Clarity of Risk is Essential for Success in International Business Development: Opacity Index & Corruption Perceptions Index (CPI)…

“We realized that a lot of information about countries or companies is lost or intentionally hidden. If you can’t get good information, risks can be overvalued or undervalued.” ~Joel Kurtzman

Opacity (defined as ‘lacking transparency or translucence; opaqueness’) is not only a deterrent to global economic development, but it also decreases the ability to access capital. According to the ‘World Bank Doing Business Database’, regulatory and legal transparency is an important indicator of the cost of starting or expanding a business, and, it can enhance or constrain business investment, productivity, and growth…

The Opacity Index is a measure of a country’s regulatory and legal transparency, and consists of five factors: corruption, legal system efficiency, economic and enforcement policies, accounting standards and regulatory effectiveness. Together, these factors form the acronym ‘CLEAR’. ‘Higher level rankings’ of opacity in the ‘CLEAR’ factors indicate poorly functioning governments, which increases the cost of doing business, as well as the risk.

The Opacity Index measures high-frequency, low-impact risks, which include; corruption and un-enforced laws and policies. It also measures the rights of debt- and equity-holders around the world, the adequacy of corporate governance and the quality of accounting standards. Whereas, most traditional measures of risk look at low-frequency, high-impact events, such as coups-d’état, nationalization of industries and earthquakes…

In the blog Overseas Investors Get Guidance from PwC’s Opacity Index by AccountingWEB writes:  The analytical model for the Opacity Index was developed by ‘PricewaterhouseCoopers (PwC) Endowment for the Study of Transparency and Sustainability’ to provide guidance for policy makers and business leaders who are considering the economic impact of international business development.  The objective was to create a country-by-country ‘ranking of opacity’, which represented degrees of ‘lack-of-clear, accurate, easily discernible and widely accepted practices governing the relationships among businesses, investors, and governments’.

The Opacity Index draws upon 65 objective variables from 41 sources compared across 48 countries. Each component of opacity; corruption (C), efficacy of the legal system (L), deleterious economic policy (E), inadequate accounting and governance practices (A) and detrimental regulatory structures (R) — is rated separately, and the component ratings contribute to an overall opacity rating…

In the article “The True Cost of Going Global” by Judy Warner writes: The Opacity Index helps to make known, that which is hard to know: True cost of doing business globally. What does it really cost to tap China’s massive market? Is that a better value than setting up shop in India or Brazil? Why is Finland considered a safe place to do business?

These type questions are the basis of the book, Global Edge: Using the Opacity Index to Manage the Risks of Cross-Border Business” by Joel Kurtzman and Glenn Yago. While working at PwC, Kurtzman and Yago developed the initial research that led to the creation of the Opacity Index. “What we were interested in were the capital markets and how they reacted to information,” Kurtzman recalls. “We realized that a lot of information about countries or companies is lost or intentionally hidden”.

If you can’t get good information, risks can be overvalued or undervalued. Our yardstick was how the capital markets looked at companies and whole countries and how that related to currencies…Then we looked at governance nationally and at a corporate level, and were able to determine that there’s a lot more globalization of processes than information. We know how to manufacture around the world but, for example, executives in Germany don’t necessarily know how business is conducted in France, or other countries. The index provides a snapshot”…

In the article The Global Costs of Opacity by Joel Kurtzman, Glenn Yago, and Triphon Phumiwasana write:  A careful review of the individual ‘CLEAR’ factors can provide highly useful information in decision-making, since even in countries with the same overall Opacity Index rating the causes of opacity might be quite different. For example, if managers have a choice of where to locate a regional headquarters, they might choose a country with scores higher on the legal and economic sub-indices. If they are looking for a place to build a plant, they may care more about the corruption sub-index.

If they are looking at a joint venture with another company, the legal sub-index will indicate those locales in which the provisions of a joint-venture contract will be best enforced. This is not to suggest that businesses should avoid high-opacity countries. Indeed, in some areas of commerce such as mineral extraction and oil production, that would be difficult, since many of the largest producers of raw materials and oil have high opacity scores. Instead, businesses can use the Index to prudently measure their risks and to create mechanisms to protect themselves against those risks.

In the article “Measuring Opacity” by Christos and Mary Papoutsy write: The Opacity Index measures ‘level of opacity’, defined as “the lack of clear, accurate, formal, easily discernible, and widely accepted practices.” The potential for opacity exists and no country is likely to earn a perfect score. For example, there may be corruption in government bureaucracy that allows bribery or favoritism. The laws governing contracts or property rights may be unclear, conflicting, or incomplete. Economic policies — fiscal, monetary, and tax-related — may be vague or change unpredictably.

Accounting standards may be weak, inconsistent, or irregularly applied. A high degree of opacity in any of these areas will raise the cost of doing business as well as curtail the availability of investment capital. As the world’s markets, in the era of “globalization,” become more interdependent, it becomes obvious that one country can differ from another in clarity and consistency of their approaches to managing their economies. Some national economies are relatively transparent, while many others are relatively opaque. The Opacity Index brings a degree of clarity to the subject of costs related to corruption…

Since 1995, ‘Transparency International (TI)’ has published an annual ‘Corruption Perceptions Index (CPI)’ ordering the countries of the world according to “the degree to which corruption is perceived to exist among public officials and politicians”. The organization defines corruption as “the abuse of entrusted power for private gain”. A higher score means less (perceived) corruption.

Since this index is based on polls, the results are fully subjective and based on a reputational model, and less reliable for countries with fewer sources. Also, what is legally defined (or perceived) to be corruption, differs between jurisdictions: a political donation that is legal in some jurisdiction may be illegal in another; a matter viewed as acceptable tipping in one country may be viewed as bribery in another.

In former Soviet states, the term “corruption” itself has become a proxy for the broader frustration with all changes since the breakup of the USSR. In the Arab world, terms for corruption had to be invented by advocates as recently as the 1990s… Critics point out that definitional problems with the term “corruption” makes the tool problematic for social science. Aside from precision issues, a more fundamental criticism is aimed at the uses of the Index. Critics are quick to concede that the CPI has been instrumental in creating awareness and stimulating debate about corruption.

However, as a source of quantitative data in a field hungry for international datasets, the CPI can take on a life of its own, appearing in cross-country and year-to-year comparisons that the CPI authors themselves admit are not justified by their methodology. The authors themselves state: “Year-to-year changes in a country’s score can either result from a changed perception of a country’s performance or from a change in the CPI’s sample and methodology. The only reliable way to compare a country’s score over time is to go back to individual survey sources, each of which can reflect a change in assessment.”

In the blogCorruption Realities Index 2010 by Anatoly Karlin writes: There are three corruption indices that aren’t as well known as the CPI, but far more useful. One of them is ‘Transparency International’s’ less well-known ‘Global Corruption Barometer’. Every year, they poll respondents on the following question: “In the past 12 months have you or anyone living in your household paid a bribe?” The answers hint at the prevalence of corruption in everyday life, as experienced by a sample of normal people…

Another key resource is the ‘Global Integrity Report’, which evaluates countries on their actually existing ‘Legal Frameworks and Actual Implementation’ on issues, such as, “the transparency of the public procurement process, media freedom, asset disclosure requirements, and conflicts of interest regulations.” This involves line-by-line examination of the laws in question, and the “de-facto realities of practical implementation”…

Finally, there is the ‘International Budget Partnership’, which – believe it or not – assesses budget transparency and accountability. It compiles an ‘Open Budget Index’ on the basis of factors such as budget documents availability, and the effectiveness of oversight by legislatures and supreme audit institutions… Data from all these three aforementioned corruption indices – to the extent available — is amalgamated to produce the ‘Corruption Realities Index’…

Having ‘clarity of risk’ is essential for success (or, for averting failure) in international business development. When assessing business risk, do your homework before investing in a country. Otherwise, problems such as corruption, weak legal systems, inefficient enforcement policies, deliberately confusing or illegal accounting procedures and dysfunctional regulations can increase your costs of doing business or even thwart your efforts.

Learn what to expect before you commit resources: The “Opacity Index” aggregates information on these complex factors to help individuals and companies formulate strategies to protect themselves against the risks of globalization. They also offer a useful, contrarian perspective on a range of issues; for example, they may question the vogue for investing in Brazil, Russia, India and China, which are highly opaque countries, according to their index…

“It’s the same whether it’s a company, a country or a region, if the risk picture is unclear, capital is less likely to go where it’s needed.” ~Matt Feshbach

Impact of War on Terrorism and Economy & Business: Spending; $Trillions + Casualties + TSA + and Counting…

“Terrorism is designed to create power where there is none or to consolidate power where there is little. Through the publicity generated by their violence, terrorists seek to obtain the leverage, influence and power they otherwise lack to effect political change on either local or international scale.” ~Professor Bruce Hoffman

According to the “RAND Database of Worldwide Terrorism Incidents (RDWTI) Study”, between 1969 and 2009 there were 38,345 terrorist incidents around the world. Of these attacks, 7.8 percent (2,981) were directed against theUnited States, while 92.2 percent (35,364) were directed at other nations of the world. Between 2001 and 2009:

  • There were 91 homegrown terrorist attacks of all kinds against theUnited States, while there were 380 international terrorist attacks against theUnited States
  • The two most prevalentU.S.targets of international terrorism were businesses (26.6 percent) and diplomatic offices (16.6 percent)
  • The two most prevalentU.S.targets of domestic terrorism were businesses (42.9 percent) and private citizens and property (24.2 percent)
  • The preferred method of attack against theUnited Statesfor international terrorists was bombings (68.3 percent), while the preferred method for domestic terrorists was arson (46.2 percent)

In the articleTrends in International Terrorism Against Business Targets by Andrew Lee writes: One of the key contemporary challenges facing international business is how the effects of international terrorism can be managed, particularly when the terrorism threat is unpredictable and indiscriminate. In addition, attacks on an international business may be based on what the organization symbolizes in the minds of the attackers rather than the actual nature of the business.

International terrorism attacks against business targets account for 18.28% of all attacks; Direct attacks on business infrastructure targets account for less than 10% of all international terrorism targets, suggesting that attacks on infrastructure are less likely to occur as an indirect attack on business targets.

The most widely used tactic in international terrorism against business targets is bombing, currently averaging approximately 39 incidents per year globally. All other forms of attack average less than five incidents a year each. However, the use of bombing is declining in favor of other tactics, particularly armed attack…

In the blog “The Effects of Terrorism on the World Economy” by evan14 writes:  Every year nearly a trillion dollars are spent on combating terrorism. This along with the billions lost in property damage, loss of human resources, and the decrease in potential profit in key industries are substantial enough to award the terrorists a small victory. Terrorism is a plague on the global economy, and it affects everyone, from entire countries all the way down to the individual.

The total cost of terrorism can be broken down into many areas, but at its simplest it comes down to the direct effects, the response costs, and the negative effects on key industries. The direct effects of terrorism can be further sub-divided into categories such as property damage, and loss of human resources.

A perfect example of the havoc an attack can wreak on businesses is the attack of September 11, 2001. When the $100 billion bill is broken down, it really helps you to realize how devastating terrorism can be. Keep in mind this is only for the 9/11 attacks: [Four civilian aircraft were lost for a total of $385 million. The replacement cost of the world trade center buildings is estimated at 3-4.5 billion dollars.

The pentagon endured nearly a billion dollars worth of damages. The clean up cost was $1.3 billion. Damages to surrounding property and infrastructure were almost $13 billion. Direct job losses amounted to 83,000, with $17 billion in lost wages. The amount of damaged or unrecoverable property reached over $21 billion.] Then, in retaliation, ‘defense and security spending increased by a massive amount’ in the aftermath of the September 11 attacks. And, the increased spending was explained as follows:

“The U.S. alone now spends about US $500 billion annually–20 percent of the US federal budget–on departments directly engaged in combating or preventing terrorism, most notably Defense and Homeland Security. The Defense budget increased by one-third, or over $100 billion, in response to the heightened sense of the threat of terrorism – an increase equivalent to 0.7 per cent of U.S. GDP. Expenditures on defense and security are essential for any nation, but of course they also come with an opportunity cost; those resources are not available for other purposes, from spending on health and education to reductions in taxes. A higher risk of terrorism, and the need to combat it, simply raises that opportunity cost”.

In the article “Organizational Stakeholder Expectations in an Age of Terrorism” by Robert S. Fleming writes:  From a business standpoint, an act of terrorism has the potential of compromising the organization’s ability to continue to operate. When it cannot operate, the length of the interruption in operations becomes a crucial factor. When the organization is able to continue to operate, operating costs may become an issue.

Ultimately, the impact of an exposure may be to undermine the organization’s ability to survive. Crucial organizational strengths that contribute to an organization’s ability to prevent and withstand a terrorist attack begin with the presence of an effective risk management program, utilizing the traditional risk management process of risk identification, risk evaluation, risk prioritization, risk control, and risk monitoring. A comprehensive risk management program can be instrumental in reducing organizational vulnerability both in terms of prevention and recovery.

Contingency planning is another organizational strength whose value cannot be overstated when it comes to minimizing organizational vulnerability and enhancing organizational recovery. The development of realistic contingency plans that interface appropriately with the organization’s corporate-level, business-level, and functional-level plans is essential, as is making sure the organization’s contingency plans coordinate with those of governmental entities, including emergency preparedness and response agencies.

The lack of planning and absence of appropriate contingency plans are a major organizational weakness in terms of organizational vulnerability to acts of terrorism (also, these preparations are applicable to pandemics or other major natural  disasters). A lack of controls or ineffective controls also represents a weakness in terms of prevention and recovery from acts of terrorism…

In the article “How can Business Cope with Terrorism?” by Bruno S. Frey writes: The term “coping with”, rather than “fighting”, terrorism has been chosen on purpose. I start from the position that terrorism always has existed, and always will exist. It is impossible to eradicate terrorism completely, not even if the most stringent deterrence policies are employed.

Business leaders should not fall prey to the illusion that terrorism is a transitory phenomenon that will disappear in due course. Rather, they need to muster ingenuity and resources and set out to deal with terrorism as a part of the many other challenges they must face. It is naïve to think that killing terrorists “wins the war against terrorism”. Members of terrorist organizations, who cannot see worthwhile alternatives in their lives will continue to turn to terrorism, and often will do so even more quickly if a superior in their ranks is killed.

This death (e.g. Osama bin Laden) at the hands of their enemies offers them the chance of a promotion within the terrorist hierarchy, and in addition, gives them a moral pretext to engage in revenge. However, based on a ‘rational choice theory’ (that might be naive), we must begin to change the game and explore non-violent propositions (together with a firm hand) for dealing with terrorist and changing the expected costbenefit ratio

In the blog 20 Year Forecast on Terrorism’s Impact on the World Economy by evan14 writes: Terrorist groups will continue to exist and operate as long as there is an imbalance of power between governments and individuals with opposing beliefs and values that see asymmetrical warfare as the only means of a solution. Many terrorist groups do not possess the military and political power necessary to combat their perceived injustices through traditional channels, so they resort to terrorism.

Global terrorism has a negative economic effect on the world economy as seen through its impact on ‘Foreign Direct Investment (FDI)’ and ‘Gross Domestic Product (GDP)’ of a given country… There will be attempts to curb and disrupt terrorist activity through changes in foreign policy, but no real way to eliminate one hundred percent of terrorist activity…

Employers need to have a well-communicated plan in place that may include third-party resources if an emergency arises and help protect employees abroad and ease concerns associated with business travel, including:

  • Assure that employees have a set itinerary in place
  • Thoroughly research the hotels, transportation vehicles and travel routes employees plan to use
  • Provide employees with a packet of updated travel logistics before they leave in case they become stranded without an operative communication device

The United States has spent more than $1 trillion on the “war on terror” since 9/11, and a recently released Congressional report says: “Adjusting for inflation, the outlays for conflicts in Afghanistan, Iraq and elsewhere around the world make the “war on terrorism” second only to World War II. World War II cost $4.1 trillion when converted to current dollars, although the tab in the 1940s was $296 billion. World War II consumed a massive 36 percent of America’s gross domestic product — a broad measurement of the country’s economic output. The post-9/11 cost of the conflicts is about 1 percent of GDP…” 

In addition, there are billions of dollars spent by global businesses for both the threat of, and damage from terrorism: Productivity and growth decline in areas where the threat of terrorism escalates, heightened threat of terrorism creates uncertainty and increases costs of doing business and slows down growth. With the threat of terrorism, normal businesses require more time and extra security for their business dealings, and there is a general slowdown in economic activity.

The true cost of terrorism or the threat of terrorism is enormous. In his October 2004 address to the American people, bin Laden noted that the 9/11 attacks cost al-Qaeda only a fraction of the damage inflicted upon the United States. “Al-Qaeda spent $500,000 on the event,” he said, “while America in the incident and its aftermath lost — according to the lowest estimates — more than $500 billion, meaning that for every one dollar al-Qaeda spent, America spent one million dollars (that’s $1 to $1,000,000)”.

Terrorism, on a pure cost-to-benefit analysis, is the most efficient business model of war… From purely a business prospective, this ROI stinks. We must develop a more reasoned approach that protects the populations, minimizes the root cases of terrorism, isolates the countries that sponsors terrorism, and adopt a more focused spending policy that fuels strong economic & business growth…

“If we like them, they’re freedom fighters… If we don’t like them, they’re terrorists. In the unlikely case we can’t make up our minds, they’re temporarily only guerrillas” ~Carl Sagan

Private Equity– Changing Face of Capitalism: Dark- & Bright-Side of the World Financial Markets…

“Private equity is becoming a life-stage for CEO’s. It’s something we’ve never seen before. Perhaps the lesson to remember best is this: the Private Equity world is now attracting the ‘best and brightest’ of the corporate world…” ~Jeffrey A. Sonenfeld

Private equity firms have been castigated as “smash and grab merchants”, “deal flippers”, and criticize severely as “locusts that fall on companies and stripping them before moving on.” They have been accused of misleading promises, dodging tax and threatening social stability. Yet they are the emerging giants of the financial world, an alternative asset class that is increasingly attracting investor interest. Consider these facts:

  • The biggest five private equity deals together are larger than the annual budgets of all but 16 of the world’s largest nations. The five biggest deals involved more money than the annual budgets of Russia and India.
  • The annual revenue of the largest private equity firms and their portfolio companies would give private equity four of the top 25 spots in the Fortune 500. These firms have more annual revenue than companies, such as, Bank of America, JP Morgan Chase, and Berkshire Hathaway.
  • The top 20 private equity firms alone control companies that employ nearly 4 million workers.

Private equity investments are primarily made by private equity firms, venture capital firms, or angel investors, each with their own set of goals, preferences, and investment strategies, yet each providing working capital to target companies to nurture expansion, new product development, or restructuring of the companies’ operations, management, or ownership.

Among the most common investment strategies in private equity are: leveraged buyout (LBO), venture capital (VC), growth capital, distressed investments and mezzanine capital. Private equity is risk capital invested in businesses that aren’t listed on public-stock exchanges, or won’t be after they’ve been taken over, and de-listed. It’s also a shorthand term for firms that specialize in raising capital for new enterprises, financing management buyouts, and restructuring companies to realize the full value of their assets.

Over $90 billion of private equity was invested globally in 2009, a significant fall from the $181 billion invested in the previous year. The 2009 total was more than 70% down from record levels seen in 2007. Deal making however gathered momentum during the year with larger deals announced towards the end of 2009. With bank lending in short supply, the average cost of debt financing was up and private equity firms were forced to contribute a bigger proportion of equity into their deals.

Private equity funds under management totalled $2.5 trillion at the end of 2009. Funds available for investments totalled 40% of overall assets under management or some $1 trillion, a result of high ‘fund raising’ volumes between 2006 and 2008. Funds raised fell by two-thirds in 2009 to $150 billion, the lowest annual amount raised since 2004.

The difficult ‘fund raising’ conditions have continued into 2010 with half-yearly figures showing a total of $70 billion raised in the first six months, slightly below the same period in 2009. The average time taken for funds to achieve a final close more than doubled between 2004 and 2010 to almost 20 months and in some cases the final amounts raised were below original targets.

Prior to the economic slowdown, the market saw intense competition for private equity financing. The three years leading-up to 2009 saw an unprecedented amount of activity, during which more than $1.4 trillion in funds were raised.

In the article A Primer on the Structure of Private Equity Firms” by Michael Gasparro writes: The private equity firm is typically made up of limited partners (LPs) and general partners (GPs). The LPs are the outside investors. They provide the capital and typically consist of institutional investors such as insurance companies, endowment funds (Harvard, Stanford, Princeton, Yale, and other universities invest endowment funds in private equity), foundations, banks, retirement/ pension funds, family investment offices, as well as, high net-worth individuals.

They are called limited partners in the sense that their liability extends only to the capital they contribute. Generally, the minimum commitment for an LP is $1 million. The agreement between LPs and GPs will typically include contractual provisions which specify what private equity firm can and cannot do. Broadly speaking, provisions will be placed around the management of the fund, the activities of the GPs and the types of investments the GPs can make…

In the articlePrivate Equity Insights You Need To Know” by Tom Johansmeyer writes: ‘Global private equity deal flow has witnessed a resurgence during 2010 as a whole, with deal flow globally this year representing the strongest year for private equity deals since the onset of the global financial crisis. ‘In particular, this year has been notable for a surge in both North American and European deals, with North American deal flow in 2010 more than double that witnessed during 2009, and European deal flow in 2010 almost three times the value of deals seen in the region in 2009.’ According to the Preqin’s statistics:

  • There were 265 exits in the fourth quarter of 2010, amounting to $71.8 billion – this is the highest quarterly figure on record.
  • In full-year 2010, $204.9 billion worth of buyout deals was announced, more than doubling the 2009 total value announced.
  • Deal flow in 2010 increased 130 percent from 2009 and 35 percent from 2008 in North America.
  • Deal flow reached $68.1 billion in Europe last year, almost three times the $24.2 billion in announced private equity deal flow the year before.
  • In Asia and the rest of the world, announced private equity deal flow spiked 39 percent from the third quarter to the fourth quarter, with $8.6 billion in transactions announced.

In the article Private Equity and Strategic Buyers -Distinction Without Difference?” by Peter Lehrman writes: According to the ‘Pitchbook Data’s 2011 Private Equity Breakdown’ there were 5,994 private equity-backed portfolio companies at year-end 2010.

According to a recent survey ‘AxialMarket’ conducted, interviewing its private equity customers, 57% of the respondents indicated that their portfolio companies were actively looking to grow through acquisitions, while over 80% of the respondents indicated that their portfolio companies would opportunistically review  acquisition  opportunities. Why does this information matter to business owners?

Because the most likely strategic buyer for your business ironically might well be a private equity firm instead of a Fortune 2000 corporation.  What business owners and to a lesser extent M&A Advisors appear to under-appreciate is how significant the private equity community has become as its own strategic buyer category. In addition to having over $400 billion of committed but un-deployed capital that must be deployed in the coming years, private equity firms collectively own almost 6,000 private companies.

In the articleWill Dodd-Frank Forever Change Private Equity?” by Kareem G. Nakshbendi and Averell H. Sutton write: The ‘Dodd–Frank Wall Street Reform and Consumer Protection Act’ brings ‘private equity funds’ under the auspices of the Securities and Exchange Commission. Any entity that has assets of at least $150 million is subject to record keeping and disclosure requirements pursuant to the SEC and Commodity Futures Trading Commission (CFTC).

However to work-around the provision of the bill, funds simply make smaller deals: A firm can create different fund structures to have multiple funds that have no more than $125 million each and do not have similar ownership structures in order to evade Dodd-Frank. Venture capital funds are exempt from Dodd-Frank. The bill creates a level of transparency that has not been seen before in private equity.

One of the attractive things about private equity deals is that the public is not at risk and therefore has no reason to know the details of a deal arrangement. Private equity’s real currency is its unique access to information and clients, and the opportunity to make big gains for the risks taken…

“The best-performing companies are those where the private equity investors are: Bought into the right company at the right time; Backed strong management from the outset; Focused on delivering sustained improvements”. “The key to a successful private equity is thorough preparation”.  ~ Ernst & Young

The private equity world is a very freewheeling world. It is entrepreneurial, competitive, hard-driving, and unforgiving, in part because it is both numbers-oriented and short-term. Private equity is not necessarily a confusing topic, but it can be highly complex. Private equity firms typically seek to re-energize businesses by refocusing, restructuring, reinvigorating – and then sell them on a short-term horizon, generally 3 to 5 years.

While these firms commonly take a management fee of 1.5% to 2% off the top each year, their primary goal is the eventual payoff: 15% to 20% of profits upon sale or public offering. Their business emphasis is not on operating businesses for a profit, or even building businesses over the long haul, but on buying-and-selling businesses for a profit. With the bursting of the credit bubble the private equity industry was badly affected: In research,

Boston Consulting Group estimates that at least 50% of the private equity deals done in the recent past will default on their debt. The liquidity crunch has changed the availability of cheap debt, and approximately half the firms need to raise capital for new funds.

As a result, private equity firms will shrink dramatically and only the best firms will survive the new financial environment. However, in the long-term, it is highly likely that a more vibrant industry will reemerge…

“Investors need to be aware that most of the publicly-available data on private equity returns are usually wrong – and often grossly misleading.” ~Michael Moritz

Training Transferability: Training for Enduring Change in Behavior to Elevate Work Performance & Improve Business Results…

“Training should not be seen as an end, but as a means to achieving the organizational objective. The changing of behavioral patterns is a long-term undertaking which, to be successful, needs to be continually monitored and reinforced” ~P. Taylor

The state of the economy has presented a challenge to learning organizations as they seek to provide an adequate level of service to their audiences with less money and perhaps fewer staff. Moreover, current and future trends around the urgency of hiring and developing productive management and sales organizations presents a heightened dilemma. In order for learning organizations to help improve performance through behavior change, five elements must be present:

  • Identify the person(s) for behavior change
  • Acknowledgement of the need to change
  • Agreement to accept and work toward change
  • Skill or knowledge-based learning interventions
  • Reinforcement of the learned concepts, and practice

When this process is used, the learning organization will have successfully imparted real and lasting change in the individual. Learners reach a new level of satisfaction with themselves and their jobs when they experience real and lasting performance improvement through behavior change. In the end, individual contribution increases, company performance rises, turnover is reduced and the bottom line is improved; one person at a time.

In the article “Training Has To Change Behavior!” by THF Team writes: Conventional training programs disregard training transferability. Transferability means determining whether the skills, abilities, or knowledge acquired in the training program are useful in getting organizational tasks accomplished. If it is, then there has to be empirical evidence to prove that! This simply means that the transferability has to be measurable.

The only certain way to do so is to assess work behavior linked to a particular training program before and after the training is imparted. However, the most critical issue is the lack of understanding that training is about learning. And, learning is about developing and maintaining an enduring change in work behavior. Unless a training program is able to do so, learning does not happen. If learning is about enduring change in behavior, then a training program should be about behavioral modification. Therefore, when a learnt skill or knowledge produces desired work behavior, only then can the skill or knowledge be said to have transferred…

In the article “Nuts and Bolts: How to Evaluate Learning” by Jane Bozarth writes:  Most instructional designers and training practitioners agree: we spend far more time on design and delivery than we do on ‘evaluation’. We often treat evaluation as an afterthought and focus on measures that offer little real information, or just don’t do evaluation at all.

The amount of talk about evaluation of training vastly outweighs actual efforts to conduct evaluation. This is due to a number of factors, among them; difficulty in establishing useful measures, challenges in collecting data, lack of priority, and so it just doesn’t get done... In 1959, Donald Kirkpatrick published the taxonomy (not a model, not a theory) of criteria for evaluating instruction that is widely regarded as the standard for evaluating training. Most often referred to as ‘Levels’, the Kirkpatrick taxonomy classifies types of evaluation as:

  • Type (Level) 1: Learner satisfaction
  • Type (Level) 2: Learner demonstration of understanding
  • Type (Level) 3: Learner demonstration of skills or behaviors on the job
  • Type (Level) 4: Impact of those new behaviors or skills on the job

Jack Phillips later added a fifth level, Return on Investment (ROI) of training, purporting to offer calculations for demonstrating cost effectiveness of the training intervention.  Those who’ve attempted to employ the taxonomy have no doubt noticed some challenges in using it. To be fair, Kirkpatrick himself has pointed out some of the problems with the taxonomy, and suggested that in seeking to apply it, the training field has perhaps put the cart before the horse. He advises working backwards through his four levels more as a design, rather than an evaluation, strategy…

An approach by Robert Brinkerhoff takes a systems view of evaluation of training, believing it should focus on sustained performance rather than attempting to isolate the training effort: “Achieving performance results from training is a whole-organization challenge. It cannot be accomplished by the training function alone…” Brinkerhoff’s ‘Success Case Method (SCM)’ helps to identify both positive results and the organizational factors that supported or hindered the training effort.

At the risk of oversimplifying his approach, he suggests we can learn best from the outliers, those who have been most and least successful in applying new learning to work… In looking at evaluation strategies, choose those that will get you what you need, e.g., are you trying to prove results, drive improvement… And above all, remember: some evaluation is better than none…

In the articleWhy Sales Training Succeeds, Or Fails by Ron Willingham writes: Organizations around the world spend billions of dollars on sales training and most of which is wasted. If you assume that the purpose of sales training is to equip salespeople to increase their sales, then most fails. Most sales training is delivered in one, two, or three day seminars, where people are only taught sales skills. The assumption is that if we teach people sales skills they’ll; (a) hear it, (b) remember it, and (c) practice it. But, guess what? After 21 days of attending this training, people forget around 95% of everything they heard. No new habits are developed.

No new unconscious beliefs are formed. Nothing causes old, fixed habits to be broken or changed. Little, if any, sales increases result. Not only do most sales training programs not increase sales, they actually can cause lower sales.  If training isn’t designed to help people develop ‘unconscious behaviors’, they won’t reach their true potential in sales production. According to research, now commonly known as the ‘Johari Window’, we must move salespeople through different levels of competence following the model:

  • Level 1: ‘Unconscious Incompetence’; not knowing what we don’t know.
  • Level 2: ‘Conscious Incompetence’; knowing what we don’t know.
  • Level 3: ‘Conscious Competence’; knowing what to do, but thinking.
  • Level 4: ‘Unconscious Competence’; knowing what to do, without thinking.

In the article Why Most Training Doesn’t Transfer to Changed Behavior in the Workplace by Dennis E. Coates, Ph.D. writes:  “Most leader and team development programs don’t produce significant changes in behavior. The evidence of this fact has been in front of us for many, many years. Talented trainers’ present excellent programs, participants usually enjoy the programs, and many of them come away enlightened and motivated.

But in most cases, many months later, there are few if any noticeable changes in behavior to justify all the expense and effort.” In the world of HRD, this challenge has been referred to as “transfer of training”. The fact that what is learned in the classroom often doesn’t transfer to improved behavior patterns on the job—where it counts.  Skill learning is not an event, but a gradual physical process that takes place in the brain. And, it takes months of consistent, persistent repetitions of new behavior pattern with continuous reinforcement…

In the article “The Real Key to Demonstrating Value and Driving Strategy by Jim Kirkpatrick writes:  The best demonstration of value occurs when learning translates into lasting behavioral change. For example, several years ago, executives from a midsized Midwestern bank set out to implement ‘Total Quality Management (TQM)’ across organizations. Significant money and effort were invested into many rounds of training. When the coursework was completed, most of the workforce was able to diagram value chains and flowchart processes, measure progress, and develop process improvement plans. But one year later, only a handful of those same employees still used the methods.

On the surface, TQM seemed to be the right approach for the bank. Participants enjoyed the training and received certificates for demonstrating that they had learned the new concepts and techniques. So, what went wrong? Apparently, there was little transfer of learning to behavior because senior and junior-level managers never fully embraced the benefits of TQM.

In a nutshell, they did little or nothing to create accountability or support new behaviors. Lack of managerial support and participant accountability is obviously much more than a training concern. The bank’s strategy, for example, didn’t get executed effectively, and the organization never realized all the possible positive results. But the consequences can get worse: Leaders might question the program’s value and the training department’s competency. That’s a reality no trainer wants to face…

“What if I told you that we have a “Trillion Dollar Training Problem”? That’s right, trillion with a “T.” The problem is transfer of learning–that is, that only 15-30% of learning transfers into actual use on the job to improve performance. Here’s how I see it. Last year organizations spent $134 Billion dollars on training in the U.S (according to ASTD). That means that somewhere around $100 billion of it was wasted!!! And that is only the direct cost of training–not the salaries of the people who sat in the classroom. That alone is a huge number that ought to get us alarmed.

But wait–it gets worse. Research also tells us that an 8:1 return on investment is quite achievable for the right learning given to the right employees. That means that the $100 billion we wasted would have returned about $800 billion in performance improvement–if we had done the right things to make learning transfer happen. Throw in some money for all the wasted wages and salaries of the participants and we have a: “Trillion Dollar Training Problem”. ~by Dr. Ed Holton

Bigness as an Obstacle to Entrepreneurship and Innovation: Big Corporations being… Nimble, Creative, Innovative… just like Small Companies

“Big companies don’t innovate” says the conventional wisdom…Not so fast, there are plenty of large companies that have done very well as entrepreneurs and innovators. Although there are quite a few big, older businesses that have succeeded as entrepreneurs and innovators in some fields, while others have failed dismally.

But the same can be said about about smaller companies. It is a matter of systematic organization, clear strategy, and hard work. The common pretext of waiting for the genius with the flash of inspiration will no longer wash. Any enterprise, no matter what its size, can organize itself to undertake continuous and purposeful innovation… ‘Bigness’ alone need not be an obstacle to entrepreneurship and innovation…

In the articleThe World’s Most Innovative Companies by Business Week writes: Innovation is about reinventing business processes and building entirely new markets that meet untapped customer needs. It’s about taking corporate organizations built for efficiency and rewiring them for creativity and growth. To discover which companies innovate best — and why – ‘BusinessWeek’ joined with ‘The Boston Consulting Group (BCG)’ to produce the annual ranking of the 25 most innovative companies.

The ‘BusinessWeek-BCG’ survey also focuses on major obstacles to innovation that executives face today. While 72% of the senior executives in the survey named innovation as one of their top three priorities, almost half said they were dissatisfied with the returns on their investments in that area. The No. 1 obstacle, according to the survey takers, is ‘slow development times’. Yet companies often can’t organize themselves to move faster, says George Stalk Jr. at BCG. “Some organizations are nearly immobilized by the notion that [they] can’t do anything unless it moves the needle (revenues),” says Stalk.

In addition, he says, speed requires coordination from the hub (CEO): “Fast innovators organize the corporate center to drive growth. They don’t wait for [it] to come up through the business units.” Indeed, a ‘lack of coordination’ is the second-biggest barrier to innovation, according to the survey’s findings. The best innovators reroute reporting lines and create physical spaces for collaboration. Innovative companies build innovation cultures. “You have to be willing to get down into the plumbing of the organization and align the nervous system of the company,” says James P. Andrew at BCG.

Procter & Gamble Co. has done just that in transforming its traditional in-house research and development process into an open-source innovation strategy it calls “connect and develop”. This embraces the collective brains of the world. Make it a goal that 50% of the company’s new products come from outside P&G’s labs. Tap networks of inventors, scientists, and suppliers for new products that can be developed in-house.

The radically different approach couldn’t be shoe-horned into managers’ existing responsibilities. Rather, P&G had to tear apart and re-stitch much of its research organization. It created new job classifications, such as 70 worldwide “technology entrepreneurs (TE)”. The TE act as scouts and look for the latest breakthroughs from places such as university labs.

They also develop “technology game boards” that map out where technology opportunities lie inside the minds of its competitors. “You want to have a coherent strategy across the organization,” says Larry Huston at P&G. “The ideas tend to be bigger when you have someone sitting at the center looking at the company’s growth goals”…

In the blog Evolution of Entrepreneurship in America? by Robert W Price writes: Entrepreneurship is not “natural”; it is not “creative”: It is work. The evidence shows that a substantial number of existing businesses, and among them a goodly number of fair-sized, big, and very big ones, succeed as entrepreneurs and innovators indicates that entrepreneurship and innovation can be achieved by any business. Entrepreneurial businesses treat entrepreneurship as a duty…they are disciplined about it … they work at it … they practice it.

A Latin poet called the human being “rerum novarum cupidus (greedy for new things)”. But, ‘How can we overcome resistance to innovation in the existing organization?’ is a common question asked by executives. Even if we knew the answer, it would still be the wrong question. The right one is: ‘How can we make the organization receptive to innovation, want innovation, reach for it, work for it?’ The answer: ‘Innovation must be part and parcel of the ordinary, the norm, if not routine…’

In the articleThink Disruptive by Andy Grove writes: The reward for businesss success is that they get big, and the punishment is that when they get big it gets harder and harder for them to grow. However, we found that under certain conditions a firm can create a new growth spurt for itself by entering an entirely different industry. The target industry must be stagnant and populated with companies that cling to doing business the way they always have. The corporation that enters this environment with an innovative product or service can shake up the status quo and reap big profits: Call this phenomenon ‘cross-boundary disruption’.

Clayton Christensen describes the process in his book ‘The Innovator’s Dilemma’. In Christensen’s scenario, a small company penetrates an industry by first establishing a position in the least demanding portion of it and then progressing into more-demanding segments. ‘Cross-boundary disruption’ is different. I’m talking about established giants (big companies) seeking to transform markets other than their own (e.g.,  Apple, Wal-Mart). These are companies, big and powerful enough to solve intractable, industry-wide problems and produce lasting change...

In the articleLack of Breakthrough Innovation by Big Companies” by Sharad Sharma writes: You want to be the innovation company, the ideas company, the good customer service company and not necessarily be tied down to a particular product or manner of delivery, then think “small teams”. Only small teams with a passionate few people can come up with new and disruptive products and services.

As a rule of thumb, any team that cannot fit in your corner office is too big. Adopt one of many solutions to this well studied problem, e.g., – new DNA, acquisitions, intrapreneurship, spin-in structures – to foster innovation.…Can big companies really innovate?  I believe that a big company can foster innovation one of two ways. It can either emulate an entrepreneurial company much like what Apple has done in recent years. Or it can leverage its size to follow the Toyota and Honda’s Kaizen method of breakthrough innovation.

In the article Popular Myth of Big Companies and Innovation by John W. Ryan writes: There are a number of people who characterize big companies as the following: Bureaucratic, corrupt, slow, boring, vast wastelands of soul-crushing activity, focused on status-quo. All of this leads to the inability to innovate. I have seen innovation and speed come out of large companies just like small companies… Smart risk-taking people work in big companies too.

Likewise, I have seen small companies paralyzed by a flat-footed CEO who couldn’t make up his mind or was in over his head.  I have also seen entrepreneurs spin out of large companies go on to create successful companies of innovation based on something they learned at the large company.  Large companies can commit to innovation and agility in a dynamic world.  It comes down to leadership and culture, not size.

In the articleWho Says Innovation Belongs to the Small? by New York Times writes:  For more than a decade, the prevailing view of innovation has been that little guys had the edge. Innovation bubbled up from the bottom, from upstarts and insurgents. Big companies didn’t innovate, and government got in the way. In the dominant innovation narrative, venture-backed start-up companies were cast as the nimble winners and large corporations as the sluggish losers.

That was the headline point that a generation of business people, venture investors and policy makers took away from Clayton M. Christensen’s 1997 classic book ‘The Innovator’s Dilemma’, which examined the process of disruptive change… But a shift in thinking is under way, driven by altered circumstances. The biggest economic and social challenges — and potential business opportunities — are problems in multifaceted fields like the environment, energy and health care which rely on complex systems.

Solutions won’t come from the next new gadget or clever software, though such innovations will help. Instead, they must plug into a larger network of change shaped by economics, regulation and policy. “These days, more than ever, size matters in the innovation game,” said John Kao. The innovation tilt toward big companies, to be sure, is a rebalancing. There is still plenty of bottom-up innovation, including promising start-ups in the environmental, health care, and energy businesses. Still, the pendulum of thinking on innovation does seem to be swinging toward the big guys…

In the article Think Tank: Size Does Matter When it Comes to Innovation by Richard Tyler writes: At a London Business School (LBS) meeting of largely international company executives the question was asked: “Can big companies innovate or is such noble activity the preserve of the new and nimble?” After much soul searching and self doubt, as well as a hearty lunch, the answer was a resounding: “Yes, we can.”

George Buckley, 3M Corporation, explained in his world innovation is everything. After all, 3M boasts 55,000 different product lines, from the ubiquitous ‘Post-it note’ to complex mobile phone screen components. Buckley’s teams routinely “cannibalize” about 30% of the sales of 3M’s existing products in existing markets every year with new versions that will attract the same customers. They also throw “pebbles” into adjacent markets to see what effect the ideas have.

This combination of “incremental innovation” with “leapfrog technologies” puts 3M in the right competitive position, Buckley argued. “If you don’t work on the leapfrog, whatever that might be, someone else is going to work on it for you,” he said.  It is all about small units of expertise, incentivised in different ways and “cherry picking” the most promising ideas appearing across a range of sectors…

In the blog The Myth of Big Organizations and Innovation” by Scott Berkun writes: One great myth about innovation is that big organizations can’t do it. It’s a shame really, as there are many stories of great innovations done by big companies. We love the start-up stories, but there are many great invention tales connected to big, older organizations… Now I’m not saying innovation is easier in large companies (although occasionally it is) – I am saying that the size of an organization is rarely a deciding factor: it’s the organization’s attitude towards change that matters.

Sure, there are a thousand caveats – I concede that risk aversion is rampant in many big organizations – but the point generally stands: size is not a primary factor in the ability to find/follow new ideas – it’s the strategy and behavior of the leaders that matters much more. So instead of lamenting “my company is so big it never innovates” – a more accurate complaint is “my boss’s strategy doesn’t reward people with new ideas”.

Silicon Valley’s Secret for Entrepreneurship and Innovation Success: Tolerance of Failure; Tolerance of Treachery; Pursuit of Risk; Willingness to Reivest; Enthusiasm for Change; Promotion on Merit; Obsession with Product; Openness to Collaboration; Anyone can Play…” ~ Tom Peters

Machiavelli Management Style: Model for Modern Business Leadership & Lessons of 16th Century Power Politics…

“The first opinion which one forms of a prince (CEO in this context) is by observing the men he has around him; and when they show that they are capable and faithful, then he (CEO) will be considered wise”. ~Machiavelli.

Similarly the selection of employees in the modern organization is critical, as they are the most valuable assets of the organization. Machiavelli proposed hiring; “those who believe in the grandness of the task and greatness of the leader rather than who are simply driven by other factors like money and reputation”….“people looking for money and reputation will leave the moment they will get it better somewhere else”…

His name evokes corruption, reeks of manipulation, and oozes with betrayal. And although Niccol Machiavelli did espouse trickery as a means to maintain power, his name has been unfairly reviled by history. He was no less a master of diplomacy and good leadership, and there’s much to learn from his writings. Machiavelli sees the successful CEO as one who seeks “fame for being great and excellent”.  He does this by managing well. Managing well means two things: the prosperity of the company and its employees, and the creation of company policies that transcend the CEO’s term, securing the survival and success of the company for generations to come…”

In the article “Machiavelli & Modern Business: Realist Thought in Contemporary Corporate Leadership Manuals” by Peter J. Galie and Christopher Bopst write: Machiavelli’s book the ‘The Prince’ has become one of the best known, if not the most influential essay in the history of political philosophy. Since that time, Machiavelli has never gone out of fashion; no doubt because ‘power’ has never gone out of fashion. His teachings seem as relevant today as they were a half-millennium ago…

In bookTennis by Machiavelli by Simon Ramo applies Machiavellian maxims to competitive sports. An advertisement in the New York Times touted the book as follows: “Wily tactics for beating faster and stronger opponents at doubles …. to get the winning edge.” Perhaps no work captures the point more effectively then unpublished dissertation entitled ‘Machiavellianism Among Hotel Employees’, a work that manages to connect Machiavellian ‘realpolitik’ to chambermaids and concierges.

Machiavelli’s ideas about power and leadership, though rooted in another time and place, have also been reformulated and reinterpreted to apply to the attaining and exercising of power by contemporary business executives…

In the article Machiavelli & the Art of Management writes: It’s easy to dismiss the Machiavellian approach to running organizations in today’s kinder, gentler world of new age, team-based management.  But some management experts like James O’ Toole, Aspen Institute, finds some merit in the timeless rules and stratagems penned by Niccolo Machiavelli. Make no mistake: O’Toole is not an unabashed admirer of the man who believed that leaders can accomplish their goals only by being tough, manipulative, dictatorial, or paternalistic as the situation requires.

Indeed, O’Toole feels most of Machiavelli’s principles are outdated in the present context.  It is wrong to assume – as Machiavelli had done – that it’s a jungle of greed and treachery out there in the world of business. But the fact is, however devious his principles may sound to the moral brigade, a careful reading of his ideas are about techniques to forge a humane and stable government.

Many may not know that Machiavelli was motivated in his philosophy by the same goals as Confucius – both had a deep underlying concern for the good of the people through stability in government. And their ideas have applications in modern organizations even more than 500 years later.

Further, why did Machiavelli recommend that a prince (CEO in the present context) must be ready to be cruel and devious? Read it in Machiavelli’s own words: A man who wishes to make a profession of goodness in everything must necessarily come to grief among so many who are not good. Therefore it is necessary for a ruler, who wishes to maintain himself, must learn how not to be good, and to use this knowledge (or, not use it), according to the necessity of the case”.

The operative word here, as O’Toole points out, is “according to the necessity of the case“, which in other words means, “it all depends“. Your management style cannot be straitjacketed and has to change as the situation demands. Even the worst of Machiavelli’s critics should find nothing wrong with these arguments. After all, expediency is the name of the game in effective management.

“Fortune favors the bold,” he noted.  ‘Look at people who were willing to take prudent risks, who were willing to pick their battles, who want to fight today and also be around to fight tomorrow”. ~Machiavelli

In the article What Can Machiavelli Teach You About Business? writes: You can be a Machiavellian businessman, in the true sense of the word, without being Machiavellian, in the popular definition; that is, be effective without being unethical. Machiavellian thought can be applied to business in a moral and responsible way. No one needs to be trampled upon and no corruption needs to take place. His ideas are founded on the understanding of human psychology and how to use it to your advantage. Politicians and businessmen have long followed his methods and accomplished good things…

In the articleMachiavelli: The Elements of Power writes:  The philosophies known as Machiavellianism have been viewed as evil throughout the centuries, but as most business leaders and politicians agree Machiavelli has only defined the physics of power. Machiavelli was only interested in directly discussing the elements of power and he wrote “…since it is my intention to write something of use…, I deem it is best to stick to practical truth of things rather than to fancies. Yet the way men live is so far removed from the way they ought to live that anyone who abandons ‘what is’ for ‘what should be’ pursues his downfall rather than his preservation.”

All human struggles boil down to the struggle for power. It is only the basics of social Darwinism. Machiavellian principals are exploited on other levels than those first intended by the author for their universal truth. His theories of power have transcended the political arena and revealed the basic functions of the human struggle for power…

In the article Machiavelli’s The Prince: A Modern Executive by Ronnie Oldham writes: Niccolo Machiavelli, a contemporary of Copernicus, is generally accepted as an early contributor to the scientific revolution, because he looked at power and the nature of sovereignty through the eyes of a scientist, focused completely on the goal without regard for religion and morals and ethics. Drawing a connection between Machiavelli’s states and modern day corporations is not difficult.

A corporation has its king and barons, its courtiers and ambassadors, its loyalists and its dissident elements, its allies and its enemies. Today’s corporate executive must routinely make decisions which directly affect the lives of thousands of individuals. To be successful, he or she must be able to identify and objectively evaluate the entire range of options, strategies, and tactics available.

This involves weighing the negative implications of a decision against the anticipated gain and then acting, without hesitation, in the best interests of the firm. ‘The Prince’ provides valuable and timeless insight for modern managers facing the difficult choices involved in right-sizing, acquisitions, mergers, hostile take-over, and fierce competition in the marketplace…

“Men must either be cajoled or be crushed. For if you do a person a slight injury he will surely avenge himself, but if you crush him he cannot.”~ Machiavelli

In the article Business and Leadership Lessons – From Machiavelli by Steve Tobak writes:  Few historical figures are as divisive and polarizing as Niccolo Machiavelli. Some view him as the father of modern materialism, inspiring people to do or say anything to achieve personal gain, ( i.e., the ends justify the means). Indeed, the word Machiavellian – derived from his most famous work, The Prince – has come to mean cunning, deceit, and manipulation.

Others, however, see him as the world’s first great realist and a positive influence on modern politics and capitalism. Some even think Machiavelli was the first to apply empirical scientific methods to human behavior by making innovative generalizations based on experience, observation, and history.

Being a realist – much like Machiavelli – I’m not inclined to weigh in on the man’s overall affect on the world, good or bad. Regardless, many of his ideas for achieving long-term political success and power translate extraordinarily well into the current business climate of intense global competition…

In the article “Machiavellian Approach to Modern Business Practices” by Garrett Vogenbeck writes:  Machiavelli writes of the quality of ‘virtù’, a word that means more than just ‘virtue’ does in English. It can mean “ability, skill, energy, forcefulness, strength, ingenuity, courage, or determination” However, ‘virtù’ for Machiavelli is virtue not for its own sake but rather for the sake of the reputation it enables princes to acquire. These are qualities required for an entrepreneur, or someone who strives to be a leader or innovator within an organization.

Alongside virtù are three specific characteristics a leader must exhibit in order to maintain his power: “he must be stingy rather than generous” for the work will go unnoticed, and it is necessary to appear generous for the sake of gaining power only. Machiavelli also stresses the importance of discipline by noting; “that it is better to be feared than loved”. This is difficult to apply in management, for many employees have the capacity to move on if a manager is somewhat ruthless in his discipline. Lastly, Machiavelli stresses the means to attain and keep power, not the morality or ethics behind those means”.

Machiavelli’s is a practical, empirical and impressionistic system not an abstract and unified philosophical one. It offers generalizations from history and experience about the possibilities and limitations of political or business action – circumstances in which acts have justified consequences. In business, more than in private life, many consequences cannot be foreseen or fully controlled. So action cannot be governed by moral absolutes.

Business did not hold the same kind of power in Machiavelli’s era as they do now. Although Machiavelli had originally intended for his writings to be applied to government, they can now be applied to business too. Machiavelli generally understood the nature of power, and the way in which one must work with the people in order to succeed. And, that the political or business agent may sometimes perform harsh, deceptive acts that others may find reprehensible…

“Leadership is a struggle by flawed human beings to make some important human values real and effective, in the world as it is.” ~Joseph L. Badaracco

Classic Employee Motivation Theories: Do They Really Work– Maslow, Herzberg, McClelland, McGregor, Alderfer…?

’Ability’ is what you’re capable of doing. ‘Motivation’ determines what you do. ‘Attitude’ determines how well you do it. ~Anonymous

Motivation is the driving force by which we achieve our goals. Motivation is said to be intrinsic or extrinsic. According to various theories, motivation may be rooted in a basic need to minimize physical pain and maximize pleasure, or it may include specific needs such as eating and resting, or a desired object, goal, state of being, ideal, or it may be attributed to less-apparent reasons such as altruism, selfishness, morality, or avoiding mortality. Conceptually, motivation should not be confused with either volition or optimism. Motivation is related to, but distinct from, emotion.

In spite of enormous research, the subject of motivation is not clearly understood and more often than not poorly practiced. To understand motivation one must understand human nature itself. And, there lies the problem! Human nature can be very simple, yet very complex too. Quite apart from the benefit and moral value of an altruistic approach to treating colleagues as human beings and respecting human dignity in all its forms, research and observations show that well motivated employees are more productive and creative. The inverse also holds true.

There is an old saying “you can take a horse to the water but you cannot force it to drink”; it will drink only if it’s thirsty – so with people. They will do what they want to do, or otherwise motivated to do. Whether it is to excel on the workshop floor or in the ‘ivory tower’ they must be motivated or driven to it, either by themselves or through external stimulus.

Thus, an overriding question: Are people born with self-motivation, or must they be instructed? It’s both, people can be self-motivated and they can be motivated. Most important and however it exists, motivation is an essential factor for any business to survive and succeed. Moreover, ‘job performance’ is considered to be a function of ‘ability’ and ‘motivation’, thus the formulation:          

                                 “Job performance = f(ability) (motivation)”

Whereas, ‘ability’ depends on education, experience and training and its improvement is a slow and long process, and ‘motivation’ can be improved quickly. As a guideline, there are broadly seven strategies for motivation:

  • Positive reinforcement / high expectations
  • Effective discipline and punishment
  • Treating people fairly
  • Satisfying employees needs
  • Setting work related goals
  • Restructuring jobs
  • Base rewards on job performance

Although these are the basic strategies, the mix for the final ‘recipe‘ will vary from workplace situation to situation. Essentially, there is a gap between an individual’s ‘actual state’ (mind-set) and some ‘desired state’, and the manager tries to reduce this gap. Motivation, in effect, is a means to reduce and manipulate this gap. It is inducing others in a specific way towards goals specifically stated by the motivator. Naturally these goals, as also the motivation system, must conform to the corporate policy of the organization…

In one of the most elaborate studies on employee motivation, involving 31,000 men and 13,000 women, the Minneapolis Gas Company sought to determine what their potential employee desire most from their job. This study was carried out during a 20 year period and was quite revealing. The ratings for the various factors differed only slightly between men and women, but both groups considered ‘security’ as the highest rated factor. The next three factors were; advancement, type of work, company. Surprisingly, factors such as; pay, benefits, and working conditions were given a low rating by both groups…

Among various motivation theories that have been embraced by American business are those of Frederick Herzberg and Abraham Maslow. Herzberg, psychologist, proposed a theory of job factors that motivate employees. Maslow, behavioral scientist and contemporary of Herzberg’s, developed a theory of various human needs and how people pursue these needs.

Maslow’s ‘Hierarchy of Needs Theory’ is often portrayed in the shape of a pyramid, with the largest and most fundamental levels of needs at the bottom, and the need for self-actualization at the top. Herzberg proposed the ‘Motivation-Hygiene Theory’, also known as the ‘Two-Factor Theory’ of job satisfaction. According to his theory, people are influenced by two sets of factors; motivator factors and hygiene factors.

  • Motivated employees always look for better ways to do a job.
  • Motivated employees are more quality oriented.
  • Motivated workers are more productive.

There are similarities between Herzberg’s and Maslow’s models. They both suggest that needs have to be satisfied for the employee to be motivated. However, Herzberg argues that only the higher levels of Maslow’s hierarchy (e.g., self-actualization, esteem needs) act as a motivator. The remaining needs can only cause dissatisfaction if not addressed.

In Maslow’s theory, he identified five sets of human needs (on priority basis) and their satisfaction in motivating employees. Hertzberg refers to hygiene factors and motivating factors in his theory. Maslow’s theory is rather simple and descriptive. The theory is based on long experience about human needs. Hertzberg’s theory is more prescriptive, and it suggests the motivating factors that can be used effectively.

Other theories that expanded and extended those of Maslow and Herzberg included Kurt Lewin’s ‘Force Field Theory’, Edwin Locke’s ‘Goal Theory’ and Victor Vroom’s ‘Expectancy Theory’. These tend to stress cultural differences and the fact that individuals tend to be motivated by different factors at different times.

According to the system of scientific management developed by Frederick Winslow Taylor, a worker’s motivation is solely determined by pay, and therefore management need not consider psychological or social aspects of work. In essence, scientific management bases human motivation wholly on extrinsic rewards and discards the idea of intrinsic rewards.

In contrast, David McClelland’s ‘Three Needs Theory’ recognizes that everyone prioritizes needs differently. He also believes that individuals are not born with these needs, but that they are actually learned through life experiences (acquired needs). McClelland identifies three specific needs:

  • Need for achievement; drive to excel.
  • Need for power; desire to cause others to behave differently.
  • Need for affiliation; desire for friendly and close interpersonal relationships.

The importance of each of these needs will vary from one person to another. If you can determine the importance of each of these needs to an individual, it will help you decide how to influence that individual.

David McClelland believed that workers could not be motivated by the mere need for money—in fact, extrinsic motivation (e.g., money) could extinguish intrinsic motivation (e.g., achievement). Although, money could be used as an indicator of success for various motives (e.g., keeping score).

Elton Mayo found that the social contacts a worker has at the workplace are very important and that boredom and repetitiveness of tasks lead to reduced motivation. Mayo believed that workers could be motivated by acknowledging their social needs and making them feel important.

As a result, employees were given freedom to make decisions on the job and greater attention was paid to informal work groups. Mayo named the model the Hawthorne effect. His model has been judged as placing undue reliance on social contacts at work situations for motivating employees.

Clayton Paul Alderfer, psychologist, further expanded Maslow’s ‘Hierarchy of Needs Theory’ by categorizing the hierarchy into his ‘ERG Theory’ (Existence, Relatedness, Growth). His approach proposes that unsatisfied needs motivate behavior, and that as lower level needs are satisfied, they become less important. Higher level needs, though, become more important as they are satisfied, and if these needs are not met, a person may move down the hierarchy, which Alderfer calls the frustration-regression principle.

Douglas McGregor, social psychologist, proposed his famous ‘X-Y Theory’ in his book ‘The Human Side of Enterprise’. Theory-X and Theory-Y are still referred to commonly in the field of management and motivation, and more recent studies have questioned the rigidity of the model but it remains a valid basic principle from which to develop positive management style and techniques:

  • Theory-X (authoritarian): Average person dislikes work and will avoid it.
  • Theory-Y (participative): Effort in work is as natural as work and play.

William Ouchi, professor business management, developed ‘Theory-Z’, which is not an extension of McGregor’s ‘X-Y Theory’. Theory Z is often referred to as the ‘Japanese Management Style’, which essentially advocates a combination of all that’s best about Theory-Y and modern Japanese management. It places a large amount of freedom and trust with workers, and assumes that workers have a strong loyalty and interest in team-working and the organization…

Workplace motivation is one of the most important aspects of good management. It may be a complex and frustrating issue, but unless it is understood and managed effectively, few organizations will flourish. Some managers may think that most employees are naturally pre-disposed to enthusiasm for their work, demonstrating an inherent preference for engagement and achievement. Ironically, it can be managers themselves who dampen this ardor, through either poor management or a lack of understanding of what workplace motivation is all about. Two quotes make this point rather succinctly:

“Most of what we call management consists of making it difficult for people to get their jobs done.” ~Peter Drucker

“… the key question is not how to motivate employees, but how to sustain – and prevent management from destroying – the motivation that employees naturally bring to their jobs.” ~David Sirota