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When breaking the rules is great for business


That giant of customer service, the late Sam Walton, advised other managements to 'break all the rules.'

That was the tenth and last of the great man's commandments, the foundation of the unexampled growth of Wal-Mart to become the world's largest retailer. Wal-Mart's own control systems must, of course, be superb – effective control is the essence of successful retailing. Yet Walton wasn't just paying lip-service to an impossible ideal. Great businesses need to combine regularity with improvisation, order with elements of spontaneity and disorder.


Peters and Waterman expressed this same idea in In Search of Excellence. Again, it was the last item in the list, this time of the eight attributes of the excellent company: 'loose-tight controls.' As a working definition, this was too vague to guide managers towards better systems and away from the trap neatly defined by one manager, talking about his large financial services company: 'So many internal processes are focused on control that it inevitably results in controlling the customer.' That's nice work if you can get it – but few businesses can, and excessive customer control is more likely to lead to excessive customer loss.

The clash between control and service highlights the basic issue, which is, like so much in management, a matter of trade-offs. In one scale, there's the optimal degree of control, with every procedure and process defined in manuals which have the force of law, with exceptions forbidden, and with all events policed and recorded to ensure that the organisation literally works to rule. In the other scale, there's the optimal degree of freedom, in which people are trusted to behave honestly and intelligently, the reporting system is designed as a forward-looking aid to maximising performance, initiative and innovation are encouraged – and rules are few and far between.


Another American retail group, Nordstrom, epitomises the second culture in its corporate manual, with the opening injunction to 'use your own best judgment at all times.' That's followed by the second rule: 'There are no other rules.' Whether this philosophy accurately depicts the realities of life at Nordstrom is beside the point. The weight of theory is leaning towards this mode of management and away from the bureaucratic paradise of the first culture, that of control. Elements of the second culture are creeping into many companies – though few would go so far as an organisation called St. Luke's. Would you be prepared to risk these elements?:

1. Everybody, from managing director to the receptionist, is an equal owner of the business.

2. Juniors are encouraged to criticise their seniors openly.

3. Upward appraisal and downward appraisal co-exist.

4. People partly determine their own rewards.

5. Nobody has an office to themselves.

6. The business is organised by customer, rather than by function or department.

Managers in more orthodox companies will be relieved to hear that St. Luke's is an advertising agency, a 45-strong breakaway from the huge Omnicom. Advertising people are seldom taken wholly seriously by their clients. Ad-men often wear exotic clothes and have eccentric habits, which is acceptable in people who are hired for their creativity and are not expected or believed to be sound business managers. A set-up like St. Luke's can be seen as a brilliant piece of branding: its original parent, the New York agency Chiat/Day, used similar approaches (wacky office design, no personal offices and a fashionable emphasis on 'virtuality') as a means of differentiation.

It's true that no major corporation has all six of the St. Luke's features. But there are no personal offices at Honda Motor, either. The admirable John Lewis department stores in Britain have been owned by an employee partnership for decades. Upward appraisal is spreading rapidly, even among corporations, like the US phone giant AT&T, that were once infamous for their bureaucracy. While few employees influence their own pay directly, linking rewards to results has become widespread at all levels of the firm.

The most striking conversion of the giants, though, is the move towards organising round the customer. This represents a logical progression from the old-fashioned functional organisation via the dominant mode of organising by product. As conventional a company as IBM has rebuilt its marketing structure round customer groups. The flatness of the St. Luke's structure is being even more widely adopted – and old rules of thumb, like 'never have more than seven people reporting to one manager', have long been thrown out of the window.


That time-expired adage has wider implications. Any organisation runs on three kinds of rule. The first variety are the formal regulations which lay down what managers and other employees can, can't and must do. The second variety are the informal rules, 'the way we do things round here', which can be even more restrictive than the formal restraints. The third variety are the mind-sets – the ways in which people think about the external world and the relationship of the business to that world.

The culture of control operates most obviously and most restrictively via the first variety of rules. The cultural brakes are just as restrictive with the second, unwritten variety. But the mind-set rules govern what the organisation does in ways that are extremely powerful and wildly erratic – sometimes restrictive, the collective mind-set can unleash orgies of uncontrol.

The shared mind-set operates in its most powerful and influential mode at the top management level. The rule is to follow the crowd: mistakes are seldom made singly. Mergers and acquisitions tell this story with particular force. A study reported in Business Week found that 83% of the 150 big deals (over $500 million) examined either substantially eroded shareholder returns, eroded some returns, or created only marginal returns. Experienced acquirers did better than the inexperienced – but were in a small minority (outnumbered three to one).

In this instance, following the crowd was a bad mistake: 69% of the non-acquirers in the study outperformed their industries, against only 58% of the acquirers. However, there were 248 of the latter and a mere 96 of the former. The relative or outright failures, to make matters worse, had fallen foul of another type of rule – principles laid down by commonsense and experience. The intelligent acquirer never breaks these rules:

1. Conduct rigorous due diligence and don't agree a deal until fully satisfied by the investigative findings.

2. Always have a powerful strategic reason for making the buy.

3. Don't buy in the expectation of synergies, unless it is clearly proved that they exist and can be realised.

4. Pay only what is justified by the financial and economic facts.

5. Ensure that the cultures are compatible.


6. Move swiftly to integrate the acquired company into the new totality.

None of these rules is in any way amazing. Who would deliberately buy a company – or anything else – while still doubtful about its value? Or commit large sums of money to a corporate purchase without having a clear idea of why the purchase was being made? Or overpay – especially if both doubtful about the buy's value and/or uncertain about its strategic purpose? In real life, this triple threat is blithly accepted – Daimler-Benz managed the trick twice, when buying AEG and the DASA aerospace business, and then did it a third time when adding 51% of Fokker, a veritable licence to lose money.

The even stranger fact is that, having broken the first three rules, acquirers do nothing to integrate incompatible cultures or to exercise rapid and effective control over the acquired company. Thus, even if synergies exist, they take far too long to emerge – and sometimes never appear at all. Top managements which love to preside over rigid control systems thus act as though wholly uncontrolled in matters of far greater financial moment than purchasing orders or time-keeping: Daimler-Benz's $4.2 billion loss for 1995 was the biggest in German history.


Those managers were, however, obeying a mind-set rule – the conventional wisdom. In this case, convention decreed that a company, however large and successful, which depends on one industry should diversify to spread its risks. Before long (but too late for Daimler), the conventionally wise were recommending companies to retreat into their 'core businesses'. In fact, the real problem lay with Daimler's core: Mercedes-Benz had become a high-cost producer, slow to market with new models, and relying on premium prices that were being undermined by Japanese competition.

That broke another commonsense rule – never neglect your base. It's taken two years of effort to restore Mercedes to decent operating profits of $2.4 billion. The antidote to the conventional wisdom is commonsense, or simple rationality applied on the basis of experience. If the written rules prevent junior managers from bringing foolish errors to their senior perpetrators, or if the unwritten rules bar middle managers from contributing to strategic planning, that vast reserve of rationality and experience won't be tapped and the uncontrolled top management will career onwards under the impulse of its mind-set – with results like those at Daimler.

The whole sorry saga stresses what Sam Walton really meant by 'break all the rules.' This self-made business genius was advocating unconventional, contrarian behaviour. Don't do as all others are doing, or as 'everybody' says. Be prepared to go against the crowd – as Walton did in refusing to believe that money couldn't be made from opening large stores in small towns.

Contrarian plans need careful analysis and keen judgment no less than orthodoxy. But the odds are in their favour. If everybody in financial services is diversifying into every service, for instance, the odds against the strategy increase with every new entry into an additional financial game.

Another commonsense rule is that the maverick who sticks to the single business he knows best must be more likely to succeed.

A fascinating study by five McKinsey authors of 'fast-growth tigers' rubs in this truth. It found 41 publicly listed companies (after screening 9,450) which by 'focusing on one major line of business' had grown revenues and operating income by 20% annually, creating over 300,000 jobs and adding $110 billion in market value. These tigers had followed 'new game' policies, providing radically different products and services, and reshaping the markets in which they operated. They 'create new markets with few if any rivals, and are able to preserve their competitive advantages for long periods.'

One of the examples is First Direct, the Midland Bank subsidiary which pioneered telephone banking in the UK with such marketing impact that one campaign achieved a 25% response rate, against a typical 1 or 2%. These mavericks have all created contrarian cultures. For example, they don't prioritise: they do 'all the right things right.' The conventional wisdom holds that you should concentrate on 'key success factors'. That would be fine in a stable, linear system. But business systems are composed of unstable 'feedback loops': malfunction in any one factor will adversely affect all others.


The McKinsey authors express this concept well: 'Trying to beat a competitor that exploits four growth accelerators by focusing on two will probably produce not half the results, but none at all.' The feedback process applies with great force to internal rules and procedures. The example cited in The McKinsey Quarterly is sales force motivation. Success leads to high rewards, high motivation, high retention and thus more success. But if sales decline, a vicious spiral sets in. The lesson is that you have to control your controls: like what you choose to measure, what you choose to control will determine your success. Flexibility is all.

That must apply to planning. The rules force conventional managers to plan in a linear fashion. They and their companies are deeply disappointed when real life fails to match their expectations: the culture of control is powerless against the uncontrolled behaviour of the external world. The unconventional planner asks 'what if?' questions, using computer simulation to help obtain the answers, taking into account the scientific law that every action produces an equal and opposite reaction. The key planning rule is to have as few rules as possible, as in this planning prescription:

1. Couple analysis and intuition.

2. Make the strategy vivid and striking, big and bold.

3. Construct a hierarchy of plans and sub-plans.

4. Keep the strategy flexible.

5. Use plans to communicate ends and means to everybody.

6. Look back on strategies and outcomes, asking…
(a) was it successfully realised as intended?
(b) was it successfully realised, but not as intended?
(c) was it realised as intended, but unsuccessful?
(d) was it not realised as intended, but unsuccessful?

This represents a culture of controlled uncontrol, which accepts that management cannot ordain what will happen in all circumstances, and shouldn't want to. That's essential when the exercise of initiative and innovation will determine the difference between success and failure – between growth tiger and pussy cat. In their hearts, managers know this to be true. They prove it every time a crash development programme is required, or an urgent problem has to be solved, or a new business has to be launched. The almost invariable response is to set up a team that is often expressly exempted from obeying the rules – written and unwritten.


In the justly famous case of IBM and the first personal computer, the Boca Raton team was allowed to go outside the company to purchase components – breaking one of IBM's most rigid codes – and to operate completely outside a notoriously restrictive system of control. The tight timetable, little more than a year, imposed controls of its own – just as strict as any that bean-counters or bureacrats can impose, but essentially creative. Racing drivers operate under strict limitations: but the controls are dedicated to achieving the fastest possible lap times – and every manager knows that the best work is often produced under the greatest pressure.

'Hot groups', in the excellent phrase used by Harold J. Leavitt and Jean Lipman-Blumen, 'do great things fast.' Writing in the Harvard Business Review, the authors point out that most successful executives have at some time experienced what these groups are like – 'lively, high-achieving, dedicated', they 'completely captivate their members, occupying their hearts and minds to the exclusion of almost everything else', showing characteristics that are always the same: 'vital, absorbing, full of debate, laughter and very hard work.'

Such groups can't operate in a culture of control: as Leavitt and his co-author write, they 'are not easily domesticated. Neatly organised institutions usually stifle them.' They require the second culture – the culture of uncontrol – which you can recognise by these signs: (1) Openness and flexibility (2) Independence and autonomy (3) People first (4) The search for truth: 'Hot groups seem to prosper in organisations that are deeply dedicated to seeking truth.' Translate 'truth' as fact-based, rational, commonsense management, and you complete the picture, not just of how hot groups should function, but of the ideal company.

If there isn't 'easy, informal access across hierarchical levels and across departmental, divisional and organisational boundaries', for instance, the controllers will win. Then you won't have a 'lively, high-achieving, dedicated' company in which hard work wins high prizes: a controlled culture of uncontrol – and success.

Robert Heller