Tuesday, April 10, 2012

Market Insights. Are they possible?

Buzzwords from this week's readings: organizational capabilities, attracting talent, changing rapidly, coherent brand identity, accountability, collaboration, learning, leaedership, customer connectivity, strategic unity, innovation, efficiency, capabilities audit, identity aligning with strategy, interdependent/combined abilities, looking outside your industry for models, virtuous cycle of assessment/investment, match capability with delivery, invest in intangibles, critical capabilities, firm volatility, organizational agility (strategic, portfolio, operational), seizing golden opportunities, small-scale probing, looking for diverse opportunity streams, mitigating risk, screening potential acquisitions, staying in the game to make a difference, structural attributes to stay in the game, developing sources of resilience, logic and data = agility, leadership training, free resources for promising ops, data-gathering and sharing, spotting trends, choose critical major initiatives, leadership quality is critical to growth, two important competencies: market insight & customer impact, talent strategies matching growth priorities, assembling a critical mass of talent

When reading the last article assigned this week ("Do you have the right leaders for your growth strategies?") I latched on to the results from Egon Zehnder's performance appraisal of executives on 8 leadership competencies. For one competency, "market insight", there was a 0.9 difference in average score for executives at top-quartile companies (by revenue growth) over those at bottom-quartile ones. This was the biggest different out of all the competencies. The article defines market insight as looking beyond a company's current business landscape to discern future growth opportunities. Evidently, finding leaders competent in market insight will improve a firm's chances of making the right M&A decisions.

However, the recent financial crisis and knowledge accrued through various Holywood movies and from my limited experience finance tells me that financial predictions are rarely straight forward. According to an article by MarketWatch (http://www.marketwatch.com/story/you-are-the-best-predictor-of-next-bull-or-bear-2012-04-10?pagenumber=2), Brandeis University Professor William Sherden tested the accuracy of economic forecasters over many decades and came to the conclusion that the business of "selling predictions" is not at all reliable and merely a matter of pushing convincing ideologies on eager investors.
Here are some of Sherden's findings:
1. Forecasting is on average about on par with guessing.
2. Economists cannot predict turning points in the economy.
3. No ideology produced superior forecasts.
4. Some forecasters are pessimistic and others optimistic. This inserts bias into their methodologies.
5. Though technology has increased in recent years, forecasting ability has not.

The general tone of this MarketWatch article by Paul Farrell is generally pessimistic. He likens forecasters and economic researchers to illusionists who manipulate your brain and take advantage of your sense of wonderment at predictions to get to your money. Though research may indicate that predicting macro-economic trends to make buy-sell decisions in the context of funds and stocks is deceptive at best, I believe the situation is different in a b2b situation. When a company wants to grow its revenue streams inorganically by buying off a smaller company, merging with a competitor, or selling off unproductive assets, there are many decision factors to take into account, but significantly less than when looking at market-wide situations that cut across various industries. Think of a practical example: a private-run hospital in Maine would like to improve its operational capabilities by switching to electronic records and moving to "cloud storage". Bringing in a leader with expertise in the IT fields and specifically in cloud system management means he has ideal market insight for the hospital. Using his knowledge of the fast-changing IT markets, he can scope out new-comers in the cloud industry, and direct a successful M&A operation.

In conclusion, forecasting and market insight is a question of scale. At the company/competitor level, it is feasible and a source of competitive advantage. At the industry or economy level, it is rarely accurate and can have disastrous effects.

Question this week: What risk management/mitigation techniques should the hospital adopt in case the new IT manager is wrong in his predictions regarding a merger with a cloud-based IT company?

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