By PAUL ORFALEA AS TOLD TO ANN MARSH
By 1983, we were doing about $70 million in sales a year with slightly more than 120 stores. We also had about 30 independent-minded partners running various corners of Kinko's. We were 30 partners—with an average age of about 28—motivated by our own value systems, ideals, and ambitions. With scant input from the head office, each person made his or her own decisions, whether they ran a single store or a string of them. The growth, even at that early point, was getting out of hand.
At the time, our head office was located on the second floor of the El Mercado shopping center in Santa Barbara. We were experiencing growing pains. The first half of the eighties was a time of furious growth and none of us had bothered to put certain fundamentals into place. I remember Dorothy Sandow, who used to do the books in our office, wondering out loud, "How will we stay the same as we grow?" Good question. I didn't have the answer. We'd grown so fast that we hadn't even bothered to secure trademark protections for ourselves nationwide. We hardly had any written agreements with anybody; most of our business was conducted on a handshake. Aside from our status as independent Subchapter S corporations, we lacked any structure to speak of.
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Workman Publishing Co.
To get some perspective on things, I enrolled in the Owner/President Management Program at Harvard Business School, which I attended three weeks a year for three years. While sitting through classes there (and never taking a note, though I did read my case studies), I realized we needed somebody—an outsider definitely and maybe an academic—to help us continue to grow while still retaining our unique culture and not killing each other in the process. My hunt lead me to John Davis, who got his doctorate at Harvard Business School and was an assistant professor at USC at the time. I called up John to ask him to meet and talk things over with me. John agreed to, even though at the end of our first conversation I abruptly hung up on him—"I gotta go," John remembers me saying, leaving him listening to a dead phone line. I guess he understood I was busy. Somehow, he was intrigued enough to follow through.
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John's association with Kinko's would last for nearly two decades. He drove up to meet me and got a look at how our head office functioned. My partnership, Kinko's Graphics Corp., was still handling all the books for the partners for a low monthly fee. It wasn't the greatest structure. We were getting by, but we could do better. Later, John turned up at one of our partner meetings. He sat in the back, scribbling enigmatically into a small red notebook. Here's John:
[BOOKS_excerpt_Orfalea_headshot]
California Polytechnic State University, San Luis Obispo
Paul Orfalea
"In my field we learn about organic organizations, but I think it's fair to say that I'd never seen, at that point and subsequent to that time, an organization that was quite so organic. Things just happened as they needed to happen, or maybe a little later than they needed to happen, but they happened. There didn't seem to be a plan. There didn't seem to be a structure. There didn't seem to be much of anything, but a lot of things were getting done at the right time. It was fascinating to me. I felt like an anthropologist trekking through the jungle and kind of stumbling on this tribe that I had never seen an example of before. I had never seen organic Republicans. They were really interesting creatures. They were capitalist hippies, really. It was bordering on strange. You can only be so organic without defying the public health laws, right? The growth of this company and the growth of the people was clearly managing to outstrip any reasonable attempts to provide logical, sane infrastructure to the company. There were costs to it, but it was part of the magic of the company."
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At the end of that first partners meeting that he attended, everyone was curious to know who this scholar in our midst was, taking notes and saying nothing while the rest of us argued, pontificated, and generally exercised our democratic rights. Eventually, John took the microphone and shared some of his observations about what he saw in us and in Kinko's. He told us he saw us moving toward a more formal organization, but he saw us doing it in our own "organic" way. He made us laugh. We liked him. We liked what he had to say.
Over the years, he came to play a variety of roles at the company. He started as an outside consultant and eventually became a full board member, a position he held for ten years. He also served as, variously, educator-in-chief, peacemaker, resident shrink, and company philosopher. As my partner Tim remembers it, "We had to start growing up once John Davis became involved. He realized we were struggling with late adolescence. We didn't yet realize that commitment and hard work could go a long way. He had a fabulous influence on us." A lot of our partners were somewhat like me. We got things done, but we couldn't talk about what we were doing with the sort of context and eloquence that John brought to bear in any discussion. He became our spokesman. He helped us to communicate better with each other and with the outside world.
John noticed our tendency to philosophize right off the bat. "At that first partner meeting," John says, "they were all just sitting around talking about their business not just in financial terms and marketing terms, but in philosophical terms as well. It was like being on the set of The Big Chill. These people didn't go to college together, but it was almost like they did. And even though Paul played the role of paterfamilias he was basically just the big brother. He encouraged very collegial relationships, buddy relationships."
Two years later, in 1985, John decided he would put our proclivity for debate and discussion to work for us. He made a suggestion. John felt strongly that we needed to write down a set of guiding principles to unite our far-flung factions, giving us a flag to rally around. We took John up on it. We decided we would go ahead and try to put something on paper about who we were and who we wanted to be. John drew up the first draft and derived the content from what he'd observed in us for two years. The result came to be called the "Kinko's Philosophy." Like so many of our best ideas at Kinko's, this one originated not with me, but with someone from the outside who, by virtue of being undistracted by being in the business, was able to offer some valuable insight. We spent six months hashing out the Philosophy, and then continued to revise it over the years. The final version read as follows:
Kinko's Philosophy
Our primary objective is to take care of our customers. We are proud of our ability to serve him or her in a timely and helpful manner, and to provide high quality at a reasonable price. We develop long-term relationships that promote mutual growth and prosperity. We value creativity, productivity, and loyalty, and we encourage independent thinking and teamwork.
Our co-workers are the foundation of our success. We consider ourselves part of the Kinko's family. We trust and care for each other, and treat everyone with respect. We openly communicate our accomplishments and mistakes so we can learn from each other. We strive to live balanced lives in work, love, and play. We are confident of our future and point with pride to the way we run our business, and treat each other.
We plastered the Philosophy everywhere. We printed it up on small, laminated wallet-sized cards so that people could carry it around in their pockets. Some partners hung the Philosophy on the walls of their stores. Eventually, and even though it seemed hokey at first, we started reciting it at our partner meetings and picnics as if it were the Pledge of Allegiance. But we didn't view it as fixed in stone. The tenets of the Philosophy were inherently contradictory: even though we valued "independent thinking," we also encouraged "teamwork." The Philosophy became a tool for managing ambiguity, one of the most difficult challenges in any business. It provided a ready forum for discussions about how we would continue to grow and work together as individuals who were also members of a collective. As we changed, we constantly floated ideas for how to further hone, expand, or otherwise alter it. I was forever asking people, "Do you think we should change the Philosophy? How would you rewrite the Philosophy?" It became a mechanism by which everyone became invested in the direction of the company.
In the Judeo-Christian tradition, there are the Ten Commandments. We may not abide by all of them all of the time, but they are there to guide us. Every company should take the time to write a philosophy statement. One of my favorite companies, Johnson & Johnson (also one of my longtime favorite investments), has a great one. I bought the stock after I watched a 60 Minutes piece on the infamous crisis during which eight people died from poisoned Tylenol pills back in the eighties. J&J decided that any response it made to the crisis would be true to its credo, which has guided the company through the past 60 years. The first sentence of that credo reads, "We believe our first responsibility is to the doctors, nurses, patients, to mothers and fathers and all others who use our products and services." In other words, covering their own butts is explicitly not priority number one of J&J's leadership. The company leaned on its own stated belief system in a time of need. J&J responded to the crisis quickly, with compassion and, in the process, won new loyalty from its customers.
Having a high-minded vision that we all embraced for Kinko's was immeasurably helpful. At least we knew if we failed to meet its ideals, we could get back on track and point ourselves in the right direction. As John puts it, "The Philosophy was the expression of the ideal culture. But it was our goal. It was what we wanted." The only limit to your growth as a person or a company is your imagination. When you think about it, there are only two things in life: matter (cars, sidewalks, bodies, etc.) and ideas. These are the only two things on Earth. (In fact, scientists now believe that, at the subatomic level, there is really no significant difference between matter and thought; in other words, our thoughts truly create our reality. Isn't that cool?) The way I see it, you're only as good as your dreams. If all of us at Kinko's could imagine an ideal place where we could all work together, we had a shot at achieving it and much of the time we did.
Envision Your Vision
Having a vision is beneficial in the private, not just the corporate, realm. Early in my time at Kinko's, I took a class on goal setting at the University of Virginia, but goal setting has always been in my blood. Picturing myself owning my own business one day helped me to navigate through my difficulties in the second grade. Even as Sister Sheila paddled me, I told myself that someday I would own my own business and have secretaries who would read for me. By the time Kinko's was up and running, I made a habit of setting new goals every six weeks or so. Wherever I went when I was with Kinko's, I carried a four-subject notebook. I didn't write long letters or reports, of course, but I did make lists. The notebook was full of them. I was an inveterate list maker. I set personal goals. I set play goals (every January 1, I scheduled my blocks of vacation for the year). I set business goals. I set financial goals. I worked out the cash flow for Kinko's in one section of the notebook. I always say that if you don't know your business well enough to calculate your cash flow on the back of an envelope, you've got problems. My coworkers were constantly criticizing me for having too many top-priority items to attend to. It was tough for me to stay "on" my business while addressing so many priority issues. So I classed them as Big, and then Big-Big, and, finally, Big-Big-Big. It sounds corny, but it worked for me.
At the end of our family vacations, or any business trips, I became maniacal about getting my lists in order. Before I headed back to work, I got to work on these lists. Completing them could take me the better part of the day.
I quickly learned not to be too specific in putting my goals onto paper. I remember one time in 1975 I set an arbitrary goal for myself to open three new stores between September and December. In order to open store number three, I pushed too hard. The store, in Westchester, California, turned out to be one of our worst locations ever. We constantly clashed with the landlord at that site. Eventually, we closed it. I've since learned that goal setting should be more like an impressionistic painting. As opposed to "Open three new stores by the end of the year," my goal became simply "Expand the business." Keep your goals as anchors and then wander around among them, giving yourself plenty of room for error and experimentation. I used to sketch the following illustration for my partners back in my twenties. You start with some clear goals. Here they are represented by two straight lines:
[parallelLines.gif]
Then you allow for a little spontaneity. You wander around among them. Like this:
[dollarSign.gif]
Ta-da! See what you end up with? Know where you're going, but don't be too wedded to the result. My friend John Davis used to say, "The best part about goal setting is going through the process. First make your plan, and then throw it out!" Remember that line from the old musical South Pacific, "If you don't have a dream, how you gonna make a dream come true?" Good question. I love to sing that line to my partners from time to time. As far as I was concerned, the Philosophy was our strategic plan. It was the expression of our collective dreaming at Kinko's. We each need to do our individual dreaming as well.
Living It
The more we recited the Philosophy and embraced it as something real, the more it became, over time, something we held very close to our hearts. Some of our former coworkers have imported modified versions of it into the new companies they started after leaving Kinko's. I carry a copy of the Philosophy around with me on one of those laminated cards and still find myself having reason to pull it out and refer to it.
At every picnic and partner meeting, someone was chosen to go to the front of the room and recite the Philosophy at the microphone for the rest of us. It could be someone who had made a pioneering change or someone who had survived hardship. One year it was our partner in Chicago, Theresa Thompson, the first of us to take her stores to a 24-hour schedule, who led us at the mike. Other times, Karen chose a partner who had recently struggled through a trying time. My partner Todd Johnson was only 30 and had been working with us for eight years when his young wife died suddenly in 1984 from an aneurysm. She was 28 years old and pregnant with their fourth child. Doctors managed to save the infant but couldn't save her. She died a month before Natalie and I were married. I'd gotten to know Todd and his family well over the years so I flew out to them after it happened. He was planning on coming out to Santa Barbara from Utah for our wedding anyhow. I told him to bring his kids and stay at our place while Natalie and I went on our honeymoon. At a partners meeting about a year later, Todd read the Philosophy out loud to everybody. In the midst of all the general zaniness and uproar that accompanied most of our company meetings, moments like these were powerful.
Todd: "Reading the Philosophy made it more than a written philosophy. It became a living philosophy. I've never been great verbally, but the first time somebody laid out the Philosophy, I thought, 'That's exactly how I feel.' You heard it all the time. When Paul picks up on something, he's relentless. It became a way of life in the stores. At first, when we recited it, I kept thinking that I felt like I was working for Amway, but I knew that Paul believed in it. When someone practices a belief system in his life, you can see it. It was Paul's own philosophy and he promoted it to the point where it became everyone else's philosophy."
If you flipped over the small laminated card that was printed with the Philosophy on one side, you would find a list of guiding principles. These are the "Kinko's Commitments to Communication."
There were 14 points, with a final add-on at the end:
1. I will recognize your value to Kinko's.
2. I will share my goals with you, and together we will develop an action plan.
3. I will respect and utilize the chain of command to resolve problems.
4. I will solicit immediate feedback to assure we understand each other.
5. I will talk with you, not at you.
6. I will listen with an open mind.
7. I will try to see the situation from all points of view.
8. I will tell you when I don't know the answer, and together we will seek the answer.
9. I will give you honest and sincere feedback.
10. I will not usurp your authority.
11. I will not confront you when I am angry.
12. I will not gossip.
13. I will not publicly embarrass you.
14. I will admit when I am wrong.
. . . and in every case, I am worthy of the same from you.
I wish I could tell you I abided by each of these tenets all the time myself, but I'm a human being and we were a company of human beings. I always figured when we hired someone, we got the whole enchilada. That applied to all of us. I plead guilty to personally violating many of these tenets. But, just because I fell short myself from time to time doesn't mean I underestimate their importance. Our partner David Vogias, who owned and ran stores in Ohio, Pennsylvania, New Jersey, and New York, was the driving force behind the Commitments to Communication. Dave felt we needed the commitments to further define how the Philosophy should be implemented—to make sure it was being implemented. The truth is, Dave and I argued so much that he proposed the commitments as an effort to lay down the rules of engagement between him and me. The commitments weren't passed by all the partners. They were passed in a committee of which Dave was a member. As Dave remembers it, "I forced the Commitments to Communication."
Looking back I should have argued more to change some of these commitments. Number 12, for example: "I will not gossip." What does that mean, really? I never understood that one. How can we function as a community and a family if we don't talk about each other? Talking and learning about each other is one of the great pleasures in life. I think that commitment should have read, "I will not engage in malicious gossip." You can see how much debate these value statements can inspire. In retrospect, I would have also instituted a values statement covering all meetings. It would have stipulated that, when it comes to meetings, everyone in attendance would (a) arrive on time, (b) understand what the purpose of the meeting is, and (c) seek together to find a conclusion so that the meeting could end—and end quickly.
Nitpicking aside, the Commitments to Communication further refined some of the practical ways we sought to live by the Philosophy.
As we grew, we came to rely on the Philosophy in more concrete ways. By the late eighties, we began circulating anonymous coworker surveys to determine whether the Philosophy was being applied in all our stores. We used the Philosophy to devise a set of criteria that we used to evaluate coworkers. As we matured as a company, our president, Dan Frederickson, instituted a program of management effectiveness surveys and, later, 360-degree reviews wherein coworkers at the head office, Kinko's Service Corp., were evaluated by their colleagues, by the people who reported to them, and by those they reported to. From all directions, coworkers evaluated each other against the principles we'd voted on and laid out together in the Philosophy.
Before coming to Kinko's, our partner Gerry Alesia had worked at Ralph's Grocery Co., General Foods, Bally's, and Ramada and he hadn't come across anything like the Philosophy. "It was very unusual," Gerry says. "It took several meetings for us to write and there was a lot of fighting about the individual words. We pretty much lived and believed what the Philosophy said. We believed that the coworkers were the foundation of our success. It wasn't just lip service."
The fact that we shared a belief in a set of fundamental principles and tenets made it, paradoxically, easier for us to tolerate conflict. I've always loved controversy and debate. I believe it's necessary for a healthy company, indeed, every healthy relationship.
Here's my partner Mark Madden, "Paul and I once met with a real estate guy in Santa Barbara. He asked us what the perfect size was for a Kinko's store. Paul said about 8,000 to 10,000 square feet and I said about 4,000 square feet. Obviously, quite a difference. We debated with each other a few minutes and then looked up, a bit embarrassed that we couldn't even agree on the size of a store. The guy got a huge kick out of seeing us debate basic business principles. He was used to seeing a boss and a bunch of yes-men and -women who would never disagree with the leader. He loved that Paul was the one pushing for a bigger, longer-term opportunity, while I was the one pushing for moderation and improved short-term profitability."
We all did business differently. Take my partners David Vogias and Tim Stancliffe. Dave, who ended up with 50 stores, admired and sought to emulate big blue-chip companies like General Electric. He ran his company with many more levels of bureaucracy than I would have. And yet, the policy manual that his company wrote up for one of our core businesses, Professor Publishing, ended up being adopted by most of the other partners. I hate policy manuals myself. Obviously, I'm never going to spend free time reading them. But, if our other partners could make use of one, I'm glad Dave got it written. He loved concocting five-year strategic plans—an activity I find pointless and unbearable. In contrast, he thought my stores were loosely and poorly run. I repeatedly told him that he could have expanded his business ten times faster were he not so wrapped up in tending to all that bureaucratic mumbo jumbo. Then there was Tim, who owned stakes in about 170 stores in Colorado and surrounding states. Tim was so frugal with his money that, in my view, he never invested enough of his profits in testing new ideas. Tim didn't protest this view of his management strategy because he liked to put new products through a lot of testing and careful consideration before using them. Tim: "No-new-products-Tim was one of my nicknames. I reveled in that kind of attention." As a result, he was never on the cutting edge of adopting our newest innovations. This meant that all the Kinko's locations in one entire corner of the country lagged behind other regions. We constantly argued about our different views of the world and of business.
Simply put, we didn't treat each other with kid gloves. We knew we didn't have to. We could stand a little controversy and trust we'd emerge the better for it. Having a shared philosophy gave us resilience.
As John Davis observed, "The Philosophy became a fundamental aspect of the Kinko's religion. When somebody stood up and recited the Philosophy at the end of each meeting, it was like a recitation of the Nicene Creed [a doctrine of Christian faith adopted in a.d. 325]. It was 'This is who we are.' People really understood that the strength of the group came from the ability to speak openly about things and to challenge each other. It was a culture of being open and honest. You could go through really turbulent meetings where there was yelling and arguing and some harsh things said, and at the end of the meeting, we would recite the Philosophy together. And it was OK."
Excerpted from "Copy This! How I Turned Dyslexia, ADHD, and 100 Square Feet Into a Company Called Kinko's" by Paul Orfalea. Copyright © 2005, 2007. Used by permission of Workman Publishing Co. Inc. All Rights Reserved.
Wednesday, June 18, 2008
Shrinkage problems-monitoring employee theft
For small businesses, preventing theft and fraud by employees can be an uphill struggle.
Unlike their big counterparts, small companies usually can't afford a large security staff or big-ticket monitoring technology to keep an eye on things. And they often don't generate enough sales volume to make up for the losses from pilfering.
WSJ's Raymund Flandez reports how grocery stores and retailers are waging a continuous battle against employee theft. He discusses "sweethearting," an unauthorized giving away of merchandise.
Now a new generation of security technology aims to give small businesses an inexpensive defense against unscrupulous employees. Some of these systems let business owners who are on the road check their security cameras over the Internet and get email alerts if something unusual happens, such as employees closing up shop early.
Restaurants, meanwhile, can use tableside credit-card readers to prevent cashiers from stealing customers' card numbers or inflating the tips written on bills. And grocery stores can use a combination of security cameras and software to automatically spot cashiers who try to slip free products to their friends and family.
These new products are arriving as stores face mounting losses from theft. According to the latest National Retail Security Survey, losses from "shrinkage" -- which includes theft, fraud and error -- reached a new high of about $40.5 billion in 2006. About half of that -- $19 billion -- came from employee theft. Shoplifting, in contrast, accounted for about a third. (The study, conducted by the University of Florida and the National Retail Federation, was funded in part by grants from makers of security systems.)
Here's a look at some of the most innovative new security systems out there.
TROUBLE IN STORE
• The Situation: Theft can mean disaster for a small business, wrecking its profit margins and hurting its reputation.
• The Trouble: Small businesses often can't afford the big-ticket security solutions big companies favor.
• The Way Out: A host of new technologies are filling the void, giving small operators a way to protect their businesses on the cheap.
WATCHING FROM AFAR
For a small-business owner worried about employee theft, leaving the shop in someone else's hands can be nerve-wracking. Now a host of security providers let bosses check in on things from the road.
For instance, Alarm.com Inc., of McLean, Va., sells a system that allows owners to travel to a Web portal and get remote feeds from security cameras, change entry codes and trigger sensors that monitor systems such as lighting and climate control. If a problem arises with those systems -- such as a power outage -- you can get an alert via a text message or email.
Recently, Kevin Donahue, owner of a Planet Beach Franchising Corp. location in McLean, was in Amsterdam on business when he received a text message from Alarm.com: The spa's alarm system had been armed at 3 p.m., before the usual closing time. He checked the security cameras online and saw the facility was dark.
So he called his manager and got the explanation: The spa had closed early because of a snowstorm.
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"The greatest thing is that it gives me the ability to travel and do the things that I do," says the 34-year-old Mr. Donahue, who's also a full-time salesperson for a tech company and often travels outside the country on sales trips. "It gives me the ability to manage my staff remotely. I can call and say, 'What's going on?' "
Mr. Donahue bought the system for under $100 and pays a monthly fee of $39. Alarm.com says the base price for the system is usually $500, with a monthly fee of $29 to $50, although those numbers can vary by reseller and area, as well as the features customers choose.
SAFEGUARDING CARDS
Another new technology helps small businesses -- particularly restaurants -- protect against "skimming." In this scam, cashiers steal customers' credit-card information for use in identity theft.
About 70% of credit-card-fraud cases involve skimming, according to Trustwave Holdings Inc., a data-security and compliance-management company based in Chicago. In many cases, business owners are ultimately held responsible for their cashiers' crimes -- costing them money and damaging their reputation.
For some businesses, the solution is to let customers become their own cashiers. At Southeast Grille House in Brewster, N.Y., servers bring a wireless gadget called On the Spot to their customers' tables. Patrons can swipe their credit cards on the device -- which is about the size of a brick -- punch in the tip amount and print out a receipt to sign, all from their seat.
Since the customer enters all the information, cashiers can't inflate the tip -- and the receipts don't contain much personal data that could be stolen and used for identity theft.
The device, from VeriFone Holdings Inc. of San Jose, Calif., runs about $1,000. Southeast Grille House owner Domenic Chiera says it was worth the investment. "It's fast, and the receipt has little information, so no names or numbers," says the 57-year-old restaurateur. "I like the system. It works well for us."
CHECKING OUT FRAUD
At grocery stores, thieving employees are almost as much of a problem as shoplifters. About 40% of grocery-store thefts were attributed to employees in 2006, according to the Food Marketing Institute's Supermarket Security and Loss Prevention 2007 report. One of the biggest problems is "sweethearting," in which cashiers give friends and family freebies by pretending to scan items at the register.
Many stores use closed-circuit television to watch checkout lines. But the stores often don't have the time or manpower to review the tapes, so the cameras aren't a strong deterrent. StopLift Inc. of Bedford, Mass., has devised a system that combines cameras with advanced software to spot sweethearting automatically. The technology can recognize when cashiers make unusual movements when handling items -- such as placing a hand over a bar code -- and determine whether the items were properly scanned.
[SECURITY_sweethearting]
Courtesy of the company
'Sweethearting' theft in progress as seen in a StopLift video
When the system identifies sweethearting, it places blinking squares over the video to show exactly where the theft occurred. Then it gathers the incriminating clips together for owners to review.
Stores "have the cameras but they don't have the manpower to watch it," says Malay Kundu, chief executive of StopLift. "What we've done is sort of automate that."
Three Big Y Foods Inc. stores in Massachusetts and Connecticut have been testing StopLift's Checkout Vision Systems for the past five weeks. Mark Gaudette, director of loss prevention at the Springfield, Mass., grocery-store chain, suspects that employee theft accounts for about 38% to 40% of its total losses.
"We've got pretty much a zero-tolerance policy for any folks that steal," Mr. Gaudette says. "What we're hoping is that all these technologies will help us in loss prevention and educate all of our staff."
The stores had already been using closed-circuit television and software that scrutinizes sales data for abnormal behavior or inconsistencies at the cash register, such as excessive voids or refunds. But those measures weren't enough to stem the losses.
StopLift's system works with those tools to ferret out sweethearting. For instance, if the sales-data software shows that somebody rang up too many coupons on one order, the StopLift system can analyze video from the exact moment this happened.
[losses from theft chart]
Big Y is still analyzing the results. So far, Mr. Gaudette says, he has spotted some sweethearting incidents, but he has seen far more cashier errors, such as giving up on hard-to-scan items instead of calling the manager for help.
Pricing for the technology is done on a case-by-case basis, says StopLift's Mr. Kundu. He says that for a typical medium-volume store, monthly subscriptions currently run about $2,000.
Of course, buying these systems isn't the only option available for small stores. Experts suggest that stores could hire fewer part-timers -- who have less attachment to the business and are more inclined to steal -- and conduct more-rigorous pre-employment screenings to weed out potential thieves.
Employers must also hammer home a code of conduct, experts advise. For instance, give new hires talks on integrity and loss prevention and offer anonymous hotlines where employees can notify managers about fellow workers who may be stealing.
The bottom line is that employees must recognize they have a part to play in stopping theft, says Joseph LaRocca, vice president of loss prevention for the National Retail Federation. "Loss prevention is really everybody's responsibility," he says.
Unlike their big counterparts, small companies usually can't afford a large security staff or big-ticket monitoring technology to keep an eye on things. And they often don't generate enough sales volume to make up for the losses from pilfering.
WSJ's Raymund Flandez reports how grocery stores and retailers are waging a continuous battle against employee theft. He discusses "sweethearting," an unauthorized giving away of merchandise.
Now a new generation of security technology aims to give small businesses an inexpensive defense against unscrupulous employees. Some of these systems let business owners who are on the road check their security cameras over the Internet and get email alerts if something unusual happens, such as employees closing up shop early.
Restaurants, meanwhile, can use tableside credit-card readers to prevent cashiers from stealing customers' card numbers or inflating the tips written on bills. And grocery stores can use a combination of security cameras and software to automatically spot cashiers who try to slip free products to their friends and family.
These new products are arriving as stores face mounting losses from theft. According to the latest National Retail Security Survey, losses from "shrinkage" -- which includes theft, fraud and error -- reached a new high of about $40.5 billion in 2006. About half of that -- $19 billion -- came from employee theft. Shoplifting, in contrast, accounted for about a third. (The study, conducted by the University of Florida and the National Retail Federation, was funded in part by grants from makers of security systems.)
Here's a look at some of the most innovative new security systems out there.
TROUBLE IN STORE
• The Situation: Theft can mean disaster for a small business, wrecking its profit margins and hurting its reputation.
• The Trouble: Small businesses often can't afford the big-ticket security solutions big companies favor.
• The Way Out: A host of new technologies are filling the void, giving small operators a way to protect their businesses on the cheap.
WATCHING FROM AFAR
For a small-business owner worried about employee theft, leaving the shop in someone else's hands can be nerve-wracking. Now a host of security providers let bosses check in on things from the road.
For instance, Alarm.com Inc., of McLean, Va., sells a system that allows owners to travel to a Web portal and get remote feeds from security cameras, change entry codes and trigger sensors that monitor systems such as lighting and climate control. If a problem arises with those systems -- such as a power outage -- you can get an alert via a text message or email.
Recently, Kevin Donahue, owner of a Planet Beach Franchising Corp. location in McLean, was in Amsterdam on business when he received a text message from Alarm.com: The spa's alarm system had been armed at 3 p.m., before the usual closing time. He checked the security cameras online and saw the facility was dark.
So he called his manager and got the explanation: The spa had closed early because of a snowstorm.
[see the report]
See the complete Small Business report. Plus, see continuing coverage.
"The greatest thing is that it gives me the ability to travel and do the things that I do," says the 34-year-old Mr. Donahue, who's also a full-time salesperson for a tech company and often travels outside the country on sales trips. "It gives me the ability to manage my staff remotely. I can call and say, 'What's going on?' "
Mr. Donahue bought the system for under $100 and pays a monthly fee of $39. Alarm.com says the base price for the system is usually $500, with a monthly fee of $29 to $50, although those numbers can vary by reseller and area, as well as the features customers choose.
SAFEGUARDING CARDS
Another new technology helps small businesses -- particularly restaurants -- protect against "skimming." In this scam, cashiers steal customers' credit-card information for use in identity theft.
About 70% of credit-card-fraud cases involve skimming, according to Trustwave Holdings Inc., a data-security and compliance-management company based in Chicago. In many cases, business owners are ultimately held responsible for their cashiers' crimes -- costing them money and damaging their reputation.
For some businesses, the solution is to let customers become their own cashiers. At Southeast Grille House in Brewster, N.Y., servers bring a wireless gadget called On the Spot to their customers' tables. Patrons can swipe their credit cards on the device -- which is about the size of a brick -- punch in the tip amount and print out a receipt to sign, all from their seat.
Since the customer enters all the information, cashiers can't inflate the tip -- and the receipts don't contain much personal data that could be stolen and used for identity theft.
The device, from VeriFone Holdings Inc. of San Jose, Calif., runs about $1,000. Southeast Grille House owner Domenic Chiera says it was worth the investment. "It's fast, and the receipt has little information, so no names or numbers," says the 57-year-old restaurateur. "I like the system. It works well for us."
CHECKING OUT FRAUD
At grocery stores, thieving employees are almost as much of a problem as shoplifters. About 40% of grocery-store thefts were attributed to employees in 2006, according to the Food Marketing Institute's Supermarket Security and Loss Prevention 2007 report. One of the biggest problems is "sweethearting," in which cashiers give friends and family freebies by pretending to scan items at the register.
Many stores use closed-circuit television to watch checkout lines. But the stores often don't have the time or manpower to review the tapes, so the cameras aren't a strong deterrent. StopLift Inc. of Bedford, Mass., has devised a system that combines cameras with advanced software to spot sweethearting automatically. The technology can recognize when cashiers make unusual movements when handling items -- such as placing a hand over a bar code -- and determine whether the items were properly scanned.
[SECURITY_sweethearting]
Courtesy of the company
'Sweethearting' theft in progress as seen in a StopLift video
When the system identifies sweethearting, it places blinking squares over the video to show exactly where the theft occurred. Then it gathers the incriminating clips together for owners to review.
Stores "have the cameras but they don't have the manpower to watch it," says Malay Kundu, chief executive of StopLift. "What we've done is sort of automate that."
Three Big Y Foods Inc. stores in Massachusetts and Connecticut have been testing StopLift's Checkout Vision Systems for the past five weeks. Mark Gaudette, director of loss prevention at the Springfield, Mass., grocery-store chain, suspects that employee theft accounts for about 38% to 40% of its total losses.
"We've got pretty much a zero-tolerance policy for any folks that steal," Mr. Gaudette says. "What we're hoping is that all these technologies will help us in loss prevention and educate all of our staff."
The stores had already been using closed-circuit television and software that scrutinizes sales data for abnormal behavior or inconsistencies at the cash register, such as excessive voids or refunds. But those measures weren't enough to stem the losses.
StopLift's system works with those tools to ferret out sweethearting. For instance, if the sales-data software shows that somebody rang up too many coupons on one order, the StopLift system can analyze video from the exact moment this happened.
[losses from theft chart]
Big Y is still analyzing the results. So far, Mr. Gaudette says, he has spotted some sweethearting incidents, but he has seen far more cashier errors, such as giving up on hard-to-scan items instead of calling the manager for help.
Pricing for the technology is done on a case-by-case basis, says StopLift's Mr. Kundu. He says that for a typical medium-volume store, monthly subscriptions currently run about $2,000.
Of course, buying these systems isn't the only option available for small stores. Experts suggest that stores could hire fewer part-timers -- who have less attachment to the business and are more inclined to steal -- and conduct more-rigorous pre-employment screenings to weed out potential thieves.
Employers must also hammer home a code of conduct, experts advise. For instance, give new hires talks on integrity and loss prevention and offer anonymous hotlines where employees can notify managers about fellow workers who may be stealing.
The bottom line is that employees must recognize they have a part to play in stopping theft, says Joseph LaRocca, vice president of loss prevention for the National Retail Federation. "Loss prevention is really everybody's responsibility," he says.
The Rise, Fall And Return of Pluralism
By Peter F. Drucker, a professor of social science and management at the Claremont Graduate University and a former president of the Society for the History of Technology. He is author, most recently, of "Management Challenges for the 21st Century," just out from Harperbusiness.
T he history of society in the West during the last millennium can--without much oversimplification--be summed up in one phrase: The Rise, Fall and Rise of Pluralism.
By the year 1000 the West--that is, Europe north of the Mediterranean and west of Greek Orthodoxy--had become a startlingly new and distinct civilization and society, much later dubbed feudalism. At its core was the world's first, and all but invincible, fighting machine: the heavily armored knight fighting on horseback. What made possible fighting on horseback, and with it the armored knight, was the stirrup, an invention that had originated in Central Asia sometime around the year 600. The entire Old World had accepted the stirrup long before 1000; everybody riding a horse anywhere in the Old World rode with a stirrup.
But every other Old World civilization--Islam, India, China, Japan--rejected what the stirrup made possible: fighting on horseback. And the reason these civilizations rejected it, despite its tremendous military superiority, was that the armored knight on horseback had to be an autonomous power center beyond the control of central government. To support a single one of these fighting machines--the knight and his three to five horses and their attendants; the five or more squires (knights in training) necessitated by the profession's high casualty rate; the unspeakable expensive armor--required the economic output of 100 peasant families, that is of some 500 people, about 50 times as many as were needed to support the best-equipped professional foot soldier, such as a Roman Legionnaire or a Japanese Samurai.
The knight exercised full political, economic and social control over the entire knightly enterprise, the fief. This, in short order, induced every other unit in medieval Western society--secular or religious--to become an autonomous power center, paying lip service to a central authority such as the pope or a king, but certainly nothing else such as taxes. These separate power centers included barons and counts, bishops and the enormously wealthy monasteries, free cities and craft guilds and, a few decades later, the early universities and countless trading monopolies.
By 1066, when William the Conqueror's victory brought feudalism to England, the West had become totally pluralist. And every group tried constantly to gain more autonomy and more power: political and social control of its members and of access to the privileges membership conferred, its own judiciary, its own fighting force, the right to coin its own money and so on. By 1200 these "special interests" had all but taken over. Every one of them pursued only its goals and was concerned only with its own aggrandizement, wealth and power. No one was concerned with the common good; and the capacity to make societywide policy was all but gone.
The reaction began in the 13th century in the religious sphere, when--feebly at first--the papacy tried, at two councils in Lyon, France, to reassert control over bishops and monasteries. It finally established that control at the Council of Trent in mid-16th century, by which time the pope and the Catholic Church had lost both England and Northern Europe to Protestantism. In the secular sphere, the counterattack against pluralism began 100 years later. The Long Bow--a Welsh invention perfected by the English--had by 1350 destroyed the knight's superiority on the battlefield. A few years later the cannon--adapting to military uses the powder the Chinese had invented for their fireworks--brought down the hitherto impregnable knight's castle.
From then on, for more than 500 years, Western history is the history of the advance of the national state as the sovereign, that is as the only power center in society. The process was very slow; the resistance of the entrenched "special interests" was enormous. It was not until 1648, for instance--in the Treaty of Westphalia, which ended Europe's Thirty Years War--that private armies were abolished, with the nation-state acquiring a monopoly on maintaining armies and on fighting wars. But the process was steady. Step by step, pluralist institutions lost their autonomy. By the end of the Napoleonic Wars--or shortly thereafter--the sovereign national state had triumphed everywhere in Europe. Even the clergy in European countries had become civil servants, controlled by the state, paid by the state and subject to the sovereign, whether king or parliament.
The one exception was the United States. Here pluralism survived--the main reason being America's almost unique religious diversity. And even in the U.S., religiously grounded pluralism was deprived of power by the separation of church and state. It is no accident that in sharp contrast to Continental Europe, no denominationally based party or movement has ever attracted more than marginal political support in the U.S.
By the middle of the last century, social and political theorists, including Hegel and the liberal political philosophers of England and America, proclaimed proudly that pluralism was dead beyond redemption. And at that very moment it came back to life. The first organization that had to have substantial power and substantial autonomy was the new business enterprise as it first arose, practically without precedent, between 1860 and 1870. It was followed in rapid order by a horde of other new institutions, scores of them by now, each requiring substantial autonomy and exercising considerable social control: the labor union, the civil service with its lifetime tenure, the hospital, the university. Each of them, like the pluralist institutions of 800 years ago, is a "special interest." Each needs--and fights for--its autonomy.
Not one of them is concerned with the common good. Consider what John L. Lewis, the powerful labor leader, said when FDR asked him to call off a coal miners strike that threatened to cripple the war effort: "The president of the United States is paid to look after the interests of the nation; I am paid to look after the interest of the coal miners." That is only an especially blunt version of what the leaders of every one of today's "special interests" believe--and what their constituents pay them for. As happened 800 years ago, this new pluralism threatens to destroy the capacity to make policy--and with it social cohesion altogether--in all developed countries.
But there is one essential difference between today's social pluralism and that of 800 years ago. Then, the pluralist institutions--knights in armor, free cities, merchant guilds or "exempt" bishoprics--were based on property and power. Today's autonomous organization--business enterprise, labor union, university, hospital--is based on function. It derives its capacity to perform squarely from its narrow focus on its single function. The one major attempt to restore the power monopoly of the sovereign state, Stalin's Russia, collapsed primarily because none of its institutions, being deprived of the needed autonomy, could or did function--not even, it seems, the military, let alone businesses or hospitals.
Only yesterday most of the tasks today's organizations discharge were supposed to be done by the family. The family educated its members. It took care of the old and the sick. It found jobs for members who needed it. And not one of these jobs was actually done, as even the most cursory look at 19th-century family letters or family histories shows. These tasks can be accomplished only by a truly autonomous institution, independent from either the community or the state.
The challenge of the next millennium, or rather of the next century (we won't have a thousand years), is to preserve the autonomy of our institutions--and in some cases, like transnational business, autonomy over and beyond national sovereignties--while at the same time restoring the unity of the polity that we have all but lost, at least in peacetime. We can only hope this can be done--but so far no one yet knows how to do it. We do know that it will require something that is even less precedented than today's pluralism: the willingness and ability of each of today's institutions to maintain the focus on the narrow and specific function that gives them the capacity to perform, and yet the willingness and ability to work together and with political authority for the common good.
This is the enormous challenge the second millennium in the developed countries is bequeathing the third millennium.
T he history of society in the West during the last millennium can--without much oversimplification--be summed up in one phrase: The Rise, Fall and Rise of Pluralism.
By the year 1000 the West--that is, Europe north of the Mediterranean and west of Greek Orthodoxy--had become a startlingly new and distinct civilization and society, much later dubbed feudalism. At its core was the world's first, and all but invincible, fighting machine: the heavily armored knight fighting on horseback. What made possible fighting on horseback, and with it the armored knight, was the stirrup, an invention that had originated in Central Asia sometime around the year 600. The entire Old World had accepted the stirrup long before 1000; everybody riding a horse anywhere in the Old World rode with a stirrup.
But every other Old World civilization--Islam, India, China, Japan--rejected what the stirrup made possible: fighting on horseback. And the reason these civilizations rejected it, despite its tremendous military superiority, was that the armored knight on horseback had to be an autonomous power center beyond the control of central government. To support a single one of these fighting machines--the knight and his three to five horses and their attendants; the five or more squires (knights in training) necessitated by the profession's high casualty rate; the unspeakable expensive armor--required the economic output of 100 peasant families, that is of some 500 people, about 50 times as many as were needed to support the best-equipped professional foot soldier, such as a Roman Legionnaire or a Japanese Samurai.
The knight exercised full political, economic and social control over the entire knightly enterprise, the fief. This, in short order, induced every other unit in medieval Western society--secular or religious--to become an autonomous power center, paying lip service to a central authority such as the pope or a king, but certainly nothing else such as taxes. These separate power centers included barons and counts, bishops and the enormously wealthy monasteries, free cities and craft guilds and, a few decades later, the early universities and countless trading monopolies.
By 1066, when William the Conqueror's victory brought feudalism to England, the West had become totally pluralist. And every group tried constantly to gain more autonomy and more power: political and social control of its members and of access to the privileges membership conferred, its own judiciary, its own fighting force, the right to coin its own money and so on. By 1200 these "special interests" had all but taken over. Every one of them pursued only its goals and was concerned only with its own aggrandizement, wealth and power. No one was concerned with the common good; and the capacity to make societywide policy was all but gone.
The reaction began in the 13th century in the religious sphere, when--feebly at first--the papacy tried, at two councils in Lyon, France, to reassert control over bishops and monasteries. It finally established that control at the Council of Trent in mid-16th century, by which time the pope and the Catholic Church had lost both England and Northern Europe to Protestantism. In the secular sphere, the counterattack against pluralism began 100 years later. The Long Bow--a Welsh invention perfected by the English--had by 1350 destroyed the knight's superiority on the battlefield. A few years later the cannon--adapting to military uses the powder the Chinese had invented for their fireworks--brought down the hitherto impregnable knight's castle.
From then on, for more than 500 years, Western history is the history of the advance of the national state as the sovereign, that is as the only power center in society. The process was very slow; the resistance of the entrenched "special interests" was enormous. It was not until 1648, for instance--in the Treaty of Westphalia, which ended Europe's Thirty Years War--that private armies were abolished, with the nation-state acquiring a monopoly on maintaining armies and on fighting wars. But the process was steady. Step by step, pluralist institutions lost their autonomy. By the end of the Napoleonic Wars--or shortly thereafter--the sovereign national state had triumphed everywhere in Europe. Even the clergy in European countries had become civil servants, controlled by the state, paid by the state and subject to the sovereign, whether king or parliament.
The one exception was the United States. Here pluralism survived--the main reason being America's almost unique religious diversity. And even in the U.S., religiously grounded pluralism was deprived of power by the separation of church and state. It is no accident that in sharp contrast to Continental Europe, no denominationally based party or movement has ever attracted more than marginal political support in the U.S.
By the middle of the last century, social and political theorists, including Hegel and the liberal political philosophers of England and America, proclaimed proudly that pluralism was dead beyond redemption. And at that very moment it came back to life. The first organization that had to have substantial power and substantial autonomy was the new business enterprise as it first arose, practically without precedent, between 1860 and 1870. It was followed in rapid order by a horde of other new institutions, scores of them by now, each requiring substantial autonomy and exercising considerable social control: the labor union, the civil service with its lifetime tenure, the hospital, the university. Each of them, like the pluralist institutions of 800 years ago, is a "special interest." Each needs--and fights for--its autonomy.
Not one of them is concerned with the common good. Consider what John L. Lewis, the powerful labor leader, said when FDR asked him to call off a coal miners strike that threatened to cripple the war effort: "The president of the United States is paid to look after the interests of the nation; I am paid to look after the interest of the coal miners." That is only an especially blunt version of what the leaders of every one of today's "special interests" believe--and what their constituents pay them for. As happened 800 years ago, this new pluralism threatens to destroy the capacity to make policy--and with it social cohesion altogether--in all developed countries.
But there is one essential difference between today's social pluralism and that of 800 years ago. Then, the pluralist institutions--knights in armor, free cities, merchant guilds or "exempt" bishoprics--were based on property and power. Today's autonomous organization--business enterprise, labor union, university, hospital--is based on function. It derives its capacity to perform squarely from its narrow focus on its single function. The one major attempt to restore the power monopoly of the sovereign state, Stalin's Russia, collapsed primarily because none of its institutions, being deprived of the needed autonomy, could or did function--not even, it seems, the military, let alone businesses or hospitals.
Only yesterday most of the tasks today's organizations discharge were supposed to be done by the family. The family educated its members. It took care of the old and the sick. It found jobs for members who needed it. And not one of these jobs was actually done, as even the most cursory look at 19th-century family letters or family histories shows. These tasks can be accomplished only by a truly autonomous institution, independent from either the community or the state.
The challenge of the next millennium, or rather of the next century (we won't have a thousand years), is to preserve the autonomy of our institutions--and in some cases, like transnational business, autonomy over and beyond national sovereignties--while at the same time restoring the unity of the polity that we have all but lost, at least in peacetime. We can only hope this can be done--but so far no one yet knows how to do it. We do know that it will require something that is even less precedented than today's pluralism: the willingness and ability of each of today's institutions to maintain the focus on the narrow and specific function that gives them the capacity to perform, and yet the willingness and ability to work together and with political authority for the common good.
This is the enormous challenge the second millennium in the developed countries is bequeathing the third millennium.
The Rules of Executive Class
By PETER F. DRUCKER
June 1, 2004
An effective executive does not need to be a leader in the sense that the term is now most commonly used. Harry Truman did not have one ounce of charisma, for example, yet he was among the most effective chief executives in U.S. history. Some of the best business and nonprofit CEOs I've worked with over a 65-year consulting career were not stereotypical leaders. They ranged from extroverted to nearly reclusive, from easygoing to controlling, from generous to parsimonious. What made them all effective is that they followed the same eight practices:
• Ask "What needs to be done?" Failure to ask this question will render even the ablest executive ineffectual. Jack Welch realized that what needed to be done at General Electric when he took over as chief executive was not the overseas expansion he wanted to launch. It was getting rid of GE businesses that -- no matter how profitable -- could not be No. 1 or No. 2 in their industries.
• Ask "What is right for the enterprise?" Note that the question is not what's right for the shareholders, or the executives, or the employees. Those are all important constituencies who need to support a decision, or acquiesce in it, if the choice is to be effective. But if a decision isn't right for the enterprise as a whole, in the long run it won't be right for any of the individual stakeholders.
• Develop action plans. The action plan is a statement of intentions rather than a commitment. It should be revised often, because every success creates new opportunities. So does every failure. Napoleon allegedly said that no successful battle ever followed its plan. Yet Napoleon also planned every one of his battles, far more meticulously than any earlier general had done. Without an action plan, the executive becomes a prisoner of events.
• Take responsibility for decisions. This is particularly important when it comes to hiring or promoting people. If after promoting a person, the decision has not had the desired results, executives don't conclude that the person has not performed. They conclude, instead, that they themselves made a mistake. In a well-managed enterprise, it is understood that people who fail in a new job, especially after a promotion, may not be the ones to blame.
• Take responsibility for communicating. Effective executives make sure that both their action plans and their information needs are understood. Specifically, this means that they share their plans with and ask for comments from all their colleagues -- superiors, subordinates, and peers. At the same time, they let each person know what information they'll need to get the job done. The information flow from subordinate to boss is usually what gets the most attention. But executives need to pay equal attention to peers' and superiors' information needs.
• Focus on opportunities, not problems. In most companies, the first page of the monthly management report lists key problems. It's far wiser to list opportunities on the first page and leave problems for the second page. Unless there is a true catastrophe, problems are not discussed in management meetings until opportunities have been analyzed and properly dealt with.
• Make meetings productive. Every study of the executive workday has found that even junior executives and professionals are with other people -- that is, in a meeting of some sort -- more than half of every business day. Making a meeting productive takes a good deal of self-discipline. It requires that executives determine what kind of meeting is appropriate and then stick to that format. It's also necessary to terminate the meeting as soon as its specific purpose has been accomplished. Good executives don't raise another matter for discussion. They sum up and adjourn.
• Think and say "We." Effective executives know that they have ultimate responsibility, which can be neither shared nor delegated. But they have authority only because they have the trust of the organization. This means that they think of the needs and the opportunities of the organization before they think of their own needs and opportunities. This one may sound simple. It isn't, but it needs to be strictly observed.
I'm going to throw in one final, bonus practice. This one's so important that I'll elevate it to a rule: Listen first, speak last.
Mr. Drucker is a professor of social science and management at the Peter F. Drucker and Masatoshi Ito Graduate School of Management at Claremont Graduate University. This commentary is adapted from his article "What Makes an Effective Executive" in the June issue of the Harvard Business Review.
June 1, 2004
An effective executive does not need to be a leader in the sense that the term is now most commonly used. Harry Truman did not have one ounce of charisma, for example, yet he was among the most effective chief executives in U.S. history. Some of the best business and nonprofit CEOs I've worked with over a 65-year consulting career were not stereotypical leaders. They ranged from extroverted to nearly reclusive, from easygoing to controlling, from generous to parsimonious. What made them all effective is that they followed the same eight practices:
• Ask "What needs to be done?" Failure to ask this question will render even the ablest executive ineffectual. Jack Welch realized that what needed to be done at General Electric when he took over as chief executive was not the overseas expansion he wanted to launch. It was getting rid of GE businesses that -- no matter how profitable -- could not be No. 1 or No. 2 in their industries.
• Ask "What is right for the enterprise?" Note that the question is not what's right for the shareholders, or the executives, or the employees. Those are all important constituencies who need to support a decision, or acquiesce in it, if the choice is to be effective. But if a decision isn't right for the enterprise as a whole, in the long run it won't be right for any of the individual stakeholders.
• Develop action plans. The action plan is a statement of intentions rather than a commitment. It should be revised often, because every success creates new opportunities. So does every failure. Napoleon allegedly said that no successful battle ever followed its plan. Yet Napoleon also planned every one of his battles, far more meticulously than any earlier general had done. Without an action plan, the executive becomes a prisoner of events.
• Take responsibility for decisions. This is particularly important when it comes to hiring or promoting people. If after promoting a person, the decision has not had the desired results, executives don't conclude that the person has not performed. They conclude, instead, that they themselves made a mistake. In a well-managed enterprise, it is understood that people who fail in a new job, especially after a promotion, may not be the ones to blame.
• Take responsibility for communicating. Effective executives make sure that both their action plans and their information needs are understood. Specifically, this means that they share their plans with and ask for comments from all their colleagues -- superiors, subordinates, and peers. At the same time, they let each person know what information they'll need to get the job done. The information flow from subordinate to boss is usually what gets the most attention. But executives need to pay equal attention to peers' and superiors' information needs.
• Focus on opportunities, not problems. In most companies, the first page of the monthly management report lists key problems. It's far wiser to list opportunities on the first page and leave problems for the second page. Unless there is a true catastrophe, problems are not discussed in management meetings until opportunities have been analyzed and properly dealt with.
• Make meetings productive. Every study of the executive workday has found that even junior executives and professionals are with other people -- that is, in a meeting of some sort -- more than half of every business day. Making a meeting productive takes a good deal of self-discipline. It requires that executives determine what kind of meeting is appropriate and then stick to that format. It's also necessary to terminate the meeting as soon as its specific purpose has been accomplished. Good executives don't raise another matter for discussion. They sum up and adjourn.
• Think and say "We." Effective executives know that they have ultimate responsibility, which can be neither shared nor delegated. But they have authority only because they have the trust of the organization. This means that they think of the needs and the opportunities of the organization before they think of their own needs and opportunities. This one may sound simple. It isn't, but it needs to be strictly observed.
I'm going to throw in one final, bonus practice. This one's so important that I'll elevate it to a rule: Listen first, speak last.
Mr. Drucker is a professor of social science and management at the Peter F. Drucker and Masatoshi Ito Graduate School of Management at Claremont Graduate University. This commentary is adapted from his article "What Makes an Effective Executive" in the June issue of the Harvard Business Review.
The American CEO
By PETER F. DRUCKER
December 30, 2004
CEOs have ultimate responsibility for the work of everybody else in their institution. But they also have work of their own -- and the study of management has so far paid little attention to it. It is the same work, whether the organization is a business enterprise, a nonprofit, a church, a school or university, a government agency; and whether it is large or small, world-wide or purely local. And it is work only CEOs can do, but also work which CEOs must do.
In any organization, regardless of its mission, the CEO is the link between the Inside, i.e., "the organization," and the Outside -- society, the economy, technology, markets, customers, the media, public opinion. Inside, there are only costs. Results are only on the outside. Indeed the modern organization (beginning with the Jesuit Order in 1536) was expressly created to have results on the outside, that is, to make a difference in its society or its economy.
The CEO's Tasks
To define the meaningful Outside of the organization is the CEO's first task. The definition is anything but easy, let alone obvious. For a particular bank, for instance, is the meaningful Outside the local market for commercial loans? Is it the national market for mutual funds? Or is it major industrial companies and their short-term credit needs? All three of these "outsides" deal with money and credit. And one cannot tell from the bank's published accounts, e.g., its balance sheet, on which of these "outsides" it concentrates. Each of them is a different business and requires a different organization, different people, different competencies and different definitions of results. Even the very biggest bank is unlikely to be a leader in all these "outsides." For which of these to concentrate on is a highly risky decision and one very hard to change or reverse. Only the CEO can make it. But also the CEO must make it. It is the first task of the CEO.
The second specific task of the CEO is to think through what information regarding the Outside is meaningful and needed for the organization, and then to work on getting it in usable form. Organized information has grown tremendously in the last hundred years. But the growth has been mainly in Inside information, e.g., in accounting. The computer has further accentuated this inside focus. As regards the Outside there has been an enormous growth in data -- beginning with Herbert Hoover in the 1920s (to whose work as secretary of commerce we largely owe the data on GNP, on productivity, and on standard of living). But few CEOs, whether in business, in nonprofits, or in government agencies have yet organized these data into systematic information for their own work.
One example: Every major maker of branded consumer goods knows that few things are as important as the values and the behavior of that great majority of consumers who are not buyers of the company's products, and especially information on major changes in the non-customers' values and habits. The data are largely available. But few consumer-goods manufacturers have so far converted them into organized information on which to base their decisions (one well-publicized exception is the Shell Petroleum group of companies). Again it is primarily the CEO who needs this information and whose work it is to organize getting it.
The definition of the institution's meaningful Outside, and of the information it needs, makes it possible to answer the key questions: "What is our business? What should it be? What should it not be?" The answers to these questions establish the boundaries within which an institution operates. And they are the foundation for the specific work of the CEO. Particularly:
• They enable the CEO to decide what results are meaningful for the institution.
This is particularly important, particularly critical, and particularly risky for institutions that lack the discipline of the "bottom line," that is, for non-businesses. And non-businesses constitute the great majority of organizations in every developed society. But even for businesses, the bottom line is not by itself adequate as a definition of results -- the same bottom line may have very differing meanings according to how an institution defines "meaningful results." To decide what results a given bottom line represents is a major job of the executive. It is not based on "facts" -- there are no facts about the future. It is not made well by intuition. It is a judgment. Again, only the CEO can make this judgment, but also the CEO must make it.
This judgment is so risky that all pre-modern economies tried to avoid making it. In fact, the Modern Enterprise -- the one major institutional innovation of the Modern Economy -- was in large part created as the systematic risk-taker and risk-sharer, thereby enabling the individual strictly to limit the personal risk of investing in future expectations.
By thus making possible these time decisions in very large numbers and on an enormous scale, the Enterprise can be said to be the one invention that created the Modern Economy -- far more so than any other invention, whether material or conceptual. With the invention of the Enterprise the Executive came into being as a distinct role and function, with one of his or her major tasks being the making of the decision between short-term yields and deferred expectations. Making this decision requires a good deal of very hard work on the part of the CEO. (Both Machiavelli's "Prince" and Shakespeare's "The Merchant of Venice," two Renaissance masterpieces the background of which is the emergence of the modern economy, are built around the challenge of this decision).
• The answers to the question "What is our business? And what should it be?" enable CEOs to decide what is meaningful information for the business and for themselves.
This too is a high-risk decision. That U.S. business executives, for instance in the '50s and '60s, decided (in many cases quite deliberately) that what was going on in Japan was not particularly meaningful information for them and their companies, explains in large part why the Japanese export push caught them so unawares and unprepared.
It is information about the Outside that needs the most work. For far too many institutions -- and not only businesses -- define Outside in large part as their direct competitors. Toy makers tend to define the Outside as their toy-maker competitors; a hospital as the two competing hospitals in the same suburb, and so on. But the most meaningful competitors for the toy maker are not other toy makers but other claimants on potential customers' disposable dollars. The most meaningful information about the toy maker's Outside is therefore what value the toy presents to the potential buyer. (Customer Research, in other words, may be more important than market research -- but also far more difficult).
• The CEO has to decide the priorities.
In any but a dying organization there are always far more tasks than there are available resources. But results are obtained only by concentration of resources, especially by concentration of the scarcest and most valuable resource, people with proven performance capacity.
There is constant pressure on every CEO to do a little bit of everything. That makes everybody happy but guarantees that there are no results. The CEO's most critical job -- also the CEO's most difficult job -- is to say "No." To do so is not just a matter of will power. It requires an inordinate amount of study and work -- work which only the CEO can do but again work which the CEO must do.
• The CEO places people into key positions. This, in the last analysis, determines the performance capacity of the institution.
Every organization says, "We have better people." But this is, of course, impossible. Once an organization grows beyond a handful of people, it is subject to statistics' most ruthless law: the law of the great number, which dictates that there is only "normal distribution." What differentiates organizations is whether they can make common people perform uncommon things -- and that depends primarily on whether people are being placed where their strengths can perform or whether, as is only too common, they are being placed for the absence of weakness. And nothing requires as much hard work as "people decisions." The only thing that requires even more time (and even more work) than putting people into a job is unmaking a wrong people decision. And again, critical people decisions only the CEO can make.
No Real Counterpart
The CEO is an American invention -- designed first by Alexander Hamilton in the Constitution in the earliest years of the Republic, and then transferred into the private sector in the form of Hamilton's own Bank of New York and of the Second Bank of the United States in Philadelphia. There is no real counterpart to the CEO in the management and organization of any other country. The German "Sprecher des Vorstands," the French "Administrateur Delegue," the British "Chairman," or the Japanese "President" are all quite different in their powers and in the limitations thereon.
The American CEO is, however, fast becoming a major U.S. export. Tony Blair and Gerhard Schroeder1 are trying to make over their countries' top political job in the image of the U.S. president. In business the CEO model is being adopted even faster all over the world, e.g., in the recent restructuring of Europe's largest industrial complex, the German Siemens Group. And what makes the American CEO unique is that he or she has distinct and specific work.
Mr. Drucker is the author, most recently, of "The Daily Drucker," just out from HarperBusiness. This is the first in a three-part series on management.
December 30, 2004
CEOs have ultimate responsibility for the work of everybody else in their institution. But they also have work of their own -- and the study of management has so far paid little attention to it. It is the same work, whether the organization is a business enterprise, a nonprofit, a church, a school or university, a government agency; and whether it is large or small, world-wide or purely local. And it is work only CEOs can do, but also work which CEOs must do.
In any organization, regardless of its mission, the CEO is the link between the Inside, i.e., "the organization," and the Outside -- society, the economy, technology, markets, customers, the media, public opinion. Inside, there are only costs. Results are only on the outside. Indeed the modern organization (beginning with the Jesuit Order in 1536) was expressly created to have results on the outside, that is, to make a difference in its society or its economy.
The CEO's Tasks
To define the meaningful Outside of the organization is the CEO's first task. The definition is anything but easy, let alone obvious. For a particular bank, for instance, is the meaningful Outside the local market for commercial loans? Is it the national market for mutual funds? Or is it major industrial companies and their short-term credit needs? All three of these "outsides" deal with money and credit. And one cannot tell from the bank's published accounts, e.g., its balance sheet, on which of these "outsides" it concentrates. Each of them is a different business and requires a different organization, different people, different competencies and different definitions of results. Even the very biggest bank is unlikely to be a leader in all these "outsides." For which of these to concentrate on is a highly risky decision and one very hard to change or reverse. Only the CEO can make it. But also the CEO must make it. It is the first task of the CEO.
The second specific task of the CEO is to think through what information regarding the Outside is meaningful and needed for the organization, and then to work on getting it in usable form. Organized information has grown tremendously in the last hundred years. But the growth has been mainly in Inside information, e.g., in accounting. The computer has further accentuated this inside focus. As regards the Outside there has been an enormous growth in data -- beginning with Herbert Hoover in the 1920s (to whose work as secretary of commerce we largely owe the data on GNP, on productivity, and on standard of living). But few CEOs, whether in business, in nonprofits, or in government agencies have yet organized these data into systematic information for their own work.
One example: Every major maker of branded consumer goods knows that few things are as important as the values and the behavior of that great majority of consumers who are not buyers of the company's products, and especially information on major changes in the non-customers' values and habits. The data are largely available. But few consumer-goods manufacturers have so far converted them into organized information on which to base their decisions (one well-publicized exception is the Shell Petroleum group of companies). Again it is primarily the CEO who needs this information and whose work it is to organize getting it.
The definition of the institution's meaningful Outside, and of the information it needs, makes it possible to answer the key questions: "What is our business? What should it be? What should it not be?" The answers to these questions establish the boundaries within which an institution operates. And they are the foundation for the specific work of the CEO. Particularly:
• They enable the CEO to decide what results are meaningful for the institution.
This is particularly important, particularly critical, and particularly risky for institutions that lack the discipline of the "bottom line," that is, for non-businesses. And non-businesses constitute the great majority of organizations in every developed society. But even for businesses, the bottom line is not by itself adequate as a definition of results -- the same bottom line may have very differing meanings according to how an institution defines "meaningful results." To decide what results a given bottom line represents is a major job of the executive. It is not based on "facts" -- there are no facts about the future. It is not made well by intuition. It is a judgment. Again, only the CEO can make this judgment, but also the CEO must make it.
This judgment is so risky that all pre-modern economies tried to avoid making it. In fact, the Modern Enterprise -- the one major institutional innovation of the Modern Economy -- was in large part created as the systematic risk-taker and risk-sharer, thereby enabling the individual strictly to limit the personal risk of investing in future expectations.
By thus making possible these time decisions in very large numbers and on an enormous scale, the Enterprise can be said to be the one invention that created the Modern Economy -- far more so than any other invention, whether material or conceptual. With the invention of the Enterprise the Executive came into being as a distinct role and function, with one of his or her major tasks being the making of the decision between short-term yields and deferred expectations. Making this decision requires a good deal of very hard work on the part of the CEO. (Both Machiavelli's "Prince" and Shakespeare's "The Merchant of Venice," two Renaissance masterpieces the background of which is the emergence of the modern economy, are built around the challenge of this decision).
• The answers to the question "What is our business? And what should it be?" enable CEOs to decide what is meaningful information for the business and for themselves.
This too is a high-risk decision. That U.S. business executives, for instance in the '50s and '60s, decided (in many cases quite deliberately) that what was going on in Japan was not particularly meaningful information for them and their companies, explains in large part why the Japanese export push caught them so unawares and unprepared.
It is information about the Outside that needs the most work. For far too many institutions -- and not only businesses -- define Outside in large part as their direct competitors. Toy makers tend to define the Outside as their toy-maker competitors; a hospital as the two competing hospitals in the same suburb, and so on. But the most meaningful competitors for the toy maker are not other toy makers but other claimants on potential customers' disposable dollars. The most meaningful information about the toy maker's Outside is therefore what value the toy presents to the potential buyer. (Customer Research, in other words, may be more important than market research -- but also far more difficult).
• The CEO has to decide the priorities.
In any but a dying organization there are always far more tasks than there are available resources. But results are obtained only by concentration of resources, especially by concentration of the scarcest and most valuable resource, people with proven performance capacity.
There is constant pressure on every CEO to do a little bit of everything. That makes everybody happy but guarantees that there are no results. The CEO's most critical job -- also the CEO's most difficult job -- is to say "No." To do so is not just a matter of will power. It requires an inordinate amount of study and work -- work which only the CEO can do but again work which the CEO must do.
• The CEO places people into key positions. This, in the last analysis, determines the performance capacity of the institution.
Every organization says, "We have better people." But this is, of course, impossible. Once an organization grows beyond a handful of people, it is subject to statistics' most ruthless law: the law of the great number, which dictates that there is only "normal distribution." What differentiates organizations is whether they can make common people perform uncommon things -- and that depends primarily on whether people are being placed where their strengths can perform or whether, as is only too common, they are being placed for the absence of weakness. And nothing requires as much hard work as "people decisions." The only thing that requires even more time (and even more work) than putting people into a job is unmaking a wrong people decision. And again, critical people decisions only the CEO can make.
No Real Counterpart
The CEO is an American invention -- designed first by Alexander Hamilton in the Constitution in the earliest years of the Republic, and then transferred into the private sector in the form of Hamilton's own Bank of New York and of the Second Bank of the United States in Philadelphia. There is no real counterpart to the CEO in the management and organization of any other country. The German "Sprecher des Vorstands," the French "Administrateur Delegue," the British "Chairman," or the Japanese "President" are all quite different in their powers and in the limitations thereon.
The American CEO is, however, fast becoming a major U.S. export. Tony Blair and Gerhard Schroeder1 are trying to make over their countries' top political job in the image of the U.S. president. In business the CEO model is being adopted even faster all over the world, e.g., in the recent restructuring of Europe's largest industrial complex, the German Siemens Group. And what makes the American CEO unique is that he or she has distinct and specific work.
Mr. Drucker is the author, most recently, of "The Daily Drucker," just out from HarperBusiness. This is the first in a three-part series on management.
Drucker on Everything
Books on management are published by the hundreds each year, but for our money you can skip everything else and simply re-read Peter F. Drucker, who was the Shakespeare of the genre and who died Friday at his California home at age 95.
For 30 years, the immigrant from Austria graced these pages as a contributor, usually under the heading, "Drucker on Management." That was a typical piece of modesty, because the more accurate description of his work would have been Drucker on Everything. He was a student of human behavior in all its ways and means, and through his many books and articles he sought to explain how managers could get the most from themselves, their colleagues and their institutions.
The business world would surely be a better place if every manager were required to read his 1966 classic, "The Effective Executive." It includes pearls on time management, especially the necessity of carving out chunks of time for thinking and decisions, on how to manage a meeting, and on the importance of focusing not on what any job requires but on what every individual can contribute.
His achievements include anticipating the rise of the modern corporation, and then dissecting its strengths and weaknesses; predicting the challenge that Japan would pose to American business; describing the rise and importance of "the knowledge worker"; and defending profit-making as central to the business enterprise at a time, in the middle of the last century, when that was not a widely held proposition.
His final piece for us, "The American CEO," was published last December 30, and was billed as a three-part series. He was too ill to complete the other parts, though it is a tribute to his stature and wisdom that readers kept sending us notes asking when the other articles would be published. We excerpt from some of his Journal articles nearby. R.I.P.
For 30 years, the immigrant from Austria graced these pages as a contributor, usually under the heading, "Drucker on Management." That was a typical piece of modesty, because the more accurate description of his work would have been Drucker on Everything. He was a student of human behavior in all its ways and means, and through his many books and articles he sought to explain how managers could get the most from themselves, their colleagues and their institutions.
The business world would surely be a better place if every manager were required to read his 1966 classic, "The Effective Executive." It includes pearls on time management, especially the necessity of carving out chunks of time for thinking and decisions, on how to manage a meeting, and on the importance of focusing not on what any job requires but on what every individual can contribute.
His achievements include anticipating the rise of the modern corporation, and then dissecting its strengths and weaknesses; predicting the challenge that Japan would pose to American business; describing the rise and importance of "the knowledge worker"; and defending profit-making as central to the business enterprise at a time, in the middle of the last century, when that was not a widely held proposition.
His final piece for us, "The American CEO," was published last December 30, and was billed as a three-part series. He was too ill to complete the other parts, though it is a tribute to his stature and wisdom that readers kept sending us notes asking when the other articles would be published. We excerpt from some of his Journal articles nearby. R.I.P.
Peter Drucker is making a posthumous comeback.
It isn't happening in the U.S., where the Austrian-born management scholar spent much of his career until his death in 2005, at age 95. While most of Mr. Drucker's 39 books remain in print, they aren't fixtures on American best-seller lists, as they were a generation ago.
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In China, however, Mr. Drucker is the man of the moment. In the past few years, devotees have created 14 Drucker academies, in Beijing, Shanghai, Xian and other Chinese cities. Their curriculum draws extensively on Mr. Drucker's writings, so thousands of students can quickly grasp the management essentials needed for China's booming economy.
Mr. Drucker's old-school values like integrity and humility play well in China, says Henry To, chief executive of the Drucker academies. Mr. Drucker spent much of his career as a consultant and professor studying big, well-known American companies. Based on their experience, he urged managers to set clear objectives, to value employees and customers, and to define their mission as more than just making a profit.
"When Drucker writes about leadership, he says that integrity must come first," Mr. To observes. "He says leaders need to listen to their employees and be followers, too. That matches our Confucian heritage."
Unlike many American management gurus, Mr. Drucker frequently stretched his precepts into nonprofit and governmental areas such as education and the Red Cross. That panoramic focus turns out to be well-suited for many Asian nations, where state policy and private-sector initiative are knit together more closely than in the U.S.
Mr. Drucker's magnum opus of the 1970s, "Management," was updated earlier this year by Joseph Maciariello, a longtime colleague of Mr. Drucker's at Claremont Graduate University in California. But his prominence has faded in the U.S., in part because his imagery often speaks to a different era.
His books sometimes recount stories from the 1940s, when Mr. Drucker was a consultant to legendary General Motors Chief Executive Alfred Sloan. Mr. Drucker's prime predated Google Inc., private-equity funds and other staples of todays most-popular business authors.
At the Drucker academies in China, however, Mr. Drucker's fondness for business history is considered a virtue, not a fault. "I tell students: 'The truth will not be outdated,'" Mr. To says.
With China building up its manufacturing capacity at breakneck speed, Mr. To says, it's probably more useful for Chinese management students to examine U.S. industrial triumphs of past decades, rather than get distracted by the fanfare associated with various postindustrial ventures of today's America.
Mr. Drucker himself laid the groundwork for China's enthusiasm for his teachings, meeting in 2000 with leaders of the nonprofit Bright China Management Foundation to get the Drucker academies started. Last year, 6,000 Chinese managers graduated from the academies, says Bright China's chairman, Ming Lo Shao, adding he expects this year's tally to be 20% higher.
Other Asian countries also are embracing Mr. Drucker's work. Last week, Drucker enthusiasts from around the globe met at the Drucker School of Management in Claremont, Calif. They discussed their efforts, through various Drucker Societies and a university think tank called the Drucker Institute, to spread his ideas.
Some of the most detailed presentations came from boosters in South Korea and Japan. In Korea, chief executives of sizable companies meet periodically in book clubs to discuss Mr. Drucker's work and how it applies to their companies. Japanese devotees publish a journal called Civilization and Management that tries to apply Mr. Drucker's ideas to current-day problems.
[business]
By contrast, U.S. attendees at the conference seemed more inclined to look backward. They giggled about Mr. Drucker's ability to outsell "The Joy of Sex" in the 1970s. Former students and colleagues shared memories of their time with him. The phrase "We miss him" was heard repeatedly.
Bob Buford, chairman of the Drucker Institute, voiced concern that American business audiences tend to be faddish, rapidly switching their attention to whatever scholar or commentator seems freshest. That makes it harder to keep Mr. Drucker's work in the public consciousness at home.
Mr. Drucker's writing style -- which mixed anecdotes and precepts in a way that led some fans to describe him as a philosopher -- is out of step with the tastes at many leading business schools, where the preference is for conclusions based on large statistical studies.
In China, however, Mr. Drucker is in no danger of fading away. His boosters there, in addition to running the Drucker academies, have assembled full sets of his translated works and have donated them to major Chinese universities. Their hope is that Chinese students will come to these "Drucker libraries" in decades ahead for inspiration.
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