Wayne Wilson on Companies in Transition

Leadership for the “new normal”

In his new book, Great by Choice, Jim Collins describes some of the leadership characteristics necessary for companies to survive and thrive in the extreme environments of the “new normal.”

Collins believes that the “unbroken rising prosperity” of the last 50 years was probably an aberration, and that we are now returning to a period of turbulence, uncertainty, and chaos which have characterized most of history.

Collins’ leadership qualities include:

• the “20-Mile March approach” - this is about establishing and maintaining a daily/weekly/monthly/annual performance standard which the organization commits to achieving continuously. Be it “zero manufacturing defects” or generating 20% return on equity every year, the goal is to establish a performance discipline which paces the organization for continuous success while also avoiding risky over extensions. Stretch in tough times while holding back in good times - steady wins the race.

• productive paranoia - this is about channeling the fear which arises in a scary world. One way to do this is to maintain a “conservative financial position” - clean balance sheets with very little debt while holding lots of cash for emergencies and opportunities. Many companies have recently been accused of hoarding cash. More likely, they are adapting to the higher levels of uncertainty of the “new normal.”

• empirical creativity - Direct marketers spend a lot of time testing mailing pieces before committing large sums of money to a campaign. The same principle should apply to all large initiatives and expenditures. Make sure the evidence is on your side before placing those big bets. Big gains require big bets, but all big bets do not result in big gains. Do the math and homework first.

Getting a return on “luck”

We all hope to “get lucky.” Right? But what do we mean by “get lucky” and how does one benefit from “being lucky”?

Jim Collins, author of Good to Great and Great by Choice, says that the causes of luck could be “randomness or complexity or anything in between.” He defines a “luck event” as any event that meets three tests ¹:

• it happens outside of your doing
• it has a potentially significant consequence - maybe good, maybe bad
• it is unpredictable

But the real key to getting a “return on luck” is what you do when a lucky event occurs:

• Does it cause you to change your plans?
• Do you grab it? or
• Do you run away from it?

According to Collins, great companies are not any luckier than other companies; the great companies just do a better job of capitalizing on the luck that comes their way.

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¹ FinancialExecutive, January/February 2012, p. 31

David Petraeus on strategic leadership

A new book about General David Petraeus’ year as commander of NATO forces in Afghanistan [1] describes at one point four tasks which all strategic leaders - be they military, political, or business - must undertake if they are to be successful.

• First, “get the big ideas right”
• Second, communicate “those big ideas”
• Third, oversee “the implementation of those big ideas”, and
• Fourth, capture the “best practices and lessons” and use them to refine the ideas and process.

There is no magic here, but rather a virtuous circle of continuous improvement if the process is implemented correctly.

“Big ideas” are really about key themes - vision, mission, goals - and the strategies that the leader must develop and employ to move his/her thematic agenda forward. In business turnaround situations, these ideas usually involve an assessment of an organization’s capabilities and the market opportunities available to it coupled with a short list of carefully thought out strategies for actually making something out of the combination.

“Communicating the big ideas” often must begin even before the strategies have been formulated because the leader needs the insights, skills, and efforts of others in the organization to ensure that the hoped-for “big ideas” will actually work (a virtuous circle within a virtuous circle if you will).

None of this matters if the "big ideas" are not implemented. Choosing the right lieutenants, communicating with and through them constantly, setting a proper example, demonstrating your commitment to the “big ideas” through  the decisions you make - all of these are important to laying the groundwork for other associates down the line to actually carry out the work of transformation which they will only undertake once they are convinced that the leader is serious about his/her agenda.

And finally, capturing, distilling, communicating and re-enforcing “lessons learned” enables this process to repeat itself with increasing levels of productivity and effectiveness because successful turnarounds invariably require multiple cycles through this process to generate truly successful performance improvement.

If it were easy, organizations wouldn't need strategic leaders.

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[1] Paula Broadwell and Vernon Loeb. All In: The Education of General David Petraeus at amazon.com.

What world are we living in?

Thomas Friedman's column in Sunday's New York Times (Serious in Singapore) describes the nimbleness of Singapore's people in responding to a changing world. Their mantra: What world are we living in and what do we have to do to thrive?

As a tiny city-state, lacking natural resources, in a volatile part of the world, Singapore has developed a culture and economy based on rapid adaptation.

What are some of the lessons here for owner/CEOs?

1. Focus on the world as it is, not as we would like it to be.

2. The world is large and we are small; learn to move quickly.

3. Success comes from being nimble and hustling.

4. Training and education are the foundation.

5. No amount of wishing is going to make reality different from what it is.

Singapore's success is a great example of figuring out what you have and making the most of it.

Are you afraid of innovation?

Economic growth is often fueled by innovation. And innovation can be tricky to cultivate and manage. Most owner/CEOs have seen examples or heard stories about workers who resist innovation because they are afraid of change, afraid that they won't be able to keep up, or afraid that they just might lose their jobs.

Are CEOs immune to this fear?

Apparently not according to innovation consultant Jeffrey Phillips. Phillips says too many executives are uneasy with the notion of unpredictable routines and uncertain outcomes. The trouble results because of the differing skill sets required to foster innovation versus manage routine operations:

"Innovation requires ART not SCIENCE
Innovation requires QUALITATIVE insights not QUANTITATIVE statistics
Innovation requires HUNCHES not FACTS
Innovation requires RISKS not CERTAINTIES"

Learn about some of the techniques great companies such as Apple use to minimize innovation fear in Phillips' Why innovation makes executives uncomfortable.

Now more than ever, scale matters

Scaling up a business is hard work. Most new businesses remain relatively small affairs, especially the "mom and pop" variety.

Venture capitalists and other early stage investors generally limit their investments to startups with large market opportunities. It's simply too hard to hit an investment homerun otherwise, and without a few homeruns,the venture portfolio investing model doesn't work very well.

And scale matters even more in a low inflation, low growth economic environment such as the one we are currently experiencing. With most companies having little or no pricing power, the advantage goes to the low-cost producer and that requires scale. Or, you have to develop a high-performance niche product or service which can consistently command premium prices.

Scale does not, however, mean just bulking up unless you can also achieve the unit costs and economies of scale of the best companies in your competitive space. Bulking up via acquisitions or lower prices is the easy part. Translating that size into competitve profitability is a lot harder. It requires automation, product simplification, and significant process and cultural changes to dramatically improve profitability. Few companies can make all of these changes successfully.

Where do you start?

First, carefully evaluate your strategic opportunites. If there is a Wal-Mart in your space, becoming the largest low-cost producer may not be a viable strategy. While there are only a few such giants, there are many, many successful niche businesses which thrive because their markets are too small to attract the giants and / or the owners have developed proprietary expertise which is not easily duplicated.

Second, if you conclude that a scale opportunity exists in your space, prepare yourself for a long, hard campaign. The numbers of Google-like companies which can spring seemingly from nothing to mega status overnight are tiny. A great example is Iron Mountain, the records storage company which has spent decades consolidating a "mom and pop" industry to become "the world leader in information management services."

Finally, there is a corollary to the "Great Leapfrog Theory".* The price of failure may be extinction. Does anyone remember Webvan or Altavista?

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* There is no natural law which says you can't jump ahead of the guy in front of you - as long as you can make it stick. Attributed to Robert Ringer in Winning Through Intimidation. (According to one reviewer "Winning Through Not Letting Yourself GET Intimidated" might have been a more appropriate title.)

Sometimes, things just don't work (out)

What do business start-ups, drug clinical trials and weather predictions have in common? High failure rates. Sometimes (many times) things just don't work out.

Over 50% of new businesses fail within four years and 71% are gone by the end of ten years. [1] Drug clinical trial failure rates are even worse, especially for new cancer medicines - only about 5% of the cancer drug candidates first tested in humans ultimately receive FDA approval. [2] And then there is the weather. We are lucky if meteorologists can accurately predict next week's weather, let alone next month's or next year's.

What are we to make of all this?

The world is a lot more complex than we realize or would like to admit. In cancer research, scientists are finding that a myriad of genetic mutations, epigenetic influences, and environmental factors all play into who gets cancer and which one of the multitude of cancer variations they get. Developing effective therapies with widespread applicability is extremely difficult.

And governmental macro economic policy is often just a crapshoot because the models used by economists are grossly simplified caricatures of incredibly complex market mechanisms. Business founders and other market participants are sometimes rational, sometimes emotional, and often wrong. And yet they just keep on trying - as long as the incentives for success are big enough. Make enough shots on goal, they believe, and sooner or later you will score. Never mind that the clock, or the funding, may run out before your number comes up.

And then there's the weather. Edward Lorenz's [3] interest in chaos theory came about accidentally through his work on weather prediction in 1961. [4] The weather, market economies, and other complex systems are not chaotic in the common meaning that their outcomes are unknowable. Such systems are in fact deterministic, but highly sensitive to initial conditions. That is, small tweaks in the initial conditions can produce a multitude of highly divergent outcomes. It is the sheer number, nature, and variety of those initial conditions that may be unknowable.

Recent work in theoretical physics by Stephen Hawking and others suggests that our observable universe may merely be one of an infinite number of randomly created universes comprising the larger multiverse. [5] According to this line of thinking, our existence in this particular universe may have resulted from the specific set of initial conditions (laws of physics, etc.) that gave rise to our particular universe. There may or may not be other universes in which our existence might have arisen.

What are we to make of all of this?

Most of us are just bit players in a grand drama whether it be business, science, or politics, to wit:

• Just play hard,
• Give it your best shot, and then
• Retire from the field so someone else can have a turn.

Once in a while, someone will score a goal, and everyone else will be the better for it.

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[1] http://smallbiztrends.com/2008/04/startup-failure-rates.html

[2] http://www.cancernetwork.com/display/article/10165/62623

[3] An early pioneer of chaos theory

[4] http://en.wikipedia.org/wiki/Chaos_theory

[5] http://www.cambridge.org/catalogue/catalogue.asp?isbn=9780521848411

Ignoring the crowd

“Great innovators often need the courage to ignore the crowd.” [1]

CEOs
Investors
Politicians

Whether it is economic policy, business strategy, or trying to protect your 401(k), many of us have joined the herd of lemmings running around in a circle wringing our hands and chasing our tails. Uncertainty is everywhere. What to do? What to do?

Uncertainty is not new. It’s really the volatility that bothers us. We had become accustomed to reasonably predictable uncertainty (is that an oxy-moron?) and now the markets seem to swing wildly like one of those amusement park rides (you know the ones where you almost lose your lunch).

It’s a time for calm and for staying focused on your mission, your goals and objectives. There is no dearth of ideas and opportunities, only the courage to pursue them.

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[1] “Schumpeter: The wiki way,” The Economist, September 25, 210, p. 82

Borrowers and Lenders

An article in today’s New York Times [1] pointed out the price savers are paying through lower income on their savings as a result of the Federal Reserve’s near-zero interest rate policy. Not only does this policy favor borrowers, it clearly favors banks (at the expense of their depositors) amid the banks’ efforts to rebuild capital and profitability.

Such low rates will be counterproductive, however, if carried on too long in an era when consumers, businesses, and banks must de-leverage to right their balance sheets. Consumer spending, especially, ran way out on the proverbial debt limb. That limb has now broken off, and consumers are scrambling to survive the fall. In fact, the lower the interest rates, the more consumers must save and the less they will spend.

If you are a borrower with good credit and equity support, these are some of the best of times with home mortgage and corporate bond interest rates at record lows.

If you are a net saver, your investment options are poor, bad and worse. Bond yields are low and stock prices stagnant. Hard assets (gold, real estate) may look attractive but low/no inflation or out-right deflation are seldom kind to such assets.

How should owner/CEOs think about their companies’ strategies in this kind of environment?

It’s a time to be cautious but opportunistic:

• There will continue to be winners and losers – The continuing success of Apple’s gadget sales demonstrates that consumers will find the money to buy the things they want. Companies with second-rate or me-too products will likely continue to struggle.

• Nothing lasts forever – Just as the good times came to an abrupt end, the current malaise will also improve but over time. Any sharp economic improvement will require significant catalysts in the form of major innovations and/or dramatically more favorable governmental policy. Look for inflection points; be ready.

• You make money when you buy or invest, not when you sell – While there are “get lucky” exceptions, most investment returns result from buying the right assets at the right price. Be patient. Liquidity is your friend, not your enemy.

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[1] “Falling Rates Aid Debtors, but Hamper Savers” at http://www.nytimes.com/2010/09/09/business/economy/09rates.html

Driving Growth

The economy seems to be awash with anxiety about the poor prospects for business growth, not to mention jobs. We are at risk of descending into inveterate hand wringing from which no good can come. It’s time to look around for what’s working (somewhere, something is ALWAYS working out well) and figure out how to apply it to our business or company.

According to Peter Cohan, “[New] jobs [and revenue growth] are going to come from innovative companies that are either jumping on a wave of growth in demand or creating a new wave through path-breaking technology.”[1]

After studying more than 30 leading startup companies, Cohan suggests the following general lessons for managers in mature, established firms:

• Tailor your product to 1 million customers

• Lock in customers for the long-term and keep renewing the relationships

• Create more network value than competitors

• Reinvent the business from the customer’s perspective

• Use peer pressure to sell your products

Cohan’s lessons are not panaceas, but they look like a good place to start.

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[1] Peter S. Cohen, “Common Threads of Startups for Driving Growth,” financialexecutive, October 2009, p. 37