Factor 1: Management’s Profit Emphasis

This factor deals with management’s emphasis on short-term versus long-term profits.

Factor extremes as measured in Calibration:

Management is looking for short-term profits

vs.

 Management is prepared to wait for big payout

Overview to restructuring initiatives

It might be that decision makers view all initiatives concerning investment and profitability as similar and, as a result, require investment returns on new initiatives to be at the same or close to similar profit levels as returns realized from older or more established lines of business. A solution is to segment the organization and planning initiative so that different criteria can be comfortably applied to each established and new business segment and therefore have investment return expectations more clearly aligned with reality.

Possible Initiatives to Modify and Improve the Culture for Innovation

Form a corporate venture capital group and integrate into the planning process

Use corporate funds to set up a traditional wholly-owned venture capital firm. Use the new venture group as a window on new technologies and markets, and as a possible source of acquisitions and further strategic longer term investment. Alternatively, and as a means of spreading risk, form a venture capital partnership as one of several investors.

Set up a new venture division as a means of segmenting the business

A new venture division can be a permanent nursing ground for new business products. The division has the status of an operating division but has different performance expectations more consistent with new ventures. The new venture can be spun-off to or made another part of the corporation after start-up but during this early phase is subject to different-than-normal investment criteria. Management typically comes from within the parent company and may return to other positions in the parent following spin-off, thus providing the opportunity for eventually changing the culture of the parent organization

Engage in seed investment in arms-length entities

Provide minority investment in a business/corporation to gain a window on emerging technologies. Such seed investments are often used as a way to manage risk and uncertainty, as well as allowing for a flexible approach to dealing with cultural differences between partners. Seed investment are sometimes made to gain privileged access to scarce new product. Seed investments can be generally made with less than 10% ownership.

Fund innovation for internal divisions or groups

Advancing monies by way of corporate loans to divisions for product development or new innovations, but making it clear that the loan value with appropriate interest is to be returned, is another way of segmenting the business to recognize different investment return criteria.

One of the Big Issue Facing Capitalism – Thinking longer-term

If you thought this issue was not important you need to read information available on the Henry Jackson Initiative for Inclusive Capitalism web site as well as other recent commentary. Of note: New York Times, May 10, 2012, on the issue of corporations having to report quarterly earnings and the need for Boards and senior management to think longer term. The group is led by Dominic Barton, Global Managing Director of McKinsey & Company. There is an interview with Lynn Forester de Rothschild, article is by by Julia Werdigier: A Call for Corporations to Focus on the the Long Term. http://dealbook.nytimes.com/2012/05/14/group-calls-on-companies-to-focus-on-long-term-goals/