The conventional unwisdom rules management. Read almost any management book, attend almost any management seminar, and your head will be filled with preaching that almost nobody practises. For instance, however much managers are advised (as by Thinking Managers) to practise people-based management, the reality is that people are widely treated as expendable. Far more companies have downsized - following the supposed conventional wisdom - than have created systems for exploiting fully the talents and initiatives of everybody in the organisation, from bottom to top.
One explanation lies in the evolutionary psychology described last month. As human beings evolved, bold mavericks had less chance of survival than cautious folk who stuck with the herd. Natural instinct drives managers and other employees to play ‘follow the leader’ and to avoid the insecure unknown in favour of the supposedly safer status quo. Yet business history abounds with examples of leaders who have dragged companies down to the depths, largely by trying to preserve a status quo that was fast disappearing.
One classic case is Digital Equipment, whose founder, Ken Olsen, was once hailed as America’s greatest entrepreneur. Having built his brilliant success on mini-computers, Olsen never adapted to the age of the microprocessor. His conservatism infected the whole organisation. By the time the board evicted the founder, Digital’s lack of a strong PC business, and of a fast-moving management ethos, condemned it to a series of uphill struggles that led only into the arms of Compaq - which, only a few years back, was a fraction of Digital’s size.
MIRED IN THE PAST
An Wang, another wonderful pioneer, proved equally and just as gravely mired in the past when PCs usurped his word-processors. In such cases, the habits of corporate discipline support the walking disasters. But those habits are by no means natural. The military makes soldiers drill for hours (a mindless and meaningless activity) to inculcate the unnatural response of automatic obedience to any command, however absurd or dangerous. Yet military history tells famous tales of victories won by outright disobedience, from major battles (like Nelson deliberately failing to see an order at Trafalgar by putting the telescope to his blind eye) to minor skirmishes.
Doing what you are told is an overrated virtue, especially in a world of abrupt and unpredictable change. The management theorists are far too intelligent to miss this truth. That’s why book after book presents the unconventional wisdom of people-based management. An example is Real Power (Nicholas Brealey), in which James A.Autry and Stephen Mitchell, applying ancient Taoist philosophy, regret the fact that ‘few of today’s business leaders’ seek to balance shareholder interests against those of employees, customers, suppliers, etc: ‘Too many of them prefer the side paths of short-term profits and short-term increases in what has been narrowly defined as stockholder value’.
This prime cut of the conventional unwisdom is extolled by stock market analysts rather than gurus. Yet driving up the share price, however sanctified conventionally, has serious defects as a corporate objective. For a start, the outcome is not within management’s control. Anything from a stock market crash to a change in investment fashion, from misunderstanding to misapprehension, can damage the share price and drag down ’stockholder value’. Those who live by this particular sword, moreover, can perish by it - like Gould, Inc., which converted wholesale from smokestack industries to electronics, only for the latter sector to slump fatally in market favour as the former soared.
A further difficulty is that value may be more effectively realised in the short term by dismembering the business than by developing its assets. Short-term share movements, as measures of performance, are irrelevant to the long-term expansion of the business. Although Nokia famously sold off paper, tyres, metals, electronics, cables, TVs and PCs, that was in the interests of concentrating wholly on the cellular phones where it found a fabulous future.
The biggest difficulty, though, is that, as a matter of historical fact, many companies do not win worthwhile increases in shareholder value. True, in the decade to 1998, some 70% of the Fortune 500 achieved a total return to shareholders in excess of 7% per annum. That doubles your money in 10 years, which is a strictly run-of-the-mill performance - and came after the longest, strongest bull market in history.
EXCELLENT BUSINESSES
Half the companies, more impressively, clocked up performances above the doubling-every-five-years level. But the super-stars in these rankings created genuine shareholder value by building excellent businesses. The unprecedented flood of wealth created for Microsoft’s stockholders flowed from the equally unexampled success of Bill Gates in protecting, extending and exploiting his worldwide near-monopoly in PC operating systems.
Much the same story holds for Dell, Intel, Oracle and Compaq, which flourished as Digital and Wang faded. In their industry, unconventional wisdom is the breath of life. Winners seek unorthodox solutions by methods which are often just as experimental. They are fully aware that placing shareholder value first puts the cart firmly before the horse and enshrines a monumental piece of the conventional unwisdom - that, so long as the share price is fine, so is the company.
The problem is partly that the conventional unwisdom provides such pat and convenient answers. But none of the neatly quantifiable financial measures that primarily influence share prices actually tells you much about the quality of management. Return on capital, gross profit margins, growth in earnings per share, etc. say nothing about competitive strength, employee morale, customer satisfaction, innovation, productivity, quality, or any other attributes of excellence.
This isn’t only a question of external ignorance. Many managers have no meaningful measures for any of the seven attributes listed above - let alone all of them. On the contrary, conventionally run companies follow policies that retard and even prevent real progress:
1. They deliver products and customer service that are well below the best possible standards.
2. They tackle problems and business areas one by one, not as part of overall plans that encompass everything.
3. They cannot give clear answers to a key question: Who’s in charge here?
4. They lose money on activities that give no customer benefit, but they underspend on activities that do the opposite.
5. They undermanage or mismanage their finances.
6. They neither identify nor meet the critical points of customer satisfaction.
7. They stress and reward individual performance, not teamwork.
8. They don’t follow through on improvement to make it continuous.
9. They don’t make top-class recruitment and personal development the keystones of policy.
10. They operate ineffective and inadequate communication systems.
11. They don’t tell people clearly what is expected of them.
12. They don’t measure the right things in the right way - like the aforementioned competitive strength, employee morale, innovation, customer satisfaction, productivity, or quality.
Most important of all, the conventional company doesn’t use such measures as driving forces for better performance. The Dozen Deadly Sins are no invention. They were all found, alive and kicking, at Continental Airlines by Gordon Bethune. As chief executive, he turned the company, in the words of his book title, From Worst to First (Wiley). His formula was the exact opposite of the Deadly Dozen - reversing which is a superb guide to corporate elevation.
MULTIPLE COMMUNICATION
On communication, for example, Bethune’s management uses ‘as many ways as possible - from newsletters to daily updates on bulletin boards to e-mail, voice mail and electronic signs all over our workplaces worldwide…If we know it, they know it’. Bethune even claims that ‘if an employee doesn’t know what’s up at work, what the goals are, what’s expected, what’s happening, it’s his or her own fault…they’d actually have to work not to know what’s up’.
He also stresses that ‘we listen as well as talk’. Now, all such claims have to be regarded suspiciously until proven true, not only for the benefit of outsiders, but for insiders themselves. There’s no substitute for an intelligently conducted survey that will confirm or correct managers’ own impressions. Bethune is less likely to be misled than most managers, however, because the circumstances of his programme drew management and other employees closely together - as usual with turnarounds from imminent catastrophe.
The abnormal conditions of crisis generally expose the conventional wisdom as dangerously, suicidally unwise. But why wait for crisis before starting to manage wisely? What are managers taught that drives them to unwisdom of the type described by the Dozen Deadly Sins? The prime suspect is ‘making the numbers’. Holding executives responsible for hitting their financial targets sounds eminently reasonable. It’s too easy a jump from that reasonable insistence to the unreasonable conclusion that failure to make those magic numbers warrants dismissal.
As Wang was heading into crisis, the bottom performer in the various monthly sales leagues was automatically fired. At ENR, another US high-tech competitor, two missed quarters also spelt instant dismissal for the sales people pushing its disc storage products. This type of approach, while very common, runs counter to both decency and common sense. The immortal W. Edwards Deming pointed out forcefully that, in any league table, somebody has to come bottom. If the whole team has boosted performance by 50%, what’s gained by sacking the bottom man for a 25% achievement?
NO FAULT OF THEIR OWN
The dismissal won’t even encourage the others, since they know that one of them will come bottom next time round, very possibly through no fault of his or her own. As for the missed quarters, the unconventionally wise manager is more interested in the reasons than the results. What are the possible explanations?
1. The targets were originally set too high.
2. Changed circumstances meant that the targets became unrealistic.
3. The sales person underperformed for ascertainable reasons.
4. He or she was not fully and properly trained and/or briefed.
5. The sales person should never have been appointed in the first place.
Whatever the explanation, the alternatives all point the finger at management. Why were the targets set too high? Was it because (see Wang) of major strategic error that vitiated all sales efforts? Did the changed circumstances (see Wang again) arise from competitive actions that the company had failed to match? Was the salesman suffering acute personal difficulties that front-line management had ignored? More often than not, the answers will indicate management defects that need urgent correction - but none of which will be cured, or even minutely improved, by firing the ‘failed’ salesperson.
Punitive action, however, fits the conventionally unwise mindset. Managers ‘know’ that being tough on perceived failure raises performance. They are proud of their business knowledge and intuitive powers. That makes it very hard for them to accept a demonstrable truth: that neither knowledge nor judgment are any substitute for specific analysis of the facts (as above). The latter may, in fact, wholly contradict the intuitive, case-hardened approach.
Thus, the managers of one health products company, trying to lift sales of surgical trays, considered seven options. The favoured suggestion was to customise the trays to each buyer’s requests. It proved to be the worst option. The effect was markedly negative - sales would actually have fallen. The company had no choice but to shelve its customising plans. Thus does the unconventional wisdom in turn become unwise. When gurus started to preach the case for placing customer delight first and working backwards from that excellent ambition, the advice led, in best practice, to radical reorientation of the value chain.
When fashion took over, however, the unwise demonstrated that falling over backwards to please customers by treating them individually can leave you flat on your back. Never adopt any strategy or tactics without simulating the impact on costs, sales or any other pressure point - as in the health care case. The method used is nothing new. Operational research was employed intensively in the Second World War to improve military performance by applying mathematical expertise to real-life problems.
In the surgical tray example, reports The Economist, an American consultancy named Qualpro needed to change only three variables on each of seven trial runs to get the right answer. Like customising, letters to doctors, hospital chief executives and operating supervisors failed the test, leaving three familiar sales force policies: paying cash commissions, training and holiday incentives. Which would you pick as the winner? In fact, the holiday incentive worked out three times more effectively than commission and twice as successfully as training. The company adopted all three, and sales soared.
LEADING TO CHANGE
The unconventionally wise approach here was to set aside instinctive, intuitive ideas while subjecting all options to rational study. Why would any sane manager ever do otherwise? Yet time and again analytical findings which overturn preconceptions are treated like the messenger bearing bad news - though the news may be excellent. A truth that leads to lower costs and higher profits is hardly painful. It will, however, lead to change, which often seems disagreeably arduous. That health care company, for instance, obviously needed to reform its compensation and training policies across the board, not just in surgical trays - and further analytical management was required for the change.
Take those holiday incentives. Typically they come into their own in the final quarter. The conventional theory is that the cut-off stimulates greater effort, which pays off in the sales boom needed to ‘make the numbers’ for the year. This process quickly decays into a ritual, with managers coming to rely on the fourth quarter surge. The analyst, however, asks: If this level of performance was attainable, why hadn’t it been achieved in the previous nine months? Why does the sales force only respond to special incentives, and not to their normal pay and conditions?
In most cases, the superhuman efforts in the last quarter are followed by slackening sales in the next - with the consequence that the company must play catch-up for the rest of the year, culminating in the fourth quarter stampede. There’s a way out of this potentially vicious circle. Calendar and fiscal years are meaningless in management terms. Yet managers persist in behaving as if something meaningful ends on 31st December or 31st March, or whenever. Rolling 12-month budgets, with a new quarter tacked on as another ends, provide a much more realistic, flexible and continuous basis for accounting and control. The forecasts get revised every three months in the light of actual experience. Reward systems also become more intelligent.
If incentives, bonuses and commissions are tied to 12-month performance on this rolling basis, several inconsistencies will automatically disappear - and so should the fourth quarter stampede. The reform has one drawback: it flies in the face of the conventional unwisdom. But doing precisely that is the way to become uncommonly wise - and successful.
by: ROBERT HELLER
