How It Works and Why It’s Everyone’s Business

What Management Is

(Joan Magretta / Free Press 1st Edition /

January 2002 / 256 Pages / $25.00)

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

The Big Idea

Management affects everyone because it is present in every aspect of the world. It
applies to managing oneself ? focusing our abilities towards our goals. It applies to our
working relationships with others because it affects our choices about them.
Management is about putting together organizations that work to accomplish a mission.

The basic tasks of the manager are to plan and to execute. The manager assesses the
organization’s goals and resources. He defines these clearly for others. The manager
formulates a plan of action or a kind of road map. Having the plan, the manager then
proceeds to implement it. The manager must constantly keep careful track of where the
organization is (Are we heading towards our goal?) and how the organization is
performing (Are we utilizing best value from our resources?).

About the Author

Joan Magretta is a uniquely authoritative
speaker on management who has written the big-picture management book for our
times—What Management Is: How It Works and Why I t ’s Everyone’s
Business—chosen by BusinessWeek as one of the ten best business books of 2002.
Speaking with an authority that comes from exhaustive research and many years as a
corporate manager herself, Joan brings her "back-to-basics" message to the podium
with enthusiasm, humor, and common sense. Joan Magretta is a Senior Institute
Associate at the Institute for Strategy and Competitiveness at the Harvard Business
School.

Prior to her current position at Harvard, Joan was the Editor-at-Large and principal
strategy editor of Harvard Business Review. A collection of her work at the Review has
been published as Managing in the New Economy, which was h a i l e d by
BusinessWeek as one of the "six books that are essential reading for modern
managers." She also served as a partner at Bain and Company, a leading strategy firm
For two decades she has advised senior management in a wide range of settings, from
healthcare to high fashion, to heavy manufacturing and higher education. She has also
written for The Wall Street Journal and Sloan Management Review.

Chapter 1 Value Creation: From the Outside In

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

Customers Define Value

Value takes many forms and is recognized in different ways by different people. It can
be tangible, for example cell phones, or intangible, like the mobile connection service

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and instant information the cell phone provides. By thinking of Value as how a customer
defines it focuses management on the consumer/customer: if no one buys it, what good
is it?

Value as Efficiency: The Manufacturing Mindset

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

The Marketing Mindset: What Does the Customer Value?

In 1954, Peter Drucker wrote The Practice Management, an introduction to

management. He concluded that customers don’t buy products; they buy the fulfillment
of their needs. He encouraged a change in perspective, to see from the customer’s eyes.
Drucker encouraged managers to ask: “What is our business?” “Who is the customer?”
“What does the customer value?”

Maximizing Shareholder Value: The New Mantra

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

How Is Value Created?

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

The Right Discipline for Nonprofits: Mission, Not Markets

Non-profit organizations, for example environment conservationists, require a different

focus. The value they create is not necessarily determined by the market. The value
they create is tied up in their mission. According to Magretta, their focus questions are:
“What is our mission?” “What is the unique value we exist to create?” “Who will support
us in fulfilling our mission, and how can we align their interests with our mission?”

Value Is a System

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

Chapter 2 Business Models: Converting Insight to Enterprise

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

A Good Model Tells a Good Story

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

Chapter 3 Strategy: The Logic of Superior Performance

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

Doing Better by Being Different

Examining what Wal-Mart, the discount retailer, did differently from competitors:

 Adapting the supermarket to sell clothes, appliances, and other goods

 Cutting the frills (sales attendants, fancy displays, etc.) means lower costs and
cheaper products.
 First-mover advantage: move into and establish yourself in a territory where
there are no competitors
 Up to date inventory: know what’s selling and how much so that you can order
more (if it sells well) or cancel (if no one is interested) as is appropriate
 Cross-docking: supplier’s goods were transferred straight from an unloading
dock to delivery trucks bound for the stores. This meant less unpacking and
repacking also no idle storage time.

The Link Between Strategy and Performance

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

How Do You Play the Game of Strategy?

Effective strategy is being different from your competitor and maintaining that

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difference/advantage. Sometimes the differences are real: Product A is more durable
than Product B. Sometimes the differences are perceived: Brand X is more comfortable
than Brand Y.
An effective strategy is to use trade-offs. One business can’t be all things for all people.
Trade-offs are choices or business practices that one competitor makes that another
competitor can not copy. The trade-off can be a different process or a different target
market, etc. The trade-offs for the rival will either incur losses from copying the process
or from neglecting or alienating its current target market.
In 1979 Michael Porter identified five underlying forces active in an industry. Since then
it has become common to plan strategy with these forces in mind:

1) The competition among existing players;

2) The threats of new entrants;
3) The power of suppliers;
4) The power of customers; and
5) The availability of new products.

From Doing Good to Doing Better: Strategy for Nonprofits

Nonprofits compete with other nonprofits for funding and/or civic involvement. Just as in
business, the nonprofit formulates strategies on how it will do better by being different.
These strategies and their resultant actions are formulated in line with organization’s
mission.

Chapter 4 Organization: Where to Draw the Lines

Current trends are for organizations to remain small, focused, and lean by reorganizing,
outsourcing or spinning off functions and units. The value chain extends more across
companies. Paradoxically, some big companies get bigger by expanding or by acquiring
new companies. Organizations reorganize depending on business strategy and in
reaction to competition: organization must be flexible and dynamic. Management
organizes by drawing lines between and among units, suppliers, and functions. There
are three kinds of lines:

1) Boundary lines: define what is inside and what is outside the organization
2) Organization chart lines: define and divide business units and relations
3) Authority lines: define who makes the decisions

Ford versus Sloan: Two Strategies, Two Structures

Henry Ford’s organization (Ford Motor Company) was very hierarchical. Henry Ford
placed himself at the top so he could control and coordinate every aspect of the
company. This was in keeping with his strategy of producing an affordable car for
everyone. His strategy was against the business practice of the day which required cars
be expensive because each was custom-made. He created just one type of car over
and over.

Alfred Sloan’s organization (General Motors Company) was multi-divisional. His

strategy was to offer “a car for every purse and purpose.” He produced more than one
car but parts were kept similar so that each division must interact to achieve economies
of scale (high initial costs are shared by mass produced units). By adding additional
features in addition to the variety, he justified to customer his greater price with greater

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value.

Manage or Buy

Companies will reorganize based on market developments, specifically changes in their

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

Manage or Buy: Outsourcing Is In

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

Chapter 5 Facing Reality: Which Numbers Matter and Why

Previous chapters dealt with planning. Equally important to management is quantifying

performance. This starts out with measuring then goes onto analyzing the context of the
measurements. Reading the measures and their context is usually represented as a
ratio or percentage or average or trend. These numbers help managers decide the
appropriate course of action to take. The actual number crunching is easily taught and
easily learned. The more difficult skill is interpreting the number as this requires
experience. Experience helps develop expectations about the numbers and guides the
manager decisions.

Numbers No Organization Can Live Without

The numbers corroborate the story of the business model. The developments in
computing power and technology bring real time responses to decisions. It is important
to note that these tech advances also mean more and more data meaning managers
have to be more attentive to the different stories they are telling.

If your model is accurate about who your customers are and what they value, your
revenues will reflect it. If your model is accurate about how you create value, your costs
will reflect it. If your model is accurate about how you differ from competitors, your
profits will reflect it. The important numbers are: revenues, costs, profits and cash flow.
Again these numbers are aids to understanding. In themselves, they are not fool proof.
The numbers are simple but the markets are complex.

Chapter 6 The Real Bottom Line: Mission and Measures

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Managers translate the organization’s mission into concrete terms of goals and
performance to focus members’ actions. The challenge is that there is rarely a clear and
easy answer. Profits are not a goal, they are a result of the actions to achieve the
mission.

In Search of the Universal Measure

Measurements evaluate performance. Measurements can be indicators, guides, and

goals for the managers and for the members. There is no one measure that will tell you
everything you need to know about the company. The profits can tell you if costs are
reasonable or if your product is doing well now. It can not tell you if your product will
continue to do well tomorrow or if it even did as well last year. Measures are industry
and business specific. Some general important measures are:

 Operating and financial measures: these can indicate the productivity of

resources, personnel, etc.
 Employee turnover: can indicate organization spirit
 External performance measures: can indicate customer satisfaction and loyalty
 Market share: can indicate relative performance versus rivals

Each has strengths and limitations. New measures or combinations of measures should
be formulated as required.

Some Examples of Matching Measures to Mission

For Continental Airlines, a US passenger airliner

Mission :
 Fly fuller flights
 Satisfy customer/passenger demands like arriving with their baggage on time
 Make employees like working for Continental

Measures:
 Revenue per available seat or number of seats filled per flight in a month
 Monthly on-time performance and mishandled baggage incidents
 Customer and employee turnover
 Number of sick leaves

For Fidelity Investments’ retirement business, a mutual fund that managed people’s
assets for their retirement
Mission :

 Ensuring that customers have enough money to retire on

 Focusing people in establishing their financial retirement goals

Measures:
 Assess people’s asset allocation and portfolio diversification

For Dell computers, a computer direct seller

Mission :
 Give customers best technology at lowest cost

Measures:

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  Low inventory. Building and shipping computers to users quickly lessens
obsolescence and storage costs
 Lessen touches. The more often components are touched, the more quality
suffers
 Return on invested capital. Revenues - (Costs of goods + advertising + building
facilities + inventory etc)

Chapter 7 Betting on the Future: Innovation and Uncertainty

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

Juggling the Present and the Future

Ford Motors produced the widely successful Model T, the first affordable car for the
masses. It did this so well and stuck with it. They didn’t see that because cars were now
affordable, they would a second and third car and these would be different from the
Model T. Because Ford made only the Model T, they bought elsewhere and Ford
suffered.
Digital Equipment Corporation (DEC) built minicomputers better than anyone else. They
didn’t foresee that people would eventually want personal computers in their homes.
They have since been acquired by another company.

One hundred twenty year-old Kodak is still wrestling with the shift from its successful
traditional imaging business to the digital imaging trend of tomorrow.
Nonprofit organizations wrestle with decisions of how much to invest in their continuing
services now and how much to invest in their continued growth tomorrow.

Good Management Is Entrepreneurial

Management must look at short term and long-term performance. Long-term

performance needs innovation, an entrepreneurial attitude.

Thinking Inside the Box

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

The Information You Need

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

Making Decisions About an Uncertain Future

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Many business decisions will have to be made based on incomplete information. A
component of innovation is not just researching information but also evaluating it:

 What information is fact?

 What information is an assumption?
 What information can you find out and what can you not find out?
 Is what you don’t know critical to your innovation/decision?

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

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

The tools can simplify complex problems, analyze outcomes and trade offs, minimize
uncertainty; but the

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