People are the key to organisational success, and also the cause of corporate failure.
This contradiction sets real problems for top managements. They want their companies (meaning the employees within them) to behave according to plan and requirements and march forward to success. Much time, money and energy are spent on trying to drive or lead people in the required direction. Yet all too often the subjects of this ambitious attention respond sluggishly or not at all.
You can see the phenomenon plainly in privatised State industries or government agencies that have been hived off into the quasi-private sector. A significant proportion of the employees stick to the habits of the civil servants they once were. However much money pours in from a privatised monopoly, the ex-officials are not motivated by the profits, which in effect finance unchanged ways of thought and action (or inaction). Their conduct is determined by other factors. These forces should not be strange to the senior managers who are upset by resistance to change: top people themselves are by no means immune to the same pressures. Try this ten-point questionnaire. Do you?…
1. React emotionally when you first receive any information.
2. Avoid risk when you feel relatively secure.
3. Fight fiercely when threatened.
4. Show more self-confidence than you feel.
5. Make snap judgments about people, situations and experiences.
6. Gossip – using the grapevine.
7. Compete for status and its symbols.
8. Dwell on your successes.
9. Feel more comfortable in smaller groups.
10. Seek hierarchical superiority.
That's a very accurate word-picture of the boss archetype: emotional, risk-averse, bridling under criticism, concealing insecurity under bravado, fast to judgment, status and success-conscious, tending to surround himself with a small inner circle or clique, and very conscious of his role at the summit of the hierarchy. But if you believe the evolutionary psychologists, these characteristics are also those of the typical person (especially males). A fascinating article in the Harvard Business Review argues that evolution has imprinted these features on human personality in general; along with other genetic inheritances which are specific to the individual, they cannot be erased.
That sounds like bad news for the innumerable practitioners who make their livings from various techniques designed to change individual behaviour and whole corporate cultures. It sounds like equally bad news for the managers who employ the consultants. Not only may their training and development efforts be misplaced, but the evolutionary behaviour patterns, as described in the HBR by London Business School professor Nigel Nicholson, are inimical to the ideal of the modern company. This model has the following characteristics:
1. Fact-based pragmatism.
2. Entrepreneurial risk-taking.
3. Collegiate, collaborative, non-combative relationships.
4. Detailed analysis before judgment.
5. Totally open communication.
6. Objective assessment of results.
7. Recognition for achievement, not status.
8. Flat, non-hierarchical structure.
The only point on which the two lists agree is the virtue of smallness. The model modern company also seeks to avoid having large concentrations of people. If you believe Robin Dunbar, professor of psychology at Liverpool University, this preference harks back all the way to primitive life on the Savannah Plain. The larger the animal's brain, Dunbar found, the larger the size of the group. The brain limits the size of the biggest group that a human being can handle to 150.
So Europe's most-admired company, ABB, averaging only 50 people at its 1,500 units round the world, is following atavistic patterns as well as modern theories of visibility, autonomy and control. That's one of Nicholson's two supporting examples: the other, Richard Branson's Virgin, is much less convincing. Virgin is a loose, entrepreneurial grouping with a patchy record of success. The example really fits better with Nicholson's suggestion that the 150 limit explains 'the persistent strength of small to midsize family businesses throughout history.'
THE WOBBLY MODEL
Size apart, if the evolutionary psychologists are right, and natural selection 'hardwires' the ten characteristics into people's behaviour at work, the modern model of management looks decidedly wobbly. The more effective model – in terms of fitting natural behaviour patterns – would be closer to the boss archetype. Emotion is a strong force in the culture; the management seeks to control rather than take risks; reacts fiercely to criticism or attack of any kind (especially assaults by competitors); exaggerates its strengths and underplays its weaknesses; leaps to conclusions; fragments into small, often warring or non-cooperative groups; and is highly political, with much emphasis on status and hierarchy.
Is this traditional mode successful? In their book The Profit Zone (Wiley), Boston consultants Adrian Slywotsky and David Morrison have an unusually strong set of case studies. The subjects are 'reinventors' who have effected real change. They include Jack Welch of General Electric: Nicholas Hayek of Swatch watch fame: Robert Goizueta of Coca-Cola: Charles Schwab, the financial services maverick: Andrew Grove of Intel: Michael Eisner of Walt Disney: ABB's virtual founder, Percy Barnevik: and Bill Gates of Microsoft. The octet have in common the fact that they have 'created' enormous corporate and personal wealth. Yet none has 'reinvented' the company in modern management mode.
The reinvention that really counted, as the book makes clear, was of the business, rather than the culture. The leaders radically changed the 'business design' in ways that generated 'profit-protecting power'. The highest power is derived through applying the most effective 'strategic control point'. You couldn't ask for a more convincing example than the way in which Microsoft 'owns the standard'. So long as the MS/DOS operating system is the heart of the personal computer, Microsoft has a dominant platform on which to build a series of quasi-monopolies.
The authors rank the strength of this control even higher than 'managing the value chain', which they attribute to Coke and Intel – though the latter surely comes very close to owning the standard as well. Coke also uses a 'string of superdominant positions' to consolidate its expansion worldwide, working through huge 'anchor bottlers' which it effectively controls. Only one other 'strategic control point' is ranked as 'high' in the book – that's 'own the customer relationship', which is cited as the key to GE's success. Welch supposedly occupies this control point by managing in the spirit of three simple Profit Zone questions:
1. Who are the most profitable customers?
2. Within that group, which customers have the highest profit growth potential?
3. What mix and level of investments are needed to meet those customers' needs efficiently and enable profit growth to occur?
The authors are right in the claims they make for this approach. Profitability analysis almost invariably shows that a small proportion of customers account for the bulk of profits, offset by a significant number who contribute only losses. The analysis shows where to raise prices, where to provide the most intensive service, where to seek new business and drop old, and how to develop profitable business for the future – with everything focused on the customer.
The GE customer strategy was to stop selling products and to offer solutions. That is very far from being a revolutionary approach. It's one of the very first lessons of salesmanship. The difference is that in practice salespeople tend to ignore the lesson and push products. The evolutionary psychologist wouldn't be at all surprised. Trying to sell a top manager a broad solution to his business problems takes salespeople out of the zone of security and into that of risk. Even if they start at the higher level, they quickly revert to the safety of selling products – often unconsciously.
Welch dealt with the matter very effectively. He didn't try to change the sales staff. He handed the customer responsibility to the men running the business units, giving them the new title of 'president and CEO' and sending them out to discuss the needs of customer CEOs. In other words, you don't try to get the leopard to change its spots: you change the leopard. That's a key conclusion confirmed by the work of evolutionary psychology – new people are more likely to adopt new ways than those whose behaviour patterns have been developed within the company or within specific roles.
But was behavioural change crucial for any of the successes of the Awesome Octet? The people inside their companies did behave differently from those in less successful competitors. But that was because the 'reinvented' business design forced different patterns of conduct on people within the system. At ABB, for example, Barnevik broke the company down into profit centres (of which there are now 5,000) and held all their heads responsible for their own profit or loss. The units, all in direct contact with local customers, concentrated on specific equipment – turbines, say. Other machinery needed to fill the customer need is supplied from other specialised members of the ABB global network. The system was changed, not the personalities.
At Swatch, an especially fascinating story, Hayek applied a consultant's skills to a very sick patient, the Swiss watch industry. The digital technology pioneered by the Swiss had proved a devastating weapon in the hands of the Japanese, who flooded the market with cheap, reliable watches. SMH, the company which Hayek created out of the two Swiss watch-making associations, couldn't hope to beat Citizen and Seiko on labour costs – but, anyway, these were not critical. Redesign was. By methods like cutting the components in a plastic watch from 155 to 51 and automating assembly, Hayek had a platform for a differentiated strategy: 'high quality, low cost, provocation and joy of life'.
The resulting lifestyle watches sold 100 million copies from 1983 to 1992 and another 100 million in the next four years – a stunning hit. But the Swatch revolution, which introduced a wholly original concept into a market full of eager, untapped customers, was the foundation of Hayek's success, not its full secret. The astonishing fact is that a third of SMH's sales and 60% of its operating income derive from 'A Class' watches like Blancpain and Omega, selling at upwards of Sfr.1000 – ten times the top price of a 'C Class' watch. The huge volume of Swatch output underpins a traditional Swiss luxury business.
Hayek is described as 'a charismatic, irascible businessman and a highly unconventional thinker.' In many respects, he fits the template of the typical boss recorded earlier: and so, in all probability, do other members of the Awesome Octet. The difference between them and lesser successes wasn't created by escapes from inherited personality, but by the use of personal characteristics in the service of better, stronger ideas. Schwab's use of technology to offer investment customers better, cheaper service, and Eisner's realisation that the Disney franchise could generate multiple sources of profit, fit the same pattern as those of the other Six – the pattern of the born businessman.
These are all people who proved able to look at an existing business situation, see how it could be dramatically changed to their advantage, and execute the new concept well and swiftly. But these abilities transcend business. They are qualities of leadership, which also figures in Nicholson's psychological hardwiring – though in a somewhat puzzling way. Humans are hardwired 'to lead in different ways or not to be leaders at all.' All that tells you is that 'leaders are born, not made': more precisely, that the 'desire to lead' matters more than any other leadership attribute. 'A propensity for authoritative behaviour', for example, may sometimes be useful, sometimes not, but isn't a necessity.
Rather, adaptability and flexibility are required to suit the leadership style to the situation. Evolutionary psychology reinforces the notion that successful management is about compromise. The importance of trade-offs – Gates giving away his browser, say, losing money to protect his other profits – is familiar territory. But effective management of people also involves accepting that you cannot achieve the ideal in all circumstances. The model of modern management needs modification in the following ways:
1. Act on fact-based pragmatism, but encourage people to feel emotional and openly express their emotions.
2. Encourage risk-taking by setting entrepreneurial and challenging targets, while being reasonably tolerant of failure.
3. Expect and facilitate aggressive debate, but insist on fully collaborative execution of agreed plans.
4. Establish systems that force objective analysis on those involved.
5. Have open communication, but include the grapevine in the process.
6. Base all promotion and reward on objective assessment of results, but celebrate success and award 'medals' at every opportunity.
7. Find ways of recognising achievement that also enhance status.
8. Forget the idea of a flat, three-tier structure, but don't use the hierarchy for management purposes.
9. Check constantly to ensure that everybody belongs to a small group with which they identify, but which operates within a collegiate framework.
10. Use the fixed groups and the temporary teams to provide opportunities for leadership.
The resulting organisation will be somewhat messy; but perfect order, while beautiful to behold, isn't well suited to chaotic markets. In fact, large integrated holding companies, which require bureaucracy to keep their many activities under central control, are not well attuned to constant change. Stultifying procedures are always appearing, even as others are being eradicated. That's why Nicholson's HBR article concludes by singing the praises of Ricardo Semler and his Brazilian company, Semco. Thinking Managers has previously recounted Semler's heretical abolition of normal corporate forms in ways (like having employees rate their bosses twice a year) that, claims Nicholson, have 'created something close to what evolutionary psychology sees as our ancestral archetype.'
Semco, however, is small and privately owned. Slywotsky and Morrison have a much larger example of organisational eccentricity – Thermo Electron, which has £3.6 billion of sales and gave investors a total return of 27% per annum over the decade to 1997. The brainwave of its boss, George Hatsopoulos, was to see that the company was outgrowing its strengths, in areas ranging from incentivising employees to the vital business of customer relationships. So he decided to grow by a kind of shrinking. The company would 'spin out' its businesses, starting with the best, raising capital by offering new equity to the stock market, but permanently holding its own shares in the subsidiaries.
Thermo Electron has thus become a tribe of tribes, which should be more comfortable for the Stone Age instincts of the members. So experiment with organisational designs built round small, interlocking groups. Be radical in changing the business design to move into higher profit zones with greater strategic control. Suit organisational and business designs and leadership style to the situation, not the other way round. Establish systems that fit the people, but guide their conduct towards the chosen ends – which are ultimately chosen, never forget, by the customer.