Posts Tagged ‘Clayton Christiansen’

The passing scene: Links & comments 6/18/14

June 18, 2014

A Tale of Torture and Forgiveness by Ariel Dorfman for TomDispatch.

The Chilean-American write Ariel Dorfman described how a British officer was tortured by the Japanese during World War Two, how the officer tracked down his torturer and what happened next.  Anyone who thinks that torture is morally acceptable ought to read this article.

Timothy Geithner Reveals Himself in His New Book by Noam Scheiber for the New Republic.

Does he pass the test? by Paul Krugman for the New York Review of Books.

Treasury Secretary Timothy Geithner wrote in his new memoir that bailing out the banks saved the USA from another Great Depression.  Maybe so and maybe not, but his policy of protecting the banks from prosecution, restructuring or strict regulation has created the conditions for a new and worse financial crash.

What the Theory of “Disputive Innovation”  Gets Wrong by Jill Lepore for The New Yorker.

I think this article is based on a misunderstanding.   Clayton Christensen was not trying to tell business executives how to become disruptive innovators, but warning of the danger of neglecting basic skills and products and of being blindsided by competitors who gain a foothold in the low end of the market.

Magic formulas and failed corporate strategies

August 9, 2013
Clayton Christiansen

Clayton Christiansen

Clayton M. Christiansen of Harvard Business School is a brilliant management scholar who has written about how U.S. corporations fail when they neglect the basics of their business.  He wrote recently in Salt Lake City’s Deseret News about another reason the corporations decline when executives focus on the wrong things.

You have such concepts as Return on Net Assets (RONA), Economic Value Added (EVA), Internal Rate of Return (IRR), Earnings Per Share (EPS) and Gross Margin Percentage. They are all ratios.

By standardizing the definition of profitability, corporations lined up to optimize these profitability ratios. RONA provides a good example.  A company could improve its RONA by generating more revenue and put that in the numerator.

But the other way to improve this ratio is to reduce the denominator by a company getting rid of assets.  Reducing assets is much easier than increasing revenue.  So if a CEO is rewarded for a good RONA ratio, the incentive is to outsource aggressively. When there are no assets on a balance sheet, then this rate of return is infinite, and according to this definition, it might seems like such a company is doing better and better.

via Clayton M. Christensen

McDonnell-Douglas was an example, he wrote.  Its DC-3 transport was a powerhouse of the industry, but the company’s RONA was low.  The company started outsourcing more and more of its work, and its RONA rose to 60 percent.  But when the DC-10 had been put on the market, there was not enough cash flow to launch a DC-11.

The economist Milton Friedman said back in 1970 that corporate executives are employees of the shareholders, and that their object should be to maximize shareholder value.  Steve Denning wrote in Forbes, quoting Jack Welch of General Electric, that this was the “world’s dumbest idea,” which is not to say that Welch never believed in it.  Denning said the truth is that the executive is the employee of the corporation, and that the purpose of the corporation, in the words of management scholar Peter Drucker, to “create a customer.”

I find this discussion familiar, because I remember how, when I was reporting on Eastman Kodak Co. for the Rochester, N.Y., newspaper in the 1980s, Kodak exited or outsourced certain businesses because profit margins were not high enough, while its main competitor, Fuji Photo (now Fujifilm), simply tried to maximize its share of the market.  Like Kodak in the days of George Eastman, Fuji never gave up any basic technological or manufacturing capability.

Why are so many corporate executive beguiled by financial formulas at the expense of long-term survival?  Christiansen thinks it is because of dogmatism and Denning because of stupidity.  Probably they’re right in many cases.  But for certain categories of people, focusing on financial ratios makes perfect sense.   They include hedge fund managers, private equity fund managers who specialize in leverage buyouts and any other investor or speculator who wants to cash in and get out.