United States: Blinded By Apparent Success, Many Businesses Fail To Achieve Their Real Potential

Responding to the challenges of an increasingly fast-paced, complex competitive environment, companies have invested heavily to transform themselves into information-driven businesses. Many organizations have earned value from these investments. But many have also, in the process of developing an information infrastructure, created managerial blinders that hide opportunities, and that undermine their efforts to achieve superior performance.

What is superior performance? The heart of it, for most companies, is to earn the best possible return for shareholders. Executives guide their organizations to achieve such returns using disciplined planning and performance evaluation processes, supported by information that clearly describes the quality and sources of organizational performance.

However, few companies have extended their visions of superior performance to explicitly require that their organizations continuously capture their full potential. So, while they have designed systems and processes to ensure that they meet economic targets, few have developed a good answer to the question - "Where are our best opportunities to do better?"

Line managers, searching for ways to achieve their assigned performance objectives, discover that they cannot look to their systems for answers. While these systems explain performance, and make it clear where performance falls short of target, they do little or nothing to help line managers decide what to do next; they do not demonstrate a manager’s best sources of performance improvement leverage.

As a result, managers commonly adopt the "do more, and do it more efficiently" approach to performance management, pushing ever harder on their current business practices, and working to address known performance shortfalls. But in the process they often miss sources of profit potential that offer the opportunity to improve earnings substantially.

Some executives have begun to address these deficiencies. They have worked to build a good understanding of their full potential, and have learned the extent to which the content and structure of their companies’ measurement systems have created managerial blinders. They have concluded that, while justifiably confident in their understanding of performance, their organizations had left substantial profit improvement opportunities "hiding in plain sight."

For example, the executives of a rapidly growing restaurant chain believed that operational efficiency and inventory control were the keys to strong performance. Accordingly, they designed the company’s information systems and incentive compensation program to focus restaurant managers on these issues.

In building a profile of performance improvement opportunities, executives were reminded that one of a restaurant’s best sources of performance leverage is the sale of high value add-on items, such as drinks, appetizers, and desserts. While company executives had understood the importance of these sales, managerial practices were guided by systems and processes that focused attention elsewhere. As a result, several of the company’s "best" managers, while very efficient at assigned targets, such as turning tables, consistently failed to sell appreciable volumes of the add-on items, which could easily have doubled the value of many customer transactions. Executives concluded that, by strengthening cross-selling disciplines, they could improve the corporate bottom line by at least 5% - 7%.

In a similar vein, executives at a large bank, upon profiling branch performance improvement opportunities, confronted an apparent paradox. The branch with the largest opportunity was one they considered to be a "platinum performer." The branch had consistently ranked near the top of its region on all key incentive metrics, and branch officers had routinely earned the maximum possible incentive compensation.

Regional executives concluded that the reason for this surprising conclusion was that, while the branch ranking system was based on performance versus goals, the bank’s process for setting targets did not include a careful assessment of market potential. Goals for this branch, which was in an affluent, growing market, had been set too low. And branch officers had been paid very well for performance that was, when compared to branches with similar market situations, very weak.

As was the case with the restaurant company, the conclusion seemed obvious in retrospect. But the structure of the bank’s measurement and incentive compensation systems had diverted attention to other issues. Executives concluded that a failure to identify good opportunities had penalized the bank’s bottom line by about 10%.

Clearly, the challenge of developing a comprehensive profile of potential opportunities can appear to be daunting. Not only will new data and analysis be required, but executives must also be prepared to make substantive changes in how people, processes and systems work together to identify and capture the organization’s potential.

However, as illustrated by these cases, the opportunity for performance improvement is compelling and makes tackling these challenges worthwhile. By including potential opportunities as an explicit component of organizational objectives, and then acting on a good understanding of their opportunities, companies can significantly improve economic performance. They can also shake free the shackles of the "do more, and do it more efficiently" management style. In its place they can build the better-focused and more creative decision-making skills that lead to more cohesive organizational action and long-term success.

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