Inserting Greater Guarantees Into Your Company's Future

Inserting Greater Guarantees Into Your Company's Future

Judy Olian

( Judy Olian is Dean of Penn State's Smeal College of Business and a leading expert in strategic human resources management .)

The tumult in the business environment is, if anything, accelerating, with the upward and downward spikes in business cycles hitting closer together. The recent crash of the dot-coms has been especially unsettling because many of us had been lulled into expecting their stratospheric valuations and the continuing upward momentum of markets.

Are there any strategies to smooth these business extremes and insert an element of guarantee into your corporate future? Of course, your best bet is to have a rock solid business model, superb customer service that breeds passionate loyalty, and a dedicated team of star employees. But short of that, I'll suggest that you focus in three areas related to your business model, your customers, and your people.

(1) Do you own a choke point? Are there elements of your business model where, in essence, you can control access to needed services or products, so that all users must go through, or depend on, you? Gary Hamel, in his recent book, "Leading the Revolution," provides several examples of choke points, akin to the old river lock system where the river keeper extracted a toll from all vessels traveling upstream. Think about Baby Bells' (now threatened) control of "the last mile" of telephone line into households, cable systems that control all local access, or Microsoft's ubiquitous Windows operating system for which most software developers and users ultimately pay. Other examples are petroleum distribution systems where the ultimate choke point resides in the real estate - - the petroleum holding tanks from which all gasoline is distributed, or DeBeers' chokehold on distribution of diamonds worldwide.

(2) Have you created lock-in of customers? Hamel discusses a variety of strategies companies use to lock-in customers by making it costly for them to switch from one provider to another. Tightly woven information systems are one form of lock-in, where the costs of IT infrastructure replacement in an electronic supply chain between suppliers and customers impedes the customer's freedom to switch to another provider. Similarly, tightly managed inventory systems where customers receive parts just-in-time, achieve similar lock-in. For example, Dell operates on a 24-hour inventory turnover system and is heavily reliant on a vast network of reliable providers. Airline frequent flyer programs or cellular telephone companies lock in customers to particular programs or telephone systems by providing incentives for loyalty, or by making switching costs expensive to the user, even if the service isn't great. Customers won't feel compelled to remain with you if the service is terrible, or if your competitors provide sufficient incentive to switch, so this isn't a foolproof guarantee. But customer lock-in does raise the ante on switching costs.

(3) Do your employees have golden handcuffs? In the knowledge economy, people are your most expensive and irreplaceable asset. How do you lock them in? There are contractual strategies through golden handcuffs (providing a sizeable bonus if employees' or executives' tenure exceeds a certain length), pension vesting after 5 or 10 years of employment, or large salary increases or stock option activation tied to long-term performance. But these are contractual lock-ins, and do not guarantee against contract buyout by a competitor who is especially hungry for that talent, nor does it guarantee continuing strong performance.

You want employees who are tied to your future because they share your vision and are committed to its realization. Advancing their knowledge base through interesting project assignments, or investing in their skill set by providing formal training or subsidizing their education, are less tangible forms of lock-in that also improve performance, and breed commitment. Executive MBA Programs are an example of significant investment in succession development that can be tied to a defined payback period. They are often expensive, yet they bond talent to you provided you also sustain the excitement and intangible incentives for remaining with your company.

These are not guarantees. However, consider these three essential components of your strategy to insert some stability into your business, and help you ride the inevitable market turmoil.