Management Primer

Most of what we call management consists of making it difficult for people to get their work done. 
-- Peter F. Drucker

The purpose of any company is to create and satisfy a customer. A successful company improves the customer's life using less resources than anybody else, and thus creates wealth. The purpose of management is to organize and run a company so it successfully does this.

Profit is the measure of success in doing this and is neccesary to compensate the risks that enterprise brings. It is so central for the success of companies, that it is often mistaken to be their purpose.

So companies exist to 1.generate profit for their owners by 2. organizing people and capital to 3. satisfy the needs of customers better than the competition. Some people also claim that, since companies are part of society, they have to give back to society. I believe that all companies do this best by being profitable, creating wealth and paying taxes.

Management has many facets, from adapting your company to the needs of customers and innovating, to hiring and leading your employees. From planning ahead and being prepared, to continual improvement of your people, processes and products. In the end it is all about resource allocation: where to put work and money, and where not, balancing the needs of the short term and the long term.

Strangely enough, it is rare that a successful manager writes a book about how to do it. There are many more books by people who share wisdom they never had to employ in the real world. I assume this is because a) real managers do not have the time to write management books, at least not before their retirement, and b) so much depends on your individual situation, that no recipe will save you from thinking to see you through your troubles. This includes the ones listed here. You always have to think about what is best in your specific situation.

In this, as in any other endeavor that deals with people it is fruitful to try and look at things from the outside, the perspective of others, to understand them. Only then can you give them what they want, and that usually helps you to get what you want. The first sections, up to and including entrepreneurship, will explore this relationship to the outside of the company.

The organization, to endure, needs to transform the goals of the company into effective work. To be effective, everybody in the company needs to do the right things. This in turn means: First, you must know what the right things are. For this you need values and goals. Second, you need good people, who are willing to contribute. Here you need to hire the right people, and give them chance to grow and make their ideas matter. Third, you must make sure everyone understands what the goals are and what is expected from him. This whole approach is called management by objectives. The second set of sections talks about the inside of the company.

The world is ever changing, and therefore, to be able to compete tomorrow, you have to continuously challenge your assumptions and grow your people. You must face the truth, so you will need to collect information, about the market and your financial results, about your internal performance, and act on it. The next sections, about information and organization discuss those topics which span the organizational border.

The last sections talk about daily practices and principles that you can employ to become individually more effective in work.

The Market

The golden rule

The golden rule applies to management just as it applies to life in general. Do unto others as you want them to do unto you. Stay honest, keep your promises. If you want that your employees trust you, you must be worthy of their trust and trust them. The same goes for your business partners. You can still be careful.

The golden rule is really in your best interest. Lasting business relationships built on mutual trust are the most profitable kind. Think of a counterfeit watch peddler. A tourist has no reason to believe the merchant gains by being honest. He knows that the merchant is not looking at repeat business. Thus, the tourist is less willing to buy. He will only buy at much lower prices, that factor in the near certainty of fraud.

You need your customers' trust to gain fair compensation for what you offer. Every unhappy customer will talk to other people about his experience, probably many of them prospective customers that you will lose, too. Honesty and integrity pay. Joe Girard, the world's most successful car salesman, asked people how many people on average were invited to funerals, and found that there were about two hundred. So he figured, by how he treated his one customer, really affected two hundred prospective customers.

Entrepreneurship

The greatest danger for the new venture is to "know better" then the customer what the product or service is or should be, how it should be bought, and what it should be used for. Above all, the new venture needs willingness to see the unexpected success as an opportunity rather than as an affront to its expertise. And it needs to accept that elementary axiom of marketing: Businesses are not paid to reform customers. They are paid to satisfy customers. -- Peter F. Drucker

According to Drucker, more often than not new ventures succeed in a market and with products not quite those with which they had set out, because their original products were bought by customers they had not even thought of, for uses which they had not thought of either. Only by organizing itself to take advantage of these unexpected insights and unforeseen markets can it avoid giving away the opportunity to competitors.

Drucker lists five common bad habits for failing to see opportunities and making a new venture vulnerable to competitors:

• First, pride. The new venture does not want to change its product. It believes in the product, even if the market tells otherwise -- after all it was the reason for starting the venture. When there is such an emotional attachment, often enough failure is preferred to change, and the world is blamed for not being ready. Ideas are rejected because they were "Not Invented Here", and that is just hubris.
• Second, "creaming". This is a focus on only the high-profit part of the market. This must inevitably lead to loss of market, as soon as a competitor arrives on the scene who is willing to service also the rest. Then this competitor has additional revenue, which gives him strength to also attack in the high-profit part.
• Third, belief in "quality". Quality in a product or a service it not something that the supplier puts in. It is what the customer gets out and is willing to pay for. A product is not quality, because it is hard to make and costs a lot of money, as manufacturers typically believe. That is incompetence. Quality is the use and value that the customers get out of the product, and nothing else.
• Fourth, "premium prices", closely related to "creaming" and "quality", which a customer is assumed to be happy to pay for premium product, and are thought to generate higher profits. Premium prices are always an invitation to competitors.
• Fifth, the desire to satisfy every single user with the same product.

When new ventures are successful and grow, new risks arise. The roles of the original founders change: a large company needs different skills and strengths for managing, than a small one. The founders have to be able to accept that, or my stunt the growth of their own business. They have to ask themselves what their strengths are, what the unique contribution is that they can provide, and focus on this, recruiting help for other areas.

Many new ventures state growth as their goal. Growth without profit is just stupidity. All it achieves is destroying money faster. Profit must be the first goal, only then will growth do good.

Innovation

How to come up with great ideas for products or services? Drucker says innovating is not so much about creativity. It is about curiosity. Curiosity for people, their problems and frustrations. It is about about exact observation. In many cases, preconceived opinion about what is important and needed stops people from innovating. The only cure for this disease of know-it-all is keeping your eyes open, and observing what people do, especially if what they do is surprising to you.

A prime source for innovation are therefore unexpected successes or failures, your own and those of your competitors. Incongruities in the process, whether production or distribution, and incongruities in customer behavior. Other sources may be new tools and knowledge, and changes in the world, the markets and population structures. Keep your eyes open.

Innovation has to be simple to be effective. Don't try to be clever and create something that is complex to use. Normal people will have to use your product, and, if you aim for any kind of size and importance, near-morons, too. Keep it simple, stupid.

Innovation has to be focused to be effective. Don't try to do too many things at once, or it will be unclear what it is about, also to customers.

Start small, so that adjustments and improvements can be made, and wrong decisions are not locked in on a grand scale. Innovation always aims at leadership in a specific market, even a specialized niche market.

Don't try to innovate for the future, innovate for the present. It is hard enough to create the right product that people want to use now. Thinking you can create something useful for a future that nobody knows is just delusional. At best, create something that has application now, but you hope will have long-ranging impact. This will also help to survive by selling it, until the future comes. Innovations that are explicitly created for the future will in most cases stay nothing but "brilliant ideas".

Pricing, distribution, branding, and service, offer opportunity for innovation, just as much as the product, it's technology and features. The user does not buy the product, he buys the use he gets out of it, and by pricing accordingly, you can make the product attractive. A classic example are mobile phones, where you get the phone basically free, but pay the price by more expensive rates for talking. This works because people are not buying the phone, they buy the ability to talk.

Competition

Death is nothing, but to live defeated and inglorious is to die daily. --Napoleon
Value is defined by the customer. The customer decides that your services or goods are of value to him, and gives you money for them. Companies succeed when they satisfy the needs of their customers better then their competition.

To be effective, it is essential that you understand your customers. Put yourself in their shoes. Try to see your company from the outside, out of the customers' perspective. Value can be many things, the usefulness of a product, it's image, ease of use or availability, quality, or service. Often that look from outside can give ideas for new solutions and services that might be wanted by the customer and thus create value for him. And often the reason why a customer buys your offering is not at all why you believe he does.

To be efficient, it is essential that you understand yourself. There are many management methods that try to increase internal efficiency, like continuously looking how and where something can be improved, and copying ideas and best practices no matter from where they originate. Large enterprises have been built on efficiency, by doing something better and cheaper than anybody else.

Just remember, if no one needs what you produce, you will fail, no matter how efficiently you do it. Efficiency alone does not create value. Ultimately, value is defined by the customer.

There is a third force, in addition to competitors and customers: the owners. They are mainly interested in profit to gain return on their investment. If the company is not able to satisfy them, they will dissolve the company to withdraw their capital.

A business model clarifies how you want to create value for the customer. Strategy focuses on how you want to beat your competition in doing this.

Business model

A business model contains your assumptions about how your enterprise creates value. This includes assumptions about how it is different from other enterprises, and about customer needs. You should be able to sum up your business model in a few sentences.

A business model is what makes you different from Generic Inc. It is the purpose of the company that determines it's character. The business model and the values the company believes in are codified together in a mission statement. In formulating this statement, there is a danger to get lost in vague generalities about integrity, customer orientation, quality and similar things that are a given for any company. Make sure the mission statement is concrete and specific for your business and the way how you create value. Jack Welch says it should answer the question How do we intend to win in this business?

The test for a business model is the market. If it does not work, it has to be changed or the enterprise will fail. Of course, even companies with the right ideas may falter, if they stumble on implementation.

For a company to be successful, both the special knowledge that drives the business model, and professional management need to come together. Both the research scientist and the manager need to balance their needs. Otherwise, if the scientist wins, there will be an unorganized mess, where everybody "does his own thing" until the company falls apart. If the manager wins, the essence of the company is lost in a hunt for money.

Collins found that successful companies had a clear idea of their business model, and this was something they understood and could be the best in the world at, and something which they were passionate about. Then they went ahead and ceaselessly executed towards it. As Warren Buffet said: They stick with what they understand and let their abilities, not their egos, determine what they attempt. (It is no use wanting to be the best in something, if you do not know how to do it.)

One example for a business model: eBay, which is in a nutshell a global online flea market and auction. The need: People have stuff they might want to sell or buy, but can do so just in their local newspaper, or a yard sale. If you have an old and maybe valuable Beatles record, the probability that someone will buy it dearly in your yard sale is low. Frustrating. There is no competition for your offer, because the audience is too small. The need is cheaply reaching a larger audience. The insight: the internet is a platform where everyone can reach millions of people. Combine the two -- suddenly you have millions of buyers including record collectors, who will bid against each other. By providing a well known market, with the possibility to search, buy and sell things for a little fee on each sale, everyone wins. And eBay was smart enough to work out the details. How can you trust someone you have never seen to send you what you paid for? By showing feedback of earlier deals, eBay offers a large incentive to stay honest.

Strategy

The essence of strategy is choosing what not to do. -- Michael Porter

Strategy is how you plan to beat your competition. There are two fundamental ways to gain an advantage: one is to be cheaper, the other is to be different.

Being different is more about being effective, focusing on market outside to do the right thing, being cheap is more about being efficient, focusing on internal proesses to do the thing right. Usually it is not possible to be both the cost leader and the technological leader, as both approaches call for differnt things to focus on, and the worst is to be stuck in the middle where you are neither, and lose to competitors on both ends. Karstadt found this out, being squeezed between luxury brands and cheap high-street chains like H&M.

Be cheaper. As long as you are not offering something unique, the only way you can beat your competition is by offering lower prices. And they have the same problem. Because of this, the market will force both of you to lower your prices until you can not any more, because you would not be making any profit any more. This condition is called perfect competition. In such a situation, the more efficient company wins, the one that is able to have lower costs and thus can offer more cheaply. If you manage to be the last man standing, having achieved a monopoly after all competition died away, you have free reign on profits.

Be different. Because competition negates profit, to make profit you must escape from competition. In a free competitive market, all strategy aims at this. The only way to achieve this is to offer something unique, for which there is no competition. How can you get to such a position? You invent new services and products, called innovation. This generates a so-called unique value proposition, which you can exploit.

Unfortunately for you, when you find something new which generates large profits, others are attracted, and start to copy you. Two general approaches to prevent others from copying what you do are to "keep moving", that is to perpetually innovate, and to "build moats", that is to make it difficult for others to imitate what you do. In the end, every moat can be overcome, so innovation is the only real long term value creator.

A last option is to focus on a very specialized market, where there is no room for competition. This limits your ability to grow, and is a less generally applicable strategy.

Porter's Five Forces

Porters Five forces model is a way to systematically look an industry to find out how the various influences affect profitability.

1. Level of competition, that is how cut-throat is the competition between players in the market. The higher the competition, the less profitable the industry. Factors that favor cut-throat competition are: a number of equal sized competitors, which may lead to fights for supremacy. Slow market growth, because then the only way to make your piece of the cake bigger is to take it from your neighbor (this phase is usually reached after the initial growth phase and is called "consolidation" of an industry.) Lack of differentiation or switching costs, which makes the products exchangeable ("commodities"), turning price into the only remaining factor. Capacity increases in large incements, as then supply may overshoot demand. Diverse competitors, who do not understand each other, or have different goals, and thus make aggressive moves, forcing a reply.
2. Entrance (and exit) barriers, that is, how difficult and costly is it to enter the market if you are not already in it, or to leave it if you are? Of these barriers to entry are more important, and have been listed above. Exit barriers hinder competitors from leaving, even if the business is becoming unprofitable. Those may be specialized assets, which have low liquidation value or high transfer cost; fixed costs of exit like standing contractual obligations; strategic tie-ins with other businesses where a company is willing to accept unprofitable business, to support profitable other business; emotional barriers, due to management ego and pride, identification with the business, concern for the employees, or fear of career consequences; finally legal, governmental or social restrictions, mostly because government does fear the of loss of jobs.
3. Threat of substitution, that is other products that perform the same function. They can cap profits, or, if they are cheaper, even obsolete an entire industry. As these often depend on innovation, in my opinion, the best defense is trying to obsolete yourself.
4. Power of the customers, the more powerful your customers, the less profitable your business. Customers are powerful if: they are not dependend on suppliers; they are more concentrated then sellers, buying large volumes relative to seller sales, so that each sale is much more important for the seller than for the buyer; the products they purchase constitute a large part of their cost, so they put effort into getting the best price; the product is not crucial for their operation; they earn low profit margin, again forcing them to contain cost; they face few switching costs or can pose a credible threat of backward integration, that is producing the needed goods themsleves; you cannot pose a credible threat of forward integration (this only applies if the customer is not the end user); they have full information; the products are undifferentiated, exchangable.
5. Power of the suppliers is the converse of customer power. Thus, suppliers are powerful, if: they are not dependent on individual customers; the quantities your industry buys make only a small part of their sales; your industry enjoys high profit margins; their products only make up a small part of your cost, are critical for you, are differentiated and not exchangeable, and fraught with large switching costs. You can not pose a credible threat of backward integration, or they can pose a threat of forward integration, and you have no information about their costs. They are also powerful, if you face high shopping, transaction or negotiation costs.

Barriers and moats

Setting up barriers the area where you have most control. Some general ways to build moats, advantages that make it difficult for others to compete, are:

• Switching costs, that is the one-time cost to the consumer if he switches from one supplier to the other. Switching costs increase with dependencies between products, so that everything has to be switched together, new supplememntary tools and products have to be purchased, or there are costs for modifying other products to match the new supplier. They also include employee retraining costs, costs of testing the new supplier's product to make sure it is suitable, cost and A prime example is a computer operating system, where switching makes all your applications useless, and you also can not start switching individual applications.
• Network externalities, that is your goods usefulness depends on the number of users. This strongly favours large and early players. For example eBay is hard to beat now, because the utility of any market directly depends on the number of vendors and customers. Any newcomer to that game must necessarily be less attractive for someone who want to sell his stuff.
• First mover advantage favors the company that does something first. This advantage is based on real barriers of entry, for example, switching costs and network externalities. If there are none, going first is probably a disadvantage.
• Brand that is having a name which is recognized by the customers and associated with quality, wealth, coolness or some other desirable quality. In order to feel special by using the brand, they are willing to pay more. Customers may also trust a brand from past positive experiences. This is part of marketing.
• Knowledge of employees or technology that nobody else has or that is hard to come by, so that you can build a product others can not duplicate. Patents provide legal hurdles to protect your knowledge advantage and forbid others to duplicate your products.
• Economies of scale, that is declining costs per unit that come with large volume per period. This happens because of a learning curve, optimization of the production process, and leverage towards suppliers and distributors if you handle large quantities, and also applies to research, marketing and service. Economies of scale favour large players, and force new entrants to come in on a large scale, or face much higher costs per unit. They also favour shared functions between businesses, or integrated buisnesses where one uses by-products of another (the German chemical "Verbund" plant is an example), and shared brand names. Another consequence of economies of scale is that if you have to little a percentage of your market, you will be marginalized, and die. You have neither the budget for innovation or marketing and branding of your larger competitors, nor do you enjoy their lower unit costs. In such a case, specializing in a niche may be the only way out.
• In the so called experience curve knowledge and economies of scale reinforce of each other. High volume helps employees to accumulate more experience, to become specialized and effective, resulting in optimized processes and lower unit costs. Experience generally is a weaker entry barrier then economy of scale, because it is hard to keep experience proprietary: competitors may hire away your people, or copy your systems, eschewing the original research costs. High specialization through economies of scale or experience also may turn into a disadvantage if the market changes, for example through innovations, as you are specialized in the outmoded way to do things.
• There are also ways to build moats to discourage others entirely to enter your field of business, so called entry barriers:
• Capital requirements. The need to invest a huge amount of money up front constitutes a barrier to entry, because not many people will be able to do this. For example, it is much simpler to start an IT consultancy, then firm that builds cars.
• Access to distribution channels. For example, shelf space in supermarkets. Sometimes innovation can get around this barrier.
• Favourable location or access to raw materials constitutes an entry barrier. Once the good locations are taken, entrants must put up with second best.
• Government policy can change the rules of the game. In many countries, governments also go to some length to protect their "National champions" (questionable as that may be from an economic standpoint overall).
• Aggressiveness. Expected retaliation to new entries or price cuts acts as a barrier. If entrants can expect aggressive retaliation, for example because the market reacted like that in the past, they will be discouraged of entering. If you know that cutting your price will only serve to provoke your competitor to do so also, leaving both of you with less, you will be discouraged.

One interesting observation is that in markets that can still grow, competition is better than no competition. This is so because your competitors innovate and force you to innovate, and thus together you create a larger market than you could alone. And 50% of 100 customers is still better than 100% of 30 customers.

As your competitors also never stand still, the environment changes continually, so you should keep it simple. Complicated theoretical models may be worthwhile to build understanding, but are probably outdated by the time they are finished.

Jack Welch's Five Slides

The following approach to strategy worked for Jack Welch: First, come up with a big insight about how to gain a competitive advantage. For this, he is using a set of questions as a tool that he calls the five slides.

Then put the right people behind it, and execute with an unyielding emphasis on continual improvement. You have to make clear cut decisions what to focus on, as you can not be everything for everybody, no matter how large and prosperous the company. You have to trade-off between your objectives.

The trick here is of course to find the big insight. For this, you have to understand the industry and nature of your customers, suppliers and competitors. Once you see how to attack the competition, do so with commitment.

Always assume that your competitors are at least as good as you are, and moving just as fast or even faster. (Only the Paranoid Survive. -- Andrew S. Grove.) The wise man also learns from his enemies.

Slide One: What the Playing Field Looks Like Now Who are the competitors in the business, large and small, new and old? What are the strengths and weaknesses of each competitor? How good are their products? How much does each one spend on R&D? How big is each sales force? How performance-driven is each culture? Who has what share, globally and in each market? Where do we fit in? What are the characteristics of this business? Is it commodity or high value or somewhere in between? Is it long cycle or short? Where is it on the growth curve? What are the drivers of profitability? Who are this business's main customers, and how do they buy?

Slide Two: What the Competition Has Been Up To What has each competitor done in the past year to change the playing field? Has anyone introduced game-changing new products, new technologies, or a new distribution channel? Are there new entrants and what have they been up to in the past year?

Slide Three:  What You've Been Up To What have you done in the past year to change the playing field? Have you bought a new company, introduced new products, hired a competitor's key sales person, or licensed a new technology? Have you lost any competitive advantages that you once had -- a great sales person, a special product, a proprietary technology?

Slide Four: What's Around the Corner? What scares you most in the year ahead -- what one or two things could a competitor do to nail you? What new products or technologies could your competitors launch that might change the game? What merger and acquisition deals would knock you off your feet??

Slide Five: What's Your Winning Move? What can you do to change the playing field -- is it an acquisition, a new product, globalization? What can you do to make customers stick to you more than ever before and more than anything else??

I do not believe in a general rules that will tell you, when to focus and when to diversify. Sometimes focus is the right thing: DELL became the largest computer manufacturer by consciously only doing mail order and having no stores. This allowed lower prices, as it saved all the organizational cost and overhead. Sometimes, focusing is not seeing the opportunity: Xerox lost huge market shares in photo-copiers to the Japanese, because it focused on expensive, high-performance machines for the professional market.

The Company

I believe there are only two really important contributions to be successful: focus and great people. From the need for focus flow values, goals and the need for leadership. From the need for great people flow hiring, differentiation, retention and firing.

Values

There is little success where there is little laughter. -- Andrew Carnegie

Values define what the company cares about and believes in. Together with the business model they are encoded in the mission statement of the company: what you want to achieve for your customers, what you belive in, and how you want to achieve it. Since values drive how it feels like to work at a company, together with anecdotes, traditions, and customs they make up the corporate culture. This section is about values.

The way companies try to define their culture and make it survive individuals is by laying down values in writing. These values should be concrete, and support the mission of the company. But values are something   abstract, and have to be brought to live so they can be felt. This is one of the main jobs of top management. Values can be driven home by relentless repetition. They can to be told as war stories. Crazy stunts and big gestures can help. Rituals, anecdotes, symbols, legends, images, parables. It's really about story telling.

Work has to be fun and fulfilling, only then can you give your best. Working at a cool company that fits your attitude helps in enjoying your work. Values can vary widely from company to company. Here are some values, that are common in the world's successful companies:

• Facing the truth, even if it is uncomfortable. This is a basic value, which, if igored spells doom. The truth may be brutal. In this case have faith in yourself, do what must be done, and never give up. In prison camps, the optimists who hope for short term release never survive long. Setting up false hopes and failing them is dispiriting. The survivors had faith that they would get out at the end, confronted the brutal truth, and did what they could every day to deal with it. Facing truth goes with a culture of open, even heated discussion about decisions.
• Competitiveness, that is, wanting to be the best in something. With successful companies, this is an active desire, nor a reactive one towards their competition. It is an urge to create excellence for it's own sake. With that go focus on performance and contribution.

Interestingly, values are important for a company, but what they are is less so. Values are unchanging, part of the mission of the company, while Strategies and operating practices change, to evolve and adapt to a changing world.

If you claim values, it is essential that you also follow through, and adhere to them yourself. Otherwise, better to keep silence. The fish always stinks from the head. Nothing destroys trust more than paying lip service to values that you do not live up to. And a feeling of belonging and trust, once damaged, is very hard to repair. Then you live in a Dilbert world of cynicism. Be authentic. Don't be phony.

A common cause of failure is a strong, charismatic leader with an over-inflated ego, who believes that he can ignore the inconvenient facts and make the world agree with his vision, just because he so wills it. In such companies, the leader becomes the reality inside the company, and everybody either leaves or tries to please him. But this is not the reality outside, and the company will pay for it with failure.

Why should you try to create a great company, and not just a good one? It is not a real difference in the amount of work that you have to do, but creating something great surely is more enjoyable and inspiring.

Goals

Never tell people how to do things. Tell them what to do and they will surprise you with their ingenuity. --George S. Patton

The importance of clear goals has been stated several times already. Since in the modern workplace, there is little dumb, mechanical activity, everyone has to be able to make decisions to be effective. Goals are the glue that link the objectives of the business to the daily work of its people.

The performance goals of the business must dictate the performance expected of each employee and to make the right decisions, he must know and understand what the business goals demand of him in terms of performance. And his contribution must be measured against that. Otherwise, his efforts will be wasted. The stonecutter must understand, that he is "building a cathedral", the deck hand must see that he is "sailing to the East Indies."

If the goals are clear, then the major difficulty that remains to make them effective is communicating them so that everyone understands them. In this communication, it is helpful to repeat them time and again. It is helpful to explain the reasons for these goals. But even more helpful than talking alone, is talking and listening. Only by listening you can find out if the message was received as you intended to.

One way to do this is to have everybody write his own charter or "manager's letter" to his manager, in which he describes the objectives of his managers job and of his own job, as he sees them. He sets down the performance objectives that he believes are applied to him, and the things he must do himself to attain these goals, as well as the major obstacles within his unit. He then lists the things his superior and the company do to help him and the things that hamper him. Finally he outlines what he proposes during the next year to reach his goals.

Doing this outlines inconsistencies in the demands that are made on people, and highlights misunderstandings. What the subordinate comes up with is rarely what the superior expects, and the first aim of this exercise is indeed to bring out this divergence in perception. It forces that the manager thinks through objectives and priorities.

Leadership

A leader is a dealer in hope. -- Napoleon

Leadership is not about being liked or being popular. It is about trust and integrity. It's about giving your best, and asking for the best. It's about giving people something to believe in. In more technical terms, it is about values and vision.

Values: The only way to communicate values is by example. In Germany, there is a proverb: "Wie man in den Wald hineinruft, so schallt es heraus. (How you call, so it will echo.)". What you want from your people, you must give yourself. You can not expect them to work hard and take their work to heart, if you are lazy and do not care. You can not expect them to trust you, if you do not trust them.

One set of values that works for me is: Be natural and honest. Care for what you do, and give it all you can. Keep your promises. Trust until proved wrong. Be hopeful and positive if you can be, but even if you can not, give people hope and confidence. Give them credit. Tell them when they do well, and when they can do better. Expect the best. Be candid -- do not shy back from probing and asking tough questions. Listen to people. Good people are self motivated. You do not need to motivate them, but you must be careful to not de-motivate them, by holding out false hopes. Confront the truth.

Vision: People are happy to work if they feel it makes a difference. This is especially true for people who are specialists in their field, who must decide how to best do their work themselves. No one can control an engineer so that he will write better code. Good work makes all the difference between success and failure, and yet you never can force bright people to do good work. You have to convince and encourage them, make it clear to them that what they work on is important and meaningful.

Collins has shown that the man at the top has a huge impact on the success or failure of the company. Leaders of great companies often combine personal humility with professional will. They are often not charismatic or flashy. They are humble. They credit their people for success, but take the responsibility for failure. They are not weak: they care about their company being the best in the world, they believe it can be done, and they will not let up to realize this dream. Brilliant egomaniacs also can make a company successful, but tend to cultivate yes-men around them, so the company often falls apart after their departure. There is no indication that executive compensation had any link to performance.

In an examination of successful executives, the following set of attributes was common: integrity, a vision of the future, the ability to communicate this vision, and little need for positive feedback.

People

No company can grow revenues consistently faster than it's ability to get enough of the right people to implement that growth and still become a great company. -- Packard's Law

Hiring the right people for the job and developing them is one of the most important aspects of management. If you get the right people on board, and care for them, whatever other mistake you make is largely irrelevant: they will pull you through. If you're worth your salt, you to will do what you can to help them. Use every opportunity to evaluate them, coach them, and build their self-confidence. My stance is that your success is their success, and if they fail, you have failed.

According to Collins, who > what. Outstanding companies first care about having the right people. Only then, they worry about strategy. Strategy must sometimes change, and good people will be able to work it out, no matter which way the journey goes. Good in this context means work ethic, intelligence, dedication to fulfill commitments, and sharing values, rather then technical skill alone.

Hiring

Accept the fact that we have to treat almost anybody as a volunteer. -- Peter F. Drucker

Hiring is the work with the most leverage that you do, if you compare the effect with the time you invest. It is worth to work your hardest to do it right. As it is so important, I made a page on hiring, which goes into more detail. Hiring the right person for the job is not easy, even the most experienced people err. There are three things to keep in mind: the person, the hiring, and the job.

First, the job. Think through the assignment. Look at the nature of the assignment for the next year or so, think through what it exactly is that you need. Look what strengths are needed for it. If it is a major assignment, try to use somebody that you know, and know he can handle it. Do not put new people on major assignments. This only increases your risks. Put them in an established position, where help is available. Do not hire people for widow maker positions, where two other good people failed. Get rid of the position.

Now, the person. Pick and assign people by their strength, ignore the weaknesses. Nobody is all strength. Successful hiring and development is based on putting the person with the right strength on the job. It does not matter when people have weaknesses in other areas irrelevant for performance.
No matter what else, you probably want people with integrity, who enjoy working hard and are no jerks.
Last, the hiring process. Look at a number of people. A good number is three to five. Do not interview the person without a second opinion. Let the future colleagues do so too, and decide if he or she fits into their team and culture. Check references, if possible not only the ones given by the candidate. Discuss anyone whom you consider in earnest with several people who have worked with them, a good number is three to five former bosses or colleagues.

Interviewing itself is the subject of whole books. Why did they quit their last jobs? One approach to interviewing is that people do not change. Past actions show future actions, so quizz them about their past. (That is also why you do not want a girlfriend who cheated on their Ex.) Another is that no one knows them better then they themselves (albeit this view may be biased), so ask about their own view of what they are good and bad at, what they like and dislike. Listen more than you talk.
If you do put someone in a job, and he does not perform, you made a mistake. You have no business to complain about him, but you might have to correct your mistake.

Retention

Good work is not the only reason why it is important that people feel well at work. A high turnover in employees costs a lot of money for hiring and training, and productivity loss. The more knowledge intensive your industry is, the more important it is to keep employees happy, so they will stick around. What it takes for this has already been stated: fun and meaningful work, integrity and sincerity of management, and the possibility to learn and grow.

Differentiation

Before you are a leader, success is all about growing yourself. When you become a leader, success is all about growing others. -- Jack Welch

What is scary about being a manager is the realization that you do not have the same control over the work that needs to be done, as you would have if you were doing it yourself, exactly as you can not do it yourself. The work must be done through your people. If you are not in a managerial position, you think the manager has power. But only the people have the power to make things happen. The manager can just help.

Therefore, the manager must make sure that he has the best people, who want to and are able to work.
As a manager, you can promote and reward good people and lay off weak or unmotivated people. The power to reward or to lay off is your responsibility, both towards your people and towards your company.
Whenever you reward and promote, be aware that you are sending a signal to everyone. Reward performance, and people will see that performance counts. Reward flattery, politicking or asking for rewards, and people will see that this is what gets you ahead in this company, and the company will degenerate and lose good people or their respect. It is critical to have fair evaluation, and only reward performance.

Jack Welch built part of his success on such differentiation or rank-and-yank: he lavished his top performers with promotions, raises, bonuses, and stock option, treated his average guys well, and fired the weakest, each year. (He used a 20%-70%-10% key for this, classifying people as A, B or C.). McKinsey & Co has a similar scheme, which it calls up-or-out, and which works OK for them, as they have so much fluctuation, that there are always new weak people to cull.

Such a scheme will push people who give their best, and gives you opportunity at first to get rid of people who are just doing time, without contributing. After a few cycles of this, there will be no weak people left, and then it will really hurt to fire good folks. But then without the culling part, differential rewards is still a very good system. It is disencouraging if everybody gets the same, no matter how good they perform. Winners need prizes.

What such a scheme needs, is a way to rank people. Of course, if you work every day with people, you will quickly learn whom you can depend on, who has energy and skill, and who has not. Still you should use a rigorous, unbureaucratic evaluation system. Welch used the criteria discussed above under hiring, to sort people into the three groups. For each person, he scored various attributes on a scale from 0 to 4 (graphically shown as partially filled pies).

It should not be more than maybe one page of paper, listing what the person did well, and where she could improve. It needs quantitative agreed-upon criteria to measure how well people achieve their goals, and qualitative ones, based on how they deliver agreed-upon desired behavior. One can also include the opinion of their peers, which may be quite insightful.

Using goal measurements to score is tricky, because you want to agree on stretch goals with input from the people themselves, and not punish them for not reaching those. Otherwise, they have strong incentive to just lower the expectations until they can get by with little effort.

The evaluation process itself must include candid feedback to each person how she is performing, and what she has to do to improve her standing in the organization. And evaluation should be done at the minimum once per year in a formal face to face session, which lets people know where they stand in relation to others. Informal evaluation and feedback should happen all the time.

You also need effective mechanisms to reward performance -- money, recognition and training. Recognition is essential, but by itself it is not enough, just warm words. It should also go with a cash reward. Put your money where your mouth is.

If you promote someone, make sure that they understand what is expected of them in their new role. People have a tendency to try and do what they were successful with in the past, and that may not be what is then needed.

Firing

Executives owe it to the organization and to their fellow workers not to tolerate nonperforming individuals in important jobs. -- Peter F. Drucker

There are three reasons for letting people go: integrity violations, economic crisis, and nonperformance.
Integrity violations are easy, No reason to feel bad.

Economic crisis are hard but external forces drive the decision, which lessens the personal hurt. The best thing you can do here, is give people insight into the companies financial situation as much as possible ("open book management"), so they can see and understand the reasons. Being open has the added bonus that people can relate to the fate of the company, and feel more part of it in normal times.

Now, the hard cases. What if somebody is not performing after several times where you let them clearly know about the problem. If you are not sure, ask yourself: Would you be secretly relieved if somebody announced they left?

Slackers who do not perform because of bad attitude are straightforward. You can try to see if there would be other work that would be a better fit for them and make them happier and want to contribute. Maybe they are just challenged too much or too little, and the attitude is a consequence.

The most difficult cases are people who are really nice, and try to do good work, but just can not manage to, and people with a bad attitude who yet manage to perform well. For the first see if you can put them on another job that better fits them. Maybe they will be doing great in another area more in line with their personality. For the second group, Welch suggests to lose those people, because they poison the atmosphere, and undermine the spirit of the whole organization. This is probably the toughest decision of all.
If there is no solution, the best is to say good-bye. By keeping them you are hurting the company, morale, and their colleagues, who have to take up the slack.

When you know someone is no good, say goodbye. If you need to tightly manage someone, you made a mistake. Good people maybe need goals, but not tight management. Keeping the wrong people is unfair to all the right ones who must compensate for their shortcomings.

At this point management books usually go into how it is also the best for the person itself. How they are stuck in a job that is sucking the joy out of their life. How somewhere else they will be much happier and flourish. I don't buy it. Being fired is a horrible experience, and chances are just as well that people will be out of work and depressed. But it is not your task to look after bad or incompetent people, unless you are in the social service. It is your task to make life better overall.

There are some things to keep in mind to make this difficult process as painless and considerate as possible.

1. No surprises. A candid performance appraisal process prepares people in a fair way, and lets them know where they stand. Also, informal honest conversations about performance and career goals have taken place. The employee should know what will happen in time to prepare himself, and not be surprised.
2. Treat people with dignity. Give them your support in finding a new job if possible.

Execution

A good plan violently executed now is better than a perfect plan executed next week. --George S. Patton

Execution, or getting things done. Be careful not to fall into the trap of acquiring other companies to carry you forward, because it looks like a shortcut and more exciting than doing the work yourself. Buying someone else only makes sense, if they fit into the business model, and supplement what you are already doing successfully.

The Tools

Information

If I always appear prepared, it is because before entering an undertaking, I have meditated long and have foreseen what might occur. It is not genius where reveals to me suddenly and secretly what I should do in circumstances unexpected by others; it is thought and preparation. --Napoleon

If you do not want to fly blind, you need information. Information is what enables you to do the right thing, and make the right decision. It frees you from prejudice, and makes it possible to face the world as it is. But you have to be willing to accept the truth that is narrated by the information you collect. Often information is not missing, but that it is telling a story that no one wants to hear. You better listen up, or you will not be around to ignore it much longer.

You need to collect information on three main areas to be able to gauge your performance and see opportunities:

• Finance or foundation data that give a baseline and indicate problems if they are abnormal. Profit, revenue, cost, and cash flow are most important, but many other measures like gross margin, earnings coverage and so on are possible. This area is the most formalized. See the financial statements page for more detail.
• Market to compare your company with competitors, measure behavior of your customers, and check the status of your core competences, the things that no other company can do or do as well. For customers, possible measures are response times, results of customer surveys, rate of repeat customers or number of complaints. Unexpected successes or failures of products, or diminishing sales of existing products. For competitors, market share, how much of the market a company owns, and market position, ordering companies by market share.
• Operations. or productivity data are measures dealing with resources and people, and reflecting the performance of key business processes. For example time for processes, the and cost and time to produce a unit, EVA calculation of project profit, or Six Sigma, a quality measure and methodology to reduce variance and the probability of a faulty product. Benchmarking can be used to compare with the best competitor. For employee morale, employee fluctuation rate, or surveys. Sometimes also learning and growth, for example the number of trainings, is included here.

Systematically collecting and tracking information from all these areas has been made popular under the name balanced scorecard.

Drucker says "Enterprises are paid to create wealth, not to control costs. (...) that requires information that enables executives to make informed judgements." and lists a fourth category, that tracks how the information is put to use by:

• Scarce Resources, people and capital, which convert the information from the other classes into action. You have to measure how projects actually perform vs. their projected results. Drucker even claims that "There is no better way to improve an organization than to measure the results of capital appropriations against the promises and expectations that led to their authorization."

You have to decide for yourself, which measures are suitable to your strategy. By picking the right key indicators to supplement your strategy you can see how well your strategy is being implemented and works. Important for any successful company is a strategy that everyone understands, combined with a few central operating figures that measure it and that are tracked continuously. You must collect data continuously, or information well be soon out of date and useless.

Jack Welch for example first followed a goal to be number one or number two in each market his company dealt in. For departments that did not succeed in this, there were just three options: fix, close, or sell. Of course, people quickly caught on to this, and started to define their market so narrowly that they always would manage to be number one or two. Welch then changed the goal and asked: redefine your market so that you do not have more then 10% share of it. This exercise forced people to think about how the company could grow.

Information comes in many forms, qualitative, quantitative, and even gut feelings for trends and developments. The first thing you have do is think what you want to measure. This depends on your business and situation. Then you must find how you can get the data. Finally, you must interpret the data you have obtained.

Measuring

To measure is to know. If you can not measure it, you can not improve it. --Lord Kelvin

The easiest items to measure are figures, like cost, time, profit. Soft factors can be measured, using questionnaires. While there are many things that are quantifiable, some of the most important things will not be.

If you have a structure that consists of repeated units, like a super market chain, then you can just pick some of those units and try out new ideas there, to see if they work out. This gives you valuable data about your ideas, without compromising your whole operation. An extension of this is called benchmarking or best practice. For example, if one of your factories is more productive than others, you can find out why, and transfer this to the others. Actually, one can even try and learn from other organizations or industries: try to learn from the best. Maybe they have better sales or accounting methods. One way is to go there directly, for training or watching how others do it. Another is to hire people from there that have the experience.

You can entertain a business intelligence person or unit, which collects and prepares information about competitors and markets. Collecting intelligence consists of several steps. First, you have to collect raw data. This can be field data acquired from sales force, engineerings staff, suppliers, distributors, advertizing agencies, at professional meetings, from trade associations, by hiring people from your competitor, or from market research firms. Or it can be published data from articles, company web pages and press releases, patent and court records, speeches by management, want ads, governemnt and regulatory filings. All this data has to be compiled centrally, by requiring people to regularily report on this kind of information, maybe even provinding forms, or by initiatively regularily interviewing such individuals. Then it has to be catalogued, by filing all information on each competitor, including the source of information. Once this happened, the data can be analyzed, and reports can be prepared to give decision makers the information they need.

Keep in mind that no single statistic alone can tell the whole story. You always need several to get a decent picture of what is going on. Also keep in mind that filling out forms detracts from the real work. Reports and procedures should be kept to the bare minimum and as simple as possible. They should not be abused to control the employees. In doubt, better use none, then too many. Or use figures that can be extracted automatically, without anybody having to fill in something extra.

One idea is a red flag warning system to tell if customers are upset. An extreme system of this kind is allowing the customer to pay less or nothing on an item, in exchange for giving a reason. Such data can not be ignored or explained away, because it directly affects results (and it keeps otherwise disgruntled customers happy).

Analysis

Once you have collected data, you have to compare those numbers. To see trends, you have to look at changes in these figures over time. Is profit going up or down over time? Sometimes it is inconvenient to use absolute numbers, as things on different scales can not be compared. In this case, use ratios, for example profit/capital employed.

When trying to guess trends for the future, the simplest way of course is to plot the past and extrapolate the slope of that curve to the future.

An S-curve, or sigmoid curve is a curve that starts out flat, then goes up steep, and finally tethers out flat again, similar to an skewed S. Such curves are observable for many processes. For instance, imagine effort vs. result. In the beginning, if you put in only minimal effort, you never get a good grasp of the problem, and make nearly no progress. But beyond a certain point, you are really immersed in the problem, and start to make great progress, every effort that you put in more will give directly better results. At the end, only the most complicated areas are left to explore, and you need huge amounts of effort to get a slightly better result. The point, where the curve starts to flatten out again is where you usually want to stop putting in much more effort.

SWOT analysis

A SWOT Analysis (Strengths, Weaknesses, Opportunities, Threats) is a sensible starting point to any planning. It is concerned with identifying your business's strengths and weaknesses (internal, that is finance, people and processes), seeing what opportunities you have, and what the threats to your business are (external, that is competitors and market). Just note down the key points in each section. Often, this is presented as a matrix, with strengths and weaknesses in the first row, and threats and opportunities in the second, so that the first column shows the good, and the second the bad.

Good	Bad
Strengths	Weaknesses	Internal
Threats	Opportunities	External

Here is a list of areas to profile for strength and weakness analysis. It can be applied to competitors also, to see where they have weak areas that can be attacked.

• Products
• Product perception from user point of view, in each market
• Breadth and depth of product line
• Distribution
• Channel converage and quality
• Ability to service channels
• Marketing/Selling
• Skills in various areas of the marketing mix
• Market research and new product developmnent
• Training and skills of sales force
• Operations
• Technological sophistication
• Know how in capacity addition, QC, tooling etc
• Flexibility of facilities/equipment
• Work climate, unionization
• People turnover
• Degree of vertical integration
• Research & Development
• Patents, Copyrights
• Skills in terms of creativity, simplicity, quality, reliability
• Access to outside sources
• Costs
• Manufacturing cost position (economies of scale, learning curve, equipment)
• Location, including labor and transport cost
• Shared costs or activities with other business units
• Access and cost of raw materials
• Finance
• Cash flow
• Short & Long term borrowing capacity
• Forseeable new equity capacity
• Financial Management ability (negotiation, raising capital, credit, inventories, accounts receivable)
• Organization
• Unity of values and clarity of purpose of the organization
• Fatigue based on recent developments
• Consistency of organizational arrangements with strategy
• Management
• Leadership qualities of the CEO, his ability to motivate
• Ability to coordinate functions and groups (eg research and manufacturing)
• Ability to implement planned changes (resources, finances)
• Age, training, functional orientation of management
• Flexibility, adaptability of management
• Other
• Special treatment and access to government bodies

Incomplete information

You will never be able to get complete information, and thus have a risk to make the wrong decision. When you can not decrease the risk by getting more information, the next option is to at least estimate how large the risk is.

A general method is to calculate for several scenarios, for example a best-case and worst-case of what can be expected based one what one knows. This method can be combined with techniques to make predictions about the future risk and value of your decisions.

Organization

No man will make a great leader who wants to do it all himself or get all the credit for doing it. -- Andrew Carnegie

Organization is about segmenting tasks to different groups. To a programmer, it sounds very much like modularization. There are three lines of segmentation: between the enterprise and the outside, between units in the organization -- who does what, and between areas of responsibility -- who decides what. I would naively assume that it would be beneficial if the people who do, also impact decisions, because they know best what will or will not work.

The key point to keep in mind is that management does not end at the legal boundaries of your organization. You also have to manage the relationships with outside units, with suppliers and contractors.

There is no best way of organization. It always depends on how your business looks like. And sometimes different parts of your business ask for different organizational structures. But there are some rules of thumb,   which could be seen as basic hygiene of organization:

• The larger an organization gets, the more difficult it is to keep it efficient when it is centralized.
• Everyone should only report to one person, and it should be clear what his responsibilities are, what he has authority over, and what is expected and not expected of him.
• Hierarchies may be necessary, but should always kept as flat as possible. Managers should have at least 10 direct reports, more if they are experienced.

One of the central questions in organization is make-or-buy: which steps should be done by the enterprise itself, and which are better bought from third parties. Each has advantages: vertical integration, bringing all steps within your company, gives you control and coordination. Outsourcing, having someone else supply them, gives you flexibility, ingenuity and motivation: that supplier is competing with other suppliers, which a group within your own company is often not. (I think there are companies, where also internal suppliers have to be able to beat external ones, or these departments get closed down).

Which is cheaper? Obviously, a third party has to make a profit to stay in business, but because of the pressures of competition, it may well be so much more efficient that it is cheaper for you still than doing it yourself. On top of these costs are also the transaction costs, the additional overhead of coordinating with an external supplier.

The principle that defines the size of an efficient organization is: as long as it is cheaper do do things internally, the company grows. If it becomes cheaper to do things externally, it stops growing, or even shrinks, down to its core competences, the things that it can do better and cheaper than anyone else.

The value chain is the sequence of all activities and information streams that have to happen within an enterprise and it's suppliers to create, market, distribute and service the companies product. Broadly speaking the value chain has two large parts: on covers everything needed to create the product or service, the other everything needed to sell it. I'm not sure of the concept is really tenable, because each of the companies doing the outsourced work again has other companies doing work for them. There is no way, to bring it all under management of one central company. It is really more like a value web.

For the customer it is irrelevant if you do the work yourself, or outsource it. For him only the final product or service is what counts. Some companies even consist mainly of organizing the outsourced work of others.

Resources

Of course, the million dollar question is what the key factors, the important things are, and should be in future. Resources (time, money) are always limited. How to best allocate them? Apart form leading people, resource allocation is really the core essence of management. More than anything else, strategy is deciding what not to do. And there can be no recipe to answer this question. This is what separates the great and successful managers from the not-so-great ones.

Put your best people on your biggest opportunities, not your biggest problems. (Collins). This is in line with Druckers view that successful enterprises are so by exploiting opportunities and Welch who gives the exact same advice. As a corollary, if you sell of some problem division, don't sell your best people with it.
For managing long term and short term results, and keeping your investors happy, one strategy is to have internal growth targets that exceed what is expected of you. If you achieve those, you can funnel the surplus in long term investments for your future.

Sunk cost

Sunk cost is cost that has been sunk into something, and can not be regained. People have a tendency: they do not like to lose. So they tend to stick to their sinking stock, hoping it will rise again, until it is to late. Nothing is more difficult and painful then to let go of old and familiar products that have outlived their time, of yesterday's successes. But it has to happen.

When you decide where to invest your money in you must ignore what you have so far invested. You must think about where time and money that you invest today will bring the best results. Don't throw good money after bad.

You have to ask yourself the question in "If we would not be in this market today, would we enter it?" And if the answer is no, this leads to the second question: "What should we do?".

Kaizen

Kaizen or continuous improvement is based on the observation that one can not just go on to do what worked yesterday, as the environment continuously changes. So it is necessary to continuously adapt and improve processes. In small steps or big ones, but mostly in small steps. Here again it helps to have figures to measure progress, be it inventory levels, response times, customer satisfaction.

Fundamental changes in companies tend to be more successful, when the end goal is clear, and is worked towards a little more every day. Big programs and sweeping changes and usually lead to failure. Successful change happens as evolution, not revolution. There is no miracle moment, no defining action, no turnaround point -- every moment, every action, every point in time counts.

Total quality management is an approach where every employee may have suggestions on how to change and improve things, not just the management. Often the people who do the work have a much better idea what is wrong, and more brains have more ideas anyways.

References

Basic management The source for some of the structure of this page.
Competitive Strategy A widely accepted text on the fundamentals of business strategy.
Good to Great Additional evidence on what works from a large multi-case study.
Konsequent einfach. Consequently simple ways to do things, that made ALDI so tough.
The Essential Drucker Most of any surprising and fundamental ideas on this page.
Winning Jack Welch's take on candor, values, hiring, differentiation, firing and strategy.
Der Termin A book on what I believe project management really is about.