Very interesting article on the The New Republic blames problems in the US manufacturing sector on most CEOs coming from a finance background and the  finance-oriented Business Schools.

the conglomerate structure forced managers to think of their firms as a collection of financial assets, where the goal was to allocate capital efficiently, rather than as makers of specific products, where the goal was to maximize quality and long-term market share…. The leveraged-buyout boom produced a whole generation of finance tycoons—the Michael Milkens of the world—whose ability to value corporate assets was far more important than their ability to run them.

It’s no wonder that such companies miss innovations or new processes, because they don’t have a high enough ROI. The problem that the article fails to mention is that such short-sightedness is usually rewarded by markets (on  the short term at least…).

Dilbert gives us the reason why all “n Habits of Highly Successful People” and “In search of Excellence” type books are useless in one strip!

The last month I’ve been reading two books: an excellent (Origin of Wealth), and a flawed one. I’m going to write some notes on the latter: The Future of Management by Gary Hamel.

Hamel attempts to turn management on its head and following Gibson’s advice that “the future is already here – it’s just not evenly distributed”, he looks for signs of the future in innovative companies.

The major problem with the book is that it’s written like a journalist article one might see in Business Week and not like a well-researched book. Like a review in Amazon mentioned this book is a mix of Drucker (good) and Tom Peters (bad!). It presents the cases of companies like Whole Foods, Google, W.L. Gore as well as the terrific work of Ricardo Semler at Semco. Although, these case studies are interesting, the problem is that they are presented as just-so stories without analysis.

After presenting the cases, Hamel attempts to answer the 6 challenges of management:

1. Democracy of Ideas – modeled after the Web and Wikis
2. Amplifying Human Imagination – give your employees the right data and tools
3. Dynamically Reallocating Resources – decentralize R&D
4. Aggregating Collective Wisdom – create a prediction market (and use the brilliant  askmarkets for the job!)
5. Minimizing the Drag of Old Mental Models – adopt OSS organizational models
6. Giving Everyone the Chance to Opt In – Google’s 20% rule, Linden Labs task list

Then the Hamel is concerned on how innovation can be sustained in large, established companies.

Often the real problem for an established company is not a dearth of ideas, but management processes and practices that favor “more of the same” over “new and different” (p.216):

I heard about France Telecom’s nth employee suicide, while reading Industry Week’s article on innovative management approaches by Nucor and Costco. On the one hand you have 80s style corporate re-organization of a behemoth, which takes its toll on employees brought up on french public-sector work ethic. On the other hand, you have two companies whose innovation efforts are focused on empowering the workforce. They achieve this by promoting an ethic of egalitarianism, which aligns their goals with those of the company – the secret behind Toyota’s success (In 2005, Toyota’s top executives earned only one-tenth as much as Ford’s – Takeouchi et al.,2008).

Takeouchi, H., Osono, E., Shimizu, H. (2008) The Contradictions that Drive Toyota’s Success. Harvard Business Review, June 2008.

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!

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).

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?

Summer is always a chance to catch up with the classics. So apart from studying Competitive Advantage (more on this on a later post), I came across Deming’s “Out of the Crisis” where he mentions the 7 Deadly Diseases of management (via Curious Cat):

1. Lack of constancy of purpose
2. Emphasis on short term profits (Overreaction to short term variation is harmful to long term success. With such focus on relatively unimportant short term results focus on constancy of purpose is next to impossible.)
3. Evaluation of performance, merit rating or annual review
4. Mobility of top management (too much turnover causes numerous problems)
5. Running a company on visible figures alone (many important factors are “unknown and unknowable.”
6. Excessive medical costs
7. Excessive legal damage awards swelled by lawyers working on contingency fees

One can see that the first 5 form a chain of incompetence. High turnover (4) makes management short sighted (2) and running the company on visible numbers alone (P&L) (5), which in turn leads to a lack of constancy of purpose (1). The latter is I believe the ultimate sin: without clear purpose there can be no strategy, and this leads to a company that pursues divergent goals at the same time: low cost position, top quality, differentiation. Usually, this leads to mediocre performance and below average returns (e.g. Grundig in the home electronics industry – which went from iconic high quality brand to jack-of-all-trades failure).

What is interesting, is the fact that the path to mediocrity  is quality > low cost, rather than the other way round:

The company either loses its actual quality advantage and is forced to compete on cost, or the product becomes a commodity so there is no perceived quality advantage. The company tries to compete on cost but usually is not equipped adequately (manufacturing- and culturewise).

It seems that in order to achieve constancy of purpose a long view is essential. But with high turnover this can be elusive…

Logistics guru Eric J. Joiner, Jr. posed an interesting question in LinkedIn:

Crocs are declining in popularity. If you were their head of Supply Chain what would you be doing now?

The question is interesting because the product was very likely a fad, with high early approval and equal backlash (a Facebook group titled “I Dont care How Comfortable Crocs Are, You Look Like A Dumbass.” has 930,000 members). Did Crocs managers evaluate all scenarios: e.g. fad vs stable demand? Their decisions point to them being optimistic:

Crocs made the decision to exit a 3PL distribution relationship and open their own “owned and operated” distribution center (this is well documents in their 10K reports). They “sunk” capital into a distribution facility in the Denver area. Now that volume is down, there has to be big unused capacity in that facility. That facility has ongoing fixed expenses that have to be paid, and are now a millstone around Crocs’ neck. Oh, and I don’t think that there is a lot of demand for a distribution facility in Denver.

Oops!

Η Booz&co έχει δημιουργήσει ένα πολύ καλό παιχνίδι/προσομοιοτή του πόσο αποδοτική είναι η οργανωτική δομή και κουλτούρα μιας επιχείρησης.

Ανάλογα με το προφίλ του οργανισμού στο οποίο δρα, ο χρήστης πρέπει να επιλέξει μεταξύ ενός αριθμού δράσεων για να βελτιώσει την αποδοτικότητα της. Το ενδιαφέρον είναι ότι κάποιες κινήσεις που εκ πρώτης άποψης φαίνονται θετικές, έχουν αρνητικό αποτέλεσμα!