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Streamline Training & Documentation
Streamline Training & Documentation
Tuesday, March 02, 2010
Working People of Holyoke II: The Bishops' Program on Social Reconstruction
It shouldn't surprise anyone to learn that the tensions between, on the one hand, Catholic clerics concerned with social justice, and, on the other hand, clerics concerned with supporting existing social relations, have existed for many years. For example, in Working People of Holyoke: Class and Ethnicity in a Massachusetts Mill Town, 1850-1960, William Hartford describes a conflict between these two points of view dating back to the 1920s: Although the 1920s would be a cheerless decade for both trade unionists and social activists, the period opened on an optimistic note. In 1919, Father John Ryan penned a sweeping statement on contemporary social problems that was subsequently adopted by the National Catholic War Council. Popularly known as the Bishops' Program on Social Reconstruction, it called for minimum wage legislation, unemployment and old-age insurance, public housing for workers, and the abolition of child labor. The document also urged organized labor to look beyond its own immediate interests and assume a more active legislative role. Although their proposals were in many respects similar to a statement recently issued by the AFL's Reconstruction Committee, the bishops chided labor leaders for leaving such vital matters as a living wage and eight-hour day to union voluntarism, an apporoach that failed "to give sufficient consideration to the case of the weaker sections of the working class, those for whom trade union action is not practically adequate."
A persisting commitment to voluntarism was not the only feature of the AFL declaration that the bishops found wanting. They also faulted labor leaders for an unwillingness to develop means by which workers might "become owners as well as users of the instruments of production" and recommended that steps be taken to provide labor participation in management through copartnership agreements and producer cooperatives. Intended as a moderate alternative to the British Labor Party's postwar social reconstruction agenda, the bishops cast their proposals in a framework of reciprocal rights and duties that would preserve the interests of labor, capital, and society at large. The laborer, they concluded,
must come to realize that he owes his employer an honest day's work in return for a fair wage, and that conditions cannot be substantially improved until he roots out the desire to get a maximum of return through a minimum of service. The capitalist must likewise get a new viewpoint. He needs to learn the long-forgotten truth that wealth is stewardship, that profit-making is not the basic justification of business enterprise, that there are such things as fair profits, fair interest, and fair prices.
Despite its conservative features, the bishops' program was not what American corporate leaders had in mind when they enthusiastically endorsed Warren Harding's call for a "return to normalcy." The statement looked much further down the road of industrial reform than capital was willing to travel, and the National Civic Federation (NCF), acting on behalf of the nation's largest businesses, mounted a counteroffensive. The NCF gathered "expert testimony" from anonymous Catholics who collectively affirmed that the bishops had exceeded their authority by issuing so wrong-headed and radical a declaration. Their program, a 1921 NCF report asserted, tended to undermine public confidence in the government and institutions of this country," and was apparently the work of a small band of radical priests sympathetic to Marxism.
However self-serving, NCF contentions that the bishops did not speak for all Catholics were only too accurate. During the early 1920s, conservative hierarchs opposed to the social-justice orientation of the recently formed National Catholic Welfare Conference persuaded Pope Benedeict XV to lift his approval of the organizstion. Although Benedict's successor, Pius XI, resanctioned the council, episcopal opposition would continue to hinder its activities, particularly efforts to implement the bishops' program. As Father John Ryan, head of the council's Social Action Department, observed: "The first obstacle confronting the department is the fact that neither the bishops, the priests, nor the laity are convinced that our industrial system should be reorganized in this radical fashion." If anything, Ryan understated the difficulties facing Catholic progressives. For as the decade unfolded, traditionalist churchmen, seeking to restore a threatened hegemony, would mount one final campaign to impose their paternalistic nostrums on American Catholics. [The campaign in question was a successful effortin 1924 to defeat an amendment to the US Constitution banning child labor.] [pp. 158-159]
In Chapter 23 of My Years with General Motors, Alfred Sloan summarizes one of his central convictions concerning management of a multi-division corporation: It has been a thesis of this book that good management rests on a reconciliation of centralization and decentralization, or "decentralization with co-ordinated control."
Eash of the conflicting elements brought together in this concept has its unique results in the operation of a business. From decentralization we get initiative, responsibility, development of personnel, decisions close to the facts, flexibility — in short, all the qualities necessary for an organization to adapt to new conditions. From co-ordination we get efficiencies and economies. It must be apparent that co-ordinated decentralization is not an easy concept to apply. There is no hard and fast rule for sorting out the various responsibilities and the best way to assign them. The balance which is struck between corporate and divisional responsibility varies according to what is being decided, the circumstances of the time, past experience, and the temperaments and skills of the executives involved.
The concept of co-ordinated decentralization evolved gradually at General Motors as we responded to tangible problems of management. As I have shown, at the time its development began, some four decades ago, it was clearly advisable to give each division a strong management which would be primarily responsible for the conduct of its business. But our experience in 1920-21 also demonstrated the need for a greater measure of control over the divisions than we had attained. Without adequate control from the central office, the divisions got out of hand and failed to follow the policies set by corporation management, to the great detriment of the corporation. Meanwhile, the corporation management was in no position to set the best policies, since it was without appropriate and timely data from the divisions. A steady flow of operating data, for which procedures were later set up, finally made real co-ordination possible.
[. . .]
Much of my life in General Motors was devoted to the development, organization, and periodic reorganization of these governing groups [governing committees and policy groups] in central management. This was required because of the paramount importance, in an organization like General Motors, of providing the right framework for decisions. There is a natural tendency to erode that framework unless it is consciously maintained. Group decisions do not always come easily. There is a strong temptation for the leading officers to make decisions themselves without the sometimes onerous process of discussion, which involves selling your ideas to others. The group will not always make a better decision than any particular member would make; there is even the possibility of some averaging down. But in General Motors I think the record shows that we have averaged up. Essentially this means that, through our form of organizatipon, we have been able to adapt to the great changes that have taken place in the automobile market in each of the decades since 1920.
Three cheers for Alfred Sloan that he decided to hire top architectural talent — Eliel Saarinen and his son Eero — to design the General Motors Technical Center, which opened in Warren MI in 1956 (by which time Eero was the main architect, his father having died in 1950). As Sloan explains in Chapter 14 of My Years with General Motors, there was some disagreement over the "architectural and aesthetic standards" that should be set for the Technical Center.
Staircase, designed by Eero Saarinen, in the Research building of the General Motors Technical Center (Critical Detroit)
... Harley Earl had contended from the beginning that we should engage an architect of stature, and aim for a center that would be distinctive. Several others felt that any emphasis on high aesthetic standards might be detrimental to the practical operations of the center, and so they wanted General Motors itself to design and plan the project. At about the time this argument was in progress, I happened to visit the Ethyl Corporation laboratores in Detroit, which had just been completed. These handsome facilities made an excellent impression on me, and so I inclined to Mr. Earl's point of view more than I might have otherwise.
Among those who expressed some concern about the effects of an aesthetically oriented center was Mr. Lammot du Pont. He felt, quite properly, that he would not be fulfilling his responsibilities as a director unless he was satisfied, on certain points. I wrote to him on May 8, 1945, arguing the advantages of retaining an outside architect, and on May 17 he replied that he was satisfied on the point. His letter said, in part:
The whole layout and the description of its preparation gave me the impression that the matter of esthetic treatment, or as I would style it, "dressing up the place," had been an important factor from the beginning. I questioned whether the matter of appearance was of any importance in a project of this kind, the sole object being to get technical results. It was with this thought in mind that in offering my remarks, I started out with the layout which had been made by an architectural firm, whereas according to my line of thought, it would have been more appropriate to have had the layout made by an engineering firm or General Motors engineers.
I gather from your letter that it is not the intention to allow the appearances to interfere with the technical possibilities or to add substantially to the cost of the project. With those two assurances, my only remaining question with respect to the project would be answered.
We asked Mr. Earl himself to find the right architect for the center. He visited a number of leading architectural schools and sought out the opinions of others who were knowledgeable in the field, and he found in the end that virtually everyone made the same recommendation. The selection of the Saarinens was not a difficult choice. [The landscape architect was Thomas Church.]
[The General Motors Technical Center] is located on a 900-acre site northeast of Detroit, about twelve miles from the General Motors Building. At the center of the site is a twenty-two acre artificial lake surrounded on three sides by clusters of buildings. On the north side are the Research Laboratories. To the east are the Manufacturing Staff and the Engineering Staff buildings. To the south are the Styling Staff buildings, including a distinctive domed auditorium in which fairly sizable groups can gather for showings of the staff's work.
The trauma of the Great Depression was intense in the auto industry. Alfred Sloan's response was to re-emphasize the importance of having a strong and agile central policy-making capability, even as policy execution remained the responsibility of the individual GM divisions.
As Sloan recalls in Chapter 10 of My Years with General Motors, The automobile industry in the United States and Canada dropped from a production of about 5.6 million cars and trucks, worth about $5.1 billion at retail, in 1929, to about 1.4 million units, worth about $1.1 billion in 1932. That was lower than any year since the war year 1918.
Thanks to the financial and operating controls, the development of which I have described in earlier chapters, General Motors did not approach disaster as it had in the 1920-21 slump. We made an orderly step-by-step retreat in all matters, including wage and salary reductions. Sales by our United States and Canadian plants dropped to 526,000 cars and trucks in 1932 as compared with about 1.9 million in 1929, a tremendous drop (72 per cent) when you consider the many expenses that are fixed. That we fared relatively better than the industry is shown by the fact that our share of the market increased from 34 per cent in 1929 to 38 per cent in 1932, the trough year of the depression. Our profits dropped from about $248 million in 1929 to $165,000 in 1932, still in the black, thanks mainly to our financial-control procedures. In 1932 we were operating at less than 30 per cent of capacity.
[. . .]
... Inevitably when an industrial enterprise is shaken with such a force as we met at the onset of the great depression, there has to be confusion. In November 1933 I began to write again on the subject of new policies, beginning at the beginning, on the subject of policy itself. I said:
I feel that this [policy] phase of the general organization problem is of particular importance to General Motors, not because of its size particularly but on account of the nature of its business, subject as it is, to what I might term "rapid changes". In other words, I contend a unit of the automotive industry has far less "coasting ability", I might term it, than units in most any other industry that might be selected for comparison. As I analyze our picture, looking forward into the future, our success or, let me say, the maintenance of our position, absolutely depends upon the ability of our organization to lay down a strategy as will enable us to forecast the rapid changes that are taking place and will continue to take place in the various activities in which we are interested, involving all the functional divisions within such activities, and to provide for those changes with sufficient rapidity.
In making this statement I am not minimizing in any sense, the importance of effectively and economically carrying out such policies as may be adopted — I am simply trying to emphasize the point that the policy phase is of vital concern because, unless we can, with reasonable intelligence, meet this issue — no matter how able an administrative set-up [i.e., policy execution set-up] we may have, it is limited in its opportunity to function. I might add further, that looking forward I feel that we have got to more aggressively deal with that phase of our problems than we have in the past. It is going to be harder to maintain both our competitive position and our profit position. We can not afford to take the time in the future that we have in the past to make up our minds what we should do with respect to changes in trends which are having an influence on our position ...
My main purpose in the memorandum from which the above passages are taken was to reassert the purely policy-making role of the Executive Committee.
Alfred Sloan's Memoir VII: The Milford Proving Ground
Interestingly, Alfred Sloan has very little to say in My Years with General Motors about production line workers. On the other hand, he gives lots of attention to GM's managers, engineers, stylists, and dealers.
For the engineers, one of the biggest steps forward was the creation of the General Motors Proving Ground in Milford MI. As Sloan explains in Chapter 14, The most important step we took to standardize and improve test procedures was the establishment in 1924 of the General Motors Proving Ground, the first of its kind in the automobile industry. The thought was that we would have a large area, properly protected, and entirely closed to the public. It would be provided with roads of various types representing all the various demands on the motorcar from the standpoints of high speed, hills of various grades, smooth roads, rough roads, ability of a car to move through water — which is frequently required in severe storms — and the like. There we would be able to prove out our cars under controlled conditions both before and after production and we could also make comprehensive tests on competitive cars.
... Michigan is rather flat, and at first we had difficulty locating an area of sufficient size that would give us all the various grades we needed. However, almost every foot of the United States has been measured topographically, and the record was available in Washington. We went to Washington and from the Geological Survey maps available there we determined a location that appeared to fulfill our needs. Then the general executives and engineers of the various divisions and myself spent a day at the prospective site. We walked all over the place, ate a picnic lunch under the trees, and finally came to the conclusion that that particular area of 1125 acres — now 4010 acres — at Milford, Michigan, would meet the requirements we had in mind.
[. . .]
The land was surveyed; the straightaways were laid out so that we could check the effects of different winds on speed; a track was built and banked so that it was reasonably safe to operate cars at speeds up to 100 miles an hour or more. Engineering buildings were erected, so that indoor tests could be made in correlation with outdoor tests. Headquarters and facilities were provided for the corporation's engineers. Separate engineering headquarters and garage facilities were eventually provided for the staffs of the engineering departments of the various divisions, so that they could preserve their divisional autonomy in testing. Chevrolet, for example, could do its own testing if desired, in addition to that being done by the corporation. A clubhouse was erected that provided sleeping quarters, dining facilities, and the like for those attached to the Proving Ground operations, since the Proving Ground itself was a considerable number of miles from any town where commissary facilities were available.
In those days I used to spend a day and a night, sometimes longer, at the Proving Ground every other week. I would go over the engineering of General Motors' cars and competitive cars. I would examine what was being done in the way of testing future products. The Proving Ground thus afforded my associates and myself a wonderful opportunity to find out what was going on in the automobile industry from the engineering point of view. To the original Proving Ground we have since added a special, desert proving ground at Mesa, Arizona [replaced in 2009 by a facility in Yuma], and a station to test cars in mountain driving and a garage and shop facility to service our test cars at Manitou Springs (Pike's Peak), Colorado [closed in 1999].
Alfred Sloan's Memoir VI: Getting Dealers Up to Speed
The woes of discontinued General Motors dealers have been much in the news lately. It's interesting to go back in time some eight decades to see how Alfred Sloan viewed the issue of developing a strong distribution system based on franchised dealerships. In Chapter 16 of My Years with General Motors, Sloan recalls: Alhough in the 1920s we had made great advances in getting the facts about General Motors' economic position, we did not then have the facts regarding the economic position of our dealers, and so were handicapped in thinking through dealer problems. When a dealer's profit position was failing, we had no way of knowing whether this was due to a new-car problem, a used-car problem, a service problem, a parts problem, or some other problem. Without such facts is was impossible to put any sound distribution policy into effect.
In the Proving Ground address which I mentioned earlier [delivered to the Automobile Editors of American Newspapers on September 28, 1927 in Milford MI], I made the following observations on this subject:
... I want to outline to you what I believe to be a great weakness in the automotive industry today and what General Motors is trying to do to correct that weakness.
I have stated frankly to General Motors dealers, in almost every city in the United States, that I was deeply concerned with the fact that many of them, even those who were carrying on in a reasonably efficient manner, were not making the return on their capital that they should. Right here let me say that so far as General Motors dealers are concerned, from what facts I have — I realize there has been much improvement during the past two or three years, but interested as the management of General Motors must be in every step from the raw material to the ultimate consumer, and recognizing that this chain of circumstances is no stronger than its weakest link, I feel a great deal of uncertainty as to the operating position of our dealer organization as a whole. I hope that this feeling of uncertainty is unwarranted. I am sure that with a responsibility so great, all elements of uncertainty must be eliminated and that our dealers should know the facts about their operating position as clearly and as scientifically as I have outlined to you we feel that we know the facts about General Motors' operating position.
This brings us back to ... two words — proper accounting. Many of our dealers, and the same thing applies to dealers of other organizations, have good accounting systems. Many of them have indifferent ones and I regret to say that too large a percentage of them have practically no accounting system at all. Many of those who have accounting systems, through lack of their being properly developed, are not able to effectively use them. In other words, they are not so developed that they give the dealer the facts about his business; where the leaks are; what he should do to improve his position. As I said before, uncertainty must be eliminated. Uncertainty and efficiency are as far apart as the North Pole is from the South. If I could wave a magic wand over our dealer organization, with the result that every dealer could have a proper accounting system, could know the facts about his business and could intelligently deal with the many details incident to his business in an intelligent manner as a result thereof, I would be willing to pay for that accomplishment an enormous sum and I would be fully justified in doing so. It would be the best investment General Motors ever made.Accordingly, in 1927 we set up an organization called Motors Accounting Company. We developed a standardized accounting system applicable to all dealers and sent a staff into the field to help install it and to establish an audit system.
Alfred Sloan's Memoir III: Management of Cash Flow
Until Alfred Sloan and his senior management colleagues stepped into the breach, handling of cash flow at GM was a shambles. For instance, in Chapter 8 of My Years with General Motors, Sloan reports: The way cash was handled at that time [1920] is almost unbelievable. Each division controlled its own cash, depositing all receipts in its own accounts and paying all bills from those same acounts. Since only the divisions sold products, none of these cash receipts flowed directly to the corporation itself. We had no effective procedure for getting cash from the points where we happened to have some to the points where we happened to need some. When the corporation, as an operating company, had to pay dividends and taxes, and such items as rent, salaries and other expenses of the general staff, the usual procedure was for the treasurer to request cash from the divisions. That was not so simple as it sounds, however, for the divisions, operating independently, tried to keep their cash balances high enough to satisfy their own peak requirements. Therefore, when they had more cash than they needed at the moment, they were not eager to turn it over to the corporation.
I remember that Buick, for example, at that time was very loath to give up its cash. This profitable division was, of course, the most prolific source of cash for the corporation, and long experience had made Buick's financial staff highly adept at delaying its report of the cash they had on hand. Buick made a practice of maintaining large cash balances in its factory sales branches. The amounts of these balances were not ascertainable at headquarters until Buick had submitted its monthly financial statement for the division as a whole — and this was usually a month or two after the fact. When the corporation needed cash, the treasurer, Meyer Prentis, would try to guess how much Buick actually had and how much of it he could probably get from them. Then he would go to Flint, discuss whatever other questions might be outstanding between Buick and headquarters, and at last casually bring up the subject of cash. Buick's financial people would invariably express surprise at the size of Mr. Prentis' request and occasionally would try to resist the transfer of such a large amount. Naturally, this cat-and-mouse game did not result in the most efficient utilization of funds, especially when some divisions had more operating cash than they needed, at the same time that other divisions were short of operating cash.
In 1922 we changed all this by setting up a consolidated cash-control system. This was a new concept for a large corporation. Depository accounts were established in some one hundred banks in the United States, and all incoming receipts were deposited in these accounts to the credit of General Motors Corporation. All withdrawals from them were administered by the central Financial Staff; the divisions had no control over cash transfers from these deposit accounts.
A central premise of the course is that companies need to define an operating model in order to be able to optimize their IT investments. Ross explains (pdf):
An operating model is the necessary level of business process integration and standardization for delivering goods and services to customers. By identifying integration and standardization requirements an operating model defines critical IT and business process capabilities ... [and thus] guides IT investment and enhances business agility. (emphasis in original)
The graphic below lays out the four types of operating model that are determined by a company's integration and standardization choices.
A company using the Coordination model operates unique business units with a need to know each other's transactions. Its key IT capability is providing access to shared data through standard technology interfaces. MetLife is an example.
A company using the Unification model operates as a single business with global process standards and global data access. Its key IT capability is providing enterprise systems that reinforce standard processes and provide global data access. UPS is an example.
A company using the Diversification model operates independent business units with different customers and expertise. Its key IT capability is providing economies of scale without limiting independence. Johnson & Johnson is an example.
A company using the Replication model operates independent but similar business units. Its key IT capability is providing standard infrastructure and application components for global efficiencies. Marriott is an example.
You can find further details concerning the characteristics of each of these models in a briefing Ross published in 2005 that serves as the assigned reading for the third session of the course.
Impact of Quality of Management Practices on Firm Performance
As a follow-on to my last twoposts, I want to call attention to a piece of experimental research (pdf) conducted by Nicholas Bloom and several colleagues that provides evidence in support of the hypothesis that the quality of management practices significantly influences firm performance.
Bloom et al. summarize their work (which is due to continue through April) as follows:
We run a field experiment on large Indian textile firms to evaluate the causal impact of management on performance. To generate changes in management we provide management consulting to a set of randomly chosen treatment plants, and compare their performance to a set of control plants. We find that improved management practices led to significantly higher efficiency and quality, and lower inventory levels, substantially increasing plants’ productivity and profitability. Firms also transferred these improved management practices from their treated plants to other plants within their group. Since firms adopted and replicated these apparently profitable management practices this raises the question of why these were not adopted previously? Our results suggest that informational barriers are important in explaining this lack of adoption, with modern management practices a type of technology that diffuses slowly between firms. These Indian firms were either unaware of many modern management practices, or did not have the know how to implement them.
The photo below, one of several included in the preliminary draft (pdf) of the authors' paper currently available on the internet, illustrates quite concretely the degree of operational slack crying out for systematic management attention.
Takeaway: This research supports the proposition that it is effective to teach managers specific lean manufacturing practices that help optimize factory operations, inventory control, quality control, human resources, planning, and sales and order management.
Why Management Practices Differ Across Firms and Countries
Yesterday's post laid out the dimensions that Nicholas Bloom of Stanford and John Van Reenen of the London School of Economics used to investigate why management practices differ across firms and countries.
Here, with encouragement to read their entire article from the Winter 2010 issue of the Journal of Economic Perspectives, I reproduce in slightly edited form their summary of the conclusions they drew from their research:
First, firms with “better” management practices tend to have better performance on a wide range of dimensions: they are larger, more productive, grow faster, and have higher survival rates.
Second, management practices vary tremendously across firms and countries. Most of the difference in the average management score of a country is due to the size of the “long tail” of very badly managed firms. For example, relatively few U.S. firms are very badly managed, while Brazil and India have many firms in that category.
Third, countries and firms specialize in different styles of management. For example, American firms score much higher than Swedish firms in incentives but are worse than Swedish firms in monitoring.1
Fourth, strong product market competition appears to boost the average quality of management practices through a combination of eliminating the tail of badly managed firms and pushing incumbents to improve their practices.
Fifth, multinationals are generally well managed in every country. They also transplant their management styles abroad. For example, U.S. multinationals located in the United Kingdom are better at incentives and worse at monitoring than Swedish multinationals in the United Kingdom.
Sixth, firms that export (but do not produce) overseas are better-managed than domestic non-exporters, but are worse-managed than multinationals.
Seventh, inherited family-owned firms that appoint a family member (especially the eldest son) as chief executive officer are very badly managed on average.
Eighth, government-owned firms are typically managed extremely badly. Firms with publicly quoted share prices or owned by private-equity firms are typically well managed.
Ninth, firms that more intensively use human capital, as measured by more educated workers, tend to have much better management practices.
Tenth, at the country level, a relatively light touch in labor market regulation is associated with better use of incentives by management.
After detailing their findings from the large cross-section of firms where they conducted interviews, Bloom and Van Reenen note that they are now gathering time series data on a smaller set of firms. This will enable them to "observe the dynamics of managerial change and make stronger statements about cause and effect."
__________ 1 For operational definitions of "monitoring," "targets," and "incentives," see yesterday's post.
I'll go into how the authors, Nicholas Bloom (Stanford) and John Van Reenen (London School of Economics), answer this question tomorrow. Today I want to highlight the way they went about measuring the quality of management practices since, among other things, the dimensions they used can be a starting point for an organization wanting to design a self-assessment.
Bloom and Van Reenen's approach was to define eighteen management practice dimensions and then to interview plant managers at 5,850 manufacturing concerns in seventeen countries to get the managers' take on where on a scale of 1 to 5 (high) their particular enterprise fell on each dimension. It is important to note that these management practices are process-oriented. They do not not relate to senior management's strategic activities, such as evaluating merger and acquisition opportunities.1
The eighteen dimensions (slightly edited) are:
1. Introduction of modern manufacturing techniques What aspects of lean (modern) manufacturing have been formally introduced, including just-in-time delivery from suppliers, automation, flexible manpower, support systems, attitudes, and behavior?
2. Rationale for introduction of modern manufacturing techniques Were modern manufacturing techniques adopted just because others were using them, or are they linked to meeting business objectives like reducing costs and improving quality?
3. Process problem documentation Are process improvements made only when problems arise, or are they actively sought out for continuous improvement as part of a normal business process?
4. Performance tracking Is tracking ad hoc and incomplete, or is performance continually tracked and communicated to all staff?
5. Performance review Is performance reviewed infrequently and only on a success/failure scale, or is performance reviewed continually with an expectation of continuous improvement?
6. Performance dialogue In review/performance conversations, to what extent are the purpose, data, agenda, and follow-up steps (like coaching) clear to all parties?
7. Consequence management To what extent does failure to achieve agreed objectives carry consequences, which can include retraining or reassignment to other jobs?
8. Target balance Are the goals exclusively financial, or is there a balance of financial and nonfinancial targets?
9. Target interconnection Are goals based on accounting value, or are they based on shareholder value in a way that works through business units and ultimately is connected to individual performance expectations?
10. Target time horizon Does top management focus mainly on the short term, or does it visualize short-term targets as a “staircase” toward the main focus on long-term goals?
11. Targets are stretching Are goals too easy to achieve, especially for some “sacred cow” areas of the firm, or are goals demanding but attainable for all parts of the firm?
12. Performance clarity Are performance measures ill-defined, poorly understood, and private, or are they well-defined, clearly communicated, and made public?
13. Managing human capital To what extent are senior managers evaluated and held accountable for attracting, retaining, and developing talent throughout the organization?
14. Rewarding high performance To what extent are people in the firm rewarded equally irrespective of performance level vs. having rewards relate to performance and effort?
15. Removing poor performers Are poor performers rarely removed, or are they retrained and/or moved into different roles or out of the company as soon as the weakness is identified?
16. Promoting high performers Are people promoted mainly on the basis of tenure, or does the firm actively identify, develop, and promote its top performers?
17. Attracting human capital Do competitors offer stronger reasons for talented people to join their companies, or does a firm provide a wide range of reasons to encourage talented people to join?
18. Retaining human capital Does the firm do relatively little to retain top talent, or does it do whatever it takes to retain top talent when they look likely to leave?
To arrive at an overall measure of a firm's management practices, Bloom and Van Reenen averaged the firm's individual scores on the eighteen dimensions.
For purposes of analysis, Bloom and Van Reenen divided the dimensions into four broad areas:2
Operations — whether firms use modern manufacturing processes in a way that helps improve firm performance on a continuous basis (items 1-3).
Monitoring — how well firms monitor what goes on inside their operations and use this for continuous improvement (items 4-7, 12).
Targets — whether firms set the right targets, track the right outcomes, and take appropriate action if the two are inconsistent (items 8-11, 13).
Incentives — whether firms promote and reward employees based on performance and try to hire and keep the best employees (items 14-18).
__________ 1Bloom and Van Reenen chose to interview plant managers because they "are senior enough to have an overview of management practices but not so senior as to be detached from day-to-day operations."
The firms where interviews took place "were randomly sampled from the population of all public and private manufacturing firms with 100 to 5,000 employees."
It might be more accurate to say firms in sixteen countries were assessed. Great Britain and Northern Ireland were measured separately, yielding the count of seventeen. The other countries were Australia, Brazil, Canada, China, France, Germany, Greece, India, Italy, Japan, Poland, Sweden, and the United States.
Bloom and Van Reenen restricted themselves to process-oriented management practices because "many aspects of strategic management, such as pricing or takeover decisions, will be very contingent on specific circumstances with no typical 'good' or 'bad' practice..."
John Shook, an industrial anthropologist who worked with the NUMMI joint venture of Toyota and General Motors from its inception, has written an illuminating article about cultural change at the NUMMI factory in Fremont CA. The article appears in the Winter 2010 issue of the MIT Sloan Management Review.
Shook's model of cultural change is a close cousin of that put forward by Edgar Schein, an emeritus Sloan professor who specializes in organizational development. The Shook and Schein models are diagrammed in the graphic below.
The arrows in the graphic represent old and new thinking concerning the process of cultural change.
The traditional view, represented by the upward arrows, is that you start by getting people to change their thinking about how it's proper to behave, and they then proceed to make the desired behavioral changes. The Schein/Shook view, represented by the downward arrows, is that you start by getting people to change their behavior and, in due course they adjust their thinking about what sort of behavior is appropriate.
In Schein's model, the initial step is to change "cultural artifacts" — "the observable data of an organization, which include what people do and how they behave." This leads to a change in people's values and attitudes and, ultimately, to a change in the "pattern of shared basic assumptions ... that has worked well enough to be considered valid and therefore, to be taught to new members as the correct way to perceive, think, and feel in relation to [solving] problems."1
In Shook's very similar model, managers initiate the process of cultural change by defining the actions and behaviors they desire, providing training, and designing the work processes that are necessary to reinforce those behaviors. This leads to a change in people's values and attitudes and, ultimately, to a change in organizational culture.
Shook describes how NUMMI's adoption of Toyota's system of requiring workers to immediately address any problem, even if that means stopping the production line until the problem is fixed, quickly produced a new culture of employee concern for quality. Previously, the factory had been plagued by worker-management friction and high absenteeism, and quality had been notoriously poor.
In Shook's view,
What changed the culture at NUMMI wasn’t an abstract notion of “employee involvement” or “a learning organization” or even “culture” at all. What changed the culture was giving employees the means by which they could successfully do their jobs. It was communicating clearly to employees what their jobs were and providing the training and tools to enable them to perform those jobs successfully.
The key take-away Shook offers at the conclusion of his article is that the "tools of the Toyota Production System are all designed around making it easy to learn from mistakes. Making it easy to learn from mistakes means changing our attitude toward them," i.e. skipping the finger-pointing and instead nurturing a culture of alert problem solving by empowered amployees.
__________ 1 Edgar Schein, "Organizational Culture and Leadership" (1993) in Classics of Organization Theory, Jay Shafritz and J. Steven Ott (eds.) (Harcourt College Publishers, 2001), pp. 373-374.
Productivity is in the news these days as people take note that it is rising impressively in the US even as unemployment remains high. What lies behind the ability of companies to maintain needed output levels with fewer employees?
One known source of productivity gains is investment in information technology. But some companies do markedly better in realizing productivity gains from IT than others. Why?
Erik Brynjolfsson, a professor at MIT's Sloan School of Management and Director of the MIT Center for Digital Business, and Adam Saunders, a lecturer at UPenn's Wharton School, have been investigating this question. The answer they offer in a recently published book is that
companies with the highest level of returns to their technology investment are doing more than just buying technology; they are inventing new forms of organizational capital to become digital organizations. These innovations include a cluster of organizational and business-process changes, including broader sharing of information, decentralized decision-making, linking pay and promotions to performance, pruning of non-core products and processes, and greater investments in training and education.
You can access the introduction and first chapter of Brynjolfsson and Saunders' book here.
[Earlier reference to the points Brynjolfsson and Saunders make in their book can be found in a post from July of last year. Brynjolfsson's views (along with those of co-auther Andrew McAfee) concerning measurement of economic activity that improves on the standard GDP measure are discussed in a post from last month.]
Michael D. Watkins on Managing Business Transitions
In the January 2009 issue of the Harvard Business Review, Michael D. Watkins, a one-time business professor and now chairman of Genesis Advisers, lays out a robust approach for leaders to follow in handling various business transitions, such as getting a start-up off the ground, or overseeing a distressed company's turnaround.
"Picking the Right Transition Strategy" explains Watkins' STARS framework, which outlines the challenges and opportunities inherent in five types of business transition. In addition to start-ups and turnarounds (S and T), STARS covers situations of accelerated growth (a company entering a period of rapid expansion), realignment (a company facing the need to significantly adjust its strategy in order to remain successful), and sustaining success (an executive taking over a company whose previous leader was highly effective).
Watkins spells out the full details of the STARS framework in his recently published book, Your Next Move: The Leader's Guide to Successfully Navigating Major Career Transitions. The HBR article focuses on a case study that illustrates how one senior executive, with conscious deliberation, handled a pair of assignments quite differently because the first was a turnaround, while the second was a realignment.
The case example highlights the fact that the same fundamental principles which "will ease your transition and increase your odds of long-term leadership success" come into play in all situations, but must be applied in ways specific to the particular type of transition involved. The fundamental principles are (in edited form):
Organize to learn about the business — Figure out what you most need to learn, from whom, and how you can accelerate the learning process.
Define the new strategic intent for the organization — Develop and communicate a compelling vision for what the organization will become. Outline a clear strategy for achieving the vision.
Establish priorities — Identify a few vital goals and pursue them vigorously. Think about what you need to have accomplished by the end of your first year in your new position.
Build your leadership team — Evaluate the team you inherited. When bringing new members onto the team, aim for a balance between people from inside and outside the organization.
Secure early wins — Think through how you plan to "arrive" in the new organization. Find ways to build personal credibility and energize the ranks.
Create supporting alliances — Identify how the organization really works and who has influence. Create key coalitions in support of your initiatives.
In parallel with the above principles relating to managing organizational change, Watkins addresses the "pillars of self-management" that someone assuming a leadership role must embrace in order to adapt personally, as needed:
Enhance self-awareness — In particular, know the leadership style that you adopt most reflexively, and be prepared to set it aside for a more suitable style if the particular transition you're managing requires that.
Exercise personal discipline — Ask yourself what behaviors with which you are particularly comfortable, you should now be doing less of; and what behaviors that you don't much enjoy, you should now be doing more of.
Build complementary teams — Get people to help you who have strengths that offset your weaker points.
You can listen to Watkins discuss much of this material in the 9:24 video below, in which he is interviewed by Sarah Green, an editor at harvardbusiness.org. Watkins also talks about on-boarding and about how you can help your family adjust to changes they have to make (e.g., moving to a new city) because of your new role.
When There is No Good Option, You Need to Prepare for Backlash
People with any kind of political instincts realize that having to choose among a set of unattractive options is going to open a decision-maker up to disgruntled flak, regardless of which particular option the decision-maker picks as the best of a bad lot.
Helping to confirm this intuition is a recent paper (pdf) co-authored by Justin Kruger (Stern School of Business at New York University), Jeremy Burrus (now at the Educational Testing Service), and Laura Kressel (a graduate student at the Stern School) which reports the results of two experiments in which participants were asked to evaluate decisions and decision-makers in just such no-win situations.
As explained in the paper's abstract:
In Experiment 1, participants read about a judge deciding to which of two seemingly unfit parents to award sole custody in a real-life divorce case. In Experiment 2, participants were led to believe that their partner in the experiment was forced to pick one of two unpleasant tasks for the participant to perform. [Specifically, the task was to wear a sign in public reading either "Long Live Osama" or "Free Saddam."] In both cases, the decision and decision-maker were evaluated negatively regardless of the alternative chosen.
An obvious question is how to minimize ill-will resulting from being forced to make an unappetizing choice. The key is effective communication, which means:
When announcing a downbeat decision, provide the facts that the decision-makers were grappling with.
Explain how pros and cons were considered and the rationale for the decision ultimately reached.
Discuss how employees' jobs and the work environoment will be affected. Explain your plans for mitigating the decision's negative impacts.
Take questions from your audience. Prepare for the Q&A in advance by discussing questions that are likely to come up and how to answer them honestly and constructively.
Finally, explain how management, with employee input, will be vigilantly assessing and acting on opportunities for maximizing positive results in the future.
People differ in their views concerning the circumstances in which businesses benefit from promoting competition among employees. I don't want to tackle such a broad topic here, and so will restrict myself to noting what some recent research suggests would be most effective specifically in a company's Sales department.
Earlier this year, Stephen Garcia, a psychology professor at the University of Michigan, and Avishalom Tor, a law professor at the University of Haifa, published a paper examining the relationship between the number of competitors a person is facing and that person's motivation to compete.1 A good summary of the paper appeared in the July 11 edition of The Economist.
Garcia and Tor report two findings of significance to businesses in which individual sales representatives are, to a greater or lesser degree, in competition with each other:
After a certain number, which is quite low,2 the more competitors a person is facing, the lower that person's motivation to compete.
The negative correlation between number of competitors and competitive motivation — which Garcia and Tor have dubbed the "N-Effect" — comes into play only when the people involved are in the habit of comparing their performance to that of others.3 I.e., it is in this context of social comparison that the number of competitors makes a difference; a small number of competitors is more conducive to comparison of one's own performance to that of others than is a large number of competitors.4
I think it's clear why I see particular relevance of these results to management of sales organizations. As Garcia and Tor put it, "In the workplace ... productivity on individual tasks (e.g., sales in a commission-based system) might be lower when the tasks are performed among many similar workers in a large warehouse than when they are performed among only a few workers in smaller branch offices."
2 Garcia and Tor note that the limits of the N-Effect remain to be studied and are likely to vary according to the exact type of competition in question. ("N poker-table competitors may well be perceived differently from N marathon runners.")
In the surprisingly fluffy Summer 2009 issue of the MIT Sloan Management Review — they seem to have been sucked into the camp that swears by abridgement and abbreviation (the curse of Twitter) — an article I found appealingly substantive addresses the question of how to manage virtual teams.
As summarized in their first exhibit, the benefits (somewhat edited) are:
Heterogeneous knowledge resources
Utilization of cost advantages
Access to diverse skills and experience
Knowledge about diverse markets
Ability to have people working more or less around the clock because they are in different time zones
The liabilities (somewhat edited) are:
Language differences
Cultural differences
Difficulties in establishing common ground
Fewer face-to-face interactions
Greater difficulty in achieving good teamwork
The key finding Siebdrat, Hoegl, and Ernst (SHE) report, from their research into the workings of twenty-eight software development teams in Brazil, China, Denmark, France, Germany, India, and the US, is that the balance of benefits vs. liabilities tends to favor dispersed teams under certain important conditions.
These conditions are that a team's task-related ("hard") and socio-emotional ("soft") processes be well-managed. SHE report:
"[T]hose processes that are directly task-related are the most critical for the performance of dispersed teams. Specifically, virtual teams that had processes that increased the levels of mutual support, member effort, work coordination, balance of member contributions and task-related communications consistently outperformed other teams with lower levels. ... Moreover, dispersed teams that had high levels of task-related processes were notably able to outperform colocated teams with similar levels of those same processes despite the physical separation of their members."
On the other hand, "dispersion carries significant risks: Those teams with poor task-related processes suffered heavily with increased dispersion."
With respect to socio-emotional processes, "organizations must ... ensure that team members commit to the overall group goals, identify with the team and actively support a team spirit." The quality of these processes, in and of themselves, does not differentiate performance of dispersed and colocated teams. However, SHE suggest that building robust socio-emotional processes supports achieving high quality of task-related processes. For example, with good team cohesion, it is probably the case that knowledge is transferred more completely, and conflicts within a team are more readily resolved.
SHE describe five dos and don'ts of managing dispersed teams:
Don't underestimate the significance of small distances. E.g., team members located on different floors of the same building actually tend to be less effective and efficient than teams whose members are on the same floor and than teams more widely dispersed. Only teams with members on different continents perform worse on average.
Emphasize teamwork skills. This means recruiting people who are inclined to play well with others, and providing training to help team members strengthen their teamwork skills.
Promote self-leadership across the team. This is necessary because of the difficulty a designated leader is likely to have in intervening effectively when members of a dispersed team are experiencing conflict or other difficulty. "For a virtual team to succeed, members generally need to be aware of the difficulties of dispersed collaboration and find effective ways to overcome those obstacles on their own." Training can help.
Provide for face-to-face meetings. For instance, a project kickoff meeting in which team members are all assembled in one place can make a real difference in how quickly they begin to function effectively.
Foster a global culture, a mindset "in which people see themselves as part of an international network. ... [M]anagers and team members need to recognize and frame their company as such, communicating the international nature of the organization's operations and markets."
SHE cite practices of companies like Nestlé, General Electric, IBM and SAP, such as sending staff on assignments in foreign countries. SHE also suggest providing inter-cultural training. The intended outcome of such measures is "development of diversity-friendly attitudes and the ability to work in different contexts, which in turn help employees cope with the challenges of distance when working on virtual teams."
I'll close by noting that this research, while quite interesting and suggestive, needs replication in order for an organization to draw on its findings and recommendations with full confidence.
__________ 1 WHU stands for "Wissenschaftliche Hochschule für Unternehmensführung” — Scholarly/Scientific University for Business Management.
An earlier post discussed the work of Nobelist Daniel Kahneman, one of the fathers of behavioral economics, a burgeoning area of research.
Behavioral economics departs from certain fundamental assumptions of neoclassical economics, notably the assumptions that
People invariably make rational decisions.
Markets are self-regulating.
In an article in the July-August 2009 issue of the Harvard Business Review, Dan Ariely, a professor of behavioral economics at Duke University, highlights findings from his research of particular significance for business managers.1
In his article, Ariely is looking to help managers "defend against foolishness and waste" that result from irrational behavior. He focuses on two behavior patterns that he has studied experimentally:
Cheating — People on teams tend to engage in mutually reinforced departures from ethical behavior. Managers need to counter this tendency by reminding teams of the organization's ethical requirements, a practice that has been shown to significantly reduce cheating.
Revenge — "If someone who works for you upsets a customer — even in ways unrelated to the job — you will very likely pay the price. Even the smallest transgression on the part of an employee can ignite the instinct for strong revenge against the employer, regardless of who is at fault."
Experiments show that apologizing can significantly dampen the impulse to wreak revenge (assuming the transgression is not repeated to such a degree that the customer decides the apology is insincere). Companies can also monitor sites like Twitter to pick up complaints and respond to them promptly.
Ariely recommends that organizations invest in behavioral experimentation because doing so "can radically improve decision making and lessen risk." He offers several examples, such as running a pricing test for a new product.
Ariely explains that "the goal [of such a test] is not simply to find out the optimal price but also discover how people arrive at a decision to buy at that price." He goes on to caution that a company should "consider also how the introductory price could influence the perception of value for a long time." Think iPhone pricing, which started at $600 and has since come down dramatically. __________ 1 For an extended treatment of Ariely's work, you can see his 2008 book, Predictably Irrational: The Hidden Forces that Shape Our Decisions.
The June 2009 issue of the American Economic Review has a notable article by Gary Charness (University of California - Santa Barbara) and Marie-Claire Villeval (University of Lyon, France) that offers evidence that older workers, on average, are no worse than younger workers in terms of cooperativeness, competitiveness, and acceptance of risk. In fact, Charness's and Villeval's evidence suggests that older workers tend to perform better than younger workers when team cooperation is needed.
Charness and Villeval summarize their findings as follows:
Our results show first that seniors [defined as workers over 50] are more cooperative than juniors [defined as workers under 30], in the sense of making more contributions to team production. Second, we see no evidence at all that seniors are more risk averse in financial decisions. Third, seniors react to incentives and the competitiveness of the environment about as strongly as juniors. These three results are found in both the field and laboratory environments. Finally, we observe beneficial effects in the field from having working groups in which there is a mix of juniors and seniors, since working seniors increase their contribution when they know they are interacting with juniors; this suggests that there are indeed benefits in maintaining a work force with diversity in age. In addition, workers at the two firms in our study reveal a preference for being in age-heterogeneous groups. Overall, the implication is that it may not be wise to exclude seniors from the labor force; instead, defining additional short-term incentives near the end of a worker's career to retain and to motivate older workers may provide great benefits to society.
Of course, this research comes with caveats concerning its generalizability (e.g., only workers at two French companies were involved in the field portion of the research). Nevertheless, the statistical significance Charness and Villeval found suggests organization managers would be well-advised to give open-minded consideration to the potential older workers have to make substantial contributions to meeting organizational goals.
Continuing my periodic citation of work by Jeffrey Pfeffer (most recently here), one of my favorite business academics, let me recommend reading the two-page piece he has in the July-August issue of the Harvard Business Review.
"Shareholders First? Not So Fast ..." deals with today's renewed appreciation of the value of considering all stakeholders in business planning and decision-making. Pfeffer argues:
In the 1950s and 1960s, the stakeholder was king. CEOs saw their role as one of balancing the interests of the various groups that touched their companies — customers, employees, suppliers, shareholders, and the community at large. This reflected the executives' sophisticated understanding not only of their role as stewards of the valuable resources entrusted to them but also of their own enlightened self-interest: Each of these groups was essential for organizational success. What was true then is even more so today, in an age of knowledge work, outsourcing, global supply chains, and activist interest groups.
Pfeffer goes on to say that
opinions on deregulation, finance, time horizons, and the wisdom of corporate leaders are all shifting, and the logic for putting the creation of shareholder wealth ahead of the creation of stakeholder-value is rightfully under fire.
To build profitability and productivity, enlightened managers are
implementing high-commitment work practices. These include investing in training, decentralizing decision making, and having pay be contingent on organizational, not just individual, performance. Other sources [of research] show the benefits companies reap from customer loyalty and high levels of customer satisfaction.
Pfeffer points to the increased prominence of balanced scorecards and other assessment tools as evidence that companies using such tools recognize the suboptimality of focusing exclusively on financial metrics.
Of particular interest to people in the training field, are Pfeffer's repeated references the the importance of employee training in implementing strategies that embody a balancing of stakeholders' interests.
