I am focusing, for a few days starting from today, on delivering educational content. In the framework of 4 courses I teach, this semester, at the Andrzej Frycz Modrzewski Krakow University, three – Foundations of Finance, International Management, and International Trade – require preparing graduation projects. I am presenting guidelines for those projects, and I start with the way I advise for preparing a project in International Management, Summer-Spring 2020.
When my students prepare a project in management, I keep repeating the truth: neither I, the teacher, nor you, my students, are professional managers. We are looking at the world of management from outside. This is a harsh truth to swallow: I teach something I have almost no practical experience with. What kind of skills can I, the teacher, bring to the table, in such case? I have skills in patterning and modelling social structures. That could be the reason why I do social sciences, and this is the bacon I can feed my students in any kind of management course. Thus, when you do management with me, in class, we are all throwing our limited knowledge at real situations and try to understand our own cognitive limitations. From that angle, the course of management aims at learning how much you don’t know, and what you need to learn about the situations we are talking about.
In the course of International Management, the general frame for your graduation projects is to figure out an organisational solution to problems, which manifest themselves as officially acknowledged risk factors, explicitly discussed in annual reports of the companies, whose cases we discuss in class. That general approach unfolds in a few distinct steps. You read the annual report of, for example, General Electric, which you have already worked with in the first online class this semester. You take any risk factor named in that report. That risk factor means that something specific can happen, which will harm GE’s business. What exactly is that specific, adverse event? Try to imagine very realistically what kind of real situation can it be. When you do that, you will probably figure out 4 types of situations.
Firstly, someone recurrently makes small mistakes, over and over again. Those small mistakes pile up, and they sort of capitalize on each other. If today I neglect checking something important, tomorrow that negligence is likely to bring some adverse effects, and when I repeat it, i.e. when I skip that important check once again, adverse effects combine. When I neglect to check, whether the salary system for salespeople in my business is working well, those people get more and more pissed every month. Their frustration accumulates, and they react more and more nervously to even small imperfections in the wage system.
Secondly, someone can make one, big, catastrophic mistake, e.g. signing a big, really bad contract, which, in turn, will expose our business to a whole series of adverse outcomes, or, for example, a person will take revenge on the top management by transmitting the details of some in-house technology to a competitor. Please, note that mistakes can fluidly transform, or coexist with opportunistic behaviour. What is seen as a mistake from outside can be the manifestation of wrongful intentions on the part of the person who makes that mistake.
A big, catastrophic event can take place as ‘force majeure’, e.g. a hurricane, or a pandemic such as the present COVID-19 one, and this is the third type of risk factor. Finally, the external structure of our market can change in an unfavourable direction, and this usually takes place on an adverse change in prices, e.g. the present slump in the prices of crude oil, which is a good thing for some businesses, and a very bad one for others. That fourth type of risk is usually called ‘financial risk’.
Thus, whatever bad happens to a business, the roots of that adverse event usually fall into one of those four categories: repeated, small human mistakes, occasional big mistake, external disaster, or unfavourable external change in the prices of something. Now, think how you can make an organisation resilient to those risks. What kind of people would you need, in order to shield the business against those risks? What kind of jobs should those people do? How can you pay them? What kind of internal control you need? What kind of organisational structure will work better, in terms of resilience? Do you need, for a given business, a solid, relatively slow functional structure with a lot of internal controls, exhaustive documentation etc., or, maybe, what you need is an agile, very horizontal structure, with task-teams focused on projects rather than functional divisions with distinct competences? Which organisational pattern which shield you better against small, bitchy mistakes or frauds? Which is going to play out better when it comes to preventing a disaster-like bad decision?
In that case of General Electric, I asked my students to study the risk of making bad investments or unfavourable dispositions (reminder: disposition, in this context, means selling and entire business or an important portion of strategic assets from a business), thus the risk named as ‘Portfolio strategy execution’. We focused on the healthcare segment of GE’s business (i.e. technologies for healthcare and biotech), and I gave my students (it was in the beginning of March) a task which looks prophetic now. I asked them to imagine that GE wants to sell (i.e. divest from) the entire healthcare segment of their business. Right now, hardly anyone in their right mind would get rid of technological assets in healthcare. Still, in the beginning of march, the s**t we currently have was just outlining itself.
Anyway, we focus on the healthcare segment in the general portfolio of General Electric. In the discussion of ‘Portfolio strategy execution’, in the GE’s annual report for 2019, you can read the following passage: “Our success depends on achieving our strategic and financial objectives, including through dispositions. We are pursuing a variety of dispositions, including the planned sale of our BioPharma business within our Healthcare segment and exiting our remaining equity ownership position in Baker Hughes. The proceeds that we expect to receive from such actions are an important source of cash flow for the Company as part of our strategic and financial planning”. Let’s break it down into adverse events, and then I can take a risk (!) at trying to lead my students from risk factors to organisational solutions that can shield against those risks.
The first sentence of that passage says: “Our success depends on achieving our strategic and financial objectives, including through dispositions”. It roughly means that the top management of GE sees the entire portfolio of businesses, all segments combined, as a hand of cards in a poker game. You probably know that in poker you can ask the croupier to exchange one or more of the cards from your hand against cards from the deck. When you go for such an exchange, you expect that the cards you get from the croupier will make a better match to the remaining ones, which you still keep in hand. You are a top manager with GE, and you decide to sell (i.e. to dispose of) an entire business, in order to generate a cash inflow, which, in turn, will serve you to buy (i.e. invest in) another entire business.
Your basic challenge in such a situation is limited, imperfect information. You know, how the business you intend to sell is playing out with all the rest in your hand, and you have some expectations as for how another business – which you intend to buy – could work with the same rest in your hand. From the cognitive point of view, you are trading actual, hard-facts-based knowledge of a presently owned business, against much foggier expectations as for future possible gains from another business. You are exchanging some known s**t against some unknown s**t, with the unknown being somehow tempting you with potentially higher rewards.
Let’s translate this situation into the four basic types of risk: repeated, small human mistakes, occasional big mistake, external disaster, or unfavourable external change in the prices of something. Someone, further down the corporate hierarchy, could have been making small recurrent mistakes, or could have been perpetrating small recurrent frauds, which could have brought the healthcare business you intend to dispose of to a situation of suboptimal performance. You think the business you want to sell is worth X $ million in terms of expected net income, but in fact it could bring much more, like 2*X $ million, if you eliminate the risk factor of recurrent, small human mistakes. How can an organization shield itself against this type of risk? The most obvious answer is that if you currently control, in a rational way, operational performance in the given business, you can have a pretty good idea of what that business is capable of. If you don’t have such a controlling system, you could be selling a business with a lot of potential, and you would be selling because you cannot see that potential.
Conclusion #1: if you have in place a rational system of KPIs (Key Performance Indicators), in each business you have in your portfolio, you can make much more informed decisions as for selling (disposing of) each such business. Topic #1, which my students can develop in their projects, and which arises from that partial conclusion, could go as follows: ‘Study the entire portfolio of businesses in General Electric. Look for any piece of information you can find about it. How can you know that each of those businesses is currently working at 100%? What system of performance measurement you would like to see in place, so as to be well informed? At the end of the day, what information would you need to be sure that the decision of selling a business is really well-founded?’
Let’s move further. The next sentence, in the same passage says: ‘We are pursuing a variety of dispositions, including the planned sale of our BioPharma business within our Healthcare segment and exiting our remaining equity ownership position in Baker Hughes’. A variety of dispositions means that GE is selling, or, potentially, can be selling at any given moment, many businesses at once. You can lose your balance in the midst of variety. You can do something relatively well, at the expense of doing something else much less efficiently that what you expect from yourself. Let’s try to find ways of preventing it.
When you perform many similar actions in parallel, you would like to carry out each of those actions with a maximum of efficiency. You study, you practice some sport, and you engage in business, and you would like to deliver your A game in each of these fields. There are some basic techniques you can use to assess whether you can find efficient balance at all, and whether your actions are balanced at a given moment. One of those techniques consist in assessing your resources. If, pursuing that existential example, you study, you do sport and you do business, a basic personal resource is time and human energy (i.e. the chemical energy you need in order to generate neurotransmitters, which, in turn, your nervous system needs to have all the major angles covered). Question: do you have enough time to cover studies, sport and business? It is a harsh question. The answer might be no, I haven’t. The even harsher implication of that answer is the necessity to cut something out. I focus on exams, and I give up my performance in an important sports event, or I focus on business and take a sabbatical at the university. Another answer could be yes, I have enough time, but I need to cut some slack. I need to give up on some pleasures (e.g. watching Netflix, or partying), and that will give me 2 extra hours a day for packing all my priorities in it.
We can translate it back into the context of General Electric. When ‘We are pursuing a variety of dispositions’, we can ask: ‘Do we have enough organisational resources to pursue that entire variety of dispositions efficiently? Do we have enough people, enough computational power in our digital systems, enough good relations (or good enough relations!) with external entities so as to handle all that variety as it is?’. The answer can be yes, we have, or no, we haven’t. In the former case, the immediately following question is: ‘Do we have those resources organized optimally? Does every person involved know what they are supposed to do? Etc.’. In the latter situation, when we conclude that we cannot possibly cover all the angles with the resources we have, we follow up by asking ourselves: ‘What do we do? Do we hire additional human resources, or/and engage additional technology into the process of managing as wide a variety of dispositions as we are currently handling, or, maybe, it is a better idea to reduce variety? Maybe we can postpone some of those dispositions and focus more efficiently on the remaining deals? Does it all have to be carried out right now? Maybe we can make a timeline over the 2 years to come?’. By the way, in unstable market conditions, such as every business is facing now, with the COVID-19 pandemic and its consequences, it might pay off to slow down our decision-making, to observe and learn more before taking strategic decisions.
Conclusion #2: in a given context of external market conditions, the organization we actually have in place has a given capacity to process information and to make strategic change on the grounds of that information. If we want to pursue more operations in parallel than our organizational resources actually allow to, we risk losing our bearings in the midst of variety. There are two alternative ways out of that predicament. On the one hand, we can cut on the variety of our operations and/or our strategic decisions so as to focus on the amount we can really handle. On the other hand, we can expand our organizational resources so as to pursue efficiently the entire variety of actions that presents itself to us.
Thus, a possible topic #2 emerges for my students in International Management. Once again, go over the business of General Electric. Try to understand very practically, what do they mean by ‘pursuing a variety of dispositions’. Variety means what exactly? Now, what organizational resources (people, information, business relations etc.) does GE need so as to carry out efficiently one single disposition? Expand by assuming that you run an investment fund, with participations in many high-tech businesses. Every few months, you need to decide whether each of those businesses is worth holding in your portfolio, or maybe it would be better to sell it. What organizational resources do you need to manage such decisions efficiently? How many people would you need to hire, in such an investment fund? What kind of duties would those people have to carry out, and what skillset you would expect in them?
