Category Archives: Growth Consulting

What Raleigh Can Learn From Chengdu

Many groups of people have been trying to spur innovation in Raleigh, North Carolina. One in particular, Innovate Raleigh, has sought to unite the educational community with economic development and entrepreneurship. Conferences, forums, and meetups all have been convened to help identify what needs to be done to create an ecosystem that is comparable to other areas of extreme innovation across the United States. What about overseas? What can be learned from places like Chengdu?Innovation ball

Chengdu, with a population of 14 million, is the capital of Sichuan province. It is the city where paper money — a colossal innovation — first appeared in 1024. The printing of the Buddhist canons “Four Books” and “Five Classics” made Chengdu the early center in the art of printing.Rowan Gibson, the co-founder of Innovation Excellence, describes Chengdu’s spirit this way: “Innovative thinking is part of its history, and it is shaping its future.”

John and Doris Naisbitt, who are well known for global trends and futuristic studies, have recently written a new book, Innovation in China: The Chengdu Triangle.  They make the following observations:

Innovation in Chengdu is growing out of a strategically planned nourishing business environment and an entrepreneur-friendly administration in a stable social climate. Following the principles of a well-run company, Chengdu’s leadership combines management and business acumen with social consciousness and, to a much greater extent than we have ever seen in a Western local government, a service-oriented administration. A good example of innovative service are the quarterly meetings the  mayor holds, and in which every problem, request or complaints must be solved or dealt with within three days. The first meeting was held in March 2003 and meetings have been held without interruption since that time.

The first pillar of Chengdu’s reform is its wider focus which is not exclusive on industrial development, but on a whole range of investment attractions. 

The second pillar of Chengdu’s innovation model is to seek to enhance the allocation and efficiency of “intangible assets.” 

The third pillar of the Chengdu model is bilateral exchange.  

Chengdu is dedicated to beat its innovation drums faster, louder and more insistently on all fronts. But Chengdu is only one of China’s many ambitious and competitive cities. High Tech Parks are growing like mushrooms after a warm summer rain and lure with high wages and $150,000 moving grant for top executives. Top-talents find support in Incubation Centers. Mentors, seed capital, offices and technological equipment are part of the package. China’s “Thousand Talents Program” aims to bring back 2,000 talented Chinese paying salaries between 60,000 and 360,000 Euro. Up to the year 2020 China is dedicating 15 percent of its GDP to human resources.

As we look at ways to broaden the Raleigh economy to capitalize on the success of the Research Triangle Park, the major research institutions, and a highly educated workforce, the Chengdu model is enlightening. We have witnessed the high tech park approach as a key economic driver in our history, and are hopeful that the next evolution of RTP will benefit Raleigh as strongly as the first few decades. The emphasis on Incubation Centers is important. Raleigh needs many such centers of innovation. Thankfully, organizations like the HUB and EntreDot are addressing this need. EntreDot is, in fact, expanding beyond its Kindred Boutique for artisan entrepreneurs and opening a new innovation center in Lafayette Village tomorrow (January 17, 2013).

Innovation centers that offer programs that do not include a strong mentoring component do not prepare entrepreneurs and existing businesses to optimize their talents. Seed capital is needed, as are offices and access to the right equipment. However, the entrepreneurial education and mentoring are key. Finding a way to attract talent back to the area is another idea whose time has come. Even in biotechnology and emerging, fast-growth sectors, study after study has stated the need for more top talent to run world class organizations. Let’s apply some of the principles of Chengdu to our own market and spur even greater innovation!

Private Company M&A Lacking Objectivity

One of the area of my consulting practice that is most enjoyable is advising clients on merger and acquisition issues. While very few of my clients actually do a deal, more and more are considering inorganic growth as a means to address both the economies of scale that come from combining back office solutions as well as what are perceived as historic opportunities to perform “roll-ups” in a variety of vertical niches. Understand that my clientele is exclusively privately held businesses whose annual revenues are under $50 million. In fact, in the $1 – $50 million range, they are usually on the lower end when we start working together. 

When I have the opportunity to become involved in a strategy conversation about the potential benefits of a transaction, then, it is not with multinational, public companies who are measuring cross border opportunities as a defensive mechanism to preserve market share against more aggressive competition. These facts notwithstanding, I enjoy reading research performed on the larger company front because many of the issues studied trickle down into my part of the market. This past fall, the global law firm Eversheds published a study, The M&A Blueprint: Inception to Integration, wherein the authors claim that deal teams need a more holistic approach and stronger connections between the planning, completion and post-deal integration phases. Amen!

The universe of participants in the study included 400+ large businesses who had pursued cross-border deals in the period 2009-2012. Many respondents felt that the inability to envision the end from the beginning (think through integration and beyond during due diligence) was the single greatest cause of unrealized potential. 

Robin Johnson, M&A partner at Eversheds, said: (bolding of phrases added)

The current economic climate has made the business of doing deals much tougher, with the research highlighting an acute awareness of risk in the process…Our research shows that the overriding factor contributing to the success of a cross-border deal, is the presence of a core team providing the ‘connective tissue’ to link all the phases together, taking the deal from the inception stage through to post-completion integration. Businesses need to start joining the dots between the different stages of the deal cycle to move the focus from just simply ‘doing the deal’ to thinking about life for the business beyond the deal.

The Eversheds report recommends a methodology that rolls out as follows:

1. Inception

  • From the start – 38% of deals where the in-house team were brought in too late suffered problems during integration.
  • Early warning – 59% of all respondents said they had spotted potentially damaging issues early enough to advise that a deal should not go ahead.

2. Planning and due diligence.

  • The crucial stage – 43% said the most common cause of the failure to realise value in transactions was down to avoidable errors in the due diligence and planning phase.
  • Joined up thinking – 70% felt that linking due diligence and integration planning together would help to improve the deal process.

3. Deal execution

  • What matters most – The reasons General Counsel would advise not to proceed with a deal were illegality/regulatory (45%), e.g. bribery, competition and antitrust, and commercial concerns (45%), e.g. price and valuation, litigation risk, integration costs.

4. Integration

  • A false saving? – 83% did not use external lawyers to a large degree during integration, although they were acknowledged to add value. The main reason for this was cost.
  • Avoid mismatches – 26% felt that the failure to realise value in a recent cross-border M&A deal was due to a misalignment between legal dealmakers and the day to day business team.

Recognizing that Eversheds is acutely focused on the implications for the legal field, they found that involvement of external transaction advisory experts earlier in the deal process yielded better results. Applying this thought to and the process outlined above to my own experience, I strongly recommend that cultural due diligence be brought front and center early on. Internal teams are not usually objective enough to evaluate their own culture, let alone that of another entity. When we delve into matters of governance, decision making, core values in action, executive team personalities and styles, we are able to more accurately predict what may happen in integration and beyond. If red flags go up, back away!

 

 

Do You Have an Innovative Strategy?

 

After a very long (10 days+) break from blogging, we are back on the job for the New Year today. The time away was refreshing and helped to restore focus. One of the reasons I began writing this blog last year was to develop a discipline for getting observations about small business management and strategy out of my head and into a “written” format. At some point in 2013, we will attempt to cull through last year’s blog posts, sort and organize them, and format all of the content into a cohesive story that should make a good book. It has been over 20 years since I published my last book and it will be fun to be in print again.

Back to the matters of management and strategy…I’d like to run through a few scenarios I’ve encountered with clients recently in an effort to highlight some of the ways business owners get “stuck” in their approach. One client is in the midst of a family business transition–none of which are what one would call a “piece of cake.” As with any business worth laboring over, this one has experienced enough success in its history that all parties think it has enduring value. All parties would be right–and wrong! 

Business valuations derive enhanced magnitude from observed plans for managing risk. The risk of the owner getting hit by a bus is, for instance, substantial. With no business continuity plan for such a horrible occurrence, the company that has taken years to build can be undone in a very short amount of time. Insurance is seen as a way to mitigate the impact of such an event on the financial performance of a business and its stakeholders. However, no amount of insurance can replace institutional knowledge. Most companies are operated based on lessons learned the hard way. When the person who remembers all the lessons is no longer around, others must climb the same painful learning curve and waste precious resources in the process. Taking the time to document what you have learned and how you apply that knowledge in daily management makes your company worth way more money–even if you never plan to sell it!

hourly billing agreementAnother client is a professional services firm that is struggling with the industry standard of billing fees on an hourly basis and all the timekeeping and dysfunction associated with this antiquated practice. In addition to the record keeping requirements, there are collection processes that are time consuming, result in write-downs, and become demoralizing. What we are implementing, then, is a change in the way business is done. We will begin to charge clients a retainer and a success fee. The retainer is some minor amount that basically allows this specialized practice to recoup some monies for overhead obligations while the team works on client issues. It is meant to encourage more calls from clients to discuss everyday items so that we become an extension of their management and leadership teams. The success fee is structured up front to be awarded to us for doing a better than average job. We work with clients when they are prospects to identify    how success will be measured before an engagement begins. we put the feedback responsibility in the hands of the client, and adjust our final payouts based on results.

These two examples illustrate how matters of strategy can be brought into the regular operations of any business. In every business we’ve encountered, there are things that are overlooked or left un-addressed because they are accepted rather than challenged. What are those things in your business that need to be tackled in 2013? How will you tackle them?

Your Perspective May Undermine Innovation and Value Creation

Every company, whether privately owned or with public stockholders, is concerned about its valuation. The value of an enterprise is enhanced when its future growth opportunities are well understood, documented, and pursued. Why is it, then, that so many small to medium size enterprises fail to articulate a compelling innovation strategy that will fuel the needed growth? Kevin McFarthing, who operates the Innovation Fixer consulting firm, argues that it can be a lack of perspective. He has seen too many companies obsessed with current period performance of the exclusion of the long term “big rocks” that must be put in place to build a foundation for sustainable success.

McFarthing evokes the Three Horizons model of the late 20th century in many consulting projects as a means to draw corporate executives’ focus into more far-reaching and significant perspective. Baghai, Coley and White first outlined the model in “The Alchemy of Growth” in 1999. Markets and technology are seen as drivers in the model and are depicted in the diagram below (from Tim Kastelle’s blog).

Three Horizons Model

 

McFarthing’s interpretation of the Three Horizons model is as follows:

The Three Horizons process forces an assessment of technology strengths and market dynamics. It then forces a view of how much resource is allocated to each of the Three Horizons. The example above shows Google’s allocation of 70/20/10, which will differ for different companies in each category. It also forces a portfolio approach to innovation.

It also helps to retain the concept of emergent strategy in your approach to the innovation portfolio, as the days of fixed long term planning are diminishing…You can’t just write a five-year plan, lock it down and expect it to deliver. Large companies must continually revise their perspective of the role radical innovation will play in their growth.

The balance of the projects and resource applied to each element of the portfolio should be decided by the top team in the company, and be dictated by corporate strategy. Incidentally, it’s not just the resource that should follow a strategic allocation; the use of management time should also follow the Horizon split. Too often resource is applied to the opportunities on the edge, but thinking time is taken up by the short term. It should be followed through, and the temptation to reallocate Horizon Three resources to fight Horizon One fires should be resisted.

Where the application of these principles falls apart in many organizations is in the allocation of strategic (often scarce and/or over-committed) resources to pursue what has been stated as a priority. You know the saying, “You gotta walk the talk.” Breakthrough innovation, then, must move from strategy and communications (though it needs to be thoughtfully developed therein) to execution via competent actions. The right combination of talent, unique skills, and initiative, when coupled with appropriate resources, produces an environment ripe for innovation to occur.  While some organizations are able to spur internal innovation, most rely on open innovation (external sources) to re-energize their enterprises. Even large companies like Kraft Foods estimated that 98% of IP in the food industry existed outside Kraft. Knowing that an industry leader like Kraft saw value in eliciting the help of others should embolden your team to admit the need for outside help.

Three Horizons, while instructional, is not the only model used to enhance one’s perspective on the opportunity for innovation. What these models have in common, according to McFarthing, are the following principles:

  • Make space in your portfolio for bets on radical innovation;
  • Balance your portfolio over different time frames;
  • Balance your portfolio over different technology needs;
  • Exploit the potential offered by Open Innovation;
  • Balance your portfolio over different market opportunities;
  • In all cases, stretch your view and take a broader perspective.

Sounds like good risk management, creative strategy, and a plan for sustainability rolled into one approach!

Innovating Words Make Healthy Corporate Hearts

 

Cheryl Heller, Board Chair of PopTech, a laboratory for disruptive innovation focused on technology and social change, says that,

The wealth of jargon used to describe intrapreneurship (itself a bit of jargon), innovation and corporate social responsibility is more exhausting than enriching, and as their importance becomes more evident, the labels and complexities grow. What’s the difference between corporate social responsibility, cause branding, cause marketing, and a triple (or sometimes lately double, as if we can just decide to leave the environment out of it) bottom line? Should companies now stop all their work on sustainability in order to focus on resilience? Has all independent thinking, or even perhaps all generative thinking inside big organizations become intrapreneurship?  What’s the difference between social innovation and innovation? What’s the relationship between design thinking and innovation? What’s the difference between disruptive innovation and incremental innovation? Is some innovation more innovative than others and is more innovation always better? And does anybody else see this as a silly and dangerously circuitous trap of our own devising?

The significance of the debate about the proper terminology is to find a means to communicate disruptive breakthrough ideas as a valuable corporate asset–without simultaneously creating anarchy! Words cited in Heller’s comment (above) evoke values and desired activities that can help an organization create–or sustain competitive advantage.  Yet, if innovation is perceived as an altogether separate category than “ordinary business,”  then it can be argued that no one will want to do what is methodical if they can be celebrated and rewarded for dreaming over practical execution of existing initiatives. Most organizations and their leaders would prefer that employees see the process of introducing initiatives as a normal part of their positions, rather than stand alone activities that become the topic du jour and are jettisoned when times get tough in favor of “that’s the way we’ve always done it here. (TTWWADIH)” 

TTWWADIH can be a pervasive attitude that implies that we can add to what exists, but should not be expected to improve what exists. In this scenario, positions and/or departments are launched rather than tackling sticky, often political issues. Star studded teams are put together many times to represent cutting edge thinking, only to exempt the teams from performance, which ultimately leads to demotivated executive management.

Yesterday, we looked at Scott Anthony’s HBR article about Medtronic, a company well known for innovation, and their efforts to become even more adept at broad scale innovation. The Healthy Heart For All product has been launched towards the rural Indian population target market. Medtronic is large, smart, connected, positioned and incentivized enough to out-hustle upstart competitors. Though they brought in a key intrapreneur, the company was effective in changing the corporate cultural stance on what it takes to be competitive.

No one wants an unmotivated workforce. Nor do we want idealists who are not well grounded. The concept to “innovate properly” is a core value of a former employer of mine who understood that creativity and innate personal responsibility for the benefit of others must work in concert. By including this core value in position descriptions, the leadership team recognized the need to challenge employees to see advanced initiatives as the responsibility of every employee–not an isolated activity. Furthermore, when innovation becomes the expectation, we don’t have to “stop the presses” to encourage innovative thinking and actions.

Find a way to articulate your expectations for intrapreneurship (or innovation if you prefer) (or corporate social responsibility if you are a part of a grandiose cause) inside your environment. Ask people to define what they mean when using these terms. Expect all employees to take initiative!