Frequently Asked Questions
How can I motivate employees without vision?
What role does long-term visions play in success in uncertain markets?
How important is scenario planning in making sense of uncertain markets?
How can I recognize a golden opportunity from fools gold?
What is promise-based management?
Why do good companies go bad?
How can I tell if my organization is susceptible to active inertia?
What kind of leader is best suited to lead an organization out of active inertia?
How can an executive pull a company out of active inertia?
Once a manager decides transforming commitments are the right move, where do they begin?
What makes an effective anchor to lead a transformation?
What can go wrong when trying to transform an existing organization?
When are professional commitments personal?
How can successful companies like Starbucks, McDonald's avoid frames becoming blinders?
What is wrong with the Detroit automakers?
How can a company with strong culture avoid active inertia?
The conventional wisdom says companies pass through lifecycles. Do you agree?
How can companies avoid a mid-life crisis?
What role do managers have in contributing to a corporate mid-life crisis?
How can companies from emerging markets innovate without the technology, expertise or cash of incumbents?
How can companies go global out of emerging markets?
There are many ways to motivate employees. In most organizations that I work with, the vast majority of employees cannot even recite the vision, let alone draw any inspiration from it. Employees can be motivated by winning in the market place, seizing a specific opportunity, succeeding in a "must-win" battle, achieving a clear mid-term priority, and so forth. In the IT industry some of the most successful companies have succeeded precisely by avoiding vision. Oracle has never articulated a vision, at least not one that anyone knew, and yet the organization has successfully seized a series of very important opportunities. Similarly Lou Gerstner saved IBM by focusing on priorities and eschewing long-term vision, while his counterpart at Compaq Eckhard Pfeiffer gave his employees a vision but soon lost the company. So from my perspective, motivation is absolutely critical, but achieve it by articulating a small number of clear and ambitious mid-term priorities, translate those into concrete performance objectives, cascade those down the organization, monitor performance, and celebrate success. And when a golden opportunity comes along rally the troops to pursue it.
None, or thereabouts. Many management gurus have argued for crystal-clear long-term visions-e.g., we will put a man on the moon and bring him back by the end of the decade. To sum up my argument, the benefits of such visions (e.g., inspiration, direction) are outweighed by their costs (i.e., premature lock-in, premature investment, and false confidence). Moreover there are alternatives that achieve the same goal with fewer risks, specifically clear mid-term priorities. Core competencies and resources can also provide a focus on how to move forward into the future.
Part of the problem is definitional on what is and isn't a vision. My objection is to the visions that are both long-term and crystal clear. If in contrast, a vision is long-term and vague it is pretty harmless. This is the path most companies follow, articulating some vague thing about aspiring to global leadership in their industry while being nice to employees, and blah, blah, blah. Of course, such vague visions are typically ignored by employees. They also tend to be identical to competitors' visions, so offer not competitive advantage through differentiation. So fuzzy visions while harmless, are pretty much irrelevant.
Now that said, I do think top executives should take the time to ensure three components of a vision are clear and understood by the organisation, but should not agonise over drafting them. Large investments of time, energy or consultants' fees to craft the "perfect" vision statement rarely repay the effort. There are a few quick and simple steps that executives can take to set their vision.
- Specify the industry domain. A long-term vision should define where the company competes. This helps managers and employees to sort opportunities in their domain from those that distract them from their core business. In some emerging or rapidly changing industries the domain may not be immediately evident. Also, a company may need to periodically reframe its domain. Recall Intel's shift from memory to microprocessors. But for most companies most of the time, it is obvious: Danone is a food company, Ford is a car maker and so on. If you don't know the answer to this, you have real problems.
- Specify geographic scope. Setting the company's geographic scope should not be rocket science for most businesses. It is, however, useful to clarify whether a company considers itself local, national, regional or global. Standard Chartered Bank, for example, recently changed its definition of itself as an "emerging markets" bank to "leading the way in Asia, Africa and the Middle East", a helpful move that brought greater clarity to the bank's geographic scope.
- Set aspirations. The third component of a vision is to set a company's level of aspiration. Many companies state this in terms of global leadership (being number one or number two in the market) or excellence. Stating high ambitions obviously beats the alternative-it is scary to imagine the management team that aspires to "global mediocrity". The problem, of course, is that the vast majority of companies aspire to "leadership" or "excellence" or "being number one or number two". Yet while it may do little to differentiate a company from rivals, a statement of aspirations is probably better than no statement.
Crystal clear long-term visions have been touted as a powerful tool for improving corporate performance. In my opinion, it is high time that someone pointed out that the emperor has no clothes. To the extent that long-term visions are specific and focused, their risks often outweigh the benefits. When managers sensibly opt instead for a fuzzy vision, they produce documents that do no harm, but also provide little benefit over rivals with identical missions.
So managers should not obsess over visions or delude themselves that getting the precise wording will make much of a difference. They should get it over with and move on to important things, such as setting the right priorities to achieve their vision and executing more effectively and quickly than their rivals. In the end, it is these abilities, rather than any good or bad decisions they make over mission statements, that spell the difference between success and failure.
Scenario planning can be a helpful tool in conducting reconnaissance into an uncertain future. Another tool is real-time, granular data that is external and focused on leading rather than lagging indicators. It is also important for firms to have multiple probes into the future.. The most important aspect of reconnaissance into an uncertain future, however, is managers' ability to lead discussions to make sense of an ambiguous, complex, fast-changing situation.
In terms of knowing whether an opportunity is as golden as it seems, below are some questions that you can ask yourself. Opportunities are by their nature uncertain, so there is no cookie-cutter approach that offers a foolproof guarentee, but based on my research and work with managers, the following questions can help you gain confidence that an apparent opportunity is or isn't golden.
- What is the anomaly? Anomalies signal discrepancies between a manager's mental model and the realities of a situation in flux, and can serve as leading indicators of an emerging golden opportunity. Managers who notice and interrogate anomalies before competitors can seize opportunities before rivals. Recall, for example, Zong's surprise that wealthy parents with well-stocked larders worried about malnutrition. Ask yourself, what is surprising here? What should work that doesn't? What shouldn't work but does? What customer pain could be solved but isn't? Managers can generally point to a specific "a-ha" moment when they noticed the incongruity that alerted them a golden opportunity.
- Why does the anomaly exist? After spotting an anomaly, its important to gather first hand information until you understand its sources. Not every anomaly signals an opportunity, let alone a golden opportunity. Understanding why an anomaly exists can illuminate the contextual variables which might (or might not) align to create an opportunity. In the mid-1990s, for example, Embraer's managers noticed that airlines often used planes that were far too large for the routes they flew. They interrogated the anomaly by interviewing executives at their top fifty customers. This research revealed that union contracts with pilots restricted the use of smaller planes, which could be flown by less-qualified pilots. Based on this insight into the root causes of the anomaly, Embraer's executives concluded that these restrictions could not persist as airlines faced increased competitive pressure and potential bankruptcy. Based on their assessment of the anomaly's sources, Embraer developed a regional jet optimized to the route length.
- What changed in the external environment to give rise to the opportunity? Before declaring an opportunity a company's main effort, entrepreneurs and managers should ask themselves what changed in the regulatory, market, technical, or social context to generate this opportunity right now. If they cannot point to specific changes, the apparent golden opportunity may be fool's gold. But a plausible story is not enough. Before declaring the main effort, managers should validate that the relevant windows really are open. BEA's three co-founders hired two additional employees and spent six month conducting in-depth analysis of trends in customer demand, technology, competition, and venture funding to test their initial hunch that the windows really were open. Then they pounced.
- Is your company under pressure to manufacture a golden opportunity? Too often executives declare an opportunity "golden" for the wrong reasons. Investors may clamor for growth, for example, or a new CEO want to make his mark with a bold move. These internal events might coincide with the emergence a golden opportunity, but don't bet on it. Wishing for a golden opportunity, unfortunately, doesn't make one appear.
- Why is the $20 bill still on the ground? An old joke describes two economists walking down the street. The first looks down and exclaims, "There is a $20 bill on the ground." The other one turns and says, "That's impossible. If it were there, someone would have picked it up already." The underlying insight is clear--attractive opportunities will be seized rapidly. Ask yourself, if this really is a golden opportunity why hasn't someone seized it already? The most compelling answer is that changes in the broader context are just now creating the opportunity and that you are uniquely positioned to spot it before others.
- How quickly will competitors move? The question is not whether competitors will notice a golden opportunity-they always do-but when they'll spot it. There are good reasons why worthy rivals might be slow to see and seize an opportunity: an opportunity may fall in a strategic blind spot; rivals may lack incentives because the market is too small or cannibalizes existing business; they may have just committed to an alternative opportunity; lack necessary resources; or be hobbled by financial distress or a major merger. Competitive gaps, like unmet customer demand, are fleeting. A competitor's management turmoil or strategic myopia might last a year, but probably won't last forever.
- Can you get big fast? Seizing a golden opportunity requires an organization to effectively scale to fill the gap before competitors rush in or circumstances change. And organizations often go off the rails when faced with the challenges of rapid growth. Executives should standardize key processes, metrics and , resources required to smooth the ride while growing. They should also recognize the binding constraints, or potential bottlenecks that could prevent them from scaling, including the availability of funding, expertise in managing rapid growth, the scalability of relevant technology, or key partners' ability to keep pace. Even if executives carefully manage the process of scaling, firms will still face unanticipated challenges. The actions managers take during periods of active waiting--such as building a war chest and maintaining pressure for operational efficiency--can hedge against bumps in the road when chasing a golden opportunity.
This is a new and exciting approach to execution that is particularly helpful when doing something new or innovative. A provider makes a promise to satisfy the concerns of a customer within the organization. "Customer" and "provider" refer simply to roles: An individual acts as a customer when making a request; a provider fulfils that request. A company's CFO might be a provider when supplying financial data to the IT department, but he then becomes a customer when requesting technical support from that group. In committing to a customer, a provider promises to fulfil the customer's "conditions of satisfaction," that is, the specific terms (such as cost, timing and quality) required for the customer to declare herself satisfied that the performer has fulfilled his pledge. Typically a customer will make a request in order to elicit a promise from a provider, but conversely the provider can take the initiative and proactively propose an offering to meet a customer's conditions of satisfaction.
We have found that in many organizations, the majority of promises are not effective. Either they deliver the wrong thing or the performer doesn't deliver at all. Managers can, however, take some concrete actions to improve the quality of promises within their organization. First, they need to recognize that promises are not the same thing as the terms of a deal, like the clauses in a contract. Rather the most important part of a promise are the discussions that give rise to a commitment and subsequently keep it alive. These conversations typically proceed through three distinct steps: discussions to achieve a meeting of minds on what is to be done and why, conversations while executing on the promise to talk through unforeseen contingencies and opportunties, and closing the loop where the customer declares satisfaction or dissatisfaction with the delivery. Second, the most effective promises have five characteristics-they are public, active, voluntary, explicit and mission based. I have an article coming out in the April 2007 Harvard Business Review entitled "Promise-based management: The essence of execution." This is a good introduction to the basic ideas on promise-management.
Well, you could always buy a copy of my book by that same title for the full answer. But the short answer is that many fall prey to to active inertia-responding to even the most disruptive market shifts by accelerating activities that succeeded in the past. When the world changes, organizations trapped in active inertia do more of the same. A little faster perhaps or tweaked at the margin, but basically the same old same old. Managers often equate inertia with inaction, like the tendency of a billiard ball at rest to remain immobile. But executives in failing companies unleash a flurry of initiatives-indeed they typically work more frenetically than their counterparts at competitors which adapt more effectively. Organizations trapped in active inertia resemble a car with its back wheels stuck in a rut. Managers step on the gas. Rather than escape the rut, they only dig themselves in deeper. This pattern of behaviour hinders agility.
What locks firms in a rut? The surprising answer is the very commitments that that enabled a firm's initial success. Everyone knows that success breeds complacency and arrogance. But a more fundamental dynamic links early success to subsequent failure. Clear commitments are required for initial success, but these commitments harden with time and ultimately constrain a firm's ability to adapt when its competitive environment shifts. This dynamic can lead good firms to go bad, even when executives avoid arrogance and complacency.
To win in the market, executives must make a set of commitments that together constitute the organization's success formula. A distinctive success formula focuses employees, confers efficiency, attracts resources, and differentiates the company from rivals. Five categories of commitments comprise the success formula:
- Strategic frames: What we see when we look at the world, including definition of industry, relevant competitors and how to create value.
- Processes: How we do things around here entailing both informal and formal routines.
- Resources: Tangible and intangible assets that we control which help us compete, such as brand, technology, real estate, expertise, etc.
- Relationships: Established links with external stakeholders including investors, technology partners or distributors
- Values: Beliefs that inspire, unify and identify us.
Although commitments are essential for initial success, they tend to harden over time. Initial success reinforces management's belief that they should fortify their success formula. With time and repetition, people stop considering alternatives to their commitments, and take them for granted. The individual components of the success formula grow less flexible: Strategic frames become blinders, resources harden into millstones hanging around a company's neck, processes settle into routines, relationships become shackles, and values ossify into dogmas. An ossified success formula is just fine, as long as the context remains stable. When the environment shifts, however, a gap can grow between what the market demands and what the firm does. Managers see the gap, often at an early stage, and respond aggressively to close it. But their hardened commitments channel their responses into well-worn ruts. The harder they work, the wider the gap becomes. The result is active inertia rather than agility.
Below are some common warning signals that the top executives may be wed to their historical commitments, and unwilling to see them objectively or decide whether they will bring success in the future. If your competitive environment has or is undergoing a major shift, then blind adherence to these historical commitments could spell trouble. Add one point for each risk factor that applies to your company. One is fine, two or three get nervous, three or more and your firm is at risk for active inertia.
- Your CEO appears on the cover of a major business magazine. Praise from the business press reinforces attachment to the success formula. By the time a firm has attracted critical acclaim, managers should be rethinking their success formula.
- Management gurus praise your company. Few companies survive guru praise for long. Consider the fall of most In Search of Excellence firms. The problem is not sloppy research. Rather guru praise reinforces confidence in the success formula. (Please note, the London Business School has no gurus, just hard-working professors toiling in the vineyards of research).
- Your CEO writes a book on the secret of your firm's success. A book publicly links a CEO to a success formula's, making it harder for him to later change those commitments.
- You build a grand new headquarters. Managers often build grand monuments to commemorate their triumph. They are rarely in the state of mind to question the commitments that led to victory. (Bonus point for indoor waterfalls, heliports or architectural awards).
- You name a stadium. CEOs sometimes name rather than build monuments, as did Enron, United, cmgi, American Airlines, PSINet, Compaq and Conseco did. Not every company falls prey-consider Pepsi or Staples-but it is another red flag.
- Your competitors share your postal code. Detroit's automakers, Sheffield's steelmakers and Route 128 microcomputer firms all went bad. Clustered firms often make similar commitments and reinforce one anothers' success formula.
- Your top executives resemble clones. Homogenous top executives generally rose through the ranks by reinforcing the same set of commitments, and often know little else.
The most promising candidates are familiar with the company's business without being trapped in the existing success formula. They are often what I call "inside-outsiders," such as Jack Welch-a lifetime GE employee who came from a peripheral business, Jorma Ollila at Nokia who knew the company intimately as its banker but was not locked into its existing commitments. Their personal values and professional backgrounds are consistent with the anchor chosen and the commitments made. And they don't try to do it all themselves. They surround themselves with a strong and diverse team. And they have the necessary support, tenure, and incentives to succeed in this leadership role. If these criteria don't fit, then it's dangerous to undertake the transformation.
Managers must explicitly commit to transforming their organization's existing commitments. They must take bold actions that remake an organization's success formula by increasing the cost, or eliminate the possibility of, persisting in the status quo. Managers might, for example, exit a legacy business, publicly commit to a new goal, or fire powerful executives who oppose the new direction. In the book, I describe several successful transformations, including IBM, Nokia, Asahi Breweries, Samsung, and Lloyds-TSB. But transforming commitments are not a panacea. They can work wonders, but they also have serious side effects. The transformation might destabilize the core business and jeopardize a predictable profit stream. They leave a company particularly vulnerable because they simultaneously set out on a risky new direction while destabilizing the core. Managers shouldn't take these actions lightly.
Transforming an organization is messy and complicated. But in broad strokes, it's a three-step process. In the first step, a leader selects an anchor. The anchor is what the manager commits to-a new strategic frame, process improvement, renewing the company's resource base, stretching relationships with external parties, or novel values. The anchor must provide a clear alternative to the status quo to help pull an organization out of active inertia.
In the second step, a manager secures the anchor with transforming commitments-actions such as exiting a business, public promises, or personnel decisions that prevent a company from falling back into the status quo. In the final step, the manager realigns the organization's remaining frames, resources, processes, relationships and values. The leader's transforming commitments will create tension with elements of the existing success formula and employees can easily slip into the status quo. In this third step, the leader must struggle against backsliding as he brings the success formula into a new alignment.
Effective anchors share three characteristics: they are credible, clear, and courageous. A manager's anchor is credible to the extent that other people believe she will stay the course even when changes in the business context might promote another course of action in the future. If customers, employees, colleagues, partners, or other stakeholders believe that the manager will be steadfast in honoring her commitment, then they will adjust their own behavior accordingly. Clear commitments increase credibility, are easier to communicate internally and externally, and they provide an easy-to-visualize alternative to the status quo. And finally, transforming existing commitments is risky business that requires managers to break sharply from the past rather than make incremental changes at the margin. If your company's future vitality depends on transforming existing commitments, then you will need courage.
Attempts to break out of active inertia can derail for any number of reasons, including time pressure, lack of resources, or just plain bad luck. But patterns of failure do emerge. In studying transformational efforts, I have observed a small number of common mistakes that managers consistently make. I call them the seven deadly sins of transforming commitments because any one of them can kill a transformation. Most are errors of commission-actions that managers should not have taken but did anyway. Others are errors of omission-actions that a manager should have taken but failed to. The seven deadly sins are: 1) repeating what worked last time; 2) failing to run the numbers; 3) not sweating the details; 4) delegating the hard work; 5) "half-tackles"-recognizing problems that arise but failing to act on them; 6) ignoring core values; 7) sticking with a transformational commitments past their sell-by date. In the book, I illustrate these common mistakes with examples including Enron, Arthur Andersen, Apple Computer, Bertelsmann Group, Compaq, Kmart, Sunbeam and Vivendi.
Transforming the status quo demands a personal commitment that feels very different from business as usual. Making bold commitments requires managers to stick their necks out and they have to decide whether they are the right person to do that. They have choices; committing isn't the only option. They can sit and wait it out or they can quit and do nothing. The last chapter gives people the license to say, "I'm not ready for this." It will help managers think about not only what needs to be done, but also whether they are the right person for the job.
Strategic frames provide focus and fit new information into a broader pattern. By continually focusing on the same aspects, frames can constrict managers' peripheral vision, blinding them to novel opportunities and threats. As their strategic frames grow more rigid, managers often shoe-horn surprising information into existing frames or ignore it altogether. Consider NatWest Bank (National Westminster until 1995). At its foundation, National Westminster's executives committed to a clear set of strategic frames--retail banking is stagnant and UK suffering irreversible decline. The bank diversified into the US, Europe, Far East and Soviet Union and expanded into new financial services. When the Big Bang deregulation heightened competition, rivals such as Lloyds TSB refocused on their domestic retail business. NatWest, in contrast, responded by accelerating geographic and product diversification. Critics blasted NatWest throughout the 1990s for waiting too long to divest money-losing distractions until RBS acquired NatWest in 2000. Managers must guard against this by remembering that like dairy products, every strategy has a shelf life. They must periodically review their strategy to see if it is still working. Also, it is useful to have small experiments going on outside the core business so that top executives have alternatives to choose from when the established strategy shows signs of aging.
I believe that the US auto makers have been stuck in active inertia for years. There problem is that management has lacked the courage to lead a successful transformation. That reluctance is easy to understand. Transforming an organization is a messy and complicated, that takes place in three stages. In the first step, a leader selects an anchor. The anchor is what the manager commits to-a new strategic frame, process improvement, renewing the company's resource base, stretching relationships with external parties, or novel values. Different anchors have advantages and limitations as levers to pull an organization from active inertia. Anchors provide and overarching objective to prioritize actions that keep managers from trying to change everything all at once. In the second step, a manager secures the anchor with transforming commitments-actions such as capital spending, public promises, or personnel decisions. In the final step, the manager realigns the organization's remaining frames, resources, processes, relationships and values. The leader's transforming commitments will create tension with elements of the existing success formula and employees can easily slip into the status quo. In this third step, the leader must struggle against backsliding as he brings the success formula into a new alignment. Each of these steps are difficult. And the Detroit auto makers have gone through a series of short-term turnarounds without ever tackling the much more difficult transformation.
A strong set of values can be a very valuable thing. Its very important to reinterpret them, however, as the world changes. Apple has done a good job of this in recent years. Historically Apple's values of relentless innovation and stunning design were interpreted as the company had to do everything itself. No partner had the same level of commitment to Apple's values. But with the iPod, Apple has maintained the same level of commitment to the fundamental values of design but reinterpreted it to include orchestrating a network of companies aligned around those values. Just like religious values, a company's values must be reinvigorated through reinterpretation to adapt to new circumstances. This does not mean abandoning the values or watering them down, just keep them updated and relevant as the world changes.
No way. The common perception is that companies, like people, pass through a series of life stages. Each firm begins with the experimentation and rapid-fire learning of a start-up, passes through a frantic adolescence as it scales its business model, matures into a reliable albeit dull middle age and finally lapses into inevitable decline. Although the metaphor of a corporation going through a lifecycle is a compelling analogy, it is fundamentally misleading. In short, lifecycle is not destiny. Our research into several supposedly "mature" sectors and companies reveals a wide gap between the winners that enjoy sustained profitable growth and the losers that stumble towards frailty and decline. Companies do not go through lifecycles, but opportunities do. That is, most firms oversee a portfolio of opportunities at different stages in their lifecycles: experimental start-up, scaling, maturity and decline. There are, of course, single-product companies that at first glance resemble one-trick ponies. But even then, a deeper look often uncovers multiple opportunities. Kodak, for example, is mostly known for film and photography. But in the 1990s the company also had a vibrant medical imaging and clinical diagnostic business even after divesting operations in photocopying, chemicals and pharmaceuticals.
Companies can avoid a mid-life crisis to the extent they successfully manage opportunities at different stages in the lifecycle-milking their mature cash cows while successfully growing start ups and scaling the most promising. Consider IBM. Of course, projects at various stages in their lifecycles require very different management styles: promoting variation at the start-up stage, making tough calls to select projects for scaling, integrating businesses at the point of maturity and fixing the problems of decline. Thus, leaders responsible for an entire opportunity portfolio must select managers whose styles, competencies and enthusiasms match each life stage. And the leaders themselves face the difficulty of engaging with, supporting and disciplining these very different managers with distinct missions.
To tackle that challenge, IBM created the Emerging Business Opportunity (EBO) management system in 1999. The goal was to spur IBM's organic growth and to protect new opportunities until they became mature enough to be transferred to the company's group operating structure. Sponsorship came from the very top through the vice-chairman of the board. EBO drew on a "horizons of growth" model that distinguished between opportunities in the start-up phase, those that were scaling through rapid growth and mature businesses. IBM recognized that each growth horizon required very different approaches to people, strategy, resource allocation and measurement. Part of EBO's role was to protect nascent opportunities from the rest of IBM, but just as critical was the need to identify opportunities that were at the point of transition from one horizon to the next.
EBO's approach to measurement therefore went beyond financial metrics to include horizon-specific milestones. Start-up opportunities, for example, needed to win share of mind, as evidenced in press and analyst reports. Scaling businesses needed to demonstrate progress in trials and early customer adoption, while mature businesses were managed with respect to profitability and sales-volume objectives. The milestones helped executives spot when an opportunity was ready to move into the next horizon, perhaps requiring a change of management as well as different forms of support and incentives from EBO. A set of requirements were used to test whether an opportunity had become a viable business, depending on the clarity of its strategy, readiness for execution and market success. Once all those requirements were met, the fully fledged business was ready to stand on its own alongside the other mature members of IBM's portfolio
Often, the existing managers are the problem. They have little to gain from investing in the new and are most comfortable with the old ways of proceeding. When the 47-year-old John Browne became BP's group CEO in 1995, he explicitly set out to place operating power in the hands of the next generation who could pursue new opportunities aggressively. He and his team broke BP's bureaucratic organization into approximately 150 business units, each overseeing an oil field, chemical plant, regional marketing area or other operation. Browne then handed the keys to these businesses to a new generation of managers, most of whom were in their 30s or early 40s. This was a massive transfer of power because those operations collectively generated over $120 billion in revenues by 2001 and employed more than 100,000 people. But what to do with the heroes from the last war? In many organizations, the biggest obstacle to a generational shift comes from seasoned executives who want to maintain an active role. At BP, many of these leaders became group vice presidents, positioned between the 150 business units and Browne's team. It should be noted, however, that the role of group vice president was not designed to direct or second-guess the operating managers. Rather these senior executives were charged with coaching the next generation, overseeing talent development and succession planning, and negotiating performance contracts with the business-unit leaders that were aggressive but achievable. This structure left Browne and his team free to focus on branding, the company's stance on environmental issues, geopolitical shifts affecting supply and other larger, longer-term issues. BP has subsequently gotten into trouble because management paid insufficient attention to safety issues, but that should not obscure the good things that Browne and his team did.
This is a really important question, so I will tackle it in some depth. When most people think of innovation, they envision developed world companies such as the USA's Microsoft and IBM, Japan's Sony, South Korea's Samsung, Finland's Nokia, or Switzerland's Novartis, technology leaders that have stayed at the cutting edge of dynamic industries such as computer hardware and software, consumer electronics and pharmaceuticals. These companies enjoy a stockpile of important patents and boast internal research and development laboratories that rival the best universities in the world. Moreover, they are headquartered in countries with myriad institutions that support innovation: Liquid financial markets and venture capitalists to fund big bets on technology, research universities that mint PhDs, and a clear legal framework which protects intellectual property.
These factors have fueled relentless innovation among high-tech industries in the developed world. What about companies in developing countries that lack these advantages? Are they forever relegated to a laggard position while the gap in innovative capability continues to widen until it becomes an unbridgeable chasm? The short answer is absolutely not.
Developing countries, it turns out, are a fertile breeding ground for innovative companies. The difference, though, is that firms located in these countries confront several external hostile factors that impede innovation, such as political instability, volatile exchange rates and underdeveloped physical infrastructure. At the same time, they must contend with three other impediments that are particularly daunting to innovation: developing countries generally lack a solid technology base of trained scientists and world-class research universities, companies in developing countries must manage to eke out a profit while serving customers with low disposable income (per capita gross domestic product in the advanced economies is on average ten times that of developing nations.), and managers in these companies must often innovate on a shoestring, since the high cost and scarcity of capital preclude them from winning through massive spending on research and development. Therefore, they must innovate from other areas of their business's structure, including manufacturing, logistics, marketing and customer service.
Despite these intimidating obstacles, over the past several years, we have identified and studied companies from developing countries that are among the most innovative in the world. These include CEMEX, the Mexican cement giant, Infosys, the Indian firm that pioneered outsourced software development; Natura a leader in Brazil's cosmetics arena; China's Haier, which sells refrigerators in the world's most demanding markets and the LNM Group, the second-largest steel maker in the world, that began with a single mini-mill in Indonesia.
Ironically, it was often the brutal competitive conditions of their home markets that forced these companies to aggressively innovate. Necessity, to paraphrase the proverb, can be the mother of innovation. Studying these firms over the past few years, moreover, we have observed striking similarities in the strategies that they employ to succeed despite the odds. This article focuses on three approaches in particular that these companies consistently employ: They know their customers' mindset-intimately, they innovate around (rather than through) technology, and they scour the globe for good ideas.
These strategies, we believe, are as important for managers in developed countries as they are for executives in the developing world. The lessons in this article can help any company seize growth opportunities wherever they are located. They can also protect incumbents from disruptive business models that can gestate in less-affluent countries and then attack industry leaders even if they're based in the developed world. Brazil's aircraft producer Embraer, for example, has moved up market from turboprop planes to mid-sized commuter jets that are nipping at the heels of Boeing and Airbus. Finally, the three strategies described below offer insight for any company trying to innovate on a shoestring in a challenging business environment.
Know Your Customers' Mindset-Intimately. Innovation comes in two varieties: technology-push and customer-pull. Technology-push-or introducing new products based on cutting-edge research-is not an option for most companies in developing countries. As a result they must rely on the customer-pull approach- finding ways to solve customers' dilemmas without relying on novel science. Many of the companies we discuss, however, have current and potential customers who are quite poor, which increases the challenge of solving their problems while still earning a profit.
Many multi-nationals entering developing countries pay lip-service to serving less-affluent customers, but then supply slightly scaled-down versions of products designed for wealthier markets. This approach rarely succeeds. Some companies, including Mexico's CEMEX and Brazil's Natura in contrast, have made a deep and enduring commitment to understanding the needs of less affluent customers and use this knowledge to devise creative solutions to customer problems. Employees of China's Haier, for example, discovered through visiting rural customers that they frequently attempted to use their washing machines not only to launder clothes, but to clean vegetables as well. By making a few minor modifications to the washers they manufactured, Haier was able to market the machines as versatile enough to wash both clothing and vegetables, and rapidly became the market leader in rural areas of their home country.
The cement-maker CEMEX typifies this approach. CEMEX, headquartered in Monterrey, Mexico, is nearly a century-old company and has emerged over the past few decades as the third-largest cement company in the world by volume, selling to customers in over 60 countries with sales figures of US $6.5 billion in 2002 . The company is the most efficient major cement producer in the world (measured by EBITDA divided by revenues), and has been lauded for its dedication to innovation by the Wall Street Journal and Wired magazine among others.
CEMEX has committed to providing solutions for regional development. To better understand the needs of Mexico's less-affluent customers, CEMEX assembled a team of employees who agreed to spend ten hours each day for an entire year in an extremely poor neighborhood in Guadalajara. The team gleaned many insights into potential customers by literally living with them every day. The CEMEX team noticed that do-it-yourself projects played a more important role in poorer neighborhoods than in affluent areas within Mexico. The DIYers generally bought less expensive powdered cement in bags, rather than already-mixed concrete delivered by trucks. The team also learned that building projects provided more than the functional benefits of extra living space. The projects-and the home improvements they generated-also conferred the psychological satisfaction of creating "patrimonio" something of enduring value that could be passed on to one's children. The insight that buildings represented more than simply utility helped CEMEX position a program aimed at these potential customers by appealing to their higher aspirations for creating an enduring legacy.
Concurrently, the CEMEX team identified the inability to secure credit as a primary obstacle to financing construction projects. They discovered that in order to raise capital for building, poor Mexicans would organize "tandas," a sort of lottery in which a group of families contribute a specific sum each week to a pool and one lucky family would win the entire amount at the end of the week. However, though these funds were intended for building, winnings were often diverted to such other purposes as weddings and celebrations of festivals.
Working with local leaders, CEMEX developed a program to help community organizers establish similar financing pools where instead of cash, the winners received building materials including cement. In addition, CEMEX provided construction advice and blueprints to the winners. The program has already helped over 30,000 families, and the company's goal is to reach 800,000 more within five years.
Innovate around (rather than through) the technology. Companies such as Samsung or Novartis can drive innovation from their R&D labs, continually translating scientific breakthroughs into new products. In contrast, innovation by developing country businesses looks very different. In general, the innovations come not from product technology, but from all the elements of the business model that surround the product-technology, including manufacturing, logistics, distribution and finance.
It's been centuries since the cement industry experienced a major shift in product technology. But that hasn't prevented CEMEX from continually striving for innovation. Consider the challenge of delivering ready-mix concrete. Contractors often change their orders at the last minute, but CEMEX found that on average it took three hours between when a change order was received and when they could deliver the order. To decrease turnaround time in Mexico, CEMEX equipped most of its fleet of concrete mixing trucks with global positioning satellite (GPS) locators, allowing dispatchers to arrange deliveries within a 20 minute window, versus the three hours CEMEX's competitors require. This system (which did not emerge from a central R&D lab, but rather, from CEMEX's internal innovation efforts, see below), has allowed CEMEX to increase its market share, charge a premium to time-conscious contractors, and reduce costs resulting from unused concrete.
Scour the globe for good ideas. One distinctive aspect of the companies we studied was their eagerness to travel around the world to find ideas. This isn't traditional benchmarking, since managers don't simply copy something they see elsewhere. Rather, they take pieces of practice or technology from somewhere else and recombine them in novel ways to solve customer problems. The CEMEX team that developed the GPS system mentioned above, for example, got the idea from a 911 call center they saw in Houston. Having identified contractors' need for just-in-time delivery, the team reasoned by analogy that emergency response teams faced a similar problem of quickly reacting to urgent requests from unpredictable sources. Based on this insight, they studied how the call-center could dispatch paramedics within ten minutes despite traffic congestion and unpredictable call patterns.
Another example of scouring the globe for good ideas comes from Natura, a leading Brazilian cosmetics company, with revenues of TK, that has been voted company of the year by Exame Brazil's most prominent business magazine. From its inception, the company focused on serving the distinctive needs of its local customers. Brazil is a nation characterized by an ethnically diverse population with different skin types as well as a humid climate. This combination of factors meant that cosmetics developed for homogenous populations in more temperate climates did not always meet the demands of Brazilian women.
Although Natura executives understood local needs well, they recognized they could never compete on technical innovation with global competitors such as Procter & Gamble, Estee Lauder and Shiseido all of which spend hundreds of millions of dollars on cosmetics R&D every year.
Instead, Natura establishes close connections with universities in France and the U.S and licenses technology from universities and research centers around the world. They also track global patents, and if they determine that something will fill a local need, they license it for use in their own products. According to Philippe Pommez, Natura's R&D director, this system works extremely well. "The hard part is not finding the new technology, it is knowing what you are looking for. This is where our conceptualization of new products and new lines that serve local needs becomes indispensable," he says.
Scouring the globe for good technology, but adapting it to local needs has served Natura well. Chronos-a skin cream geared toward women over 30-was one line that emerged from this. The cream drew on existing technologies but combined a number of them into an integrated product that specifically served the needs of Brazilian women. Further innovation in Chronos came largely through positioning it in the market, rather than solely relying on a superior product that integrated three vitamins. Chronos was marketed with the message that beauty was not achieved through the pursuit of youth but rather through the right attitude toward ageing. In its commercials for Chronos, Natura featured actual consumers over 30 years of age instead of young models, with the implicit message that "you will not look like Claudia Schiffer with our products, but you're still beautiful".
Approximately 40% of the company's revenues are derived from products introduced within the last two years. Natura achieved this result with an R&D staff of approximately 150 and a budget totaling 3% of net income. Compare this with L'Oreal, the producers of Lanc™me and Maybelline, which spends approximately one-third of net income on R&D and employees nearly 3,000 researchers
Natura's innovation process started with a monthly meeting between the company's three presidents, its marketing director and the R&D director. At this meeting, new ideas and technological advances would be discussed. Because Natura has a network of over 200,000 direct sales consultants (much like the USA's Avon or Mary Kay), new product ideas can be quickly tested in the market and immediate feedback from customers regarding ideas or actual products can be easily obtained. Consultants are encouraged to call clients after the sale of a new product simply to gauge their reactions, and solicit real-time feedback. Says Pommez, "The close relationships between customers, consultants and promoters can give us a good idea of a product's acceptance within a week. With one of our perfumes, we realized it would be a failure from the consultants' reactions, even before the actual product was put into the market. It was removed from our catalogs within 3 weeks."
Natura's faith in the concepts behind its products often challenged industry precedents. One of the company's most daring ideas was its Mother/Baby product line, launched in 1993. Although research showed that Johnson & Johnson, with a 90% share, had an unassailable lock in this market, Natura decided to enter anyway and succeeded in capturing a significant piece of the sector for its creams, soaps and shampoos. They did so by linking their product with the Shantala method, a popular bonding technique in Brazil for strengthening ties between mothers and their infants by encouraging touching and caressing at an early age. The Shantala method posits that mothers can forge stronger relationships with their infants by gently massaging them during bathing and while applying creams and lotions. Natura's Mother/Baby line provides instructions on the Shantala method and outlines its benefits.
Going global is tough in any country, but internationalizing out of emerging markets is tougher still. Companies in India, China, Brazil, Turkey or other emerging markets face a series of obstacles that make doing business that much harder. Many companies are burdened with a scarcity of capital, a domestic market with relatively low per-capita disposable income, a technological disadvantage relative to their international rivals, and corruption in the local market among other factors. As if this weren't enough, the domestic Turkish market which represents the basis for expansion is turbulent region. On their home turf, managers must worry about the potential for exchange rate change, the possibility of a hard landing of the quickly growing economy, shifting government policies, unpredictable rates of inflation and interest, and increasing foreign competition.
In earlier years, firms in South Korea, China and Latin America have faced similar burdens and succeeded in going global. Some examples include South Korea's Samsung, China's Lenovo and Haier, Mexico's Cemex and Brazil's AmBev have managed to become global leaders in their respective industries despite similar obstacles.
Over the past few years, I have studied how emerging market firms achieved international success and found some surprising conclusions. First, I observed striking similarities in the steps they followed to achieve their exalted position. All the companies I studied took three critical steps: they committed to a global mindset; managers took bold actions to give their commitment teeth; and they re-aligned their entire organizations to compete globally.
STEP ONE: COMMIT TO A GLOBAL MINDSET. The first step in going from good to global is committing to a global mindset. For example, many Chinese managers still view the world from a parochial perspective. This mindset is captured beautifully by the route maps found the in-flight magazine of Chinese airlines, that show the Beijing or Shanghai as the center of the globe (and the center of the page), with routes extending outward in all directions. The problem, of course, is that only a small fraction of the planet's population sees the world this way. While your company may be doing very well against local rivals, the performance gap against global leaders may be enormous. Do Indian executives view the world differently?
Over in Korea a decade ago, Lee Kun Hee, Samsung's chairman fought against a similar attitude. To remedy this situation, Lee convened a meeting of 23 senior managers of Samsung Electronics in Los Angeles in February 1993. Before the meeting began, Lee took them to visit local electronics retailers. The managers were dismayed to find their products often stacked in corners gathering dust, while market leaders like Sony enjoyed a prominent position and commanded a price premium. Distressed by the gap between their self-image and how American consumers perceived their products, Samsung managers quickly concluded that the only way to global leadership was to improve product technology and brand to the standards set by Sony.
Seeing your company from a global perspective can be a rude awakening to local leaders. Managers require the intellectual honesty to stare the facts in the face and humility to accept the reality that they may indeed have a very long way to go before they close the gap with the best in the world. If your company is still too small to worry global leaders, it may be possible to visit them and benchmark their operations.
Committing to a global mindset requires a broad view of what it takes to be global. Truly global firms excel not only in their product and service markets, but across multiple markets including those for assets, talent, capital, technology, raw materials, market for corporate control (M&A). They also know, and approach the global best practices in key processes including operations, governance, post merger integration, information technology, etc. A useful exercise in broadening your global mindset is identifying the best company in the world across each of these categories, understanding their practices, and evaluating the gap with your company.
STEP TWO: GIVE YOUR COMMITMENT TEETH. Just because the CEO or a few are committed to going global, there is no guarantee that the rest of the organization will follow along. Decisive actions to give the global mindset teeth serve several purposes: they convince employees and external stakeholders that top managers mean business, and that globalization is not simply the management fad of the month that will come and go like so many buzzwords before. They serve as a wake up call that signals not only the company is in a crisis, but also that management has a way forward. Finally, these actions can help the company make a clean break with the past, and prevent the company from relapsing into the status quo. Like the general who burned the bridges behind his advancing army, retreating from the battle was no longer an option. Below are a list of examples, not a to do list. The appropriate commitments will vary by company.
Bet Big on Focus: Commitments to focus are common. Consider Cemex. Twenty years ago the company was a small family run company in Mexico with businesses in mining, tourism, petrochemicals and cement. Today it is the third largest cement company in the world, selling to customers in more than 60 countries with 2003 revenues exceeding $7 bn. Cemex CEO, like Samsung's Lee, realized his best chance in going global lies in focusing on a single business. It is hard enough to go global in a single industry, but spreading management attention and scarce resources across multiple sectors is reckless. To achieve global competitiveness in one business, Indian executives will need the courage to exit most others.
Bet Big on Acquisition: Focus was not the only big bet Cemex made. In 1992, Cemex, spent about $1.8bn to acquire two large Spanish cement companies almost equal in size to Cemex Mexican operations. These acquisitions allowed Cemex to raise funds in Mexico, retaliate against European players in their home market, and learn more about global expansion. Similarly, Laksmi Mittal built the LNM Group and its publicly-traded subsidiary Ispat International to the second-largest steel company in the world through a series of bold acquisitions.
Bet Big on Partnership: Sometimes the commitment goes the other way and consists in selling a portion of your company to a multinational. Consider the Modelo Group which grew from a small brewer in Mexico to one of the top five beer makers in the world with revenues of over $4bn. Modelo sold a large stake to Anheuser-Bush, which allowed it to protect its Mexican market from Budweiser itself and gain access to a great distribution partner in the USA for its beer. Garanti Bank has done something similar by selling a significant stake of its equity to GE Capital.
Bet Big on Brand: When Model decided to enter the US market, many doubted its ability to complete in the most competitive beer market in the world. From 1990 to 1996, however, Modelo increased its marketing budget to launch the Corona brand in the US by 780%, eventually making Corona the most popular imported beer in the US. Samsung made a similar bet to build its brand.
Change Headquarters and Official Language: Today Bunge is the largest soy bean producer in the world, and one of the largest food companies. To signal their commitment to globalization, the top managers relocated its headquarters from Brazil to White Plains, New York in 1999 and made English its official language.
Bet Big on a Customer: When Brazil ended trade protection in the auto industry, nineteen of the top twenty automotive parts suppliers went out of business or were acquired by multinationals. The only survivor was Sabo was which succeeded in globalizing its operations by committing to serve General Motors. While its competitors choose to serve less demanding local customers, Sabo early on committed to supplying the most demanding customers in the world, which forced the company to achieve world class standards quickly. When protection ended, Sabo was prepared while its competitors were not.
Bet Big on Technology: Samsung is not the only company which bet heavily on technology to win in global markets. Consider Brazil's Embraer, which is today the fourth largest airplane maker in the world. After its partial privatization in 1994 Embraer decided to bet the company on the launch of the ERJ 145, a regional jet. This project involved investments of over $800mn, and allowed Embraer to win 40% of the global market for regional jets.
STEP THREE: ALIGN THE ORGANIZATION. The final step is to align the rest of the organization to deliver on the commitment to global competition. This is the final step, but one that takes most of a decade and companies face a common set of challenges. Cemex provides an excellent example of aligning the organization to compete globally.
Strategic Frames: Cemex managers had to focus on global cement players (Lafarge and Holderbank)--rather than Mexican rival--as it defined the markets in which it would compete. Cemex managers characterize their international operations as a "ring of gray gold" comprising commitments to high growth markets (mostly in developing countries in a band north of the Equator). Cemex engaged in a global chess game where attacks in one market often led to retaliation in another market. Moreover, Cemex began to measure success in terms of economic value added and how quickly it could bring acquired operations to Cemex operational levels.
Resources: Cemex's internationalization accelerated with the bold acquisition of two large Spanish cement companies, which yielded a market leading 28% share in one of Europe's largest cement markets. Though shareholders initially took a dim view of the acquisitions, the boldness of the investment created the needed urgency to turnaround the two Spanish companies. Moreover, the Spanish acquisition was followed by transactions in Venezuela, Colombia, and Chile. Cemex also made strong commitment to having a superior IT platform to connect its plants. By 2000, Cemex was investing 1% of revenues in IT, well ahead of its rivals.
Processes: With its new internationalization strategy, Cemex invested in two critical processes: opportunity identification and post merger integration (PMI). To identify new acquisitions, managers scanned the world and developed strict rationale to enter a new market which included consumption potential, competitive dynamics, and how the acquisition would help the company manage salient risks (e.g., exchange rate, political risk, demand volatility) through diversification . Once the decision to proceed with an acquisition was made, Cemex formed a multi-disciplinary PMI team which would spend six months to a year on each company. This team would be in charge of improving the situation of the plant, replicating basic management processes and harmonizing cultural beliefs. Cemex became so good at the PMI process, that it started setting up PMI teams to "re-acquire" existing operations in periodic intervals.
Relationships: To fund its international expansion, Cemex developed relationships with global bond and equity markets. In 1990 it was the first Latin American company to list American Depository Receipts in the NYSE. In 1999 it also partnered with AIG, the insurance company, and the private equity arm of the Government of Singapore to fund up to $1.2bn in acquiring cement assets in Asia.
Values: Cemex developed global values to hire top graduates from local schools in each country and invest heavily in training and development. Cemex acquired a private satellite TV network for training and is increasingly using the internet for training and development. More importantly, Cemex wanted to preserve the basic elements of its strong culture, while adapting it to cut across multiple languages, cultures and religions Đ such as incorporating religious breaks in daily operations of its Indonesian plants.
For managers leading emerging market companies, these are the questions: How many are willing to commit to a truly global mindset? Are they willing to put their money where their mouth is and invest heavily to achieve global scale? Are the leading business families willing to give up the short-term safety of diversification to place a few bets for global leadership? And the most important question of all-What is the cost of not committing to globalization?