What Management Is: How It Works and Why It's Everyone's Business

What Management Is How It Works and Why It’s Everyone’s Business

Author: Joan Magretta Publisher: Free Press Date of Publication: 2002 ISBN: 0743203186 Number of Pages: 256 pages

About the Author

Joan Magretta Joan Magretta is a uniquely authoritative speaker on management who has written the big-picture management book for our times—What Management Is: How It Works and Why It’s Everyone’s Business—chosen by BusinessWeek as one of the ten best business books of 2002. Speaking with an authority that comes from exhaustive research and many years as a corporate manager herself, Joan brings her "back-to-basics" message to the podium with enthusiasm, humor, and common sense. Joan Magretta is a Senior Institute Associate at the Institute for Strategy and Competitiveness at the Harvard Business School. Prior to her current position at Harvard, Joan was the Editor-at-Large and principal strategy editor of Harvard Business Review. A collection of her work at the Review has been published as Managing in the New E c o n o m y, w h i c h w a s h a i l e d b y BusinessWeek as one of the "six books that are essential reading for modern managers." She also served as a partner at Bain and Company, a leading strategy firm. For two decades she has advised senior management in a wide range of settings, from healthcare to high fashion, to heavy manufacturing and higher education. She has also written for The Wall Street Journal and Sloan Management Review.

The Big Idea Management affects everyone because it is present in every aspect of the world. It applies to managing oneself - focusing our abilities towards our goals. It applies to our working relationships with others because it affects our choices about them. Management is about putting together organizations that work to accomplish a mission. The basic tasks of the manager are to plan and to execute. The manager assesses the organization's goals and resources. He defines these clearly for others. The manager formulates a plan of action or a kind of road map. Having the plan, the manager then proceeds to implement it. The manager must constantly keep careful track of where the organization is (Are we heading towards our goal?) and how the organization is performing (Are we utilizing best value from our resources?).

Chapter 1 Value Creation: From the Outside In Creating value is the primary duty of management. The term Value Creation is important because it underscores the shift from managing resources (which was the main focus of management th th from the late 19 to the early 20 century) to managing the results or performance of the organization. Warren Buffet succinctly defines it as what you get in exchange for what you pay.

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What Management Is By Joan Magretta

Customers Define Value Value takes many forms and is recognized in different ways by different people. It can be tangible, for example cell phones, or intangible, like the mobile connection service and instant information the cell phone provides. By thinking of Value as how a customer defines it focuses management on the consumer/customer: if no one buys it, what good is it?

Value as Efficiency: The Manufacturing Mindset th

th

In the late 19 to early 20 century, businesses were what they made. A business manufactured steel, automobiles, etc. To increase a business' value, one increased manufacturing efficiency to produce more steel or more automobiles, etc.

The Marketing Mindset: What Does the Customer Value? In 1954, Peter Drucker wrote The Practice Management, an introduction to management. He concluded that customers don't buy products; they buy the fulfillment of their needs. He encouraged a change in perspective, to see from the customer's eyes. Drucker encouraged managers to ask: “What is our business?” “Who is the customer?” “What does the customer value?”

Maximizing Shareholder Value: The New Mantra During the 1980s it was common to hear of hostile takeovers and battles for corporate control, these goings on even became the theme of movies. Takeovers become possible when the value of the whole company being taken over was less than the sum of its parts or in other words, undervalued. This pressured management to do more than create value; they must maximize it for the shareholders.

How Is Value Created? In Michael Porter's Competitive Strategy, he developed the concept of the value chain which is the sequence of events, data, and processes that turns out and delivers the product. One major consequence of value chain thinking is that each activity is not a cost but a step in adding value to the final product. Another major consequence is that it looks at the total process of value creation that includes suppliers, distributors, marketers, etc, each one's role in it and how it affects the whole.

The Right Discipline for Non-profits: Mission, Not Markets Non-profit organizations, for example environment conservationists, require a different focus. The value they create is not necessarily determined by the market. The value they create is tied up in their mission. According to Magretta, their focus questions are: “What is our mission?” “What is the unique value we exist to create?” “Who will support us in fulfilling our mission, and how can we align their interests with

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our mission?”

Value Is a System Management is charged with creating value; but management does not determine if value has in fact been created. The scorekeepers are the shareholders, the employees, and the suppliers. Management therefore also has to ensure that these scorekeepers will continue to be involved in the system that creates value for all of them.

Chapter 2 Business Models: Converting Insight to Enterprise A business model is a theoretical structure of how an organization will perform based on assumptions made. The theory predicts the value it creates for participants: the shareholders, customers, etc. As real data comes in, the theory is revised to account for real results. The process is similar to a science experiment.

A Good Model Tells a Good Story A story has characters and plot. In a business model, the characters are all the people involved and their respective roles and motivations. The plot in a profit venture is about how it will make money. The plot in a non-profit is how it will effect change. A good story has a plot twist. For business ventures this plot twist is usually an insight into the value chain. The problem with business models is that they are easily defined in hindsight; which doesn't mean to say they have no use. What it does mean is that the characters, their motivations and the plot twist/value chain insight all have to be plausible.

Chapter 3 Strategy: The Logic of Superior Performance A key aspect in analyzing the business model is the economic relationships of the characters. However the model does not include competition which is inevitable. This where strategy comes in: how to do (your business) better than your competitors by doing it differently.

Doing Better by Being Different Examining what Wal-Mart, the discount retailer, did differently from competitors: · Adapting the supermarket to sell clothes, appliances, and other goods · Cutting the frills (sales attendants, fancy displays, etc.) means lower costs and cheaper products. · First-mover advantage: move into and establish yourself in a territory where there are no competitors · Up to date inventory: know what's selling and how much so that you can order more (if it sells well) or cancel (if no one is interested) as is appropriate

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Cross-docking: supplier's goods were transferred straight from an unloading dock to delivery trucks bound for the stores. This meant less unpacking and repacking also no idle storage time.

The Link Between Strategy and Performance A company is profitable when its returns or sales are larger than its costs. So in order to do better the company can either charge customers more or lower its costs. These options or combinations (as in the Wal-Mart example) are what have to be done differently from competitors to capture the market (or part of the market) and get more profits. The interaction of competitors can range from perfect competition where rivals are fairly equal (so innovations/advantages are quickly echoed) to monopoly where one company holds an insurmountable or near invincible advantage over competitors. The more monopoly like advantage a company maintains, the better it is for profits as they can demand higher prices.

How Do You Play the Game of Strategy? Effective strategy is being different from your competitor and maintaining that difference/advantage. Sometimes the differences are real: Product A is more durable than Product B. Sometimes the differences are perceived: Brand X is more comfortable than Brand Y. An effective strategy is to use trade-offs. One business can't be all things for all people. Trade-offs are choices or business practices that one competitor makes that another competitor can not copy. The trade-off can be a different process or a different target market, etc. The trade-offs for the rival will either incur losses from copying the process or from neglecting or alienating its current target market. In 1979 Michael Porter identified five underlying forces active in an industry. Since then it has become common to plan strategy with these forces in mind: 1) The competition among existing players; 2) The threats of new entrants; 3) The power of suppliers; 4) The power of customers; and 5) The availability of new products.

From Doing Good to Doing Better: Strategy for Non-profits Nonprofits compete with other nonprofits for funding and/or civic involvement. Just as in business, the nonprofit formulates strategies on how it will do better by being different. These strategies and their resultant actions are formulated in line with organization's mission.

Chapter 4 Organization: Where to Draw the Lines Current trends are for organizations to remain small, focused, and lean by reorganizing, outsourcing or spinning off functions and units. The value chain extends more across companies. Paradoxically, some big companies get bigger by

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expanding or by acquiring new companies. Organizations reorganize depending on business strategy and in reaction to competition: organization must be flexible and dynamic. Management organizes by drawing lines between and among units, suppliers, and functions. There are three kinds of lines: 1) Boundary lines: define what is inside and what is outside the organization 2) Organization chart lines: define and divide business units and relations 3) Authority lines: define who makes the decisions

Ford versus Sloan: Two Strategies, Two Structures Henry Ford's organization (Ford Motor Company) was very hierarchical. Henry Ford placed himself at the top so he could control and coordinate every aspect of the company. This was in keeping with his strategy of producing an affordable car for everyone. His strategy was against the business practice of the day which required cars be expensive because each was custom-made. He created just one type of car over and over. Alfred Sloan's organization (General Motors Company) was multi-divisional. His strategy was to offer “a car for every purse and purpose.” He produced more than one car but parts were kept similar so that each division must interact to achieve economies of scale (high initial costs are shared by mass produced units). By adding additional features in addition to the variety, he justified to customer his greater price with greater value.

Manage or Buy Companies will reorganize based on market developments, specifically changes in their value chain. Is it better for the company to buy components (for the final product) from suppliers or manage the production themselves? Producing the components improves coordination of the processes and so lowers costs. However, producing their components may dampen innovations (to improve costs, quality, etc) that the division would normally undertake in reaction to other competitors who produce the same components. Toyota showed it was possible to have the best of both by cooperating better with suppliers. Increased information exchange with suppliers helped suppliers customize their components for Toyota. The information also allowed coordination of manufacturing and delivery of the components which decreased idle inventory and lessened storage costs.

Manage or Buy: Outsourcing Is In The manage-or-buy decision directly affects the size of the organization. In 1991 Ronald Coase developed a simple principle to explain these changes: if is cheaper to accomplish an activity within the organization then the organization would grow larger, if not then it would maintain its size or shrink as the activity was outsourced. This is however only a trend and not a rule. Companies will ultimately choose to grow or shrink based on their strategy.

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Chapter 5 Facing Reality: Which Numbers Matter and Why Previous chapters dealt with planning. Equally important to management is quantifying performance. This starts out with measuring then goes onto analyzing the context of the measurements. Reading the measures and their context is usually represented as a ratio or percentage or average or trend. These numbers help managers decide the appropriate course of action to take. The actual number crunching is easily taught and easily learned. The more difficult skill is interpreting the number as this requires experience. Experience helps develop expectations about the numbers and guides the manager decisions.

Numbers No Organization Can Live Without The numbers corroborate the story of the business model. The developments in computing power and technology bring real time responses to decisions. It is important to note that these tech advances also mean more and more data meaning managers have to be more attentive to the different stories they are telling. If your model is accurate about who your customers are and what they value, your revenues will reflect it. If your model is accurate about how you create value, your costs will reflect it. If your model is accurate about how you differ from competitors, your profits will reflect it. The important numbers are: revenues, costs, profits and cash flow. Again these numbers are aids to understanding. In themselves, they are not fool proof. The numbers are simple but the markets are complex.

Chapter 6 The Real Bottom Line: Mission and Measures Managers translate the organization's mission into concrete terms of goals and performance to focus members' actions. The challenge is that there is rarely a clear and easy answer. Profits are not a goal, they are a result of the actions to achieve the mission.

In Search of the Universal Measure Measurements evaluate performance. Measurements can be indicators, guides, and goals for the managers and for the members. There is no one measure that will tell you everything you need to know about the company. The profits can tell you if costs are reasonable or if your product is doing well now. It can not tell you if your product will continue to do well tomorrow or if it even did as well last year. Measures are industry and business specific. Some general important measures are: · Operating and financial measures: these can indicate the productivity of resources, personnel, etc. · Employee turnover: can indicate organization spirit · External performance measures: can indicate customer satisfaction and loyalty

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· Market share: can indicate relative performance versus rivals Each has strengths and limitations. New measures or combinations of measures should be formulated as required.

Some Examples of Matching Measures to Mission For Continental Airlines, a US passenger airliner Mission: · Fly fuller flights · Satisfy customer/passenger demands like arriving with their baggage on time · Make employees like working for Continental Measures: · Revenue per available seat or number of seats filled per flight in a month · Monthly on-time performance and mishandled baggage incidents · Customer and employee turnover · Number of sick leaves For Fidelity Investments' retirement business, a mutual fund that managed people's assets for their retirement Mission: · Ensuring that customers have enough money to retire on · Focusing people in establishing their financial retirement goals Measures: · Assess people's asset allocation and portfolio diversification For Dell computers, a computer direct seller Mission: · Give customers best technology at lowest cost Measures: · Low inventory. Building and shipping computers to users quickly lessens obsolescence and storage costs · Lessen touches. The more often components are touched, the more quality suffers · Return on invested capital. Revenues - (Costs of goods + advertising + building facilities + inventory etc)

Chapter 7 Betting on the Future: Innovation and Uncertainty Innovation in management is searching for new value or new ways to create value. Without innovation a company will stagnate and fall behind the competition. Because the future is uncertain, managers must make bets as to which innovation will keep the company ahead or at least strongly competitive tomorrow.

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Juggling the Present and the Future Ford Motors produced the widely successful Model T, the first affordable car for the masses. It did this so well and stuck with it. They didn't see that because cars were now affordable, they would a second and third car and these would be different from the Model T. Because Ford made only the Model T, they bought elsewhere and Ford suffered. Digital Equipment Corporation (DEC) built minicomputers better than anyone else. They didn't foresee that people would eventually want personal computers in their homes. They have since been acquired by another company. One hundred twenty year-old Kodak is still wrestling with the shift from its successful traditional imaging business to the digital imaging trend of tomorrow. Nonprofit organizations wrestle with decisions of how much to invest in their continuing services now and how much to invest in their continued growth tomorrow.

Good Management Is Entrepreneurial Management must look at short term and long-term performance. Long-term performance needs innovation, an entrepreneurial attitude.

Thinking Inside the Box “Thinking outside the box” has become a phrase synonymous with creativity and innovation. A popular graphic to illustrate this is the 9 dot problem arranged in a 3 x 3 square formation. The problem posed is how to link all 9 dots without lifting your pen and with just 4 lines. The solution requires the lines to extend outside the “box” or square that you would naturally picture. This innovative solution comes about because of the constraints or bounds of the box. This is the core principle of innovation in business: creating new value within fixed constraints.

The Information You Need To see the constraints or bounds of the box, the manager must first find the answer to what the customers need or value. This can be done with surveys, interviews, or observing their activities.

Making Decisions About an Uncertain Future Many business decisions will have to be made based on incomplete information. A component of innovation is not just researching information but also evaluating it: · What information is fact? · What information is an assumption? · What information can you find out and what can you not find out? · Is what you don't know critical to your innovation/decision?

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Innovation and value creation is not necessarily a random process. Tools for arriving at decisions involving uncertainty have been developed. These tools are aid the manager in arriving at good decisions.

Break even analysis figure business costs then figure how many customers need to spend (revenues) to make up the costs or break even. Payback analysis figure business costs then approximate revenues and how quickly you get paid back. Because of the focus on return managers are more likely to work with short term investments. It ignores risk and money lost from an alternative investment(s). Net present vale the same money you have now will be worth less or be able to purchase less tomorrow. Net present value analyzes future cash flows and relates it to today. Probabilities and expected value analyze the chances/probabilities of possible outcomes and weigh it against the profit this is the expected value. Decision trees systematically layout decisions and their outcomes. Focuses on steps, processes and effects. The tools can simplify complex problems, analyze outcomes and trade offs, minimize uncertainty; but the