To centralize or not to centralize?

McKinsey Quarterly had an interesting article on whether To centralize or not to centralize?:

The chief executive of a European equipment manufacturer recently faced a tough centralization decision: should he combine product management for the company’s two business units—cutting and welding—which operated largely independently of each other but shared the same brand? His technical leader believed that an integrated product range would make the company’s offerings more appealing to businesses that bought both types of equipment. These customers accounted for more than 70 percent of the market but less than 40 percent of the company’s sales. “You cut before you weld,” he explained. “You get a better weld at lower cost if the cutting is done with the welding in mind.” Managers in both divisions, though, resisted fiercely: product management, they believed, was central to their business, and they could not imagine losing control of it.

Clearly, centralization has many benefits – from leveraging synergies between product lines to reducing overhead costs. However it can also add bureaucracy and reduce visibility into overall performance. The article points out a three question discussion:

Is the centralization mandated by regulation?
If not, does centralization add significant value?
If not, are risks of centralization low?

Pretty useful.

The Innovation Premium

INSEAD Knowledge had an intriguing article that I have been meaning to write about. The Innovation Premium meanders along multiple themes (some of them untenable) but in the end has a couple of interesting observations. The article discusses the book The Innovator’s DNA:

“Innovation makes millionaires and undermines monopolies. It raises the profitability of companies and puts a premium on the shares of the most successful. But how can companies foster it? New research sheds light on the innovation process and how firms can tap into it to raise their performance and their share price.”

To that end, the article defines innovative companies purely based on share prices:

Common to all companies on the list is the fact that their share prices are 25 percent or more above what would be justified by cash flow alone. The leader is cloud computing company Salesforce.com, with its AppExchange that offers more than 1,000 applications for businesses, and which recently launched Chatter draws on features of Facebook and Twitter to provide social software for enterprise collaboration. Market expectations for further innovations have given it a premium based on 2010 results of no less than 75 percent.

We have discussed in the past that Wall Street is NOT a consistent or dependable evaluator of innovation. In fact, Wall Street rewards predictability more than disruptive innovations. The share price measure would move companies like Netflix from innovative to not in the matter of weeks! RIM and Blackberry has moved into the non-innovative group since the article was written a few weeks ago…

The lack of universally acceptable definition of innovation (such as the Oslo Framework) notwithstanding, the article still had some interesting points. A key point is that the leaders in innovative companies ask a lot of questions, challenge the status quo and do so based on personal involvement / observation (as opposed to through subordinate presentations):

They, too, are always asking questions and looking out for the unexpected: “Why not this? Why couldn’t we do that? What’s going on here? How could we do this better?” When someone “behaves that way, acts differently, asks lots of questions, observes like an anthropologist, experiments constantly, networks for new ideas,” Gregersen observes, “they’re likely to get incredibly insightful ideas about new businesses, new products, new services, breakthrough processes: things that will make a difference for any company or country.”

The article also suggests (as we have discussed many times) that innovation starts from the top and that the leaders actually have to start the innovation process – not wait for it to bubble up from the bottom. The article also disruptive innovation is hard to manage and integrate into the product line. Innovative leaders have to actually nurture innovation. Since the article mentions Steve Jobs, and we can certainly learn from him as well.

Unmanned aerial warfare: Flight of the drones

The Economist has an interesting article Unmanned aerial warfare: Flight of the drones. In addition to providing an overview of the market, it provides lots of interesting statistics and graphics that will be very useful. To kick it off, the article says:

Over the past decade UAS have become the counter-terrorism weapon of choice. Since 2005 there has been a 1,200% increase in combat air patrols by UAVs.

A suprising statistic for me was the number of people involved in keeping each Reaper UAV flying (I am not sure how they arrive at that information. Sounds a bit too high)

There may not be a man in the cockpit, but each Reaper, a bigger, deadlier version of the Predator, requires more than 180 people to keep it flying. A pilot is always at the controls (albeit from a base that might be 7,500 miles, or 12,000km, away); and another officer operates its sensors and cameras.

Here is the market size and forecast:

It is amazing that US is by far the largest market much larger than the rest of the world put together! I wonder how the competitive landscape is going to change in the time of austerity. Another key concern is new innovations or breakthrough technology such as artificial intelligence that may change the landscape completely.

The article is an interesting read. Please check it out.