Thursday, September 27, 2012

Who should lead Procter & Gamble out of the crisis?

Procter & Gamble (P&G) has had poor financial results as of late, and the Wall Street Journal is reporting that its CEO Robert McDonald is under pressure from hedge fund manager William Ackman. Ackman is convinced that Mr. McDonald is not the right person to lead P&G because of apparent inaction in the face of a three-year run of profit declines. I have earlier argued that it is simplistic to just argue for CEO replacement when things go poorly, and I could make the same case here: P&G has a high-quality, high-price position in many markets, which means it will temporarily suffer when the economy is doing poorly. In the long run it may do better by holding firm and waiting for the recovery than by changing its position.

However, the Wall Street Journal on P&G also documents clear mistakes that cast doubt on their current leadership. They may need to rethink their strategy. Is Mr. McDonald the right person to do that? Recent research by Adam Kleinbaum in Administrative Science Quarterly suggests that we can know the answer by looking at Mr. McDonald’s career. Mr. McDonald was a Tide brand manager before becoming a laundry business manager, then had stints in the Philippines and Japan before taking over regional responsibilities in Northeast Asia. His last functional job before COO and CEO was (surprise!) Fabric Care. In other words, Mr. McDonald was a laundry manager in a company that gets a large bulk of its revenue from laundry products. I don’t know for sure what a typical P&G managerial career looks like, but his seems pretty typical.

Adam Kleinbaum’s point is that managers with typical career paths get narrow interpersonal networks with limited opportunities to connect people (broker) across different areas of the organization. This matters because brokerage across different areas of the organization lets the manager contact friends who have different types of information than their immediate reports and learn about ideas and opinions that they would not otherwise have known. Such ideas from separate parts of the information, in turn, can be assembled like pieces of a puzzle to form new initiatives and renew the strategy. The usual tools for making new strategies, like working groups and committees, are often more political than such networks of friends and can be less frank. It is reported that they have been pure talking shops during Mr. McDonald's time.

There is a good chance that William Ackman wants to force renewal of P&G by replacing Mr. McDonald with someone from outside the organization. Given the size and complexity of P&G, it would probably be difficult to find anyone who could take on that job and be effective right away, so that would likely be a mistake. On the other hand, if my guess about Robert McDonald’s career path is correct, he is not a likely source of renewal for P&G either. The upside is that a large organization such as P&G should have a large pool of the type of manager that Adam Kleinbaum calls “organizational misfits”: people whose experiences have been so unusual that they have much better connections across the organization than the average P&G manager. Maybe the P&G board of directors should be looking for a few good misfits from within its ranks?

Glazer, Emily, Ellen Byron, Dennis K. Berman and Joann S. Lublin. 2012. P&G’s Stumbles Put CEO on Hot Seat. Wall Street Journal, Sep 27 2012.
Kleinbaum, Adam M. 2012. Organizational Misfits and the Origins of Brokerage in Intrafirm Networks. Administrative Science Quarterly, 57.
Wikipedia. “Robert A. McDonald.” Accessed Sep. 27 2012.

Sunday, September 23, 2012

Renesas Electronics: When the Network Cares about the Firm

Today there was news that a government-backed Japanese investment fund may be entering the fray to buy domestic firm Renesas Electronics corporation after takeover firm KKR has issued a bid. A piece of everyday protectionism, or is there a bigger story behind this action? Well, let us start with the fact that the current high yen means that there are more Japanese firms and funds buying abroad than the other way around, so Renesas is special.

Renesas makes specialized controllers that are used in a variety of industrial applications, and is best known for its high market share in the automotive market. In fact, car makers, who are normally wary of being too dependent on any one supplier, trusted Renesas so much that it came as a nasty shock to them when the great earthquake and Tsunami one year ago devastated some of its manufacturing facilities and caused delays in the delivery of essential parts. It was able to recover quickly in part from a massive recovery effort from its suppliers and customers, but it is still not healthy economically. As a high-quality firm with economic problems, it is a classic takeover target.

Strictly speaking that should not worry the government, because good takeover houses can inject necessary capital and improve their target before reselling them. These firms make a living by improving their target, not by destroying them. But the likely reason the government is worries is probably that Renesas’s customers are worried. As an essential supplier to firms across a wide range of industries, it sits as a hub in a network that creates a lot of value in aggregate. No doubt some of that value goes to Renesas, but not all: its customers also benefit a lot. What worries them now is that a new owner will take a cold hard look at each relation and cut those that don’t seem to pay off. That could destroy significant value for the customer firms and even the economy as a whole.

This is why the customers are now rallying to have someone – either the government or themselves – rescue Renesas. There is a network creating value that might go away if one isn’t careful, and there is merit in having a friendly owner. As Renesas is currently managed, the network around Renesas is worth much more than Renesas itself. That might be changed under new ownership such as KKR, or even under the same ownership and a tougher set of managers, but its customers are pretty happy about the current arrangement. Later I plan to write more about what makes networks valuable. For now, let the games begin: KKR versus the Japanese government.

Schlesinger, J. M. and B. Frischkorn. 2012. Japanese Government-Affiliated Fund Weighs Renesas Bid. Wall Street Journal, Sep 23. 2012.

Sunday, September 9, 2012

I See You: Face-saving Helps Negotiators Understand Each Other

We just completed a long education for executives for a World Fortune 500 corporation. The program included some negotiation exercises, and we talked to the participants about them afterwards. They found the negotiation stressful, and especially because the emotions were so strong when negotiating within the corporation and the same culture (all of them were from the same nation; I prefer not to say which one). It would have been easier to negotiate with outsiders, and even foreigners, they said.

It struck me as interesting that these managers were relatively unfazed by cross-cultural negotiation compared to negotiating with their compatriots. But, I should not have been surprised, because there is still much we don't know about negotiation. This is definitely odd given its importance for business. To take one example, the potential $34 billion merger between diversified commodities firm Glencore and mining firm Xstrata has been a long saga of negotiations between the two firms, as well as with large shareholders including some sovereign wealth funds. Currently, the tie-up seems to hinge on whether the Glencore can agree with Xstrata shareholder Quatar Holding on the price of Xstrata shares. One can imagine the stakes when representatives of these firms meet.

A key task in negotiations is to come to a common understanding of the situation – a mental model. When the parties even disagree on what is true and what is relevant and important, it is hard to even know how to negotiate, let alone reach an agreement. This is one of the key challenges in cross-cultural negotiations, where the gap in mental models is greater. It is one of the reasons I was surprised to hear managers express comfort with that situation. It turns out that we can explain who is more successful in reaching common understandings. In recent research, Liu and coauthors found that a concern for face-saving (for oneself and the other) helped negotiators get to a better common understanding and shared mental models. This was true for Chinese and US negotiators. Concern for face-saving also gave higher creation of value through finding win-win contracts, and higher satisfaction with the process.

It is easy to explain these findings, and to apply them. Face-saving means that the individual is paying attention to the concerns that the other is expressing, because face-saving in negotiations is something both sides have to collaborate to accomplish. Attention to the other also helps understanding and value creation. Concern for face-saving differs between cultures, but individuals also differ in face-saving within the same culture. In order to benefit from this knowledge, managers putting together negotiation teams need to be aware that the most assertive negotiators may be ineffective in inter-cultural negotiation: that style is the opposite of what a face-saving negotiator will use, and it risks destroying value.

Sunday, September 2, 2012

Sharing Less to Learn More: A Radical Rethinking of Productivity

Sometimes management scholars get findings that shake up established truths and make us rethink how firms function. These findings are often directly important to managers as well, because they question common practices that are used with the intention of producing better decision making, higher productivity, and greater competitive strength – but may turn out to have the opposite effect.

Ethan S. Bernstein published a paper "The Transparency Paradox: A Role for Privacy in Organizational Learning and Operational Control" that has just such a finding. The established truth is that transparency in production processes increases productivity because it allows faster learning from others, as problems are immediately seen and effective solutions can immediately be learned by others in the same situation. The idea is to use visibility along a production line to drive a fast learning curve of efficiency increases, and it is a key component of the vaunted Toyota Production System and Total Quality Management practices.

The problem is, his research showed it to be false. In a study design that combined observation of production practices with a controlled experiment, he made some very interesting observations. First, he showed that workers concealed production practices from managers even when production lines were fully visible. Their reasons for doing so was that they had formalized procedures for production steps (also a key quality control practice), and when they found ways to do things faster but still with high quality they preferred to do them under-cover rather than go through the procedure for changing the procedures. But that meant they were worried about getting caught. Second, he showed that the time and effort spent concealing these practices was a form of waste that was especially high when the production lines were visible, because managers could easily see far along the line. Third, he showed that the economic effect of this concealment was big. When some production lines were given privacy (through the kind of curtain that one sees between hospital beds!) while others were left open, the private lines outperformed the transparent ones by 10-15%. That’s a big number in manufacturing efficiency; especially for this firm, which was a contract manufacturer that got all its profits from making goods more efficiently than other contract manufacturers.

So what to do? Clearly, researchers need to find out whether there are conditions that make concealment likely and costly. It is not clear that visible production lines are costly at Toyota and all other firms using them too. If not, then we have to ask why. Managers need to reconsider the role of visibility in manufacturing efficiency. If privacy can give a 10 plus percent improvement in some firms, possibly also theirs, it is a good idea to reassess what they are doing and maybe hang some curtains as an experiment. In a decent-sized manufacturing facility, it takes less than an hour of more efficient production to cover the cost of those curtains!