The Role of Management Systems in Strategy
I have frequently been asked by Playing to Win aficionados for more clarity on the Management Systems, the last box of the five-box strategy choice cascade. So, I thought it would make sense to provide more detail and clarity on my thinking on this important box in what will be the 1st piece in my Playing to Win/Practitioner Insights series. (Links for the rest of the PTW/PI series can be found here.)
While many observers don’t actually see the choice of management systems as part of strategy itself but rather a lesser choice, I see management systems choice otherwise, as integral to the practice of high-quality strategy. It is positioned at the bottom of the cascade only because the logic starts from the upper left and flows to the lower right. However, the flow goes both ways so no box is really at the start or finish. Great management system choices help confirm that the logic also flows from management systems back up to winning aspiration.
In this way it is an important reality check on the distinctiveness of strategy. A company needs management systems that build and maintain the distinctive capabilities that underpin a unique how to win in the chosen where to play that meets its winning aspiration. If a strategy does not have specific management systems that serve the purpose of building and maintaining distinctive capabilities, then those capabilities either won’t get built in the first place or will deteriorate because they are not systematically maintained. Additionally, if the capabilities and management systems of an organization are entirely or nearly identical to those of competitors, its where-to-play and how-to-win choices will be replicated as soon as shown to be successful. Hence distinctiveness is a key attribute to management systems. Sameness in management systems is typically matched with sameness in capabilities which delivers competitive parity not competitive advantage.
That having been said, every company has numerous management systems. It has an order-entry system, a system for putting together its regulatory filings, a system for announcing new executive appointments, a capital appropriations system, etc. For that reason, simply creating a list of all of a company’s management systems is not a useful part of a strategy exercise. The key is to make and enumerate management systems choices that are disproportionate, novel and notable compared to competitors and linked to building distinctive capabilities for the company. However, since the key distinctive capabilities of a given company’s strategy vary widely across companies and their strategies over time, it is not possible or sensible to specify which are generically good management systems. The key to great management systems is their individual match with the distinctive capability.
The two pieces of useful guidance I can provide, therefore, on management systems, are a categorization framework and a range of examples of each. I have found that management systems that provide competitive advantage by building and maintaining distinctive capabilities fit into three categories: they drive disproportionate resource investment, they specify novel allocation of decision rights and/or obligations, or they mandate unusual measurement or tracking of information.
I provide a number of examples of each below.
Management Systems that Drive Disproportionate Resource Investment
The first category contains the management systems that drive the disproportionate resource investment that is required to build and maintain a distinctive capability, which is critical to winning.
Four Seasons Hotels & Resorts seeks to win with a kind of service that is unique and that needs to be carried out by experienced Four Seasons hotel staff (as opposed to hotel staff experienced at other hotels), but in an industry that experiences 60–70% annual turnover. To get this kind of experienced hotel staff, Four Seasons has a management system that drives disproportionately huge investment in recruiting/hiring. To be hired, a recruit needs to have three successful in-person interviews, the last of which is with the hotel manager. This would be an unthinkably large expenditure of resources for other hotels, but sensible and necessary for Four Seasons desired capability. This management system is rigorously enforced and adhered to. In addition, its career development system is disproportionately invested in because after recruiting the very best, Four Seasons wants and needs to keep them for a long career, which it does with turnover below 10%.
Progressive Insurance seeks to win, in part, by getting settlements to its customers so quickly that lawyers don’t get into the middle of the process because Progressive knows that on average when a lawyer is involved, it costs Progressive more and the customer gets less due to the high fees charged by the lawyer. In order to be in a financial position to pay claims quickly, Progressive has a management system for its investment portfolio that invests disproportionately in short-term liquidity at the cost of earning higher investment returns.
Southwest Airlines seeks to win by having an extremely efficient cost structure while providing outstanding customer service. A key aspect of its cost efficiency is a uniquely high level of flexibility in what employees can do in a specific situation. They are cross-trained and can surge to where they are needed, which makes for much more efficient staff utilization than experienced by its competitors. But this means that its management system for labor negotiations entails not negotiating hard on salary but rather investing in high salaries in order to gain — as a negotiating trade-off — the much more important — and unique — labor flexibility.
WestRock, the paper packaging giant, follows a differentiation strategy of being the premier partner and unrivaled provider of winning packaging solutions. That means, among other things, having a management system that compensates its salesforce disproportionately highly for selling differentiated packaging solutions, not just generic volume of packaging.
The Mabin School, a uniquely differentiated elementary school, illustrates disproportionate investment in a non-profit context. Its philosophy holds that it admits a family, not just the child. Hence, it invests heavily in family engagement in order to succeed with its unique approach to elementary education. That means having a system in place that guides teachers and administrators in making a disproportionate investment of time with parents during the admissions process, the entire educational process and the process of gaining placement into the next educational level.
Management Systems that Specify Novel Allocation of Decision Rights and/or Obligations
The second category contains the management systems that specify novel allocations of both decision rights and decision obligations that are required to build and maintain a distinctive capability that is critical to winning.
Four Seasons Hotels & Resorts, as mentioned above, differentiates on the basis of a consistently high level of service in an environment in which there are millions of touch-points per year between staff and guests. Because quick resolution of guest problems as they occur is a key to high-quality service, the company has a management system that pushes down the decision rights on fixing customer service problems directly to frontline workers. If staff members see a path to resolution that they think will work, they don’t have to check with a supervisor before taking action.
Progressive Insurance, as described above, differentiates itself, in part, by getting more cash to customers by cutting out the lawyer as ‘middle man.’ That entails having a management system that empowers mobile Progressive claims-people to make settlement decisions and cut checks for customers at accident sites rather than having to go through a time-consuming head-office claims processing ritual.
Procter & Gamble seeks to differentiate on the basis of technologically superior products backed by compelling brand building. To ensure this comes to fruition, P&G enforces a decision-making obligation on its managers to perform and win in a statistically-robust blind test for potential new products before they are approved for any launch decision. In addition, it enforces a decision-making obligation to perform similarly robust advertising copy testing before releasing it for public use. For both product blind tests and advertising copy testing, there is a clear and formal management system to be followed.
Procter & Gamble (Hair Care) sought, beginning in 2016, to reestablish unquestioned global leadership in the hair care category. A challenge for the category at the time was a bias toward making decisions entirely based on quantitative data. Since the category has many non-technical consumer needs (emotional/phycological) that are difficult to measure quantitatively, the Beauty Care President mandated a decision-making obligation to incorporate both quantitative and qualitative data and insights into every hair care strategy decision.
Management Systems that Mandate Non-Standard Measurement/Tracking of Information
The third category contains the management systems that mandate non-standard measurement and tracking of information.
Four Seasons Hotels & Resorts, as mentioned above, seeks to further its service differentiation by quickly and thoroughly resolving all guest service problems before the guest checks out of the property. In order to ensure this is the case, it mandates that every hotel in the chain thoroughly deploys its ‘glitch reporting & service recovery system.’ The system provides encouragement and reward for all staff members to report any guest service glitch that they observe — even if they were the cause of it. All such glitches are captured on the ‘glitch report,’ which is reviewed each morning by the hotel staff. The group then creates an individualized service recovery plan to make sure that all guests who experienced service glitches feel as good or better about Four Seasons service when they check out as when they checked in.
Progressive Insurance, in addition to winning on the basis of getting bigger settlements to customers faster, seeks to win on the basis of more effective underwriting based on a huge database that enables it to create tens of thousands of pricing categories based on many more risk variables than its competitors. To build and maintain that database, it has a management system that mandates the ongoing collection and processing of a volume and breadth of data that exceeds industry practices and standards.
WestRock, which as mentioned above, seeks to differentiate based on providing uniquely-valuable packaging solutions. In order to judge whether it is doing so, or not, WestRock mandates a management system for measuring whether it is helping customers do one or more of the four following value-adding things: lower their total costs, grow their sales, reduce their risk, and/or improve their sustainability.
Procter & Gamble, when CEO AG Lafley took the helm in 2000, switched its basis for determining incentive compensation from market total shareholder return (M-TSR) to operating TSR (O-TSR). M-TSR, which measures performance based primarily based on movements in the company’s stock price, is the standard measure used across public companies. But it has the effect of encouraging management teams to focus on short-term fluctuations in stock price and the drivers thereof rather than on the long-term performance of the company, which O-TSR more closely measures by focusing on sales growth, profitability and cash conversion.
Management Systems may be the fifth and final box on the strategy choice cascade but not because it is unimportant. It is positioned there because that is where it logically belongs. But it is as important to competitive advantage as any other box. The key is that the management systems help the cascade flow back consistently back to the top.
There are no generically superior management systems. Strategically strong management systems are those that help build and maintain the distinctive capabilities that underpin company advantage. Distinctive management systems that are disproportionate, novel and non-standard in the areas of resource allocation, decision rights and measurement are the key to making sure that strategies are real and powerful.