Lessons from Brazilian champions

July 23, 2010 5:59 am

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

Continue reading: “Lessons from Brazilian champions”

Tags: agility, Brazil, Embraer, turbulence
Posted in business models, creating value in a downturn, emerging markets, entrepreneurship, execution, leadership, mental maps, organizational agility, performance culture, talent, turbulence, value creation | Permalink

Disciplined entrepreneurship at ONSET Ventures

April 16, 2010 9:19 am

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
Continue reading: “Disciplined entrepreneurship at ONSET Ventures”

Tags: agility, agility loop, disciplined entrepreneurship, entrepreneurship, simple rules, venture capital
Posted in business models, entrepreneurship, execution, mental maps, organizational agility, simple rules, value creation | Permalink

Overcoming one-size-fits-all management

March 4, 2010 10:11 am

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.

Continue reading: “Overcoming one-size-fits-all management”

Tags: agility, corporate entrepreneurship, growth, horizons of growth, IBM, McKinsey, portfolio agility, start-up
Posted in business models, diagnostic exercise, execution, organizational agility, portfolio agility, turbulence, value creation | Permalink

The danger of sticking to your knitting

February 28, 2010 1:11 pm

Shifting market conditions require executives to reallocate resources across opportunities at different stages in their life-cycle. This sounds straightforward in theory, but many firms struggle to achieve portfolio agility in practice. Portfolio agility requires a diversified collection of units, a disciplined process, group control of resources, a cadre of general managers who can work on various businesses, and leaders willing to make the hard calls. In addition, several common pathologies, such as delayed disinvestment, systematically derail portfolio agility within organizations.

An over-reliance on value-based management can also impede portfolio agility, to the extent it prevents experimentation outside a company’s core activities. In the downturn, many firms have tightened their investment criteria, to focus on projects with a positive net present value, an approach that emphasizes credible forecasts of cash flow. The most credible forecasts, however, come from low-risk projects in known domains–sticking to one’s knitting, in management-speak. An investment process that values credibility and low risk above all else penalizes projects with uncertain outcomes, even

Continue reading: “The danger of sticking to your knitting”

Tags: agility, Blue Circle, Lafarge, portfolio agility, stick to your knitting, value based management
Posted in creating value in a downturn, emerging markets, organizational agility, portfolio agility, turbulence, value creation | Permalink

Private equity, operational improvement, and value creation

February 24, 2010 9:19 am

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
Continue reading: “Private equity, operational improvement, and value creation”

Tags: LBO, leveraged buyout, London Business School Private Equity Conference, operational improvements, private equity, returns to LPs, value creation
Posted in business models, creating value in a downturn, execution, organizational agility, performance culture, private equity, talent, The Upside of Turbulence, value creation | Permalink

Beyond the growth share matrix

February 16, 2010 8:56 am

Contrary to the conventional wisdom in management, companies need not pass through a life-cycle. Rather, individual opportunities pass through a life-cycle beginning with the start-up stage, followed by scaling the business, maturity, and decline. It is more accurate to view firms not as a monolithic entity, but as a portfolio of opportunities at various points in their individual life-cycles. How can executives visualize the businesses in their portfolio to manage them more effectively?

The standard method for evaluating a firm’s portfolio is to array them using a two-by-two matrix, such as the Boston Consulting Group’s popular growth-share matrix. The vertical axis of this matrix measures the growth rate of the market, and indirectly cash usage, since faster growing markets typically require more investment to keep pace. The horizontal axis measures market share, and indirectly cash generation, under the assumption that businesses with a higher share of the market tend to throw off more profits. Combining these axes generates the familiar quadrants of the matrix, including the cash cows (low growth, high share), stars (high share, high growth), dogs (low on both dimensions), and question marks denoting businesses with low share of a growing market.

The matrix provides executives with a snapshot to consider resource allocation among units, identifying cash cows, for example, that could fund investments in rising stars, while looking to disinvest from dogs and puzzle over question marks. Although portfolio planning using the BCG and related matrices took hold in many companies, laboratory experiments and empirical studies find no evidence that these tools improved performance, and suggest on the contrary they lead to sub-par

Continue reading: “Beyond the growth share matrix”

Tags: BCG matrix, Boston Consulting Group, Boston Consulting Group Matrix, growth share matrix
Posted in diagnostic exercise, portfolio agility, value creation | Permalink

How to avoid a corporate mid-life crisis

February 12, 2010 7:57 am

Companies, like people, must pass through a life cycle according to the conventional wisdom in management. Start-ups begin their life in a period of rapid-fire experimentation, pass into the organizational equivalent of adolescence as the company scales its business model, eventually mature into the dull reliability of middle age, and then lapse into unavoidable decline. Like Shakespeare’s seven ages of man, the stages of the corporate life cycle are clear and inevitable. Sometimes companies progress through this sequence as a cohort. Minicomputer makers arrayed along Boston’s Route 128 including Wang Laboratories, Digital Equipment Corporation, Data General Corporation, and Prime Computer rose and fell as a group. Other times a company passes through the lifecycle in isolation, as Polaroid or Laura Ashley did. Whether firms pass through it together or alone, life cycle according to this viewpoint, is destiny. For many people, maturity is a tough life stage, hence the midlife crisis. The thrill of youth has passed, while the

Continue reading: “How to avoid a corporate mid-life crisis”

Tags: agility, Burberry, Data General, DEC, Digital, diversification, diversified portfolio, GE, General Electric, Hewlett Packard, HP, HSBC, Kodak, Laura Ashley, Nokia, P&G, portfolio agility, Prime Computer, Procter & Gamble, Samsung, Wang
Posted in portfolio agility, turbulence, value creation | Permalink

Stalling in reverse: Resource allocation and delayed exit

February 9, 2010 10:17 am

In turbulent markets, firms must disinvest from under-performing units to free resources necessary to exploit new opportunities. Most firms are better at getting into new things than getting out of established ones. In a recent survey, respondents cited their firm’s lack of a “well-defined processes to exit declining businesses and kill unsuccessful initiatives” as the second biggest obstacle to agility (out of a total of thirty possible factors). My last post summarized data suggesting that firms typically delay exit beyond the optimal point, and in the process deplete resources to invest in growth opportunities.

Why do firms struggle to kill failing initiatives? There are many sound reasons to delay exit, including uncertainty about the payoff to persistence, closing costs, and interdependencies among units that prevent a clean severing of ties. In many cases, however, executives fail to exit even as evidence mounts that the costs of persistence outweigh the benefits of staying the course. Instead they double down, and increase their investment rather than pulling back to revisit their ingoing assumptions, and make mid-course corrections or pull the plug.

Management scholars refer to this tendency as “escalating commitment to a failed course of action,” and have

Continue reading: “Stalling in reverse: Resource allocation and delayed exit”

Tags: agility, Clay Christensen, disinvestment, divestment, escalating commitment, escalating commitment to a failed course of action, exit, Joe Bower, Joseph Bower, portfolio agility, resource allocation, resource allocation processes
Posted in organizational agility, portfolio agility, turbulence, value creation, Why good companies go bad | Permalink

Slow exit: Delayed disinvestment and value destruction

February 6, 2010 4:32 pm

In my last post, I argued that turbulent markets demand portfolio agility–an organization’s capacity to reallocate cash, people, and other resources from stagnant or declining businesses into promising opportunities, and do so in a timely manner. Effective portfolio agility consists of both investment and disinvestment. Unfortunately, most companies are better at getting into new businesses than they are at getting out of declining subsidiaries or ones that no longer fit as the corporate strategy evolves. Firms can rarely avoid disinvestment forever, but they often delay the inevitable for far too long. These delays consume scarce resources, and starve promising initiatives of the cash they need to succeed.

Research has shown that companies regularly divest businesses to re-balance their portfolio. In a study of 9,276 deals completed by 86 of the Fortune 100 firms in the 1990s, Belen Villalonga and Anita McGahan report that the median number of divestitures was 17 for firms they studied. Divestitures were almost as common as major acquisitions–the median for firms in their sample was 19 completed acquisitions over the same time

Continue reading: “Slow exit: Delayed disinvestment and value destruction”

Tags: agility, delay, disinvestment, divestment, exit, plant closure, portfolio agility, Thomson Corporation, tire industry, value creation, value destruction
Posted in portfolio agility, turbulence, value creation | Permalink

Rethinking the “diversification discount”

January 30, 2010 11:07 pm

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

Continue reading: “Rethinking the “diversification discount””

Tags: Carlyle, Carlyle Group, corporate diversification, corporate focus, diversification, diversification discount, focus, growth, J&J, Johnson & Johnson, KKR, LBOs, leveraged buyouts, McKinsey, McKinsey & Company, revenue growth, sales growth, Samsung, Tata, TPG
Posted in portfolio agility, turbulence, value creation | Permalink

Older entries

Don Sull's blog

value creation