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
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
How can managers survive and thrive in unpredictable markets? To shed light on this question, I and my co-author Martin Escobari, who is now a managing director of Advent International in Brazil, analyzed ten Brazilian companies that managed to survive and thrive amidst the turmoil of the Brazilian market during the 1990’s. In several cases these companies emerged as world-class competitors in global industries including aerospace, brewing and banking.
We published our findings in the book Success Against the Odds. My posts through the rest of the summer will draw on our research and this book to bring to light some of the impressive success stories and the broader principles they illustrate about thriving in turbulent markets.
These firms’ success is an impressive accomplishment, because Brazil is one of the most unpredictable markets in the world. Brazilian managers during the 1990’s faced volatile exchange rates, sporadic availability of capital, inconsistent industrial policy, unpredictable rates of inflation and interest, and sharply increased levels of foreign competition, in addition to the competitive threats, shifting consumer preferences, and potential technological disruptions common to every country.
An elite group of Brazilian companies not only survived this turmoil, but actually emerged stronger at the end of the last decade. They responded quickly and effectively to shocks that threatened their very survival and
The model of emerging market innovation that most people have in mind is a multinational corporation pioneers a novel product or service in their sophisticated home market, drops some features and cuts the price, and then exports the stripped-down innovation into emerging markets.
Increasingly, however, innovation flows the other way. Companies develop a product that appeals to emerging market consumers who combine discerning tastes with low disposable income, then managers quickly recognize that these products would appeal to some segments within mature markets as well.
At a recent London Business School panel on multinationals in emerging markets, I had the chance to discuss this reverse innovation with Paul Bulcke, CEO Nestlé; Anshu Jain, who runs Deutsche Bank’s investment banking business; Vittorio Colao, the CEO of Vodafone; and John Connolly, the global chairman of Deloitte.
- Distinguish between emerging consumers and emerging markets. Paul noted that Nestlé distinguishes
Yesterday the London Business School held its annual Global Leadership Summit, I moderated a panel on how multinationals can seize opportunities in emerging markets. My panelists were Paul Bulcke, CEO Nestlé; Anshu Jain, who runs Deutsche Bank’s investment banking business; Vittorio Colao, the CEO of Vodafone; and John Connolly, the global chairman of Deloitte. (The podcast of the full panel is here).
Emerging markets are important for each of these companies. Vodafone books 22% of its revenues in emerging markets including India, Egypt, and Turkey. Deutsche Bank earns about €3 billion in these markets. Currently emerging markets account for approximately 32% Nestlé total sales (and more than half the firm’s factories), but Nestlé intends to increase revenues from emerging markets to 45%. Deloitte has about 15% of headcount in the BRIC countries.
One of the questions we discussed was other than their own company, which multinationals do the panelists most admire for their performance in emerging markets. Their answers are interesting.
- Tesco. John noted that by the end of this year, Tesco will have more retail space in Asia than the UK.
Entrepreneurs and managers can consciously design experiments to surface flaws in their business plan and spur revision. An entrepreneurial experiment, as I use the term, is a test designed to reduce uncertainty critical to success before committing additional resources. Common examples include customer research, prototypes, regional service, and beta customers. Based on the results of these experiments, entrepreneurs may decide to cut their losses, revise their working hypothesis and run another experiment, or harvest the value they have created. Below are some examples.
- Identify the deal killers. Every plan includes countless assumptions. Rather than worrying about all of them, an entrepreneur should identify potential deal killers, variables that could prove fatal. Deal killers vary: In commercial real estate development, title disputes or environmental liabilities could scotch a deal, while a software start-up faces a deal-killer if a deep-pocketed rival has a valid claim on the underlying intellectual property. Deal killers are often discernible early on, and managers and entrepreneurs should try to surface these critical source of uncertainty early. New deal killers may appear as the venture proceeds, while others prove tractable.
- Know what you are betting on. In turbulent markets, multiple variables influence the an opportunity’s
Entrepreneurs can pursue an opportunity much as scientists pursue knowledge–by following a disciplined process of identifying an anomaly in the market, formulating a plan to fill the gap, testing their plan in the real world, and revising their assumptions in light of new information. Menlo Park based ONSET Ventures, a venture capital firm focused on fledgling start-ups, has codified a set of practices that increase the odds that entrepreneurs formulate, test, and revise their working hypothesis in a disciplined fashion.
Since its founding in 1984, ONSET has backed over 100 early stage start-ups, 80% of which have gone on to receive subsequent rounds of financing, a much higher success rate than the average for investments in raw start-ups. When they co-founded ONSET in 1984, Terry Opdendyk and David Kelley (who also founded IDEO) conducted a systematic study of 300 seed stage ventures, with an eye to understanding the factors that influenced their ultimate success or failure. They found that a few factors accounted for most of the variation between successful and failed start-ups, and codified these findings into a set of principles for incubating new ventures.
- Simplify the working hypothesis. When selecting potential investments, ONSET partners use a set of
Firms do not pass through a life-cycle, but individual opportunities do. To thrive in turbulence, organizations must rapidly shift resources from stagnant businesses to the most promising opportunities for future growth, a capability I refer to as portfolio agility. Unfortunately, reallocation of resources is easier said than done.
Opportunities at different stages in the life-cycle vary in objectives, appropriate management style, performance metrics, and predictability. A venture in the start-up stage should focus on milestones that validate customer demand and technical feasibility, for example, while success of a mature business can be measured by financial metrics. Many companies, however, apply a one size fits all management style to all businesses in their portfolio, regardless of their stage in the lifecycle.
This Friday, the London Business School Private Equity and Venture Capital Club hosts its annual Private Equity Conference. I will moderate the closing panel discussion called “Value Creation: Overtaking Leverage?” that will explore how buyout firms can create value not by piling on debt, but by improving the operating performance of their portfolio companies. This is a particularly topical issue right now, as debt has become more expensive, financing terms more onerous, and market conditions more challenging for portfolio firms.
In preparation for the panel, I have reviewed recent research–largely by financial economists–on private equity, operational improvement, and value creation. Recent papers provide some very helpful, and in some cases surprising, insights into how late-stage private equity firms add value. Below is a selective review of papers that bear on a set of questions related to how leveraged buyout firms create economic value through operational improvements. (For comprehensive reviews of private equity trends, see papers by Cumming et al. and Kaplan and Stromberg).
- Do leveraged buyout firms create economic value? Excluding fees, leveraged buyout firms
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