Sunday, November 29, 2009

Competence-Loyalty Dichotomy: Separating Grain from Chaff

Individual survival and group living have been the two fundamental, though apparently bipolar, aspects of human living from the start of civilization. As administrative, industrial and political organizations evolved over time, teams have emerged as the basic platform of organized living. The evolution of the modern form of corporation gave a new meaning and role to teams and team leadership. From the frontline teams at work for departments to the apex leadership teams at the helm driving corporate futures, management of teams offers its own challenges and opportunities.

Leaders provide hope and aspiration for their teams and in return gain their trust and support. This relationship is not always reciprocal; in some cases leaders trust the teams more than the teams trust them while in other cases the teams trust their leaders more than the leaders trust them. Traditionally leaders across generations relied on the formal organization to achieve consensual action and leaned on the informal organization to push through specific agendas. The balance between the formal and informal organizations is levered by the leaders through their loyalists, with the attendant pros and cons. This apparently perplexing sub-optimization of the team organization needs a behavioral evaluation.

Complexity needs competence

Management of modern day organizations, whether business, administrative or political, has become a more challenging and complex task than ever, with a heavy responsibility devolving on the leaders. In today's competitive environment, the leaders are required to build cohesive, high performance leadership teams with high competency metrics to be able to discharge their onerous responsibilities. In a well- balanced leadership team all missions, domains and members should display equal competence and evoke equal confidence.

Yet, it is not unusual for leaders to be selective in the way they repose their confidence across missions, domains and members. Some members gain more confidence than others through well demonstrated loyalty. Some members gain more appreciation than others through well demonstrated performance. Loyalty is often accompanied by total compliance to the leader while competence is accompanied by a certain degree of independence. A leader as much as a team member needs to differentiate between loyalty and competence in an organizational context.

Confidants and loyalists

Both loyalty and competence have merits if they are aligned to enhancing the performance of the entity. A competent loyalist in a leadership team is someone who not only appreciates the leader’s ideas and personality but also improvises on it for better corporate performance. A competent loyalist becomes the leader’s confidant. The competent confidant wins praise from the leader and the team not merely because of his loyalty and commitment but also because of his performance and perspectives. A confidant becomes a trouble shooter, and even a successor to the leader. From Henry Kissinger of the US Government to Steve Ballmer of Microsoft Corporation, organizational history has case studies of team members who fused competence and loyalty to emerge as dominant forces of teams. A loyalist who is only marginally competent or is even incompetent, on the other hand, drags down organizational performance. Ordinary loyalists observe, act and speak as proxies for their leaders skewing the organizational balance in the process.

In the complex modern day organizations, confidants who are trouble shooters are welcome in the teams; they even signify a typically Darwinian way of leadership selection. On the other hand, team members who seek a loyalty driven role should be less than welcome; they throttle independence and objectivity, often bringing bias into managerial processes. A competent confidant has the right perspectives for the future. An ordinary loyalist however largely remains in the past.

Competent confidants boost an organization’s drive into the future while ordinary loyalists impede its ability to move with, let alone ahead of, times. A loyalist, always waiting for the leader’s cue, adopts a cautious approach that inhibits independent and proactive thinking on the part of others. A confidant who is absolutely confident of his capability as well as loyalty is, on other hand, willing to even openly differ with the leader as long as it would such challenge helps the company’s future.

Despite these factors, leaders probably tend to have more run-of-the-mill loyalists than out-of-the-box confidants in their teams. When a loyalist gets preferred for loyalty rather than competence to manage crucial missions, the very choice signifies a sub-optimal performance benchmark that weighs down the overall organizational performance. Yet, the loyalist’s compliance instincts and the leader’s dominance compulsions make for an puzzling combination. The key to the puzzle, however, lies in the leadership realpolitik that pervades organizations.

Leadership 'realpolitik'

Complex leadership and management challenges are involved in setting up and growing business corporations or administrative entities. These challenges include, among others, crafting of a vision, drafting of a strategy, creation of an organizational structure, raising of resources, establishment of facilities, assembly of inputs, opening up of partnerships and above all, high quality product delivery for the marketplace, all of which require a high level of business appreciation and functional excellence. These activities also need to be continuously fine-tuned to counter and even stay ahead of the inevitable competition. Undoubtedly therefore, superior leadership and management skills are called for on the part of not only the business leaders but also his or her leadership team.

That said, there is a dimension of realpolitik beyond the textbook definition of leadership and management that governs corporate or administrative leadership. Realpolitik has its origins in politics or diplomacy which dictates formulation of policies and actions based primarily on practical considerations, rather than ideological notions. The term realpolitik, however, also pejoratively implies politics that are power-centric, and not necessarily principle-centric and which are often Machiavellian. Managing organizations requires not only leadership skills but realpolitik attributes to be able to remain at the helm, satisfying multiple internal and external stakeholder pulls and pressures. Leaders being also careerists as anyone else need loyalists to be in control of the corporate ship cruising in the choppy business waters.

Loyalist – joker in the pack?

The ordinary loyalist is very much like a joker in a pack of cards (no pun intended). Those who know card games understand that the joker card plays an extremely beneficial (and occasionally harmful) role in a card game. A joker card can substitute for any card of any rank, symbol or color and hence affords tremendous flexibility in forming winning sequences and sets. The holder of a joker card surprises the rest by forcing a quicker win than is usually anticipated. While in a game of cards serving of joker cards is a matter of chance, in an organizational setting the evolution of loyalist in a team is a matter of historical inheritance as much as it is a designer act.

A study of corporations that have seen dramatic failures, from Enron to Lehman, points out that unbridled power of the corporate leaders has been a root cause of corporate collapse. Such failure comes with circumvention of processes through motivated management of leadership teams. A chief financial officer or a chief business officer in some cases and a chief technical officer or a chief marketing officer in other cases have enabled the typically dominant corporate leaders embark on wildly adventurous paths. Castle-in-the-air concepts of virtual energy trading and bubble-beyond-reality of sub-prime lending are reflective of how confidants of corporate leaders could hijack organizations and distort economies. The leader’s loyalist provides a total malleability to the leadership fiber to the detriment of organizational solidity.

Loyalty tips the balance

Typically a leadership team varies in size depending on whether the company is functionally organized or divisionally managed and whether it is regional or global in its presence. The multiplicity of views in large teams can at times be highly vexatious and energy-consuming for corporate leaders. The leader can exercise positional power only to a limited extent to achieve convergence. Realpolitik comes in handy to develop paradigms based on quick conclusions rather than lengthy deliberations, even if the later were to be beneficial in the long term.

Heads of corporate functions are particularly helpful for the corporate leaders in drawing business realignments. That is because they have the capability to shape future plans, allocate resources, recruit manpower and control certain shared services. The strengths of individual business operations can be skillfully undermined by the realpolitik of shared services with a fa├žade of corporate optimization. Loyalists can be divisive too. The loyalist can launch frontal attacks on inconvenient members at the behest of his leader, fracturing the leadership team into multiple fractions. The leader finds it easy to implement his plans with a divided house despite a fractured mandate. In all of the scenarios discussed above, the leaders stay on but the businesses stagnate.

Loyalty to the leader or passion for the company

The excessive emphasis on a singular leader as the driver of corporate growth is in enigmatic contrast with the elaborate mechanisms put in place for board oversight and corporate governance. The increasingly enormous influence the leader has come to wield on corporate affairs has led to the spawning of the loyalty culture to the detriment of commitment to the company. Genuine leaders must overcome the temptation to seek loyalty for him from his team members and instead encourage his team members to develop passion for the company. Visionary leaders recognize that it is the institutions that are perpetual and leadership achievements constitute but mere chapters in unending histories of enterprises.

The competence-loyalty dichotomy disappears when it is realized by the leader and the team members that the leadership interests are best served only when the corporate interests are best served. Team members who have ample loyalty for the leader but little passion for the business are a liability while members who are independent of the leader but passionate about the company are an asset. Passion for business emanates from an innate desire to achieve self-actualization while loyalty for leader comes from a comforting instinct to promote mutual aggrandizement. Once the hypothesis that institutions are larger than even the individuals who establish or grow them is accepted the competence-loyalty debate gets settled irrevocably in favor of the former.

Competencies make conglomerates

Companies with a progressive and confident leader and a large number of competent confidants have quickly evolved as successful conglomerates and eventually became leading industrial houses. High performance teams are an asset to the company even though individual business leaders appear to challenge corporate hegemony. Capable business leaders aggressively perform but also openly demand space for performance. They are conscious of their domain and business expertise and view their performance as a vehicle to position them as the future leaders. In a conglomerate or a diversified business, business leaders compete, rather than collaborate, to establish their credentials. Left uncontrolled, the leadership battles can be self-consuming.

In such organizations, conflicting aspirations compete for scarce resources, different businesses shape up at different points of value curve and burning desires lead to organizational bushfires. The corporate leadership teams in such organizations are bound to be in constant turbulence. In a conglomerate corporation, the confidant typically emerges from the businesses preferred by the corporate leader or select corporate functions close to the corporate leader. The deft leader in such situations chooses a performance driver and an opinion maker from the leadership team to harmonize the multiple directions of a conglomerate. Many conglomerates have failed to utilize their diversified positioning and cash resources objectively due to the failure to nurture competent confidants across the spectrum. There is no reason why only Tata Motors, Tata Consultancy Services and Tata Steel should be the flagship companies of the Tata Group when with the right harmony between the group leader and business confidants, the Group would have been a leader in various other segments like power and chemicals.

Confidence with competence

Indian business families have discovered to their advantage that the concept of having loyalists is detrimental to the professionalization and growth of family businesses. Gone are the days when trusted family lieutenants bereft of academic qualifications or business experience dominated the boards or management teams simply because of significant native wisdom and unflinching loyalty towards the family. The fast forward growth of Indian family businesses can be traced to the downplaying of the loyalist culture.

When family businesses have gone through this positive metamorphosis, it is paradoxical that professional organizations, should succumb to the loyalist culture. A dependence on loyalty as a proxy to leadership is corrosive in that it weakens the resolve of the leadership team to debate issues objectively and professionally. The loyalist culture is also debilitative as it enhances non-formal authority and misaligns formal and informal organizational structures. The leaders who find the loyalty culture to be expedient initially often find their own leadership authority weakened eventually.

A virtuous leadership team is one which is open, transparent and collaborative in discussing vision, goals and strategies, in making resource allocations and in measuring and rewarding performance. While individual businesses, domains and members of a leadership team need to be competitive, the dynamics should be balanced by self-regulation. Similarly while teams need to be integrated and aligned with the leadership, the mechanics should be supported by adequate autonomy provided by the leader.

A corporate leader and his team have tremendous strategic responsibilities towards the company and all its stakeholders. A corporate leader who expresses open confidence in the team, sans the loyalists would reinforce the corporate performance through collaborative competition. Individual members can support this process by acquiring cross-functional and cross-business skills which could help them contribute equally in strategic deliberations. A completely integrated and aligned leadership team with high competency metrics will be truly inspirational for a company or an industrial house, and its stakeholders.

Posted by Dr CB Rao on November 29, 2009

Sunday, November 1, 2009

The Fine Art of Business Collaborations: From Hidden Agendas to Shared Missions

It is a dream for any company in an industry to be so integrated and so diversified that it is able to exercise complete control over its value chain and provide the complete spectrum of its products to all its customers, globally. Such a perfect monopoly, however, is neither economically feasible nor socially desirable. It is no wonder that corporations around the world, within industries and across industries, are recognizing the need to collaborate and maximize value for themselves and all their stakeholders. That said, there is still far lower emphasis in corporations on collaborations, compared to competition as a means of value maximization. This deficiency is even more palpable in India. This arises from an inadequate appreciation of the power of collaboration and an insufficient availability of talent to manage collaborations as they ought to be.

Collaborations: value drivers

In today’s world technology is becoming both specialized and expansive at such a fast pace that it is unproductive for any firm to attempt to do everything by itself. By collaborating with segmental players, companies can focus their energies on developing new products on a continuous basis. This collaborative model has indeed been demonstrated most effectively in the automotive and electronics industries, although there is considerable ground to be covered in these industries as well. On the other hand, most other industries including such intellectually driven industries such as pharmaceuticals are paranoid about self-reliance and circumspect, if not suspicious, about collaborations.

As a result, while the automotive and electronics industries continuously offer new products and services at an amazing pace offering better choice for the consumer, introverted industries such as pharmaceuticals are facing new product drought which could threaten the very existence of such industries in future. The concepts of integration and differentiation which are fundamentally investment- intensive and hence cost-accretive can be made market-friendly and value building initiatives if collaborative strategic relationships between specialist companies can be fostered.

Technologies: collaboration drivers

A strong collaborative position emerges from core competencies in science and technology. Manufacturers of computers, mobile phones and cameras, for example, are immensely benefitted by the core competencies of chip makers such as Intel and AMD in developing high performance processors for a variety of applications. Automobile manufacturers are significantly benefitted by the core competencies of their component makers in upgrading component and overall system performance. As a result, firms within and across industries that are engaged in collaborative product development and manufacture are able to continuously expand the boundaries of performance.

In this collaborative model, maximization of corporate performance emerges as a logical corollary of maximization of customer satisfaction with better product choice. The collaborative model focuses on creating product attributes that are not limited by current input functionalities and instead focuses on motivating the participants of the collaborative model to invent new functionalities. In contrast, firms and industries which seek performance maximization through monopoly control over the value chain tend to face economic extinction in the long term.

Markets: value determinants

Very often, strategists and CEOs make the mistake of judging value propensity of their firms only by way of internal value chain optimization and by deployment of internal performance metrics. The questions that they often ask themselves relate to the internal efficiencies in each of the primary functions of product development, manufacturing and marketing, and the several ancillary functions that support them. Very rarely, they focus on how well those functions are collaborating to determine a benchmark value for their firm, let alone explore if the value chain can be optimized for maximal value by bringing other players from within the industry as well as from outside the industry into the collaborative loop.

Companies which have listened to the signals from diverse markets to fulfill their differentiated needs, and collaborated for new technologies and new inputs to create new products that fulfill such needs have clearly outperformed others. Tata Motors outperformed its peers in India consistently as it has excelled in developing products that meet segmented customer needs. The roadblocks to a more universal implementation of this collaborative principle of business reconstruction stem largely from introverted corporate and professional mindsets that are unwilling to invest in business innovation and instead seek to maximize short run performance.

Extroverted mindsets: value visionaries

Corporate and CEO mindsets need to look beyond the current business models and delivery platforms on a continuous basis to extract the maximum value from the happenings around the world. Except in monopoly and patent protected domains, the competitive sustainability of a product is limited to one or two years and that of its manufacturing platform to four to six years. Strategists and CEOs, rather than periodically reinvent the value chain, fall into the trap of trying to extend product and manufacturing life spans until the last dollars are squeezed out of them. In the process, they make their companies highly vulnerable to more extroverted and more proactive competition.

A computer maker who is concerned about the current stocks and who holds back from either the development or the launch of a full range of upgraded models simultaneous with the launch of the latest operating system (Windows 7, for example) makes itself vulnerable to a competitor who has been more proactively collaborative with the developer of the new operating system. Steel plants which recognized the strategic importance of mines, petroleum companies which recognized the source vitality of oil fields and foundries which recognized the criticality of die, pattern and gating system making as a core competence present examples of companies looking beyond straightjacket business models to explore sustainable models of collaboration across industries and geographies. Value visionaries are those CEOs and strategists who constantly search for newer and more collaborative ways of doing business.

Talent: primer for collaboration

A corporation’s ability to look beyond the zones of comfort stems from the availability of talent that can identify new market needs, explore new delivery platforms and create new business models. The global delivery model pioneered by the Indian IT firms to meet the IT needs of global customers is a classic example of breaking the mould. The efforts by GE to develop new low-cost diagnostic devices for the emerging markets and taking them back to their developed markets is a more recent example of reverse globalization. Typically, talent pools from different functions, different industries and different geographies are harnessed together to make such game changing events possible.

For talent driven business optimization to happen, CEOs and strategists must have an appreciation of the constantly changing drivers of value in a business model. These could relate to a fundamental redefinition of customer needs which a firm seeks to meet, the configurations of products that best fulfill the changing needs, the material inputs, manufacturing processes and conversion technologies, facility standards, quality levels and delivery mechanisms. Companies must nurture talent that looks beyond current comforts and constraints to seek new ways of doing things. Strategists and CEOs in particular need to understand the essentiality of cross-corporate and cross-industry collaboration, and need to be suitably talented by themselves to lead by example.

Negotiation: foundation of a collaboration

Any collaborative relationship requires negotiation to make it happen. Negotiation is the complex and often tiresome process of two companies attempting to develop common ground to meet future strategic objectives. Hidden agendas destroy negotiations and collaborations while shared missions strengthen them. A good negotiation posture can only emerge from strategic clarity on the drivers of industry evolution and the determinants of firm’s competitiveness, with and without the proposed collaborative framework with the potential partners. A fruitful negotiation can occur only when the partner for negotiation is chosen based on detailed desk research and on-site due diligence. A smooth negotiation process can only happen with deployment of negotiators who understand the essential ingredients of viable business and the subtle nuances of a win-win collaboration.

The above three essential steps of negotiation are sequential in nature. Any attempt to invert or mix up the sequence or priorities would invariably result in a botched up negotiation. Negotiation of a business collaboration can neither be top-down nor bottoms-up. It is one process that is typically driven by a mid-tier organization that establishes a cooperative framework based on business fundamentals. For the negotiation to succeed in terms of a sustainable collaboration, the top leadership should be irrevocably committed to the three essentials of negotiation identified above and the operating level should have adequate strategic appreciation.

Hidden agendas: value destroyers

The purpose of any collaboration is to create synergy for enhanced performance of the partners. The process of negotiation seeks to create a charter for achieving such synergy. The biggest roadblock for any negotiation is the opaqueness which each partner faces in its attempt to understand the other partner’s motives. The fundamental prerequisite for any successful collaboration is therefore mutual trust. Trust is required because collaboration involves exchange of information, based on confidentiality agreements, on market plans, product plans, technologies and costs and a host of confidential data. Hold-back of information on these fronts leads to sub-optimal and at times counterproductive collaboration.

The typical negotiator, either as a company or as a professional representing the company, has therefore the challenging task of establishing trust as the fundamental lever for a successful collaboration. Trust emanates from strategic clarity, leadership commitment and negotiator skill. Trust emanates from each party having faith in its own competencies and a belief that the collaboration would not short-change on its strengths. Collaborations that are unevenly poised on mutual strengths or weaknesses and mutual risks or rewards are more likely to fail. Even if a collaborative framework is cobbled together initially it will eventually flounder on mutual non-performance.

Strategic clarity: shared missions

Any collaboration must fit into the long term strategy of the company. Collaborations must be leveraged to supplement technologies, markets or people. They should play a clear role in the integration and diversification value chains of the company. This means that a company seeking a collaboration must have a strategic roadmap with a role clearly assigned to each strategic partner. The company should be able to visualize a performance scenario with and without the collaboration and be prepared to share with the partner. It is heartening that progressive companies develop strategic clusters of related companies with whom they are able to share their long term technology perspectives and agree on shared missions.

Strategic clarity on collaboration roadmaps and enabling shared missions is generally missing in the Indian scenario. The more knowledge driven and the more competitive a company considers itself the more introverted and the more closed the company behaves. The Indian pharmaceutical industry which has an aggressive global agenda and weak local resources is a telling illustration of how resources can be diffused in highly duplicative activities that run counter to the structural requirements of a global aspiration model. The industry is all set to replicate its chaotic and fragmented Indian market model in the global markets, eroding its own value in the bargain. A Japanese MITI kind of initiative is called for to infuse appropriate strategic and collaborative thinking among the firms in various industries in India.

Structured diligence: mutual alignment

Correct selection of the partner is an essential element of the negotiation process. Opportunistic selection of partners often leads to conflicts in negotiation processes as well as in collaboration management. There are four important phases of a diligence exercise for successful negotiation and collaboration. The first is a broad business level meeting to determine compatibility of business models, organizational culture and functional capabilities. The second is a technical evaluation of the required products and services, or their surrogates. The third is a detailed evaluation of the quality and compliance capabilities. The fourth is an evaluation of the opportunity of collaboration and the competitiveness of the firms to generate value from the collaboration model.

There are several examples in the global business scenario which demonstrate the critical importance of diligence. Roche-Genentech and Daiichi-Ranbaxy represent two distinct polarities in the pre-collaboration diligence spectrum and post-collaboration value build or value erosion as the case may be. Jet-Sahara merger in the airlines industry, Tata-Corus acquisition in the steel industry, Kingfisher-Shaw Wallace spat in the liquor industry, and HM-Isuzu collaboration in the automobile industry are but a few examples of how the level of due diligence could influence outcomes.

The negotiator: catalyst or inhibitor?

The personality of the negotiator plays a key role influencing the speed with which a negotiation can proceed and the strength which a collaboration can take shape. The demands on a negotiator are plenty. The negotiator needs to be highly competent with a complete understanding of the industry and the firm. He needs to be exceptionally communicative with an ability to listen as much as talk. And above all, he needs to be a collaborator with an outstanding ability to reinforce mutual strengths and overcome mutual weaknesses. He needs to be committed not only to the company he represents, understandably for business expansion, but also to the very process of collaboration, to inspire confidence and trust in the other party.

The negotiator when he is competent, communicative and collaborative as discussed above can be a true catalyst for the negotiation process. If he lacks any or all of the three critical factors could well be a major roadblock for the partnership. Rail track type of parallel negotiations, neither converging nor diverging or circular type of negotiations, with neither a beginning nor an end, are familiar examples of a faulty negotiating personality. An understanding of multiple cultural requirements is an additional requirement for a global negotiator. Negotiation requires openness with appropriate transparency as much as softness with adequate firmness to develop a mutually respected win-win position.

Model pitfalls: rat traps and pies in the sky

There are two clever, if not cunning, negotiation models that are employed by negotiators in negotiating with apparently weaker partners, trying to seek one-sided success; not surprisingly neither will be a sustainable success in the long term. The first is the rat trap negotiation model. In this model, the weaker partner, often requiring urgent cash consideration, is enticed into a ‘rat trap’ of excusive and perpetual collaboration which completely limits future flexibility and cash flows for the weaker partner. The characteristic feature of the rat trap model is that given the dire need for cash, just as a rat in need of food enters a rat trap, the needy partner enters a one way street of permanent collaboration. Technology sellouts without royalties, contract manufacturing sans profit shares, perpetual royalty-free licenses, circular first rights of refusals, corporate selloffs without tagalong rights, low private equity valuations in times of downturn, and technology imports without access to improvements are some examples of typical rat trap negotiations.

The second model is the pie in the sky model. This model appeals to partners who have a comfortable present but are driven by ambitions of a highly prosperous future. Aggressive and adventurous partners who are unaware of future industry evolution, and pitfalls thereof, fall for this model. Typically, in this model one partner offers for the other a highly attractive future cash flow stream in return for a nominal upfront payment. Collaborations which swap current businesses for apparently more attractive future collaborations, payment models which are not linked to success milestones, exotic valuations based on bloated business plans, royalties linked to declining businesses, payments linked to uncertain product developments and approvals, and non-competes without current business alternatives fall under the pie in the sky negotiation model. Needless to say, neither the rat trap negotiation model nor the pie in the sky negotiation model would lay the basis for a strategic collaboration; some of these could end up in tortuous litigation as well.

Collaborating to win

Strategic collaborations are equitably negotiated to bring mutual competencies into constructive play. They represent a balance of rigidity and flexibility. For example, mutual exclusivity is balanced by performance triggers for non-exclusivity. They balance risk with reward appropriately. For example, both partners need to bring in balanced resource commitments to the collaboration to be able to reap the rewards proportionately. Strategic collaborations require milestones and deliverables that are mutually agreed a priori to measure performance and undertake course corrections. And they require a governance structure, with equal senior level representation and voting rights as well as arbitration procedures to move with the times.

Strategic collaborations essentially require a three dimensional fit: strategic, cultural and operational. Well structured collaborations transform the value chains of companies, helping them to address new products and markets with optimized resources. They enhance technological depth and enhance market reach. They consolidate industry structure while preserving firm level competitiveness. The society benefits with technologically updated products with cost economics. The firms, industry and economy benefit with efficient deployment of scarce resources for consistent growth of national product. A truly collaborative mindset, with no hidden agendas and with shared missions, represents a unique managerial alchemy that can usher in multiple benefits to all the stakeholders.

Posted by Dr CB Rao on November 1, 2009