August 12, 2009

Organizational Behavior in the Stone Age – How Evolution has Shaped and Biased our Behavior

Jim Neroda and I are writing a paper on how human nature impacts strategy formulation and implementation.  While doing research on this topic, we found an excellent Harvard Business Review article titled “How Hardwired is Human Behavior?” by Nigel Nicholson, July-August 1998.  This article is far superior to most Organizational Behavior literature and should be required reading for every manager.  The paper can be purchased and downloaded from Harvard Publishing at:


http://harvardbusiness.org/product/how-hardwired-is-human-behavior/an/98406-PDF-ENG?Ntt=hardwired
 

The basic premise is that although humans have developed highly advanced technology and complex organizations, our intellectual capacity is still based on what evolved during the Stone Age.  The author draws on the concepts of evolutionary psychology to explain how behavior that evolved in a hunter-gatherer society leads to many of the quirks we see in how people interpret information and make decisions in an organizational setting.  As the author puts it, “You can take the person out of the Stone Age … but you can’t take the Stone Age out of the person.”  Observations include:


Emotional Filter – As humans evolved, using instinct to react immediately to danger was key to survival.  The residual effect today is that no matter how hard we attempt to apply logic and reason, we always have an emotional filter that reacts first to information.  In particular, this filter is tuned to avoid danger and reacts to bad news first and most aggressively.  Hence the ‘shoot the messenger’ reaction we see in some executives.


Aversion to Loss – When we existed at the edge of survival, our behavior was asymmetrical depending upon whether we were above or below subsistence.  Above subsistence, we were extremely reluctant to change lest we disrupt what was working.  Below subsistence (faced with a starvation, disease or a predator), we would take immense risk to try and stay alive.  The modern equivalent is that when we are comfortable, we avoid change that seems risky.  Yet when we feel threatened, we’ll behave irrationally – such as coming apart emotionally if we’re laid off or compounding investment losses in our portfolio when the market drops. 


Overconfidence – Confidence was undoubtedly an asset in the Stone Age – it helped ensure rapid decision making and attracted tribe members.  Today confidence is still an essential element of successful leadership.  The downside is that it can cause leaders to ignore warning signs and forge ahead regardless of negative feedback – believing “…there isn’t a problem they can’t control…”


Classification – Early humans needed a simple way to understand their environment without the help of science.  Understanding which plants were edible or which people could be trusted required quick interpretation of visual cues.  The carryover today is that people still sort others into groups based on quick assessment of their looks and actions – making effective teamwork between different departments and business cultures a real challenge.


Gossip – Our Stone Age ancestors lived with frequent changes in leadership due to injury and disease.  Knowing what other clan members were thinking helped them anticipate and influence changes in the hierarchy.  Today’s equivalent is the “rumor mill” – which is still a tool for getting early information and shaping opinions.


Empathy – Empathy is a corollary skill that supports gossip.  Clan members are more likely to share information with understanding people.  Those who can anticipate how others are feeling will ask more pertinent questions.  In general, people have always been co-dependent for survival and rely on friendly exchange of information and favors.  The modern downside is that empathy causes us to believe that others are more like us than is really the case and we make excuses for weaknesses rather than addressing them head-on.


Public Contests – In ancient societies, status was determined by the strength, skill and aggressiveness of group members.  This ingrained behavior persists (largely in males) in the form of public displays to demonstrate virility and competence.  Even when all “…would benefit from cooperation, men frequently choose competition.”


Tribalism – According to research, the human brain is only able to really know and understand about 150 other individuals.  Coincidentally, Stone Age clans appear to have been limited in size to about 150 members.  In addition, throughout history and across cultures, family businesses typically have no more than 150 members.  The implications for modern organization are that similar sized groups are both inevitable (defined by departments or cliques) and are generally most productive.


Hierarchy – Social status based on wealth and behavior was important in the hunter-gatherer world since it lead to being sought out for alliances or leadership.  This inbred desire to obtain status carries over to the business world - humans expect and will create an informal hierarchy even in temporary work groups.  This behavior supports the use of rewards and recognition as management tools.


The author closes by stating that we ignore evolutionary psychology at our peril.  “…encouraged by the optimistic recipes of management cookbooks or constrained by technological and economic imperatives – (managers) falsely believe that with commitment, resources, and ingenuity, anything is possible.  In this spirit, time and time again we have tried and failed to eliminate hierarchies, politics, and inter-organizational rivalry.  Evolutionary psychology says it’s time to recognize what we are and use this information to live in harmony with our hardwiring.”

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July 07, 2009

Strategic Thinking - The Role of Formal Planning versus Organizational Learning

Developing corporate strategy involves three categories of activity – definition of principles, strategy formulation and effective strategy execution.  Traditional “Strategic Planning” tends to organize these activities into a short term, linear process at the executive level.  This is an oversimplification since:
  • Strategic Principles include both current, fixed elements that precede strategy formulation (mission) and future, variable elements that precede, evolve with and are used to communicate after strategy formulation (vision).
  • Strategy Formulation includes more than just analysis and planning – new insight generally requires an intuitive understanding of the business that is only achieved with long term organizational learning.  The people most likely to have the experience and creativity to see new business approaches are often deep in the organization closest to the customer and internal business processes.
  • Strategy Implementation is not just an exercise to convert the strategy into action plans.  It must also engage a broader group of employees (ideally done during strategy development) and provide direct feedback into both corporate vision and strategy formulation.

A more complete model allows the Vision to develop and mature throughout the Strategy Formulation and Implementation phases.  It also recognizes that strategy involves both scheduled (planning) activities and evolutionary (organizational learning) aspects.  Once we see strategy from this perspective – “Strategic Thinking” becomes the objective for a robust corporate strategy process.  Strategy creation is no longer an annual event but a long term process that has both non-linear and re-entrant elements.  Strategy is no longer the exclusive domain of senior executives but must incorporate the best business intelligence (from those close to the information source) and the most creative minds (those not yet biased by established industry practices).


In order to harness the insight and creativity of a broad cross section of employees – the technique of strategy focus teams has proven effective.  These teams are composed of mid and lower level people with direct customer contact and/or business process insight.  They report to the executive strategy committee but must also maintain a high degree of independence to encourage new ways of thinking about the business.  This requires a unique mix of strong executive support yet minimal executive influence.  The CEO in particular must endorse a more democratic and inevitably more critical approach to understanding the business and creating new approaches.  For those executive teams that have sufficient discipline and self-confidence, the application of a broad “Strategic Thinking” process can yield exceptional new insights.


For more information see my white paper at:


http://www.strat-edg.com/files/Strategic_Thinking.pdf

 

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June 22, 2009

Understanding Market Share Calculations

The concept of market share is pretty simple – just divide your company sales by the total sales within the market.  The problem is getting accurate information for the denominator in this ratio.  Three common approaches and their relative strengths and weaknesses are:


Bottom-up Approach – this method relies on information gathered directly from the users of the product.  It is theoretically the most accurate since these users can provide unfiltered input on their current suppliers, product usage and forecasted requirements.  The supplier collecting this data, however, has a potential bias toward overestimating market share by gathering data from customers who are known to the company and overlooking applications or firms that are not currently served.


Top-Down Approach – this method uses high level econometric data and projections to derive demand for the product and thereby estimate market share.  This method is less subject to consistent bias but is prone to the compounding of errors in the underlying assumptions used to derive demand.  Moving from a high level forecast (such as GDP) to sales of a specific product requires either:

    • A series of fractions which model how overall demand is broken down by region, industry and segment or
    • A rule of thumb that implicitly captures these assumptions based on historic ratios.
       

Both methods are subject to random error depending upon the validity of the assumptions and the potential for these assumptions to deviate from historic norms.

Purchased Industry Analysis – this method relies on a third party to capture product sales data within a specific industry.  Using such a service should provide better information since they can collect data without representing any particular supplier, are likely to take a comprehensive view of the available market and, since this is their core business, will invest more to refine their methodology over time.  On the other hand, these services tend to simplify their data collection by relying on industry suppliers to provide accurate sales figures rather than going directly to a large customer base.  Each supplier has a natural desire to maximize their reported sales / share and may include spares, service and upgrade revenue in their reported figures.  This tends to overstate total demand and underestimate market share for those companies who accurately report sales.
 

As you can see, each method has limitations.  The best approach is to understand and compensate for those limitations.  Utilizing more than one technique is a very useful practice since it forces you to compare results achieved by different methods and understand the underlying assumptions and limitations of each method – ultimately resulting in both more accurate share numbers and a better understanding of market dynamics.

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April 21, 2009

Inspirational Leadership

I recently attended a Semiconductor industry meeting where one of the speakers referred to the incredible leadership displayed by Bob Noyce.  Bob was a founder of Fairchild Semiconductor and later Intel Corporation.  He was a pioneer in developing the integrated circuit and, in many ways, was instrumental in creating Silicon Valley.  I had the privilege of meeting Bob in the late 80’s when he was President of SEMATECH.  He was, without a doubt, the most impressive person I’ve ever met.  He had incredible “presence” based on his intelligence, articulate way of framing issues, exceptional poise and overall sense of competence.


It’s been reported that another Intel legend, CEO Andy Grove, found Bob’s nice guy attitude irritating and believed that his leadership style was ineffective.  Andy, known for directness in finding fault, had a fiercely competitive and highly demanding leadership style.  According to Richard S. Tedlow in “The History and Influence of Andy Grove”, this created a “pressure cooker” environment within Intel.  Interestingly, just as both Bob and Andy were successful with dramatically different leadership styles, it’s clear that both highly stressful and more constructive cultures can lead to corporate success.


The difference between these cultures is in the secondary or unanticipated consequences of using conflict and criticism to motivate performance.  Along with higher pressure, you also get defensive behaviors – including unwillingness to volunteer new information, unproductive time spend on CYA activities, attempting to win points in meetings at others expense and heightened politics where alliances are used to avoid personal exposure and shift blame.


High expectations, personal accountability, fast decision making and aggressive action are universal requirements for business success.  The fundamental question, however, is whether that pressure is derived primarily from a negative, external stimulus or from a positive, internal drive to succeed.  When leaders create a culture of open communication, cooperation and rational discussion of business problems, they are leveraging people’s internal drive to learn and achieve.  They are leading based on logic and respect.  They are motivating based on appealing to the intellect and positive emotions.  They are inspiring us to our best.  And along the way, they are getting the benefits of improved productivity and decision making.

For additional details, see a white paper at:

http://www.strat-edg.com/files/Inspirational_Leadership.pdf

 


 

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March 22, 2009

Product Roadmaps - Transforming Strategy into Growth

Premise – (1) Strategy by itself only defines the destination and the basic means of travel – there is no growth engine without value added products and services since they provide the means to capture market share and earn superior margins.  (2) Given this situation, organizations need a mechanism to provide the substance behind the strategy.  (3) The development of Product Roadmaps provides such a mechanism.


Note that I said the development of the roadmap provides this linkage between strategy and product development.  This is because the Product Roadmap (the end result of the road mapping process) is nothing more than a graphical tool to visualize a time phased sequence of projects that represent marketing’s best guess on what is needed to expand market share and profitability.  Although the roadmap is rather simple, the roadmap development process involves a significant amount of analysis and decision making.


The analysis steps include a thorough understanding of market trends; in-depth knowledge of customer needs and business constraints; analysis of competitive offerings; and assessment of internal development capabilities.  This information creates a foundation for the development of new product concepts.  These concepts don’t appear from the analysis alone but evolve over time as product and customer experience is coupled with the intuition and innovation of strong product managers and creative technologists.


The decision making kicks in as these new product and service candidates are evaluated and refined – searching for a combination of features that provide unique value to customers at an appropriate price point.  This tradeoff of product features versus cost, risk and lead-time results in a condensed project list.  Inevitably, there are more concepts for new products, feature enhancements and cost reduction than there are resources to develop these into viable products.  As a result, the list of product candidates must be rank ordered based on their potential impact on market share / margin, timing versus market opportunity and resource utilization.   Projects near the top of this list and within overall resource constraints are selected for the roadmap and subsequent funding.


Given this sequence, the roadmap becomes the means to an end – the product line plan to implement the business unit strategy – and its primary value is not in the graphical output but in the analysis and decision making embedded in the road mapping process.  For additional details, see my white paper at:


http://www.strat-edg.com/files/Product_Roadmaps.pdf

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March 03, 2009

The Art of M&A Integration

M&A activity is often biased toward closing the deal.  Company executives review strategic implications, define expected results and analyze financial projections.  Consultants and functional experts perform due diligence.  Brokers and bankers model business synergy and valuation.  The legal team works out contractual details.  When the deal finally closes, the vast majority of these people move on to their next challenge – leaving a business unit manager and corporate staff functions to actually engage with the new group, ensure functionality between business systems and, most importantly, deliver on the promised results.


There is often no formal integration process – this is typical of less sophisticated acquirers and acquisitions which claim no anticipated changes in a “merger of equals”.  Unfortunately, this initial independence is short lived as various corporate functions start expecting information in the format used by the acquiring company.  Next, these same well intentioned staffers expect compliance with corporate policies and procedures.  This will likely impact budget and hiring approvals and may extend to more critical business processes like customer terms or credit approval.  While all these changes seem reasonable to the various staff groups - the cumulative effect on the acquired company is at least a diversion of resources to deal with non-value added administrative tasks and at worst a direct violation of their expectations and trust.  The most destructive changes occur when organizational decisions and HR policies combine to impact reporting relationships, titles and compensation.   Coupled with the more benign administrative issues and an information vacuum – the intended synergies of the acquisition are quickly forgotten – replaced by uncertainty about levels of authority, long term job security and outright mistrust.


It is never wise to assume or communicate that business will continue as usual for the acquired company.  The reality is that many things will change with an acquisition and this needs to be communicated and planned well before the deal is signed.  The most critical elements of an effective integration plan include:

  • Common Objectives
  • Early Integration Planning
  • Resource Allocation
  • Fast Decision Making
  • Effective Communication
  • Strong Working Relationships
  • Expect Problems
     

For additional details on these elements, see my white paper at:


http://www.strat-edg.com/files/The_Art_of_M_A_Integration.pdf

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February 06, 2009

What Constitutes Differentiation?

Differentiation is literally how you differ from the competition – what makes you unique.  It is generally thought of as differences in product attributes and performance but it applies equally to the services which accompany the product and to the customers’ entire interaction with your company.  As pointed out by Theodore Levitt, “There is no such thing as a commodity.”  Even if you provide a generic product, you can differentiate on the ‘offering’ – the sum of the tangible product and the intangible support and business process characteristics.

Tangible product characteristics often carry a higher premium in the customers’ eyes – particularly if they allow that customer to compete more effectively.  Supporting a unique capability in your customer’s product or providing higher throughput both fall into this category.  Intangible aspects of the product offering can also provide measureable value – such as simple configuration and ordering, fast delivery, manufacturing advice, installation support and simple repair.  As a result, both a detailed understanding of the product / application and review of all the steps required to obtain, use and dispose of the product should be considered as potential axes of differentiation.

Creating differentiation is critically important since it forms the basis of establishing unique customer value and thereby justifying a premium price.  As discussed in the prior post on Strategic Pricing and in the accompanying white paper – understanding and selling on the basis of value allows you to negotiate from a position of strength rather than reacting to customer demands for lower price and threats to move the business.  


A couple useful articles from Harvard Business Review include:
1.       “Marketing Success Through Differentiation – of Anything”, Theodore Levitt, Jan-Feb 1980.

http://harvardbusinessonline.hbsp.harvard.edu/b02/en/common/item_detail.jhtml?id=80107&_requestid=44212


2.        “Discovering New Points of Differentiation”, Ian C. MacMillan and Rita Gunther McGrath, Jul-Aug 1997. 

http://harvardbusinessonline.hbsp.harvard.edu/b02/en/common/item_detail.jhtml?id=97408&_requestid=44407

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January 19, 2009

Strategic Pricing - Getting Paid for the Value You Provide

I’ve worked with a number of people exploring how to maximize their pricing and margins.  Their industrial customers have been increasing the pressure for price discounts at the same time that process improvements like Lean Manufacturing and additional outsourcing to low cost countries have become saturated.  The key here is to provide genuine customer value that is also unique from the competition.  This requires in-depth understanding of your customer’s business / processes so that you can assess opportunities and determine the impact of innovative products.  The highest utility will result if you provide technical superiority that helps your customers differentiate their own products and services.  Next would be something that reduces cost of ownership – generally based on higher throughput or reliability.  Finally, you can simplify how the customer obtains and utilizes your product over the entire cycle of evaluation, purchase, delivery lead-time, installation, routine operation and eventual obsolescence.


By becoming an expert in your customer’s business, you are able to both develop competitive products that anticipate their needs and communicate this value in terms meaningful to them.  This “value equation” provides a tool to shift the dialog from a defensive reaction when faced with discount demands to a logical discussion of how your product is used and where there are opportunities for cost reduction based on product features, volume, timing or other parameters.  This transition won’t happen overnight – it requires that every customer discussion be disciplined to focus on applications, value and tradeoffs that can be made to optimize price/performance.  For a more complete discussion of this topic, see the white paper on my website at:


http://www.strat-edg.com/files/Strategic_Pricing3.pdf
 

Two excellent books on this topic are:

  • “The Strategy and Tactics of Pricing” by Thomas Nagle and John Hogan, Pearson Prentice Hall, 2006.
  • “Pricing with Confidence” by Reed K. Holden and Mark R. Burton, John Wiley & Sons, 2008.

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January 07, 2009

Moving from Strategy to Results

When the senior management team invests their time and energy in developing corporate strategy, they expect to see measureable progress.  When that’s not forthcoming, the time spent offsite brainstorming seems like just so much group catharsis.  In my experience, the best mechanism to ensure execution against the strategy is the concept of Key Result Areas or KRA’s.  These KRA’s represent business processes, skills or projects that have been identified as critical to the strategy – areas where the firm must excel.  Examples might include product quality, lean manufacturing, fast product development, expertise in new markets or specific new products.

The KRA’s are a mechanism to move from long term strategic concepts and objectives to short term, executable projects.  They are typically built into the annual plan for a business unit.  Each KRA includes a description (explaining how it supports the strategy), metrics and a set of projects.  These projects are where the action takes place - each has its own definition, owner, metrics and schedule.  The owners are typically direct reports to a business unit VP and are expected to marshal internal and cross functional resources to achieve the desired outcome.  To ensure progress, each KRA and its related projects are reviewed by the business unit VP on at least a monthly basis.  In this way, the strategy is broken down into well defined pieces that can be implemented by working level managers and teams.

I’ve led traditional strategic planning exercises and I’ve led teams in the formation of an executable strategy using KRA’s.  The former sat on the shelf until the following year with only some residual influence over the course of day-to-day business management.  The KRA approach, in contrast, became an integral part our staff meetings and yielded an 85% hit rate on achievement of strategic goals.  For additional information, see the white paper on my website at:

http://www.strat-edg.com/files/Strategic_and_Business_Planning2.pdf


 

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December 31, 2008

Succeeding with Alliances and Joint Ventures

While meeting with a friend from a prior company, we found ourselves trying to figure out why a previously vibrant and productive joint venture relationship had turned sour.  We reviewed the history of this overseas JV – noting that the relationship had gone through at least 3 phases – a period of misunderstanding and frustration early on, a mid-life where communication and partnership were excellent, followed by a period of decaying relationships and loss of all the information sharing and joint product development enjoyed in phase 2.  I have since concluded that there were 4 essential elements that enabled the highly successful phase:

1.       Common Objectives – shared within both organizations.  In spite of ambiguity in the JV agreement, phase 2 started with acceptance of the JV as a fully capable partner rather than just an overseas distribution branch.  There was a common enemy and an opportunity to partner to share resources and ingenuity.


2.       Leadership - key operational executives working as partners.  Phase 2 was also marked by the appointment of a new JV president that recognized weaknesses in management – replacing key personnel with those who had US work or education experience.  The US parent also made adjustments in the leadership, training and recognition system to emphasize the need for partnership.


3.       Leverage Differences - in culture and skills to gain competitive advantage.  It became evident in phase 2 that the JV had unique skills in terms their customer relationships and automation design capability.  These were complemented by understanding of long term technology trends and good process and controls design in the US.


4.       Working Level Relationships - based on mutual respect and direct communication.  Peers within each company met face to face at least quarterly for both technical and social interaction.  Phase 2 was characterized by a very high degree of trust and shared information.


Upon reflection, it’s evident that the single most critical factor was leadership.  The relationship between operational managers, their vision of how the partnership benefited both companies and their investment of energy to make it work ensured that we could resolve any conflicting objectives, discover the synergies between groups and foster the peer to peer relationships. 


 You can read a white paper on this topic at:

http://www.strat-edg.com/files/Successful_Alliances_and_Joint_Ventures2.pdf

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