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How it Works: Value Creation
Value creation is a corporation’s raison d’être, the ultimate measure by which it is judged. Debate has focused on what is the most appropriate type of value for the corporation to create. Is it:
- the value that the stockmarket gives the company (its market value);
- the value shown in its balance sheet (the accounting or book value of its assets minus its liabilities);
- something based on its expected future performance - profits or cash; or
- none of these?
In the 1990s, the main emphasis of executives was on creating value for shareholders - a value that was reflected in movements of the company’s stock price. But measures based on stockmarket values are subject to the same wild fluctuations as the market itself. In a rising tide, all boats get raised. But when macroeconomic changes force up markets generally, it does not mean that the value of each individual company in that market has changed similarly. Markets are moved by sentiment that has little to do with the underlying value of individual corporations.
The dotcom frenzy at the end of the 1990s was proof of this. Small new internet firms were suddenly lifted into the stratosphere by investors’ enthusiasm for their stocks. But their underlying value throughout the frenzy remained more or less unchanged - for many of them, that value was ultimately measured by a liquidator.
However, any measure based on book value has to get over the fact that accounting measures are not carved in stone. They can (and do) differ from country to country. It is also stymied by the fact that book values fail to take full account of intangible assets - things you cannot kick, like brands, patents or partnerships. These have come to assume a growing proportion of many companies’ value, particularly in the high-tech sector where the most valuable assets walk in and out of the front door every day. At the start of this century, it was estimated that intangible assets could account for as much as half of the value of the entire American economy.
Measures that attempt to value a company based on its future prospects are no easy alternative. They soon run into the difficulty of quantifying what those prospects are. The popular idea that a company is no more than the net present value of its future cash flow depends on guessing first what that cash flow is going to be, and then what future interest rates are going to be. Interest rates are used to discount those cash flows and calculate their present value. However, these measures do have the advantage of being independent of accounting rules, so they can be used to compare companies in different industries and countries.
A measure developed to overcome these problems is called EVA (economic value added). This is the measure of output (taken as operating profit after tax and some other adjustments) less input (taken as the annual rental charge on the total capital employed, both debt and equity). Managers have all the elements of this equation (costs, revenues, debt and capital expenditure) in their hands. So when it increases or decreases they have no one to praise or blame other than themselves. This makes it (in theory) a good benchmark against which to measure their bonuses and other perks.
How it Works: The Five Competitive Forces That Shape Strategy
In essence, the job of the strategist is to understand and cope with competition. Often, however, managers define competition too narrowly, as if it occurred only among today’s direct competitors. Yet competition for profits goes beyond established industry rivals to include four other competitive forces as well: customers, suppliers, potential entrants, and substitute products. The extended rivalry that results from all five forces defines an industry’s structure and shapes the nature of competitive interaction within an industry.
As different from one another as industries might appear on the surface, the underlying drivers of profitability are the same. The global auto industry, for instance, appears to have nothing in common with the worldwide market for art masterpieces or the heavily regulated health-care delivery industry in Europe. But to understand industry competition and profitability in each of those three cases, one must analyze the industry’s underlying structure in terms of the five forces. (See the exhibit “The Five Forces That Shape Industry Competition.”)
If the forces are intense, as they are in such industries as airlines, textiles, and hotels, almost no company earns attractive returns on investment. If the forces are benign, as they are in industries such as software, soft drinks, and toiletries, many companies are profitable. Industry structure drives competition and profitability, not whether an industry produces a product or service, is emerging or mature, high tech or low tech, regulated or unregulated. While a myriad of factors can affect industry profitability in the short run - including the weather and the business cycle - industry structure, manifested in the competitive forces, sets industry profitability in the medium and long run.
Differences in Industry Profitability
Understanding the competitive forces, and their underlying causes, reveals the roots of an industry’s current profitability while providing a framework for anticipating and influencing competition (and profitability) over time. A healthy industry structure should be as much a competitive concern to strategists as their company’s own position. Understanding industry structure is also essential to effective strategic positioning. As we will see, defending against the competitive forces and shaping them in a company’s favor are crucial to strategy.
Forces That Shape Competition
The configuration of the five forces differs by industry. In the market for commercial aircraft, fierce rivalry between dominant producers Airbus and Boeing and the bargaining power of the airlines that place huge orders for aircraft are strong, while the threat of entry, the threat of substitutes, and the power of suppliers are more benign. In the movie theater industry, the proliferation of substitute forms of entertainment and the power of the movie producers and distributors who supply movies, the critical input, are important.
The strongest competitive force or forces determine the profitability of an industry and become the most important to strategy formulation. The most salient force, however, is not always obvious.
For example, even though rivalry is often fierce in commodity industries, it may not be the factor limiting profitability. Low returns in the photographic film industry, for instance, are the result of a superior substitute product—as Kodak and Fuji, the world’s leading producers of photographic film, learned with the advent of digital photography. In such a situation, coping with the substitute product becomes the number one strategic priority.
Industry structure grows out of a set of economic and technical characteristics that determine the strength of each competitive force.
As different from one another as industries might appear on the surface, the underlying drivers of profitability are the same. The global auto industry, for instance, appears to have nothing in common with the worldwide market for art masterpieces or the heavily regulated health-care delivery industry in Europe. But to understand industry competition and profitability in each of those three cases, one must analyze the industry’s underlying structure in terms of the five forces. (See the exhibit “The Five Forces That Shape Industry Competition.”)
If the forces are intense, as they are in such industries as airlines, textiles, and hotels, almost no company earns attractive returns on investment. If the forces are benign, as they are in industries such as software, soft drinks, and toiletries, many companies are profitable. Industry structure drives competition and profitability, not whether an industry produces a product or service, is emerging or mature, high tech or low tech, regulated or unregulated. While a myriad of factors can affect industry profitability in the short run - including the weather and the business cycle - industry structure, manifested in the competitive forces, sets industry profitability in the medium and long run.
Differences in Industry Profitability
Understanding the competitive forces, and their underlying causes, reveals the roots of an industry’s current profitability while providing a framework for anticipating and influencing competition (and profitability) over time. A healthy industry structure should be as much a competitive concern to strategists as their company’s own position. Understanding industry structure is also essential to effective strategic positioning. As we will see, defending against the competitive forces and shaping them in a company’s favor are crucial to strategy.
Forces That Shape Competition
The configuration of the five forces differs by industry. In the market for commercial aircraft, fierce rivalry between dominant producers Airbus and Boeing and the bargaining power of the airlines that place huge orders for aircraft are strong, while the threat of entry, the threat of substitutes, and the power of suppliers are more benign. In the movie theater industry, the proliferation of substitute forms of entertainment and the power of the movie producers and distributors who supply movies, the critical input, are important.
The strongest competitive force or forces determine the profitability of an industry and become the most important to strategy formulation. The most salient force, however, is not always obvious.
For example, even though rivalry is often fierce in commodity industries, it may not be the factor limiting profitability. Low returns in the photographic film industry, for instance, are the result of a superior substitute product—as Kodak and Fuji, the world’s leading producers of photographic film, learned with the advent of digital photography. In such a situation, coping with the substitute product becomes the number one strategic priority.
Industry structure grows out of a set of economic and technical characteristics that determine the strength of each competitive force.
How it Works: Segmentation
Segmentation is the process of slicing a market for a particular product or service into a number of different segments. The segments are usually based on factors such as demographics, beliefs or the occasion of use of the product. One segment of the market for video cameras, for instance, might be the group of people who have new-born babies. Another could be the group of people visiting relatives who live abroad.
In their book “Breakthrough Imperatives”, Mark Gottfredson and Steven Schaubert say:
"The goal of customer segmentation analysis is to identify the most attractive segments of a company’s customer base (existing or potential) by comparing the segments’ size, growth and profitability."
The idea of segmentation has spread beyond its consumer origins. Human-resources departments now talk about segmenting their “customers”—that is, the different groups of employees within their own organisation. In a bank, for example, three such segments might be retail bank tellers, investment bank advisers and money-market traders.
Once different segments of a market have been identified, suppliers to that market can target their advertising and promotional efforts more accurately and more profitably. Different segments can be reached through the most appropriate channel: parents of new-borns through ante-natal clinics, for instance, and foreign travellers through airlines’ websites.
Each market segment represents a group of potential customers with common characteristics. In consumer markets, segmentation is usually based on the following:
• Demographic factors. Gender, age, family size, and so on.
• Geography. In most countries there are marked differences in the consumer preferences of different regions. The consumption of wine in the north of England, for example, is very different from that in the south.
• Social factors. One classic segmentation is by income and occupation, but this is proving to be less and less useful. There are a lot of extremely wealthy people who do not spend much, and vice versa. So the focus is shifting to lifestyle. In recent years, marketers have become more interested in categorising consumers as “generation Xers” or “the millennial generation” rather than by the size of their bank accounts. Consumers are thought to have more in common with people from the same generation than with any other grouping.
Industrial markets have been notoriously more difficult to segment than consumer markets. Firms find it hard to decide which factors are most useful for categorising their corporate clients. Should it be size, industry sector, or geography? Computer-maker Hewlett-Packard segmented its big industrial customers into five categories based on the value of their purchases and the complexity of their IT systems.
Segmentation was in part a reaction against the mass-marketing tactics sparked off by Henry Ford when he said that customers could buy his Model T car “in any colour as long as it’s black”. Many of its classifications, however, have proved to be of little use. Baby boomers have been found to have little more in common than their defining characteristic: a birthdate in the years following the second world war. John Forsyth, a consultant, wrote in McKinsey Quarterly in 1999:
Unfortunately, easy cases permitting marketers to establish meaningful differences among groups of customers and then to identify them—a phenomenon we call “actionable segmentation”— are rare.
The internet promises to provide new opportunities for segmentation. It offers continuous opportunities to capture information about customer behaviour. Consumers identify themselves and their characteristics by their electronic participation in particular interest groups, and by their general online behaviour.
In their book “Breakthrough Imperatives”, Mark Gottfredson and Steven Schaubert say:
"The goal of customer segmentation analysis is to identify the most attractive segments of a company’s customer base (existing or potential) by comparing the segments’ size, growth and profitability."
The idea of segmentation has spread beyond its consumer origins. Human-resources departments now talk about segmenting their “customers”—that is, the different groups of employees within their own organisation. In a bank, for example, three such segments might be retail bank tellers, investment bank advisers and money-market traders.
Once different segments of a market have been identified, suppliers to that market can target their advertising and promotional efforts more accurately and more profitably. Different segments can be reached through the most appropriate channel: parents of new-borns through ante-natal clinics, for instance, and foreign travellers through airlines’ websites.
Each market segment represents a group of potential customers with common characteristics. In consumer markets, segmentation is usually based on the following:
• Demographic factors. Gender, age, family size, and so on.
• Geography. In most countries there are marked differences in the consumer preferences of different regions. The consumption of wine in the north of England, for example, is very different from that in the south.
• Social factors. One classic segmentation is by income and occupation, but this is proving to be less and less useful. There are a lot of extremely wealthy people who do not spend much, and vice versa. So the focus is shifting to lifestyle. In recent years, marketers have become more interested in categorising consumers as “generation Xers” or “the millennial generation” rather than by the size of their bank accounts. Consumers are thought to have more in common with people from the same generation than with any other grouping.
Industrial markets have been notoriously more difficult to segment than consumer markets. Firms find it hard to decide which factors are most useful for categorising their corporate clients. Should it be size, industry sector, or geography? Computer-maker Hewlett-Packard segmented its big industrial customers into five categories based on the value of their purchases and the complexity of their IT systems.
Segmentation was in part a reaction against the mass-marketing tactics sparked off by Henry Ford when he said that customers could buy his Model T car “in any colour as long as it’s black”. Many of its classifications, however, have proved to be of little use. Baby boomers have been found to have little more in common than their defining characteristic: a birthdate in the years following the second world war. John Forsyth, a consultant, wrote in McKinsey Quarterly in 1999:
Unfortunately, easy cases permitting marketers to establish meaningful differences among groups of customers and then to identify them—a phenomenon we call “actionable segmentation”— are rare.
The internet promises to provide new opportunities for segmentation. It offers continuous opportunities to capture information about customer behaviour. Consumers identify themselves and their characteristics by their electronic participation in particular interest groups, and by their general online behaviour.
How It Works: The Peter Principle
The Peter Principle is a concept in management theory in which the selection of a candidate for a position is based on their performance in their current role rather than on their abilities relevant to the intended role.
The authors (Laurence Peter and Raymond Hull) suggest that people will tend to be promoted until they reach their "level of incompetence".
The Peter Principle is a special case of a ubiquitous observation: anything that works will be used in progressively more challenging applications until it fails.
In an organizational structure, the assessment of the potential of an employee for a promotion is often based on their performance in their current job which results eventually in their being promoted to their highest level of competence and potentially then to a role in which they are not competent, referred to as their "level of incompetence". The employee has no chance of further promotion, thus reaching his or her career's ceiling in an organization.
Peter suggests that "in time, every post tends to be occupied by an employee who is incompetent to carry out its duties" and that "work is accomplished by those employees who have not yet reached their level of incompetence."
He also notes that their incompetence may be a result of the skills required being different rather than more difficult. For example, an excellent engineer may find that they make a poor manager due to limited interpersonal skills which a manager requires to lead a team effectively.
Rather than seeking to promote a talented “super-competent” junior employee, Peter suggests that an incompetent manager may set them up to fail or dismiss them because they will likely "violate the first commandment of hierarchical life with incompetent leadership - namely that the hierarchy must be preserved".
Alessandro Pluchino, Andrea Rapisarda and Cesare Garofalo use an agent-based modelling approach to simulate the promotion of employees in a system where the Peter Principle is assumed to be true. They found that the best way to improve efficiency in an enterprise is to promote people randomly, or to shortlist the best and the worst performer in a given group, from which the person to be promoted is then selected randomly. For this work, they won the 2010 Nobel Prize in management science.
How it Works: Core Competence
The idea of core competence was introduced into management literature in 1990 by C.K. Prahalad and Gary Hamel. The two business academics wrote:
"Core competencies are the collective learning in the organisation, especially how to co-ordinate diverse production skills and integrate multiple streams of technologies...core competence is communication, involvement and a deep commitment to working across organisational boundaries...core competence does not diminish with use. Unlike physical assets, which do deteriorate over time, competencies are enhanced as they are applied and shared."
Prahalad and Hamel went on to outline three tests to be applied to determine whether something is a core competence:
First, a core competence provides potential access to a wide variety of markets.
Second, a core competence makes a significant contribution to the perceived customer benefits of the end product.
Third, a core competence is difficult for competitors to imitate because it is a complex harmonisation of individual technologies and production skills.
The two academics painted a picture of the corporation as a tree whose roots are its particular competencies. Out of these roots grow the organisation’s “core products” which, in turn, nourish a number of separate business units. Lastly, out of these business units come “end products”.
It was Prahalad and Hamel’s contention that if a company could “maintain world manufacturing dominance in core products”, it would “reserve the power to shape the evolution of end products”. Many of the examples on which they based their theories were large, successful Japanese companies. Before the end of the century, however, the performance of many of these companies had become distinctly less exemplary.
The core competence idea was useful to managers not only for focusing them on the essentials, but also for identifying those things that were not “at the core”. Why, management might ask, were these non-essential things being allowed to consume valuable resources?
Prahalad and Hamel succeeded in persuading managers to look at strategy as something fluid and imprecise. Their writing is spattered with references to things like “strategic intent”, “strategy as stretch and leverage”, “competitive space” and “expeditionary markets”. It was a switch from the more modular approach of Michael Porter (see article) and of the tradition of scientific management. Porter had turned strategic thinking back in the direction of Frederick Taylor; Prahalad and Hamel changed that direction by several degrees.
The drive to identify core competencies moved in line with the growing popularity of outsourcing. When companies were suddenly able to outsource almost any process that came under their corporate umbrella, they needed to know what lay in the hard core of activities that they were uniquely well qualified to carry out, the activities that it made no sense for them to hand over to a third party. In some cases the answer was very few.
The idea spread from core competencies to core everything—core processes, core businesses—everything that constituted the essence of what a company was and did. Management consultants encouraged companies to focus on their core as a source of untapped potential in a time of rapid change and unpredictability.
Chris Zook, a strategy consultant, has written a trilogy around the idea of getting more growth from core businesses. His second book, “Beyond the Core”, was subtitled “Expand Your Market Without Abandoning Your Roots”.
How it Works: The Hawthorne Effect
The Hawthorne effect is named after what was one of the most famous experiments (or, more accurately, series of experiments) in industrial history. It marked a sea change in thinking about work and productivity. Previous studies, in particular Frederick Taylor’s influential ideas, had focused on the individual and on ways in which an individual’s performance could be improved. Hawthorne set the individual in a social context, establishing that the performance of employees is influenced by their surroundings and by the people that they are working with as much as by their own innate abilities.
The experiments took place at Western Electric’s factory at Hawthorne, a suburb of Chicago, in the late 1920s and early 1930s. They were conducted for the most part under the supervision of Elton Mayo, an Australian-born sociologist who eventually became a professor of industrial research at Harvard.
The original purpose of the experiments was to study the effects of physical conditions on productivity. Two groups of workers in the Hawthorne factory were used as guinea pigs. One day the lighting in the work area for one group was improved dramatically while the other group’s lighting remained unchanged. The researchers were surprised to find that the productivity of the more highly illuminated workers increased much more than that of the control group.
The employees’ working conditions were changed in other ways too (their working hours, rest breaks and so on), and in all cases their productivity improved when a change was made. Indeed, their productivity even improved when the lights were dimmed again. By the time everything had been returned to the way it was before the changes had begun, productivity at the factory was at its highest level.
Absenteeism had plummeted.
The experimenters concluded that it was not the changes in physical conditions that were affecting the workers’ productivity. Rather, it was the fact that someone was actually concerned about their workplace, and the opportunities this gave them to discuss changes before they took place.
A crucial element in Mayo’s findings was the effect that working in groups had on the individual. At one time he wrote:
"The desire to stand well with one’s fellows, the so-called human instinct of association, easily outweighs the merely individual interest and the logic of reasoning upon which so many spurious principles of management are based."
Later in life he added:
"The working group as a whole actually determined the output of individual workers by reference to a standard that represented the group conception (rather than management’s) of a fair day’s work. This standard was rarely, if ever, in accord with the standards of the efficiency engineers."
Fritz Roethlisberger, a leading member of the research team, wrote:
"The Hawthorne researchers became more and more interested in the informal employee groups, which tend to form within the formal organisation of the company, and which are not likely to be represented in the organisation chart. They became interested in the beliefs and creeds which have the effect of making each individual feel an integral part of the group."
How it Works: Theory X and Y
Theory X and Theory Y was an idea devised by Douglas McGregor in his 1960 book “The Human Side of Enterprise”. It encapsulated a fundamental distinction between management styles and has formed the basis for much subsequent writing on the subject.
Theory X is an authoritarian style where the emphasis is on “productivity, on the concept of a fair day’s work, on the evils of feather-bedding and restriction of output, on rewards for performance … [it] reflects an underlying belief that management must counteract an inherent human tendency to avoid work”. Theory X is the style that predominated in business after the mechanistic system of scientific management had swept everything before it in the first few decades of the 20th century.
Theory Y is a participative style of management which “assumes that people will exercise self-direction and self-control in the achievement of organisational objectives to the degree that they are committed to those objectives”. It is management’s main task in such a system to maximise that commitment.
Theory X assumes that individuals are base, work-shy and constantly in need of a good prod. It always has a ready-made excuse for failure—the innate limitations of all human resources. Theory Y, however, assumes that individuals go to work of their own accord, because work is the only way in which they have a chance of satisfying their (high-level) need for achievement and self-respect. People will work without prodding; it has been their fate since Adam and Eve were banished from the Garden of Eden.
Theory Y gives management no easy excuses for failure. It challenges them “to innovate, to discover new ways of organising and directing human effort, even though we recognise that the perfect organisation, like the perfect vacuum, is practically out of reach”. McGregor urged companies to adopt Theory Y. Only it, he believed, could motivate human beings to the highest levels of achievement. Theory X merely satisfied their lower-level physical needs and could not hope to be as productive. “Man is a wanting animal,” wrote McGregor, “as soon as one of his needs is satisfied another appears in its place.”
There are parallels with Abraham Maslow’s hierarchy of needs, and Maslow was indeed greatly influenced by McGregor. So much so that he tried to introduce Theory Y into a Californian electronics business, but found that the idea in its extreme form did not work well. All individuals, he concluded, however independent and mature, need some form of structure around them and some direction from others. Maslow also criticised Theory Y for its “inhumanity” to the weak, and to those not capable of a high level of self-motivation.
In his comic classic “Up the Organisation”, Robert Townsend wrote powerfully in support of Theory Y:
People don’t hate work. It’s as natural as rest or play. They don’t have to be forced or threatened. If they commit themselves to mutual objectives, they’ll drive themselves more effectively than you can drive them. But they’ll commit themselves only to the extent they can see ways of satisfying their ego and development needs.
Theory X is an authoritarian style where the emphasis is on “productivity, on the concept of a fair day’s work, on the evils of feather-bedding and restriction of output, on rewards for performance … [it] reflects an underlying belief that management must counteract an inherent human tendency to avoid work”. Theory X is the style that predominated in business after the mechanistic system of scientific management had swept everything before it in the first few decades of the 20th century.
Theory Y is a participative style of management which “assumes that people will exercise self-direction and self-control in the achievement of organisational objectives to the degree that they are committed to those objectives”. It is management’s main task in such a system to maximise that commitment.
Theory X assumes that individuals are base, work-shy and constantly in need of a good prod. It always has a ready-made excuse for failure—the innate limitations of all human resources. Theory Y, however, assumes that individuals go to work of their own accord, because work is the only way in which they have a chance of satisfying their (high-level) need for achievement and self-respect. People will work without prodding; it has been their fate since Adam and Eve were banished from the Garden of Eden.
Theory Y gives management no easy excuses for failure. It challenges them “to innovate, to discover new ways of organising and directing human effort, even though we recognise that the perfect organisation, like the perfect vacuum, is practically out of reach”. McGregor urged companies to adopt Theory Y. Only it, he believed, could motivate human beings to the highest levels of achievement. Theory X merely satisfied their lower-level physical needs and could not hope to be as productive. “Man is a wanting animal,” wrote McGregor, “as soon as one of his needs is satisfied another appears in its place.”
There are parallels with Abraham Maslow’s hierarchy of needs, and Maslow was indeed greatly influenced by McGregor. So much so that he tried to introduce Theory Y into a Californian electronics business, but found that the idea in its extreme form did not work well. All individuals, he concluded, however independent and mature, need some form of structure around them and some direction from others. Maslow also criticised Theory Y for its “inhumanity” to the weak, and to those not capable of a high level of self-motivation.
In his comic classic “Up the Organisation”, Robert Townsend wrote powerfully in support of Theory Y:
People don’t hate work. It’s as natural as rest or play. They don’t have to be forced or threatened. If they commit themselves to mutual objectives, they’ll drive themselves more effectively than you can drive them. But they’ll commit themselves only to the extent they can see ways of satisfying their ego and development needs.
How it Works: Maslow's Hierarchy of Needs
The hierarchy of needs is an idea associated with one man, Abraham Maslow (see article), the most influential anthropologist ever to have worked in industry. It is a theory about the way in which people are motivated. First presented in a paper (“A Theory of Human Motivation”) published in the Psychological Review in 1943, it postulated that human needs fall into five different categories. Needs in the lower categories have to be satisfied before needs in the higher ones can act as motivators. Thus a violinist who is starving cannot be motivated to play Mozart, and a shop worker without a lunch break is less productive in the afternoon than one who has had a break.
The theory arose out of a sense that classic economics was not giving managers much help because it failed to take into account the complexity of human motivation.
Maslow divided needs into five:
• Physiological needs: hunger, thirst, sex and sleep. Food and drinks manufacturers operate to satisfy needs in this area, as do prostitutes and tobacco growers.
• Safety needs: job security, protection from harm and the avoidance of risk. At this level an individual’s thoughts turn to insurance, burglar alarms and savings deposits.
• Social needs: the affection of family and friendship. These are satisfied by such things as weddings, sophisticated restaurants and telecommunications.
• Esteem needs (also called ego needs), divided into internal needs, such as self-respect and sense of achievement, and external needs, such as status and recognition. Industries focused on this level include the sports industry and activity holidays.
• Self-actualisation, famously described by Maslow: “A musician must make music, an artist must paint, a poet must write, if he is to be ultimately happy. What a man can be, he must be. This need we may call self-actualisation.” This involves doing things such as going to art galleries, climbing mountains and writing novels. The theatre, cinema and music industries are all focused on this level. Self-actualisation is different from the other levels of need in at least one important respect. It is never finished, never fully satisfied. It is, as Shakespeare put it, “as if increase of appetite grows by what it feeds on”.
An individual’s position in the hierarchy is constantly shifting and any single act may satisfy needs at different levels. Thus having a drink at a bar with a friend may be satisfying both a thirst and a need for friendship (levels one and three). Single industries can be aimed at satisfying needs at different levels. For example, a hotel may provide food to satisfy level one, a nearby restaurant to satisfy level three, and special weekend tours of interesting sites to satisfy level five.
The hierarchy is not absolute. It is affected by the general environment in which the individual lives. The extent to which social needs are met in the workplace, for instance, varies according to culture. In Japan the corporate organisation is an important source of a man’s sense of belonging (although not of a woman’s); in the West it is much less so.
Peter Drucker took issue with the hierarchy of needs. He wrote:
What Maslow did not see is that a want changes in the act of being satisfied … as a want approaches satiety, its capacity to reward, and with it its power as an incentive, diminishes fast. But its capacity to deter, to create dissatisfaction, to act as a disincentive, rapidly increases.
One of Maslow’s early disciples was a Californian company called NLS (Non-Linear Systems). In the early 1960s it dismantled its assembly line and replaced it with production teams of six or seven workers in order to increase their motivation. Each team was responsible for the entire production process, and they worked in areas that they decorated according to their own taste. A host of other innovations (such as dispensing with time cards) revolutionised the company. Profits and productivity soared, but Maslow remained sceptical. He worried that his ideas were being too easily “taken as gospel truth, without any real examination of their reliability”.
The theory arose out of a sense that classic economics was not giving managers much help because it failed to take into account the complexity of human motivation.
Maslow divided needs into five:
• Physiological needs: hunger, thirst, sex and sleep. Food and drinks manufacturers operate to satisfy needs in this area, as do prostitutes and tobacco growers.
• Safety needs: job security, protection from harm and the avoidance of risk. At this level an individual’s thoughts turn to insurance, burglar alarms and savings deposits.
• Social needs: the affection of family and friendship. These are satisfied by such things as weddings, sophisticated restaurants and telecommunications.
• Esteem needs (also called ego needs), divided into internal needs, such as self-respect and sense of achievement, and external needs, such as status and recognition. Industries focused on this level include the sports industry and activity holidays.
• Self-actualisation, famously described by Maslow: “A musician must make music, an artist must paint, a poet must write, if he is to be ultimately happy. What a man can be, he must be. This need we may call self-actualisation.” This involves doing things such as going to art galleries, climbing mountains and writing novels. The theatre, cinema and music industries are all focused on this level. Self-actualisation is different from the other levels of need in at least one important respect. It is never finished, never fully satisfied. It is, as Shakespeare put it, “as if increase of appetite grows by what it feeds on”.
An individual’s position in the hierarchy is constantly shifting and any single act may satisfy needs at different levels. Thus having a drink at a bar with a friend may be satisfying both a thirst and a need for friendship (levels one and three). Single industries can be aimed at satisfying needs at different levels. For example, a hotel may provide food to satisfy level one, a nearby restaurant to satisfy level three, and special weekend tours of interesting sites to satisfy level five.
The hierarchy is not absolute. It is affected by the general environment in which the individual lives. The extent to which social needs are met in the workplace, for instance, varies according to culture. In Japan the corporate organisation is an important source of a man’s sense of belonging (although not of a woman’s); in the West it is much less so.
Peter Drucker took issue with the hierarchy of needs. He wrote:
What Maslow did not see is that a want changes in the act of being satisfied … as a want approaches satiety, its capacity to reward, and with it its power as an incentive, diminishes fast. But its capacity to deter, to create dissatisfaction, to act as a disincentive, rapidly increases.
One of Maslow’s early disciples was a Californian company called NLS (Non-Linear Systems). In the early 1960s it dismantled its assembly line and replaced it with production teams of six or seven workers in order to increase their motivation. Each team was responsible for the entire production process, and they worked in areas that they decorated according to their own taste. A host of other innovations (such as dispensing with time cards) revolutionised the company. Profits and productivity soared, but Maslow remained sceptical. He worried that his ideas were being too easily “taken as gospel truth, without any real examination of their reliability”.
How it Works: Business Models
The use of computer models to simulate different business activities and to assist in decision-making processes is almost as old as IBM itself. Most business modelling nowadays is based on widely available software that allows non-technical general managers to try out different options on (electronic) paper before deciding which one to follow. A retailer, for instance, might have a model to help it choose where to locate a new store. Based on data about the size of the catchment area, the local road networks, parking facilities, demographics and local competitors, the model would come up with the optimal location.
Consultants KPMG say that “to take major [business] decisions without first testing their consequences in a safe environment can be likened to training an airline pilot by having him fly a 747 without first having spent months in the simulator”.
Business modelling also helps to democratise decision-making when it is diffused throughout the organisation. In “Reengineering the Corporation”, Michael Hammer wrote:
When accessible data is combined with easy-to-use analysis and modelling tools, frontline workers—when properly trained—suddenly have sophisticated decision-making capabilities. Decisions can be made more quickly and problems resolved as soon as they crop up.
Coincidentally, large airlines are among the biggest users of sophisticated business models. They have to juggle a multitude of different fare structures and handle tricky things like stand-by tickets. Modelling such variables saves them millions of dollars a year.
Other common uses of business modelling include the following:
- Financial planning, with the help of spreadsheets. This quantifies the impact of a business decision on the balance sheet and the income statement.
- Forecasting. Analysing historical data and using it to predict future trends.
- Mapping processes in a visual representation of the resources required for a task and the steps to be taken to perform it.
- Data mining. Analysing vast quantities of data in order to dig out unpredictable relationships between variables.
- “Monte Carlo” simulation. Putting in random data to measure the impact of uncertainty on the outcome of a project.
The idea of using computer models to support decision-making was given a boost by a popular book published in 1990. “The Fifth Discipline”, written by MIT academic Peter Senge, argued that the ability to use models to experiment with corporate structure and behaviour would be a key skill in the future. Senge described computer simulation as “a tool for creating”.
Senge also promoted the idea of using modelling to create what he called “Microworlds”. These are simplified simulation models packaged as management games. They allow managers to “play” with an issue in safety rather than playing with it first in the real world.
How it Works: The Balanced Scorecard
Robert Kaplan seems to come up with one big idea per decade. In the 1980s it was activity-based costing; in the 1990s it was the balanced scorecard.
The Balanced Scorecard idea was first set out in an article that Kaplan wrote in 1992 for Harvard Business Review, along with David Norton, president of a consulting firm. The article, entitled “The Balanced Scorecard—Measures that Drive Performance”, began with the principle that what you measure is what you get. Or, as the great 19th century English physicist Lord Kelvin put it: “If you cannot measure it, you cannot improve it.”
If you measure only financial performance, then you can hope only for improvement in financial performance. If you take a wider view, and measure things from other perspectives, then (and only then) do you stand a chance of achieving goals other than purely financial ones.
In particular, Kaplan and Norton suggested that companies should consider the following:
• The customer’s perspective. How does the customer see the organisation, and what should the organisation do to remain that customer’s valued supplier?
• The company’s internal perspective. What are the internal processes that the company must improve if it is to achieve its objectives vis-à-vis customers, shareholders and others?
• Innovation and improvement. How can the company continue to improve and to create value in the future? What should it be measuring to make this happen?
The idea of the balanced scorecard was embraced with enthusiasm when it first appeared. Companies were frustrated with traditional measures of performance that related only to the shareholders’ point of view. That view was seen as unduly short-termist and too concerned with stockmarket twitches; it prevented boardrooms and managers from considering longer-term opportunities. The balanced scorecard not only broadens the organisation’s perception of where it stands today, but it also helps it to identify things that might guarantee its success in the future.
Kaplan and Norton saw the benefits of the balanced scorecard as follows:
• It helps companies to focus on what needs to be done to create a “breakthrough performance”.
• It acts as an integrating device for a variety of often disconnected corporate programmes, such as quality, re-engineering, process redesign and customer service.
• It translates strategy into performance measures and targets.
• It helps break down corporate-wide measures so that local managers and employees can see what they need to do to improve organisational effectiveness.
• It provides a comprehensive view that overturns the traditional idea of the organisation as a collection of isolated, independent functions and departments.
The Balanced Scorecard idea was first set out in an article that Kaplan wrote in 1992 for Harvard Business Review, along with David Norton, president of a consulting firm. The article, entitled “The Balanced Scorecard—Measures that Drive Performance”, began with the principle that what you measure is what you get. Or, as the great 19th century English physicist Lord Kelvin put it: “If you cannot measure it, you cannot improve it.”
If you measure only financial performance, then you can hope only for improvement in financial performance. If you take a wider view, and measure things from other perspectives, then (and only then) do you stand a chance of achieving goals other than purely financial ones.
In particular, Kaplan and Norton suggested that companies should consider the following:
• The customer’s perspective. How does the customer see the organisation, and what should the organisation do to remain that customer’s valued supplier?
• The company’s internal perspective. What are the internal processes that the company must improve if it is to achieve its objectives vis-à-vis customers, shareholders and others?
• Innovation and improvement. How can the company continue to improve and to create value in the future? What should it be measuring to make this happen?
The idea of the balanced scorecard was embraced with enthusiasm when it first appeared. Companies were frustrated with traditional measures of performance that related only to the shareholders’ point of view. That view was seen as unduly short-termist and too concerned with stockmarket twitches; it prevented boardrooms and managers from considering longer-term opportunities. The balanced scorecard not only broadens the organisation’s perception of where it stands today, but it also helps it to identify things that might guarantee its success in the future.
Kaplan and Norton saw the benefits of the balanced scorecard as follows:
• It helps companies to focus on what needs to be done to create a “breakthrough performance”.
• It acts as an integrating device for a variety of often disconnected corporate programmes, such as quality, re-engineering, process redesign and customer service.
• It translates strategy into performance measures and targets.
• It helps break down corporate-wide measures so that local managers and employees can see what they need to do to improve organisational effectiveness.
• It provides a comprehensive view that overturns the traditional idea of the organisation as a collection of isolated, independent functions and departments.
How it Works: Scenario Planning
Scenario planning (sometimes called “contingency planning”) is a structured way for organisations to think about the future. A group of executives sets out to develop a small number of scenarios—stories about how the future might unfold and how this might affect an issue that confronts them. The issue could be a narrow one: whether to make a particular investment, for example. Should a supermarket put millions into more out-of-town megastores and their attendant car parks, or should it invest in secure websites and a fleet of vans to make door-to-door deliveries? Or it could be much wider: an American education authority, for instance, contemplating the impact of demographic change on the need for new schools. Will the ageing of the existing population be counterbalanced by the rising level of immigration?
In Peter Schwartz’s book “The Art of the Long View”, scenarios are described as:
"Stories that can help us recognise and adapt to changing aspects of our present environment. They form a method for articulating the different pathways that might exist for you tomorrow, and finding your appropriate movements down each of those possible paths."
Scenario planning has been used by some of the world’s largest corporations, including Royal Dutch Shell, Motorola, Disney and Accenture. Two things lay behind its rapid growth in the 1970s:
• Widespread dissatisfaction with existing ways of planning. Many organisations realised how misleading were predictions based on straight-line extrapolations from the past. The oil price hikes of 1973 and 1978 dramatically and painfully brought home how vulnerable businesses were to sudden discontinuities. The unusually smooth path of economic progress since the second world war had lulled them into a false sense of continuity.
• Growing attachment to the idea that business can make better use of the non-rational side of human nature. At the head of Royal Dutch Shell’s planning department at the time was Pierre Wack (see article), a Belgian who had been persuaded to give up the editorship of a Franco-German philosophy magazine and join the company.
The appeal of scenario planning increased further in the wake of the September 11th 2001 terrorist attacks in the United States and the greater perceived uncertainty of the 21st century. According to Bain & Company’s annual survey of management tools, fewer than 40% of companies used scenario planning in 1999. But by 2006 its usage had risen to 70%. As a result of its scenario planning, the New York Board of Trade decided in the 1990s to build a second trading floor outside the World Trade Centre, a decision that kept it going after September 11th 2001.
In an article in Harvard Business Review in 1985, Wack wrote:
"Scenarios deal with two worlds; the world of facts and the world of perceptions. They explore for facts but they aim at perceptions inside the heads of decision-makers. Their purpose is to gather and transform information of strategic significance into fresh perceptions."
The process of scenario planning usually begins with a long discussion about how the participants think that big shifts in society, economics, politics and technology might affect a particular issue. From this the group aims to draw up a list of priorities, including things that will have the most impact on the issue under discussion and those whose outcome is the most uncertain. These priorities then form the basis for sketching out rough pictures of the future.
Scenario planning draws on a wide range of disciplines and interests, including economics, psychology, politics and demographics. The recommended reading list of Global Business Network, a leading adviser on scenario planning, includes Alexis de Tocqueville’s “Democracy in America” as well as Peter Senge’s “The Fifth Discipline” and “The Leopard”, Giuseppe Tomasi’s sweeping tale of Sicilian family life.
In Peter Schwartz’s book “The Art of the Long View”, scenarios are described as:
"Stories that can help us recognise and adapt to changing aspects of our present environment. They form a method for articulating the different pathways that might exist for you tomorrow, and finding your appropriate movements down each of those possible paths."
Scenario planning has been used by some of the world’s largest corporations, including Royal Dutch Shell, Motorola, Disney and Accenture. Two things lay behind its rapid growth in the 1970s:
• Widespread dissatisfaction with existing ways of planning. Many organisations realised how misleading were predictions based on straight-line extrapolations from the past. The oil price hikes of 1973 and 1978 dramatically and painfully brought home how vulnerable businesses were to sudden discontinuities. The unusually smooth path of economic progress since the second world war had lulled them into a false sense of continuity.
• Growing attachment to the idea that business can make better use of the non-rational side of human nature. At the head of Royal Dutch Shell’s planning department at the time was Pierre Wack (see article), a Belgian who had been persuaded to give up the editorship of a Franco-German philosophy magazine and join the company.
The appeal of scenario planning increased further in the wake of the September 11th 2001 terrorist attacks in the United States and the greater perceived uncertainty of the 21st century. According to Bain & Company’s annual survey of management tools, fewer than 40% of companies used scenario planning in 1999. But by 2006 its usage had risen to 70%. As a result of its scenario planning, the New York Board of Trade decided in the 1990s to build a second trading floor outside the World Trade Centre, a decision that kept it going after September 11th 2001.
In an article in Harvard Business Review in 1985, Wack wrote:
"Scenarios deal with two worlds; the world of facts and the world of perceptions. They explore for facts but they aim at perceptions inside the heads of decision-makers. Their purpose is to gather and transform information of strategic significance into fresh perceptions."
The process of scenario planning usually begins with a long discussion about how the participants think that big shifts in society, economics, politics and technology might affect a particular issue. From this the group aims to draw up a list of priorities, including things that will have the most impact on the issue under discussion and those whose outcome is the most uncertain. These priorities then form the basis for sketching out rough pictures of the future.
Scenario planning draws on a wide range of disciplines and interests, including economics, psychology, politics and demographics. The recommended reading list of Global Business Network, a leading adviser on scenario planning, includes Alexis de Tocqueville’s “Democracy in America” as well as Peter Senge’s “The Fifth Discipline” and “The Leopard”, Giuseppe Tomasi’s sweeping tale of Sicilian family life.
How it Works: Championing a Project
To champion something is to support it, to defend it. We champion the cause of liberty. Hugh Grant, an actor, champions the right of old people to die in their own homes.
The word was given a management twist in the late 20th century when companies came to believe that a new project, to gain success, needed a champion, a specific individual within the organisation who would defend it and nurture it through its early days. Without such a person, it was suggested, new projects would wither from lack of devotion.
Donald Schon, a consultant before becoming a professor at the Massachusetts Institute of Technology (MIT), once wrote:
"The new idea either finds a champion or dies … No ordinary involvement with a new idea provides the energy required to cope with the indifference and resistance that major technological change provokes … Champions of new inventions display persistence and courage of heroic quality."
Championing is often applied to people as well: bright, young, talented people within an organisation are deemed to need a champion, someone higher up the corporate ladder who will support them and fight their corner. Many chief executives have risen to the top largely because they have been nurtured through their careers by people in high places.
In their book “In Search of Excellence”, Tom Peters and Robert Waterman argued that successfully innovative companies revolve around “fired-up champions”. 3M, the American inventor of the Post-It note, is quoted as saying: “We expect our champions to be irrational.”
Champions are not easy people to work and live with. James Brian Quinn, a professor at Tuck School of Business at Dartmouth, has spelt out a paradox associated with the type:
The champion is obnoxious, impatient, egotistic, and perhaps a bit irrational in organisational terms. As a consequence, he is not hired. If hired, he is not promoted or rewarded. He is regarded as not a serious person, as embarrassing or disruptive.
Peters and Waterman maintained that companies need to set up special systems to support and encourage these disruptive people if they are to benefit from their extreme persistence with new ideas (which need not necessarily be their own).
History is spattered with innovations that would never have been successful if they had not been stubbornly supported by one (often rather cranky) individual. Moreover, such support often needs to be for the long term. The Economist once wrote (see article), “All big innovations need to be championed and nurtured for long periods, sometimes up to 25 years.”
A widely reported case of championing was that of Spence Silver, an employee of 3M who became unnaturally fond of a glue that was not very good at sticking. “I was just absolutely convinced that it had some potential,” Silver is reported as saying. But for many years he was unable to persuade anybody within the organisation to agree with him. He persisted, however, in championing his pet product. As he put it:
You have to be a zealot at times in order to keep interest alive, because it will die off. It seems like the pattern always goes like this. In the fat times, these groups appear and do a lot of interesting research. And then the lean times come just about at the point when you’ve developed your first goody, your gizmo. And then you’ve got to go out and try to sell it. Well, everybody in the division is so busy that they don’t want to touch it. They don’t have time to look at new product ideas with no end-product already in mind.
Silver’s persistence with his “glue that doesn’t glue” eventually led to the invention of the Post-It note. The rest, as they say, is history.
The word was given a management twist in the late 20th century when companies came to believe that a new project, to gain success, needed a champion, a specific individual within the organisation who would defend it and nurture it through its early days. Without such a person, it was suggested, new projects would wither from lack of devotion.
Donald Schon, a consultant before becoming a professor at the Massachusetts Institute of Technology (MIT), once wrote:
"The new idea either finds a champion or dies … No ordinary involvement with a new idea provides the energy required to cope with the indifference and resistance that major technological change provokes … Champions of new inventions display persistence and courage of heroic quality."
Championing is often applied to people as well: bright, young, talented people within an organisation are deemed to need a champion, someone higher up the corporate ladder who will support them and fight their corner. Many chief executives have risen to the top largely because they have been nurtured through their careers by people in high places.
In their book “In Search of Excellence”, Tom Peters and Robert Waterman argued that successfully innovative companies revolve around “fired-up champions”. 3M, the American inventor of the Post-It note, is quoted as saying: “We expect our champions to be irrational.”
Champions are not easy people to work and live with. James Brian Quinn, a professor at Tuck School of Business at Dartmouth, has spelt out a paradox associated with the type:
The champion is obnoxious, impatient, egotistic, and perhaps a bit irrational in organisational terms. As a consequence, he is not hired. If hired, he is not promoted or rewarded. He is regarded as not a serious person, as embarrassing or disruptive.
Peters and Waterman maintained that companies need to set up special systems to support and encourage these disruptive people if they are to benefit from their extreme persistence with new ideas (which need not necessarily be their own).
History is spattered with innovations that would never have been successful if they had not been stubbornly supported by one (often rather cranky) individual. Moreover, such support often needs to be for the long term. The Economist once wrote (see article), “All big innovations need to be championed and nurtured for long periods, sometimes up to 25 years.”
A widely reported case of championing was that of Spence Silver, an employee of 3M who became unnaturally fond of a glue that was not very good at sticking. “I was just absolutely convinced that it had some potential,” Silver is reported as saying. But for many years he was unable to persuade anybody within the organisation to agree with him. He persisted, however, in championing his pet product. As he put it:
You have to be a zealot at times in order to keep interest alive, because it will die off. It seems like the pattern always goes like this. In the fat times, these groups appear and do a lot of interesting research. And then the lean times come just about at the point when you’ve developed your first goody, your gizmo. And then you’ve got to go out and try to sell it. Well, everybody in the division is so busy that they don’t want to touch it. They don’t have time to look at new product ideas with no end-product already in mind.
Silver’s persistence with his “glue that doesn’t glue” eventually led to the invention of the Post-It note. The rest, as they say, is history.
How it Works: Synergy
The word comes from ancient Greek: synergia means working together. Andrew Campbell and Michael Goold, two British academics, define it as “links between business units that result in additional value creation”. It is, they go on to say, “a Holy Grail for large multi-unit companies”. It is something akin to the philosopher’s stone: seeming to create extra value without consuming resources.
Synergy has been used as part of the justification for almost every takeover since Alexander moved into Egypt. In the 20th century the idea was refreshed by Ruth Benedict, an anthropologist. She used the word when writing during the second world war about communities where cooperation was rewarded and proved advantageous to all. The idea was picked up and transferred to the business world by Abraham Maslow. It fitted well with Maslow’s non-authoritarian model of organisational structure.
The business gains from synergy are often not distinguished sufficiently well from those that come from combining two businesses in such a way as to create value. Synergy is passive; it happens when two things come together regardless of what else they do. If a company buys one of its major suppliers, the synergy comes from the fact that it is now a preferred customer, not from the subsequent reorganisation of the supplier’s warehouses so that they are more conveniently located for their new owner.
Promises of synergy are rarely fulfilled. Campbell and Goold say: “Synergy initiatives often fall short of management’s expectations.” They quote the example of a firm of consultants where, to gain synergy, the IT specialists were merged with the strategy specialists, until the day when the it people found that the strategy people were on a completely different scale of pay and perks. All the synergy gains were lost in an instant. The authors end their article by quoting the physicians’ creed: “First ensure you do no harm.”
The synergy from mergers and acquisitions (M&A) is particularly elusive. Leon Cooperman, a senior executive at Goldman Sachs, a big investment banking adviser on M&A, when asked to name one big merger that had lived up to expectations, said: “I’m sure that there are success stories out there. But at this moment I draw a blank.”
Michael Porter, who looked closely at the activities of 33 large American companies between 1950 and 1986, found that 55% of their acquisitions were later divested. Of their forays into unrelated industries (the fashion at the time was for conglomerates), 74% were later divested.
Synergy fails to materialise in M&A for two main reasons:
• Managers give too much attention to financial and strategic aspects during the negotiation of the deal. All eyes are focused on striking the right price (whatever it is), not on extracting the full value.
• Managers underestimate the cultural differences between organisations. These can be particularly significant in deals that cross borders. An Anglo-French merger between packaging companies Metal Box and Carnaud, for instance, was notorious for the refusal of managers from different cultures to work with each other. It has been said that cross-border deals work well in the airline industry because people have gone into that particular business to meet and understand people from other cultures. The same cannot be said of people who go into packaging.
The unbundling of organisations, which often occurs after a prolonged period of mergers and acquisitions, involves a sort of reverse synergy. In this, three minus two equals more than one. This greater value is realised either through a capital gain from the sale of previously bundled assets (a process often referred to as asset stripping), or through an improvement in the margins on the unbundled businesses.
Synergy has been used as part of the justification for almost every takeover since Alexander moved into Egypt. In the 20th century the idea was refreshed by Ruth Benedict, an anthropologist. She used the word when writing during the second world war about communities where cooperation was rewarded and proved advantageous to all. The idea was picked up and transferred to the business world by Abraham Maslow. It fitted well with Maslow’s non-authoritarian model of organisational structure.
The business gains from synergy are often not distinguished sufficiently well from those that come from combining two businesses in such a way as to create value. Synergy is passive; it happens when two things come together regardless of what else they do. If a company buys one of its major suppliers, the synergy comes from the fact that it is now a preferred customer, not from the subsequent reorganisation of the supplier’s warehouses so that they are more conveniently located for their new owner.
Promises of synergy are rarely fulfilled. Campbell and Goold say: “Synergy initiatives often fall short of management’s expectations.” They quote the example of a firm of consultants where, to gain synergy, the IT specialists were merged with the strategy specialists, until the day when the it people found that the strategy people were on a completely different scale of pay and perks. All the synergy gains were lost in an instant. The authors end their article by quoting the physicians’ creed: “First ensure you do no harm.”
The synergy from mergers and acquisitions (M&A) is particularly elusive. Leon Cooperman, a senior executive at Goldman Sachs, a big investment banking adviser on M&A, when asked to name one big merger that had lived up to expectations, said: “I’m sure that there are success stories out there. But at this moment I draw a blank.”
Michael Porter, who looked closely at the activities of 33 large American companies between 1950 and 1986, found that 55% of their acquisitions were later divested. Of their forays into unrelated industries (the fashion at the time was for conglomerates), 74% were later divested.
Synergy fails to materialise in M&A for two main reasons:
• Managers give too much attention to financial and strategic aspects during the negotiation of the deal. All eyes are focused on striking the right price (whatever it is), not on extracting the full value.
• Managers underestimate the cultural differences between organisations. These can be particularly significant in deals that cross borders. An Anglo-French merger between packaging companies Metal Box and Carnaud, for instance, was notorious for the refusal of managers from different cultures to work with each other. It has been said that cross-border deals work well in the airline industry because people have gone into that particular business to meet and understand people from other cultures. The same cannot be said of people who go into packaging.
The unbundling of organisations, which often occurs after a prolonged period of mergers and acquisitions, involves a sort of reverse synergy. In this, three minus two equals more than one. This greater value is realised either through a capital gain from the sale of previously bundled assets (a process often referred to as asset stripping), or through an improvement in the margins on the unbundled businesses.
How it Works: Competitive Advantage
“Competitive Advantage” is the title of a book by Michael Porter (see article) which became a bible of business thinkers in the late 1980s. With its echo of the ideas of comparative advantage expounded by David Ricardo, a 19th-century economist, it provided managers with a framework for strategic thinking about how to beat their rivals.
Porter argued that:
"Competitive advantage is a function of either providing comparable buyer value more efficiently than competitors (low cost), or performing activities at comparable cost but in unique ways that create more buyer value than competitors and, hence, command a premium price (differentiation).
You win either by being cheaper or by being different (which means being perceived by the customer as better or more relevant). There are no other ways.
Few management ideas have been so clear or so intuitively right. Although there were business and management books that sold more copies in the last two decades of the 20th century, none was as influential as 'Competitive Advantage'."
Behind Porter’s idea lay a novel way of looking at the firm as a series of activities which link together into what he called “a value chain”. For many, this was the theory’s eureka moment. Writers since have developed further concepts based on the metaphor of a linked chain of activities or groups of activities (or their close equivalent, processes). Each of the links in the chain adds value—that is, something that a customer is prepared to pay for. Even a company’s support activities, such as its training and compensation systems, can be links in the chain and sources of competitive advantage in their own right.
“Competitive Advantage” was published in 1985 as “the essential companion” to Porter’s earlier work, “Competitive Strategy” (1980). “Competitive Strategy” considered competition at the industry level, whereas “Competitive Advantage” looked at it from a firm’s-eye view. “My quest”, said Porter, “was to find a way to conceptualise the firm that would expose the underpinnings of competitive advantage and its sustainability.”
“Competitive Strategy” (subtitled “Techniques for Analysing Industries and Competitors”) was an aide for ambitious young executives in the planning department to help them come up with grand ideas about what to do next. The book identified five factors that have an impact on a company’s profitability: customers, suppliers, substitutes, potential entrants into the industry, and competitors. “Competitive Advantage”, however, was a book for chief executives. Its subtitle was “Creating and Sustaining Superior Performance”. Not only did it promise to enable senior managers to get ahead of the competition, it also promised to help them stay there.
The ideas in “Competitive Advantage” persuaded corporate chiefs to undertake more internal reflection. Previously their firm’s identity had been largely described in terms of its relationship to others: its market share, for instance, or its relative size. Porter made corporate navel-gazing respectable. In practice, many firms had difficulty in identifying all the discrete Porterian activities in their organisation, even in cases where they were confident that they knew what they were looking for—and many were not.
In a later book, “The Competitive Advantage of Nations”, Porter looked at how the choice of location by an internationalising business might be a source of competitive advantage. From this issue of location he was drawn on to consider clustering and how business clusters are nowadays “critical to competition”.
Porter argued that:
"Competitive advantage is a function of either providing comparable buyer value more efficiently than competitors (low cost), or performing activities at comparable cost but in unique ways that create more buyer value than competitors and, hence, command a premium price (differentiation).
You win either by being cheaper or by being different (which means being perceived by the customer as better or more relevant). There are no other ways.
Few management ideas have been so clear or so intuitively right. Although there were business and management books that sold more copies in the last two decades of the 20th century, none was as influential as 'Competitive Advantage'."
Behind Porter’s idea lay a novel way of looking at the firm as a series of activities which link together into what he called “a value chain”. For many, this was the theory’s eureka moment. Writers since have developed further concepts based on the metaphor of a linked chain of activities or groups of activities (or their close equivalent, processes). Each of the links in the chain adds value—that is, something that a customer is prepared to pay for. Even a company’s support activities, such as its training and compensation systems, can be links in the chain and sources of competitive advantage in their own right.
“Competitive Advantage” was published in 1985 as “the essential companion” to Porter’s earlier work, “Competitive Strategy” (1980). “Competitive Strategy” considered competition at the industry level, whereas “Competitive Advantage” looked at it from a firm’s-eye view. “My quest”, said Porter, “was to find a way to conceptualise the firm that would expose the underpinnings of competitive advantage and its sustainability.”
“Competitive Strategy” (subtitled “Techniques for Analysing Industries and Competitors”) was an aide for ambitious young executives in the planning department to help them come up with grand ideas about what to do next. The book identified five factors that have an impact on a company’s profitability: customers, suppliers, substitutes, potential entrants into the industry, and competitors. “Competitive Advantage”, however, was a book for chief executives. Its subtitle was “Creating and Sustaining Superior Performance”. Not only did it promise to enable senior managers to get ahead of the competition, it also promised to help them stay there.
The ideas in “Competitive Advantage” persuaded corporate chiefs to undertake more internal reflection. Previously their firm’s identity had been largely described in terms of its relationship to others: its market share, for instance, or its relative size. Porter made corporate navel-gazing respectable. In practice, many firms had difficulty in identifying all the discrete Porterian activities in their organisation, even in cases where they were confident that they knew what they were looking for—and many were not.
In a later book, “The Competitive Advantage of Nations”, Porter looked at how the choice of location by an internationalising business might be a source of competitive advantage. From this issue of location he was drawn on to consider clustering and how business clusters are nowadays “critical to competition”.
How it Works: Game Theory
The idea of business as a game, in the sense that a move by one player sparks off moves by others, runs through much strategic thinking. It is borrowed from a branch of economics (game theory) in which no economic agent (individual or corporate) is an island, living and acting independently of others.
In sectors where firms compete fiercely for market share and customer loyalty, this stylised progression of moves closely parallels actual behaviour. Few firms nowadays think about strategy without adding a bit of game theory. For John von Neumann and Oskar Morgenstern, the two economists who developed the idea, strategy was “a complete plan: a plan which specifies what choices [the player] will make in every possible situation”.
Seeing business life as a never-ending series of games, each of which has a winner and a loser, can be a handicap. In business negotiations, for example, with external suppliers or customers, or with trade unions or colleagues, it can be unhelpful if participants see it only in terms of a victory or a loss. For that way one party has to walk away feeling bad about the outcome. In some non-western cultures the aim is different. The negotiation process is steered towards a win-win outcome, one with which both parties can be reasonably content.
The language of business is scattered with references to games. Regulators try to make sure that companies operate on a “level playing field”, and competition is, according to at least one dictionary, “a series of games”. Business games that have enjoyed (sometimes brief) popularity include the following:
• The end game. This is a strategy for a product that seems to be on its last legs. Should the company bleed it for all it is worth before it dies? Or should it introduce an aggressive pricing policy aimed at forcing its competitors out of business and allowing it to continue in a much reduced niche market? In her book “Managing Maturing Businesses”, Kathryn Harrigan, a professor at Columbia Business School, argues that end games can be highly profitable. She writes: “The last surviving player makes money serving the last bit of demand, when the competitors drop away.”
• The croquet game. In “The Change Masters”, Rosabeth Moss Kanter (see article) wrote:
I think the game that best describes most businesses today is the croquet game in “Alice in Wonderland”. In that game nothing remains stable for very long. Everything is changing around the players. Alice goes to hit a ball, but her mallet is a flamingo. Just as she’s about to hit the ball, the flamingo lifts its head and looks in another direction. That’s just like technology and the tools that we use.
• The win-win game. This is a game where both parties end up as winners; for example, a merger between two companies where synergy genuinely allows them to become more than the sum of their parts.
• The zero-sum game. This is shorthand for the idea that in every game, whether in business or on the sports field, the value of the winner’s gains and the loser’s losses is equal. In such games there is no incentive to co-operate with opponents because every inch given to them is an inch lost. The idea of the zero-sum game is modified by the introduction of the possibility of change in the nature of the game while it is being played. Hence, for instance, companies that are fighting for market share are playing a zero-sum game if they see that market as fixed. But if the market is continually expanding (or if the companies redefine it so that it is), the players are playing a game in which they can have a declining share of a bigger cake and still see their businesses grow.
In sectors where firms compete fiercely for market share and customer loyalty, this stylised progression of moves closely parallels actual behaviour. Few firms nowadays think about strategy without adding a bit of game theory. For John von Neumann and Oskar Morgenstern, the two economists who developed the idea, strategy was “a complete plan: a plan which specifies what choices [the player] will make in every possible situation”.
Seeing business life as a never-ending series of games, each of which has a winner and a loser, can be a handicap. In business negotiations, for example, with external suppliers or customers, or with trade unions or colleagues, it can be unhelpful if participants see it only in terms of a victory or a loss. For that way one party has to walk away feeling bad about the outcome. In some non-western cultures the aim is different. The negotiation process is steered towards a win-win outcome, one with which both parties can be reasonably content.
The language of business is scattered with references to games. Regulators try to make sure that companies operate on a “level playing field”, and competition is, according to at least one dictionary, “a series of games”. Business games that have enjoyed (sometimes brief) popularity include the following:
• The end game. This is a strategy for a product that seems to be on its last legs. Should the company bleed it for all it is worth before it dies? Or should it introduce an aggressive pricing policy aimed at forcing its competitors out of business and allowing it to continue in a much reduced niche market? In her book “Managing Maturing Businesses”, Kathryn Harrigan, a professor at Columbia Business School, argues that end games can be highly profitable. She writes: “The last surviving player makes money serving the last bit of demand, when the competitors drop away.”
• The croquet game. In “The Change Masters”, Rosabeth Moss Kanter (see article) wrote:
I think the game that best describes most businesses today is the croquet game in “Alice in Wonderland”. In that game nothing remains stable for very long. Everything is changing around the players. Alice goes to hit a ball, but her mallet is a flamingo. Just as she’s about to hit the ball, the flamingo lifts its head and looks in another direction. That’s just like technology and the tools that we use.
• The win-win game. This is a game where both parties end up as winners; for example, a merger between two companies where synergy genuinely allows them to become more than the sum of their parts.
• The zero-sum game. This is shorthand for the idea that in every game, whether in business or on the sports field, the value of the winner’s gains and the loser’s losses is equal. In such games there is no incentive to co-operate with opponents because every inch given to them is an inch lost. The idea of the zero-sum game is modified by the introduction of the possibility of change in the nature of the game while it is being played. Hence, for instance, companies that are fighting for market share are playing a zero-sum game if they see that market as fixed. But if the market is continually expanding (or if the companies redefine it so that it is), the players are playing a game in which they can have a declining share of a bigger cake and still see their businesses grow.
How it Works: Building Strategic Alliances
A strategic alliance is a relationship between two or more organisations that falls somewhere between the extremes of an arm’s-length sourcing arrangement on the one hand, and a full-blown acquisition on the other. It embraces things such as franchising, licensing and joint ventures.
Booz Allen & Hamilton, a firm of management consultants and an acknowledged expert in the field, defines a strategic alliance as:
A cooperative arrangement between two or more companies in which:
• a common strategy is developed in unison and a win-win attitude is adopted by all parties;
• the relationship is reciprocal, with each partner prepared to share specific strengths with the other, thus lending power to the enterprise;
• a pooling of resources, investment and risks occurs for mutual gain.
In general, there are two types of strategic alliance: a bilateral alliance (between two organisations) and a network alliance (between several organisations). The alliance between Royal Bank of Scotland and Tesco, whereby the British supermarket chain provided the Scottish bank’s services throughout its stores, is an example of the former; the Airbus consortium and the Visa card network are examples of the latter.
Strategic alliances have many advantages: they require little immediate financial commitment; they allow companies to put their toes into new markets before they get soaked; and they offer a quiet retreat should a venture not work out as the partners had hoped. However, going into something knowing that it is (literally) not a big deal, and that there is a face-saving exit route, may not be the best way to make those charged with running it hungry for success.
The most popular use for alliances is as a means to try out a foreign market. Not surprisingly, therefore, there are more alliances in Europe and Asia (where there are more foreign markets nearby) than in the United States. In some cases, alliances are used by companies because other means of entering a market are closed to them. Hence there have been many in the airline industry, where governments are sensitive about domestic carriers falling into foreign hands.
One thing crucial to a successful alliance is a degree of cultural compatibility. Companies are advised, for example, to pick on someone their own size. Alliances between the very big and the very small are hard to operate not least because of the different significance that the alliance assumes in each organisation’s scale of things.
Alliances are often said to be like marriages. The partners have to understand each other’s expectations, be sensitive to each other’s changes of mood and not be too surprised if their partnership ends in divorce. Indeed, many companies build into their alliances a sort of prenuptial contract, an agreement as to what is to happen to their joint property in the event of a subsequent divorce.
Strategic alliances grew at a phenomenal rate in the 1990s. Some companies, such as General Electric and AT&T, set up several hundred. On one estimate, IBM cemented almost 1,000 strategic alliances during the decade. Booz Allen & Hamilton reckons that more than 20,000 were formed worldwide in the period 1996–98. Accenture says that Fortune 500 companies have an average of 50–70 alliances each.
Alliances have not always been successful. In 1998 BT and AT&T agreed to bundle their international assets into a single joint venture that started off with annual revenues of $11 billion, annual operating profits of $1 billion and some 5,000 employees. In 2001 the two companies agreed to unwind the alliance—at considerable cost.
Booz Allen & Hamilton, a firm of management consultants and an acknowledged expert in the field, defines a strategic alliance as:
A cooperative arrangement between two or more companies in which:
• a common strategy is developed in unison and a win-win attitude is adopted by all parties;
• the relationship is reciprocal, with each partner prepared to share specific strengths with the other, thus lending power to the enterprise;
• a pooling of resources, investment and risks occurs for mutual gain.
In general, there are two types of strategic alliance: a bilateral alliance (between two organisations) and a network alliance (between several organisations). The alliance between Royal Bank of Scotland and Tesco, whereby the British supermarket chain provided the Scottish bank’s services throughout its stores, is an example of the former; the Airbus consortium and the Visa card network are examples of the latter.
Strategic alliances have many advantages: they require little immediate financial commitment; they allow companies to put their toes into new markets before they get soaked; and they offer a quiet retreat should a venture not work out as the partners had hoped. However, going into something knowing that it is (literally) not a big deal, and that there is a face-saving exit route, may not be the best way to make those charged with running it hungry for success.
The most popular use for alliances is as a means to try out a foreign market. Not surprisingly, therefore, there are more alliances in Europe and Asia (where there are more foreign markets nearby) than in the United States. In some cases, alliances are used by companies because other means of entering a market are closed to them. Hence there have been many in the airline industry, where governments are sensitive about domestic carriers falling into foreign hands.
One thing crucial to a successful alliance is a degree of cultural compatibility. Companies are advised, for example, to pick on someone their own size. Alliances between the very big and the very small are hard to operate not least because of the different significance that the alliance assumes in each organisation’s scale of things.
Alliances are often said to be like marriages. The partners have to understand each other’s expectations, be sensitive to each other’s changes of mood and not be too surprised if their partnership ends in divorce. Indeed, many companies build into their alliances a sort of prenuptial contract, an agreement as to what is to happen to their joint property in the event of a subsequent divorce.
Strategic alliances grew at a phenomenal rate in the 1990s. Some companies, such as General Electric and AT&T, set up several hundred. On one estimate, IBM cemented almost 1,000 strategic alliances during the decade. Booz Allen & Hamilton reckons that more than 20,000 were formed worldwide in the period 1996–98. Accenture says that Fortune 500 companies have an average of 50–70 alliances each.
Alliances have not always been successful. In 1998 BT and AT&T agreed to bundle their international assets into a single joint venture that started off with annual revenues of $11 billion, annual operating profits of $1 billion and some 5,000 employees. In 2001 the two companies agreed to unwind the alliance—at considerable cost.
How it Works: SWOT Analysis
SWOT is a handy mnemonic to help corporate planners think about strategy. It stands for Strengths, Weaknesses, Opportunities and Threats. What are an organisation’s SWOTs? How can it manage them in a way that will optimise its performance? A second four-letter acronym is sometimes brought into play here: USED. How can the Strengths be Used; the Weaknesses be Stopped, the Opportunities be Exploited; and the Threats be Defended against?
Wikipedia credits the technique to Albert Humphrey, an academic at Stanford University, who based it on an analysis of Fortune 500 companies that he carried out in the 1960s and 1970s.
The process starts by listing a firm’s attributes under the four headings; a particular strength, for example, might be a dedicated workforce or some currently valuable patent. These are then given scores according to what is seen as likely to be the company’s business environment over the next few years. If a recession is beginning and employees have to be laid off, a dedicated workforce might be a weakness. If a boom is about to begin, however, it will be a strength.
The four features can be divided along two main dimensions:
• Internal/external. The internal features are the company’s own strengths and weaknesses. Analysing them is a matter of analysing the state of the company. They are things that already exist. The external features are the organisation’s opportunities and the threats to its future performance. These exist only on the horizon, and they are less easy to assess and measure. They arise from things like changes in technology, demography or government policy.
• Positive/negative. The positive things are the strengths and opportunities; the negative ones are the threats and weaknesses.
A SWOT analysis can be applied to different aspects of a company’s business, such as its it capability or its skills. The simplicity and intuitive wholeness of the framework have helped to make it extremely popular with both corporations and governments. An analysis of the competitive advantages and disadvantages of Germany in 1999 found that the country’s strengths lay in its educated and skilled workforce. Among its weaknesses were its high labour and social costs.
Nevertheless, there has been no shortage of critics. One of the main criticisms is that, in the end, such an analysis invariably relies on subjective judgments. Objective measures of all the ingredients in the balance simply do not exist. Some say that this does not matter, because the process of doing the analysis is more important and revealing than the results of the analysis themselves. The journey is more important than the destination.
Wikipedia credits the technique to Albert Humphrey, an academic at Stanford University, who based it on an analysis of Fortune 500 companies that he carried out in the 1960s and 1970s.
The process starts by listing a firm’s attributes under the four headings; a particular strength, for example, might be a dedicated workforce or some currently valuable patent. These are then given scores according to what is seen as likely to be the company’s business environment over the next few years. If a recession is beginning and employees have to be laid off, a dedicated workforce might be a weakness. If a boom is about to begin, however, it will be a strength.
The four features can be divided along two main dimensions:
• Internal/external. The internal features are the company’s own strengths and weaknesses. Analysing them is a matter of analysing the state of the company. They are things that already exist. The external features are the organisation’s opportunities and the threats to its future performance. These exist only on the horizon, and they are less easy to assess and measure. They arise from things like changes in technology, demography or government policy.
• Positive/negative. The positive things are the strengths and opportunities; the negative ones are the threats and weaknesses.
A SWOT analysis can be applied to different aspects of a company’s business, such as its it capability or its skills. The simplicity and intuitive wholeness of the framework have helped to make it extremely popular with both corporations and governments. An analysis of the competitive advantages and disadvantages of Germany in 1999 found that the country’s strengths lay in its educated and skilled workforce. Among its weaknesses were its high labour and social costs.
Nevertheless, there has been no shortage of critics. One of the main criticisms is that, in the end, such an analysis invariably relies on subjective judgments. Objective measures of all the ingredients in the balance simply do not exist. Some say that this does not matter, because the process of doing the analysis is more important and revealing than the results of the analysis themselves. The journey is more important than the destination.
How it Works: Management By Objectives (MBO)
The idea of management by objectives (MBO), first outlined by Peter Drucker and then developed by George Odiorne, his student, was popular in the 1960s and 1970s. In his book “The Practice of Management”, published in 1954, Drucker outlined a number of priorities for the manager of the future. Top of the list was that he or she “must manage by objectives”. John Tarrant, Drucker’s biographer, reported in 1976 that Drucker once said he had first heard the term MBO used by Alfred Sloan, author of the influential “My Years with General Motors”.
With the benefit of hindsight, it may seem obvious that managers must have somewhere to go before they set out on a journey. But Drucker pointed out that managers often lose sight of their objectives because of something he called “the activity trap”. They get so involved in their current activities that they forget their original purpose. In some cases it may be that they become engrossed in this activity as a means of avoiding the uncomfortable truth about their organisation’s condition.
MBO received a boost when it was declared to be an integral part of “The HP Way”, the widely acclaimed management style of Hewlett-Packard, a computer company. At every level within Hewlett-Packard, managers had to develop objectives and integrate them with those of other managers and of the company as a whole. This was done by producing written plans showing what people needed to achieve if they were to reach those objectives. The plans were then shared with others in the corporation and coordinated.
Bill Packard, one of the two founders of Hewlett-Packard, said of MBO:
"No operating policy has contributed more to Hewlett-Packard’s success … MBO … is the antithesis of management by control. The latter refers to a tightly controlled system of management of the military type … Management by objectives, on the other hand, refers to a system in which overall objectives are clearly stated and agreed upon, and which gives people the flexibility to work toward those goals in ways they determine best for their own areas of responsibility."
MBO urged that the planning process, traditionally done by a handful of high-level managers, should be delegated to all members of the organisation. The plan, when it finally emerged, would then have the commitment of all of them. As the plan is implemented, MBO demands that the organisation monitor a range of performance measures, designed to help it stay on the right path towards its objectives. The plan must be modified when this monitoring suggests that it is no longer leading to the desired objective.
One critic claimed that MBO encouraged organisations to tamper with their plans all the time, as and when they seemed no longer to be heading towards their latest objective. Many firms came to prefer the vague overall objectives of a mission statement to the firm, rigid ones demanded by MBO.
After a while, Drucker himself downplayed the significance of MBO. He said:
"MBO is just another tool. It is not the great cure for management inefficiency … Management by objectives works if you know the objectives: 90% of the time you don’t."
Management by objectives is now largely ignored. Its once widely used abbreviation, MBO, has been taken over by management buy-out, the purchasing of a company by a group of its managers with the aim of making as much money for themselves as possible.
With the benefit of hindsight, it may seem obvious that managers must have somewhere to go before they set out on a journey. But Drucker pointed out that managers often lose sight of their objectives because of something he called “the activity trap”. They get so involved in their current activities that they forget their original purpose. In some cases it may be that they become engrossed in this activity as a means of avoiding the uncomfortable truth about their organisation’s condition.
MBO received a boost when it was declared to be an integral part of “The HP Way”, the widely acclaimed management style of Hewlett-Packard, a computer company. At every level within Hewlett-Packard, managers had to develop objectives and integrate them with those of other managers and of the company as a whole. This was done by producing written plans showing what people needed to achieve if they were to reach those objectives. The plans were then shared with others in the corporation and coordinated.
Bill Packard, one of the two founders of Hewlett-Packard, said of MBO:
"No operating policy has contributed more to Hewlett-Packard’s success … MBO … is the antithesis of management by control. The latter refers to a tightly controlled system of management of the military type … Management by objectives, on the other hand, refers to a system in which overall objectives are clearly stated and agreed upon, and which gives people the flexibility to work toward those goals in ways they determine best for their own areas of responsibility."
MBO urged that the planning process, traditionally done by a handful of high-level managers, should be delegated to all members of the organisation. The plan, when it finally emerged, would then have the commitment of all of them. As the plan is implemented, MBO demands that the organisation monitor a range of performance measures, designed to help it stay on the right path towards its objectives. The plan must be modified when this monitoring suggests that it is no longer leading to the desired objective.
One critic claimed that MBO encouraged organisations to tamper with their plans all the time, as and when they seemed no longer to be heading towards their latest objective. Many firms came to prefer the vague overall objectives of a mission statement to the firm, rigid ones demanded by MBO.
After a while, Drucker himself downplayed the significance of MBO. He said:
"MBO is just another tool. It is not the great cure for management inefficiency … Management by objectives works if you know the objectives: 90% of the time you don’t."
Management by objectives is now largely ignored. Its once widely used abbreviation, MBO, has been taken over by management buy-out, the purchasing of a company by a group of its managers with the aim of making as much money for themselves as possible.
How it Works: Managing Talent
No one word demonstrated the shift in corporations’ attention in the mid-1990s from processes to people more vividly than the single word “talent”. Spurred on by a book called “The War for Talent”, written by three McKinsey consultants in the late 1990s, the word became common in management speak. “We need to cultivate the talent”; “Where are we going to find the talent essential to our future success?” Talent is a subset of what used to be called human resources, the people who work in organisations. It is, essentially, those individuals among that group who have the potential to add most value.
Behind the word lies the idea that more and more corporate value is going to be created by knowledge and by so-called “knowledge workers”. Manual labour is worth less; knowledge (and the right use of it) is worth more. And people with such knowledge are (so the theory goes) in short supply. One CEO was reported as saying that not only did he not have enough talent to carry out the company’s strategy, but he did not even have “the talent needed in HR to hire the missing managers”. Moreover, the situation is likely to stay that way (and may even get worse) for some time to come.
This has significantly shifted the balance of power in the recruitment process. Companies used to be relaxed about finding enough qualified people to run their operations. What they could not find they would train, was the usual attitude. That might take some time, but in a world where people sought jobs for life (and the pensions that went with them) time was in the company’s favour. But talent is not patient, and it is not faithful. Many companies found themselves training employees only for them to go on and sell their acquired skills to their rivals. So now they look for talent that is ready-made.
In their eagerness to please this talent, companies have gone to considerable lengths to appear especially attractive. They have, for instance, devoted a great deal of effort to the design of their websites, often the first port of call these days for bright young potential recruits. They have in many cases reconstructed their HR departments, in part so that they can tailor their remuneration packages more finely for the individuals that they really require. And they have altered their approach to issues such as governance and environmental responsibility because they know that many of the talented people they are seeking want to work for ethical and responsible employers—almost more than they want a hefty pay packet.
Talented people increasingly want to work in places where they can feel good about what they do for most of the day. What’s more, in today’s knowledge-based businesses, these young people are far more aware of their working environment, of “what’s going on around here”, than were their grandparents, who were hired for their brawn rather than their brain. It is harder for today’s businesses to disguise from their employees what they are up to—even when, as in cases such as Enron and WorldCom, they put a lot of effort into it.
Behind the word lies the idea that more and more corporate value is going to be created by knowledge and by so-called “knowledge workers”. Manual labour is worth less; knowledge (and the right use of it) is worth more. And people with such knowledge are (so the theory goes) in short supply. One CEO was reported as saying that not only did he not have enough talent to carry out the company’s strategy, but he did not even have “the talent needed in HR to hire the missing managers”. Moreover, the situation is likely to stay that way (and may even get worse) for some time to come.
This has significantly shifted the balance of power in the recruitment process. Companies used to be relaxed about finding enough qualified people to run their operations. What they could not find they would train, was the usual attitude. That might take some time, but in a world where people sought jobs for life (and the pensions that went with them) time was in the company’s favour. But talent is not patient, and it is not faithful. Many companies found themselves training employees only for them to go on and sell their acquired skills to their rivals. So now they look for talent that is ready-made.
In their eagerness to please this talent, companies have gone to considerable lengths to appear especially attractive. They have, for instance, devoted a great deal of effort to the design of their websites, often the first port of call these days for bright young potential recruits. They have in many cases reconstructed their HR departments, in part so that they can tailor their remuneration packages more finely for the individuals that they really require. And they have altered their approach to issues such as governance and environmental responsibility because they know that many of the talented people they are seeking want to work for ethical and responsible employers—almost more than they want a hefty pay packet.
Talented people increasingly want to work in places where they can feel good about what they do for most of the day. What’s more, in today’s knowledge-based businesses, these young people are far more aware of their working environment, of “what’s going on around here”, than were their grandparents, who were hired for their brawn rather than their brain. It is harder for today’s businesses to disguise from their employees what they are up to—even when, as in cases such as Enron and WorldCom, they put a lot of effort into it.