C K Prahalad, Professor of Strategy, University of Michigan

© C.K. Prahalad1

Managing in Turbulent Times:Restructuring or Revitalization?

C.K. PrahaladPaul and Ruth McCracken Distinguished University

Professor Stephen M. Ross School of Business

The University of Michigan

February 13, 2009

© C.K. Prahalad2

Part IThe Underlying Causes and Consequences of Volatility

© C.K. Prahalad3

The Start of the Crisis;Financial System in the United States

1. Markets do not extinguish risk but distribute itMarkets do not extinguish Leverage

2. Complexity and Conspiracy of DenialsPressures for Growth, Profitability, Compensation

3. Regulatory design: Unfettered innovationPoor regulatory Oversight

4. Systemic Risk: VaR calculations

5. Underestimating Complexity. Individualdeals Vs. a complex Interdependent set

A S

yste

m R

eady

for F

ailu

re

© C.K. Prahalad4

The “Collapse” of the Financial System1. Geographical Impact : Europe (Iceland, Ireland,

UK, Spain,……..)Japan, China, S. Korea,….

2. Industry Impacts : Mortgages,Credit, Credit Card Crisis (?)Automotive, Retail, Capital Eqpt.

Employment Impacts : layoffs in USA, Europe, Japan,China, and othersUSA alone over 2 million in a year

Currency Impacts : $ to Rs; #$ to or £ and €

© C.K. Prahalad5

Implications to Industry Structure

1. Firms Declaring Bankruptcy (e.g. Bears Stearns, Lehman Brothers, Circuit City)

2. Forced/opportunistic Mergers (Countrywide + M.lynch + BOA,Wachovia + Wells Fargo,Pfizer + Wyeth,Chrysler + Fiat?......)

3. Governmental Bailout (Citi, BOA, Wells Fargo, AIG,GM, Chrysler, RBS, …..De facto Nationalization)

4. Massive layoffs Fin. Services Auto, Retail, Electronics, Hospitality,…

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Global Restructuring of Industries1. All major Players in Financial

Crisis; Will be burdened with“govt. systems” – Impact ofBailouts (“Nationalization”)

2. All of them are focused onPortfolio and OperationalRestructuring

3. Focus on TraditionalDeveloped Markets?

4. Lots of Churn in SeniorManagement

© C.K. Prahalad7

Global Restructuring of Industries1. All major Players in Financial

Crisis; Will be burdened with“govt. systems” – Impact ofBailouts (“Nationalization”)

2. All of them are focused onPortfolio and OperationalRestructuring

3. Focus on TraditionalDeveloped Markets?

4. Lots of Churn in SeniorManagement

Is there anOpportunity to Change the game?Buy distressedAssets? Use IncreasedAccess to Talent Pool?

© C.K. Prahalad8

Impact of Current Crisis on Indian FirmsM

arke

t (R

even

ue) F

ocus

Domestic

Global

Portfolio Focus

SingleBusiness

HighlyDiversified

1 3

2 4IT majors

© C.K. Prahalad9

Volatility is everywhere…

Do we need a New ApproachTo Managing?

Volatility inCommodity

markets (e.g. oil)

Focus on ClimateChange, Inclusion

Governments:USA, India, Japan, Europe,Russia

VolatilityIn FinancialMarkets

UnpredictableConsumerReactions

Terrorism, genocide,Pandemics,

© C.K. Prahalad10

What are the Managerial Demands?

Focus on Quality

Focus on Productivity, Cost

Focus on Cycle Time, Speed

Focus on Disruptive Business Model Innovation

Focus on Volatility andDiscontinuities

© C.K. Prahalad11

What are the Managerial Demands?

Focus on Quality

Focus on Productivity, Cost

Focus on Cycle Time, Speed

Focus on Disruptive Business Model Innovation

Focus on Volatility andDiscontinuities

TQM, Training, Empowering all

Training, Systems, O/HAnalysis, Restructuring

Innovation Sand Box,BOP Markets, 4 AsBusiness processes,Leveraging Core Comp.

© C.K. Prahalad12

Traditional Managerial Challenge

Manage Trends:Future Resembles Past How to

DifferentiateOurselves?

Well KnownMethods

a. Growth rates,b. Seasonalityc. Competitor’ behaviord. Consumer Preferences

© C.K. Prahalad13

Traditional Managerial Challenge

Manage Trends:Future Resembles Past How to

DifferentiateOurselves?

ManageDiscontinuities:Past is not a predictor

How to Copeand Thrive?

Well KnownMethods

Need NewMethodologies?

a. Growth rates,b. Seasonalityc. Competitor’ behaviord. Consumer Preferences

© C.K. Prahalad14

Managing in a Volatile Environment

© C.K. Prahalad15

Volatility and Managerial Antidotes

Wild Swings in:Input Costs,Revenues,Product/ Geo. Mix

Sudden shifts in:Social Preferences,

Technologies,Crisis (sentiment)

Abili

ty to

:Sc

ale

up/d

own

Cap

acity

to h

old

on

to O

pera

tions

,R

eass

essi

ng P

riorit

ies

Cla

rity

to L

ong

Term

Dire

ctio

nA

gilit

y in

the

Shor

t ter

m

© C.K. Prahalad16

What to do “Here and Now”1. Conserve Cash2. War on Waste

Receivables,InventoriesLogistics, Energy

3. Do not Build for Stock4. Lower B/even

5. Shift to Newer Businesseslower RiskCan learn fast

6. Business portfolio Choices7. Focus on Core

Competencies

Increasing the capacity to support operations

Reduce the impact of swings

Mitigate Risk in the portfolio

© C.K. Prahalad17

Part IIDo We Need a New Methodology?

© C.K. Prahalad18

Two Contradictory Requirements

StrategicClarity and Consistency

OperationalAgility andResilience

© C.K. Prahalad19

Two Contradictory Requirements

StrategicClarity and Consistency

OperationalAgility andResilience

Shift Management Focus from:

Wait and ReactSense and Respond

Anticipate and Create

© C.K. Prahalad20

The Volatility Sandbox

Capacity for Real time Reconfiguration of Resources

Low Capital Intensity:Building an Ecosystem

Continuous Churning of Business Models

Focus onAnticipation;New Game

© C.K. Prahalad21

The Volatility Sandbox

Capacity for Real time Reconfiguration of Resources

ITSystems andAnalytics

StrategicIntent

Low Capital Intensity:Building an Ecosystem

Continuous Churning of Business Models

Focus onAnticipation;New Game

© C.K. Prahalad22

The Capabilities to Focus on…1. Anticipation of New Opportunities/ Problems

2. Capacity to Reconfigure the Organization: Velcro

3. Ability to Change the Product/service Portfolio at low Cost: Core competence

4. Building an Eco System: Capital Intensity

5. IT Architecture and Analytics: Insights

6. Science based Strategies

7. Focus on Enterprise Risk

© C.K. Prahalad23

Anticipate New Opportunities

© C.K. Prahalad24

The New Age of Innovation:The Basic Thesis

Globalization Connectivity,Digitization,Convergence,Social Networks

A New ApproachTo Innovation &Value Creation

+ =

© C.K. Prahalad25

Price-Performance Envelopes are Changing Faster than anyone Expected

1. Transistors/chip 103 106 109

2. Decrease in size of micro-devices 10-1 10 -6

3. Computing power 1011 1015

4. Cost per MIPs($1000) 1 1M 5. DNA sequencing cost

($/BASE PAIR) 10 0.05 6. Magnetic data storage 104 1011

(bits/dollar)

1970 80 90 2006

Source: Ray Kurzwell

© C.K. Prahalad26

The New Age of Innovation:Core Drivers:

Connectivity, Convergence,Digitization, Social Networks

Shifting Balance of Power:C < F to C ≥ F

New FirmsN=1; R=G

Traditional FirmsMigrate toN=1; R=G

LooseCompetitive Advantage

Build New Capabilities:Social and Technical Architecture

Talent Matters IT Matters

No

No

© C.K. Prahalad27

Consider Cardiac Pacemakers

Patient

© C.K. Prahalad28

Consider Cardiac Pacemakers

Patient Away Hospital

Doctor onLocation

Experts’Conference

Your Doctor

Spouse

© C.K. Prahalad29

The Value of the Pace Maker?

1. Experience of the Patient?2. Integration of the Experience for the Patient,

Doctor, Family, others…?3. Do we need a Network of Providers to

Create an Experience Environment?4. Is the Pacemaker a Part of but Distinct

from the Experience?5. What can you Monetize? How?

© C.K. Prahalad30

Car as a Stand Alone Product or a Node in Seamless Connectivity?

High CapacityCC Node

© C.K. Prahalad31

Transformation of Traditional Industries: Truck Tires

Sell a tirePrice ?

Transaction

© C.K. Prahalad32

Transformation of Traditional Industries: Truck Tires

Sell a tirePrice ?

Transaction

Sell Usage,PersonalizedCo CreatedExperience,New BusinessModel

Rel

atio

nshi

p

© C.K. Prahalad33

The Key Drivers of Value:

1. Personalized Experience2. Co Creation3. Individuals4. Thematic Communities 5. Experience Platform6. Delivery Network

© C.K. Prahalad34

Value Creation Process in:

1. Google2. Li & Fung3. Netflix4. Starbucks5. Amazon6. Aviva7. Nike8. ICICI- Prudential9. Automotive -OnStar10. Bridgestone11. Medtronics12. UPS

One Consumer atA time (N=1);

Multiple Vendors(R=G)

© C.K. Prahalad36

The Emergence of Nodal Firms

1. Intellectual Influence2. Network Infrastructure3. Standards4. Consumer Interface5. Privileged Access, not ownership

© C.K. Prahalad37

The New Innovation Process:

ConsumersAnd Consumer Communities

SupplierAnd Talented Individuals

Setti

ng th

e A

gend

a;O

rche

stra

ting

the

Flow

s of

Idea

s, pr

oduc

ts, s

ervi

ces

Cre

atin

g an

d Sh

arin

g V

alue

© C.K. Prahalad38

Active Involvement of the ConsumerChanges the Innovation Dynamic

BusinessUnits

Corp. as aPortfolio Of

Competencies

ExtendedSupply

Network

Enhanced Network of suppliers,Partners,

Consumers

The Sources of Competence is Changing

Pre 1990 1990 - 1995- 2001 -

© C.K. Prahalad39

The Meaning of Innovation is Changing

Product Innovations

Customer Specific

Solutions

Customer Experiences:Co Creation

Pre 1995 1995 - 2001-

© C.K. Prahalad40

We can Identify an Innovation Continuum

Locus ofCompetence

Locus of Innovation

Products Solutions Experiences

ExtendedNetwork

Enhanced Network:Customers

Corp.As a Source

© C.K. Prahalad41

Experience Innovation….

1. Enlarges the Innovation Space2. Changes the Meaning of Innovation3. Changes the Players who influence Innovation

ExperienceInnovation =

Multiple Learning RedeployingTechnologies as a x across new

Network Opportunitiesx

© C.K. Prahalad42

The New Game:

N = 1

R = G

( Co creation of Personalized Experiences)

(Multi-Institutional and Multi –Geographic Access to Resources)

© C.K. Prahalad44

New Source of Competitive Advantage?

Efficiency and InnovationCo CreationRapid Reconfiguration of

ResourcesReal Time ActionIntelligent ProductsLow Cost; High QualityCycle timeGlobal ScaleFlexible Logistics

AdvantageLink Between

Strategy and Operations:Quality of

Business Processes,Analytics

Table Stakes:Access to Capital,Raw Materials,

Technology

© C.K. Prahalad45

What are the Impediments toBuilding New Capabilities ?

Social InfrastructureOf the Firm:Legacy MindsetsDominant LogicSkills, Attitudes and

BehaviorsDecision ProcessesIncentives

Tech. InfrastructureOf the Firm:Legacy Systems

DatabasesICT ArchitectureApplications

BusinessProcessesAnalytics

Access toTalent

© C.K. Prahalad46

Access to New Sources of Advantage….

Access to TalentMobilizing Talent

Global Search forTalent

Cost, Quality,Speed, Innovation

Collaborative &Integrative Capacity

Not Exporting Jobs; Importing Competitiveness

© C.K. Prahalad47

We Need New Capabilitiesfor N=1; R=G

Managerial Mind sets,Leveraging Global Talent

Flexible Systems,Measurement

Visibility to Values, Skills, Flexible and ResilientTraining, Performance Business Processes andMeasurement, Incentives… Focused Analytics

Social Architecture IT Architecture

© C.K. Prahalad48

The New House of Innovation

The Technical Architecture of the Firm:(Information and Communication Technology –ICT-

Backbone of the Firm)

The Social Architecture of the Firm:

(Values, Skills, Attitudes, Decision Processes,

Performance Metrics in the firm)

Flexible and ResilientBusiness Processes andFocused Analytics

Per

sona

lized

Co

Cre

ated

E

xper

ienc

es:

N=1

Glo

bal A

cces

s to

R

esou

rces

and

Ta

lent

:R

=G

C K Prahalad, Professor of Strategy, University of Michigan

Technology

Transcript of C K Prahalad, Professor of Strategy, University of Michigan