Organizational Effectiveness: Regression Toward the Mean
What role does benchmarking play in your strategy?
I “grew up” in a multiunit retail environment where benchmarking worked wonders as a tool to spread great ideas and fix broken stores, districts and areas. But whether you are focused internally or externally, benchmarking has a dark side.
As a problem-solving tool, we examined stores that were below the mean for deficiencies (oftentimes management) and took corrective action. Stack ranking became a feared, though useful, tool. People reduced labor costs, squeezed equipment costs, lowered rents, and tightly managed training and development expenses — but when this process was overused, it ripped the heart out of the company. Growth soon plummeted. There was a regression toward the mean, but the mean was declining.
Before this, people used benchmarking in a more positive fashion. All levels of management visited stores that had great results to see what was going right. Management spread great ideas not so much by force across the chain but because the ideas produced results. Middle and senior management did not see themselves as “enforcers” but rather as idea pollinators — spreading success stories and leveraging great ideas. Healthy competition drove innovation.
People often ask me what role benchmarking the competition should play in crafting strategy. I believe it should be minimal. When you focus on the competition, you end up looking for incremental, tactical advantages. Although strategy is meant to make you “different,” you become more similar through benchmarking. There’s a regression toward the mean as companies in an industry focus on one another. “Me too” is not a good strategy. McKinsey and Company offered evidence that regression toward the mean of companies within an industry as measured by return on invested capital really does occur. Bad companies get better and good companies get worse.
Apple was transformative because it didn’t focus on competition and, in fact, didn’t build product from comparative data but rather focused on homegrown innovation. It will be interesting to see how this plays out over time. Will the company focus on the competition or come up with the new iCar or iSpaceship or iPet? You can bet that they are not intent upon getting to “average.”
Todd Ordal is President of Applied Strategy®. Todd helps CEOs achieve better financial results, become more effective leaders and sleep easier at night. He is a former CEO and has led teams as large as 7,000. Todd is the author of, Never Kick a Cow Chip On A Hot Day: Real Lessons for Real CEOs and Those Who Want To Be(Morgan James Publishing, 2016). Connect with Todd on LinkedIn, Twitter, call 303-527-0417 or email email@example.com.