Day 21 – Tuesday Sept 28th 2010

After many days of gorgeous weather, today started of with a gloomy outlook - cloudy and dull.

After classes yesterday, we had a short session on 360 degree feedback. Before coming here I had asked our bosses, direct reports, peers and others to give feedback - this was done by an organization based in the US called Personnel Decisions International (PDI). The PDI folks distributed our feedback in sealed covers - since most of the participants here are familiar with the 360 degree process, there were only a few questions. We can schedule two sessions with the coaches from the PDI over the next 3-4 weeks, to help us understand the feedback better and work on an action plan.  More about this after I meet some one of the coaches to understand the report better.

If its Tuesday, its an early start. Today we have three sessions: the first on a Global brand roll out study of Colgate by Prof. Quelch, the second a case of Leveraged Recapitalization and a lecture by Prof. Tushman on Organization Alignment, Architecture and Culture.

The Colgate case examines the steps leading to the introduction of a new product by a very well respected brand in three different global markets - the USA, China and Mexico.

• We saw some ads used by Colgate and debated the down side of using a celebrity in the ads - when you use a celebrity the linkage may be with the celebrity rather than the brand.
• In global roll outs, the big issue is standardization vs adaptation. Of course the regional marketing manager, in order to justify his role, will find hundreds of reasons to justify why the product has to be adapted to the local market. This is a trade off
• There are costs associated with adaptation
• Direct cost of adaptation
• Opportunity cost of lost sales or market share due to delayed launches
• Increased marketing launch costs due to delay
• Delayed launches of successor products - because there is only so much a sales chain can absorb in terms of new products
• Administrative and complexity costs
 

• The advantages of adaptation should be : increased sales and market share, testing alternatives, buy-in from local teams and motivation
• The advantages of standardization are: speed, consistency and administrative efficiency
• Key question to ask : are the extra costs of  adaption offset by additional profits ?
• One of the smart things done by Colgate was to market in all three representative markets - USA, China and Mexico - see chart below

• By doing this, they have the experience in three different representative markets - most other countries will fall into one of these quadrants and Colgate can then draw on the experience of the launch in the representative markets.
• Large global companies also have this issue of the role of the central marketing team and the local marketing teams - simplistic view is that the central marketing team focuses on direction and approving, whereas the local team focuses on informing and coordinating; of course both teams have to collaborate and persuade each other; this is like a pendulum, and we have to ensure that it does not swing to either end; and like in the case of the pendulum, the speed is the highest in the middle !

The second session was a classic case, where the company (Sealed Air Inc) announced a one time cash dividend of $40 per share. Now you must be wondering, there is nothing wrong with this. Here is the context:

• the share price of the stock in the prior 30 days was between $44 and $45
• it has been paying dividends for the last 10 years but never more than $0.18/quarter
• the total cash payout required was $330m, which was more than 85% of the market cap of the firm
• with only $54m cash in hand, it had to borrow more than $300m to pay the dividend
• After this, the firm had a negative net worth of $160m

Now, this should surely come as a surprise. These kind of transactions are called leveraged recapitalization. Now, I am not sure how the shareholders agreed to this, because in case the company goes belly up, there shareholders get nothing (because of the negative worth). Keeping this aside for a moment, why would anyone do this ? The logic was as follows: the company had good cash flow from operations, no additional capex requirements in the next few years, and no good acquisitions in the market - and if all this was true what do we do with the cash on hand ? Why not give it away to the shareholders, take additional debt and work towards improving the cash flow and repay the debt ? And this additional debt acts as a weapon against takeovers ! How did the market react ? After the announcement, the market price went up to $50, and ex-dividend price fell to $12. Through the year 1989, it slowly inched up to $23 and in the next 8 years, the stock reached a price of $246 ! The finance team pulled it off, without resorting to layoffs or downsizing ! Did they raise the risk of the firm, of course they did ! Interestingly, they tried it one more time - but this time, instead of paying a dividend by borrowing, they borrowed and bought a company ! Maybe luck did not favour them this time, as they got caught in a class action suit related to asbestos. 

Sometimes you wonder if all this financial engineering for the sake of increasing the value of the company is worth it or not. I suppose in the business world we live in, with market pressures and all the accompanied expectations of the capitalists, people will try all means - and take some risks. Some will succeed spectacularly, some will fail spectacularly !

The last session was a lecture on Organizational alignment by Prof. Tushman

• Culture is a combination of many things
• Norms, dress code, working late, conflict resolutions
• Values
• Communication and influence patterns
• Core beliefs
• power and politics
• key roles
 

• In most strong culture organizations, many of these are not documented - they are passed on from one to another, and if anyone violates a culture norm, then others tell her that this is not done here
• HBS is a strong culture organization
• For whatever reason, there is no question of missing classes; hence if the weather is bad with snow storms or something like that, the professors are required to stay in their rooms for the night - there are nice couches to sleep, apparently !
• Professors are required to be in fine suits for the class
 

• Nordstorm is another strong culture organization. They have only two rules - " Use your good judgment in all situations" and the second one being, " there will be no other rules".

I wonder if organizations with a strong culture can grow fast - that is when the culture and the firm's commitment to it gets tested. Culture should not ignore the social networks within organizations.  People have social power and formal power; social power comes from the need to be helpful, trust worthiness and ability to listen. In fight between culture and strategy, "culture will eat strategy for breakfast".

Context is very powerful. There is a famous experiment to measure the obedience to authority, even if that authority asked one do to acts which were  against one's conscience. This was done  by a Yale Professsor, which is known as the Milgram experiment. This shows a very strong context. For more information see wikipedia link. (http://en.wikipedia.org/wiki/Milgram_experiment )

There is another form of conforming context - called the social information process. There is another famous experiment called the "elevator experiment"  ( http://www.betterdaystv.net/play.php?vid=19442 ), which demonstrates this behaviour in people, where a person follows others behaving in a particular fashion.

Today two hours have been reserved for thinking about a personal case, so no classes in the afternoon. I used the time to go to the gym for 45 minutes - I have got into a good pattern of doing different things in the gym - which is a fantastic place to spend time.

More later ....