Sustainable Growth and Performance in IT Companies - Essay Example

28 November 2005 Sustainable Growth and Performance in IT Companies Over the last few years, companies and organizations have been working towards creating a new dynamic within their businesses called disruptive growth (Christensen and Raynor 177). In the book The Innovator’s Solution, the disruptive process is “to commercialize a simple, more convenient product that sells for less money and appeals to new or unattractive customer set…this phenomenon…frequently defeats successful companies. It implies…that the best way for upstarts to attack established competitors is to disrupt them” (Christensen and Raynor 32). Figure 1 shows how this disruptive model works. The focus of this paper is to ascertain the secrets of success in sustaining long-term performance and growth; in essence, how to become an innovator. In MGT class, we have asserted that it is no simple matter for a firm to be a long-term innovator and that accomplishing this requires capable performance in corporate strategy, culture, architecture, leadership and decision making (taken from topic question). During the process of researching this paper, the realization I came to is that sustainable growth comes from many different factors but they are all under one subheading: Management’s Role in Sustainable Growth Marketing Resources Implementation This one heading encompasses the myriad of topics that were and still are discussed in MGT. These areas also contain the seeds of creating sustainable growth and innovation in companies. I will discuss how these areas manifested in various companies for their betterment or their detriment. My position is that I agree with Christensen and Raynor in that disruptive sustainable growth, while not yet fully experienced by any company to date (except possibly for Microsoft), is within the realm of possibility. Figure1 (Christensen and Raynor 33) Management’s Roles in Sustainable Growth Sustainable growth and innovation is a product of one seamless thread of business concept and application from top to bottom. How this thread is severed can come from many different areas, one of the most important being from the management team level. Executives are charged with the task of creating profit in various business and product lines within their companies. How does a manager allocate his time and resources to do this? For me, the concept of disruptive growth is a Rosetta stone in this topic. To me, it holds within it the essence of growth and success along with chaos theory. These two concepts create a complexly rich look at how managers can conceptualize and manage their businesses without forcing control onto their businesses. Chaos theory ‘deals with unpredictable complex systems’ (“What is Chaos Theory?” 1) where the discovery of tiny perturbations in the system (organization) can lead to extreme changes in the overall system (“What is Chaos Theory?” 2). Chaos theory was adapted from mathematics and physics where scientists attempted to find order within nature, an ever-changing system. A meteorologist, Edward Lorenz, discovered something called the Butterfly Effect when he was trying to find a regular pattern in the weather. He found that by rounding off to 3 digits instead of 6 digits, the weather patterns appeared completely different almost as if it were different numbers he input into his computer. This small mathematical difference – one part in a thousand – was enough to create a new branch of science that has found a home in the business world (“What is Chaos Theory?” 3). Dee Hock, founder and former CEO of Visa International, wrote Birth of the Chaordic Age in 1999 in which he defines chaordic organization as ‘a self-organizing and self-evolving entity, which ends up looking more like a neural network (like the Internet) than a hierarchically organized bureaucracy in which decision-making power is centralized at the top and trickles down through a series of well-regulated departments and managers. Chaordic organizations do not fear change or innovation. They are, by their very nature, supremely adaptive’ (Hoffman 2). Chaordic organizations is nothing more than a customization of chaos theory that Hock adapted from his reading of Mitch Waldrop’s Complexity (chaos theory also goes by the name of complexity theory) (Hoffman 2). Chaos theory and disruptive growth meet where a catharsis opportunity exists. A great example is how one of the world’s best and biggest firms came into being. In the 1980’s IBM was the most well-known company in the world. It had a solid business in mainframe computers and was still looking at other markets to move into. Its managers felt that home personal computers may become a new viable market; however they needed a new disk operating system (DOS) in order to create this new line of smaller personal computers. They decided to outsource acquiring the DOS system to a small company owned by a guy named Bill Gates who said he had a brand new DOS system. IBM didn’t think this new branch of its business would catch on well and did not want to devote the resources to develop something that would bring marginal profits. Getting back to Bill Gates, while he didn’t actually own the new operating system he spoke to IBM about, he knew someone who did and bought the rights to it immediately for a few thousand dollars. Gates then made the deal with IBM and received a royalty on each and every disk operating system sold. Voila. The rest is all old news (“What is Chaos Theory?” 5). This business scenario shows chaos theory and disruptive growth in a snapshot. Chaos theory in that one small change – a new disk operating system – came into being and changed the overall system of the technology industry in one sweep; disruptive growth in that a simple product was brought to market that appealed to a virtually nonexistent market that the larger company (IBM) did not properly assess. This action spawned a new entity – Microsoft – which to this day, continues to dominate the field of new technological innovations that IBM has yet to recover from. The lesson an astute IT manager will take from this is to view his or her business not as an organization to be managed, but as a dynamic entity that is ever-changing. The key thing that both Dee Hock and Bill Gates did was to see what potentials were on the horizon. The horizon is the low end of the market where there is a dearth of customers. This is the area that IBM missed because they thought the home personal computing market would not be a lucrative one; this was IBM’s horizon. Bill Gates saw it and beat out the large giant creating disruptive growth. Microsoft continues its disruptive growth in software market and the videogame market. They may be the one company that has so far hit upon the right pattern to sustain disruptive growth without going too far which would lead to its demise. Figure 2 shows Microsoft inarguably solid financial success in the past three years taken from its 2005 annual report. In conclusion, managers need must look upon their businesses in an almost mystical way and to almost redefine themselves to be of outmost utility to the company. Dee Hock writes about ‘keeping at bay the four beasts that inevitably devour their keeper: Ego, Envy, Avarice and Ambition’ (Hock 17). With this accomplished, one can move on to other steps. Figure 2: Microsoft’s Financial Overview for the Last 3 Years (Microsoft 2005 Annual Report) (In millions, except per share amounts) (Unaudited) Quarter Ended Sep. 30 Dec. 31 Mar. 31 June 30 Total Fiscal year 2003 Revenue $7,746   $08,541   $7,835   $08,065   $32,187 Gross profit 6,402   6,404   6,561   6,761   26,128 Net income 2,041   1,865   2,142   1,483 (1) 7,531 Basic earnings per share 0.19   0.17   0.20   0.14   0.70 Diluted earnings per share 0.19   0.17   0.20   0.14   0.69 Fiscal year 2004 Revenue $8,215   $10,153   $9,175   $09,292   $36,835 Gross profit 6,735   7,809   7,764   7,811   30,119 Net income 2,614   1,549 (2) 1,315 (3) 2,690   8,168 Basic earnings per share 0.24   0.14   0.12   0.25   0.76 Diluted earnings per share 0.24   0.14   0.12   0.25   0.75 Fiscal year 2005 Revenue $9,189   $10,818   $9,620   $10,161   $39,788 Gross profit 7,720   8,896   8,221   8,751   33,588 Net income 2,528 (4) 3,463   2,563 (5) 3,700 (6) 12,254 Basic earnings per share 0.23   0.32   0.24   0.34   1.13 Diluted earnings per share 0.23   0.32   0.23   0.34   1.12 (1) Includes charges totaling $750 million (pre-tax) related to the Time Warner settlement and $1.15 billion in impairments of investments. (2) Includes stock-based compensation charges totaling $2.2 billion for the employee stock option transfer program. (3) Includes charges totaling $2.53 billion (pre-tax) related to the Sun Microsystems Inc. settlement and a fine imposed by the European Commission. (4) Includes charges totaling $536 million (pre-tax) related to the settlement of certain litigation with Novell, Inc. (5) Includes charges totaling $768 million (pre-tax) related to the Gateway, Inc. and Burst.com settlements, Sun Microsystems, Inc., and additional charges related to anti-trust and certain other matters. (6) Includes charges totaling $756 million (pre-tax) related to IBM and other matters. Marketing While managers have to look at the overall business, the parts of the business are equally important. Marketing and promotions are unequivocally one of the top areas for a company to push its brand. A key path to achieving growth is through sales. In a recent book about marketing it was stated that the pivotal point in achieving success is by having a vision for the product; in fact that a “big, hairy audacious objective” was in order (Clancy and Krieg 75). “A vision, at its most basic, dictionary level, is, among other things, an ability to see something not visible. It is a force or power of imagination, something supernaturally revealed, as to a prophet. A vision provides a company with a purpose and a sense of mission. Visions define a few outstanding goals around which companies can organize their resources; they help to inspire the workforce to pursue common aims. The vision must be so big, so bold, and so ambitious that expressing it – never mind executing it – has a transformational effect. The company starts to become what it wants to be. The dream and the reality fuse” (Clancy and Krieg 75). The mystical theme runs through this as well which is again, another parallel to nature where the mystical seems to abound due to an extraordinary amount of complexity and diversity which takes us right back to the key concepts of this paper -- chaos theory and disruptive growth. In the scope of business, especially IT businesses, it is impossible to know with assuredness what the future will hold, therefore, it should be evident that controlling something that, by its very nature, cannot be controlled, is futile. A good marketing program will grow organically from its customer base and the inherent qualities of the service/program offered based on its vision. Take for example Apple’s vision statement of having a “PC for every man, woman and child in America”. That’s a big vision, an enormous goal that will require ingenuity, savvy, guts, good distribution, strong marketing campaigns, as well as superior products and varying price points. These all have a place, however how will the manager organize them? By realizing that organizations are chaotic and ever-changing, managers must have multiple plans in place to “manage” any situation or eventuality that might present itself. In chaos theory, this is called bifurcation which is ‘the sudden appearance of qualitatively different solutions to the equations for a nonlinear system as a parameter is varied…two different groups can emerge to address an issue differently, as complexity increases” (“What is Chaos Theory?” 4). Managers need multiple marketing plans ideally carried out by different teams or groups in order to spur creativity and thereby enhancing a company’s ability to be counterintuitive according to Clancy and Krieg. Resources Today’s business managers are becoming savvier to the new definition of what resources are. Gone are the days when managers only look to financial statements and company equity; now managers are also hawkish about their non-asset resources such as ‘people, product and process knowledge and capabilities, the strength of the company’s brands, and the contents of information databases’ (Johansson, McHugh, Pendlebury, and Wheeler III 143). By focusing on the non-asset resources, managers are in effect managing closely the asset resources as it is the people, the product and the intellectual property of the company that combine to create the essence of the business. However, this is a major switch for many managers. It takes a keen understanding of one’s business as well as an open liberal mind that has no problems with adapting to change in order for this to take place, but that’s what disruptive growth and chaos theory are all about – being open to change; to not be fearful and know how to manage anxiety in oneself and in others regarding change. Change is inevitable. This is its weakness. Change is inevitable. This can be a manager’s greatest asset if he or she knows how to view it. What will make your people stay with your company? Research has proven time and time again that pay increases do not encourage and sustain long-term productivity. “Ironically, not all employee motivation and productivity problems are solved by pay raises and promotions. It isnt necessary to make pay adjustments beyond a fair industry-wide (market place) level. You can motivate an employee to increase productivity by providing opportunities for career development (training or schooling)” (“Increasing Employee Productivity” 1). Microsoft encourages its employees by sharing the rewards of its success with them (Bowman 1). Google encourages its employees by having a relaxed creative atmosphere and free gourmet meals available in its cafeteria. In fact, this past summer Google began searching for two gourmet chefs to replace the current chef, Charlie Ayers, who is leaving (DiRomualdo 1). These technology companies, veritable powerhouses in the industry, are showing that they are investing heavily in their non-assets. Other IT companies should follow their lead in ways that make sense for their businesses. Most companies may not be able to afford to give away stock options, or may choose not to do so. Nor can most companies engender the cost of hiring two gourmet chefs to prepare meals for their employees, but maybe by a food allowance reward system for meeting certain goals every week can be implemented where the employees are rewarded with a free meal or dinner. Mangers must know their people and their company’s capabilities to reward and create incentive programs based on this knowledge. Implementation Putting in place programs created using chaos theory and disruptive growth concepts will require constant monitoring and a finely honed sense of timing based on a number of factors. Companies must hurdle the task of creating disruptive growth time and time again – successfully (Christensen and Raynor 268). This is no easy feat. ‘Personal oversight of a senior executive is on of the crucial resources that disruptive businesses need to reach success’ (Christensen and Raynor 269). Senior mangers need to put a system in place for knowing when to get involved and helping to find/create a solution to a company problem and when to let lower level managers handle the situation. Many companies do this based upon the capital involved in the decision; the higher the dollar amount, the more senior the decision becomes. However, this can create problems as the senior managers may not know all of the details that the lower level managers work with on a day-to-day basis. This is where the disruptive concept of “driving decisions down to the lowest level” and of “making the lowest level competent” theories come into play (Christensen and Raynor 270). Even if the dollar amount is very large, the most competent manager – no matter his or her level – should be the one who makes the decision. This will make the decision sound on all levels and will ensure the disruptive growth can be continued without danger. Take for example, Nypro, an extraordinarily successful custom injection molder of precision plastics and microelectronic products. They have 28 manufacturing plants worldwide who supply their customers in their particular region. Each plant has an engineering team that is working to satisfy that region’s particular needs. Senior management is no where near each and every one of these manufacturing plants and if there’s a question about a new innovation to be done, or not done, the best people to answer this are the people in the engineering teams! “Most of the important process innovations that help Nypro to make ever-better products are developed by engineering teams working to solve customer problems in far-flung individual plants, out of eyesight and earshot of senior management…senior managers typically can’t even see what innovations are being considered and developed, let alone decide which ones merit investment” (Christensen and Raynor 272). Therefore, implementation can become a thorny problem and has to be reflected on case-by-case, company-by-company. Conclusion No two companies will use the same exact solution. There’s an old proverb that says you don’t walk into the same river twice because the water will not be the same a minute from now. Like the river, companies are changing all the time. Managers of today need to be well-versed in new theories and concepts that allow them to shape their minds and ideas around the basic concept of change and they need to cultivate adaptability so as to become resilient when the tide of change advances. Works Cited Christensen, Clayton M. and Raynor, Michael E. The Innovator’s Solution: Creating and Sustaining Successful Growth. Boston: Harvard Business School Publishing Corporation, 2003. “Microsoft 2005 Annual Report”. Microsoft Investor Relations. Microsoft Corporation. 25 November 2005 . “Increasing Employee Productivity”. Employee Network Monitoring. Young Entrepreneur.com. 26 November 2005 < http://www.employee-network-monitoring.com/productivity.html>. Bowman, L. “Are strike-it-rich stock options facing extinction?” C\Net News.com. 14 July 2003. Retrieved from http://news.com.com/A+fair+share/2009-1017_3-1025285.html. DiRomualdo, T. “Is Google’s Cafeteria A Competitive Weapon?” Wisconsin Technology Network. 30 August 2005. 25 November 2005 < http://wistechnology.com/article.php?id=2190>. “What is Chaos Theory?” IIT Systems Theories. Institute for Interactive Technology. 27 November 2005 . Hoffman, M. “Transformation by Design”. What is Enlightenment Magazine. Issue 22. Fall/Winter 2002. 27 November 2005 . Hock, Dee W. Birth of the Chaordic Age. San Francisco: Berrett-Koehler Publishers, Inc., 1999. Clancy, Kevin J. and Krieg, Peter C. Counter-Intuitive Marketing: Achieve Great Results Using Uncommon Sense. New York: The Free Press, 2000. Johansson, Henry, J., McHugh, Patrick, Pendlebury, A. John, and Wheeler III, William A. Business Process Reengineering: Breakpoint Strategies for Market Dominance. New York: John Wiley & Sons, Inc., 1993. Read More