Business
The Remedy for ROA Flatlining
TThe average return on assets of U.S. companies has steadily fallen to almost one quarter of what it was in 1965, and the trend line approaches zero in 2020. ROA is a measure of how profitable a company is and how efficient management is at using its assets to generate income.
The decline in ROA has occurred despite steady improvements in labor productivity, which have occurred despite stagnant wages for the labor. As a result, businesses have been paying no more for an increasingly productive workforce, which pretty much eliminates wage control and productivity as factors in improving ROA.
So how can leaders reverse the trend?
John Hagel III and John Seely Brown address this issue in “Six Fundamental Shifts in the Way We Work” (HBR, August 17, 2010). The six shifts they mention are:
- Management practices and corporate institutions are fundamentally broken. Most have not yet figured out how to compete more successfully.
- The source of value creation is shifting from your stock of knowledge to the flow of knowledge, and most executives lag in understanding what this means for their companies.
- Management innovation is not enough: Institutional innovation, exemplified by China’s open production and design models and India’s open distribution models, are needed.
- A new kind of performance curve is emerging: The collaboration curve, which brings together participants in a carefully designed environment to make rapid leaps in performance improvement.
- Talent development is broader than training programs: People need to learn new…
Ready to Go Big
The results speak for themselves:
- Same store sales have grown for 24 years
- Market share has grown for 24 years
- Service speeds four times faster than competitors
- Order accuracy at least ten times better than the closest competitor
- Employee turnover half the industry average
Pal’s Sudden Service has accomplished all of this with what may be the ugliest store design in fast-food history—and it may be coming to a major thoroughfare near you. Pal’s was recently named one of Restaurant Business magazine’s “Future 50,” which are restaurant chains that have proven their concepts, are fast growing, and are getting ready to go big.
Pal’s key concept is a management system based on the Baldrige model. The restaurant chain won the Baldrige Award in 2001. It established the Business Excellence Institute to share its best practices with other organizations, and those lessons aren’t just for food service companies. More than 50 nonprofit organizations and government agencies have taken the training BEI offers, which once again demonstrates the universality of Baldrige principles. You can learn more about Pal’s BEI by clicking here.
Pal’s did its first Baldrige assessment in 1995. As I’ve seen with other organizations, the first assessment often produces profound insights, and the same was true for Pal’s. “From the founding of this company until 1995 we didn’t know what business we were in,” said Thom Crosby, the CEO at Pal’s. “We took it for granted that we were in a service industry. When…
29Jul2010 | Steve George | 0 comments | ContinuedThink Like Your Buyers
In the 1980s, four out of five American car buyers were loyal to the company that manufactured their brand. I remember growing up in a Chevy family and we had friends who were Ford people and we were as loyal to our car brand as we were to our religion.
In 2009, only one in five Americans was loyal to the same car brand.
In “The Manufacturer’s World Has Changed Forever” (IndustryWeek, July 14, 2010), Robert Bloom provides this contrast in customer loyalty to point out that the purchasing behavior of customers has changed, which is old news to any company that’s managed to keep its head above water the last two years, but his case study is interesting. Italy’s Fiat Auto reported a net loss of nearly two billion euros in 2002 and experts thought it would not survive. In 2008, it reported a trading profit of more than 1.1 billion euros—a three billion euro turnaround in six years.
How did Fiat Auto do it? Bloom lists several key actions:
- Terminated a failing venture with General Motors to gain full decision-making autonomy
- Eliminated an entire floor of executives to reduce costs and bureaucracy
- Cut Fiat’s product development time in half to get products to market quickly
- Reorganized and re-energized its dealer organization to assure sell-through
- Redesigned every Fiat product to create Customer Preference for the Fiat brand and products
According to Bloom, manufacturers can take several steps to compete in today’s global marketplace—and those…
14Jul2010 | Steve George | 0 comments | ContinuedSmall Wonder
Stoner expects every one of its employees to be a leader. Before starting their jobs, new employees complete two weeks of orientation that includes shadowing every job in the company—including that of the president. They can do all that in two weeks because Stoner only has 45 employees.
Located in Quarryville, Pennsylvania, Stoner makes specialized cleaners, lubricants, and coatings, primarily for car care. In 2003, it became the smallest company to win the Baldrige Award.
“We first learned about Baldrige in 1991 through the local Lancaster County program,” said Rob Ecklin, Jr., Stoner’s president. “We started to familiarize ourselves with the criteria then.” Stoner became the first company in the county to win the award in 1995. A few years later it submitted its first Baldrige application.
“We like to learn, to challenge ourselves and to be challenged,” said Ecklin. “Only a small percentage of companies truly want to improve. We’re one of them. We get excited about performance excellence. This is not a sexy business. It’s not high tech. Not flashy. But we’ve been able to get extraordinary results from ordinary people.”
Stoner gets these results by expecting every employee to be a leader. It involves all employees in setting the direction for the company. It uses teams to flatten the organization and push accountability to the front lines. It reinforces accountability by giving every employee the authority to spend up to $1,000, without supervisor approval, to resolve…
24Jun2010 | Steve George | 0 comments | ContinuedAnother Case of Corporate Irresponsibility
How can a major oil company that is drawing oil from a mile below the water’s surface not plan for a disastrous oil spill? They never thought it would happen. BP’s own documents said that the likelihood of such an accident occurring was “virtually impossible.” And since it was virtually impossible, BP decided to save a half-million dollars on a remote-control shutoff valve that two oil-producing countries, Brazil and Norway, require—a valve that would have stopped the spill that is inexorably creeping toward the Gulf coast.
As if that wasn’t enough, BP fought efforts to change the voluntary self-regulation laws. The oil industry opposed mandates for the remote-control shutoff switch. And BP has a history of environmental and safety violations and fines including a criminal violation of the Clean Water Act on the North Slope ($20 million fine), a leaky pipeline in Alaska ($20 million fine), and the largest OSHA fine in history for failing to correct safety problems at its Texas City, Texas, refinery ($87 million). Only a company that is making obscene profits can risk ignoring environmental and safety problems that could incur multimillion-dollar penalties.
In the Leadership category of the Baldrige Criteria, these questions are asked:
- How do you consider societal well-being and benefit as part of your strategy and daily operations?
- How do you consider the well-being of environmental, social, and economic systems to which your organization does or may contribute?
Based on results, BP apparently…
4May2010 | Steve George | 0 comments | ContinuedThe Best Way to Measure Company Performance
OK, I stole the title. John Hagel III, John Seely Brown, and Lang Davison posted on this very topic on the Harvard Business Review today. And then they spent the entire time dissing return on equity and touting return on assets in its place.
Hello? I understand the whole “business-exists-to-make-a-profit-and-nothing-else-really-matters” position, but are ROA or ROE really the best ways to measure company performance? I thought the balanced scorecard came along because our obsession with financial performance wasn’t working. Apparently, a lot of folks can’t stop obsessing.
Case in point: HuffPost Business. If you visited its home page today you would find articles on Goldman Sachs, predatory lending, Hank Paulson, the Treasury Department, AIG’s bonus cutbacks, robber barons, financial crisis, financial innovation, bank bailouts, Federal Reserve, credit card blacklists, financial reform, economic oracles, Citigroup, China, more on the Federal Reserve, home sales, jobs bill, dollar vs. euro, Greece bailout, still more Federal Reserve, etc. About the only articles on the home page that weren’t about money were about health care and fast cars.
It shouldn’t be HuffPost Business; it should be HuffPost Finance. And they’re far from alone. Pick any random site that purports to tell you what’s happening in the business world and you’ll find that 90% of their articles revolve around finance. The same is true for most business magazines.
This is how the Baldrige Criteria, which define performance excellence, measures company performance:
- What are your product performance…
The Real Heroes
Toyota’s front-page fall-from-grace has rivaled that of Tiger Woods, a business world parallel to the sporting world’s latest scandal. No wonder. Our business publications, from BusinessWeek to Fortune to Fast Company to the Wall Street Journal, weave their stories around the companies and executives who have risen to the top today. It is a cult of personality, no different than the teams and stars in the athletic world or the TV shows and actors in the entertainment world. We read about a company’s breakthrough performance or an executive’s startling turnaround and we place them on a pedestal and feel betrayed when they fall off.
They always do, of course. No company or leader can sustain performance excellence indefinitely. There are Baldrige Award winners that have failed after they received the Award, but so what? The Baldrige Award doesn’t guarantee unending success. It simply recognizes that, in the year it was received, that organization was one of the best-run organizations in the country. Next year, who knows? It’s like winning the Super Bowl one year (not that I’d know what that’s like, living in Minnesota) and expecting to win it next year and the year after, ad infinitum.
We’re focusing on the wrong thing. Baldrige Award winners have a lot to teach us about designing, managing, and improving effective processes in all areas of a management system. They have the results that show how well those processes work. We can learn…
24Feb2010 | Steve George | 2 comments | Continued
