Tag Archives: business

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 (www.rhsa.com), coach, mentor and help managers design 100-Day Rapid Results projects.

Casting the spell of success by asking for what we want

Business leaders must develop the skill of demanding results if they want to tap potential, write Ted Black and Gerard van Hoek.

THERE IS NO TRY: Business leaders in today’s hostile, competitive climate can learn a great deal from the no-nonsense approach of Jedi master Yoda from the Star Wars films.

THE Democratic Alliance’s new team in Western Cape sparked much sound and fury after the election. It raised a critical issue ignored at the time. SA’s future success depends on a few factors. The most crucial, because it drives everything we want to achieve, is to build a new generation of results-driven managers.

The African National Congress has discovered from its time in government that only effective managers make resources productive — not politicians and bureaucrats. To be effective, “There is only do or do not. There is no ‘try’,” as Jedi master Yoda said.

The DA’s Helen Zille knows that and acts on it. When explaining her selection decisions, she said in her typically forthright way about one of them, “He can manage!” In other words, he gets things done.

In 1974, Robert H Schaffer wrote a Harvard Business Review (HBR) classic called, Demand Better Results —And Get Them. Reissued in 1991, it became one of HBR’s 10 most requested articles during the 1990s. Maybe that’s because few managers have the ability, or the will, to set expectations in a way that gets results. It’s the scarcest skill but we must develop it if we want to tap into our huge, untapped potential.

Over the years, thousands of managers, in SA and around the world, have been asked to guess how much more productive they would be if overlapping functions were eliminated; there was more co-operation and less internal competition; people worked closer to their potential; there were less politics and ego-driven behaviour; fewer useless meetings, conferences and projects that go nowhere; lastly, that people had to achieve hard, clear, result-driven tasks — not perform soft, fuzzy, activity-driven “roles”.

Almost everyone selects “25% to 50%” and “over 50%” potential to improve. Compare average and best performance among yo u r units and people if you want proof. And it’s even more urgent to release potential in this hostile competitive climate, with its recession, unions agitating for higher pay, and our need to make the poor productive.

Managers invest a lot to get better results. They buy companies, reorganise, and install new technology, plants and enterprise resource planning systems. Widespread training focuses on continuous improvement, culture change, “empowerment”, balanced scorecards with their countless, confusing “key performance areas” and “key performance indicators ”. Then, after throwing academics, corporate resource groups and consulting firms into the mix, look at the cost to value ratios.

You’ll battle to find links to a positive economic impact. That’s because the activities, as good as they are, become handy bolt holes for managers to avoid the struggle of achieving a big step up with the resources they already have. You only get “breakthrough” when a leader decides his people must and can make a big productivity gain, and then demands it.

Why don’t managers make demands? Pushing for big gains can seem risky. It’s because of the ways we assume the world works. They put a serious damper on ambitions for the better.

If you are new in your job, you could threaten and anger your boss by implying he has settled for less. Or, you may fear ridicule if you don’t reach your goal.

Again, you might irritate peers with your high expectations. Efforts to lift performance may expose weakness, uncertainty and lack of know-how as you challenge the existing way of doing things.

With your people, a clear demand for better performance can stir up conflict and dislike — maybe raise another fear. What do you do if they fail?

On top of these concerns, many in the human relations movement see the demanding manager as a villain. So instead of using power to make demands, you have “vision” statements and “communication” programmes all backed with training, incentive schemes, posters and slogans on display around offices and factories.

These tactics stress process and method but weaken the value of results. Little improvement occurs because there’s no forceful call for it. Test any typical enterprise resource planning (ERP) system or change project for proof. The response is, “It’s very hard to measure. Trust us, the results will come .” Left unsaid is, “Like rain in the desert.”

You’ll never achieve superior results as long as you think the right training and indoctrination will produce them. All it means is we lack the courage to face up to the struggle that’s needed to break down the barriers of inertia and resistance that exist everywhere.

We even sabotage ourselves with our own escape routes. We convince ourselves we’ve done all we can to spell out what must be done and say: “Well, if they don’t know what they have to do by now, they shouldn’t be here.”

We play games. “Look, I don’t know where we’re going to get a 15% increase in sales, but I have to stick it in my plan so you must do the same.” Or, we accept trade-offs. “I’ll increase sales but I’ll have to give bigger discounts to get them.”

We back away from tough demands by saying, “Okay, let’s budget for the same level of expenses, but I’d really like to see some reductions when we get into the new year.”

Often, we set vague and distant goals. “By this time next year, I want to see a significant improvement in material utilisation”. Sometimes there are too many. “These are the 30 key goals that we must focus on this year,” says the executive giving “good slide” to the CEO.

Then there’s the bureaucrat’s response. “If you really want to reduce inventory, then let’s first commission a study to find out how we got into this mess — who ordered it, why it’s not being used —and if we need to rethink our whole approach to supply chain and stock control management.”

As to “performance management”, you get a blizzard of documents that forces huge amounts of energy spent on procedures, not results. In the same way, according to most longsuffering operating managers, putting in ERP systems is like “pouring liquid concrete”.

If you want a breakthrough, you have to master the art of demandmaking. It applies if you lead a team of creative boffins, conduct an orchestra, or run a mine. Nothing happens until you make demands that get a productive response. The good news is you can develop the skill, but not in a classroom.

Rehearse and prepare in one if you want, but learn on the job.

Demand-making is not barking orders. Your aim is to get people to drop, for a while, all the “activities” —the studies, preparations, training, surveys and analyses. Instead, make a successful, first attempt to lift expectations, get a tangible result and use the success as a foundation for ever more ambitious steps.

“We lack the courage to face up to the struggle needed to break down barriers of inertia and resistance”

The essence of the process is that a series of demands, limited at first but becoming more ambitious —each backed by careful plans, controls and determined effort — makes success far more likely than a plunge into widespread change from the start. There are five guidelines for designing the breakthrough goal.

It is urgent, and compelling. Focus on improvements that everyone clearly and instantly sees as vital and necessary now. Generate the feeling that the goal is an imperative — not nice to have.
Anticipate success in 100 calendar days or less — not many months and years. Chunk down from the large and complex — something that concerns say sales, quality, costs or output — to a short-term, first-step goal. Focus on one product in one branch to one customer; one machine in one plant; one hospital ward; one clinic; one customer; one backlog.
Make it simple — not simple to do; simple to understand — one with a physical measure you can plot daily. You trigger change with one number — not many of them.
Exploit what people are able, willing and ready to tackle now. To guarantee and build commitment, do what excites them — not what you think they ought to do.
It is achievable with existing resources and authority. They must do what they can with what they’ve got. All key people involved can commit without hedging bets and finding ways to duck responsibility —there’s no escape.

Selecting a goal and demanding a result this way creates a “credible crisis”. It generates the “must do” energising forces you find in emergencies. There is urgency, challenge, and excitement. Success is near and clear. The pressure to get things done fast stimulates people to collaborate, experiment and ignore “red tape”.

With a clear, non-negotiable demand, you nail them down. Do that and you often find the imagined threats and dangers never show up. If your people are like most, they will respond to the challenge. They achieve the goal. If they fall short, that’s still a success to build on.

Despite first doubts, most people enjoy working in a resultsdriven climate. It empowers them. They contribute and take responsibility for “doing” or “not doing”. They know if they don’t deliver they’ll let themselves and the team down.

Finally, you achieve the prime objective — to grow your people. You do it fast, measurably, just-in-time, on-the-job. They are more confident, competent, improve relationships and increase their personal value. They grow into more effective managers.

The result, the change in the number from the start of the project to its end, does two things. It keeps you honest. It tells you if your people are growing. That’s leading with integrity.

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

Mergers need a sober approach

The world of business can learn a lot from beverage manufacturer SABMiller, a company that has been an acquisition machine in the world’s beer sector, writes Ted Black

A GOOD prophecy does not have to be right, but it should alert you. On these pages a year ago, we looked at the relationship between ROAM (return on assets managed) and market capitalisation —or value of the firm (VOF) — on the JSE.

It shows a clear, positive correlation between ROAM performance and the VOF. As ROAM rises, so does the perceived value of the sector and the companies in it. The drivers of ROAM are revenues, margins and asset productivity. They result in the three most important financial measures of operating management’s competence:

Profit margin (operating profit divided by sales multiplied by 100) multiplied by;
Asset productivity, or asset turnover (sales divided by assets), which give you; and
Return on assets managed (ROAM) — the total operating profitability of the business.

Managing revenue and margins are both critical tasks, but asset turnover is the most important one of the three. That is why we also took a peek at SABMiller through the asset turnover (ATO) and ROAM lenses last year.

We can learn a lot from a firm that has been an acquisition machine in the world’s beer sector.

First, what governs top management ’s behaviour? It has given up using EVA™ as a measure. It uses total shareholder return (TSR) instead. This combines share price growth and dividends over time.

However, there is a danger when you measure management with share price movements. The late Peter Drucker once said: “Stock option plans reward the executive for doing the wrong thing. Instead of asking, ‘Are we making the right decisions?’ he asks, ‘How did we close today?’ It is encouragement to loot the organisation.”

EVA™ is driven by productivity, but growth is one of the drivers of the share price and therefore TSR. That is why it makes sense for managers to go for mergers and acquisitions to accelerate growth and reward.

According to I-Net Bridge’s analysis, SABMiller directors’ remuneration in rand value has gone up 814% over a five-year period — not a bad return for their efforts.

SABMiller1 SABMiller ’s market capitalisation has grown roughly in line with the growth of the asset base through 2004 to this year —about 190%. Exhibit 2 shows the effect of this over the past 10 years on asset productivity — a steady fall from right to left. You could call it “brewer’s droop” after SABMiller’s involvement in the consolidation “beer bust” of the past 10 years.

Mergers and acquisitions are management’s “Sun City” gamble —the big bet with high hopes that are seldom met. Statistically speaking, they seem doomed to mediocre economic performance. There is a reason for that: the sellers walk away with the value, leaving the buyer with a huge cost.

InBev is the latest example of that. It has offered $52bn for Anheuser-Busch’s asset base of $17bn —a premium of $35bn.

Accountants call it goodwill, but it does not generate a return and is bad for ROAM and the VOF. Today, Anheuser has aROAM of 17,3% on total assets. That means each year management will have to generate an additional $6bn operating profit out of the tangible assets to pay for the “opportunity cost”. It is the “winner’s curse”.

Few changes are as complex and challenging as acquisitions. The closing of the deal marks the end of a job well done. Top management celebrates victory and moves on. Making them work is someone else’s task.

That is when large numbers of people from two organisations plunge into the deep, cold waters of a new working environment. After the excitement of the courtship and consummation of the marriage, the offspring can be a big disappointment. The question becomes, how do we turn this unhappy product of a happy moment into a success? Miller is a case in point for SAB.

Despite some impressive productivity programmes described in annual reports, the acquisition seems to have put SAB management onto a permanent learning curve. You never, ever generate high productivity and cash when you learn.

Given the generally accepted 70%-80% failure rate of mergers, SABMiller ’s expansion through foreign acquisitions was seen as high risk at first. To lower the odds against it, the strategy, like all good ones, was simple and based on SABMiller’s strengths.

Its experience curve, a hugely profitable one, is anchored firmly in SA — especially Soweto. That’s not a good address by international standards. So to achieve the vision of becoming a major global player, the mission was clear and brilliantly simple: move the head office to London —a good address —and then: “Buy good beer firms at bad addresses.”

Like everything in life, it was not so simple to execute. Profitability fell steadily as the comp a ny grew in Eastern Europe, Africa, the Far East and Latin America, where it now has a big stake.

The share price languished for a while, but improved results changed capital market perceptions and doubled the VOF over a couple of years.

However, in 2002, management turned its successful formula on its head. It bought a bad beer firm at a good address — Miller in the US. In one move, it jumped onto a long, steep learning curve in a complex, highly fragmented market with a big, hostile gorilla in it.

The results since show that it cannot make the breakthrough onto a US experience curve even with highly competent operating management. The great lesson from SABMiller’s North American experience is to match opportunity with strength —not weakness.

Could that insight have prompted its decision to merge its US operation with Molson Coors and let them manage it?

The beer business is mostly a good one to be in —it has high operating margins and even the worst performers have a return on sales of about 10%. However, most of the well-known players who have been involved in the consolidation “beer bust” now have serious “hangovers ” – an intangible asset burden of around 50% of their total asset base. This causes low ATO and the effects are shown in Exhibit 2.

SABMiller2 Low ATO companies rarely see good returns, but high margins compensate for it in the beer sector. The highest ROAM is Modelo’s 20,6% in Mexico — its return on sales is 28%. Unless you have “orderly market arrangements” as most big South African firms seem to, or you have a monopoly, low asset productivity means trouble.

Exhibit 3 shows what can happen. It looks at geographic market segments and InBev. First, compare SABMiller and Molson Coors with Anheuser- Busch’s US beer interests. It is like taking on SAB in SA.

SABMiller3 Once the InBev deal is consummated, and $35bn is added to its asset base, Anheuser Busch will collapse in a heap in the left-hand corner along with its Chinese interests. Its ATO will be about 0,2.

That is what Bavaria’s was before SAB bought it, and why the Latin American segment also languishes down the bottom of the left-hand corner.

In last year’s article, the Molson Coors deal was being mooted. The warning given was to be wary of adding low productivity assets to low productivity assets. Rainbow Chickens tried it by acquiring Bonny Bird and Epol from Premier and took many years to recover. As Molson is already reporting poor results, will the US become SABMiller ’s Russian Front, or is this merger part of a withdrawal and regrouping strategy? In SA,Heineken ’s entry pulled SABMiller’s operating margin down to 24,3% from 27,3% and ROAM from 50% to 44%. Competition gets prices down. The very thought of it will change behaviour, which ra i s e s the final issue.

What should shareholders demand from SABMiller today? After the latest frenzy of acquisitions, they must stay sober. With rising input costs and the huge hangover of intangible assets, now is the time to focus on the VOF. The VOF is key to all management interventions. It is not growth, not revenues, not market share, not size; except to massage the VOF.

The VOF is governed by volatility and uncertainty. Volatility equals uncertainty, and uncertainty equals risk. To reduce risk, get managers to focus on economic profit and follow Warren Buffe tt’s advice. Build a crocodilefilled moat around the fortress: “Widen the moat: build enduring competitive advantage — delight your customers, and relentlessly fight costs.”

It means that productivity ratios become the only valid measures of management intent and results —not the share price. Productivity is units sold: resource units used. Improving productivity will reduce risk by influencing price recovery, which is the ratio sales price:resource price.

If you use a high selling price to make money without keeping product costs down, you increase the risk. This is price over recovery. It typically arises from sales price growing faster than resource price.

That is the basis of the information I would seek from management if I were a shareholder —or say Maria Ramos — who has just joined the board. Coupling a productivity focus to Heineken’s presence here would be good news indeed for long-suffering South African consumers. We seem to pay huge premiums for everything we buy, whether it is from the private or public sector.

Ted Black (jeblack@icon.co.za) coaches and conducts ROAM workshops that help managers design results-driven projects.

SA Inc should take less and make more

HR-Strategic-Partner COMPANIES and institutions are complex social systems and therefore difficult to manage. Consider the huge and rapid changes of recent decades, the even greater ones in years to come, and people become more important than ever to success.

Despite this challenge, and its diligent efforts over the years, the human resource (HR) function struggles to position itself in management ’s mainstream.

That’s probably one reason why the Boston Consulting Group (BCG) and the World Federation of Personnel Management Associations recently surveyed the views of nearly 5 000 executives in 83 countries and markets. They published a report of their findings and called it Creating People Advantage — How to Address HR Challenges Worldwide Through 2015. It covers 17 topics in human resources management and lists 194 action steps to compete better through people. The three main areas of focus that emerged were:

Keeping and developing the best employees;
Creating “learning organisations”; and
Anticipating change —for global companies this includes managing demographics and differing cultures.

Not surprisingly, the report concludes that the challenges are greater than ever before. That’s probably why transforming the HR function into “strategic partner” was one of the 17 topics raised. This is the “right to sit at the high table” with top management.

If HR managers want that, it seems they missed a DAZZGOTO — a dazzling glimpse of the obvious — during the survey. Productivity was not even raised. The closest to it was “performance management ” — usually this ends up as a more complex version of the dreaded, and mostly ineffectual, annual performance appraisal.

It highlights the problem HR people have. Operating managers see a need for what they do, but it tends to be a defensive one. It’s more a case of “keep us out of trouble” ( that ’s putting it politely), than anything else, and certainly not to help with productivity.

As to productivity improvement, within HR are the human resource development (HRD) specialists. These HRD people claim they already respond to the need through training, organisation development, selection, performance management programmes and incentive schemes. The belief is that improved results will follow these activities but the link is tenuous at best.

During the survey, executives in Africa identified the management of talent, work-life balance, globalisation and diversity as major issues —again nothing about productivity. The issues raised are important but the accompanying rand-dollar chart spells out the challenge and prime focus for South African managers — not least, HRD. Today, we don’t create wealth — we destroy it. The long decline in the buying power of the rand stopped in 2002 but seems about to resume its steady descent. T hat’s because it’s hard to swim against the tide of three numbers.

Our population growth is one of the world’s highest even if tempered by disease. Our inflation rate is higher than our major trading partners. Lastly, our productivity is low and falling compared with the rest of the world. That’s because a common driving value in government and corporations in SA is to “take ” money, not “make ” money.

Indeed, the way we pay people, especially managers, can even cause falling productivity. It’s all about pay and reward for size — size of the asset base, sales, costs, profit, numbers of people and growth —not productivity.

The rand-dollar chart’s wakeup call is loud and highlights a key economic principle —productivity equals wealth and is the most powerful weapon for fighting inflation.

Productivity gains allow companies to increase wages without increasing prices at the same rate. This keeps inflation below wage increase levels and grows real income and standards of living.

Moreover, HRD people with the talents they have are uniquely suited to contribute directly, significantly and measurably to productivity initiatives. However, they have to make a shift and bring meaningful metrics into play — simple ones that people at all levels can understand.

It is time for HRD to work with the finance department —another function that is largely irrelevant when it comes to productivity. If measures influence behaviour, then accountants are hugely ineffective. Most often, the numbers arrive far too late to make any difference and no one understands them anyway.

If you expect to find out if a company is improving productivity or not by reading the financials, you won’t. They mislead rather than inform. That’s why there is a flourishing trade in business school courses and finance workshops for non-financial managers. They achieve little.

In fact, accountants and HRD people share the same problem, but it is also a huge opportunity. They both battle to become genuine business partners and advisers. Their barrier is how to communicate — to present the numbers in plain, simple language for operating people with no formal training. If they did, then employees would think intelligently and suggest ways to improve them — just as they do in Toyota.

This year, in its neck-and-neck race with General Motors, it will probably take the lead and then widen the gap between the two companies. For good reason. Its employees generate one million suggestions a year. That’s around five per person. What’s more, they implement most of them — in many cases without even waiting for management approval.

Toyota has perfected a system that continually improves itself and creates huge profitability through productivity improvements. It is now the benchmark for world-class manufacturing — indeed for the profession of management. What the company shows us through its suggestions is that there is a vast, untapped reserve of potential in every organisation. The trouble is it stays hidden, and then simply fritters away because of historical accounting methods, policy and culture.

As one CEO of a major US company put it: “The three biggest barriers to continuous improvement are top management, middle management and supervisory management.” When anyone suggests a change for the better, typical reactions will be: “We’ve tried that before and it didn’t work so why don’t you go back to your workplace and get on with your job?” and: “No, that’s a silly suggestion. The savings will be too small.”

So what metrics should HRD people use to reposition themselves and help finance do the same? The first trait of the longlived companies that Arie de Geus described 10 years ago in his book, The Living Company, was that extraordinarily successful companies understand the meaning and value of cash in the bank. The second attribute was that no matter how diversified they were, people in long-lived companies felt they belonged. Case histories showed that a “sense of community” was essential for long-term survival.

This community includes not only the internal one, but those on whom the firm depends for its survival — its customers and suppliers. It means the company has to position itself to make it easy and worthwhile for customers and suppliers to do business with it. That’s the strategy part — designing your business to do that. Next is making it happen.

If you had only two measures to tell you about a firm’s health, the first is the length of the “cash-to-cash cycle” — the time it takes from paying your suppliers to the time your customers pay you.

The second measure is based on the classic sales prospecting question. You ask your customer: “Would you recommend us to your close friends and colleagues?” Trended “yes” replies tell you how well you are doing and whether or not you are going to grow.

These two measures — the cash-to-cash cycle and customer perceptions — drive productivity improvement and test the health of the firm. You can’t have many “yes” answers with high inventory turns and fast payment by customers if you aren’t doing a lot of things right.

PRODUCTIVITY is a much misunderstood and often misused concept. There is a physical and financial side to the equation. The physical side deals with quantity of input— resources and time — to quantity of output. The relationship between them defines “productivity ”. If you can get more output with the same level of input, that is a productivity gain. There are several other ways to do it.

Then there is the price of the input — what the resources and time cost — and the price of the output. This is about “price recovery”. If you increase salaries and wages by 10% but increase selling prices by less, the company suffers a price recovery loss. When you multiply the two elements (productivity and price recovery) you deal in rands. The relationship of rands input (costs) to rands output (sales) is profitability.

If your people understand these two elements, they can start to measure, analyse and make changes in the right way.

And the right thing to measure is the system, not people or processes in isolation. W Edwards Deming, father of the modern quality movement that found its genesis in Japan, saw that the typical employee worked in processes that have wasteful activity built into them. People don’t say: “I’ll go and do lots of wasteful things at work today.” Waste is already part of the system designed by management. This means HRD has to get managers to admit that all systems have waste built into them, put a process in place to identify it without blaming anybody and allow employees to eliminate it.

Eliminating waste isn’t the problem. Identifying it is. Only your people can do that—the people who actually execute the ser- SA Inc should take less and make more A great opportunity exists for HR to earn executive respect —by improving productivity, write Ted Black, Gerard van Hoek and Bazil van Loggerenberg A common driving value in government and corporations in SA is to take money, not make money vices or make the products.

Based on research by BCG and the Lean Thinking movement, the amount of time needed to execute a service, to order, to make and to deliver a product is only 5% or less of the time that the service or product spends in the system. That’s from the time you pay suppliers to being paid by the customer — the cash-to-cash-cycle. Attack the waste of time in the system — the cash cycle time — and you will gain remarkable improvements in results.

This brings us to the second trait of the long-lived company. You only get sustainable productivity when there is a strong sense of community — when all people feel they are in it together.

We take the positive view. A community is a group of people who are ready and willing to mould themselves into a close-knit team. They succeed because they:

Have a clear, “bottom- line ” goal;
Respect each other no matter how different they all are; and
Know the one thing they can never do is to let each other down. This is HRD’s prime task if it wants to “sit at the high table”—to help operating managers build communities for productivity. If they succeed in that, they will meet the prime growth needs of South African management. These are:
Vastly upgraded skills in the management of change;
The management of communication; and
The management of diversity and the conflict that comes with it.

You build communities of growing people most rapidly and sustainably when its members are “forced”, so to speak, to develop them under short-term, concrete, real-life challenges that are important to them. These challenges always lie at points of overlap between people along the value stream of activities, from supplier through to customers. That’s where you find the opportunities to lever up productivity and where you can design community-building projects.

THE question to ask that pinpoints opportunities is: “Would the customer be willing to pay for what we are doing here and now?” Answering that question means people can devote their efforts towards eliminating all the things that do not add value.

That is business acumen — being able to see and identify opportunities to make and save money.

The long-lived companies commit to people first, and physical and financial assets second. People are “the horse” and productivity is “the cart”. All it needs is to educate your people in what productivity is. As we all know, very few of them do, and that’s true from boardroom to the work place.

It is a wonderful message of opportunity for HRD people and it is how they can be part of the game of business. They will get onto the playing field as contributors to economic results. No longer will they be just observers while operating management does its thing. Moreover, they will address the prime areas of focus discussed earlier —attracting and retaining the best employees; managing change; and building a learning organisation.

Ted Black (jeblack@icon.co.za) conducts ROAM workshops. He and Gerard van Hoek are affiliates of Robert H Schaffer & Associates Bazil van Loggerenberg, from Loggic LLC, is a developer of analytics and mathematics for productivity control systems.

Time to get serious about productivity

“The future of the planet, and of SA, depends on effective management”

Focus on margins prevents managers from creating wealth, writes Ted Black

Elephant1

AFTER 1994, a rather arrogant, patronising, white, male old guard passed on to a new generation of inexperienced managers and owners some very sophisticated and complex organisations in both the private and public sectors.

Today, the new generation is discovering how difficult it is to run them. And the focus has not changed —it remains the same as the old guard: to maximise sales margins and redistribute wealth, not to create it. The prime lever for improving performance is not through improving productivity of resources but through the power to set and control prices. It is quick and relatively easy, but it is not sus tainable.

From a shareholder’s point of view, management still has only one legitimate purpose — to maximise the value of the firm. Mo r e – over, the value derives fundamentally from productivity. That is where the focus needs to be.

We cannot ignore the elephant sitting on our stoep

As we read of our steady slide down the world’s productivity rankings, then gaze north at Zimbabwe and elsewhere in Africa, we cannot ignore the elephant on our stoep. When are we going to stop taking money and start making money?

Peter Drucker described it in 1980 in Managing in Turbulent Times: “Only managers — not nature or laws of economics or governments — make resources productive.” I would add that you get sustainable productivity only when there is a sense of community — when all people feel they belong and are in it together.

Robert Mugabe has destroyed that in Zimbabwe. Where is SA heading? What are the omens?

Forget the hype about the need for leaders. The future of the planet, and of SA, depends on effective management.

Business literature swamps us with stories about leaders pointing the way and changing people with their visions. A lot of it is rubbish. throughout history, the reality is that few leaders have done that and four recent ones are Lenin, Stalin, Hitler and Mao.

Besides, how many of us want to be led anyway? We might like to be trained, coached, and developed by mentors we choose. We may even agree to be managed in the right way —but not led.

As to South Africa Inc, for this fledgling democracy to succeed we have two critical factors to address — make the poor productive and build a new generation of management. These issues should drive everything we do in the government and the private sector.

We need fiscal discipline, but the blunt instruments of free market monetary and interest-rate controls bludgeon the very people who have least influence over rising inflation—the poor. The negative effects on growth and job creation could damage us seriously and destroy the already fragile community and family structures in SA. The most fruitful way to tackle the thorny issues facing South Africa Inc is to lift productivity and create wealth that everyone can share.

During the previous century a small proportion of this country’s population prospered because of abundant mineral resources. Commodity exports were the lifeblood of the economy and still are. In effect, a mining camp spawned the industries we have today. Moreover, the government protected them with its political system, high tariff barriers and subsidies.

Judged by world standards, these hot-house conditions created highly profitable firms run by quite capable management.

In our Third World economy, with value based on limited beneficiation of exported commodities, corporate strategy was to gain preferential access to raw materials. This meant that productivity focused on low input costs and high pricing tactics in local markets. The aim was to maximise dividends, minimise equity holdings here and to shift money overseas.

Little has changed, except our management. After 1994, in the rush to meet affirmative action and black economic empowerment (BEE) quotas, a rather arrogant, patronising, white, male old guard passed on to a new generation of inexperienced managers and owners some very sophisticated and complex organisations in both private and public sectors.

Today, the new generation is discovering how difficult it is to run them. What is more, our focus is still to maximise sales margins and redistribute wealth — not to create it. The prime lever for improving performance, whether it be for municipalities, Eskom, or private firms, is not through improving productivity of resources but through the power to set and control prices. It is quick and relatively easy, but it is not sus tainable.

In the developing world a major barrier to improving productivity is financial illiteracy. Many of us have a phobia about numbers: we cannot do simple arithmetic and have only the vaguest notion of how business works.

Most people think that money cascades magically through an organisation into their bank accounts on the 25th of the month, whether they get the work done or not. Moreover, more employees are now shareholders with no clue as to what that it means for them.

To compound the problem we have a corporate governance movement that aims to influence boards and have companies compete and prosper in an ethical way —to make society a better place for everyone. However, it stresses social responsibility more than economic results and productivity.

“Business literature swamps us with stories about leaders pointing the way and changing people with their ‘visions’. A lot of it is rubbish”

Despite good intent, it’s hard to measure what it wants. A triple bottom line and balanced scorecards hold no-one to account.

From a shareholder’s point of view, management still has only one legitimate purpose — to maximise the value of the firm (VOF). Moreover, the value derives fundamentally from productivity.

By shareholders we do not include in-and-out traders looking for short-term gains. We mean investors who put their cash in a company expecting an economic return for a long time.

They see management as being ethical, competent and effective — people who do the right things in the right way because they think and act like owners. When that happens, shareholders become more than investors. They become long-term savers.

An example of a company that provides such opportunity is Berkshire Hathaway. As James O’Loughlin wrote in his revealing book, The Real Warren Buffett: “Buffett says he does not understand the CEO who wants lots of share activity: that can be achieved only if many of his owners are constantly exiting. At what other organisation —school, club, church — do leaders cheer when members leave? If this were the case, then Buffett would not be able to fulfil his function as corporate saver —the proper function of the stock market.”

In the 2007 annual report, Buffett says: “We do not view the company itself as the ultimate owner of our business assets but instead view the company as a conduit through which our shareholders own the assets.”

He says they are not “faceless members of an ever-shifting crowd but rather co-venturers who have entrusted their funds to us for what may well turn out to be the rest of their lives”.

Contrast that view of management with former General Electric CEO Jack Welch who said: “Being a CEO is nuts! A whole jumble of thoughts comes to mind: Over the top. Wild. Fun. Outrageous. Crazy. Passion. Perpetual motion. The give-and-take. Meetings into the night. Incredible friendships. Fine wine. Celebrations. Great golf courses. Big decisions in the real game. Crises and pressure. Lots of swings. The thrill of winning. The pain of losing.”

Nice work if you can get it! Clearly, he was no corporate saver but he did manipulate Wall Street very skilfully, and that helped pump up the share price no end.

Whether he allocated capital very well is a moot point judging by General Electric’s relative economic performance over the years. Sorry to say he has become a model most modern managers want to emulate.

In stark contrast, Buffett and his colleague, Charlie Munger, see themselves as managing partners and see shareholders as owner partners. It is why today about 30 000 of them rock up for Berkshire’s annual meeting. At the end of one year the same investors who owned them at the start of the year held 97% of shares. That makes them savers, and for good reason.

The result of Buffett’s stewardship is a compounded gain on investment of 21,1% a year from 1965 to 2007. That’s a 400 863% gain over 43 years. The S&P 500 over the same period achieved 6 840%. The VOF today is more than $200bn. Apart from investments in companies, the firm has 76 operating businesses. It is a diversified conglomerate employing 233 000 people. Only 19 of them work at HQ.

There is no share option scheme — Buffett doesn’t believe in them. They violate the principle of rewarding people for their own efforts in their own units. However, most of the key managers of the operations are independently wealthy and none has left the group to work elsewhere.

Buffett delegates to the “point of abdication” as he puts it, and says that HQ has a twofold task. First, it is to “create a climate that encourages (key managers) to choose working with Berkshire over golfing or fishing. This leaves us needing to treat them fairly and in the manner that we would wish to be treated if our positions were reversed.” He rewards them handsomely for making an economic return on capital in their own companies and for sending all surplus cash back to HQ. That’s where he fulfils the second part of the “owner’s” task — to allocate capital for acquisitions or investment.

As he puts it, “our carefully crafted acquisition strategy is to wait for the phone to ring”. The bigger the company the greater his interest will be. He responds to an approach within five minutes if it grabs his attention. He never does an unfriendly takeover and his attitude to start-ups, auctions or turnarounds is, “When the phone don’t ring you’ll know it’s me.”

He looks for well-run businesses “with a fortress-like business franchise ” — a product or service that is needed and wanted, with no perceived close substitute and which is not subject to price regulation. Owners usually run the firms he buys and he keeps them doing it after he buys control. It is how he gets good management into Berkshire Hathaway.

He wants high levels of profitability from a low capital base and low operating costs. In other words, he seeks low risk, high return, cash fountains — not cash drains. Businesses like that don’t need reinvestment to sustain them. Another criterion he looks for is that they must be simple enough for an idiot to run because sooner, or later, one will. In other words, he sets out to minimise risk and maximise return through a simple agenda.

Elephant3

The chart in the illustration, In the shareholders’ shoes, shows how he might position an opportunity. Behind the four quadrants are 17 business safety ratings cases —they provide clear, unambiguous signals for shareholders to rate managerial per formance.

Most managers picture an entrepreneur as a hardened risktaker who shoots from the hip. This viewleads to the master myth of management: all things being equal, higher returns reward higher risks. Driven by the myth, corporate cowboys, egged on by greedy merchant bankers, lawyers and accountants, head for box one.

They might as well be going to a racetrack or casino. They end up in box four where you find the wreckage of corporate start-ups, mergers and acquisitions, the result of high-risk, low-return strategies. Winning firms achieve lowrisk, high-return positions. Only companies positioned in quadrant two will satisfy the long-term shareholder as Buffett sees it.

So, what does his simple agenda mean for the corporate governance movement, company boards and even the South African government? Giving management and employees share options, as so many firms are doing, won’t make them think and behave like owners. You have to do more than that.

“In reality most organisations operate in ways that switch off the brain”

Just as a firm has an external marketing programme to win the minds of investors, it needs an internal one for results. It is the only way to surmount what Buffett calls the “institutional imperative”. We paraphrase his description of it:

As if ruled by Newton’s First Law of Motion, institutions resist any change in direction;
Just as work expands to fill available time (Parkinson’s law), managers chase the big projects and acquisitions that drain cash;
Corporate troops (the bureaucrats) quickly support any business craving of their leader no matter how foolish it is; and
Firms mindlessly imitate peer companies, whether they are expanding, acquiring, or setting executive pay.

Buffett says that when he went to business school he got no hint of the imperative’s existence. If he went back to one today he probably still wouldn’t. He thought decent, intelligent and experienced managers would make rational business decisions and he learned that they do not. When the institutional imperative takes hold, and it does in government too, rationality wilts.

It wilts because managers reduce the fear of uncertainty by asserting control. They do it with plans, budgets, forecasts and they manage systems and people by decree. However, this approach triggers other needs —the need for survival and the pursuit of selfinterest. Improving productivity, and allocating capital and resources efficiently and effectively are not the priorities that the business safety ratings can reveal.

In Buffett’s view, the strategic plan creates the institutional imperative. That’s why he doesn’t have one. He believes it gives him his greatest advantage. It means he lets go of the bureaucratic controls that a corporate HQ exerts, the exact opposite of the typical manager. His leadership style conforms to Chinese philosopher Lao Tzu ’s description: “Intelligent control appears as no control or freedom. For that reason, it is genuinely intelligent control. Unintelligent control appears as external domination and that is why it is really unintelligent.”

The institutional imperative becomes a heavy blanket that stifles people’s potential. We talk of the value of human capital and business academics want it put on the balance sheet. However, in reality most organisations operate in ways that switch off the brain.

As to his operating companies, Buffett wants a crocodile-filled moat around the fortress. He urges his managers: “Widen the moat: build enduring competitive advantage —delight your customers, and relentlessly fight costs.”

Growth is not the aim. However, his productivity goals generate the cash returns he then uses for growth opportunities.

In summary, he gets his key managers to focus on productivity — the most powerful competitive weapon for a business and a country. He has no strategic plan and gives no forecasts. The world is too random for that.

This approach frees him and his managers to pursue the vision of thinking and acting like owners. He can allocate capital where, when and at a pace that suits him — not Wall Street.

Given this perspective, we wonder how a board that focuses on productivity would view South Africa Inc and some of its diversified portfolio of industries and companies. Using the ROAM model (return on assets managed) and operating margin (operating profit/sales%) on a small sample of big players, we compare the profitability of their domestic operations with their global ones.

Elephant4-all

You can draw your own conclusions from the accompanying charts. Four conclusions stand out in my view:

South Africa Inc is still seen as high risk and is not run by corporate savers;
This means South African citizens pay through their noses for the internationalisation strategies that follow from that perception;
South African management is not as good as it thinks it is when facing the heat of competition;
This is because the productivity focus overseas shifts from pricing tactics to the sales productivity of the asset base — the other prime measure within the ROAM model. This is the sales/assets ratio known as asset turnover (ATO).

South African management is not good at managing productivity because there has been no pressure to do so. It involves work on the entire supply chain through to customers. The goal is to drive out the wasteful activity that exists throughout the value/cost chain— to lift everyone’s productivity — and to speed up the time from paying to being paid. The benefits come through to the customer in more competitive pricing.

However, there is another conclusion that defines the elephant on the stoep even more clearly. The sanctions era under the National Party government entrenched a policy of import parity pricing that led to inefficient resource allocation. Its effects persist today. Even ANC government policies protect high-cost industries that are uncompetitive by world standards.

The long-term weakening of the rand creates huge price overrecovery. This is when a producer charges an excessive price — as most South African institutions seem to do. They extract an everincreasing price subsidy from consumers. This guarantees profit growth but management becomes complacent. With no competition it just becomes a case of cost-plus pricing that encourages waste and low productivity, all to our economy ’s detriment.

A nice example of this in our sample, apart from the obvious ones of Sasol and Mittal, is Sappi. With Mondi, it forms an oligopoly — a small group of typically very large firms that collude to exert power and control over pricing — as we have seen exposed in the steel and food industries.

At first glance, this firm’s low returns — it has an overall ROAM of only 6% — do not reflect the benefits of a monopolistic position. However, you can see from the chart how Sappi takes advantage of the South African consumer with a 19,4% ROS. It is even higher because that figure includes exports at a much lower selling price than its local customers pay.

There is a deep-seated problem with the paper industry. Pe ter Drucker wrote in 1974 in Management Tasks and Responsibilities that since the Second World War the paper industry “has substituted capital for labour on a massive scale. But the trade off was a thoroughly uneconomic one. In fact, the paper industry represents a massive triumph of engineering over economics and common sense.”

“If we are serious about productivity and increasing our national competitiveness we have to change behaviour”

Thirty-three years later in San Francisco on October 22 2007, Eugene van As, at the end of a long career with Sappi, 30 years of it as CEO, candidly endorsed Drucker’s view. “For the past 20 years the top 100 paper companies have collectively destroyed value consistently every year.”

As a wag in the South African paper industry put it: “So why was he there so long? He should have left long ago!” His remark was more colourful than that but it’s the gist of what he said. Many shareholders would probably agree. They have a low-return, relatively high-risk investment.

When it comes to risk, there are two key elements — productivity and price recovery. We define productivity as units sold divided by resources units used.

Improving this rate lowers product cost (all the costs of getting products ready for sale) and lifts profit. It also lifts business safety, because it lowers risk. A low product-cost firm deters competitors. Moreover, it is never that easy to copy what others do.

With ready-for-sale costs, because of the institutional imperative, the potential for improvement is huge. The lean-thinking movement proves that we add cost with value for a tenth or less of the time between paying suppliers and getting paid by customers. That means for 90% of the time or more we pile up costs without adding a cent of value.

Corporations such as Tiger Brands write about “continuous improvement” programmes in their annual reports. What do they mean? Continuous improvement is not about improving what you do well. It is about eliminating all the things that stop you from doing what you do well — all the headaches. That’s waste. It’s what you have to look for and eliminate.

Management — or we should say bureaucrats—design waste or fat into the systems and procedures that people have to follow. It exists everywhere you look. We don’t see it because we don’t look for it. The only people who do see it and live with it are the people doing the work. Rarely do we ask for their ideas on how to remove it. Even more rarely does management act on them. It means that their brains never get out of bed in the morning. They just have a job.

The second major factor is price recovery measured as sales price/resource price. If you use a high selling price to make money without keeping product cost down, you increase risk. We call this price over-recovery. Typically it arises from sales price growing faster than resource price. This lowers business safety.

Managers use price over-recovery to subsidise a company’s ine fficiencies. However, high selling prices linked with low productivity send a signal that provokes competitors to attack. They steal customers with lower prices and better service.

The safest way to make money is to generate high productivity and use some of it to keep selling prices down, which is price underrecovery. You charge less but operate more profitably off a lower cost base than your competitors.

Productivity and price recovery determine business safety. They qualify the sales productivity of the asset base — the most important measure of all. It enables you to measure the productivity of capital —the real capital cost per unit sold — and creates a focus on speeding up the time from paying to being paid. This is sales revenue/ marketing assets managed. It drives ROAM, economic profit and ultimately the VOF.

If we are serious about productivity and increasing our national competitiveness we have to change behaviour. As effective managers know, the best way of doing that is through measurement and feedback, not visions and pep talks.

You only have to tell people you will be measuring them. Even if you don’t give them the measure, the very thought of it will change their behaviour in some way. So, it makes sense to have ones that they believe in and trust.

In the late 1970s, during a severe drought in Clarens in the Free State, no matter how much the town fathers urged everyone to save water nothing happened until the doughty town clerk intervened. She published the names of every householder, showing how much water each used a month. Only then did behaviour change and consumption drop. That’s the power of public measurement.

We could have monthly publication of what we term business safety ratings (BSR). They would apply to all private and publicsector entities. They give clear signals on productivity and price recovery. Boards can use them as part of internal management development and performance improvement programmes and investors can use them as part of their risk-return evaluations.

An additional possibility is that government could apply tax incentives to companies which engage in price under-recovery because they would be lifting productivity to do it and remain viable. It can be done. It just remains for us to start doing it and we will.

In future articles, I will analyse companies to derive business safety ratings and see how big the elephants sitting on the corporate stoeps really are.

Ted Black (jeblack@icon.co.za) coaches and conductsROAM workshops that help managers design results-driven projects.

Greed has never been good

The profit motive is not a prime cause of competent performance, writes Ted Black

Greed2-1

WHEN the Soviet empire collapsed and capitalism became the only game in town, the “greed is good” doctrine took hold with a vengeance. It fuelled the 1980s boom and the dotcom bubble that followed. In turn, this led to the Enron and WorldCom scandals among many others. Now a key public concern is how to regulate roller-coaster stock exchanges and the corporations listed on them.

Driving through the Dimension Data campus reminds us that SA has its share of unbridled capitalists. Didata’s top management palmed its flawed “new economy” business model onto a gullible, investing public. Despite the marketing “spin” coming from the top today, its managers generate a return on assets of only 8%. That accomplishment is still around R2bn short of making an economic profit — probably something many IT people don’t even know about let alone measure.

The names of buildings on the campus —the Wanderers, the Gabba and Roland Garros —remind us how useful sporting analogies can be for the game of business. The trouble is that many of us have lost the concept of sportsmanship. When it comes to values, managers tend to model themselves on professional sportsmen and that’s a bad thing.

In 2004, after a 17-year study with 72 000 interviews, Prof Sharon Stoll at the Centre for Ethics at the University of Idaho in the US concluded that sport is good for “teamwork, loyalty, self-sacrifice, work ethic, and perseverance ” — all the “passion” and “commitment” stuff you see in annual reports. However, when it comes to “honesty, fairness, and responsibility ”, professional sportsmen are lousy models. Stoll ends her study concluding that sport today is about winning at all costs. With the notable exception of people like Adam Gilchrist — Australia ’s great wicketkeeper who walks when he knows he’s out —the driving value is “how to get away with it”.

It’s little different for many in corporations and the government. The price-fixing in the bread industr y followed closely on the Mittal fine. Next we have the dairy men accused of running a cartel, and skulduggery in the furniture business. Finally, Tiger Brands is under the spotlight again with Adcock Ingram’s pharmaceutical products. They all highlight issues of great concern.

Free-market ideologues argue that the relentless pursuit of greed and acquisition leads to best outcomes for society. In other words, the “profit motive” is a prime cause of competent performance. Another belief is that organisations with the best talent, rewarded with lavish compensation, will outperform their competitors. They are myths.

Dr Tom Gilbert wrote a masterful book on the subject of performance management in 1978. Pulling no punches, he argued that the subject of motivation arouses more nonsense, superstition and plain self deception than any other topic. Two kinds of incentive on offer are money and the other ways we recognise people for good work. The most powerful lever of all is money. However, the truth is it has limited effect on productivity because it’s the hardest one to grasp. Moreover, the higher you go in an organisation, the more slippery it gets. Why is that?

It ’s because we confront a host of vested interests in incompetence. The issue becomes highly emotional and political. It’s about distribution of wealth: who do we reward with how much for what?

Greed1-1 That’s why top executive pay is such a hot topic. There’s no positive correlation between money paid and competence. Top executive pay derives from one thing. Above all, the value of any firm links to its monopolistic position in the market segment it serves. This enables it to create high profits. These high profits come from being very good at what they do—a good thing—or in some cases collusion with competitors to fix prices —now illegal.

It also means that many powerful people who control company performance systems are not paid for managerial competence. If they were, a lot of them would be out of a job. That fear is a major barrier to the efficient use of money to reward worthy performance.

The power to set and control prices is the only power corporations need to ensure a self-fulfilling profit motive. Exhibit 1 shows some dominant players in SA and the relationship between return on sales (operating profit as a percentage of sales — ROS) and return on assets managed (operating profit as a percentage of assets managed —ROAM).

All the companies shown dominate their market sectors. With the exception of retailers Pick ’n Pay and Cashbuild who strive to sell at lowest price to customers, the rest aim to sell at as high a price as they can get.

The Vodacom and MTN numbers reflect their southern African segments and SAB numbers include ABI. I suspect that if SABMiller’s annual report were to show Beer SA on its own, with a ROS of at least 27% for beer, the ROAM will be higher than 100%. Sasol’s performance is tied to the oil price and PPC cement rides the economic wave. They can’t go wrong even when they performin a mediocre fashion —as do the telecom companies. That’s the power of monopolistic market share.

As to Tiger Brands, after its baking and milling operation was caught colluding with competitors, it used legal firm Edward Nathan Sonnenberg (ENS) to argue that “hands-on” CEO Nick Dennis knew nothing about the arrangement. It was not a good move. His claims of innocence coupled with the ENS study smacked of “he doth protest too much, methinks”.

ENS, known for its skill in running with the hares and hunting with the hounds, was discredited by the Nedbank deal it did at the height of the dotcom boom. That’s when “brains ” became “intangible” assets on company balance sheets. The deal probably cost the bank’s shareholders R1bn if you add in lost opportunity cost to the R500m paid to own these legal brains for five years.

When it comes to corporate governance — and ENS helped define the King Code —the firm’s reputation is spotty. Especially when you consider that it bought its brains back for a mere R50m.

Greed1-2 Little has changed with lawyers and cartels it seems. A classic British Board of Trade study in the 1940s observed: “The variety of (cartel) arrangements is very striking and attests to the ingenuity of industrialists, or at least of the accountants and lawyers who advise them.” Given that some things change very little over time, how much collusion goes on among the companies on the chart? The telecoms industry and cement producers for instance?

As to the bread pricing issue, it will not go away. Moreover, it seems that some Tiger Brands executives are either unaware of their own numbers or do not understand what they mean. Exhibit 2 shows group segments at year-end 2006.

Pharmaceuticals, not surprisingly given the latest allegations of price collusion, had a 90% ROAM in 2006. The baking and milling division that sells bread, a consumer staple, achieved a 40% ROAM. It has just announced a further price increase to recover increased costs.

In contrast to Mittal, whose ROS dropped sharply after being fined— it fell from 30% to 25% —Tiger ’s bakers and millers have increased returns sharply over the past four years. The ROS has moved from 9,7% to 16%; an increase of 65% for a staple food. Exhibit 3 shows how well this division is doing.

The question is how much of the improvement can be attributed to the “continuous improvement” productivity programmes proudly described in the annual reports, or to price increases? That’s what Tiger Brands ’ corporate marketing effort should be explaining to the public, the shareholders and most importantly, the company’s employees.

Greed1-3 Instead, the SABC website quotes Tiger ’s spokesman as saying: “The price increase is also to maintain employment. So which one is a better devil—to retrench a whole lot of people so that you can push down your labour costs, or cause more poverty and frustration to the poor?” So much for top management understanding and measuring the effect of productivity initiatives!

Corporate marketing should be 80% internal and only 20% to investors and analysts. Most companies get it the wrong way round. They learned to do that from narcissistic celebrity manager Jack Welch whose cost to society and the environment probably far outweighed his value. His greatest skill for GE’s shareholders was his ability to market himself and to manipulate Wall Street analysts, academics, the media, and the share price.

THE reality is that despite the high returns some companies deliver, their people perform incompetently for most of the time because of the systems they work in (confirmed by Tiger Brands’ defence of the price increase above). This incompetence inflates the costs of doing business. Top management, responsible for the design of the systems, then raises prices to cover them. Most of its talent is applied to developing strategies that make the price rises as invisible as possible.

When business slows, customers, especially the big and powerful ones, won’t accept the increases. That’s when the word goes out from the top: “Cut costs!” The message sent is that a higher level of incompetence is fine during boom times when customers can carry the cost burden. However, top management scores either way. When times get tough, after sacking thousands of people they are rewarded with plaudits from the analysts and healthy bonuses from remuneration committees.

In 2005, Boston Consulting Group published one of its brilliant “Perspectives ” on the issue of incentive compensation. Its authors, Andrew Dyer and Ron Nicol, started by asking: “How do you create a hunger for performance in your organisation without creating a greed for reward? Too often, in the pursuit of growth, we strike a dangerous bargain. We start with a promise: ‘I’ll pay you whatever it takes to meet these goals.’ Then we delude ourselves into thinking we can control the inevitable and spreading greed by installing tighter governance. But greed outsmarts governance. With bonuses at stake and promotions on the line, games get played and figures are faked. Not just accounting figures but also sales, delivery and return figures.”

The danger in all this — particularly in SA — is that capitalism won’t be the only game in town any longer if this situation continues. Tiger Brands’ CEO Nick Dennis will probably walk away with a package that would take the lowest paid worker in the company more than 3 000 years to earn. It’s nonsensical and dangerous.

The least known and most under-appreciated great man of the 20th century was the late Peter Drucker. Because of his focus on management, he probably had more influence on more people than any other writer in the last half of the century. He saw that corporations, with some special exceptions, had lost the communal spirit he first saw in General Motors during the 1940s when the workforce was making tanks and Jeeps for the war effort.

He argued that the first of two reasons for losing this spirit was that workers and employees were viewed as costs—not resources. It all comes down to treating them right. This means “releasing ” their energies to be the best at what they do. And secondly, that even in the 1980s executives were being overpaid when compared to the rank and file.

Finally, levering up margins through high pricing instead of productivity means firms define themselves in terms of the products they produce and not —as Drucker urged managers to do — the customers who buy them. In SA by far the majority of customers are dirt poor. That’s why capitalism driven purely by greed will destroy community and ultimately itself and the nation.

Sir Adrian Cadbury wrote in his book “Corporate Governance and Chairmanship. A Personal View” (Oxford 2002) that the character of a company is in its people’s hands. They inherit its reputation and standing and it is up to them to take them forward. One of his simple, admirable statements of aims was “nothing is too good for the public”.

Ted Black writes, coaches and conducts ROAM workshops that help managers design results-driven projects that grow them and their people.

Motlanthe’s three management priorities

The world cup is a breakthrough project able to harness dormant talent – Ted Black.

World-Cup-2010-1 LIKE any new chief executive, SA’s “interim president” has to make today ’s business viable, unlock its hidden potential and turn it into tomorrow’s business.

When you launch a business, you drive for a breakthrough with a superior product, technology or service that has big potential.

Kgalema Motlanthe has that in the Soccer World Cup 2010. It is a mission that can focus brains, win hearts and become a huge step forward towards our vision of a rainbow nation. The global soccer showpiece meets all criteria for a “breakthrough” project that puts participants on a learning curve.

Rainbow nation’ is the vision —2010 the mission

World-Cup-2010-2 WE HAVE had some disturbing news recently for the good sailing ship SA (Pty) Ltd, and now there’s a new captain — albeit in an acting capacity. However, if President Kgalema Motlanthe acts like most leaders in his situation, he will make the job his own. If he really wants to do more than keep the seat warm for someone else, he will get results fast and have the most important power of all —performance.

To get it, Motlanthe has to tackle the threefold management task common to all CEs. That is to:

Make today’s business viable;
Unlock its hidden potential; and
Turn it into tomorrow’s business.

To continue with the sailing analogy, navigator Trevor Manuel has taken us into calmer economic waters after the stormy seas of apartheid years. However, there are storm clouds lowering on the horizon and we have Tito Mboweni at the wheel. He is steering a high interest rate course that has us sailing very close to the wind. He is “pinching” the boat and we have lost speed.

There is no doubt our ship is seaworthy but, like all of them, it needs constant maintenance, and we have failed at that. We also have our weaknesses and threats—the most serious of them come from within. The organisation’s climate, culture and values among officers and crew are lousy.

There has been a highly acrimonious tussle in the officers’ mess. To add to the unrest, the crew down below squabbles and fights in the destructive ways of the past. It is also mutinous and wants to plunder what it can. Others are jumping ship.

Sadly, that’s because we have followed a course over the past 10 years that has taken us a long way from former president Nelson Mandela ’s simple, inspiring vision of what Archbishop Desmond Tutu ’s words “rainbow nation” meant to him. He said: “Each of us is as intimately attached to the soil of this beautiful country as are the famous jacaranda trees of Pretoria and the mimosa trees of the bushveld — a rainbow nation at peace with itself and the world.”

Some leaders pooh-pooh the idea of visions and missions. That is because political bureaucrats write them for annual reports and outsiders. They become mere slogans. However, if articulated well, they point the way and inspire people to make a difference.

Mandela ’s words expressed the vision for us in a way that meets the criteria described by Jerry Porras and Jim Collins in a seminal article at Stanford Business School in 1989.

It should be concise and simple — simple enough to pass the “grandmother ” test. If she “gets it” then you have something that will hook your people. It has to meet a fundamental need and be convincing enough to last a hundred years. Its purpose is to arouse, excite and mean a lot to people inside the organisation. Lastly, you describe it in the present tense. You can already see and feel what the future will be like.

However, you need steps to get you there. They derive from the mission. In contrast to the ongoing purpose of a vision, the mission is a clear, compelling, urgent, exciting, time-bound and measurable goal. It moves you forward in a steady, unrelenting and purposeful way. It is demanding, even unreasonable, but you are going to tackle it anyway.

President John Kennedy’s vision for the US nearly 50 years ago was for the US to become the greatest, most respected nation in the world. The mission to land a man on the moon and bring him back safely within 10 years was a big step towards that.

Sadly for Americans, that vision, like ours under Mandela, is taking some big knocks today. So, coming back to SA (Pty) Ltd, what is the mission that can focus the brains, win the hearts and become a huge step forward towards our vision of a rainbow nation? It has to be World Cup 2010. It meets all criteria for a “breakthrough” project that puts you on a learning curve. When you launch a business, you drive for breakthrough with a superior product, technology, or service that has big potential.

The curve in the exhibit below shows that a firm will not be economically productive during the start-up phase because of Murphy ’s Law: “If anything can go wrong, it will.” Those are the “Snafus” (situation normal — another f ***-up).

SA has reached the biggest Snafu of all — the fallback stage. We have been chasing numbers — not the vision of a rainbow nation.

Learning is hard work. It consumes energy, resources and time and always takes longer than you think it will.

However, viewed in the right way, the inevitable setbacks become stepping stones to success.

Once you reach a level of competence, the business is viable and can pay its bills. You have the platform to step onto the experience curve. Now you can make many, purposeful moves that tap into the hidden potential.

You standardise ways of doing things but keep improving them. You build teams; train people; develop, redesign and entrench new systems and procedures that take wasteful practices out of the system.

When people do the work together and share knowledge instead of competing with each other, productivity climbs and costs per unit plummet. You make lots of money and generate cash. Your company becomes a cashcompounding machine.

However, what the curve tells us is that you cannot simply switch people from competing with each other to co-operating and collaborating productively. It takes time and focused effort, although you can speed it up. That is where the “breakthrough” project comes in.

It demands change. This is unlike capital projects or annual performance goals, which do not change the way people do the work together. A breakthrough project does. However, you have to make an ego-free admission first and it is what our fallback is telling us: “The way we do things now does not work.”

There is a critically important presupposition behind this admission. It is the belief that no one reaches full potential. If you are very capable, and lucky, you will be above average but you get so far then stall.

World-Cup-2010-3-1 Left to find your own way, you level off way below what you could achieve. A lack of awareness, challenge, criticism and testing stunts personal growth. This is true without exception. It applies to all organisations and leaders — for CEOs and their boards and for the president and his cabinet of ministers. No leader can afford to surround himself with “yes” men or to kill criticism from the public and media. It results in disaster as we see happening on our northeastern border —another threat to SA (Pty) Ltd.

Executive growth is evolutionary. It takes time and does not happen in a classroom. No successful executive ever attributes his or her success to a course or qualification. It is always some particular experience. However, you can accelerate it in a welldesigned situation.

To design it, use the conditions that drive people to tackle crises successfully. The factors that typify an emergency do not exist in the daily life of most organisations. Typically, people are frenetically busy doing exhausting work that adds little or no value.

A lot of the time, they are simply playing politics and pursuing their own agendas. They tackle false crises, not genuine ones. When you share stories about the genuine ones — fires, floods, strikes, and other “must-do” situations —they reveal two profound truths.

The first is that people quickly rise to the challenge. They do it without conferences, planning workshops, orders from above, consulting advice, motivational training or team building. Moreover, they do it with no additional resources.

The second truth is that it means every organisation owns and pays for significant, but unused, hidden capacity. A crisis uncovers this hidden potential because there is extreme urgency to get things done.

The goal is near and clear. People take charge. The challenge excites and stimulates them. They collaborate, ignore red tape and experiment. Politics and backbiting disappear. Depending on the nature of the emergency, they have fun doing what must be done. The results that these “zest factors” stimulate can be amazing.

The good news is that you can tap into this huge reserve of potential without burning down a factory or suffering a strike or blackout. So the challenge is for managers to release it. It is the same for SA and its new skipper.

World Cup 2010 has all the elements to unite the nation and to harness the hidden reserve of ability that lies dormant in our population. It is an exciting, breakthrough project — like Kennedy ’s 10-year moon mission.

Done well, it can have an effect on three factors critical to the nation’s success:

Make the poor productive;
Build a new generation of effective, ethical managers; and
Develop tourism.

The mission must be to organise a Word Cup that equals or betters the “best” of all that have gone before and that provides an unforgettably positive response for all visitors to the country.

The 2010 World Cup provides a narrow focus. With communication, less is more. You change an organisation, and a nation, with one, simple, easily measurable goal —not many of them.

To get results fast, there must be a powerful sponsor and a champion with the clout to back team leaders as they cut through the Gordian knots of red tape.

You must have people in the teams who can contribute — not people who are “nice to have”.

This is no time for bureaucratic numbers — the only numbers that count are ones that measure results. There has to be regular review. We have less than 600 calendar days left to execute our own “moon mission”.

There is no doubt our ship is seaworthy but it needs constant maintenance, and we have failed at that

World-Cup-2010-3-2 Chunk the 600 days into 100 day milestones. There are only six left. Within the 100 days, have 10- day milestones. That is 60 to go. Every six days that go by take us 1% closer to crunch time. This builds up a sense of urgency as you look at the accomplishment ratio — time lost against results achieved.

World Cup 2010 demands radical change in the way we manage our country. Maximising this opportunity will reposition SA and even Africa itself.

More important, it will kickstart the development of our managerial capacity.

Imagine the improvement in our self-esteem, self-confidence, competence and relationships as we celebrate the end of a hugely successful event. Moreover, our economic productivity will improve. The change in the numbers will reflect the growth in management ability and the way our people work together.

This project is far too important to be throttled by the dead hands of bureaucrats or politicians squabbling with each other. It calls for highly visible, active top-level sponsorship and involvement of “line management”.

Nothing should deflect us — not even next year’s election. There ought to be a “war room” or “bridge ” in the Union Buildings. In it, the new skipper should be able to review at any time a portfolio of projects that have an effect on the overall mission.

If World Cup 2010 is to be the next major port of call for the good ship SA (Pty) Ltd, let us be sure firstly that the crew does not “run ashore” to rape and pillage.

Secondly, let us ensure that more than 90% of the visitors who climb up the gangplank to explore the ship leave us with a resounding “Yes! ” to this one question: “Will you tell your relatives and friends to visit SA at the first opportunity they have?”

Ted Black (jeblack@icon.co.za) helps managers to design results driven projects that grow them and their people measurably.

The phenomenal cash builders

Ted Black gets back to basics with the cash-to-cash cycle and prays Cashbuild continues to do so

CASHBUILD released its best results yet in September. Though relatively small in terms of market capitalisation, it is SA’s leading building materials supplier.

For good reason, this company has fascinated management stu – dents and analysts for more than 20 years. It has had its bad times as many firms do and that’s when “get back to basics” always becomes the management mantra. There are only a handful, and tough-minded Pat Goldrick applied them after becoming CEO in 1997.

Published results since 1986 showthere is one success imperative for any firm, irrespective of whether it is an “old” or “new” economy one. It is the velocity of the cash-tocash cycle.

This is the measure: add the number of sales days of inventory you hold to the time it takes your customers to pay you. Next, subtract from that total the number of days you take to pay your suppliers.

If you end up with a negative number, it means you generate cash from your dayto- day and month-to-month operating cycles. You’ll have cash in the bank.

Many companies find it difficult, even impossible, to achieve zero or a negative cash-to-cash cycle. It depends on their business design and operating system.

Goldrick understands the measure because he has used his own cash to buy a chunk of the business and owns 10% of it. Being a genuine “owner ”, he thinks and acts like one. Moreover, unlike most “turnaround” managers who tend to bring some order and quickly move on, he is the company’s longest-serving CEO.

The cash-to-cash cycle governs a company’s viability and has done since the days of the pharaohs. It has nothing to do with the fashionable distinction made between “tangible” and “intangible” assets. Nor does it drift into asset theories that treat people as “human capital” and “brands ” as assets.

Cashbuild will be 30 years old next year and as Arie de Geus observed 10 years ago in his book, The Living Company, few firms reach that age. In contrast, the seasons of man’s life, tempered by lifestyle and disease, are programmed to take about 100 years to unfold.

Yet, for companies, infant mortality is high. Few survive the t h re e – ye a r “start-up” phase. Those that do can still die young. Hardly any celebrate 20 but they have the potential to last for hundreds of years.

The paradox is that, like people, firms are different but very much the same. They share a common reality that defines management’s threefold task, which is to:

Make today’s business viable;
Identify and unlock its hidden potential; and
Turn it into tomorrow’s business.

EXHIBIT 1 provides a context. The universal “S-curve” reflects an organisation ’s pattern of growth, effort and results over time. Two more underpin it. The first is the bumpy learning curve.

When you launch a business, you drive for breakthrough with a superior product, technology or service that is low on the S-curve but has big potential. The model shows that a firm will not be economically productive during the start-up phase because of Murphy’s Law: “If anything can go wrong, it will.”

Learning is hard work. It consumes energy, resources and time. However, the inevitable mistakes become stepping stones to success. Once you reach a level of competence, the business is viable and can pay its bills. That’s when you step onto the experience curve and take many, purposeful steps to tap into the hidden potential.

You standardise ways of doing things but keep improving them. You build teams. Train people. Develop, redesign and entrench new systems and procedures that take wasteful practices out of the system.

When people do the work together and share knowledge instead of competing, productivity climbs and costs per unit plummet. You make lots of money and generate cash. Your company becomes a cashcompounding machine.

The Japanese call this stage Kaizen – the process of continuous improvement. After the Second World War, using knowledge of statistical process control and of experience curve effects first discovered in the US in the 1920s, they revolutionised productivity and achieved quality standards and levels of output that enabled them to capture many world markets through the 1960s, 70s and 80s.

A humiliated Western world eventually caught up by using the knowledge it had gained 60 years earlier but neglected. During the 1980s, the mantra was “total quality management”. Today, it has been rebranded as “Six Sigma” and converted into another fad.

When competitors catch up, performance peaks. The S-curve tops out and heads south. What won you leadership is out of date. The time for radical change puts you at the bottom of a new S-curve. If you don’t confront this reality, one of two things can happen:

You drive the company crazy by injecting it with one-off, activity driven crash programmes; or
You redouble your efforts with continuous improvement.

The first change strategy never works. With the second, you discover how futile it is to revive a company through, say, Six Sigma, if what it does is out of date. At best, you improve productivity and keep products going a bit longer. However, it’s a bit like putting a brain-dead person onto a life support system.

You breathe new life into a company by creating and maximising opportunities. If you continue to pour your best people, resources and effort into yesterday’s problems, your wheels may spin more efficiently but you sink ever deeper into a swamp of diminishing returns.

The S-curve is a great theory but not easy to use. Its great value is in helping you to decide what your initiative aims for. Are you going for “breakthrough ”? Or are you challenging the status quo — siphoning off resources to tap into the hidden potential lying dormant in the organisation?

With the benefit of hindsight, Cashbuild fits the model well. Albert Koopman led the company start-up in 1979 in the Metro Cash and Carry Group and beat the long odds against success.

Corporate start-ups rarely succeed because most managers lack the discipline of genuine entrepreneurs. They don’t have what used to be known as Joburg’s “Newtown ” MBA. Pat Goldrick does have one.

He started work as an ironmongery apprentice in Ireland aged 14. Fortunately, he lacks a “master’s degree in “business administration”— a qualification that would confuse and cause him permanent, bureaucratic brain damage. He knows that management is not a science. It is an art and a discipline that you can’t learn in a classroom.

Under Koopman, the company soon made profits and grew fast. Then in 1983, when there were nine branches, it ran out of steam. As he put it, rigor mortis set in. The fall in profits was only 11% — a bagatelle compared with the corporate collapses of recent years. However, it triggered a change process that revitalised the company.

He claimed the root cause of the problem was his autocratic management style. He felt it destroyed any hope of building a company of loyal, committed people. The change that followed was so successful it became a case study for business schools.

The academics argue that participative management releases people to be “the best”. Involve everyone in making decisions and improved results will follow.

With authoritarian styles of management governing most companies and institutions, the social unrest and escalating violence in the 1980s, the Cashbuild story did send an exciting message of hope. However, participation is only half of it.

Effective executives concern themselves with people and numbers. For Koopman and Goldrick, “empowerment” is not another form of patronising, debilitating socialism that promotes dependence, not autonomy. To executives like them, it means accepting responsibility and accountability for results.

EXHIBIT 2 trends some key ones. They are asset growth, the ROAM (return on assets managed) percentage and market capitalisation over the company’s lifetime since listing on the Johannesburg Stock Exchange in 1986.

The curves tell a story.

Koopman left soon after the listing and an acquisition in 1987 hiked the number of branches from 32 to 52 and sales hit R84m. ROAM fell from 16,5% to 10,7% but recovered to peak at 16,7% in 1991. Then it started its erratic 10-year descent to zero in 2000. However, there was a short up-tick after management abandoned a misguided change in strategy during the early 1990s.

To spur growth, it had decided to offer credit and created “Creditbuild” — a bad decision. Builders worldwide are notorious for being hugely inefficient. In SA they are no different. If you give them time to pay, you may never see your money.

Meanwhile, the branch network grew at a steady clip until 1996 when it had 108 outlets and sales of R880m. During the slide down the slippery slope, Koopman’s critics ignored the upward ROAM trend that followed his departure and the big acquisition. They argued his style was too soft and blamed it for the decline. The best way to get results is to “kick ass”, they said.

The fact is that Koopman did manage for results, as does Goldrick. Their styles may differ but, to paraphrase the late Peter Drucker, effective executives come in many types. Some are charismatic and ebullient. Others are shy and diffident. Some booze. Others don’t touch a drop. Some are warm, charming and intuitive. Others are cold, logical, and analytical — they have the personality of a round-eyed trout on a s l a b. All differ, but share one trait. They get the right things done.

Drucker described these “right things” — the fundamentals of management practice — in both Managing for Results and The Effective Executive, in the 1960s. No one has done it better. If there were a “top 10” of the best business books ever written, they would be on the list.

He observed that effective executives get their organisations to concentrate and focus on opportunity —the key to economic results.

In the late 1970s Koopman studied the building material supplies market in SA and saw how desperately black communities in rural areas and townships needed and wanted to build or upgrade homes. Despite widespread poverty and limited personal buying power, Koopman reckoned the market size to be R4bn a year. It was attractive but none of the established chains of builders’ merchants saw it that way. Only a few smaller, regional firms and many individual “owner-managed” businesses competed for it — thousands of them.

The big companies thought it too fragmented and high risk. However, Koopman transformed what others saw as a “problem ” into an “opportunity” and designed a business to capitalise on it.

First, he went where the big players weren’t. He chose to compete in towns with lots of black people living nearby. Locating away from big cities put it in a low-cost position. Branches cost less to build or rent and, because there were more people than jobs, salaries were lower.

Second, he applied the military rule of force — concentrate re-sources on a narrow front. He targeted smaller building contractors and black traders and went for leadership in that niche.

Third, he changed the game. He adapted the business to the economic and social realities of life facing the majority of South Africans by providing the building basics at lowest cost for cash.

Last, with personal growth, effective managers build on their own strengths and the strengths of people around them. Under Goldrick, the management profile at branch level has moved fast to reflect the country’s demographics: 50% of store managers are black and 15% of those are women. At senior level, 30% are black and 10% are women.

Today, having jumped onto a new S-curve that took the company from wholesaling to retailing, Goldrick sees the market opportunity as being R120bn and climbing. Although it is still highly fragmented with more than 3 000 individual players, other bigger firms such as Spar’s Buildit division, Massmart and Iliad are climbing into it.

To hold their leadership position in the face of intense competition, Cashbuild has erected some competitive barriers.

The first is to locate, build and revamp its stores fast to achieve the lowest capital cost per square metre of merchandising space. The stores are designed so as to erect the second barrier: to turn stock over quickly within a relatively small space. Third, Cashbuild works with suppliers to get the right stock in the store at the lowest price.

These three barriers combine to create a moat that makes Cashbuild the lowest-cost supplier in SA and positions it for aggressive defence and attack.

Last, although it operates with a low profit margin, it has to make enough to invest in the future — to train and develop staff and expand at a rate of 10 new stores a year.

These barriers protect the business. Cashbuild concentrates on a chosen segment and dominates it with focused operations. The success of its strategy makes it attractive, sexy, and safe for investors and all who do business with it.

Capital markets now rate the company as a relatively low-risk, high-return business in its sector and, as Exhibit 2 shows, reward it with a climbing share price and a market capitalisation that is bigger than the value of assets that Goldrick and his people are managing.

However, despite its success, there is a “problem-opportunity” looming — one that faces more and more companies as they introduce share ownership schemes which form part of their economic empowerment initiatives.

Giving employees precious equity through share options achieves nothing without a systematic education programme to go with it. In all companies, from boardroom level down, there is widespread ignorance about the rules of the game of business. People are just employees and kept that way. It creates a massive opportunity for productivity improvement.

The prime measure of operating competence, one that few managers pay much attention to, is ROAM. As Drucker observed, if people work at it purposefully, day to day, year on year, it is the easiest and quickest way to improve the profitability of a business. The three key measures of ROAM are:

Return on assets managed (ROAM) —the total profit of the business. This is,
Profit margin or ROS% (operating profit ÷ sales x 100) multiplied by
Asset turnover or ATO (sales ÷ assets).

The most important measure in this equation is asset turnover (ATO). It governs the cash-to-cash cycle. However, let’s first take Cashbuild’s return on sales percentage (ROS%).

EXHIBIT 3 shows the close correlation between its profit margin and ROAM since first listing on the JSE.

On the X-axis is the return on sales percentage (ROS%). The higher it is, the higher the ROAM. The message sent by this chart is that Cashbuild has to keep ROS around the 5% mark if it wants a respectable ROAM. That’s the hurdle to keep beating. Even in a growth market, with increasing competition it is a tough ask. So where must they look to make a difference?

Asset Turnover (ATO) and its submeasure — stock turnover (sales ÷ stock) —powers the cashto- cash cycle.

Take a Cashbuild branch. Say it stocks one window at a time and sells it for R100. To get it sold costs R95. The profit is R5 and the profit margin is 5%. If it turns its window stock once a year — sells a window once — that’s a 5% return on the asset. If it can turn its stock twice —sell two of them — then return on the asset doubles to 10%. Sell it six times and the return is 30%.

To raise profit margins through increased selling prices, bigger volumes and cost-cutting in a highly competitive market is very difficult. Yet, to increase asset turnover by 10% and more a year by “turning” the inventory faster only means using the Cashbuilders ’ brains purposefully. It needs some consistent hard work inside the business, but especially with suppliers.

Goldrick took charge in 1997. Cashbuild ’s ATO for the years 1997 to 2007 averages out at 3,1. That means for every rand of assets that Cashbuild manages, it generates on average R3,10 of sales each year. In 2007, with an extra week, it generated R3,40. For the previous seven years, it averaged R2,90.

With the branch network growing steadily each year, Cashbuild ’s key lever for lifting asset productivity is inventory.

EXHIBIT 4 uses a statistical process behaviour chart — a valuable but rarely used management tool. It shows that the business model — the system designed by management — generates the numbers.

The graph shows Cashbuild ’s sales productivity of stock since listing in 1986. It answers this question: for every rand of stock, how many Rands of sales do we generate?

The performance is typically random but relatively stable and predictable. The first plot, falling outside the upper limit in 1986, was probably due to year-end “window dressing” in preparation for the first year of the listing. Management most likely reduced stock as low as possible or used some accounting artifice to improve the result.

The time series from 1997 when Goldrick took charge shows that R1 of stock generates an average of R5,73 in sales. The task is to get it above R6—say R6,50 —a 13% improvement. Goldrick would probably expect more than that to get the brains really working.

To expand this “problem/opportunity”, the company is about to install a system from SAP. Will this help or hinder it?

A recent Economist article posed a question about SAP’s new product launch — a web based product code-named A1S. It asked if SAP could overcome its history of selling complicated software to big businesses. A systems consultant replied: “People still haven’t forgotten that implementing SAP is like pouring concrete into a company.”

The last thing shareholders would want is for an entrepreneurial company such as Cashbuild to be throttled by bureaucracy. It is a very real threat. A recent study by Micro Focus® of some the world’s leading companies across five countries in Europe found that they ignore the size and value of the IT assets under their control.

Less than half of chief financial and information officers try to quantify the value of these assets and, even more appalling, less than a third have ever tried to value their contribution to business performance. That won’t surprise long-suffering operating managers but it is bad news for Cashbuild — unless they approach things differently.

Effective managers perform well with or without IT systems. If high-performance IT people, not high-tech ones, supported them they could probably achieve spectacular results. IT people are among the most talented in organisations. However, they only talk the ROAM and management of change games. They don’t play them.

If they want to play the game of business, they must start seeing themselves as a centre for value creation, not technology. To be a “fee-for-service” firm is less important than attitude, self-image and mission. If they hold the view that “you can’t operate without us”, they will never deliver the way they could and should.

So, that’s the Kaizen’s goal for the next year or so —to get Cashbuild ’s new IT assets to deliver a ROAM higher than today’s 18%. For IT and financial people it is more of a “breakthrough ” goal, but the company is still on the “retailing ” experience curve.

The omens for immediate improvement are not good. During the late 1990s research indicated that most enterprise resource planning implementations tend to depress ROS and ROAM for a few years before they deliver economic results. Look at BCX’s results for the last two years for proof of that. By its own admission, the company whacked itself with a SAP implementation. That’s hardly surprising when we learn that most financial and IT people can’t be bothered to measure themselves anyway.

Because Cashbuild operates with a low ROS percentage and Goldrick is a genuine “owner ”, perhaps it won’t fall prey to accountants and IT “techies”. If they don’t, then we’ll have a wonderful success story worth the retelling and more great lessons from them.

Ted Black (jeblack@icon.- co.za) writes, coaches and conducts ROAM workshops that help managers design results driven projects.

Performance power is what counts

Asset productivity drives the engine of efficient companies over the long term, writes Ted Black

THE share market and the pressures it creates for top management is a significant, topical issue raised in the latest McKinsey Quarterly Review (Richard Rumelt, Strategy’s Strategist). Generous share-option schemes can aggravate the problem, stimulating managers to pursue the wrong goal.

As we know, prices are volatile. They respond to speculative expectations about future changes in industry and market sectors — less so to individual company performance. Top managers may think that’s unfair, but what does it mean for them?

They have to grit their teeth and detach themselves. They must play the ball, not the market players. They must stop pandering to analysts; ignore short-term share-pricemoves and perform their prime threefold management task, which is to: n Make today’s business viable; n Identify and release its hidden reserve of potential; and n Turn it into tomorrow’s business. Do these three things well, and the numbers will follow—not least the share price. We know that the valuation mechanisms of professional investors and analysts can be hugely inefficient for a long time. However, in the end, performance power counts. It is the most important power of all. For a company, a key driver of it is asset productivity. High productivity buys you the time and leisure to think creatively —a rare activity for most people in most organisations. Thinking people make assets work. When they work, they generate cash. Cash creates options and opportunities. Seize them and you leave competitors trailing as you take charge of your own destiny —your growth and evolution. The first trait of the long-lived companies that Arie de Geus described 10 years ago in his book, The Living Company, was conservative financing. Extraordinarily successful companies do not risk money needlessly. They understand the meaning and value of cash in the bank.

The three most important financial measures of operating management are:

Return on assets managed (ROAM) — the total profit of the business. This is
Profit margin (operating profit divided by sales multiplied by 100), multiplied by
Asset productivity, or asset turnover (sales divided by assets).

Using the latest year-end numbers, Exhibit 1 is a snapshot using data from more than 100 companies in 27 sectors on the Johannesburg Stock Exchange. It compares ROAM performance to a measure of value creation.

It shows clearly a strong, positive correlation between ROAM performance and the ratio of market capitalisation to assets managed. As ROAM rises, so does the perceived value of the sector.

However, as Boston Consulting Group pointed out as recently as 2003 in its Value Creators Report, Back to Fundamentals, the measure in ROAM that is most significant from a competitive viewpoint is asset productivity (asset turnover, or ATO in accounting jargon). It drives ROAM and, fundamentally, the value of a firm.

Its findings showed that the days of relying on “expectation premiums” to fuel total shareholder returns are over. They argue that these premiums eventually decline to their long-term market average of zero. Only firms with strong fundamentals can achieve superior returns. Moreover, the top performers rely on asset productivity more heavily than cash-flow margins to lift profitability.

To back that view, a momentous but predictable event occurred this year. Toyota passed General Motors (GM) to become the biggest, most profitable car manufacturer in the world. However, a warning light flashed on more than 25 years ago.

Toyota landed a car from Japan outside GM’s HQ in Detroit at better quality and a lower delivered cost than GM could achieve in the US.

Ironically, that’s when Tom Peters launched his career as a management guru and hyped GM as an excellent company in his, and Robert Waterman’s, blockbusting In Search of Excellence.

Exhibit 2 shows a major reason why Toyota is the leader today.

The latest results (car-making only) illustrate the relative, competitive ATO effect. Toyota’s asset productivity, with Tata close on its heels, is about 60% higher than the rest. It has been way ahead of GM for years.

Firms worldwide are now applying its manufacturing principles, not only in production plants, but also in service industries wherever managers are determined to drive waste out of business systems and change the way their people work together.

We applaud management heroes who rescue companies. However, few of them build sustainable businesses. They bring some order, then move on. In contrast, the truly successful companies have no heroes.

Very few of us can name the man who runs Toyota. As Jim Womack, coauthor of Lean Thinking puts it, its success comes through the work of lots of “farmers”, not heroes. These farmers are people who plough straight furrows, fix fences and keep a beady eye on the weather.

Moving back to SA, there were many heroes in the information technology sector a few years ago. Most IT companies are not highly valued today.

Overall, the sector’s market capitalisation to assets managed ratio is 0.7, despite a booming market. Exhibit 3 displays its performance.

Again, the ATO effect is clear. Datatec, Didata and Business Connexion account for 85% of the assets managed. Their combined ROAM is 6% — a very mediocre result. The top performer is Paracon, but its core business is to find and place IT people — not sell software, implement systems or “drop boxes”.

As to Didata, the boys from Roosevelt High have learned the truth of Virgil’s maxim from the Aeneid (Book 6): “Facilis discensus averim… Sed revocare gradum …Hoc opus, hic labor est” — the descent (to hell) is easy …but to recover one’s steps … that’s the task and effort.

Once you’re on the slippery slope, it’s all hell to get back again.

It is easy to be carried away with hubris, but ego can stop top management from doing much needed weeding and pruning in the garden even though the numbers tell them to do it. Half of Didata’s asset base generates 37% of sales, but 74% of the operating profit. The rest of the assets generate 63% of sales and only 26% of the profit. To make matters worse, the poor performers probably attract more than 80% of the central costs of $34,5m that wipe out their contribution anyway.

And the final message from this sector? A recent Financial Mail article about Business Connexion says it all: “The move to a business management software system from SAP had a material adverse impact on the collection of trade debtors.” So much for asset productivity.

One can only wonder about the number of companies that have been whacked by SAP-wielding IT people who do not seem to understand what productivity is or know how to use their technology to make a measurable impact on it. Their systems seem to tighten, instead of prising off the throttling grip of bureaucracy ’s dead hand.

Then we move into the retailers. Exhibit 4 compares the relative asset productivity and ROAM of the big three food retailers in SA. Until its latest results, Shoprite trailed Spar and Pick ’n Pay with both measures. Its sales margin has lifted ROAM, but not enough to catch up.

There is a lot we can learn about business design and supply-chain management from these big retailers —some of it not always good. There are suppliers who would prefer to deal with terrorists — at least you can negotiate with them, they say.

However, in contrast to the traditional, confrontational buying approach of most firms, Wal-Mart in the US raced ahead of Kmart during the early 1990s by paying its suppliers sooner and working closely with them. Faster inventory turn led to better instore product availability. This meant they sold more, which pushed up sales per square metre and fixed asset productivity.

To achieve these improvements, management chose a measure that Wal-Mart’s then 1-million employees would understand. That criterion eliminated EVA™(economic value added) and CFROI (cash flow return on investment) as measures. They wanted something that everybody could grasp easily and commit to —it was ROAM.

The effect was dramatic. Over a three-year period, sales increased 47%, but inventories grew only 7%.

Taiichi Ohno, Toyota’s legendary plant manager, was the architect of the company’s manufacturing system. He visited Ford Motor Company before and after the Second World War. He found no change the second time and learned nothing from his trip.

However, while there, he walked into a supermarket for the first time. The experience sparked Toyota’s asset productivity-driven design. He switched it from “push” to “pull” production, and knew that suppliers had to become a key part of that shift in strategy. Today, Toyota’s business model is the machine that is changing the world.

If retail and IT companies are asset-light, what about capitalintensive industries such as mining? The sector’s market cap/assets ratio is 2.1 and individual companies are plotted in Exhibit 5.

The picture is the same. ATO drives up ROAM. Kumba and Lonmin lead the pack. Harmony and Anglo Gold bring up the rear.

The writing was on the wall for Harmony in 2004. Management’s strategy doubled up the asset base and halved its productivity. It has bumped along or below the line at the bottom left-hand corner of the chart ever since.

As to one of SA’s exemplar companies, Exhibit 6 compares SABMiller ’s various business units with each other and for further comparison, includes Anheuser Busch’s and Molson Coors’ North American beer interests.

Yet again, the asset productivity effect is clear. We can only hope that management doesn’t fall prey to ego, and match weakness with opportunity as it did when buying Miller, and compound the problem by merging it with Molson Coors. Adding low-performing assets to low-performing assets — doubtless at a hefty premium —will plunge it deeper in the North American swamp and guarantee failure.

As to taking SABMiller on in SA with Amstel, Heineken could be careering into a swamp here. On the chart, the South African business unit includes ABI. If we could take it out and look at asset productivity of beer alone, it’s a safe bet that ATO and ROAM will be right off the chart.

SAB can crush anyone who tries to enter this market. However, instead of going to Sun City for a gig costing millions of rands to work its sales and marketing people up into a competitive frenzy, it might be in the company’s interests (and shareholders’ for that matter) to adopt a more “statesmanlike” approach.

An “orderly ” beer war might not be such a bad thing. They don’t have to maul each other like Miller and Bud are doing. Instead, a well orchestrated arrangement (kept top secret, of course) could see all beer sales going up as consumers join in the fray “chug-a-lugging” their favourite brands. It won’t happen though. As Joseph Bower wrote 20 years ago in When Markets Quake: “The willingness of companies to bleed each other is awesome!”

If they do go to war, the company with the highest asset productivity will win. It can bleed for longer. Beer South Africa can bleed for a very long time if it has to.

Competitive ATO is why Miller is doomed to mediocrity in the US and why Heineken is taking such a big risk here — unless it has a sinister bloodletting plot with wider implications that we don’t know about.

So what does all this mean for management? The second characteristic of the long-lived companies that Arie de Geus identified was that no matter how diversified they were, their people felt they belonged.

Case histories showed that a “sense of community” is essential for long-term survival. The managers of living companies commit to people before assets because they know that people — not spreadsheets and pieces of paper—make assets work. Moreover, line managers must initiate the change process, not earnest corporate staff who behave as if they own the assets. They don’t. Line managers do.

Effective managers who believe in growing people and building a community know that you don’t do it in a classroom. You build communities of growing people most rapidly and sustainably when its members are “forced ”, so to speak, to develop it under short-term, concrete, real-life challenges that are important to them.

These challenges always lie at points of overlap along the value stream of activities from supplier through to customers. That’s where you find the largest performance improvement potential to lever up asset productivity and where you can design community building projects that grow members fast, furiously and measurably. The improvement in the number tells you how much they have developed and provides the building blocks for expansion of the process.

The long-lived companies commit to people first and assets second. People are “the horse” and asset productivity is “the cart”. All it needs is to educate your people in what it is. As we all know, very few of them do, and that’s true from boardroom to the work place.

It’s a wonderful message of opportunity.

Ted Black (jeblack@icon.co.za) writes, coaches and conducts ROAM workshops that help managers design results-driven projects that grow them and their people

ROAMing through Rainbow’s prism

Ted Black and Frank Durand explain why Johann Rupert should have listened to his mum TRENDY theories that treat people as “human capital” or “intellectual property” and “brands” as assets, argue for new business metrics to measure and value talent. They are red herrings. What is important is to harness people’s brains with the numbers we already have.

There are only two critical factors in business. One is to make money. The other is to generate cash.

Most managers and staff don’t understand that their financial rewards and long-term security depend on doing those two things. Moreover, they don’t know how to do it. Imagine what could happen if they did. Without the big picture that the financial numbers give, they just have a job.

Bruce Henderson, the late founder of Boston Consulting Group, cut to the heart of the matter: “A business is a cash compounding machine or it is nothing, and sooner or later will be swept away.”

“Get back to basics” always becomes the management mantra when companies hit bad times. The recent Remgro offer of R16 a share to minorities of RainbowChickens presents us a timely reminder of them.

The bid puts Rainbow’s value-of-the-firm (VOF) measure today at R4,6bn (share price multiplied by issued shares). It hit a year-end low of R230m in 1998. Anyone who bought shares near the time, probably most of today’s minorities, has done very well indeed. But what about Remgro itself? What kind of investment has it been? Furthermore, what lessons can we take from the Rainbow saga? It’s a great story.

The first is that no manager can act intelligently, or with integrity, unless he thinks like an owner all the time. It is a state of mind. No-one tells owners what to do. They work it out for themselves.

Despite all other demands, management has one legitimate purpose. It is to maximise the VOF for its owners — the shareholders.

Fundamentally, the VOF derives from the productivity of the asset base, not the workforce. Managers make a return on assets. Owners make a return on investment.

That is why return on assets managed (ROAM) is still the best measure for operating management and a great lens to use to seek and pinpoint productivity opportunities for people to tackle together.

You cannot be a first-class manager unless you understand finance. The ROAM model helps build that understanding. It requires no more than Grade 6 arithmetic and can be used to teach everyone the “great game of business”.

Ignorance about the rules of the game is widespread — even at the highest levels. The first responsibility of any manager is to educate his or her people in business basics to give them the big picture — never mind specific job skills.

The only valid measures of management intent and results are “resource in: result out” ratios. The ROAM model provides many of them. If used in the right way — to develop people — it triggers innovation, collaboration, teamwork and learning. Improved, sustained productivity follows.

Rainbow1-1

Exhibit 1, above, shows Rainbow’s ROAM performance over 25 years. It sends the message: “All roads lead to ROAM … or ruin!”

Sadly, that message did not re a c h the owner, Johann Rupert, until it was too late. People at the top are too often the last to know when things go badly wrong. The dour people he charged to watch over his investment typified those who Adam Smith described in The Wealth of Nations in 1771: “The directors, being the managers of other people’s money, cannot be expected to watch over it with the same anxious vigilance with which owners frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to detail as beneath them. Negligence and profusion, therefore, must always prevail, more or less in the management of the affairs of such a company.”

A 15-year decline resulted in a loss of R150m in 1996 and near bankruptcy for Rainbow. Following a rights issue to rescue the company, a furious Rupert stuck in another R600m, pulled on his gumboots and trudged around his chicken farm to find out what was going on. Did he own a sh*t chicken business or was he in a chickensh*t” business? It looked like both.

Facing the truth seldom comforts us. It is why crises can be so valuable. They force us to confront reality and take action.

The first truth Remgro had to face was that it had made some huge blunders. Strategic planning’s great contribution, if done well, is to trigger managed change — change that exploits proven strengths and maximises opportunities.

However, neither Remgro, nor a reluctant HL&H, which ended up running Rainbow, knew anything about chicken farming. Seduced into a honey trap, they matched opportunity with weakness — the first blunder — and the numbers followed the weakness.

Soon after listing, the company acquired Bonny Bird/Epol from Premier Milling — a monumental bungle. This one doubled up the asset base and created a very different company from the one built by its founder — the late, legendary Stanley Methven.

The move was based on the false premise that high market share results in high ROAM — that it is a cause-effect relationship. It is not. It is a probability, but a most unlikely one when you add nonperforming assets to low-performing assets.

Methven knew this. Despite many approaches from Premier — a milling company that got into chickens by default — he did not want his company to be contaminated by it. The story goes that he even celebrated the end of a short, disastrous foray into feed milling. With his team gathered round him in Hammarsdale, he raised a glass of French Champagne, and said: “If I ever get the urge to buy a feed mill again, shoot me.”

That’s another important lesson. Celebrate the mistakes, savour them, and learn from them.

Over the years, Epol had performed little better than break-even and Bonny Bird made a profit once in its history. Market analysts thought it a great move both for Premier and Rainbow, whose share price doubled. The VOF went to R1,7bn in 1992.

The capital market’s vote of confidence confirmed the 6th Higher Law of Business: “You can sometimes fool the fans, but you never fool the players.”

The first loss followed and the VOF dropped to R848m. However, a small profit a year later in 1994 duped the fans again. They pushed the VOF back to R1,3bn, showing that managers in charge of a sick company can produce a big rise in the share price with second-rate financial performance.

The players — Rainbow’s people — were not fooled. From 1996 to 1999, the company lost nearly R600m, confirming the 9th Higher Law: “If nobody pays attention, people stop caring.”

It was a disaster, and all to get one good brand, Farmer Brown, the only Premier “asset” really worth having.

The move also destroyed HL&H — a once proud, 150-year-old company. The social and economic costs were grave, confirming the 10th Higher Law: “Sh*t rolls downhill.”

With acquisitions, the golden rule is: “Don’t buy a standalone company, especially if you don’t know the business.” You will pay far too much unless you can uncover and release hidden productivity opportunities. It is better to buy a parcel of companies, sell the ones you do not want and get the one you do for a knockdown price.

Corporate managers nearly always pay over the odds. In contrast, successful entrepreneurs bid “low”. Knowing how to allocate capital well, they buy at a discount; sometimes for nothing if the target company is in distress. Seldom do they pay a big premium.

Macsteel, owned by Eric Samson, is a good example. Reputed to be the biggest privately owned steel trading company in the world, it has acquired many companies but Samson has never paid more than net asset value — usually less, or in the end, sometimes nothing.

There are good reasons why corporations pay too much. First, top management uses other people’s money. Second, professional advisers’ commissions and fees are linked to the size of the deal — the bigger the better. Third, executive pay is based on size of company and responsibility, not economic productivity. This brings us to the next measure. It’s a cash one.

Rainbow has been profitable every year since 1999, achieving its highest ROAM since 1982 — 21%. But has the turnaround been good enough to justify owning it?

As Peter Drucker put it: “Until a business returns a profit that is greater than its cost of capital, it operates at a loss. Never mind that it pays taxes as if it had a genuine profit. The enterprise still returns less to the economy than it devours in resources. Until then it does not create wealth; it destroys it.”

Economic profit is a true measure of management competence and it is a tough one. You can manipulate the share price for quite a long time before capital markets catch on, which is why corporate management prefers it to economic profit.

Funding comes from owners, lenders and suppliers. The cash buys assets that operating managers have to manage. None of it comes free.

Rainbow’s interest charge has always been low except in the mid- 1990s when debt reached R500m. Supplier credit is interest free, but not cost free. Inventory takes up space, needs management and generates many hidden costs.

Owners’ cash is also not free. Until you charge for it, you do not know if the firm has made an economic profit or not. It must not be so high as to miss the creation of it, nor must it be too low or the company becomes a cash trap.

If you look at other, better alternatives for investment that Rupert had to give up, it seems reasonable and defensible for him to have “charged” Rainbow management 25% for his money and the risk he took. If he had, then Exhibit 2, below, is an indicator of how much wealth his management destroyed from 1989. It is not a pretty sight.

Rainbow1-2

The calculation is based on Stern Stewart’s EVA™ measure (net operating profit after tax less the actual cost of capital). It took until 2003 to create an economic profit equal to or better than a 25% return on equity. From 1989 to 2003, Rainbow returned R195m to owners for average equity of about R750m. That’s a 26% return in total for a 15-year investment, or only R13m a year—an annual return of less than 2%.

As a self-deprecating Rupert humorously admitted at a shareholder AGM in 1998, his late mother had told him not to buy it. She was right. It was, and probably still is, a disastrous investment if you look at the 20-year opportunity cost.

However, it is rare indeed for a business leader to have the courage and integrity to do what he did. Facing harsh reality and taking full responsibility leads to “breakthrough” and another important lesson.

The corollary to the 9th Higher Law that the stuff rolls downhill is: “Change must start at the top.”

Rupert intervened, picked his own man to run the show, and the turnaround started.

Most organisations have huge potential for improvement but unlike Rainbow, few achieve major breakthroughs. The successful ones have leaders who grasp what has to be achieved — the goal is clear. They also confront their people with the clear belief that it will be done and that they can do it.

Finally, they know that simplicity drives productivity. If you want change you do it with one number.

Most managers “manage by the numbers” but with too many of them. Daily, a torrent of data swamps us. Most of it means little. Moreover, the numbers are random — random within the system.

Before looking at the random numbers, let’s look at the system.

Rainbow’s latest annual report gives a clear picture of the value stream of activities. If it attached asset values to each activity it would be even more interesting and revealing (see Exhibit 3 below). The business model determines if you make money. The key to economic productivity is concentration and focus. It raises two strategic questions: “What assets should we own?” and “How do we control the rest?”

The most toxic of all business designs is unfocused, vertical integration. That is when a company owns everything. Rainbow was highly integrated in 1996 and still is.

To make money, you must be the lowest-cost producer or you must have something no one else has. Unless you have a unique product or service that makes you different, you have to compete on price.

The first strategic decision taken was to have good genetic stock. It affects the cost and quality of the bird on the plate. Your birds must grow faster, resist disease and end up plumper after eating less. Rainbow management had neglected this issue but corrected it successfully.

The ROAM model poses two marketing questions to test a business model. They lead to input:output ratios. The first is: “For every rand of assets we have, how many rands of sales do we generate?” (Sales divided by total assets is the measure and is called asset turnover).

Asset turnover is the most important measure of operating management and the least used. For Rainbow, it determines the capital cost of every kilogram of chicken sold — the first competitive productivity barrier for any firm.

The slower your asset turn, the lower your ROAM is likely to be. Exhibit 4, below, shows how management improved asset turnover steadily through to 2002.

Rainbow2-2 The first task was to undo much of the Bonny Bird/EPOL acquisition. Plants were closed and farms sold. As asset turnover accelerated from 1,3 in 1996 to 2,4 in 2002, it cranked up ROAM from -10,9% in 1998 to 12,5% in 2002.

Then as management started to reinvest in new plant from 2003, slowing asset turn down, the next ROAM marketing measure becomes more significant: “For every rand in sales, how many cents profit do we make?” This is return on sales (operating profit ÷ sales × 100). It improved steadily from 5,2% in 2002 to its highest level in 18 years— 14,1% last year. However, there are warning signs that today’s management is losing sight of the importance of asset turnover.

Watch out for marketing guys. They generate excitement and growth but have an Achilles heel. Asset productivity is not their strong suit. Because their mission is to please customers, give them the smallest gap and they expand and extend product lines, fill up warehouses with stock, discount it and then shy away from collecting money. This lowers the next ROAM productivity barrier: current asset turnover. It drives the measure that governs every company’s viability — the cash-to-cash cycle.

You must aim to have a lower level of stock and debtors per rand of sales than your competition. In Methven’s day, stock and debtors spun an average of 6,3 times a year — that is about a 58-day cycle.

Under HL&H it fell to an average of 3,9 — about 94 days — but reached a low of 3,5 (104 days) in 1997. Alarmingly, it is back there.

Rainbow2-3 Rainbow2-5 Exhibits 5 and 6, at right, use physical numbers to show what happened. The first shows sales in kilograms over a three-year period just before the crash started in 1996.

The pattern is typical for many companies. Although it shows random sales performance month on month, market demand was stable and predictable. It probably still is.

Reporting to the board, all the various Rainbow MDs could have truthfully said was: “Some months are better than others.” It would have not gone down well but would have been helpful.

Rainbow management could expect sales of about 3,5 tons of chicken a week for the foreseeable future. However, that is not how the organisation responded. Company plans often do not reflect market reality. Big, hairy, audacious goals set by gung-ho managers out to please their bosses can cause huge instability and distortion of information as it filters through people in the value stream.

Exhibit 6 shows what happened to inventory. It was “out of control”. At the end of this time series with stock leaping up, the company went on to record massive losses.

Not matching intent with reality is a common phenomenon. The dotcom bubble burst for a similar reason only a few years later.

“New economy” companies such as Solectron held $4,7bn inventory because of blue-sky forecasts from the likes of Cisco, Ericsson and Lucent. Cisco eventually “wrote off” $2,5bn inventory, axed 6 000 people and its VOF fell by $400bn.

With Rainbow, the velocity of current asset turnover increased from 3,5 in 1997 to 5,8 in 2002 and has slowed since then. At the 2006 yearend it was at 3,8 and wound down further to its 1997 level of 3,5 at end- September 2006.

To put the importance of competitive asset turn in perspective, compare Rainbow’s performance with Astral, the best-performing feed and poultry firm ( Exhibit 7 below).

Rainbow2-4 Astral consistently outperforms Rainbow with an overall asset turn 30% faster on average over seven years; at year-end 2006 it was 60% faster. Astral’s current assets turn has averaged 6,1 for the past two years while Rainbow has slipped to average 4,1 — 50% slower and losing speed.

However, with the next productivity barrier, Rainbow’s cost of sales dropped from 75% to 63% in 2006 — a great achievement, probably due mainly to the low maize price and shrewd buying. Today, it could be the least-cost producer off the farm.

Then there’s the fourth productivity barrier: “How do you differentiate a dead chicken and charge more?” Rainbow’s “innovative solutions” do not seem to be working yet. Cost seems to have more influence on profit than the so-called “highmargin” products that analysts and financial pundits waffle about.

For every rand spent on administration, selling and distribution, Astral generated R8,98 of sales, and output is rising. Last year, every rand of expenses for Rainbow generated R4,62 in sales, but fell from R6,50 the previous year.

In summary, Rainbow lags Astral with these key productivity measures except cost-of-sales. However, this is a message of opportunity. It is no accident that Rainbow’s improved ROAM has generated an economic profit and improved the VOF.

Asset turnover and sales profitability drive ROAM. They are two of the four levers that create economic profit. The others are growth of a productive asset base, and gearing. When management achieves a ROAM result that beats the cost-ofcapital, you can expect the VOF to keep rising.

The “new”, much improved Rainbow has more, huge untapped potential waiting to be released, confirming another higher law from The Great Game of Business: “The more successful you are, the bigger the challenges you have to deal with.”

It is the same with every firm. However, because of fear, we do not educate people with the numbers. We fear they may fall into competitors’ hands. So what if they do?

We fear that employees will misunderstand and use them against management. They probably will if we do not educate them.

Give them the big picture and you appeal to a higher level of thinking. You knock down the barriers of ignorance that keep people apart. When you do that, it leads to higher levels of performance and results on your road to ROAM.

Ted Black (black@icon.co.za ) is an executive coach focusing on converting problems and opportunities into action projects. Frank Durand is a senior lecturer at the Wits Business School in the fields of finance and asset management.