Business As The Art of Breathing Underwater
Iceberg of Ignorance
In 1989, Sidney Yoshida, a business executive from Japan, claimed that:
Frontline workers know about 100% of an organization’s problems.
Supervisors - about 74%.
Middle management - about 9%.
Top managers - about 4%.
Yoshida didn’t prove his findings. But he coined the term ‘Iceberg of Ignorance’.
And as someone who has worked as a CEO and a board member for many years, I believe he was fundamentally wrong.
A deal that left much to be desired
In early September 2001, Carly Fiorina, then the CEO of Hewlett-Packard, announced the acquisition of PC maker Compaq with US$25 billion in stock.
Shortly before that, Compaq bought DEC. So, Fiorina actually had to merge three companies.
Various experts had different opinions on whether it was the right decision.
The February 7, 2005, issue of Fortune described her merger plan as “failing” and the prognosis as “doubtful.”
In 2008, former CEO of Compaq Ben Rosen stated that Fiorina lacked the skills to run the merged company, but her successors made it work.
A 2011 The New York Times described it as “one of the more questionable deals of the time.”
Just because you’ve managed to swallow something, it doesn’t mean you’ll be able to digest it.
The merger created the world’s largest PC manufacturer. But HP stumbled upon cultural issues and didn’t capitalize on it.
Many M&A deals look like attempts to merge a philharmonic orchestra with a guerrilla squad.
Merging companies have different cultures, workflows, and product lineups. But CEOs, blinded by the dazzling prospects of the deals, don’t even try to learn about 96% of problems they don’t see.
If you need a new strategy, you’ll have to go underwater.
Everybody knows close to nothing
I’m afraid I have to disagree with Sidney Yoshida. If a company is bigger than a garage startup, nobody knows about much more than 4% of the problems.
Executives live in their ivory tower and know only about a few major problems. They learn about them from the reports, so they don’t see the issues – only their implications, such as plummeting revenues.
Other workers know only what they see and touch. An accountant has no idea what troubles the logistics guys face, and vice versa.
No wonder that up to 84% of digital transformations fail. Business leaders try to turn their organizations inside out but don’t have a clue about what is happening under the hood.
Many strategies fail for the same reason. Leaders have a vision and the executive teams’ buy-in. They scan their markets and see many lucrative opportunities.
But success doesn’t depend only on brave strategic steps. It depends on how well a company delivers value to the six stakeholder groups – day in and day out.
Strategy is not only about thinking bold and big. It works only when all employees think and act according to it.
Many CEOs regularly meet with frontline workers and middle managers, encouraging executives to do the same.
Unfortunately, this is not enough.
As Peter Drucker said, solving problems doesn’t lead to success. It just puts the company back on track.
‘Vertical’ goals vs ‘horizontal’ processes
What Peter Drucker didn’t say is that culture eats strategy for breakfast (it is a myth). And culture isn’t what sabotages strategy.
My experience is that strategies fail because CEOs set goals, cascade them down to objectives and KPIs, and think that employees will do the rest.
And this is where our ignorance about 96% of what goes on in a company backfires.
I see two problems here.
Problem #1
Imagine a company that sets a strategic goal – to slash delivery times for its customers’ goods.
Executives and middle managers thoroughly cascade this goal down to lower-tier objectives.
It may look like this:
However, this goal (to slash delivery time) is complex. It involves many departments – from warehouse and logistics to procurement and marketing.
When we cascade the goal, we follow the ‘vertical’ logic and ignore the ‘horizontal’ and intricate nature of interdepartmental interactions – processes:
And if nobody has any idea of how the whole process works (and everybody knows only about 4% of the problems), we will make many huge mistakes.
We may be able to achieve all the lower-tier targets but won’t hit the overall goal.
Everyone feels like a hero, but customers keep bailing on us.
Problem #2
Even if a middle manager has a clear objective or target KPI, they don’t know what processes to change to meet it.
We believe they will find it out themselves. But can we be so sure?
Conclusion
Every company generates six Value Waves – a set of workflows. Each of them creates value for one of the six stakeholder groups:
Customers
Employees
Shareholders
Business partners
Watchdogs and regulators
Society and community
You can take a look at an example of building a Value Waves map by downloading the file for free (no registration required).
Running a business means taking measures to increase the value it delivers to stakeholders.
Business strategy is a set of practical steps to enhance the value by improving these Value Waves and building new ones.
Strategic goals are clear targets that give a team the direction and pace of these improvements.
Setting the goals without analyzing the Value Waves is dangerous because we can miss some critical points.
In the upcoming articles, we’ll explore other facets of strategic thinking – stay tuned!
Work on the mini-book about strategic thinking, which newsletter subscribers will receive for free, is in full swing, but it still requires some more time.
Read also: Seeing The Future in the Rear-View Mirror.
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It’s a complex problem. My simple thought is there are different problems at different levels. Each person should focus on their level and provide broad guidance downward. Empower people to take care of their part where they have the most information and expertise. Run it like independent mutually supporting cells rather than command driven.