Three Myths of Management - HBS Working Knowledge

When U.S. automobile companies decided to embrace total quality management and emulate Toyota, the world leader in automobile manufacturing, many copied its factory floor practices. They installed pull-cords that stopped the assembly line if defects were noticed, just-in-time inventory systems, and statistical process control charts. Yet even today, decades later, U.S. automakers for the most part still lag behind Toyota in productivity—the hours required to assemble a car—and many trail in quality and design features as well. Similar failures have plagued retailers' efforts to copy Nordstrom's sales commission system to achieve higher service levels, and the numerous organizations that attempted to mimic General Electric's forced-curve performance-ranking system.

In these and scores of other examples, a pair of fundamental problems render casual benchmarking ineffective. The first is that people copy the most visible, obvious, and frequently least important practices. Southwest's success is based on its culture and management philosophy, the priority it places on its employees (Southwest did not lay off one person following the September 11 meltdown in the aviation industry), not on how it dresses its gate agents and flight attendants, which planes it flies, or how it schedules them. Similarly, the secret to Toyota's success is not a set of techniques but its philosophy—the mindset of total quality management and continuous improvement it has embraced—and the company's relationship with workers that has enabled it to tap their deep knowledge. As a wise executive in one of our classes said about imitating others, "We have been benchmarking the wrong things. Instead of copying what others do, we ought to copy how they think."

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The fundamental problem is that few companies, in their urge to copy—an urge often stimulated by consultants who, much as bees spread pollen across flowers, take ideas from one place to the next—ever ask the basic question of why something might enhance performance. Before you run off to benchmark mindlessly, spending effort and money that results in no payoff, or worse yet, in problems that you never had before, ask yourself:

• Is the success you observe by the benchmarking target because of the practice you seek to emulate? Southwest Airlines is the most successful airline in the history of that industry. Herb Kelleher served as CEO during most of Southwest's history and remains the chairman to this day. Kelleher drinks a lot of Wild Turkey bourbon. So does that mean that if your CEO starts drinking as much Wild Turkey as Kelleher, your company will dominate its industry? Get the point?
• Why is a particular practice linked to performance improvement—what is the logic? If you can't explain the underlying logic or theory of why something should enhance performance, you are likely engaging in superstitious learning and may be copying something that is irrelevant or even damaging.
• What are the downsides and disadvantages to implementing the practice, even if it is a good idea? Are there ways of mitigating these problems, perhaps ways your target uses that you aren't seeing?

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Carol Bowie, director of governance research services at the Investor Responsibility Research Center, concluded, "At the very least, options tended to promote a short-term focus . . . and at worst they promoted fraudulent activity to manipulate earnings."9 Roy Satterthwaite, a beneficiary of the options craze while a vice president at Commerce One, noted that options not only fueled long work weeks but they skewed people's decision priorities, leading to an excessive focus on cutting deals and growing revenues, the numbers the market seemed to focus on.10 Satterthwaite confessed that options "motivated us to a selfish, short-term view" and did not create long-term value. Nor is the evidence about stock options and their effects just anecdotal. One study comparing 435 companies that had to restate their financial statements with companies that did not found that the higher the proportion of the senior executives' pay in stock options, the more likely the company was to have restated its earnings.11 A study by Moody's, the bond rating service, concluded that incentive pay packages can "create an environment that ultimately leads to fraud."12

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Even the logic behind the use of options as managerial incentive is flawed once you consider what behaviors are actually rewarded. Roger Martin, Dean of the University of Toronto's business school and one of the co-founders of the strategy consulting firm Monitor, noted the problems of mixing the measuring and rewarding of performance in an expectations market—the stock market—with the measuring and rewarding of performance in the real market of sales, earnings, and productivity. As he noted, in the National Football League, players would never be permitted to profit from beating the point spread—the expectations market—because it would encourage all kinds of nefarious activity. Martin argued that, "stock-based compensation is an incentive to increase expectations, not performance. The easiest way to do that is to hype the stock."13

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There is, in fact, little evidence that equity incentives of any kind, including stock options, enhance organizational performance. One review of more than 220 studies concluded that equity ownership had no consistent effects on financial performance.14 Another massive study and review of research on executive compensation published by the National Bureau of Economic Research reported that most schemes designed to align managerial and shareholder interests failed to do so; instead, executive compensation practices just operated as devices to enrich senior managers, who usually received most of the stock options.15

Yet executives, particularly those in high technology, remain uninterested in and unconvinced by the logic and the evidence, waging political battles to avoid expensing stock options on their income statements and maintaining that stock options are not only helpful but essential for building their companies. The evidence notwithstanding, many executives maintain that options create an ownership culture that encourages eighty-hour workweeks, frugality with the company's money, and a host of personal sacrifices designed to make the options more valuable. T. J. Rodgers, Chief Executive of Cypress Semiconductor, is typical. He has maintained that without options, "I would no longer have employee shareholders, I would just have employees."16

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And stock options are just one case where vehement beliefs rather than logic and evidence guide management ideas and actions. A series of studies demonstrates that people, especially those who write for and read the business press, believe in the first-mover advantage—that the first company to enter an industry or market will have an edge over competitors. Existing empirical evidence is actually mixed and unclear as to whether such an advantage exists, and many of the "success stories" purported to support the first-mover advantage turn out to be false—Amazon.com, for example, was not the first company to start selling books on the Web. The more that people read the business press, the more strongly they believe in first-mover advantage. But nonbusinesspeople usually believe in it as well, apparently because of cultural beliefs that favor being first, and giving either group—experienced or naïve—contradictory evidence does not cause them to lose their faith in the first-mover advantage. Beliefs rooted in ideology or in cultural values are quite "sticky"—they resist disconfirming evidence and persist in affecting judgments and choice, regardless of whether or not they are true.17

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Michael Schrage is right: "A collaboration of incompetents, no matter how diligent or well-meaning, cannot be successful."21 But not being in the top 10 percent isn't the same as being incompetent—90 percent of the people in every organization simply fail to qualify. It is a mathematical fact that only 10 percent of the people are going to be in the top 10 percent. And despite claims in The War for Talent, Topgrading, and numerous other books on hiring the best people, the talent mind-set is rooted in a set of assumptions and empirical evidence that are incomplete, misleading, and downright wrong. A moment's consideration will reveal that the war for talent idea rests on three crucial assumptions:

• Individual ability is largely fixed and invariant—there are better and worse people.
• People can be reliably sorted based on their abilities and competence.
• Organizational performance is, in many instances, the simple aggregation of the individual performances; what matters is what individuals do, not the context or system in which they do it. [. . .]

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Yet another problem with assessing ability or talent is that human judgments are clouded by invariable, potent, and largely inescapable psychological biases. A few years ago, one of us talked to an oil company executive who claimed he could identify top managerial talent at an early age. We asked how he could be so confident in his ability. He responded that the people he identified, who then were tapped for a fast track program, invariably turned out to be successful. This executive never considered that their success could stem mostly from being tapped, not from his ability to spot talent. Consider a more systematic study of managerial bias. Managers provided performance evaluations for two types of employees—subordinates they were involved in hiring versus subordinates they were not involved in hiring. As you might expect, managers gave higher performance evaluations to subordinates they had a voice in hiring, independently of other employee performance measures.24 This is what happens when people expend effort and make a public commitment to a course of action—they think they have done a good job. If you help chose someone for a position, you will think more highly of that person's abilities compared to someone you didn't help select, in part to justify the decision you have made.

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