In today’s guest post Dr Jules Goddard, Fellow of the LBS reminds us that reducing costs is only a means to an end, not a strategy.
He goes on to say …
The art of management is to manage a business in such a way that the need for operational excellence, continuous improvement, “right first time”, cost leadership, process redesign, corporate renewal, cultural change, charismatic leadership, employee engagement and financial incentives is redundant; and the declared pursuit of these objectives counts as a clear admission of failure.
When executives reach for these remedies, you can be sure that the business has been woefully mismanaged and failure cannot be far away. There are no surer signs of the inadequacy and delinquency of corporate leadership than that (1) cost efficiency should be extolled as the dominant issue facing the company, and (2) the tactics of outsourcing, shared services, restructuring and other short-term palliatives are being paraded as the main drivers of profitability.
“You don’t make yogurt; you make the conditions and the yogurt makes itself.” Like that wise saying, you don’t manage costs; you design the business strategy and the strategy establishes the necessary cost base.
Costs are an outcome of the strategy, not the goal of the strategy. Cost efficiency is always relative to a strategy or to a business model, never to a competitor or to an absolute standard or benchmark.
One step ahead
Strategy is, therefore, the skill of staying one step ahead of the need to be efficient. As soon as the firm starts to attract competitors and pressures on cost start to be felt, a winning strategy will already have been invented to ensure that the business is moving into a new, distinctive and unassailable market position in which its quasimonopolistic power enables it to be a price maker, not a price taker or cost cutter.
The true test of the innovative capability of a firm is that it never needs to worry about, let alone wrestle with, the cost competitiveness of its business model. Its creativity and courage are of such a quality that they immunize the firm against ever having to resort to such mundane and mind-sapping activities as cost reduction, business reorganization, zero-based budgeting or change management. The job of accounting is to keep the firm honest to this purpose. Financial accounts should be designed primarily to pick up signs of commoditisation at the earliest possible stage, before strategic damage is done, by detecting any backsliding to policies such as taking cost out, downsizing, restructuring, outsourcing or, indeed, any other management fad that serves only to damage the firm’s strategy.
Time spent on strategies of cost efficiency is time stolen from the much more important and wealth-creative activities of innovation, differentiation and entrepreneurship.
A poor management sees its job as “re-profiling the human capital” to fit the needs of its strategy. If the strategy is stunted and unimaginative, then a proportion of the workforce will inevitably be made redundant. This goes by the euphemism of “headcount reduction”. A gifted management takes the talents of everyone in the organisation as a given and pits its imagination against the challenge of inventing a strategy that makes maximum use of everyone’s capabilities It is questionable whether management has the right to cut the workforce to suit its strategy; its moral legitimacy depends upon its ability to find market opportunities whose capture depends upon applying the talents of the entire workforce.
Indeed, this is the central responsibility of senior management. If it cannot do this (if its only strategy is to cut costs), then it should step down and give other management teams the chance to do so. Put another way, the top management team should start its cost-cutting drive with itself.
“Managerialism” is steeped in an instrumental ethic in which employees are called “human resources” or “human capital” and are treated as factors of production or the agents of stakeholders. Kant’s categorical imperative warns us against treating other people as means rather than ends. In many firms, the prevailing model of management, with its fixation on control, coordination and compliance, has effectively institutionalized the instrumental treatment of other people. Managers typically get to a better result by thinking of the organisation as the means to the fulfilment and betterment of individuals than as an end in itself.
The lead indicators of strategic failure are typically three:
(1) the notion of “best practice” creeps into the management lexicon,
(2) the practice of bench-marking the performance of competitors takes hold and
(3) business managers are set targets to match or exceed the bench-marked performance of key competitors through the implementation of best practice.
Most firms that go bankrupt are paragons of this style of management. Over the 40 years that GM gradually moved towards Chapter 11, there wasn’t a single quarter in which management missed its cost-reduction targets.
Since 1970, when GM first chose Toyota as its benchmark, its remorseless and unwavering pursuit of operational excellence, cost leadership, worldclass manufacturing and best practice never faltered. Eventually this mindset drove the business bankrupt – as cost-reduction strategies nearly always do, eventually. The story of GM could serve as the epitaph of managerialism.
Jules Goddard (firstname.lastname@example.org), formerly Gresham Professor of Commerce at City University, is currently Fellow at the Centre for Management Development, London Business School