Renewing The Enterprise: Governance, Innovation and Performance in The New Normal

Renewing the Enterprise and Preparing for the New Normal
Adaptation, Resilience, Innovation and Leadership

By Dave Livingston, Managing Principal, Llinlithgow Associates (www.llinlithgow.com )
Dave is a management consultant primarily focused on improving enterprise performance by coupling

strategy with execution thru the design and implementation of workable, integrated management systems.
He blogs on this and related issues in Economics, Markets & Investments and specific industries and
companies at www.llinlithwo.com/bizzx, his BizzXceleration blog.
Introduction
You would think being blindsided by the sudden eruption of a major worldwide downturn would teach businesses
that they need to both monitor environmental conditions and make themselves more responsive and agile.
Unfortunately that doesn’t seem to be the case, based on a wide range of evidence. Here we want to define what
the “New Normal” environment looks like now and what it will look like over the next decade, what the responses
of business are as best we can determine and why they are struggling to adopt alternative approaches and adapt
to the more competitive and disruptive environment they will be competing in.
We want to specifically understand the major problem causing these struggles, which appears to be management
systems and corporate governance that lend themselves to the accumulation of old rules, procedures and
processes and rigidity – we term this organizational sclerosis, or organoscelrosis. To cure themselves and
prepare for the new normal businesses must run more efficiently and effectively by improving governance by re-
thinking and re-designing their management system. At the same time they must be preparing for the disruptions
by creating new sources of value in products, service, markets and capabilities which requires an entirely new
and more effective approach to managing and operationalizing Innovation. And they must tie all this together by
learning to deal with the mental barriers and leadership challenges involved.
We start by laying out the current situation, framing the approach, illustrate the impact of the new normal using
the Oil/Energy Industry and suggest a “dashboard design” for monitoring and management support. That’s
followed and coupled with a discussion of mental attitudes and how they help and hinder dealing with a more
turbulent world. Then we discuss the widespread evidence for lack of preparation for the new normal and start
digging into specifics. The specifics include two major essays on the strategic management of Innovation followed
by another on an operational management system for end-to-end Innovation, a detailed decision of the
mechanics of organosclerosis and why it leads to governance failures and performance problems and a detailed
discussion of the design principles of an integrated enterprise management system that helps balance short vs.
long-term decisions and operational vs. strategic ones in a common framework. We also include two key articles
on learning to manage Human Resources strategically, a necessary support and enabler of an effective
enterprise!
Finally, we finish up with a summary of the structural outlook for the next decade, the New Normal, and what the
major trends and characteristics are as well as the major risk factors and likely disruptions; at least for some of
the factors. We are on the cusp point of major and far-reaching changes in the structural underpinnings of the
global economy where the trends of the last 30-40 years are going to cause tectonic shifts in many dimensions.
Shifts that most enterprises do not see coming, are not prepared for and don’t appear to be preparing for.
Along the way we illustrate our points and arguments with examples drawn from Energy, Finance, Auto and
Technology Industry cases. We’ll also point out that these issues are urgent no matter what the size or
geographic location of the firm is. In fact, we’d even go so far as to argue that developing an effective
management system that reflects necessary strategies for the new normal is more important for the smaller
enterprises than for the larger. They have less cushion to fall back on and fewer resources and skills to devote to
these challenges.
This is our best-effort attempt to sketch out workable blueprints for diagnosing, correcting and implementing
corrective measures that will create performing enterprises by improving governance and value creation. We
hope you find it valuable, useful and above all workable.
Table of Contents
1. More Tales From the Frontline: Econ/Mkts to Performance & Policy 3
2. Response vs. Performance: Walking Wounded & Mental Attitudes 6
3. Adaptation & Resilience: Looking for the Naked Swimmers 9
4. A Bit of Xmas Cheer: Innovation As The Future 12
5. Christmas Wishes: Peace, Prosperity and Performance 16
6. Dealing With the Brave New World: Resilience vs. Sclerosis 18
7. People & Performance: Assets or Fungible Commodities? 22
8. Aholes, Shirkers and Performance: a Draft People Principles Policy 23
9. Renewing the Enterprise 1: the Proper Management of Innovation 24
10. Pecora 2 Hearings, Malfeasances, Your Future & Cusp Points 28
11. Talking Business: the Outlook vs. the Preparations 32
12. Renewing the Enterprise 2: Governance, Measurement & Performance 34
13. Chaos, Turbulence, Fragilities: Defining the New Normal, Blueprinting Business Performance 39
About Llinlithgow Associates 43
Page 2 of 43
Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
December 03, 2009
More Tales From the Frontline: Econ/Mkts to Performance & Policy

http://llinlithgow.com/bizzX/2009/12/more_tales_from_the_frontline.html
It'
s just about time to switch back to our bread and butter of
looking at business performance but the readings start with
some segues into the state of the Economy and Markets. The
latter at this point, as we' ve hopefully made clear a time or
thousand, cognitively detached from any linkages to the reality
of the former. But not inseparable either, nor for that matter is
business performance. Nor are any of the three detached from
the huge inventory of policy-driven fluctuations gyrating at day-
trading speeds while deeply impacting the underlying structure
of all. Or, as we put it, it'
s a policy-driven economy and, adding
to that, a fantasy-driven market.
Accordingly the readings have update chunks on the economy

and markets plus the business stories we want to point to, and
end with a survey of all those policy gyrations. A set of inter-
dependent interactions we try and conceptualize with this
graphic. If business performance is the sine qua non, that
without which there is no other, it depends utterly on the
Economy, Politics & Policy and the state of the Markets. While
enterprises cannot control most of these factors they MUST
deal with them, which means understanding how the winds are blowing is essential.

Let' s pop way up the conceptualization stack for a

minute to explain part of our approach. The world is
full of experts in their subject areas, whether it'
s
Finance, Economics, technical analysis, marketing
or manufacturing. The problem is that no problem
we must address is driven by just one factor but by
all of them together. That means that you need to
understand each subject area to some extent, their
linkages and relationships and how they fit into a
bigger context and need some sort of framework for
understanding the "ecology". The best illustration
we' ve ever seen of this argument is this graphic.
The problem comes when specialists in one area

pontificate on all the others without investing
sufficient time to become knowledgeable. Which
happens over and over again to the point of
predictability. In fact we'
d even argue that specialists
reaching firm conclusions that are flatly contradicted
by the facts and other domain frameworks is the
general rule. And have spent considerable time in trying to sidestep that by digging deep enough into each area
to be grounded and, at the same time, linked into the bigger picture.
Page 3 of 43

There's a second implication here that' s potentially profound - a lot of what you hear is going to be wrong when an
expert is outside their area and refuses to recognize it.
For example the Stimulus package in combination with other policy moves saved us from GD 2.0, a fact which
most were in denial about but now, at least implicitly take for granted to the point of myopic complacency. Yet not
knowing how the buzz saw works leaves them and us vulnerable to surprises. Dubai being the recent case in
point, which we just used as the jump off point for reinforcing the idea of a fragile and vulnerable market (Markets
in a Policy-Driven Economy: Turbulence, Data and Idiocies, Thanksgiving Surprises: GDP to Dubai to "Fragile" ). The
other big "surprise" in this environment is that while we won Stalingrad we may lose Kursk thru misinterpreting the
known and knowable data. Specifically the impacts of the stimulus will be fading and with all the political backlash
preventing further stimulus exposes us to a W-shaped downturn redux, because the Economy is a long....long
way from being organically self-sustaining. But, to our basic point, nobody is preparing or positioning for those
likelihood’s.

In this environment, where EVERY asset class is moving

up and down together in lock-step, you can keep on
"trading" with the new pattern until it breaks. Or you can
understand why that pattern' s in place and what's likely to
happen as the ecology keeps changing; whether it' s gold,
currencies, stocks or bonds. So when we say "performance
is everything" we' re talking about the Buffet-Graham
mantra - understand the value, the margin of safety and the
key drivers.
In the case of businesses, in some ways the most complex

and important, it is these five factors that drive
performance. And each of the stories in the readings, each
worthy of their own post and discussion, are chosen to both
represent one or the other of those factors and to serve as
representatives of the broader issues. (The dynamic linkages between the factors are also illustrated in this
graphic: BizzX Performance Requirements).
They start with the large cash balances companies are maintaining for security which some argue indicate a
surge in business investment but, as regular readers know, is NOT likely since investment lags demand growth.
They go onto to talk about fundamental changes in the economics of energy development - a huge structural
change in the industry, the comparative performance in developed vs. emerging markets for the Auto Industry and
the recent ouster of GM' s CEO, Sharp' s double-down bet on a huge new plant in Japan using a whole
transformative view of manufacturing, supply chain operations and supplier management, how retailers are
reacting to the continued weakness and frugality of consumers, and Subway' s $5 Footlong as a case in market-
driven innovation, coupled with an interesting take on Bill Bellichek'
s evidence-driven gamble in their Colts game
and a story on GE' s pending sale of NBC to Comcast. All of which speak to adaptation, innovation and resilience
in one way or another.
Page 4 of 43

Structural Changes in Oil: a Case in Point
In the last few weeks there have been some huge

decision taken by major players in the oil and energy
markets to give up existing resources and focus on
more easily controlled and accessible ones. These
decisions are being driven by deep changes in
exploration and development economics as well as
by the on-going changes in control of oil resources.
We' ve gone from a world where the "Seven Sisters"
were the dominant players to one where national oil
companies and governments control the under-
developed oil reserves, which is limiting access and
enormously raising the costs of development. For an
energy company to keep on for the next decade
pouring investments into those potential fields
requires deep pockets, financing and some level of
trust and certainty. Most of which is missing.
Ideally new oil would be coming into the long-term pipeline faster than existing reserves are being depleted but
just the opposite is happening. Worse, because of the downturn, both existing and new reserves and fields are
not getting the investment they need. The end result is a future of much lower affordable reserves, setting the
stage for a new energy crisis if demand picks up. But will it? With a decade of slower than expected growth
demand in the developed world will continue dropping while demand in the developing world won' t grow as fast as
was expected. We still think that D>>S but also think the gap won' t be as big. Interesting times indeed - and
perfectly illustrative of the complexities for investing in oil and energy. For example are oil sand or green
alternatives economically justified in this new regime? Not really...what does that say about a lot of potential
investments?

When you translate all of those issues that

impact performance into a set of key issues
that MUST be monitored and acted upon you
end up with a very complex "dashboard"
indeed. Put them all together and you end up
with this little nightmare - yet it'
s inescapable.
The UL chart is its own little nightmare that

tries to capture the geo-political and
socionomic issues that need to be monitored.
The UR chart represents the state of the
Economy (we trust its clear, NOW, why that' s
critical to understand and monitor even if
almost all companies got blindsided). The LR
chart summarizes the major waves of
innovation and the outlook and tells us, in
general, what the prospects are for most
industries. And the LL chart tries to capture the
dynamics of business performance - what all
the piece parts are, how they link and why the whole is ALWAYS different than the sum of the parts. Though not
necessarily greater than, sadly and unfortunately!
Page 5 of 43

The last readings collection could be taken as the readings for the UL quadrant and provides updates on
Financial Reform, a huge change in the Fed' s outlook on policy where it will start including bubble-popping as one
of its goals, the upcoming confirmation hearings for Uncle Ben (& implicitly the threat to an independent central
bank, which would be a disaster), a WSJ oped piece takedown by Paul Kasriel of Northen Trust pointing out
where ideology triumphs analysis and how dangerous that is and another WSJ piece form Christina Romer on
why a renewed focus on job creation is so critical.
If you don' t think this will all, immediately and far into the future, impact your investments, jobs and well-being
you' re not paying close enough attention, we haven' t been clear and convincing enough or your brain is full and
it'
s time to go home. Just remember - the boogiemen can find you anywhere, anytime....enjoy your nightmares!
December 05, 2009
Response vs. Performance: Walking Wounded & Mental Attitudes

http://llinlithgow.com/bizzX/2009/12/response_vs_performance_walkin.html
Well if last week was a surprise downward revision to GDP this

week was, ostensibly, a massive surprisingly good number on
Employment. Even more interesting the Markets should have
shot thru the roof. Instead they barely moved as the Dollar rallied
strongly, Gold fell dramatically and Oil did poorly. Now if the
Markets were based on fundamentals you' d have expected the
opposite. We' re not going to dig into the detailed analysis and
interpretation of either the Economy or the Markets - almost
entirely because everything that' s been going on and just
happened were things we' ve been dissecting extensively. We
will poke at both chartwise (the Market composite dashboard
chart's in the readings) and there are some very good readings
you should at least skim. Instead we' re going to continue our
focus on Business Performance - in fact the intent is to continue
the theme of the last post thru the next several because
adaptability, resilience, innovation and performance are going to
be the sine qua non of returns for the next decade and beyond.
We do our level best to be evidence-driven around here and focus most of our efforts to those ends, as hopefully
you' ve noticed. In filtering all the myriads data points and shibboleths down to key findings we end up with pretty
good dashboards on the economy, markets, assets, strategies and businesses but if we were to boil it down to
four key things we' d ask (plead?) with you to remember it would to four major things. First, this time it really is
different (the Reinhardt and Rogoff findings that this is a major downturn associated with a financial crisis which
take forever to repair). Next, with a jobless recovery likely it'
s going to be a long, slow and painful process to re-
build employment (est. 2019 before Unemployment reaches 2006/2007 levels!). Third, valuations are aberrational
and the markets are as divorced from those underlying realities as they have been and there is NO MARGIN of
SAFETY. Finally, and the reason for our focus on performance, businesses taken as a whole weren' t prepared for
the downturn, reacted poorly, aren' t prepared for the New Normal and ARE NOT preparing. At the end of the day
this is a failure of Leadership, Governance and a willingness to be evidence-driven in decision-making. Implying
that the search for the performers is in reality a search for the clear-headed, simple and honest.
Page 6 of 43


Let's set the stage for that discussion as

well as picking up points #1 and #2 briefly
with this wonderfully convoluted chart
(the argument being that, like a Chinese
ideogram a lot of background information
is implicit in such a construct - if you
decode it; and there are no surprises
here if you' ve been here before). We do
strongly recommend enlarging this
however!
The UL piece gives us four Employment

data series which show us that a turning
point has been crossed but things are still
in about as bad a shape as they have
been (some more chart roundups are in
the readings, please check ' em out) while
the middle left (ML) chart relates
Employment to GDP x-trade impacts.
Ditto on the findings.
The real showstopper is the LL where New Jobs and Net New (-450K/quarter for growth) both upticked sharply,
are still quite negative and relatively improved and, most importantly, as still worse than at any other period in
these timeframes. Cumulative new jobs are now -12.2 million. In other words just to get back to breakeven we
need 12 million jobs! During the 60s we grew jobs at 2.6%, the 70s 2.4%, the 80s and 90s at 2.0% and this
decade it was 0.2%! If you look at the R.H. chart set 4% GDP growth gets you 2.5% while 2.5% GDP growth gets
you about 1% or so. Tell me again we' re in a position to create a prosperous 60s-like economy, please! No
wonder wages have been stagnant for three decades!!! Really stop and think about that for a minute, PLEASE?

Do we really need to explain that? If businesses see

growing demand they hire. Those hired spend more
so businesses, in a virtuous feedback loop hire more
and invest more, making their operations more
productive and so on. Sadly of course it runs in the
other direction. All else aside, ignoring all the
shibboleths about social policy, etc. etc. if businesses
don't perform neither does the economy, nor do we.
Period, end of story. We buried a couple of charts on
historical business performance and on key strategies,
borrowed from from BCG, in the readings but if
you're in hurry click to see 'em now. Just to reinforce
those key points. We think they' re being too nice
though.
Performance is the result of operational efficiency,

strategic effectiveness and innovation. A performing
business does all three. In fact a business executive
Page 7 of 43

MUST balance total company concerns with detailed functional concerns for both the long- and short-terms. The
question is are they doing that? Our assessment is represented in the accompanying graphic.
In our view a business that' s controlling costs and improving operational performance gets a 3, a business that' s
taking strategic initiatives in product development, new markets, etc. a 4 and one that is Innovating a 5. One that
blindly cut costs after being blind-sided by a foreseeable downturn and doing a perfect imitation of a deer in the
headlights is in the Red/Yellow Zones, with a 1 or 2. Everything we' ve read, seen or heard is that the vast majority
falls into the Danger Areas. Just to drive the point home we need 2.5% job growth to recovery a prosperous
economy. To get that kind of growth depends utterly and finally on the majority of businesses being in the
Blue/Green Zones. If you can counter that we really hope you' re right!
! ! "
# $ % %
%& '

Let's be clear - we're facing at least another decade of

troubled times. And, in fact, we' ve lived thru three decades of
such times judged by the job creation evidence, living in a
debt-fueled, profligate and misspent economy. Yet everyone
looks back on the 80s and 90s as "Golden Ages", despite the
evidence we have now and despite the evidence adduced
and presented by several folks (Krugman for example) then.
Now that we really are deep in the doo doo what' s the
outlook?
That depends on how we respond - how we evaluate the

data, what kind of decisions we take, how we act on those
decisions and how effective we are implementing and
sustaining them. The readings are, so to speak, bookended
by the comments of a distinguished British historian talking
about the need to keep things simple and understandable on
the front. And by the executive brought in to clean up Enron
on the back talking about honesty, integrity, clear-sightedness
and a high-performance culture.
Unfortunately, that' s not the way our brains our built. They are
built by evolution for our forebrain (the modern) to be clever in
getting what the Monkey (the midbrain) and the Lizard (the
hindbrain) want. Now we need the Lizard for its reflexes in
crisis and the Monkey for its curiosity and drive. The question
is can we learn to train both to be evidence-driven? Instead of
impulse controlled. There' s been a revolution in the last
twenty years in cognitive neuroscience showing that that' s not
only possible but showing the brain circuits changing as it happens. Of course this is what the Buddhists have
been working on for 2500 years. Clearly it' s possible. Equally clearly there'
s a pretty good case to be made that it
hasn' t happened for the majority of businesses.
And therein lies the tale! Just to close out, amuze you a bit and make our point (if you listen carefully to the words
as well as watch the Performance [puns intended] we give you the Muppets Doing Bohemian Rhapsody!
(http://www.youtube.com/watch?v=cGlTzt24Izw ).
Page 8 of 43

December 09, 2009
Adaptation & Resilience: Looking for the Naked Swimmers

http://llinlithgow.com/bizzX/2009/12/adaptation_resilience_looking.html
One of our constant themes around here is that

it'
s the age of the "New Normal". The last post
reviewed some key arguments that we hope will
stick in your mind, talked about some key findings
regarding the state of employment and the
outlook and linked that into market performance.
(BtW - can we rest our case about over-valuation
and market fragilities given week-to-date market
performance?). We' ll re-visit the new normal with
regard to both the economy and the markets -
and ask that you review the four points - but want
to focus some more here on business response.
Last time we talked about "deer in the headlights"

syndrome among executives. Now we' re going to
dig into that a little deeper, that is what do we
mean by that? In particular we ended up
discussing the importance of business job
creation and the mental agility and resilience of
executives. And make no mistake - it' s a lot easier to sit on the sidelines and critique their responses.
On the other hand they' ve been very handsomely compensated for sitting in the hot seats. The questions become
how to judge who' s earning those salaries? And what to do about it? The last post worked its way to this chart,
which summarizes our impressions of how companies are, on the whole, responding to the crisis and positioning
for the future. The answer is, not very well. As Warren says, and is now frequently quoted, we' re finding out that
there are a lot of folks who floated with the tide and now that it'
s going out turn out to have been swimming naked.
As an investor, employee, business partner or other stakeholder you need some way of judging the clothed from
the unclothed.

(
) * )
A couple of weeks ago the CEO of the Boston Consulting Group (BCG) had
some interesting and revealing interviews with the Financial times. He' s a tad
circumspect, to say the least, but if you listen carefully you'
ll here what we
mean. Oftentimes the first thing to do with regard to dealing with a crisis is to
admit it exists. The "sudden" appearance of a major downturn that turned
into a crisis last Fall caught almost all businesses by surprise, though
arguably it shouldn' t have. At least not on the evidence we've been trotting
out for almost three years here!
This is Part 1 of a three part interview. Part 2 and Part 3 are also online and
well worth listening IOHO, by clicking on thru or just letting the FT video site take you there. Herr Burckner lays it
out nicely though. Including the argument that, having survived the crisis, a strong sense of complacency and this
too shall pass has overtaken most management. In other words they aren' t preparing for the future we think is all
too clear! (http://www.ft.com/cms/8a38c684-2a26-11dc-9208-
000b5df10621.html?_i_referralObject=10606516&fromSearch=n )
Page 9 of 43

(
+ (
+ ,

The second biggest problem, after recognizing the situation,

is figuring out what to do. Those that haven' t frozen up at the
first hurdle often freeze at the second, which is often more
difficult because the old built-in responses won' t work. Just
meat-axing costs and laying off people while curtailing
capital investment and R&D spending will simply store up
trouble for the future. Resilient adaptation requires new
thinking and new responses - and that' s hard! Especially if
you were caught by surprise and are still scrambling to catch
up.
Lest you think we' re making all this up we'

ve borrowed some
charts from some other BCG studies (some of which we' ve
admittedly shown before) to back up our assertions. The top
sub-chart is a conceptual view of good vs. bad response,
though we' d add a truly class 1/2 company would already
have been re-thinking their business model and strategies
(as MCD and the other examples we discussed in the first
chart did).
The middle chart give you some strong indicators to assess

where a company' s response fall. Based on this survey work
most of them fall into the trim things up and hope for a return
to business as usual. Let' s make that point really explicit -
any company that' s "just" trimming costs and managing it' s
financials gets a 3 at best on our ranking scale; and that' s
being generous. We' d even argue that continuing to invest in
R&D, albeit at a reduced rate, to maintain longer term
effectiveness should be a requirement for a 3!
If you don't think all that'

s important we went to the trouble of
collecting all our prior posts on the auto industry and on
finance where we repeatedly applied this sort of assessment
to their performance outlook. The Auto Industry study is here
while one of several finance studies is here. In both cases
the bottomline is the same - complacent, business-as-usual
response are a death knell!
Page 10 of 43


One of the most common complaints that you here

from executive management is best put as, "they
made me do it". That is the quarterly performance
numbers and reported earnings per share numbers
are so important that companies will go to any length
to try and meet expectations, which they' ve done
their best to lower anyway, including selling their own
children in effect. Their children in this case being the
long-term health and capabilities of their companies.
Now that' s actually never been true. If you have a

cogent, defensible and credible story to tell about
your "Theory of the Case", that is how you' re going to
manage for the short-, intermediate- and long-terms,
Wall St. has always been prepared to listen. As
Fedex and Expeditors International have been
proving for years. And as Carol Bartz at Yahoo is
proving now.
But there's also evidence that there's a more general

change underway in the Finance community. BCG
has obligingly provided us with this second chart set
which is worth some careful study. The top shows PE
Ratios vs. CDS spreads. Now a CDS spread tell you
what a company has to pay for default (BK)
insurance on its debt while the PE ratio tells you what
investors think of the long-term (well sorta) growth
and earnings prospects. Interestingly the folks in the
upper left corner, the good corner, would still only get
a 3/4 on our rating scale.
But even more interestingly BCG only found about 20% of companies qualify as Haves. Instead of interesting
maybe we should have said scary. The bottom chart is another form of verification coming from a survey of
institutional investors and the factors they'
ll be using to evaluate company performance. In both cases you have
pretty independent confirmation of our arguments AND, this is important, a strong indicator of how performance
assessment translate into market judgment.

As usual you'll find an extensive series of readings intended to provide more

ammo for these lines of inquiries. It starts with another dissection of earnings
and selected company outlooks, the failures of forecasting and the
consequences of business failure. It then continues to look at the new rules for
the reset economy including those companies (Level 4' s?) who are moving to
take some strategic advantage of the crisis by going for market share and the
specific example of GE. The latter reading was collected before the NBCU sale
btw.
It then takes you to the questions of agility and re-thinking your business model
and a discussion of why operational strategy is so critically important.
Page 11 of 43

Something most companies not only neglect but completely ignore but is fundamental to good performance. It
concludes with some pointers on finding the next McDonald'
s. A question to which our answer is look for the Level
4'
s and 5'
s!
But other than that survey we' ll pass on a more pungent summary and instead appeal to yet another authority,
Jim Collins, who' s latest book is "How the Mighty Have Fallen". A book he started working on a long time before
last Fall'
s disaster. He lay out five typical steps in how companies get themselves in trouble. If the link doesn'
t
work go to www.charlierose.com and search for Jim Collins in the new format.
We will tell you about one of the most fascinating conversations we' ve had in a long time about corporate
performance. An acquaintence and I were discussing why so many companies get themselves into so much
trouble. His answer, which I consider deeply insightful is that because most companies are unwilling to hear the
truth they create an internal climate where the only way to survive is game the system. In other words we' ve
institutionalized mal-performance because executive management "can' t handle the truth". But listen to Collins
and think about it! The companies you want to be working with or investing in are the ones who can face the truth
and figure out what to do about it.
Hard, hard, hard. How many would rather stay in denial and simply go down with the ship they know? On the data
above, whether they know it or not, it would appear to be most of them. And if you believe us that we'
re facing an
extremely difficult decade they will not be among the survivors. Certainly not among the performers!
December 23, 2009
A Bit of Xmas Cheer: Innovation As The Future

http://llinlithgow.com/bizzX/2009/12/a_bit_of_xmas_cheer_innovation.html
The last several posts might have struck you as a bit depressing. The next in order might have been a year-
endish survey and summary of the markets but given performance over the last decade we didn' t really want to
head into Christmas Day with that on your or our minds. Instead we' re going to pick up the thread of business
performance and concentrate on the future and what we think are some reasons for optimism. At least guarded
optimism. Though we' re going to start with a bit of a down note by adding one more chart to the chain of argument
on the long-term economic challenges we' re facing. Our optimism rests on the notion of Innovation, which we' ve
covered before. The challenges are indeed daunting
and long-standing but we' ve faced worse, on both the
enterprise and total economy levels. So what rays of
light are there for this optimistic season?

- ! "
We' ll let'
s start with one semi-final note of a darker
hue and compare GDP Potential with Actual over the
post-WW2 period. Potential GDP is the level of
growth that we could reasonably expect if the
economy was efficiently and effectively operating so
that all resources were fully employed. The CBO
makes continuous estimates of this number and does
a pretty good job - it is if nothing else an excellent
benchmark to start with.
The top chart shows GDP Potential (dark blue) vs.

Actual (light blue) since 1950, as well as the
difference between them. First off, in case you had
Page 12 of 43

any doubt as to the real depth of this Great Recession, this ought to put them totally to rest. We'
ve never been
any farther below potential in six decades than now.
The bottom sub-chart shows the difference compared to the running total difference, the aggregate (in red). As
always click to enlarge. Notice that the aggregate differences ran close to zero thru 1980 and then started
dropping away. As we know from the previous post on Debt, Savings and Investment, that was because of the
rise of over-consumption fueled by debt. Our grandmothers were right. Then in the mid- to late-80s it really
dropped until it started to recover a bit in the late 90s, due to an economy running above potential (as good as
any working definition of a boom as there is).
' ! %'
. &
If it'
s not clear running companies efficiently
and effectively is a necessary condition for
survival. But in this new economy, where the
sins of several decades have caught up with
us, it is NOT sufficient. Digging out of this
hole will require the creation of new value
(new products, new services, new paths to
market). A main reason for a pronounced lack
of Innovation, as opposed to "mere"
inventiveness is confusion over what
Innovation is combined with poor execution.
Let' s start with this graphic showing how it's generally treated and what'
s wrong with that view.
First off invention is not innovation. All to often the coming up with an idea is mistaken for delivering it in usable
form. Innovation IS the creation of new delivered value, not the exercise of cleverness. An academic
acquaintance of mine was running a multi-year research project which we tried to shape by trying to expand his
framework. Unfortunately his sponsors (mostly corporate researchers) were only interested in tools and
techniques to help them with lab work, not in creating new things. You can see this in history - the great
innovations that drove post-WW2 growth in the US were the result of investigations during the 20s and 30s,
scaling up to industrial production levels during the war with government money and then the post-war
commercialization by private industry. If we' re going to have another Golden Age like the 50s it'll take
investigations, big ideas and delivery of those ideas.
What happens now is that most organizations think they come up with an idea, sail it over the transom to
development and production who readily and straight-forwardly turn it into a product and then pass it on to
Marketing and Sales who will have no problem wrapping a ribbon around this great idea and turning it into the
next blockbuster. Almost a year ago now we posted a question on LinkedIn to see what folks thought and got
some substantive feedback, ALL centered on culture and responsiveness. That' s a recipe for a resilient and
adaptive enterprise within existing boundaries - not a way to create something new, meaningful and valuable.
Page 13 of 43

' !
% %
% + % +

So how should it work? There are two levels to the answer, one explicit and the other implicit, in this graphic.
First, start with a real problem whose solution
addresses real wants and needs in the
marketplace. A lot of VC-funded startups fail
right here because they go after "neat" stuff
(which is also the typical problem with the as-is
approach). The really critical next step, the
central engine, is to analyze the needs and
translate those into the high-level design, from
a business (or customer or user) perspective.
All of the innovation projects that fail tend to fail
here....and that' s based on literally decades of
working on such projects personally as well as
observing lots of others.
Then comes the very hard but somewhat

straight-forward processes of translating the
value-driven design into engineering and
manufacturing. A key here though is feedback
- what are the tradeoffs between boots on the ground reality and initial fantasies about what you want? When you
have a multi-functional team actively involved thruout the entire process it'
s possible to make sound judgments
about the pros and cons. When you manage the process thru transom-sailing, which is the typical approach, you
get more Edsels.
The other big glitch is when you finally take your dream to market. Typically marketing and sales are brought in
only at the last to put lipstick on a pig. That leaves them with little or no choice but to, shall we say, present an
altered reality. If M&S have had early involved, in fact if market-based business analysis was your starting point,
then you know what the value is and can carry that message all the way to the go-to-market activities. A night and
day difference, in our experience.
' !

Business as a whole should be a team sport but

especially innovation. The approach where each
function works in its own little silo with no cross-
linkages and no feedback or feed-forward will end
up with a lowest common denominator
compromise. Pleasing to no one and not likely to
satisfy the market or customers.
If you look at organizations and companies that

are effective and repeat innovators, like Pixar or
Apple or Boeing, what you see over and over
again is highly motivated teams with good
executive sponsorship sharing a common
endpoint vision, coordinating their work and led
by an executive who has the vision, the technical
competence and the human skills to make more
than the sum of its parts from a disparate and multi-function team.
Page 14 of 43

If you want to see this in action we know of no better example than Lord of the Rings - get/borrow/steal the
extended edition DVD and watch all the special features. The level of commitment, sheer inventiveness and
willingness to both know their own specialty while serving the overall objectives of each of the specialists is
amazing.

A while back Business Week had the sheer audacity and gall to
tell us the truth - the Emperor has no clothes. In other words we
were and are suffering from a lack of Innovation. That' s one
reason that jobs, wages and economic growth have been
stagnant for so long, along with all the others we've been
deconstructing.
But at the end of the day the two biggest barriers to successful
innovation are rooted in executive leadership. Most companies
can invent and deliver new products or services that are
consistent with their history and culture. Few, if any, can do
something that' s truly outside the box. For one particular big
example consider IBM' s work on e-Business, which Irving
Wladawsky-Berger discusses in a recent blog post (The
Evolution of Collaborative Innovation). Irving tells a good story
that'
s true and accurate, but (IOHO) incomplete (read the comments). We also were involved in the teams that
created e-Business but on a whole different, and far less successful, side of the house than the technologists.
Aside from Culture the single biggest barrier to real Innovation is that almost all companies treat it as "business-
as-usual". They establish the same set of performance criteria, insist that standard operations be used, apply the
same overhead rates and judge returns as if this were an existing business. Strangely, oddly and sadly enough
IBM scaled up the commercial PC business by breaking those rules and creating a stand-alone business unit
outside normal controls and management systems.
If organizations truly want to innovate they need to treat the investment as a separate and stand-alone project.
Remember our saying that there was an implicit message in the Should-Be chart? Well here it is - Innovation
should be viewed as an inter-linked chain of activities with its own separate management systems based on a
project orientation, rather than as an on-going business.
And that'
s the magic ingredient in a nutshell. But in the coming turbulent decade of extended doldrums the
companies that Innovate will be the ones that do well. Whether as employee, supplier, customer, investor or other
stakeholder those are the folks you want to look for.
Page 15 of 43

December 25, 2009
Christmas Wishes: Peace, Prosperity and Performance

http://llinlithgow.com/bizzX/2009/12/christmas_wishes_peace_prosper.html
Please consider the normal wishes and sentiments of the season extended, sincerely and well, to all my readers.
Christmas is the day and season of renewal and hope, and has been for ages, even millennia. It, after all, is the
Solstice which all Man'
s religions have recognized in some form or another for as long as we know.
As is our wont however we would like to put a little more substance and reflection around the surface. It is also a
season for reflection on the year and years passed and on what the future may hold. Hope is one thing but hope
based on substance something different. Based on previous posts it' s clear that this next year, even this next
decade will be challenging.
We exited the last decade and entered this one in a state of euphoria that went aground on many hard realities.
While it would be "nice" to suppose that some cosmic scale would see us entering a decade with a distinct lack of
euphoria to be one of progress and prosperity. Alas, all the signposts point to continued challenges. Yet there is
hope - not least that we recognize these realities and prepare to meet them. And in that, combined with action,
lies the true hopes for a good decade.

(
/ '
In a word we hope to see Performance this decade instead of

continued coasting along on leverage, failures to execute and
strategic mal-adjustment. At the end of the day, therefore, all our
hopes rest on the ability of business to do its job and perform.
For our inspiration we look to the great Japanese Zen sage and
founder of the Soto sect, Dogen. One of the greatest thinkers,
philosophers and poets who ever lived, and capable of putting the
most profound truths in the most elegant and simple verse.
In Steve Heine'
s wonderful translation, "Verses from the
Mountain of Eternal Peace", Dogen says:
Attaining the heart

of the sutra,
Are not even the sounds
Of the bustling marketplace
The preaching of the Dharma?
As Adam Smith pointed out a long time ago, though almost a

1,000 years more recently than Dogen, man has a natural
propensity to truck, barter and trade. Economic relationships are
as natural to man as any other and promise more increase in well-being than any.
The Dharma is the natural way of things, the ultimate truth(s), which we must strive to see by seeing and
understanding things as they are. Without distortions or delusions. A sutra is a major teaching of the Buddha, a
Page 16 of 43

doctrinal bedrock akin to the Bible or the Quaran, in which he set down his lessons for all to read, study and
adapt.
Thus, we take the poem to tell us that doing business is a natural activity of humankind and that in conducting it
well, with honesty and integrity, we pursue the path toward enlightenment (small e of course). And that conducting
business well is as much a natural activity of us all and can take us in positive and productive directions. IF WE
CHOOSE.

(
&

Our great sage of business performance is

Peter Drucker who seems to us isn' t just a
member of the Panteheon but defines it. A
position he earned by focusing on those things a
business needed to do to perform thruout a
long, exemplarly and constructive life whose
central concern was making things better.
What is the purpose of Business? It is to

provide goods and services that create value in
the marketplace for the rest of society.
What is the measure of an effective and

successful business? It is Profit - but not profit
as it is usually grossly mis-understood and mis-
represented. Profit is not the "excess" returns to
capital (an accident as it were) but the cost of
doing business that provides funding for jobs
and job growth, insurance against ups and
downs, the funds for new capital spending and
the only way to invest in new ventures. Without
real Profits, well-earned and wisely spent,
business does not perform.
How should a business conduct itself? It should provide a valuable service that justifiably earns a profit, it
should create a productive working environment, for its employees sake and in its own self-interests in
performance and it should be socially responsible in the broadest sense. That is it should first do no harm and
correct the ones it causes, it should collaborate to reduce the impacts of unavoidable harms and it should support
the effective solution of broader social problems.
How should it meet those goals? By balancing the overall performance requirements of the business with the
capabilities and characteristics of the key operational functions and by making each decision for both the
immediate needs and long-term requirements for performance. Above all, when those basics are satisfied, it must
Innovate, and continuously re-invent itself.
Page 17 of 43

!
( ' '
#

-
The problems we' ve chronicled that interfere with meeting those goals
are largely rooted in the decades prior to the Noughties. We coasted thru
all these trials, tribulations and turbulences on the backs of financial
engineering and shorttermerism, with the underlying structural
weaknesses disguised, as it were, by a high fever of money and paper
profits. This next decade will require facing the challenges of reality as
they are, not as we' d wish they were, determing the correct pathways to
performance, pursuing the necessary actions with dedication and
discipline and delivering that performance thru sustained execution.
In other words, judged by Drucker'

s standards, business did not perform
well this last decade.
The difference between survivors, prosperors and also-rans (or the dead
for that matter) lies in not deluding ourselves.
Ganesha is the Hindu deity of obstacles and wisdom and new ventures.
In all his attributes therefore let him be the deity of this next decade for
business. This decade is a time of risk and opportunity. Where it falls, on
balance, is going to be up to us and doing the right thing.
December 28, 2009
Dealing With the Brave New World: Resilience vs. Sclerosis

http://llinlithgow.com/bizzX/2009/12/dealing_with_the_brave_new_wor.html
By this time we hope it' s crystalline that the

"Brave New World" is going to be tough,
steep and rocky, that is no more liquidity
from which we can all get high fevers and
have bubblicious ephorillusions (boy, don' t
you just love it when word coinage can
really get carried away). We won' t review
either the extensive de-mythologizing we
spent so much time on, nor the equally
intensive review of the long-term structural
outlook for the next decade. Hopefully, it' s
not necessary, right? Instead we' re going
to turn our attention to the critical fulcrum -
how are businesses preparing for the this
upcoming decade? One where there ARE
NO mysteries about how tough it' s going to
be.
We started this series by setting out a

marker that summarized our best
impression from our network, other
Page 18 of 43

contacts, and various readings and used the accompanying graphic to illustrate our main points. Sadly, our
friends at BCG have just published another study (not available yet) on how businesses are responding and
confirm there own findings from earlier in the year as well as our own (you' ll find a link to the WSJ'
s summary in
the readings). Let's repeat it - businesses are NOT prepared, preparing or anticipating. Instead they' re all praying
for a miracle - we won' t retell the old joke about the believer who drowned after being given multiple chances to
save himself but it seems to apply.
(
0 !
1 ' 2
Let's make another key point briefly - about

why your care. It doesn' t matter whether
you're an employee, a business partner, a
customer, an investor or otherwise
involved - just general citizens ought to be
concerned because it is business
performance that drives how and when
jobs are created and, ultimately, whether
or not the economy grows and at what rate. When we focus on the big abstractions this down-in-the-mud view
disappears all too often but this really matters. We can'
t put it any more clearly than that (and the graphic is our
attempt to bring it home).
**
, 3
/
Let's re-visit another previous BCG graphic (our

compositing) that the recent findings confirm and
amplify. The red line in the top chart is how
executives should not have reacted to the downturn
and the crisis but is emphatically how they did.
They ignored the warning signs, waited far too late
and then were forced to make drastic, meat-axe
cuts in costs - often reaching beyond the bone. And
certainly damaging morale and attitudes as well as
mortgaging futures by truncating new projects and
R&D. By our standards the worst thing they did was
do their meat-axing arbitrarily and out of balance.
That is they just went ripping thru rather than
weighing and weighting each of the functions,
status, contribution, performance and opportunities.
On the bottom chart what you see is the actions

that got the most attention. Which are the short-
term and short-sighted ones. And what the recent
BCG studies tell us is that this same blindness,
willful neglect and wishful thinking is, by the
executives own admission still going on.
Only this time around - a consequence of all our

economic analysis - there' s not going to be another
asset bubble to bail people out with artificially
stimulated demand and growth. Not Tech Bubble,
not Housing ATM. In fact, just the opposite. Take a
careful skim/read of the excerpts in the reading
section. You'll find a very carefully selected set of links that summarize the key characteristics of this brave new
Page 19 of 43

world and why/how businesses are struggling with coping. They range from deep changes in consumer attitudes
toward frugality and value to the over-emphasis on financial engineering and short-term paper earnings displacing
operational and industry savvy to some of the ripple effect consequences. Including all the businesses that bit the
dust this last decade, the growing public backlash that'
s leading to major regulatory changes mandating pay for
performance for ALL companies, not just financials, to perhaps the most important. That would be the attitudinal
adjustment crisis and lack of confidence.
(

(
%%'
1
We don' t know how many of you have

been involved in the decision making
processes inside any organization, let
alone large ones. Obviously the bigger
an organization the more complex it is
and the more difficult to coordinate. In
fact one possible problem is that as
organizations become ginormous that
the amount of nerve tissue required to
connect all the parts and coordinate
them starts to absorb to many
resources and slow down and distort
decisions. We' ve all seen that, at least
symptomatically.
But there are two fundamental

problems that you have to be
somewhere near the insider to
appreciate. Most people think
businesses are run by the org chart
with steely-eyed killer analysts and
hardcore decision-making machines
as the executive making all the right
choices based on a complete
command of the inner nature of the
Universe. (the reference here might be
to E.E. "Doc" Smith's Grey Lensman
scifi series). Well there are no Arisian super-beings here, unfortunately.
Let me give you two constructs that serve well. Once the formality is over think of the table in the boardroom as a
poker table - if you've delivered before you get more chips and the House will hold your marker. The second and
even more important construct is political log-rolling - too many business decisions are made based on what
exists and the amount of sunk resources, thereby reinforcing history instead of investing in the future. Over time
more and more decisions become less and less about creating external value and more and more about internal
gerrymandering. We could give you explicit examples but then "they' d" come carry us away. Consider that your
introduction to the real dirty little secrets of corporate politics.
So we' ll give you this abstraction to think about. As companies grow and mature they build out their organizations
and accumulate investments in people, plants, equipment, etc. More importantly a lot of rice bowls get attached to
the the way things are - not the way they should. We know of one major telecom firm who made office phone
switches using the old telephone circuitry who had a prototype of a new software-based VoIP platform that would
handle any service on any size from small-business to major phone company. They shut it down because the
existing business, more importantly its executives, found their positions threatened. That'
s the difference between
Page 20 of 43

rent-seeking vs. profit-creating, or between internal political agendii and external value generation. We call it
organosclerosis - organizational sclerosis.
%% (

The cure is simple in practice and devilishly hard in

execution. It requires good people, courage and
sound leadership, above all other things. If you
browse back thru all the companies we' ve cited good
and bad you' ll find two sets of characteristics that are
constant. ONE - the ones that got into trouble did so
because they got sclerotic and they got sclerotic
because leadership refused to tackle the problems
even when they knew they were major problems. Two
- the companies that avoided or dug out of trouble
broke up the political plaque and did it with good
leadership. Whether we' re talking WMT, MickeyD' s,
HPQ,.... and others that' s it in a nutshell.
The third thing you' ll find is that each of these

companies had crisp, well thought out answers that
they committed to and executed on to the questions
in the chart. If you listen to their conference calls,
read the annual report or analyst presentations, check
out the press or otherwise investigate you' ll be able to
find out what those answers are. Even more
importantly you can watch them in action - how are
the stores laid out, what products are there at what
prices, what kind of PCs do they make and are they any good .... and so on and so forth.
That brings us full circle to the original "investment mantra" from economy to performance to profits to earnings to
returns. Ask yourself what the answers to each of those questions are in each of the timeframes. If you can' t find
out then think twice. Just consider - what if anybody had applied this test to, say, Enron or Worldcom last bubble
and bust? Or Lehman, Bear Stearns, Citi, et.al. this one? We doubt that any of them would have passed any of
these screens. It turns out you might be able to be an Arisian in training after all (sorry for all the obscure old scifi
references but once you get rolling and it works...it' s hard to just pun one).
March 20, 2007
People & Performance: Assets or Fungible Commodities?
http://llinlithgow.com/bizzX/2007/03/people_performanceassets_or_fu.html
It'
s long been a truism that '
people are our most important asset'but anybody with a little bit of real-world
experience has plenty of ground to question that. If you want some interesting evidence follow an old colleague'
s
advice and read a Dilbert book from cover-to-cover, if you can. Amusing one cartoon at a time but taken as a
series deadly depressing. Many things are embedded and embodied there but one of the keys is this fundamental
question:
Are people truly assets or are they consumables that're easily replaced?
Now if people were really and truly assets we'

d apply the rigors of capital budgeting, discounted cash-flow
analysis and IRR assessments. Despite the unhappy reactions I' ve gotten to that suggestion stop and think about
Page 21 of 43

it for a while: we look at capital over it'
s total lifetime, understand that regular maintenance and upkeep is required
and the total life-cycle costs and benefits do NOT happen with one fell swoop. Why can' t we apply the same logic
to people.
With at least two fundamental differences:
1. People are appreciating assets - unlike others they accumulate experience, training,
contacts and knowledge. Their productivity and value should grow over time.
2. People are the last thing between you and your customers - and your suppliers for that
matter. If you'd like to establish viable and effective long-term relationships it should pay
to treat them well.
If you stop and think about it for just a bit the widely shared tribal folk wisdom of business and organizations is
that in fact people are treated, depending, as anything but assets. Somebody who' s made a major part of his
career in examing the characteristics and consequences of that ' strategy'is Prof. Bob Sutton of Stamford who has
an excellent blog up at Work Matters .
Bob has recently published his latest book "The No Asshole Rule" which has gotten a huge jumpstart in the blog
community and is know a bestseller on Amazon before even hitting the mainstream. Highly recommended as is
his blog.
There' s a recent entry on the blog on the "Waste of Talent" which reflects the huge outpouring of painful stories
that indicate how widespread the problem is. I' m sure Bob' s e-mail is getting swamped. You can read my
comment there but let me put it up here as well. In my earlier, first post on Nardelli' s impact on Home Depot
enterprise performance I tried to link external performance measures, market value, to the treatment of
employees and customers. That approach is a top-down one that reflects Mr. Market figuring out something is
wrong, rather badly wrong, and adapting valuations accordingly. The Efficient Market Hypothesis is all well and
good but it takes a while for the distinctiveness of new information to be absorbed by the collective. It's fairer to
describe the market, in the short-run, as Adaptive.
I'
m not sure that Dark Minions actually do make money at all for themselves or their company.
Rather it's a question of the measurement and management systems not capturing the
damage they do. One could take that top-down or bottom-up. For the latter consider - if an
asshole is abusing their team then more and more of the team' s efforts (as ALL your stories
show) goes into avoiding him/her and diverting their effort into other directions. And that
generalizes to a company-wide basis - can' t tell you for example the number of folks at well-
known large companies who' ve told me how bad things are.
If after several rounds of over-work, bad measurement, etc. etc. the bulk of the employees keep
reducing their efforts while spending all their time watching their backs and looking for
alternatives you get an original 80% effort reduced by, say, 20%, at several rounds of stupidity.
Well .8 x . 8 x .8 X .8 is 40% or so. In other words one gets 1/2 the effort from skilled employees
that one is ostensibly paying for.
It doesn't take many iterations for this to destroy a company's capabilities. Yet because
people are treated as fungible commodities instead of (uniquely) appreciating assets they'
re
grossly mis-managed.
Turn it around - good service is a major requisite of good competitive position yet employee
abuse causes them to spend less and less on attending to customers and you get the external
death spiral going. For one perspective on how that played out and is "measurable'at Home
Depot see the prior post on Nardelli: Cheap at the Price ?
Interestingly enough there's reverse evidence when you look at how the military performs. Despite the reputation
of top-down, rigid hierarchies the modern US military has gone, and continues to go, to great lenghts to push
Page 22 of 43

empowered decision-making as close to the frontline as possible. In some cases, for example, USMC doctrine
calls for local operating authority to devolve to the squad leader, a corporal. And the Corp expects all its'leaders
to take care of the folks underneath them. Which makes perfect sense on several levels when you stop to think
about, and for many reasons.
One of which is the joint benefit to all the team-members is pretty clear. Have you ever stopped to wonder why
everyone who works for an effective startup is excited and works long hours at 120% efforts levels. Sure, some of
it is the wealth prospects and some of it' s the challenge. But a lot of it'
s the fundamental satisfaction we all get
from doing good work that is worth doing and makes a difference.
The real question is why don' t we manage our organizations to maximize total performance by managing people
as assets?
July 23, 2007
Aholes, Shirkers and Performance: a Draft People Principles Policy
http://llinlithgow.com/bizzX/2007/07/aholes_shirkers_and_performanc.html
Several posts here have explored the relationship between enterprise performance and the human environment.
The argument is that the better people are treated the better they will perform for the company by taking care of
customers and its'interests. Now my biases in this case are shaped by both my management experience and my
earliest working experience at Fedex who' s motto was/is "People, Service, Profit". And they backed it up - the
three policy manuals around which the company governed itself were the People, Service and Profit manuals.
Compensation and promotability were determined by effectiveness in people management and they' ve found
since their beginnings that people are the key to service which is their whole reason for existence (& pricing and
profit : ).
That said, at the same time, people are definitely not all perfect. In fact my experience has been that out of any
ten person team normally assembled you' re lucky to get one star solid performer, three decent ones and a lot of
folks who' d like to be more than they work or are capable of. And further everybody' s in denial about this from
both sides - both bad bosses and bad employees. With all due respect to HR' s due processes they aren' t taken
very seriously in general.
+ ' 4 !

!
/ ,
5 6 / , !
! "
UPDATE (8/1): Seth Godin has two interesting post on toxicities among bosses and employees that are short,
sweet and to the point. To which I' d add, my point here, toxic behavior is not rational (this is a family blog so
scruples prevent putting it more strongly).
Bob Sutton over at his blog has covered his new book "The No Asshole Rule" and triggered an avalanched of
heartfelt outpourings on bad treatment. Some of the stories of aholes run amok and bad people policy are....what
? Startling, heartrending, make you shake your head ? Well my triggerring was to start wondering about the
rationality of these choices and on several lines of inquiry I'
d argue that we can make a very strong case (see the
three prior posts cited below for different perspectives on total enterprise performance and people management).
Let me put that more directly and strongly.
1. Bad people policy makes no rational sense and damages corporate performance in the short- and long-
runs.
2. Bad people policy has a measurable impact on both enterprise value and internal efficiency and
effectiveness. It is NOT judgemental though judgement as to consequences is required.
3. In other words the costs and benefits of strategic investment in investing in people can be thought of in
the same way as we do other strategic choices.
Page 23 of 43

In other words we' ve all known for a long-time that we don' t like working in bad environments and our collective
tribal knowledge is that it'
s bad for us, for the company and for the stock. But we' ve also generally talked about
these issues in '
soft'terms. I would argue that' s mis-guided when the problem is properly framed and thought thru.
So how to bridge the gap between delusions and realities ? Well, it' s not entirely clear that I'
ve got an answer but
being on a plane and in that wonderful state of sleep-deprivation, crampedness and caffeine over-dosing where
sometimes the gods speak to you what they suggested was this little manifesto. It' s based on the principle of
running a company for adults. See what you think:
6 7 8
1. You are an adult, worthy of respect, who has every right to be treated as such and so expect.
2. But we also expect you to be and act as an adult who takes responsiblity for their actions and deals with
the good and bad times equally well.
3. You are entitle to a fair day'
s pay for an honest day' s work
4. We expect you, in fair exchange, to put the organizations long-term best interests first in your priorities
but not to the unbalanced exclusion of others in your life.
o The virtuous circle of priorities is Customer (take care of them), Organization (which results in
satisfaction and value) and You (so the Organization will take care of you).
5. We will walk this walk together - not just talk about it while we walk to the bank and you walk to the door.
6. Good work done well is worth doing and it' s fun (or least satisfying). We intend to do good and do well
and have fun as best we can manage.
Taken all together the organization will perform better in the short- and long-runs. Which implies the pie (Pi as in
profits) will be bigger for all of us even if somebody'
s slice changes relative size.
The prior posts that make the case are:
• People & Performance:Assets or Fungible Commodities ?

• Aaargh, Captain Ye Best Take Care of the Crew
and Bob'
s blog is here and one of my favorite posts dead on this is "Waste of Talent" .
December 31, 2009
Renewing the Enterprise 1: the Proper Management of Innovation

http://llinlithgow.com/bizzX/2009/12/renewing_the_enterprise_1_the.html
By this point it should be absolutely clear that we're facing many

challenges, collectively and individually, to recover from a brush
with near-death. It should be even clearer from out earlier
discussions that our present troubles are the accumulated result
of the last three decades of not-so-benign neglect, wishful
thinking and refusal to face facts. Equally clear should be the
notion that this next decade will a challenging one with no
financial leverage to bubble us out of our troubles. We' re going
to have fix this old fashioned way - by earning it. There are two
fundamental directions we need to pursue.
One is making the enterprise perform as it ought, the subject of

the last post (Dealing With the Brave New World: Resilience vs.
Page 24 of 43

Sclerosis).
The other is that we need to find, develop, create and deliver new sources of value, also discussed in a previous
post (A Bit of Xmas Cheer: Innovation As The Future). On reflection and discussion it occurred to us that we didn' t
lay down enough detail to get specific and convincing so we' re going to re-visit the subject of innovation in some
depth. And do so from the perspective of how to make it happen, not why it' s such a good thing. The New Year is
traditionally when we look ahead with some hope to a better future but what is faith without execution? Let us
therefore "Make It So". (Christmas Wishes: Peace, Prosperity and Performance).
,
%%! ' !

So what is Innovation? And how does it

work...or should it in our idealized fantasy
world? The last Innovation post wrestled
with the first - Innovation is NOT invention,
nor is it clever people sitting around making
incremental improvements in existing
products. It is the creation of new value.
Two things happen in general regarding I-
discussions.
First off the more trouble an organization is

in the louder the arm-waving about.
Followed by a lack of delivery - no
resources, no commitments, too much
rules-as-usual. NB: Innovation is not
measured by the size of the R&D budget.
Those are inputs. What we' re concerned
with it outcomes. The other thing that
happens is that everyone stands around
and talks about changing the mindset -
building a new culture. Well culture is
important but again it's not Innovation.
On the next level down Innovation is a set of replicable processes that start with scanning all possible sources of
ideas - ideas which must answer one fundamental question. What' s the problem? And who' s got it, can we solve it
and what' s it worth to you. The first step in the process is picking up all the little bits and pieces floating around
and experimenting with them, rigorously, to see what starts passing those tests.
The first test is the demographics and sociographics of demand and value, not leaping into development.
Demographics is the analysis of standard customer data (otherwise segmentation) but what you really want to
know is not who they are but what they value. That would be sociographics and it tells you what features and
functions satisfy which needs and wants, as well as the potential values and returns. Then you start doing Design
- which should be the translation of market-based analysis into the high-level characteristics of your product,
solution or service. Of course real men don't do analysis, they just start building. (My favorite tech cartoon is the
IT manager standing by the cubicle of his troops saying, "you guys start coding, I' ll go see what the user wants").
Finally it has to be deliverable at an affordable price relative to value. Each of these steps defines a filtering
process where possibles are winnowed to potentials and then down to probables - which you then get to test in
the marketplace. Notice that a) a lot of time, effort and resources are being dedicated here. Also notice that
there's no guarantees BUT you can play the numbers game. If you' re not willing to play for table stakes AND learn
to play the game well don' t bother kidding yourself or anyone else that you' re serious about Innovation.
Page 25 of 43


! 44

Let's spin that overview down a level

and look at the activities within the big
processes and the links - which are as
important as anything else. It' s the
feed forwards and the feeds backward
from each activity to another, as part of
a synchronous whole that creates the
real magic. And where most efforts
typically fail - no market analysis, no
links to business-design (in fact no
business-design at all), and no design
and build for delivery. It's an end-to-
end view that' s required.
What we' ve tried to capture in this

graphic is the next level of detail, the
links and the content that' s carried
around the loop. Anytime you have a
loop you have feedback. Another
typical failure point is that things are
thrown over organizational walls
instead of being an integrated flow.
Typically, for example, all the knowledge of customer needs and values used in design would make
documentation and training a snap but is lost and the poor schmoos at the final end start from scratch. On a
subject the probably don' t actually know. So the rounded rectangles are the activities while the squares are the
intellectual capital that should be carried along and appreciate thruout the chain of activities. Do it right and you
get a virtuous cycle that runs faster and faster and better and better. Break it anywhere and you create risks of
failure. Break or weaken it at too many places and the whole "machine" simply shakes itself apart when it' s put to
the tests of the real-world.
' %

Above we said that Innovation was a

process - or more correctly a linked web
of processes and activities. It's also a
project and that' s perhaps one of the
most important challenges to bear in
mind. Most organizations most of the
time are great at dealing with things as
they are - that is in managing the
existing business. And attempt to
squeegee innovation within the
boundaries of the pre-existing
structures. Which is a death sentence
(the reason the IBM-PC took over the
world (briefly) was that it was set up as
a stand-alone.
The reason so much innovation comes

from startups is that they are
greenfields). The cure is to treat each
Page 26 of 43

opportunity as a project. The difference between an existing operating process and a new project is that the
former has a set schedule and performance metrics. The latter is built up out of a set of related steps where you
MUST complete them in sequential order or pause until you do. You' re not running on a metronome here - nor are
you managing against the normal cost, return or headcount measures.
Here we try to translate those ideas and the ones on the activities into the skeleton of an Innovation management
system that' s both a pre-defined process and a performance-based project management blueprint. We talked
about three levels of types of innovation. The incremental which should run in existing organizations but, perhaps,
off to the side. The major which requires more dedicated and stand-alone resources. And the Significant which
MUST be managed as a separate business by different metrics and performance measures. How you evaluate
each varies of course.
But you can use the blueprint to assess the likely performance in each case. Typically innovation
organizations/efforts are strong on low-level engineering and development, which are not then well-linked into
delivery. Roughly the "1" index-line in our graphic. So the first thing to do is figure where the major bang for the
buck is, typically in improving the grasp on the marketspace and translating that into design as well as putting
more beef into incorporating your improved understanding of value into the delivery tools and content. That would
be the "3" level. Where you should be shooting for is the "5" level where you start to create the virtuous cycle we
spoke of, with the hope and anticipation, and committed investment plan, to eventually reach the "7" level.
You can use this template to evaluate any innovation or investment effort, at least IOHO. Just because a
company is spending a lot on R&D doesn' t mean that it'
s effective. Conversely they may not be spending an
usually large amount but if it's well-managed, along these lines, it will be productive.
, & #

, ,
Just to prove our points about innovation,

translating that into "on-the-field" execution, the
power of doing things differently and the fact that
magnitude of resources is no measure of likely
success we' ll point you to this Sixty Minutes story
on the coach of the Texas Tech Red Raiders and
his success in creating footaball power with a
resource base completely out-of-line with that of
his competitors.
Lots of lessons here, or so we think, but you

decide.
It'
s not just Leech' s different, even confusing,
mindset. It' s his ability to translate that into training,
drills, plays and playbooks and train his players in
a whole new game.
Pay particular attention to the quarterback'

s view of a Leech-inspired view of the field in action. And ask yourself if
that'
s business as usual?
URL: http://www.cbsnews.com/video/watch/?id=4697690n&tag=cbsnewsMainColumnArea.6%20%20
Page 27 of 43

January 13, 2010
Pecora 2 Hearings, Malfeasances, Your Future & Cusp Points
http://llinlithgow.com/bizzX/2010/01/pecora_2_hearings_malfeasancs.html
The Financial Crisis Inquiry Commission (FCIC), or

Pecora 2, kicked off its hearings this morning with quick
statements from the chair and vice, testimony from the
heads of 4 of 5 of the big banks, a second panel from
several investment banker/analysts with strong
criticisms and an afternoon panel from four
banking/economic/housing experts.
Frankly the hearings so far are stunning - intelligent,
polite, informed, limited axe-grinding by the
commissioners (with some exceptions), almost no
ideology and a strong bi-partisan spirit of inquiry,
digging into the data and understanding. In just today' s
hearings (which we intended to listen to only for the
kickoff but ended up getting sucked into for the whole
day mostly) we heard the entire crisis reviewed, most
of the major root causes id' d and the last two years of
back and forth raised, reviewed and either put too bed
or confirmed. By and large the preliminary indicators
are that our assessments align with the Commission' s and the witnesses.
Just to set the stage however we' ll start you off with a recent show from Bill Moyer'
s Journal on PBS where an
editor and a report for Mother Jones discuss their findings for why there' s been such a delay in moving forward
with reform and how the Industry has influenced things. (http://video.pbs.org/video/1380851536 )If you find your
blood pressure rising that was and is the intent. Perhaps the most interesting thing was that all the big bankers
started off, stayed with and finished up with Mea Culpas and fairly forthright discussions of what went wrong (the
most intransigent and argumentative being Blankfein of GS, who more than got into it with the Chair).
Page 28 of 43


Let's start with some charts taken

from Mark Zandi, of Economy.com,
testimony. Zandi by the way is well
respected on both sides of the aisle,
was an advisor to McCain and has a
reputation for even-handedness.
Starting in the UL corner he tell us
that after a near-collapse that
government intervention has
stabilized the financial markets
(under questioning he stated that the
Stress Tests this last spring were
THE major turning point). At the
same time he also said that the
markets are far from healthy, using
(UR) the bond markets and the level
of debt issuance as the critical
indicator.
He then went on to point out that it

was almost entirely the stimulus
package that saved the economy per
se from greater collapse and that
many of the programs had large and
beneficial effects, leading to an estimate of 4% GDP growth in Q4. Yet also worried that the as the impact fades
the risks of a W-shaped outcome are serious and would recommend another $200B stimulus follow-on (again,
this from a McCain advisor). He also pointed out that (LL) the labor markets were damaged and recovering poorly
and would remain in trouble for a long time. Since all that lines up with everything we'
ve been saying for months
we thought it was profoundly insightful :)!

Interestingly, despite differences in

perspective (and one commissioner with
an ideological axe to grind) all of the
witnesses basically agreed to the same
set of problems and breakdowns. Since
one of them (Michael Mayo of Calyon
Securities) was kind enough to provide
charts to back up his diagnosis we
borrowed a subset to create this
composite. (all the exhibits can be
downloaded from the FCIC' s web site at
www.fcic.gov).
Starting in the UL corner he first pointed

out that there was an explosion of
Page 29 of 43

securities in the 00'
s AND that the Asset/Equity ratios of the Banks and Securities firms exploded;i.e. they got
themselves leveraged to a fare-thee-well (really interesting despite the roots lying in the 80s this didn'
t explode
until this decade).
Moving down the left column that much of that issuance moved from secure instruments to structured products
and that this financial engineering drove a huge surge in fees. No self-interest here of course. Moving to the
righthand column we see the concentration of this new issuance in real estate trading in one form or another, in
which btw, consumers, et.al. were complicit as well - since consumer debt also exploded. The real money chart is
the last in the lower r.h. corner - which tells you what happened to compensation in the Finance industry vs. the
rest of the economy. So there you have it - graphic testimony to malfeasant greed run amok taking the innovative
technology of securitization and metastasizing it this decade to drive fees, profits and bonuses. And, oh yeah,
almost collapsing the world. Again - in so many words - everybody including Blankfein, Dimon, Mack and
Moynihan (BAC), basically conceded all these points (and a good thing it was the new guy and not Lewis
testifying).

So what are the long-term consequences?

Well if you read our year/decade outlook on
the economy, markets and business you' ve
got one set of answers. But we' ll go back to
Mr. Zandi for his take - remember this is
under oath btw.
Well Mark sees it pretty much as we see it -
though if anything he' s even gloomier,
though he put it more simply and clearly
perhaps; and talked more about long-term
debt and savings. Nonetheless coming from
very different directions we ended up with
identical conclusions.
First off (UL) Consumers took a huge shot
to their Net Worth that they will likely never
recover and which will cause fundamental
long-term damage. Which you can see in
the Confidence charts (UR) for businesses
and consumers - which despite improvement are still worse than at any time this data shows (NB: the spokesman
for regional/community banks said something similar in his own words).
The two really sad, scary and critically important factors are the long-term structural impacts. In the LR you can
see the estimate of the long-term impact on GDP growth rates - we' re going to be hamstrung for a long time. And
in the LL you can what kind of debt financing problem we got saddled with and will take a long time to work out of.
In the readings below we have a very long accumulation of excerpts leading up to the hearings, setting out the
background, some diagnosis and recommended resolutions and the impacts. The Commission is chartered to
take the year to to reach its conclusions but this will indeed be the year of re-regulation in several forms or the
other.
Page 30 of 43

The Hearings and the Assessment
There' s been an enormous amount of criticism of the

Administration and Congress for not moving faster on all
this to quickly and magically fix it. Of course that' s how we
got into these problems and the original Pecora
Commission didn' t reach its end and see new legislation for
almost four years. There was plenty else to do this year
which should have and did preclude starting hearings on
this matters. At the same time now people both have some
perspectives and we' ve seen the Industry' s true colors. All
in all we don't think things could be better positioned for as
good an investigation and re-think as we' re ever likely to
see. CSpan is carrying the hearings live and also putting
them up on its web site. It' s at least worth some of your
time to listen to the openings (if the Chairman and Vice' s
statements are on this) but we felt encouraged from the get
go, and more so as thing proceeded. This is as qualified a
group of public servants as you' re likely to get, even considering the political process that brought them there.
During the course of the hearings Zandi summarized the "root causes" in three points:
1) a worldwide excess of savings which created a sloshing surfeit of liquidity that drove down
returns and caused people to go crazy looking for any advantage (something we remember saying
a few times going back to '03).
2) the over-use and over-exploitation of securitization combined with absolutely terrible under-
writing and diligence
3) and a failure of regulation.
He and several others added a fourth multiple times thruout today'

s hearings as the real root of the root -
HUBRIS!
But we'll add a fifth that is the Alpha and the Omega, the ultimate AUM (OM): the failure of corporate governance
and performance management. In legal doctrine there is the notion of last clear chance to avert a disaster - well
the people who had the first and last chances and who had the fiduciary duty to do so were the executives in
charge. And the man who stepped up to that admission was Jaime Dimon, strongly seconded by John Mack.
There were lots of factors, lots of mechanical breakdowns, a triumph of greed and some really terrible regulatory
decisions.
But the ultimate failure was a management failure - opting for malfeasant choices, in both the private and
public senses, in the service of greed. Synthetic derivatives were merely the enabler, or one among many.
The results of these hearings are going to frame your life and those of you descendents for decades, just as the
originals did. And just as the failures of Financial leadership already have. Like we keep trying to say - the
Industry as people keep trying to analyze it ain' t coming back!
Page 31 of 43

January 15, 2010
Talking Business: the Outlook vs. the Preparations
http://llinlithgow.com/bizzX/2010/01/talking_business_the_outlook_v.html
Well with the second day of FCIC hearings behind us and the
agita reactions we could easily pick up on that thread and
continue the conversation. Especially because we think almost
all commentators are misjudging what they' re hearing. Of
course to better judge it you'
d actually have to a) listen to the
whole thing, b) know what you' re hearing and c) know some of
the background.
We still think the three most important things we heard were 1)

we really screwed up, 2) it was fundamentally bad
management and leadership and we' re responsible and 3) we
apologize but we' re not really sorry (especially Blankfein and
GS!). The Street' s grasp on the tsunami that will build up over
the next two years is abysmal and they don' t know how to deal
with it, but dealing with public responsibilities is as much a part
of an executive' s responsibilities as is day-to-day decision
making.
But, God being just, JPM' s lackluster earnings which are

bringing down the market as we speak for all the problems
we' ve been warning about for 18 months at least (literally) will
do for now (that'
ll do Donkey, that' ll do). Blankfein'
s major
defense for drinking the koolaid was that nobody could have
seen it coming - which is just flat not true, and is being
repeated. CalculatedRisk was warning about this problems in
2005 and we were warning about a slowing economy in early
2006.
Here' s where those all come together - our fundamental

question. Are businesses properly preparing for the next
decade of slow growth? Just to put up some new charts on that point of forewarnings this one shows monthly
retail sales, quarterly back to 1960 compared to Consumption and GDP and the determinants of future demand.
The sum of changes in Employment and real Wages continues to weaken. Now if you don' t believe things aren' t
very rosy you' re probably done here. If on the other hand you think business performance is a critical factor in
how things will go please continue on.

' 6

In the readings you' ll find another slew of stuff starting with starting with long-term fundamental changes in
consumer spending habits (' ol hat here we know but it always bears repeating apparently). All the rest of the
excerpts are specific company stories starting with Best Buy and Sony, which gives us consumers and the CPG' s
(of a sort), Alcoa (who had not so good results and tanked the markets themselves), and Exxon who' s acquisition
of XTO Energy (a natural gas firm) tells us an enormous amount about deep structural change in the Energy
Sector. Then there' s a slew of Auto articles followed by another chunk of Technomedia stories covering the
outlook, Intel (who' s surprisingly good results did NOT result in any significant market pop), IBM, patents and
(indirectly) innovation and Comcast-NBC. Need we mention that the Jay/Conan screwup is more symptomatic of
Page 32 of 43

NBC' s struggles with the new age than of anything else. When the world is changing under you well... march or
die as they still say in La Legion Etranger!
The top chart pretty well speaks to the retail and consumer
outlook - whether the necessary steps are being taken
we' re not sure (that' s being polite btw. Actually we'
re
highly suspicious that the overbuilt, over-stored and under-
run Retail Industry is in deep dodo and about a 1 on the
adaptation scale [1-5], and its suppliers along with it). Let' s
turn to the Auto Industry as our exemplar then. (The Self-
Inflicted Collapse of the Auto Industry). The top chart
shows Industry Sales and YoY changes - notice the big
bubble in Sales after things were already headed south.
Instead of adapting and adopting they choose to use
special incentives to move stuff nobody wanted to buy.
Our judgment would be that the US going out sales figure
will be 13mil/year at best, probably take 2-3 years to crawl
back that high, if it does and tells us the US industry is still
about 40% over-capacity. Europe' s in much worse shape.
Meanwhile the real growth opportunity is in Asia and Latin

America but the Chinese have 117 manufacturers who
need to shake out but will continue to be subsidized into
more over-capacity by government spending to goose
employment. And all that' s before we raise the perennial
but really critical issues about re-thinking and re-
engineering product development, manufacturing,
distribution and marketing & sales. Over this next decade
the industry has merely survived so far though the jury' s out. And, again, it'
s not like you couldn'
t see this coming
as long as you didn' t drink the koolaid and talked to somebody besides yourself.

(

Well, what about it? Well obviously Tech will save the
day, right? Let' s try that again by refreshing ourselves
on how business makes capex decisions - rather like
we did circa Jun08 when we said things were going to
hit the rotary impeller real soon now and folks needed
to prep right now. Needless to say nine months later
there were lots of Tech execs wondering around with
startled looks and meataxed labor forces.
The top chart compares YoY changes in GDP and

Tech spending. Looks like an extraordinarily close fit
to us. Which is born out in the bottom chart which
shows the relationship over time - notice how tight the
fit is and how high the R2 is! About as good as we' ve
ever seen for any economic data.
Now Forrester tells us that worldwide spending will go

up about 8.1% while US spending will increase about
6.6%. Who are we to argue with the guys who got it
wrong the last time. Of course if you do the math and
a 2.5% real GDP growth rate implies a 4.5% growth in real tech spending. Not bad all things considered but a 1/3
under the analysts forecasts. That would required a sustained 3% GDP for the entire year - again not to far off
Page 33 of 43

and given how sharply the sector might rebound possible but, we think, unlikely. If you want some more
background on far and fast the Industries are changing try: Technomediatainment Futures: Evolution, Barriers,
Structure and Opportunities of a New Industry.
,
& '
So, there you have it. Reality checks from fundamental

changes in Consumer behavior and weak employment to slack
demand growth and the ripple effects across the spectrum of
Industries from Retail to Manufacturing to Extraction to Autos
to Tech and Entertainment.
In an interesting comment on the "perversity" of our times one

of the best places to get your news and substantive discussion
of serious issues is Stewart' s Daily Show. Here' s interviewing
Paul Ingrassia, ex-WSJ Detroit reporter and editor. Paul' s got a new book out on the history and performance of
the Industry, how it dug itself into these holes and dodges the "what next" questions. Of course he' s also the
same guy who wrote a book in ' 94 about the recovery and bright future of the Industry. Here he admits they
completely lost their way back then and took their fingers off the control levers.
(http://www.thedailyshow.com/watch/tue-january-12-2010/paul-ingrassia )
How many other companies out there are in the same state today? We certainly know that the Finance Industry
hasn't even repaired the balance sheets let alone started re-thinking its businesses. How many others are going
to be the next Auto Industry?
January 18, 2010
Renewing the Enterprise 2: Governance, Measurement & Performance
http://llinlithgow.com/bizzX/2010/01/renewing_the_enterprise_2_gove.html
The fundamental messages we' ve been trying to drive home are that the next
decade will be one of the most challenging in at least four, if not since the
Great Depression, that the new realities have not sunk into investors,
management and stakeholder consciousness and the single biggest challenge
will be to improve enterprise performance. Performance improvement will
either be led by the enterprises or imposed from the outside, less effectively,
by a high level of distrust and justified anger at near-disasters brought on by
malfeasance. And this is not just restricted to the Finance Industry. It is in
enterprises own best interests to improve their governance, management
systems and performance to make sure it' s done well, adapted to their needs
and, most importantly, they actually improve their performance.
Backing up those assertions you' ll find an extensive readings collection on each of the major issues involved after
the break; here we want to review the evidence and explore the core concepts of performance improvement and
management systems. But start with the BNN clip of Don Coxe both laying out the situation and the level of reality
denial currently prevelent in the markets. A reality, judging by the week' s reactions to earnings in the markets, that
might just be sinking in the general consciousness.
(http://watch.bnn.ca/market-morning/january-2010/market-morning-january-12-2010/#clip254429 )
Page 34 of 43

%%

9 5
! " #
If you look at the general cases, the industries or the specific

companies there is one redcurrant symptom of failure. The
sacrifice of long-term value creation for the appearance of short-
term performance.
That difference, often thought to be mere words and arm-waving,
actually makes a substantive difference in enterprise
performance and in long-term stock values. In other words it
makes a difference to every stakeholder.
And it actually turns out to be measurable using market data -
though only after performance has resulted in changes in market
valuation.
The graphic lays it out nicely, both in general terms and using the
specific example of MickeyD' s. In their case the fundamental
strategy was add more stores without changing the old value
proposition and just grow, grow, grow. Well that kept up reported
operating profits and earnings but the saturation led to a
deterioration in total enterprise value because long-term value
tanked.
Then they slowed growth, reinvented the menu and the stores
and created both a new core proposition and translated that into
execution. The result was a surge in future enterprise value
driving a surge in total value. The trick is to spot the change in
the value equation early but clearly you can also spot it while it's
well underway and hop on the gravy train as it plays out.
To spot it early and to know whether or not it is sustainable you have to analyze the business as a business -
think like an owner. Is the value creation sustainable, what is the strategy, can it be executed and, most
importantly, are they walking the talk? That is, is what they say they intend to do what' s built into plans,
capabilities and compensation? If so value will be created.
! " & *
It'
s not just the Finance Industry but all enterprises
that have lost trust thru, at best, non-performance or,
at worst, malfeasant behaviors.
The argument for exorbitant executive compensation

has been that it results in outperformance. As the
result of the Financial crisis there have been several
major studies of that proposition and the "startling"
result confirms what common wisdom would suspect.
Not only has it NOT resulted in out-performance but
just the opposite. In fact the performance deficit is
large and significant.
This ought to cause major pressures from

stockholders and stakeholders for performance-based
Page 35 of 43

compensation tied to long-term value creation. But, with all the sturm und drang in Washington the fundamental
regulatory change has already happened. The SEC has put forth new regulations requiring executive
compensation to be tied to long-term objectives.
The saddest thing about this is that a regulatory agency is having to put controls in place that should have been
common business practice and taken for granted. That it felt it had to act, on the basis of good evidence that it is
not, is a major indictment of corporate governance. When the Auto Task Force went into Detroit what it found was
not the bad situations it anticipated but abysmal conditions; Wagner should have been removed, years ago. When
the government is forced by your private and social failures to re-engineer executives and the Board have let
everyone down, including themselves.
- ! & * %' ! "

%

The question becomes what' s broken and

what should be done to fix it. Let'
s start with
the way things are and go to the way things
should be, and must be to cope with the
New Normal, not to mention the SEC!
At best what you here from most companies

is some rather vague strategic assessments
of the state of the enterprise (and if you
listen to conference calls, all the questions
that get asked). For that strategy to be
deliverable it must translate into operational
capabilities that support each other and are
aligned with the overall enterprise goals.
What you get is a set of functional fiefdoms
that grew up by accident and are defended
politically on internal agendii, with the result
that the realities of strategic implementation
are dictated by inadvertent operational
strategies. Thereby making what you hear
all fantasy. And it's easy to judge - when
Bartiromo interviewed Sue Decker at Davos a while back the answers were beyond vague. Immediately telling
you that Yahoo hadn' t a clue. The contrast with Bartz is astounding. Which is one early and easy tell!
What you want and need is a clear, simple, straight-forward and crisp definition of current strategy and objectives
and evidence that it is operationally deliverable. WMT would be our example of best practices while Citi is a
perfect example of an organization that, finally, articulated a clear strategy but doesn'
t have the management
system or operational capabilities to make it happen. BAC and Dell may be suffering similar breakdowns in
performance management. Ideally what you' d hear, less granularly and with more give in the boundaries, would
be a clear articulation of future value and strategy as well as deep changes in operational capability. Again these
are things you can dig into the analyst presentations.
Page 36 of 43

%%
&
,
A favorite story is the Citi branch manager who

confessed that the 30 corporate memos from
HQ he saw a month went into the round file
cabinet and he focused on monthly branch
performance. That' s sad but telling because it
tells you how broke the management system is,
that any notion of long-term value was non-
existent and that incentives were on the
appearance of short-term performance. People
will do what you incent them to do, period,
though that takes more than money.
What you need is set of operational

measurements and metrics that link the
performance of the individual functions and
organizations to the broader corporate goals.
Fedex has been doing this for years and the
heart of WMT' s re-engineering was setting
performance goals for return and operational
performance at the store and department level.
Performance results from Efficiency (using what
you' ve got given a level of economic activity),
Utilization (using what you' ve got effectively as
demand rises and falls in the cycle) and Capacity (increasing capabilities in line with the strategy).
But what business units do is activities - they don' t return profits per se. In other words the necessary, and now
mandated, revolution in management systems requires decisions about the principal activities for each unit, the
appropriate metrics, and what should they be in three time frames (matched against the Efficiency, Utilization and
Capacity adjustments). For a Fedex station manager it might be packages per stop, for a WMT store manager it
might be sales and profits per square foot, preferably by department.
Most importantly compensation of all sorts, including who gets promoted, should be based on these sorts of
adjustmenable activity indicators. And you' ll be able to tell that it'
s happening when you hear the executives talk
about it (see UTX's analyst reports for example) and it starts showing up in results.
& ,
) * )

To return to our point about the coming

challenging decade take a look at this chart
(PBS just put out an interactive graphic looking
at job creation from BLS stats for the decade,
anticipating 10% job growth over the decade.
Less than breakeven - this is going to be a
VERY tough decade indeed). This chart give
us a start on the long-term market performance
of four exemplary firms, all of whom are on our
list of very well-run organizations.
Recently they've had major runups following

the market but, on the whole, nobody has
Page 37 of 43

returned to '04 peaks. You can see the Enterprise Value pressures at work on WMT in the middle of the decade
as their business model aged and withered, and the impacts of their re-invention, then and now. But INTC and
BAC are indeed challenged (meant to include CSCO but...fat fingers).
If we're right about the decade profits and earnings will be challenged (not to mention the artificiality and poor
quality of finance profits) and we'
re looking at a sideways market where PE' s will compress. The bottomline of
bottomlines here is that long-term performance, and therefore management systems, performance, governance
and compensation practices, are really going to matter. More than ever! And it will be incumbent to find the
enterprises walking the talk now and for the future.

! 1 $
One organization with astounding espirt de corp that manages to do more with
less again and again, maintain discipline but always be resilient under extreme
stress while also, simultaneously, adaptive to long-term requirements is the
USMC. And nobody summarized it better than Gen. David Petraeus (in a
Marine birthday speech where he took a lot of heat for his USAF jokes while
everybody missed or ignored the substance).
(http://dodvclips.mil/?fr_story=FRdamp358972&rf=bm )
If you find this overall topic of organizational performance interesting we

strongly suggest that you listen to the address, though it admittedly runs about 30 min. or so. But in that time
there's a lot of ground covered, besides the inside jokes of course.
Petraeus'fundamental theme is that what distinguishes Marines is their adherence to bedrock principles in the
face of all opposition combined with a constant willingness to innovate and adapt. Examples in history include the
invention of amphibious warfare and Counter-Insurgency but more recently the application of COIN to supporting
the Anwar Awakening in Iraq.
We' d add that within the context of strategy, doctrine and operations every Marine corporal is empowered to make
local decisions. Applied to business the lessons are that value is created on the frontline, not in the Boardroom.
And what happens on the frontline needs to be decided based on the overall good of the enterprise, not on merely
local conditions, narrow incentives or short-term gains. To get from where we' re at to where we need to be will
challenging but necessary and the heart of it lies in governance and performance.
Page 38 of 43

January 29, 2010
Chaos, Turbulence, Fragilities: Defining the New Normal, Blueprinting

Business Performance
http://llinlithgow.com/bizzX/2010/01/chaos_turbulence_fragilities_d.html
A few interesting things happened in this last week that define the things we want to address here. In an
exchange with a friend on business performance in the new normal, despite several months of back and forth,
most of what we' d been saying about the next decade hadn' t really sunk home but we finally managed to get the
other shoe to drop. His reaction was somewhere between Wow and OMG! What that exchange makes clear to us
is that, in line with our expectations, most businesses haven' t a clue as to what'
s coming at them. So those issues
(defining the New Normal benchmark and assessing business preparation and performance outlook) define our
endpoints. At the same time we had an amazing, in many senses State of the Union and Davos 2010 kicked off.
This environment has moved from Chaos to Turbulence and is still very Fragile - and will remain both Turbulent
and Fragile for the decade as deep structural adjustments in the global economy, governance (corporate and
public) and geo-politics that will radically alter the deep foundations we' ve taken for granted for the last three
decades are changed in response to the crisis and governance and performance failures. Those changes are a
central theme of this year' s conference.
Taken all together the economic outlook, the implications for investment
and asset performance and business governance define the touchpoints
of our highly selected readings section after the break, including several
critical vidclips from Davos as some from the FT on emerging markets.
There' s nothing there that we'
re putting up just for fun. But the central
questions are what will the New Normal look like and how are businesses
prepared for it? And how will public authorities deal with restoring a fragile
world economy. To set the stage you might want to listen to this brief
round table from McKinsey.
(https://www.mckinseyquarterly.com/ghost.aspx?ID=/Video?vid=702%20 )
But we'
ll let a much wiser man define the situation in words we hope you recognize and take to heart:
"The dogmas of the quiet past, are inadequate to the stormy present. The occasion is piled
high with difficulty, and we must rise with the occasion. As our case is new, so we must
think anew, and act anew. We must disenthrall our selves, and then we shall save our
country. Fellow-citizens, we cannot escape history. We of this Congress and this
administration, will be remembered in spite of ourselves. No personal significance, or
insignificance, can spare one or another of us. The fiery trial through which we pass, will
light us down, in honor or dishonor, to the latest generation."
Annual Message to Congress (1 December 1862) – A. Lincoln
Page 39 of 43


) * )

Despite all the political posturing that

went with it it was government
intervention that saved us from a
second Great Depression. The good
news is that a recovery has begun but
that bad is that it'
s policy-dependent, still
far from self-sustaining (meaning
interest rates are going to say low), will
weaken as stimulus fades and be below
potential for a long time. Which means
weak job growth when almost all
industries are already over-capacity.
Just on these factors alone would mean
we' d be facing a weak decade with, let
us emphasis, no clear back to long-term
potential growth and prosperity without
fundamental changes in the deep
structure of the Economy. In the chart in
other words that upward sloping curve is
out of reach without major public
investments. NB: since we' ve covered
all these points are trying to provide a
compressed blueprint our charts will be
composites and we' ll leave the
interpretations up to you.
%
%!

At this point we hope it's clear that

what sustained the economy for the
last three decades was decreasing
savings, under-investment and
over-consumption, fueled by
financial de-regulation, leverage and
debt which hurt long-term
investment and growth. Dealing with
the consequences of deleveraging
and balance sheet reconstruction
for consumers and businesses will
take the rest of the decade,
presuming growth is adequate if not
good, but is primary reason why it' ll
be lackluster and unlikely on current
course and speed to reach the
upward sloping curve. Building off
Reinhardt and Rogoff' s work the
McKinsey Global Institute did a
detailed study of the outlook by
country and sector for deleveraging
Page 40 of 43

over the next decade (links in the reading - you really need to read it).
+ ! + ' ! -- *

O.K. - so far we' ve got a weak

recovery with challenges reaching
takeoff speed, a sustained period of
low, below potential growth that will
keep job growth limited to breakeven
or below and deleveraging that will
further reduce consumer demand in
the developed world. We previously
dug into how the high growth eras in
the US economy were the result of
high savings, which led to high
investment and created a virtuous
cycle. Now we' re on the wrong side
of a vicious cycle. The l.h. side of this
composite illustrates the technical
side of that argument while the r.h.
side illustrates the conceptual side.
There are two bottomlines here.
Consumers, as they are already
doing, will be forced to do and are
likely to choose to do, will need to
change their fundamental behaviors.
And collectively we need to rebase
the economy and find new sources of
growth while reducing or eliminating
major structural weaknesses that have been drags on economic performance: deteriorating infrastructure,
exponentiating healthcare, poor education and a shortage of high-quality laborforces and a dearth of new
innovation. To get back to long-term potential we need to fix all that (and it'
s a great puzzlement to us why
businesses, investors and financial advisors don't see that but on the evidence to date they really....really....really
don' t get it).
%%

(
,
The rapidly emerging world grew on the

developed world' s consumer bubble and
the recycling of their savings into our
debt. Well in this brave new world that
equation is going away. The major
exporting countries are going to have
shift to more domestically based
economies instead of relying on
exporting commodities or manufactured
goods. In fact despite the BRIC
acronym lumping very disparate
countries together we' re going to see a
great seperation driven by these factors.
Brazil is well positioned by a balanced
economy, India somewhat less so,
China' s basic model probably needs to
Page 41 of 43

adjust faster than it's capable off and Russia' s in the deep dodo. All of this governed as much by geo-political
factors as much as anything else. In some ways this chart set almost speaks for itself - consumer debt is dropping
dramatically in the US because of huge hits to net worth while China built its growth on exports and investment
and has a very unbalanced economy where forced savings have subsidized manufacturing and infrastructure.
The Chinese have an immense challenge that could take the rest of the decade to deal with but have a sharply
limited horizon because of demographic problems, unlike Brazil and India plus constant and on-going risks of
social instability. They know all this but the various factions are debating how, when, where and even why. May
we all live in interesting times indeed!

%
%

We won' t go back over the business

performance problems in any depth since
we' ve just spent the last several years going
into it in excruciating detail over the last few
weeks. But what we hope is clear from the
benchmarks we' ve summarized above is that
businesses need to be constantly monitoring
and adapting to the multi-dimensional factors
of a very fragile, turbulent and complex New
Normal. They need to understand the social,
political and international factors, the
structural disruptions in their industries and
economies and the business cycle and long-
term economic trends.
But all those things are largely beyond their

control (the Supreme Court notwithstanding).
What is in their control is how they respond -
and the fundamental conclusion of all our
previous analysis is that they need to perform
well now and innovate for the future - and put
in place the proper sets of metrics, incentives
and management systems to turn strategies into delivered realities. One of the themes that comes up over and
over again in the Davos vidclips is that the public's trust in business has gone from bad to abysmal in the last few
years - and we' re not talking about just Finance but all business. As you'll find out from the last set of readings it
would appear that business is doing NONE of the things it should be doing to cope with these realities.
On that note we'

ll give you a quote from another wise and brilliant man:
"The costs of maintenance of an existing order are inversely related to the perceived
legitimacy of the existing system. ... it is the successes and failures in human organization
that account for the progress and retrogression of societies".
Prof. Douglas North, "Structure and Change in Economic History", 1981.
In other words either companies fix their performance and governance problems and start meeting their private
and public obligations effectively or they will be fixed for them (fix is used here the same way the vet talks about
"fixing" your cat!).
Page 42 of 43

About Llinlithgow Associates
Customer Problem
• Value Proposition
Llinlithgow Assoc. is a management consultancy • Business Model
• Strategy
focused on evaluating businesses to reduce risk,
leverage under-developed opportunities in
operations and increase overall enterprise
performance to improve investment return. Management System
Marketing, Sales &
•Budgeting system Service
Our approach is based on BizzXceleration, a •Management Controls • Customer value focus
•Operating Plans
proprietary framework with 25 years of •Resource Development
• Process Discipline
• Business-driven
development, to review and analyze Business
Models and Strategy, key operating functions and
supporting infrastructure and management
Core Operating
systems. From there we develop comprehensive, Functions
integrated operating plans that tie all the • Functional Efficiency
• Inter-function
components of the business into a high- Integration
performance enterprise. •Value Alignment
Several years ago Michael Lewis published an interesting book on how the Oakland A’s took a systematic look at
how the game really works, and what investments in players, strategies and tactics were most likely to result in
the most wins for the lowest cost. Our approaches are similar in taking a systematic look at the whole business,
each of the major components and the best way to tie everything together into a high-performance system.
We start by looking at the basic core value proposition and it’s translation into the Business Model and Strategy.
Typically we next examine Marketing and Sales operations, where it is possible to reduce operating costs by
30%, shorten the sales cycle by 30% and increase the closure rate by 30%. This is primarily the result of
establishing good processes and discipline.
BizzXceleration is comprehensive but integrated across the total reach and range of business activities and
issues. And emphasizes a pragmatic, workable approach that results in a stepwise path to performance
improvement. We believe that our approach mitigates business risks, improves operational performance and can
lay the groundwork for 10-30% EBITDA improvements in post-deal execution.
If you would be interested in further discussions, more detailed descriptions or the review and testing of specific
opportunities we would enjoy hearing from you. We can be reached at contact@llinlithgow.com .
Page 43 of 43


Renewing The Enterprise: Governance, Innovation and Performance in The New Normal

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Renewing the Enterprise and Preparing for the New Normal

Adaptation, Resilience, Innovation and Leadership

Dave is a management consultant primarily focused on improving enterprise performance by coupling

1. More Tales From the Frontline: Econ/Mkts to Performance & Policy 3

2. Response vs. Performance: Walking Wounded & Mental Attitudes 6

3. Adaptation & Resilience: Looking for the Naked Swimmers 9

4. A Bit of Xmas Cheer: Innovation As The Future 12

5. Christmas Wishes: Peace, Prosperity and Performance 16

6. Dealing With the Brave New World: Resilience vs. Sclerosis 18

7. People & Performance: Assets or Fungible Commodities? 22

8. Aholes, Shirkers and Performance: a Draft People Principles Policy 23

9. Renewing the Enterprise 1: the Proper Management of Innovation 24

10. Pecora 2 Hearings, Malfeasances, Your Future & Cusp Points 28

11. Talking Business: the Outlook vs. the Preparations 32

12. Renewing the Enterprise 2: Governance, Measurement & Performance 34

About Llinlithgow Associates 43

Strategy without execution is fantasy. Execution without strategy is thrashing.

More Tales From the Frontline: Econ/Mkts to Performance & Policy

Accordingly the readings have update chunks on the economy

Let' s pop way up the conceptualization stack for a

The problem comes when specialists in one area

Strategy without execution is fantasy. Execution without strategy is thrashing.

                

In this environment, where EVERY asset class is moving

In the case of businesses, in some ways the most complex

Strategy without execution is fantasy. Execution without strategy is thrashing.

In the last few weeks there have been some huge

When you translate all of those issues that

The UL chart is its own little nightmare that

Strategy without execution is fantasy. Execution without strategy is thrashing.

December 05, 2009

Response vs. Performance: Walking Wounded & Mental Attitudes

Well if last week was a surprise downward revision to GDP this

Strategy without execution is fantasy. Execution without strategy is thrashing.

Let's set the stage for that discussion as

The UL piece gives us four Employment

Do we really need to explain that? If businesses see

Performance is the result of operational efficiency,

Strategy without execution is fantasy. Execution without strategy is thrashing.

Let's be clear - we're facing at least another decade of

That depends on how we respond - how we evaluate the

Strategy without execution is fantasy. Execution without strategy is thrashing.

Adaptation & Resilience: Looking for the Naked Swimmers

One of our constant themes around here is that

Last time we talked about "deer in the headlights"

Strategy without execution is fantasy. Execution without strategy is thrashing.

The second biggest problem, after recognizing the situation,

Lest you think we' re making all this up we'

The middle chart give you some strong indicators to assess

If you don't think all that'

Strategy without execution is fantasy. Execution without strategy is thrashing.

One of the most common complaints that you here

Now that' s actually never been true. If you have a

But there's also evidence that there's a more general

As usual you'll find an extensive series of readings intended to provide more

Strategy without execution is fantasy. Execution without strategy is thrashing.

December 23, 2009

A Bit of Xmas Cheer: Innovation As The Future

The top chart shows GDP Potential (dark blue) vs.

Strategy without execution is fantasy. Execution without strategy is thrashing.

Strategy without execution is fantasy. Execution without strategy is thrashing.

Then comes the very hard but somewhat

'  !      

' !

+ ' 4 !

6 7 8