summary for this article :key theme, major findings, and key implications

Harvard Business Review www.hbr.org A classic boxing match offers useful lessons for seizing How to Thrive in opportunities during a downturn: True champions have the capacity for both Turbulent Markets agility and absorption. by Donald Sull Included with this full-text Harvard Business Review article: 1 Article Summary The Idea in Brief-the core idea The Idea in Practice-putting the idea to work 2 How to Thrive in Turbulent Markets 11 Further Reading A list of related materials, with annotations to guide further exploration of the article's ideas and applicationsIn today's volatile world, doing business feeis like competing in a heavyweight box ing ring.To prevail,should yourcompany rely on agility (nimbleness) to quickly spot and exploit market changes? For instance, shifting resources from struggling divisions to more promising ones can spur revenues. Or should you rely on absorption (tough ness) to withstand punches? For example, keeping a lot of cash on hand might enable your rm to weather unexpected threats. Sull recommends agile absorption: de ploying both capabilities in various combi- nations as needed.Through agile absorp tion, you consistently identify and seize opportunities while also retaining the Struc tural heft your company needs to thrive. Toyotafor example, maintains absorption by employing a large workforce, but unlike U.S. automakers, enhances agility with a combi nation ofexible work rules, variablejob as~ signments, and employee involvement. How to Thrive in Turbulent Markets JhejdeaitLPractice SOURCES OF AGILITY Source Denition ' Characteristics Operational Ability to improve operations and - Shared, detailed, and reliable real~time processes; for example, by introducing market and processperformance data new offerings, cutting costs, or - Clear performance goals enhancing quality fasterthan rivals - Mechanisms for holding people ' accountable forgoals Portfolio Ability to quickly reallocate resources ' - Diversied portfolio of independent units (cash,talent, managerial attention) - General managers who can be transferred from lessepromising business units to across units more attractive ones - Centralized control of key resources - Willingness to make unpopular resource reallocation calls Strategic Ability to seize gameechanging - Large war chest to nance big bets opportunities; for instance. by rapidly - Patience to wait for the right opportunities scaling up a new business, entering - Mechanisms for mitigating downside risk a new market, or betting on a new on big bets technology SOURCES OF ABSORPTION Source Purpose Low xed costs To weather challenges such as price wars or rising rawematerial costs War chest of cash To deploy against unexpected opportunities and threats Diversied cash flows To withstand downturns in specic units that can serve as stores of potential wealth you'll sell later Vast size To enable downsizing of operations and staff during crises Tangible resources To generate prots later (may include raw material deposits and real estate) Intangible resources To insulate your rm against short and mideterm market shifts (may include brand, expertise. and technologies) Customer lock-in To buy time when competitive dynamics shift (high switching costs, for instance, can discourage your customers from jumping ship) Protected core To bar competitors and provide safe cash streams to survive storms market Powerful patron To provide extra resources or buffer from market shifts during volatile times (may include a powerful government, regulator, customer, or investor vested in your rm's success) ACHIEVING AGILE ABSORPTION Tactic l Example Build absorption without hurting agility. Low xed costs enable your rm to weather diverse threats without impeding its ability to seize gamechanging opportunities. Manage the trade-offs. To promote agility, break your large company into independent prot- and-loss units. Each can quickly and continually probe different markets and spot opportunities to ll gaps. But to preserve overall absorptive capacity, you'll need to promote cooperation among them. Maintain a culture of agility. Agility can deteriorate as companies mature and acquire sources ofabsorption; for instance, a protected core market can |u|| rms into complacency. Nurture agility by focusing everyone on its dening values: for example. eliminate status symbols to signal that performance trumps titles or tenure. A classic boxing match offers useful lessons for seizing opportunities during a downturn: True champions have the capacity for both agility and absorption. How to Thrive in Turbulent Markets by Donald Sull In the dressing room before the fight, the ticipate a wily foe's deliberate shift in tactics. reigning heavyweight champion, George Fore- Uncertainty is also the defining characteris- man, bowed his head in prayer. In a few min- tic of business competition today. Competing utes he would defend his title against Muham- in volatile markets can feel a lot like entering mad Ali in a bout dubbed the Rumble in the the ring against George Foreman in his Jungle, held in Kinshasa, Zaire, and broadcast prime-or, even worse, like stumbling into a around the world. The stakes were high for barroom brawl. The punches come from all di- both fighters. They would split a $10 million rections, include a steady barrage of body purse-the largest to date-and the winner blows and periodic haymakers, and are thrown would hoist the championship belt. Foreman by a rotating cast of characters who swing bot- and his corner men did not pray for victory; tles and bar stools as well as fists. they took that for granted. Rather, they prayed Many managers consider the recent global that the champion would not seriously injure credit crunch and resulting economic melt- his opponent. Muhammad Ali, despite his down to be a one-off-that right hook they vaunted ability to float like a butterfly and never could have seen coming. Nothing could sting like a bee, entered the match as the be further from the truth. In a report, the ac- three-to-one underdog. Uncertainty is the defining characteristic of counting firm PricewaterhouseCoopers even any boxing match. Fighters and trainers can summarized the decade ending in 2006 as "10 years of high-speed change" characterized by study the tapes of past fights or select sparring "unsettling twists and turns," recounting a se- partners who simulate an opponent's style, but ries of events that confounded executives' they cannot predict a blow-by-blow chronology plans. Those included Enron's implosion, the of a fight, foresee spikes in confidence, foretell popping of the dot-com bubble, the September the errant punch that splits an eyebrow, or an- 11 terrorist attacks, the Gulf War, a sharp jumpHow to Thrive in Turbulent Markets in commodity prices, the rise of emerging mar- Operational agility. The first kind of agility ket economies, and growing concerns about is a company's capacity, within a focused busi- global warming. ness model, to find and seize opportunities to As they fight their way through the turbu- improve operations and processes. These op- lence, business leaders can learn much from portunities need not be sexy. Cost reductions, the Rumble in the Jungle. The two opponents quality improvements, or refinements to dis- vividly illustrate two distinct approaches to tribution processes can be just as valuable as mastering the brute uncertainty of the ring. Ali introducing new products and services-as was alert to fleeting opportunities and nimble the success of Toyota, FedEx, and Southwest at seizing them. Foreman lacked Ali's agility, Airlines illustrates. but because of his sheer bulk, physical The crucial factors here are speed and execu- strength, and toughness, he could absorb all tion-central tenets in the case of Companhia the punishment his opponent could dish out, Cervejaria Brahma. In less than two decades, all the while waiting for a chance to unleash his own powerful blows when his adversary the company rose from the struggling number- two brewer in Brazil to drive the creation of tired. the world's largest brewer, by merging first Companies can, like the contender Ali, em- with its domestic rival, Antarctica Paulista, ploy agility to spot and exploit changes in the market. Alternatively, they can rely on their then with Belgium's Interbrew, and finally with Anheuser-Busch. powers of absorption to withstand market Much of Brahma's rise to global leadership is shifts. Some, however, combine both ap- the result of its operational agility, honed in proaches and display "agile absorption"-the the harsh climate of Brazil's volatile market. ability to consistently identify and seize oppor- Marcel Telles, who joined Brahma as CEO in tunities while retaining the structural charac- 1989, had spent the preceding two decades as a teristics to weather changes. In unstable times, trader in Brazil, a job in which he learned the cultivating and using both capabilities in com- value of real-time market data. On taking bination can help companies not only survive charge, he revamped the brewer's information but emerge as true market leaders. systems, providing executives with daily sales data by individual retail outlet at a time when Agility: Float Like a Butterfly, Sting competitors relied on dodgy numbers aggre- Like a Bee gated by region at month's end. To help his In his prime, Muhammad Ali embodied agil- management team develop a shared under- ity. He could spot a fleeting opportunity-the standing of the market situation, Telles liter- hint of a sagging glove or an upturned chin- ally knocked down the walls and created an and shoot off a well-placed blow before the moment passed. Many executives aspire to open office reminiscent of a traders' room. The space encouraged collaboration among manag comparable nimbleness. A recent Mckinsey & ers, who constantly swapped insights on the Company survey found that nine out of 10 ex- changing business landscape and ideas for new ecutives ranked organizational agility as both ways to seize market share or improve effi- critical to business success and growing in im- ciency. portance over time. Respondents expected Brahma's managers moved quickly from in- agility to confer multiple benefits, including sight to action. The company's top manage- higher revenues, greater customer satisfac ment team selected and prioritized three op- tion, increased market share, and faster time portunities each year-such as targeting 20- to market. something consumers, reducing the cost of Organizational agility is a company's ability goods sold, and strengthening the distribution to consistently identify and capture business opportunities more quickly than its rivals do. network-each based on current market reali- Donald Sull (dsull@london.edu) is a In a decade-long study of dozens of firms ties. The company's focused business model- nearly all its profits were earned in Brazilian professor of strategic and international around the world that thrived in volatile mar- beverages at that time-allowed executives to management at London Business kets, I have identified three distinct forms of choose opportunities that made sense for the School in England. His next book, The agility: operational, portfolio, and strategic. business as a whole. The team translated the Upside of Turbulence, will be published (For an overview of each type, see the exhibit corporate priorities into clear performance ob- in September by HarperBusiness. "Three Ways to Be Agile.") jectives and communicated them throughoutHow to Thrive in Turbulent Markets the organization. Those few objectives chan- neled the company's efforts, prevented manag ers from wasting resources on peripheral activ- ities, and claried who was accountable for what. Telles and his team kept up the pressure to execute by offering high-powered incentives, including a compensation scheme that re warded the top 14% of managers with bonuses equal to 18 months of their base pay, while the bottom 40% received no bonuses at all. Man agers' objectives, moreover, were posted pub- licly in the ofce and coded: Green dots de noted that they were on track, yellow dots meant objectives were at risk, and red dots agged initiatives that were off track. Brahma's largest rival, Antarctica, attempted to seize the same opportunities but consis- tently started a year or two later, took longer to execute, and trailed well behind Brahma. When budget brewers depressed prices across the industry, for example, Brahma's manage ment moved quickly to reduce its xed costs, shedding more than half the company's work- Three Ways to Be Agile force between 1991 and 1994. Meanwhile, Ant arctica began its staff reductions in 1995 and took another three years to complete the job. With cost cuts behind them, Brahma's execu tives could turn their attention to exploiting the market gap in serving young adults, while the company's competitor was still mired in cost cutting. Portfolio agility. The second type of agility is the ability to quickly and effectively shift re- sources, including cash, talent, and managerial attention, out of less-promising units and into more-attractive ones. A recent study of more than 200 large enterprises by McKinsey found that the reallocation of resources to faster growing segments within a company's portfolio of businesses was the largest single driver of revenue growth. Although the conventional wisdom holds that diversied conglomerates think Daewoo and Tycodestroy shareholder value, recent research by economists qualies this generalization, nding that diversication does not necessarily destroy value. Rather, managers often diversify in a desperate bid to Organizations can achieve agility in three distinct ways. Here are some of the factors associated with each. 1: Operational Within a focused business model, consis- tently identify and seize opportunities more quickly than rivals do Examples Southwest Airl ines, Toyota, Tesco Must-haves Shared real~time market data that is detailed and reliable A small number ofcorporate priorities to focus efforts Clear performa nce goals for teams and individuals Mechanisms to hold people accountable and to reward them Leaders need to Stay in the ow of information Sustain a sense of urgency Maintain focus on critical objectives Recruit entrepreneurial staff 2: Portfolio Quickly shift resources out of lesspromising businesses and into more-attractive opportunities Examples General EIectric,Samsung Electronics, Procter & Gamble Must-haves A diversied portfolio of independent units A cadre ofgeneral managers who can be transferred across units Central corporate control over key resources, such as talent and cash Structured processes for decreasing investments or selling off units Leaders need to Make unpopular calls on resource reallocation Base decisions on rational rather than emotional or political criteria Invest heavily in promising opportunities 3: Strategic Identify and seize game-changing opportunities when they arise Examples Banco Santander, Emirates Airline, Oracle Must-haves A strong balance sheet and a large war chest to nance big bets A governance structure that permits companies to seize opportunities more quickly than rivals do Longterm perspective from owners and executives Leaders need to Maintain the owners' condence Mitigate downside risk on big bets Wait for the right opportunities How to Thrive in Turbulent Markets Agility: Ali could spot a eeting opportunity the hint of a sagging glove or an upturned chinand shoot oa well-placed blow before the moment passed. escape problems in their core businesses which is the real underlying source of weak earnings. In contrast, diversied rms such as iohnson 8: Johnson, Procter 8: Gamble, and Samsung Electronics have used their portfolio agility to succeed over long periods, while pri vate equity groups, such as Blackstone, KKR, Carlyle, and TPG, have earned high returns for their investors by actively managing portfolios of businesses. A varied set of business units doesn't guaran tee portfolio agility, however. Portfolio agility requires disciplined processes for evaluating in- dividual units and reallocating key resources. Since those resources include talent, compa nies also must cultivate general managers who are versatile enough to move from business to business. General Electric, a pioneer in active portfolio management, invests heavily to de- velop a cadre of such managers. In addition to offering them leadership training, it gives them P&L responsibility early on and rotates them through jobs and units. It is equally critical that the corporate ofce control a central pool of resources. Consider the experience of one large North American bank, which paid a management consulting rm millions of dollars to prole its diverse business units in painstaking detail. The re search provided a compelling case for shifting resources from two established businesses into promising new ones. Unfortunately, the bank operated as a loose federation of units and lacked the precedent or processes to reallocate resources across efdoms. As a result, the cash cows continued to jealously hoard their money, their claims on the IT budget, and their best people. As this example suggests, portfolio agility de mands that leaders make difcult and often unpopular choices. The late Reginald H. Jones, lack Welch's predecessor at GE, had the formal tools to classify the company's strategic busi- ness units, but he shied away from some dif- cult decisions, such as exiting the Utah Interna tional mining company deal, which he himself had pushed. Welch excelled at reversing Jones's mistakes, cleaning out GE's portfolio in his early years on the job. More impressive, he was thrilling to reverse his own mistakes, such as selling Kidder, Peabody & Company in 1994 when the acquisition, engulfed in trading scan- dals, did not live up to expectations. Welch was also great at allocating resources based on logic rather than emotion. He was willing, for in stance, to invest heavily in GE Capital, al though he did not always see eye-toeye with the leadership of that business. But he red the head of Kidder, even though that executive was an old friend. Strategic agility. Business opportunities are not distributed evenly over time. Rather, rms typically face a steady ow of small opportuni- ties, intermittent midsize ones, and periodic golden opportunities to create signicant value quickly. The ability to spot and deci- sively seize the last kind of opportunity, the game changers, is the essence of strategic agil ity. Such opportunities usually entail rapidly scaling up a new business, aggressively enter- ing a new market, betting heavily on a new technology, or making signicant investments in capacity. The agility to make a big bet quickly does not, of course, guarantee that the gamble will pay offrecall AT&T's cable ac quisitions. However, companies that avoid big bets altogether risk falling behind more ag gressive competitors. Emirates Airline faced a golden opportunity in the midst of a perfect storm in the global air line industry in the early zooos. At the time air carriers were battered by a surge in crude oil prices and depressed consumer demand in the wake of the September 11 terrorist attacks. By sheer bad fortune, the supervisory board of Airbus announced its intention to produce the A380 less than a year before the September 11 attacks and desperately needed to ll its order book to cover development costs. Although the double-decker aircraft promised more passen ger space, better range, and greater efciency, it came to market at a time when few carriers had the wherewithal to buy it. Emirates, however, ordered 15 aircraft less than a month after the World Trade Center at- tacks and soon became Airbus's largest cus- tomer for A3803. Emirates' ability to buy in bulk when other airlines could not ensured the carrier favorable prices and delivery terms, which gave it a leg up on rivals. Absorption: Take a Licking and Keep on Ticking Agility makes for good viewingfew heavy- weights have matched the young Muhammad Ali for pure spectacle. But agility is not the only or surest way to win a bout. Boxers like George Foreman rely on absorptioncom- How to Thrive in Turbulent Markets pensating for their lack of \"bob-and-weave\" dexterity with the size, physical strength, and toughness to withstand nearly any punish ment opponents can mete out. Foreman could weather his opponent's blows, round after round, patiently waiting for his adversary to run out of steam or make a mistakeand that's when he'd let loose the knockout punch. in a business context, rms can build absorp- tion in several ways. The obvious levers include size, diversication, and a war chest of cash. Other factors (high customer switching costs, low xed costs, and a powerful patron) can also buffer a rm against environmental changes, although in less evident ways. (See the exhibit "10 Ways to Build Absorption?) Emirates, for example, had structural strengths other airlines lacked. To begin with, it was owned by the government of Dubai, which is ruled by the AlMaktoum family, so it was free to make bets that might pay off in years, not quarters. The airline also had diversi- ed its protability across regions and cargo, which left it less susceptible to a drop-off in travel; possessed a large war chest; and main- tained low xed costswhich put it in a good position to ride out tough times. Because golden opportunities are not evenly spaced over time, absorptive capabilities can keep a company in the game until its big chance emerges. Look at Apple. Its iPod is an excellent example of agility, but it was the rm's absorptionin the form of a small core of customers locked into the rm's product that kept Apple around long enough to seize the opportunity. During the 1990s, Apple was relegated to the \"other\" category in the us. PC market when its share fell to under 5%, and from the late 1980s through early 2004, its stock was essentially at. A small base of fanat- ically loyal customers kept the company going until changes in context created its golden op- portunity. Absorption also allows companies to outlast rivals in wars of attrition. Consider Microsoft's entry into the game-box industry. The software giant has duked it out in round after round with Nintendo and Sony, in the process losing billions of dollars by some estimates. But Mi- crosoft has also built up enormous stores of ab- sorption over the yearsthrough its brand identity, customers who are locked into its standard, and bulging coffers of cashthat have allowed the company to wear down its gaming rivals through successive periods of in- vestment. Microsoft's absorptive capabilities increase the odds that the company could emerge victorious at the end of the battle for leadership in the gamebox industryeven without offering the best product. Firms that rely on absorption solely for de- fensive purposes risk falling behind rivals that deploy it on offense as well. For over a century, Banco Santander and rival Banco Popular were members of a protected oligopoly of Spanish banks. Then Spain deregulated its 10 Ways to Build Absorption To create a buffer against inevitable hard times, executives should focus on strengthen- ing the following sources of organizational absorption. They must remember, however, that some sources of absorption tend to kill agility, while others allow a rm to weather a wide range ofthreats without necessarily im- peding its ability to seize opportunities. Low costs, for instance, can keep a company in the game long enough to ride out market shifts, but excess staff can depress protability and create busywork for others. 1: Low xed costs.To weather a wide range ofchangesfor instance, price wars, higher rawmaterials costs, declining demand 2: War chest of cash.To deploy against unexpected opportunities and threats 3: Diversied cash ows.To withstand downturns in specic units; diverse units can serve as a store of potential wealth that can be sold later 4: Vast size. To enable downsizing of operations during crises 5: Tangible resources.To generate prots in the future; these resources might include rawmaterials deposits and real estate 6: Intangible resources.To insulate the rm against short and mid-term market shifts; these resources might include brand, exper tise, or technologies 7: Customer lockin.To buy time when competitive dynamics and markets shift; high switching costs, for instance, can prevent customers from jumping ship 8: Protected core markeLTo provide a safe stream ofcash to weather storms 9: Powerful patron.To provide extra resources or a buffer from market shifts during times of change; such patrons may include a powerful government, regulator, investor, or customer vested in the rm's success 10: Excess stafTo be shed in hard times How to Thrive in Turbulent Markets banking market, and their paths diverged. Santander bulked up at home, seized opportu and then hire local talent, inculcate those nities in Latin America, and expanded into Eu- hires in the P&G way over the years, and gradually replace the expats rope, while Banco Popular played it safe, es- chewed foreign markets, and focused on the Agile Absorption: Strike the Right Spanish market. Popular's domestic focus pro- vided good returns to shareholders but Balance Absorption and agility are not stark alterna- bank without Santander's ability to weather tives-the former is not the sole domain of es- changes in the home market or seize major op- tablished enterprises defending their turf nor portunities-such as buying a portion of ABN the latter of nimble start-ups looking at new Amro's business-when they arose. ways to grow. In the Rumble, Muhammad Ali Whereas agility allows a company to stake prevailed because he maintained his trade- out an early position, absorption permits the firm to secure an early lead and reinforce its mark agility but also had enhanced his absorp- position. For example, in the fast-moving con- tion. His training regimen months before the sumer goods industry both Groupe Danone fight consisted largely of being clobbered by the hardest-hitting sparring partners his and Procter & Gamble were quick to spot trainer could find. And during the Rumble, he growth opportunities in China, Russia, Bra- zil, and other emerging markets. Danone, a deployed the now-famous "rope-a-dope" strat- egy, defying centuries of conventional wisdom much less absorptive company, relied on joint in boxing by deliberately placing himself on ventures to scale up quickly despite limited the ropes, which absorbed the energy of Fore- resources. This approach, however, created man's massive blows and allowed Ali to take headaches later on when the partnerships much more punishment. soured. By contrast, the much more absorp- Managers should similarly view agility and ab- tive P&G could afford to initially staff its sorption as complements, with the balance shift emerging market operations with expatriates ing as circumstances change. Getting the mix Is Your Business a Champ or a Chump? The matrix plots 18 of the great- Next, calculate the average of est heavyweight boxers of all your scores for each of the ab- DANCERS CHAMPS time in terms of their agility (in- sorption and agility measures. Jack Johnson cluding variables such as hand You can then plot your organiza- speed and footwork) and absorp- tion on the matrix against the Muhammad Ali ion (including size and endur- heavyweights. James J. Corbett ance). George Foreman defines If your organization lands in 4 Ezzard Charles Larry Holmes one extreme, scoring among the the upper-right quadrant, it will Gene Tunney Joe Louis highest in absorption and lowest likely do well, come what may. If n agility, and 1892 heavyweight it lands in the bottom-right box, champ James J. "Gentleman Jim" it may well survive but risks a Corbett represents the other ex- steady decline as it cedes oppor- e-exceptional agility but tunities to agile rivals. If it's in AGILITY "Jersey Joe Walcott Floyd Patterson Jack Dempsey Evander Holyfield " Lennox Lewis limited absorption. the upper-left corner, it needs to To see where your organization build absorption. And if it lands " Sonny Liston falls in terms of agility and ab- in the lower-left Joe Frazier Rocky Marciano Riddick Bowe sorption, take the accompanying risks the failure and obscurity of survey: Fill in the number that re- the boxers who lacked agility Jim Jeffries lects your level of agreement and absorption. with each of the statements. George Foreman CHUMPS POWERHOUSES ABSORPTIONHow to Thrive in Turbulent Markets right, instead of relying heavily on one or the other, increases the effectiveness of these two approaches during volatile times. (The sidebar \"Is Your Business a Champ or a Chump?" con- tains a diagnostic tool to quickly assess your or ganization's balance of agility and absorption.) Striking the right balance isn't necessarily easy. Many of the structural factors that pro vide absorption appear, at rst glance, diamet- rically opposed to those required for agility: glo- bal scale versus lean operations, for instance, or legacy assets versus a clean sheet of paper. So how, in practice, can leaders help their rms achieve and maintain agile absorption? More good fats, fewer bad fats. As arst step, executives should recognize that sources of ab- sorption vary in terms of their effect on agility. Absorption is a store of energy for hard times much like fat on the human body. And like di- etary fats, some sources of absorption are more healthful than others. Low xed costs, for ex- ample, are an outstanding source of absorption. They allow a rm to weather a wide range of threats without necessarily impeding its ability to seize golden opportunities. The low xed costs of Brazilian brewer Brahma, for instance, allowed the company to outlast its rival Antarc- tica in the face of price competition, attening demand, and macroeconomic shocks. The brewer's savings on xed costs also provided the cash required to launch a second brand and ul timately acquire Antarctica and start the ascent to global leadership. At the other extreme are sources of absorp tion that bolster the company's ability to weather uncertain times but come at an unac- ceptably high cost in terms of lost agility. A prime example is excess staff. Over time, rms often build up \"latent slack,\" the academic eu- phemism for more employees than a com pany needs to get the work done. Excess em- ployees, in this view, constitute resources that management can recover, through layoffs or capacity reductions, to free up cash in difcult times. But excess workers, particularly those in staff positions, tend to generate work to justify their existence. Their efforts, however well-intentioned, introduce unnecessary lay- ers of complexity and bureaucracy that sap an organization's agility. Actively managing trade-offs. Consciously managing the tradeoffs between agility and ABSORPTION VS. AGILITY SURVEY s'gl'i'; 1. Our size prevents us from failing or being acquired. 2. Ourcompany's cash flows are highly diversied by business line or geography. 3. We have a strong balance sheet and more cash and marketable securities than our rivals do. 4. We own uniquetangible assets that customers pay a premium for and our rivals cannot imitate. 5. We control intangible resources that customers pay a premium for and our rivals cannot imitate. 5. We have abundant slack (people who are not creat- ing value in the organization). 7. Customers are locked into using our product by high switching costs. 8. Powerful partners lfor instance, gave rn ment or investors) are vested in our success. 9. We are leaders in a protable home market with high barriers to entry. 10. We have low xed costs relative to our most ef- cient competitors. 1 2 3 4 5 STRONGLY NEITHER AGREEJ STRONGLY DISAGREE DISAGHEE AGREE MEASURES OF AGILITY 1. Our systems provide us with detailed. reliable market data in real time. 2. We consistently spot and exploit changes In the market before our competitors do. 3. We have a shared understanding ofthe situation across units and levels. 4. Objectives are clear to all. and everyone is held accountable for delivery. 5. We are not overwhelmed by a large number of key performance indicators and obiectives. 6. Our organization attracts, retains, and rewards entrepreneurial managers. 7. We maintain the same sense of urgency as a start- up venture even in good times. 8. Management admits mistakes and does not delay in exiting unsuccessful businesses. 9. Top executives systematically reallocate cash and top management talent across units. 10. Top executives have the courage to seize major opportunities when they arise. ABSORPTION scone AVERAGE - - AGILITY scone AVERAGE How to Thrive in Turbulent Markets Absorption: Foreman compensated for his lack of \"bob-and-weave\" dexterity with the size, physical strength, and toughness to withstand nearly any punishment. absorption is critical, as the experiences of two automakers show. Consider Genera] Motors, which consistently missed opportunities that Toyota seized, including differentiating on product quality and coming out with smaller cars and hybrids. Many factors have contrib uted to GM's relative decline, but one oft-cited explanation is management's inability to lay off workers when demand slips, which would translate labor from a variable to a xed cost, thereby decreasing the car-maker's absorption. But Toyota also guarantees its workers life time employment; the Japanese carmaker at- tempted to lay off workers in the 19 5os but en countered massive resistance from unions and the government. Toyota agreed to a larger workforce with its higher xed costs but also instituted exible work rules, variable job as signments, and employee involvement, which collectively enhanced the company's agility. GM's executives, in contrast, basically gave the absorption away without receiving signicant benets in return. Many managers believe that corporate bulk is the archenemy of agility. But it is not size per se that kills agility, it is complexity. Executives at Emirates, for example, found they needed several ancillary businesses, including baggage handling, hotels, and tours, to support the company's growth from a two-plane operation in 1985 to one of the top 10 international carri- ers in the world by 2007. Rather than compli- cate the core business, however, Emirates hived off the ancillary businesses into a sepa- rate entity under different management. Note that while a focused business model denitely enhances operational agility and scales up well without adding complexity, it can also decrease the scope for portfolio agility and leave a rm vulnerable to shifting consumer tastes (as Ben- etton and Laura Ashley were) or to new tech- nologies (think Wang or Polaroid). An alternative approach to combining scale and agility consists of breaking a large company into multiple, independent protand-loss units. These units can move quickly, increase transparency and therefore accountability for performance, and foster a sense of ownership among managers and employees. Because they continually probe different markets, looking for ruilled gaps, the units are also more likely to see new opportunities before their rivals do. The great attraction of this approach is that it offers the potential to combine all three types of agility with high levels of absorption. Firms that excel at this, including GE and Johnson & iohnson, have remained leaders in their indus- tries over long periods of time. Note that this approach carries costs as well: Independent units often duplicate back-ofce functions, which increase xed costs, and executives must invest heavily to promote cooperation among ercely autonomous divisions. Maintaining a culture of agility. During the startup phase, rms generally are agile but in credibly short on absorpn've capabilities. Their small size and lack of legacy allow these rms to tum on a dime, but they can also nd them selves at a disadvantage to heavyweight in cumbents. As rms enter corporate adoles cence, they maintain some agility but also accumulate absorption as they launch new products, expand geographically, bolster brand value, or rm up customer relation ships. Over time, absorption stabilizes while agility deteriorates. Worse, a company's absorptive strengths can erode the culture of agility that once enlivened it as a start-up: Size often engenders bureau cracy and silos. Switching costs give incum bents a false feeling of invulnerability, which can lead to high-handed arrogance in dealing with customers and competitors. A protected core market can lull rms into complacency. The biggest threat facing absorption heavy- weights such as General Motors, Coca-Cola, Microsoft, Royal Dutch Shell, and Sony is the slow erosion of their once vibrant cultures, rather than threats from new technologies, competitors, or regulators. The decline of a company's culture of agility is common but not inevitable. Recall the Bra- zilian brewer Brahma. The new CEO and his partners bought a controlling stake in 1989 and spent the next decade transforming the century-old company from a sleepy bureau- cracy to an aggressive competitor, and in the following decade transplanted its culture rst to its largest Brazilian rival, Antarctica, and then to Belgian Interbrew. (And perhaps it will transplant that culture to AnheuserBusch in the future.) Managers who want to maintain (or rekin dle) a culture of agility need to maintain a strict focus on the handful of values they deem criti cal to agility. Telles and his team, for example, eliminated status symbols such as executive dining rooms and reserved parking spaces to How to Thrive in Turbulent Markets send a clear signal that performance trumped titles or tenure. The team minimized the role of hierarchy by holding meetings around a large table and modeling executive meetings on the free giveandtake of a traders' room. \"Ii-anspar ency was another critical value: Financial and operating data were freely available, while indi- vidual and team objectives and performance were posted publicly to stimulate healthy ri- valry, put pressure on underperformers, and help managers come to a shared understanding of what everyone was doing and how every- thing hung together. The team also focused on attracting and re taining employees who shared these values. Brahma had limited success hiring experienced recruits from the industry, who were often too political and cynical to thrive in the company. Instead the team focused its attention on at- tracting new recruits and launched a trainee program that hired students straight from col- lege to serve as the primary source of manage- ment talent. The career opportunities, rich in centives, and excitement of the company were such that the trainee program attracted 9,000 applicants for 25 positions, placing the pro gram among the most popular in Brazil. In its rst decade, the company hired more than 400 recent college graduates; 60% went on to man agement positions, with the other 40% serving in senior positions. The new recruits, along with promising employees promoted from within, became the carriers of the new culture to the acquired companies. As executives set out to increase their orga- nization's capacity for agile absorption, they should keep in mind that what works in one in- dustry may prove totally inappropriate in other sectors. Scaling up a focused model, for instance, works well in airlines, retail, automo- biles, and fast food but not in consumer goods, luxury products, or investment banking, all of which require more portfolio agility. No mat- ter what the situation is, however, managers need to take inventory of the sources of agility and absorption within their organizations. Spe- cically, they can ask themselves a series of questions: How agile are we? How absorptive are we? Where does our absorption currently come from? Are these the best sources? Are there alternative ways to boost our absorption that would enhance our agility? The rise and fall of Muhammad Ali illustrates a universal dynamic: In his early career, Ali could bobandweave to victory, but he rose to true greatness by building his capacity to take a punch. As champion, Ali combined agility and absorption in measures that made him \"the greatest of all time." But over time, the agility seeped from his limbs, and by his nal ghts Ali could do little more than absorb the punishment his opponents dished out. Many organizations follow a similar arc. Their early agility wins them the trappings of successsize, cash, and a secure position. These very sources of absorption, however, gnaw away at the cultural roots of agility, while bureaucracy, political inghting, com- placency, and arrogance sprout like noxious weeds in their place. when the context shiftsand it always doesthe bloated orga- nization lumbers through the ring like a punchdrunk heavyweight, absorbing blows that it can no longer dodge and missing op- portunities it is too slow to seize. The cumula- tive effect of these blows can wear down champions, like U.S. Steel or General Motors, that once appeared invincible. But tendency is not destiny. By understand- ing the sources of agility and absorption and their combined power as a one-two punch, and by actively balancing them over time, leaders can increase their organization's ability to go the distance in an uncertain world. Reprint R0902F To order, see the next page or call 800-9880886 or 617-783-7500 or go to www.hbr.org Harvard Business Review 9 To Order For Harvard Business Review reprints and subscriptions, call 800-988-0886 or 6i 7778377500. (30 to wwwhbrorg For customized and quantity orders of Harvard Business Review article reprints, call 61 77837626, or email customizations@hbsp.harvard.edu How to Thrive in Turbulent Markets MW A R T l C L E 5 Why Good Companies Go Bad by Donald N. Sull Harvard Business Review July 1999 Product no. 99410 One of the most common business phenom ena is also one ofthe most perplexing: when successful companies face big changes, they often fail to respond effectively. Many assume that the problem is paralysis, but the real problem, according to Donald Sull, is aCtive inertiaan organization's tendency to persist in established patterns of behavior. Most lead ing businesses owe their prosperity to a fresh competitive formulaa distinctive combina tion of strategies, relationships, processes, and values that sets them apart from the crowd. But when changes occur in a company's mare kets, the formula that brought success brings failure instead. Stuck in the modes ofthinking and working that have been successful in the past, market leaders simply accelerate all their tried-and-true activities and, by attempting to dig themselves out ofa hole,just deepen it. In particular, fourthings happen: strategic frames become blinders; processes harden into routines; relationships become shackles; and values turn into dogmasTo illustrate his point, the author draws on examples of pairs of industry leaders, like Goodyear and Fire stone, whose fates diverged when they were forced to respond to dramatic changes in the tire industry. In addition to diagnosing the problem, Sull offers practical advice for avoid ing active inertia. Rather than rushing to ask, \"What should we do?" managers should pause to ask,\"What hinders us?\"That question focuses attention on the proper things: the strategic frames, processes, relationships, and values that can subvert action by channeling it in the wrong direction. Strategy as Active Waiting by Donald N. Sull Harvard Business Review Septem ber 2005 Product no. Ro5ogC Successful executives who cut their teeth in stable industries or in developed countries often stumble when they face more volatile marketsThey falter, in part, because they as sume they can gaze deep into the future and develop a longterm strategy that will confer a sustainable competitive advantage. But visibi|~ ity into the future of volatile markets is sharply limited because ofthe many different vari ables at play. Factors such as technological in~ novation, customers'evolving needs, govern- ment policy, and changes in the capital markets interact with one another to create unexpected outcomes. Over the past six years, Donald Sull, an associate professor at London Business School, has led a research project ex amining some of the world's most volatile are nas, from national markets like China and Bra- zil to industries like enterprise software, telecommunications, and airlines. One ofthe most striking findings from this research is the importance oftaking action during comparar tive lulls in the storm. Huge business opportu nities are relatively rare; they come along only once or twice in a decade. And, for the most part, companies can't manufacture those op portunities; changes in the external environ- ment converge to make them happen.What managers can do is prepare for these golden opportunities by managing smart during the comparative calm of business as usual. During these periods of active waiting, leaders must probe the future and remain alert to anoma- lies that signal potential threats or opportunir ties; exercise restraint to preserve theirwar chests; and maintain discipline to keep the troops battle~ready