Monthly Archives: September 2009

Roaming for opportunity in the financial crisis

Why do company managers keep employees ignorant, like priests in the Dark Ages hoarding knowledge?

SA WILL not escape the effects of the financial collapse that started in the US. With falling sales, companies will lay off people to cut costs. The sad thing is that many of those who lose jobs won’t even know why it happened. They will think they were doing good work, and they probably were.


However, the crisis reveals a huge problem/opportunity. It is to break down the barriers of ignorance, give people the big picture and release their creativity. They have to understand the only way for a business to be secure is to make money and generate cash. Everything is a means to that end.

It is what business education is all about — the real business of business. Remove ignorance if you want people to work together — especially financial ignorance. Very few companies educate their people this way. In fact, they do the opposite. Most firms keep their people ignorant — like priests did in the Dark Ages.

How many employees know what cash effects their work and decisions have on the company? Do they understand how they create value for customers? Most of them find work incredibly boring. To them, a job is just a job. They become zombies — the walking dead. Their brains get out of bed only when they get back home to do things they enjoy doing.

So, instead, give them the numbers that paint the big picture. Dump the “employee ” way of thinking. You want an educated, flexible, alert company where people think like owners. You don’t tell owners what to do — they work it out for themselves.

This can be achieved through measuring return on assets managed — the ROAM model, which can be used to point to opportunities. It has two key measures: asset turnover (ATO) and return on sales (ROS). ATO is measured by dividing sales by assets and the ROS percentage by dividing operating profit by sales and multiplying by 100 (operating profit ÷ sales × 100).

The most important is ATO, or “as – set spin” as I like to call it. It is the one that management uses least.

Remove ignorance if you want people to work together — especially financial ignorance


The great physician Sir William Osler (1841-1919) wrote many aphorisms. Some apply as much to managers as they do to doctors. One that will make male executives wince when they think of their annual medical checkup is: “A finger in the throat and one in the rectum makes a good diagnostician.”

If we were to examine companies with the ROAM model, Osler’s aphorism would be: “A finger in the throat (to test the ROS percentage) and one up the ass-et (to test ATO) makes for a good ROAM diagnosis.” So let’s look at a few patients in the doctor’s waiting room. These can be found below.

Waiting-Room2-1The first is a chart of Didata after its near-death collapse in 2001. Exhibit 1 compares its market capitalisation, or value-of-the-firm (VOF), to its ROAM performance since its collapse.

The link is clear. ROAM — or asset productivity — drives the VOF.

It has been a long haul back since the heady days of the dotcom boom. Two thousand years ago the Roman poet Virgil wrote “Facilis est discensus Averni ” — the descent to hell is easy. Once you’re on a slippery, downward slope, it’s all hell to clamber back up again as Didata’s new management team has found.

They first had to jump into a sobering cold bath after reaching a VOF of $10bn or so. Then they took a good dose of “asset spin” (ATO) for three years to get rid of a $4,5bn headache. That is what they paid for “brains” that turned out to be non-existent.

This caused a negative ROAM in 2003 but moved ATO from a low of 0,3 times to 2,0 by 2004 when they generated a positive ROAM of 3%.

A determined team has stuck to the grindstone ever since. They steadily improved ROAM from 3% to 8,2% and the VOF went from $775m to $1,825bn. The last time they ended a year that high was in 1998.

The question they should ask themselves now is, “What could happen if every employee in Didata sees this chart, and understands what it means and how they can influence it?”

The result might surprise them. Their operating units might soon generate an ATO of three and a 10% ROS. It is an achievable goal if they have the courage to concentrate and focus — to match strengths, not weakness, with opportunities.

Waiting-Room2-2The next patient is Nampak, portrayed in Exhibit 2, and it is not a pretty sight. The ATO and ROAM trends paint a grisly picture for shareholders. It also probably shows why this top management team may not be keen for employees to understand the financial numbers. There has been a steady, inexorable decline since 1994.

To use a yachting metaphor, Nampak’s top management, and what has to be one of the most supine boards in SA, are like the crew of a yacht who set out on a northeast heading, then abandon the tiller to go down below to play poker, roll out the gin and drink themselves into a stupor. Meanwhile, the prevailing wind shifts 180º.

Waiting-Room2-3For 15 years, they sail southwest using a ROS sail of 10% but leave their ATO sail in the locker. The effect on the VOF can be seen in Exhibit 3.

What makes the performance more amazing is that two of the directors on a heavyweight board have first-hand experience of the ATO effect on results. Michael Katz, an architect of the King code on corporate governance, and Thys Visser of Remgro were both involved with HL&H and the Rainbow Chicken fiasco of the late 1990s.

It shows two things. The first is that many senior executives don’t learn because they think they don’t have to. Secondly, the gap between knowing and doing is huge. Instead of giving people ever more knowledge, it is better to keep reminding them of what they already know but don’t do.

Indeed, Nampak’s performance gives rise to another of Osler’s aphorisms that you can adapt for management: “It’s much more important to know what sort of patient (manager) has an illness (a problem) than what sort of illness (problem) a patient (manager) has.”

Waiting-Room2-4As to the chicken and animal feed business, both Astral and Rainbow performed extremely well up to the crash but a ROAM diagnosis raises some interesting strategic issues. Exhibit 4 compares ATO and ROAM for both firms.

Astral holds its leadership with an ATO that averages 2,6 while Rainbow, after hitting an ATO of 2,4, has slipped back to around 1,5 but with an improved ROS percentage.

That is why the trend slopes northwest. Management claims it is the result of producing more added value products — the classic market differentiation strategy.

However, there are costs attached to it. If you delve a little deeper into the notes in the annual report you find that R a i n b ow ’s marketing and distribution costs moved from 5% of sales to 14% of sales while Astral’s remained at 5%. What’s more, Rainbow’s inventory ATO has fallen from 15,6 to 11,4 while Astral’s is 27,3.

Then last year, the ROS% plunged in both companies but the ROAM gap between them widened. It seems to confirm that a higher ATO, lowest-cost strategy always wins in the end — especially in tough times.

Waiting-Room2-5Waiting-Room2-6The results also influence the VOF as Exhibit 5 shows.

The capital market does not seem to reflect Astral’s stronger competitive position, but productivity is not most analysts’ strong suit. ATO drives positioning by raising the first three productivity barriers — capital cost per unit, marketing ATO and cost of goods sold (COGS) — as the model shows in Exhibit 6.

With an average ATO of 2,6 Astral is way down the track before Rainbow has left the starting blocks. It means Astral’s capital cost per kilogram of product sold has to be much lower. Secondly, it spins its marketing assets — inventory and debtors — far faster than Rainbow’s managers do.

Where Rainbow has scored is in dramatically reducing its COGS from 80% of sales in 2004 to 65% last year. The trouble is it has spent a lot more in operating expenses than Astral — 22% of sales against 8,5% of sales, and that could be linked to the differentiation strategy.

“Ready-for-sale” COGS includes all costs to produce products and services — the scrap, rejects, rework and waste in the system. The first three barriers make you the lowest cost-producer — a position that Astral must hold comfortably. They have surrounded themselves with a crocodile-filled moat.

The “costs of the future” in operating expenditure — product research and development, training and development of people, for instance — make you the most differentiated. Finally, the capital market judges the firm in terms of its positioning and risk.

Waiting-Room2-7There is no doubt that ATO is the prime driver of strategic and task-level productivity. If you are still sceptical let’s look at the “house”, or maybe “hype”, that Jack built. Exhibit 7 shows General Electric’s ATO and ROAM performance for 10 years. The data start in the last few years of Jack Welch’s term as CEO. He retired just before 9/11. The board must have hauled him off stage just in time by the look of it and it seems the touted Six Sigma programme was a red herring.

Operations’ ATO — the industrial and commercial interests — declined from 1,2 times in 1998 to 0,5 in 2004. ROAM fell from a high of 25,6% to a low of 7,2%. Now the new boss, Jeff Immelt, is clawing it back. ATO is at 0,9 and ROAM at 14,2%.

As to GE Finance, it contains more than 70% of the asset base. However, it seems that there is a need to undo a lot of what Jack did and get back to what GE is good at good at.

Waiting-Room2-8The last exhibit compares operations to the VOF/assets ratio. The ROAMlink to VOF is clear yet again. It tells us the business model GE had in the 1930s when it started GE Finance probably still applies to a large extent. It was a financing arm to help grow the businesses and sell its products.

So Immelt’s goal is a simple one but not so simple to do. It seems as if he should cut out all the interests in GE Capital that do not support its industrial and commercial firms. This will lift asset productivity dramatically because today they are really bankers.

Finally, one last quote adapted from Lord Byron’s Child Harold V, in which he wrote about Rome the city, seems apt: “When assets spin, ROAM shall rise; when assets laze, ROAM shall fall; and when ROAM falls, the Firm!”

People make assets spin and ROAM work — not spreadsheets produced by accountants who act as if they manage assets but don’t. Most behave like the priests in the Dark Ages. That’s why educating people about ROAM should be a management priority.

Ted Black develops managers. He is an affiliate of Robert Schaffer & Associates ( and runs ROAM workshops that help managers identify opportunities and organise 100-day projects to tackle them.

Key to graphs: ATO: Asset turnover COGS: Cost of goods sold ROAM: Return on assets managed VOF: Value of firm/market capitalisation SOURCE: I-Net Bridge, annual reports

Sense of belonging is the cement of success

The depreciation of community within our business organisations hurts them at every level, write Ted Black and Gerard van Hoek.

THE “Greed is Good!” doctrine that fuelled the 1980s boom, the dotcom bubble, and then the investment banksters’ subprime mortgage scam, has caused another crisis.


PEOPLE POWER: A targeted project such as ‘100-Day Rapid Results’ can jump start the process of building a sense of community in an organisation.

The late management expert Peter Drucker saw early signs of it in General Motors (GM) 60 years ago. Now, in this year’s July/ August Harvard Business Review, Henry Mintzberg takes up the issue. He calls it “the depreciation in companies of community — people’s sense of belonging to and caring for something larger than themselves”. He views it as an even greater crisis than the economic one. Tellingly, he says that of some companies that we do admire — Toyota, Semco (Brazil), Mondragon (a Basque federation of co-operatives), and Pixar — all have a strong sense of community.

When Drucker first studied GM in 1943, he discovered amazing team spirit in the workplace. Women, who weren’t there before or after the war, were making tanks and Jeeps for the war effort. The powerful sense of community he found led him to stress that managers should view workers as assets — not as costs and liabilities to be eliminated.

However, during the ’70s and ’80s he saw firms doing the very opposite as they abandoned concepts such as life-time employment. Barring a few special exceptions, he lost hope with American corporations. The extreme riches given to mediocre executives while they slashed workforces sickened him. To find community and human satisfaction in the workplace, he worked with nonprofit organisations instead.

Today, people are now what Mintzberg calls “fungible commodities … to be downsized at the drop of a share price…. The result is mindless, reckless behaviour that brought the world economy to its knees.”

He argues that the problem is rooted in the mistaken belief that leadership is somehow different from, and superior to, management. Too many leaders today are only interested in their own success. This leads to isolation at the top and destroys any sense of community.

It links to another fundamental problem — competition — the driving force behind capitalism and why we value sporting analogies for business.

However, there is a flip side. When it comes to honesty, fairness and responsibility, professional sportsmen are not good role models. Greed for fame and money makes them cheat.

As Nancy Kline puts it in her brilliant book, Time to Think, competition between people achieves only one thing: someone does a better job than the other person did. That doesn’t mean that it was the best that could be done or that it was even good for everyone concerned.

Kline observes that competition is a function of male conditioning. Male traits are to know everything, interrupt and do the talking. The aim is to assume superiority, criticise, control, toughen, conquer and deride differences — even lie if you have to get your way. This approach destroys community. People cannot think for themselves. They must fit in, or else … leave.

Quality work and high productivity is a function of collaboration — not competition. As Kline puts it, when people collaborate they ask questions and listen to each other. They establish equality in an atmosphere of ease and appreciation. People are encouraged to think for themselves, to tell the truth, and to try new ways of doing things.

“I am done with great things and big plans, great institutions, and big success; I am for those tiny, invisible, loving forces that work from individual to individual.”

Successful management is not about one’s own success, but about others’ success — it is to foster and encourage it. Those are female traits. That’s why women in the workplace must never emulate males. When they do, they often do it even better than men do — not a good thing.

All this means we need managers with human skills — not business school academic credentials. Success depends less on managers’ ability to analyse, decide and allocate resources, but more on what they help others do. You learn these skills on the job — not in a classroom.

Executive growth is evolutionary. It takes time and none of us reaches our full potential. You get only so far and stall. If you are very capable, and lucky, you’ll be above average. Left to find your own way, you level off way below what you could achieve. A lack of awareness, challenge, and testing, stunts growth. This is true without exception. However, you can accelerate it through a welldesigned situation. We call it “Building Community-for- Productivity”.

We have asked many managers what was the biggest contributor to their success. None ever attributes it to a course or qualification. It is always an experience they once had. If learning is a process of discovery and invention, then there are two golden rules for doing it. We learn best when we tackle an important “problem/opportunity” with other people and when we have fun doing it.

You build community most rapidly and sustainably when you “force” its members so to speak, to tackle a short-term, concrete, real-life challenge that is important to them. The best way to “jump start” the process is to tackle an issue for which the organisation seems to have no answer.

You do it by designing a 100- Day Rapid Results project. This temporary, concentrated focus of minds drags the problem out of the chaos of everyday life and transforms it into an opportunity you can manage. You are now in charge — not a victim.

You find the opportunities along the value stream of activities that flow from suppliers through to customers. The best ones, without exception, are upstream and they always lie at overlap points between functions and people. That’s where the slippage in performance happens and the place to focus the efforts.

The result you get is “the cart”, and personal growth of team members is “the horse”. Today, most managers “manage by the numbers” — they put the cart before the horse.

Long-lived companies commit to people first, and physical and financial assets second.

As to “community-for-productivity” this is how we describe it. It is a tight-knit group of people who commit themselves to gaining an economic result but with the higher aim of personal growth. They come together thoughtfully with respect for each other no matter how much they differ. They know the one thing they can never do is let each other down as they tackle the issue.

Personal growth of each team member is the only objective. We define it in five ways:

  • Improvement in self-esteem — you feel better about yourself in several important ways.
  • A rise in self-confidence — yo u are willing and ready to attempt new ways of doing things and to risk making demands of yourself and others.
  • Higher level of competence — you develop new management skills that make you more effective.
  • Improved relationships — yo u work more effectively with people critical to your success.
  • Increased open-market value — your capacity to earn more is improved.

The objective is to promote growth in these five ways measurably and sustainably. The change in the number over time tells you how the team is doing. That’s why you have to have a number — it keeps everyone honest. Without one, projects are make-believe.

As they review and reflect on what they have done and learned, managers can genuinely feel pride of accomplishment and start to see how much they have grown during the experience. It gives them the confidence to try new things and expand the process. An organisation filled with growing people eventually reaches a critical mass. When it happens, like leaven in the bread, you get “liftoff”.

So where do you start? You start where people are ready to give it a go. As the American philosopher William James said, “I am done with great things and big plans, great institutions, and big success. I am for those tiny, invisible, loving forces that work from individual to individual, creeping through the crannies of the world like so many rootlets, or like the capillary oozing of water, which given time will rend the hardest monuments of pride.”

Black and Van Hoek, affiliates of Robert H Schaffer & Associates (, coach, mentor and help managers design 100-Day Rapid Results projects.