Tag: Networks


The Joys and Perils of Dancing on a Knife’s Edge

February 25th, 2011 — 11:09am

The tumultuous crowds that brought down a dictator in Egypt had an unintended impact far from their homeland: they drowned out – rightfully! – the announcement of a strategic partnership between Nokia and Microsoft. I admire the Nokia I researched; yet I acknowledge it is currently in deep trouble. I have long disdained Microsoft for its product quality and its reliance on monopolistic power instead of innovation (sole exceptions: Xbox and Kinect; and yes, I admit that Office 2011 for the Mac is far better than iWorks!). So, what do I think of this alliance?

A key “prerequisite” question is: Do I still believe the ideas in The Spider’s Strategy? Absolutely! Toyota’s “unexpected acceleration” fiasco and its resultant recalls of millions of cars didn’t discredit Lean Enterprise. Why then, should Nokia’s recent challenges discredit Networked Organizations? Indeed, Nokia got into trouble because in the key area of product innovation, it stopped applying the ideas that powered its 17% compounded annual organic growth rate (in revenues and operating profits) from 1995 to 2006.

Nokia violated a subtle rule embedded in my third Design Principle, “Value and nurture organizational learning.” It used to learn rapidly by setting seemingly impossible targets that demanded the periodic reinvention its business model. Simultanneouly, to keep control, it insisted its managers follow a “no surprises” policy. This brilliant rule is the proverbial knife’s edge. Balance well, and you can pull off miracles. Tilt toward “big risk” and you can lose your shirt. Tilt toward “no suprises” and you will bring innovation to a screeching halt. As it grew, Nokia made the mistake many other large companies have: it tilted toward “no surprises.” So, unlike Apple, it didn’t build a network of complementary product makers to buttress its proprietary Symbian software. Unlike Google, it didn’t attract a different type of sustaining network by making Symbian open source – until it was too late.

The alliance with Microsoft was in the cards from the day Nokia’s Board appointed Stephen Elop CEO. Nokia’s press release spoke of a strategy to “build a new global mobile ecosystem” with Windows Phone software at its core; “capture volume and value growth to connect ‘the next billion’ to the Internet in developing growth markets;” and make “focused investments in next-generation disruptive technologies.”

The second element – a continued focus on markets like India and China – is an key, though the notoriously developed-world-focused financial analysts may not care. Apple has ignored these markets and Windows still has a true monopoly among operating systems. These facts, plus Nokia’s still dominant marketshare there, give the alliance a strong base on which it can build; Nokia can instantly create volume for the Windows Phone and a seemless integration with Wintel computers may give it an edge over low cost Chinese phone makers. At the very least, this element will buy the alliance time; at best, the “next billion” is a huge market. That’s where the first element is also critical.

To bring the alliance value, the goal of building a mobile ecosystem must truly assimilate the lesson of a recent The New York Times story about a start-up company that hoped to build a business around enabling group dates. The founders noted that the site’s users were mostly South or East Asians, but filed that fact away as “Interesting, but Unimportant.” Success came only when they reluctantly acknowledged that group dating wouldn’t fly in the US and shifted their focus to India. The world, as Thomas Freidman said, is flat. But that doesn’t mean people’s needs are the same everywhere. That’s why the word “global” in the language of this strategic element is troubling. Its use may seduce financial analysts, but unless an ecosystem to specific markets, it won’t amount to a hill of beans. At one time Nokia knew this lesson; it had had anthropologists in Indian villages whose work strengthened its market position there. Does it still remember that lesson and can it convince a monopoly to learn it too?

The third element is critical for the long term and most troubling: Will two companies who haven’t created any disruptive technology recently be able to do so in the near future? Nokia’s Chairman Jorma Ollila had championed the Networked Organization philosophy and as CEO, had managed its phenomenal growth. I could make a cogent case that he and the Board had no choice but to create the alliance with Microsoft. (Which would explain why they pursued Mr. Elop in the first place.) Now, he must ensure that Mr. Elop realizes that his most critical tasks are (1) putting into leadership positions those within Nokia who are still capable of dancing gracefully on a knife’s edge and (2) using his deep knowledge of Microsoft to convince Mr. Ballmer to do the same. Then, and only then, will the alliance succeed. If so, I may one day become once again an enthusiastic customer of both companies.

Comment » | Business Environment, Company Performance, Corporate Culture, Leadership

Better on a Camel?

June 9th, 2010 — 3:54pm

It has been exactly 99 days since I last posted. Hadn’t meant all this time to pass, but life intervened. So, I’m going to welcome myself back by first looking back 40 years.

If you are old enough – or have an deep interest in commercial flying – you might know that long ago, British Airways used to be British Overseas Airways Corporation. During those days of genteel competition, airlines’ acronyms often became amusing nicknames. BOAC was “Better on a Camel;” industry insiders used this moniker affectionately. Decades later, however, one would truly be better off on a camel than on British Airways.

Why? Three words: People, people, people. BA and its employees are constantly at war. Their mutual acrimony routinely spills over into public and affects passengers. Both sides seem to loath the customers who keep them employed.

In the late 1990s, BA put up signs at Heathrow, threatening to prosecute passengers who were discourteous to its employees. It neglected to tell its employees that they too needed to be polite. And with that omission, they unleashed trouble. At a check-in counter once, I expressed mild irritation that I was not given the seat I had reserved. Red Queen style, the agent literally turned crimson with fury. How dare I complain, he asked? If I didn’t like the seat he was giving me, I didn’t have to fly.

Fast forward a few years to an ever lengthening Business Class check-in line. One of the two agents designated to attend to it was enjoying a long, uproariously funny phone conversation. A passenger left our line and requested him politely to terminate what was clearly a non-urgent call. The agent followed the man back to the line and as the rest of us stood around stunned, began screaming, “Who are you to tell me what work I must do?” His rant lasted a couple of minutes and then, he went back to his call.

Fifteen minutes later, he was still on his call and the line was becoming ever longer. Another passenger screwed up his courage and asked a passing agent to summon a manager. This one also became Red Queen incarnate, “You’re telling me to do something? Who are you to tell me what I should do?” He hadn’t heard the “please” the rest of us did and felt it was completely appropriate to abuse a premier passenger.

I’m not making these up! More recently, a business class counter at Brussels was open, but the BA agent was missing. I chatted with a couple of other waiting passengers. Each of us had multiple such horror stories. One called me “lucky” since I only had to fly to London, while he was stuck with BA till Sydney.

This is one sad, sad airline whose service is worse than even the deficient service (by Asian standards) available in the US. As I am writing this, BA cabin crew are finally on the strike that judges had forbid twice before. Once was last December, but by the the time the judicial edict came down, they had hurt thousands of vacationers during the Christmas holiday period. Another time was last April. I was on a round the world business trip that began in Europe and I actively avoided all BA long-haul flights even though they were theoretically the most convenient. Unable to avoid a short Madrid-to-London flight, I waited with bated breath for signs of trouble. Fortunately, I wasn’t affected.

Some readers might blame such behavior on the presence of unions. Maybe so, but they are, at worst, only partly at fault. To me, the clear onus for such disregard for customers must be placed on management. BA management, it seems, has long believed that “service” means more amenities. BA has generally been among the leaders in introducing new technology – like flat bed seats in business class. But in the far more difficult area of creating a more positive corporate culture, in well over a decade, its management has failed – miserably, in my opinion. Nor has their approach to management created much value for their shareholders. Which raises the question: Why do they still have their jobs? (I know, Richard Branson’s been asking this for a long time.)

Economists point to the virtues of free markets; if enough people felt like me, they say, we could take our business elsewhere and punish BA. In a world of networks, however, that is not true; BA is a key member of the One World alliance and as long as I choose to fly One World, I will have to put up with BA, at least occasionally.

Sometimes, good things have very bad consequences.

Comment » | Company Performance, Corporate Culture

Looking for Risk in All the Wrong Places! Part 1 of 2

September 23rd, 2008 — 1:21pm

I was trying to avoid writing about the financial crisis since it is hard to say anything substantive briefly and in order to stay away from politics. However, since my book’s subtitle refers to averting crises, I cannot. So, here is the first of two posts. This one expresses three ideas: (1) We need a mindset change from a bilateral to a multilateral (or networked) perspective in business. (2) Unless work practices change, such crises will recur. (3) The (regulatory) culture must change, for it affects perceptions of risk.

20+ years ago, I was a junior banker at an American owned international bank. Today, I understand finance from a strategist’s perceptive, but am not an expert. So, my wife and business partner, Sanghamitra Dutt, has co-authored these posts. Before we co-founded Ishan Advisors, she was a Managing Director at a “money center commercial bank.” In the 1990s, the US Office of the Controller of the Currency recommended that other major banks adopt the information and analysis packages she had designed for use by her bank’s top managers and Board.

Let’s understand that financial innovation did not cause this crisis. Financial innovation has been with us ever since Europeans reshaped the world centuries ago by creating the first stock market. Nor is the complexity of innovations the problem. As an MBA, I had considered doing a Ph.D. in Finance and had learned risk analysis at levels beyond those taught to my peers. So, when my bank entered the new commodities lending business, I got tasked to understand the credit issues – and these to teach others, including my bosses. That fact did not depress our stock price or sink the markets! Blaming innovation for the crisis is akin to blaming Edison for destroying the livelihoods of candlestick manufacturers.

Now consider a simplified description of how financial institutions assess risk. Let’s say Bank A asks an analyst to evaluate whether AIG is a good credit risk. She would study its financials (including confidential information) and pass a judgment. However, unless Lehman Brothers was also A’s client, no one would analyze its financial statements in depth. If both were clients, any direct interactions between them would be looked at, but no one would necessarily evaluate how a failure of a partner of a Lehman client could affect AIG. To address such broad issues, an analyst would be asked, “Given our capital structure, should we be comfortable with our exposure to all financial institutions in this particular sector?” He would perform “what if analyses” (or “stress tests”) and posit an opinion. A group of senior executives would debate these analyses and reach consensus on policy, keeping in mind the revenues A was earning (no risk, no reward). A’s board might provide oversight over this decision (by mandating “portfolio limits”) but would not delve into details. It could not; look at a few annual reports to see for yourself how many Board members of financial institutions actually have deep financial expertise.

If you asked any executive involved, “Can you precisely describe a situation that could cause every financial institution in the market to implode over a matter of a week?” they would probably answer “No.” The idea would seem irrational, given this type of analysis and decision making. Scientists have established that humans are notoriously bad at estimating, understanding and acting on probabilistic information.

The root cause of the crisis, then, is the limited ability of financial institutions to estimate risk that arises from sources beyond their immediate trading partners. In the past, they operated as relatively isolated organizations linked loosely to each other by specific transactions. Today, they form a global network that is constantly managing flows of monies; here, any institution’s failings can affect every other institution it touches.

Yet, they lack the management mechanisms essential for this changed world. Their standard risk approval mechanisms, anchored on an “one lender, one borrower” and “one lender, one sector of borrowers” mindset, are outdated. Their standard tools of risk analysis focus on individual institutions or sectors and cannot reveal risks buried in the network. The data they have available to do any analysis is weak: these are usually, but not always, available in the US and less so in Europe; they are usually unavailable or unreliable for institutions from the rest of the world. So, without being the demons they are being made out to be, financial managers have for long been on the edge of today’s crisis.

The loosening of regulatory requirements, particularly under the present administration, exacerbated this weakness by encouraging a culture tolerant of imprudent risk. We can recall saying “There goes the neighborhood” when investment banks abandoned the partnership model and became common stock companies. When their partners’ personal wealth was at risk, they were more cautious. Even when risks were apparent, important people looked away. Consider The New York Times report (“A Professor and a Banker Bury Old Dogma on Markets” September 21) that Secretary Paulson praised Chairman Bernanke for identifying the possibility of today’s crisis a year ago. He meant to praise Chairman Bernanke’s brilliance; we were outraged. Messers Paulson and Bernanke, what did you do over the last year to head off the crisis before it occurred? If you did nothing, why not? If you did act behind the scenes, what caused you to fail? Congress should ask these two gentlemen these questions before giving them a blank check.

Keep in mind that the paucity of financial information about ‘Rest of the World’ institutions suggests the possibility of a widening crisis. Think of this not as the falling of “another” shoe, but in terms of a well shod millipede! Foreign banks with exposure to Lehman could be grossly weakened by its bankruptcy. Their weakness could precipitously weaken other US banks that are (thus far) healthy. Some European banks have already lobbied for their share of the $700 billion and in principle, Secretary Paulson has already acquiesced to their request.

Moreover, what about the “non-bank banks” in the US economy? GE and GM get more than 50% of their profits from their financial arms. GE might be financially sound, but will the meltdown be the straw that breaks GM’s back? Trickle down network effects can reach pension funds, state and local governments and the like.

Networks at their best, are wonderful. Networks that are not managed appropriately are deadly. Nokia and Ericsson tried to teach us these lessons. Too bad we haven’t learned them yet.

1 comment » | Business Environment

The Evolution of Companies

June 27th, 2008 — 9:24am

This blog’s title, Guilds, Teams and Networks, pays homage to one of the best pieces of business research ever done: HBS Professor Ramchandran Jaikumar’s From Filing and Fitting to Flexible Manufacturing. Jai discussed how companies changed over the centuries because of six “epochal” transformations instigated by technology. The Spider’s Strategy builds on Jai’s work by adding my research and experiences as well as the research of others. In this post, I will explain the blog’s title and so provide a context for the book and for a broader discussion. (After Jai’s untimely death in 1998, Professor Roger Bohn masterfully edited and published the work, which is definitely worth reading as a stand-alone piece. It is available at www.nowpublishers.com)

In 1789, Henry Maudslay initiated the first epochal change, the “English System,” when he gave his workers direct access to two simple tools – a precise micrometer and a flat surface. These enabled them to accurately measure dimensions. Quality improved sharply and productivity rose 400%; companies that gave workers access to these tools outperformed those that did not. Work areas used to be organized by craftsmen’s guilds; Maudslay’s changes also had a critically important and unexpected effect: no longer did the guild master have to approve each work-product. So companies learned that they could directly hire and train young people with skills and knowledge they needed. Conversely, young men realized that no longer did they have to apprentice with guild masters for many years. Over time, the guild system collapsed.

In the mid-20th century, Statistical Process Control charts enabled a very sharp leap forward in quality and productivity – and changed the nature of work. In the 50 prior years, the third epoch, “Scientific Management,” had vested problem solving authority in foremen or managers. Now, SPC returned the responsibility for solving problems to workers, not as individuals, but as teams. “Good” workers did not just do accurate work, but as members of teams, could also diagnose and solve problems. This fact raised the level of education and training demanded even by basic jobs. Companies that made the appropriate changes, thrived; Japan, devastated by war and known hitherto for creating shoddy products, became the beacon for quality and the world’s second most powerful economy.

Starting in the late 1990’s, distributed computer networks, engendered by the Internet, began driving the sixth epochal change. (This description of the present epoch diverges somewhat from Jai’s.) Unlike prior ones, this epoch quickly moved beyond manufacturers into retail businesses. So, I call it the epoch of “Adaptive Businesses.” Companies used to be hierarchical entities linked together into linear supplier-customer chains. Now, increasingly diverse groups of people – spanning product development, manufacturing, engineering, marketing, sales, finance and logistics – began working together. Often they existed within a company, but increasingly frequently, they belonged to different organizations and were separated by time and space.

Their ubiquity and importance make networks of companies/people the defining organizational characteristic of our times. In every prior epoch, changes in organizational structure created new winners and losers among companies. So it is reasonable to believe that the effectiveness with which a company manages its network will affect its likelihood of success.

The network effect is being paralleled in the political world. Recently, I read Fareed Zakaria’s brilliant article in Newsweek The Rise of the Rest For now let me simply note that Mr. Zakaria makes a cogent case that the political world is becoming “multi-polar” and linked by economic flows. Just as the transition from a linear world to a networked world is challenging many companies, so is the transition from a world of two superpowers to a world of one superpower to a world of several rising power bases (EU, Brazil, India and China) challenging the US. The article provides an introduction to the thesis for Nr, Zakaria;s new book, which I hope to read in the near future. At that time, I will draw parallels and distinctions between the formation of corporate networks and the formation of political – country-level – networks.

This blog, I hope, will draw you into a multiway discussion on the future of “the company” and its relationship to the world at large. Bring to it your thoughts, criticisms, questions, opinions, profound disappointments, comments, and ecstatic elation at having seen the light! We will collaborate to create implementable insights. I’ll start by making one major post a week, but I will respond more often to your inputs. Before you depart today, leave some comments … What are good issues – that inspire or rile you – to discuss in the weeks ahead?

Welcome to this spider’s web.

 

Comment » | Business Environment, Organizational structure

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