External Trends in Strategy
By Ram Charam
Lord John Browne, chief executive of BP (née British Petroleum), is perhaps best known for the gamble he and his company took in 1997. At that time, Lord Browne began to reposition the company in a more environmentally conscious direction, after famously arguing that “the time to consider the policy dimensions of climate change is…when the possibility cannot be discounted and is taken seriously by the society of which we are part. We in BP have reached that point.” At first the stock price fell, but did the company suffer in the end? Hardly.
In 2004, BP passed both ExxonMobil and Royal Dutch/Shell Group in gross revenues, to reach No. 2 on the Fortune Global 500 list (after Wal-Mart): It is the largest energy company in the world by this measure. A similarly prescient corporate leader is Richard Harrington, CEO of the Thomson Corporation, a media company based in Toronto. When Mr. Harrington took office in 1997, the company was best known for its 55 daily newspapers in seven states.
Business was good, but Mr. Harrington — with the full support of his board — began to divest Thomson’s newspapers and its travel and leisure business, steering the company instead toward delivering information and services online to professionals in law, education, health care, and finance. Today, the company is thriving, while major newspaper companies, like Knight Ridder, are struggling.
This is the art of business acumen: linking an insightful assessment of the external business landscape with the keen awareness of how money can be made — and then executing the strategy to deliver the desired results. The word acumen means “keenness and depth of perception, especially in practical matters.” Leaders like Lord Browne and Mr. Harrington apply a high level of acumen to business matters. They have the usual skills of successful executives, including the ability to deliver high performance. But they are distinguished by their ability to position their companies advantageously while operating within the same external landscape as their competitors. This is the source of their ability to achieve returns above the risk-adjusted cost of capital.
No single aspect of managerial skill is more important. If the company’s assessment of the external landscape — how patterns of converging and diverging trends fit together — is inaccurate, the company’s strategic positioning will likely be wrong. Decision makers will be tempted to develop the wrong capabilities, hire the wrong people, or enter the wrong markets. Business acumen demands intense mental activity. Seeing how the landscape is evolving requires a high caliber of qualitative logic and the ability to frame, assess, discard, and adopt many assumptions at once. Because that landscape is continuously changing, the task is doubly difficult and always worth revisiting.
To be sure, change in the external landscape is nothing new, but it can be linear and continuous, or it can be exponential and abrupt. From the mid-1980s through much of the 1990s, change was relatively linear. Competition was fierce, but most businesspeople had a good idea who their competitors were and how to survive. Whether they could execute was a different matter. Then, in the late 1990s, heavy investment in Internet-related technologies and companies began to create deep discontinuities in some industries. At the same time, the economies of China and India were stirring to life.
China’s efforts to join the globalizing world accelerated after the country signed a trade agreement with the U.S. in 2000; the process led to its historic agreement to join the World Trade Organization in 2001. And momentum for India’s economic liberalization was spurred by recovery from the fiscal crisis it had experienced in 1991. These trends built up until, as happens every few decades, they reached a tipping point, and the rate and depth of change accelerated abruptly. The effect can be seen, for example, in the U.S. current account balance, which was roughly in equilibrium in the early 1990s, but dropped to a $668 billion deficit in 2004; in the global glut of manufacturing capacity that is pressuring many industries; and in the new geopolitical realities that became tragically evident on September 11, 2001.
When such forces combine, they can uproot the competitive landscape of a worldwide industry. Suddenly, the moneymaking approach of that industry can be in jeopardy. Success depends on a leader’s ability to recognize such moments of disequilibrium in advance — and to have the courage and business acumen to chart a new course in the face of them, as Lord Browne and Mr. Harrington did.
Lord John Browne, chief executive of BP (née British Petroleum), is perhaps best known for the gamble he and his company took in 1997. At that time, Lord Browne began to reposition the company in a more environmentally conscious direction, after famously arguing that “the time to consider the policy dimensions of climate change is…when the possibility cannot be discounted and is taken seriously by the society of which we are part. We in BP have reached that point.” At first the stock price fell, but did the company suffer in the end? Hardly.
In 2004, BP passed both ExxonMobil and Royal Dutch/Shell Group in gross revenues, to reach No. 2 on the Fortune Global 500 list (after Wal-Mart): It is the largest energy company in the world by this measure. A similarly prescient corporate leader is Richard Harrington, CEO of the Thomson Corporation, a media company based in Toronto. When Mr. Harrington took office in 1997, the company was best known for its 55 daily newspapers in seven states.
Business was good, but Mr. Harrington — with the full support of his board — began to divest Thomson’s newspapers and its travel and leisure business, steering the company instead toward delivering information and services online to professionals in law, education, health care, and finance. Today, the company is thriving, while major newspaper companies, like Knight Ridder, are struggling.
This is the art of business acumen: linking an insightful assessment of the external business landscape with the keen awareness of how money can be made — and then executing the strategy to deliver the desired results. The word acumen means “keenness and depth of perception, especially in practical matters.” Leaders like Lord Browne and Mr. Harrington apply a high level of acumen to business matters. They have the usual skills of successful executives, including the ability to deliver high performance. But they are distinguished by their ability to position their companies advantageously while operating within the same external landscape as their competitors. This is the source of their ability to achieve returns above the risk-adjusted cost of capital.
No single aspect of managerial skill is more important. If the company’s assessment of the external landscape — how patterns of converging and diverging trends fit together — is inaccurate, the company’s strategic positioning will likely be wrong. Decision makers will be tempted to develop the wrong capabilities, hire the wrong people, or enter the wrong markets. Business acumen demands intense mental activity. Seeing how the landscape is evolving requires a high caliber of qualitative logic and the ability to frame, assess, discard, and adopt many assumptions at once. Because that landscape is continuously changing, the task is doubly difficult and always worth revisiting.
To be sure, change in the external landscape is nothing new, but it can be linear and continuous, or it can be exponential and abrupt. From the mid-1980s through much of the 1990s, change was relatively linear. Competition was fierce, but most businesspeople had a good idea who their competitors were and how to survive. Whether they could execute was a different matter. Then, in the late 1990s, heavy investment in Internet-related technologies and companies began to create deep discontinuities in some industries. At the same time, the economies of China and India were stirring to life.
China’s efforts to join the globalizing world accelerated after the country signed a trade agreement with the U.S. in 2000; the process led to its historic agreement to join the World Trade Organization in 2001. And momentum for India’s economic liberalization was spurred by recovery from the fiscal crisis it had experienced in 1991. These trends built up until, as happens every few decades, they reached a tipping point, and the rate and depth of change accelerated abruptly. The effect can be seen, for example, in the U.S. current account balance, which was roughly in equilibrium in the early 1990s, but dropped to a $668 billion deficit in 2004; in the global glut of manufacturing capacity that is pressuring many industries; and in the new geopolitical realities that became tragically evident on September 11, 2001.
When such forces combine, they can uproot the competitive landscape of a worldwide industry. Suddenly, the moneymaking approach of that industry can be in jeopardy. Success depends on a leader’s ability to recognize such moments of disequilibrium in advance — and to have the courage and business acumen to chart a new course in the face of them, as Lord Browne and Mr. Harrington did.
posted by John Caswell at 3:23 AM
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