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Smart business

Book cover

by James Leibert, Capstone, 2004.

Abstract

A consultant who helps to rescue failing businesses and develop new ones shares the best business and management ideas. He provides a valuable management compendium.

(Reviewed by Kevin Barham in October 2004)

(These book reviews offer a commentary on some aspects of the contribution the authors are making to management thinking. Neither Ashridge nor the reviewers necessarily agree with the authors’ views and the authors of the books are not responsible for any errors that may have crept in.

We aim to give enough information to enable readers to decide whether a book fits their particular concerns and, if so, to buy it. There is no substitute for reading the whole book and our reviews are no replacement for this. They can give only a broad indication of the value of a book and inevitably miss much of its richness and depth of argument. Nevertheless, we aim to open a window on to some of the benefits awaiting readers of management literature.)

James Leibert is a strategy consultant who helps companies rescue failing businesses and develop new ones. In just under 300 pages, he takes us on a ‘high-speed tour of the smartest business ideas’, showing which are useful and where to find out more. Along the way, he calls on support in the form of quotes and insights from some of the ‘most celebrated minds in business’ (‘smart people to have on your side’) - including Edward de Bono, Peter Drucker, Adam Smith, Tom Peters, Henry Mintzberg, Michael Porter, Rosabeth Moss Kanter.

Creating value for customers

The highest priority, as discussed in the first part of the book, is to create real value for customers as efficiently as possible - making money will inevitably follow. Creating customer value, says Leibert, is about servicing needs, not just providing products. By focusing on how to service the need rather than just selling a product, the opportunities for value creation will be much greater. Technology investment and learning are the keys to greater efficiency. New technologies like email are useful because they allow us to get more from less. Although we may need to invest heavily in a new technology to make use of it, even to serve only one customer, the incremental costs are very low - big is efficient when it comes to technology investment. It is vital to ensure every part of the value chain creates value efficiently - regard each step in the chain as a business whose aim is efficient creation of value for its ‘consumer’ next in the chain.

How to meet customers’ needs and earn their trust

To meet customers' needs, you need to understand what is valuable to them and how they make decisions. To be profitable in a competitive industry, companies need to offer customers more value or be able to produce more cheaply. Three strategies are available for avoiding direct competition based on creating more customer value; niche focus; differentiation; or innovation leadership (although the latter has problems as Leibert discusses later). Customers must be convinced that the product will actually deliver and their doubts must be quelled. Trust creates value for customers which can then be translated into higher prices. Customers’ confidence can be developed by good past experiences, demonstrated commitment and through a positive brand image. The author feels that ‘loyalty’ is something of a misnomer as it usually means either reciprocation for value already received or ‘lock-in’ where higher profits can be made from a customer’s inability to switch to a competitor.

Persuading customers to buy your products

In the short term, it is possible to influence customers’ decisions. But if influence is used to sell products that do not ultimately provide long-term value, the customer will resent it and the company will lose out financially in the long term. It is therefore best to focus on helping the customer come to an informed decision that is in their long-term best interest, and on reassuring them that their decision was correct. Leibert believes advertising is too blunt an instrument and that people tend to ignore it. The ‘hard sell’ is also self-defeating as it loses long-term relationships. Helping customers see the truth is the best plan - the firm trying to build trust in the long term should try to communicate the true value of the product and encourage word of mouth and other testimonial evidence to spread the news.

Producing products efficiently

The main way to become efficient is by investing in technology. A technology is a ‘big idea’ that allows you to create more customer value more efficiently. Most technologies require substantial investment, which is only worthwhile if the resulting productivity improvement outweighs the costs of the investment. Large investments are a double-edged sword as they allow efficiencies and limit flexibility. Technology breakthroughs can create an important competitive advantage but firms hoping to succeed as innovators must learn to innovate efficiently, produce lots of ideas, be open to ideas from unusual sources, and develop their ideas effectively and quickly. The ease with which products can be copied means that companies trying to win through innovation must come up with new ideas on a regular basis. A strategy of constant innovation, however, is unreliable, expensive and its gains are usually short-lived.

Big ideas are all very well, says Leibert, but they are not enough to be efficient. Much of the efficiency gains associated with new technologies only come when they are put into practice. Learning and gradual improvement are therefore the other keys to efficiency - with more experience, costs fall and quality rises. Accelerating the learning process and replicating the knowledge of experts is critical to the success of any company. Leibert recommends quality management as a formal way to accelerate learning. Knowledge management practices are also essential for maintaining and sharing learning - computerised knowledge management systems can be used to store ‘factual’ knowledge, although the ‘tacit’ knowledge (behaviours and intuition) stored in people’s heads is less easy to capture. The important thing is to make sure the experts stay in the company and then use them to train other experts.

Good management

The author goes on in the second part of the book to consider what constitutes ‘good management’. From his point of view, managers need to concern themselves with five critical tasks: (1) Vision-setting and communicating; (2) Planning actions to achieve the visions; (3) Organising people effectively; (4) Monitoring progress; (5) Developing organisational capabilities. Leibert says that managers need to become effective time managers before they can be great business managers, and suggests some time management strategies including: doing the big things first; asking the right questions; focusing on prevention (rather than ‘fire-fighting’); and delegating effectively.

How to delegate

The author sees delegating as the most important task of the manager and recommends an MBO (management by objectives) approach which consists of setting goals rather than duties. The key challenge is setting the right goals and developing self-sufficiency in employees. Goals should be controllable and within the employee’s competence. Self-sufficiency comes with trust, maturity and project management skills and takes time to develop. The move from duties to goals also requires companies to reassess the way they reward people. Rather than defining pay by a person’s job, people might be paid for the useful skills and experience they can apply to the project in hand. Incentive pay, however, should be dependent on achieving controllable goals and should be no more than 10% of total pay - much more will be de-motivating as it shifts attention from a job well done to making a judgement of an individual’s worth.

Managing strategy

Strategy, as Leibert notes, is the most overused word in business. He believes that strategy is about making choices for the long term. To do this, firms need to understand market dynamics as this allows them to predict where profits can be made and make better decisions about the future. Product life cycles have a big impact on profit opportunities and can change which parts of the value chain are most attractive. The author recommends the ‘market diffusion’ model for forecasting product life cycles (this depends on two variables - the take-up rate and the eventual market size.)

Other long-term trends also need to be taken into account when looking for new market opportunities. For example, predicting long-term demographic, economic and behavioural trends allows you to spot the emergence of new markets and predict which markets will grow or decline. Recognising that market dynamics are often difficult to forecast, the author suggests that companies can maintain flexibility by buying ‘options’ to let them delay major commitments until the uncertainty is resolved. (The author provides an introduction to valuing options.) When uncertainty is very high, the best approach is ‘guided opportunism’, adapting to circumstances and pouncing quickly on new business opportunities - though this is only viable if your competitors are also in the dark.

Creating a lasting competitive advantage

While competitive advantage can be achieved by being better at efficient customer value creation, to be sustainable it usually requires a core competence in a key process such as innovation or resource allocation. A more effective approach is to avoid competition by achieving resource dominance - dominating a limited resource in the industry (the author calls this the ‘heavy artillery’ of competitive advantage.) Most industries have limited resources somewhere in their value chain and the aim should be to obtain control of these resources as cheaply as possible In many industries it is possible to use standards or network effects to create strong competitive advantage. Managers might also seek the benefits of co-operation, using alliances with other firms as a way to acquire core competencies, limited resources and efficiencies.

Systematic planning

Companies use formal planning processes to ensure strategic issues are considered when undertaking major initiatives, to co-ordinate actions and to ensure that managers look to the long term. Typically companies use two planning processes - an ad hoc process for new project proposals and a systematic annual planning cycle. The capital expenditure allocation process is one of the most important levers available to senior managers for co-ordinating company activities and guiding strategy. Leibert sets out the questions that he feels should be asked about return on investment, risk and strategic fit when reviewing expenditure proposals. He notes that budgeting and strategic planning are often combined to reduce the burden on busy managers but suggests the combination may not always serve the best interests of either process as strategy is creative, contemplative and long-term and budgeting is analytical, commercial and shorter-term. (He supplements his recommendations on planning with sample investment proposals and annual plans and budgets)

The author recognises that strategy cannot be left to the formal planning process alone and draws on Henry Mintzberg’s ideas on crafting strategy to suggest that strategy creation should be the result of a dynamic interaction between operations (finding new ideas) and formal planning (deciding which activities to pursue and which to drop).

Designing an effective organisation

The choice of organisation structure is usually a compromise between different kinds of organisational benefits - we want the best of both worlds: large company efficiency and small company flexibility. The most important thing is to focus on the needs of processes critical to a company’s competitive advantage and build the structure around them. The author’s preferred approach is divisionalisation which, he says provides decentralised decision-making but centralised control. There is no talk here of new organisational forms such as network or virtual organisations, although the author does acknowledge that people work best in small teams as these provide better communication and higher motivation. Organisations can therefore benefit by using multi-functional project teams and high-performance work teams.

Managing change

With the pace of change in the business environment speeding up, coping with change is a critical function of management. Major change initiatives, however, are costly and traumatic mainly because of employee resistance. A process for accomplishing major change should focus on breaking down this resistance and should consist of the following steps:

  1. Create widespread dissatisfaction with the current situation.
  2. Provide a clear vision for the new company.
  3. A detailed plan of action.
  4. Set an example.
  5. Enforce the changes.

Major change processes can be brutal, says the author, and it takes a lot of time for an organisation to recover from them. So instead, companies should look for ways to make themselves more flexible by, for example, building an infrastructure that standardises ‘back-end’ processes where efficiency matters and allowing ‘front-end’ flexibility. Improving people’s attitude to change can be achieved by setting clearer strategic goals and increasing employee empowerment. ‘Intrapreneurship’ as a route to greater empowerment is not likely to work in every company, especially in operations-oriented firms, but there are elements that can be incorporated into any company, including the ability to rapidly assemble ad hoc project teams.

Keeping track of the money

Every business person needs a basic grasp of accounting. A good understanding of accounts, and profit accounting in particular, can tell you a great deal about where you are making money, where to look for more and gives early warning of problems. Because the timing of cash receipts and payments in a company is so variable, the main task of profit accounting is to match up all the revenues and profits from the same sale. Managers can use the principles of profit accounting to determine the profitability of individual activities, although how they deal with shared costs depends on the nature of the costs and on what decisions they are looking to make. Since investors care about returns rather than profits, the author recommends the use of Shareholder Value (profit less an additional charge for the cost of using investors’ capital) as a measure.

The future of business

The author looks briefly at emerging trends. The ascent of knowledge workers will mean more autonomy, project-work and use of contractors and requires companies to provide more meaningful work for people and better opportunities for self-development. The ‘connected world’ will bring substantial new opportunities for efficient customer value creation through new communication technologies. Managers will need the skills to manage across markets, countries, languages, and cultural boundaries and firms will need to benchmark themselves not just against their local competitors but with the best companies in the world. Social responsibility will be an increasingly important company objective and there will be greater pressure for managers to detect and punish unethical employee behaviour. Finding new ways to make labour-intensive services more efficient will be a key challenge.

Achieving personal success

The last part of the book considers how to achieve personal success. The author suggests that the best way to play organisational politics is to brand yourself as a ‘straight-shooter’, make plenty of friends and work on getting tangible results. Play to your strengths and avoid projects that you are unlikely to succeed with easily. (Contrast this latter piece of advice with that in another book, Beyond the Summit.) To become a great manager, you need to take time to develop your interpersonal, self-management and leadership skills. You don’t need to be charismatic to be an effective leader, as long as you meet four key needs: providing a clear, uniting mission; earning trust and respect; choosing the right strategy; and designing an effective organisation - the latter includes letting everybody know what they need to do and how it will contribute. You also need to improve your ability to learn and to develop your employees. The best way to learn is through frequent, immediate, positive feedback. Another great way to learn is to teach - acting as a mentor to someone else can be a great help in stimulating your own learning.

The publisher’s claim that this is the only book you will ever need to help you make sense of the business world is exaggerated, but James Leibert has certainly provided a very useful primer for anybody seeking a comprehensive approach to management in one volume. He says that, if there is one idea that he wants the reader to take away, it is the concept of efficient customer value creation because that is the principle at the heart of business and, is in the end, what every ‘fancy’ business theory comes down to.

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