Leadership Outlook – April 2013

Global-tilt-mapGreetings. I hope this finds you well.

I enjoy speaking with leaders like you about the many changes underway in the business environment and I am pleased to have the opportunity this month to explore an issue that continues to come to the surface as part of the response to my new book GLOBAL TILT: Leading Your Business Through the Great Economic Power ShiftThe issue is one of competence and how to make sure the core competence of your company stays relevant in a tilted world.

Let’s begin by looking at what happens when a company’s core competence is not shed or replaced as it becomes less relevant.

kodak_10616252.1The sad breakup of Kodak, finalized by the recent bankruptcy court approval to sell some $500 million in digital assets, carries a warning that business leaders may have missed:  It’s not just your technology that may be growing obsolete but your whole approach to creating strategy.  In today’s fast-changing world, the central mental skill of leadership is the ability to identify long-term, large-scale opportunities. Once you spot those opportunities, you may have to build new capabilities to pursue them.

The problem for many of you is that this line of thinking is the opposite of lessons you have learned for much of your career: Stick to your knitting; stay with your core competencies.  For several decades, leaders have grown their businesses by finding new ways to apply their existing core competencies.  But that approach tends to prevent leaders from seeing that their company’s wonderful unique strength is becoming less relevant in today’s fast-changing world.

Look again at Kodak. In the late 1990s it expanded its film business into China, an untapped market that then-CEO George Fisher saw as an enticing opportunity for growth. At that time, it was impossible to get nationwide access to China.  Regardless, Fisher worked tirelessly to develop relationships with Chinese state-owned enterprises, provincial governments, city governments, ministries, commissions, and banks, and even played tennis with Zhu Rongji, who became Chinese prime minster in 1998.

Eventually the doors opened. In 1998 the company committed to invest $1.2 billion in two joint ventures to manufacture and distribute film, paper, and photochemical products in the country. Fisher wisely established the ventures in a way that gave local partners minority stakes in exchange for business assets, ensuring that Kodak would have operational control. Despite the political risk, it seemed that Kodak was making a breakthrough, and investors approved.

But while the Chinese deals expanded Kodak’s core business and leveraged its tremendous capabilities in film, they did nothing to solve its bigger problem: the shift to digital photography. Kodak had been pioneering digital technology since the 1970s. It had a crude prototype of a digital camera as early as 1975 and in the mid-1990s helped Apple develop its QuickTake 100 digital camera. Competing in digital technology was a different game altogether and one that threatened Kodak’s core business. The company didn’t dominate the field the way it did in film but was one of many players.  The market was also less predictable, and margins were lower. Much lower. According to a former executive, gross margins on the traditional business were a whopping 75 percent, while for digital imaging it was around 25%.

Despite the growing importance of digital imaging, the old business commanded the resources and management attention for too long.  Later efforts to speed the transition to digital were unable to stem Kodak’s decline.
There is an important lesson in this example for you – don’t rely on core competencies that are becoming less relevant; instead, build the competencies you need to keep your business vibrant.

But, where should you start?

Outside In, Future Back

Strategy making as usual is basically an inside-out, rearview-mirror approach that too often misses the opportunity or necessity for large-scale change. Wall Street is complicit in this myopic point of view. Even as George Fisher recognized the growing importance of digital imaging, Wall Street wanted earningsnow, which translated into “don’t change much.”

Expanding your lens and lengthening your time frame is a first step in spotting opportunities for your business (and yourself) and recognizing what core competencies will be needed and which ones will no longer be of value.  The concepts of Outside In and Future Back can help you take a fresh view of the macro environment:

  • Outside In thinking means looking at the business through the lens of a leader sitting elsewhere and identifying global trends without the existing assumptions, biases and rules of thumb.
  • Future-Back requires you to extend your time horizon as you assess the world and imagine what the competitive landscape will be some twenty years out. This longer time frame will help you see what trends are enduring, or unstoppable.

The point is to see what’s coming— soon or many years away— in time to adjust.  This kind of broad, forward-looking view informed GE’s decision to sell its plastics division in 2007. Top management foresaw that a move into plastics by the Saudi Arabian public-private partnership SABIC would ultimately alter the competitive game. Plastics were a profitable core GE business. But neither profits nor sentiment kept the decision makers from looking at the business with clear eyes. They realized that one of the unit’s core competencies was no longer going to be differentiated, given the incoming competition and commoditization. Reshuffling the portfolio for the future global game, they sold the division to SABIC for roughly $11 billion.

Jumping onto a new growth trajectory may require capabilities you lack or barely have.  That shouldn’t necessarily stop you.  Indian infrastructure company GMR, which built the Indira Gandhi International Airport in Delhi to rave reviews, knew virtually nothing about building or running airports when it made a successful venture into that business.  It partnered with experienced players it could learn from and worked hard and fast to build its competence.  This successful entry into the airport business followed similar moves into power plant and highway construction.

Fight the Short-term Beast

It’s true that publicly held companies in the North face a conundrum: How do you think ten or twenty years out when Wall Street thinks short term?  After all, the owners of capital are represented vociferously by middlemen such as fund managers, whose compensation rests on delivering near-term profits.

You have to recognize that the highest duty of a business leader is to build long-term economic value and an important skill for leaders who will succeed in our tilted world is the ability to clearly communicate the logic of your short-term/long-term balance and direction—to investors if you’re a CEO or to higher-ups if you are a middle manager. You must build credibility in your efforts to balance the short-term with the long-term through execution and clear, vision-driven communication.

Another part of fighting the short-term beast is ensuring that you are not only thinking about the future, but also investing in it. Companies like IBM, Johnson & Johnson and Amazon build these kinds of investments into their budgets to support their visions of a short-term/long-term balance and I encourage you to consider doing the same.

Finally, it will be important for you to change your psychology. Outside-in, future-back thinking is one way to break the mental barriers.

Has your company had to abandon a core competence?  Or did you have to build a new one? I invite you to share your thoughts on my recently created Facebook page and I look forward to next month’s communiqué.

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Global Tilt

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