Corporate India woke up on August 5, 2010 to the news that the Tata Group, the largest Indian industrial conglomerate, would look for a successor to group chairman Ratan Tata, who is due to retire when he turns 75 in December 2012 as per the group retirement policy, which he himself had put in place. Tata Sons, the holding company of the group, stated that it had set up a panel to begin a global search for a successor, considering external or internal candidates, to replace the veteran leader who took the Tata Group to new international glory. The Group would like to complete the search process for the Chairman by March 2011.
The 142 year-old Tata Group, founded in 1868 by Jamsetji Nusserwanji Tata and developed further by Sir Dorab Tata, has a formidable reputation for its business track record and corporate value system. Tata companies operate in seven business sectors: communications and information technology, engineering, materials, services, energy, consumer products and chemicals. They are, by and large, based in India and have significant international operations. The total revenue of Tata companies, taken together, was reportedly USD 78 billion (around Rs 358,800 crore) in 2009-10, with over 65 per cent of this coming from business outside India. The group probably employs nearly 400,000 people worldwide. The Tata name has consistently been respected over 14 long decades for its adherence to strong values and business ethics.
The legacy of Jamsetji Tata and Dorab Tata was taken to greater heights by JRD Tata who took over the reigns in 1938 (in his five decade tenure, covering the period 1938 to 1988, the Group grew from Rs 620 million to over Rs 100 billion and from 14 companies to 95 enterprises, and as a brand in itself). Ratan Tata who took over in 1991 from JRD steered the group into the international league. Ratan at that time was relatively an untested leader for the conglomerate as a whole, despite playing a role in certain Tata businesses. Ratan confounded analysts who were concerned that the different constituent companies, each with a powerful leader, would pull apart disparately. He represented continuity by preserving and institutionalizing the core Tata values but also led a positive change with a unique alchemy of consolidation, diversification, globalization and performance management.
Given the remarkable contributions of Ratan, it is not surprising that some wonder if the group would be able to find a leader who would match Ratan’s track record. Future proceedings would, no doubt, provide the answer in a positive manner, particularly in the context of the diligent manner the group has applied itself to the challenge of finding a fitting successor to Ratan Tata. The question of leadership succession, however, has connotations that are universally relevant to any firm in any industry and in any country.
Inevitability of succession
Virtuous institutions outlast capable individuals. Virtuous institutions are managerially programmed to grow. Individuals, however capable they are, on the other hand are genetically programmed and administratively ordained to retire. Leadership succession, especially at the Chief Executive Officer (CEO) level, is therefore of considerable importance. Not surprisingly, numerous books and papers have been written about the challenges and opportunities of leadership succession planning.
Some leadership successions, as with GE and now with Tata, are meticulously planned and executed to achieve remarkable continuity and growth. Some successions are accelerated when the leaders die in harness, as was the case with Dhirubhai Ambani’s Reliance group. Some successions are opportunistically handled, as with Apple when Steve Jobs returned in 1997, but are nevertheless dramatically successful. Some successions are seamlessly and consensually managed as with Infosys. A few others are cataclysmically induced, as experienced, for example, by a troubled BP with the major safety incident in Gulf, by certain Wall Street corporations that caused, or were impacted by, the global meltdown or by a highly successful HP facing a sudden CEO discharge. Various experiences teach us that leadership successions could be badly stuck in the middle unless well planned in advance, and as both cause and consequence, unable to balance change with continuity, and growth with stability.
The challenge of succession management lies in the fact that apex level leadership changes often assume larger than life dimensions, more so when charismatic incumbents are involved. A leadership succession is, more often than not, pivoted around the personalities of the incumbent leader and the new leader in terms of not merely their capabilities but also in terms of the new leader managing and exceeding the stakeholder expectations, relative to the incumbent leader. Most corporations, through their boards and shareholder expectations, create a halo around leadership succession leading to an overarching emphasis on results rather than means, and change rather than continuity.
An ancillary reason is that most leaders fail to recognize the transient nature of their own sojourn in their corporations and unwittingly make leadership and management a highly personalized effort. The more charismatic and aggressive a leader is, the more of a cult phenomenon leadership becomes in such organizations. The successor in such cases has not only a legacy that he has to live up to but also a perception that he needs to overwrite. Leaders often make it difficult for their successors to steer their companies in alignment with a changing environment. Comparisons with a larger than life Jack Welch at GE, for example, took long for an equally capable, but differently styled, Jeff Immelt to overcome.
Models of succession management
Ram Charan, in his paper, “Ending the CEO succession Crisis”, Harvard Business Review, February 2005, refers to the track record of perennial performance powerhouses such as GE and Colgate-Palmolive and points out that nothing affects a company’s future more than CEO succession. He proposes internal leadership development and active involvement by the Boards as critical components of a successful succession exercise. He recommends incorporation of certain non-negotiable aspects such as talent, know-how and experience in the process. Kenneth W Freeman in his article “The CEO’s Real Legacy”, Harvard Business Review, November 2004, states that CEOs have a mindset of being unable to imagine anyone adequately replacing them, which thus constitutes a major roadblock to timely succession. A non-egoistic effort by incumbent CEOs to initiate and manage selection and grooming of successors with effective board involvement is suggested by the author.
Manfred F R Kets De Vries in “The Dark Side of CEO Succession” Harvard Business Review, January-February 1988, examines the unconscious emotions that come into play during changes in a company’s top leadership. While any leadership change is unsettling, the incumbent CEO, board of directors and other top managers become particularly vulnerable to unconscious emotions during three specific points in the succession process. These time points relate to when the decision is taken on the need to hire a successor, when the successor is chosen and when the new CEO takes charge. Management of emotions based on knowledge of these time points is seen to promote a positive CEO transition.
General Electric has seen successful CEO successions over time. In 1981, Jack Welch succeeded Reginald Jones as the CEO in a process that was personally driven by Jones as the incumbent CEO. A significant nomination input from several likely candidates followed by in-depth interviews with candidates helped the process. Twenty years later, Jack Welch named Jeffrey Immelt as his successor based on a detailed evaluation of, and discussions with, three potential candidates. Welch focused on the values that he instilled in the GE’s management – speed, simplicity, self-confidence and boundarylessness – as filters to select. A larger discussion of the GE succession process can be had in James Heskett, “Succession at GE: What’s Next?”, Harvard Business School, Working Knowledge, November 2006.
Glaxo SmithKline’s (GSK’s) succession planning process was uniquely different. Dennis Carey et al discuss the GSK process in their paper “Picking the Right Insider for CEO Succession”, Harvard Business Review, January 2009. GSK took the daring decision of making its top three internal candidates very publicly compete with each other to become the CEO. While each was well qualified to run the business, GSK decided to ask them take on year long CEO-level projects under the discerning eyes of the directors and the incumbent CEO. The projects were individually different covering supply chain management, product safety and sales & marketing. The process was also expanded to include outsiders’ evaluation of the three candidates. The way the succession planning process was conducted at GSK resulted in the departure of the two unsuccessful candidates to their own new CEO pastures, despite efforts to retain them.
Leadership succession, not unnaturally, is a favorite topic of executive search firms as well. Max Landsberg, Head of Heidrick & Struggles’ Leadership Consulting Practice, in a 2006 paper (“In Search of Excellence in CEO Succession”) places selection of the new CEO on par with another crucial task of a Board viz., a decision to merge or sell the company. He argues that association of outside agencies helps in a structured and systematic review of all options and selection of the most appropriate choice which could also be potentially followed up with transition support. He advocates prior framing of the ‘‘persona” of the CEO to support the process. According to him, correct CEO succession can create substantial market value for the company while longer term and broader reviewing of the company’s senior executive cadre and succession pipeline can support both the selection of the next CEO, and also the strategic growth of the company.
Infosys, India’s leading information technology company, has been in the forefront of succession planning in India. It has demonstrated how a highly capable and collaborative team of founders could provide a rich pipeline of leadership succession. The principal founder and CEO, N R Narayana Murthy who founded the company with six others in 1981 passed on the baton of CEO when he was at his prime to his deputy and co-founder, Nandan M Nilekani in March 2002, and became the Chief Mentor. Nandan, in turn, passed on the CEO baton to S Gopalakrishnan, another co-founder after just after five years in June 2007. On August 10, 2010 Infosys took one more stride in orderly succession management by initiating a search for its Chief Mentor. Infosys model of collaborative leadership succession, from within the promoter group, meeting all the tests of merit, performance, stability and continuity is indeed unique even in a global context.
Not all leaders happen to be internally developed, however, in the global canvas. Internal development is a strong possibility, and an appropriate option, when companies have been on a consistent growth track. Such companies usually brim with talent and are potentially CEO factories (for example, GE, Unilever, Infosys, Tata, Proctor & Gamble). On the other hand, companies which need turnaround or which operate in highly competitive and volatile industries tend to look at experts from outside the industry to rejuvenate the businesses. Nor has it been found necessary for firms to have CEOs only from the core competency backgrounds of the firms. Allan Mulley from aircraft maker Boeing helped Ford, the automobile maker revitalize itself. Sergio Marchionne who engineered a stunning turnaround of Fiat (which was facing bankruptcy) in mid-2000s was a lawyer and accountant by qualification and practice, with a prior background in chemicals and banking sector. Pfizer, the world’s largest pharmaceuticals company is headed by a legal expert. So has been the world’s leading technology firm Intel, choosing to be led for the first time with a chief executive without a degree in science or engineering. The models of CEO succession thus defy easy classification in any fixed templates.
Ken Favaro et al, based on a study of the World’s 2500 largest public companies identified several trends in CEO succession covering the recent decade. The paper titled “CEO Succession 2000-2009: A Decade of Convergence and Compression” in Strategy + Business, Issue 59, Summer 2010, identifies four key trends that were discernable – the predominance of insiders, the split of the CEO and Chairman roles, the growth of the apprentice model (in which the new CEO’s predecessor assumes the job of board Chairman) and the consistence of CEO turnover rates. Importantly, natural and planned successions are being increasingly seen as the foundations for continued growth in difficult times.
The key aspect of leadership succession whether in successful corporations or unsuccessful corporations, and whether it is through internal development or external induction, is continued corporate growth and profitability. Equally importantly, the focus is on sustainable vitality in the face of increased volatility of economies, enhanced intensity of competition and heightened discontinuities in key technologies. The fact that an incumbent leader has a larger than life image of his or her contributions to the company’s progress puts a significant pressure on the new leader. In addition, the more high profile and the more comprehensive the succession process is, the greater would be the level of public approval or disapproval of the new leader’s performance. These factors bring to the fore issues in management of continuity and change arising out of leadership succession. All these issues would be further amplified in the case of succession to the top position in a conglomerate.
Recent research by Bain & Company, the noted management consulting firm, that was based on a study of 44 top Indian firms suggested that only one in five board members was even involved in talks about a CEO’s succession and little effort was made at board level to groom top leadership. By comparison, more than 60 percent of the boards at the top-ranked S&P 500 companies in the US are said to discuss CEO succession at least once a year and 80 percent of these companies have emergency succession plans in place. Building on the report, Financial Times (August 7/August 8, 2010; “beyond brics:www.ft.com/bb) stated that lack of succession planning was a key failure of boards at many family-owned businesses in India, leaving them highly vulnerable after the retirement or loss of their leaders. According to the paper, such an omission is a drag on investor appeal for many of India’s largest, fast-expanding companies. Indecision on leadership has led to family disputes that have split or disrupted companies.
The announcement by the Tata group to find a successor for Mr Ratan Tata, several months ahead of his planned retirement (to enable the successor work with Ratan and then takeover in full) demonstrates the progress the Indian businesses can make in terms of succession planning. Considering that large industrial houses and firms are grown typically by established business families and self-made entrepreneurs, the challenges of planned succession are all the greater in India. While the Tata Group and Infosys have been ahead of the rest in the systematization and professionalization of the succession issues, others such as the Birla group, Murugappa Group, Godrej group, GMR group, HCL group, Apollo group and Bharti group have started putting in place governance structures and processes to not only plan a successor, whether from the promoter group or from the non-promoter group, but also to ensure an appropriate demarcation between the promoters and the firms that they helped promote.
Tatas’ model of succession management
The review of literature on succession suggests that the more planned and the more contextual the succession is, the greater is the likelihood of its success. There can, therefore, be no singular model of succession that can be adopted by all firms. On the other hand, the right parameters for selection of the successor become paramount for each firm. Depending on the strategic needs of the firm which could range from turnaround to ramp-up on one hand and from efficiency to innovation on the other the screens for selection of the successor could also vary; relevant screens, however, are essential.
Boards and search agencies often attempt to err on the safe side by defining too idealistic a persona for the future CEO. Maxs Landsberg of Heidrick & Struggles, for example, in the earlier quoted paper rhetorically prescribes ten dimensions on which he expects leadership from an ideal CEO. He defines the ten persona of the CEO as Grand Master of Corporate Strategy, Chief Architect of the Corporate Structure, Vocal Exponent of the Corporate Values, Rigorous Shaper of the Talent Portfolio, Inspiring Forger of Exemplary Top Teamwork, Brahma-Creator; Vishnu-Maintainer; Shiva-Destroyer, Scrutineer of Quality Customer Service, Executive Settler of Disputes and Resolver of Dilemmas, Umblical Cord to Chairman and Board, and Fluent Spokesperson to the World. It appears that such a prescription is not only utopian but also off-mark in today’s competitive and unpredictable environment.
A more appropriate hypothesis is that the successful CEO of this generation requires a contextually appropriate mindset rather than a theoretically winning skill-set. The components of the CEO mindset include an ability to tailor corporate strategy to a volatile environment, a flexibility to constantly realign the organization structure to a dynamic strategy, a penchant to institutionalize operational excellence, a passion to leverage science and technology for new products and processes, a flair to connect with all stakeholders, a promise to provide an enriched work environment to employees, an evangelical commitment to quality and most importantly, balancing change with continuity. The CEO’s role is increasingly going to be mind-play rather than skill-deployment.
To validate the above hypothesis, one would need to only look at how Ratan Tata redefined Tata Group ever since he took over the reigns in 1991, confounding the analysts who doubted if he had the required skill-set for steering a highly diversified group of companies. Over and over again, it was Ratan’s mindset that led to appropriate strategies that grew as well as coalesced over hundred companies of the group into the largest Indian conglomerate. Aligning the virtually independent companies and leaders of the group to a common credo (Tata branding, values and retirement age), fusing indigenization with innovation (Indica and Nano cars , Sumo and Safari SUVs, Ace trucks), empowering individual companies to undertake ambitious global acquisitions (Tetley, Corus, Daewoo, Jaguar, Land Rover assets and marques), scaling up companies to top national and international rankings (Tata Motors, Tata Steel, Tata Consultancy Services) and numerous other business initiatives have been primarily a resultant of a winning Indian mindset that spurred bold and innovative strategies.
HBS professors Tarun Khanna and Krishna G. Palepu, authors of the new book “Winning in Emerging Markets: A Road Map for Strategy and Execution”, Harvard Business Press, 2010, speak glowingly of the contribution Ratan Tata made to the Tata Group and how it could become a role model for emerging markets. As they observe, when markets in India opened in 1992, around the time Ratan Tata became the Chairman of the group, the Tata Group had been in existence for more than a hundred years. Yet as a sprawling, diversified business group spanning nearly 100 businesses, each of which was not performing up to its full potential, it was uncompetitive. According to them, the Chairman of the group, Ratan Tata, creatively reorganized the group to make it survive in the new open global economy, and then challenged the individual companies to innovate. At the same time, Ratan Tata motivated his companies to think globally, attempting some of the never-before global acquisitions. Khanna and Palepu are right when they conclude that the Tata Group is a great example of a company that transformed itself from a successful company in a closed, local environment to a fairly aggressive player that has fostered innovation and globalization in almost a trendsetting manner in a completely different, globalized environment of rapid growth and extreme competition.
Change with continuity model
At the core of Ratan Tata’s success has been the plank of change with continuity. Following serves as an effective model of change with continuity, on a foundation of the basic Tata philosophy that the group is a trustee of the wealth that the group creates for the nation.
Investment + divestment. When Ratan took over he inherited a large diversified group of businesses. Rather than abandon the diversification strategy, he defined core businesses and reinforced them (for example, automobiles, steel, beverages, chemicals, information technology, hotels) even as he exited non-core businesses (for example, generic pharmaceuticals, soaps and detergents) and entered into new potential businesses (for example, retail, realty, telecommunications, infrastructure). Divestment of non-core was not seen as a failure to compete; it was seen more as a strategy to make the group more competent and competitive as a whole.
Consolidation + professionalization. The striking feature of the Tata group of companies in the 1980s was that most of these were led by leaders who were stalwarts in their own ways but were also highly independent. This acted to the detriment of group cohesion often. Ratan not only reigned in the individualism of the leaders but also reinforced professionalism in the group through structured retirement and succession policies as well as induction of external talent (for example, Sumatran and Ravi Kant for Tata Motors, Gopalakrishnan for Tata Sons and a few experienced expats from time to time). All through, considerable emphasis was laid in taking forward the legacy of building internal leadership talent left behind by Jamsetji, Dorab and JRD.
Growth + security. When Ratan Tata took over, the holdings of the Tatas in the group companies were in low teen percentages, making the companies vulnerable to takeovers in an economy set to open up. While the public fascination for the indigenous Tata ownership was a powerful counter to takeover attempts, he recognized that more structural defences were needed. He quickly reinforced the capital structure of the holding company, Tata Sons as well as its holdings in the group companies. Limited divestments in non-core businesses were utilized to reinforce equity consolidation. This, coupled with aggressive global acquisitions required the group to be financially bold as well as prudent in terms of global fund raising, which was also accomplished.
Globalization + acquisitions. Ratan’s key change driver has been in the group’s approach towards globalization. From 2002, the group pursued a strategy of aggressive globalization acquiring overseas companies, businesses and brands. These important acquisitions and mergers were aimed at expanding and globalizing the footprints of core companies. Close to USD 5 billion was spent by the group between 2002 and 2010 in nearly 70 mergers and acquisitions across the globe, including such high profile ones as Tetley Tea, Corus Steel, Daewoo, JLR and Hispano. Almost all of these have been successful reflecting positively on the group’s technical and managerial capabilities to integrate new businesses and operations.
Innovation + competitiveness. Scale, scope and technology were used by Ratan to make the group competitive as well as innovative. It has always been in the DNA of the Tata group to be pioneering, whether it was putting up a steel mill in the British-occupied India in early 1900s, introducing new commercial vehicles in the 1970s and 1980s, developing the first indigenous car in the 1990s and ultimately launching the world’s cheapest family car in the 2000s. With Ratan at the helm, the latter day innovations have sought to promote self-reliance, functionality and affordability for making greater numbers of Indians happy, as a true tribute to the expressed philosophy of JRD Tata.
The ten-element strategic framework as above could be effectively practised by Ratan Tata with institutional support in his office, through the Group Executive Office (GEO) and Group Corporate Centre (GCC). The former conducts strategic analysis and develops strategic decisions while the latter provides policy support and conducts portfolio and business reviews. These two entities, chaired by Ratan Tata have the top Tata leaders, R K Krishnakumar, Ishaat Hussain, Kishor Chaukar, J J Irani, R Gopalakrishnan, and Arunkumar Gandhi as their members.
Summary
India’s Tata Group has demonstrated, independent of Western management thought and practice, for several decades that Indian entrepreneurs and professionals of the Group can create a world-class conglomerate as an inspired national endeavor and with an unflinching social purpose. Ratan Tata’s growth model based on change with continuity is an eminently commendable model for effective succession management. Under the overarching umbrella of Tata vision with values, the ten self-balanced components of refining core with divesting non-core, leadership consolidation with professionalization, business growth with ownership security, globalization with acquisitions, and innovation with competitiveness, a uniquely Indian, and a characteristically Tata-stamped succession model has been brought to the fore.
It is a moot point whether the successor to Ratan Tata would follow, or would need to follow, the business strategy established by Ratan Tata in a rapidly changing global environment. Whether the successor would need to discover new core businesses such as clean and alternate energy generation, aerospace and satellite businesses, infrastructure building and management, healthcare and life sciences, and in doing so would need to adopt different strategic planks is a matter for the future. What can be certainly predicted is that the Tata Group would continue to aim at conglomerate leadership with social trust, and the successor to Ratan Tata would achieve success by following the proven succession model of “change with continuity”.
Posted by Dr CB Rao on August 9, 2010.
Monday, August 9, 2010
Tuesday, August 3, 2010
Employee Value Credits: Driving Organizational Transformation
Employee engagement is a critical component of organizational transformation. Genuine employee engagement aligns the employees to organizational goals, enhances the employee capabilities and builds the competitive advantage of the company. It is not surprising therefore that employee engagement is on the agenda of experts and leaders in human resources management. Yet, there are very few cases where employee engagement has been institutionalized as an effective and sustainable business process, with a universal coverage of all the employees.
The roadblocks to authentic employee engagement are many. Oftentimes it is implemented as a top-down communication program, largely driven through supervisors and managers. It is also mixed up with the goal setting and performance appraisal exercise. Many times, multiple company-wide initiatives are taken which leave the employee confused and bereft of focus. Reliance is placed also on external consultants who may lack the business grasp and individual empathy. Amongst the various roadblocks, an excessive dependence on performance appraisal system as an employee engagement tool turns out to be the most problematic.
Over the years, multiple approaches have been attempted to make the appraisal system broad-based and participatory. However, these merely have resulted in larger appraisal forms and increase in the number of appraisers than in more effective employee engagement. The reasons are not far to seek. The appraisal systems, whatever the hue, focus essentially on individual performance. Given the large employee numbers they tend to be only annual, and at best semi-annual, processes. Even more unfortunately, the appraisal systems tend to get tied to compensation increases and promotions, often bringing in a conformance pressure, related to the growth expectations of the employees and business compulsions of the company.
Expert views on engagement
Expert studies on employee engagement point to complex nuances that connect or disconnect employee engagement and employee motivation. These range from simple incentive-engagement linkage theories to more complex multi-factorial behavioral theories. Five important alternative theories are summarized below.
Jody Heymann in his book, “Profit at the Bottom of the Ladder: Creating Value by Investing in Your Workforce”, HBS Business Press, May 2010, holds that there is a demonstrated advantage in overall business performance among high-engagement companies compared with their low-engagement counterparts. According to him, it is time to unlock the potential increase in customer satisfaction, commercial sales, and diminished turnover rates that engaging and motivating low-level employees can bring, even in an economic downturn. He commends design of a customized incentive program that will increase the engagement and motivation of employees at all levels. He provides several approaches that can be tailored to almost every budget and business model, from all-expenses-paid company vacations to simple public recognition of a job well done. In this approach engagement is correlated with employee incentive and reward programs.
Kenneth W Thomas in his paper, “The Four Intrinsic Rewards that Drive Employee Engagement”, Ivey Business Journal, November/December 2009, suggests that extrinsic rewards like pay and bonus as well as other financial incentives are no longer sufficient to achieve employee engagement and motivation. He proposes a framework of four intrinsic rewards. These are: the meaningfulness or importance of the purpose the employee is trying to fulfill, the choice of work activities to fulfill the purpose, the feeling of competence and high quality delivery in performing the work, and the recognition that the purpose is fulfilled through performance. Managements which facilitate and encourage self-management by employees are seen to create high-engagement culture in organizations resulting in high performance.
In the case commentary titled “Why are We losing Our Good People”, Harvard Business Review, June 2008, Edward E Lawler III brings forth, through four experts, as to how empathy and rapport constitute the cornerstone of employee engagement. One expert commends establishment of a forum where employees can freely, and without fear of repercussions, express their concerns and apprehensions. Another expert suggests that the most important contributor to employees’ emotional commitment is a sense of connection to the company’s mission, and the company’s culture and values. The third expert suggests simplicity of management structure, clarity of corporate mission and equity in employee compensation as essential for effective employee engagement. The fourth expert concludes that an open door communication policy should be supplemented by holding leaders accountable to attracting and retaining good talent.
Nitin Nohria et al in their article, “Employee Motivation: A Powerful New Model”, Harvard Business Review, July 01, 2008, hold that the ability of an employee to comprehend is directly linked to the engagement he has. Specifically, they define engagement as reflective of the energy, effort and initiative employees bring to their jobs. Clearly, the more engaged the employees are the greater could be the performance impact. Nitin Nohria and his co-authors, however, caution against simple correlation. According to them, engagement is but one component of four factors, namely engagement, satisfaction, commitment and intention to quit that influence employee motivation. They believe that each of the four emotional levers would need to be differently pulled to achieve the right employee motivation.
A dramatically novel concept of “employees first” is now propounded by Vineet Nayar through a stirring case study of HCL Technologies Ltd, an Indian information technology major in his book “Employees First, Customers Second: Turning Conventional Management Upside Down”, HBS Press, June 2010. Vineet Nayar who is HCL’s successful CEO describes how the company defied conventional wisdom of customers first and then turned the hierarchical pyramid upside down by making management accountable to the employees first. This strategy, backed by a culture of trust based transparent communication and information sharing, created a sense of urgency and involvement in the employees, empowered them and unlocked their potential. The engagement strategy fostered an entrepreneurial mind-set, decentralized decision making and transferred the ownership of change to the employee in the value zone, according to Vineet.
Though the above five schools of thought appear to capture diverse possibilities on employee engagement, they may not offer the required framework for authentic employee engagement. The compensation and incentive linked approach is too simplistic to be of sustainable benefit while the employee-first approach is too radical for universal adoption by all companies. The mid-way behavioral approaches tend to be abstract and require leadership nuances that are unlikely to be widespread in organizations.
The Paradox of employee engagement
The opportunity in authentic engagement is that the typical employee has the intrinsic capability and aptitude to contribute to his or her organization’s processes and activities in more ways than the formal job profile demands of him or her. This, of course, is subject to the caveat that the organization has good recruitment filters which selects higher percentile candidates and has, in addition, comprehensive on-boarding practices that enable employees acquire a good grasp of the company’s business and operations. However, the challenge in a permissive system of letting employees contribute in multifarious directions is that it could lead to dilution of core responsibilities to the detriment of the goals that an organization must fulfill in a focused manner.
The paradox of employee engagement lies in terms of balancing the creativity of an employee with the focus of the organization. Over a period of time, the more creative an employee is allowed to be, the more diffused his role is likely to be; on the other hand the more focused an employee is expected to be, the less creative he is likely to become. The organization and leadership have the responsibility to solve this paradox in a comprehensive and sustainable manner to unlock employee creativity without compromise to the focus of the organization.
Such an approach needs to develop a canvas that is larger and more impactful than quality circles, suggestion schemes or idea initiatives. All of such schemes whose utility has been well established are specific and relevant to the jobs the employees carry out, and would need to be continued, regardless of any larger initiative for capturing employee creativity and seeking employee engagement. The proposed framework called employee value credits is a well-guided but open-sky initiative that enables an employee to be creative with no restrictions but at the same time prevents diffusion of focus.
Employee Value Credits – the framework
The fundamental premise of the employee value credit framework is that each employee will have the capability and plan to contribute in several areas that are not only directly or indirectly connected with the job but also some which could be currently out-of-organizational orbit but may have value at a future point of time. Each employee contributing in such a manner would be motivated to contribute only when an appropriate recognition is provided. As one is aware, the only three classic motivated aids that are available are on-the-job implementation, monetary reward and non-monetary reward.
All the three motivational tools have limitations vis-à-vis the need for authentic and global employee engagement. On-the-job implementation of new ideas is doubtless highly satisfying to an employee but the ideas that can be implemented under this route tend to be few. Monetary rewards can also be only limited in scope and in some cases may be better spent only after the real value of the engagement process is demonstrated. Non-monetary rewards by way of appreciation letters or public celebration tend to have only a transient ‘feel good’ factor. The framework of employee value credits, on the other hand, provides a robust and sustainable mechanism for employee engagement and motivation.
The theory of authentic employee engagement is based on the following five core principles, each being of equal importance and priority:
1. Creative: Employee engagement brings out the creativity in each employee, and enables him or her to contribute to the organization through not only operational performance but also through creative value-add.
2. Expansive: Employee engagement grows on the employee and the organization in an expansive manner, and enables the employee and the organization relate to each other not only on the job but also off the job.
3. Collaborative: Employee engagement breaks down the silos (individual versus individual, individual versus company, and domain versus domain), and enables the employees contribute through collaboration.
4. Expressive: Employee engagement removes fear and diffidence and enables both the engager and the engaged become expressive, and helps employees bring out the latent issues clearly and powerfully.
5. Timeless: Employee engagement is not about finding quick-fix and rapid-fire solutions to current needs; it is all about creating a bank of ideation value from which ideas can be tapped as their time dawns on the horizon.
Clearly, the principles do not become operational by themselves. The leadership of an organization must demonstrate its commitment to genuine employee engagement by a set of policies. First, it must make clear that employee engagement is not an opportunistic initiative solely to aid performance. To reinforce such a perspective, all performance improvement initiatives (example, suggestion schemes) which are job focused must be allowed to continue. Second, it must choose the mentors, or the engagers, in the engagement process carefully. To ensure this, the choice of engagers needs to be made a prestigious matter. Third, an institutional framework needs to be created to collect, receive, and analyze as well as credit the employee inputs for inherent or potential value. The framework of Employee Value Credits makes this happen.
Institutionalizing the EVC framework
The framework of Employee Value Credits starts with the creation of a dedicated department, headed by a leader positioned as a direct report to the chief executive officer. The leader of the EVC department (EVCD) should be a seasoned, empathetic mentor with an outstanding grasp of the current businesses and a good understanding of the related and substitute businesses. He should have the resilience and flair for building value for tomorrow. EVCD should be manned by professionals who have subject expertise corresponding to the functions and domains that exist in the company’s value chain with excellent conceptual and analytical capabilities.
EVCD has the responsibility, along with the human resources department to propound, articulate and propagate the concept of employee value credits and the processes that enable employee engagement and value generation. EVCD also shall have the responsibility to seek, identify and coach the engagers to enable them conduct the employee engagement process in the optimal manner. EVCD should have the authority to identify and course-correct the functions, domains and businesses which are tepid to the concept of employee engagement.
The employee value credit processes can be institutionalized through a set of guiding principles as set out below.
Responsible department: EVCD shall be primarily responsible for assigning employee value credits to the ideas, plans and programs that are generated by the employees across the organization. Employee value credit is the value that is assigned by the EVCD to each idea of an employee after due consideration and analysis.
Value definition: Value is defined as incremental revenue generated by an employee idea (that is profit adjusted) divided by the incremental capital investment required for implementing the idea. Each one million dollar of value, for example, could qualify for one value credit in a large organization. Profit adjustment of revenue is achieved by dividing the revenue by the gross margin percentage. Ideas with less than ten percent gross margin may not qualify for the value credit mechanism.
Value target: Depending upon the value chain, each business, domain or function (called employee entity) shall be eligible for setting for itself a value credit target for the year. EVCD shall have the responsibility and authority to negotiate value credit targets for each employee entity. The setting of value credit targets shall be a wholly voluntary process.
Iterative process: Each employee entity shall have the flexibility to accept individual employee value credit targets as part of the overall employee entity value credit target setting process. Ideally, it shall be an iterative bottom-up and top-down process with active participation by employee entity leadership and EVCD.
Evaluation: As employees provide their ideas to EVCD, which need not necessarily be subject to clearance by hierarchy, EVCD shall evaluate and provide value credits to the individual suggestions. For each employee and employee entity such value credits shall be grossed up over the year. At the end of the year EVCD shall publish the grossed up value credits for each employee entity and employee.
Tradability: Employees shall be able to trade their value credits at the end of each year for cash compensation during the annual appraisal processes or retain and accumulate them for future encashment or for retirement benefit. Employee entities can trade their gross value credits for special allocations beyond the normal budgeting allocations. This system would provide incentives to employees at individual level and to employee entities at corporate level.
Enhancements: There could be sophistications added to the value credit process by differentiating between ideas that have short term impact (say, within one to two years) and those which would have medium and long term impact (say, three years and beyond). Obviously, different credit systems need to be adopted between the two categories.
Flexibility: The value credit system could be refined to provide fixed credits for ideas with short term impact and minimal forecasting uncertainty, and scalable credits (basal plus variable) for ideas with long term impact and maximal forecasting uncertainty.
Collaboration: There could be functions and domains (such as corporate planning, industrial engineering) which could have certain advantages in ideation by virtue of their functional specialization. At the same time, they would need technical inputs to succeed well in their jobs. Entity value credits could be exchanged between such employee entities reflecting the mutual exchange of inputs.
When operated as a continuous process, the employee value credits framework helps the organizations achieve authentic employee engagement, unlock employee creativity, achieve employee motivation and enhance corporate growth.
Summary
The Employee Value Credit framework recognizes the intrinsic capability of all employees to be creative, collaborative and value adding. It also recognizes that not all ideas are borne equal; nor can they be treated equal. Employee value credit framework recognizes that ideas can be for current business development or could be for future businesses and accordingly provides for the needed flexibility. It rewards intellectual capability of employees at individual level and that of employee entities at aggregate level.
The Employee Value Credit framework provides incentives that are appropriate to individuals through value credit linked compensation and to departments through additional budgetary allocations to implement their plans. Needless to add, the creation of Employee Value Credit Department with an effective leadership will be a key trigger for implementation of this framework. In the overall, the employee value credits framework, when institutionalized, will create an organizational eco-system that is creative, participatory and collaborative for corporate growth.
Posted by Dr CB Rao on August 3, 2010
The roadblocks to authentic employee engagement are many. Oftentimes it is implemented as a top-down communication program, largely driven through supervisors and managers. It is also mixed up with the goal setting and performance appraisal exercise. Many times, multiple company-wide initiatives are taken which leave the employee confused and bereft of focus. Reliance is placed also on external consultants who may lack the business grasp and individual empathy. Amongst the various roadblocks, an excessive dependence on performance appraisal system as an employee engagement tool turns out to be the most problematic.
Over the years, multiple approaches have been attempted to make the appraisal system broad-based and participatory. However, these merely have resulted in larger appraisal forms and increase in the number of appraisers than in more effective employee engagement. The reasons are not far to seek. The appraisal systems, whatever the hue, focus essentially on individual performance. Given the large employee numbers they tend to be only annual, and at best semi-annual, processes. Even more unfortunately, the appraisal systems tend to get tied to compensation increases and promotions, often bringing in a conformance pressure, related to the growth expectations of the employees and business compulsions of the company.
Expert views on engagement
Expert studies on employee engagement point to complex nuances that connect or disconnect employee engagement and employee motivation. These range from simple incentive-engagement linkage theories to more complex multi-factorial behavioral theories. Five important alternative theories are summarized below.
Jody Heymann in his book, “Profit at the Bottom of the Ladder: Creating Value by Investing in Your Workforce”, HBS Business Press, May 2010, holds that there is a demonstrated advantage in overall business performance among high-engagement companies compared with their low-engagement counterparts. According to him, it is time to unlock the potential increase in customer satisfaction, commercial sales, and diminished turnover rates that engaging and motivating low-level employees can bring, even in an economic downturn. He commends design of a customized incentive program that will increase the engagement and motivation of employees at all levels. He provides several approaches that can be tailored to almost every budget and business model, from all-expenses-paid company vacations to simple public recognition of a job well done. In this approach engagement is correlated with employee incentive and reward programs.
Kenneth W Thomas in his paper, “The Four Intrinsic Rewards that Drive Employee Engagement”, Ivey Business Journal, November/December 2009, suggests that extrinsic rewards like pay and bonus as well as other financial incentives are no longer sufficient to achieve employee engagement and motivation. He proposes a framework of four intrinsic rewards. These are: the meaningfulness or importance of the purpose the employee is trying to fulfill, the choice of work activities to fulfill the purpose, the feeling of competence and high quality delivery in performing the work, and the recognition that the purpose is fulfilled through performance. Managements which facilitate and encourage self-management by employees are seen to create high-engagement culture in organizations resulting in high performance.
In the case commentary titled “Why are We losing Our Good People”, Harvard Business Review, June 2008, Edward E Lawler III brings forth, through four experts, as to how empathy and rapport constitute the cornerstone of employee engagement. One expert commends establishment of a forum where employees can freely, and without fear of repercussions, express their concerns and apprehensions. Another expert suggests that the most important contributor to employees’ emotional commitment is a sense of connection to the company’s mission, and the company’s culture and values. The third expert suggests simplicity of management structure, clarity of corporate mission and equity in employee compensation as essential for effective employee engagement. The fourth expert concludes that an open door communication policy should be supplemented by holding leaders accountable to attracting and retaining good talent.
Nitin Nohria et al in their article, “Employee Motivation: A Powerful New Model”, Harvard Business Review, July 01, 2008, hold that the ability of an employee to comprehend is directly linked to the engagement he has. Specifically, they define engagement as reflective of the energy, effort and initiative employees bring to their jobs. Clearly, the more engaged the employees are the greater could be the performance impact. Nitin Nohria and his co-authors, however, caution against simple correlation. According to them, engagement is but one component of four factors, namely engagement, satisfaction, commitment and intention to quit that influence employee motivation. They believe that each of the four emotional levers would need to be differently pulled to achieve the right employee motivation.
A dramatically novel concept of “employees first” is now propounded by Vineet Nayar through a stirring case study of HCL Technologies Ltd, an Indian information technology major in his book “Employees First, Customers Second: Turning Conventional Management Upside Down”, HBS Press, June 2010. Vineet Nayar who is HCL’s successful CEO describes how the company defied conventional wisdom of customers first and then turned the hierarchical pyramid upside down by making management accountable to the employees first. This strategy, backed by a culture of trust based transparent communication and information sharing, created a sense of urgency and involvement in the employees, empowered them and unlocked their potential. The engagement strategy fostered an entrepreneurial mind-set, decentralized decision making and transferred the ownership of change to the employee in the value zone, according to Vineet.
Though the above five schools of thought appear to capture diverse possibilities on employee engagement, they may not offer the required framework for authentic employee engagement. The compensation and incentive linked approach is too simplistic to be of sustainable benefit while the employee-first approach is too radical for universal adoption by all companies. The mid-way behavioral approaches tend to be abstract and require leadership nuances that are unlikely to be widespread in organizations.
The Paradox of employee engagement
The opportunity in authentic engagement is that the typical employee has the intrinsic capability and aptitude to contribute to his or her organization’s processes and activities in more ways than the formal job profile demands of him or her. This, of course, is subject to the caveat that the organization has good recruitment filters which selects higher percentile candidates and has, in addition, comprehensive on-boarding practices that enable employees acquire a good grasp of the company’s business and operations. However, the challenge in a permissive system of letting employees contribute in multifarious directions is that it could lead to dilution of core responsibilities to the detriment of the goals that an organization must fulfill in a focused manner.
The paradox of employee engagement lies in terms of balancing the creativity of an employee with the focus of the organization. Over a period of time, the more creative an employee is allowed to be, the more diffused his role is likely to be; on the other hand the more focused an employee is expected to be, the less creative he is likely to become. The organization and leadership have the responsibility to solve this paradox in a comprehensive and sustainable manner to unlock employee creativity without compromise to the focus of the organization.
Such an approach needs to develop a canvas that is larger and more impactful than quality circles, suggestion schemes or idea initiatives. All of such schemes whose utility has been well established are specific and relevant to the jobs the employees carry out, and would need to be continued, regardless of any larger initiative for capturing employee creativity and seeking employee engagement. The proposed framework called employee value credits is a well-guided but open-sky initiative that enables an employee to be creative with no restrictions but at the same time prevents diffusion of focus.
Employee Value Credits – the framework
The fundamental premise of the employee value credit framework is that each employee will have the capability and plan to contribute in several areas that are not only directly or indirectly connected with the job but also some which could be currently out-of-organizational orbit but may have value at a future point of time. Each employee contributing in such a manner would be motivated to contribute only when an appropriate recognition is provided. As one is aware, the only three classic motivated aids that are available are on-the-job implementation, monetary reward and non-monetary reward.
All the three motivational tools have limitations vis-à-vis the need for authentic and global employee engagement. On-the-job implementation of new ideas is doubtless highly satisfying to an employee but the ideas that can be implemented under this route tend to be few. Monetary rewards can also be only limited in scope and in some cases may be better spent only after the real value of the engagement process is demonstrated. Non-monetary rewards by way of appreciation letters or public celebration tend to have only a transient ‘feel good’ factor. The framework of employee value credits, on the other hand, provides a robust and sustainable mechanism for employee engagement and motivation.
The theory of authentic employee engagement is based on the following five core principles, each being of equal importance and priority:
1. Creative: Employee engagement brings out the creativity in each employee, and enables him or her to contribute to the organization through not only operational performance but also through creative value-add.
2. Expansive: Employee engagement grows on the employee and the organization in an expansive manner, and enables the employee and the organization relate to each other not only on the job but also off the job.
3. Collaborative: Employee engagement breaks down the silos (individual versus individual, individual versus company, and domain versus domain), and enables the employees contribute through collaboration.
4. Expressive: Employee engagement removes fear and diffidence and enables both the engager and the engaged become expressive, and helps employees bring out the latent issues clearly and powerfully.
5. Timeless: Employee engagement is not about finding quick-fix and rapid-fire solutions to current needs; it is all about creating a bank of ideation value from which ideas can be tapped as their time dawns on the horizon.
Clearly, the principles do not become operational by themselves. The leadership of an organization must demonstrate its commitment to genuine employee engagement by a set of policies. First, it must make clear that employee engagement is not an opportunistic initiative solely to aid performance. To reinforce such a perspective, all performance improvement initiatives (example, suggestion schemes) which are job focused must be allowed to continue. Second, it must choose the mentors, or the engagers, in the engagement process carefully. To ensure this, the choice of engagers needs to be made a prestigious matter. Third, an institutional framework needs to be created to collect, receive, and analyze as well as credit the employee inputs for inherent or potential value. The framework of Employee Value Credits makes this happen.
Institutionalizing the EVC framework
The framework of Employee Value Credits starts with the creation of a dedicated department, headed by a leader positioned as a direct report to the chief executive officer. The leader of the EVC department (EVCD) should be a seasoned, empathetic mentor with an outstanding grasp of the current businesses and a good understanding of the related and substitute businesses. He should have the resilience and flair for building value for tomorrow. EVCD should be manned by professionals who have subject expertise corresponding to the functions and domains that exist in the company’s value chain with excellent conceptual and analytical capabilities.
EVCD has the responsibility, along with the human resources department to propound, articulate and propagate the concept of employee value credits and the processes that enable employee engagement and value generation. EVCD also shall have the responsibility to seek, identify and coach the engagers to enable them conduct the employee engagement process in the optimal manner. EVCD should have the authority to identify and course-correct the functions, domains and businesses which are tepid to the concept of employee engagement.
The employee value credit processes can be institutionalized through a set of guiding principles as set out below.
Responsible department: EVCD shall be primarily responsible for assigning employee value credits to the ideas, plans and programs that are generated by the employees across the organization. Employee value credit is the value that is assigned by the EVCD to each idea of an employee after due consideration and analysis.
Value definition: Value is defined as incremental revenue generated by an employee idea (that is profit adjusted) divided by the incremental capital investment required for implementing the idea. Each one million dollar of value, for example, could qualify for one value credit in a large organization. Profit adjustment of revenue is achieved by dividing the revenue by the gross margin percentage. Ideas with less than ten percent gross margin may not qualify for the value credit mechanism.
Value target: Depending upon the value chain, each business, domain or function (called employee entity) shall be eligible for setting for itself a value credit target for the year. EVCD shall have the responsibility and authority to negotiate value credit targets for each employee entity. The setting of value credit targets shall be a wholly voluntary process.
Iterative process: Each employee entity shall have the flexibility to accept individual employee value credit targets as part of the overall employee entity value credit target setting process. Ideally, it shall be an iterative bottom-up and top-down process with active participation by employee entity leadership and EVCD.
Evaluation: As employees provide their ideas to EVCD, which need not necessarily be subject to clearance by hierarchy, EVCD shall evaluate and provide value credits to the individual suggestions. For each employee and employee entity such value credits shall be grossed up over the year. At the end of the year EVCD shall publish the grossed up value credits for each employee entity and employee.
Tradability: Employees shall be able to trade their value credits at the end of each year for cash compensation during the annual appraisal processes or retain and accumulate them for future encashment or for retirement benefit. Employee entities can trade their gross value credits for special allocations beyond the normal budgeting allocations. This system would provide incentives to employees at individual level and to employee entities at corporate level.
Enhancements: There could be sophistications added to the value credit process by differentiating between ideas that have short term impact (say, within one to two years) and those which would have medium and long term impact (say, three years and beyond). Obviously, different credit systems need to be adopted between the two categories.
Flexibility: The value credit system could be refined to provide fixed credits for ideas with short term impact and minimal forecasting uncertainty, and scalable credits (basal plus variable) for ideas with long term impact and maximal forecasting uncertainty.
Collaboration: There could be functions and domains (such as corporate planning, industrial engineering) which could have certain advantages in ideation by virtue of their functional specialization. At the same time, they would need technical inputs to succeed well in their jobs. Entity value credits could be exchanged between such employee entities reflecting the mutual exchange of inputs.
When operated as a continuous process, the employee value credits framework helps the organizations achieve authentic employee engagement, unlock employee creativity, achieve employee motivation and enhance corporate growth.
Summary
The Employee Value Credit framework recognizes the intrinsic capability of all employees to be creative, collaborative and value adding. It also recognizes that not all ideas are borne equal; nor can they be treated equal. Employee value credit framework recognizes that ideas can be for current business development or could be for future businesses and accordingly provides for the needed flexibility. It rewards intellectual capability of employees at individual level and that of employee entities at aggregate level.
The Employee Value Credit framework provides incentives that are appropriate to individuals through value credit linked compensation and to departments through additional budgetary allocations to implement their plans. Needless to add, the creation of Employee Value Credit Department with an effective leadership will be a key trigger for implementation of this framework. In the overall, the employee value credits framework, when institutionalized, will create an organizational eco-system that is creative, participatory and collaborative for corporate growth.
Posted by Dr CB Rao on August 3, 2010
Sunday, July 11, 2010
Decision Making: Perspectives and Platforms
Decision making is perhaps the most critical of the various managerial processes. An organization which is able to take purposive, focused and timely decisions is likely to fare better than organizations which are unfocused, dysfunctional and slow in decision making. Decision making has its pitfalls regardless of the size of the organization. Smaller companies have typically fewer stakeholders for decisions and tend to be adventurous and hasty in decision making. Larger companies have multiple stakeholders for decisions and tend to be conservative and complacent in decision making. As businesses become larger and more complex with increased competition, decision making emerges as a source of competitive advantage or disadvantage for the corporations depending on how well or how poorly decisions are taken.
Multiple schools
Decision making has been a fertile domain for consultants and practitioners to operate in. The field has spawned landmark contributions from the 1960s to date. Harvard Business Review became the home for several leading papers such as “The Effective Decision” by Peter Drucker (January 01, 1967), “Interpersonal Barriers to Decision Making” by Chris Argyris (March 01, 1966), “Hidden Traps in Decision Making” by Ralph L Keeney et al (January 01, 2006) and “Who Has the D? How Clear Decision Roles Enhance Organizational Performance” by Paul Rogers and Marcia Blenko (January 01, 2006).
Equally, journals have sprung up dedicated to decision making in different domains: The Journal of Decision Making, Strategic Decision Making, Management Decision, Journal of Behavioral Decision Making, Journal of Cognitive Engineering and Decision Making, The Journal of Financial Decision Making, International Journal of Decision Support Systems, Medical decision Making, The Journal of Financial Decision Making, International Journal of Management and Decision Making, and International Journal of Information Technology and Decision Making to quote a few.
It is no surprise that the field of decision making has spawned multiple schools of thought. Some organizational experts consider that the business structure and the organization structure that a corporation adopts have a significant bearing on the decision making effectiveness. Some others consider that the managerial processes and leadership styles of profoundly influence the decision making effectiveness. A few others consider all the four as critical influencers. Another school of thought segments decisions as strategic, operational or tactical and recommends different decision making structures for the three different types of decisions.
In addition to the above there are administrative, behavioral and informational approaches. Administrative school believes that the decision making capability and authority ought to be aligned to scale up of organizational hierarchy. Behavioral experts link decision making to personality types and conclude that good decision making can be the preserve of only a few types of personalities. They place significant emphasis on intuition and experience, and rank gut over head as a guide to good decision making. Others on the behavioral stream, on the other hand, are concerned about excessive personality-driven influences and biases as well as interpersonal barriers to effective decision making. The information school believes that biases can be eliminated and objectivity ensured by incorporating sophisticated analytics and by deploying stochastic processes to model uncertainties.
Organizations are therefore perpetually in search of structures, formats, processes and tools that enable more effective decision making. In the process, the natural instincts of decision making that could serve as the growth triggers for growth corporations are curbed by complex structural and process solutions seeking to elegantly systematize and analytically speed up decision making. In this attempt, the micro-entrepreneurial element of decision making at employee level is overwhelmed by the macro-bureaucratic systems of organizational engagement. Concepts such as employee empowerment and grassroots leadership remain lofty ideals against a background of structures and processes that make decision making an opaque activity with unclear participation and intangible accountability.
Decisions, and decision making
Decisions are an integral part of organizational life. The biggest folly in organizations, however, is that decisions are treated as ends in themselves. Decisions, however, are only the means to achieve outcomes. The theory of decision making tends to be bipolar. One extreme view is that there are no right decisions or wrong decisions and it is only the quality of execution that determines whether a decision is right or wrong. The other extreme view is that several companies have come to grief solely because of wrong decisions that have been taken. The truth, as always, lies in between the extremes. There are certain fundamental characteristics of decisions that need appreciation as one prepares an organization to achieve effective decision making.
Competitive decisions are generic, yet need to be differentiated. The types and classes of decisions have been the same from the very early days of business and industrialization; so much so all decisions can be considered generic. Even strategic decisions have become generic; for example decisions such as the businesses to enter, the scale and scope of business to target, the functional strategies (from research and manufacturing to sales and finance) to deploy, the geographies and markets to enter, the businesses or products to acquire, outsourcing options, integration compulsions, and so on, have become classic generic decisions. The challenge to decision makers is, therefore, not the decisions per se but the differentiation that defines and achieves exciting outcomes. Decision makers who combine the power of decision making with the responsibility of aligning decisions to desired outcomes build enormous value for their companies.
India offers many interesting examples of differentiated generic decisions. For example, large Indian business groups such as Future, Bharti, Tata and Reliance groups took a common generic decision to enter the retail business in India but each, despite being in the first wave, endeavored to develop a differentiated strategy of its own to create unique strategic propositions. Future group leveraged the potential of ready-made garments and household goods required by the growing Indian middle class under two brand and retailing formats (Pantaloons and Big Bazar). Bharti decided to benefit from the retailing and supply chain skills of WalMart through a joint venture under an Indian brand name. Tata decided to focus on electronics and household necessities through Croma and StarBazaar respectively, also drawing on retailing expertise of an overseas retailing major, Tesco. Reliance, on the other hand, created distinct retail entities for several product lines, as varied as textiles, apparel, grocery, footwear and electronics, all with local supply chain and retail management capabilities. It is a moot point whether a shared focus on the middle class is balanced by the above level of differentiation. Decision makers have to be strategic thinkers, besides being functional specialists, to enable differentiated decisions and outcomes even under common generic umbrella.
Effective decisions are contextual and not absolute. Decision makers, and consequently organizations, oftentimes become prisoners of the decisions they have taken. The longer the lead times involved in executing decisions the more risky and more inflexible decisions become. Yet it becomes important for organizations and decision makers to constantly reappraise the decisions as environment, competition and markets change, even if decisions are under execution. Recessionary conditions in advanced markets left Indian companies who structured themselves only to operate for such countries were caught flat-footed. On the other hand, companies with more diversified strategic and geographic portfolio weathered the storm better. Emerging markets in particular are characterized by a changing mosaic of regulatory and market dynamics. Decision makers need to have their finger on the pulse of markets to course-correct.
Indian industry has many examples of contextual decision making that served to revitalize the earlier decisions at current risk. Two striking examples are relevant. Tata Motors had its most prestigious Nano micro car planned at Singur in West Bengal. Faced with a serious political campaign that virtually stopped the project in its tracks, the company had the option of minimizing delays by down-sizing project by returning a part of the land. Instead, the company chose to move to a new site in Gujarat to protect the project in its original integrated scale and scope. But for the openness to re-site rather than compromise, despite the short run costs, the delivery would not be taking place to the envisaged long term economies. Reliance Anil Ambani group which faced an adverse Supreme Court decision in its gas pricing dispute with the Reliance Mukesh Ambani group has been quick to abandon its contentious posture and make peace with the Mukesh group. Decisions revisited contextually by the Ambani industrialist-brothers are helping their groups unlock greater value from current and future businesses. Decision making needs to be value-centric rather than ego-centric.
Successful decisions are conviction-driven, and often contrarian and/or proactive. Conviction is a professional capability that comes from intuition, experience, knowledge, and application that one has. Conviction, therefore, enables a professional take tough and challenging decisions that have appropriate risk-reward equations. Conviction enables leaders take decisions that are contrarian to current trends, such as having the gumption to invest in times of recession. Conviction also propels the decision makers to be proactive rather than reactive in decision making. Conviction enables the decision makers to see beyond the obvious and the immediate term, appreciate their own organizational strengths in a holistic perspective and take value building decisions for the future.
India Inc, in its globalization quest, has proved to the world what conviction-driven decisions could achieve. Just ahead of the global meltdown Tata Steel acquired the Anglo-Dutch steel company, Corus and Tata Motors acquired Jaguar-Land Rover assets from Ford Motor in some of the most expensive and daring globalization investments made by the Indian industry ever. The decisions were contrarian to the need for the Tata companies to conserve cash for future protection. On the other hand, the conviction of Ratan Tata and other Tata executives in the Indian capability to not only turn around the ailing facilities and assets but also create new synergies stands vindicated by the improved performance of these acquisitions, a few years later. Bharti, India’s leading telecom player had the conviction that it needed to be a global telecom player, and despite regulatory hurdles and market inhibitions won ownership of the African Zain telecom assets. Decision makers need to be driven by conviction rather than by mere positional power or analytical guidance to be able to fare significantly better in terms of successful outcomes.
Decision making needs to be encompassing and diffused for organizational competitiveness. Successful organizations make decision making the competitive capability of each employee. This happens through creation of organizational units that are networked and collaborative on one hand, and identification of key themes for the organizations to succeed. Such organizations also imbibe a culture where ideation is visibly encouraged and empowerment is actually practiced. This approach recognizes that successful decision making is a pyramid-like effort; thousands of creative decisions at grassroots level support successful execution of one breakthrough decision at the apex level. Many organizations speak of employee engagement but such initiatives fail to generate desired impact as most often these are one-way efforts from managers to employees. On the other hand successful engagement empowers ordinary employees reach out to higher echelons with creative inputs for effective decision making.
The remarkable growth of many Indian companies in the highly competitive global environment is directly related to the flow of creative ideas and decisions from the laboratory benches, drawing boards or machining centers. Glenmark, an Indian pharmaceutical major succeeded in global pharmaceuticals space because of the ability of the bench chemists and biologists to choose the right therapeutic targets and create the right new molecular entities. It was virtuous ground-level decision making that created value for Glenmark in global drug discovery space. Similarly, it is the engineering decision making at product-project level that helped Tata Motors build new indigenous automobile product portfolios such as Sumo, Safari, Indica, Indigo, Ace and Nano successively. Employees need to be developed and empowered not only for execution but for decision making as a cultural embodiment of forward looking organizations.
TIEDES, a decision making framework
Companies need a framework to generate and institutionalize positive and constructive decision making capability across their organizations. The author proposes a simple, six component TIEDES (pronounced “Tides”) framework to achieve that. The framework enables organizations to Theme, Ideate, Evaluate, Decide, Execute and Synchronize as a comprehensive integrated decision making system. The framework is outcome driven rather than structure driven. The framework is contextual rather than historical. It is conviction driven rather than compliance driven. Most importantly, it provides a tool in the hands of all employees to feel, experiment and imbibe the art and science of effective decision making. Each of these components is elaborated below.
Theming. Companies need precise and purposive themes for employees to be aligned and coalesced across the organization. Growing revenues and profits, cutting costs, increasing market capitalization and driving growth are no longer special themes. Every corporation pursues these generic objectives, which are often nebulous for the employees on the shop floor, in the laboratory or in the field. Companies need to granulate the macro objectives into tangible themes, which every employee can relate to. Suzuki did an exceptional theming initiative across the organization when it unveiled “one component-one gram” program, which exhorted that each employee should contribute to reduction of one gram in each component to make its cars lighter, faster and cheaper. Theming represents a unique way to engage, challenge and inspire all of its employees to a corporate goal in a meaningful manner.
Ideation. Companies struggle to generate ideas from employees on a sustainable and participatory basis. Human dynamics which tend to reject ideas not from their silos or not aligned with their biases constitute a major dampener for employees brimming with ideas. Companies, as a result, fail to realize the potential of their employees. On the other hand, Toyota and IBM have emerged as idea-friendly companies that purposefully encourage their employees to contribute ideas for betterment. Toyota’s Kaizen (continuous improvement) philosophy seeks ideas from employees on a perpetual basis. IBM uses software called ThinkPlace and provides online chatting rooms to connect employees and generate ideas from employees. Toyota and IBM as well as other companies with similar idea-friendly philosophy are role models for idea generation.
Evaluation. The first ingredient of successful evaluation is “trust”! Everything else, including analytics comes only next. Evaluation needs to be carried out by employees prior to submitting the ideas, with trust in themselves. Evaluators, taking up evaluation as a part time activity, tend to be pressured and often dismissive of others’ capabilities to generate ideas. Such evaluators, without doubt, destroy potential value for their companies. As with mentorship, evaluation is an artful science that leverages knowledge not only to accept or reject an idea but synthesize nuggets of wisdom from even only partially helpful ideas. Evaluation needs to integrate the ability to prioritize acceptable ideas based on techno-commercial factors and ultimately integrate them into the corporate planning process.
Deciding. Decision making is not an end in itself but is only a step towards outcomes. Decision making oftentimes is a positional or authoritative power granted by organizations to higher level managers and leaders. Decision makers need to be mindful of their power distorting the objectivity of decision making. Similarly, decision makers need to be conscious that their responsibility does not end with signing off the decisions but extends well into the ultimate phase of successful outcomes. This holds good even though execution tends to be the responsibility of a different set of personnel. Decision makers need to combine the power of exercising choice with the responsibility of owning outcomes. Decision makers, regardless of their functional or business affiliations, need to possess end-to-end thinking with a perspective of long term competitiveness.
Execution. Execution is often seen in organizations as a step by step implementation exercise. However, unless there exists a well documented transfer from decision making to execution, execution could get mired in the hidden traps that were considered but dismissed as of low risk in the decision making process. Execution is essentially a line responsibility; project or program management keeps execution on track but is not a substitute for employee-owned passionate execution. As a company encourages ideas potentially employees would have involvement and stake in seeing their ideas through execution for fruition. Entrepreneurial startups, technology companies and research laboratories are role models of achieving successful execution through collaboration and participatory passion.
Synchronization. Typically companies would have decisions defined as several projects under execution across product lines, manufacturing sites, field operations and businesses. These tend to get viewed as individual projects as time progresses. Continuous synchronization is required to relate the status of each project to the other, with the authority and responsibility for execution heads to detect and report asynchronous movement of interconnected projects. When major environmental, regulatory and market changes take place it becomes necessary to pass even the approved and under-execution projects through processes of synchronization. Korean companies, ever mindful of opportunities and risks, are role models of timely synchronization as a DNA of refinement in decision and execution management.
Summary
Decision making needs distinct perspectives and accessible platforms to engage all employees to their full potential. Highly visible breakthrough decisions of companies are often a resultant of a specific organizational culture that encourages and enables grassroots decision making. Differentiation, flexibility, conviction and diffusion shape a holistic outcome-driven timely decision making culture in organizations. Employees, in addition, need also a purposeful and participatory decision making platform to build value and add speed to decision making. Theming, Ideation, Evaluation, Deciding, Execution and Synchronization are six components of effective decision making organizations.
Posted by Dr CB Rao on July 11, 2010
Multiple schools
Decision making has been a fertile domain for consultants and practitioners to operate in. The field has spawned landmark contributions from the 1960s to date. Harvard Business Review became the home for several leading papers such as “The Effective Decision” by Peter Drucker (January 01, 1967), “Interpersonal Barriers to Decision Making” by Chris Argyris (March 01, 1966), “Hidden Traps in Decision Making” by Ralph L Keeney et al (January 01, 2006) and “Who Has the D? How Clear Decision Roles Enhance Organizational Performance” by Paul Rogers and Marcia Blenko (January 01, 2006).
Equally, journals have sprung up dedicated to decision making in different domains: The Journal of Decision Making, Strategic Decision Making, Management Decision, Journal of Behavioral Decision Making, Journal of Cognitive Engineering and Decision Making, The Journal of Financial Decision Making, International Journal of Decision Support Systems, Medical decision Making, The Journal of Financial Decision Making, International Journal of Management and Decision Making, and International Journal of Information Technology and Decision Making to quote a few.
It is no surprise that the field of decision making has spawned multiple schools of thought. Some organizational experts consider that the business structure and the organization structure that a corporation adopts have a significant bearing on the decision making effectiveness. Some others consider that the managerial processes and leadership styles of profoundly influence the decision making effectiveness. A few others consider all the four as critical influencers. Another school of thought segments decisions as strategic, operational or tactical and recommends different decision making structures for the three different types of decisions.
In addition to the above there are administrative, behavioral and informational approaches. Administrative school believes that the decision making capability and authority ought to be aligned to scale up of organizational hierarchy. Behavioral experts link decision making to personality types and conclude that good decision making can be the preserve of only a few types of personalities. They place significant emphasis on intuition and experience, and rank gut over head as a guide to good decision making. Others on the behavioral stream, on the other hand, are concerned about excessive personality-driven influences and biases as well as interpersonal barriers to effective decision making. The information school believes that biases can be eliminated and objectivity ensured by incorporating sophisticated analytics and by deploying stochastic processes to model uncertainties.
Organizations are therefore perpetually in search of structures, formats, processes and tools that enable more effective decision making. In the process, the natural instincts of decision making that could serve as the growth triggers for growth corporations are curbed by complex structural and process solutions seeking to elegantly systematize and analytically speed up decision making. In this attempt, the micro-entrepreneurial element of decision making at employee level is overwhelmed by the macro-bureaucratic systems of organizational engagement. Concepts such as employee empowerment and grassroots leadership remain lofty ideals against a background of structures and processes that make decision making an opaque activity with unclear participation and intangible accountability.
Decisions, and decision making
Decisions are an integral part of organizational life. The biggest folly in organizations, however, is that decisions are treated as ends in themselves. Decisions, however, are only the means to achieve outcomes. The theory of decision making tends to be bipolar. One extreme view is that there are no right decisions or wrong decisions and it is only the quality of execution that determines whether a decision is right or wrong. The other extreme view is that several companies have come to grief solely because of wrong decisions that have been taken. The truth, as always, lies in between the extremes. There are certain fundamental characteristics of decisions that need appreciation as one prepares an organization to achieve effective decision making.
Competitive decisions are generic, yet need to be differentiated. The types and classes of decisions have been the same from the very early days of business and industrialization; so much so all decisions can be considered generic. Even strategic decisions have become generic; for example decisions such as the businesses to enter, the scale and scope of business to target, the functional strategies (from research and manufacturing to sales and finance) to deploy, the geographies and markets to enter, the businesses or products to acquire, outsourcing options, integration compulsions, and so on, have become classic generic decisions. The challenge to decision makers is, therefore, not the decisions per se but the differentiation that defines and achieves exciting outcomes. Decision makers who combine the power of decision making with the responsibility of aligning decisions to desired outcomes build enormous value for their companies.
India offers many interesting examples of differentiated generic decisions. For example, large Indian business groups such as Future, Bharti, Tata and Reliance groups took a common generic decision to enter the retail business in India but each, despite being in the first wave, endeavored to develop a differentiated strategy of its own to create unique strategic propositions. Future group leveraged the potential of ready-made garments and household goods required by the growing Indian middle class under two brand and retailing formats (Pantaloons and Big Bazar). Bharti decided to benefit from the retailing and supply chain skills of WalMart through a joint venture under an Indian brand name. Tata decided to focus on electronics and household necessities through Croma and StarBazaar respectively, also drawing on retailing expertise of an overseas retailing major, Tesco. Reliance, on the other hand, created distinct retail entities for several product lines, as varied as textiles, apparel, grocery, footwear and electronics, all with local supply chain and retail management capabilities. It is a moot point whether a shared focus on the middle class is balanced by the above level of differentiation. Decision makers have to be strategic thinkers, besides being functional specialists, to enable differentiated decisions and outcomes even under common generic umbrella.
Effective decisions are contextual and not absolute. Decision makers, and consequently organizations, oftentimes become prisoners of the decisions they have taken. The longer the lead times involved in executing decisions the more risky and more inflexible decisions become. Yet it becomes important for organizations and decision makers to constantly reappraise the decisions as environment, competition and markets change, even if decisions are under execution. Recessionary conditions in advanced markets left Indian companies who structured themselves only to operate for such countries were caught flat-footed. On the other hand, companies with more diversified strategic and geographic portfolio weathered the storm better. Emerging markets in particular are characterized by a changing mosaic of regulatory and market dynamics. Decision makers need to have their finger on the pulse of markets to course-correct.
Indian industry has many examples of contextual decision making that served to revitalize the earlier decisions at current risk. Two striking examples are relevant. Tata Motors had its most prestigious Nano micro car planned at Singur in West Bengal. Faced with a serious political campaign that virtually stopped the project in its tracks, the company had the option of minimizing delays by down-sizing project by returning a part of the land. Instead, the company chose to move to a new site in Gujarat to protect the project in its original integrated scale and scope. But for the openness to re-site rather than compromise, despite the short run costs, the delivery would not be taking place to the envisaged long term economies. Reliance Anil Ambani group which faced an adverse Supreme Court decision in its gas pricing dispute with the Reliance Mukesh Ambani group has been quick to abandon its contentious posture and make peace with the Mukesh group. Decisions revisited contextually by the Ambani industrialist-brothers are helping their groups unlock greater value from current and future businesses. Decision making needs to be value-centric rather than ego-centric.
Successful decisions are conviction-driven, and often contrarian and/or proactive. Conviction is a professional capability that comes from intuition, experience, knowledge, and application that one has. Conviction, therefore, enables a professional take tough and challenging decisions that have appropriate risk-reward equations. Conviction enables leaders take decisions that are contrarian to current trends, such as having the gumption to invest in times of recession. Conviction also propels the decision makers to be proactive rather than reactive in decision making. Conviction enables the decision makers to see beyond the obvious and the immediate term, appreciate their own organizational strengths in a holistic perspective and take value building decisions for the future.
India Inc, in its globalization quest, has proved to the world what conviction-driven decisions could achieve. Just ahead of the global meltdown Tata Steel acquired the Anglo-Dutch steel company, Corus and Tata Motors acquired Jaguar-Land Rover assets from Ford Motor in some of the most expensive and daring globalization investments made by the Indian industry ever. The decisions were contrarian to the need for the Tata companies to conserve cash for future protection. On the other hand, the conviction of Ratan Tata and other Tata executives in the Indian capability to not only turn around the ailing facilities and assets but also create new synergies stands vindicated by the improved performance of these acquisitions, a few years later. Bharti, India’s leading telecom player had the conviction that it needed to be a global telecom player, and despite regulatory hurdles and market inhibitions won ownership of the African Zain telecom assets. Decision makers need to be driven by conviction rather than by mere positional power or analytical guidance to be able to fare significantly better in terms of successful outcomes.
Decision making needs to be encompassing and diffused for organizational competitiveness. Successful organizations make decision making the competitive capability of each employee. This happens through creation of organizational units that are networked and collaborative on one hand, and identification of key themes for the organizations to succeed. Such organizations also imbibe a culture where ideation is visibly encouraged and empowerment is actually practiced. This approach recognizes that successful decision making is a pyramid-like effort; thousands of creative decisions at grassroots level support successful execution of one breakthrough decision at the apex level. Many organizations speak of employee engagement but such initiatives fail to generate desired impact as most often these are one-way efforts from managers to employees. On the other hand successful engagement empowers ordinary employees reach out to higher echelons with creative inputs for effective decision making.
The remarkable growth of many Indian companies in the highly competitive global environment is directly related to the flow of creative ideas and decisions from the laboratory benches, drawing boards or machining centers. Glenmark, an Indian pharmaceutical major succeeded in global pharmaceuticals space because of the ability of the bench chemists and biologists to choose the right therapeutic targets and create the right new molecular entities. It was virtuous ground-level decision making that created value for Glenmark in global drug discovery space. Similarly, it is the engineering decision making at product-project level that helped Tata Motors build new indigenous automobile product portfolios such as Sumo, Safari, Indica, Indigo, Ace and Nano successively. Employees need to be developed and empowered not only for execution but for decision making as a cultural embodiment of forward looking organizations.
TIEDES, a decision making framework
Companies need a framework to generate and institutionalize positive and constructive decision making capability across their organizations. The author proposes a simple, six component TIEDES (pronounced “Tides”) framework to achieve that. The framework enables organizations to Theme, Ideate, Evaluate, Decide, Execute and Synchronize as a comprehensive integrated decision making system. The framework is outcome driven rather than structure driven. The framework is contextual rather than historical. It is conviction driven rather than compliance driven. Most importantly, it provides a tool in the hands of all employees to feel, experiment and imbibe the art and science of effective decision making. Each of these components is elaborated below.
Theming. Companies need precise and purposive themes for employees to be aligned and coalesced across the organization. Growing revenues and profits, cutting costs, increasing market capitalization and driving growth are no longer special themes. Every corporation pursues these generic objectives, which are often nebulous for the employees on the shop floor, in the laboratory or in the field. Companies need to granulate the macro objectives into tangible themes, which every employee can relate to. Suzuki did an exceptional theming initiative across the organization when it unveiled “one component-one gram” program, which exhorted that each employee should contribute to reduction of one gram in each component to make its cars lighter, faster and cheaper. Theming represents a unique way to engage, challenge and inspire all of its employees to a corporate goal in a meaningful manner.
Ideation. Companies struggle to generate ideas from employees on a sustainable and participatory basis. Human dynamics which tend to reject ideas not from their silos or not aligned with their biases constitute a major dampener for employees brimming with ideas. Companies, as a result, fail to realize the potential of their employees. On the other hand, Toyota and IBM have emerged as idea-friendly companies that purposefully encourage their employees to contribute ideas for betterment. Toyota’s Kaizen (continuous improvement) philosophy seeks ideas from employees on a perpetual basis. IBM uses software called ThinkPlace and provides online chatting rooms to connect employees and generate ideas from employees. Toyota and IBM as well as other companies with similar idea-friendly philosophy are role models for idea generation.
Evaluation. The first ingredient of successful evaluation is “trust”! Everything else, including analytics comes only next. Evaluation needs to be carried out by employees prior to submitting the ideas, with trust in themselves. Evaluators, taking up evaluation as a part time activity, tend to be pressured and often dismissive of others’ capabilities to generate ideas. Such evaluators, without doubt, destroy potential value for their companies. As with mentorship, evaluation is an artful science that leverages knowledge not only to accept or reject an idea but synthesize nuggets of wisdom from even only partially helpful ideas. Evaluation needs to integrate the ability to prioritize acceptable ideas based on techno-commercial factors and ultimately integrate them into the corporate planning process.
Deciding. Decision making is not an end in itself but is only a step towards outcomes. Decision making oftentimes is a positional or authoritative power granted by organizations to higher level managers and leaders. Decision makers need to be mindful of their power distorting the objectivity of decision making. Similarly, decision makers need to be conscious that their responsibility does not end with signing off the decisions but extends well into the ultimate phase of successful outcomes. This holds good even though execution tends to be the responsibility of a different set of personnel. Decision makers need to combine the power of exercising choice with the responsibility of owning outcomes. Decision makers, regardless of their functional or business affiliations, need to possess end-to-end thinking with a perspective of long term competitiveness.
Execution. Execution is often seen in organizations as a step by step implementation exercise. However, unless there exists a well documented transfer from decision making to execution, execution could get mired in the hidden traps that were considered but dismissed as of low risk in the decision making process. Execution is essentially a line responsibility; project or program management keeps execution on track but is not a substitute for employee-owned passionate execution. As a company encourages ideas potentially employees would have involvement and stake in seeing their ideas through execution for fruition. Entrepreneurial startups, technology companies and research laboratories are role models of achieving successful execution through collaboration and participatory passion.
Synchronization. Typically companies would have decisions defined as several projects under execution across product lines, manufacturing sites, field operations and businesses. These tend to get viewed as individual projects as time progresses. Continuous synchronization is required to relate the status of each project to the other, with the authority and responsibility for execution heads to detect and report asynchronous movement of interconnected projects. When major environmental, regulatory and market changes take place it becomes necessary to pass even the approved and under-execution projects through processes of synchronization. Korean companies, ever mindful of opportunities and risks, are role models of timely synchronization as a DNA of refinement in decision and execution management.
Summary
Decision making needs distinct perspectives and accessible platforms to engage all employees to their full potential. Highly visible breakthrough decisions of companies are often a resultant of a specific organizational culture that encourages and enables grassroots decision making. Differentiation, flexibility, conviction and diffusion shape a holistic outcome-driven timely decision making culture in organizations. Employees, in addition, need also a purposeful and participatory decision making platform to build value and add speed to decision making. Theming, Ideation, Evaluation, Deciding, Execution and Synchronization are six components of effective decision making organizations.
Posted by Dr CB Rao on July 11, 2010
Tuesday, June 15, 2010
Comparative Advantage: A Behavioral Theorem
The comparative advantage of a nation is its ability to produce products or services more efficiently and cheaply than others. Nations such as China and India can power their way in global economic ranking only through sustainable comparative advantage. The comparative advantage of a nation, however, is broader than either the advantage of natural resources and factor supplies or the competitive advantage of industries in a nation.
Comparative advantage is a behavioral theorem rather than an economic model as is commonly understood. In fact, while economic parameters may quantify comparative advantage, they do not adequately adequate describe the sources or processes of comparative advantage of a nation. The comparative advantage is a function of certain basic behavior patterns exhibited by socio-economic constituents in a nation.
Each nation comprises individuals and entities. Though entities are the creations of individuals, over time entities and individuals develop their own behavior patterns. These determine the economic performance of a nation. Individuals and entities simultaneously function as producers and consumers, savers and investors, and ruled (governed) as rulers (governors). These behavior patterns in the aggregate define the national comparative advantage.
Individuals and entities in nations
At a broad level, individuals and entities of a nation need to function in harmony and synergy. The elaborate governance systems (for example, the corporate entities, the democratic polity, the administrative framework and the regulatory systems) are intended to align economic performance to society’s needs. However, individuals and entities are usually unable to make choices that are aligned to each others’ interests. Conflict rather than collaboration characterizes the functioning of individuals and entities thus affecting the comparative advantage of a nation.
There are a few cases in economic history that demonstrate how alignment of individual and entity behaviors leads to national comparative advantage. It occurred, decades ago, in America with swift economic construction, development of a large labor market and arguably one of the best university and research systems of the world. It occurred in Japan with emphasis on innovation and productivity, and almost seamless integration of social, national and corporate cultures for global economic domination. Select countries in Europe had at different points of time reflected periodic alignments and misalignments.
Nations which had individuals and entities passionate about efficiency and effectiveness clearly could generate national comparative advantage. However, over time, the very same nations began to lag as divergence between individuals and entities, and misalignment across behavior patterns within individuals and entities began to emerge. The loss of competitiveness of advanced nations, whether due to peaking of living conditions, unionism, lack of reinvestment or slowing down of knowledge formation, reflects this trend. The competitiveness of emerging countries, initially quantified through low labor costs and cheap facilities, need not as a corollary mean the natural emergence of sustainable comparative advantage.
China recognized the challenges of natural evolution of comparative advantage and began to shape the society’s behavior patterns through stringent rule. Mao’s Great Leap of the 1960s and Deng’s Great reforms of 1980s reflect unparalleled examples in behavioral management of nations. Factor supplies were regulated, utility costs administered, employee mindsets regimented and bank finances channeled to funnel competitive industrial growth. Massive investments in infrastructure fueled industrial consumption, opened up labor markets, encouraged labor migration, attracted foreign technologies and turned out cheap manufactured goods. Virtually all consumer electronic products are manufactured in millions and billions in China with perpetual lowering of scale-led manufacturing costs.
India, in contrast, relied on natural evolution to align individuals and entities for greater economic growth. Even though economic growth and export performance have been the avowed goals of post-independent India from 1947, India could not discover sources of sustainable comparative advantage for as many as five decades. The first signs of comparative advantage of India became evident in the globalization of India’s information technology and business process outsourcing industries between 1995 and 2005 during which decade China continued to take long strides as the manufacturing capital of the world. However, between 2005 and 2010 India also started to display new sources of comparative advantage on both manufacturing and services fronts.
Comparative advantage, beyond cost arbitrage
Quality related incidents (Heparin and toys, for example) and industrial regimentation aftereffects (Foxconn, for example) in China, mining backlashes in Asia, Australia and Africa, and operational safety hazards (from fireworks companies in India to oil drilling companies in advanced countries, for example) demonstrate that comparative advantage based on planetary exploitation, low labor costs, extended output targets, indiscriminate outsourcing and cheap manufacture may not constitute a sustainable phenomenon. Sooner or later cost levels and output levels would need to reflect realities of physical human life, and lead to equalization across economies and labor markets around the emerging countries eventually.
Sustainable comparative advantage, on the other hand, would stem from aligning the individuals and entities on shared responsibilities and goals, which are broader than monitory ones. The behavioral theorem is based on individuals and entities being producers and consumers, savers and investors, and ruled and rulers simultaneously. In an ideal national system production is balanced by consumption, imports are compensated by exports, savings are directed towards investments and wealth maximization is harmonized with social equalization. This process, however, gets impeded by the fact that all nations are not equally endowed.
Globalization commenced as an answer to this disparity but could not provide an equitable solution. Globalization has had three phases. In the first phase products, technologies and people were imported from advanced countries into less developed countries to meet local demand. In the second phase, technologies were imported to mass produce products for consumption in developed markets. The third phase which is now emerging involves a fusion of technologies and management approaches of advanced and emerging markets to optimize production and consumption globally. The world order should logically move to an equilibrium state as the third phase of globalization progresses.
Cost arbitrage would diminish in importance as improvements in living conditions and greater consumerism would lead to demands for higher salaries in emerging markets. Producers would need to not only channel a large part of their production to local markets but also build global brands around local designs. As earning potential in emerging markets improves savings would need to be invested in productive activities in local markets. Employees and managements as well as societies and governments need to be bound by shared ethics of productivity, efficiency and egalitarianism. This would require nations to raise capabilities in a wide spectrum of products and services rather than being focused on only a few industries or just leverage natural resources.
Intellectual edge versus physical rigor
The days of glossy products deriving attractive revenues and profits from low cost internals could be over sooner than later. Rather, high quality standards in design, manufacturing and service could differentiate products in future. The days of a pioneering brand and scores of follower clones could also be over sooner than later. Rather, novel ways of fulfilling the user requirement through innovative products and services could become necessary. There could be limits to stretching physical performance given the machine speeds and 24 hours all that being available in a day. There would, however, be no limits in stretching human intellect to generate novel products and services, and novel methods of design, manufacturing, delivery and service.
The industrial revolution started in laboratories with scientists and technologists creating new products. As demand burgeoned methods of factory-led mass manufacture shifted accent from design to manufacture. The limits of manufacturing efficiency as derived from cost arbitrage may well have been reached. There is still a residual possibility to innovate in manufacturing system design and equipment configuration as being discovered by global automobile firms with Indian engineering ingenuity. Even this phase will get over in the next five to ten years. Time is appropriate to get back to fundamental research in laboratories to develop novel products and services.
As India gets increasingly recognized as a global hub of manufacturing India has choices to make; whether to follow the established Chinese model of low-cost mass manufacture, albeit with more consistent quality, delivery and regulatory parameters, modify it with innovative manufacturing system designs or supplement it with novel research innovations. Sustainable comparative advantage emerges from all the three. Natural resources and synthetic outputs would need to be protected with novel research and manufacturing technologies. Waste needs to be eliminated and savings generated by adopting optimal business and conversion processes. Employees and citizens need to see value in generating comparative advantage. Comparative advantage becomes a behavioral and intellectual exercise.
Individuals and entities tend to have production, consumption, savings, investment, governance and governed behaviors that could be synergistic or antagonistic. The sustainability of comparative advantage of a nation arises from how well these behaviors are made harmonious.
Production and consumption behavior
Modern industrial theory is based on aggressive production and consumption behavior to boost growth. Resources being limited it is important that production and consumption are supported by meaningful behavioral patterns that support wise utilization of resources both from production and consumption points of view. China and India may have paltry automobile ownership rates of 14 and 8 respectively compared to 478 in USA but what should be the levels to which the vehicle density would need to grow? Should not road density per unit area grow first in India before vehicle density leapfrogs? And even when road density leapfrogs should not bus density jump ahead of car density? These are complex questions that need to be answered as much by public policy considerations as by individual and social behaviors.
Modern competition theory suggests that corporations intensify their efforts to segment the markets with diverse products of multiple functionalities to capture market share. Supported by saturation marketing this would prompt higher consumption, increased production and better economic growth. Such industrial theories lead to nagging worries on true competitiveness. Would not multiplication of products reduce innovation or at best perpetuate incremental innovation? Would not corporations be better placed by opening out new products with new features rather than by crowding out existing market segments with only incrementally relevant products? Would not consumers be better off by owning different types of products and services rather than many variants of the same product and service? These again are complex questions to be answered as much by regulators and strategists as by individual and social behaviors.
Modern economic theory has favored consumerism. It is believed that increased purchases and ownerships of houses, gadgets, equipment and stocks will lead to multiplier effects in the economy. Supply push and demand pull are considered synchronous. Consumerism is measured by the screens on which a movie is screened in the first days, the millions a gadget is sold on launch, the apartments that are booked on announcement and the times a capital market issue is oversubscribed. Consumerist economic thought generates its own questions. Would not overwhelming consumerism reduce product life cycle artificially and lock up capital in both production and consumption? Would not producers and consumers be better served by an orderly, rather than by a hyperactive, production and buying spree? Are considerations of quality well-served by saturated production and consumption? These are challenging issues that need to be answered as much by resource considerations as by individual and social behaviors.
Savings and investment behavior
Traditional Indian society moorings favored living within means. Savings were the pillar of social security for families and driving force of banking behavior. Typically, the Indian salaried class used to own a house at the end of the career out of the savings. The savings paradigm has undergone a fundamental transformation over the last three decades. Ambitious executives splurge their earnings on gadgets and are willing to make early purchase of loan-funded houses, only to live on wafer-thin savings. Credit cards are used by people to live beyond the means. Loans are treated as deferred savings. This distinctly American trend raises disturbing question for the Indian society. At a time when the American society has learnt at great cost the perils of living beyond means on credit the wisdom of Indian society following the disastrous trend is highly debatable. Have banks and financial institutions developed a vested interest in funding the society to profligacy? These questions need to be answered by economists and individuals as well as society in search of security and status.
Savings are meant to be channeled as prudent investments. Investments are to be made keeping in view lifestyle goals for retirement. Investments are to be made in assets to be held over a long time for capital appreciation. Modern trends have turned investment into expenditure and popularized buy-sell transactions as opportunistic short term alternatives to long term investments. With the proliferation of such investment trends America created asset bubbles in housing which shook the global economy to its core. Would not societies be safer by prudential allocation and management of investments? Should mathematical models be allowed to blur rational and logical investment behavior? Should complex instruments like derivatives and opportunistic methodologies such as short sales and day trades be banned? Again, these are critical questions for the stability of economies and societies to be answered by policy makers and market participants.
Ruler and ruled behavior
Rulers come in many forms; employers, companies, leaders, regulators, ministers, administrators, and so on. Correspondingly, ruled also come in more simple forms; employees, followers and citizens. The relationship between the ruled and rulers, or the governors and the governed, determines the equity, strength and stability of the society and polity. The drivers for rulers and the ruled are quite distinct. Rulers whether of corporations or nations are driven by control over resources and power. Ruled, on the other hand, are driven by needs for security and development. Different socio-economic systems and national governance systems sought to develop different methodologies to align the interests of the rulers and the ruled. The welfare states of Sweden and Switzerland represent one end of the spectrum while the controlled state of China represents another end. The purely capitalistic, but democratic, state of USA and the highly fragmented democratic polity of India represent other typical examples.
Totalitarian states provide quick fixes and democratic capitalistic states encourage but also punish excesses while fragmented democratic states are caught in chaotic turmoil of informed and uninformed debate. In the long run, informed democracies align the ruled and rulers better than highly controlled totalitarian states which force the ruled to subjugate free expression in exchange for economic rewards. The challenge for the ruled in democratic states is to gain absolute literacy and awareness and exercise the democratic power to keep the ruled focused on the imperatives of equitable economic growth. If any single factor is holding back India becoming a super economic power, it is neither industry nor infrastructure as commonly hypothesized but it is its inability to achieve complete literacy. The ruled in India which hitherto had a vested interest in keeping literacy at low levels has taken an epoch-making step with the Right to Education (RTE) bill. When the RTE and other education bills are implemented in letter and spirit India will beat all the emerging countries including China to a virtuous superpower status.
Summary
Comparative advantage is more of a human endeavor rather than an economic or industrial endeavor. Individuals and entities in a national system pursue aggressive pursuit of production and consumption patterns on one hand and savings and investment patterns on the other that encourage profligacy. Ruled are unaware of their rights and responsibilities on one hand and their capabilities and potentialities on the other hand. The rulers tend to have a vested interest in achieving a totalitarian control or a democratic fragmentation of these human behavior patterns. All these behaviors need to be harmonized for sustainable comparative advantage. Universal education is the key enabler for a tolerant society and democratic nation as India to discover its full potential through creative intellect rather than regimented labor.
Posted by Dr CB Rao on June 15, 2010
Comparative advantage is a behavioral theorem rather than an economic model as is commonly understood. In fact, while economic parameters may quantify comparative advantage, they do not adequately adequate describe the sources or processes of comparative advantage of a nation. The comparative advantage is a function of certain basic behavior patterns exhibited by socio-economic constituents in a nation.
Each nation comprises individuals and entities. Though entities are the creations of individuals, over time entities and individuals develop their own behavior patterns. These determine the economic performance of a nation. Individuals and entities simultaneously function as producers and consumers, savers and investors, and ruled (governed) as rulers (governors). These behavior patterns in the aggregate define the national comparative advantage.
Individuals and entities in nations
At a broad level, individuals and entities of a nation need to function in harmony and synergy. The elaborate governance systems (for example, the corporate entities, the democratic polity, the administrative framework and the regulatory systems) are intended to align economic performance to society’s needs. However, individuals and entities are usually unable to make choices that are aligned to each others’ interests. Conflict rather than collaboration characterizes the functioning of individuals and entities thus affecting the comparative advantage of a nation.
There are a few cases in economic history that demonstrate how alignment of individual and entity behaviors leads to national comparative advantage. It occurred, decades ago, in America with swift economic construction, development of a large labor market and arguably one of the best university and research systems of the world. It occurred in Japan with emphasis on innovation and productivity, and almost seamless integration of social, national and corporate cultures for global economic domination. Select countries in Europe had at different points of time reflected periodic alignments and misalignments.
Nations which had individuals and entities passionate about efficiency and effectiveness clearly could generate national comparative advantage. However, over time, the very same nations began to lag as divergence between individuals and entities, and misalignment across behavior patterns within individuals and entities began to emerge. The loss of competitiveness of advanced nations, whether due to peaking of living conditions, unionism, lack of reinvestment or slowing down of knowledge formation, reflects this trend. The competitiveness of emerging countries, initially quantified through low labor costs and cheap facilities, need not as a corollary mean the natural emergence of sustainable comparative advantage.
China recognized the challenges of natural evolution of comparative advantage and began to shape the society’s behavior patterns through stringent rule. Mao’s Great Leap of the 1960s and Deng’s Great reforms of 1980s reflect unparalleled examples in behavioral management of nations. Factor supplies were regulated, utility costs administered, employee mindsets regimented and bank finances channeled to funnel competitive industrial growth. Massive investments in infrastructure fueled industrial consumption, opened up labor markets, encouraged labor migration, attracted foreign technologies and turned out cheap manufactured goods. Virtually all consumer electronic products are manufactured in millions and billions in China with perpetual lowering of scale-led manufacturing costs.
India, in contrast, relied on natural evolution to align individuals and entities for greater economic growth. Even though economic growth and export performance have been the avowed goals of post-independent India from 1947, India could not discover sources of sustainable comparative advantage for as many as five decades. The first signs of comparative advantage of India became evident in the globalization of India’s information technology and business process outsourcing industries between 1995 and 2005 during which decade China continued to take long strides as the manufacturing capital of the world. However, between 2005 and 2010 India also started to display new sources of comparative advantage on both manufacturing and services fronts.
Comparative advantage, beyond cost arbitrage
Quality related incidents (Heparin and toys, for example) and industrial regimentation aftereffects (Foxconn, for example) in China, mining backlashes in Asia, Australia and Africa, and operational safety hazards (from fireworks companies in India to oil drilling companies in advanced countries, for example) demonstrate that comparative advantage based on planetary exploitation, low labor costs, extended output targets, indiscriminate outsourcing and cheap manufacture may not constitute a sustainable phenomenon. Sooner or later cost levels and output levels would need to reflect realities of physical human life, and lead to equalization across economies and labor markets around the emerging countries eventually.
Sustainable comparative advantage, on the other hand, would stem from aligning the individuals and entities on shared responsibilities and goals, which are broader than monitory ones. The behavioral theorem is based on individuals and entities being producers and consumers, savers and investors, and ruled and rulers simultaneously. In an ideal national system production is balanced by consumption, imports are compensated by exports, savings are directed towards investments and wealth maximization is harmonized with social equalization. This process, however, gets impeded by the fact that all nations are not equally endowed.
Globalization commenced as an answer to this disparity but could not provide an equitable solution. Globalization has had three phases. In the first phase products, technologies and people were imported from advanced countries into less developed countries to meet local demand. In the second phase, technologies were imported to mass produce products for consumption in developed markets. The third phase which is now emerging involves a fusion of technologies and management approaches of advanced and emerging markets to optimize production and consumption globally. The world order should logically move to an equilibrium state as the third phase of globalization progresses.
Cost arbitrage would diminish in importance as improvements in living conditions and greater consumerism would lead to demands for higher salaries in emerging markets. Producers would need to not only channel a large part of their production to local markets but also build global brands around local designs. As earning potential in emerging markets improves savings would need to be invested in productive activities in local markets. Employees and managements as well as societies and governments need to be bound by shared ethics of productivity, efficiency and egalitarianism. This would require nations to raise capabilities in a wide spectrum of products and services rather than being focused on only a few industries or just leverage natural resources.
Intellectual edge versus physical rigor
The days of glossy products deriving attractive revenues and profits from low cost internals could be over sooner than later. Rather, high quality standards in design, manufacturing and service could differentiate products in future. The days of a pioneering brand and scores of follower clones could also be over sooner than later. Rather, novel ways of fulfilling the user requirement through innovative products and services could become necessary. There could be limits to stretching physical performance given the machine speeds and 24 hours all that being available in a day. There would, however, be no limits in stretching human intellect to generate novel products and services, and novel methods of design, manufacturing, delivery and service.
The industrial revolution started in laboratories with scientists and technologists creating new products. As demand burgeoned methods of factory-led mass manufacture shifted accent from design to manufacture. The limits of manufacturing efficiency as derived from cost arbitrage may well have been reached. There is still a residual possibility to innovate in manufacturing system design and equipment configuration as being discovered by global automobile firms with Indian engineering ingenuity. Even this phase will get over in the next five to ten years. Time is appropriate to get back to fundamental research in laboratories to develop novel products and services.
As India gets increasingly recognized as a global hub of manufacturing India has choices to make; whether to follow the established Chinese model of low-cost mass manufacture, albeit with more consistent quality, delivery and regulatory parameters, modify it with innovative manufacturing system designs or supplement it with novel research innovations. Sustainable comparative advantage emerges from all the three. Natural resources and synthetic outputs would need to be protected with novel research and manufacturing technologies. Waste needs to be eliminated and savings generated by adopting optimal business and conversion processes. Employees and citizens need to see value in generating comparative advantage. Comparative advantage becomes a behavioral and intellectual exercise.
Individuals and entities tend to have production, consumption, savings, investment, governance and governed behaviors that could be synergistic or antagonistic. The sustainability of comparative advantage of a nation arises from how well these behaviors are made harmonious.
Production and consumption behavior
Modern industrial theory is based on aggressive production and consumption behavior to boost growth. Resources being limited it is important that production and consumption are supported by meaningful behavioral patterns that support wise utilization of resources both from production and consumption points of view. China and India may have paltry automobile ownership rates of 14 and 8 respectively compared to 478 in USA but what should be the levels to which the vehicle density would need to grow? Should not road density per unit area grow first in India before vehicle density leapfrogs? And even when road density leapfrogs should not bus density jump ahead of car density? These are complex questions that need to be answered as much by public policy considerations as by individual and social behaviors.
Modern competition theory suggests that corporations intensify their efforts to segment the markets with diverse products of multiple functionalities to capture market share. Supported by saturation marketing this would prompt higher consumption, increased production and better economic growth. Such industrial theories lead to nagging worries on true competitiveness. Would not multiplication of products reduce innovation or at best perpetuate incremental innovation? Would not corporations be better placed by opening out new products with new features rather than by crowding out existing market segments with only incrementally relevant products? Would not consumers be better off by owning different types of products and services rather than many variants of the same product and service? These again are complex questions to be answered as much by regulators and strategists as by individual and social behaviors.
Modern economic theory has favored consumerism. It is believed that increased purchases and ownerships of houses, gadgets, equipment and stocks will lead to multiplier effects in the economy. Supply push and demand pull are considered synchronous. Consumerism is measured by the screens on which a movie is screened in the first days, the millions a gadget is sold on launch, the apartments that are booked on announcement and the times a capital market issue is oversubscribed. Consumerist economic thought generates its own questions. Would not overwhelming consumerism reduce product life cycle artificially and lock up capital in both production and consumption? Would not producers and consumers be better served by an orderly, rather than by a hyperactive, production and buying spree? Are considerations of quality well-served by saturated production and consumption? These are challenging issues that need to be answered as much by resource considerations as by individual and social behaviors.
Savings and investment behavior
Traditional Indian society moorings favored living within means. Savings were the pillar of social security for families and driving force of banking behavior. Typically, the Indian salaried class used to own a house at the end of the career out of the savings. The savings paradigm has undergone a fundamental transformation over the last three decades. Ambitious executives splurge their earnings on gadgets and are willing to make early purchase of loan-funded houses, only to live on wafer-thin savings. Credit cards are used by people to live beyond the means. Loans are treated as deferred savings. This distinctly American trend raises disturbing question for the Indian society. At a time when the American society has learnt at great cost the perils of living beyond means on credit the wisdom of Indian society following the disastrous trend is highly debatable. Have banks and financial institutions developed a vested interest in funding the society to profligacy? These questions need to be answered by economists and individuals as well as society in search of security and status.
Savings are meant to be channeled as prudent investments. Investments are to be made keeping in view lifestyle goals for retirement. Investments are to be made in assets to be held over a long time for capital appreciation. Modern trends have turned investment into expenditure and popularized buy-sell transactions as opportunistic short term alternatives to long term investments. With the proliferation of such investment trends America created asset bubbles in housing which shook the global economy to its core. Would not societies be safer by prudential allocation and management of investments? Should mathematical models be allowed to blur rational and logical investment behavior? Should complex instruments like derivatives and opportunistic methodologies such as short sales and day trades be banned? Again, these are critical questions for the stability of economies and societies to be answered by policy makers and market participants.
Ruler and ruled behavior
Rulers come in many forms; employers, companies, leaders, regulators, ministers, administrators, and so on. Correspondingly, ruled also come in more simple forms; employees, followers and citizens. The relationship between the ruled and rulers, or the governors and the governed, determines the equity, strength and stability of the society and polity. The drivers for rulers and the ruled are quite distinct. Rulers whether of corporations or nations are driven by control over resources and power. Ruled, on the other hand, are driven by needs for security and development. Different socio-economic systems and national governance systems sought to develop different methodologies to align the interests of the rulers and the ruled. The welfare states of Sweden and Switzerland represent one end of the spectrum while the controlled state of China represents another end. The purely capitalistic, but democratic, state of USA and the highly fragmented democratic polity of India represent other typical examples.
Totalitarian states provide quick fixes and democratic capitalistic states encourage but also punish excesses while fragmented democratic states are caught in chaotic turmoil of informed and uninformed debate. In the long run, informed democracies align the ruled and rulers better than highly controlled totalitarian states which force the ruled to subjugate free expression in exchange for economic rewards. The challenge for the ruled in democratic states is to gain absolute literacy and awareness and exercise the democratic power to keep the ruled focused on the imperatives of equitable economic growth. If any single factor is holding back India becoming a super economic power, it is neither industry nor infrastructure as commonly hypothesized but it is its inability to achieve complete literacy. The ruled in India which hitherto had a vested interest in keeping literacy at low levels has taken an epoch-making step with the Right to Education (RTE) bill. When the RTE and other education bills are implemented in letter and spirit India will beat all the emerging countries including China to a virtuous superpower status.
Summary
Comparative advantage is more of a human endeavor rather than an economic or industrial endeavor. Individuals and entities in a national system pursue aggressive pursuit of production and consumption patterns on one hand and savings and investment patterns on the other that encourage profligacy. Ruled are unaware of their rights and responsibilities on one hand and their capabilities and potentialities on the other hand. The rulers tend to have a vested interest in achieving a totalitarian control or a democratic fragmentation of these human behavior patterns. All these behaviors need to be harmonized for sustainable comparative advantage. Universal education is the key enabler for a tolerant society and democratic nation as India to discover its full potential through creative intellect rather than regimented labor.
Posted by Dr CB Rao on June 15, 2010
Sunday, June 6, 2010
Exit Cross-functional: Enter Cross-industry
Organizational structure is both the boon and bane of corporate development. Without organizational structure, management would be chaotic and even impossible. With organization structure, management is constrained, and even thwarted by silos. Organization experts have tried to configure several models of organizational structure – functional, product, geographic, project, matrix, congruence, strategic business to name a few – to make organizational structures support efficient and effective realization of corporate goals. As companies diversify and globalize on multiple product-market dimensions, structural and process challenges of organization design become more intense.
Whatever be the nature of business and the type of the organization however, departmental configurations perpetuate themselves into structural silos. Functions, domains, businesses or any other part of value chain of any organization turn into structural silos. As leaders of functions, domains and businesses compete to grow in an organization, silos become even more obdurate and ossified. Organization experts have tried to configure solutions by advocating cross-functional management as a process approach to break silos. In today’s fast changing technology space and competitive world, however, it is no longer sufficient to have solutions that attempt to merely overcome self-inflicted organizational problems.
Limitations of intra-organization approach
Cross-functional approach within an organization is at best palliative and is neither curative nor preventive of typical organizational ills. It merely accepts the limitations of organizational structure and leadership styles at higher levels and seeks to discover solutions by encouraging middle and lower levels to work together cutting across functions and enhance organizational delivery. Very often, these cross-functional solutions are presented to, and are discussed and finalized by cross-functional groups of leaders. The entire process merely restores value chain management within a business which is fragmented by the type of organization structure adopted.
Cross-functional groups themselves may not function to the best of the abilities of individual members as often ‘give and take’ of positions is involved in team dynamics. Very often different line functions (such as manufacturing, materials, engineering, research and marketing) and staff functions (such as finance, human resources, corporate planning and information technology) tend to have differentially respected positions in an organization. Cross-functional processes fail to remove such intrinsic legacy positions. In addition, members are often faced with conflicts of time management related to their internal functions and external functions. They are also occasionally faced with the challenges of coping with leadership conflicts. More importantly, cross-functional groups are introverted into organizational vortices rather than extroverted to discover what lies outside the organizations.
Limitations of intra-industry approach
Many times managers and leaders attempt to enhance functional and cross-functional effectiveness by focusing their own attention and the attention of team members on the more effective competitors. Benchmarking of structure, processes, talent and results against those of competitors in an industry is utilized to focus attention on potential improvements. Most such studies are done based on public domain information or syndicated information. Neither approach provides information on the true status and fundamental sources of competitive advantage of a successful competitor in an authentic manner.
The intra-industry approach is also deficient as typically players in an industry replicate the strategies of other players to reach an equilibrium state. For example, a player who specializes in mass products would endeavor to establish a division for differentiated products. A niche player, on the other hand, would seek to enter the mass markets by acquiring capabilities for cost leadership. Eventually, players within an industry tend to have little that can learn from each other. The focus then turns to execution which would require increasingly higher efforts to derive rather unfortunately decreasing levels of additional benefits.
Opportunities of cross-industry approach
Notwithstanding the organizational limitations that could exist within players in an industry, exciting things are happening across industries. These fundamental changes occur mainly as a result of science and technology across industries on one hand, and growing consumerism and egalitarianism in the societies on the other. Some of the changes are truly mind-boggling and challenge what conventional organizations understood as the limits of creativity or performance. For example, automobile industry was the only leading protagonist of consumer choice with its concept of model year for the passenger cars. Upgrades of car designs each year and introduction of new series every four or five years was the ultimate epitome of customer orientation. However, today the electronics industry surprises us by having new models launched each month. Model month, rather than model year, is the new benchmark of competitive development.
The change is not reflected merely in the speed of new product development. The change is also reflected how conventional product features are replaced by new product functionalities. If personal computers rewrote the chapter of mainframe computers yesterday, tablets and cloud computing could consign the personal computers to history tomorrow. Each such new industry development, however, flourishes on certain embedded breakthrough processes of harnessing science, technology and management, which need to be observed and assimilated by other industries consistent with their own research, manufacturing and marketing characteristics. This would require leadership teams in industries discard their dogmas and rewrite the rules of business based on breakthrough concepts that occur in other industries.
Dogmas that need to be discarded
Conventional industrial and business development is severely limited by dogmas that have taken root in the in the theory and practice of management over the years. These dogmas provide stability to organizations and comfort to leaders and managers. When followed unquestioningly these dogmas perpetuate status quo in industries and render individual players uncompetitive and even obsolete. The first trickles of novel technology and new business processes are, however, enough to destabilize such firms. Innovators as well as established firms fall victims to such changes if they hold on to their dogmas. Palm is a classic example of an innovator which almost collapsed on the dogmatic plank of the invincibility of its original innovation. Microsoft, despite being an established colossus, has been wise to discard some of its dogmas and embrace newer trends to stay competitive.
The dogmas that are limiting the innovative capacity of firms are many. A few of these follow. The first is that the longer a product stays in the market the greater is the investment recovery. The second is that it is counter-productive to make one’s own product obsolete or cannibalize one’s own product. The third is that scale of each product is more important than the scale of the overall business. The fourth is that profitability is inversely proportional to product variety. The fifth is that market segmentation is quantitative and not qualitative. The sixth is that emerging markets are only production centers and not consumption markets. The seventh is that the costs of changing the customer mindset for new technologies are prohibitive. The eighth is that digital revolution is only for younger generation. The eighth is that certain technologies, for example touch technology and convergence, are limited only to consumer electronics. The ninth is that management is a superior enabler compared to science and technology. The tenth is that structures and processes shape and harness discordant mindsets. By discarding dogmas and stretching ingenuity to rewrite the traditional economic rules of management, leaders, managers and professionals can revitalize firms and industries.
From diseconomies to economies
Dogmas survive on the basis that any opposing practice leads to diseconomies. Newer pragmatic practices, however, generate their own economies, overturning dogmas. The cellular phone industry, for example, leads all industries in product innovation and launches. Even as one product is launched the next product launch is announced by firms in this industry. The diseconomies of the startling reduction in product life cycle are countered by the economies of saturation launch sale and multiple saturation launches. The consumer electronics industry thrives by making its products obsolete and even cannibalizing its own products. The lessons are that it is profitable to pull out all stops to research and innovation. The consumer goods industry proves that multiple products (SKUs) expand the market and eventually make sub-scale products viable. Skills in retooling, outsourcing and supply chain management can help firms manage the challenges of commercialization of multiple products in quick succession and make profitability directly proportional to product variety.
Market segmentation is the only productive way to serve customers more intensely with the right products, and in the process help firms grow profitably. Market segmentation is as much cardinal as it is ordinal. Products can be designed to fulfill customer needs in terms of application granulation as much as being positioned in terms of user image. Over the last few years, even emerging markets failed to recognize their own potential. Firms which focused on a judicious mix of developed and emerging markets have become more valuable companies than those companies which focused only on any one set of markets. Today’s consumer is information-savvy. The customer is willing to discover new product features on his or her own, providing a great support to product proliferation, with all the benefits underlined above. Boxing (packaging) of each product with appropriate product usage aids is an important contributor to the process of smooth product discovery by the customers.
A digital bridge is developing at breakneck speed extending the present into a wildly different future. The digital bridge is visible to some and invisible to several others. Is the forthcoming ‘slate’ revolution only for the book readers or youngsters? Is the touch technology limited only to cellular phones? Are the robots that talk and walk robots just entertainers or real humanoids? These developments are, in fact, the start of a new wave of human engineering whereby technology would make products and people discover each other’s senses and sensitivities. Science and technology are original and dedicated to making life more productive and helpful; so much so, even human life could soon be synthetically cloned. In contrast, management has done so little in originality and creativity that it would appear counterproductive for science and technology to play second fiddle to management. Science and technology have discovered fundamental laws of life through physics, chemistry, mathematics and biology. Management needs to similarly integrate the social sciences such as economics, psychology, sociology and stochastic sciences to redefine itself.
Benefits of cross-industry assimilation
There are many lessons that can be learnt by firms through an open and structured process of cross-industry observation.
Cellular phone industry teaches one the paradigm of extremely fast-track product development. The industry believes in research as a continuous process rather than a batch process. R&D is organized as a factory operation virtually. The industry sees obsolescence as an opportunity and seeks to create as many opportunities as possible by making as many of its current products obsolete as possible. The industry also demonstrates how multiple functionalities can be optimized under a convergence model. Market segmentation in its ordinal and cardinal senses can be well-understood from the dynamics of cellular phone industry.
Automobile industry teaches one how product performance can be perked up by integrating electronics into design and manufacture. It also demonstrates how an essentially resource guzzling industry (oil reserves and road space) copes with environmental compulsions by enhancing fuel economy, using alternative fuels, and rediscovering compactness. Automobile industry also develops management as an optimal interface of man and machine where synchronization, whether on shop floor or in supply chain, holds the key.
Retail industry teaches one how a certain, fixed-cycle production system can be coordinated with an uncertain, variable-cycle market system. Firms which market non-consumer products can upgrade supply chain practices by observing how retail needs are met by the consumer goods and retail industries in tandem. Requirements of freshness and shelf-life require special capabilities in cold chain and distribution management. The industry also teaches how customer contact and communication intensity can lead to enhanced footfalls.
Infrastructure industry teaches one the challenges of dreaming big, executing under hazardous circumstances, living under regulatory uncertainty, raising massive finances and remaining motivated despite extended viability. Project management in the typically multi-dimensional infrastructure ventures demonstrates how facile should it be to project-manage normal research and manufacturing projects. Financial institutions and investors who see patience as a virtue in the long gestation infrastructure projects would help out other long-gestation industries such as pharmaceuticals and research in general.
Pharmaceutical industry demonstrates how product safety and efficacy as well as manufacturing quality and regulatory compliance determine the level of competitive advantage of a firm. The industry provides a template by which people are rigorously trained for institutionalization of quality and compliance. The industry demonstrates how multiple disciplines of science and technology to make life better for human beings, whereby an unknown molecular entity can be made to cure or prevent disease through innovation and rigor.
Fast moving consumer goods (FMCG) industry teaches how by taking care of day to day needs of individuals and families businesses can be created and grown. The industry teaches how mega businesses can be built on mini technologies. It also reflects on how perceptions and realities can be merged and de-merged to support business development. It brings forth the importance of packaging as a key differentiator. It also demonstrates the power of observation of consumer behavior as a trigger for strategy development. It is a perfect industrial crucible for merger of tradition with globalization and nativity with modernity.
The list could go on; the sooner firms realize that greater competitiveness could emerge from assimilation of best cross-industry practices the greater would be the benefits to economic, industrial and social development.
Posted by Dr CB Rao on June 6, 2010
Whatever be the nature of business and the type of the organization however, departmental configurations perpetuate themselves into structural silos. Functions, domains, businesses or any other part of value chain of any organization turn into structural silos. As leaders of functions, domains and businesses compete to grow in an organization, silos become even more obdurate and ossified. Organization experts have tried to configure solutions by advocating cross-functional management as a process approach to break silos. In today’s fast changing technology space and competitive world, however, it is no longer sufficient to have solutions that attempt to merely overcome self-inflicted organizational problems.
Limitations of intra-organization approach
Cross-functional approach within an organization is at best palliative and is neither curative nor preventive of typical organizational ills. It merely accepts the limitations of organizational structure and leadership styles at higher levels and seeks to discover solutions by encouraging middle and lower levels to work together cutting across functions and enhance organizational delivery. Very often, these cross-functional solutions are presented to, and are discussed and finalized by cross-functional groups of leaders. The entire process merely restores value chain management within a business which is fragmented by the type of organization structure adopted.
Cross-functional groups themselves may not function to the best of the abilities of individual members as often ‘give and take’ of positions is involved in team dynamics. Very often different line functions (such as manufacturing, materials, engineering, research and marketing) and staff functions (such as finance, human resources, corporate planning and information technology) tend to have differentially respected positions in an organization. Cross-functional processes fail to remove such intrinsic legacy positions. In addition, members are often faced with conflicts of time management related to their internal functions and external functions. They are also occasionally faced with the challenges of coping with leadership conflicts. More importantly, cross-functional groups are introverted into organizational vortices rather than extroverted to discover what lies outside the organizations.
Limitations of intra-industry approach
Many times managers and leaders attempt to enhance functional and cross-functional effectiveness by focusing their own attention and the attention of team members on the more effective competitors. Benchmarking of structure, processes, talent and results against those of competitors in an industry is utilized to focus attention on potential improvements. Most such studies are done based on public domain information or syndicated information. Neither approach provides information on the true status and fundamental sources of competitive advantage of a successful competitor in an authentic manner.
The intra-industry approach is also deficient as typically players in an industry replicate the strategies of other players to reach an equilibrium state. For example, a player who specializes in mass products would endeavor to establish a division for differentiated products. A niche player, on the other hand, would seek to enter the mass markets by acquiring capabilities for cost leadership. Eventually, players within an industry tend to have little that can learn from each other. The focus then turns to execution which would require increasingly higher efforts to derive rather unfortunately decreasing levels of additional benefits.
Opportunities of cross-industry approach
Notwithstanding the organizational limitations that could exist within players in an industry, exciting things are happening across industries. These fundamental changes occur mainly as a result of science and technology across industries on one hand, and growing consumerism and egalitarianism in the societies on the other. Some of the changes are truly mind-boggling and challenge what conventional organizations understood as the limits of creativity or performance. For example, automobile industry was the only leading protagonist of consumer choice with its concept of model year for the passenger cars. Upgrades of car designs each year and introduction of new series every four or five years was the ultimate epitome of customer orientation. However, today the electronics industry surprises us by having new models launched each month. Model month, rather than model year, is the new benchmark of competitive development.
The change is not reflected merely in the speed of new product development. The change is also reflected how conventional product features are replaced by new product functionalities. If personal computers rewrote the chapter of mainframe computers yesterday, tablets and cloud computing could consign the personal computers to history tomorrow. Each such new industry development, however, flourishes on certain embedded breakthrough processes of harnessing science, technology and management, which need to be observed and assimilated by other industries consistent with their own research, manufacturing and marketing characteristics. This would require leadership teams in industries discard their dogmas and rewrite the rules of business based on breakthrough concepts that occur in other industries.
Dogmas that need to be discarded
Conventional industrial and business development is severely limited by dogmas that have taken root in the in the theory and practice of management over the years. These dogmas provide stability to organizations and comfort to leaders and managers. When followed unquestioningly these dogmas perpetuate status quo in industries and render individual players uncompetitive and even obsolete. The first trickles of novel technology and new business processes are, however, enough to destabilize such firms. Innovators as well as established firms fall victims to such changes if they hold on to their dogmas. Palm is a classic example of an innovator which almost collapsed on the dogmatic plank of the invincibility of its original innovation. Microsoft, despite being an established colossus, has been wise to discard some of its dogmas and embrace newer trends to stay competitive.
The dogmas that are limiting the innovative capacity of firms are many. A few of these follow. The first is that the longer a product stays in the market the greater is the investment recovery. The second is that it is counter-productive to make one’s own product obsolete or cannibalize one’s own product. The third is that scale of each product is more important than the scale of the overall business. The fourth is that profitability is inversely proportional to product variety. The fifth is that market segmentation is quantitative and not qualitative. The sixth is that emerging markets are only production centers and not consumption markets. The seventh is that the costs of changing the customer mindset for new technologies are prohibitive. The eighth is that digital revolution is only for younger generation. The eighth is that certain technologies, for example touch technology and convergence, are limited only to consumer electronics. The ninth is that management is a superior enabler compared to science and technology. The tenth is that structures and processes shape and harness discordant mindsets. By discarding dogmas and stretching ingenuity to rewrite the traditional economic rules of management, leaders, managers and professionals can revitalize firms and industries.
From diseconomies to economies
Dogmas survive on the basis that any opposing practice leads to diseconomies. Newer pragmatic practices, however, generate their own economies, overturning dogmas. The cellular phone industry, for example, leads all industries in product innovation and launches. Even as one product is launched the next product launch is announced by firms in this industry. The diseconomies of the startling reduction in product life cycle are countered by the economies of saturation launch sale and multiple saturation launches. The consumer electronics industry thrives by making its products obsolete and even cannibalizing its own products. The lessons are that it is profitable to pull out all stops to research and innovation. The consumer goods industry proves that multiple products (SKUs) expand the market and eventually make sub-scale products viable. Skills in retooling, outsourcing and supply chain management can help firms manage the challenges of commercialization of multiple products in quick succession and make profitability directly proportional to product variety.
Market segmentation is the only productive way to serve customers more intensely with the right products, and in the process help firms grow profitably. Market segmentation is as much cardinal as it is ordinal. Products can be designed to fulfill customer needs in terms of application granulation as much as being positioned in terms of user image. Over the last few years, even emerging markets failed to recognize their own potential. Firms which focused on a judicious mix of developed and emerging markets have become more valuable companies than those companies which focused only on any one set of markets. Today’s consumer is information-savvy. The customer is willing to discover new product features on his or her own, providing a great support to product proliferation, with all the benefits underlined above. Boxing (packaging) of each product with appropriate product usage aids is an important contributor to the process of smooth product discovery by the customers.
A digital bridge is developing at breakneck speed extending the present into a wildly different future. The digital bridge is visible to some and invisible to several others. Is the forthcoming ‘slate’ revolution only for the book readers or youngsters? Is the touch technology limited only to cellular phones? Are the robots that talk and walk robots just entertainers or real humanoids? These developments are, in fact, the start of a new wave of human engineering whereby technology would make products and people discover each other’s senses and sensitivities. Science and technology are original and dedicated to making life more productive and helpful; so much so, even human life could soon be synthetically cloned. In contrast, management has done so little in originality and creativity that it would appear counterproductive for science and technology to play second fiddle to management. Science and technology have discovered fundamental laws of life through physics, chemistry, mathematics and biology. Management needs to similarly integrate the social sciences such as economics, psychology, sociology and stochastic sciences to redefine itself.
Benefits of cross-industry assimilation
There are many lessons that can be learnt by firms through an open and structured process of cross-industry observation.
Cellular phone industry teaches one the paradigm of extremely fast-track product development. The industry believes in research as a continuous process rather than a batch process. R&D is organized as a factory operation virtually. The industry sees obsolescence as an opportunity and seeks to create as many opportunities as possible by making as many of its current products obsolete as possible. The industry also demonstrates how multiple functionalities can be optimized under a convergence model. Market segmentation in its ordinal and cardinal senses can be well-understood from the dynamics of cellular phone industry.
Automobile industry teaches one how product performance can be perked up by integrating electronics into design and manufacture. It also demonstrates how an essentially resource guzzling industry (oil reserves and road space) copes with environmental compulsions by enhancing fuel economy, using alternative fuels, and rediscovering compactness. Automobile industry also develops management as an optimal interface of man and machine where synchronization, whether on shop floor or in supply chain, holds the key.
Retail industry teaches one how a certain, fixed-cycle production system can be coordinated with an uncertain, variable-cycle market system. Firms which market non-consumer products can upgrade supply chain practices by observing how retail needs are met by the consumer goods and retail industries in tandem. Requirements of freshness and shelf-life require special capabilities in cold chain and distribution management. The industry also teaches how customer contact and communication intensity can lead to enhanced footfalls.
Infrastructure industry teaches one the challenges of dreaming big, executing under hazardous circumstances, living under regulatory uncertainty, raising massive finances and remaining motivated despite extended viability. Project management in the typically multi-dimensional infrastructure ventures demonstrates how facile should it be to project-manage normal research and manufacturing projects. Financial institutions and investors who see patience as a virtue in the long gestation infrastructure projects would help out other long-gestation industries such as pharmaceuticals and research in general.
Pharmaceutical industry demonstrates how product safety and efficacy as well as manufacturing quality and regulatory compliance determine the level of competitive advantage of a firm. The industry provides a template by which people are rigorously trained for institutionalization of quality and compliance. The industry demonstrates how multiple disciplines of science and technology to make life better for human beings, whereby an unknown molecular entity can be made to cure or prevent disease through innovation and rigor.
Fast moving consumer goods (FMCG) industry teaches how by taking care of day to day needs of individuals and families businesses can be created and grown. The industry teaches how mega businesses can be built on mini technologies. It also reflects on how perceptions and realities can be merged and de-merged to support business development. It brings forth the importance of packaging as a key differentiator. It also demonstrates the power of observation of consumer behavior as a trigger for strategy development. It is a perfect industrial crucible for merger of tradition with globalization and nativity with modernity.
The list could go on; the sooner firms realize that greater competitiveness could emerge from assimilation of best cross-industry practices the greater would be the benefits to economic, industrial and social development.
Posted by Dr CB Rao on June 6, 2010
Sunday, May 30, 2010
Indian Management: The Unseen Revolution
India has made a mark globally with its software skills. More recently, India has come into global reckoning for its manufacturing capabilities. In future, India will be the hub of infrastructure building. Consolidating the gains in services and products and making new gains in infrastructure, India will keep up its growth momentum. India’s economic growth could be upwards of 10 percent per annum in the years to come which could catapult India as the fourth largest economy in the world by 2030, after USA, Japan and China. In fact, the gap, if any, in terms of gross national product could be small within these four economies.
Indian management and global achievement
Science and technology power the economy as a chip powers the computer. Management drives the economy just as software programs the computer for performance. A unique way of Indian management has emerged over the last few decades of the independent India that is shaping the new economic revolution in India despite all the constraints that exist. The distinctive Indian management paradigm is a result of the multiple ownership and organizational formats, and the diverse organizational eco-systems that evolved over the years in India.
The Indian managerial alchemy is no longer a perception or an aspiration; it is a reality. If global scale is a metric, Indian management has proved itself with several Indian companies joining the Global 2000 Club (Forbes Asia, May 2010, Volume 6, Number 6). If global recognition is a metric, most Indian managed companies have proved themselves by exporting products and services, by becoming chosen partners and in some cases by being courted by global giants to add strength to their value chains. In fields as diverse as traditional arts and culture or modern science and technology, Indian management demonstrated a sure ability for global marksmanship.
The mix of Indian companies in the Forbes list or the Fortune list of the largest publicly traded companies of the world illustrates that it is not merely the Indian factor advantage but also a pan-industry managerial capability that helped India Inc power its way into the global club. The Indian companies in such global lists come from diverse business and industrial domains, to name a few: ACC (cement), Allahabad Bank, Axis Bank, Bank of Baroda, Bank of India, Canara Bank, Central Bank of India, Corporation Bank, HDFC Bank, ICICI Bank, IDBI Bank, Indian Bank, Indian Overseas Bank, Oriental Bank, PNB, State Bank and Syndicate Bank (banking), Bharat Electronics, Bharat Earth Movers and Bharat Heavy Electricals (equipment), Bharat Petroleum, GAIL, Hindustan Petroleum, Indian Oil, ONGC and Oil India (oil and gas), Bharti Airtel, Idea and Reliance Communications (telecommunications), DLF and HDFC (real estate), Grasim and Reliance Industries (diversified), HCL Technologies, Infosys Technologies, Tata Consultancy and Wipro (information technology), Jet Airways (airlines), Ashok Leyland, Bajaj Auto, Hero Honda, Mahindra & Mahindra and Tata Motors (automobiles), Hindalco, National Aluminium, NMDC, SAIL, Sterlite and Tata Steel (metals), ITC (FMCG), JP Industries, Larsen & Toubro and Reliance Infra (infrastructure), NHPC, NTPC, Power Finance, Power Grid, Rural Electrification, Tata Power (power), Cipla, Dr Reddy’s, Piramal, Ranbaxy and Sun Pharmaceuticals (pharmaceuticals) and United Breweries (spirits). In addition, several subsidiaries of multinationals in India, ABB, Siemens, Vodaphone, Hyundai, Unilever, Proctor & Gamble and IBM, to mention a few, have acquired statures of their own.
The high number of Indian banks in the global list illustrates the overall strength of the economy. The fact that no Indian bank failed when several global banks went into a tailspin in the global economic meltdown illustrates the financial management skills of Indian economists and banking managers. Similarly, the growing number and increasing scale of firms in growth sectors such as automobiles, telecommunications, infrastructure, oil and gas and metals illustrates the diversified managerial base. Several Indian subsidiaries of global multinationals such as Unilever, Hyundai, Proctor & Gamble have consistently provided a large Indian anchor to global operations. The ability of large Indian groups such as Tata, Bharti, and Reliance to acquire overseas firms reflects new confidence in globalization. Similarly the growth of large non-resident Indian groups such as the Hindujas and Mittals on a global scale illustrates the global entrepreneurship of Indian business groups. It is also interesting that some of the largest listed companies are government owned while several government owned corporations and departmental undertakings are unlisted but are very large, reflecting the management acumen in India that transcends public-private ownership differences.
On a different but allied plane, for over five decades, Indian academic scholors enriched the global technology and management scenario. In the US alone, more than 8000 professors are said to be making important contributions to the academic life. In the management and economics areas of reputed business schools, not limited to Harvard, Stanford, Kellogg, LBS and Wharton, Professors CK Prahalad, Sumantra Ghoshal, Marti Subrahmanyam, Bala Balachandran, Krishna Palepu, Pankaj Ghemawat, Raj Varadarajan, Nitin Nohria, Amartya Sen, Jagdish Bhagwati, Kasturi Rangan, and Jagmohan Raju made a mark as eminent exponents of management. In the global consulting firms such as McKinsey, BCG, Bain and PRTM as well, Indian management consultants have become an increasingly impactful fraternity.
In a dramatic change, even the multinational corporations known for their fiercely US or European headquarter-centric structures and talent management models are beginning to engage Indian management talent in localized corporate roles. While Indian Americans have been occupying high positions in the global headquarters, global multinational corporations in diversified fields are now choosing to build new regionalized centers of excellence and corporate divisions around Indian, and on a broader base around Asian talent. This represents a paradigm shift in the MNC way of thinking on globalization of talent. The new paradigm is that true globalization extends beyond seeking wider markets or factor inputs and focuses on building global centers of excellence around proven local talent.
What do these results and trends, at both corporate and individual professional levels, portray? While modern management no doubt has its origins in the Western schools, Indian companies and managers have developed their own indigenized management alchemy based on the specific characteristics of the Indian situation.
Indian management evolution
Indian organizations typically reflect one of the three types: the government civil organizations, including the Indian Administrative Services (IAS), the government owned public sector undertakings, including those set up to own the commanding heights of economy, some of which are listed in the stock exchanges (PSUs), and the private sector companies, most of them publicly listed in stock exchanges (PSCs). The IAS typically attracted top talent that was service oriented. The PSUs attracted talent that liked industrialization with scale and scope. PSCs attracted talent that believed in capitalistic growth despite constraints. Different ownership formats and organizational templates typically created different managerial dynamics and led to multiple managerial genres.
Five major forces silently shaped Indian management to a global top spot over the decades. The first is the coexistence of, and osmosis between, the three genres of management styles: the IAS, the PSU and the PSC styles. The second is the induction of multiple technologies and with them related management concepts, from different countries as part of the industrialization from 1947; British, European, American, Japanese and Korean, to name a few. The third is the unique Indian social psyche that adapts to imposition as much as it demands independence, and that encourages creative chaos as much as it respects rigid compliance. The fourth is the motivation to do better and match the best; starting with fierce competition from the school days. The fifth is the proliferation of engineering and management education in India, with a strong influx of engineers into management. These five forces have created a unique Indian managerial alchemy.
Capable administrators from the IAS moved through public sector to private sector to leverage their skills for unfettered growth of institutions. Public and private sector managers learnt the art of positioning corporate strategies in alignment with national needs and bureaucratic challenges. This facilitated a multi-pronged osmosis of managerial aspirations, thoughts and styles. The multiplicity of behavioral approaches was sharpened with engineered precision of a liberal managerial culture. The resultant Indian management style is a unique one that combines administrative efficiency, national passion and material pursuit.
Some of the above are practical hypotheses that are built upon the proven and highly visible successes of the Indian industrial scenario. The author had personal experiences with several such leaders. Stalwarts such as V Krishnamurthy, a PSU technocrat and SVS Raghavan, an IAS bureaucrat built Bharat Heavy Electricals as a leader in power equipment. Again, V Krishnamurthy and later RC Bhargava and Jagdish Khattar, both IAS professionals built Maruti Suzuki as an automobile firm of global repute, even outshining the Japanese parent in certain aspects. S Soundararajan who turned around a sick Garden Reach and TS Kannan who repositioned NSIDC were other IAS professionals. Government-owned insurance giant, Life Insurance Corporation of India had leaders like R Narayanan who built huge strengths in the institution. The list of Indian leaders who built PSU and PSC behemoths and ran departmental undertakings with great vision and success is indeed large.
India’s private sector benefitted from the leadership of several enterprising visionaries. N Vaghul and KV Kamath who built ICICI Bank into a first class private sector bank, Deepak Parekh who built HDFC as a role model in housing finance, Dhirubhai Ambani who built India’s new generation conglomerate, the Reliance Group, JRD Tata and Ratan Tata who revved up and reshaped the Tata group, S Moolgaokar who made Tata Motors (then Telco) the first visible sign of indigenous technological capability, RJ Shahaney and R Seshasayee who unlocked value of a slow-grown British subsidiary, Ashok Leyland, Rahul Bajaj who provided an Indian techno-marketing paradigm in two-wheeler industry with Bajaj Auto, Subir Raha who globalized ONGC, Kurien who made Amul the largest milk cooperative in the world, Anand Mahindra who transformed Mahindra & Mahindra, a tractor and Jeep company into a diversified group, Kishore Biyani who built a hugely successful Indian model of retail business, Pantaloons and Big Bazaar, NS Narayana Murthy and Azim Premzi who built India’s famous global IT companies, Infosys and Wipro respectively, Anji Reddy who demonstrated to the world a new Indian pharmaceutical paradigm, Pratap Reddy who built a world-class hospitals network and K Raghavendra Rao who became a rare-in-class first generation entrepreneur in global pharmaceuticals business reflect the myriad hues of the uniquely Indian management paradigm. There are also several brilliant scientists, technologists and strategists who provided the core competencies for Indian firms and supported the leaders in their global visions; like V Sumatran who helped Tata Motors realize the first indigenous small car dream, leading the multi-faceted Indica passenger car design team, and RS Prasad who helped Anji Reddy and K Raghavendra Rao realize their global generics dreams, building world-class pharmaceutical research and manufacturing infrastructure with first-to-file capabilities. Each of the leaders mentioned above, and not mentioned above brought a uniquely Indian perspective as to how from highly modest and severely resource constrained beginnings world-class corporations could be built in India, irrespective of the ownership.
(Author’s note: In fact, this blog feels humble that it is too inadequate to accommodate the list of top leaders of the IAS, PSU and PSC streams which is so large, running into thousands. Omissions, therefore, are inevitable but are certainly neither intentional nor reflective of any priority.)
The Indian management alchemy
What do these several named, and unnamed, Indian managerial stalwarts have in common? They have, in fact, a lot in common, even if they pursued diverse business and operational models. First, as leaders all of them sought to grow their companies as the best-in-class companies. Second, they believed in Indian talent and indigenization, even if they had to rely on certain imported technologies from time to time. Third, they possessed exceptional personal and professional attributes combining intellect, grasp, memory, speed, passion and accuracy for unique managerial delivery. Fourth, they combined leadership with mentorship, building successive generations of leaders to keep up growth momentum. Fifth, they believed in empowerment of people and teams to drive into new growth horizons. Sixth, they combined global aspiration with Indian patriotism. As a result, each of the leaders could establish or grow companies which held, and continue to hold, Indian flag high.
If the above are the common characteristics of Indian leaders, what then are the common features of Indian management that helped the firms make a global mark? First, Indian management is not deterred by resource constraints. Dreaming big despite a small resource base brings out the best stretch in Indian firms, from strategic innovation to operational excellence. Second, Indian management is sensitive to national imperatives. As a result, Indian firms built unique business models on twin pillars of catering to domestic consumption and generating export revenues. Third, Indian management is a multi-tasking paradigm with low respect for robotic sequencing of events and high passion for simultaneous pursuit of activities. This helps Indian firms cut down development cycles and time to market. Fourth, Indian management looks for delivery leaders rather than deliberative teams. As a result, Indian companies have fairly simple organizational structures that have as little clutter as possible and as many single point responsibilities as can be reasonable. Fifth, Indian management is reflective of the Indian society in terms of frugality and conservation. This naturally induces Indian engineers to come up with functional and utilitarian plant designs that are cost-competitive. Sixth, Indian management is conscious of the need to build and retain reputation. This motivates employees to work on the safe side to meet future quality and regulatory requirements. Seventh, Indian management is impatient, functioning almost from thought to action, skirting elaborate planning rituals. This helps Indian firms beat the competition on speed of delivery, even on a global scale. Eighth, Indian management protects jobs as much as it can. Indian organizations typically stay together in bad times retaining the flexibility to take off when good times return. Ninth, Indian management focuses on organizational and career growth as a base motivator. This provides leaders with multiple avenues for talent management. Tenth, Indian management is intrinsically entrepreneurial and opportunistic. As a result, Indian firms are quick to capitalize on market opportunities. Evidently, some of the above characteristics have contradictory potentialities; the success of Indian management lies in its ability to harmonize the multifarious tendencies for synergy.
Probably, not all aspects of Indian management are flawless. Things possibly could be even better with stronger internal and external collaboration, clearer communication and negotiation, broader application of analytics, stronger grassroots leadership, closer alignment of aspirations and resources, greater openness to indigenous consolidation, higher belief in innovation, lower emphasis on followership, and so on. Several top rung companies not only hire the best talent from leading institutes but also have elaborate in-house leadership development programs to address the residual concerns. The forecast tripling of top-notch engineering and management institutes in India such as the Indian Institutes of Technology and the Indian Institutes of Management in the next few years would provide further reinforcement to the Indian talent pool. As Indian management globalizes and absorbs some of the finer nuances of competitive global management, and appreciates the need for innovation, scale and scope to stay on top globally, the fundamental strengths of “value with vision” and “speed with passion” that uniquely characterize Indian management would be reinforced to an even greater extent.
Posted by Dr CB Rao on May 31, 2010
Indian management and global achievement
Science and technology power the economy as a chip powers the computer. Management drives the economy just as software programs the computer for performance. A unique way of Indian management has emerged over the last few decades of the independent India that is shaping the new economic revolution in India despite all the constraints that exist. The distinctive Indian management paradigm is a result of the multiple ownership and organizational formats, and the diverse organizational eco-systems that evolved over the years in India.
The Indian managerial alchemy is no longer a perception or an aspiration; it is a reality. If global scale is a metric, Indian management has proved itself with several Indian companies joining the Global 2000 Club (Forbes Asia, May 2010, Volume 6, Number 6). If global recognition is a metric, most Indian managed companies have proved themselves by exporting products and services, by becoming chosen partners and in some cases by being courted by global giants to add strength to their value chains. In fields as diverse as traditional arts and culture or modern science and technology, Indian management demonstrated a sure ability for global marksmanship.
The mix of Indian companies in the Forbes list or the Fortune list of the largest publicly traded companies of the world illustrates that it is not merely the Indian factor advantage but also a pan-industry managerial capability that helped India Inc power its way into the global club. The Indian companies in such global lists come from diverse business and industrial domains, to name a few: ACC (cement), Allahabad Bank, Axis Bank, Bank of Baroda, Bank of India, Canara Bank, Central Bank of India, Corporation Bank, HDFC Bank, ICICI Bank, IDBI Bank, Indian Bank, Indian Overseas Bank, Oriental Bank, PNB, State Bank and Syndicate Bank (banking), Bharat Electronics, Bharat Earth Movers and Bharat Heavy Electricals (equipment), Bharat Petroleum, GAIL, Hindustan Petroleum, Indian Oil, ONGC and Oil India (oil and gas), Bharti Airtel, Idea and Reliance Communications (telecommunications), DLF and HDFC (real estate), Grasim and Reliance Industries (diversified), HCL Technologies, Infosys Technologies, Tata Consultancy and Wipro (information technology), Jet Airways (airlines), Ashok Leyland, Bajaj Auto, Hero Honda, Mahindra & Mahindra and Tata Motors (automobiles), Hindalco, National Aluminium, NMDC, SAIL, Sterlite and Tata Steel (metals), ITC (FMCG), JP Industries, Larsen & Toubro and Reliance Infra (infrastructure), NHPC, NTPC, Power Finance, Power Grid, Rural Electrification, Tata Power (power), Cipla, Dr Reddy’s, Piramal, Ranbaxy and Sun Pharmaceuticals (pharmaceuticals) and United Breweries (spirits). In addition, several subsidiaries of multinationals in India, ABB, Siemens, Vodaphone, Hyundai, Unilever, Proctor & Gamble and IBM, to mention a few, have acquired statures of their own.
The high number of Indian banks in the global list illustrates the overall strength of the economy. The fact that no Indian bank failed when several global banks went into a tailspin in the global economic meltdown illustrates the financial management skills of Indian economists and banking managers. Similarly, the growing number and increasing scale of firms in growth sectors such as automobiles, telecommunications, infrastructure, oil and gas and metals illustrates the diversified managerial base. Several Indian subsidiaries of global multinationals such as Unilever, Hyundai, Proctor & Gamble have consistently provided a large Indian anchor to global operations. The ability of large Indian groups such as Tata, Bharti, and Reliance to acquire overseas firms reflects new confidence in globalization. Similarly the growth of large non-resident Indian groups such as the Hindujas and Mittals on a global scale illustrates the global entrepreneurship of Indian business groups. It is also interesting that some of the largest listed companies are government owned while several government owned corporations and departmental undertakings are unlisted but are very large, reflecting the management acumen in India that transcends public-private ownership differences.
On a different but allied plane, for over five decades, Indian academic scholors enriched the global technology and management scenario. In the US alone, more than 8000 professors are said to be making important contributions to the academic life. In the management and economics areas of reputed business schools, not limited to Harvard, Stanford, Kellogg, LBS and Wharton, Professors CK Prahalad, Sumantra Ghoshal, Marti Subrahmanyam, Bala Balachandran, Krishna Palepu, Pankaj Ghemawat, Raj Varadarajan, Nitin Nohria, Amartya Sen, Jagdish Bhagwati, Kasturi Rangan, and Jagmohan Raju made a mark as eminent exponents of management. In the global consulting firms such as McKinsey, BCG, Bain and PRTM as well, Indian management consultants have become an increasingly impactful fraternity.
In a dramatic change, even the multinational corporations known for their fiercely US or European headquarter-centric structures and talent management models are beginning to engage Indian management talent in localized corporate roles. While Indian Americans have been occupying high positions in the global headquarters, global multinational corporations in diversified fields are now choosing to build new regionalized centers of excellence and corporate divisions around Indian, and on a broader base around Asian talent. This represents a paradigm shift in the MNC way of thinking on globalization of talent. The new paradigm is that true globalization extends beyond seeking wider markets or factor inputs and focuses on building global centers of excellence around proven local talent.
What do these results and trends, at both corporate and individual professional levels, portray? While modern management no doubt has its origins in the Western schools, Indian companies and managers have developed their own indigenized management alchemy based on the specific characteristics of the Indian situation.
Indian management evolution
Indian organizations typically reflect one of the three types: the government civil organizations, including the Indian Administrative Services (IAS), the government owned public sector undertakings, including those set up to own the commanding heights of economy, some of which are listed in the stock exchanges (PSUs), and the private sector companies, most of them publicly listed in stock exchanges (PSCs). The IAS typically attracted top talent that was service oriented. The PSUs attracted talent that liked industrialization with scale and scope. PSCs attracted talent that believed in capitalistic growth despite constraints. Different ownership formats and organizational templates typically created different managerial dynamics and led to multiple managerial genres.
Five major forces silently shaped Indian management to a global top spot over the decades. The first is the coexistence of, and osmosis between, the three genres of management styles: the IAS, the PSU and the PSC styles. The second is the induction of multiple technologies and with them related management concepts, from different countries as part of the industrialization from 1947; British, European, American, Japanese and Korean, to name a few. The third is the unique Indian social psyche that adapts to imposition as much as it demands independence, and that encourages creative chaos as much as it respects rigid compliance. The fourth is the motivation to do better and match the best; starting with fierce competition from the school days. The fifth is the proliferation of engineering and management education in India, with a strong influx of engineers into management. These five forces have created a unique Indian managerial alchemy.
Capable administrators from the IAS moved through public sector to private sector to leverage their skills for unfettered growth of institutions. Public and private sector managers learnt the art of positioning corporate strategies in alignment with national needs and bureaucratic challenges. This facilitated a multi-pronged osmosis of managerial aspirations, thoughts and styles. The multiplicity of behavioral approaches was sharpened with engineered precision of a liberal managerial culture. The resultant Indian management style is a unique one that combines administrative efficiency, national passion and material pursuit.
Some of the above are practical hypotheses that are built upon the proven and highly visible successes of the Indian industrial scenario. The author had personal experiences with several such leaders. Stalwarts such as V Krishnamurthy, a PSU technocrat and SVS Raghavan, an IAS bureaucrat built Bharat Heavy Electricals as a leader in power equipment. Again, V Krishnamurthy and later RC Bhargava and Jagdish Khattar, both IAS professionals built Maruti Suzuki as an automobile firm of global repute, even outshining the Japanese parent in certain aspects. S Soundararajan who turned around a sick Garden Reach and TS Kannan who repositioned NSIDC were other IAS professionals. Government-owned insurance giant, Life Insurance Corporation of India had leaders like R Narayanan who built huge strengths in the institution. The list of Indian leaders who built PSU and PSC behemoths and ran departmental undertakings with great vision and success is indeed large.
India’s private sector benefitted from the leadership of several enterprising visionaries. N Vaghul and KV Kamath who built ICICI Bank into a first class private sector bank, Deepak Parekh who built HDFC as a role model in housing finance, Dhirubhai Ambani who built India’s new generation conglomerate, the Reliance Group, JRD Tata and Ratan Tata who revved up and reshaped the Tata group, S Moolgaokar who made Tata Motors (then Telco) the first visible sign of indigenous technological capability, RJ Shahaney and R Seshasayee who unlocked value of a slow-grown British subsidiary, Ashok Leyland, Rahul Bajaj who provided an Indian techno-marketing paradigm in two-wheeler industry with Bajaj Auto, Subir Raha who globalized ONGC, Kurien who made Amul the largest milk cooperative in the world, Anand Mahindra who transformed Mahindra & Mahindra, a tractor and Jeep company into a diversified group, Kishore Biyani who built a hugely successful Indian model of retail business, Pantaloons and Big Bazaar, NS Narayana Murthy and Azim Premzi who built India’s famous global IT companies, Infosys and Wipro respectively, Anji Reddy who demonstrated to the world a new Indian pharmaceutical paradigm, Pratap Reddy who built a world-class hospitals network and K Raghavendra Rao who became a rare-in-class first generation entrepreneur in global pharmaceuticals business reflect the myriad hues of the uniquely Indian management paradigm. There are also several brilliant scientists, technologists and strategists who provided the core competencies for Indian firms and supported the leaders in their global visions; like V Sumatran who helped Tata Motors realize the first indigenous small car dream, leading the multi-faceted Indica passenger car design team, and RS Prasad who helped Anji Reddy and K Raghavendra Rao realize their global generics dreams, building world-class pharmaceutical research and manufacturing infrastructure with first-to-file capabilities. Each of the leaders mentioned above, and not mentioned above brought a uniquely Indian perspective as to how from highly modest and severely resource constrained beginnings world-class corporations could be built in India, irrespective of the ownership.
(Author’s note: In fact, this blog feels humble that it is too inadequate to accommodate the list of top leaders of the IAS, PSU and PSC streams which is so large, running into thousands. Omissions, therefore, are inevitable but are certainly neither intentional nor reflective of any priority.)
The Indian management alchemy
What do these several named, and unnamed, Indian managerial stalwarts have in common? They have, in fact, a lot in common, even if they pursued diverse business and operational models. First, as leaders all of them sought to grow their companies as the best-in-class companies. Second, they believed in Indian talent and indigenization, even if they had to rely on certain imported technologies from time to time. Third, they possessed exceptional personal and professional attributes combining intellect, grasp, memory, speed, passion and accuracy for unique managerial delivery. Fourth, they combined leadership with mentorship, building successive generations of leaders to keep up growth momentum. Fifth, they believed in empowerment of people and teams to drive into new growth horizons. Sixth, they combined global aspiration with Indian patriotism. As a result, each of the leaders could establish or grow companies which held, and continue to hold, Indian flag high.
If the above are the common characteristics of Indian leaders, what then are the common features of Indian management that helped the firms make a global mark? First, Indian management is not deterred by resource constraints. Dreaming big despite a small resource base brings out the best stretch in Indian firms, from strategic innovation to operational excellence. Second, Indian management is sensitive to national imperatives. As a result, Indian firms built unique business models on twin pillars of catering to domestic consumption and generating export revenues. Third, Indian management is a multi-tasking paradigm with low respect for robotic sequencing of events and high passion for simultaneous pursuit of activities. This helps Indian firms cut down development cycles and time to market. Fourth, Indian management looks for delivery leaders rather than deliberative teams. As a result, Indian companies have fairly simple organizational structures that have as little clutter as possible and as many single point responsibilities as can be reasonable. Fifth, Indian management is reflective of the Indian society in terms of frugality and conservation. This naturally induces Indian engineers to come up with functional and utilitarian plant designs that are cost-competitive. Sixth, Indian management is conscious of the need to build and retain reputation. This motivates employees to work on the safe side to meet future quality and regulatory requirements. Seventh, Indian management is impatient, functioning almost from thought to action, skirting elaborate planning rituals. This helps Indian firms beat the competition on speed of delivery, even on a global scale. Eighth, Indian management protects jobs as much as it can. Indian organizations typically stay together in bad times retaining the flexibility to take off when good times return. Ninth, Indian management focuses on organizational and career growth as a base motivator. This provides leaders with multiple avenues for talent management. Tenth, Indian management is intrinsically entrepreneurial and opportunistic. As a result, Indian firms are quick to capitalize on market opportunities. Evidently, some of the above characteristics have contradictory potentialities; the success of Indian management lies in its ability to harmonize the multifarious tendencies for synergy.
Probably, not all aspects of Indian management are flawless. Things possibly could be even better with stronger internal and external collaboration, clearer communication and negotiation, broader application of analytics, stronger grassroots leadership, closer alignment of aspirations and resources, greater openness to indigenous consolidation, higher belief in innovation, lower emphasis on followership, and so on. Several top rung companies not only hire the best talent from leading institutes but also have elaborate in-house leadership development programs to address the residual concerns. The forecast tripling of top-notch engineering and management institutes in India such as the Indian Institutes of Technology and the Indian Institutes of Management in the next few years would provide further reinforcement to the Indian talent pool. As Indian management globalizes and absorbs some of the finer nuances of competitive global management, and appreciates the need for innovation, scale and scope to stay on top globally, the fundamental strengths of “value with vision” and “speed with passion” that uniquely characterize Indian management would be reinforced to an even greater extent.
Posted by Dr CB Rao on May 31, 2010
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