Basic Competence Can Be a Strategy

AI is transforming the world. And it starts with the right compute ARM is the AI compute platform trusted by global leaders, proudly NASDAQ listed, Built for the future. Visit arm.com discover. Welcome to the HBR IdeaCast from Harvard Business Review. I'm Sarah Greenpe. Telling executives that they need to have clear goals and retain talent seems, well, silly. Isn't that just common sense? But the truth is, so many organizations are failing on the fundamentals and don't even realize it. Harvard Business School professor Rafaela Sedoun says it's time to go back to the basics, and she has the data to prove it. Sedun and other Researchers have surveyed 15,000 organizations in 34 countries about core managerial practices. And what they've found calls into question the conventional wisdom about operational excellence. It's not just table stakes, nor is it distinct from strategy. In fact, operational excellence is so rare and so hard to achieve that it actually can be a strategic advantage. Joining me now is Rafaela Sedun. She's a co author of the new article why Do We Undervalue Competent Management? It's in the September October 2017 issue of Harvard Business Review and available on hbr.org Rafaela, thank you so much for being here today.

Thank you.

Are you telling me that the good people of the world are not reading HBR enough?

They are, don't worry. They all read hbr. They all do. What I'm telling you is that maybe they read HBR and they think they're doing what HBR tells them to do, but in practice, they don't. So although we know that certain practices should be done, it's very rarely that we go and really self evaluate. What are we doing? Are we really using them? Are we really being objective in the way we look at data, or are we even collecting the right data? We were surprised by the fact we asked managers to self evaluate and then we compare their self evaluation with our score. We found that there was a very large discrepancy. Everybody's above average when we asked them what they are. Right?

I'm wondering if there was like a conversation, you remember, with a manager where the person sort of realized in the conversation, oh, I'm not as good as I thought I was.

Oh yeah. I remember talking with a manager that we interviewed. We had the results on his organization. He came out at the very bottom. And I remember this feeling of, how is that possible? It was a good moment of realization that maybe there were some improvements that could be done. It was also a moment of, is this how we want to do things. Maybe we do things because it's perceived to be better for us, but, you know, can we question, should we change or not?

What are some of the other reasons that companies struggle to improve at management?

One is awareness, so not knowing that you're behind. The second one is the issue of skills, which is very important. And I think that that has actually a public policy type of angle to it, too. Some of the practices that we survey require a minimal level of literacy and numeracy skills. If your workforce does not have these basic skills, it's going to be hard to implement them because you're effectively shifting the discussion to numbers checking. You know, even if it's basic stuff, sometimes the workforce cannot apply it. The third one, which I think it's fascinating and has not been really studied well, but it's this issue of organizational dynamics and resistance. I think that it comes down to the fact that you are. When you are introducing a process in a company, you're asking people to standardize what they do to some extent. Nobody likes to be standardized, and especially who doesn't like it? The very skilled individuals hate it.

Yeah. People chafe under processes sometimes. Yeah, yeah.

And I think it's because sometimes processes are felt as constraint on what you do, and you sort of lose sight of the fact that if you're able to move the organization toward processes that are not bureaucracy, but they're processes that are conducive to learning and improvement, you get such a large gain as an organization that they overweight your personal cost. I'm fascinated by the idea of studying how this resistance. Right. How does it play out and how do you overcome it?

Yeah. Do you have any kind of ongoing research about that now?

Yeah, actually, in the healthcare setting in a developing country, you know, we've been working with a set of 50 hospitals and in particular neonatal intensive care units of these hospitals. One thing that we noticed there is that the basics, for example, hand washing, the rate of hand washing in this neonatal intensive care unit is below 10% on average, which is tragic. Neonatal mortality rates are very high. What we realized working with these hospitals is that, however, the quality, the extent to which people were nurses were following clinical protocols very much depended on the way their bosses, their clinical heads were working with them. Some of them were very good at sort of creating this coordination with the nurses, meeting with them regularly, talking about how things were done, how things should be done, getting their feedback. Others were completely disconnected from the nurses, and really they were not managing them. So what we are trying to do is can we think of a management intervention where we teach the clinical heads to be better coordinators and can this lead to improved clinical quality and therefore lower infection rates for the kids? That's one example where I really think basic management can have a powerful effect. And it's important to study whether that's true and to study it in a rigorous fashion.

What are some of the patterns you've seen so far and just between different types of companies or across different countries?

It's fascinating. So the level, the differences that we've seen are. First of all, there is a big difference across countries. And that is something that, you know, I'm an economist and I came to this research because I was interested in why are certain countries growing more than others? Right. And can we link it back to companies? And this is absolutely. You know, if you look at the management data, there is a very large difference across countries. You will see that developed countries, as you would expect, are much more professionalized. The firms are much more professionalized than in developing countries. This is an important finding because it's telling us that perhaps one of the reasons behind these differences, level, levels of development, can be traced back to the organizations themselves. It's not just, you know, the government is not working or the education system is not working. It's something that has to do with firms, with people, managers. So that's the first level of differences. And then I think what was really striking and surprised us as much as it surprised other people is the level of heterogeneity differences even within countries and even within the same industries within countries. So you look at the U.S. probably the most developed country, even within the U.S. you will observe that there are some companies that are really well managed and some companies are instead still not implementing the basics.

In your view, what are just some examples of managerial basics?

Yeah. So let me give you like one of my favorite examples is meetings, right?

Yes. Okay. Yep.

And I'm not talking about just, you know, the frequency or, you know, the length of the meetings, but how do you approach your meetings? Do you have an agenda that is discussed? Do you have a follow up plan? Are you using data or are you just telling people, you know, your gut feeling or ordering people what to do? I think meetings are important because it's one of those instances where if run well, you can learn a lot. You can learn, you know, you can learn from the experience of the participants. You can think about new ways of doing things. You can allocate responsibilities and create accountability if done well. And you know, if they're not done well, as we all know, they can be a complete waste of time. So what is interesting is that actually there are some well known processes on, you know, how to conduct meetings. And these are some of the things that we capture. We ask managers if they have an agenda, we ask them if they have a follow up plan, we type. We try to understand how the interactions work in these meetings. So that's, that would be one very basic example that I think touches everybody.

When you look at different firms, one of the big differences you see is the worst managed firms in your sample seem to be founder led firms and family firms. Why do you think you found that?

What fascinates me at least is that when you look at the family firm, for example. Absolutely. There is a willingness to make the firm grow or to keep it profitable over the long term. But the family firm also mixes. It has a mixture of objectives. Right. So one is making money for sure, but then there is all this other emotional bundle of I want to be the boss or you know, I really would like for my kids to work with me. Well, it turns out your kids are not necessarily always the best managers. And so once you start mixing business with family, you and you know, you might make decisions that are very good for what we call private benefits of control, being your own boss or giving a job to your kid. But it might not be necessarily the best thing for the firm itself or for the managerial quality of the people working in the firm.

So people already think that they're doing a good job. They chafe under the sort of mandate to be doing things in a more standardized way. Was there sort of anything else that came up in terms of why this is just so hard to do? I mean, as you say, it's not rocket science like we sort of know what people should be doing.

Yeah. And I think it really comes down to the fact that it's not going to be if it's only one person doing it. These type of processes typically don't have a strong impact on organizational performance. You really want to have different parts of the organization working together with this common language. When that happens, the gains can be really large. But until you get to that point, it's a costly process. And so, you know, you might have organizations that decide to start a lean trajectory. How many lean initiatives are there? Many. But you know, what happens in practice? Well, the, you know, manufacturing people are very excited about it, but the, you know, sales and marketing really hates it. And so what happens next? Well, it's the, you Know, it's the flavor of the month, it's abandoned. It's not part of the culture of the organization. And so you just leave it there.

Does it matter what, what the CEO is like? Does it matter if the CEO is a great manager? Can he or she sort of push that through the whole organization or does it just not quite get that far?

I think the CEO can have a very strong influence on management practices. And here I think what's really interesting is if you have strong processes, the CEO doesn't have to check constantly what people are doing. It's a little bit counterintuitive. A CEO can have a strong effect as long as the CEO is able to convey this idea of, you know, we have to work together on this. So it's more kind of building consensus. That's where I see the role of the CEO as being really important in translating what moving towards a process oriented organization is across the hierarchy and making sure that there is a strong signal of this is how things are going to be done. This is how we work together. What happens is also in doing that, CEOs have also to realize that they will start to delegate much more. So they're not in charge of operations anymore necessarily because they have established processes that allow other people to do this job. So the effectiveness of the CEO. I think CEOs can be very effective once, say, also give themselves, if you like, a new job description which is not so much working on the minutia or the micromanagement piece, but they can really step up to this different role of coordination and persuasion.

I'm wondering if you've seen a kind of similar transformation in a company where the CEO or a senior team has managed to really turn around people's thinking and actually really improve the, the management of their firms.

As you can hear from my accent, I'm Italian. So one is an Italian company that Moleskine. And, and it was really interesting. You know, Moleskine is a relatively, you know, was really small when they decided that they wanted to professionalize what they were doing and hired a professional manager to do that. And what was fascinating to me was to see how the professional manager changed the way things were done within Moleskine, introducing processes that were foreign to the company up to that moment, because it was led through this sort of tacit knowledge that was embodied in the founder. And that is a transformation that took some time to do. And it took a very strong partnership with the founders themselves to realize, which I think was, you know, a point. Imagine had he, you know, they were backed by a private equity company. Imagine a different approach where he would have just, you know, walked in on day one and said, this is how we do things today. What would have been the odds of success in that case? Through the partnership, he was really able to understand what they knew, what the founders knew, and scale it up so that that knowledge was accessible to many different people.

So in the article, you recount the kind of famous story of how GM tried to adopt the Toyota production system and failed. What is the difference between a company that kind of successfully makes this transition and a company like GM that says, hey, this is great, we're going to do this, and then it just totally just sputters out.

Yeah. You know, the case of gm, I think it's fascinating because my interpretation of what happened there is that there was an underestimation of really the type of implicit agreements that you need to have between the top of the organization and the workforce for these processes to be embraced. In the GM case, the relationship between the workforce and the management was there wasn't trust between the two of them. So you cannot. Once they tried to introduce processes that would lead to higher productivity, the thought was, if we become more productive as a workforce, they're going to fire us. They don't need us anymore. And that is a major obstacle. Right, because you have to convince people to do things in a different way. And the threat to the workforce is that by becoming more productive, they're going to lose their jobs. And this is something that is not just gm. GM is just an example of why using managerial processes is hard. This is one of the concerns. And so I think that, again, it goes back to the idea that we tend to say these processes are so basic, we're just going to tell people to do things in a different way. You really have to work with getting a mutual understanding with your employees. And that's only at that point they will believe in the fact that by changing the way of doing things, there will be a benefit, not just for you, but also for them.

The kinds of firms that seem to come out at the top end of the best managed firms are private equity firms. And I'm just sort of curious about that tension because usually when a firm is bought by a PE firm, the staff do feel like, oh, we're all going to be fired.

Yeah.

So can you just explain, like, how does that work? How do PE firms pull this off? Even maybe if there's not a lot.

Of trust, you know, you don't have to rebuild trust. You're basically starting from the assumption that there is a minimum level of trust, there is selection of the workforce. So in some cases, some PE firms actually, you know, change the entire top team. There is a conscious understanding that if you want to change the way things are done, you have to work with people that believe in what you're doing. You know, that already is creating a more homogeneous sort of set of beliefs across the workforce. And then there is accountability. And so, you know, if it's accountability that is built, sometimes it's built through monetary incentives, sometimes it's built through again this creation of our common language of performance results. That's my understanding, is that there is this way of doing it systematically from the top to the bottom that helps create a common set of understanding of how things are going to work forward. You know, going forward.

There is this kind of debate about like, which comes first. If you have a great culture and a trusting culture, do you then have operational excellence or is it operational excellence that that creates a sort of culture of winning and trust? Where do you come out on that chicken versus egg question?

Two things on this. The first one is trust. You know, it also has some strong historical roots. For example, we've measured the extent to which managers delegate to other people and you can see that the patterns of delegation vary very much across geographies, even within the same country. Let me give you the Italian example. Firms in the north tend to delegate much more to the managers tend to delegate much more to the workforce relative to plants in the south. And Italy is one of those countries where the level of generalized trust, forget about this. Individual companies varies very tremendously for historical reasons within the country and the north tend to be more trusting relative to the south relates back to social capital. So to some extent, trust is exogenous. It depends on where you know, where your firm is, the history of the company, the patterns, the relationship that you had with your employees going Back to the GM example. Right. @ the same time, trust is also a variable that can be changed. I go back to the idea that the top of the organization can play an important role in building trust. But if you want the organization to follow managerial principles, you as a CEO should make sure that you know, you, you, you buy into them.

Right. You know, what is the proper role of places like business schools and training programs in that? Because it seems like there, there are a lot of expensive and prestigious programs and managers learn a lot of things there. But are they learning things that would help them address this specific.

Issue? Yeah. Yeah. Well, I guess I have the experience of my students at hbs and when we discuss cases where it's clear that what distinguishes an organization is the use of processes, but the use of processes throughout the hierarchy, as we discussed before, they question whether is this really, is this really something that is going to lead to competitive advantage. They can't believe that these things which are so basic and so known, can actually be a source of performance differentials. So I think that maybe one aspect that I'd love to see more is really exposing the students to this variety of how things get done in practice. Maybe you can embed them in organizations and you can see this is a well run organization, this is a badly run organization. What do you make of it and what's your role? How would you change how things are done? And it's the same with executive students which come and they think that they come and they have this moment of realization that they could do things differently. If it's only one person in the organization coming and getting exposed and then he or she goes back and there isn't that commitment from the top, it's going to be hard to change. So when you think about training program, I think it's important to think about training from not just learning the abstract, but thinking proactively of how am I going to adapt, how am I going to use this when I go.

Back. Well, Rafaela, thank you so much for talking with us.

Today. Thank you so.

Much. That's Rafaela Sedoun. She's a professor at Harvard Business School and she's co author of the article why Do We Undervalue Competent Management? Read it in the September, October 2017edition of Harvard Business Review or on hbr.org. thanks for listening to the HBR Ideacast. I'm Sarah Green.