If management is a craft that can be learned and perfected over time – are you actively pursuing excellence in management or are you taking on things as they come along? Moreover: Is your company actively pursuing excellence or does it appear to be just drifting in time? What is your, what is your companies level of ignorance?
Level 1: Ad hoc – manage as you go
Taking decisions as they come along, using intuition and experience as a guide, seems to be the most practiced management model. Both, on the level of the individual manager (see Jeffery Pfeffer in sources) brand on company level (see Rumelt in sources).
There are several possible explanations why this high level of ignorance is prevailing in todays management practice. First and simplest of all, the “Peter principle“. According the Peter principle, everyone is promoted up to the level of incompetence.
But the Peter principle is not scientifically proven, as it is hard to prove and hard to falsify, too.
People do not start their career as managers. They are promoted to be a manager from a career as a specialist. Of these newly created managers, how many define themselves over time as managers, seeking to perfect management as a skill? How many remain loyal to their professional ethos as a specialist and do not see management as a skill? The answer is: Most managers do not define management as a skill that is to be perfected. An answer that leading management thinkers, such as Rumelt and Pfeffer would surely support.
In other words: Managers take decisions as they go. They follow their individual experiences, values, their style of doing management. Without a holistic plan, without a consistent system how to manage things.
Level 2: Best practice -manage by standards
More advanced managers try to utilize best practices they picked up from training courses, books or just plain imitation of things they have seen or experienced.
On an individual level, these are things like meeting ethos, keeping minutes, regular one on one meetings, how to give feedback, how to conduct performance reviews, how to brief, how to present and communicate etc.
On a company level standards are things like organizational arrangements, processes, ways of communication, planning cycles. In short: The way business is repeatedly done in a company.
These standards bring order, reliability and efficiency both for the manager, employees and for the company. Standards may be haphazard, not well thought through and even sometimes counterproductive, but they are usually efficient and provide structure.
Level 3: A system – manage by hypothesis
If an individual or a company wants to transcend to Level 3, she or it must go beyond best practices and start to build hypothesis about causal relations between causes and effect.
Wait a minute and take time to think about this last sentence: “Start to build hypothesis about causal relations between causes and effect”. How many managers do you know who can stand the term “hypothesis” and really embrace the notion that a hypothesis is not a certainty, needs validation and might fail? How many would loose interest in what you are saying by just hearing “causal relations” ?
To manage with a system, a company needs to know what works best and what not, not just do thinks like they always have been done. To know means to seek confirmation in the data.
Let me give you an example. Take a retailer, which takes a decision on the number of merchandise that is displayed per square meter in the store. If the number is too high, the customer will have difficulties to find the merchandise she likes. Plus, the store will look like a discounter, the capital employed might be excessively high, inventory turn-over might decrease etc. If the number is to low, the customer might not find what he likes in the few items displayed. So what is the optimal number?
Companies and managers on level 1 would decide on a combination of gut feeling and the status quo. As these two factors are not exactly stable over time, inventory levels are likely to rise and fall excessively. Companies on level 2 would mix best practices into gut feeling and the status quo and come up with a number. With the addition of best practices into the decision process, inventories are likely to be more stable over time.
On level 3 the decision makers of the company would have to know cause and effect. They would know that there are multiple moving parts in the equation and that there are trade-offs to be made. They would have a system that regulates under which circumstances inventory should vary to a certain level.
Level 4: A learning system – manage by experiment
Managers working on level 4 take decisions not on a truth that once has been right, but on a truth that has the highest probability to prove right in the future.
Academically speaking, in the words of Fredlund Malek (see sources), they would frame a decision in a complex, cybernetic system, where the complexities of the relationships between cause and effects are not only recognized (as within a system) but also the stochastic nature of these relationships.
Taking the example of the retailer deciding on its optimal number of items per square meter in his stores, decisions makers would know that a level which achieved good results at a certain point of time, might not perform as well next time. They know, that there are multitudes of variables at work, e.g. weather, holiday schedules, events, the assortment, the store equipment, marketing displays, staffing levels etc. And they know, that just being right one time, is not sufficient proof to be right next time. They accept complexity, embrace it and learn over time themselves and enable the organization to learn.
The best level of ignorance
Daniel Kahnemann won a nobel price for his work “Thinking fast and slow” by proving that decisions done by an individual based on a fast, instinctive and emotional mode (called “system one”) can beat decisions taken slower, more deliberately, more logical.
Likewise, managers should not take all decisions on level 4, as this would overcomplicate matters, as best practices or even ad hoc decision making based on gut feelings and experiences can yield better results for decisions which need to be taken fast and/or have a limited “blast radius”, i.e. which can go wrong from time to time.
But the more esp. a high ranking manager thinks in level 4, learning systems, the better the results of a company will likely be. Especially in those complex environments created by the digital transformation of businesses.
It is good to ignore complexity for daily, routine problems in order solve problems in a hands-on manner.
It might be fatal to ignore complexity in complex situations in the long term
Consistent outperformance of the market by a company will need more level 4 thinking of high ranking managers: The highest level of awareness, the lowest level of ignorance.
The alternative – ignorance of complexity – will prove to be costly.