CASES IN STRATEGIC THINKING - …€¦ · Web viewBoth models are presented as mandalas designed to encourage thinking creatively. The word organization as used here includes all

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BUSINESS STORIES

REVISED JULY 2017

Professor Robin Matthews

Additional materials can be found at

http://www.robindcmatthews.com/lectures

and

http://www.tcib.org.uk/about.html

robindcmatthews.com 11/05/2023 18:57:38

http://www.tcib.org.uk/about.html

http://www.robindcmatthews.com/lectures

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Introduction

Students on business and management programmes are introduced to a bewilderingly number of models. I introduce two general models ; the meta model and the enneagram model.

The meta model is concerned with the system state of an organization (situation analysis) is to provide a set of categories that contain many of the models you may be familiar with,

The enneagram model is concerned with processes. Strategy is a process. It happens over time. It represents a series of system states over time.

The interesting problems in business require creative thinking; thinking out of the box. Both models are presented as mandalas designed to encourage thinking creatively.

The word organization as used here includes all types of organization; governments, public and private business, large and small, charities, not for profit businesses, national and international institutions, business in organizations generally.

Business problems

There is nearly always a repetitive element to business problems that can be approached using the managers own experience, the experience of fellow managers and experience synthesised in a management programme. Equally there is nearly always a unique element in a business problem that requires new and creative and imaginative ways of thinking and behaving. The business stories here are designed to fit both requirements. They should be approached together with my papers on the meta model and the enneagram methodology. They aim to encourage new ways of thinking and to challenge existing or conventional thinking.

The task of managers

We define the task of managers 1as, “care for the assets that they are entrusted with“. Care is an important word. The word assets is preferred to the more commonly used word resources. The word resource suggests that what are, in fact, scarce assets, are there to be exploited. There is no reason why organizations should care less for assets than, say, an actor using a text, or a sculptor using some materials or other. And business is no less creative than artistic or scientific activities generally.

They should be scientific and artistic activities that are governed ethically.But business often becomes debased, narrowly concerned with profit, behaving monopolistically, sometimes resembling crime syndicates rather than organizations concerned with caring for the assets they manage, own or control.

For many reasons, business and management activities have been seen as separate from creative activities in the arts or science. Similarly there is an uneasy relationship between business and ethics and between business and spirituality or (if you prefer a secular distinction) between business and humanity.

1 You may see the parallel between definition of management here and the parable of the talents.robindcmatthews.com 11/05/2023 18:57:38

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Care for assets

All aspects of the world are interdependent. Interdependence is one of the distinguishing features of the current era. Organizations are often so big that they impose systemic risk on society. That is why the idea of care and the concept, asset is becoming increasingly important. What one organization does, has implications for other organizations, for our ecosystem, or biosphere, for society in general so care is important, and assets are things to be nurtured rather than exploited. Neither care, nor assets are emphasised on business programmes. Business programmes have been swallowed up by concepts such as competitive advantage and shareholder value. The concept of competitive advantage represents a misreading of Charles Darwin’s idea of natural selection. Misreading inherent in the concept shareholder value is a little more complex. It involves a misunderstanding of how stock markets work plus a misunderstanding of what it means to be efficient.

Organizations as coalitions

A business firm can be described in many ways; as a collection of assets, or projects, or teams or value chains, or a part of a supply chain, business sector, or industry either national, regional or global economy. In game theory language, organizations are coalitions.

Evolution of firms and industries arises from the formation and reformation of coalitions of

activities; a complex interaction between activities and the agents, managers, leaders or

decision makers. Thus evolution takes place at many levels of organization; in businesses

within teams, functions, subsidiaries, business units, divisions, entire organizations, supply

chains, alliances and so on; that is coalition formation. What constitutes inner and outer with

respect to organizations depends upon the level (of organization) we are considering. The

general proposition of the paper is that organizational payoffs depend on an interaction

between inner dynamics (the capability of an organization at some level to self adapt) outer

dynamics (influences from other levels of organization) and organizational grammar (a mix

of procedures and rules, morphologies, formal/informal, internal/external and social/personal,

held together by a syntax). Thus we think of the outcome of strategy as a complex interaction

of four systems that are themselves complex; inner dynamics, outer dynamics and

organizational grammar (Matthews, 2006).

Organizations as stories

Organizations could be described as collections of stories: made up of the stories that people tell about them.

Here I am going to focus on the stories that people tell about their organizations. Organizations have many faces or characteristics. By faces I mean the way they are seen or perceived by people inside and outside; this includes stakeholders (staff at all levels, managers, presidents, customers, suppliers and so on) and also people just acquainted with them, journalists, writers and readers of various media, advertisers and so on. robindcmatthews.com 11/05/2023 18:57:38

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Stories reflect the image and reputation of an organization. There are as many stories about organizations as there are characteristics. I will also take a very broad view of stories. I include what people might say in formal interviews; what they might tell to their friends and acquaintances as anecdotes or jokes; what the media or public relations say. I also include formal ways of describing organizations; through financial statements, mathematical models, company reports and reports by analysts, stories from a human resource perspective, from a Gaia perspective, statistical and econometric stories, and many others and combinations of all the preceding stories.

What I really imply by using the word story is that there is no reality other than the stories we tell about reality. We tell ourselves stories to describe things and events that we experience. They all represent faces of an organization. They are all attempts to make sense of organizations.

Stories may have common themes or contradictory themes. Different stakeholders will tell different stories. The many faces shown by different stories enables us to see their complexity and appreciate the complexity of management problems.

Normal and extreme events in stories

Stories may be approached from a statistical point of view by statisticians or econometricians looking for significant common elements in organizational data of various kinds (the usual categories are quantitative and qualitative but I consider this division unsatisfactory). These stories are likely to focus on averages and their accuracy is judged the amount of variation they explain. The attitude is that there is an objective truth about organizations, independent of the perceptions of the source of the data provided the source is considered reliable, trustworthy according to some standard criteria.

Other stories of this kind are likely to focus on extremes. Rather than considering data or stories to be normally distributed with limited variation they consider data to be governed by power laws in which extremes though unlikely are possible. The underlying view here is that management is concerned with extreme situations, rather than average or ordinary situations.

Information

An idea that you may find difficult to come to terms with is that so called inanimate objects (or events, which are only moving objects) have their own stories. I think this is true. You may find the idea more acceptable if we say that in fact what we call objects (or events).

Many different stories

One reason why business problems are so complex is that the stories of different stakeholders reflect their interests. They have different ways of making sense. Their solution requires reconciling and negotiating between different interests and therefore different stories and different ways of making sense and resolving trade-offs.

The general idea of the stories below is to encourage creative thinking, in the belief that this is what is required of (senior) managers. I am uncertain whether we should speak of senior managers,

(a) because (in my experience) management and decision making is distributed throughout an organization (like the nodes or vertices of a network) and


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(b) often informal networks have more influence than formal networks.

Stories versus cases

The term stories is used rather than cases, because cases are associated with Harvard type cases, which plug a particular point of view (shareholder value and competitive advantage- the current grammar of business) in a non critical way. Indeed the authors of the cases are often unaware that there are alternative viewpoints, or that the grammar they present might not be the ultimate truth.

Practicality

Many of the stories are adaptations of the situations of companies I and my colleagues have worked with. Sometimes problems met in different situations, with different companies are combined in the same story. They do not pretend to be cases in the Harvard sense. You are encouraged to try to think outside the stories as they are presented below. That is a route to creative and analytical thinking. In fact I am not sure that the two are really distinctive.

Consulting

Consulting involves discovering the relevant business stories. These stories illustrate how different stakeholders make sense of an organization. The problem of consulting them becomes three fold: (a) elicit the relevant stories; (b) deconstruct these stories (do they say what the manager means?); (c) try to reconcile the stories (get people to tell and see the same story i.e. make the same sense). If yes to (c) OK; if no to (c) too bad!

Problems are like life. They pursue one another like day follows day. And maybe it helps to use an alternative word to problems. Call them materials, the things that managers work with.

Sense making and creativity

The diagram below is a picture of the process of sense making and pre sense making. 2

2 See David Boje (2001) Narrative Methods for Organizational and Communications Research and/or Robin Matthews Antenarratives Organizational Grammar and Gödel robindcmatthews.com.robindcmatthews.com 11/05/2023 18:57:38

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The diagram also defines creativity. As making something out of nothing.

Stories that follow should be used together with the paper on the Enneagram Methodology, which they are designed to illustrate. Most of the models you meet on a management course can be expressed as sub models of the Enneagram model.3

The first question to ask about the stories below is from which stakeholder’s point of view is the story written?

3See http://www.valuebasedmanagement.net/ and on above websiterobindcmatthews.com 11/05/2023 18:57:38

http://www.valuebasedmanagement.net/

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STORY 1

Preamble

Many aspects of a business can be presented as a network; the value chain, the web of relationships with suppliers, customers, competitors and so on. Business can be spoken of in many different ways. This really involves deciding what aspects we want to focus on (nodes) and how they are connected (linkages or edges). The organizational grammar (grammar) we adopt determines which nodes and which linkages we focus on and how we speak about them.

Networks and organizational grammar

Complexity, interdependence and the role of organizational grammar can be illustrated by networks. Networks consist of nodes and linkages or edges between nodes as in the figure below.

Figure 1

Here is an example of formal and informal networks4.

4 See Lowell L. Bryan, Eric Matson, and Leigh M. Weiss (2007), Harnessing the power of informal employee networks, Mkinsey Quarterly November.


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You can see that Cole is a relatively minor figure in the formal structure but he/she has the greatest number of linkages. If we were more precise, we would ask also about the strength of Cole’s linkages and whether they were plus or minus.

The default state of many networks appears to small world5 networks

Story1 Discussion

1. Illustrate your cohort as a formal or informal network.2. Who are the key connectors.3. ‘If we were more precise, we would ask also about the strength of Cole’s linkages and

whether they were plus or minus.’4. Apply 3 above to your own organization or one you are familiar with.

5 See Mark Newman, (2008) The physics of networks, Physics Today, November, pp. 33–38. also at ftp://ftp.elet.polimi.it/users/Carlo.Piccardi/VarieCda/Articoli/CdA-Art-Reti-3.pdfrobindcmatthews.com 11/05/2023 18:57:38

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STORY 2

Short and long term scenarios

This is an exercise on outer dynamics primarily; outer dynamics with respect to entire economies and to individual firms. The scenario below is painted by the UK Ministry of Defence (1-9) and other sources (10-11)

1. New weapons: An electromagnetic pulse will probably become operational by 2035 able to destroy all communications systems. Neutron weapons can destroy living organisms leaving buildings intact. Unmanned weapons could exert lethal force.

2. Technology: By 2035, an implantable information chip could be wired directly to the brain. Communications technology will enable states, terrorists or criminals, to mobilise flashmobs, challenging security forces to match their agility and speedy concentration.

3. Marxism: The middle classes could become a revolutionary class because of the increasing gap between the middle classes and the super-rich. Marxism may be revived because of inequality within nations.

4. Social unrest: In 2011 more than 50% of the world's population live in towns (rising to 60% in 2035), leading to instability and the growth of shanty towns. Globalisation may lead to inter-communal violence across national boundaries.

5. Population and Resources: The global population is likely to grow to 8.5bn in 2035, with less developed countries accounting for 98% of it. 87% of under 25’s live there. Implications for the environment, migration and international relations are serious.

6. Youth unemployment: The expectations of employment for the young everywhere are unlikely to be met. Resentment may be expressed in migration and global communications, encouraging contacts between diaspora communities and their countries of origin.

7. Islamic militancy: Population growth will mean that the Middle East, especially Saudi Arabia and North Africa, will remain highly unstable. Tension between the Islamic world and the western capitalism will remain, and may increasingly be targeted at the new-found materialism and institutional atheism in China.


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8. Terrorism: Casualties and the amount of damage inflicted by terrorism will stay low compared to other forms of coercion and conflict. But acts of extreme violence, supported by elements within Islamist states and media exploitation will increase its impact.

9. Climate change: Climate change is occurring and that the atmosphere will continue to warm at an unprecedented rate throughout the 21st century

10. Technological singularity: some IT gurus say that following Moore’s law, technology advances at an exponential rate and may soon go beyond the capacity of humans to understand it (event horizon). Indeed ours may be the last generations to die. They adopt a computer metaphor model of the brain, but maybe singularity is a real possibility. (Technological Singularity refers to a situation in which the computer’s power to generate algorithms surpasses the cognitive ability of humans to understand them.)

11. Google: Larry Page and Sergey Brin propose that at some stage in the near future it will become possible to implant the Google search engine in the brain.

Story 2 Discussion

1. “Outer dynamics should be thought of as a network of relationships. At a simple level this is true of PEST analysis. It is also true contagion or domino effects from economics to politics to social unrest in the Middle East”. Discuss.

2. Referring to 1 above, what implications does it have for thinking and analysing in terms of the normal distribution?

3. Comment on the proposition that real management problems are really about managing the kind of extreme events that are ruled out by Gaussian (normal curve) type thinking.6

4. Can you relate the diagram on the left side of the figure below to the small world networks referred to in story 1?

NOTE

The diagrams below illustrate the difference between Gaussian or normal curve thinking and power law (fat tailed/heavy tailed) distributions. The former more or less rule out extreme events: the latter notes that they happen unpredictably.

Power law distribution

Gaussian or normal distribution

6 See Andriani and Mkelvey, (2006) Beyond Gaussian Averages: Redirecting Management Research Toward Extreme Events and Power Laws, www.dur.ac.uk/resources/.../ BeyondGaussianAverages 19Jun06.pdf and/or Robin Matthews, Interdependence, no one is an Island at robindcmatthews.comrobindcmatthews.com 11/05/2023 18:57:38

http://www.dur.ac.uk/resources/.../BeyondGaussianAverages19Jun06.pdf

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STORY 3

Competition in the old and new economy

Preamble

This is a story about the interaction of inner and outer dynamics. Also note that creative destruction is an element in the grammar of capitalism. Also note that the contradictory story, the Red Queen Effect reflects an alternative version of grammar. In the contradictory story, capitalism self destructs. What do you think?

Creative destruction

According to Joseph Schumpeter, innovation is the dynamic of capitalism. Capitalism, he thought is unstable. It oscillates between boom and slump. An upswing results from a boom in investment and innovation and is inevitably followed by a downswing and a recession or more severely a slum and a decline in investment and implementation of innovations is often delayed. What drives the upswing? According to Schumpeter, it is a spate of innovations that create new profit opportunities; new products, new technologies, new markets. What turns a boom into a downswing and eventually a recession? According to Schumpeter, this happens because eventually the rate of profit declines as profit opportunities are eroded by competition and market saturation. Creative destruction then occurs. Firms are either destroyed and go into bankruptcy, or they are forced by losses or declining profitability to seek new sources of profit. Resources are freed up to await new profit opportunities resulting from a new phase of innovations. Destruction is creative in that it frees up resources and enables them to be transferred from old uses to new uses. It probably is a painful process; bringing unemployment, losses, bankruptcy, the death of firms. But it forces an economy to innovate and Schumpeter argued, an increase in wealth.

The red queen effect

In Through the looking glass, Alice, running beside the red queen, finds that neither she nor the queen is moving. They remain exactly where they began and the red queen observes that “ it takes all the running you can do, to keep in the same place." Similarly sometimes firms invest in innovation only to find that their profits are eroded by competitors who copy their innovation, and can sell their products cheaply, because they have not had to undertake the initial investment (sunk costs) in innovation and promotion. Competitors copy innovations: hence the margins of the innovating firm are reduced and innovators are no better off: they may even suffer losses

This happens time and time again in new economy7 businesses such as telecoms, communication, and information technology. It happens also in old economy businesses, such as automobiles and pharmaceuticals. To prevent this happening, firms need somehow to create barriers to new competition, though patents, or scale economies, that make the cost of entry into an industry prohibitive; that is, protect themselves against competition by establishing some form of monopoly power. Schumpeter maintained that monopoly power in this sense was a prerequisite for capitalism and innovation, because it enabled profit to be accumulated in the upswing of a cycle, that could be used to finance future innovation (which in turn would create a new upswing).

7 Old economy businesses (resources, autos, banking, etc.) all have new economy elements (extensive use of media in advertising and PR, IT systems, telecoms etc); new economy businesses use old economy hardware, resources, engineering. So the distinction between old and new economy is approximate.robindcmatthews.com 11/05/2023 18:57:38

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The red queen effect an example in telecoms: a new economy business

Telecoms illustrate a typical situation facing new economy businesses. They reach a level of maturity. Technology moves quickly. So there is a need to invest. Invest involves large setup (sunk) costs, not only in R&D and product development and testing, but in marketing sales and setting up distribution networks.

Firms have a choice. Either they invest: or they wait for competitors to invest, save some setup costs and perhaps learning costs, but lose market share. If they invest, then competitors quickly follow, making the product cycle short, reducing margins through price competition. Thus it is difficult to recoup setup costs because margins on operations costs are so low.

Alternatively if they wait and follow, they are subject to the same processes: they may save on setup costs but they lose market leadership, because they are late into the market. Most companies follow the same pattern. Margins on additional services associated with telecoms are usually higher. So they invest in add on service (apps for example). The same process results however. Margins are eroded. So the red queen process proceeds.

Story 3 Discussion

1. Explain and illustrate creative destruction and the red queen effect from your own experience.2. See the quotation in the preamble at the beginning of this story. What do you think? You

might give examples of yin and yang in management. 3. Can the great recession (2007- ) be explained as creative destruction?4. Compare and contrast the two principles (creative destruction and the red queen effect) with

Porter’s 5 forces model.5. Which of the two principles predominate in your industry? 6. You could say that in the face of creative destruction, managers are helpless and prisoners of

circumstances that they can do little about. Do you agree? Provide concrete examples.


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STORY 4

An archetypal model of firm growth

Preamble

This story is centred on inner dynamics. You will see that organizational grammar enters the picture in various ways; logistic growth (the S curve) is part of the grammar of growth which is a succession of system states); the new manager attempts to alter corporate grammar; structures and systems in the firm; government regulations are part of the grammar of outer dynamics and so on. Note that the logistic curve is a convenient way of illustrating the relation between the system state (where we are now), with processes (trajectories) that take place in time.

The logistic curve

The logistic curve describes the typical growth pattern of a species, rabbits, for example. Population growth begins slowly then accelerates into exponential growth, then the rate of growth declines. As the population of rabbits for example grows, this attracts in predators foxes. Predators, plus the rise in the number of rabbits, relative to the food supply causes the rate of growth of the population to decline. Perhaps growth becomes negative and the population declines (though this is not shown on the graph.

The logistic curve: formal representation8

x(t+1)

↑

→ x(t)

It is easy to see how the logistic curve can be generalised into a business context. Market share in one year depends on market share in the previous year. When the share of the market is small, then increase in the market share are relatively easy; growth of market share is exponential. Eventually as market share increases, it becomes more and more difficult to increase market share. Growth slows down and may even become negative.

8 In this form 0 ≤ x ≤ 1 is market share. Solutions are when x (t) = x (t+1) and lie on a 45 degree line through the origin passing through x = 0 and

x = ( 1-k)/k on the logistic diagram on the right. If k < 1 then population declines. If 1 ≤ k ≤ 2.9 (approx) then the curve has the familiar S shape. Between 2.9 ≤ k ≤ 3.2 cycles develop and for values of k greater than the model descends into chaos.robindcmatthews.com 11/05/2023 18:57:38

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Similarly the same idea can be generalised to describe sales growth. Marketers speak of the product cycle. A new product is invented. First, sales grow slowly. Then, the product takes off and sales grow exponentially. Then, as a result of competition or market saturation the rate of growth of sales slows down and may even become negative (sales decline). Another business example of the logistic curve is the life cycle of firms. They begin small than take off into rapid growth. Eventually the rate of growth declines. The firm reaches maturity. Perhaps at some point in the future the firm actually declines or becomes extinct. The lifetime of the average firm is surprisingly short.

Distribution

For reasons that will be clear, the firm has to be anonymous; so call it firm X. Firm X is a private company, distributing low value pharmaceutical products (gloves, towels, masks and so on). Firm X buys pharmaceutical equipment and accessories from suppliers, stores them and then sells them to their customers, hospitals and clinics. At the time of the story, market and their share of the market was growing exponentially. Firm X was on the exponential phase of the logistic curve.

The story begins around 2000. At that time the market was expected to grow even faster than earlier, because of injections of government spending into the health sector. In other words, the logistic curve was expected to shift upwards, signifying even faster logistic growth. Projections were that market growth would accelerate even further over the next three or four years.

Issues

Company X had/has a principal shareholder who wished at some point in the future either to sell the company outright or to conduct an IPO. In addition to the issue of whether to invest or not, a decision about selling the company, or conducting an IPO had to be made. The problem here is timing

Risks

As the market grew new firms could be expected to enter and compete with X (entry barriers into the market were low). So unless X expanded it would lose market share and might even decline. The reason was that hospitals and clinics were expected to increase in size and expand their demand for products. Since it is most economical for them to deal with a single supplier, unless X increased in size, held more products, to satisfy this increased demand, customers would switch to other suppliers.

Also X needed to increase in size as the market grew to get better terms from its own suppliers by buying in bulk from them. A further risk was that suppliers of X might decide to sell directly to final customers (hospitals and clinics) and in so doing dis-intermediate X. Thus X’s potential competitors included, not only existing competitors, but new entrants including new competitors who might be their existing suppliers.

X needed to expand. X’s biggest most costly asset was working capital, in the form of goods held as stocks and accounts receivable; that is, goods delivered to customers, who settled their accounts after a period of time. So X‘s cash flow was held up until accounts are settled. A further complication was that typically, although customers, the hospitals and clinics and so on, want delivery of goods throughout the year; but because of their own cash flow situation (they were financed by the government) they tended to settle accounts at the end of the year, November or December. So accounts receivable could waited for up to 10 or 11 months before they were settled.

This situation (government payment practices) was understood to be unchangeable: an unchangeable component of external grammar as far as X was concerned.

Financing issues


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Another problem arose about raising additional funds for working capital. X had little or no debt. It was funded by a single entrepreneur/investor.

Should the funds be raised by issuing debt instruments (bonds), borrowing from the bank (overdraft) or by raising new equity (share issue)?

The latter (share issue) would involve taking additional partners into the business, which would, the current owner thought, reduce his control over the business and dilute share values. Interest rates in the early years of the century were low, credit fairly easy to get. The owner raised funds skilfully; borrowing short term, selling off the real estate on which his warehouses were sited to another company, who then leased it back to him. Real estate was booming at the time so this was easy to do.

Yet another problem arose, because at some point the owner wished to sell the business outright; maybe through public offering of shares, effectively reducing or even liquidating his own holding, or selling to a single investor. The question was; if and when should he do this? What is the best timing? What timing will result in the highest price for the company? In other words; at what point would the company have its highest expected net present value? The answer to those questions was that nobody could really know.

However, times were propitious. Asset prices were rising. The company was growing exponentially since the product curve continued to shift upwards. A manager was hired, who had extensive logistics experience. He was paid extravagant bonuses to shave costs off the business.

By drawing on his relationships with customers, and using information, not only about their needs on average, but about the variance of their needs, the new manager re-aligned stocks of goods and working capital held by X with both average demand but with variations in demand. This information was channelled to suppliers bringing the situation closer to just in time supply. Purchasing and payment periods were also rationalised.

The decision to sell

All these things meant that the value of the firm increased. Three things determine the value of a firm; (a) the expected revenue stream,

(b) the expected cost stream and

(c) the cost of the firm’s capital.

The bigger are expected revenues and the smaller are expected costs the greater the value of a firm: the lower its cost of capital the higher the value of the firm.

As we explained revenues were growing and fortunately for the owner, people’s expectations are invariably based on recent experience. Similarly costs had been reduced. The cost of debt capital was low so there was a ready market for the firm.

The owner, somewhat fortuitously chose to sell out at the end of 2006, when the growth rate of the firm was at the highest level he considered feasible. Asset prices generally were high at that point in time. Had he sold one year later, in 2007, after the financial crash, and at a time when government expenditure was expected to fall then he would have got a considerably lower price. So we might argue, he obtained a windfall gain.


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Story 4 Discussion

1. Illustrate the story using the archetypal presentation of a business model; eg. the firm its suppliers, customers, competitors, payoffs and so on.

2. Use the story to illustrate a. the system state and b. the trajectory of a business over time

3. Illustrate the logistic curve with reference to your own experience as managers.4. Use the full Enneagram model to illustrate the various stages of strategy: cognitive, intent

alternatives, values; action decision, choice, implementation, control; adaptation.5. Comment on the factors that determine

a. the market value of the firm and b. the distribution of payoffs to stakeholders.

6. Comment on the statement, “[t]he latter (share issue) would involve taking additional partners into the business, which would, the current owner thought, reduce his control over the business and dilute share values.”

7. Was the owner just lucky in his choice of dates to sell? Or was it insightful?

8.


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STORY 5

Organizational grammar creativity and change

Preamble

This is a story about grammar and trying to change grammar, to increase payoffs. It illustrates McKinsey 7S (loose/tight) version of it. Beinhocker is a McKinsey employee. I often wonder whether such models are really useful to managers or whether they are statements of the obvious. The loose/ tight framework was adopted by Enron. It also appears to have been a model for the originate and distribute model rewarding bankers

Beinhocker’s model

Beinhocker9 gives 3 examples of barriers to change: (a) fixed mind sets, (b) the danger of complexity catastrophe and (c) path dependence. Briefly, fixed mind sets refer to the fact that peoples thought patterns become fixed and inflexible; complexity catastrophe can be illustrated by networks that are organized in such a way that if one part is disturbed there are blowbacks (domino effects/contagion) that disturb other parts of the system; path dependence means that often early choices have a huge effect on the future, often constraining later choices.

To introduce adaptability Beinhocker suggests (a) reducing hierarchy, (b) increasing autonomy and (c) introducing diversity into an organization. The following situation illustrates the applicability or inapplicability of Beinhocker’s diagnosis of adaptability. You must judge the situation.

It also illustrates a fundamental concept I have developed: organizational grammar.

Grammar and Beinhocker’s propositions

Beinhocker distinguishes aspects of organizational grammar that inhibit adaptation: 1. fixed mind sets and 2. path dependence. 3. A third factor, complexity catastrophe may make problems even more difficult to resolve.

1. Mind sets

Mental models become more rigid, more locked in, and more averse to novelty as we gain experience. Many cognitive scientists believe that one important way people learn involves condition-action (or if-then) rules. This set-up of mental rules, weightings of alternatives, and hierarchies of solutions has tremendous benefits. It enables us to learn from experience, to make decisions using ambiguous information, and to make inferences across experiences. Some cognitive scientists use the phrase “neurons that fire together (frequently) wire together (become fixed habit patterns)

But the downside is that mental models may become rigid. As mental models become more complex over time, major rearrangements become more and more difficult. There are 20-year-olds who have fixed mind sets and creative people of 70. But in broad terms, the structures of mental models change over time, and each stage of development has its strengths and weaknesses.

9 Beinhocker, Eric. (2006). The adaptable corporation, The McKinsey Quarterly. May.


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2. Path dependence

Early choices set an organization on a particular path that it might be difficult, even impossible to reverse.

3. Complexity catastrophe

Organizations can be viewed as networks or webs in which people interact. Complexity catastrophe, explain why interconnected networks and large organizations often find it harder than small organizations or disconnected networks to adapt. In any network with more than one connection per node, as the number of nodes grows, the number of connections or interdependencies grows even faster10.

The more interdependencies there are, the more potential for conflicts that constrain the range of solutions. Highly interdependent systems can sometimes become so complicated that they go into gridlock either because (a) they become catatonic, frozen in a state such that any change (except increasing entropy) becomes impossible, or (b) people are fearful of changing anything.

Organizational grammar and adaption in local government in Russia

Igor manages a small team of 40 advisors to the governor and his deputies in a small Siberian town of approximately 70 thousand people. Within the region there are about 200 thousand people. The team has an executive role:

1. providing advice and assistance on policy and together with local leaders in education, health, transportation, policing, welfare, etc., and

2. implementing policy.

Senior staff in the governor’s office have long term connections and relationships in the region; but according to Igor, attitudes are stuck in a Soviet style mentality. The governor and his administration are new and want to institute radical reforms. Igor is one of the governors new appointments and there are 10 new members in Igor’s team. The rest, have long experience of working in the governor’s office, and are resistant to any changes in work practices or in their attitudes to clients.

It is difficult for Igor to attract new people. Wages for professionals working in the region’s oil sector are relatively high and local government rates are not competitive. So hiring new people is not easy.

Igor is short staffed. Much of his time is spent dealing with emergencies. There is little time for long term strategy. He needs to double his staff and there are resources for this. Regional legislation says that he must hire in the region. This is difficult because of competition from the oil sector for educated people.

Staff attitudes are poor. Igor says there is a real motivational problem. Except for the new staff, there is generally no sense of service to customers. Management training is available from the local university, but it is outdated and Igor judges it to be very unsatisfactory. However he is required to use the university and not to send trainees outside the region for management education.

It is difficult to promote because promotion must be based on years of service.

10 Mathematically the number of nodes in a network increases logarithmically and the number of connections increases exponentially. This mathematical fact explains why small world networks arise.


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Story 5 Discussion

1. Illustrate the concept of organizational grammar and Beinhocker’s analysis of adaptability with reference to Igor’s problem.

2. Comment on (fixed) mind sets, path dependence and complexity catastrophe as part ofa. Internal grammar (grammar and inner dynamics)b. External grammar (grammar in outer dynamicsc. Grammar and payoffs.

Comment both within the context of Igor’s team and with examples from your own experience.

3. How would you advise Igor? Tell the story from the point of view of a. the governor, b. new members of Igor’s team, c. pre Igor staff

4. Does creativity feature anywhere in the story from your point of view?5. In the introduction to these stories consulting is said to be about “discovering the relevant

business stories. These stories illustrate how different stakeholders make sense of an organization. The problem of consulting them becomes three fold: (a) elicit the relevant stories; (b) deconstruct these stories (do they really say what the manager means?); (c) try to reconcile the stories (get people to tell and see the same story ie. make the same sense). If yes to (c) OK; if no to (c) too bad!” Comment with reference to

a. story 5 b. your experience

6. Use the full Enneagram model to illustrate the various stages of strategy: cognitive, intent alternatives, values; action decision, choice, implementation, control; adaptation

a. To illustrate Beinhocker’s thesisb. To illustrate your advice to Igor.


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STORY 6

Kraft and Cadbury

(Manchester United and Glazer brothers)

Preamble

A business firm is a collection of different projects; projects in production, training, cost reduction, marketing, operations, projects in finance, etc. Acquisition is a popular project for many firms. This story is typical. Alternatively a business firm is a collection of stories

Mergers and acquisitions

Success of the merger depends on 4 things.

1. Realising payoffs from anticipated synergies; making them happen.2. Over estimating synergies 3. Kraft not paying more for Cadbury than the value realised synergies.4. The structure of the deal.

Impact on shareholders

Points 1-3 are dealt with in many studies. Kraft agreed to pay £11.5bn or 840p a share for Cadbury, which pleased most Cadbury shareholders( four months before the takeover Cadbury shares traded at 568p). Normally most gains go the shareholders of the company taken over. Other stakeholders may not be so happy. Normally managers of the takeover company overestimate payoffs. One reason is the principal agent problem. Managers gain prestige and celebrity from big takeovers: it makes them feel important, whether or not the takeover results in gains for their own shareholders. Anticipated synergies are nearly always outweighed by high integration costs and conflicts of business and operational cultures. Point 4 refers to the way the deal is financed. It was a leveraged buyout financed by debt which secured on Cadbury assets. The biggest is that Kraft is funding the acquisition with £7bn of debt, meaning that the new group’s debt to EBITDA (Earnings before interest, taxes, depreciation and amortization) ratio is 4. If cash is generated on this type of acquisition, it is usually not spent not on investment, but on interest payments, management fees, and directors bonuses.

Football clubs

Manchester United, Liverpool and many premier league football clubs in the UK, find themselves in much the same situation. The present value of their profits is securitized into the debt used to finance the leveraged buyout; then they are required to devote part of future revenues to management fees accruing to the owners, who periodically must refinance their debt. Note that their debt has 2 components: a. debt due to the new acquisition; b. debts securitized on their other assets. Often profit streams from football clubs are used to refinance older debts.

Impact on other stakeholders

One of the former Cadbury UK plants was already scheduled to be closed. Commentators predicted that jobs would be lost if Kraft was to gain from the merger. But Kraft vowed to protect other Cadbury jobs in the UK: and convinced the then business secretary, Lord Mandelson; apparently.

Subsequently Kraft reneged on its promise


http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=200909081541dowjonesdjonline000396&title=krafts-debt-levels-could-limit-cash-outlay-for-cadbury

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Luckily we don’t have to worry about Sir Roger Carr the CEO of Cadbury at the time. Kraft has decided to move Cadbury headquarters to Switzerland to avoid UK taxes. But Sir Roger was awarded a Knighthood in 2011for services to British industry. He is also Chairman of Centrica, the parent company of British gas which recently announced an increase of 7% in prices. Centrica profits for 2010 are likely to be 2.2 billion UK pounds.

Story 6 Discussion

1. Analyse the story using the categories of the system state relevant to the situation: payoffs inner and outer dynamics, grammar. Note that what you include in the categories depends on the point of view you adopt in analysing the story.

2. Distinguish system state from trajectory in the story. Illustrate the trajectory with reference to the categories; intent, .......choice/decision,.......adaptation.

3. Write the story from the point of view of different stakeholder groups.

4. The Russian government has sought to limit foreign ownership of Russian firms. Do you think this story provides support for such a policy?


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STORY 7

BPR in the Russian banking sector

Inner and outer dynamics and organizational grammar

This Story concerns the inner dynamics of a major Russian bank that is largely state owned. It was decoupled from the immediate effects of the recent financial crisis, but the secondary effects of world recession has resulted in high levels of bad (non performing) loans. Competition from other Russian banks is not strong. Its reputation is good and there is perhaps nothing to fear in the immediate future from competition for big global banks; at least in the short to medium term. So outer dynamics are not the immediate problem.

Payoffs of the bank

The government naturally wants to increase the payoffs of the bank. Hence it has encouraged the bank to develop an operations strategy to improve productivity and reduce costs.

BPR in the value chain

One of the bank’s strategies is to use Business Process Engineering (BPR) on its inner dynamics and internal grammar (structures, routines and their architecture) to

1. increase efficiency of the business functions in its value chain;2. create positive synergies between them; 3. eliminate negative synergies and processes that don’t add value.

The Wikipedia entry defines (BPR) as a private sector technique to rethink their work, improve service, reduce costs and become a world class competitor. Information systems and networks are tools of BPR and are used to support new innovative business processes, instead of merely adapting existing processes. BPR is usually accompanied by a mission statement...

BPR was originally a technique developed by Mike Hammer. Hammer’s preoccupation was customer value. He thought that many activities in organizations do not add value for customers: so they should be eliminated and then costs would be reduced.

Hammer’s ideas are part of a tradition of management techniques begun by Fred W Taylor (Fast Fred) in the USA. Taylor was the founder of the use of Time and Motion techniques in the value chain. Just in Time (JIT) production, Lean Manufacturing and Total Quality followed later. W Edwards Deming invented Management (TQM) for use in USA; in practice Japanese manufacturers were the first to use after World War 1 when Japan was short of all kinds of capital including working capital. Later developments in management techniques include Six Sigma and Balanced Business Scorecard (BBS).

BPR in the bank

Technically BPR in the bank is working; productivity increases are happening, but there is a lot more potential for improvement. The main problem is resistance by staff many of whose former colleagues have been made redundant or retired; there is a sense of grief about this. People also fear that they themselves will become redundant. A typical comment of a middle manager who has worked in the bank for approximately 5 years was; “I have worked in this particular department (credit control) for two years. There are certainly ways in which we could improve things. I realise that changes are necessary. No-one asked my opinion. My views might be wrong or they might be right. But no one asked. They just imposed changes. “


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Mind sets, of both management and staff, are resistant to change: not only because of their experience with BPR but also because of path dependence, resulting from their early careers in a state bank in which traces of Soviet management style still exists.

Story 7 Discussion

1. What does the value chain of a bank look like? Compare it to the value chain of your business.11

2. Analyse the BPR aspect of the bank’s strategy from the point of view of different stakeholders (their stories)

3. The problem that senior managers have identified is how to overcome resistance. What would you suggest? Answer with reference to Beinhocker’s examples of grammar (mindsets, path dependence, complexity catastrophe),

4. In the introduction to these stories consulting is said to be about “discovering the relevant business stories. These stories illustrate how different stakeholders make sense of an organization. The problem of consulting them becomes three fold: (a) elicit the relevant stories; (b) deconstruct these stories (do they really say what the manager means?); (c) try to reconcile the stories (get people to tell and see the same story ie. make the same sense). If yes to (c) OK; if no to (c) too bad!” Comment with reference to

a. story 7 b. BPR

5. What aspects of external grammar inhibit change in the bank? (See footnote below)

11 See my website Bankers and Says Law for an outline of what banks dorobindcmatthews.com 11/05/2023 18:57:38

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6. STORY 8

The retail sector in Russia: Sunflower Company

Introduction

Sunflower is a business to business (B to B) company and one of the largest branded food distributors in Russia. One aspect of Sunflower’s grammar is its reputation for efficiency. Another is its distribution model. Sunflower specializes in brands that have an international reputation which it buys either directly from global companies (including Proctor & Gamble, Mars, Unilever and Kraft) or from large international distributors or agents. Sunflower sells to supermarkets, hypermarkets and retail chains throughout Russia, focussing on major cities.

Sunflower is not highly leveraged does not have a lot of debt). Returns to shareholders have increased in real terms by about 8% per annum even in the recession of 2008. Forecasted returns are good, but investors in sunflower are aware of the risks.

Critical success factors (CSF’s) are: 1. Margins between the purchase price of foods from suppliers and selling price of foods to

customers (sales margin). 2. Sales turnover; turnover of stock per month or per year. 3. Productivity and scale and scope economies in distribution.

Both high volumes and high sales turnover are necessary.

Outer dynamics and competition

Suppliers of Sunflower have high bargaining power from their monopoly position. Sunflower customers (supermarkets) also have high bargaining power (monopoly buyers). Both squeeze Sunflowers margins. An additional difficulty in Sunflower’s outer dynamics is rising food prices in Russia which is causing its customers to be more aggressive.

Sunflower’s search for higher payoffs and other payoffsThe goals of Sunflower are growth of sales and growth of margins. Unless they grow they cannot increase margins. Investors in Sunflower know that if they grow rapidly they will require more investment funds, but they are willing to sacrifice return on capital (lower rates of return on investment (ROI) or capital employed (ROCE) in the short term, for growth in sales (CAGR) in the medium to long term.

DilemmaThe CEO thinks that Sunflower’s dilemma is this: unless Sunflower increases its size and growth, the company cannot increase margins; but if Sunflower grows too much and too quickly (1) suppliers may set up their own distribution centres and (2) that customers (mainly supermarkets), fearing Sunflower’ increasing bargaining power will seek other suppliers.

Story 8 Discussion

1. Describe Sunflower’s business model. How does it add value? For whom does it add value?2. What is Sunflower’s dilemma? What threats are there to payoffs? To sunflower? To other

stakeholders3. What are the main risks that sunflower faces from inner and outer dynamics? Inner dynamics

are related to Sunflower’s resources and assets. Outer dynamics include the economic situation and competition)


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4. What do you understand about grammar from reading the case? What other information would you like to have to say more about the various dimensions of grammar.

5. In the introduction to these stories consulting is said to be about “discovering the relevant business stories. These stories illustrate how different stakeholders make sense of an organization. The problem of consulting them becomes three fold: (a) elicit the relevant stories; (b) deconstruct these stories (do they really say what the manager means?); (c) try to reconcile the stories (get people to tell and see the same story ie. make the same sense). If yes to (c) OK; if no to (c) too bad!” Comment with reference to story 8

6. Critical success factors for Sunflower are stated in the case. What are the critical success factors in your organization? Do you think that Sunflower has any sources competitive advantage that they can sustain? (dynamic capabilities)? Does your company have any? If so what are they?

7. If you were CEO, how would you resolve Sunflower’s dilemma?


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Story 9

STEVE JOBS AND APPLE

To be creative is to make something out of nothing; something valuable. Was Steve Jobs creative? What sort of leader was he? Is he a model for others to follow? What is the yin and yang of Steve Jobs? What is the yin and yang of leadership? What is the in and yang of management? Are leadership and management distributed (like computing), not concentrated in just one person.

Listen to Jobs

“Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma; which is living with the results of other people’s thinking,” said Jobs in 1995. He hoped to make a hole in the universe. “Do you want to spend the rest of your life selling sugared water, or do you want a chance to change the world?” he asked John Skulley, whom he hired as CEO of Apple in 1983. (Skulley had been president of Pepsi.)

When Apple 1 was invented by Steve Wozniak in 1975, Wozniak’s father said to Jobs, “You don’t deserve shit. You haven’t produced anything.” Jobs was fond of the word ‘shit’. People according to Jobs were either ‘amazing’ or ‘shit’.

He became famous for his stare; disturbing, demented; “like Rasputin”, some say.

Revolution

Steve Jobs revolutionised personal computing, animated movies, music, phones, tablet computing digital publishing and retail stores. He created new industries. He created employment. At 25 he was worth $25 million. When he died, in 2011, Apple was worth $350 billion.

History

Jobs was born in 1955, deserted as an orphan, adopted by quite poor people whom he later rejected. He hated his natural parents. His rudeness became legendary. His factories in China are death traps for employees. He often rejected people whose talents he borrowed; like Wozniak or Ivey (one of the principal designers of Apple products).

After Apple 1 and Apple 2, perhaps the first successful personal computers produced in the 1970’s, Macintosh followed in 1984. Beginning in 1998, a stream of products followed; iMac, iPod, iTunes, iPhone, iPad. He was expelled from Apple in 1985 and set up NeXT, in 1985. His main achievement in NeXT was to buy Pixar. In 1996 Jobs returned to Apple, when apple bought NeXT to acquire Pixar. In 2006 Apple sold Pixar (to Disney) for $7.4 billion.

NeXT was nearly ruined by the enormous cost of Jobs fascination with design. But design is one of the real strengths of Apple. Jobs seemed to understand what captured the customer’s imagination. Another strength was focus on customers rather than businesses; there are more customers than businesses; simple. A third is that Apple’s hardware and software is proprietary and designed by Apple. These three strengths enable Apple to charge monopoly prices.


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Listen to his biographer.

Jobs was unable to accept any reality other than the reality he, himself wanted to see; regardless of the facts. More surprising Steve Jobs was able to get people to believe in Steve Jobs’ version of reality. Jobs was a mono maniac; as self centred as a three year old child (an American version of a three year old apparently); a sociopath. But the “poetry” and “artistry” of Apple’s products, is “as sublime as walking in one of the Zen gardens of Kyoto that Jobs loved”.

Authentic managers

We identify authentic decisions, strategies and leaders as follows. People or groups in this category are dynamic in that they take some responsibility for their personal evolution and they are aware to an extent of their own conditioning; they are aware of their habitual grammar. In the sense implied by the by the Magritte pictures in figure 14 they are capable of self reflection. In much the same way as most people have creative potential, the state of authenticity, or perhaps of dynamism, is achievable.

Static group

Figure 14 relates grammar to some recognizable employment/leadership categories. Note that people may occupy all of the different categories in figure 14 at different stages of their lives, or indeed at any one period of their lives.


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Story 9 Discussion.

1. ‘To be creative is to make something out of nothing; something valuable. Was Steve Jobs creative? What sort of leader was he? Is he a model for others to follow? What is the yin and yang of Steve Jobs?

2. What is the yin and yang of leadership? What is the in and yang of management? 3. Are leadership and management distributed (like computing), not concentrated in just one

person.’ 4. In terms of the box below that I have extracted from the notes on the Enneagram

methodology, how would you categorize Steve Jobs?5. Comment on the proposition “that creativity is about creating something out of nothing”,

with reference to the Steve Jobs story.6. Apply Woody Allen’s proposition in story 11 to the Steve Jobs story? Does it fit?


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Story 9The Hedge Fund Long term Capital Movements (LTCM)

Preamble

This story illustrates the Black Swans/fat tailed distributions at work. On a smaller scale it illustrates the type of interactions that brought about the Great recession in 2007/8. It is primarily illustrates inner dynamics (of LTCM) outer dynamics (the potential impact of LTCM on economies businesses) that was neutralised by the intervention of the USA Federal Reserve.

History

Long term Capital Management (LTCM) was set up in 1993, borrowing large amounts to exploit small differences in the price of assets; arbitrage opportunities. Risks in the fund were diversified and controlled, using modern mathematical theories of finance, based on work in the 1970's by financial economists Black, Merton, Miller and Scholes and earlier work on stochastic differential equations by Ito, in Japan.

Asset pricing

The solutions to the problem of pricing options, contracts that give the right12 to buy (call) or sell (put) assets such as shares at a given date or during a given period, is based on constructing a replicating portfolio: a continuously adjusted set of investments in the asset (the share itself) on which the option is written and government bonds or cash. The replicating asset would (according to the financial models) have exactly the same pattern of risk and return as the option itself. In an efficient market the cost of the replicating portfolio, should equal the price of the option. If the two diverge, gains can be made by buying the cheaper one, and selling the dearer. A massive global industry in financial derivatives developed, by the standards of the time. In 1997 the Financial Times estimated the value of the derivatives market as $60,000 for every human being on earth. By 2007 it was much bigger13.

LTCM's strategy was to exploit arbitrage possibilities when short-term divergences arose between assets with identical risk (according to their models). To repeat; they would buy under-priced assets and sell over-priced assets. Risks of prices brought about by prices diverging further in the short or medium term, or by extreme events such as the collapse of the European Monetary Union, or big stock market crashes were carefully calculated and hedged.

12 Two of this quartet were awarded Nobel Prizes in economics; not Black since prizes are not awarded to the diseased. But not the obligation. This was before the era of CDO’s and CDW’s when the picture looked like this

CDS CDW

2001 $ 920bn $279 bn

2007 $62 trillion $4.7 trillion

Bear in mind that world GNP is around $60 trillion.13 See The Financial Tower of Babel robindcmatthews.comrobindcmatthews.com 11/05/2023 18:57:39

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Fat/heavy/Taleb/Black-Swan distributions

The probability of LTCM collapsing according to the models it used was negligible. Its managers, some of them Nobel Prize winners in economics convinced themselves that they had no risk at all. The problem was that they only had no risk 99% of the time.

The theories they used assumed that variations in stock prices were small and normally distributed. They also assumed that events are independent. If these assumptions hold, extreme events are more or less impossible. But extreme events happen. Events are not independent and nor are changes in stock prices normally distributed.

LTCM became temporarily short of liquid assets. An email indicating this somehow became public knowledge. Essentially the problem was rectifiable. But it was taken as evidence of desperation. People began to panic and sell LTCM assets. Then Russia defaulted rather than print rubles in the crisis of 1998. Although LTCM had only small exposure to the Russian market, self-validating beliefs turned into self-feeding fear. Illiquid and risky assets everywhere began to be sold in favour of lower risk liquid alternatives. This worked against LTCM, which was holding illiquid assets. Its assets further fell in price. Also LTCM strategy had been to short sell; that is, to borrow assets whose prices were rising, at their current prices, return them at the old price (plus a commission) and pocket the difference. This turned into a loss making activity when asset prices suddenly and unpredictably begin to fall.

The impossibility of insolvency when assets are perfectly hedged turns into a reality

Illiquidity problems began to turn into insolvency problems. More things conspired against them. Traders were on holiday in August. The computer programmes they had set in motion instructed automatic selling of assets whose prices fell below a certain minimum level. Many banks were in the same position as LTCM thus compounding the problem. Banks imposed sanctioned traders everywhere, forcing them to sell assets even if when it was unfavorable to do so.

The Fed and moral hazard

Events that in normal circumstances are independent (private emails, Russian default, the price Mexican assets that LTCM held and so on) became interdependent; connected to such an extent that a financial virus developed that could cause the entire financial system to collapse. The United States Fed organized a rescue plan for LTCM to prevent default on its borrowings that would have spread like a virus to the entire global financial system. LTCM was closed down in 2000.

Gauss again

This brings us back to the problem with the grammar of Gaussian (normal) distributions and statistical properties such as the central limit theorem that are based on Gaussian distributions (and for that matter asset pricing models). They are based on the assumption that events are independent. Events like the Arab Spring, the Great Recession, Disease, earthquakes, and the numerous events that seem to


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follow power laws, are not independent. No one, no thing, no event is an island insulated from other people, things events.

This does not mean that Gaussian distributions are not extremely valuable. What it means is that they have to be applied properly; to independent events. In many business situations independence is not a valid assumption.

Thus events that are supposed to happen only 1% of the time happen, events are often interdependent not independent, stock prices do not vary according to the normal distribution, but are probably fat tailed, meaning that extreme events are more likely than some Nobel Prize Winners think; and success (and failure) that we (and Nobel Prize Winners and earners of fat bonuses) attribute to our unique genius, are, as the actor in the voiceover in story 10 says, due to luck.

Story 12 Discussion

1. Read this story alongside (recommended sections of) the Andriani and McKelvey paper.2. Can you see it from another point of view? The point of view of complexity catastrophe in

story 5.


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STORY 13

Luck, risk and uncertainty

In a voiceover of Woody Allen’s film Match Point, showing a ball hovering over the net, an actor says;

The man who said I would rather be lucky than good saw deeply into life. People are afraid to face how much of life is dependent on luck. It’s scary to think so much is out of one’s control. There are moments in a match when the ball hits the top of the net and for a split second it can go either forward or fall back. With a little luck it goes forward and you win: or maybe it doesn’t and you lose.

Story 10 Discussion

1. What does this quotation imply about risk, about luck, about the ability to determine and plan life, projects or business about strategy?

2. Comment in the light of your experience of strategic decision making and academic courses in strategic management and about sense making in business.


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Story 14

Global warming

James Lovelock is associated with the Gaia hypothesis that the biosphere has gone beyond the pint of no return. The earth, he thinks, is a self regulating complex system that is now beyond the limits necessary to preserve life.

The Gaia hypothesis has a weak form (Weak Gaia) and a more radical strong form (Strong Gaia).

According to the weak form, the Earth a coevolving system, radically altered by the living creatures that inhabit the earth; plants, animals and humans. The stronger forms is that the Earth's biosphere is a complex adaptive system, acting in a self-organizing way, that keeps the sub-systems of which it is composed, in a system state that supports life.

Evolution, ecology and climate change show that the trajectory of system states has changed, sometimes very rapidly, over time, bringing extinctions and new life forms, interactions within the networks of life, society, economics, demography, ecology that have brought about the rise and fall of civilisations. Jared Diamond agrees with this view, placing most of the (causal) emphasis on ecology and Darwinism. Some thinkers emphasize the importance of dramatic changes that have taken place from time to time, disturbing the balance of life, leading to punctuated equilibrium; periods of stability punctuated by huge disturbances.

The strong Gaia hypothesis is that all life forms are part of one single living planetary being Gaia; the atmosphere, the sea and the earth’s crust, plants animals and humans co-evolve as part of a single Gaia, the living earth. In Lovelock’s view, the earth has reached a point of singularity or what some authors call the sixth great extinction, and it is too late to stop deterioration.

Other views are more moderate. But econometric/ecological studies seem to agree on the following. Greenhouses gases (GHG’s) have two effects on the climate (a) direct heat increases through for example a doubling of CO2 concentrations and (b) indirect (carbon feedback) effects from heat induced GHG increases in the arctic permafrost and methane (CH4) other boggy soils, plus release of offshore CH4. CHG’s are likely to double in the next 40 years whatever agreements are made internationally to limit them (and recent attempts at international agreement are not very promising increasing the likelihood of doubling).

Through the lens of fat tailed distributions and based on expert opinion there is a 5% probability that global temperatures will increase by 100 Celsius and the 1% probability that it will increase by 200 Celsius in the next 200 years. Such changes have not happened for hundreds of millions of years and such rates of change have not happened for billions of years. Undoubtedly such changes would obliterate life on earth. We can ignore these probabilities as we are tempted to do by normal distribution or Gaussian thinking.

Business and economic analysis and practice is almost solely concerned with managing extreme events and so it is argued, are environmental studies. Yet researchers in business robindcmatthews.com 11/05/2023 18:57:39

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focus almost entirely on normal distributions that are such that they predict relatively small changes; very extreme events having miniscule probability on the normal curve.

Story 14 Discussion

1. Tell story 14 from the point of view of a. BP b. an emerging economy or BRICc. the earth.


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STORY 15

FRANKO CONSULTING

PROF ROBIN MATTHEWS

March 2017

This is an example of a consultancy issue that I’m concerned with now. The company has to remain anonymous, so let’s call it Franco. The idea is to spark ideas rather than to provide a hard and fast set of instructions that must be adhered to. Originality is prized.

Franko consulting

Franco is a consultancy company based in a small country central Europe let’s call it Swabia (a fictitious name). The business model of Franco is to provide information services to companies in the Russian Federation considering exporting to Swabia. Franco provides advice about Swabian law marketing and distribution networks, provides introductions to possible partners and investors and so on; in brief, a set of information services necessary for a Russian company to operate in the Swabian business environment.

Franco has share capital of around €50 million divided among the three founding partners. In addition to these partners there are four full-time staff and a network of part-time staff, lawyers and accountants, business analysts and so on. One of the principal assets of Franco is the relationships it has with business and politics in both Russia and Swabia.

The critical issue at the moment is how to leverage Franco’s considerable reputation in both Swabia and the Russian Federation into providing consultancy services in the other direction; that is providing similar services to Swabian firms considering operating in the Russian Federation.

The barriers to mainly exist in Swabian culture, mindsets and generally [organizational grammar- just call it grammar] with respect to Russia, since most of the media reports Swabians come into contact with about Russia are very, very negative.

In spite of this the directors of Franco are convinced that considerable business opportunities exist for Swabian firms. So, how to overcome these barriers?

The managing partners have asked for a report and presentation addressed to themselves and to the four full-time staff and selected partners. All of the prospective audience have extensive business experience and understand BUSINESS AND MANAGEMENT type language.

The change has been initiated by Franco. People in the company recognise that they themselves have to change several aspects of grammar; with respectrobindcmatthews.com 11/05/2023 18:57:39

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1. outer dynamics: including would be client perceptions and mind sets about Russia to their mindsets, path dependence, regulations about trade, corruption, etc. in Russia

2. inner dynamics: mindsets, culture, hard and soft systems in Franko; complexity in Franko- will the new venture disturb existing business?

3. Payoffs; clearly financial returns are important but also to be taken into consideration are the aspirations Franco investors as to building up business, and considering long and short term tradeoffs beween for example CAGR14 versus ROI.

1. Gradually transforming (they recognise this will be a gradual process) the perceptions of Swabia firms about Russia and

2. Persuading prospective clients that real opportunities do exist.

With respect to 1, the audience is quite open-minded about the need to transform their own mindsets, the culture and grammar of Franco. The precondition for succeeding in this is first to understand the roots of these barriers, second to consider whether the barriers are rationally based on third to transform and overcome them where necessary. Perhaps Beinhocker’s categories (mindsets, complexity catastrophe, path dependence) might provide a framework for self evaluation. Certainly the audience will be looking for suggestions as to how to go about this. And they will be looking for some kind of roadmap. Actually I’m considering using the enneagram methodology as a tool. Maybe also the idea of a strategy roadmap – more linear way of looking at things – might be useful.

With respect to 2. Franco already has reputational capital both through its directors/partners reputations and the network of businesses in both Russia and Swabia that it has dealt with in the past. The issue is; can this reputational capital be leveraged? And if so, how? And to what extent the barriers to do so exist in the mindsets, cultures and generally grammar of the firms already in its network.

And of course, Franco needs to extend the network.

It is likely both with respect to 1 and 2 above that both Franco and its prospective clients will require a realistic picture of the upside and downside risks.

Let us the same that the content of the report to be delivered, the date of delivery and the consultancy price has been negotiated.

A report of around 4000 words has been agreed. The report will begin with a brief abstract that summarises the main things that the consultant wishes to emphasise.

14 See https://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&ved=0ahUKEwic9-79qqTVAhXHKsAKHUmDDLAQFgg6MAQ&url=http%3A%2F%2Fwww.investopedia.com%2Fterms%2Fc%2Fcagr.asp&usg=AFQjCNGQVq7KzqLTLNiGMp4j3UVUApuSBQ


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Following the abstract some keywords relating to the report are useful. The people preparing the report are considering choosing candidates for keywords among the following; system state, path dependence, mindsets, process, priorities, BBS, Sigma,…… Meta model perhaps, enneagram model perhaps,……

The brief has been agreed upon. I have stated it here precisely, but it can be summarised in a sentence or so.

The report will begin with an introduction telling the reader what to expect. This will be followed by three or four sections, addressing 1 and 2 above and an outline of the upside and downside risks in the light of which there will be a set of recommendations and priorities about what to do and in what order to do it.

Maybe a checklist, based on some kind of scorecard will be provided. The client do like to see illustrative diagrams/figures/tables where necessary.

Certainly they do not want images lifted from the web that are not directly related in the report to the issues facing Franco.

The report will finish with a summary and conclusions related to the brief and to the intentions expressed in the introduction.

Franco are interested in the kind of references that have been used in completing report. Since part of the report may go out to prospective clients, then a statement of the credentials of the period of the people preparing report is desirable – why on the basis of experience and so on other people writing the report qualified to do so authoritatively?


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STORY 16

CHANGE15

In Spring 1750 children began to disappear from the streets of Paris: little mites and even

big boys and girls of 14 and 15. People blamed the authorities. Street fighting broke out.

Bad harvests had caused migration to the cities. An Edict of 1749 had ordered a roundup of

all homeless in Paris; children included. Constables, paid per arrest, were overzealous in

scooping up any child any where they could find them. Rumour had it that Louis XV was a

leper and leprosy (it was thought) could cured by washing in the blood of children. The

frightened king, accused by rumour, fled Paris and potential revolution. But the riots died

down. Did the events of 1750 prefigure those of 1789? Why in one case was the extent of

change limited and in the other not so?

Why are some changes limited and others not? Does a correspondence exist between changes

in physical systems and changes in social systems? What is the nature of change? Is there

explanation that applies generally to change in business and change in society? Does the fall

of companies fall into the same class of problems as the fall of nations or systems or into the

same class as the emergence or extinction of species? Does the co-evolution within an

ecological system correspond to the evolution of products, firms, industries, economies or

15 See also the footnotes on stories 2 and 4. robindcmatthews.com 11/05/2023 18:57:39

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technologies? Are the processes that bring sudden revolutionary financial, economic and

political change (stock market collapses, the end of business or national empires) driven by

the same class of processes to the sudden calamitous changes in the physical world? Is

change the inevitable outcome of events outside the control of organizations (outer

dynamics)? Or is a degree of self adaptation or self determination possible (inner dynamics)?

There are an underlying algorithms of change; to which organizations gravitate;

(a) change on all scales is probable,

(b) change on some scale or other is a continuing reality,

(c) small degrees of change are more likely than large degrees and

(d) organization of all forms are poised, held perilously there by organizational grammar.


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STORY 17

The Balanced Business Scorecard; example

The balanced business scorecard (BBS) is a relatively recent development in management accounting, by Kaplan and Norton (1992). The scorecard perspectives are financial, customer, internal processes, and learning and growth. The focus is on balance between the four perspectives. The use of nonfinancial measures appears to increase with the level of regulation. Google notes that there are 260,000 citations on the BBS

They claim that although managers use all kinds of techniques to evaluate performance, JIT, ABM, corporate reengineering, core capabilities and so on they frequently rely on one-dimensional accounting measures. They recommend the BBC as providing a a balance between long and short term objectives. The table below indicates some of the measures used to evaluate the BBS.

www.businessballs.com Balanced Business scorecard

There appears to be two ways of using the BBS; for classic scorecard perspectives as compared to the causal linkages approach (Kaplan and Norton (1996, 2000). Later developments tie the scorecard to a strategy map or a value driver map as it sometimes caught. Strategy maps are intended to translate results into testable hypotheses and causal chains.


http://www.businessballs.com/

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Very few firms do check on causality when they adopt BBC methodology and when they do so very few test the hypotheses they set out. Psychological explanations of the way managers interpret results may be more significant than economic explanations (Ittner, et al. 2003)i.

Tayler (2010) uses and experiments to test whether managers interpret data in such a way as to arrive at conclusions that are consistent with those they most desire. What is results show is that managers who are involved are more likely to see strategic initiatives as successful and those who are not involved. This really is a test of what the authors call motivated reason.

Tapinos et al (2011) note that a great number of tools are taught in business schools for use in enhancing strategy, but does little evidence on how they actually influence the strategy process. The BBC is sometimes seen as an exception that can influence all elements of the strategy process. Their results of their study show that there are some differences, quite significant, between the strategy processes of firms that have implemented the BBC, the impact of the technique is doubtful. They also suggest that the BBS may be more suitable for large organisations which collect lots of data.

Moods often have respect and organisational behaviour and of course no difficult to track or account for. You get mood congruent judgements. Ding and Beulieu (2011) suggest that the influence of moods is greater when there is information overload; a 16 measure BSC may be too much for managers to cope with and make moods very important factors in judging performance to be good or bad. Things get better when the BSC is simplified. Processing capacity of individuals is important. Apart from references cited above the bibliography below includes further critical papers.


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STORY 17

UBER

Uber is the result of a technological spin-off from the revolution in communications and information technology. It began as an entrepreneurial company, this is probably still the case. But it reached a critical size, properly too big for the entrepreneurial style, something of a gung ho style. Then it ran into problems. This is a phenomenon which is very common to rapidly growing companies – they reach a stage when they need to introduce conventional hard systems. And often entrepreneurs are unwilling to do this. They resist. But the fact that they’ve gone public, means that they have lost ultimate control.


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STORY 18

THE LIFE EXPECTATION OF COMPANIES

Evidence shows that the life expectation of companies, regardless of how old or new they are is consistently 10 years. It’s good to take this into consideration when evaluating corporate performance. Think about the companies that beat this average.

The life expectation of companies follows a negative exponential path.

And a linear form when the data (number of companies against current life expectation) is transformed into logarithms.

Ask if you’re not certain about this

SEE

West, Geoffrey B. Scale: the Universal Laws of Life, Growth, and Death in Organisms, Cities, and Companies. Penguin Books, 2018.


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