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A senior executive friend on new management being added to a company once commented to me on how they went about finding the right people for the job. I had asked him if the looked internally or externally.
“Internally initially. Externally if we have to. I still manage their transition into the position as if they were rookies.”
I was incredulous. “Weren’t these individuals that already had senior management experience? Didn’t they have a track record in P&L accountability?”
His reply was a simple one: “We hired them for what they had done, but we keep them for what they are doing”.
What was striking in this statement was not only than new executives were being judged by current performance, or seeing how well they could motivate and manage people, but a deeper, more underlying inference. This underlying issue revolved around what were the driving factors and underlying beliefs of business and management that shaped their day-to-day and moment-to-moment decisions of these new senior managers.
The word belief is an important one in this statement. As a college professor told me in my philosophy of religions class,
“There is a significant difference between ‘truth’ and ‘belief’. ‘Truth’ is like ‘Fact’. ‘Truth’ is absolute. It stands on its own and unfailingly validates its absoluteness. ‘Belief’ is relative. Belief is what individuals perceive as ‘truth’, but is based on many underlying assumptions combined with what is recognized and accepted about ‘truth’.”
In other words, beliefs shape and determine the decisions and actions of each person’s awareness and acceptance of truth. Like it or not, everyone has beliefs that shape actions and choices, but truth stands alone.
This chapter is dedicated to explaining the underlying beliefs about running and managing a business. Executive management always determines and forces which of these beliefs will be used for running a business. People who do not follow these beliefs are either removed from their positions or removed from the company.
This is not an incorrect or corrupt action on management’s part. It is the responsibility of executive management to shape the business decision beliefs of a company. The belief about managing a business that the president and first line executives enforce in a business shapes the culture and determines the success or failure of the company. The tentacles of the belief reach far beyond employees. It affects customer relations, market perceptions, and shareholder satisfaction. This broad influence changes the belief into a philosophy; a philosophy of management.
In decades of efforts in the private sector only three driving factors in running a business appeared. Though business strategists and planners may disagree, the conclusion became undeniable that there are only three philosophies of how a business is run. Understanding this may be easier if we define the word “philosophy”.
Philosophy is a compound Greek word: “philo” which is “love” and “sophia” which is “wisdom”. Philosophy is a love of wisdom, and business philosophy is a love of wisdom in how you run a business.
So What Are the Three Philosophies of Management?
Philosophy of management means an underlying, driving current that affects decision-making in a business on a daily basis. Many businesses have a stated philosophy of management. It appears in their mission statement, their corporate image advertising, and their logo and other graphical symbols.
All too frequently these same companies have a different actual and real philosophy of management.
The three management philosophies are:
- To be financially driven
- To be operationally driven
- To be market driven
We will examine the first of these three philosophies.
Financially Driven Companies
Financially driven companies manage their activity by closing watching the money, minimizing the costs, and working to maximize the profits. After all, “making Money” is what a business is about…
In a financially driven company there is a close attention to budgets and to target objectives. Measurables are very, very important.
Cost In A Financially Driven Company:
Cost is almost considered evil. Reducing cost is critical. Cost comes right off the bottom line. The purpose of a business is to be profitable. It is very, very important to keep a tight reign on cost. Obsession with managing cost can reach unusual levels.
A client I assisted in the 1980’s was a banker who acquired a growing high tech business. I was brought on as the chief marketing officer to generate increasing revenues and restructure the selling and service strategies of the business. We became one of the fifteen largest resellers in the country in a market area one-tenth the size of all other companies in the top fifteen.
Our suppliers were referring to us as “the model other resellers should emulate”. During this time the company grew to over 65 employees. Despite this phenomenal increase in revenues the strength of his belief in fiscal management was so great that fourteen of the employees (nearly 25%) worked in the accounting department!
Cost controls were so strong that I was asked to bring in my own printing calculator. This was promptly borrowed by the accounting department and never returned.
His management style was very financially driven.
Objectives and Measurables:
Financially driven companies manage by identifying and hitting objectives. There is cost for doing business and a reward you get for doing it right. Reaching the measurable objectives results in the reward.
Management either defines what the measurables are and when the company is going to reach them, or requires the departments to evaluate the measurables, determine what is needed to reach them, and when they will be reached. A common mindset in a financially driven company is
“Tell me how you are going to get there, tell me what you need to get there. Based on what you tell us we can allocate for you or we’re going to tell you we don’t have quite enough.”
The view of management by objective that accompanies financially managed companies brings a view of business that it is a cost/reward experience.
Asset Management:
Financially driven businesses are very aware of their cash. Assets that are easily measurable appear on the Balance Sheet statements, while the P&L statement can help show the success or failure of the cost/reward. The real picture is in Balance Sheet Forecasts (called “Triple Cash Flow Forecasting in some parts of the world), as these show the future of the real cash on hand if the company continues on it’s current pace. What seems to be the challenge with this approach?
Hard assets tend to be valued far above soft assets. What are hard assets? These are the company’s
- Cash,
- Capital reserves,
- Accounts receivable,
- Inventory, and
- The depreciated value of tools and property.
In an interesting paradox, Employees tend not to be regarded as “hard assets”, though they absolutely are. Their Hard Asset value is the sum of their wages and benefits provided by the company. This value is the company’s view of the asset. The confusion occurs because management tends to not understand how to leverage a rate of return on this asset value; consequently they lump wages and benefits into a fixed cost.
From an accounting standpoint, this is accurate. From a management standpoint it shows a limited understanding of how to run the company… If you are not sure about this, consider what happens when a company hits cash problems- they liquidate the asset value of their employees (the wages and benefits) in a move called “downsizing”. Though it reduces the fixed expenses of the business it usually also reduces capacity, efficiency, and rate of return on the activities of the company.
Soft assets are a little more intangible. Soft assets include
- The corporate logo
- Tag lines
- The company’s brand identification
- The image in the business community
- Distribution centers
- Intellectual property
- Patents
- Trademarks, and
- Other items that define the business
In a financially driven company, hard assets tend to be viewed as having greater value than soft assets.
The diminishing of soft assets value results in certain strategies taking place. These include:
1. Consolidate costs
Financially driven companies look for consolidating costs. They spend as little as possible to reach acceptable features, results and benefits for the company’s efforts. They don’t mind investing hard assets into soft assets, but they want to be careful in monitoring that investment. They must reach those acceptable levels to minimize risk and maximize profitability.
The auto industry is a classic example of consolidating costs. General Motors had nine lines in the United States, (Chevrolet, Pontiac, Oldsmobile/Aurora, Buick, Cadillac, GMC Truck, Hummer, Saab, and Saturn) and other than Hummer and Saab, each line has at least four models, yet all the makes and models were built on only a few “platforms” (underlying chassis, drive train, and suspension configurations). The bodies and features differ somewhat between brands, but the limited number of platforms for so many different cars and trucks is an example of cost consolidation.
2. Ride the Wave, Don’t Create the Wave
Financially driven companies ride the wave as long as possible. What is riding a wave? The company finds itself able to offer a product or service at a time when market conditions are so good that demand is greater than supply for as far as the eye can see. The company hits a business opportunity where market conditions are right. Riding a wave as long as possible is nothing more than continuing to squeeze a product or service until market demand has shrunk far below supply or capacity.
An example of this would be sporty vehicles in the automotive industry. General Motors stopped production of the Chevy Camaro and Pontiac Firebird in 2002. The Dodge Challenger and Plymouth Barracuda disappeared in 1974. The Challenger reappeared for a brief time in 1978 to 1983 as a Dodge version of the Japanese Mitsubishi Gallant Lambda GSR. The wave had diminished at various points in time resulting in each of the manufacturers abandoning the line.
Only Ford carried on with various versions of the Mustang. Finally, improving sales of the Mustang in 2008 and 2009 resulted in GM bringing back the Camaro. Chrysler followed suit soon after. The wave had gotten large enough to attract financially driven companies.
The benefits and liabilities of sporty muscle cars may be debatable. What is not debatable is that they have become a huge market; every automobile manufacturer is jumping into it. That is a wave. Financially driven companies want to get on the wave as soon as they see it is there.
Financially driven companies would never be the one initiating the wave; that would be too much risk. It is a rare event for a financially driven company to invest the research and development money to truly create a new wave. Rather, they prefer to let other companies create the wave, and jump on for the ride.
The desire to generate as much revenue as possible from a wave creates an interesting phenomenon in a product or service’s life cycle. Financially driven companies frequently continue to sell the wave beyond its true life cycle without preparing for what the market is next demanding.
A good example of this would be the demise of Wang Corporation in the computer industry in the 1980s. As office automation products became the domain of personal computers, Wang attempted to hold on to their mini computer office automation focus without diversifying their products and services to the new shape of the market. This approach resulted in the death of the company. It will be interesting to see how other financially driven company will do when the cycle comes around again, and supply far exceeds demand.
3. Differentiation Is Built Around Perception, Not Design
Financially driven companies look at differentiating their products and services as inexpensively as possible. Remember that cost is evil. Lets look at our sport utility vehicle (SUV) as an example. Ford motor company makes a large SUV called the Expedition. Their Lincoln brand division now has a large SUV. What does the Lincoln branded versions have that is different from the Expedition? Besides a higher price, it has a slightly different grill, it has a little extra badge and trim, an upgraded interior, different suspension settings, and more interior soundproofing. Is it differentiated from the other Ford product? Yes, but relatively inexpensively. It is a differentiation of perception rather than one of substance. Ford has recognized this challenge in the Lincoln line, and is working hard at creating greater differentiation in the brand. We shall see…
Let’s compare that to Toyota Corporation’s Lexus line. Does Lexus have an SUV? Yes, they do. Does Toyota have an SUV? Yes, they do, the Toyota Land Cruiser. Is there much differentiation in the Lexus? Yes. The Lexus has a different engine, different suspension system, different body shape and style, and different dimensions in the product and vehicle. There is a much greater differentiation between Toyota’s Land Cruiser and the Lexus SUV than between the Ford Expedition and the Lincoln SUV because Toyota’s philosophy of business is significantly different from Ford Motor Company.
4. Business Performance Is Evaluated Frequently
In a financially driven company business performance is evaluated very frequently. It is changed as necessary to help meet objectives. Monitoring performance quarterly in financially driven company is fairly common. Have you ever worked in a large corporation where you are part of a team that has a business objective you are going to fulfill that year, but find that three months later you are reporting to someone else in a lateral move? That is very typical in financially driven companies. Objectives weren’t met: the company restructures what is going on in order to contain costs.
5.Plan By Allocating Budgets From Profits
Financially driven companies build their future by allocating a percentage of the corporate profit to next year’s growth and risk budgets. In other words, they try to build incrementally on historical performance. The reasoning is fairly straightforward. When you plan you must project where the business is going to be. If you project where you are going to be, you must know how much it will cost. So how much do you spend? Financially driven companies look historically at what they have done, what it cost in the past, determine how much profit we have left after having paid incentives and dividends. When management knows how much is left, they can determine how much to allocate to next year’s budgets. Planning in a financially driven company tends to be determined by historical evidence.
These five strategies occur as a result of hard assets being valued above soft assets.
Part Ten coming soon...