Shhh...Don't tell the Americans

An investment strategist who travels the world advising fund managers where to put their clients money was told by his company to censor his presentation for their American market. The London Head Office felt that American finance experts would not appreciate hearing about the decline of American markets. I used to work for his bank and they were not shrinking violets when it came to telling the brutal facts so this hesitancy to tell the truth just because the clients will not like what they hear and have deep pockets is a radically new policy.

Having lived through the last century, I lived through lights on the British Empire. Denial is the common reaction. Watch this season of Mad Men to see the British in full steam, eyes closed mode as they take over a New York agency and the Americans tell them “We are the future, not Britain.” Well, now Americans are in the same situation.

Smart investors will put aside their patriotism and figure out how to get on with things.

Twelve Myths of Sustainability

The sound of profits sucking out of the balance sheet is a common one and the temptation is to go wild trying to build a better business. Hold on. Some of your ideas may be drastically wrong. So, I thought it would be a great time for a book summary from my favourite management philosophers, James C. Collins and Jerry I. Porras.

They did a six-year research study, and examined what it takes to "create and achieve long-lasting greatness as a visionary corporation". The findings were summarized in their early and more text like book Built To Last. The research produced surprising results for the authors, exposing at least twelve commonly held businesses myths:

MYTH 1. It takes a great idea to start a company.

Few visionary companies started with a great idea. Many companies started without any specific ideas (HP and Sony) and others were outright failures (3M). In fact, a great idea may lead to road of not being able to adapt.

MYTH 2. Visionary companies require great and charismatic visionary leaders.

A charismatic leader in not required and, in fact, can be detrimental to a company's long-term prospects.

MYTH 3. The most successful companies exist primarily to maximize profits.

Not true. Profit counts, but is usually not at the top of the list.

MYTH 4. Blueprint for Core Values

Visionary companies share a common subset of "correct" core values.

They all have core values, but each is unique to a company and it's culture.

MYTH 5. The only constant is change.

The core values can and often do last more then 100 years.

MYTH 6. Blue-chip companies play it safe.

They take significant ‘bet the company’ risks.

MYTH 7. Visionary companies are great places to work, for everyone.

These companies are only great places to work if you fit the vision and culture.

MYTH 8. Highly successful companies make some of their best moves by brilliant and complex strategic planning.

They actually try a bunch of stuff and keep what works.

MYTH 9. Companies should hire outside CEOs to stimulate fundamental change.

Most successful organisations have had their change agents come from within the system.

MYTH 10. The most successful companies focus primarily on beating the competition.

They focus on beating themselves.

MYTH 11. You cannot have your cake and eat it too.

Decisions do not have to either or, but can be both.

MYTH 12. Companies become visionary primarily through "vision statements".

Vision is not a statement it is the way you do business.

Why most innovation never gets off the shelf

It never fails to amaze me how difficult it is to get innovations actually done in larger organizations. There are root causes common to many of my clients, and I have observed that so often it comes to the day-to-day nature of communication.

To be fair, the conversations to get innovations of the shelf and onto the company's list of things to do are difficult for many companies. Michael Beer (great name, even better guru of organizations) says that most organizations won't change unless the leadership has the courage to initiate the measures necessary to do so. Here is a summary of how to ensure innovation happens by Michael Beer:

Ways to make your company bring up its innovation game

We've discovered that standard initiatives such as employee surveys, interviews by external consultants, and even relatively straightforward, one-on-one conversations between managers and the CEO don't usually help an organization shift toward greater candor. Primarily that's because employees don't believe that management, particularly the CEO, will actually listen and act on their comments.

Often, such initiatives have a negative effect on the company, fostering cynicism. In one multinational company we studied, a task force of valued managers, when asked by senior management to conduct and analyze a worldwide employee survey, refused to do so. They simply did not want to be associated with what they perceived would be yet another useless exercise. At the same time, top management honestly believed that past initiatives they had instituted were the result of past feedback.

Creating organization-wide conversations is a crucial task of leadership—but often a very difficult one. We've developed a four-point process for fostering such conversations:

1. Advocate, inquire, repeat
A conversation that surfaces the unvarnished truth about an organization's innovation strategy needs to move back and forth between advocacy and inquiry. CEOs and senior leaders need not only to defend their initiative but also to find out what others think, up front. Indeed, the two activities should be closely linked.

Innovation initiatives tend to fall apart right from the start when top management advocates for a specific project and then begins to implement it without discussing it with key team members and partners in other parts of the organization. This inevitably leads to management later discovering that employees had legitimate concerns about the project that they never felt free to voice.

Some managers err in the opposite direction. They don't advocate at all, opting instead to simply inquire. So they assemble a large team of trusted employees and ask for a consensus on direction. This just leads to frustration and, often, stagnation.

It's the leader's job to point managers and team members in a specific direction but to make sure it's a direction they can respond to. To effect innovation, a leader must advocate, then inquire, and continue to repeat these actions as necessary.

2. Cut to the chase
Energizing an initiative requires that the conversations about it focus on only the most significant factors facing the organization—the company's ability to carry out the initiative and any obstacles to performance. All too often, leaders become mired in mundane business details and lose sight of the issues that will guarantee overall success. Leaders must ask themselves, "Do we have a coherent and distinctive innovation strategy that key managers believe in? Do we have the capabilities to execute? Is our leadership effective?"

When Ludwig implemented a strategic fitness process at DIS, he focused on the most important issues: the division's overall strategy and the barriers to innovation. Through honest conversations, he quickly learned about the real cause of DIS's inability to get its new products to market. The division had a hierarchical culture that dated back to the original owners of the business, which had been acquired by Becton Dickinson several years earlier. The various departments, accustomed to being directed from the top, were unable to cooperate effectively, and therefore the project organization strategy intended to speed innovation had failed.

DIS's open conversation about the issues that really mattered clarified the company's strategy and energized the organization. As Ludwig says, "Getting feedback from the employees was indispensable, and putting it into a strategic context is important. We discussed… strategic issues, such as delivering the goods and services to our customers more effectively than our competitors. Once we decided it was strategic, we had to fix it or suffer the consequences; and no one was willing to suffer the consequences of gradual loss of competitive position." Soon after these candid conversations took root, DIS regained leadership in its market. "The process got things on the table quickly," Ludwig says.

3. Be open and inclusive
Fundamental business innovations almost always require changing the worldview and the behaviors of a whole set of interdependent players—the CEO, the senior leadership team, and managers down the line. This won't happen without a collective, public conversation. Several levels of management across important functions and value-chain activities must be part of the conversation, and leaders need to keep everyone three to four levels below them informed about what they've learned, and what changes they're planning.

This collective, public conversation was critical when sales managers at Mattel Canada were trying to initiate a different kind of innovation: introducing a new sales channel. Due to the cyclical, hit-driven nature of the toy industry, excess inventory was a perennial problem for the company. The inventory could be sold off only via heavy discounting, which tended to depress margins for all sales.

Since the warehouse was close to a major Canadian city, a group of employees proposed adding an outlet store to their warehouse. Several managers praised this as an excellent idea, but it was never implemented. It was apparent that conflicts between the sales department and the distribution department were to blame—but no one was willing to confront the conflicts openly.

Mattel Canada finally and successfully implemented its toy outlet innovation only after sales, distribution, and the other departments had an open, fact-based discussion of their issues. At that point, they realized that the outlet store would benefit all of them. Sales could maintain better margins by avoiding discounting, distribution could save time by not having to shift around old inventory, and finance would be able to free up capital that had been tied up in inventory. Mattel Canada used collective conversations so effectively that it transformed its division from Mattel's least profitable international subsidiary to its most profitable.

4. Strive for honesty alongside low risk
In most of the companies we've studied, managers discussed innovation-related problems with the few people they trusted but acted on their findings in more public venues. Since most managers fear that being honest would hurt their careers or even endanger their jobs, they are naturally reluctant to speak candidly. Plus, many managers worry that candor would only make leadership so defensive that the conversation would not lead to change. By encouraging honesty, then rewarding it, leaders can demonstrate to all levels of the organization that candor is valued. Once a leader is able to address the real issues facing innovation, issues that could only have been unearthed through truthful give-and-take can be rapidly and effectively addressed. With an increase in profitability comes a side benefit: employee morale will also improve dramatically.

It's surprising how few corporate leaders make a genuine effort to foster candor within their companies. Sadly, they lose any chance at building organizations in which speed and transparency contribute to the vitality of their enterprise. Adopting the process we have outlined here is a critical first step in creating an agile enterprise that can drive rapid innovation and compete on a global scale.

The Ugly Truth about Customers' Buying Preferences

By Jacoline Loewen

Summer movies show you that sometimes ‘good enough’ is what your customers want. I checked out the latest date movie The Ugly Truth with my husband. He suggested it knowing that my favourite Scottish hunk, Gerard Butler, was playing the lead role. Well, it served up a good enough script with lots for the male and female funny bone, a predictable ending and lots of eye candy. Will it win an Oscar? Not a hope in hell! Will I tell my book club I enjoyed it? No way! Did it make me, the client, happy? Absolutely!

The ugly truth actually is, that I have been dreaming of seeing Macbeth with my other favourite actor, Colin Feore, at Stratford this summer; instead, I settled for convenience.
These summer movies do not plan to be best in the Oscar category. Their plan is to appeal to a mainstream audience with a need to share a pleasant time together and a willingness to pay cash for movie tickets.

In the same way, Microsoft did not take over the computer market because it was the best operating system – Apple arguably offers superior technology to Windows. Microsoft took over the market because it gave the customers what they valued.

What did customers need, back in those early days of software applications? In the 1980s, people wanted to type, draw diagrams, create slide presentations and run spreadsheets. So what was the problem? You could get any of those software packages and have an excellent spreadsheet or word processor program.
The problem was that businesses were busy going international; they needed a universal language for all of their documents.

Executives from Vancouver wanted to be able to walk into the office in Hong Kong and be able to use the same software application. They also wanted to connect directly and immediately – seamlessly – to their customers’ computer systems. Microsoft was the first to bundle up three different software ‘apps’ (applications) into one, add in email and call it Windows. It could run with one operating system and in additional, any document could be emailed and used anywhere in the world.

Microsoft offered integrated product choice, not random stand-alone products that addressed one problem only.

Good Enough

Microsoft provided that connectivity in a single package and at a ‘good enough’ standard. The market bought it.

You see, the better mousetrap does not win. If you are building the best mousetrap out there and hoping to get venture capital, take a moment to review your lofty goals. Yes, you can continue selling your wonderful product that is far superior to the competitors, but Betamax engineers also shared your mindset. VHS succeeded with innovative marketing and better management, yet we all know Beta was far superior technology.

Look at Apple. Its intuitive software was far more advanced than Windows, but the US Justice department wanted to carve up Microsoft into Baby Bills, not Apple into Baby Steves.

The Value Rule

The Windows ‘value proposition’ beat the superior performing packages that were stand-alones. The past decade has shown that customers will pass the 'best of the breed' products to buy the all-in-one Windows integrated solution. Customers came flooding in through the doors (and Windows – excuse the pun.)
Your ‘value proposition’ should focus on one problem (e.g. Microsoft’s customers’ yearning for a universal language for all documents) experienced by your customers.

Begin With Your Customer

Business begins with people. Human beings make up your market. Each one, with her quirky tastes, individually buys from you. Understanding this will give you a competitive advantage. Your strategy must dig deep. There are the obvious, frequently discussed; overt needs, but the un-discussed, covert needs are where you will find gold. Your customers are going to force you to change because they will vote with their wallets where their needs are best met.

Critical Question: How do you add value to your customer?

Asking your customers is not the way to figure out value. If you asked them if they would use the mainframe with all its power, or the PC, which is a step backwards, you know the answer you are going to get. You have to get inside their day and watch how your product could make life easier, so much easier that your customer will take on the hassle of switching over to your company.

Signs of revivals among private equity's giants

From The Economist, we learn that there are signs of revival among private equity's giants:
Along with the rest of the finance industry, the private-equity business has endured a miserable couple of years. Congress continues to plan heavier taxation of its profits, even though they have slumped. As banks, which had been lending buy-out firms spectacular sums of money on extraordinarily generous terms, abruptly turned off their taps, buy-outs became a rarity.
In the first half of 2009, just $24 billion of private-equity deals were completed worldwide and only three loans were extended to fund leveraged acquisitions, the lowest number since 1985, according to Dealogic. That compares with deal volumes of $131 billion last year and $528 billion in 2007.
Meanwhile, the economic crisis has meant that many of the firms snapped up by private equity in the boom years have got into difficulties, so private-equity bosses have had to spend most of their time trying to keep them alive when they would rather have been selling them for a profit and snapping up new bargains.
There have been some notable casualties suffered by some usually reliable performers. Apollo could not save Linens ’n Things, a retailer, from bankruptcy. The purchase of Chrysler by Cerberus made the private-equity firm named after the three-headed dog guarding the gates of hell look like a different sort of dog when the carmaker filed for bankruptcy. But possibly the most ignominious loss in the history of private equity was suffered by the venerable Texas Pacific Group (TPG): it invested $1.35 billion in Washington Mutual in April 2008, only for its entire stake to be wiped out five months later when the mortgage lender went bust and most of its assets were bought by JPMorgan Chase.
Last week TPG’s founder, David Bonderman, was appointed to the board of post-bankruptcy General Motors, suggesting that the WaMu misfortune has not done too much damage to his reputation. That is one of several signs in recent weeks that the wind may be starting to blow in a better direction for private equity. Some private-equity firms have invested on terms that have been described as “Don Corleone financing”
First, a few deals have been announced. They are small compared with the blockbusters of the credit bubble, such as Blackstone’s $40 billion purchase of Equity Office Properties in 2007, but better than nothing. Bankrate, a financial-services website, has agreed to be bought by Apax Partners for $571m. Some private-equity firms have invested in life support for CIT, a troubled lender, on terms that have been described as “risk-free” and “Don Corleone financing”.
There has also been a twitch of life in the market for disposals, with the announcement that Vitamin Shoppe, owned by private equity, intends to hold an initial public offering (IPO), albeit a tiny one that may value the retailer at $150m. Still, given that the IPO market has been dead this year, and trade sales of private-equity-owned firms have also been rare, this is not to be sniffed at. Perhaps the exit market, which in the first half of this year has raised only $21 billion, compared with $115 billion in the first half of 2008 (according to Dealogic), is past its worst.
But the clearest signal that things are looking up for private equity is the news that the granddaddy of the industry, Kohlberg Kravis Roberts (KKR), is to revive its plans to go public—and fast. These plans were postponed after the bankruptcy of Lehman Brothers last September led to a meltdown in the financial markets. By early this year KKR’s partners were considering abandoning the IPO for good. Now, they are in a hurry to get it done. The IPO is due to take place in October, through a reverse merger of the holding company into a European unit that KKR floated in happier times. By this method, KKR gets a listing in Amsterdam at least a year before it could get one in America—though the firm says it will put in place corporate-governance measures designed to meet the high standards of the New York Stock Exchange rather than the less demanding Dutch requirements.
Why the rush? There is no evidence that Henry Kravis and George Roberts, the two founders still active at KKR, are looking to cash out, as was the case with Pete Peterson, a founder of Blackstone, which went public in 2007. It seems that KKR wants public equity as currency for rewarding and retaining other partners and for acquisitions (perhaps of other private-equity firms or financial companies). That means it sees opportunity.
Mention of Blackstone is a reminder that when a private-equity firm goes public, that is not necessarily a buy signal for the industry. Blackstone’s IPO marked the industry’s pre-crunch high point, and Blackstone’s share price has never since come close to its IPO level of $31 a share. Strikingly, however, having fallen to under $4 this March, Blackstone’s share price has since rallied to over $11—another sign that KKR may be getting its timing right. If so, it will be no surprise if IPO plans are soon announced by Carlyle and perhaps other leading firms.
For all its recent difficulties, private equity still has plenty going for it—not least an estimated $400 billion of uninvested capital. True, the credit-fuelled mega-deals of old are unlikely to return soon. Deals will be mostly financed with equity rather than debt, which means that private-equity groups will need to improve the fundamentals of the businesses they buy rather than just profiting from financial engineering. The first area to see an increase in dealmaking is likely to be “roll-ups”, in which firms already backed by private equity will consolidate fragmented industries by buying small competitors from their troubled owners.
However, for the big private-equity firms like KKR, the greatest opportunity may come in diversifying. Already KKR has raised money to invest in distressed securities and infrastructure development. It may also see a chance to snap up stakes in other private-equity firms through the fast-growing secondary market for limited partnerships. It also has an advisory business, and is said to see an opportunity in helping firms raise capital. With the investment-banking industry a shadow of its former self, could it be that the future of the newly public KKR, along with Blackstone and maybe others, will be to become increasingly like, and competitive with, Goldman Sachs?