Quick takes

Strategy & Leadership

ISSN: 1087-8572

Article publication date: 3 July 2009

87

Citation

Gorrell, C. (2009), "Quick takes", Strategy & Leadership, Vol. 37 No. 4. https://doi.org/10.1108/sl.2009.26137dae.002

Publisher

:

Emerald Group Publishing Limited

Copyright © 2009, Emerald Group Publishing Limited


Quick takes

Article Type: Quick takes From: Strategy & Leadership, Volume 37, Issue 4

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

Interview: Surviving the recession and thriving beyond it: Rita McGrath explains how to deliver discovery-driven growthBrian Leavy

Rita Gunther McGrath, an Associate Professor in the Management Division of the Columbia University Graduate School of Business, is particularly well-known for developing practical tools and frameworks to make the innovation process less risky and difficult.

Overview of the interview: “Why now is it so important to have a different mindset and a different set of planning tools when it comes to new business ventures, and what are they?”

Theme 1: new business venturing in the current recessionNew business development and the precursor activities to it are going to go a long ways toward explaining which companies will come out of the current turmoil strengthened and ready, and which will have allowed the bad times to hollow them out. Two tools are offered: customer consumption chain and mapping product/service attributes.

Theme 2: discovery-driven growthThe essence of the discovery-driven growth (DDG) approach is to recognize that under conditions of high uncertainty, you need to invest in learning rather than in analysis. We emphasize step-by-step investing, keeping your costs low and known, until you’ve brought that ratio of assumptions relative to knowledge down.

Discovery-driven growth places a huge emphasis on dynamics, on learning, and on discipline. “Real options reasoning” refers to a way of thinking about investments in new ventures that help contain cost and that reflect how much uncertainty you have. It is a different discipline than might be used in a more predictable business. Unlike a financial option, however, real options require active management to make sure that the appropriate investment pattern is maintained: access to an attractive upside, contained and ideally small downside, investing across a portfolio of opportunities and the preservation of the ability to stop or redirect when new information becomes available.

Idea: have a portfolio of projects differentiated around opportunity type. Seven initiatives with different levels of uncertainty serve different strategic purposes are cited. The right mix of each type of project will be different for every firm, depending on the nature of its business and its strategy. Faster moving situations often call more for options; slower moving ones for more core investment. The crucial thing is to achieve alignment between the strategy and the portfolio of actual investments that you’re making.

Theme 3: Organizational challenges in innovative corporate venturesAs a contributor to the essential Darwinian processes that take place in healthy organizations, new ventures can help companies identify where the future resources should go, as well as create a culture of constant investment in the future.

Succeeding in the new economic environment – three targets for leadersSaul Berman, Steven Davidson, Sara Longworth and Amy Blitz

Companies are now struggling to cope with the most severe recession in more than half a century. Leading companies that have successfully reacted to the crisis have learned to ask, “Which strategies will allow the company to both survive in this economic transformation and, potentially, to thrive in it?”

While some of the early winners were simply in the right place at the right time, most demonstrate the power of having a strategic vision that can thrive in even the toughest of times. Overall, the early winners:

  • Focus on value via sustainable strategies that emphasize long-term value.

  • Exploit opportunities presented during downturns, including growing through low-cost acquisitions and stock buy-backs.

  • Act quickly, with the agility to respond ahead of, or at least to keep pace with, rapid changes in the new economic environment.

These are the three targets for leaders in the new economic environment.

Leadership target #;1: focus on value

  1. 1.

    Do more with less: cut costs strategically (not just across the board); conserve working capital; protect cash reserves; increase flexibility and responsiveness (know degree of vulnerability to declines in demand and revenues-know capacity to cope).

  2. 2.

    Focus on the core: create value for clients and preserve differentiation; strip out non-value-add activities and reduce non-core costs; shift from fixed to variable costs.

  3. 3.

    Understand your customers: target value-oriented customers; reduce complexity.

Leadership target #2: exploit opportunities

  1. 1.

    Capture share: disrupt weaker competitors; focus efforts on growth markets; acquire bargain-priced assets.

  2. 2.

    Build future capabilities: protect and acquire critical talent; establish the corporate infrastructure to seize future growth opportunities; invest in innovation.

  3. 3.

    Change your industry: understand the impact of the current transformation on your industry–consider a new business model; pioneer new industry approaches and standards; identify and exploit new revenue models; cultivate strategic partnerships.

Leadership target #3: make speed a competitive advantage

  1. 1.

    Empower leaders: establish strong and aligned leadership; communicate your strategy quickly, clearly, and often.

  2. 2.

    Manage risk: reduce risk and increase transparency; apply analytics to improve decision-making.

Amid the noise, chaos and confusion of these tumultuous times, the companies that prepare themselves in advance to focus on value, to exploit the advantages of being prepared, and to act quickly, will be most likely to turn their opportunities into long term competitive advantage.

Case: Distressed M&A and corporate strategy: lessons from Marvel Entertainment Group’s bankruptcyJoseph Calandro Jr

Distressed M&A deals have become more common given the current recession, and may increase in number as this economic environment may continue for some time to come. Many viable companies suffer distress due to financial issues rather than operational issues, which is a reason why bankruptcy can generate an M&A strategy opportunity for those with cash. Here are lessons learned to assess distressed M&A opportunities as part of a company’s corporate strategy, using a case study for illustration.

Marvel Entertainment Group, Inc. (Marvel) demonstrates the kind of hidden value-based opportunities that are sometimes found in distressed M&A. The Marvel case also dramatically illustrates how lucrative those opportunities can be; however, the value of such opportunities is often hidden amidst the confusion and distress of bankruptcy. Fortunately, it can often be identified through an integrated financial and strategic valuation, such as the Graham and Dodd valuation approach. This entails an analysis of Marvel’s liquidation value, net asset value, earnings power value, and growth value.

A key lesson here is that a good understanding of the business in distressed M&A is crucial, not only from a business risk management perspective but also from a liquidation risk perspective. Firms without a viable value-proposition or business plan should be liquidated; conversely, viable firms should be reorganized and returned to the marketplace.

When compared to financial investors, corporate strategies have several advantages in distressed investments:

  1. 1.

    Specialized industry knowledge. Corporate strategists can have an advantage assessing distressed firm viability if they focus on deals within their areas of expertise. Doing so will enable them to efficiently leverage their industry market knowledge in a field usually considered a specialty of financial experts due to its unique valuation and negotiation dynamics.

  2. 2.

    A longer time frame over which to operate. Many investors seek relatively quick rates of return so they can move on to the next deal. Corporate strategists, on the other hand, generally work with five to ten year corporate plans, enabling them to capture significantly more of a deal’s value.

  3. 3.

    Bottom-line: if properly evaluated, distressed M&A opportunities could become a valuable corporate strategy alternative, especially during troubled economic times. Identifying such opportunities requires a multi-layered valuation approach, such as the Graham and Dodd-based valuation.

Variabilization of costs: especially effective in a recessionNicolas Kachaner

Transform fixed costs into variable costs! The experience of pioneering companies doing this shows that such a strategy can contribute to competitive advantage and even be highly profitable.

Redesigning cost structureBegin with the question: “Why does the firm need to own something to use it?” Why does a hotel chain have to own its real estate, thus trapping a lot of capital and representing big fixed costs? A construction company with a truck fleet or any company with extensive IT assets should ask the same question. Consider turning to major suppliers and asking them to buy back all the assets they have sold the company, which is good for cash flow, and then, negotiating contracts that require a firm only to pay for those assets as they are used or, even better, as a percentage of sales. This is referred to as back-end variabilization.

Developing front-end variabilization solutionsWhy would suppliers ever accept these terms? Think of Xerox, who used this approach to sell copiers by the paper copy, with the usage charge including maintenance and upgrades. Or the mobile telephony industry, in which customers are offered “free” cell phones and pay for usage by the minute, with minimum usage and a contractual commitment to a certain duration of service.

By retaining the assets and selling usage, companies can optimize costs across the value chain. Because assets can be redeployed from one client to another, providers of variabilization solutions can mitigate risk that a particular client might prove unable or unwilling to bear. A provider of variabilization solutions can leverage economies of scale and experience across its portfolio of clients’ equipment, creating far more economic value from those assets than could any individual client – even the largest in its industry.

Risk factorsIsn’t this a dangerous model in a downturn? Won’t customers reduce usage, causing revenue to decline? To a degree, yes. But if a firm used the traditional model for selling capital equipment, a downturn might lead to revenues plunging 50 percent or more. By contrast, our experience suggests that a variabilized offering would fare much better, with sales declines in the range of 10 percent. Variabilization solutions represent a resilient business model.

TrendsIn the new world of variabilization, the following trends can safely be anticipated:

  • Assets, risks, and activities will migrate to those that can best optimize them.

  • Companies’ cost structures will become more variable, making their business models more resilient.

  • Suppliers and customers will become more and more integrated.

  • Competitive advantage will shift away from scale and toward agility, risk management, and coordination across the value chain.

Leadership liabilities of newly appointed managers: arrive preparedMarius Pretorius

There are seven categories of liabilities all new managerial appointees must overcome, regardless of whether they are a new CEO or a new department manager. They are the preconditions that act as obstacles to effective leadership and strategy implementation. And because the liabilities are interdependent, their effects can be additive and the relationships not always directly visible.

1. Liability of legitimacyThis liability is inherent in any situation where a new manager is appointed.

2. Liability of lack of prior knowledgePrior knowledge refers to two specific elements, industry knowledge and network knowledge. Time is a crucial factor for overcoming the liability of inadequate knowledge, as the newly appointed manager strives to quickly “learn the ropes.” As legitimacy becomes established, the liability of prior knowledge lessens.

3. Liability of data access and data integrityThe newly appointed manager has little information about systems, performance and people, yet decision-making depends on both access to and soundness of information about the challenges.

4. Liability of failing to share a visionThe number one reason reported for managers failing as leaders is because they are unable to share their vision successfully with followers. This liability can be seen as a dilemma, in that legitimacy depends on a successfully shared vision, while at the same time legitimacy is also a prerequisite for being able to share the vision successfully.

5. Liability of integration for critical massImplementing strategies requires an integrated approach to assimilating different initiatives, activities and people in a holistic way so as to create “critical mass” for achieving goals. Integrating this effort requires the ability to see the big picture and manage the detail actions of the process at the same time. It is only when the initiatives reach a critical mass of effectiveness can leadership momentum be sustained.

6. Liability feedback controlDelivering effective feedback presents another dilemma for the new appointee. To enhance legitimacy, the new manager must offer the team or unit timely feedback, but to do this accurately requires the mastery of performance measures and the insights to apply them.

7. Liability of cultureCulture affects the liabilities of sharing the vision, integration for critical mass and feedback control through its influence on follower perceptions. Data access and data integrity also depend on each company’s culture.

Practices for overcoming liabilitiesTo overcome the liabilities, leaders can adopt these three key practices:

  • Deliberately acting by example. This leads to overcoming the liability of legitimacy.

  • Supporting and encouraging followers. This overcomes the liability of feedback control as well as sharing the vision.

  • Acting with passion and compassion. This contributes to legitimacy, especially in a dysfunctional culture.

The bottom line message: Awareness and an action plan are essential to resolution of the seven interdependent liabilities.

How subsidiaries are battling to survive and growPamela Sharkey Scott and Patrick T. Gibbons

Given the world’s stressful economic environment, subsidiaries of multinational corporations (MNCs), located in developed countries (such as Ireland), are increasingly vulnerable to being closed, and their operation moved to a lower-cost country.

As one director wryly acknowledged, “without the rhetoric, we are a manufacturing plant in an expensive country and our position is insecure unless we constantly prove our value to our parent corporation by adding value. How to come up with ways of adding value is the difficult part.”

A major survey and interview program of subsidiary CEOs of leading MNCs discovered that subsidiaries are employing four mutually reinforcing strategies to enhance their position:

  1. 1.

    Seizing the initiative – not passively accepting their role and fate but recognizing that survival and growth depends on attaining sufficient autonomy to exploit opportunities.

    • Instill confidence in the subsidiary’s management skills. Greater headquarters confidence in subsidiary management’s judgments leads to greater autonomy, allowing the subsidiary freedom to act on opportunities.

    • Build headquarters contacts. Geographical remoteness can be overcome by knowing the right people to access.

    • Obey the rules, most of the time.

  2. 2.

    Building information networks – developing networks with external customers, competitors and rival subsidiaries to access knowledge, innovative ideas and opportunities.

  3. 3.

    Creating a climate for entrepreneurship – Successful entrepreneurial subsidiaries are well aware of the risks, but they do not allow the fear of failure to inhibit their pursuit of opportunities.

    • Stop penalizing failure.

    • Introduce strategic reward systems.

  4. 4.

    Developing subsidiary strategy development processes – using strategic management techniques to adapt their position within their MNC and their external environment. As urged by one CEO, “… make the hard decisions rather than have somebody else making them.”

Subsidiary CEOs must drive the vision. Balancing how to drive innovative plant strategy within the constraints of headquarters’ requirements for the subsidiary is a difficult task and the choices made have career implications. In essence as described by one director, the subsidiary CEO needs to “be a catalyst in terms of delivering on strategies or objectives handed down and to then be innovative in how it is done.”

So what are your subsidiaries doing to make themselves more valuable to their parent?

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

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