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
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
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).
- Do leveraged buyout firms create economic value? Excluding fees, leveraged buyout firms
When I ask executives to list examples of agile companies, they often mention firms such as Tesco, Southwest Airline, or Wal-Mart, which excel at operational agility–the ability to seize opportunities within a focused business model. Operational agility is important, but it is not the only way that firms can exploit changes in their environment. Diversified companies including Johnson & Johnson, Goldman Sachs, Samsung Electronics, and the Tata Group exemplify portfolio agility, or the the capacity to quickly and effectively shift resources, including cash, talent, and managerial attention out of less-promising opportunities and into more attractive ones. Fluid reallocation of resources is necessary in turbulent markets, but many companies struggle to achieve portfolio agility. Below are five prerequisites for portfolio agility.
1) Diversified portfolio. The broader the range of business units, geographies, or products a firm encompasses, the greater scope it will have for portfolio agility. The conventional wisdom holds that the disadvantages of diversification–including loss of focus, subsidization of under-performing units, organizational complexity, and potential for empire building by top executives-outweigh the advantages. Conglomerates, as a result, trade at a “diversification discount.” My last post argued that the benefits of diversification–protection against unexpected threats and exposure to growth opportunities–are more valuable in turbulent markets. Firms can gain the benefits of diversification while minimizing the costs in several ways: Firms can, as General Electric does, give business units a great deal of autonomy to achieve their profit and loss objectives. Companies can also minimize complexity and maintain focus by diversifying around a set of core competencies, as Procter & Gamble does with multiple products that all draw on the company’s marketing expertise, or firms can stick to a core business but diversify across global markets.
2) Disciplined processes for revisiting investments. Portfolio agility requires a process to evaluate the existing portfolio of business units, regions, products, or customers on a regular basis to reallocate resources from less to more productive uses. In turbulent markets, the relative attractiveness of opportunities shift more rapidly than in stable contexts, necessitating more frequent reviews. A disciplined process is conducted by
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
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
In October 31, 1989 Mitsubishi Estate bought a controlling stake in the Rockefeller Group, owner of iconic buildings including Rockefeller Center and Radio Center Music Hall. The acquisition, for many, underscored the inevitable rise of Japan Inc. In the preceding decade, best-selling books like Clyde Prestowitz’ Trading Places: How we are Giving Our Future to Japan and How to Reclaim It and Ezra Vogel’s Japan as Number One confidently predicted that Japan Inc. would dominate wide swaths of the global economy by the 1990s. Instead, Japan lost a decade, and Japan Inc lost its luster.
In the past few years, firms from emerging markets have acquired high-profile firms. Mittal Steel bought Arcelor, while the Brazilian-Belgian brewer InBev acquired Anheuser Busch. Many North American and European managers reassure themselves that the rise of emerging market firms will repeat the Japan Inc story–initial success, followed by massive hype that ends in a fizzle. The analogy to Japan Inc is reassuring, but deeply flawed. This comparison ignores the underlying sources of advantage enjoyed by the best emerging