Wednesday, July 16, 2008

Business Natural Selection

When scientists talk about Natural Selection, they refer to the process through which certain heritable (passed on via DNA) characteristics are favored by the environment at a given time, leading to the proliferation of organisms that carry these characteristics.   The organisms are said to be "selected" by the given environmental conditions.  Likewise one can think of similar principles in effect governing the success of a given business under specific economic or business conditions.  Algorithms have been proposed to explain the success or failure of a business based upon certain financial performance metrics.  But one can also think about this at a more general level.  The existence of Business Natural Selection (BNS) can explain quite a few things.  For example, when the latest genius CEO is profiled in the media, one is often struck by the uncanny insightfulness of decision-making that led this individual to success when many others failed.  Time and time again, when poor decisions were made by many, the "genius" makes the right call.  In fact that is because we are scrutinizing the chain of decisions after the fact.  How many business leaders are convinced when they are faced with choices, that their ultimate choice was the wrong one?  Does it make more sense to assume that the majority of business leaders make what they consider to be the best choice for a given situation?  Sometimes that choice is arrived at more confidently than other times, but no one knowingly opts to move in the wrong direction, or to make the wrong decision.  Rather, the best decision is generally thought to be selected and time proves whether that decision was a good one or a bad one.  If one creates a chain of decisions over a given span of time that might have been made by a given business, with thousands if not millions of decisions made, certain ones are favored under a given set of business or economic conditions.  Over time, with millions of businesses counted, a few might have made a series of decisions that ultimately favors them over other businesses for that timespan.  These are the companies that "win" in the marketplace and who thrive despite downturns or other failures within their industry.  This then, may be an explanation for the common observation that the CEO that is profiled today in a prominent periodical is also the one fired next year.  In an environment where Business Natural Selection governs failures and successes, that executive, if not possessing of statistics-beating insight, will quickly regress to the mean and perform no better or worse than others.  In the case of companies that are struggling however, average performance might not sustain a career.  Likewise those leaders with true insight and who have not benefitted from BNS, will exhibit a record of statistics-beating performance year after year.  

The Problem of Corporate Transformation

"Business Transformation" is increasingly in vogue as businesses look for ways to deter the inevitable decline that occurs when their core products become commodities or worse. Telecommunications, financial institutions, computer and network hardware manufacturers have all struggled recently.  Companies (Lucent, Nortel, etc) in these industries in particular have goals to dramatically re-engineer themselves to reinvigorate growth.  This then becomes an archetypal transformation:  cut costs, eliminate non-performing product lines, enter new or adjacent markets, offer new products and change the corporate culture. 

One oft-cited example of successful transformation was IBM's change from being the world's largest mainframe computer manufacturer to the largest technology services provider in the world.  But most often dramatic re-engineering does not lead to success.  Corporate Strategy Board research, the most comprehensive to date on the topic, cites a 1 in 36 chance that businesses are able to create a model for sustained revenue growth.  Of these only about 5% are effected through business transformation.  None were the result of entering wholly unrelated lines of business.  The pitfalls are many, lack of core competency with proposed new business lines, loss of strategic direction and the challenges of developing new technology infrastructure or  to support an unfamiliar business. 

In addition, there is a natural tendency for people throughout an organization to reject a new culture.  Corporate change experts talk about the "ten percenters."  The ten percent of the employee base who will never embrace the change.  

With these issues in mind, here are some suggestions based upon experience on how to successfully transform a business, given these challenges:

1) Ensure that a suitable culture change plan is in place prior to undertaking the change. Hire seasoned experts.  There will be no time to "learn while doing" with this type of venture and one cannot afford to fail because employees weren't receptive.

2) Obtain funding for the undertaking before starting.  When beginning extensive technology re-engineering efforts, not having sufficient funding to complete the re-engineering leads to costly redesigns.   It is best to obtain prioritized funding that remains in the funding portfolio for the requisite number of years to complete the project successfully.

3) Create a dedicated transformation organization to lead the effort and an appropriate governance process to manage it across the enterprise. Include both business and technical architects that will lead platform re-engineering and business model re-engineering efforts. 

4) Define concrete measures of success for the transformation that cross the business.  Be aware of interdepartment metrics tradeoffs--e.g. when cost is reduced in one area of the business only to increase in another unnoticed as a result of a process or system change.  Attach the appropriate incentives to these measures to drive their attainment.  

5) Identify empowered executive advocates or sponsors.  It is often best if the sponsor is the chief executive officer or another similarly senior position.

6) Don't underestimate development timelines and costs for the project at the onset and ensure it generates an appropriate return even under these conditions.  In fact a rule of thumb would be to double or even triple informed cost estimates.  Also, don't underestimate benefits that accrue as a result of the change, however. 

7) Engage and involve the highest performers in line functions to assist with the process of transforming the business. It will take that caliber of talent to realize success.  

8) Don't try to do too much all at once.  Engineering such complex changes is best tackled via understanding interdependencies and properly sequencing activities.  

Friday, July 11, 2008

Net Neutrality Imminent?

The Wall Street Journal reported today that FCC chairman Kevin Martin intends to force Comcast to change its practices related to slowing down certain types of data traffic.  This is certain to be viewed by Net Neutrality advocates as a victory. However as indicated by the article, it may hasten the adoption of new approaches toward pricing of broadband data services by service providers.  Most carriers today will argue that capital costs to build high speed broadband networks cannot be recovered under today's "all you can eat" pricing models and increasing use of high-bandwidth services like streaming video and that application providers like Google are benefitting from these low prices without incurring any of the costs for construction of broadband networks.  Ultimately whether Net Neutrality advocates' or broadband service providers' arguments prevail at the FCC, consumers will no doubt be the ones paying for the information superhighway.  

Sunday, July 6, 2008

The Role of Emotions in Trading

Why does the average individual investor have a reputation for buying high and selling low?  If you use a financial advisor, you might have been given the talk on the need to "control your emotions" when trading.  The July issue of SFO Magazine outlines the role of emotions in trading and how to overcome their pitfalls.