Natural Science

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Natural Science

• Applying Science to Company Performance

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• We have seen that science involves doing certain
  things.
• Scientific ideas need to be tested by collecting
  evidence.
• We try to collect several lines of evidence.
• Correlation indicates areas that may be
  interesting to investigate.
• Experiments allow us to be more certain about
  causation.

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• If we ask the question What do good companies do
  that makes them successful?
• How could we find the answers to this question?
• Socrative.com

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• There have been several attempts to answer the
  question What do good companies do that makes
  them successful?

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• In 1982 Tom Peters and Robert Waterman wrote a
  book
• In Search of Excellence Lessons from Americas
  Best-Run Companies.

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• In Search of Excellence Lessons from Americas
  Best-Run Companies.
• 1 copy in Hallym Library
• ??? ??? ?? ????? ???? ??? ?? 8??
• 4 copies in Hallym Library

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• Method
• They identified 43 excellent American companies,
  including Boeing, Caterpillar, Digital Equipment,
  Hewlett- Packard, IBM, Johnson Johnson,
  McDonalds, Procter Gamble, and 3M.

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• They gathered data from historical material -
  archival sources, press accounts, and from
  interviews.

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• They gathered data from historical material -
  archival sources, press accounts, and from
  interviews.
• Is this a good way to collect information?
  Explain
• Socrative.com

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• Based on these data, Peters and Waterman
  identified eight practices that appeared to be
  common to the excellent companies.

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• Result 1
• The book was extremely successful.

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• What do you think could be wrong with the method
  in Peters and Watermans book
• In Search of Excellence Lessons from Americas
  Best-Run Companies?
• Socrative.com

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• Problem 1
• The sources of data were likely to be compromised
  by the halo effect.

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• Problem 1
• The sources of data were likely to be compromised
  by the halo effect.
• Excellent companies were thought to be good at
  managing people and listening to customers, or
  were said to have strong values or a good
  corporate culture.

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• What do you think could be problem 2?
• Hint was there a control?

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• Problem 2
• There were no unsuccessful companies to compare
  to.

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• Problem 2
• There were no unsuccessful companies to compare
  to.
• Do you understand this problem?
• What if unsuccessful companies were also good at
  managing people and listening to customers, or
  had strong values or a good corporate culture?

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• The real results
• After the study, the performance at most of the
  43 Excellent companies decreased sharply.
• Over the next five years, only one-third of the
  Excellent companies grew faster than the stock
  market. The other two-thirds grew less than the
  stock market.

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• Of the 35 companies for which data were
  available, only 5 improved their profitability,
  while 30 became worse.

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• Market measures or profit measures of performance
  show the same pattern most of these companies,
  selected for their high performance, did not keep
  a high performance.

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• Peter and Waterman mostly found, not the causes
  of performance, but rather what we would say
  about companies with good performance.

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• The research method of Peters and Waterman
  contained two basic errors.

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• First, they studied a sample made up entirely of
  outstanding companies. They selected their sample
  based on the dependent variable that is, based
  on outcomes.

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• If we look only at companies that have performed
  well, we can never hope to show what makes them
  different from companies that perform less well.

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• The second mistake
• Much of their data came from sources that are
  commonly biased by the halo effect.
• They gathered data from historical material -
  archival sources, press accounts, and from
  interviews.

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• They got data from historical material - archival
  sources, press accounts, and from interviews.
• By relying on sources of data that are not
  independent of performance, the data were biased
  from the start.

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• In 1994, Jim Collins and Jerry Poras tried to
  answer the question What makes a successful
  company? in a book
• Built to Last Successful Habits of Visionary
  Companies

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• Built to Last Successful Habits of Visionary
  Companies
• 0 copies in the Hallym library

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• Built to Last Successful Habits of Visionary
  Companies
• 0 copies in the Hallym library
• ???? ???? 8?? ??
• 2 copies in the Hallym Library

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• Collins and Porras studied companies that had
  been successful for a long time.
• They hoped to find the underlying timeless,
  fundamental principles and patterns that might
  apply across eras
• How is this different from the previous study?

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• Studied companies that had been successful for a
  long time.
• How is this different from the Peters Waterman
  study?
• Socrative.com

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• Peters and Waterman focused on the days
  successful companies many of which might soon
  falter.
• Collins and Porras studied companies that had
  been successful over the long term.

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• Collins and Porras began by identifying 200
  leading companies from a wide range of
  industries, then narrowed their sample to include
  the most long lasting and successful of them all,
  the best of the best.

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• Eighteen companies were selected as truly
  outstanding, enduring, visionary companies.

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• Eighteen companies were selected as truly
  outstanding, enduring, visionary companies.
  Included were high-tech companies such as IBM,
  Hewlett-Packard, and Motorola financial services
  giants such as Citicorp and American Express
  health care companies such as Johnson Johnson
  and Merck plus Boeing, General Electric, Procter
  Gamble, Wal- Mart, Disney, and more.

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• Collins and Porras knew that In Search of
  Excellence had made a basic error by simply
  looking for what was common among successful
  companies.

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• They noted, if you look at a group of successful
  companies and try to find what they have in
  common, you might conclude that they all are in
  buildings.

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• They noted, if you look at a group of successful
  companies and try to find what they have in
  common, you might conclude that they all are in
  buildings.
• This is true, but it doesnt distinguish
  successful companies from less successful ones,
  and doesnt say what leads to success.

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• Next step
• For each of their Visionary companies, Collins
  and Porras identified a Comparison company from
  the same industry, of about the same age, and
  that was a good performer not a bad company.

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• Boeing was paired with McDonnell Douglas,
  Citicorp with Chase Manhattan, Hewlett-Packard
  with Texas Instruments, Procter Gamble with
  Colgate-Palmolive, and so forth.

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• Collins and Porras were trying to find what made
  the most successful and enduring companies
  different from others that werent quite so good.

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• Collins and Porras were trying to find what made
  the most successful and enduring companies
  different from others that werent quite so good.
• What do we call the companies that werent so
  outstanding?
• Socrative.com

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• Then they studied these 18 matched pairs. They
  went through an extensive process of data
  collection more than 100 books including company
  histories and autobiographies, more than 3,000
  documents, from magazine articles to company
  publications, business school case studies.

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• They discovered some timeless principles

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• They discovered some timeless principles
• having a strong belief that guides the companys
  decisions and behavior
• building a strong corporate culture
• setting brave goals that can inspire and stretch
  people
• developing people and promoting them from within
  
• creating a spirit of experimentation and risk
  taking and
• trying for excellence.

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• This was good, wasnt it?

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• Unfortunately, Collins and Porras didnt really
  try to get data independence.

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• Much of the data they gathered came from sources
  that are known to be undermined by the halo
  effect.
• Unfortunately, if the data are biased, it doesnt
  matter how much you have.

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• If you study any group of highly successful
  companies and look backwards, relying on articles
  in the business press and on interviews after
  they have success, and you may find that theyre
  said to have strong cultures, solid values, and a
  commitment to excellence.

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• If you pick a group of comparison companies that
  are good but not outstanding, they will probably
  be described in lesser terms.

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• Did Collins and Porras successfully identify
  practices that led to high performance, or did
  high performing companies tend to be described as
  having these practices?

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• Collins and Porras thought so
• a master blueprint for building organizations
  that will prosper long into the future.
• Just about anyone can be a key protagonist in
  building an extraordinary business institution.
  The lessons of these companies can be learned and
  applied by the vast majority of managers at all
  levels.

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• You can learn them. You can apply them. You can
  build a visionary company.

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• In the five years after the study ended, the
  performance of the 18 Visionary companies dropped
  quickly.

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• Over the next five years more than half did not
  even match the overall stock market performance.

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• Five companies improved their profitability,
  while eleven decreased their profitability, with
  one unchanged.

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• Most of Collins and Porrass Visionary companies,
  chosen because they had done so well for so long,
  quickly decreased their profits once the period
  of study was over. The master blueprint of
  long-term prosperity was wrong.

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• Some regression (loss) is to be expected, even
  among the best companies. However, so much loss,
  so quickly and over so many companies after such
  a long period of success, means there are serious
  questions.

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• It did not seem that Collins and Porras had
  really found the reasons for long-term success.

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• Using biased sources of data, the things that
  were said to create enduring performance strong
  culture, commitment to excellence, and more
  were attributions based on performance.

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• They may have had some random errors in their
  data.
• There is a difference between noise and bias. If
  errors are randomly distributed, we call that
  noise. If we get enough data, we may be able to
  find a trend through the random noise.

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• However, if errors are not distributed randomly,
  but are systematically in one direction or
  another, then the problem is one of bias then
  gathering lots of data doesnt help.

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• The halo effect is a problem of bias what is
  known about company performance has a systematic
  effect on how people judge them, and therefore
  will produce skewed results.

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• Collins and Porras said it is not possible to
  study company performance using the techniques of
  scientific experimentation.
• We cant put a company in a laboratory and study
  it.
• we have to take what history gives us and make
  the best of it.

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• Collins and Porras said it is not possible to
  study company performance using the techniques of
  scientific experimentation.
• We cant put a company in a laboratory and study
  it.
• we have to take what history gives us and make
  the best of it.
• What do you think?
• Socrative.com

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• However, good researchers dont simply take what
  history gives us. Good researchers challenge and
  probe the data, they look for corroborating
  evidence from reliable sources, they triangulate,
  and then they set aside what is suspect and rely
  on data that are solid and accurate.

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• Triangulation is a powerful technique that allows
  validation of data through cross verification
  from two or more sources.
• In particular, it refers to the application and
  combination of several research methods in the
  study of the same thing.

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• The result will not be perfect, and will always
  include some noise (randomness), but should be
  free of strong and systematic bias.

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• Collinss next study asked a different question
  Why do some ordinary companies make the shift to
  outstanding performance while others dont?
• This was written in the 2001 book
• Good to Great Why Some Companies Make the Leap .
  . . and Others Dont

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• Good to Great Why Some Companies Make the Leap .
  . . and Others Dont
• 1 copy in Hallym Library
• ?? ??? ??... ??? ????
• 7 copies in Hallym Library

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• Collins team considered all 1,435 companies on
  the Fortune 500 between 1965 and 1995.

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• From this group, they found a very few that
  fitted a particular pattern 15 years of stock
  market returns near the general average, followed
  by 15 years of stock market returns well above
  the average.

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• Just 11 fitted the profile
• Abbot, Circuit City, Fannie Mae, Gillette,
  Kimberly-Clark, Kroger, Nucor, Philip Morris,
  Pitney Bowes, Walgreens, and Wells Fargo.

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• They considered everything from strategy to
  corporate culture, from acquisitions to
  compensation, from financial measures to
  management policies.
• The team read dozens of books and reviewed more
  than 6,000 articles.

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• They had many interviews with managers, asking
  them to explain the events of past years.
• They collected large amounts of data, filling
  crates, and entire cabinets, as well as 384
  million bytes of computer storage.

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• They found that the 15 years of average
  performance were described as a Build-Up phase,
  characterized by strong yet humble leadership,
  employing the right people, and facing reality
  directly and courageously.

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• The 15 years of rapid growth were called the
  Breakthrough phase, and were characterized by
  focus, execution, and, finally, the use of
  technology to reinforce progress.

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• But there are serious problems with the data.

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• Some of the data appear to be free of the halo
  effect for example, measures of top manager
  turnover, or the presence of major institutional
  shareholding blocks, or the extent of board
  ownership, are all matters of public record and
  not likely to be shaped by perceptions.

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• Yet much of the data had problems.
• Much data came from magazine and newspaper
  articles, sources that are biased by the halo
  effect.

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• Yet much of the data was problematic.
• Other data came from interviews with managers who
  were asked to look back and describe what
  contributed to greatness. These sorts of
  interviews are commonly biased by the knowledge
  of eventual performance.

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• If researchers begin by selecting companies based
  on outcome, then gather data by collecting
  articles from the business press and conducting
  retrospective interviews, they are not likely to
  discover what led some companies to become Great.
  The information will be strongly affected by the
  halo effect.

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• These and other popular studies have arrived at
  wrong conclusions about the causes of company
  performance.

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• They also have helped bring about a fundamental
  misunderstanding of the nature of company
  performance. They have taken our attention from a
  more accurate understanding of what it takes for
  companies to achieve success.

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• A first mistake is the idea that there is a
  definite process which can be followed to achieve
  high performance.

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• In fact, definite processes can never predictably
  lead to business success with the accuracy of
  physics because, in business, performance is
  relative, not absolute.

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• Part of the problem is that we often think in
  terms of laboratory sciencewhether physics or
  chemistry.

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• Part of the problem is that we often think in
  terms of laboratory sciencewhether physics or
  chemistry.
• Put a beaker of water on a burner, and youll
  find that it boils at 100 degrees Celsius.

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• Part of the problem is that we often think in
  terms of laboratory sciencewhether physics or
  chemistry.
• Put a hundred beakers on a hundred stoves, and
  youll find they still boil at 100 degrees. One
  beaker doesnt affect another.

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• However, thats not how things work in the
  business world.
• Companies compete for customers.
• The performance of one company is affected by the
  performance of others.

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• Consider the case of Kmart.
• After being a major U.S. retailer, Kmart went
  into steep decline during the 1990s and declared
  bankruptcy in 2002.

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• Yet on several objective dimensionsincluding
  inventory management, procurement, logistics,
  automated reordering, and moreKmart actually
  improved during the 1990s.

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• Why then did its profits and market share
  decline?
• Because on those same measures, Wal-Mart and
  Target improved even more rapidly. Kmarts
  failure was a relative failure, not an absolute
  one.

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• The same is true for General Motors.
• Compared to what it produced in the 1980s, GMs
  cars today are better in many ways features,
  quality, safety, and styling. Why then is it
  bordering on failure?

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• Because other automakers, including many from
  Japan and Korea, have improved even more.

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• Indeed, one of the reasons why GM has made
  important improvements is because of the
  competitive pressures of the foreign rivals. Thus
  the paradox a company can get better and fall
  further behind its rivals at the same time.

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• A second misperception comes from this first one
  if we believe that firm performance is absolute,
  not relative, we may conclude that it is driven
  entirely by internal factors, such as the quality
  of its people, the values they hold, their
  persistence, etc.

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• It may be nice to think that greatness is a
  matter of choice, but, after we recognize that
  performance is fundamentally relative, it becomes
  clear that analysis of the competition is central
  to performance.

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• Strategic choices are critical, and they are
  based on an assessment of not only our
  capabilities and resources, but also on those of
  our present and potential rivals.

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• That part of company performance is missing in
  formulaic treatments, which emphasize what is
  internal and overlook the complex and
  unpredictable competitive landscape.

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• But there are ways of investigating what
  contributes to company success.
• And some of these ways can involve laboratory
  research.
• We will explore evidence based management and
  evidence based advertising.