Model Management

Model Management: No end of books can provide theories on model management but you need to follow up with action

The current spate of management books is timely at a moment when world financial and economic conditions have abruptly become far more testing. The literary spate is presumably based on a profound belief that managers actually read the books and learn from them - a view which the two multi-book authors of Thinking Managers naturally hold to be true. Very likely, the appetite for management literature has increased with the supply and the need. But the more important question lies with the use: do managers actually translate what they read into action?

The full value of any management teaching is only realised by action back at the workplace. As always in management, there's a yawning gap between precept and practice. Thus, the instant reaction to global turmoil (a new spate of downsizing, led by once-stellar growth companies like Gillette), is hardly what the gurus have been preaching. Nor is it ideally how a professional manager demonstrates his or her professionalism. Professionals raise their standards of knowledge and know-how and apply those enhanced capabilities to sustain growth strategies in all weathers.

That was the philosophy of the justly legendary Forrest Mars. He created a confectionery and food empire that has long been one of the wonders of the management world - and Mars learnt all the time. As a Yale student, he read every book he could find on Du Pont, on Rockefeller, on Ford. But his reading was very highly directed: 'it wasn't the entrepreneurial ambitions of these men that impressed him; it was the nuts-and-bolts business principles each employed - their accounting practices, their manufacturing techniques, their internal organisation'.

WAR STORIES
The quotations come from The Chocolate Wars, in which Joel G. Brenner explores the secret worlds of Mars and Hershey (two firms whose business paths have often crossed). Secretive is a better word than secret: Forrest Mars, whose company remains wholly private and family-controlled, had an obsession with concealment so complete that turnover figures are a matter of guesswork even today. Fortunately for his education, other business leaders (emulating the three mentioned above) are more forthcoming. The business book spate includes a rising number of biographies and autobiographies.

These 'war stories' are heavily outnumbered by works from two other groups, the academics and the consultants. The lines between the two are blurred, since many academics (notably Michael E. Porter, the reigning expert on competitive strategy) make sometimes enormous livings from consultancy. The academics do not advertise their double lives, however; the consultants unashamedly push their wares - sometimes with huge success, like Michael Hammer and James Champy, with their wondrous promotion of the short-lived boom in 'business process reengineering'.

This doesn't exhaust the classifications of writers: for instance, there's the retired manager (a rare specimen) who theorises about his experience and observations, like Arie de Geus. This former Royal Dutch-Shell executive has been praised in Thinking Managers for his essays at explaining why some companies survive and others perish.

Test his formula on your own organisation:

1. Is it sensitive to the environment - can the company learn and adapt?
2. Is it cohesive, with a clear individual identity - can the company build a community and a persona for itself?
3. Is it tolerant and decentralised - can the company build constructive relationships with other entities, within and outside itself?
4. Is it conservatively financed - can the company govern its own growth and evolution effectively?

Unlike de Geus, few of the war stories go into enough detail about their management ideas and practices to provide textbook answers to these questions. Reading Lee Iacocca on Iacocca tells you surprisingly little about how he turned round Chrysler. Andrew Grove (Only the Paranoid Survive) is better value as an introduction and guide to the revolutionary management that's essential in Silicon Valley and which is spreading, of necessity, to formerly more sedate industries. But Inside Intel, by Tim Jackson, tells you more about Grove's management methods.

Jackson is one of the journalists who form another group of business writers: again, the lines are blurred, because, while journalists often write general management books, they also write some of the war stories - with or without the combatants' aid. The Chocolate Wars was written in spite of the immense difficulties which the Mars organisation places in the path of any enquiring outsider. Whether written by the heroes or journalistic authors, war stories always provide food for thought, and sometimes inspire. But the practical value usually has to be mined, a la Forrest Mars.

ACADEMIC EXPERTS
The success stories of entrepreneurs, though, are generally less valuable than management advice from people they tend to despise: the academic experts. Not so Mars. He borrowed his planning system from a company, Du Pont, but from the 1930s onwards he 'patterned his management structure' after T. G. Rose's Higher Control in Management. This British book, which is not among the much-thumbed classics of the literature, 'emphasizes flat, simple organisation', and was thus well ahead of its time. Flatness and simplicity are the watchwords of the present day - in theory.

In practice, complex hierarchical matrix managements survive - making life much harder for those inside the pyramid (and often for the customers and suppliers outside). Much of today's literature (like Thinking Managers) is devoted to demolishing hierarchy and its attendant hang-ups. To judge by the literature, this is a truly demanding task. For instance, do you know how to...

1. Unleash the full potential of teams and individual leaders?
2. Put your whole company's brain to work?
3. Maximise internal growth and profitability?
4. Turn the ten keys to successful change management?
5. Manage and sustain radical change?
6. Create the self-adapting, self-renewing, instant-action enterprise?

These six questions are drawn from a small proportion of the books and articles seeking to turn corporations towards the new frontiers. If your answers are negative, you're in good company. Nobody performs all these wonders, because they seldom align well with the practicalities of organisational life. The name of the game is to change behaviour by direct methods. Inspired by Rose and his own experience and instincts, Forrest Mars followed half-a-dozen simple, practical precepts. These questions are much easier to answer positively. Do you...

1. Give people a sense of ownership in the final product?
2. Reward employees for their performance?
3. Encourage people to makes decisions for themselves?
4. Focus on quality, quality, quality?
5. Eradicate bureaucracy wherever it rears its head?
6. Say what you mean, and do what you say?

Without the sixth Yes, the other five won't work. To defeat bureaucracy and status, you must be deeply determined. For instance, the Mars management system makes people (or 'associates' - a title later adopted by Sam Walton of WalMart fame) work side by side, without separate offices or personal secretaries: forbids memos and elaborate presentations and holds meetings only 'as needed': and keeps head office numbers at McLean, Virginia, to tiny numbers - a mere 51 people.

These are the characteristics of a small company, not a multinational mammoth. By no coincidence, Rose's book also underpinned the Mars financial model with 'an unconventional and rather obscure accounting system' designed for small businesses. As Rose noted, the usual benchmarks - numbers such as return on sales, earnings per share and monthly or quarterly profit - notoriously fail to provide an accurate picture of performance.

The Harvard Business Review has recently published no less than eight pieces on measuring corporate performance - three of them on the 'balanced scorecard' alone, written by Robert Kaplan and David Norton. Their technique has much to commend it, above all the emphasis on non-financial measures. But it can result in great complexity: a bank given as one example by Norton needed 12 lagging indicicators and eight leading ones to complete its 'strategic measurements'.

PROLIFERATING MEASURES
This proliferation of measures, some of them complex, denotes a large company tool, one for which Rose (and Mars) would have found no room. It's generally believed that small businesses and large live on a different planet. But I have never found a principle or practice that works with true effectiveness in small firms that doesn't apply to large - and vice versa. The Mars experience confirms this truth. At $19 billion of sales (or whatever the real number is), Mars operates on the same basic accounting target as in Forrest's small beginnings in Slough, near London: ROTA.

That stands for Return on Total Assets. Mars, following Rose, reasoned that his own money was being spent on machines, factories, offfices, etc. and that he should get an adequate return on its use. So far, so obvious. But Rose's twist on that concept is to insist that the assets be valued, not on what they originally cost, but on their replacement cost. Mars not only raises the base for calculating ROTA in this way (sometimes very steeply), but sets an enormously high target - 18% before tax.

The candy king was ahead of his time here, too: this target guarantees a high Economic Value Added, that being the difference between the cost of capital (including equity) and the profits earned on that capital. EVA is more fashionable than the balanced scorecard, being much simpler in concept and easier to apply. While it underlies the supreme performance of Coca-Cola (24% net on total assets), EVA is not published in any company report of which I know - no doubt because this truly vital statistic is often embarrassingly small, if not negative.

The Mars numbers are vastly above the typical performance of many great American companies - even before the slowdown induced by world financial crisis. The mighty General Electric earns a tiny 2.7% after tax on assets valued at historic cost. No doubt the company much prefers to quote return on shareholders' equity, which eliminates all debt from the baseline - and thus greatly exaggerates the corporate profitability (GE's score on this meaningless measure is 24%).

A good financial target, like all good measures, drives management in desired and desirable directions. ROTA and EVA both have this effect. EVA targets compel managers to reduce the amount of capital they employ while raising the efficiency of its employment. The flip side is that under EVA managers have a vested interested in minimising investment. ROTA has the opposite effect. As Brenner writes: 'Valuing machinery at its current cost gives Mars managers a tremendous incentive to continually replace old equipment with state-of-the-art'.

EXCEPTIONAL REWARDS
That has a sharp impact on productivity and on the ability (see above) to pay exceptional rewards. Pay starts at very high levels. Not for Mars those big company exercises that involve careful positioning in the 'top quartile' of industry pay. Forrest Mars was happy for his managers to earn three to four times going rates. For all employees, soaring profts can push bonus payments up to 15 weeks salary, balanced by a downside if profits fall.

That apparently rash policy is based on an elementary calculation: that high pay is cheap if it results in sufficiently higher performance. All too often, Western firms faced by Asian competition have declared themselves unable to compete with lower wage costs, without investigating the size of wages in the final cost to the customer, or the productivity achieved by the Eastern rivals. The advantage frequently lies, not in lower wages, but much higher efficiencies.

Forrest could readily see the force of the simple sums involved. He was devoted to 'the principles of economics, mathematics and science', according to one consultant. This study made him a business economist as well as a top-class entrepreneur; in fact, entrepreneurship is a branch of business economics. It involves creating an organisation that will deliver, at an economic cost, goods and/or services for which customers will happily pay economic prices. Failing to make, or cutting back on, state-of-the-art investment inevitably weakens the economic foundations of the business.

Understanding this proposition to the full, Mars aimed to have the most efficient plants in every business he entered, from chocolate bars and candy to petfood and Uncle Ben's rice. He could easily afford his generosity on wages by getting greater sales per employee than his rivals, and earning higher profits on those sales - even though sales margins are held to 3%. Anything more, in the Mars philosophy, gives the customer a poor deal. The principle is yet another enshrined in modern management theory: that perceived value for money is the key to customer retention and attraction.

At Mars, the limitation on margins and its effect on pricing make the targets for sales still more stretching. The critical number is another idiosyncratic measure. GSV, or gross sales volume, divides total sales revenue by total population. The Mars family, intent on doubling the business in real terms every seven years, wants to get GSV in the US ($15 per capita) up to British levels ($40), passing Europe, Switzerland and Austria on the way up. That means growing after inflation by 10% per annum, which will be another of the many tests that the Mars formula has passed.

It is inherently ultra-sound. This is where reading and learning come in. Every business person needs the equivalent of the T. G. Rogers doctrines: a set of logical principles which make sense to the individual executive and serve his or her ends. The principles should also be simple, so that everybody in the organisation can understand and apply them. The great entrepreneur, like the superb manager, sets about the act of business creation with two important weapons in hand: the means to tailor policies and practices to the chosen purposes, and willingness to experiment.

That tailoring is crucial. To be fair to the balanced scorecard, its basic principle is that strategic measurements should be linked to strategic objectives. For example, do you want to increase customer satisfaction with your products and people? Norton's bank looked at two indicators here: share of segment (lagging) and depth of relationship (leading). The pair weren't enough: to go further and meet the second objective of increasing after-sale satisfaction, the bank needed to measure customer retention (lagging) and to run a satisfaction survey (leading).

WHAT ACTION WILL YOU TAKE?
But the same question that applies to reading must be asked. What action will you take? What happens if customer retention begins to fall? Or if the satisfaction survey fails to show a large enough proportion of customers who rate your products and service 'excellent' - as opposed to merely 'very good' or 'good'?At Mars, for instance, absenteeism is one of the indicators that are watched very closely: but action is automatic - bonus payments are made for on-time attendance.

In many ways, then, Mars passes the Arie de Gues survive-and-prosper tests given above. The ability to learn and adapt, shown by its leader, has become part of a very real community persona. It is not tolerant of error, but is decentralised and obviously has formed constructive internal and external relationships - though with more friction than de Gues would approve. And ROTA is the epitome of conservative finance. But Forrest Mars brought a vital extra ingredient to this feast - the compelling urge to turn knowledge, know-how and analysis into highly focused and effective action. That's the great entrepreneur's own greatest lesson - and it's one that anybody can turn into practice.