Three Factors Of Successful Companies

Kweilin Ellingrud, a senior partner at McKinsey & Co, contributed the following interesting article to Forbes magazine

 

It’s been 12 years since the last recession, when the World Bank estimates that global GDP fell by 1.7%. But some companies were better prepared than others: their revenues didn’t fall as far and, as the recession ended, they recovered more quickly than their peers. Looking at what these organisations did differently, and learning lessons from their experiences can help leaders prepare for the unexpected—whatever the source of turbulence.

According to a recent study of more than 1,000 large, publicly-traded companies, three factors made the biggest difference before, during, and after the downturn:

  • Increasing productivity levels—and, crucially, making the improvements stick
  • Improving balance sheets through a combination of decreasing debt and cutting operating costs
  • Being smart with M&A activity—both in divesting underperforming businesses and in buying promising ones from other companies

 

The combination allowed some businesses not only to boost earnings by an average of 10% in the darkest year of 2009, but also to build on that advantage over the coming decade. This is what we mean by “resilience”: a company’s ability to generate an economic profit through cyclical and structural changes in supply and demand, balanced on twin pillars of flexibility and productivity. After 10 years, total return to shareholders for this resilient group had outperformed their non-resilient competitors by about 150%.

Given the volatility of the current economic environment, achieving resilience will require a new, flexible approach to operations. This approach applies next-generation levers such as digitisation, analytics, and automation, and integrates them to cut across silos and sustain the impact. The result helps businesses respond not only to the fast pace of change but also to an ageing workforce, increasingly regionalised value chains and rising consumer demand for fast delivery and mass customisation. Together, these forces make adaptability and responsiveness more valuable than ever before.

During previous downturns, resilient companies drove higher productivity to help protect margins. In our new digital age, digital and analytics tools allow organisations to dial production levels up or down to match demand, building a new and important factor of flexibility. It requires a focus on the success measures that really matter—defining what it means to win the day at the individual, team, business unit, and company levels. It also requires a management system that works across all levels of the organisation, empowering the employees closest to the work to inform the development of digital processes—and aligning incentives accordingly.

Companies can increase their readiness for the unexpected by making structural, strategic, and operating decisions that improve performance. Even in good economic times these are helpful actions to take, as they ensure an organisation is ready, whatever storms may come their way.

The auto industry’s performance is a good demonstration of the effect of different levels of preparedness for a downtown. During the 2007 recession globally, vehicle production dropped by nearly 16% in 2008 and 2009, and in North America vehicle production dropped by over 43%. It was not just auto manufacturers who suffered in terms of profitability, the whole value chain was impacted—several major auto OEMs and up to half of all North American auto suppliers were in severe financial distress. Bankruptcies spiked, and government support was critical to helping the industry recover.

In recent times automakers around the world have been significantly reducing their operating costs and increasing flexibility. Organisations that take actions such as these will be better positioned to cope with economically challenging times in the future.

Companies should act now, when the economy is stronger, so that they can adjust quickly to a changing environment. Automation, digitisation, and analytics are changing industries faster than ever before, and the pace of change is only accelerating. And with political flux and trade disputes on the rise, economic disruption becomes more a question of “when” than “if.”

What was “good enough” five or ten years ago will no longer do. To pivot in time, businesses need to be lighter on their feet and quicker in their reflexes. By understanding where your operations are rigid or slow today, you can take practical steps to become more resilient tomorrow—and perform much better over time

Mentalism overtaking Materialism

According to official statistics, the GDPs of all G7 developed nations have been trending flat, even downward, over the last decade and more

The big question is whether, at the turn of the century, the G7 reached a watershed between their old 20th century materialist economies and the new 21st century mentalist economies – the former focused on the production of tangible stuff, the improvement of our SoL (Standard of Living) and the minimising of the negatives of life – the latter focuses on intangibles, the creation of stuff which improves our QoL (Quality of Living) and maximises the positives of our life

Consider how outputs and inputs have changed over this period

OUTPUTS

The problem here is our official bean-counters have no appropriate measures for the new mentalism world and continue to collect statistics appropriate only to the old materialist world – one where GDP either clocked the private sector’s output of tangible stuff which had a price, or the public sector’s costs which were assumed to be the value of their output

Manufacturing dominated economies (80% plus) for most of the 20th century and output value was relatively easy to count – GDP totals were thus assumed to paint a reasonably accurate picture of the state of entire developed economies 

However, by the end of the 20th century, major changes had occurred – manufacturing’s share of developed economies fell to around 20% and has continued to trend downwards – at the same time, ‘relatively-difficult-to-measure’ service sectors grew to over 80%

Now we’re well into the new 21st century – instead of just buying stuff which helps remove the chores of life and makes our lives more comfortable, many of us now have ‘enough‘ – we don’t need another car, house or pair of shoes – we just replace them when worn out – there’s nothing fundamentally new to buy to add to them now most have an iPhone – so we’ve moved on to seek ‘higher level’ things which we enjoy doing such as socialising with friends and family, playing games and sports, developing hobbies or being entertained

The problem is such latter ‘higher things’, whilst valued highly by us are often available for free and hence are not clocked by the official GDP bean-counters

Inevitably, some geek has come up with a new collective noun for all this new stuff – consumer surpli – aka unmeasurable intangibles i.e. the extras, including freebies, on offer to customers by the likes of Google, Skype and Facebook to attract valuable personal preference information from us which they sell on to companies seeking to target those of us most likely to buy from them – and such consumer surpli comprise an ever-increasing proportion of the value created by national economies but are also totally missed by their GDP numbers

The same change in values has already occurred with private businesses – if in any doubt, note how the most valuable companies nowadays are ones which are tangibles poor Coca Cola, Apple or Google for example – overall, some 80% of stock market values are now based on intangible assets, so the financial markets and investors are already up to speed

Sadly, at present, we’re stuck with official GDP data which presents a gloomy failing picture for most developed nations – in particular:

  • We knew the base data was already seriously flawed, being so full of errors, assumptions and forecasts – now we know much that we value is being ignored
  • We also know G7 experts, economists and media all announce there is a productivity puzzle because their GDP and productivity (GDP/ Labour) growth has apparently stalled over the last decade or so
  • And yet government ministers are reliant on these statistics to decide their economic policies and different ways to tax us
  • The consumer surplus is the biggest economic elephant in their room

 

G7 bean-counters thus must at least recognise the failings of their current measures and gear up for these fundamental economic changes

INPUTS

And it’s not just outputs where big changes have occurred

Once, most people went to work for the pay alone – work was a chore they had to do, something they would not do if not paid – and most work was brawnwork, few opportunities were available for brainwork

Now, already, quite the reverse applies – most brawnwork that was dirty, dangerous, dull or repetitive has been automated with robots, AI  or computer software – most has been replaced by more interesting jobs involving considerable, if not total, brainwork:

  • Brawnwork required numbers of workers ‘clocking-in’ for numbers of hours on the factory floor or in the office – such numbers were easily countable and thus controllable by local managers 
  • Brainwork is different, and far less controllable – it requires individuals to produce results by deadlines – it requires problem solving, creativity, analysis skills and decisiveness – it thus requires individuals who are well trained but also motivated, ’employee engagement’ being the buzzword for the latter

 

Indeed, modern managers have become increasingly concerned to maximise employee engagement to boost overall productivity levels – they do this also to maximise staff retention, especially of staff they cannot afford to lose, and so minimise the extra costs of recruitment, training and short term work disruption

Essentially, this means:

  • Re job design – they seek to inject more interest, variety, control and responsibility into jobs – to make them seem more like hobbies, something they’d want to do for no pay, and even work endlessly at – even get people to look forward to Monday mornings, not dread them
  • Re individuals – they show genuine interest in their staff, talking face-to-face with them often – they also train them not only so they are more efficient at their work but become more promotable and can climb ladders

 

We’re not there yet – the following describes the current situation in most organisations:

  • Being seen in the office working long hours is deemed essential for holding on to a job – input hours still rate more than results achieved with most managers – presenteeism still outweighs individual productivity 
  • Over 90% would not do their job if they were not paid
  • Most don’t enjoy what they do and would resign immediately if they won the lottery
  • Most don’t rate their immediate boss
  • Most would love to run their own business and be their own boss

 

But changes to working conditions are increasingly being made or considered, including the following: 

  • Flexi-time working, working from home, four day working weeks
  • Dress-down days
  • Gig work – zero hours contracts (some people prefer this, some do not)
  • Appointing mentors
  • Free healthcare insurance, gyms, yoga classes, massage parlours
  • Office games rooms, nap rooms, healthy lunches

 

Such changes all have a part to play but more radical change is needed, addressing the following issues:

  • How to make jobs become paid hobbies – just as many footballers would continue to play, even if not paid
  • How to allow people to work from wherever they want, whenever they want
  • How to let people feel they are their own boss 
  • How to make work feel like being a member of a social club – a place to meet and chat with lots of different like-minded chums

 

CONCLUSIONS:

  • G7 economies are changing big-time at present but official statisticians are not noticing
  • Hence, official ‘doom and gloom’ economic pictures do not paint the real world out there
  • Modern managers can no longer manage their troops using old ‘command and control’ methods – they must ensure their troops enjoy their work if they are to get the best results out of them 

A new ISC rides to the rescue

Puzzle no more about dormant national productivity – the cavalry have arrived in the form of Andy Haldane, chief economist of the BoE (Bank of England) who is to chair the government’s new ISC – Industrial Strategy Council – it’s another quango of sorts for a select few of our great and good to deal with a nagging problem that nobody seems able to resolve

Despite most experts bemoaning the UK’s lack of significant productivity improvement over the last decade, Andy claims: “The UK’s macroeconomic performance has improved dramatically since 1992 when the UK was forced out of the EU’s ERM (Exchange Rate Mechanism)” – furthermore: “The UK is now, arguably, an established Premier League team”

Then another surprise

Apparently this is  all due to “inflation targeting” by his chums at the BoE rather than the government’s efforts which: “Frequently adopted and abandoned different industrial strategies as well as other schemes to raise Britain’s productivity”

Note the role of UK managers at the coal-face merit no mention yet it is they (in our view) who determine some 80% of national productivity levels achieved – Governments can only influence the other 20% by complementing the private sector via their taxation policies and investment in education, healthcare, low-income housing, R&D and infrastructure

Why such influence by organisation level managers?

Because workers in all sectors, public or private, soon settle down to a rate of work they’re comfortable with whatever the systems and processes they’re required to follow – and it’s those systems and processes that determine most of the productivity levels achieved, both at organisation and hence national level – indeed, the famous management guru Dr Edwards Deming went so far as to claim it was systems which determined as much as 94% of an organisation’s productivity level – and the people with the power over and sole responsibility for those systems and processes are organisation managers, not their employees

Undeterred,  Andy goes on to say the ISC will provide: “An independent body to evaluate progress and develop appropriate measures of success” which suggests he has doubts about the current official data available (we wish him well)

However, to kick off his ISC reign, Andy tells us he has identified three productivity gaps facing the UK – sadly,  they’re all based on the rich, albeit flawed, trove of national statistics available to him – viz:

  • Inequality between the country’s highest and lowest performing areas/ regions
  • Lower labour productivity than other large rich countries
  • A slowdown in productivity growth since the 2008 financial crisis

 

Such claims may or may not be true to a greater or lesser extent – the data on which they’re based is so full of errors, forecasts and assumptions that we’re not talking here about 1% or even 5% error margins – our guestimate is it’s more likely to be in the 30% to 50% range

And if that were not bad enough, what would Andy and his new colleagues be prompted to recommend to whom on the basis of such claims – by the sound of it, he’d be focussing on possible changes to Government policies whilst continuing his successful BoE action, and thus restricting himself and his council to a mere 20% of the problem causes

One can only hope that the value of the ISC will itself be determined by some significant improvement in some acceptably accurate measures of national productivity – and disbanded if found to be yet another ‘kicking the can down the road’ initiative

Conclusion:

Beware all economist geeks bearing their advice and solutions

Currently, we are very cynical about Andy’s prospects with the ISC

At work but not working

According to the CEBR (Centre for Ecoomics and Business Research) UK businesses don’t know how to maximise their human capital despite the vast majority being ‘concerned’ or more about their people productivity – indeed, a survey they conducted found that:

    • Some two thirds have not looked at ways to boost employee well-being and so motivation levels
    • Some 60% have not looked at improving business processes and decision-making
    • Some 70% have not invested in technology to automate repetitive tasks

 

But, important as such initiatives are, a bigger source of ‘human capital improvement’ they should all address is the huge waste of employee time when at work – plenty of studies show that, most of the time, people are busy at work but ‘are they productive during that time?’

At present, most managers still equate long hours at work with dedication, commitment and loyalty

This is why, in the early days of Microsoft, Bill Gates memorised employee license plates: “I knew everyone’s licence plates so I could look out in the parking lot and see when people came in, and when they left”

But this attitude is ineffective nowadays, as Gates soon realised – what matters is results, not hours worked

This particularly applies to brainworkers as they steadily replace brawnworkers in workplaces – the former are people who have to use their brains more than their hands to complete their work – people whose outputs and results are less easily countable and often subjectively measured

Brainworkers can look extremely busy when they’re actually unproductive

Indeed, one recent study claims most employees only work about three hours a day – they fill the rest of the time following Parkinson’s Law and surfing, chatting or complaining about being overloaded whilst accomplishing very little – they’re at work but not working

Hence, the increasing calls for most to work only six hours a day or four days a week – or flexitime working, often from home – all  in the expectation of producing much the same if not more and better output

The problem with this is most managers would feel a loss of control over their charges – they find hours input are easily countable and so controllable,  whilst results are less so – hence many managers stick with their old ‘command and control’ ways and manage by time inputs mainly

Fortunately, more enlightened managers recognise their need to move with the times – actions they are taking include:

  • Hiring people they can trust – then trusting them – and this is usually reciprocated
  • Setting expectations and targets for each of the people in their charge – expectations of each team member include not only deliverables on time and of acceptable quality but also coming up with new improvement ideas and helping each other
  • Letting their people decide when they work, where – they know they will be judged on what they get done so they plan accordingly but this allows them to manage their work/ life balance requirements better – an important motivation factor nowadays
  • Not endlessly contacting individuals when not in the office, unless absolutely essential – most problems/ thoughts can wait until tomorrow or later

 

Better results inevitably follow – and all started by the manager managing differently

 

Further UK education needs

“The new prime minister will have to rise to the skills and productivity challenge, and make sure that everyone, no matter where they come from, can get a chance to have a great job”, says Anne Milton, UK Minister for Skills and Apprenticeships

The following is an article she wrote in FEWeek

I want the next prime minister to make sure the work on technical and vocational education continues to be a priority and that we build on what we have already achieved.

Significant progress has been made on our technical education reforms: the first T-levels are on track to be rolled out in 2020; the first Institutes of Technology will launch later this year; and we continue to see more people starting on apprenticeships.

I want the progress we have made to be a step change in how FE (Further Education) is viewed in this country. People are finally waking up to the need for a rebalance between FE and HE. There is much more recognition of the huge impact our further education sector plays in supporting more people to gain the skills they need to get a good job, get on the path to great careers – and for the country, boosting productivity.

This week we published the findings from our review of level 4 and 5 qualifications – or Higher Technical Qualifications – and we launched new proposals to make sure more people and employers can take advantage of them in the future.

All the evidence from our review highlights that higher technical skills (the type that many level 4 or 5 qualifications can provide) are increasingly in demand from employers, but the uptake remains worryingly low. Only 1 in 10 adults in England have studied for a qualification at this level, despite the prospect of better wages and job prospects.

The skills our economy needs now and in the future are not always aligned with the qualifications on offer and we need to make sure that we change that. Young people need to be better informed when it comes to studying for jobs and careers in key sectors such as science, technology and engineering.

Some of this is about all of us continuing to bang the drum about the benefits of technical education. We need to dispel the intellectual snobbery that still exists which dissuades some students from choosing this route in favour of a traditional academic option.

There is no overnight fix for changing the way technical and vocational education is seen by the public, but we can make sure that the qualifications and options that are available are high-quality, are valued by students, parents and employers and ultimately get more people on a path to a good, well-paid job.

That is at the heart of everything we are doing – from the introduction of new T-levels, our reforms to apprenticeships, as well as consulting on changes to post-16 qualifications at level 3 and below, and our new level 4 and 5 proposal. It is all about providing a choice of high-quality options as well as logical, clear training routes that everyone can understand.

These are once-in-a-generation reforms and while I don’t imagine that we are going to get everything right at the first time of asking, if we want to make a success of them in the long term, we need a strong sustainable and coherent technical education system. This will help unlock untapped potential and boost our economy.

The new prime minister will have to rise to this challenge if we are to have the skills we need to increase productivity and make sure that everyone, no matter where they come from can get a chance to have a great job and fulfilling life. This will be critical to the future prosperity of individuals and the country as a whole.

Conclusion: “Well said, ma’am, as far as it goes