CHAPTER ELEVEN
Business Realities
THAT MANAGERS GIVE NEITHER sufficient time nor sufficient thought to the future is a universal complaint. It is a recurrent theme in their working day and in the articles and in the books on management.
It is a valid complaint. Managers should spend more time and thought on the future of their business. They also should spend more time and thought on a good many other things, their social and community responsibilities for instance. Both they and their business pay a stiff penalty for these neglects. The neglect of the future is only a symptom; executives slight tomorrow because they cannot get ahead of today. That too is a symptom. The real disease is the absence of any foundation of knowledge and system for tackling the economic tasks in business.
Today’s job takes all the manager’s time, as a rule; yet it is seldom done well. Few managers are greatly impressed with their own performance in the immediate tasks. They feel themselves caught in a “rat race,” and managed by whatever is dumped into their “in” tray. They know that crash programs which attempt to “solve” this or that particular “urgent” problem rarely achieve right and lasting results. And yet, they rush from one crash program to the next. Worse still, they know that the same problems recur again, no matter how many times they are “solved.”
Before thinking of tackling the future, a manager must be able therefore to dispose of the challenges of today in less time and with greater impact and permanence. For this a systematic approach is needed to today’s job.
Three Dimensions of the Economic Task
There are three different dimensions to the economic task: (1) The present business must be made effective; (2) its potential must be identified and realized; (3) it must be made into a different business for a different future. Each task requires a distinct approach. Each asks different questions. Each comes out with different conclusions. Yet they are inseparable. All three have to be done at the same time: today. All three have to be carried out with the same organization, the same resources of people, knowledge, and money, and in the same entrepreneurial process. The future is not going to be made tomorrow; it is being made today, and largely by the decisions and actions taken with respect to the tasks of today. Conversely, what is being done to bring about the future directly affects the present. The tasks overlap. They require one unified strategy. Otherwise, they cannot really get done at all.
To tackle any one of these jobs, let alone all three together, requires an understanding of the true realities of the business as an economic system, of its capacity for economic performance, and of the relationship between available resources and possible results. Otherwise, there is no alternative to the “rat race.” This understanding never comes ready-made; it has to be developed separately for each business. Yet the assumptions and expectations that underlie it are largely common. Businesses are different, but business is much the same, regardless of size and structure, of products, technology and markets, of culture and managerial competence. There is a common business reality.
There are actually two sets of generalizations that apply to most businesses most of the time: one with respect to the results and resources of a business, one with respect to its efforts. Together they lead to a number of conclusions regarding the nature and direction of the entrepreneurial job.
Most of these assumptions will sound plausible, perhaps even familiar to most people in business, but few people ever pull these assumptions together into a coherent whole. Few draw action conclusions from them, no matter how much each individual statement agrees with their experience and knowledge. As a result, few managers base their actions on these, their own assumptions and expectations.
Results and Resources Exist Outside a Business
Neither results nor resources exist inside the business. Both exist outside. There are no profit centers within the business; there are only cost centers. The only thing one can say with certainty about any business activity, whether engineering or selling, manufacturing or accounting, is that it consumes efforts and thereby incurs costs. Whether it contributes to results remains to be seen.
Results depend not on anybody within the business nor on anything within the control of the business. They depend on somebody outside—the customer in a market economy, the political authorities in a controlled economy. It is always somebody outside who decides whether the efforts of a business become economic results or whether they become so much waste and scrap.
The same is true of the one and only distinct resource of any business: knowledge. Other resources, money or physical equipment, for instance, do not confer any distinction. What does make a business distinct and what is its peculiar resource is its ability to use knowledge of all kinds—from scientific and technical knowledge to social, economic, and managerial knowledge. It is only in respect to knowledge that a business can be distinct, can therefore produce something that has a value in the market place.
Yet knowledge is not a business resource. It is a universal social resource. It cannot be kept a secret for any length of time. “What one person has done, another can always do again” is old and profound wisdom. The one decisive resource of business, therefore, is as much outside the business as are business results.
Indeed, business can be defined as a process that converts an outside resource, namely knowledge, into outside results, namely economic values.
Results from Opportunities: Resources to Opportunities
Results are obtained by exploiting opportunities, not by solving problems. All one can hope to get by solving a problem is to restore normality. All one can hope, at best, is to eliminate a restriction on the capacity of the business to obtain results. The results themselves must come from the exploitation of opportunities.
Resources, to produce results, must be allocated to opportunities rather than to problems. Needless to say, one cannot shrug off all problems, but they can and should be minimized.
Economists talk a great deal about the maximization of profit in business. This, as countless critics have pointed out, is so vague a concept as to be meaningless. But “maximization of opportunities” is a meaningful, indeed a precise, definition of the entrepreneurial job. It implies that effectiveness rather than efficiency is essential in business. The pertinent question is not how to do things right but how to find the right things to do, and to concentrate resources and efforts on them.
Leadership Position and Results
Economic results are earned only by leadership, not by mere competence. Profits are the rewards for making a unique, or at least a distinct, contribution in a meaningful area; and what is meaningful is decided by market and customer. Profit can only be earned by providing something the market accepts as value and is willing to pay for as such. And value always implies the extra which makes one product stand out, the distinction which gives it that elusive quality of leadership. The genuine monopoly, which is as mythical a beast as the unicorn (save for politically enforced, that is, governmental monopolies of which the cartel of the Petroleum Exporting countries is perhaps the outstanding example), is the one exception.
This does not mean that a business has to be the giant of its industry nor that it has to be first in every single product line, market, or technology in which it is engaged. To be big is not identical with leadership. In many industries the largest company is by no means the most profitable one, since it has to carry product lines, supply markets, or apply technologies where it cannot do a distinct, let alone a unique job. The second spot, or even the third spot, is often preferable, for it may make possible that concentration on one segment of the market, on one class of customer, on one application of the technology, in which genuine leadership often lies. In fact, the belief of so many companies that they could—or should—have leadership in everything within their market or industry is a major obstacle to achieving it; it makes these companies splinter their resources—and performance demands their concentration.
But a company which wants economic results has to have leadership in something of real value to a customer or market. It may be in one narrow but important aspect of the product line, it may be in its service, it may be in its distribution, or it may be in its ability to convert ideas into salable products on the market speedily and at low cost.
Unless it has such leadership position, a business, a product, a service, becomes marginal. It may seem to be a leader, may supply a large share of the market, may have the full weight of momentum, history, and tradition behind it. But the marginal is incapable of survival in the long run, let alone of producing profits. It lives on borrowed time. It exists on sufferance and through the inertia of others. Sooner or later, whenever boom conditions abate, it will be squeezed out.
Any leadership position is transitory and likely to be short-lived. No business is ever secure in its leadership position. The market in which the results exist, and the knowledge which is the resource, are both generally accessible. No leadership position is more than a temporary advantage. What this really means is that profits result only from the innovator’s advantage and therefore disappear as soon as the innovation has become routine. In business (as in a physical system) energy always tends toward diffusion. Business tends to drift from leadership to mediocrity. And the mediocre is three-quarters down the road to being marginal. Results always drift from earning a profit toward earning, at best, a fee which is all competence is worth.
It is, then, the manager’s job to reverse the normal drift. It is the manager’s job to focus the business on opportunity and away from problems, to re-create leadership and counteract the trend toward mediocrity, to replace inertia and its momentum by new energy and new direction.
Efforts Within the Business and Their Cost
The second set of assumptions deals with the efforts within the business and their cost.
What exists is getting old. To say that most managers spend most of their time tackling the problems of today is euphemism. They spend most of their time on the problems of yesterday. Managers spend more of their time trying to unmake the past than on anything else.
This, to a large extent, is inevitable. What exists today is of necessity the product of yesterday. The business itself—its present resources, its efforts and their allocation, its organization as well as its products, its markets and its customers— expresses necessarily decisions and actions taken in the past. Its people, in the great majority, grew up in the business of yesterday. Their attitudes, expectations, and values were formed at an earlier time; and they tend to apply the lessons of the past to the present. Indeed, every business regards what happened in the past as normal, with a strong inclination to reject as abnormal whatever does not fit the pattern.
No matter how wise, forward-looking, or courageous the decisions and actions were when first made, they will have been overtaken by events by the time they become normal behavior and the routine of a business. No matter how appropriate the attitudes were when formed, by the time their holders have moved into senior, policy-making positions, the world that made them no longer exists. Events never happen as anticipated; the future is always different. Just as generals tend to prepare for the last war, the people in business always tend to react in terms of the last boom or of the last depression. What exists is therefore always aging. Any human decision or action starts to get old the moment it has been made.
It is always futile to restore normality; “normality” is only the reality of yesterday. The job is not to impose yesterday’s normal on a changed today; but to change the business, its behavior, its attitude, its expectations—as well as its products, its markets, and its distributive channels—to fit the new realities.
What exists is likely to be misallocated. Business enterprise is not a phenomenon of nature but one of society. In a social situation a very small number of events at one extreme—the first 10 per cent to 20 per cent at most—account for 90 per cent of all results; whereas the great majority of events accounts for only 10 per cent or so of the results. This is true in the market place: a handful of large customers out of many thousands produce the bulk of orders; a handful of products out of hundreds of items in the line produce the bulk of the volume; and so on. It is true of sales efforts: a few sales people out of several hundred always produce two-thirds of all new business. It is true in the plant: a handful of production runs account for most of the tonnage. It is true of research: the same few people in the laboratory are apt to produce nearly all the important innovations.
It also holds true for practically all personnel problems: the bulk of the grievances always comes from a few places or from one group of employees, as does the great bulk of absenteeism, of turnover, of suggestions under a suggestion system, of accidents. As studies at the New York Telephone Company have shown, this is true even in respect to sickness.
The implications of this simple statement about normal distribution are broad.
It means, first: while 90 per cent of the results are being produced by the first 10 per cent of events, 90 per cent of the costs are incurred by the remaining and resultless 90 per cent of events. In other words, results and costs stand in inverse relationship to each other.
A second implication is that resources and efforts will normally allocate themselves to the 90 per cent of events that produce practically no results. They will allocate themselves to the number of events rather than to the results. In fact, the most expensive and potentially most productive resources (i.e., highly trained people) will misallocate themselves the worst. For the pressure exerted by the bulk of transactions is fortified by the individual’s pride in doing the difficult—whether productive or not. This has been proved by every study. Let me give some examples:
A large engineering company prided itself on the high quality and reputation of its technical service group, which contained several hundred expensive engineers. They were indeed first-rate. But analysis of their allocation showed clearly that while they worked hard, they contributed little. Most of them worked on the “interesting” problems—especially those of the very small customers—problems which, even if solved, produced little business. The automobile industry was the company’s major customer and accounted for almost one-third of all purchases. But few technical service people had within memory set foot in the engineering department or the plant of an automobile company. “General Motors and Ford don’t need me; they have their own people” was their reaction.
Similarly, in many companies, sales people are misallocated. The largest group of sales people (and the most effective ones) are usually put on the products that are hard to sell, either because they are yesterday’s products or because they are also-rans which managerial vanity desperately is trying to make into winners. Tomorrow’s important products rarely get the sales effort required. And the product that has sensational success in the market, and which therefore ought to be pushed all out, tends to be slighted. “It is doing all right without extra effort, after all” is the common conclusion.
Research departments, design staffs, market development efforts, even advertising efforts have been shown to be allocated the same way in many companies— by transactions rather than by results, by what is difficult rather than by what is productive, by yesterday’s problems rather than by today’s and tomorrow’s opportunities.
A third and important implication is that revenue money and cost money are rarely the same money stream. Most business people see in their mind’s eye—and most accounting presentations assume—that the revenue stream feeds back into the cost stream, which then, in turn, feeds back into the revenue stream. But the loop is not a closed one. Revenue obviously produces the wherewithal for the costs. But unless management constantly works at directing efforts into revenue-producing activities, the costs will tend to allocate themselves by drifting into nothing-producing activities, into sheer busy-ness.
In respect then to efforts and costs as well as to resources and results the business tends to drift toward diffusion of energy.
There is thus need for constant reappraisal and redirection; and the need is greatest where it is least expected: in making the present business effective. It is the present in which a business first has to perform with effectiveness. It is the present where both the keenest analysis and the greatest energy are required. Yet it is dangerously tempting to keep on patching yesterday’s garment rather than work on designing tomorrow’s pattern.
A piecemeal approach will not suffice. To have a real understanding of the business, the manager must be able to see it in its entirety. The manager must be able to see its resources and efforts as a whole and to see their allocation to products and services, to markets, customers, end-users, to distributive channels. The manager must be able to see which efforts go onto problems and which onto opportunities, and also must be able to weigh alternatives of direction and allocation. Partial analysis is likely to misinform and misdirect. Only the over-all view of the entire business as an economic system can give real knowledge.
Concentration is the key to economic results. Economic results require that managers concentrate their efforts on the smallest number of products, product lines, services, customers, markets, distributive channels, end-uses, and so on, that will produce the largest amount of revenue. Managers must minimize the amount of attention devoted to products which produce primarily costs because, for instance, their volume is too small or too splintered.
Economic results require that staff efforts be concentrated on the few activities that are capable of producing significant business results.
Effective cost control requires a similar concentration of work and efforts on those few areas where improvement in cost performance will have significant impact on business performance and results—that is, on those areas where a relatively minor increase in efficiency will produce a major increase in economic effectiveness.
Finally, human resources must be concentrated on a few major opportunities. This is particularly true for the high-grade human resources through which knowledge becomes effective in work. And, above all it is true for the scarcest, most expensive, but also potentially most effective of all human resources in a business: managerial talent.
No other principle of effectiveness is violated as constantly today as the basic principle of concentration. This, of course, is true not only of businesses. Governments try to do a little of everything. Today’s big university tries to be all things to all people, combining teaching and research, community services, consulting activities, and so on. But business—especially large business—is no less diffuse.
Not long ago it was fashionable to attack American industry for “planned obsolescence.” And it has long been a favorite criticism of industry, especially American industry, that it imposes “deadening standardization.” Unfortunately industry is being attacked for doing what it should be doing and fails to do.
Large United States corporations pride themselves on being willing and able to supply any specialty, to satisfy any demand for variety, even to stimulate such demands. Any number of businesses boast that they never of their own free will abandon a product. As a result, most large companies end up with thousands of items in their product line—and all too frequently fewer than twenty really sell. However, these twenty or fewer items have to contribute revenues to carry the costs of the 9999 non-sellers.
Indeed, the basic problem of United States competitive strength in the world today may be product clutter. If properly costed, the main lines in most of our industries prove to be fully competitive, despite our high wage rate and our high tax burden. But we fritter away our competitive advantage in the volume products by subsidizing an enormous array of specialties, of which only a few recover their true cost. In electronics, for instance, the competition of the Japanese portable transistor radio rests on little more than the Japanese concentration on a few models in this one line—as against the uncontrolled excess of barely differentiated models in the United States manufacturers’ lines.
We are similarly wasteful in this country with respect to staff activities. Our motto seems to be: “Let’s do a little bit of everything”—personnel research, advanced engineering, customer analysis, international economics, operations research, public relations, and so on. As a result, we build enormous staffs, and yet do not concentrate enough effort in any one area.
Similarly, in our attempts to control costs, we scatter our efforts rather than concentrate them where the costs are. Typically the cost-reduction program aims at cutting a little bit—say, 5 or 10 per cent—off everything. This across-the-board cut is at best ineffectual; at worst, it is apt to cripple the important, result-producing efforts which usually get less money than they need to begin with. But efforts that are sheer waste are barely touched by the typical cost-reduction program; for typically they start out with a generous budget.
These are the business realities, the assumptions that are likely to be found valid by most businesses at most times, the concepts with which the approach to the entrepreneurial task has to begin.
That these are only assumptions should be stressed. They must be tested by actual analysis; and one or the other assumption may well be found not to apply to any one particular business at any one particular time. Yet they have sufficient probability to provide the foundation for the analysis the executive needs to understand his business. They are the starting points for the analysis needed for all three of the entrepreneurial tasks: making effective the present business; finding business potential; and making the future of the business.
The small and apparently simple business requires this understanding just as much as does the big and highly complex company. Understanding is needed as much for the immediate task of effectiveness today as it is for work on the future, many years hence. It is a necessary tool for any managers who take seriously their entrepreneurial responsibility. And it is a tool which can neither be fashioned for them nor wielded for them. They must take part in making it and using it. The ability to design and develop this tool and the competence to use it should be standard equipment for business managers.