In my last post, I argued that turbulent markets demand portfolio agility–an organization’s capacity to reallocate cash, people, and other resources from stagnant or declining businesses into promising opportunities, and do so in a timely manner. Effective portfolio agility consists of both investment and disinvestment. Unfortunately, most companies are better at getting into new businesses than they are at getting out of declining subsidiaries or ones that no longer fit as the corporate strategy evolves. Firms can rarely avoid disinvestment forever, but they often delay the inevitable for far too long. These delays consume scarce resources, and starve promising initiatives of the cash they need to succeed.

Research has shown that companies regularly divest businesses to re-balance their portfolio. In a study of 9,276 deals completed by 86 of the Fortune 100 firms in the 1990s, Belen Villalonga and Anita McGahan report that the median number of divestitures was 17 for firms they studied. Divestitures were almost as common as major acquisitions–the median for firms in their sample was 19 completed acquisitions over the same time Continue reading "Slow exit: Delayed disinvestment and value destruction"

When I ask executives to list examples of agile companies, they often mention firms such as Tesco, Southwest Airline, or Wal-Mart, which excel at operational agility–the ability to seize opportunities within a focused business model. Operational agility is important, but it is not the only way that firms can exploit changes in their environment. Diversified companies including Johnson & Johnson, Goldman Sachs, Samsung Electronics, and the Tata Group exemplify portfolio agility, or the the capacity to quickly and effectively shift resources, including cash, talent, and managerial attention out of less-promising opportunities and into more attractive ones.  Fluid reallocation of resources is necessary in turbulent markets, but many companies struggle to achieve portfolio agility.  Below are five prerequisites for portfolio agility.

1) Diversified portfolio. The broader the range of business units, geographies, or products a firm encompasses, the greater scope it will have for portfolio agility. The conventional wisdom holds that the disadvantages of diversification–including loss of focus, subsidization of under-performing units, organizational complexity, and potential for empire building by top executives-outweigh the advantages. Conglomerates, as a result, trade at a “diversification discount.” My last post argued that the benefits of diversification–protection against unexpected threats and exposure to growth opportunities–are more valuable in turbulent markets. Firms can gain the benefits of diversification while minimizing the costs in several ways: Firms can, as General Electric does, give business units a great deal of autonomy to achieve their profit and loss objectives.  Companies can also minimize complexity and maintain focus by diversifying around a set of core competencies, as Procter & Gamble does with multiple products that all draw on the company’s marketing expertise, or firms can stick to a core business but diversify across global markets.

2) Disciplined processes for revisiting investments. Portfolio agility requires a process to evaluate the existing portfolio of business units, regions, products, or customers on a regular basis to reallocate resources from less to more productive uses.  In turbulent markets, the relative attractiveness of opportunities shift more rapidly than in stable contexts, necessitating more frequent reviews.  A disciplined process is conducted by Continue reading "Five requirements for portfolio agility"

Academics, managers, and investors agree with near unanimity that corporate diversification destroys value. In their best-seller, In Search of Excellence, Tom Peters and Robert Waterman argued managers should “stick to the knitting” by focusing on the business they know best. Their argument presaged a series of management articles and books using different terms–including “core competency,” “unbundling the corporation” and “profit from the core“–to make the same point: Firms should focus on activities and markets where they have a sustainable competitive advantage. Diversification, according to this line of thought, dissipates attention and resources and breeds complexity. Outsourcing, off-shoring, and alliances allow firms to offload peripheral activities and focus narrowly on discreet activities where they excel.

A series of studies by financial economists documents a correlation between diversification economic value destruction. Philip Berger and Eli Ofek find that diversified firms trade at a discount of approximately 15% compared to focused competitors in the same industry. Larry Lang and René Stulz show that a firm’s diversification is negatively correlated with its Tobin’s Q (a firm’s market value divided by the book value of its Continue reading "Rethinking the “diversification discount”"

Most managers (90% according to two recent surveys) agree that agility is important to succeed in turbulent markets. There is less agreement on precisely what agility is. My research on companies competing in turbulent markets reveals three distinct types of agility: operational, portfolio, and strategic. Operational agility is a company’s capacity, within a focused business model, to consistently identify and exploit opportunities to create economic value, and do so more quickly than rivals. Toyota, Wal-Mart, Southwest Airlines, and British grocery chain Tesco are good examples of operational agility.

Opportunities are not defined by their novelty, per se, but by their ability to create economic value. Economic value is the gap between a customer’s willingness to pay for a good or service, Continue reading "Operational agility at Toyota"

The Counter-Reformation bred a host of new religious orders, but within a few decades the Jesuits rose above the others newly-formed religious orders in terms of size, global spread, and influence. My last post described how the Jesuits attracted talented priests and allocated them to the most promising opportunities, and the post before that introduced the remarkable success of the early Jesuits as depicted in John O’Malley’s outstanding history The First Jesuits. O’Malley demonstrates that Ignatius of Loyola did not have a clear master plan to guide the Society of Jesus in its early years. Rather the early Jesuits explored multiple ministries, pulled back from those that didn’t work, ramped up those that did, built a cadre of priests who could be deployed against any opportunity that arose, all without losing sight of their overarching mission to save souls.

The Jesuit’s approach is best characterized as “strategic agility,” or an organization’s ability to seize opportunities to achieve long-term goals as they arise and build the resources–including people, cash, and brand–to exploit unforeseeable opportunities. Strategic agility combines clear long-term mission (saving souls for the Jesuits) with a recognition that the best opportunities cannot be planned in advance. Strategic agility describes how organizations including Chinese food leader Tingyi and the U.S. Marine Corps proceed into a foggy future. The early Jesuits illustrate key principles of strategic agility in action:

• Plunge into the fray. In uncertain situations, plunging into the fray is a better way to spot opportunities than contemplating the situation from a far.  The early Jesuits emphasized “the world is our

Continue reading "Strategic agility: The early Jesuits"

The first Jesuits, as portrayed by Professor John W. O’Malley, S.J. in his book of the same name, excelled at seizing unexpected opportunities to fulfill their mission of saving souls. In its first two decades, the Society of Jesus spread throughout Europe, and expanded into Brazil, India, Ethiopia, and Japan, grew from nine founders to over three thousand members, and exerted influence disproportionate to its size by educating children of the ruling elites.

The Society of Jesus relied on highly-trained priests to staff the order’s various ministries. The geographical distribution of the early Jesuits and the slow pace of communication in the Sixteenth century (a letter and response from Rome to Jesuit missions in India or Japan could take three years) meant left missionaries with great autonomy. The diversity of contexts in which Jesuits operated demanded judgment in assessing a novel situation and flexibility in responding to circumstances. The order’s success depended on how well it identified, attracted, and retained promising candidates for priesthood, and put them to their best use.

Viewed in organizational terms, the early Society of Jesus was a precursor to the modern professional service firm–in fields including accounting, law, consulting, or investment banking–where highly trained Continue reading "Agility through people: Five lessons from the early Jesuits"

A few years ago, over lunch in an Indian restaurant near Harvard Square, I learned that one of the best examples of organizational agility was founded in 1540 through a papal bull issued by Pope Paul III. My lunch companion was Father John W. O’Malley, a leading historian of the Renaissance church, member of the American Academy of Arts and Sciences, and a Jesuit priest.

O’Malley spent years researching the early decades of the Society of Jesus, often refered to as the Jesuits, poring over the Monumenta Historica Societatis Iesu, a 157 volume record of the early years of the Jesuit order including letters from the founding members, rules and directives, and quarterly reports on the state of the order. O’Malley’s research resulted in The First Jesuits, the definitive study of the first quarter century of the order, which won the American Philosophical Society’s prize for the best cultural history published that year. O’Malley’s book strips away many of the stereotypes and misconceptions that have surrounded the Jesuits over the centuries, and presents an unvarnished account of the foundation and early decades of the order.

And what a story it is. The Society originated at the University of Paris between 1528 and 1536 as a group of Continue reading "Organizational agility and the Jesuits"

My last post presented findings from a survey on organizational agility that I conducted with McKinsey Quarterly. This post explores findings from two earlier surveys on agility.  In June 2006, McKinsey Quarterly conducted a survey, collecting responses from 1,562 executives from public and private companies across a range of industries. The Economist Intelligence Unit (EIU) survey, conducted in December 2008 and January 2009, included responses from 349 executives with 49% from three European countries (UK, France, and Germany), 19% from the United States and Canada, and the remainder from Singapore, Australia and New Zealand. The EIU respondents represented eighteen industries, and nearly one-third had revenues in excess of $5 billion.

The precise definitions of agility varied between the two surveys. For McKinsey, agility is linked to speed and defined as an organization’s “ability to change tactics or direction quickly…to anticipate, adapt to, and react decisively to events in the business environment.”  while the EIU defines it as how firms “respond quickly and nimbly to the changing environment.” Both definitions share a focus on how well a firm anticipates and responds to environmental changes.

1. It’s not about IT. Information technology factors were ranked as the three least important

Continue reading "Five things we know about organizational agility"