Management is about human beings.
Its task is to make people capable of
joint performance, to make their strengths
effective and their weaknesses irrelevant.1
—Peter F. Drucker
Peter Drucker stressed, throughout his life and in all his work, that businesses, including nonprofits, always had to put people first—employees and customers, as well as shareholders and stakeholders. Because Peter viewed businesses as the critical engine of a thriving and sustainable democracy, he focused heavily on the people element both in his writings and in his own interactions. In a thriving democracy, people have opportunities to earn a living, to grow and contribute their skills as valued members of an organization, to have a purpose beyond subsistence. In a thriving democracy, the broader society is economically healthy, benefiting its individual members.
As I traveled around the country interviewing Drucker clients, I met many executives and grad students who to this day still feel a very personal affinity to Peter. In our impersonal age, where companies routinely lay off thousands of people, Peter knew and genuinely cared about his clients’ children. Jim Collins, author of Good to Great, said it best when he recently described Peter as “infused with this humanity and, above all, I believe, a very, very deep compassion for the individual.”2
Paul O’Neill, the former Treasury secretary, retired CEO and chairman of Alcoa, and Peter’s former student, credits much of his business success to his former professor. When I asked Paul about his focus on individuals, he explained his philosophy of management. A test of an organization’s potential for greatness, Paul told me, is whether every person in that organization can say yes to three questions every day without any reservation or hedging or stopping to think. Then he pulled out the yellowed, dog-eared notes he had taken 50 years earlier in Peter’s class and read:
• Are you treated every day with dignity and respect by everyone you encounter?
• Are you given the things that you need—education and training and encouragement and support—so that you make a contribution?
• Do people notice that you did it?
At Alcoa, O’Neill put these ideas into practice by seeing to it that the company would become the first injury-free workplace in the world. He believed, “If we value individuals and our colleagues, we will work in such a way that people are never hurt at work. Not as a banner and not something you do as cheerleading, but something you set up and do using Drucker’s ideas to create systems to help you realize your potential.”3
When O’Neill first announced this policy, it was greeted with widespread skepticism both in the business community and inside the company.
Managers at Alcoa insisted that the company’s performance in this area was already excellent. Alcoa’s on-the-job injury level was running at one-third the U.S. average. Managers contended that it was simply impossible to achieve a zero-injury safety record given the fact that a certain level of risk was inherent in daily operations. Moreover, any attempt to achieve such a perfect record was likely to be undercut by the law of diminishing returns.
O’Neill rejected these contentions. He was intent on achieving something close to the theoretical limit of what was actually possible—a goal Peter aimed for in his own work and encouraged everyone to pursue. O’Neill believed that Alcoa could become the best at everything it did by committing itself to becoming what he called the world’s first injury-free workplace.
For years, Wall Streeters failed to see the logic that connected human values, safety, and financial success. What Wall Street did not understand was that this focus on complete safety was the catalyst for improved productivity through human bonds and the commitment to understanding and improving processes by all of Alcoa’s people. O’Neill knew that it is “people who produce value in any enterprise, and that people will respond to a set of values and proven ideas and principles to produce unbelievable increases in performance.” Between 1987 and 2000, Alcoa’s lost workday rate fell from 1.87 to 0.15 days per 100 workers, productivity went up by a factor of 3, and quality issues fell by a factor of 10. Financial success followed. Once a threatened company with 1986 sales of $4.6 billion and net income of $264 million, Alcoa had achieved record profits of $1.5 billion on sales of $22.9 billion, while increasing market value by 800 percent, when O’Neill retired at the end of 2000.
People will respond to a set of values
and proven ideas and principles to produce
unbelievable increases in performance.
Progress at Alcoa has continued, and in 2005 the lost workday rate was down to 0.09—18 times better than the national average. O’Neill is now turning his attention to an urgent problem, the U.S. health-care system, first as CEO of the Pittsburgh Regional Healthcare Initiative and later as founder of a hospital consulting company. No wonder. It’s 27 times less dangerous to be one of the 129,000 people working at Alcoa in one of 30 countries around the world with 2,000-degree Fahrenheit metal-melting machinery than it is to work in the average hospital in the United States.
Peter always believed that, “Management is about human beings,” that a company is really its people, specifically, their knowledge, capabilities, and relationships. And well before the Internet arrived—even before PCs—Peter anticipated a different breed of worker, motivated by pride, accomplishment, and professional association. In the late 1950s, Peter coined the term “knowledge worker.” He used the term to mean a white-collar worker whose primary task was interpretation, translation, and problem solving—requiring the use of gray matter rather than muscles.
A company is really its people—
their knowledge, capabilities, and relationships.
With his human orientation and ability to translate trends into social implications, Peter pointed out that the old ideas about employee loyalty and retention no longer apply. He saw that knowledge is portable, and its application is not confined to a narrow specialty in one company or industry. In a sense, knowledge workers are more like independent contractors than like employees. They don’t leave their work at the office—they take it home with them. They work for a series of companies over time (and may work in a number of different functional positions within a company). They value their knowledge and competence, and the recognition and prestige that come with it, as much as, if not more than, their jobs. While they expect to be well compensated for their work, they also insist on a far greater degree of autonomy, self-management, and respect. They respond best to the standards of excellence associated with their expertise rather than to the discipline imposed by traditional management practices.
Peter believed this new type of worker required a different type of management. He articulated this difference as effectiveness versus efficiency. For manual work, efficiency, that is, the ability to get things done, is key to management. For knowledge workers, effectiveness, or the ability to get the right thing done, is paramount. So instead of just getting the job done, a knowledge worker has to decide which job to do. Peter was the first writer to pick up on this critical distinction, understand it, and translate it to management principles.
For knowledge workers, effectiveness,
the ability to get the right thing done,
is paramount.
Peter also noted the rise of the service worker whose tasks support customers or help with transactions, such as a UPS delivery-man or a waitress, but who does not need extensive knowledge or high-level, problem-solving skills. Management here is another unique challenge. Service workers need to feel good about themselves; they are representing the company to customers, and their feelings are often reflected in their interactions with customers.
Today, according to the U.S. Bureau of Labor Statistics, knowledge and service workers together constitute just over 75 percent of the U.S. workforce, with knowledge workers slightly outnumbering service workers.4 In our conversations, Peter indicated the current need to approach these two types of workers differently from the traditional blue-collar worker. All workers need respect and pride, and to be set up to win. They need to feel they are making a difference. How management sets workers up to win varies to some degree for the different types of workers. Much has been written about managing and motivating the traditional, blue-collar workforce; our focus in this chapter is knowledge and service workers.
People are more important to an organization’s success and thus more powerful than ever before. As Drucker put it, “The knowledge world begins to reverse the balance of power between organizations and individuals.” Nevertheless, most individuals still need organizations—not so much for a paycheck, but to combine their expertise with other people’s complementary skills, insight, and relationships. They need to work toward a mission that has an impact on the customer and thus the world. They need colleagues. They need to be able to measure their effectiveness. This is what management must offer the knowledge worker.
“What differentiates organizations is
whether they can make common people
perform uncommon things.”
In the rest of this chapter, we examine Peter’s classic questions about people and knowledge tuned to the twenty-first century and study Electrolux. Then we’ll look at how a focus on people and knowledge drives day-to-day corporate life and strategy at the financial firm Edward Jones.
People are the business. They are your front room, your connections to others and to the customer; they are your knowledge and your access to changing opportunities and resources. Peter said that, “What differentiates organizations is whether they can make common people perform uncommon things—and that depends primarily on whether people are being placed where their strengths can perform”5 or whether, as is all too common, they are being placed for the absence of weakness. Given this dynamic, it is critical to constantly ask and re-ask five Drucker questions:
1. Who are the right people for your organization?
2. Are you providing your people with the means to achieve their maximum effectiveness and contribute to the organization’s success?
3. Do your structure and processes institutionalize respect for people and investment in human capital?
4. Is knowledge and access to knowledge built into your way of doing business?
5. What is your strategy for investing in people and knowledge?
WHO ARE THE RIGHT PEOPLE FOR
YOUR ORGANIZATION?
1. What is the task?
2. What knowledge and working style will help an individual win with the task?
3. Are you accessing the full diversity of the population to best tap the global customer base and shifting demographics?
Regardless of whether your organization taps into different sources and types of workers or it finds better, smarter ways to search for workers, the challenge of finding the best possible talent is more important in the twenty-first-century knowledge economy than ever before. In one of our conversations, Peter repeated one of his basic statements: “The only thing that requires even more time (and even more work) than putting the right people into a job is unmaking a wrong people decision.”6
The standard approach to hiring someone is to ask the question, What skills are needed to do this job? Recently, the executive committee at a leading European consumer goods company sent me the target skills for its new head of sales and asked me to edit the list. Peter suggested that managers ask very different questions:
1. What is the task?
2. What is the knowledge base required to carry out the task?
3. What are the necessary working characteristics of the individual carrying out the task and the team dynamics (e.g., self-starter, problem-solver, connector)?
The more explicit the job definition and requirements, the greater the likelihood you will be able to identify what the position really requires and find the right candidate.
Whole Foods, the $3.9 billion natural food retail chain, has developed a highly successful method for finding the right people. The employees of each store are organized into self-managing teams responsible for the operations of the store, including merchandising, scheduling, and hiring. They are also charged with writing the job descriptions and tasks. Team leaders screen and recommend candidates for jobs with specific teams, but every hire must be approved by a two-thirds majority of the team after a 30-day trial period. The company’s approach to hiring, managing, and rewarding its personnel has resulted in high morale, a lower employee turnover than the industry average, and a top ranking on Fortune’s 100 Best Companies to Work For in both 2005 and 2006.
Once the task is defined, attention turns not to what skills are required, but rather to what knowledge and working style will help the individual win in performing that task. Peter believed that, for knowledge workers especially, that simple shift in question is important for bringing the right worker to the task. With the rate of change in what and how so much is done, there is no one set of skills that will fit all the tasks going forward. However, an ability to access and use knowledge and work with a team will be critical.
One way to spot that ability is to look at the breadth of candidates’ experience, particularly in leadership positions. For example, Lou Gerstner’s highly successful tenure at IBM had a lot to do with the scope of his experience—his training as an engineer and top jobs at McKinsey & Company, American Express, and RJR Nabisco.
In its search for a CEO, The Conference Board surfaced over 20,000 candidates with private sector experience. When it added the requirement of public sector and academic experience, the list shrank to seven names. Richard Cavanagh got the job. The broad experience he brought with him at the Office of Management and Budget, McKinsey & Company, and Harvard’s Kennedy School of Government helped him elevate The Conference Board’s focus and broaden its membership.
Drucker listed five rules for making hiring decisions:
Look at a number of potentially qualified people.
Test your understanding of the position and its requirements by considering several qualified candidates. Envisioning each of several strong people operating within your organization may broaden your own understanding of the position’s demands and potential impact.
Think hard about what each candidate brings to the position and the organization.
What are the strengths of each, and are these the right strengths for the assignment and the organization? Focusing on strengths is fundamental to making knowledge workers as productive as possible, and it starts with staffing decisions. Emphasize what each candidate can bring to the job and the organization, not skill gaps or weaknesses in their résumés. For example, in picking the members of their cabinets, both Franklin Roosevelt and Harry Truman said, in effect: “Never mind personal weaknesses. Tell me first what each of them can do.” It may not be coincidence that these two presidents had what many consider the strongest cabinets of the twentieth century.
Have a variety of people get to know the candidate—as a person.
The personal qualities each candidate brings to the organization are as important as any other qualification. Ability to interact and work collaboratively with other professionals—peers and subordinates as well as the boss—is a key determinant of effectiveness, motivation, aspirations, and a feel for corporate context.
Discuss each of the candidates with several people who have worked with them.
One executive’s judgment alone is worthless; several perspectives provide a more complete picture and also guard against bias or the overly rosy picture some references feel obligated to present.
After the hire, follow up to make sure the appointee understands the job.
It is much easier to evaluate a candidate who has been in the position for a while. Ask, “You have now been regional sales manager or whatever for three months. What do you have to do to be a success in your new job? Think it through and come back in a week or 10 days and show me in writing. But I can tell you one thing right away: The things you did to get the promotion or to land the job are almost certainly the wrong things to do now.”8
In our conversations, Peter emphasized the need today to recognize the globalization of markets and customers and the new demographics of potential contributors to an organization, and to think broadly about possible candidates.
A diverse global workforce is necessary, according to Peter. Educational elites in emerging nations bring knowledge and the ability to integrate that knowledge into a value proposition that has global appeal. The president of the Massachusetts Institute of Technology, Susan Hockfield, told a story that perfectly illustrates Peter’s point. The executives of a money management firm described their target candidates to her as “smart, numerate people who were raised in cultures other than the U.S.” When she asked about whether candidates needed specialized financial and economic education, the managers responded, “What we need are people who understand their culture and how one operates in the culture. We can teach them the financial analysis, the sensitivity to market flows, and negotiation management. We need to learn from them in turn how the culture operates.”9
Given twenty-first-century demographics, management should also be asking, “Are we tapping into older, more experienced talent by offering employees more flexible work schedules? Are we open to high-talent telecommuters and temps?” In 1993, after reading The Post-Capitalist Society, Hewlett-Packard’s management recognized that many talented people could devote only part of their time to work because of family responsibilities. HP pioneered “work-share” arrangements that enabled it to tap into this talent pool. Many firms followed suit, devising special working arrangements for parents, retirees, and people caring for aging parents as well as telecommuters and “flex-time” employees. It’s another example of the shifting balance of power between organizations and those they employ.
ARE YOU PROVIDING YOUR PEOPLE WITH THE MEANS TO MAKE THEIR MAXIMUM CONTRIBUTION TO THE ORGANIZATION’S SUCCESS?
1. Is there a clear mission and direction that builds commitment and helps people and teams prioritize?
2. Are people given autonomy and support?
3. Are you playing to people’s strengths rather than managing around their problems?
It was a wet day in April of 2005 when Peter and I focused our discussion on people. I rarely take notice of weather, but I remember the rain hitting the cover of the Druckers’ pool that day. I frequently needed to look outside to ground myself in the reality and importance of what Peter was saying. He began our conversation by contrasting what it takes to set people up to win today with what it took historically.
What made the traditional workforce productive was the system, whether it was Frederick Winslow Taylor’s “the best way,” Henry Ford’s assembly line, or W. Edwards Deming’s “total quality management.” The system embodied the knowledge. The system was productive because it enabled individual workers to perform without much knowledge or skill. In a service-based organization, you need a system that supports the worker, but the worker needs to support the customer individually. In a knowledge-based organization, it is the individual worker’s productivity that makes the entire system successful. In a traditional workforce, the worker serves the system; in a knowledge-based or service-based workforce, the system must serve the worker.10
When Peter talked about the system serving the worker, he was talking about setting workers up to win with high stakes—the heart of management’s most important impact on people. To set people up to win, he emphasized teams and missions, authority and independence, and playing to their strengths.
When Peter talked about the system serving
the worker, he was talking about
setting workers up to win with high stakes.
It has been proven time and again that individuals achieve their greatest successes when they work with others toward a common goal they are passionate about reaching. Drucker first saw this phenomenon in work teams at General Motors and over the years in many of the not-for-profit organizations he counseled.
Similarly, when I had the opportunity to consult with work teams or cells on the plant floor, their results were astonishing. At Clairol, these teams of batching chemists and packaging workers were managing everything from scheduling to the delivery of what was being made. They met the customers. They called Sally Beauty Supply frequently, even daily, to make sure the stores had enough inventory on hand. They tracked their own performance. Beyond the reduced management burden, labor costs went down by over 30 percent, and customer satisfaction with service moved well past 99 percent for the first time in the company’s history. The results showed that a committed team could set new performance benchmarks over and over again.
Crucial to such a team is a well-defined shared mission that sets the team up to win. At Clairol the mission was satisfying the customer every day in every way. And everyone on the plant floor understood how they impacted that mission. Without an effective mission there will be no performance, and knowledge workers may labor away unproductively without true focus or impact. “Every enterprise and team requires simple, clear, and unifying objectives. Its mission has to be clear enough and big enough to provide a common vision. Without a commitment to a common vision there is no enterprise; there is only a mob.”11 Drucker would often add, “A mission statement should fit on your T-shirt.”12
“A mission statement should
fit on your T-shirt.”
In our conversations, Peter referred to the team that created the first user-friendly computer at Palo Alto Research Center (PARC) set up by Xerox Corporation and led by Bob Taylor. Sadly, as a company, Xerox never really connected with this team or benefited from its work, but the team’s formation and internal management exemplify setting knowledge workers up to win in their own sphere and not within the corporation. Taylor was credited with “creating the ideal environment for basic computer research, a setting so near perfect that it enabled four dozen people to invent much of the computer technology we have today.13” He had thought systematically about how to best manage research and developed a model emphasizing recruitment, structure, communications, and tools. In recruitment, Taylor was looking for people with rare intelligence and creativity who wanted nothing less than to reinvent computer science. He was, however, willing to forgo a disruptive genius in favor of someone who could work collaboratively. The computer science lab had a flat structure, with all 40-plus scientists reporting to Taylor. Scientists could move from one project to another, and the best projects attracted the best people, allowing the most valuable ideas to emerge from the process. Communication and sharing of information were critical to the success of the group. In the mandatory weekly meeting, every member of the group listened to the ideas and fragmentary accomplishments of the others. That meeting was also an opportunity to allow tensions and disagreements to surface and be worked out on the spot. Access to the right tools and cutting-edge technology was of course critical, and Taylor was willing to risk his career to provide this support to his group. He refused to use an inferior computer developed by a newly acquired Xerox company, and PARC ended up making its own computer.
Most important, Taylor succeeded in making all the scientists feel that they were members of an elite group, “Doing a thing that they all thought was worthwhile and really thought would change the world.”14 They were committed to the mission and connected to the other members of the group. And although they failed to provide a benefit to Xerox, they did develop technology that changed the world. After “a walk in the PARC,” Steve Jobs of Apple and Bill Gates of Microsoft both became convinced that a graphical user-interface-based operating system was the future. A few years later, Apple launched Macintosh, and Microsoft launched Windows.15
Especially for knowledge workers, Drucker was a strong advocate of autonomy rather than control. Liberating knowledge workers entails giving them the guidance and perspective they need to assess and direct their own efforts and to take responsibility for the results. Employees who bring substantial intellectual capital need a large measure of autonomy—real freedom to pursue their mission their way. This means delegating responsibility and often decision-making authority and providing up-front direction when defining the task. Drucker once told me that when you delegate a task to other people and they do it inefficiently, you must let them learn how to do it their way as long as it is not unethical or illegal, unless they ask for help. There is risk in doing this, and a knowledge worker’s autonomous behavior needs to be closely monitored. Yet the risk must be taken if people are to be allowed to define their own paths.
Drucker was a strong advocate
of autonomy rather than control.
Well aware that he was advocating a radical departure from the reigning hierarchical approach to management, Drucker warned that conventional bottom-line-focused managers would resist granting such autonomy. “They believe ‘that there is one right way.’ Well, there isn’t.” He went on, “If you’re uncomfortable with the idea of vesting people with the power to fire their boss, then you are not ready for the task of leadership in the next century.”16
Peter smiled and brought up Marvin Bower, the founder and former head of consulting giant McKinsey & Company and the subject of my earlier book. “Marvin and I would frequently discuss how we could get CEOs to understand this idea as we rode the train together.” In fact, Marvin had written, “It is part of our basic strategy to maintain the kind of working atmosphere that is attractive to the high-talent people we need to serve our clients well. Such an approach should include a philosophy of relying on autonomy and responsible self-government by the individual just as far as we can. Operationally, this means that the burden of proof should always rest with the proponent of centralized control and bureaucratic rules.”17 Is this a test you might use in your organization?
Jim Collins, who heads a management research lab, echoed Drucker’s call for a new management paradigm when I met with him: “The whole key to the high-performance climate for our research team is our use of mechanisms of commitment and connection rooted in freedom of choice. We operate off a clear set of deadlines and project objectives, yet team members generally select their own deadlines, as people feel much more committed to a deadline they have a hand in setting. . . . We have weekly gatherings at the lab in which team members interact with each other, and we assess overall progress and discuss emerging ideas. The meeting serves as a glue, bonding the team members together. Most important, we design the work process so that team members must draw from each other’s work as the project progresses.
“This ’commitment plus freedom’ approach requires heavy up-front investment in selecting the right people. They don’t need rules. You need to guide them; you need to teach them; you need to provide direction; you need clear objectives; you need mutually agreed deadlines; you need mechanisms of commitment and connection. But you don’t need control.”18
As big a step as it may be for some managers, Peter proclaimed, “Autonomy is not enough.” Management must ensure that knowledge workers take responsibility for their own work and then provide them with guidance and oversight that is appropriate rather than intrusive. The term Peter would use to describe the manager’s liberation of knowledge workers would decidedly not be “empowerment”—he despised this current buzzword. You don’t “empower” people. You help them measure themselves by their contributions to the whole.19
You don’t “empower” people.
You help them measure themselves
by their contributions to the whole.
Ongoing management oversight, encouragement, and support are also essential to keep the team on track and to provide some adrenalin, guidance, and a broader perspective to the effort. The simplest way to approach this role is to ask, “What do I, as your manager, and what do we, as the company’s management team, do that helps you in doing what you are being paid for? Is there anything we do—reporting requirements or purchasing or HR policies—that hinders your effort?” And listen closely. This is not only an issue of management style. Drucker’s first business book, Concept of the Corporation, was about federal decentralization and the role of headquarters, setting up divisions as teams, and asking what headquarters could do to support the teams.
One of my favorite quotes from Peter that rainy day is, “You will achieve the greatest results in business if you drop the word ‘achievement’ from your vocabulary. Replace it with ‘contribution.’ Contribution puts the focus where it should be—on your customers, employees and shareholders.” Helping people see that they have a unique contribution to make is central to setting them up to win.
There is no better motivation for working hard than success. And if people work hard and play to their strengths, they can succeed. This is a theme that runs through much of Peter’s work, from the lessons he took from his favorite teachers to the advice he gave clients in the last year of his life. Identifying people’s strengths can be difficult; often they don’t even understand their own strengths or are stuck in positions where their strengths do not matter. But some companies have started to focus explicitly on people’s strengths. Bill Pollard, the retired chairman of ServiceMaster, described the approach: “Peter Drucker used to say . . . you gotta major in strengths and not in weaknesses. And I think the way we tried to implement that is through . . . our appraisal review process. When someone wasn’t performing, we would first ask the question, ‘Do we understand this person’s strengths versus his or her weaknesses?’ And is it the fact that we haven’t majored in his strengths or her strengths . . . is that the reason why there isn’t performance? And look for another position for that person. One can accomplish something only with his strengths. With his weaknesses, he cannot accomplish anything. Thankfully here lies an advantage of the organization. In an organization, we can bring an individual’s strengths into play and make his weakness irrelevant.”20
You will attain the greatest results in business
if you drop the word “achievement” from your
vocabulary. Replace it with “contribution.”
DO YOUR STRUCTURE AND PROCESSES
INSTITUTIONALIZE RESPECT FOR AND
INVESTMENT IN HUMAN CAPITAL?
1. Do you systematically match strengths with opportunities through assignments?
2. Do your structure and processes maximize the knowledge worker’s contribution and productivity?
3. Do you systematically develop employees through assignments that play to their strengths and provide feedback that helps them grow?
The power of passionate teams is remarkable. Unfortunately, teams come and go, and all too often their cohesion is project-specific and not institutional.21 If the larger organization is not geared toward supporting and sustaining teams, their successes may not advance the organization’s mission and will almost certainly not be replicated. Bob Taylor’s legendary computer science lab at Xerox PARC provided almost no benefit to Xerox because there was a complete disconnect between the research team and the Xerox organization. The downside of the elite team was its incredible arrogance; the PARC scientists were rude to and disdainful of Xerox officials, whom they referred to as toner heads.22 Although the group changed the world by reinventing personal computing, its success was a Pyrrhic victory: Taylor and Xerox failed to align the group’s mission with the corporate mission, and, consequently Xerox never commercialized any of the breakthrough technology developed at PARC.
In the knowledge economy, winning organizations are those that can deploy passionate, high-performing teams again and again—not just for what they accomplish for the corporation but for the satisfaction their members can derive from the experience.
If you ask someone, “What did you learn from Peter Drucker?” one of the most likely answers is, “That managers must match strength to opportunity.” This requires allocating resources to tomorrow, rather than frittering them away on the problems of today. Putting the best people on the most promising projects seems straightforward, but as often as not, it doesn’t happen.
Managers often make the mistake of diffusing first-rate resources rather than concentrating them: it is so much easier than confronting painful priority decisions. And the results can be fatal. Diffusion of resources killed Rubbermaid, a star of the 1980s. People who were phenomenal at designing unique plastic injection-molded toys were set to work designing products for multiple markets and found they could not focus on or “live in” those markets. As one engineer told me, “I don’t get excited about the kitchen, and my creativity just doesn’t turn on.”
Similarly, in many companies, people are simply misallocated. Research departments, design staffs, market development efforts, even advertising efforts are allocated by transactions rather than by results, by what is difficult rather than by what is productive, by yesterday’s problems rather than by today’s and tomorrow’s opportunities. Too often people are put on projects or task forces almost willy-nilly, to represent their departments, instead of to use their abilities and potential to greatest advantage.
Some organizational structures lend themselves to matching strengths with opportunities. A relatively flat, decentralized structure can minimize hierarchy and bureaucracy, and facilitate communication; it can also maintain the flexibility to allocate the strongest resources to critical tasks or projects at hand and to reallocate them as priorities shift. An organization without huge functional silos also has greater flexibility to field effective cross-functional teams.
The internal marketplace is another means of matching people to opportunities. It can range in form from an informal meeting to a database of staff résumés and projects in the works to the vast clearinghouse used at Electrolux. The internal marketplace makes it easy for managers to consider potential team members and for people to see the range of projects in which they might want to get involved. Jim Collins has used this approach to good effect with teams at his management research laboratory. “We break the research projects into discrete chunks and then have a draft in which individuals bid for the pieces they would most like to work on, a process that creates much greater commitment than preassigned responsibilities.”23
In the knowledge economy, management must maximize the use of each worker’s focus and effort, because time is the capacity constraint. David Jones, retired chairman and CEO of Humana Inc., recalls Drucker’s core lesson as, “Successful enterprises create the conditions to allow their employees to do their best work.” Perhaps the most important rule—and the one to which few managers pay much attention—is to enable knowledge workers to do what they are being paid for. And the first step is simply to get out of the way, to eliminate unnecessary activities that eat up the day and disrupt the train of thought. One Microsoft staffer who became an independent contractor noted that her productivity soared the day she went off the payroll and was freed up from the revolving door of meetings that had dominated her working life. Many well-intended organizational mechanisms become nightmarish drains on productivity, such as nonessential e-mails and routine meetings that accomplish little. Management should make a practice of periodically reviewing how people’s hours at work are spent and then eliminate nonessential elements that dilute focus and eat up time.
“Liberation and mobilization of human energies—
rather than symmetry or harmony—
are the purpose of organization.”
Yet management must not confuse autonomy with isolation. Although connecting with a broader organization takes time, isolation can rob the knowledge worker of motivation and curtail opportunities for learning. As Drucker put it: “It is appalling in many ways how isolated and ineffectual knowledge workers can be when nobody understands their output.” A flat organizational structure can help promote communication and avoid unproductive pockets of isolation, keeping the knowledge worker connected to the team and its mission. As Peter said, “The best structure will not guarantee results and performance. But the wrong structure is a guarantee of nonperformance. The right answer is whatever structure enables people to perform and to contribute. Liberation and mobilization of human energies—rather than symmetry or harmony—are the purpose of organization. Human performance is its goal and its test.”24
A problem Drucker often cited was that knowledge and service workers’ productivity was far too low, with little improvement underway. While improving productivity of knowledge and service workers may not be an exact science, it is not rocket science either. Peter felt that many of the principles and techniques used to deliver operational excellence in the manufacturing world could also be used to improve efficiencies in the service and knowledge worlds, from reengineering to time management. By carefully nailing down the task or desired outcome, mapping out the process steps involved, identifying and sequentially reducing barriers, and, importantly, establishing key performance measurements and measuring results, companies in many different industries have been able to continually improve productivity.
Whole Foods has embraced the principle that you can manage only what you measure and uses feedback and visible results to fuel worker motivation and productivity. Its teams are continually measured and evaluated on operational metrics that are posted daily, such as previous day’s sales by team, and product costs, aggregated salaries, and operating profits. All these measures are benchmarked against last year’s results; other teams in a region; and occasionally industry best practices. Competition between teams in the same store and against other stores is encouraged, and the teams are pressured to set ambitious goals for themselves. Store employees are compensated based on performance metrics, and all compensation is publicly disclosed.
Even the U.S. health-care system has been addressing ways to increase productivity and quality. Studies have shown25 that it is quite possible to reduce medical errors, medication errors, and central-line (i.e., catheter-associated bloodstream infections) infections (together estimated to cause as many as 167,000 deaths annually at U.S. hospitals) using processes adapted from the Toyota Production System. The Pittsburgh Regional Healthcare Initiative (PRHI) slashed the number of reported central-line infections by more than 50 percent between 2001 and 2004. I am amazed not that a systematic approach to quality and productivity enhancement achieves results, but that health care has been so much slower than other industries in organizing for continuous improvement. Paul O’Neill, who was the CEO of PRHI 2003-2005, and whose work at Alcoa created the inspiration for PRHI, is a perfect example of how a dedicated and passionate leader can help solve the interrelated problems of quality, safety, and cost in health care. From government agencies to the private sector, we are just starting to look in earnest for approaches to improve the productivity of knowledge workers. “It is an underlying challenge management faces in the twenty-first century.”
Creating opportunities for people means helping them learn and develop. Peter often stated, “Every knowledge organization is a learning and teaching institution. Knowledge can’t be taught, but it can be learned.”
The best learning comes from a combination of experience, hands-on training, and mentoring, with explicit feedback loops. Development is still primarily experiential or “on the job,” involving a series of progressively more challenging assignments, a structured rotation through various departments, organizational units, and geographies, or even a series of apprenticeships. Ideally, these are positions of substantial responsibility integrated into the day-to-day operation of the business, not separate programs. Home Depot, for example, keeps the learning curve steep for high performers: The average age at which managers get their first P&L responsibility is 26. Unlike other retailers, the store managers have the freedom to hire their own people, order their own products, and set prices—the kind of autonomy that sets them up for learning.
A flat, decentralized organization provides an unusually broad range of opportunities for assignments of this type. Special projects are often good development opportunities. They usually require problem solving, cross-functional integration, the ability to persuade and influence, and a certain level of judgment, and many afford exposure to senior executives. Arrow Electronics frequently uses such projects to develop high-potential young managers.
Knowledge can’t be taught,
but it can be learned.
Formal training is another learning and development mechanism. Companies are increasingly organizing training efforts around application areas (e.g., benchmarking and continuous improvement teams) rather than subject disciplines or functions, thereby making it easier to apply new knowledge directly to rapidly changing tasks or opportunities. Moreover, training efforts are trying harder to accommodate diverse learning styles, moving beyond reading and presentations to incorporate firsthand experience, group problem solving, and the power of anecdotes.
Development is greatly enhanced by conversation, feedback, coaching, and mentoring—much of which happens informally. A tremendous amount of learning occurs through conversations and debate with colleagues and superiors. The feedback people receive on their performance is also a major source of learning, whether informal commentary from a team manager or peer, or a formal performance review. In many cases, the performance review is a missed opportunity; so many of them either politely gloss over opportunities for improvement or limit the discussion to shortfalls and mistakes.
Drucker’s original blueprint for the performance review was management by objectives (MBO), which he designed as a way for workers to take responsibility for their contribution to the organization: The workers themselves define their objectives, thinking through their connection to the objectives of the company and the unit to which they belong, and discussing them in depth with their management. Then management and the workers agree on performance targets, which the workers make a commitment to achieve. The process demands that managers and workers communicate directly and honestly and encourages employees to be part of the decision-making process. Unfortunately, once widely adopted in the business world, MBO was often misused by management to dictate short-term goals to workers, and it lost a great deal of its effectiveness as a developmental tool. However, the original concept is still state-of-the-art when combined with the practice of 360-degree feedback from all the worker’s colleagues, peers, and subordinates as well as the boss.
Much has been written about the learning organization, and at the core of it is the liberating quality of learning, which fosters the ability to challenge assumptions and abandon conventional wisdom. To build on this informed openness, the learning organization at every turn encourages open dialogue with colleagues and the dissent we cited as a key to innovation in Chapter 3. But the watchword for the knowledge organization is strengths—they are the avenue for the corporation to reinvent and thus sustain itself.
In many ways, Electrolux is the story of a company that recently sought and institutionalized a number of practices oriented toward building capabilities.
The Swedish company Electrolux is grappling with the challenges of managing its global pool of talent. I recently had the opportunity to talk with several of the company’s senior executives—CEO Hans Stråberg; Harry de Vos, head of group staff human resources and organizational development; and Lilian Fossum, vice president for pricing appliances in Europe and de Vos’s predecessor in human resources—about the company’s experience in changing its approach to talent management. CEO Hans Stråberg told me, “At Electrolux, we aspire to be the world leader in each of our businesses. To do this, it’s absolutely necessary that we retain, develop, excite, and attract highly talented people.” But first, some background about the company.
Electrolux is the world’s largest producer of white goods, an old-fashioned name for appliances derived from their white porcelain finish. The company’s 2005 revenues were close to $18 billion.26 It is a truly global company, with less than 4 percent of sales and only 9 percent of its 72,000 employees in Sweden. Founded in 1919, the company realized at the end of the 1960s that it was too small compared with its international competitors. It decided to diversify and gain global scale economies by undertaking an unprecedented international acquisition initiative: more than 450 companies to date. The company became very adept at turning around troubled appliance makers and also developed what became known as the “Lux culture,” an engineering-driven but entrepreneurial climate based on quick decisions, cost efficiency, decentralized operations, and very little bureaucracy.
At the end of the 1990s, faced with higher interest rates, slowing appliance sales, and ongoing distributor consolidation, Stråberg’s predecessor, “Mike the Knife” Treschow, undertook a radical restructuring, spinning off noncore businesses, closing 27 plants and 50 warehouses, and eliminating 14,500 jobs—10 percent of the company’s workforce.27
In late 2000, Electrolux changed its strategy: a great engineering and industrial player, it sought to become a more customer-driven provider. Senior management knew that the strategy would require a new approach to managing the company’s pool of talent. Stråberg said that the company needed new talent because it was becoming a consumer-driven marketing company that catered to global consumers and that it was in the process of reshaping its manufacturing base. “We found that we had good talent in the company but not for the positions that we needed. And we also had a number of people who would have been suited for those jobs leaving with entities that we sold off, or for other reasons. . . . As a result, external recruitment was substantial, and we had to bring in many of the new divisional leaders from the outside.”
In 2000, Lilian Fossum was brought in as head of human resources and organizational development to spearhead the new talent management system and its mission. Ushering in a new era for Electrolux, she made “people” one of six companywide initiatives, instituted a coaching program, overhauled the evaluation system to identify strengths and development needs, and began posting almost all open jobs on the company’s Web site (referred to as the open labor market or OLM) to encourage cross-divisional and geographical mobility.
Today, each of Electrolux’s top 3,000 managers undergoes a rigorous talent review process that aims to identify areas for further development, to make employees better known to managers in other sectors of the company, and to identify and weed out underperformers. Managers are rated not only on their operational performance but, equally importantly, on their strategic orientation and people leadership and team-player attitude. In people leadership skills, coaching and effective communication are important. Group management spends two days together every year reviewing all direct reports to assign ratings and actions required for the person to reach his or her leadership potential. This process cascades down the organization, with sector management reviewing the next management layer, and so on.
Five years after this system was introduced, the performance reviews and open labor market, supported by significant investments in leadership and coaching training, are becoming part of Electrolux’s culture. Some managers were resistant to losing their best employees, even to other parts of the same company. By making these internal transfers an essential part of talent development and by making talent development an essential part of the company’s philosophy, Electrolux is changing its culture. Career development responsibility is shared between the individual employee and the manager. Stråberg explained this ongoing process, “We are actually creating a culture . . . in which managers talk with employees about their careers . . . In the annual appraisal talk or when people have an interest, they go to their boss and say, ‘Hey, I’ve been in my job now for three years, I see this great opportunity, what do you think?’ This atmosphere is an essential aspect of having employees think of their careers as ‘Electrolux careers.’”
Stråberg also stressed the value of the increased transparency and insight developed about the talent pool: “After two or three years, people who were previously known only within their own divisions were known to other people in the organization as well. So that when a recruitment need came up, it was much easier because we had already reviewed people in the management group. It really helped that management could talk about these people, and they shared a common reference.”28
Still, the process is far from complete, and Electrolux recently hired Harry de Vos from GE to head its human resources and organizational development department when Lilian Fossum was rotated to a new leadership position. After just five years, some sections of the company are further along in incorporating these ideas than others. Moreover, as Electrolux’s needs continue to change, the skills it seeks to develop in its employees continue to change as well. As Stråberg said, “We are trying to make the talent management process more proactive, to anticipate our needs so that we have people that know key account management, for example. We are operationalizing talent management to support our strategic direction.”29
IS KNOWLEDGE AND ACCESS TO KNOWLEDGE
BUILT INTO YOUR WAY OF DOING BUSINESS?
1. Is knowledge built into your customer connection?
2. Is knowledge built into your innovation process?
3. Is knowledge built into your collaborations?
4. Is knowledge built into your people and knowledge management?
In Peter’s writings, he did not separate knowledge from people. He wrote about the knowledge worker. He wrote about applying knowledge to what the knowledge worker does. He wrote about the real impact of information and how it changes knowledge and the knowledge worker. Yet he did separate information from people. And he talked about people’s challenge in sorting through information and identifying the most critical elements. My assumption is that Peter viewed knowledge as people-dependent and information as a storage house that people can tap into.
Yes, knowledge is still power. Yet in this age of instant access and unlimited information, the power of knowledge in and of itself has been diluted. At an ever-accelerating rate, today’s advanced knowledge is tomorrow’s ignorance. The knowledge that matters—knowledge on which businesses and industries are constructed—is subject to rapid and abrupt shifts. For example, breakthrough technologies can create discontinuities that destroy or redefine whole industries. If, for example, the fuel cell, long under development, emerged as a feasible and economic electrical power device, 90 percent of the demand for oil would disappear, and the cornerstone of the world economy and geopolitical dynamics—never mind the oil industry and all that revolves around it—would shift radically. That shift would reflect the strategic harnessing of scientific and technical knowledge as well as business acumen.
Today’s advanced knowledge is
tomorrow’s ignorance.
Along with the rapid emergence of new knowledge, the ability to interpret, integrate, and strategically apply new knowledge has become immensely valuable—it can make or break a company. For example, confronted with the emergence of digital photography, Polaroid responded too late. It hesitated to embrace the new technology, because it was not consistent with its own differentiating heritage (instant photography) and knowledge base (chemistry). A late arrival to the digital arena, they could not compete effectively. Rather than continue to dominate its inevitably diminishing but still-profitable market or create a new white space for instant photography, Polaroid suffered a precipitous decline, which led to its 2001 bankruptcy and subsequent sale of the pieces of the company.30 Peter would have found this “heritage” strategy abominable. Polaroid failed to abandon old assumptions. In contrast, Canon acted early. It embraced the anticipated shift to digital technology, set up an independent research group in Silicon Valley, and began testing new printing capabilities. It built on rather than bet on its heritage in technology, modified its allocation of resources, and invested in the future.
Every enterprise must build knowledge
into its value proposition. Knowledge cannot be
separated but needs to be an explicit part of
everything about an enterprise.
Every enterprise must build knowledge into its value proposition, harnessing knowledge in every aspect of the way it does business—its customer perspective and interface; its efforts to abandon assumptions and reinvent itself through innovation; and its capabilities and focus, both in its own people and throughout the network it connects with in serving customers. Knowledge cannot be separated but needs to be an explicit part of everything about an enterprise.
From the outside in, the business needs to ask, “How can the knowledge we have, or have access to, enhance our relationships and offering to our customers, and how might new knowledge change that?” With today’s increased connectivity, information and knowledge can touch everything from answering the phone (with caller ID telling you it is Sheila calling) to fundamentally rebalancing the value of the bundle of services you provide. Peter emphasized that knowledge is not about doing what you do better; it facilitates your doing something new. By interpreting and translating the individualized customer knowledge that is often available, a company can significantly improve its customer relationships.
Sealy Mattress, in collaboration with Kittle’s Furniture and other Sealy retailers, analyzed retailer- and customer-specific information from across its distribution network. When Sealy understood how its product moved on the Kittle’s sales floor as compared to bedding retailer trends, it was able to help Kittle’s move product more effectively, train salespeople to emphasize higher-priced mattresses, and put in place the right promotions and sales for each neighborhood.
Building knowledge into the product or service a company takes to market increasingly creates real value for customers. For example, an “intelligent” oil drill that bends its way to extract more oil from the pockets of underground oil formations commands more than twice the price of a standard drill. Self-diagnostic electronics have surfaced in an enormous range of equipment and consumer products, from photocopiers to automobiles. With information technology’s capabilities and applications growing as fast as they are, knowledge-based improvements in product offerings and customer interface have, according to Peter, only just begun.
One of the most direct ways knowledge creates value in a business is by fueling its innovation process. Simply to remain competitive, the organization must continually scan related fields for changes that could affect its competitive landscape. For example, a manufacturer of optical glass needs to monitor developments that might make plastic a more attractive alternative, such as scratch-resistant formulations or high-performance coatings. The scan must embrace not only key technology platforms but also substitute and enable technologies that will open the door for totally new approaches to technical problems.
As part of its scanning efforts, the R&D group at Corning frequently organizes workshops on new technological developments that have the potential to lead to new business opportunities, such as cell-based assays and cellular arrays, high-bandwidth applications, and photonic crystals. The company brings in world-class experts from academia or industry so Corning’s scientists and business people are provided with a quick view into the state of the art. The workshops conclude with open brainstorming sessions about possible business ventures and their fit with Corning capabilities and business models. Corning has also been a leader in developing management processes to ensure that new knowledge and new ideas—even those completely unrelated to existing business units—are translated effectively into new ideas and developed rather than being left to languish in the laboratory. On this front, Peter was very curious about how Corning was listening to other companies. He commented, “Who would have guessed that prioritizing pursuit of new knowledge would be a management focal point?”
Collaborations are often the product of shared objectives and knowledge. The Cochrane Collaboration is an international nonprofit organization providing a centralized online database with up-to-date, unbiased analyses of reliable and relevant health-care research studies. Its nearly 8,000 researchers and health-care professionals from a multitude of organizations around the world work together to help people make better-informed decisions about health care based on the best available research.
In this age of the Internet, collaboration is more important than ever. The Internet is the perfect medium for sharing information and for creating online communities, both of which enhance knowledge. Peter’s grandson, Nova Spivack, takes his grandfather’s work one step further and updates Peter’s ideas for the online age. Spivack’s point is that access alone has limited value. While individual interpretation and screening enhance the value of knowledge, exponential gains are evidenced from the collective interpretation of connected communities.
Figure 5.1 Knowledge and Connectivity of Information and People
Perhaps the most direct use of knowledge within an organization is to build its own capabilities. From Peter’s perspective, this ability to apply knowledge to knowledge will be the critical factor in productivity moving forward. The challenge is sorting through and prioritizing the knowledge. From where I sit, every one of my clients is struggling today to figure out how to prioritize the vast array of knowledge available to them and utilize it fully in their business, be it the retailer’s data on consumer habits or access to every country’s tax laws in deciding where to locate facilities.
Applying knowledge to knowledge will be the
critical factor in productivity moving forward.
I recently connected with a friend who had returned to the management consulting firm Bain & Company after a two-year absence. He told me that Bain had become a different world. He had just started a piece of work at a major semiconductor company, looking at marketing spending and productivity. Before he visited the client, he got onto the Bain knowledge system and looked at the 10 most frequently used frameworks for analyzing and working with unnamed clients interested in enhancing and or reducing its marketing spending. He had access to every marketing effectiveness effort done by Bain over the last year, with commentary.
He then downloaded the most recent semiconductor industry knowledge and profile available at Bain. He commented that he was going into the study with understanding and capabilities far greater than anything he ever had two years earlier.
I shot back that in five years everyone would have access to Bain’s frameworks, and McKinsey’s, and BCG’s, too. In fact, the information will be disseminated directly from clients and their partners. This access to high-level knowledge—as distinct from just information—will occur as experts and capabilities increasingly link and overlap across industries, and as the academic world becomes more collaborative. Bain’s knowledge will become widely available and become information for the masses that aren’t privy to the commentary, and so forth. Knowledge will be the ability to sort through the multiplicity of frameworks and apply critical questions to the problems at hand. He thought about my comment and said it will take 10 years. Whatever the time frame, knowledge and its availability are changing how business is and has to be done every day.
WHAT IS YOUR STRATEGY FOR
INVESTING IN PEOPLE AND KNOWLEDGE?
1. Given your overall business strategy and the scope of your product or service offerings, what core capabilities do you want to invest in?
2. What role does knowledge play in the value you offer customers and in your core capabilities?
3. How and to what extent are you investing in attracting and developing your people and knowledge base?
People, not policy, define a company’s front room and move the company along the path it has delineated to deliver value to the customer. In so doing, people are informed by knowledge, the sources of which go beyond their own experience and education and training and include internal and external performance metrics, outside entities within the organization’s extended network, research findings, and so on. Armed with knowledge, supported by an infrastructure (physical assets, intellectual property, information systems, material/component flows, etc.), and properly engaged and motivated (by means of a shared vision, a clear mission that contributes to that vision, and incentives that create accountability and reward results), people are the core of the organization’s capabilities and agility.
“The first sign of decline of a company
is loss of appeal to qualified, able,
and ambitious people.”
In the new world of the knowledge worker, attracting and retaining high-talent people is at least as important as anything else a company does. Drucker said, “The first sign of decline of a company is loss of appeal to qualified, able, and ambitious people.”31 What attracts them is work that is truly interesting and the chance to make a contribution that is truly significant. But as highly skilled and independent professionals, knowledge workers are highly mobile. Despite their migratory nature, the knowledge organization invests in them and seeks to retain them by fostering an excellent working environment—a culture that respects and values them as knowledge professionals, and that sets them up to win.
However, a company’s people and knowledge strategies depend heavily on the nature of its business and begin with the question: Given your overall business strategy and the scope of your product or service offerings, what core capabilities are needed to provide value to the customer? Which of these capabilities represents your unique strengths? Those are the core capabilities that define your front room. A key objective of the people and knowledge strategy is to ensure that you maintain and build your core capabilities while being strategically adaptable. This requires investing in people and knowledge—through your recruitment strategies, development and training strategies, knowledge management, and top-notch human resource management—not only in the Human Resource department but throughout your management team as an explicit part of your overall business strategy.
The next questions are: What role does knowledge play in the performance of these core capabilities, and what are the implications for your investment in people and/or knowledge? How large is the knowledge component of the value you deliver to customers? How important is knowledge to your value proposition? How much of this knowledge-based value do you provide through your core capabilities, and how much is provided by your “backroom”? How much are you investing in people and knowledge to maintain your capabilities?
The front room is the area of heaviest investment in people and knowledge; the backroom is where you cut costs by minimizing investment or farming out the activity entirely. For example, Morgan Stanley is moving the bulk of its information systems to India in an effort to reduce its backroom or support costs, but it is investing heavily in its front room by training and developing its traders. Apple, with its strong customer focus, has made working as a “genius” at the “genius bar” in its retail stores a prestigious and sought-after position, because serving customers is part of its front room. But Apple is outsourcing all its technical repairs, which are part of its backroom.
An organization may have more than one strategy, as Apple illustrates. An effective strategy is generally a function of the business’s level of investment in people and knowledge, and the extent to which knowledge is a component of its product or service offering (see Figure 5.2). Peter and I discussed four general categories of strategies: the service provider, the knowledge provider, the commodity player, and the relationship-dependent connector.
Figure 5.2 General Categories of People and Knowledge Strategies
Of the four types of knowledge strategy, the knowledge provider typically involves the highest investment in knowledge. The bulk of the knowledge provider’s value proposition derives from people and knowledge, and it therefore invests heavily in them. As a management consultancy, McKinsey & Company is all about people and knowledge: It has no physical product other than spiral-bound reports. What it brings to each client is pure expertise. McKinsey’s staff plays the central role in its success. It pays them well and invests heavily in training programs around topics and problem-solving capabilities as well as knowledge sources and capabilities to support the staff’s intellectual and professional growth. Fundamentally, McKinsey’s people strategy is to create opportunity, provide growth, and foster a sense of belonging to “a special group” to attract and retain talent as well as to expand the firm. Its Web site uses the word “opportunity” more than 20 times and makes the claim, “If you come here, we make the implicit promise that we’re going to provide you with opportunities you cannot equal anywhere else.” The development process—continuous mentoring, challenging experience, and collective learning—is at the heart of the firm’s identity. McKinsey also offers these opportunities to its network of alumni and clients, who in turn provide support in the form of referrals and personal references.
The service provider has a smaller knowledge component in its offering; it is a purely service organization. It must therefore invest enough in its people (and, where relevant, in knowledge) to ensure that its service meets customer expectations for quality. A good example is ServiceMaster.
This organization has created a $3.8 billion business by making supporting functions (such as housekeeping, termite and pest control, and landscape maintenance) its front room and serving as a backroom for its customers—hospitals, schools, industrial firms, and individuals. The core of the company’s business is to offer professional management of the jobs that most of its clients consider menial and a nuisance to oversee. The real secret to the company’s success, however, is its unique ability to develop sometimes illiterate hires into highly productive, motivated, and quality-conscious service workers by recognizing the potential, dignity, and worth of the individual. Bill Pollard recalls when Peter Drucker addressed the board of directors after he had helped crystallize the core competency of the company: “He started out with a question to the board, ‘What is your business?’ And as the board responded to him in things that we were doing, he just told them something I was never able to tell our board of directors. He said, ‘You are all wrong. Your business is simply the developing and growing of people. You can’t deliver a good service without trained and committed people. You package it in different ways to meet the needs of your customers. And that is your basic business.’”32 Today, ServiceMaster employs 38,000 people and manages an additional 200,000 people employed by others.
The commodity player, on the other hand, is all about low price; it carefully considers the return it will get from its investments in people and knowledge and makes them judiciously. Wal-Mart, the world’s largest retailer and one of its largest private employers with 1.7 million associates worldwide, has built its success on the ability to squeeze out cost at every step of its business system so as to offer consumers prices lower than anyone else’s. Unlike a service provider, who typically needs to provide a fairly high level of service to meet customer expectations, Wal-Mart’s value proposition is dominated by low cost, and its customers have lower expectations of service. Wal-Mart’s effort to limit its investment in retail sales associates has made the company a lightning rod for criticism of its benefits and other employment practices, with local legislators putting in place statutes directed at Wal-Mart and advocacy groups mounting demonstrations and boycotts. Although Wal-Mart is always looking for sales associates with leadership potential and says, “We train at all levels, and everyone has an equal opportunity,”33 the company notes that there is no difference in productivity between a sales associate of seven years’ tenure and a one-year associate—the minimal training is not making a difference.34 In logistics, however, Wal-Mart is the most efficient retail competitor and wants to maintain that position, so it has a different people/knowledge strategy in that function. Wal-Mart’s logistics support functions have relatively high knowledge content, and it manages them more like a service provider, offering ample leadership and training programs.
Finally, there is the relationship-dependent connector that has a high knowledge content within its offering and needs few people to operate, because its business is all about enabling others to interact. This approach is exemplified by eBay, the online auction house and the largest online market for the sale of goods and services by consumers and small businesses, which has created a virtual marketplace for people from around the world to buy and get rid of practically everything from old toys to fine antiques. eBay’s value proposition is to make marketplaces more efficient by offering users an easy and inexpensive way to communicate, exchange information, and complete transactions for a huge variety and selection of goods. To this end, eBay has created an advanced, easy-to-use online trading platform, including software tools and services to make the search and trading process easy and efficient. eBay employs thousands of people35 to serve and connect its community of over 200 million registered users. In 2006, Beth Axelrod, one of the authors of The War for Talent and coleader of McKinsey’s global organizational practice, joined eBay as head of human resources. When we exchanged e-mails, she commented, “eBay recognizes that the key to building an enduring success story is focusing on our people and organization.”36
Management thinking about the strategic application of people and knowledge is still in its infancy, although the best-performing, knowledge-driven companies clearly have built significant expertise in managing both their people and the knowledge base in which they have invested. People and their knowledge are at the heart of the enterprise’s capabilities, both present and future—the ability to deliver today, with an outside-in perspective, and the ability to innovate and grow for tomorrow.
The investment firm Edward Jones was one of Peter Drucker’s last clients, and he consulted with it as late as April 2005, at the age of 95. The relationship started in 1980, shortly after John Bachmann succeeded Ted Jones as managing partner. He and Jones had read Drucker’s book Management: Tasks, Responsibilities, Practices and found it a useful set of instructions to define strategy and managing people. “We spent a year on it, every chapter. We would spend the time learning what the book had to say. And it—I would say the humaneness of it, respect for people—made it something we really related to. I mean, it was what we would aspire to do and be ourselves.” In several letters, Bachmann told Drucker that his mark was all over Edward Jones and expressed an interest in establishing a consultant relationship. He told me that the company “aspires to build a great business, a great organization. And we come upon Peter and his writings, and said, this is the kind of company we want to be. We want to be a place that respects the individual. We want to be a place that’s demanding and yet fair. We want to build on people’s strengths.”37
We want to be a place that respects
the individual.
Over the years, Drucker met regularly with Edward Jones management groups to discuss questions raised by the team. Characteristically, Drucker did not provide straight answers to the questions. “He didn’t come up with any answers. He doesn’t give answers. He creates a framework; when you are thinking about mission, he doesn’t tell you what the Jones mission is. He talks about what a mission is, how you go about determining your mission, and how you go about determining what strategies really are.”38
Peter sometimes jokingly referred to himself as an insultant (who had the pleasure of “scolding clients and getting paid for it”) rather than a consultant, based on his habit of challenging prevailing assumptions. Do you remember the Edward Jones, Wee Willie Keeler story from Chapter 2? Well, John Bachmann remembers it as the critical conversation that ultimately laid the groundwork for Edward Jones’s future growth strategy.
Peter sometimes jokingly referred
to himself as an insultant.
Edward Jones has quietly built one of the largest, fastest-growing retail brokerage networks in the world, with over 9,000 offices, establishing, to quote Peter Drucker, “A confederation of highly autonomous entrepreneurial units bound together by a highly centralized core of values and services.” Moreover, it has consistently generated returns on equity of around 30 percent,39 exceeding those of every major competitor, including Morgan Stanley, Merrill Lynch, and A.G. Edwards. Jones is not your typical financial services company. For the past 50 years, the company has served individual investors with a strong focus on long-term, buy-and-hold, conservative investing policy, providing face-to-face service even to very small investors. To provide that personal service, Jones has built an innovative, decentralized organizational structure centered on a network of mostly single-broker offices staffed by entrepreneurially-minded investment representatives (IRs).
Central to the company’s success is finding the right people for the organization. Jones “looks for people with passion, confidence, independence, and a belief in doing what’s expected. We like to hire people who understand and can embrace our ‘unfashionable’ approach to investing. We try to recruit individuals who want to live in the community where they build a business.” The company is quite selective. From the 15,000 job inquiries it receives each month, the firm hires only 200.40
In an organization that is built upon a far-flung network of independent offices, it is critical to instill a strong, well-defined, shared mission to make brokers and administrators alike feel part of a group with a common agenda. The challenge is to balance the freedom awarded the IRs to run their own businesses with the need to stick to the firm’s strategy and principles. “We have canvas and we have paints,” says Bachmann. “You’re going to stay on the canvas, or you’re not going to be here. And you’d better use our paints, or you’re not going to be here. Which means that you don’t get off into products that are highly speculative or dangerous. But as long as you use our canvas and our paints, then you paint your own masterpiece.”41
As long as you use our canvas and our paints,
then you paint your own masterpiece.
Consistent with these principles, the company does not offer penny stocks, options, commodities, or indeed any investment that is deemed speculative. Unlike other brokerage firms that live on the commissions generated by “churning,” Jones frowns on frequent trading. Similarly, online trading is not offered (although bill payment and other services are offered online), since the company does not cater to the do-it-yourself segment of the market.
The organizational structure is very flat; in Bachmann’s words: “Nobody reports to anybody around here, or they get their mouths washed out with soap!”42 Every one of its more than 9,000 offices is its own profit center. The St. Louis head office is essentially a support function, providing a full range of operational and marketing services as well as research.
While it is hard to orchestrate frequent interactions between the company’s employees, Jones uses several mechanisms to connect its network of brokers and encourage collaboration. Every office has its own satellite dish and is connected to a satellite network, which not only pipes trading information back to the St. Louis backoffice but also provides continuous learning opportunities, such as investment seminars and training modules, to the offices. The IRs get a 40 percent share of the gross commissions generated, but the bonus system kicks in if the firm is also profitable—the more profitable it is, the higher the bonus (provided that the office itself has reached a certain level of profitability). In the corporate culture, the emphasis is on growing the size of the whole pie rather than just getting a bigger piece for yourself.
Jones is the only major brokerage firm still organized as a partnership. Unlike other partnerships, in which only a select few become partners and share in the profits of the company, everyone from mailroom worker to broker at Jones has an opportunity to become a limited partner, which further serves to align employees’ interests with those of the firm. There are 305 general partners and 4,636 limited partners.43
Jones’s organizational structure is clearly an excellent way to grant autonomy and authority to IRs; they are given the freedom to decide how to run their businesses. There are, for example, no budgets or performance objectives (except for the requirement that new recruits personally make at least 25 calls per day). IRs literally set their own objectives, recognizing that they must become profitable. The company fully realizes that this very decentralized structure, coupled with the type of high-achieving, self-starting individuals attracted to Jones, could result in destructive behavior and competition, which are not uncommon in the brokerage industry. So there is no tolerance for “playing it close to the line,” even if you are a star performer.
The company’s advanced training program is recognized as one of the best in the industry. In January 2006, Fortune ranked Jones 16th in its 100 Best Companies to Work For. (This is Jones’s seventh appearance on the list.) According to Fortune, what makes Jones great is that, “The education never ends at this brokerage firm, which spends 2.5 percent of payroll on training. A mentoring program pairs new brokers with veterans for a year, and lots of workers take subsidized business school classes.”44
In many ways Edward Jones epitomizes the knowledge organization that liberates its people to pursue their mission. Solid IR knowledge and experience are central to both the service offering and successful client relationships, and this strongly decentralized organization gives its IRs extraordinarily high levels of autonomy, encouraging a highly entrepreneurial culture while inculcating clear ethical values and instituting a few clear and well-placed controls. Consequently, investment in people and knowledge has played a key role in the company’s success.
In early 2005, Peter and I discussed Google. He commented on how powerful online communities were and would be and how managing these more autonomous workers to be productive and innovative is a challenge. Eric Schmidt, the CEO of Google, appears to have accepted this challenge with relish (see sidebar). In a conversation at a cocktail party, Schmidt commented that the team at Google has more in common with professional basketball players than with traditional workers. Most of them are free agents; they have specialized skills that they carry with them wherever they work; and their companies need them more than they need their companies. Nevertheless, the basketball player cannot be a star without a team to play on and a league to compete in.
At its core, according to Drucker, management is all about human beings and “the integration of people in a common venture. The test of a healthy business is not the beauty, clarity, or perfection of its organizational structure. It is the performance of people.”46 In a world where a company is its people, their capabilities, and their relationships, the importance of respecting employees and investing in them has never been greater:
1. People are much more than employees. They embody the knowledge, the capabilities, and the relationships that your company takes to the market. The organization is more dependent on its people than its people are on the organization. People are the most important investment a company makes.
2. Enabling people to live up to their potential, achieve their maximum effectiveness, and contribute to the organization’s performance is what makes the difference between success and failure. That enabling is the role of management. In an organization of self-managing knowledge workers, “command and control” is obsolete. “Trust and support” is key.
3. Successful teams generally dissolve at the end of a project, but the knowledge organization must create and deploy them again and again.
4. Business survival requires applying and integrating knowledge continuously to create value all the time.
These realities and the corporation’s need to operate effectively in the Lego world only underscore the importance of investing in and caring for people and relationships. Relatively few companies over time have done a consistently good job of managing knowledge workers, and this is a twenty-first-century challenge.
Connecting to the customer with innovation as the way of life, using the best resources anywhere in the world to deliver value, and by investing in people, an enterprise is set up to win—if it can coordinate its activities across different places and over time. That is the subject of the next chapter.