Quick takes

Citation

Gorrell, C. (2009), "Quick takes", Strategy & Leadership, Vol. 37 No. 1. https://doi.org/10.1108/sl.2009.26137aae.004

Quick takes

Article Type: Quick takes From: Strategy & Leadership, Volume 37, Issue 1

Catherine GorrellPresident of Formac, Inc. a Dallas-based strategy consulting organization (mcgorrell@sbcglobal.net) and a contributing editor of Strategy & Leadership.

These brief summaries highlight the key points and action steps in the feature articles in this issue of Strategy & Leadership.

End shareholder value tyranny: put the corporation firstMichael E. Raynor

The challenge

Corporate leaders have to make hard choices, allocating limited resources among competing objectives. For example, how do leaders strike a balance between cutting costs to sustain profitability and investing resources for the long term? How far beyond government mandates should a company go with its “green” initiatives when the financial benefits are unclear but the environmental benefits are obvious? What investments in workplace safety and employee health are appropriate? Is compliance with the law enough, or is something more “required?”

Core question

To make those tradeoffs effectively the whole organization needs a clear sense of what it is trying to achieve, and how choosing between specified alternatives serves its highest goal; it needs a “best metric” for the corporate strategy. In other words, what ultimate end should corporations – that is, the managers who run them – refer to when making these difficult and sometimes painful tradeoffs?

The answer

Many investors in corporations view maximizing shareholder wealth as the most obvious and defensible, corporate objective function. But let’s consider the shortcomings of the “shareholder” view.

Shareholder-wealth view

This widely held view holds that every choice should be made with an eye to creating as much financial wealth as possible for the providers of equity capital. But none of the familiar justifications for this view stand up to scrutiny. It is not true that:

1. 1.

   Shareholders are owners.

2. 2.

   Shareholders bear the most risk.

3. 3.

   Maximizing shareholder value is a clear goal.

4. 4.

   Maximizing shareholder value is a legal requirement.

Corporation-first view

There is a better alternative principle: the ultimate purpose of the corporation is the survival of corporation itself. The corporation should not seek to maximize the interests of shareholders, or employees, or suppliers, or the environment, or anyone or anything else. The author examines the Costco case, a clear example of a strategic alternative to the shareholder value approach.

Bottom line

This article is intended to provoke some serious soul-searching about the largely unquestioned primacy of shareholder interests as the objective function of the corporation.

Case:Managing enterprise risk: why a giant failedDale E. Zand

Tenneco – a large, prosperous firm – failed and its best assets had to be sold to allow its survival. Why? Behind its actions of problematic acquisitions and questionable financial policies, are underlying dynamics that offer lessons for other companies. The findings are based on extensive interviews of management, board members, and review of documents and publications.

Principles of enterprise-risk management

Six principles of enterprise-risk management can be distilled from the Tenneco case:

1. 1.

   In organizations that enjoy an extended period of prosperity, CEOs and the board of directors must curtail risk taking habits when they detect a culture of complacency developing.

2. 2.

   When a board sees that management is committed to chasing problematic ventures it must strenuously object and support alternate courses of action.

3. 3.

   It is the CFO, CEO, and the board’s responsibility to be vigilant to the risks of highly leveraged debt. Board members who see a problem looming should request a study by impartial risk consultants.

4. 4.

   The CFO, CEO and the board should anticipate and preempt a risk crisis by analyzing the implicit risk inherent in depending on vulnerable earnings.

5. 5.

   The CFO, CEO and the board should discuss a plan for a response to a risk crisis so management will fully understand the dire consequences of imprudent risk management.

6. 6.

   Both management and the board should take a system view of enterprise risk. Evaluating the risk of individual projects and decisions is important, but in a multi-business firm, only a system-wide view of risk can identify the full extent of the organization’s exposure.

Tenneco management’s blind spot was its failure to consider the interaction of its decisions and implicit assumptions over time. It treated each decision as separate and self-contained. In contrast, a system-wide view would have shown Tenneco’s board that investing in Case-IH, increasing debt to fund manufacturing programs and eroding equity to pay unearned dividends was a potentially disastrous combination, given the volatility of its energy business earnings.

Bottom line

To succeed, all parties must commit to realistically assess system risk, openly consider alternatives, and act with prudence and independence. To do otherwise is to jeopardize the survival of the organization.

How teams can capitalize on conflictTim Flanagan and Craig Runde

Teams and teamwork are critical components of business success, providing the collaborative work (for new ideas, better methods, and novel approaches) necessary for a company’s competitiveness. But the burgeoning diversity of team members, which increases divergent perspectives, is simultaneously a strength and a challenge. Conflict is inevitable. Yet, this is not an inherently negative factor.

Premises

1. 1.

   When innovative alternatives are being analyzed and challenged, conflict is a necessary ingredient in the creative process. Differences are often the catalysts to vigorous debate and creative thinking. Therefore, the critical challenge for leaders and teams today is how to get the best from the inevitable differences and disagreements that arise while minimizing the harm and discomfort routinely associated with conflict.

2. 2.

   Teams can foster constructive forms of conflict by creating the right climate and constructive engagement.

Creating the right climate

This requires the use of constructive communication skills and techniques that keep group discussions headed in the right direction. Teams frequently focus on their substantive tasks without taking the time to address process concerns. If they want to keep conflicts from derailing their efforts, an essential first step for teams is to:

• •

  Establish team “norms”, including trust and safety, collaboration, and emotional intelligence.

• •

  Establish at the outset how they will promote and support each of the norms.

Engaging constructively

Creating and maintaining the right climate cannot be accomplished unless team members choose to communicate in constructive ways. Several constructive communication approaches and tactics are described:

• •

  Improved self awareness.

• •

  Delayed response and increased reflective thinking.

• •

  Perspective taking.

Benefit: disruptive innovation

Beyond the adoption of methods and approaches to resolve the conflicts, teams must realize the potential inherent in conflict and capitalize on it. Differences of opinion can be strengths. Disagreements may signal the emergence of innovative, novel concepts as yet unrealized. When addressed competently, conflict becomes an advantage for teams as issues are examined thoughtfully, new approaches are considered, and opportunities are expanded.

Strategic thinking about disruptive technologiesNick Evans, Bill Ralston and Andrew Broderick

A company’s strategy work is not complete without a consideration of the ongoing emergence of disruptive technologies from laboratories around the globe. Its future opportunities and risks depends on its ability to speedily identify which technologies will be significant, to analyze their potential impacts, to understand their uncertainties, to identify technology-connected synergies created by convergence of knowledge, to select targets for focus, and to continually review new information and choices. In short, a method is needed to do this analysis in an orderly and effective way.

Offered in this article is one such methodology – the “opportunity-discovery process” – to systematically look at a full range of emerging technologies, see the commercialization possibilities, and lay the foundation for understanding what to do.

Opportunity-discovery process

Key features of the process include:

• •

  Assembling a multidisciplinary group of technology and market analysts.

• •

  Using a common language for describing and discussing emerging technologies.

• •

  Using workshops to assimilate and sort through information rapidly, generate innovative ideas, conduct comparisons, and segregate results.

• •

  Preparing decision-oriented profiles of high-potential technologies. The profiles include information, judgments, and alternative future scenarios.

All of the steps in the opportunity-discovery process are demonstrated in a project done for the US government. The challenge was to identify the most important civilian technologies disruptive to the US interests up to 2025. For the US project, 102 potential technologies were identified, and 20 dominant ones were mapped. In this article, biogerontechnology is used to show the analysis methodology. For biogerontechnology, the disruptive potential comes in the form of new treatment modalities and shifts in the cost, allocation, and use of health-care resources.

Bottom line

The task to analyze disruptive technologies is complex, involving internal and external information sources and knowledge collaboration. It is also critically important because making the uncertainties about the future explicit is the key to understanding the possibilities and making good choices about where and when to invest the company’s precious time and resources.

The new demography of the 21st century: part 2 – gender gaps and population bulges – what demography means to the corporate plannerMartin Walker

Part 2 – gender gaps and population bulges – what demography means to the corporate planner is the second segment of a two-part article. “Part 1 – the birthrate surprise” appeared in the previous issue of Strategy & Leadership (Vol. 36, No. 6).

Corporations rely on population trends to assess production and employment plans, the development of markets, and the best targets for future investments. But many demographic factors – such as birth-rate trends – can take surprising turns that should cause cautious use of long-term projections. There is, however, one demographic area that offers reliable hard census data rather than conjectures; that is the “youth cohort.”

Youth cohort facts

All of the teenagers who will be alive in 2020 have already been born. Therefore key facts can be known. For example, based on youth cohort data, a significant gender imbalances exist, leading to one estimate that there are 90 million fewer women than men in Asia. Regarding China, Beijing expects that it may have as many as 40 million more men than women by 2020. Since millions of Chinese males may never find a mate to raise a conventional family, these frustrated bachelors might generate social and political instability. The state’s response to crime and social unrest could prove to be a defining factor for China’s political future. One researcher made the dramatic suggestion that “in 2020 it may seem to China that it would be worth it to have a very bloody battle in which a lot of their young men could die in some glorious cause.” Other experts aren’t so alarmed.

Key points for corporate planners

Some demographic profiles, such as the youth cohort, can provide a clear road map to markets at their most promising points. Many examples are cited supporting these five demographic factors:

1. 1.

   Forecasting for bulge markets. The implications of a youth bulge and its progress over time are reasonably predictable. Once the birth rate is known for a particular market, corporate planners can start making estimates of the future demand for goods over the next 70 years.

2. 2.

   Sources of cheap labor in the future are already known. The places where labor will be cheap and plentiful can be deduced from the birthrates from the late-1980s. Example: North Africa and the Middle East could start to experience relative shortages of young employee recruits from around the year 2020.

3. 3.

   A growing middle class is emerging worldwide. The middle class in developing countries may already be the fastest-growing distinct group of the world’s population.

4. 4.

   A growing class of the very poor. Although well over half of the world’s population by 2050 can expect to enjoy a basic middle-class status, the number of the very poor will more than double.

5. 5.

   An aging population. Perhaps the most striking feature of the demographic transformation now unfolding is that the world is aging in an unprecedented way.

How visionary nonprofits leaders are learning to enhance management capabilitiesDaniel Stid and Jeff Bradach

Leadership and management: different skills, yet both are very necessary in every organization, whether it is a for-profit or a non-profit. Whereas the strength of most for-profit enterprises is their management practice, surveys show that non-profits are best in visionary leadership, but often significantly under-managed. A balance is critical, with the goal of becoming both strongly led and strongly managed.

Basic premises

If leadership is – in management guru John Kotter’s apt phrase – “a force for change,” then management is geared to reliably delivering the product or service of the organization amid complexity. Leadership and management need to be understood in terms of the collective capacity of an organization and not as characteristics of individual people. And the crucial importance of both these capabilities needs to be acknowledged and addressed if an organization is to deliver great results over time.

Non-profit’s challenge

When asked, non-profit leaders profess that visionary leadership (with a compelling case for a cause) drives fund raising and recruitment of volunteers. But their management to deliver long-term results is not as strong. Examples of five leading non-profits are presented to show how management strengths can be added.

Key points learned by successful non-profits

1. 1.

   Understand the tension between leadership and management.

2. 2.

   Get strategic clarity to make it easier to see how to achieve the desired impact by setting priorities, establishing performance measures, and making tradeoffs.

3. 3.

   Anchor strategic clarity in a few key metrics, to keep everyone focused.

4. 4.

   Build and align the team: bring in complementary skills, release those not able to contribute, and create new roles and/or elevate key positions to reinforce a new emphasis on management.

5. 5.

   Actively manage the change process – reinforcing not only why change is necessary, but also how it will strengthen the organization’s ability to sustain its impact and live into its mission over time. It is essential to continually communicate the idea that stepped-up management practices aren’t distractions from the work – they are the work.

Implementing this agenda in the context of nonprofit leadership is difficult. A framework is offered that illustrates the shift that many non-profits need to work through in order to become a high performing organization.