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Business Structure: Management frameworks and business models in the modern corporate world

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How to Create and Implement a Killer Business Strategy


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The 'set-up' is critical to success. This doesn't mean just the structure of the organisation itself, but also that of the whole business system within which it operates. Structural change, mismanaged, causes havoc at worst, In most cases, it only sets the stage for the next upheaval. With the help of the Internet and related technologies, though, an organised process of change can transform any organisation - much faster than managers expect, much faster than many prefer - and go on doing so.

Managers understandably prefer continuity to discontinuity, evolution to revolution. But as Year 2000 approached, that preference became increasingly irrelevant. In discontinuous times, efforts to evolve at your own pace are doomed. Your internal thought and action must keep up with the pace of external change, or you will be unable to cope with external pressures that, equally, demand a revolutionary approach to structure - the construction of a new business model.

This consideration is so compelling that several speakers, at a 1998 IBC seminar on Strategy as Revolution, commented that the title should have been transposed: Revolution as Strategy. The argument is that, if strategy is not revolutionary, it is not strategic. Yet the harsh fact remains that the great majority of companies are not revolutionary, in strategy or structure. They are not truly aligned to the fast changing world outside. Revolutionary thought may be winning the battle for minds, but action still lags many miles behind thought.

For example, take the most common structural initiative: down-sizing. Even City financiers now accept that cutting numbers and eliminating assets, either by closing plants or selling businesses, is not a new business model. What Gary Hamel calls 'denominator management', cutting costs, is out of intellectual fashion. 'Nominator management', improving the top line by raising revenues, is seen, even in the City and on Wall Street, as the key to optimising 'shareholder value'.

So much for words. As for structural deeds, Philips at the time of that conference was closing one-third of its factories worldwide, Siemens announced its retreat from businesses with a turnover of $10 billion (the same size as Gillette), Boeing was laying off 20,000 workers, Zeneca and Astra would eliminate 5,000 jobs by merging...and so on, and on. The last two, note, are engaged in the trendiest sector (life sciences) of the highly favoured pharmaceutical industry. Astra's management, moreover, had decried the mega-merger wave in its industry in most scornful terms - until the moment came when its organic growth prospects seemed insufficiently rosy.

You can improve the bottom line by cutting expenditure, increasing sales, or (preferably) both. Of the three alternatives, however, the first is much the easiest.

That's because the other two probably cannot be achieved without transforming the whole structure of the company and its management. That is a tremendous test of both will and skill. The struggles at giants like Royal Dutch-Shell, Siemens and Philips show how fruitless it is to attempt radical changes in behaviour unless you first tear down a conservative framework.

You can see that framework physically simply by visiting the Shell head office in The Hague, where directors and their flunkies occupy whole floors apiece. Significantly, some top executives in Silicon Valley, even a mega-rich mogul like Andrew Grove of Intel, have been abandoning their private offices for desks on the executive floor. The dignity and privileges of the summit are among the first targets of revolutionaries in politics. They should be equally prominent targets in management transformation.

Reinforcement for this truth came in the pre-Millennial turmoil over the top post at Marks & Spencer, the retail group previously thought by many to be Britain's best managed company. Commentators remarked, almost unanimously, that the chairman, Sir Richard Greenbury, who stepped down as chief executive in the turmoil, was too powerful. The case also illustrates how the concentration of power and privilege at the top goes hand-in-hand with conservatism in strategy. Not long before, Greenbury had told a public audience that he would believe in electronic commerce when he saw it.

THE ELECTRONIC THREAT
He didn't have to look very far. As Michael de Kare-Silver points out in E-Shock, already some 15-20% of consumers say they would prefer to shop electronically, rather than visit shops. He quotes the managing director of a $2 billion-plus retail group: 'Even a 10% loss in consumers visiting our stores would be a worry. For many of our outlets, that would push us below breakeven'. The author's consultancy, CSC Kalchas, reckons from its own research that 'average retailer margins will be eliminated by a 15-20% reduction in consumer traffic through their stores'.

Against this dynamic background, M&S has been conducting a leisurely 18-month strategy review. In that time, usage of the World Wide Web, doubling every 100 days, will have multiplied over 30 times. The only policy that can work in such circumstances is transformation. In starting that process, don't think about 18 months. A former chairman of ICI once said confidently that 'you can't turn around a large company like this every 18 months'. He would not have recognised today's landscape in which, according to Alan Stevens, managing director of EDS in the UK, the time between corporate restructurings has generally halved - to 18 months.

ICI itself has disposed of its best business (the afore-mentioned Zeneca), shifted its entire focus from commodity chemicals to specialisms - and has still failed to crack its strategic growth problems. As Stevens went on to observe, you can't grow dynamically on the wrong structural system. Just as information technology has progressed from high centralisation (the mainframe) to distributed processing (the mini-computer) to total decentralisation (the PC and the Internet), so freeing up corporate structures along the same route offers the same benefits in speed, responsiveness and flexibility.

In this process, the first 18 weeks are much more important than the first 18 months. A third of a year is quite long enough to prove that anything which requires changing will be changed, that no cows are sacred any more, and that the new technology will be embraced until it permeates every process in the business - from people management to customer satisfaction (two sides of the same coin), from 'knowledge management' to achieving radical and continuous change.

The precondition of successful transformation is to close the gap between management's perception of present reality and the truth. Large and rich companies spend heavily on advertising and 'new products', which convinces them, but nobody else, that they have established meaningful distinctions between themselves and their competitors. The reality is that the market can't tell any of them apart.

Gary Hamel, co-author of Competing for the Future, has a convincing explanation. Companies in the same industry tend to follow the same road. They even benchmark against competitors to ensure that they are doing the same things at least as well, preferably better. But no lasting advantage can be gained from marching in step. By far the most successful financial services firm today is Charles Schwab, which turned the investment industry upside-down by being wholly different. Schwab didn't emulate the established industry: it forced its rivals to follow its lead - too late to prevent Schwab's upsurge.

In contrast, every car company in both East and West, to greater or lesser extent, has followed the strategic lead of Toyota, basing their programmes on reducing costs by improving productivity. Despite that, their operating margins have fallen, converging to a low 3-4% cluster. Across whole swathes of the industry, there is no real differentiation in either product line, quality or methods. Innovation has largely been confined to doing the same thing better. In consequence, the performance of Ford Motor only looks good in comparison to the industry laggard, the giant and perennially troubled General Motors.

Here, too, attempts at transformation have been hamstrung by the survival and resistance of the old structural order. GM's market value has been running at half the dollar volume of its sales. In contrast, Microsoft and Intel, the microelectronic champions, have been selling at extravagant multiples of their revenues (29 times and 7.5 times respectively). Both, of course, dominate fast-growing markets where succulent profit margins are available - and even getting larger. But both companies, being agents of revolution as well as its beneficiaries, have shown the ability to engage in the new necessity: continuous transformation.

TWO YEARS FROM FAILURE
Bill Gates of Microsoft has expressed the driving force well: 'We're always two years away from failure'. The drawback for large established companies, like Shell, GM, Siemens and Philips, is that, no matter how strong the evidence of market failure, they refuse to believe in anything but their own permanence. They think that they are 'Built to Last', to quote the title of a book by James Collins and Jerry Porras. Hamel points out, however, that several of the book's heroes have not lasted, in the sense that their shares have heavily underperformed the stock market: companies of high repute like 3M, Ford, Sony, Motorola and Hewlett-Packard.

The last three, until quite recently, were management superstars, and still are, in the minds of most people. As noted earlier, Motorola has been greatly tarnished by its failure in the digital phone market, and Sony's reputation has suffered along with those of other stars of Japan's dead miracle. But HP seemed particularly strong, as a company highly decentralised, yet strongly directed from the centre; which had exploited established positions, as in printers, with unrelenting drive; and which had even emerged as a powerful contender in the cut-throat battle in PCs.

That last success, however, is relatively profitless. Because HP's business model needed restructuring, it missed the big, rich plays in its industry - software, microprocessors, the Internet - and such opportunities, once missed, are gone for ever. Hamel tells how he was present at the launch of IBM's laptop PC. He observed to an IBM man that the product was more than somewhat late: five years behind Toshiba, in a market that was already worth $6 billion. The IBM man gave a lordly answer: 'We'll catch them'. To date that has not happened, and almost certainly never will. These days, forgoing an initial opportunity may mean permanent disadvantage and major loss.

Merely think of the billions in sales and profits that IBM lost through its tardiness. As Hamel remarks, any IBM executive who had lost a mere million would have been in deep trouble. But corporate structures are not geared to sins of omission. Though somebody should, nobody counts the losses from what might have been, and wasn't. For that reason, it's easier for executives to reject great ideas than to turn them into reality. Forcing through a project exposes you to the risks of failure, which are measurable. Opposing innovation exposes the company to the risks of obsolesence. They may be far graver, but will not be laid at the door of any individual.

By much the same token, downsizing produces rewards that are measurable and relatively rapid. But the sums usually bandied about, involving billions of costs 'saved', are fraudulent. They take no account of extra costs incurred, through redundancies, plant closures, etc. Nor do they allow for the weakening of the firm's true asset base. In 1996, for instance, AT&T announced that it would reduce its workforce by 40,000 people. One consultant worked out that this write-off of 'human capital' was equivalent, at between $4 billion and $8 billion, to 'wiping out more than a third of the company's stock of property, plant and equipment'.

FIVE REVOLUTIONARY MORALS
The quote comes from Thomas Stewart's Intellectual Capital, a fascinating study of the discontinuous present, in which intangible assets, which may have no place in the balance sheet, prove to be the overwhelmingly dominant source of wealth. The afore-mentioned Charles Schwab has grown to 5.5 million customers on the strength of ideas. Back in 1975, Schwab had no differentiation: it was like every other small brokerage house. But then the eponymous Charles (or Chuck) made a pregnant decision: to become a discount broker. The key was the outlawing of fixed commissions.

Revolutionary Moral 1: look out for major shifts in the conditions governing your marketplace, and transform the business model to fit.

Schwab soon found that simply undercutting the full-service brokers was too easily imitated. So Schwab differentiated further. He invested in new technology and advertising to increase the value offered to investors. He moved to put their interests first (for instance, by placing salesmen on salary instead of commission), and advertised heavily. By 1988 he had a market share of 40% in discount broking, with revenues of $392 million.

Revolutionary Moral 2: Build your business model to be better, different and more dynamic.

As Adrian Slywotsky and David Morrison report in The Profit Zone, Schwab next turned his attention to independent financial advisers. They could stay happily independent, but Schwab would look after all their back office requirements. By end-1991 even happier IFAs had helped Schwab's equity to rise to $1.2 billion of market value.

Revolutionary Moral 3: Look for allies to help you outgrow your rivals in a restuctured business system.

But why were the advisers doing so much business? Because they focussed on helping customers, who were not well served by the big mutual funds. Schwab decided to become 'customer-centric', too. It pioneered acting as 'one source', through which they could buy many mutual funds with no front-end load and no transaction fees. This third transformation took Schwab to $1.07 billion of revenue by 1994, with $19.7 billion in fund assets.

Revolutionary Moral 4: Let the customers and their needs really determine your business model.

Schwab had already added on-line trading to a brilliantly efficient telephone service. But it saw the Internet as both promise and threat. To quote Fortune, 'all that their research told them was that lowering prices to compete on the Web would cost them as much as $125 million in forgone revenues'. But that price was worth paying for what Schwab's co-CEO, David Pottruck, calls 'the transforming event...the ability to deliver personalised information to the customer in real time, at virtually no cost'. Schwab now has 2 million active Web investors, who account for a third of $433 billion in customer assets.

Revolutionary Moral 5: To buy the future, be prepared to cannibalise the present.

Moral 5 isn't a new concept. It has always made sense to scrap or sell a perfectly good machine if a new model offers much better performance. The same is true of business systems. Change the model to boost performance. Revolutionaries like Schwab and Pottruck look at current riches as a source for future growth, and at current strengths as platforms for change. For others, that is very evidently easier said than done.

Consultants A.T. Kearney looked at the non-financial companies in the FT-SE 100 share index between 1984, when it was launched, and end-1997. Total sales, corrected for inflation, were £260 billion in 1984, and only £2 billion higher at end-1997. Thanks to cost cuts, earnings before interest and tax had risen by 76%, and return on invested capital had practically doubled. But the researchers found no correlation whatsoever between individual profit performances and total returns to shareholders over the period. Why not?

The answer is that downsizing is one-off, and subject to sharply diminishing returns. Whatever Siemens, say, gains from $10 billion of sell-offs will be offset in time by loss of the growth potential of the sold capital, human and otherwise. Moreover, the downsizing knee-jerk draws attention away from two crucial issues:

• How and why did we get into this mess? • How and where can we find the transformations that will re-grow the company?

The answers to the first question begin and usually finish at the top. The answers to the second lie in structural revolution on all three counts: Information, Management and Global. And that demands finding, promoting and retaining real revolutionaries.


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