Drawing on 25 years of research and corporate consulting, forecasting pioneer Spyros Makridakis reveals that a thorough knowledge of the basic rules of forecasting and judgemental psychology can have a pronounced and positive impact on future-orientated decision-making. Building on his unique knowledge of the methods of foreasting and their real-life applications in companies throughout the world, Makridakis presents a non-technical reassessment of forecasting, planning and strategy that may of interest to every manager who has ever struggled with a long-range plan.
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Spyros G. Makridakis is research professor at INSEAD, Fontainebleau, France. He consults internationally, and is the author or co-author of seventeen books including Forecasting Methods for Management, Fifth Edition.Excerpt. © Reprinted by permission. All rights reserved.:
The Rise and Fall of Management Theories
That which has always been accepted by everyone, everywhere, is almost certain to be false.
Paul Valéry, Tel Quel
A manager must decide whether existing or new knowledge can be introduced to help run his or her organization more efficiently. This requires a critical evaluation of existing or new management theories (or, if none are appropriate, his or her own). The challenge is to avoid making costly mistakes (by selecting an inappropriate theory or wrongly implementing an appropriate one) and instead to benefit by using the correct existing or new theory. This chapter describes problems with management theories, mistakes managers have made in the past in using them, and what can be done to improve chances of success by identifying the right issues and adapting the right theory.
The book In Search of Excellence was published in 1982. It became an instant commercial success, selling several million copies. Through research conducted between 1961 and 1980, its authors, Tom Peters and Robert Waterman, identified thirty-six excellent companies and presented throughout the book the factors that contributed to such "excellence." The purpose of the book can best be captured by its subtitle, Lessons from America's Best-Run Companies. Could others have learned, however, from America's best? An answer might suggest itself if we look at what has happened to those thirty-six "excellent companies" since 1980.
In October 1987, Business Week published a study identifying the "Top 46" of "America's leanest and meanest companies." Among those forty-six companies, only seven were from the thirty-six applauded in In Search of Excellence. A few months later Fortune published its annual survey of America's most admired companies. Among the top ten, six were not even listed in In Search of Excellence. The book's favorite, IBM, had slipped into thirty-second place, and Wang Labs, an "excellent" company according to Peters and Waterman, had slipped to the bottom of Fortune's 300 or so companies; in 1988 its profits were down 97 percent from 1987, while in 1989 it incurred a loss of close to half a billion dollars. If the vast majority of the excellent companies from before 1980 did not manage to meet that definition less than ten years later, can they really offer lessons on excellence to others?
Another commercially successful book published in 1982 (more than 3 million copies sold), was The One-Minute Manager. It offered a handful of recipes for one-minute praise, reprimand, and goal-setting to those wishing to become effective managers in sixty seconds. It has been followed by other one-minute management books, which will probably be succeeded in their turn by The One-Minute Inventor, The One-Minute Planner, The One-Minute Strategist, and so on. After all, if one can manage in sixty seconds, why not do everything else in that amount of time?
In Search of Excellence and The One-Minute Manager cover the two extremes of management literature. The former, according to its authors, represents twenty years of research as well as an extensive review of existing management literature. It was written by two top consultants, one of whom was teaching at the Stanford Business School at the time the book was written. The second book can be read in nearly sixty seconds. It does not make any claims to superior methodology and long years of research. Its authors do not come from a known consulting firm or a famous business school. Yet both books were read by millions of managers and the overwhelming majority of business students at the time.
Today both books are out of fashion, replaced by new favorites. The advice they gave for success does not seem to be working today. Peters, a co-author of In Search of Excellence, admits this in his new book, where he writes, "IBM is declared dead in 1979, the best of the best in 1982, and dead again in 1986. People Express is the model 'new-look' firm, then flops twenty-four months later....Excellent firms don't believe in excellence -- only in constant improvement and constant change."
In Search of Excellence and The One-Minute Manager are not the only books on management to become popular for a time and then slowly fade away. They were chosen as highly visible examples of the fads and fashions that characterize the field of management. Exhibit 1-1 shows some major theories that, like fashion in clothing, became popular at some point but were then put into the closet, to be worn only occasionally in special circumstances.
The theories listed in Exhibit 1-1 cover the period from 1965, when I started my PhD studies at New York University, to the present. Those at the top of Exhibit 1-1 were popular when I was a student. The others became popular at some time in the intervening years. Each theory, when it appeared, gave rise to a surge in the number of papers and books written on the topic, courses offered at business schools, and consultants trying to sell its ideas to business firms. Those theories inevitably then became unpopular as experience with their application or empirical investigation showed no visible benefits or, in some cases, extensive damage. Today only a handful of the theories listed in Exhibit 1-1 are taught to business students; the rest are all but forgotten. Some of these theories, notably the portfolio matrix proposed by the Boston Consulting Group, brought huge losses to those who used them.
Exhibit 1-2 lists eight individuals (along with the essence of their theories) whom the majority of my academic colleagues agree to have been the most influential management thinkers in this century. From the eight, only Alfred Chandler, Peter Drucker, and Herbert Simon are still alive, and only Peter Drucker is still being read by a large number of business students and executives. Although some of his theories (e.g., management by objectives) have gone out of fashion, his work has been the opposite of faddish.
The point behind both exhibits is this: The question of how a manager is to evaluate existing or new theories is important and must be carefully considered.
EVALUATING MANAGEMENT THEORIES
A theory can be descriptive, normative, or predictive. A descriptive theory, as the name implies, attempts to describe a phenomenon, event, function, or job. It can explain, for instance, how organizations become bureaucratic and another how chief executive officers make decisions. Normative theories describe how things ought to work under ideal conditions. In economics, for instance, it is often assumed that consumers are rational, their preferences are stable, information is ideally disseminated, and perfect competition exists. Given those assumptions, one can develop a theory that explains prices in different conditions of supply and demand.
Predictive theories, finally, aim not only at describing and explaining the past but also at predicting the future. This means their assumptions must be realistic and must hold true in the conditions of the future, which might differ from those existing when the theory is proposed. A recent example of a theory with high predictive value concerns the launching and trajectory of Voyager 2, which on August 24, 1989, after having traveled twelve years and 2.8 billion miles, arrived at its rendezvous with Neptune within a few thousand miles and a few seconds from the intended place and time estimated theoretically twelve years earlier.
Descriptive and normative theories provide insights that can help managers understand themselves and their organizations by studying and explaining the past. It must be understood, however, that descriptive theories refer to specific situations and periods of time. It must also be clear that normative theories are based on restrictive assumptions that often have little or nothing to do with reality. Therefore, any attempt to generalize from descriptive or normative theories and to use such theories for predictive purposes involves a risk, as the conditions in the future will in all likelihood be different. Interestingly enough, all eight theories listed in Exhibit 1-2 are descriptive. Such theories do not tell us how to improve future-oriented decisions. Instead, they describe strategies, operations, organizations, or people. No predictive theories seem to have lasted.
Nevertheless, predictive theories are of special value to the field of management, because, in addition to describing or explaining the past, they can also provide us with the means of making most effective decisions concerning future situations. A theory must predict future events accurately; otherwise, its value is no greater than that of history, which supplies us with an understanding of the past so that we can avoid repeating past mistakes.
A serious problem develops when descriptive or normative theories are confused with predictive ones. There would have been nothing to complain about, for instance, had the subtitle of In Search of Excellence been A Historical Description of America' s Best-Run Companies, 1960-1980. The problems develop when descriptive or normative theories are used as the basis for future-oriented decisions, when the circumstances in all likelihood will have changed, and when idealized or unrealistic assumptions do not hold true in practice.
Theories in the field of management are a mixture of descriptive, normative, and predictive. Descriptive and normative theories, however, are rarely labeled as such, while the assumptions and limitations of predictive theories are rarely stated.
A limitation of descriptive theories in management is that their forecasts are often like those of the stock market. Future prices of individual stocks and market indices can be predicted through a high-powered and accurate descriptive theory. But don't raise your hopes of becoming rich, as such a theory tells us that the best forecast of future prices is today's value (see Chapter 3). Thus, although there is a predictive theory, its benefits do not come from its forecasts. If the best forecast for the future price of stocks is its price today, everybody has access to such a "best forecast." Nobody can benefit more than anyone else since everybody can use the best forecast to maximize his or her benefits by buying stocks. There are advantages to be gained by accepting and using such a predictive theory. The most obvious one is not paying a fee to those who pretend that they can forecast stock market prices better than "today's" price.
There are some reasons why predictive theories in management are similar to those of the stock market:
1. The Zero-Sum Game of Excellence. Unfortunately, the number of companies that can be excellent in a certain industry is limited. Excellent companies will, by definition, excel, thus forcing their competitors into also-ran status. At the same time, the competitors of excellent companies will not be capable of uprooting them unless they can come up with imaginative new methods, whether in marketing, production, or provision of services.
Now consider a new theory. It is perfect. It provides seven easy steps for a company to become excellent. Can such a theory have any real value? Obviously not. If it is so easy and so perfect, competitors, including the excellent company, will also use it. In that case nothing much will change. Now suppose manager X uses it first. It is highly unlikely that competitors, including the excellent company, will not realize that he or she is using a new theory. They will soon follow, erasing whatever advantages the innovator might have gained since he or she started using the perfect magic formula. After all, the theory is simple and highly effective. Thus, what has worked for the innovator will necessarily work for them too.
2. Shifting the Real Issues. Theories are often presented in the form of a claim that it is easy to succeed if you do A and B. They do not say, however, how A and B, frequently restatements of the real issue, can be achieved. In the field of strategy, for instance, one is told that to be successful opportunities and threats in the environment must be recognized. Once that is done, the opportunities must be exploited while steering clear of the threats. No one is ever told, however, how to find and exploit opportunities or how to predict and avoid threats (the "easy" things are left unsaid).
3. Ignoring Constraints. Managers are told that successful leaders must be great communicators and great motivators, must manage by walking around, must be available to be seen by everybody, must be present at all meetings, must send thank-you notes -- or better yet make personal telephone calls -- to everyone who has done something clever, must be active in public relations, and, at the same time, must free themselves from mundane tasks so that they can do the strategic thinking indispensable for the long term well-being of their organization. However, there is no advice on how to become Superman or Superwoman or how to learn to manage with no more than a couple of hours of sleep at night.
4. Change and Innovation, the Ultimate Buzzwords. The newest advice for becoming successful is to create an organizational climate that thrives on constant change and innovation. We are not told, however, how such an organization can be created, or what type of change and innovation will be beneficial. Business firms, and life in general, would be trivial to manage if all change and innovation produced positive results. IBM has tried for the last few years to change and innovate, but somehow its competitors have managed to change and innovate even more successfully. In 1987, for instance, IBM's profits increased 10 percent (the lowest in its industry) while those of Apple increased by 80 percent, and Compaq Computer's an astonishing 218 percent. In 1988 IBM's profits increased only 4 percent (below the 6 percent industry average), leaving it far behind Apple and Compaq Computers, which grew 50 and 87 percent, respectively.
In 1978 General Motors was earning a record $3.5 billion while holding more than a 48 percent share of the U.S. market. In 1987 its market share had fallen to 36 percent (an enormous 12 percent drop in an industry where each percentage point is worth more than $2 billion), while its earnings were $1.1 billion below those of Ford, although GM spent close to $70 billion to change and innovate.
5. Heisenberg's Uncertainty Principle. Heisenberg, a Nobel Prizewinning physicist, showed that the mere act of observing a particle affects the outcome of the observation. Thus, it becomes impossible to determine with high accuracy the position of a particle if we observe its momentum, or its momentum if we measure its position. The same phenomenon applies to management theories. Observation affects the outcome and in the process reduces or nullifies a theory's value or its predictions. Consider, for instance, the one-minute manager. He or she is not the only one who has read the little book that describes how to become such a manager or is aware of its approach. Thus, an employee will know when he or she gets one-minute praise, a one-minute reprimand, or is asked to describe half a dozen goals to be read in under a minute. The employee will therefore play the one-minute game. Or, better, as André and Ward suggest in their book, employees can get a one-second jump on their managers by predi...
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