Table of Contents
- 1 1. Successful businesses set stretch goals
- 2 2. You should use performance targets to set direction
- 3 3. You have to win the war for talent
- 4 4. Businesses need leaders not managers
- 5 5. No Rules Rules
- 6 Why it’s plausible
We develop theories to explain experience. Scientific theories that explain a lot are often taken to be universal but subsequently reveal themselves to be partial. Newtonian physics still explains a lot about the way nature behaves on earth, but Einstein revealed that it does not explain how things work in the universe.
If that is the case in science, it surely applies in the practical art of management. In science the key question is, “Is it true?” In management the key question is “Does it work?” Here, context is critical. Many of the ideas developed by management thinkers are helpful in a particular context. The problem comes when these ideas start being treated as if they were universal truths. It is then that they turn into myths, and myths can lead us astray.
Here are five of the most common ideas that tip into myth that I encounter most often in my work with clients, the reasons they are plausible, and how to keep them within their proper limits.
1. Successful businesses set stretch goals
In 1994 James Collins and Jerry Porras published Built to Last, a best-selling account of “the successful habits of visionary companies.” The authors claimed that one of the habits exhibited was setting “Big Hairy Audacious Goals.” In 2012, eight years later, Sean Covey and others suggested in another best-seller that what companies actually need is “WIGs,” or “Wildly Important Goals.” Funny acronyms and a dose of hyperbole ensured that these ideas caught on.
Why it’s plausible
Sometimes, visionary entrepreneurs see the possibility of fulfilling unmet customer needs in unprecedented ways. They set seemingly impossible goals, take huge risks and succeed. We don’t hear much about the many visionary entrepreneurs who fail.
Sometimes, visionary CEOs realize that their companies need to radically change their ways of working and set an apparently impossible goal in order to stimulate creativity. They challenge their organizations because they realize that the biggest risk to them is carrying on as before.
What is common to both groups is that they have a completely realistic grasp of the potential for innovation. Their situational awareness is acute, their vision is pragmatic, and the goal is carefully chosen.
How it can lead you astray
The problem comes when the goal has no logic behind it, the situation actually demands persevering with incremental improvements, and the organization does not have much stretch left in it.
In October 2019 my colleagues Jo Whitehead and Felix Barber, together with Julia Bistrova, published an article in the California Management Review called Why Giants Stumble. In it they revealed that over the previous decade no less than 20% of the 100 top U.S. and European corporations underperformed the market by 25% or more over a one to two-year period and lost their CEO as a result. In their words: “Rather than simply focus on being good stewards of solid businesses and creating value for shareholders by returning cash, each CEO chose to take high risks to increase the pace of growth. They developed ambitious plans that ended up destroying value.”
Take BG Group. Created in 1997 when the former state utility British Gas spun off its electricity and gas supply operations, BG rose to become an oil and gas exploration business to rival to the likes of BP and Shell, operating in 25 countries. In 2008 it set an annual growth target of 6–8% to be maintained into 2020.
Then it hit problems with some of its largest projects. Though growth slowed as it addressed these issues, it continued to commit to its growth target. From 2010 to 2012, its shareholder value creation underperformed the market by 26%. A new CEO came on board. Between 2012 and 2014 value creation underperformed the market by 34%. Another new CEO was appointed.
At that point, BG finally abandoned its growth target but by then the fall in the share price allowed others to swoop in, and in April 2015, BG accepted a takeover offer from Shell.
Pursuit of the original stretch goal helped the company to create a lot of value but also created over-stretch. The specific problems it encountered were not in themselves predictable, but it was entirely predictable that some things were likely to go wrong at some point between 2008 and 2020 in the highly risky business it was in. It was also clear that the more successful BG was and the bigger it got, the more risk the management had to accept to maintain the goal. The stretch goal turned calculated risk-taking into gambling.
In an uncertain environment, betting on one optimistic scenario is particularly perilous. It is wiser to follow the rule of minimizing maximum regrets. That means optimizing decisions for robustness so that you will do reasonably well in any plausible future and might even enjoy a boost if luck is on your side — but don’t bet on it.
Businesses need to be constantly aware of the fundamental assumptions underlying their success. Setting a seemingly impossible goal which makes them question those assumptions is one way of shaking them up, but it should not itself become a habit. What should become a habit is questioning assumptions.
Which brings us to the next half-truth.
2. You should use performance targets to set direction
In early 1992, Robert Kaplan and David Norton published an article in the Harvard Business Review called “The Balanced Scorecard” and followed it up in 1996 with a book of the same name, which became a best-seller. They advocated supplementing financial measures with ones covering customer, business process, and learning perspectives. The resulting “scorecard” was to function as “an integrated strategic-management system” in which every measure is “an element in a chain of cause and effect that communicates the meaning of a business unit’s strategy to an organization.” By 2000, almost half of major U.S. corporations and a quarter of European ones were reported to be using a balanced scorecard.
Why it’s plausible
In order to execute a strategy, you need to know what effects your actions are having and whether they are moving you in the right direction. This involves measuring a range of variables, not just financial results, to create the equivalent of the dashboard of a car.
The measures should constitute a decision-support system that enables managers to change their actions and adapt to the changing situation. Most of the metrics need to be monitored to provide information about what is happening. A few carefully chosen ones might be targets which define what you want to achieve.
But that does not mean you should turn the whole of the dashboard into a scorecard consisting solely of targets.
How it can lead you astray
If you let a scorecard of targets drive your strategy, you may end up mistaking your targets for your strategy. There is even a name for this trap: surrogation, a subject discussed in a useful HBR article by Michael Harris and Bill Tayler, who documented the perversities that can arise from scorecard-driven strategies.
The trap is compounded when you are trying to manage according to multiple targets. Imagine going on a car journey. To set targets of an arrival time of 5:30 p.m., an average speed of 45 mph, and a fuel consumption of 38 mpg is not the same as “get there on time, but don’t break the speed limit, and try to drive economically.” You can’t just look at what the numbers are telling you. To work out what to do, you need an active understanding of what is actually going on. If you are driving a car, the way to do that is not to stare at the instrument panel, but to look out of the window. If you are running a business, it’s not a bad idea to do the equivalent once in a while.
We need a wide range of measures to understand what is going on and what matters. Businesses will now have to measure environmental, social, and governance performance. They should use the information the measures provide wisely. But they should not mistake the measures for wisdom. Creating a strategy is about setting direction. A set of measures is a just control system that helps you to understand whether or not you are heading in the direction you set. Which is precisely why Kaplan and Norton also developed a different, more visual tool for actually setting strategy: the strategy map.
3. You have to win the war for talent
In 2001, several McKinsey partners published a book called The War for Talent, which built on a study the firm had conducted in 1997. Since then, various writers have explored a wide range of battles in that war, ranging from women’s talent to talent in China to digital talent.
The insight was that a company’s performance depends to a disproportionate extent on the performance of a minority of employees, the “talented” few who are highly intelligent, highly qualified, and highly driven. As companies prioritized hiring employees that fit that description, competition for them became a veritable war.
Why it’s plausible
There is indeed some evidence that every company has a few high performers who contribute disproportionately to its success. As a result, “talent development” is a common job in HR and most corporations have a “high potentials” program.
Given that the senior leadership of most companies will emerge from the pool of talented high performers — and that how they perform will have a big impact on the company’s fortunes — this makes some sense.
But it is not the whole story.
How it can lead you astray
The performance of the organization depends as much on the knowledge, judgement, and skills of the averagely talented many as it does on the very talented few. It also depends on the effectiveness of the organizational system in which they all work. So we need to beware of focusing on the talented few — and be very careful about what we mean by “talent.”
The nature of talent is a matter of some dispute, but there is a lot of evidence that competence is domain specific and involves practice. In his book Talent is Overrated, Geoff Colvin argues that the key variable is the cumulative amount of “deliberate practice” individuals perform in their domain. That seems to explain a lot about world class performers in very narrow domains like sport or music. But the broad domain of management contains a wide range of narrow domains, many of which we need in any one organization. We need nerdy programmers and inspiring leaders, but not many people are both. Most of us have come across inspiring leaders who would not recognize a strategy if it jumped up and bit them.
The underlying reason the high performing minority achieve so much is that most of the time they work through others. They come up with innovative ideas, they build great teams, they work for the organization as a whole. In so doing, they help to raise the performance of the average, which by definition, is what most of us are. And it is the performance of the average many, not the talented few, that is the true mark of a great organization.
Which means that what we really need is more effective leaders, right?
Yes — and no.
4. Businesses need leaders not managers
Throughout most of the 20th century the core of a manager’s job was described as “administration.” When Harvard University founded the Harvard Graduate School of Business Administration in 1908, its graduates emerged with a qualification called “Master of Business Administration” or MBA. In the early 1990s, having dropped the word “administration” from its title, the school still called its core qualification the MBA, but was no longer training managers how to run companies. Instead, it rather grandly declared that its purpose was “to educate leaders who make a difference in the world.”
Why the change?
In 1977, one of the School’s Professors, Abraham Zaleznik, published an article in HBR called “Managers and Leaders: Are They Different?” His answer was “yes” — in fact he claimed that managers and leaders are quite different types of people. The article won the McKinsey award, was reprinted as an HBR classic in 1992, and again in 2004. In 2001, while arguing that companies needed managers as well as leaders, John Kotter opined that most U.S. corporations were over-managed and under-led (“What Leaders Really Do”). The literature on leadership has become vast, and even Harvard Business School’s “management” programs are described as being for “leaders.”
Why it’s plausible
Even today, Zaleznik’s piece is heady stuff.
Managers, he claimed, “emphasize rationality and control,” adopt “impersonal if not passive attitudes towards goals,” and get people to accept solutions to problems by “balancing opposing views.” Leaders on the other hand “work from high risk positions,” are active towards goals, “shaping ideas instead of responding to them,” and thus “attract strong feelings of identity and difference or of love and hate.” In the 1992 retrospective commentary Zaleznik added that whilst managers seek order and control, leaders “tolerate chaos and lack of structure.”
The conclusion was that in a stable, predictable environment businesses need managers, but in an unpredictable world of constant change, they need leaders. Today, it seems, we can hardly get enough of them. Managers, on the other hand, may be chummy, but they are a bit boring and decidedly old-fashioned.
How it can lead you astray
As we have recognized that leadership matters, we have turned leadership into an obsession and leaders into celebrity-heroes. We attribute more and more of a company’s fortunes to its leaders, and in particular its CEO, and less and less to the organization itself.
And as the press adulates them, many CEOs come to believe their own myths, and their judgment falters. Some become egotists, driven by the desire for power. Notions of stewardship and humility, realism and responsibility fall by the wayside. Take a look, for example, at how Chris Bones in The Cult of the Leader — A Manifesto for More Authentic Business criticizes the ethos of what he calls the “L’Oréal generation,” whose narcissistic slogan “Because you’re worth it” is intensified by the belief that success is about winning a “war for talent.”
The fundamental problem is that leading and managing do not describe the activities of different people, but are different roles carried out by the same people. All executives have both to manage resources judiciously and to lead their people to motivate them. Some are better at one than the other, but every organization needs both. If highly motivated people are badly organized or do not have the tools for the job, they will get nowhere.
As Zaleznik was well aware — and we tend to forget — leadership can be a force for good or ill. We should therefore be careful how we inculcate it. And we should not denigrate management’s focus on order and control, particularly in a fast changing, uncertain environment.
Which brings me to the fifth myth.
5. No Rules Rules
We all hate bureaucracy. It wastes time, stifles creativity, and focuses people’s attention inwards instead of outwards towards the customer. Most entrepreneurs — very notably Netflix’s Reed Hastings — hate bureaucracy. Rather than rules, structure, and processes, they want to foster freedom, responsibility, and performance. Many corporations seek to follow their example.
Why it’s plausible
Many modern, fast-growing organizations are built around a set of shared values and principles such as “focus obsessively on customers,” “win and lose as a team,” “take some risks, and learn from failure,” “spend money as if it were yours.” They rely on their culture to create coherence rather than on process. As a result, people feel empowered and ideas are judged on their merit. Everyone works together towards shared vision. Structure is minimal, hierarchy is as flat as possible, and processes are whatever it takes to achieve outcomes. But it doesn’t end there.
How it can lead you astray
Meetings start to proliferate. They are devoted to getting “buy-in” from influential stakeholders or trying to clarify accountability structures, decision-making authorities, and conflicting priorities between teams. People spend more and more time navigating the internal complexity of the organization, which becomes highly political.
Start-ups hire great people — they are in the front line of the “war for talent” — and “great people” tend to be ambitious and competitive. When there are no clear rules, everyone makes up their own. Core values and operating principles are interpreted inconsistently, which leads to the emergence of subcultures heavily influenced by the personalities of the most influential individuals. It becomes harder to communicate consistently to newcomers, turf wars arise, and the organization becomes more complex to navigate, less stable and less predictable. When hierarchy is not explicit, it emerges on its own, based not on the needs of the organization, but on power.
Which is precisely what everyone was trying to avoid.
The real choice we have is not between having rules and having no rules, but between having good rules and bad ones. Good ones create internal predictability and simplicity that enables the group to deal with external uncertainty and complexity. It is just like music. Without the rules of harmony, rhythm, and tempo, music is just noise.
The purpose of structure is to distribute decision-rights in a rational way. A good structure reflects the hierarchy of the main tasks the organization has to carry out, and there is clear accountability for decision-making at each level. Good processes ensure that everyone know how the organization works, so that they can devote their energies to dealing with the chaos on the outside. To deal with the unpredictability of the world outside you need to create predictability on the inside.
If you set a stretch goal, make sure that the organization has some stretch in it, or it will break. If you treat performance indicators as your strategic goals, be very sure that what you are asking for is what you want, because it is what you will get — and nothing else. In developing an employee value proposition, think hard about what ‘talent’ means for you and do not forget that the real challenge is building an organization that enables average people to deliver an above-average performance. Develop good leaders, but do not neglect the skills of management, for no-one can perform if they do not have the right resources in the right place at the right time. Reduce bureaucracy to a minimum, but make sure you have enough structure to distribute decision rights in a rational way and enough process to enable people to know how the organization will work.
To be sure, ambitions, targets, talent, leadership, and culture are all important. But in each case, make sure that you’re using them rather than letting them use you.