Strategy

In recent years, leaders at such high-profile companies as Xerox, Procter & ; Gamble, Lucent, Coca-Cola and Mattel have flamed out early in their tenures. Why did such promising and previously successful individuals fail so quickly in the CEO role? And why is such failure happening today with relatively high frequency? The individuals in charge bear some of the responsibility, of course. But the authors' research also uncovered other major forces at play. First is the impact of the predecessor CEO's actions on his or her successor's performance. While outgoing CEOs do not intend to contribute to the failure of their successors, their personal needs and actions can lay the groundwork for derailment. A second force is often the succession process itself. Once again, the outgoing CEO may be responsible, having failed to prepare a successor adequately; and the board is also often guilty of lack of oversight. A third reason for failure by new CEOs is their often narrow expertise and inability to set a proper context as a leader. The authors explore these issues and then offer advice to outgoing CEOs, directors and incoming leaders that may help them avoid the troubles that some companies have faced in making a leadership transition.

Faced with saturation of their core product markets, companies in search of growth are increasingly turning to services. A few companies have enjoyed success with this approach; others have not been so fortunate. The authors explain how managers can improve the odds of success by taking a systematic approach to creating services-led growth. Companies must begin by redefining their markets in terms of customer activities and customer outcomes instead of products and services. Customers seek particular outcomes, and they engage in activities to achieve them. These activities can be mapped along a customer-activity chain, which is the foundation for exploring services-led growth opportunities. Analogous to product-centric growth strategies such as product-line extension, product-line filling and brand extensions, customer-activity chains can be extended, filled, expanded or reconfigured with new services. The authors have developed a framework -- the service-opportunity matrix -- to help managers structure the investigation of new opportunities. For each quadrant of the matrix, they provide a set of questions to help companies determine whether a particular approach would work for them. In addition, they have devised another matrix, on risk mitigation, to help managers assess the pitfalls and risks that these opportunities represent.

Despite studies indicating the contrary, many academics and practitioners assert that the business cycle can’t be predicted and therefore can’t be managed. However, managers who draw upon forecasting models, closely follow leading economic indicators and manage their business cycle proactively are likely to emerge from tough economic times intact, says the author. To this end, the “master cyclist” project has evaluated companies’ market literacy, forecasting capabilities and use of macroeconomic strategy. From the evaluation, it developed a set of managerial principles, defining how a market-literate management team would approach short-run functional decisions regarding inventory, production, marketing and pricing as well as more strategic choices regarding capital expansion, acquisitions and divestitures. According to the author, explicitly cycle-savvy companies like Johnson & ; Johnson, Southwest Airlines, DuPont and Duke Power weathered rough economic times well, while companies like Cisco Systems, which rejected the use of macroeconomic forecasting, was caught during the recent recession with crippling levels of product and supply-chain inventories. It follows then, according to the author, that strategic, tactical and functional decisions are better informed by intelligent speculations about the business cycle. As economic-forecasting indicators and techniques continue to improve, so should our understanding of both the business cycle and the principles associated with effectively managing it.

Many corporate boards adopt a one-size-fits-all approach to governance. Instead, they should consider that their primary role must shift depending on various conditions, both internal and external. Boards have four main functions -- auditing, supervising, coaching and steering -- each with a different perspective and behavior. The roles reflect two main differences in board culture. The first type of board concerns itself mainly with shareholder interests or shareholder plus other stakeholder interests. The focus is on externalities. The second type of board either monitors executives' activities or gets actively involved in the conduct of the organization. Here the focus is on handling ineffective management. The basic role types are not mutually exclusive; instead they reflect different board cultures that result from different emphases on decision making and resource allocation. During any time period, a board must determine what its dominant role should be, given the current conditions.

Popular wisdom holds that blue-chip companies can somehow grow continuously. According to the authors, however, the struggle of corporate icons like Kodak, Digital and Xerox demonstrate that natural limitations, managerial complexity, a lack of stakeholder harmony and antitrust concerns make continuous growth increasingly difficult. Rather than seeking growth at any cost, they suggest that companies seek alternative ways of moving beyond natural growth limits. The authors draw on a host of examples -- from Microsoft, J.P. Morgan, IBM and others -- suggesting that companies finding themselves confronting this scenario can either break up their company, create new corporate forms or make a graceful growth-to-value transition. In evaluating their options, say the authors, the corporate executives must consider their company's position in its life cycle -- growth, stall or post-stall. Stalls can be anticipated by assessing the natural limits of the company's dominant growth strategy and its pattern of financial performance. Executives must also realistically assess their company's capacity for both innovation and new-business creation in order to decide whether their capital and talent would be better spent on core business development than on the reckless pursuit of high growth. Choosing alternate options is not easy, suggest the authors, given the pervasive culture of continuous growth. The first step toward making constructive decisions for a company's future, however, is to acknowledge that unbounded growth may indeed be a myth.

Data from a decade-long research project puts advice to managers in context, country by country.

Much of the recent research on mergers and acquisitions (M&;A) seeks to link the market valuations of individual companies, as well as overall stock market levels, with merger activity and performance. In their review of work conducted in this field, the authors present a primer on ways to measure whether M&;A actually creates value and then offer an overview of the "winners" and "losers." But the long-held observation that stock prices affect merger activity was confirmed in 2001, they say, by work that revealed a correlation between high merger activity and high market valuations. Several other studies have shown that acquirers who pay with stock underperform their peers in the long run, whereas acquirers who pay cash outperform their peers. Another line of inquiry, according to the authors, finds that the level of the stock market when an acquisition is announced affects short-term and long-term merger performance. The short-term effects are positive for acquisitions announced in high-valuation markets and negative for those undertaken in low-valuation markets. Supporting evidence is provided in other recent work too: Acquisitions that take place during periods of below-average economic growth create more shareholder value than strong-economy acquisitions. The strong performance of low-valuation acquirers and weak-economy acquirers suggests that they are not distracted by short-run market reactions, but instead focus on business fundamentals and true potential synergies. Two articles published in 2002, suggesting that the root cause of such links between valuation and performance may be incorrect valuation by the market, are empirically supported by current work that Bouwman et al. also describe. The conclusion of these various research streams is that stock prices matter, say the authors. The key implication for managers: Be wary of acquisitions made when market or firm valuations are high, and be optimistic about acquisitions when valuations are low. This review includes a comprehensive sidebar of all referenced and relevant research.