Companies – what are they for?

Jul 25 2007 by Robert Heller Print This Article

The most important question a company has to answer is: what is it for? So a quote I came across in Business Week recently jumped out at me. It came from Tom Davenport, a Babson College management professor:

"Process management is a good thing. But…it always has to be leavened a lot with a focus on innovation and [customer relationships]."

But haven't caring for the customer and sustaining both that relationship and the corporation's health and wealth with a flow of new products and processes always been at the forefront of a company's objectives?

Well, Davenport is concerned that this may not be the case with a large number of big companies – eight out of 10, according to a survey conducted by the American Society for Quality.

It found that 82% of the 100 biggest US firms have 'embraced' the Six Sigma management process.

Six Sigma derived from Total Quality Management (TQM). Both hold that every business process can be bettered: you can always manage or produce more efficiently if you understand the process at work and calibrate where it can be improved.

Business Week says: "The discipline was developed as a systematic way to improve quality, but the reason it caught fire was its effectiveness in cutting costs and improving profitability. That makes it a powerful tool – if those are a company's goals."

Going back to the eight major companies out of ten, those might well be the objectives, only for 'Shareholder Value' to take preference.

So cutting costs and improving profitability is used as the quickest and most direct route. The problem is that both are subject to the law of diminishing returns.

The Excellence Model of The European Foundation for Quality Management measures a company by the answers to nine questions:

  1. How well do all our leaders lead for us?
  2. How effectively do we manage our people?
  3. Where is the corporation going and how?
  4. Do we have what we need [in resources] and make best use of it?
  5. How do we do things and ensure customer focus before and after costs?
  6. Are our people satisfied and wanting us to do well?
  7. Are our customers satisfied and using us more?
  8. What is our effect on the outside world?
  9. Are we achieving as much as we could?

The website publishes The Thinking CEO internet business magazine, where there is an article by Derek Medhurst reporting the results obtained by award-winning companies which ranked high on the very demanding criteria applied by the EFQM.

The studies show conclusively that if performance is measured before and after a company wins its first quality award, there is an incredibly strong correlation with good results.

Over the entire post-implementation period the award winners showed superior outcomes over five years in five key performance areas where every company would want to excel:

  • Operating income was 18% higher than that of closely matched 'control companies'.
  • Total costs as a percentage of sales went down by 4.4% more.
  • Capital expenditure as a percentage of sales was up by 31%.
  • Asset growth was an incredible 44% greater than that of the controls.
  • An even bigger surprise, total sales growth was 77% greater.

The last of those lines should certainly come first. Revenue growth is the Achilles Heel of the Six Sigma brigade. Cutting the costs and raising the margins won't lift the top line. But neither will they raise the bottom line indefinitely.

Find out what old strengths you can turn into new. But that means answering that question: what is the company for? How and why has it gained success? What isn't working at the moment? Make a new start with new ideas.

more articles

About The Author

Robert Heller
Robert Heller

Robert Heller, who died aged 80 in August 2012, was Britain's most renowned and best-selling author on business management. Author of more than 50 books, he was the founding editor of Management Today and the Global Future Forum. About his latest title, The Fusion Manager, Sir John Harvey-Jones wrote: "The future lies with the thinking manager, and the thinking manager must read this book".