Managers have become practised in the arts of running businesses in times of slow growth. They have had two decades to master the necessary aptitudes and attitudes. But now companies and their executives need a new skill-set, for the world has in all probability entered a sustained period of much faster economic expansion. I write this with some relish, because throughout the slow-growth years (2% per annum in the decade to 1993), I've been telling anyone who would listen that the phase would end as the Kondratieff Cycle once again worked its magic.
The theory involved holds that the world economy moves in long cycles, roughly a quarter of a century at a time. The rich post-war expansion crashed to a halt with the oil price shocks of 1973: my view was that, well before 2000, growth would ride again. Bang on schedule, the rate accelerated to 3.7% in 1994 and has maintained a 4% clip ever since. To stress how important that number is, the growth rate has doubled, despite spells of stagnation in Europe and Japan. If sustained improvement materialises in the lagging major economies, long-range forecasts of 4% growth for the next two decades will appear modest.
WONDROUS OPPORTUNITIES
Given that the slow-growth phase saw more new businesses and industries created than ever before, the opportunities that now lie ahead must be wondrous. But the implications for management go beyond the necessity to seize those opportunities (following the sage Japanese injunction: 'Never let an opportunity pass by, but always think twice before acting'). General booms carry a danger for individual managements. As sales rise and profits soar, it's easy to bask in your own supposed brilliance. And that's the sure way to head for the rocks and future shipwreck.
No company in the last growth era revelled in its cleverness more than Litton Industries, founded by a couple of escaped whiz-kids from Ford Motor, and acclaimed as a paragon of modern high-tech management, much as Microsoft or Intel are lauded today. By 1996 Litton was far down Fortune's list of the top 500 US companies. At 372 in the league, the company had managed to lower its earnings per share by 2.4% compound over the previous decade. A company that boasted of its skill at converting high-technology opportunities into high earnings growth missed out on a whole series of strategic openings - many of them exploited before its very eyes in its home state of California.
There's a warning, not just in Litton's unhappy history, but in the recipe which it proffered as the key to its super-growth. It eschewed large-scale operations, preferring to break big units down to manageable size. Control was exercised through swift and efficient financial reporting. The able managers hired to run the many units were rapidly promoted as they used their individual skills to deliver organic growth. That supposedly resulted from sessions where the two founders, Charles B. Thornton and Roy Ash, master-minded and promoted strategic initiatives with inspired (but, so it proved, faulty) intelligence.
If the recipe seems familiar, so it should. This is the standard formula for management in the later Nineties. Top management is supposed to conern itself with strategy, decentralising operations to responsible managements who are placed in charge of businesses small enough to 'get their arms round'. Thanks to the brand-new wonders of information technology, control and reporting are faster and more reliable than ever before. But the lesson of Litton, which came permanently unstuck with absurd strategic and operational errors in shipbuilding and office machinery, is that there's no magic formula for continuously effective management. Also, magical results tell you nothing about the quality, magical or mundane, of management.
In the slow-growth era, many fast-expanding companies proved that point by unravelling when their businesses turned sour. The toughest task for management is to reform its own processes and the operations which they govern when all current indicators are recording nothing but success. That's one of the prime arguments in favour of Total Quality Management. Because TQM holds that all operations can always be improved, and establishes procedures for achieving that improvement, the firm should maintain progress in fair and foul weather alike.
The virtuous results were confirmed for me when talking to REL, a consultancy which specialises in the reduction of working capital. Even the best and biggest companies can usually save 20% of that money by better methods. REL had only found one firm so effective that the consultants could make no improvement. That was Honeywell, UK - which I knew as a dedicated believer in TQM. It had embarked on that arduous (but rewarding) way of corporate life, moreover, not to escape from failure, but to reinforce success. It was already number one in most of its markets, and wanted to stay there.
THE SEEDS OF DECAY
Likewise, Royal Dutch-Shell, as previously reported in Thinking Managers, has embarked on a massive restructuring and change programme to preserve and enhance its position as oil's richest profit earner. Every business success not only carries within it the seeds of its own possible future decay, but will very probably conceal behind its shining results major strategic and operational failings - faults that are adversely affecting results at the present time. There's no alternative to working through a catechism such as this: Are you....
1. Behaving towards others (customers, employees and suppliers, etc) as you wish them to behave towards you?
2. Assessing each activity with all the objective, measured information you can muster?
3. Concentrating on what you do well?
4. Keeping the company flat, so that authority is spread over many people, and not stuck at the top?
5. Thinking as simply and directly as possible about what you and the company are doing - and why?
6. Owning up to your errors - and correcting them?
7. Bolting up the organisation continuously - so that success doesn't breed slackness?
8. Asking questions ceaselessly about your performance, your markets, your competition, your objectives?
9. Saving costs by LIMO - least input for most output?
10. Improving basic efficiency all the time?
11. Cashing in - ensuring that profits are building in the bank, and not just on paper?
12. Sharing the benefits of success widely among those who helped to create it?
These nine fundamentals spell out an acronym: BACK TO BASICS. During individual or general booms, the tendency is to forget about the basics and concentrate on meeting the booming demand, and never mind the costs. Today, however, there's far less excuse for that - and the reason is intimately connected with the cause of the acceleration of world economic growth. What swings the Kondratieff Cycle is investment. In this particular upturn, the main engine of the surge in expenditure for the future has been IT. In 1996 companies spent between $4 billion and $6 billion on developing Intranets alone - that is, in-company networks in cyberspace. A fourfold expansion is expected in this market by 2000.
That's only one aspect of a boom which has taken spending on IT hardware in the US alone to $282 billion a year - 17% more than on new motors and parts and 49% above spending on new homes. In 1996, a third of the growth in the nation's gross domestic product stemmed from the IT industries. The equivalent figures for other countries will be smaller, simply because the US is exploiting the hardware and software tools (mostly developed by US companies) with much greater vigour.
STATE OF THE ART
Boomtime profits provide the perfect opportunity to catch up with the state of the IT art. The new systems offer such golden benefits as instantaneous and cheap transactions: the ability to supply customers with customised goods and services: cutting out the middleman and selling direct: and interacting with suppliers and customers to your mutal benefit. Yet, according to an AST survey of British firms:
'Surprisingly, the most obvious business activity on the Internet, connecting clients and suppliers, is extremely under-utilised. Only a quarter [of those surveyed] expect suppliers to be electronically connected, and three-quarters are happy that it's not used.'
The temptations of boomtime profits include those of sticking to obsolete methods - because the incentives to cut costs and raise productivity appear to have weakened. That reinforces the natural conservative tendency found in all organisations: the NDH factor (Not Done Here). The faster the rate at which markets are moving, however, the greater the necessity to accept change. The companies that will most benefit from the upswing of the Kondratieff Cycle will be those which most readily make change their ally. For IT purposes, state-of-the-art change means obeying six injunctions:
1. Link the computers.
2. Accept that you won't manage the organisation as it has always been run.
3. Act accordingly.
4. Manage the transition to achieve precisely what the users need.
5. Accept that changes in circumstances and technology will necessitate continuous change in the system.
6. Use the World Wide Web to its maximum potential.
In the reform programme mentioned earlier, Shell is installing a world-wide IT system named Global Office to link all its operations via a common platform. This massive investment, though, will be wasted unless those using the system can master 'new ways of working to deliver breakthrough performance'. For instance, people will have to learn how to collaborate across borders (departmental, functional and national): to communicate better; to share knowledge; to improve team-working; and to adopt more effcicient organisation and processes.
These are self-evident needs in every business and non-business activity. Shell wants to throw out five 'goers' - internal focus, bureaucracy, under-performance, 'paralysis by analysis' and consensus: and to substitute five 'newcomers' - customer focus, profitable growth, external focus, unleashing diverse talent and the aforesaid breakthrough performance. Of course, much of the 'goers' will remain. It's just as obvious that Shell would never have achieved its present size and profitability if the 'newcomers' had been wholly absent. And what remains unknown is whether the drive for change will be sustained if Kondratieff growth eases the fiercely competitive conditions which inspired the Shell reforms.
Prosperity is exactly the time, however, when a company has the financial resources to invest in change. The drawback is that the human resources tend to be tightly stretched by fast growth - so the easy way out is taken: developing the capacity of the organisation and its managers gets delayed until the next slack times, when the investment, naturally, can't be afforded. That doesn't have to happen. Managers can make change much easier on themselves and their resources if they avoid the traps described by Colin Price, who is global head of the change integration practice at Price Waterhouse. The costly mistakes are...
1. Selecting the 'golden path' to ultimate change.
2. Leaving no stone unturned.
3. Deciding your strategy and then trying to change the culture to achieve it.
4. Working to win the hearts and minds of all employees.
5. Believing that people will resist change if it affects them negatively.
NO GOLDEN PATH
The first point is that there is no 'golden path'. When markets are changing rapidly, and even when they are not, no management dare lay down an immutable strategic plan. If the plan must be flexible and responsive, the organisation has to be the same. You can't foretell the future, but you can create a set-up that's built around your strengths and will adapt as the business itself adapts to change. The fluid organisation structures that Price recommends make sense for other reasons: they make it harder for bureaucracy to clog up the corporate arteries in the ways that have bedevilled corporations like Shell.
The 'paralysis by analysis' that also bothers Shell should be cured by understanding Price's second point. He reckons that Pareto's Law applies - that 80% of the benefits stem from 20% of the analysis. That will show you where the major changes, yielding the biggest benefits, are located. Price cites a large maker of mechanical parts in the US which had 165 staff beavering away full-time to reform its order management processes. After two years, the project teams had readied a no doubt splendid plan. But the overall strategy had changed - so the plan didn't fit. Far better, as Price suggests, to spend a month, say, on review, make the agreed changes fast and correct as necessary as you go along.
In essence, that's the same principle which Pepsico embodies in the slogan 'Ready, fire, aim.' The truth is that, however much care you take over planning and preparation, error always results. So you end up redesigning and correcting in any event. You have, however, wasted time and probably opportunity on seeeking perfection. Pepsico isn't the happiest of examples these days, though, having been whacked by Coca-Cola in its core business: which only emphasises the point made earlier - a management philosophy is only as good as its application.
That application is bound to fail if deeds are out of synch with words. If you try changing the culture to fit the strategy (Point Three), the strategy will have run its two-to-three years course before the culture change is effective. Some parts of the organisation - Price gives structure, human resources systems and leadership style as examples - have the greatest cultural impact: so concentrate on those. My own preference is always to seek and exploit ways in which behaviour, and thus culture, can be radically altered - say, by adopting total quality programmes.
As for hearts and minds, Pareto comes to the rescue again. Who are your key 20% among your people - the natural leaders? Get them on your side, and most others will literally follow. That will be far more effective than scores of videos, mass briefings and newsletters. Note the 'most others': some of the 80% will be resistant grumblers. But Point Five needs to be remembered. The fact that people dislike the consequences of change doesn't mean that they will resist it. On the contrary, the experience of Business Process Engineering has shown that people will cooperate in reviews that are bound to end in eliminating some of their jobs.
THOUGHT FOR THE FUTURE
In boomtime, you hope, the need for downsizing will diminish because of the strength of the markets. That, however, poses a further covert threat. When the present is marvellous and order books are overflowing, thought for the future seems almost superfluous. This is precisely the time when the business should be preparing for the next downturn in the market, or slowdown in growth rates, by developing new products and new capacities. If you're not world-class, now is the time to raise standards - while being very careful to understand what world-class means.
It doesn't necessarily equate with being the leanest. Alan Harrison of Cranfield School of Management points out that BMW makes its unrivalled product range with the help of a far from lean logistics operation. Because other qualities compensate for the higher costs, BMW retains real competitive advantage. Research by the Judge Institute at Cambridge found that big British users of lean production methods actually reported lesser profit margins than low users. The latter, for instance, may benefit from having higher stock levels in fluctuating markets. So Harrison's advice chimes with that of Price to form the ultimate boomtime credo:
1. Develop broad organisational capabilities over time, and continually reinforce the competitive advantages they confer.
2. Since no advantage is fixed, be permanently dissatisfied with performance - which means seeking continual improvement.
3. Develop your people for future as well as present needs.
That short credo holds the key to world-class exploitation of favourable conditions. Often, the best firms don't produce the biggest boom bonanzas. But profit bubbles always burst. The best firms build on booms to ensure that the good times go on rolling.
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