Thursday, June 14, 2012

MANAGEMENT SPECIAL..WHY SOME COMPANIES THRIVE IN UNCETAINTY


FORTUNE HUNTER

 Uber-guru Jim Collins on why Bill Gates is lucky — and Warren Buffet wasn't



    ‘‘I’m just a relentlessly curious person who loves understanding things right," says management guru Jim Collins about himself. And it is this relentless curiosity that has led Jim to study enduring companies - how they grow, how they attain superior performance, and how good companies can become great companies. Collins has spent nearly a quarter of a century researching the topic and has authored or co-authored six books, including bestsellers like Built to Last and Good to Great, that have collectively sold more than ten million copies worldwide. His latest, Great by Choice: Uncertainty, Chaos, and Luck-Why Some Thrive Despite Them All, co-authored with Morten Hansen, seeks to understand why some companies thrive in uncertainty. In an interview with CD, the celebrated author talks of fanatic discipline, the importance of luck - and rock climbing. Excerpts:
Why do you open Great by Choice with the line "we cannot predict the future. But we can create it"?
The opening was inspired by a wonderful line that Peter Drucker had written. He said that the best way to predict the future is to create it. Imagine Gordon Moore in 1965, observing the doubling of the components in a semiconductor chip at an affordable cost and figuring out what it might mean. The world became different because companies set out to follow Moore's Law. Intel sustained its commitment to achieving Moore's Law whether in good times or bad times, always moving to the next generation chip, for more than thirty years. All these gadgets that you have today and the ways in which the world has been utterly transformed because of the process: could you have predicted all of it? To me that is a great example of shaping the future. Then there is Bill Allen at Boeing, who basically brought the world around to the jet age. Everybody was flying around in propeller planes at that time. Allen had seen the rise of jet engines. But instead of sitting around and saying that we are going to predict that the world would move into the jet age, he converted a military tanker into a commercial aircraft called the 707. The leaders of these companies understood that they couldn't predict everything that was going to happen, but by taking deliberately disciplinary creative action, they could create their own future.
What is the role of luck in business success?
I have always been fascinated by the topic of luck because I could see the role of luck in my own life. I have had lots of really good mentors. I had really substantially lucky breaks along the way. I can count at least six times that I came close to getting killed. In this study we were looking at entrepreneurs who became huge successes in very uncertain environments. This was a great vehicle for studying luck. We figured out a way to define luck rigorously and asked three questions. First, is luck, good or bad, rare or common in the history of these companies? Second, did the winners have more good luck or less back luck? Third, did they do differently about luck? Our method is always about contrast. We looked at two different enterprises which were in a similar environment had similar opportunities but had dramatically different results. We went through their history and looked at everything that might be a luck event. The creative fanatic
    We found there is a lot of luck but the winners are not luckier. They don't get more good luck. They don't get less bad luck. They don't really have a single spike of luck that completely explains their success. That led to this idea of return on luck, like return on investment. Luck is this extreme, observable and concrete event that we didn't largely cause. It has a potential good or bad consequence. It has some element of surprise. So you look and decide whether a particular event is a luck event or not? You put that definition on, and then you look at an event, that you test, and decide whether it is a discreet luck event. Luck events are distortion moments. The critical thing is what someone can do on that distortion moment. Do they get a high return on that luck or do they squander that luck?
Who were the luckiest entrepreneurs in your study?
Bill Gates was lucky. There were thousands of other people who had the same luck. There were thousands of other people who could have written Basic for the Altair 8800 microcomputer in 1975. They had technical capability. But how many of them actually did? And that's the actual difference. Gates quit school, moved to Albuquerque, worked 20 hours day. And he threw himself fully in getting that first contract. He worked with that luck. He kept marching for a quarter of a century to build Microsoft.
Is Warren Buffet lucky as an investor?
Buffett adhered to his value-based investment philosophy during the internet bubble of the 1990s, saying he didn't understand the new economy. He said that he was going to continue to adhere to what he understands, that the fundamental value of a stock ultimately has to do with earnings potential. But that wasn't luck. An insight is not the same as luck
.
As a business author, why have you included non-business cases like Roald Amundsen and Robert Falcon Scott and their quest to get the South Pole?
We had finished most of the research on Great By Choice and I was out rock climbing with Chris Archer, a good friend of mine. I was telling him that leaders who run the winning companies are really unusual and interesting people. They are kind of fanatic and paranoid. I was just talking about people like Gates and he said wow they sound just like Roald Amundsen, the first guy who got to the South Pole. I had never known about Amundsen, who was from Norway. I started reading about him and the whole journey to the South Pole. It turned out to be a study in contrasts. There were two teams on the coast of Antarctica in October 1911, with the same goal, same environment and the same uncertainties. One was led by Roald Amundsen and another by Robert Scott. Amundsen gets there first by 37 days and he makes it back with every member of his team healthy. Scott and every member of his team die on the way back. They perish 11 miles from the supply depot. It had to be something about the choices they made, about their behaviours. Amundsen had very different leadership behaviours from Scott. And it turned out that the leadership differences map almost perfectly to the differences we saw in people like Andy Grove and Bill Gates, who were Amundsens. What we find is that there is a triangle of fanatic discipline, the empirical kind of creativity and very productive paranoia, which makes such leaders different.
What is fanatic discipline?
It means consistency in your values, your goals, your standards, and with what you are trying to get done.
If you are truly disciplined you are going to be a non conformist. Being disciplined means that you are going to be somewhat strange. Let's get back to Warren Buffett. He is so disciplined about value investing that he was a non-conformist in the new economy.
Why is creativity so crucial?
Discipline without creativity will not get you far enough. If you are just disciplined you never would make the 707. If you are just disciplined you would never actually created Windows. One of my favourite stories is about the resurgence of Apple under Steve Jobs. It wasn't just blue sky creative innovative visionary genius. Steve Jobs returned to Apple in 1997, after having been in the wilderness for 12 years. What did he do to get Apple on track? First he increased discipline. He brought in Tim Cook, a world class supply-chain expert, and together they formed a perfect yin-yang team of creativity and discipline. They cut perks, improved operating efficiency and lowered overall cost structure. Its best selling product, the iPod, came nearly five years after Jobs returned to Apple. By then the MP3 had already happened. They felt that they were behind and the market had already moved on. So they went step by step. In fact in the early days of the iPod it didn't even merit its own line in the Form 10-K (a filing companies have to make to the stock market regulator in the US) and was described as 'an important and natural extension of Apple's digital hub strategy'. It wasn't even viewed as a separate product. They fired a small bullet and made a product for themselves with their own file sharing software. They gave it away with the Mac. They created events. And then finally, they had great validation that this product had great potential. It was then they went big; fired a cannonball.
What role does productive paranoia play in making of a great leader?
It basically tells you to be very aware of the potential of bad luck, big forces beyond your control which can really hurt you. You have to always prepare for a whole sequence of bad events or very bad things that happen at once. That also means being conservative in good times. Amundsen kept three tonnes of supplies for five men starting out versus Scott's one tonne for 17 men. Amundsen always had extra supplies because he thought that he might need them. When setting up supply depots, he not only flagged a primary depot, he placed 20 black pennants in precise increments for miles on either side, giving himself a target more than ten kilometres wide in case he got slightly off course coming back in a storm. He was building contingencies in. That's productive paranoia, channelling all the anxiety into preparation and action. Scott left himself unprepared and complained in his journal about his bad luck.
    Then there's the example of Southwest. In the 1990s the airline industry was growing very rapidly and Southwest Airlines had always been very productive. But even then, the question was not what if something bad was to happen, but when. The very nature of the industry is chaotic and certainly endangered. There are fuel shortages, regulations and interest rate cycles. Southwest had decided that never even in good times to overstretch their balance sheet, overstretch their culture, or overstretch their systems. In 1996 more than a hundred cities clamoured for Southwest's service, but it opened only four. Five years later, the whole airline industry got crushed after 9/11. Southwest was in a strong condition at that point of time with $1 billion in cash and the highest credit rating in the industry. What they did before the storm came enabled them to do better than everybody else when the storm came.
What exactly is a 20-mile march?
In a world of uncertainty and disruption, with black swans, you have to ensure that you are moving forward and you are not frozen. The idea behind a 20-mile march is that you have some sort of a basic performance object. It could be performance object that we have to make profits every year, like Southwest Airlines, even when the entire industry has lost money. From 1990 through 2003, when the US airline industry as a whole turned a profit in just 6 out of 14 years, Southwest remained profitable all along. It is about having concrete, clear, intelligent, and rigorously pursued performance mechanisms, which you are going to meet consistently over time. This means that in good times you have the discipline to hold back and in bad times you still achieve your mark. In Intel's case, Moore's Law was their 20-mile march. You don't do fifty miles one day and then zero another day. You do 20 miles every day. When the industry was going through a depression in the 1980s, Intel continued to invest in the R&D. In fact they increased it, because no matter what was happening in the environment, they had to keep doubling the number of components on the chip. By having a 20-mile march approach you are exerting a sense of self control in a world that is out of control.
Are there any widely prevalent management ideas that you deem dangerous?
We put a premium on innovation but being more innovative doesn't really help the winners. Intel was not the most innovative in its industry all the time. It was the most successful because of its ability to blend discipline with creativity. I think just the idea that the more innovation by itself will work is dangerous.
 

Vivek Kaul ET 120406




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