Consider a PC manufacturer. Typically a PC manufacturer builds to stock and thus makes all production and distribution decisions based on forecast. This is a typical push system. In a push/pull strategy, the manufacturer will build to order. This implies that component inventory is managed based on forecast, but the final assembly is made in response to a specific customer request. So, the push part is part of the manufacturer’s supply chain prior to assembly, while the pull part is the part of the supply chain that starts with assembly and is based on actual customer demand. Dell Computers is an excellent example of the impact the push / pull system has on supply chain performance.
The book industry is a good example of the evolution of supply chain strategies from push to pull and then to push /pull. Barnes and Noble, for example, has a typical push supply chain. When Amazon.com started about four years ago, its supply chain was a pure pull system — with no warehouses and no stock. Actually, Ingram Books filled orders to meet customer demand. But this arrangement simply did not work well. Today, Amazon.com has seven warehouses around the country where it stocks most of the titles it sells. Thus, inventory at the warehouses is managed based on a push strategy (based on forecast) while demand is satisfied based on individual request, a pull strategy.
The online grocery industry is another excellent example. When Peapod was founded 11 years ago, the idea was to establish a pure pull strategy with no inventory and no facilities. When a customer ordered groceries, Peapod would pick up the products at a nearby supermarket. Unfortunately, stock-out rates at the supermarkets were very high. In the last few years, Peapod changed its business model to a push / pull strategy, adding a number of warehouses; stockout rates are now less than 2%. Of course, in this industry there are other challenges, especially reducing transportation costs. The problem is that no online grocer has the geographic density of customers that will allow them to control transportation costs and therefore compete with traditional supermarkets.
So, this sounds as though online distributors need to have an infra s t r u c t u re of, ye s, good old warehouses and distribution centers around the country or world.
Precisely, In that respect, brick-and-mortar to click-and-mortar companies (those that have added an Internet shopping to their services) have a huge advantage over the pure Internet companies.
They already have distribution and warehousing infrastructure in place. Wal-Mart, K-Mart, Target and Barnes and Noble, as a few examples, have all established virtual retail stores, serviced by their existing warehousing and distribution structures. As a result of going online, click-and-mortars have now changed their approaches to stocking their various warehouses. High volume products or products for which the demand can be matched with supply, are stocked locally in the stores, while low volume products are stocked centrally for online purchasing.
(Source: http://slevi1.mit.edu/docs/psd.pdf) by Penny Guyer is editor of Parcel Shipping &
Distribution and is manager of Mail and Shipping Services at the Massachusetts Institute of Technology)
Tuesday, October 30, 2007
Friday, October 26, 2007
IBM Global CFO Study
IBM (NYSE: IBM) today announced the findings of a major new study of over 1,200 Chief Financial Officers (CFOs) and senior finance executives from 79 countries worldwide, which concludes that a surprising number of enterprises are not well prepared to handle the impact of a major risk event to their organization.
According to the study, in the past three years 62 percent of enterprises with over $5 billion in revenue encountered a major risk event. When a major risk event did occur -- such as strategic, operational or geopolitical -- 42 percent of these enterprises were not well prepared for the event.
The Global CFO Study, titled "Balancing risk and performance with an Integrated Finance Organization" was developed by IBM Global Business Services' Financial Management practice and the IBM Institute for Business Value (IBV), with assistance from the Wharton School at the University of Pennsylvania and the Economist Intelligence Unit. Over half of the participating CFOs and senior finance executives participated in a face-to-face structured interview, designed to capture insights on the subject of risk management and finance transformation. The remaining balance responded to an online survey.
Another key component of the study is the emergence of Integrated Finance Organizations (IFOs) which are defined as entities that, at minimum, mandate standards enterprise wide with a standard chart of accounts, common data definitions and standard common processes. The study concludes that enterprise wide common data definitions, a standard Chart of Accounts, common standard processes and globally mandated standards are the components of good governance and what the study calls the Integrated Finance Organization (IFO). Fewer than one in seven enterprises govern and manage the integration of their Finance organization by the combination of these four criteria.
The study finds that IFOs provide greater resiliency, better decision support and help to drive outperforming enterprises. Additionally, the study shows that enterprises with IFOs are more likely to perform better financially than non-integrated finance organizations and are more likely to proactively manage risk.
Who owns Risk?
CFOs are increasingly becoming "owners" of risk management within their enterprise and sharing ownership with the CEO. The study found 61 percent of CFOs are expected to lead risk management within their organization, followed by CEOs (50 percent), Chief Technology Officers (27 percent) and Chief Risk Officers (19 percent).
The study lends credence to observations that globalization opens up significant opportunities for companies but exposes more risks for the enterprise. The IBM Global CFO Study found that in the past three years enterprises encountered a range of risks including strategic (32 percent), geopolitical (17 percent), environmental/health (17 percent), financial (13 percent), operational (13 percent) and legal and compliance (8 percent).
"Globalization currently presents, at the same time, one of the largest challenges and one of the greatest opportunities for global enterprises," said Stephen J. Lukens, Global Financial Management Leader, IBM Global Business Services. "Forward-thinking executives locate operations and functions anywhere in the world based on the right cost, the right skills and the right business environment. The world is shifting towards a new definition of globalization, but a majority of companies are still maintaining the old worldview. Enterprises need to transform their financial management models. They need to integrate their finance operations to take advantage of this new perspective on globalization. Integrated operations alleviate the threats they face and improve the operational performance of their organizations."
Formal Risk Management is Immature
While risks are prevalent, many companies do not have a formal risk management program in place. At many organizations formal risk management is still fairly immature. By their own admission, only 52 percent acknowledge having any sort of formalized risk management program. Moreover, only 42 percent of respondents do historic comparisons to avoid risk, just 32 percent set specific risk thresholds and only 29 percent create risk-adjusted forecasts and plans.
The Rise of the Integrated Finance Organization (IFO)
The study concludes that through greater discipline Integrated Finance Organizations (IFOs) are more flexible, dynamic and effective at executing finance activities and are much better situated to handling risk. While this is important, less than one in seven enterprises with over $1 billion in revenue has an Integrated Finance Organization.
IFOs Perform Better Financially
Overall, IFOs are part of enterprises that achieve higher revenue growth rates -- a 5 year 18 percent Compound Annual Growth Rate (CAGR) versus 10 percent for non-integrated finance organizations. Fifty percent of IFOs are in high growth markets. Integrated enterprises in high growth markets outperform industry peers in stock price and revenue over a five year CAGR period. Revenue jumped 24 percent for IFOs versus 14 percent for non-IFOs.
IFOs Handle Risk Better
The study findings suggest CFOs at Integrated Finance Organizations are more proactive at supporting and managing risk management than their counterparts in non-IFOs. Sixty percent of those surveyed in the study say they are more effective at managing risk versus only 43 percent at non-IFOs. IFOs are also twice as likely to be prepared for major risk events. When IFO respondents were asked to measure their own risk preparedness, 62 percent of organizations over US $5 billion in revenue that experienced a material risk event in the past three years stated that they were well prepared, versus only 29 percent of non-IFOs in the same situation.
CFOs executing effective risk management are 1.2 times more likely to have risk management reporting directly to them, that is 54 percent to 44 percent. The study finds that IFOs more proactively evaluate and address risk. They also formally conduct these activities enterprisewide. Sixty-six percent of IFOs have a formally identify and manage risks versus 51 percent for non-IFOs. Sixty-three percent of IFOs conduct routine management monitoring versus 49 percent for non-IFOs. In addition, 51 percent of IFOs perform a historical comparison of their data versus 41 percent at non-integrated finance functions.
IFOs Execute
Integrated Finance Organizations and influential CFOs are more effective at executing their agenda. CFOs with an IFO feel that they are very effective at measuring and monitoring business performance than their counterparts at non-IFOs, 81 percent versus 57 percent. The study also shows that 93 percent of CFOs with an IFO feel they are very effective at meeting fiduciary and statutory requirements versus only 79 percent for non-integrated finance functions.
IFOs Improve Operational Performance
An Integrated Finance Organization improves performance and increases responsiveness. IFOs spend more time (10 points or 21 percent) on analytical activities (decision support and control activities); report on 20 percent more dimensions and are more likely to focus on customer, industrial and channel activities. They also access data more quickly and provide confidence in data veracity.
Many enterprises are currently non-integrated, but the future is evolving towards more globally integrated enterprises. More than two-thirds or 69 percent of finance executives believe greater integration is difficult to execute but an imperative.
About the Global CFO Study
The findings of this report are based upon a survey conducted in the spring and summer of 2007 by IBM Global Business Services' Financial Management practice and the IBM Institute for Business Value (IBV). Over 1,200 Chief Financial Officers and senior Finance executives from 79 countries participated in structured interviews or online surveys designed to capture insights on how Finance professionals are affected by and deal with performance, risks, operational levers and governance. The majority of these interviews were conducted in person by IBM practitioners, with the remainder interviewed online through a partnership with The Economist Intelligence Unit (EIU). The Wharton School of the University of Pennsylvania assisted with survey design, data organization and interpretation. Participants represent organizations across a variety of industries, geographic locations and revenue size.
By:
Randy Zane
IBM Media Relations
917-472-3589
rzane@us.ibm.com
According to the study, in the past three years 62 percent of enterprises with over $5 billion in revenue encountered a major risk event. When a major risk event did occur -- such as strategic, operational or geopolitical -- 42 percent of these enterprises were not well prepared for the event.
The Global CFO Study, titled "Balancing risk and performance with an Integrated Finance Organization" was developed by IBM Global Business Services' Financial Management practice and the IBM Institute for Business Value (IBV), with assistance from the Wharton School at the University of Pennsylvania and the Economist Intelligence Unit. Over half of the participating CFOs and senior finance executives participated in a face-to-face structured interview, designed to capture insights on the subject of risk management and finance transformation. The remaining balance responded to an online survey.
Another key component of the study is the emergence of Integrated Finance Organizations (IFOs) which are defined as entities that, at minimum, mandate standards enterprise wide with a standard chart of accounts, common data definitions and standard common processes. The study concludes that enterprise wide common data definitions, a standard Chart of Accounts, common standard processes and globally mandated standards are the components of good governance and what the study calls the Integrated Finance Organization (IFO). Fewer than one in seven enterprises govern and manage the integration of their Finance organization by the combination of these four criteria.
The study finds that IFOs provide greater resiliency, better decision support and help to drive outperforming enterprises. Additionally, the study shows that enterprises with IFOs are more likely to perform better financially than non-integrated finance organizations and are more likely to proactively manage risk.
Who owns Risk?
CFOs are increasingly becoming "owners" of risk management within their enterprise and sharing ownership with the CEO. The study found 61 percent of CFOs are expected to lead risk management within their organization, followed by CEOs (50 percent), Chief Technology Officers (27 percent) and Chief Risk Officers (19 percent).
The study lends credence to observations that globalization opens up significant opportunities for companies but exposes more risks for the enterprise. The IBM Global CFO Study found that in the past three years enterprises encountered a range of risks including strategic (32 percent), geopolitical (17 percent), environmental/health (17 percent), financial (13 percent), operational (13 percent) and legal and compliance (8 percent).
"Globalization currently presents, at the same time, one of the largest challenges and one of the greatest opportunities for global enterprises," said Stephen J. Lukens, Global Financial Management Leader, IBM Global Business Services. "Forward-thinking executives locate operations and functions anywhere in the world based on the right cost, the right skills and the right business environment. The world is shifting towards a new definition of globalization, but a majority of companies are still maintaining the old worldview. Enterprises need to transform their financial management models. They need to integrate their finance operations to take advantage of this new perspective on globalization. Integrated operations alleviate the threats they face and improve the operational performance of their organizations."
Formal Risk Management is Immature
While risks are prevalent, many companies do not have a formal risk management program in place. At many organizations formal risk management is still fairly immature. By their own admission, only 52 percent acknowledge having any sort of formalized risk management program. Moreover, only 42 percent of respondents do historic comparisons to avoid risk, just 32 percent set specific risk thresholds and only 29 percent create risk-adjusted forecasts and plans.
The Rise of the Integrated Finance Organization (IFO)
The study concludes that through greater discipline Integrated Finance Organizations (IFOs) are more flexible, dynamic and effective at executing finance activities and are much better situated to handling risk. While this is important, less than one in seven enterprises with over $1 billion in revenue has an Integrated Finance Organization.
IFOs Perform Better Financially
Overall, IFOs are part of enterprises that achieve higher revenue growth rates -- a 5 year 18 percent Compound Annual Growth Rate (CAGR) versus 10 percent for non-integrated finance organizations. Fifty percent of IFOs are in high growth markets. Integrated enterprises in high growth markets outperform industry peers in stock price and revenue over a five year CAGR period. Revenue jumped 24 percent for IFOs versus 14 percent for non-IFOs.
IFOs Handle Risk Better
The study findings suggest CFOs at Integrated Finance Organizations are more proactive at supporting and managing risk management than their counterparts in non-IFOs. Sixty percent of those surveyed in the study say they are more effective at managing risk versus only 43 percent at non-IFOs. IFOs are also twice as likely to be prepared for major risk events. When IFO respondents were asked to measure their own risk preparedness, 62 percent of organizations over US $5 billion in revenue that experienced a material risk event in the past three years stated that they were well prepared, versus only 29 percent of non-IFOs in the same situation.
CFOs executing effective risk management are 1.2 times more likely to have risk management reporting directly to them, that is 54 percent to 44 percent. The study finds that IFOs more proactively evaluate and address risk. They also formally conduct these activities enterprisewide. Sixty-six percent of IFOs have a formally identify and manage risks versus 51 percent for non-IFOs. Sixty-three percent of IFOs conduct routine management monitoring versus 49 percent for non-IFOs. In addition, 51 percent of IFOs perform a historical comparison of their data versus 41 percent at non-integrated finance functions.
IFOs Execute
Integrated Finance Organizations and influential CFOs are more effective at executing their agenda. CFOs with an IFO feel that they are very effective at measuring and monitoring business performance than their counterparts at non-IFOs, 81 percent versus 57 percent. The study also shows that 93 percent of CFOs with an IFO feel they are very effective at meeting fiduciary and statutory requirements versus only 79 percent for non-integrated finance functions.
IFOs Improve Operational Performance
An Integrated Finance Organization improves performance and increases responsiveness. IFOs spend more time (10 points or 21 percent) on analytical activities (decision support and control activities); report on 20 percent more dimensions and are more likely to focus on customer, industrial and channel activities. They also access data more quickly and provide confidence in data veracity.
Many enterprises are currently non-integrated, but the future is evolving towards more globally integrated enterprises. More than two-thirds or 69 percent of finance executives believe greater integration is difficult to execute but an imperative.
About the Global CFO Study
The findings of this report are based upon a survey conducted in the spring and summer of 2007 by IBM Global Business Services' Financial Management practice and the IBM Institute for Business Value (IBV). Over 1,200 Chief Financial Officers and senior Finance executives from 79 countries participated in structured interviews or online surveys designed to capture insights on how Finance professionals are affected by and deal with performance, risks, operational levers and governance. The majority of these interviews were conducted in person by IBM practitioners, with the remainder interviewed online through a partnership with The Economist Intelligence Unit (EIU). The Wharton School of the University of Pennsylvania assisted with survey design, data organization and interpretation. Participants represent organizations across a variety of industries, geographic locations and revenue size.
By:
Randy Zane
IBM Media Relations
917-472-3589
rzane@us.ibm.com
Wednesday, October 24, 2007
the World is Flat
The world, indeed, is flat.
Mention outsourcing and you hear all kinds of claims about American jobs being stolen by China, India and other countries in Asia. But for much of San Diego's pharmaceutical industry, outsourcing is a financial necessity.
"Competition is everywhere. With prices going up and salaries going up, it would be prohibitive to get drugs to the market" without turning outside the United States for cheaper labor and less
costly trials, said Scott Saika, CEO of Ambit Biosciences in San Diego. Saika was joined by Dr. Penny Randall, senior director of medical and scientific services for Quintiles, and Krishna Kanamuri, chief business officer for Sai Advantium Pharma Ltd., both San Diego firms. All
three were part of a panel, moderated by Dinu Sen, , CEO of Avera Pharmaceuticals Inc., dealing with the topic "Outsourcing and Offshoring in the Life Science Industry: Challenges and
Opportunities," during the monthly meeting of TiE, the Indus Entrepreneurs, at
the La Jolla Women's Club.
The panel took the gathering through all the stages of bringing a drug to market and the costs involved at each stage. And while seeking opportunities overseas may be the way to survive these days, it is not without risk, according to the panelists.
Said Saiko: "You have to be careful who you partner with. You may find your idea in a catalogue of a small company" in Asia.
All three, who represented life science companies involved in outsourcing and offshoring,
discussed quality, regulatory, legal and financial challenges companies face in today's extremely competitive business environment.
"You have to pay lower to remain competitive," said Saiko, who added that countries in Asia are already catching up in the amount of money they spend on getting pharmaceutical products to market.
While the United States spends 2.6 percent of its gross domestic product on research and development, for example, Japan spends more - 3.5 percent - while Korea and China spend 2.6 percent and 1.4 percent, respectively.
In the United States, according to the panelists, it takes between $500 and $900 million and 10 to 12 years to get a drug to market, which makes it financially practical to cut costs anywhere during the pocess, from discovery through the three rial phases to actually marketing the
final product. Some of the issues that have to be considered include case control, control over
discovery, confidentiality and failure todevelop in-house expertise. On the plus side, there's a lot of money to be saved.
In India, for example, it costs about $25 a day to house a patient, compared to $1,000 a day in the U.S. This can be especially crucial during the final clinical trial, which requires thousands of patients before a drug will pass U.S. Federal Drug Administration Approval.
Ironically, the panelists concurred, the most important phase, the initial discovery, is the toughest to raise money for. "The nature of the product has not been established," Saiko pointed out. "But savings here means more money later in the crucial trial phases." Outsourcing and the ability to speed development of drugs by working with overseas partners was one of the main
topics of last November's second annual Pacific Forum, produced by the Sino- American Biotechnology and Pharmaceutical Professionals Association (SABPPA).
According to testimony at the conferece, some life science firms are saving as much as 75 percent on projects by completing them in Asia. In fact, according to industry sources, partnering with companies in China, India, Taiwan, Singapore, Japan and, more recently, Vietnam, are becoming the norm more than the exception.
At the TiE meeting, Randall said, "A lot of work is going to India. Most major companies have trials going on there now." Her fellow panelists agreed that India as an outsourcing partner has a lot going for itself.
While 1,650 languages are spoken throughout India, 24 of them by a million or more people, English is spoken extensively. Also, the country's infrastructure "is sometimes good," said Sen, who drew some laughs form the largely Indian audience. India also has a large patient population, who are more family oriented, less prone to drug problems and generally in
better health than their American counterparts, according to Kanumuri. Also on the plus side, and in China as well, the work force is highly educated.
Contrary wise, managing trials at a variety of sites throughout India may behard to manage because of the proliferation of so many local languages. Also, added Sen, the learning curves of staffs is not as fast as in the U.S., some hospitals are not "up to speed," regulatory timelines
are different and many labs are not fullyaccredited.
In the end, a lot depends on the quality of partners one finds. The topic of outsourcing was also the topic at an informal luncheon gathering recently by SABPPA members. Hui Li, the group's president, contended that as few as 30 percent of all discoveries are profitable.
"If you have resources in these Asian countries, it allows you to do research at lesser costs and helps American companies to be more productive," said ZhuShen, senior director at Immusol and one of the founders of SABPPA.
"The world is flat, with technology able to connect people globally. And that promises innovation," added Shen, who was recently nominated for a prestigious Athena Pinnacle Technology Award for contributing “to the vitality of women's roles in the San Diego technology community.”
Conclusion: As for outsourcing, "people will take advantage of that. If they don't, they will be left behind,"
(Source: http://www.asiamediainc.com/atf/cf/%7B8654644D-2241-4F54-B13D-589F4D8E9C1F%7D/ASIA%20April%206%20Outsourcing.pdf)
Mention outsourcing and you hear all kinds of claims about American jobs being stolen by China, India and other countries in Asia. But for much of San Diego's pharmaceutical industry, outsourcing is a financial necessity.
"Competition is everywhere. With prices going up and salaries going up, it would be prohibitive to get drugs to the market" without turning outside the United States for cheaper labor and less
costly trials, said Scott Saika, CEO of Ambit Biosciences in San Diego. Saika was joined by Dr. Penny Randall, senior director of medical and scientific services for Quintiles, and Krishna Kanamuri, chief business officer for Sai Advantium Pharma Ltd., both San Diego firms. All
three were part of a panel, moderated by Dinu Sen, , CEO of Avera Pharmaceuticals Inc., dealing with the topic "Outsourcing and Offshoring in the Life Science Industry: Challenges and
Opportunities," during the monthly meeting of TiE, the Indus Entrepreneurs, at
the La Jolla Women's Club.
The panel took the gathering through all the stages of bringing a drug to market and the costs involved at each stage. And while seeking opportunities overseas may be the way to survive these days, it is not without risk, according to the panelists.
Said Saiko: "You have to be careful who you partner with. You may find your idea in a catalogue of a small company" in Asia.
All three, who represented life science companies involved in outsourcing and offshoring,
discussed quality, regulatory, legal and financial challenges companies face in today's extremely competitive business environment.
"You have to pay lower to remain competitive," said Saiko, who added that countries in Asia are already catching up in the amount of money they spend on getting pharmaceutical products to market.
While the United States spends 2.6 percent of its gross domestic product on research and development, for example, Japan spends more - 3.5 percent - while Korea and China spend 2.6 percent and 1.4 percent, respectively.
In the United States, according to the panelists, it takes between $500 and $900 million and 10 to 12 years to get a drug to market, which makes it financially practical to cut costs anywhere during the pocess, from discovery through the three rial phases to actually marketing the
final product. Some of the issues that have to be considered include case control, control over
discovery, confidentiality and failure todevelop in-house expertise. On the plus side, there's a lot of money to be saved.
In India, for example, it costs about $25 a day to house a patient, compared to $1,000 a day in the U.S. This can be especially crucial during the final clinical trial, which requires thousands of patients before a drug will pass U.S. Federal Drug Administration Approval.
Ironically, the panelists concurred, the most important phase, the initial discovery, is the toughest to raise money for. "The nature of the product has not been established," Saiko pointed out. "But savings here means more money later in the crucial trial phases." Outsourcing and the ability to speed development of drugs by working with overseas partners was one of the main
topics of last November's second annual Pacific Forum, produced by the Sino- American Biotechnology and Pharmaceutical Professionals Association (SABPPA).
According to testimony at the conferece, some life science firms are saving as much as 75 percent on projects by completing them in Asia. In fact, according to industry sources, partnering with companies in China, India, Taiwan, Singapore, Japan and, more recently, Vietnam, are becoming the norm more than the exception.
At the TiE meeting, Randall said, "A lot of work is going to India. Most major companies have trials going on there now." Her fellow panelists agreed that India as an outsourcing partner has a lot going for itself.
While 1,650 languages are spoken throughout India, 24 of them by a million or more people, English is spoken extensively. Also, the country's infrastructure "is sometimes good," said Sen, who drew some laughs form the largely Indian audience. India also has a large patient population, who are more family oriented, less prone to drug problems and generally in
better health than their American counterparts, according to Kanumuri. Also on the plus side, and in China as well, the work force is highly educated.
Contrary wise, managing trials at a variety of sites throughout India may behard to manage because of the proliferation of so many local languages. Also, added Sen, the learning curves of staffs is not as fast as in the U.S., some hospitals are not "up to speed," regulatory timelines
are different and many labs are not fullyaccredited.
In the end, a lot depends on the quality of partners one finds. The topic of outsourcing was also the topic at an informal luncheon gathering recently by SABPPA members. Hui Li, the group's president, contended that as few as 30 percent of all discoveries are profitable.
"If you have resources in these Asian countries, it allows you to do research at lesser costs and helps American companies to be more productive," said ZhuShen, senior director at Immusol and one of the founders of SABPPA.
"The world is flat, with technology able to connect people globally. And that promises innovation," added Shen, who was recently nominated for a prestigious Athena Pinnacle Technology Award for contributing “to the vitality of women's roles in the San Diego technology community.”
Conclusion: As for outsourcing, "people will take advantage of that. If they don't, they will be left behind,"
(Source: http://www.asiamediainc.com/atf/cf/%7B8654644D-2241-4F54-B13D-589F4D8E9C1F%7D/ASIA%20April%206%20Outsourcing.pdf)
Monday, October 22, 2007
Enron Incident Scared the Boss promoted Corporate Enterpreneurship?
The collapse of the Enron Corporation has had enormous ramifications, not just for its shareholders, suppliers, and other creditors, but also for management theory. The company was widely celebrated for its ambitious, innovative, and seemingly successful management model — the balance of loose and tight management, the use of stretch goals, the system for attracting and retaining aggressive and creative people, and, in the center, the encouragement of internal entrepreneurship as the engine of growth and change.
Now that Enron has collapsed, are we required to write off the idea that companies should encourage entrepreneurship, stretch goals, and risk taking, on the grounds that they will ultimately lead to disaster? Must we accept the logic of journalist Malcolm Gladwell, who, assaying Enron’s demise, asked rhetorically in The New Yorker magazine, “What if Enron failed not in spite of its talent mind-set but because of it? What if smart people are overrated?”
No, we do not have to reverse our thinking. As with any corporate failure, the challenge is to separate the actions that led to the problems from those that continued to work well despite them. Or, stated more positively, we need to understand the enormous benefits of internal entrepreneurship and how it can drive corporate innovation and growth, while not neglecting the costs and risks that are associated with it.
This article provides a framework for thinking through the paradox of entrepreneurship: Every company needs to embrace it, while understanding that, if taken too far, entrepreneurship has the ability to undermine its own power. Building on extensive research in more than a dozen multinational companies (see “About the Research,” at the end of this article), this article describes a model of corporate entrepreneurship and the four typical problems that may arise if it is carelessly implemented. It also suggests ways to avoid each of those problems. Additionally, the research illuminates the promise and the pitfalls of some of today’s celebrated organizational concepts, in particular the challenges of encouraging an unconstrained free-market environment for managing people and ideas inside companies.
An Entrepreneurial Framework
The concept of corporate entrepreneurship has been around for at least 20 years. Broadly speaking, it refers to the development of new business ideas and opportunities within large and established corporations. Within this broad definition, there are at least four schools of thought, each with its own assumptions and objectives. The four basic schools are corporate venturing, intrapreneurship, entrepreneurial transformation, and “bringing the market inside.” (See “The
Four Schools of Thought on Corporate Entrepreneurship,” at the end of this article.)
This article centers on the entrepreneurial transformation school of thought. According to this view of corporate organization, entrepreneurship is an individual behavior that is shaped by the systems and culture of the firm. To bring about lasting change in an established company, the job of senior executives is to develop a set of corporate systems and processes that promote such entrepreneurship throughout the organization.
Our approach is to take the model of entrepreneurial transformation that BP PLC has developed and add our own conceptual twist to it, to show that when it is taken too far, entrepreneurialism can be detrimental to the enterprise. BP is a rare example of a giant company that has radically, and beneficially, transformed itself from within. Close to collapse at the end of the 1980s, BP is now recognized as a leader in the restructuring of the global oil and gas industry and a highly innovative, forward-looking company that, in its pursuit of sustainable energy solutions, is effectively managing the difficult task of balancing growth, profitability, and social responsibility.
At the heart of BP’s transformation is a management philosophy that places responsibility for delivering results deep down in the organization. “Contracts,” as they are known within BP, are set between the top executives, Chief Executive Lord John Browne and Deputy Group Chief Executive Rodney Chase, and those running BP’s business units. Then those individuals are given free rein to deliver on their contract in whatever way they see fit, within a set of identified constraints. Call it empowerment or call it entrepreneurship, the essence of the model is that successful business performance comes from a dispersed and high level of ownership of, and commitment to, an agreed-upon objective.
According to Mr. Chase, the BP management model rests on four components that help guide and control entrepreneurial action. These are direction, space, boundaries, and support.
Direction essentially is the company’s strategy. It is a statement of the goals of the company, the markets in which it competes, and its overall positioning in those markets. BP sees itself as an integrated energy company, but it also defines itself in terms of its commitment to social responsibility, to act as a “force for good.”
Space identifies the degrees of freedom provided to business unit managers to deliver on their commitments. It manifests itself in terms of physical space — that is, freedom from constant interruption, close oversight, and supervision — and the time managers need to experiment and refine their ideas.
Boundaries are the legal, regulatory, and moral limits within which the company operates. These boundaries can be explicit, recorded in policy documents and codes of conduct, or they can be implicitly understood.
Support denotes the systems and programs provided by the company to help business unit managers do their job. These include information systems, processes for knowledge sharing, training and development activities, and work/life balance services.
The beauty of this model is that, together, these four elements create an organizational environment of controlled freedom in which senior executives do their jobs by getting out of the way of those they empower to execute strategy. The point is that for positive, strategically predicated change to occur, the company needs all four components. If any one is missing or out of balance, the model breaks down and the ability of people in the organization to act as effective entrepreneurs is compromised.
(Source: http://www.strategy-business.com/press/16635507/8276)
Now that Enron has collapsed, are we required to write off the idea that companies should encourage entrepreneurship, stretch goals, and risk taking, on the grounds that they will ultimately lead to disaster? Must we accept the logic of journalist Malcolm Gladwell, who, assaying Enron’s demise, asked rhetorically in The New Yorker magazine, “What if Enron failed not in spite of its talent mind-set but because of it? What if smart people are overrated?”
No, we do not have to reverse our thinking. As with any corporate failure, the challenge is to separate the actions that led to the problems from those that continued to work well despite them. Or, stated more positively, we need to understand the enormous benefits of internal entrepreneurship and how it can drive corporate innovation and growth, while not neglecting the costs and risks that are associated with it.
This article provides a framework for thinking through the paradox of entrepreneurship: Every company needs to embrace it, while understanding that, if taken too far, entrepreneurship has the ability to undermine its own power. Building on extensive research in more than a dozen multinational companies (see “About the Research,” at the end of this article), this article describes a model of corporate entrepreneurship and the four typical problems that may arise if it is carelessly implemented. It also suggests ways to avoid each of those problems. Additionally, the research illuminates the promise and the pitfalls of some of today’s celebrated organizational concepts, in particular the challenges of encouraging an unconstrained free-market environment for managing people and ideas inside companies.
An Entrepreneurial Framework
The concept of corporate entrepreneurship has been around for at least 20 years. Broadly speaking, it refers to the development of new business ideas and opportunities within large and established corporations. Within this broad definition, there are at least four schools of thought, each with its own assumptions and objectives. The four basic schools are corporate venturing, intrapreneurship, entrepreneurial transformation, and “bringing the market inside.” (See “The
Four Schools of Thought on Corporate Entrepreneurship,” at the end of this article.)
This article centers on the entrepreneurial transformation school of thought. According to this view of corporate organization, entrepreneurship is an individual behavior that is shaped by the systems and culture of the firm. To bring about lasting change in an established company, the job of senior executives is to develop a set of corporate systems and processes that promote such entrepreneurship throughout the organization.
Our approach is to take the model of entrepreneurial transformation that BP PLC has developed and add our own conceptual twist to it, to show that when it is taken too far, entrepreneurialism can be detrimental to the enterprise. BP is a rare example of a giant company that has radically, and beneficially, transformed itself from within. Close to collapse at the end of the 1980s, BP is now recognized as a leader in the restructuring of the global oil and gas industry and a highly innovative, forward-looking company that, in its pursuit of sustainable energy solutions, is effectively managing the difficult task of balancing growth, profitability, and social responsibility.
At the heart of BP’s transformation is a management philosophy that places responsibility for delivering results deep down in the organization. “Contracts,” as they are known within BP, are set between the top executives, Chief Executive Lord John Browne and Deputy Group Chief Executive Rodney Chase, and those running BP’s business units. Then those individuals are given free rein to deliver on their contract in whatever way they see fit, within a set of identified constraints. Call it empowerment or call it entrepreneurship, the essence of the model is that successful business performance comes from a dispersed and high level of ownership of, and commitment to, an agreed-upon objective.
According to Mr. Chase, the BP management model rests on four components that help guide and control entrepreneurial action. These are direction, space, boundaries, and support.
Direction essentially is the company’s strategy. It is a statement of the goals of the company, the markets in which it competes, and its overall positioning in those markets. BP sees itself as an integrated energy company, but it also defines itself in terms of its commitment to social responsibility, to act as a “force for good.”
Space identifies the degrees of freedom provided to business unit managers to deliver on their commitments. It manifests itself in terms of physical space — that is, freedom from constant interruption, close oversight, and supervision — and the time managers need to experiment and refine their ideas.
Boundaries are the legal, regulatory, and moral limits within which the company operates. These boundaries can be explicit, recorded in policy documents and codes of conduct, or they can be implicitly understood.
Support denotes the systems and programs provided by the company to help business unit managers do their job. These include information systems, processes for knowledge sharing, training and development activities, and work/life balance services.
The beauty of this model is that, together, these four elements create an organizational environment of controlled freedom in which senior executives do their jobs by getting out of the way of those they empower to execute strategy. The point is that for positive, strategically predicated change to occur, the company needs all four components. If any one is missing or out of balance, the model breaks down and the ability of people in the organization to act as effective entrepreneurs is compromised.
(Source: http://www.strategy-business.com/press/16635507/8276)
Subscribe to:
Posts (Atom)
