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What Management Is How It Works

and Why It’s Everyone’s Business
Krishna Murthy P

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 What Management Is
How It Works and Why It’s Everyone’s Business

Author: Joan Magretta

Publisher: Free Press
Date of Publication: 2002
ISBN: 0743203186
About the Author Number of Pages: 256 pages

Joan Magretta The Big Idea

Joan Magretta is a uniquely authoritative Management affects everyone because it is present in every
speaker on management who has written the aspect of the world. It applies to managing oneself - focusing our
big-picture management book for our
times—What Management Is: How It
abilities towards our goals. It applies to our working relationships
Works and Why It’s Everyone’s with others because it affects our choices about them.
Business—chosen by BusinessWeek as Management is about putting together organizations that work to
one of the ten best business books of 2002. accomplish a mission.
Speaking with an authority that comes from
exhaustive research and many years as a The basic tasks of the manager are to plan and to execute. The
corporate manager herself, Joan brings her manager assesses the organization's goals and resources. He
"back-to-basics" message to the podium with defines these clearly for others. The manager formulates a plan of
enthusiasm, humor, and common sense.
Joan Magretta is a Senior Institute Associate
action or a kind of road map. Having the plan, the manager then
at the Institute for Strategy and proceeds to implement it. The manager must constantly keep
Competitiveness at the Harvard Business careful track of where the organization is (Are we heading towards
School. our goal?) and how the organization is performing (Are we utilizing
Prior to her current position at Harvard, Joan
best value from our resources?).
was the Editor-at-Large and principal
strategy editor of Harvard Business Review.
A collection of her work at the Review has
been published as Managing in the New Chapter 1 Value Creation: From the Outside In
E c o n o m y, w h i c h w a s h a i l e d b y
BusinessWeek as one of the "six books that Creating value is the primary duty of management. The term Value
are essential reading for modern managers."
She also served as a partner at Bain and
Creation is important because it underscores the shift from
Company, a leading strategy firm. For two managing resources (which was the main focus of management
th th
decades she has advised senior from the late 19 to the early 20 century) to managing the results or
management in a wide range of settings, from performance of the organization. Warren Buffet succinctly defines
healthcare to high fashion, to heavy
manufacturing and higher education. She
it as what you get in exchange for what you pay.
has also written for The Wall Street Journal
and Sloan Management Review.

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 What Management Is By Joan Magretta

Customers Define Value

Value takes many forms and is recognized in different ways by different people. It
can be tangible, for example cell phones, or intangible, like the mobile connection
service and instant information the cell phone provides. By thinking of Value as how
a customer defines it focuses management on the consumer/customer: if no one
buys it, what good is it?

Value as Efficiency: The Manufacturing Mindset

th th
In the late 19 to early 20 century, businesses were what they made. A business
manufactured steel, automobiles, etc. To increase a business' value, one increased
manufacturing efficiency to produce more steel or more automobiles, etc.

The Marketing Mindset: What Does the Customer Value?

In 1954, Peter Drucker wrote The Practice Management, an introduction to
management. He concluded that customers don't buy products; they buy the
fulfillment of their needs. He encouraged a change in perspective, to see from the
customer's eyes. Drucker encouraged managers to ask: “What is our business?”
“Who is the customer?” “What does the customer value?”

Maximizing Shareholder Value: The New Mantra

During the 1980s it was common to hear of hostile takeovers and battles for
corporate control, these goings on even became the theme of movies. Takeovers
become possible when the value of the whole company being taken over was less
than the sum of its parts or in other words, undervalued. This pressured
management to do more than create value; they must maximize it for the
shareholders.

How Is Value Created?

In Michael Porter's Competitive Strategy, he developed the concept of the value
chain which is the sequence of events, data, and processes that turns out and
delivers the product. One major consequence of value chain thinking is that each
activity is not a cost but a step in adding value to the final product. Another major
consequence is that it looks at the total process of value creation that includes
suppliers, distributors, marketers, etc, each one's role in it and how it affects the
whole.

The Right Discipline for Non-profits: Mission, Not Markets

Non-profit organizations, for example environment conservationists, require a
different focus. The value they create is not necessarily determined by the market.
The value they create is tied up in their mission. According to Magretta, their focus
questions are: “What is our mission?” “What is the unique value we exist to create?”
“Who will support us in fulfilling our mission, and how can we align their interests with

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 What Management Is By Joan Magretta

our mission?”

Value Is a System
Management is charged with creating value; but management does not determine if
value has in fact been created. The scorekeepers are the shareholders, the
employees, and the suppliers. Management therefore also has to ensure that these
scorekeepers will continue to be involved in the system that creates value for all of
them.

Chapter 2 Business Models: Converting Insight to Enterprise

A business model is a theoretical structure of how an organization will perform based
on assumptions made. The theory predicts the value it creates for participants: the
shareholders, customers, etc. As real data comes in, the theory is revised to account
for real results. The process is similar to a science experiment.

A Good Model Tells a Good Story

A story has characters and plot. In a business model, the characters are all the
people involved and their respective roles and motivations. The plot in a profit
venture is about how it will make money. The plot in a non-profit is how it will effect
change. A good story has a plot twist. For business ventures this plot twist is usually
an insight into the value chain. The problem with business models is that they are
easily defined in hindsight; which doesn't mean to say they have no use. What it
does mean is that the characters, their motivations and the plot twist/value chain
insight all have to be plausible.

Chapter 3 Strategy: The Logic of Superior Performance

A key aspect in analyzing the business model is the economic relationships of the
characters. However the model does not include competition which is inevitable.
This where strategy comes in: how to do (your business) better than your
competitors by doing it differently.

Doing Better by Being Different

Examining what Wal-Mart, the discount retailer, did differently from competitors:
· Adapting the supermarket to sell clothes, appliances, and other goods
· Cutting the frills (sales attendants, fancy displays, etc.) means lower costs
and cheaper products.
· First-mover advantage: move into and establish yourself in a territory where
there are no competitors
· Up to date inventory: know what's selling and how much so that you can
order more (if it sells well) or cancel (if no one is interested) as is appropriate

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 What Management Is By Joan Magretta

· Cross-docking: supplier's goods were transferred straight from an

unloading dock to delivery trucks bound for the stores. This meant less
unpacking and repacking also no idle storage time.

The Link Between Strategy and Performance

A company is profitable when its returns or sales are larger than its costs. So in order
to do better the company can either charge customers more or lower its costs. These
options or combinations (as in the Wal-Mart example) are what have to be done
differently from competitors to capture the market (or part of the market) and get
more profits. The interaction of competitors can range from perfect competition
where rivals are fairly equal (so innovations/advantages are quickly echoed) to
monopoly where one company holds an insurmountable or near invincible
advantage over competitors. The more monopoly like advantage a company
maintains, the better it is for profits as they can demand higher prices.

How Do You Play the Game of Strategy?

Effective strategy is being different from your competitor and maintaining that
difference/advantage. Sometimes the differences are real: Product A is more
durable than Product B. Sometimes the differences are perceived: Brand X is more
comfortable than Brand Y.
An effective strategy is to use trade-offs. One business can't be all things for all
people. Trade-offs are choices or business practices that one competitor makes that
another competitor can not copy. The trade-off can be a different process or a
different target market, etc. The trade-offs for the rival will either incur losses from
copying the process or from neglecting or alienating its current target market.
In 1979 Michael Porter identified five underlying forces active in an industry. Since
then it has become common to plan strategy with these forces in mind:
1) The competition among existing players;
2) The threats of new entrants;
3) The power of suppliers;
4) The power of customers; and
5) The availability of new products.

From Doing Good to Doing Better: Strategy for Non-profits

Nonprofits compete with other nonprofits for funding and/or civic involvement. Just
as in business, the nonprofit formulates strategies on how it will do better by being
different. These strategies and their resultant actions are formulated in line with
organization's mission.

Chapter 4 Organization: Where to Draw the Lines

Current trends are for organizations to remain small, focused, and lean by
reorganizing, outsourcing or spinning off functions and units. The value chain
extends more across companies. Paradoxically, some big companies get bigger by

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 What Management Is By Joan Magretta

expanding or by acquiring new companies. Organizations reorganize depending on

business strategy and in reaction to competition: organization must be flexible and
dynamic. Management organizes by drawing lines between and among units,
suppliers, and functions. There are three kinds of lines:
1) Boundary lines: define what is inside and what is outside the organization
2) Organization chart lines: define and divide business units and relations
3) Authority lines: define who makes the decisions

Ford versus Sloan: Two Strategies, Two Structures

Henry Ford's organization (Ford Motor Company) was very hierarchical. Henry Ford
placed himself at the top so he could control and coordinate every aspect of the
company. This was in keeping with his strategy of producing an affordable car for
everyone. His strategy was against the business practice of the day which required
cars be expensive because each was custom-made. He created just one type of car
over and over.

Alfred Sloan's organization (General Motors Company) was multi-divisional. His

strategy was to offer “a car for every purse and purpose.” He produced more than one
car but parts were kept similar so that each division must interact to achieve
economies of scale (high initial costs are shared by mass produced units). By adding
additional features in addition to the variety, he justified to customer his greater price
with greater value.

Manage or Buy
Companies will reorganize based on market developments, specifically changes in
their value chain. Is it better for the company to buy components (for the final
product) from suppliers or manage the production themselves? Producing the
components improves coordination of the processes and so lowers costs. However,
producing their components may dampen innovations (to improve costs, quality, etc)
that the division would normally undertake in reaction to other competitors who
produce the same components.
Toyota showed it was possible to have the best of both by cooperating better with
suppliers. Increased information exchange with suppliers helped suppliers
customize their components for Toyota. The information also allowed coordination
of manufacturing and delivery of the components which decreased idle inventory and
lessened storage costs.

Manage or Buy: Outsourcing Is In

The manage-or-buy decision directly affects the size of the organization. In 1991
Ronald Coase developed a simple principle to explain these changes: if is cheaper to
accomplish an activity within the organization then the organization would grow
larger, if not then it would maintain its size or shrink as the activity was outsourced.
This is however only a trend and not a rule. Companies will ultimately choose to
grow or shrink based on their strategy.

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 What Management Is By Joan Magretta

Chapter 5 Facing Reality: Which Numbers Matter and Why

Previous chapters dealt with planning. Equally important to management is
quantifying performance. This starts out with measuring then goes onto analyzing
the context of the measurements. Reading the measures and their context is
usually represented as a ratio or percentage or average or trend. These numbers
help managers decide the appropriate course of action to take. The actual number
crunching is easily taught and easily learned. The more difficult skill is interpreting
the number as this requires experience. Experience helps develop expectations
about the numbers and guides the manager decisions.

Numbers No Organization Can Live Without

The numbers corroborate the story of the business model. The developments in
computing power and technology bring real time responses to decisions. It is
important to note that these tech advances also mean more and more data meaning
managers have to be more attentive to the different stories they are telling.

If your model is accurate about who your customers are and what they value, your
revenues will reflect it. If your model is accurate about how you create value, your
costs will reflect it. If your model is accurate about how you differ from competitors,
your profits will reflect it. The important numbers are: revenues, costs, profits and
cash flow.

Again these numbers are aids to understanding. In themselves, they are not fool
proof. The numbers are simple but the markets are complex.

Chapter 6 The Real Bottom Line: Mission and Measures

Managers translate the organization's mission into concrete terms of goals and
performance to focus members' actions. The challenge is that there is rarely a clear
and easy answer. Profits are not a goal, they are a result of the actions to achieve the
mission.

In Search of the Universal Measure

Measurements evaluate performance. Measurements can be indicators, guides,
and goals for the managers and for the members. There is no one measure that will
tell you everything you need to know about the company. The profits can tell you if
costs are reasonable or if your product is doing well now. It can not tell you if your
product will continue to do well tomorrow or if it even did as well last year. Measures
are industry and business specific. Some general important measures are:
· Operating and financial measures: these can indicate the productivity of
resources, personnel, etc.
· Employee turnover: can indicate organization spirit
· External performance measures: can indicate customer satisfaction and
loyalty

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 What Management Is By Joan Magretta

· Market share: can indicate relative performance versus rivals

Each has strengths and limitations. New measures or combinations of measures
should be formulated as required.

Some Examples of Matching Measures to Mission

For Continental Airlines, a US passenger airliner
Mission:
· Fly fuller flights
· Satisfy customer/passenger demands like arriving with their baggage on
time
· Make employees like working for Continental
Measures:
· Revenue per available seat or number of seats filled per flight in a month
· Monthly on-time performance and mishandled baggage incidents
· Customer and employee turnover
· Number of sick leaves

For Fidelity Investments' retirement business, a mutual fund that managed people's
assets for their retirement
Mission:
· Ensuring that customers have enough money to retire on
· Focusing people in establishing their financial retirement goals
Measures:
· Assess people's asset allocation and portfolio diversification

For Dell computers, a computer direct seller

Mission:
· Give customers best technology at lowest cost
Measures:
· Low inventory. Building and shipping computers to users quickly lessens
obsolescence and storage costs
· Lessen touches. The more often components are touched, the more quality
suffers
· Return on invested capital. Revenues - (Costs of goods + advertising +
building facilities + inventory etc)

Chapter 7 Betting on the Future: Innovation and Uncertainty

Innovation in management is searching for new value or new ways to create value.
Without innovation a company will stagnate and fall behind the competition.
Because the future is uncertain, managers must make bets as to which innovation
will keep the company ahead or at least strongly competitive tomorrow.

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 What Management Is By Joan Magretta

Juggling the Present and the Future

Ford Motors produced the widely successful Model T, the first affordable car for the
masses. It did this so well and stuck with it. They didn't see that because cars were
now affordable, they would a second and third car and these would be different from
the Model T. Because Ford made only the Model T, they bought elsewhere and Ford
suffered.

Digital Equipment Corporation (DEC) built minicomputers better than anyone else.
They didn't foresee that people would eventually want personal computers in their
homes. They have since been acquired by another company.

One hundred twenty year-old Kodak is still wrestling with the shift from its successful
traditional imaging business to the digital imaging trend of tomorrow.
Nonprofit organizations wrestle with decisions of how much to invest in their
continuing services now and how much to invest in their continued growth tomorrow.

Good Management Is Entrepreneurial

Management must look at short term and long-term performance. Long-term
performance needs innovation, an entrepreneurial attitude.

Thinking Inside the Box

“Thinking outside the box” has become a phrase synonymous with creativity and
innovation. A popular graphic to illustrate this is the 9 dot problem arranged in a 3 x 3
square formation. The problem posed is how to link all 9 dots without lifting your pen
and with just 4 lines. The solution requires the lines to extend outside the “box” or
square that you would naturally picture. This innovative solution comes about
because of the constraints or bounds of the box. This is the core principle of
innovation in business: creating new value within fixed constraints.

The Information You Need

To see the constraints or bounds of the box, the manager must first find the answer to
what the customers need or value. This can be done with surveys, interviews, or
observing their activities.

Making Decisions About an Uncertain Future

Many business decisions will have to be made based on incomplete information.
A component of innovation is not just researching information but also evaluating
it:
· What information is fact?
· What information is an assumption?
· What information can you find out and what can you not find out?
· Is what you don't know critical to your innovation/decision?

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Innovation and value creation is not necessarily a random process. Tools for
arriving at decisions involving uncertainty have been developed. These tools are
aid the manager in arriving at good decisions.

Break even analysis figure business costs then figure how many customers
need to spend (revenues) to make up the costs or break even.
Payback analysis figure business costs then approximate revenues and
how quickly you get paid back. Because of the focus on return managers
are more likely to work with short term investments. It ignores risk and
money lost from an alternative investment(s).
Net present vale the same money you have now will be worth less or be
able to purchase less tomorrow. Net present value analyzes future cash
flows and relates it to today.
Probabilities and expected value analyze the chances/probabilities of
possible outcomes and weigh it against the profit this is the expected value.
Decision trees systematically layout decisions and their outcomes.
Focuses on steps, processes and effects.
The tools can simplify complex problems, analyze outcomes and trade offs,
minimize uncertainty; but the