Sunday, February 27, 2011

The Universal Corporation: India Inc’s Defining Goal

This blog post, the seventy-fifth post in my series of Strategy Musings, is a sequel to my earlier post titled “The Firm’s Next Frontier: The Universal Corporation” which concluded that the firm’s next frontier is a transformation into a universal corporation. This post analyses the concept of a universal corporation in terms of a strategy, structure and competency paradigm, and hypothesizes that the universal corporation is a defining goal for India Inc.

A clear practical path

It is tempting to define a universal corporation as one which manufactures virtually every product or one which is present in every territory of the globe. Apart from the fact that there is no firm that has ever attained that capability covering a total product spectrum and geographic canvas it is clear that any journey towards that goal would face not only challenging technical and economic hurdles but also insurmountable policy barriers. That said, a truly universal corporation is not an impossible option; rather, it would be a result of a journey that could span several generations that would need to be travelled by founders and chief executives with a completely open mind. Early successes in core technologies and core markets provide the competencies and cash for capable companies to cover total value chains, product-wise and/or market-wise.

There are certain Japanese and Korean corporations which come close to the concept of a universal corporation, demonstrating the feasibility of the goal. Japanese conglomerates such as Sumitomo and Mitsubishi have a formidable reputation for manufacturing anything from pins and pens to metals and medicines. Hyundai, the Korean conglomerate has the enviable reputation of manufacturing everything from chips to ships. The capabilities of such behemoths cover a whole range of technologies from electronics to automobiles, and consumer goods to industrial products. Their presence is also significantly global. Developing countries such as China and India have also been home to several diversified groups. The development of these large conglomerates has been spurred by several disconnected aspirations rather than by a planned strategy of universal coverage. Today, however, there is validity and feasibility for large conglomerates or large specialized organizations in India to pursue the strategy of a universal corporation.

Defining universality

A universal corporation is not necessarily only an integrated company or a diversified company, or even both. Neither is it a geographically dispersed company. As the previous blog considered, a universal corporation is more than a multinational corporation. To achieve conceptual integrity, a universal corporation may be defined as one which achieves total dominance in one technological domain, straddling complete product portfolio and providing global market coverage. If Sony decides that it would operate in any product that incorporates electronics and provides such range across the globe it would fit this definition; given the ubiquitous spread of electronics it is a moot question if it would ever be possible on a total basis. If Toyota decides that it would operate in every conceivable type of automobile from a two wheeler to earthmoving vehicle, serving every terrain in the world it would be a universal corporation; a journey which Toyota is entirely capable of but has not carried out because of its own volition. If Google decides that it would offer any and every product that deals with Internet, and would customize its products to all global languages Google would become a truly universal corporation; probably something a journey on which it is already set.

The concept of universality is best pursued by focusing first on a product-market dimension, and then expanding on either the technological dimension or the user dimension, or both. To take an example, one could start a foods business by opening a restaurant. Normal strategy aims at scale and scope in terms of chain of restaurants and multiple culinary tastes respectively, within the overarching umbrella of geographic coverage. Universal strategy, on the other hand, aims at leveraging the core technology of food preparation and service to extend the footprint to cover fast food restaurants, coffee cafes and tea kiosks on one hand, and processed food ingredients, processed foods and ready to have foods and beverages. Does the universal strategy militate against Porter’s concept of defining tightly the industry boundary, and developing a relevant competitive strategy? Does it also militate against Prahalad’s concept of defining core competencies in a focused manner, and building a business strategy around them? Certainly not, as universal strategy is an inevitable transformational journey in strategy formulation for a highly networked world, with multiple convergence points.

Formulating a universal strategy

Amongst all competitive strategies, formulation of universal strategy is the most challenging. Firstly, the company should have a basic critical mass to be able to enable, support and sustain a universal strategy. Secondly, the firm should be in possession of a core proprietary platform to be able to universalize itself. Thirdly, strategists should have a flair for identifying the multiple dimensions in which a firm can universalize itself and then prioritize the sequence. Taking the restaurant example given above, should the company move from restaurant to fast foods business first, and next to the processed foods, or vice versa? Or, within the processed foods side, which should come first: ingredients, foods or readymade foods? The decisions depend as much on the core competencies that are in possession of the company as on the market opportunities that become available. Many times, pursuit of parallel dimensions in one go could be an ideal strategy.

Technology determines a core competence but the manner in which it is deployed could provide a disincentive or incentive to universal growth. Without doubt Apple products are universal in appeal, backed by unique technologies of feel and function, and enablement of applications. Yet, by linking up with a personal computer and/or iTunes being mandatory and by not allowing a standard USB drive, by limiting the range to a few iconic models, and/or by ignoring certain countries in its pecking order, Apple is not really tuning itself to a universal strategy. On the other hand, Samsung which embraces multiple operating systems, including its proprietary Bada OS and developing products for multiple market cubes with value pricing is clearly set for a universal strategy. Such differences in strategy are quite understandable as universal strategy need not be the only compelling necessity for growth or profitability. However, one may appreciate that had Apple chosen to adopt a universal strategy, possibly the industry would have seen better consolidation and profitability in the overall.

Structuring a universal strategy

Universal strategy can rarely be one hundred percent organic. Though in a classic sense, structure follows strategy, in respect of a universal strategy structure is an integral part of strategy. However big a corporation or a conglomerate is, universal growth relative to the existing base is a challenge. Companies need to adopt a variety of strategies including equity owned relationships, joint ventures and franchising to expand the footprint. India has shown how simplest of ventures could achieve a national and even a global footprint by adopting appropriate structures. Apollo Hospitals, established as a Chennai based hospital in the 1970s by a physician as a business enterprise rapidly grew to become the leading corporate hospital chain of India and one of the largest healthcare groups of Asia, comprising 50 hospitals and 60 clinics, all of them largely in India, by appropriate structuring strategies. Its pharmacy chain, Apollo Pharmacy became the largest branded pharmacy chain of 740 plus round-the-clock outlets in India by adopting an aggressive franchising strategy. Innovative and aggressive corporate structuring arrangements enable companies leapfrog on the universality dimension.

Flexible structuring is based on the premise that the firm attaches greater value to achieving a universal brand presence than to absolute ownership capitalization. Flexible structuring also helps express global aspirations through local needs. As the firm gets universal, supply chain becomes simplified. It is, for example, inefficient for Marks & Spencer to market in its Indian stores garments designed in Sao Paulo, Brazil and stitched in Honduras when capable garment manufacturers of Tirupur in India can produce to a fusion of national tastes and global designs. Universal strategy which is based on leveraged structures builds speed and efficiency in localization.

Universalizing through local competencies

A review of the relatively more global corporations throws light on core competencies required for a universal corporation. An understanding of local needs and development of designs to suit such local requirements is a key factor for an MNC to emerge as a universal corporation. Japanese automobile companies have been successful in India because they have been able to appreciate the need for high ground clearance, short turning radius and large seating capacity and develop suitable designs. Having introduced products meeting the needs of multiple user cubes, developed a keen understanding of the tough operating conditions and appreciated the increasingly discerning selection criteria of users, the Japanese automobile users have started trending designs and manufacturing products exclusively for, out of India (Toyota Etios car, for example). GE has developed medical devices for India, and for other low cost countries out of India. As a universal corporation integrates local competencies, hybrid technologies develop at a faster clip.

An ability to express global capabilities through localization is a fundamental platform on which a typical MNC and a futuristic universal corporation differentiate themselves. The former would place a premium on global standardization in form and components as well as in overt and latent characteristics. The latter would keep the key drivers of excellence non-negotiable but be keen to enhance performance through local creative practices. Carlos Ghosn, the CEO of Renault-Nissan stated while inaugurating the Chennai plant of Nissan in 2010 that he chose to enter into Indian manufacture not because of labor cost arbitrage but because of the ability of Indian production engineers to design and establish facilities at costs that are fractional to the developed world costs. Japanese automobile makers found India’s ability to find economics in small batch manufacture to be synergistic to their own approach of lean manufacture (Indianized Toyota Production System, for example). The universal corporation bets naturally on hybrid state-of-the-art for its versatility and effectiveness.

Barriers and bridges

Any, or all, of the Fortune 1000 global corporations could have become universal corporations. Several of them, in reality, have not even become multinational. The reasons relate to the barriers that exist in cross-border evolution of companies, some of them external and some internal. Homogeneity of culture, market, skills and common law make it easy for a company to scale up in one country while heterogeneity of the very same factors make it difficult for firms to seek cross-border growth. The challenge is also one of dealing with multiple host country governments, each with its own plethora of complex laws and investment regulations. Internally, lack of a managerial bandwidth to cope with the multiple challenges of cross-border growth is a major self-constraining barrier. However, firms which have explored cross-border operations early have been at home as much as local companies themselves. Several fast moving consumer goods (FMCG) companies such as Unilever, Colgate, Nestle, Proctor & Gamble have discovered this decades ago. The balance Fortune 1000 companies who saw barriers where opportunities beckoned continue to remain anchored in flat, mature developed country markets. For several such companies, inability to foresee future competition from developing nations, unwillingness to dilute corporate policies to suit local laws, diffidence to localize to achieve competitiveness, and reluctance to share management with local partners have been great barriers to cross-border exploration.

It has taken a complete meltdown in developed economies and a visible climb up in developing economies for some of the Fortune 1000 companies to reassess their strategies. The bridges to developing economies clearly are local professionals, who are today as well qualified and experienced as the MNC professionals, and local corporations, which have today achieved requisite local scale and brand power. While Wal-Mart has been a slow collaborator with Bharti in the retail space, Pizza Hut has scored fast fame in the fast foods domain in collaboration with Jubilant Food Works, with Dunkin Donuts in tow to repeat the successful experiment. Starbucks’s recent collaboration with Tata Coffee is another example of complementary capabilities being harnessed for cross-border growth. The bridges such as these, however, require dismantling of barriers and delineation of opportunities in the backdrop of right perspectives, in the collaborating companies. Developing countries require massive investments in infrastructure, energy, education and healthcare. Fortune 1000 companies which see value in participating in this space will reap superior returns in future if they attempt to evolve as universal companies. However, there is no discernable evidence that more firms have appreciated the broader value of transforming themselves into universal corporations. Such continued hesitancy provides a great opportunity for aggressive Indian companies and conglomerates to be proactive.

Indian universal corporations?

The 2000s have seen a few Indian companies and conglomerates taking measured steps to acquire overseas brands, assets and companies, with partial or full equity ownership to emerge as Indian MNCs in their own right. Over the last ten years, India’s companies have made overseas acquisitions worth nearly USD 70 billion. Tata Group’s acquisition of Tetley tea, Corus steel and Jaguar-Land Rover assets, Bharti’s acquisition of Zain group’s telecom operations, Vijay Mallya’s snapping up of White and Mackay and Taiitinger spirits, Hindalco’s acquisition of Novelis, and moves by Indian oil and steel companies to secure oil and coke resources are but a few examples. Certain non-resident Indian groups, on the other hand, won abroad prior to entering India. Hinduja Group carried out flourishing international trade and global financial investment and banking services for decades before it made their first major investments in India in the 1980s. Laxmi Mittal’s Arcelor-Mittal, the world's largest steelmaker, has been a truly global powerhouse with only a marginal presence in India.

With the slowdown in mature economies and consequent availability of value buys on one hand, and the openness of other emerging economies to welcome overseas partnerships, even from other leading emerging nations such as India and China, India has a great opportunity to go beyond mimicking the MNC strategies. By adopting a whole new strategy aimed at universal growth, creating innovative structures to extend Indian corporate presence, developing a core competency of competitive collaboration, and building value propositions across product lines in a universal manner, Indian corporations can become truly universal. Tata Motors is a defining icon for universality in technological value chain (from Nano micro car to Jaguar luxury car, from Sumo SUV to Land Rover SUV and from 2 tonne Ace LCV to 60 tonne HCV) and in geographical value chain (with the largest automotive base covering cars and commercial vehicles in India, and its ownership of JLR luxury car assets in the UK and Daewoo heavy vehicle assets in Korea as well as exports to most countries). There is no reason why a whole multitude of Indian companies and conglomerates cannot become universal corporations sooner than later.

Posted by Dr CB Rao on February 28, 2011.

Friday, February 25, 2011

The Firm’s Next Frontier: The Universal Corporation?

There is no evidence in industrial chronology as to when the first firm came into being in this world. It may, however, be hypothesized that the concept of the firm got established when the first trade took place in the world, probably simultaneous with the origin of human being. The firm as an institution got rooted in different countries and communities as the concept of capitalism got ingrained in the human mind (probably from 1300 AD). Capitalism being creation of more wealth from available wealth, human beings found the need for collaborate as well as compete to gain access for resources, convert the resources into products and/or services and sell them. In this process, the firm emerged as the appropriate forum to conduct all such activities. There is, however, enough evidence when the first joint stock company was established in the world (Muscovy Company in Britain, circa 1555) and when the first international venture originated (East India Company of Britain, circa 1600). The Dutch East India Company was probably an earlier multinational corporation in the world, but it was the East India Company of Britain that was aggressively multinational, also gaining infamy as the Trojan Horse that brought the British conquest of India. Today’s firm has, of course, come a long, long way from the historical version of the firm. Keeping that in view, we also need to conceptualize how the firm of the future would look like. India, like China, offers an excellent backdrop to analyze the past evolution and forecast the future transformation of the firm.

MNCs in India, and of India

Over the centuries, the firm has taken various hues. From a strictly own country boundary to export to other countries had been the first evolution for the firm. An export-oriented firm thus took shape. In due course, the multinational firm took shape as the firm started having headquarters and/or principal manufacturing complex in one country, mostly a developed country, and having production and/or sales in different countries, mostly developing nations. Also called transnational corporation, the multinational corporation (MNC) has been a major feature of industrial development in the whole of the twentieth century. The growth of MNCs has been like the flow of water; from developed economies to less developed economies, from high technology countries to low technology countries, and from saturated markets to virgin markets. Market and structural imperfections such as differentials in skill levels, access to resources, policy inducements, local partnerships, and tax treatments provided additional impetus to the growth of the MNCs. Typically the need of the host country for the MNCs proprietary technology and the need of the MNC for new markets provided a platform of quid pro quo for such development. The journey for the MNCs has rarely been smooth however across the world, more so in less developed countries. India offers an educative case example.

The growth of the MNCs during 1950s to 1990s in India has been marked by both pragmatic and dogmatic considerations. Industrial evolution in the pre-independence India had to bear the bias of foreign occupation. Industrial development in the post-independence followed a very distinct model governed by the socialistic dogmas of the successive governments. All technology and investment-intensive industries were, by and large, reserved for the government owned enterprises, called public sector undertakings (PSUs). PSUs typically grew based on technical collaborations with engineering and technology majors from advanced countries without any equity investments. However, the areas that the successive governments considered non-strategic were left open for MNCs to enter India as branch offices, listed companies, joint ventures and in exceptional cases as wholly owned enterprises. Almost all aspects of MNC enterprise operations were closely monitored and controlled while in some cases either takeover by the government (nationalization) as in the case of Shell, Exon or Caltex or demands for alignment with public policy made certain MNCs in a few sectors disappear from India (for eg., Coca Cola and IBM). Until economic liberalization of the 1990s and beyond, most MNCs stayed on as bystanders than as active participants of economic development. The liberalization of economic policy and dismantling of licensing has seen a host of MNCs reenter India in 1900s and 2000s to benefit not only from India’s huge market base that could absorb MNC products and services but also from India’s educated workforce which could provide cost-competitive software and manufacturing solutions.

As one reviews the tryst between India and the MNCs, the need for public policy and private initiative to be aligned with each other becomes clear. Clearly, the MNCs in the initial days of Indian independence were reluctant to offer any more than low technology items (eg., oils and soaps) or dated technologies in otherwise high technology industries (eg., automobiles and electronics). MNCs in certain sectors such as pharmaceuticals were totally reluctant to participate in India due to lack of patent protection. The government, on its part, was perhaps justified in insisting that the MNCs should do better than offering cigarettes and aerated beverages to India. The government, in addition, had its own strange diffidence towards the Indian private sector, which could have been the natural ally for the MNCs in India on a much larger spectrum. Today, the history of India’s industrial development, despite the warp, offers two lessons: firstly, Indian government’s protectionist policies have given strength to a fledgling indigenous private sector (as was the case with several other emerging economies) as well as established a robust public sector, operating in technology and investment intensive sectors (a feature unique to India). Secondly, market imperfections being what they are, the market and the MNCs had to find workarounds to facilitate MNC growth in India. From re-jigging product and manufacturing strategies through a national lens (for eg., Lever and Colgate) to collaborating on a low-risk technical collaboration and minority equity route (for eg., auto components) MNCs and India had been moderately successful in retaining a relationship if not a tryst. As MNCs and a host of rapidly developing economies, including India and China, view the future the question to ask is whether the MNC as seen today would morph into a new avatar!

MNCs and societies under transformation

Some scholars believe that rapid economic growth around the world has reduced market imperfections, and as a result the MNCs and the nations now face a climate of mutual trust and dependency, in the background of market maturity. Some others believe that most MNCs are already becoming global corporations in the sense that the research, manufacturing and commercial operations are more widely dispersed across several countries than ever. They also believe that the sheer need for investible resources from the MNCs would keep the nations on the path of pragmatism. Both the schools inevitably come to the conclusion that the emergence of a global corporation, already underway, would make the classic MNC an even more relevant institution for the future. While these views have their merit, the fact is that both MNCs and societies are under such transformation that even the concept of a global corporation would fall short of the transformational change that would dictate new trends. There are two market and skill related facets of the transformation that the MNCs and nations must take note of even as they participate in the transformation, by design or default.

Markets as 3D Matrices

Just how effective the firm would in future be would in turn be dependent on how the firm is aligned to the markets, and how well the skills are aligned to the needs so that the firm could develop the products the markets would need. Hitherto, it has been assumed that the MNCs by virtue of their scale, scope and technologies are well positioned to address the needs of the markets and access the skills well. In doing so, it is also assumed that the markets can be segmented to accept products at different points, essentially specification-price driven, often depending on the purchasing power of economies and their citizens while countries and skills can be uniquely identified with each other to arrive at the most efficient means of development and manufacture. This finely honed model of the MNC, it is felt by them, would meet all foreseeable needs for the future. The classic MNC model, which ordains that certain economies need only certain types of products misses out the crucial point that more than the corporation, the consumer is global today. The citizen as the consumer has, in fact, transformed more than the citizen as the producer. This has important implications as below.

With information display and information flow reaching new highs through the Internet and all of global media systems the consumer is exposed to multiple technologies and functionalities. The consumer no longer views product differentiation merely in terms of a few features or price levels. Neither is the consumer interested in receiving products with generational lag depending on the development status of the country he or she belongs to. Under the transformation currently underway, the traditional one-dimensional layering of the market or two-dimensional market segmentation is yielding place to a more sophisticated three dimensional market cubing, the key dimensions being technological feel, functional performance and value pricing, irrespective of the development status of the country. These three dimensions are of transformational impact. Technological feel is the tactile, sensual and emotional experience that a device or equipment provides. Functional performance is the efficiency and effectiveness with which the device or equipment meets the performance needs of different market cubes. Value pricing is cost competitiveness enhanced by perceived superior value of the product in its market cube.

The corporation of tomorrow has to therefore develop a broad range of products, satisfying all of the market cubes, if it needs to achieve scale. The corporation has to master the ability to first start with the best of the three dimensions, and then downsize or vary the dimensions to meet various market cubes. This approach is antithetical to the wisdom that new products should be introduced at the lower end first to get as large a market toehold as possible and then upgrade to cover higher grounds. The transformation of the consumer from a price-sensitive persona to a value-conscious personality drives this need to stay at the top of the three dimensional axis. This hypothesis also upturns the established notion that different countries could be seen on the three dimensions of technology, performance and value depending on stage of their economic and social development. Nike, Rolex and iPhone are today seen as much in any interior habitat of Asia and Africa as they are seen in the upscale neighborhoods of New York Manhattan and Tokyo Ginza. The corporation of tomorrow has no option other than transform itself into a universal marketer, and consequently a universal developer and manufacturer as well.

Equilibrium of skills

A world leader implied in a recent exhortation to the developed industry that technology should flow to where markets are, and production should occur right in the midst of such needy markets. This, he argued, would create more jobs in developed countries as well, because as core technologies and components would continue to be developed out of developed countries. This, in fact, has been the theory and practice of the classic MNC. Unfortunately, the universalized market structure no longer deems the classic MNC model to be adequate. Sophisticated designs and products would need to be made in as many countries as possible to achieve universal appeal with country-specific value pricing. Fortune at the bottom of the pyramid applies to countries in economic pyramid as much as to economic strata in each country. This again requires as much universalized development and production across the globe as possible. There is a concomitant need therefore for several countries to ensure the availability of leading skills as an essential requirement for supporting universal production.

Not many would still endorse the proposition that there could eventually be better skill-sets emerging out of developing nations, leading eventually to equilibrium of skills across nations, developed and developing. That is probably a myopic view. None had, for example, hypothesized two decades ago that India would have leading edge automobile design and manufacturing skills. The fact, however, is that India over these two decades not only commenced design and manufacture of vehicles indigenously but could also create the world’s smallest but spacious Nano car as an innovative first in the world. Two decades into the future it is quite conceivable that India could be a hub of global innovation and manufacture in a wide range of industries, developing products truly for the first time in the world. Similar could be the opportunity for other innovation-aspiring countries. Technological leapfrogging could occur in respect of select rapidly developing countries on a much larger scale in future.

The essential requirement for the transformation would, however, be the availability of requisite intellectual capital in universities, laboratories and industries. Here again, the view could be that India or any other developing country would never reach the intellectual level of advanced countries, given the fact that thousands of Indian graduates still flock to the US universities for higher order education and research. That again would be a myopic view. There are clearly two waves of educational transformation sweeping India and China, whether or not attributable to tiger parents in these countries. The only inhibitor to a total global domination by the educational value chain of these two countries relates to certain major disconnects.

For example, aggressive private sector investments in secondary schooling have led to mathematical and scientific brilliance at school finishing levels in India. This is taken forward at graduation level by the Indian Institutes of Technology and Indian Institutes of Management which are among the top institutions globally already on their own. However, major failure in high quality primary education at the lower end, and significant inadequacies in cutting edge research in sunrise sectors are two major disconnects that constrains the educational value chain of these countries. As these countries recognize the need for fundamental investments in education at both the ends of the spectrum, the capabilities of their educational systems would increase manifold. Also, as more educational institutions and laboratories become multinational the intellectual transformation would be stoked further by their participation in the rapidly developing economies. In addition, the corporation that desires to cater to all the multidimensional cubes of the markets across the world has to make special efforts to advance the skill levels in the host countries. As skill levels reach equilibrium the intellectual markets would turn perfect providing flexibility to adopt multiple modes of development and manufacture in multiple countries.

The universal corporation

The age of the universal corporation is ready to dawn, primed by growth of new age economies such as India and China and the consequent diversification in development, manufacturing and marketing bases across the world. As customers become well informed and highly discerning, apparently homogenous markets would support heterogeneous products and services. The classic concept of a multinational corporation headquartered in an advanced country and having manufacturing bases in low cost countries, and accepting generations of products, and their manufacturing lines, sequentially would be a thing of the past in the next decade or two. The concept of a universal corporation which constantly seeks value arbitrage rather than mere cost arbitrage would simultaneously take root. The scale and scope of the markets in the rapidly developing economies combined with the accumulating and unstoppable intellectual power of youthful demographics in such economies would make the universal corporation a reality. What would be the strategies, structures and competencies of such universal corporations is, of course, a distinct area of research by itself.

Posted by Dr CB Rao on February 25, 2011

Saturday, February 19, 2011

Strategic Comparators and Responders: Reinventing Strategy Formulation

The most relevant but most ignored fact of corporate strategy is that competitive strategy can rarely be drawn up in isolation. In any industry, the strategies pursued by individual firms impact not only the industry structure but also affect the competitive strategies of all other constituent firms of the industry. Yet, firms and strategy leaders find it expedient to draw up strategies as though only they exist in the industry individually. It is not uncommon, for example, to see almost all firms in an industry aspiring to achieve growth rates above the industry average, move up the industry pecking order by a few notches, achieve the largest market share or secure the highest profitability. No wonder therefore that only a few firms succeed in achieving their operational aspirations and most land up with randomly unsuccessful and patchily successful performance.

Given that corporate strategy in a firm is typically drawn up at the level of the chief executive officer, chief strategy officer, chief financial officer and other CXOs all with requisite capabilities, the ostrich like manner in which corporate strategy is drawn up defies logic. The reasons are often three pronged: structural, systemic and behavioral. Strategy is a highly complex intellectual activity which integrates established data as much as it factors in uncertain aspirations. The larger the organization the greater is the need for inclusivity, calling for ground level strategy development in all functions, domains and regions, with a sharp eye for internal and external factors. Yet, typically the strategy department is usually the smallest one in a firm, denying structurally the ability to capture all the required nuances and details, and conduct necessary sophisticated analyses.

Systemically, industrial managers and leaders, despite the strong managerial learning that emphasizes coping with uncertainty with a wide range of tools, get inclined to accept quantitative data rather than qualitative information or interpretations. Behaviorally, professionals involved in strategy development tend to believe that strategy formulation is an esoteric science which only strategy specialists can carry out. This factor and the distance strategists tend to create between themselves and other organizational members act as behavior barriers between ground level realities and capabilities of the broader organization and the senior level aspirations and potentialities. These factors, and lack of quality external data or the cost and time required to access such data, act as systemic deterrents to developing a comprehensive strategic canvas and achieving organizational inclusivity in strategy formulation.

Pitfalls of introverted strategy

Every strategist maintains that his or her strategic plan is developed based on opportunities and risks inherent in the economic environment and the likely moves of competitors. Apart from the fact that such claims are often no more than armchair predictions, the benefits of any strategic plan disappear the moment the first year of the strategic plan is converted into the monthly budget for the firm. This is because thereafter the firm keeps monitoring its performance against the budget rather than external developments or competitor achievements. As a result, the firm misses out the opportunity to overcome new challenges or spot new opportunities. As economic environment becomes more volatile and competitive dynamics become more intense by the day, there is every need for all professionals who treat strategy as an exclusive preserve to look at a more pervasive and expansive approach to strategy formulation.

A classic instance of the introverted strategy is found in certain recent developments in the top crust of the Indian information technology industry. One of the top IT players was preoccupied with implementing strategies developed at the beginning of economic downturn and was oblivious to the moves being made by other top players to build capacities as global economy began to come out of woods. As a result, the firm lost the edge in terms of consulting capacity and customer access, and got relegated to a lower spot. An inability to assess, or accept, the superiority of other more effective mobile operating systems and a belief in its own proprietary system made a leading global mobile maker such as Nokia lose the edge in smart phones. Several Indian pharmaceutical majors who have ignored the plans of late starters to aggressively establish capacities or create marketing organizations saw their market share drop precipitously.

Certainly, directional stability for business and performance comparison vis-a-vis plans are extremely important for firms to stay focused. Given that most strategic investments such as capacity creation have lead times of several years and even tactical operations such as inventory management involve lead times in months it is impractical to have continuously dynamic plans, even if they are responsive to external developments. That said, given the fundamental responsibility of strategy formulators of delivering sustainable growth for the firm, innovative ways must be found to balance internal stability and external volatility. Ease of making internally focused plans and difficulty of compiling reliable external information or lack of organization to support external intelligence should be the least of the reasons to stay only inward focused, and in the process oblivious of external developments. The wise firm must institutionalize a process of strategic comparison and responsiveness as a strategic management ethic.

Key external themes

The theory of strategic comparators and responders herein proposed is quite different from the existing concepts of competitive benchmarking or strategy development. Competitive benchmarking essentially focuses on metrics that are measurable and are reflective of operational and market performance. These could be market share, published financials and stock price. The paradigm of strategic comparators and responders includes external benchmarking but goes beyond that into a holistic reinvention of the art and science of strategy formulation. It is based on the premise that operational metrics or cross-sectional snapshots of a firm or its competitors do not necessarily capture the longitudinal impact or potential of external developments and potential external-internal (dis)equilibrium. Further to that, simple benchmarks fail to project the transformational trends that could potentially rewrite the comparative attractiveness of economies and competitive positioning of firms. Prediction of transformational phenomena requires superior analysis and judgment on the part of strategy formulators, and CSOs. For example, when the concept of Brazil-Russia-India-China (BRIC) economies as the rapid growth economies of the future was propounded a few years ago there were not many takers; it became, however, a reality sooner than forecast. Firms which embraced the BRIC concept early on benefitted from the rapid and transformational economic growth of such countries.

Strategic comparators emerge as both metrics and scenarios. Strategic responders are strategies that reset the firm’s strategy in response to the strategic comparators. The theory uses metrics as a means to predict future based on statistical sciences and experiential judgments, given the complexity. Essentially, comparators occur at four levels over the two dimensions of economy and industry: macro-economic, micro-economic, macro-industrial and micro-industrial. Taking the example of India, current macro-economic trends and social aspirations indicate the potential for a major transformation in terms of becoming the third largest economy in ten to fifteen years, with greater rural inclusivity. At a micro-economic level, changing demographics which would lead to around sixty percent of population being of thirty years of age or below portend a major transformation in consumption patterns. From a macro-industrial perspective, new industrial sectors catering to children and youth could be the new drivers of industrial growth. At micro-industrial level, firm and industry specific competencies honed in industries such as automobiles, pharmaceuticals, information technology, engineering, communication, defence and electronics could become factors of national comparative advantage. Any strategic planning process must, therefore, address the economic-industrial scenario.

The practice of strategic planning in the 1960s and 1970s advocated analysis of economic and technological environment as a primary component of the long range planning process. Firms felt that it was important to have economic analysts, including econometricians, in the long range planning departments. However, the slow rates of change in external environment of yesteryears caused such analytics appear as a redundant, non-value adding exercise over time. Not surprisingly, strategists and CEOs began to focus more on firm-specific internal factors than on external factors, a trend which got fortified over the 1980s to 2000s. CK Prahalad’s concept of core competencies of the firm reinforced the trend. Although Michael Porter focused on micro-industrial environment as an influence over competitive strategy, his prescription also focused on firm level competencies. With the tumultuous changes in global economic environment, emergence of rapidly developing economies such as China and India and exponential growth in new technologies, an understanding and forecasting of external economic and technological drivers, together with a more nimble and perceptive strategic response mechanism, assumes great importance for strategists.

Connecting the dots faster

In the emerging world, uncertainty is the only certainty and volatility is the only steady factor! The emerging environment does not lend itself to classic statistical and technical analyses of the past to arrive at the future. The scale and flow of business has enhanced globally to such an extent that for the first time in the 2000s, the fallibility of large individual firms could put to risk whole economies. Strategy formulators are now expected to marshal intuition, experience and analytics in equal measure to develop judgments on future. The CXOs who seek comfort of pure analytics, therefore, are unlikely to take their firms far; neither would be the CXOs who are solely intuitive or biased by their own experiences. Emerging economies could throw up new points of inflexion unexpectedly. As an example, even in the matter of air transportation where sectors are subject to rigid governmental controls, and hence apparently predictable, the trio of Emirates, Etihad and Qatar airlines have grown so much over the last five years that they can today, in the aggregate, claim more air passenger kilometers than the largest established carriers such as Lufthansa or British Airways can claim. If the CEOs of the established airlines tried to forecast future scenarios through yearly measurement of air kilometers they would have been off the mark as well as late to respond.

Strategy formulators in the new era need to not only understand the dots that could lead them to the future but also learn to connect them faster. Not many overseas firms perhaps predicted that China would make massive investments for super fast bullet trains and therefore let the initiative slip away into indigenous development of such trains by China (good for China of course). Not many advanced nations and their national firms predicted that India would double its growth rate to 8 plus per annum and consequently missed the opportunity to participate in the growth and even accelerate it. Japan, and Japanese firms, for example, had been so close to, yet so far from, India; they could not foresee that India could be one of the largest markets and production centers for automobiles, electronic and consumer goods. Even today, despite this experience, many countries and national firms are still unwilling to visualize that India is at the cusp of a new qualitative revolution, taking the growth to a new trajectory. Similarly, Indian government and the firms as well as financial institutions do not seem to realize that India can acquire overseas assets much more expansively and decisively than it has done so far.

From the behavior of nations, societies, governments and economies to the aspirations of firms and professionals, the external world presents innumerable indicators of a transformational future; and there could be diverse futures relevant for different firms. CXOs must have the perspicacity and capability to see the futures beyond the obvious through multiple lenses. Before mild ripples of change turn into huge waves of transformation, firms would have only small windows of time to retool their strategies and redirect their execution. Unidirectional companies obviously face greater challenges on this front, the saving grace being that growth economies do offer base line growth in all sectors while offering hyper growth in select sectors. Conglomerates have greater flexibility to capture opportunities across the economy. However, whether specialized or diversified, companies need to reintroduce economic, demographic, technological and social forecasting to meet future challenges and opportunities as well as appropriate mechanisms to respond to them. This external orientation requires a major transformation in how budgets and strategic plans are formulated in firms.

Strategic simulations and strategic budgets

Firms would need to reconfigure the strategic planning and budgeting processes by a two-way equilibration. On one hand, the strategic plans should be unburdened of the needless quantitative load while on the other certain foundational strategic elements should be introduced in the budgeting processes. To enable this, strategic plans while being retained on a five year rolling basis must be developed in terms of multiple scenarios rather than with singular quantitative precision. Simultaneously, the annual budgeting cycle would need to be extended into a rolling two year span to provide the potential to cover strategic programs from investment to commercialization cycle. This twin change would enable companies to be prepared for dynamic changes in environment. A two year strategic budgeting cycle, though unusual in the current corporate practice for the extended span, would be the right transformation for operating executives to view their programs with the right strategic perspective. A five year scenario-driven strategic plan, though also could be unusual for absence of quantitative rigor, would enable strategic readability and flexibility for firms.

The strategic budgeting process would provide ample potential to understand fledgling strategic directions of the incumbent firms in an industry. The company annual reports, especially in India, provide a wealth of information on physical and financial parameters and investment indices, apart from standard information relating to balance sheet, income statement, cash flow statement and asset schedule. Some of these include information on underlying strategic parameters such as licensed capacities, installed capacities, production, sales, imports, exports, consumption of materials, inventories, energy consumption, technology imports, R&D investments, indigenization efforts, senior managerial remuneration etc. Most information is also made available on segmental or product basis. The information pool enables strategists to quantify and judge trends relating to a number of strategic parameters such as product specialization, export orientation, import dependence, asset intensity, research commitment, energy efficiency, import substitution, financial prudence, operational excellence and so on. Strategic budgets, by integrating such quantitative strategic parameters in bi-annual planning processes, equip the larger organization to deliver operations in line with the corporation’s strategic intent.

The strategic simulations would, on the other hand, develop multiple scenarios of likely external environment, competitor moves and potential strategic fit between the firm and any of the scenarios. As discussed earlier the economic and industrial environments can be simulated in a 2X2 matrix of macro and micro levels. Each environmental facet can be, in turn, assessed on a 3X3 matrix of interplay of optimistic, likely and pessimistic economic opportunity scenarios on one hand and dominating, co-existing and declining competitor dynamics on the other, a firm would have thirty six scenarios in which it can play its act. Assuming again that the firm chooses to play by an aggressive, middle of the road or conservative competitive strategy there would be a total of one hundred eight scenarios that could develop for the firm. The ability of the firm to deep-dive into each of the primal scenarios of opportunity, competition and competitive strategy in terms of various causative triggers could lead to even more intense scenario build-up. Economic opportunity even in one scenario, say optimistic, could be characterized by different levels of national savings, inflation and foreign direct investment; or by different rates of growth in agricultural, industrial and service sectors, for example. Competitor actions, say could be characterized by different levels of cash generation, cash deployment and external financing; or different levels of emphasis in core domains of research, manufacturing and marketing. A firm in each of its competitive strategies could seek out a cost position, differentiated position or niche position. The possibilities are endless; therefore the new age firm would need a new way of organizing the strategic planning function in a more intellectually reinforced way.

A new paradigm of strategic planning

To be able to meet the new age challenges of internally competent and externally sensitive strategic planning, strategic planning departments need to be expanded and restructured into three clear specializations. The first specialization stream would be driven by economists and technologists best equipped to forecast economic and technological scenarios. The second specialization stream would focus relentlessly on competitive intelligence to identify strategies and execution plans of competitors. The third specialization would be internally driven, analyzing the firm’s strengths and weaknesses, and developing the firm’s strategic options to achieve a fit with the multiple economic and technological scenarios. The chief strategy officer would not only be an erudite synthesizer of the enormous amount of information thus generated but also be an outstanding collaborator of multiple specialists to arrive at the most plausible set of strategic comparators and the most feasible set of competitive strategies. The holistic strategic planning process identifies drivers of competitive strategy, in an eclectic combination of various theories of strategy gurus, from Drucker, Ansoff and Ohmae to Prahalad, Porter and Kaplan, just to quote a few. The new age chief strategy officer must accordingly be a professional par excellence who can pioneer and institutionalize the new paradigm of strategic comparators and responders in the firm.

Posted by Dr CB Rao on February 19, 2011

Monday, February 7, 2011

Enigma of Entrepreneurial Energy: Defying the Laws of Entropy?

Given my association at senior levels with entrepreneurs and entrepreneurial organizations, I am often asked the question “who is an entrepreneur”. Often, my answer has been that an entrepreneur is one who creates something out of nothing. I however realize fully that such a simplistic definition hardly does justice to what makes an entrepreneur or what an entrepreneur makes for the society or economy. Clearly, an entrepreneur creates wealth with his products and/or services that are innovative, exciting, outstanding or novel, that are developed, manufactured or delivered with very lean start-up resources, amounting to nothing more than his or her ideas and some savings. It is this unique characteristic that positions entrepreneurs in a class of their own, relative to common citizens, professional managers, governmental administrators, industrial leaders and academic scholars.

Much has been written about the skills, capabilities and attributes that characterize entrepreneurs. Two critical attributes of long standing entrepreneurs are irrepressible passion and boundless energy. Passion to achieve goals of distinction and energy that drives all actions towards the goals shape entrepreneurs into what they are. Mostly however it is the entrepreneurial passion that is spoken of and entrepreneurial energy rarely finds mention. If passion is the spark, energy is the fuel for entrepreneurial ventures. As automotive and chemical engineers are aware certain fuels and chemicals can spark themselves into high energy combustion by themselves under high pressures and a spark by itself can ignite only ignitable fuels or chemicals. Passion dims without energy, which possibly explains why entrepreneurs, as they mature, fail to translate their continued passion into sparkling ventures as they once could do.

Entrepreneurs have great expectations of themselves and their organizations. They expect their organizations to clone them in terms of passion and energy. In doing so, they ignore the differences between passion and energy on one hand, and themselves and their organizations on the other. Passion is akin to motivation while energy is very much the motive power. It is possible for individuals to be energetic but not necessarily passionate, and vice versa. Passion provides the aspiration but energy leads one to achievement. Bereft of passion, sheer energy can drive results provided the entrepreneur sets a goal model. In sum, the energy quotient of the entrepreneurial system rather than its passion equation drives the growth and sustainability of an entrepreneurial organization.

Entrepreneurial potential and paradox

Entrepreneurship is full of potential and paradox. Nations are made competitive by entrepreneurship. New ventures are established and additional jobs are created by entrepreneurs who eschew traditional jobs and push the envelope with their passion and energy. Sunrise sectors in advanced markets and growth sectors in emerging markets offer full potential for entrepreneurial play. Product innovation, manufacturing efficiency, and delivery excellence, either singly or in combination, help an entrepreneurial venture to succeed. Clearly, as a global economic system the full entrepreneurial potential is not yet tapped because advanced countries are unable to spark entrepreneurship in mature sectors while emerging countries have no roadmap for creating crucibles of entrepreneurship in sunrise sectors. While the high cost advanced countries may never be able to reenact entrepreneurial play in mature and commoditized sectors emerging markets have all the potential for broad based entrepreneurial play in sunrise sectors. To achieve this potential two paradoxes of entrepreneurship must be well understood and squarely addressed.

The first paradox is that entrepreneurship tends to be inversely proportional to scale. The faster and bigger an entrepreneurial enterprise becomes the lighter its entrepreneurial passion becomes and the colder its entrepreneurial fire becomes. From Microsoft to Google and from Sony to Ford, industrial history has several case examples of scale diluting entrepreneurship. There are several reasons for it. As entrepreneurs create industries out of their ventures they also attract follow-on entrepreneurs and competitors. As they grow organizationally, entrepreneurs integrate more managers than entrepreneurs in their organizational eco-systems and consequently become more deliberative and administrative in nature than intuitive and impulsive. Start-up entrepreneurship has more of goal directed execution and less of strategy driven execution while scale-sufficient entrepreneur firms become more process-dependent and less goal-inspired. Retaining entrepreneurial culture as an entrepreneurial firm grows is a daunting challenge for the entrepreneur.

The second paradox is that entrepreneurship is rarely linear. If the information technology leader of India, with a start-up investment of USD 10,000 in 1990 by its founders could become a USD 5 billion enterprise by 2010, with a net profit percentage of 27, cash and equivalents ratio of 70 percent and fund raising capability of say another 5 billion it does not mean that the firm can automatically grow to a USD 100 billion enterprise by 2020. The reason is that entrepreneurial organizations as they grow become stymied by the growth boundaries of the industries and their markets. Neither arithmetic nor geometric progression in entrepreneurship would be feasible in entrepreneurial organizations unless entrepreneurs overcome the constraints of scale sensitivity outlined above and pursue out-of-the approaches to achieve market hegemony. The challenge of achieving exponential growth would be next to impossible, however, passionate an entrepreneur is, and competent his organization is.

Limits to growth, ebbing passion or eroding energy?

Not enough research has been conducted as to why fiery entrepreneurs who created rapid growth organizations out of next to nothing fail to replicate their entrepreneurial magic proportionately either in scale or scope. While the above hypotheses offer several plausible explanations, possibly there could be other reasons as well. A natural inclination to seek a better work-life balance, a satiation of capitalistic thrust that triggers entrepreneurial urge, a failure to get synergistic technology or business partners, a changing macro-economic environment or a desire to self-actualize in areas other than corporate or industrial development could be some other reasons. Whatever be the reason, entrepreneurs in aspiration-driven and potential-plenty emerging markets should not forget that they are instruments of national wealth creation, and the nation cannot become a superpower unless the entrepreneurial fervor is personally maintained and/or is strongly institutionalized. There exist two ways to achieve this.

Entrepreneurs who are intent on retaining the individual charisma of entrepreneurship have few options other than becoming serial entrepreneurs. Successful serial entrepreneurs bring up their firms to critical scale and leave them in the hands of larger investors or partners, unlocking value and cashing out the stake, generating larger corpuses for subsequent ventures. This strategy is particularly relevant when their core entrepreneurial capabilities are not industry or technology specific or when the industry itself is on a mode of continuous expansion. India has its shining examples of serial entrepreneurs, for example Jerry Rao, the former Citi India head who set up Mphasis and is now in the fourth act of being a champion of affordable housing,GR Gopinath who founded India’s trail-blazing low cost airliner, Air Deccan and is now the creator of Deccan Express Logistics, and K Ganesh who recently sold his stake in his online educational venture, TutorVista, following three other exits in the past. That said, serial entrepreneurship is unlikely to be a major phenomenon in the Indian entrepreneurial scene which is marked as much by emotive attachment as by growth passion.

The second sustainable approach for institutionalizing entrepreneurial fervor lies in morphing firms into conglomerates. This unique method of institutionalization of Indian entrepreneurial spirit is best evidenced by Tata, Birla, Bajaj, Reliance, Essar, Dhoot, TVS, Murugappa, Apollo, and various other individual or family entrepreneurial ventures which became major conglomerates. From a simple strategic business unit (SBU) approach at the firm level to a diversified conglomerate group approach, there could be enormous opportunities for fervent entrepreneurs to co-opt other capable entrepreneurs to let them start up and grow such SBUs and constituents firms as future conglomerates. Institutionalization of this approach needs a breed of professionals who are fired with entrepreneurial passion and energy as much as individual entrepreneurs are. As one dwells on this approach, it is enigmatic as to why conglomerate entrepreneurship has been a preserve of entrepreneurial families rather than individual entrepreneurs. There is a need for conceptualizing and analyzing the entrepreneurial paradigm in a totally different perspective that emphasizes energy rather than passion as the key constituent.

Entrepreneurial thermodynamics

Although entrepreneurship is seen largely as an organizational or behavioral phenomenon, the challenges and paradoxes of sustainable entrepreneurship can be better understood in a thermodynamic perspective. All things in the observable universe are affected by and obey the laws of thermodynamics. Entrepreneurial systems are no exception. If entrepreneurial energy is considered the heat of a heat engine, the laws of thermodynamics apply strikingly to systems analysis of entrepreneurship. Entrepreneurial energy provides the power to performance of a start-up firm. Just as temperature, pressure and chemical potential of a heat system dictate the thermodynamic behavior of a heat engine, energy, passion and competencies of an entrepreneurial system dictate its behavior. As an analogous concept, entropy is a thermodynamic property that is a measure of the energy not available for useful work in a thermodynamic process such as in energy conversion devices, engines, or machines. Such devices can only be driven by convertible energy, and have a theoretical maximum efficiency when converting energy to work. During this work entropy accumulates in the system, but has to be removed by dissipation in the form of waste heat. Many entrepreneurial systems are affected by the entropy caused by the lag that typically exists between the passionate fast-forward of the entrepreneur and the conservative status quo of his leadership and managerial team.

When I postulate that an entrepreneur is one who creates something out of nothing, evidently I challenge the first law of thermodynamics, which is an expression of the principle of conservation of energy. The law expresses that energy can be transformed, i.e. changed from one form to another, but can neither be created nor be destroyed. It is usually formulated by stating that the change in the internal energy of the system is equal to the amount of heat supplied to the system, minus the amount of work performed by the system on its surroundings. However, to the extent that a successful entrepreneur draws more than proportionate output from lean inputs, whether meager financial resources, insufficient talent pool, indifferent regulatory policies or inadequate market perception, a true entrepreneur challenges the first law of thermodynamics. Drawing lessons from this, however, entrepreneurship in India would fly even higher if financing options for entrepreneurial firms are expanded substantially, talented people opt enthusiastically to support entrepreneurs, regulatory agencies provide fast-track, single window support to start-ups and expansion projects, and customers encourage indigenous entrepreneurial product and service offerings.

No two entrepreneur systems can be alike. This is because no firm, much less an entrepreneurial system, is insulated from the external eco system (as in a thermodynamic adiabatic process). Adiabatic processes of thermodynamics between two specified states of a closed system specify that the net work done is the same regardless of the nature of the closed system and the details of the process. Entrepreneurs who refuse to be insulated and introverted and in contrast excel in interacting with the eco system and in influencing to achieve positive outcomes achieve superior results. Successful entrepreneurs need to be seen, felt and experienced by various stakeholders, from employees to investors, from domestic associates to international partners, and from local governments to central government to reinforce faith in entrepreneurial capabilities. Entrepreneurs have to be sensitive to external eco systems to manage their expectations in a non-adiabatic fashion.

Systems of entrepreneurial energy calibrate with the second law of thermodynamics as well. The second law of thermodynamics is an expression of the tendency that over time, differences in temperature, pressure, and chemical potential equilibrate in an isolated physical system. From the state of thermodynamic equilibrium, the law deduces the principle of the increase of entropy and explains the phenomenon of irreversibility in nature. The second law of thermodynamics, also known as the law of increased entropy postulates the loss of matter and energy gradually over time. Usable energy of a power system is used for productivity, growth and repair. In the process, usable energy is converted into unusable energy. Thus, usable energy is irretrievably lost in the form of unusable energy. The greater the unusable energy the greater would be the inefficiency of the system. Entropy is defined, in practical thermodynamics, as a measure of unusable energy within a closed or isolated system (even, the universe as the ultimate example). As usable energy decreases and unusable energy increases, "entropy" increases. Entropy is also a gauge of randomness or chaos within a closed system. As usable energy is irretrievably lost, disorganization, randomness and chaos increase.

The second law of thermodynamics has several lessons for entrepreneurial organizations. Just as no heat engine is one hundred percent efficient, no entrepreneurial engine is totally efficient. It would be inappropriate on the part of entrepreneurs to equate their organizational energy levels to their individual energy levels. Smart and practical entrepreneurs, therefore, work to accept the theory of entropy and work towards minimizing the heat loss rather than expect the organizations to outperform their own energy levels. The second law implies that heat can never move from a colder body to a hotter body. So is it in entrepreneurial organizations; organizational teams would sap the energy of an entrepreneur unless the teams themselves are made up of high energy, entrepreneurial members. The need to look beyond the founder’s capabilities and build a high performance team, preferably also an entrepreneurial one too, is evident for the long term sustainability of entrepreneurial organizations.

The third law of thermodynamics, though much less known relative to the other two laws, is equally important for entrepreneurial organizations. It states that the entropy of a heat system attains zero when the system reaches the absolute zero temperature (Kelvin temperature of minus 273 degrees centigrade). The third law of thermodynamics means that as the temperature of a system approaches absolute zero, its entropy approaches a constant (for pure perfect crystals, this constant is zero). A pure perfect crystal is one in which every molecule is identical, and the molecular alignment is perfectly even throughout the substance. For non-pure crystals, or those with less-than perfect alignment, there will be some energy associated with the imperfections, so the entropy cannot become zero. Drawing an analogy, if an entrepreneurial organization becomes a pure perfect crystal organization, ie., an organization in which each employee has at least the same energy and talent level as the founder-entrepreneur then the entropy or loss in the system would become zero. As we can appreciate, such a pure perfect crystal organization is an impossibility. Entrepreneurs would do well, however, to seek high energy levels within their organizations to the best extent possible, providing opportunities of empowerment and business building to such members. Otherwise, as with Google and other entrepreneurial organizations, high entrepreneurial energy individuals would migrate to establish their own ventures.

Minimizing entropy and maximizing energy usage

The laws of thermodynamics are absolute physical laws - everything in the observable universe is subject to them. Like time or gravity, nothing in the universe is exempt from these laws. Human and corporate entrepreneurial systems are no exception. The laws of thermodynamics, the law of energy conservation, the law of energy loss and the law of zero entropy, urge the entrepreneurs to look beyond themselves and model their organizations around the core concept of entrepreneurial energy. Neither egoistic defiance nor fatal compliance to the entrepreneurial thermodynamics would ensure sustainability of entrepreneurial energy. Institutionalization of entrepreneurial energy through structure and talent optimizes entrepreneurial thermodynamics.

Posted by Dr CB Rao on February 7, 2011