AIMA INVEST IN YOUR BEST MIND THE VALUE GAP Yuval Atsmon STRATEGIC RESOURCES ALLOCATION ey i ae a UNLOCKING VALUE, POWERING GROWTH020 - 22934304/5 | [1 +919730008615 | = info@scmhrd.edu | @ www.scmhrd.edu Moulding every student into a professional since 1993. De ee ase) (Overall Ranked 10° in top 100 B-Schools in India, "in Top Private Institutes by Times B-school survey ~ 5% in Top Ranking B-Schools of Super Excellence, 3"in state wise Private B-Schools, 47 in top 20 B-schools (Govt. and Private) by placement [domestic and international], USP, social responsibility, networking and industry Interface by CSR-GHRDC B-School survey 2017 Highest domestic package of 38.5 CPC Consistent ace at corporate competitions organised by Axis Bank, Shoppers ‘Stop, Reliance Jio, PepsiCo, ete. 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MULTIMEDIA download your digital issue now Available on: iPad, iPhone, iPod touch and Android devices Sieg nn Ceca Cae at Re eeu RenTHTTEAN eLetter VOLUME 581 /SSUE 101 OCTOBER 2010 COVER STORY WEIGH YOUR OPTIONS INVEST IN YOUR BEST 1 | SALES Creating value throug resource allocation REDEFINE UX 38 NO AND MICHAEL CHEW ive category merchandising is key to driving MIND THE VALUE GRP 1B | e-commerce s How to double company value by seallocai Om BKRAWAIT YUVAL ATSMON TEAM PRODUCTIVITY SEN ones ANEW LENS 24 AUTONOMY AT STARE? cae OM JELLER AND JULIA DHAR Decision-making in an alg Six reasons why a coach is just what your team EER OUA ” eee ones TAKE OFF YOUR BLINDERS 56 NO ‘REAL THREAT 28 | Disruption isthe new reality, and leaders must Losing the human toch? avoid being blindsided by change Jon 0 Woo! TELASSI, AND OMAR TOULAN SELF-DEVELOPMENT WHO ARE YOU? 4 Tap into all your behaviour styles for your best performance, DUANA THEDDORES{ESONSFORIGNTING CRO TT 7 SPEED LEARNING CAPSULE STRY CONNECTED 64 [New-age leaders should noe stop at mere OPERATIONS EXCELLENCE LIES I. 68 Forge tient, embrace deliberate practice, 'SANJEEV BAVTMANGALKAR SUSTAINABILITY SHAPING SHARED GOALS 4 Delivering on sustainability goals sa leadership responsibility NaTAStA MUDHAA HR THE MILLENNIRL CONNECT 18 Millennial ation is not an insurmouneable problem, HR PEOPLE POWER 82 ‘Are employess uly an ast? SRIVASA ADDEPALL! ENTREPRENEURSHIP MORE THAN JUST BIG IDEAS 86 ‘What goes into the making of successfil entrepreneut? as shanaRationing resources SSAUYRLESHAR& Carns Moab Dee, Ks BP Ln anagement is about getting the best out of finite resources, and sensible allocation of resources 's crucial to organisational outcomes. In this age of disruption, agile reallocation of resources can be the key to bumper returns or survival itself, Typically, source allocation is pegged to the past. Budgets tend to be increments to what has happened in the past year or two. Biases and poltics also influence dynamism and direction of resource allocation. In any organised group, each policy and strategy is influenced by who gets what. Therefore, business leaders have to lay down clear systems of vetting resource allocation decisions and evaluating their outcomes for subsequent reallocation. Often, resource allocation can be frustrating because of the misalignment between growth strategy and earning targets. While strategy tends to lean towards investment in innovation, expansion and diversification, resource allocation leans towards quarterly profits. It is rare to see a company or a department budgeting predominantly for strategy. Managers put their neck on the line with resource allocation because if their investment 6 + INDIAN MANAGEMENT + OCTOBER 2019 + bets go wrong, then they lose their jobs quickly ‘and if they do not invest in growth, they lose their jobs a ite later In everyday operations, resource allocation is about value creation. Typically, organisations that allocate and reallocate dynamically end up with much better outcomes than those that make up their minds only when they fail to achieve the target numbers. tis difficult for ‘a manager to shift resources from a steady business to another for greater gains because of the attendant risk Ithelps to build alternative scenarios while budgeting and allows flexibility for pursuit of new opportunities or mid-course correction when things do not go according to plan. Having an “it, then’ approach to resource allocation allows dynamic alignment with business events. Itis useful to keep a reserve for unforeseen requirements or opportunites. However, itis vital tat clear markers are established for triggering reallocation to avoid uncertainty and confusion in the organisation. Improvisation is critical during unexpected ‘events, No organisation can ever have enough resources for all contingencies and there are situations when resources have to be moved ‘around and repurposed to get things done.While itis true that you get what you pay ‘or, it is also true that resource adequacy is a matter of perception. Those with fixed notions of resources and outcomes are crippled when some key asset or people become unavailable. Itis not always possible to buy solutions by throwing money at the problem. One can learn a lot from sports where coaches have to repurpose their available players quite often because of injuries to AIMA direction quickly when unforeseen events take place, Irrespective of size, every organisation lives with internal power struggles and biases of its leaders. In the run-up to resource allocation and target setting, managers indulge in ‘influence shopping’ so that they can get what they want or, at least, their demands are not scrutinised too closely. Many managers equate resource allocation The kay tominimising Me sey payer, with persona staring in the egerisation and Incumbeny' influence Fgityahaerimlarge | they tuto any gh to anesthe on resource allcation ergerisatons because the croariston' interests to premete ther own is to make decisions a ens of " ao evidence-based and open to contel things by cenvlsing | have the most eso.ces and want to prevent ‘those to challenges. resource allocation decisions, They are also the only ones who know what the various units are doing and what their opportunities and challenges are. Big organisations rely on their size to see them ‘through if events go against them. In comparison, the smaller organisations can have more flexibility by adopting a bottom-up approach where each unit requests for resources based on its needs and ‘opportunities. Such organisations can change a reallocation. The key to minimising the incumbency's influence on resource allocation is to make decisions evidence-based and open those to challenges. Top leaders can allocate resources ‘based on the net effect on returns over the foreseeable future. In the digital age, data is the prophet and r predictions, and not preferences.m ning resources depends on ‘The onion expressed persona, INDIAN MANAGEMENT + ocToaER 2019 + 7Dear Readers, ven the most thorough leaders can fall prey to not paying enough attention to one major aspect ofa truly agile business plan—the reallocation of resources. In theory, shifting resources from a below: par or flat business unit to a growing one should be a straightforward process. But in reality, itis a not-so-simple act—it requires a vigorous strategy overhaul, constant vigilance against external threats, and a clear-eyed examination of biases. ‘The question now arises: i all this effort worth the potential reward? Afterall, it is easier to hold on to something tangible rather than take a risk, Well, research is on the side of the risk-takers, AsYuval Atsmon, McKinsey & Company, points out in one of our cover stories, A company that actively reallocates delivers, on average, a 10 per cent return to shareholders versus 6 per cent for a sluggish reallocator, Wit 20 years, the dynamic reallocator will be worth twice as much as its less agile counterpart.” Maximising the value of your company’s coin is an uphill task that necessitates battling the forces of inertia and internal resistance to change. This isa big ask for any company, but the very real rewards may well be worth it Do write in with your views to imeditorial@spentamultimedia.com Mande D aww — ‘Maneck Davar 8 + INDIAN MANAGEMENT + OCTOBER 20:9 + indian management OCTOBER 2019 VOLUNE 58 ISSUE 10 EDITORIAL ADVISORY BOARD DShivekumar Sanjay Kiloskar Rekha Sethi Prot. JK Mira Maneck Davar N Radhakrishnan £01 &PUBUSHER 1 eeckOaae wasn EOR 1 Katee Stroman ASSOCATE EDTOR Arita Mech DITOR TEAM Ach Gt, Si ie SEMOR GRAPHIC DESIGNER Mira S Pat ILLUSTRATORS 1 Swap Rota, Nias a DDRECTOR— arin 2 Sala Gav ‘es oamnasooaae 2eseHs mua suai vanara | 491 9821216261 For(eat 22) fst 102i ‘Siohir@spetamutineda com eS a og7 7980 Fra 2) ater 1021 ‘ajdspenamuteds com Devs Aas Gaga 9191888772 nhshspersanatinedia co BENGALLRY~ Sandy Kumar +91 H86870671 ‘sandeep Bsperanutneda cam Cth tena Reborn | 491 8684055523 ‘hoaaipentmatineda sa OUT Pbk chsh (91 9 4073 5025 pulk sperxdpnal con CGUUARAT ~ Sana Cand | +91 8024045072 Sanyetawaanal con ert Gans | 00824893024 1 ‘eeridigoamutinedacom ‘Stina nang ie ‘stp SeaAIMA YOUNG LEADERS COUNCIL Champions of change Inspiring, Creating and Innovating With a vision to be a leader in Management Development AIMA facilitates Individuals and organisations to realise their potential. And in its endeavour to shape the management destiny of the new age India, AIMA has constituted YOUNG LEADERS COUNCIL for young leaders. A non-lobbying platform to mentorand nurture young leaders forthe next wave transformation, q a | os | = POC eee cn Young Leaders Council, All India Management Association Management House, 14 Insti SRL OEE esa cc ee rnWEIGH YOUR O)MBIO Ne hhWHAT IS AVAXHOME?eos c le ee Ce cL Le et ace ee ete oe Unlimited satisfaction one low price Cheap constant access to piping hot media Protect your downloadings from Big brother SS) (Toman ole eda eae ToL Coa) 18 years of seamless operation and our users' satisfaction ORE erry Brand new content lel ic AvaxHome - Your End Place We have everything for all of your needs. Just open https://avxlive.icuInvestin your best Maximising to ‘value creation engines’, but few companie: get it right value requires disproportionately funneling resources from ‘cash-generating’ businesses GREG MILANO AND MICHAEL CHEW, FORTUNA ADVISORS.hrewd investors commit Funds to companies they expect to rise in value, while reducing their exposure to those they expect to be relatively flat or down. The same principles ought to be applied inside companies, where management teams should “disproportionately’ allocate capita, innovation, and marketing resources to the products, services, brands, regions, and businesses they expect will create the greatest value and draw resources away from business areas where they expect performance to be flat or down, We call this process strategic resource allocation, or SRA. COVER STORY Seems simple, right? Nearly every executive ‘we meet acts as if these statements are intuitively ‘ruc. Yet, a careful analysis of allocation decisions inside company after company shows that ‘many often smear resources uniformly across business lines without enough recognition of where the best opportunities lie. Sometimes it results from managers’ misguided desire to be equitable to business lines, oF due to the internal political hierarchy. But, most often, the culprit behind such suboptimal decision-making isa lack of insight into a company's various value-creation prospects, Identifying and investing in winners ‘The starting point for an effective SRA process should be to chart an ‘economic map’ of the various products, services, brands, regions, or businesses that represent ‘Value centres’ for the ‘company. To do so, companies must consider tradeofls between various capital deployment alternatives, which requires a comprehensive ‘measure that is consistently correlated with value creation. Unfortunately, most companies use traditional performance measures which, despite their popularity fail to “reliably” indicate value ereation, Pure income statement measures like revenue growth, profit margins, EBITDA, and EPS all safer from inadequate recognition of the amount of investment required to deliver the growth or INDIAN MANAGEMENT + ocrosea 20sa + 13,The starting point for an effective SRA process should be to chart an ‘economic map’ of the various products, services, brands, regions, or businesses that represent ‘value centres’ for the company. profits. This was supposedly remedied by return ‘measures such as return on invested capital (ROIC) and return on equity (ROE), but these inicate quality only as percentage rates of return and not the overall quantity of growth. In the 1990s, economic value added (EVA) came into favour due to its professed ability to balance both performance dimensions, quantity and quality, into a single metric To explain it simply, EVA is a variation of economic profit that is calculated as net ‘operating profit after taxes less a capital charge based on the amount of capital multiplied by the weighted average cost of capital But, las, EVA proved to be prohibitively complicated for many companies that adopted it. This was because it requires a wide range of accounting adjustments, which makes it hard for managers to see how it relates to their plans and decisions. And likely, worse, it tends to systemically encourage underinvestment. This ‘short-termism’ problem is caused by the capital charge—which generally refers to the cost of ‘capital times the amount of investment—being based on net depreciated assets, So new assets appear very expensive in the early periods of the forecast, often causing the EVA contribution to be negative. Then as assets depreciate over time, EVA tends to rise, giving the illusion ‘of value creation. This depreciation problem ‘exists for return measures ike ROIC and ROE. too. Perhaps the greatest evidence of EVA’s ineffectiveness, though, has been that nearly all ‘companies that adopted the measure in its heyday in the ‘90s ultimately abandoned To improve the recognition of value creation, wwe developed residual cash earnings,’ or RCE, which i similar to EVA, but simpler, and does not penalise performance with depreciation charges." We calculate RCE as gross cash ‘earnings, which is essentially after-tax EBITDA, less.a capital charge on gross undepreciated assets, In contrast to EVA, RCE tends to show ‘earlier positive performance indications from new investments, without any upward drift ‘over time, since depreciation costs are removed, ‘What is more, our recent research has shown ‘hat, in all non-financial industries, improvement in RCE relates to total shareholder return (TSR), asa proxy for value creation, better than improvements in EVA.‘ 14s inDIAN MANAGEMENT + oCTOAER 2019 +Be @2 a Consolidated ‘Once management teams have a credible forecast for each value centre's RCE, the objective should be to ‘value creation engines’; that is, the businesses, joritise investment in the regions, or markets where one expects to deliver the most improvement in RCE per dollar of investment. Again, this is just like picking stocks that one expeets to yield strong growth. In multi-business company, corporate leaders should challenge the managers of these value creation engines to be creative in finding ways to deploy more capital, innovation, and marketing investment. Indeed, one of the common causes of underperformance is underinvestment in a company’s best business lines or markets. Sure, it is easy to play it safe with conservative investment plans; but this consistently, and predictably, leads to suboptimal results Ina study titled, ‘Don’t Waste Time on Poor Performers’ ,* wwe showed that $100 invested in top-quartile S&P 500 stocks would have created more than “toventy times as much TSR than that destroyed!” by the bottom-quartile stocks, over a 10-year period. Bsa 3 1200 2a ow Ef ow i Percent of Ina Vue | 10-Year TSR |Encing vate] POTSSRt soo | rom | te | me $100 we | so | am] (Stas cS 100 25% 5 % $00) a8% | «Sta | 100% Figure 1—Average 10-Year TSR of S&P 500 by Quartile, 2001-2010 While this analysis applies to the members of the S&P 500, itis a good analogy to the circumstances faced by most large companies, witha portfolio of different businesses, So, if there is one takeaway from this article, it should be thatthe opportunity cost of not achieving incremental growth in a promising business is likely to substantially dwarf that of filing to turn around weaker-performing businesses" So, companies should seek to redirect resources from ‘cash-generation engines’, those swith weak RCE-improvement prospects, to the value creation engines that are likely to sustain significant profitable growth and thus buoy aggregate company performance over time. OF course, one must be careful to avoid throttling these businesses, or they might experience sharp declines in performance, like that seen by Kraft- Heinz earlier this year. But since one should not expect much growth from cash-generation ‘engines, investments should most often be focused on improving cost efficiency, profit ‘margins, and capital productivity, so that their cash flows can support future growth in value creation engines. As one of our clients recently said, "It’s okay'to lose market share in such businesses, as long as w in the businesses where we aim to win.” ain oF grow share Understanding the sources of value creation When evaluating the appeal of value centres, °g the app it isnot enough to just know the financial performance; iti aso crucial to examine and understand the factors that drive RCE growth, ‘The two primary conditions needed for value creation are market attractiveness and strategic position, Market attractiveness refers to the size and growth of the market fora particular product or service. Naturally, not all markets are alike. Growing revenue in a fast-growing market is like being chased by wild animals in an open field, where there is plenty of room to manoeuvre. But growing in a flat market is more like being chased by the same animals through a narrow,Peroeived Commeditisation Value to ‘and Competitive Customer Sources of Pressure Competitive ‘Advantage Brand Strength Innovation Process Know-How Sharper Decisions Captive Supply Execution Mentality Ownership Culture Cost including ‘Cepital Charges Figure 2—How Strategic Position Drives ROE Abrand is differentiated when consumers perceive it as unique and meaningful, and are willing to pay a premium for its products or services. dead-end alleyway. Strategie position refers to the competitive standing against other ‘market participants, ‘on dimensions such as brand or technological differentiation and other competitive advantages, reg Mano founcer an chet recite ofa, Fortuna Advi, sn ator are Foran book, Curing Corporate Shor Temisa, 16 6 INDIAN MANAGEMENT + OCTOBER 2019 + as shown in Figure 2. brand is differentiated when consumers perceive it a unig) and meaningful, and are willing to pay a premium for its products or services. Differentiated technologies can provide user functionality that is unavailable from competitive products, as can be seen in some software applications, high-end ‘electronics, and premium-class automobiles, ‘to name a few examples. Cost benefits can beEvery aspect of planning and investment decision-making can, and should, benefit from strategic resource allocation. ‘Onee these steps have bee competitive advantages t00; however, they will endure only ifthe cost advantage cannot readily be replicated, so differentiated products and services tend to be more sustainable than cost advantages, Size of the prize Incone recent client engagement, we constructed a top-down reallocation of resources, shifting significant investment capital from the client's cash- generating engines to its value creation engines. The value creation upside was so significant that each dollar reallocated created worse etree et ct oF NP, Featon Abie, which is quite significant. Suffice it to say, cat” shh squte sat Sie oy tt, nding es rn ade a sora taken.a clear line ‘of sight into value creation can be established. Not only will this help direct resources to their but also alleviate headwinds from best internal polities and bureaucratic slowdowns, And ‘once such practices are integrated into business processes, maximising value creation tends to become second nature—as the straightforward ‘objective that it should be. Indeed, every aspect of planning and investment decision-making «an, and should, benefit from strategic resource allocation. 1 O'Byene, Stephen Why Gaptal Etetency Measures Ae Fare Used inircantve Pars and How to Change Tha Jal of Appied Corporat France 22 no. 2 (Spring 200) era. 2 iano, Gregory V. Postmodem Corprate Finance! Journal of ‘Apple Corporate France 22, no. 2 (Sing 2010 48-38. ‘Silane, Gregor V."Bejend EVR. Jounal of Appl Corporate Franco 31, na 3 Surever 2019; 16-125. ‘AN, Gregory V. Beyend EVA Jornal of Apples Corprate Franco 31, ne 3 Sureer 2019; 16-125, ‘SMa, Gregor Ve You Wasting Time on Poor Porrmers?” CFO com, dy 8, 2011, Mipe:ortina aio. ‘2om/2011/078/re you-wasing-tme-oe poor performers! INDIAN MANAGEMENT + CToRER 2019 6 17Mind the value gap Inertia is an attribute of the strategically poor. The prudent keep pace with the ever-changing business context and reallocate their resources suitably. YUVAL ATSMON, MCKINSEY & COMPANY 18 6 INDIAN MANAGEMENT + ooTOBER 2019reallocation’ is a mouthful, but its meaning is simple: shifting money, talent, and management attention to where they will deliver the most value to your company: The usefulness of doing so effectively is self-apparent but the forces of inertia are remarkably strong. Accordance to research my colleagues and I have conducted, senior exceutives understand the importance of strategically shifting resources: COVER STORY 83 per cent identify its the top management lever for spurring growth, above operational excellence and M&A. And yet a third of the companies reallocate a measly 1 per cent of their capital from year to year; the average is 8 per cent. ‘This is a huge missed opportunity because the value ereation gap between dynamie and drowsy reallocators is staggering, A company that actively reallocates delivers, on average, a 10 per cent return to sharcholders versus 6 per cent fora sluggish reallocator. Within 20 years, the reallocator will be worth twice as much as its less agile counterpart—a divide that is increasing as accelerating digital disruptions and growing geopolitical uncertainty boost the importance of nimble reallocation. ‘Companies are slow to shitresources... © though rewards ae high Ce coneutora wamewarmme moe 6 ee wm Cae ceaanaa ‘Why do companies fail to follow through and reallocate? Some of the challenges are in what I broadly consider the analytical domain, Companies struggle to establish a rigorous, objective fact base for facilitating fair, clear-eyedd debate around where to allocate and how much they should reallocate, Faced with difficult choices about how to protect profitability in segments they want to allocate less to and INDIAN MANAGEMENT + ocroaER 2019 + 19debate trade-offs across thousands of micro- ‘markets (though some functions like marketing and sales should). You want to drill down to the smallest‘ meaningful” business, where a shift in resources will produce a material impact for the ‘overall company. This is likely to be more than 0.5 per cent to 1 per cent of overall revenues. Sometimes, investments have a direct business case and you can quantify the net present value (NPV) of all future cash flow associated with it. finding breakthrough growth in segments they want to allocate ‘more to, they stand stil. The other set of challenges are ‘more organisational and social, It can be difficult for executives to reach a consensus on the fact base and figure out how to execute successful reallocation, How to be a dynamic reallocator? ‘To bridge between the theoretical and the practical and make the right decisions, you should follow four important principles: 1.Go granular Beware of the tyranny of averages. One business unit (BU) may have lines of business or geographic pockets with highly variable returns, It is common to see returns vary from declines of 5-10 per cent to three-digit growth when looking at more granular market segments in one BU, whereas across BUs the difference may often be fairly minor. Defining the level of granularity can be something of an artas the top executives cannot 20 + INDIAN MANAGEMENT + ocronER 2019 + Each business segment should ideally have a distinct external market, say premium sports cars in the UK, even if some resources are not fully Aivisible. For example, R&D may still be shared across premium sports cars regardless of country, but not marketing spend, 2. Focus on value creation Assessing which segments deserve more or less ‘money and attention requires the right metrics. Sometimes, investments have a direct business ‘ase and you can quantify the net present value (NPV) of all future cash flow associated with it.A project to invest in a new mine, or develop a new vehicle, may look like that. In other cases, the ‘overall economic profit (profit ereated above the cost of capital) of a segment may be an excellent and more consistent method to assess ongoing value creation,(One of my favourite and relatively simple Rol metrics isto calculate the cumulative expected economic profit and divide it by the cumulative (Financial) resources it will require (invested capital, additional R&D, sales and marketing, and, if meaningful, other G&A). Timing may vary according to the business lifecycle, For cxample, fast moving consumer goods or services companies may take less than two to three years to realise most of the returns from a major investment, whereas some more complex products will ake longer. Finally, consider if your options have a very different risk profile. A good comparison of NPV co economic profit should be risk adjusted 3. Overcome biases Any resource allocation exercise must be grounded in hard data, so decisions are driven by cost improvement into the bank for new allocations). = Role-playing scenarios that force executives to debate against their natural interest, or allocate resources to anonymous business segments that may, or may not, be their own. My favourite technique, though, is “re-anchoring’ This involves removing the ‘management's optimistic ‘hockey stick’ projections of rapid improvement. Do this by building a model based on outside forecasts and by assuming there will be no improvement in performance. Consider if such a‘momentum . iO v Gar eo ® ae) emis vero & 7 ee = OOF i Bae 20 v fine Vialein 4g] Lead Management = Lead Nurturing 2 Application &2 2 Management q Sj Post Application Management Ja Final v Enrolments Empowering 207+ Institutions across the Country NMAT., omc | @AMRITA Geir | 9 #switchN your admissions growth www.nopaperforms.com | switchon@nopaperforms.com | +91 73033 93210 ‘Surv Nanae Urversiry 92