The use and abuse of scenarios

Although it is surprisingly hard to create good ones, they help you ask the right questions and prepare for the unexpected. That is hugely valuable.

Scenarios are a powerful tool in the strategist’s armory. They are particularly useful in developing strategies to navigate the kinds of extreme events we have recently seen in the world economy. Scenarios enable the strategist to steer a course between the false certainty of a single forecast and the confused paralysis that often strike in troubled times. When well executed, scenarios boast a range of advantages—but they can also set traps for the unwary.

There is a significant amount of literature on scenarios: their origins in war games, their pioneering use by Shell, how to construct them, how to move from scenarios to decisions, and so on. Rather than attempt anything encyclopedic, which would require a book rather than a short article, I have put forward my personal convictions, based on experience in building scenarios over the past 25 years, about both the power and the dangers of scenarios, and how to sidestep those dangers. I close with some rules of thumb that help me—and will, I hope, help you—get the best out of scenarios.

The power of scenarios

Scenarios have three features that make them a particularly powerful tool for understanding uncertainty and developing strategy accordingly.

Scenarios expand your thinking

You will think more broadly if you develop a range of possible outcomes, each backed by the sequence of events that would lead to them. The exercise is particularly valuable because of a human quirk that leads us to expect that the future will resemble the past and that change will occur only gradually. By demonstrating how—and why—things could quite quickly become much better or worse, we increase our readiness for the range of possibilities the future may hold. You are obliged to ask yourself why the past might not be a helpful guide, and you may find some surprisingly compelling answers.

This quirk, along with other factors, was most powerfully illustrated in the recent meltdown. Many financial modelers had used data going back only a few years and were therefore entirely unprepared for what we have since seen. If they had asked themselves why the recent past might not serve as a good guide to the future, they would have remembered the Asian collapse of the late 1990s, the real-estate slump of the early 1990s, the crash of October 1987, and so on. The very process of developing scenarios generates deeper insight into the underlying drivers of change. Scenarios force companies to ask, “What would have to be true for the following outcome to emerge?” As a result, they find themselves testing a wide range of hypotheses involving changes in all sorts of underlying drivers. They learn which drivers matter and which do not—and what will actually affect those that matter enough to change the scenario.

Scenarios uncover inevitable or near-inevitable futures

A sufficiently broad scenario-building effort yields another valuable result. As the analysis underlying each scenario proceeds, you often identify some particularly powerful drivers of change. These drivers result in outcomes that are the inevitable consequence of events that have already happened, or of trends that are already well developed. Shell, the pioneer in scenario planning, described these as “predetermined outcomes” and captured the essence of this idea with the saying, “It has rained in the mountains, so it will flood in the plains.” In developing scenarios, companies should search for predetermined outcomes—particularly unexpected ones, which are often the most powerful source of new insight uncovered in the scenario-development process.

Broadly speaking, there are four kinds of predetermined outcomes: demographic trends, economic action and reaction, the reversal of unsustainable trends, and scheduled events (which may be beyond the typical planning horizon).

• Demography is destiny. Changes in population size and structure are among the few highly predictable aspects of the future. Some uncertainties exist (potential increases in longevity, for example), but only at the margin. Sometimes, the effects of these trends are far off—as with Social Security in the United States today—so they are generally ignored. When these trends grow near, however, their effects can be powerful indeed, as when the baby boom generation is on the brink of leaving the workforce.

• “You canna change the laws of economics!” Just as Scotty the engineer could not change the laws of physics when Captain Kirk1 demanded more warp speed, so business leaders cannot assume away the laws of economics. If demand shoots up, prices will too—which will limit demand and drive increasing supply—with the result that demand, prices, or both will drop. Nothing increases in price forever, in real terms. We recently saw oil prices more than double and then sink back again by an equal amount. Price changes of this scale inevitably drive supply and demand reactions in every relevant value chain. As in physics, every economic action has a predetermined reaction. These reactions are often ignored in business strategy. If uncovered through scenario planning, however, they can generate powerful insights.

• “Trees don’t grow to the sky.” Business plans often extrapolate into the future trends that are clearly unsustainable. Economies are fundamentally cyclical, so beware of politicians bearing tales about the end of boom and bust. Equally, do not build a strategy based on the claim that the business cycle has been tamed. Often, optimistic projections are accompanied by bold claims of a new paradigm. Strategists need to be very cautious about alleged new paradigms. The appearance of even a genuine new paradigm almost always results in a speculative bubble. The “new economy” was a good example. More recently, securitization proved to be another sound idea that resulted in a speculative bubble. And in the past, many new, innovative technologies—railroads and radio, for example—were hailed as “new paradigms” and then promptly led to investment bubbles. A useful test is to project a trend at least 25 years out. Then ask how long can this trend really be sustained. Challenge yourself to try and prove why the shape of the future should be so fundamentally different from the more cyclical past. Chances are you won’t be able to, and this will open your eyes to the possibility of a break in the trend.

• 
  Scheduled events may fall beyond typical planning horizons. There is also a simpler kind of predetermined outcome that does not involve any unalterable laws: scenarios must take into account scheduled events just beyond corporate planning horizons. A recent example, the results of which we have already seen, is reset dates on adjustable-rate mortgages. Well before the event, one could have predicted a spike in resets as mortgages sold in 2005 and 2006—the peak years—completed their low, three-year introductory rates. Something bad was going to happen to the economy in 2008. Right now, there is another important “timetable” to watch: the wave of large bond issues that has resulted from banks having to refinance hundreds of billions of dollars of maturing debt. Although these types of scheduled events ought to be common knowledge, they tend to be overlooked in planning exercises because they fall beyond the next 12 to 18 months. Scenarios should account for scheduled events that could have a big impact in the 24–60 month time frame.
  

While some errors can be avoided by recalling certain fundamental economic and demographic facts or scheduled events, problems of timing will continue to exist. Your company’s strategic planners may know that a massive dollar value of mortgages is about to reset. But when will the market actually wake up to this reality? Financial services cannot grow as a percentage of GDP forever. But at what percentage will this stop? We didn’t know before, and we still don’t know today. Still, the realization that something must happen, even if it is not clear when, leads to the inclusion of at least one scenario in which, say, financial services stop growing sooner rather than later.

Scenarios protect against ‘groupthink’

Often, the power structure within companies inhibits the free flow of debate. People in meetings typically agree with whatever the most senior person in the room says. In particularly hierarchical companies, employees will wait for the most senior executive to state an opinion before venturing their own—which then magically mirrors that of the senior person. Scenarios allow companies to break out of this trap by providing a political “safe haven” for contrarian thinking.

Scenarios allow people to challenge conventional wisdom

In large corporations, there is typically a very strong status quo bias. After all, large sums of money, and many senior executives’ careers, have been invested in the core assumptions underpinning the current strategy—which means that challenging these assumptions can be difficult. Scenarios provide a less threatening way to lay out alternative futures in which the these assumptions underpinning today’s strategy may no longer be true.

Avoiding the common traps in using scenarios

For all these benefits, there is a downside to scenarios. Inexperienced people and companies are prone to fall into a number of traps.

Don’t become paralyzed

Creating a range of scenarios that is appropriately broad, especially in today’s uncertain climate, can paralyze a company’s leadership. The tendency to think we know what is going to happen is in some ways a survival strategy: at least it makes us confident in our choices (however misplaced that confidence may be). In the face of a wide range of possible outcomes, there is a risk of acting like the proverbial deer in the headlights: the organization becomes confused and lacking in direction, and it changes nothing in its behavior as an uncertain future bears down upon it.

The answer is to pick the scenario whose outcome seems most likely and to base a plan upon that scenario. It should be buttressed with clear contingencies if another scenario—or one that hasn’t been imagined—begins to emerge instead. Ascertain the “no regrets” moves that are sound under all scenarios or as many as possible. Ultimately, the existence of multiple possibilities should not distract a company from having a clear plan.

Don’t let scenarios muddy communications

The former CEO of a global industrial company once suggested that scenarios are an abdication of leadership. His point was that a leader has to set a vision for the future and persuade people to follow it. Great leaders do not paint four alternative views of the future and then say, “Follow me, although I admit I’m not sure where we are going.”

Leaders can use scenarios without abdicating their leadership responsibilities but should not communicate with the organization via scenarios. You cannot stand up in front of an organization and say, “Things will be good, bad, or terrible, but I am not sure which.” Winston Churchill’s remarks about British aims in World War II—“Victory at all costs, victory in spite of all terror, victory however long and hard the road may be”—are instructive. By insisting on only one final outcome, Churchill was not refusing to acknowledge that a wide range of conditions might exist. What he did was to set forth a goal that he regarded as what we would call “robust under different scenarios.” He was acknowledging the range of uncertainties (“however long and hard the road may be”), and he resisted overoptimism (which affected many bank CEOs early in the recent crisis).

A chief executive, a prime minister, or a president must provide clear and inspiring leadership. That doesn’t mean these leaders should not study and prepare for a number of possibilities. Understanding the range of likely events will embolden corporate leaders to feel prepared against most eventualities and allow those leaders to communicate a single, bold goal convincingly.

One additional point about communication and scenarios is worth noting. Scenarios can help leaders avoid looking stupid. A wide range of scenarios—even if not publicly discussed—can help prevent leaders from making statements that can be proven wrong if one of the more extreme scenarios unfolds. For instance, one financial regulator boldly announced, early in the financial crisis, that its banking system was, at the time, capitalized to a level that made it bulletproof under all reasonable scenarios—only to announce, a few months later, that a further recapitalization was required. Similarly, the head of a large bank confidently suggested that the downturn was in its final phases shortly before the major indexes plummeted by 25 percent and we entered a new and even more dangerous phase of the crisis. Many CEOs have given hostages to fortune; scenarios would have helped them avoid doing so.

Don’t rely on an excessively narrow set of outcomes

The astute reader will have noticed that the above-mentioned financial regulator managed to embarrass itself even though it was using scenarios. One of the more dangerous traps of using them is that they can induce a sense of complacency, of having all your bets covered. In this regard at least, they are not so different from the value-at-risk models that left bankers feeling that all was well with their businesses—and for the same reason. Those models typically gave bankers probabilistic projections of what would happen 99 percent of the time. This induced a false sense of security about the potentially catastrophic effects of an event with a 1 percent probability. Creating scenarios that do not cover the full range of possibilities can leave you exposed exactly when scenarios provide most comfort.

One investment bank in 2001, for instance, modeled a 5 percent revenue decline as its worst case, which proved far too optimistic given the downturn that followed. Even when constructing scenarios, it is easy to be trapped by the past. We are typically too optimistic going into a downturn and too pessimistic on the way out. No one is immune to this trap, including professional builders of scenarios and the companies that use them. When the economy is heading into a downturn, pessimistic scenarios should always be pushed beyond what feels comfortable. When the economy has entered the downturn, there is a need for scenarios that may seem unreasonably optimistic.

The breadth of a scenario set can be tested by identifying extreme events—low-probability, high-impact outcomes—from the past 30 or 40 years and seeing whether the scenario set contains anything comparable. Obviously, such an event would never be a core scenario. But businesses ought to know what they would do, say, if some more virulent strain of avian flu were to emerge or if an unexpected geopolitical conflict exploded. Remember too that it would not take a pandemic or a terrorist attack to threaten the survival of many businesses. Sudden spikes in raw-material costs, unexpected price drops, major technological breakthroughs—any of these might take down many large businesses. Companies can’t build all possible events into their scenarios and should not spend too much time on the low-probability ones. But they must be sure of surviving high-severity outcomes, so such possibilities must be identified and kept on a watch list.

Don’t chop the tails off the distribution

In our experience, when people who are running businesses are presented with a range of scenarios, they tend to choose one or two immediately to the right and left of reality as they experience it at the time. They regard the extreme scenarios as a waste because “they won’t happen” or, if they do happen, “all bets are off.” By ignoring the outer scenarios and spending their energy on moderate improvements or deteriorations from the present, leaders leave themselves exposed to dramatic changes—particularly on the downside.

So strategists must include “stretch” scenarios while acknowledging their low probability. Remember, risk and probability are not the same thing. Because the risk of an event is equal to its probability times its magnitude, a low-probability event can still be disastrous if its effects are large enough.

Don’t discard scenarios too quickly

Sometimes the most interesting and insightful scenarios are the ones that initially seem the most unlikely. This raises the question of how long companies should hold on to a scenario. Scenarios ought to be treated dynamically. Depending on the level of detail they aspire to, some might have a shelf life numbered only in months. Others may be kept and reused over a period of years. To retain some relevance, a scenario must be a living thing. Companies don’t get a scenario “right”—they keep it useful. Scenarios get better if revised over time. It is useful to add one scenario for each that is discarded; a suite of roughly the same number of scenarios should be maintained at all times.

Remember when to avoid scenarios altogether

Finally, bear in mind the one instance in which strategists will not want to use scenarios: when uncertainty is so great that they cannot be built reliably at any level of detail.2 Just as scenarios help to avoid groupthink, they can also generate a groupthink of their own. If everyone in an organization thinks the world can be categorized into four boxes on a quadrant, it may convince itself that only four outcomes or kinds of outcomes can happen. That’s very dangerous. Strategists should not think that they have all reasonable scenarios when there are quite different possibilities out there.

Don’t use a single variable

The future is multivariate, and there are elements strategists will miss. They should therefore avoid scenarios that fall on a single spectrum (“very good,” “good,” “not so good,” “very bad”). At least two variables should be used to construct scenarios—and the variables must not be dependent, or in reality there will be just one spectrum.

Some rules of thumb

Obviously, some general principles can be assembled from the points above: look for events that are certain or nearly certain to happen; make sure scenarios cover a broad range of outcomes; don’t ignore extremes; don’t discard scenarios too quickly just because short-term reality appears to refute them and never be embarrassed by a seemingly too pessimistic or optimistic scenario; understand when not enough is known to sketch out a scenario; and so on. But there are some additional rules of thumb that I have found particularly useful.

Always develop at least four scenarios

A scenario set should always contain at least four alternatives. Show three and people always pick the middle one. Four forces them to discover which way they truly lean—an important input into the discussion. Two is always too few unless there is only one big swing factor affecting the situation.

Technically, of course, many scenarios can be sketched out in almost any situation. All possible combinations of just three uncertainties will create 27 scenarios. But many of them will be impossible because the variables are rarely completely independent. Usually, the possibilities can be boiled down to four or five major possible futures.

“Crunch” the quadrants

Often people use a two-by-two matrix when presenting scenarios. But it is not routinely the case that there are just two major variables. In developing scenarios, it would be typical to identify three to five critical uncertainties. How to resolve this tension? One approach is to create multiple two-by-twos using all possible combinations of the four or five critical uncertainties. It will quickly become clear that some uncertainties are highly correlated and so can be combined—and that others are not principal drivers of the various scenarios. At minimum, this will allow for simplification. Sometimes, however, it is possible to uncover a real insight when trying to describe a quadrant created by an unusual combination of uncertainties.3

There should always be a base or central case

This point goes back to the chief executive, mentioned above, who claimed that scenarios were an abdication of responsibility. It is fine to put forward scenarios—it is, in fact, the responsible thing to do. But those who must weigh scenarios and reach decisions based on them expect and deserve to get a specific point of view about the future. The scenario that is highest in probability should always be identified, and that ought to become the base case. If that proves impossible, it should at least be feasible to fashion a “central” case—but there must be crystal clarity about the degree of certainty attached to it, the alternatives, and the resilience of any strategy to those alternatives.

Scenarios must have catchy names

The notion of attaching clever names to scenarios may well sound trivial. It is not. Unless scenarios become a living part of an organization, they are useless. And if they do not have snappy, memorable names, they will not enter the organization’s lexicon. Use two to four words—no more. Plays on film titles and historical events are recommended. Some names that I have used, and that appear to have stuck, are “Groundhog Day,” “the long chill,” “perfect summer,” “end of an era,” “silver age,” and “Mexican spring.”

Avoid long, descriptive titles. No one will remember “Restrengthening world economy at a lower level of overall growth.” And avoid boring “bull, bear, and base” scenarios, even though these are used by many stock analysts. If no snappy title seems to present itself (assuming that someone creative is available), the scenario is probably too diffuse and may contain elements of two different scenarios jammed together.

Learn from being totally wrong

Developing scenarios is an art rather than a science. People learn by experience. It is useful to look back at old scenarios and ask what, in retrospect, they missed. What could have been known at the time that would have made for better scenarios? Events will prove that some scenarios were too narrow or that one was thrown out too soon. The more comfortable an organization and its people are with mistakes and learning from them, the less likely it is to be mistaken again.

Listen to contrary voices

This is a good corrective to groupthink. We tend to dismiss the mavericks. Scenarios are there to make room for them. Maverick scenarios have the virtue of being surprising, which makes people think. If a company’s scenarios are all completely predictable (conventionally good, conventionally bad, and somewhere in the middle), they are not going to be valuable. The best scenarios are built on a new insight—either something predetermined that others have missed or an unobvious but critical uncertainty.

On one occasion, when oil was at $120 a barrel, we presented a scenario with oil at $70. Someone asked what would happen if oil dropped to $10 a barrel. We said that was unnecessarily radical. But we probably should not have been so dismissive, as oil promptly fell below $50 a barrel. We should have been more open to the possibility of this radical price swing—after all, oil has been at $10 a barrel well within living memory. Scenarios should not assume a short-term time series; they should go back as far as possible. If a data series going back 300 years is available, you should consider using it (they do exist for UK interest rates and UK government debt as a percentage of GDP and these long-term data series have certainly informed current debates about the possible interest rates and sustainable debt to GDP ratios). Most variables can only be supported by data going back tens of years—but even this is much more instructive than the meager data often used and helps broaden the range of possible outcomes.

Even modest environmental changes can have enormous impact

The best example of this principle is that specialist business models fail when the business environment changes. I call this the “saber-toothed tiger” problem. The saber-toothed tiger was a specialist killing machine, its big teeth perfectly evolved to capture large mammals. When the environment changed and the large mammals became extinct, saber-toothed tigers became extinct too—those large teeth were not as good for catching small, furry mammals. By contrast, the shark is a generalist killing machine—and so has remained highly successful for hundreds of millions of years.

A specialist business model can suffer the fate of the saber-toothed tiger if the environment changes. Many winning business models are highly specialized and precisely adapted to the current business environment. Therefore no one should ever assume that today’s winners will be in an advantaged position in all possible futures (or even most of them). Therefore, scenarios should be based on creative thinking about how predicted changes in the business environment will alter the competitive landscape. If the environment changes in a scenario but the competitors remain the same, that scenario may not be imaginative enough.

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None of the above is rocket science. Why, then, don’t people routinely create robust sets of scenarios, create contingency plans for each of them, watch to see which scenario is emerging, and live by it? Scenarios are in fact harder than they look—harder to conceptualize, harder to build, and uncomfortably rich in shortcomings. A good one takes time to build, and so a whole set takes a correspondingly larger investment of time and energy.

Scenarios will not provide all of the answers, but they help executives ask better questions and prepare for the unexpected. And that makes them a very valuable tool indeed.

(Source: Charles Roxburgh - McKinsey Quarterly)

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Crazier - Taylor Swift

I never gone with the wind
Just let it flow
Let it take me where it wants to go
Till you open the door
There 's so much more
I never seen it before
I was trying to fly but I couldn't find wings
But you came along and you changed everything

You lift my feet off the ground
You spin me around
You make me crazier, crazier
Feels like I'm falling
And I'm lost in your eyes
You make me crazier, crazier, crazier

I watched from a distance as you
Made life your own
Every sky was your own kind of blue
And I wanted to know how that would feel
And you made it so real
You showed me something that I couldn't see
You opened my eyes and you made me believe

You lift my feet off the ground
You spin me around
You make me crazier, crazier
Feels like I'm falling
And I'm lost in your eyes
You make me crazier, crazier, crazier

Ohhhhh

Baby you showed me what living is for
I don't want to know to hide anymore

You lift my feet off the ground
You spin me around
You make me crazier, crazier
Feels like I'm falling
And I'm lost in your eyes
You make me crazier, crazier, crazier, crazier, crazier.

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Love story - Taylor Swift

We were both young when I first saw you
I close my eyes
And the flashback starts
I'm standing there
On a balcony in summer air

See the lights,
See the party,
the ball gowns
I see you make your way through the crowd
You say hello
Little did I know

That you were Romeo, you were throwing pebbles
And my daddy said stay away from Juliet
And I was crying on the staircase
Begging you please don't go, and I said

Romeo take me somewhere we can be alone
I'll be waiting all there's left to do is run
You'll be the prince and I'll be the princess
It's a love story baby just say yes

So I sneak out to the garden to see you
We keep quiet cause we're dead if they knew
So close your eyes
Escape this town for a little while

Cause you were Romeo I was a scarlet letter
And my daddy said stay away from Juliet
But you were everything to me
I was begging you please don't go and I said

Romeo take me somewhere we can be alone
I'll be waiting all there's left to do is run
You'll be the prince I'll be the princess
It's a love story baby just say yes

Romeo save me, they try to tell me how to feel
This love is difficult, but it's real,
Don't be afraid
We'll make it out of this mess
It's a love story baby just say yes

Oh oh,

I got tired of waiting
Wondering if you were ever coming around
My faith in you was fading
When I met you on the outskirts of town. and I said

Romeo save me I've been feeling so alone
I keep waiting for you but you never come
Is this in my head, I don't know what to think
He kneels to the ground and pulled out a ring

And said

Marry me Juliet you'll never have to be alone
I love you and that's all I really know
I talked to your dad, go pick out a white dress
It's a love story baby just say yes

Oh, oh, oh

Oh, oh, oh, oh

Cause we were both young when I first saw you

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Strategy is bags of fun

Had you walked into the handbag designer Anya Hindmarch’s head office in London last February, you would have been struck by how weirdly hirsute it was. All the men were either in the process of growing a beard, had a full-fledged beard or were just about to shave off their beard. 

The company was not engaged in the facial equivalent of growing a hair shirt in empathy with their economically-squeezed customers – though the recession did have something to do with it.

“It was a beard-growing contest, with very strict rules and prizes for growth and creativity,” says Ms Hindmarch. An employee from the graphic design team won simply because the contrast with his usual clean-shaven mien was so extreme.

“It was the web team’s idea,” she explains. “We had them for supper at home and my husband James [Seymour, the company’s finance director] had failed to shave that morning. We were joking around and came up with the plan – anything to brighten what was a pretty depressing month.”

Perhaps because she started her company, which had revenues of £20m ($32.5m) in 2008, when she was 19; perhaps because she has no business school background; or perhaps because she made her name on such leavening products as evening bags that resemble beaded satin packs of Malteasers and tote bags with a tongue-in-chic schnauzer photo-shopped onto silk, Ms Hindmarch has based her recession-busting strategy as much on play and humour as on cost-cutting. And though some of her innovations seem, on the surface, like the sort of cringe-making bonding exercises occasionally practiced during corporate away-days, the result has, she says, “been our best quarter ever”, with revenues up 4 per cent at a time when most luxury businesses are experiencing negative growth. 

“The thing is,” she continues, “this is really about personalising action: buckling down and fostering a sense of community in hard times. So it’s not company versus its employees or versus its customers, but rather a group of people who are all in the same place, working together for the same goal.” 

Ms Hindmarch first began her fun-and-games strategy a year ago when she made an internal presentation about reining in costs and debt. Instead of merely running through the sales numbers from her 53 stores around the world, however, she used slides of about 20 posters from the second world war of the “Keep Calm and Carry On” variety. 

“People asked if it was really that bad – I think it scared them a bit,” she says. “At the same time, though, it made them laugh, and did create this sense of hunkering down together.”

The reactions also gave her an idea, which she leveraged to boost both internal morale and balance sheets. After all, Ms Hindmarch points out, using fun to offset the pain of financial reality can provide not just a psychological outlet but tangible cost-effective solutions. 

So she made 41 photocopies of £50 notes and handed them out to every employee with the caveat: “If you can think of a way to save £500, you can keep the note.” The point was to raise awareness of the small ways it was possible to think about spending, whether it was simply re-thinking business travel and the approvals process for trips or going through the line items while ordering office equipment. “It was empowering for everyone to make their own recommendations about where to save,” she says. The result was £25,000 in savings. 

From there, the idea of creating little rewards grew, so that in effect everyone was “competing against themselves” and the more they saved, the more they won. Ms Hindmarch established certain “treats” such as a weekly manicure and pedicure for her employees – “that way they don’t leave the office to get one”, she says, noting it also means more actual time at work – and started occasional on-site pilates and yoga classes. 

The rise in morale was palpable enough for the designer to decide to extend the tactic to her customers, and she embarked on a number of limited joint ventures with other niche brands to offer similar perks in-store: florists Scarlet & Violet set up a temporary flower stall in her shops; ice-cream brand Norris Ices was enlisted to serve ice cream for a week; and cosmetic brand Chantecaille came in-store to do pre-cocktail makeovers for customers. The cost was simply the floor space donated. The effect was to pull people into the stores and help bind them to the brand.

“They feel they’re being treated like friends, and shown our private address book,” says Ms Hindmarch. “One mother came in to buy her daughter an ice-cream and the daughter announced the next time she wanted both an ice-cream and a handbag. 

“I’m a great believer in the village church barometer,” she says. “We all spend so much time in our own little world, communicating via e-mail, that we need to actively find a sense of common purpose.” 

Even if it’s just agreeing the punch line to a joke hatched over supper.


(Copyright The Financial Times Limited 2009)

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Four Lessons from Y-Combinator's Fresh Approach to Innovation

A central tenet in The Silver Lining is that the tough times today are actually a hidden boon for innovation — scarcity will drive discipline, forcing innovators to focus on critical assumptions and make quick decisions. 

One organization that is trying to live these principles is Y Combinator. For those who haven't heard about it, the company was founded in 2005 by Paul Graham, who sold a startup venture to Yahoo in 1998 for about $50 million. 

In just a few years, Y Combinator has funded 150 different software and Web services startups. Well known Web 2.0 companies Scribd, Xobni, and Loopt are Y Combinator alums, and me-too funds are springing up across the United States. Sequoia Capital invested $2 million in the business earlier this year.

Y Combinator's basic approach is to give promising ideas a small amount of seed capital (the average investment is less than $25,000), then house those startups for a short period of time. The startups get the capital, strategic input from the Y Combinator team (Graham and his wife), access to a robust network of potential investors, and the opportunity to learn from other Y Combinator–funded startups. In return Y Combinator gets a slice of the business.

In essence, Y Combinator is trying to develop a process to systematize early-stage angel investing. As Fred Wilson, a well known venture capitalist, told Inc. magazine, "Y Combinator is transformative. Paul gives these kids money, but he also gives him a methodology and a value system." 

There are four lessons that corporate innovators can draw from Y Combinator: 

You can do a lot for a little. It amazes me when corporations complain that they lack adequate financial resources for innovation. With open source software, online market research tools, and the ability to create virtual prototypes, you can do a huge amount for $10,000. A lack of financial resources is very rarely a rate limiter.
Tight windows enable "good enough" design. Most Y Combinator–funded companies are expected to release a version of their idea in less than 3 months. That tight time frame forces entrepreneurs to introduce "good enough" software packages that can then iterate in market. This approach contrasts to efforts by many companies to endlessly perfect ideas in a laboratory, only to fail the real test of being exposed to real market conditions. 
Business plans are nice, not necessary. Y Combinator doesn't obsess over whether entrepreneurs have detailed business plans. Again, the focus is getting something out in the market to drive iteration and learning. After all, if you are trying to create a market, most of the material in a business plan is assumption-based anyway.
Failure is an option. One of the benefits of the Y Combinator approach is it forces quick decision making — if the team can't produce a prototype, or the prototype bombs in market, the end comes quickly. And the low, up-front investment makes it easier to wind down ideas. Corporations that say they lack resources often have those resources tied up in the wrong projects. Saying no is not a bad thing.

One open question is whether Y Combinator has the right up-front screens to make sure it is picking the right businesses. The best process in the world can only do so much if inputs are sub par. Nonetheless, corporations seeking to improve their ability to innovate should carefully consider the merits of Y Combinator's approach.

(By Scott Anthony - HarvardBusiness.org)

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Germany to shield Opel from GM bankruptcy

BERLIN (Reuters) -- Germany scrambled Wednesday to put a plan in place to protect carmaker Opel from a looming bankruptcy filing by U.S. parent General Motors.

Members of German Chancellor Angela Merkel's government were meeting with Opel suitors in Berlin in the hope of narrowing the field of bidders and clinching a deal to separate Opel assets from GM (GM, Fortune 500) and provide the European firm with financing until a deal can be closed.

Italy's Fiat, Canadian auto parts company Magna, Belgium-listed holding company RHJ and China's Beijing Automotive Industry Corp (BAIC) are vying for Opel, and Germany has been pushing all four to improve their offers.

The German newspaper Die Welt, citing sources in the Berlin talks, reported that the government planned to give Fiat and Magna preferred bidder status, granting them access to Opel's books for due diligence.

But the report said the other two bidders remained in contention and could be granted the same privilege if they further developed their offers.

A government official, who requested anonymity, said the report was not fully accurate but declined to elaborate.

In addition to examining the bidders, Germany must also win approval from the U.S. government and GM for its plan to temporarily place Opel assets with a trustee, a step to protect its patents and technology from GM creditors who could swoop when the U.S. parent files for bankruptcy.

"We need to see significant movement, both from the potential investors and from the U.S. government and General Motors," Economy Minister Karl-Theodor zu Guttenberg said.

He said it was unlikely the government would settle on one single bidder at the Wednesday meeting, which was expected to continue until at least 11 p.m.

GM is expected to have the final word on who buys Opel, but Berlin will play a crucial role in the decision because it is being asked to cough up billions of euros worth of loan guarantees as part of any deal.

Opel traces its roots in Germany back to the 19th century and employs about 25,000 staff here in four plants. Its future has become the focus of a furious politically charged debate in Berlin ahead of a federal election in September.

Global shakeout

Like its parent GM, Opel has suffered acutely from the worldwide economic slowdown.

Its sale would be part of an industry shakeout sweeping Germany and other carmaking countries across the globe.

Fiat has presented an ambitious plan to fold Opel into a transatlantic car empire that would also include U.S. manufacturer Chrysler.

Magna wants to use Opel and other GM brands to make an aggressive push into the Russian market.

Heading into the talks, these two offers appeared to have an edge over those of RHJ and BAIC, the Chinese group which submitted a late offer Tuesday that the German government has said lacks the required detail.

Germany has warned that insolvency remains an option if no offer is deemed suitable.

It is considering offering Opel 1.5 billion euros ($2.09 billion) in bridge financing to tide the company over until a deal is finalized and wants the bidders to contribute funds.

Excluding Saab, GM Europe employs some 50,000 workers. It has car manufacturing plants in Spain, Poland, Belgium and Britain, where Opel cars are sold under the Vauxhall brand, as well as engine and parts sites such as Aspern near Vienna.

Selling Opel was identified as a major priority by GM ahead of a June 1 deadline to restructure.

The parent company's board could meet as soon as Wednesday to review options for GM, which has been kept in operation since the start of the year with $19.4 billion in emergency federal loans. 

(CNN Money)

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Body in numbers

1. Our heart beats around 100,000 times every day. 

2. Our blood is on a 60,000-mile journey. 

3. Our eyes can distinguish up to one million color surfaces and take in more information than the largest telescope known to man. 

4. Our lungs inhale over two million liters of air every day, without even thinking. They are large enough to cover a tennis court. 

5. Our hearing is so sensitive it can distinguish between hundreds of thousands of different sounds. 

6. Our sense of touch is more refined than any device ever created. 

7. Our brain is more complex than the most powerful computer and has over 100 billion nerve cells. 

8. We give birth to 100 billion red cells every day. 

9. When we touch something, we send a message to our brain at 124 mph. 

10. We have over 600 muscles. 

11. We exercise at least 30 muscles when we smile. 

12. We are about 70 percent water. 

13. We make one liter of saliva a day. 

14. Our nose is our personal air-conditioning system: it warms cold air, cools hot air and filters impurities. 

15. In one square inch of our hand we have nine feet of blood vessels, 600 pain sensors, 9000 nerve endings, 36 heat sensors and 75 pressure sensors.

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Asia’s future and the financial crisis

The region has been hit hard but can help the world recover. Meanwhile, the global crisis is likely to spur further integration among Asian markets.

The collapse of Lehman Brothers triggered a global credit shock that struck with surprising force in Asia. Before Lehman’s failure, many looked to the region as a bastion of economic stability. After all, Asia had high growth rates, large trade surpluses, and substantial foreign reserves. Its large companies were well capitalized and the books of its banks mostly free of the subprime loans and doubtful investments afflicting their Western peers.

Yet Asia couldn’t avoid the economic fallout from the troubles of Europe and the United States: the region’s stock markets plummeted, its currencies weakened, and its exports to the West slowed considerably. The impact of the crisis on the financial markets and real economies of Asia has largely ended speculation about its full “decoupling” from the West. The ties still bind. But the developments of the past few months reinforce our view that Asia should move more aggressively than ever to secure its economic future and improve its resilience in future crises. Asian governments must accelerate their plans to integrate regional economies—for instance, by boosting demand at home, speeding up intraregional trade and investment, and strengthening local and regional financial markets. Only through such initiatives can Asia hope to minimize the impact of future economic dislocations, whether they originate inside or outside the region.

Asia’s economies remain fundamentally sound. They will probably emerge from the global downturn more rapidly than economies in other regions will. Nonetheless, the crisis has exposed important linkages between Asia, on the one hand, and Europe and the United States, on the other. Asia depends heavily on external consumers: for example, in 2007, exports from Asian economies—excluding Australia, Japan, and New Zealand—reached a high of 45 percent of regional GDP, up a full ten percentage points since 1995.1 We estimate conservatively that Western consumers account for about half of these exports, including both direct exports and indirect exports through a growing intra-Asian reexport trade. Moreover, Western investors remain major players in most of Asia’s capital markets. Asian banks, except for those in China, are tightly linked to Europe and the United States through the interbank market and US dollar liquidity needs.

Increased exports to the United States played an important role in Asia’s relatively swift recovery from the 1997–98 crisis and helped China and India become economic giants. This time, however, US consumers, with their troubled mortgages and maxed-out credit cards, probably won’t provide much relief. Asia’s stock and bond markets have deepened significantly since the last crisis: the value of equity and debt markets in Asia, for instance, has soared to 140 percent of regional GDP, up from 50 percent, in the past five years. But along with this deepening has come significant foreign portfolio investment, representing, for example, 30 to 40 percent of the money invested in the financial markets of Hong Kong and South Korea. As margin calls came due and investors sold shares to cover severe liquidity needs in Western markets, capital fled Asia, battering regional equities. Moreover, as Western banks began to deleverage, reducing their $2.8 trillion of credit to Asia, dollar liquidity dried up, along with interbank markets and trade finance.

Although Asia’s foreign-exchange position has strengthened dramatically over the past decade, the sudden shift in foreign financing and the portfolio flows back to the West generated large exchange-rate shifts: currencies in India, South Korea, and other Asian economies depreciated significantly—by over 40 percent relative to the dollar in the case of the South Korean won. Adjustments of this magnitude caused significant losses on currency-hedging products, especially among Asia’s export-oriented small and midsize enterprises. Such losses, combined with the freezing of trade finance and other serious liquidity issues, began to force some of these companies into bankruptcy.

How should Asia respond? The answer will vary from economy to economy and sector to sector. China and India, with their large and growing domestic markets, will find it easier to weather the storm than will mature economies, such as Japan, or late developers, such as Vietnam. Companies in domestically focused industries, such as telecommunications and health care, will do better than those in export-driven sectors, such as electronics and consumer goods.

Nonetheless, choices made in Asia—the source of a third of global GDP—will play a crucial role in driving a global recovery. We see three ways for the region to strengthen its own resilience and help the world recover from the crisis.

Boost demand at home 

Many Asian countries have recently unveiled sweeping government spending plans; China’s proposals, on the surface, appear to be the most ambitious. This is a region with huge infrastructure needs—especially in China and India and, to a lesser extent, Vietnam. Efforts to develop India’s infrastructure are critical but may stall because of the tightening of credit and the weak finances of local governments. These efforts should be pursued aggressively to promote even faster growth through more rapid urbanization, much needed productivity improvements, and the multiplier effects of spending.

Asia is home to an enormous emerging middle class, which we estimate will grow by more than 800 million people within the next decade. Regional policy makers must do more—now—to unlock the spending power of this formidable group. In China, for example, private consumption accounts for only 35 percent of GDP, compared with more than 70 percent in the United States. Consumption-boosting measures, such as increased spending on social services, the liberalization of property rights, and wider access to consumer finance, will speed China’s progress down the path of sustainable growth.

Accelerate intraregional trade and investment

Over the past seven years, trade within Asia has risen 75 percent faster than its trade with Europe and the United States. In fact, trade with the West is now half that of intra-Asian trade. Much of the growth, though, has come from the regional expansion of global supply chains culminating in Western markets. Asia’s economies, with their burgeoning middle-class populations, must begin to see each other as end markets rather than only primarily as links in the global supply chain.

With negotiations over the Doha free-trade-development round stalled, Asian countries have shown new interest in regional free-trade agreements. More than 70 of them have been concluded among the ten members of the Association of Southeast Asian Nations (ASEAN), along with China, Japan, and South Korea.2 Many more are under negotiation. But such bilateral deals have far less impact on trade flows than regionwide agreements do. Asia’s progress in liberalizing regional trade has been too slow, and it is imperative to rebuild momentum for a multilateral solution. The region’s huge infrastructure needs and growing consumer class offer ample investment opportunities for Asian capital. More should be done to tap, for use within the region, the Asian savings and reserve funds allocated to sovereign wealth–style investments.

Strengthen local and regional financial markets 

Asian financial markets have come a huge distance since 1997 but must evolve further if they are to continue supporting the region’s growth over the next five years. More can be done to deepen local and regional capital markets, but in a measured way that seeks to avoid the excesses that have roiled those in the West. Pension reform would provide additional long-term local capital for domestic investment. Asia must do more to put in place the right consumer-finance credit regulations and infrastructure—such as credit bureaus to ensure that the emerging consumer class can spend more, but prudently. The region could also benefit from the adoption of countercyclical financial safeguards, such as dynamic provisioning (which requires banks to build rainy-day reserves in good times for future nonperforming loans) and dynamic capital-adequacy ratios (which would increase capital requirements in boom times and reduce them in troubled ones).

These efforts alone will not suffice. When leaders from Asian and European nations gathered in Beijing last October for their annual summit, several Asian participants called for the establishment of new regional financial institutions to promote growth and stability. Thailand urged the creation of an Asian version of the International Monetary Fund, to be capitalized with $350 billion. Leaders from the Philippines and South Korea offered similar proposals and urged broader currency-swap arrangements. Such ideas are worth exploring. 

In the short term, though, Asia is likelier to achieve consensus by focusing on more targeted measures. These include developing the region’s bond markets aggressively, consolidating its stock exchanges, and establishing additional mechanisms for improving the consistency and approach of regional regulators.

Each of these solutions implies a capacity for coordinated action that has thus far eluded Asia. The received wisdom has long been that it is too economically and politically diverse to integrate policy in a meaningful way. European-style cooperation may not be a realistic goal. Even so, current global financial problems give the region’s leaders a unique opportunity to pull together. Asia isn’t the source of the crisis but could point the way to its long-term resolution.

(Dominic Barton - The McKinsey Quarterly)

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Turning around a struggling airline: An interview with the CEO of Malaysia Airlines

Idris Jala led the state-controlled carrier from the brink of bankruptcy to record-breaking profits. Now he wants it to become what he calls a “five-star value carrier.”

When Idris Jala became CEO at Malaysia Airlines, his goal was to keep the carrier flying. Now he wants to create a new breed of air service. Much has happened in the intervening three years.

Malaysia Airlines, the Southeast Asian country’s national carrier, was less than four months away from running out of cash when Jala took charge, in December 2005. The state-controlled airline had been struggling for some time, but inadequate yield management, an inefficient network, and poor cost control finally brought it to its knees that year, when it posted a 1.7 billion ringgit ($500 million) loss.

Yet in 2007, the airline earned record annual profits of 851 million ringgit. Such a swing would be remarkable for any company, much less one facing the hurdles common with state ownership: a large number of stakeholders, intense public scrutiny, competing priorities, insufficient freedom to operate commercially, and a host of legacy personnel challenges. Now Jala aspires to turn Malaysia Airlines into a “five-star value carrier.”

Jala came to Malaysia Airlines with no experience in the aviation industry or state-run companies. But he had won a reputation for engineering business turnarounds during his 23 years at the oil giant Shell, whose Sri Lankan and Malaysian units he rescued from years of chronic losses. In Sri Lanka, he says, “The Shell leadership told me if I couldn’t fix it in two years, just tell them and they would shut it down. I’d be the last person to switch off the lights.”

In this interview at his office, at Sultan Abdul Aziz Shah Airport, near Kuala Lumpur, Jala discussed the lessons he brought from Shell and how he met the urgent need for change when he arrived at Malaysia Airlines.

The Quarterly: What were your first impressions when you took over Malaysia Airlines, in 2005?

Idris Jala: The company was in a financial crisis—the worst in its entire 50-year history. At the time, we just had enough cash to last three-and-a-half months.

Before I joined, I looked at ten years of financial data. When you’re brought into a problem, you should first ask what’s wrong with the profit-and-loss statement. It’s crucially important to frame the problem in the context of the P&L rather than something nebulous, like the culture, the structure, the processes, and all these other things. You must anchor everything on the profit and loss. I’m boringly consistent on that point.

Here, it was clear that there were three problems with the P&L statement. The first was a very low yield. Average fares were unable to cover the cost of running the airline. The second problem was a very inefficient network. For a long time, we were asked to fly routes that didn’t make any commercial sense. The government wanted those routes, and we flew them. The third problem was high costs linked to low productivity—too many people. In the year when I joined, costs went up by more than 50 percent.

But I didn’t need to tell anyone that there were these three problems. Every analyst report about Malaysia Airlines talked about the same problems. The question was what would we do about them.

The Quarterly: How did you begin?

Idris Jala: When most CEOs try to turn around a business, they will say let’s change the organization or the structure. Or they’ll say let’s change the culture. Or let’s change the systems and processes. They do business-process mapping or make organizational changes that take a few years to finish.

But we had three-and-a-half months to fix the problem, and if we didn’t fix it by then we’d be bankrupt—we’d have no money for salaries, no money for fuel. So I told everyone we had no time to reorganize, to rearrange the deck chairs on the Titanic.

At a board meeting on my first day, I announced our business-turnaround blueprint. I’d never worked a single day at an airline before, but looking at the P&L it didn’t take more than an hour to figure out the solution. If you have to control costs, you just go and cut the costs. If your network’s inefficient, get rid of the routes that are bleeding cash. And if you have a problem with low yield, fix the yield. What else are you going to say?

The Quarterly: Were you given free rein to tackle these problems?

Idris Jala: When the government approached me about this job, I said I would need freedom to act. Of course, they promised I would have it, but I discounted 50 percent of what they said. I wouldn’t say I have 100 percent freedom to act, but I have more than 50 percent. And, more importantly, the freedom was granted in areas really relevant to fixing the business.

For example, nobody disturbed us as we improved the yield, which often meant increasing fares. We could change flight frequencies, get rid of routes, cut costs. These were things that were virtually impossible for my predecessors to do, because they didn’t have such freedom. When I started, our headquarters was in downtown Kuala Lumpur. We sold it for 130 million ringgit, which gave us enough cash to operate for 20 more days. A lot of people, especially a few politicians and long serving Malaysia Airlines employees, said the building’s an icon—it’s our brand in the city—but we were given the freedom to act.

The Quarterly: Were there other factors that helped you push your plans forward?

Idris Jala: Once the government agreed on what needed to be done, we made our business turnaround plan available publicly. At Shell, I never needed to do that. But Malaysia Airlines is a government-linked company and the national flagship. Publishing helped us build a winning coalition not only with the government but also with other stakeholders, like the unions, the staff, and the public. Being upfront about the P&L and making it all transparent were very important to bringing the coalition together. 

The Quarterly: How did this translate into action?

Idris Jala: In a business turnaround plan, you need to identify the key business activities that impact the P&L. These activities are candidates for transitional vehicles that I call laboratories. Essentially, we’d create groups of 10 to 15 people from various functions and backgrounds—all people who had a direct stake in a given activity—and tell them they had to tell us how to fix the problem or else. The people inside the labs were fully accountable. The motto behind the labs is “big results fast.” We had no interest in slow and incremental results. We focused these laboratories on routes and many other parts of the business but never, never on minor activities. If you run a lab on something that has nothing to do with key business activities, don’t be surprised when there are no results. And when you put people in labs, you had better put the best and the brightest.

It is also important to think of the laboratories as a nursery for ideas. We grow the seedlings of innovation in the nursery, and once they are big enough they are implemented. But we really keep control over them—and the CEO has to protect them—so that nobody can kill them when they are transplanted into the operating jungle of the organization.

The one item with the biggest P&L impact was yield, so we set up laboratories to examine the profitability of various routes, with a focus on yield. The members of these labs knew that if they didn’t fix a route, we’d close it and they’d have no jobs. It was as simple as that. We had a team looking at the Kuala Lumpur–Manchester route. The team couldn’t fix it. To be profitable, we needed 40 percent more passengers than we had capacity for. What would we do? Tie the passengers on the wings? After we went through a full analysis, everyone on the team knew that the route couldn’t be fixed. They all knew that they were out of a job.

In the first three months, we got rid of a lot of routes that were bleeding cash and not contributing to the P&L. Within another six months or so, we got rid of most of the ones that were unsalvageable. But we rescued a lot of routes, too. The thing that really catalyzed the new way we did these things was that there was real accountability. 

Today, we have individual P&Ls for each route—by day, by month, and by flight number. Altogether 160,000 P&Ls. These are grouped into regional P&Ls, and every day at 5 pm sharp I get all these on my Blackberry. So do all the route managers. 

The Quarterly: Did transplanting and protecting these innovations require organizational changes?

Idris Jala: I prefer to keep the current setup and change the responsibilities. For instance, our laboratories developed a new job—route profitability manager—that didn’t exist in our structure. Instead of adding a new player, we told people to double up on their responsibilities. The person taking on the responsibility might not be a regional manager; it could be a subordinate. But someone was now responsible for profitability on that route. The structure remained the same, but we gave people a new vocabulary, new responsibilities. Once we were sure that the new thinking works, we got rid of the transitional role. With route profitability managers, we did that after one year.

The Quarterly: Looking back, you make your effort sound very straightforward. How confident were you when you started?

Idris Jala: I gave myself a 50/50 chance of success. First, I had never worked in an airline before, and, second, I had never worked in a company that’s government linked. So there was a tremendous chance of failure, and it was very important for me to conquer that fear. My wife and I had a lot of discussions about that. If I hadn’t conquered the fear of failure, I would never have stepped out of Shell to take this job.

To conquer that kind of fear, it is important to have serious conversations with the people who matter. First of all, I’d share with them targets that are seemingly impossible, such as turning around the company within a year and making huge profits within three. Everyone said it couldn’t be done. The conversation must end with the stakeholders saying, “It’s OK to fail.” That takes out a lot of the fear before the journey begins.

But the key word is seemingly impossible. You must believe deep inside that it can be done. If the leader doesn’t believe in the journey, then it cannot begin. The leader is like someone who cuts a clearing in a very dense tropical jungle. Everyone else is under the canopy, where they can’t see the sky and it’s very depressing. The leader has to bring people over to that clearing, into the space where innovation begins. The single biggest thing a leader brings to a turnaround is hope.

The Quarterly: With the initial turnaround complete, you’ve begun a transformation program. What does that entail?

Idris Jala: We originally wanted to do the business turnaround in three years, but we completed it in two. We targeted profits of 500 million ringgit in 2008, but in 2007 our profits had already reached a record 851 million ringgit. 

We’ve already talked about some of the principles embedded in any change program: the game of the impossible, anchoring everything on the P&L, and building a winning coalition. Two others that I brought from my time with Shell are discipline of action—which means that when we commit to doing something, we monitor results relentlessly and make sure it’s done—and situational leadership. At the start of a turnaround journey, a company is not a democracy. You can’t empower people or ask everybody what they think. You have to be directive, brave enough to set the course. How many generals do you need to win a battle? One. But once results begin to appear and new leaders begin to learn, you must be ready to let go and empower them.

The corporate graveyard is full of people who thought they were indispensable. After every turnaround I’ve done, my successors have gone on to earn even higher profits and greater achievements. These leaders have been developed by putting individuals in the right situations when they’re ready to take control.

The final principle is a subject people don’t talk about in the corporate world: divine intervention. More than 50 percent of what happens to you in life, and in my case probably more than 60 percent, is outside your control. It is important for everyone in an organization, particularly the top leaders, to understand that. I can’t, for example, control oil prices—the single largest thing that impacts our industry—or SARS,1 or other things like that.

If you are a spiritual person, you’d better pray. If you believe in feng shui, go consult a feng shui master. Everyone must come to realize that we only control a small component, so you do the best you can with that and relax about the rest. It gives you peace of mind. You know, when you run a really hard race, like what we did here, you put yourself under tremendous pressure—and others around you, too. You want to go home every single day knowing you’ve done your best, and if you fail it’s OK because we all recognize that you can fail. It has a calming effect on the organization.

The Quarterly: Does talking about divine intervention give people a handy excuse to fail?

Idris Jala: No, because the other five principles provide balance. When you look at our plans, there are reams and reams of detailed activities that must be completed. For example, we have a service campaign called Malaysian Hospitality—MH—which is also our airline code. We have 500 initiatives underpinning it. These are spread throughout the organization, and you can’t run away from them, because of the principle of discipline of action. If you follow all six principles, there’s no way you can run away.

The Quarterly: Have you set new impossible goals for the current phase of your transformation?

Idris Jala: Our new target is to reach profits of 2 billion to 3 billion ringgit within three years, but the more exciting aspiration is that we want to become the world’s five-star value carrier. Such a thing doesn’t exist in today’s vocabulary; what we mean is an airline that provides top-quality products and services at the most affordable prices. We want to be the Toyota of the airline industry.

Is it impossible? Yes. Can it be done? It can. The key is to find the sweet spots. There will always be trade-offs between the quality of products and services and their costs, but there are many, many sweet spots.

One example: for a time, we were serving lamb biryani on our flights to China. But customers didn’t really like it, and it was very expensive. We looked at different meals. When we starting serving fried rice with some satay chicken, which is half the cost, the customers loved it. Why were we giving them something that was expensive and that they didn’t like? But customers flying to Delhi would love lamb biryani.

You have to customize to find the sweet spot, and this is painful. The mantra for bringing down costs says you have to standardize, but standardization really requires you to migrate to the highest common cost denominator, and that’s expensive. Instead, by finding these sweet spots, we can continue playing the game of the impossible and reach our goal.

The Quarterly: In the initial transformation and this ongoing effort, how have you handled talent?

Idris Jala: I believe that everybody can contribute more than they are currently. In my old job at Shell, we turned around Shell MDS, a gas-to-liquids plant in Malaysia, and not a single person was employed from the outside. The people in the company were the same guys who had been losing money for ten years. Help is abundantly available from within, but you must channel the energy to the right business activities.

How do you do that? You make sure people have the right priorities. You say, “I know you like to do this or that, but that’s not what we are going to do now.” When you reward people for doing things differently, like linking pay increases and bonuses to their performance and contribution to the P&L, you find that they deliver results that impact the P&L. They get out from the complacency of not delivering. They discover that they can do a lot more than they ever dreamed possible.

The Quarterly: Beyond the financials, what changes have you noticed at Malaysia Airlines since your program began?

Idris Jala: Number one, this organization is now very good at rigorous analysis. When I joined, that was sadly missing. People did cursory analysis, and I mean cursory. Today, people really get into the analysis and bring back fact-based work.

Second, a cultural change has taken place. This is no longer a culture where if you don’t agree with someone, you keep quiet about it. We now have a culture where people will speak up and disagree.

Also, people are more prepared to step up. Recently, one of my general managers who is in charge of strategic procurement held a session with the top management team to generate cost-cutting ideas for next year. I didn’t even know about it. He asked me at the last minute to speak briefly at the meeting. He gave me five minutes.

The Quarterly: What would you like your legacy to be at Malaysia Airlines?

Idris Jala: I would like to see us achieve our vision of becoming a five-star value carrier. I’m inspired by creating a kind of airline that doesn’t exist today. If we can do it, it will be fascinating. This will be one of the most attractive places to work in Malaysia. In fact, we have the chance to make this one of the best places to work not just in Malaysia but in the world. That’s the legacy I hope for.

(The McKinsey Quarterly)

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