Back to Basics: The Key to Improving Performance

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After many years of working with organizations in different industries on a variety of issues, I have discovered that the most common reason for performance falling short of expectations is a lack of attention to the basics.  I have seen numerous initiatives fail because of misalignment between, or inconstancy within, a company's purpose, values, objectives, and reward systems.

Consider the following objectives:

• Improve EBITDA by 20% over the next two years;
• Achieve compounded double-digit revenue growth each year for the next five years;
• Introduce 5 new products to the market next year.

In each of the above examples, the organizations failed to achieve the stated objectives.  This was not because of a lack of talent or desire to meet the goals.  In each case, managers responsible for the objectives felt extreme pressure to succeed but were handcuffed by the problems related to trust, teamwork, reward systems, and overall company focus.

An organization cannot perform at a level beyond its capabilities for a sustained period of time - and its capabilities are determined by the basics.  Setting objectives that are beyond capabilities will do little more than create frustration or apathy among those assigned the responsibility to meet them.  You can challenge, pressure, or cheer as much as you want but unless you deal with the fundamental roadblocks to success, you will end up sorely disappointed.

In sports, it's common for individuals and teams to address a slump by getting back to the basics.  In tennis for example, correcting poor performance requires thinking about footwork, watching the ball, and focusing on each point.  Attempts to ascend to a new level of performance will be fruitless without mastering these basic aspects of the game.

Getting Back to the Basics

Addressing the fundamental issues in an organization can take several different paths depending on the company's situation, but generally involves the five areas listed below.

• Reaffirm & Recommit to the Purpose:  Assure that the organization's purpose - including mission and vision - is absolutely clear.  Obtain commitment to the purpose at all levels and develop objectives that support its achievement;
   
• Clarify & Commit to the Values:  Define the company's DNA and assure that the hiring process includes some type of assessment to assure candidates possess the desired values.  It is important to understand that, regardless of how successful an individual appears to be performing - if he or she does not follow the same values as the rest of the organization, damage will occur;
   
• Align Focus on the Customer:  In relation to the purpose, assure that everything the organization does is focused on the customer.  As Gene Perkins, retired Group Vice President-Flow Products at Emerson Electric Company once said to his management team, "if we're not thinking about the customer first in everything we do, we might as well fold up our tents and go home;"
   
• Increase Understanding of the System:  Especially at the management level, people must understand the company's overall system (i.e., how the company serves the customer) and work to continually improve how materials and information flow through the system.  Managers must be company-focused rather than functionally-focused;"
   
• Align Measures & Rewards with Direction:  Once the direction and focus has been established, make absolutely sure that there is close alignment between them and the reward systems in the organization.  Be continually on the lookout for rewards that may encourage undesirable behavior.

It is very easy for an organization to stray from the above areas.  There is often so much going on and everyone is so busy that it is easy to be distracted with internal issues that do not tend to be as glamorous as improving EBITDA by 20% or achieving double-digit revenue growth.  Without a strong foundation on which to build the business, however, achieving and sustaining any type of significant improvement will not happen.

Company Purpose and Shareholder Value

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What is the purpose of a company?  It's one of those questions that has been debated since the beginning of the industrial revolution.  So, is it related to shareholders?  Customers?  Employees?

While presenting at a conference a few years ago, I surveyed those in attendance to discover what they felt the purpose was for the companies for which they worked.  77% of the people who responded (243 of 315) chose money as the reason their companies existed (e.g., earnings, shareholder value, etc.).

The results were not really surprising since the financial side of the business often receives the most attention by senior leaders.  Also, the actions taken in response to a decline in earnings tend to affect a greater number of employees than when the other parts of the business suffer.

Why it Matters

A company's purpose drives its business strategies, including direction, investment related to products and services, marketing, people development, and processes.  On the highest level, the purpose drives the decisions regarding whether the company will compete on the basis of innovation, low costs, or product and service features.

A clear purpose also helps to motivate people by giving meaning to the work they do and build teamwork by providing a common focus.  Without clarity, people will define the purpose in their own terms, resulting in internal battles and a breakdown in teamwork because of conflicting ideas regarding what the company is trying to achieve.

Is it Money?

Those who have read my book or other posts on this blog know that I believe a company's purpose should be focused on serving a need in society (in other words, providing something that potential customers value).  Although it is important for any company to be financially successful, this is the effect - not the cause - of serving customers well.

For example, suppose a privately-held manufacturer of relief valves defines its purpose as, to help protect homes and lives by providing high-quality and reliable temperature & pressure relief protection.  Further, suppose that the company's focus on offering highly reliable, easy-to-install valves at a reasonable price lead to dramatic success and growth.  To grow further, though, the decision is made to take the company public.

Now that it has become a publicly traded company, does it make sense for management to change its purpose from protecting homes and lives to increasing shareholder value?  In other words, should the focus now shift from customers to shareholders?  Obviously not, but this is, in effect, what many companies have done over the years.

What Others Have Said

Peter Drucker wrote that the purpose of a business is to create a customer.  In his book, The Practice of Management, Drucker wrote, "the profit motive and its offspring, maximization of profits, are just as irrelevant to the function of a business, the purpose of a business, and the job of managing.  In fact, the concept is worse than irrelevant.  It does harm.  It is the major cause for the misunderstanding of the nature of profit in our society and for the deep-seated hostility to profit which are among the most dangerous diseases of an industrial society."

Many people may be surprised to learn that, during a March 2009 interview with the Financial Times, Jack Welch [link] referred to focusing on shareholder value as a dumb idea.  Often considered as the creator of the shareholder value movement in business (a fact disputed by Welch), he added that, "shareholder value is a result, not a strategy," and that the main focus should be on employees, customers, and products.

Serve First, Collect Later

The point of all this is to emphasize the importance of developing (and sticking with) a clear purpose - and that it is not related to making money.  Focusing on financial gain leads to short-term decisions and cost cutting that, although well-intended, tend to damage the organization's future.  A focus on shareholder value may lead to satisfied stockholders (at least in the short-term), but dissatisfied customers and employees.  A focus on the customer, on the other hand, can lead to happy customers, employees, and shareholders.