Catalign Quarterly - June 2012

Catalign Quarterly is an attempt to put together insights relevant for fostering a culture of innovation in organizations. This is the third issue of the Quarterly.

Theme for this quarterly is “Design of strategy as if implementation matters”. If designing a good strategy is difficult then designing a strategy as if implementation matters is far more challenging. IBM’s ex-CEO Louis Gerstner expressed this well when he said, “It [IBM] had file drawers full of winning strategies. Yet, the company was frozen in place.”

In the first article we reflect on the 3 challenges in implementing a strategy as observed by Richard Rumelt. We explore an approach called "following the bright spots" in the second article. We summarize 3 of the lessons Sudhir Kumar learnt in implementing a strategy in Bihar. Finally I review a book "Understanding Michael Porter" by Joan Magretta.

1. 3 Challenges in implementing a strategy

2. Following the bright spots and its implications for designing a strategy

3. 3 lessons from implementing a strategy from Sudhir Kumar’s experience in Bihar

4. “Understanding Michael Porter” by Joan Magretta: A book review

I would like to thank Prof. Rishikesha T. Krishnan for the discussions on this topic.

Theme for the Sept 2012 quarterly is: Building experimentation capacity.

“Understanding Michael Porter” by Joan Magretta: A book review

Why I read the book: I got interested in “Understanding Michael Porter” by Joan Magretta when I read following remark of Porter in an interview which is an excerpt from the book. Porter said, “I used to think that most strategy problems arose from limited or faulty data, or poor analysis of industry or competition. But the more I have worked in this field, I have come to appreciate that some of the most significant barriers [of designing & implementing a good strategy] come from the many hidden biases embedded in internal systems, organizational structures and decision-making processes.” I thought here is an opportunity to understand Porter’s view on what is beyond “analysis” part of strategy. After all, Porter is the most cited author in business and economics according to Wikipedia. So, there were two questions in mind while reading the book. One, “What is the essence of Porter’s work on business strategy?” and the second, “What does Porter say about – design of strategy as if implementation matter?” I felt that the book did a great job in answering the first question in a simple and concise manner. On the second question, the book mostly remains silent.

Here are two things I liked most and one thing I found really surprising from the book. Let me begin with the things I liked.

Competing to be the best vs unique: In 1999, Westin Hotels and Resorts introduced its branded “Heavenly Bed” after investing tens of millions of dollars in testing mattresses, pillows and bed linens. Rivals didn’t leave much time in jumping the bandwagon. Hilton introduced Serenity Bed, Marriott -Revive Collection, Hyatt – Hyatt Grant Bed etc. Soon it resulted in a bloody Bed War. The consumer was the winner. However, how much the hotel industry benefited is debatable. Porter says that “Competing to be the best” leads to competitive convergence. Over time, all rivals begin to look alike. A much better thing to do is “competing to be unique”. And how do you do it?

Dual emphasis on value proposition and tailored value-chain: There are two sides to the strategy equation. One is what customers see different in you – the value proposition. The other, what you do differently in creating the value – the value chain. For example, for Southwest Airlines, the lowest cost is what its customers see and value. How does Southwest do it? By tailoring its value chain. For example, one of things it needs to minimize is gate turnaround time. That means draining the lavatories fast. To do this, it needs to hook up an equipment to service channels. This interfered with other activities. So Southwest got Boeing to reposition the service panel in new 737-300. That is tailoring the value chain – zooming in on the price and/or cost drivers and performing the activities differently or performing different activities to achieve the same goal.

Now, about the thing I found surprising:

Underlying economic model: What is the right goal for strategy? According to Porter, it is Return on Invested Capital (ROIC). I am sure it is a great goal. However, that’s not how Mark Zuckerberg or Steve Jobs looked at it when they started their companies. They were passionate about doing something – building a PC or a social network and they did it. In laying out the framework, Porter emphasizes how “rigorously grounded the framework is in economic principles”. Ironically, he makes strong assumptions about how rational the decision maker “ought to be”. That makes the underlying economic model shaky as human decision making is subjected to systematic errors of judgment or biases. So I feel Porter’s framework is like a chair designed for ultra-smooth surface and then used on a wobbly surface.

Overall, I enjoyed the book, found it useful and would strongly recommend it to anyone who wishes to get an overview of Porter’s work on business strategy.

Photo sources: wikipedia.org (Porter's photo), barnesandnoble.com (book cover)

What is “change by being”? Stories of Ramana Maharshi and Eckhart Tolle

‘Change by doing’ doesn’t require much of selling. Whether it is a salt march, a war or the creation of Facebook, the act triggers a change process – sometimes quite massive. In contrast, ‘change by being’ is relatively less understood. Many people may not even consider it as a legitimate approach for change. And yet, I believe ‘change by being’ is just as powerful an approach as ‘change by doing’ if not more in bringing about a change. What is ‘change by being’? Let’s get a glimpse of it through 2 short stories of Ramana Maharshi and Eckhart Tolle.

Ramana Maharshi: David Godman narrates the story of a “miserable, crabby” woman who visited Ramana Ashram during 1940s in one of his interviews. The story was narrated to him by Arthur Osborne’s daughter. During that time Osborne’s house at Tiruvannamalai was a place where foreigners who couldn’t find a place to stay would be put up. One evening a miserable, crabby woman was sent to Osborne’s place by Ashram folks. The next day she left for the Ashram after breakfast. When she came back for lunch she was radiant and glowing with happiness. Hosts were happy and curious to hear about the “transformation story”. However, the woman remained silent throughout the lunch. Finally, the hosts couldn’t resist it anymore and asked her, “What happened? What did Bhagwan do to you?” The woman was surprised. She said, “He didn’t do anything. He didn’t say anything to me. I just sat there the whole morning and then came back for lunch.”

Eckhart Tolle: Tolle narrates the story of one of his neighbours Ethel , a “middle aged, intelligent and highly educated” woman in the book “A New Earth”. One night at 11 o’clock Ethel wanted to see Tolle urgently. It was clear that she was under stress. She was trembling as she took out papers from a file and spread them on the sofa. Tolle says, “I looked at her with no thought and no judgment and listened in stillness without any mental commentary.” Ethel kept talking. She was worried about a dispute which arose after she had refused to pay service charges for the repairs at her house. Ethel kept talking for ten minutes and then suddenly stopped. Then she looked at Tolle and asked, “This isn’t important at all, is it?” Tolle said, “No, it isn’t”. She sat quietly for a few more minutes, picked up her papers and left. The next morning when she saw Tolle on the street, she asked, “What did you do to me? Last night was the first night in years that I slept well.”

Did both the stories involve a change? Yes. Did the stories involve an action? Almost no visible action from Ramana or Tolle. So, what is happening here? I don’t know. But I like Tolle’s approach – which begins with complete acceptance of the situation – without being judgmental about it. Perhaps this creates a mirror so clear that the other person sees herself and the futility of the conflict with utmost clarity. That leads to the change.

David Bohm calls a person like Ramana or Tolle “a catalyst” – a person who “makes possible certain action without itself taking part, but merely by being what it is.”

Can anyone become a catalyst by creating such a mirror? Eckhart feels that it needs practice. For most of us, the mirror is tinted – in fact, heavily tinted. With practice it can become clearer. I hope it is like building stamina.

Sources:

Tolle’s story is on page 175-176 of “A New Earth” by Eckhart Tolle.

“Catalyst” analogy of David Bohm is on page 173 of “The ending of time” which contains dialogues between David Bohm and Jiddu Krishnamurti.

3 Lessons in implementing a strategy from Sudhir Kumar’s experience in Bihar

Sudhir Kumar (SK) played a key role in turning Indian Railways around during 2004-2008. However, initial years in his tenure in Bihar were disastrous. He was shunted, frustrated and according one wise-old colleague accelerating towards martyrdom. What did the angry young man learn about implementing a strategy during this period? Let’s look at 3 lessons in this article.

1. First learn to survive: When SK was posted to Bihar as a fresh IAS officer, he wanted to “quickly sort out the whole world” – especially the corrupt system. He says, “While I was honest, I was also impolite, abrasive, and saw words like ‘compromise, adjustment or tact’ as signs of cowardice and weakness”. One of his first projects was to arrest the theft of electricity in Patna. He discovered that many prominent people were involved in the illegal activity. He began to go after the top honchos to send a strong message to the bad guys. Is it difficult to guess what happened next? SK was transferred to a different post. The system revolted in unison to make SK ineffective. SK learnt his first lesson: To accomplish a mission, first learn to survive in the position.

2. Empower the beneficiary: One of the assignments was to build wells for the poor. Initially, SK and team executed the project with remote control. All the decisions about selection of well site, their diameter, depth, material to be used were made sitting at the head quarter. The primary users of the well were not consulted at all. The scheme was a failure in terms of how useful these wells turned out to be. Later the approach was modified to empower the people on-the-ground in making these decisions. SK says, “As outsiders, our judgements would never be as good because we had limited data on ground realities.”

3. Start where you can easily make progress: In another project SK & team was to increase tax revenue by arresting tax evasion. One option was to attack the unorganized sector like spices or cashew nuts. However, in this category it was difficult to get authentic information. The other option was to look at organized sector categories like scooter, motorcycle and cellphone. In this category, the first sale at the point of origin was in white currency. SK started with the second option where computers could be used to maintain and track the data. It worked very well. Later on when SK worked with Lalu Prasad in Indian Railways this lesson was very useful.

Source:

“Changing tracks: Reinventing the spirit of Indian Railways” by Nilakant V. and Ramnarayan S, Collins Business, 2009, pp 29-34.

Sudhir Kumar’s photo is from IIM Indore site.

Following the bright spots and its implication for designing a strategy

In an interview Andrew Grove narrates his experience at one of the exit interviews while being CEO of Intel. Steve, a young employee who is leaving Intel, said, “Andy, if I were you, I would take microprocessors seriously. We should learn how to use microprocessors, how to develop applications and become experts.” Andy said, “Sure” and never paid any further attention to the remark. In fact he says, “It was inconceivable for me to think of it.” Looking back Andy feels, “He was so right and I was so wrong.” What Steve was pointing to was an internal bright spot – the microprocessor business – doing well at the time but without any strategic attention from management. Question is: Can focusing on bright spots be a good option while designing strategy? If so, can it be done systematically??

Strategy answers 2 questions: What game are we playing? How will we win it? At the time of Steve’s exit interview with Andy, Intel was playing memories game and losing it badly. Many companies are in a situation like Intel and figuring out what to do next. Most of the time the attention is put on the questions “What is not working? And why?” In this article I want to explore what happens when the attention is put on the questions, “What is working? And can we replicate it elsewhere?”

For Intel the bright spot Steve alluded to was already quite bright. In most organizations it is much dimmer and needs some digging like that done by archaeologists. When Sudhir Kumar started working with Lalu Prasad Yadav in 2004, Indian Railways was heading towards bankruptcy, fast. Dr. Rakesh Mohan committee had already submitted an eight volume report on the causes of the failure and possible remedial actions. The committee had attributed the falling market share of Railways to high freight rates that subsidized low passenger fares.

When Sudhir Kumar studied the data on freight traffic, he discovered an interesting anomaly. Market share of some of the commodities (like steel and cement) had gone down. However, some other commodities (like iron ore and coal) had held on. What was happening? After analysing it further, Sudhir Kumar discovered that the Railways was providing door-to-door service for the winning commodities. On the other hand, it was doing station-to-station service for the losing ones. This lead to the insight of creating differentiated freight rates based on the value created for the customer. This became a key element of the strategy designed by Railways and it paid handsomely. Point to be noted in this story is that Sudhir Kumar followed the bright spots i.e. he asked “What is working? And can we clone it?”

Peter Drucker referred to this approach as pursuing the “unexpected success” in his book “Innovation and Entrepreneurship” written more than a quarter of a century ago. He begins chapter 3 as follows:

No other area offers richer opportunities for successful innovation than the unexpected success. In no other area are innovative opportunities less risky and their pursuit less arduous. Yet the unexpected success is almost totally neglected; worse, management tend actively to reject it.

Of course, the knowledge of an unexpected success may not come to you on a platter like it did for Andy Grove. Like Sudhir Kumar you might have to go hunting for it. The good news is that there is a systematic approach on how one can go about hunting for the bright spots. See the figure below adapted from Chip & Dan Heath's Switch.

Sources:

Sudhir Kumar story is from “Changing tracks: Reinventing the spirit of Indian Railways” by V. Nalakant and S. Ramanayaran, Collins Business, 2009, pp 112-115.

“Follow the bright spots” approach is explored in detail in “Switch: How to change things when change is hard” by Chip and Dan Heath, Broadway Books, 2010, chapter 2 titled “Find the bright spots”.

Sudhir Kumar’s photo is from IIM Indore site.

Baseline rates in innovation management

Wikipedia says that Fetal Heart Rate (FHR) should be between 110 beats per minute (bpm) 160 bpm. Anything beyond this range is considered abnormal. These rates are called baseline rates. FHR baseline rate is the same no matter which culture or nation the baby is born into. Are there any baseline rates in innovation management similar to FHR baseline rates? I don’t know. However, I feel that we need to establish them as they are going to be very useful in making various decisions in managing innovation. Nobel Laureate Daniel Kahneman highlights in “Thinking, fast and slow” that baseline rates are a good starting point while making risky decisions. In this article, I present my current view and a first attempt at the baseline rates relevant for innovation management.

Let me qualify the data set first. These rates are based on the data from 25 to 50 organizations depending upon the parameter. There are some parameters like the “idea per person per year” and “participation” where data is available from more organizations (50). And there are parameters like “response time” and “success rate” for which data is available from fewer organizations (25). Moreover, these numbers are not averages. Like FHR baseline, they are linked to the health of the innovation engine. Currently I have used my judgement in calling some rate “poor, OK or Good”. I have used publicly available information such as INSSAN benchmarks as well as data published from companies like Toyota and P&G. Moreover, I have also used data from a dozen odd organizations where I have seen the innovation engine personally.

Let’s look at each parameter briefly:

Idea pipeline (General): This parameter says that if you are 1000 people organization and if you have an idea box (physical or on intranet), then you should get at least 1000 ideas in a year to qualify for “good” category. If you get, say 150 ideas, then you are OK. And if you get 70 ideas in a year then you are poor. The maximum number I have seen is from Brasilica (a Brazilian firm) is at 143.

Big idea pipeline: Many organizations manage a separate pipeline for large impact ideas. Take each idea in the pipeline and identify how much business impact (annual) it projects today. Let’s say your big idea pipeline has 3 ideas with following potential revenue: 1 crore, 3 crore, 1 crore and if your revenue is 100 crore then total business impact of the pipeline is: 1+3+1 = 5 and the ratio of total business impact to revenue is 5/100 = 0.05. The table says it is “poor”. GE’s breakthrough imagination has 100 ideas each with a minimum potential of $1 billion. That makes the ratio at least 0.67 (perhaps the actual ratio is > 1).

Participation: Less than 5% employees giving at least one idea in a year is “poor”. More than 30% doing the same is “good”. See here how this parameter evolved in Toyota over 40 years.

Response time: How soon are you getting in touch with the person who submitted an idea? Less than a week is “good” and more than a month is “poor”. For example, Shell Gamechanger process promises to communicate input on your idea within 48 hours.

Success rate: This is the trickiest parameter. Too high of a success rate may mean nobody is taking any risk. Check out my article “Lower your batting average to improve innovation productivity”.

Will these baseline rates change as we get more data? Yes. Will the role of baseline rates diminish? I doubt it. As I mentioned this is my first attempt and your inputs would be greatly appreciated.

3 challenges in implementing a strategy

If designing a good strategy is difficult, then designing a strategy as if implementation matters is far more challenging. Louis Gerstner articulates the challenge in his autobiographical account of IBM turnaround¹ “Who says elephants can’t dance” - It [IBM] had file drawers full of winning strategies. Yet, the company was frozen in place. IBM hadn’t missed predicting any technological trend and yet the company was paralyzed enough not to act on any of those effectively. What are the challenges in implementing a strategy? Here is my reflection based on Prof. Richard Rumelt’s video interview.

1. Not simple enough: A few weeks back I witnessed following conversation in a senior management meeting. It got started when someone asked, “How is our innovation program aligned with our strategy?” One response came, “What is our strategy?” This was followed by a noticeable silence in the room. Then answers started - One answer was “Our vision statement articulates our strategy”. Another one was “We have percolated our strategy through a balanced score card. Hence, our KRAs tell us what to do in line with our strategy”. Each answer had an element of truth. However, my conclusion after witnessing this discussion was, “If the company has a strategy, nobody in the room has articulated it in a simple manner.” Each member in the room was making various decisions – including selection of large impact ideas. And yet there was no coherent view on how they would win in the market – today & tomorrow. I like what Rumelt says in the interview, “A good strategy is essentially simple. If you can’t explain your business strategy in a few minutes and in a few pages, there is something wrong.”

2. No good progress indicator: Infosys announced its results last week and missed its annual guidance for the first time in two decades. Infosys revenue had grown by 15.8% YoY and profits by 14.5%. Market reacted harshly; the stock shed 13% in a single day. It has been little over a year since Infosys announced Infosys 3.0 goal of getting its revenue equally from transformation, innovation & operation. In March 11, 2011, transformation, innovation & operation constituted 25%, 10% and 65%. Last week, Infy CEO Shibulal emphasized their commitment to make the portfolio balanced. However, its “innovation” bucket portion seems to have dipped from 9.5% to 6.2% of its revenue. Is Infosys strategy working? There is no easy way to find out, especially for an outsider, perhaps even for an insider. As Rumelt says in the interview, “It is difficult to determine whether or not you are accomplishing your strategy by looking at current results. You can have a company that is producing excellent results but has a poor strategy. Vice versa, you can have a company that has poor results but an excellent strategy.” My friend Prof. Rishikesha Krishnan who visited Infosys Labs recently is right in pointing out, “It may be premature to knock Infosys off”.

3. Ambivalent messaging: Andrew Grove tells a story of his Intel days², when he & CEO Gordon Moore made a significant strategic decision in the middle of 1985 – that of getting Intel out of the memory business. This was the business Intel had identified itself with for more than a decade. Initially when Grove talked about it to his team, he had a hard time getting the words out of his mouth without equivocation. In his own words, “Saying it to Gordon was one thing; talking to other people and implementing it in earnest was another”. Several months after this decision, Grove was visiting a remote Intel location. He was still not ready to announce that they were getting out of the memory business. He would usually give negative-to-ambivalent answers to questions pertaining to memories. And one of the senior managers attacked him aggressively, “Does it mean that you can conceive of Intel without being in the memory business?” In Grove’s own words – “I swallowed hard and said – yes, I guess I can. All hell broke loose.” Communicating an intent (like that of getting out of memory business) with clarity is not easy. Most companies mess it up. Rumelt says in the interview, “There is an essence of compromise that is part of human character. While competitive success comes from focus of resources, our natural tendency in the organizations is to satisfy multiple constituencies.”

Sources:

1 “Who says elephants can’t dance” by Louis Gerstner, HarperCollins, 2003 (reference to drawers full of winning strategies is on page 16)

2 “Only the paranoid survive” by Andrew Grove, Doubleday, 1996. (reference to the visit to the remote location is on pages 89-90).