MANAGEMENT SYSTEMS MYOPIA

Author’s Note to Readers for the April 2023 issue:

This newsletter focuses upon various aspects of the development of “Sustainably Successful Organizations.”? The April, 2023 issue examines the notion of?“Management Systems Myopia,” a term I have coined to indicate the dysfunctional phenomenon whereby there is a relatively wide spread failure to recognize the critical importance of management systems to the sustainable success of business enterprises. It will also examine the example of Starbucks and its extraordinary success to illustrate the that that Management Systems Myopia prevents many companies from understanding the true nature?of the competition that they face.

Abstract

“Management Systems Myopia,” a term I have coined to indicate the dysfunctional phenomenon whereby there is a relatively wide spread failure to recognize the critical importance of management systems to the sustainable success of business enterprises. We examine the example of Starbucks and its extraordinary success to illustrate the that that Management Systems Myopia prevents many companies from understanding the true nature?of the competition that they face.

INTRODUCTION

The March issue of this newsletter examined the premise that the secret weapon of many leading companies has been their “management systems.” As I explained in that issue, throughout history the battle for supremacy in industry and after industry and firm after firm has been won by the organizational with the superior management system. Examples include:

·???????General Motors defeated Ford

·???????Walmart defeated Kmart and Sears

·???????Starbucks defeated All Others:

For example, beginning in 1994 when Starbucks was a fledgling company, there was a battle to control the market for a Starbucks type cafe. By the year 2000 that battle was over strategically, and it has been a mop up operation since that time.

THE KEY INSIGHT

Similar battles have been fought by many companies over the past several decades. The outcome is virtually always the same--the company with the superior management system always wins!

“Management Systems Myopia”

Unfortunately, this insight is not generally recognized because of a construct the I call “Management Systems Myopia.” The term “Management Systems Myopia” refers to the relatively wide spread dysfunctional phenomenon whereby there is a failure to recognize the critical importance of management systems to the sustainable success of business enterprises. Concomitantly, there is a similar failure to recognize that the lack of development of management systems leads inevitably to the distress and or failure of business enterprises. There are many examples of organizational distress and/or failure of business enterprises, including once great enterprises. For example, many great enterprises such as General Moros, General Electric, Kodak, Xerox, ATT, and International Harvester have experienced great distress and falls from Grace. Others such as Sears, K-mart, and Hertz have gone bankrupt.

A KEY EXAMPLE: STARBUCKS versus All Others

To flush out this thesis, we will examine the battle of Starbucks versus All Others. This a particularly interesting compassion for several reason. First,?of course, because SBUX has become the unquestioned dominant leader in its space.?SBUX has grown from a relatively small company to a giant business with more than $20 billion in annual revenue. Next, Starbucks and its competitors are producing a commodity product. This is particularly significant because there is no proprietary product or technology that give any competitor a sustainable advantage in the coffee-café space.?This unique aspect of Starbucks success was captured in the succinct and ingenious title of the book by Howard Behar, who was the head of Retail at Starbucks for during its key developmental period: “It not about the coffee: Leadership Principles from a Life at Starbucks”![1]

Other highly successful companies from Amazon, Alphabet, Amgen, and Apple?(to cite just those beginning with A’s) are not really relevant?examples because their products have proprietary advantages. It is one thing to have a proprietary product advantage such as a patent (Amgen, Apple) or unique technology (i.e., Alphabet/Google) and quite another to be in a commodity business where there is no difference in the product per se.?

Another reason for the selection of Starbucks is that I am very familiar with the development of Starbucks during its early years because I was a “participant observer” in key aspect of that development.[2] Specifically, I was engaged as an organizational development consultant from 1994 to 1997 to apply the framework for management system described in my core book, Growing Pains.[3] Specifically, Orin Smith (then Starbucks CFO) contacted me and stated: “We have a Tiger by the tail and we have only one shot to get this right. We have ready your book.[4] Come up to ‘Seattle and spend a few days with us and if the chemistry is right, we will engage you to help us apply your framework (for building sustainably successful organizations).[5]”

The framework that Orin Smith refers to above is called the Pyramid of Organizational Development model that is described in our book Growing Pains, and was previously described in the March, 2023 article referenced at the outset of the current article.

HOW STARBUCKS BECAME THE LEADER IN ITS SPACE--ITS NOT THE COFFEE!

Now I can explain the rationale underling Howard Behar’s insightful observation that coffee per se was not the reason for Starbuck’s extraordinary success. Specifically, in the sections below,?I will first briefly review the Pyramid of Organizational Development model for the reader’s convenience, and then show how this framework was applied at Starbucks to create an integrated management system.

Summary of the Pyramid Framework

An initial premise or hypothesis underlying the Pyramid of Organizational Development (“The Pyramid”) framework cited by Orin smith above is that organizations must perform certain tasks to be successful at each stage of their growth. The six key tasks, all of which have been supported by previous research, are:[6]

·???????Identification and definition of a viable market segment

·???????Development of products or services for the chosen

·???????Acquisition and development of resources required to operate the firm

·???????Development of day-to-day operational systems

·???????Development of the management systems necessary for the long-term functioning of the organization

·???????Development of the organizational culture that management feels necessary to guide the firm and a related culture management system.

These six key tasks are each “components” of The Pyramid framework and are defined below:

·???????Markets: The extent to which the company has identified its market (i.e., customers it wants to serve) and has developed a market niche (i.e., a place in the market where the company has a sustainable competitive advantage).

·???????Products/ Services: The extent to which the company’s products and/or services meet the needs of its chosen customer base (i.e., market).

·???????Resources: The extent to which the organization has developed effective procedures for acquiring and managing the resources needed to support its growth.

·???????Operational Systems: The extent to which the organization has developed the systems needed to support its daily operations (e.g., accounting, sales, personnel, etc.).

·???????Management Systems: The extent to which the organization has developed the systems (planning, performance management, organizational structure, and leadership development) needed to support its long-term growth.

·???????Culture: The extent to which the organization has systems in place to explicitly manage its culture

The six key components can also be viewed as “strategic building blocks” of an enterprise; that is, they comprise a set of “tasks” to build?an organization.

The Framework Model as a Whole

Taken together as a whole, these six “key strategic building blocks” created in stepwise fashion comprise the “structure” of a sustainably successful organization. ?If any one or more of the “key strategic building blocks” or tasks a is not developed effectively, the entire organization will be weakened and be subject to risk of failure. In addition, even if all of the individual strategic building blocks are developed, but the set as a whole is not integrated effectively, the organization will be weakened and be subject to risk of failure.

This set of six “key strategic building blocks” (markets, products, resources, operational systems, management systems, and culture) is typically shown as a Pyramid shape, with each of these building blocks comprising a level of the Pyramid.?The Pyramid model is discussed in detail in Flamholtz, 1995 and Flamholtz and Randle 2016.[7]

It should also be noted that the Pyramid shape is not intended not imply that the key tasks are carried out independently. All six tasks are vital for the health of the firm, and must be built simultaneously. However, the relative emphasis on each task or level of the Pyramid will vary according to the organization’s stage of growth. [8]?

It should also be noted that the top four levels of the Pyramid (resources, operational systems, management systems, and culture) form the “infrastructure” of the firm. Generally, however, although competition between firms takes place at all levels, long-term sustainable advantage is primarily found at the top two levels (management systems and culture), because they are the least susceptible to are less susceptible to imitation and, accordingly, provide the basis for long term sustainable competitive advantage.[9]

STARBUCKS THROUGH THE LENS OF “THE?PYRAMID”

Starbucks did not explicitly use the Pyramid of Organizational Development initially in designing an organization to support the new vision. It was however explicitly used later (beginning in 1994), when I was asked to facilitate strategic planning for Starbucks and introduced this construct there.?Nevertheless, we can use the Pyramid as a lens to examine what Starbucks did and did not do well in building the company,?just as I used it in early 1994 when I conducted a “familiarization/ organizational assessment” at the start of my organizational development work with Starbucks.?The highlights of the “familiarization/ organizational assessment” is summarized below.

Markets and Products

The foundation of Starbucks was its vision of the market and product. Schultz had a vision for the development of the business, and he set about to grow a company that would fulfill it.??Schultz envisioned a large, national company.?He knew that although the core of his company’s product was coffee, the real “product” was the store itself.?It was what Starbucks conceptualized as “a third place to be” (or, more simply, “the third place.”) As stated in the 1995 Annual Report of Starbucks Corporation:

???????????“Ever since diners and pubs and plazas and town halls we’ve needed places to gather outside of home, outside of work, rather [a third place to go.] Coffee... community... camaraderie... connection... It seems we all just need the warmth.”2

Schultz also understood that service was an integral part of the “deliver” of his product, and that the person Starbucks calls a “barista” (the person who tends the coffee bar) was critical.

Resources and Operational Systems

Once the market and product for Starbucks was identified and designed, the next steps in building the organization involved the acquisition of resources and the development of operational systems.?As we have already discussed, Schultz spent considerable time identifying investors.?In this regard, it was fair to state that, “No bucks, No Starbucks!”

The financial resources were used to hire people capable of building Starbucks as a national company.?In contrast to many entrepreneurships, where there is a relatively strong senior team but not strong people at the next level, one of the reasons for Starbucks success and its ability to manage its rapid growth was a relatively strong team of functional specialists in areas such as real estate and retail operations.?This, in turn, reduced the severity of the usual Growing Pains experienced by virtually all rapidly growing companies.?

Management Systems and Culture

The final building blocks of successful organizations are the management systems and culture.?Corporate culture was something that was very important to Schultz.?Unlike many other companies at a comparable stage of development, there was an explicit statement of Starbucks Culture?called its “Guiding Principles.?However, the one area of the Pyramid that was significantly under-developed was Starbucks’ management systems.?

Until 1994, there was planning and strategy but not a formal strategic planning process.?There was training for customer service personnel but no management development.?In addition, there was an incentive system for people but no a well-developed “performance management system.”

Insert more here

· Starbucks demonstrated strength in five of the six key building blocks that comprise the Pyramid (all except “Management Systems).”?

The management system’s actual involves building core systems comprising the?“management infrastructure” of an enterprise. This includes the:

·?Planning system

·?Organizational structure

·?Management Development system

·?Performance management system, and

·?Culture management system.

These are typically underdeveloped and neglected in building rapidly growing enterprises. In fact, entrepreneurs can have an explicit bias against developing them, which is a serious mistake.

One of the key lessons of Starbucks concerns the lack of a well-developed concept of its business’ foundation and its management infrastructure, the only neglected strategic building block at the firm, and how that was corrected.

The Mindset Issue. Their lack of development of “management infrastructure” at Starbucks was a result of the “mindset”?of Starbucks leadership at that time. That mindset needed to be changed to avoid Starbucks?becoming derailed and failing to develop into a sustainably successful enterprise. It was a prerequisite for taking Starbucks to the next level.

The core senior leadership team at Starbucks at that time (as discussed in the January issue of this newsletter ) was comprised of Orin Smith, then CFO, Howard Behar (then head of Retail Operations) and Howard Schultz (then CEO).

During my initial visit to Starbucks in February 1994, Orin and Howard Behar told me that my greatest challenge in applying me framework and methodologies for organizational development at Starbucks would be Howard Schultz’s concern that what I then referred to as professionalization of managements would make the company “bureaucratic.” This was not the first time I had encountered this issue.?Fortunately,?Howard Schultz had an open mind and was prepared to experiment with this process and take it one step at time.

My initial assignment included coaching Smith, Behar and Schultz and seeing if I could help them “get on the same page” with certain issue about the development of Starbucks including issue of building the management infrastructure. So,?each time I visited which was?actually becoming quite?frequent I ask Howard Schultz where was on this issue. By late Spring, his answer was: “I get it. It’s offense and defense.” That was a very savvy way to put it. Stated differently,?entrepreneurship is “offense,” and the management infrastructure is “defense.” As any good coach knows,?the optimal condition for becoming a champion is a combination of offense and defense!

Taking Starbucks to the Next Level

In May of 1994,?we began an organizational development program designed to remedy these deficiencies and prepare Starbucks for future growth. The initial step was a one day “visioning” session in May of 1994.

The Bottom Line: The key difference Between SBUX and all others in its Space

What Was THE key difference Between SBUX and all others in its Space? In brief,?it was that SBUX did everything else that its competitors did but it also focused on the development of it management systems!

?Starbucks focused on the development of all of its systems, including its management systems.?

It might seem a stretch to assert that Starbucks became the leader in its space through management systems and not coffee! However, as Howard Behar, formerly?SVP of Retail Operations of SBUX, clearly asserts by the title of his book (“It’s not the coffee”!),[10] the real secret of Starbucks’ success was not the coffee but its management systems!

Beginning in 1994 when Starbucks was a fledgling company, there was a battle to control the market for a Starbucks type cafe. By the year 2000 that battle was over strategically, and it has been a mop up operation since that time. It was over not because Starbucks had discovered or invented a new type of coffee bean; but because Starbucks had fully developed a comprehensive management system.

The Competitive Value of Management Systems as a Stealth Weapon

The beauty of what Starbucks had done was that it not only had fully developed a comprehensive management; it also now had what amounted to a Stealth Weapon! Although competitors such as coffee Bean and Tea Leaf and Caribou Coffee could “see” products, locations and store merchandizing, management systems are invisible! Accordingly, they cannot be copied.

In addition, competitors might not really understand or even?believed what they are hearing about the real secret to Starbucks success. For example, in the late 1970s a few years after I had completed my work with Starbucks, I was invited to a meeting with a competitor of Starbucks, I was ”free and clear” and potentially able to work with them because there were no restrictions in my agreement with Starbucks.

I told them that in my opinion they were unlikely to catch Starbucks be they could become the number 2 player in that space if they did what Starbucks has?done to develop its management systems. They never followed up and they are still a laggard. It continues to be Starbucks and the several dwarfs! I doubt that they either understood or?believed what they were hearing about the real secret to Starbucks success.

SEARCHING FOR THE SECRET OF?SUSTAINABLE ORGANIZATIONAL SUCCESS?

For about a half century (actually since 1976), I have been engaged in research on organizational success and failure. This research has led to a new paradigm for building sustainably successful organizations. In addition, I have conduced application work on the paradigm working with hundreds of companies globally to apply the models developed in order to increase their probability of sustainable success. This has led to many of clients becoming or reinforcing their positions as leaders in their space. In addition,?data derived from our research and applications work has led to further insights about what it takes to be or become a sustainably successful organization.

One important finding that has grown out of our overall research and applications work with our clients is identification of the secret to the sustainability of success for many organizations. Specifically, that secret is a fully integrated ?management system consisting of a set of processes (articulated components or parts) of strategic planning, performance management, culture management and leadership development.?

Unfortunately, most companies do not have a fully integrated ?management system consisting of a set of articulated components (parts) of strategic planning, performance management, culture management and leadership development. Instead,?what they have is something that they refer to as their “management system,” which typically consists of various parts of management systems such as a planning process, some aspects of?a performance management process, and possibly some aspects of?culture management; but these processes are?neutered designed nor are they integrated into a UNIFIED WHOLE as a true management system!?

Further, the problems or underlying cause is that is that most if not all?providers of aspects of management systems neither think of management systems as an integrated whole not are capable of the design or integration of such an integrated system. One relevant analogy is a computer. A computer is an integrated systems of subsystems and components. In the early days of computers, some people purchased the components of computers as a kit and assembled them into the final device.?Today,?virtually everyone buys a computer as an integrated product-- not as a kit to be assembled! Unfortunately, the field of management is well behind the development of computers. The notion of a?“management system” is still in the stage of development as a virtual kit, rather than as an integrated system!

Development of Management Systems

Our firm’s name is “Management Systems,” an abbreviation of the legal name?“Management Systems Consulting Corporation.” Our business purpose or raison d’etre is to help companies develop their own managements system which are appropriate to their size and stage of growth. Accordingly, that is a custom designed “product.”

We believe we are the only management consulting or organizational development firm that has created and can apply a fully integrated?management system, where all individual processes or subsystems for planning, performance management, culture management and leadership development all link together seamlessly.

Based on our research and experience, we also believe that such a comprehensive management system is the ultimate secret weapon behind the success of several of our clients becoming leaders in their space.

Development of Management Systems

The fifth step is to develop the management systems, which is essential for the long-term viability of the firm (Flamholtz & Randle, 2016). Management systems include systems for planning, organization, performance management, leadership and management development and culture management. Each aspect or process of management systems is explained below, in turn.

Planning systems involve planning for the overall development of the organization and the development of scheduling and budgeting operations. It includes strategic planning, operational planning and contingency planning (Flamholtz, 1995). The mere existence of planning activities does not indicate that the firm has a planning system. A planning system ensures that planning activities are strategic and ongoing.

???????????Organizational Structure Design involves the ways in which people are organized and activities are coordinated. As with the planning activities, success depends not on the mere existence of a structure but on the match between the structure and business strategy (Flamholtz, 1995).

Performance management systems are the set of processes (budgeting, goal setting) and mechanisms (performance appraisal) that would encourage behavior that would help achieving organizational objectives (Flamholtz, 1995).

Leadership and management development involves the?process of planned development of the current and future managers.

???Culture management?is the process of defining the organization’s core values, beliefs and norms and managing the process of?motivating people to embrace and practicing them on a day-to-day basis. This notion will be examined further below.

ABOUT THE AUTHOR

About the Author_________________________

Eric Flamholtz is Professor Emeritus, Anderson School of Management, UCLA. He is the founder and President of Management Systems Consulting Corporation, 10940 Wilshire Boulevard, Suite 600, Los Angeles California, 90024. He has served on the faculties at Columbia University, The University of Michigan, and UCLA, and has lectured at Columbia University Executive Development Program, Cornell University School of Hotel Management, Cheung Kong Graduate School of Business (China), Fudan University (China), Shanghai Advanced Institute of Finance (China),??HEC (France), Almaty University (Kazakhstan), CETYS (Mexico), Orestano University (Sardinia),?Stockholm University (Sweden), and?Moscow School of Management Skolkovo (Russia).??His latest book (co-authored with Yvonne Randle, is The Crisis Leadership Playbook, Vandeplas Publishing. 2020.?

FURTHER INFORMATION

For further information about developing integrated management systems, see Eric G. Flamholtz and Yvonne Randle, Growing Pains: Building Sustainably Successful Organizations, Wiley 2016. See also: www.Mgtsystems.com. ?

REFERENCES

Flamholtz, E. (1995). Managing Organizational Transitions: Implications for Corporate and Human Resource Management. European Management Journal, 13(1), 39-51.

Flamholtz, E. (2000). Corporate Culture and the Bottom Line. European Management Journal, 19(3), 268–275.

Flamholtz, E. & Randle, Y. (1998). Changing the Game: Organizational Transformations of the First, Second, and Third Kinds. New York, New York: Oxford University Press.

Flamholtz, E. & Randle, Y. (2011). Corporate Culture: The Ultimate Strategic Asset. Stanford, California: Stanford University Press.

Flamholtz, E. & Randle, Y. (2016). Growing Pains: Building Sustainably Successful Organizations. Hoboken, New Jersey: John Wiley & Sons.

?REFERENCES

[1] Howard Behar with Janet Goldstein, It’s not About the Coffee: Leadership Principles from a Life at Starbucks, Portfolio, 2007.

[2] Howard Schultz and Dori Jones Yang, Pour Your Heart into it: How Starbucks Build a Company one Cup at a Time, Hyperion, 1994.

[3] Flamholtz, E. & Randle, Y. (2016). Growing Pains: Building Sustainably Successful Organizations, Fifth Edition. John Wiley & Sons.

[4] Flamholtz, E. & Randle, Y. (1990). Growing Pains, Second Edition, Jossey Bass Publishers

[5] Personal communication by telephone with Orin Smith, February 1994.

[6] See Eric Flamholtz and Yvonne Randle, Growing Pains: Building Sustainably Successful Organizations, Wiley 2016.

[7] See Eric G. Flamholtz (1995). Managing Organizational Transitions: Implications for Corporate and Human Resource Management. European Management Journal, 13 (1), 39-51.and Eric G. Flamholtz and Yvonne Randle, Growing Pains: Building Sustainably Successful organizations, Fifth Edition, Wiley, 2016

[8] See Eric G. Flamholtz (1995). Managing Organizational Transitions: Implications for Corporate and Human Resource Management. European Management Journal, 13 (1), 39-51

[9] See Eric G. Flamholtz (1995). Managing Organizational Transitions: Implications for Corporate and Human Resource Management. European Management Journal, 13 (1), 39-51