Setting goals is basic management, and there’s only one right way to set them so that everyone in the organisation is aligned. Who could argue with that? Hold on, says Julian Birkinshaw, who spent three years studying new principles in management in 25 companies across three continents. In today’s chaotic business environment, he asserts that lateral goals may be the best course for your company.
This article is provided by the Deloitte Institute of Innovation and Entrepreneurship.
Some business principles are so deeply ingrained in our way of thinking that they are almost unassailable. Alignment is one such principle. Every corporate plan, every measurement system and every project review is built on the assumption that alignment - the notion that all people should be moving together towards a common goal - is a good thing.
I believe we should challenge this assumption. Corporate objectives can be developed according to the principles of alignment, and many times that will indeed be the best way forward. But corporate objectives can also be developed using a lateral, or oblique, approach that explicitly encourages people to move in a direction that does not take them directly towards their end goal.
A number of progressive business leaders are doing just that:
- Vineet Nayar, CEO of HCL Technologies (the Indian IT services group) uses the concept ‘Employees First, Customers Second’ to underline his focus on engaging the company’s employees as a first priority.
- John Mackey, CEO of Whole Foods Market, argues that like happiness, profits are best not pursued directly, but as a by-product of other things — higher purpose, service to customers, developing employees and improving the well-being of the community.
- Eric Schmidt, CEO of Google, sees a clear distinction between the company’s goals and its shareholders’ demands: “What is the number one goal of the company? It’s end-user happiness with search. Number two? End-user happiness with advertising. Three? The construction of the Google network of partners to effectuate the first two. And four is to scale the business… None of the things that I’m supposed to be doing as CEO — maximising revenue and shareholder value — are the goals of the company.”
I have been researching the issue of how companies set objectives for the last three years, as part of a broader project on the new principles of management. A lateral approach to corporate objective setting is used in many organisations, but rarely in a conscious or proactive way. Let’s shine the spotlight on some of these examples and suggest the conditions under which a lateral, rather than an aligned, approach to objective setting is superior.
In a business context, the principle of alignment means that all employees are working toward the same common objective. In their book, Alignment: Using the Balanced Scorecard to Create Corporate Synergies (Harvard Business Press, 2006), Robert Kaplan and David Norton paint a nice picture of alignment through the metaphor of the rowing team - eight oarsmen, all pulling together in perfect harmony, moving straight as an arrow toward a goal. The rowing team members share a common objective, they are skilled professionals, they work together as a team and they know each other’s strengths and weaknesses. It’s easy to see why managers find the concept of alignment so attractive. But you only need to think about companies in which you’ve worked to recognise that the metaphor, although evocative, is somewhat misleading.
Here are four limitations to the principle of alignment:
- Individuals in companies often have very different agendas - and with good reason. What gets a PhD-level researcher out of bed in the morning? It is the excitement of pushing the boundaries of knowledge and the possibility of creating new society-changing technologies. His time is directed primarily toward the pursuit of knowledge for its own sake rather than toward the immediate commercial priorities of the company. Big technologies companies understand and accept this, and they know they would fail to attract top researchers if they put too many restrictions on them.
- Measures and incentives are blunt instruments. The alignment model assumes that executives can set clear, quantifiable objectives to ensure that every division contributes effectively to the company’s overall goals and that these can then be cascaded down through a set of Key Performance Indicators (KPIs) for each sub unit. But it is difficult to establish KPIs that really work - especially in settings requiring employees to show creativity and initiative. How would the researcher above be able to show that the new technology he’s been working on for years - which may never result in a commercial product - is contributing to the company’s profitability?
- Short-term targets drive out long-term objectives. In the Anglo-American capitalist system, the pressure to deliver on-target quarterly earnings - largely to satisfy shareholders - is immense; and, frequently, such pressures lead companies to do things that are inconsistent with their long-term vision. True alignment - between the efforts of employees and the organisation’s ultimate objective - therefore ends up being compromised.
- Shareholder demands are satisfied at the expense of other stakeholders. A broader problem with the Anglo-American capitalist system is not only that objectives tend to be short-term and financially oriented but also that they serve the interests of shareholders at the expense of other stakeholders. As stated by John Mackey, CEO of Whole Foods: “The best way to maximise long-term shareholder value is by managing the interdependent system [so] that all the stakeholders are linked together… This is the best strategy to create the most value for customers, the most value for your team members and the most value for the communities; but it is definitely the best strategy to maximise shareholder value as well.”
All of which suggests the rowing team metaphor is of limited value in making sense of how people work together in large organisations. A more useful metaphor is a jazz ensemble. Jazz musicians work together to achieve a worthwhile outcome, blending initiative and creativity with discipline and structure. Moreover, they also have fuzzy objectives. Do jazz musicians want to make beautiful music? Do they want to have fun? Do they want to do something no one else has done before? Do they want to make a lot of money? Of course, it is some combination of all these things - and the most critically acclaimed or the happiest musicians are not necessarily the ones who earn the most money. It is easy to see the parallels to the business world.
None of this is to suggest that alignment is a bad thing per se. But it underlines the need for greater care in deciding when an alignment-driven approach to goal setting is appropriate. There are many contexts in which our existing ideas about alignment work fine; but there are many others - typically those that require greater creativity and initiative on the part of employees - in which the alignment principle gets firms into trouble.
A lateral approach
Lateral objective setting is not a new concept. John Kay, a British economist, discussed it under the name of ‘obliquity’: “Strange as it may seem, overcoming geographic obstacles, winning decisive battles or meeting global business targets are the type of goals often best achieved when pursued indirectly. This is the idea of obliquity. Oblique approaches are most effective in difficult terrain, or where outcomes depend on interactions with other people.” Kay suggested that companies with oblique goals often outperformed those with much narrower, or more financially driven, targets. And he argued that oblique approaches were particularly relevant in complex social systems. A small company in a predictable business environment will often succeed in pursuing its goals directly - through careful alignment of all its constituent parts. But the more unpredictable the environment, and the more complex the company, the more important the oblique principle becomes.
Just as there are many different forms of lateral thinking, there are also different models of lateral objective setting. My research suggests that it is possible to identify at least three different models:
Lateral Approach #1: Pursuing an indirect goal
It is often beneficial to pursue your ultimate objective through one or more indirect goals. Consider further the case of HCL Technologies. In 2006, CEO Vineet Nayar had begun a transformation process directed toward improving the quality of management in the company, and he wanted to lay out his broader vision for HCL in an open forum. So he hosted a three-day conference, ‘Explore and Transform’, bringing together customers, analysts and employees.
In the closing session, Nayar introduced the concept of ‘Employees First, Customers Second’ (EFCS). He explained first how this philosophy would guide HCL’s internal initiatives. Then he boldly made it clear that HCL was going to start making choices about which customers it wanted to do business with - even walking away from many small-time, non-strategic engagements. By creating a satisfying and empowering work environment for employees, Nayar argued, the impact would be highly positive for customers as well.
Needless to say, this was a risky approach to take in front of a large group of customers. One attendee observed, “EFCS got a good reception, but maybe it would have been safer to socialise the idea with key customers first.” Another recalled that some customers were unhappy and, in fact, walked out.
But the logic behind Nayar’s approach was sound. He could have said employees and customers are both equally important, and the statement would have been dismissed as a platitude. Instead, by telling his customers that they were less important than his employees, he sent a very strong and positive message to the entire employee base of HCL. Four years later, EFCS is still a centrepiece of the company’s management model. Employee satisfaction continues to improve and so, in turn, does customer satisfaction.
EFCS is a clear example of an indirect goal. Of course, there is no guarantee that satisfied employees will create satisfied customers (we can always imagine exceptions to this rule); but Nayar knew on the basis of his lengthy experience in the IT services industry that there was a strong likelihood these relationships would hold and that the risk was worth taking.
It is important to state some caveats to this lateral approach. First, there must be a clear and strong relationship between the indirect goal and the ultimate goal, so that by pursuing the indirect goal we can be confident of reaching the ultimate goal. Second, there must be risks, and perhaps even major barriers, to pursuing the ultimate goal directly, so an indirect approach works better. Third, there must be widespread agreement among stakeholders about the nature of the ultimate goal — an obvious point, perhaps, but one that needs making when this lateral approach is compared to the other two approaches discussed below.
Lateral Approach #2: Pursuing a creative goal
The second lateral approach applies particularly to creative and science-based workplaces where the overall commercial objectives of a company are frequently orthogonal to the objectives of critical acclaim, peer review and scientific progress. Management writer Bill Breen wrote a fascinating account of one drug-development process, having followed a team of diabetes-drug specialists at Pfizer who maintained their enthusiasm despite repeated failures. As noted earlier, one interviewee observed, “Science folk don’t live for the big day when a drug makes it to market; they live for the small moments when you see exciting results in journals.” For these scientists, it was the ‘sheer intellectual challenge of the pursuit’ that they cared about. Commercial success was not irrelevant to them, but it didn’t change the way they behaved on a day-to-day basis.
As with the first lateral approach, the ultimate objective in this approach is clear: Pfizer has to seek ways of securing a good return on its shareholders’ money. And, even more so than with approach #1, pursuing this ultimate objective directly is very risky. Pfizer knows it will fail if its research scientists are told to align all their efforts around the financial objectives of the company - both because many of its experimental projects would no longer be pursued and because its top scientists would all quit.
The distinctive feature of this approach lies in the uncertain nature of the relationship between intermediate and end goals. Pursuing projects for their ‘sheer intellectual challenge’ is not a recipe for commercial success. But some projects end up being successful anyway, so that the money they bring in covers a whole range of failures. Executives in pharmaceutical companies, therefore, play the numbers game: they allow scientists enormous degrees of freedom to pursue early-stage projects on the basis that they can then select which ones to stop and which to invest more money in as their potential value becomes clearer.
In the first approach, the intermediate goal is positioned as a stepping-stone toward the end goal. In the second approach, the intermediate goal is being pursued for its own sake. Employees are encouraged to pursue this intermediate goal — even though its relationship to the end goal is uncertain - and it is then up to the company’s executives to decide when their commercial priorities should be brought to bear.
Lateral Approach #3: Taking a leap of faith
The third approach to goal setting differs markedly from the first two in one important respect: it does not involve executives taking a strong position about the company’s financial goals. In other words, while the first two approaches work on the basis that the company’s ultimate objective is to make profits for its shareholders, the leap-of-faith approach eschews such an assumption. Rather, it assumes that every company has multiple stakeholders (without any clear hierarchical ordering stating that some are more or less important) and that these stakeholders are interdependent of one another.
Consider the case of Seventh Generation, a 20-year old, privately held company that makes basic commodity products such as toilet paper, diapers and laundry detergent. The company is committed to becoming the world’s most trusted brand of authentic, safe and environmentally responsible products for a healthy home. Its name, explained President and Chief Inspired Protagonist Jeffrey Hollender, comes from the Great Law of the Iroquois that says that, in every deliberation, it behoves us to consider the impact of that decision on us for the next seven generations. What this means, in practice, is that decisions about what products to launch, where to sell them and how to source their materials are made according to a dramatically different set of principles than those used by Procter & Gamble or Unilever.
One such principle is transparency: when anything bad happens, the company makes sure that everyone knows about it rather than hushing it up. It’s not enough, say, for the company to be trying to eliminate a certain chemical from its laundry detergent - stakeholders have to be involved in the dialogue. So the company puts on its website anything critical that any of their stakeholders might want to know about. While such transparency may seem counter-intuitive, it has helped Seventh Generation thrive.
Another key principle is ‘reconciling systemic dissonance’, which in layman’s terms means avoiding a scenario in which one stakeholder wins at the expense of another. For example, Wal-Mart’s purpose of saving consumers money can hurt suppliers who are required to reduce their prices to Wal-Mart every year, which could be viewed as ‘the antithesis of being responsible’. So Seventh Generation does not sell its products through Wal-Mart.
This goes along with a key objective of Seventh Generation: to get other companies to think more responsibly about the planet and act accordingly. According to Hollender: “A lot of what we do is to actually engage with other businesses in helping them think about these things because the solutions aren’t going to come from 7Gen. We are a little company. Most of our influence is not even on our consumers; most of our influence is on other businesses who look at what we do and say, ‘Wow, that’s interesting. I didn’t think that was possible.’”
Seventh Generation may be an unusual example, but it illustrates an important point. While it sells green products, its real mission is much bolder and more multifaceted: it wants to create more conscious consumers, create justice and well-being through education, ensure the sustainable use of natural resources and pursue a number of other equally noble goals. In other words, the company does not have a clear, unequivocal end goal. Instead, it revels in the ambiguity of having many partly complementary and partly competing goals.
Now one might think that such an approach - nowhere among the objectives is ‘profitability’ - would have a negative effect on Seventh Generation’s bottom line. Not so: growth has gone from 25 per cent per year in the late 1990s, to 45 per cent in 2008, and even higher in 2009.
What are the relative merits of aligned and lateral approaches to objective setting? As a general rule, alignment-based approaches work best in a stable business world where work is relatively routine and conducted in a linear manner (for example, through a production line), where there is a reasonable degree of predictability about how things interact with each other and where outcomes can easily be measured. It also works well in small companies in which everyone knows one another and in which the objectives can therefore be quickly communicated.
Lateral approaches, on the other hand, are more appropriate in a turbulent business environment where work involves a high degree of creativity and interactivity, where the system in which one operates is complex and where outcomes are harder to predict and measure.
Clearly aspects of our current business environment are becoming more complex - hybrid alliances, joint ventures and outsourcing deals are increasing — and there is much greater concern today for the impact of our business activities on the social and natural environments. These and other factors are making lateral approaches to goal-setting more salient. That doesn’t mean alignment should be dismissed; it just means managers must be more careful about how and when it is used. In the final analysis, every manager must regularly consider where the company is going and then decide which approach to goal setting will help employees move effectively in that direction. Those lockstep boat rowers, after all, would be lost in a sailboat race that requires frequent tacking in a turbulent ocean.