Helping Companies Stay Relevant: An Interview With Author Amit Mukherjee
Why is it necessary for today’s manufacturers to evolve?
It is not just necessary, but essential. And not just manufacturers, but retailers and service providers too. Most companies have already partly evolved by fragmenting their work across multiple companies spread across time and space. In effect, they created networks of partners and became heavily reliant on their effective performance. Where they have not evolved yet is in the creation of managerial policies to weave these partners into a coherent, effective network.
This is not a trivial issue! Peer-reviewed research by professors Kevin Hendricks and Vinod Singhal show that ordinary, routine failures within a network can drive down a company’s stock price 35-40 percent and the price may not recover for two years. Research I conducted for the software giant SAP showed that 30-50 percent of large companies are challenged by such ordinary, routine failures. So, without the evolution of network-focused management policies, many of our companies are at as much risk of failure today as they were in the face of the Japanese onslaught in the 1980s. Indeed, though The Spider’s Strategy is not about the financial industry, the crisis there is a perfect case in point.
Describe what you learned when you talked to the executives at Nokia and HP. How did these companies transform, and why was this transformation necessary?
Many people know of a fire at a Philips plant in March 2000 that catapulted Nokia to the top of the mobile phone industry while devastating the then-market leader Ericsson. As the story is told, Nokia managed the crisis brilliantly, but that’s not what really happened. The (former) Nokia executive credited by The Wall Street Journal with managing this "crisis," Pertti Korhonen, told me, "Externally, the fire has been a much bigger thing than internally. For us, it has been business as usual." In reality, in 1995, Nokia experienced a very similar challenge that did become a severe crisis. CEO Jorma Ollila tasked Mr. Korhonen to find a solution. Over the next few years, Nokia developed network-focused management policies, processes, culture and organization and integrated these with technology. These efforts helped it avoid a crisis in 2000.
Change came to HP in a different way, though roughly at the same time. Here, middle management led the change largely because the received wisdom on the "right way" to manage did not seem to be working, and HP was falling behind arch-rival Dell. Several different people initiated changes in their own areas independently (and HP’s next challenge will be to weave these into a coherent managerial policy), but the story I like best is that of a then very junior professional, Venu Nagali. Venu had a self-described "eureka moment" when he realized that managing a technology company was really all about managing risk.
Normally, most companies pile risk on organizations that are simply not powerful enough to reject the load. This approach may reduce immediate tangible costs (e.g., price of a component), but drives up opportunity costs (e.g., cost of recovering from a problem) and weakens the network. HP pursued this and developed software to objectively measure these costs. That software, and the associated managerial policies and processes, today anchors HP’s network-focused management capabilities.
What effect does a company’s culture have on its success?
Culture either opens up or shuts down the soft side of a business: Do I trust you to keep your word when I can’t force you to do so? Can I take reasonable risk instead of only pursuing "no one can blame me" solutions? How do we learn from mistakes–do we learn at all, or do we bury them (and the people involved)? Do we rely on data or opinion? Will I willingly share ideas that can make others as successful as I am? These are very important issues for a networked world.
I once taught the senior executives of a company I’ll call "EuroCo." After hearing the Nokia and HP stories, one person announced that unless I could tell him the exact formula HP used to anchor its collaboration efforts, he wouldn’t believe me; no company could ever collaborate and succeed. Then he–and several of his colleagues–turned his back on me.
That evening, a few others apologized–in ones or twos, but never more. They said while their CEO was focused on finding yet another strategy, I had actually got a taste of the culture that was keeping them from succeeding, and they felt powerless to change it. The point is that in a networked world where every company depends on others, a hard-edged take-no-prisoners culture will assure failure, for the best of the best will choose not to partner with a company with such a culture.
You mention "Design Principles" in The Spider’s Strategy. What is a Design Principle and how can executives use these principles in business?
A Design Principle is a guideline for policy, as opposed to a cookie-cutter template to apply as is. Having worked with senior and top executives of companies ranging from steel wire to food, I believe that on the most important issues, there is no "one right way" of implementation that will work for every company in every industry.
The four Design Principles for networked companies [that I mention in mention in my book], one apiece for processes, strategies, values/culture and technology, suggest what networked companies need, but do not precisely specify how to accomplish the policy. For example, one principle, Value and nurture organizational learning, addresses what makes learning "organizational," why this is important, what types of learning should be pursued and how processes, organizational structures and culture interact to create different types of learning capabilities.
However, since HP is much more decentralized than Nokia, the very effective applications of this Design Principle at both companies have little in common. Indeed, if each adopted the other’s approach, each would probably kill off all organizational learning! The executive’s job is to take each Principle (and related tools), use these to diagnose his or her own organization, and then design the best solution that will work in that organization.
Why are the Design Principles "deceptively simple"?
In any reasonably well-managed company, people will have no problems finding a handful of examples to "prove" that they do apply each of the Design Principles. The real challenge is finding if the Principles are so deeply embedded in the company that they dictate every aspect–as opposed to isolated examples–of behavior. For example, at Nokia, under some conditions, a function that is not the "lead" can smoothly take on the lead role temporarily without its actions triggering a turf battle. Its ability to do that is crucial for Nokia’s ability to sense-and-respond as envisioned in the first Design Principle. This action also says a lot about how Nokia applies another Design Principle, which concerns collaboration. It is far easier then to say that a company can sense-and-respond or collaborate with partners than it is to actually do so day in and day out.
Why is it crucial for companies to identify problems early?
In a networked economy, an ounce of prevention is worth not a pound, but a thousand pounds, of cure! Networked organizations give us enormous benefits; next time you are out of state and use the ATM at a bank that is not your own to get cash, thank the fact that your bank is networked with the one you used.
At the same time, networks have the power to turn small or isolated problems into huge and widespread crises. Since networked companies are linked by multiple flows of monies, information and goods, when a problem occurs, efforts by managers to stop its propagation by blocking the most likely path often fails, since many others are available for the problem to traverse. For example, had the financial industry not been so tightly networked, the financial meltdown we are experiencing would probably not have become as devastating. But it was, and so, Lehman’s problems (lots of bad debt) threatened Goldman Sachs (which had foreseen the crisis and had sold off potential bad debt); the sequential rescue of AIG and Merrill Lynch failed to save WaMu and the government’s interceding there did not help Wachovia.
When the brakes seemed to hold in the United States, banks in Europe, far from America’s real estate meltdown, started toppling. Indeed, the crisis is propagating into the manufacturing world through the financial arms (GMAC) of companies such as GM. The failure of such companies can devastate the remaining seemingly-solid financial institutions.
We can’t get the benefits of networks without their problems. Great companies avoid crises; merely good ones manage them well. The earlier a problem is detected–by applying my four Design Principles–the more likely it is that its impact can be ameliorated.
You write of the importance of "intelligent knowledge sharing." Why do you recommend this?
As networks include members of disparate sizes, divergent processes, inconsistent tolerance of risk, different financial and administrative capabilities across geography and time zones, no member company has complete visibility across the network. On noticing an opportunity or a problem, a member of an effective network would be expected to communicate what it knows to its partners. All partners must then respond quickly and coherently to whatever it is that was sensed. To do so, all the parties involved must decide what information to collect, what specific information to share with others, how to use the information to reach key decisions and how to act on the information. In all of these steps, each member must have the ability to learn from the experiences, knowledge and opinions of its partners. This, in effect, is "intelligent knowledge sharing."
If the network cannot do all this seamlessly, it will fail to exploit the opportunity or ameliorate the problem before it becomes a crisis. But doing so will take dedicated effort. Consider this: Who in any of the member companies is authorized to share what information with whom under what conditions? Most companies have very restrictive policies, and those policies may preclude any sharing. There isn’t a "one size fits all" answer to this question; a policy that is perfect for a decentralized company may be disastrous for a centralized one. And when the problem or opportunity is being sensed is not the time to search for answers to this question! Similar issues could be raised about the words "intelligent" and "knowledge." Executives and managers must start working on crafting the capabilities for "intelligent knowledge sharing" now.
What kind of relationships must companies form with their partners?
When events move very fast, one can’t dot every "i" and cross every "t" before acting in concert. Consequently, executives must build strong collaborative and trusting relationships with people whose help they might need someday, when they least expect to do so. (Case in point: After the fall of the stock markets, many commentators and executives blamed the credit market tightening on the vanishing of trust among financial institutions.)
The challenge is that old habits die hard and we spend precious little time building strong relationships with outsiders and continue to interact mostly with bosses, colleagues and direct reports. Nokia Senior Vice President Jean-Francois Baril says, "The bias towards win-lose is the most difficult thing to unwire." Speaking on a similar theme, Hewlett-Packard Vice President Eric Schneider spoke of the need to "sit…down face-to-face with people" in order to "… establish a personal relationship about hobbies, sports, family" that would "make negotiations less confrontational." There is a certain irony in this. The networked corporation is undoubtedly a product of a computerized world, which makes co-location and direct contact unnecessary. Yet its fate may ultimately lie in whether people can look into each other’s eyes and think, "I suppose I can trust you!"
What are some of the obstacles to collaboration with business partners?
The biggest obstacle is the bias towards win-lose that Mr. Baril spoke about. What makes this bias particularly challenging is the fact that it is hard-wired into corporate processes, culture and performance management systems. In the early days of its effort to transform itself, HP was challenged by the fact that many professionals were unwilling to collaborate even when it was in the company’s best interest, because they felt they would be personally penalized if things went wrong. So, for them, not collaborating was a perfectly rational decision.
There are many other possible problems. Some are cultural (e.g., potential partners may have different perspectives on risk), some are policy-driven (e.g., who is authorized to share what information with whom), some are generational (e.g., younger people are more able to use technology to collaborate) and some are technological (e.g., well-meant but possibly useless "knowledge management" tools). Some of these reinforce each other and make the challenge even more difficult.
What is the one piece of advice you hope readers take away after reading your book?
Every manager and executive needs to focus on the organizational innovation challenge of creating an effective networked organization; they must shed their old ways of managing! Anyone who is hesitant about the need for such broad change, particularly in the present economic climate, should re-read the discussion above (and similar assessments that are beginning to appear in the media) about how the network effect aggravated the problems of the financial services industry. Whether it is by deep introspection or by focused training, unless managers and executives learn how to quickly create processes, strategies, culture, organization and technologies for the networked world, their companies may not be around when then economic downturn is reversed. Transforming is not an option; the only choice to make is how fast the transformation be implemented.
Read the review of The Spider's Strategy here.
Interview by Jessica Livingston, managing editor