From Lego to McKinsey, bureaucratic managers hurt companies

Big business executives are allowing themselves to be used to deliver social benefits governments can’t deliver.

Adrian Wooldridge

May 23, 2024 – 5.00am

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If the best management minds agree on anything, it is the importance of corporate focus. Peter Drucker repeatedly argued that deciding what not to do is as important as deciding what to do.

The chief executive of Apple, Tim Cook, once said that “we believe in the simple, not the complex. We believe in saying no to thousands of projects so that we can focus on the few.” Tom Peters, who recently announced his retirement from writing after decades searching for excellence, advised companies to “stick to their knitting”.

At a recent executive breakfast held at the Ivy Club in Covent Garden, London, by the Global Peter Drucker Forum, and featuring management thinkers as well as former and current executives, the most popular answers to the question of what ails the corporate world were “lack of focus” or excessive complexity.

Legoland Malaysia in 2013: In the 1990s, the Lego Group diversified into clothes, watches, publications, TV and theme parks. Alamy

Lack of focus not only diverts companies from providing their core products and services. It also contributes to managerial overload and complexity. People who have nothing to do with the company’s core business build empires. CEOs are distracted by an expanding list of demands on their time. What was once transparent becomes opaque and what was once straightforward becomes labyrinthine.

In developed economies diversified companies suffer from a 13 to 15 per cent discount on the sharemarket compared with single-segment competitors (the so-called “conglomerate discount”). The one company that seemingly defied the curse of the conglomerate in the late 1990s – General Electric Co – eventually succumbed and, in 2021, began breaking itself up into three more focused companies.

It takes a disciplined CEO to keep repeating the old winning formula or, if things are going badly, to restore focus on what works.

Even first-rate companies that lose focus eventually suffer as a result. In the 1990s, the Lego Group faced a crisis as management diversified into clothes, watches, publications, TV, learning labs and theme parks, even as low-cost competitors attacked its core business of building blocks.

In 2004, a new CEO, Jorgen Vig Knudstorp, restored focus on its magic bricks, eliminated a variety of products and negotiated new brick-related licences such as with Harry Potter. Sales surged. Both McDonald’s and KFC have suffered from similar dips when they have tried to diversify from fast food to fancier (and slower) fare.

Loss of focus explains some of the great business mysteries of our time. Why are hydrologists warning Britons of impending hosepipe bans despite the wettest 18 months since records began? The answer is that water companies have spent the decades since they were privatised diversifying into shopping malls or construction companies rather than investing in British reservoirs or sewage pipes.

Why has McKinsey & Co fallen from being one of the most respected management consultancies in the world to a byword for bad management? The answer is that the company has abandoned Marvin Bower’s values-based vision of what the company is about – providing first-class management advice to blue-chip corporations and turning down clients that do not fit the McKinsey mould – and instead focused on growth from wherever it could get it, including dubious government clients in the emerging world and dodgy corporate clients in the opioid business.

In one of the many ironies of this dismal tale, Tom Peters came up with the phrase “sticking to your knitting” when he was working for McKinsey.

Companies perhaps have a natural tendency to lose focus over time. Successful companies tire of repeating the same winning formula and venture into new areas (experimenting with corporate purpose is more exciting than producing packets of washing powder). Unsuccessful ones tend to ricochet from one desperate solution to another.

It takes a disciplined CEO to keep repeating the old winning formula or, if things are going badly, to restore focus on what works. And today, a combination of politico-social pressures and ill-thought-out corporate fashions is making the problem of keeping focus significantly worse. Rather than sticking to their knitting, companies are being obliged to take in everybody’s dirty washing — and then write detailed reports on what they do with it.

Eurocrats in charge

The most obvious culprit is regulation. The past two decades have seen an explosion of regulation of the corporate sector after an era of deregulation. Some of this new regulation is necessary: The US government had to step in after the corporate scandals associated with Enron and WorldCom. But regulation feeds on itself: No sooner does the government create a paper-clip regulator than he or she demands a department of paper-clip monitoring.

In the European Union, eurocrats are trying to turn the union into a regulatory superpower to make up for their failure to turn it into a business superpower. In the US, the Biden administration has unleashed a regulatory blizzard to lock in rules against the possible return of a Trump administration.

Regulation not only diverts companies’ focus from outside (serving customers and mastering technological change) to inside (monitoring internal processes). It also contributes to internal bureaucratisation.

After the government creates a department of paper-clip regulation, the corporation must perforce create its own internal department of paper-clip monitoring — and soon the head of the paper-clip monitoring department is demanding a seat on the executive committee.

The European Union’s Brussels headquarters, which has led re-regulation of business across the Continent. Bloomberg

A second culprit is the shift from shareholder capitalism to stakeholder capitalism. Shareholder capitalism provided companies with an external discipline: if CEOs diversify into unrelated businesses or engage in vanity projects, they are soon punished by the market and disciplined by their boards. But stakeholder capitalism weakens external discipline and increases the power of jostling pressure groups.

CEOs can claim that they need to engage in this or that grand project to earn their licence to operate regardless or the short-term impact on shareholders. Pressure groups can argue that the company needs to pursue this or that good cause to satisfy this or that stakeholder group.

Green tape

The fashion for ESG (environmental, social and governance) is a particular problem because it introduces complexity into the routine measurement of corporate performance. Complex measurement systems by their very nature distract companies from their core businesses.

And ESG essentially redefines your core business away from satisfying your customers to delivering various environmental and social goals. But its different metrics also conflict with each other: Tesla is an exemplar when it comes to “E” but a laggard when it comes to “G”, even though Elon Musk’s rule-breaking management style is one of the things that made the company successful.

The fashion for sucking up (or is it down) to young employees is also a potential source of distraction. Knowledge-intensive companies pander to younger employees by encouraging them to bring their whole selves to work and form identity groups. But this seemingly benign development is in danger of becoming a distraction as identity groups speak out on pet causes and geopolitical problems such as the Israel-Gaza war.

Not that long ago, companies instinctively looked to universities and NGOs for how to appeal to younger knowledge workers: hence the fashion for corporate universities and corporate volunteering. Today, we need to reverse the fashion and study both institutions for examples of what to avoid rather than what to embrace.

US universities suffer from increasing institutional incoherence because nobody knows what they are for: a triffid-like class of academic administrators think that their core job is to promote diversity and inclusivity while a subset of students think that they are social justice machines. Some progressive advocacy groups have become almost paralysed because their employees have been consumed by gesture politics and internal feuds.

The fashion for regulation, stakeholder capitalism and ESG are symptoms of a bigger problem: society’s growing willingness to force businesses to deliver an ever-lengthening wish list of social benefits that governments cannot deliver themselves, either because they don’t have the money or the will.

We can see this in microcosm in Britain today as the Labour Party prepares for power not just by wooing business, but also by indicating that it will raise the minimum wage and grant workers more rights from day one. This impulse starts with perfectly reasonable principles (for example, that the polluter should pay for pollution and that companies should train their employees) and then extends to an ever-widening mesh of regulations and incentives that oblige companies to deliver things that, in many cases, are well outside their area of competence.

In Britain, businesses are promising to work with Labour to solve the country’s problems blind to the fact that the party wants to work with them in the same way that a python wants to work with a particularly succulent pig that it has in its coils.

Instead, CEOs should resist that tightening embrace and reassert the importance of focus. They need to remind politicians that companies pay a high price for distraction and complexity. The best way that they can serve the common good is to focus on their core business.

And politicians need to recognise that, convenient as it is to tell other people to deliver public goods, companies won’t deliver good jobs and high wages, or indeed any jobs at any wages, if they are driven out of business or obliged to flee to more clement climes.

Adrian Wooldridge is the global business columnist for Bloomberg Opinion.

Bloomberg Opinion