Old Theories Take Back Seat To Innovation
What management style produces the “biggest bang” for an investor’s buck? This is a critical question for entrepreneurs who have put their personal funds at risk in an enterprise or who are seeking financial backing from private investors. It’s also an important issue for managers in large corporations
Q. Of all the operating theories I learned in college - and have read about since - which can help me the most in boosting the value of my business? If Bill Gates made $12 billion, so can I!!!
A. The average business school professor will insist that the fundamental worth of a business is created through the persistent application of proven management techniques that cost-effectively increase revenues. While admitting that this approach is more difficult to execute than it sounds, they insist that it works and that it’s the preferred way to enhance profit performance and the value of a firm.
Indeed, economists who study the functioning of business firms have long been able to demonstrate a link between revenue growth and shareholder value. So for generations we’ve been told that anything an executive can do to hone growth-oriented marketing, financial management, and administrative skills would ultimately work to produce a bigger top line and, thus, a healthier bottom line.
This “nose to the grindstone of growth” approach still is considered by most “experts” to be the best avenue to wealth creation in a business. Business schools typically echo this sentiment and have thrived by helping managers refine those skills to a point where they can be appropriately “crowned” with an MBA.
However, a couple of “mahatmas” from the management consulting firm of Booz-Allen & Hamilton have recently begun to question this operational article of faith. The results of their research suggest that a firm’s revenue growth is only moderately related to the value of its equity.
Surprisingly, for periods of less than 10 years they found no correlation between a company’s growth and its capacity to create shareholder value. As a consequence of their analyses the folks at Booz have come to the conclusion that there are two fundamentally different paths along which you can direct the affairs of your firm in order to create wealth.
The first, more traditional manner relies on superior planning and the application of sophisticated management techniques like those commonly revered at B schools. These most often emphasize productivity-enhancement through disciplines like re-engineering, TQM, and “scientific management.”
The use of stretch goals and target marketing are also featured. Selective, market-expanding acquisitions, mergers and strategic alliance are thrown in for good measure.
Some companies, like General Electric, have done very well with this modus operandi.
But the second path marked by Booz explorers seems to have greater potential to take a firm beyond the “ordinary excellence” produced by the more common classical management techniques. This approach is fueled by innovation and guided by “entrepreneurial” managers who constantly strive to do new and dramatically different things in order to differentiate themselves from their competitors and to compel customer response.
These pathfinders focus on understanding a customer’s needs - and latent wants - and they design unique products, services and delivery methods to satisfy them. As leaders they concentrate on initiating change, strategizing and seizing opportunities.
The firms they lead, like Wal-Mart, Microsoft and Southwest Airlines are well-managed in the conventional sense, but that’s just for openers. These companies truly distinguish themselves with an ability to rapidly develop new and better techniques to design, develop, produce and market.
The theories you learned in college will doubtless help you be a good manager. But for the kind of payoff you want you’ll have to release your innate, intuitive entrepreneurial energies. These unique personal powers are the ones that can take your enterprise to the pinnacles you are seeking.
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