A recent report on “Executive Pay” in The Economist (20th January 2007) summarized how private equity scores over listed capital.
The boards are staffed by knowledgeable directors.
Directors are intensely involved. Their bonuses depend on company’s performance.
The focus is on a medium term goal of listing or selling a company that will fetch a good price.
The long-term cannot be used as an excuse for postponing tough action.
Managerial pay in private equity is attractive. But it is aligned with success or failure.
No wonder, there are thousands of private equity firms today managing billions of dollars of capital. The action is now spreading all over the world. Citigoup has announced it will set up a new $200 million fund dedicated to Africa. Many of the bigger players plan to increase their commitment to emerging markets in the next five years.
Thursday, January 25, 2007
How Private Equity Scores over Listed Capital
Sunday, January 21, 2007
Saturday, January 20, 2007
The Nationalization of the Suez Canal
[1]
My old interest in History was revived by a very insightful article which appeared in the Economist dt July 29, 2006. The article explained how the Suez canal was nationalized and the resultant fallouts.
On July 26th 1956, Gamal Abdul Nasser, president of Egypt, addressed a huge crowd in the city of Alexandria and instigated them against Britain. The colonial power had ruled Egypt from 1882 to 1922, when it gained independence, and continued to influence Egyptian affairs for several years till the monarchy was finally overthrown by Nasser in 1952.
During his speech, Nasser mentioned the name of the Frenchman who had built the canal, Ferdinand de Lesseps, several times. "De Lesseps", it turned out, later was the signal to the Egyptian army to start the seizure of the canal.
The Suez crisis resulted in a major humiliation for Britain and France. As America's supremacy over its Western allies became evident, European countries came together to create what is now the European Union. The crisis promoted pan-Arab nationalism and effectively transformed the Israeli-Palestinian dispute into an Israeli-Arab one.
Background Note
Britain had become such an unwanted guest in Egypt that by the early 1950s, Winston Churchill, (who had returned as prime minister in 1951) felt he could no longer resist the tide of nationalism. By June 1956, the last of the British soldiers had left. Yet Anglo-Egyptian relations did not improve.
Meanwhile, Nasser was also enraged by America's withdrawal of its offer of loans to help pay for the building of a dam on the Nile at Aswan. This project was central to his ambitions to modernize Egypt. But John Foster Dulles, the American secretary of state, thought the dam would place too much strain on the resources of newly independent Egypt. At the same time, the British, mistrustful of Nasser were also ready to withdraw their loan offer. Under the circumstances, Dulles thought the Russians would finally step in and assist Egypt. But in a surprising turn of events, Nasser nationalized the canal.
Britain and France reacted strongly, by getting ready for a military invasion of Egypt and a reoccupation of the canal zone. But they faced resistance from US President Eisenhower, who from the beginning was against the use of force by his two main allies. One concern for Eisenhower was the presidential election due that November, which he was contesting on the "peace" plank. Eisenhower was also motivated by anti-imperialist sentiments that had made the Americans break free from the British empire. Eisenhower also feared that, any bullying of Egypt by Western powers would alienate the Arabs and drive them towards the Russian camp.
In another turn of events, Israel provided a way out. Israel offered to invade Egypt and reach the canal. The French and British could then intervene, posing as peacekeepers to separate the two sides, and occupy the canal, ostensibly to guarantee the free passage of shipping. The details were finalized at a secret meeting near Paris.
On October 29th, Israeli paratroopers were dropped into Sinai to begin the invasion. The British and French promptly issued an ultimatum to both sides to cease fire. When the Egyptians did not budge, British planes started bombing the Egyptian air force on the ground. On November 5th, Anglo-French troops went ashore to invade the canal.
Eisenhower, who felt utterly betrayed by his erstwhile allies, was determined to put an end to the war. Presumably, at his instance, America refused to allow the IMF to give emergency loans to Britain unless it called off the invasion. Faced by imminent financial collapse, on November 7th, Britain surrendered to American demands and stopped the operation. The French were furious, but had to fall in line as their troops were under British command.
America also swung things in its favor at the UN. On 2nd November an American resolution demanding a ceasefire was passed by a majority of 64 to five. The Russians voted with the United States. As they say, circumstances make strange bedfellows! And to sidestep Anglo-French vetoes at the Security Council, the General Assembly met in emergency session and decided to assemble an international emergency force (a suggestion made by Canada) to go to the canal and monitor the ceasefire. Eisenhower won his election in America.
Implications
The French and soon the Germans realizing they were too small individually to deal with the Americans, took the lead in setting up the six-country European common market, which later became the European Union. The founding Treaty of Rome was signed the very next year, in 1957. The French kept the British out of it until 1973. France had by then made itself truly independent of American military power by building its own nuclear deterrent from scratch. In 1966, France also left NATO's integrated command structure. Meanwhile, the British decided to be content playing second fiddle to America unlike the French, who wanted to lead Europe.
The crisis affirmed America’s new status as the global superpower, challenged only by the Soviet Union. As Eisenhower had feared, the Russians moved into the Middle East to fill the gap left by the disorderly retreat of the British. So the Americans felt compelled to get in as well. Thus the cold war spread to North Africa and Egypt and Israel became ever more closely tied to the United States.
Before 1956, Israel had been morally and politically unassailable beyond the Arab world. The Israeli occupation of 1956 changed this perception, marking the country’s first expansion beyond its original borders. In 1956, the Israelis were quickly forced to withdraw by American (and Russian) pressure. But this was the last time an American president would speak out so forcefully against Israel.
Nasser emerged a clear winner in the short term. Before the crisis, he had faced opposition in Egypt, not only from the former ruling class but also from communists and radical Islamists. Encouraged by his success, Nasser launched misguided adventures such as a short-lived political union with Syria and nationalization of Egyptian industry. Nasser also triggered off a wave of pan-Arab nationalism across much of the Arab world. Though Nasser was largely discredited by Israel's crushing victory in the 1967 war, the institutions of Nasserism still lived on, in Egypt and elsewhere, as effective ways of maintaining political control and perpetuating autocratic regimes. Saddam Hussein also drew inspiration from Nasser.
References
1. “An affair to remember,” The Economist, 29th July 2006, pp 23-25.
[1] This article draws heavily from an article in The Economist, “An Affair to remember,” 29th July 2006, pp 23-25.
Mergers & Acquisitions in 2006
The pace of deal-making across the world has accelerated in recent months. Most M&As fail to create value for the acquirer's shareholders. However, today a growing body of evidence suggests that the continuing appetite for M&A can make sense. Not every deal will succeed but the probability of predicting which kind of deals will create value, has increased.
Deal-making has picked up momentum in Europe. In the United States, industries such as telecommunications and defence have already been consolidated and now contain only a few enormous companies. In Europe, only now is cross-border integration happening to the extent anticipated at the birth of the euro.
Private-equity firms seem to have understood the building blocks of a successful acquisition. Companies like Cisco and General Electric have also demonstrated that it is possible to add value through acquisitions by identifying targets carefully and planning the integration of each new acquisition well in advance.
GE spends billions of dollars a year buying companies. About 230 people work full-time in the team, roughly a quarter of them at head office and the remaining in GE's six main business units. GE has a systematic process for handling acquisitions. Regular reviews compare the performance of past acquisitions with the targets they were set. CEO Jeff Immelt is personally involved. No deal of more than $3m[1] is done without Immelt's approval. Deals are evaluated using both quantitative and qualitative criteria. GE plans the detailed integration of the target acquisition even as it is doing due diligence. When an acquisition fails, GE spends a lot of time trying to understand the reasons for the failure.
There are various signals by which one can judge whether a merger is going to add value. If the acquirer is paying in cash not shares, it shows more confidence. Paying with cash also puts pressure to produce results. Quite a few deals in the early part of 2006 were in cash. It is partly this use of cash that has raised expectations that these transactions will add value. Deals that facilitate global industry consolidation such as Mittal Steel's hostile $24 billion[2] bid for Arcelor, another steelmaker, also seem to have the potential to add value. On the other hand, grand mergers that promise synergies from combining unrelated businesses often fail to add value.
The circumstances make the current takeover boom appear more solid than at comparable times in the late 1990s. Companies in America and Europe have been through a long period of cost-cutting in the past 5 years. This has helped improve significantly both profits and cash flows, which can be used for either capital expenditure or acquisitions. Takeover premiums also have been modest. The difference between an offer price and the target company's previous share price is averaging around 20%, compared with 35-40% at the height of previous merger waves. Another reason for optimism is the cheap, plentiful debt that companies are able to use for deals, thereby lowering the cost of capital and increasing earnings per share.
Despite all this optimism, however, companies would do well to be careful before going ahead with a merger. The risks involved in a merger should never be underestimated.
References
“Learn as you churn,” The Economist, 8th April 2006, p72.
“Riding a wave,” The Economist, 8th April 2006, pp 18-19.
“Once more unto the breach, dear clients, once more,” The Economist, 8th April 2006, pp 71-72,
[1] “Learn as you churn,” The Economist, 8th April 2006, p72.
[2] “Riding a wave,” The Economist, 8th April 2006, pp 18-19.
Deal-making has picked up momentum in Europe. In the United States, industries such as telecommunications and defence have already been consolidated and now contain only a few enormous companies. In Europe, only now is cross-border integration happening to the extent anticipated at the birth of the euro.
Private-equity firms seem to have understood the building blocks of a successful acquisition. Companies like Cisco and General Electric have also demonstrated that it is possible to add value through acquisitions by identifying targets carefully and planning the integration of each new acquisition well in advance.
GE spends billions of dollars a year buying companies. About 230 people work full-time in the team, roughly a quarter of them at head office and the remaining in GE's six main business units. GE has a systematic process for handling acquisitions. Regular reviews compare the performance of past acquisitions with the targets they were set. CEO Jeff Immelt is personally involved. No deal of more than $3m[1] is done without Immelt's approval. Deals are evaluated using both quantitative and qualitative criteria. GE plans the detailed integration of the target acquisition even as it is doing due diligence. When an acquisition fails, GE spends a lot of time trying to understand the reasons for the failure.
There are various signals by which one can judge whether a merger is going to add value. If the acquirer is paying in cash not shares, it shows more confidence. Paying with cash also puts pressure to produce results. Quite a few deals in the early part of 2006 were in cash. It is partly this use of cash that has raised expectations that these transactions will add value. Deals that facilitate global industry consolidation such as Mittal Steel's hostile $24 billion[2] bid for Arcelor, another steelmaker, also seem to have the potential to add value. On the other hand, grand mergers that promise synergies from combining unrelated businesses often fail to add value.
The circumstances make the current takeover boom appear more solid than at comparable times in the late 1990s. Companies in America and Europe have been through a long period of cost-cutting in the past 5 years. This has helped improve significantly both profits and cash flows, which can be used for either capital expenditure or acquisitions. Takeover premiums also have been modest. The difference between an offer price and the target company's previous share price is averaging around 20%, compared with 35-40% at the height of previous merger waves. Another reason for optimism is the cheap, plentiful debt that companies are able to use for deals, thereby lowering the cost of capital and increasing earnings per share.
Despite all this optimism, however, companies would do well to be careful before going ahead with a merger. The risks involved in a merger should never be underestimated.
References
“Learn as you churn,” The Economist, 8th April 2006, p72.
“Riding a wave,” The Economist, 8th April 2006, pp 18-19.
“Once more unto the breach, dear clients, once more,” The Economist, 8th April 2006, pp 71-72,
[1] “Learn as you churn,” The Economist, 8th April 2006, p72.
[2] “Riding a wave,” The Economist, 8th April 2006, pp 18-19.
Hedge Funds in 2006
The hedge fund business has attracted a lot of attention in recent months. There are about 8,000 hedge funds today[1], with more than $1 trillion of assets under management. Most of these funds are clustered around a few centers like Connecticut and London.
What exactly is a hedge fund? According to Wikipedia, the term "Hedge Fund" is used to distinguish lightly regulated funds generally open to only a limited number of investors, from retail investment funds or Mutual funds, which are widely available to the general public. Because of limits on investor numbers or minimum investment amounts, hedge funds are normally open only to professional / institutional investors or high net worth individuals.
Mutual Funds typically go "long" the market and may not have much exposure to derivative contracts. But, hedge funds may be long or short the market and may use various derivative contracts. Thus, hedge funds pursue more complex investment strategies when compared to mutual funds.
But in recent times, the complexion of the hedge funds industry has been changing. Regulators are looking more closely at the sector than in the past due to the changing investor mix. Until recently, hedge funds mostly attracted the rich and super-wealthy. Today's hedge funds are increasingly monitored by professional managers at pension funds, endowments, foundations and even central banks. New investors are more demanding and, curiously enough risk-averse. This is forcing some hedge funds to change their investment style. A decade ago, investors wanted 30-50% returns. Now pension funds will settle for 8-10% returns[2], but want less volatility. Competition is also growing, as more traditional fund managers try to imitate the strategies of hedge funds.
It is estimated that 50-60%[3] of hedge-fund assets today come from institutions. Diversification is one reason motivating institutions to invest in hedge funds. Hedge funds have low correlations with other investments. Other advantages cited by institutions are the low volatility of hedge funds, their lack of correlation with economic cycles, and their greater risk taking predispostition.
Meanwhile, as hedge funds get bigger, the worry is that managers will become less entrepreneurial and more cautious. The distinction between mutual and hedge funds is also less clear than before. Mutual funds are acquiring hedge funds and pusuing some of their strategies, such as the use of leverage, short-selling and derivatives. For example, early in 2006, Schroders, an old British institution, decided to pursue a more aggressive investment style when it agreed to buy NewFinance Capital, a London fund of hedge funds[4]. Other big fund managers, including State Street Global Advisors and Goldman Sachs Asset Management, have also been trying to increase returns by using short-selling techniques. They are developing funds that will enable them to short-sell exposure to companies they do not like in an index. Both institutions would limit short-selling[5] to around 30% of a global portfolio, while keeping 130% long-only.
As short selling becomes more common, the distinction between mutual funds and hedge funds will get further blurred. In the US, mutual funds can sell short with some restrictions. In the European Union, recent changes in regulation allow fund managers to take short positions by using derivative instruments. As a result of all these changes, some traditional asset managers are planning to charge hedge fund-like fees to manage hedge fund-like products. Others charge like a hedge fund only when they beat their benchmarks. Because of all these options for investors, there is likely to be a paradigm shift. The exact impact of this shift, however, will be known only with time.
References
“The long and the short of it,” The Economist, 25th February 2006, pp 77-78.
“Growing pains,” The Economist, 4th March 2006, pp 63-66.
www.wikipedia.org
[1] “Growing pains,” The Economist, 4th March 2006, pp 63-66.
[2] “Growing pains,” The Economist, 4th March 2006, pp 63-66.
[3] “Growing pains,” The Economist, 4th March 2006, pp 63-66.
[4] “The long and the short of it,” The Economist, 25th February 2006, pp 77-78.
[5] “The long and the short of it,” The Economist, 25th February 2006, pp 77-78.
Monday, January 15, 2007
The real estate bubble, Why the government should burst it
The real estate craze has crossed all reasonable limits. Irrational exuberance has driven people crazy and taken home prices to ridiculous levels. These days, it is quite normal to talk of a couple of crores of rupees for a small duplex bungalow or a three bedroom apartment in Hyderabad. What this means is that places like US and Australia have become more attractive places to invest!
Surely, we are heading for a big shakeout. I mean these purchases are obviously funded by loans. And if people are going to take a home loan of Rs 80 lakhs say, they will have to shell out close to Rs 80,000 per month. How many can afford that?
Too much is being made out of the IT industry boom. These people make up only a miniscule portion of the population. And not all people in the IT industry are earning the huge salaries that can support such big loan repayments. And if the industry slows down a little as it happened in 2001, there could be major social upheavals.
People also seem to be smug in their belief that real estate prices can only go one way, ie up. This is a completely wrong assumption. What goes up can come down. Real estate is no exception. Today demand is more in relation to supply. But as smaller towns grow in stature and the demand supply equation in today's metros changes, real estate prices will fall.
But the government should not stand a passive spectator. It should jump in quickly, raise interest rates and cool down the real estate market. Better regulations are also needed. Residential areas should be kept away for the office districts to insulate home prices from avoidable shocks. Too often we have heard in the recent past, an IT company announcing the establishment of a development centre and land prices in the area immediately shoot up.By building good roads and reducing commuting time, people will be encouraged to travel longer distances. In places like the US, this is quite common. You don't find people owning homes in business districts.
A strong public debate is also needed. Ultimately, a house is not about investing and making money. It is about creating a shelter for our old age. If people think that real estate is the best investment oppportunity going around, there is something seriously wrong. For real estate does not add any value for the economy as a whole. It is essentially a zero sum game. It only redistributes income. By bringing back interest rates to the levels of the mid-1990s, the government can ensure that pensioners of the earlier (my father's) generation will benefit even as home prices come down. These people toiled their whole lives for their organisation without being driven by greed. If something good happens to them, I am all for it. And I think the society too would be happy . Only a few real estate speculators may not like it. But who cares?
Surely, we are heading for a big shakeout. I mean these purchases are obviously funded by loans. And if people are going to take a home loan of Rs 80 lakhs say, they will have to shell out close to Rs 80,000 per month. How many can afford that?
Too much is being made out of the IT industry boom. These people make up only a miniscule portion of the population. And not all people in the IT industry are earning the huge salaries that can support such big loan repayments. And if the industry slows down a little as it happened in 2001, there could be major social upheavals.
People also seem to be smug in their belief that real estate prices can only go one way, ie up. This is a completely wrong assumption. What goes up can come down. Real estate is no exception. Today demand is more in relation to supply. But as smaller towns grow in stature and the demand supply equation in today's metros changes, real estate prices will fall.
But the government should not stand a passive spectator. It should jump in quickly, raise interest rates and cool down the real estate market. Better regulations are also needed. Residential areas should be kept away for the office districts to insulate home prices from avoidable shocks. Too often we have heard in the recent past, an IT company announcing the establishment of a development centre and land prices in the area immediately shoot up.By building good roads and reducing commuting time, people will be encouraged to travel longer distances. In places like the US, this is quite common. You don't find people owning homes in business districts.
A strong public debate is also needed. Ultimately, a house is not about investing and making money. It is about creating a shelter for our old age. If people think that real estate is the best investment oppportunity going around, there is something seriously wrong. For real estate does not add any value for the economy as a whole. It is essentially a zero sum game. It only redistributes income. By bringing back interest rates to the levels of the mid-1990s, the government can ensure that pensioners of the earlier (my father's) generation will benefit even as home prices come down. These people toiled their whole lives for their organisation without being driven by greed. If something good happens to them, I am all for it. And I think the society too would be happy . Only a few real estate speculators may not like it. But who cares?
The Medici Effect
I recently attended a highly absorbing workshop. We played the Medici game on innovation facilitated by Waltraut Ritter, a reputed international consultant and Director of Knowledge Enterprise, Hong Kong.
The Medici game is based on the best selling book The Medici Effect by Frans Johansson. The book is titled after the Medicis, a group of businessmen in Italy who funded various innovative ventures that helped in triggering off the Renaissance, a period of great innovation and a watershed event in human civilization. Thanks to the Medicis, sculptors, scientists, poets, philosophers, painters and architects converged upon the city of Florence. There they learned from one another and broke barriers between disciplines and cultures. They unleashed a wave of innovation which would impress even today’s Silicon Valley.
Johansson has drawn a distinction between Directional (Incremental) innovation and Intersectional (Radical) innovation in his book.
As many would know, incremental innovation involves making minor changes over time to sustain the growth of a company without making sweeping changes to products or looking at totally new markets. On the other hand, radical/breakthrough innovation is about launching a totally new product, process or service. This kind of innovation requires bringing together divergent ideas from different fields. For radical innovations to happen, people need to have a broad knowledge in different areas in addition to deep specialization in their domain area.
Johanson argues that the basic understanding of individual disciplines has progressed so much that any further improvement is possible only at the intersection of two or more disciplines. He makes the crucial point that the pay offs from innovation capital will be greater by linking up seemingly unconnected ideas than by trying to develop deeper and deeper expertise in any one discipline.
The characteristics of intersectional innovations are –
a) They are surprising and fascinating
b) They take leaps in new direction
c) They open up entirely new fields
d) They create space (a concept called Blue Ocean Strategy by Chan Kim and Renee Mauborgne)
e) They allow a new entrant to become market leader overnight
According to Johanson, the three drivers of intersectional innovation (facilitated by globalization and advances in information technology and communication) are
a) Movement of people
b) Mingling of cultures
c) Rise of computing power which enables us to do things faster and try out different things in a cost effective way
The workshop helped in exploding various commonly held myths related to innovation.
For more information, please read the book, The Medici Effect, or visit the website www.themedicieffect.com
You may also read " How breakthroughs happen" (Harvard Business School press, 2003)by Andrew Hargadon who has covered similar ideas in this book.
The Medici game is based on the best selling book The Medici Effect by Frans Johansson. The book is titled after the Medicis, a group of businessmen in Italy who funded various innovative ventures that helped in triggering off the Renaissance, a period of great innovation and a watershed event in human civilization. Thanks to the Medicis, sculptors, scientists, poets, philosophers, painters and architects converged upon the city of Florence. There they learned from one another and broke barriers between disciplines and cultures. They unleashed a wave of innovation which would impress even today’s Silicon Valley.
Johansson has drawn a distinction between Directional (Incremental) innovation and Intersectional (Radical) innovation in his book.
As many would know, incremental innovation involves making minor changes over time to sustain the growth of a company without making sweeping changes to products or looking at totally new markets. On the other hand, radical/breakthrough innovation is about launching a totally new product, process or service. This kind of innovation requires bringing together divergent ideas from different fields. For radical innovations to happen, people need to have a broad knowledge in different areas in addition to deep specialization in their domain area.
Johanson argues that the basic understanding of individual disciplines has progressed so much that any further improvement is possible only at the intersection of two or more disciplines. He makes the crucial point that the pay offs from innovation capital will be greater by linking up seemingly unconnected ideas than by trying to develop deeper and deeper expertise in any one discipline.
The characteristics of intersectional innovations are –
a) They are surprising and fascinating
b) They take leaps in new direction
c) They open up entirely new fields
d) They create space (a concept called Blue Ocean Strategy by Chan Kim and Renee Mauborgne)
e) They allow a new entrant to become market leader overnight
According to Johanson, the three drivers of intersectional innovation (facilitated by globalization and advances in information technology and communication) are
a) Movement of people
b) Mingling of cultures
c) Rise of computing power which enables us to do things faster and try out different things in a cost effective way
The workshop helped in exploding various commonly held myths related to innovation.
For more information, please read the book, The Medici Effect, or visit the website www.themedicieffect.com
You may also read " How breakthroughs happen" (Harvard Business School press, 2003)by Andrew Hargadon who has covered similar ideas in this book.
Friday, January 12, 2007
Environments that Support Organizational Learning
A conducive environment supports organizational learning. Companies must :
Encourage divergent opinions
Give timely, accurate feedback
Invite new ideas
Tolerate errors and mistakes
Encourage risk taking
Source: David Garvin, “Learning in Action,” Harvard Business School Press, 2000.
Encourage divergent opinions
Give timely, accurate feedback
Invite new ideas
Tolerate errors and mistakes
Encourage risk taking
Source: David Garvin, “Learning in Action,” Harvard Business School Press, 2000.
Learning Disabilities
Various challenges are involved in organizational learning. These learning disabilities must be carefully understood and addressed:
a) Biased Information: Blind spots, filtering, lack of information. People fail to observe or notice the significance of some information or filter it out. They also fail to spread it across the organization.
b) Flawed Interpretation: Information interpretation is often flawed because it involves judgment and guesswork that are not completely guided by logic and reason. Stereotypes, wrong correlations and wrong attributions are examples.
c) Little Action: Routines are often difficult to change. People tend to persist with what happened in the past. They also tend to be risk averse and may not be willing to experiment.
Source: David Garvin, “Learning in Action,” Harvard Business School Press, 2000.
a) Biased Information: Blind spots, filtering, lack of information. People fail to observe or notice the significance of some information or filter it out. They also fail to spread it across the organization.
b) Flawed Interpretation: Information interpretation is often flawed because it involves judgment and guesswork that are not completely guided by logic and reason. Stereotypes, wrong correlations and wrong attributions are examples.
c) Little Action: Routines are often difficult to change. People tend to persist with what happened in the past. They also tend to be risk averse and may not be willing to experiment.
Source: David Garvin, “Learning in Action,” Harvard Business School Press, 2000.
The Learning Process
Acquiring information: The key challenge is separating out relevant from irrelevant information, signals from noise. Managers tend to receive information selectively.
Interpreting information: People tend to interpret information based on various assumptions about markets, customers, competitors, technology, the organization’s goals and competencies. The validity of these assumptions must be checked from time to time.
Applying information: The company must modify its behavior to reflect new knowledge and insights. Managers must send clear signals and offer opportunities to practise new behaviors. Unnecessary and outdated tasks must be eliminated even as new ones are added.
Source: David Garvin, “Learning in Action,” Harvard Business School Press, 2000.
Litmus tests of a Learning Organization
According to Harvard Business School Professor, “David A Garvin,” in his book “Learning in Action,” to qualify as a learning organization, a company should pass the following litmus tests:
a) The organization must have a learning agenda. It must be clear about what knowledge it needs and have a strategy in place to gain that knowledge.
b) The organization must be open to bad news. It must not have the “shoot-the messenger” syndrome.
c) The company should be able to avoid past mistakes by reflecting on past experience, distilling into useful lessons and sharing the knowledge across the organization.
d) The company should not be vulnerable to the risk of losing knowledge when talented people leave. These companies have mechanisms to institutionalize the tacit, unarticulated knowledge of such people. Learning organizations find ways to embed such knowledge within the company’s systems, processes and values.
e) Learning organizations believe in getting into action mode. They take advantage of their new knowledge and adapt their behavior accordingly.
The Three Questions Learning Organizations know how to address
What are our most pressing business challenges and greatest business opportunities?
What do we need to learn to meet the challenges and take advantage of the opportunities?
How should the necessary knowledge and skills be acquired?
Source: David Garvin, “Learning in Action,” Harvard Business School Press, 2000.
What do we need to learn to meet the challenges and take advantage of the opportunities?
How should the necessary knowledge and skills be acquired?
Source: David Garvin, “Learning in Action,” Harvard Business School Press, 2000.
What is a Learning Organization?
According to Harvard Business School professor, David Garvin, “A learning organization is an organization skilled at creating, acquiring, interpreting, transferring and retaining knowledge and at purposefully modifying its behavior to reflect new knowledge and insights.”
A learning organisation
Knows how to improve its actions and decision making processes through better knowledge.
Knows how to build on past knowledge and experience. It is good at detecting and correcting errors
Is good at learning new things and acting upon this knowledge. It knows how to change people’s behavior according to the needs of the business environment.
Knows how to institutionalize the knowledge of individuals. It keeps increasing its capacity to take effective action.
Source: David Garvin, “Learning in Action,” Harvard Business School Press, 2000.
Monday, January 08, 2007
The growing importance of KM
The growing importance of KM
As the foundation of today’s global economy moves away from natural resources to intellectual assets, knowledge is increasingly becoming the only basis for sustainable competitive advantage. Knowledge Management (KM) is being embraced by more and more companies. KM is becoming an integral part of corporate strategy for the following reasons:
· The market capitalization of companies today largely depends on their intangible, physical assets.
· Unlike technology, knowledge cannot be easily copied.
· KM delivers increasing returns, unlike any physical asset.
· KM helps avoid unnecessary work duplication, expensive reinvention and repletion of mistakes.
· KM minimizes the impact of talented people leaving the firms.
· KM improves the agility of the firm.
· KM can compress delivery schedules and reduce cycle time.
The economics of knowledge is different from that of other assets. The cost of producing knowledge is little affected by how many people eventually use it.
Knowledge also provides increasing returns. Unlike traditional physical goods that are consumed as they are used (providing decreasing returns over time), knowledge provides increasing returns as it is used. The more it is used, the more valuable it becomes, creating a self reinforcing cycle.
Unlike other assets, knowledge is difficult to replicate. Knowledge—especially context-specific, tacit knowledge embedded in complex organizational routines and developed from experience—tends to be unique and difficult to imitate. Unlike many traditional resources, it cannot be easily purchased in the marketplace.
Knowledge-based competitive advantage is also sustainable because a firm that already knows, is better placed to learn. Sustainability also results when an organization already knows something that uniquely complements newly acquired knowledge. Then the new knowledge can be integrated with existing knowledge to develop unique insights and create even more valuable knowledge.
The starting point in KM is framing a knowledge strategy. Knowledge strategy, effectively means identifying and developing the knowledge required for providing products or services to customers, more effectively than competitors. Identifying which knowledge based resources and capabilities are valuable, unique, and inimitable as well as how those resources and capabilities support the firm's competitive position form the core of a knowledge strategy. The strategic choices that the company makes, regarding technologies, products, services, markets and processes decide what kind of knowledge is required to compete and excel in an industry. On the other band, what a firm does know, limits the ways in which it can actually compete.
World class organizations like McKinsey drive KM by having what is called a knowledge agenda which identifies knowledge gaps and how they must be dealt with. But pinpointing the knowledge that an organization must build is not easy. There are no simple answers regarding what a firm must know to be competitive. Indeed, if the answers were so easy, knowledge would not yield a sustainable advantage. The trick is to stay in touch with customers and also understand what competitors are doing. In addition, the company should have a broad vision of how the business environment is likely to evolve in the long run and the kind of knowledge capabilities that might be required.
The 2005 MAKE(Most Admired Knowledge Enterprises) survey (For more details, visit the website of the Know network) identified the following Indian companies as leaders for their innovative & pioneering work:
· Infosys for developing knowledge workers through senior management leadership (1st place), and transforming enterprise knowledge into share holder value .
· Eureka Forbes for creating a corporate knowledge-driven culture developing knowledge workers through senior management leadership, and creating an environment for collaborative knowledge sharing.
· Tata Consultancy Services for maximizing the firm’s enterprise intellectual capital and delivering value based on customer knowledge
· Satyam Computer Services for creating a learning organization, and transforming enterprise knowledge into shareholder value.
· Tata Steel for creating an environment for collaborative knowledge and organizational learning .
· i-flex solutions for creating a corporate knowledge-driven culture, and delivering knowledge-based products / services / solutions .
The survey reports that a majority of the Asian (mainly Japanese) MAKE leaders began to implement their corporate knowledge strategies much earlier during the late-1990s. Despite the late start, the 2005 Indian MAKE Winners have reached parity with Asia’s knowledge-driven leaders on many dimensions.
One area where Indian MAKE leaders trail their Asian counterparts is in managing customer knowledge. Although the MAKE leaders from India state that they are intellectual capital (IC) driven organizations, most of them do not have in place strategies, methods and processes for actively managing, measuring and reporting their enterprise IC. They lag behind the global leaders. Indian MAKE Winners also trail in the areas of innovation, managing customer knowledge, and transforming enterprise knowledge into shareholder wealth.
India’s knowledge leaders are also concentrated in one business sector, IT. Five of the seven Indian MAKE Winners are IT companies. There is a significant gap (in the total composite score) between the seven Indian MAKE Winners and five other Finalists (Mahindra & Mahindra, ranked in 8thposition, is 8.5 points behind 7th place i-flex solutions). The result is a two-tier Indian knowledge leadership ranking table. In other words, the Indian MAKE Winners have knowledge processes which match those of MAKE leaders from around the world. On the other hand, the remaining Indian MAKE Finalists and nominees are still in the early stages of implementing KM.
But whatever be the scenario, there is little doubt that managing enterprise knowledge pays! – This year’s Indian MAKE Winners’ Return on Assets and Return on Revenues were 8.8 and 4.1 times, respectively, that of the Fortune Global 500 company median. Whether it is market capitalization, return on assets, return on revenues, or a host of ‘soft’ metrics, the 2005 Indian MAKE Winners and Finalists clearly demonstrate that adopting enterprise knowledge-driven strategies pay off – not only in the short term, but more importantly over the longer term!
As the foundation of today’s global economy moves away from natural resources to intellectual assets, knowledge is increasingly becoming the only basis for sustainable competitive advantage. Knowledge Management (KM) is being embraced by more and more companies. KM is becoming an integral part of corporate strategy for the following reasons:
· The market capitalization of companies today largely depends on their intangible, physical assets.
· Unlike technology, knowledge cannot be easily copied.
· KM delivers increasing returns, unlike any physical asset.
· KM helps avoid unnecessary work duplication, expensive reinvention and repletion of mistakes.
· KM minimizes the impact of talented people leaving the firms.
· KM improves the agility of the firm.
· KM can compress delivery schedules and reduce cycle time.
The economics of knowledge is different from that of other assets. The cost of producing knowledge is little affected by how many people eventually use it.
Knowledge also provides increasing returns. Unlike traditional physical goods that are consumed as they are used (providing decreasing returns over time), knowledge provides increasing returns as it is used. The more it is used, the more valuable it becomes, creating a self reinforcing cycle.
Unlike other assets, knowledge is difficult to replicate. Knowledge—especially context-specific, tacit knowledge embedded in complex organizational routines and developed from experience—tends to be unique and difficult to imitate. Unlike many traditional resources, it cannot be easily purchased in the marketplace.
Knowledge-based competitive advantage is also sustainable because a firm that already knows, is better placed to learn. Sustainability also results when an organization already knows something that uniquely complements newly acquired knowledge. Then the new knowledge can be integrated with existing knowledge to develop unique insights and create even more valuable knowledge.
The starting point in KM is framing a knowledge strategy. Knowledge strategy, effectively means identifying and developing the knowledge required for providing products or services to customers, more effectively than competitors. Identifying which knowledge based resources and capabilities are valuable, unique, and inimitable as well as how those resources and capabilities support the firm's competitive position form the core of a knowledge strategy. The strategic choices that the company makes, regarding technologies, products, services, markets and processes decide what kind of knowledge is required to compete and excel in an industry. On the other band, what a firm does know, limits the ways in which it can actually compete.
World class organizations like McKinsey drive KM by having what is called a knowledge agenda which identifies knowledge gaps and how they must be dealt with. But pinpointing the knowledge that an organization must build is not easy. There are no simple answers regarding what a firm must know to be competitive. Indeed, if the answers were so easy, knowledge would not yield a sustainable advantage. The trick is to stay in touch with customers and also understand what competitors are doing. In addition, the company should have a broad vision of how the business environment is likely to evolve in the long run and the kind of knowledge capabilities that might be required.
The 2005 MAKE(Most Admired Knowledge Enterprises) survey (For more details, visit the website of the Know network) identified the following Indian companies as leaders for their innovative & pioneering work:
· Infosys for developing knowledge workers through senior management leadership (1st place), and transforming enterprise knowledge into share holder value .
· Eureka Forbes for creating a corporate knowledge-driven culture developing knowledge workers through senior management leadership, and creating an environment for collaborative knowledge sharing.
· Tata Consultancy Services for maximizing the firm’s enterprise intellectual capital and delivering value based on customer knowledge
· Satyam Computer Services for creating a learning organization, and transforming enterprise knowledge into shareholder value.
· Tata Steel for creating an environment for collaborative knowledge and organizational learning .
· i-flex solutions for creating a corporate knowledge-driven culture, and delivering knowledge-based products / services / solutions .
The survey reports that a majority of the Asian (mainly Japanese) MAKE leaders began to implement their corporate knowledge strategies much earlier during the late-1990s. Despite the late start, the 2005 Indian MAKE Winners have reached parity with Asia’s knowledge-driven leaders on many dimensions.
One area where Indian MAKE leaders trail their Asian counterparts is in managing customer knowledge. Although the MAKE leaders from India state that they are intellectual capital (IC) driven organizations, most of them do not have in place strategies, methods and processes for actively managing, measuring and reporting their enterprise IC. They lag behind the global leaders. Indian MAKE Winners also trail in the areas of innovation, managing customer knowledge, and transforming enterprise knowledge into shareholder wealth.
India’s knowledge leaders are also concentrated in one business sector, IT. Five of the seven Indian MAKE Winners are IT companies. There is a significant gap (in the total composite score) between the seven Indian MAKE Winners and five other Finalists (Mahindra & Mahindra, ranked in 8thposition, is 8.5 points behind 7th place i-flex solutions). The result is a two-tier Indian knowledge leadership ranking table. In other words, the Indian MAKE Winners have knowledge processes which match those of MAKE leaders from around the world. On the other hand, the remaining Indian MAKE Finalists and nominees are still in the early stages of implementing KM.
But whatever be the scenario, there is little doubt that managing enterprise knowledge pays! – This year’s Indian MAKE Winners’ Return on Assets and Return on Revenues were 8.8 and 4.1 times, respectively, that of the Fortune Global 500 company median. Whether it is market capitalization, return on assets, return on revenues, or a host of ‘soft’ metrics, the 2005 Indian MAKE Winners and Finalists clearly demonstrate that adopting enterprise knowledge-driven strategies pay off – not only in the short term, but more importantly over the longer term!
Building Domain competency in the software industry
Building domain competency
Indian software services companies are well aware of the need to develop strong domain competency. What does domain competency mean for a software services company ?
Software companies are in the business of providing information technology based solutions for business problems. So associates must understand the client’s business and how it is positioned against that of competitiors.That in turn calls for a good understanding of the industry trends, the rules of the game, how value is being created, the basis for competition, and the strengths and weaknesses of the major players in the client’s industry.
But ultimately, the skill of a software consultant will not lie in posing as an intellectual expert who can predict long term industry trends as a management guru like CK Prahalad might, but as someone who can smell where IT can be meaningfully used to achieve one of the three objectives: increase efficiency or cut costs, improve effectiveness and facilitate innovation. IT can typically be used where there is scope for streamlining and automating structured, transaction intensive processes. Areas which involve considerable human ingenuity and are unstructured as well as one time activities are less amenable to IT intervention. Thus in merchant banking, the real IT opportunity lies in settling trades, not in deal making.
In short, building domain competency involves developing:
a) A broad understanding of the industry structure and trends
b) A detailed understanding of the company’s business model
c) A good understanding of the industry value chain and the segment occupied by the client
d) Clarity on where to use information technology to improve business processes.
Clearly, the competitive advantage of Indian software companies will increasingly lie in marrying industry knowledge and technological enterprise, and the ability to work at the intersection of the two. Raising three questions as a matter of habit can go a long way in making our techies true consultants. What is the business problem that the client is trying to solve? Is it amenable to IT intervention? What kind of technology will provide the most value to the client? Coding should succeed, not precede these questions.
Indian software services companies are well aware of the need to develop strong domain competency. What does domain competency mean for a software services company ?
Software companies are in the business of providing information technology based solutions for business problems. So associates must understand the client’s business and how it is positioned against that of competitiors.That in turn calls for a good understanding of the industry trends, the rules of the game, how value is being created, the basis for competition, and the strengths and weaknesses of the major players in the client’s industry.
But ultimately, the skill of a software consultant will not lie in posing as an intellectual expert who can predict long term industry trends as a management guru like CK Prahalad might, but as someone who can smell where IT can be meaningfully used to achieve one of the three objectives: increase efficiency or cut costs, improve effectiveness and facilitate innovation. IT can typically be used where there is scope for streamlining and automating structured, transaction intensive processes. Areas which involve considerable human ingenuity and are unstructured as well as one time activities are less amenable to IT intervention. Thus in merchant banking, the real IT opportunity lies in settling trades, not in deal making.
In short, building domain competency involves developing:
a) A broad understanding of the industry structure and trends
b) A detailed understanding of the company’s business model
c) A good understanding of the industry value chain and the segment occupied by the client
d) Clarity on where to use information technology to improve business processes.
Clearly, the competitive advantage of Indian software companies will increasingly lie in marrying industry knowledge and technological enterprise, and the ability to work at the intersection of the two. Raising three questions as a matter of habit can go a long way in making our techies true consultants. What is the business problem that the client is trying to solve? Is it amenable to IT intervention? What kind of technology will provide the most value to the client? Coding should succeed, not precede these questions.
Thought Leadership in the Indian software industry
Thought Leadership
For the Indian software companies thought leadership is the need of the hour. Thought leadership is about originating and promoting ideas and building a profitable consulting practice around them. For most clients, ideas are important for increasing efficiency, improving effectiveness and facilitating innovation. The essence of thought leadership is conceptualizing, packaging and presenting ideas to clients.
Most seemingly new ideas are not all that new. They have some relatively new components and some classical wisdom. Thus in CRM, the idea of knowing and understanding the customer is an age old concept but the use of Information Technology is new. Similarly, in case of Knowledge Management, the importance of knowledge has been widely accepted since time immemorial but the ability to leverage the power of Information Technology to facilitate knowledge sharing is a more recent development.
Thought leadership is all about assembling, packaging and disseminating business ideas. Thought leadership needs a combination of three capabilities: developing practical insights through hands on doing or consulting, reflecting on these insights and writing and presenting these ideas at meetings and conferences.
How can we nurture thought leadership ? Clearly the biggest advantage of our softare professionals , especially when compared to academics (to whom thought leadership comes more naturally) is that they have plenty of hands on experience. What they need to do is to reflect on their experiences, put their thoughts together on a piece of paper, expand them, write about them in journals and present them at seminars and conferences. In short, what they need are abstraction, conceptualization and presentation skills.
How do we build these skills? Let us take conceptualization first. Associates need to develop the ability to cull out the important learning lessons from each engagement or project and capture them as insights.
The term insight can be defined in different ways. But the most practical way of viewing an insight is as something that is not known to most people, something novel, a revelation. An insight must also be applicable across situations. That is it must be somewhat conceptual and not completely context specific. At the same time it must not be so general that it can be dismissed as theory or common knowledge.
When we say that a good advertisement should be able to communicate effectively the benefit(s) to customers, it is theory. When we say that an advertisement on a hoarding should convey the benefit in not more than 3-4 words, we are conveying an insight. It is an insight because theory has been applied to a context. The practical experiences of different companies with hoardings have been distilled into a simple principle that has great practical implications.
Presentation skills include the ability to communicate both orally and in writing. Most software professionals especially at the senior levels are reasonably articulate. But when it comes to putting thoughts on a piece of paper, there is scope to improve. Like any skill, writing improves with practice. Writing is about both style and substance. The more we write, the better we become. We can also improve our writing skills by reading great articles written by celebrated thought leaders. That will tell us how they introduce a new concept; explain it with examples and the kind of writing style they employ.
The need for Thought leadership is well accepted today. It is up to associates in the software companies to go ahead and do it.
For the Indian software companies thought leadership is the need of the hour. Thought leadership is about originating and promoting ideas and building a profitable consulting practice around them. For most clients, ideas are important for increasing efficiency, improving effectiveness and facilitating innovation. The essence of thought leadership is conceptualizing, packaging and presenting ideas to clients.
Most seemingly new ideas are not all that new. They have some relatively new components and some classical wisdom. Thus in CRM, the idea of knowing and understanding the customer is an age old concept but the use of Information Technology is new. Similarly, in case of Knowledge Management, the importance of knowledge has been widely accepted since time immemorial but the ability to leverage the power of Information Technology to facilitate knowledge sharing is a more recent development.
Thought leadership is all about assembling, packaging and disseminating business ideas. Thought leadership needs a combination of three capabilities: developing practical insights through hands on doing or consulting, reflecting on these insights and writing and presenting these ideas at meetings and conferences.
How can we nurture thought leadership ? Clearly the biggest advantage of our softare professionals , especially when compared to academics (to whom thought leadership comes more naturally) is that they have plenty of hands on experience. What they need to do is to reflect on their experiences, put their thoughts together on a piece of paper, expand them, write about them in journals and present them at seminars and conferences. In short, what they need are abstraction, conceptualization and presentation skills.
How do we build these skills? Let us take conceptualization first. Associates need to develop the ability to cull out the important learning lessons from each engagement or project and capture them as insights.
The term insight can be defined in different ways. But the most practical way of viewing an insight is as something that is not known to most people, something novel, a revelation. An insight must also be applicable across situations. That is it must be somewhat conceptual and not completely context specific. At the same time it must not be so general that it can be dismissed as theory or common knowledge.
When we say that a good advertisement should be able to communicate effectively the benefit(s) to customers, it is theory. When we say that an advertisement on a hoarding should convey the benefit in not more than 3-4 words, we are conveying an insight. It is an insight because theory has been applied to a context. The practical experiences of different companies with hoardings have been distilled into a simple principle that has great practical implications.
Presentation skills include the ability to communicate both orally and in writing. Most software professionals especially at the senior levels are reasonably articulate. But when it comes to putting thoughts on a piece of paper, there is scope to improve. Like any skill, writing improves with practice. Writing is about both style and substance. The more we write, the better we become. We can also improve our writing skills by reading great articles written by celebrated thought leaders. That will tell us how they introduce a new concept; explain it with examples and the kind of writing style they employ.
The need for Thought leadership is well accepted today. It is up to associates in the software companies to go ahead and do it.
Sunday, January 07, 2007
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