Beyond Performance Management

Why, When, and How to Use 40 Tools and Best Practices for Superior Business Performance

Jeremy Hope, Steve Player

• Publisher: Harvard Business Review Press
• Year: 2012
• ISBN:
  9781422142264
• Topic: Business
• Subtopic: Management
• Index: Business

There’s a bewildering array of management tools out there. And they all promise to help you excel at the toughest parts of your job: defining your organization’s strategic direction, managing customers and costs, and boosting workforce performance.But just 30 percent of these tools deliver as intended. Why? As Jeremy Hope and Steve Player reveal in Beyond Performance Management, while many tools are sound in theory, they’re misused by most organizations. For example, executives buy and implement a tool without first asking, "What problem are we trying to solve?” And they use tools to command and control frontline teams, not empower them—a serious and costly mistake.In this eminently useful, clear-eyed book, the authors critically review dozens of well-known management tools—from mission statements, balanced scorecards, and rolling forecasts to key performance indicators, Six Sigma, and performance appraisals. They explain how to select the right tools for your organization, how to implement them correctly, and how to extract maximum value from each.Brimming with rigorous analysis and solid advice, Beyond Performance Management helps you swiftly gauge the value of each management tool, as well as navigate the increasingly crowded field of offerings—so the tools you select deliver fully on their promise.

Part I

Strategic Planning

1

MISSION STATEMENTS

What is this practice and how effective is it?

Mission statements have become popular in recent years as managers look to build a high-performance culture. The trouble is that most focus on lofty goals and meaningless words rather than inspiring people with a compelling “reason for being” and core values that build their emotional commitment. Consequently, despite the time and effort involved, people end up ignoring most of them. We will look at how the best organizations deal with these problems and inspire their people.

Alternative names and related topics: corporate governance; business ethics; emotional commitment

How an organization defines its purpose and defines and articulates its goals influences how its people think, behave, and act in any given situation. Many organizations have focused their purpose and goals on making money or maximizing shareholder value rather than building great businesses and satisfying stakeholders, including employees, customers, and the wider community. The shareholder value model is rooted in traditional economic thinking. The model assumes that individuals are self-interested, rational decision makers driven by economic goals, and that economic relationships—with employees, suppliers, customers, and external partners—are governed by binding contracts. In the industrial age, most people didn’t need to understand their company’s purpose; they simply did what was specified on their job descriptions and what their bosses told them to do.

In this model, the senior executive officers are agents of the owners, who act as stewards for the owners’ capital and are hired and paid to invest it wisely and grow its value over successive years. If they succeed, they are well rewarded, but if they fail, their jobs are on the line. Most large corporations have mission statements filled with words such as “shareholder value,” “customer service,” and “product quality.” And of course every chairman’s report pays homage to the firm’s employees, who are usually “the company’s greatest assets.” But despite pandering to other stakeholders, most executive teams know that it is increasing shareholder value that will keep them in their jobs.

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Businesses and great relationships

“Businesses that are most profitable and are able to sustain profits in the long run are actually those that build great relationships with customers, employees and suppliers. On the other hand, businesses that are most profit-oriented, like Enron, Bear Stearns and Lehman Brothers, are not in the long run profitable because they are pulled apart by the greed of their own employees.”—John Kay, business economist

Source: Vivek Kaul, “Profit Can’t Be Primary Goal of Business,” DNA India, June 19, 2010, www.dnaindia.com/opinion/interview_profit-can-t-be-primary-goal-of-business_1398327.

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But is the explicit pursuit of shareholder value the best way to actually achieve it? Not according to British economist John Kay. He believes that great organizations are not exclusively profit oriented.

Take the case of ICI, Britain’s leading industrial company for most of the twentieth century. Its original purpose was about the responsible application of chemistry to business. The company began in dyes and explosives and then moved into new chemical businesses like fertilizers, petrochemicals, and finally into pharmaceuticals, all in the pursuit of applying chemistry to business in different ways as the needs of the wider economy changed. But in the 1990s, the company very explicitly abandoned that kind of goal in favor of shareholder value. Leaders disposed of many of their traditional businesses and bought a range of new ones, and paid too much for the businesses they bought. The company declined rapidly and disappeared altogether in 2007 (the business was sold to the Dutch company, Akzo Nobel). So not only did the responsible application of chemistry create a better business than did the attempts at increasing value; it also created more shareholder value. “So it’s a process of adapting, a very loose general idea, to changing particular circumstances over time,” noted Kay.¹

When Citicorp merged with Travelers in 1999 to create the sprawling bank conglomerate Citigroup, the joint CEOs held a press conference. John Reed, Citicorp’s CEO, declared, “The model I have is of a global consumer company that really helps the middle class with something they haven’t been served well by historically. That’s my vision. That’s my dream.” His joint-CEO, Travelers’ Sandy Weill, rapidly interjected, “My goal is increasing shareholder value.” Reed and his old-fashioned, oblique way of running a business was sidelined. Just a few years later, Citi was in trouble and Weill was forced out; within a decade, Citigroup was forced into the arms of the U.S. government.²

What these stories tell us is that by pandering to rapacious shareholders, firms are not just trying to come up with the results too quickly. They’re actually pursuing the wrong goal. It’s not just about numbers and targets and synergies. It’s about great products, happy customers, and loyal staff. As Kay says, no one will be buried with the epitaph, “He maximized shareholder value.”³

But in recent years, the assumptions underpinning this model have started to unravel. Other stakeholders have started to flex their muscles. For example, in knowledge-based organizations—that is, just about every company other than some traditional manufacturers—employees are claiming that their interests should come before shareholders. They say they have more at risk; it is harder and more expensive to change jobs than to move capital around. Customers also want more influence as they demand more choice, lower prices, and better service; otherwise, they will take their business elsewhere. And local communities demand that corporations consider their interests and protect local jobs and the environment.

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Shareholder value

In a recent interview, legendary leader and former CEO of General Electric, Jack Welch, stated, “Shareholder value is the dumbest idea in the world.” He added, “Shareholder value is a result, not a strategy . . . Your main constituencies are your employees, your customers and your products.”^a

^a Michael Skapinker, “Replacing the ‘Dumbest Idea in the World,’” Financial Times, April 10, 2010, www.ft.com/cms/s/0/98e020d0-4664-11df-9713-00144feab49a.html.

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Paul Polman, chief executive of Unilever, has added his voice to the growing number of business leaders who argue that shareholder value is a misguided and potentially harmful goal for companies to pursue. He said shareholders had benefited as a result of his concentration on customers: “I drive this business model by focusing on the consumer and customer in a responsible way . . . and I know that shareholder value can come.”⁴

We are also living through a sea change in how society and governments view commercial organizations and the values they espouse. Over the past ten years, bad news from the corporate sector has dominated the headlines as organizations such as Enron, WorldCom, Tyco, HealthSouth, Adelphia, Global Crossing, Xerox, Lehman Brothers, Fannie Mae, Citigroup, AIG, Royal Bank of Scotland, and HBOS have all become notorious for the wrong reasons. Greed, corruption, and fraud, often at the highest levels—and all in the pursuit of short-term shareholder value—have ensured their places in the governance hall of shame. You can be sure that all these organizations had carefully crafted mission statements with all the right words on them. But their actions spoke louder than their words.

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A noble purpose at Whole Foods

The CEO of organic foods retailer Whole Foods, John Mackey, is a devout believer in each business having a noble purpose. “It’s not that there’s anything wrong with making money,” notes Mackey. “It’s one of the important things that business contributes to society. But it’s not the sole reason that businesses exist. Just like every other profession, business serves society. They produce goods and services that make people’s lives better. Doctors heal the sick. Teachers educate people. Architects design buildings. Lawyers promote justice. Whole Foods puts food on people’s tables and we improve people’s health. And we provide jobs. And we provide capital through profits that spur improvements in the world. And we’re good citizens in our communities, and we take our citizenship very seriously at Whole Foods.”^a

^a John Mackey, “Creating the High Trust Organization,” Whole Foods Market CEO Blog, March 9, 2010, http://www2.wholefoodsmarket.com/blogs/jmackey/2010/03/09/creating-the-high-trust-organization.

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Clearly, defining an organization’s purpose in terms above and beyond shareholder value really matters in the long run. Only if employees have a crystal-clear understanding of business purpose, boundaries, goals, ethics, values, and performance standards will they be able to make decisions with speed, confidence, and consistency. But such clarity rarely exists in organizations today. All too often mission and values statements are too bland to convey deep meaning. Employees end up ignoring them.

A noble purpose and clear, inviolate values have never been more important. We have witnessed many examples of senior executives abusing fair values and acting in their own self-interests. The message this sends to employees is disturbing. Why should employees act in the interests of the organization when senior executives do not? This leads to a slippery slope toward unethical behavior and, ultimately, fraudulent action. We need more leaders like Herb Kelleher, former CEO of Southwest Airlines, who once said: “The more people will devote themselves to your cause on a voluntary basis, a willing basis, the fewer hierarchs and control mechanisms you need. We’re not looking for blind obedience. We’re looking for people who on their own initiative want to be doing what they’re doing because they consider it to be a worthy objective.”⁵

What is the performance potential of this practice?

• To recruit the “right” people. There is little doubt that establishing a clear purpose and a set of inviolate values is a critical step in recruiting the right people, who naturally fit with your culture and values.⁶
• To build a high-performance culture. You want people to believe in the organization’s purpose and values and work together as a team. With a clear social purpose, employees have a reason for coming to work every day that transcends shareholder value. This purpose helps to build a high-performance culture that encourages ambition, creativity, and sharing.
• To provide a framework for coherent decision making across the company. In a fast-changing world, organizations increasingly depend on the passion and creativity of their employees to provide innovative products and high-quality service. These can no longer be mandated from the corporate center. Clear and inviolate values set the boundaries for innovation, decision making, and management behavior.
• To build emotional commitment. Most people go to work each day to earn their monthly paycheck. If you want people to volunteer their passion and creativity, you need to inspire them with a purpose above and beyond profit. To witness the power of a clear purpose and how it can inspire and motivate people to raise their game, you only have to look at the nonprofit or voluntary sector. Major charities attract and retain very talented people, who work incredibly hard for modest rewards.

What actions do you need to take to maximize the potential of ...

Table of contents

• Cover
• Title Page
• Copyright
• Preface
• Introduction
• Part I: Strategic Planning
• Part II: Shareholder and Customer Value
• Part III: Lean Cost Management
• Part IV: Performance Measurement
• Part V: Performance Evaluation
• Notes
• Acknowledgments
• About the Authors