This is the last post in my blog for the Financial Times. I will take a break from regular blogging, but I will from time to time post new materials on my website.
Identifying opportunities early is necessary, but not sufficient, to seize them. A company must also be able to strike decisively when the time is right. Managers at Brazil’s Banco Itaú recognized that the privatization of state banks freed a new set of valuable resources – customer relationships and locations which had not been obtainable previously, and Itaú spotted the value in these banks before its peers. Equally important was top executives’ willingness to declare the acquisitions as the main effort and redeploy whatever human and financial resources were required to seize the moment. Below some key insights:
- Mobilize best people for golden opportunity. As with experiments, it is critical to put the best people on the best opportunities. Itau’s CEO commissioned one of the most senior members of his team, a Senior Vice-President and Board Member, to spearhead the analysis of opportunities created by the privatization process. And this SVP, in turn, quickly appointed some of the bank’s most promising executives to form a fifty-person task force to evaluate the opportunity and create a post-acquisition plan in case Itaú decided to make an acquisition. Make no mistake, the managers appointed to lead this initiative were not corporate rejects whose careers were stagnated, rather they were among the most promising managers in the company, responsible for running its most profitable lines of business. Assigning them to this opportunity represented a real commitment on the part of Itaú executives.
- Rapid approval processes. Sometimes, seizing a golden opportunity comes down to signing a deal
My last post discussed how managers can collect information to spot emerging opportunities in turbulent markets and illustrated these points with the case of Brazil’s Banco Itau’s acquisition of privatized banks in the 1990s. Information are most likely to reveal new opportunities to the extent it is real-time, combines first-hand observation with statistical data, shared across silos in the organization, and drawing on multiple data sources within and outside the firm.
In addition to gathering data, managers can also design and run experiments to actively evaluate opportunities. Typical experiments include pilot projects, minor acquisitions, and prototypes of new product development. Despite differences in form, successful experiments share a few common characteristics, which Banco Itaú’s experiment with the Argentine market illustrate.
- IN-BOUNDS.Firms often use the term experiments to justify undisciplined forays outside their core market. The best experiments, in contrast, fall squarely within a firm’s declared strategic domain. The
Even in the most volatile environment, companies do not face a constant rush of golden opportunities. Instead, periodic golden opportunities are interspersed among many smaller chances. The trick is to keep in the information flow, talk through alternative scenarios, and keep discussing possible opportunities as a management team to decide identify the most attractive.
In the case of Itaú, the golden opportunity came with the privatization of state-owned banks beginning in the mid-1990’s. The Federal Government decided to privatize most public companies in telecommunications, energy, and banking to attract capital to these sectors after years of underinvestment. Roberto Setubal – a member of one of the families that controlled the bank – was appointed Itaú’s CEO in 1994 in the midst of this privatization. In addition to a variety of operational positions in the bank, Roberto Setubal had received a masters degree in engineering from Stanford University, and apprenticed under John Reed, the legendary former CEO of Citibank. Setubal’s breadth of experience helped him to quickly realize that the privatization process was a decisive opportunity for the bank’s future.
Between 1995 and 2002, Itaú purchased eight large banks. Major competitors, including Banco Bradesco and Unibanco, were less aggressive in acquiring assets during the privatization period. Itaú’s ability to see this opportunity was not the result of luck. Rather, the top management team had actively gathered and processed data to identify and evaluate potential opportunities:
- Stay in the flow of information. In a constantly changing environment the top management team must
A bias for action counts as a cardinal virtue in business. In turbulent markets, however, a bias for action can cause companies to chase every opportunity as if it were the chance of a lifetime or responding to every threat as if it could destroy the company. Frantic activity dissipates an organization’s war chest and focus and leaves it poorly positioned to seize golden opportunities when they do arise. (There are other risks to a bias for action, as I argued in an earlier post). Managers require discipline to say no to potential distractions to maintain reserves for golden opportunities and major crises when they arise.
When conducting research on Brazilian multinationals, I learned about the sport of spearfishing, which serves as a graphic metaphor to illustrate the importance of disciplined opportunism. Spearfishermen dive underwater without oxygen tanks, armed only with a gun with a single spear. Once submerged, they surround themselves with kelp, which both attracts fish and hides the fisherman from his prey. Then he waits, motionless in the murky water, conserving oxygen and energy while waiting for the right fish to approach. A good fisherman can stay underwater for up to four minutes, and during this time needs the discipline to let the small fish swim by, while preserving his spear for the big prey, which can be as large as a person. At the right time, the fisherman shoots his spear with deadly accuracy. If he succeeds in spearing the fish, he must then reel it in and quickly kill it before surfacing with his catch.
Not a sport for the impatient or faint of heart, spearfishing provides a graphic metaphor to illustrate the process by which companies can effectively wait for, identify and seize opportunities in a turbulent market. The
Consolidation of the Brazilian banking sector in 2001 reached the final stage in the seven-year cycle, which began with the implementation of the Real plan. During this cycle, the competitive environment has been altered by the privatization of basically all the state-owned banks, the restructuring of the federally-owned banks, the absorption of many large private-sector Brazilian banks, and by a free market for international banks…Itaú is clearly one of the winners in this consolidation process. Olavo Setubal, chairman of Banco Itaú, 2001 letter to shareholders
Setubal had good reason to feel proud. Between 1995 – the first year after the Real plan stabilized Brazil’s inflation – and 2001, Banco Itaú (Itaú) posted an average return on equity of 21%, grew its asset base from $25.1 billion to $34.8 billion, and enjoyed the highest market capitalization of any private sector bank in Latin America.
Itaú’s performance was particularly impressive when compared to its rivals. Itaú posted significantly better returns on equity than other Brazilian banks. Itaú’s performance allowed it to avoid the fate of Mexican and Argentinean banks, which were for the most part displaced or acquired by multinational banks once their markets were opened to foreign competitors.
Banco Itaú, however, had not always been one of Brazil’s premier banks. The bank was born in 1945 as Banco Central de Crédito, and for its first twenty years remained a credible, but small regional player. Between 1964 and
In turbulent markets, companies can enhance their agility and minimize risk by orchestrating a network of resource providers. The story of Promon, a Brazilian engineering company, illustrates the advantages of orchestrating a network.
Promon initially grew on the back of government funded infrastructure projects that were the mainstay business of Brazil’s engineering firms during the 1970’s and early 1980’s. This all changed when a fiscal crisis in 1986 prevented the Brazilian government from commissioning new projects and forced it to renege on existing contracts. Most Brazilian engineering firms collapsed in the face of this sudden-death threat and disappeared.
Promon survived and thrived while its competitors floundered, in large part, because the company successfully transformed itself into an innovative systems integrator for the telecommunications, power and industrial segments. As an illustration, one joint-venture formed by Promon has 82 employees who supervise a project with 1,907 workers representing 573 separate subcontractor companies. Promon rolled out this system throughout the 1990’s. System integration projects increased from less than 20% in the late 1980’s to over 90% by the end of the 1990’s.
The company developed sophisticated skills for forging and managing partnerships, which allowed it to increase net revenues (including both revenues for services and the value of goods and services procured under its responsibility) from $10 million in 1987 – the year after the Brazilian government’s fiscal crisis – to $852 million in 2008, while decreasing total staff from 4,000 to approximately 1,360 professionals over the
After the September 11 terrorist attacks, the aviation industry witnessed a severe decline in air travel, which translated into cancelled contracts for airplanes and sharp reductions in purchases planned for the future. Aircraft producers like Embraer had already committed significant resources to building planes – aircraft that they could no longer sell. Between August 31st and December 31st, 2001, Embraer’s inventories grew from $600 million to $1.1 billion, absorbing $500 million in cash in four months.
CEO Mauricio Botelho later remarked: “If we did not have cash at hand and weren’t flexible, we would probably be dead right now”. But by building a cash cushion during the relative lull in the airline industry in the late 1990s, Embraer was able to survive 9/11. Embraer also shifted production to military aircraft to capitalize on rising demand from the defense sector after the terrorist attacks. Embraer’s operational improvements also conferred the flexibility to respond to the September 11 slowdown. Botelho described the situation:
We were increasing our production from 14 to 20 aircraft per month from January to December 2001. On August of that year, we had delivered 18 aircraft. Then, September 11th came and we immediately, by the end of September, announced our actions to face the new scenario. We visited all our customers, studied the impact on their operations, and then studied the impact on us. And we reacted very promptly, adjusting our man power, our course and everything to a new delivery scheme of 10 aircraft per month. We adjusted from 18 to 10 aircraft per month overnight. Flexibility is mandatory, and the downturn forced us to lay off 1,800 employees (14% of total) and reschedule our production line.
One might be tempted to attribute Embraer’s resilience to luck. After all, Embraer was at the right place to capitalize on the boom in demand for regional jets. However, a comparison with competitor Fairchild Dornier
As a state-owned enterprise, Embraer had long suffered under stifling bureaucratic processes. One long-time employee recalled, “Embraer was subject to many procedures, norms and government audits, which contributed to bureaucratizing the company, setting barriers to its efficient operations.”
Founder and long-time CEO Ozires Silva initially wanted to establish Embraer as a private firm, and resorted to government funding only after failing to persuade private investors to finance such a risky enterprise. Under Silva’s leadership, Embraer was not as bad as many other state-owned enterprises in Brazil: bloated infrastructure, over-politicized appointments and lack of long-term financing. But it still suffered from the bureaucracy that often plagues state-owned enterprises.
However, government influence prevented Embraer from promoting employees based on merit, responding quickly to changing market conditions, or developing sophisticated financial engineering strategies. Nevertheless, his successor dramatically increased the organization’s agility through a number of steps.
- Delayer and organize around customers. To reduce the distance from the top to the bottom of the organization, Botelho reduced the number of managerial levels from seven to five. By 1996, Botelho
The period between 1997 and 2000 proved relatively calm for Embraer, at least by the standards of the global airline industry and the early 1990s in Brazil. As the sales of the ERJ-145 took off, Embraer executives took advantage of the break in the action to position the company to seize future opportunities and avoid or respond to sudden-death threats that might emerge in the future.
- Continuously improve operating efficiency Although Embraer had a long history of new product innovation, the company’s engineering prowess had not translated into efficient production processes. Embraer had introduced quality improvement programs in early 1985, but these were executed in a fragmented and half-hearted manner. In 1996, Embraer top executives initiated a business process redesign project to implement Total Quality Management techniques in all of the company’s processes. Embraer also worked with external partners including McDonnell Douglas, Boeing, and the International Organization for Standardization to provide external certification of quality, as well as guidance on how to improve Embraer’s internal processes to achieve higher quality targets. Embraer also invested heavily in information technology – not only for the design and engineering, but for all financial reporting systems as well. These actions together enabled Embraer to cut its production cycle by half, while increasing revenues per employee five-fold.