How companies can think smarter

David Knott
London
[email protected]

Petroleum companies have become lean and mean over the last 20 years, but such corporate bodybuilding has often neglected the thinking function.

So say Jim and David Matheson, a father-and-son team at management consultancy Strategic Decisions Group. Jim is a director at SDG's Menlo Park, Calif., office, while David is a principal at the London office.

The Mathesons have written a book about "corporate mind-building:" The Smart Organization (Harvard Business School Press, Boston).

Their view that companies need more brain to match their brawn arose from an SDG study that revealed that, despite strategic planning, companies often have a high proportion of live projects that do not fit their plans.

"Also," said David, "a study of projects that failed revealed that many were 'no-brainers,' that everyone had easily agreed to. Marginal projects did better because people worked actively to improve them."

Uncertainty

One key to being a smart company, say the Mathesons, is embracing uncertainty. In reducing uncertainty in projects by depending on contractors, petroleum companies are not always being smart, they say.

"The smart organization," said Jim, "continually learns how to be better. But if a lot of learning is going on under an alliance project, there is the issue of whether this is core to the oil company or the contractor.

"You can end up with the companies you outsource to having a greater understanding. Oil companies are now worrying about whether turnkey suppliers can start to compete with them."

Another key to being smart is value creation, the Mathesons say. Here, the problem is deciding on one factor that can be measured as a pointer to success.

"For value creation," said Jim, "you want to measure long-term shareholder value. One measure of shareholder value for oil companies would be long-term discounted cash flow.

"If people don't understand value, they manage cost instead. This is okay short-term, but disastrous over a long period. Reengineering made firms efficient to a certain point. After that (point), slashing costs hurt the companies."

Liars' Game

A common annual demonstration of low corporate IQ comes at budget-setting time, say the Mathesons. They call this process the Liars' Game.

"Asset managers submit budgets with an extra 25% built in," said David. "Executives then cut everything by 25% to get the overall budget they want. This misses the point that every budget should not necessarily be cut equally. Yet if anybody tries to break out of this process, their budget gets hit."

The Mathesons cite General Motors as a company that learned to avoid the Liar's Game. GM has its asset managers provide multiple alternatives for projects in line with strategies, and its executives back the best.

"We have developed an IQ test for companies," said David, "which measures how good they are at making decisions. This can be applied to particular areas, such as outsourcing."

Jim added, "There is now so much total quality management in company operations that not much else can be screwed out. But I'll bet any company can find areas of strategic thinking where it can improve."