Corporate Dyslexia

Mr. Anjani, Canta Coffee Company's CEO had quit the troubled coffee chain after a short one-year stint. He was the third successive top-level official to have exited this group-owned coffee chain in a span of two years. The core of Canta's problems included an indiscriminate expansion strategy, steep overhead costs, high employee churn, new competition and high prices. Recently, the group sold off its stake in the chain.

Knowledgeable people are the key to corporate success. The corporate houses which cling to yesterday's haphazard means of developing organization and their people suffer from corporate dyslexia. In this era when executives are turning entrepreneurs or joining competition for higher perks, it is important to know about the next big opportunity as well as innovative organizational dynamics and business frameworks which can overcome this so called corporate dyslexia.

There's a scene in Alice in Wonderland when Alice comments that everyone in the domain of the Red Queen seems to be perpetually running. The Red Queen responds that Alice must live in a very slow place indeed, for in her world everyone must run simply to stay standing.

If you are a business leader, chances are you know the feeling. Like the Red Queen, you live in a world in which continual changes in technologies, markets and organizational forms require your firm to be in constant motion just to keep in place. Understanding the paradox of the Red Queen involves recognizing that, unlike in the tidy world of economic and organizational theory, in the real world there is no equilibrium. If you are doing a good job causing problems for your competition, you are sowing the seeds of problems they will cause you down the line.

Drawing from a recent happening where Mr. Ram, MD & CEO of a book store retail chain, who moved out to create a new business model, where client companies will become virtual organizations, outsourcing essentially all of their management activities. This new concept venturing in future retail practices will manage complete gamut of activities like, project roll out, human resources planning, marketing, store designing and M&A consulting etc. These kinds of changes disrupt the market and over time, alter the basis of competition.

Thus to overcome this corporate dyslexia, the business leaders should keep in mind that today's innovation is tomorrow's noose. Organizations that don't keep changing eventually become punished for being really good at what used to be rewarded. In 1980s, for example, Bank of America's efficient brick-and-mortar operation became a liability as automatic teller machines and electronic funds transfer emerged to allow people to get their money more easily.

Nevertheless, competition is one of the best forces for organizational learning and improvement. Dealing with the troubles of competition allows you to build the capacity of your organization. Good business models arise from trial and error and even the road to microprocessors and the Internet were fraught with early misjudgments about the utility of personal computers and linked networks.

Business leaders must therefore face the Red Queen head on. One way of doing so is to get in on early diffusion of the product, which can often give a firm an advantage. Establishing product teams, phase reviews and cross-functional mechanisms can all speed the rate at which an organization is able to respond to the market. But it's not just about going fast. The art of strategy is about understanding your industry well enough to know a promising innovation from a blind alley.

Leaders should focus on connecting strategy planning teams with those who are involved in product and service development and are actually in touch with customers. In the end you want to think of yourself as the architect of a system that is trying to engage, not eradicate, competition.

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It is not the strongest of the species that survive, not the most intelligent, but the one most responsive to change. - Charles Darwin

Brain-Dead and Branded

A Servicing Company had appointed a branded internal audit firm for four years continuously. Next year, the partner of the firm became Chief Internal Auditor of the Company who was managing its internal audits for all these years. The Managing Director was somewhat satisfied with his services. However, looking at the latest internal audit report, Managing Director became very concerned as it raised only the pending issues of the last year.

Managing Director knew that his line managers were performing reasonably well even during the bad times. After discussing with his line managers and the Chief Internal Auditor, he realized that all the recommendations, though got implemented in spirit, had not been implemented in the form as suggested by the Internal Auditor.

Internal Auditor was a knowledgeable person but he was not able to add more value with any newer perspective since long. Managing Director realized that they have been always basically washing themselves with the same dishwasher i.e. all ideas of his have been listened to and there have been no fresh perspective from a newcomer who could have brought new insights about the business.

Managing Director immediately decided to change working of the internal audit function to make it more meaningful for the business. He resorted to bring rotation of duties with in the organization to change the leaderships. He thought it's not the branding which is essential as much as the competency to provide innovative and frank views without fear and favor. Thus, he worked with new risk consultants and not any branded consulting firm to change the way Internal Audit had been functioning. This ensured that they did not all go brain-dead talking to each other on the same topic just using latest buzz words which are not capable of bringing any new insights.

Simply, in most of such situations there is a need to change the entire IA function i.e. IA organization, IA leadership, IA strategy, IA technology, IA culture, Business Control Framework and Management Accounting System. Not for sake of bringing newness but to connect it with business results.

What is difficult to change is the thinking of these so called experienced top nuggets who say that there is nothing new or rocket science. These are the people who have not yet changed their ways. They have actually gone brain-dead.

Fiction or Reality : IA Failure

Arvind, a young Internal Auditor had reached the internal audit location on time at 9:00 AM. He had the entire day at his disposal to spend on the audit area as planned. Mr. Swami, the Functional Head who had not been able to find time to see the email from the corporate office about the internal audit, exclaimed seeing Arvind. He asked him to wait for some time saying that the corporate office has not forewarned him about the Internal Audit. After some time he called up the corporate office in front of Arvind asking for sending the email again.

At 10.00 AM, Mr. Swami called Arvind in his office. Mr. Swami started with a waffler and took about an hour speaking unnecessary things without answering the Arvind's main questions on the audit area. Arvind broke in between to ask questions differently but Mr. Swami started with his Dog & Pony Show giving a long elaborate presentation to impress Arvind so that it may become difficult for Arvind to see the main issues. It was almost 12 PM then. He took Arvind for a round of the factory, which proved to be a very long round consuming one more hour. Mr. Swami suggested Arvind a good place for lunch. His idea seemed apparently to be to form a good working relationship with Arvind. The place suggested by Mr. Swami was miles away from the factory and after heavy lunch both returned at around 3.00 PM.

After coming from lunch, Mr. Swami left Arvind saying that he will be back in 30 minutes as he has a meeting with local excise officer. When Mr. Swami finally arrived after 1.5 hours, he saw Arvind, who had spilt some tea from his cup on the table. He then started lecturing Arvind for ensuring that he abides by complex hygiene and safety regulation. This was again a delaying mechanism by Mr. Swami. At around 5:00 PM Arvind started making some probing questions and asked for some documents and invoices. He told Arvind that he is not supposed to answer those questions as it is not making any business sense. He insisted to stop audit in lack of clarity about the scope. Unluckily Arvind had forgotten to bring the scope document and it wasted another half an hour. Mr. Swami then started suggesting areas which Arvind should look into. At around 5:30 PM and after some struggle, Arvind convinced Mr. Swami to give him the sample documents for his review as listed by him.

Mr. Swami came to Arvind at 5:45 PM without any documents. On asking for the documents again Mr. Swami exclaimed which documents he is talking about. Then he said Oh yes, I will just bring those to your table. At Around 6:15 PM, Mr. Swami came with few documents saying that he was unable to bring all the samples as requested as some documents are in processing with other departments and thus he picked up some other samples instead which were available with him but not listed on Arvind's list.

Arvind, the smart internal auditor picked up a serious problem from the given samples and asked about it to Mr. Swami. Mr. Swami suggested that this is a special one of case. He started abusing Arvind indirectly for his lack of knowledge about the business. When Arvind asked for more details about the said transaction, Mr. Swami told him that the accounting personnel who has the needed documents is on leave and he has no access to his drawers. He started then admiring and flattering Arvind for becoming over familiar with him. He won Arvind's mercy very soon when he spoke about a major deadline approaching that weekend and about his wife's illness.

This all took around half an hour more and around 6:45 PM; Mr. Chauhan, the Engineering head, who also lived near Mr. Swami's house, came there to offer him lift in his car. Mr. Swami looked at Arvind and said that he has provided him with all the data and now he has to call off the day as it takes about one hour to reach his house in the evening traffic and he has to cook food due to illness of his wife.

Mr. Swami suggested speaking to Mr. Ayengar in case he needs any documents or clarification. Mr. Ayenger did not know a single word in English or Hindi and he could only speak native language. After struggling a bit with Mr. Ayenger, Arvind given up and started enjoying the expensive chocolates which Mr. Swami had brought for him that evening.

At around 7:30 PM Arvind decided to pack up to catch the train of 8:30 PM to Mumbai as there were chances of heavy traffic as suggested by Mr. Swami.

After a week Mr. Swami received a report from Arvind which suggested that every thing was found to be in order.

Death Spiral: 360 Feedback

The key employees started disobeying orders of CEO and this clearly implied leadership failure for one of the Japanese Multinational. There is a saying that employees don't quit companies, they quit bosses!

When leadership failure is at the CEO level, it is common for various senior executives to try to fill the vacuum. Without a clear decision on direction by the CEO, the Japanese Organization was facing protracted power struggles and a further deterioration in competitive market position as the senior executives blocked or undermined each other's initiatives.

Key employees got frustrated with this lack of proper, needed action and left the company, degrading its strengths even more. Also, various incorrect habits were formed in the organization which made it much harder to lead in the future.

The leadership at this Japanese Multinational in India always failed to provide proper direction, inspiration and vision for their company from the start. The Controlling Management at Japan just kept on changing its strategy and the leadership except the consulting firm with which it had entered into a long term contract. Continuous consulting interventions by the Japan were faulty and unwarranted, which made the local leaders to think that inaction is a viable choice.

Unfortunately, they believed that they can continue to do what they like. They were comfortable with status-quo irrespective of what market conditions demanded. They did implement some changes, but at a rate or time that was convenient.

The Controlling Management at Japan then thought of carrying a 360 Review just to find a death spiral.

Implementing a 360 degree review process can either be a destructive and devastating experience, or a developmental epiphany for those involved, depending entirely on how the process is structured and the level of preparedness.

Although it is required that leaders should seek-out candid feedback from colleagues and subordinates using a 360-degree review in order to discover blind spots that reduced the performance but success lies in taking stock of their personal strengths and weaknesses and the commitment to take necessary steps to achieve personal as well as organizational change.

The 360, is only a tool that provides quantitative and qualitative evidence of the causal link between management behavior and business outcomes. If any one agrees that managerial behavior significantly impacts productivity, employee attitudes, morale, retention, teaming, and therefore the quality of customer interaction and overall business results, then one must exert the same level of scrutiny upon behavior as is traditionally imposed upon the functions. Unless and until top management is willing to exert that level of scrutiny, the impact of management behaviors on organizational performance will not be measurable, and will therefore remain invisible, free to impede business results with impunity.

More people would learn from their mistakes if they weren't busy denying they made them.

Not-So-Significant Variance

The Purchase Manager of a manufacturing plant was very unhappy with the unfavorable price variance although not very significant. He then expressed his uneasiness to VP-Operations saying that price variance does not measure the purchasing department's performance any longer. He said that his department has worked hard to obtain price concessions and purchase discount from the suppliers. He pointed out that engineering changes have been made in several parts, increasing their prices whereas part identification remaining same.

Similarly, the Manufacturing Manager also had approached VP-Operations saying that responsibility for unfavorable quantity variance should be shared. He was of the opinion that his department should not be made liable for quality problems associated with the use of obsolete or less expensive parts. He said that they had to use substitute materials of low quality to make up with engineering changes and to use up obsolete stock. In spite of all these problems he has reduced his other assembly costs and improved efficiency of the department.

The VP-Operation then approached Accounts Manager worried about the cost of investigating these not-so-significant variances to understand the problems more clearly. The Accounts Manager was smart Management Accounting Graduate; he first wanted to review the standards before investigating these not-so-significant variances. He was clear that the problems are due to incorrect management accounting practices.

He found out that the evaluation of the purchase manager was based on direct materials price variances. This created incentive for him to build inventory. Price discounts were granted for large purchases. Thus, one way to generate favorable variance was to purchase raw materials in lot sizes larger than necessary for production and to hold these inventories until they are needed. However, it was proving costly to hold inventory due to warehousing, material handling, and obsolescence etc.

Accounts Manager found that firm is purchasing in excess of production requirement to get a huge price discounts and the Purchase Manager had taken necessary permission from VP-Operations for this. He thought that to curb these practices, the purchase department should be charged with the hidden cost of holding inventories.

He thought that instead of sharing the quantity variance as suggested by the Manufacturing Manager, to offset the purchasing manager's incentive to purchase low quality raw materials, purchases should be inspected when received thus purchasing should not be allowed to buy materials that deviate from the engineering specifications.

Frequent engineering design changes should properly be incorporated in the variance analysis to identify the actual performances.

He thought that new Key Performance Indicators and Standards will recognize the existence of all these problems, so the managers will no longer be responsible for the variance that is considered too costly to fix or investigate.

Standard costing method although traditional is still used by many organizations. One needs to understand the issues pertaining to the system in its entirety to discover any cost saving advantage.

Accounts Manager then calculated the impact of changes in the management accounting system and found out that the organization can save up to Rs. 20 Million in each period.