Identifying opportunities early is necessary, but not sufficient, to seize them. A company must also be able to strike decisively when the time is right. Managers at Brazil’s Banco Itaú recognized that the privatization of state banks freed a new set of valuable resources – customer relationships and locations which had not been obtainable previously, and Itaú spotted the value in these banks before its peers. Equally important was top executives’ willingness to declare the acquisitions as the main effort and redeploy whatever human and financial resources were required to seize the moment. Below some key insights:
- Mobilize best people for golden opportunity. As with experiments, it is critical to put the best people on the best opportunities. Itau’s CEO commissioned one of the most senior members of his team, a Senior Vice-President and Board Member, to spearhead the analysis of opportunities created by the privatization process. And this SVP, in turn, quickly appointed some of the bank’s most promising executives to form a fifty-person task force to evaluate the opportunity and create a post-acquisition plan in case Itaú decided to make an acquisition. Make no mistake, the managers appointed to lead this initiative were not corporate rejects whose careers were stagnated, rather they were among the most promising managers in the company, responsible for running its most profitable lines of business. Assigning them to this opportunity represented a real commitment on the part of Itaú executives.
- Rapid approval processes. Sometimes, seizing a golden opportunity comes down to signing a deal
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.
- IN-BOUNDS.Firms often use the term experiments to justify undisciplined forays outside their core market. The best experiments, in contrast, fall squarely within a firm’s declared strategic domain. The
Even in the most volatile environment, companies do not face a constant rush of golden opportunities. Instead, periodic golden opportunities are interspersed among many smaller chances. The trick is to keep in the information flow, talk through alternative scenarios, and keep discussing possible opportunities as a management team to decide identify the most attractive.
In the case of Itaú, the golden opportunity came with the privatization of state-owned banks beginning in the mid-1990’s. The Federal Government decided to privatize most public companies in telecommunications, energy, and banking to attract capital to these sectors after years of underinvestment. Roberto Setubal – a member of one of the families that controlled the bank – was appointed Itaú’s CEO in 1994 in the midst of this privatization. In addition to a variety of operational positions in the bank, Roberto Setubal had received a masters degree in engineering from Stanford University, and apprenticed under John Reed, the legendary former CEO of Citibank. Setubal’s breadth of experience helped him to quickly realize that the privatization process was a decisive opportunity for the bank’s future.
Between 1995 and 2002, Itaú purchased eight large banks. Major competitors, including Banco Bradesco and Unibanco, were less aggressive in acquiring assets during the privatization period. Itaú’s ability to see this opportunity was not the result of luck. Rather, the top management team had actively gathered and processed data to identify and evaluate potential opportunities:
- Stay in the flow of information. In a constantly changing environment the top management team must
Consolidation of the Brazilian banking sector in 2001 reached the final stage in the seven-year cycle, which began with the implementation of the Real plan. During this cycle, the competitive environment has been altered by the privatization of basically all the state-owned banks, the restructuring of the federally-owned banks, the absorption of many large private-sector Brazilian banks, and by a free market for international banks…Itaú is clearly one of the winners in this consolidation process. Olavo Setubal, chairman of Banco Itaú, 2001 letter to shareholders
Setubal had good reason to feel proud. Between 1995 – the first year after the Real plan stabilized Brazil’s inflation – and 2001, Banco Itaú (Itaú) posted an average return on equity of 21%, grew its asset base from $25.1 billion to $34.8 billion, and enjoyed the highest market capitalization of any private sector bank in Latin America.
Itaú’s performance was particularly impressive when compared to its rivals. Itaú posted significantly better returns on equity than other Brazilian banks. Itaú’s performance allowed it to avoid the fate of Mexican and Argentinean banks, which were for the most part displaced or acquired by multinational banks once their markets were opened to foreign competitors.
Banco Itaú, however, had not always been one of Brazil’s premier banks. The bank was born in 1945 as Banco Central de Crédito, and for its first twenty years remained a credible, but small regional player. Between 1964 and
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
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.
- Increase peer pressure to perform. Many executives rely on their positional power to drive execution. In
In 1964, the Metropolitan-Dade county government completed construction of a new Miami port that accelerated the growth of the nascent Caribbean cruise industry. Throughout the next fifteen years, dozens of start-ups, including Royal Caribbean and Carnival, retrofitted existing ships to offer pleasure cruises. Established transatlantic cruise companies, such as Hamburg America Line and the White Star Line, which transported tens of millions of immigrants from Europe to the United States in the late 19th century, failed to seize the opportunity.
Incumbent cruise lines had every incentive to exploit the new market. The rise of non-stop commercial flights between Europe and North America decimated demand for transatlantic passenger cruises, produced massive overcapacity, and wiped out industry profits. They also knew about the market. For decades, European passenger lines had sailed overnight cruises to Caribbean ports with departures from Miami as a way to utilize their ships during the Winter, when rough waters limited Atlantic crossings.
Managers and entrepreneurs walk past lucrative opportunities all the time, and later kick themselves when
Throughout history, leaders have relied on a linear process of predicting how events will unfold, planning a sequence of actions far into the future, and proceeding to systematically implement their plan. A diverse range of leaders–including central planners managing the Soviet economy; army generals who plotted attacks on World War I trenches to the last bullet; and programmers scheduling a detailed plan for a multi-year software development project–have followed this methodical approach. The linear process of predict, plan, and proceed instills a sense of control over an uncertain future. This sense of control is illusory, however, and this confidence misguided for two reasons.
- Premature lock in. A linear planning approach by necessity must exclude information that will only emerge in the future. The implementation of a plan produces new information about the validity of the underlying assumptions, and the passage of time generates other data that bears on the initial plan. By locking into a plan at the onset of an initiative, leaders voluntarily exclude critical information that will emerge in the future. Software programming illustrates the disadvantages of following a linear plan into
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.
Soldiers, scientists, entrepreneurs, venture capitalists, improvisational comedians, and athletes must all act–and act decisively–despite facing an impenetrable fog of the future. Over the past decade I have studied action under uncertainty in a variety of domains to glean insights that could prove useful to managers facing turbulent markets. One of the most robust findings was the value of iterative loops when proceeding into an uncertain future. These iterative loops include distinct steps to make sense of an ambiguous situation, make choices, execute, and then revise in light of new information. Variations of the agility loop have emerged as useful tools to guide scientific experimentation, aerial combat, software development, and venture capital investments. My next several posts will discuss how loops can promote agility in turbulent domains, beginning with an unexpected military success that triggered a fundamental rethinking of military doctrine.
As the Korean War began, the situation looked bleak for the US pilots and their allies fighting under the United Nations flag. North Korea, along with the Soviet Union and Peoples Republic of China, could field more jets, and flew superior planes. The American-made F-86, nicknamed “the Sabre,” had entered active service only the preceding year and was unproven in combat. The Sabre’s swept back wings cut a fine profile, but at the time few experts considered it equal to its Soviet-produced counterpart, the Mikoyan-Gurevich (MiG) 15.