I recently wrote a piece on this very subject and would like to reproduce it here ..... please feel free to comment.
Why striving for the number one position in your
industry is a bad goal
The recent scandal at VW had me thinking. It reminded me of all the
times I have seen well-intended goals and performance measures end up producing
terrible or unintended consequences. This experience has been the driving force
behind my belief that you should NEVER set a goal of being number 1
in your industry. I know the great Jack Welch had a philosophy that his
divisions at GE had to be either number one or two in their industry but the
overwhelming evidence leads to the conclusion that under normal circumstances
this isn’t a good idea. (Jack was an extraordinary leader and may possibly be
the one exception that proves the rule).
As the ole saying goes – “What gets measured gets done”. The problem
is more often than not what gets done is not what the measure was set up for in
the first place. The business world is full of unhappy and unsatisfactory results
from poorly designed KPI’s and goals.
While reaching number one is a laudable endeavour and achievement,
however the achievement of reaching number one in your industry should be the
result of a different set of goals than that of being number one. There have
been some recent high profile examples of why specifically targeting number one
is a bad idea. Take for example the following cases:
·
Toyota
and their massive recall quality issues.
In around 2002 Toyota set a goal of being the
largest vehicle manufacturer in the world. In doing so it targeted growth
primarily in the USA as its path. Having initiated its presence in the USA with
a joint venture with GM at the NUMMI plant in Kentucky it grew its USA
manufacturing base to seven plants in:
o
Mississippi
o
Two separate plants in Kentucky
o
Texas
o
Indiana
o
Alabama
o
West Virginia
They also have plants in Argentina,
Australia, Belgium, four in Brazil, two in Canada, two in Colombia, South
Africa, France, Indonesia, sixteen in their homeland of Japan, Mexico,
Philippines, Portugal, Russia, four in Thailand, Turkey and two in the UK. They
also have 18 other plants in joint ventures in other countries including China
and India.
As Toyota grew rapidly it lost its ability to
inculcate the “Toyota Way” into its new employees and new plant processes.
Previous growth was a result of a patient approach to developing people in the
company with knowledge about the Toyota Way. A key component of the Toyota Way
is to work closely and in some cases within the businesses of their suppliers
to assist them to adapt to and adopt the new paradigm. This was not done well
in a rapidly growing environment.
This resulted in quality issues sneaking into
the process and was exacerbated by the level of growth the company was
experiencing. My view is if the executives had a goal of ensuring the Toyota
Way was successfully inculcated into every new plant – this would have ended up
with a completely different result. They may not have become number one as
quickly – but I firmly believe they would not have had as dramatic a crisis to
deal with as they ended up having.
·
VW and their devious deception of the emission
results on diesels. They too set a target of being number one. They too
identified that leadership in the USA was their path to this position. In February
2007 the new CEO Martin
Winterkorn was appointed and from his first day in office, he is aware that the
group’s U.S. business is floundering. He believes that only diesel engines will
enable VW to gain significant market share in the United States and to fend off
Japanese rival Toyota and its hybrid drive.
In January
12, 2008 At the Detroit Motor Show, Matthias Wissmann,
president of German automotive industry association VDA, says 2008 will be the
year in which “clean diesel” achieves a breakthrough in the U.S. market. He
predicts diesel cars will increase their market share from 3 to 15 percent by
2015, thanks to rising oil prices and stricter emissions standards.
In August
2008 Volkswagen announces the launch of the VW Jetta
2.0 TDI in the United States, based on the EA 189. The company highlights the
car’s low fuel consumption and low emissions, which have been made possible
thanks to the cheat software.
Early 2014
the environmental organization ICCT tests actual
emissions figures for diesel cars and finds that the two Volkswagen models are
well above the limits, exceeding the guidelines 35-fold in extreme cases. In May 2014 two U.S. authorities are
informed of this, the Environmental Protection Agency and the California Air
Resources Board, a state agency. They commence official investigations into
Volkswagen. VW indicates that it is willing to discuss the matter, conducts its
own investigations and repeatedly compares the results on both sides.
It is clear that the drive to be number one
resulted in practices and decisions being made that were, at least in hindsight
– however should have been known at the time, deceitful and unethical. Again my
belief is if the advantage of efficient diesels were in fact the game changer
they expected – the setting goals around this would have helped them become
number one. No target being number one as a prime goal.
·
Sears
Roebuck in the 1990s found themselves in a situation where executives mandated a
sales goal for automotive mechanics of $147 an hour. Rather than work faster, as
was the expectation, employees met the goal by overcharging for their services
and “repairing” things that weren’t broken.
·
The 2008 financial collapse, in which “motivated
blindness” (explained below) contributed to some bad decision-making. The
“independent” credit rating agencies that famously gave AAA ratings to
collateralized mortgage securities of demonstrably low quality helped build a
house of cards that ultimately came crashing down, driving a wave of
foreclosures that pushed thousands of people out of their homes. Why did the
agencies vouch for those risky securities?
These four examples demonstrate the unexpected consequences of
poorly thought out goals. A smaller but no less important example is where
companies of all sizes mandate cost cutting programs (see my article 7 reasons why cost cutting is
the worst thing for your business). Procurement cost cutting more often
than not results in the purchase of inferior quality parts that leads to
further expense somewhere down the supply/manufacturing/maintenance chain.
It’s well documented that people see what they want to see and
easily miss contradictory information when it’s in their interest to remain
ignorant—a psychological phenomenon known as “motivated blindness”. The root
cause of this blindness or self-interest is in the setting of goals and the incentives
attached to those goals.
So how do you avoid these consequences when you want to set goals
and incentives within your business? I have developed 5 steps to setting
worthwhile goals:
1.
Examining what behavours you want in your
business. Leaders setting
goals need to view the situation from the perspective of those whose behavior
they are trying to influence and think through their potential responses. This
will help head off unintended consequences and prevent employees from “motivated
blindness”.
2.
Having goals such as honest reporting are just as important to reward if not more
so. When leaders fail to meet this responsibility, they can be viewed as not
only promoting unethical behavior but also blindly engaging in it themselves.
3. Identify
how one measures the achievement of these goals. The goal has to be
quantifiable.
4. Set
up the measuring of this goal so that it occurs as part of the normal process
of conducting business. Your ERP system should be able to assist here albeit it
may require a modification or specific BI report to be written. It is not until
we examine what behavours are occurring in the business are we in a position to
understand if the consequences are unexpected or not.
5. As
with all KPI’s or incentives constant monitoring of the result and the act of
asking questions around the specific KPI results, is crucial to making this
process work. One must monitor if the goal or incentive is having the desired
impact. Without these actions being taken – the chances of motivated blindness
dramatically increase.
6. Examine
how the cognitive biases that
result from the motivated blindness could potentially distort ethical decision-making.
For example, the most common problem executives report around the
setting of goals and incentives is that their sales forces maximize sales
rather than profits. I see this every day in all the client’s businesses I work
with. I ask what incentives are they giving their salespeople, and they confess
to actually rewarding sales rather than profits.
The lesson is clear: When employees behave in undesirable ways, it’s
a good idea to look at what you’re encouraging them to do. Examine if you have
followed the six steps completely. If you do; your chances of goals and
incentives being productive is greatly enhanced.
Contact
Details:
David
Ogilvie
Ph: +61 (0)
438 787 759
© Copyright David Ogilvie 2015
