Why Companies Underperform – Part I

And what they must do to succeed in the new economy

The recent economic downturn has caused much concern about how organizations will continue to exist and deal with the ambiguity and adversity caused by the recent "great recession." Some researchers have taken an evolutionary approach to the issue, examining the performance of numbers of organizations in these conditions.

Others have taken a more policy-oriented perspective, examining how specific organizations have successfully or unsuccessfully adapted to threatening environments. This paper will address the question of organizational adaptation and reaction in the face of adversity.

However, rather than just concentrating on organizational actions in a social or market context, we will focus on how adversity affects the adaptability of an organization. Adaptability is critical for a company and its ability to deal with the ambiguities it will face given the "uncertainties" that could be created by the current (2010) environmental conditions.

It is what businesses don’t know that presents the greatest threat to their existence and to their current and future performances!

Malignant Manifestations

Many businesses develop (or inherit) management processes that are ‘strategically rigid.’ Business managers (even of new businesses) quickly develop rigidity of thought and action as a result of stress due to expectations, or by being in a ‘threat’ environment. The uncertainty caused by events beyond ones control (like the economy) creates a serious threat environment.

"Nothing focuses the mind like a hanging" (Samuel Johnson  – British Author, 1709 – 1784 )

Unfortunately it is this kind of (gallows) thinking that prevails in many American businesses today. The focus on survival often conditions a rigidity of thought and action.  Managers may bring this behavior with them from previous jobs, especially if the core values that they had adopted brought success. We believe that this behavior manifests itself in the face of the implied threat caused by the economic downturn.

In fact, there may be a general tendency for individuals, groups, and organizations to behave rigidly in threatening situations. There may be two types of effects; first, a threat may restrict information flow and processing, narrowing the field of attention. Or maybe cause a simplification or modification of information, or a reduction in the information sources used.

Second, when a threat occurs, a constriction in control often results, such that power and influence becomes more concentrated; placed at the higher levels of the management hierarchy. It is hypothesized that threats result in changes to both the information and control processes in an organization, and because of these changes, behaviors are predictably more rigid.

Effects on Strategy Creation

There is a large amount of collective evidence indicating that sameness in market strategies and actions has become more the rule than the exception, for many businesses. This rigidity is a reaction to perceived threats; from inside, or outside (the environment), i.e. from investors, or the market, fear of running out of cash, or by threat of action if management objectives are missed.

In response to perceived threats, managers will take the least risky and most conservative approach to running and developing their businesses. This rigidity will prevail, if reacting flexibly, requires that managers deviate from a company’s core beliefs, values and behaviors.

Threat reaction causes decision-makers to take ‘well known’ actions, and make practiced decisions that restrict open decision making by the management team. Rigidity causes businesses to become strategically myopic as well as product centric, and centric to their core values. They assume (metaphorically) a "business fetal position."

Adherence to core values can cause a rigidity of thought and action that cripples the strategic thought processes used to gain market share, meet revenue or growth targets, etc. Or (with startups) obtain capital, or satisfy investors. Generally the desire is to achieve targets, while not violating core values, or deviating from previously learned behaviors, this outweighs all else.

Management Myopia

Rigidity causes management teams to become unaware of other strategic, or environmental requirements; like the need to develop social capital, or to optimize their human capital. And most usually, they are unaware of the ambiguities facing them, or possess the strategic flexibility to deal with them. Especially if developing flexibility pulls them away from the application of processes developed through previous successes.

There is evidence that there is an unprecedented focus on efficiency by an organization’s management during times of threat. Efficiency concerns are manifested in the tightening of available budgets, increased emphasis on cost cutting, and intensification of efforts to ensure accountability. These effects are often brought about by a severe decline in performance and a reduction in slack resources within the organization.

Many companies have used temporary expedients such as cost cutting, budget tightening and the restriction of marginal activities to deal with financial adversity. Researchers have noted that in times of sustained resource scarcity there is increased efficiency, and increased pressures for accountability, which in turn, eliminates (or severely restricts) the use of creative or novel strategies in decision making. Companies are not tending to innovate their way to recovery!

Corporations operate with management philosophies based on the assumption of continuity; as a result, in the long term, they cannot change — or create value — at the pace and scale of the markets. (Foster & Kaplan – Creative Destruction, 2001)

When Help is Needed

Companies need to obtain (or develop) the ability to apply ‘knowledgeable objectivity’ to their processes, whether it be to business planning, new products, evaluating the capabilities of their current human capital, or their marketing and sales activities.

"O wad some pow’r the giftie gie us. To see oorselves as ithers see us," (Roberts Burns, 1759 – 1796)

Other firms have been down similar roads (consultants have probably been there too) to the one the company’s on. There is much to be learned from others experiences, managers can’t be taught experience, they can only experience. That is why companies should look outside themselves for resources that can provide ‘knowledgeable objectivity’ and a diversity of opinion and support.

Companies need an unbiased strategic focus; they must have the flexibility to deal with environmental and market based ambiguities. Most of their problems (and maybe opportunities) are not anticipated; despite attempts to forecast them. Rigidity of thought and action creates paradoxically complex opportunistic situations for them. Companies must create a path to flexibility, through learning and constant improvement!

This last highlighted recommendation often goes ignored because of the drive for efficiency and cost cutting. Efficiency is not a differential advantage! And improved efficiency is not a long term strategy for success in a competitive marketplace. Managers must become aware of this fact if their company is to realize the benefits of an improving economy. They must become aware of their company’s inbuilt rigidities and develop counteractive processes.

A Company’s management team must look outside of itself to develop self correcting perspectives. If not, the team’s thinking can freeze (become strategically rigid), get on the wrong track, and launch its company on an underperforming trajectory.

Copyright 2008 – 2010 Henry Gregor, StrategicVisions. All Rights Reserved Worldwide.