Information systems and organizational hydraulics are the hardware of operational agility, but culture and people represent the software that bring the processes to life. The companies that I have studied that excel at operational agility share a common set of values, with performance (aka achievement or meritocracy) at the heart of the corporate culture. Companies that excel at operational agility do not rely on a grand strategic coup, but win by consistently out-executing rivals time and time again. Relentless execution requires continuous injections of urgency, effort, and enthusiasm. To induce the effort required to win consistently over time, the corporate culture must recognize, prize, and celebrate performance above seniority, power, expertise, or anything else.
A culture that rewards only individual performance can quickly degenerate into a dog-eat-dog environment
Organizational hydraulics translate corporate priorities into coordinated action throughout the organization. Hydraulics include processes to select overarching priorities, translate them into individual performance objectives and cascade them down the chain of command, monitor progress, and reward performance. When a firm’s hydraulics are broken, top executives must exert heroic effort to get things done, while well-functioning processes allow an organization to execute effectively on priorities, even when these priorities shift in response to changing market conditions.
In recent decades, few markets have been more turbulent than Brazil, and few firms demonstrated greater agility than Garantia Bank and its affiliated companies, including the brewer AmBev, retailer Lojas Americanas,
Leaders recognize the value of agility in turbulent markets, but are often less clear on how they can enhance their own organization’s ability to identify and seize opportunities more effectively than rivals. Over the past decade, I have analyzed more and less successful firms in some of the world’s most turbulent markets, including China, Brazil, European fast fashion, and financial services. My research revealed three distinct forms of agility-operational, portfolio, and strategic agility.
Operational agility is a company’s capacity, within a focused business model, to consistently identify and exploit opportunities more quickly than rivals. Toyota, Soutwest, and Zara exemplify this form of agility at the corporate level. In diversified groups, operational agility occurs (or doesn’t) within discrete business units. Opportunities create economic value either by raising a customer’s willingness to pay (which translates into higher price or volume) or by reducing costs. The best firms exploit both types of opportunity with equal fervor. Toyota, for example, has consistently anticipated consumers’ shifting preferences-for quality, fuel-efficiency, and environmental impact-and introduced vehicles to meet emerging needs. At the same time, Toyota’s production system weeds out activities that do not add value for customers.
Toyota illustrates another aspect of operational agility. Firm’s should exploit revenue and cost opportunities
With the worst of the economic crisis behind them, many executives look forward to a period of stability and predictability when companies can return to business as usual. They are likely to be disappointed. Market turbulence did not begin with the fall of Lehman Brothers, and it will not end when the global economy recovers. As I’ve noted in an earlier post, scholars using a variety of measures including stock price volatility, firm mortality, persistence of superior performance, frequency of economic shocks, and speed of technology dissemination. have converged on the finding that volatility at the firm level has increased somewhere between two- and four-fold between the 1970s and 1990s. Turbulence, in other words, was on the rise before the current recession began, and there is little reason to believe it will retreat end when the global economy recovers.
In turbulent markets, business leaders recognize the value of organizational agility in dealing with rapid-fire change. A recent McKinsey survey found that nine out of ten executives ranked
While trying to understand the sources of economic profit, the economist Frank Knight introduced a powerful distinction between risk and uncertainty. Knight’s distinction is more nuanced and interesting than the caricature view that his critics dismiss. In my view, the difference between risk and uncertainty hinges on the range of possible actions an investor, manager, or entrepreneur can take to achieve their desired result.
Clear choices and risk
People encounter risk when they face what I call a “clear choice,” where an agent can specify, in advance the possible outcomes relevant to their actions. A gambler, for instance, knows that there are precisely 38 possible pockets where the roulette ball could land, and where the ball lands will influence whether his bet pays off or
Market volatility has undermined the credibility of models in macro-economics and finance. Lacking accurate maps to navigate the current turbulence, investors, scholars, and managers are spending more time pondering uncertainty and risk. These topics can lure even hard-nosed thinkers into fuzzy rumination–recall Donald Rumsfeld’s distinction between known unknowns and unknown unknowns. In these unsettled times, it worthwhile revisiting the contribution of Frank Knight, an economist who was among the earliest and most penetrating analysts of what uncertainty and risk meant, and how they influenced a firm’s ability to make a profit.
Although few people recognize his name today, Frank Knight was one of the most influential economists of the last century. Knight joined the economics faculty of the University of Chicago full-time in 1928, and remained there until his retirement in 1972. In his forty four years, he co-founded and shaped the “Chicago School” of economics that produced many of the Twentieth Century’s giants of economics, including Milton Friedman, Ronald Coase, and Gary
The final stage in globalizing is less a step and more a long march. After adopting a global mindset and giving their commitment teeth, executives must make a series of organizational changes–large and small–required to execute on their global strategy. To succeed on the global stage, a company must align its organizational realities with its lofty ambition.
Improving the organizational attributes required to compete globally often takes the best part of a decade, particularly for large complex enterprises. Samsung’s Chairman Lee was forced to realign most aspects of the group’s business model to deliver on his commitment to global leadership. When transforming their company to compete globally, owners and executives should focus on five key aspects of the organization: Strategic frames, Along with the Samsung case described in an earlier post, CEMEX (a leading global cement producer), provides another example of transforming an organization for global competition
Strategic frames refer to what managers see when they look at the world, and include definition of market, focal
Committing to a global mindset is only the first step in globalization. Just because the owner is committed to going global, there is no guarantee that the rest of the organization will follow along. Samsung’s Chairman Lee declared a “Second Foundation” in 1987, but found the group had made little progress six years later in moving towards global competitiveness. To commit the organization to globalization, Lee divested businesses, shook up management and made bold public declarations to global leadership in electronics.
Decisive actions to give the global mindset teeth serve several purposes: They convince employees and external stakeholders that top executives mean business, and that globalization is not simply the management fad of the month. Commitments trigger a sense of crisis, but also that management has a way forward. Finally, these
Making the leap from local player to a global firm often takes the better part of a decade. Owners and executives take the first step by committing to a global mindset. Many executives still view the world from the vantage point of their corporate headquarters. This mindset resembles the route maps found the in-flight magazine of local airlines, that places Chicago, Taipei, or Helsinki in the center of the globe with routes emanating outward in all directions. Only a small fraction of the planet’s population, however, sees the world in the same way. While your company may be doing very well against local rivals, the performance gap relative to global leaders may be enormous.
Entry into the global economy and WTO accession in particular are forcing managers in many emerging markets to develop a new mental map of the world. There are a few concrete steps they can take to accelerate this process. First, they can simply take a field trip to more developed markets to understand how they are viewed outside their home country. In February 1993, Samsung’s Chairman Lee convened a meeting of 23 senior executives of Samsung Electronics in Los Angeles. Before the meeting began,