Why Do Firms Fail in Emerging Markets?
It is well accepted that emerging markets like BRIC countries represent a huge present and future opportunity for growing the business. Thus, many companies are entering into those markets. Unfortunately, not all organizations are able to show off that they are growing as it was planned. So let us review why do firms fail in emerging markets like Brazil:
Focus on what we need (increase sales) rather than in which customers need
Our financial goal can be to increase sales, but we must maintain customer focus. We should not assume that because our products fulfill global needs and are selling properly in some developed countries, those are going to work properly in emerging countries. We should ask ourselves: What are customers’ needs? And what is customers’ behavior (in emerging markets)? So, we will likely realize that customers in those countries buy with a different mindset. E.g. In Europe, it is much more likely to find customers that buy products according to “Product Life Time Value” than in Brazil that prefer list price to make purchasing decisions.
Market research focuses on the size of the opportunity and “neglect” product and price market constraints
There are still companies in B2B markets that pay much attention to sales and much less on marketing. So, some firms wrongly leave product introduction project on the hand of not very experienced marketing people. Having a deep study of how our products and prices fit the market is so important.
Decision-makers and influencers with lack of understanding of emerging markets
We can find that decision-makers have been historically located in Europe or North America headquarters. Some of them have never lived or even been in any of those markets, and they use their own country mindset.
“Global product strategy” rather than “fit to market strategy”
We have listened many times: “be global, act local.” However, there are still many companies that executing their global strategy (for instance reduce complexity,) they kill the necessary “fit to market strategy.” E.g. In the automotive industry in Brazil, customers prefer mechanical engines, so offering just electronic engines in order to have a global product strategy means give up a huge potential customer base.
Not understanding the “good enough segment”
Important growth in emerging markets comes from that segment. Good enough segment expects reliable enough products at low enough prices. I mean enough quality at affordable prices that still generate profits. Moreover, this segment is important to achieve economies of scale that will allow us to access to competitive price levels. E.g. In the automotive industry environmental regulation for emerging countries have a few years of delays. Trying to reduce product complexity having the same product for Europe and Brazil means increase features and prices that push us out of the “good enough segment.”
Not understanding “growth strategy” implications
In order to grow, firms need to invest. Some companies get in dead-circuit because they want to grow and get short-term profitability, and both strategies used to be incompatible in the short-term. Indeed, growing means investing (facilities, stock, days of sales outstanding, sales force, and so on,) and just a few industries allow firms to materialize profits in the short-term. Many of the successful firms that entry in emerging countries have invested strongly during years before getting the expected return. Other companies think that the important is just to fulfill their global footprint, and they invest shyly (probably one salesman by-product or vertical industry). In this last case because the investment is not enough, it will take very long time to get the return on investment, and firms could lose the patient and enthusiasm for those markets.
“Problems are OUT (of the firm) approach” rather than “problems are INSIDE (of the firm) approach”
The arrogance of some people/companies does not allow them to realize that they have many improvement opportunities inside. Those companies blame to market, customers, and so on. Many times, those people are bad listeners, and therefore people with low customer orientation. Moreover those people with a limited view of the problem cannot take advantage of the “power of AND” when trying to solve problems. So, they think in terms of OR. For instance, rather than improve the firm processes to be more competitive AND solve the market price issues, they think that the solution is lost money OR to increase even more the list price.
Measure success perceptually (%) rather than in euros/dollars ($)
Controllers can kill growth initiatives because those initiatives do no reach a percentage of net margin. Indeed, those initiatives can have a positive net margin, an important contribution margin, and support market share growth during the market penetration stage.
Not pursue costs saving aggressively
There are huge global corporations that are losing market share because they created in the past huge facilities (with several thousands of employees) difficult to manage properly. Those plants have very limited flexibility, diseconomies of scale, and massive overheads. Again, we have the risk of controllers assuming wrongly that current cost structure is correct, and suggesting “rationalizing” products, customers or markets.
Assuming that managing more value activities means creating more customer value and profitability
Some organizations decide to enter emerging markets and be focused on sales development. So, they use resources to grow quickly, and they take advantage of local partners and outsourcing activities. Other firms decide to invest at the same time in sales and building other capabilities. For instance, there are companies that have a distributor business model, but those firms try to add assembling/manufacturing capabilities to the distributor business model to generate more customer value and be more profitable. Nevertheless, they deviate resources from sales development to assembling/manufacturing, and because at the beginning there are not enough sales, the assembling facilities do not get economies of scale to compete. So, they face two problems at the same time: low sales and lack of economies of scale in production.
It is important to highlight that many of those causes are interrelated. So, companies failing in emerging markets are quite often affected by several of those causes, which increases even more the probability of failure in the emerging markets.
Is Profitable and Justified Strategically Maintaining Our Current Network Of Facilities?
Products, customers and offices unprofitable must be identified and make profitably or we should take the decision to remove them. Many times it is assumed that facilities network are a strategic long-term decision, so it is not reviewed the strategic convenience of those investments approved for top management any time ago. Thus, we are going to review some of the commonest strategic and financial reasons argued to open/maintain subsidiaries opened.
We must be aware that in the last few years many things relating communications have changed a lot. For instance, traveling costs are cheaper because we have low-cost airlines, communication costs are cheaper because there are communications base on Internet, companies have adopted widely conference-calls as a cheap and reliable communication way, virtual offices with sharing meeting rooms and other services are in place, teleworking can avoid investing in an office, and so on. Moreover, dot com firms have showed us that is possible to compete in many industries with a much less footprint those traditional companies.
So let’s go to analyze those often strategic reasons for opening/maintaining facilities:
“Being close to customers was going to facilitate customer acquisition and/or retention.”
- If we analyze our value proposition, we used to ask ourselves: What value do we deliver to the customer? Which one of our customer’s problems are we helping to solve? What bundles of products and services are we offering to each Customer Segment? Which customer needs are we satisfying? Why do customers turn to one company over another? (Alexander Osterwalder & Yves Pigneur 2010) But having a new office is not a likely question.
- If we analyze our customer relationship approaches: Personal assistance; Dedicated Personal Assistance; self-Service; Automated Services; Communities; Co-creation (Alexander Osterwalder & Yves Pigneur 2010). Even the personal assistance relationships not necessary must be built from the same location. In personal assistant is more important the person than the location.
“Being close to customer means offering better services.”
Nowadays, we have access to motorways, higher fly frequency, service logistics operators that deliver in 24 hours or fewer from central distribution centers, etc. This means that today we could offer a similar service level from a central location than from a local one.
Many times is hard to recognize that managing subsidiaries is a very tough task for our organization. So outsourcing that distribution center or for instance using a dealer could be more profitable at the same time that we could be able to improve service levels. Although that means having the humility to recognize that someone can do a better job than us.
“Cost of doing business is reduced because traveling costs are reduced.”
We must analyze the traveling cost avoided versus cost to have a facility:
- Obvious office related costs: Costs for rent, electricity, water, communications, insurance, cleaning, security, taxes, and so on.
- Office staff related costs: Salaries, office furniture, telephones, computers, software licenses, company cars, petrol, traveling costs to headquarter meetings, etc.
- Office/Warehouse improving costs: Human being used to try to improve things. So because we have a new facility, we can take advantage of that and we could think that we could build some stock. So because we have some stock, we need racks. So because we have some stock, we need a forklift. So because we have a forklift, we need a warehouse man, etc. I mean once that we have a new facility we open the door to many initial unexpected costs.
- Control costs: ERP customization to control that office, traveling to audit and support the office staff, etc.
- Productivity costs: Many small offices have less access to resources, training, control, etc.
- Complexity costs: Sometimes subsidiaries argue that local suppliers are better than corporate ones. That practice reduces cost saving of using corporate suppliers.
I am not suggesting that having more than one facility is wrong. What I am trying to suggest is that in turnaround is very important to review the real need of current offices or even the appropriate decision to open a new one. Subsidiaries can affect massively in company profitability.
When Should We Outsource Activities?
“Whenever a company produces a service internally that others buy or produce more efficiently or effectively externally, it sacrifices competitive advantage” (Quinn, James Brian, Thomas I. Doorley, Penny C. Paquette “Technology in services: rethinking strategic focus” Sloan Management Review, Winter 1990). Thus, any activity not considered a core competency has the potential to be outsourced, but what are the advantages of outsourcing?
Outsourcing Advantages
The big disadvantage of outsourcing that used to be mentioned is the “loss of control”. Although with the information systems that today are in place, and managing properly the relationship with the outsourced firm by having regular meeting and conference calls, we should be able to overcome that “disadvantage.” In reality one of the biggest handicaps for outsourcing could be “the loss of power” for some managers. For instance, we could have a Supply Chain Director managing more than 1,000 workers and after outsourcing the distribution centers network he could be managing just 20 people. So that strategic focus could be seen for some managers as “loss of power and control.”
Activities like transportation, warehousing, co-packing, publicity, payrolls, or legal support have been outsourced during many years in order to materialize the outsourcing advantages. However, the outsourcing process continues its evolution and its getting further. In the last years some companies have implemented outsourcing AND offshoring strategies in order to enhance the outsourcing benefits. For example, DHL is outsourcing globally some IT activities in India, or Telefonica is outsourcing call centers in Colombia.
The long tail concept introduced for Chris Anderson in 2004 is supporting the access to outsource for very small firms or low volume activities. For instance, Legalitas in Spain offers outsourcing legal advice for just 15 €/month, or outsourcing the marketing creation of a PC wallpaper can be sold in Internet for just $ 50.
Once that we have identified a potential outsourced activity, the next step would be answering the following question: How can we “guarantee” that we should outsource that particular activity? We should outsource it, if we are able to answer affirmative to the following three questions:
- Are we reducing complexity or increasing flexibility? If managing the outsourced firm is being easier than managing that activity internally. From the change management perspective, this is an important issue because outsourcing important activities are probably creating some internal conflicts with trade unions. Moreover, those processes could affect staff morale (thinking that their jobs are in danger in the current or in the future coming from outsourcing processes.)
- Is the service being improved? If the outsourced firm has more expertise or specialized resources to perform those activities, the outsourced firm is likely improving the current service.
- Are we improving our cost structure or reducing our assets? Companies with higher expertise and more specialized resources should have better processes (reducing the cost of “poor” quality) and higher productivity. Moreover, better processes and resources allow companies to use less experienced and cheaper workers to perform activities. For example, warehouse men using well design processes supported by radio frequency just would need a very short training about products, their location, picking strategy, etc. The location and type of business that the outsourced firm performed can create a competitive advantage from the labor cost point of view what it is so important in intensive manpower industries like services. Cost reductions is going to support turnaround projects, but assess reductions offer one of the best opportunity in turnaround projects to improve cash (selling warehouses/buildings, machines, etc.)
How Does Top Management Make Decisions?
Many CEOs assume that making and publishing an organizational chart is enough in order to answer the structure and some relates matters like company style. However, there are some key questions like the style question “How does top management makes decisions?” that are not answers with an organizational chart.Decision Styles: Adapted from Marcia W. Blenko, Paul Rogers and Patrick Litre
Bain & Company explains that participative styles improves decision quality because takes advantage from collaborative styles that at the same time get employees engagement via participation. Additionally the decision-making process is accelerated because just one person takes responsibility for each decision avoiding bureaucracy. It having one person in charge of every decision brings single-point accountability as well.
We would like to stress that there is another important advantage not mentioned for Bain & Company from having one single-person taking the responsibility for each decision; we get a consistent and coherent decisions direction because the same person is in charge of decisions. We mean we get decisions alignment.
From the turnaround perspective we cannot sacrifice the speed of decision, neither the quality. So we could say that we are almost forced to use the participative decision style.
Finally, we have to mention that it is essential that the CEO decides and communicates the primary decision style for the company. This can avoid internal conflicts. For instance, if the firm decides to use a participative style and there are people who feel most comfortable with other more collaborative decision styles (democratic or consensus) communicating formally the participative style decision will help that staff to embrace the decision style and avoid unnecessary internal conflicts. We must be aware that people from primary activities of the company can feel most comfortable with the participative style, while people from support activities can prefer consensus style. So again we have to highlight the importance of defining and communicate the decision style to avoid conflicts and get people much better aligned.
Business Alignment: When Board Is
Misaligned with
Management
It is pretty obvious that business alignment is a prerequisite for firms to success. This alignment is even more important in the two top layers of the firm, the board of directors and the management team. Thus, we can find companies underperforming which main cause is poor management, and the effect is the misalignment between the board and management.
What is board and management alignment?
Peter Drucker defined this alignment very clear and showed us that a clear responsibility definition is one of the main business Key Success Factors: “The board must not act at the level of tactical planning, or it interferes with management’s vital ability to be flexible in how goals are achieved… the board is accountable for mission, goals, and the allocation of resources to results, and appraising progress and achievement. Management is accountable for objectives, for action steps, for the supporting budget, as well as for demonstrating effective performance.”
Adapted from Peter Drucker: "Defining the board and management responsabiities"
How board and management misalignment used to happen?
Most of the time a board member does not understand his role. In this situation that member used to implement what we could call “micro-management.” That is entering in the tactical planning and interfering with management.
What are the consequences of this misalignment?
The consequences could be disastrous for the following reasons:
- The board member wastes his time with tasks that he should not perform.
- The management team waste their time and energy internally rather than externally making loyal customers and fighting with competitors for market share.
- The board used to overrule the management members. This is a common human being practice to demonstrate “they are adding value”. This attitude used to unmotivated the management team, and in the mid-term could provoke desertion of good managers who will prefer moving to others firm with less interference in their job.
- For seniority, respect and status quo the suggestions of the board used to be followed. However, those suggestions could be “wrong” because the board members used not to have the daily contact with customers and other regular issues to “properly understand” the importance, urgency, and consequences of those tactical decisions. The other reason why board members used to fail in tactics’ decisions is that most of them use what I call the “fishbowl approach.” I mean they prefer isolating themselves in their offices to improve their own productivity but that approach used to work uncorrelated with the capacity to solve tactic issues that required to be very much in touch with the staff, customers, suppliers, and so on.
There is one case in which could be understandable the practice of micro-management for a board member. It is the case in which the management team is not good enough. Nevertheless, the top management team have been hired for the board. So it is again the responsibility of the board to select a good management team and to replace underperforming managers, but no interfere with managers’ tactics. We should not forget that another Key Success Factor for board members should be their ability to hire the right people for the right position.
Before continuing, we must answer the question is micro-management always a bad practice? The answer is no. I mean micro-management could be needed it for managing young and inexperienced staff, or to manage inexperienced middle management in underdeveloped countries and/or organizations. However, board should not use micro-management under any circumstance with management.
Other way to identify poor management practices in the board is analyzing their tasks. Poor board members do what they do not have to do, and they do not do what is expected from their positions. It is easier to perform micro-management because those tasks used to be easier than board activities but this is not the expected work for board members.
How is business alignment and misalignment affecting turnaround initiatives?
In turnaround projects, we should wonder us:
- Do we have a poor management issue?
- Is there a misalignment between the board and management?
- Who is the responsible of this misalignment?
- Can we perform a success turnaround, if the people underperforming are still in the firm?
This misalignment issue probably is quite uncommon on large corporations. But it is quite common in small businesses that have grown fast, and the same people who used to be managers are now low experienced board members.
The Sales Area Is Underperforming: Have
You Promoted Your Best Salesperson to
Sales Manager?
It sounds strange hearing that it could be something wrong promoting the best performer. For instance, do you know any good mechanics or engineers who were promoted to a managerial position, and the company lost a good technician and got a not too good manager? Please, don’t misunderstand me. There are many mechanics or engineers with the right managerial skills but having technical skills, does not guarantee good managerial skills.
From the Kindergarten, we have been taught that people with better score are the best. Therefore, we can find many Small and Medium Business (SMB) that follow the assumption that the best salesperson should be promoted to the position of sales manager. Even in the subsidiaries of global corporations are in place the same assumption because the hiring responsibility of the sales manager position depend on the country manager in order to have full accountability.
We have been taught that all of us we should be leaders and the proof of our success will be achieving a managerial positions. However, this is not exactly true. No everybody is or will be prepared to be an effective leader or manager. However, that does not mean that the person failed. It just means that those people are more suitable for other positions that can be of high value for the firm and very well-paid too. Anyway, I prevent you that this article could be very challenging for the current mindset of many salespeople and sales manager.
Why the best salesperson wouldn’t probably be the best suitable person for the sales management responsibility?
First, as Mike Weinberg point out “the successful individual sales producer wins by being as selfish as possible with her time… The seller who best blocks out the rest of the world, who maintains obsessive control of her calendar, who masters focusing solely on her own highest-value revenue-producing activities, who isn’t known for being a team player, and who is not interested in playing good corporate citizen or helping everyone around her, is typically a highly effective seller… The successful sales manager doesn´t win on her own; she wins thorough her people by helping them succeed.” It is relevant to stress the difference between selling on her own and selling thorough her people. An evidence of the misunderstanding of selling through other is that with almost the exception of IT industry, no other industry is using Partner Channel Management as a powerful sales channel that could provide around 60% of total company sales. Anyway, you could find a top salesperson who is suitable to be a sales manager but is quite improbable. I am explaining why in the next paragraph.
What is the profile of Top Salespeople and Sales Managers
Second, the skills and responsibilities of a salesperson and a sales manager are different. Let list some of the skills of a sales manager: building a sales culture; leading a team; team motivation; hiring; retaining top performers; conflict management; coaching; feedback delivery; challenging data, false assumptions, wrong attitude, and self-complacency; create the area budget and forecasts; etc. Are those the skills of sellers? The answer is NO!
Third, as Mark Roberge highlight sales top performers used to base their success in a specific selling skill (relationship building, or consultative selling, etc.) Nevertheless, the sales managers need “a well-rounded grasp of the entire sales methodology. Sales leaders with balanced abilities would be able to diagnose a specific issue and be qualified to customize a coaching plan to address the issue.” So, sales top performers with unbalanced skills are not likely able to coach a team on any skills that they have poorly developed. Now, we must clarify that a sales manager must have a good performance selling in order to know the process of selling well but he is not usually a top sales performer.
Fourth, we should remember that “what distinguishes great leaders from merely good ones? It isn’t IQ or technical skills, says Daniel Goleman. It’s emotional intelligence.” Many people with high technical skills are promoted without some training on management and leadership. Other times, firms think that managers could be built with just a few days of leadership training (for instance the “famous company talent programs.”) The good performance of top sales producers does not guarantee that they will be great leaders for sales teams, and a few days of training on leadership neither. In fact, as Mark Roberge says: “Sometimes really good salespeople are selfish, egotistical, and competitive by nature. Those traits do not translate well into management.”
I would like to say that the rule should be “don’t promote your best salespeople to sales management.” Nevertheless, as any rule there are exceptions but remember that exceptions are very few cases.
Be careful if you are using a multitasking approach: Part-time salesperson and part-time sales manager
This used to be a very seductive approach for small business and even large corporation subsidiaries. Getting two roles for the price of one. I have to say “good try but this shortcut is not working at all.”
As we have mentioned before it is quite improbable that you find the right person for both different positions. However, if you are lucky to find someone who fits with booth positions, you will have some important challenges mixing those responsibilities:
- This salesperson will probably pick the best leads for himself with the excuse that the top performer must manage those important leads in order to increase the probability of win the customer. This could create mistrust on the sales team.
- How much time will he commit to each person if part-time means 2.5 working days per week? He could spend just very few hours on each salesperson what could be not enough to develop the sales team.
How can you motivate and retain your top sales performer without promoting her to sales manager?
The answer is building a Career Growth Plan with a few sales titles that link performance with the sales compensation model. Thus, higher sales performance means higher position and total salary.
So, what should be your first recruit priority? A top salesperson or a sales manager?
For a new sales organization with no more than a couple of people on sales, hiring a top salesperson could be a good first step. Indeed, I know some success examples of this approach. Although there are three considerations regarding hiring a top salesperson:
1. Industry experience used to be overrated: I remember the best salesperson that I have ever met that told me once: “Today, I am selling logistics but the important thing is that I master the selling technique. So, I could sell to any B2B almost any product or service.” This is true but there are still some fear for hiring people from other industries.
2. Industry connections used to be overrated: We must highlight that “customers belong to companies not to salespeople.” Salespeople could bring small accounts that have very low risk trying a new supplier. However, for large B2B sales account the reality is different:
- for large purchasing amounts used to have medium or long-term contracts in place that prevent to move the account;
- the relationship between buyer and seller used to be built around many people in different levels of the organization, not just the salesperson;
- the buyer justified internally the decision to work with the current supplier, trying to move to another supplier would mean that the decision was wrong which could be put in danger the job of the decision maker;
- move from one supplier to another just because the salesperson moved to other firm does not have any sense from the risk associated with large contracts
- Etc.
So, do you really think that a salesperson would be bring her last sales accounts to your firm? I don’t think so. If this is happen, it will take at least 2-3 years to move large complex accounts.
3. Is this person able to success in an unstructured environment? My experience is that top sales performers used to be hired from larger and better organized corporations with more sophisticated sales and ops process, customer based, marketing support and lead generation capabilities. Small firms used to have the temptation to solve their sales problems hiring a top sales performer from one of the largest competitor. This used to be “a big mistake.” First, as we have explained before is quite unlikely that the salespeople are moving their last sales to your firm. Second, small unstructured firms require of “evangelistic sales” in order to communicate their “not well-structured value proposition” and building the company brand. That necessary education skill is quite unusual on top sales performers from large firms because large firms are well-known and customers do not question their capabilities. Salespeople working for large firms no need to educate the customer regarding their company rather than developing a different skill, quickly building customer solutions. So, what is the probability that she replicates her past success selling with your small unstructured firm? Honestly speaking, very low!
If we are thinking not just in one or two salespeople rather than building a sales organization, it should be more suitable to hire a sales manager before thinking about recruiting a top sales producer. Be aware that a sales manager should increase the chance to hire the right top salesperson. Additionally, the sales manager would implement a sales leadership and culture that could be exponentially deployed around salespeople and branches.
For new sales organizations, Mark Roberge suggests hiring a quite uncommon profile rather than a sales manager or a top salesperson, the entrepreneur. He pointed out “the entrepreneur is most likely to accelerate the company toward the right product/market fit…She will dig in with prospective customers to learn about their challenges, opportunities, perspectives, and priorities.” I am personally think that he is right. Recruiting a sales manager for a consolidated and organized firm has sense, but for a new company or sales organization the first thing is to learn about customers in orders to build the “customized sales weapons” (communication plan, firm positioning, etc.) that will guarantee the success foundation for a fast growing sales organization.
Self-questions
If you are a…
- Sales manager: Are you in the right position or should you go back to be a top sales performer?
- Salesperson: What do you think that is more suitable for you career path to remain as a salesperson or to move on sales manager?
- CEO and your sales area is underperforming: Do you have the right person to growth your company revenue?
Creative Destruction in Human Resources: Creating High Performance Teams with the 20–70–10 Rule
Jack Welch is a leader with followers and detractors. So we are going to analyze the 20-70-10 Rule that some people could say that is a worthy management tool that creates high performance teams, and others say that is a cruel tool because it fosters to fire 10% approximately of the less performer.
The 20-70-10 Rule can be categorized inside the concept of creative destruction (Joseph Schumpeter work). We mean the idea is not firing 10% of the staff to reduce cost rather than change poor performers for other people with the expectation that the new staff could be better. Thus, increasing the number of high performance people and raising the company results.
20-70-10 Rule: Defining good and poor performers
We should ask ourselves a few key questions in order to know if the tool is adding value or not to our organization:
- Can our companies allow itself to maintain poor performers? Nowadays markets globalization, weaker economic drivers, intense competition, product commoditization, etc., make difficult to justified maintaining poor performers.
- What is the internal message maintaining poor performers? The culture of the company would get “paternalistic” or permissive. Then people working close of poor performers would realize that they could reduce their productivity and the firm is not taking any action. So what is it going to happen to the company productivity?
- What is the consequences to maintain a poor performance in the long term? The company would lose competitiveness day a day while other firms are rising their competitive advantage. Thus probably one day the firm would take the decision to close down the facility and move it to other location even outside the country. Thus, the consequence could be fired 100% of the staff rather than 10%. Some people could argue that the battle competing with emerging economies is already lost. Indeed, we have countries like Germany that they are demonstrating that the battle is not lost at all, if firms focus on raising productivity.
- Is it fair to maintain 10% of poor performers having people looking for an employment? Probably it is not. Moreover, it is not fair for the staff that are performing well, because maintaining underperforming people can put in danger the company and their jobs in the future.
- What about good performers? Poor performers are easy to retain, but good performers are a different issue. Good performers are demanded by the market, and they are more confidents in their abilities in order to move to other company. Moreover, good performers expect to work in high performance environment, and be paid according to the value that they create. Although with poor performers into the company is difficult to fulfill those expectations. So there is a real risk that good staff would get out of the firm, and mediocre staff would grow even higher than 10%.
- Why do we maintain under performers? In order to answer properly this question we should ask ourselves another question before: do we maintain under performers because it is an unpleasant task to fire people?
In turnaround projects where poor management is an issue, one of the most important causes of the company decline is because we do not have the right people. It is not unusual to find in those firms 10% of poor performance staff. So in those cases “getting out the bus” that staff allow us to increase firm results, and accelerate the change management process bringing new people with new mindset and abilities to the organization.
We have to highlight that organizations have the responsibility preventing poor performers, and we can suggest to prevent poor performers: First, having good performers in key positions, because good performers do not use to tolerate the poor performance. Second, selection process should be excellent. Third, making a periodic follow up of the team and specially the new staff, because two or three months is enough to realize if new employees should continue or not. It is better to “get out the bus” people in the second or third month that allow continuing in the company.
Finally, while poor performers by definition are people who damage the organization, and “getting out the bus” those people would not be an issue for the company. What it is not clear for me is the following: as Jack Welch suggests continually changing 10% of the staff that worst performs (being categorized like poor performers although they are not necessary underperforming, just they are on the bottom of the list) is getting any return. I mean there is low risk changing the staff that underperforms, despite changing people that are not “really” underperforming is increasing the risk to get the worse staff. Additionally we are losing the investment done in our current staff, and we have to invest in finding and training new workers. Moreover, we are creating an unhealthy stress in the organization. So I would not personally recommend continually changing 10% of the staff just because they are the worst performers.
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