In a crisis, innovate

Recently, an executive – an ex-student – told me about his company. The company has a handful of competitors (it is a local business) highly similar to itself, and they’re all losing money in the current economic climate. Now one competitor – the worst-performing of the lot – has started to accept assignments for a fee below its cost price, just enough to cover its variable costs and at least earn back a tiny bit of its fixed costs. My ex-student asked me, “What can we do?”

The answer isn’t easy. But it is of course a rather typical situation to be in. It happens in most industries in trouble; some bloody competitor – often the lousiest one of all – starts to sell below cost price, out of pure desperation. Actually, my ex-student’s company responded in a way that is just as typical: they said, “But their product is inferior; we deliver quality, and customers will always want to pay for that” (and stuck to their comparatively high price). But customers didn’t. And they seldom do. Even if there is a minor quality difference – and it’s usually just minor; at least in the eyes of the customer – if the price difference is large enough, you’ll lose a lot of clients; more than you can afford.

So what can you do? What else can you do than lower your prices too, tighten your belt, hold your breath, and hope the crisis blows over before you bankrupt yourself? Because that’s what companies usually do.

I’d say the phenomenon is rather common, so the solution can’t be.

It reminded me of the English newspaper business some years ago. All quality newspapers were in trouble; stuff had started to move on-line big time, free newspapers such as the Metro had flooded the market and, on top of that, the general trend was that people simply read less. The four main players in London – The Guardian, The Times, The Daily Telegraph and The Independent – were all in decline but The Independent was the one widely expected to fall the first. The others had deep pockets due to rich owners and, due to a price war several years earlier, which had hit The Independent hardest, it was basically broke.

Now, The Independent could have done what most companies in such a situation do: moan about it, cut some more costs (or whatever is left of it) and attempt to prolong an inevitable death. But it didn’t. It took a plunge. It launched a small-sized version of its newspaper; the denounced “tabloid” format. All newspapers had been talking about it for a long time, but everyone had dismissed it as too risky (customers won’t like it), phoney or plain cheap. But The Independent launched it, and it worked (customers loved it). They survived.

Was it a coincidence that out of the four main players it was The Independent that launched the thing? Of course not. It was The Independent who basically had nothing to lose; it would have been the first one to go under had the industry continued as is. But it chose to not just prolong its demise: it took a plunge, and recovered.

The same happened to the famous Southwest Airlines. In its early days, when it was in deep trouble, it had to sell one of its four planes. Yet, it didn’t try to just save some more costs and continue with 75 percent of its operations, prolonging an inevitable decline; it took a plunge. It said “we’re going to run 100 percent of our operations but with just three planes!” and, in the process, invented the widely successful low-cost airline model, having scrapped all frills and complications, combined with the emergence of a must-succeed culture.

So, when you’re down: innovate. Don’t just wait for the inevitable to happen; prolonging your decline out of some false hope that you’ll weather the storm. Storms kill; get out of it while you can.

Spinning clients – the McKinsey effect

Some time ago I was having lunch with three McKinsey consultants and they started talking about how different all the people in their organisation were. I was watching them during this conversation and couldn’t help but notice that they even looked alike... They spoke alike, dressed alike and, clearly, thought alike. What seem like huge differences within a group may be miniscule (or even non-existent) if you’re an outsider looking in.

It actually reminded me of a scene in Monty Python’s “Life of Brian”, in which Brian looks out of his window and sees this huge crowd gathered in front of his house waiting for him to speak. And he shouts “you are all different!” After which they dutifully reply in chorus “yes, we are all different”.

[Brian] “You are all individuals!” [Chorus] “Yes! We are all individuals!”
(I particularly like the guy who subsequently says “I’m not”...)

Anyway, McKinsey, like many highly successful individuals and organisations – my great colleague Professor Dominic Houlder tends to call them the most successful religious order since the Jesuits – attracts scorn and admiration in equal measure. And I too believe they do many things right. One of them is that although the average person only stays with McKinsey for barely three years, when you join, you pretty much become a McKinsey person for life. If you "leave", you become an alumnus.

And that is a great feeling to foster if you, as an organisation, lose most of your employees to your customers. Because those people become great advocates for The Firm. McKinsey, for instance, proudly showcases them as alumni (although they have been able to keep remarkably quiet the fact that Enron’s Jeff Skilling was among their most high-rising offspring…). Importantly, what do these alumni do, as soon as they start to work in the real world? Yep, they hire McKinsey consultants…

And these type of beneficial effects do not only accrue to McKinsey; mere mortal organisations can reap them too. Professors Deepak Somaya, Ian Williamson and Natalia Lorinkova, for example, examined the movement of patent attorneys between 123 US law firms and 109 Fortune 500 companies from a variety of industries. Indeed, they found that if one of those Fortune 500 firms recruited a patent attorney from a law firm, subsequently that law firm would start to get significantly more business from that company. And I am sure it works that way for many other types of companies too.

In addition, by the way, Deepak, Ian and Natalia also found the reverse: if the law firm would hire a person from one of the Fortune 500 firms, the business it received from that company tended to go up too! Moreover, if the law firm would poach an attorney from one of its competitors, it would see business go up from the companies that were on the books of that attorney’s previous employer. Apparently, customers often follow a job-hopping attorney to his new law firm.

Therefore, like McKinsey, perhaps you shouldn't be too frightened of people moving. You want to hire people from your competitors and your clients, but you may also want your clients to hire yours. Rather than vilify them for leaving and cut all strings, keep them on the books as alumni, and actively cultivate relationships with them, in the form of clubs, Christmas cards and summer-evening barbeques if necessary! The only thing you don’t want is for your people to move to your competitors… They too may take business with them.

Hence, people will move; if they do, just make sure it is to a (potential) client – that’s the McKinsey way. And, of course, make sure to keep it quiet if they mess it up over there (like alumnus Skilling did at Enron) – that’s also the McKinsey way.

What really caused the 2008 banking crisis?

When you compare the 2008 banking crisis with the Enron debacle, with Ahold’s demise or even with the Union Carbide disaster in Bhopal in 1984 some surprisingly clear parallels emerge. Various explanations have been offered for each of these crises, ranging from top management greed, failing watchdogs to insufficient government regulation and inappropriate accounting and governance structures. Yet, there is one common cause underlying all these symptoms and triggers, and that is the structural failure of management.

One central element in each of these disasters, including the banking crisis, is caused by the division of labour and specialisation within and across organisations. In the case of investment banks, financial engineers drew up increasingly complex financial instruments that, among others, incorporated assets based on the American housing market. Yet, the financial engineers didn’t quite understand the situation in the housing market, the people in divisions and banks participating in the instruments didn’t quite understand the financial constructions or the American housing market, and when it all added up to the level of departments, groups, divisions and whole corporations, top managers certainly had no clue what they were exposed to and in what degree.

Similarly, in Enron, managers did not quite understand what its energy traders were up to, Ahold’s executives had long lost track of the dealings of its various subsidiaries scattered all over the world, and also Union Carbide’s administrators had little knowledge of the workings of the chemical plant in faraway Bhopal. The complexity of the organisation, both within and across participating corporations, had outgrown any individual’s comprehension and surpassed the capacity of any of the traditional control systems in place.

Another crucial role was played by the myopia of success. Initially, the approach used by the companies involved was limited and careful, while there were often countervailing voices that expressed doubts and hesitation when gradually less care was taken – there certainly is evidence of all of this in the case of Enron, Ahold and also Union Carbide. However, when things started to work and bring in financial returns, as in the case of the banks, the usage of the instruments increased, sometimes dramatically, and they became bolder and more far-reaching. Iconoclasts and countervailing voices were dismissed or ceased to be raised at all. For example, in Ahold and Enron, the financial success of the firms’ approaches suppressed all hesitation towards their business strategies.

This caused a third element to emerge: it actually became improper not to follow the approach that brought so much success to many. In the case of investment banks, other banks and financial institutions that did not participate to the same extent as others, received criticism for being “too conservative” and “old-fashioned”. Investors, analysts and other stakeholders joined in the criticism, and watchdogs and other regulatory institutions came under increasing pressure to get out of the way and not hamper innovation and progress.

Similarly, Enron was hailed as an example of the modern way of doing business, while analysts (whose investment banks were greatly profiteering from Enron’s success) recommended “buy” till days before its fall. Similarly, Ahold’s CEO Cees van der Hoeven continued to receive awards when the company had already started its freefall. All of these organisations’ courses of action had been further spurned and turned into an irreversible trend by the various parties and stakeholders in its business environment.

This relates to a fourth management factor that contributes to the formation of a crisis. It’s the factor that is related to what was on everyone’s lips in the immediate aftermath of each of the aforementioned crises: greed. Somehow, all organisations and individuals involved seemed to have let short-term financial gain prevail over common sense and good stewardship. But in all these cases, greed was not restricted to the few top managers who ended up in jail or covered in tar and feathers. Ahold’s shareholders initially profited as much as its executives. Investors, politicians and even customers shared in equal measures the early windfalls of Enron; likewise for the investments banks. Even the Church of England made big bucks on the financial practices they so heavily criticized in the days following the collapse of the system.

The greed factor, however, does not stand alone; it is built into the structure of the whole corporate system. Traders are incentivised to concentrate on making money; top managers are supposed to cater to the financial needs of shareholders above anything else – opening themselves up to severe criticism if they don’t – and customers are expected to choose the best deal in town without having to worry where and how the gains were created. However, none of these parties actually see what lies behind the financial benefits, and where they come from. The traders just see the numbers, the investors only see their dividends and earnings per share and the Church of England simply chose the best deal while the archbishops were unaware it amounted to short-selling. The high degree of specialisation and division of labour both within and between the financial institutions may have revealed the result of the process but showed no sign of how these profits were actually produced.

In combination, all these elements create a system that escalates risky short term strategies until it culminates into an irreversible course of action. Consequently, it becomes unseemly to do anything else. As in a pyramid investment scheme, everybody is interlocked and benefits until the whole structure collapses, sometimes with devastating consequences. The 2008 banking crisis is only unique in the sense that it did not concern one organization but a whole global sector of interlocked firms, due to the high degree of similarity between the various corporations and their business strategies and the unprecedented extent of the financial linkages between them.

All these things point to one underlying cause: the structural failure of management. The management systems used to govern these organisations were unable to control the inevitable process towards destruction. Whether analysing Enron, Ahold, Union Carbide in 1984 or banks in 2008, the striking commonality is the sheer inevitability of the disaster; each of them were accidents waiting to happen, given the state of the organisation.

More rules and regulations and more quantitative and financial controls are unlikely to solve the problem, and prevent similar events from happening in the future. All organisations and people involved in these cases, ranging from top managers to traders and customers, were governed and incentivised by means of quantitative and financial controls. However, today’s businesses are too complex to be controlled by rules and financial systems alone.

Instead, organisations will need to tap into the fundamental human inclination to belong to a community (such as an organisation), including people’s desire to do things for the benefit of that community rather than focus on their individual, narrow interests. These are alien concepts in the City today, where incentives are geared towards optimising individual, short-term performance while company loyalty and a sense of community are all but destroyed by the financial incentives and culture in place. Yet, when such human desires to contribute to a community are artificially suppressed through narrow financial incentivation schemes, weird things can happen – and the 2008 banking crisis certainly was one weird thing.

The process of making strategy (or just gibberish?)

“Strategy making in the emergent stage can be viewed as a social learning process in which managerial action and cognition are intrinsically intertwined”, Stanford professor Robert Burgelman once wrote.

And I thought “What…?!”

But the more times I read the sentence, and the more I thought about it, and the more I compared it to the strategy-making processes in the (successful) companies I have seen from up close, it actually started to make sense… (although I acknowledge that I have no confirmation that the interpretation I came up with, of Robert’s gibberish, is actually what he meant with it!)

1) In a strategy-making process “managerial action and cognition are intrinsically intertwined”; what the heck might he mean with that? Well, if I think about the companies I’ve analysed, in pretty much all cases, strategy was not the result of a one-time rational analytical process but there was quite a bit of trail-and-error to it.

The firm, for whatever reason, tries something new – a new product, service or process. Or they simply happen to run it to something by accident. For example, Hornby, when they outsourced production of their model trains to China, added additional detail and quality to their products. That’s the “action”.

Then, the firm receives feedback from the market. In Hornby’s case, for example, sales went up. People in the company then stop, take notice and try to understand what led to the result. People in Hornby, for example, discovered that it was now hobbyists and collectors buying their products, instead of children, and they concluded they were moving out of the toy market into the hobby market; that’s the element of “reflection”.

Subsequently, the decided to deliberately try more of this, and add detail and quality to some of their others products as well, refocus their marketing efforts on adults and see what happened (that’s another action). When they noticed that this campaign was a success, they gradually decided to make this market-shift the basis of their new strategy (another moment of reflection). My guess is that’s what Robert meant, with “action and reflection are intrinsically intertwined”.

2) But what did he mean with it is “a social learning process”…? Well, my guess is that he meant a top manager doesn’t do this all by himself. It involves lots of people in the organisation – which is why it is a social process – and even from outside the firm. Hornby employees debated at length what was causing the surge in their sales, after outsourcing their production to China, and where it came from. They even explicitly involved their retailers in this discussion, to try and understand their view on what had happened to them.

3) Finally, what might Robert have meant with strategy making “in the emergent stage”…? Well, all of this means that strategy isn’t necessarily planned, especially in the beginning; organisations try stuff, some of it fails, other things stick and some of them become big successes. As a result of these processes, strategy happens; it emerges from within a (good and effective) organisation, rather than that it is the result of some 100 percent rational model and process. In later stages, it may become more deliberate and planned, just like Hornby nowadays very carefully taylors its products to hobbyists.

And that’s not only a very realistic view of how strategy really happens, but perhaps also one that a good organisation should aspire to. Because purely rational, planned strategies are seldom the big break-through successes. Simply because life is more complex than that. Just like Robert’s language.

The hidden cost of equity

What’s all the noise about being a public company anyway? I recently asked the CEO of a FTSE 250 company “what’s the advantage of being listed?” She shrugged and said “I don’t know; it can give you access to some capital I guess but, apart from that…”.

Of course it is rather “sexy” and exciting. Many CEOs don’t just want to be a CEO; they want to be the CEO of a public company. But what really are the advantages of having your company listed on the stock exchange? Naturally, selling equity is a source of money, but of course there are other sources of capital which could suffice for your investment plans. But, alright, I’ll give you that; it’s one potential source of money.

Yet, I would say this source comes at a cost. Investment bankers will be able to spell out to you – in much much, much detail... – what the advantages and disadvantages are of the various sources of capital, including equity. However, I think they’re forgetting one.

I recently spoke to Bill Allan; CEO of THUS (the former Scottish Telecom). Some years back, they all of a sudden were elevated into the FTSE 100. He admitted that, at once, he found himself having to spend the majority of his time dealing with fund managers, analysts, investors, the business press, etc. Of course this was a relatively unusual and extreme situation; the telecom bubble launched THUS into the FTSE 100 when they weren’t quite ready for it. However, all the CEOs of public companies that I have talked to, in private, will admit that they spend about 30 percent of their time dealing with “the stock market” (i.e. fund managers, analysts, institutional investors and the wider public). Simply put, they wouldn’t have to do this if they weren’t listed.

Think about it: that’s quite a cost. If you have a good company and you decide to float it (starting to sell equity on the stock market), all of a sudden, you lose 30 percent of your top management capacity!

Are you sure that’s worth it? That’s 30 percent which they could have spent on cultivating the organisation, motivating employees, thinking through opportunities for future growth, integrating acquisitions, etc.

Moreover, many CEOs end up not particularly liking the 30 percent… It is a lot of hassle, pressure and a bit of a pain, having to tell (and defend) your “story” over and over again, to people who really don’t have much in-depth knowledge about the company and its business, often haven’t received any training in developing or even understanding strategy, and occasionally may not have much talent for or affinity with it anyway!

How do you quantify this cost of being listed? I don’t know; it is difficult to put a number on such a thing (which is probably why we don’t pay much attention to it in the first place!). But I will assure you that many CEOs will privately tell you – be it while whispering behind the palm of their hand – that being listed isn’t so sexy and exciting after all. And, if they still had a choice, they would do without it.

Hang the hero

Remember the disaster with Union Carbide’s chemical plant in Bhopal, India, on the 3d of December 1984? One of the most dreadful industrial accidents in the history of mankind; thousands of people died terrible deaths on the horrid day itself; tens of thousands of people perished in the aftermath.

Strangely enough, the faith of Union Carbide’s CEO at the time, Warren Anderson, always reminds me of Tolstoy’s War & Peace.

In our world, CEOs often become celebrities, heroes and superstars. We place them on the cover of magazines such as Fortune and Business Week, we give them awards, honorary doctorates and multi-million salary packages, while they command dazzling fees for after-dinner speeches, at which they are drenched in the adoration of star-struck hopefuls, who quench their thirst for personal business success on the (expensive) words of the great leader.

The manager starts to personify his company and its success: Steve Jobs and Apple, Carlos Ghosn and Nissan and, of course, Jack Welch and GE. But do we really believe that organisations that consist of a 100,000 employees, located on various continents in all corners of the world, producing dozens of products in a multitude of industries and markets are controlled by the lunch-time decisions of one man? Can one man be that omni-potent?

Similarly, CEOs can become villains. They start to personify the misery that their organisation has brought us. We mock them, vilify them and, if we get the chance, put them in jail. Cees van der Hoeven – who got off with a suspended jail sentence – exemplified Ahold’s fall from glory; Enron’s Jeff Skilling is spending 24 years in a prison in Minnesota (of all places), while former media mogul Conrad Black is at least catching some rays of sunshine through the bars on his window of his cell in Florida.

I guess these attributions are not restricted to business leaders only. Tolstoy, reflecting on the eventual defeat of the Napoleon’s forces in Russia after the battle of Borodino, was explicitly sceptical of any attributions of omnipotence. He wrote: “Many historians contend that the French failed at Borodino because Napoleon had a cold in the head, and that if it had not been for this cold ... Russia would have been annihilated and the face of the world would have been changed”.

“If it had depended on Napoleon’s will whether to fight or not to fight the battle of Borodino, or had it depended on his will whether he gave this order or that, it is evident that a cold affecting the functioning of his will might have saved Russia, and consequently the valet who forgot to bring Napoleon his waterproof boots on the 24th would be the saviour of Russia”.

“But for minds which cannot admit that Russia was fashioned by the will of one man… such reasoning will seem not merely unsound and preposterous but contrary to the whole nature of human reality. The question, ‘what causes historic events?’ will suggest another answer, namely, that the course of earthly happenings … depends on the combined volition of all who participate in those events, and that the influence of a Napoleon on the course of those events is purely superficial and imaginary”.

Perhaps we also overdo it a bit when we bestow our adoration or vilification on the CEOs of multinational companies. The people from Bhopal viewed – and still view – Warren Anderson as the prime instigator of the evil that befell them. They still paint “Hang Anderson” on the city’s walls and burn puppets in his imagery. Was Warren Anderson responsible? I am sure he was; he played his part being in charge of the company that owned 51% of the dreadful factory. The personified anger of the people of Bhopal is understandable, just like the adoration of Jack Welch con suis seems due to some deep human inclination. But, in reality, both the success and the downfall of our organisations are, as Tolstoy put it, the result of “the combined volition of all who participate in those events”.

Who should come first? Shareholders? Are you sure…?

Herb Kelleher– the founder and former CEO of American icon Southwest Airlines – used to say: “We place our employees first”.

That’s a fairly extreme thing to say though, especially in corporate America, that you do not place your shareholders first.

Of course he would always be quite quick to continue: “Because if you have happy employees, you will get happy customers, and if you have lots of happy customers, shareholders will inevitably become quite happy to”. Now you could be inclined to say “ah, so it’s all the same; at the end of the day all parties’ interests are aligned”. In the long run that may be true, but in the short run such an “employee orientation” – the choice of who comes first – can lead to rather different decisions than a “shareholder value orientation”. And at Southwest they do put their money where their mouth is; they for instance provide perfect job security. Consider, for example, Southwest’s response to 9/11, which triggered a global airline crisis, prompting many companies to execute the hatchet on their employee head-count:

Southwest Airlines’ current President and COO (Colleen Barrett) said: “Southwest has not had a layoff in its thirty-year history and is not contemplating one now” (after which employees collectively organised an internal giveback effort, called “Pledge your Luv”, offering up to thirty-two hours of pay during the last quarter of 2001).

In contrast, US Airways paid $35 million in lump-sum retirement benefits to its former top three executives, while 12,000 employees were laid off and pilots agreed to $565 million in concession in their own retirement plans. Rakesh Gangwas, briefly chairman and CEO (who received $15 million of the 35 million) declared, a few days before resigning, that “the September 11 attacks had allowed the airline to restructure and downsize in ways that would have been impossible otherwise”.

Of course US Airways filed for bankruptcy in 2003, while Southwest recovered in less than a year.

Placing employees first may be suboptimal in the short run but in the long run it’s a different picture. You don’t become a better organisation by having “better shareholders” (whatever that may be). You can most definitely become a better organisation by having better employees. Truly prioritising the well-being of your employees just might pay off financially in the long run too. Loyalty, trust, extraordinary effort, etc. are reciprocal things; we give it to those from whom we receive it. And organisations and employees are no different.

Chief Story Teller

What do CEOs really do? Stevie Spring, CEO of Future Plc (the magazine publisher), recently expressed it to me in the following way: “I am not really the Chief Executive; I am the Chief Story Teller”. What (on earth) did she mean with that?

What really is an organisation? Well, it is a group of people – sometimes a rather large group of people – (supposedly) working towards a common goal. This goal may simply be profit, but it certainly helps if we have a common idea of what we’re trying to do in order to make a profit. Hence, it is about setting a clear strategic direction.

A clear strategic direction is not a 40-page document outlining a firm’s strategy – that’s a drawer-filler. It is a concise set of choices that determines what we do and don’t do. For example, for Future it’s something like “special interest, English-language magazines for young males, possibly with spill-overs on-line and in terms of events”. Hence, they would for instance do a magazine on “guitar rock” but not on “music” (as that is not focused enough to be considered a special interest); they would do such a magazine in the US but not in German (then they might license it); they would cover motorcycle racing, or Xbox or wind-surfing, but not knitting (unless, without me realising it, knitting has recently had a popularity surge in the community of 20-something old males). Thus, it determines what you do, but it also determines what you don’t do, because it doesn’t fit your expertise and capabilities.

And Stevie Spring tells that story – over and over again – to a variety of constituents: to analysts and fund managers, board of directors, employees, customers and even the occasional business school professor.

Good CEOs have a story. Tony Cohen of Fremantle Media says they want television productions to which they own the rights, with spin-offs in other areas (e.g. on-line), which are replicable in different countries – simple and focused. Alistair Spalding of Sadler’s Wells theatre wants to be involved actively in producing a broad array of cutting-edge modern dance, aimed at a London audience. Frank Martin of Hornby wants to produce near-perfect scale models of model trains (and Scalextric race tracks) for collectors and hobbyist, which appeal to some feeling of nostalgia. Their stories are clear and simple; employees, investors and customers alike can understand and believe in them.

Is being able to tell a convincing story enough for a good strategy? I guess not – for instance, I remember a Goldman Sachs analyst writing about Enron in October 2001 (weeks before its bankruptcy) “Enron is still the best of the best. We recently spoke with most of top management; our confidence level is high."

However, it certainly helps. When you have a lousy strategy, without much focus or logic to it, it will be hard to come up with a coherent and convincing story. And it’s a good story that makes people want to invest in you, that carries the day when you need your board’s support (e.g. when making tough choices what to divest or invest in), and what helps your employees see their task and decisions in light of the company’s overall direction. It's the strength of the story, which makes the CEO.

Complex yet so simple. Or was it the other way around…?

As a junior professor, starting to teach strategy at the London Business School, one of the first cases I ever discussed was that of a hotel chain in the south of the US, called La Quinta. It was a great example, not only because it came with a video featuring the famous Harvard Business School professor Michael Porter (who was goofy enough to make me look normal), but because it illustrated a particular point well: That, over time, successful organisations become both more complex and more simple.

What the heck did I mean with that (my students tended to ask)?! Well, over time, successful firms fine-tune their organisations to do even better what they already do well. They learn to operate through a particular set of procedures, gradually develop and employ a very appropriate yet intricate incentive system, organise a few specialist departments or functions focused on some specifically thorny issues, and grow a culture which is highly suited for the task at hand. And, as a result, they become quite a subtle and “complex” organisation.

Yet, such an organisation usually is also quite simple. What did I mean with that – complex AND simple…?!

Well, such an organisation becomes extremely suited for the thing it does, but suited for that one thing only. Hence, it’s a complex organisation, but “simple” in terms of what it can do.

For example, at the time, La Quinta hotels tailored to traveling sales people. People who are on the road all the time, work on commission, and often receive a travel budget (which they can spend or pocket). La Quinta targeted those customers (and those customers only). They located themselves literally on the highway, often next to a large parking lot. They did not operate any restaurant or offered any form of room-service but that was fine; opposite the parking lot would always be a diner, McDonalds or Pizzahut, and the salespeople would be happy to use those.

They did have spacious and very quiet rooms, which were standardised across all La Quintas, among others to give the salespeople a familiar feel away from home. And, above all, they offered low prices. It was perfect for the sales people, and every aspect of a La Quinta fell perfectly in line with the sales people’s needs. In this sense, La Quinta’s entire organisation was very subtle and “complex”.

But that would also make it simple. It could only do one thing, and target only one type of customer: the sales people. As soon as something would happen that kept away the sales people – a recession, a large business center in the vicinity moving away, etc. – the hotel would be vulnerable. It could not switch to high-end executives; after all, it didn’t have a restaurant, room service or business center. But it could also not switch to tourists; they were located on a highway for Pete’s sake, at a parking lot across from a diner! Let alone that they operated a family pool.

That’s the danger of being both complex and simple. You learn to do one thing very well; but one thing only… And when the world changes on you – which it usually does – that might get you into trouble.

A Creosote bush: How "exploitation" drives out "exploration"

Established, very profitable companies often find it difficult to remain innovative (which may get them into trouble in the long run). In contrast, entrepreneurial, innovative companies often find it difficult to start producing efficiently and make a healthy profit out of their inventions. That is because the organisation required to be creative and innovative is usually quite different from the organisation that is suited for efficient, mass-scale production.

Professor Jim March from the Stanford Business School eloquently put it like this: he said there is a fundamental tension between “exploitation and exploration”. Exploration involves innovation and creativity, which often requires a high level of autonomy for people in the organisation and a flat organisational structure. Exploitation is associated with words such as productivity, efficiency and control, which requires hierarchy and clear rules and procedures.

If a company is financially successful, exploitation often starts to crowd out exploration. This relates to the idea of “the success trap”: organisations start to focus more-and-more on what they do well; the thing that brings them success and prosperity. Yet, this comes at the expense of other things, which may not be so profitable now but which could (have) become important for the firm in the long run.

Even the famous Intel fell into this trap. In the 1980s and 1990s, Intel had become hugely successful in the microprocessor business by being extremely innovative and running many experiments in semi-conductors. Yet, once they had developed an enormous advantage in microprocessors, they gradually stopped doing anything else. In 1996, CEO Andy Grove recognised the long-term dangers of this and remarked “There is a hidden danger of Intel becoming very good at this. It is that we become good at one thing”. Yet, he also found himself unable to revive Intel’s entrepreneurial creativity.

In 1993 microprocessors had made up 75% of Intel’s revenues and 85% of its profits. By 1998, this had increased to 80% of its revenues but 100% of its profits! This mega-company basically had only one product on which they relied to bring in all the dosh. That sounds a bit risky... The company’s COO, Craig Barrett remarked about this that Intel’s core microprocessor business “had begun to resemble a creosote bush”. In case you're not a botanist (and, like me, only appreciate plants when they come on plate), a creosote bush is a desert plant that survives by poisoning the ground around it, so that nothing else can grow in its vicinity… Quite a peculiar way to qualify your top-selling product I'd say, but not a bad analogy. Microprocessors were so successful that no other product could grow within Intel, because it would always look bad in comparison to these damn processor things.

Of all organisations that I have been studying over the past few years, the one that has probably impressed me most in this respect is the famous Sadler’s Wells theatre in London. On the one hand, they are phenomenally innovative, putting on the most novel and creative modern dance shows on the planet. But, on the other hand, they also stage a substantial number of shows that are tried and tested, and from which they know that they will reap a healthy profit without much of a doubt.

How do they maintain this balance so well? There are several complementary explanations, but one of them is that they work on it continuously; literally every day. They aim for about 15-30% of totally new innovative shows in the programme (often the result of a collaboration between artists who usually wouldn’t work together, because they have very different styles, background and training) and discuss this issue all the time. They do that in regular formal meetings, which invariably involve people from various departments, but also on an ongoing informal basis (that is, in the corridor, in the restaurant and in the toilet).

They are always discussing which show should go where on the theatre’s calendar, for how long it should be scheduled, what other show needs to be scheduled around the same time, etc. Because they continuously discuss and work on it, they manage to get the balance right. And, as their numbers show, the cool thing is that often, those shows which at the time were exploratory and considered risky and innovative, are now the ones that contribute most to their bank account.

“Heerlijk, helder, Heineken”

The line above probably didn’t mean much to you, unless you’re Dutch.

No I am not getting a commission for rehashing their old marketing slogan (which it is; I guess you could translate it as “heavenly, clear, Heineken”), it just reminds me of the acquisition strategy they used under the reign of their illustruous former chairman Freddy Heineken (who unfortunately died a few years ago).

Since I have been known to sound slightly sceptical (yes, this is a good english eufemism) of the vehicle of corporate take-overs, people sometimes ask me which company’s acquisition strategy I actually like… A painful silence (to this fair question) used to ensue. But no longer! Since I didn’t want to create the erroneous impression that I think all acquisitions and acquirers are bad, I decided to look for one.

And I found Heineken. It happens to be a product that I studied extensively during my student days but some time ago I also really dug into their past acquisition strategy, and whether it made sense. And I have to say “heerlijk, helder, Heineken” or, in english, "yes".

This is what I like about it. Many managers see acquisitions as a relatively easy and quick way to increase the size of their company, in comparison to the painstaking process of organic growth. Yet, they forget that owning a bunch of companies doesn’t necessarily turn them into one organisation. Successful companies often have a high level of coordination between the various activities and parts of their organization. This involves technology and systems but also intangible characteristics such as a shared culture and informal networks. Research by Wenpin Tsai and Sumantra Ghoshal, published in the Academy of Management Journal, showed that these organizational abilities take ample time to grow and develop. Freddy Heineken realised this; he did quite a few acquisitions, but not too many, and carefully added and integrated them into his company.

Moreover, he did not see them as a substitute for organic growth but, instead, as an enabler of it. He used to undertake acquisitions with the explicit aim to create further opportunities for organic growth for both the acquired company (which benefited from Heineken’s knowledge, purchasing power, etc.) and for the Heineken brand (which benefited from added local distribution).

Heineken’s focus was always on profitability, rather than scale per se. This made him stubbornly resist loud calls (for instance by analysts and investors, and some business school professors…) to merge with a major rival. Freddy used to say, “I don’t want to be the biggest; I want to be the best”. And he was.

“Innovation networks” and the size of the pie

It’s becoming a bit of a corporate buzzword – “innovation networks” – but one that (to my slight disappointment) I actually quite believe in.

More and more companies I see and talk to seem to realise that it is quite difficult to be innovative on your own. For true innovation, almost by definition, you need a wide variety of capabilities, knowledge and insights. It is just difficult to find such diversity within one organisation. If you, as a firm, are trying to come up with fundamentally new things, you would likely do well to also look outside your own organisation’s boundaries, whether anyone knows anything that just might be useful and interesting for you.

This is what “innovation networks” are about; combining and tapping into other companies’ knowledge resources to, collectively, come up with something that neither firm could have done by itself.

IBM, for example, does it consistently and in a highly structured way. They work with specific partners on specific projects. Some of these partners are from outside their industry but others could even concern straight competitors. For example, in their Cell Chip project, developing multi-media processors, they work with Sony, Toshiba and Albany Nanotech. In their Foundry R&D project, designing manufacturing processes for mobile phone chips, they work with Chartered, Infineon, Samsung, Freescale and STMicroelectronics. And they have several other similar projects, with yet different groups of partnerships.

However, the networks can also be of a more informal nature. For example, the successful Sadler’s Wells theatre in London, which focuses on the creation of ground-breaking modern dance, has no orchestra or ballet of its own. Instead, it tries to create innovative modern dance shows by putting artists in touch with each other who otherwise would not have worked together. They organise dinners during which those artists meet, they give them some studio time and budget to improvise and experiment, and assist them with advice and other facilities to get them to combine their skills and talents to create new forms of modern dance. What they ask in return is that the artists premiere their performance in Sadler’s Wells.

The most striking example of informal innovation networks I have seen, however, is that of Hornby; the iconic English producer of little model trains and Scalextric slot car racing tracks. They have some more or less formal alliances with software producers and digital electronics companies, which for instance led them to develop virtual reality train systems and digital slot car racing tracks (allowing multiple cars in lanes, which can overtake each other; clearly the most prevalent schoolboy dream since the emergence of Samantha Fox!). Yet, they also have some striking informal networks, which stimulated their innovativeness.

For example, one of their latest innovations is a real steam train (which retails at a whopping £350), and I mean real steam. The little whistler doesn’t run on electricity but on actual steam. The interesting thing is how they came up with it. Well, or actually, they didn’t… One of their customers did. They maintain close networks – on-line, by organising collector clubs, tournaments, etc. – with their collectors. Through these networks, they learned about a hobbyist who had invented a real model steam train. They went to visit him and adopted his rudimentary technology.

But the most striking example of their informal innovation networks I saw when I visited Frank Martin, Hornby’s CEO, at the company in Margate some time ago. In his office lay a piece of slot car racing track. “Look” he said “a very innovative and sophisticated new surface, which is not only much more realistic but also much less slippery for the toy cars. Our Spanish competitor sent it to us”. I said “what?! why would your competitor do that? are you sure it is not a fluke? are you paying them for it?” And he replied “no, whenever they invent something new, they send it to us. And we also send them stuff”.

They have no contracts or any other formal arrangements in place for these exchanges. They just figure, ‘we could shield our innovations from our competitors but we’re all much better off if we share them’. The size of the pie (the total size of the market) will increase as a result of it, and they all benefit; much more than when they would all keep their innovations to themselves.

It is a peculiar type of innovation network, if your customers and even competitors become part of it and share their innovations with you, purely on the basis of trust and reciprocity, but it is certainly a formula that works for Hornby. They managed to quintuple (I had to look up this word) their stock price over the past few years, partly as a result of such innovations. Innovation is important to many companies in many businesses; too important to (merely) leave to your own devices.

“A serial changer”…

Some time ago, I interviewed a guy called Al West. And Al is quite a guy. Not only because he is the founder and CEO of SEI, an investment services firm headquartered in Oaks, Pennsylvania, which is worth about 4 billion (of which he still owns about a quarter) but because of the way he runs his company.

For example, I asked for the contact details of his secretary to put an appointment in the diary. He doesn’t have a secretary. Actually, he doesn’t even have an office. And when I went to their London office to speak to him, reported at reception and asked for Al West, the lady behind the desk said “Who? Al West you say? Let me see if we have anyone in this company by that name”. Al doesn’t strike me as the stereotypical autocratic, macho CEO.

What Al does strike me as – and which is the reason why I wanted to talk to him – is a “serial changer”; or at least that is how one of his employees described him to me. He is altering his organisation – in terms of its structure, incentive systems, decision-making procedures, etc. – all the time, never quite satisfied and never quite done. And somehow, I suspect that is part of the key to his company’s success.

In 1990, Al broke his leg in a skiing accident. He lay in the hospital staring at the ceiling for about 3 months. When he came back to work, despite the company growing and performing well, the first thing he did was completely reorganise the entire firm. His employees thought, “why change a winning formula? he must have been quite bored and couldn’t think of anything better to do. I am sure it will pass”. But it didn’t pass. Ever since, Al has been reorganising his company regularly.

And he does it because he doesn’t want to allow his organisation to become settled and “comfortable”. SEI has been growing steadily for decades now, with an impressive – and impressively stable – 30% per year. Yet, Al never does any acquisitions (he feels they would disrupt the smoothly-running organisation). Yet, unlike many other successful companies, SEI doesn’t get trapped in its own success and gradually grow rigid and inert. SEI continues to innovate and grow.

The reason why many very successful companies find themselves in trouble in the long run, is that they become too insular, narrow and set in their ways. This leads to problems when their environment changes. Yet, Al’s regular changes to his organisation prevent it from becoming set in its ways. Moreover, powerful people and groups within an organisation usually, over time, become even more powerful (because they can get their hands on even more resources, budget and people); too powerful for the good of the firm. Yet, in SEI people don’t get a chance to create fiefdoms and accumulate influence beyond what’s good for the company. Al doesn’t give them the time to do it.

Along similar lines, my colleagues Phanish Puranam and Ranjay Gulati examined periodic structural changes within Cisco. And they found that Cisco’s many reorganisations helped to solve some tricky coordination problems within the firm. In many organisations, over time, employees become focused on their own unit, group or department. It’s their perspective that they view things from, that’s where there social networks lie and whose interests they pursue. By regularly reshuffling departments, however, Cisco's people not only are forced to develop new perspectives and cooperate with other people, the contacts and perspective of their old group (now dispersed across the firm) are still available too, so that the firm gets the best of both worlds. Professors Nickerson and Zenger found similar patterns examining Hewlett Packard’s regular switches between centralisation and decentralisation.

The regular changes to the organisation prevent it from becoming rigid and inert. They may be perceived by people working in the firm as a pain (in all sorts of body parts) if not completely unwarranted (“we’re performing well, aren’t we? why would we change anything?") but it helps avoid more serious trouble in the long run.

Means & ends; profits & innovation

Don’t ask why, but I have long been interested in what makes certain companies better at innovation than others. Research shows that it is actually not that easy to remain innovative. Once a firm becomes profitable, over time, it is as if the organisation loses the urge to be really innovative and creative, and come up with truly new products and services.

Therefore, one of the things I always ask the executives of a company whose innovation process I am examining is “why do you want to be innovative?” Invariably, the answer is that they realise they need to innovate in order to remain profitable in the long run.

And this is a good point. You may be profitable now, but if you wait to invest in innovation till you see your performance dropping – trying to innovate yourself out of the looming trouble – it may be too late. True innovation has a long lead time; only starting to think about new stuff once your old stuff is beginning to show signs of decay often means you have left it too late. Moreover, by then, you may be out of touch; once you really stop innovating it will be very difficult to get back into it.

All this is of course not rocket-science. Yet, over the past year or so, I have been examining a rather different but also consistently very innovative organisation – as a matter of fact, one of the most innovative organisations of its kind it the world: the famous Sadler's Wells theatre in London.

Sadler’s Wells is a large theatre (their main auditorium takes about 1900 people) which is focused on modern dance. And they host and (co)produce some of the most innovative productions in the world. Moreover, they manage to consistently attract large audiences and are – which is quite rare for such a theatre – financially self-sufficient, very healthy and sound.


When I was talking to their managing director (Chrissy Sharp) and chief executive (Alistair Spalding) – about their many productions, how they organise them, the relations between the theatre and the artists, etc. – at some point I also asked them my usual question: “why do you want to be innovative?” They both stared at me in silent disbelief…

While I was pondering whether they might be wondering whether I was serious (or mad), thinking it was just an incredulously stupid question, or considering to stop the interview immediately, Chrissy finally stammered “but… because we have to… it is what we do”.

Then it dawned on me, they had never even considered the question before.

And gradually, speaking to many more people in the organisation, I figured out that there is a subtle yet fundamental difference between Sadler’s Wells’s commitment to innovation and that of many of the businesses I’ve seen. Companies invariably see innovation as a means to an end; you have to innovate in order to remain profitable. Sadler’s Wells theatre views it the other way around; you have to make a healthy profit in order to be able to continue to innovate.

For them, profit is the means and innovation the end. Companies often struggle to remain truly innovative when they are making huge profits; the urge and feeling of necessity just inevitably slips away. Not for Sadler’s Wells; they continue to innovate, and innovate a bit more the more profit they make. It is not the big, tried-and-tested projects that they have been running for years that excite them, but the new, risky, creative productions that no-one in the world has seen before that get their hearts racing. They respect their established projects but invariably use the profit they make through those to invent new stuff.

And I wonder whether not more companies should adopt this stance: where the organisation’s ultimate commitment is to innovation. It is good to make a profit, and ever better to make a lot of profit. But innovation is what keeps you healthy in the long run, and what generally tends to excite your people; employees and customers alike.

CEOs, marriage, mergers, geriatric millionaires and blushing brides

These things called acquisitions continue to surprise me. Especially how they, quite openly, can get entangled with the personal aspirations and career progress of the companies’ executives.

For example, often it is thinly veiled that the single biggest hurdle to a particular merger, determining whether the deal will go through or not, is the question “who will be in charge” afterwards; the current CEO of company 1 or the CEO of company 2? The proposed merger between Dutch banks ING and ABN-Amro, for instance, was rumoured to have fallen through because executives could not agree on who would take the helm. But are these really good, strategic and legitimate reasons to pursue (or abolish) a deal?! If you didn’t notice: that was a rhetorical question…

Similarly, in 1999, the merger of Viacom and CBS completely hinged on whether CEOs Sumner Redstone and Mel Karmazin could figure out how to distribute responsibilities and power. Eventually, the $40 billion mega-merger – at the time, the biggest media deal ever – seemed to be more of a declaration of love between the two than a move inspired by a clear strategic rationale.

For example, the LA Times referred to "secret meetings" between the two during which Redstone "grew to see the magic of the marriage Karmazin was proposing", while The New York Times quoted Redstone saying of Karmazin: "He is a master salesman, and he began to turn me on", also referring to "a marriage that was consummated after a two-year flirtation and a brief but painstakingly intense two-week prenuptial discussion. ‘Mel seduced me’," Redstone dreamily told reporters and investors after the merger was announced, sounding for all the world like a blushing bride.”

Yet, the marriage came to an abrupt end in 2004, when Karmazin left acrimoniously. What turned out to be the case: If old Sumner (aged 81) would have died during Karmazin’s employment contract with Viacom, he would have taken the mantle. Yet, old Sumner didn’t die… And CBS and Viacom split in 2005.

To me, these kinds of negotiations suggest that the logic for a deal may have more to do with advancing the careers of the people in charge, rather than advancing the value of the combined companies. If you’re an investor or board member, I would conjecture that some suspicion may be warranted.

Sometimes it is about knowing when not to decide

Some time ago I was interviewing Tony Cohen, CEO of Fremantle Media; they own television production companies all over the world. A programme developed in one country (say, "Pop Idols" or "The Price is Right") may also have potential in another country. I asked him, “how do you decide which programme is right for which country?” He said, “I don’t”.

“Why would I know any better than anyone else?” he continued. “I don’t make these decisions”. But he does make sure to set up a system that enables the organisation to arrive at a good set of decisions. For example, each year, they organise what is called “The Fremantle Market”. It is a one-day event in London, for which Fremantle executives from all over the world fly in. They present to each other their new television programmes, which they have just had commissioned or developed pilots for.

I visited the event this year. Country executives really try to do a good job convincing their counterparts to “buy” their new television programme, because Tony has made sure that if the new production of Fremantle’s company in the Netherlands gets shown on television in the UK, the Dutch subsidiary receives a good commission that goes straight into their P&L. Moreover, the UK company is eager to obtain Fremantle’s best new programmes developed in other countries because if it manages to sell them to television broadcasters in the UK, it also gains a good profit.

Hence, Tony (or anyone else at Fremantle’s head-office) does not decide which programme to invest in and promote as their next international winner, but he sets up the organisational system in order for local people to make their own decisions. This will enable their next global hit to emerge, without knowing in advance which programme that will be. Sometimes he expected it; sometimes it’s a programme that he never thought would see the light of day.

But often that is not the role we expect CEOs to assume. We expect them to make the decisions, quickly and without hesitation or even a drop of sweat.

It reminded me of Andy Grove, when he was CEO at Intel. When Intel, in the 1980s, was in doubt whether to concentrate on DRAM memory chips or on microprocessors, people (employees, analysts, shareholders, etc.) were banging on his door, asking “please Andy, make a decision; are we going for DRAM or for microprocessors? Tell me what to do”. But Andy said, “I don’t know yet. No, I am not going to make a decision; let’s see how things play out”:

“You need to be able to be ambiguous in some circumstances. You dance around it a bit, until a wider and wider group in the company becomes clear about it”. Andrew Grove

And that’s what he did. He let individual middle managers make up their minds about what they were going to concentrate on. He gave the manager of their production plant a formula, in which he had to input a bunch of data concerning the market, margins, production efficiency, etc. and said “this formula will tell you what to produce (because I don’t know)”. And gradually more and more middle managers started working on microprocessors (instead of DRAMs), and more and more the plant manager’s formula told him to produce microprocessors (and not DRAM). When basically the whole company had switched and chosen for microprocessors, Andy said “now I am ready to make a decision: we’re going to be a microprocessor company”. And everybody said “duh”, because that’s what they had been doing already.

I’d say his “indecisiveness” served Andy rather well, as Intel became one of the most successful and profitable companies in the world for the ensuing two decades. Not by making a tough decision quickly and decisively, but by not making it at all, yet instead enabling the organisation to do it for him - just like Tony Cohen let's his organisation decide what television programmes to promote.

Customers…? Ah, forget about them

Some time ago, for an ongoing project about “organising for innovation”, I interviewed a guy called Farooq Chaudhry; a founder and producer of the Akram Khan Dance Company. The Akram Khan Company is a small but extremely innovative (and extremely successful…) company which focuses on creating contemporary dance.

Farooq had several interesting things to say about creating an organisation that excels in delivering continuing, successful innovation. One of them, that stuck to my mind, was “In order to be truly innovative, you have to forget about your customer”.

What?! I don’t know much about Marketing (and would prefer to keep it that way), but don’t these people always go on and on about “customer-focus”, “client-driven innovation”, “the customer always comes first”, and so on?

So I tried, “Farooq, do you perhaps mean that you should only have the customer in the back of your mind?” “No, no, I mean, customers – just forget about them altogether”. Ok…

What (on earth) did Farooq Chaudhry mean – after all, this is one of the most innovative companies of their kind, since… well, like ever?

According to him, if you want to be truly innovative, you have to purposely not try to give the customer what he wants. Because, as he argued, if you set out to develop what you think the customer will like, you end up satisfying existing needs and tastes; you follow the customer, rather than that you lead him. True innovation, according to him, is about changing the tastes of customers, and giving them something that they have never seen or even imagined before.

Getting lucky – fortune favours the prepared firm

Ok, let me tell you one more story. Once upon a time there was a plumber, called Geoffrey Ward, who lived in London. One day a local government official told him he would have to vacate his workshop and office because it was located in an area reserved as a retail zone.

Geoffrey decided to place an old, slightly exotic-looking, artistically shaped radiator, which he had removed for a client because it was broken, in the window of his workshop, just to make it look like a shop. Yet, in the following days and weeks, people kept knocking on this door asking whether they could buy that funny-shaped radiator. Not for long, Geoffrey realised that he could have made quite a lot of money had he been able to sell such a “designer radiator” and decided to change profession. This was how the company Bisque, who produce and distribute designer radiators, was founded.

Luck you say? Of course but, as said before, many people don’t take advantage of luck even when it is staring them into the face; Geoffrey did.

Andy Grove, former CEO of Intel, called it “strategic recognition capacity”. He could have said “know it when you got lucky” (but I’m sure you agree that that wouldn’t have sounded as fancy). Intel, who of course became one of the most successful companies ever by producing microprocessors, also got lucky. In the early 1980s, they were working on microprocessors when they did not have a clue what they would be able to use them for.

They even made a list of potential applications – which had anything on it ranging from handheld calculators to lamp-posts. Yep, lamp-posts. What was not on it was: the computer. It was not until IBM kept persistently knocking on their door that they said “alright then, you can put our product in this thing you call a PC”.

Yet, was this all down to luck? Of course not, Andrew Grove and his partners recognised the opportunity when it came knocking on their door (in the shape of Big Blue’s rather sizeable fist). But there’s more to it.

“Fortune favours the prepared mind”, Louis Pasteur famously said. He got lucky several times, making important yet serendipitous discoveries (such as a rabies vaccine). Yet, it was not mere chance that it was Pasteur who made these discoveries: 1) he recognised opportunities that presented themselves to him, but 2) also had the skill, knowledge and ability to turn them into something useful. That required many years of careful practice and training.

Moreover, and importantly, he wasn’t sitting in his kitchen waiting for lucky events to fall into his scientific lap. He was actively experimenting with lots of things. Most of them were bogus; others not.

And that is what Intel did: running many experiments in the margin. Most of them failed and wasted money. But one sunny day, one of these experiments just might result into a thing called “microprocessors” and, believe me, you won’t shed a tear about all the other ones that failed.

It is ok to get lucky – even for a top manager

Let me tell you a story. A story of a company called Hornby. If you’re British, you’ll know them. You might even be feeling slightly nostalgic merely thinking about them. Hornby makes little model trains, and has been doing so for a very, very long time.



Ten years ago the company was nearly bankrupt. In an attempt to save costs they decided to outsource production to China. However, much to their surprise, they discovered the Chinese not only produced much cheaper, they also delivered superb quality. Therefore, middle managers could not resist spending all the money that they were saving through the outsourcing on adding additional quality in their product designs and, most of all, a lot of extra detail: a working light on every table in the restaurant carriage, windscreen wipers on the locomotive, a bit of dirt (painted) on the bottom of the carriages, etc. Their products became perfect scale models.

Then, as much to their surprise as to their joy, they noticed sales increasing substantially. When it persisted, they started talking to their vendors to figure out what on earth was happening?! They discovered that it was no longer fathers buying model trains for their children, but buying them for themselves (and in the process spending quite a bit more money on themselves than on their children…). Inadvertently Hornby had moved out of the toy market into the hobby market, producing for collectors rather than children.

Not long thereafter, Hornby was outperforming the FTSE dramatically, seeing its share price rise from 35 to 250 in just a few years.

But what can we learn from a story like Hornby's? Isn’t their smart change in strategy simply due to sheer, unintended luck!? Well, partly, but that’s perhaps the first lesson. I find that many successful companies with great innovative strategies (e.g. Southwest Airlines, Zara, CNN) experienced some significant element of serendipity at their inception. But we (and often they) post-rationalise things as if it was all planned as such from the get-go.

But why? There is no shame in getting lucky. A great manager (such as Hornby’s Frank Martin) does not necessarily come up with the strategy, but is superb at recognising the opportunity when it comes knocking on the company's door, while subsequently carefully adding all the other necessary strategic elements (marketing, investor relations, distribution, etc.) to take advantage of the opportunity. Just recognise the importance of luck - rather than deny it - and make sure you gratefully take advantage of it.

Deal-eager executives – tribal instincts

Why is it that top managers often seem to become so gung-ho on acquisitions? Take Ahold’s “fallen-from-grace” ex-CEO (now corporate convict) Cees van der Hoeven. Ahold actually started out with quite a careful approach to doing take-over deals, but over the years acquired itself completely out of control, like a Faliraki girl with a credit card in a Gucci store.

My guess is there are two causes of deal-eager executives. It is the type of person who becomes CEO and it is the type of person we make them. Let me discuss the first one with you.

An interesting line of research in social anthropology analysed what type of person is more likely to rise through the ranks to become the headman of a tribe. Often, this would be the most fierce, ambitious and aggressive warrior, who would be willing to take on all his opponents in the quest for leadership.

Yet, interestingly, although characteristics such as fierceness and ambition would be helpful in becoming tribe leader, these characteristics were not necessarily positive for the future of the settlement, since these type of leaders were prone to take the tribe to war. This would ultimately take its toll on the size, strength and survival chances of the tribe. Thus, the same characteristics that would make people more likely to become the headman, were likely to get the tribe in to trouble.

CEOs might not be all that different. Those people who are ambitious, risk-seeking and aggressive enough to be able to rise to the ultimate spot of CEO, just might be the same people who, once they’re there, take their firm on a conquest.

Acquisitions offer the thrill of the chase. You select a target, mobilise resources and lead the attack. Sometimes there are others eyeing your prey but skilful manoeuvring and a fierce battle will make you come out victorious again. And another victory means pictures in the newspapers, popping champagne, and a larger tribe to rule and command.