Book Digests/General Business

Book Digest: High Output Management

Posted on by Mike Pinkel

Andy Grove’s High Output Management is an example of sound engineering thinking applied to management. It’s also the best book on management I’ve read. The most powerful idea in the book is that managers should focus on activities that have high leverage, meaning that they they either affect the productivity of a large number of people or affect their productivity in a lasting way. The concept of leverage is critical in setting priorities, even if you’re not a manager. Will your effort improve an ongoing process or just the outcome of one task? If the former, it’s worth prioritizing. If the latter, perhaps not.

I also admire the elegance of Grove’s reasoning. He defines concepts with rigor and then shows you how they apply to challenges you’ll face. Because of the precision of his definitions, he can explain how the best approach varies depending on circumstances. You come away not with a list of prescriptions but a set of tools for thinking through problems and arriving at rational solutions.

Introduction

  • Output-oriented approach to management. Think of management like running a factory.
  • Output comes from teams
    • The output of a manager is the output of the teams under his supervision and influence
    • Maximizing output requires focusing on high leverage activities
  • Teams perform well when every individual performs at peak output

I. The Breakfast Factory

1. The Breakfast Factory

  • The principles of management can be illustrated through the operations of a breakfast factory
  • In a production process, pin down the limiting step, the one that will determine the shape of the operation
    • Start with the longest, most difficult, or most expensive piece. In a breakfast factory, this would be the food item that takes the longest to prepare.
  • Design the rest of the process around the limiting step
    • E.g., in an interview process, the expensive part is having candidates come for in-person interviews, so design the process to screen out poor fits prior to the in-person interview
  • Try to detect problems at the lowest-value stage possible before you’ve done the work to add value

2. Managing the Breakfast Factory

  • Choose five indicators to track
  • Each indicator should be focused on a specific goal. At a breakfast factory, you might pick:
    • Sales forecast
    • Variance between the production plan and delivery the preceding day
    • Raw material inventory
    • Equipment condition
    • Manpower
    • Quality
  • Assuring quality
    • Reject defective material at an early stage when it has accumulated less value
    • Types of tests
      • Gate: Hold material until test passed
      • Monitoring: Take a sample to test and let the process continue
      • Variable inspections: Check less often if you observe few problems, more often if you observe more. Dig deeply into one aspect of a process.
  • Productivity
    • Two ways to improve: (1) work faster, (2) work better by increasing leverage, the output per activity
    • Ways to increase leverage
      • Work simplification: Cut out unnecessary steps
      • Stress output rather than activity level

II. Management as a team game

3. Managerial Leverage

  • Manager’s output = output of his organization + output of organizations under his influence
    • Managers should shift their limited time to activities that have the biggest impact on their organization’s output, i.e., activities with greater leverage
    • Knowhow managers have great potential to influence organizations even if they do not supervise one
  • Four major managerial activities
    • Information gathering
      • Walk around your department without an objective and have informal conversations. This makes subordinates comfortable approaching you and makes it easy to quickly deal with issues.
      • Preparing reports requires clarifying thinking, even if the report is not read
    • Nudging
      • Giving advice builds shared corporate culture and approach
      • Advice is more frequent than formal decision-making
    • Decision-making
      • Forward looking
      • Responding to problem
    • Being a role-model
      • How you spend your time is the most important part of being a role model
  • Leverage of managerial activity
    • Managerial output = Output of organization = Leverage of activity 1 * Amount of activity 1 + Leverage of activity 2 * Amount of activity 2 ….
    • You can increase productivity by:
      • Increasing activity rate
      • Increasing the leverage associated with a given activity
      • Changing the mix of activities toward high leverage activities
    • High-leverage activities
      • Many people affected by one manager
      • One person affected for a long time
      • Large group affected by gaining a key piece of knowledge
    • Examples
      • Timeliness matters. Preparing prior to a meeting maximizes impact on everyone and reduces scrambling to fill in gaps later on.
      • Good performance reviews impact performance over a long period of time
      • Technical experts can supply a critical insight that impacts many people’s work
    • The art of management is isolating high leverage activities
  • Delegation as leverage
    • Must have a common base of operational methods
    • You can’t abdicate a task, you have to monitor without meddling
    • Monitoring
      • Monitor at a low value added stage, e.g., a rough draft of a report
      • The frequency of monitoring depends on your subordinate’s experience with that specific task, their task-relevant maturity
  • Increasing managerial activity rate
    • Identify the limiting step in your schedule: the immovable, large commitments
      • Design your day around these
    • Batching
      • Each type of activity has setup time, so do many of that activity at once to economise on setup time
    • Forecasting
      • Take the initiative to schedule important but not time-critical activities between fixed commitments
      • Say no to work beyond your capacity and say no early at a low value-added stage before others have invested in something
    • Carry an inventory
      • This is a list of discretionary activities that are important but not urgent
      • Use these to fill gaps in time between fixed commitments
  • How many subordinates you should have
    • 6-8 if your work is largely supervisory
    • Plan to spend a half a day per week with each subordinate
    • Know-how managers effectively have one subordinate for each planning or coordination committee they are part of
  • Controlling unplanned interruptions
    • Group the questions/interruptions and prepare standard responses
    • Create regular meetings for specific types of questions

4. Meetings – The Medium of Managerial Work

  • Most managerial tasks are done through meetings, so meetings should be made as efficient as possible
  • Process-oriented meetings
    • Focus on a single type of task at a meeting to enable batching
    • One-on-ones
      • Purpose is mutual teaching and exchange of information
      • Subordinate sets agenda and prepares for meeting
      • Manager’s role is to ask questions to get subordinate to talk about problems the subordinate confronts
    • Staff-meetings
      • Staff meeting is one where supervisor and all of his subordinates participate
      • Topics should include items that affect more than two people present
      • Prepare agenda far enough in advance that subordinates can prepare
      • Supervisor moderates, subordinates work the issues
    • Operation Reviews
      • Managers describe work to managers who are not their supervisors and to peers in other parts of the company
      • The supervisor of the presenting managers organizes the meeting
      • The reviewing manager is typically the supervisor of the meeting organizer. He asks questions and promotes participation and expression.
      • The audience asks questions and makes comments
  • Mission-oriented meetings
    • Designed to produce an output, usually a decision
    • The chairman:
      • Organizes the meeting and sets the objective
      • Circulates an agenda and assigns tasks to the participants
      • Circulates minutes summarizing the discussion, the decision, and the next steps to be taken

5. Decisions, Decisions

  • Ideal model
    • Free discussion
    • Clear decision; the more controversial the decision the more clear it needs to be
    • Full support from everyone in the group, not necessarily agreement
    • Decisions should be worked out at the lowest competent level because that’s the level that has the relevant information
    • Status symbols inhibit the free flow of ideas, so high ranking people should not have them
  • The peer-group syndrome
    • If a problem is discussed among a group of equals, they may go around in circle without reaching a decision
    • The peer plus one approach solves this by adding a more senior manager whose job it is to shape the meeting
  • Striving for output
    • The manager must settle six questions in advance
      • What decision needs to be made
      • When does it have to be made
      • Who will decide
      • Who needs to be consulted prior to the decision
      • Who will ratify or veto the decisions
      • Who will need to be informed of the decision

6. Planning: Today’s Action for Tomorrow’s Output

  • Steps
    • Establish projected need
    • Establish present status/capacity
    • Compare and reconcile need with capacity
  • Environmental demand
    • Forecast this without worrying what steps you can take to remedy shortfalls
    • If you fail to forecast full demand, you won’t even be trying to solve the real problem
  • Present status
    • List capabilities and present projects, discount present projects by a failure rate
  • Closing the gap
    • Quantify the gap before thinking about solutions
    • List potential actions, quantify their impact, specify their timing
  • The output of the planning process
    • Today’s gap likely represents a failure of planning sometime in the past
    • Plans try to solve or avoid tomorrow’s problems
  • Management by objectives
    • Answers two questions
      • Where do I want to go (objective)
      • How will I pace myself to see if I am getting there (milestones, key results)
    • Feedback is best when received quickly, so keep the period short
    • Focus is critical, so keep the number of objectives small

III. Team of Teams

7. The Breakfast Factory Goes National

  • When the breakfast factory scales, it wants to keep both:
    • The advantages of having a local entrepreneur set up each franchise
    • The economies of scale of a large organization
  • Large organizations have to have multiple teams support each other effectively

8. Hybrid Organizations

  • Mission-oriented organizations are decentralized: Each store would be responsible for all elements of its operations
  • Functional organizations are completely centralized: The central staffing department would hire for all stores
  • Most companies adopt a hybrid form to get the best of both
  • Functional units
    • Serve as internal subcontractors, e.g., accounting or IT
    • Economies of scale
      • Resources can be shifted across the company as needed
      • Knowledge can be diffused across the company
    • But there can be overload as the functional organization receives demands from diverse parts of the company
  • Mission-oriented units
    • Can respond quickly to changes in environment
    • Responsiveness is the core purpose of business, so this one advantage is critical
  • The biggest challenge of hybrid organizations is allocating resources
  • Middle managers must accept that hybrid forms are inevitable and embrace dual reporting

9. Dual Reporting

  • Dual reporting happens because the head of a mission-oriented organization can’t provide functional guidance to subordinates with functional expertise
  • Therefore, functional experts report both to the head of their mission-oriented organization and to someone in their functional organization
    • Mission-oriented supervisor sets priorities relevant to the business unit
    • Functional supervisor ensures proper training and technical performance
    • Functional peers meet to discuss problems common to all
  • Multi-plane organizations
    • People may work in multiple organizations and have a different spot in the hierarchy in each. E.g., one person could be the head of a mission-oriented organization but a regular member of a planning team

10. Modes of Control

  • Free-market forces
    • Price-based interaction, each party acts for short-term self interest
    • Very efficient, but breaks down where value is harder to define
  • Contract
    • Defines standards of work and grants employer generalized control over work
    • Works where value is less easily defined and interaction is longer term
    • Contracts don’t work where change is rapid or the circumstances are very ambiguous because it’s too difficult to craft rules to cover all possibilities
  • Cultural values
    • Best solution when there’s change and ambiguity
    • Common values, objectives, and methods
    • Group interests take precedence over the individual
  • The role of management
    • Free-market systems: no managers needed
    • Contract systems: managers set the rules and monitor adherence
    • Cultural values: management nurtures values by articulation and example
  • The most appropriate method of control
    • Depends on the nature of a person’s motivation and his environment
      • Environments vary from low to high for complexity, uncertainty, and ambiguity (CUA)
      • Motivations vary from self-interest to group-interest
    • Free-market: Self-interest and low CUA
    • Contract: Group-interest and low CUA
    • Cultural values: Group-interest and high CUA
    • Nothing works: Self-interest and high CUA

IV. The Players

11. The Sports Analogy

  • Teams perform as well as the individuals on them
  • Individual low performance is due to either lack of capacity or lack of motivation
    • To decide which, ask if they could do their job if their life depended on it
  • It’s unclear that you can create motivation. All you can do is create an environment where motivated people will flourish.
  • A hierarchy of needs
    • Basic needs make us show up for work
      • Physiological: Food/shelter
      • Security/Safety: Health insurance
      • Social/Affiliation: People want to belong to groups whose members share traits with them
    • Higher needs make us perform well
      • Esteem/recognition: Competing to be the best. Can be satisfied by winning.
      • Self-actualization: What I can be, I must be; drive to achieve one’s personal best. Unlimited source of motivation.
  • Achievement orientation  
    • Achievement oriented people must achieve in all that they do
    • To foster achievement orientation, set stretch goals and be focused on output rather than effort or abstract knowledge
  • Money and task-relevant feedback
    • When one’s basic needs are satisfied, money is a measure of achievement
    • Performance reviews steer people toward important rewards rather than irrelevant ones
  • The sports analogy
    • You can motivate employees by making work like sports: Establish rules and ways to measure the score

12. Task Relevant Maturity

  • No managerial approach is universally best
  • The most effective depends on the task-relevant maturity (TRM) of the employee
    • TRM varies based on achievement orientation, readiness to accept responsibility, and training/experience. A person’s TRM depends on the task, not just the person.
    • Low TRM: Precise instructions, goals, and schedules
    • Medium TRM: Communication, support, and encouragement
    • High TRM: Agree on objectives, otherwise don’t interfere
  • Always monitor work; don’t worry which style is nice, only worry about which style is effective
  • Managerial difficulties
    • Each manager prefers a specific style; it’s hard to be adaptable to the employee
    • Most managers see themselves more as communicators and delegators than they are
    • Don’t be friends with subordinates if that would make it hard for you to deliver a tough performance review

13. Performance Appraisal : Manager as Judge and Jury

  • Reviews are how we assess TRM and how we deliver that assessment
  • Assessing performance
    • Clarify what is expected from the subordinate and judge performance relative to expectations
    • Output measures: Completing tasks and hitting goals
    • Internal measures: The way output is produced. Are we achieving goals by burning out employees?
    • Consider time factors: Today’s performance may be a result of work from a long time ago; today’s work may not result in performance for a long time
    • Assess performance, not potential
  • Delivering the assessment
    • Level
      • Be totally frank
    • Listen
      • Listen to ensure that the subordinate understands what you’ve said; not because it’s a discussion
    • Leave yourself out
      • Keep your anxiety, guilt, and insecurities out of it
  • Three types of performance reviews
    • On the one hand, on the other hand
      • A mixed review
      • The goal is to improve performance, not be exhaustive
      • Less is more; look for themes that emerge from the details
    • The blast
      • An employee who needs to turn it around or get fired
      • First goal is to get the subordinate to recognize the problem and assume responsibility rather than ignoring the issue or blaming others
      • Any commitment to action that can be measured is a good outcome
    • Reviewing the ace
      • We should devote more effort to improving the work of star performers since they account for so much of the organization’s output
    • Other points
      • It’s good to give your subordinate the review ahead of time so he has time to react and reflect

14. Two Difficult Tasks

  • Interviewing
    • Applicant should do most of the talking but you should interrupt applicants to focus them on the most important topics
    • You want to assess: (1) skills, (2) prior performance, (3) reasons for discrepancies between skills and prior performance, (4) operational values
  • Talking a valued employee out of quitting
    • Drop what you’re doing and ask why he’s quitting. Don’t argue, long into the explanation you may hear the real reasons.
    • Bring your supervisor in to help create a solution that makes the employee happy
    • Stress that you’re not responding to blackmail, the threat to quit just made you do what you should have done a long time ago

15. Compensation as Task Relevant Feedback

  • Base part on salary and part on a performance bonus
  • The higher the manager’s pay, the greater the proportion of bonus. You don’t want to threaten someone’s basic needs if their bonus is low.
  • The bonus might be split into multiple categories. Even if the amount in each category is low, it still calls attention to that issue.
  • Total pay often varies based both on merit and seniority
  • Merit based compensation requires that you accept that, for someone to be first, someone else has to be last
  • There are two types of employees who meet but don’t exceed expectations
    • Non-competitors who are satisfied
    • Competitors who just got promoted and went from being excellent to meeting expectations. They will likely excel, be promoted, and repeat the cycle.
    • Sometimes someone is promoted well past their level of competence. Let them step back to their prior role rather than letting them go.

16. Why Training is the Boss’s Job

  • Training is one of the highest leverage activities because it increases the capability of your entire team
  • Training must be consistent rather than a rescue effort
  • 2-4% of time at Intel is spent in classroom learning, much delivered by own managerial staff
  • Implementing a training program
    • Determine the skills your team should know
    • Make an inventory of the manager/teachers in your organization
    • Assign priorities
  • Accept that your first effort will be sub-par. Get anonymous feedback and improve it.
Mike Pinkel