In the last few days I’ve had a few great examples of why companies both big and small can’t see the competition coming, can’t innovate and frequently get bested by much smaller firms. The point was really driven home by a meeting I had recently with a company which shall remain nameless.
This company is loosely in the media industry. They have had declining revenue for ten years now. In fact revenue has been declining in double digits for that period. As you can imagine, after 10 years of double digit decline, there isn’t much left.
Meanwhile, new upstarts in the same area of the media industry have had double and even triple digit growth, have become the companies that everyone talks about and have been invested in by the world’s best venture capitalists.
So what is it that makes the difference? Two things. The older companies have been around for a while and are populated by people who fundamentally don’t like two things: change and ambiguity.
When a new form of competition enters the market, the first thing an established company has to do is to change. But if it has employees who don’t like change then without replacing all its employees, it is hard to create the type of change that is necessary.
The next problem is ambiguity. Even if people like to change, you have to like changing from a clear situation to one with a great deal of ambiguity. The challenging upstarts are exploring new ways of doing business, new business models, and new products. Creating these things is a highly ambiguous exercise. When you start out, you don’t know where you’re going to end up.
Many people who would embrace change are reluctant to embrace anything ambiguous. They want to know what’s at the end of the change process if they commit to it. They are reluctant to change to an ambiguous situation and with that, entropy sets in.
The lesson to me is that if you’re starting a company or are in one that is being pummelled by new upstarts, look for people who like change and ambiguity or you’ll end up running the equivalent of a buggy whip maker in the automotive age.
I was looking at a performance plan and bonus scheme for someone today and noticed a rather problematic hurdle. That’s one of those statements that says you get a $10,000 or whatever bonus if revenue exceeds $1 million. These weren’t the numbers but I blanched at the amounts as the bonus was large and the hurdle was high. It was so high, it was almost a cliff.
I’ve worked with people before, who when they realize they don’t have any chance of meeting their bonus, sandbag sales in order to shift them into the next year. The same thing happens with ceilings. In the old days IBM had a rule that no one could earn more that the President. That stopped more than one sales rep from selling late in the year.
The problem is, what do you do about performance hurdles and ceilings? I think ceilings are stupid. You can get burned one year without a ceiling but you can change the comp plan the next year so the expected revenue is more in line with reality.
But hurdles are another matter. How do you set a minimum standard without a hurdle. I don’t think there is any way to deal with them except through one of my favourite tools, trailing 12 month averaging. Paying every quarter or even monthly based on the last twelve months results doesn’t penalize or benefit anyone for sandbagging and you can adjust the hurdle rate to make it more realistic on a regular basis.
I know one company that pays bonuses based on weekly results. You can have an off week and it won’t affect the rest of your month. It also means that you can’t slack off for very long as you’re being measured all the time. They have hurdles and they work when measured weekly.
Complex to administer, maybe but it gets rid of quarter and year end stuffing which inevitably leads to operating issues and it keeps people on their toes all the time.
I think I lost the plot for the last three months and after one of the busiest periods of my life, am finally getting back to having time to think. This got me wondering about the definition of success. It is one of those concepts that plague people and society has developed an elevated level of anxiety about success.
Am I successful because I’m busy, because I’m making money? Because I’m happy? Don’t look at me for an answer as I frequently grapple with the same question. Particularly so as I walk through my own neighbourhood, past $5 million houses that seem to capture today’s definition of success. (The one that amuses me most is the house where the owner bought the house next door and tore it down so that he could have a slightly bigger garage.)
Someone who has grappled successfully with the concept is Alain de Botton. I thought for a treat today, you might enjoy his TED Talk on the subject.
I’m teaching a course at U of T in Continuing Studies in the fall called Connecting Strategy with Action. It’s all about driving superlative results through better strategy execution. The most remarkable outcome of students who take it is how they end up shifting their whole management focus from activities to results.
In the course we talk about employees three greatest needs:
- To know exactly what is expected of them.
- To know how they’re doing.
- To understand how they can improve.
I prepared this document as an outline of the course and thought I should share it here as well.
13 Steps to Better Strategy Execution
Daniel Levitin has written an interesting book called the Organized Mind. I saw him speak the other day about the book and was fascinated by the stories he told about highly accomplished people.
Not being one of those people, I listened closely to figure out what I could learn. What struck me most was the way he differentiated between creative thinking and rational decision making.
To Levitin, “Creative thinking means allowing the nonlinear to intrude on the linear and to exercise some control over the output.” It is a mystery though, how linkages are made between the linear and non-linear in order to make creative leaps.
“In contrast to creative thinking is rational decision making.” According to Levitin, “Human brains didn’t evolve to be very good at this…because we have a limited attentional capacity to deal with large amounts of information.”
So if a human brain has two critical functions: creativity and decision making, it turns out that we’re not much good at either of them. And if we don’t have the ability to to pay attention to detail, we’ll never get any better at the latter.
This leaves the human brain to excel at one thing, which is day dreaming, and that I suspect we are all very good at this.
I’m continually finding interesting entrepreneurship research (among many topics) and thought that it might be useful to share it from time to time. I share on Twitter but it probably just zings by quickly so here is some interesting stuff.
Failed Entrepreneurs Find More Success the Second Time.
My favourite entrepreneurship research of the week is about failure. I’m glad to see that failed entrepreneurs are much more likely to be successful on their second go round. This of course means that we’re willing and able to learn from past mistakes.
Culture More Important than Strategy and Execution
While I disagree with these findings of this research it is because it asks opinions of leaders and doesn’t do any empirical research into the subject of causal factors for success. In any case it is an interesting question to ask.
Accelerators and Incubators have become much more prevalent in recent years to assist startups. I was amazed to find that there were 464,819 entrepreneurs applying to 2,856 accelerator programs. I was flabbergasted to think that there were that many of each.
Tech Industry Not Good at Diversity
Finally to something that is disappointing and probably not a surprise. Research by Y Combinator has found that it funds startups with women on the founding team at a lower percentage than those startups’ application rates.
If you did a survey of drivers I think that you would find that 80% of them consider themselves to be of above average capability. I know I fall into that category yet I am guilty of speeding (most of the time), rolling stops (often) and running yellow lights (sometimes.)
In reality, I am probably a below average driver and yet because I don’t get caught, I figure I’m above average. After all I have a friend (Tom are you there?) who gets caught speeding half a dozen times a year. He is definately below average.
But what about execution?
I figure its the same thing with execution. Most managers out there probably think they are above average at execution. Well if this is true (statistically impossible) why does HBR think that execution is the biggest problem in business today?
I finally figured it out and of course it has to do with the way people are managed. If a company has a results-based management focus and good metrics then people can know with precision whether or not they are executing well.
However this isn’t the case with most companies. Most of them are activity-focussed, manage activities and use metics that track activities. If they don’t have a measured, causal relationship between activities and results then they’ll never know whether they are any good at execution.
And because there is no one explicitly in charge of execution (we all are) and thus no one measuring it, no one really ever has a way of finding out whether or not they are any good at executing.
Which brings up the dreaded annual appraisal. Is there anyone out there whose appraisal is any good at dealing in an objective manner with execution?
So there we have it: No one in charge, poor metrics, activity orientation instead of results, poor appraisals means no one really knows if they are any good at execution. (But I’m sure you’re all great drivers – except Tom of course.)
I’m back to talking about science and physics as a way to understand fixing business entropy. (See definition if you missed that blog. This may be boring or confusing but if you read it, I promise it will be good for you.)
If you look at entropy in physical or scientific terms it is pretty easy to see how to fix it. Don’t forget that entropy results in a closed system through the equalization of energy among all elements of that system.
So to fix entropy in a physical system you need to add new energy from the outside.
Fixing Business Entropy
Same in business. Fixing business entropy means applying an outside force to find out why chaos is occurring and develop solutions for that chaos.
It can’t be done from the inside due to the nature of entropy. For a person within the business to address chaos, it would mean doing a regular job managing the chaos and adding extra time to deal with the resolution of it.
The extra effort rarely exists and rarely works because all other employees in the business will resist any application of force that would cause them to exert more than the minimal amount of effort required.
That’s where consultants come in. A consultant is an external force that can look objectively at why chaos is occurring, recommend solutions and drive implementation.
Then the consultant can go away and the business is left to slowly devolve into entropy all over again. Entropy is inevitable and that’s why consultants are inevitable. They are the outside force needed for fixing business entropy.
(And I hope that consultants everywhere can use business entropy as a justification for their existence.)
I’ve worked over the years in a variety of environments that were totally chaotic and always wondered why employees didn’t do something about it. Why do people put up with chaos when they could be fixing systems to make them more orderly?
Well thanks to a comment from Oksana Fedan I finally understand what causes the acceptance of chaos and it is Business Entropy. Now I am not much of a physicist and I’ll have to resort to physics to explain this so hold on.
Entropy is a “measure of disorder or randomness in a closed system.” The concept originated in thermodynamics but has been applied to all sorts of fields. In physical terms, energy flows from a hotter region to a colder one until they all become equally distributed and less able to utilize that heat.
Business entropy occurs in bureaucratic organizations when people begin only to see their own jobs and not interactions with others. Employees do only what is expected of them and cease trying to organize the work in a manner that best suits the entire organization.
It takes extra effort to bring order out of chaos and when things get chaotic, organizations just find it easier to adjust to the chaos than to fix it. It takes less energy to do this (and less cost).
Unfortunately, Business Entropy is almost inevitable as an organization grows, becomes more process oriented, jobs become more specialized and bureaucracy emerges.
Bureaucracy begets more bureaucracy and as employees become more process oriented they tend to defend their processes against intrusion from outsiders and change that would benefit the organization as a whole.
It takes a shift in business thinking from a process orientation to an orientation around results to counter Business Entropy and for most companies, that’s just too much of a switch.
I was working away on a new business plan with Paul Engels of Veloxsites fame when out of the blue he said something like: “Stop the presses, we have to do this differently.” Being an inquisitive type and not understanding what on earth he was talking about, I asked him what’s up.
Well Paul had gotten fed up (and rightly so) with the quantity of words in the document. Being someone who as you might imagine, has a love affair with words, I was very disappointed as I actually wanted to add more words.
The way I figure it, no one reads business plans anyway so adding more words just makes the plan seem all the more righteous. But no, this wasn’t what Paul was talking about.
What he wanted was to add more pictures. Yes, replace words with cute little pictures and diagrams that make it so that people who don’t like to read things can get some value out of a document.
That’s when he said something that rocked my world. He gave me a new way to think about communication. What he said was:
Having a picture gives the reader permission to skip reading in detail.
And this is true. When there are pictures in a document, most readers gravitate directly to the pictures and skip the rest. Genius. What it means for you, is that if you want to communicate better, draw some pictures.