Tuesday, July 28, 2009

Paradoxical Issues the Most Profitable Companies Manage Well

Priusjpeg314x129 Toyota is the number one car manufacturer in the world. It also sells more cars in the United States than either General Motors or Ford. The year prior to the global recession, Toyota reported a profit of $13.7 billion, where as General Motors and Ford reported losses of $1.97 billion and $12.61 billion, respectively. (1) According to an interview with Katsuaki Watanabe, Toyota’s 65-year-old president, Toyota's future will depend on its ability to strike the right balance between these paradoxical issues:

  • Short-term and long-term
  • Being a Japanese company and being a global company
  • The manufacturing culture of Toyota city and the design culture of Los Angeles
  • Cautious Toyota veterans and confident youngsters
  • Incremental improvements and radical reform

These are not empty words from Toyota's president. Professor Takeuchi and his colleagues studied Toyota for six years, interviewing hundreds of Toyota employees at all levels, in 11 countries. (2) They concluded that...
"The company succeeds because it creates contradictions and paradoxes in many aspects of organizational life... Toyota's culture of contradictions plays as important a role in its success as the Toyota production system does."
The researchers further point out that Toyota deliberately fosters contradictory viewpoints because they understand that “when people grabble with opposing insights, they understand the different aspects of an issue and come up with effective solutions." Do you understand this?

But let us not mistake anecdotes for evidence.

Researchers Dodd and Favaro studied the 20-year performance of 1,000 companies and found that the most profitable companies managed what the authors called “the three tensions” the best. (3) These three tensions were:

1. Profitability and growth;

2. Short-term and long-term;

3. Whole and parts.

The authors calculated each company’s “batting average,” defined as "how often a company is able to succeed at managing two competing objectives at the same time in any given year." They found that although most executives said they tried to manage both issues of the paradox simultaneously, the data showed that they failed well over half the time. Thus, the batting average for profitability and growth was only 38%; meaning only 38% of the companies were able to achieve both positive profitability and real revenue growth in the same year. For short-term and long-term, only 44% of the companies grew earnings over the previous year while also staying on their path toward long-term profitable growth. Finally, only 45% of the company’s divisions (i.e., business units) were able to add value to the whole while improving their stand-alone performance at the same time.

Baseballj0428624The authors found that a mere 10% increase in the batting average (i.e., hitting both objectives one additional year every 10 years) equaled a two-percentage point increase in annual total shareholder return. The authors point out that although this may seem like a small number, consider that an investment of $1,000 made in 1983 in the average S&P 500 company would be worth $5,620 twenty years later; with a return of two percentage points higher each year, that investment would have been worth more than $8,000.

Performing well on both of the competing issues in a paradox at the same time is important because it, not only expands your thinking, it shows your ability to meet the conflicting interests of different stakeholders.

What is good for organizations applies to individuals. When Professor Beech studied 400 middle managers, he discovered that simply raising awareness of the types of tension that frequently occur at work enhanced a manager’s ability to handle them. Many of the managers he studied commented that just understanding that there are no easy answers was empowering. (4)

This is why the web-based eXpansive Leadership Method (XLM) Assessment measures paradox in the “Agility Score.” Within minutes of completing your assessment (which takes less than 20 minutes to fill out), you can download your highly personalized Profile - a comprehensive, 21 + page report and customized action plan in PDF format. Click http://xlmassessment.com/ to take the assessment or see below for more info*.

Which paradoxes do you see at work? How are they managed?

Keep eXpanding,

*Your Personal Profile provides the insights required to leverage your strengths and minimize your weaknesses in the four, paradoxical leadership styles. By concentrating your energy on a few actions, you’ll develop the leadership flexibility you need to navigate today’s whitewater environment and tomorrow’s foggy future. Click http://xlmassessment.com/ to take the assessment.



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1. Thomas A. Stewart and Anand P. Raman, Lessons from Toyota's Long Drive, Harvard Business Review, July -- August 2007, 74 -- 83.

2. Hirotaka Takeuchi, Emi Osono, and Norihiko Shimizu; The Contradictions That Drive Toyota's Success, Harvard Business Review, June 2008, 96 -- 104.

3. Dodd, Dominic and Favaro, Ken, Managing the Right Tension, Harvard Business Review, December 2006, 62-74.

4. Beech, Nic; Contrary prescriptions: Recognizing Good Practice Tensions In Management, Organization Studies, January 2003, 1 -- 28.

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