Business Case Studies, Executive Interviews, Bala Chakravarthy on Global Economy and Global Managers

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Executive Interviews: Interview with Bala Chakravarthy on Global Economy and Global Managers
October 2008 - By Dr. Nagendra V Chowdary

Prof. Bala Chakravarthy
Professor of Strategy and International Management

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  • What important lessons do the last hundred years of business history offer us today?
    One of the important lessons of the past century is that sustaining superior performance is not just about great execution but also about continuous strategic renewal. Otherwise, excellencewill be fleeting. We have all had our frustrations with an ever-changing list of 'excellent' and 'great' companies from one decade to the next. In my own study of over 6000 publicly listed companies around the globe, only 1 in 4 achieved sustained profitability and growth over a 5 year period that was better than the average for their industry. That proportion drops to 1 in 20 over a 10 year period and 1 in a 100 over a 15 year period. Sustaining superior performance over the long haul is hard. Here is why.

    Pursuing growth requires exploring for new opportunities and competencies. It calls for entrepreneurship and risk taking. Profitability on the other hand, is helped by exploiting the opportunities and competencies that are already available to the firm. Systems and processes that are finetuned over time to maximize profitability cannot nurture entrepreneurship. But then a firm's market opportunities get depleted steadily both through market saturation and the actions of competitors. Its competencies lose their distinction through imitation and substitution. Unless there is a continuous push to explore new opportunities and capabilities that will be needed for competing successfully in the future, the firm's performance will eventually suffer. Without continuous strategic renewal a firm cannot show sustained excellence in performance.

  • The first eight years of this century (2001-2008) would definitely go down in history as watershed years for global businesses. First it was colossal fall of Enron, Arthur Anderson, Tyco, WorldCom, etc., September 11, attacks put countries on high alert. 2007 saw the world getting engulfed in subprime mortgage crisis and with that a complete washout of trillions of dollars of shareholder wealth and 2008, has seen the global banking crisis, oil price shocks and Food price rises, etc. What do all these events signify? Should they be looked at isolation or are there any powerful lessons for future managers and CEOs when they connect the dots?
    You ask two different questions here. The first has to do with shocks to the economy and the other is about corporate failures.

    Let me talk about environmental shocks first. These are not new. Managers have had to deal with them for years. There are two types of shocks though, one that can be anticipated and the other a total surprise. For example, some would argue that the spike in oil prices should have been anticipated. With the soaring demand for energy, the poor track record on conservation and oil supply being controlled to a significant degree by the oil cartel OPEC, oil price had to spike sooner or later. Managers simply have to get better at scenario planning and learn to formulate strategies that can deal robustly with multiple scenarios. The days of pin point forecasting are over. Then there is the other type of shock, like the terror attacks of September 11. This is perhaps a scenario that nobody could have anticipated in advance. Nevertheless, firms that had lean organizations and low break even points could absorb the sudden loss in demand better than others that were not as efficient. Building resilience is another important response to dealing with environmental shocks.

    The other question you raise is about corporate failures. You refer to Enron, Arthur Anderson, Tyco and WorldCom. All these case studies point to lack of ethics. In the case of Tyco and Arthur Anderson, it was the moral failure of its leaders. That was also the case at Enron andWorldCom, but with an important twist.

    I talked about continuous renewal earlier. If a firm fails to renew its opportunity space and capabilities, it will soon face performance pressures that it cannot handle. Indeed, companies like Enron and WorldCom faced such a pressure. Their leaders had promised the financial community more than what they could deliver. They did not have an underlying strategy to back their promise. So they began taking shortcuts; which soon transgressed into illegal activities. Jeff Skilling of Enron and Bernie Ebbers of WorldCom are in jail today, convicted for their roles in this sad drama. It is important to remember though that what started it all was a flawed strategy.

    The root causes underlying the subprime crisis are similar: stale strategies that could not support the performance commitments that were being made by these firms; combined with weak ethical standards that did not question the means that were then used to artificially boost firm performance.

    Moral leadership and smart strategy go hand in hand. Performance is enhanced when both are present and it degenerates precipitously when both are missing.

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