ten countries invited to join the European Union in 2004 (Lithuania, Estonia, Latvia, Czech Republic, Hungary, Slovakia, Slovenia, Poland, Cyprus and Malta) seem sensible prospects. It is certainly true that global foreign direct investment (fdi), a signifi- cant measure of globalisation, having risen from $160 billion in 1991 to $1.5 trillion in 2000, has since shrunk back to about $650 billion in 2002. 13 However, this is much more to do with a downturn in the developed economies and particularly a sharp drop in mergers and acquisitions. It is in developing economies that globalisation continues to grow steadily, if slightly less spectacularly, with fdi expected to increase by 50% during the period 2002–06 (see Figure 1.1). This growth is driven by a growing appreciation in the West of the opportunities these markets can provide, combined with a growing understanding of how best to do business in developing markets. One region that should continue to develop economically is Asia. Japan, South Korea, Hong Kong, Singapore and Taiwan started the process, and Thailand, Malaysia and Vietnam have all grown rapidly in recent years. But the biggest powers of all, India and China, on top of the strides they have made, show massive, unfulfilled, economic potential. Eastern Europe (notably Poland) and Latin America (Mexico in particular) are other regions possessing significant economic poten- tial. When western markets falter, it is often developing economies that are seen as offering the greatest growth potential. The ability to find commercial opportunities in unlikely places is an increasing 20 BUSINESS STRATEGY Source: Economist Intelligence Unit Foreign direct investment 2002–06, US$ billion 2.11.1 2002 2003 2004 2005 2006 0 100 200 300 400 500 600 700 800 900 Developed countries Developing countries 01 Business Strategy 11/3/05 12:15 PM Page 20 source of competitive advantage. Financial management is changing Traditionally, financial management has been largely about producing the figures required for business decisions to be made and establishing and enforcing financial controls. Recent years have seen a rise in the sig- nificance and influence of the chief financial officer (cfo) to the point where virtually no major decision is made without the cfo’s involve- ment. Businesses have woken up to the complexities of financial man- agement and the cfo now has major responsibilities in managing risk, controlling costs, increasing brand equity, maximising shareholder value, measuring financial performance and determining strategy. Thus corporate health depends increasingly on the finance function, as share- holders in Enron, Marconi and WorldCom and many other companies are only too well aware. Rethinking the budget: Diageo 14 Diageo was created following the 1997 merger between Guinness (a brewing conglomerate) and GrandMet (one of the world’s largest producers of branded spirits), and its subsidiaries include Pillsbury and Burger King. Following the merger, 60 finance managers from all parts of the business met to discuss how they could best serve their shareholders in the future. Overwhelmingly, the response was to “blow up the budget”. The feeling was that the budget process consumed vast resources, took too much time and took too little account of each individual business: there was a one-size-fits-all approach. There was little benefit for the shareholders in this detailed process (which is replicated in many corporations). The budgeting exercise was seen as a game, and the managers of the business understood that shareholders were concerned not about performance against arbitrarily agreed targets but about whether the company was worth more this year than last. As one senior finance manager commented: Everyone knew that something had to be done – we were wasting too much time and money. We began streamlining the current system’s workload and progressed to creating an integrated strategic and annual planning process built around key performance indicators (KPIs) and rolling forecasts … [We] focused on developing strategy-driven KPIs that were interconnected up and down the organisation. This ensured that people at every level and position had relevant metrics, while giving the 21 SOCIAL , CULTURAL AND COMMERCIAL FORCES 01 Business Strategy 11/3/05 12:15 PM Page 21 board the right information to plan with. The same data, slightly modified, enabled business units to operate most productively. Diageo went further than this, preferring externally oriented and forward- looking performance indicators to historical or internally focused ones. In this way, issues such as leading market indicators and brand equity become apparent. The result is a management focus that is concerned with resolving strategy issues and preparing for the future rather than dwelling on presentations of past figures and performance. The previously unsung and currently burgeoning talents of finance experts made this inevitable; they have much more to offer than simply tallying past events. Other business leaders, and in particular shareholders, want finance personnel to help them get the greatest value from every asset, including the expertise in their finance department. Technology makes all the difference In Competing with Information, 15 Donald Marchand and his co-authors highlight the breadth of the practical, commercial applications of tech- nology. The most successful and effective organisations use technology for market sensing, innovation, flexibility, learning, selling, competing for and keeping customers, managing supply chains and improving effi- ciency, managing risk, motivating, leading and empowering. Much has been learnt about the role and application of technology, but more remains to be learnt about what it can do and, in particular, how to use it. As Marchand says: Information can be used to develop and sustain competitive advantage, it is the way people in organisations express, communicate and share their knowledge with others, to accomplish their activities and achieve shared business objectives. If knowledge – our experience, skills, expertise, judgment and emotions – primarily resides with people, then by using information, people can inform each other and be informed about the decisions, actions and results of their work in companies. It is through information about markets, customers, competitors, partners, internal operations and the mix of products and services offered by the organisation, that managers and employees create business value and improve performance. 22 BUSINESS STRATEGY 01 Business Strategy 11/3/05 12:15 PM Page 22 In Making the Invisible Visible, 16 Marchand highlights a critical and decisive factor: the way that people and technology interact. Companies spend huge sums on their technology systems, with little direct under- standing of how that investment directly affects profits. How technol- ogy enhances business strategies and decisions is covered in Chapter 13, but it is helpful to understand the following:  Managers will increasingly need to develop an integrative view of the way that people, information and it work together. it specialists are, of course, important in supporting an organisation’s effective use of information, but it is others who need to understand how to integrate processes, structures, behaviours and values in order to set the strategic route and follow through.  Organisations must discern where and when technology can be deployed to facilitate the effective use of information. Senior managers, who are not it specialists, should decide which it investments and applications are appropriate and when it investments will not necessarily lead to improvements in information management or produce better results. Business leaders must develop the ability to balance the opportunities, risks and investments in technology with their people’s ability to use information to add value and improve performance.  Organisations must create the conditions for effective information use. Information management is the responsibility of every manager and information responsibility, as Drucker 17 calls it, means that managers have to discover what information they need, how that information should be provided, and who will supply it and when. Also important is how well the organisation uses information to create value. According to Marchand: Information management responsibilities exist at the level of the individual manager and business unit at the same time. Managers must understand how they use information with those around them and how their company creates business value with information. Senior management must, therefore, ensure that information use is as 23 SOCIAL , CULTURAL AND COMMERCIAL FORCES 01 Business Strategy 11/3/05 12:15 PM Page 23 intelligent, co-operative and focused as possible on the goals of the organisation. Those who are in the know have huge power, so it is in everyone’s interests that managers should be fully aware of how they use information to make decisions. If they are not, they will find their competitive advantage dwindling. Demographic challenges Demographic changes are likely to have a dramatic effect over the next 20–50 years. Significant reductions in the number of people in both the developed and developing world will affect the availability of skills, the size and dynamics of markets, and the value of many key resources. Such changes will have a big impact on businesses and the decisions they make. The world’s population is likely to fall. For the population to stand still, each woman needs to have 2.1 children (one child per parent, plus an extra 0.1 to account for women who die young, are infertile, or oth- erwise do not have children). This is known as the replacement level. Today more than 60 countries, including China, Germany, Greece, Japan, Korea, Russia, Spain and the United States, as well as much of eastern Europe and the Caribbean, have fertility rates below this level, and the trend is deepening and extending to other countries. The UK’s replacement rate is 1.7 and Italy’s is 1.2. Within the next 20 years the fer- tility rates of Brazil, India, Indonesia, Iran, Mexico, Sri Lanka, Thailand and Turkey will fall below the replacement level. At this rate, Italy’s current population of 56m would crash to 8m by 2100; Germany’s would decline by 85% over the same period from 80m to 12m; and Spain’s would decline by 83% from 39m to 6.6m. However, just as fears of increasing population rates resulted in fore- casts of disaster during the early 1970s, highlighted by the Club of Rome’s Limits to Growth report, tales of populations falling by over three-quarters are probably exaggerated, not least because they will be alleviated by the effects of immigration. Nonetheless, populations are likely to fall. As the New Scientist reported: “Within two generations four out of five of the world’s women will be having two children or fewer.” 18 So what are the likely consequences for businesses?  More women will work at all levels in organisations, and will increasingly compete with men for higher-status jobs. Women’s emancipation and moves to more equal status have driven a 24 BUSINESS STRATEGY 01 Business Strategy 11/3/05 12:15 PM Page 24 string of changes reflecting women’s priorities and increased purchasing power.  The technological development that transformed the 20th century will continue. With fewer traditional workers, even in the developing world, and an increasing need to industrialise poorer countries, technology will be used to raise productivity globally.  Some markets and industries will contract and others will expand. This will potentially have an impact on many sectors, from healthcare to agriculture. When populations change, social change follows. For example, when there is a decreasing number of working people to fund pensions, retire- ment ages may need to change, and immigration may need to be encouraged to ensure that there are people to do the jobs that need to be done. What is driving change? An economist’s view of technology As well as changing the way in which organisations deliver value, technology is driving change in many other areas, affecting the context of strategic decisions. Laura D’Andrea Tyson, dean of London Business School and a leading economic adviser to Bill Clinton from 1996 until 2000, highlights the main force driving global change: The basic factor driving change is technology. It’s trite to say but it’s true. The two major developments taking place in the world are demographics and interconnectedness. Interconnectedness is about transportation and communication, and that’s driven by technology. Demographics is actually about biotechnology and science. She adds that demographics examines the causes of improved longevity. Technological advances have increased longevity and reduced disability. The impact of this change is felt in a number of areas, including retirement. Should people retire at 65 if they are going to live to 100? In advanced industrial societies, less time is spent in the workplace than on other activities because longevity has increased but working hours have not. People are staying at school longer and are retiring earlier. 25 SOCIAL , CULTURAL AND COMMERCIAL FORCES 01 Business Strategy 11/3/05 12:15 PM Page 25 The key to the future is how to make work-life more meaningful – now it’s like a cliff, and when you retire you fall off that cliff … There need to be alternatives or bridging mechanisms in place, to help people prepare for retirement. Technology is driving all of this. Controlling businesses A wave of financial and accounting scandals in the early years of the new millennium, involving, among others, Enron, WorldCom and Andersen, focused attention on the way that organisations are con- trolled. The possibility that even respected firms might be guilty of accounting shenanigans depressed stockmarket prices. How are we to regain faith in standards of corporate governance, and what are the implications for businesses? The regulatory route Supranational bodies, such as the European Union, have steadily increased regulations in areas such as corporate governance, data pro- tection and employment. In 2002 the United States introduced the Sar- banes-Oxley Act, requiring ceos to formally vouch for the accuracy of their firm’s accounts. Developing countries, China being an important case, are recognising that an efficient capital market can only be achieved if there is intelligent and effective regulation of corporate activity and corrupt practices are weeded out. The intention is that this will redress the balance; however, as Lucy Kellaway, a journalist, com- ments: Bureaucracy, after many years of decline, will be on the rise again. More regulation of companies, encouraged by the Sarbanes-Oxley Act in the United States, and other measures designed to clean up the corporate act will be the spur. The onus of proving that a company is whiter than white will bring huge time demands and a heavy paper trail with it. 19 Personality matters Business history is full of the influence of people such as Henry Ford, Alfred Sloan, Akio Morita, Harold Geneen, Richard Branson, Jack Welch, Herb Kelleher and Bill Gates. But today charismatic business leaders are less able to influence the business environment. To some extent they 26 BUSINESS STRATEGY 01 Business Strategy 11/3/05 12:15 PM Page 26 can set the agenda, focus and direct, but they are much more vulnerable to internal and external factors. Charismatic leaders will always inspire but their organisations are likely to succeed only if there is a coherent, well-organised and imaginative team supporting them. Key questions  What is your organisation’s most important asset (or greatest source of competitive advantage)? How secure is it?  How well do your organisation’s human-resources policies reflect changing patterns of employment? In particular, is your organisation co-ordinating the efforts and talents of all employees, enabling them to improve the organisation’s effectiveness?  Does the increasing flexibility of the labour market offer opportunities to improve organisational effectiveness, by reducing costs, increasing capability, or both?  Is your organisation unnecessarily bureaucratic? Could it become more flexible, and if so, how?  How can productivity be measured more effectively, and could these measures be enhanced? How can people in the organisation be encouraged to come up with ways in which productivity could be increased?  Where does the intellectual capital of your organisation or business unit lie, and what can be done to develop and exploit it to gain long-term competitive advantage?  How does your business involve customers? Are efforts made to understand what they want? Is the firm certain about what its customers value? 27 SOCIAL , CULTURAL AND COMMERCIAL FORCES 01 Business Strategy 11/3/05 12:15 PM Page 27 2 Ideas at work S etting strategy is complex because of the complicated, shifting array of challenges and opportunities an organisation faces over time. For decision-makers to come to grips with this mounting complexity it helps to have an understanding of theories of management and leadership that have emerged during the past century. Decision-making approaches The classical administrator The classical administrator is the most traditional model of the decision- maker or strategist. Henri Fayol is recognised as a founding father of this model, known as the classical school of management, which came into its own around 1910. He developed a set of common activities and prin- ciples of management, dividing general management activities into five sections: planning, organising, commanding, co-ordinating and control- ling:  Planning involves considering the future, deciding the aims of the organisation and developing a plan of action.  Organising involves marshalling the resources necessary to achieve these aims and structuring the organisation to complete its activities. Both of these roles remain crucial.  Commanding may be a term that is out of fashion in the egalitarian, politically correct and empowered world of many western organisations, but the concept remains significant. It is important to achieve the optimum return from people, frequently the most expensive component of a business.  Co-ordinating involves focusing and, in particular, unifying people’s efforts to ensure success.  Control involves monitoring that everything works as planned, making adjustments where necessary and feeding this information back so that it can be of value in future. The classical-administrator approach to decision-making is largely concerned with measuring and improving internal competencies in organisations. It is characterised by hierarchy, usually in the form of top-down planning and control, formal target setting and performance 28 01 Business Strategy 11/3/05 12:15 PM Page 28 measurement, structured programmes for functional improvements through “scientific” engineering and a formal organisation structure. Fayol can be seen as a forerunner of modern management theorists who take a prescriptive view of strategic decision-making. For example, Frederick Taylor, one of the founding fathers of management theory in the first half of the 20th century, introduced a scientific-management approach to production department work; and Peter Drucker can be cat- egorised as a classical administrator, at least in his approach to strategy development and decision-making. The classical approach really took hold once entrepreneurs, such as Henry Ford, realised that they needed to focus on the productivity of their new manufacturing plants. It led to the development of efficient production lines and a focus on production quality, which started in the 1950s, built up efficiency in Japanese manufacturing industry and then took hold more widely in the 1980s. (This approach was publicised by W. Edwards Deming, an American who helped the Japanese improve their production processes in the early 1950s, although it was not until the early 1980s that his contribution to improving quality processes, and building a reputation for Japanese reliability, was recognised in his native land.) The emphasis on controlling and measuring foreshadowed the arrival of the total quality management movement. A Fortune mag- azine article in 1997 highlighted the significance of Taylor’s work: It’s his ideas that determine how many burgers McDonald’s expects its flippers to flip or how many callers the phone company expects its operators to assist. 1 Arguably this approach is for a different time and is no longer rele- vant. In Taylor’s words: Nineteen out of twenty workmen throughout the civilised world firmly believe it is for their best interests to go slow instead of fast. They firmly believe that it is for their interest to give as little work in return for the money that they get as is practical. 2 In this situation, a controlling, commanding and monitoring approach is probably vital, but even if this were once true, is it now? The point is that it does not matter. The great value of the classical- administrator approach lies in the structured framework for action that 29 IDEAS AT WORK 01 Business Strategy 11/3/05 12:15 PM Page 29 [...]... instead a more practical, contextsensitive approach that is better suited to individual businesses It takes into account commercial risk and discounts future cash 41 01 Business Strategy 11/3/05 12: 15 PM Page 42 BUSINESS STRATEGY flows (that is, it takes into account the time value of money) when making commercial, and particularly investment, decisions With sva, financial considerations and techniques are... largest bankruptcies the world had ever seen Stewart Hamilton, a professor at imd in Lausanne, Switzerland, and a commentator on issues of financial strategy and control, argues that: The key lessons for the financial sector of recent years are general management issues relating to the use of business information in managing risk – they are therefore highly relevant to all firms.8 Scandals often hit the headlines... Page 35 IDEAS AT WORK say that any one approach is more valid than another Each approach gained support because of prevailing circumstances, and this is still the case The most effective approach depends on the issues faced by an organisation, as well as the style and preferences of its leaders Furthermore, each of these theories of management can be taken to reflect a particular leadership style, although,... target itself Long-term financial decisions and shareholder value Shareholder value analysis (sva) is a concept used for managing longterm financial decisions so that the value of the business is increased sva is founded on a view that standard accounting methods for calculating the value of a business are outmoded: either they dwell on a backward-looking historical perspective, or they are simply too... 11 for a more detailed guide to applying sva techniques The balanced scorecard approach In their best-selling book The Balanced Scorecard,10 Robert Kaplan and David Norton highlighted several ways in which business decisionmakers can increase the long-term value of the business Their approach applies the concept of sva and is based on the premise that the traditional measures used by managers to see... plan Invariably, further discussions are necessary to agree the detail of the goals and activities to be measured and what measures should be used Each measure needs an action to make it happen, and this is where the real value in the approach lies: deciding what action to take to achieve the goal Once finalised, the plan needs to be communicated and implemented, with responsibility for different parts... responsiveness? What about the fundamental decisions that are made not at the top of the organisation, but much further down? For Mintzberg, vision, communication and negotiation, as well as the need to be able to react quickly to disturbances and to change tactics at short notice, are of greatest importance Moreover, an ad hoc approach balances short-term needs with a longer-term understanding of environmental developments... came to prominence in the 1980s, largely as a result of Tom Peters and Robert Waterman.5 They saw vision as one of the fundamental tools of an effective strategic decision- maker, regarding issues such as: Where should the organisation position itself in the market to 32 01 Business Strategy 11/3/05 12: 15 PM Page 33 IDEAS AT WORK provide growth, to continue to build shareholder value and to keep ahead... competitors? What type of organisation should it be? What are the brand values and aspirations of the organisation, and what do they need to be to realise its aims? What guiding principles steer the organisation, and how are they best assessed, communicated and applied? (This sense of mission is seen as essential; people that understand the core goals and values of the organisation are better placed to. .. to the fore when managers are making commercial decisions; issues such as return, risk, cash flow and value routinely guide managers in their operational as well as their strategic decisions It requires more comprehensive commercial information across a range of factors, compared with traditional measures that only focus on a few short-term indicators, such as share price or quarterly profits See Chapter . production department work; and Peter Drucker can be cat- egorised as a classical administrator, at least in his approach to strategy development and decision- making. The classical approach really took. and improve performance. 22 BUSINESS STRATEGY 01 Business Strategy 11/3/05 12: 15 PM Page 22 In Making the Invisible Visible, 16 Marchand highlights a critical and decisive factor: the way that. competitive advantage. Financial management is changing Traditionally, financial management has been largely about producing the figures required for business decisions to be made and establishing and