Friday, 29 August 2008

The Monkey Story

The experiment involved 5 monkeys, a cage, a banana, a ladder and, crucially, a water hose.

The 5 monkeys would be locked in a cage, after which a banana was hung from the ceiling with, fortunately for the monkeys (or so it seemed…), a ladder placed right underneath it.

Of course, immediately, one of the monkeys would race towards the ladder, intending to climb it and grab the banana. However, as soon as he would start to climb, the sadist (euphemistically called “scientist”) would spray the monkey with ice-cold water. In addition, however, he would also spray the other four monkeys…

When a second monkey was about to climb the ladder, the sadist would, again, spray the monkey with ice-cold water, and apply the same treatment to its four fellow inmates; likewise for the third climber and, if they were particularly persistent (or dumb), the fourth one. Then they would have learned their lesson: they were not going to climb the ladder again – banana or no banana.

In order to gain further pleasure or, I guess, prolong the experiment, the sadist outside the cage would then replace one of the monkeys with a new one. As can be expected, the new guy would spot the banana, think “why don’t these idiots go get it?!” and start climbing the ladder. Then, however, it got interesting: the other four monkeys, familiar with the cold-water treatment, would run towards the new guy – and beat him up. The new guy, blissfully unaware of the cold-water history, would get the message: no climbing up the ladder in this cage – banana or no banana.

When the beast outside the cage would replace a second monkey with a new one, the events would repeat themselves – monkey runs towards the ladder; other monkeys beat him up; new monkey does not attempt to climb again – with one notable detail: the first new monkey, who had never received the cold-water treatment himself (and didn’t even know anything about it), would, with equal vigour and enthusiasm, join in the beating of the new guy on the block.

When the researcher replaced a third monkey, the same thing happened; likewise for the fourth until, eventually, all the monkeys had been replaced and none of the ones in the cage had any experience or knowledge of the cold-water treatment.

Then, a new monkey was introduced into the cage. It ran toward the ladder only to get beaten up by the others. Yet, this monkey turned around and asked “why do you beat me up when I try to get the banana?” The other four monkeys stopped, looked at each other slightly puzzled and, finally, shrugged their shoulders: “Don’t know. But that’s the way we do things around here”…

I got this story from my colleague, the illustrious Costas Markides. It reminded him – and me – of quite a few of the organisations we have seen. Over the years, all firms develop routines, habits and practices, which we call the firm’s “organisational culture”. As I am sure you know, these cultures can be remarkably different, in terms of what sort of behaviour they value and what they don’t like to see, and what they punish. Always, these habits and conventions have been developed over the course of many years. Very often, nobody actually remembers why they were started in the first place... Quite possibly, the guy with the water hose has long gone.

Don’t just beat up the new monkey – whether it is a new employee, a recent acquisition or a partner; their questioning of “the way we do things round here” may actually be quite a valid one.

Tuesday, 26 August 2008

“Work-family initiatives”...?! We're a company not a leisure park!

“Work-family human resource initiatives”; sounds rather soft and fluffy, doesn’t it? Guess it does. It concerns stuff such as on-site childcare centres, flexible work arrangements, family stress initiatives and other such humbug.

Which tough, self-respecting corporation would want to be associated with that? Or should they… I guess it might actually help you become a more attractive employer, which should ultimately help your performance. Hey, even the stock market might appreciate such a thing, right?

Some time ago, Professor Michelle Arthur, from the University of New Mexico, set out to examine stock market reactions to the announcement of Fortune 500 firms adopting such work-family initiatives, which she collected from the Wall Street Journal. For example, one of them said “IBM began a childcare referral service for its employees” or “Procter & Gamble are broadening the scope of their family-friendly policies”, etc. She found 231 of them and then, for each of them, tested the stock market reaction to the announcement, through what in statistics is known as an “event study”.

The results were clear. In the early 1980s, the stock market would hardly react at all to such fluffy initiatives; if anything the effect of the fluffy announcement on a firm’s share price was slightly negative (-.35%). However, that changed quite a bit into the 1990s. When in that period firms would declare a work-family initiative, stock price immediately jumped up, with on average .48%. Now that may seem peanuts to you, but if you’re a $5 billion company, it means that even one such initiative would already immediately increase the value of your firm with 24 million. That’s a lot of peanuts. And a lot of share-holder value.

I’ve long thought that, for example, an investment bank which would be able to come up with a formula that enables people to have a real career without working 70 hours or even 5 days per week, should be able to turn that into a momentous competitive advantage in their industry (and it actually doesn’t seem that hard to do). But macho culture and self-delusion – and not much else – seems to always stand in the way of developing such a practice. What Michelle’s study suggests is that such firms are simply stuck in the 1980s; nowadays even the stock market recognises the sheer monetary value of work-family initiatives.

Time to wake up I’d say, and join the new millennium. Because if you don’t, you’re actually destroying shareholder value, and that’s not a very macho and serious thing to do now is it?

Thursday, 21 August 2008

It looks like we don’t have a strategy…

Whenever I interview people at a particular company regarding their firm’s strategy – for instance because I am writing a business case about them – I try to make a point of not only finding out exactly what their strategy is, and why it works, but also where it came from. That is, how they came up with the strategy in the first place. And usually, I get a perfectly logical and rational answer – at least at first…

However, often, when I subsequently “dig deeper” into the organisation, by interviewing middle managers and engineers (who have been there for a long time), by talking to the CEO again, by reading up on some company documentation, etc., it appears that the (wonderful) strategy was not the result of some sort of rational analysis at all. Instead, invariably, it seems, there was some lucky moment or unexpected event which triggered the company to alter its course and move into a new direction.

Hornby accidentally saw itself appear in the hobby market (instead of the toy market) when they spent their cost savings from outsourcing on adding detail and quality to their products; CNN figured out it could become a global (instead of US) news company when Fidel Castro (picking up the American satellite signal in Havana) told founder Ted Turner he watched it all the time, Southwest invented low-cost airlines when competition forced them to sell a plane but decided to try and fly the same routes with three instead of four aircraft, and Bisque founder Geoffrey Ward switched from being a plumber to selling designer radiators when people kept knocking on his door asking whether they could buy that funny-shaped radiator which he had just removed for a client and placed in his workshop window to make it appear shop (to see off the civil servants who had told him he was illegally located in a retail zone).

But why do people, in retrospect, almost always want to make it sound like it was the result of some thorough analysis and innovative thinking? Ego? Embarrassment? I guess that might play a role; “rational thinking” sounds better than “ehm… we stumbled upon it, I guess…” But, I’ve also found that people I interviewed who weren’t there at the time of the strategic switch at all – and therefore can’t take any credit or blame for it anyway – make it sound all logical. And that’s, I guess, because in retrospect, it all sounds so bloody obvious: moving into the hobby market, becoming global, not handing out food, newspapers and hot towels on a 45-minute flight (but instead focusing on turning the darn thing around on the tarmac in 20 minutes and fly again). It just makes so much sense, that it just had to be the result of thorough analysis and thinking – surely.

But admitting – even if alone to yourself – that the best strategies often emerge when you weren’t really planning for it, could actually help you get lucky more often. Andy Grove – former CEO and Chairman of Intel – figured that one out when Intel moved its microprocessors into computers after IBM (finally) convinced them that they could be applied in their PCs and, “yes, they really wanted to buy them”. After that, he said:

“We say we have a top-to-bottom strategy. But don’t act top-to-bottom. You can look at it positively or negatively. Positively, it looks like a Darwinian process: we let the best ideas win; we match evolving skills with evolving opportunities. Negatively, it looks like we don’t have a strategy…”

And you want to make sure ideas reach you from everywhere: suppliers, customers, competitors, bloody civil servants and, yes, even Fidel Castro.

Monday, 18 August 2008

Star knowledge workers – you really should not pay them that much, you know

Why do we pay certain employees so much?
Duh, because they make us a heck of a lot of money!

Sure, that may be true, but I guess that’s not enough. When a team of 5 salespeople earn you 7 million, you might pay them 100k each. But when a team of 5 consultants, attorneys or security analysts makes you 7 million, you often end up paying them 1 million each! And why do we do that!?

Perhaps because their skills are more specialised and scarce and if they walk out of the door we’d have a hard time replacing them…?

Sure, that may be true, but I guess that’s not enough either. Because if we would have a highly specialised sales team, with technical knowledge perfectly attuned to our particular product range, we would likely still not pay them 1 million each, although we’d have a hard time replacing them if they’d leave. And that’s because they too would not find it easy to find a replacement job. Their skills are so specialised, attuned to our particular product, that they would not be able to make the same kind of money for any other company, and hence would be much less valuable anywhere else, to anyone else. Nope, we don’t have to pay them that much to keep them; they don’t have anywhere else to go!

But the consultants, attorneys and security analysts do. They can just take their rolodex, their files, their client base and expertise with them, and stroll into the office and payroll of our competitor, and earn them the same 7 million, right?

Well… maybe not. We often think they can just “take it with them”; they think that they can just take it with them, and our competitor usually thinks they can just take it with them. But often we’re all wrong.

For example, Professor Boris Groysberg – at the Harvard Business School – examined the portability of star security analysts’ performance. Security analysts, as you may know, are employed by investment banks to analyse companies in a particular industry. They, among others, produce earnings forecasts, buy and sell recommendations, and detailed reports on individual companies. If they’re any good – because they, for instance, produce quite accurate earnings forecasts – they can easily make a million or three per year – and, yes, that is British Pounds millions.

Investment banks pay them so much because they think they can easily take their skills, financial models, industry contacts, etc. to a different bank if they wanted to, and analyse the same sectors and companies. However, Boris found that that is actually not as simple as it seems…

He analysed the performance of 316 top-ranked security analysts who switched firms, using rankings published by “the Institutional Investor All-America Research Team poll”. He found that star analysts who switched employers immediately experienced a significant decline in their performance. The effect was substantial. For example, the chance that a particular analyst would come out top of his sector’s league table (having made the most accurate forecasts etc.) would drop with 50% if he had just switched firms. Actually, on average, it would take such an analyst five years to recover and make up for the switch and subsequent drop in performance.

Hence, even security analysts, whose work seems highly individual and not dependent at all on the particular organisation that they are working in, experience a very significant decline in their performance when they switch firms. Apparently, the soft stuff, such as the intellectual capital embedded in the fabric of the organisation, their relationships with colleagues, and all sorts of other social and tacit processes (which are difficult to identify, observe or even name!) play a huge role, even in the work of such star performers. Take them out of their organisation and their ability vanishes with the severance of the social ties.

This means that we probably all overestimate the portability of our star workers, and of ourselves...

It also means we pay them too much.

Thursday, 14 August 2008

Is innovation over-rated?

Innovators are always the heroes of the story. They saw the opportunity when no one else could see it; they persisted stubbornly when everyone said they were a fool; they suffered hardship but eventually defied the odds to make it big, and so on and so forth.

And innovation is great. But we hear very little about the (undoubtedly many) poor sods who think they’re seeing something but it really is just their imagination, who persist stubbornly and foolhardily with something that ain’t never going to work, who continue suffering hardship till they vanish.

Do innovating firms perform better? Evidence from academic research on the topic is certainly equivocal: it is very hard to find solid evidence that firms that innovate (e.g. obtain more patents) perform better.

It so happened that I had a database of about 1300 firms active in some segment of the pharmaceutical industry, and all their innovations. Note, innovations do not all have to be real blockbusters but could just be new types of products or applications. These new types really can concern truly novel drugs new to the world but more often they concern a new dosage of some existing drug, a new intake form (e.g. pills versus injections), a new application of the same drug (i.e. a different disease for which a particular existing drug might also work), etc. Thus, not all of them are very radical innovations, but they are all new enough for them to have required clinical trials before their launch.

Using these data, I first tested, through some fancy statistical methodology, whether such innovations contributed to the growth of the firms over the subsequent years. The answer was a clear “no”; in fact, innovators grew more slowly.

Then I thought “perhaps they are innovating because they’re running out of growth”, so I applied a different (and even fancier) statistical technique to correct for that. Still, the answer was a resounding “no”: innovators subsequently really had more trouble growing and it was a direct consequence of the innovations.

So then I thought, “Perhaps I am looking at the wrong thing; and I should not be looking at growth but at firm survival”. Therefore, I changed my (already fancy) statistical methodology to test the impact of innovations on firm survival. But no, innovators died (i.e. went bankrupt) more often than non-innovators.

Then I thought “ah, it must be because innovation is risky; innovators may be the big failures of the industry but they are probably also the biggest success stories (I should really have thought of this earlier… better not tell anyone…)”. So I used an even fancier statistical methodology to model not only the average survival probability of the innovators (vis-à-vis the not-so-much-innovators) but also their “variance”. But no… innovators really did fail more often than non-innovators and with very little “risk”! In layman terms: they died pretty quickly and you could be sure of that. No risk-return trade-off here: do not innovate and you’ll get higher return for less risk…!

So then I gave up.

Might the answer simply be that innovation really is not such a very smart thing to do for a firm…? It seems, as an organisation, your chances of success are quite a bit better, and with little risk, if you simply stick to your guns, or at least not try come up with the new stuff yourself (but just wait patiently to imitate it).

But if that is the case, perhaps we shouldn’t tell anyone… Because innovation really is great and, as a society, we need it. But if everyone finds out that you, as an individual firm, are better off without it, nobody might do it anymore… So let’s keep this one under wraps, and between you and me, alright…?

Tuesday, 12 August 2008

Who should come first? Shareholders? Are you sure…?

Herb Kelleher– the founder and former CEO of American icon Southwest Airlines – used to say: “We place our employees first”.

That’s a fairly extreme thing to say though, especially in corporate America, that you do not place your shareholders first.

Of course he would always be quite quick to continue: “Because if you have happy employees, you will get happy customers, and if you have lots of happy customers, shareholders will inevitably become quite happy to”. Now you could be inclined to say “ah, so it’s all the same; at the end of the day all parties’ interests are aligned”. In the long run that may be true, but in the short run such an “employee orientation” – the choice of who comes first – can lead to rather different decisions than a “shareholder value orientation”. And at Southwest they do put their money where their mouth is; they for instance provide perfect job security. Consider, for example, Southwest’s response to 9/11, which triggered a global airline crisis, prompting many companies to execute the hatchet on their employee head-count:

Southwest Airlines’ current President and COO (Colleen Barrett) said: “Southwest has not had a layoff in its thirty-year history and is not contemplating one now” (after which employees collectively organised an internal giveback effort, called “Pledge your Luv”, offering up to thirty-two hours of pay during the last quarter of 2001).

In contrast, US Airways paid $35 million in lump-sum retirement benefits to its former top three executives, while 12,000 employees were laid off and pilots agreed to $565 million in concession in their own retirement plans. Rakesh Gangwas, briefly chairman and CEO (who received $15 million of the 35 million) declared, a few days before resigning, that “the September 11 attacks had allowed the airline to restructure and downsize in ways that would have been impossible otherwise”.

Of course US Airways filed for bankruptcy in 2003, while Southwest recovered in less than a year.

Placing employees first may be suboptimal in the short run but in the long run it’s a different picture. You don’t become a better organisation by having “better shareholders” (whatever that may be). You can most definitely become a better organisation by having better employees. Truly prioritising the well-being of your employees just might pay off financially in the long run too. Loyalty, trust, extraordinary effort, etc. are reciprocal things; we give it to those from whom we receive it. And organisations and employees are no different.

Thursday, 7 August 2008

Narcissus versus Humble Bloke – and the winner is…?

Have you heard of Narcissus – the character in Greek mythology? Narcissus was an exceptionally beautiful young man. He was so beautiful (and full of himself) that he fell in love with his own reflection in the water. He could not bring himself to stray from the well and did not even drink the water; fearing he’d disturb the water reflecting his image and would not see himself again. Our word “narcissistic” – to describe someone full of himself – is derived from it.

How would you recognise a narcissistic CEO (as certainly not all of them are exceptionally beautiful)? Seriously, think about it, what would you say are signs of a CEO who is narcissistically full of himself…?

Someone who always has his photograph displayed very prominently in his firm’s annual report? The CEO’s prominence in the company’s press releases? How often he uses first-person singular pronouns (such as I, me, mine, my, myself) giving interviews to the business press? Or his financial compensation relative to the second-highest paid executive in his firm?

Arijit Chatterjee and Donald Hambrick, of Pennsylvania State University, measured all of these things, among 111 CEOs, and used them to construct a measure of their narcissism. They selected their 111 CEOs from the computer hardware and software industries because prior writers on Leadership had suggested that narcissism in a CEO might actually be a good thing in very dynamic, fast-changing industries – which these two are. They then examined a bunch of characteristics of a firm’s strategy, to figure out what narcissistic CEOs do differently than their more humble counterparts (in between periods staring at their own reflection I guess).

And guess what, they found that the more narcissistic types changed their firm’s strategy more often than the humble blokes. Moreover, they also tended to undertake a lot more – and a lot bigger – acquisitions. The performance of their corporations (perhaps partly as a consequence) fluctuated quite heavily, in comparison with the humble types.

But what about the level of their firms’ performance; it may have fluctuated more heavily but did the narcissistic guys on average achieve higher or lower performance?

Neither. They didn’t do better, and they didn’t do worse (both in terms of return on assets and total stock market performance).

Arijit and Don concluded, “that narcissistic CEOs favor bold actions that attract attention, resulting in big wins or big losses, but that their firms’ performance is generally no better or worse than firms with non-narcissistic CEOs”.

However, I’d say they’re worse; you’re better off without them. It is not only money that matters; these types are plain annoying. If they don’t bring in more dosh than their more pleasant counterparts, you’re better off with humble bloke.

Tuesday, 5 August 2008

How to make a compelling corporate strategy in six easy steps

What is the “strategy process” that I observe in most corporations?

Step 1: On the 15th of October (or whatever month), we send a memo to our business unit managing directors that we will need their unit’s strategy input by the 1st of December, including an explicit elaboration of how it fits in with the corporation’s overall strategy.

Step 2: BU’s management thinks, “What was the corporate strategy again?” and looks up last year’s document.

Step 3: It takes note of what its business unit’s input needs to be – in terms of the guidelines provided by corporate – and, after a week or so, assigns some junior staff members, consultants or interns to provide the numbers about the market, forecasts, benchmarking (in terms of what competitors are doing) and so on. They give them last year’s document and also send round an e-mail to all team leaders urging them to diligently provide the necessary data (“because it is that time of year again” and corporate wants it by the 1st of December).

Step 4: After two weeks, BU management thinks, “Wonder how that is going?” and finds out that the team leaders have not been very quick to provide the necessary information. After another e-mail (marked “urgent”), information starts flowing in and by mid-November there is a big pile of data. In the subsequent two weeks (while flipping through last year’s documents a bit), they write a number of pages about what the unit has been doing over the past year (which corresponds remarkably well with what they said last year they would be doing), what they will be doing next year and how it is all contributing to (yes, even driven by!) the overall corporate strategy. On the 1st of December, we note from our e-mail inbox that we received their document last night on the 30th of November (just in time!), at 11:37pm, which makes us realise, with a slight feeling of guilt, that we had just gone to bed at that time (after finishing that rather good bottle of Australian Shiraz).

Step 5: The next day, we flip through the various units’ strategy documents and put them aside. Some time during the first week of January, we flip through them again and take last year’s corporate strategy document out of the drawer. We then think about all the activities the corporation is engaged in and – usually with the aid of our strategy department or, in the blissful absence of such a group, a consultant or two (they usually hunt in packs) – we come up with some overarching logic (and a quite compelling one, we proudly congratulate ourselves) of why we are doing the various things we’re doing anyway.

Step 6: On the 1st of February, we send the document to all company directors and business unit managing directors. They look at its shiny cover (with a picture of us standing in front of our new corporate building – we first objected against having our own picture on the cover, but PR convinced us it would give it a more personal touch), read the first page (checking the acknowledgements for their name), briefly flip through some of the other chapters, and put it in a drawer.

Where it remains until the 15th of October, when we remind them “it is this time of year again”.

Friday, 1 August 2008

Executives: super-human after all…

It is a well-known aspect of our everyday behaviour: when we perform well, we credit ourselves; when something goes wrong we blame something (or someone) else. This effect – known as attribution bias – has been well-documented by social psychologists, but I guess we didn’t really need their research; it is quite a common phenomenon in everyday life.

Professors John Wagner and Richard Gooding, at Michigan State University, examined whether managers suffer from the same bias. They rounded up a 102 executives and subjected them to some lengthy experiment and statistical analysis – the details I won’t bore you with because the answer was (surprise, surprise), yes. When a company’s performance is great, executives claim (and actually believe!) that it is due to their brilliant efforts; when, vice versa, their company’s performance sucks, it’s someone else’s fault and they’re really really not to blame, honoust. Yep, executives are just like humans.

Then, however, John and Richard did something rather interesting. They did not only ask these executives to interpret the performance of their own companies (as explained above); they also asked them about what they thought caused the performance of their peers/competitors…

As said, when their own company was performing well they attributed it to their own efforts, while when they were performing badly they blamed some external circumstances. Yet, when assessing their colleagues’ performance, the bias flipped! When other executives’ firms performed well, the managers said “it’s due to some external circumstances” while when their colleagues’ firms were underperforming, they attributed it to these persons’ errors!

I believe this extremity hadn’t been documented before, among humans, other mammals or reptiles. But I guess it is just very very human, which is perhaps some sort of a consolation? After all, it just shows managers are the most human among us.