Strategy as revolution

How often does the strategic-planning process start with senior executives asking what the rest of the organization can teach them about the future? Not often enough, argues Gary Hamel. In many companies, strategy making is an elitist procedure and ?strategy? consists of nothing more than following the industry's rules. But more and more companies, intent on overturning the industrial order, are rewriting those rules. What can industry incumbents do? Either surrender the future to revolutionary challengers or revolutionize the way their companies create strategy. What is needed is not a tweak to the traditional strategic-planning process, Hamel says, but a new philosophical foundation: strategy is revolution. Hamel offers ten principles to help a company think about the challenge of creating truly revolutionary strategies. Perhaps the most fundamental principle is that so-called strategic planning doesn't produce true strategic innovation. The traditional planning process is little more than a rote procedure in which deeply held assumptions and industry conventions are reinforced rather than challenged. Such a process harnesses only a tiny proportion of an organization's creative potential. If there is to be any hope of industry revolution, senior managers must give up their monopoly on the creation of strategy. They must embrace a truly democratic process that can give voice to the revolutionaries that exist in every company. If senior managers are unwilling to do this, employees must become strategy activists. The opportunities for industry revolution are mostly unexplored. One thing is certain: if you don't let the revolutionaries challenge you from within, they will eventually challenge you from without--in the marketplace.     

Consumer strategy in the public sector: Are you being served?

If your consumers had a choice, would they still choose you? Looking at your service through their eyes is a useful first step in working towards a positive answer to that question. Public sector managers need market sensitivity, whether or not they are monopoly suppliers of services.     

Organigraphs: drawing how companies really work

Walk into any organization and you will get a snapshot of the company in action--people and products moving every which way. But ask for a picture of the company and you will be given the org chart, with its orderly little boxes showing just the names and titles of managers. Now there's a more revealing way to depict the people and operations within an organization--an approach called the organigraph. The organigraph is not a chart. It's a map that offers an overview of the company's functions and the ways that people organize themselves at work. Perhaps most important, an organigraph can help managers see untapped competitive opportunities. Drawing on the organigraphs they created for about a dozen companies, authors Mintzberg and Van der Heyden illustrate just how valuable a tool the organigraph is. For instance, one they created for Electrocomponents, a British distributor of electrical and mechanical items, led managers to a better understanding of the company's real expertise--business-to-business relationships. As a result of that insight, the company wisely decided to expand in Asia and to increase its Internet business. As one manager says, "It allowed the company to see all sorts of new possibilities." With traditional hierarchies vanishing and newfangled--and often quite complex--organizational forms taking their place, people are struggling to understand how their companies work. What parts connect to one another? How should processes and people come together? Whose ideas have to flow where? With their flexibility and realism, organigraphs give managers a new way to answer those questions.     

Build the co-creative enterprise

These days more companies are inviting customers to help them design products. Now a few are taking things further and including their other stakeholders--employees, suppliers, distributors, and even regulators--in "co-creation" efforts, too. By focusing on improving the experiences of everyone involved, such firms are achieving breakthrough insights, lower costs, new revenues, and new business models. Consider how this worked at France's La Poste, which wanted to expand package delivery and banking services in light of a decline in its mail business. La Poste had three obstacles: unmotivated union tellers, customers disgruntled by long waits, and frustrated local managers, who felt caught in between. The company set some high-level goals and invited all three groups to decide how to reach them together. To get tellers' buy-in, La Poste gave them a say in their schedules. In workshops, the groups figured out when each office should be open and how its space should be configured. The results: a 50% decrease in waiting time, a jump in satisfaction for customers, soaring job satisfaction among tellers, and significant growth in package delivery and banking, despite the recession.     

Creativity, Leadership and Change

The Department for Education and Employment's (DfEE) Permanent Secretary asks what needs to be done to deliver better public services. What are the priorities for modernization and how can these be achieved? He explains that the civil service has often under-valued management, skimped on management development, left project managers inadequately trained and recognized, and failed to reward effective service delivery. Improving delivery therefore requires a major cultural shift. He discusses four key issues: creativity, leadership, delivery, and community ownership.     

Managing for creativity

A company's most important asset isn't raw materials, transportation systems, or political influence. It's creative capital--simply put, an arsenal of creative thinkers whose ideas can be turned into valuable products and services. Creative employees pioneer new technologies, birth new industries, and power economic growth. If you want your company to succeed, these are the people you entrust it to. But how do you accommodate the complex and chaotic nature of the creative process while increasing efficiency, improving quality, and raising productivity? Most businesses haven't figured this out. A notable exception is SAS Institute, the world's largest privately held software company. SAS makes Fortune's 100 Best Companies to Work For list every year. The company has enjoyed low employee turnover, high customer satisfaction, and 28 straight years of revenue growth. What's the secret to all this success? The authors, an academic and a CEO, approach this question differently, but they've come to the same conclusion: SAS has learned how to harness the creative energies of all its stakeholders, including its customers, software developers, managers, and support staff. Its framework for managing creativity rests on three guiding principles. First, help employees do their best work by keeping them intellectually engaged and by removing distractions. Second, make managers responsible for sparking creativity and eliminate arbitrary distinctions between "suits" and "creatives". And third, engage customers as creative partners so you can deliver superior products. Underlying all three principles is a mandate to foster interaction--not just to collect individuals' ideas. By nurturing relationships among developers, salespeople, and customers, SAS is investing in its future creative capital. Within a management framework like SAS's, creativity and productivity flourish, flexibility and profitability go hand in hand, and work/life balance and hard work aren't mutually exclusive.     

What is a global manager?

To compete around the world, a company needs three strategic capabilities: global-scale efficiency, local responsiveness, and the ability to leverage learning worldwide. No single "global" manager can build these capabilities. Rather, groups of specialized managers must integrate assets, resources, and people in diverse operating units. Such managers are made, not born. And how to make them is--and must be--the foremost question for corporate managers. Drawing on their research with leading transnational corporations, Christopher Bartlett and Sumantra Ghoshal identify three types of global managers. They also illustrate the responsibilities each position involves through a close look at the careers of successful executives: Leif Johansson of Electrolux, Howard Gottlieb of NEC, and Wahib Zaki of Procter & Gamble. The first type is the global business or product-division manager who must build worldwide efficiency and competitiveness. These managers recognize cross-border opportunities and risks as well as link activities and capabilities around the world. The second is the country manager whose unit is the building block for worldwide operations. These managers are responsible for understanding and interpreting local markets, building local resources and capabilities, and contributing to--and participating in--the development of global strategy. Finally, there are worldwide functional specialists--the managers whose potential is least appreciated in many traditional multinational companies. To transfer expertise from one unit to another and leverage learning, these managers must scan the company for good ideas and best practice, cross-pollinate among units, and champion innovations with worldwide applications.     

Managing away bad habits

We've all worked with highly competent people who are held back by a seemingly fatal personality flaw. One person takes on too much work; another sees the downside in every proposed change; a third pushes people out of the way. At best, people with these "bad habits" create their own glass ceilings, which limit their success and their contributions to the company. At worst, they destroy their own careers. Although the psychological flaws of such individuals run deep, their managers are not helpless. In this article, James Waldroop and Timothy Butler--both psychologists--examine the root causes of these flaws and suggest concrete tactics they have used to help people recognize and correct the following six behavior patterns: The hero, who always pushes himself--and subordinates--too hard to do too much for too long. The meritocrat, who believes that the best ideas can and will be determined objectively and ignores the politics inherent in most situations. The bulldozer, who runs roughshod over others in a quest for power. The pessimist, who always worries about what could go wrong. The rebel, who automatically fights against authority and convention. And the home run hitter, who tries to do too much too soon--he swings for the fences before he's learned to hit singles. Helping people break through their self-created glass ceilings is the ultimate win-win scenario: both the individual and the organization are rewarded. Using the tactics introduced in this article, managers can help their brilliantly flawed performers become spectacular achievers.     

Tournament incentives, firm risk, and corporate policies

This paper tests the proposition that higher tournament incentives will result in greater risk-taking by senior managers in order to increase their chance of promotion to the rank of CEO. Measuring tournament incentives as the pay gap between the CEO and the next layer of senior managers, we find a significantly positive relation between firm risk and tournament incentives. Further, we find that greater tournament incentives lead to higher R&D intensity, firm focus, and leverage, but lower capital expenditures intensity. Our results support the hypothesis that option-like features of intra-organizational CEO promotion tournaments provide incentives to senior executives to increase firm risk by following riskier policies. Finally, the compensation levels and structures of executives of financial institutions have received a great deal of scrutiny after the financial crisis. In a separate examination of financial firms, we again find a significantly positive relation between firm risk and tournament incentives.     

How to make experience your company's best teacher

In our personal life, experience is often the best teacher. Not so in corporate life. After a major event--a product failure, a downsizing crisis, or a merger--many companies stumble along, oblivious to the lessons of the past. Mistakes get repeated, but smart decisions do not. Most important, the old ways of thinking are never discussed, so they are still in place to spawn new mishaps. Individuals will often tell you that they understand what went wrong (or right). Yet their insights are rarely shared openly. And they are analyzed and internalized by the company even less frequently. Why? Because managers have few tools with which to capture institutional experience, disseminate its lessons, and translate them into effective action. In an effort to solve this problem, a group of social scientists, business managers, and journalists at MIT have developed and tested a tool called the learning history. It is a written narrative of a company's recent critical event, nearly all of it presented in two columns. In one column, relevant episodes are described by the people who took part in them, were affected by them, or observed them. In the other, learning historians--trained outsiders and knowledgeable insiders--identify recurrent themes in the narrative, pose questions, and raise "undiscussable" issues. The learning history forms the basis for group discussions, both for those involved in the event and for others who also might learn from it. The authors believe that this tool--based on the ancient practice of community storytelling--can build trust, raise important issues, transfer knowledge from one part of a company to another, and help build a body of generalizable knowledge about management.     

Pension Fund Manager Tournaments and Attitudes Towards Corporate Characteristics

Abstract:  This paper explores the relationship between the tournament incentives of pension fund managers and the characteristics of equities they choose to hold. Using a comprehensive data set on pension fund portfolio holdings, we determine the intensity of fund manager tournaments by sorting pension funds into portfolios based on the number of concurrent managers each pension fund employs. We then investigate which corporate characteristics are preferred by each of these portfolios by estimating share selection models that include a range of corporate characteristics that are expected to shape the returns to investment in stocks over the short and long run. We find that the intensity of the tournament faced by fund managers plays a significant role in shaping preferences over corporate characteristics. Managers facing more intense tournaments exhibit significantly weaker preferences for attributes associated with long run payoffs, such as social performance and growth potential, and significantly stronger preferences for short term attributes, such as operational efficiency, when compared to managers that face weak or no tournament incentives.     

Is your company ready for one-to-one marketing?

One-to-one marketing, also known as relationship marketing, promises to increase the value of your customer base by establishing a learning relationship with each customer. The customer tells you of some need, and you customize your product or service to meet it. Every interaction and modification improves your ability to fit your product to the particular customer. Eventually, even if a competitor offers the same type of service, your customer won't be able to enjoy the same level of convenience without taking the time to teach your competitor the lessons your company has already learned. Although the theory behind one-to-one marketing is simple, implementation is complex. Too many companies have jumped on the one-to-one band-wagon without proper preparation--mistakenly understanding it as an excuse to badger customers with excessive telemarketing and direct mail campaigns. The authors offer practical advice for implementing a one-to-one marketing program correctly. They describe four key steps: identifying your customers, differentiating among them, interacting with them, and customizing your product or service to meet each customer's needs. And they provide activities and exercises, to be administered to employees and customers, that will help you identify your company's readiness to launch a one-to-one initiative. Although some managers dismiss the possibility of one-to-one marketing as an unattainable goal, even a modest program can produce substantial benefits. This tool kit will help you determine what type of program your company can implement now, what you need to do to position your company for a large-scale initiative, and how to set priorities.     

Managing our way to higher service-sector productivity

In the two decades following World War II, U.S. productivity grew at an annual rate of 3%. But since the beginning of the 1970s, it has grown at only about 1%. Had the earlier rate been sustained, the gross domestic product would now be about $11 trillion instead of about $6.5 trillion. That extra $4.5 trillion per year in economic output would have had a profound impact on a wide range of social and economic problems. What is preventing a productivity revival in the U.S. economy? Clearly not the manufacturing sector, which has rebounded since the early 1980s. The service sector, on the other hand, has seen productivity growth rates stagnate during the same period. Why? Michael van Biema and Bruce Greenwald believe that the usual explanations are incomplete and have resulted in some serious misconceptions. The authors point out the limitations of those explanations and offer one of their own. They lay the blame in two places: the ineffectiveness of many service-sector managers at improving productivity and the inherent complexity of the sector itself. The authors argue that the problem is not a lack of resources; rather, it is that service sector companies operate below their potential. If managers focused on putting the existing technologies, labor force, and capital stock to work, rapid productivity growth would follow. Although the service sector is complex, the authors believe that managers would do well to apply the same tools, techniques, and policies that have been so effective in manufacturing sector. Doing so would help them keep their eye on the ball - the efficiency of basic operations.     

Tournament incentives and firm credit risk: Evidence from credit default swap referenced firms

In this paper, we evaluate the impact of managerial tournament incentives on firm credit risk in credit default swap (CDS) referenced firms. We find that intra‐firm tournament incentives are negatively related to credit risk. Our results suggest that tournament incentives reduce credit risk by alleviating the potential for underinvestment when managers are concerned about exacting empty creditors. Further, we find that tournament incentives decrease credit risk when internal governance is strong or product market competition is intense. Taken together, our results suggest that creditors perceive senior manager tournament incentives (SMTI) as a critical determinant of a firm's credit risk, particularly in settings where managerial risk aversion is high.     

Welcome aboard (but don't change a thing)

Cheryl Hailstrom, the CEO of Lakeland Wonders, a manufacturer of high-quality wooden toys, is the first person outside the Swensen family to hold the top job. But she's not a stranger to this 94-year-old company: She'd been the COO of one of its largest customers and had worked with Lakeland to develop many best-selling products. Wally Swensen IV, the previous CEO, chose Cheryl because she knew how to generate profits and because he believed her energy and enthusiasm could take the company to the next level. Yet here she is, nearing her six-month anniversary, wondering why her expansive vision for the company isn't taking hold. She's tried to lead by example: traveling a pounding schedule to visit customers, setting aggressive project deadlines, and proposing a bonus schedule. She has a plan to reach the board's growth goals--going beyond Lakeland's core upscale market and launching into the midmarket with an exclusive toy contract with a new customer. The problem is that while Cheryl's senior managers are giving her the nod on the surface, they're all really dragging their feet. Some fear that offshore outsourcing will hurt their brand, not to mention make for tricky union negotiations. Others are balking at trying a new design firm. Is Cheryl pushing too much change too quickly? Should she bring in outsiders to speedily adopt the changes she envisions and overhaul Lakeland's corporate culture? Or should she keep trying to work with the current team? Commentators Kathleen Calcidise of Apple Retail Stores; executive coach Debra Benton; Dan Cohen, coauthor of The Heart of Change; and consultant Nina Aversano offer advice in this fictional case study.     

Manage marketing by the customer equity test

Managers have recently begun to think of good marketing as good conversation, as a process of drawing customers into progressively more satisfying relationships with a company. And just as the art of conversation follows two steps--first striking up a conversation with a likely partner and then maintaining the flow--so the new marketing naturally divides itself into the work of customer acquisition and the work of customer retention. But how can managers determine the optimal balance between spending on acquisition and spending on retention? Robert Blattberg and John Deighton use decision calculus to help managers answer that question. That is, they ask managers to approach the large, complex problem through several smaller, more manageable questions on the same topic. Then they use a formal model to turn those smaller judgments into an answer to the larger question. The ultimate goal, the authors say, is to grow the company's customer equity the sum of all the conversations-to its fullest potential. Recognizing that managers must constantly reassess the spending points determined by the decision-calculus model, the authors also provide a series of guidelines and suggestions to help frame the issues that affect acquisition, retention, and customer equity. When managers strive to grow customer equity rather than a brand's sales or profits, they put a primary indicator of the health of the business at the fore front of their strategic thinking: the quality of customer relationships.     

Difference in interim performance and risk taking with short-sale constraints

Absent much theory, empirical works often rely on the following informal reasoning when looking for evidence of a mutual fund tournament: If there is a tournament, interim winners have incentives to decrease their portfolio volatility as they attempt to protect their lead, while interim losers are expected to increase their volatility so as to catch up with winners. We consider a rational model of a mutual fund tournament in the presence of short-sale constraints and find the opposite: Interim winners choose more volatile portfolios in equilibrium than interim losers. Several empirical works present evidence consistent with our model. However, based on the above informal argument, they appear to conclude against the tournament behavior. We argue that this conclusion is unwarranted. We also demonstrate that tournament incentives lead to differences in interim performance for otherwise identical managers and that mid-year trading volume is inversely related to mid-year stock return.     

To diversify or not to diversify

One of the most challenging decisions a company can confront is whether to diversify. The rewards and risks are extraordinary. Success stories such as General Electric, Disney, and 3M abound, but so do stories of failure-consider Quaker Oats' entry into the fruit juice business with Snapple. What makes diversification such an unpredictable, high-stakes game? First, companies usually face the decision in an atmosphere that is not conducive to thoughtful deliberation. For example, an attractive company comes into play, and a competitor is interested in buying it. Or the board of directors urges expanding into new markets. Suddenly, senior managers must synthesize mountains of data under intense time pressure. To complicate matters, diversification as a corporate strategy regularly goes in and out of vogue. In short, there is little conventional wisdom to guide managers as they consider a move that could greatly increase shareholder value or seriously damage it. But diversification doesn't need to be quite such a roll of the dice, argues the author. His research suggests that if managers consider six questions, they can reduce the gamble of diversification. Answering the questions will not lead to an easy go-no-go decision, but by helping managers weigh risks and opportunities, it can help them assess the likelihood of success. The issues that the questions raise, and the discussion they provoke, are meant to be coupled with the detailed financial analysis usually conducted before a diversification decision is made. Together, these tools can turn a complex and often pressured decision into a more structured and well-reasoned one.     

Zero defections: quality comes to services

Companies that want to improve their service quality should take a cue from manufacturing and focus on their own kind of scrap heap: customers who won't come back. Because that scrap heap can be every bit as costly as broken parts and misfit components, service company managers should strive to reduce it. They should aim for "zero defections"--keeping every customer they can profitably serve. As companies reduce customer defection rates, amazing things happen to their financials. Although the magnitude of the change varies by company and industry, the pattern holds: profits rise sharply. Reducing the defection rate just 5% generates 85% more profits in one bank's branch system, 50% more in an insurance brokerage, and 30% more in an auto-service chain. And when MBNA America, a Delaware-based credit card company, cut its 10% defection rate in half, profits rose a whopping 125%. But defection rates are not just a measure of service quality; they are also a guide for achieving it. By listening to the reasons why customers defect, managers learn exactly where the company is falling short and where to direct their resources. Staples, the stationery supplies retailer, uses feedback from customers to pinpoint products that are priced too high. That way, the company avoids expensive broad-brush promotions that pitch everything to everyone. Like any important change, managing for zero defections requires training and reinforcement. Great-West Life Assurance Company pays a 50% premium to group health-insurance brokers that hit customer-retention targets, and MBNA America gives bonuses to departments that hit theirs.     

Warum sich Kommunen versichern

Most communes insure themselves and thus behave differently than the Federal Government and the Laender. In many cases communes take out insurance although they can in fact bear the covered risks on their own. Based on the assumption that municipal decision-makers behave reasonably, there are further good reasons to effect an insurance contract. The settlement process carried out by the insurance company in the event of damage or loss is such a major factor. Moreover, insurance can also constitute a service for citizens and help to ease conflicts. Finally, it cuts the costs for political transactions.