Optimizing a Business
write 300 words or less: Most people found the General Motors ignition switch scandal appalling. Not only did the defect result in over 100 deaths, but it turned out that fixing the problem would have cost less than $1 per car. For many, it was a horrible indictment of corporate greed. Profits, it seems, were valued more than human lives. Yet look a little closer and it becomes clear that the real problem wasn’t callousness, but mismanagement. The defect in the ignition system was, in fact, relatively minor. The real problem was that it caused airbags not to deploy. Each subsystem was performing to standard, but the interaction between them resulted in disaster. Unfortunately, most organizations today fall into the same trap: they look at isolated metrics, but fail to see the whole system. They optimize each part of the business separately, and fail to consider how they interact. When we see an operation as a set of isolated metrics to optimize, we can lose our sense of context and decrease overall performance — an efficiency paradox. In The Good Jobs Strategy, MIT professor Zeynep Ton makes exactly this point through her study of retailers. The conventional wisdom says to maximize profits through low wages, optimized scheduling, and extensive inventory management systems. Yet her research finds that these practices often serve to reduce overall efficiency and profitability. One example she gives is how bad weather can wreak havoc on an “optimized” system. A rainy day reduces store traffic, resulting in lower sales. Lower sales translate into reduced staffing forecasts. Stores are then understaffed when the sun comes back out, leading to poor customer service and inventory tracking problems. The result is even worse sales, even more reduced staffing, and a vicious circle of lost revenue. By contrast, some high-performing retailers such as Trader Joe’s, Costco, and Quick Trip, deliberately increase their labor investment through better wages, increased training, and over-staffing. While these extra costs might not look good on a spreadsheet, it allows them to handle a lot more complexity and generate new ideas, which increases performance. In his book Team of Teams, General Stanley McChrystal describes another aspect of the over-optimization problem. Although his soldiers were winning every battle, somehow they were losing the war. What’s more, every time they began to gain the upper hand by shifting tactics, the enemy would adapt. It was beginning to seem like they were engaged in a never-ending game of whack-a-mole. McChrystal realized that although his squads of highly trained commandos and intelligence analysts were performing their individual tasks with world class alacrity, they were failing to, as he put it, “see the whole system.” For example, teams of commandos would go on a raid and capture valuable intelligence, but then bags of documents and hard drives would sit in a closet for weeks before anyone got a chance to look at it. Other times, an analyst would make an important breakthrough, but was unable to get that intelligence to the ground units that could make best use of it. McChrystal took the unusual step of decreasing the emphasis on efficiency and focused his sights on agility and interoperability. By beefing up the roles of liaison officers and embedding specialists in each other’s units, he slowed each unit down slightly, but overall operational efficiency increased by a factor of seventeen. Managers often fall into the trap of thinking that by improving each part of their enterprise, they will improve the whole. However, the opposite is often true. Success and failure are rarely determined by performance against a plan, but rather how you adapt for events that cannot be foreseen. If, as Zeynep Ton described, an errant thunderstorm or blizzard can throw your system off, it’s not much of a system. The problem is that the world is far too complex to be reduced to excel sheets, organization charts, and diagrams. In the final analysis, nobody cares what your internal metrics are. What’s really important is not the nodes, but the network. That’s what McChrystal means when he speaks of “seeing the system.” If everyone is trained — and compensated — to focus on only their part of the task, the shared mission is lost. That’s not a path to greater efficiency or to profitability, but to oblivion