Monday, April 08, 2013

The Discipline of Managing Disruption
To Harvard professor Clayton Christensen, coauthor of How Will You Measure Your Life?, a primary task of leadership is asking questions that anticipate great challenges.
by Art Kleiner

An important lesson from an interview with Clayton Christensen:

S+B: You’ve said that metrics like the internal rate of return (IRR) and return on net assets (RONA) lead to shortsighted decisions. What would be better measures? 
CHRISTENSEN: The answer probably depends on where you are in the cycle of a business. What you measure has a huge impact on what people prioritize—in fact, whatever you measure will put into place a way for people to game the system. Therefore, you’d better pick a measurement that causes people to do good things when they try to game the system. 
For instance, integrated steel companies used net profit per ton to measure their performance in the 1980s. This led them to want to get out of the low, commodity-based end of steel production, because volume at the low end makes it harder to get dollars per ton up. That decision made them vulnerable to the mini-mills. It turns out that most managers don’t even think about where their measurements come from. You can ask executives, “Who decided to measure net profit per ton?” They’ll scratch their heads and say they don’t know. It’s as if somehow the measure came from the sky. And it causes them to do crazy things.

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