performance culture

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.

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.

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 nature of work has shifted in the century since Henry Ford introduced the Model T. Today, activities adding the most value–entering new markets, for example, or shifting business models–cannot be reduced to standardized operating procedures. Economic activity has migrated beyond the boundaries of the firm and now takes place in an ecosystem of organizations that are interlinked but independent.

While work has changed, the tools to get things done have not. Executives invoke hierarchical power in a networked world, and try to standardize non-routine activities. Leaders rely on power and process not because they work, but because they are familiar.

An alternative approach frames an organization not as a hierarchy of power or bundle of processes, but as a set of overlapping networks of commitments that extend up and down the chain of command, across units within the organization, and beyond the boundary of the firm. Effective execution, in this view, occurs when people make the right commitments and fulfill them with vigor. Organizations can enhance the quality of execution by requiring public commitments, which confer five key benefits.

Execution is about getting things done. When driving execution in their organizations, hard-nosed managers dismiss talk and demand action. Phrases like “cheap talk,” “all talk, no action,” and “rhetoric versus reality” illustrate the common distinction drawn between talking.

This bias for action reveals a deep-seated belief that action changes the real world, while talking is mere commentary. Sports announcers (and fans in pubs) debate England’s disappointing performance against Algeria, but their conversations have no impact on the result. Action, in contrast, takes place when players like Wayne Rooney or Steven Gerrard step on the field and take charge of the game.

This apparently sensible distinction between talk and action ignores a crucial insight: In many situations, talking is doing. When people make a sincere promise to do something in the future, they are not merely commenting on the real world. Instead, their commitment can change the situation in a meaningful way, particularly if it induces other people to change their behavior based on the promise.

The head of engineering in a software company, for example, might make a promise to his counterpart in

Many executives, consultants, and academics focus their effort on crafting the perfect strategy. assuming formulation is the hard part, while implementation is straightforward. They maximize the brilliance of their strategy, while treating execution as a thresh-hold variable that must be met.

This approach is wrong-headed. Instead of maximizing strategic elegance and accepting satisfactory execution, executives should formulate a good-enough strategy and maximize their ability to execute. Many industries exhibit limited variation in strategy, while winners separate themselves from also-rans through execution.

Many managers equate execution with process discipline. Six sigma or ISO certification, in their minds, measures of an organization’s ability to execute. But as I have argued in previous posts, the standardization that allows continuous improvement in processes also impedes the execution on novel initiatives. Motorola pioneered six sigma quality program, but look where that company is today.

The most important corporate initiatives are often non-routine. These include projects to integrate company mergers, fill market gaps that fall between current business units, roll out large-scale IT systems and develop innovative solutions to new customer needs. Promises, or employees’ personal pledges to stakeholders within and outside an organization, offer an alternative way to execute on non-routine activities with vigor.

A firm, in this approach, is less a bundle of standardized processes than a network of interconnected commitments to get things done. These promises extend up and down the chain of command, across units, and beyond the boundaries of the firm. Along with my co-author Charles Spinosa, I have studied what makes for effective promises in dozens of organizations. We have found that the best promises share five characteristics; they are public, active, voluntary, explicit, and include a clear rationale for why they matter.

Many people have contributed to our understanding of agility, but few have contributed more than John Boyd. My last post described how U.S. fighter pilots dominated their adversaries during the Korean War despite inferior planes, fewer of them, and less secure bases. The secret of their success remained poorly understood until US Air Force Colonel John Boyd studied the Sabres several years later, while developing a next generation fighter plane.  Boyd, it turns out, was ideal for the job.  By the end he not only cracked the mystery of the Sabres’ success and designed the new plane, but also re-conceptualized combat in a way that highlighted how agility can trump superior resources or position.

John Boyd, then a Lieutenant, landed in Suwon South Korea in March 1953 hoping he would not arrive late for his second war. Nine years earlier, Boyd–then a high school senior–had enlisted in the U.S. Army Air Forces (the precursor to the Air Force), hoping to serve as a pilot in the Second World War. Upon completing high school, Boyd enlisted for active duty in April 1945, and was still in training when the war ended. Boyd served out the remainder of his military obligation as a swimming instructor.

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).

  1. Do leveraged buyout firms create economic value? Excluding fees, leveraged buyout firms

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 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

Leading in turbulent times

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Don Sull is professor of management practice in strategic and international management, and faculty director of executive education at London Business School. This blog is dedicated to helping entrepreneurs, managers, and outside directors to lead more effectively in a turbulent world.

Over the past decade, Prof Sull has studied volatile industries including telecommunications, airlines, fast fashion, and information technology, as well as turbulent countries including Brazil and China, and found specific behaviours that consistently differentiate more, and less, successful firms. His conclusion is that actions, not an individual’s traits, increase the odds of success in turbulent markets, and these actions can be learned.

Don Sull’s blog: a guide

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Managing in an Unpredictable World
A series of video lectures by Professor Don Sull

Part 1: Fog of the future
Part 2: Future reconnaissance
Part 3: The strategic agility loop
Part 4: Executing with commitments
Part 5: Leading into the fog

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