Letter L

L
Lateral Thinking: Lateral thinking, a term coined by Edward de Bono, a Maltese psychologist, effectively means problem solving by approaching problems indirectly from diverse angles instead of concentrating on one approach at length. Lateral thinking involves reasoning that is not immediately obvious and ideas that may not be obtainable by using only traditional step-by-step logic. Lateral thinking implies shifting of thinking patterns away from entrenched or predictable thinking to new or unexpected ideas.
(See Innovation)

Law of Conservation of Profits: A principle coined by Clayton Christensen of Harvard Business School. The total profit along an industry value chain does not change. What happens is that profit moves along the value chain. Some parts of the value chain become more attractive and others less attractive over time as both technology and markets undergo a change. The smart companies understand the industry dynamics and occupy the sweet spot on the value chain. This is the place where there is still scope to improve the performance of the product or service, differentiate it from competitors and charge a premium. In the PC industry for example, Microsoft and Intel have occupied sweet spots on the value chain. They have kept coming up with improved versions of their products and the market buys them as they deliver enhanced features and better performance.
(See Value Migration)

Law of Unintended Consequences: Things do not often happen the way we expect them to. Leaders frame policies with good intentions. But at the end of the day, the consequences of these policies are very often unintended. Leaders should appreciate this when they take a decision or frame a policy. A few examples will illustrate the point.

One of the most important decisions in Corporate Finance is Capital Structure. Managers often prefer equity to debt as equity is perceived to be less risky. Debt involves mandatory principal and interest payments. In case of equity, there is no compulsion to pay dividends. And rarely if ever, is equity capital (except for small portions which are bought back) returned to investors. But as equity is less risky, managers tend to take things easy and do not use the capital efficiently, often landing the company in trouble. Indeed, this is why many dotcoms folded up in the early 2000s. On the other hand, because debt is more risky, companies tend to be more careful with the money they receive. Consequently, debt often brings in quite a bit of discipline and leads to better financial performance.

Inventory is another good example. Managers routinely keep inventory as a buffer against uncertainty. Inventory comes in handy if a supplier is late in delivering parts or delivers defective parts or if a machine in the plant breaks down. In Just-in-Time (JIT) production systems, little inventory is maintained. The entire plant comes to a stand still if something goes wrong. So it is potentially risky. But companies like Toyota, are aware of the possible consequences of things going wrong in a JIT system. So they make sure that suppliers always make delivery in time, always maintain quality and ensure all the machines are maintained well. On the other hand, in companies which hold a lot of inventory, quality control tends to be slack, vendor management highly ineffective and maintenance of machines very poor. In other words, holding inventory undermines the effectiveness of the plant. Instead of acting as a buffer, the inventory creates problems.

In short, decisions have to be made carefully after considering various implications. Things give a certain appearance on the surface but deep down, they are different. If we overlook the deeper issues, the most logical decisions will lead to unintended consequences.
(See Decision Making)

Leadership: A much discussed and widely written about term. A good definition of leadership is offered by Prentice in his 1961 Harvard Business Review Article, “Leadership is the accomplishment of a goal through the direction of human assistants. The man who successfully marshals his human collaborators to achieve particular ends is a leader. A great leader is one who can do so day after day and year after year in a wide variety of circumstances.”

According to Stephen Covey, in his recent book, “The 8th Habit”, “Leadership is communicating people’s worth and potential so clearly that they come to see it in themselves. People must feel an intrinsic sense of worth – that is, that they have intrinsic value – totally apart from being compared to others and that they are worthy of unconditional love, regardless of behavior or performance. Then when you communicate their potential and create opportunities to develop and use it, you are building on a solid foundation.”

As Covey mentions various leadership theories have emerged in the twentieth century. One of the early theories was Great-man theory of leadership, which dominated any discussion of leadership prior to 1900. History and social institutions are shaped by the leadership of great men and women Dowd (1936) maintained that there is nothing like leadership by the masses. Individuals in every society possess different degrees of intelligence, energy, and moral force. They are always led by the superior few. Leaders are endowed with superior traits and characteristics that differentiate them from followers. Research of trait theories addresses the following two questions: What traits distinguish leaders from other people? What is the extent of those differences? According to the situational theories, leadership is the product of situational demands. Situational factors determine who will emerge as a leader rather than a person’s heritage. The emergence of a great leader is the result of time, place and circumstances. Later, theorists began to place a strong emphasis on situational and environmental factors. Subsequently, theories of integration have been developed around persons and situations, psychoanalysis, role attainment, change, goals and contingencies.

House and Mitchell describe four styles of leadership.

Supportive leadership: The leader believes in considering the needs of his followers, showing concern for their welfare and creating a friendly working environment. The leader focuses on increasing the self-esteem of people and making their jobs more interesting. This approach works best when the work is stressful, boring or hazardous.

Directive leadership: Here the leader tells followers what needs to be done and gives them appropriate guidance along the way, often including schedules of specific work to be done at specific times. Rewards may also be increased as needed and role ambiguity decreased. Such an approach may be used when the task is unstructured and complex and the follower is inexperienced.

Participative leadership: Consulting with followers and taking their ideas into account when making decisions and taking particular actions. This approach works best when the followers are experts, their advice is needed and they want to give it.

Achievement-oriented leadership: Setting challenging goals, both in work and in self-improvement. High standards are demonstrated and expected. The leader shows faith in the capabilities of the follower. This approach works best when the task is complex.
According to Daniel Goleman , executives use six leadership styles. Coercive leaders pursue a top down high handed approach. Authoritative leaders mobilize people towards a vision. Affiliative leaders create emotional bonds and harmony. Democratic leaders build consensus through participation. Pace-setting leaders expect excellence and self-direction. Coaching leaders develop people for the future. The most effective leaders switch flexibly from one style to another, depending on the circumstances.
Coercive leadership is the least effective in most situations. The leader's extreme top-down decision making kills new ideas. People feel disrespected. Their sense of responsibility evaporates. Unable to act on their own initiative, they lose their sense of ownership and feel little accountability for their performance. The coercive style should be used only with extreme caution and in the few situations when it is absolutely imperative, such as during a turnaround or when a hostile takeover is looming.
The authoritative leader motivates people by making it clear to them how their work fits into a larger vision for the organization. When the leader gives performance feedback, the main criterion is whether or not that performance furthers the vision. The standards for success are clear to all. Authoritative leaders give people the freedom to innovate, experiment, and take calculated risks. The authoritative style tends to work well in many business situations but fails, when the team consists of experts or peers who are more experienced than the leader.
The affiliative leader strives to keep employees happy, to create harmony and to increase loyalty by building strong emotional bonds. Affiliative leaders give people the freedom to do their job in the way they think is most effective. Affiliative leaders are likely to take their direct reports out for a meal or a drink, to see how they're doing. They will take out the time to celebrate a group accomplishment. They are natural relationship builders. The affiliative style is effective in many situations but it is particularly suitable when trying to build team harmony, increase morale, improve communication, or repair broken trust. One problem with the affiliative style is that because of its exclusive focus on praise, employees may perceive that mediocrity is tolerated. And because affiliative leaders rarely offer constructive advice on how to improve, employees must figure out how to do so on their own.
Democratic leaders increase flexibility and responsibility by letting workers themselves have a say in decisions that affect their goals and how they do their work. By listening to employees' concerns, the democratic leaders learn what to do to keep morale high. People have a say in setting their goals and performance evaluation criteria. So they tend to be very realistic about what can and cannot be accomplished. But the democratic style can lead to endless meetings and postponement of crucial decisions in the hope that sufficient discussion and debate will eventually yield a great outcome. The democratic style does not make sense when employees are not competent or informed enough to offer sound advice. Such an approach also does not make sense during a crisis.
Pacesetting leaders set extremely high performance standards, are obsessive about doing things better and faster, and demand the same from everyone around them. If poor performers don't rise to the occasion, these leaders do not hesitate to replace them with people who can. The pacesetter's demands for excellence can overwhelm employees and their morale drops. Such leaders also give no feedback on how people are doing. They jump in to take over when they think people are lagging. When they leave, people feel directionless as they're so used to "the expert" setting the rules.
Coaching leaders help employees identify their unique strengths and weaknesses and consider their personal and career aspirations. They encourage employees to establish long-term development goals and help them conceptualize a plan for attaining them. Coaching leaders excel at delegating, give employees challenging assignments, are willing to put up with short-term failure, and focus primarily on personal development. When employees know their boss watches them and cares about what they do, they feel free to experiment. People know what is expected of them and how their work fits into a larger vision or strategy. The coaching style works particularly well when employees are already aware of their weaknesses and would like to improve their performance. By contrast, the coaching style makes little sense when employees, for whatever reason, are resistant to learning or changing their ways. And it fails if the leader is inept at coaching.
Jim Collins in his book “Good to Great” has introduced the concept of Level 5 leadership. This represents the highest level of leadership, is exhibited by an individual who blends humility with intense professional will. Level 5 leaders are typically modest, talk little about themselves and like to talk more about the company and the contributions of other executives. The Level 5 leader sits on top of a hierarchy of capabilities. Four other layers lie below. Individuals do not need to proceed sequentially through each level of the hierarchy to reach the top, but to be a full-fledged Level 5 leader requires the capabilities of all the lower levels, plus the special characteristics of Level 5. Level 5 leaders are also good at changing their style of leadership from situation to situation. Thus, they can be extremely democratic at times. On other occasions, they can be authoritative. Level 5 leaders are very particular about the quality of people in their team. People in such organizations are self-driven and the CEO does not have to spend much time trying to motivate them.
(See Emotional Intelligence, Personal Effectiveness)
Lean Manufacturing: Lean manufacturing is a management philosophy which focuses on reduction of the seven wastes (Over-production, Waiting time, Transportation, Processing, Inventory, Motion and Scrap) in manufactured products. By eliminating waste (muda), quality is improved, production time is reduced and cost is reduced. Lean "tools" include constant process analysis (kaizen), "pull" production (Kanban) and mistake-proofing (poka yoke). Lean manufacturing is relentlessly focused on eliminating inventory.
The key lean manufacturing principles include:
• Perfect first-time quality - quest for zero defects, revealing & solving problems at the source
• Waste minimization – eliminating all activities that do not add value & safety nets, maximize use of scarce resources (capital, people and land)
• Continuous improvement – reducing costs, improving quality, increasing productivity and information sharing
• Pull processing – pulling products from the consumer end, not pushing from the production end
• Flexibility –producing different mixes or greater diversity of products quickly, without sacrificing efficiency at lower volumes of production
• Building and maintaining a long term relationship with suppliers through collaborative risk sharing, cost sharing and information sharing arrangements.
Lean thinking is a broader concept, compared to lean manufacturing. It is basically about getting the right things, to the right place, at the right time, in the right quantity while minimizing waste and waiting time and being flexible and open to change. A term coined by James P. Womack and Daniel T. Jones, lean thinking provides a way to specify value, sequence value-creating actions in the best way, conduct these activities without interruption whenever someone requests them, and perform them more and more effectively. Lean thinking means doing more and more with less and less resources while providing customers with exactly what they want.
Lean thinking is the antidote to muda. Muda means “waste,” specifically any human activity which absorbs resources but creates no value:
 mistakes which require rectification,
 production of items no one wants,
 processing steps which aren’t actually needed,
 movement of employees and transport of goods from one place to another without any purpose,
 groups of people remaining idle because an upstream activity has not delivered on time,
 goods and services which don’t meet the needs of the customer.

Lean thinking also improves job satisfaction by providing immediate feedback to employees on their efforts to convert muda into value. Unlike process reengineering, it provides a way to create new work rather than simply downsize in the name of efficiency.

Licensing: Licensing involves the transfer of some intellectual property right from the licensor to a licensee. The right could be a patent, trademark, or technical know-how for which the licensee pays a royalty. MNCs often use licensing to lower the risk of entry into foreign markets. Licensing is also a handy tool for companies, which want to focus managerial efforts on intangible assets such as design and brands and outsource other non core activities.

Two major problems exist with licensing. One is the possibility that the partner will gain experience and become a major competitor over time. The other is that the licensor may lose control on production, marketing and general distribution of its products. So a key success factor is how the licensing agreement should be structured and implemented carefully.

A special form of licensing is franchising, which allows the franchisee to sell a product or service, using the principal's brand name or trademark in conformance with policies and guidelines laid down by the franchisor. The franchisee pays a fee to the parent company, typically based on the volume of sales of a defined market area.
(See Franchise)

Long Term Objectives: These are the objectives a firm would like to achieve in the long run in terms of profitability, productivity, competitive position, employee development, employee relations, technological leadership and public responsibility. Long term objectives should be carefully framed, consistent with the company’s mission, understandable to employees, acceptable to them, flexible enough to be modified in the light of changes in the environment and measurable. To be able to motivate employees, these objectives should be challenging but not impossible to achieve. The performance evaluation criteria should be made clear.
(See Goals, Strategic Planning)

Loss Leader: A product sold at or below cost in the hope of generating sales of other profitable items. The method is most commonly used in retailing. A shop may advertise a loss leader heavily, to entice customers. The hope is that customers will probably buy other, full-priced items as well. The term loss leader can also be used to describe a manufacturer who prices a lead item low, knowing that the usage of the item requires further, full-priced purchases.