What is your company's key theory of success?
Organizational leaders regularly face new challenges and ever-increasing expectations for performance. At the same time, they are at a loss to select the right management ideas, tools, and techniques that will truly help them solve organizational problems and improve overall performance. In a desperate attempt to find solutions to intractable problems, managers may be tempted by new techniques and approaches that promise simple answers to complex questions. But the latest management fad only brings temporary relief: the same problems resurface, just in a different part of the organization.
Managers often lack the time, perspective, or methodologies to learn from successes and failures when they invest their efforts in problem solving. As a result, they encounter a recurring pattern of temporary relief, followed by a return of familiar problems. When people do try to learn from the past, they find they are ill-equipped to do so. Even when solutions produce good long-term results, managers often fail to understand why these approaches were successful.
As the quality of relationships improves, the quality of thinking improves, which leads to higher quality actions and results. Achieving high-quality results positively influences the quality of relationships, creating a self-reinforcing mechanism for success.
Limitations of Traditional Approaches
In trying to determine why an initiative succeeded, most executives talk about the individual factors that were critical to its success. This tendency to focus on factors in isolation, rather than viewing them as interconnected sets, is part of “traditional business thinking.” Indeed, many companies formulate their idea of success in the form of lists of important attributes or competencies without identifying the key connections between these elements.
For example, companies often begin the process of organizational improvement by listing critical success factors. They select a goal (e.g., industry leadership) and then identify the factors that management believes are important to achieving that goal (e.g., products and services in demand, ability to deliver). They then prioritize the tasks and assign teams to address the highest-priority tasks. This approach creates several problems. First, people often look at the factors in isolation, pursuing a divide-and-conquer strategy. The danger is that they may fail to consider important relationships between different factors. For example, the marketing department may fail to alert the customer service department in time to the potential impact of a major marketing campaign.
Another problem is that if management reduces the initial investment after a key success factor (KSF) has reached the desired level, the success may be temporary. Often, after reaching the desired level in KSF1, we declare victory and transfer resources to KSF2. As we develop KSF2 and then KSF3, KSF1 begins to deteriorate due to lack of continuous investment. So, after declaring victory over KSF2 and KSF3, we transfer some resources back to KSF1.
Until managers develop a theory of how these factors interrelate to create sustained success (or failure), they will not be able to integrate the data from their experiences in a way that will guide future actions. Unfortunately, most approaches to solving sustained problems in organizations focus on applying others’ theories and methods to the organization rather than developing specific theories about the organization’s own operations. Systems thinking and organizational learning can offer companies the tools and methods to begin developing such theories and to put them into practice.
Why Theory Is Important
Unfortunately, few people in the corporate world understand the importance and power of theory. Many managers associate theory with universities and research institutes, which they believe are too isolated from the real world. As a result, managers often dismiss theory as too academic and irrelevant to the pragmatic world of business. However, the American Heritage Dictionary defines theory as “systematically organized knowledge applicable to a relatively wide range of circumstances, especially a system of propositions, accepted principles, and rules of procedure designed to analyze, predict, or otherwise explain the nature or behavior of some particular set of phenomena.” This definition makes it clear that there is nothing strictly academic about the concept of theory.
Based on this definition of theory, building a long-lasting and successful organization requires that managers develop systematically organized knowledge, which is the system of assumptions, accepted principles, and procedural rules that they use to make sense of their past experiences and predict the future. In this sense, theory building is about developing a better understanding of the organization and improving our ability to predict the future. In other words, theory building is about running a successful business.
The word “prediction” must be used with caution because it is often used as a synonym for “forecast.” Forecasting attempts to provide a specific kind of prediction; however, it usually focuses on the calculation of specific numerical data that we expect to occur at a specific point in the future. The primary criterion for the success of forecasts is the accuracy of the result, not the accuracy of the assumptions or methods used to obtain it.
But when we talk about predictions based on a theory, we are more interested in the accuracy of the underlying assumptions and less in the numerical precision of the predicted outcome. Why? Because in a complex world that is inherently unpredictable (a central tenet of the emerging science of chaos), only understanding the relationships can help us make the course corrections needed to cope with rapid and constant change. So all good theories help us navigate, enhancing our ability to predict the future.
Building a Theory: Moving from Factors to a Cycle
So, responsible leaders must ask themselves, “What are some good theories that will serve as practical guidance for the future success of the organization?” The more clearly you can articulate a theory about what drives success, the more intelligently you can invest in the factors that are critical to that success. From a systems thinking perspective, having a core theory of success means moving beyond identifying individual success factors to seeing the connections that create self-reinforcing mechanisms of success in the organization.
Once we have compiled a list of key success factors (KSFs), we can go further and identify how each KSF is linked to a positive feedback loop (or cycle). The key success loop (KSL) shows that by increasing the number of products and services that are in demand, we increase sales revenues and increase the amount of financial resources available for investment. With more money to invest, we can attract more technical talent and produce even more in-demand products and services (the R-loop).
The shift in theorizing from factors to cycles is important for several reasons. First, it forces us to think through the logical chain of cause-and-effect relationships that make the key success factors (CSFs) self-sustaining. Second, it shifts the focus from the factor itself to the broader set of relationships in which it is embedded. Third, by mapping each CSF as a CSF cycle, we are more likely to see the relationships between all the CSFs. This approach requires a shift in our worldview: instead of viewing factors as the lowest unit of analysis, we begin to recognize cycles as the fundamental building blocks of organizational systems.
Theory as a guide to action
Having a clearly defined theory of success allows an organization to continually test the impact of planned actions and evaluate whether those actions are having a positive or negative impact on the overall success of the company. So what might a theory of success look like in a learning organization?
One such basic theory of success is based on the premise that as the quality of relationships between people working together improves—high team spirit, mutual respect, and trust—the quality of thinking improves (more aspects of a problem are considered and more different points of view are shared). As the quality of thinking improves, the quality of action also improves (better planning, greater coordination, and greater commitment). In turn, the quality of results improves. Achieving high-quality results in a team positively influences the quality of relationships, thus creating a virtuous cycle of ever-higher results.
The most important thing about a system theory of this kind is that success depends not on the individual variables that make up the cycle, but on the cycle itself. All variables are important for the theory to work properly, because if one of them is not functioning, there is no forced process. If we believe that this cycle describes a relevant theory of success for our organization, we pay attention to how all the variables work and how each one affects the others in the cycle.
As an example, we can use this basic theory of success to trace the effects of a common phenomenon in corporations: top-down organizational efforts to achieve quick, short-term results. When results fall short of expectations, management often “helps” the performers by making efforts to immediately improve financial performance. The “accelerator” (say, downsizing) works and helps to achieve the results we want (improves the bottom line). But these same actions can also act as “brakes,” or have unintended consequences that counteract any useful actions. These actions destroy the quality of relationships, breeding mistrust and lowering morale, and ultimately lower the quality of the results. The end result can be a lot of wasted energy, without any real, global improvement.
Without an underlying theory, we can simply focus on the “accelerator aspect” and declare victory when results improve in the short term. We won’t necessarily attribute the long-term negative effects of the “slowdown” to the initial intervention. When results deteriorate again, the pressure to improve results will increase. In response, we may repeat the same actions that we thought worked so well last time. With a theory, we can see how top-down efforts can have a negative impact and take additional measures to offset that effect.
To illustrate how this general dynamic of accelerators and inhibitors can play out in a specific situation, consider an example. Curtis Nelson, president and CEO of Carlson Hospitality Worldwide, wrote on his company’s blog: “Take care of your employees, inspire them, allow them to reach their full potential and express their individuality, and they will achieve higher levels of job satisfaction. This, in turn, inspires greater commitment, which ultimately leads to greater customer satisfaction.”
Although Nelson did not draw a cycle in his article, he did formulate his basic theory of success for the hotel and cruise industry. The diagram shows that investing in people’s potential increases job satisfaction, which increases commitment, which leads to higher customer satisfaction and higher revenue. Higher revenue means higher profits, which in turn leads to higher investment in people.
Now suppose that something unexpected causes profits to decline—for example, rising airfares lead to a reduction in business travel. Senior management might respond by calling for cost-cutting to improve the profit picture. In the short term, profits are likely to rise—the desired outcome. However, an unintended consequence of taking such action might be that the company significantly reduces its investment in its people, leading to lower job satisfaction. In the long term, lower job satisfaction will lead to lower profits because employees will become less committed and loyal, leading to lower customer satisfaction. Lower profits may then trigger another wave of cost-cutting, repeating the “accelerators and brakers” dynamic. Thus, a one-time external shock can trigger an internal reaction that lasts for a long time.
Again, by formulating a core theory of success, we are more likely to pay attention to both the short-term and long-term consequences of our actions. In particular, our theory can protect us from inadvertently disrupting the very cycle on which our success depends.
Of course, in a real company, the underlying theory of success will involve not one but many cycles. The different cycles will be interconnected in many ways, and their dynamic behavior will not always be intuitive. Building and understanding such theories requires more than a one-time investment in creating a quick overview map (as in this article); it requires a shift in thinking that values theory building as a vital, ongoing activity for the organization.
Managers as researchers and theory makers
But to survive and thrive in the emerging economic order, organizations must focus on producing long-term, sustainable results. Managers at every level need a broader vision—a theory of how their organization can create and sustain success. Theory building can no longer be seen as an activity separate from management practice; it must become an integral part of managers’ work. Managers must take on new roles as researchers and theory creators, which will require investing in new skills. Just as we depend on accountants and financial statements to help us manage our companies today, there may come a time when we depend on theorists, organizational maps, and models to navigate the turbulent waters of tomorrow’s business environment.
Integration is often thought of as simply establishing a correspondence between the data tables of two systems (supplier and client) and creating a channel for transmitting information.
But in reality, data flows in IT systems accompany real business activities. And integration becomes a simple flow from one system to another, often intermittent, detached from reality.
Today, August 19, at a free webinar we will touch upon individual issues of digitalization of business reality in IT systems and modeling of data flows in them. If the topic is relevant for you – sign up using the link.
