“Retailers” believe “Supply-Chains Not Optimal”: Strategic Role of “SCM in an All-Channel World” | ET Retail

A majority of #GlobalRetailers believe that their Retail #SupplyChains, are currently “Not Optimal” in the current Retail environment, said a survey conducted by PricewaterhouseCoopers (PwC) for JDA Software…!!

As per the survey titled ‘CEO Viewpoint: The Strategic Role of Supply Chain in an All-Channel World’, 83 per cent of worldwide CEOs believe that their retail supply chains are currently not optimal for today’s changing retail environment..

” Digitally-connected Consumers have turned #RetailModels upside down as Omni-Channel Shopping has transformed Supply-chain from an important business concern to a mission critical one,” the survey said..

The survey pointed out that 50 per cent of CEOs recognise that their supply chain can be a strategic differentiator…!!

“As #MobileCommerce, comes of age, one of the biggest challenges facing CEOs is managing the transformation to Omni-channel retail,” it added..

However, as per the survey, only 34 per cent of CEOs consider the rise of omni-channel shopping to be an external threat while only 22 per cent said it will have a direct impact on their organisation.

” The rise of Omni-Channel is one of the most #Transformational Shifts that has occurred in Retail in recent times,” JDA Software chairman of the board,commented on the survey findings…

“Retailers who don’t understand the #StrategicAlignment, of their supply-chain with #ConsumerExpectations, are in danger of becoming non-competitive,” he added.

Survey said CEOs Top Priorities are ” centered on more traditional areas of growth” –” by entering into new regions and markets”, “by opening more Stores”, OR ” through Mergers & Acquisitions”…

” These priorities highlight potential #MissedOpportunities, for more than two-thirds of CEOs who failed to consider Enhancing #DistributionCapacity and Supply-chain as ” a key contributor to drive Profitable Growth”, the survey said…

CEOs think THREE Fundamental Risks will have the most impact on their organisation over the Next THREE Years :

  1. Increasing competitive threats (41 per cent).
  2. Margin erosion and cost reduction (39 per cent).
  3. Attracting and retaining customers (24 per cent).

This global survey was conducted amongst 409 Retail Chief-Executives…!!

“Legislative issues, Lack of Quality Retail space are impediments”, to spread of Organised Retail in India | CBRE

“High Rentals  and “poor Mall-Management” are deterrents to Entry & Expansion of #InternationalRetailers in the country”, says a study by the real estate services firm..!!

Almost 60% of global retailers have a presence in India, but legislative issues and lack of quality space continue to impede the growth of organised retail in the country, CBRE Research has said in a study titled ‘Expanding Horizons of Global Retailers in India’.

The multinational #RealEstateServices firm analysed more than 300 prominent global retailers in the study to identify Operating-trends, #ExpansionStrategies and extent of #MarketPenetration across Leading cities in the country..

The firm undertook this project in an effort to map and analyse the spread of international retailers in India, where the expansion of global retailers has been a major driver of real estate demand..The study analysed Brands across Luxury, Premium & High-end Categories, and judged their presence in the country on the basis of #StandaloneStores within Malls as well as Traditional Marketplaces / #HighStreets…

Although India has emerged as a prominent destination for #RetailSegments, such as Food and Beverages (F&B), #FashionApparel and BigBox / #HypermarketChains, almost FOUR out of TEN #GlobalRetailers, are yet to set up shop in the country…the study found..

Nearly 80% of the retailers that have entered India are present in New Delhi while the figure is 70% for Mumbai and nearly 50% for Bangalore. This signifies the significance of the metropolitan cities as the preferred entry points for international retail chains..

The retailers chose tier II cities such as Pune, Hyderabad, Kolkata, Ahmedabad, Chandigarh and Jaipur next, the study shows….” India is still a largely untapped and #unorganisedRetail Market as a large number of prominent #GlobalRetailers are yet to commence operations here…The country holds a considerable advantage over other #EmergingRetailDestinations due to its strong Domestic-consumption and Low-rate of #MarketPenetration by #InternationalRetailers…

India’s new middle class is increasingly becoming brand conscious and willing to spend on quality goods, a trend which is creating numerous business opportunities for mid-range international brands. With political and economic sentiments already showing signs of improvement, we believe this is the right time for international retailers to look at India for expansion into the region,” said chairman and managing director of CBRE, South Asia..

American brands account for the bulk of retailers covered in the CBRE study, comprising 30% of the total…Most US retailers are present in the mass market F&B category while retailers from Italy and the UK account for about 19% and 16%, respectively, and are largely concentrated in the luxury segment..

The study also points to the lack of Quality #RetailRealEstate supply, coupled with prohibitive-legislation that has acted as an impediment to the spread of organised retail in India..

Compounding the problem of limited investment-grade supply of #RetailSpace are high-rentals and lack of professional #Mall-management, all of which make for a challenging operating environment for Global Retailers, the study says…!!

“Stress Testing” the “Character of Future Business-Leaders”: “Leadership Under Fire” | Ivey Business Journal

Early one morning late last summer, a bus load of ambitious Ivey Business School students departed from Western University’s campus in London, Ontario, and headed north for a unique course on leadership. The individuals in question were not exactly sure what to expect when they arrived at their destination—Canadian Forces Base Borden…!!

From the course outline, the students knew #LeadershipUnderFire : Developing Character was a new program designed to challenge them both mentally and physically in an environment outside their comfort zones…. Many students, however, didn’t fully realize how much the course would empower them to explore their personal strengths and weaknesses and assess their suitability for leadership.

Some students imagined they had signed up for a field trip with relatively simple team building exercises and a fun obstacle course. At least one didn’t even bother to bring along boots and a backpack, which were clearly listed as required items on the course equipment list. These harmless misconceptions were quickly dispelled along with the dangerous and false idea that good leadership comes easy to intelligent and confident people.

“We’re not in Kansas anymore,” one student not-so-playfully noted after being ordered off the bus by a professional Canadian soldier, who made it clear (in the colourful terms deployed by hardened boot camp instructors) that the days and nights ahead would be far more educational than pleasant for members of the group that soon became known as Ivey Platoon…

Good leaders learn from experience…. If they are lucky, they eventually become aware of their limitations and take steps to address them. Unfortunately, history shows that too many leaders fail to become aware of their blind spots until it is too late. It doesn’t have to be this way…

 

The need to stress test balance sheets of financial institutions is generally accepted as a prudent form of risk management…. So why not test the character of managers of organizations where #LeadershipCharacter plays a major role in determining success or failure ? Better yet, why not give business students a chance to assess themselves before they accept the significant responsibilities that come with managing organizations in today’s challenging environment ?

This article discusses the need for more business school courses like Leadership Under Fire, which was developed in partnership with Canada’s military to allow Ivey students to gain a deep  understanding of their strengths and weaknesses before they graduate and serve future employers as risk managers, department heads, chief executives, directors and boardroom chairs…!!

THE NEED TO FOCUS ON LEADERSHIP-CHARACTER :

Forbes columnist Mike Myatt recently observed that the world suffers greatly at the hands of people who confuse their need for an ego boost or thirst for greed with leadership. “ Whether through malice or naïveté,” he writes, “ those who abuse OR tolerate the abuse of leadership place us all at risk. Poor leadership cripples businesses, ruins economies, destroys families, loses wars, and can bring the demise of nations. The demand for true leaders has never been greater – when society misunderstands the importance of leadership, and when the world inappropriately labels non-leaders as leaders we are all worse for the wear ”…!!

Improving the quality of leadership, of course, depends on the efforts of many of society’s stakeholders… As a business school, Ivey has long recognized its obligation to thoroughly examine, understand and commit to the development of good leadership. Following the financial crisis, Ivey faculty partnered with organizational leaders from outside academia to ask if better leadership would have made a difference..

The answer—an unequivocal yes—formed the basis of Leadership on Trial : A Manifesto for Leadership Development, which noted Good Leadership rests on THREE Pillars : “commitment”, ” competencies” and “character”… As explained by the authors (Gandz, Crossan, Seijts and Stephenson), when any one of the THREE Pillars is deficient, the shortfall will ultimately lead to problems. But while business schools have done an admirable job of researching and teaching the competencies that are deemed essential for individual and organizational success, the importance of leadership character and commitment as cornerstones in the development of the next generation of business leaders has been largely ignored.

To address this issue, Ivey compared the various strengths and weaknesses of leaders at companies that survived or prospered during the meltdown to those that didn’t. The school found “Good Leader Character” relies on having appropriate strength in 11 inter-related dimensions of leadership character: Accountability, Collaboration, Courage, Drive, Humanity, Humility, Integrity, Judgment, Justice, Temperance and Transcendence. If left unchecked, shortfalls or excesses in any of these areas can turn virtues into vices and ultimately lead to failure..

JOINING FORCES WITH CANADA’S MILITARY:

As noted above, the global economic meltdown reinforced Ivey’s commitment to identifying and promoting the prerequisites for good leadership. Since 2010, the business school has conducted research and published empirical and practitioner papers on leadership character for use in educational programs. Case studies with an explicit focus on character and commitment have been written. Special events and conferences that emphasize the three pillars of good leadership have been held. Speakers have been invited to address the issue in both conventional and unconventional ways. But all that still left a void because to understand the demands of good leadership in a way that will truly resonate, students need to do more than simply read or hear about the importance of character and commitment. They need to directly experience how their own character works in a team environment and how it holds up under duress.

Unlike the management skills required to run businesses, teaching someone to understand their character strengths and weaknesses isn’t something that can be done in a typical classroom, at least not effectively…

After all, one of the “Foundations of Leadership” is the “Ability to Accomplish a Task by influencing the Behaviour of other people”…To do that, a leader must be able to assess a situation, develop a plan, issue clear instructions and then supervise execution….And when trying to teach this in a traditional classroom setting, students never really get beyond assessing a situation and developing a plan. As a result, they never directly experience the challenges involved in issuing instructions and managing plan execution..

A solution to this dilemma was developed by two Canadian entrepreneurs with military backgrounds, Toronto-based corporate strategy consultant John Mercer, a former captain and personal assistant to the commander of the Canadian Army, and Larry Stevenson, managing director with Toronto’s Callisto Capital and former army platoon commander who revolutionized the Canadian book industry as founder of the Chapters retail chain..

Mercer (Ivey MBA, 1986) and Stevenson (Harvard MBA, 1984), who is currently Honourary Colonel of the Queen’s Own Rifles of Canada, had long agreed that business schools were better at producing managers than developing leaders. Together, they approached Ivey with the idea of combining business education with elements of the Basic Officer Training Course (BOTC), which teaches the basics of leadership to every officer in the Canadian Forces before they move on to more advanced training.

Our troops have long had a reputation for being well disciplined, highly effective and well led, which is why the level of trust and confidence in the Canadian Forces ranks high amongst institutions in this country. And the wisdom accumulated by successive generations of Canadian military leaders represents an underutilized Canadian competitive advantage. The development of business school courses that tap into this knowledge is overdue.

Designed to be both a formative and transformative experience that students will reflect upon throughout their career,Leadership under Fire is all about getting the job done. Students must do much more than simply collaborate to achieve goals. They need to demonstrate good judgment, drive and courage in an ambiguous and challenging environment while knowing they will be held accountable for their actions and attitudes as leaders and followers. Simply put, partnering with the Canadian Forces (on a cost recovery basis) allows Ivey to introduce its students to valuable military insights while honing their individual leadership, followership and teaming abilities and instilling them with an understanding of the critical role character and commitment play in good leadership…

HOW IT WORKS :

Leadership Under Fire, which is delivered by veteran Canadian officers and non-commissioned officers in partnership with Ivey faculty, has several objectives, including :

  • To create an awareness of the character-related challenges encountered in leadership and decision making in challenging and ambiguous situations;
  • To deepen student understanding of the role played by virtues and values in leadership effectiveness and the shaping of individual decisions and actions; and 
  • To have students think hard about their own strengths and weaknesses (as both leaders and followers) and how to develop and maintain the required commitment, competencies and character it takes to be a good leader.

Students are divided into units with military mentors, issued uniforms, assigned ranks and then expected to effectively perform as a team while facing various challenges that expose their strengths and weaknesses in both leading and following positions.

While the course features leadership presentations by both military and business leaders, the focus is on task-oriented problem solving in stressful and uncertain contexts…Each student unit, for example, is required to assess practical problems like clearing a minefield….!!

They must develop a plan of action, communicate clear instructions and work as a team to complete the task. Unlike the case method used in class, the focus is on “ what to do ?” as opposed to, “ what would you do ..? ”

Pretty much anyone, of course, can learn to poke a stick in the sand to clear a path through a mock minefield. But having the discipline and patience it takes to do it to military standards as part of a team exhausted by late night learning exercises and early morning marches (while sporting backpacks and carrying field equipment such as water cans and medical stretchers) is something completely different, especially when Mother Nature proves she has what it takes to be a boot camp instructor by alternatively adding torrential rain and scorching humidity, not to mention bugs and poison ivy, to the list of things making it hard to concentrate…

Situational elements complicate the execution of the tasks assigned in real-life, so students participating in Leadership Under Fire quickly learn not to expect a time out to deal with bad weather or any other unexpected obstacle that makes completing tasks more difficult..

Keep in mind that tension and irritants are part of the program, making execution of assignments a true learning experience. In the field for three grueling days, students experience stress, physical fatigue and sleep deprivation. Meanwhile, military professionals constantly push the students outside their comfort zone while demanding cleanliness, discipline and respect. There is no downtime from learning. Something simple like forgetting to serve bacon with the breakfast prepared for the core group of master corporals leading the program’s exercises quickly turns into a long hard lesson on the importance of attention to detail…!!

MEASURING IMPACT :

As an educational experience, Leadership Under Fire offers students an opportunity to open their minds and demonstrate courage by putting their leadership and followership abilities to the test in fluid and uncomfortable situations…But the physical side of the course is merely a vehicle to help students to reflect on their own character and developmental needs because good leaders require self-awareness and reflection capabilities..

Feedback on performance from faculty and military personnel plus peer evaluations on the student’s leadership and follower skills provides each participant with a road-map for personal improvement. This requires students to be open to constructive criticism that in many cases they did not expect or want to hear….!!

The following comments are just some of the wide-ranging personal-insights voiced during and after the course :

Being a great leader is to keep improving and learning from your mistakes and past experiences. Whether positive or negative there is a lot to learn from our past experiences, especially when we take the time to reflect upon them. In hindsight, I can see the best lessons come from my failures. It is through failures that the best successes are made..

  • I quickly learned this course was not only about being a good leader under normal circumstances but rather more heavily focused on being a good leader when everything is going wrong.
  • Remaining calm under pressure is something I need to work on. The only viable way to do this is to continue to pursue experiences like the Leadership under Fire course that will test my decision-making abilities under pressure.
  • I displayed bad temper because I didn’t stay calm and lacked self-control. I regret the way I first reacted when feeling overwhelmed… I realize that there will be many times when I will encounter unfamiliar and difficult situations. I believe the key to getting past these challenges is to stay calm and think clearly which is hard to do when you are stressed and anxious.
  • I realize now … reflection is very difficult and can be unpleasant because it is painful to think of things we put out of our minds for a reason – it can be embarrassing to look back on past failures. Our society, which values perfection, or at least a perfect image, certainly doesn’t encourage us to reflect.
  • Sometimes it takes a course like Leadership under Fire to expose your vulnerability and perhaps admit that you are not perfect.
  • Humility is hard to swallow – not everyone has it. I don’t always have it. One of the greatest challenges of Leadership under Fire was recognizing weaknesses without making justifications for the shortcomings.
  • I definitely learned a lot about how I lead and identified some major things I need to improve on. I think the stress factor was needed to remove the guise that we often put up in order to see our true character.

The deliverable for the course is a comprehensive self-reflection. Before they start, students complete an assignment that requires them to engage in a “deep excavation” around who they are, what they value and why they are who they are, which opens their minds to who they hope to become and what must be done to make it happen. Each student also completes the Leaders Character Insight Assessment (LCIA), a self-assessment resource to help individuals unpack the dimensions and elements of leader character…. Other inputs used in the reflection process range from assigned readings on leadership development and speaker presentations to team debriefings and peer reviews of individual performance.

Following completion of a final self-reflection paper, participants receive a report that provides individual feedback on the 11 dimensions of leader character and their associated elements. The report also provides suggestions on how to enhance or strengthen the character dimensions.

Leadership Under Fire concludes with a formal reception and dinner. At this point, students get a well-deserved chance to relax, but the learning continues. Military personnel, including war veterans, are on hand, along with representatives from the Ivey Veteran’s Group, to share their experiences and offer valuable perspectives on leadership. Brigadier-General (retired) Gary Stafford, for example, was the guest of honour last year. After hearing about his experiences overseas, the members of Ivey Platoon gained even more appreciation for the role character and commitment play in good leadership…

As the Canadian Forces winds down its commitments in Afghanistan, there is an abundance of leadership experience and leadership character development knowledge that can be shared with educational institutions producing our economy’s future leaders….More business schools just need to tap into it….!!

“Assessment of Risks in Investment Decisions”: help Managers decide “Capital Project Best-Fit, Portfolio & Risk-Tolerance” | McKinsey

Never is the “Fear Factor” higher for Managers than “when they are making Strategic-Investment decisions on multi-billion-dollar capital projects”…

With such High-stakes, we’ve seen many managers prepare elaborate financial models to justify potential projects. But when it comes down to the final decision, especially when hard choices need to be made among multiple opportunities, they resort to less rigorous means—arbitrarily discounting estimates of expected returns, for example, or applying overly broad risk premiums.

There are more transparent ways to bring assessments of risk into investment decisions. In particular, we’ve found that some analytical tools commonly employed by oil and gas companies can be particularly useful for players in other capital-intensive industries, such as those investing in projects with long lead times or those investing in shorter-term projects that depend on the economic cycle… The result can be a more informed, data-driven discussion on a range of possible outcomes. Of course, even these tools are subject to assumptions that can be speculative. But the insights they provide still produce a more structured approach to making decisions and a better dialogue about the trade-offs.

Some of the tools that follow may be familiar to academics and even some practitioners. Many companies use a subset of them in an ad hoc fashion for particularly tricky decisions. The real power comes from using them systematically, however, leading to better decisions from a more informed starting point : a fact-based depiction of how much a company’s current performance is at risk; a consistent assessment of each project’s risks and returns; how those projects compare; and how current and potential projects can be best combined into a single portfolio….!!

Assess how much current performance is at risk :

Companies evaluating a “New ” Investment Project ” sometimes rush headlong into an assessment of risks and returns of the project alone without fully understanding the sources and magnitude of the risks they already face…This isn’t surprising, perhaps, since managers naturally feel they know their own business. However, it does undermine their ability to understand the potential results of a new investment. Even a first-class evaluation of a new project only goes so far if managers can’t compare it with the status-quo OR gauge the incremental risk impact…

Evaluate each project consistently :

Once managers have a clear understanding of the risks of their current portfolio of businesses, they can drill down on risks in their proposed projects and eliminate the need—and the temptation—to adjust net present value (NPV) or risk premiums arbitrarily…What’s needed is a more consistent approach to evaluating project economics and their risks, putting all potential projects on equal footing. an overview of standardized summary metrics for risk and return; and an explicit description of the sources of Risk (above Exhibit).

The project team specifies the basic economic-drivers of the project, but the central strategic-planning and risk departments prescribe consistent key assumptions, help to assess and challenge the risks identified, and generally ensure that the method underlying the analysis is robust.

This approach is pragmatic rather than mechanical. A corporate-finance purist might challenge the idea of a probability distribution of discounted cash flows and the extent to which a chosen discount rate accounts for the risk already, but in practice, simplicity and transparency win over. The project displayed in above Exhibit, is one where the economics are clearly worse than in the original baseline proposal; indeed, this project is only 25 percent likely to meet that baseline. Nevertheless, it has more than a 90 % chance of breaking-even. And even after taking into account the potential need for additional investment after risks materialize, the project has attractive returns…

Making this extra information about the distribution of outcomes available shifts the dialogue from the typical ”  Go/No-Go “ decision to a deeper discussion about how to mitigate risk. In this case, it is clearly worth exploring, for example, how to reduce the likelihood of over-runs in capital expenditures in order to shift the entire probability distribution to the right. This is likely considerably easier to achieve if started early.

Prioritize projects by Risk-adjusted Returns :

The reality in many industries, such as oil and gas, is that companies have a large number of medium-size projects, many of which are attractive on a stand-alone basis—but they have limited capital headroom to pursue them. It isn’t enough to evaluate each project independently; they must evaluate each relative to the others, too.

It’s not un-common for managers to rank projects based on some estimate of profitability OR ratio of  NPV to investment. But since the challenge is to figure out which projects are most likely to meet expectations and which might require much more scarce capital than initially anticipated, a better approach is to evaluate them based on a risk-adjusted ratio instead. At one multinational downstream-focused oil company, managers put this approach into practice by segmenting projects based on an assessment of risk-adjusted returns and then investing in new projects up to the limit imposed by the amount of capital available (below Exhibit). The first couple of iterations of this process generated howls of protest. Project proponents repeatedly argued that their pet projects were strategic priorities—and that they urgently needed to go ahead without waiting until the system fixed all the other projects’ numbers.

The arguments receded as managers implemented the process. Projects that clearly failed to meet their cost of capital—the lowest cut-off for Risk-Adjusted Returns—were speedily declined or sent back to the drawing board. Those that clearly met an elevated hurdle rate were fast-tracked without waiting for the annual prioritization process. Projects in the middle, which would meet their cost of capital but did not exceed the elevated hurdle rate, were rank ordered by their risk-adjusted returns. For these projects, adhoc discussion can shift the rank ordering slightly. But, more important, the exercise also quickly focuses attention on the handful of projects that require nuanced consideration. That allows managers to decide which ones they can move forward safely, taking into account their risk and the constraints of available capital…

Determine the Best Overall Portfolio :

The approach above works well for companies that seek to choose their investments from a large number of similar medium-size projects. But they may face opportunities quite different from their existing portfolio—or they must weigh and set project priorities for multiple strategies in different directions—sometimes even before they’ve identified specific projects. Usually this boils down to a choice between doubling down on the kinds of projects the company is already good at, even if doing so increases exposure to concentrated risk, and diversifying into an adjacent business. Managers at another Middle Eastern energy company, for example, had to decide whether to invest in more upstream projects, where they were currently focused, or further develop the company’s nascent downstream portfolio. Plotting the options in a risk-return graph allowed managers to visualize the trade-offs of different combinations of upstream and downstream portfolio moves…

In this case, doubling down on up-stream investments would have generated a portfolio with too much risk. Emphasizing the down-stream, with only a slight increase in up-stream activity, improved on the status-quo, but it left too much value on the table. Through the exercise, managers discovered that a moderate amount of commodity hedging to manage margin volatility would allow the company to combine a reduced upstream stake with a significant downstream one. The risks of the upstream and downstream investments were quite diversified—and thus the company was able to pursue a combined option with a more attractive risk-return profile than either option alone.

The power of the approach lies in nudging a strategic portfolio decision in a better direction rather than analytically outsourcing portfolio construction. Managers in this case made no attempt, for example, to calculate efficient frontiers over a complex universe of portfolio choices. Oil companies that have tried such efforts have often given up in frustration when their algorithms suggested portfolio moves that were theoretically precise but un-achievable in practice, given the likely response of counter-parties and other stakeholders…

Managing Risk (and Return) in capital-project and portfolio decisions will always be a challenge… But with an expanded set of tools, it is possible to focus risk-return decisions and enrich decision making, launching a dialogue about how to proactively manage those risks that matter most in a more timely fashion…

“How GE Stays Young & Relevant”: an “icon of global Management Best-Practices”| by: Brad Power | HBR

“GE (General Electric) is an icon of management best practices. Under CEO Jack Welch in the 1980’s & 1990’s, they adopted operational efficiency approaches (“Workout,” “Six Sigma,” and “Lean”) that reinforced their success and that many companies emulated”…

But, as befits a company that has been around for 130 years, GE is moving on. While Lean and Six Sigma continue to be important, the company is constantly looking for new ways to get better and faster for their customers. That includes learning from the outside and striving to adopt certain start-up practices, with a focus on THREE Key-Management processes :

  1. Resource Allocation that nurtures Future Businesses
  2. Faster-cycle Product Development
  3. Partnering with Start-ups. 

1. Resource Allocation – Incubating a protected class of ideas :

A fundamental challenge of any firm – especially a huge global company such as GE – is how to balance nurturing tomorrow’s future businesses, with the resource demands for running and improving today’s operations. You need to think like a portfolio manager, allocating resources both to innovate in your core and for the future. Knowing that today’s operations will almost always win the lion’s share of resources, you need to consciously create a protected class of innovative ideas to invest in, even if money is tight.

For example – GE incubated an energy storage company (“Durathon”), which has gone from the lab to a $100 million business in five years. In 2009, GE’s transportation unit developed a new sodium battery for a hybrid engine for locomotives. Chief Marketing Officer, told me they looked to see how they could take this battery technology to new markets. After first targeting backup power for data centers, they settled on providing backup power for cell phone towers in countries with unreliable electrical grids, such as in Africa and India. Says Comstock, “You have to believe that energy storage has a big future.” It took the financial backing and technical support of GE and the support of CEO Jeff Immelt, to nurture this business through numerous technical and business model changes. Marketing plays a catalyst role, providing growth funding. And after accumulating significant experience with this portfolio approach, GE is focusing today on fewer things that they’re incubating in a bigger way.

2. Product Development – Getting closer to Customers & Moving Faster :

Organic Growth depends on discovering breakthrough ideas, leveraging technology, and getting closer to customers. As it turns out, getting the breakthrough ideas is usually the easy part. The hard part is executing the idea to build a business, which takes a process that actually works.. In our current fast-paced environment of constant change, you need a product development approach that relies on many fast cycles of experimentation, reviewing prototypes early on with customers to learn what provides value, and being flexible if customer feedback suggests new directions.

As I described in a previous post, GE is working with Eric Ries, a Silicon Valley entrepreneur and author recognized for pioneering the Lean Startup movement. The “Lean Startup approach” is enabling GE to take “Agile” & “Lean” methods, which they had been using to improve operations, and apply them to starting businesses…

They have branded it “FastWorks.” And it has helped not only provide a new product development process, but a role model for a new culture based on a venture model. People in finance at GE, typically focused on return on investment and payback periods, love FastWorks because they get a better throughput of ideas.

3. Partnering – Getting ” ideas from Start-ups” :

Leading companies have been using “Open Innovation,” collaboration, and joint ventures for many years to get a shot of adrenaline, find new markets, and get to them faster…What’s new is Partnerships by large & successful companies with start-ups for joint incubation of innovative business ideas.

“Despite all their resources, big companies realize they can’t tackle big challenges alone”…They need to tap into young, entrepreneurial companies filled with brilliant data scientists, restless tinkerers, and passionate innovators. On the other hand, start-ups benefit from the resources, customer relationships, expertise, and scale of the established companies..!!

GE has actively created several “Eco-systems” with start-ups… For example :

  • In March the company formed a joint venture with Local Motors, a “co-creation company” that taps into an online community of car enthusiasts (engineers, mechanics, and industrial designers) to design new vehicles. GE intends to use Local Motors’ crowd-sourced workforce model to design new products, initially for GE Appliances.
  • GE has formed a partnership with Quirky, a crowd-sourced innovation platform, to invent connected products for the home: innovators submit ideas, which are voted on by Quirky’s community, and the promising ones are refined by Quirky’s designers and engineers.
  • Through Kaggle, another GE partner that is a community of data scientists, GE asked for algorithms to optimize airline flight paths and reduce delays – ultimately improving air travel overall.
  • In advanced manufacturing, GE turned to GrabCAD, asking their experts to help redesign a metal jet engine bracket with the goal of making it 30% lighter while preserving its integrity and mechanical properties like stiffness. Participants from 56 countries submitted nearly 700 bracket designs, and the winner was an engineer from Indonesia who reduced the weight of the bracket by 84%.
  • Finally, GE has created GE Ventures, a group in Silicon Valley that spends their time not just investing ($150 million annually), but forming technical and commercial collaborations with start-ups in energy, health, software, and advanced manufacturing.

GE’ s current Focus on ” innovation” and on these ” THREE Key Management processes” – which draw on the techniques and the energy of start-ups – represents the latest wave of improvement over a long and successful history. By working with and emulating start-ups, GE hopes to both grow their core offerings and disrupt their current way of doing business — and to keep an “Old” company “Young”.

And as one of the world’s largest and most respected companies, it’s easy to imagine that other large companies will soon be following suit….!!

“There are 450 Strategic Platforms”; which one “works with your Business-Model?”| Leaders Laboratory

Of the 450 Strategic-platforms…,Which one do I pick for my company ??  Which one works with my Business-Model??  Which one works with the Skill-Level of my Employees ?? Which one will get me Where I want to Go ?? “

All are questions I should never stop asking…yet I can’t investigate every Strategic-Model, I don’t have TIME to test every One of them…to see which one will work….Even after I select a model, how do I measure its effectiveness ??

The “model I select” should have the following considerations :

  • What is the Life-cycle of my company ?
  • What is the Life-cycle of my products/services ?
  • Which one works with my Business-Model ?
  • What am I trying to Accomplish ?
  • What is the Maturity-Level of my Employees ?
  • How well does my Executive-Team work together ?
  • Do I have a Mix of Generations on my Team and in my Company ?
  • What does my Strategic-Canvas Look like ?

Strategy isn’t just about the Right Product at the Right Time to the Right People…It’s about Leveraging and maximizing my Resources..” Pace, Rhythm, and Alignment of your organization” so it runs like a finely tuned-automobile.

How your team manages through turbulence is the sign of a High-Performing Team.  This is why it is essential the team prepare the strategic-plan together and evaluate for adjustments on a quarterly basis…The variables used to create the strategic-plan come from the team, not from an outside industry expert, from you..

Which of the 450…will get me where I’m trying to go ??  Depends on the Resources available to me.  I know the job of the best CEO’s is to find the best resources I can afford, ” when I need them “ and ” Not “ sooner.

I use the following Checker-Board (above exhibit) to help me determine the strategy that will best assist me in making my Next moves for Growth.

Where and how to best use my time and money to grow my company depends on how I answer the above list of questions ??

Leadership, systems and structure, and market dynamics do not require the same level of resource focus at the same time… If I did focus on all at the same time the energy would be wasted, not all levels can or need to grow at the same time.

Knowing when to apply the right resources at the right time is the key to leveraged growth…A high-performing Executive Team will provide the right feedback at the quarterly strategy-meetings to help “determine where the greatest focus should be applied in order to move the needle with the least amount of effort” – yet, effort is required in order to move the needlebut how much ??……Get thinking…!!

“Corporate-Governance Reform in India”: Gauging Impact on Investors | Aligning Listing, with Companies Act 2013 | CFA Institute

Approval of all material related-party transactions by independent share-holders (i.e., related parties have to abstain from voting) is standard in many markets around the world and considered a best practice. Now, listed companies in India will abide by this rule beginning in October 2014 as part of a slew of corporate governance reforms announced recently, by the Securities and Exchange Board of India (SEBI). Will these new measures bring much-needed relief to minority shareholders, or is it just old wine in a new bottle ??

SEBI consulted industry participants in January 2013 to revise and overhaul Clause 49 of the Equity Listing Agreement that deals with the corporate governance norms for listed companies in India….CFA Institute, in conjunction with the Indian Association of Investment Professionals (IAIP), officially responded to the consultation by highlighting our policies and global best practices. The recently revised SEBI norms are expected to enhance the corporate governance framework to reflect global best practices. The requirements in certain areas, including independent directors and related-party transactions, are more stringent than the new Companies Act 2013.

Some of the significant changes are discussed below : 

 

Aligning Listing Agreement with the Companies Act 2013 – Companies Act requirements on issuing a formal letter of appointment, performance evaluation, and conducting at least one separate meeting of the independent directors each year and providing suitable training to them are now included in the revised norms of SEBI. Independent directors are not entitled to any stock option, and companies must establish a whistle-blower mechanism and disclose it on their websites.

Restricting Number of Independent Directorships – Per Clause 49, the maximum number of boards a person can serve as independent director is seven, and three in cases of individuals also serving as a full-time director in any listed company. The Companies Act sets the maximum number of directorships at 20, of which not more than 10 can be public companies. There are no specific limits prescribed for independent directors in the Companies Act.

Although SEBI reforms seem to be moving in the right direction, these limits may initially pose challenges in sourcing qualified independent directors for listed companies.

Maximum Tenure of Independent Directors – Based on the Companies Act as well as the new Equity Listing Agreement, an independent director can serve a maximum of two consecutive terms of five years each (aggregate tenure of 10 years). These directors are eligible for reappointment after a cooling-off period of THREE years.

Can a director who has served two five-year terms be considered independent after a cooling period of three years ? CFA Institute recommends that board members limit their length of service on a specific company board to no more than 15 years to ensure new board members with fresh insights and ideas are elected.

Board-Mix Criteria Redefined – Per Clause 49 of the Equity Listing Agreement, 50% of the board should be made up of independent directors if the board chair is an executive director. Otherwise, one-third of the board should consist of independent directors. Additionally, the board of directors of a listed company should have at least one female director.

While it is a welcome change that SEBI mandates a female director, will it make a huge difference to the effectiveness of boards ?

CFA advocates that diversity should be embraced from all angles, such as diversity of backgrounds, expertise, and perspectives, including an increased investor focus to improve the likelihood that the board will act independently and in the best interest of shareholders.

Role of Audit Committee Enhanced – The SEBI reforms call for two-thirds of the members of the audit committee to be independent directors, with an independent director serving as the committee’s chairman. While the Companies Act requires the audit committee to be formed with a majority of independent directors, SEBI has gone a step further to improve the independence of the audit committee.

The role of the audit committee also has evolved to incorporate additional themes from the Companies Act, such as reviewing and monitoring auditor independence, approval of related-party transactions (RPTs), scrutiny of inter-corporate loans, valuations, and evaluations of internal financial controls and risk management systems.

More Stringent Rules for Related-Party Transactions – The scope of the definition of RPTs has been broadened to include elements of the Companies Act and accounting standards :

  • All RPTs require prior approval of the audit committee.
  • All material RPTs must require shareholder approval through special resolution, with related parties abstaining from voting.
  • The threshold for determining materiality has been defined as any transaction with a related party that exceeds 5% of the annual turnover or 20% of the net worth of the company based on the last audited financial statement of the company, whichever is higher.

Since SEBI Clause 49 requires shareholder approval for all material RPTs, with no exception for transactions in ordinary course of business or at arms-length, companies feel that this will result in practical difficulties (i.e., compliances costs and delays), particularly for those that regularly transact business with subsidiaries.

The ultimate effectiveness of such legislation will depend upon the degree and quality of enforcement, or the monitoring capabilities of the regulator.

Improved Disclosure Norms – In certain areas, SEBI resorts to disclosure as an enforcement tool. Listed companies are now required to disclose in their annual report granular details on director compensation (including stock options), directors’ performance evaluation metrics, and directors’ training. Independent directors’ formal letter of appointment/resignation, with their detailed profiles and the code of conduct of all board members, must now be disclosed on companies’ websites and to stock exchanges.

E-voting Mandatory for All Listed Companies – Until now, resolutions at shareholder meetings in listed Indian companies were usually passed by a show of hands (except for those that required postal ballot). This means votes were counted based on the physical presence of shareholders. SEBI also has changed Clause 35B of its Equity Listing Agreement to provide e-voting facility for all shareholder resolutions.

We think this is a pertinent change as it will allow minority shareholders to express their voices at shareholder meetings without having a physical presence. CFA Institute has advocated for company rules that ensure each share has one vote.

Enforcement – SEBI is setting up the infrastructure to assess compliance with Clause 49 to ensure effective enforcement. Companies need to buckle up and assess the impact of these reforms and step up compliance.

Industry Impact – I asked Navneet Munot, CFA, CIO of SBI Mutual Fund and advocacy director for IAIP, to gauge industry reactions. Mr. Munot was optimistic about SEBI boosting investor confidence through these sweeping changes, especially the potential to empower minority shareholders through e-voting, enhanced disclosures on remuneration that is aligned with global best practices, and by requiring independent share-owner approval for related-party transactions. Given India’s humongous need for risk capital, regulatory reforms and better enforcement are critical for market integrity and building investor trust, he said.

CFA Institute, along with the IAIP, is currently working on an investor’s guide to shareholder meetings in India to help retail and institutional investors understand the rights, role, and responsibilities of shareholders…

“Time For Retailers To Re-Evaluate” their Store Footprint : “One Size Does Not Fit All” | by: Laura Pomerantz | Forbes

“As digitally savvy shoppers continue to drive today’s retail environment, companies are being forced to strategically re-think their store footprint to be more relevant with these consumers”…

Increasingly, these important decisions have been moved into the boardroom, as real estate can be the most critical factor in a retailer’s operating and growth strategy and a key driver in unlocking value…Investors are demanding that retailers reassess their real estate to maximize their space, and we’re finding that as they do so, there is no longer a one size fits all model..

While in the past, a retailer’s needs might have consistently been a 1,500 square foot store in an “A” mall, today, there is a lot more to consider. Every retailer needs to address their real estate strategy in each of the markets they serve, and identify the right size space that makes sense for their business. This means smaller spaces for some, and larger spaces for others.

We’ve seen big box retailers like Best Buy and Staples move to smaller spaces to better serve the digitally savvy consumer, while others, such as leading men’s big and tall apparel retailer Destination XL, is catering to its customer with larger format stores to showcase its premium brand merchandise in wider aisles, with larger fitting rooms, sofas, chairs and flat-screen televisions.

Photo courtesy of: Pioneer Press Best Buy Mobile store in Mall of America -- Best Buy will continue to emphasize e-commerce and smaller stores to reshape its future

Further, as demand for  Michael Kors  products continues to grow, it is capitalizing on its strong opportunities with aggressive expansion in the  U.S., as well as in Europe and China. Having successfully expanded beyond apparel into handbags, small leather goods, eyewear, jewelry, watches, and footwear, the renowned global lifestyle brand has been moving to larger store formats to accommodate its growing number of product categories. Constantly delivering new innovation to its customers, the brand continues to grow its global footprint.

Conversely, some retailers are redesigning their stores to occupy a smaller footprint in order to greater utilize their space. Contemporary apparel retailer Scoop, for example, has begun moving to smaller spaces to provide a more exclusive experience for its customers. With less duplicative product, and a more intimate environment, Scoop is enhancing its customer shopping experience, while lowering overhead cost and increasing sales.

We are also seeing companies re-think their footprint, as they expand with new retail concepts. In an effort to reach different segments of the population, J. Crew is speculated to be developing a new store format aimed at budget-conscious shoppers, according to a recent Wall Street Journal article. If so, you can expect the retailer will look for appropriate locations, markets, and store sizes to attract this target customer.

So how should retailers evaluate their square footage ?

There are a number of factors to consider when assessing a retailer’s footprint, and each neighborhood needs to be addressed individually.  Importantly, a retailer will want to know the market potential in the given area. What is the population threshold, and could this location present further opportunities?  A retailer will also want to seek out any competition and determine if there is already over-saturation in its market niche or if it is strong enough to carry another retailer in that space. Further, who are the co-tenancies? Is the retailer’s customer already there? After a thorough evaluation, a retailer can appropriately determine its ideal square footage.

As retailers remain committed to driving shoppers back into the store, they have a lot to consider in terms of re-thinking their store footprint to align with today’s sophisticated consumers…!! 

At the same time, rental costs have risen dramatically in the last few years as new developments have slowed, which is forcing retailers to refocus their real estate strategies to maximize square footage and sales.

While this is driving some retailers to reduce their number of stores and relocate to smaller spaces, it is driving others to increase square footage and open additional stores. Clearly, there is not a one-size fits all approach.

Retailers need to develop the optimal strategies in the appropriate markets, location and space that make sense for their business..

“Why Do Leaders Ignore Risk ? ” : FIVE simple “Questions You Should be Asking” | by: Marge Combe | VMC

In a turbulent market-place, with steady risk and even some periodic Catastrophes (cyber-attacks, political issues, weather and earthquakes, as examples), Risk is something that should be a careful and objective consideration for all leaders…

Yet the NACD 2013–2014 Public Company Governance Survey found that only 26 % of companies have a defined risk appetite statement to guide their thinking about how to consider risk.

While that may be a new concept to many of us – it was to our team – it may point to a deeper reluctance on the part of leaders to give serious due diligence to the risks inherent in their businesses.

Studies are emerging that point to reactions of discomfort in dealing with risk.  These studies show that the “fight-or-flight” hormone cortisol is released in response to the stress induced when humans are faced with choices inherent in risk.  For example, in a December, 2013 study published in the Proceedings of the National Academy of Sciences of the United States of America, researchers found that when exposed over a period of days to a situation of uncertainty, the subjects became more risk-averse as time progressed. Conversely, studies find that in times of stability, leaders tend to underestimate risk…!!

Security guru Bruce Schneier notes, “We’re bad at accurately assessing risk; we tend to exaggerate spectacular, strange, and rare events, and downplay ordinary, familiar, and common ones”..

Neither approach to risk is responsible leadership – and, in fact, may prove to be poor leadership – usually and unfortunately, in retrospect. Responsible leadership demands clear-headed consideration of risks before the environment triggers the cortisol.  What are leadership questions you should be asking regularly in your organization about risks ??

1. What is important for us to protect at any cost, and where do we have some degree of tolerance ?  A baby food manufacturer cannot tolerate a food safety issue, but may be able to accept some risk around source of its product ingredients.  This question helps your organization to reflect rather than react when there are challenges.

2. What are our most constant risks, and how can we keep them in an acceptable range ?  Constant risks tend to be in such day-to-day issues as failures in suppliers or partners or transportation.  While not devastating, they can be disruptive in the moment if there isn’t a backup plan.  Good leaders assure these day-to-day risks have been considered and addressed.

3. How much will it cost to reduce a given risk, and would it be worth it ?  Keeping in mind Bruce Schneier’s comment about exaggerating the rare risks, it’s important for leaders to keep the organization from over-reacting to the one-in-ten-thousand chance of the spectacular disaster.

4. Can we afford to take more risk on this, and what are the worst case scenarios if we do ?  In those times of uncertainty when the tendency to entrench is high, a good leader will beg the question.  Often the worst case scenarios are not catastrophic, nor even of long-term impact.

5. How much total risk can we afford as an organization ?  It’s good to look at each risk independently, but at some point, the inventory of risks also has to be considered.  If TWO or THREE Risks were realized at the same time, what would it do to the company ??

A dauntless Leader does not shirk the responsibility to objectively consider the organization’s “ Risk Appetite ”, no matter the discomfort it engenders...If you find your head in the Sahara of risk, pull it out and start asking these questions… !!

Private Equity : “Changing perceptions & New Realities” ; “Need to adapt to changing conditions” | McKinsey

” Private-equity Industry performance is better than previously thought, but success is getting harder to repeat. Investors and firms will need to adapt to changing conditions”…

Private-equity performance has been misunderstood in some essential ways. It now seems that the private-equity industry decisively outperforms public equities with respect to risk-adjusted returns, which may prompt return-starved institutional investors to allocate even more capital to the asset class. But this good news comes with an asterisk: top private-equity firms now seem less able to produce consistently successful funds. That’s because success has become more democratic as the general level of investing skill has increased.

The new priority for success is differentiated capabilities…Limited partners (those who invest in the funds raised and managed by General Partners) expect funds that exploit a general partner’s distinctive strengths will do well, while more generalist approaches may be falling from favor. Institutional investors will need to get better at identifying and assessing these skills, and private-equity firms will need to look inward to better understand and capitalize on the factors that truly drive their performance..

A new understanding of an elusive industry :

Private equity has grown from the equivalent of 1.5 % of global stock-market capitalization in 2000 to about 3.9 % in 2012. Along the way it has boomed and busted alongside public markets, while inexorably taking additional share. At the same time, many have observed that private equity—though ostensibly an “Alternative” Asset Class—has in two ways drifted toward the mainstream. Several researchers concluded in the mid-2000s that, on average, buyout funds under-performed the S&P 500 on a risk-adjusted basis; only about a quarter of firms consistently beat the index. Other research has found that private-equity returns have become highly correlated with public markets.

As the perception of private equity’s differentiation has waned, the fees that the industry charges investors, already under pressure, have come to seem especially exorbitant to some. And as firms have come under fire for some of their practices, they have not always done a good job of explaining their role to the public.

These are serious challenges but, if returns are only average, none of the rest matters very much. Private-equity returns are, however, notoriously difficult to calculate. By and large, the industry does not publish its results; the data that are available can be inconsistent and hard to reconcile, as both private-equity firms and their limited partners use diverse approaches for their calculations. Making things more difficult, a database on which researchers have relied turns out to have had serious methodological issues.

Encouragingly, new research based on more recent and more stable data suggests that private-equity returns have been much better than previously supposed, though top firms’ performance is now somewhat less consistent… The conventional wisdom on returns stems from analyses of funds raised in 1995 and earlier. In January 2011, McKinsey developed an analysis for the World Economic Forum in which we found that funds created since 1995 appear to have meaningfully outperformed the S&P 500 index, even on a leverage-adjusted basis (Exhibit 1). Two academic teams have since reached similar conclusions. Both find that over the long term, private-equity returns have outstripped the public market index by at least 300 basis points.

Poised for growth, with new complications :

These insights on persistence and dispersion are important nuances to the larger story: private equity is a more attractive investment class than was previously understood. A 300-basis-point gap in returns makes a world of difference : a 9 % annual return from private equities is a big improvement on the 6 % OR so that institutional investors tend to expect from listed equities. Confirmation of this persistent performance superiority means that return-seeking limited partners, especially those like pension funds that also crave stability, will likely increase allocations to private equities. The industry can also look forward to a new wave of commitments from high-net-worth individuals as private-equity firms roll out new retail offerings and distribution mechanisms..

As a result, we believe the industry is on the verge of a new phase of growth in capital under management―though with the history of troubled data, the potential for other possibilities must be acknowledged. But where will this additional capital be deployed ? There are several possibilities. One is that fund size will rise as general partners seek larger deals. A recent McKinsey analysis found no meaningful correlation between performance and either deal size or fund size. If the boom era’s mega-deals prove successful and borrowing costs remain low, then more such large transactions are likely as the demand among institutional investors to deploy large amounts of capital continues to increase. Another possibility is that private-equity firms will look to more nascent markets and to adjacent asset classes. Finally, firms could expand the universe of potential targets simply by lowering their return expectations.

But before the industry can accelerate to its full potential, some questions must be answered. Limited partners are increasingly concerned about management fees; some also wonder if they can get the scale they need, or if private equity will remain a small slice of their portfolio. While fund-raising in 2013 was the highest in five years, many general partners are struggling to raise new funds on the heels of disappointing recession-era vintages, let alone to convince limited partners to commit larger sums. Both sides will need to take stock and design strategies to capitalize on the new realities in private equity.

An agenda for Limited Partners (LP) :

The shifts in the industry are pushing limited partners to rethink their general-partner selection capabilities. Despite the drop-off in persistence, the reward for selecting the best general partners is still great—but making that choice is now much more difficult. Track record is no longer a reliable indicator. General-partner selection is becoming more focused on understanding the capabilities that have driven past returns and assessing whether those capabilities are still present, relevant, and sufficiently differentiated to continue to drive out-performance into the future.

To make these assessments, limited partners will need to generate deeper insights into the drivers of private-equity performance, follow these insights to identify high-potential geographies and sectors, and have the conviction to use these insights to select external managers. The challenge of acting on conviction is particularly acute in the emerging markets, where shorter track records and even spottier data create further challenges in general-partner selection.

Achieving such insight will require real investment in research and in due diligence of managers. These capabilities should be built by enhancing the talent base within institutional investors and exploiting data through advanced analytics. In addition, investors will need to improve the general knowledge and understanding of private equity among their board members, as these directors are often entrusted with asset allocation and manager selection.

Some Limited Partners have begun to ” insource”, effectively to doing private-equity investments on their own…Recent academic research has found this approach preferable for institutional investors in certain circumstances; direct private investment saves fees and can generate better results than an external manager. The research considered a small sample of SEVEN Canadian pension funds that have enjoyed higher returns from their own deals than from their investments in private-equity funds or even from their co-investments in the funds’ deals…!!

While the returns may be enticing, this kind of forward integration is not for everyone. Many institutions may face daunting structural obstacles, notably in their ability to hire, govern, and retain top talent. And the effort put forth by the Canadian investors was substantial: first, they had to establish professionalism in their management and governance, including the board. To build and sustain internal teams of investment professionals with the right skills, the funds had to be able and willing to provide an attractive level of compensation that was frequently much higher than that of professionals in other asset classes. The funds had to learn to trust these professionals with investment decisions. And they needed to build strong research teams to understand the cyclical and structural trends of private markets to determine the optimal time to invest.

How General Partners (GP) might respond :

General partners have several options they might consider. To raise capital in a newly competitive era, private-equity firms must be able not only to point to a track record of success, as in the past, but also to say how that track record was achieved and, even more critically, how it will be maintained. As such, private-equity firms may need to develop a more detailed understanding of their past performance and be able to describe its fundamental underpinnings—in particular, the skills, brand, focus, and other capabilities that the firm brings to its deals. They may also need to explain how these capabilities are evolving to allow them to keep ahead in a competitive market. Limited partners are looking for clear, differentiated strategies, with relevant and proven capabilities; General Partners will need ready answers..!!

As a simple example of the kind of distinctive skill and insight that limited partners may now seek, McKinsey research has shown that Deal Partners with strong transaction backgrounds add considerable value to transactions in roll-ups (deals made to expand market share in a given industry)—but not as much when companies develop organically. The converse is true for those with managerial or consulting backgrounds.

Knowing how a differentiated value proposition and strategy for the future generates performance can help a General Partner(GP) articulate one that sets it apart from both its private-equity competitors and from Limited Partners(LP), that aspire to invest directly. It may want to review the possibilities for increasing its specialization, by sector, geography, or deal type. It should consider cataloguing its skills, identifying both the relevant abilities it has and those it needs to deepen or build from scratch. It can then raise funds for investments that can only succeed with those skills…Imagine a firm with exceptional skills in chemical deal making and operations. It might raise a fund with a 15-year lifetime, rather than the usual 10 years, to ensure that it was active through at least two of the industry’s cycles. And it might swear off any investment that is not directly tied to the sub-sectors in which it specializes.

As Limited Partners concentrate their investment with fewer firms, General Partners should consider ways to integrate investors further into their business system. General partners already regularly invite their Limited Partners to co-invest in some deals, where a decade ago they might have formed a consortium with other buyout funds. But more is possible. For example, General Partners may provide investment advice to Limited Partners on some portions of their portfolio that are not invested in private equity. A General Partner with expertise in China, for example, may counsel a Limited Partner on how to invest there. And General Partners might look to Limited Partners as an exit route for certain types of businesses that Limited Partners may want to own for the long term. All these closer relationships can benefit both parties..!!

General partners can also consider some bold changes to their incentive structures. In an era of smaller fund sizes, the 2 % management fee was designed to “keep the lights on”—that is, to cover basic operating costs. It was a way to simplify the annual process in which the investment firm submitted its budget to investors for approval. Today, even though most firms have lowered the fee, it is often a major source of income. Some institutional investors worry that it distracts managers from their main task of generating returns. Firms have an opportunity to distinguish themselves by shifting incentives away from the management fee and toward carried interest. This is not a zero-sum move; rather, it should increase the size of the profit pool that general partners and their investors share.

Along these same lines, firms can also offer options to their investors. Some leading firms, for example, now allow investors in some funds to choose either “1 & 20” (a 1 %  management fee and 20 %  of carried interest) OR “2 & 15”. Firms may also consider changes in the calculation of “Carry”. Measuring carry by its true rate of return rather than returns in excess of an absolute threshold (typically 8 % ), as is the common practice, can better align the interests of General Partners and their investors.

It remains to be seen if the next phase of private-equity growth can match the last boom…??  What does seem clear, though, is that Limited Partners(LP) will have to work harder and smarter to find Top-funds, and General Partners (GP) will need to become better marketers of their unique abilities…