 |
| Making your stuff. |
“When
Everything is made in China” went the title of a Business Week article in 2002 (Garten, 2002). Although the title may have been sensationalist, in
over a decade since, it has become a common refrain in the discussion of understanding
how Global businesses operate as complex organisms spread across the world. Challenges
such as labour shortages, strikes, currency fluctuations, political risks,
tariffs, oil prices and any number of other items influence those global players
in different ways than they would a local business. To write global businesses
off as merely ‘made in China,’ overlooks much of the complexity and ingenuity
that surrounds these organizations.
How Global Businesses Work
Ronald Coase’s classic, The Nature of the Firm is remarkable in
many ways. For one, it was written in 1937 when
Coase was just a 26-year old but more importantly, explains the role
transaction costs play in the genesis of a business. In it, he says “the main
reason why it is profitable to establish a firm would seem to be that there is
a cost of using the price mechanism”, which until today, forms the basic idea
behind many firms as they come into existence where they can reduce transaction
costs between individuals (Coase, 1937,
p. 390).
In fact, low transaction costs are just one of the reasons why so much
production occurs in China, as noted in the previous section. For example, many
of Taiwan’s well-known computer companies began in the 1980s as Chinese
entrepreneurs in Silicon Valley sought lower cost alternatives (Saxenian, 2002).
Global businesses are different
to local businesses. This may seem like an obvious statement at first but the
implications not only apply to the geography, scale and scope of the
businesses: the way in which we interact with these firms is different as well.
Our tax schedule changes for them in a way that it doesn’t for smaller businesses.
Take the example of state taxes in the United States; companies only need to
collect a sales tax where they have a physical presence – effectively excluding
e-commerce firms like Amazon from paying sales tax in many states (Ainsworth & Madzharova, 2013). Even office
complexes provide them with better rates so that they can become “anchor
tenants.” In the early 1990s, with London in the grip of a recession, the
landmark Canary Wharf office development was offering 10-year free leases to
blue-chip companies to become anchor tenants (Ashworth, 2013, p. 303).
It doesn’t stop there. The
internal practices of global businesses become industry standards to follow.
Take the example of Toyota’s Lean Six Sigma, an efficient production system
developed by the Japanese auto manufacturer (Dahlgaard & Mi Dahlgaard‐Park, 2006), ‘McDonaldization’
(Ritzer, 1983) or even Amazon’s
incredible logistics centres (Crandall, Crandall, & Chen, 2014), which the
company are planning to augment using same-day drone deliveries (Bensinger, 2013). In short,
global businesses are constantly pushing the boundaries in the industries they
operate in.
Running these businesses requires
“daily assessment of opportunities, risks and trends. Corporate leaders who
ignore economic, political, or social changes will lead their companies towards
failure. So too will those who overreact to change and perceived risk” (Schmidheiny,
1992, p. 1). This
in turn this opens up exposure to new challenges such as exposure to new
cultures like McDonalds push towards non-beef burger for the Indian market (Kumar & Goel, 2007)) and complex
political environments such as censorship of Yahoo!, Microsoft, Google and Cisco in countries like China (Deva, 2007)). Businesses that
operate in environments where their assets can be seized carry a similar risk,
as happened with Spanish energy firm Repsol in Argentina in 2012 (Moffett & Turner, 2012).
Given these challenges, one might
wonder why businesses need to go global at all. The traditional answer has
been, “in search of new markets, cheap labor, and unrestricted production sites”
or generally, when a company reaches a certain size and the growth trajectory
that its revenues initially experienced begin to tail off (Farazmand, 1999, p. 512). There are a
few options to generate growth in those circumstances, for instance mergers and
acquisitions (M&A), innovating new product lines. However studies
suggesting M&A that they can also destroy value for firms over the long
term (Martin & Sayrak, 2003), and
innovation is not always easy to generate when the occasion demands it.
It’s not only contact with new
clients, which speeds up the process. As Coase (1937) points out,
anywhere in the value chain of a business that can make the process more
efficient opens up the possibility of outsourcing of production or services.
The example of national telecoms providers, many of which never stray beyond
national borders, often outsourcing services such as technical support and
customer service to countries like India and Bangladesh, where these services
can be provided for a fraction of the price offered in western countries (Dossani & Kenney, 2007). Xiang (2007) notes that
India in particular, developed an education system, which was aimed at
attracting the high-skilled labour, which global businesses look for.
There is generally a diminishing
cost and effort required by firms who are already present in several markets to
enter new ones. According to Madhok (1997) this is
partly due to the generated know-how when making the decision of strategy or
entry mode when exploring expansion into new markets. This idea of
‘experiential learning’ helps to explain the presence of global firms operating
in so many countries (Zahra, Ireland, & Hitt, 2000). Logic would
suggest that these firms should already be much further up the learning curve
compared to others just starting out in the internationalization process.
What Learning Curve?
Focusing on process of running global
firms until now, there will always be a learning curve when firms physically
move to new countries. Taking the advent of the Internet and especially
focusing of the example of e-commerce, firms moved further along the learning
curve: as soon as an e-commerce business begins, its customer base is global.
Even e-commerce businesses rely
on other global firms to conduct business on a global scale. Amazon has fulfilment
centres in Europe, but even if it didn’t, it would rely on global Third-party
logistics (3PL) services like UPS or FedEx (Wisner, Tan, & Leong, 2015). Likewise,
every time a package is sent, it is met at the customs of a country before
entering, often being subject to much higher taxes than the product originally
cost on Amazon’s website.
Identifying Competitors
 |
| Trojan Horse: Technically speaking, a gift from a competitor. |
A truism in the world of business
is that most companies, which no longer exist, are the ones, which failed to
recognize their competitors early enough. By the time they finally recognise
the threat posed by these competitors, it was already too late. Very rarely are
two businesses, even those in an oligopoly, content to accept their market
share: Most Fortune 500 company’s, which won’t talk about future growth in its
annual report. And in a market, which isn’t growing, it’s a zero-sum game: if
one company gains, another has to lose. Therefore, identifying competitors is
paramount.
It’s important to define what ‘identifying
competitors’ means. Many will
immediately think of the phrases of the Chinese philosopher Sun Tzu (“supreme
excellence consists of breaking the enemy’s resistance without fighting” (Sun
Tzu, year unknown)) or the Italian variant, Niccola Macchiavelli (“it is better
to be feared than loved, if you cannot be both.”(Machiavelli, 1532)) Their phrases roll of the tongue
– easy to recant at a moment’s notice. It’s far too simplistic a view of the
competition, however. In fact, the millions of copies of the Art of War which
have been sold, combined with the number of its readers who have been taken by
competitors in that time should tell us something about the effectiveness of
its philosophy.
It’s important for businesses to
take a more holistic view of competition. The reality is that even monopolies
face competition. Competition exists where previously companies didn’t know it
existed – Coca Cola’s competition isn’t just Pepsi Cola; it’s health drinks,
sports drinks, people who say that we should stop drinking sugared drinks and
more. These ideas were brought to the fore in 1979 by a young Harvard
Professor, Michael Porter in his ground-breaking work, “How Competitive Forces
shape Strategy.” (Porter, 1979).
Porter’s “Competitive Forces”
According to a 2008 Harvard
Business Review article in which he revisits his original ideas, Michael Porter
states that he was essentially saying that managers were defining their
competition too narrowly (Porter, 2008, p. 1) These were: the rivalry among
(immediate) competitors, the bargaining power of suppliers, the bargaining
power of buyers, the threat of new entrants and the threat of substitute
products or services. Understanding these forces is the bedrock of identifying
competition for management. In reviewing his 1979 work, Porter wrote in 2008:
“understanding the competitive forces and their underlying causes, reveals the
roots of an industry’s current profitability while providing a framework for
anticipating and influencing competition (and profitability) over time.”
(Porter, 2008, p. 3)
Michael Porter’s key achievement
with that framework lies in recognizing some competitors that haven’t even been
formed yet. Take the example of Encyclopaedia Britannica, which failed to see
the advent of a competitor, Microsoft Encarta, which in turn, failed to see the
advent of its ultimate competitor, Wikipedia (Bosman, 2012). Some
competitors are the ones who bargain with buyers better than your business. The
airline Ryanair jumped ahead of competition in the late 1990s, understanding
that customers were happy to receive less service if they had to pay less (O’Connell & Williams, 2005).
How do you Identify Competition that doesn’t exist yet?
Nobody could blame management of
the taxi company that didn’t predict the arrival of taxi hailing mobile
application five years ago. But five years on, a company offering just that
service, Uber, is predicting revenues of $10 billion for 2015 (Frizell, 2014).
Even a billionaire investor like Carl Icahn didn’t spot that Blockbuster would
be busted by streaming services like Netflix when he invested $320 million in
the firm in 2005 (Hoffman, 2010). Management is effectively supposed to keep
track of competition that doesn’t exist yet. It’s not as ludicrous a proposition
as it may seem and perhaps management should focus particular attention on one
word in the question: yet.
Management is seeing that one of
the keys to overcoming this problem is looking out for disruptive technologies:
new technologies that change the paradigm for existing competitors in an
industry. A 2013 by McKinsey (McKinsey, 2013) on disruptive technologies. The
report notes that companies shouldn’t focus too much on their largest and most
established markets as disruptive technologies and the companies that abide by
them can “jump industry or market boundaries and change the rules of the game.”
Those companies that identify these competitors before everyone else will be
the ones who remember the wise words of Henry Kissinger: “There cannot be a
crisis next week: my schedule is already full.” (Augustine, Sharma and Kesner,
2000, p.7)
Sources
Augustine, N.R., Sharma, A.,
Kesner, I.F., 2000. Harvard Business Review on Crisis Management, Harvard
Business Press.
Frizell, S., 2014. A Historical
Argument Against Uber: Taxi Regulations are there for a Reason. Time Magazine
online. Available at: http://time.com/3592035/uber-taxi-history/
Hoffman, D., 2010. Carl Icahn’s 6
biggest busts…is Genzyme next? Wallstcheatsheet.com. Available at: http://wallstcheatsheet.com/trading-markets/carl-icahns-6-biggest-busts-is-genzyme-next.html/
Machiavelli, N., 1532. The
Prince. Oxford University Press. ISBN: 9780199535699.
McKinsey Global Institute:
Disruptive Technologies: Advances that will transform life, business, and the
global economy. Available at: http://www.mckinsey.com/insights/business_technology/disruptive_technologies
Porter, M., 1979. How competitive
forces shape strategy. Harvard Business Review, March 1979 edition, pp.
137-145.
Portner, M., 2008. The five
competitive forces that shape strategy. Harvard Business Review, January 2008
edition, pp. 2-17.
Sun Tzu, date unknown. The Art of
War. Oxford University Press. ISBN: 9780195014761
The
advent of big data in the past decade has brought the maxim of management guru,
Peter Drucker, “what gets measured, gets managed.” (cited by Prusak, 2010) This
can now be done for everything from smart systems in production lines which,
using vast amounts of data, can tell when a repair might be required and notify
the line manager, to freelance workers online, where the contractor can see how
long the contractor has spent at their computer and how active they were in a
file. It used to be that assessing performance happened once every quarter on a
balance sheet; now, it happens on an ongoing basis through all manner of data
streams.
Assessing Performance
In the modern age, we’re
programmed to believe that the true measure of a firm’s performance is its
share price. Make no mistake – the share price is a good indication of the
firm’s performance as viewed from the outside. But there are limitations to this
performance measure, since constant fluctuations in the stock market create a
lot of “noise,” shrouding the true value of your firm and therefore, a
reflection of its performance. A good example is provided by the benchmark
figure for an industry, according to a 2009 paper in the Journal of Financial
Economics (Sensoy, 2009, p. 25).
The benchmark figure is the
return experienced by the industry as a whole. So, taken on its own, 10% annual
growth is impressive. But that growth needs to be put in context: if the
average company in an industry achieves 30% growth in the same year, suddenly
the assessment of the business performance doesn’t seem so positive. In fact,
if these figures were the case, you would really have to question the
effectiveness of senior management of that business. There could be a number of
potential reasons behind the under-performance, but what’s almost certain is
that managers haven’t been focusing on value drivers for the business.
What drives value at a firm?
Looking at a number of metrics on
an ongoing basis is a good way for managers to assess the performance of their
business. One can’t stress enough here the importance of the word ongoing. At any point in time, metrics
may all look good together but beware that metrics can also often be filtered
to tell the story that the teller wishes to tell. Therefore, looking at the performance
marker more often rather than every now and then avoids the chances of this
happening. The drivers are many of the simple tenants of management measurement
that have existed for years: Return on investment capital, and growth. As the respected
McKinsey book on valuations attests, “what drives a business’s value (are) its
long-term growth potential and its return on invested capital” (Koller,
Goedhart and Wessels, 2010, p.42)
This seems straightforward
enough but anecdotal evidence suggests that most managers, when asked on
the spot, would not know the difference between accounting profit and economic
profit. And everyone knows what growth and debt are, but perhaps they aren’t
clear on the relationship between them. As the recent global financial crisis showed,
even practitioners are capable of under-estimating the sometimes devastating
effects of holding too much debt on the balance sheet when growth figures are
attractive. The appropriate level of debt varies by industry, of course. Debt
to equity ratios at tobacco firms tend to be higher as the general stability
(until now) of their earnings means that they afford higher leverage (Alden,
2010).
The Balanced Scorecard
Beneath the headline figures,
there are other measures of performance in a business that managers need to
assess on an ongoing basis. This was captured by a seminal book, “the Balance
Scorecard,” (Kaplan and Norton, 1996) based on articles they had previously had
published on the theme. There, the authors attempt to develop a range of
measures for managers to assess the effectiveness of their staff actions as
well as whether the company strategy is being implement properly.
Managers can design their own
balanced score-card by identifying some financial and non-financial measures
and quantifying them in a particular manner. There are numerous examples of
where managers have implemented measureable targets (sometimes referred to as
“key performance indicators” or KPI, for short), which have affected year-end
results in a positive manner. An example given by the website
balancedscorecard.org (2011) notes that a company made an income return 10%
over its historical best return by managing 3 parts of their business more
effectively: optimizing business systems, improving process management and
improving product development. These always seemed difficult to measure. Now,
using the tools provided by the Balanced Scorecard, managers can assess
performance on these too.
Innovation, Customer Satisfaction, Culture and Others
The ways in which business can
and indeed, have to track performance are manifold and growing. It used to be
innovation was something intangible in the ether. But given the growth that innovation
can bring to a firm, managers are looking assess the performance of their
R&D departments as well. One measure might be provided by how many patents
are being developed by the business. Another might be whether the business
leasing the rights of some patents to other business as in the example of Apple
leasing patents to HTC in 2012,(Musil, 2012).
Then, there’s customer
satisfaction. It used to be assessed by sales. Now, an industry has grown
around customer satisfaction. When mobile telecom operators are all selling
what is essentially a commodity, they need to find differentiators. The
telephonic industry is not just about copper cable – it’s a customer service
industry in itself. Vodafone’s 2014 annual report, for example, mentions
customer service 213 times (Vodafone, 2014). Customer retention is one of the
key metrics of the mobile telecoms industry. The “churn rate”, which isa term
used in the telecoms industry to denote “the customer movement from one
provider to another (Hung, Yen and Wan, 2006, p.516), features regularly on
internal presentations. Clearly, the key to keeping these figures positive is
customer satisfaction.
These are just some of the ways
in which companies assess performance. As the opening paragraph of this chapter
outlined, big data means management is able to assess the performance of more
and more variables on an ongoing basis. In the past ten years, companies have
been asked to track C02 emissions, air miles and water consumption.
The future is likely to see an increased emphasis on assessing performance in
these metrics and who knows – other measures of performance that haven’t even
been looked at as potential performance metrics yet.
Sources
Alden, M., 2010. Two investing
mistakes to avoid and four dividend stocks to look into. Dividend Monk (blog).
Available at: http://dividendmonk.com/two-investing-mistakes-to-avoid-and-four-dividend-stocks-to-look-into/
Balancedscorecard.org. Case study
available at: http://balancedscorecard.org/Portals/0/PDF/Shat-R-Shield_Case_Study.pdf
Hung, S., Yen, D.C., Wang, H.,
2006. Applying data mining to telecom churn management. Expert Systems with
Applications 31, pp. 515-524.
Kaplan, R.S., Norton, D., 1996.
Wiley Publishing.
Koller, T., Goedhart, M.,
Wessels, 2010. Valuation: Measuring and Managing the Value of Companies, 5th
Edition. Wiley and Sons. ISBN:
978-0-470-42465-0.
Musil, S. 2012. Apple’s patent
licensing pact with HTC released – mostly. CNET.com. Available at:
<http://www.cnet.com/news/apples-patent-licensing-pact-with-htc-released-mostly/>
Prusak, L., 2010. What can’t be
measured. Harvard Business Review. October 2010 edition. Page unknown.
Vodafone 2014 Annual Report.
Available online at: http://www.vodafone.com/content/annualreport/annual_report14/downloads/full_annual_report_2014.pdf
The Challenges of Multi-Site Operations
McDonalds
is the example which springs to most people’s minds when they think of
multi-site, multi-country operations. In an interview the currency trading
manager of McDonalds, revealed that a 1 cent swing in the euro against the
dollar can cost McDonalds $100m in its foreign exchange operation[1].
While the McDonalds example is more dramatic than most, currency exchange is
arguably one of the more straight-forward of the many challenges which global
businesses face in having multi-site operations.
Managing multi-site operations is
not a linear equation. That is to say, the expansion of a business from one
location to two does not bring about a two-fold increase in the challenges faced
by the business. There will be more. In addition to doubling or something
approximate to double,the level of effort required for everything that the
business has done until now, there will be contingencies that occur, which
effectively reduce the by-now established business to a start-up again. Even
though there is knowledge acquired along the way – each new location for the
business is unique in some way.
Unique is an over-used word, of
course, it might even be over-used here. But no two members of staff are the
same. Likewise, the immediate business environment that the business faces in a
new location will be different. Therefore it would be a good idea to revisit
Michael Porter’s five forces (1979) for the business as soon as it arrives in a
new city or country. More often than not, there will be at least one new
language, a new currency and naturally, different economics (inflation,
corporate tax, import and export taxes, etc.). Binding all of these issues
together is the issue of culture.
Changing Culture: The largest Challenge of Multi-site Operations
Culture is not a “fuzzy” concept
where management is concerned and many businesses have failed to grasp this. Take
the example of mergers and acquisitions: in the first three quarters of 2014, this
industry was estimated to be worth $2.66 trillion globally (Hammond, 2014).
Given the scale of the deals and the overall values involved, it is no surprise
culture is probably the first item on the “to do list” of the management
involved in these M&A deals, once the deals have been finalized. In fact,
before any deal was signed between the companies in question, the issue of
culture would have been raised at some level.
When the word “synergy” is
mentioned in M&A terms, the synergy is not only a financial estimate – it
is also to express the meshing of the two firms’ business cultures. Post-merger
integration operations of large consulting firms have grown up around this
effort to merge the cultures of multi-site operations. Case studies abound: the
text-book case for dealing with culture is Europe’s Banco Santander, which operations
all over Europe demands that the firm quick immerses newly acquired branches
into its cultural framework. Its acquisition of Abbey National in the UK was a
case in point about how culture is managed: unions and distrusting employees
all had to be immersed in the Banco Santander culture (Huws and O’Keefe, 2008,
p. 3).
Logistical Matters
Culture in the context described
in the previous section is mainly an issue for mergers and acquisitions which
involve new businesses being brought under the umbrella of the existing
business. These companies at least offer management the consolation of already
being operational. But there’s also the case of green field operations – establishing
operations in a location where there isn’t already a business. This brings
about a myriad of challenges for management. Again, we can turn to the
experience of McDonalds in dealing with multi-site operations to illustrate
this. Their entry to Russia offers a case in point.
McDonalds first restaurant on
Pushkin Square in Moscow is probably more famous an icon of the end of the Cold
War between the United States and the Soviet Union than Ronald Reagan’s “Mr.
Gorbachev, tear down this wall” sound bite. The market entry to Russia is often
seen as a resounding success – and indeed, it is. But it didn’t just happen.
Every detail had to be considered with regard to the new country for McDonalds.
For example, for several years, while McDonalds could not guarantee the quality
of beef in Russia, it imported bull sperm into the country (Borisova, 2001).
Likewise, despite its massive
popularity in Russia, McDonalds was receiving cash in roubles – traditionally
not a safe haven currency to put it lightly. Russian law stipulated that the
firm cannot expatriate this money back to Canada where McDonalds Russia’s
parent company is based, leaving it with a huge amount of cash in a currency
that it cannot translate into dollars. Instead, it used this currency to
purchase property all over Russia, making McDonalds the largest property owner
in Russia after a number of years (Arvedlund, 2005). Nobody said flipping
hamburgers was easy.
Finally, having been in Russia for
over 20 years, in 2014, the company announced that many of its outlets were
being closed down by the authorities for dubious reasons connected to US
diplomatic disputes with Russia related to its incursion into the Ukraine.
McDonalds plight is probably due in no small part to the fact that the previous
mayor of Moscow, a contact of the company in government and the one who secured
a stake for the city in McDonalds profits (Jensen, 1999), was thrown out of
office in 2010. The example of McDonalds in Russia shows that managing
multi-site operations is not just a case of learning a new language and cashing
cheques in a different currency; the logistical operations involved can be far
larger than anticipated.
Several Challenges at once in 20 different Locations
As this section has illustrated,
the challenges for management raised by multi-site operations have the
potential expand exponentially rather than in a linear fashion. As such, there
is only scope to touch on some. Even with vast accumulated experience on the topic,
other authors (cf. Collings, Scullion and Morley, 2007) believe that
multinational companies, or even those companies beginning expansion,
underestimate the complexities involved in international staffing.
Ultimately, manager cannot be in
two places at once. The conference call and other modern communications have
slightly eased the challenges of multi-site operations for senior management,
but it hasn’t eliminated them. In most instances, the best senior management
can do is to delegate to competent on-site individuals. With time, the learning
curve for new environments begins to smoothen, at which point, the company can
look to new locations and begin the process all over again, each time with
small local differences.
Sources
Arvedlund, E.E., 2005. McDonalds
commands a Real Estate Empire in Russia. New York Times. Available at: http://www.nytimes.com/2005/03/17/business/worldbusiness/17mcdonalds.html?_r=0
Collings, D.G., Scullion, H.,
Morley, M.J., 2007. Changing patterns of global staffing in the multinational
enterprise: Challenges to the conventional expatriate assignment and emerging
alternatives. Journal of World Business. Vol. 42, No. 2, pp. 198-213.
Borisova, Y., 2001. Putting Milk
on the Table. The Moscow Times. Available at:
<http://www.themoscowtimes.com/business/article/putting-milk-on-the-table/251119.html>
Hammond, Ed,. 2014. M&A deals
in 2014 eclipse levels in past 5 years. FT.com. Available at: http://www.ft.com/intl/cms/s/0/e0c9cbae-45be-11e4-9b71-00144feabdc0.html#axzz3PDyMaHb3
Huws, U., O’Keefe, B., 2008. Managing change in
cross-border mergers and acquisitions: Case example Santander and Abbey:
Expansion enabling access to new markets. EMCC Company Network. Available
online at: <http://eurofound.europa.eu/sites/default/files/ef_files/pubdocs/2008/044/en/1/ef08044en.pdf>
Jensen, D., 1999. The Boss: How Yury Luzhkov runs
Moscow. Demokratizatsiya: The Journal of Post-Soviet Democratization. Number 1,
Winter 2000, pp. 83-142.
The Role of Senior Management
Envisioning the global strategy
of the firm is one of the vital roles of upper management. “It is crucial that
the CEO is seen as a proponent of a global vision, which is experienced as
relevant throughout the organization” (Bartlett, Doz, & Hedlund, 2013, p. 148).
Why was Steve Jobs such a well
thought-of CEO? Some might say it because he designed the iMac in 1997. But he
didn’t design it; Jonathon Ive designed it and just about everything else in
the Apple stable. Others might answer it because he invented the mp3 player
with the iPod. Again, this wasn’t the case: Creative Labs pioneered the mp3
player well before the iPod. The real reason Jobs was so well thought-of was
his ability as a senior manager to drive these changes. Under his stewardship,
Apple shares went from under one dollar to $100. Driving performance is sort of
a catch-all phrase when looking at the role of senior management.
The example of Steve Jobs
provides us with the archetypal example of successful modern senior-management:
charismatic and always excellent for sound bites providing good media coverage
for the firm. Jobs is famous for luring John Sculley away from Pepsi Co by
saying “do you want to make sugar water for the rest of your life or do you
want to come with me and change the world?” (Feser & Vasella, 2011, p. 143). This lust
for innovation, and the ability to recruit the right senior management at the
firm was enough to raise Apple’s stock prices on its own.
But while computers and
entertainment were Jobs’ speciality, he may not have thrived in other
industries. What works in one industry simply won’t work in another. Michael
O’Leary at Ryanair has been CEO of the firm since it was a regional airline based
in Waterford, Ireland’s fifth biggest city. Under O’Leary’s watch, Ryanair has
become the largest airline in Europe by number of annual passengers (Center for
Aviation, 2014). This was primarily achieved by aggressively cutting costs and
cutting deals with smaller airports. It’s unlikely that Steve Jobs have been
the same success at Apple if the emphasis had been on cost-cutting.
Similarly to Jobs, Michael
O’Leary thrives on providing media with sound bites. His flippant remarks over
the years have created publicity for Ryanair that would probably have cost
shareholders a fortune if they had paid for advertising to generate the same
PR. Every remark he makes (e.g. an aeroplane “is just a bloody bus with wings” (Tuttle,
2012)) or gesture he provides (e.g. turning up to Dublin Airport Terminal 2
with a coffin reading, “RIP Irish Tourism” (Flynn, 2010)) provides valuable
inches of newspaper columns. Again, it’s unlikely that the same approach work
at say, Goldman Sachs. Their CEO, Lloyd Blankfein wasn’t inclined to turn up
with a coffin saying “RIP traditional investment banking” in the aftermath of
the global financial crisis.
Clearly, the role of senior
management depends on situational factors such as where the business is in its
business cycle. The management at Kodak in 2012 might have been among the
best, but it probably would not have made any difference.The performance of
peers and underlings is also crucial - Napoleon said that it’s better go be a
lucky general than a good general – he was really talking about the quality of
his soldiers;changing customer perceptions. Take the example of how findings on
the health effect of smoking changed the game for RJR Nabisco’s tobacco
division in the 1960s (cf. Burrough and Helyar, 1990) and even one-off events such
as the global financial crisis, which many senior financial managers couldn’t
predict before it arrived and couldn’t understand after it had.
Who wants to be a (better) Senior Manager?
An industry has grown up around
what it means to be a manager and DIY improvement handbooks. In an
appropriately titled book on management writing, “the Witch Doctors,”
(Micklethwait and Woodridge, 1996) authors John Micklethwait and Adrian
Woodridge slate this industry as being nothing more than hokum. The advice is
rarely provided by practitioners and is often obscured by “management speak.”
Which leads to another trait of excellent senior management: the ability to communicate
clearly and accurately: for shareholders and analysts.
Even when management advice is
provided by long-term practitioners, it is a dangerous game to play. In 2011,
Terry Leahy, then CEO of British supermarket chain Tesco,at that time, the third
biggest supermarket chain in the world, released his own collection of
management advice, “Management in 10 Words” (Leahy, 2012). Leahy was probably
better placed than most to provide advice on management, having started as a
branch manager at Tesco and climbing through the ranks to become CEO.
Leahy’s advice came on the back,
not only of years of experience in senior management, but also phenomenal
success at Tesco: the company had just expanded to the United States, the share
price had reached a near peak of £366 (Yahoo Finance) and Tesco’s shares had
been given the ultimate seal of approval: Warren Buffett had invested to take a share of Tesco into the Berkshire Hathaway
stable. Fast forward five years and Tesco has pulled out of America with $678
million losses, the share-price dropped and Buffett has called his investment
in Tesco, “a huge mistake” (Buhayar, 2014).
To be fair, Terry Leahy’s
“Management in 10 Words” is possibly among the best that any modern senior
manager has written. Perhaps though, he encapsulated the role of senior
management best by quitting while he was ahead. Senior management is full of
brilliant leaders but they all share one common trait: as human beings, they
are ultimately fallible. Leahy’s book on management is like most of the
most-acclaimed books on the same topic in that it speaks in generalities.
Generalities like “know your enemy” by Sun Tzu the Chinese philosopher will
only get any manager so far, unfortunately, particularly when paradigms are
changing as quickly as they are now.
A Changing Paradigm for Senior Managers
It is not unusual for modern
senior managers to control firms which span five continents and tens of
thousands of employees. This would be enough of a challenge were it not for how
competitive the landscape has become in almost every industry. Large companies
are no longer just looking over their shoulder but to other large companies in
countries that before seem irrelevant to their progress. The days of a well-regarded
floor sweeper taking over Goldman Sachs (as was the case with Gus Levy) are
long gone.
We are now in an environment
where masses of children, sometimes no older than 12 years of age, are working
in advanced programming – more complex than the type that allowed Bill Gates to
develop Microsoft DOS in the 1970s. Many of these children are bilingual,
internet consumers (on their parents’ credit cards) and represent the next wave
of customers. Senior management are running multi-national companies in this
shifting and unforgiving paradigm. They deserve our admiration and pity in
equal measure: just as the environment businesses face is a constantly shifting
paradigm – the role of senior management is a constantly shifting paradigm. We
will finish with the words of Carol Stephensen, former Dean of Canada’s Ivey
Business school.
“I remember the days when if you
excelled at finance, your chances of making it to the top were better than
those of your colleagues in other departments. You did not have to understand
marketing – an agency handled that. You didn’t have to talk to customers – the
sales representatives handled that. And you did not have to worry about what
was happening in another industry. Chances are those events would have
absolutely no impact on your company.
That is not the case today.
Leaders cannot afford to stay safely tucked away in an ivory tower. They must
understand how the different parts of their enterprise work. They must stay on
top of developments in other industries. They have to get outside their
offices, and talk and listen to their employees, their customers, their
stakeholders, their investors and their partners as much as they can.”
(Stephenson, 2011).
Sources
Buhayar, N., 2014. Berkshire
profit slips on Buffett’s Tesco “mistake.” Bloomberg. Available at:
<http://www.bloomberg.com/news/2014-11-07/berkshire-profit-falls-8-6-on-investments-to-4-62-billion.html>
Burrough, B., Helyar, J., 1990.
Barbarians at the Gate: The Fall of RJR Nabisco. Harper Publishing.
Flynn, F. 2010. Ryanair CEO says
$823 million Dublin terminal explains why country is “broke”. Bloomberg.com.
Available at: http://www.bloomberg.com/news/2010-11-19/ryanair-s-o-leary-slams-dublin-terminal-as-imf-welcome-lounge.html
Leahy, T. 2012. Management in 10
words: Practical advice from the man who created one of the world’s largest
retailers. Crown Business Publishing.
Micklethwait, J., Wooldridge, A.,
1996. The Witch Doctors: Making Sense of the Management Gurus. Crown Business.
ISBN: 0812928334.
Stephenson, C,. 2011. How
leadership has changed. Available at: http://iveybusinessjournal.com/departments/from-the-dean/how-leadership-has-changed#.VM_mM2hzSGw
Tuttle, B., 2012. Possible.
Time.com. Available at: http://business.time.com/2012/11/12/new-low-for-flying-standing-room-only/
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