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How to build a smart company
Gita Piramal and Sumantra Ghoshal |
May 06, 2005
We bring to you an article written by Gita Piramal and late Prof Sumantra Ghoshal. Sumantra Ghoshal was a globally renowned leading management guru. Gita Piramal is managing editor, The Smart Manager. The two also co-authored a book: Managing Radical Change.
One vital element for developing an entrepreneurial process is a set of systems that reinforce the focus and accountability of the performance units.
In both design and implementation, they stand in stark contrast to the staff-led, document-driven strategic planning exercises, the 'trickle-down economics' of classic resource allocation processes and the complex and abstract financial control systems in traditional hierarchies.
Rather than being driven by the informational need of top management, the systems in these organisations are designed and managed to be more sensitive to operating realities facing front line managers and more focused on their motivational impact on this key group.
Consider capital allocation systems as an example. Traditionally, in established companies, these processes have been structured for handling large investments, typically after reviewing and evaluating detailed long-range plans and projected returns.
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In companies with effective entrepreneurial processes, the system needs to be geared to a much more incremental and flexible approach, but one, which is still very rigorous.
3M's philosophy of 'make a little, sell a little' which legitimises multi-stage funding of promising projects is an example of this approach.
An entrepreneur's initial idea might secure funding from his or her division to develop the concept further; a new more sophisticated proposal could justify building a prototype; a subsequent report on results might request funding for market and technical testing; and so on.
At each stage from the initial idea to the eventual product launch, the product champion must review performance against earlier commitments and propose a budget and quantified mileposts to evaluate the next stage of funding.
And, as the project evolves in potential and investment needs, the review may be elevated from the division to the group to the corporate level for funding.
In India, Pune-based Thermax has grown organically, continuously expanding into new niche businesses based on creative development and application of technology.
In a relatively small and resource constrained company, this ability to develop technologies was based, not on the strength of large up-front investments in R&D, but on the same process of flexible resource allocation driven by the same 'make a little, sell a little' philosophy.
Thermax's boiler business was supported by its knowledge of heat transfer processes. The director of its small R&D team found that rice and oil mills accumulated a lot of husk, which they then paid to dispose of. With a small investment, he and his team adapted the boiler to use husk as its fuel.
The new boiler started selling well, generating revenues and profits. Then the R&D unit used a bit of that profit to adapt the technology so that coal could be used as the fuel.
As the businesses grew, the team slowly built a sophisticated and broad capability in the area of fluidised bed combustion systems.
Over a fifteen year period, such small, multi-staged investments in technology, led by the entrepreneurial instincts of its R&D head, helped Thermax create a whole host of focused and complimentary technologies that undergirded its business evolution.
From its knowledge of combustion systems, Thermax built niche application technologies in the areas of incineration, drying, cooling and stripping. Heat transfer technologies led to specialised capabilities in water treatment, mechanical feeding systems, thermic fluids and heat utilisation.
Each step was small, supported by small investments. At each step, the technology was developed to meet a specific customer need, and was converted into a business. And the entire process was led by Thermax's autonomous business managers in partnership with its highly entrepreneurial research director.
Another main pillar of corporate systems is the annual budgeting process, and many companies find that this core system is also too inflexible and impersonal to support the kind of entrepreneurial values they want to cultivate.
Desired sales, expense and profit objectives are often agreed at the top and cascaded down, with senior managers cajoling and pressuring unit managers to accept the numbers.
Furthermore, the targets are typically set only in financial terms often not fully understood by line managers who pass the management and reporting task off to the financial controller. Lacking credibility, understanding, and commitment, the budget system deteriorates into a mechanical exercise managed by the accountants.
Confronting these problems is difficult, and many are hard to totally overcome. But companies that hope to create an entrepreneurial organisational process must develop budgeting systems that are seen as legitimate, and manage them in a way that is motivating.
For most, this approach implies a budget system in which front-line managers not only take more responsibility but are also held more accountable.
Corporate management's primary role is to set broad objectives and clear standards to elicit honest and ambitious operating objectives from the units, and to measure and evaluate performance against those objectives.
Published with the kind permission of The Smart Manager, India's first world class management magazine, available bi-monthly.