Letter D

D

Decision Making: Decision making is a key element in strategic management. Good decision making is as much about collecting hard data and doing painstaking analysis as much about behavioral issues. According to Herbert Simon, the Nobel prize winner, decision making takes place in four stages. “Intelligence” involves discovering, identifying and understanding the problem. “Design” includes identifying and exploring solutions to the problem. “Choice” means choosing one of the alternatives. “Implementation” means making the chosen alternative work.

These stages explain how decision making should take place logically. In practice, the influence of various behavioral issues cannot be overlooked. Moreover, the four steps, instead of occurring sequentially, may overlap. And in many cases, decision making takes place in iterative fashion, accepting things that work and rejecting those that do not. Three key factors that are an impediment to good decisions are information quality, human filters and resistance to change. Information may not be accurate, complete, consistent or available on a timely basis. Managers have selective attention, various biases and focus on some dimensions of the problem while ignoring others. Last, but not the least, people are resistant to change. So, decisions often tend to be a balancing of the firm’s various interest groups rather than the most optimal solution.

The way people think, both as individuals and in groups, affects the decisions that they make. Bad decisions take place when the alternatives are not clearly defined; the right information is not collected and the costs and benefits are not accurately weighed. Sometimes the fault lies not in the decision-making process, but in the mind of the decision-maker. Managers often do not realize the various traps that exist while taking decisions. Some common traps include:

The anchoring trap. Managers tend to give disproportionate weight to the first piece of information they receive.

The status quo trap. People like to maintain the status quo, even when better alternatives exist.

The sunk-cost trap. Companies often perpetuate the mistakes of the past because they have invested so much in an approach or decision that they find it difficult to alter course.

The confirming-evidence trap. Managers tend to seek information to support an existing tendency and discount opposing information.

The overconfidence trap. Most people have an exaggerated belief in their ability to understand situations and predict the future.

The framing trap. People's roles in an organization influence the way problems are framed. So often a problem or situation is incorrectly stated.

Deming, William Edwards : (1900-1995): An American engineer who is regarded as the founder of total quality management. It was under Deming’s stewardship that Japan became renowned for producing innovative high quality products. No wonder the Japanese have named their premier quality award after him.

Deming understood that technology was not enough to tackle the quality problems. The people best equipped to resolve such problems, were those who worked with the system on a daily basis and who knew it best. Insights into the system and useful ideas for changing it had to percolate up from the bottom of the organization. So management had to shake up the hierarchy, drive fear out of the workplace and foster the intrinsic motivation of its employees.

Deming emphasized the systems approach (i.e., the interdependence of all the organizational units that work to accomplish the goals of an organization). Strongly opposed to traditional performance appraisal and merit pay, Deming argued that merit rating encouraged short-term performance undermined long-term planning, built fear, destroyed teamwork and fueled rivalry and politics. Deming argued that pay for performance was intrinsically unfair because it ascribed to the people in a group differences that might be caused totally by the system they were working in. If management did its job well in terms of hiring, developing employees, and keeping the system stable, most employees would perform as well as the system permitted.

Deming believed that the desire for achievement was fundamental to human nature. Employees wanted to be given the chance to demonstrate their abilities and exploit their potential. The greatest competitive advantage would accrue to companies that helped employees achieve their full potential. Deming contended that within a stable system, most fluctuations in individual performance over time would be attributable to natural variations in the system. Moreover, it was almost impossible to measure the contribution of a single individual within a system that was subject to the vagaries of numerous other variables.
Deming emphasized that by embracing appropriate principles of management, organizations could increase quality and simultaneously reduce costs (by reducing waste, rework, staff attrition and litigation while increasing customer loyalty). The key lay in practicing continual improvement and viewing manufacturing as a system, not as bits and pieces.
Deming articulated various principles for successful business transformation. Some of them are:
• Reduce dependence on mass inspection to achieve quality. Instead, improve the process and build quality into the product in the first place.
• Build leadership capabilities for the management of people, recognizing their unique abilities, capabilities, and aspirations. Leaders should help people, machines, and gadgets do a better job.
• Drive out fear and build trust so that everyone can work more effectively.
• Break down barriers between departments. Abolish competition and build a win-win system of cooperation within the organization.
• Eliminate slogans, exhortations, and targets asking for zero defects or new levels of productivity. Such exhortations only create adversarial relationships, as the bulk of the causes of low quality and low productivity lie in the system and thus lie beyond the power of the work force.
• Remove barriers that rob people of joy in their work. Abolish the annual rating or merit system that ranks people and creates competition and conflict.
• Involve people at all levels.
(See Total Quality Management)
Demographic Environment: The demographic environment takes into account factors such as age, population, immigration, marital status, sex, education, religious affiliations and geographic dispersion. Based on these characteristics, demand forecasts can be made and the market appropriately segmented. Unlike many other trends, demographic trends are generally stable and easy to predict. They are unlikely to change suddenly. So market forecasts can be made with a fair degree of accuracy. One of the important demographic trends of recent times, the ageing of Japan and Europe, for example, has major implications for marketers and pension fund managers.
(See Environmental Scanning)

Devil's Advocacy: A way of improving the decision making process. When a proposal is being discussed, someone can act as a devil's advocate and argue why the proposal should be accepted. By examining the downside, the risks associated with the proposal can be better understood and managed. The creativity guru, Edward De Bono calls it, black hat thinking. However, if taken too far, Devil’s advocacy may be equated with cynicism or obstructionism.

Diamond: A term coined by Michael Porter. According to Porter, the competitive advantage of an industry derives from the national `diamond', i.e. four different determinants, which are created within the nation state: factor conditions, demand conditions, related and supporting industries, and firm strategy, structure and rivalry.
Factor conditions: Factors can be grouped into a number of broad categories:
• Human resources: the quality, skills and cost of personnel.
• Physical resources: land, water, mineral or timber deposit, hydro electric power sources, fishing grounds and other physical traits.
• Knowledge resources: scientific, technical and market knowledge
• Capital Resources: the amount and cost of capital available.
• Infrastructure: the transportation system, the communications system, mail and parcel delivery, payments or funds transfer, health care and so on.
A nation’s firms gain competitive advantage if they possess factors that are significant to competition in a particular industry.
Basic factors are either unimportant to national competitive advantage or the advantage they provide for a nation’s firms is unsustainable. Advanced factors are more significant for competitive advantage. They are scarcer because their development demands large and often sustained investments in both human and physical capital.
Generalized factors, like the highway system, a supply of debt capital, or a pool of well motivated employees with college education support only rudimentary types of competitive advantage. They are usually available in many nations, and tend to be more easily nullified, circumvented, or sourced through global corporate networks. Specialized factors involve narrowly skilled personnel, infrastructure with specific properties, knowledge in particular fields, and other factors with relevance to a limited range or even to just a single industry. Specialized factors which provide more decisive and sustainable bases for competitive advantage require more focused, and often riskier, private and social investment.
The most significant and sustainable competitive advantage results when a nation possesses advanced and specialized factors needed for competing in a particular industry. Nations must also be good at upgrading the needed factors.
Demand Conditions: The composition of home demand, the size and pattern of growth of home demand, and the mechanisms, by which a nation’s domestic preferences are transmitted to foreign markets, shape the rate and character of improvement and innovation by a nation’s firms.
A nation’s firms are likely to gain competitive advantage in global segments that represent a large or highly visible share of home demand but account for a less significant share in other nations. Small nations can be competitive in segments which represent an important share of local demand but a small share of demand elsewhere, even if the absolute size of the segment is greater in other nations.
A nation’s firms are likely to be globally competitive if domestic buyers are among the world’s most sophisticated and demanding buyers for the product or service. Such buyers put pressure on local firms to meet high standards in terms of product quality, features and service. A nation’s firms gain a competitive advantage if the needs of home buyers anticipate those of other nations and become an early indicator of global buyer needs.
Related and Supporting Industries: National advantage is also determined by the presence in the nation of supplier industries or related industries that are internationally competitive. For example, Japanese machine tool producers have drawn on the expertise of world-class suppliers of numerical control units, motors and other components. Sweden’s fabricated steel products (like ball bearings and cutting tools) industry has leveraged the country’s strength in specialty steels. Japan’s global competitiveness in facsimile machines owes much to the country’s strength in copiers.
The presence of globally competitive suppliers creates advantages in downstream industries in several ways - efficient, early, rapid and sometimes preferential access to the most cost-effective inputs, superior coordination and faster innovation and upgrading. Competitive advantage emerges from close working relationships between world-class suppliers and the industry.
Firm strategy, structure and rivalry: The way in which firms are created, organized and managed as well as the nature of domestic rivalry determine global competitiveness.
Nations will tend to succeed globally in industries where the management practices and modes of organization prevalent in the country are well suited for generating competitive advantage. Italian firms, for example, are world leaders in a range of fragmented industries (lighting, furniture, foot ware, woolen fabrics and packaging machines) in which economies of scale are either modest or can be overcome through networks of loosely affiliated companies. Italian companies tend to pursue focus strategies, avoiding standardized products and operate in small niches with their own particular style or customized product variety. These firms do not have depth of management talent. Indeed, they are often, dominated by a single individual. Yet these firms can take quick decisions, rapidly develop new products and adapt to market changes with great flexibility.
Competition is possibly the biggest driver of improvisation and innovation. Rivalry increases the pressure to lower costs, improve quality and service and create new products and processes. Active pressure from rivals stimulates innovation as much from fear of falling behind as the inducement of getting ahead. Intense rivalry also puts pressure on domestic firms to sell abroad in order to grow. Particularly when there are economies of scale, rivalry increases the pressure to globalize. Toughened by intense rivalry, the stronger domestic firms are also equipped to succeed abroad.
(See Clusters)

Differentiation: A strategy that lays emphasis on offering a superior product, on some dimension(s), compared to what competitors are providing. Differentiation is possible along one or more of various dimensions – product features, quality, customer service, guarantee, distribution, delivery, product customization, etc.

A successful differentiation strategy emphasizes uniqueness in ways that are valued by buyers. If buyers are willing to pay for these unique features and the firm’s costs are under control, then the price premium will lead to higher profitability. The key success factor in differentiation is sound understanding of the buyer needs. A differentiator needs to know what buyers value, deliver that particular bundle of attributes and charge accordingly. By effectively serving a sub-group of buyers who will not consider other firms’ offerings as substitutes for this offering, the company can effectively lock up the segment.

A successful differentiation strategy reduces the head-to-head rivalry witnessed in price based competition. If suppliers raise prices, loyal customers who are not price conscious are more likely to accept the higher price that the differentiator passes on. Customer loyalty also acts as a barrier to new entrants and as a hurdle that potential substitute products have to overcome.

However, the differentiation strategy is not without its risks:

• If the basis for differentiation is easily imitated, it will not lead to a sustainable advantage. Then rivalry within the industry is likely to switch to price-based competition.
• Broad-based differentiators may be outmaneuvered by specialist companies who target one particular segment.
• If the strategy is based on continual product innovation, the company runs the risk of exploiting risky territory merely for followers to exploit the benefits.
• If the firm ignores the costs of differentiating, the premium prices charged may not lead to superior profits.
(See Generic Strategy)

Discovery Driven Planning: A term coined by Rita Gunther McGrath and Ian C. MacMillan. It refers to planning in the case of highly uncertain ventures, where new data and assumptions are incorporated on an ongoing basis and plans revised on the basis of new information flowing in from the market. This technique can be really useful for a multinational corporation, which is entering an emerging market. It is also useful in case of a new technology when it is difficult to make market forecasts based on the past. If past assumptions change, sales and cost projections and investment plans need to be altered.
(See Strategic Planning)

Diseconomies of Scale: Factors which increase unit costs with increasing scale of operations. Costs of coordinating activities tend to be high when the scale of operations is unwieldy. Large firms have many layers of hierarchy. Communication can get distorted as it is typically done through memos, reports or written requests. Worse still, written messages are often impersonal and less motivating than conversation. In small firms, decisions are usually made by the proprietor, or a small group of people at the top. One person taking the decisions ensures coordination of the firm’s strategy and actions. Large firms are typically organized as Business Units. Different units may head in different directions. So regular meetings involving senior managers are required to ensure coordination. This drives up costs significantly. While all these coordination and administration costs go up, the scale economies that come as a result of using large plant and equipment, may disappear beyond a certain size. As a result of all these reasons, costs may go up as the scale of operations increases, beyond a point.
(See Economies of Scale)

Disruptive Technology: A term coined by Clayton Christensen of Harvard Business School to describe a technology that is quite different from the existing one and offers a totally new price-value proposition. A disruptive technology may have less features but it may be cheaper and more user friendly. Such a technology tends to attract new customers for whom existing products are too expensive or too sophisticated. It is often newcomers and not established players who succeed in developing disruptive technologies. The PC has been a disruptive technology in relation to mainframe and mini computers. Despite being inferior to a mainframe in terms of performance capabilities, the PC is cheaper and easier to use for most people.
(See Innovator’s Dilemma, Innovation, Technology Risk)

Diversification: A strategy that involves going beyond the current line of business into a new one for various reasons:
• In the existing business, opportunities to grow may be limited.
• What starts out as a technology for one product may soon become a whole family of technologies generating a range of products targeted at different markets.
• Tired of doing the same type of work, managers may think actively in terms of entering a new business.
• Diversification may be prompted by the need for vertical integration to get greater control over the value chain.
• Most tax legislation incorporate incentives for reinvestment of profits. Firms may find it tempting to invest the surplus capital in a new business.

The strategic challenge in diversification is to determine whether there is a fit between the old and the new business. In general, the least risky form of diversification is offering a new product to existing customers. Then comes offering the existing product to a new market. The highest degree of risk is involved while introducing a new product in a new market. Companies which embark on diversification, in response to the poor performance of their existing business, usually fail.

There are instances of successful and unsuccessful diversification. Among the successful diversified conglomerates are General Electric, Siemens, Hoechst and ICI. On the other hand, there have been some classic failures like the Ruias of the Essar group in India and Metal Box (India) Ltd. which went into a terminal decline, following its ill-advised diversification into bearings.

In general, the less complex a business is, the easier it is to manage it and lower the probability of things going wrong. Highly diversified businesses tend to have more layers of management and more complicated structures and control systems. The top management has to depend on reports, figures and other quantitative data rather than a fundamental understanding of the customers and technology. So before diversifying, the firm must critically examine whether the move can create value for shareholders that they cannot create themselves by diversifying their investment portfolio. A small checklist is given below:

A. Core Competencies: These are the value creating skills which can be extended to new products or markets. A company can create value for its shareholders by leveraging its core competencies.
B. Market Power: By becoming larger through diversification, the business might be able to gather extra market power vis-a-vis competition, buyers, suppliers and substitutes.
C. Sharing Infrastructure: Infrastructure represents tangible resources such as production facilities. There may be scope to leverage this infrastructure and enter a new business.
D. Financial stability: A diversified business portfolio can balance cash flows across businesses effectively. For instance, businesses in growing markets may need more cash than they have while those in mature markets may have more cash than they need.
E. Growth: Diversification can provide opportunities for fast growth.
F. Risk: When different businesses respond differently to economic cycles, diversification can reduce business risk.

Peter Drucker’s insights on diversification though mentioned several years ago, are still useful. The diversified company must have a common core of unity to its businesses. The different businesses, technologies, products and activities must be united within a common market, Alternatively, the markets, products and activities must be linked together by a common technology. In general, market diversification based on common technology is more difficult than technological diversification based on a common market. Expertise in technology can be readily identified and acquired whereas that in markets is tacit knowledge based on experience and rather more difficult to assimilate.

Under what circumstances does diversification work? Milton Lauenstein argues that in well-managed conglomerates, the mediocre performance of unit managers is not tolerated. On the other hand, in focused firms, the CEO is rarely sacked unless the performance is disastrous. Moreover, well managed conglomerates tend to have a corporate staff who go through the annual budgets and long range plans of the operating units with a microscope. In contrast, directors of a focused company often do not spend enough time, going into details. If a conglomerate selects able unit managers, energizes them with a strong corporate purpose, monitors their progress and provides guidance and support when needed, it can outperform the boards of many independent companies. This is exactly what GE, the most successful large diversified company in corporate history, seems to have done under the leadership of Jack Welch.

However, diversified corporations must avoid heavy bureaucracy. They must focus on basic governance using a small corporate staff. As Lauenstein puts it: “If it begins trying to coordinate the activities of various units, it will be drawn into operating management functions. The corporate office will expand and begin making decisions which would be better made by executives in operating units. It then becomes an easy mark for a well managed independent competitor.” Lauenstein also points out that in focused firms, the top management’s role is to understand the industry, make the key operating decisions and run the business. In a conglomerate, the top management must govern, not run operations. Its focus must be on selecting, motivating and mentoring the general managers of individual units.

At GE, Jack Welch killed bureaucracy, encouraged innovation and selected extraordinarily talented managers to manage each of the company’s diverse businesses. Welch was also ruthless with non-performers. In India, JRD Tata successfully built a portfolio of diverse businesses. Even though his management style was quite different, Tata like Welch had the extraordinary knack of selecting some truly outstanding managers to run the different companies. He kept Russi Mody at Tata Steel, Sumant Mulgaonkar at Telco, Darbari Seth at Tata Chemicals and Ajit Kerkar at India Hotels.
(See Concentric Diversification, Conglomerate Diversification)

Divestiture: A divestiture strategy involves the sale of a business or part of a business for various reasons. One could be a lack of fit with the core business. A second reason could be that the business has entered the decline phase of its life cycle. The third might be an urgent need for cash. A fourth could be government antitrust action when a corporation is perceived to monopolize or unfairly dominate a particular market.

Divisional Structure: A type of structure in which the grouping is done either on the basis of product or geographic segments. The famous Japanese company, Matsushita has been one of the pioneers in the use of the divisional structure, as also General Motors under Alfred Sloan. The idea is to empower managers who have an intimate understanding of the individual businesses. At the same time, some functions like finance are centralized and tightly controlled. The divisional structure creates a sharper focus on different market segments. But duplication of functions makes it less efficient, when compared to the functional structure. Moreover, when capabilities, especially knowledge, are spread across the divisions, pooling them together for the benefit of the organization as a whole can be a major challenge.
(See Organizational Design, Organizational Structure)

Downsizing: In the face of slowing or declining sales, companies often cut manpower strength. Downsizing can cut costs but it may also result in lower employee morale and a sense of uncertainty across the organization. Creative ways to avoid downsizing include hiring freezes, salary cuts, shortened work weeks, restricted overtime hours, unpaid vacations, and temporary plant closures. When downsizing becomes unavoidable, the aim should be to eliminate non-essential company resources while minimizing the negative impact on the remaining organization. This calls for a frank and free explanation of the circumstances and transparent communication with employees.

Drucker, Peter F: Widely considered the father of modern management, Drucker, who passed away in 2005, was a well known writer, management consultant and professor. Drucker published his first book, The End of Economic Man, in 1939. He then joined New York University's Graduate Business School as Professor of Management in 1950. In 1971, he became Clarke Professor of Social Science and Management at the Claremont Graduate University in Claremont, California. The university named its management school after him in 1987.
Drucker wrote several books on management, including the landmark books The Practice of Management and The Effective Executive. His other books include “Management Challenges for the 21st Century” “Managing for Results” “Management: Tasks, Responsibilities, Practices” “Innovation and Entrepreneurship” “The Age of Discontinuity” and “The New Realities”. Drucker also served as a regular columnist for The Wall Street Journal from 1975 to 1995 and contributed essays and articles to numerous publications, including the Harvard Business Review, The Atlantic Monthly, and The Economist. He served as a consultant to various organizations.
Arguably the most popular management philosopher of the country, Drucker’s writings cover a wide range of areas. Drucker’s great strength is his ability to absorb vast amounts of information, to see patterns in what would appear as a jumble of chaotic events, trends, and economic indicators, and to anticipate trends. Though some academics consider Drucker no more than a “journalist”, his admirers consider him to be one of the most perceptive observers of all time. Earlier and more clearly than anyone else, he highlighted the importance of the corporation as the defining social institution of our time.

Drucker’s interest in nonprofit organisations was a logical evolution of both his commitment to the importance of organizations and his recognition that many corporations had failed to live up to expectations in discharging social responsibility. Drucker’s most compelling argument may be that for capitalism and democracy to survive, society must find a way to mitigate the social costs of a free market economy.

Due Diligence: The examination of the books of a company which has been identified as a takeover target by the acquiring company. Due diligence is important because the financial statements may not tell the complete story. Many skeletons may be hidden in the cupboard by the company being acquired. If these are not taken into consideration, the bidder may end up paying an excessively high price. Due diligence can play an important role in identifying specific problem areas such as over valued assets, window dressed financial statements or wrong market projections.

Dynamic Capability Building: In a dynamic environment, companies must be able to strengthen existing capabilities and build new ones smartly. John Hagel III and John Seely Brown, in their book, “The Only Sustainable Edge” define capability as the recurring mobilization of tangible and intangible resources for the delivery of distinctive value in excess of cost. They emphasize that companies must take a more dynamic view of capabilities to stay ahead of competitors. Sustainable competitive advantage will ultimately come from a firm’s institutional capacity to rapidly strengthen its distinctive capabilities and to accelerate learning across enterprise boundaries. As Hagel and Brown mention, “….the primary role of the firm should be to accelerate the knowledge and capability building of its members so that all can create even more value. This perspective broadens managerial attention from the tasks of allocating existing resources to the tasks of deepening knowledge and capability in an increasingly uncertain environment.” Hagel and Brown suggest three mechanisms to accelerate capability building. Processes can be outsourced or offshored to gain access to specialized capabilities. Distributed networks of specialized companies can also help in mobilizing resources. People with diverse backgrounds and skills can be brought together to solve business problems.
(See Process Networks, Strategic Alliances)

Dynamic Specialization: A term introduced by John Hagel III and John Seely Brown in their book, “The Only Sustainable Edge”. It implies eliminating resources and activities that no longer act as differentiators and focusing on capabilities that can truly distinguish the firm in the market place. Such firms are more focused, have a greater sense of urgency and are more responsive to the potential threats and opportunities unfolding in the environment. Within the area they choose, firms with dynamic specialization can serve a broader range of customers. Senior executives in such companies have a deeper understanding of the operational details of their business and can therefore encourage and facilitate innovations more effectively.
(See Core Competence)