November 17th

At the National Academy of Public Administration’s Annual meeting the subject turned to the implications that the Leader’s Guide held for management in a crisis.  The moderator, Tom Timons of Federal Drive Time Radio, first asked what do we mean by a crisis. We are focused on planning for leadership in a crisis.  But what does that mean?

For me, a crisis in government might have once been limited to natural security crises or the emergencies that are the mission of FEMA.  But today this has been considerably broadened as crises in our lifetime and recent memories range from the Arab Oil Embargo to the financial crisis and from Japan’s Tsunami to Katrina to the BP oil spill.  Crisis in government that generally does not respond with agility is any event where a critical parameter changes by a factor of 10.  The events that occur in the life of any company or government agency that Andy Grove of Intel called Strategic Inflection Points are now the crisis for which we are training future leaders.

The Playbook had at least two important points of intersection where leadership

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The Transformational Leader’s Playbook

August 12th

In the beginning, the opportunity to write a study on transformational leadership – interviewing leaders from agencies across the federal government seemed to be such a straightforward thing that I vastly underestimated the value that might becreated by being able to draw togetherthe views of senior officials at this point in time.

First, there is the point in time. There has been no comparable time in the past 44 years of government. In January of 1969 Lyndon Johnson, the father of the Great Society left office but by many measures the age of “big” government had not even arrived.

A combination of technology (because we can), natural resource and economic crisis (Arab oil embargo) and political and constitutional crisis (Watergate & Ralph Nader) would conspire to make the government much larger than the Great Society Planners had ever contemplated.

By most estimates, however, we have now met a time of constraints in which the bills for global leadership, resource dependence and our lifestyle are coming due. Government will have to “right size”. There will be federal managers who have to drastically cut their programs but they aren’t going to have constituent groups coming in and showing them how they can do more with less.

Many will know where they need to go. But they will need a pathway to get there.

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The Uses of History

August 4th

As noted in an earlier post, in 2011, the U.S. Postal Service faces certain bankruptcy if the Congress does not act to modify the retiree health benefits payment required by the 2006 postal reform law.  Some might find it perverse to imagine that a strategic plan of more than a decade ago could be seen as a positive contribution when there a crisis today.

Yet a review of the 1997 strategic plan shows interestingly that the problems that are creating the crisis today were anticipated years ago.  The plans forecast that mail volume would decline and there was an imperative to rethink the nature of the mission of the agency and the means with which it delivers service.

In the introduction to the 1997 five-year strategic plan the Postal Service presented a vision of the future the follows.

As certain and clear as this path is, the future is not. Ten years from now, this same environment may be transformed by technologies in their infancies today. Ten years from now, the United States Postal Service mission responsibilities may be met only by a new understanding of universal service, access, and how best to deliver them. A decade from today, the Postal Service may have embraced technologies and systems as dramatically different as jet airplanes and robotic package sorters would have seemed to the 19th-century letter carrier.

Because this five-year plan is a living document, conceived to be flexible and adaptive to such environmental shifts, these challenges and external factors will be examined, weighed and — where appropriate — addressed in the years ahead. Ultimately, the philosophy underlying this plan, these goals, and their strategies is to create unique customer value as the Postal Service grows, improves and strengthens its financial foundation. This is a philosophy that embraces change. Because, in change, there will be opportunity for the United States Postal Service to serve its customers better.

Ultimately, government leaders and for that matter, leaders in every sector, are necessarily limited in their capacity to reshape markets, to alter macro economic trends or to change the nature of their agency missions.  Leaders cannot anticipate that their actions will be judged failures if their plans are undercut by massive societal and market shifts.

In coming years there will’s most certainly be frustration with the need to realign government service and to downsize its presence.  Yet, seeing in a larger context, the requirement to publish a formal strategic plan offers an opportunity for proactive leaders to create markers, waypoints on a journey long journey of continuous improvement.

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The American Post: Where From Here

August 3rd

“It’s time to rethink the mission and meaning of the United States Postal Service. The old model is breaking, if not broken.” Kansas City Star Editorial

With these simple words the Kansas City Star took on the issue of the future of the Postal Service.
The point that has been lost in many conversations about the future of the Postal Service – and there have been many in the past 2 decades – is that the basic business model of the USPS is not working any more. The postal reform debate has focused on pensions and retirement costs (we will get to that). But the issue of first principles is

  • How will the postal business model be sustained in a world in which customers are choosing to communicate differently?

The question facing the USPS – that is currently urgently imploring Congress to address the issue of a pending multi-billion dollar payment that it cannot make - is simply how can future revenues exceed future expenses? Without an answer to this, there is no sustainable business model and someday soon there won’t be a Post Office unless something changes.

The debate over arcane pension and retiree health benefit topics is about whether the law should be changed to reduce the expenses that the USPS is required to pay. The costs are simply too high.

The discussion over regulation, monopoly, universal service and a host of questions that economists like to discuss is all about what rules should guide the generation of revenue? The revenues are too low.

Television ads from the American Postal Workers Union say that no taxes support the USPS, only stamp revenues. There are three reasons why they are presenting a misleading picture. First, the Postal Service receives “implicit subsidies” as Congressman Darrell Issa points out. The Federal Trade Commission recently detailed the way in which the USPS has advantages that a private competitors do not enjoy. (And, to be fair, it has unique burdens too.) Second, the USPS does actually receive appropriation support, although it is admittedly in the form of “reimbursement” as apposed to classic “appropriations”, and in permissions to charge customers. But most importantly, the USPS is running in the red. It’s losing more than $8 billion and stamp revenues are not going to pay for all of the current costs.

So the post office and Congress are going to have to do something because stamp revenues are not enough to afford the labor costs and the current infrastructure. This is why the Kansas City Star is right on target.

The business model is broken and must be fixed. But to do this, America is going to have to face difficult choices about the mission of an institution that is historically at the core of our culture and our economy – but not so much any more.

The law says that the mission of the Postal Service is to “bind the nation together with the correspondence of the people”.

But in an age of electronic communication and social networks its reasonable to ask whether this is a mission that it can fulfill. (Whether it should extend its reach with electronic services like secure email is another question. But the law would have to be changed to permit it to do so. This was put out of reach in 2006, just as the recession and the electronic invoicing and bill payment was about to hit.)

So what should Congress do? Change the business model or change the mission? Something is going to have to give. In an electronic age in which America’s oldest communications infrastructure is now prevented by law from offering electronic services it is not possible to be “businesslike”, to sustain the old ways of doing business, and to bind the nation together – something is going to have to give.

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Directors Hazard and the New Rules of Governance

July 20th

The Murdoch hearings before Parliament gained a global audience and once again served to focus attention on the governance issues that now seem to arise at every turn.  Or, at least, when something goes wrong and we look back to determine who was responsible? or who should have been responsible? we seem to be confronted repeatedly with issues of governance and questions of moral hazard.

Where you responsible Mr. Murdoch?  No, he answered the people he trusted were responsible and the people that they trusted.

Unfortunately, since there had plainly been wrongdoing in the interest of selling more newspapers, Mr. Murdoch’s answer became the centerpiece of much of the coverage that followed.  Should he have assumed greater responsibility?  Was it even true that he didn’t know what was happening?

For directors who are responsible for protecting the well being of their companies, this answer raised troubling questions (once again) about the nature of moral hazard.  Economists talk about moral hazard (a condition that occurs when a party that is insulated from risk behaves differently than they would if they were exposed to the risk) as a case of information asymmetry.  Insurers need to be protected, according to the theory, from cases where the insured do not behave as they would if they had no insurance, if they were themselves subject to the full risks of their behavior.

In the 17th Century when insurance companies were first grappling with the concept of risk, they sought to understand whether the people that they insured would behave in a riskier manner as a result of the insurance.  In the case of health insurance today, there is ongoing debate over whether insurance encourages an overconsumption of health care and then there is a debate over whether that’s a bad thing.  Co-payments and other devices are used to encourage the consumer to assume part of the risk.

But in recent years, especially after the financial crises of 2008, the question of risk to the taxpayer became clear as institutions were protected, at taxpayer cost, from behaviors in which they had assumed too much risk.  Directors and national leaders, it was reasoned, would be better able to protect shareholders and taxpayers if the actions of CEOs were less protected and if their decisions were required to be transparent.

Michael Anteby, an associate professor of organizational behavior at Harvard Business School, writes in Working Knowledge, an HBS blog that “many companies today operate like Russian nesting dolls, relying heavily on other companies or external individuals to conduct many of their activities”.  (“Rupert Murdoch and the Seeds of Moral Hazard”)  Anteby expands the concept of agency and moral hazard by looking more broadly at the implications of the interconnectedness of our society.  He is concerned that when companies interconnect the “associated moral hazard often goes unnoticed.  Such risk can prove even greater when the various elements of the ‘delegation chain’ obey different standards.”

Whether or not the Murdochs knew about the phone hacking at the News of the World they were plainly in a situation of “plausible deniability”.  In the food and apparel industries, Anteby argues, there is a need to “secure” all elements of the production chain.  Whether they have in fact recognized this and whether there is a similar requirement in other industries is a debatable point.  But certainly one of the most interesting consequences of Rupert Murdoch’s denial of responsibility for the actions of his agents was to raise once again the question:  If not you, then who is responsible for the actions of your employees?

Future directors will have to think carefully about what these emerging concepts of “responsibility” will mean for them.  Will transparency be sufficient to protect the shareholders and the public?

We have reached a time when every company is an IT company.  Some Boards are beginning to see this and to grapple with the risks associated with information.  They may not yet have reached the point where they are grappling with the risks of information asymmetry and, if transparency is an antidote to the problem of the Russian nesting dolls, the consequences that this form of insurance will convey.

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UK’s Watergate

July 19th

The Parliamentary Hearing into the actions of News Corp broke new ground and the whole matter has opened a new requirement for business analysts everywhere.

First, the questioning of Rupert Murdoch and his son on live international television was an extraordinary spectacle worthy of, say…Rupert Murdoch.

The opportunity to inquire into the most intimate details of corporate governance of one of the most powerful men in the world is extraordinary theater.

And, in this case, there was an element of human drama that would have been difficult to miss.  Here was Murdoch being asked “what did you know and when did you know it?”  He was given the choice that always dominates discussions like this one – what did you know about this scandal?  What steps did you take?  Obviously, the witness cannot say that he was fully informed and took actions to make things better for his company.  Now that the dam has broken and there is a formal, legal inquiry, any actions taken that were protective have the taint of being conspiratorial.

So what could he say?  He could say that he was a bad manager.  Or he could say that he was foolish or stupid.  Or he could say that he did not know.

But if he didn’t know and if he was a competent manager, then his son must have known.   So there was a human drama of potentially throwing his son under the bus.  Of course, his son was the Chief Executive and perhaps should have taken steps long ago.

Finally, there should be little question that this is not a “UK” problem as much as the Murdocks might have wished that it were.  US law – foreign corrupt practices and licensing before the FCC – make this inquiry a US inquiry as well.

The new ground?  In their answers the Murdochs referred frequently to their reform of the corporate governance committee.   Clearly it would have been better to have had a Management and Standards Committee that reported to the independent directors.   The corporate governance process would have been better protected and that decision may turn out to have been a multibillion dollar decision.

In the end, it’s hard to predict how extensive the damage will turn out to be.  Business analysts everywhere will have to be even better at being able to assess events and processes like this one.

New ground at a minimum, indeed.

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Postal Reform 2

May 17th

What has become clear in the recent debate over financial crisis at the Postal Service is that there will be another round of debate over reform.  Round 1 began 1995 when Marvin Runyon confronted the new Republican Congress that had begun to talk about privatization almost from Election Day 1994.  There was also talk of new deals in which the revenue stream of the USPS would be tapped to pay for budget priorities.  A need for reform was clear.  But the debate lasted from 1995 through 2006 when the Postal Accountability and Enhancement Act (PAEA) was finally passed and signed into law.

In 2011, as a new Republican Congress has begun to review the financial crisis that is pending for the Service, there will again be a new debate that seeks to reform the USPS.

But as the debate emerges, inevitably there will be a question about Round 1.  What was learned from experience with PAEA?  How well did it serve the needs of the USPS?

In 2007 after the first law was passed, I wrote a paper for an international conference sponsored by the Rutgers Center for Research in Regulated Industries.  My co authors were Larry Buc and Pierce Myers, an economist and a lawyer who were as knowledgeable as any professionals working in the postal and delivery industries.  We asked “how should the new law be evaluated?”  As the Postal Reform Debate 2 began to emerge Larry Buc and I wrote another paper for the Eastern Conference of CRRI.  (Click on “paper” to see our 2011 paper.)

We reexamined the criteria from the 2007 paper and concluded that the emerging debate was going to miss the underlying question – what kind of a law will be needed to make the USPS a viable institution in the 21st Century?

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Public Sector Takeover? We Need a New Powell Doctrine

April 11th

Professor Jim Heskett asks When Should the Public Sector Take Over in the Event of a Meltdown? in the newest edition of Working Knowledge.

There’s a need for a new doctrine such as the one that Former Secretary of State Colin Powell sought to define to answer the question when to intervene – remember that “if you break it you own it”.

There is strong value in the HBS “analysis-decision-reflection” framework for questions such as those of Professor Heskett – when should the public sector takeover strategy be used in the case of a meltdown? There are, as has been noted in the discussion that Professor Heskett’s question triggered, significant questions of public sector values as well as public sector competence.

The question of the public’s right to know is a good example of the issues underlying this concern. In Japan there has been strenuous debate following the near meltdown at the Fukashima plant about the right of the public to know about the risks and the state of the crisis. Here the comparison of last year’s BP oil spill is instructive. In 2010 when BP was finally forced to make the video from the undersea camera available on-line, expert estimates of the extent of the damage of the oil flowing into the sea jumped by tenfold in 24 hours in comparison with previous assessments that were limited to company data after it was screened. Disclosure would seem to be one area where there are strong public sector values at stake.

But takeover? Even assuming that the issue of competence could be resolved, that some form of expert conservatorship could be established (as for example, in the case of Fannie Mae in 2008) there are two questions that will require analysis in every meltdown case: What’s the cause of the problem? And what are the public interests at stake?

The day may come when some will argue that there should be a takeover of the money losing Postal Service for example. (See RReisner, “When a Turnaround Stalls”, HBR 2002.) After all, it will be argued, the post office is losing billions each year.

But in fact, analysis will show that the Postal Service would have broken even so far this year if it had not had to “pre pay” the health care costs of its retirees, a special multibillion dollar provision added to postal reform in 2006.

So is the Postal Service a dinosaur of the information age that could meltdown? Should there be a public takeover? You have to first analyze what’s the problem?

In the short term the postal service is losing billions so that Congress can sustain its pay/go rules. This is an accounting problem having to do with federal cash cow status.

But the long term? Is there a need to move paper and packages? Through a public infrastructure? For how long? What’s the 2030 forecast? How can revenue exceed costs? What should the Postal Service be permitted to do to make money? What should it be free to do to cut costs?

Before the rhetoric that the Postal Service is “not too big to fail” starts and someone decides that creating a postal meltdown is a good idea, its useful to analyze the causes of crisis and decide whether there is a public interest at stake.

The public sector does some things very well, but not everything. Public takeovers are like invading Libya. We want to be very careful to understand where the problem is coming from, what can be done about it, and to continuously improve the performance of interventions before we try them.

We have vast social and economic systems like the Postal Service and Medicare and Medicaid and Social Security that will have to be realigned in coming years. There may have to be a threatened meltdown before the political consensus will support action. But public takeover? Even by a competent designated management team, we should be clear on causes and remedies, very clear, before we move there.

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Then and Now

March 10th

In the late 1960s a French journalist named Jean-Jacques Servan-Schreiber
wrote The American Challenge, one of the most popular books ever published in
France, about the silent economic competition between Europe and the US. The
popularity of the book was partially based on its strategy for European
Unification to match Americaʼs emerging power. As de Gaulle resigned in 1969, Servan-Schreiber offered a contrasting view for a resurgent, unified Europe.

Even more importantly for Americans, the book offers a high water mark
documenting American economic strength. In spite of American preoccupation
with Vietnam, there were many others in the world who envied the economic
power of the US. At this moment in 2011,  it seems as though a peak had
been reached some time ago.  The American Challenge documented a high point of economic
achievement emerging from the 60s.  In light of the challenges that face the US today, when many are beginning to take stock of the economic vitality that appears to have been lost, that moment in 1970 documents an interesting point of perspective.

To contrast the world of 197o with today it’s useful to seek data that might give content to the comparison.  The 1970 Fortune 500′s top 30 companies compared with the Fortune 30 from 2010 seemed to be an appropriate comparison.  Primarily, I wanted to see whether a comparison of the top firms in the U.S. economy – then and now – would tell any stories.

Table 1 lists the top 30 firms from the Fortune 500 of 1970 and makes the
comparison with 2010.

THE TOP OF THE FORTUNE 500[1]

1970 List 1970 Sales 2010 List 2010 Sales
1. General Motors $24.3 billion 1. Wal-Mart Stores $408 billion
2. Exxon [Mobil[2]] $14.9 2. Exxon Mobil $285
3. Ford $14.8 3. Chevron $164
4. General Electric $8.4 4. General Electric $157
5. Intl. Business Machines $7.2 5. Bank of America $150
6. Chrysler $7.1 6. ConocoPhillips $140
7. Mobil $6.6 7. AT&T $123
8. Texaco $5.9 8. Ford Motor $118
9. ITT [Industries] $5.5 9. J.P. Morgan Chase $116
10. Gulf Oil $5.0 10. Hewlett-Packard $115
11. AT&T Technologies $4.9 11. Berkshire Hathaway $112
12. U.S. Steel $4.8 12. Citigroup $109
13. Chevron[Texaco] $3.8 13. Verizon Communications $108
14. LTV $3.8 14. McKesson $107
15. Dupont $3.7 15. General Motors $105
16. Shell Oil $3.5 16. American International Group $103
17. CBS $3.5 17. Cardinal Health $100
18. Amoco $3.5 18. CVS Caremark $99
19. General Telephone & Electronics $3.3 19. Wells Fargo $99
20. Goodyear Tire & Rubber $3.2 20. IBM $96
21. RCA $3.2 21. United Health Group $87
22. Esmark $3.1 22. Proctor & Gamble $80
23. McDonnell Douglas $3.0 23. Kroger $77
24. Union Carbide $2.9 24. AmerisourceBergen $72
25. Bethlehem Steel $2.8 25. Costco Wholesale $72
26. Boeing $2.8 26. Valero Energy $70
27. Eastman Kodak $2.7 27. Archer Daniels Midland $69
28. Proctor & Gamble $2.7 28. Boeing $68
29. Atlantic Richfield $2.7 29. Home Depot $66
30. Rockwell $2.7 30. Target $65
[1] With appreciation to Fortune Magazine and CNN Money.  From http://money.cnn.com/magazines/fortune/fortune500_archive/full/1970/

[2] Their convention is to show the current name of the company. I have put the changed part in brackets.

My conclusion is that there are almost too many stories to tell. Just this
comparison shows a number of the dramatic transformations of the economy in
our time.

  • The dramatic consolidation of the oil and gas industries and their continuing geopolitical problems stands out. Perhaps as we watch the run up in oil prices and recognize once again that American dependence on conventional oil has not been broken, the vulnerability of the worldʼs economy to an exceptionally fragile set of political arrangements is still clear. The missing names are particularly obvious (Texaco, Gulf, Chevron, Shell, Amoco, and Atlantic Richfield) and with revolution in Tunisia and drama unfolding in Libya and Bahrain this is not a story that is complete.
  • The automotive industry’s crisis has been a long running story over 30 years of American competitiveness but the loss of Chrysler, slippage of General Motors and Ford’s almost surprising success is still notable.
  • Part two of this story is the dramatic loss of the American industrial base.  The missing companies like US steel, LTV, Union Carbide, Bethlehem Steel, and Rockwell are interesting and itʼs apparent how much has been hollowed out of the American economy.
  • Perhaps a related part of this story is the financial crisis and the loss of thefinancial base. Bank of America and J.P. Morgan Chase, Citigroup, AIG, Wells Fargo all have substantial sales. But they acquired substantial parts of their modern portfolios when icons of finance collapsed. General Electric is fundamentally a different company today then it was 10 years ago when GE Capital was playing such an important role in its success as Jack Welch retired.

Oil, manufacturing and finance, all showing the effects of significant turmoil now
are managed with exceptional attention to managing risk. The picture of
consolidation and continuing exposure to powerful global forces can be seen in
each sector.

  • The story of the telecommunications sector, the Internet, the changes in the computer industry almost offer to many stories to create a meaningful summary. In the information sector alone the story of revolutionary change has involved changing government roles and regulations, Globalization, technology innovation and social trends that were rarely anticipated in 1970. CBS is no longer the company that it was in 1970. Verizon and AT&T barelyresemble their 1970 counterparts. Above all, this sector explains why market capitalization rather than sales is probably a better measure of todayʼs marketplace.
  • The rise of retail in the current list is astonishing. Not only is Wal-Mart sitting in the lead position but the appearance of Kroger, Home Depot, Costco, and Target is fascinating. And of course
  • Finally, there is the story of an aging population and the appearance of Cardinal Health, CVS Caremark, United Health Group Amerisource Bergen on the list.

That’s only seven stories from a small shard of data. Yet it was surprising to me
that in this shifting picture there would so much that could be seen in this
comparison of the world of 1970 and the present.

My memory of the time dwells on the disruptions of Vietnam, civil rights
struggles and Watergate, but what is striking to me now about the two lists is the way in
which the “externalities” to corporate strategies have proven over time to be the forces that defined the companies that disappeared and the evident trends that are shaping the largest
companies that remain in the marketplace today.

I am not reassured by looking at the top 30 companies of the Fortune 500 today.
They would seem to illustrate an economy of accumulated wealth sitting at the
end of a global supply chain expanding its consumption of what other people
make. How long could such a picture be sustainable on todayʼs terms?

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The State of Strategy, 2011

March 4th

After reading the excellent and provocative Lords of Strategy only recently, I eagerly seized “The State of Strategy Consulting, 2011”. (A blog post by Walter Kiechel in the Harvard Business Review, March 2, 2011) I should have known that when Walter Kiechel cited the Book of Job in the first sentence of his post that the outlook was not going to be rosy.

His assessment of the state of strategy consulting was that the premier firms are going to have difficulty selling their services at premier prices and that they are already doing strategy work as a “loss leader.”

Of course, the Lords of Strategy itself would caution that it’s difficult to remove assessments of the value of management tools from their market context. Rationalizing portfolio strategies in the 1970s, grasping the transformative impact of the Internet on the five forces in the 90s…leaders have consistently found that in times of fundamental change, strategy tools have proven valuable. Bain research drew this conclusion several years ago.

So what should we make of our current context and what implications should future lords of strategy draw? A clear-eyed assessment might begin with the fact that the HBR has found it useful to facilitate a “conversation” blog and that multiple participants commented on the state of strategy consulting by referring to technology, open source concepts and agile responses.

The basic point of Walter Kiechel’s blog post (that when the premium firms pursue whale projects they are moving into a competitive space that will make premium pricing a challenge) is not contradicted by an even more important development. A challenge has been issued to the traditional concept of strategy in places like Tunis and Cairo with astonishing results.

Strategy, the “work of generals,” that Napoleon and Clausewitz adopted from the Greeks, is already being challenged in fundamental ways by technologies like Twitter and Facebook. Only a few weeks ago it would have been controversial to suggest that a democratic impulse is surging in the traditional constituencies of the firm who are demanding a seat at the table when the most sacrosanct of strategy concerns are decided. The future lords will have to adjust and anticipate the crowd that is gathering outside the door. While strategy firms are seeking new markets, the core concept of strategy is itself changing.

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