Many articles are written these days to comment on GM’s bankruptcy. One of the most insightful so far is the one by Hamel, were he reflects on the reasons that cause great companies (the kind that case studies are written for), to turn mediocre or worse. Hamel states three reasons:

1. Gravity wins
2. Strategies Die
3. Change Happens

Just to add some arguments to the debate: on the first point I remember a quote by a P&G executive that to keep the growth rate expected by shareholders they needed to create equivalent of a brand the size of “Tide” every year - a nearly impossible feat! Also, it is just natural that huge corporations will underperform due to the inherent complexity that size brings: the only reason this does not happen everywhere is when there is a huge moat (to quote Buffet) that protects the company’s uniqueness. This is where we get to the second point of Hamel’s argument - a strategy does not a permanent moat build! It doesn’t matter how good the strategy is - most times it can be copied by a hungry competitor. As Hamel says:

Over the past few decades, product- and technology-based advantages have become more fleeting. At the same time, the correlation between current and future earnings performance has become progressively weaker.

Is there a way out of this vicious circle? Can companies escape senescence? I don’t know, but the solution surely isn’t applying the latest buzzword, or copying the latest successful company as some gurus will have you believe: after all, today’s Nintendo will be tomorrow’s Sony!

Robert D. Austin and Carl Størmer draw business lessons from Miles’ “Kind of Blue” record, on how to escape the plateau of success and innovate once more, a feat very difficult for both musicians and companies: just think how many groups are worth following past their third record. In order to innovate you have to take some risks:

Also, Miles was on a trajectory, pushing the boundaries of bebop toward greater complexity in the music. He had a fantastic band, so nobody could take this trajectory where he and his band could. But when he jumped to the next S-curve, he actually turned around 180 degrees and went the opposite direction, toward simplicity—simplicity that empowered and freed his players to improvise and create, rather than pushing them to the limits of their technical mastery. He gave them some slack to work with, and asked them to do unusual things with it. It’s interesting to think about and look at examples of companies that have the will to turn 180 degrees, of course, but also there are probably business benefits in relying on radical simplicity to free and empower employees in a similar way.

While browsing around in my library, I found an old article from Strategy & Business, which documents the feud between ABC-Balanced Scorecard guru R.S. Kaplan and Prof. Johnson, who believes that following such systems is a way to failure.

So, should management be based on financial measurements and indicators, or on extensive, detailed knowledge of the company’s operations? At this time, the first approach is far more popular due to the success of ABC and Balanced Scorecard books:

In time, this teaching contributed to the modern obsession in business with ‘looking good’ by the numbers,” writes Professor Johnson, “no matter what damage [it] does to the underlying system of relationships that sustain any human organization.”

But ABC was supposeb to get us out of narrow-minded management:

“Managing Our Way to Economic Decline,” by the Harvard Business School’s William J. Abernathy and Robert H. Hayes, the article was the first of a series of broadsides against the tenets of financially oriented management. American companies that lived by the numbers, said the article, were dying by the numbers; they were shutting down profitable product lines because they looked costly on paper, and were making themselves unnecessarily vulnerable to competition from Japan.

In a way the accounting and control system itself is an enormous overhead, that should be skipped according to Prof. Johnson. But the evils of such systems are not only monetary:

“The problem with managing by data,” Professor Johnson says, “is that it creates a mind-set that leads people to pay less attention to the day-to-day particulars of work.”

On the other hand many of the operational parameters are difficult to measure (and hence control), and ABC - Balanced Scorecard can help by producing an estimate of the efficiency of the operations. But then there is the issue of whether goal setting and productivity bonuses really help in improving operations.

Personally, I am really torn between the two views. I really believe that ABC costing is a powerful tool, that can enhance profitability by exposing inefficiencies, and unprofitable products. On the other hand it gives you the illusion of being in control of things that are quite remote from what the measures can actually tell you (especially Balanced Scorecard). This reductionistic view is inherently short-sighted, and dangerous especially the effects it has in the management culture of a company.

This is not a problem with Balanced Scorecard only, but with any reductionist goal-directed system: initially there may be some benefits, but eventually people will game the system and “goals will go wild” (Ordonez et al., 2009).

(Via Noise Between Stations) A very interesting analysis of how value is created and captured in the iPod supply chain. They take a 30GB 5th Generation iPod ($300 price tag when the article was written), and take it apart. Then, they trace the value created by each component and/or assembly. As predicted, Apple gets most of the value ($80), but what is surprinsing is the authors’ estimate that Chinese assemblers get only $4!

Apart from the apparent simplification (the authors considered the iPod as a single gadget, rather than as an iPod+iTunes ecosystem), the message is clear: innovative concepts, executed right create value. Guess which of the two is harder!

In his blog, my brother discussed Cialdini’s research on influencing behaviour through peer pressure. In particular, he focused on an experiment were a household’s energy usage was compared to that of the neighborhood’s.

What is even more interesting is Goldstein’s research:

And in research I conducted with Wesley Schultz and several colleagues, California households that were informed they were using more electricity than their neighbors reduced their consumption, but those informed that they were using less increased their consumption by 8.6% (emphasis mine). (Goldstein in HBR January 2009)

So, peer pressure leads to improvement or mediocracy? In factory settings, operators who receive bonuses according to their performance, find the “sweet spot” of effort/reward and don’t move an inch past it. Even when the performance measures change, people are quick to adapt (we thrive in feedback loops after all). Visualization of performance is important, but maybe it could focus on piecemeal but continuous improvement - like sports and high scores in video games.

The Wall Street Journal (via Curious Cat) has an article on companies that refuse to do layoffs despite the crisis.These companies have made a kind of social contract with their employees and explore more creative ways of coping with excess capacity, like transferring employees and using 4-day workweeks.

The article also mentions some of the obvious benefits of layoffs:

Some workplace experts say layoffs are a useful part of the business cycle, allowing employers to weed out poor performers, increase efficiency and promote a high-performance culture. Layoffs “are not inherently bad,” says Mark Nadler, a partner at management consultancy Oliver Wyman’s Delta practice. “Some people…are just more crucial to the survival of the organization than others.”

But the downsides are severe too and include loss of productivity and loss of knowledge capital (even in “low-tech” industries, like metal processing).

Lincoln Electric, a Cleveland maker of welding and cutting products, guarantees employment to U.S. workers with at least three years experience, says spokesman Roy Morrow. He says the company, with 9,000 employees world-wide, hasn’t had a U.S. layoff at least since 1949.

Is there a premium gained from such altruistic behaviour? Increased loyalty and flexibility come to mind. But, how can one achieve such stability without things becoming too stable - and driving away top performers?

From LBS Professor Freek Vermeulen comes piece of counter-intuitive (and therefore interesting - Bateson) advice: in a downturn a company should diversify rather than focus exclusively on the core product. The rationale is that, in a downturn, no single pocket of revenue is big enough to sustain the firm. This kind of thinking extents to the firm’s clients too:

…firms should not be focused on winning any big accounts, major new products or customers; they should aim for many smaller ones. They are relatively cheap to access and often the firm will already have knowledge about them; they shunned them in the past considering them too small to advance at the time.

The only real downside of Vermeulens’ idea is that such diversification and focus on more and smaller accounts will exhaust the managerial and “attentional” resources of the firm, in a period when it needs them the most in order to perfect its operations.

An intriguing article by John Kay about the credit crisis and the amount of control that the “big heads” actually had: none! In any crisis or success (e.g. Seven Habbits of Highly Effective People) we tend to attribute causality to the people at the top because it is easier that way:

Our desire to see history through the lives of great men blinds us to the real complexity of politics, business and finance, and leads us to find intentionality and design where there are only chance and improvisation. The philosopher, Alasdair MacIntyre, put it acerbically: “When imputed organisational skill and power are deployed and the desired effect follows, all that we have witnessed is the same kind of sequence as that to be observed when a clergyman is fortunate enough to pray for rain just before the unpredicted end of a drought!” He also said: “One key reason why the presidents of large corporations do not, as some radical critics believe, control the US is that they do not even succeed controlling their own corporations.” That was the experience of Chuck Prince, former Citigroup chief, and Stan O’Neal, former head of Merrill Lynch.

Could Napoleon have coped in a credit crunch?

Reality is too complex for simple causal links…

Industrial Engineer’s dream: a nice Shadow Board (via Evolving Excellence). Sometimes, factories get lost in buzzwords - Lean/TPS, Six Sigma etc., attempt to implement them using a top-down approach, but neglect the basics! The “shadows” show the designated place for each tool and give instant feedback on what’s missing!

Evolving Excellence: Examples of Excellence: Shadow Board

Good times are over and drastic measures are needed VC uberlords Sequoia Capital (via Techcrunch). Trimming the fat off the corporation is a necessity, but what about growth? Where will it come from? Unless the product/service is something really revolutionary (no Jaiku-style crap), you are in for some tough competition.

Sequoia Venture Capital Warning to CEOs - Get more Business Plans