Day 16 – Thursday Sept 23rd 2010

A Linkedin group has been created for AMP179 by Joseph Sawicki (Mentor Graphics) - it was nice of him to have started this early - email has been sent to all AMPers. It is probably the best way to keep in touch. Thanks, Joseph.

One other interesting view was that, for any large catastrophe to happen (like the sub-prime crisis or the BP oil well disaster), many things have to go wrong simultaneously - or multiple players have to make mistakes almost together.

Today we have a special optional session - a joint session with the MBA students. Only some of us have signed up for this - I did not. But feedback from this session was on expected lines - mixed feedback. The students, I understand were more eager to answer questions and express views, disagree vehemently with other views and were eager to mix with the AMPers in the post-session cocktail and dinner reception. These students are quite smart and no wonder they land up in good positions. Interestingly one student observed, that the tough part was to get into HBS - not what you do here. That was not expected !

The first session today was how to structure earn-outs in an M&A - so that the focus is on the right performance goals. And the related issues of whether you fully integrate the new entity into the bigger organization, how do you communicate the performance goals,etc. 

If you structure the earn-out linked only to revenues and profits without a threshold value on both the parameter, it will cause dysfunctional behaviour. For example, if the team knows that it is not going to meet the profit goals, they might go all out and spend money to achieve the top line goal. Though difficult to achieve, earn-outs should be more holistic - with emphasis on revenues, profits, customer satisfaction, quality and people satisfaction - sort of a balance scorecard. We are going to have a separate session on balanced scorecard - eagerly looking forward to this session.

Incentives have to be a combination of short term and long term focused goals. And when buying a entrepreneur driven company, you have to plan for a post entrepreneur "look and feel" of the organization - otherwise you will have to keep incentivising the founders every year. And the approach one takes should also depend on whether you are buying a business or buying a set of very talented people.

There was an article which was circulated but not discussed in class, on how to exercise adequate control in organizations, where there is a need and an expectation that requires flexibility, innovation and creativity. The following diagram captures the essence :

There are four levers - most managers tend to excessively focus on diagnostic control systems - but the other three are equally important in the current business environments. Belief systems and boundary systems are like the yin and the yang to get the right balance. Boundary systems are like the brakes. And like racing cars, the fastest companies need the best brakes ! The most complex and difficult is the interactive control systems - these are like the :what-if" analysis - if one critical input or market data changes, what will be the impact to your business.

All businesses should have something like a "product / services vitality index" - which states that in the next three years, we will have x% of revenues from new services / products which do not exist today. This will ensure innovation and drive complacency out.

The Starbucks customer service session by John Quelch was fantastic. The issue being discussed was this :  Starbucks store growth and stock performance have been impressive but management has lost sight of its original core customers who are increasingly dissatisfied with in-store congestion and less able to enjoy the traditional, relaxing Starbucks experience.  How can Starbucks retain the loyalty of its original constituents while appealing to new segments that may not need or desire the total Starbucks experience?  Should it try to do both?

If your customer is not switching away from you, it could be either because of behaviour inertia or loyalty (to your product or service) - if it is the former, obviously you are on  slippery ground.  There was intense discussion on whether rampant growth has an inherent characteristic of destroying value - this is  very subjective.

The interesting question in front of Starbucks is : can two different customer segments co-exist. One thing is clear, that as markets expand there will be automatic segmentation of the market. In the Internet world, it is easy to serve multiple segments, primarily because the segments do not see what the others get/don't get.

I liked the quote made by someone senior in Starbucks, " we are in the people business serving coffee; not in the coffee business serving people" ! Almost true of all service businesses, isn't it ? 

The last session was the competitive dynamics and we were discussing the case of Dell. In the process we also discussed Intel's pricing policies - which are so fascinating, because:

• they kept a level playing field
• Encouraged players to sell more of the current generation chips, by stating that the next generation chips allotted to you will be in proportion to the volume of old generation chips sold.

Dell's attack on the PC industry is a classic example of good dynamics - go where the customers will be in the future, not where they are today; and do something different from the competition, which the competitors will struggle to match. They also had a complex strategy, in which all the subsystems were dependent on everything else and replicating any one subsystem was useless.

Prof. Rivkin's energy in the class is amazing. And I always wonder how they do it twice in the same day, because the whole AMP group is split into two sections. Which means all the professors have to teach the same topic twice in the same day !

Since the day ended early and since I was not attending the MBA class, I went for my run. Did about 6 km, which is not too bad.  The pressure of the week normally shows up for me by about Thursday, so doing a vigorous exercise is a great way to recharge yourself, at least partly, to reach the weekend - when we can do a full re-charge ! More later .........