Blogging on Business Update: Week of 10/1/12

Here are some recent posts that may be of interest:

BOOK REVIEWs

The Strategy Book
Max Mckeown

Adaptability: The Art of Winning in an Age of Uncertainty
Max Mckeow

Steal Like an Artist: 10 Things Nobody Told You About Being Creative
Austin Kleon

Found in Translation: How Language Shapes Our Lives and Transforms the World
Nataly Kelly and Jost Zetzsche

INTERVIEWs

Max Mckeown (Agility)

John Perry (The Art of Procrastination)

Kevin Allen (The Hidden Agenda)

COMMENTARIES

“How to Make Sure You’re Solving the Right Problem”
HBR‘s Management Tip of the Day

“Why It’s Time to Rethink Recruitment”
Chris Gould
Talent Management

“New Research on Working Parenthood: Men Are More Egalitarian, Women are More Realistic”
Stewart Friedman
Harvard Business Review

“You Don’t Have To Be Loud to Lead”
Erika Andersen
Forbes

“How Business Schools Can Teach ‘Character 101′”
Warren Bennis
BloombergBusinessweek

“Deconstructing Executive Presence”
John Beeson
Harvard Business Review

“How to become more strategic: Three tips for any executive”
Michael Birshan and Jayanti Kar
The McKinsey Quarterly

“The Imperfect Balance Between Work and Life”
Rosabeth Moss Kanter
Harvard Business Review

“Organizational health: The ultimate competitive advantage”
Scott Keller and Colin Price
The McKinsey Quarterly

You can check out these and all the other content by clicking here.

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How to put your money where your strategy is

Here is an excerpt from another outstanding article featured by The McKinsey Quarterly, published by McKinsey & Company. It was co-authored by Stephen Hall, Dan Lovallo, and Reinier Musters. Most companies allocate the same resources to the same business units year after year. That makes it difficult to realize strategic goals and undermines performance. The co-authors explain how to overcome inertia.

To read the complete article, learn more about the firm, check out other resources, sign up for email alerts, and obtain subscription information, please click here.

Source: Strategy Practice

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Picture two global companies, each operating a range of different businesses. Company A allocates capital, talent, and research dollars consistently every year, making small changes but always following the same broad investment pattern. Company B continually evaluates the performance of business units, acquires and divests assets, and adjusts resource allocations based on each division’s relative market opportunities. Over time, which company will be worth more?

If you guessed company B, you’re right. In fact, our research suggests that after 15 years, it will be worth an average of 40 percent more than company A. We also found, though, that the vast majority of companies resemble company A. Therein lies a major disconnect between the aspirations of many corporate strategists to boldly jettison unattractive businesses or double down on exciting new opportunities, and the reality of how they invest capital, talent, and other scarce resources.
For the past two years, we’ve been systematically looking at corporate resource allocation patterns, their relationship to performance, and the implications for strategy. We found that while inertia reigns at most companies, in those where capital and other resources flow more readily from one business opportunity to another, returns to shareholders are higher and the risk of falling into bankruptcy or the hands of an acquirer lower.

We’ve also reviewed the causes of inertia (such as cognitive biases and politics) and identified a number of steps companies can take to overcome them. These include introducing new decision rules and processes to ensure that the allocation of resources is a top-of-mind issue for executives, and remaking the corporate center so it can provide more independent counsel to the CEO and other key decision makers.

We’re not suggesting that executives act as investment portfolio managers. That implies a search for stand-alone returns at any cost rather than purposeful decisions that enhance a corporation’s long-term value and strategic coherence. But given the prevalence of stasis today, most organizations are a long way from the head-long pursuit of disconnected opportunities. Rather, many leaders face a stark choice: shift resources among their businesses to realize strategic goals or run the risk that the market will do it for them. Which would you prefer?

Weighing the evidence

Every year for the past quarter century, US capital markets have issued about $85 billion of equity and $536 billion in associated corporate debt. During the same period, the amount of capital allocated or reallocated within multibusiness companies was approximately $640 billion annually—more than equity and corporate debt combined. [Note: See Ilan Guedj, Jennifer Huang, and Johan Sulaeman, “Internal capital allocation and firm performance,” working paper for the International Symposium on Risk Management and Derivatives, October 2009 (revised in March 2010).]  While most perceive markets as the primary means of directing capital and recycling assets across industries, companies with multiple businesses actually play a bigger role in allocating capital and other resources across a spectrum of economic opportunities.

To understand how effectively corporations are moving their resources, we reviewed the performance of more than 1,600 US companies between 1990 and 2005. [Note: We used Compustat data on 1,616 US-listed companies with operations in a minimum of two distinct four-digit Standard Industrial Classification (SIC) codes. Resource allocation is measured as 1 minus the minimum percentage of capital expenditure received by distinct business units over the 15-year period. This measure captures the relative amount of capital that can flow across a business over time; the rest of the money is “stuck.” Similar results were found with more sophisticated measures that control for sales and asset growth.]  The results were striking. For one-third of the businesses in our sample, the amount of capital received in a given year was almost exactly that received the year before—the mean correlation was 0.99. For the economy as a whole, the mean correlation across all industries was 0.92 (Exhibit 1).

In other words, the enormous amount of strategic planning in corporations seems to result, on the whole, in only modest resource shifts.

Whether the relevant resource is capital expenditures, operating expenditures, or human capital, this finding is consistent across industries as diverse as mining and consumer packaged goods. Given the performance edge associated with higher levels of reallocation, such static behavior is almost certainly not sensible. Our research showed the following:

o   Companies that reallocated more resources—the top third of our sample, shifting an average of 56 percent of capital across business units over the entire 15-year period—earned, on average, 30 percent higher total returns to shareholders (TRS) annually than companies in the bottom third of the sample. This result was surprisingly consistent across all sectors of the economy. It seems that when companies disproportionately invest in value-creating businesses, they generate a mutually reinforcing cycle of growth and further investment options.

o   Consistent and incremental reallocation levels diminished the variance of returns over the long term.

A company in the top third of reallocators was, on average, 13 percent more likely to avoid acquisition or bankruptcy than low reallocators.

o   Over an average six-year tenure, chief executives who reallocated less than their peers did in the first three years on the job were significantly more likely than their more active peers to be removed in years four through six. To paraphrase the philosopher Thomas Hobbes, tenure for static CEOs is likely to be nasty, brutish, and, above all, short.

We should note the importance of a long-term view: over time spans of less than three years, companies that reallocated higher levels of resources delivered lower shareholder returns than their more stable peers did. One explanation for this pattern could be risk aversion on the part of investors, who are initially cautious about major corporate capital shifts and then recognize value only once the results become visible. Another factor could be the deep interconnection of resource allocation choices with corporate strategy. The goal isn’t to make dramatic changes every year but to reallocate resources consistently over the medium to long term in service of a clear corporate strategy. That provides the time necessary for new investments to flourish, for established businesses to maximize their potential, and for capital from declining investments to be redeployed effectively. Given the richness and complexity of the issues at play here, differences in the relationship between short- and long-term resource shifts and financial performance is likely to be a fruitful area for further research.

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To read the complete article, please click here.

Stephen Hall is a director in McKinsey’s London office, and Reinier Musters is an associate principal in the Amsterdam office. Dan Lovallo is a professor at the University of Sydney Business School, a senior research fellow at the Institute for Business Innovation at the University of California, Berkeley, and an adviser to McKinsey.

The authors would like to acknowledge the contributions of Michael Birshan, Marja Engel, Mladen Fruk, John Horn, Conor Kehoe, Devesh Mittal, Olivier Sibony, and Sven Smit to this article.

Creating more value with corporate strategy: McKinsey Global Survey results

Here is an excerpt from article featured by The McKinsey Quarterly online (January 2011). To read the complete article, check out other resources, obtain subscription information, and sign up for free email alerts, please click here.

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Few companies create strategies that deliver more value than the sum of their business unit parts, but those that do also excel at moving resources and removing barriers.

Source: Strategy Practice

The development of a corporate strategy should amount to more than the aggregation of business unit strategies. The best corporate strategies, in our experience, force a multibusiness company to make clear choices about its portfolio and the allocation of its resources. Yet the results of a recent McKinsey survey show that just one executive out of five says his or her corporation fully addresses strategy in this way. What’s more, more than a quarter of executives at multibusiness companies say their corporations lack a consistent process for developing strategy.

In this survey, we asked executives at multibusiness companies how they approach the development of corporate strategy—the frequency with which they review it and the amount of time they spend on it, the inputs of the process and the resulting activities, the barriers to reallocating resources, and the talent and other management processes they apply to overcome these barriers.
[Note: The online survey was in the field from December 7 to December 17, 2010, and received responses from 2,313 executives around the world, representing the full range of industries, regions, tenures, and functional specialties. Of those, 1,944 respondents are at multibusiness companies and can describe their companies’ process for developing a corporate strategy.]

A small group of 151 respondents emerged who rate their companies’ approaches to strategy development as very effective and also say their profit margins are higher than those of competitors. Executives at companies that are “effective developers of strategy” are twice as likely as their peers to say their companies apply a distinct corporate strategy process (38 percent compared with 18 percent of all other respondents). Furthermore, 97 percent of these respondents view their companies’ processes for developing corporate strategy as consistent, compared with 59 percent of others. Executives also say these companies spend more time developing strategy, review strategies more frequently, and are much better at eliminating barriers to implementation.

Slow and steady doesn’t win

In both the boom of the mid-2000s and the financial crisis that followed, many companies did not (or could not) make critical portfolio choices and trade-offs. This may be why so few—just 19 percent of all respondents to this survey—say their companies have a distinct process for developing corporate strategy (Exhibit 1). Nearly a quarter, however, think their companies should engage in corporate strategy development on an ongoing basis (as opposed to episodically), compared with only 8 percent who say they currently do so (Exhibit 2). The small group of respondents at the effective-developer companies is ahead of the pack: 19 percent say their companies currently review corporate strategy on an ongoing basis.

A similar pattern emerges with regard to the amount of time a company’s senior-executive team actually spends—and ideally should spend—on developing corporate strategy in a typical year. No more than one in seven respondents say their companies’ senior leaders currently spend more than 15 percent of their time on this activity, but nearly three times as many describe that as the ideal time commitment. Among respondents at effective developers, a quarter say senior leaders currently spend more than 15 percent of their time on corporate strategy development.

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To read the complete article, please click here.

About the Authors

The contributors to the development and analysis of this survey include Michael Birshan, a principal in McKinsey’s London office; Renee Dye, a consultant in the Atlanta office; and Stephen Hall, a director in the London office.