Archive for December, 2011|Monthly archive page

The Dark Side of Creative People

Companies looking to kick-start innovation by hiring more creative people may want to think twice about this strategy, based on the findings of new research.  In a series of studies summarized in a recent issue of Harvard Business School’s Working Knowledge, Professors Francesca Gino (Harvard) and Dan Ariely (Duke, author of the best seller Predictably Irrational) found that intrinsically creative people tend to cheat more than noncreative people. In addition, the researchers found that inducing creative thinking tends to trigger unethical behavior.  The findings suggest that managers should consider the risks before unreservedly encouraging creative thinking.

Philosopher René Descartes, in his famous 1641 treatise Meditations on First Philosophy, introduced the idea of an “evil genius,” a powerful force of nature who is equally smart and deceitful. The World has experienced many examples of the evil genius including Soviet dictator Joseph Stalin, Professor and Unabomber Ted Kazynski and Wall Street villain Bernie Madoff. Clearly, Descartes was on to something.  Is there a correlation between creativity/genius and unethical behavior?

Gino and Ariely explored this question in a number of experiments involving employees and students. In one study, the researchers surveyed 99 employees at an American advertising agency, where some roles (e.g., art direction, copywriting) required much more creativity than others.  Gino and Ariely asked the participants to reply to a questionnaire on how likely they were to engage in ethically questionable work behaviors such as “inflate your business expense report” and “take home office supplies from work.”  In another phase of the study, the researchers explored how participants behaved when faced with various hypothetical scenarios that were ethically ambiguous in nature.  Finally, Gino and Ariely looked at whether promoting creativity within a group would trigger an increase in cheating afterwards.

Research results

The study’s findings were telling:

  • Inherently creative people cheated more than noncreative types. Specifically, participants who had scored high on a creativity scale were the most likely to exhibit unethical behavior, especially when there was a potential for monetary gain. 
  • People who have been primed or induced to be more creative were more likely to display unethical behavior.
  • The higher the creativity required for a job, the higher the level of self-reported dishonesty.

Cogito ergo sum

By their very nature, creative individuals have an elastic moral sense that helps them rationalize different behaviors and deal with ambiguous situations. According to Gino, the findings suggest that “…moral flexibility is the mechanism explaining why being in a creative mindset or being a creative person puts you more at risk to do the wrong thing. Our ability to justify things is significantly greater if we are in a creative mindset or when we are creative people.”

Management implications

Obviously, creativity is not a bad thing.  It should be part of most performance measurement systems and corporate priorities, albeit with structural and process safeguards.  In their search for innovative thinking, leaders should be careful not to staff their teams exclusively with creative types or give the decision making responsibilities solely to creative people.  Moreover, Gino cautions that, “As a manager, if you’re highlighting the importance of being creative and innovative, it’s important to make sure that you’re stressing the presence of ethics, too.  She goes on to hope “that managers will start thinking about how to structure the creative process in such a way that they can keep ethics in check, triggering the good behavior without triggering the bad behavior.”

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

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Turning industrial waste into gold

The idea that waste from a manufacturing process can be reused or sold is fairly well established.  In agriculture, cast-off corn husks are being converted into animal feed, while discarded cow parts are turned into everything from leather to jet engine lubricant. Harvard Business School professor Deishin Lee has pushed the notion of waste management even further with her concept of “by-product synergy.” As outlined in the school’s Working Knowledge newsletter, BPS is about taking the waste stream from one industrial process and using it to make a new product. According to Lee’s research, a BPS strategy can: 1) boost profits by reducing waste disposal fees;   2) create new revenue streams by using the waste to develop new products;  2)  decrease the environmental impact of a process and;  3) improve operational efficiencies through increased manufacturing utilization. 

Virtually every manufacturer defaults to a disposal or sale strategy when dealing with waste.  BPS looks at waste more strategically by asking a simple question:   What is the maximum value that can be extracted from the by-products given existing inputs, processes and capabilities?   At its full potential, BPS leads to the development of new products, derived from the by-product waste, and delivered through the same production process.

To tie her conceptual thinking into a practical tool, Lee developed a scenario-based model that is driven off the relative value of the original waste-generating product, the cost of waste disposal, and the cost of raw materials:

Scenario 1 – Waste has low value and utility  

Since the by-product is of low value, a company should not commit too much time or capital to repurposing the waste.  To maximize profits, firms would seek to dispose of the waste through traditional means and look for easy and inexpensive opportunities to turn some of the waste into a new product.

Scenario 2 – Waste has significant value and utility

As the value of the waste increases, managers would explore how to “productize” it within the existing operational model.  In some cases, there may be a profit incentive to actually increase the production of the original product in order to generate more “waste.” Though profits of the legacy product might fall due to market saturation or reduced operational efficiencies, the incremental revenue and profits from the secondary product could more than compensate for the loss.

Lee uncovered this insight in her study of Cook Composites and Polymers Co., a manufacturer of gel coats for premium yachts. One of the by-products created in the manufacturing process was styrene, a chemical used to clean molds between batches.  Interestingly, the firm discovered  styrene can also be used to make coating for concrete. Through productizing the styrene waste stream, the company gained more options to optimize the joint production process, creating a win-win situation for both products.

The operational benefits of manufacturing multiple products in one line will not always be apparent. Competing product priorities could generate capacity and workflow challenges since BPS implies a proportional volume relationship between products.

Scenario 3 – Waste is more valuable than original product

The company may discover that the by-product is more profitable than the legacy product. In this case, a consumer goods producer might deal with the problem by sourcing virgin material to create more of the secondary product. Not only does the company reduce costs for the original product by cutting down on waste, but it also gains competitive advantage over other firms for the secondary product – who are limited to sourcing virgin material.

Environmental questions

While BPS can deliver new revenues and greater operational efficiencies, its environmental benefits are not always clear cut.  According to Lee, “As you create more value and demand for your by-product, and you increase the quantity of everything, then emissions might increase, depending on process characteristics. That could be the unfortunate part of being successful.”  Furthermore, it is hard to quantify the net effect of a joint manufacturing process on the environment, as BPS may change the nature of the environmental impact.  In essence, Lee asks “Is it better to have carbon emissions or toxic waste in a landfill?”

Manufacturers with hundreds of inputs and complex production processes could face a dizzying array of BPS options.  To choose wisely, managers should apply a market lens to focus on what current customers want and what the company is well-positioned to produce. Properly planned and managed, BPS can be the alchemy that turns industrial waste into gold.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Breakthrough with business model innovation

Many companies find themselves in situations where following the ‘same old strategy’ has little chance of reigniting growth.  Realistic CEOs will quickly come to the realization that when the going gets really tough, the tough innovate their business model.  Business model innovation is a high reward/high risk move that is normally preceded by a financial crisis, the emergence of a compelling market opportunity, or a fatal decline in competitive position. 

Some of the World’s most successful companies – IBM, Amazon, Apple and Google etc – have gained a sustainable competitive advantage and industry-leading shareholder returns by moving boldly away from their traditional business models.  To successfully navigate a shift, leadership needs a true picture of their current prospects, a vision for the future and the perseverance and courage to shepherd major change.

BMI is a fancy term to describe company-wide innovation around i) the value delivered to customers and ii) the operating model to deliver that value.  As compared to incremental product and operational innovation, BMI is a more encompassing and complex form of innovation.  It impacts the core beliefs around the business and market.  For example:    

  1. Do the targeted customer segments have unmet or emerging needs?
  2. What is the ideal product/service mix to satisfy these needs and maximize revenue?
  3. What is the most profitable operational model to deliver this value? 

Disruption is coming

Many factors can contribute to an environment where a company would seriously consider revamping its business model.  Markets can become commoditized, resulting in zero profitability for most of its players; a firm’s cost position can become untenable; a technological breakthrough can provide opportunities to serve users in a completely new and powerful fashion or;  a new regulation creates the potential for the industry structure to change.  Bold and visionary leaders who are prepared to make major moves can reap considerable benefits.

Superior returns are attainable

Properly designed and executed, BMI is a proven business-building strategy.  Research from the consultancy BCG has shown that total shareholder returns versus peers for BMI was five times higher than product or process innovation (8.5% vs 1.7%) over a 3 year period and over 55% higher (2.7% vs 1.7%) over a 10 year period. In many cases, BMI practitioners have leapfrogged competition and carved out new market space.   

Your move

Companies often pursue BMI for defensive reasons.  In many cases, however, leaders may choose this strategy in order to change the rules of the game.   BCG studied the implementation of BMI in a variety of industries.  Below are 3 success stories:

1.  Beating Back Competition

In an effort to compete with a successful low-cost airline, Virgin Blue, Qantas launched a new, ultra low cost airline, Jetstar.   Structured as a separate division with a business model designed from the ground up, Jetstar was effective in blunting Virgin Blue’s share growth while providing consumers with a unique and customizable flying experience.   

2.  Reigniting growth

By 2001, Apple’s proprietary and closed approach to hardware and software development had relegated the company’s PCs to niche shares.  By leveraging its unique and compelling core capabilities and brand, Apple was able to create entirely new categories of consumer electronics and smartphones through the iPod and iPhone platforms.  As well, Apple used its proprietary advantages and outsider status to establish the de facto standard for fee-based music downloading, a model that had evaded the music industry for years.

3.  Extending the business model

Ikea discovered, through its experience launching stores in Russia, that the land value surrounding its new outlets would appreciate markedly following a store opening.  The company decided to capitalize on this happenstance by leveraging its brand and real estate competencies to develop adjacent malls.  Ikea’s new division, Mega Mall, now makes more profit on building and managing malls than it does through its retail division.

Making BMI work

Organizations considering BMI need to ensure they have the capability to design, plan and implement a major transformation.  The challenge of pulling this off must not be underestimated.  Experience is usually scarce as firms do not often retool their businesses.  Moreover, BMI is typically undertaken in times of internal stress, limited resources and competitive pressure. For company’s considering BMI, they would be well served  to use a proven approach to transformation.  Our firm deploys this simplified 4-step process:

Know thyself

  • How urgent is the need for change?
  • What are our strengths and weaknesses?
  • Are there any assets that can be extended beyond the core business? 

Uncover opportunities

  • What gaps exist between the current value proposition and delivery model, and industry trends, underserved customers needs/preferences and relative industry competitiveness?
  • What new offering, value proposition and operating model can address the gaps?
  • How do you generate high margin revenues?

Align

  • How do you reorder the value chain?
  • What resources – capital, talent, assets, information – are needed?
  • What is the impact on the organizational structure and culture?

Implement

  • How do you mobilize the organization to change?
  • How do you deal with barriers and risks such as customer retention?

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Planning for the next Black Swan

Companies have been through a lot over the past 10 years – 9/11, SARS, and the 2008 financial crisis to name but a few catastrophic events.   If you thought we were done with major global disruptions, think again.  Looming on the horizon are potentially new Black Swan events like a Eurozone collapse, a possible war in the Middle East  or a major Chinese currency devaluation.  All of these threats dramatically amplify business and financial risk for companies, their markets and their employees.     

Coined by Nassim Taleb in his 2007 bestselling book, a Black Swan is a major occurrence that is unexpected and generates a tremendous impact. In spite of its outlier status, human nature invents explanations for a Black Swan after the fact, making them explainable and predictable.   These low-frequency, high magnitude events can be triggered by any one or a combination of factors within the realm of  politics, technology, healthcare, economics, the environment or government policy.  Although they are very difficult to predict, Black Swans have occurred on a regular basis, somewhere on this planet, over the past 75 years. Many commentators believe that catastrophic events are becoming more prevalent due to issues such as climate change, poor regulatory oversight and increased political strife in weak states. 

Not only is the frequency of Black Swans increasing, but so is their magnitude. Dynamic such as faster communications, pervasive global supply chains, and ubiquitous social networking create conditions that increase interdependence, accelerate the pace of change and restrict management control. Disruption can come to a firm directly through its assets, customers and employees or indirectly through its partners, suppliers and regulators. As examples, the great Japanese earthquake of 2011 led to parts shortages in North American plants.  The 2008 collapse of Lehman Brothers triggered a global liquidity crisis. It’s no longer a question of whether a Black Swan will impact your firm, but when and how.  

Typically, large companies rely on enterprise risk management systems, or worse, management judgement, to predict potential interruptions to their operations.  However, standard ERM approaches are problematic when it comes to forecasting Black Swans.  For practical and budgetary reasons, these systems focus on the risks organizations typically encounter – around people, finances and business continuity – while ignoring the myriad of low-frequency risks beyond a company’s control.  Furthermore, these systems can not account for management bias which creates risk blind spots.

Boards and senior leaders have a clear responsibility to protect shareholders and other stakeholder from the effects of credible Black Swans.  What can be done to assess and mitigate the major business risk from these catastrophic events? Booz & Co., a consultancy, recommends that company’s undertake a Disruptor Analysis Stress Test.  Complementing the firm’s existing ERM approach, this test would be periodically administered by a senior team of risk managers and line of business leaders.  

The analysis includes a 4-step process:

  1. Understand the current state

To find vulnerable nodes in the business, it is vital to map the full operational profile – relationships, costs, revenues, capital deployed etc – of the firm including its suppliers, channel partners, stakeholders and customers.  This analysis should  go beyond direct relationships to key interdependencies like ‘suppliers of suppliers’ as well as market dynamics such as competition and industry structure

  1. Develop the disruptor list

Given the unexpectedness of Black Swans, managers needs to cast a wide net to identify potential disruptions to the operating model. To be comprehensive, this list should encompass every potential interruption across multiple geographies based on what could occur within a 1 year horizon.

  1. Asking “what if” questions

During this phase, the team would explore what would happen to the enterprise if one or a more of these events transpired.  This type of scenario development helps discover new hazards and drives further clarity around previously identified risks.  Moreover,  these activities can help uncover informational blind spots and bias while building internal knowledge. 

  1. Create contingency plans

Contingency plans are then developed based on the most likely to occur “what if” scenarios.  These plans would include financial, operational and human resource strategies for coping with the scariest Black Swans.  Though this planning is handled internally, many companies may choose to gain an independent, third-party validation of their thinking.

It is virtually impossible to produce quality contingency plans for every possible Black Swan.  Yet, impossibility does not mean senior managers should not try to minimize organizational impact by raising internal awareness, gaining cross functional alignment and making preparations.  Indeed, success favours the prepared mind.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.