Maxims in Need of a Makeover
Forget those management cliches. These professors say it's time to follow the evidence
To many, they are the commandments of business management--truths to be ignored at a company's peril. Say them together now: Great leaders make great companies. Strategy is destiny. Change or die.
But here's a thought: What if some of the business world's most dearly held axioms are wrong? What if there is a better way? This is the argument Jeffrey Pfeffer and Robert Sutton, management professors at Stanford University, make in their new book, out this week, Hard Facts, Dangerous Half-Truths, and Total Nonsense: Profiting From Evidence-Based Management. Gathering the work of psychologists, sociologists, and management experts, the authors make a compelling case that some of business's beloved truths are far from self-evident. Too many business leaders, they argue, are making decisions based on vague hunches, management fads, and heroic-success stories instead of on empirical data. Too often, the consequences are grave. "If doctors practiced medicine the way many companies practice management," Pfeffer and Sutton write, "there would be far more sick and dead patients, and many more doctors would be in jail."
More than a few management experts agree that some of these Olde Business Maxims are long overdue for a makeover. "They have really touched a nerve here," says Tom Donaldson, a professor of ethics at the University of Pennsylvania's Wharton School of Business: "Managers often don't know what they don't know." So what is a Jack Welch disciple to do? U.S. News sat down with Pfeffer and Sutton to discuss their five favorite myths of management--and to see who they think is practicing business their way.
MYTH 1.
Financial Incentives Drive Good Performance
Managers often think money can solve all their problems. Workers not performing the way you'd like them to? Tie their pay to performance. Executives haven't bought into the company's mission? Offer them stock options. Pfeffer and Sutton argue, though, that using financial incentives to improve performance isn't quite so simple.
Too many managers overlook the fact that incentives can inspire bad behavior as well as good--and often hurt performance as much as they help it. Take the incentive system put in place recently by the city of Albuquerque, N.M. To cut down on overtime paid to garbage truck drivers, the city began to encourage workers to finish their routes on time or early, by offering a driver who completed a route in five hours, say, three additional hours of "incentive pay." The results were not quite what the city had hoped. Drivers drove too fast, often in trucks that were overweight, and in many cases garbage didn't even get picked up. "When you tie money to incentives, people will not necessarily focus on what's best for the organization," says Sutton. "They'll focus on what it takes to get the incentive."
Which, of course, can lead down a slippery ethical slope. In a study conducted last year comparing 435 companies that restated their earnings with those that did not, researchers at the University of Minnesota found that the bigger the proportion of stock options in senior executives' payment packages, the more likely the companies were to have to restated their finances. Cooking the books, in other words, became increasingly tempting the more salary was linked to stock price.
So why do so many companies keep trying it? Simple intellectual inertia, says Pfeffer: At some point, "it just becomes what everybody does; nobody thinks about it anymore. They don't ask if it's appropriate, if it fits their particular circumstances. They don't ask anything--they just do it." Managers don't seem to realize that equity incentives rarely improve company performance. But they should. "The lesson here," the authors write, "is a variant on an old adage: Be careful what you pay for, you may actually get it."
MYTH 2.
First-Movers Have the Advantage
There is something about this idea that appeals to the entrepreneur in every executive: Be the first to move into a market, and you'll have it all to yourself. Victory will be yours.
But actually, it may be better for a business in the long run to be second or even third. "Success stories that support first-mover [advantage] turn out to be false," says Sutton. "People believe in it religiously, but the evidence is mixed." There are plenty of infamous first-movers, after all, that did not go on to dominate their markets: Xerox invented the first PC, Netscape came up with the Internet browser, Ampex produced the first VCR--and yet none of these companies managed to hold on to their leads. Meanwhile, Microsoft has made a living coming in second: Windows is a copy of the Mac; Excel followed Lotus 1-2-3; Internet Explorer jumped into water warmed by Netscape. And Bill Gates isn't alone. Wal-Mart was hardly the first discount retailer. Apple wasn't the first company to sell MP3 players. And Amazon wasn't the first to sell books online. "At first blush, it sounds like a good idea," says Sutton, "but as soon as you start challenging assumptions, it's a half-truth."
Many other management experts concur. "We're still looking for the silver bullet: 'If you do this, you will guarantee success; if you do that, you'll guarantee failure,'" says Barry Staw, a professor of leadership and communication at the University of California-Berkeley's Haas School of Business. But being first to move into a market is not necessarily it. "A lot of what's effective management is doing things well and doing it over and over again," says Sutton. Too many managers become obsessed with being first, when coming in second, oddly enough, may be the most cost-effective way to be the best.
MYTH 3.
Layoffs Are a Good Way to Cut Costs
It seems like basic economics. If you have a company with 100 employees, and you're over budget by 10 percent, laying off 10 workers will solve your problem. In one stroke, there go hundreds of thousands of dollars in salaries, healthcare benefits, and 401(k) plans--and suddenly your balance sheet is looking much better.
Not so fast, say Pfeffer and Sutton. While some research shows that layoffs have no effect on long-term financial performance, and other data show they have a negative effect, there are few studies, if any, demonstrating that layoffs have a positive effect on company performance. A recent report by Bain & Co., in fact, found companies that manage to avoid layoffs--even in tough financial straits--end up better off financially in the long term.
Witness the recent successes of SAS Institute, the world's largest privately owned software company, and Xilinx, a maker of computer chips. Both companies struggled mightily through the dot-bomb crisis with the same slumping growth as their competitors, but they avoided layoffs--and the loss of service, product innovation, and development that often come with them. The result: "SAS made a killing in the middle of the downturn," says Pfeffer, by attracting customers frustrated with the dwindling services offered by their competitors. In 2005, Xilinx was named the No.1 high-tech company to work for by Fortune magazine. Both companies successfully weathered the recession and are still hiring.
Too many managers have itchy trigger fingers when it comes to layoffs. In one survey of 720 companies conducted by the American Management Association, 30 percent said they'd been forced to hire back people they'd laid off or to use them as contractors. Sometimes, of course, layoffs can't be avoided, but before managers take such a drastic, morale-destroying step, they should consider the myriad other, cheaper ways to cut costs--trimming travel budgets, say, or executive pay. Believe it or not, it might even save them money.
MYTH 4.
Mergers Are a Good Idea
It is no secret that the vast majority of mergers fail to deliver their intended benefits--about 70 percent, according to some estimates. What's incredible, though, are the sheer numbers of executives who keep trying them anyway. "Everybody says they know the data but it's not going to happen to us," says Pfeffer. The bankers come knocking, the PowerPoints go up, the smell of blood is in the water, and companies close their eyes and take their leaps of faith. "If a doctor tells you that 70 percent of the time this is going to make things worse instead of better, and people keep doing it anyway, well, that's crazy," says Sutton.
Most mergers fail to live up to expectations for one of three reasons: The companies are too similar in size (DaimlerChrysler), they are too geographically distant (SynOptics and Wellfleet Communications), or their cultural differences run too deep (AOL-TimeWarner). Hewlett-Packard's merger with Compaq in 2001 is an example of the perfect storm: Two companies of roughly equal size, one in Silicon Valley and one in Houston, struggled mightily with their fundamentally different cultures. (One example: HP employees used voice mail to communicate; Compaq used E-mail. "So they literally couldn't talk to each other," says Sutton.) The result? A tailspin that resulted last year in the ousting of CEO Carly Fiorina.
Still, there are a few companies, like Cisco Systems, for example, that seem to be exceptions to this merger rule. Since 1993, Cisco has acquired a total of 108 companies without a major hiccup. Its secret? Senior managers have looked at what went right and wrong in other companies' mergers--and used the evidence to their benefit. They have avoided the pull of the big deal, focusing instead on smaller, targeted acquisitions. They have learned to trust their instincts: "When you're going through the negotiation process, it's like dating," says Dan Scheinman, the company's senior vice president of corporate development. "If you don't like someone you're dating, getting married doesn't solve the problem." Most important, the company practices what it preaches: "A lot of companies treat [mergers] as an event: 'We did it; we've got the press conference; we're done,'" he says. "For us, we've got the acquisition, then the next step, then the next." Evidence-based management seems to work: Nearly half of the 10,000 employees Cisco has acquired in the past 12 years have stayed with the company.
MYTH 5.
Life and Work Should Be Kept Separate
It is a truism that dominates almost every office building in the country. Intraoffice dating and marriage are no-nos. Jobs aren't offered to people who "smile too much." Senior partners frown on dogs or kids in the office. "You should consider your coworker your enemy," former CEO James Halpin of CompUSA once told his employees.
But wait. Why are businesses so determined to keep work and life separate? There is certainly plenty of evidence that companies willing to gray the line between work and play aren't suffering as a result. Google, for example, asks employees to spend 70 percent of their time on the company's core business, then gives workers the remaining 30 percent to work on other projects related to new business--something akin to what they would do for fun. Does it work? The proof may be in the pudding. Out of this "free time" Google News, Google Earth, and Google Local have emerged.
Southwest Airlines has gone a step further--tossing the old maxim about intraoffice relationships to the wind. About 2,200 of the 32,000 employees at the company are married to someone at Southwest. "We've talked to our employees from Day 1 about being one big family," Colleen Barrett, the company's president, told the authors. "If you stop and think about it for even 20 seconds, the things we do are things you would do with your own family." Southwest sends birthday cards and letters of congratulation on the anniversary of each employee's hire. The company acknowledges when employees' children are sick or when there has been a death in the family. And the message seems to be getting through: One study of the major carriers in the U.S. airline industry found that Southwest employees did, in fact, talk about the company as if it were an extension of their family. They use "we" to describe their employer. Southwest attracts 30 or more applicants for every job opening. Driving a wedge between work and life is a fool's errand, says Pfeffer. "The idea that you can separate those two is just impossible." The more companies that realize it, the sooner work won't have to be a four-letter word.
This story appears in the March 27, 2006 print edition of U.S. News & World Report.