Levers of Control

This is a tool for how founders manage their companies, and the core takeaway is about how to "budget" your management energy.

There are three things that need to be balanced: 1. Top-down direction vs. bottom-up creativity

The side effect of order is less innovation. In management, how do you encourage innovation while running efficiently? 2. Unlimited opportunities vs. limited energy

We have so many opportunities, and it seems we could achieve a lot. But there are only 50–60 hours in a week, and every hour has to be productive enough. 3. Self-interest vs. employees who contribute

Everyone reacts differently in different situations. If an employee isn't performing well, look for problems in management first.

How do people know their work contributes to the company's vision? They need clear goals, boundaries, wins, room for innovation and creativity, and to be competent at their jobs. What tools can help the team achieve these? —

The four management systems

Boundary systems: avoiding risk

Belief systems: letting values drive growth

Diagnostic control systems: using critical performance variables

Interactive control systems: dealing with strategic uncertainty

1. Boundary systems

Grey lists, codes of business conduct, codes of professional ethics and so on all exist to let the team know where the boundaries are. The most famous boundary system is the Ten Commandments in the Bible: The first commandment: You shall have no other gods. The second: You shall not make for yourself a carved image, nor bow down to such images. The third: You shall not take the name of the Lord your God in vain. The fourth: Remember the Sabbath day, to keep it holy, and do no work. The fifth: Honor your father and your mother. The sixth: You shall not murder. The seventh: You shall not commit adultery. The eighth: You shall not steal. The ninth: You shall not bear false witness against your neighbor.

The tenth: You shall not covet your neighbor's house; nor your neighbor's wife, nor his servants, nor his ox or donkey, nor anything that is your neighbor's.

This actually helps innovation, because if people get their knuckles rapped every time they try something new, they'll stop trying. If people know where the boundaries are, they can experiment with innovation within them. It's a kind of "guardrail."

2. Belief systems

Core values — mission, credo, statements of purpose. A great example is "Johnson & Johnson's Credo."

The J&J Credo was written in 1943, and looking back, it was remarkably forward-looking — it even covers ESG.

Their values are alive, used every day. — To become a J&J supplier, you have to learn the J&J Credo; every rotating manager has to study the Credo together with their suppliers, to make sure the suppliers understand it.

They often say the "Credo" is the foundation of everything they do. In an organization whose hierarchy is highly decentralized, this lets employees do the right thing on their own.

"Reality isn't as good as we imagine, but we spend a lot of time on the Credo. Our actions have to reflect our values, our beliefs. We invest a lot in this, and we firmly believe that if employees understand the Credo, they will do the right thing."

3. Diagnostic control systems: critical performance variables, KPIs

This system can help us… communicate business strategy and support clear goals, and keep senior management focused — with a target to aim at

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The "Balanced Scorecard" may be a fairly useful tool, but…

There are many dimensions here, with lagging indicators and leading indicators, and we have to look at things from different perspectives, including but not limited to: The financial perspective: revenue, profit margin, gross margin… The internal business perspective: the ground we must take, the areas where we must achieve excellence. The customer perspective: how do customers see us?

The innovation and learning perspective: can we keep innovating and creating value, and how?

What matters is putting "strategy" at the very center; every metric serves the strategy. Some companies have only KPIs and no strategy.

If you want to improve, you can follow this process: (1) communicate the business strategy with every department (2) set and support clear goals

(3) make good use of managers' attention: it's an extremely scarce resource, so make good use of every day and every hour.

If we get it right and connect "strategy" and "performance goals" very efficiently, we get the payoff — the company will run on autopilot and head in the direction we want. Otherwise, you'll find management effectiveness drops sharply.

4. Interactive control systems

"Those below follow the example of those above" is a trait of human nature, and a very neutral phrase. The positive side is "the power of example"; the negative side is "what you say doesn't matter, only what you do." Everything about a company's boss, from their code of conduct to how they treat people, even their taste in clothes, invisibly influences the people below. Plant a seed, and the company's strategy takes shape.

Every manager should pay enough attention to themselves and check whether their own behavior is consistent with their strategy.

As for how to hear feedback from the front line, what matters is to keep asking the people at the very bottom: what needs adjusting? And to keep up with technological developments. Below is J&J's powerful profit-planning process. As the professor said in class, very few companies discuss their profit plans this frequently:

Finally, all these tools look great, but does every company need to use all of them? I don't think so. Different strategic positions call for focusing on different metrics.

At the end of class, the professor said, "It's just like raising kids." The boundary system is punishing them when they do something wrong; the belief system is telling them what the right way to do things is; the diagnostic system is their grades and achievements; the interactive system is the conversations you have when you chat together on weekends.

He said, all in all…

"We don't need McKinsey to tell us how to do it."