Tesco’s Sir Terry Rails Against Centralized Management
In his new book, Management in Ten Words, Sir Terry Leahy, who retired from Tesco in March 2011, states that one of his major challenges upon becoming CEO in 1997 was motivating his troops and avoiding the incentive-drain that stems from bureaucracies.
"I’d already seen the dangers for myself," wrote Sir Terry, who first joined Tesco in 1979 at the age of 23 as part of its leadership program, in the book to be released June 19. "People who work in a company wedded to rules and regulations feel trapped."
Upon becoming CEO, management layers were reduced to just six between him and a checkout assistant. Wrote Sir Terry, "This helped us all, from the board downwards, to keep our finger on the pulse — or rather on the shop floor. And the fewer management jobs there were, the less opportunity there was for people to get in each other’s way."
Local staffs were empowered to make more personnel and other decisions to create a culture where "employees could take responsibility for their own actions, and dare to try something new — rather than constantly covering their backs."
He adds, "I knew the success of Tesco couldn’t just depend on people issuing orders from headquarters."
Although the benefit of decentralized structures "sound obvious," it’s more common to see "large, centralized enterprise with numerous layers of management" across industries, he notes.
The first problem with centralized structures is it removes responsibilities and incentives from "those at the bottom of the ladder" who are most likely to deal with customers. Said Sir Terry, "They may be the people who have first-hand experience of a problem and know how to solve it but they don’t have the authority to do so."
Centralization then creates situations where the head office takes credit for any successes while laying blame on "those out in the sticks" for any failures.
"Meanwhile, the plush HQ, full of brainy people developing strategy, can quickly become a hornets’ nest of cliques and political rivalry," wrote Sir Leahy.
The disconnection between top and bottom then causes corporate to lose focus on consumers.
"Confusion creeps in," writes Sir Leahy. "Jobs are left undone or done late. People start to do someone else’s job — or nothing at all. Then the individuals with the strongest personalities begin to impose their will on others, talented people leave and the company enters a vicious circle of decline."
By comparison, he argues that extending greater responsibilities across ranks enables the team to "grow in confidence, self-esteem, courage, determination and commitment. They trust their colleagues more. And some of them eventually become leaders themselves."
- How to make your fortune in 10 easy steps: Don’t send emails and trust workers – not bosses. Tips from the man who took Tesco to the top – Daily Mail
- Tesco Terry proves we don’t need job quotas – Daily Mail
- How Tesco chief Sir Terry Leahy changed the way Britain shops – Guardian
- Sir Terry Leahy: Management in 10 words – Retail Week
Discussion Questions
Discussion Questions: Why do many management structures tend to be bureaucratic despite the best intentions otherwise? What are the relative merits of centralized and decentralized structures for retail?
Management becomes bureaucratic as the result of lots of things — egos, politics, fear of loss of control and over staffing. In short, management is prone to all the weaknesses of human nature.
The merits of centralized control are, as Sir Terry, noted allegedly obvious. De-centralization is supposed to encourage nimbleness, flexibility, attention to local detail, local market knowledge, etc.
While I’m a great personal proponent of freedom, I guess my one question to Sir Terry would be, “Given your theory, how can one explain the growth of Walmart?”
Of course, a more wicked question might be, “Given your theory, what happened in the early days of Fresh & Easy?” There’s a case where policy, apparently dictated from afar seemed to trump observation and management on the ground.
Naturally, once you’ve relinquished the reins of power, it becomes much, much easier to tout the virtues of decentralization.
This is the legacy of a Newtonian organizational model. When organizations are simply a collection of parts ‘disconnects’ must follow. Disconnects in turn make everyone fearful. When we become fearful we rush to the command and control mindset. And this is why 93% of all organizations (stores, churches, schools, businesses, governments) are almost totally driven by fear. A survey in the St. Louis Times claimed that 43% of executive decisions are driven by fear.
And we wonder why our whole society is trapped in fear? Fear is also the driving force on both sides of the political aisle these days.
ALL policies, procedures and bureaucracies owe their existence to fear. That’s not to say we don’t need some of that for safety (Eg. we all stop at red lights) — but most of it is totally opposite to what will bring out the power of the human spirit. Sir Leahy was able to remove some of this at Tesco and I want to get his book.
The discussion of what to do must be deeper than a mechanistic decision of do we want centralized or decentralized structure. We have a spiritual problem, not a structural one. To work effectively, decentralized structures need even more understanding on how to align energy toward its highest possibilities.
Monitoring decisions and managing results is the challenge related to the paradox of allowing others to make decisions and accepting responsibility for the results. On the one hand, making decisions closer to consumer is valuable and difficult to relinquish. On the other hand, coordination among many local units and being liable for the results of local decisions creates an atmosphere of unease when allowing local decision making. To be successful at decentralizing decision making, organizations need to be successful at managing a good balance between allowing freedom and accepting responsibility.
Management structures, like government structures, tend to be bureaucratic since they give protection to the ‘involvees’ and allow them to be judgmental of those who have to carry out their directives. This creates a game of personal safety for those in key positions … and not much else. Those on the firing line then tend to focus on preserving their jobs by pleasing the ‘higher ups’ more than fine tuning into timely customer response mechanisms.
Retail is local. Customers don’t intermingle with the HQ crowd or its thoughts. Decisions are most effective at retail when they involve the input and wisdom of local managers. Centralization at retail favors the company’s buyers, planners and management, but not always nuances needed by individual stores.
I hope my enthusiasm is pardonable as I relate a collaborating personal note. When I was head of operations for Supervalu in its former halcyon days, which produced 3 stock splits and a decade-long 20% annual compounded profit growth rate, we were decentralized. There were no management layers between my office and the 20 operating divisions except a clearly defined and closely monitored corporate philosophy that demanded that everyone in the organization “serve our customers better than anyone else could serve them” and also be responsible for budgeted sales increases and return on capital employed. With that strategy and decentralization, the business was controlled at the local level. It succeeded.
It is the nature of any organization that grows from a small, entrepreneurial start into a major force to become more centralized and thus more bureaucratic. What Leahy describes is sadly true, and it can be worse in retail because of the detail and complexity of stocking and merchandising thousands of items.
It is interesting to note that before the chain drug industry consolidated into a small number of mega chains, on the West Coast there were several companies, such as Long’s, that made each store a business unit, with merchandising and decision-making handled by the store manager. Done this way, the stores were highly successful, with the highest per-store performances in the industry, and there was a relatively small HQ staff. I don’t remember for sure, but my recollection is that there were only one or two management levels between the store manager and top management. However, while this format lasted for several decades, it didn’t last forever, and Longs and the others were acquired by other chains. Given the size of the companies that now populate the chain drug industry, and the close relationships between suppliers and retailers, I doubt that decentralization is a viable option any more.
Perhaps it goes without saying but decentralizing only works if the management at the local level is armed with the knowledge and skill sets needed, and the willingness to act. I learned a long time ago that “empowerment before education equals chaos.”
I have experience with this, as I started with a retailer when we had 200 stores and left ten years later when there were 4,500 stores. My assessment is that bureaucracy works in ebbs and flows. At first, much of the organization needs more structure and the positive payback is felt immediately. But after a while, it develops a life of its own, creeps into everything and subsequently becomes detrimental.
The key then is for management to recognize how far the bureaucratic needle has gone and act on it quickly if it’s gone too far. If not, you could become the Post Office in no time.
So the lesson is, some structure is needed, but don’t over-do it. And it’s up to the leaders of an organization to keep the company smooth and streamlined, as Sir Terry attempted to do.
Problems occur when people start pulling in different directions. This happens in both centralized and decentralized businesses and Ryan has listed some of the reasons why, so I don’t need to duplicate this.
A lot can be taken from looking at the behaviors of great sports teams and the great rock bands that sustain for decades. These are characterized by shared belief, high trust, high respect and everyone focused on the same outcome. When they are working well together they deliver far greater than the sum of the parts.
Too often in business everything is fragmented with narrow focus on an individual area (or silo). When added up these often don’t even achieve the sum of the parts due to the overheads in trying to connect them back up.
For our clients the key (re)unifying element is the “customer” as this transcends the silos of the business: a single customer strategy, customer language and customer-led metrics can really help a company re-learn how to pull in the same direction and deliver more than the sum of the parts.
As this sounds, great customer insights and CRM is just as much about the organization and the rallying cry around the customer as it is the technical data, insight and execution solutions.
Sir Terry saw this and drove this customer focus at Tesco from the top, which was a key component of their transformation into a global retail leader.
For a long time, technology has been used to bring a picture of the field into corporate. Region, division, and store results were summarized and reported to senior managers. Corporate directives were relayed through vice presidents to the directors, store managers and individual personnel at store level.
The role of technology has turned this whole thing upside down. Individual stores can quickly compare their results to others in the organization and strive to improve. Every employee in the organization can now have a feedback loop that tells them how they are doing. The goals of the organization can be quickly communicated over the Intranet and everyone in the organization hears the same message.
The only role left for “middle management” is to supervise the organization. This is where both improved hiring and greater freedom at store level make it possible to cut back on middle management. If store managers are capable and have the enthusiasm to “run their own organization,” there is no need for them to have their hand held.
There is a cost to the decentralized organization. It requires more independent, intelligent, and skilled people at the store level. Without the supervisory level, stores have to be able to run their own businesses. This means all the store employees must have the store’s best interest in mind.
A common characteristic of any centralized retail organization is relegating the store managers to executing the decisions of others, not their own. The result is a static organization that may be operationally efficient, but often at the expense of not being able to overcome the occasional bumps in the road, and perhaps more importantly, not being able to take advantage of opportunities as they arise.
A static, centralized retail organization with tight controls over local decision making can make sense if retailers operate in an environment where the customer base and shopping landscape are also static. And, it makes sense if the retailer doesn’t have the means of providing store associates the accurate information required to make timely and intelligent decisions. These conditions are not representative of current times. Today’s customers, as well as their shopping landscape, are very dynamic. And, today’s technology gives retailers the means of empowering store managers and associates with the information they need to make intelligent decisions, locally.
Whenever possible, decisions should be made at the point closest to the customer interaction.
Centralized = Risk Adverse. De-Centralized = Empire Building.
EGO. A simple word but the core of the bureaucratic mess we see in many operations. The core behind this EGO issue — this is a guess, but a good one — is very low self-esteem which impacts self-confidence. Thus when a “low-level manager” mapping to this concept (and many do) can grab and control something, they become the the starting point for the bureaucratic mess.
If no one intervenes, this grows from an EGO boost for the manager into a new, unneeded and slower process, and more costs.