Advanced Fundamentals · Lesson 1 of 8
The crisis in management
Medicine keeps people alive longer; management hasn’t kept companies alive longer. Look at how companies die, and at the one graph every business has to keep apart.
Are we facing a crisis in management?
Over the last fifty years, people have come to live much longer. Medicine can claim real progress as a body of knowledge. Can management claim the same?
Look at a few facts that come up again and again in studies of business:
- Companies are living shorter lives. The average time a company spends among the largest listed firms has fallen sharply over the past half century.
- Size doesn’t protect. Over the years, a large share of the biggest companies have gone bankrupt, ceased to exist or been acquired. The bigger and more successful a firm, the harder it seems to find it to see disruption coming; outsiders saw the obvious long before the incumbents did.
- Transformations mostly fail. Studies regularly report that around 70% of large transformation programmes fail, and the failure rate for digital transformation is higher still.
- Lasting success is rare. Set a modest bar for an “ever-flourishing” company, say: grow sales every year, grow profit every year, and keep return on investment above 25%. Very few companies on any major stock index clear it.
If management as a body of knowledge exists to create successful, ever-flourishing organisations, it can explain these failures after the fact, but it can’t seem to prevent them.
Pause and think: what does it mean if a body of knowledge can explain failures but not prevent them?
- That failure is just bad luck
- That companies should stop studying management
- That its basic assumptions may be wrong, and need to be examined, not added to
- That only big companies fail
A science that only explains after the event is missing something at its foundations. That’s where TOC starts: not with more tools, but with different assumptions about how organisations work.
Let us not give up: how do companies die?
To see where a new body of knowledge could help, look at how companies die. There are two common ways.
Ageing-related death. Costs creep up every year, with inflation, salaries and overheads, but those increases don’t add capacity. At the same time, markets for established products saturate or shrink. Slowly, the business becomes unviable.
Accidental death. The company makes a very large bet on new capacity or new markets. The future doesn’t arrive as planned, and the company runs out of cash.
The decouple graph
Both deaths show up on one simple graph: gross contribution (sales minus truly variable costs) against operating expense, over time. To keep surviving and flourishing, a business must keep its rate of gross contribution growing faster than its operating expense, without taking big risks with its capital. The two lines must stay apart, decoupled.
One of the main reasons the lines come together is that managers expand assets before exploiting them. They add capacity before using what they have, enter new markets before winning their share of existing ones, and hire before freeing up the people they already have.
The way out
The only way out is to keep the decouple graph trend, and that means getting more out of what the company already has, before expanding. The next lesson looks at where those hidden assets are, and why most companies can’t see them.
Check your understanding
Answer all five. Get four right to complete the lesson.
1. “Ageing-related death” of a company happens when…
- The founders retire
- Costs creep up without adding capacity while established markets saturate
- A big bet fails
- The company is acquired
Slowly, the business becomes unviable.
2. “Accidental death” comes from…
- Inflation
- Competition
- Bad hiring
- A big investment in capacity or markets that doesn’t pay off, so cash runs out
The future didn’t arrive as planned.
3. The decouple graph compares…
- Gross contribution and operating expense over time
- Sales and market share
- Headcount and revenue
- Price and cost per unit
The gap between them is profit.
4. A main reason the two lines come together is that managers…
- Cut costs too fast
- Raise prices
- Expand assets before exploiting them
- Ignore inflation
Exploit before you expand.
5. To keep flourishing, a business must…
- Grow operating expense faster than contribution
- Grow contribution faster than operating expense, without big risks to capital
- Stop all investment
- Only cut costs
That keeps the decouple graph apart.