C K Prahalad, Professor of Strategy, University of Michigan

Managing in Turbulent Times: Restructuring or Revitalization? C.K. Prahalad Paul and Ruth McCracken Distinguished University Professor Stephen M. Ross School of Business The University of Michigan February 13, 2009 1 © C.K. Prahalad

Part I The Underlying Causes and Consequences of Volatility 2 © C.K. Prahalad

The Start of the Crisis; Financial System in the United States 1. Markets do not extinguish risk but distribute it Markets do not extinguish Leverage A System Ready for Failure 2. Complexity and Conspiracy of Denials Pressures for Growth, Profitability, Compensation 3. Regulatory design: Unfettered innovation Poor regulatory Oversight 4. Systemic Risk: VaR calculations 5. Underestimating Complexity. Individual deals Vs. a complex Interdependent set 3 © C.K. Prahalad

The “Collapse” of the Financial System 1. 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 others USA alone over 2 million in a year Currency Impacts : $ to Rs; #$ to or £ and € 4 © C.K. Prahalad

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,… 5 © C.K. Prahalad

Global Restructuring of Industries 1. All major Players in Financial Crisis; Will be burdened with “govt. systems” – Impact of Bailouts (“Nationalization”) 2. All of them are focused on Portfolio and Operational Restructuring 3. Focus on Traditional Developed Markets? 4. Lots of Churn in Senior Management 6 © C.K. Prahalad

Global Restructuring of Industries 1. All major Players in Financial Crisis; Will be burdened with “govt. systems” – Impact of Bailouts (“Nationalization”) Is there an Opportunity to 2. All of them are focused on Change the game? Portfolio and Operational Buy distressed Restructuring Assets? Use Increased Access to Talent Pool? 3. Focus on Traditional Developed Markets? 4. Lots of Churn in Senior Management 7 © C.K. Prahalad

Impact of Current Crisis on Indian Firms Global 4 2 Market (Revenue) Focus IT majors 1 3 Domestic Single Highly Business Diversified Portfolio Focus 8 © C.K. Prahalad

Volatility is everywhere… Focus on Climate Change, Inclusion Volatility Terrorism, genocide, In Financial Pandemics, Markets Do we need a New Approach To Managing? Governments: Unpredictable USA, India, Consumer Japan, Europe, Reactions Volatility in Russia Commodity markets (e.g. oil) 9 © C.K. Prahalad

What are the Managerial Demands? Focus on Volatility and Discontinuities Focus on Disruptive Business Model Innovation Focus on Cycle Time, Speed Focus on Productivity, Cost Focus on Quality 10 © C.K. Prahalad

What are the Managerial Demands? Focus on Volatility and Discontinuities Innovation Sand Box, Focus on Disruptive BOP Markets, 4 As Business Model Innovation Business processes, Focus on Cycle Time, Speed Leveraging Core Comp. Training, Systems, O/H Focus on Productivity, Cost Analysis, Restructuring TQM, Training, Focus on Quality Empowering all 11 © C.K. Prahalad

Traditional Managerial Challenge Manage Trends: Future Resembles Past How to Well Known Differentiate a. Growth rates, Methods Ourselves? b. Seasonality c. Competitor’ behavior d. Consumer Preferences 12 © C.K. Prahalad

Traditional Managerial Challenge Manage Trends: Future Resembles Past How to Well Known Differentiate a. Growth rates, Methods Ourselves? b. Seasonality c. Competitor’ behavior d. Consumer Preferences Manage Need New How to Cope Discontinuities: Methodologies? and Thrive? Past is not a predictor 13 © C.K. Prahalad

Managing in a Volatile Environment 14 © C.K. Prahalad

Volatility and Managerial Antidotes Clarity to Long Term Direction Wild Swings in: Agility in the Short term Input Costs, Reassessing Priorities Capacity to hold on Revenues, Scale up/down to Operations, Product/ Geo. Mix Ability to: Sudden shifts in: Social Preferences, Technologies, Crisis (sentiment) 15 © C.K. Prahalad

What to do “Here and Now” 1. Conserve Cash 2. War on Waste Increasing the capacity to Receivables, support operations Inventories Logistics, Energy 3. Do not Build for Stock Reduce the impact of 4. Lower B/even swings 5. Shift to Newer Businesses Mitigate Risk in the portfolio lower Risk Can learn fast 6. Business portfolio Choices 7. Focus on Core Competencies 16 © C.K. Prahalad

Part II Do We Need a New Methodology? 17 © C.K. Prahalad

Two Contradictory Requirements Operational Strategic Agility and Clarity and Resilience Consistency 18 © C.K. Prahalad

Two Contradictory Requirements Operational Strategic Agility and Clarity and Resilience Consistency Shift Management Focus from: Wait and React Sense and Respond Anticipate and Create 19 © C.K. Prahalad

The Volatility Sandbox Continuous Churning of Business Models Low Capital Focus on Intensity: Anticipation; Building an New Game Ecosystem Capacity for Real time Reconfiguration of Resources 20 © C.K. Prahalad

The Volatility Sandbox Continuous Churning of Business Models Low Capital Focus on Strategic Intensity: Anticipation; Intent Building an New Game Ecosystem IT Systems and Analytics Capacity for Real time Reconfiguration of Resources 21 © C.K. Prahalad

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 22 © C.K. Prahalad

Anticipate New Opportunities 23 © C.K. Prahalad

The New Age of Innovation: The Basic Thesis + = A New Approach Connectivity, Globalization To Innovation & Digitization, Value Creation Convergence, Social Networks 24 © C.K. Prahalad

Price-Performance Envelopes are Changing Faster than anyone Expected 1970 80 90 2006 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) Source: Ray Kurzwell 25 © C.K. Prahalad

The New Age of Innovation: Core Drivers: Connectivity, Convergence, No Digitization, Social Networks No Shifting Balance of Power: C < F to C ≥ F Traditional Firms Loose New Firms Migrate to Competitive N=1; R=G N=1; R=G Advantage Build New Capabilities: Social and Technical Architecture Talent Matters IT Matters 26 © C.K. Prahalad

Consider Cardiac Pacemakers Patient 27 © C.K. Prahalad

Consider Cardiac Pacemakers Your Doctor Experts’ Conference Doctor on Location Patient Away Hospital Spouse 28 © C.K. Prahalad

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? 29 © C.K. Prahalad

Car as a Stand Alone Product or a Node in Seamless Connectivity? High Capacity CC Node 30 © C.K. Prahalad

Transformation of Traditional Industries: Truck Tires Sell a tire Transaction Price ? 31 © C.K. Prahalad

Transformation of Traditional Industries: Truck Tires Sell a tire Transaction Price ? Relationship Sell Usage, Personalized Co Created Experience, New Business Model 32 © C.K. Prahalad

The Key Drivers of Value: 1. Personalized Experience 2. Co Creation 3. Individuals 4. Thematic Communities 5. Experience Platform 6. Delivery Network 33 © C.K. Prahalad

Value Creation Process in: 1. Google 2. Li & Fung 3. Netflix One Consumer at 4. Starbucks A time (N=1); 5. Amazon Multiple Vendors 6. Aviva (R=G) 7. Nike 8. ICICI- Prudential 9. Automotive -OnStar 10. Bridgestone 11. Medtronics 12. UPS 34 © C.K. Prahalad

The Emergence of Nodal Firms 1. Intellectual Influence 2. Network Infrastructure 3. Standards 4. Consumer Interface 5. Privileged Access, not ownership 36 © C.K. Prahalad

The New Innovation Process: Creating and Sharing Value Orchestrating the Flows of Ideas, products, services Setting the Agenda; Consumers Supplier And And Talented Consumer Individuals Communities 37 © C.K. Prahalad

Active Involvement of the Consumer Changes the Innovation Dynamic The Sources of Competence is Changing Enhanced Extended Network of Corp. as a Business Supply suppliers, Portfolio Of Units Network Partners, Competencies Consumers Pre 1990 1990 - 1995- 2001 - 38 © C.K. Prahalad

The Meaning of Innovation is Changing Customer Customer Product Experiences: Specific Innovations Co Creation Solutions Pre 1995 1995 - 2001- 39 © C.K. Prahalad

We can Identify an Innovation Continuum Enhanced Network: Customers Locus of Competence Extended Network Corp. As a Source Products Solutions Experiences Locus of Innovation 40 © C.K. Prahalad

Experience Innovation…. 1. Enlarges the Innovation Space 2. Changes the Meaning of Innovation 3. Changes the Players who influence Innovation Experience Multiple Learning Redeploying Technologies x as a x across new Innovation = Network Opportunities 41 © C.K. Prahalad

The New Game: N=1 ( Co creation of Personalized Experiences) R=G (Multi-Institutional and Multi –Geographic Access to Resources) 42 © C.K. Prahalad

New Source of Competitive Advantage? Table Stakes: Efficiency and Innovation Access to Capital, Co Creation Raw Materials, Rapid Reconfiguration of Technology Resources Real Time Action Advantage Intelligent Products Link Between Low Cost; High Quality Strategy and Operations: Cycle time Quality of Global Scale Business Processes, Flexible Logistics Analytics 44 © C.K. Prahalad

What are the Impediments to Building New Capabilities ? Social Infrastructure Tech. Infrastructure Business Of the Firm: Of the Firm: Processes Legacy Mindsets Legacy Systems Analytics Dominant Logic Skills, Attitudes and Databases Behaviors ICT Architecture Decision Processes Applications Access to Incentives Talent 45 © C.K. Prahalad

Access to New Sources of Advantage…. Global Search for Talent Access to Talent Cost, Quality, Mobilizing Talent Speed, Innovation Collaborative & Integrative Capacity Not Exporting Jobs; Importing Competitiveness 46 © C.K. Prahalad

We Need New Capabilities for N=1; R=G Flexible Systems, Managerial Mind sets, Measurement Leveraging Global Talent Visibility to Values, Skills, Flexible and Resilient Training, Performance Business Processes and Measurement, Incentives… Focused Analytics Social Architecture IT Architecture 47 © C.K. Prahalad

The New House of Innovation The Social Architecture of the Firm: (Values, Skills, Attitudes, Decision Processes, Performance Metrics in the firm) Personalized Co Created Global Access to Resources and Experiences: Flexible and Resilient N=1 Business Processes and R=G Talent : Focused Analytics The Technical Architecture of the Firm: (Information and Communication Technology –ICT- Backbone of the Firm) 48 © C.K. Prahalad

C K Prahalad, Professor of Strategy, University of Michigan

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