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
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,
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
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
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
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.
- It’s not about IT. Information technology factors were ranked as the three least important
I recently published a McKinsey Quartlerly article and video interview on how organizations navigate turbulent markets. The article, in a nutshell, argued that organizations can be agile in three distinct ways: Operational agility (think Wal-Mart or Tesco) refers to a company or business unit’s ability, within a focused business model, to consistently identify and seize opportunities more effectively than rivals. Portfolio agility (think P&G or GE in its prime) is an organization’s capacity to quickly and effectively shift resources out of less promising businesses and into more attractive opportunities. Finally, strategic agility describes an organization’s ability to identify and seize game-changing opportunities at they arise, and helps explain the long-term success of companies like Oracle and Banco Santander.
Along with the article, McKinsey Quarterly conducted an on-line survey whereby readers could assess their own organization in terms of the factors that foster operational, portfolio, and strategic agility. The survey consisted
My last post described strategic agility as a means by which US Marines allocate scarce resources to their most productive use, despite facing situations in constant flux, incomplete information, time pressure, and high stakes. Strategic agility focuses on plunging into the action, remaining alert to unexpected opportunities, retreating in the face of established resistance, and vigorously exploiting opportunities when they arise. The rise of Tingyi, a leading Chinese food company, illustrates strategic agility in action.
Based in Tianjin and traded on the Hong Kong stock exchange, Tingyi booked 2008 revenues of US$4.3 billion, EBITDA of US$625 million, and had a market capitalization of US$6 billion at the end of that year. Tingyi controls “Master Kong,” one of the best recognized consumer brands in China, as well as a distribution network of over five hundred sales offices serving nearly six thousand wholesalers and seventy thousand retailers. According to ACNielsen, at the end of 2008 Tingyi was the leader in China’s market for instant noodles with 51% share, ready-to-drink tea with 43% market share, and number two in sandwich crackers with one-quarter of the market.
Tingyi’s success in China was neither inevitable, nor particularly likely. Tingyi traces its origins to the Ting Hsin
My last post discussed Warfighting, the US Marine Corp manual that characterizes combat as disorderly, uncertain, fluid and plagued by friction that makes “the simple difficult and the difficult seemingly impossible.” This post focuses on resource allocation in turbulence, specifically how an officer with limited troops, ammunition, and attention can commit the resources under his control to achieve the greatest impact.
Allocating scarce resources entails difficult trade-offs even in stable circumstances. But Marines face the added complications of a situation in flux, acute time pressure, incomplete and often conflicting data, an enemy attempting to anticipate and thwart their plans, all with life and death at stake. Warfighting outlines principles that help Marine officers allocate resources in real time, without resorting to the fiction that they can predict how battle will unfold. Below is my synthesis of the Marine Corps’s principles as they relate to resource allocation in turbulence:
Plunge in without overplanning. Officers can plot strategy in the map room, but battles are won or lost in the field. Marine Corps officers plan, of course, but they also recognize the limitations of their plans. Not even the best informed or most experienced officer, can foresee how an engagement will unfold. Rather than spend endless hours honing the perfect plan, Marines develop a good enough plan. Many follow the 70 percent solution— if they have 70 percent of the information, do 70 percent of the analysis, and feel 70 percent