by Jonathan Ellis and Rene Tissen, Profile Books, 2003.
These include viewing shareholder value as the only purpose; going for wealth not health; attacking the competition; neglecting the present for the past or future; covetousness; gluttony for growth; envy in the workplace; pride at the top.
(Reivewed by Kevin Barham in June 2003)
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Of the Fortune Top 500 companies in 1970, only four per cent still existed in the same form in 1991. This is clear evidence that you don’t survive or succeed by staying the same. However, many managers and firms are locked into old ways of doing things that are no longer valid in the new world of business. So says this ‘irreverent’ book (as the jacket describes it) which warns about current management practice and thinking. Its aim is to expose the underlying ‘deadly sins’ that have led to the mediocre performance of so many managers and companies and, in some cases, to outright corporate failure.
The authors claim that the profession of manager is falling into disrepute and that managers are losing credibility. Today’s managers no longer manage companies, they manage careers. There is too much greed and there are too many bad decisions which show that managers don’t understand their companies’ actual business. Many managers are arrogant and won’t listen to advice; they seem to be there for their egos, not for their companies.
We have passed, as the authors describe it, out of the Industrial Economy and in to the Knowledge-based Economy but many managers are refusing to learn from their mistakes and are continuing along the same old unsuccessful paths. Each of the seven deadly sins identified by the authors appears at first sight to be a legitimate management practice but each of them reveals a mentality firmly rooted in the past. The Knowledge Economy is a totally different ball game played by new stars according to new rules. Traditional management concepts have no place; past solutions will not work in the current environment. Just as the Seven Deadly Sins conspire to destroy our soul, so the Seven Deadly Sins of Management conspire to destroy our business.
So what are the deadly sins and who are the saints and sinners of the business world? And how can we avoid the sins of management in the future?
Sin number one is the drive to create shareholder value, no matter what it costs. There’s nothing wrong with creating shareholder value in principle, say the authors. Striving to achieve a healthy return for the people who provide some of the capital to make your operations possible is absolutely right. It only becomes a deadly sin when it takes priority over everything else of importance - operations, investments, motivating the workforce, creating strategic alliances, etc. And all too often, a focus on shareholder value goes hand in hand with a lust to increase the value of the CEO’s own shareholdings.
Making shareholder value the main objective is putting the cart before the horse. Intangible assets are becoming ever more important today. Knowledge resides in the heads of employees so they must be valued much more than in the past. Managers must also focus on creating strategic alliances - networks of knowledge - if they are to satisfy customers who demand more than ever before. Stakeholder value - in which shareholders are one of the parties - must take priority.
The authors contrast the approach of Philips, the Dutch electronics company, with that of L’Oréal, the French cosmetics firm. Philips, they say, concentrated on shareholder value but did not generate higher profits and its share price declined. L’Oréal, on the other hand, focused on generating profits from operations and was rewarded by a steadily rising share price. It’s the difference between going for wealth and going for health. Another sinner is Railtrack, now in administration, which also placed shareholder value above everything else and which, according to the authors, preferred to put its profits into dividends rather than improving the infrastructure. This is contrasted with Saint Cadbury Schweppes whose promise to increase shareholder value is not an aim in itself, but rather the result of a clearly-defined market-driven strategy.
The sin here is the notion that we must attack the competition with anything it takes, even if it means copying their products and using undercover methods. But concentrating on attacking the competition reduces the chances for creating opportunities. In particular, alliances with other firms can offer win/win solutions. Companies must learn to operate with greater inner confidence and to mobilize their own resources, rather than waiting to see what the competition will do. Infineon, a computer chip manufacturer, focused on beating the competition but failed because it forgot about the needs of customers. And Hoover, the authors allege, responded to the challenge from James Dyson by copying his innovative bagless vacuum cleaner technology, rather than thinking of their own ideas. They subsequently lost the court action brought by Dyson.
Sin number three is that too many firms focus on the future and let the present take care of itself. There are no reliable predictions, however, and the future is a force unto itself. The only way to cope is to operate flexibly and efficiently and, above all, instantly. Firms must learn to operate in Zero Time - it is better to be fast to a market rather than predict a market that never happens. Bertelsmann’s prudent financial management is contrasted with the enormous debts run up by other, now bankrupt, media firms who made empty promises about huge future profits.
We are constantly being told we must embrace change - for better or for worse. Change has become the secret formula. While it is certainly vital to stay abreast of change in the external environment, inside their firms managers use change as a blunt instrument. Change is inflicted on companies by managers trying to get out of problems. Some of it also comes from firms who try to outdo each other in adopting the latest management fad (presumably this is where the ‘covetousness’ comes in).
But change of this kind doesn’t work, the authors point out - seven out of ten business re-engineering projects fail, for example. Many change programmes also take place in an atmosphere of threat and involve reductions of headcount. Companies say that people are their most valuable asset but people are the first to be ditched when the going gets tough. No wonder employees are cynical when yet another change programme is announced. Change is essential, say the authors, but it must be Knowledge-based change aimed at minds brains, not Industrial-Age change aimed at bodies. When you reduce headcount you also reduce the brain count. Nokia, we are told, is a company which believes the vital thing is to encourage a mentality of flexibility to respond to change outside the company.
This sin is about managers and companies who want to ‘own it all - and still want more’. Managers are confused by the talk of a knowledge-based economy. They think it means gathering more knowledge and acquiring more knowledge-rich companies. They have lost sight of the fact that their true task is to add value. Owning knowledge is no guarantee of success. A ‘go-it-alone’ mentality has no place in the Knowledge Economy. Owning assets just makes you fatter; it does not give you the agility that is one of the key qualities needed in the new economy. Windows of opportunity are smaller and smaller and there is no time to learn everything from scratch. But the larger a company becomes, the more knowledge it gathers and the more it feels it is necessary to use that knowledge to justify the investment.
Having too much knowledge is a dangerous thing because it causes an inward-looking focus. A company spends too much time trying to work out how to use its knowledge rather than looking externally at what it is that customers need and want. The authors point here to the example of German media firm KirchGruppe whose ‘empire building’ left it with huge debts that eventually undermined it. Success will only come to those firms that have the agility to access the knowledge they need to create solutions to emerging customer needs. When opportunities arise, it is necessary to leverage the knowledge required quickly and efficiently. Fat, inefficient companies go out and buy the knowledge; agile, responsive companies go out and use it. And, if necessary, like firms in the computer chip industry, they do this by creating alliances with competitors.
The theme of this sin is ‘guarantee quality - and let the figures prove you right’. Quality was thrust upon western firms by the Japanese. Many believed that all they had to do was to match the quality of Japanese firms to win back their markets. Today, they still believe that a focus on quality will guarantee competitiveness. Quality programmes, however, focus on improving the ‘industrial’ aspects of the company, the parts that most managers are comfortable with, and where they can book numbers more easily. Some firms even believe that if you concentrate on high product or process quality, you can do away with real customer service. (One of the worst offenders here are call centres which, say the authors, ultimately treat customers - the most precious possession of any company - as numbers and problems they would rather not bother about).
The obsession with quality shows firms’ addiction to the past. By now, say the authors, quality should have become normal and so embedded in corporate culture that it should not be necessary for management to focus on it. Companies have created quality in processes but have failed to create a culture of quality. They do not understand what competitiveness means in the new economy. A focus on quality means a focus on the tangibles and processes rather than on intangibles and people. Quality does not create competitiveness but quality people can. If firms want to attract and keep today’s knowledge professionals and their brains, managers must guarantee not quality of processes but quality of environment. The authors point to car manufacturer Porsche as a firm where quality is embedded in everything it does and where employees take pleasure in responsibility for the work they do.
Managers face huge challenges today. The solution, many feel, is to ‘fix it’ - to find the fastest, least expensive and most efficient way out of the situation. They believe that they must be seen to be doing something. But so often they fall back on their experience and try to use the same solution they have always used before. They assume that, if it worked in the past, it will work again today. The circumstances may be different but the problem is basically the same. So why bother working out an alternative approach when there is a solution to hand?
The trouble is that most of today’s managers gained their experience in Industrial Economy companies. They still turn to old solutions like downsizing, price-cutting, and ganging up to put restrictive measures on foreign competitors. These fixes don’t work in the Knowledge Economy, however. Downsizing means losing brains, price-cutting may create losses that are impossible to win back in today’s telescoped product life cycles, and the foreign competitor we are trying to do down may be a potential alliance partner. The new economy needs new solutions. Change in attitude and mindset are essential. We must obtain fresh insight into our business and its strengths and weaknesses.
We cannot go on with business as normal. This does not mean rushing on to the internet - which is just another symptom of managers needing to be seen to do something. There are some big problems to get round. Managers are driven by their tight schedules to rely on superficial information. They are reluctant to address complexity, because they were used in the past to dealing with either/or situations, whereas today they face an increasing number of frequently conflicting demands. Complexity, however, cannot be reduced to one page proposals.
The answer is that managers must spend much more time on re-education, learning and reading about what the rest of the world is doing. They must get rid of their Industrial Economy mental baggage and stop automatically using old tools like resizing, re-engineering or restructuring. They must become zero-minded and open their minds to new ideas. If the authors are right in their analysis, there are some clear challenges - and opportunities - for the business schools here.
Good news, also, for women managers. The authors have found that the management sinners are generally men, not women. The central message of their book is that management is now more than ever about managing people and creating an environment that allows a free flow of knowledge and exchange of ideas. Managers must regain their passion for people.