Change for change’s sake

Have you ever worked for a company that changed its structure, and you couldn’t figure out why? Me too. Ages ago I was working for a consulting company which was organised by “function”: consultants were grouped into departments defined by “strategy”, “operations”, “HR”, etc. But then the company decided that they really should be organised by “industry”, that is, group its employees into a division for fast-moving consumer goods, a division for government, heavy industry, professional services, etc.

And when people would ask “why?”, the company’s management would come up with quite convincing answers why it was beneficial for consultants working on the same type of customer to be grouped together. And people shook their head in reluctant understanding and grudgingly eyed up their new colleagues.

But I couldn’t help but think “I could come up with equally convincing reasons for why this company should (still) be organised by function”. And that is usually the case for organisations. For example, you could easily come up with an explanation of why a bank should create divisions organised by geography; after all people located in the same country often need to coordinate and have a joint manager. Yet, you could also come up with an argument of why they should be organised by product type; after all, people working on the same product (wherever in the world) should coordinate and learn from each other. Similarly, you could come up with valid reasons why the bank should be organised by customer-type; after all, big customers often want one point of contact, regardless of the product they require, and where in the world.

And I used to think, unless you can come up with very convincing reasons why being organised by “industry” is now really more beneficial than being organised by “function”, there is no justification for dragging everyone through a hefty reorganisation.

But I’ve changed my mind. Dragging everyone through a hefty reorganisation is exactly what you should do (every now and then), even if it is unclear why.

Now that I have seen many more companies change their structures, I realise that, unless you can come up with very convincing reasons that being organised by function (your old structure) still is a heck of a lot more useful than becoming organised by industry (the proposed new structure), you should change the whole darn thing. Just swap the divisions around, reshuffle them and force your people to work with a new set of colleagues, under a new set of rules.

Let me explain. There is value in the process of re-organising. Usually people in an organisation should coordinate with other employees in their country, just like they should also cooperate with others working on the same product (wherever in the world), and others in the same function, etc. Yet, you’re going to have to make a choice what criterion you will use to organise your departments. Once you’ve for instance chosen to group people by function, inevitably, over the years, employees will start to identify with others in their function, their networks in the firm will be dominated by those people (because that is the people they interact with most), and gradually they may become a bit insular, and not have much understanding or appreciation of people in other functions and departments, even if they are working on the same product or serve the same geographical market.

The trick to resolve this – or even avoid it, if you manage to do it pro-actively – is to simply swap them around. Break up the old functional departments and, for instance, put them all together in departments defined by product (or whatever). The employees won’t like it, because they think these other folks are a bit weird (if not dumb and whining) and they will tell you they felt quite comfortable in their old functional departments – which is precisely the reason you should change them!

Once people become comfortable in their groups, stop communicating and coordinating with others outside their department, and fail to see others’ perspectives, it is time to turn them around. And the good thing is, for the first few years after the reorganisation, they will still have their old social networks, perspectives and knowledge of their previous, functional departments, while already working with the new product structure. As a result, you can actually get a bit of the best of both worlds. And once they start to lose that; just change them again.

Patent sharks

You never heard of patent sharks?! You’re kidding, right? Ok, I’ll admit it, I had never heard of them either. But they sound pretty scary, right? Well… ok, perhaps not; the word “patent” sort of seems to take the edge of the word “shark” a bit. Yet, now that I have learned more about them, I have to admit, I am starting to believe that they should send some shivers down your corporate spine; they really are quite creepy.

My colleague at the London Business School, Markus Reitzig, has been studying patent sharks at length. I always found IP (intellectual property) a bit of a bore when it comes to research topics but, admittedly, his research did remind me of Jaws III, but then with briefcase, pin-striped suit and, importantly, a mob of solicitors to accompany him. Let me explain.

As you may know, when it comes to the effectiveness of patents, pharmaceuticals are a bit of an exception. In most industries, patents provide only very limited protection against imitation by competitors. Usually, the part of the product that is patent-“protected” can be substituted or “invented around”. Therefore, what firms have started doing is protect their products with as many patents as possible. That is, it is not uncommon in some high-tech industries to have over a 1000 different patents protect many little components in a firm’s product. They figure, one of them may not do the trick but if you have such a bunch of them, collectively they should give some protection.

Yet, since competitors do the same, as a result, researchers have long noticed that patents have become sort of a corporate currency. How does this work? Well, whatever you want to do, in terms of developing a new product or technology, you’re bound to infringe on someone’s patent. Luckily, that someone is likely to need to infringe on some of your patents too. Rather than going to court, firms usually strike a deal: “I will forgive you for infringing on these 84 patents if you just absolve me from infringing on your 63 ones”. And this system generally works quite well.

However, given the plethora of patents in such industries, the difficulty is that you seldom know in advance exactly which patents you will be infringing on; there are just too many of them lying around. What has now happened is that some specialised firms – the infamous “patent sharks” – have started taking advantage of this. They acquire patents not with the intention of using them, but with the aim to extort money from the unknowing infringers.

When a patent shark finds out that a certain firm is using a technology which more or less falls under one of its patents, it waits patiently until that firm has fully committed itself to the technology (and has incorporated it in its products, marketed them, made additional investments, etc.). Then the shark surfaces…

It will demand large sums of money for the infringement. If the firm refuses, they will roar “court action!” and threaten to shut them down. And the nice thing – at least, for the shark – is that the patent doesn’t even have to be a real good one. Even if it is only a half decent patent, with little chance of holding up in court, often they can convince a judge to issue an injunction, forcing the firm to suspend business pending the court’s decision. And this can be so potentially disastrous for the firm that it quickly coughs up the dough to make the shark go away.

For example, NTP, a pure patent-holding company, filed a suit against RIM; the producer of the best-selling Blackberry. RIM was confident that the five patents NTP was throwing at them would not hold up in court – because all of them had already been preliminarily invalidated by the US Patent and Trademark Office while two of them had already received a final rejection! – but when it seemed that a particular US district court judge (“The Honorable Judge James Spencer”) was inclined to grant the injunction, which would have costed RIM billions in lost revenues and deteriorated competitive advantage, they promptly – but undoubtedly grudgingly – decided to hand over 612.5 million dollars to NTP.

Getting scared already? I guess you should. There just might be some shark circling underneath, in your blue ocean… holding some obscure patent which could cost you an arm and a leg, if not more.

“Heerlijk, helder, Heineken”

The line above probably didn’t mean much to you, unless you’re Dutch.

No I am not getting a commission for rehashing their old marketing slogan (which it is; I guess you could translate it as “heavenly, clear, Heineken”), it just reminds me of the acquisition strategy they used under the reign of their illustruous former chairman Freddy Heineken (who unfortunately died a few years ago).

Since I have been known to sound slightly sceptical (yes, this is a good english eufemism) of the vehicle of corporate take-overs, people sometimes ask me which company’s acquisition strategy I actually like… A painful silence (to this fair question) used to ensue. But no longer! Since I didn’t want to create the erroneous impression that I think all acquisitions and acquirers are bad, I decided to look for one.

And I found Heineken. It happens to be a product that I studied extensively during my student days but some time ago I also really dug into their past acquisition strategy, and whether it made sense. And I have to say “heerlijk, helder, Heineken” or, in english, "yes".

This is what I like about it. Many managers see acquisitions as a relatively easy and quick way to increase the size of their company, in comparison to the painstaking process of organic growth. Yet, they forget that owning a bunch of companies doesn’t necessarily turn them into one organisation. Successful companies often have a high level of coordination between the various activities and parts of their organization. This involves technology and systems but also intangible characteristics such as a shared culture and informal networks. Research by Wenpin Tsai and Sumantra Ghoshal, published in the Academy of Management Journal, showed that these organizational abilities take ample time to grow and develop. Freddy Heineken realised this; he did quite a few acquisitions, but not too many, and carefully added and integrated them into his company.

Moreover, he did not see them as a substitute for organic growth but, instead, as an enabler of it. He used to undertake acquisitions with the explicit aim to create further opportunities for organic growth for both the acquired company (which benefited from Heineken’s knowledge, purchasing power, etc.) and for the Heineken brand (which benefited from added local distribution).

Heineken’s focus was always on profitability, rather than scale per se. This made him stubbornly resist loud calls (for instance by analysts and investors, and some business school professors…) to merge with a major rival. Freddy used to say, “I don’t want to be the biggest; I want to be the best”. And he was.

What management bandwagons bring

Management by Objectives, Zero-based Budgeting, T Groups, Theory Y, Theory Z, Diversification, Matrix Organisation, Participative Management, Management by Walking Around, Job Enlargement, Quality Circles, Downsizing, Re-engineering, Total Quality Management, Teams, Six-sigma, ISO9000 and Empowerment.

Surely you must have been subjected to some of those? Most of them have fallen out of favour again. We call them Management Fads. But do they do anything? Well… the answer is yes, but perhaps not what you’d expect them to do, or least what they are intended to do.

Professors Barry Staw and Lisa Epstein, both from University of California in Berkeley, through careful statistical analysis, examined some of the consequences of organizations’ adopting such techniques on a variety of factors. They collected data on exactly 100 Fortune 500 companies, including their adoption of quality techniques (such as Total Quality Management), teams and empowerment, the company’s reputation (through Fortune’s “Most Admired Companies” survey), their financial performance and… of course… CEO’s compensation. This is what they found:

Firms adopting popular management techniques (such as TQM, etc.) did subsequently not perform any better than firms not adopting them. Actually, if Barry and Lisa did find an effect of any of the techniques, it was negative. Usually though the stuff didn’t do a thing at all.

Then they examined the effect of adopting such techniques on the companies’ reputation, measured through their position and ascent on Fortune Magazine’s “Most Admired Companies” list. The analysis revealed clearly that adoption of the popular management techniques significantly increased firms’ position on the “Most Admired Companies” list, irrespective of their performance… To be precise, those firms were rated as being more innovative and as having higher quality management. Apparently, the stuff doesn’t have to work, but it does enhance your reputation in the outside world.

Finally the piece-de-resistance: The influence of the adoption of popular management techniques on a CEO’s compensation package (salary and bonus).... Yep, you guessed it, and the effects were very strong: If a CEO’s firm adopted one of the popular management techniques, his compensation went up.

So what does this tell us? Well, first of all of course that many of these management fads simply don’t work. The organisation doesn’t perform better as a result of adopting any of them. Yet, apparently, it does make you look innovative and legitimate in the eyes of others. This includes fellow executives, who subsequently vote for you as being “much admired” but – hurrah! – also in the eyes of your Board; they enthusiastically pad you on the back for the great achievement and, with grace and thanks, increase the size of your compensation package.

“Innovation networks” and the size of the pie

It’s becoming a bit of a corporate buzzword – “innovation networks” – but one that (to my slight disappointment) I actually quite believe in.

More and more companies I see and talk to seem to realise that it is quite difficult to be innovative on your own. For true innovation, almost by definition, you need a wide variety of capabilities, knowledge and insights. It is just difficult to find such diversity within one organisation. If you, as a firm, are trying to come up with fundamentally new things, you would likely do well to also look outside your own organisation’s boundaries, whether anyone knows anything that just might be useful and interesting for you.

This is what “innovation networks” are about; combining and tapping into other companies’ knowledge resources to, collectively, come up with something that neither firm could have done by itself.

IBM, for example, does it consistently and in a highly structured way. They work with specific partners on specific projects. Some of these partners are from outside their industry but others could even concern straight competitors. For example, in their Cell Chip project, developing multi-media processors, they work with Sony, Toshiba and Albany Nanotech. In their Foundry R&D project, designing manufacturing processes for mobile phone chips, they work with Chartered, Infineon, Samsung, Freescale and STMicroelectronics. And they have several other similar projects, with yet different groups of partnerships.

However, the networks can also be of a more informal nature. For example, the successful Sadler’s Wells theatre in London, which focuses on the creation of ground-breaking modern dance, has no orchestra or ballet of its own. Instead, it tries to create innovative modern dance shows by putting artists in touch with each other who otherwise would not have worked together. They organise dinners during which those artists meet, they give them some studio time and budget to improvise and experiment, and assist them with advice and other facilities to get them to combine their skills and talents to create new forms of modern dance. What they ask in return is that the artists premiere their performance in Sadler’s Wells.

The most striking example of informal innovation networks I have seen, however, is that of Hornby; the iconic English producer of little model trains and Scalextric slot car racing tracks. They have some more or less formal alliances with software producers and digital electronics companies, which for instance led them to develop virtual reality train systems and digital slot car racing tracks (allowing multiple cars in lanes, which can overtake each other; clearly the most prevalent schoolboy dream since the emergence of Samantha Fox!). Yet, they also have some striking informal networks, which stimulated their innovativeness.

For example, one of their latest innovations is a real steam train (which retails at a whopping £350), and I mean real steam. The little whistler doesn’t run on electricity but on actual steam. The interesting thing is how they came up with it. Well, or actually, they didn’t… One of their customers did. They maintain close networks – on-line, by organising collector clubs, tournaments, etc. – with their collectors. Through these networks, they learned about a hobbyist who had invented a real model steam train. They went to visit him and adopted his rudimentary technology.

But the most striking example of their informal innovation networks I saw when I visited Frank Martin, Hornby’s CEO, at the company in Margate some time ago. In his office lay a piece of slot car racing track. “Look” he said “a very innovative and sophisticated new surface, which is not only much more realistic but also much less slippery for the toy cars. Our Spanish competitor sent it to us”. I said “what?! why would your competitor do that? are you sure it is not a fluke? are you paying them for it?” And he replied “no, whenever they invent something new, they send it to us. And we also send them stuff”.

They have no contracts or any other formal arrangements in place for these exchanges. They just figure, ‘we could shield our innovations from our competitors but we’re all much better off if we share them’. The size of the pie (the total size of the market) will increase as a result of it, and they all benefit; much more than when they would all keep their innovations to themselves.

It is a peculiar type of innovation network, if your customers and even competitors become part of it and share their innovations with you, purely on the basis of trust and reciprocity, but it is certainly a formula that works for Hornby. They managed to quintuple (I had to look up this word) their stock price over the past few years, partly as a result of such innovations. Innovation is important to many companies in many businesses; too important to (merely) leave to your own devices.

Boardroom friends

Boards of directors, in various countries and systems, lately have been subject to considerable frowning, loathing, smirking and indecent hand gestures. “They’re all part of the same elite”, “corporate amateurs”, “never really objective”, “not really independent”, “an old-boys-network”, etc. etc. Surely, it is said, those directors that are pretty much personal friends of the CEO will be quite useless; they will just protect him and never really be critical, asking the nasty and awkward questions they should be raising.

Yet, is this necessarily so? Are “friends” bad directors? Professor James Westphal, of the University of Michigan, became sceptical of the sceptics. He investigated whether social relations between board members and CEOs really are as harmful as assumed. He extensively surveyed 243 CEOs and 564 of their outside directors and examined whether personal friendships and acquaintances made for less effective board members.

First of all, he found that the boardroom friends hardly ever engaged in less “monitoring” of the CEO (that is, checking strategic decisions, formal performance evaluation, etc.) – the traditional stuff that directors are supposed to do. They were still quite active in that sense, despite being the CEOs personal friend.

In addition, Jim found that boardroom friends engaged a lot in another type of behaviour towards the CEO: ongoing advice and counselling. They gave their CEO informal feedback about the formulation of the firm’s strategy: they acted as a ‘sounding board’, continuously provided general feedback and suggestions, etc. All this happened outside the company’s formal board meetings. Directors who were not personal friends hardly engaged in this type of behaviour.

Usually CEOs don’t easily do this; accept or even ask for ongoing counselling and opinion. It is well-known from research that a primary inhibitor to seeking advice is the perceived effect it could have on the advice seeker’s status. People often believe that others will view their need for assistance as an admission of uncertainty or dependency and as an indication that they are less than fully competent or self-reliant.

Little doubt that CEOs – who are expected to be confident, proud and self-assured – have these tendencies too! Fierce, testosterone-driven CEOs may not take criticism or even advice easily, but if the director is a personal friend, it might just be a bit easier to swallow. Psychologically, it is just a bit more secure to listen to criticism from someone you know and trust than from a formal stranger. Hence, having your friends in the boardroom may not be such a bad thing after all.

Eating uncle Ed – don’t worry, it’s called downsizing

About a century ago, the Fore people, who inhabited Papua New Guinea, had the habit of burying their deceased relatives, just like many other societies. Yet, on some sunny day, Uncle Ed died, and it was just around lunch time. Uncle Ed’s relatives were about to put him into the ground when one of his cousins (who looked particularly hungry) said “why bury all that good meat; it’s a waste; we might as well eat it”. And so they did.

When the following month another relative died, they did the same thing, and not for long, the whole village was eating their deceased relatives, rather than putting them into the ground. The advantages were obvious; there had actually been quite a bit of famine and malnutrition among the Fore people and this habit enabled them simply to not be so hungry.

Some time later, a visitor from a neighbouring village witnessed the practice. When he got home and his cousin died, he quickly convinced his relatives to rather than bury the good chap, consume him on the spot. Gradually the practice started spreading to all villages in the tribe, until the habit of eating deceased relatives had become the norm and the Fore’s proud tradition.

Yet, unfortunately, they ate everything, including their relatives’ brains. As a consequence, they developed a horrible, lethal disease called Kuru (which is related to Creutzfeld-Jacob, aka mad cow disease). The disease has quite a long incubation time (i.e. it takes several years before it becomes apparent) but eventually the Fore people started getting sick and dying in masses. Of course, they noticed something was seriously wrong but, due to the disease’s long incubation time, had no idea that their misery was caused by the habit of eating their deceased. The practice continued until half of the Fore population had been wiped out and Australian invaders put an end to it (because they thought it was gross, not because they understood it caused the disease).

Why am I telling you this story – after all, you might be reading this just before lunch? The reason is as follows: Many managers and companies remind me of the Fore people.

Let me explain: The Fore’s practice clearly was detrimental; after all, it was killing them! Yet, the reason for them adopting it was clear too: the practice gave them an immediate advantage, namely less hunger and less starvation. In the long run, however, they were definitely worse off for doing it but the problem was that, due to the practice’s incubation time, they could not understand that it was this habit that they had picked up many years ago that was causing the problems.

Quite a few popular management practices have the same characteristics. The problems they cause only occur in the long run and are therefore underestimated or not understood at all. The benefits are immediate.

Take, for example, the practice of “downsizing” (or rationalizing, restructuring, reorganising, etc.: that is, making people redundant). It is a trend that has now been going on for at least a decade and a half; companies – even if they are not in financial difficulties – engage in systematic programmes to reduce the headcount in their organisations. The short-term benefits are clear: It leads to lower costs (sometimes accompanied by a positive response from the stock market to the announcement of the programme). Yet, there is also evidence of sizeable long-term detrimental influences, such as reduced innovation and lower employee commitment and loyalty. However, such consequences are only noticeable in the long run.

Usually, when a firm faces a serious problem, for example due to a lack of new products in the pipeline, top management does not realise that the lack of innovation is caused by the downsizing programme that they engaged in a near decade ago. Just as it did for the Fore people and their illness, the long lead time makes it all but impossible for managers to connect and understand cause and effect. Thus, not only will top management take inappropriate action to solve the problem (not seldom another cost-cutting programme…), it also remains unclear to other firms that downsizing is harmful, leading them to adopt and continue the practice too.

“A serial changer”…

Some time ago, I interviewed a guy called Al West. And Al is quite a guy. Not only because he is the founder and CEO of SEI, an investment services firm headquartered in Oaks, Pennsylvania, which is worth about 4 billion (of which he still owns about a quarter) but because of the way he runs his company.

For example, I asked for the contact details of his secretary to put an appointment in the diary. He doesn’t have a secretary. Actually, he doesn’t even have an office. And when I went to their London office to speak to him, reported at reception and asked for Al West, the lady behind the desk said “Who? Al West you say? Let me see if we have anyone in this company by that name”. Al doesn’t strike me as the stereotypical autocratic, macho CEO.

What Al does strike me as – and which is the reason why I wanted to talk to him – is a “serial changer”; or at least that is how one of his employees described him to me. He is altering his organisation – in terms of its structure, incentive systems, decision-making procedures, etc. – all the time, never quite satisfied and never quite done. And somehow, I suspect that is part of the key to his company’s success.

In 1990, Al broke his leg in a skiing accident. He lay in the hospital staring at the ceiling for about 3 months. When he came back to work, despite the company growing and performing well, the first thing he did was completely reorganise the entire firm. His employees thought, “why change a winning formula? he must have been quite bored and couldn’t think of anything better to do. I am sure it will pass”. But it didn’t pass. Ever since, Al has been reorganising his company regularly.

And he does it because he doesn’t want to allow his organisation to become settled and “comfortable”. SEI has been growing steadily for decades now, with an impressive – and impressively stable – 30% per year. Yet, Al never does any acquisitions (he feels they would disrupt the smoothly-running organisation). Yet, unlike many other successful companies, SEI doesn’t get trapped in its own success and gradually grow rigid and inert. SEI continues to innovate and grow.

The reason why many very successful companies find themselves in trouble in the long run, is that they become too insular, narrow and set in their ways. This leads to problems when their environment changes. Yet, Al’s regular changes to his organisation prevent it from becoming set in its ways. Moreover, powerful people and groups within an organisation usually, over time, become even more powerful (because they can get their hands on even more resources, budget and people); too powerful for the good of the firm. Yet, in SEI people don’t get a chance to create fiefdoms and accumulate influence beyond what’s good for the company. Al doesn’t give them the time to do it.

Along similar lines, my colleagues Phanish Puranam and Ranjay Gulati examined periodic structural changes within Cisco. And they found that Cisco’s many reorganisations helped to solve some tricky coordination problems within the firm. In many organisations, over time, employees become focused on their own unit, group or department. It’s their perspective that they view things from, that’s where there social networks lie and whose interests they pursue. By regularly reshuffling departments, however, Cisco's people not only are forced to develop new perspectives and cooperate with other people, the contacts and perspective of their old group (now dispersed across the firm) are still available too, so that the firm gets the best of both worlds. Professors Nickerson and Zenger found similar patterns examining Hewlett Packard’s regular switches between centralisation and decentralisation.

The regular changes to the organisation prevent it from becoming rigid and inert. They may be perceived by people working in the firm as a pain (in all sorts of body parts) if not completely unwarranted (“we’re performing well, aren’t we? why would we change anything?") but it helps avoid more serious trouble in the long run.