Chapter 2: What Really Works

Management practices studies are as old as business administration theory. Everyone wants to find and publish the holy grail of business. Well, fact is that none of the so-called business gurus is a billionaire (and neither am I). So, something must be terribly wrong with all these theories about what works, and what not. Right? Well, kind of. 

Look at the seminal management book In Search of Excellence by Tom Peters and Robert Waterman. Published in 1982, it remains one of the biggest selling and widely read business books ever. Peters and Waterman found eight common themes which they argued were responsible for the success of the chosen corporations, which have become pointers for managers ever since. In Search of Excellence didn't start out as a book, as Tom Peters explained when interviewed in 2001 to mark the 20th anniversary of In Search of Excellence: Peters and Waterman were both consultants on the margins of McKinsey, based in the San Francisco office. In 1977 McKinsey director Ron Daniel launched two projects; the first and major one, the Business Strategy project, was allocated to top consultants at McKinsey's New York corporate HQ and was given star billing. Nothing came of it. The second 'weak-sister' project (as Peters called it) concerned Organization - structure and people. The Organization project was seen as less important, and was allocated to Peters and Waterman at San Francisco. Peters travelled the world on an infinite budget, with license to talk to as many interesting business people as he could find about teams and organizations in business. He had no particular aim or theory in mind. In 1979 McKinsey's Munich office requested Peters to present his findings to Siemens, which provided the spur for Peters to create a 700-slide two-day presentation. Word of the meeting reached the US and Peters was invited to present also to PepsiCo, but unlike the hyper-organized Siemens, the PepsiCo management required a tighter format than 700 slides, so Peters produced the eight themes.

The platform for Peters and Waterman onto which the In Search Of Excellence research and theorizing was built, was the McKinsey 7-S model:

1. Structure

2. Strategy

3. Systems

4. Style of management

5. Skills - corporate strengths

6. Staff

7. Shared values

Peters and Waterman examined 43 of Fortune 500 top performing companies. They started with a list of 62 of the best performing McKinsey clients and then applied performance measures to weed out what they thought to be the weaker companies. General Electric was one of the casualties failing to make the cut. Peters says that one of his personal drivers in carrying out his research was to prove that certain established methods - particularly heavily systemized philosophies and practices - were wrong, notably those used by Xerox, and advocated by Peter Drucker and Robert McNamara. Peters says that he wanted - with a passion - to prove how crucial people were to business success, and to release business from the 'tyranny of the bean counters'.

As Peters explained in 2001: 'Start with Taylorism, add a layer of Druckerism and a dose of McNamaraism, and by the late 1970's you had the great American corporation that was being run by bean counters...'

Peters says the essential message of In Search of Excellence, was simply:

• People
• Customers
• Action

Peters claims that In Search of Excellence turned these 'soft' factors into hard ones, when previously the only 'hard factors were considered to be the 'numbers'.

Peters also said in 2001 that other than certain companies highlighted that should not have made the cut - Atari and Wang for instance - In Search of Excellence absolutely “nailed the eight points of the compass for business at that time” (1982). He admitted that its central flaw was in suggesting that these points would apply for ever, when they most certainly have not.

Peters said finally in his 2001 interview that were he to write In Search of Excellence today, he would not tamper with any of the eight themes, but he would add to them: capabilities concerning ideas, liberation, and speed.

Here is a summary of the 'In Search of Excellence' eight themes, which also form the eight chapters of the book.

• A bias for action, active decision making - 'getting on with it'.
• Close to the customer - learning from the people served by the business.
• Autonomy and entrepreneurship - fostering innovation and nurturing 'champions'.
• Productivity through people - treating rank and file employees as a source of quality.
• Hands-on, value-driven - management philosophy that guides everyday practice - management showing its commitment.
• Stick to the knitting - stay with the business that you know.
• Simple form, lean staff - some of the best companies have minimal HQ staff.
• Simultaneous loose-tight properties - autonomy in shop-floor activities plus centralized values.

So, in hindsight Peters and Waterman were right, even if some of the 43 companies (actually most of them) did not make it into the next millennium. Certainly Peters became famous and wealthy with his work – and reading his newer publications and listening to his presentations is a treat. He became to management what the Beatles became to pop music.

There were many other attempts to follow in the footsteps of Peters and Waterman. Jim Collins was getting close to fame with his 2001 Book Good to Great: Why Some Companies Make the Leap... and Others Don't . It aims to describe how companies transition from being average to great companies and how organizations can fail to make the transition. "Greatness" is defined as financial performance several multiples better than the market average over a sustained period. Collins finds the main factor for achieving the transition to be a narrow focus of the company’s resources on their field of competence. The key messages of the book are:

• Level 5 Leadership: Leaders who are humble, but driven to do what's best for the company.
• First who, Then What: Get the right people on the bus, then figure out where to go. Finding the right people and trying them out in different positions.
• Confront the Brutal Facts: The Stockdale paradox - Confront the brutal truth of the situation, yet at the same time, never give up hope.
• Hedgehog Concept: Three overlapping circles: What makes you money? What could you be best in the world at? and What lights your fire?
• Culture of Discipline: Rinsing the cottage cheese.
• Technology Accelerators: Using technology to accelerate growth, within the three circles of the hedgehog concept.
• The Flywheel: The additive effect of many small initiatives; they act on each other like compound interest.

Collins finds eleven examples of "great companies" and comparators, similar in industry-type and opportunity, but which failed to achieve the good-to-great growth shown in the great companies:

Good to Great is often cited as the best business book ever written, but I personally believe that there is a better one.

In 2003 William Joice, Nitin Nohira, and Bruce Roberson conducted a groundbreaking 5-year study analyzing data on 200 management practices gathered over a 10 year period. They published their findings in a book with title "What (Really) Works -The 4+2 Formula For Sustained Business Success”. It revealed the effectiveness of the 4+2 practices (4 primary and 2 of 4 possible secondary) practices that really matter -- the ones that, if followed rigorously, ensure sustained business success.

Based on the "Evergreen Project" a massive, five-year study involving the business school faculties of ten universities, the authors set out to find the management practices that truly promote long-term growth and success. The book shows that there are essentially six management practices that all successful companies must master simultaneously. They range from focusing on a strategy of growth to maintaining the depth and quality of human talent in the organization. The study also uncovered the converse: which of the many management nostrums available do not contribute significantly to a company's performance. They found, for example, that a zeal for quality, or the building of a technologically superior infrastructure, does not necessarily contribute to real success. With these and other findings to be revealed in the book, the authors at last have uncovered the real keys to business success.

Business is full of mysteries, but none is greater than this: What are the elements that contribute to a company's success? Executives have spent 100 years guessing about what makes a company succeed--and usually guessing wrong. In the best of times, most don't fully understand what they're doing right. Even fewer really know how to keep their companies prospering when the economy falters.

That's why 50 leading consultants and academics undertook a five-year study called the Evergreen Project, a systematic analysis of the practices that create business winners. Using well-accepted research tools and procedures, the Evergreen team analyzed the experiences of 160 companies over a 10-year period, from 1986 to 1996, in search of the management practices that directly correlate with superior corporate performance as measured by total return to shareholders. In May 2003 their findings were being released in What Really Works (Harper Business). Almost ten years and two economic crises later, I believe the findings are as relevant as ever.

The study found that just eight practices, four primary and four secondary, make all the difference. Winning companies achieved excellence in all four of the primary practices, plus two of the secondary ones--what they came to call the 4+2 formula for success. Losing companies failed to do so. The four primary management practices were identified as: strategy, execution, culture, and structure. The four secondary areas are talent, leadership, innovation, and mergers and partnerships.

The correlation between 4+2 practices and business success was astonishing. Companies that scored high in all four primary areas and any two of the four secondary ones had a better than 90% chance of consistently delivering high shareholder value. Over the 10 years of the study, these "winners" saw their sales rise an average of 415%, assets increase 358%, and operating income lift 326%. Total returns to their investors rose 945%. Companies that didn't follow the formula, meanwhile, produced just 62% in total returns to shareholders over the decade; their sales rose only 83%; their assets, 97%. Operating income grew just 22%.

All eight practices covered by the 4+2 formula have features that are both intuitive and counterintuitive to most businesspeople. In our consulting practice, we are using a bullet-point format of the practices to initially evaluate an organization. The tool works specifically well as self-assessment by a management team. All you need to do is for every practice (slide) rate every bullet point from low (1) to high (5) and then average grade for the practice and for the group.

Primary Practice 1: Devise and maintain a clearly stated, focused strategy.

Whether the strategy is based on low prices or innovative products, it should double your core business every five years while simultaneously building a related new business to about half that size. The strategy must be sharply defined, clearly communicated, and well-understood by employees, customers, partners, and investors.

One of the key mandates found among winners was a strategy focused on growing the core business. Too many leaders, besieged by demands for more support from all segments of the company, allow their resources to be nibbled away. Winning companies keep their goals firmly in mind and tailor their budgets to fit. For managers, the successful pursuit of the strategy practice means following five mandates:

• Build your strategy around a clear value proposition for the customer.

• Develop strategy from the outside in. Base it on what your customers, partners, and investors have to say.

• Fine-tune the strategy to changes in the marketplace.

• Clearly communicate your strategy within the organization, and among customers and external stakeholders.

• Beware the unfamiliar. Grow your core business.

Aldi is an excellent example of the above. Founded in 1958 in Essen, Germany, Albrecht Discount changed the grocery store market in Europe with its limited assortment hard-core discount concept. Today the company operates 9,062 stores worldwide, including the U.S. When the company came to the U.S. in 1976, they realized that a copy of the European peripheral location concept would be a frontal attack to Walmart. Walmart owned and made retail in the urbane periphery of the U.S. Instead of going head-on against Goliath, Aldi reconsidered their strategy for the U.S. and set up shop in small spaces in or close to city-centers. Until then, people shopping groceries in city centers had no other option than paying upscale prices of delicatessen stores, or being ripped off by the charming shopping experience of a seven-eleven. Aldi brought food to customers at the lowest prices possible and introduced shoppers to the select-assortment concept, carrying only 500 select brand products. Compared to other supermarkets, their stores seemed tiny. But ALDI found a niche with Americans hungry for real value, and the chain grew rapidly.

Over time, more products were added, including more refrigerated and frozen foods. ALDI also began experimenting with Special Buy items, to great success. More recently, Sunday hours were instituted, and ALDI began accepting debit cards (before that they were cash only…).

Today, there are over 1,000 ALDI stores in 31 states, from Kansas to the East Coast. And today’s ALDI store carries about 1,400 regularly-stocked items, including fresh meat, and, in certain locations, beer and wine. Though the original ALDI concept has been modified somewhat to accommodate our ever-changing tastes and preferences, the core concept remains: “honest to goodness savings.” Once established in the urbane cores, ALDI acquired Trader Joe’s niche food stores and moved peripheral. Now they are offering healthy food choices in larger stores and very often next to the big Goliath Walmart stores.

Primary Practice 2: Develop and maintain flawless operational execution.

If you can't always delight your customers, you must at least never disappoint them. There's no question that poor quality hurts. Companies are safe as long as they remain in the top third of the perceived quality rankings in their industry, and can never afford to slip into the bottom half. Winners constantly slash operational costs while increasing productivity by 6% to 7% every year.

Superior execution can be achieved only through intense and continuing study and effort. Managers also must be willing to ignore some conventional wisdom. The study found no relationship between outsourcing and financial performance, for example; nor did success hinge on CRM, ERP, or supply-chain management systems. While these applications and services are important elements of overall strategy, they don't correlate directly to the bottom line.

Duke Power, for example, aggressively used IT to improve execution on its strategy of delivering significantly enhanced power quality and service levels to customers in both its regulated and unregulated businesses. Kohl's stores also are very effective in execution, so much so that they can offer department-store products at the same cost as lower-quality goods sold in discount chains. This unique strategy, shared within the company and embedded in its strong culture, lets it grow at a rate far exceeding its competitors.

The study found three mandates for the execution practice: Deliver products and services that consistently meet customers' expectations. Empower the front lines to respond to customer needs. And constantly strive to improve productivity and eliminate all forms of excess and waste.

Primary Practice 3: Develop and maintain a performance-oriented culture.

Among the more intriguing findings was the emergence of culture as one of the four primary practices. Some quarters of the business world are just beginning to take culture seriously. Yet the study clearly showed that companies become winners when everyone in the organization performs at the highest level.

Corporate-culture advocates sometimes argue that if you can make the work fun, everything else will follow. But the study suggests that winning corporate cultures put fun second to high performance. First they do the job well; then they celebrate.

We also found that too many companies fool themselves into believing they're doing well whenever their financial results beat those of the previous year. But winners know that a year-to-year comparison is an insufficient measure. The only meaningful way to define progress is by comparing your performance with that of your competitors. True performance-based cultures go a step further: They aim to surpass top-ranked companies in every industry.

The four mandates for winning corporate cultures, then, are:

• Inspire all to do their best.
• Establish and abide by clear company values.
• Reward achievement with praise and pay, but keep raising the performance bar.
• Create a work environment that's challenging, satisfying, and fun.

Primary Practice 4: Maintain a fast, flexible, flat organization.

There's just one kind of structure that really counts: one that reduces bureaucracy and simplifies work. Procedures and protocols--what bureaucracy is, after all-are absolutely necessary to keep large organizations functioning smoothly. But an excess of them puts roadblocks in the way of progress and dampens employees' enthusiasm and energy. Winners trim away every vestige of bureaucracy. USAA, the insurance company, calls this "painting the bridge." When maintenance experts finish painting one side of a bridge, they know it's time to start again on the other side. Similarly, when USAA finishes eliminating bureaucratic obstacles to its core processes, it begins the search anew.

The mandates for winning corporate structures are:

• Eliminate redundant organizational layers and bureaucratic structures and behaviors.
• Promote cooperation and information exchange across the company.
• Keep your best people close to the action and your front-line stars in place.

You may ask yourself how to assess traditional matrix organizations in view of the above. My response here is very simple: Matrix is nix. It leads to roadblocks, increases confusion and therefore the number of meetings, and is an excuse not to instill clear leadership and decision-making.

Secondary Practice 1: Hold on to talented employees and find more.

The most important indicator of the depth and quality of your talent is whether you can grow your own stars from within instead of buying talented outsiders in every crisis. Winners like Google, Facebook, General Electric, and Procter & Gamble have mastered the deep bench by providing broad educational and training opportunities. Winners don't completely shy away from pursuing talent from outside, though. Their talent-rich environment helps attract even more good people.

Winning companies promote from within whenever possible, create top-of-the-line training, and design jobs that challenge their best performers. And their leaders get personally involved in winning the war for talent.

From my experience I would however caution to hire people just because they apply – even with referrals. There needs to be a job and a need. Several times I have made the experience that when you try to create a job around a person, it will not work out. 

Secondary Practice 2: Make industry-transforming innovations.

One might expect that winners would excel at innovation-but only a bare majority did. Companies that excel keep their eye on the big opportunity-the totally new and disruptive product or technological breakthrough with potential to transform their industry. They don't limit innovation to product lines, either; they understand that applying new and old technologies to internal business processes can yield as big an edge on the competition. Apple, for example, keeps its focus on its core business of consumer electronics, but stays at the leading edge of the innovation curve. It constantly introduces breakthrough products and new models, even if they hurt sales of existing ones.

Secondary Practice 3: Keep leaders and directors committed to the business.

Great chief executives communicate their vision so convincingly that others adopt it, and they have great integrity in word and action. When confronted by moral dilemmas, they don't hesitate to resolve them fairly and quickly.

Good CEOs are picked by good boards. Only two characteristics really matter: that board members truly understand the business and are passionately committed to it. Winning companies make sure board members have a substantial stake in their success and closely link executive pay to performance.

As a former CEO of a public company, I can certainly add my own experience here:

• Never appoint directors just for the sake of having warm bodies filling vacancies around your boardroom table. Spend enough time to find the proper mix of directors. If you can’t – there is something wrong with the company and you should leave as soon as possible. If you don’t, you may end off with a toxic board constellation. Always remember that incapable people tend to oust those who disturb their equilibrium – and that outlier may be you.
• If you have an urgent personnel vacancy on officer level (a CFO, for example), resist the urge to appoint the next possible candidate – always evaluate to find the best, or you will end up with the worst.

Secondary Practice 4: Make growth happen with mergers and partnerships.

Internally generated growth is essential, but it's not usually enough. Best practices in mergers and acquisitions include buying new businesses that leverage your existing customer relationships and complement your strengths, and developing a systematic capability to identify, screen, and close deals. Relatively small deals-less than 20% of a company's own size-done on a consistent basis (two or three every year) are better than large, occasional deals.

Conclusion

The scary fact is that less than 5% of all the publicly traded companies in the study maintained a total return to shareholders greater than their industry peers for more than 10 years. Joining this elite club means running full-speed on six tracks at once. It does not surprise me that only every twentieth organization qualified. Another study by Booz Allen Hamilton showed that over 80% of companies have a culture defined as “passive aggressive”. People working for these companies don’t care what would be in favor of the company. They care to succeed in their own politics and intrigues.

Bottom line is that my wife and I are glad to be back in the business of just being small business entrepreneurs. One of my key findings is that achieving independence is the highest management and business goal of all. More about that in a later chapter.

DISCLAIMER

This webbook is an educational business publication and not a factual report. Unless events, persons, or situations are described and quoted based on public knowledge, all events, persons, or descriptions are strictly fictional. Any resemblance to existing companies, people, or situations is unintended and purely coincidental. Citations for third party sources used in this publication are available in the publication, in the accompanying slide shows, or available upon request from the author. The owner of this website and blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.

Copyright 2012 Chris J. Stern, all rights reserved.