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DOMINANT LOGIC

Definition

It is Prahalad and Bettis (1) that introduced the concept of dominant logic in mangerial literature. They defined it as the perception managers have of the links between the various businesses in which they are active and for which they need to be making investment decisions.

It goes without saying that managers operating in businesses having more than one product or activity need to see the commonalities between them. Managers may perceive these commonalities, but their perceptions may differ from that of actors of the environment such as their financial partners or the stock market. If the dissonance between perception and the development of the environment is large, then the dominant logic was mistaken and needs to be rethought and, usually, businesses divested. The market is always right. Sensemaking appears to be at fault here.

Further, as customers, competitors and technologies change, the commonalities may lose their coherence.

Types of dominant logic

One of the most common flaws in dominant logic relates to the product life cycle which may be perceived as simlar so as to match the time frame managers have established to attain corporate objectives. In the US, particularly, but to some degree also in Europe, managers work with short time frames. The advantage is that objectives are attained faster, but they tend to be less ambitious and cannot wait for the in-depth corporate transformation that may be required.

However, by far the most important error in dominant logic stems from the willingness to create additional value by splitting certain elements of the business. As an example, a mining company that does not require a very sophisticated extraction and treatment process, but ships large volumes of product through its own railway spanning one thousand kilometers, and its own port facilities, will employ the bulk of its personnel, and have the vast majority of its investments, in transport facilities.

An engineering company that operates a credit and leasing subsidiary that generates a significant part of the corporate profits may lose its position if it has to compete on a market without the advantage of offering its services simultaneously with the product offer.

Some hard thinking may lead outsiders to consider these two businesses separately rather than viewing them holistically.

In the first example above, it may result in a corporate decision to rethink the transport facilities in an effort to increase competitivity. It may, however, also lead the corporation to develop cutting-edge transport technology and attempt to sell it, thus decoupling the two units - mining and transport.

Such decisions, however, cannot rely entirely on figures of the present investment portfolio or on the number of employees per business unit. Other elements, such as the attractiveness of the industry under consideration as a diversification candidate, the investment and time required to make the firm credible in its new offer, the firm's own size and capabilities, the homogeneity of the client base as well as the acceptance of such a change by mid-management also need to be taken into account.

Of these factors, no doubt the two most important are the size of the corporation and the similiarity of the company's core customers.

Companies having reached a significant size can no longer devote senior managerial time to marginal offshoots. While they may feel that the only reasonable model for them to grow is diversification, this may fail miserably if senior management can not encourage the operational managers during the nurturing period.

Precisely in that nurturing period, when the new unit does not yet have loyal customers, the first businesses concluded might be so small as to be unprofitable, particularly if full costing is considered.

The decision that would have failed to take the environment into account would lead to a destructive situation, compounded by internal problems if senor management's conceptualizing skills are not well above average.

Conceptualization skills

The Word Reference English dictionary (2) defines conceptualization as 'inventing or contriving an idea or explanation and formulating it mentally.' It implies, in our context, the analysis of extremely complex facts and their transformation into abstract ideas. The concept is intimately linked with that of sensemaking.

Thus, senior management should be able to build an abstract model of the similarities and dissimilarities between the critical success factors of the industry in which it is active and the one it is considering diversifying into. If the similarities do not overwhelmingly outnumber the dissimilarities, the corporation should not venture into the diversification process.

Quite obviously, the ability for senior management to see relationships and similarities that others have not appreciated is key to the creation of highly profitable internal bridges.

Sharing the dominant logic

Even so, senior management will need, at a fairly early stage, to share its vision with middle management. Indeed, for a corporation to be successful, it must be coherent with itself. In other words, the entire management team must share the dominant logic to the point of owning it.

That will certainly not be an easy task to accomplish. If their background or managerial experience is too diverse, and therefore their understanding and interpretation of a given issue substantially different, it will be difficult to reach a consensus unless a form of social cohesion is obtained. While such differences in perception are only normal, a corporation should not take the risk of a significant dilution of the dominant logic to the point of irrelevance. This may well happen if the basic cultural values and tacit experience of the members of the group is very different or if radical innovation has pushed the dominant logic into uncharted territory.

Changes in sensemaking

When the corporation intends to venture into areas of high uncertainty, for instance following a disruptive innovation, there may be little information available to justify the sentiment of a positive uotcome. Fears of failure and consequent job loss may become a hindrance to effective teamwork by creating conflict inside the management team. The solution lies in the presence of an external consultant who should insure a common understanding of the issues at play which should lead to a full consensus.

He will attempt to ensure that important elements of change have not been too lightly brushed away as improbable. Wild crads, which are low-probability high-impact developments, should be detectable through a careful analysis of weak signals and also through intuitive analysis. This may best be done through brainstorming sessions or the use of Six Hats methodology.

This approach, nevertheless, does not exclude the possibility of totally unpredictable events that may significantly alter possible similarities and convergences between industries.

Once a clear conclusion is apparent, momentum must not be lost and the strategy should be implemented without further delay.

References

1) Prahalad C K and Bettis R A : The Dominant Logic : A New Linkage Between Diversity and Performance, Strategic Management Journal, 7 (1986) : 485 - 502

(2) www.wordrefence.com

Newsletter July 2006

The Text of this Newsletter originally appeared in the June issue of EHLITE

SPAS IN AN AGING SOCIETY

Introduction

Key to identifying successful new ventures is their coherence with sustained societal trends. Products that meet latent needs in early phases of long-term trends, and can establish themselves as references on the market by adequately segmenting the market, create sustainable value for stakeholders.

While several emerging societal trends have been identified such as the new family, it appears to us that the major trend that will affect all aspects of society is, beyond any doubt, the combination of the lengthening of human life span and the sharp reduction in the birth rate in developed countries, with the possible exception of the United States. We have called this phenomenon the Aging Society.

An Aging Society

Worldwide populations are ageing. Developing countries now have a large percentage of their population younger than 15. African countries which have consistently maintained high birth rates count with up to 40% of their population under that age. With the exception of Afghanistan, the top ten countries with the youngest population are African.

Conversely, Europe and some of the Asian countries, particularly Japan, are witnessing both a reversal of the age pyramid, but also what has been termed a 'baby bust' - i.e. a substantial drop in birth rates. Thus, the part of the population over 65 represents 17% or more of the population in Belgium, Italy, Spain and Sweden.

Average life expectancy on a world-wide basis has jumped from an estimated 22 at the time of the Roman Empire to today's 78. Countries exhibiting the highest life expectancy include France, Iceland, Japan, Sweden and Switzerland.

The share of the population over 65 is expected to continue to grow and the projections of the US Census Bureau are that by 2050, this group will represent nearly 30% of the population in Europe and 15 to 20% on the other continents, with the exception of Africa that will, nevertheless, count 20% of its population as older than 65.

With women still marginally outliving man, a difference rapidly disappearing due to the increased number of women smokers, one girl on two born today will live to be 100 years old. Thus, while the number of centenarians in France today is of 6 000, they aer expected to reach 150 000 by 2050.

The US Census Bureau indicate a figure of 50 000 centenarians in 2000 in that country.

Both the French and American figures indicate a 20-fold increase over a period of only 50 years. In fact, our lifespan gains 15 seconds every half hour or a couple of months every year.

The US Census Bureau projects, for 2050, 834 000 centenerians and up to 4 million by the end of the century.

A special class, super-centenarians has even been created, to designate the part of the population over 110 years old. Indeed, some predictive models suggest that human life-span could increase by a year each year over the next 20 years.

The Baby Boomers

'Baby boomers' is the term that has been used to describe the part of the population boom between 1946 and 1964. In the United States they represent, at the time of writing, 77 million people. This is an unprecedented number of individuals to have gone beyond the age of fifty.

If they are, in their vast majority, healthy and highly educated, they are not a homogeneous group or segment, to express it in marketing terms. Nearly 15% are foreign-born, with a predominance of Latin Americans and Asians. Income inequality is large, and Black Americans show a substantial lower income than whites. One in ten boomers lives in poverty. Inequalities increase with age. This should reflect both on their disposable income and their health.

Incomes are higher among married, white elderly and lower among single Hispanic women.

Generally, people with higher education tend to be healthier and live a longer life. The reason is probably that they are better informed on disease prevention and cure.

Data in Europe is less extensive and tend to either rely on American or wold-wide data or on projections of future developments.

The accent, on both sides of the Atlantic, has been put on the anachronism of defining as 'elderly' anyone over 60. Let us not forget that astronaut John Glenn went back to space at the age of 77.

Projecting into the future

By 2025, the proportion of the EU population between 50 and 64 will have increased by 25%. Simultaneously, because of low birth rates, the 20 - 29 age group will have decreased by 20%. This should impact on political choices (older people tend to be more conservative), economic growth (which will be slower) and lead to increased geopolitical tensions with neighboring areas with endemic population growth.

With increased longevity, this also means that retirees will rely on pensions for at least part, if not all, of their income, for substantially longer periods of time than in the past or even in the present. Should the social security systems be unable to find a solution to this situation, poverty of the elderly might be inevitable.

The one likely solution is to push back retirement age, perhaps to as late as 85. That, in itself, poses a range of problems.

Legislation in several countries deters the hiring or keeping of older employees by increasing the cost, to the employer, of social benefits. A EU directive, the purpose of which is to abolish age-related discrimination in the work place, is having a reverse effect by increaing the cost of benefits.

Younger employees have prejudiced opinions about the older workforce and may even be hostile to their presence.

It is expected that baby boomers will re-enter the workforce but will prefer corporations that offer flexible working conditions that will allow them to blend work and leisure.

Another development is the increasing involvement of the elderly, such as grandparents, in assisting the family with the raising of young children either directly or indirectly, for instance through volunteer work at day-care centers.

The economy of aging

Today senior citizens have access to more wealth than ever. However, since the birth rate has fallen, even collapsed in some countries, this situation is unlikely to last. Governments will be unable to continue paying pensions for periods that are constantly being extended and may eventually reach averages of 30 or 40 years. Retirement age is constantly being extended and the elderly will be required to maintain an economic activity. To do so, they will have to be in good health.

Maintaining the senior population in good health, through ecologically and economically sound practices, will also contribute greatly to limiting the inexorable rise in medical expenses.

For all the above reasons, health tourism, of which spa tourism is a component, will grow more rapidly than the tourist industry overall.

Spas as treatments

Spas were reputed both for their holistic virtues as well as for their ability to heal specific ailments. In other words they not only create a sense of well being, but also cure specific diseases.

Spas are considered as one of the alternatives to medication-based treatments. Susbstantial research has been undertaken on the medical properties of waters, going back to the 19th century and continuing into the present.

The main characteristics that give water its healing characteristics, and that vary from spa to spa, are :

  • temperature
  • pH
  • the free ions
  • the dissolved gases
  • the deposited or suspended solids
  • the evenutal presence of plankton

The climate also plays a major contributing role in assisting patients overcome their pathologies. This explains the location of many spas either in mountain, lake or coastal resorts. The combination of th two basic elements which are water and air seem to be a major contributing factor to the efficacy of thermal cures, accompanied by the total break in their normal lifestyle routines.

New astonishing properties of water are constantly being discovered and we are only beginning to understand some of its effects on our basic biological processes.

The main ailments affecting the elderly are long-term illnesses such as back problems, coronary and vascular diseases, dementia, loss of strength, respiratory diseases, stiffness, stroke and visual impairment. Obesity and diabetes are also on the rise.

Both bones and muscles are weaker. Vascular diseases translate into varicose veins and difficulties in walking.

Finally there are also various forms of psychic diseases, ranging from stress to dementia. These diseases are closely linked to, and caused by, isolation and loneliness.

Extensive studies have shown spas to be particularly effective on rheumatic ailments, cardio-vascular diseases, metabolic, digestive and kidney diseases, as well as psychosomatic problems. The environment of the spa contributes to a rise in spirits and therefore is a useful cure for certain forms of depression.

Care, however, must be exercised to ascertain that the pools and the surrounding areas are kept free of pathogens to avoid infections.

Sea water has been shown to both remineralize and detoxify the body and therefore thalassotherapy answers the needs of the elderly. The effect of sea water is compounded by the sea breeze which has electrolytic properties.

Alternatives to sea water are aromatic baths with a large number of herbal extracts such as essential oils.

The ubiquity of spas

While spas are were intially limited to thermal cities, a number of factors have rendered spas more accessible and the sustained demand leads to the establishment of spas in hotels and even in airports.

Competition will therefore become intense, clients more savvy and good managerial practices will, as usual, make the difference in profitability. There are a large number of specificities in a field that combines both health and leisure that has convinced a number of institutions worldwide to create courses in Spa Management. A course in Lausanne is to open this coming fall, targeted at French-speaking professionals so as to assist the hotel industry in taking advantage of this deep historical trend towards maintaining a longer-living population in the best possible health.

Newsletter May / June 2006

The Text of this Newsletter appeared in Johnson's Russia List 2006/119 of May 22, 2006, as a translation of the original article in French which appeared in AGEFI of May 2006. Several translations and reprints have appeared in a number of journals and sites in France, Iceland, Russia and the USA

A NEW ENERGY ELDORADO

The Arctic Holds Exciting Oil and Gas Prospects

Not well known, poorly defined, not very populated, not competing to be a holiday destination, the Arctic, thanks to global warming, could become the new energy Eldorado. The area is estimated to hold nearly a quarter of the world's hydrocarbon reserves - a resource so valuable that some countries are threatening to 'secure' them with nuclear weapons.

Presently the cost of producing oil and gas in the Arctic remains high, but global warming, which is affecting the Arctic region twice as fast as the rest of the world, will allow easier access to the reserves, and make their extraction more affordable, particularly if the price of oil stays at its present levels.

The Russian government, which controls the majority of the country's oil and gas reserves, has stated that by 2020, 25% of oil production and 33% of gas production should come from the Arctic. Russia owns a large number of installations in that part of the world, including the port of Murmansk and loading facilities for hydrocarbons on the Baltic coast.  Russia also has a well-developed military infrastructure, particularly the Northern Fleet, based in Severmorsk, near Murmansk, and stationed in the ports of Kola, Motovskiy, Gremikha and Ura Guba. The Northern Fleet contains two thirds of Russia's nuclear submarines and a large part of its entire nuclear forces.

The most promising deposits are at the Shtokman site. Located in the Barents Sea 550 kilometers (330 miles) north of Murmansk, it is the world's largest offshore gas field. Gazprom, which has plans for 120 wells at Shtokman, is presently looking for a partner to which it could sell a minority share for $ 10 billion. Many firms have expressed interest, including Chevron and Conoco Phillips, the Norwegian companies Norsk Hydro and Statoil, and the French group Total. Several sources are speculating that Total will win the deal because it can offer Gazprom a share in a liquid gas terminal in Louisiana.

The North American Arctic also has a large energy potential. Three fields have been identified with a global capacity of 6 trillion cubic meters of gas in the Mackenzie Delta, under Canadian control. BP Amoco is developing the Northstar and Liberty oil fields, which are estimated to contain close to 6 billion barrels of oil.

The European Arctic also contains major energy deposits. The Norwegian group Statoil produces gas from its Snow White deposit at Hammerfest, which contains 160 billion cubic meters of gas. The Italian company ENI produces oil from the Goliat field, estimated to have a reserve of 250 million barrels. The reserves from these fields are extracted through a sub-marine system linked to a land-based station that controls the production unit remotely.

At the moment, however, the area is lacking in transport infrastructure. The European Union ARCOP project has offered to ship oil through the Northern Maritime Route across the top of Russia, which would allow energy from the Pechora and Kara seas to flow into Europe. Currently, this maritime line is only used by the Russian fleet.

Canada's new conservative government committed to building armed icebrakers and ports immediately following its election. Canada now realizes the value of its Arctic lands and is unlikely to repeat the mistake it made in 1997, when the government sold the abandoned port of Churchill, Manitoba, to American Pat Broe for 10 Canadian dollars. By 2020, the value of goods flowing through the port will be $ 100 million.

Contrary to the Antarctic, no international treaty covers activities in the Arctic region. Several countries have made claims to the territory, including Canada, Denmark, Finland, Iceland, Norway, Russia, Sweden and the United States. International treaties currently in place authorize countries to lay claim to the ocean floor up to 350 miles from their coast, provided they can prove a continuation of their continental platform. To this day, no country has offered proof that its continental platform allows it to claim the entire reserves of the pole. As long as that is not done, the neutral zone around the pole will remain under the administration of the International Seabed Authority.

In March 2006, the leadership of the Russian fleet announced that it was studying the possibility of securing the Arctic energy deposits by using nuclear submarines equipped with nuclear missiles. Similarly, Canada has unveiled a plan to defend the Northwest Passage at a cost of $ 5 billion.

Currently, the Artic region is used by both the United States and Russia for moving submarines and planes carrying nuclear weapons. For this reason, the United States and its allies have created the North Warning System. In a recent White Book, the US military has discussed its strategy to destroy Russian balistic missiles in the Arctic if a conventional conflict erupted in Europe.

In a period in which national policies are becoming radicalised, particularly over energy issues, any activity in the Arctic region could have a major impact on global geopolitics.

The Text of this Newsletter appeared in Johnson's Russia List 2006/119 of May 22, 2006, as a translation of the original article in French which appeared in AGEFI of May 2006

MOSCOW - TEHRAN : THE AXIS OF ULTIMATE DANGER ?

In a previous article we briefly mentioned the relationship between Russia and Iran and Russia's wish to become an unavoidable actor in the resolution of the crisis which it has, needless to say, helped create. We would like to analyze this situation which has increasingly taken the dimension of an international crisis.

Access to nuclear power

Russia is a recent partner since it is only in 1995 that it signed an agreement with Iran to refurbish the Bushehr plant which was damaged during the Iran - Iraq war. Iran's nuclear ambitions aer substantially older since they can be traced back to the epoch of the Shah who signed an agreement with France. The Islamic Republic bought equipment from Germany, Argentina, China, North Korea and Pakistan. A Pakistani engineer called Abdel Kader Khan, in particular, gave considerable aid to Iran.

The agreements with Russia cover not only the rehabilitationof Bushehr, but also the supply of fuel and its eventual re-processing. The two countries also have military cooperation agreements. Russia also supplied Iran with the technology required to produce missiles. It also launched an Iranian spy satellite.

Iran's place in the nuclear community

During the Shah's time, the United States wanted to make the country its key ally in the Gulf and firmly helped the country acquire military equipment. By its geographic position, it offers a major barrier to the old Russian dream of access to the warm seas. The country borders not only the Caspian and its very important deposits but has common borders with two countries in which the United States have deployed their troops : Afghanistan and Iraq. Just like Russia, Iran wishes to see an end to the present monopolar world.

Iran's relationship with Turkey

Although Turkey has no nuclear program, and neither appears to want to develop one, the present government, dominated by an Islamic party, has become closer to Iran. The party in power has an Islamization program while seeking to become a member of the EU. This allows the government to reduce army's power, which arduously defends the non-religious nature of the country. The government has also become more distant in its relationship with the United States and refused to let American troops cross the country during the invasion of Iraq. It is the first time a NATO country takes such a position. By controlling the Black Sea, Turkey occupies a first rate strategic position. It has borders with several particularly sensitive areas such as Russia and the countries of the Caucasus while being very close to Iraq and to some extent to Iran. The Caspian and Central Asian pipelines cross its territory. Seventy percent of Turkey's gas consumption is of Russian origin. For Turkey, Russia represents a significant market for its construction industry and for tourism.

With Rumania's and Bulgaria's entry into the EU, still planned for 2007, and the possible entry of Turkey, the European entity will also find itself on the borders of the Black Sea and will thus be very close to the Iranian problem. However Europe does not appear to have a well defined strategy to stabilize the area and it is not even certain that Turkey will join the EU. That leaves Russia free to develop its own strategy. Russia wants, above all, to guarantee its borders, and sees therefore in an alliance with Iran the creation of a first line of defense, in spite of the fact that its battlefields are inside its borders, and more particularly in Chechnya.

Iran's enemies

Iran is targeting Israel in the most direct manner. Clear threats have been made repeatedly. Iran already finances Hezbollah which threatens Israel from its Southern Lebanon base. The United States are also part of this select category and the Iranian leaders are convinced, just as the Soviet leaders were until recently, that the United States are in a deliquescent state and that their capacity to respond is weak. There is also the interior enemy, the need to galvanize public opinion and make it forget the failure of the country's economic policy by raising nationalistic feelings, a well proven method.

Russia's motivations

These are numerous. First of all, just like Tehran, Mr Putin's Russia wants to see the end of the monopolar world, or of America's hyper-strength, and dreams of becoming once more an important actor in international politics. It is something that is proving difficult to accomplish in a context in which American military supremacy, and Russia's profound decline in its ability to both attack and defend the country, have had the consequence of a near inability for the country to re-enter the arms race, unless it is able to develop weapons of a totally new type.

But even if such weapons were developed, they would still need to be tested, which cannot be done without this being noticed, and they would need to be produced, which may prove to be difficult considering the gradual dismembering of the military-industrial complex in Russia. It would therefore be out of the question, assuming such weapons would be developed, to deploy them before another ten years assuming that all these stages : development, testing and production, are done in very short delays. The risk Russia would take would be that of a preventive strike by the United States, in particular from the Pacific, a blind zone in the Russian alert system.

It is precisely in this zone that the strengthening of the links between the United States and Japan creates a danger for the Russian military to be encircled, particularly if the American government would undertake to strike North Korea preventively. This claustrophobic feeling by the military is increased by the presence of NATO on the West, Islam in the South and China in the South-East. Russia's inability to mount an immediate and lethal response could well encourage US politicians and military alike to envisage another solution. It is particularly worrying for Russia, and even for numerous other countries inasmuch as the United States do not hide their intention of using their crushing military superiority to impose their political objectives throughout the world. The invasion of Afghanistan and Iraq are examples. Very recently they have let it be understood that a limited nuclear strike against Iran was an option they were considering. In the context of this strong Eurasian presence of the United States, Russia sees the Iranian crisis as an opportunity to profile itself in a leading role on the international scene and particularly to show the Middle East that an alliance with Russia can be a viable alternative to find a solution to the present complex situation in the face of a militarily vastly superior United States. Russia also has merchant motivations. Iran is an important client for military equipment and can increase its purchases in the coming years. Lukoil, the Russian oil producer, had obtained ol concessions from Mr Hussein's governmetn and Russia relies on Iran's assistance in having them confirmed by the new Iraqi government.

However, if the United Nations, or the United States, unilaterally, declared an embargo, Russia would find itself in a difficult position if it did not conform to it considering it is siting on G8. It is therefore essential that the deliveries of nuclear material be done rapidly, if at all. In taking military positions in the Middle East, the United States control both the resources and the shipping routes, in particular through the Hormuz Straits, through which Iranian crude is exported. There is also the issue of the security of the Caspian Sea. Indeed, several of the countries around the sea are either in open or latent conflict.

Russia reinforces its military fleet

Russia is said to carry out aerial reconnaissance flights, and perhaps even bombings, over Georgia and is trying hard to destabilize a government which is, to a large extent, disliked by the population. Indeed, none of the countries issued from the former Soviet Union, with the exception of the Baltic States, has been able to reinvigorate its economy.

Georgia has an American military presence which is supposed to train the local armed forces to better fight against the Islamic movements. There are also sharp tensions between Armenia and Azerbaijan, both countries being led by autocrats. Russia maintains a basis in Armenia, but this country is also of interest to the United States.

Uzbekistan, finally, has been a witness of civil riots, harshly repressed. As far as internal security is concerned, Russia relies probably on Iran exerting a moderating influence on the Chechen rebellion. If Russia announced, in October 2005, by the voice of Sergei Ivanov, the Minister of Defense, its wish to create a military partnership, in which Iran would have a position of choice, to protect the interests of the states bordering the Caspian Sea, the United States have, on their side, created a mixed group, including private interests, called Caspian Guard, which encourages a cooperation between military and civilian interests with, as its objective, a common defense system.

Azerbaijan, which receives American military equipment, and where BP leads an oil cartel, has shown very openly its lack of interest in joining a Russian-led system. On the other hand, Kazakhstan has undertaken joint naval exercises with Russia. Economically, Russia is a clear winner based on the present situation. The present tension leads the markets to sustain the price of oil at its present levels, which is favorable to Russia's revenues from oil exports.

America's mistakes

One of the biggest American errors sicne the end of the Vietnam War has been, without any doubt, the invasion of Iraq and the overthrowing of Saddam Hussein who was a very efficient obstacle to Iran's expansionist policies as well as to Islamic fundamentalism. By creating the present chaos, they allowed Iran to involve itself almost openly in the new situation in the Middle East. For the other American misake is to compare the situation of the civil war, or of quasi-civil war, with the guerilla tactics the United States fought in Vietnam. In fact, these two situations are totally different. If the Vietnam war was an ideological conflict that the United States hoped to win by relying on the national army and idological campaigns, this approach can not work in Iraq. The drawing lines in that country are ethnic and religious between the Shiite majority, crushed under the previous regime, and the Kurdish and Sunnite minorities (and Saddam Hussein was a Sunni Arab). No American miliatry action is likely to solve this type of conflict, quite to the contrary. The only possible solution may be to split the country in three. This reminds one of India's partition with Pakistan.

American public opinion pressure could lead the government, particularly in case of a victory of the Democratic party in the US presidential elections, to leave the country well before it has been stabilized. A similar scenario occurred in 1932 when the British, who had a mandate of the League of Nations, left the country hurriedly and in a state of chaos, and allowing the military dictatorship to take power and lead a massacre of the Iraqi Jewish community. These two situations have a number of common points, such as a number of tactical errors, which are of considerable importance, even if Miss Condoleeza Rice thinks history does not remember tactical errors.

A hurried retreat would be very similar to what happened in Saigon

In 1930 the Iraqi army massacred the minorities but was unable to defend the country against its enemies. Russia probably counts on a reproduction of this scenario and thinks that Iran could be the invader. One more reason to be on the side of the winner. Ms Rice, again, irritates the Russians by complaining of the lack of democracy in that country, a particularly taboo subjcet as it implies that the United States is involving itself in Russia's national policies.

What solution ?

If Russia uses smartly the present situation to advance its pawns, one must not be led to think that Iran obeys Russia. Most definitely not. Iran's position of neither accepting nor rejecting Russia's latest offer shows that the decisions are taken in Tehran and not in Moscow. Moscow, on its side, is not blind and can also believe that Iran, whcih would not be blindly submitted to Moscow's policies, and what's more strongly armed, could become a problem over  the long term. The only real solution would be for the United States to increase the dependence of states such as Russia and Iran on the US so as to convince them of the lack of attraction of a confrontation.

If that is possible in the case of Russia, it is difficult to imagine how this could be undertaken in the short term with Iran, particularly considering it is rather the United States that needs Iran's assistance in disengaging itself from Iraq. If the Untied States leave Iraq rapidly, for instance after a democratic victory in the forthcoming presidential elections, it is not impossible that Iran may invade Iraq to guarantee the security of the Shiite minority. That would possibly lead Iran to be so involved in this situation as to shelve, at least temporarily, its nuclear program.

Newsletter May 2006

The text of this newsletter appeared in the April  2006 issue of Strategy Magazine

STRATEGIC THINKING

There is evidence that strategists and managers have different approaches to decision making, and that this difference can be identified. Michael Akerib considers whetehr there is a specifically strategic thinking process.

Strategists are deemed to be able to blend intelligence and emotions, be creative and have initiative, be better at the planning process than at implementation, and have the ability to understand how the environment affects their vision of the future. It is these differences, however, that have been deemed accountable for the unsuccessful implementation of many an ambitious strategic plan. Strategists appear to think on a different level from operational managers : but is this a myth or reality ?

Analysis and creativity

Strategists, it is believed, are able to use both sides of the brain as intensively as each other. Thinking with the left hemisphere is organised and rule-centered and requires precision. With the right, we tend to listen more carefully to our intuition, are more qualitative than quantitative and are definitely more creative. But is using both hemispheres what we call strategic thinking ?

In his epoch-making book, The Mind of the Strategist (1), Kenichi Ohmae states that successful strategists have 'insight and a consequent drive for achievement, often amounting to a sense of mission'. That, in turn, leads to creativity and intuitive decision making. Not, says Ohmae, that strategists refuse to think analytically, but rather they use their analysis to feed the creative process.

Analysis and complexity

A relevant question, however, is whether modern strategists can conduct a meaningful analysis when there is an overabundance of data and the situation being analysed is constantly evolving. Even strategists' ability to create meaningful patterns and understand the consequences of their decisions and actions, in this highly complex context, may be challenged.

This may well be the most disruptive change they are witnessing today, as strategists have no previous experience of either the speed or the depth of the uncontrollable changes that are taking place both within corporations and in their environment. The ability to see the big picture, rather than the view from a single window, is key to strategic thinking. It entails the ability to think in abstract and conceptual terms.

Strategists have to accept that the world is extremely diverse and offers an array of possibilities, which can lead them in many strategic directions. Furthermore, this world is constantly evolving, thus increasing the uncertainty in which the corporation operates.

The importance of paradigms

Managers perceive problems according to their own paradigms. Thus problems might go undetected and unsolved if they do not fit the dominant paradigms. The stability of the paradigms, which may be so entrenched that they can be regarded as beliefs, will determine how open to change managers are. These beliefs encompass the corporation, its environment and the interaction between the two. They shape the very identity of the corporation. This identity will, in turn, have to be in line with the image senior management has of itself and of its future. It will also determine the idiosyncratic reading of the past.

Past, present and future

Each person's perception of the past is just as variable as their perception of the future. Morevoer, the meaning each person gives to the past may change as time goes on, and their understanding of past events is modified as their moods lead them to different conclusions about them.

More correctly, this is a question of reframing - that is, of changing the angle of the thought process to have a different view of a particular situation. Reframing can lead to totally opposite viewpoints, but that is a constant in a strategist'sw work. Reframing should also assist the strategist to avoid the herding instinct - doing whatever everyone else is doing - and sometimes paying a heavy price for it.

Long-term focus

Strategists take the key decisions in the corporation : decisions that bind it for extensive periods of time, are difficult to reverse and make significant resource commitments. It follows that they must have full confidence in these decisions, not only because the figures tell them this is the most likely route to success, but also, chiefly, because their intuition leads them in the same direction.

Because the results of a strategy are not immediate, strategists' focus is on the future rather than on the immediate. In this, they are assisted by a strong personal vision. Indeed, one of their core skills is the ability to align the decisions they take about the opportunities the market offers with their vision.

Even if the results of strategic decisions are not immediately visible, strategists need to monitor, and eventually correct, the short-term impact of their actions. If they do not, they will give up control to operational managers who are more concerned with their own prerogatives and constraints than with strategy. Adquately communicating the strategic choices to all employees reduces this natural propensity.

Furthermore, strategists need to work within a reasonable variety (though not too large a variety) of time horizons. The usual procedure is to work on a short-, medium- and long-term framework. For each of these, strategists' main preoccupation will be building up the core competencies needed to attain their objectives. It is unlikely that these competencies will be acquired in a short period of time, thus reinforcing the strategists' long-term bias.

The process of building up their required competencies, nevertheless, has to be integrated into a shorter time perspective. And there has to be constant monitoring of the environment to ensure that the inevitable changes occuring around the corporation will not render the acquisition of these competencies irrelevant.

Thinking 'down the road' is an incredibly difficult taks for most people, so great is their attachment to the present - so great, indeed, that they fail to see the difference between present and past. This is perhaps strategists' most precious skill : the understanding of how the past has mutated into the present and how they can conduct their organisation through its evolution into a profitable future.

Conclusion

There are some specific characteristics that can be identified in strategists' appraoch to decision making :

They do not attempt to deny the impact of their emotions on their analyses

They will offer creative solutions, and are able to understand the highly complex world in which they operate and abandon dominant paradigms

They are able to prepare historical analyses to show the causal links that are fundamental to creating the future

They are not afraid of reframing their thinking based on input from contradictory sources

They understand that time is required to build the right competencies, and their focus is thus on a different time horizon from that of operational managers.

References

Ohmae K (1982) The Mind of the Strategist, McGraw-Hill, New York

April 2006

The text of this newsletter appeared in Johnson's Russia List  2006/56 of March 6, 2006, and is the English translation of a French article which appeared in the February issue of AGEFI

RUSSIAN ENERGY : WHAT DOMINANT LOGIC ?

Energy : Market Economics or State Policy ?

The concept of dominant logic is used in management to define the perception that managers have of the link between the corporation's various activities. It allows it, on one hand, to have a global vision of the direction they want to take and, on the other hand, to establish a priority ranking of the actions and investments to be undertaken. It is obvious that this concept can also apply on te scale of a country and of its industrial policy.

In both cases, the perception that leads to this logic can be sufficiently idiosyncratic to be poorly, or not at all, understood, by the other actors of the international economy. This is even more so when a given state is not a particularly good communicator, voluntarily or not. In the specific case of energy, probably the biggest difference among producing states as regards perception, is in their willingness to either use energy as a tool of foreign policy or to allow private corporations to master the value chain and limiting the role of the state to collect and manage, poorly rather than well, an important tax income.

Inasmuch as Russian oil and gas are mostly supplied through state-owned infrastructure such as oil and gas pipelines, owned by Transneft, which is also state-owned, it is tempting for the Russian state to consider that there is no international market in these raw materials, but that they are governed by conventions between states.

Russia : the country of gigantism

Russia is a country in which dimensions reach proportions rarely reached elsewhere. Thus, Russia, the world's largest country, holds the world's biggest reserves of gas (twice those of Iran, which ranks second), the world's second largest reserves of coal, and the eighth largest oil reserves. These figures allow it to be the world's largest exporter of gas, the second largest exporter of oil, but also, with a population close to 150 million inhabitants, and an industry that is not efficient in its energy consumption, the world's third largest energy consumer. Its oil and gas reserves could, in fact, be larger than what has been estimated so far. This lack of precise knowledge of the size of its reserves is due to the fact that not only Russian oil companies do not have access to the latest exploration technologies, but also due to the lack of motivation on the part of oilmen to explore in areas in which production is either impossible, or very difficult, due to permafrost. Climatic warming, however, could considerably alter this.

Wealth and poverty

The recent sharp increase in the price of oil has brought considerable revenues to the country. However, if the country's safes are full, poverty continues to touch an important part of the population, a third of which lives under the level of poverty. Yeltsin's Russia had allowed a handful of oligarchs, that some prefer to consider as kleptocrats, to enrich themselves by purchasing, at extremely low prices, in hurried privatization schemes, the country's gigantic oil and gas reserves. These persons collected fortunes that amount to billions of dollars.

Under Mr Putin's presidency, the idea of a collective ownership of natural resources has been increasingly put forward. A fund has been established to collect part of the excess income from exports, but these funds have still not been assigned to a specific use. It is not, however, as if needs were lacking - poverty reduction, modernization of the infrastructure, diversification of the industrial backbone of the country, etc.

Regaining control

It is in this context that in 2005 the state has moved to regain control. It started with the arrest, followed by the trial, amd finally the sentencing to prison, of Mr Khodorkovsky, for fiscal fraud, which allowed the state to seize, auction and purchase, Yukanskneftgaz, the jewel in Yukos' crown. The buyer was none other than Rosneft, the state-owned oil corporation. That moved was followed by Gazprom's purchase of the oil producer Sibneft, which allowed the gas producer, the main shareholder of which is the state, to become one of the world's biggest energy producers. This has given Mr Putin two major pawns on the international energy board. He has decided not to consolidate them in a single mega-corporation, probably to avoid the risks Gazprom would have incurred due to the various law suits being held abroad by Yukos' shareholders.

A race against the clock

Although the country's energy resources will only be depleted by 2050, the country will become a net oil importer by 2017 and a net gas importer by 2012. Russia is running out of time, but to do what ?

And now we are back to Mr Putin's dominant logic. If this logic was purely economic, it is more than likely that the country's interests would be better served by allowing private industry to develop its own production. Indeed, since the state's takeover of Yukanskneftgaz, the production of this company has dropped considerably due to the lack of maintenance of the wells. Even though he is a pure product of communist ideology, Mr Putin understands that. His reasoning, his dominant logic, is different. Mr Putin is a declared enemy of monopolarity and as the arsenal is aging, some of the missiles being probably inoperative due to their obsolescence, the energy weapon is an excellent substitute with the reserve that, as we have noted above, it also has a limited life. Time is running out.

FROM STRATEGY TO ACTION

Prevent monopolarity, but how ?

By creating a dependence of Europe on the supply of energy products in three ways : by maintaining the control of the infrastructure, avoiding passing through countries judged unreliable such as the Baltic states, Ukraine or Poland; by being partners in the gas pipelines, such as the one that will link Russia to Germany through the Baltic; by taking majority or meaningful minority positions in European distribution companies. If at present the companies. If at present the companies in which they have shareholders are in Hungary and Rumania, rumors are circulating on a possible takeover of Centrica, the owners of British Gas, and an interest that would not be entirely academic, for Gaz de France. It goes without saying that this dependence can lead to the economic integration of Russia into the wider European economic zone and the creation of a European alternative to the American economic and military domination. Russia also wants to be a major actor of the resolution of the Iranian crisis. Let us, however, not forget that this crisis has been to a large extent caused by Russia itself which has supplied a large part of the equipment.

The relations between the two countries are excellent, since they will both participate in the new military alliance, CASPSFOR, the aim of which is to defend the deposits in the Caspian Sea. It is probable that Russia also has other objectives. It could see in Iran, a Chiite country, a key element to prevent the creation of a major Islamic nation at its doors. Mr Putin does not forget that Islamic countries have a sharply growing demography while Russia's is collapsing. It can also see the possibility for it to recoup the Iraki concessions that had been given to it by Mr Sadam Hussein's regime. If the presence of the American army makes this objective highly unlikely to be reached, it would not be the case once a Shiite government, close to Iran, is in place.

August 2005

Competition Avoidance

Every single marketing book, and most strategy books, contain considerable material and recommendations on competitive advantage and the best ways to ensure its sustainability.

There are cases, however, when the very existence of a corporation or of a business unit, depends on resisting competitive pressure for a more or less long period of time, after which it should be able to regain lost graound due either to changes in environmental factors or to its ability to establish a new competitive advantage.

In the 1980s, large currency fluctuations placed the company I used to work for in a rather difficult situation since we were faced with competitors in countries whose currencies were on a steady decline against the dollar.

To make this worse, our competitors had introduced a price reduction strategy and we were the main victims. They were able to do this by using their lower production costs (in their local currencies) to force down world market prices over a period of a few years. Ultimately world market prices dropped below our US dollar-based production costs - an unsustainable situation.

It therefore became urgent for us to find a solution that would enable us to at least cover our costs until either world prices recovered and / or our competitors sought higher margins again, since we were convinced that their shareholders would at some stage demand greater returns.

Our feelings were supported by three facts :

  • our competitors were either state-owned and scheduled for privatization (and hence had to show they offered a strong profit upside potential)
  • the market was larger than their combined capacity and hence our own production potential was necessary to supply overall demand
  • our shareholders were not interested in selling the corporation, at least in a situation of depressed prices and profits.

We therefore gave our problem a strong probability weighing that it would be a short- to mid-term issue.

We looked at the possibility of taking our product out of the market by reducing our production volumes and thus leading to shortages and hence price increases. Being a very high cost producer, the profitability issue would remain unchanged.

Among the various alternatives that were examined, one attracted our attention : competition avoidance, in other words identify or create a situation in which competition will not be present. Even if we were only able to sell part of our production at a higher price in a protected market, it might ensure at least that our corporation did not lose money and was able to survive until either the situation reversed itself or we were able to realign our resources to a more cost-competitive situation.

There are seven broad categories of competitive avoidance strategies.

The first consists of an appropriation strategy - i.e. a strategy in which intellectual protection (patents or copyrights) - forbids competitors from making the same offer. Raw materials are unique in their own way (no two minerals are identical) but the material did not require any specific treatment for which we could have obtained a patent. Trade names are not common in raw materials, and an attempt we had made in that direction a few years previously had not born fruit.

Lobbying to change the rules of the game is another option. In our case it translated into attempting to revive a legal cartel that was registered with UNCTAD (United Nations Conference on Trade and Development). This proved impossible considering one of our competitors was based in a country with strong anti-trust legislation.

A third category of competition avoidance strategies consists of securing an exclusive location from which competition would be barred. This is particularly true for tourism, hospitality and retail stores. In our case we made the assumption that location was a market. We therefore attempted to identify one or several countries where our competitors were at a major disadvantage to us.

While this was true for several destinations due to shipping rate differentials, both our competitors and us, had adopted a global price strategy and therefore were happy accepting lower ex-loading port returns for certain destinations, as long as our world-wide average return was satisfactory.

So while this did not appear to be an option for us, we did pursue the matter further by carrying out an in-depth market analysis.

We were able to confirm that some countries that did have local production of their own were hindered by the low quality of their product. This led them to have less efficient, more energy-consuming processes. Blending with our product, we believed, would allow higher yields at more economic rates.

The decision making structure of these countries, run along the lines of Centrally Planned Economies, allowed us to rapidly identify key potential partners and understand possible motivational factors that could induce them to seriously consider our proposal. By satisfying them, we not only opened sizable markets, that eventually came to account for 25% of the group's expanded sales, but also, by the very nature of these demands, which concerned either reciprocal pruchases or technology transfers, we were able to ensure that we were the only foreign supplier at least for a few years. It also enabled us to avoid contract, and thus price, transparency.

The fourth competition-avoidance strategy is that of establishing strategic alliances that are likely to hamper competition.

To this purpose we pursued a strategy of establishing strategic alliances with two of our customers.

One of these alliances consisted of a simple cross-shareholding agreement with shares of an equal value being exchanged. While we hoped this would strengthen our ties and induce a more favorable view on our company as a supplier of privilege, this did not happen. Looking retrospectively, it was probably because the participation was too small and that the deal was negotiated with the client's major shareholders in the face of a strong managerial resistance.

The second alliance was substantially more complex. It enabled us to index our sales price against the client's net margin while giving him very long payment terms. The attraction to us, other than withdrawing a client from the arms of competition, was the access we had to his costs, including electricity, wages, etc. We felt we were acquiring unique knowledge we may want to use at a later date.

We did exactly that, which corresponds to the fifth competition-avoidance strategy : substracting sizable cleints from the market through mergers and acquisitions. We bought two of our customers and that represented another quarter of our production, thus leaving only 50% of our produciton subject to competitive pressures.

On a longer-term basis, innovation, in particular radical innovation, creates a major break in the market and leaves competition behind creating at worst a situation of monopolistic competition, and at best a totally new industry. We were never able, in the industry in which the company was active, to generate such a discontinuity.

The seventh and last category is the simultaneous integration of all these strategies into an elaborate and ambitious master plan.

Michael Akerib