What important lessons do the last
hundred years of business history
offer us today?
One of the important lessons of the
past century is that sustaining
superior performance is not just
about great execution but also about
continuous strategic renewal.
Otherwise, excellencewill be fleeting.
We have all had our frustrations with
an ever-changing list of 'excellent' and
'great' companies from one decade to
the next. In my own study of over
6000 publicly listed companies
around the globe, only 1 in 4
achieved sustained profitability and
growth over a 5 year period that was
better than the average for their
industry. That proportion drops to 1
in 20 over a 10 year period and 1 in a
100 over a 15 year period. Sustaining
superior performance over the long
haul is hard. Here is why.
Pursuing growth requires exploring
for new opportunities and
competencies. It calls for
entrepreneurship and risk taking.
Profitability on the other hand, is
helped by exploiting the
opportunities and competencies that
are already available to the firm.
Systems and processes that are finetuned
over time to maximize
profitability cannot nurture
entrepreneurship. But then a firm's
market opportunities get depleted
steadily both through market
saturation and the actions of
competitors. Its competencies lose
their distinction through imitation
and substitution. Unless there is a
continuous push to explore new
opportunities and capabilities that
will be needed for competing
successfully in the future, the firm's
performance will eventually suffer.
Without continuous strategic renewal
a firm cannot show sustained
excellence in performance.
The first eight years of this century
(2001-2008) would definitely go
down in history as watershed years
for global businesses. First it was
colossal fall of Enron, Arthur
Anderson, Tyco, WorldCom, etc.,
September 11, attacks put countries
on high alert. 2007 saw the world
getting engulfed in subprime
mortgage crisis and with that a
complete washout of trillions of
dollars of shareholder wealth and
2008, has seen the global banking
crisis, oil price shocks and Food
price rises, etc. What do all these
events signify? Should they be
looked at isolation or are there any
powerful lessons for future
managers and CEOs when they
connect the dots?
You ask two different questions here.
The first has to do with shocks to the
economy and the other is about
corporate failures.
Let me talk about environmental
shocks first. These are not new.
Managers have had to deal with them
for years. There are two types of
shocks though, one that can be
anticipated and the other a total
surprise. For example, some would
argue that the spike in oil prices
should have been anticipated. With
the soaring demand for energy, the
poor track record on conservation
and oil supply being controlled to a
significant degree by the oil cartel
OPEC, oil price had to spike sooner
or later. Managers simply have to get
better at scenario planning and learn
to formulate strategies that can deal
robustly with multiple scenarios. The
days of pin point forecasting are over.
Then there is the other type of shock,
like the terror attacks of September 11.
This is perhaps a scenario that
nobody could have anticipated in
advance. Nevertheless, firms that had
lean organizations and low break even points could absorb the sudden
loss in demand better than others that
were not as efficient. Building
resilience is another important
response to dealing with
environmental shocks.
The other question you raise is about
corporate failures. You refer to Enron,
Arthur Anderson, Tyco and
WorldCom. All these case studies
point to lack of ethics. In the case of
Tyco and Arthur Anderson, it was the
moral failure of its leaders. That was
also the case at Enron andWorldCom,
but with an important twist.
I talked about continuous renewal
earlier. If a firm fails to renew its
opportunity space and capabilities, it
will soon face performance pressures
that it cannot handle. Indeed,
companies like Enron and
WorldCom faced such a pressure.
Their leaders had promised the
financial community more than what
they could deliver. They did not have
an underlying strategy to back their
promise. So they began taking
shortcuts; which soon transgressed
into illegal activities. Jeff Skilling of
Enron and Bernie Ebbers of
WorldCom are in jail today, convicted
for their roles in this sad drama. It is
important to remember though that
what started it all was a flawed
strategy.
The root causes underlying the
subprime crisis are similar: stale
strategies that could not support the
performance commitments that were
being made by these firms; combined
with weak ethical standards that did
not question the means that were
then used to artificially boost firm
performance.
Moral leadership and smart strategy
go hand in hand. Performance is
enhanced when both are present and
it degenerates precipitously when
both are missing.
