When Everything Changes, What Stays the Same?
In periods of great change, you need the time-tested fundamentals more than ever in order to make sense of what’s unfolding around you. Dealing effectively with change, then, requires a clear understanding of what doesn’t change.
Management is easier to describe than it is to do.
Organizations don’t just happen by themselves. Management makes them possible. Good management makes them — and society as a whole — more prosperous.
The Universal Discipline
The human ability to manage, to organize purposefully, is as characteristic of the species — and probably as old — as the opposable thumb. But the discipline of management is new. Its roots can be traced to the mid-nineteenth century. Its coming of age as a discipline, however, is an unfolding event of our lifetime.
Management remains the least understood of the professions that shape modern life. For many, management is something to be tolerated. Management makes organizations possible; good management makes them work well.
While the reputation of business continues to rise, the reputation of management continues to decline.
The more we are left to infer what management is from the behavior of the individual who is our boss, the less likely we are to grasp the underlying method.
For many people, one of the most positive aspects of the new economy is its promise to do away with management and traditional organizations altogether.
Management’s real genius is turning complexity and specialization into performance. As the world economy becomes increasingly knowledge based and global, work will continue to grow more specialized and complex, not less. So, management will play a larger role in our lives, not a smaller one.
Managerial literacy means that we will all need to learn to think like managers, whether or not that is what we’re called. It means we will all need a working grasp of the discipline of management.
By the 1990s, most writers understood there was enormous value in branding an idea: establishing a connection between your name and a program that organizations might want to adopt.
Good theory doesn’t give you today’s marching orders in the form of a to-do list. Instead, it helps you to make sense of things. It helps you to see patterns, to separate what matters from what doesn’t, to ask the right questions.
True mastery of change comes from understanding why the world works as it does.
Value creation is the animating principle of modern management and its chief responsibility. Value creation answers the why part of management’s basic question; it goes to the heart of an organization’s purpose, the mission it exists to accomplish.
An organization’s business model lays out how it will accomplish its purpose, the system of players it must depend on to create value.
“Strategy,” addresses how that system will differ from competing alternatives and, by so doing, create enough value to satisfy its owners and to be self-sustaining.
An annual event called planning. Most organizations have their own versions of this corporate ritual. It is often tied to other important management processes such as budget setting or leadership-team building. While rituals give shape and structure to our lives, they can also become a substitute for the meaning they were initially created to foster.
Translating plans into performance — execution. Words like execution and implementation make management sound like nothing more than following a recipe, or carrying out a set of orders.
Managers may be nominally in charge, but they are rarely in control of anyone’s performance but their own. Making this joint performance possible is often the most challenging part of management.
Balancing short-term and long-term performance. Managers must commit resources today, in the face of uncertainty, to create the future.
Design: Why People Work Together and How
Price is what you pay. Value is what you get.
Value Creation: From the Outside In
Value creation is the animating principle of modern management and its chief responsibility.
The phrase captures an important shift in mindset from managing the resources that go into work (the inputs) to managing performance (the outputs, or results).
The value created for the customer usually resides in time or labor or materials saved, and those savings can be quickly translated into a cash equivalent. But the service may also create value in another way.
Value, then, not only takes many forms, it comes from many sources — from a product’s usefulness, its quality, the image associated with it (by advertising and promotion), its availability (how easy it is to get, where it’s sold or distributed), the service that accompanies it. The more intangible the value appears, the more important it is to recognize that value is defined by customers, one person at a time.
One of the most powerful insights of modern management, however, is that there is really only one test of a job well done — a customer who is willing to pay for it. Only real customers write real checks. Only by meeting the needs of customers, as customers themselves define those needs, can an organization perform.
The prophet of efficiency was Frederick Winslow Taylor. Born in 1856 to a prosperous Pennsylvania family, Taylor could have gone to Harvard, but chose manual work instead. Taylor undertook many of the experiments described in The Principles of Scientific Management (1911). Taylor’s message was clear: However simple a task may seem, you need to study it systematically to determine the “one best way” to do it.
Never assume that the best way to do something is the way it has always been done.
When Vienna – born Peter Drucker decided, in 1943, to spend two years studying General Motors from the inside, he put his career at risk.
In his landmark book, The Practice of Management, he offered a critical redefinition of value. Efficiency was necessary, but not sufficient. Customers don’t buy products, Drucker observed, they buy the satisfaction of particular needs.
Defining value as efficiency, as Taylor did, led to an intense focus inward, on what the company makes and how it makes it. This has become known as the manufacturing mindset.
Look through the customer’s eyes, from the outside in. The new perspective advocated by Drucker and others became known as the marketing mindset.
It quickly led to a crucial distinction between selling — convincing a customer to buy whatever it is you make, and marketing — understanding what customers value so that you can work to satisfy their needs.
Drucker formulated a series of deceptively simple questions: “What is our business?” “Who is the customer?” “What does the customer value?”
Bain & Co., was started by a handful of individuals who thought hard about these questions and came up with this answer: our clients want better business results, not reports. They’re not buying hours of advice, they’re buying greater profitability — profits at a discount.
Maximize value for shareholders or you will be ousted by the unrelenting discipline of the capital markets. The upshot was that managers became dramatically more responsive to the interests of owners, and more aware of the direct link between delivering value to customers and creating value for shareholders.
Before the 1980s, a company that created enough value to cover its costs could safely, and sometimes comfortably, underperform relative to its potential. Value creation was sufficient. Since the 1980s, any public corporation that doesn’t maximize value risks losing control to a new owner. This is what people mean when they talk about the discipline of the capital markets.
Michael Porter’s Competitive Strategy (1980), a landmark book that almost singlehandedly created the new field of business strategy. This concept is the value chain, the sequence of activities and information flows that a company and its suppliers must perform to design, produce, market, deliver, and support its products.
Matching the value chain — what’s inside the company — to the customer’s definition of value was a new way of thinking just twenty years ago. Today, it has become conventional wisdom.
A second major consequence of value – chain thinking is that it forces you to see the entire economic process as a whole, regardless of who performs each activity.
Today purchasing has evolved into supply-chain management, and this is a real shift, not just an instance of title inflation.
Why are nonprofit organizations so notoriously difficult to manage? In a sense, for-profit managers have it easy.
Well-run nonprofits have to take on the more difficult challenge of imposing mission discipline on themselves.
Mission, not “customers,” must be in the driver’s seat. “Customers” can lead mission-driven organizations astray.
Even in the business world, customers aren’t the only constituency modern management has to satisfy. In reality, every successful organization depends on multiple players, each of whom defines value in a particular way.
Modern management’s challenge is to ensure that each of these necessary players will choose to participate in the system that creates value for all of them. The term value creation captures this larger, more systemic understanding of performance in a way that earlier definitions of performance did not.
How a business model works as a system for converting insight into enterprise.
Business Models: Converting Insight to Enterprise
A business model is a set of assumptions about how an organization will perform by creating value for all the players on whom it depends, not just its customers.
The business model became a kind of shorthand for “Trust us. We know what we’re doing. Someday we’ll make money.”
A good business model, however, does a lot more than legitimize entrepreneurs in search of capital, and it captures much more than how an enterprise might make money. Business models reflect the systems thinking that is so central to management.
Creating a new business model is not unlike writing a new story. At some level, all new stories are variations on old ones, reworkings of the universal themes that underlie human experience. Similarly, new business models are all variations on the universal value chain that underlies all businesses.
Every business model is a story about the basic human activities of making and selling.
Within any pool of buyers, some are willing to pay more than others. In economists’ terms, the item gives those buyers greater utility (value) and their willingness to pay is, therefore, higher. If a market is large enough to be efficient, there will be enough buyers competing against each other to drive the price up to the level of the buyer for whom the item has the greatest utility.
After an organization has been spectacularly successful or unsuccessful, it’s not hard to derive its business model and see what makes it work — or the flawed assumptions that led it to fail. Before the fact, the picture is filled with all sorts of uncertainties. Uncertainty doesn’t mean that there’s no basis for making reasonable assumptions, however. Much of what ultimately determines a business model’s success is the behavior of people and organizations in markets.
Embedded in every business model is a set of hypotheses about how the world works. Although it starts with who customers are and how you think they will behave, it also includes all the rest of the players on which the model depends.
Thinking managerially means looking at these resources through the lens of markets: seeing the world as a set of discrete markets for talent, capital, and supplies.
When managers look at the markets in which they must participate they see something else. They see a web of power relationships that sets limits on their organization’s ability to perform. The configuration of this web is a constraint that ultimately determines both a company’s costs and its prices.
For a business, survival demands that prices be set somewhere between what it costs to make the product and its value to the customer.
The price of software engineers and web-site designers, for example, has soared in recent years, because the demand for their skills far exceeded the supply. Hiring companies had few alternatives, and so bid ever – higher prices for people who could fill the jobs. Sellers of talent have been in the driver’s seat, and the result has been what’s called a seller’s market.
At another level, however, the power relationship also reflects a phenomenon known as industry structure, one important aspect of which is the relative concentration of buyers and sellers in an industry.
A mantra of the new economy, one that is recited somewhat automatically, is that value is shifting from things to ideas, from products to services.
Inventory has always been the critical issue for a service business.
And every professional — lawyer, doctor, consultant — knows that her time can’t be stored in inventory. The plot in most service businesses with high fixed costs turns on how to solve this problem.
This is known as the “broken-window” theory: When a broken window in a building isn’t fixed immediately, people assume that no one cares and, soon, all the windows will be broken.
Strategy: The Logic of Superior Performance
Of all the concepts in management, strategy is the one that attracts the most attention and generates the most controversy. Almost everyone agrees that it is important. Almost no one agrees on what it is.
Strategic thinking begins with a good business model that describes, as a system, the economic relationships central to fulfilling an organization’s particular purpose.
The business model does not factor in something that is omnipresent in the commercial world and growing fast in the social sector as well: competition. Sooner or later — and it is usually sooner — every enterprise runs into competitors.
Unless you can promise superior returns or superior opportunities, the money and people needed to fuel an organization will go elsewhere.
Organizations do better — they achieve superior performance — when they are unique, when they do something that no one else does in ways that no one else can duplicate.
How did Sam position WalMart to make it different from other discounters? From the very start, Walton chose to serve a different group of customers in a different set of markets. The ten largest discounters in 1962, all gone today, focused on large metropolitan areas and cities like New York. WalMart’s key strategy in Sam’s own words, “was to put good-sized stores into little one-horse towns which everybody else was ignoring.”
Herein lies the difference between a model and a strategy. His model (discount retailing) was the same as Kmart’s. His strategy was unique.
WalMart promised national brands at everyday low prices. What made this promise more than a marketing slogan was WalMart’s systematic pursuit of efficiency and low cost.
Information technology may be just about the only area in which WalMart has historically outspent competitors. That’s because, in retailing, timely information is the key to maximizing sales and minimizing costs.
As WalMart kept finding new ways to improve efficiency, the concept of storing goods in warehouses gave way to a radically different notion, moving goods through distribution centers. One of the breakthroughs in this transformation was the process WalMart pioneered called cross-docking. Goods from a supplier’s truck went seamlessly from an unloading dock directly into a truck bound for the stores.
Without a strategy that in some way makes what you do unique, you may create lots of value, but competition will prevent you from charging higher prices, so you will turn most if not all of that value over to consumers.
Competition in consumer electronics is intense, approaching what economists refer to as perfect competition, in which equally matched rivals face off head-to-head. Under perfect competition, switching costs are low. At the other end of the competitive spectrum is monopoly.
Smart competitors like Sam Walton know that the best competition is no competition.
Patents are an extreme form of what every business wants to do, which is to prevent the competition from copying what it does.
In the industrial economy, the barriers to perfect competition were often physical — the wire or pipeline that ran to your house, for instance, or the huge plant required to manufacture a product. In the knowledge economy, the barriers are shifting increasingly to intangibles, such as intellectual property or the know-how embodied in a company’s core competences in areas such as new product development or customer service.
Your way of being different must have staying power — your castle needs a moat — or your performance will be undistinguished.
Strategic thinking is necessarily interactive: It acknowledges that the world is filled with potential rivals and allies; it allows for both competition and cooperation.
Mathematician John von Neumann and economist Oskar Morgenstern wrote the Theory of Games and Economic Behavior.
From the theoreticians of game theory, managers have learned some important lessons about strategic thinking. First, every move will evoke a response. Second, in economic games, it’s critical to keep your eye on the whole value chain — and on the value that each player adds to the whole. Third, although the key to success in a game would seem to be focusing on your own position, in practice, the opposite holds true. You have to put yourself in the shoes — and even the minds — of the other players.
This kind of strategic thinking — looking forward in the game — is essential to creating strategies with real staying power.
Strategy is difficult, because it is about how others will react to what you do.
Porter identified the underlying forces that determine the attractiveness of any industry: the competition among existing players, the threat of new entrants, the power of suppliers, the power of customers, and the availability of substitute products.
Staying the course is difficult for any organization. For businesses, the challenge most often is growth. The pressure to grow can lead organizations to extend themselves too broadly, to blur their positioning, and, thus, to damage their performance. New initiatives are added piecemeal with the idea that each one will contribute new revenues. Over time, however, the whole can become less than the sum of its parts.
Organization: Where to Draw the Lines
Over the past two decades, most major enterprises have undergone some form of radical reorganization, restructuring, or reengineering.
Management’s job, turning complexity and specialization into performance, requires it to draw three different kinds of lines. First, the boundary lines, which separate what’s inside and what’s outside. Second, the lines of the organization chart, which map how the whole is divided into working units and how each part relates to the others. Third are the sometimes invisible, but always important, lines of authority. These determine who gets to decide what, and how the internal game is played.
Drawing the lines of organization is an ongoing struggle to stay relevant, not a job done once and for all.
The battle for dominance in the automobile industry offers a classic illustration of the link between strategy and organization. The story begins a century ago, with Henry Ford. Within a few years of founding the Ford Motor Company in 1903, Ford’s ambition had crystallized: he would build a motorcar for the multitudes, a car that every working man could afford.
The cheaper the Model T became, the more people could afford them. And the more Model T’s people bought, the cheaper each one became. The breakthrough innovation — the one responsible for the 30 percent price drop between 1908 and 1912 — was the assembly line.
By 1914, Ford made more than 260,000 cars with 13,000 workers. The rest of the industry combined turned out roughly 287,000 cars, about 10 percent more than Ford, but used over five times the numbers of workers — some 66,000 — to do so.
In the same year that Henry Ford launched the Model T, William C. Durant, then head of Buick, formed the General Motors Company by acquiring a string of independent car and component makers.
Durant assembled the pieces we recognize as General Motors, but never figured out how to turn them into a working whole. That job fell to his better-known successor, Alfred Sloan. In the early 1920s, Sloan knew he couldn’t compete head-to-head with Ford’s low-cost Model T. But what if he positioned Chevrolet as more than basic transportation?
Sloan had the right idea, but positioning each GM brand to meet the needs of a different customer was easier said than done.
Sloan’s organizational design gave GM focus in marketing and sales, and economies of scale in production and design. In other words, Sloan’s structure fit his strategy.
Scope refers not only to the breadth of an organization’s product line, it also describes the range of activities an organization performs.
Why do companies draw and redraw the lines that define how many of the steps in the value chain they perform themselves?
When you do something yourself, using your own resources and employees, you have more control. This solves one of the fundamental problems of organization: how to coordinate the resources and the people you depend on to get the job done. With ownership, you get to set the terms.
However, in solving the coordination problem, you run afoul of an equally fundamental problem of organization, the problem of motivation. For an organization to perform, every player must be motivated to do his best.
The better your suppliers understand what you’re trying to accomplish, the more they can tailor their efforts to fit.
Second, the conventional wisdom in manufacturing was that inventory was a necessary evil. You needed to keep extra parts lying around as a buffer.
Unable to afford “just in case,” Toyota developed just in time.
Toyota developed a host of techniques (collectively known as Total Quality Management, or TQM) to improve the quality of the manufacturing process.
Toyota’s competitive advantage in cost and quality arose directly from its organizational practices.
The phrase make or buy arose in a manufacturing context.
Companies typically asked make – buy questions as they were expanding. The question was, Is it time for us to make it ourselves?
Transaction costs occur whenever two parties interact and their work must be coordinated.
In recent years, transaction costs have dropped sharply.
Health care is an information-intensive industry — 30 percent of the costs lie in activities best described as the gathering, processing, and reporting of information.
As technology and globalization have lowered transaction costs, places like India and Ireland are becoming the world’s back office. Outsourcing is in.
Ronald Coase won the Nobel Prize in economics in 1991 for his work (dating to the late 1930s) on how transaction costs determine the boundaries of organizations.
Today, management looks at the value chain from the outside in, from the customer’s point of view, and seeks a configuration that delivers the best value overall, regardless of who executes each activity.
In industries where value has migrated from physical things to intangibles, manufacturing — once a core activity — may have become peripheral. Many companies no longer make the products that bear their name.
Highly efficient contract manufacturers, such as Flextronics, Solectron Corp., Jabil Circuit Inc., and SCI Systems Inc., accounted for about 20 percent of the world’s electronics output in 2000, and their share has been growing rapidly.
What’s unfolding in the NBA is an athletic version of the tragedy of the commons: Everyone is acting in his own self-interest, no one has any incentive to think about the health of the game overall, and the NBA lacks the centralized power to force everyone to restrain themselves for the good of all.
Conventional wisdom in the auto industry, for example, is that a company needs to sell four million cars per year just to stay in the game.
Producing two million cars per year, Honda is a small car company, but it’s a giant in engines, which represent 10 percent of the cost of a car.
We may dismiss Henry Ford’s command and control style as a throwback to the industrial age, but standardization as a design principle is alive and well, and still works miracles of productivity.
Despite all the claims by management writers to the contrary, there is no one best way to organize. Scale, scope, and structure are enormously contingent on what you’re trying to do.
Designing an organization is an exercise in frustration. Time and events will inevitably overtake the best-laid plan: One way or another, you’ll outgrow the design.
Organizations are always slipping out of alignment.
Execution: Making It Happen
Facing Reality: Which Numbers Matter and Why
Not everything that can be counted counts, and not everything that counts can be counted.
Numbers are essential to organizational performance. But basic managerial numeracy isn’t rocket science, and there’s no need for anyone to be intimidated by the math. Measurement is necessary but not sufficient, however. Ultimately, the numbers that truly matter are the ones that tell a story about how the organization is doing.
Consider six sigma, a quality measure that has been all the rage for the past decade. Six sigma is basically just a batting average that tells you what percentage of your efforts are error-free.
One sigma means 68 percent of your output is acceptable. Three sigma means that you’ve succeeded 97 percent of the time. At six sigma, 99.999997 percent of the products you’ve made are acceptable.
Numbers that reveal trends are related to ratios. A time series follows a measure over time, a company’s revenues or costs over the past five years, for instance. (Growth rates are simply ratios that compare today to yesterday.)
It’s easy to focus so intently on the numbers alone, that you forget that they reflect what people are doing. At the same time, without the numbers, you wouldn’t see larger patterns unfolding. What is harder and takes longer is developing judgment about what the number means.
We described business models as stories, and focused on narrative logic as the test of a good model. Numbers take you an important step further. If the narrative makes sense, the numbers will add up.
Revenues, costs, profits, and cash flow are the numbers no organization can live without.
Robert McNamara, a leading figure of this generation, brought a management-by-the- numbers approach to the Ford Motor Company.
McNamara was given license to build a large and powerful staff. They were soon dubbed bean counters by the product men who resented both their rapid rise to power and their ignorance of cars.
But the tools are only aids to judgment. Simple numbers properly used help organizations understand what’s going on, to take their bearings so that they can get where they’re going. They discipline us to face reality.
The Real Bottom Line: Mission and Measures
One of the most powerful management disciplines, the one that more than any other keeps people focused and pulling in the same direction, is to make an organization’s purposes tangible.
Managers do this by translating the organization’s mission — what it, particularly, exists to do — into a set of goals and performance measures that make success concrete for everyone.
Its executives must answer the question, “Given our mission, how is our performance going to be defined?”
Now that we have become a nation of shareholders and investors, we are more likely than ever to think that the purpose of a business is to generate profits.
But the real purpose of any business is to create value for its customers and to generate profits as a result.
“The only things that evolve by themselves in an organization,” Peter Drucker once observed wryly, “are disorder, friction, and malperformance.”
What gets measured gets managed. Without measurement, there is no performance. Measures help organizations map their course as they venture into uncharted territory. Good measures help you to find your way; they signal when you need to make midcourse adjustments in direction or in speed. They also serve as a kind of beacon for everyone in the organization, providing a common goal and a common language for talking about it.
Consider the bottom line, certainly one of the acid tests of value creation.
You know you’ve created value for customers if they are willing to foot the bill, and the bill includes the cost of all the resources that go into serving them. Profit is one of those costs. A healthy bottom line tells you that the customer values what you do.
Operating measures and financial measures tell managers how well they’re using resources, people, physical facilities, and capital. Measures of employee turnover are an important barometer of the climate inside an organization. Measures of external performance, such as customer satisfaction and loyalty (retention rates, for example, and repeat sales) and market share give managers a handle on how well the organization is doing at creating value for customers, as well as a way of keeping score against rivals.
“Turnarounds” — companies in deep trouble — face a very stark current reality. Turnarounds make it easy to see the power of translating what the organization needs to do into simple measures of performance that everyone can understand.
“The foundation of any successfully run business is a strategy everyone understands coupled with a few key measures that are routinely tracked.”
How do you balance rapid growth with profitability and liquidity? Gross margin, which is revenue minus the cost of goods sold, is a traditional measure of profitability. It doesn’t include, however, all the funds that have to be invested in growth (advertising to build your market, for example, and money invested in facilities and inventory). Meredith shifted Dell’s financial focus from gross margin to return on invested capital, a measure that includes those funds, paving the way for Dell’s focus on low-inventory manufacturing.
Market leaders, by virtue of their greater market power and scale, were more likely to achieve superior performance. If you weren’t number one or number two you had to fix the business, or else close it or sell it.
People in organizations are very creative when it comes to gaming performance systems — and so the lines need to be redrawn periodically.
Translating purpose into performance measures is a very subtle, very complex task.
Like the navigators of the age of exploration, good managers always have one eye fixed on the horizon and the other on their current position.
Managers either innovate today or fall behind tomorrow. But every dollar they spend for the future is charged against today’s performance.
In May 1927, Henry Ford did a most extraordinary thing. He shut down his assembly line and sent the workers home while he went back to the drawing board.
Betting on the Future: Innovation and Uncertainty
What Ford didn’t count on was that once he had introduced people to automobile ownership, he would change their lives forever. Ford, remember, made cars affordable for the mass market. This meant that someone buying a car was almost surely buying his first car. Ford never imagined that when it came time for a second car, or a third, people would develop a taste for better cars, for more comfort and power and style — which is precisely what happened.
The investments that managers make to project their organizations into the future, whether it’s hiring people they’re not sure they can afford or developing new products, reflect the fundamental optimism of management.
Contrary to the popular stereotype, then, management and entrepreneurship are not antithetical roles. As Peter Drucker has argued for decades, they “are only two different dimensions of the same task.” An entrepreneur who doesn’t learn how to manage won’t last long. Nor will a manager last long if he doesn’t learn to innovate.
Although successful managers may use different metaphors to talk about what they do, at its core, the innovative work of organizations is the orchestrated search for new value.
The familiar phrase listening to customers, doesn’t fully capture what’s going on. Gathering the information you need to create better bets requires active engagement, not just passive listening.
True curiosity about other people — a passionate interest in understanding why people do what they do — is rare. Suspending judgment, observation, and curiosity — these are the necessary complements (and sometimes antidotes) to the prompting of instinct, intuition, and industry lore.
Sometimes, you have to take what people say with a grain of salt, especially when they say one thing and do another.
The fact that things can turn out in more ways than one is perhaps the defining characteristic of managerial decision making. You are forced to commit resources today toward performance in an uncertain future.
Author and longtime investment advisor Peter Bernstein offers up a witty summary of the problem, which could be titled “The Innovator’s Lament”: the information you have isn’t what you want; the information you want isn’t the information you need; the information you need isn’t the information you can obtain; the information you can obtain costs more than you’re willing to pay.
If there were no uncertainty, there would be no need to make decisions — you would just do it.
The cost of capital, which can sound very abstract, is as real and concrete as the cost of labor and steel. It is basically the cost of using other people’s money in a risky enterprise.
Net present value (NPV). NPV is the price you’d be willing to pay today to buy all the net cash flows associated with an investment. Net present value has been the signature tool of professional managers for the past three decades. It has become the global standard.
People confuse the best case (what they hope will happen) with the base case (what’s most likely to happen). The cash flows you lay out are only as good as your answers to these questions: What could go wrong? What could go right? How likely is it that those things might happen?
Xerox, once an icon of corporate America, badly fumbled the future, not because it couldn’t innovate, but because it failed to commercialize its innovations.
Management is active, not passive. You make hundreds of decisions over the course of time as events unfold, as new information emerges, as you learn and respond. At every new decision point, you need to reassess the expected value from that moment forward.
When decisions are sequential, it helps to map them out graphically in the form of a decision tree, a versatile tool for thinking systematically about all kinds of decisions — personal as well as business — that involve uncertainty.
Delivering Results: First, You Focus
The ability to deliver results year in and year out is one of the hallmarks of a seasoned professional. Among managers, the phrase she or he can deliver the numbers is high praise indeed.
When Jack Welch describes his job as CEO of GE as putting “the best people on the biggest opportunities and the best allocation of dollars in the right places” he is affirming Pareto’s Law. Applied to organizations, it means that performance will depend disproportionately on doing a few things really well.
The overriding point of Pareto’s Law: In most instances, a few things matter far more than others.
The problem with averages and aggregate numbers is that they often hide significant differences in the component figures.
Before the 1980s, most companies thought all their customers were equally valuable. Since then, the spread of 80-20 thinking, coupled with the greater availability of data and computer-processing power, has made disaggregating the numbers more and more common. Choosing which customers to serve has always been a critical dimension of strategy.
Joseph Juran’s groundbreaking Quality Control Handbook, published in 1951, was one of the sparks that ignited this quality revolution. He applied Pareto’s Law: A relatively small number of quality problems accounted for most of the losses related to defects. He concluded that quality could be dramatically improved by applying the 80-20 principle to an organization’s production processes. This revolutionary idea, ignored at first in the United States, was enthusiastically embraced in Japan, where Juran and W. Edwards Deming, another American apostle of quality, were treated like heroes. His ideas came back to US as TQM, or total quality management, and six sigma.
Drivers — an important piece of business jargon — as in cost drivers, quality drivers, and profitability drivers. In each case, a driver is the 20 of the 80-20, a big cause that accounts for a disproportionate share of the results.
Resource allocation is one of those awful, technocratic phrases that make people’s eyes glaze over. Like value creation, it is abstract and colorless, a phrase that’s hard to put a human face on.
People disagree about priorities. They build empires and defend their turf. They cling to the past, to familiar territory. They hate to stop what they’re doing, because it would look and feel like an admission of failure. The math of priority setting is simple. Acting on the math is hard, because putting resources here means you’re not going to put them there. It means, in other words, that you will often have to say no, when it is always easier and far more agreeable to say yes.
Peter Drucker noted repeatedly that the greatest obstacle to innovation in organizations is the unwillingness to let go of yesterday’s success, and to free up resources that no longer contribute to results.
We needed “to ask ourselves Peter Drucker’s very tough question, ‘If you weren’t already in the business, would you enter it today?’” he has said. “And if the answer is no, face that second difficult question, ‘What are you going to do about it?’”
A sunk cost is an investment of time or money that can no longer be recovered or put to another use.
Long before benchmarking and best practices had become management buzzwords, however, Sam Walton had all his store managers filling out “Beat Yesterday” ledgers, simple forms that tracked daily sales in comparison to same-day sales one year earlier.
Benchmarking and best practices. These related disciplines are keeping more and more organizations marching to the steady drumbeat of continuous improvement.
Benchmarking became widespread in the 1980s, as a result of heightened competition and the need to improve productivity and quality.
You need numbers to tell you where you stand, but performance isn’t a matter of numbers alone. It is what people do with the numbers that counts.
Managing People: Which Values Matter and Why
Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don’t have the first, the other two will kill you.
All the disciplines we’ve discussed — from creating a common reality to allocating resources — help transform the specialized contributions of individuals into the joint performance of organizations.
When people become managers for the first time, they often experience a rude awakening. At last, they take control, only to find they’ve been taken hostage instead. They realize that they are now dependent as never before, because management creates performance through others. Without the willing cooperation of others, management can accomplish very little.
Resolving this tension between the individual and the organization is at the heart of management’s work.
Welch went on to elaborate, dividing his managers into four distinct types.
- Type I, he said, is “everybody’s star. These people deliver on commitments, financial or otherwise , and share our values.”
- Type IIs are the opposite: “They do not meet commitments, nor share our values — nor last long at GE.”
- Type IIIs try hard, miss some commitments, but work well with people and share the values. They deserve another chance.
- Type IVs deliver the numbers, but do so by forcing them out of people. Says Welch, “This is your big shot, your tyrant, the person you’d love to be rid of — but oh those numbers.”
Culture building is hard work. It requires communication, communication, and, then, more communication. It thrives on simple messages, repeated again and again — one of Jack Welch’s special gifts.
No value is more universally and loudly proclaimed in organizations than respect for the individual. Like the phrases value creation and thinking outside the box, this one, too, often makes people cringe because it is so often said insincerely.
Hiring the right person for the job was one of the core principles of scientific management laid out by Frederick Winslow Taylor a century ago.
Waiting too long to act when individuals aren’t right for the job is a pervasive problem — in all organizations and at all levels of an organization.
More than anything else, this is a lesson in empathy, which is probably the most important lesson a manager can learn. Empathy is yet another instance of the outside – in perspective, of seeing the world through other people’s eyes.
As individuals we’re slow to apply the principles of value creation to our own efforts. We persist in defining our performance by how hard we work at something, rather than by the results we achieve. Nothing is tougher than to break that old mindset.
Next Steps
Management is the discipline that makes joint performance possible. Its mission is value creation, where value is defined from the outside in, by customers and owners in the case of a business; by society, more broadly, in the case of government agencies and nonprofits.
Purpose comes first. Management starts with a mission worth accomplishing, with the value it sets out to create.
A design to match the purpose. The second test of management is whether it can articulate a theory of how the organization will accomplish its purpose.
The work of execution.
The optimism necessary to lead an organization, the essential can-do attitude of management, can easily blur into wishful thinking or worse, self-delusion.
Accountability may become one of the hot words of the coming decade. If so, let’s hope it is because we are grappling seriously, as citizens, with an important challenge: how to measure the best things in life. These things may be priceless, but they are by no means free.
