Nothing commands respect like intelligence in the business arena. We constantly seek out the smartest people to hire, we want our smartest people running the company, and we strive to outsmart the competition.
But you should actually focus on your company’s health. Not the stuff of corporate fitness centers, although I strongly recommend you stay in shape.
I’m referring to health as described by Patrick Lencioni in his book, The Advantage. Using a specialty label company as an example, I’d like to show you why a company’s health is ultimately more important than its smarts.
The Difference Between ‘Smart’ and ‘Healthy’
Before we get to the company analysis, let’s take a closer at Mr. Lencioni’s premise.
In The Advantage, Lencioni explains the “smart” organization, writing, “Smart organizations are good at those classic fundamentals of business – subjects like strategy, marketing, finance and technology – which I consider to be decision sciences.”
These “decision sciences” are critical to the success of a business, and like any good owner, you probably spend most of your time focused on them. But they’re only half of the picture, and truly don’t matter unless your organization is healthy.
According to Lencioni, a healthy organization has “minimal politics and confusion, high degrees of morale and productivity, and very low turnover among good employees.”
This is the workplace where the management teams are in alignment, a place where people are generally upbeat about where they work. Management and staff don’t lose sleep at night over what happens at the office. If they do, it’s because they’re excited about something new, not anxious.
Take a look at the table below, in which Lencioni illustrates the difference between smart and healthy.
Lencioni writes that whenever he shows this table to executives, they all agree that all the health issues are truly hampering their organizations. Yet none of them are addressing the problems. Why?
A scene from an old “I Love Lucy” episode explains the disconnect. Ricky enters the living room and finds Lucy crawling on the floor.
“What are you doing?” he asks.
“Oh, I’m looking for an earring that I lost somewhere in the bedroom.”
Ricky is puzzled. “If you lost it in the bedroom, why are you looking in the living room.”
“Because the light’s much better in here.”
Executives like to focus on the “smart” aspects of their organization because the issues are easy to see. A few metrics here, some disrupted processes there – these are surface-level issues. They’re also much easier to deal with than personnel conflicts.
Failing Vital Signs
Now let’s take a look at the specialty label company. On paper, this company appeared to have it all.
The $6.9 million operation was over 50 years old, with third generation ownership at the helm. It was in a niche that had the potential to generate 15-20% net income and had an executive team filled with bright thinkers. It was also a family business, which according to family business expert Tom Hubler, can out-perform a Fortune 500 company when aligned and cohesive.
The table was set, and this specialty label company should have been killing it. Instead, they were killing themselves, thanks to their poor organizational health.
The company, which included a father at the helm as CEO and his son as president, had struggled over the last 10 years to produce 4-5% net income. The CEO was happy with that type of income in the past, but burnout and poor health left him wanting improved performance. The CEO blamed the president, and I was brought into the arrangement because the company wasn’t hitting the father’s expectations or industry benchmarks.
After a careful quantitative and qualitative analysis, it was obvious the company was somewhat “smart.”
The organization made wise use of its technology, and its financials, while not great, were at least being tracked. Yes, the company was short on a strategic plan, and had little focus on marketing, but this is typical of a small business with 35-45 employees.
Overall, the company looked like it should have been performing better than it was. Yet the father told me they were planning a series of layoffs.
The mention of layoffs surprised us. The company was actually growing at 5% per year. When we compared them to the rest of the industry, they had the potential for 15-30% growth. They should have been expanding their ranks, not handing out pink slips.
The company also would have been an ideal acquisition target for a much bigger fish, but the management was so seriously out of alignment, that an M&A simply would not have been possible.
Why was the company floundering? Yes, a focused strategic business plan and a stronger emphasis on marketing would have done wonders. However, the problems ran much deeper than that.
The patient was suffering, and Patrick Lencioni knew the cure.
Trying to Heal an Unhealthy Organization
Seeing all the growth potential, and knowing the team had the smarts, we decided to take on the company’s health problems. We recommended an industrial psychologist provide a complete profile.
Fortunately, the patient wasn’t in denial (at least not yet), and they agreed. As you would expect, the results were dismal.
The profile indicated that the father and son were not aligned, and that the son should consider leaving the company. To the surprise of the father, the profile also indicated that the son was the true visionary, but was being stifled by his father’s controlling ways.
If you’re part of a family business, this scenario may sound familiar. It’s not uncommon for the entrepreneur to wield control of a company past the point of being productive. It’s also common for a son or daughter’s opinions to be short-changed.
In this case, the father was the cause of the ailing company. He refused to change. The son had managed to fight off the company’s high turnover rate and keep productivity high, but he battled his father every step of the way.
With no other options, the father stepped aside. In 12 months, the organization experienced a complete turnaround. Sales doubled. The company generated 18% net income. The patient was healthy. Too healthy, it turned out.
Seeing the company flourish, the father stepped back in and, unfortunately, started spending heavily on non-business related investments. The issues now shifted to poor “cash flow,” and the bank requested a serious focus on its loan agreement. Once again, the company began to flounder.
When last I made contact with the patient, the son was downtrodden. Instead of getting healthy, the company is spending too much time focusing on its “smarts.” It hires new people, but soon after the CEO plots to fire them, believing they’re overpaid and unproductive. In truth, they’re confused, unhappy and looking for options.
Where will this specialty label company go? While the rest of the industry is on an upward trajectory, they’re on an opposite path. And who’s to blame?
Why Don’t People Use the Door?
Confucius once said, “The way out is through the door. Why is it that no one will use this method?” In this case, why wouldn’t the father walk through that door again, especially after it worked so well the first time?
I believe it’s because of the “I Love Lucy” example. It’s not easy enough to focus on organizational change. It’s much simpler to deal with the decision sciences than to resolve the underlying problems.
Think about your own company. How many times are you prevented from making fundamental changes that can rocket you to the forefront, all because you’re trying to patch up personnel issues?
As much as we like to focus on whiz-bang new technologies, it’s still people that make the world go round. Instead of running from issues, we need to confront them, head-on.
Lencioni has a number of recommendations for making a patient healthy. One of his biggest is to build a cohesive leadership team, and communicate with clarity. In fact, he pounds on the issue of clarity, devoting three chapters to the practice.
One way you can help achieve that kind of clarity is to use more formal processes in your business. Back to our specialty label business; if they had established more clear-cut metrics for success, it would have been far more difficult for the father to randomly slash and burn his business.
If the company had agreed to pre-set success measures, for example, the father would not be able to fire the new hires simply because they were making “too much money.” With a salary structure tied to the bottom line, his knee-jerk, emotional responses would have been kept at bay.
I’ll leave you with one final thought from Lencioni: Health always trumps smarts.
“An organization that is healthy will inevitably get smarter over time,” he writes. “That’s because people in a healthy organization, beginning with the leaders, learn from one another, identify critical issues, and recover quickly from their peers.” In contrast, in the smart organization, “Leaders who pride themselves on expertise and intelligence often struggle to acknowledge their flaws and learn from peers.”
Don’t make the mistake of the failed father/son specialty label company. Focus on your company’s overall health. It will be the smartest move you’ve ever made.
Rock LaManna, President and CEO of LaManna Alliance, helps printing owners and CEOs use their company financials to prioritize and choose the proper strategic path. He provides guidance and how to grow a printing business, merge with a synergistic partner, make a strategic acquisisition or create a succession plane. Rock can be reached at email@example.com.