Business Sense: Exercising Management's Five Freedoms

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9780029324448: Business Sense: Exercising Management's Five Freedoms

In this brilliantly conceived, practical book for managers, Dan Thomas shows how general managers can take advantage of core management processes-what he terms management's "five freedoms" -- that make the most difference between success and failure. Thomas, who has been an entrepreneur, educator, consultant, and manager, has devoted over twenty years to studying the strategy, structure, and systems of successful companies. He explains how managers can exercise their five freedoms to choose the right business, create the right strategy, implement the right systems, design the right organizational structure, and get the right people.

The single most important freedom for management, Thomas argues, is to choose the "right business." He suggests that there are great businesses and lousy ones, and managers should choose a business with growth, profit, and diversification potential to drive shareholder wealth. Next, Thomas shows how, even in those businesses with a lower potential for success, creating the "right strategy" can produce superior results. Companies such as Wal-Mart in the otherwise faltering discount retail industry and Southwest Airlines in the ailing passenger airline business are cases in point.

Management's third freedom, developing the "right systems," is illustrated by examples from successful companies such as Frito-Lay, and unsuccessful companies such as Micropolis, that have employed different types of information, incentive, and decision-making systems. Thomas discusses management's tendency to look for "quick fixes" through changes in "organization structure" that promise overnight success. He explains that realigning a company's organizationalstructure, the fourth freedom, must be based directly on the strategies being employed in the business, not the latest fad.

The fifth freedom-getting the "right people" -- is perhaps the biggest concern of top management. Thomas illustrates how general managers who have exercised their first four freedoms effectively do not have much difficulty in getting and keeping the right people. By providing techniques that allow managers to assess a person's skills and motivation, Thomas enables managers to exercise their fifth freedom by matching these assets to the business, its strategy, systems, and structure.

"synopsis" may belong to another edition of this title.

About the Author:

Dan Thomas is founder and president of FOCUS, a management consulting firm in Palo Alto, California, that has worked with such clients as Hewlett-Packard, AT&T, Bendix/King, The Allen Group, Peat Marwick, and CompuServe. He has taught at both the Harvard and Stanford business schools.

Excerpt. © Reprinted by permission. All rights reserved.:

Chapter 1

What Is Business Sense?

"What is the one thing every manager wants?"
"I don't know. Can there be one thing that every manager wants?"
"Of course. Every manager wants better results!"

Better results may mean more results, more consistent results, faster results, or even different results, but they are somehow better than the current results. It's the job of general management to get better results.

What is it that managers do that consistently makes the most difference in results? What are the ongoing management processes that literally cause success?

My search for answers to these questions was a process of discovery, and I found the richest source of knowledge in my own experience.

The answers I found there surprised me. They weren't as complex as I expected. The answers were so obvious that I am surprised that no one has written about them before. But no one has.

There are just a handful of things that successful managers do consistently that make the most difference in improving results. These five are the common sense of business. Each of the five is something that management is free to do.

Managers with Business Sense exercise Five Freedoms that create better results. By exercising management's Five Freedoms you can take the most effective actions that will have the greatest impact on results.

Freedom #1: Choosing the Right Business

If you have the option, the first effort you should make is to choose a business that gives you the best chance for success.

Are there lousy businesses? Businesses in which you just can't win?

Absolutely.

To understand what factors create a lousy business, we must first understand what a good business is. In a capitalistic world, a good business is one that has the potential to increase shareholder wealth. Period.

Lousy businesses have characteristics that are likely to decrease shareholder wealth. In some businesses you can't win.

No business is an automatic success, and there are more ways to lose than to win. The best a business can do given its essential characteristics is to have potential. Good businesses have three kinds of potential: profit potential, growth potential, and diversification potential. Any one of the three is a positive thing to have. Taken together they are dynamite. They maximize the potential for success by creating a field on which you can play and really have a chance to win.

Lousy Businesses

Lousy businesses are all around you. Take a look.

Businesses that have low barriers to entry tend to become fragmented because more and more people go into them until the shareholder returns are no longer there. Take any of the cottage industries like shoe repair, dry cleaning, or delicatessens (especially in New York City!). You can make a living, but not much more.

Look at all those businesses that you can enter fairly easily, that let you work twelve to fourteen hours a day, six or seven days a week, and your return is the same salary you could be earning by working eight to ten hours a day, five days a week for somebody else. But you do get to be your own boss! Big deal. They're still lousy businesses.

Businesses that are associated with things that people love to do can also be lousy businesses. How many sailboat manufacturers make money on a consistent basis? Why do restaurants have the highest annual failure rate of any business? It's because of all those people, known officially as "stupid competitors," who like to sail or cook more than make money.

Even businesses with significant barriers to entry can be lousy businesses when they become over-hyped as the "business of the future." During the 1980s venture capitalists invested in more than fifty startups that made disk drives for personal computers, a business that requires significant capital and technology. How many are still around?

Sometimes businesses do not develop because of limitations in technology. One of my clients once described gallium arsenide semiconductors as "the business that is now, always has been, and always will be the business of the future."

In effect, lousy businesses have so little profit, growth, and diversification potential that it doesn't matter what actions you take, you can't do much that will improve results.

Great Businesses

As noted previously, good businesses have three fundamental characteristics: profit potential, growth potential, and diversification potential. Which one should you look for first? Growth potential!

It is almost always easier to be successful in a growing business than in a declining one. Growth means that customers want more of the value that the business provides. Therefore, multiple competitors have the opportunity to be successful while avoiding fierce, direct competition.

Growth can hide a multitude of sins and often does. Business history is replete with examples of companies that were successful for years until the market growth slowed and real management skill was required.

Because growth potential is such a powerful factor, it tends to attract competitors. The number and type of competitors directly affect the profit potential of the business. Profit potential is directly proportional to the suppliers' ability to provide value to the customers in excess of the cost to produce that value. The profit potential of any one competitor in a business is directly proportional to that competitor's ability to create and sustain a significant advantage over the competition.

No matter how good a business is today, it will eventually mature and decline. Every business, like every person, has a life cycle. One of my seminar participants once challenged a group of sixty high-level executives to name the businesses that had not changed significantly in the last twenty years. It was, and is, a very short list. Virtually all businesses are constantly changing.

Constant change is the reason for the third requirement for a good business: diversification potential. You need a new business to jump to before the old one dies.

Instant photography and video games are two examples of businesses that had terrific growth and profit potential but little or no diversification potential. The results were stalled or failed companies (e.g., Polaroid and Atari). Without diversification potential, you had best know when to get out of a business. Otherwise you may see a lot of that shareholder wealth you have created disappear. We will see whether Nintendo finds more diversification potential in computer games than Atari did.

An example of a business with excellent diversification potential is personal computers. Not only do the computers hook onto lots of other things like laser printers that you could also produce, but a personal computer is a "scalable product." Increase its "scale" (i.e., its power and capabilities) and you have the "engineering workstation business." Decrease its scale and you have the "home computer business."

When growth, profit, and diversification potential are all excellent, it's much easier to get good results. Some businesses are so good that you have to try hard not to be successful. In the early 1990s networking of personal computers and graphical user interface software for those same computers are examples of great businesses. The demand clearly exists, the profit potential is huge, and the diversification potential is significant. Any company with competitive products and services should do well.

In order to evaluate the business' potential, you have to define the business first. What is a business anyway? How do you know whether you are in one, two, or twelve businesses? Chapters 2 through 5 in the first part of this book, "Freedom #1: Choosing the Right Business", show you how to define a business and

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