Value Creation is Changing

The capitalist system is under siege, says Michael Porter, Harvard Business School and the originator of the term Competitive Advantage. Porter talks about how business is a popular choice to play the role of the bad guy in Hollywood and how there is a deluge of opinions about it causing societal problems. Business has tried to take on “Social Responsibility” but this openness and good will seems to have opened up more criticism. Private equity, which has saved thousands of jobs and protected the longevity of companies, is also under fire and being questioned.

This declining trust has caused politicians and market regulators to add more rules and policies to cripple the capitalist system. 

As always, business needs to be the first to step forward in a new direction and look for solutions. Already there are signs that business has been the first to recognize, the business model that worked well ten years ago may now be growing swiftly stale.

One such framework to review is the way business views value creation. It is the short time financial focus in a bubble, while missing customer needs and broader societal influences that determine long term success.

Obviously, those companies who are large enough to have the luxury of participating in round tables and what not, and can take the time to influence and brainstorm the issues. 

Yet in Canada, 80% of company owners run smaller businesses and from the ones I see on a daily basis, they are running on whiffs of fumes. For example, plastic bag manufacturers are having to deal with plastic bags manufactured with logo and all in China and shipped at a tiny cost. How can a small Canadian based company making slim profit margins compete? How can the Canadian government demand more from their taxes, paperwork and health and safety regulations while opening up the door to competitive products not burdened with labour law or higher capital costs?

Secret: Build better products

I valued Ben Horowitz talking about Cloud Technology and how to build a good company. He is so truthful about the 3:00am in the morning fearful meltdowns.
Ben says there is no way to build a new company without a transformational product. What is really important is the product, not the business model, the business plan or hiring MBAs. Innovating and coming up with something way better is key. The big firms have a hard time doing innovation.
Here is Andreeson's other half, Ben Horowitz, taking about how to build a good company. A brief list of Ben's points:

1. When a bankrupt Apple got Steve Jobs back as leader, his new strategy was "build a better product" and it worked. 
2. Skills to win the market are then important. Do you take the market and sell your excellent product?
3. Be a good person as CEO. No one wants to work for a CEO who is a jerk.
4. The key ingredient really is leadership, not management. Leadership is the ability to get people to follow you, if only out of curiosity.

Ben Horowitz was a co-founder of Opsware (formerly Loudcloud), which was acquired by HP in 2007. Earlier, he was vice president and general manager of America Onlines E-commerce Platform division, where he oversaw development of the companys flagship business.

Is Govt Backing of PE Funds Unique to China?

Xie Ping, head of China's Private Equity fund, must be unfamiliar with one of Canada's largest and most influential funds such as OTPP, which was involved in some of the biggest deals in the world. Xie said, 

"China’s private equity industry is unique because it’s dominated by the State and will follow a different path from overseas peers." 

Entities that manage private equity in China and those that invest in such funds are primarily State-owned institutions, China Investment Corp’s Xie said in Beijing.

By having government backing, China’s private equity funds can increase the value of Chinese companies in which they invest, the report cited Xie as saying. This is an aspect of the Chinese market that is different from other countries, he added.The ability to invest directly in private equity is currently limited to a few large State-owned institutions such as China’s national pension fund, the report said.

Bloomberg News reported Tuesday, citing Xie Ping, vice-president at the nation’s $300 billion sovereign wealth fund.

How to Boost Sales

US executives are turning to reality television to repair the battered image of corporate America, turning a show, in which bosses work incognito alongside their most poorly-paid employees into the most successful tool for restoring brand images.

Undercover Boss was responsible for seven of the year’s 10 most effective product placements according to Nielsen, the measurement company, which looked at how well audiences recalled the brand and how much the show improved their opinion of it. Nielsen’s data show a trend towards such extended features on a single company rather than the traditional highlighting of brands in programmes such as American Idol.

"In difficult times, people are interested in watching TV programmes where there is some recognition of the difficulties they face,” says Stephen Lambert, the executive producer behind Undercover Boss and Fairy Jobmother, a UK import about getting the unemployed back to work. “At a time of great insecurity people like watching shows where people end up in a better place.”

Undercover Boss typically ends with the executive setting up a health scheme or taskforce, and rewarding employees with scholarships, holidays or, in one case, a 7-Eleven franchise.

Read more at Financial Times 

Sir James Goldsmith talks about outsourcing to China

Twenty years ago, Sir James Goldsmith talks about how America will kill its own economy. It is quite horrifying hearing Goldsmith accurately predict today's situation as Clinton's trade agreement GATT gets implemented and the long term consequences unfold. Goldsmith talks about how jobs will get obliterated as they are exported from America and the number of jobs reduced sharply.
Goldsmith asks,"What is the purpose of an economy?" He says it is there to serve the needs of society - prosperity and stability. He adds, "Material wealth would solve our problems and we achieved that. We have destabilized society because the economy is no longer serving us."
"Who benefits from these trade treaties? Major corporations benefit. What is good for GM is good for the USA is no longer true. They are no longer linked to the USA. They farm out their production wherever they can get the cheapest capital and labour."
Charlie Rose is stunned at the suggestion that automobile manufacturing or technology industries would move out of America. I would enjoy Charlie Rose doing a "Stupid Things I Said in the Past 20 Years on my Show." This show is almost painful to watch as a wise entrepreneur who can see the patterns of industry tries to get across his correct vision of the outsourcing of American jobs. Clinton's spokesperson does not listen and just shouts him down. She ran the London School of Economics and boy, if this is the type of "thought leader" leading our universities, the type that refuses to listen but shouts down the opponent, it is not a good trend.
Clinton's aid says. "When American jobs are moved abroad, they add jobs here too."
Goldsmith points out that new jobs are part time and lower skilled. This was back in 1992. We have seen that real income has not risen since 1992. Goldsmith saw the future, here is the interview:

Enjoy your holidays and Happy New Year

Needed Words for Your Strategy

I make every effort to read new business strategy books and articles. In 90 percent of cases, I can dismiss neither the author's thought process nor his or her evidence—but I am always taken aback by the abundance of "clever" and the absence of any discussion or consideration of the ability to implement the suggestions made or implied. There is total silence around the subject. For example, I did a quick analysis of the Index of one "famous" strategy tome circa 2007—words like "people" and "customer" and "leadership" and "implementation" and "execution" were literally missing.

How Deming would have loved Private Equity

Private equity fulfills one of Deming's key ideas - that profound knowledge generally comes from outside the system, or the business, and is only useful if it is invited and received with an eagerness to learn and improve. 
When private equity is invited into a business, the owner-operators are ready to hear suggestions on how to improve. New comments by the Private Equity team will be anticipated and absorbed. This power to influence is one of PE's main differentiators from the public market financing where faceless investors have little impact on strategy or operational priorities.
Deming believed that a system (business) cannot understand itself without help from outside the system, because prior experiences will bias objectivity, preventing critical analysis of the organization. Critical self-examination is difficult without impartial analysis from outside the organization. Also, insiders can rarely serve as hostile critics who speak frankly without fear of reprisals.
According to Deming, the journey from the prevailing management style to quality requires the understanding of systems. A system is composed of interrelated components. Quality is the optimization of performance of the components relative to the goal or aim of the system. Individual components of the system will reinforce, not compete with each of the other components of the system to accomplish the aim of the system.
Surprisingly, a lack of clearly defined purpose is common in U.S. organizations, particularly long-range purpose. Short-term thinking, quarterly and annual performance evaluations, and bottom line thinking forces attention to quick-fix solutions. Even if long-range plans exist, prevailing short-term thinking distracts from long-term behavior toward real solutions.
Quality is a systematic process: 

1. First, establish the aim: vision, mission, goals or constancy of purpose of the
2. system. According to Deming, without aim, there is no system (Identity).
3. Identify the components
4. Map the processes 
5. Examine the interrelationships of the components within the system (relationships).
6. Constantly improve on the processes of the system (Information/Learning/Knowledge.)

Why every private equity firm should read Deming

The best private equity partners strongly support that management must be judged not only by the quarterly dividend, but by innovative plans to stay in business, protect investment, ensure future dividends, and provide more jobs through improved products and services.
It is recognized that Private Equity is about the deal and, although they do leave the people side to the owners running the business, the best PE guys know operations and long term success do not flow from the numbers but from the passion of the people.
Talking about Deming in my past blog, and how much he impacted on my approach to strategy for growth, made me stop by Wikipedia and read about this extraordinary man who was honoured by the Japanese with the Deming Prize.
It took me back to my MBA days to review Deming's extraordinary impact that he made in the late 1980's. His focus on the people, despite being a statistics and measurement boffin, did inspire me to write my first book: "Long-term commitment to new learning and new philosophy is required of any management that seeks transformation. The timid and the fainthearted, and the people that expect quick results, are doomed to disappointment."
Deming had such an impact on humanizing business as his 14 points focus on how to motivate the brains in your business. Too many managers ask their team to check their brain at the door. Ford took over the world leader in cars - GM - after consulting help from Deming. 

Ford Motor Company was one of the first American corporations to seek help from Deming. In 1981, Ford's sales were falling. Between 1979 and 1982, Ford had incurred $3 billion in losses. Ford's newly appointed Division Quality Manager John A. Manoogian was charged with recruiting Dr. Deming to help jump-start a quality movement at Ford.^[17] Deming questioned the company's culture and the way its managers operated. To Ford's surprise, Deming talked not about quality but about management. He told Ford that management actions were responsible for 85% of all problems in developing better cars. In 1986 Ford came out with a profitable line of cars, the Taurus-Sable line. In a letter to Autoweek Magazine, Donald Petersen, then Ford Chairman, said, "We are moving toward building a quality culture at Ford and the many changes that have been taking place here have their roots directly in Dr. Deming's teachings."^[18] By 1986, Ford had become the most profitable American auto company. For the first time since the 1920s, its earnings had exceeded those of arch rival General Motors (GM). Ford had come to lead the American automobile industry in improvements. Ford's following years' earnings confirmed that its success was not a fluke, for its earnings continued to exceed GM and Chrysler's.

In 1990 Marshall Industries (NYSE:MI, 1984-1999) CEO, Robert Rodin, trained with the then 90 year old Deming and his colleague Nida Backaitus. Marshall Industries' dramatic transformation and growth from $400 Million to $1.8 Billion was chronicled in Deming's last book "The New Economics", a Harvard Case Study, and "Free Perfect and Now".

In 1982, Dr. Deming, as author, had his book published by the MIT Center for Advanced Engineering as Quality, Productivity, and Competitive Position, which was renamed Out of the Crisis in 1986. Deming offers a theory of management based on his famous 14 Points for Management. Management's failure to plan for the future brings about loss of market, which brings about loss of jobs. 

Why "Hey, I'm in a community" makes people work

In baseball, a guy hits a home run, goes around the bases, and all his teammates come out and they give him a high five, and that’s awesome. And then every time somebody hits a home run, they do that.

In private equity, people tend not to do that enough, so when Loewen & Partners achieves a goal, we have to go celebrate. When I did my MBA, we had a third of our mark based on a proper Masters' thesis, which was the best part of the MBA for most of us. I wrote my Masters' thesis on Total Quality Management, TQM, which the Japanese had embraced to leap frog themselves ahead of the Americans. I discovered the writing of Deming and his 14 points to achieve TQM. The last point stunned me - celebrate!

And there are two reasons why we need to do just that - throw a party. As human beings, we’re not emotionally and anthropologically different from who we were on the plains of Africa 100,000 years ago. We need to feel that "hey, I’m in a community."

The second reason is that out of everything that I could be focused on during a year, the thing that gets rewarded with a party will be the thing that I really focus on. So I’ll tell everyone, if we hit this mark or we hit that mark, we’re having a party. Then it’s been concretely expressed to the employees that that must be the important thing. So it’s a way to double and triple underline the really important goal.