Managing for Results

Preface

Managing for Results was the first book to address itself to what is now called business strategy. It is still the most widely used book on the subject. When I wrote it, more than twenty years ago, my original title was, in fact, Business Strategies. But strategy in those days was not a term in common usage. Indeed, when my publisher and I tested the title with acquaintances who were business executives, consultants, management teachers, and booksellers, we were strongly advised to drop it. Strategy, we were told again and again, belongs to military or perhaps to political campaigns but not to business.

By now, of course, business strategy has become an in term. Yet in retrospect I am glad we changed the title. To be sure, Managing for Results may be less sexy. But it is far more descriptive of what this book tries to do. Above all, it expresses the book’s premise: businesses exist to produce results on the outside, in the market and the economy. On the inside there are only costs. Indeed, what are commonly called profit centers are as a rule really cost centers. Managing for Results therefore begins with an analysis of what the book calls business realities—the fundamentals and constants of the outside environment, the things the business executive has to consider as givens, as constraints, as challenges. And it proceeds to discuss how a business positions itself in respect to these realities to convert them into opportunities for performance and results.

This explains, I believe, why this book, after twenty years, is still far more comprehensive than books on strategy alone. It pioneered practically everything to be found in these books: the analysis of markets and products (it contains the first classification of products—today’s breadwinner, for instance); the organized abandonment of the old, the obsolete, the no-longer productive; the rewards for leadership; and the objectives of innovation. But it also—and in this it still stands alone—showed how to analyze the environment and how to position a business in it. It was the first—and by and large it still is the only—book to try to balance managing today’s business with making the business of tomorrow. And it concludes by linking business as an economic institution measured by economic results and business as a human organization. The last chapter deals with building performance into the organization. The book thus was the first to attempt an organized presentation of the economic tasks of the business executive managing a business organization.

Above all, as the introduction states, this book took the first step toward a discipline of economic performance in business enterprise. Never has such a discipline been needed more than it is today, when the economic, social, technological, and political environments in which businesses live and operate are changing faster than ever before, and when every business therefore needs to ask the questions which this book raises and answers: What are the realities of this business? What are its result areas? How are we doing? and What is this business and what should it be?

Claremont, California

Thanksgiving Day, 1985

Introduction:

The Task

This is a what to do book. It deals with the economic tasks that any business has to discharge for economic performance and economic results. It attempts to organize these tasks so that executives can perform them systematically, purposefully, with understanding, and with reasonable probability of accomplishment. It tries to develop a point of view, concepts and approaches for finding what should be done and how to go about doing it.

This book draws on practical experience as a consultant to businesses of all kinds and sizes for a good many years. Everything in it has been tested and is being used today effectively in real businesses. There are illustrations of, and references to, concrete situations on almost every page—drawn mostly from the United States (simply because most of my experience has been here) but also from Europe, Japan, and Latin America.1

Though practical rather than theoretical, the book has a thesis. Economic performance, it asserts, is the specific function and contribution of business enterprise, and the reason for its existence. It is work to obtain economic performance and results. And work, to yield results, has to be thought through and done with direction, method, and purpose. There is however, so far, no discipline of economic performance, no organization of our knowledge, no systematic analysis, no purposeful approach. Even the sorting out and classification of the tasks have yet to be done.

The foundation for systematic, purposeful performance of the specific task and function of business enterprise is thus still missing.

There are a good many successful businesses and effective executives—as there are many with at best mediocre results. One searches in vain, however, for an analysis that identifies what the successful are doing to give them results. Nowhere is there a description even of the economic tasks that confront a business, let alone how one goes about tackling them. To every executive’s desk come dozens of problems every morning, all clamoring for his attention. But there is little to tell him which are important and which merely noisy.

This book lays little claim to originality or profundity. But it is, to my knowledge, the first attempt at an organized presentation of the economic tasks of the business executive and the first halting step toward a discipline of economic performance in business enterprise.

II

The book is divided into three parts. The first—and longest— stresses analysis and understanding. Chapter 1 deals with the Business Realities—the situation most likely to be found in any business at any given time. The next three chapters (chapters 2, 3,4) develop the analysis of the result areas of the entire business and relate them to resources and efforts on the one hand and to opportunities and expectations on the other. Chapter 5 projects a similar analysis on the cost stream and cost structure—both of the individual business and of the economic process of which it is part.

Chapters 6 and 7 deal with the understanding of a business from the outside where both the results and the resources are. These chapters ask, What do we get paid for? and What do we earn our keep with? In Chapter 8 all analyses are pulled together into an understanding of the existing business, its fundamental economic characteristics, its performance capacity, its opportunities, and its needs.

Part II focuses on opportunities and leads to decisions. It discusses the opportunities and needs in each of the major economic dimensions of a business: making the present business effective (Chapter 9); finding and realizing business potential (Chapter 10); making the future of the business today (Chapter 11).

The last—and shortest—part presents the conversion of insights and decisions into purposeful performance. This requires that key decisions be made regarding the idea and objectives of the business, the excellences it needs, and the priorities on which it will concentrate (Chapter 12). It requires a number of strategic choices: what opportunities to pursue and what risks to assume; how to specialize and how to diversify; whether to build or to acquire; and what organization is most appropriate to the economics of the business and to its opportunities (Chapter 13). Chapter 14 finally embeds the entrepreneurial decisions for performance in the managerial structure of the organization—in work, in business practices, and in the spirit of the organization and its decisions on people.

The Conclusion projects the book and its thesis on the individual executive and his commitment—and especially on the commitment of top management.

Any first attempt at converting folklore into knowledge, and a guessing game into a discipline, is liable to be misread as a downgrading of individual ability and its replacement by a rule book. Any such attempt would be nonsense, of course. No book will ever make a wise man out of a donkey or a genius out of an incompetent. The foundation in a discipline, however, gives to today’s competent physician a capacity to perform well beyond that of the ablest doctor of a century ago, and enables the outstanding physician of today to do what the medical genius of yesterday could hardly have dreamt of. No discipline can lengthen a man’s arm. But it can lengthen his reach by hoisting him on the shoulders of his predecessors. Knowledge organized in a discipline does a good deal for the merely competent; it endows him with some effectivenes. It does infinitely more for the truly able; it endows him with excellence.

Executives have the economic job anyhow. Most work at it hard—too hard in many cases. This book poses no additional work. On the contrary, it aims to help them do their job with less effort and in less time, and yet with greater impact. It does not tell them how to do things right. It attempts to help them find the right things to do.

PART I

UNDERSTANDING

THE BUSINESS

1 Business Realities

That executives give neither sufficient time nor sufficient thought to the future is a universal complaint. Every executive voices it when he talks about his own working day and when he talks or writes to his associates. It is a recurrent theme in the articles and in the books on management.

It is a valid complaint. Executives should spend more time and thought on the future of their business. They also should spend more time and thought on a good many other things, their social and community responsibilities for instance. Both they and their businesses pay a stiff penalty for these neglects. And yet, to complain that executives spend so little time on the work of tomorrow is futile. The neglect of the future is only a symptom; the executive slights tomorrow because he cannot get ahead of today. That too is a symptom. The real disease is the absence of any foundation of knowledge and system for tackling the economic tasks in business.

Today’s job takes all the executive’s time, as a rule; yet it is seldom done well. Few managers are greatly impressed with their own performance in the immediate tasks. They feel themselves caught in a rat race, and managed by whatever the mailboy dumps into their in tray. They know that crash programs which attempt to solve this or that particular urgent problem rarely achieve right and lasting results. And yet, they rush from one crash program to the next. Worse still, they known that the same problems recur again and again, no matter how many times they are solved.

Before an executive can think of tackling the future, he must be able therefore to dispose of the challenges of today in less time and with greater impact and permanence. For this he needs a systematic approach to today’s job.

There are three different dimensions to the economic task: (1) The present business must be made effective; (2) its potential must be identified and realized; (3) it must be made into a different business for a different future. Each task requires a distinct approach. Each asks different questions. Each comes out with different conclusions. Yet they are inseparable. All three have to be done at the same time: today. All three have to be carried out with the same organization, the same resources of men, knowledge, and money, and in the same entrepreneurial process. The future is not going to be made tomorrow; it is being made today, and largely by the decisions and actions taken with respect to the tasks of today. Conversely, what is being done to bring about the future directly affects the present. The tasks overlap. They require one unified strategy. Otherwise, they cannot really get done at all.

To tackle any one of these jobs, let alone all three together, requires an understanding of the true realities of the business as an economic system, of its capacity for economic performance, and of the relationship between available resources and possible results. Otherwise, there is no alternative to the rat race. This understanding never comes ready-made; it has to be developed separately for each business. Yet the assumptions and expectations that underlie it are largely common. Businesses are different, but business is much the same, regardless of size and structure, of products, technology and markets, of culture and managerial competence. There is a common business reality.

There are actually two sets of generalizations that apply to most businesses most of the time: one with respect to the results and resources of a business, one with respect to its efforts. Together they lead to a number of conclusions regarding the nature and direction of the entrepreneurial job.

Most of these assumptions will sound plausible, perhaps even familiar, to most businessmen, but few businessmen ever pull them together into a coherent whole. Few draw action conclusions from them, no matter how much each individual statement agrees with their experience and knowledge. As a result, few executives base their actions on these, their own assumptions and expectations.

1. Neither results nor resources exist inside the business. Both exist outside. There are no profit centers within the business; there are only cost centers. The only thing one can say with certainty about any business activity, whether engineering or selling, manufacturing or accounting, is that it consumes efforts and thereby incurs costs. Whether it contributes to results remains to be seen.

Results depend not on anybody within the business nor on anything within the control of the business. They depend on somebody outside—the customer in a market economy, the political authorities in a controlled economy. It is always somebody outside who decides whether the efforts of a business become economic results or whether they become so much waste and scrap.

The same is true of the one and only distinct resource of any business: knowledge. Other resources, money or physical equipment, for instance, do not confer any distinction. What does make a business distinct and what is its peculiar resource is its ability to use knowledge of all kinds—from scientific and technical knowledge to social, economic, and managerial knowledge. It is only in respect to knowledge that a business can be distinct, can therefore produce something that has a value in the market place.

Yet knowledge is not a business resource. It is a universal social resource. It cannot be kept a secret for any length of time. What one man has done, another man can always do again is old and profound wisdom. The one decisive resource of business, therefore, is as much outside of the business as are business results.

Indeed, business can be defined as a process that converts an outside resource, namely knowledge, into outside results, namely economic values.

2. Results are obtained by exploiting opportunities, not by solving problems. All one can hope to get by solving a problem is to restore normality. All one can hope, at best, is to eliminate a restriction on the capacity of the business to obtain results. The results themselves must come from the exploitation of opportunities.

3. Resources, to produce results, must be allocated to opportunities rather than to problems. Needless to say, one cannot shrug off all problems, but they can and should be minimized.

Economists talk a great deal about the maximization of profit in business. This, as countless critics have pointed out, is so vague a concept as to be meaningless. But maximization of opportunities is a meaningful, indeed a precise, definition of the entrepreneurial job. It implies that effectiveness rather than efficiency is essential in business. The pertinent question is not how to do things right but how to find the right things to do, and to concentrate resources and efforts on them.

4. Economic results are earned only by leadership, not by mere competence. Profits are the rewards for making a unique, or at least a distinct, contribution in a meaningful area; and what is meaningful is decided by market and customer. Profit can only be earned by providing something the market accepts as value and is willing to pay for as such. And value always implies the differentiation of leadership. The genuine monopoly, which is as mythical a beast as the unicorn (save for politically enforced, that is, governmental monopolies), is the one exception.

This does not mean that a business has to be the giant of its industry nor that it has to be first in every single product line, market, or technology in which it is engaged. To be big is not identical with leadership. In many industries the largest company is by no means the most profitable one, since it has to carry product lines, supply markets, or apply technologies where it cannot do a distinct, let alone a unique job. The second spot, or even the third spot is often preferable, for it may make possible that concentration on one segment of the market, on one class of customer, on one application of the technology, in which genuine leadership often lies. In fact, the belief of so many companies that they could—or should—have leadership in everything within their market or industry is a major obstacle to achieving it.

But a company which wants economic results has to have leadership in something of real value to a customer or market. It may be in one narrow but important aspect of the product line, it may be in its service, it may be in its distribution, or it may be in its ability to convert ideas into salable products on the market speedily and at low cost.

Unless it has such leadership position, a business, a product, a service, becomes marginal. It may seem to be a leader, may supply a large share of the market, may have the full weight of momentum, history, and tradition behind it. But the marginal is incapable of survival in the long run, let alone of producing profits. It lives on borrowed time. It exists on sufferance and through the inertia of others. Sooner or later, whenever boom conditions abate, it will be squeezed out.

The leadership requirement has serious implications for business strategy. It makes most questionable, for instance, the common practice of trying to catch up with a competitor who has brought out a new or improved product. All one can hope to achieve thereby is to become a little less marginal. It also makes questionable defensive research which throws scarce and expensive resources of knowledge into the usually futile task of slowing down the decline of a product that is already obsolete.

5. Any leadership position is transitory and likely to be short-lived. No business is ever secure in its leadership position. The market in which the results exist, and the knowledge which is the resource, are both generally accessible. No leadership position is more than a temporary advantage.2 In business (as in a physical system) energy always tends toward diffusion. Business tends to drift from leadership to mediocrity. And the mediocre is three-quarters down the road to being marginal. Results always drift from earning a profit toward earning, at best, a fee which is all competence is worth.

It is, then, the executive’s job to reverse the normal drift. It is his job to focus the business on opportunity and away from problems, to re-create leadership and counteract the trend toward mediocrity, to replace inertia and its momentum by new energy and new direction.

The second set of assumptions deals with the efforts within the business and their cost.

6. What exists is getting old. To say that most executives spend most of their time tackling the problems of today is euphemism. They spend most of their time on the problems of yesterday. Executives spend more of their time trying to unmake the past than on anything else.

This, to a large extent, is inevitable. What exists today is of necessity the product of yesterday. The business itself—its present resources, its efforts and their allocation, its organization as well as its products, its markets and its customers—expresses necessarily decisions and actions taken in the past. Its people, in the great majority, grew up in the business of yesterday. Their attitudes, expectations, and values were formed at an earlier time; and they tend to apply the lessons of the past to the present. Indeed, every business regards what happened in the past as normal, with a strong inclination to reject as abnormal whatever does not fit the pattern.

No matter how wise, forward-looking, or courageous the decisions and actions were when first made, they will have been overtaken by events by the time they become normal behavior and the routine of a business. No matter how appropriate the attitudes were when formed, by the time their holders have moved into senior, policy-making positions, the world that made them no longer exists. Events never happen as anticipated; the future is always different. Just as generals tend to prepare for the last war, businessmen always tend to react in terms of the last boom or of the last depression. What exists is therefore always aging. Any human decision or action starts to get old the moment it has been made.

It is always futile to restore normality; normality is only the reality of yesterday. The job is not to impose yesterday’s normal on a changed today; but to change the business, its behavior, its attitudes, its expectations—as well as its products, its markets, and its distributive channels—to fit the new realities.

7. What exists is likely to be misallocated. Business enterprise is not a phenomenon of nature but one of society. In a social situation, however, events are not distributed according to the normal distribution of a natural universe (that is, they are not distributed according to the bell-shaped Gaussian curve). In a social situation a very small number of events at one extreme—the first 10 per cent to 20 per cent at most—account for 90 per cent of all results; whereas the great majority of events accounts for 10 per cent or so of the results. This is true in the market place: a handful of large customers out of many thousands produce the bulk of orders; a handful of products out of hundreds of items in the line produce the bulk of the volume; and so on. It is true of sales efforts: a few salesmen out of several hundred always produce two-thirds of all new business. It is true in the plant: a handful of production runs account for most of the tonnage. It is true of research: the same few men in the laboratory are apt to produce nearly all the important innovations.

It also holds true for practically all personnel problems: the bulk of the grievances always comes from a few places or from one group of employees (for example, from the older unmarried women or from the clean-up men on the night shift), as does the great bulk of absenteeism, of turnover, of suggestions under a suggestion system, of accidents. As studies at the New York Telephone Company have shown, this is true even in respect to sickness.

The implications of this simple statement about normal distribution are broad.

It means,