Strategy P. 13

Companies have four ways of building businesses from within their organizations. Each approach provides certain benefits — and raises specific challenges.

Strategy can be thought of as a loop with four steps: making sense of a situation, making choices, making things happen and making revisions.

For executives running global companies, the challenge of keeping abreast of events in markets around the world is mind-boggling. The problem is not a lack of information -- it is having the time and energy to process the information. How should executives prioritize their time to ensure that it is focused on the countries and subsidiaries that need the attention? Which markets should they emphasize, and which ones can they allow to fall off their radar screen? The authors researched executive attention at global companies for five years, interviewing 50 executives at 30 corporations including ABB, Dun & Bradstreet, Nestl_ and Sara Lee. They found that executives end up prioritizing a handful of markets at the expense of the others, but they don't always select the most promising ones. Because executive attention is so limited, executives tend to focus on the home market or on "hot" markets, always at the expense of other opportunities. The authors examine the nature of executive attention and identify mechanisms by which subsidiary companies attract attention from the top executives. Although attention can be harmful as well as helpful, the article focuses on the positive aspects. In particular, the authors focus on three elements: support, in terms of how headquarters executives interact with and help subsidiary managers achieve their goals; visibility, in terms of the public statements headquarters executives make about how the subsidiary is doing; and relative standing, in terms of the subsidiary's perceived status vis-_-vis other subsidiaries in the organization.

The place of multinational corporations in China has rapidly changed since the 1970s. No longer expected to bring cash and management expertise to China, the authors argue that MNCs have taken on a new role as teachers and role models. However, recent high-profile mistakes including a McDonald's Corp. (of Oak Brook, Illinois) ad that over 80% of Chinese surveyed found offensive, show that MNCs are not entirely up to this task. They illustrate the consequences of this inability to cope and suggest eight strategies for improving MNC's success in China: Think local-act global, don't apply double standards, don't bend the rules, avoid making "symbolic" acquisitions, avoid employing aggressive tactics over intellectual property rights, guard against management insensitivity, don't "strip mine" profits and don't use China as a lab. The authors then go on to show how these strategies can be executed to increase MNC's profits and standing in China.

In the past, companies have tried to manage risks by focusing on potential threats outside the organization: competitors, shifts in the strategic landscape, natural disasters or geopolitical events. They are generally less adept at detecting internal vulnerabilities that creep into organizations and other human-designed systems. Indeed, as companies increase the complexity of their systems -- products, processes, technologies, organizational structures, legal contracts and so on -- they often fail to pay sufficient attention to the introduction and proliferation of loopholes and flaws. Ericsson, Barings Bank and Comair are but a few examples of companies that have suffered disastrous breakdowns in their complex internal systems. A crucial thing to remember is that the possibility of random failure rises as the number of combinations of things that can go wrong increases, and the opportunity for acts of malicious intent also goes up. Build new applications on top of legacy systems, and errors creep in between the lines of code. Merge two companies, and weaknesses sprout between the organizational boundaries. Build Byzantine corporate structures and processes, and obscure pockets are created where bad behavior can hide. Furthermore, the enormous complexity of large systems like communications networks means that even tiny glitches can cascade into catastrophic events. In fact, catastrophic events are almost guaranteed to occur in many complex systems, much like big earthquakes are bound to happen. So, without the benefit of perfect foresight, how can businesses uncover and forestall the fatal flaws lurking within their organizations? There are three complementary strategies: (1) Assess the risk to make better-informed decisions, such as purchasing an insurance policy to cover the risk; (2) spot vulnerabilities and fix them before catastrophic events occur; and (3) design out weaknesses through resilience. These ideas have been around for years, but researchers have recently had to reinvent them in the context of extremely complex, interconnected cascade-prone systems.

What is the optimum growth rate to maximize total return to shareholders? This is a critical question facing both managers and investors. An answer is found in the concept of a company's growth corridor, which is set by the upper bounds of a financially sustainable growth rate and the lower bounds of the competitive growth rate. Using data from Fortune Global 500 companies, the authors find that those companies that grow within their respective growth corridor create above average total shareholder returns. Drawing examples from companies such as AES, BMW, Marks & ; Spencer, Nestle, and Wal-Mart, they show how managers can identify their growth corridors, and how they can restore healthy and smart growth.

Personal investment puts management at risk.

Defining an innovation process increases companies' future value.

In every large company, groups of creative individuals self-organize to explore and develop ideas that they care deeply about. These collaborative networks often include customers and others outside the company’s boundaries. Take, for instance, the automaker BMW, which posts numerous engineering challenges on its Web site, enabling customers and company designers to network and collaborate on developing various features of future cars. Now collaborative innovation is being extended from the realm of idea generation and product development to the very essence of doing business. In fact, some companies have based their entire business models on collaborative networks. The classic example is Wikipedia, the free online encyclopedia that relies on a swarm of people to write, edit and fact check the information listed in its entries. According to the authors, these “swarm businesses” pick up where the e-business craze stopped, with one crucial difference: e-businesses were primarily concerned with eyeballs (getting as many people as possible to visit a particular Web site), whereas swarm businesses strive mainly to create real value for the swarm. As companies like BMW, IBM, Novartis and others are discovering, swarm businesses require a completely new corporate mindset. Specifically, to reap the benefits of swarm innovation, companies must (1) gain power by giving it away, (2) share with the swarm and (3) concentrate on the swarm, not on making money. Although these principles differ from the traditional ways of doing business in a number of fundamental ways, they are crucial for companies to succeed in this emerging era of increased collaboration among innovators both inside and outside the organization.

Many corporations are failing to obtain the full value from their boards. This lost opportunity occurs not only in dysfunctional organizations but also in companies that perform well and are market leaders. Specifically, from a recent comprehensive study of board reviews, the authors found that many boards are suffering from the following fundamental problems: inadequate competencies, lack of diversity, underutilization of skills, dereliction of duties, and poor selection and assessment processes. To avoid those problems, organizations need to adopt a set of five basic practices: (1) Choose the right directors (four competencies are required: results orientation, strategic orientation, collaboration and independence). (2) Appoint the right chairman (in addition to the four competencies, candidates must be skilled in empowering others to encourage vigorous debate, coaching and mentoring directors, and holding key executives and other board members accountable). (3) Make succession planning the first priority (this starts with graduate recruitment practices at the organization and is complemented by management development programs). (4) Focus on a few key agenda items (at a minimum, boards should regularly address the following issues: conformance with governance codes and regulations, review of the CEO's performance and succession planning, discussion of ways in which the company will create and develop long-term value for shareholders, and monitoring of the company's operating and financial performance). (5) Review the board's collective and individual contributions (reviews should go beyond just compliance). Although these practices might seem obvious, the simple fact is that far too many organizations either neglect them or make costly mistakes in implementing them.