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Survival of the Smartest Haim Mendelson
0-471-29560-4

(The figures and/or tables mentioned in this sample chapter do not appear on the web version.)

THE QUICK AND THE DEAD

Today, there are just two types of companies: the quick and the dead.
Andy Grove, Chairman and former CEO of Intel

In 1992, TEN personal computer (PC) manufacturers participated in a global survey that allowed us to assess their Organizational IQ-a measure of their ability to quickly process information and translate it into viable decisions.
By 1998, only five of these companies were still around. Five had either faced bankruptcy or had been acquired by stronger competitors. Some of the five that didn't make it had appeared to be quite successful in 1992. Their profit margins were above industry average and growth rates were positive. Why weren't they able to sustain their position? The answer is twofold:

1. The clockspeed of the industry has increased dramatically from 1992 to 1998. Figure 1.1 shows the decline in product lifecycles for the PC industry.
2. Each of the five companies that failed had poor information and decision architectures, indicated by Organizational IQs that were below the industry average. The five surviving companies were "smarter"-scoring above the industry average.

THE CLOCK IS TICKING FASTER
It's not just the PC industry. Around the world and in all industries, managers are feeling the clock ticking faster and faster. Decisions have to be made quickly. Everything is in flux. There is too much information and no time to absorb it. Everybody's calendars reflect the frenzy. One meeting follows another, and day-to-day operations are driven by immediate or missed deadlines. Annual plans can become obsolete in weeks, and five-year plans sound surreal.
In this environment, speed of decision making is key. At the same time, the quality of decisions and their implementation cannot be compromised-one wrong move can open the door for competitors and jeopardize the results of lengthy efforts.
The ability to process large amounts of information quickly and effectively has become the crucial competence of companies in the Information Age. This is where our concept of Organizational IQ comes into play. A company's Organizational IQ describes how well the organization performs along the following dimensions:

• External Information Awareness: Ensuring that each part of the organization captures the external information it needs quickly and accurately. This includes information about customer dynamics, technology opportunities, and competitive actions.
  
• Effective Decision Architecture: Ensuring that decisions are being made at the right level, that is, by the people with the best information and perspective.
  
• Internal Knowledge Dissemination: Ensuring that each part of the organization knows what it needs to know when it needs to know it. Knowledge dissemination within the organization takes place both horizontally and vertically, across geographical boundaries, and over time.
  
• Organizational Focus: Fighting information overload and organizational complexity by limiting the scope of the business and simplifying structures and processes.
  
• Information Age Business Network: Recognizing that one company cannot create value on its own; that it needs to operate as part of a network. In managing partnerships, High-IQ companies apply the four previous principles of High-IQ management to their entire business network.

THE PLIGHT OF LOW-IQ ORGANIZATIONS
What happens if companies do not adapt to the management practices of the Information Age, but instead continue with business as usual? Unless the company operates in a protected environment (and these are endangered species), the answer is simple: Things get worse. In Low-IQ companies, high-level managers make tactical decisions even if they are not the people with the best knowledge of the problem at hand. People communicate with their peers in other functions only through their bosses. Employees engage in unproductive activities because they have been told to do so. Physical and cultural walls separate corporate functions. Access to external information is restricted, too. Talking to customers and suppliers is the task of specialists. Everyone else is shielded from reality. Deadlines are missed, customers get angry, and workloads increase while productivity keeps deteriorating. Soon, the difficulties become apparent at both the top line and the bottom line: growth slows down and profits decline as well.
Managers in Low-IQ companies often react, almost reflexively, by adding a dose of the old medicine: tighter controls and the concentration of power at the top. This, however, starts a vicious cycle: the "medicine" becomes part of the problem and the results get predictably worse.
Often, employees and first-line managers intuitively feel that something is wrong. On the working level, the folly of Low-IQ management manifests itself every single day. Management attempts to downplay the difficulties and suggest the same old solutions which are met with cynicism. No wonder Scott Adams' Dilbert cartoon character, which exposes the absurdity of traditional management practices at the end of the twentieth century, is so successful!
Here is how employees in some Low-IQ companies described this downward cycle:

"It took an awful lot of time until we came to a decision. After top management finally got its act together, we had to work like crazy to implement the plan."
"The people who make the most important decisions have no idea of what's going on here."
"Marketing is blaming product development for the mess-and vice versa."
"We are always behind. Nobody is taking the schedule seriously any more."
"I'm busy doing all kinds of things-I just don't find the time to do my 'real' job!"
"We are directionless. Everybody is pulling in a different direction."

THE BOTTOM LINE
Does a high Organizational IQ help to turn things around? If yes, how strongly does it actually affect the bottom line? We answered these questions by measuring the Organizational IQ as well as the financial performances of a large number of high-tech companies.
We chose high-tech companies because, by any measure, the high-tech sector is leading the worldwide march into the Information Age. High-tech industries undergo an unprecedented rate of change driven by dramatic improvements in the underlying technology and global competition. Furthermore, high-tech companies are utilizing the latest information technology to improve communication and speed up decision making-technology that will soon become as common and crucial to business in every industry as the telephone.
Our analysis included two comprehensive worldwide surveys of the electronics industry, broadly defined. The surveys were conducted as part of a partnership between Stanford University, McKinsey & Company, and the University of Augsburg in Germany. In all, more than 2000 managers from 164 business units of large high-tech companies from Asia, Europe, and the United States participated in the effort. The level of detail in which data was collected allowed us to calculate the Organizational IQ for each of the participating business units and analyze its impact on financial performance.
In this dynamic industry, we found dramatic differences in performance between companies that applied Information-Age principles (high Organizational IQ) and those that did not. As Figure 1.2 shows, High-IQ companies are much more likely to survive and thrive in the Information Age than their Low-IQ peers. During the late entire industry, including Low-IQ companies, grew at double-digit rates. When competition heated up and prices for electronic products came down in the early 1990s, the overall industry growth rate declined. High-IQ companies, however, continued to grow at a comfortable double-digit rate. Low-IQ companies, on the other hand, tell a very different story. At first, they grew at double-digit rates, albeit well below those of their High-IQ peers. If they found comfort in those rates, they were in for a rude awakening: in later years, their average growth rate fell below zero.
We found similar results when we looked at other measures of financial performance. Productivity is much higher at High-IQ companies than at Low-IQ competitors, and while High-IQ companies enjoy profits that are consistently above industry-average, their Low-IQ counterparts, on average, did not make any profits. Average returns on assets of High-IQ companies were about 10 percentage points higher than those of their Low-IQ peers. Not surprisingly, many Low-IQ companies did not survive.
Other industries are experiencing similar trends. While the opportunities and challenges of the global marketplace are a daily reality for Sony, Cisco, and Dell, this is also the case for BMW, Nestlé, and GE. Employees at Compaq, IBM, and Xerox communicate through global intranets, but so do people at Charles Schwab, Ford, and British Petroleum. What's more, high-tech components are built into many traditional products, thereby effectively blurring the boundaries between high-tech and low-tech industries. When auto industry executives, for example, talk about "convergence," they mean convergence of the auto and electronics industries: electronics will soon account for one quarter of the cost of an automobile.
Companies that operate in slower paced environments can learn from those that have already adapted to the Information Age. If things are just beginning to move faster in your own industry and you can hear the clock ticking, chances are you still have a chance to beat the clock. This creates a tremendous learning opportunity for executives in slower moving industries: Many of today's practices of successful high-tech companies are indicators of what will be important in other industries tomorrow. Every company will eventually have to learn to play by the rules of the Information Age, or else they might not stay around for much longer.
We present examples of companies from various industries that used High-IQ practices to improve their competitiveness. Chrysler applied Information Age management principles to build an effective "extended enterprise"-and dramatically increase the profit margins of its cars. Kodak's black-and-white film manufacturing division returned to profitability by increasing the organization's IQ. We dedicate an entire chapter (Chapter 9) to British Petroleum's transformation from a traditional, slow-moving company into an agile, High-IQ competitor that is setting the pace for everyone else in its industry.
Looking at successful companies and trying to copy their practices is not enough, though, to understand the direction in which your organization needs to move. Many of "America's Best-Run Companies" featured in the all-time business bestseller In Search of Excellence ran out of luck soon after the ink had dried. We would not be surprised if companies we feature in this book will be outrun by even more agile and smarter competitors, too. We are convinced, however, that the winners of tomorrow will be High-IQ companies. To be among the winners, it is important to grasp the logic that's behind a high Organizational IQ. That's why we spend an entire chapter on each of the fundamental principles of Information Age management.