Leadership

Leadership is linked with independence, ie

"...to be independent of public opinion is the first formal condition of achieving anything great..."

Hegel as quoted by Martyn Newman, 2007

"...to make a decision to lead is to decide to stop being a product of your time and place and instead take responsibility for creating a distinct vision and accomplish something unique. This is what ultimately defines you as a leader..."

Martyn Newman, 2007

It is worth noting what great leaders do, ie great leaders discover what is universal and capitalize on it. Their job is to rally people towards a better future by cutting through differences of race, sex, nationality and personality, etc; using stories and celebrating heroes to tap into those very few needs we all share.

In evaluating leaders, we need to ask the following questions

- what do they stand for?

- what are their values?

- can we trust them?

- do they have charisma"

Peter Drucker, 2006

NB Charisma is defined as the ability to capture other people's attention and to communicate major assumptions and values in a vivid and clear manner so that people become followers. Be wary of too much charisma!!!!!!!!!

There is a link between leadership and organisational culture, ie

"...Leadership is intertwined with cultural formation, evolution, transformation, and destruction. Culture is created in the first instance by the action of leaders; culture is also embedded and strengthened by leaders. When culture becomes dysfunctional, leadership is needed to help the group unlearn some of its cultural assumptions and learn new assumptions. Such transformations sometimes require what amounts to conscious and deliberate destruction of cultural elements, which in turn requires the ability to surmount one's own taken-for-granted assumptions, to see what is needed to ensure the health and survival of the group, and to make things happen that enable the group to evolve toward new cultural assumptions..."

Edgar Schein, 2004

Based on this leaders need to have

- perception and insight (leaders must be able to perceive the realities; to have objective insights into themselves and the organisational culture, and its dysfunctional elements. This may include leaders admitting to not knowing the answer, to admit to not being in control, to embrace trial-and-error learning, and to become supportive of the learning efforts of others, etc)

- motivation (to intervene in one's own culture and to have extraordinary levels of motivation to go through the inevitable pain of learning and change, especially in a world with looser boundaries in which one's own loyalties become more and more difficult to define)

- emotional strength (to manage one's own and others' anxiety by creating psychological safety as learning and change become more and more a way of life; at times staff can become angry and obstructive, especially as the leader can challenge some of what the group has taken for granted; this requires taking some risk, especially when entering unknown territory)

- ability to change cultural assumptions or induce cognitive redefinition (this includes new skills in analysing, renewing and changing cultural assumptions)

- ability to create involvement and participation (this involves the willingness and ability to involve others and elicit their participation, ie ability to listen and encourage the group to look at itself and identify cultural dilemmas, etc

- resilience (ability to filter much highly complex information that is coming from varying sources - sometimes incomplete - so as to understand the important parts very quickly and to make sound decisions, especially in emergencies; not taking things personally; able to bounce back from adversity)

Remember: in changing an organisation, old habits and ways can be hard to change but need to be given up before new ones are learned; the leader plays the role of anxiety-and-risk absorber to help staff through the early stages of change; at times an established culture can serve as an important anxiety-reducing function (even if the organisation has become dysfunctional because of it); leaders need to be able to analyse the culture in sufficient detail to know which cultural assumptions can aid and which ones will hinder achieving the desired changes. Furthermore, the leader has to have the intervention skills (including communication and implementation skills); other skills include listening, absorbing and searching the environment for trends and building the organisation's capability to learn; the ability to acknowledge complexity, uncertainty and experimentation (including trial and error); develop a purpose (realising that a purpose only works once staff feel anxious and need a solution)

It has been suggested that the best leaders have an unusual characteristic called integrative thinking:

"...they have the predisposition and capacity to hold two opposing ideas at once......they're able to creatively resolve the tension between those two ideas by generating a new one that contains elements of the others, but is superior to both..."

Roger Martin, 2007

These integrative thinkers work through 4 related but distinct stages:

i) determine salience (actively seek the less obvious but potentially relevant factors that sometimes result in a messier situation)

ii) analyse causality (not afraid to question the validity of apparently obvious links or consider multi-directional and non-linear relationships)

iii) envision the decision architecture (when trying to invent a new business model, understand the relationships between the number of decision-making variables)

iv) achieving resolution (embrace holistic rather than segmented thinking that can creatively resolve tensions that are found in the decision-making process)

Followers

Followers have 4 basic needs, ie stability, compassion, trust and hope

- stability

"...I need to know the things around me are secure, they are real and they are going to last into the future and that is a critical part of what makes me feel secure in what I do..."

Barry Conchie et al as quoted by Fiona Smith, 2009e

- compassion

"...I need leaders to project the sense that they care about me, though they might not know me as a person. But, through their actions and through their words, they show some compassion for my existence and for what it is I want and need in life..."

Barry Conchie et al as quoted by Fiona Smith, 2009e

- trust

"...there has to be some honesty and openness in the face of the situation that confronts me. So, I don't trust the leader who speaks in Pollyanna language and who dresses up problems as easy to solve or pretends there are problems where there are none - because I can see through that..."

Barry Conchie et al as quoted by Fiona Smith, 2009e

- hope

"...the optimist tries to communicate to people that struggle is worthwhile, there is going to be benefit to be gained as a consequence of the hardship that we go through. That the future state we are going to create is better than the state that we are in, and that I am part of the solution rather than a passer-by watching what is going on..."

Barry Conchie et al as quoted by Fiona Smith, 2009e

It has been demonstrated that employees who strongly believe their leaders feel enthusiastic about the future, and engage considerably better in the workplace.

Middle management

According to Quey Nguyen (2001), middle management takes on 4 vital functions, ie

i) entrepreneur

ii) interpreter between management and staff/teams

iii) therapist to staff

iv) tightrope walker (maintaining the delicate balance between stability and change)

Merging, acquiring, partnering, diversification, alliancees, etc

When looking at merging, acquiring, partnering, diversification, etc with another organisation, you

"...usually makes careful checks of the financial strength, market position, management strengths and various other concrete aspects pertaining to the health of the other company. Rarely checked, however, are those aspects that might be considered cultural: a philosophy or style of the company, its technological origins, its structure, and its ways of operating - all of which may provide clues to the basic assumptions about its mission and its future. Yet if culture determines and limits strategy, a cultural mismatch in an acquisition or merger is as great a risk as a financial, product, or market mismatch..."

Edgar Schein, 2004

Furthermore,

"...mergers often fail because the excitement over the deal isn't matched by attention to people issues and planning for long-term. Hostile bids make it all the harder to take care of these factors......caught up in the deal fever, it seems all too easy to forget the nitty-gritty, and what will actually transpire once the deal-making caravan and the media move on and investment bankers pocket their fees and start working on the next money-spinner. Number crunchers often dismiss the integration of merging organisational cultures as the soft stuff. But it quickly becomes the hard stuff when it is so easily mishandled ..."

Katrina Nicholas, 2007a

"...Research by Hay Group shows that when mergers and acquisitions fail, it is often because leaders get bogged down by finance and technology issues and don't spend enough time integrating corporate cultures and technology styles..."

Fiona Smith, 2008q

An example of this is Fosters which struggled with its dominant beer culture to merge with the more complicated wine business of Southcorp and US wine house Beringer, ie

"...extremely hard to extract distribution synergies between beer, a product manufactured daily in cities, and wine, an agricultural commodity requiring high capital investment in but producing only one of crop a year......Fosters became overweight in premium wines in essentially what was a beer distribution system......brand loyalty in the one industry is different from what it is with beer. Wine drinkers' tastes change - they don't want to drink the same wine, which is a challenge for Foster's large, mature brands..."

Trevor O'Hoy as quoted by Joanne Gray, 2008

Furthermore, winemakers were price takers while breweries were priced makers.

However, the main justification for Foster's getting involved in the wine industry its need to diversify across products and geographies; gain savings in costs (such as distribution channels), etc, to counter the consolidation of the liquor retailing bargaining power in the hands of the supermarkets, eg Woolworths and Coles. These 2 major retailers control the sale of around half of the wine sold in Australia, and, as a result have the power to make demands in terms of pricing, volume and promotional support.

Also, when you are emerging, etc with another organisation, you are inheriting someone else's baggage, ie their culture. Richard Branson (2008) believes that you cannot reconstruct culture. Thus, it is better to start with a greenfield operations.

At each step of the merger and acquisition process, management can be vulnerable to a variety of cognitive biases (psychological phenomenon). The table below identifies these biases and suggests specific steps to address them.

Process step

Bias

De-biasing prescriptions

Preliminary due diligence

(over-estimate stand-alone enhancement, revenue and cost synergies; decide how much to bid; under-estimate the time, money and other resources needed for integration

Confirmation bias (seek information that validates initial hypothesis)

Seeking out disconfirming evidence; use synergy estimates to guide the price; examine potential pitfalls

 

Overconfidence (especially in identifying revenue & cost synergies)

Use reference forecasting plus comparable prior deals to estimate synergies; use a balanced assessment of entire competitive environment (both top-down & bottom-up)

 

Under-estimation of cultural factors (language, codes, symbols, anecdotes & rules) & conflict differences; use of blame game

Use tools such as network analysis maps

 

Planning fallacy (tend to under-estimate resources required)

Use reference-class forecasting to estimate the time and money needed for integration.

Estimate and update best practices

Need to learn from deal making experience

 

Conflict of interest

Seek objective, independent, external advice from experts

Bidding phase (submit bids until the seller agrees on a price)

Winner's curse, ie in a bidding war, the winner bids above its true value

Set a limit price & avoid bidding wars

Have a dedicated M & A function that looks at alternatives to the deal and sets price limits

Tie compensation of deal-maker to success of the deal

 

Competitive arousal, ie it is an adrenaline fuelled emotional state that is aimed at beating an opponent at all costs.

Need to focus on maximising value

Final phase (obtain greater access to the target's books so better able to determine final pay terms and closing details

Anchoring, ie a tendency to under-act to surprising news by holding onto initial numbers, etc

Seek the fresh eyes of independent, dispassionate analysts who review from the start of the bid

 

Sunken costs fallacy, ieswayed by amount of resources (time, money, credibility, etc) already invested in the bid

Seek the fresh eyes of independent, dispassionate analysts who review from the start of the bid

Have a backup plan and alternative options (including "walking away")

Have multi-options so that not stuck with one bid

(source: Dan Lovallo et al, 2007)

Potential dangers signals to be aware of during mergers and acquisitions include

- top management are the only ones who believe in the deal

- focus on synergies analysis of the revenue enhancement (without an investment plan) rather than cost savings

- inadequate cultural due diligence performed

- lack of independent outside advice

- too many restrictions on price changes during the bidding

- many others bidding for the same organisation

- too much emphasis on the time, money, or reputation already invested in the deal

- the deal must be done no matter what

Two other key biases include loss aversion and comparative ignorance

- loss aversion

"...refers to fearing losses more acutely than desiring equivalent gains......the psychological impact of a loss is about 2 to 1.5 times that of a gain......often, the net effect of loss aversion is inaction..."

Dan Lovallo et al, 2007

One of the best ways to overcome loss aversion is to aggregate a particular decision within the larger portfolio of strategic choices thereby mitigating the loss associated with a single poor outcome. For example, over time firms can undertake numerous investments; so long as one investment doesn't threaten, they should be considered a minor part of the continuing gamble

- comparative ignorance

"...given a pair of betting options, people prefer the gamble that is comparatively less certain..."

Dan Lovallo et al, 2007

Overcome ignorance by identifying actual returns your organisations has achieved on internal projects as against returns from acquisitions.

"...this baseline, objective measurement of the 2 types of returns can be formulated by using a reference class of at least eight similar deals......revealing ventures in this way will help reduce uncertainty about an acquisition's potential range of outcome, minimizing the ambiguity inherent in an unfamiliar gamble..."

Dan Lovallo et al, 2007

It has been found that in the short-term (1 to 2 years) most acquisitions fail but over a 10 year period those that do survive perform well. This could be explained by

- all benefits may not be apparent in the short-term

- good acquirers keep on making good acquisitions

However

"...Research shows that mergers and acquisitions have a high probability of destroying shareholders' value: three years after completion, 48 percent of merged organisations had a total shareholder return that was lower than the industry average......61 percent failed to earn cost of capital, or better, on funds invested.....managing human capital risk is both the most important factor for success of the deal, and the most difficult to manage.....people and cultural issues was cited as the underlying cause of disappointing results of M&A transactions......respondents were asked to name what area of human capital management they could have done better, communications, culture and leadership were the top three items on the wish list......the cultural thing is hard to get your arms around. Organisations really struggled to make it tangible. This is about getting the people and cultural issues right: the loss of the people; lower productivity before and after the deal; disruption to sales and customer service; industrial disputes; delays to the process of implementation. The organisations that get it right are the ones who do it (M&As) time and time again. But they have learned the hard lessons and make the time to review how the last deal went......30 percent of the people in a company that has been taken or merged say they do not intend to stay......damage done by a disengaged or disheartened person can be greater than the impact of their loss to another company..."

Fiona Smith 2008e

At the same time, every M&A is different

Even though research has shown that integrating processes from different firms is one of the main problems in forming successful mergers, partnerships, acquisitions, strategic alliances, joint ventures etc, management needs to be aware of cultural incompatibilities. More often than not these are not taken into account in the initial decision-making process. When one firm buys another, the buyer assumes that its culture will dominate. At the same time the buyer needs to respect the other firm's culture. There needs to be objectivity in decision-making around the composition of the new management team, and the culture and values that will emerge

There are 4 critical tasks that leaders need to address in these situations of potential cultural incompatibilities

...1. Leaders must understand their own culture well enough to be able to detect potential incompatibilities with the culture of the other organisation

2. Leaders must be able to decipher the other culture; to engage in kinds of activities that will reveal to them and to the other organisation what some of its assumptions are

3. Leaders must be able to articulate potential synergies or incompatibilities in such a way that others involved in the decision process can understand and deal with cultural realities

4. If the leader is not the CEO, he or she must be able to convince the CEO or the executive team to take cultural issues seriously..."

Edgar Schein, 2004

Furthermore

"...So many business acquisitions end up being disasters because the people involved fail to understand the real challenges involved in getting different types of people to work together and share the same goals. They look only at the numbers..."

Richard Branson, 2008

Despite increasing number of alliances, most fail (over 60 %). According to Jonathan Hughes et al (2007), successful alliances require focus on 5 principles:

i) placing less emphasis on defining the right business arrangement and more on developing the right working relationship (it is important to develop and maintain trust and communications so that the inevitable disagreements have a solid basis for solving; develop collaboration so that alliance members understand how each other operates including decision-making, resource allocation, information sharing, organisational structure, policies, procedures, cultural norms, etc; this needs to get beyond abstract terms, guiding principles and phrases - it needs to explore the potential challenges of working together, examine differences, develop shared protocols for clarifying and managing those differences and establish mechanisms of daily work operations.)

ii) placing less emphasis on creating end metrics and more on creating means metrics (generally as alliances take time, considerable investment and efforts occurs; need to initially use leading indicators that look at relational aspects of the alliance, such as amount of information sharing, development of ideas, speed of decision-making, etc rather than just the financial indicators, such as reduced costs, revenue generated, marketshare gains, etc)

iii) placing less emphasis on eliminating differences and more on embracing difference, ie leverage them to create value and stop driving difference underground where it becomes potential 'time bombs' (sometimes the differences touch on sensitive issues, such as competencies and culture - initially people can be reluctant to address these differences and preferred to focus on perceived commonality. Once you start to view the differences in a positive and productive fashion and demonstrate a willingness to acknowledge your own weaknesses and limitations, the relationships in the alliance improve.)

iv) placing less emphasis on establishing formal alliance management systems and structures and more on enabling collaborative behaviour (need to nurture and actively foster the collaborative behaviour; need to get away from the "blame culture" or "finger-pointing" or "CYA" when something goes wrong by having an emphasis on inquiry rather than judgment; an inquiry focuc acknowledges that in a complex and interdependent relationship difficulties usually result from actions of both sides - not just one)

v) placing less emphasis on managing the external relationship with partners and more on managing internal stakeholders (sometimes focus is on alliance partners and customers at the expense of your own staff; need to get "buy-in" and internal alignment to the alliance from all your staff; need to beware on the biggest barriers to trust, ie

"...mixed messages, broken commitments, and unpredictable, inconsistent behaviour..."

Jonathan Hughes et al, 2007

NB Working in alliances requires a different approach from that required in traditional business relationships

These 5 principles are in addition to the conventional advice to

"...create a solid business plan backed up by a detailed contract. Define metrics for assessing the value your alliance delivers. Seek common ground with partners and pay close attention to managing your interface with them. Establish formal systems and structures..."

Jonathan Hughes et al, 2007

Furthermore, in mergers and acquisitions, etc, there is a need to understand if the acquisition is going to sustain and improve performance of its current business model, ie help the organisations move up-market better and faster. Or is it going to disrupt the current business model and thus be treated as an autonomous business unit?

With mergers and acquisitions, etc, there is a need to develop an exit strategy, ie will it be a sale, or a float on a stock market?

Generally invest emergers, acquisitions, etc

"...synergies are overestimated, immigration costs are underestimated and time frames are unrealistic..."

Tommie Bergman as quoted by Narelle Hooper, 2008b

In mergers, acquisitions, etc need to overcome

"... usual barriers to successful mergers: employees shock, protests and anxiety, all of which can fuel supplier unrest, government disapproval and customer affections..."

Rosabeth Moss Kantor, 2010

Furthermore, it is important to understand the cultures of the different organisations involved. This requires understanding the informal networks and how decisions are made. The different organisational cultures can be further complicated if the firms are in different countries.

One approach for successful merger integration involves 3 sets of activities - "dual organisations, one organisation, new organisation"

- dual organisation (operates both organisations side-by-side - especially in complex situations, operating parallel operations can be a practical necessity. Furthermore, it helps people retain their identities, avoids too much change initially and staff can learn new ways with open minds)

- one organisation (find a common human bond and encourage developing relationships - need to encourage people to meet frequently, including social events. This can help forge an emotionally unified culture despite operations still being separate; motivate staff to connect and work across divides.)

- new organisation (quickly starts envisioning and building the future - create a new business model that is separate so that sends attention away from territoriality and conflict, and towards collaboration and facilitates future success.)

NB You need to focus beyond the short-term financial benefits of the deal and aim to integrate the talents. Also, staff need to see and hear the human side of the senior management!!!

Management/leadership and change

Martyn Newman (2007) states that decade-long research has identified people's top 10 personal needs:

- great recruitment

- great induction programs

- a great boss and leadership

- great training and development

- great future and security

- great career opportunities (in and around the organisation)

- involvement in change

- appropriate reward and recognition

- great quality of work and work environment

- good communication that allows people to have influence

Management needs to understand how it can satisfy the above needs to keep its staff

Implementation of new methods of management (such as E commerce, syndication, partnering and alliance, etc) is vital in handling the challenge of change, as traditional approaches are unable to handle the challenge. Change is already a significant factor in management, and is increasingly important to the future. Constructive leadership in response to change (rather than a "knee-jerk reaction") combined with a sense of leading organisations forward can ensure that leaders actually "make it happen". One way to handle this is patching - building inherently temporary structures that allow managers to continually re-stitch their businesses to match changing market opportunities. Patching occurs when a lot of small changes are made frequently to organisational structures such as splits, additions, combinations, transfers, combining chunks of businesses and exits. The process focuses on speed and agility, and requires adaptable organisational structures to handle turbulent times. The organisational structure is continually re-mapped against shifting market opportunities. Thus patching is creating a continually shifting mix of highly focused, tightly aligned businesses that can respond to changing market opportunities. This is very different from the approach of less frequent but more dramatic organisational restructuring that is more the norm. These major changes are then 'set in concrete', despite any future change in environment

Remember:

"...the organisation of the future will be virtually layerless and increasingly boundaryless, a series of information networks in which more connections and fewer people"manage processes. Information will become transparent. No leader will be able to hoard the facts that once made the corner office so powerful. Most of the information a manager will need to run a business will reside on a computer screen in a "digital cockpit". It will contain every piece of real-time data, with automatic alerts spotlighting the trends requiring immediate attention. While information will be available as never before, it will always be human judgment that will make the organisation go..."

Jack Welch as quoted by Jack Welch et al, 2001

Organisational thinking is moving away from an emphasis on linear, analytical, straight-line (cause and effect), quantifiable, reductionist, mechanistic, convergent (only one best way) thinking, to a more systematic and holistic approach with divergent (more than one answer) thinking that involves the likes of action learning, double loop-learning, self-organising systems, positive and negative feedback loops, process consultation, memes, multiple intelligence, creative orientation, creative tension, destructive creativity, dialogue, governance design, scenario planning, quantum physics, ecology, instability within stability, etc such as that explained by the Chaos Theory which is a sub-set of the Complexity Adaptive Theory.

The basis for Chaos Theory is that the universe is uncertain, unpredictable, irrational, illogical, non-linear, problematic and complex: order within disorder.

Chaos theory is about

"...Tiny shifts in initial conditions have a critical effect on the final outcome of a chaotic system, and this applies as much to human behaviour as it does to the physical world. It is impossible to model our behaviour because there are too many factors involved...... explanation of a great deal of human behaviour is an extraordinarily complex process. It is the product of many different factors - instinctive, physiological, rational and emotional - and prediction becomes impossible..."

Robert Winston, 2002

Furthermore,

"...This often renders previous experience and existing knowledge redundant and could be described as anti-intuitive, anti-historical and anti-experience. Complexity theory offers the ultimate experiential learning encounter..."

Paul Day, 2004

As Gil Sawford (1998) states:

"Chaotic systems display a repetitive pattern"..The evolution of these systems is sensitive to initial conditions and to continuous small disturbances. Owing to the difficulty of stipulating precise initial conditions, their behaviour is unpredictable and random. Chaotic systems are deterministic"When applied to non-linear feedback systems, Chaos can explain how variations in inputs and continuous small disturbances can quickly produce confounding variations in outcome. Accurate predictions are hard, if not impossible, to make as feedback loops magnify variations, taking the system to a state that we are unable to determine" ... The long-term future is not only unknown, it is unknowable, and the efficiency of long-term planning is delusive. The border between stability and instability is a compromise of both order and recurring disorder. This border is far from the equilibrium state of chaos where specific long-term outcomes are unknown. This can be represented graphically and shows the original shape of stability recurring over and over again. Humans are able to use this recurring patterns analogy by reflecting on experience and adapting to new situations. This allows us to create reasonably predictable short-term futures, and long-term futures that can be managed in an emergent way"

Furthermore,

"...any organisation.....capacity to be creative and sustainable in today's unstable and crisis-riven world will have the characteristics of what chaos and complexity theory call 'complex adaptive systems..."

Danah Zohar, 2004

 

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