Strategic management – Page 2 – Escondido Framework

Shifting the dial on purposeful business: what can we learn from crises, past and present, in solving the problems of people and planet?

The fifth and final session of the British Academy Future of the Corporation – Purpose Summit was a disappointment after some of the high points of the earlier sessions, but was rescued by an inspiring closing contribution from Mohamed Amersi, whose Amersi Foundation is one of the principal sponsors of the Future of the Corporation programme.

The essential shortcoming of the session was that it failed to address its intended subject or answer the question set in its title. I was left with the impression that, particularly with the backdrop of the Covid-19 pandemic, the organisers felt that they would be failing to notice the elephant taking up most of the room if they didn’t address business purpose in times of crisis. As keynote speaker, Mark Carney tried to combine his experience as a central banker through the financial crisis and its aftermath with his appointment as UN Special Envoy for Climate Action and Finance. He made the case for a strategic reset to deliver “Net Zero” to address climate change, argued for corporations to be required to disclose how they contribute towards reducing carbon emissions, but did not manage to articulate how this relates corporate purpose. In Escondido Framework terms, the appetite of investors and consumers to do business with organisations that are addressing climate change and the restrictions and/or incentives provided by governments reduce carbon emissions shape the market interfaces of the firm, and the interest of the firm in its own sustainability should encourage it to behave sustainably, but they don’t change the corporate purpose.

Following Carney’s contribution, the session moved onto a panel discussion. As CEO of SSE, an electricity utility, Alistair Phillips-Davies had an easy job relating the changes made to his company’s corporate purpose in relation to the climate crisis. He further argued that clarity of corporate purpose helped everyone in his company respond appropriately to the current Covid-19 crisis, albeit that this sounded like a general statement about how it was good for the company’s reputation to be seen to behave responsibly when this latest crisis hit. The session then wandered, as it seemed unclear whether the discussion should be about how companies respond to crises, in particular whether they should be holistic and strategic or driven by short term financial optimisation, or whether companies should become principals in addressing the crises themselves, which seemed to be the line adopted by Ngaire Wood of the Blatavnik School.

I was left frustrated as Colin Mayer tried to sum up both this discussion and the material covered over the three days of the summit, ultimately feeling that we were left with a laundry list rather than an understanding of purpose, and that this final session had left the impression that the purpose of the organisation had been reduced to steering the organisation through the crisis. This may be consistent with the thesis that an organisation can be viewed as an organism whose purpose is to survive, but it falls short of the Escondido Framework understanding the purpose of the organisation is to create value for society than cannot be created through a set of atomised transactions.

Mohamed Amersi was given a few minutes to wrap up the summit and, for me, saved the day. He referred back to the 1850 charter of his family’s business which stated its duty to its “superior creator”, suppliers, those served [ie customers], the state, shareholders, surroundings and society. He described the challenges we face today as planetary sustainability, inequity and technology. He spoke of modern society by way of an analogy with an apartment block containing a flooded basement, crowded middle floors and a growing penthouse, but with a broken elevator. He despaired of top-down organisations in which no-one is actually in control and argued that is up to everyone to act – “If not you, who? If not now, when?”

How can technological change serve society through purposeful business?

This third session of the on-line British Academy Future of the Corporation – Purpose Summit was anchored in an interview with Satya Nadella, CEO of Microsoft and, as became clear, a living embodiment of the importance of purpose to business.

He conveyed a strong commitment to the resilience and survival of the corporation, and the place of purpose within this. Early on, he stated “A company should not outlive its social purpose. Its social contract should be sustained.” His final remark, in response to a question about what he wanted to achieve at Microsoft, was that measure of the contribution of leaders to their companies was that they left them with the institutional strength to outlive them. These two observations together add up to a compelling view of the role of the leader to ensure that the company’s purpose, in terms of what it provides to society at large, creates value for society. By implication, strategy is about adapting to ensure that the company’s purpose continues to achieve this.

Nadella, in common with Alan Pole of Unilever in an earlier, reflected on the importance of a company’s purpose in relation to meeting he challenges of the climate crisis and inequality. He spoke of the need for economic growth, but that it needs to serve everyone, to be anchored in popular trust, and to be sustainable – “you can’t have growth and break the planet.”

Nadella spoke repeatedly about the need to earn and maintain the license to operate, a particular concern for the very largest technology companies. They need to be more sophisticated in avoid the harm that is a consequence of their scale – not least to keep regulators and would be regulators off their backs. He spoke of the need for companies like Microsoft look upstream of themselves and see what they can do to ensure that through an embedded culture and value system of their own they do what they can to shape their external environment so that “we can be customers of good stuff”.

He was asked whether the pressures of quarterly reporting imposed short term pressures on Microsoft and compromised its corporate purpose and own long term strategy. He acknowledged that quarterly reporting was a constraint but only insofar as it forced the company to explain what it did and why. He explained that he had no difficulty, for example, justifying to his shareholders why Microsoft invested in local housing projects in Washington since the company need to support its wider workforce, not just highly paid software engineers but also people in blue collar service roles keeping the local economy operating.

Chair of the House of Commons Science and Technology Select Committee and former minister, Greg Clark, had to follow this tour de force. He reflected on the how the Covid-19 pandemic had accelerated some technology trends such as video-conferencing but also commented on the degree to which the recent experience surrounding the popular responses to apps to tracking infected patients had highlighted the importance of face to face contact in service activities.

The third contributor to this session was Ngaire Woods, Dean of the Blatavnik School of Government at Oxford who focussed on the role of government in regulation and the limitation of self regulatory codes in prevent a “race to the bottom”. It was apparent that her underlying thesis is that, notwithstanding the sense of purpose adopted by some business leaders, regulatory intervention is necessary – citing as her example the need for Robert Peel to secure the legislation to ensure widespread adoption of the standards in factories that Robert Own had pioneered. She also highlighted the need for appropriate regulation, in that the cheap solution is not always the best (using the example of the alternative approaches to preventing oil spills: the inexpensive solution of a fining system was ineffective whereas the policeable and expensive solution of requiring tankers to have a double skin has been highly effective). In answer to questions later, she also argued that governments should be prepared to use their power as lenders of last resort in the pandemic to secure responsible and purposeful behaviour by business – an answer that unwittingly brought us full circle back the issue addressed by Nadella of the license to operate.

Lessons from a Warzone, by Louai Al Roumani

My NHS Trust has an annual “Lessons Learned” conference, for sharing the lessons that teams have drawn out from incidents that have taken place in the previous twelve months. Don’t waste a crisis by failing to learn from the experience. This book is about lessons learned from a crisis, but is much more than just another business book.

Louai Al Roumani was the fairly newly appointed CFO of the leading retail bank in Syria when the Arab Spring turned into the Syrian civil war. Most of his family fled to the safety of Kuwait as conditions turned nasty (ironically, they had been living in Kuwait when Saddam Hussein invaded in 1990, but missed the occupation because they were on vacation in what was then a very safe Damascus), but Al Roumani chose to remain, loyal to his home city and his company.

“Lessons from a Warzone: How to Be a Resilient Leader in Times of Crisis” recounts the lessons learned by Al Roumani over the next five years. In this time, despite mortar bombs falling in Damascus and ISIS reaching the outskirts, his bank, BBFS, didn’t just survive but thrived. It did this by doing things that when explained by Al Roumani, and you should already have realised if only you thought about them for moment, make lots of sense even if they fly in the face of what many less insightful managers and directors might do (and, indeed, was evidence by departure of the two directors appointed the one of the major investors).

The lessons include going the extra mile to look after customers (airlifting safe deposit boxes out of a local branch as ISIS overran a provincial town), providing them with reassurance (displaying piles of cash when they queued up to withdraw their deposits and not restricting the amount they could withdraw), looking after staff and avoiding redundancies and cost-cutting around workplace hygiene factors ,and robust systems testing and disaster planning.

He draws on his heritage as a Syrian, living in a city that claims to have been longest continuously inhabited community in the world (a claim of Damascus that Aleppo contests), but also sharing the nomadic transitions of hospitality and reciprocity of Arabi culture. There are great insights relating to thinking about the long term health of the company, informed in part by a different “concept of time” from the one that he had been exposed to during his Harvard MBA. He argues that you should not treat profitability as a critical success factor but that if you see your objective the long term wealth of your shareholders you will from time to time have to sacrifice short term profitability. Although his bank was a creation only of the 1990s, he argues for playing “the long game as a third generation family business does.” He tells a charming anecdote of a large purchase from a shop in the Damascus souq where, in contrast the lady ahead of him who haggled hard and secured no discount, the old gentleman who been silently observing the young man serving Al Roumani gave the instruction that Al Roumani should receive a discount to reward him for not haggling. The account provided by Al Roumani explains why BBFS displayed such resilience through the Syrian civil war that it both maintained sustainable positions in relation to the marketplaces it deals with and also built the corporate and social capital inside the organisation not just to survive but the thrive.

Don’t read this book just for the business lessons. It is a powerful tale of the resilience of a man and a society in the face of enormous threat and massive upheaval. You will learn about the experience of a slice of Syrian society during the last decade and about the cultural hinterland that supports it. It is also a human tale, which keeps resurfacing through the book and continues right through to the acknowledgements at the back – just for once, make the effort to read these as the book keeps on giving right up to the final page.

Investors should look below the bottom line – says the FT

“This newspaper has welcomed the shift among corporate leaders from a narrow focus on shareholder value to the pursuit of a broader purpose — for a hard-headed reason: when business takes a broad perspective, it can leave everyone more prosperous, including shareholders. Rejecting the dogma of shareholder primacy is not a question of bleeding hearts, it is a matter of enlightened self-interest.” So says the FT editorial board in a powerful opinion piece today, before going on to argue that investors should follow suit.

The FT argues that there are two reasons for the investors to look beyond the bottom line and consider the impact of business decisions on climate and the environment and on workers and the communities they operate in. The first is that by ignoring the impending crises facing us, a corporate focus on shareholders alone contributes to the political neglect of the problems and can stand in the way of solutions. The second relates to the way that many investments are held by shareholders, through diversified portfolios intermediated by managed funds. The result of this is the ultimate investors (people like me with investment through pension funds, insurance policies and ISAs[1]) are in effect “universal investors” exposed to hundreds or thousands of individual companies, fortunes. As the FT team observe: “Their returns depend on that of the private sector overall. When one company profits by “externalising” its costs, that may flatter its bottom line only by losing investors more money in other companies which pay the price.”

Consequently, investors and company leaders both have an interest in internalising the externalities rather than ignoring them. But the FT finds that both company and investment managers feels constrained in doing so, and it argues that government should look at ways of changing the legal frameworks that shape behaviour by corporate leaders and fund managers.

My own belief is that there is evidence that some corporate leaders and some fund managers (notably Baillie Gifford who I got to know well over a period of nine years as the finance committee chair of an asset rich charity) do take the wider perspective and longer term into account and, in the UK at least, what is at issue is not so much the legal framework but the career paths, knowledge bases, incentive mechanisms, cultural biases and social norms in the City and in our board rooms.

[1] Individual Saving Accounts – the UK tax sheltered scheme for smaller retail investors

Purposeful finance – in ancient Ephesus

I have always been interested in long lasting institutions. I attended Corpus Christi College, Cambridge, established by the city’s townspeople in the aftermath of the Great Plague, and lived for a year in a room in its Old Court, built in the 1350s. There was something very special about occupying a room that had seen young men* engaged in the same endeavour for over 600 years. A few years later, living in west London, I relished the occasions driving when I found myself behind removal vans owed by the local branch (sadly since renamed because the branding confused the locals) of the Aberdeen Shore Porters Society, that proclaimed its foundation in 1498.

Esra Turk wrote a fascinating article in the FT on 20 August about an even longer lasting institution, a bank rather than a college or a logistics business, albeit one that was abolished 1600 years ago by a Roman emperor, a Christian intent on stamping out pagan beliefs. The Artemision was one of the earliest known banks, operating within the great temple of Artemis (as known to the Greeks, or Diana to the Romans) at Ephesus, one of the seven wonders of the ancient world. Its origins were as a place to deposit wealth under the protection of the deity and predate Croesus, the first ruler to issue gold coinage, and man synonymous with great wealth and an early depositor in the Artemision.

Turk recounts how the Artemision developed to become more than just a safe deposit facility for the mega rich to evolve “into a much more sophisticated regional and international financial institution, operating not only as a reserve and depository bank, but also undertaking fiduciary and mortgage business. The accumulation of earnings and reserves were of such magnitude that it became known as the Bank of Asia”.

What was the behind its success and its longevity? As every pre-digital retailer will tell you, the first was location – Ephesus was the central junction of the ancient world. But beyond that, Turk spells out three great strengths: purpose, leadership and a clear view of risk.

Regarding purpose, Turk observes, its “sophisticated banking functions were always carried out in the sacred service of a goddess with a strong ethical code. Similarly, banks today need a guiding purpose that looks beyond financial performance and provides a clear and sustainable ethical framework”. It may be a stretch, but is there anything in the waxing and waning of some of high street financial institutions in the UK to link the points at which they have exhibited most resilience and placed themselves at great risk to the strength or weakness of their links to heritage of their Quaker and Non-conformist founders?

Regarding leadership, Turk tells us its “governance was characterised by high levels of personal and collective accountability, trust and connection to the society in which it operated”. Leadership was initially jointly vested in the high priest and priestess of the temple and later in the sole charge of a high priestess. Turk wryly describes this as “an experiment not much emulated in the subsequent 16 centuries, but perhaps worth revisiting”. Not so much the 30% Club as the 100% Club. Gender may have played its part, but I think Turk’s core message is that accountability and trust embodied in the priesthood and accountability to the deity was key to the longevity of the bank.

Regarding the clear of view of risk, Turks suggests that bank was a model of prudence and caution, deploying its own capital as well as the funds of its depositors, and restricted itself to low risk lending because the money help under the goddess’s protection had to remain inviolable. No sub-prime activity in the Artemision!

*Corpus Christi only started admitting women undergraduates in the 1980s

Should customers have come first in the GKN battle?

I don’t disagree with Michael Skapinker often, but his commentary on the successful bid by Melrose for GKN in today’s Financial Times “Customers should have come first in the GKN battle” had me getting out a metaphorical red ballpoint to mark his homework.

It was a shame. He made such a good start, rehearsing points that he has made well in the past about shareholder value:

Whose interests should companies serve? For decades, the answer, particularly in the US and the UK, was shareholders’. Total stock market return, the argument went, was clear and measurable and it kept managers focused — until Jack Welch, former General Electric boss and one of shareholder value’s greatest champions, denounced it as “the dumbest idea in the world”.

That was in 2009. Mr Welch was not the only business chief to notice that the financial crisis had shredded the idea that if companies looked after shareholders, everything else would follow. Josef Ackermann, then-head of Deutsche Bank, said: “I no longer believe in the market’s self-healing power.”

A little later in his article, I also awarded him marks for citing the late Sumantra Ghoshal of London Business for arguing in 2005 that:

the people whose contribution should be recognised first were employees, who also took the biggest risks;

shareholders could sell their shares far more easily than most employees could find another job;

and employees’ “contributions of knowledge, skills and entrepreneurship are typically more important than the contributions of capital by shareholders, a pure commodity that is perhaps in excess supply”.

Not content with citing Sumantra Ghoshal with approval, Skapinker moved on later in the article, in the context of the intervention by the Tom Williams, chief operating officer of Airbus’s commercial aircraft division, about the need for long-term investment and strategic vision in the aircraft industry, to cite “the great” Peter Drucker for saying that

the purpose of business was to create a customer. Without that customer, there are no jobs for workers, no returns for shareholders and no strategic skills for nations.

All good stuff, and essentially consistent with Escondido Framework thinking, but Skapinker and others who were unhappy at the outcome of the bid seem to have missed the point about what was happening.

During the takeover battle, much was made of the heritage of GKN, whose origins lay in the founding of the Dowlais Ironworks in the village of Dowlais, Merthyr Tydfil, Wales, by Thomas Lewis and Isaac Wilkinson ion 1759. John Guest (whose name survives in the “G” of GKN – formerly Guest Keen and Nettlefold) was appointed manager of the works in 1767, and in 1786, he was succeeded by his son, Thomas Guest, who formed the Dowlais Iron Company. However, the links to the multinational automotive and aerospace components company of 2018 are slight and accidental.

The company acquired by Melrose consists of four major divisions: GKN Aerospace (Aerostructures; Engine Products; Propulsion Systems); GKN Driveline (Driveshafts; Freight Services; Autostructures; Cylinder liners; Sheepbridge Stokes); GKN Land Systems Power Management; PowerTrain Systems & Services; Wheels and Structures; Stromag); and GKN Powder Metallurgy (Sinter Metals; Hoeganaes). This is a collection of businesses that is the outcome of over a hundred years of acquisitions and disposals across the globe¹. At least at the parent company level, there is little to suggest the opportunity for much value creation from them all being part of the same corporate entity.

What business was GKN plc in? The management of a portfolio of business units, primarily in manufacturing but some in services, spread across a range of different industries and technologies serving a variety of different types and classes of industrial customers, many but not all being OEMs.

Who were the customers of the corporate entity, as opposed to the subsidiaries (which are the entities that interface directly with the purchasers of goods and services, with their employees, and with suppliers)? Perhaps the subsidiaries themselves, insofar that they derived value from the parent company and investment funds, in return for cash returned to the parent? Perhaps the employees of the subsidiaries, at least in so far as they were beneficiaries of a corporately administered pension scheme (that, incidentally, Melrose committed to topping up with an extra £1 billion)?

Much has been made, including by Michael Skapinker in his article, of the 25% of the shares that were in the hands of hedge funds and other short term speculators who had only bought them very recently in the hope of a quick return. Presumably they bought these shares from owners who were willing to sell at a lower price against the possibility that the Melrose bid failed and the share price under the existing management team would fall.

Melrose’s argument during the takeover battle was essentially that it is a management team with a record of successful managing corporate assets who would replace a management team that has been destroying value in its management of the GKN portfolio. The commitments Melrose made along the way to the customers for the GKN subsidiaries’ goods and services and to their employers (in part evidenced by the promises relating to the pension scheme), suggest that they are not old fashioned asset strippers, selling off assets as part of strategy to wind down wealth creating business units. Rather, they appear to understand the business that the GKN plc is currently in, which is managing a portfolio of businesses, adding value to those where it can, and selling those to which other companies can add more value.

If this is indeed the approach that Melrose takes, it will reflect a mindset in which the board thinks about the businesses within the portfolio as customers for the corporate centre, recognising that if there are other corporations that can provide individual business units with a better deal, let them go. And that will make it easier to keep their customers in the capital markets, to whom they have spent the last few months marketing themselves, happy, loyal, and committed.

¹ Wikipedia history of GKN plc since 1966

Is Capitalism Killing America?

I was stopped in my tracks this morning by an email from the Stanford Graduate School of Business with the subject line “Is Capitalism Killing America?”. It is not the sort of thing that the world’s top business school (at least that was how it was rated forty years ago when I was there) normally sends to its alumni.

The key feature in the email newsletter was an article with the subheading “Young & Rubicam Chairman Emeritus Peter Georgescu says it’s time to end the era of shareholder primacy[1] which reviews Georgescu’s new book Capitalists Arise! End Economic Inequality, Grow the Middle Class, Heal the Nation (Berrett-Koehler, 2017). Georgescu, a fellow Stanford GSB “alumn”, is looking to chief executives to think about how, and for whom, they run their companies.

Capitalism is an endangered economic system, Georgescu says. He cites by economist William Lazonick, who studied S&P 500 companies from 2003 to 2012 and discovered that they routinely spend 54% of their earnings buying back their own stock and 37% of their earnings on leaving just 9% of earnings for investment in their business and their people.

“Innovation is the only real driver of success in the 21st century, and who does the innovation? Our employees. How are we motivating them? We treat them like dirt. If I need you, I need you. If I don’t, you’re out of here. And I keep your wages flat for 40 years,” says Georgescu, who points out that growth in real wages has been stagnant since the mid-1970s.

Georgescu continues by noting that the lack of investment in business and their people feeds back into demand, undermining sales growth. With median household income in the US less than 1% higher today than in 1989: “There’s no middle class, and the upper middle class has very little money left to spend, so they can’t drive the economy. The only people driving the GDP are the top 20% of us”. 60% of American households are technically insolvent and adding to their debt loads each year. In addition, income inequality in the U.S. is reaching new peaks: The top layer of earners now claim a larger portion of the nation’s income than ever before — more even than the peak in 1927, just two years before the onset of the Great Depression.

Georgescu blames the ascendency of the doctrine of shareholder primacy.

“Today’s mantra is ‘maximize short-term shareholder value.’ Period,” he says. “The rules of the game have become cancerous. They’re killing us. They’re killing the corporation. They’re helping to kill the country……..

“The cure can be found in the post–World War II economic expansion. From 1945 until the 1970s, the U.S economy was booming and America’s middle class was the largest market in the world. In those days, American capitalism said, ‘We’ll take care of five stakeholders,’. Then and now, the most important stakeholder is the customer. The second most important is the employee. If you don’t have happy employees, you’re not going to have happy customers. The third critical stakeholder is the company itself — it needs to be fed. Fourth come the communities in which you do business. Corporations were envisioned as good citizens — that’s why they got an enormous number of legal protections and tax breaks in the first place.

“If you serve all the other stakeholders well, the shareholders do fine,” he says. “If you take good care of your customers, pay your people well, invest in your own business, and you’re a good citizen, the shareholder does better. We need to get back to that today. Every company has got to do that.”

It’s refreshing to hear this from one of the grand old men of the commercial world in the United States. But in his critique of “shareholder value”, he fails to single out the principal beneficiaries, the chief executives and top management teams themselves (including our fellow business school alumni) who have exploited the system to cream off an ever increasing share of the rewards in salaries, bonuses and options, all the while failing to invest in productive assets, innovation, securing long term positions with customers and local communities, and in the people who work in the companies themselves.

[1] https://www.gsb.stanford.edu/insights/capitalism-killing-america?utm_source=Stanford+Business&utm_medium=email&utm_campaign=Stanford-Business-Issue-122-10-1-2017&utm_content=alumni

Jawbone, another unicorn washed away

And Noah looked out through the driving rain, Them unicorns were hiding, playing silly games.They were kickin’ and splashin’ while the rain was pourin’, Oh, them silly unicorns!

There was green alligators and long-necked geese, Some humpty backed camels and some chimpanzees.Noah cried, “Close the door ’cause the rain is just pourin’, And we just cannot wait for no unicorn!”

The ark started moving, and it drifted with the tide, And them unicorns looked up from the rocks and they cried.And the waters come down and sort of floated them away, That’s why you never seen a unicorn to this very day.

But you’ll see green alligators and long-necked geese, Some humpty backed camels and some chimpanzees.Some cats and rats and elephants, but sure as you’re born, You’re never gonna see no unicorn![1]

I advise a fitness monitoring technology company[2] and consequently have followed the rise and, as of this week, demise of Jawbone, which has run through $1 billion and was at one point valued in 2015 at $3.3 billion.

The company started out modestly, founded as Aliph in 1998, in the first dotcom boom. It started out making mobile phone headsets, launching a wireless version at the Consumer Electronics Show in 2007 prior to raising $5 million from Khosla Ventures later in the year and $30 million from Sequoia Capital in 2008. Bluetooth headsets followed (I think I may have had one) in 2009, and the Jambox, a Bluetooth compact speaker and speakerphone, in 2010.

Things started to go crazy in 2011, with three rounds of funding bringing in $160 million, new product launches and, most critically, entry into the into the lifestyle tracking market with a wristband product called UP by Jawbone. Product enhancements, acquisitions, awards for design, and citations – and the TED talks – for founder and CEO Hosain Rahman[3] all followed. May 2013 brought the addition of a heavyweight corporate board: Marissa Mayer, CEO of Yahoo!, and Robert Wiesenthal, COO of Warner Music Group as directors and Mindy Mount, corporate vice president and CFO for the Online Services division of Microsoft, as president of the company (although she was gone within 12 months) A further round of funding later in 2013 brought in $20 million more equity and $93 million of debt, followed by another round in 2014 bringing in $250 million and finally another $350 million of debt from Blackrock in April 2015.

A flurry of new product introductions, expanding into other areas of monitoring including heart rate and sleep – but complaints from consumers and technical criticism, and intellectual property suits from market leader Fitbit and a dispute with a manufacturing supplier in 2015 suggested all was not well. Later in the year a market research report suggested that Jawbone’s share of the fitness tracker market was only 2.8% and in November the company started to announce lay-offs.

After Reuters marked last week’s announcement that the company had placed itself in liquidation with a report titled “Death by Overfunding”, Jonah Comstock of Mobile Health News put out a call on Twitter to mobile health pundits for their views. Opinions included the company having too much money to spend and consequently under pressure to chase investor expectations with a need to do stuff – innovate (“random pet projects and pilot collaborations go no where and suck up precious engineering resources….. too pie in the sky- not enough rubber-meets-road”), launch new products, invest in marketing – probably ahead of its ability to deliver quality, and with the volume of activity generating internal turmoil and lack of focus, in marked contrast to the laser sharp strategy of rival Fitbit.

I’m not sure that this can be the whole story. But what is without doubt is that

the efforts of what I assume were bright and capable people on the front line – probably poorly led, directed and managed – failed to deliver output that delivered products and services that customers valued
the company burnt through a lot of money in a very short time, with the result that some very big investors destroyed a lot of value for the investors upstream of them
the presence of a board of heavy weight external directors did very little to secure the future of the enterprise.

(And perhaps sometimes it’s better to settle on being a green alligator, long-necked goose, humpty backed camel, chimpanzee, cat, rat or even elephant that can deliver value sustainably than a unicorn left “kickin’ and splashin’ while the rain was pourin’”)

[1] Shel Siverstein, 1962 (extensively covered, eg byThe Irish Rovers, Val Doonican and many others)

[2] HRV Fit Ltd, manufacturers of ithlete https://www.myithlete.com/

[3] Fortune magazine’s 40 Under 40; Fast Company magazine’s most creative people; Vanity Fair magazine’s New Establishment; TIME 100’s most influential people of 2014

Lessons from the misfortunes of Deutsche Bank and Twitter

“John Gapper has written today in the Financial Times about the problems facing Deutsche Bank and Twitter, very different companies but both coincidentally valued at about $16 billion and, but for different reasons, facing an uncertain future. He describes them as both lost in the past and argues that “unless a company finds a way to diversify and expand beyond its core business, it gets stuck”. He makes a good case for the first part of his diagnosis. The second, while well argued about the particular positions of Deutsche Bank and Twitter is far from true as a generalisation in that the both the commercial and non-commercial worlds are full of organisations that have thrived and survived without either diversify or expanding, but who have at least adapted.

The point he makes about Deutsche Bank concerns failed diversification and poorly conceived and executed expansion. He writes: “The obvious lesson from Deutsche’s experience is not to lose touch with your roots. “It strikes me that a lot of banks have lost a sense of what made them special in the first place,” says Chris Zook, a partner of Bain & Company, the management consultancy. The bank’s corporate business is outweighed by retail banking and securities trading, neither of which is doing well….. From early on, Deutsche decided that its founding mission — to challenge the hegemony of UK banks in financing foreign trade in the late 19th century — was too small a niche. But expanding into retail and small business banking, as it did after being reconstructed in 1957, was tricky.”

He describes the problem of Twitter as being a victim of the niche in which it was conceived, the 140 character SMS defined tweet, that now is on the slide and any enhancements are proving insufficient to cope with competition. He contrasts this niche definition at conception with the vision of Jeff Bezos who: “astutely started a business that was neatly defined yet had equally clear room to grow. He entrenched it in the public’s mind as an online bookseller before expanding into other products”. Gapper is conveniently ignoring Amazon’s first mover advantage. It is hard to remember now, but it was founded in the earliest days of the world wide web, in 1994, whereas Twitter only came into existence in 2006, when the internet was much further evolved and Facebook, for example, was already two years old.

Gapper contrasts Twitter with Facebook pointing out that it was restricted when first launched, with strict rules about who could befriend users, but Mark Zuckerberg was able to widen its scope by adding videos and messaging relatively early and with a strong revenue model that allowed him to generate both investment and cash that allowed him to buy businesses like Instagram and WhatsApp to neutralise competition both by taking competitors out an enhancing the core service offering.

So what does Gapper think will happen next to these two: “Deutsche now wants to turn back to something closer to its origins, rebalancing towards corporate finance and asset management with less of the expensive grandeur of investment banking. Twitter seems more likely to take shelter within a bigger company”. This first option appears doable, and actually gives the lie to Gapper’s opening argument about diversification and expansion and, if not “sticking to the knitting” is returning to the knitting. In Twitter’s case, it appears that the only hope is finding another company who can replace the company’s interface with the external financial market with a hierarchical relationship to a group HQ and, if there are indeed value creating opportunities for a new parent, something that provides enough sustainable value in the broadcastable message of less 140 characters and audiences that seem fickle and ephemeral to justify an price that provides some sort of return to the existing shareholders.

Footnote: Gillian Tett reports in FT 30th September that Deutsche Bank paid staff 4bn euros in bonuses in 2006 and 2007 and 2bn in 2008.

Highlights from October 2016 Harvard Business Review

My two picks from the latest Harvard Business Review relate to two Escondido Framework themes: the way that executive teams have been the beneficiaries of the misunderstanding by shareholders (or, rather, their representatives on remuneration committees) of what motivates them and how the relevant market relationships work; and the need to think about employees as customers.

An article titled “Compensation, the case against long-term incentive plans” reviews the work of Alexander Pepper, set out in his book “The Economic Psychology of of Incentives: New Design Principles for Executive Pay (Palgrave Macmillan 2015). Pepper documents how pay for performance incentives, and Long Term Incentive Plans in particular, fail to work as proponents expected. The four reasons are summarised as follows:

Executive are more risk-averse than financial theory suggests
Executives discount heavily for time
Executives care more about relative pay
Pay packages undervalue intrinsic motivation

HBR’s review of Pepper’s work, in its Idea Watch section, comes not long after news broke in London on 22^nd August that Woodford Investment Management was to scrap all staff bonuses, based on the belief that ‘bonuses are largely ineffective in influencing the right behaviours.’

The second article of interest is an article by Cheryl Bachelder, CEO of fast food franchise Popeyes: “How I did it…… The CEO of Popeyes on treating franchisees as the most important customers”. It’s not so much the lesson expressed in the article’s title that excites me, but an extract in the middle of the text that takes the message a stage further, recognising staff as customers:

At one point in my career, I was touring restaurants to talk to team members about the importance of serving guests well. I met a young man who was not excited about my “lesson”. He asked who I was. “I’m Cheryl,” I said. “Well Cheryl,” he said, “there’s no place for me to hang up my coat in this restaurant, and until you think I’m important enough to have a hook where I can hang up my coat, I can’t get excited about your new guest experience program.” It was a crucial reminder that we are in service to others – they are not in service to us.