Management: Theories wear out too

American Express, General Motors, Westinghouse and IBM have all shaken up their top management to bring about a turnaround. For a short time, this action - combined with job cuts - is likely to send costs down and profits and share prices up. But a year or so later, each company will be no better off than it was before, and then it will surely announce more job losses.

Similarly, each promises a turnaround through 're-engineering' operations to focus them on key tasks. Yet although the re-engineered operations do get better, the overall performance improves little, if at all.

This is because, however badly needed, neither layoffs nor re-engineering are likely to restore an ailing company to health. A company beset by malaise and steady deterioration suffers from something far more serious than inefficiencies. Its 'business theory' has become obsolete.

Every business, in fact every organisation, operates on a set of assumptions regarding the outside (customers, markets, distributive channels, competition) and a set concerning the inside (core competences, technology, products, processes). Executives base everything on such theories. The longer they work, the more they pervade the organisation.

But a business theory is not a law of nature. Eventually, it becomes inappropriate to the realities of the market and technology. And the only thing that can effect the turnaround is rethinking it to reposition the business on a new set of assumptions.

The diagnosis is fairly simple. Whenever a business keeps on going downhill despite massive spending and heroic efforts by its people, the most likely cause is the obsolescence of its business theory.

This diagnosis becomes a virtual certainty if (a) the malaise follows long years of unbroken success (GM's case), or if (b) newcomers to the industry flourish while the long- time leaders are fading (as with the Japanese and Koreans steadily gaining market share while the Dutch electronics giant Philips slides ever deeper into the hole).

To start the turnaround requires stopping saying 'we know' and instead saying 'let's ask'. And there are two sets of questions that need to be asked. First: who are the customers and who are the non-customers? What is the value to them? What do they pay for? Second: what do the successes do that we do not do? What do they not do that we know is essential? What do they assume that we know to be wrong?

These are always very unpopular questions, particularly in a business that has had long years of success - which may explain why so many of the successful turnarounds are initiated by managements recruited from outside. Yet unless they are asked seriously there will be no turnaround.

It may take years for the new business theory to be made truly effective. But as soon as these questions are asked the turnaround has begun. Then it often proceeds with stunning speed.

Asking these questions immediately makes effective action possible. Re-examining an ailing company's business theory almost always shows right away that the best resources - people, knowledge, money - are misinvested.

The next step in a turnaround is to find what works in the business and to build on it. Even in a very sick company there are islands of strength.

Of 29 stores in an ailing department store chain, for instance, 25 were haemorrhaging. Four stores, however, were doing well. But no one had paid attention to them. They were busy working on the 'problems'.

But the four stores performed because they had - half-knowingly - repositioned themselves on a new business theory that was in line with market realities.

In the typical turnaround situation the central challenges are, however, neither things to be abandoned nor successes to be exploited. They are 'almost successes': activities that aim at building a different tomorrow but are instead misused to keep yesterday alive a little longer.

The best example is an old one: the attempt of the founder of IBM, Thomas Watson, in the early 1950s to keep the punch card alive by selling it as an accessory to the then-new computer. (Fortunately for IBM, an anti-trust suit forced the company out of the punch card business; otherwise IBM would surely have gone the way of the punch card).

Typically - as with IBM's punch card - yesterday's product, technology or customer service is the 'cash cow'. But hanging on to it invariably stunts the new, promising business or product. The turnaround thus always involves a big gamble. But while hanging on to the old will soon destroy the company, gambling on the new is a rational risk, based on a valid business theory and justified by the successes that are already basing their practice on it.

Rapid changes of all kinds in the years ahead will make existing theories obsolete. In fact, the most probable assumption is that no currently working business theory will be valid 10 years hence - at least not without major modifications.

And not only businesses will have to learn to turn themselves around. Almost every large organisation - including government - will have to rethink its business theory.

The author is a professor of social sciences at Claremont Graduate School, California.