Best
Business Books 2016: Strategy
When Britain surprised the world by voting to
exit the European Union last spring, any book publisher worth the paper it was
printing on should have sensed the opportunity for a timely meditation on the state
of globalization, or a chance to discuss the fragile thing that is modern
industrial society. And the lesson was a familiar one: People don’t always do
as the prevailing wisdom would have them do.
This
year’s three most compelling books on the topic of strategy touch on how to
plan for, quantify, and cope with unpredictability in life, business, nature,
and geopolitics. The first two — Yossi Sheffi’s The Power of Resilience and
Robert Salomon’s Global Vision — are explicitly about managing
the risks faced by leaders of large global enterprises. The third, Friend
& Foe, by Adam Galinsky and Maurice Schweitzer, is about relationships,
both personal and business, and how to navigate the opposing forces of
cooperation and competition that underlie them all.
Resilience
Is Powerful
Most
corporate managers and business school professors simply accept globalization
as an unalloyed good. After all, if your goal is to sell more of something,
more potential customers must be better than fewer. But although globalization
does hold out the promise of boosting revenues, cutting costs, or both, it also
exposes companies to all manner of new risks. Yossi Sheffi’s The Power
of Resilience: How the Best Companies Manage the Unexpected, which stands
head and shoulders above this year’s crop of the best business books on
strategy, does an excellent job of covering the most important of those risks
as well as best practices in everything from preparation to monitoring to
drawing up crisis playbooks. And it does so while focusing on a relatively
obscure corporate competence: supply chains.
An
entire book on supply chains would seem to be a slog and particularly narrow.
But The Power of Resilience is actually a bit of a page
turner, with implications that go beyond tactics to strategy. (Stories of
disaster always help a narrative along.) A professor of engineering at MIT
and director of the school’s Center for Transportation and Logistics, Sheffi knows
his material cold, and the book benefits from an obviously fat Rolodex of
personal contacts at crucial points in various supply chains.
Sheffi delivers exactly what his subtitle
promises — an explanation of “How the Best Companies Manage the Unexpected.”
And there’s plenty to unexpect: In 2016, managing the supply chain of a global
enterprise such as microprocessor maker Intel or automaker GM is about as
complicated as the science that goes into the chips or the cars themselves, and
possibly more complicated. When catastrophic events such as Japan’s March 11,
2011, earthquake and tsunami and subsequent nuclear plant near meltdown happen,
dozens of crucial suppliers can be put at risk. Both the quality and the timing
of the corporate response can determine whether the unexpected ends up costing
a company millions or billions of dollars.
The unexpected starts with natural disasters
such as earthquakes, hurricanes, or fire; in 2011, companies lost US$360
billion to nature’s whims. But disruptions are inevitable regardless of nature’s
input. Between 2003 and 2013, while worldwide GDP grew 30 percent annually,
global trade grew at almost double that pace, or 55 percent annually, and the
size of the world’s largest container ships more than doubled. A storm in
India, protests in Venezuela, a terrorist attack in Europe — the supply chain
of any global company can be disrupted somewhere, somehow, every single day.
When supply chains expand, companies (and
hence the economy as a whole) become exposed to new and novel risks along the way.
Not just risks to the flow of goods, but risks involving money and information
as well. Whether it’s so-called Deep Tier risks (disruptions at a company’s
Tier Two, Three, or Four suppliers), corporate social responsibility risks, raw
material risks, or something else, the hardened supply chain expert spends a
tremendous amount of time thinking about what could go wrong.
Sheffi makes a compelling argument in support
of proactive moves designed to enhance redundancy and flexibility, while
swatting away superficial conclusions such as the idea that supply chain
resiliency is an expensive option that pays off only in a disaster. Resilience
efforts, he shows quite clearly, can drive everyday improvement in costs,
operations, revenues, reputation, and responsiveness.
Sheffi’s discussion of how the “global
bullwhip” of corporate reaction to a crisis sends tremors up and down every
supply chain is also illuminating. If a retailer experiences an X percent drop
in sales, for example, leaders are likely to cut orders by 2X percent, both to
plan for softer future sales and to manage inventory. At the next node, the
size of the cuts might double again. Although consumer demand declined by only
12 percent during the 2008 financial crisis, inventories were shaved 15
percent, manufacturing sales declined 30 percent, and imports fell by more than
30 percent.
The book focuses the mind on the crucial
measure of time, starting with the speed of detectability (information can and
does flow faster than disaster itself) and going all the way through recovery,
which in some cases can take years. Consider General Motors and the 2011
earthquake in Japan. At first glance, the automaker determined that only 390 of
the more than 30,000 parts that go into each car were at risk. That sounds like
a rounding error, but supply chain forecasting also showed that a persistent
shortage of just a few of those 390 could shut GM’s entire production down by
month-end. The company dodged that worst-case scenario, but by mid-April, the
number of affected parts had risen to 5,329. This story has a happy ending for
the company: GM ultimately had to idle production only of Chevy Colorado small
trucks in Shreveport, La., for one week. Consumers probably didn’t even notice
the slight and temporary reduction in the range of vehicles available.
Other stories don’t end so well. In early
2007, a shortage at a paint supplier of toymaker Mattel resulted in the company
having to use a backup supplier that insisted its product was safe. It was not,
and Mattel ended up recalling some 2 million toys and paying a fine of $2.3
million for violating a federal ban on lead paint.
Sheffi outlines the many things you want to
have in place before a disruption, starting with a crisis communications
protocol. Before Hurricane Katrina hit land, for example, Procter & Gamble
had plans in place to ensure continuity of pay, interest-free loans, and even
counseling for its employees in the storm’s expected aftermath. Cisco employs
an in-house Resiliency Index to score and then monitor all product
introductions. The company also has at least 14 supply chain incident
management playbooks, and four levels of alert: L0 (“watching”), L1 (“minor
impact expected”), L2 (“$100 million impact expected”), and L3 (“$1 billion
impact expected”). The Hershey Company keeps six months’ inventory of milk
chocolate in a secret refrigerated warehouse.
If you’re in the market for a thoughtful
how-to detailing others’ handling of a crisis you yourself may just see one
day, this is it.
Quantifying
Risk
Sheffi’s
book is a master class on the need for business strategists to reimagine
complex networks and use human intelligence, insight, and experience to find
ways to plan for risks proactively. But what if it is possible for number
crunching to do this task? What if we can turn over the risk-assessing strategy
to a computer? That, in effect, is the argument Robert Salomon makes
in Global Vision: How Companies Can Overcome the Pitfalls of Globalization.
Salomon, an associate professor of
international management at New York University’s Stern School of Business,
approaches the challenge from a perspective that is similar to the one Sheffi
uses. Business is getting ever more global, but risk increases when you do
business outside your home turf. It’s a phenomenon described in the field as
the “liability of foreignness.”
The liability arises thanks to differences
among countries in consumer tastes, business practices, and legal systems.
British supermarket giant Tesco, we are told, “learned the hard way that it is
important to understand the local consumer culture” when it lost nearly $2
billion on its disastrous U.S. rollout of its small grocery stores, “Tesco’s
Fresh & Easy.” The brand occupied the middle ground between convenience
stores and supermarkets, only to realize that few customers were looking for a
third way.
Likewise IKEA, whose 15-year struggle in
Russia provides a “hard lesson” about the fact that in some countries, your
power supplier might back out of a contract, be sued by you, and then win a
judgment in its favor. In other words, some countries might say all the right
things about foreign investment, but when push comes to shove, local interests
will take precedence, even if the law says otherwise.
Instead of looking to the best practices of
the Fortune 500, Salomon seeks salvation in data. The ease or difficulty of
doing business in another country isn’t determined only by the norms and
culture of that country; it’s also determined by the ease or difficulty of
doing business that you’re accustomed to in your home country. Salomon believes
it is possible to measure and express as a number such differences as the
“institutional distance.” And, he continues, “studies show a positive correlation
between institutional distance and the level of risk in doing business across
countries.” When crafting a global strategy, he argues, executives would be
well advised to calculate that distance.
The next step is to factor that knowledge and
information into investment decisions. Salomon has developed an institutional
risk pricing algorithm, Global Acumen, that helps quantify and value the risk
of operating outside a company’s home market. In short, when discounting the
future cash flows of a project, the cost of capital (aka the discount rate)
used to justify potential international expansion needs to be adjusted for the
increased risks of taking that step. A proposed Starbucks in Senegal, for
example, should use risk calculations different from those for a possible
Starbucks in Seattle.
It’s difficult to argue with the logic of
this data-centric approach to strategy. But we journalists don’t always share
the faith of social scientists that if we could just get our hands on the right
data, everything that matters could be calculated with great precision. Too
frequently — the 2008 financial crisis, Superstorm Sandy, the Arab Spring, the
2016 Brexit vote, terrorist attacks in Europe — events roll out in ways that
defy precision, amplify risk, and confound the best-laid plans.
Frenemies
with Benefits
Uncertainty
doesn’t pertain simply to the way events unfold. There’s also great uncertainty
in the relationships we have with one another as individuals, managers, and
executives. In Friend & Foe: When to Cooperate, When to Compete,
and How to Succeed at Both, Adam Galinsky and Maurice Schweitzer describe
how to understand and navigate this ambiguity successfully. “[The] question —
should we cooperate or should we compete — is often the wrong one,” write the
authors. “Our most important relationships are neither cooperative nor
competitive. Instead, they are both. Rather than choosing a single course of
action, we need to understand that cooperation and competition often occur
simultaneously and we must nimbly shift between the two, and that how we
navigate the tension between these seemingly opposite behaviors gives us
profound insight into human nature.” (The authors themselves represent this
dynamic: Galinsky teaches management at Columbia Business School, and
Schweitzer teaches at the University of Pennsylvania’s Wharton School. The two
institutions are fierce rivals for students and faculty.)
This is a fine strategy for going through
life, but also for thriving in competitive arenas, such as business and sports.
To buttress their case, the authors draw on research not just from the social
sciences (psychology, economics, sociology, political science) but also from
animal studies that reveal the primal essence of it all and neuroscience that
purportedly reveals that the tension between cooperation and competition is
“wired into the very architecture of the human brain.”
It turns out there’s an evolutionary basis
for why humans, and the organizations they build, toggle between cooperation
and competition. Galinsky and Schweitzer write that three “fundamental forces”
impel us to act as both friends and foes: Resources are scarce; humans are
social beings; and our social world is inherently unstable and dynamic. In
other words, not everyone can have everything they want, so most of us are
compelled to compromise more often than we’d like.
The same fundamental forces are at work in
the corporate arena, as well. And we can see this in hypercompetitive realms.
Take bicycling. In the Tour de France, resources — stage victories — are scarce
and the outcomes are always uncertain. So it’s not uncommon to see riders and
teams, all of whom are seeking their own glory, cooperate to set the pace,
chase down breakaways, and deny victories to others. Or take entertainment and
media. Resources such as advertising dollars and viewers have become scarce for
incumbents. The future of distribution and business models is highly uncertain.
So a handful of companies that usually exert great effort to dominate one
another — Disney, Time Warner, 21st Century Fox, and Comcast — have joined
forces to build Hulu as a content platform. In the automotive industry,
companies that compete fiercely have banded together to support fundamental
research on alternative fuels and batteries, and to develop common standards.
Galinsky and Schweitzer argue, correctly,
that circumstances should dictate the ways in which we relate to our
counterparts on a strategic level. At the end of the day, we’re all frenemies.
by Duff McDonald
http://www.strategy-business.com/article/Best-Business-Books-2016-Strategy
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