Management Frameworks

Aligning Strategic Thinking and Execution

Jacques Kemp, Andreas Schotter, Morgen Witzel

• Publisher: Routledge
• Year: 2012
• Print ISBN: 9780415781640
• eBook ISBN: 9781136194610
• Topic: Business
• Subtopic: Business General
• Index: Business

Today's business organizations, especially large ones, are complex places; difficult to manage and to control. Much of this complexity is self-induced and too much of the management of these organizations is done on an ad hoc basis. Different reporting, control and management systems are used in different parts of the company and often these are incompatible, making it difficult, sometimes impossible for top management to know what is going on. Consequently it is an arduous task for managers to make strategic plans for the business or react quickly to changes in the environment.

This book shows how much of this complexity can be smoothed away through the introduction of overarching management frameworks that are complete, consistent and comprehensive; bringing all the various parts of the organization together as a single system. It provides a whole-firm view of management and suggests that reputational and ethical issues are equally important to marketing, operations and finance and need to be considered within the framework.

Management Frameworks is a practical and insightful book; offering students the tools and knowledge required for viewing strategy and management holistically. It will be required reading for executive education classes in strategic management and will find a ready audience with thinking managers everywhere.

1

TOO COMPLEX TO MANAGE?

The aim of Occupy is not to think for yourself … We want to change the process of finding solutions.

(Maria, Occupy protestor at the World Economic Forum, Davos, 2012)

In an increasingly complex world, leaders and managers must cope with many unexpected issues and unforeseen events. This of course increases business risks, but it also creates potential new opportunities. Adaptability, especially the personal and organizational capability to reconfigure quickly and efficiently, has become the key to achieving superior performance.

Few public or private organizations have been able to develop the internal capabilities to adapt the core elements of their organizational cultures and mindset of their managers. In this chapter, we will describe how complexities seem to keep multiplying at an ever-increasing pace. We will also show how many of our personal capabilities are severely constrained by ‘silo’ approaches to management and by the lack of skills and processes that are needed to ‘connect all the dots’ in order to manage in an integrated but dynamic way.

The solution to the problem lies in the introduction of overarching management frameworks into the management process. These frameworks should involve all key decision-makers in all business units and functions. The results of the introduction of frameworks can be far-reaching. They can result in enhanced understanding and better social cohesion within the organization, and hence more organizational alignment. They can assist us in managing complexities, which should in turn lead to greater efficiency. A well organized approach to management – in other words, the better ‘management of management’, can help to reduce the creeping inefficiencies of large and complex organizations, often referred to as ‘corporate discount’, and turn these instead into a ‘corporate premium’. Through simplified, streamlined, holistic management frameworks, organizations can avoid the problem of becoming too complex to manage.

Let us look at a couple of prominent examples, where well-known, successful organizations have experienced serious crises because of the lack of efficient management frameworks.

January 24, 2008. French financial group Société Générale announced the loss of €4.9 billion due to the actions of a rogue trader. The trader, Jérôme Kerviel, was accused of having set up a string of fake deals in order to defraud the bank. Arrested and charged with several offences, he was convicted in October 2010, but the money was never recovered.

Like other similar incidents, such as the actions of rogue trader Nick Leeson who brought down Barings Bank in 1995, no one in a top leadership role at Société Générale was aware of what was happening until it was too late. Some later claimed to have their suspicions of Kerviel, but if so they did not act on them. He was allowed to operate unmolested for some time, long enough to create record losses,¹ leading to organizational failure.

September 15, 2008. Lehman Brothers, one of the oldest banks on Wall Street, petitioned for bankruptcy. The shockwaves went around the world, rocking the global financial system and raising the spectre of recession. Tens of thousands of jobs were lost, tens of billions of dollars were wiped off the balance sheets not just of banks but of many other businesses.

To many, including many inside the financial system, this was a shocking event, simply incomprehensible. How had this old and respected institution got itself into this position? How could a bank like Lehman go from a seemingly solid position to bankruptcy in so short a time? In fact, as the subsequent two-year inquiry into the bankruptcy made clear, few at Lehman Brothers had any real understanding of the scale of the disaster threatening the bank until it was almost upon them. The Financial Times, commenting on the official report, noted that the bank lacked operational controls and took too many shortcuts, all of which put the bank itself at risk. No one, not even Dick Fuld, the bank's boss, seemed to have any real idea of what the bank's actual financial position was or where it stood. ‘Lehman Brothers took excessive risks and betrayed all principles of financial good sense’, says Peter Chapman in his history of the bank, The Last of the Imperious Rich.²

From the outside these sort of events appear incomprehensible. Yet they are numerous and frequent. These two examples come from the banking area, but there are plenty of non-banking examples too, as we will see in a moment. Public sector organizations too experience their extreme failures. And yet, all these organizations have controls, accounts, audits, which are intended to prevent such incidents. On the whole, these systems do work, and those who commit fraud or transgress in other ways are nearly always caught. But in cases like Barings, Société Générale and Lehman Brothers they are not caught soon enough. By the time the losses are discovered and those responsible for the failure are identified, the damage has been done. The critical question is, why does this happen?

The reason is deceptively simple. Research for this book, focusing on the linkages between business strategy, organizational structure and performance effects, shows that although most firms routinely gather and analyse huge amounts of data, too often the relevant and right data do not reach the right individuals. In addition, firms often have very fragmented and isolated data-gathering approaches that lack interconnectivity and a unified managerial language. More often than not, effective feedback loops that allow real-time adjustments without disrupting the overall organization are also not in place. Organizations also have huge problems in reconciling often opposing initiatives that stem from different divisions or business units and are not harmonized with each other. The result is a lack of a ‘big picture’ overview which creates a tactical instead of a strategic approach to management.

Our investigation also showed that the warning signs of crisis are nearly always there in advance of the crisis. But these signs are ignored or discounted by executives too busy and too distracted by tactical management and short-term trouble shooting. Top management needs systems in place to help executives understand what is going on everywhere in the organization now, not what went on last week or last quarter or last year. If those systems are not in place, or are in place but not working, then the organization itself is at risk.

Analysis of the examples cited above and other major failures suggests that some of the senior executives in these firms were hiding their heads in the sand. But it also appears that there was a lack of control, consistent control across the organization. To some extent, Lehman's senior managers for example were guessing in the dark – about the financial health of their own institution. And they were guilty too of what consultant and academic Tom FitzGerald calls ‘looking in the rear view mirror’.³ Their accounting and reporting frameworks were heavily geared towards past performance. They had no systems in place to help them understand the future and plot a course through it. Lacking an integrated framework that helps the organization to navigate through unexpected external events, they made bad decisions – like the decision to invest in toxic mortgage bonds. The result was the end of one institution, and severe damage to many others.

Now let us move fast forward to 20 April 2010. A massive explosion aboard the oil-drilling platform Deepwater Horizon killed eleven members of her crew and started a fire that could not be extinguished. Two days later the rig sank, leaving an uncapped oil well gushing crude oil into the Gulf of Mexico. The well was not finally capped until September 2010, four months later. By this time hundreds of thousands of gallons of oil had been spilled into the sea.

Owned by Transocean Ltd, a drilling contractor, the platform had been leased to BP and was operated by the giant oil company. BP was blamed for the accident. Anticipating huge costs for cleaning up the spill and subsequent litigation, the markets sent BP's shares into freefall. Its market value declined by £12 billion in the first ten days alone. At the same time a media storm broke over the corporation. In the American press in particular, BP and its executives were accused of reckless behaviour, of breaches of safety procedures and of callousness towards the inhabitants of the Gulf Coast affected by the spill. It did not matter that these accusations were exaggerated, and that the safety record on Deepwater Horizon up to this point had been very good. Nor did it matter that, as subsequent enquiries showed, companies other than BP bore a share of responsibility. Regardless of rights or wrongs, the damage done to BP's financial position, its reputation and its brand has been immense. A long road to recovery lies ahead.

In retrospect, the disaster itself is less important than BP's response to it. There was a strong perception that BP had been slow in its response, both in terms of moving resources into place to deal with the problem itself, and critically, in terms of protecting its public image. That perceived hesitation has cost the company billions, and even more severely, damaged nature and local communities almost irreparably.

What could have been done differently? Every part of an organization has a role to play in minimizing risks or in overcoming crises. This can only be achieved if a comprehensive, integrated, transparent, and dynamic management framework exists that is geared toward execution excellence. Top management has to have clear, deep-reaching information tools and decision-making levers at its disposal, which it can pull in order to bring resources and people to bear on the problem. Those were lacking at BP. Since the crisis, BP has moved to a much tighter system with more information flowing to and from corporate headquarters and more effectively connecting the parts of the company. This should lead to a much faster and more effective response should a similar crisis occur. But as far as Deepwater Horizon is concerned, it is too late. The stable door is now securely shut, but the horse has long since bolted.

The complex world

The economy is a marvel of complexity. Yet no one designed it and no one runs it. There are, of course, CEOs, government officials, international organizations, investors, and others who attempt to manage their particular patch of it, but when one steps back and looks at the entirety of the $36.5 trillion global economy, it is clear that no one is really in charge.⁴

Eric D. Beinhocker, The Origin of Wealth

The examples cited above are by no means unique. Open any business newspaper on any given day and one will see many other examples of how the complexity of the business environment that Beinhocker refers to creates problems for management, from macro-level geopoliticial issues that threaten economic stability to micro-level managerial issues that can nonetheless knock even the most robust strategy off track. Here are some examples of stories from the Financial Times of 25 October 2010:

Toyota, the once shining company, continue to be tarnished by ongoing problems … Still on alert a year after the crisis.

Famous for its quality and for being a world-leading company, Toyota continues to suffer the fallout from its well-publicized problems in 2009.⁵

Lego: for 70 years Lego experienced steady growth. But in 1998 the company started losing money. By 2003 sales had dropped by 20% … these two years represented the biggest losses in Lego history. The challenge: the company's focus on creativity, innovation and superior quality had created high complexity. The company had a total of 12,500 stock-keeping units, with more than 100 different colours and more than 11,000 suppliers etc. Fixing: new vision … a new strategy … a new model. Results: sales up … customer satisfaction up … the unexpected problem … a lot of things did not work as expected … Key lessons: complexity in terms of a company offering too many products creates very high costs … The idea of exceeding customer requirements might lead to an overly complex and costly value chain … These strategic relations must be proactively managed in a structured and planned way.

The Truth about Ikea [book review]. The book sets out to demolish the idealized image of Ikea … issues about succession might negatively impact Ikea's future …

SAP has been ordered to pay $1.3 billion in damages to arch-foe Oracle, for software stolen by a subsidiary company it acquired for $10 million in 2005.

Bank of Ireland: The bank can not stand anymore on its own.

UBS: Sued by Madoff trustee for $2 billion.

Thus on just one day, one newspaper's news shows examples of well-intentioned executives managing companies as best they can, coping with a wide range of complexities, problems and unexpected issues but still failing to execute business strategies effectively. We ask: was reality more complex than these CEOs and their boards had foreseen, or were they just simply assuming that based on a clear mission and a good vision, they could execute a long-lasting strategy? Books like Built to Last and Good to Great tend to encourage managers to believe this to be so but we have our doubts.⁶

Over the past few years we have seen billions wiped off the balance sheets of companies around the world. Once respected corporate names have fallen prey to forces that, on the surface at least, seem to be beyond their control. Whenever things like this happen, we look for answers; but we never seem to find any, or at best we only seem to find answers ‘with the benefit of hindsight’. Were the heads of our large institutions simply asleep at the wheel? Or is it that these i...

Table of contents

• Cover
• Half title
• Title
• Copyright
• Contents
• List of illustrations
• Acknowledgements
• 1 Too complex to manage?
• 2 The architecture of an organization
• 3 Planning for frameworks
• 4 The portfolio driver
• 5 The marketing driver
• 6 The organizational driver
• 7 The operational driver
• 8 The reputation driver
• 9 The financial driver
• 10 Performance excellence
• 11 Connecting the dots
• Notes
• Bibliography
• Index