Strategies built on assumptions and not facts
17 June 2016
- Managers unable to justify strategy with data from their own company
- Study finds a happy workforce does not always mean bigger profits
- Instead highest growth stores had the least satisfied workers
- Core assumptions need to be relevant to own organisation
Many managers do not know the real reasons why their business is failing or succeeding, according to new research.
Rhian Silvestro, Associate Professor of Operations Management, has found some managers do not actually apply ideas on financial performance to their own organisation, instead operating on the assumption their strategies are correct.
“Some of the core assumptions about what drives financial performance have become so widely accepted that they are often assumed as fact,” said Dr Silvestro. “However, managers are frequently unable to justify the assumptions underlying their competitive strategies with data from their own organisations.
“The danger is that unless the core assumptions are sound and relevant to your own circumstances, you run the risk of developing wrong-headed strategies that will lead you astray.”
In the paper Understanding What Drives Your Business Performance, published this in MIT Sloan Management Review, Dr Silvestro gives an example of such thinking: the assumption that well rewarded and engaged employees deliver a higher level of service and consequently generate better customer loyalty, which in turn results in an enhanced financial performance.
Dr Silvestro researched two well-known British retail organisations to see how management assumptions around the use of strategy maps and models such as the service profit chain – the idea customer satisfaction mirrors employee satisfaction, or the satisfaction mirror effect – showed a lack of actual organisational application.
The superstore study was based on a sample of 15 stores spanning 12 months; the home improvement retailer provided data for 75 stores over 10 months.
Both firms were organisationally similar in that they both had strong brand identities and were geared to selling a wide variety of products to the mass market through large numbers of stores, according to Dr Silvestro.
Similarly, the store layout was made central and replicated in all of them, while staff cost was a relatively small percentage of total cost.
“With the superstore, I found some positive correlations to align with the service profit chain: notably productivity linking with customer satisfaction and ultimately profit,” added Dr Silvestro.
“However, there were also negative correlations between employee satisfaction and sales growth, and between employee loyalty and both profit and productivity.
“While the service profit chain posits that the most productive, profitable and highest growth stores are the ones where employees are likely to be most satisfied and loyal, in the superstore chain this was not the case; in fact, the most productive, profitable and highest growth stores were those where employees were least satisfied and least loyal.
“In the case of the home improvement retailer the data revealed negative correlations between labour productivity and employee satisfaction. What’s more this was also the case between store productivity and employee loyalty.
“There was no evidence of a link between customer loyalty and either profit or revenue growth.”
In both cases, management consulted for the research actually acknowledged these issues and were even able to attribute the reason behind the results: store size.
Bigger stores tended to be the most profitable, but at the same time stressful places to work.
Despite this both companies’ training programmes still, falsely as it turned out, operated under the assumption that satisfied loyal employees would have a positive effect on financial returns.
Instead of accepting untested hypotheses about performance linkages that may not apply to their organisations, Dr Silvestro believes managers should use a more rigorous analytic approach.
One such example Dr Silvestro gives is ‘topology mapping’ a well-established approach for depicting complex networks commonly used to represent the relationships in settings such as transportation and communications networks.
“Performance topology mapping can help managers take a fresh look at performance relationships in their organisations without being blinded by assumptions or business models that don’t apply to their own business reality,” said Dr Silvestro.
“Done properly, topology maps can reveal drivers of performance and pathways that may be unique to the way a business is set up, thereby allowing managers to take advantage of complexities and linkages to improve performance.”