Since the 1890s, there have been, arguably, only a few major management breakthroughs, along with several minor ones. What will be the next big advancement in management that can differentiate leading organizations from the also-rans that lag behind them? I suggest one possibility at the conclusion of this article.
The History of Management Breakthroughs
When talking about innovative methodologies that can provide an organization with a competitive edge, how does one distinguish between major and minor management breakthroughs? The answer is largely subjective, so my list is likely a blend of the two:
Frederick Winslow Taylor's Scientific Management: In the 1890s, Taylor - the luminary of industrial engineers - pioneered methods to organize work systematically. His techniques helped make Henry Ford a wealthy man. Ford applied Taylor's methods at his automobile company, dividing labor into specialized skill sets in a sequential production line and setting stopwatch measured time standards as target goals to monitor employee production rates. During the same period, Alexander Hamilton Church, an English accountant, designed a method of measuring cost accounting variances to measure the favorable and unfavorable cost impact of faster or slower production speeds compared to the expected standard cost.
Alfred P. Sloan's Customer Segmentation: Henry Ford's pursuit of a low unit cost for a single type of automobile (i.e., the Model T) was countered with an idea championed by Alfred P. Sloan, who became president of General Motors in 1923. Sloan advocated expanding product diversity by style, quality and performance. The idea was to provide increasingly more expensive features in car models as a staircase for higher-income consumers to climb - starting with the Chevrolet and ultimately peaking with the Cadillac. This idea revealed the power of branding for retaining customer loyalty.
Harvard Business School's Alfred D. Chandler Jr.'s Organizational Structure: In 1962, Professor Chandler's groundbreaking book, Strategy and Structure, concluded that one factor that could explain why some large companies fail while others succeed involved how those companies learn about their customers and how well they understand the boundaries of their competencies in order to focus their strengths.
Harvard Business School 's Michael E. Porter's Theories of Competitive Advantage: It is hard to believe that prior to Porter's 1980 book, Competitive Strategy: Techniques for Analyzing Industries and Competitors, very few organizations had a formal strategic planning department. Today, they are commonplace. Conglomerates that encompass many diverse businesses were becoming numerous in the 1960s when Porter introduced his "four forces" approach for individual businesses to assess their strengths and opportunities. His basic message was that strategy is about making tough choices.
Total Quality Management from W. Edwards Deming, Joseph Juran and Phil Crosby: The total quality management (TQM) and continuous quality improvement (CQI) programs of the 1970s were a response to Japanese manufacturers grabbing market share as they went from being viewed as makers of cheap products to makers of high-quality ones. During the same time period, Shigeo Shingo and Taiichi Ohno of Toyota Motors introduced "pull-based" just in time (JIT) production systems that were counter to the traditional, large batch-and-queue production management economic lot size thinking. JIT provided faster throughput with less inventory. In the 1990s, Mikel Harry of Motorola introduced a TQM refinement called Six Sigma, which has merged recently with lean management techniques.
Michael Hammer's Business Process Reengineering: In the early 1990s, Michael Hammer recognized the importance of focusing on and satisfying customers. He observed that stovepiped, self-serving organizational departments could not serve customers efficiently and that the best way to improve service - particularly given the rapid adoption of computers - was not to just modestly improve business processes, but rather to radically reengineer processes through redesign, as if starting with a clean sheet of paper.
Peppers and Rogers' Customer Relationship Management: In 1994, Martha Rogers and Don Peppers co-authored the book Customer Relationship Management - One-to-One Marketing, which foreshadowed the eventual death of mass selling and faith-based, spray-and-pray marketing. It described how computers could track the characteristics and preferences of individual customers.
Peter Senghe and Organizational Learning: In the 1980s, professor Peter Senghe of MIT recognized that many industries were becoming increasingly dependent on educated knowledge workers. His subsequent research concluded that going forward, the rate of organizational learning - not the amount but the rate - would be a differentiator between successful and unsuccessful organizations.
Kaplan and Norton's Strategy Maps and Balanced Scorecard: In 1996, professors Robert S. Kaplan and David Norton published the first of four related books, The Balanced Scorecard. They recognized that what caused executives to fail, and consequently lose their jobs, was not poor strategy formulation, but rather the inability to successfully implement strategy. They advocated for executives to communicate their strategy to employees using visual maps and to shift performance measures from month-end financial results to nonfinancial operational measures that align work and priorities with the strategy.
Will Predictive Analytics Be the Next Breakthrough?
Performance management - defined as the integration of multiple managerial, customer, operational and financial methodologies - embraces all of the above advances. Performance management integrates methodologies and their supporting systems in order to produce a synergy that's not present when they are implemented in isolation.
Professor Tom Davenport of Babson College authored a January 2006 Harvard Business Review article proposing that the next differentiator for competitive advantage will be predictive analytics. Davenport coined the phrase "competing on analytics." His premise is that change at all levels has accelerated so much that reacting after-the-fact is both too late and too risky. He asserts that organizations must anticipate change and be proactive -and the primary way is through robust quantitative analysis. This is now feasible thanks to massive amounts of economically stored business intelligence combined with powerful statistical software that can surface previously undetected patterns and produce reliable forecasts.
In a recent study sponsored by SAS and Intel, Davenport and two colleagues researched 32 organizations that were leveraging analytical activity. They found that the highest performers were those that: 1) captured and managed large volumes of transactional data; 2) combined it with other public domain data; and 3) had a culture of fact-based decision-making. These organizations have a "test and learn" approach to business changes. As an example, Capital One, the credit card company, conducts more than 30,000 experiments per year to identify desirable customers and price credit offers.
As another example, customers can be finely micro-segmented using multiple factors - such as age, income level, residence location and purchase history - and recognizable patterns can predict which customers are likely to leave for the competition, providing an opportunity for companies to attend to such customers with a deal, offer or higher service level in an effort to retain them. And as an additional example, minute shifts in customer demand for products or services can be monitored in real time, and projections of changes in actions or spending can be used to induce customer behavior.
Davenport 's study validated that predictive analytics can produce substantial benefits. Those companies using predictive analytics reported double the rate of innovation, competitive advantage and agility compared to those respondents not leveraging predictive analytics.
In conclusion, performance management is not just about better managing performance, but improving performance. Integrating systems and information is a prerequisite, but applying predictive analytics is quite possibly the critical element necessary to achieve the full vision of performance management.