Evolutionary Models in Business. Evgeny Klochkov

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      The choice of Magnit chain new shareholders in favor of Naumova was absolutely logical: to get a ready-made and highly successful manager from a direct competitor would seem to be a real bargain. The prospects are excellent. A successful top manager has taken the lead. However, something went wrong then. As it follows from its financial statements, Magnit’s revenue grew in 2018 by 8.2% (up to 1.2 trillion rubles), but the company failed to catch up with its main competitor – X5 Retail chain. X5's indicators were growing faster and in 2018 its turnover increased by 18.5% (up to 1.53 trillion rubles). Thus, the gap in turnover between the competitors sharply increased over the year. At the end of 2018, the American investment company OppenheimerFunds, owning 7.3% of shares, withdraws from the capital of Magnit.

      To understand the reasons for this outcome, it is necessary to study the history of each of the companies carefully and to figure out their essence. The largest stake in X5 Retail Group belongs to co-owners of Alfa Group, a part belongs to the founders of Pyaterochka and directors of X5 Retail Group, and there are also free float shares. Considering that the majority shareholder is Alfa Group, it is worthwhile to study its essence more closely.

      Alfa Group was founded in 1989, and today it is one of the largest private financial and investment consortia in Russia. At the time of the company foundation, the USSR’s legacy was about to be divided, and Alfa Group was being built as a structure ready to actively participate in mergers and acquisitions. It was characterized by posession of a staff of specially trained lawyers specializing in mergers, acquisitions and corporate conflicts, the rigid centralization of power in the management company, the presence of a “trooper” landing in newly acquired companies and taking over their management. Alfa Group was born, grew up and survived as a “predator” in the aggressive environment of the 90s, and X5 Retail Group is a very similar structure. It was created largely through mergers with other structures, absorbing ready-made retail chains and restructuring formats.

      In the mean time, Magnit could hardly claim to be a predator. The founder of Magnit did not plan to participate in the division of the USSR’s inheritance and was building a family company. The key positions were held by the people close in kinship or in values, and the project developed mainly based on organic growth. Avoiding capital cities, clearly saving on store interiors, Magnit focused on efficient logistics and ensured low prices for goods on the shelf. Magnit went through cost optimization and fine-tuning of internal processes, not resorting to takeovers of competitors. On completing the transaction with VTB Group, its founder S. Galitsky left the business, having by the time of the sale already accumulated a number of systemic contradictions, including those related to the resignation of Vladimir Gordeichuk, a key partner and CEO of CJSC Tander. Olga Naumova, invited from X5 Retail Group to the position of CEO, inevitably encountered a completely different nature of the business. Despite the fact that she came from a direct competitor, X5 Retail Group, Magnit chain was a completely different entity.

      Olga Naumova and her team found themselves at the head of a company, which was developing within the framework of the strategy of survival in the regional market. It is obvious that the management of such a company involves completely different principles and a different approach than the ones applied with X5 Retail Group. When looking at the situation through the proposed paradigm, it becomes clear why at the beginning of 2019 a new position of president appeared at Magnit, which was taken by Jan Dunning, former Lenta’s CEO. As the RBC news site wrote: “In the new configuration, Naumova will continue to be responsible for the entire work of the company, while Dunning will deal with strategy and interaction with shareholders.” However, a few months later, at the end of June 2019, Olga Naumova left the company. As a result, Magnit suffers significant losses and changes its position in the competition from the leader to the one having to catch up. Due to the drop in the capitalization of the retailer, shareholders lose billions, while X5 Retail Group continues increasing its turnover.

      Thus, in the above examples, we see that the different natures of the companies impose different restrictions on their development, which leads to the fact that application of some traditional approaches to the development of the company leads to failure. Despite the external similarities of the two companies, i.e. the same market, the same specificity, and equal weight category, they turned out to have a completely different essence, which in the end gave completely different results.

      For a predator, some losses in fights with opponents are commonplace, and the company has the skills to replace the lost competencies. X5 Retail Group quickly replaced the top manager that left, regrouped and, without unnecessary hype in the media, showed concrete results – an increase in the revenue and capitalization, as well as capture of an even larger market share. Meanwhile, Magnit, which had an excellent start in the form of a state bank as a shareholder and a top manager from a competitor, was unable to reach the potential.

      It is obvious that Olga Naumova, a native of the clan of predators, having joined the new company, found herself in a very unexpected environment for herself. They hardly prepared for the seizure of new territories and battles with opponents. Obviously, all the available tools were not formatted for the Alfa-Group style of operation. Instead of adapting her own role, the new director decided to remake the entire company to what she was used to, trying to change the nature of the company. This is confirmed by the announced new development strategy, including rebranding. However, changing the nature of a business structure is a task that requires a long time and significant inner changes. That said, one shouldn’t forget about the environment, where the race for market leadership did not stop for a moment and the resources of both companies were being actively spent to maintain the pace. Accordingly, any complex operation carried out “on the fly” has a low chance of success.

      There is a number of similar examples in the world of business, the positive or negative results of which, when viewed through the proposed model, become understandable and logical. For instance, the outcome of the Skolkovo Technopark residents performance on the international market, the development of the Aurus car project, attempts to purchase the Brazilian company Embraer by Boeing, the purchase of Tiffany by the LVMH holding, and many other cases.

      The study substantiates that the cases considered and similar ones have the same nature and similar reasons underlying the resulting consequences. The range of problems to be solved within the framework of this study will be formulated as follows: why do even large companies with substantial resources make big mistakes? How can one take into account factors that cannot be identified by using the classical approach and traditional business models in the process of taking complex strategic decisions?

      The answer to these questions lies in the special view of business structures described and justified in this study. The object of the study is to create a new model of business vision, as well as to develop recommendations for the model application. The work was based on classical principles and models that are already known and have proven themselves in practice. These are Charles Darwin’s Theory of Evolution, genetic algorithms, Spiral Dynamics, the Rainforest model of the Silicon Valley from V. Hwang and G. Horowitt, the Blue Ocean Strategy of W. Kim and R. Mauborgne, Corporate Lifecycle Model from Dr. I. Adizes, C. Christensen’s Jobs-to-be-Done concept, R. Dilts’ Pyramid of Logical Levels, the T.O.T.E. Model, Carl Jung’s theory of archetypes, the Propaganda concept from E. Bernays, D. Ariely’s Predictably Irrational, PSYCHEA model of O. Klepikov and A. Murazanov.

      The synthesis of these models makes it possible to create not just another model, but to formulate a novel outlook on the existing models and tools in the field of management, which are of a mechanistic nature. The new model takes into account not only mechanistic relations, but also organic, social, and psychological relationships. It enables prediction of the competitors’ behavior and gives understanding СКАЧАТЬ