UK: MIS-MEASUREMENTS MAY LEAD TO FATAL ERRORS IN JUDGMENT. - To measure success in sales and profits may be to ignore serious failings.

by Robert Heller.
Last Updated: 31 Aug 2010

To measure success in sales and profits may be to ignore serious failings.

Misfortune has the uncomfortable habit of stripping bare management pretensions. Not a day passes without evidence that the superhuman Japanese are all too human. Criticism of their weaknesses has swollen to loud accusations that, stripped of the competitive benefit of cheap money, Japan's managers are no more effective than anybody else's.

Rather, they are just as ineffective. When Nissan was riding high, instead of losing billions of yen, nobody bothered about its excess of components or excess of models: 29 in all, an assemblage reminiscent of the old, awful British Motor Corporation. Those untroubled by Nissan's negligence included not only its management, but outside observers. Where BMC's sins were all too evident from its excessive manufacturing costs, terrible product quality, poor delivery performance and slumping market share, the failures of Japanese car firms were hidden by their successes on these obvious and very important points. What you look at is what you see. What you do not look at, by the same token, goes unobserved and without criticism.

The Japanese policy of lifetime employment, for instance, was universally applauded. In hindsight, it is obvious that, combined with vigorous competition for graduate recruits, it must result in steady bloating of the executive ranks. Many aspects of Japanese management reflect this inflation. But who cared, so long as sales and profits rose?

From the investors' viewpoint, those two measures are practically the only visible signs of management excellence. Since financial numbers are also the main internal measures in most Western companies, other, possibly significant, indicators go unnoticed. Thus managers believe performance to be excellent, when their customers know it to be dreadful.

Probably no authenticated case exists in which customers' perception of a company's quality has proved higher than that fondly held by management itself. In an alarming majority of cases, the measured truth about external perceptions pole-axes managements: often the shock is so severe that they will not believe the messenger bringing the bad news. But what the customers think is always true - because that is what guides their buying decisions.

It does not follow that measuring per se is the answer to mismanagement. There is also the mis-measurement mentioned above. The Major administration's passion for league tables, for example, is worthy enough in intent: but if the statistics are misleading, managements will be misled - and so will customers.

In fact, for public services, customer satisfaction is the most meaningful measure of all. That is how schools, hospitals and police forces should be judged - not by numbers that either mean nothing (like exam successes), or (like hospital waiting lists) can easily be juggled to satisfy the tables, but not the need. The Metropolitan Police, for instance, is famous for backroom bloating: not long ago, only five per cent of the force, on a good day, worked at the sharp end. The new Commissioner, Paul Condon, is the first in decades to confront the problem of Japanese-style over-manning in the upper echelons. And the Met did not have the excuse of conspicuous achievement.

Mediocre performance can also conceal mismanagement from outside eyes. At IBM, long before the visible numbers told the full story, customers were audibly annoyed by high prices, incompatible machines, bureaucratic responses and unfulfilled service promises. A second stage of failure was required for the idol to crash.

Top management may be well aware of marketplace moans. But reacting to the symptoms of failure demands changes in strategy and organisation that may turn the company upside-down. Mis-managers would rather turn a blind eye: but mismatch between the business and its markets must eventually prove fatal.

The Japanese car firms matched their product strategies to a domestic market whose zooming growth allowed too many manufacturers to compete across the board. They prided themselves on the manufacturing genius which made it possible to make too many models at remarkable speed. Now that domestic demand has reverted closer to the worldwide norm, the strength has become a weakness.

In hindsight, piling up product upon product, so that one Japanese food manufacturer, cited in the Financial Times, is reducing its lines to 2,500, seems weird: even weirder when you learn that two-fifths of its products provided only three per cent of the sales.

But that is no stranger than reading that, although Barclay's chairman, Andrew Buxton, was MD as the bank piled up duff property loans he disclaims responsibility. Why? Because 'credit decisions were not a board matter'. Well, they should have been - and not just because those in charge lumbered the bank with £2.5 billion of non-performing loans. When, long ago, the clearing banks were foolishly imagined to be well run, their systems were not focused on the right measures. Nor were those systems capable of timely response when the measures signalled malfunction. Even today, does Barclays (or any clearer) have any idea of whether the new methods of countless small individual charges for everything accomplish anything - save alienating customers? Was any management time devoted to discovering the direct cost of administering these items (let alone the indirect costs of customer dissatisfaction)?

More important still, would the bankers, if they found the policy to be counter-productive, change their ways? One big difference between East and West remains: finding sin, the Japanese act swiftly to achieve virtue. That is the best reason for supposing that Japan's idols may return to the plinths from which they fell through their own unnecessary failings.

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