leadership
managers: organization, an eye for for strategy, and an eye for detail; is to produce more leaders,
detail, communication, emotional but he has also been criticized for not more followers.
intelligence, and the ability to lacking leadership skills, for Ralph Nader
delegate. And as Indian executive micromanaging, and, common US political activist (1934–)
Vineet Nayar advised, effective to entrepreneurs, for an inability to
leadership involves encouraging delegate and let managers manage.
others within the company to US professor Larry Greiner
realize their potential, and excel. identified leadership—the ability
of a start-up founder to transition
Making the transition from entrepreneur to leader—as one
Canadian business guru Professor of the major crises that businesses ventures, and leadership skills
Henry Mintzberg proposed that face as they grow. Greiner suggests to move the start-up beyond its
management can be broken down that successful growth often entrepreneurial roots.
into three categories: managing requires the employment of Start-ups require the spark
by information, through people, and professional managers who bring of entrepreneurship; but growth
through action. Many entrepreneurs to the business an understanding requires a different set of skills: a
have difficulty managing through of the requirements of financial founder must transition from being
information—they often lack the markets, banks, and—most sole decision maker to being a
skills to build the systems and importantly—have the leadership disciplined manager and a
communication networks on which skills needed to manage complex successful leader. Those who are
large businesses are built. organizations. Entrepreneurs may unable to make this transition
Cyprus-born Stelios Haji- possess bountiful ideas, but it takes often need to step aside and let the
Ioannou, entrepreneur and founder management discipline to turn professionals take over. But this is
of easyGroup, is known for rarely those ideas into successful often easier said than done. ■

Zhang Yin Chinese entrepreneur and paper- exporter in the USA, and the
recycling tycoon Zhang Yin was largest overall exporter to
born in Guangdong in 1957. China. In 1995, after returning
Recognizing that the Chinese to Hong Kong, Zhang cofounded
export sector faced a shortage of Nine Dragons Paper with her
paper-packaging materials, Zhang husband and her brother. The
(her Cantonese name is Cheung company went on to become the
Yan) opened a paper-trading world’s largest maker of
business in Hong Kong in 1985. packaging paper.
Quickly moving from In 2006, at the age of 49,
entrepreneur to established Zhang became the first woman
business leader, Zhang moved to top the list of richest people
to Los Angeles, US, where she in China, according to the
co-founded the paper-exporting magazine Hurun Report. The
company America Chung Nam in following year, Ernst & Young
1990. The business quickly awarded her “Entrepreneur of
became the leading paper the Year in China 2007.”
48
IN CONTEXT

CHAINS OF HABIT
FOCUS
Middle management
KEY DATES

ARE TOO LIGHT TO Pre-1850 The business


landscape is dominated by
small, family-run firms.

BE FELT UNTIL THEY 1850s and 60s A rapid


expansion of the railroad
systems and new industrial

ARE TOO HEAVY technology in Europe and


America create greater
possibilities for

TO BE BROKEN
KEEP EVOLVING BUSINESS PRACTICE
entrepreneurial businesses.
From 1880s As family
businesses grow ever larger,
administration becomes
important and they begin to
employ professional managers.
1982 UK economist Norman
Macrae predicts a future trend
of “intrapreneurs”: managers
with entrepreneurial thinking.

P
eople are important in
organizational life. Whether
it is the initiative of a single
entrepreneur or the combined
energy of thousands of employees,
it is people who get things done.
However, that energy and initiative
would count for little without
managers to foster it. The creation,
implementation, and management
of organizational processes is what
molds individual energies into a
coherent whole—and as a company
evolves, it is the experience of
management that is essential in
redefining those processes.
While management experience
can liberate a business, it can also
enslave it. Experience quickly gives
START SMALL, THINK BIG 49
See also: Beating the odds at start-up 20–21 ■ Take the second step 43 ■ Reinventing and adapting 52–57 ■ The Greiner
curve 58–61 ■ The weightless start-up 62–63 ■ Beware the yes-men 74–75 ■ The capability maturity model 218–19

Companies must look


to the experience
of middle managers
It is the structure of the for growth.
organization, rather than the
employees alone, which holds
the key to improving the As a business
quality of output. matures and grows it
W. Edwards Deming This requires
will require systems,
US business professor (1900–93) experienced handling.
procedures, and
protocols.

way to the comfort of habit, and Companies must balance Those systems are the
in ever-dynamic markets habit structure with purview of middle
can too easily lead to stasis and flexibility. management.
stagnation. The danger for
management is that, as US investor
Warren Buffet warned, “chains of
habit are too light to be felt until
they are too heavy to be broken.” But too much
process can stifle
Middle management innovation and,
therefore, growth.
The importance of middle
management was described by
business historian Alfred Chandler
in his 1977 text, The Visible Hand,
a play on economist Adam Smith’s transportation and communication As standardization and mass
“invisible hand” metaphor, which allowed firms to grow beyond the production emerged in the early 20th
explains the self-regulating forces immediate gaze of friends or family, century, the role of management
of the market. Chandler noted that and beyond the immediate locale. grew. Business was taking place on
before 1850, family firms dominated But to prosper in this new an increasingly global scale. Even
business in the USA. These firms environment, companies needed before mechanization, coordination
had poor communication networks more rigorous processes and from managers enabled mass
and limited access to educated structures. The increasing production. Standardization turned
staff, so rarely grew beyond groups geographic scope and size of management into a science, and
of family and friends who could be businesses required new levels of managers into a vital cog in the
educated, trained, and trusted to coordination and communication. organizational machine.
manage the business. Businesses had grown too unwieldy
However, with the growth of for one person to manage; they Enablers and enterprise
national railroad networks in the required the oversight of a team of In a 2007 Harvard Business Review
1850s, the management landscape people. This marked the emergence article “The Process Audit,” US
began to change. Improvements in and rise of the professional manager. businessman Michael Hammer ❯❯
50 KEEP EVOLVING BUSINESS PRACTICE
summarized the science of Japan for dry beer and allowing the
management (which is essentially company to capture more market
the management of business share. Similarly, a group of Motorola
process) into two factors: enablers middle managers was lauded for
and enterprise capabilities. successfully developing a new
Enterprise capabilities stem from wireless digital system for a client Middle management as
senior management, and include in under one year (the process a technology enables the
culture, tight governance usually takes two to three years). organization as we know it.
mechanisms, and strategic vision. Sitting between senior leaders Alfred Chandler
Enablers, however, are the task of and operational staff, middle US business historian (1918–2007)
middle management. They include managers are the communications
design, infrastructure, process, conduit through which executives
protocol, responsibilities, and remain attuned to day-to-day
performance management. The business and personnel issues.
enablers turn vision into reality. Middle managers, as the Asahi and
Motorola examples show, are often
Realizing the vision at the heart of corporate inspiration lessons learned through business
Hammer claimed that while the and perspiration—they generate experience. The true science of
aspiration for business growth ideas and they work to realize ideas management is the conversion of
might come out of the boardroom, in practice. Middle management experience into repeatable and
it is a company’s infrastructure— is also the driver of functional reliable process—today’s problems
designed and implemented by efficiency: improvements in cost, become tomorrow’s processes and
middle management—that makes quality, speed, and reliability are next year’s capabilities.
growth possible. Vision without delivered by middle management Process is the “stuff” of
infrastructure is just a dream—it and the processes it introduces. management. Business processes
cannot become a reality. Leaders are essential to maintaining order;
of growing companies know that, Growing the business like a country’s rail system and the
regardless of their own aspirations, As a business evolves, so must the rules that accompany it, processes
the building blocks of growth are management processes that enable are the infrastructure around which
laid by middle management. it. Whereas initial stages of growth a company organizes. Business
At the Japanese brewer Asahi, rely on individual initiative and practice must evolve as the business
for example, it was a team of entrepreneurial spirit, evolving grows from a single outlet to a chain,
middle managers who developed ad-hoc practices into sustainable from one staff member to many,
Super Dry Beer, starting a craze in growth needs to be based on and from national to multinational.

Cath Kidston English fashion designer, author, she had to buy her stock
and entrepreneur Catherine carefully, mixing her own fabrics
Kidston was born in 1958. Raised and wallpaper with items from
with her three siblings near tag sales and fabric from eastern
Andover in Hampshire, she was Europe. Gingham ordered from
educated at a number of English Europe arrived already made
boarding schools, before moving into duvet covers and
to London at 18. pillowcases, rather than as a
After working as a store fabric bolt. Kidston realized she
assistant, she ran a vintage curtain would have to improvise, so
business with a friend on London’s decided to “cut it up and make
King’s Road for five years. In 1992 it into other things.” She kept
she sold the business and a year some of the bedding, but altered
later opened a store selling vintage most items into products such
home goods, wallpaper, and fabric. as toiletry bags. The Cath
With about $23,000 in her pocket, Kidston brand was born.
START SMALL, THINK BIG 51
The development of infrastructure Enablers are the realm of middle managers,
and the strength of a new layer of according to Michael Hammer’s analysis of the
middle management were key science of management. When implemented
and maintained efficiently, they foster
factors in the evolution of UK retailer growth and turn the vision of
Cath Kidston from a single store senior executives into reality. Middle
in 1993 to more than 120 global managers
branches and concessions by 2013, Pro
ce ss
with stores throughout Europe and
Asia, and plans to expand into Design
North America. Widely renowned ture
Infrastruc
for its vintage fabrics, wallpapers, ent
and brightly painted junk furniture, a n agem ies
em t
ili

l
anc

co
Kidston’s initial growth, as is m b
or i

to
common with many single-founder Perf ns
po

o
Pr
start-ups, was slow. In the early s
Re
days, monthly accounts took six
weeks to prepare and clashes
between IT systems caused issues
with cash-flow projections and
supply-chain management. It took
nine years to open a second branch,
and another two before the third. down, stifling innovation and have since helped Renault Samsung
Following a buy out in 2010, hindering growth. As markets and Motors gain a footing within the
Cath Kidston became partly owned technology move ever faster, South Korean automotive market.
by a US private-equity group, with process must not blind managers to Business leaders dismiss the
Kidston herself retaining about 20 opportunity, and systems must not value of middle management, and
percent of stock. As expansion took restrict strategic agility. For the value of process, at their peril.
hold, the company started to move example, Motorola continued to Without middle managers who are
from ad-hoc processes to a more invest in satellite technology able to evolve a leader’s vision into
planned approach. Specialized throughout the 1990s even after reality, many businesses would be
managers and consultants were competitors had switched to stuck like those of the pre-railroad
brought in to help build capacity for cheaper, more effective ground- era, destined to remain small, local,
growth. New departments were based cell towers. and family run. It is the science of
added, including design, buying, Habit can also twist logic. So management that enables business
and merchandising, and systems habitual, for example, were the evolution and growth. ■
were introduced. Most importantly, claims of ethical behavior from
middle management gained Dennis Kozlowski, CEO of Swiss
experience of what it takes to open security company Tyco International,
and run a new store. The lessons that he seemed able to divorce the
from earlier mistakes were reality of his own behavior from his
integrated into procedures and rhetoric—in 2005 he was convicted
policies; by building on experience, of corporate fraud. Habit can also If you can’t describe
every new store opening became lead to hubris. Buoyed by his what you are doing
easier than the last. business’s accomplishment in as a process, you don’t
electronics, in 1994 Samsung CEO know what you’re doing.
Excess and habit Lee Kun-Hee believed that the W. Edwards Deming
The dangers of processes and of same approach would lead to
hierarchy (if it becomes excessive) success in the car market, but the
are that they may begin to grip the venture struggled and was rescued
organization too tightly. Protocol in 2000 by Renault. The experience
and bureaucracy can wear people (and habits) of Renault’s managers
52

A CORPORATION
IS A LIVING
ORGANISM
IT HAS TO CONTINUE TO
SHED ITS SKIN
REINVENTING AND ADAPTING
53
54 REINVENTING AND ADAPTING

J
ust as human beings are
IN CONTEXT organisms that grow,
change, and adapt, so do
FOCUS
successful businesses. In 1970, the
Process and product
US futurist Alvin Toffler published
KEY DATES Future Shock, a book that predicted The reinvention of daily life
1962 US professor Everett the coming phenomenon of “a means marching off the
Rogers writes Diffusion of perception of too much change edge of our maps.
Innovations, showing how in too short a period of time.” The Bob Black
innovation moves through pace of change, he said, would also US activist (1951–)
social systems. spread to the world of business, as
companies were forced to adapt
1983 US business consultant their products and processes to
Julien Phillips publishes the maintain advantage in an
first change-management increasingly competitive market.
model in the journal Human Toffler’s ideas of the effects of
Resource Management. rapid technological change were In 1989, US computer scientist
viewed at the time as far-fetched, Alan Kay claimed that it took 10
1985 In Innovation and but with the invention of computers years for an innovation to go from
Entrepreneurship, Peter and the Internet, change has the laboratory to everyday life, but
Drucker describes the best accelerated even more rapidly than by 2006 Twitter had managed to
approach to managing change he predicted. Toffler presciently cut this down to just four years.
as one that “always searches claimed that we would live in a Products can now be bought online
for change, responds to it, state of “high transience,” in which from anywhere in the world, and
and exploits it.” we would give ideas, organizations, customer feedback is instant and
and even relationships an ever- global. The challenge for companies
1993 US change expert Daryl
shorter amount of our time. Social to adapt and reinvent is huge.
Conner uses the metaphor of
media websites are witness to this
“the burning platform” to idea in action, providing a platform Products and processes
describe the high cost of a for the new ways we have begun The personal and business
business that stays the same. relating to one another; they also landscape has changed so radically
demonstrate new ways of starting, since the 1960s that no industry or
growing, and building businesses. corporation has proved immune to

Markets are never static— Businesses must respond


change is inevitable to change through …in thinking, product,
and continuous. innovation… and process.

Adaptation
This flexibility allows
and reinvention companies to respond to the
are necessary market and gives them
for business a competitive edge.
survival.
START SMALL, THINK BIG 55
See also: Gaining an edge 32–39 ■ Keep evolving business practice 48–51 ■ Creativity and invention 72–73 ■ Thinking
outside the box 88–89 ■ Changing the game 92–99 ■ Avoiding complacency 194–201

its effects. Consider, for example, Apple iTunes store offered 60,000 Product adaptation in the music
the music and movie industries. movies across 119 countries, and industry demonstrates the steady use of
New technology has completely, 35 million songs. new technology—from gramophone to
vinyl, cassette, CD, minidisc, and MP3
and very rapidly, changed the digital music file—as companies have
way that movies and music are Innovative methods sought to broaden the market for music.
purchased and consumed. For the Process adaptation involves finding
big movie and music businesses new ways to do things; it involves
(and all their associated suppliers introducing or removing processes.
and producers), survival has Competition from online sales and
required a high level of reinvention pirate streaming continue to affect
and adaptation. movie distribution companies such
This reinvention has come in the as Netflix. The response of this
form of both new products and new highly popular video streaming
processes. Product adaptation service was to make all the episodes
involves updates and redesign— of one television series (House
essentially, innovation and of Cards) available for download
invention. The movie industry has simultaneously; the rationale being
undergone many transformations that the risk of piracy would be
since the early days of black-and- lower if consumers were able to
white moving pictures, or “movies.” legally buy all episodes at once.
It has reinvented itself through For Netflix this bold strategy was
technology (from adding sound to not just a radical new process; it was
creating “impossible” computer- also an adaptation of the company’s
generated images); marketing entire business model. Still in the
devices, such as monthly access adolescent stages of growth, in 2012
cards; events, such as outdoor Netflix was primarily an online
screenings; and the growth of the streaming service, but for House of
multiplex to multiply visitor Cards it entered the world of
numbers and reduce turnaround production. By producing and
times. The newest product aimed distributing, Netflix was able to
at luring viewers away from illegal capture more profit and gain more
downloads and back into movie control over content. Netflix did not ❯❯
houses is Stereoscopic-3D—itself a
reinvention of an older idea.
Around the turn of the 21st
century, the music industry was
also struggling because of the drop
in sales of CDs, and began to refocus Excellent companies don’t
on live music and merchandise. believe in excellence—only in
However, both the music and movie constant improvement
industries found new life through
and constant change.
digitization, such as Apple’s iPod
and iTunes. This revolutionary
Tom Peters
US business expert (1942–)
combination of product and
process—Apple’s hardware and
software—made legal downloads of
music and movies more attractive
than illegal versions. In 2013 the
56 REINVENTING AND ADAPTING
know if the House of Cards internal systems allowed the
experiment would work. It did know, company to exploit global sales
however, that in order to maintain opportunities. In 1994, due to the
the momentum of early growth, it brand’s growing popularity, demand
needed to adapt and reinvent—in far exceeded manufacturing
this case reinvention as television capability. Poor planning and Those who initiate change
producers as well as distributors. coordination led to delayed will have a better opportunity
production and lost sales. The to manage the change
Internal changes solution was a reinvention of internal that is inevitable.
Reinvention and adaptation can also systems based around an integrated William (“Bill”) Pollard
be internally focused on systems, IT system. The product itself—the US businessman (1938–)
recurrent tasks, or operational classic “1460” eight-laced leather
activities. Whether improvement of boot—changed very little, although
this type is based on data from more designs were later added to
formal process improvement the product range. The key change
frameworks (such as Total Quality was the adaptation of internal
Management) or simply on the processes, which ensured supply
experience and intuition of could match demand. industry. The company began with
managers, internal process black-and-white televisions and
adaptation allows companies to Adapting in a recession moved into home appliances during
maximize revenue while also Internal process adaptation is even the 1970s. In the 1980s, production
reducing costs. more important in markets where grew to PCs and semiconductors.
The McDonalds McSnack Wrap, demand is static or falling. In 1986, Samsung released its
for example, takes staff only 21 Operational efficiencies, rather first car phone, the SC-100. The
seconds to make—the shorter the than revenue growth, are the key product was a disaster—the quality
preparation time, the greater the to profit. For insurance companies, was so poor that many customers
number of customers that can be for example, scope for new product complained. This reputation for poor
served by the fewest staff. At R adaptation is limited, so competition quality blighted Samsung for much
Griggs Group Ltd, manufacturer of is price-based—especially in a of its early life, since consumers
Dr. Martens shoes, a reinvention of recession, when customers are regarded its goods as inferior to
particularly price sensitive. The key premium Japanese products.
to maintaining profitability while On June 7, 1993, chairman Lee
remaining price competitive is Kun-Hee gathered senior Samsung
continual process improvement— executives and declared that the
the reinvention of internal systems company needed to reinvent itself.
that deliver the same product to His famous instruction “Change
customers, but at a lower cost and, everything except your wife and
therefore, increased profitability. children” shows how seriously he
The days of the door-to-door took the situation. Lee also
insurance salesperson have long recognized shifting market
since been replaced by telesales dynamics, telling colleagues that
and an e-commerce approach. the company needed to “produce
cell phones comparable to Motorola’s
Reinventing the company by 1994 ... or Samsung will
A notable company that has disengage itself from the cell-phone
successfully reinvented itself is business.” The “new management”
Samsung Electronics. Established initiative that followed, supported
Dr. Martens footwear grew from a
niche fashion item to an international in 1969, Samsung Electronics is a by product and process innovation,
mainstream hit within a matter of years. subsidiary of the Samsung Group, put the emphasis on the quality
R Griggs, the brand’s producer, had to which aimed to exploit opportunities and innovation that Samsung is
reinvent processes to match demand. in the emerging technology now renowned for, and galvanized
START SMALL, THINK BIG 57
When processes evolve they may
create new jobs or cause existing ones
to disappear. The manual switchboards
of the old ztelephone system were soon
replaced by faster, automatic ones.

its foundation for future growth.


Samsung’s transformation was not
yet complete, however—the Asian
financial crisis of the late 1990s
forced the company to reinvent
itself yet again. Adapting its process
turned Samsung into a more
market-focused and consumer-
friendly brand. Since then the
company’s efforts, particularly in
the cell-phone industry, have been
based on constant attrition,
reinvention, and adaptation.

Long-term survival tasks are automated and fulfilled by a continual process. Social media,
Few businesses survive without computers and robots. Promotions for example, has created a market
adaptation or reinvention. Products have also adapted to fit changed shift that has required businesses of
such as Kellogg’s Cornflakes and consumer demographics, globalized all types to adapt; even record labels
Heinz Beans—products that have markets, and customer preferences. now embrace the promotional value
not changed in decades—are rare. Even established brands cannot of websites such as YouTube.
Even when a product has not avoid reinvention. The ecosystem in which a
changed, many of the processes Truly successful business business operates is rarely, if ever,
used in its manufacture, transformation is rarely due solely to static. Corporations exist in these
distribution, and marketing have discovering and commercializing ecosystems as living organisms
altered dramatically. The factories bold new ideas, technologies, and that must adapt to survive; great
of 100 or 50 years ago were very products. The most successful leaders know that failure to adapt
different than today’s, where many businesses know that reinvention is leads to extinction. ■

Lee Kun-Hee Born on January 9, 1942, Lee has been transformed from a
Kun-Hee is Chairman of the South Korean budget brand into a
Korean conglomerate Samsung. major international force and,
Holding an economics degree from alongside Sony, is one of the
Waseda University in Tokyo, world’s most prominent
Japan, and an MBA from George Asian businesses. Samsung
Washington University in the US, Electronics, the conglomerate’s
Lee Kun-Hee joined the Samsung most famous subsidiary,
Group in 1968 and succeeded is a leading developer of
his father as Chairman on semiconductors, TV screens,
December 1, 1987. and cell phones—with its
Samsung is the quintessential smartphones even outselling
example of a chaebol, a uniquely the iPhone in many markets.
Korean conglomerate that mixes The Forbes 2013 Rich List
Confucian values with family ties recorded Lee as the world’s
and government influence. Under 69th richest billionaire, and
Lee’s stewardship, the company the richest Korean.
58
IN CONTEXT

WITHOUT CONTINUAL FOCUS


Business growth
KEY DATES

GROWTH AND 1972 Larry Greiner outlines


five stages of business growth,

PROGRESS, SUCCESS
and their related crises, in
“Evolution and Revolution
as Organizations Grow.”

HAS NO MEANING
THE GREINER CURVE
1988 Macedonian business
expert Ichak Adizes writes
Corporate Lifecycles, in which
he describes the growth of
corporations as a series
of five “S” curves.
1994 Professor David Storey
claims that all forms of “stage”
models have limitations. He
suggests looking at growth
through categories of
companies instead: failures,
trundlers, and flyers.
1998 In a reprint of his 1972
article, Greiner updates his
theory and adds a sixth stage
to the Curve.

A
side from the financial
rewards that they offer to
entrepreneurs, start-ups
can be exciting places to work.
Amid the chaos, continual change,
ever-evolving policies and
procedures, and the abundance of
work required, these environments
buzz with energy, initiative, and
ideas. But as business growth
places increasing pressure on
people and systems, excitement
can turn into frustration.
Periods of chaos often occur in
a start-up’s early life. As it matures,
the new business will pass through
various conceptual thresholds. In
1972 Larry Greiner identified these
as “crises of growth,” which he
START SMALL, THINK BIG 59
See also: Beating the odds at start-up 20–21 ■ Take the second step 43 ■ How fast to grow 44–45 ■ From entrepreneur to
leader 46–47 ■ Keep evolving business practice 48–51 ■ The weightless start-up 62–63

These crises are


Start-ups are ...but growth predictable and can
exciting places brings inevitable be managed by using
to work... crises. the Greiner Curve.

illustrated on a graph that came will be required (perhaps from banks many cases the original founders
to be known as the Greiner Curve. or venture capitalists), and the need have neither the skills nor the desire
He noticed that companies of all for formal systems and procedures to take on more formal leadership.
types go through periods of growth increases. The founders—who In 2002, chef Jamie Oliver founded
followed by inevitable crises, when are likely to be technically or Fifteen, a chain of restaurants that
major organizational change is entrepreneurially oriented—find also provide training opportunities
needed to maintain momentum. themselves faced with their first for disadvantaged young people.
crisis, as they become burdened by As the chain grew, he handed over
Stages of growth management responsibilities that the management to a CEO, so that
Greiner initially identified five they are ill-equipped to deal with. he could return to doing what he
stages of growth, but later added This first crisis is therefore one of does best: being a commercially
a sixth. The first of these stages is leadership: who will lead the successful celebrity chef.
“growth through creativity.” During company out of confusion and solve Under professional managers,
this stage, the start-up is small and the new management problems? business growth continues in
growth is fueled by the enthusiasm Change of leadership required for an environment of more formal
of its founders. Management phase two may only be a question of structures and budgets, and with
procedures, communications—and internal reorganization and a change the establishment of separate
even interactions with customers— in style, abandoning the casualness functions, such as production
are usually informal and ad hoc. of the company’s early days in favor and marketing. This is the second
However, as more staff joins and of greater formality and more rigid stage of growth, known as “growth
production expands, more capital systems and procedures. But in through direction.” As the new ❯❯

The Greiner Curve Phase 1 Phase 2 Phase 3 Phase 4 Phase 5 Phase 6


illustrates the six Growth Growth Growth Growth Growth Growth
stages of growth that through through through through through through
any company might creativity direction delegation coordination collaboration alliances
SIZE OF ORGANIZATION

undergo during its


development. Each Crisis 5:
growth phase Growth
generates a crisis,
Crisis 4:
the resolution of Red tape
which leads to the
next growth stage. Crisis 3:
Control
Crisis 2:
Autonomy
Crisis 1:
Leadership

TIME
60 THE GREINER CURVE
manager takes responsibility for free. All businesses, of all sizes,
direction, mid-level supervisors or and regardless of growth aspirations,
managers act more as functional will face uncertainties and
specialists, but after a while they challenges. It does mean, however,
begin to demand more freedom that the business will avoid the
to make decisions, leading to the One can choose to requirements of the next stage:
second crisis: “autonomy.” This crisis go back towards safety or “growth through coordination.”
can be solved by freeing the mid- forward towards growth.   During this fourth stage,
level managers from bureaucracy Abraham Maslow increasing centralization is
and allowing the company to US psychologist (1908–70) common. By this time the company
achieve “growth through delegation” may be relatively large, with
—Greiner’s third stage of growth. operations controlled through a
Unburdened by the need to manage head office. The company may
day-to-day issues, senior appoint executives with experience
management can shift its attention of managing large, diverse
to strategy and long-term growth. businesses and introduce standard
entrepreneurs start a small company operating procedures.
Stay small or grow? to escape the stresses, politics, and However, the introduction of
At this point a start-up faces office-bound purgatory of corporate standard policies eventually leads
perhaps the biggest crisis of all: a life and so, for them, it may make to the next crisis: a “red-tape
crisis of control. The founders or sense to limit growth at this stage. crisis,” in which increasing
senior management may find it Other entrepreneurs—such as bureaucracy stifles operations,
hard to give up responsibility for Virgin chief, Richard Branson—are and growth falters as a result.
decision making, even to trusted enthused by the early phases in the
boards. When this happens, the life of a new business, but become A return to informality
founder may decide to remain bored as the bureaucratic demands Paradoxically, the fifth stage,
small—in essence, to limit growth increase. Branson likes to guide a “growth through collaboration,”
to the extent of their own control. business through its start-up phase requires, in part, a return to the
Such decisions are laudable. Not then hand it over to professional earlier days of flexibility. Systems
all companies can be global and all- managers, so he can move on to allow greater spontaneity,
conquering, and in fact, small- and new, more exciting, projects. teamwork is introduced, and matrix
medium-sized enterprises dominate Choosing to remain small does not (network) structures are used to
the business landscape. Some mean that a business will be crisis- recapture the collaborative nature
of a start-up—in other words, the
Larry Greiner Organizations Grow”, is regarded organization tries to operate like a
as an all-time classic. Greiner lean, creative company once again.
Larry Greiner is a professor of has acted as a consultant to Once this has been attained,
management and organization companies and government the next crisis relates to the limits
at the University of Southern agencies in the US and abroad, of internal growth. Under pressure
California, US. He received a BA such as Coca-Cola, Merck, from shareholders to continually
degree from the University of Andersen Consulting, Times improve returns, further growth
Kansas, and an MBA and Mirror Company, and KinderCare. can only be achieved by developing
doctorate from Harvard partnerships with complementary
Business School. Key works organizations. By this sixth stage
Greiner is the author of a company is already big, possibly
numerous publications on the 1972 “Evolution and Revolution
very big. “Growth through
growth and development of as Organizations Grow”
1998 Power and Organization
alliances” therefore suggests that
organizations, management
consulting, and strategic Development expansion will continue through
change. His 1972 article, 1999 New CEOs and Strategic mergers, outsourcing, or joint
“Evolution and Revolution as Change, Across Industries ventures—the company needs
to look beyond its own internal
START SMALL, THINK BIG 61
Spotify CEO Daniel Ek worked with
co-founder Martin Lorentzon to build
a large but agile company. It avoids
Greiner’s growth problems by working
in small squads overseen by “tribes.”

as a start-up business. Mirroring


the benefits enjoyed by companies
in Greiner’s first stage, every squad
is fully autonomous, has direct
contact with its stakeholders,
and operates with minimal
dependency on other squads.
To deal with the various crises
of growth (such as autonomy and
red-tape), related squads are
grouped into “tribes.” The function
of the tribe is to support and enable
the activities of each squad, in
capabilities, and the capacity of In this regard, the various crises essence mirroring the role of
its core markets, and seek identified by the Greiner Curve can venture capitalists in incubating
external growth. be seen as natural transitions. An new start-ups. The operation is
The actual rate of growth— organization must manage its way kept small and agile by limiting the
in terms of customer numbers, through such transitions and head count for each tribe to 100.
revenue, or profits—within each growing pains as it continually Spotify appears to have managed
phase of the Greiner Curve will defines and redefines the scope of its to maintain a balance between the
vary, depending on the individual operations, its values, and its overall benefits of growth and the feel-good
company. Organizations such as purpose. As Benjamin Franklin elements of a start-up. The founders
Facebook were already large by the observed, “without continual nevertheless admit that the system
time they started to face crises of growth and progress, such words is not flawless, and as the demand
delegation and control. Others may as improvement, achievement, and for an organization-wide strategy
remain small for many years, success have no meaning.” grows, it may be that even Spotify
perhaps never even reaching will not escape the crises of growth
the leadership-crisis stage. Large but agile predicted by the Greiner Curve. ■
One company that seems to have
Using the Greiner Curve heeded the lessons of the Greiner
Knowledge of the Greiner Curve Curve is the Internet music-
can help start-up founders to streaming service, Spotify. The
predict and manage the inevitable organization’s Swedish founders,
crises of growth. Even when Daniel Ek and Martin Lorentzon, All growth depends upon
enjoying the heady days of early knew at the company’s inception activity. There is no
growth, entrepreneurs need to be in 2008 that their aim was growth. development physically or
mindful of the steps required to They also knew that they were not intellectually without effort,
build the business further. They willing to compromise the benefits
and effort means work.
must put structures in place as that accompany the excitement
soon as possible; the earlier that of a start-up business.
Calvin Coolidge
US former President (1872–1933)
formal systems and professional Spotify organizes itself around
management are introduced, the project-based teams, called
less they will be resented and “squads.” The organization is
resisted, and the stronger the divided into small clusters of
foundations for continued growth. squads, with each squad running
62

IF YOU BELIEVE IN
SOMETHING, WORK
NIGHTS AND WEEKENDS—
IT WON’T FEEL LIKE WORK
THE WEIGHTLESS START-UP

S
tarting a business requires
IN CONTEXT almost boundless energy,
unwavering commitment,
FOCUS Many start-ups require skill, and the resilience to deal with risk.
Start-ups not capital outlay. But increasingly, the commercial
KEY DATES potential of the Internet is allowing
1923 Walt Disney starts a growing number of “weightless”
making professional cartoons start-ups to take flight. These
in his uncle Robert’s garage. ventures are low on financial
resources, but high on individual
1976 The first 50 Apple skill and the investment of time
computers are built in the to bring an idea to fruition.
In a weightless start-up,
spare room of Steve Jobs’s the risk is time, Personal passion is an essential
parents’ house. A few months not money. ingredient in a successful start-up.
later Apple moved “upscale” As Kevin Rose, founder of Internet
to his parents’ garage. start-ups Digg, Revision3, and Milk,
1978 Indian master brewer put it: “If you believe in something,
work nights and weekends—it
Kiran Mazumdar-Shaw founds
won’t feel like work.” Even global
biotechnology company,
greats such as Nestlé foods and
Biocon, in the garage of her The work can be done Siemens electronics grew from the
rented house in Bangalore, initially on weekends and dreams and aspirations of a small
India. evenings, but... group of people. These entrepreneurs
2004 Kevin Rose quits his faced the risk of a new business
television job to found Digg, a because they deeply believed in
news aggregator website that something, and were driven to
attracts 38 million users a realize their dream, despite long
month during its peak. The hours, stress, and, often, a string
...if you believe in of failures large or small. These are
“office” is his bedroom.
what you’re doing, quickly forgotten when people are
it won’t feel doing something they love.
like work. Traditionally, the main barriers
to enterprise were time and capital.
Entrepreneurs from nonwealthy
START SMALL, THINK BIG 63
See also: Beating the odds at start-up 20–21 ■ Luck (and how to get lucky) 42 ■
The Greiner curve 58–61 ■ Changing the game 92–99 ■ Small is beautiful 172–77
Hewlett-Packard
Bill Hewlett, born 1913, and
Dave Packard, born 1912, were
close friends who graduated
as electrical engineers from
Stanford University. After his
marriage, Packard moved into
an apartment in Palo Alto,
California, with his wife, while
Hewlett camped out in a shed
on the grounds. A garage
belonging to the property
became a decidedly low-tech
workshop. From 1938 to 1939
the garage served as home,
think tank, lab, office, and
production department. Bill and
David developed the 200A and
200B audio oscillators, which
became Hewlett-Packard’s
first products.
Believed to be the first US
Hewlett-Packard (HP) began life in These micropreneurs, who sell technology company to launch
Dave Packard’s garage. The company everything from homemade fashion in a garage, Hewlett-Packard
has restored the garage, which in 1987 items to antiques and secondhand was founded by the two
was named a California landmark as
electronics, are risking very little friends on an investment of
“the birthplace of Silicon Valley.”
other than their own time—the just $538. Today the
capital outlay can be as much or as organization is one of the
backgrounds usually needed a full- little as they are willing to risk. The world’s largest technology
time job to meet the living costs micropreneur’s skill lies in spotting companies, with sales in
of themselves and their families. the right opportunity. In this way excess of $27 billion in 2012.
Without sufficient savings, few the business can be as small or The garage is designated a
historic landmark and is listed
people could risk a new business large as time, and desire, allows.
on the United States National
venture in the 20th century, but For those who aspire to more Register of Historic Places.
today, starting a business is easier. than running a business as a part-
time hobby, the lean start-up path
Micropreneurism is well trodden. Large companies
In the mid-2000s, the notion of a such as Hewlett-Packard and
micropreneur began to emerge. This Indian biotech Biocon both started
was an individual who ran a very in their founders’ garages. Passion
small business, often in addition to was key—with very limited capital,
full-time employment. The concept essential equipment was begged You have to really believe
gained popularity alongside the rise and borrowed; friends and family in yourself and know that, in
of e-commerce, which made it were used as (free) staff; and sleep the worst-case scenario, if it
possible to launch a commercial was sacrificed. The main resources doesn’t work out, you still
website and manage it nights and were time, skill, and tenacity. built something really cool.
weekends. Sales platforms, such as The path is not straightforward, Kevin Rose
those provided by eBay and the however, and requires a deep
Chinese online marketplace Taobao, commitment, often in the face
made it even easier, since they of failure. As Jeff Bezos warned,
dispensed with the need for a “invention requires a long-term
website or payment systems. willingness to be misunderstood.” ■
LIGHTIN
THE FIR
LEADERSHIP AND
HUMAN RESOURCES
G
E
66 INTRODUCTION

G
rowth from a small start-up the most of their talent. In other Mintzberg noted that none of these
to a large multinational words, leadership is about creating roles is exclusive or privileged.
company cannot be capacity in others. It is about Leading well often involves shifting
achieved without leaders who are imagining the future, determining seamlessly between leadership and
passionate about their business strategic direction, and aligning management, and knowing when,
and who are inspirational to their the organization and its people to contextually, each role is most
staff. Leading a business is, at its a particular vision. appropriate to adopt.
core, about harnessing the power Creating the organizational
of people. Leaders and managers capacity for continued success also
One popular business aphorism The very best leaders, as Steve means putting together teams and
claims that “there are no business Jobs said, “put a dent in the managing talent. An effective team
problems, only people problems.” universe.” These leaders are not is a powerful thing. Individuals
Managing people is not easy; every bound by convention; they are able perform better in teams; they are
organization is a collection of to think outside the box, embracing more productive and more
individuals, each with their own one-of-a-kind ideas that disrupt the innovative. Teams can also be self-
philosophies, vulnerabilities, status quo in their favor. In today’s managing; individuals support
drives, strengths, and weaknesses. hypercompetitive markets, the each other and strive not to let the
Effective leadership embraces leaders we celebrate do not only team down. Effective teams require
these differences and creates a outthink, outsmart, and outcompete less supervision and less direction
culture in which people can make their rivals, they disrupt entire than individuals, and performance
industries. They change the game. is guided by group norms, not by
Rarely, though, do leaders one individual’s expectations.
achieve greatness alone. Leaders It is not surprising, then, that
rely on managers. While leadership great organizations recognize the
is about vision, management is value of teams. Google, for example,
Good leadership consists about process, planning, budgeting, designs workstations so that staff
of showing average people structuring, and staffing—tasks can easily collaborate. “Hangout
how to do the work of that help an organization to keep spaces” are adorned with funky
doing what it does. In The furniture and supplied with food to
superior people.
Manager’s Job (1975), Henry allow teams to work and socialize.
J. D. Rockefeller Mintzberg identified three broad Leaders at Google want employees
US industrialist (1839–1937)
management roles: informational to interact; they recognize that by
(managing by information); encouraging teamwork, employees
interpersonal (managing through enjoy greater job satisfaction and
people); and decisional (managing creativity, and as a result,
through action). Importantly, innovation rises. To the benefit of
LIGHTING THE FIRE 67

its staff and its bottom line, Google is littered with examples of leaders The best leaders accept that they
knows that the best workplaces feel who, blinded by success, leapt into are not gods of management, and
like playgrounds—places where ill-conceived initiatives or made that, in fact, occasionally being
people can imagine and invent. “bet-the-farm” decisions that told “no” can be more important
proved disastrous. “Deal fever” than always hearing “yes.”
Satisfaction and challenge can mean that warning signs are
Creating an organizational culture ignored by leaders who feel they Emotionally intelligent
that embraces teamwork and can do no wrong. Successful Creating a culture where this kind
encourages creativity helps leaders, however, know that they of challenge is the norm depends
companies address the perennial must fight against the illusion of upon diversity. In companies
question: “is money the motivator?” invulnerability. They also realize with employees from diverse
Most find the answer is “no.” Higher the dangers of wanting to be liked backgrounds, where gender, race,
pay might encourage an individual or to conform. Great leaders know and age are balanced, the different
to take a new job, it might encourage that they must guard against perspectives mean decisions are
people to move a little faster or to groupthink and “yes-man” more likely to be questioned.
work a little harder, but people soon mentalities in themselves and Perhaps most importantly then,
forget about the money and start to others, because such approaches and as recent research indicates,
focus on other things—such as job leave decisions unchallenged, and the single most important trait for
satisfaction, challenge, and respect allow ill-judged projects to proceed successful leaders is emotional
from managers. Virgin Atlantic without sufficient due diligence. intelligence. In his bestselling book,
airline, for example, is not known as Emotional Intelligence (1995), Daniel
one of the highest payers, but is Goleman describes five domains of
regarded as a great place to work. Emotional Intelligence (EQ): knowing
A strong organizational culture your emotions; managing them;
is, therefore, essential to success. motivating yourself; recognizing
Through tradition, history, and Everyone experiences tough and understanding other people’s
structure, companies build a sense times; it is a measure of your emotions; and managing
of identity—a unique personality determination and dedication relationships. Without EQ, a leader
defined by the characteristic can be technically brilliant and full
how you deal with them.
rituals, beliefs, stories, meanings, of great ideas, but still ineffective.
values, norms, and language that
Lakshmi Mittal This is because a sole trader may
Indian entrepreneur (1950–)
determine the way in which be able to survive on intuition
“things are done around here.” alone, but as soon as someone
Importantly for leaders, else is employed, EQ becomes key.
managing people also means Lighting the fire means keeping
managing oneself. Business history the sparks flying for everyone. ■
68

MANAGERS DO THINGS
RIGHT, LEADERS DO
THE RIGHT
LEADING WELL
THINGS

IN CONTEXT
Leaders develop a vision They conquer in any
FOCUS
for the organization. context—even in the most
Organizational roles turbulent of times.
KEY DATES
1977 US professor Abraham
Zaleznik writes an article
asking “Managers and
Leaders: Are They Different?”
...that managers then
1985 In Leaders: Strategies for Leaders advocate change
implement to make a new,
Taking Charge, Warren Bennis and new approaches...
stable environment.
and Burt Nanus suggest four
leadership strategies to help
leaders do the right things.
1990 US leadership expert
John Kotter publishes What
Leaders Really Do. Managers do things right,
leaders do the right things.
1997 Robert House and Ram
Aditya claim that management
consists of implementing the
vision and direction provided

G
by leaders. ood managers do not 1985, “managers do things right;
necessarily make good leaders do the right thing.” Leaders
2005 Warren Bennis publishes leaders, and good leaders “conquer” their surroundings—the
Reinventing Leadership: can be poor managers. This is competitive environment—through
Strategies to Empower because the two jobs are not vision and strategy, and it is the
the Organization. the same, despite sharing similar role of managers to then implement
characteristics—principally the these strategies effectively.
need to drive human (and therefore Effective management is crucial
organizational) capacity. As Warren to organizational success. It takes
Bennis and Burt Nanus noted in care of processes, planning,
LIGHTING THE FIRE 69
See also: The value of teams 70–71 ■ Gods of management 76–77 ■ Effective leadership 78–79 ■ Organizing teams and
talent 80–85 ■ Develop emotional intelligence 110–11 ■ Mintzberg’s management roles 112–13

budgeting, structure, and staffing; regarded leaders—such as Jack


tasks that help an organization to Welch of General Electric, Steve
keep doing what it does. Without Jobs of Apple, and Jill Abramson
management, no matter how well of The New York Times—have
led, an organization would been well documented.
disintegrate into disorganized Leaders have to be brave in
chaos. However, management the face of uncertainty, standing
is not leadership—it will not lead firmly behind their vision for the
the company in new directions. company. They need to hold staff
accountable when things do not
Decisive leadership go as planned, and make difficult
In 1990, John Kotter argued that decisions about who to hire or
leadership is about dealing with fire in order to develop an
change and developing a vision organizational culture capable
for the organization, often within of achieving their strategic vision.
turbulent times. Leaders then
communicate their vision to the The next generation
rest of the company, and motivate Truly great leaders know that they Jill Abramson was the first woman
staff—especially managers—to will not be around forever, and one of to become executive editor of The New
act in ways that will bring about their most important tasks is to hire, York Times. She found that unpopularity
the required change. Leadership train, and nurture their successor. came “with the territory,” as Times’
chairman Arthur Sulzberger had warned.
is about setting the agenda and They lead well by making sure
empowering people to produce somebody is ready and waiting to
useful change. take over from them. Nine years It is common practice in many
“Leading well” does not always before his retirement, General companies to privilege leadership
mean making people happy; Electric CEO Jack Welch said, “from over management, but it is unwise.
likability and success rarely go now on, choosing my successor is Great organizations value both:
together. The direct, tough, and the most important decision I’ll leaders who can spot opportunities,
sometimes even rude leadership make. It occupies a considerable and managers who can make those
styles of some of the most highly amount of thought almost every day.” opportunities a reality. ■

Blending leadership and management


Inspirational leadership skills immediately. When he first took
are the hallmark of Portuguese over Chelsea Football Club in
Leadership is lifting a person’s soccer coach José Mourinho. London, England, he called a
His teams won two European team meeting and urged any
vision to high sights, raising Cups and 14 trophies in eight naysayers to speak up, or stay
their performance to a higher years, elevating him to sit silent from then on. He learned
standard, building a personality alongside some of the greats his management skills from
beyond its normal limitations. of soccer management. Bobby Robson and Louis van
Peter Drucker Successful sports teams, Gaal, for whom he worked as
US management consultant like great organizations, are an assistant coach and translator
(1909–2005) a blend of good management at the Spanish soccer team FC
and good leadership, and Barcelona. Under their guidance
Mourinho achieves the rare he also learned how to study
feat of excelling in both. As opponents, form strategies, and
a leader, he makes his mark build strong, winning teams.
70

NONE OF US
IS AS SMART
AS ALL OF US
THE VALUE OF TEAMS

IN CONTEXT
Teams help to
FOCUS Human beings generate a sense
Teamwork like to belong. of place and
counter anomie.
KEY DATES
1924–1932 The Hawthorne
Studies, conducted by
Elton Mayo, highlight the
importance of groups in None of us
affecting the behavior is as smart
of individuals at work. as all of us.
1930s The Human Relations
Movement is sparked by Mayo’s
work. It proposes that worker
satisfaction and productivity Organizations Successful teams
depend on careful management can be thought of provide an
as a collection environment
and consideration of groups. of teams. for new ideas.
1940s As a result of Abraham
Maslow’s findings, and
the earlier work of Mayo,
businesses begin to recognize

W
e might complain about and familiarity of belonging to a
the value of teamwork. routine and familiarity, group helps people to avoid anomie,
21st century Workplace but research shows and find security and purpose.
design moves from the solo that human beings have an innate The existence of groups serves
workspaces and closed offices need for some degree of stability. two purposes. Organizations, and
of the 20th century to open Without rules, norms, values, and the groups within them, can be
layouts that encourage expectations, people begin to feel seen as an expression of the human
collaborative working. anxious, rootless, and confused. desire to belong. As psychologist
This is termed “anomie,” and it is Abraham Maslow identified in his
the reason that humans often self- 1943 paper “A Theory of Human
organize into groups. The routine Motivation”, groups give us a sense
LIGHTING THE FIRE 71
See also: Creativity and invention 72–73 ■ Organizing teams and talent 80–85 ■ Make the most of your talent 86–87 ■

Organizational culture 104–09 ■ Avoid groupthink 114 ■ The value of diversity 115

of belonging. Maslow believed


that there is a hierarchy of human
needs; once we have met the most
basic of needs—the physiological
ones, such as hunger and thirst—
we progress to the next: security.
When these needs are satisfied,
we move to the third basic need:
a sense of belonging. Once this
is met, we will proceed toward
increasing self-esteem through
achievement, and ultimately
toward self-actualization, by using
our inner talents with creativity.
When Maslow’s theory is will increase an individual’s security Cisco Systems uses workspaces that
applied to the workplace, working and encourage collaborative, can be transformed from small groups
in groups and gaining a sense of creative, work—as US management of work pods to large open spaces for
conferences. Cisco aims to be flexible for
belonging make employees more expert Ken Blanchard said, “none of
connectivity and a sense of community.
effective. With the need to belong us is as smart as all of us.” In turn,
already addressed, individuals are commitment toward a project
able to focus on other things, such creates ties that strengthen the bond the “Connected Workplace”, which
as a desire for achievement and the between individuals and, ultimately, offers employees great flexibility in
practicing of inner talents. In this the company’s communal purpose. working practice and environment,
way, the movement through the while ensuring that they always
stages of satisfying needs can Places to belong feel part of the Cisco community.
benefit a company. Free from Great organizations recognize the Business success is rarely
anomie, groups are places where value of teams and the importance achieved through individual genius,
human beings, and therefore ideas, of the working environment. Cisco and the greatest leaders are those
can flourish. Teams that are Systems, the Internet infrastructure who recognize the value of
carefully chosen and supervised company, has created what it calls maximizing talent through teams. ■

Abraham Maslow The American psychologist you can be.” Contrary to many
Abraham Maslow was born in of his peers, Maslow focused on
1908. He grew up in Brooklyn, the positive side of mental health.
New York, and earned a degree, The hierarchy of human needs,
masters, and PhD in psychology which Maslow outlined in “A
from the University of Wisconsin. Theory of Human Motivation”,
Maslow started his career as a remains influential even today
teacher, working at Brooklyn in fields as diverse as social
College from 1937 to 1951, after work and management theory.
which he became chair of the
psychology department at Key works
Brandeis University, US. Here he
met Kurt Goldstein, the originator 1943 “A Theory of Human
of the idea of self-actualization, Motivation”
and Maslow became fascinated 1954 Motivation and Personality
with the path of human 1962 Toward a Psychology
development toward “being all of Being
72

INNOVATION MUST BE
INVASIVE AND PERPETUAL:
EVERYONE, EVERYWHERE,
ALL OF THE TIME
CREATIVITY AND INVENTION

O
ur fondest childhood Like the playgrounds of our
IN CONTEXT memories are often those childhoods though, companies that
that involve the freedom embrace creativity and innovation
FOCUS
of play, and the unbridled use of as “invasive and perpetual”—as
Creativity
imagination to create and live out consultant Stephen Shapiro puts
KEY DATES fantasies. As human beings we it—are exciting places to be.
17th century Polish poet never lose the inner joy of creativity, Google, Facebook, and Procter &
Maciej Kazimierz Sarbiewski but it tends to be suppresed by the Gamble, for example, are renowned
applies the word “creativity” responsibilities of adult life—we for hiring and nurturing creative
to human activity. For more trade the playground for the office. people, and for rewarding
than a century and a half, the
idea of human creativity is
resisted—“creation” is
reserved for describing The desire to create
God’s creative act. As children, creativity
and invent is deeply
comes naturally...
1970s Influenced by the work embedded in all of us.
of psychologists Abraham
Maslow and Frederick
Herzberg on the subject of
motivation, businesses begin
to design jobs that allow For businesses,
employees space for establishing a climate ...but for many adults,
of perpetual creativity it has to be
creative freedom. worked at.
motivates staff...
2010 IBM lists creativity as
the most sought-after trait
in business leaders.
2013 Bruce Nussbaum’s book
Creative Intelligence states ...and improves the company’s
that creativity is the greatest competitiveness.
source of economic value.
LIGHTING THE FIRE 73
See also: Stand out in the market 28–31 ■ Gaining an edge 32–39 ■ Thinking
outside the box 88–89 ■ Changing the game 92–99

imagination and invention. They often work harder, longer, and more
attract thousands of applicants as productively, yielding innovative
a result. Moreover, creativity is not solutions to problems, new cost-
only a potential source for ideas saving processes, or profitable
that can yield economic value, but new products.
is a vital asset for individuals and So significant is the competitive
companies operating in increasingly edge that can be gained that a 2010
changeable global markets. IBM survey listed creativity as the
most sought-after trait in leaders.
Defining creativity When it was announced that the
Creativity involves the generation Creative Director of Mulberry, Emma Hill
of ideas, alternatives, or possibilities, Emma Hill—who was largely
and the consideration of situations credited with the fashion label’s UK-born fashion designer
or problems in novel ways. Invention renaissance—was stepping down Emma Hill studied at the
Wimbledon School of Art in
is the practical application of in 2013, the company’s shares fell
1989 before graduating from
creative thought. When successfully by more than 9 percent. As Steve Ravensbourne College of
realized, creativity and invention Jobs proved at Apple, “thinking Design and Communication
are highly motivating. They allow differently” is not just cool or in 1992. Starting her fashion
us to combine our innate desire for quirky—it matters to staff, to career at luxury brand
autonomy, purpose, and mastery. customers, and to investors. Burberry, Hill also worked for
They also produce a sense of UK retailer Marks & Spencer,
achievement, which is a key element Fostering creativity US fashion designer Marc
in what Abraham Maslow described The challenge is for companies to Jacobs, and US retailer Gap,
as the “Higher Order Needs” of balance creativity with financial before moving to Mulberry—
motivation—the factors that allow us prudence. Unbridled creativity which has stores in Europe,
to feel value and self-actualization. rarely leads to commercial success, US, Asia, and Australia—as
For businesses, establishing yet businesses are required to Creative Director in 2007.
a climate of creativity has the dual make profits in order to survive. At Mulberry, Hill’s creative
talent for designing handbags
benefit of enhancing employee For Mulberry, it was a clash of
carried by the likes of model
satisfaction and improving its these values that resulted in Hill’s
Kate Moss and musician Lana
competitiveness. Excited by the departure. When the joined Del Rey resulted in waiting
pursuit of invention, employees will company in 2007, Hill was lists for purchases. Thanks
responsible for some of the label’s to her expansion of the brand
biggest hits—notably its Alexa and into small leather goods
Bayswater handbags—and (such as brightly colored card
presided over a period of significant holders) in order to appeal
innovation and growth. In 2013 to the more price-conscious
When you innovate, you’ve though, with sales falling, the end of the market, the brand
brand’s management decided it enjoyed stellar growth. When
got to be prepared for she joined Mulberry the
everyone telling you needed a new creative direction—
even the most creative brands company’s shares had stood at
you’re nuts. $1.78 (111 pence); at the time
feel the need for reinvention.
Larry Ellison As creative organizations know, of her departure in 2013 they
US co-founder, Oracle Corp. (1944–) were worth nearly 10 times as
to the benefit of their staff and
much. In 2010, thanks to Emma
the bottom line, creativity and Hill’s work, Mulberry won the
invention—by everyone, everywhere, “Best Designer Brand” prize at
and all of the time—are vital the British Fashion Awards.
ingredients for business success. ■
74

DISSENT ADDS SPICE,


SPIRIT, AND AN
INVIGORATING
BEWARE THE YES-MEN
QUALITY

F
or many employees,
IN CONTEXT working within an
If managers organization means forever
FOCUS
are only brought saying “yes.” Fearful of losing their
Behavioral management
good news... jobs, eager to please, and ambitious
KEY DATES for promotion, subordinates are
1992 Indian economist Abhijit often happy to pass on good news,
V Banerjee looks at how but reluctant to deliver bad news.
decision makers refer to the This might be good for their
choices made by previous manager’s ego but it can be
decision makers for guidance, damaging for the business—if
...they are forced to make bad news is hidden, managers lack
in his book A Simple Model of
decisions based on incomplete vital information and can make
Herd Behavior. or inaccurate information. bad decisions as a consequence.
1993 US economist Canice This can happen at the highest
Prendergast writes A Theory of levels with catastrophic results.
Yes Men, identifying the A Financial Services Report in
tendency of subordinates to 2012 on the Royal Bank of Scotland
agree with their superiors (RBS) suggested that the bank’s
as a “market failure.” failure in 2008 was, in part, due to
Leaders should beware
“the yes-men” “a lack of effective challenge by the
1997 US psycholinguistics board and senior managers to the
expert Suzette Elgin writes and embrace constructive
conflict in their companies. CEO’s proposals, resulting in risks
How to Disagree without Being being overlooked and strategic
Disagreeable. mistakes being made.”
2000s Leadership theory
encourages leaders to embrace A tolerant business culture
constructive conflict as a Being an effective leader involves
healthy, and necessary, part recognizing that it is impossible to
of the business environment. Sometimes “no” be right all of the time. Seeking,
is ultimately more and graciously accepting, critical
useful than “yes.” feedback from trusted colleagues
can help maintain a balanced
perspective. The challenge for
LIGHTING THE FIRE 75
See also: The value of teams 70–71 ■ Hubris and nemesis 100–03 ■ Effective leadership 78–79 ■ Ignoring the herd 146–49
■ Learning from failure 164–65 ■ Avoiding complacency 194–201 ■ Creating an ethical culture 224–27

are those who are courageous


and caring enough to tell the truth,
no matter how bad it might be.
For employees, delivering bad
news is a skill in itself. It is better
In an organization where if the news comes with a proposed
innovation happens, very often solution attached, and with causes
people ignore orders. of the problem acknowledged rather
Robert Sutton than ignored. The news should be
US professor of management delivered promptly; the sooner a
problem is identified, the sooner
it can be solved, and the better a
manager’s reaction is likely to be.

Testing your ideas


Jean Paul Getty, founder of the Saying yes to every task and giving
leaders is to create an environment Getty Oil Company, recognized only good news to a leader might result
where bad news is tolerated, and the value of outspoken employees, in popularity, but will soon overload
even encouraged. If leaders react to claiming that “dissent adds spice, the employee and risks blinded
decision making by the leader.
unwelcome news without spirit, and an invigorating quality.”
screaming or recrimination, staff is Ken Olsen, founder of Digital
more likely to be confident about Equipment Corporation, built Management teams that can
delivering it. Good leaders tend to dissent into company culture, using challenge each other’s thinking
address the problem, rather than debate and conflict resolution as the develop a richer understanding of
simply apportioning blame, helping primary ways of decision making. strategic options, and, ultimately,
to prevent a repeat scenario. Jack Welch, CEO of General Electric make better decisions. The best
An important way of preventing (GE), encouraged no-holds-barred business leaders attempt to
a yes-men culture is to create a debates, saying, “if the idea can’t harness criticism and debate.
culture of collective responsibility. survive a spirited argument, the If everybody is saying “yes,”
Often, the most valuable employees marketplace will surely kill it.” something is seriously wrong. ■

Jean Paul Getty Jean Paul Getty was born in buy several oil companies and
Minneapolis in 1892. His father build these into a pyramid of
was a lawyer who moved into the corporations, with the Getty Oil
oil business in 1903. Getty studied Company at the top. In 1949, he
at universities in the US and UK purchased a 60-year concession
before joining his father’s in a tract of land between Saudi
business, The Minnehoma Oil Arabia and Kuwait that was
Company. He set out to make a thought to be barren of any oil.
million dollars within his first two His company struck oil in
years, and did so by buying and massive quantities in 1953,
selling oil leases. making Getty a billionaire. He
Because Getty married five died in 1976 at the age of 83.
times, his disapproving father
bequeathed him only $500,000 Key works
from his $10-million estate.
Undeterred, Getty combined this 1953 My Life and Fortunes
with his own amassed earnings to 1965 How to be Rich
76

NO GREAT MANAGER
OR LEADER EVER
FELL FROM
GODS OF MANAGEMENT
HEAVEN

I
n his influential 1978 book who have the expertise to solve
IN CONTEXT Gods of Management, Charles problems. In Dionysus’s “existential
Handy used the allegory of the culture,” the organization exists to
FOCUS
gods of ancient Greece to describe support the individual’s needs.
Organizational dynamics
the nature of organizations. Handy Handy’s typology provided an
KEY DATES proposed that four management entirely new and original method
20th century Typologies styles could be identified, a for managers to analyze a
emerge to help management combination of which are likely to company’s dynamics, and to
thinkers sort organizations into be present in every organization. understand culturally embedded
identifiable classifications, and Zeus represents the “club culture,” behaviors, biases, and beliefs.
individuals into distinct types. in which relationships with the However, it soon became clear that
What motivates each person is leader are more important than because organizations are vast and
thought to be determined by formal titles or positions. Apollo’s diverse entities, and are seldom
“role culture” is defined by static, organizational behavior
their “type.”
functions, divisions, rules, and evolves over time. Under pressure
1978 Charles Handy’s Gods rationality. In Athena’s “task externally and internally, most
of Management proposes culture,” power lies within teams companies operate in a constant
that understanding which
classification an organization
fits into is key to understanding
the type of people it contains Handy’s Gods of
and, thus, the way to lead them. ...but organizations are
Management reveals
complex at institutional
different types of
1989 In The Age of Unreason, organizational dynamic...
and the individual level.
Handy puts forward the theory
of the Shamrock Organization.
21st century Management
thinking increasingly
acknowledges that stylistic Therfore, typologies can Effective leadership requires
typologies are just one of many still be helpful for God-like omniscience, but
methods of understanding and understanding organizational no great leader ever fell
managing companies and staff. and individual complexity. from heaven.
LIGHTING THE FIRE 77
See also: Leading well 68–69 ■ Effective leadership 78–79 ■ Organizational
culture 104–09 ■ Mintzberg’s management roles 112–13
Charles Handy
Professor Charles Handy, born
in 1932, is Britain’s best-
known management guru.
After graduating from Oxford
University he joined the
Massachusetts Institute of
Technology in 1965, moving
Zeus— Apollo— to the London Business School
Club Culture Role Culture
As the ruler of the Greek gods, Apollo was the god of order and
(LBS) in 1967 to run the only
Zeus was at the center of power and rules. Successful in times of stability, Sloan School of Management
influence. Club cultures are built on role cultures tend to flounder when program outside the USA.
affinity; proximity to the center of rapid change is required. Insurance Handy’s challenging ideas,
the club reflects an individual’s companies are among those articulate style, and use of
standing within it. Investment typically led along Apollonian provocative imagery—such as
banks often have dominant principles.
club cultures. his text The Empty Raincoat,
a critique of the “impersonal
mechanics of business
organizations”—set him apart
Charles Handy’s from his contemporaries.
Gods of Handy sees himself as a social
Management philosopher rather than
management guru—his
writings, he believes, are
commentaries rather than
Athena— Dionysus— manuals for success. His
Task Culture Person Culture opinions have influenced
Athena, the goddess of wisdom, Dionysus, the god of wine, stood
was a problem-solver. Task cultures for individual freedom. In person business thinking for decades.
thrive where innovation is required, cultures, professional opinion is
but struggle with routine. privileged and management is seen Key works
Advertising agencies and as an unnecessary burden.
consultancies often display Professional service companies, 1976 Understanding
task cultures. such as legal firms, mirror Organizations
Dionysian cultures.
1978 Gods of Management 
1994 The Empty Raincoat

state of flux—they adapt and year may not motivate them the The job of leadership is to align these
change in unforeseen, unplanned, next. When a company consists of a differences toward a common,
and unpredictable ways. staff of thousands, it is clear that organizational goal.
people, and therefore organizations, Organizational dynamics are
Accounting for complexity are more complex than the stylistic important because people matter.
Organizational complexity is often Gods of Management suggest. Typologies only take a leader so far.
measured by the number of Handy later wrote of the Leaders must recognize that each
countries a company operates in, Shamrock Organization—a flexible employee perceives the company
or the number of brands under a organization made of core employees, differently, and has unique drivers
manager’s control. Such peripheral outsourced staff, and an (and barriers) to effectiveness. As
institutional complexity is not external, flexible work force. Each US businessman Tom Northup
insignificant; it pales though category of worker has a different said, great leaders do not “fall from
compared to individual complexity. commitment to the organization, a heaven,” but God-like omniscience
For example, something novel that different understanding of its vision, is a useful—albeit unreachable—
motivated a member of staff one and their own motivations for work. goal to strive for. ■
78

A LEADER IS ONE WHO


KNOWS THE WAY,
GOES THE WAY,
AND SHOWS THE WAY
EFFECTIVE LEADERSHIP

IN CONTEXT
FOCUS Effective leadership A leader’s charisma alone
Leadership builds capacity is not enough. Effective
in others. leadership requires the
KEY DATES establishment of...
1520s Italian diplomat Niccolò
Macchiavelli’s The Prince
discusses the perils of
leadership in political life.
1916 French executive Henri
Fayol’s work General and
Industrial Management defines Effective leadership ...integrity, trust,
a leader as someone who requires action from empathy, and
“should possess and infuse the leader, not just empowerment.
into those around him courage brainpower.
to accept responsibility.”
1950s and 60s The
authoritative “Command and
Control” school of management

F
or centuries scholars have example, Henry Ford was renowned
becomes popular. Charismatic attempted to determine for his charismatic leadership
leaders dominate organizations the definitive styles, style—there is a danger that
through force of personality. characteristics, and personality rhetoric can exceed reality. Rather
1980s and 90s Leadership traits of great leaders. Yet, despite than empowering their employees,
thinkers, such as US professor thousands of studies, effective charismatic leaders often
Warren Bennis, encourage leadership remains a subject of micromanage tasks and prevent
debate. However, one common their staff from gaining a sense of
a leadership style based on
theme is that effective leadership achievement from their work.
integrity, trust, and the ability
requires action, not just intellect. Charismatic leaders are often
to build an organization’s
Leaders cannot simply rely on heralded as champions of
capacity for change. charisma. While charismatic organizational success, but that
leadership has its place—for charm can be a blessing and
LIGHTING THE FIRE 79
See also: Leading well 68–69 ■ Gods of management 76–77 ■ Changing the game 92–99 ■ Develop emotional
intelligence 110–11 ■ Mintzberg’s management roles 112–13

Renault and Nissan. Within a


year of his appointment in 1999, Carlos Ghosn
Ghosn returned Nissan to
profitability and was credited with Born in 1954, Carlos Ghosn,
a French-Lebanese Brazilian,
saving the company from collapse.
started his career with
This proved to be one of the most
Michelin, moved to Renault
dramatic turnarounds in modern in 1996, and was appointed
business history. the CEO of Nissan in 1999
Among the leadership traits following Renault’s purchase
that contribute to Ghosn’s of a substantial stake in the
effectiveness is his belief that ailing Japanese company. At
leadership is learned “by doing.” the time, Nissan’s debts had
On joining Nissan as CEO he reached $20 billion and only
walked around every factory, three of its 48 car models were
meeting and shaking hands with generating a profit. Promising
every employee. To this day he to resign if the company did
Actively participating in business remains a common sight on factory not reach profitability by the
life, from the boardroom to the factory floors. Integrity and trust, Ghosn end of the year, he defied
floor, is vital for effective leadership. believes, are built when leaders are Japanese business etiquette,
Carlos Ghosn visited car assembly lines cut 21,000 jobs, and closed
seen to be willing to “get their
to build integrity and trust with staff. unprofitable domestic plants.
hands dirty” and remain in touch Within three years Nissan
with the factory floor of the business. became one of the most
a curse—the void created by the profitable automakers, with
departure of a charismatic leader Empowering staff operating margins of higher
can be hard to fill. It may flatter the Leaders must communicate a strong than 9 percent—more than
ego to be proclaimed a hero, but vision but, above all, they must twice the industry average.
great leaders know that success empower staff to make decisions Having presided over what
involves building long-term themselves. In large, diverse has been described as one of
organizational capacity that will organizations a leader cannot, and the greatest turnarounds in
outlast their own tenure. should not, make all the decisions— business history, Ghosn was
helping others to understand the named “the hardest-working
Keys to effectiveness necessity for change, and giving man in the global car business”
To be effective, a leader must be them the tools to manage that by Forbes magazine in 2011.
confident and secure, and at the change is key to the leader’s role.
same time open and empathetic. The success of Nissan is also
Effective leadership involves the attributed to Ghosn’s ability to
ability to create capacity in others manage cross-cultural teams.
through the process of interacting, Leaders, Ghosn suggests, require
informing, listening, developing, the ability to listen and to empathize,
and trust-forming. Credibility of not just with employees from their The universe rewards
the leader is achieved through own countries, but also with people action, not thought.
collaboration, not domination. from different countries and cultures.
Russell Bishop
Central to effective leadership is Ghosn’s insights illustrate that US executive coach
empowerment—the art of enabling effective leadership requires putting
other people to get things done. vision into action. Achieving this
One of the most effective requires more than just rhetoric:
contemporary business leaders is effective leaders must “talk the talk”
Carlos Ghosn, CEO of car makers and “walk the walk.” ■
80

TEAMWORK
IS THE FUEL THAT
ALLOWS COMMON PEOPLE
TO ATTAIN UNCOMMON
RESULTS
ORGANIZING TEAMS AND TALENT
81
82 ORGANIZING TEAMS AND TALENT

E
ffective teams are the key
IN CONTEXT to great organizations.
This is especially true in
FOCUS
business, where teamwork merges
Teamwork
individual talent into something
KEY DATES greater than the sum of its parts, Members of a team seek out
1965 US professor Bruce enabling “common people to attain certain roles and they perform
Tuckman proposes that teams uncommon results” in the words of most effectively in the ones
go through five stages: US industrialist Andrew Carnegie. that are most natural to them.
forming, storming, norming, Manufacturing companies in Meredith Belbin
performing, and adjourning. Europe and the US began to explore
the idea of teamwork in the 1960s
1981 British management and 1970s, in response to the
theorist Meredith Belbin success of Japanese team-based
writes Management Teams: working methods such as kaizen
Why they succeed or fail, (staff are responsible for a company’s
describing nine distinct continuous improvement) and in profit, and improved job
roles that are essential to “quality circles” (groups of staff satisfaction. In Honeywell’s
team success. tasked with improving quality). In commercial flight division in
the 1980s, as many companies Minneapolis, for example, teamwork
1992 Peter Drucker describes adopted “total quality management” was credited with achieving an
three kinds of team in “There’s (organization-wide quality), 80 percent market share in flight
more than one kind of team,” teamwork began to spread beyond and navigation systems—and for
published in The Wall its genesis in manufacturing. generating profits that were
Street Journal. Today, it would be rare to find an 200 percent higher than projections.
1993 Jon Katzenbach and organization, of any type or size, Teams succeed because they
Douglas Smith write The that did not value teamwork. provide an environment where
Wisdom of Teams, claiming weaknesses can be balanced out
that forming a team leads to The benefits of teamwork and individual strengths multiplied.
greater success than Teamwork has been credited with Teams also safeguard against
individual efforts. bringing about substantial individual shortcomings, such as
reductions in absenteeism, lower underperformance and personal
staff turnover, significant increases agendas. Projects are more likely to
stay on track when peers support
Meredith Belbin consultant. Belbin studied each other and review each other’s
teamwork in the UK, US, and and the team’s work. Teams also
Meredith Belbin was born in Australia, and in 1981 wrote create an environment that most
Beckenham, UK, in 1926. He Management Teams: Why they people enjoy. The security of a group
earned a degree in Classics at succeed or fail, which became makes each individual feel less
the University of Cambridge, and one of the world’s best-selling exposed and, in turn, more likely to
then a doctorate in psychology, management books. Belbin has take risks, be more creative, and
during which he did research on advised the US government, the therefore be better able to perform.
the importance of teamwork. He European Union, companies and
then took a research fellowship public service bodies. Storming and norming
at Cranfield—where he studied Effective teams take time to
the benefits of ergonomics Key works
develop. It is rare that a group of
(designing tools and systems
1981 Management Teams: Why
people can come together and
that fit best with people’s needs)
and improving efficiency in they succeed or fail begin to perform immediately; most
production lines—before 1993 Team Roles At Work teams go through a series of stages
becoming a management 2000 Beyond the Team before effectiveness is achieved.
Bruce Tuckman, a US professor of
LIGHTING THE FIRE 83
See also: Leading well 68–69 ■ The value of teams 70–71 ■ Effective leadership 78–79 ■ Make the most of your talent
86–87 ■ Organizational culture 104–09 ■ Avoid groupthink 114 ■ The value of diversity 115 ■ Kaizen 302–09

educational psychology, described work because the most effective setting the right tone is essential.
these stages as forming, storming, teams are those where members The tone should not be too
norming, performing, and trust one another, share a strong casual—teams perform better
adjourning. During forming, the sense of group identity, and have when challenged, so a sense of
group comes together, and confidence in their effectiveness urgency needs to be imparted.
members get to know one other. It as a team. The team should agree on clear
then moves into a storming stage, rules for group behavior and norms,
where members challenge each Effective team building and meet often, both formally and
other for coveted group roles, and In 2005, US researchers Jon informally. If possible, the team
group processes begin to emerge Katzenbach and Douglas Smith should be allowed to enjoy some
through trial and error. The middle identified a series of factors that early success; a few easy wins
stage—norming—marks a period seem to be essential for effective early on has been found to boost
of calm, where agreement is teamwork. First, team members performance later. Likewise,
reached on roles, processes, and must be chosen for their skills, not the group—and its individual
group norms. By the fourth stage, their personality. The team then members—needs to be lavished
members have become familiar needs to get off to a good start; with praise. Continuing motivation ❯❯
with each other, with their roles,
and with the processes involved.
At this stage, team performance
hits its most effective level. Once
their work is done, the group moves Mutual support
to adjourning, or disbanding. encourages team
Businesses are eager for teams members to
to move quickly through the early reach their
stages, reaching “performing” as potential.
soon as possible. This is why
companies invest so much in team- Teams produce Teams provide
building activities, where teams more creative an environment
face and solve artificial challenges, solutions to to manage
problems. talent.
often in a different environment.
Many companies also use the
architecture of their building to Effective teams
encourage team interaction. For provide synergy.
example, at Pixar, the movie 2+2=5
animation studio based in
California, the cafeteria, meeting
rooms, employee mail boxes, and Individual Teams provide
bathrooms are located around a shortcomings security, so
centralized atrium designed for are balanced members feel free
collaborative working. The building out in a team. to take risks.
design and layout encourages Teams
members of teams to meet and establish
interact with one another, even positive group
when they are based in different norms that
departments within the company. encourage
Research has shown that team- openness and
building activities and collaborative flexibility.
work spaces help to improve team
84 ORGANIZING TEAMS AND TALENT
is encouraged by new challenges,
Belbin Team Inventory since they help to keep the work
fresh and engaging.
Team role Talent Weakness
Successful roles
Plant Individuals offer different talents
Creative, unconventional Not good at managing and attributes, and these need to
thinker who excels at (or communicating with) be taken into account when putting
solving problems less creative people
together teams. UK management
theorist Meredith Belbin claims
Resource there are nine distinct roles within
investigator Communicative extrovert a team that are essential to team
who develops contacts and Loses interest once initial
explores opportunities enthusiasm has passed success, and that the key to a well-
organized team is balance. For
example, Belbin found that teams
Coordinator without Plants (creative,
Mature, confident person unconventional thinkers) struggle
who is able to clarify goals Can be manipulative and
and promote decision appear aloof
to come up with ideas; but if there
making are too many Plants, idea generation
starts to take precedence over
Shaper action. Similarly, if there is no
Dynamic, outgoing, highly Shaper (a dynamic, driven person
strung person who will Prone to provocation and who pushes the group toward
challenge, pressure, and short-lived bursts of temper
find ways around obstacles decisions), teams lack drive and
direction. But in a team with too
many Shapers, arguments occur
Monitor/
evaluator frequently and will lower morale.
Sober, strategic, discerning
Lacks drive and ability to Now an established business
person able to see and
inspire others
judge options objectively tool, the Belbin Team Inventory is
frequently used by companies to
maximize team effectiveness.
Teamworker
However, many companies make the
Social, mild, perceptive and
accommodating, this
Indecisive in crunch mistake of using it after teams have
situations been formed; to work successfully, it
teamworker averts friction
must be used before creating a team.
Implementer Managing talent
Disciplined, reliable,
Somewhat inflexible, slow Sir Alex Ferguson, former manager
conservative, efficient
to respond to new
person who can turn ideas of Manchester United, one of the
possibilities
into practical actions
world’s best-known soccer teams,
is a master of building winning
Completer/ teams over and again, and his
finisher Painstaking, conscientious
Inclined to worry unduly, methods can be applied to the
person who is always able
to meet deadlines
reluctant to delegate business environment. His team
was bonded by a strong sense of
shared mission—a desire to win.
Specialist Players were cohesive on the field,
Single-minded, dedicated
self-starter who brings Contributes only on because Ferguson demanded
knowledge or technical a narrow front cohesiveness off the field. An
skills that are in rare supply exceptional team culture ran
through the veins of every player
LIGHTING THE FIRE 85
because talented people often contributions. In The Wisdom
resist being managed, and it of Teams, Jon Katzenbach and
can be difficult to find challenges Douglas Smith defined a team as
that keep them sufficiently “a small number of people with
motivated, while at the same complementary skills who are
Teams develop direction, time aligned with organizational committed to a common purpose,
momentum, and commitment goals. However, teams provide set of performance goals, and
by working to shape a an environment where talent can approach, for which they hold
meaningful purpose. thrive. By giving talented staff themselves mutually accountable.”
Jon R. Katzenbach teams to manage, or—although No individual is responsible for
Douglas K. Smith risky—grouping talent together success or failure, because no one
in teams, it is possible to stretch acts alone. Teamwork encourages
even the most gifted member of listening, responding constructively
staff. Teams provide a framework to the views of others, providing
and value system to which all support, and recognizing the
members, however skilled or interests, skills, and achievements
talented, must adhere. of the other team members.
and every staff member. Ferguson Most successful teams are
realized the value of positive group Collective products formed in response to a perceived
norms. He was, for example, one Businesses, like sports teams, threat or opportunity. When these
of the first managers to ban the face performance challenges for arise, the role of senior leaders is to
consumption of alcohol. Moreover, which teams are a powerful organize teams with clear purpose,
alongside a host of team-building solution. This is because teams balanced membership, disciplined
activities—quizzes on the team are not simply a group of people procedures, and strong bonds,
bus, for example—he demanded who work together; they are judged while giving them enough
ferocious loyalty. Players could not by individual performance, flexibility to develop their own
expect unfailing public support from but by their “collective work timing and approach. By doing so,
Ferguson and the team. Equally, products.” These are the pieces leaders create environments where
players were expected to observe a of work—which might be products, individuals—and therefore the
code of media silence in regard to surveys, or experiments—that organization—are able to succeed
teammates. Anyone breaching this come about as a result of joint and flourish. ■
team ethic was quickly ousted.
Team management often
involves dealing with large egos
and highly talented people. Ferguson
recognized that it was folly to rein
in significant talent—players Eric
Cantona and Cristiano Ronaldo
were both encouraged to express
their soccer-playing flair—but he
also transferred highly skilled
players who felt themselves to be
more important than the team.
Talent management is a source
of frustration for many executives,

Flying geese demonstrate the power


of teamwork. By flying together, each
one reduces air resistance for the ones
behind. They rotate leadership and
“talk” continuously by honking.
86

LEADERS ALLOW
GREAT PEOPLE TO
DO THE WORK THEY
WERE BORN TO
MAKE THE MOST OF YOUR TALENT
DO
S
taff in many organizations 2012 Global Work force Study only
IN CONTEXT reports feeling undervalued, 35 percent of employees reported
overstretched, and forced to engagement with their jobs,
FOCUS
work in areas beyond its competence. revealing a disconnect with what
Work-force effectiveness
Because of this they feel ineffective employers want and what employees
KEY DATES —they want to work better, but feel are willing to give. Studies have
1959 US psychologist that the organization is constraining found engaged employees—those
Frederick Herzberg defines them. The best companies allow devoted to their jobs and committed
factors in job satisfaction in his staff to build careers around what to the company’s values—are
study The Motivation to Work. they excel at—in leadership expert significantly more productive,
Warren Bennis’s words “to do the provide better customer service,
1960 In his book The Human work they were born to do.” and outperform those who are less
Side of Enterprise, US Contemporary organizations, engaged. But many companies treat
academic Douglas McGregor faced with dynamic, fast-moving staff as little more than pieces on
proposes Theory Y, urging markets, favor employees who are an organizational chessboard that
companies to adopt a flexible and multiskilled. Yet in a can be moved around at will.
participatory management
style that motivates workers to
strive to achieve their potential.
1989 US management guru Effective people create effective organizations.
Rosabeth Moss Kanter’s
When Giants Learn to Dance
suggests that employees are
most productive when
empowered to make their Great leaders allow great people
own decisions. to excel at what they do well.

They value the factory floor as much as the shareholders.


LIGHTING THE FIRE 87
See also: Leading well 68–69 ■ Creativity and invention 72–73 ■ Effective leadership 78–79 ■ Organizing teams and talent
80–85 ■ Is money the motivator? 90–91

underachievement. Consequently, up to the shareholders. Companies


equipping employees with the tools that value effectiveness over
to develop effective habits can lead to volume, and performance over
more effective performance, happier, presenteeism (when staff works
more productive staff, and, in turn, despite illness, instead of taking
improve a company’s results. sick leave) often find themselves
at the top of best-employer lists.
Working better, not harder Leaders of these companies realize
Google, borrowing from a practice that shareholder value is driven by
introduced by US conglomerate 3M staff performance; allowing staff
in 1948, encourages staff to spend to build careers around what they
20 percent of their time on projects excel at is good for employees and
of their own choosing. Rather than the bottom line. ■
distract from directed projects,
Google’s innovative, dynamic culture,
in which staff are encouraged to work Google found that their staff works
to their strengths and explore projects better on all tasks—when people are
that they are passionate about, is one of passionate about their work, it does
the reasons for the company’s success. not feel like work. Such discretionary
effort, the willingness of employees The man who does not
In his two-factor theory, US to “go the extra mile,” can be the work for the love of work, but
psychologist and management difference between good and great. only for money, is likely to
thinker Frederick Herzberg identified Great businesses focus on getting neither make money nor
a sense of achievement as being the best out of people, not the most
find much fun in life.
closely linked to motivation to work. out of them. Gmail, one of Google’s
Effectiveness is intrinsically most popular products, is a result
Charles M. Schwab
US industrialist (1862–1939)
rewarding; even the most generous of the company’s 20-percent time.
salary cannot, over the long term, Enabling staff to work better,
replace the satisfaction of a job well not harder, requires an enlightened
done. The same generous salary will leadership approach that looks
not offset the dissatisfaction of down to the factory floor as well as

Warren Bennis Born on March 8, 1925, Warren studies, Bennis was named one
Bennis is an American scholar, of the ten greatest influencers
organizational consultant, and on business thinking by
management author. Enlisting BusinessWeek magazine in
in the US Army in 1943, Bennis 2007. The Financial Times lists
was one of the youngest infantry his classic 1985 book Leaders
officers to serve in World War II, as one of the top 50 business
and was awarded the Purple books of all time.
Heart and Bronze Star for service
in action. After leaving the Key works
military, Bennis studied at Antioch
College, Ohio, and later became 1985 Leaders: Strategies for
a professor at the Massachusetts Taking Charge
Institute of Technology’s Sloan 1997 Why Leaders Can’t Lead:
School of Management. Widely The Unconscious Conspiracy
regarded as the pioneer of the Continues
contemporary field of leadership 2009 On Becoming a Leader
88

THE WAY FORWARD


MAY NOT BE TO
GO FORWARD
THINKING OUTSIDE THE BOX

T
he competitive pressures old environment. To avoid this, the
IN CONTEXT that businesses face are idea of “thinking outside the box”
constantly in flux: new ideas is used to challenge precepts and
FOCUS
and disruptive technologies emerge, assumptions—to consider that
Innovation
the economic power of countries sometimes, the way to move
KEY DATES shifts, and market dynamics forward is not to move forward at all.
1914 The nine-dots puzzle change. Yet business history is The idea of thinking outside the
is published in Sam Loyd’s littered with companies that box emerged in the 1960s and is
Cyclopedia of Puzzles. ignored change and pushed forward based on the nine-dots puzzle, a
with flawed strategies based on the game that was used by management
1967 Edward de Bono coins
the term “lateral thinking” to
describe the process of the
“horizontal imagination,”
which has a broad sweep but Markets are dynamic;
is unconcerned with detail. technologies and competitive
pressures change.
1970s There is a surge of
management consultants
encouraging creativity.
Strategic thinking is said
to embrace retrenchment
and retreat. For businesses to survive,
2012 Jeff Bezos of Amazon leaders must motivate staff
to avoid fixed thinking.
claims that ”if you’re inventing
and pioneering, you have to be
willing to be misunderstood
for long periods of time.”
Thinking outside the box Sometimes the way
is a leadership tool that to move forward
encourages creative is not to move
responses to problems. forward at all.
LIGHTING THE FIRE 89
See also: Gaining an edge 32–39 ■ Keep evolving business practice 48–51 ■ Creativity and invention 72–73 ■ Changing
the game 92–99 ■ Forecasting 278–79 ■ Feedback and innovation 312–13

The nine-dots puzzle challenges


players to connect the nine dots with
four straight lines or less,
without lifting pen from
paper or tracing the same
line twice. The solution
involves drawing lines
“outside the box.”

Nintendo’s Wii console is a product


of lateral thinking. Rather than taking Zuckerburg’s hugely successful price and increasingly
on their industry rivals head on, the Facebook. The future survival of sophisticated games, the Nintendo
Wii’s designers redefined gaming MySpace depended on new Wii created a whole new market. Its
as a family-friendly, social activity. thinking—it turned its business unique player interface—with a
around by successfully refocusing range of handheld, wireless
consultants to encourage lateral on a core market of creative music controllers—and focus on group-
thinking. Several of its solutions professionals, leaving the social- based gaming made it family-
involved drawing lines that were media mass-market to Facebook. friendly; suddenly gaming was a
literally outside the puzzle’s box. Other companies have social activity for gamers of all ages
The phrase was adopted to represent employed leaders with a more and experience levels. The console
any kind of creative thinking that radical approach to guide them quickly outsold the competition in
goes beyond the obvious. Today, through fast-changing times. almost every territory.
thinking outside the box represents Nintendo’s response to the Leaders taking this kind of “bold
innovation, the need to be aware of technological superiority of the retreat” willingly cede technological
market changes, and the need to X-Box and Playstation, for example, advantage or market position to the
avoid fixed ways of thinking. was to think differently. Instead of dominant player, pursuing instead
competing on the usual grounds of less vulnerable (and often more
The bold retreat profitable) market positions.
Linear thinking—the opposite of
thinking outside the box—has been Rethinking the box
responsible for the downfall of Some business leaders believe that
many businesses. MySpace, a even creative thinkers may take
website that dominated the online BT should have invented certain things—such as
social-media market in the early Skype. But they didn’t organizational structure—for
2000s, is an example of a business because the concept of a free granted. They are therefore
that fell victim to strategic platform totally disrupts their encouraging their staff to think
retrenchment—sticking to a failing literally “beyond the building” for
business model.
strategy rather than adapting to new ideas. Procter & Gamble CEO
new competition or a changing
Alan Moore A G Lafley sent employees to live
US systems expert
marketplace. Purchased by News temporarily in the homes of
Corp for $580 millon in 2005, the consumers to better understand
business was sold in 2011 for $35 their needs and identify product
million, having failed to match the opportunities. The box itself, it
creative vision of Mark seems, is perhaps a distraction. ■
90

THE MORE A
PERSON CAN DO,
THE MORE YOU CAN
MOTIVATE THEM
IS MONEY THE MOTIVATOR?

IN CONTEXT
When present,
FOCUS If poorly managed,
motivators—such as
hygiene factors—such as
Motivation recognition, professional
pay, conditions, supervision,
growth, and responsibility—
KEY DATES and security—can increase
can contribute to job
1914 Henry Ford doubles job dissatisfaction.
satisfaction.
wages at Ford Motor Company
in an effort to reduce labor
turnover. Thousands apply
for jobs with the company.
1959 Fredrick Herzberg
proposes his theory that Money matters, but workplace motivation is much
“motivators” and “hygiene more complex than financial reward alone.
factors” lead to satisfaction
or dissatisfaction at work. He
stresses that pay demotivates,
but it does not motivate.

I
f you were paid more, would Herzberg began to study workplace
2000s “Best Employer” lists
you work harder? The answer motivation in the 1950s while
reveal that the highest ranked is probably partly yes, and teaching at Case Western Reserve
companies are often not those partly no. Higher pay might University, OH. In 1959 he proposed
offering the biggest salaries. encourage you to move to a new job the “two-factor theory”—that a
2012 Fortune magazine cites or to work a little faster or harder, series of “motivators” encourage job
Google as the best organization but this focus is soon eroded—or satisfaction, while aspects of work
to work for in the US, and it equally, magnified—by other factors, termed “hygiene factors” contribute
also tops the list of employers such as job satisfaction, respect to dissatisfaction in the workplace
in developing countries, from managers, and the challenge if they are poorly managed.
including India. High salaries presented by the work itself.
and a range of perks contribute Financial gain can move us Removing dissatisfaction
to do things, but motivation is more Hygiene factors include working
to staff satisfaction.
complex than money alone. US conditions, job security, relationships
psychologist Professor Frederick with other workers, and salary.
LIGHTING THE FIRE 91
See also: Leading well 68–69 ■ The value of teams 70–71 ■ Creativity and
invention 72–73 ■ Effective leadership 78–79 ■ Make the most of your talent 86–87
Frederick Herzberg
US psychologist Frederick
Herzberg was born on April
JOB DISSATISFACTION JOB SATISFACTION 18, 1923. He attended City
College of New York and later
held a professorship at the
Achievement
University of Utah, USA.
Recognition Herzberg’s service in the
Work itself US Army, in particular his
observation of conditions
Responsibility at the Dachau concentration
Advancement camp in Germany during
World War II, is thought to
Growth have inspired his interest
Company policy and in motivational theory.
administration Herzberg’s two-factor
Challenging the notion
Supervision theory illustrates the
dichotomy of workplace
that workers are driven only
Relationship with supervisor motivation—that for the by money and other benefits,
Work conditions most part, job satisfaction Herzberg suggested that
derives from fulfilment of achievement and recognition
Salary a different set of factors are powerful motivators. He
Relationship with peers (“motivators”) than those believed that managers should
that cause dissatisfaction create safe, happy workplaces
Personal life (“hygiene factors”). and make tasks interesting,
Relationship with subordinates challenging, and rewarding.
His work influenced a
Status Motivators
generation of managers.
Security Hygiene factors
Key works

Motivators include recognition, increase job satisfaction, but when 1959 The Motivation to Work
responsibility, the opportunity for lacking, actually only result in low 1968 One More Time: How do
advancement, a sense of personal levels of employee dissatisfaction. you Motivate Employees?
1976 The Managerial Choice:
achievement, and potential for
To Be Efficient and to Be
growth—as Herzberg put it “the Motivators in practice Human
more a person can do,” the more Herzberg’s findings are significant
easily they can be motivated. for business leaders. The two-factor
Herzberg argued that job theory proposes that job design is environment and flexible working
dissatisfaction is as important crucial—it must create conditions policies. Initiatives such as the
as satisfaction. He believed that in which employees can feel a sense “friends and family contract”—in
unless hygiene factors were well of achievement, enjoy responsibility, which employees from the same
managed, no matter how good the and gain recognition for their work. family or friendship group can cover
motivators, staff would not be Levels of pay may be important for each other’s shifts—give staff a
inclined to work hard. They would, recruitment and retention, but it sense of shared responsibility, and
he suggested, be so dissatisfied as is less important in encouraging enhance loyalty to the company.
to be demotivated. He also believed staff to work effectively. The top-paying companies are
that hygiene factors do not, in Every day, thousands of people rarely ranked as the best employers.
themselves, motivate; but when around the world apply for jobs at Money matters, but job satisfaction,
fulfilled, they reduce dissatisfaction fast-food outlet McDonald’s. career advancement, management
and provide a foundation for Frequently rated at the top of “best attitude, and personal relations are
motivation. On the other hand, employer” lists, the chain is popular the workplace factors that most
motivators have great potential to because of a friendly working motivate us to work harder. ■
BE AN ENZYME—
A CATALYST FOR
CHANGE
CHANGING THE GAME
94 CHANGING THE GAME

T
he business people we
IN CONTEXT remember are those who
do things differently—
FOCUS
people such as Facebook CEO
Innovation
Sheryl Sandberg, US investor
KEY DATES Warren Buffett, Hong Kong business I want to put a dent
1997 US professor Clayton M. magnate Stanley Ho, British in the universe.
Christensen introduces the entrepreneur Richard Branson, Steve Jobs
concept of “disruptive and US media giant Oprah Winfrey.
technologies”—major and Similarly, the companies we
unforeseen technological remember are those whose products
advances that cause companies and services stand out. Companies
to redefine how they operate. that shuffle along with the crowd,
doing the same thing in the same
2000s Global Positioning old way, are soon forgotten; those Thinking one step ahead of
System (GPS) navigational that disrupt industries and change customers and competitors disrupts
technology emerges as a the game are celebrated, sometimes the status quo in a business’s favor.
disruptive innovation in a even idolized.
range of industries, from travel In today’s global market, Disruptive innovation
and fitness to recreation and competition is fierce and every Harvard Business School scholar
smartphone applications. percentage point of market share is Clayton Christensen identified
hard fought and precious. Operating two types of technology that can
2014 US professor of business in these markets is often a zero-sum influence businesses: ”sustaining
administration David game: competition drives prices technologies,” or advances in
McAdams writes Game- down and costs up. Gaining a technology that help companies
Changer: Game Theory and the significant competitive advantage make gradual improvements to
Art of Transforming Strategic requires more than gradual product performance; and
Situations. McAdams uggests improvement, it demands radical “disruptive technologies,” radical
that game-changers are those and disruptive shifts—if you cannot advances in technology that disrupt
who are “determined enough win the game, move the goalposts. the industry and force companies to
to change the game to their Redefining the rules and boundaries rethink their entire mode of being.
own advantage.” of an industry is the essence of Christensen later changed the term
game-changing business strategy. “disruptive technology” to

Steve Jobs Entrepreneur and inventor fate, Apple bought NeXT in 1996
Steven Paul Jobs was born on and Jobs returned to Apple later
February 24, 1955 in San that year, becoming CEO in
Francisco, California, US. In 1976, 1997. In 1998 Jobs launched the
at the age of 21, he and Steve iconic iMac computer and went
Wozniak started Apple Computers on to preside over one of the
(from the garage in Jobs’s home). most famous corporate
The business went public in 1980, renaissances in history. Under
with a market value of $1.2 billion. his guidance, Apple led the way
In 1985, after disagreements with innovative product design
with the board, Jobs was fired and technology to become one
by recently appointed CEO John of the most valuable technology
Sculley. Jobs nevertheless went businesses in the world.
on to found NeXT Computer and In 2010, Steve Jobs was 61st
invest in Pixar Animation Studios, in Time Magazine’s “100 People
which was to become hugely who Changed the World.”
successful. In a twist of corporate He died on October 5, 2011.
LIGHTING THE FIRE 95
See also: Stand out in the market 28–31 ■ Gaining an edge 32–39 ■ Creativity and invention 72–73 ■ Thinking outside
the box 88–89 ■ Leading the market 166–69 ■ The value chain 216–17 ■ Creating a brand 258–63

Gradual change
Today’s markets are ...and increasingly can only bring gradual
increasingly global... competitive. improvement
to a company.

They are ...they redefine the But successful leaders


catalysts markets in which embrace radical,
for change. they operate. disruptive thinking...

“disruptive innovation” to reflect need for a product, even before with the new market segment.
the fact that it is not so much customers realize such a need The German company Siemens,
technology itself that is disruptive exists, and opens up new, for example, built the world’s first
as how that technology is applied. untapped markets with significant electric elevator in 1880, and in
One such product that has first-mover advantages—not least 1881 provided power for the world’s
changed the game by adapting of which is brand association first electric street lights (in
technology for new purposes is
GlowCap. A screw-on top that
can be attached to prescription
medicine containers, GlowCap
contains a glowing LED and audio
alert that signal when medication
should be taken. It also connects
via Wi-Fi to the user’s smartphone,
sending a text message or an email
alert if a dose is missed. Like many
game changers, it utilizes lateral
thinking to present a solution to
an existing problem, effectively
meeting the consumer’s needs.
Disruptive innovation creates the

The Crystal is one of the world’s most


sustainable buildings. Built in the UK
by Siemens, it symbolizes the spirit of
innovation that has been the hallmark
of the company since the 1880s.
96 CHANGING THE GAME
Disruptive innovation refers to
an innovation that transforms the
market. When an existing product Overperformance of existing
boasts more features or services product creates a gap for a
than customers require, it may new, “disruptive” product
become too complex or difficult
to use. As the gap between the
existing product’s performance Point of overperformance
and customer requirement grows,

PERFORMANCE
it creates a gap in the market
that can be exploited by a new,
“disruptive” product. Over time, the
new product can redefine the market.

Performance demand of
mainstream consumers

Mean performance
demand

Existing company/
product

New “disruptive”
company/product TIME

Godalming, England). More recent industry, the music industry, the unlikely to have shifted the market
game-changing products in cell-phone industry, and the tablet- very far—true game changers raise
lighting, energy, transportation, computer industry. eyebrows and prompt questions.
and healthcare have ensured that Apple’s iMac, with its focus
the Siemens name is associated on user-friendly design and Interfacing technologies
with quality and innovation. software, made a significant The iPod was a cross between the
Leaders like the company’s impact on the personal computer early crop of low-storage MP3
founder, Werner von Siemens— industry. However, Apple’s first players and the large, hard-drive-
those with the vision and courage major game changer was the iPod, based players that provided several
to pursue game-changing first introduced in 2001. The gigabytes of storage. Amid a sea of
strategies—are, however, all too product was met with scepticism— bland competing products, the iPod
rare. It takes great courage to break but this, according to Christensen, stood out thanks to its stylish and
from tradition; and charisma and is a classic reaction to a game distinctive design. It was small, easy
conviction to lead individuals, changer. A product that is accepted to use, and came with the promise
organizations, and entire industries at first glance as a “winner” is of “1,000 songs in your pocket.”
away from the status quo. Success The real disrupter, however, was
is met with reward and celebration; the combined power of the iPod
failure with ridicule and scorn. and its software interface, iTunes.
For would-be game changers, the Customers could now access a
line between fame and infamy is huge amount of music from one
often thin. You cannot lead place, buy it, download it, and
from the crowd. “sync” music from their computer
Rewriting the rules Margaret Thatcher to their devices with ease. The
Another company that has changed UK former Prime Minister (1925–2013) iPod could also be charged while
the game in its favor, on several syncing. The fact that we now
occasions, is Apple. Under the take such features for granted
guidance of its co-founder and demonstrates the extent to which
CEO, Steve Jobs, the organization Apple transformed the market
disrupted the desktop computer for personal-music devices.
LIGHTING THE FIRE 97
The iTunes Music Store (now the The iTunes Store and the iPod
iTunes Store) redefined the music system, quite simply, worked for
industry in 2003. At the time, digital consumers, who had been baffled
music piracy was on the rise; record by the many MP3 players and online
labels were fighting against digital methods of finding music. Apple
distribution for fear of losing control simplified the process, and made It’s kind of fun to do
and further damaging already its solution aesthetically appealing the impossible.
declining revenues. Jobs exploited at the same time. By 2013, its Walt Disney
the record executives’ nervousness strategy had brought sales of around US entrepreneur (1901–1966)
to his advantage, offering people a 400 million iPods and more than
way to purchase music legally but 25 billion iTunes Store downloads.
easily and instantly.
Apple’s software changed the Continually game-changing
music industry’s business model Such radical disruption, if achieved
forever. In addition to changing the only once, could be put down to
way we access and listen to music, good luck, but true game changers called the iPhone “a revolutionary
iTunes enabled people to buy single are those who persistently seek product,” claiming it was “five
tracks from albums. Artists no to separate themselves from the years’ ahead of any other cell
longer needed to slave for months competition. Steve Jobs was not phone.” His words were prophetic:
on albums, but could release a content merely to have changed the for some years after, the iPhone
steady stream of singles instead. music industry: in 2007 he turned remained the standard against
Consumers no longer felt trapped his attention to the cell-phone which all other cell phones
into album purchases and felt less industry. Cell phones had been were assessed and defined.
need to search for free, pirated getting smarter for a while, but the Shortly before his death in 2011,
downloads in place of legal versions. iPhone was a giant leap forward. Jobs did it again—this time with
Offering users access to a suite the iPad. Launched in April 2010,
of computer-like applications and, to confusion and some cynicism,
The Apple logo has become a global
emblem of the modern age—an in particular, seamless Internet the iPad came to (re)define the
indication of the extent to which access, it was an instant hit. The industry. It extended access to
the organization has revolutionized real breakthrough was the iPhone’s technology beyond its accepted
technology and product development. touch-screen technology. Jobs business, educational, and ❯❯
98 CHANGING THE GAME
change.” But to be truly successful,
and to outlive the tenure of a highly
driven leader, the desire to disrupt
must be pervasive. The energy,
innovation, and courage required
What today seems odd, to repeatedly disrupt industries Problems cannot be
unnecessary, offbeat—maybe must be deeply ingrained in the solved at the same level
even outrageous—may corporate culture, which must also of awareness that
prove integral to solving allow for flexibility to change. created them.
tomorrow’s problems. In the case of eBay, Omidyar Albert Einstein
Pierre Omidyar realized that the future was German-born physicist (1879–1955)
unpredictable and nonlinear,
and decided to structure his new
venture with the approach of a
software engineer (his former job),
“who has learned to strive for
desktop-bound roots, in a format flexibility in design.” While a users to do most of the work. These
that few, at first, expected to be software program might seem features nevertheless ensured
popular. The iPad ushered in initially to provide more than its that eBay evolved not only around
a new era of computing, and customers need, this is what gives Omidyar’s ideas and energy, but
remains, even in an increasingly it the flexibility to change and also around the requirements of the
crowded tablet-computer market- “prepare for the unexpected.” entire eBay community.
place, the industry standard. Ebay’s self-sustaining system
required little intervention and was Embracing failure
Corporate culture able to adapt and grow according However, such deeply embedded
Apple has changed the game so to customer needs. Its design game-changing mentality is rare.
significantly that the brand has effectively embedded disruption Heroic leaders—game changers and
entered the cultural zeitgeist: its within the core structure. The idea risk takers—are difficult to find and
products are seen everywhere— of allowing users to rate each other even more difficult to replace. With
from coffee shops and classrooms was both new and risky—as was fewer than one in ten new product
to television shows. Apple’s a business model that required ideas making it to market, people
technology has made its products
ubiquitous and its customers
fanatically brand loyal. With such a
competitive edge, it is no surprise
that the company’s prices are able
to sit well above industry averages.
But the challenge for any
organization is to ensure that
such game-changing mentality
informs the spirit of the whole
company. As French businessman
Pierre Omidyar, founder of the
online auction site eBay, suggests,
a leader must be “a catalyst for

Pierre Omidyar, chairman and


founder of the popular auction site
eBay, has embedded the desire for
innovation and dramatic change within
his company’s corporate culture.
LIGHTING THE FIRE 99
are rarely brave enough, or
confident and committed enough Challenging the status quo
in their ideas, to stake their careers
and reputations on risky game- African-American businessman African-American history,
John H. Johnson had the acumen literature, arts, and culture.
changing innovations. The heroic
to recognize the untapped It was a rapid success, reaching
leader’s strength lies not just in potential for publications aimed a circulation of 50,000 in only six
their vision, but also in their at the African-American market. months. A second magazine,
willingness to stand in the Excelling at high school despite Ebony, was founded in 1945, and
spotlight when things go wrong. an impoverished upbringing, at its height reached a circulation
Corporate history is littered Johnson won a scholarship to of more than 2 million. Thanks
with examples of failed products. the University of Chicago and to his willingness to challenge
Most businesses are therefore, by supported himself with an office the status quo, Johnson built
nature, risk averse. Even Apple has job at an insurance company. It a publishing empire that
made mistakes—and, again, its was while at work that he came included radio, television, and
example is instructive. Jobs may be up with the idea for Negro Digest books. He was named in the
best remembered for transforming (later renamed Black World), a Forbes 400 list of wealthy
the music, computer, and phone magazine that would feature Americans in 1982.
industries, but he’ll also be
remembered as the poster boy for world; Walt Disney’s Laugh-O-Gram encourages long-term thinking.
embracing failure, and bouncing studio went bankrupt in 1923; Adopting such a strategy means
back from it. He has reigned over and Henry Ford had three failed that shareholders must be tolerant
a long list of failures. The Pippen businesses before finding success. of risk and uncertainty, and patient
games console, for example, was Game changers such as Albert with regard to returns; payback
unable to compete with the likes Einstein (labeled “slow” by his periods may be long, and rewards
of Sony’s Playstation, and was teachers) and billionaire Oprah difficult to measure. But if allowed
quickly dropped. The Apple III Winfrey (told she was not “fit to to flourish, this longer-term approach
computer suffered major design be on screen”) seem to defy the enables a business to build a
faults, and the Lisa—a computer future mapped out for them. stronger brand, invest in research
that would eventually provide the and development, create better
basis for the iMac—had poor sales. Long-term thinking business processes, and avoid
The Apple Newton, a forerunner of It is the ability to recover from taking (possibly damaging) actions
today’s smartphones, was a flop. failure, and maintain the courage to boost short-term profits.
These failures led to Jobs being and conviction to keep changing As Christensen’s The
fired in 1985. In a speech to students the game, that sets great leaders Innovator’s Dilemma suggests,
graduating from Stanford University apart from the rest. From a game-changing leaders are not
in 2005, Jobs stated that the strategic point of view, a focus bound by incremental change and
dismissal triggered him to change on game-changing innovation “me-too” thinking: they rewrite the
his own game: “The heaviness of terms of competition by embracing
being successful was replaced by unique ideas, and recognize that
the lightness of being a beginner in a corporate world characterized
again, less sure about everything. by the mantra “change or die,”
It freed me to enter one of the most disrupting the status quo in your
creative periods of my life.” You have to be willing own favor puts you not just one
History is filled with examples to be misunderstood. step, but several steps ahead of
of trailblazers who stumbled before the competition. In today’s
Jeff Bezos
finding success. KFC chicken, US entrepreneur (1964–) hypercompetitive markets, game-
invented by Harland David Sanders, changing leaders do not simply
was rejected by more than 1,000 outthink, outsmart, and
restaurants; R. C. Macy opened and outcompete their rivals—they
closed many stores before founding move the goalposts and redefine
the largest department store in the the rules of the game. ■
100
IN CONTEXT

THE WORST
FOCUS
Success and failure
KEY DATES

DISEASE THAT
c.500 BCE The ancient Greeks
coin the term “hubris” to
describe a form of pride that
loses touch with reality and

AFFLICTS
leads to “nemesis”—a fatal
retribution or downfall.
2001 Kenneth Lay, CEO
of Enron, sends employees an

EXECUTIVES email saying “our performance


has never been stronger.”
Four months later, Enron files

IS EGOTISM
for bankruptcy.
2002 US activist Herbert
London claims that hubris is
as great a danger in the 21st
HUBRIS AND NEMESIS century as in ancient Greece.
2009 Jim Collins identifies five
stages of corporate decline in
How the Mighty Fall.

E
ven iconic companies can
falter, fail, and become
irrelevant. History repeatedly
shows that successful corporate
goliaths—such as Swissair, Enron,
and Lehman Brothers—can fall from
greatness. The list of possible causes
is long and includes management
complacency, poor marketing, poor
products, strategic blindness, a
weak economic environment, or
simply bad luck. However, in many
cases, paradoxically, success is the
catalyst for failure.
This is because success can
lead to an overconfidence that
blinds business owners and
managers to the real state of affairs.
Meanwhile, they also start to
LIGHTING THE FIRE 101
See also: Reinventing and adapting 52–57 ■ Beware the yes-men 74–75 ■

Good and bad strategy 184–85 ■ Avoiding complacency 194–201

Success breeds Great success can lead to


confidence. overconfidence.

This can make managers


Greedy for more success, blind to changes that
managers force the begin to affect the Jim Collins
company to overreach. company.
Business consultant, author,
and self-titled “student of
great companies” Jim Collins
was born in the US in 1958.
Collins holds degrees in
Problems and pitfalls By the time management business administration and
are swept aside as realizes there is a major mathematical sciences from
irrelevant or mere blips. problem... Stanford University, and
several honorary doctoral
degrees. He has worked
alongside senior executives
and CEOs at corporations of
The worst all types—from health care,
disease that ...it may be too late education, and the arts, to
afflicts executives to save the company. religious organizations and
is egotism. government. His interest lies
in the difference between
good and great: how do
companies attain such
believe their own hype. Internal company’s directors and staff start
superior performance?
warning signs may be present long to become overconfident. In highly In 1995 he founded a
before management—buoyed by successful companies there is a management laboratory in
seemingly unstoppable success— risk that staff members will Boulder, Colorado, to do
notices or chooses to do anything become arrogant, and will begin further research into business
about them. Hubris, a kind of blind to regard their success as a right excellence. His books have
pride, can shield people from or entitlement. Managers lose sight sold more than 10 million
seeing that a company is already on of the underlying factors that copies globally and have been
the path to corporate catastrophe. created success in the first place, translated into 35 languages.
overestimating their own strengths
Five stages of decline and those of the business. Key works
Jim Collins identified five stages If stage 1 is a feeling that “we’re
of corporate decline. In stage 1, the so great, we can do anything!” 1994 Built to Last 
business is doing well, perhaps stage 2 is characterized by the 2001 Good to Great: Why
Some Companies Make the
exceptionally well. Press coverage feeling that “we should do more!”
Leap … And Others Don’t 
is positive, finances are good, and Collins calls this stage the 2009 How the Mighty Fall:
morale is high. However, as a result “undisciplined pursuit of more”: And Why Some Companies
of such success, during stage 1 the more sales, more stores, more Never Give In 
first warning sign appears—the growth, more of everything. ❯❯
102 HUBRIS AND NEMESIS
Continued management arrogance markets pick up, their business
breeds indiscipline; decisions are brilliance will ensure that the
made out of greed and warning company regains market leadership.
signs are ignored. Companies at
stage 2 make indisciplined leaps Now or never
into areas where they have little Stage 3 represents the turning point. The best leaders never
competitive advantage; diversify Many companies reach this stage presume they’ve reached
into areas in which they have no but manage to avert collapse. If ultimate understanding
expertise; or undertake ill-conceived management listens to the views of of all the factors that
mergers and takeovers. The its staff (especially from the front brought them success.
complacency of stage 1 turns into lines, such as sales staff), heeds Jim Collins
the overreaching of stage 2. shareholder concerns, and changes
By stage 3, problems begin to strategy in line with the changing
mount, staff begins to question reality, it is likely to recover. Andy
management decisions, and Grove famously pulled Intel back into
disturbing data suggest things profitability by pursuing this strategy.
might not be all that they seem. However, the same cannot be said
However, as Collins points out, it is for Lehman Brothers. In 2007, with bank and journalists asked
possible to be in stage 3 of decline its stock price at a record high, the questions about its future, Fuld
and not yet realize that it is US investment bank ignored the was reluctant to countenance any
happening. Anomalies in early warning signs of collapse. Even capital infusion. Selling parts of the
performance at this stage tend to be as cracks in the US housing market bank was not an option he felt he
explained away; any problems are became apparent, with subprime could consider. Although Fuld
blamed on “difficult trading mortgage defaults rising to a seven- eventually revoked this decision, it
conditions.” Management holds firm year high, Lehman continued to was too late: the bank declared
in the view that the company is expose itself to mortgage-backed bankruptcy on September 15, 2008.
strong and nothing is fundamentally financial products. Management, The way in which management
wrong. They believe that once the particularly the chief executive, responds to a crisis brought about
Richard Fuld, were blinded by hubris by success and accompanying
and deep in denial. They pressed on hubris is critical. Inevitably, “band-
with ill-conceived strategies and aid” solutions that do not address
quickly found themselves in stage 4. the underlying problems rarely
succeed. Quick fixes based on the
Dealing with disaster same overconfidence that brought
By stage 4 a company’s difficulties crisis in the first place—such as a
become undeniable—even the bold but risky strategy, a hoped for
most headstrong and arrogant blockbuster product, or a “market-
manager has to acknowledge that changing” acquisition—usually
there are problems. The question result in the company moving
now is how to respond. Unfortunately, to stage 5: capitulation to
as the Lehman example shows, irrelevance, or death.
acknowledgment does not always
result in appropriate action. Capitulating to irrelevance
As the global credit crisis In stage 5, reality finally hits home.
erupted in August 2007, Lehman’s Expensive failed strategies erode
stock fell sharply. Having grown financial strength and accumulated
Lehman to become the fourth setbacks damage the individual
“Rogue trader” Jérôme Kerviel
claimed his company, Société Générale biggest bank on Wall Street, Fuld spirits trying to repair the damage.
bank, was aware of his dangerously could not accept that it was time to Key managers generally leave the
large trades, but turned a blind eye adopt a new strategy. When company at this stage, and the few
because they were focused on profits. uncertainty started to grip the customers that remain migrate to
LIGHTING THE FIRE 103
US homeowners were prey to
companies such as Lehman, which made
big profits in mortgage-backed securities
in the 2000s. Lehman’s managers ignored
warnings of unrepayable mortgages.

other brands. The once-mighty


company has finally fallen. A
management buy out, merger, or
takeover may save the business
and protect some jobs, but the
company is unlikely to ever
recapture its former glory. Most,
having slipped this far, survive (if
they survive at all) as niche brands
trading on past history.

Return to glory
Decline is, of course, not inevitable
for all successful companies. Those
that reach the later stages of Group. By 1997, Apple was months simplified product line, sold through
corporate decline do so because from bankruptcy, as the business a limited number of outlets. He
managers failed to heed the early continued to spiral out of control. stabilized Apple and allowed a
warning signs of change or were A new board assembled and called return to its core values—a focus
irrationally sure of their ability to for the return of one of the on innovation and quality—that
“beat the odds.” However, it is cofounders—Steve Jobs—as CEO. later brought iconic products such
possible to reach stage 4 and Many expected him to respond as the iMac, iPod, iPhone, and iPad.
recover. According to Collins, with a slew of new products, but
this involves taking a calm, clear- he did the opposite. He shrank the The pursuit of less
headed approach and reaching not company to a size that reflected Hubris is not the single cause of
for savior strategies, but for the its niche position, and cut back the business failure. Even the most
basic core values and disciplines desktop computer models from skilled management may fail when
that made the organization great 15 to one. He ended production of faced with turbulent markets, the
in the first place. printers, cut software development, collapse of a key supplier, or other
Steve Jobs did just that at and moved production abroad. He factors beyond their control (the
Apple. In the late 1980s and early redesigned the company around a 2008 credit crunch, for example,
1990s, the company’s management was the final blow for an already
perceived Apple as vastly superior, struggling Woolworths). Hubris
ignored increasing competition may occasionally be a factor in
from PC manufacturers, and corporate decline, but failure may
expected customers to dismiss also result from poor business
quality and compatibility issues as Success comprises in practice or simply from bad luck.
“quirks.” After the 1995 release of itself the seeds of its However, if overconfidence
Microsoft’s Windows 95 operating own decline. leads to an “undisciplined pursuit
system, Apple fell into decline. of more,” the remedy seems to be
Pierre de Coubertin
Sales, profits, and Apple’s image French educator (1863–1937) the disciplined pursuit of less—a
tumbled. BusinessWeek called it return to a company’s strategic
“the fall of an American icon.” The roots. Ego, though, is a powerful
CEO, Gil Amelio, cut costs, thing, and humility is too rarely
reorganized the company, and the tool managers reach for when
added a new Internet Services fighting for survival. ■
CULTURE
IS THE WAY IN WHICH
A GROUP OF PEOPLE
SOLVES PROBLEMS
ORGANIZATIONAL CULTURE
106 ORGANIZATIONAL CULTURE

IN CONTEXT
Culture is “the way we do things
FOCUS around here.”
Organizational structure
KEY DATES
1980 Geert Hofstede draws
attention to the importance of
organizational culture in his
book Culture’s Consequences. Culture is
1982 US business consultants Organizations exemplified by a
Culture is
Terrence Deal and Allan are collections company’s
subject to
Kennedy argue that culture is of different language,
variation.
cultures. routines,
the single most important and rituals.
factor in determining success.
1992 Harvard professor John
Kotter claims that in an 11-year
period, organizations with rich
cultures see net income growth
of 756 per cent, compared to
Culture impacts every aspect
one per cent in those with of business behavior.
less-defined cultures.
2002 Watson Wyatt develops
the Human Capital Index,
demonstrating the economic
value of business cultures
that maintain good practice
in human resources. Culture is a significant determinant
of organizational success or failure.

O
rganizations build a 1940s, human relations experts overlaps with societal culture. He
sense of identity through began to consider organizations from identified five dimensions of culture
tradition, history, and a cultural point of view, drawing that influence business behavior:
structure. This identity is kept alive inspiration from earlier sociological power distance, individualism vs.
through the organization’s culture: and anthropological work associated collectivism, uncertainty avoidance,
its rituals, beliefs, legends, values, with groups and societies. However, masculinity vs. femininity, and long-
meanings, norms, and language. the term “organizational culture” vs. short-term orientation.
Corporate culture determines how only became part of the business
“things are done around here.” lexicon in the early 1980s, following Five cultural dimensions
Culture provides a shared view the publication of Culture’s The first of Hofstede’s dimensions—
of what an organization is (the Consequences by the Dutch cultural power distance—refers to the
intangibles) and what it has (the psychologist and management distance in authority between
tangibles). It is the “story” of the expert Geert Hofstede. manager and subordinates. Business
organization: a narrative reinforced Looking closely at organizational cultures that have a high power
through idiosyncratic languages and structure for the first time, Hofstede distance tend to be rule-driven and
business-specific symbols. In the observed that it is shaped by and hierarchical (everyone “knows their
LIGHTING THE FIRE 107
See also: Creativity and invention 72–73 ■ Gods of management 76–77 ■ Hubris and nemesis 100–103 ■ Avoid groupthink
114 ■ Balancing long- versus short-termism 190–91 ■ The learning organization 202–07 ■ Creating an ethical culture 224–25

Hofstede’s five cultural


traits can be measured
120 across companies in
different countries.
Hofstede’s research
100 allocated a score between
1 and 120 for each trait.
For example, companies
80 in China received the
highest score—118—for
long-term orientation,
60 while companies in the
USA had a much
shorter-term focus,
40 receiving a score of 25 (in
Russia, data for this trait
was unavailable).
20
Brazil China
Russia USA
0
Power Individualism Masculinity vs . Uncertainty Long-term vs .
distance vs . collectivism femininity avoidance short-term
orientation

place”). In Russia, for example, Masculinity and femininity, more uncertain and ambiguous
employees have little access to Hofstede’s third cultural dimension, situations. British organizations, for
executives (power distance is high). are viewed differently from one example, are considered fairly at
Conversely, in low power-distance organization to another. Some place ease with unstructured and
cultures, such as many companies great emphasis on masculine traits unpredictable situations.
in Australia, decision making is (such as status, assertiveness, and Hofstede’s fifth dimension, long-
distributed more evenly throughout advancement), while others accord vs. short-term orientation, is the
the organization. feminine traits (such as humanism, extent to which organizations
Anthropologists have long cooperation, collegiality, and privilege the short-term (profit) over
theorized that collectivist cultures nurturance) greater value. Italian the long-term (value generation). ❯❯
control members through external organizations, for example, tend to
societal pressure (shame), whereas have assertive, competitive cultures.
individualistic cultures control their The fourth of Hofstede’s
members more through internal dimensions is known as
pressure (guilt). In his second uncertainty avoidance. This is the
dimension, Hofstede proposed that extent to which workers feel The thing I have learned
this tendency toward collectivism threatened by ambiguous at IBM is that culture
or individualism can be most situations. The more uncomfortable is everything.
clearly seen in the difference people are with “not knowing” how
Louis V Gerstner Jr
between Asian and US companies. to react in a certain scenario, the US businessman (1942–)
When problem-solving, US more rules and policies the
businesses tend to look to the company will need to introduce to
individual for a solution, whereas reduce that uncertainty. Companies
Asian companies prefer to pose with a low degree of uncertainty
the problem to a group. avoidance are likely to thrive in
108 ORGANIZATIONAL CULTURE
Japanese businesses, for example, maintaining unified business decisions, big and small, then they
think very much in the long-term: cultures, whether operating across start to feel unloved and removed
Toyota Motor Corporation has a multiple national or international from the business and its success.”
100-year business plan. cultures. The challenge is to balance
the promotion of “one culture” within Cultural benefits
Why culture matters an organization against the Strong cultures give staff a sense
Every organization’s culture has influences of local cultures in of belonging, which in turn brings
varying degrees of these different the external world. benefits, such as job satisfaction and
dimensions. The best leaders know Companies with strong staff retention. At Nike, staff are
which cultures operate within cultures, such as Nike and India’s considered rookies if they have been
different parts of their organization Tata Motors, are intensely aware of at the company for less than a
(and within different parts of the their history and image. At Nike it decade. Moreover, culture defines
world), and adjust their leadership is not unusual for employees to “the rules of the game,” simplifying
style to suit—valuing collective have the company’s “swoosh” logo priorities. Decision making is faster
approaches, for example, when tattooed on their body. At these and easier if everyone understands
dealing with Asian subsidiaries. businesses, culture encompasses company values, beliefs, and vision.
Today, organizational culture is an internalized sense of “who we Deeply embedded cultures also
more important than ever before. are” and “what we stand for” to improve the customer experience; if
Increasingly competitive markets, such an extent that many of the staff believes in the product, they
globalization, the prevalence of staff are able to recite corporate will transfer this belief to customers.
mergers, acquisitions, and alliances, maxims from memory. Similarly, Culture also protects an
and new modes of working (such as the UK smoothie company Innocent organization from the whims of
teleworking) require coordination has worked hard to create a charismatic leadership and the
across vast numbers of staff and corporate culture based on fickleness of fashion. A leader may
huge geographic distances. communication. Dan Germain, the influence corporate culture, but a
Hofstede’s observations highlight brand’s Head of Creative, explains: successful culture should endure
the difficulties that leaders face in “if people aren’t involved in all even when management changes.

Features of culture
Visible aspects of culture, such as
an organization’s rituals, stories and
Strong organizational cultures can
symbols, are only the tip of the iceberg. suffer from problems of groupthink
Its beliefs, values, attitudes, and basic (everyone is too like-minded),
assumptions are hidden but definitive. insularity (too narrow a vision), and
arrogance (a belief that everything
Symbols
the company does is right). Culture
Ceremonies can become a source of power and
Stories resistance; necessary change may
Behaviors be resisted simply because “that’s
not the way we do things.”
Terrence Deal and Allan
Kennedy’s 1982 publication
Values Corporate Cultures outlined a range
Assumptions of cultural phenomena. The authors
suggested that culture is composed
Attitudes of a framework of six interlocking
Beliefs
elements: a company’s history; its
values and beliefs; its rituals and
Feelings ceremonies; its stories; the heroic
figures whose words and actions
embody corporate values; and the
cultural network.
LIGHTING THE FIRE 109
secret sauce that made this place Geert Hofstede
great and allowed us to earn our
clients’ trust for 143 years ... I look Born in 1928 in Haarlem, the
Netherlands, Geert Hofstede
around today and see virtually no
went to technical college then
trace of [that] culture.” The letter
gained an MSc in mechanical
made headlines, and the company’s engineering from Delft
shares fell by 3.4 percent. Technical University. He
spent two years in military
Culture in practice service with the Dutch army,
The desire by leaders for some sort before going into industrial
of standardized culture—one that management and beginning
is fixed, visible, and stable—is a PhD. In 1965, while studying
understandable, but it likely to part-time, he joined IBM and
The cultural network, devised by operate only in the imaginations of founded a personnel research
Deal and Kennedy, refers to the informal leaders than in the experiences of department. His years at IBM
channels in a company—storytellers, employees. Companies rarely have were to prove formative; the
gossipers, and whisperers—through one culture; they are usually a data and insight gleaned there
which culture is formed and passed on. formed his research base and
combination of many, which
his “bottom-up” view of
overlap across departments,
organizations. Hofstede
Deal and Kennedy also defined four countries, and business units. The became a professor of
types of organizational culture, task for leaders is to ensure that management in 1973, and was
which emerge from the interplay these cultures do not diverge too named one of the world’s most
between a company’s attitude to far from core organizational values. influential thinkers by the Wall
risk, and the speed of feedback and Organizational culture is not Street Journal in 2008. The
reward. In the tough-guy, “macho” static. Every type of culture is ideas in his 1980 book Culture’s
culture, rapid feedback and reward dynamic and shifts, incrementally Consequences continue to
are combined with a high tolerance and constantly, in response to inform global debates on
of risk, as in the advertising industry. internal and external pressure. organizational culture.
In the work-hard, play-hard culture Managing culture, especially
—such as a sales company—risk is through periods of deliberate Key works
less prevalent, but rapid feedback change, is one of the most difficult
and reward produce a high-pressure business tasks a leader can face. 1980 Culture’s Consequences
2010 Cultures and
environment. In the “bet-your- The advice for leaders seeking
Organizations: Software
company,” high-stakes culture, the to change culture is start small. of the Mind
risk attached to decisions is high, Culture is slippery, and trying to
but feedback on success or failure is change everything at once often
slow. The oil industry is typical of the results in failure. Bold new mission
high-stakes culture. In a process statements, big office redesigns, or
culture, such as an insurance exhortations that “working here is
company or government agency, fun” rarely have the desired impact.
feedback is slow and risks are low. Cultural change requires long-term
Leadership and culture are investment in employees, not in Culture eats strategy
interwoven and interdependent. If a buildings and branding. This is
for breakfast.
leader does not protect or redefine because culture may be led from
the core values that made a the top, but it grows from the
Peter Drucker
US management consultant
company successful, culture can bottom; it requires patient nurturing (1909–2005)
erode. In 2012, a Goldman Sachs over time. Leaders must understand
employee bemoaned the investment the dynamic of an organization’s
bank’s “toxic culture” in an open culture so that they can usefully
letter to The New York Times, draw on its strengths, rather than
claiming: “the culture was the be overcome by its constraints. ■
110

EMOTIONAL
INTELLIGENCE IS
THE INTERSECTION
OF HEART AND HEAD
DEVELOP EMOTIONAL INTELLIGENCE

E
motional intelligence your emotions; motivating yourself;
IN CONTEXT (commonly abbreviated recognizing and understanding
as “EQ”, for emotional other people’s emotions; and
FOCUS
quotient) is the ability to perceive, managing relationships.
Emotional intelligence
control, and evaluate emotions, Goleman pinpoints high EQ as
KEY DATES both in oneself and in others. The a common trait among effective
c.400 BCE The philosopher concept emerged from research business leaders. Without emotional
Plato says that all learning into social intelligence in the 1930s, intelligence, he argues, a leader can
has an emotional base. and from work in the 1970s on have limitless energy and ideas, a
different forms of intelligence. In perceptive and logical mind, and
1930s US psychologist the 1990s, US psychologist Daniel impressive qualifications, but still be
Edward Thorndike describes Goleman published the highly ineffective and uninspiring.
the concept of “social influential Emotional Intelligence: Goleman cites Bob Mulholland,
intelligence”—the ability to Why it Can Matter More Than IQ. head of client relations at Merrill
get along with other people. In the book he identified the five Lynch during the 9/11 attacks, as a
1983 US psychologist Howard “domains” of emotional intelligence: leader with high EQ. After his staff
Gardner suggests that people knowing your emotions; managing saw a plane hit the twin building
opposite their own, they began to
have multiple intelligences,
panic—some ran from window to
including interpersonal,
window, and others were paralyzed
musical, spatial-visual,
with fear. His first response was to
and linguistic. “unfreeze” their panic by addressing
1990 US psychologists Peter each of their concerns individually.
Salovey and John Mayer The most effective He then calmly told them that they
publish the first formal theory leaders are alike in one were all going to leave the building,
of emotional intelligence. crucial way: they all via the stairs, and that they all had
have a high degree of time to get out. He remained calm
1995 Daniel Goleman emotional intelligence. and decisive, but did not minimize
publishes Emotional Daniel Goleman people’s emotional responses. All
Intelligence: Why It Can his staff escaped without injury.
Matter More Than IQ, which This was a rare and unusual context,
becomes a global best seller. but Mulholland’s approach shows
the value of EQ in managing staff
in any form of volatile situation.
LIGHTING THE FIRE 111
See also: From entrepreneur to leader 46–47 ■ Effective leadership 78–79 ■ Organizing teams and talent 80–85 ■

Avoiding complacency 194–201 ■ The learning organization 202–07 ■ Kaizen 302–09

Emotional intelligence has five components:

Motivation
Self-awareness Self-regulation Empathy Social skills
(a desire to
(the ability to (the ability (the ability to (an ability to
pursue goals
recognize and to control understand find common
with energy)
understand impulses and other people’s ground and
emotions) emotions) emotions) build rapport)

Goleman suggests that high EQ that the answer is both: inherent trigger points might be. This
facilitates other essential leadership personality traits are important in procedure seeks to increase
traits. For example, the ability to leadership, but EQ—which grows emotional maturity. A 1999 study
recognize accurately what another with age, experience, and self- showed that partners in a
person is feeling (empathy) enables reflectiveness—is just as important. multinational consulting company
one to manage that feeling and any Today, the development of EQ who scored highly on EQ delivered
behaviors that arise from it. lies at the heart of leadership $1.2 million more profit than other
coaching. New and aspiring leaders partners. Other studies have shown
What makes a good leader? are mentored by experienced ones; similar correlations between EQ
One persistent debate within the together, they discuss past and and effectiveness. Emotional
business world is whether leaders future scenarios, various possible balance, it seems, is a key factor
are born or made. Goleman suggests responses, and what the emotional in commercial success. ■

Daniel Goleman Psychologist Daniel Goleman was his PhD, he traveled widely in
born in 1946 in California, US. India and Sri Lanka, studying
His parents were both college meditation and mindfulness.
professors, and Goleman was He taught briefly as a visiting
president of his high school before lecturer at Harvard University
receiving a scholarship to study before becoming a journalist
at Amherst College, MA. During and author. His bestselling
the course, he transferred to the book, Emotional Intelligence,
University of California, Berkeley, has sold more than 5 million
for a year, where he studied the copies in 40 languages.
rituals of social interaction under
sociologist Erving Goffman. Key works
Goleman then took a doctorate
at Harvard University, where he 1995 Emotional Intelligence
studied under David McClelland, 1998 What Makes a Leader?
best known for his theories on the 2011 Leadership: The Power
drive to achieve. After completing of Emotional Intelligence
112

MANAGEMENT IS
A PRACTICE WHERE
ART, SCIENCE, AND
CRAFT MEET
MINTZBERG’S MANAGEMENT ROLES

IN CONTEXT Managers perform a multitude of roles,


FOCUS which can be divided into three categories...
Management roles
KEY DATES
1949 French engineer and
business theorist Henri Fayol
...Decisional:
develops what becomes ...Informational: ...Interpersonal: Entrepreneur
known as “the classical theory Monitor Figurehead Disturbance
of management.” This claims Disseminator Leader handler
that managers have five Spokesperson Liaison Resource allocator
key functions: planning, Negotiator
organizing, coordinating,
commanding, and controlling.
1930s Australian psychologist
Elton Mayo publishes the
Hawthorne Studies, which Management is a blend of these often conflicting
ushers in an era of people- roles, where art, science, and craft meet.
oriented management, rather
than managing according to
business objectives alone.

T
he question “What do discontinuity.” He finds them to
1973 In The Nature of managers do?” has vexed be strongly oriented to action,
Managerial Work, Henry experts, and many front- and disliking of reflection.
Mintzberg dismisses Fayol’s office staffs, since organizations Mintzberg suggests that there
claims about the management came into existence. In his 1975 are ten basic management roles,
process as “folklore.” paper “The Manager’s Job,” business which fall into three categories:
guru Henry Mintzberg argues that informational roles (managing
managers are not the reflective, through the use of information);
systematic planners that people interpersonal (the management of
assume; instead, “their activities are people); and decisional (managing
characterized by brevity, variety, and decisions and action).
LIGHTING THE FIRE 113
See also: From entrepreneur to leader 46–47 ■ Leading well 68–69 ■ Gods of management 76–77 ■ Learning from failure
164–65 ■ Crisis management 188–89 ■ Simplify processes 296–99 ■ Kaizen 302–09

The informational role is possible personnel resources and decision


because, although managers do making (be a “resource allocator”),
not know everything, they tend to encourage innovation (act as an
know more than their subordinates. entrepreneur); and seek conciliation
“Scanning the environment” and or pacification when the company
processing information is a key part is unexpectedly upset or Organizational effectiveness
of the manager’s job. In this sense, transformed (be a “negotiator” does not lie in that narrow-
Mintzberg claims, they are “the and “disturbance handler”). minded concept called
nerve center of the organizational None of these roles is exclusive rationality. It lies in the blend
unit.” They monitor what is going or privileged. Mintzberg claims that of clearheaded logic and
on, disseminate it to others in effective managers shift seamlessly powerful intuition.
the companies, and act as a between these different functions Henry Mintzberg
spokesperson for the business and know when each role is most
in the world at large. appropriate for the given context.
Information is easily available
to the manager because the role Fact and fiction
connects him or her to many The traditional view held that
people. In this sense, the manager management was a science, where
plays an interpersonal role, which managers controlled a company’s Mintzberg argues that the answer
also involves acting as a figurehead constituent parts—people and to the question “what do managers
for the companies, providing machinery—both of which acted do?” is not simple. He concludes
leadership, and acting as a liaison in predictable and scientifically that management is complex and
point between a large group of controllable ways. Mintzberg contradictory in its demands,
people. The group may include argues, however, that management relying as much on intuition,
subordinates, clients, business is a practice in which art, science, judgment, and intellectual agility
associates, suppliers and peers and craft meet. It involves sorting as on technical skill, planning,
(managers of similar organizations). and processing of information, and scientific logic. All these come
The third role of management, organization of systems and, into play, he says, since a manager
is decision making. Managers must most importantly, highly subjective, designs, monitors, and develops the
oversee financial, material, and nonscientific management of people. ways in which things are done. ■

Henry Mintzberg Mintzberg is the author or co- Although he has been teaching
author of 15 books and more than since 1968, Mintzberg’s interest
Born on September 2, 1939 in 150 articles, and is best known for in organizations and managers
Montreal, Canada, Henry his work on management and emerged during his first degree,
Mintzberg’s background was in managers. His Harvard Business when he spent time at the
mechanical engineering. After Review paper “The Manager’s Canadian National Railway.
graduating in 1968 from the Job: Folklore and Fact” won a His memoirs describe the
Massachusetts Institute of McKinsey award in 1975. In 1997 catastrophic result of two
Technology (MIT), US, he moved he was made an Officer of the boxcars colliding as an excellent
to McGill University in Montreal, Order of Canada and of l’Ordre metaphor for corporate mergers.
where he joined the faculty of national du Quebec; and in 2000
management. He later took a he was awarded Distinguished Key works
joint appointment as professor of Scholar of the Year by the
strategy and management at Academy of Management. In 2013, 1973 The Nature of Managerial
both McGill in Montreal and he was awarded the first honorary Work
INSEAD, in Singapore and degree ever given by the Institut 1975 “The Manager’s Job”
Fontainebleu, France. Mines-Télécom in France. 2004 Managers not MBAs
114

A CAMEL IS A
HORSE DESIGNED
BY COMMITTEE
AVOID GROUPTHINK

T
he desire to belong is a of assumptions, and ignores
IN CONTEXT powerful human emotion. warnings. It begins to assume
We want to be accepted a position of moral superiority,
FOCUS
and to be part of a group, which and fails to consider the ethical
Group dynamics
explains why individuals may set consequences of its actions.
KEY DATES aside their opinions, remain silent The challenge for managers is
1948 US advertising guru in meetings, and nod in agreement to recognize groupthink and take
Alex Osborn promotes the even when they disagree. This action to prevent it. Encouraging
practice of “brainstorming”— deterioration of individual “mental dissent, assembling groups with
generating ideas in groups, efficiency, reality testing, and moral diverse demographics, and listening
without criticism. judgment” was outlined by US to others’ opinions before airing
psychologist Irving Janis in 1972, their views are means of doing so. ■
1972 US research psychologist and is known as “groupthink.”
Irving Janis publishes Victims Groupthink is the idea that
of Groupthink. concurring with others is the sole
2003 An investigation into overriding priority. It can become
the Columbia space-shuttle so strong that it precludes realistic
assessment and analysis. Insulated
explosion cites a culture where
from contrary perspectives, groups
it was “difficult for dissenting
displaying groupthink self-justify
opinions to percolate up.”
their own conclusions. Irrational
2005 Robert Baron publishes decisions may be made based on
the academic paper “So Right false or incomplete information.
it’s Wrong,” claiming that Irving noted that groups
groupthink tendencies may displayed a series of characteristics
be confined to the early stages when groupthink gains hold. The
Swissair went into liquidation in 2001.
of the formation of a group. group begins to feel invulnerable, Once labeled “the flying bank” due to
which encourages extreme risk its profitability, the airline’s executive
2006 Steve Wozniak, the taking. It collectively rationalizes structure displayed groupthink traits,
inventor of the first Apple decisions, fails to check the reality such as a sense of invulnerability.
computer, advises creative
thinkers: “Work alone. Not on See also: The value of teams 70–71 ■ Beware the yes-men 74–75 ■

a committee. Not on a team.” Hubris and nemesis 100–03 ■ Organizational culture 104–09
LIGHTING THE FIRE 115

THE ART OF THINKING


INDEPENDENTLY,
TOGETHER
THE VALUE OF DIVERSITY

A
s with most clichés,
IN CONTEXT it is also a truism that
managers often tend
FOCUS
to recruit in their own image—
Work-force diversity
males, for example, have a tendency
KEY DATES to employ males. If left unchallenged, Diversity management
2005 Car maker Daimler such behavior can lead to companies isn’t merely nice to have,
targets 20 percent of staffed with homogenous clones— it’s a business must.
management roles be filled by people from the same backgrounds Daimler company statement
women by 2020. It sets similar and with the same view of how (2005)
targets for other diversity the business should be run.
measures, such as age mix, In contrast, when organizations
socio-demographic mix, and actively pursue diversity—by
employing people from different
nationality mix.
cultures and socio-economic
2009 A survey analyzing backgrounds, and of different
the value of female genders and ages—the more can stifle innovation and growth.
representation on corporate dynamic and stimulating they In diverse teams, opinions are less
boards ranks companies are as places to work. likely to go unchallenged.
with more females higher Diversity is not confined to
than male-dominated rivals. The case for diversity employee demographics. It might
Greater diversity means greater simply involve creating cross-
2012 A Harvard Business scope for creativity—the more functional teams that incorporate
Review article by business varied are the sources of an the views of people from across
consultants Jack Zenger and organization’s views, the more a company—the marketing team,
Joseph Folkman finds that likely that out-of-the-box thinking for example, might benefit from the
women are rated higher in 12 and problem solving will occur. insight of operations or finance. But
of the 16 competencies that Studies have shown that diversity whatever the context, monochrome
define outstanding leadership. can also combat groupthink, a recruitment can lead to stasis—
2013 New Italian law requires malaise in group dynamics that diversity fights against it. ■
a third of a company’s board
members be women by 2015. See also: The value of teams 70–71 ■ Beware the yes-men 74–75 ■ Thinking
outside the box 88–89 ■ Organizational culture 104–09
MAKING
WORK
MANAGING FINANCES
MONEY
118 INTRODUCTION

F
inance has always been finance, in other words, when business owners, particularly when
seen as having two distinct they do not report loss-making the failing institution has been a
functions: recording investments on the company’s bank. Some financial commentators
what has happened (financial balance sheet, thereby appearing wonder whether the balance has
accounting) and helping businesses to boost profits. This leads to an swung too far away from tradition.
to make decisions about the future important question in relation to
(management accounting). Today, modern business: who bears the Director involvement
it has a third function: financial risk? Traditionally it was assumed When times are tough, directors
strategy. This incorporates that the risk taker was the have to make difficult decisions
judgments about risk, which some shareholder, because it is the about investment and dividends.
companies (especially banks) shareholders who collectively own Usually the directors will have an
have realized must play a larger the business. However, in Europe agreed policy in place—perhaps
part in financial decision-making. and the US especially, the desire that half the after-tax profit will be
to encourage entrepreneurship has paid as dividends to shareholders,
Understanding risk led to generous rules that reduce the while the other half will be retained
Fundamental to an understanding extent to which losses are borne by to invest in future growth. But
of financial strategy are the business owners. Since 2008, many during recessions it is wise to keep
concepts of leverage and excess business collapses have proved more cash within the business, so
risk. “Leverage” is a measurement expensive for customers, staff, directors may decide that dividends
of the extent to which a business and suppliers, but less so for the should be cut. If the business also
is dependent upon borrowings. cuts its investment plans, it can
The higher the leverage, the greater keep more cash in its current
the level of risk. In good times, account, providing the liquidity to
directors come under pressure to survive difficult trading conditions.
produce impressive profit growth, So who is responsible when
and one easy way to achieve it The bonus mania which things go wrong? This depends on
is to borrow money and invest caused the recession could the systems of accountability and
in the most profitable parts of the never have happened without governance within each company.
business. However, if the economy Ideally, the directors of the business
corrupted accounting rules.
turns downward, toward recession, should be sufficiently involved to
heavy borrowings turn into
Nicholas Jones know when things start to go wrong,
UK film maker, ex-accountant
an overwhelming burden. and call for discussion of a change
Leverage becomes toxic. in strategy. If the directors are too
The risk level generated hands-off, they may feel unable
by leverage is worsened when to hold the CEO fully accountable
businesses use off-balance-sheet when things do go wrong. Alert,
MAKING MONEY WORK 119

hands-on directors should also understanding the huge potential For financial accountants, the
spot when rewards for staff are of the mass market. When looking traditional stance has long been
so out-of-control as to threaten the at China today, the most exciting “playing by the rules.” Integrity and
profits being made for shareholders opportunities are for products that adhering to accounting principles
and for the future financial health would appeal to the hundreds of such as prudence and consistency
of the business. “Profit before millions of potential consumers were seen as most important. More
perks” should be the mindset. who are workers, not managers. recently, career opportunities have
Important to good governance arisen for accountants who are
is a willingness to ignore the herd. Using money wisely willing to be more creative. This
For example, if every US bank began In management accounting, two way of thinking stems from the
to expand into South America, a factors are of particular importance: scope for “making money from
smart South Korean bank would cash and costs. A management money,” by lending the company’s
refuse to copy. However, in practice, accountant works hard to provide cash deposits to other companies at
this proves hard to do. Directors accurate data on production costs, high rates of interest, or speculating
meet each other in the same clubs so that managers can make on future trends in exchange rates
and conferences, and like to be part informed decisions about pricing, or commodity markets. In a world
of the same pack. Nevertheless, on outsourcing, and on which where a quicker, bigger buck can
US investment guru Warren Buffett products to back with marketing be made from money than from
has become one of the world’s spending. Activity-based costing, manufacturing, playing by the
wealthiest men by ignoring the which provides the most complete rules may seem a poor choice. ■
herd instinct among investors. data on costs per unit, is the best
way to do this. When trading
The mass market is poor, however, management
Some modern boards of directors accountants place their tightest
accept that if there is wisdom focus not on costs but on cash
among crowds, there may be flow, following the maxim that I am incredibly nervous that
even greater wisdom among staff. “cash is king.” This arises because
we will implode in a wave
Henry Ford was one of the first the worse the trading conditions,
to realize that your workers are the more that companies try to hold
of accounting scandals.
your customers, but it has taken onto the cash they have—making
Sherron Watkins
US executive, former vice president
a century for others to see the it much harder to get paid if they of Enron (1959–)
potential in this phrase. Not only are your customers. The flow of
is there value in drawing ideas from cash dries up, so an early focus on
staff who care about the products cash flow makes sense: start your
they both produce and use, but own cash hoard before others
there is also strategic value in begin trying to create their own.
120
IN CONTEXT

DO NOT LET
FOCUS
Governance and ethics
KEY DATES

YOURSELF BE
1978 US scholars Ross
Watts and Jerold Zimmerman
write Towards a Positive
Theory of the Determination

INVOLVED IN
of Accounting Standards.
1995 French professor Bernard
Colasse claims that “there isn’t
any true result, but a result

A FRAUDULENT arranged using creative


accounting techniques.”
2001–02 Telecoms giant

BUSINESS
PLAY BY THE RULES
WorldCom overstates earnings
by more than $3.8 billion.
2009 UK professor David
Myddelton publishes Margins
of Error in Accounting.
2012 Directors of US discount
website Groupon identify
a “weakness” in financial
reporting, five months after
becoming a public company.

B
usiness accountants have
two roles: to record profits
and cash flow and to provide
tightly estimated data about costs
to help make strategic decisions.
The accountant’s instinct is to be
cautious and prudent—costs and
cash-outflow figures generally err
on the high side, while revenues
and cash inflows tend to be on the
low side. Any surprises should be
positive. For example, in January
2009, Honda Motor Company
warned that dramatic falls in sales
worldwide—due to the global
downturn and the strong Yen—
would force the company into a $3.7
billion loss in the fourth quarter of
its financial year. However, the loss
MAKING MONEY WORK 121
See also: Hubris and nemesis 100–03 ■ Profit before perks 124–25 ■ Making money from money 128–29 ■ Accountability
and governance 130–31 ■ Morality in business 222 ■ Creating an ethical culture 224–27 ■ The appeal of ethics 270

The alternative to
...but some rules rules is a principled
The rules set out ignore morality— approach based on a
minimum standards... “playing by the rules” “true and fair view”
may not be enough. of a company’s accounts.

But without statutory


Good companies and
protection, individuals can
accountants consider
ignore principles and profit
rules plus morality.
from immoral actions.

turned out to be $3.3 billion, up with different figures, even UK’s newly formed Accounting
demonstrating that the company though the underlying data that Standards Board, which in turn
had erred on the side of caution. they are analyzing is the same. developed new accounting rules
In 1992, British banking analyst in an attempt to minimize the
Accounting for profit Terry Smith published a book scope for “creative accounting.”
An accountant who follows safe called Accounting for Growth. Today, most countries around the
practices sleeps well, but may This publication set out the world follow the rules laid down by
struggle to climb the corporate remarkable array of opportunities the International Financial Reporting
ladder. When the stock market is for publicly traded companies to Standards (IFRS). As a consequence,
full of optimism (a “bull market”), provide an artificial boost to their the income statements and balance
there are intense pressures within stated profit levels. The book had a sheets of companies in most
companies to push the stated profit huge impact, and influenced the countries follow the same format. ❯❯
level to the highest feasible point.
This could be considered an odd
statement, since profit might seem
to be a simple matter of fact.
However, the calculation of profit
(which is effectively an estimation)
is underpinned by a series of
assumptions, and a company’s
stated profit is effectively a
moveable figure. Different
accounting teams may come

Accountants must decide how


cautious they are going to be when
reporting a company’s financial status,
since they may be under pressure to
boost the stated level of profits.
122 PLAY BY THE RULES
Mark-to-market accounting is a risky method of valuation, since it of rules in accounting. He believes
values a company’s assets according to current market value. Historic in traditional accounting principles,
cost valuation is a more reliable, and cautious, measure of value. because these supply the required
flexibility for accountancy across
many different types of companies.
He claims that the idea that there
is a “single correct answer” when
During a stock-market If the stock market preparing a company’s accounts is
boom, valuing a company’s falls, the value of the nonsense. Nevertheless, this idea
assets and investments balance sheet will lies behind the call for increased
according to their shrink, leaving the regulation. “People want it to seem
current market value company in a as if we’re doing something about
can lead to an vulnerable scandals,” he says; they think that
overinflated position. greater regulation will make a
balance sheet. difference, “but it never does.”
Myddelton also believes that
directors should gain a “true and
fair view” of their accounts, instead
of being forced to rely on a picture
produced by someone else’s idea
of the accountancy rules.
Although the time frame for suggested that a more prudent Some “creative accountancy”
implementation is unclear, a widely approach would be to increase the practices stretch the flexibility
supported plan is in place to merge level of provision” against bad debts. within the rules so far that they
the IFRS with the US’s Generally Ultimately, the directors of HBOS can produce potentially misleading
Accepted Accounting Principles had decided to take an optimistic accounts. “Mark to market”
(GAAP) to provide globally view of the bank’s lending. They accounting, for example, values
recognized accounting rules. chose to play beyond the rules. assets at their current market value.
Although the rules are becoming This means that when the stock
clearer, important areas for debate Cautious accounting market is booming, any investment
remain. These might be raised Professor David Myddelton, a (such as shares in another business)
internally, in arguments between UK management scholar, argues will also be booming. This boosts
company accountants and directors; strongly against the expansion the value of the company’s balance
or the debate might be between
independent auditors and the Moral duty
organization. When UK bank Halifax
Bank of Scotland (HBOS) collapsed Julian Dunkerton is the founder profit to the tax authorities. Not
in 2008, the UK government bailed and major shareholder in the that Dunkerton wants to claim
it with $32 (£20) billion, before the fashion business SuperGroup the moral high ground—in its
bank was acquired by Lloyds Bank. plc, whose leading brand is annual report, SuperGroup plc
In 2008 the gap between the bank’s the popular street-wear label explains that “We recognize the
loans and its deposits was $341 Superdry. Based in Britain, commercial value, as well as
(£213) billion. The bank’s auditor, but with business and outlets the moral duty, of consistently
KPMG, was heavily criticized over worldwide, SuperGroup could operating with integrity,
the HBOS collapse, although KPMG easily follow the lead set honesty, and a commitment to
by other organizations and responsible and ethical business
had consistently raised warnings
manipulate accounts to practices.” Dunkerton has the
over the risks involved. When the
minimize its tax liabilities. wisdom to appreciate that
UK’s regulator, the Financial Instead, the business plays acting responsibly can yield
Services Authority, published a by the spirit of the tax rules, financial benefits, particularly
report on HBOS in 2012 it noted paying about 30 percent of its in the long term.
that KPMG had “consistently
MAKING MONEY WORK 123
Major accounting misconduct was
unearthed by US company Caterpillar
Inc. in a Chinese business it purchased
in 2012. Irregularities included
overstated profits and falsified stocks.

sheet and may encourage it to


expand beyond its means. All it
takes is a fall in the stock market for
this valuable shareholding to
become worth considerably less.
Myddelton suggests that it is better
to use “historic cost” accounting
than “mark to market,” since this
provides a more stable set of figures;
it values assets at their cost at time
of purchase, minus any depreciation
that has taken place, rather than at
their current market value.
The argument of rigid rules 2013 Caterpillar said it was writing countries in which it operates have
vs. looser-based principles will be off $580 million from the value of no legislated cap on interest rates,
heard repeatedly when the merger ERA, thereby virtually admitting so the directors are playing by the
talks between the US’s rules-based that the purchase was a complete rules. However, a report by the UK
GAAP system and the IFRS waste of money. Caterpillar then Citizens’ Advice Bureau in 2013
become serious. Even though the accused the previous management stated that three out of four “payday
IFRS is far more rule-based than at Siwei of deliberately creating loan” customers struggle to repay.
its predecessors, it retains a greater misleading accounts, but let the In contrast to the UK, countries
reliance on principles than the matter drop in May 2013 when a such as France and the US have
US’s GAAP system. financial settlement was reached. rules that set maximum interest
In other circumstances, directors levels for consumer credit loans.
Ethical conduct can find solace in the rules. Ultimately, no set of rules can
Whether rules based or rooted in Operating in South Africa, Canada, substitute for ethical behavior
principles, no accounting methods and Europe, short-term money- nor safeguard the system from a
can prevent a deliberate attempt lender Wonga.com sets its annual determined attempt to manipulate
by directors to mislead. In June percentage rate (APR) on “payday accounting figures in a misleading
2012, for example, US construction- loans” as high as 5,800 percent. way. In the hands of principled
equipment giant Caterpillar Inc. This is perfectly legal because the accountants, flexibility within the
completed a $650-million purchase rules is useful; but if someone seeks
of Chinese company ERA Mining to gain huge financial advantage
Machinery Ltd. and its wholly no matter what, that flexibility will
owned subsidiary Zhengzhou enable him or her to do so, even
Siwei Mechanical and Electrical if this entails acting immorally.
Equipment Manufacturing Co. Mark-to-market accounting Rules help to ensure that
This was part of Caterpillar’s is like crack. Don’t do it. companies operate at an acceptable
long-standing strategy of growth minimum standard. The argument
Andrew Fastow
in China. Unfortunately, a series of US former Enron executive (1961–) revolves around where this standard
black holes in Siwei’s accounts lies, balanced as it is between useful
soon emerged, including the standards and costly overregulation.
discovery in November 2012 that Rules also encourage those with
the company did not hold the stock ethical principles to go further
levels it had claimed. In January than the minimum. ■
124

EXECUTIVE OFFICERS
MUST BE FREE
FROM AVARICE
PROFIT BEFORE PERKS

IN CONTEXT
Multiple shareholders
FOCUS In a public company, cannot run a company,
Equity and performance the shareholders so they must employ
are the owners of executive officers to do
KEY DATES the company. this for them.
1776 Adam Smith says that
managers will not watch over
a business with the same
vigilance as partners in a
private company would
watch over their own. ... so it is essential that
managers can be trusted It is not possible
1932 US professor Adolf to oversee, in detail,
Berle and US economist to act in the interests of
the company, not everything that these
Gardiner Means coin the managers do…
themselves.
phrase “the separation of
ownership and control.”
1967 Canadian-American
economist J. K. Galbraith says
that shareholders no longer
control the organizations Executive officers must be free from avarice.
they legally own.
2012 Larry Ellison of US
computing corporation Oracle

I
Inc. becomes the world’s n an ideal business, directors Yet there is a risk that bosses can
highest-remunerated CEO, pursue the company’s be dazzled by the wealth generated
when he receives $96.5 million objectives without undue around them, and work toward
in pay, shares, and perks. consideration for personal gain. boosting personal gain instead
Upon election to the board, they of the profits due to shareholders.
negotiate their salary and standard This situation, known as “the
perks, and from then on, their focus divorce of ownership and control,”
is on the success of the business. first arose in the late 19th century,
MAKING MONEY WORK 125
See also: Beware the yes-men 74–75 ■ Is money the motivator? 90–91 ■ Organizational culture 104–109 ■ Avoid
groupthink 114 ■ Play by the rules 120–23 ■ Accountability and governance 130–31

question corporate governance


mechanisms and executive pay. The
shareholders of Barclays Bank, for
example, were stirred into taking
action just before the bank’s 2012
AGM. They had discovered that in Leadership is a privilege
the previous year, profits had fallen to better the lives of others.
by 3 percent, shares had dropped by It is not an opportunity to
26 percent, but chief executive Bob satisfy personal greed.
Diamond was due to receive a bonus Mwai Kibaki
of $4.2 (£2.7) million and total pay in Former President of Kenya (1931–)
excess of $10 (£6.3) million.

Restricted ownership
In private limited companies, the
situation is simpler. Since share
ownership is restricted (often within
a single family), the directors and of family-owned and publicly owned
the shareholders are usually the companies in Spain found that
German mittelstand companies— same people. In any case, it is family-owned companies performed
such as Faber-Castell, a world-leading unusual for people to take advantage better, in terms of financial equity,
producer of pencils—are usually family- financially of those within their than nonfamily companies of the
owned. Directors of such firms are more own circle of family and friends. For same size in the same industry.
likely to focus on long-term performance.
example, the problem of perks before Countries such as the UK and US,
profits is rarely an issue in Germany, however, have a larger proportion
with the creation of large, public where the mittelstand (medium- of plcs than many other countries.
limited companies (plcs) that sized) companies—which are After decades of noninterference,
allowed senior management more mainly family companies—are the shareholders are once again
freedom to operate beyond effective dominant business model. A recent becoming interested in corporate
shareholder scrutiny. As long as the study of the different performances governance and gain. ■
company profits were satisfactory,
directors were free to conduct their Fewer perks, more profits
business functions as they saw fit.
However, if a business enterprise Several companies have taken were told that the choice was
comes to reflect the aims of its positive steps to eliminate perks between a reduction in travel
managers, will the business be as part of a cost-cutting strategy. expenses, or a cut in their
focused on profit maximization At the German company annual bonuses.
(for its owners, the shareholders) or T-systems International, an ICT Since the 2008 financial
on increasing the status, financial subsidiary of Deutsche Telekom downturn, there has been an
rewards, and power of its managers? AG, all workers must now fly in increase in the trend of
coach class, regardless of the organizations tightening their
Personal interests traveler’s position within the purse strings. Even the mighty
company, or the distance and entertainment company Walt
Some directors act opportunistically;
duration of their journey. The Disney is phasing out executive
they seem to be more interested
change from business- to car allowances. Cost cutting and
in personal gain than in the economy-class travel is thought eliminating perks puts greater
company’s financial well-being. to have saved T-systems $1.5 pressure on managers to boost
The banking crisis of 2008 led the million annually. Executives their company’s profitability.
shareholders of many companies to
126

IF WEALTH IS PLACED
WHERE IT BEARS INTEREST,
IT COMES BACK TO YOU
REDOUBLED
INVESTMENT AND DIVIDENDS

A
fter calculating the year’s to shareholders that most businesses
IN CONTEXT profit, a company’s manage each year. It might amount
directors can choose to a 3 percent return on the sum
FOCUS
whether to pay a dividend to invested, which would make it
Financial strategy
shareholders or reinvest the sum. comparable to the interest a saver
KEY DATES A dividend is the annual payment might receive from a bank deposit.
1288 The first recorded share
certificate is issued to the
Bishop of Vasteras in Sweden
by Stora Enso, a pulp and How much a company pays in dividends or
reinvests in the business is decided…
paper company.
17th century The Dutch East
India Company issues shares,
heralding the emergence of
organized share trading.
…according to growth prospects and the health
1940 Peter Drucker writes on of the balance sheet.
the need for businesses to
balance short-term dividends
and long-term reinvestment.
1961 Modigliani and Miller
claim that paying or retaining When the balance sheet is
When growth is high, or the
strong, or growth is slowing,
dividends does not affect balance sheet is weak,
companies should pay
a business’s long-term companies should retain cash
dividends
performance. Their seminal for reinvestment.
to shareholders.
work is later disputed, with
several studies showing that
dividend increases boost a
company’s share price.
Directors must balance the need for reinvestment
in the business with shareholder returns.
MAKING MONEY WORK 127
See also: Accountability and governance 130–31 ■ Who bears the risk? 138–45
■ Ignoring the herd 146–49 ■ Profit versus cash flow 152–53
John Kay
Professor John Kay is a British
economist born in 1948. Best
known for his sceptical support
for free-market business
behavior, he is a visiting
professor at the London School
of Economics and regular
contributor to the Financial
Times. In 2012 he presented
a detailed report to the UK
government on the stock
market, which emphasized
that the normal purpose
of stock markets is not
speculation, but to provide
companies with access to
capital and to provide savers
with an opportunity to share
in economic growth. He also
highlighted concern about
excess dividend payouts.
The Dutch East India Company the company for reinvestment? The
was the first public company to offer higher the company’s growth Key works
shares. Investors put up money for prospects, the greater the incentive
voyages in return for a share of the
to keep money within the business. 1996 The Business of
profits made from successful trips.
Slow-growing companies should Economics
therefore pay out a high proportion 2003 The Truth About
In 2012, for example, Honda Motor of profits in dividends, whereas Markets
Company of Japan paid out just booming organizations are more 2006 The Hare and the
under half its $2.7 million profit in likely to keep the cash within the Tortoise
dividends, leaving just over half to business. There is no safer source
reinvest in the company. of capital than retained profit: it does
The first dividend payments not need to be repaid, nor does it Just two years later RBS was forced
were made in the 17th century by require the payment of interest. to ask shareholders to buy shares at
the Dutch East India Company, Another factor to consider is the 200p ($3.13) each, in order to raise
which was the world’s first company health of the company’s finances. £12 ($18) billion. Six months later,
to issue shares in exchange for If they are weak, profits should be those shares were worth only 65p
capital. To encourage investors to retained; only if the balance sheet ($1.03); three months after that, just
buy shares, a promise of an annual is strong should generous dividends 11p (¢17). The company’s generosity
payment (called a dividend) was be paid to the shareholders. in 2006 cost its shareholders dearly.
made. Between 1600 and 1800 the Dividend payouts must be In contrast, Apple did not pay
Dutch East India Company paid considered carefully. In 2006, the dividends from its formation in 1977
annual dividends worth around 18 Royal Bank of Scotland (RBS) until 2013. The directors, led by
percent of the value of the shares. declared a 25 percent increase in Steve Jobs, argued that shareholders
dividends to shareholders. Market would benefit in the long term by
Invest or pay out? commentators praised the move, allowing Apple to reinvest profits.
Dividend payouts are entirely the gift with one team of analysts issuing Only in 2013, with its growth rate
of the directors. Their decision is the note: “Thanks Fred [Goodwin, beginning to fall, did the company
simple: what proportion of after-tax CEO of RBS], we love you.” The announce dividend payouts, which
profit should be paid in dividends, dividend increase put money directly it projected would average $30
and what should be retained inside into the hands of the shareholders. billion a year until 2015. ■
128

BORROW SHORT,
LEND LONG
MAKING MONEY FROM MONEY

IN CONTEXT Companies with a good cash flow and liquidity


can make money from money, by…
FOCUS
Financial products
KEY DATES
c.1650 A rice market in …investing in financial …borrowing short-
Osaka, Japan issues the first products such as term and lending to
standardized futures contract, derivatives and customers long-term,
agreeing to prices for goods futures contracts. like a bank.
not yet delivered.
1970s and 80s Deregulation
gives banks and companies But this can prove to be a
more ways to use money to money-losing exercise if there is
make money. a crash in markets or the economy.
1973 US economists Fischer
Black and Myron Scholes
devise a mathematical formula
that appears to take the risk Making money from money is a risky,
out of futures contracts. short-term strategy.
1980s Large corporations
begin to use derivatives to

S
make money from money. ome companies opt to they can gain access to a new
“make money from money.” source of profit. The two terms that
2007–08 Financial markets This means they use their exemplify the idea of making
collapse around the world, cash assets not only to further the money from money are “treasury
threatening the continued development of their products, but function” and ”shadow banks.”
existence of banks and also to generate money through
banking-type ventures. the financial markets. Some Hedge betting
companies believe that by making “Treasury function” is a term that
hedges (bets) on the fluctuations of emerged in the late 1970s in the
the currency markets, for example, wake of economic challenges, such
MAKING MONEY WORK 129
See also: Managing risk 40–41 ■ Hubris and nemesis 100–03 ■ Investment and
dividends 126–27 ■ Who bears the risk? 138–45 ■ Leverage and excess risk 150–51
Treasury in focus
For the decade prior to the
financial crisis of 2007–08,
to rise, but in fact it underwent a
many companies began to use
sharp devaluation and the company short-term financing to fund
ended up losing $2.5 billion. long-term capital expenditure.
As a result, some companies now However, the financial crisis of
spell out their opposition to making 2007–08 changed conditions
money from money. Mining dramatically, as banks
multinational Rio Tinto, for example, collapsed or came close to
stated in its 2013 annual report that doing so. CEOs demanded to
its treasury “operates as a service know where their company’s
to the businesses of the Rio Tinto cash was, and the real-time
group and not as a profit center.” cash position. Not all
treasurers were able to
Shadow banks provide immediate answers,
Other companies, however, have since some of their
investments were in local,
extended the treasury function to
Many manufacturing companies, manually operated, less-than-
become a major, or even majority, transparent systems.
such as Brazilian paper company Aracruz
(known as Fibria since 2009), used the profit center for the business. As a result, the treasury
treasury function to make money, not just Companies such as US function has moved to the
manage it, from the 1980s onward. conglomerate General Electric (GE) forefront for many companies,
have developed this function into with an increased need for
as quadrupled oil prices and an effective “shadow bank.” In transparency and up-to-the-
“stagflation” (where inflation and 2007, GE’s treasury function GE minute accountability. Boards
unemployment are both high at the Capital held over $550 billon of expect treasurers to be
same time). The idea emerged that assets, making it larger than some prepared for the unexpected—
the goal of a company’s treasury of America’s top ten banks. It such as by increasing cash
function (the department responsible contributed 55 percent of GE’s reserves to reduce liquidity
for stewarding its finances) should profits, mainly by borrowing money risk. However, this brings up a
be to achieve the optimum balance short-term to lend to customers new problem for the treasury
between liquidity and income from over the long-term (“borrowing function: if more cash is kept in
reserve, how can this surplus
the company’s cash flows. short and lending long”). GE was
liquidity be used most
During the decades leading up able to flourish as a member of the effectively to fund growth?
to the 2007–08 financial crisis, shadow banking system without
large companies steadily added having to bear the regulatory
greater responsibilities to the burdens of banks. By 2008,
treasury function. Often, these however, it was forced to ask to
began as ways to minimize risk, participate in the US government’s
but the opportunities for profitable banking sector bail-out program.
trading became very tempting—to Making money from money
the point that some companies took carries serious risks, whether the The line separating
out contracts on financial hedges bets go wrong or not. This is investment and speculation
that were worth more than all their because the more profits a is never bright and clear.
export earnings. For example, in company’s treasury generates, the
Warren Buffett
2008, the Brazilian paper and pulp less willing the board may be to US investor (1930–)
company Aracruz used cash assets invest in research and development
to make bets on currency futures for the future growth of the company.
(the value of currencies at a future This way of making money from
date). Specifically, it bet that the money is strongly correlated with
Brazilian currency would continue short-termism in business. ■
130

THE INTERESTS OF
THE SHAREHOLDERS
ARE OUR OWN
ACCOUNTABILITY AND GOVERNANCE

IN CONTEXT
Good governance relies on...
FOCUS
Executive control
KEY DATES
1981 Australian-born US
management consultant Peter
Drucker suggests that chief
executives “have not yet faced
up to the fact that they ...proactive, ethical, ...clear, traceable
...alert board
represent power—and power well-informed lines of
members.
has to be accountable.” directors. responsibility.

1991 The Cadbury Committee


is established in the UK to
investigate scams, failures,
and accountability in corporate

A
governance. Its influential ccountability is the Following a series of business
report, Financial Aspects of obligation of an individual disasters (from Enron through to
Corporate Governance, is or organization to accept Lehman Brothers and numerous
published a year later. responsibility (be accountable) banks), corporate governance has
for their actions. In business, become a major issue worldwide.
2002 The US government’s it is often used to trace chains To achieve effective accountability,
Sarbanes-Oxley Act sets out of responsibility: staff may be directors need to make sure that
much stricter guidelines to held to account for their actions roles and lines of authority are clear.
govern accounting practices by those above them in the This makes it possible to trace the
and the publication of organization’s hierarchy; or higher cause of a mistake to its source—
previously confidential tiers of management may be held and attribute responsibility to
data (such as operational accountable for those below them. the right person or group. For
business risks). Ultimately, the way the company is governance to work well, board
governed is the responsibility of the members must be well-informed,
directors; their governance should fully independent, and should work
therefore be proactive and ethical. together for the long-term interests
MAKING MONEY WORK 131
See also: Profit before perks 124–25 ■ Who bears the risk? 138–45 ■ Profit versus
cash flow 152–53 ■ Balancing long- versus short-termism 190–91
Jamsetji Tata
Born on March 3, 1839 in
South Gujarat, India, Jamsetji
limited or no understanding of the
Tata might have appeared an
risks their company faced. This unlikely candidate to be the
suggested a flaw in the ability of the founder of a business that
board to hold executives to account. would grow to be one of the
Most of the time, in most largest conglomerates in the
companies, executives make sound world. Tata followed his
decisions that require minimum father—who had broken the
scrutiny. However, good governance family tradition of being a
ensures that the board is always Brahmin priest—into business
alert—so it will be fully aware of at 14 and soon showed
what is happening when a mistake potential, graduating from
is made. Such a mistake might be Elphinstone College in
Companies that bury their heads related to strategy (an overpriced Mumbai in 1858. After
in the sand—like the proverbial ostrich— takeover bid, for example), or to working for his father, Tata
may be reluctant to be held accountable took on his first enterprise—a
the ethics of a particular situation.
for actions and decisions, with damaging cotton mill—in 1868. One of
Independently minded nonexecutive his dreams was to found a
consequences for business ethics.
directors should be in a prime steelworks, and although this
position to question, for example, business aim would not be
of the business and its owners— whether the company is right to achieved in his lifetime, Tata
the shareholders. Nonexecutive be using very low-cost suppliers, Iron and Steel Company was
directors have an important role or whether a contract has been set up in 1907 by his son
to play in corporate governance: won using questionable means. Dorabji. The steel industry
they are not company employees went on to be the foundation
and should be able to quiz When things go wrong for Tata Group’s global success.
executives with impunity. The importance of good governance One of Jamsetji Tata’s
was made clear in the case of overriding principles was
Board-level scrutiny Japan’s mighty Olympus camera fairness, which permeated
In 2011, consultants McKinsey & business in 2011. Newly appointed his entire business approach.
In terms of accountability, his
Company published findings from Chief Executive Michael Woodford
vision was simple: “We started
a survey of 1,597 board directors, found that a $1.7 billion cover-up on sound and straightforward
providing fascinating insights into of losses had been made when business principles, considering
the proceedings of board meetings. acquiring other companies. The the interests of the
The survey showed that in Asia, Olympus directors had hidden shareholders as our own.”
no more than a third of a board’s these losses from the published
meeting time was spent scrutinizing accounts and therefore from public
management actions and decisions; scrutiny. The board responded
far longer was spent on strategic by firing Woodford. Only after a
planning. Although this sounded successful campaign by Woodford
sensible, it suggested that did the Japanese authorities charge
accountability and governance key Olympus directors with fraud.
Accountability breeds
received less time. By contrast, in Eventually the whole board
North America nearly two-thirds of resigned. The case demonstrated
response-ability.
board time was spent on scrutiny. how ineffective Olympus’s
Stephen R. Covey
US management consultant (1932–2012)
More surprisingly, the same nonexecutive directors had been
sample showed a lack of satisfaction in holding the board to account,
with fellow board members. and how important good governance
Directors thought that more than and accountability are to the
30 percent of their peers had well-being of every company. ■
MAKE THE BEST
QUALITY OF GOODS
AT THE LOWEST COST
PAYING THE HIGHEST WAGES

POSSIBLE
YOUR WORKERS ARE YOUR CUSTOMERS
134 YOUR WORKERS ARE YOUR CUSTOMERS

M
ost economic models
IN CONTEXT state that during the
early stages of economic
FOCUS
development, low-wage workers
Market expansion
find themselves making products
KEY DATES that are bought by middle- and
1914 Henry Ford doubles his upper-class consumers. The
employees’ wages to $5 a day. workers tend to eat simple food,
such as potatoes, rice, or corn,
1947 US psychologist Alfred J. and travel on foot or—if they are
Marrow finds that productivity lucky—use a bicycle as a means
increases when employees are of transportation. Meanwhile, their
involved in decision making, employers eat expensive meat-
and introduces the concept based meals, and travel in
of participative management. luxurious transportation—from The Ford Motor Company quickly
the fine horse carriages of the 17th realized that its production line was
1957 Douglas McGregor efficient but made workers unhappy.
publishes The Human Side century to the sleek, “dream
machine” automobiles of today. By giving them a large pay rise, Ford
of Enterprise, claiming that created a market of staff-customers.
However, economic growth
organizations thrive best by
takes a huge step forward when
trusting staff to apply their workers are able to buy the products Model T automobile was priced at
creativity and ingenuity to the that they make; when they, too, can $825 in 1908, at a time when Ford
enterprise in which they work. afford to eat meat and purchase workers earned less than $2 a day.
1993 Ricardo Semler of Brazil’s household and leisure goods. This In 1913, Ford introduced a system
Semco writes Maverick!. is now starting to happen rapidly in of conveyor-belt mass production,
China, where the the sales of staple reducing the time taken to make
2011 Google is revealed products—such as toilet paper and a Model T from 750 to 93 minutes.
to have the highest job refrigerators—are growing quickly. With this improvement in efficiency,
satisfaction in the US high- the company could afford to cut the
tech sector; young “Googlers” Building a market price of one of its vehicles to $550.
are both employees and Workers were recognized as One problem remained, however.
customers of the company. potential customers by US car- The repetitive jobs required to run
making pioneer Henry Ford. Ford’s the Model T production line made

Companies should focus on


They should also reward This enables employees
providing consumers with
their employees with the to buy the company’s
good products and
highest wages possible. products or services.
services at low prices.

They can then provide


If your workers become management with
your customers, your valuable insights
business will thrive. and ideas, as well as
boosting sales.
MAKING MONEY WORK 135
See also: Changing the game 92–99 ■ Organizational culture 104–09 ■ Understanding the market 234–41 ■ Focus on the
future market 244–49 ■ Make your customers love you 264–67 ■ Maximize customer benefits 288–89

workers dissatisfied, and pushed Household spending


labor turnover to higher than 370 data from 2011 shows
60 that US spending on
percent—the average employee
luxury goods (such as
stayed for only three months before chocolate) outstripped
50

$ (US) PER CAPITA, 2011


quitting. To counter this, Ford spending on essentials
announced that wages at the (like toilet paper). The
company’s factories would be more 40 data from China shows
than doubled, to $5 a day. His that as an economy
actions made headlines around 30 develops, spending
the world, and in the factory, labor on essential items
rises the most.
turnover fell to 16 percent annually, 20
helping the output per worker (a USA
measure of overall productivity) 10
to rise by around 40 percent. China
By 1914, it took a Ford worker India
0
just three months to save enough Toilet paper Chocolate Fragrances
money to purchase a Model T. By
1924, the price of a Model T fell
again to $260, making it possible stumble upon an important fact: in helping to generate the 400,000
to buy a brand new car with a when your workers earn enough work force suggestions per year
month’s pay. By 1924, the Ford to afford to be your customers, on how the company might improve
Motor Company sold more than there can be huge benefits for the production efficiency and quality.
50 percent of the world’s cars. business. Along with increases
in staff pride and commitment, Emerging markets
Learning from employees managers are likely to be given In 1924, the US government
Although Henry Ford generated valuable insights into the company’s published a report titled Cost of
excellent publicity by making his products and processes. Living in the USA. It showed that
policy of paying high wages sound In Toyota City, Japan, more than the average family spent 38 percent
like altruism, his practical need to half the work force owns a Toyota of its $1,430 annual expenditure on
lower the labor turnover helped him vehicle. This is a significant factor food. This is interesting because,
in the past five years, India’s family
spending pattern has slipped below
this level, to 36 percent, indicating
that the average wealth of Indian
families is increasing. When China’s
proportion of spending on food fell
toward 30 percent of income,
households could afford to increase
their wider spending on nonfood
items, such as consumer goods.
In the US today, just 7 percent of
household income is spent on ❯❯

Farm wages in India increased by


17.5 percent annually from 2007 to 2012.
Since farm labor is at the bottom of the
economic pyramid in India, this signifies
a very fast overall rise in wages.
136 YOUR WORKERS ARE YOUR CUSTOMERS
Car sales in China
and India grew steadily
90 18 from 2005 to 2012. The
potential for sales is
80 16 huge—percentage

ANNUAL SALES (MILLION CARS)


ownership in both
70 14 countries is tiny
CAR OWNERSHIP (%)

compared to the US,


60 12
where ownership
is high and sales
50 10
remained static.
40 8 China
Car ownership
30 6 Annual sales

20 4 India
Car ownership
Annual sales
10 2
USA
0 0 Car ownership
2005 2006 2007 2008 2009 2010 2011 2012 Annual sales

food, leaving the average family five years, boosts its spending on disguise, to find out what the
with a huge surplus with which toilet paper to China’s per-capita business looks like from that
to buy nonessential items that spending, the market growth in perspective. The show clearly
quickly become “necessities,” such India will be $8.4 billion ($6.72 x illustrates how those in charge of
as cosmetics and gym membership. 1.25 billion population). For China a business are often unaware of the
India is perhaps about to embark to catch up with the US would opinions, insights, and feelings of
on this stage of economic imply market growth of $24.3 billion their customers and staff. Despite
development. If so, this will have ($17.98 x 1.35 billion population). a world of online praise and blame,
an impact on the sales of a huge And that’s just the increase in some companies are able to remain
range of everyday items. market size—not the total market. in a bubble of self-delusion.
The significance of this trend Exactly the same logic applies However, this is unlikely to be
lies in the numbers of people across the market for ordinary true of an organization in which the
involved. If India, over the next household goods throughout the worker is also the customer. These
developing world. Already, China is employees care about the product
the world’s biggest market for luxury or service because they experience
items, such as Swiss watches, it themselves and realize that their
jewelry, and cars. Over the coming job security relies on customer
decades, China is also likely to satisfaction and the company’s
I will build a car for dominate sales of ordinary items commercial success. If a customer
the great multitude … (such as toothpaste), and services waiting room becomes messy and
[that] will be so low in (such as insurance). The potential dirty, for example, staff-customers
price that no man making sales volumes involved are huge. will quickly draw attention to it.
Today, China is the world’s largest In Europe, fashion retailer
a good salary will be
car market, even though fewer than Primark enjoys huge success
unable to own one. 10 percent of households own a car. in the mainstream market. The
Henry Ford company turns runway fashion
US industrialist (1863–1947)
In touch with reality speedily into low-priced garments
The television show Undercover with a target market of 15–35-year-
Boss sends senior executives olds. However, its growth was
into low-level jobs in their own instigated by an unusually elderly
companies, under alias and senior management team. By
MAKING MONEY WORK 137
Clothing retailer Primark has built a
reputation for low-cost fashion in the
European ready-to-wear market. Its
success is due in no small part to the
opinions of its workers.

his engineers to start a special new


business division. This became the
nucleus of a new Semco, developing
new ideas that soon generated 66
percent of the company’s business.
Semler’s leadership approach
is to encourage his work force to
manage themselves in terms of
time-keeping, work-scheduling,
and career development. By doing
so, he believes that workers will
truly care about what they do; this
means that they will inevitably be
taking care of not just the business,
the time Primark had reached its beyond empowerment toward but its customers too.
strongest phase of growth in the worker fulfilment, even delight. Semler describes his methods
2000s, its senior executives were Born in 1959, Semler took over the in his book Maverick! (1993) and
in their 60s and 70s. It was critical, business from his father at the age outlines how much companies can
therefore, for directors to listen to of 21. Between 1982 and 2003, he benefit from the staff engagement
the young work force, who could drove Semco’s sales turnover from that results. This approach has
give insights into customer views. $4 million to $200 million. On his become known as participative
first day in the office, he fired nearly management. It holds that people
Democratic management two-thirds of the senior management are naturally capable of self-direction
Ricardo Semler, head of Brazil’s team, who he believed were too if they are committed to corporate
Semco Group, is perhaps the rooted in his father’s autocratic goals. And when your workers are
world’s most radical employer. He management style. In the late 1980s, your customers, the two sets of
believes that bosses need to move he backed a proposal by three of goals become perfectly aligned. ■

Arthur Ryan the name to Primark for the


business model that he was to
Born in Ireland in 1935, Arthur use in the UK, the Netherlands,
Ryan is the founder of Primark. and Spain. From 1973 until his
Work should be a pleasure, After leaving school, Ryan retirement in 2009, Ryan built
worked at a department store up the business to change it
not an obligation … and then a fashion wholesaler from being a “bargain” store to
We believed that people in London before returning to an inexpensive, on-trend fashion
working with pleasure could Dublin, where he worked for retailer. In 2013, Primark
be much more productive. retailer Dunnes Stores. In 1969, employed more than 43,000 staff
Clóvis da Silva Bojikian Garfield Weston, CEO of in stores in Ireland, Spain, the
Brazilian former HR officer of Semco Associated British Foods (ABF), UK, Austria, Belgium, Portugal,
(1934–) hired Ryan to set up a discount Germany, and the Netherlands.
clothing chain with a seed fund ABF is still its parent company.
of $80,000 (£50,000). The first In the recessionary year of 2009,
store, Penneys, opened later that Primark’s like-for-like sales grew
year in Dublin, but Ryan changed by more than 7 percent.
UTILIZE OPM
OTHER PEOPLE’S
MONEY
WHO BEARS THE RISK?
140 WHO BEARS THE RISK?

IN CONTEXT
FOCUS
When a business is
Financial risk ...a small investment
financed with debt,
in shares can yield
KEY DATES or with other people’s
control of the company.
1950s US economist Harry money...
Markowitz advocates
gathering a portfolio of
investments to protect against
losses due to financial risk.
1990s Research on types of
financial risk identifies ways
of measuring and managing
different kinds of risk, including This increases
...while the costs of
the chances of huge
market risk (changes in the failure are largely borne
profits for the
value of equity, interest rates, by the work force...
business owners...
currency, and commodities)
and credit risk (the risk of
nonpayment of debts).
1999 UK conglomerate General
Electric Company (GEC) is
renamed Marconi plc, and its
traditional businesses are
sold off. The directors’ gamble ...and the company’s
on this change in strategy middle managers, who Heads I win;
fails—the business collapses take the blame for tails you lose.
in 2001 and shares are poor performance.
suspended. Nearly 25 percent
of staff is laid off.

T
he degree of financial risk Greek shipping magnate Aristotle shareholders’ capital finances the
borne by a company has Onassis built a business empire business start-up, and remains at
profound implications for that stretched across the world and risk until it is repaid in full. If the
the long-term viability and success incorporated dozens of industries, business liquidates, the holder of
of the business, its employees, and was underpinned by complex “ordinary” shares (as opposed to
and its shareholders. A business financial arrangements. Onassis “preferred” shares, which are higher
structured in a traditional manner recommended utilizing “other in ranking and yield dividends
would put the most risk on the people’s money,” and while this before ordinary shares) is the last
shareholders, since they stand approach might yield financial in the line to be paid. The ordinary
to lose their investment if the success, it may end with others shareholder is therefore the least
venture fails. But the proliferation bearing the costs of failure. likely to recover his or her
of increasingly complex financial investment. Because of the risks
mechanisms and means of Traditional risk they take, entrepreneurs are held in
accounting have, to a degree, In theory, the risk takers in a market high esteem. So are early-stage,
insulated a business’s owners from economy are the shareholders, who venture-capital investors, who invest
the worst effects of failure. effectively “own” the business. The in start-ups in return for equity.
MAKING MONEY WORK 141
See also: Managing risk 40–41 ■ Play by the rules 120–23 ■ Accountability and governance 130–31 ■ Leverage and
excess risk 150–51 ■ Off-balance-sheet risk 154 ■ Balancing long- versus short-termism 190–91 ■ Morality in business 222

The burden of risk associated with a business is spread wider as its financial
affairs grow more complex. Executives and staff stand to lose financially and
perhaps even punitively—with prison sentences possible—if the company fails.
Creditors and shareholders can lose financially, while in the worst-case scenario
taxpayers may bear the heaviest burden of all—in the form of high taxation and
low economic growth—if their government chooses to rescue the business.

Shareholders Creditors

Venture capitalists, such as Indian-


born Vinod Khosla of Sun Microsystems, Business
invest in companies at an early stage
and risk bearing the brunt of failure.
But returns can be high with success.

Executives Staff
The association of risk with the
shareholder is beneficial in many
respects. A risk-bearing shareholder
in a large, multinational bank would
be inclined to discourage senior Taxpayers
management from taking large risks
with the bank’s capital or reputation.
Calculated risks may be considered, Risk of financial
loss
but not risks that threaten the
existence of the business. The Risk of criminal
prosecution
shareholder can play a significant
part in the business process, acting
as a natural check on the company’s code gives a struggling business business’s assets are sold after it
propensity to take risks. This view substantial protection from those to has entered bankruptcy. The assets
of business has been held since the whom it owes money (its creditors, and operating model are sold to
foundations of modern capitalism such as suppliers of raw materials, new owners, leaving the original
in the 18th century. ingredients, or subsidiary services). business entity behind. Suppliers
This protection is intended to allow and other creditors may receive no
Suppliers and creditors a company to rethink its business more than a token payment, such
The traditional view may be plan and perhaps find a more as 10 percent of the value of their
threatened due to effects of new profitable business model. claims on the business. The new
rules and practices. In an attempt In the UK, a struggling company shareholders then have a debt-free
to encourage entrepreneurship, can choose to enter a phase of “pre- business with all the assets of the
Chapter 11 of the US bankruptcy pack administration,” in which the old company, but with none of the ❯❯
142 WHO BEARS THE RISK?
Suppliers are among the last to receive
compensation for their goods or services
if a business goes bankrupt. If, in the
UK, it enters “pre-pack administration,”
suppliers might receive nothing at all.

liabilities. This method can be


especially controversial, since it
can allow the owners of the original
business to sell the “pre-packaged”
new entity and still be involved in
the business. In August 2008 the
London-based restaurant business
of Michelin-starred chef Tom
Aikens went into administration.
It was bought by TA Holdco Ltd.,
of which Aikens was appointed
partner and shareholder. Around
160 suppliers were left nursing
losses that would never be protection, the creditors can find personal pension funds in Enron
recovered. However, by early 2010 themselves in a riskier position shares. When the business was
Tom Aikens’ business achieved a than the shareholders. liquidated, employees not only lost
financial turnaround, and opened their jobs, but also their pensions.
three new ventures in London. Employees at risk When the collapse of the business
When pre-pack administration Staff employed by a business is was becoming clear, Enron froze
is utilized, suppliers are revealed also at risk when a company fails. its pension fund, preventing
to be in a much more vulnerable When US energy company Enron employees switching their pension
position than might otherwise be collapsed in 2001, an extraordinary holdings out of Enron shares.
expected. The financial losses feature of the unfolding story was Employees can also be
incurred by Aikens’s restaurants the plight of many employees. vulnerable due to the predations of
were effectively absorbed by Unlike the senior executives, rank- the investment market. If a company
suppliers, not shareholders. In a and-file staff had been part inspired is bought through private equity,
world of pre-pack administration and part browbeaten into “showing employees can find themselves
and Chapter 11 bankruptcy faith in Enron” by investing worse off if the business fails. A
private-equity purchase is when a
publicly traded company is bought
by a “private-equity group,” often
“Heads I win”—in good through a leveraged buy out, where
times, the business the assets of the purchased
owner stands to gain, company are used as security to
whereas the position of “Tails you lose”—in bad borrow funds with which to finance
employees changes little. times, the owner is protected the purchase. In so doing, the burden
from losses, but the business of risk is on the business (and its
and its employees suffer.
employees), not on the owners.
The UK franchise of Canadian
underwear business La Senza
Private-equity ownership collapsed in 2012, with 1,100
is typically structured in an
asymmetric way. If things go employees losing jobs. In cases like
well the private-equity owner this, the staff has little to gain when
gains, and if things go badly things go well, but everything to
the subsidiary business loses. lose when they go wrong. Suppliers
MAKING MONEY WORK 143
are in the same position. Only the They were investigated over a ten-
private-equity shareholders are year period—the six years leading
protected—by limited liability. up to the buy out, and the four
When publicly traded soccer years after it. The researchers found
team Manchester United was that in the year following the buy
purchased by US businessman out, 59 percent of the private-equity There is a simple way of
Malcolm Glazer and his family in owned businesses cut their staffing avoiding excess risk taking
2005, the transaction was levels, compared with 32 percent in by the managers of our
effectively a private-equity deal. the control group. In the following financial institutions. It is
The Glazers followed standard years, private-equity ownership to make it a crime.
practice, buying the publicly-listed was associated with falling average Paul Collier
company for $ 1.3 billion, then put wage levels among staff. In the UK economist (1949–)
the debts onto the balance sheet of short term employees appear to
the new Manchester United Ltd. lose out—and in the medium to
Private-equity owners suggest that long term their chances of losing
debt is an effective means of forcing their jobs are higher due to the
employees to work efficiently to greater level of debt of the
make a profit and meet interest companies they work for.
payments. More plausibly, though, company Blackstone Group earns
it is a way of transferring risk from Private-equity iniquity $130 million a year. He is closely
the private-equity owner to a limited Not everyone loses out under followed by the bosses of Carlyle
liability subsidiary. If Manchester private equity. In 2003 the British Group, Apollo Global, and KKR—
United Ltd. were to enter financial retailer Debenhams was purchased who each earn in excess of $100
trouble, the liability of the Glazers by three private-equity companies. million a year. Remarkably, all these
would be minimal due to the The businesses paid themselves bosses enjoy favorable tax treatment
protection of “limited liability,” a dividend of $1.9 (£1.2) billion in both the US and the UK. This
which limits the owners’ liability to before floating the publicly traded became an important issue in the
the value of their investment, not Debenhams onto the stock market 2012 US presidential election, when
the total debts of the business. in 2006—laden with debt. Years Republican candidate Mitt Romney
Research published in 2013 later, in its 2012 annual accounts, (a former private-equity boss) had
compared the performance of 105 the financial strain still showed. to admit that his income tax rate, at
companies purchased through The degree of “gearing” (debt as a 14 percent, was lower than that of
private equity and 105 “control” percentage of capital employed in average, working Americans.
companies in the same industries. the business) at Debenhams was a
high 51.5 percent, and its liquidity Executives on the hot seat
(as measured by the “acid test In the world of public limited
ratio,” which determines whether a companies and corporations, the
company has enough short-term CEO might be in the riskiest
assets to cover its immediate position of all. They may have the
We have corporate liabilities) was a very weak 0.175. most to gain from their business’s
CEOs who raise their pay Yet for the private-equity owners, success, but also the most to lose
20 percent or more in years the deal was highly profitable— from its failure. These risks may be
when they lay off thousands they made $1.9 (£1.2) billion very partly financial, but even more they
quickly and still retained shares in are reputational. Richard Fuld, chief
of people. It’s obscene.
Debenhams (a stake that was sold executive of Lehman Brothers at
Charles Handy in the years that followed). Their the time of its 2008 bankruptcy,
UK management expert (1932–)
overall profits exceeded 200 percent. went from being an award-winning
For the bosses of private-equity CEO to a nominee for a range of
companies, the rewards can also be “worst ever...” awards. From being a
impressive. Bernard Schwarzman of director of the Federal Reserve Bank
US private-equity investment of New York, he became a pariah. ❯❯
144 WHO BEARS THE RISK?
Italian food giant Parmalat’s 2004
$1.6-billion accounting cover-up was
primarily due to fraud. The effects were
sharply felt by shareholders and the
many employees who lost their jobs.

term “too big to fail” illustrates that


business risks have been transferred
to the taxpayer. Faced with the
bankruptcy of General Motors and
Chrysler in 2009, the US government
—in other words, US taxpayers—
took on billions of dollars’ of debt to
give the companies a fresh start.
In the UK and Europe, bank
bailouts in 2008 and 2009 saved
the private sector from huge losses.
In Europe, what was put forward as
a Eurozone government problem
In the UK, a similar fate awaited should, on this basis, lead to the was in fact a private-sector problem,
figures such as Fred Goodwin (CEO death of the business. Austrian- as banks faced nonrepayment of
of Royal Bank of Scotland when it American economist Joseph loans to businesses within Greece,
collapsed in 2008) and James Crosby Schumpeter, in his classic 1942 Portugal, or Italy. The bailouts
(CEO of Halifax Bank of Scotland book Capitalism, Socialism, and were arranged and financed by
until 2006). Both were blamed for Democracy, made the famous governments, meaning that
the dramatic collapses of their statement: “The process of Creative taxpayers turned out to be the risk
banks in 2008, and for their part in Destruction is the essential fact takers, even though nobody asked
the subsequent economic turmoil. about capitalism.” Schumpeter, like their opinion. American economist
Is it fair that a company’s many others, viewed recessions as Nouriel Roubini summed this up
bosses should have to take the a cleansing mechanism, allowing by saying: “This is again a case
blame for failure so personally? the weak to fall back and new, of privatizing the gains and
After all, it is inconceivable that the stronger companies to emerge. socializing the losses; a bailout
CEO is the only one to blame for the Yet modern governments seem and socialism for the rich, the
failure of a business. Objectively, to see things differently, certainly well-connected, and Wall Street.”
the answer is clear, because in relation to large businesses. The This issue has stretched far
business failure is certainly the wider than the US and Europe,
responsibility of more than just the influencing the economic situation
CEO. Yet high-profile executives in both Japan and China in recent
often strive to associate themselves decades. From the start of its
so closely with the company— 20-year depression in 1990, land
making it seem as though they prices in Japan fell by more than 80
personally are the business—and Risk comes from percent, and today remain far below
are so eager to back this up with not knowing what the levels reached in 1988 before the
massive remuneration packages, you are doing. recession began. In effect, almost
that it can be no surprise when the Warren Buffett every bank in Japan was insolvent
public and the media turn on them. US investor (1930–) as a result of vast portfolios of
nonperforming loans—loans that
Taxpayers to the rescue were made to companies that could
In mature, developed economies, neither repay the debt, nor pay the
businesses are supposed to take interest on that debt. Only the
risks in pursuit of reward. Failure support of the Japanese central
MAKING MONEY WORK 145
bank kept these commercial banks by only 37 percent. Government
alive. The taxpayer took on the bailouts for big business effectively
risks that are supposed to be taken mean that taxpayers are providing
by the private sector. Many support for those who benefit most
analysts suggest that the same is from today’s economic system. In
true in China at present, although the long run, businesses may enjoy
the opacity of the Chinese banking substantial profits, and accept the
system makes this hard to verify. rewards as recompense for the risks
they take. But if the risks (and losses)
Who bears the risk? are borne by the taxpayer, it is fair
Roubini’s statement that losses to question why only shareholders
are “socialized” (borne by the public) gain the profits in the good times.
while profits remain in the private Often, employees and suppliers
sector appears to be true. Income bear higher levels of risk than Richard Fuld
inequality has widened considerably seems fair—shareholders, who
around the world in recent decades, enjoy the rewards of success, should Richard “Dick” Fuld was born
in countries including the US, bear the primary risk of failure. in 1946 in New York City, NY.
He graduated from the
UK, China, and India. For instance, Even trade-union protection for
University of Colorado in 1969,
between 1979 and 2007 in the US, workers has been eroded in recent and received an MBA from the
the income of the top 1 percent of decades—in the US and many Stern School of Business in
earners rose by 266 percent, while countries around the world, unions 1973. He was CEO of Lehman
that of the bottom 20 percent rose account for no more than 10 percent Brothers investment bank
of private-sector employees, which from 1994 to the day of its
leaves workers unprotected when collapse in 2008, and during
Greek citizens protest in Athens
against austerity measures in 2011. things go wrong. Although labor that time, he received more
Rescue loans from the European Union flexibility has its merits, imbalance than $500 million. Known as
to Greek banks mean that the country between “my risk” and “your the “Gorilla of Wall Street,”
faces years of economic hardship. reward” has perhaps gone too far. ■ Fuld was the domineering
boss who pushed the company
into the subprime mortgage
business. For many critics, the
decision that illustrated his
hubris was his refusal of
bailout funds from investor
Warren Buffett and the Korea
Development Bank, even
though Lehman Brothers was
in the throes of being toppled
by the 2008 credit crunch. His
reasoning was that the offers
of cash did not match his own
valuation of Lehman Brothers.
Following the company’s
bankruptcy in September
2008, Time Magazine named
Fuld as one of the “25 People
to Blame for the Financial
Crisis,” and Condé Nast
Portfolio magazine ranked him
number one on its list of “Worst
American CEOs of All Time.”
146
IN CONTEXT

SWIM UPSTREAM. FOCUS


Business behavior
KEY DATES

GO THE OTHER WAY. 1841 Scottish journalist


Charles MacKay documents

IGNORE THE
herd behavior in his book,
Extraordinary Popular
Delusions and the Madness

CONVENTIONAL of Crowds.
1992 Indian economist Abhijit
V. Banerjee publishes A Simple

WISDOM
IGNORING THE HERD
Model of Herd Behaviour.
1995 In “Herd Behaviour,
Bubbles and Crashes,” German
professor Thomas Lux claims
prices and sentiment affect
one another, so feelings of the
herd affect prices (for example,
faith in the housing market
pushes up prices).
2001–06 The housing bubble
in the US and parts of Europe
gathers pace before collapsing
in the 2007–08 financial crisis.

T
he herd instinct is clear in
nature and just as clear in
business. Most people feel
more comfortable following what
others are doing than standing out
as a “loner” or maverick. Ignoring
the herd takes great psychological
strength. When stock markets rise
steeply, new—perhaps first-time—
investors get sucked in by the
apparently easy pickings. These
latecomers to a booming “bull
market” cause share prices to propel
upward for a last time before they
slump back toward their previous
value. By following the herd in this
way, most first timers invest when
share prices are near the top and
usually sell when they find that their
MAKING MONEY WORK 147
See also: Stand out in the market 28–31 ■ Gaining an edge 32–39 ■ Beware the yes-men 74–75 ■ Thinking outside the
box 88–89 ■ Avoid groupthink 114 ■ Protect the core business 170–71 ■ Forecasting 278–79

Companies follow herd instincts when they…

…stampede to buy …buy other businesses


…develop “me too”
shares in high-trend because of a current
products rather than
businesses, or buy them market trend in
follow logical strategy.
completely. diversification.

These actions are unlikely to be financially beneficial.

Swim upstream. Go the other way.


Ignore the conventional wisdom.

assets have dropped in value. They An example of the risks of following shares. And by February 2001, the
often suffer serious losses. A the herd came with the dot-com share price had fallen to 9 cents.
contrarian investor—or a savvy bubble, between 1998 and 1999. A little later the business was
company that holds a portfolio of Among numerous examples of declared bankrupt. ❯❯
investments—does the opposite. extraordinary share-price gains
When share prices rise and new followed by equally huge losses,
investors are attracted into the was the business eToys.com,
market, they sell, and if the market which was opened in 1997. In May
slumps, they buy. However, few 1999 it was launched onto the New
investors show the foresight required York Stock Exchange at $20 per The herd instinct among
to know when a boom is turning to share, raising $166 million. Buyers forecasters makes sheep look
bust. Warren Buffet, a legendary piled in, pushing the price up to like independent thinkers.
investor, says: “We simply attempt $76 by the end of the first day. By
Edgar R. Fielder
to be fearful when others are greedy fall 1999, the share price was $84, US economist (1930–2003)
and to be greedy only when others giving the business a higher
are fearful.” Between 1965 and 2013, market value than the retail giant
Buffet’s investment company gave Toys R Us. As the market turned
investors a capital gain of more downward, the experts started to
than 900,000 percent. sell, leaving the herd with the
148 IGNORING THE HERD
Global market shares of smartphones in 2009–13 varied Nokia military spending. A worried BAe
greatly: Apple stayed relatively stable; Nokia and RIM, who then approached the owner of
Samsung
had responded with herd instincts to the iPhone’s success, Airbus, suggesting a merger and
saw huge losses; Samsung’s shares soared, reflecting its Apple
development of products that would stand the test of time.
implying that a mix of civilian
RIM and military businesses was a
preferable focus. Could things
40% really have changed that much
between 2006 and 2013, or was
35% BAe responding to the trend for
diversification? Strong business
30% leaders look to the long-term and
ignore fads and fashions among
25% stock-market analysts and
management consultants.
20%

15% Following the leader


The third herd behavior to avoid
10% is “followership.” This occurs
when companies develop “me-too”
5% products to imitate market
innovators. Of course, if a business
0% already has a genuinely
2009 2010 2011 2012 2013
differentiated offering, it is wise to
follow a new trend. Often, though,
It makes sense for the share-buying but little mention of long-standing businesses rush out copycat
public not to follow mass trends, research, which suggests that 60 products to demonstrate that they
but is the same true for business to 66 percent of all takeovers are staying competitive in a sector.
leaders? In 2008, US mass-media destroy shareholder value for the When the iPhone was launched in
corporation AOL, noticing the winning company. In other words, 2007, Nokia could boast more than
growth in social network sites, most takeover bids prove to be 40 percent of the global smartphone
bought the social-networking site a disappointment. market. Despite a series of new
Bebo for $850 million. It joined the The second herd behavior to product launches by the company,
herd and lost out badly. In 2013, it ignore is the strategic clash between
sold the same business back to its focus and diversification, and the
founders for $1 million. way the market tends to concentrate
on one of these two at any one time.
Following trends When “focus” is the market mantra,
Business leaders, then, must be share prices rise in companies that Those entrapped by the
as cautious as anyone else about sell off peripheral assets or divisions herd instinct are drowned
treading the same path as the of the business. This is what in the deluges of history.
majority. There are three main happened to British Aerospace But there are always the
types of herd to ignore. The first, (BAe) when it sold its 20 percent few who observe, reason,
as mentioned, is the occasional stake in the Airbus aircraft business
and take precautions,
stampede to make takeover bids. in 2006. At the time, the stock
In this case, business leaders worry market liked its $2.99 (£1.87) billion
and thus escape the flood.
that if they do not buy a rival, sale of the largely civilian aircraft
Anthony C. Sutton
UK economist (1925–2002)
someone else will and perhaps maker, since it focused BAe on the
create a bigger, more difficult defense and military sector. By 2013,
competitor. At such times, there is this view looked absurd, as Airbus
much talk of synergies (the sum powered ahead but governments—
being worth more than the parts) especially the US—cut back on
MAKING MONEY WORK 149
“netbooks.” In 2009, global netbook
sales rose by 72 percent. The herd
instinct of businesses such as Dell
was to produce their own netbook.
At Apple, by contrast, boss Steve
We find that whole Jobs announced that “the problem
communities suddenly with netbooks is that they’re not
fix their minds upon better than anything.” He worked
one object, and go mad to develop a superior alternative to
in its pursuit. netbooks—the iPad. By mid 2013
Charles MacKay the iPad had sold more than 145
million units and the original
makers of netbooks (Taiwan’s Asus)
had halted production completely. Warren Buffett
Those who ignore the herd can
apply cool logic to their situation Generally considered the
and think ahead to possible future most successful investor of the
20th century, Warren Edward
its share of smartphone sales scenarios. The herd tends to think
Buffett was born on August
collapsed to around 3 percent in the that tomorrow will mean more and 30 in 1930 in Omaha, NE. He
first quarter of 2013. Throughout this more of today. Those who ignore demonstrated an early ability
period, Nokia was desperately trying the herd can identify fundamentals with mathematics and was
to catch up with Apple’s iPhone— that persist over time, while looking able to add large columns
but doing no more than throwing toward what might be different of numbers in his head. His
new products at the problem, instead tomorrow. As US entrepreneur Sam father was a stockbroker
of taking a deep strategic breath Walton advised, it often makes and congressman.
and deciding what innovations sense to “swim upstream.” ■ Buffett began investing
might earn it a stake of the market. at the age of 11. He started
The contrast between Nokia’s several small businesses
The success of the iPad reflected while still a teenager, before
behavior and that of Apple’s could Apple’s resolve to develop a superior
not be greater. In 2008 and 2009 going to the universities of
alternative to the “netbook.” Companies Pennsylvania, Nebraska, and
the big trend in mobile computing like Apple and Samsung need to be
Columbia to study business. In
was away from laptops and toward ahead of the herd, not behind it.
1956 he formed the company
Buffett Partnership, where his
investment successes led to
his nickname, “the Oracle
of Omaha.” In 2006 he
announced that he would be
giving his entire fortune to
charity. In 2012 his net worth
was estimated at $44 billion.

Key works

2001 The Essays of Warren


Buffett: Lessons for Corporate
America (with Lawrence A
Cunningham)
2013 The Essays of Warren
Buffett: Lessons for Corporate
America, Third Edition (with
Lawrence A Cunningham)
150

DEBT IS THE
WORST POVERTY
LEVERAGE AND EXCESS RISK

I
n 2012, US theoretical noted the importance that central
IN CONTEXT physicist Mark Buchanan banks (and governments) place on
wrote Forecast, a book inflation, interest rates, exchange
FOCUS
detailing his investigations into rates, and consumer confidence. He
Managing risk
the workings of the economy. In was puzzled by the absence of one
KEY DATES assessing the variables that affect variable that had proved a central
1970–2008 Banks in economic growth and decline, he factor in past extremes of boom and
developed countries double
the ratio of loans that they
issue compared to the value
Increasing leverage Decreasing leverage
of money they hold. allows companies to... allows companies to...
2002 The Global Executive
Forum report on the collapse
of the Enron corporation says
that “the genius of Enron was
infinite leverage.” ...focus on growth and ...focus on increasing profit
convert short-term debt through minimizing costs
2007–08 Increasing numbers into long-term loans... and repay long-term loans...
of people access credit to
finance mortgages, but later
default on their loans. Global
financial markets collapse.
2013 The UK government ...and pay increased
...and issue more shares.
forces banks to publish their dividends to shareholders.
leverage ratios. Among the
highest leveraged is Barclays,
which has loans worth 35
times its (equity) capital base.
However, the company
However, it can leave
may fall behind rivals
businesses vulnerable
who can boost growth
to cash-flow problems.
through higher leverage.
MAKING MONEY WORK 151
See also: Who bears the risk? 138–45 ■ Profit versus cash flow 152–53 ■

Maximize return on equity 155 ■ The private equity model 156–57


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

CASH IS KING
PROFIT VERSUS CASH FLOW

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

Cash is king.
MAKING MONEY WORK 153
See also: How fast to grow 44–45 ■ Investment and dividends 126–27 ■ Making money from money 128–29 ■ Leverage
and excess risk 150–51 ■ Maximize return on equity 155 ■ Balancing long- versus short-termism 190–91

company may rely on dipping into A business receives a $24,000 order, and has to plough cash into
an overdraft to make up for a cash making the goods. By week six, $20,000 has been spent by the company;
shortfall. But when times are tough, the customer is invoiced, but is not required to pay until week 13. This
means the company faces serious negative cash flow for 12 to 13 weeks.
a reliance on the bank may be too
risky. A business needs to manage 10
its finances well enough to avoid
periods of negative cash flow. 5

How good companies fail 0


Profit
Cash is a constant pressure for $4,000
-5
every new business. Even if the $0000s
company keeps to its start-up Deliver and
-10
budget, it takes time for trading invoice
to reach a high enough level to -15
generate positive cash flows. For
example, a sports’ equipment -20
store may take three years to
build up the regular clientele that -25
will enable it to start making 1 2 3 4 5 6 7 8 9 10 11 12 13 14
money. Until then, the business WEEKS
faces negative cash flow. So it
is crucial for new businesses to flow problems can also cause well- admitted that its overall financial
prioritize cash flow from the established companies to stumble stability had been seriously
beginning. This may mean and even collapse. In 1998, South undermined by a new reliance
leasing equipment, or buying it Korea’s Daewoo Group encountered on borrowings, but insisted that
secondhand rather than new, and growing problems because of it was a brief moment of crisis.
choosing suppliers that provide “increasing difficulties in arranging Despite being one of the largest
the same credit period as the store working capital and investment conglomerates in the world, the
gives to its customers, even if these funds.” The group had been group collapsed the following year
suppliers cost a little more. Cash- aggressively expanding, and due to massive cash shortfalls. ■

Money scams
US investment advisor and of these early customers led
financier Bernard Madoff was them to recommend the scheme,
sentenced to 150 years in prison which then continued to pay
in 2009 following a money earlier investors with the cash
scam that is believed to have put into the company by
led to about $18 billion of losses subsequent investors.
to investors. Although hailed This type of financial pyramid
as a distinguished and expert is able to stay afloat as long
financier, capable of generating as sufficient numbers of new
very high returns for investors, savers put cash into the scheme.
Madoff was in fact responsible If the flow of funds dries up,
for running a “Ponzi scheme,” in the scheme collapses. Madoff’s Farmers buying livestock at market
which cash from new investors scam collapsed due to a loss of must—like many business owners—
is used to pay generous returns investor confidence following pay up front. Costs, such as feed and
to earlier investors. The delight the 2008 financial crisis. storage, will mount before they see a
return on their investment.
154

ONLY WHEN THE TIDE


GOES OUT DO YOU
DISCOVER WHO’S BEEN
SWIMMING NAKED
OFF-BALANCE-SHEET RISK

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

See also: Play by the rules 120–23 ■ Accountability and governance 130–31 ■

Who bears the risk? 138–45 ■ Leverage and excess risk 150–51
MAKING MONEY WORK 155

RETURN ON EQUITY
IS A FINANCIAL GOAL
THAT CAN BECOME
AN OWN GOAL
MAXIMIZE RETURN ON EQUITY

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

See also: Investment and dividends 126–27 ■ Accountability and governance


130–31 ■ Who bears the risk? 138–45 ■ Ignoring the herd 146–49
156

AS THE ROLE OF
PRIVATE EQUITY HAS
GROWN, SO HAVE
THE RISKS IT
THE PRIVATE EQUITY MODEL
POSES
S
ome economists believe
IN CONTEXT At first, private equity came that “private equity” is
only from large investors misnamed, since it is a
FOCUS
wanting long-term gains. model based on debt, not equity
Profit and risk
(the value of assets owned outright
KEY DATES by an individual or company).
1959 Fairchild Semiconductors, Private equity involves “leveraging”
the first venture-capital-funded a balance sheet by loading debt onto
start-up, is created. But in the 1980s, smaller the business. This is similar to the
investors used leveraging controversial practice of “leveraged
1978 US investment group and debt to buy companies. buy-outs” (LBO), in which a
KKR pays $380 million to take company is acquired using a high
manufacturer Houdaille percentage of borrowed funds,
Industries Inc. private; this is loading it with a high level of debt.
probably the first private- Such levels of debt pose
equity transaction. This type of private equity inherent risk, as US politician Jack
1988 KKR buys conglomorate requires high short-term Reed highlighted. Pressure on
profit (to service debts). managers increases—good profits
RJR Nabisco for $25 billion in
are necessary in order to minimize
the biggest private-equity
interest charges on the company’s
purchase the world has
debt. The theory is that this forces
yet seen. managers to perform better, but
2006–07 A peak year for Long-term opportunities critics claim that a company run on
private equity—in the US are likely to be overlooked the private-equity model is likely to
alone, private equity in favor of short-term profit. maximize short-term profit at the
companies buy 654 cost of long-term business growth.
companies for a total of
around $375 billion. Less pressure, more focus
To its supporters, the main strength
As the role of private of the private-equity model is in
what it removes. First, it removes
equity has grown, so
the regular profit pressure from
have the risks it poses. shareholders that is faced by bosses
of a publicly traded company. For
MAKING MONEY WORK 157
See also: Beating the odds at start-up 20–21 ■ Who bears the risk? 138–45 ■
Leverage and excess risk 150–51 ■ Balancing long- versus short-termism 190–91

example, in 2012, the US decisions and strategy. In the long


department-store chain JC Penney term, there are two critical questions
was given a facelift and a new, more about private equity: does it produce
upmarket strategy. A sharp a better profit performance? And is
downturn in sales forced a quick it better for the long-term success of
rethink, including firing the the business, taking into account
recently hired CEO. Short-term innovation, staff commitment, and
underperformance is unacceptable customer satisfaction?
to a public company, and can even In 2013, a combined study by
attract the attention of private-equity three UK universities found that a
investors seeking new acquisitions. company’s performance falls after Alec Gores
The second strength of the being subject to a private-equity
private-equity model is said to be buyout, based on profits and Perhaps the richest private-
the focus it provides. The boards of employment levels. The research equity businessman in the
world, Alec Gores’s personal
publicly traded companies often showed that four years after a
fortune was estimated at
direct a diverse range of businesses. private-equity purchase, revenue $1.9 billion in 2013. Gores
For example, in 2012, the Sumitomo per employee rose from $190,000 to was born in Israel in 1953 to
Corporation of Japan sold a 50 $252,000, while in a control group it a Greek father and Lebanese
percent stake in its Jupiter Shopping increased from $190,000 to $295,000. mother. He emigrated to the
Channel subsidiary to US private- However, other studies have US in 1968, where he attended
equity group Bain Capital. This suggested the opposite—that high school in Michigan.
effectively separated Jupiter from private equity boosts profits—so the After earning a degree
Sumitomo, ensuring that the research is inconclusive. in computer studies from
Jupiter directors could focus on just It might seem that when “private Western Michigan University,
one area of business. This enabled equity” is used as a term to describe he founded a computer retail
them to play a more hands-on role in debt-fueled growth, years of success business (Executive Business
can be followed by spectacular Systems) selling computers
losses. However, the majority of from his basement in 1978.
Jupiter Shopping Channel is Japan’s Within seven years, he
most popular television shopping companies making private-equity
employed more than 200
company. Now 50 percent privately purchases are institutional
people. Gores sold the company
owned, it benefits from an increased investors, who want to invest large for $2 million at the age of 33
focus on call-center efficiency. sums of money over long periods. ■ and used the capital to start
the Gores Group in 1987.
The Gores Group private-
equity fund specialized in
acquiring and operating
undervalued and under-
performing noncore businesses
from major corporations, and
turning them into profitable
concerns. These included
loss-making divisions from
large companies, including
Mattel and Hewlett-Packard.
Since its founding, the
company has acquired
more than 80 businesses.
158

ASSIGN COSTS
ACCORDING TO
THE RESOURCES
CONSUMED
ACTIVITY-BASED COSTING

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

Assign costs according to


the resources consumed.
MAKING MONEY WORK 159
See also: Play by the rules 120–23 ■ Profit versus cash flow 152–53 ■ Good and bad strategy 184–85 ■ The value chain
216–17 ■ Product portfolio 250–55 ■ Benefitting from “big data” 316–17

should about their costs. They that the cost of making a chocolate
may be relatively clear about product, for example, is not “about
direct costs, but vague about 65 cents,” but exactly “59 cents.”
the overhead costs that should This level of accuracy tends
be attributed to specific products. to be especially important when
The commercial consequence of considering nonstandard products, Keeping of costs with
this is that a business may allocate such as the completion of a special a reasonable degree of
marketing spending to a product order of merchandise for the Brazil accuracy can be made a
that is not very profitable. In the Olympics in 2016. Activity-based matter of very great profit
long run, a business that makes costing might show that the costs to the company.
wrong decisions like this will associated with this special order F. W. Taylor
struggle to keep up with its rivals. are higher than they would be for
standard products. This would help
Activity-based accounting the business to set the right prices
Ideally, an accounting system for the Olympic items.
measures every aspect of every To perform effective activity-
transaction and decision related to based costing, a company needs
a particular product or service. The to: first, identify all the direct and calculations, a company can
most effective way of achieving this indirect activities and resources; calculate the total direct and
is through activity-based costing. second, determine the costs per indirect costs for a product or
Whereas traditional accounting indirect activity; and third, identify service. By dividing these costs
systems estimate the overheads the “cost drivers” for each activity. A by the quantity produced, an
(perhaps by assuming that every cost driver is a factor that influences accurate unit cost can be obtained.
unit produced at a factory should or creates costs. For example, a The company can then establish
have the same share of the total bank teller has many activities— reliable break-even points, identify
overhead bill), activity-based costing when measuring the cost driver the products with the profit margins
is much more precise: it breaks of an activity such as handling that make them worth backing (with
down the overhead costs to find out incoming checks, the bank should advertising support, perhaps), and
which activities create which costs. figure out how long the teller spends allow clear comparisons for making
This allows the company to realize on this task alone. From these three sound investment decisions. ■

Frederick Winslow Born in 1856 in Philadelphia, decide what to produce. His


Taylor PA, F. W. Taylor trained as a belief was that if accounting
mechanical engineer. He later information is to be valuable,
became famous for his study it must be useful, timely,
of “Scientific Management,” and formed into comparable
which was based on the idea statements, so that progress
that effective management is (or decline) can be identified
a science with clearly defined quickly. F. W. Taylor died of
laws. Taylor was also known as pneumonia in 1915 at 59.
the “father” of cost accounting.
In the late 19th century, he Key works
established new accounting
systems involving the “monthly 1911 The Principles of Scientific
determination of unit costs.” Management
He highlighted the value of cost 1919 Two Papers on Scientific
data as information that managers Management: A Piece-rate
could use to set prices and System and Notes on Belting
WORKIN
A VISION
STRATEGY AND
OPERATIONS
G WITH
162 INTRODUCTION

I
n Lewis Carroll’s Alice in but it should also involve identifying when sales of its BlackBerry
Wonderland the Cheshire cat which actions not to take. Strategy smartphones fell sharply—bosses
tells Alice that if you don’t know is also vital for companies who had failed to anticipate Apple’s
where you are going, “it doesn’t want to lead the market—most do more advanced iPhone.
matter which way you go.” This is so by offering a product or service
a trap that businesses must avoid— that is either the cheapest or the Keeping a balance
the starting point for any new best. There are numerous business Companies should always balance
venture is having a goal and there models and theories that can be long- and short-term objectives.
must be a clear strategy as to how followed to devise a successful The board must keep the long-term
to get there. It is also essential to strategy. Leading US strategist vision in sight, but in the short term
have a vision of what success will be Michael Porter, for example, has they need to make decisions that
like once that goal has been reached. provided organizations with ideas allow them to create enough profit
This vision must be shared and to help them analyze their market, to stay in business—a precarious
understood by everyone so that the understand the competitive forces balancing act, particularly in an
company has a common objective. at play, and position themselves for uncertain world. It is impossible
competitive advantage. to predict what the future will
Following a vision Once the board of a company has bring, so executives often use
Making decisions about a good agreed a strategic direction, it must scenario planning by asking
business strategy starts with critical be prepared to change course if the “what if?” questions. Assessing the
analysis, such as SWOT analysis, need arises—but always keeping likelihood of unwanted events does
the original vision in mind. In not remove uncertainty, but it does
addition, business leaders should help to avoid complete surprises.
be on continual alert for changes in The trend of diversification into
the external environment. Avoiding unrelated businesses has declined
complacency is crucial, since the recently, and companies now focus
Determine that the thing pace of business and change is on the core business. Management
can and shall be done, constantly increasing. Competition experts C. K. Prahalad and Gary
and then we shall is fierce, and companies must Hamel argued that a company’s
innovate if they want to stay at the ability to consolidate its strengths
find the way.
top and avoid being overtaken or into core competencies can provide
Abraham Lincoln becoming outdated. There are a competitive edge over rivals.
US former president (1809–65)
many examples of companies who
failured to do this, such as Research Flexibility
in Motion (now known as BlackBerry Globalization, technology, and a
Ltd), the Canadian technology changing world order have made
company whose business suffered business far more complex.
WORKING WITH A VISION 163

Hierarchical structures tend to to manage chaos and use it as an or at a kitchen table. The important
be inflexible, so the emphasis opportunity to grow and refresh thing is that companies should not
today is on nonhierarchical the business. only offer what people want, but
structures, empowering people, also make it easy for consumers
and teamwork. Flexible businesses Business today to reach them online.
ensure that everyone is involved Business may be complex in the In addition to this is the overall
and can adapt swiftly to change. modern world, but it has never importance of ethics. “Profit at any
Such organizations collaborate been more interesting or exciting. cost” is no longer an acceptable
with external partners, rather than Physical size no longer equates maxim. There is growing regulation
merely transact with them, thus with success. The Internet changed on financial reporting and on issues
encouraging shared learning. US everything—now small can be such as bribery. Today’s consumers
scholar Peter Senge introduced beautiful. Businesses that spring are increasingly demanding and
the concept of the “Learning up offering customized products discerning: they want to know
Organization,” whereby a company in niche markets are often able to how raw materials are sourced,
facilitates the learning of its compete effectively in the global how products are made, and how
employees and is able to transform economy. Some of today’s most the company impacts the
itself on a continual basis. Control successful businesses started with environment. Some companies
by management is replaced by just one person, often in a garage have policies and procedures in
leadership and direction. place to help create an ethical
Organizations with a learning culture. In this way, employees
culture and a shared vision enable know what standards are expected.
people with different functions to And yet there are still numerous
work together to develop ideas, cases of corporate tax avoidance,
make decisions, and create new You have to have vision. It’s price-fixing through collusion, and
products and services more quickly. got to be a vision you excessive risk taking. These issues
Staff act as a group of entrepreneurs articulate clearly and forcefully persist because individuals are
rather than as paid employees. Being on every occasion. You can’t often motivated by personal gain.
able to learn from failure requires a High-profile cases include the 2008
blow an uncertain trumpet.
culture in which people are not collapse of the US financial-services
criticized for mistakes, since this
Father Theodore organization Lehman Brothers early
impairs initiative and new ideas.
Hesburgh in the global economic crisis.
US priest and scholar (1917–)
Companies have to learn not However, many of the examples
just to deal with chaos but to in this chapter suggest that
thrive. In the ever-changing companies who hold a clear vision
environment of the 21st-century’s and do the right thing, in the right
digital economy, companies have way, are most likely to succeed. ■
164

TURN EVERY
DISASTER INTO
AN OPPORTUNITY
LEARNING FROM FAILURE

IN CONTEXT
When a company performs an activity,
FOCUS it gains experience.
Management thinking
KEY DATES
c.560 BCE Chinese philosopher
Lao Tzu says that failure is the
The company implements The experience gained
foundation of success and the these better methods provides useful feedback,
means by which it is achieved. and approaches in whether the activity
1960s Soichiro Honda, founder new projects. succeeded or not.
of the Honda Motor Company,
says that “success can only be
achieved through repeated
failure and introspection.” The company must analyze the feedback
to find out what could be done
1983 Apple Computer Inc.
differently and better.
releases the Lisa computer.
It is a commercial failure,
but plays a vital role in the
development of the Apple Mac.
1992 US management Every disaster is an opportunity for learning.
professor Sim Sitkin introduces
the idea of “intelligent failure”
in Learning Through Failure:

T
The Strategy of Small Losses. here are many stories of inventor James Dyson produced
success built on failure: more than 5,000 prototypes before
the US inventor Thomas he came up with a successful
Edison failed to register patents bagless vacuum cleaner. Success
for his ticker tape machine so felt for entrepreneurs always involves
compelled to continue inventing, trial and error, and resilience. US
eventually perfecting the industrialist J. D. Rockefeller, the
incandescent light bulb. British world’s first dollar-billionaire, looked
WORKING WITH A VISION 165
See also: Managing risk 40–41 ■ Luck (and how to get lucky) 42 ■ Reinventing and adapting 52–57 ■ Creativity and
invention 72–73 ■ Beware the yes-men 74–75 ■ Thinking outside the box 88–89 ■ The learning organization 202–07

to “turn every disaster into an this principle into their culture. US


opportunity.” As the world turned corporation 3M, for example, allows
to electric lighting from kerosene oil technical staff to allocate 15 percent
lamps, his business was threatened. of their time to experimenting with
However, he quickly saw the ideas, understanding that there will
potential of Ford’s automobile and be occasional winners (such as the I have not failed.
realized that oil could just as easily Post-it Note) along with the I’ve just found 10,000 ways
be converted to gasoline as repeated failures. that won’t work.
kerosene. His fortune rocketed. Recognizing error, cutting Thomas A. Edison
losses, spotting new opportunities, US inventor (1847–1931)
Constant learning and changing course is a test of
Personal experience is recognized leadership and also sends out a
as the way individuals learn, and it positive message to those who
is much the same for organizations; work in the organization. It requires
they gain knowledge and capability rational, unemotional thought that
from corporate experience. The focuses on the costs and benefits
pace of change in the global market of changing direction. The world’s third-largest retailer,
means that constant improvement In the mid-1980s, the Coca-Cola Tesco, opened its Fresh & Easy
has become the norm. The greatest Company decided to replace its stores in the US in 2007. After six
challenge, however, is for original formula with a sweeter years and $2.27 billion in costs,
companies to recognize failure and product: New Coke. In the US, this it admitted failure and pulled out.
learn from it. In order to do this, an prompted consumer protests. The The stores were unsuccessful
organization needs to build a company learned that US consumers because Tesco misjudged the
culture in which people are not were protective of Coca-Cola and shopping habits of its target
criticized or penalized for mistakes, felt unhappy about any tampering customers. Chairman Richard
but are actively encouraged to gain with the recipe. The CEO quickly Broadbent said they had learned
useful insights from them. reintroduced the original formula as the value of remaining open-
Some companies recognize that Coke Classic. By responding quickly, minded about projects. Flexibility,
it is only through failure that he grasped an opportunity for feedback, and fast response are key
success can be found, and build significant publicity; sales soared. to finding a new path via failure. ■

J. D. Rockefeller John Davidson Rockefeller was exclusive deal with the railroad
born in 1839 in Richford, NY. company to transport his oil,
At age 16, he took a job as an putting all his competitors out
assistant bookkeeper with a of business. Standard Oil gained
commission-merchants business. a monopoly position first in
Just four years later, he set up Cleveland and then in the US.
his own, similar company with In 1902 his monopoly in refining,
a partner: it grossed $450,000 transporting, and marketing oil
in the first year. He then opened made headline news and the
his first oil refinery in 1863, company was broken up by the
founding Standard Oil. US Supreme Court in 1911.
Rockefeller’s business interests Rockefeller then became the
made him the richest person in world’s greatest philanthropist,
the world at the time, but his giving away around $350
practices were unpopular. million, and setting up many
Realizing the value of effective charitable institutes. He died
distribution, he arranged an in 1937, at 97 years old.
166
IN CONTEXT

IF I HAD ASKED FOCUS


Market leaders
KEY DATES

PEOPLE WHAT 1780s British inventor Richard


Arkwright devises a complete

THEY WANTED,
mechanized system for the
production of yarn on an
industrialized scale.

THEY WOULD HAVE 1860s US general Nathan


Bedford Forrest claims the key

SAID FASTER HORSES


to military success is “to get
there first with the most men.”
1989 Dutch businessman Arie
LEADING THE MARKET de Geus suggests that a
company’s only sustainable
competitive advantage is its
ability to learn faster than its
competitors.
1994 Al Ries and Jack Trout
publish The 22 Immutable
Laws of Marketing, in which
they outline the advantages of
being first to market.

B
usiness logic often dictates:
hold back; let someone else
go first, incur the costs, and
make mistakes. But there are many
examples of significant advantages
for companies first off the mark.
A company that leads the way
into a new market gains a
competitive advantage, which
might enable it to dominate over the
long term. Richard Arkwright, the
inventor of the modern factory
system, is an example. He devised
the first complete mechanized
system for the spinning of cotton
yarn in the 18th century in Britain.
His patents were overturned just
five years after they were filed, but
his head start ensured that he
WORKING WITH A VISION 167
See also: Stand out in the market 28–31 ■ Gaining an edge 32–39 ■
Balancing long- versus short-termism 190–91 ■ The value chain 216–17

Consumers do not When a company


innovate—they are happy introduces a totally new
with a better version of concept, it creates a new
an existing product. market and is “first” in
consumers’ minds.

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

In 1979 Sony introduced the Sony


Walkman, the first portable music-
listening device. Just as Ford had
changed the way people traveled,
Sony changed music-listening
habits—and lifestyles. Its launch
coincided with the aerobics craze,
and millions used the Walkman
to add music to their exercise
workouts. Between 1987 and 1997,
the height of the Walkman’s
popularity, the number of people
starting to walk as exercise
increased by 30 percent, according
a new market, such as Gillette, the superior products. Sony is one to Time magazine. Sony sold 200
men’s grooming business, with its example of a technology company million of their portable cassette
long-held policy to be the “first to that led the market for around 20 players, and by 1986 the word
get it right.” Some companies years, until competition from new “Walkman” had entered the Oxford
choose not to do this; Samsung, for technology arrived. English Dictionary.
example, aims to be a fast follower, Sony’s corporate philosophy is The Walkman evolved from
having learned from competitors. built on “doing things that no one cassette to CD technology, and
else is willing to do.” The business consumers were happy with their
First-mover advantage was set up in the ruins of Tokyo portable music players until 2001,
Being first to market gives a after World War II, and the founder when Apple CEO Steve Jobs said:
company “first-mover advantage,” Ibuka Masaru was determined to “The coolest thing about the iPod
which can be long-lasting or develop leading-edge products and is that your whole music library fits
short-lived. Long-term advantage get them to market faster than the in your pocket.” So began a new
brings durable benefits, either by competition. This idea became a industry, based on portable digital
creating an entirely new market, personal obsession for Ibuka and music, and dominated by market-
or by improving a company’s his successor, Morita Akio. leader Apple.
market share over a long period.
Companies that succeed in Being first is everything
building long-term advantage Leading the way often depends
often dominate their product on the product being embraced by
categories for many years. Hoover “early adopters”—consumers who
and Post-it Notes, for example, It’s not the consumers’ are willing to pay a price premium
were so successful in their market job to know what to be the first to own something.
sectors that their brand names they want. This happened with the launch of
have become generic terms. Apple’s iPhone in the summer of
Steve Jobs
Short-term advantage typically US former CEO of Apple (1955–2011) 2007. Even though the price was
occurs because it is based on new reduced a few months after launch,
technology. Today, innovation is those who had bought at the higher
exceptionally fast in many sectors, launch price did not resent it due to
with increasingly shorter gaps the cachet of being at the forefront
between new introductions and of the latest trends and fashion.
WORKING WITH A VISION 169
As long as products remain the only fighting a product battle rooted in
one of their kind available, the reality. But consumers are not
company that is first to market has a concerned with reality; they make
monopoly position; this means it can purchases based on perception.
set the price, establish loyalty, and “Being first in the mind is everything
build a reputation before competitors in marketing. Being first into the The key to success for
catch up. When competition does marketplace is important only to the Sony, and to everything
arrive, the first-mover still has the extent that it allows you to get into in business … is never
advantage, because it has the mind first,” say Ries and Trout. to follow the others.
established itself. This is generally Ibuka Masaru
the case even when subsequent The car in front Japanese co-founder of Sony
products are better than the first. Japanese car manufacturer Toyota (1908–99)
tries to be first to market, and
It’s all in the mind imparts this message in the minds
Al Ries and Jack Trout, authors of of consumers with the slogan: “The
The 22 Immutable Laws of car in front is a Toyota.” Toyota was
Marketing, developed a theory of the first company to introduce a
why the first company to market hybrid car—with an engine drawing
can continue to dominate. They power from both gas and electricity an environmentally friendly driving
proposed that the customer’s —to market. Its Prius went on option. Second, creating a hybrid car
perception of where a product or sale in Japan in 1997. Several would increase access to new and
service sits in the market is of manufacturers were considering existing markets, such as the US,
utmost importance, claiming that the concept of a hybrid car in the where emissions legislation would
“it is better to be first than it is to 1980s, but combining an internal favor a hybrid car. Third, it would
be better.” It is easier to get into the combustion engine and an electric enhance Toyota’s image, because of
consumers’ minds first than to motor required significant its clear message of the company’s
dislodge a product or service from investment. Despite this, Toyota commitment to environmental
their minds and convince them that knew that if they could lead the protection, while at the same time
your company has a better product. way, there would be a number of generating excitement about
Ries and Trout argued that most advantages for the company. First, Toyota’s new products and the
marketing stems from the Toyota would gain early-adopter company‘s innovative capabilities.
assumption that companies are consumers who were looking for The Prius went on sale
worldwide in 2001, and more than
ten years later Toyota continued
to lead the hybrid market. The Prius
was the top-selling car in California
in 2012, giving Toyota a 21.1
percent market share, compared to
closest rival Honda’s 12.5 percent.
Although other companies, such
as Ford and Nissan, have now
developed their own hybrid models,
Toyota’s first move into the market
continues to yield benefits in an
ever-growing market. ■

The Prius gas-electric hybrid has won a


sizable share of the low-emissions market
for Toyota. The company was willing to
invest significant development funds in
return for a market-leading position.
170

THE MAIN THING


TO REMEMBER IS,
THE MAIN THING
IS THE MAIN THING
PROTECT THE CORE BUSINESS

IN CONTEXT
Businesses are usually
FOCUS very good at one This skill gives the
Business strategy thing, such as making company a competitive
computer chips. advantage.
KEY DATES
1900s–1950s Growth of
large, vertically integrated
corporations that control and
own their assets, requiring
complex and multilayered
If the company diversifies
management structures. into noncore businesses or
...the core business may
1950s–1990s Organizations outsources some
begin to fail.
begin to expand by acquiring functions to unreliable
unrelated businesses. third parties...

1990 Business experts


C. K. Prahalad and Gary Hamel
introduce the idea of “core
competencies” in their The main thing to remember is,
Harvard Business Review the main thing is the main thing.
article “The Core Competence
of the Corporation”.
1995 US companies start to

T
outsource functions to he expression “Jack of all on using that advantage rather than
companies “offshore,” such as trades” refers to someone branching out with something new.
businesses located in India. who can do many things, The core business is the “main
but is not particularly good at any thing” at the heart of a company’s
2000s Companies begin to one thing. Unless a company is able operation, and organizations must
sell off unrelated businesses to maximize its competitive remember that “the main thing is
to refocus on their core. advantage over its competitors, the the main thing,” according to
same can also be true in the world Brigadier General Gary Huffman
of business. Success usually relies of the US Army. When a company
WORKING WITH A VISION 171
See also: Study the competition 24–27 ■ Stand out in the market 28–31 ■ Gaining an edge 32–39 ■ Porter’s generic
strategies 178–83 ■ Why takeovers disappoint 186–87 ■ The MABA matrix 192–93

is struggling to win sales for its some companies decided to


core product, it may be tempting “outsource”—contracting a business
to consider diversifying, but this activity to an outside company—
often ends up being a distraction. peripheral activities that they had
During the second half of the previously performed internally.
20th century, there was a trend The trend of outsourcing gathered
for companies to acquire unrelated momentum as companies realized
businesses. Gillette, a leader in they could cut their business back
razors, bought PaperMate pens; to the core and achieve leaner, more
Dalgety, which made Homepride efficient, cost-effective operations.
Flour, acquired a pig-breeding For example, a company that
company; and Cadbury, best known manufactures refrigerators may McDonald’s acquired several food
for candy, took control of Schweppes decide that its core business is chains, such as Donatos Pizzeria, during
beverage business. The trend began simply the design, manufacture, the 1990s in an attempt to enter new
to turn in 2003, when McDonald’s and marketing of those refrigerators. market sectors. In 2003, it sold them to
refocus on its core business—burgers.
began to sell off diverse restaurant It might outsource delivery (which it
chains it had acquired, including sees as not adding value), and its
a pizza brand purchased during the information technology (IT) needs internal functions and customer
1990s. This was because it wanted (which it views as a specialized interaction. Outsourcing is useful
to focus on its core business: function). In the short term, handing for lesser functions, but only as long
McDonald’s. Other companies over these activities to a third party as it works well—if it fails, it can
soon began to divest unrelated would seem to make sense. But in adversely affect the core business.
businesses to protect the core. the long term, it could be a mistake. Whenever companies outsource
Delivery might be an important part or acquire a separate business to
Understanding the core of customers’ perceptions of the take over a peripheral function, it is
The theory behind selling secondary product, and the business could vital that management take steps
interests is that the business should suffer if the outsourced delivery to protect the “main thing.” Any
focus its energy and resources on company is unreliable. Similarly, secondary units or third parties
what it is good at. This idea was IT is increasingly integral to the must be fully aligned with the vision
taken further during the 1990s, when success of a business, both for and values of the organization. ■

Core competencies
An organization has a particular Prahalad and Hamel describe
set of diverse production skills the corporation as a tree.
If you cannot be the best and individual technologies. Its roots are its unique
in the world at your core These are its core competencies, competencies, and from these
according to business experts roots grow the organization’s
business, then your core C. K. Prahalad and Gary Hamel. core products, which in turn
business absolutely Unlike physical assets, which nourish separate business units.
cannot form the basis inevitably deteriorate over From these business units come
of a great company. time, competencies become the end products. The idea of
Jim Collins enhanced, because they are core competencies can be used
US business expert (1958–) applied and shared. They are to identify those things within
strengthened by involvement, an organization that are not
communication, and a shared “at the core,” which might be
commitment to working across a distraction, consuming a
an organization’s boundaries. company’s valuable resources.
YOU DON’T NEED A HUGE
COMPANY
JUST A COMPUTER
AND A PART-TIME
PERSON
SMALL IS BEAUTIFUL
174 SMALL IS BEAUTIFUL

W
hen British computer world’s largest search engine.
IN CONTEXT scientist Tim Berners- By 2013, Google employed 30,000
Lee harnessed the people worldwide, of whom around
FOCUS
Internet to develop the World Wide 53 percent worked in research and
Internet business
Web, he was simply creating a development, which may explain
KEY DATES way of sharing information. It was the company’s phenomenal growth.
1974 US computer scientists not viewed as a money-making
Vent Cerf and Bob Kahn exercise. However, the Internet’s Doing business on the web
design the first Transmission disruptive power soon became clear: As two-way communication over
Control Program, enabling it would change business and our the Internet became a reality
computers to talk to each other. way of life, enabling commerce to during the 1990s, organizations
be conducted by a profusion of began to see the potential offered
1977 The first electronic mail individuals and organizations. by the new e-commerce platform.
(“email”) is sent, via the US Early search engines were The first books were sold online
Department of Defense’s invented as an increasing amount in 1992, and in 1994 Pizza Hut in
ARPANET. of information became available on Santa Cruz, California enabled
1991 The World Wide Web the web. Larry Page and Sergey people to order a pizza delivery
Brin, two US computer science via the Internet.
(WWW), the first widely
students, designed a search engine The idea of online selling took off
accessible system to share
that could quickly search all the in 1995 when Jeff Bezos dispatched
data files via the Internet, is available documents and generate the first book sold by Amazon.com,
released by Tim Berners-Lee. highly relevant results. In then located in his Seattle garage.
1993 Netscape launches September 1998 they set up a Around the same time, software
Mosaic, the first commercial work space in a friend’s garage and programmer Pierre Omidyar was
Internet browser. opened a bank account in the name starting a simple website called
of Google Inc. The soon-to-be giant AuctionWeb from his San Jose
2013 More than two million company began, as Page said, with living room. The first product he
third-party sellers use Amazon no more than “a computer and a posted for sale was a broken laser
to reach their customers. part-time person.” pointer. It sold for $14.83. Omidyar
Within a year Google had 40 recognized the Internet’s power to
employees, and in June 2000 reach individual customers,
announced its first billion-URL anywhere in the world, when he
index, making it officially the checked whether the buyer

Larry Page Born in 1973 in Michigan, created a search engine called


Lawrence (Larry) Page was BackRub, which operated on
exposed to computer technology Stanford servers until it outgrew
at an early age; his father was a their capacity. The pair worked
pioneer in computer science and together on a bigger and better
his mother taught computer version, which they named
programming. Page studied Google after the mathematical
engineering at the University of term “Googol”—the number 1
Michigan and then completed a followed by 100 zeros. Page and
Masters in computer engineering Brin were jointly awarded the
at Stanford University. Marconi Prize in 2004, and Page
On his first visit to the campus, was elected to the US National
Page was shown around by fellow Academy of Engineering in
postgraduate student Sergey Brin, 2004. Today Google is the
who would later be the co-founder world’s most popular search
of Google. During a research engine, handling more than 5
project in 1997, Page and Brin billion search queries every day.
WORKING WITH A VISION 175
See also: Beating the odds at start-up 20–21 ■ How fast to grow 44–45 ■ The weightless start-up 62–63 ■ Creativity and
invention 72–73 ■ The long tail 212–13 ■ M-commerce 276–77 ■ Feedback and innovation 312–13

A seller in Japan can A buyer in India


source and sell a blue, wants to buy a green,
customized widget. customized widget.

The Internet connects buyers You don’t need a


and sellers, and manufacturers huge company, just
and suppliers; it acts as a global a computer and a
marketplace. part-time person.

A seller in Poland can A buyer in France


source and sell a green, wants to buy a blue,
customized widget. customized widget.

understood that the pointer was an auction service, eBay sees itself Before the existence of the Internet,
broken. The buyer assured him that as in the business of linking users, if someone wanted to sell their
he was a collector of broken laser not selling them things. products, a physical presence was
pointers. One year later, with two necessary: a store, market stall, or
full-time employees, the soon-to-be- Starting small going door-to-door. Generally, the
renamed eBay sold goods to the Both eBay and Amazon started bigger the presence, the more
value of $7.2 million. By acting as small, and their platforms have successful the business. Success ❯❯
empowered countless other small
businesses around the world. Their
pioneering use of the Internet
changed the way that businesses
and consumers interact, putting
A business succeeds not buyers and sellers in touch with
because it is long established one another in a way that had not
or because it is big, but been possible before. Amazon and
because there are men and eBay demonstrate the power of the
idea that “small is beautiful.”
women in it who live it,
Anyone can sell products from their
sleep it, dream it. platforms, from individuals selling
J. W. Marriott unique items to “power sellers”
US businessman (1932–)
who set up virtual stores, either
In the pre-Internet age, vast numbers
within the platform or linked to it. of people were often necessary for
In the online marketplace the same administration. The combined power
opportunities exist for every of computing and the Internet changed
business, whether large or small. organizational structures forever.
176 SMALL IS BEAUTIFUL
In the digital, networked economy,
people can work anywhere, at any
time. This shift in working habits
is changing the face of business
environments and staff distribution.

purchase; cost and speed of delivery


are critical too. Free shipping and
free returns are attractive incentives
to purchase. Time of delivery is also
important: retailers who can offer
one-hour time slots and deliver
beyond the traditional working day
gain a competitive edge. Customer
service is more important than ever.

Feedback is king
in retail, for example, traditionally Today, however, the Internet is free Whatever the goods being sold,
relied on a prominent store on a and technology prices are relatively they must be of the quality stated,
town’s main street, where the inexpensive. Cloud computing— because feedback on the Internet
retailer could attract the largest whereby organizations share virtual can have a powerful effect on the
number of customers through the infrastructure, software, and market. For hotels and restaurants,
door. Companies often depended storage —has enabled small feedback and ratings by customers
on a large sales force, who visited businesses to have access to the are now the norm, and many
customers to build relationships. power of integrated networks and consumers base their purchasing
Businesses held significant computing at a very low cost, and decisions on other people’s
amounts of stock in warehouses, with no use of physical space. comments. A well-run, small,
and had a large office staff to take Just as scale is no barrier to family-owned hotel, which focuses
phone calls and handle paperwork. success, neither is geography. on excellent service and delighting
That has all changed. A small business can now reach its guests, can build a reputation as
Consumers can now find retailers customers all over the world just the number one place to stay in a
large or small via the Internet from a as effectively as a large one. It is particular town—ahead of a big
laptop, smartphone, or tablet. The possible to live on one side of the chain hotel—because of review
physical scale of a business no longer globe and sell items from an entirely websites such as Trip Advisor.
correlates with success. Many different continent. The introduction
businesses no longer need large of PayPal in 2000 allowed simple
offices. Paperwork has diminished, payment and money transfers in a
while online communication—email, wide range of currencies via the
instant messaging, and social media Internet, furthering opportunities
—allows sole-traders and employed for small companies to operate as The Internet is really
people alike to work remotely, from global e-commerce businesses. about highly specialized
home, anywhere in the world.
information, highly
Large companies used to be Competing with giants
more competitive than small With an increasing choice of goods
specialized targeting.
companies because they had better and services available online for
Eric Schmidt
US former CEO of Google
economies of scale (the cost consumers, small businesses must (1955–)
advantages that enterprises obtain offer something more than the giants
due to size). When computers were in order to compete. Price is critical
first developed, this continued to be because consumers can easily
true, because large, costly servers compare prices online. But it is not
were required for file storage. the only factor that affects an online
WORKING WITH A VISION 177
Small businesses can receive market information just
as quickly as large companies thanks to the Internet,
but due to their size are often better placed to respond
quickly and adapt to changes in demand, supply niche
products, and deliver a more personalized approach.

The Web does not just


connect machines, it
connects people.
Sir Tim Berners-Lee
UK inventor of the World
Wide Web (1955–)

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

IN CONTEXT
FOCUS Companies need to find a competitive advantage.
Business strategy
KEY DATES
1776 UK economist Adam
Smith introduces the concept
of comparative advantage,
where one party has the ability
to produce a particular good or They can do this by offering customers...
service at a lower marginal
cost than another.
1960 US economist Theodore
Levitt says that rather than
finding a customer for their
existing product, businesses
should find out what customers ...the cheapest ...a product or service
want, and produce it for them. product or service that is outstandingly
on the market. This is good in some way.
1985 Michael Porter publishes the strategy of cost This is the strategy
Competitive Advantage. leadership. of differentiation.
2005 Professors W. Chan
Kim and Renée Mauborgne
recommend a “blue ocean”
strategy for generating growth
and profits, in which new
demand is created in an
uncontested market space. Be the cheapest or the best;
don’t get caught in the middle.

C
onsumers have choice. his idea in Competitive Advantage: strategy,” offering a specialized
And different consumers Creating and Sustaining Superior service in a niche market. This
will choose differently— Performance (1985). Porter used a position can be applied to both
some like to pay the most for the four-celled matrix to represent the of the initial generic strategies,
luxurious option, while others will four different generic strategies resulting in a cost-focus strategy
always opt for the cheapest. in his theory. (where the company aims to be
Companies recognize this and Companies generally choose cheapest within a niche market) or a
pitch their business at a particular between two generic strategies: differentiation-focus strategy (where
group of consumers. This is either “cost leadership,” where they the company offers unique products
because it is never wise for a aim to be the cheapest in the or services within a niche market).
company to be caught between market; or “differentiation,” where
groups of customers. they create unique products or Cost-leadership strategy
Harvard Business School services. However, there is another Companies pursuing a cost-
professor Michael Porter proposed element that can be added to these leadership strategy have two
“generic strategies” for gaining two generic strategies: a company options. They can choose to sell
competitive advantage, explaining might choose to pursue a “focus products at average industry prices
WORKING WITH A VISION 181
See also: Gaining an edge 32–39 ■ Leading the market 166–69 ■ Good and bad strategy 184–85 ■ The MABA matrix
192–93 ■ Porter’s five forces 212–15 ■ The value chain 216–17

leadership have to be confident that This strategy is more appropriate in


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

Bose Systems is an audio specialist


that pursues a differentiation strategy.
It distinguishes itself from competitors
through research and development,
which results in innovative technology.
182 PORTER’S GENERIC STRATEGIES
good research and development, an Whichever focus a company
innovative culture, and the ability to chooses, it must do so on the basis
deliver consistently high-quality that it can successfully compete
products or services. This needs to on the strength of a particular
be supported by effective marketing, ability or competence that will
so that the differentiation is help it in its chosen market niche. Every company competing
positioned and communicated to If the company aims for cost in an industry has a
customers. Brand image is integral, leadership in a niche market, for competitive strategy,
and is often strengthened by the example, it has to be based on whether explicit or implicit.
nature of the differentiation. distinctive relationships that have Michael Porter
been developed with specialized
Focus strategy suppliers. If the company goes for
Companies pursuing a focus differentiation in a niche market,
strategy choose a particular niche on the other hand, it has to be on
market. They have to understand the the strength of a deep understanding
dynamics of that market and the of customer needs. However, a
unique needs of customers within it, company that chooses to focus on offers only a few routes. Airlines
and then develop either low-cost or a small market segment because tend to focus on a particular group
well-specified products or services. it is too small to serve the larger of travelers as an effective way of
They also tend to serve their market risks being sidelined by achieving competitive advantage in
customers well, and so build strong bigger companies with distinctive a crowded market, for example by
brand loyalty. This makes their abilities, which enable them to offering discounted travel or a more
particular market segment less better position their offerings. luxurious traveling experience.
attractive to potential new entrants. Low-cost, Ireland-based airline
Ferrari is an example of a Airline strategies Ryanair has championed the idea
company in a niche market that has The airline industry illustrates of cost leadership, and describes
chosen to differentiate itself. The Porter’s idea. Consumers have a itself as “Europe’s only ultralow
company targets the limited high- choice when they book an airline cost carrier.” The notion of a low-
performance sports-car segment, ticket. They can choose between a cost airline was pioneered by
and its cars are differentiated no-frills airline or a more expensive Texas-based Southwest Airlines,
through high-spec design, high- operator offering better service, and Ryanair followed with similar
performance, and the company’s quality, and comfort. There may also principles: use a single plane type
Grand Prix association. be a third option: a small airline that to keep costs down, constantly
review overheads, turn aircraft
around as quickly as possible, and
Porter’s generic do not offer a loyalty plan.
Large markets

business strategies
Ryanair bought 100 Boeing 737-
fall within two basic
categories: lowest 800 passenger jets at a significant
Cost leadership Differentiation
COMPETITIVE SCOPE

cost or marked discount in 2002. Starting with


differentiation. newer, more fuel-efficient planes
Companies can than many rivals, Ryanair could
choose between afford to fill its planes with
these approaches passengers buying low-price tickets.
Niche markets

whether they are


small or large, and
However, Ryanair could make a
Differentiation profit because passengers would also
Cost focus whether they are
focus operating in broad spend money on areas such as
target markets, or on-board food and hotel reservations.
niche ones. Ryanair is able to increase profits
Lowest cost Markedly different year after year since it continually
looks for ways to keep costs down
SOURCE OF COMPETITIVE ADVANTAGE and charge customers for extras.
WORKING WITH A VISION 183
Singapore Airlines’ customer service
ethic is personified by “The Singapore
Girl,” who portrays the idea of Asian
hospitality. Her image has become
a successful brand icon.

These include being the first airline


to implement baggage charges;
working to eliminate the need for
check-in desks (by offering online
check-in facilities); and charging for
options such as seat reservation
and priority boarding. This
consistent search for new ways to
transform costs is the essence of
the cost-leadership strategy. In the
12 months ending March 31, 2013,
Ryanair transported nearly 80
million passengers and announced
record profits of $753 million, Singapore Airlines recognizes that around service excellence mean
despite a rise in fuel costs. innovation is short-lived in the that customers are more than
Singapore Airlines (SIA) by airline industry. New features and happy to pay a premium price.
contrast, pursues a differentiation ideas can easily be copied by other Porter’s generic business
strategy. The brand’s major drivers airlines, so it continues to invest strategies can be used by any
are groundbreaking technology, heavily in innovation and technology company to achieve a competitive
innovation, quality, and excellent as an integral part of achieving its advantage. However, the
customer service. It maintains the differentiation strategy. The airline competitive environment consists
youngest fleet of aircraft among runs a comprehensive and rigorous of more than just present rivals;
major air carriers, and keeps to a training program for cabin- and changes in the industry and
stringent policy of replacing older flight-crew to ensure the customer’s environment add to a constantly
aircraft with newer, better models. in-flight experience is consistently changing business context. For this
SIA has always been first to take excellent. The success of its brand reason, strategy choice must be
delivery of new aircraft types. strategy and its entire positioning regularly reviewed and checked. ■

Ice cream with a difference


Quirky flavor names—such as Consumers are prepared to
Imagine Whirled Peace, Chubby pay a premium price because
Hubby, and Brownie Chew of the ice cream’s all-natural,
Gooder—set Ben & Jerry’s ice high-quality ingredients and
creams apart. Ben Cohen and innovative flavors—months of
Jerry Greenfield started the research go into perfecting the
company in 1978 and wanted it to taste. The company’s strategy to
be alternative. According to Jerry, differentiate itself from the
“if it’s not fun, why do it?” Ben competition extends beyond the
claims to have no sense of taste, product. The organization is
so he relied on texture (what he active in social campaigns such
Ben & Jerry’s ice cream is now part called “mouth feel”)—big chunks as gay marriage, buys only from
of the Unilever brand, but continues of added ingredients such as fruit, fair-trade suppliers, and
to use the differentiation strategy it chocolate, or cookies therefore considers environmental aspects
adopted to become a market leader. became the brand’s signature. in production and delivery.
184

THE ESSENCE OF
STRATEGY IS
CHOOSING WHAT
NOT TO DO
GOOD AND BAD STRATEGY

S
trategy is a concept with
IN CONTEXT its roots in military history,
when army generals planned
FOCUS
campaigns of war. Today, it is an
Strategic thinking
overused and often misunderstood
KEY DATES word in business theory. Put
1960s Strategic planning simply, strategy is the way a
grows in popularity, and is business gets from where it is to
enthusiastically adopted in the where it wants to be; it involves
new field of management identifying the choices that must
consultancy. be made to overcome the obstacles
that lie in the way. Often, choosing
1962 Alfred Chandler’s what not to do is as important as
Strategy and Structure sets out what to do. Strategy guru Michael Kodak failed to recognize that
a model in which a company’s Porter first drew attention to this in film-based photography was effectively
structure matches its strategy, 1985, then specifically explored it in “what not to do.” Choosing to move away
not vice versa. his 1996 article “What is Strategy?” from this area could have made Kodak
a market leader in digital technology.
For businesses, it is just as
1985 Michael Porter’s
possible to follow bad strategy
Competitive Advantage
as good. Richard Rumelt’s Good and may involve painful decisions.
redefines business thinking
Strategy/Bad Strategy (2012) It should result in a strategy based
on competition, repopularizing explained that good strategy on clear goals that capitalizes on
the ailing field of strategic should emerge out of an analysis the company’s strengths and can
thinking in the process. of the company itself, and its goals. be flexible if external factors change.
1990s/2000s Strategy is SWOT analysis (strengths, Bad strategy often goes hand in
increasingly practiced as a weaknesses, opportunities, and hand with setting a simplistic goal
continuous process by all in a threats) is one of the most popular or vision. Leaders in organizations
business, not just by those at systems for such audits, and to be may use powerful rhetoric about
boardroom level. Nokia says effective it should be conducted “winning” to motivate staff, but
that strategy should be “a daily among middle managers and empty goals are easy to set—
part of a manager’s activity.” people across the organization, not formulating the strategy required to
just those at the top. Good strategy achieve them is much more difficult.
requires analysis of the competition Executives bent on pursuing a bad
and any threats to the organization, strategy will ignore problems and
WORKING WITH A VISION 185
See also: Protect the core business 170–71 ■ Avoiding complacency 194–201 ■

Porter’s five forces 212–15 ■ The value chain 216–17


Richard Rumelt
Professor Richard Rumelt
(1942–) studied electrical
engineering at the University
Company A sets out to of California, Berkeley, before
...its strengths,
define its strategy for the going on to receive a doctorate
such as quality of
coming years. It conducts in business administration
manufacturing...
analysis to understand... from Harvard Business School
in 1972. He worked as a
systems engineer at NASA’s
Jet Propulsion Laboratories
while also serving on the
...its opportunities, ...its weaknesses, faculty of Harvard Business
such as developing new such as manufacturing School. In 1976 he joined
products or going into capacity or the availability the Anderson School of
different markets... of skilled labor... Management at the University
of California, where he has
remained ever since, rising to
become Professor of Business
and Society. From 1993 to 1996
...and its threats, Company A must
he taught at INSEAD, the
such as the strength of the set clear goals and
leading French business
competition, or shortage decide where to focus
school at Fontainebleau, near
of raw materials. its efforts.
Paris. Rumelt also works as a
consultant to several
companies and governments.

The essence of strategy is choosing Key works


what not to do.
1982 Diversity and Profitability
1991 How Much Does Industry
Matter?
be blinded to the choices available. digital camera, but the senior 2012 Good Strategy/Bad
Strategy
Rather than making tough decisions, management of Kodak ignored the
they will try to accommodate a opportunity presented by this new
multitude of conflicting demands technology. They believed they
and interests to stick to a plan. were in the chemistry-based film
Managers in these circumstances business and were not prepared to
risk following old ideas and paths “kill the golden goose.” Executives
that no longer work, rather than failed to see that digital photography
leading with new ones. would make film redundant and
challenge their near-monopoly Good strategy honestly
Film is dead business. Japanese company acknowledges the
The demise of Kodak is a prime Fujifilm, however, recognized the challenges being faced
example of a company following threat and diversified successfully. and provides an approach
bad strategy. Founded in 1890, by Kodak began its shift to digital to overcoming them.
the 1970s Kodak was the US market cameras too late, as smartphones Richard Rumelt
leader in the photographic sector, and tablets replaced cameras.
with nearly 90 percent of the film The senior executives’ inability to
and camera market. It was rated as make the tough decision to change
one of the world’s top brands. In course led to the company being
1975 Kodak engineers invented the declared bankrupt in 2012. ■
186

↜渀屮↜渀屮Synergy and
↜渀屮↜渀屮other lies
Why Takeovers Disappoint

C
ompanies have to grow in scale: overhead costs are shared
in context order to survive. One way and money can be saved from
to make an organization increased buying power. Fixed
focus
bigger is to buy (acquire) another costs can also be reduced because
Mergers and takeovers
and make it part of the original the combined business needs less
Key Dates company. Alternatively, two staff in functions such as finance,
1890–1905 The first “takeover businesses can agree to merge, human resources, and marketing,
wave” occurs in the US and forming another organization than the two separate entities.
Europe, triggered by an with an entirely new identity. The Companies’ also buy businesses to
economic depression and purpose of an acquisition or merger acquire new technology, reach new
new legislation. is often to increase shareholder markets, or increase distribution.
value beyond the sum of the two
1960s Abraham Maslow companies. These benefits are Corporate divorce
applies the idea of “synergy” known as “synergy”; the concept In practice, takeovers and mergers
to the way that employees in being that one plus one equals three. are rarely marriages made in heaven,
organizations work together. The reasons for two businesses a fact underlined by Harold Geneen
2001 US companies AOL and joining together might seem in the books he co-authored in 1997
compelling. The new, combined and 1999 on the pretence of synergy.
Time Warner merge in a deal
company increases sales, market Mergers can fail to deliver the value
worth $182 billion. It does not
share, and revenue. It should also promised, with one plus one often
work out, and in 2009 the
be a more efficient operation. Bigger equaling less than two. There are
companies become separate companies also enjoy economies of many reasons for failure. Hidden
entities.
2007 In the US alone, 144 Synergy is the
takeover deals worth more additional value that
than $1 billion take place. is created when two
business units are
2009 Only 35 takeover deals joined. A holy grail in
worth more than $1 billion business circles,
take place in the US. academics Campbell
and Goold concluded
that “synergy
initiatives often fall
short of management’s
expectations”.
working with a vision 187
See also: The Greiner curve 58–61 ■ Organizing teams and talent 80–85 ■

Organizational culture 104–09 ■ Protect the core business 170–71

Company A
Company A Company B
agrees to buy
makes widgets makes widgets
Company B. The
and sells them in and sells them in
legal processes
the north. the south.
are completed.

Harold Geneen
Company A has Company B has Harold Geneen was born in
New company
a formal, an informal, Dorset, UK, in 1910, but his
“AB” is formed
hierarchical democratic parents emigrated soon after
from two
culture with culture where his birth and he was raised
companies with
highly defined staff forms teams in the US. He studied
mismatching
roles and levels of to match skills accounting at NYU (New York
cultures.
management. to projects. University) and went on to
become a highly successful
businessman in the US. He
is best known as the father
of the conglomerate concept,
The new company does not deliver synergy. where a large corporation is
created from seemingly
Takeovers disappoint. unrelated businesses. In 1959
he became president and CEO
of International Telephone and
problems might be discovered after motor markets. The new company, Telegraph Corporation (ITT),
and grew the company from
the deal is done because of the DaimlerChrysler, was dubbed a
a medium-sized business to a
limitations on sharing commercially “merger of equals.” But the reality
multinational conglomerate.
sensitive information prior to was a classic culture clash. Daimler His 18-year tenure included
common ownership. The focus at was a formal, hierarchical 350 acquisitions and mergers
the time of the deal is often on the organization, while Chrysler favored in more than 80 different
event of joining together rather than a more team-oriented approach. countries, including Sheraton
planning what will happen next. Chrysler operated in a market Hotels in the US, and
Effective integration requires quick, where low price and catchy design telecommunications
courageous decision making so that were important; high-end Daimler companies in Europe and
time and momentum are not lost. was focused on quality and luxury. Brazil. Despite his success and
However, the most common Chrysler executives felt wealth, he was known for his
reason for failure is that the two undermined in the new alliance no-nonsense values and plain
organizations have different because Daimler tried to dictate talking. He died in 1997.
approaches and lack synergy. the terms on which the new
In 1998, German car producer business should work and to place Key works
Daimler-Benz bought US its people in key positions. The
1997 The Synergy Myth
automotive business Chrysler for result was a costly corporate (with Brent Bowers)
$38 billion. The logic seemed divorce with Daimler-Benz selling 1999 Synergy and Other Lies
obvious: create a trans-Atlantic Chrysler to a private-equity firm for (with Brent Bowers)
powerhouse that would dominate a mere $7 billion in 2007. ■
188

THE CHINESE WORD


“CRISIS” IS COMPOSED
OF TWO CHARACTERS:
“DANGER” AND
“OPPORTUNITY”
CRISIS MANAGEMENT

M
ankind has faced crises affect businesses across the world.
IN CONTEXT throughout history, from Digital, 24/7 communication means
natural disasters to man- that news travels far and fast. The
FOCUS
made calamities. Businesses face result is that crises may seem to
Business crises
similar crises—internal or external be more prevalent than they were
KEY DATES events can pose major threats to during the predigital age.
1987 Ian Mitroff, Paul the organization. Unpredictable in
Shrivastava, and Firdaus nature, they require quick decision Responding to crisis
Udwadia publish the paper making and action from leaders. The random nature of crises means
“Effective Crisis Management.” Globalization has increased the that they can strike anywhere.
complexity of the business world, Typical crises include technological
1988 Shrivastava, Mitroff, so an event in one country can failure; employee actions, from
Danny Miller, and Anil Miglani
say that organizational crisis
requires an interdisciplinary
approach, using psychological,
technological-structural and A company develops a An unpredictable,
social-political perspectives. crisis management major crisis hits the
plan covering “who, what, company, requiring
1995 A. Gonzalez-Herrero and when, where, and how” for immediate decisions and
C. Pratt suggest a model for the first critical hours. actions.
crisis management: diagnosis
of impending trouble; decision
and actions; implementation of
change; and monitoring.
2000s Business continuity
planning is introduced to deal
with terrorism and major The crisis is effectively Leadership takes
technology failure. managed and, if possible, control and puts the
turned into an crisis management
2010s Social media allows a
opportunity. plan into action.
crisis to be publicized rapidly,
often to a company’s detriment.
WORKING WITH A VISION 189
See also: Managing risk 40–41 ■ Hubris and nemesis 100–03 ■ Learning from
failure 164–65 ■ Contingency planning 210 ■ Coping with chaos 220–21
Supplier roles in crisis
In their article “The Toyota
Group and the Aisin Fire,”
be minimized and its reputation
authors Toshihiro Nishiguchi
even enhanced. As president John and Alexandre Beaudet
F Kennedy said, “in Chinese, the demonstrated the importance
word ‘crisis’ is composed of two of supplier relationships
characters—one represents danger during a crisis. In 1997, a fire
and one represents opportunity.” at the plant of one of Toyota’s
most trusted suppliers, Aisin
Handling a crisis Seiki, threatened to halt
In 1982, Johnson & Johnson reacted Toyota-group operations for
to a crisis effectively when Tylenol weeks. Aisin Seiki was the
pain-relief capsules sold in the sole source for a small but
Chicago, IL, area had been laced crucial part used in all Toyota
with cyanide. The company recalled vehicles. Only two or three
the product, stopped advertising, and days’ worth of stock was on
hand. Toyota’s manufacturing
Tylenol was the top pain reliever reintroduced Tylenol in a triple-seal,
in the US when it was hit by a crisis:
plants shut down but were
tamper-resistant package. The reopened after only two days.
lethally contaminated capsules. Over public felt reassured by the move,
30 million bottles were recalled at huge The recovery was achieved
and once again trusted the product. through an immediate and
cost, but consumer faith was retained.
At around the same time, another largely self-organized effort
US company tried to contain a by companies from within and
walkouts to fraud; sudden supplier similar crisis using a very different outside the Toyota group, who
loss or rising prices in raw materials; approach. A woman returned a jar set up alternative production
and environmental disasters. Every of Gerber Product’s baby food to sites. The collaborative effort
crisis has the potential to damage her local supermarket, saying that of more than 200 companies
a company’s profits and reputation. it contained a shard of glass. was orchestrated with limited
The extent to which it is able to Gerber ran laboratory tests and direct control from Toyota
withstand a crisis and limit the found nothing; the store had lost and with no haggling over
damage is determined by its ability the shard, and the company technical proprietary rights
or financial compensation.
to respond fast and appropriately. decided there was no problem on
its production line. However,
Planning and decisions customers in 30 different states
Effective crisis management then said they too had found glass
involves careful planning, so that if in the baby food. The company
a crisis strikes it can be addressed could find no evidence to support
in a calm, professional way. This these claims, so announced that
involves quickly establishing the they were “being had” by people
“who, what, when, where, and how” wanting to file false liability claims. Effective crisis management
of the crisis within the critical first They did not recall any products. is a never-ending process,
few hours. Any crisis—no matter Public confidence in the company not an event with a
how small—is newsworthy, so a fell; some states demanded other beginning and an end.
company’s public response must Gerber products be removed from Ian Mitroff,
be fast. Public perception affects stores. Although the company’s Paul Shrivastava,
consumer trust. position was evidence-based, it Firdaus Udwadia
Leadership during a crisis is seemed callously indifferent to the
particularly important, since swift, welfare of babies. It lost sight of the
effective decision making is critical. essential rule in any crisis: always
Every company recognizes that if it show commitment to the safety and
handles a crisis well, damage can well-being of your consumers. ■
190

YOU CAN’T GROW


LONG-TERM IF
YOU CAN’T EAT
SHORT-TERM
BALANCING LONG- VERSUS SHORT-TERMISM

IN CONTEXT If a company only If a company only


FOCUS thinks short-term... thinks long-term...
Managing objectives
KEY DATES
1938 US author F. Scott
Fitzgerald writes that ...about immediate issues ...about new products,
“intelligence is the ability with customers, wages, new markets, innovation,
to hold two opposed ideas in suppliers, and staff... and growth...
the mind at the same time,
and still retain the ability
to function.”
1994 US business experts ...it becomes outdated
James Collins and Jerry ...it runs out of capital
and creates no new
Porras publish Built To to fund investment.
opportunities for growth.
Last: Successful Habits of
Visionary Companies.
2009 In The Opposable Mind, Successful companies
Canadian business professor have to balance short-term
Roger Martin claims that and long-term thinking.
great business leaders are able
to use “integrative thinking” to
creatively resolve the tension
in opposing ideas and models.

A
successful business has to a company’s sole focus is on new
balance two different time prospects, it will soon become
horizons: short-term and unprofitable. As Jack Welch, CEO of
long-term. In the short term, a GE, said: “You can’t grow long-term
company needs cash to pay its wages if you can’t eat short-term. Anybody
and bills. But if it focuses too much on can manage short. Anybody can
the immedate present, it risks manage long. Balancing those two
missing opportunities. Conversely, if things is what management is.”
WORKING WITH A VISION 191
See also: Take the second step 43 ■ How fast to grow 44–45 ■ Effective leadership 78–79 ■
Investment and dividends 126–27 ■ Accountability and governance 130–31 ■ Profit versus cash flow 152–53

In 1994, James Collins and Jerry Today JCB is the third-largest


Porras studied companies such as manufacturer of earth-moving
General Electric, Marriott, and 3M machinery in the world, with 22
that had been in business for more factories in Europe, Asia, and North
Preserve
than a century and that consistently and South America. Bamford can the core
outperformed the stock market. invest when and where he chooses.
They used the Chinese yin-yang He decided to invest in India by
sign—symbolizing complementary opening a factory in 1978, a long-
opposites—to explain how term prospect that paid off; JCB Stimulate
successful businesses maintain is now market leader there. In 2012, progress
control of both the short- and long- JCB opened a factory in Brazil.
term. The organizations they Unlike many CEOs, who hold a
studied were able to manage post for a few years then move on,
contradictory ideas at the same Bamford saw that balancing the The yin-yang symbol reflects
time, by focusing on “both … and short- and long-term is critical. His the dual nature of visionary companies,
…” rather than “either … or …” dual focus has paid off: despite the according to Collins and Porras. They
suggest replacing the “tyranny of the
They also demonstrated the worldwide recession, JCB sales
‘OR’” with the “genius of the ‘AND.’”
concept by performing well both in grew 40 percent in 2011 and topped
the short-term and in the long-term. £2.75 ($4.3) billion in 2012.
In contrast, a typical public in the business, without regard to
Public and private limited company (plc), owned by the impact on long-term prospects.
In a private limited company (Ltd), shareholders and quoted on a stock This happened in 2013 at Apple.
managers can plan for different exchange, is under greater scrutiny. To ensure the right balance
time horizons without scrutiny from These investors look for returns, between short- and long-term,
shareholders. Sir Anthony Bamford, in the form of dividends, on an companies often split planning
for example, runs JCB, a privately annual basis. This can become a responsibility between different
owned British company. JCB was strategic issue, since institutional management teams. This allows
started by his father, Joseph Cyril shareholders may put pressure on the organization to manage the
Bamford, who began making