Business Transformation

I was on the train heading into London. It was outside of the rush hour which gave me a chance to have a cup of coffee and read the FT without any distractions or having to demonstrate the usual Origami skills any broadsheet reader needs to turn a page of a paper this size on a packed train!

I read a great article in the analysis section on business transformation. It stated that over the past few years we have seen businesses create strategies around shareholder value with ever increasing demands for higher profits and dividends each quarter. All this was probably summed up by Alfred Rappaport in 1986 in his seminal book, Creating Shareholder Value: “The ultimate test of corporate strategy, the only reliable measure, is whether it creates economic value for shareholders”. It became an epidemic that swept across our corporations, fund managers and banks and catalysed each to focus on a quarterly shareholder ROI above all else.

Having spent a number of years in the banking sector I’m very familiar with the underlying premise that the whole industry is trust based. I trust my local clearing bank to take my money and return it when I want it, preferably with some interest. Banks then assume that we’re not all going to ask for it back at the same time. Unfortunately we humans tend to exhibit a degree of herd behaviour under stress and all it takes to bring most banks to their knees is a run of customers/investors demanding their money back. Those banks will then react by not lending and recalling money that they have lent out which creates a domino effect across multiple market sectors.

Government initiatives to reverse the pattern highlight just how key trust is as it doesn’t matter how much money you pour in if people do not feel confident to take a degree of risk (i.e. invest or borrow). Amongst all the doom and gloom, however, are a few encouraging signs that we will build a very different business landscape going forward. It’s certainly encouraging to hear respected leadership gurus like Jack Welch comment that focusing solely on quarterly profit increases was “the dumbest idea in the world”. “Shareholder value is a result, not a strategy”. “Your main constituencies are your employees, your customers and your products”

Jack’s comment reminded me of the Jim Collins book Good To Great. Jim and a whole bunch of research students spent 15,000 hours looking for companies that had not only achieved greatness but had sustained it for at least 15 years. The idea was to identify businesses that had something special in their corporate DNA that allowed them to excel across economic cycles and not just during a boom or under a specific leader. For those of you who don’t want to read the entire book Jim neatly summarises the findings on page 13:

• First who...then what . It all comes down to the right people doing the right jobs
• Confront the brutal facts. Have absolute faith in your ability to succeed and be a realist
• Hedgehog concept. You have to be best in the world in your core competency
• Culture of discipline. Disciplined people + entrepreneurship = great performance
• Technology accelerators. Select the right technology tools for your business
• The flywheel. Change has to start small and build momentum

If you take a close look at the businesses that are making headway in the midst of this recession I bet most if not all have these characteristics. Wal Marts, McDonalds, P&G and Novartis could hardly be labelled as fast movers but they have focused on putting in a great set of foundations and incrementally improving their business models and profits. D&H is a privately owned distributer that is reporting steady growth and has tackled an issue that has constrained most of its competitors businesses, it has actually increased credit lines to its resellers. D&H argues that it sees this as an investment for the future.

The first early shoots of a real business transformation can already be seen. Those companies that focused on shareholder value and accelerated past their competitors in the boom years are now seeing slower moving but more strategic organizations pass them in the downturn. As Jeffrey Immelt at GE stated “Anybody could run a business in the 1990’s. A dog could have run a business.”