Tis the season to be jolly...

as we near 2012..we muz reflect retract n react on what we did wrong this year and try our hardest to make better endings next year or at least put a broader smile on the ones we love, that intuitive ..he isnt that bad after all....reflectively...there hasnt been one bad intention, fowl communications  that you missed out this year ,either in single or a group,the unleash of evil doings were so great,i could imagine satan thinking i couldnt do it better myself....all spoiled by divine interventions...of god really saying...not so fazz!@#%^...bucko.!!!.im in charge...and yet the malicious deeds continued,spread like wild fire,intense hatred so bad, it literally shifted earths paradigm of natural living.i mean..there had to be those earning 5k above,playing 21 n worked better than sapura rite?..and ohh..Wales n London .. a tough act to beat i guess..haha.but are you such losers you  cant match or beat that charsee??.but are we really on to  becoming the most punitive society ever lived because that "thing" is so much better than I!?...or is it really god putting you up to this in telling  you to really watch each word that come out of dat stinking mouth and you are really nothing and will be nothing even if God wanted you to..and just  because you think you deserve a higher plateau as you pray endlessly ..and those who doesnt deserve to be conned in going to hell...its plainly clear it does not work like dat!...or a royal,sultan or a king,a billionaire,millionaire an army of ministers, dishing out the same hatred but nothing gets done, its all work of god, as i told him in my prayers, i accept what come may,god!men,women,children, of rich and poor,managers,ceos,gms, con men ,prostitutes, destitute s, handicapped,has beens,siblings,relatives of course,stand in solidarity to just end my miserable life..but the not so fazz of god stopped everyone short of joyousness and delight!Such is the intense evil going around i only point to the rise of abu dajals...a period so cruel n vicious, the prophet said, even he would shudder to live through it, this was from the Chosen One!
i dont know if i ever get to write same time next year,  but through  the instances of extreme criminal  situations committed by persona du royales so to speak, is my habit of trivial ice smoking and the visit to professionals a death sentence worthy judgement and stay in my house if you like,but driving me out n my rights say we are right on course of hoo stays and hoo lives undereground...soo...as i live you this rather complex but really simple year of living,i m really asking here to one and all....if i answer mine ..would you answer yours...and really...real men dont whisper nor echo like satans,they face da music or foes ..they  just act like da shit has hit da fan!....and the chips fall where they may!!capische..dats all...salam and a have a brilliant 2012!...on my mother soil n rational countrymen..i have a chance!

Resetting the Cost Structure at Shell

A senior finance executive explains how a zero-based cost management effort is leading to significant performance improvements.

Illustration by Lars Leetaru

For virtually every company, the need to manage costs is an imperative for sustained high performance. The need is especially acute now. After several recessionary years and a hesitant recovery, today’s business environment leaves no room for error. Indeed, in the oil and gas industry, recent and long-term trends suggest a period of continuing uncertainty.

Demand for oil and gas is nearly impossible to predict, as industrialized economies revive in fits and starts and emerging economies mature, changing global trading patterns. Meanwhile, the supply side has its own question marks, as the impact of events like BP’s spill in the Gulf of Mexico, the post-earthquake nuclear power plant accidents in Japan, climate change concerns, more stringent drilling regulations, and political turmoil in the Middle East add to the challenges and opportunities facing the oil and gas industry. Questions abound about where new energy sources and reserves will be found, and what the future energy mix will look like.

Given these industry conditions, companies that fail to deftly manage revenue and costs will find themselves vulnerable to market and price fluctuations that are often out of their control. Consequently, in early 2010, Royal Dutch Shell PLC’s European Upstream leadership team decided to pursue a significant improvement in its cost structure, one that would have a substantial impact on the company. We defined having a substantial impact as lowering the cost budget by 30 percent. In fact, the only aspect of our business that was off-limits was what we call HSE, or health, safety, and the environment; to achieve top performance in our industry, we must protect our workers and assets and the environment around them. Uncompromising HSE management is a prerequisite.

It was obvious to me that traditional continuous improvement and lean efforts, many of them already widely adopted by Shell, would not be sufficient to meet the high expectations we had for our European business. I see continuous improvement in a big corporation as necessary in what I would call managing cost creep: reducing the 3 to 5 percent in additional costs or waste that most large companies seem to generate every two or three years. But continuous improvement alone wouldn’t do this time; we wanted a “hard reset” to make a significant difference. We wanted to achieve a real step change in cost levels and, more importantly, in the company’s approach to cost management.

To establish the program, the executive vice president for Europe (equivalent to a CEO) and I (a CFO for exploration and production operations in Europe) put our full weight behind the initiative from Day One, by communicating the importance of resetting our cost base and spending behavior throughout the organization. We characterized it as a way to allow our teams to explore new revenue opportunities. We described cost reduction as a priority that was as important to our business as oil and gas production and hydrocarbon maturation. We articulated both the size of the cost management effort that we wanted and the timing (2011 through 2013). Moreover, we backed up our new cost estimates with benchmarks, such as unit cost of production, to illustrate our current performance, and where we could improve relative to our competitors and the top quartile in our industry.

We and the wider leadership team involved in exploration and production of oil and gas in Europe put substantial resources behind this cost management campaign. We created two multifunctional teams made up of our most talented staffers — handpicked from a wide array of company functions, including technical, production, commercial, and finance — to identify cost opportunities and develop implementation plans. We freed these staff members from their day-to-day work for five weeks to spend 100 percent of their time identifying realistic cost management opportunities.

Often, when there is a special project, you go around the organization and ask, “Who is available to work on it?” But we felt that this effort was so critical to our success that we needed the best talent in the organization to oversee it and drive it to completion. This sent a message to everyone in the company that we were serious.

The teams initially explored a series of cost-control frameworks, but the most powerful was a strategic approach known as zero-based cost management. This unique, holistic approach involves a fundamental reassessment of the entire business to answer these questions: Which activities and assets still fit with the company’s future goals and strategy, and which should be improved or eliminated? How much funding is required to support each necessary activity or asset at peak performance? And finally, which budgets must we alter to reach cost management targets? Simply put, in zero-based cost management, the budgets for assets, operations, functions, and departments are rewound to nil as a starting point so a fresh argument can be made for every funding and portfolio decision.

The results of this focused cost management and reduction analysis were presented to the company’s leadership. After approval, a commitment session was held with the managers of each of upstream Europe’s functional groups that could challenge the findings. If those groups did question the budget levels, a discussion ensued so they could reach a consensus. Ultimately, we obtained a commitment from these functional managers to meet the proposed cost limits, which were subsequently embedded in the business plan.

A Three-Step Implementation

A zero-based cost management implementation can be broken down into three steps.

Step 1. Reexamine the company’s goals and strategies. This sounds dramatic and disruptive, but in fact it isn’t. We simply needed to have a series of pragmatic discussions among members of management, both upper level and midlevel, throughout the organization about where we thought the business was going in the next few years. The goal is to define a common reference point for everyone, a set of outcomes against which we can evaluate costs. Done well, this creates an environment for innovation and change by aligning people to a common goal.

We didn’t conduct a wholesale reexamination of strategy. We simply asked, What are we trying to do as a company and which activities are needed to execute our plan? Stacked next to this was our new budget expectation or target of reducing costs by 30 percent.

Also at this stage, we explored competitive repositioning of the portfolio. We ranked each of our assets by how well they were able to compete for capital and resource allocation within Shell at their current level of performance. This wasn’t an overly detailed exercise, but instead an effort to get an idea of where our best cost management opportunities would be found.

Step 2. Zero-base the activities. In this stage, we dove in deeply, stripping all business areas down to zero and then going through the exercise of building them back up. To do this, we asked, What is the minimum resource required to run each part of our business — that is, to cover the cost of those activities necessary to comply with legal, corporate, and regulatory rules as well as to achieve production targets? These are the “must-haves”; all other activities are essentially discretionary and optional, or in the zero-based framework, “nice to have.” Given the risks and dangers of our business, HSE is always a “must-have.” Much of what organizations do, however, involves an implicit choice about what to do above and beyond these “must-have” activities.Less imperative to operations, “nice to have” activities could in principle be eliminated without affecting the company’s license to operate. But the company’s competitive position may well be affected. As a result, “nice to have” activities must be separated into those that are needed to continue to support growth and marketplace performance and those that could be changed or even shelved completely. The ones we chose to maintain were certainly discretionary but were nonetheless considered distinctive and critical to our ultimate goal of being the most competitive and innovative energy company.

In some ways, identifying the keepers is the easy part. Discerning which activities can be terminated demands a great deal of discipline and dispassion, and requires smart, diligent teams who can prepare the business argument for or against them. Often, certain activities are green-lighted and well funded year after year because that’s the way it has been done historically at the company, even though these activities may have outlived their usefulness. For instance, a business unit may have at one point established teams to adopt and implement global standards, but these groups may have been rendered essentially irrelevant when the company set up centralized corporate standards centers that called on outside subject matter experts as needed. In our case at Shell, by canceling unused software licenses for the dozens of applications that we’d amassed over the years — such as geological imaging systems needed by only a small percentage of the people who had been given paid access to them — we were able to save millions of dollars without weakening operations in the least.

Moreover, sunk costs can sometimes persuade corporate executives to keep projects alive, with the idea that shutting down a project essentially wastes the resources already invested in it. As appealing as this notion of avoiding waste may be, it is foolhardy if better value can be unearthed elsewhere, in another project or asset. Tough and intelligent choices must be made about all activities for the full long-term impact of zero-based cost management to be felt.

Step 3. Adjust budget lines for surviving activities. After the “must-have” and “nice to have” activities were identified, we began the task of allocating the funding required to best manage our critical assets and projects. This means we actually lowered our budgets to match the expectations derived from the zero-based assessment. From this analysis, we could see whether after budgeting for all the activities core to our operations we could reach the 30 percent cost savings we envisioned. Had we failed to reach that goal, we would have had to pare back the discretionary activities and assets further.

Clarity and Commitment

In undertaking this exercise, we learned relatively quickly that there are many ways to challenge budgets for discretionary activities. For example, ask yourself, “Which activities can be simplified or aggregated?” Just because an activity is necessary doesn’t mean that it is being performed efficiently. In addition, similar activities may be duplicated across functions. Such cases may be widely known but remain unaddressed because changing them would be complicated, time-consuming, or difficult politically within the organization. In the zero-based approach, these impediments should be circumvented, once and for all. For instance, we combined and reduced “nice to have” finance and services activities linked to oil well operations.

At Shell, one of the key opportunities for cost efficiency was in rebalancing the work that we manage in-house and the work we contract out at our assets. We’ve increasingly embraced an outsourcing model for maintenance activities, but over time this has proven to be insufficiently flexible in reacting to market developments and business requirements and has resulted in additional costs. For instance, an integrated services contractor that performs a variety of tasks over numerous assets handles the frontline maintenance in our facilities. However, during our zero-based budget analysis, we realized that by bringing some of this work in-house, we could save on the cost of maintenance and reduce expenditures targeted for logistics and supervision. Particularly on offshore rigs, a tremendous amount of money is spent on moving contractors on and off the platforms and on coordinating their schedules.

Consequently, at one offshore project, we found that by in-sourcing maintenance typically handled by an outside contractor’s 30-person crew, we were able to improve costs materially. The Shell payroll and head count increased somewhat, but by fewer workers than the contractor employed because existing on-site teams could expand their responsibilities to handle some of the maintenance work. And thus by simplifying logistics and supervision, we found additional real savings. As importantly, the total number of workers spending time on drilling platforms dropped; hence, there was less worker exposure to potential health, safety, and environment risks.

Once we brought more of our maintenance in-house, ancillary gains could be explored. We examined, for example, the frequency and nature of the shutdowns we scheduled for upkeep and repair. Inefficient patterns, like cost creep, tend to grow in an organization over time. We found cases in which an asset was shut down just prior to, say, a public holiday — which created an extended shutdown that wastefully added nonproductive days to the operations schedule and forced us to pay premium rates for workers and equipment.

Besides the oil and gas production assets themselves, we found savings in each of the functions that provided support, such as finance, human resources, and IT. We already had shared financial services, the routine back office–like operations, located in Shell operations centers in several locations globally. But using the zero-based lens, we were able to optimize our use of finance experts — who, among many other things, do cost-benefit and appraisal analyses on assets and projects — by eliminating overlapping and redundant activities and spreading their work over multiple units.

And we zero-based our non-operated ventures, those in which other companies manage oil and gas assets in which we have a stake. We interviewed the people in the companies running these joint ventures and asked, “When you look at Shell as a partner, what do you think we add to the operation? Are we efficient? Can we do better to help hold costs down? In what ways?” We also ranked these non-operated assets by five criteria: HSE risk, material value to Shell, Shell’s ability to influence operations, Shell’s confidence in the operator, and how well technology was applied. We then classified the non-operated assets into two categories: those in which we could have a real and lasting impact on the expense curve in a way that would improve Shell’s financial performance substantially and those in which we should basically be hands off. This allowed us to vary resource allocation, in both governance and activity budgets.

Implementing a Zero Base

Several critical attributes are necessary to make sure that a zero-based effort is embraced by the organization as an actual step-change tool. Among them: having visible management commitment; having clarity and transparency about specific expectations, deadlines, and savings; having dedicated resources to drive the program; and supplementing the effort with symbolic high-visibility interventions or events, including frequent management discussions that emphasize the importance of the opportunity to the company’s competitiveness.

It may sound overly confident, but I was certain from Day One that our program would succeed, in part because I and the other managers were dedicated and committed to it and were not willing to accept failure or complacency. Not by being tough, but by being inclusive and committed, we created the environment for change and the motivation to deliver. It has taken 30 percent or more of my time to manage the process and to continually show that I am engaged, ready to communicate the appropriate management messages, and ready to direct the effort as needed. Because the program is being phased in over three years, the results are not yet in, but we are well on track to meet our goals.

The zero-based approach is not a one-time event, nor is it self-propelling. But with the right mix of management support and diligent analysis, this approach will yield sustainable results that are impossible to achieve with even the most diligent continuous improvement campaign.Salam

The Top 10 M&A Fallacies and Self-Deceptions

With merger and acquisition activity heating up, here’s a due diligence checklist for regaining clarity.

Imagine that you have just concluded a major merger or acquisition. Your organization is energized and focused by your speech, which outlined the features of the M&A deal and the potential of the combined entities. Having crossed off every item on your due diligence checklist, you expect big savings from restructuring; more importantly, you know that a year from now this newly created company will be the leader in its industry, with significant growth in revenue and higher profit levels.

Then flash forward to the first anniversary of your M&A deal announcement. The company’s performance is below expectations and you’re left with a nagging sense of doubt about the transaction. Wall Street analysts are questioning your firm’s strategy, the wisdom of the deal, and the prospects for your stock.

We have seen this story repeated again and again after mergers and acquisitions. What goes wrong? Often, when you look closely, a common set of attitudes is at play — implicit assumptions held by the leaders who put the M&A deals together and conducted the due diligence. These attitudes fall into two broad groups. First are fallacies, misleading beliefs about the nature of M&A itself. Second are self-deceptions, the acquirers’ misperceptions of their own company’s capabilities and competence. By becoming more aware of them, you can raise the success rate of all your M&A deals significantly.

Five Fallacies to Avoid

M&A fallacies are often ingrained in a company’s legacy practices, including the due diligence practices that have been successful in the past. It’s not enough to recognize these fallacies. You must take specific precautions to keep from being blindsided by them.

1. “We can’t walk away from this deal.” This fallacy about M&A seems to make intuitive sense. The people who put a deal together — often the business unit general manager and his or her staff — know the target company’s strengths and weaknesses and have the most at stake in the deal’s success. Like all of us, however, they are subject to the vagaries of human nature. When they are too close to a deal, it clouds their ability to make an objective, unbiased decision. They are far too likely to focus on details that confirm their preconceptions and ignore details that contradict them. This is known in the field as “deal fever.” It often manifests itself in statements like “We already have an agreement. Backing out would be too embarrassing to the CEO.”

You can generally avoid deal fever with a layered decision-making process. The deal team, including the business leader who champions the acquisition, should present the case to a separate group or individual who can review its attractiveness more objectively. You must balance these prudent checks and balances against your need for speed. The most effective companies adopt “high-speed lanes” for decisions that must be fast-tracked, as well as top-layer deal review committees staffed by executives who agree to make themselves available quickly if needed. A deal committee frequently includes members of the company’s capital committee, but the deal committee is smaller, enabling greater nimbleness and flexibility.

In one large industrial company, three layers of senior executives must approve a deal. The first layer consists of the president of the relevant business unit and his or her team; the second is a committee of senior corporate executives including the firm-wide CFO; the third includes the CEO and chairman of the board, plus corporate counsel and a few key advisors. Thus, the final level of approval consists of just a half-dozen individuals. Between 2002 and 2008, this company executed more than 50 transactions, and after the close, more than 90 percent of their deals either met or exceeded the performance target metrics set during pre-deal. The layered decision-making process, including efficient oversight at the top, is credited with being an important factor underlying the company’s success. It means that experienced executives, who were not involved in setting up the deal, participate actively in two levels of review.

2. “Any experienced negotiator can negotiate deals.” Executives often assume that all forms of negotiation are alike; thus, their commercial experience has prepared them for M&A deal making. Unfortunately, the auction-like nature of competitive deals can make mergers and acquisitions very different from negotiating a product launch or joint venture–related agreement.

For example, the acquiring management team may fall prey to a seller’s overoptimistic projections or their own synergy estimates. This is especially likely to happen when there are several competing would-be acquirers, and the team feels time pressure to complete due diligence and submit a bid. It is easy to lose sight of the fact that if the price and terms aren’t right, “winning” the deal can be worse than losing.

The answer is to think ahead of time about what you are willing to pay and to develop a true “walk-away” price. During negotiations, as you learn about the sellers’ motivations and as new options are suggested, this preparation can help you turn down any new arrangement that doesn’t give you what you need. Keep internal or external advisors in the loop to continuously check the value of the deal and provide advice on hard stops. You can also put measures in place that share some upside potential while still staying below the walk-away price. For example, you can prearrange a performance bonus for the sellers, to be awarded when agreed-upon financial milestones are reached. Be careful to make the terms explicit; even with good faith on both sides and well-thought-out milestones in place, it is possible to end up in a situation where targets are not met, and acrimony ensues.

3. “M&A performance is all in the numbers.” Many executives assume that if the financial arrangements are secure, the rest of the deal will follow. But all deals have two other significant factors to consider that are often not accounted for in the numbers: the human element and the need to develop the capabilities required to succeed in the new or merged business. This is especially important if the new business model is different from the company’s established model. A comprehensive due diligence process should take into account both the cultural and capability aspects of the deal.

Culture was a major potential hurdle when two large hotel and resort companies recently merged. One company had been founded by a hands-on entrepreneur who had always taken a data-driven, centralized approach to making major decisions (such as where to expand). The other company had been loosely cobbled together through past acquisitions, and left most expansion decisions to regional or local leaders. Before the merger was concluded, the senior leaders-to-be of the new entity conducted a survey of top executives across both organizations, and developed an action plan to counter the gaps in talent and skill that this survey revealed. The merger turned out to be a largely successful endeavor that brought two disparate organizational cultures into a cohesive brand and operating model.

In another case, the merger of capabilities had to be explicitly managed. A global operating company of a specialty materials group, which typically operated in business-to-business markets, acquired a maker of construction materials for consumers. Although the acquisition was relatively small, the president of the division made several trips to the acquired company’s remote headquarters and spent significant time learning about the capabilities it had, as well as those that would be needed to win in the acquisition’s market. This helped the acquiring company place the incoming team in the business unit that fit the team best.

4. “Information in the M&A process will naturally be kept confidential.”When middle- and low-level employees get wind of a possible acquisition, leaks are possible, and they can have major consequences. Confidentiality should be taken very seriously and enforced during the due diligence process; leaks can come from a variety of sourA division of a global industrial concern was in the midst of negotiating a potential acquisition of a publicly traded company when a person on the diligence team leaked information about the deal to an outsider. Word spread, and the stock price of the target rose, significantly diminishing the deal’s attractiveness. The person who leaked was dismissed, and a new confidentiality policy was put in place: All corporate development staff, as well as leadership team members, had to sign global nondisclosure agreements (NDAs) explicitly agreeing to secrecy on each deal to which they were privy.

Other ways of enforcing confidentiality include extending the NDA requirements to administrative staff, highlighting the importance of confidentiality during key due diligence checkpoints, prohibiting e-mail about the deal, and instituting preannounced penalties for leaks and breaches. Sometimes, key components of the due diligence process can be outsourced to a third party to reduce internal communications. These extra steps help reinforce the importance of the rules, even when the staff is already aware of the guidelines for confidentiality.

5. “There’s time for detailed postmerger planning after the merger takes place.” This fallacy is a comforting assumption for executives trying to rapidly conclude a detailed acquisition (while maintaining all their other commitments). However, it rarely leads to good results. Unless you define a detailed merger integration plan before the submission of the binding bid, you risk losing the momentum that you need to drive change and integrate the companies. In larger deals, in which input is required from the target to properly plan the postmerger effort, or in situations in which information is not forthcoming (such as hostile takeovers or auctions), due diligence can still identify the biggest integration risks and help you make the go/no-go decision, set your offer price appropriately, and identify initial risk mitigation hypotheses.

Identify a postmerger integration team and a leader during due diligence, as soon as it is clear that a binding bid will be submitted. This will help you identify some of the key integration risks and issues, and the resources required for integration. It will also lay the groundwork for postmerger review processes and metrics that can help hold the integration and business leaders accountable.

Self-Deception vs. Reality

Self-deceptions are often more difficult to address than fallacies, since practitioners think that they are already following the best practices. Our experience suggests otherwise.

1. “Our company’s M&A process is strategy-led.” Corporate leaders generally understand the importance of having a clear growth strategy before venturing into deals. Nonetheless, even in a sophisticated company, strategic definition can be surprisingly incomplete. This leads to significant delays in conducting due diligence, or to a lack of preparation in responding to deals when they become available (for example, responding to a banker’s deal book).

At a large global industrial company, one division was very successful at getting internal approvals, whereas another division was not. Both divisions had good overall financial performance, but the successful division also paid specific attention to integrating its M&A plans with its organic growth strategy. The division leaders reviewed this cohesive combined strategy with the CEO every year. The result was a predisposition at the corporate level toward deals proposed by this division, even before they were presented. The other division had to go through an extensive analysis and approval process, especially for M&A deals involving adjacent or unfamiliar markets.

This is not just a matter of generating buy-in. Deals need to be generated with strategic intent, no matter how attractive the financials appear to be. This means that the acquired business should bring in capabilities that fit with the capabilities system of the larger company — or bring in new products and services for which the acquiring company’s capabilities system is relevant. Otherwise, a deal may put the core business at risk or drain attention, time, and resources. In particular, mergers and acquisitions should reinforce and help build the capabilities that distinguish the core business from its competition.

 2. “We have a thorough understanding of our markets.” Most business leaders are predisposed to believe this. They have been involved in commercial transactions within their industries for the bulk of their careers. However, a merger or acquisition can easily bring a company face-to-face with aspects of its market that it doesn’t know well.

An oil and gas equipment company was about to buy a company that specialized in innovative technologies for reading container capacity. The would-be acquirers thought they knew the market well and assumed this technology — which was most useful for partially loaded containers — would fit. But during due diligence, they discovered that in the largest markets, full load deliveries are the norm, and the technology thus had little utility. Because they weren’t blindsided by their own assumptions, the company avoided making a potentially bad acquisition.

Draw on multiple perspectives, whether from inside or outside the company, to help you become aware of these sorts of issues. As you conduct due diligence, make sure you have a reasonably complete and up-to-date picture of the value chain for your target company’s industry; the relevant market size, relevant segmentation data, and trends and growth drivers in each segment; customer needs by segment; customer attitudes toward the target company; current profit and profit potential by segment; technology trends and potential substitute products; geographic nuances by segment and product; competitive landscape (including as much as you can glean about products, pricing, and costs); and barriers to entry and new disruptive entrants.

3. “Our core market success is replicable in adjacent markets.” The traditional definition of an adjacency is products and services that share some qualities or characteristics with your core market. For example, a manufacturer of frozen foods might think of entering the dairy business, because both businesses involve delivering precooled foods to supermarkets. In reality, however, most moves into adjacent markets are unsuccessful, especially those made through M&A. In our experience, only companies that have a well-defined M&A process that recognizes the importance of existing capabilities and the changes that will be required to evolve those capabilities have successfully executed such transactions with regularity.

Thus, when beginning an acquisition campaign, you should begin by evaluating your capabilities. Examine how well these will apply to the businesses in the company you are acquiring — and how well the capabilities you acquire will mesh with your own lineup of products and services.

The best acquirers take a strongly disciplined approach to business building, with strict criteria for acquisitions. These could include criteria related to target market size, degree of market fragmentation, gross margin targets, cyclicality and volatility, brand strength, customer concentration, and robust replacement parts or other streams of ongoing business. Such strict criteria should supplement the usual, simpler measures used by less-disciplined companies, which might be limited to target company size as well as revenue and earnings growth. When you reject target companies that do not fit your strictest criteria, you put a stake in the ground indicating that any company acquired will set up your company for above-market growth.

4. “We have a well-defined due diligence process.” Many corporate leaders learn the hard way that this isn’t true, particularly when their company is an infrequent acquirer or when they consider acquiring companies in different markets. They underestimate the amount of effort and time consumed by an acquisition or merger. Even when experienced senior executives are overseeing various functions, enthusiastic junior staff are executing the requisite tasks, and some due diligence processes are in place, there is still a tremendous amount of work to be done in a compressed time frame.

 

You may find, as you begin due diligence, that your processes are incomplete, and your team lacks the expertise to evaluate commercial prospects; technologies; legal issues; manufacturing footprints; procurement concerns; intellectual property; tax questions; regulatory issues; export controls; or issues related to health, safety, and the environment. At the least, you will need detailed standard questionnaires covering these issues; more likely, you will need to bring in experts who can answer questions with confidence.

However, this is not just a matter of finding the right people to help. One large diversified industrial company had a thorough due diligence process with pockets of expertise — but it was not well documented, making it difficult for everyone to coordinate, and for new staff to get up to speed. At one point, the corporate M&A team asked a divisional M&A team to add targets that had already been identified (by the division) as improbable candidates. Another business unit suggested a candidate that was not a good strategic match, but that was located conveniently close to the business unit’s headquarters.

To avoid these types of problems, arrange regular meetings of new business development practitioners across internal boundaries. Document what went well and what did not go well following each transaction, to share with the group. Use these meetings to drive best practice development; share basic information about the market, as well as simple tips and tricks. Create due diligence templates and questionnaires, such as data request templates, so that work can flow seamlessly, even if individual staff members depart in the middle of a project.

5. “Our legacy due diligence team knows what they are doing.” Even experienced due diligence staff may not have the right skills for every deal. It is important to bring in pertinent expertise to fully analyze a given opportunity, especially for adjacent markets, new geographies, and unfamiliar technologies.

In one case involving the acquisition of a technology firm whose primary customer was the U.S. government, due diligence was conducted by a team with very little experience in the defense sector. They correctly pointed out that margins on the target firm’s government business were declining somewhat; however, they failed to discern a coming wave of increased government spending in the company’s key business. The purchaser hesitated, opening the door for another buyer to come in and purchase the company. That competitor rode the wave of growth, enjoying high returns.

M&A is a complex process that requires significant and diverse skills and resources to execute well. By being aware of the trap these common fallacies and self-deceptions present, teams can design and execute an M&A process that is more effective and yields outcomes that consistently create rather than destroy values.  Salam

 

 

wedding of the gods-the final episode

How to Be a Truly Global Company.An essay.

During the high-growth years between 1992 and 2007, the globalization of commerce galloped at a faster pace than in any other period in history. Now, amid the chronic unemployment and anti-trade rhetoric of the post-financial-crisis world, some observers wonder whether globalization needs a time-out. However, the experience of multinational companies in the field suggests the opposite. For them, globalization isn’t happening rapidly enough. Whereas GDP growth has stalled in the industrialized world, consumption demand is still expanding in China, India, Russia, Brazil, and other emerging markets. The 1 billion customers of yesterday’s global businesses have been joined by 4 billion more. These customers reside in a much larger geographic area; three-quarters of them are new to the consumer economy, and they need the infrastructure, products, and services that only global companies provide.

The problem is not globalization, but the way our current institutions are set up to respond to this new demand. The prevailing corporate operating model does not work well with the structural changes that have taken place in the global economy.

Most companies are still organized as they were when the market was largely concentrated in the triad of the old industrialized world: the U.S., Europe, and Japan. These structures lead companies to continue building their global strategies around the trade-offs and limits of the past — trade-offs and limits that are no longer accurate or relevant.

One of the most prevalent and pernicious of these perceived trade-offs is the one between centrally driven operating models and local responsiveness. In most companies, an implicit assumption is at play: If you want to gain the full benefits of economies of scale — and to integrate common values, quality standards, and brand identity in your company around the world — then you must centralize your intellectual power and innovation capability at home. You must bring all your products and services into line everywhere, and accept that you can’t fully adapt to the diverse needs and demands of customers in every emerging market.

Alternatively (according to this assumption), if you want locally relevant distribution systems, with rapidly responding supply chains and the lower costs of emerging-market management, then you must decentralize your company and run it as a loose federation. You must move responsibilities for branding and product lineups to the periphery, and accept different trade-offs: more variable cost structures, fewer economies of scale, more diverse and incoherent product lines, and more inconsistent standards of quality.

Some companies try to use strict cost controls to manage these trade-offs. They put in place a decentralized operating model with some central oversight, usually augmented by outsourcing. But this is a tactical move based on expediency, rather than a global strategy. This approach leads to suboptimal results in today’s complex world.

Other false trade-offs are visible in the tension many companies experience between their current business model and the needs of the emerging markets they are entering. They wonder:

• Whether to serve existing customers in their home countries or new customers in emerging countries.

• Whether to meet competitive quality standards demanded by consumers in wealthy countries or offer just the “good enough” features that poorer customers can afford.

• Whether to pursue a strategy of premium or discount pricing.

• How to attract and retain resources and talent, which are perceived as draining away from emerging markets to the industrial world whenever employees are permitted to migrate.

• Whether, in using resources strategically, to follow the typical Western orientation (toward reducing labor and accumulating capital) or the view from emerging markets (where labor is inexpensive, capital is difficult to accumulate, and therefore it is worth investing in building large workforces for growth).

orporate leaders expect to have to make stark choices as they expand. But the time has come to embrace a new business model that encompasses both the established advantages of industrial markets and the opportunities of emerging economies. (Also see “Competing for the Global Middle Class,” by Edward Tse, Bill Russo, and Ronald Haddock, s+b, Autumn 2011.) Instead of struggling to apply a Western business model everywhere, you can adopt a business model that treats decentralization, centralization, current practices, and potential disruptions not as trade-offs, but as complements.

C.K. Prahalad, 1941–2010
Portrait by Martin Mörck

In a previous article, “Twenty Hubs and No HQ” (s+b, Spring 2008), we proposed an essential part of this business model: a global corporate structure with no headquarters. Instead of a single center, companies would establish core office “hubs” in many or most of the 20 gateway countries in the world that house 70 percent of the world’s population and account for 80 percent of its income. These 20 countries include 10 from the industrialized world: Australia, Canada, France, Germany, Italy, Japan, the Netherlands, Spain, the United Kingdom, and the United States. The other 10 are emerging markets: Brazil, China, India, Indonesia, Mexico, Russia, South Africa, South Korea, Thailand, and Turkey.

A hub strategy enables a company to provide products and services everywhere. But it will not in itself resolve the trade-offs of globalization. Companies can accomplish this only with a more comprehensive business model that (1) customizes their products and services in hubs around the world, (2) unites business units around a platform of proprietary knowledge and the building of competencies, and (3) arbitrages their operating models to gain cost-effectiveness, productivity, and efficiency.

An Operating Model without Trade-offs

Some companies are already following these three imperatives, pursuing all of them simultaneously. Among those that we have studied in detail are Toyota, Marriott, McDonald’s, GE Healthcare, and several global cellular telephone companies. Leaders in these enterprises have trained themselves and their teams to be very deliberate about where to customize, how to build competencies, and what to arbitrage. With this type of operating model, there is no longer a need to choose between a centralized and a decentralized structure, between current and future customers, or between a strategy grounded in industrialized economies and one grounded in emerging economies.

To illustrate these three imperatives, we draw on the experience of GE Healthcare (customization), McDonald’s (competencies), and the Chinese and Indian mobile telephone industries (arbitrage). It’s important to remember, however, that all these stories involve integrating all three elements — a rare feat. Only with the full operating model can a company gain the benefits of decentralization, centralization, and outsourcing without making compromises.

• Customization. The key to this imperative is to deliver products and services in a locally competitive way. That means they must satisfy the needs and wants of diverse customers, in terms of features, affordability, and cultural affinities. Because needs and wants vary greatly among people at different income levels, this objective is complex and expensive to reach in any centralized way. That is why companies must leverage the diversity of a decentralized structure.

Is there a simple and coherent way to deliver customization to customers in 200 countries spread over five continents? The answer is yes, through the hub system: Companies customize only in a maximum of 20 gateway countries. With this limited investment, they can serve customers everywhere, on every level of the income pyramid, from the wealthiest to the poorest. These 20 countries have enough scale in themselves to offer the necessary economies and growth potential. They are also well equipped with skills: Manufacturers of goods will find the suppliers and employees they need to meet reliable quality standards in operations, and they will also find innovation and R&D facilities already existing there. The logistical and institutional infrastructure is well developed in most of these gateway countries, integrated into international regulation and trade. Each gateway country can independently perform most necessary business activities; when linked together, they make up a formidable network.

Many companies will settle on fewer than 20 hubs; each industry requires a different selection of gateway countries to meet differing tastes and needs. Reducing complexity in this way also dramatically reduces a wide range of overhead costs for large global companies, while enabling them to travel the last mile to customers. For example, by trimming back supervisory layers to only those needed by the gateways, companies can cut overhead costs significantly.

GE Healthcare’s story illustrates how expanding through a few gateway countries enabled it to thrive in many locations. Its primary business is high-end medical imaging products. In the late 1980s, GE Healthcare started investing in ultrasound machines, designing separate devices for use in obstetrics and cardiology. Over time, the business became a market leader, with a portfolio of premium products employing cutting-edge technologies, sold primarily to big hospitals in rich Western countries.

Very few devices made by GE Healthcare were sold in China and India in the 1990s, although the medical need was enormous and the region represented a huge potential market. In these large but poor countries, the general population relied (and still relies) on poorly funded, low-tech hospitals and clinics in small towns and villages. None of these organizations could afford sophisticated, expensive imaging machines. There was a significant need for customization: Someone needed to create low-priced machines with basic features that were easy to use. The devices also needed to be portable, so that medical workers could bring the machine to the patient, rather than the patient to the machine.

GE Healthcare started a major effort in 2002 in China to tackle this problem. The initiative was favored by a corporate policy put in place a few years earlier: reorganizing some emerging-market enterprises into semi-autonomous “local growth teams” with their own P&Ls. This meant that GE Healthcare could now create a local business oriented to China’s particular needs and advantages, drawing on local talent and combining product development, sourcing, manufacturing, and marketing in one business unit. The price of a conventional Western ultrasound machine is between US$100,000 and $350,000. GE’s first portable machine for China was launched at a price of only $30,000, and by 2007 a newer machine was on the market for $15,000. Sales took off in China and then in a few other emerging-market gateway countries.

Soon, customization worked in the other direction. Applications were found for these devices in several rich countries as well, at accident sites and in clinics and emergency rooms. Sales rose from zero to more than $300 million in five years. In 2009 — as recounted by GE chief executive officer Jeffrey Immelt and innovation experts Vijay Govindarajan and Chris Trimble in the Harvard Business Review in October 2009 — GE announced that “over the next six years it would spend $3 billion to create at least 100 healthcare innovations that would substantially lower costs, increase access, and improve quality.”

• Uniting around a platform of competencies. This initiative means aligning your entire global company with a common core purpose, a body of proprietary world-class knowledge, and the competencies that distinguish your company from all others.

The core purpose must be understood equally in all functions and geographies of the corporation. Every individual should know the strategic principles of the business — which are the same around the world, but adapted differently in each locale. For example, providing “everyday low pricing” is the core purpose of Wal-Mart Stores Inc. Although that principle remains constant, the implementation varies considerably; Walmart in India is a joint venture wholesale operation, and Walmart in Mexico operates restaurants and banks as well as superstores.

he core competencies at the heart of this platform include proprietary technology and intellectual property. These are the unique pieces of knowledge and know-how that distinguish any company — not the applications or technologies, but the standards and platforms of knowledge that the company creates and makes its own. They may include manufacturing processes, supply chain and logistics systems, customer insight–gathering processes, or distribution and access systems. They are made available to all operations, everywhere in the world, and are used to customize offerings and arbitrage procurement and costs.

At the McDonald’s Corporation in the mid-2000s, this type of unity represented a dramatic shift away from the rigid hierarchies, brands, financial performance metrics, and reporting relationships of its old centralized model. The restaurant chain had embodied the centralization model for many years. Every aspect of the system had been standardized around the world: brand identity, product offerings, packaging systems, franchise arrangements, and the design of the stores. All this had come out of a single manual, and the company’s rigidity had helped it prosper, because it was seen as exporting an image of the American lifestyle.

But standardization began to reach its limits around 2001. There was a distinct shift in consumer taste toward healthier, more nutritious foods. In the U.S., fast-food restaurants in general and McDonald’s in particular were blamed by many for the emerging obesity epidemic, especially among American children. Customers started switching to other chains. In the rest of the world, McDonald’s was identified with American tastes, and seen as being out of sync with the needs of non-U.S. consumers.

The McDonald’s leadership responded by creating a new platform on which the company could unite: not standardization, but a common thrust to provide fresh food, healthier menu options, and customized offerings for different cultures. Product offerings were no longer centralized, and the menus at McDonald’s restaurants vary widely, while unity remains firmly entrenched where it should be — in branding, technology, and the business processes that gave the company its differentiation, cost bases, and productivity. The brand logo, color schemes, and store layouts are the same around the world. Procurement and distribution systems are centrally managed to ensure that deliveries take place on time to more than 32,000 individual restaurants. Structured training from a common playbook is given every day to store associates in all locations. The company’s proprietary knowledge remains centrally and rigidly controlled.

• Arbitrage. The final imperative involves gaining effectiveness and reducing cost by finding less expensive materials, manufacturing processes, logistics systems, funds sourcing, or infrastructure. Most companies have addressed this tactically, by offshoring back-office work or moving manufacturing to locations with lower-cost labor. This is generally a defensive or reactive move, rather than a well-considered strategy.

An arbitrage initiative is much more systemic. The business looks at its production flow and disaggregated cost chain as a whole, seeking optimized sourcing, sales conversion, and go-to-market options. The initiative approaches materials, factory locations, and people as part of a single system, taking into account the processes and procedures within the most important hubs, and among hubs as well.

The history of mobile telephony in China and India provides a good example of the power of arbitrage. These two countries together have more than 1 billion cell phone users, and the number of new connections in India alone exceeds a staggering 10 million a month. In the early 2000s, the groundwork for new networks in China and India was laid by a few farsighted telephone companies. At that time, landline networks were sparse, and the number of homes with phone lines was a minuscule fraction of the total households. The only way to build a profitable phone system was to create “network value”: access to enough other people and institutions to make the system feel indispensable. This meant providing telephone access to millions of prospective customers who had never used a phone, who lived on $2 a day, who had no money to buy the phones outright, and who lacked the bank accounts and credit cards that would allow them to sign service contracts.

The pricing structures reflected these realities. In India, for example, Reliance Industries Ltd. (a large nationwide conglomerate) sold Nokia and Motorola handsets for as little as $10, lowered call rates to two cents per minute for these phones, and sold prepaid cards that customers could use both to pay for and to ration their telephone use. It took skillful collaboration among cell phone manufacturers and carriers to accomplish the arbitrage needed for them to offer such prices. Manufacturers such as Nokia, Motorola, and Samsung offered their products, product knowledge, and R&D capability at a reduced cost; carrier companies such as Vodafone, China Mobile, and Airtel invested in cell phone towers and switching equipment with minimal return at first. Then Airtel in India took a hugely innovative step. Realizing that its own capital for network expansion was constrained, it brought in Ericsson, Siemens, Nokia, and IBM as network equipment and IT vendors, convincing them to forgo their ordinary fee structures. Instead, Airtel paid these companies on the basis of usage and revenue. Airtel thus converted fixed infrastructure costs to variable costs and improved its ability to offer low prices to customers.

Another form of arbitrage, deploying the most inexpensive marketing and distribution channel available, was an essential factor in creating a mass mobile phone market. Reaching people in remote Chinese or Indian villages was a huge challenge. Little grocery shops, often housed in temporary structures, were often the only commercial channels available to consumers there. These stores sold everyday-use products such as soap, cigarettes, and matchboxes. Instead of creating a new channel of dedicated telephone stores, the phone companies established partnerships with these outlets; they stocked and sold the prepaid cell phone cards. This would never have happened if the telcos had followed their old pricing and distribution models.

Bringing the Elements Together

Some companies recognize the benefits of customization; they are moving into new geographies through gateway countries. A growing number of companies are uniting around platforms of competencies. And, of course, many companies practice arbitrage. But until they join the few pioneers that combine these three elements, most companies will not get the full payoff of the new operating model. Indeed, the three cases described in the previous section are successful precisely because they integrated all three elements.

For example, GE Healthcare had to drop the price of its ultrasound machines by more than 90 percent in order to have its products accepted in emerging markets. Its solution involved not just customization, but arbitrage: It used an ordinary laptop computer instead of proprietary hardware. These machines did not have many of the features of their expensive counterparts, but they could perform such simple tasks as spotting stomach irregularities or enlarged livers or gallbladders. This made them critical tools for doctors at rural clinics. The laptop-based design, in turn, drew heavily on GE’s platform of competencies: specifically, experience with other projects that had shifted from using custom hardware to using standard computers. The new devices also incorporated breakthrough ideas from scientists in the GE system with deep knowledge of ultrasound technology and biomedical engineering.

Similarly, the McDonald’s story did not only involve unity around a platform. The company also saw the power of customization. Today, McDonald’s offers rice burgers in Taiwan, vegetarian entrees in India, tortillas in Mexico, rice cakes in the Philippines, and wine with meals in many European cities. McDonald’s also extended its already impressive arbitrage capabilities through sophisticated sourcing and distribution practices, tailored to each location’s opportunities.

The arbitrage in the Chinese and Indian mobile phone story also depended on the other two elements. Although the prices were low, the equipment was standard quality; networks had to seamlessly integrate with the world’s telecommunications systems. The companies involved, including the vendors such as Siemens, Motorola, and Ericsson, drew upon their platforms of proprietary knowledge to make it work. Everyone customized relentlessly, varying the payment plans, the amounts coded into phone cards, and the services offered to support the different needs and interests of telecom users in each country.

For another example of the way these three elements can be deliberately combined, consider the case of Marriott International Inc. Throughout most of its history, the company followed a centrally driven strategy with tight controls over the look and feel of its properties. But the company was also willing to experiment. For example, in 1984, it was the first hotel chain to offer timeshare vacation ownership.

Like McDonald’s, Marriott learned the problems of rigorous centralization firsthand. In 2001, when it opened a timeshare in Phuket Beach, Thailand, the venture failed. Gradually, Marriott realized that the reason had to do with cultural differences: Asian tourists, especially the Japanese, want to visit multiple places during a single vacation. They typically stay two or three days in one location and then move on. This made them very different from Marriott’s U.S. and European holiday travelers, who prefer to stay in one place for a week or more. In 2006, the hotel chain launched a timeshare network called the Marriott Vacation Club, Asia Pacific. Customers could hop among locations, spending their annual club dues anywhere in the network. This customization initiative turned a failed project into one of the company’s fastest-growing businesses.

In initiatives like this, Marriott draws on its central strengths, including a devotion to knowledge that starts with the CEO (and son of the founder) J.W. (“Bill”) Marriott Jr. In his 1997 book, The Spirit to Serve: Marriott’s Way (with Kathi Ann Brown; HarperBusiness), Marriott wrote, “Our principal product is probably not what you think it is. Yes, we’re in the food-and-lodging business (among other things). Yes, we ‘sell’ room nights, food and beverage, and time-shares. But what we’re really selling is our expertise in managing the processes that make those sales possible.” This approach is reflected in Marriott’s strong “spirit to serve” philosophy and its highly centralized recruiting approach for seeking out dependable, ethical, and trustworthy associates. The company is known in the U.S., for example, for its robust efforts to train welfare recipients to make a permanent transition into the workforce, and worldwide for its extensive profit-sharing practices and human resources support.

The company’s collegial culture allows it to pare back the expenses of oversight and supervision; everyone naturally pays attention to cost and efficiency. Marriott also demonstrated its facility for arbitrage through its early adoption of the Internet as a vehicle for making and confirming reservations.

Many CEOs and top managers are still asking themselves when the bad times will end. No one has the answer, and even in a robust recovery, competition will not slacken. A better question is, What can we do now to establish ourselves in the new global economy? Consumer-oriented companies will need to deliver world-class quality in their products and services, customized for purchasers in multiple locales and circumstances, with significant price reductions (affordable to people at the lowest income levels). They must also provide their customers varying forms of access (owning, renting, or leasing equipment). This cannot be done when a company is striving to balance decentralization and centralization. It can be accomplished only by companies that transcend the old trade-offs and seek operating models that allow them to serve the largest numbers of people while meeting the highest possible standards.

 

 

 

 

anyway poem...

People are often unreasonable, illogical and self centered;

Forgive them anyway.
If you are kind, people may accuse you of selfish, ulterior motives;
Be kind anyway.
If you are successful, you will win some false friends and some true enemies;
Succeed anyway.
If you are honest and frank, people may cheat you;
Be honest and frank anyway.
What you spend years building, someone could destroy overnight;
Build anyway.
If you find serenity and happiness, they may be jealous;
Be happy anyway.
The good you do today, people will often forget tomorrow;
Do good anyway.
Give the world the best you have, and it may never be enough;
Give the world the best you've got anyway.
You see, in the final analysis, it is between you and your God;
It was never between you and them anyway

All-new Porsche 911 to debut at Frankfurt

The latest generation of Porsche’s iconic 911 will make its grand entrance soon, and the chosen venue is none other than the upcoming 2011 IAA Frankfurt Motor Show. Code-named 991 internally at Stuttgart, this is sixth generation model of the 911 lineage, and it debuts with two variants – Carrera and Carrera S.

While the silhouette and proportions are unmistakably 911, the body is all-new, featuring aluminium-steel construction, an approach that Porsche claims to shave up to 45kg off the car’s weight from its predecessor. In terms of body measurements, the 991 sits slightly lower than the outgoing 997 and its wheelbase is stretched by 100mm.

Porsche 911 Carrera

Continuing with tradition, both launch variants of the 911 are powered by flat-six engines, displacing 3.4 and 3.8 litres in the Carrera and Carrera S respectively. The base Carrera’s motor is good for 350hp, but is still able to return a rated fuel consumption of 8.2 l/100km in the NEDC test cycle if equipped with the 7-speed PDK dual clutch transmission. Carbon dioxide emission is measured at 194 g/km, making it the first Porsche to dip below 200 g/km. Meanwhile, the Carrera S is rated at 400hp with fuel consumption quoted at 8.7 l/100km and CO₂emissions at 205 g/km if equipped with PDK.

Although PDK is likely to be the transmission of choice for most 911 buyers, those opting to stick with three-pedaled motoring will have the privilege of being among the first in the world to try their hands on a 7-speed manual transmission. With economy and emissions being key talking points these days, the new 911 is naturally equipped with a range of fuel-saving measures such as auto start/stop, thermal management, electrical system recuperation, and electric power steering.

Porsche 911 Carrera S

It’s not all curtains for the old 997 though. The outgoing model will sign off with a bang – the 911 GT3 RS 4.0, which will also make its first public appearance in Frankfurt. This 600-unit limited edition model comes with a 4.0-litre flat-six engine (biggest ever in a production 911) with 500hp at its disposal. Porsche claims a Nürburgring-Nordschleife lap time of 7:27.

Farewell to the 997 – the 911 GT3 RS 4.0

Another even more exclusive limited edition model to be showcased by Porsche is the Cayman S Black Edition, limited to 500 units. Power of its 3.4-litre flat-six has been boosted by 10hp to 330hp, allowing it to complete the century sprint in 5.1 seconds with the 6-speed manual transmission and 5.0 seconds with the optional PDK.

Porsche Cayman S Black Edition

Also set to make a first appearance on Porsche’s Frankfurt stage is the Panamera Diesel, powered by a 250hp / 550Nm 3.0-litre V6 diesel engine paired with an 8-speed automatic transmission. Tested in the NEDC cycle with optional low-friction tyres to record consumption figures of 6.3 l/100km, the Panamera Diesel has a theoretical cruising range of 1,200km per tank.

Porsche Panamera Diesel