Inside Business: Firms that fail their IQ tests

All the faddish theories won't help a business which lacks corporate brain-power, writes Roger Trapp. A new book tells how it's done

THE RECENT financial turmoil in South-east Asia appears to have caught most businesses on the hop. Even now, some weeks after the initial shock, executives seem undecided about what to do next.

Some may have been so concerned by the developments that they will abandon attempts to break into what only a little while ago were seen as highly lucrative markets. But, say two management consultants, that could well be the wrong decision.

Just as businesses should have seen the possibility of problems in Asia, so should they now see the potential opportunities, say David and Jim Matheson, authors of the just published book The Smart Organisation (Harvard Business School Press).

They suggest that at the heart of organisations' troubles in this area is a lack of strategic decision-making ability. Encouraged by management fads and books such as In Search of Excellence and Re-engineering the Corporation, companies have made great strides in improving processes, or the ways in which they do things. But, says this father-and-son team, they remain less adept at doing the right things.

In the Mathesons' view, companies can be like athletes who concentrate on body-building at the expense of mind-building. In trying to be "mean and lean", they have done such muscle-flexing exercises as productivity drives, efficiency initiatives and corporate restructurings, but left themselves brain dead.

As they write: "We have seen many organisations achieve great things during that journey: new, life-enhancing drugs, customer-pleasing designs for new products and improved process technologies. In these firms we have observed behaviours and practices that energise and inspire people. We have seen the opposite as well: companies that routinely snatch defeat from the jaws of victory; behaviours and practices that suck the creative spirit out of employees; R&D efforts that lead nowhere. What explains these differences? In most cases, the differences are explained by strategic choices and - just as important - how these choices are made. Companies that consistently make smart decisions end up ahead."

This requires much more than slavishly following the principles set out by the quality movement. This approach takes a company only so far and may even divert attention from important issues. Just as commentators have enjoyed pointing to the rapidity with which many companies featured in Tom Peters and Robert Waterman's In Search of Excellence stumbled, so have they feasted on the setbacks experienced by winners of the Deming and Baldrige quality prizes.

The authors quote with approval Edwin Artzt, chairman of consumer goods company Procter & Gamble: "The limitation is in the area of strategy: total quality does not guarantee that companies will produce winning strategies. Winning strategies have to come from the minds of leaders and be augmented by input from the troops. Total quality ensures the success of a winning strategy and sustains success, but it doesn't automatically solve strategic problems."

So can companies improve? The Mathesons say they can. They extend their analogy between companies and people to talk of the concept of corporate IQ. Fortunately, unlike people - who are stuck with their IQ - companies can improve theirs.

How? The Mathesons and Strategic Decisions Group, the California-based consulting organisation Jim founded, have devised a formula. This is based on nine principles that underly strategic leadership and so have the potential to - in the current terminology - unlock "untapped value" in organisations.

These nine principles are ranged along three "axes" - Achieving Purpose, Mobilising Resources and Understanding the Environment. Within the first group are continual learning, a value creation culture and creating alternatives; in the second are open information flow, disciplined decision making and alignment and empowerment; and in the third are systems thinking, embracing uncertainty and an "outside-in" strategic perspective - shorthand for an appreciation of the external factors affecting the organisation.

Many companies will have difficulty grappling with these concepts, and many no doubt pay only lip service to them. But the authors are confident that adhering to this framework is what sets apart the likes of the diversified industrial group 3M, the electronics company Hewlett Packard and drugs group Merck, from the rest. But SDG, which has offices in Boston, New York, London, Caracas and Singapore besides Menlo Park, is particularly concerned with boosting research and development efforts. It has, after all, long been acknowledged that just spending more money in this area does not make a company more innovative than its rivals; rather, it is how it allocates that finance that is important.

For those willing to give it a try, there is even a Corporate IQ test at the back of the book.