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© C.K. Prahalad1
Managing in Turbulent Times:Restructuring or Revitalization?
C.K. PrahaladPaul and Ruth McCracken Distinguished University
Professor Stephen M. Ross School of Business
The University of Michigan
February 13, 2009
© C.K. Prahalad2
Part IThe Underlying Causes and Consequences of Volatility
© C.K. Prahalad3
The Start of the Crisis;Financial System in the United States
1. Markets do not extinguish risk but distribute itMarkets do not extinguish Leverage
2. Complexity and Conspiracy of DenialsPressures for Growth, Profitability, Compensation
3. Regulatory design: Unfettered innovationPoor regulatory Oversight
4. Systemic Risk: VaR calculations
5. Underestimating Complexity. Individualdeals Vs. a complex Interdependent set
A S
yste
m R
eady
for F
ailu
re
© C.K. Prahalad4
The “Collapse” of the Financial System1. Geographical Impact : Europe (Iceland, Ireland,
UK, Spain,……..)Japan, China, S. Korea,….
2. Industry Impacts : Mortgages,Credit, Credit Card Crisis (?)Automotive, Retail, Capital Eqpt.
Employment Impacts : layoffs in USA, Europe, Japan,China, and othersUSA alone over 2 million in a year
Currency Impacts : $ to Rs; #$ to or £ and €
© C.K. Prahalad5
Implications to Industry Structure
1. Firms Declaring Bankruptcy (e.g. Bears Stearns, Lehman Brothers, Circuit City)
2. Forced/opportunistic Mergers (Countrywide + M.lynch + BOA,Wachovia + Wells Fargo,Pfizer + Wyeth,Chrysler + Fiat?......)
3. Governmental Bailout (Citi, BOA, Wells Fargo, AIG,GM, Chrysler, RBS, …..De facto Nationalization)
4. Massive layoffs Fin. Services Auto, Retail, Electronics, Hospitality,…
© C.K. Prahalad6
Global Restructuring of Industries1. All major Players in Financial
Crisis; Will be burdened with“govt. systems” – Impact ofBailouts (“Nationalization”)
2. All of them are focused onPortfolio and OperationalRestructuring
3. Focus on TraditionalDeveloped Markets?
4. Lots of Churn in SeniorManagement
© C.K. Prahalad7
Global Restructuring of Industries1. All major Players in Financial
Crisis; Will be burdened with“govt. systems” – Impact ofBailouts (“Nationalization”)
2. All of them are focused onPortfolio and OperationalRestructuring
3. Focus on TraditionalDeveloped Markets?
4. Lots of Churn in SeniorManagement
Is there anOpportunity to Change the game?Buy distressedAssets? Use IncreasedAccess to Talent Pool?
© C.K. Prahalad8
Impact of Current Crisis on Indian FirmsM
arke
t (R
even
ue) F
ocus
Domestic
Global
Portfolio Focus
SingleBusiness
HighlyDiversified
1 3
2 4IT majors
© C.K. Prahalad9
Volatility is everywhere…
Do we need a New ApproachTo Managing?
Volatility inCommodity
markets (e.g. oil)
Focus on ClimateChange, Inclusion
Governments:USA, India, Japan, Europe,Russia
VolatilityIn FinancialMarkets
UnpredictableConsumerReactions
Terrorism, genocide,Pandemics,
© C.K. Prahalad10
What are the Managerial Demands?
Focus on Quality
Focus on Productivity, Cost
Focus on Cycle Time, Speed
Focus on Disruptive Business Model Innovation
Focus on Volatility andDiscontinuities
© C.K. Prahalad11
What are the Managerial Demands?
Focus on Quality
Focus on Productivity, Cost
Focus on Cycle Time, Speed
Focus on Disruptive Business Model Innovation
Focus on Volatility andDiscontinuities
TQM, Training, Empowering all
Training, Systems, O/HAnalysis, Restructuring
Innovation Sand Box,BOP Markets, 4 AsBusiness processes,Leveraging Core Comp.
© C.K. Prahalad12
Traditional Managerial Challenge
Manage Trends:Future Resembles Past How to
DifferentiateOurselves?
Well KnownMethods
a. Growth rates,b. Seasonalityc. Competitor’ behaviord. Consumer Preferences
© C.K. Prahalad13
Traditional Managerial Challenge
Manage Trends:Future Resembles Past How to
DifferentiateOurselves?
ManageDiscontinuities:Past is not a predictor
How to Copeand Thrive?
Well KnownMethods
Need NewMethodologies?
a. Growth rates,b. Seasonalityc. Competitor’ behaviord. Consumer Preferences
© C.K. Prahalad14
Managing in a Volatile Environment
© C.K. Prahalad15
Volatility and Managerial Antidotes
Wild Swings in:Input Costs,Revenues,Product/ Geo. Mix
Sudden shifts in:Social Preferences,
Technologies,Crisis (sentiment)
Abili
ty to
:Sc
ale
up/d
own
Cap
acity
to h
old
on
to O
pera
tions
,R
eass
essi
ng P
riorit
ies
Cla
rity
to L
ong
Term
Dire
ctio
nA
gilit
y in
the
Shor
t ter
m
© C.K. Prahalad16
What to do “Here and Now”1. Conserve Cash2. War on Waste
Receivables,InventoriesLogistics, Energy
3. Do not Build for Stock4. Lower B/even
5. Shift to Newer Businesseslower RiskCan learn fast
6. Business portfolio Choices7. Focus on Core
Competencies
Increasing the capacity to support operations
Reduce the impact of swings
Mitigate Risk in the portfolio
© C.K. Prahalad17
Part IIDo We Need a New Methodology?
© C.K. Prahalad18
Two Contradictory Requirements
StrategicClarity and Consistency
OperationalAgility andResilience
© C.K. Prahalad19
Two Contradictory Requirements
StrategicClarity and Consistency
OperationalAgility andResilience
Shift Management Focus from:
Wait and ReactSense and Respond
Anticipate and Create
© C.K. Prahalad20
The Volatility Sandbox
Capacity for Real time Reconfiguration of Resources
Low Capital Intensity:Building an Ecosystem
Continuous Churning of Business Models
Focus onAnticipation;New Game
© C.K. Prahalad21
The Volatility Sandbox
Capacity for Real time Reconfiguration of Resources
ITSystems andAnalytics
StrategicIntent
Low Capital Intensity:Building an Ecosystem
Continuous Churning of Business Models
Focus onAnticipation;New Game
© C.K. Prahalad22
The Capabilities to Focus on…1. Anticipation of New Opportunities/ Problems
2. Capacity to Reconfigure the Organization: Velcro
3. Ability to Change the Product/service Portfolio at low Cost: Core competence
4. Building an Eco System: Capital Intensity
5. IT Architecture and Analytics: Insights
6. Science based Strategies
7. Focus on Enterprise Risk
© C.K. Prahalad23
Anticipate New Opportunities
© C.K. Prahalad24
The New Age of Innovation:The Basic Thesis
Globalization Connectivity,Digitization,Convergence,Social Networks
A New ApproachTo Innovation &Value Creation
+ =
© C.K. Prahalad25
Price-Performance Envelopes are Changing Faster than anyone Expected
1. Transistors/chip 103 106 109
2. Decrease in size of micro-devices 10-1 10 -6
3. Computing power 1011 1015
4. Cost per MIPs($1000) 1 1M 5. DNA sequencing cost
($/BASE PAIR) 10 0.05 6. Magnetic data storage 104 1011
(bits/dollar)
1970 80 90 2006
Source: Ray Kurzwell
© C.K. Prahalad26
The New Age of Innovation:Core Drivers:
Connectivity, Convergence,Digitization, Social Networks
Shifting Balance of Power:C < F to C ≥ F
New FirmsN=1; R=G
Traditional FirmsMigrate toN=1; R=G
LooseCompetitive Advantage
Build New Capabilities:Social and Technical Architecture
Talent Matters IT Matters
No
No
© C.K. Prahalad27
Consider Cardiac Pacemakers
Patient
© C.K. Prahalad28
Consider Cardiac Pacemakers
Patient Away Hospital
Doctor onLocation
Experts’Conference
Your Doctor
Spouse
© C.K. Prahalad29
The Value of the Pace Maker?
1. Experience of the Patient?2. Integration of the Experience for the Patient,
Doctor, Family, others…?3. Do we need a Network of Providers to
Create an Experience Environment?4. Is the Pacemaker a Part of but Distinct
from the Experience?5. What can you Monetize? How?
© C.K. Prahalad30
Car as a Stand Alone Product or a Node in Seamless Connectivity?
High CapacityCC Node
© C.K. Prahalad31
Transformation of Traditional Industries: Truck Tires
Sell a tirePrice ?
Transaction
© C.K. Prahalad32
Transformation of Traditional Industries: Truck Tires
Sell a tirePrice ?
Transaction
Sell Usage,PersonalizedCo CreatedExperience,New BusinessModel
Rel
atio
nshi
p
© C.K. Prahalad33
The Key Drivers of Value:
1. Personalized Experience2. Co Creation3. Individuals4. Thematic Communities 5. Experience Platform6. Delivery Network
© C.K. Prahalad34
Value Creation Process in:
1. Google2. Li & Fung3. Netflix4. Starbucks5. Amazon6. Aviva7. Nike8. ICICI- Prudential9. Automotive -OnStar10. Bridgestone11. Medtronics12. UPS
One Consumer atA time (N=1);
Multiple Vendors(R=G)
© C.K. Prahalad35
The Basic Transformation
Suppliers The Firm Channel
SCM ERP CRM
NodalFirm
© C.K. Prahalad36
The Emergence of Nodal Firms
1. Intellectual Influence2. Network Infrastructure3. Standards4. Consumer Interface5. Privileged Access, not ownership
© C.K. Prahalad37
The New Innovation Process:
ConsumersAnd Consumer Communities
SupplierAnd Talented Individuals
Setti
ng th
e A
gend
a;O
rche
stra
ting
the
Flow
s of
Idea
s, pr
oduc
ts, s
ervi
ces
Cre
atin
g an
d Sh
arin
g V
alue
© C.K. Prahalad38
Active Involvement of the ConsumerChanges the Innovation Dynamic
BusinessUnits
Corp. as aPortfolio Of
Competencies
ExtendedSupply
Network
Enhanced Network of suppliers,Partners,
Consumers
The Sources of Competence is Changing
Pre 1990 1990 - 1995- 2001 -
© C.K. Prahalad39
The Meaning of Innovation is Changing
Product Innovations
Customer Specific
Solutions
Customer Experiences:Co Creation
Pre 1995 1995 - 2001-
© C.K. Prahalad40
We can Identify an Innovation Continuum
Locus ofCompetence
Locus of Innovation
Products Solutions Experiences
ExtendedNetwork
Enhanced Network:Customers
Corp.As a Source
© C.K. Prahalad41
Experience Innovation….
1. Enlarges the Innovation Space2. Changes the Meaning of Innovation3. Changes the Players who influence Innovation
ExperienceInnovation =
Multiple Learning RedeployingTechnologies as a x across new
Network Opportunitiesx
© C.K. Prahalad42
The New Game:
N = 1
R = G
( Co creation of Personalized Experiences)
(Multi-Institutional and Multi –Geographic Access to Resources)
© C.K. Prahalad43
The Transformation from a Product/Firm Centric View to N=1: R=G
1910 2010
© C.K. Prahalad44
New Source of Competitive Advantage?
Efficiency and InnovationCo CreationRapid Reconfiguration of
ResourcesReal Time ActionIntelligent ProductsLow Cost; High QualityCycle timeGlobal ScaleFlexible Logistics
AdvantageLink Between
Strategy and Operations:Quality of
Business Processes,Analytics
Table Stakes:Access to Capital,Raw Materials,
Technology
© C.K. Prahalad45
What are the Impediments toBuilding New Capabilities ?
Social InfrastructureOf the Firm:Legacy MindsetsDominant LogicSkills, Attitudes and
BehaviorsDecision ProcessesIncentives
Tech. InfrastructureOf the Firm:Legacy Systems
DatabasesICT ArchitectureApplications
BusinessProcessesAnalytics
Access toTalent
© C.K. Prahalad46
Access to New Sources of Advantage….
Access to TalentMobilizing Talent
Global Search forTalent
Cost, Quality,Speed, Innovation
Collaborative &Integrative Capacity
Not Exporting Jobs; Importing Competitiveness
© C.K. Prahalad47
We Need New Capabilitiesfor N=1; R=G
Managerial Mind sets,Leveraging Global Talent
Flexible Systems,Measurement
Visibility to Values, Skills, Flexible and ResilientTraining, Performance Business Processes andMeasurement, Incentives… Focused Analytics
Social Architecture IT Architecture
© C.K. Prahalad48
The New House of Innovation
The Technical Architecture of the Firm:(Information and Communication Technology –ICT-
Backbone of the Firm)
The Social Architecture of the Firm:
(Values, Skills, Attitudes, Decision Processes,
Performance Metrics in the firm)
Flexible and ResilientBusiness Processes andFocused Analytics
Per
sona
lized
Co
Cre
ated
E
xper
ienc
es:
N=1
Glo
bal A
cces
s to
R
esou
rces
and
Ta
lent
:R
=G
© C.K. Prahalad49
Transformation Requires:
ImaginationPassionCourageHumanityHumilityIntellectLuck !