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”.

Down-town Calcutta firms

I'll admit it: I have a love-hate relationship with organisations. On the one hand, they’re fantastic, and they produce things that no individual could have produced by himself, such as airplanes, open-heart surgery and sky-scrapers. However, on the other hand, they can be incredibly stupid. British Gas who sends 28 letters and 3 bailiffs for a £100 bill despite having received evidence on multiple occasions that the meter is your neighbour’s (as you may gather, this is not a hypothetical example…), Firestone which continues to invest in bias tyres while the whole world (including their own employees) understands radial technology is the future, and Ahold which continues to make acquisitions although even the most junior HQ employee is starting to suspect things are getting out of hand.

Yet, the thing that I probably dislike most about large firms, is that so many of my (very well-educated and intrinsically motivated) friends seriously dislike going to work on a Monday morning – because, despite the façade, corporate life is rather dull, repetitive and unexciting. I also think this is probably the clearest symptom that organisations are not making sufficient use of the potential of what is likely to be their most valuable resource: people.

But many large organisations would like to be more entrepreneurial and vibrant. And therefore, they send their employees on training programmes and culture courses, in which they build sandcastles together, climb poles, play drums or go line-dancing, to develop some positive team-spirit, and provide them with entrepreneurial energy and creativity.

My favourite anecdote regarding this issue comes from my late and great colleague Sumantra Ghoshal, who used to say the following: He would tell executives that every year in August, during his children’s summer holiday, he would take them to his native Calcutta for a month. However, down-town Calcutta would be so humid and hot in August that he could not do anything else than lie on his bed and be sleepy all day. However, when he’d spend spring in Fontainebleau – where he lived for many years when he was on the faculty at INSEAD business school – which is located right in the middle of a protected forest in France, he could not help become cheerful seeing the flowers blossom, start to whistle a song, run through the forest and leap up to grab a branch!

"The problem with large organisations", he’d say, "is that most of them create down-town Calcutta in summer within them".

And then they send you on a training course to improve your creativity and entrepreneurial energy. "But the problem is not me!" he’d shout; "place me in the Fontainebleau forest in spring and you’ll see that I have all the energy and creativity you'll ever need". I don’t need a course; you need to change your organisation.

When to fire your M&A management consultant

Some time ago, I gave a presentation to a group of executives from a variety of companies on the topic of acquisitions. Much of the talk was about how vastly different acquisitions can be, in terms of the purpose they are intended to serve.

As often, I ended my talk urging the executives that, if they would ever come across a consultant who would tell them “this is how you should integrate acquisitions” (promoting one particular method), they should fire him. Because acquisitions can be so enormously different in purpose and nature that they really require quite fundamentally different approaches to integration, and if someone recommends a “one mould fits all” method, it is best to show that person the door.

Little did I know that the speaker coming after me was a consultant, armed with an impressive array of powerpoints on “this is how you should integrate acquisitions…” He looked a bit apologetic. They were also the main sponsor of the event.

Anyway, I sort of mean it. Because sometimes acquisitions are intended to lead to consolidation in an industry, and the reduction of overcapacity (think for instance of Daimler & Chrysler). Sometimes acquisitions enable a number of companies to join forces, and benefit from some shared operations while remaining relatively autonomous (think for instance of Johnston Press, buying scores of local newspapers). Other acquisitions are intended as some form of substitute R&D (e.g. Cisco buying scores of entrepreneurial companies in Silicon Valley). Some acquisitions enable a firm to gain access to a new product or geographical market (e.g. Heineken buying local breweries), while yet others have to do with blurring industry boundaries (e.g. the various industry conglomerates, such as Viacom).* Thinking that you could just all treat them the same way seems a tit naïve.

Now, it is of course true that, in all cases, you should “have a good communication plan”, “integrate carefully”, “make sure to not over-pay”, and so on. But this type of advice is also a bit of a motherhood; after all, the professional life of a consultant (or Strategy Professor) recommending to “integrate poorly”, “make sure you over-pay” and “have an appalling communication plan” would likely be swiftly truncated.

So what can you recommend? Well, first make sure that you understand what type of acquisition you’re engaged in or, put differently, exactly why you are considering buying the company. What is it that is supposed to create all this surplus value? Once you have figured that one out, you might be able to deduce what can or needs to be preserved in the company, what needs to be integrated and what can be left to its own devices. Dependent on the outcome of that exercise, you can start to device a further acquisition plan including, yes, “a good communication plan”, “a careful integration approach” and “a proportionate acquisition premium”. And perhaps even a consultant.



* Based on a well-known typology from Harvard Business School Professor Joe Bower.

The Monkey Story

The experiment involved 5 monkeys, a cage, a banana, a ladder and, crucially, a water hose.

The 5 monkeys would be locked in a cage, after which a banana was hung from the ceiling with, fortunately for the monkeys (or so it seemed…), a ladder placed right underneath it.

Of course, immediately, one of the monkeys would race towards the ladder, intending to climb it and grab the banana. However, as soon as he would start to climb, the sadist (euphemistically called “scientist”) would spray the monkey with ice-cold water. In addition, however, he would also spray the other four monkeys…

When a second monkey was about to climb the ladder, the sadist would, again, spray the monkey with ice-cold water, and apply the same treatment to its four fellow inmates; likewise for the third climber and, if they were particularly persistent (or dumb), the fourth one. Then they would have learned their lesson: they were not going to climb the ladder again – banana or no banana.

In order to gain further pleasure or, I guess, prolong the experiment, the sadist outside the cage would then replace one of the monkeys with a new one. As can be expected, the new guy would spot the banana, think “why don’t these idiots go get it?!” and start climbing the ladder. Then, however, it got interesting: the other four monkeys, familiar with the cold-water treatment, would run towards the new guy – and beat him up. The new guy, blissfully unaware of the cold-water history, would get the message: no climbing up the ladder in this cage – banana or no banana.

When the beast outside the cage would replace a second monkey with a new one, the events would repeat themselves – monkey runs towards the ladder; other monkeys beat him up; new monkey does not attempt to climb again – with one notable detail: the first new monkey, who had never received the cold-water treatment himself (and didn’t even know anything about it), would, with equal vigour and enthusiasm, join in the beating of the new guy on the block.

When the researcher replaced a third monkey, the same thing happened; likewise for the fourth until, eventually, all the monkeys had been replaced and none of the ones in the cage had any experience or knowledge of the cold-water treatment.

Then, a new monkey was introduced into the cage. It ran toward the ladder only to get beaten up by the others. Yet, this monkey turned around and asked “why do you beat me up when I try to get the banana?” The other four monkeys stopped, looked at each other slightly puzzled and, finally, shrugged their shoulders: “Don’t know. But that’s the way we do things around here”…

I got this story from my colleague, the illustrious Costas Markides. It reminded him – and me – of quite a few of the organisations we have seen. Over the years, all firms develop routines, habits and practices, which we call the firm’s “organisational culture”. As I am sure you know, these cultures can be remarkably different, in terms of what sort of behaviour they value and what they don’t like to see, and what they punish. Always, these habits and conventions have been developed over the course of many years. Very often, nobody actually remembers why they were started in the first place... Quite possibly, the guy with the water hose has long gone.

Don’t just beat up the new monkey – whether it is a new employee, a recent acquisition or a partner; their questioning of “the way we do things round here” may actually be quite a valid one.

“Work-family initiatives”...?! We're a company not a leisure park!

“Work-family human resource initiatives”; sounds rather soft and fluffy, doesn’t it? Guess it does. It concerns stuff such as on-site childcare centres, flexible work arrangements, family stress initiatives and other such humbug.

Which tough, self-respecting corporation would want to be associated with that? Or should they… I guess it might actually help you become a more attractive employer, which should ultimately help your performance. Hey, even the stock market might appreciate such a thing, right?

Some time ago, Professor Michelle Arthur, from the University of New Mexico, set out to examine stock market reactions to the announcement of Fortune 500 firms adopting such work-family initiatives, which she collected from the Wall Street Journal. For example, one of them said “IBM began a childcare referral service for its employees” or “Procter & Gamble are broadening the scope of their family-friendly policies”, etc. She found 231 of them and then, for each of them, tested the stock market reaction to the announcement, through what in statistics is known as an “event study”.

The results were clear. In the early 1980s, the stock market would hardly react at all to such fluffy initiatives; if anything the effect of the fluffy announcement on a firm’s share price was slightly negative (-.35%). However, that changed quite a bit into the 1990s. When in that period firms would declare a work-family initiative, stock price immediately jumped up, with on average .48%. Now that may seem peanuts to you, but if you’re a $5 billion company, it means that even one such initiative would already immediately increase the value of your firm with 24 million. That’s a lot of peanuts. And a lot of share-holder value.

I’ve long thought that, for example, an investment bank which would be able to come up with a formula that enables people to have a real career without working 70 hours or even 5 days per week, should be able to turn that into a momentous competitive advantage in their industry (and it actually doesn’t seem that hard to do). But macho culture and self-delusion – and not much else – seems to always stand in the way of developing such a practice. What Michelle’s study suggests is that such firms are simply stuck in the 1980s; nowadays even the stock market recognises the sheer monetary value of work-family initiatives.

Time to wake up I’d say, and join the new millennium. Because if you don’t, you’re actually destroying shareholder value, and that’s not a very macho and serious thing to do now is it?

It looks like we don’t have a strategy…

Whenever I interview people at a particular company regarding their firm’s strategy – for instance because I am writing a business case about them – I try to make a point of not only finding out exactly what their strategy is, and why it works, but also where it came from. That is, how they came up with the strategy in the first place. And usually, I get a perfectly logical and rational answer – at least at first…

However, often, when I subsequently “dig deeper” into the organisation, by interviewing middle managers and engineers (who have been there for a long time), by talking to the CEO again, by reading up on some company documentation, etc., it appears that the (wonderful) strategy was not the result of some sort of rational analysis at all. Instead, invariably, it seems, there was some lucky moment or unexpected event which triggered the company to alter its course and move into a new direction.

Hornby accidentally saw itself appear in the hobby market (instead of the toy market) when they spent their cost savings from outsourcing on adding detail and quality to their products; CNN figured out it could become a global (instead of US) news company when Fidel Castro (picking up the American satellite signal in Havana) told founder Ted Turner he watched it all the time, Southwest invented low-cost airlines when competition forced them to sell a plane but decided to try and fly the same routes with three instead of four aircraft, and Bisque founder Geoffrey Ward switched from being a plumber to selling designer radiators when people kept knocking on his door asking whether they could buy that funny-shaped radiator which he had just removed for a client and placed in his workshop window to make it appear shop (to see off the civil servants who had told him he was illegally located in a retail zone).

But why do people, in retrospect, almost always want to make it sound like it was the result of some thorough analysis and innovative thinking? Ego? Embarrassment? I guess that might play a role; “rational thinking” sounds better than “ehm… we stumbled upon it, I guess…” But, I’ve also found that people I interviewed who weren’t there at the time of the strategic switch at all – and therefore can’t take any credit or blame for it anyway – make it sound all logical. And that’s, I guess, because in retrospect, it all sounds so bloody obvious: moving into the hobby market, becoming global, not handing out food, newspapers and hot towels on a 45-minute flight (but instead focusing on turning the darn thing around on the tarmac in 20 minutes and fly again). It just makes so much sense, that it just had to be the result of thorough analysis and thinking – surely.

But admitting – even if alone to yourself – that the best strategies often emerge when you weren’t really planning for it, could actually help you get lucky more often. Andy Grove – former CEO and Chairman of Intel – figured that one out when Intel moved its microprocessors into computers after IBM (finally) convinced them that they could be applied in their PCs and, “yes, they really wanted to buy them”. After that, he said:

“We say we have a top-to-bottom strategy. But don’t act top-to-bottom. You can look at it positively or negatively. Positively, it looks like a Darwinian process: we let the best ideas win; we match evolving skills with evolving opportunities. Negatively, it looks like we don’t have a strategy…”

And you want to make sure ideas reach you from everywhere: suppliers, customers, competitors, bloody civil servants and, yes, even Fidel Castro.

Star knowledge workers – you really should not pay them that much, you know

Why do we pay certain employees so much?
Duh, because they make us a heck of a lot of money!

Sure, that may be true, but I guess that’s not enough. When a team of 5 salespeople earn you 7 million, you might pay them 100k each. But when a team of 5 consultants, attorneys or security analysts makes you 7 million, you often end up paying them 1 million each! And why do we do that!?

Perhaps because their skills are more specialised and scarce and if they walk out of the door we’d have a hard time replacing them…?

Sure, that may be true, but I guess that’s not enough either. Because if we would have a highly specialised sales team, with technical knowledge perfectly attuned to our particular product range, we would likely still not pay them 1 million each, although we’d have a hard time replacing them if they’d leave. And that’s because they too would not find it easy to find a replacement job. Their skills are so specialised, attuned to our particular product, that they would not be able to make the same kind of money for any other company, and hence would be much less valuable anywhere else, to anyone else. Nope, we don’t have to pay them that much to keep them; they don’t have anywhere else to go!

But the consultants, attorneys and security analysts do. They can just take their rolodex, their files, their client base and expertise with them, and stroll into the office and payroll of our competitor, and earn them the same 7 million, right?

Well… maybe not. We often think they can just “take it with them”; they think that they can just take it with them, and our competitor usually thinks they can just take it with them. But often we’re all wrong.

For example, Professor Boris Groysberg – at the Harvard Business School – examined the portability of star security analysts’ performance. Security analysts, as you may know, are employed by investment banks to analyse companies in a particular industry. They, among others, produce earnings forecasts, buy and sell recommendations, and detailed reports on individual companies. If they’re any good – because they, for instance, produce quite accurate earnings forecasts – they can easily make a million or three per year – and, yes, that is British Pounds millions.

Investment banks pay them so much because they think they can easily take their skills, financial models, industry contacts, etc. to a different bank if they wanted to, and analyse the same sectors and companies. However, Boris found that that is actually not as simple as it seems…

He analysed the performance of 316 top-ranked security analysts who switched firms, using rankings published by “the Institutional Investor All-America Research Team poll”. He found that star analysts who switched employers immediately experienced a significant decline in their performance. The effect was substantial. For example, the chance that a particular analyst would come out top of his sector’s league table (having made the most accurate forecasts etc.) would drop with 50% if he had just switched firms. Actually, on average, it would take such an analyst five years to recover and make up for the switch and subsequent drop in performance.

Hence, even security analysts, whose work seems highly individual and not dependent at all on the particular organisation that they are working in, experience a very significant decline in their performance when they switch firms. Apparently, the soft stuff, such as the intellectual capital embedded in the fabric of the organisation, their relationships with colleagues, and all sorts of other social and tacit processes (which are difficult to identify, observe or even name!) play a huge role, even in the work of such star performers. Take them out of their organisation and their ability vanishes with the severance of the social ties.

This means that we probably all overestimate the portability of our star workers, and of ourselves...

It also means we pay them too much.