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Published: February 28, 2006

 
 

Sharpening Your Business Acumen

These trends built up until, as happens every few decades, they reached a tipping point, and the rate and depth of change accelerated abruptly. The effect can be seen, for example, in the U.S. current account balance, which was roughly in equilibrium in the early 1990s, but dropped to a $668 billion deficit in 2004; in the global glut of manufacturing capacity that is pressuring many industries; and in the new geopolitical realities that became tragically evident on September 11, 2001.

When such forces combine, they can uproot the competitive landscape of a worldwide industry. Suddenly, the moneymaking approach of that industry can be in jeopardy. Success depends on a leader’s ability to recognize such moments of disequilibrium in advance — and to have the courage and business acumen to chart a new course in the face of them, as Lord Browne and Mr. Harrington did.

Seeing the Big Picture
At the time this article was written (in late 2005), the price of oil hovered around $60 per barrel, more than twice its cost about two years earlier. The rise was unexpected and rapid — OPEC’s own price target remained $22 to $28 per barrel until early in 2005 — leaving oil-consuming developed nations to wonder how long it would be before inflation set in.

This type of change would drive many corporate leaders to reexamine their strategy. A typical thought process might begin with a look at cost structures: If oil prices stay at $60, how does it affect my costs this month? Or this year, if prices stay high? Should I hedge oil prices? Can I pass these costs on to customers? If so, can I get my sales force and pricing team together to resegment the customer base? Can we respond faster than our competitors to gain a small advantage until they catch up? Longer term, do we find substitutes for oil, develop new technologies, or initiate research with suppliers to increase energy efficiency?

Answering a series of questions like this may well be necessary for survival, but it is hardly sufficient. It misses the big picture. A different leader, one with sharply honed business acumen, might look at the potential impact of Chinese and Indian demand for oil on the patterns of global supply and demand, asking such questions as: How might geopolitics constrain the supply side of the equation? What might generate a resurgence of supply in the Middle East, Latin America, Russia, or the Arctic, or accelerate the exploitation of Canadian oil sands?

Going further, the executive might ask how different actors might respond: As China and India seek to control more oil and gas production or refinery assets, will they form political alliances with nations rich with such assets? How might high oil prices shift the balance of power between the government and oligarchs in Russia? Will developed-world consumers demand energy-efficient products — and be willing to pay a premium for them until economies of scale bring costs down?

The business leader might also wonder about the flow of capital: Where are oil-producing nations, flush with cash, going to park their funds? If those funds go toward U.S. Treasury bonds, will long-term interest rates remain low? Is more capital accruing among people with an interest in funding terrorism, potentially exacerbating global security problems? Will private equity funds, also flush with cash, invest in companies developing new sources of energy or revitalizing nuclear power, creating a new wave of change?

Questions like these are distinguished from simple woolgathering about current events because the answers have direct implications for every business decision. Until these brainteasers are thought through and understood, worrying about cost structure won’t take the company very far.

 
 
 
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Resources

  1. Kenneth R. Andrews, The Concept of Corporate Strategy (Dow Jones/Irwin, 1971): Classic strategy manual, still relevant in a turbulent world.
  2. Larry Bossidy and Ram Charan, Confronting Reality: Doing What Matters to Get Things Right (Crown Business, 2004): How to define an ongoing, external-world-savvy strategy.
  3. Ram Charan, “Boardroom Supports,” s+b, Winter 2003: How governance and leadership development can align. Click here.
  4. Randall Rothenberg, “Ram Charan: The Thought Leader Interview,” s+b, Fall 2004: On building better executives and continuous transformation. Click here.
  5. Jack Welch with Suzy Welch, Winning (HarperBusiness, 2005): Guide to acumen in practice.
 
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