Edited presentation to the Merge Foundation September 13th, 2021
Healthy Company How and Why?
Presentation by Prof. Ichak Adizes to Merge Foundation
All these achievements I could not do if I was not healthy. So, how should we produce profits in the short and the long run? By being healthy. If the organization is not healthy, it cannot produce the profits. Maybe it can produce in the short run, but it will not be sustainable. I started asking myself : "What does it mean to have a healthy company?"
To make a long story short because we have only one hour but if you look at my website, I hope you have my full name, with my spelling I have hundred videos on YouTube, 26 books in English and in other 36 languages, some of them in Hebrew, you can learn more and if you want to know even more, Adizes Institute has an online program where we teach this methodology. It has been tested over 50 years in 52 countries including Israel. Elbit is one. It went from 150 million to 4 billion. And many other companies. It have been tested and documented.
So, why healthy? Because for sustainable long-term success, that's why. Whatever way success is measured. For a business organization, success will be measured in profits. Return on investment, return of investment, increase in stockholders, shareholders' value, and for a not-for-profit, the not-for-profit goals. And for a country, and I've consulted to eight prime ministers, including Shimon Peres a country also has a goal. Whatever the goal is, you better be healthy if you want to achieve the goal sustainably overtime.
Let's go into the how.
An organization is healthy if it is effective and efficient in the short and the long run.
Now what does it mean to be effective? To satisfy client needs, whoever the client is. For a country, the clients are the people. For a not-for-profit, the client is the purpose of the non-for-profit. For a business organization, ask yourself the question, "Who will cry if I die?", Who needs you?
I differentiate between client, customer, and stakeholders, which in the literature is a big confusion. For me, a client is who makes the decision to buy, not necessarily who consumes this. And the stakeholders are those the organization needs to keep relatively happy so they continue giving the resources needed to satisfy client needs. The focus is on client needs, those who makes the decision to pay. And you can measure that, how? Look at a restaurant. If the people don't come back to the restaurant, how good is the restaurant?
So, the measurement that I use in my consulting practices, is repeat sales. What percentage of sales are repeat sales? Are the clients coming back? If they're coming back, it means that you're satisfying their needs in a competitive market. And applies not just to the CEO of the company. It applies to any manager in the company. Accounting has clients too. Who is a client? Who needs information? It's not only the IRS. Other people inside the company need information. Are you satisfying the need?
And you can ask the clients: if you had the choice (that is why competitive market is important for effectiveness) would you get the service outside or continue using the service on the inside? If they say, "If I could only get out…." that means I'm not satisfying the need. Every manager must have a client that he identifies and knows what their needs are and ask themselves the question, "Will they come back if they had the choice?" And that includes marriage. Will your spouse come back if she had the choice? She or he. And if they're stuck, the marriage is not satisfying a need. Same thing for a country. How many people want to get into the country versus how many people want to get out of the country tells you how healthy the country is. Does it satisfy the needs of its population?
And you have to satisfy the needs efficiently because people are willing to pay only a certain price to satisfy a need in a competitive market. There is a cost to satisfying that need. If the cost of satisfying the need is less than the perceived value of that need as measured by how much people are willing to pay, the difference is profit. So, profit is not a dirty word. It measures adding value. You're adding value. You're satisfying a need at less cost than the perceived value of satisfying the need.
But this is good only for the short run. You are satisfying a present need efficiently. Thus profitably. But needs change. The environment changes. So, you need to be also effective in the long run. You have to plan. What is planning? Planning is not what we're going to do tomorrow. That's called dreaming. Planning is what are we going to do today to get ready for tomorrow so when tomorrow arrives, we are ready to satisfy the need. For that you need to be creative and you have to be willing to take risk, the company has to be entrepreneurial. Look at the environment, think what is going to change, how do we manage the change, how do we take risk to be able to satisfy that need in the future when the future arrives. Still not good enough. To be efficient in the long run, we also have to be integrated. Why integration is important? Because when the company is not integrated or there is a lot of internal fighting, there is a lot of wasted energy. And we know from physics, that energy is fixed. So, any energy that is being wasted on fighting internally is not available to fight the market.
I had companies, startup companies, their technology was incredible, patented, had competitive advantage in technology, and their market was dying for the product or for the service. And when you have a market and you have a technology, money will come. They will come and knock on your door and offer to give you money and invest. It had a market, a technology and money and still went bankrupt. How come? The partners were fighting. And when you fight inside, your eyes look inside. They don't look outside and you miss the opportunity. So, you need internal integration, working together.
Now, let me tell you what internal integration means which is a source of being healthy. Without integration, the first three roles, satisfying client needs efficiently and proactively, will not work. Why? Because energy is wasted on fighting. So, integration is a platform on which everything else happens. It's the essence. What is it?
Whenever there is change, there are problems. Why? Here's why. What is change? Something new is happening over there. Now, you have to decide what to do about it. It's like I come into an intersection and have to decide, do I go left? Do I go right? What do I do? Some people cannot make a decision, "I don't have enough information. Too risky. Let's wait. We are not going to make a decision." You just made a decision. You made the decision not to make a decision, to stay where you are. Not to go left, not to go right, not to go back, to stay where you are and maybe it's a worst decision. Why? Even if you are on the right road, if you don't move, a truck might come and run you over. Why? You are not changing but the world continues to change, my friend. The world is not saying, "Oh, if you don't change, we'll wait for you until you change." It continues changing. A truck will appear and run you over.
So, you have to decide, and it might be you decide not to change but it is a conscious decision. Rather than say, "I'm not deciding," which is denial. You have to decide in a situation of uncertainty. Why? Because you don't have all the information until it happens. You only know on Monday morning, what happened to Sunday. And then, there's the problem of implementation. You made the decision. Now when you implement, there is risk. That's why when there is change, we say, "We have a problem. What should we do and how much risk can we take?" And the more change, the more problems. Why? What causes these problems?
Everything is a system. A company is a system. Every system is composed of subsystems. Let's take a company. It has a marketing subsystem, sales subsystem, production subsystem, accounting subsystem, information system subsystem, human resources subsystem. Many subsystems. What I discovered is that the subsystems do not advance in synchronicity at the same speed. Marketing changes fast. How long does it take to change a sales effort? Retrain the salesman, retrain the customers. It takes a little bit longer. How long does it take to change operations and production? That's why people in operations say, "Guys, slow down. We cannot catch up." How long does it take to change the accounting system, the information system? And how long does it take to change the human capital? Attitudes, climate, people… Now, look at what that means. Whenever there is change, gaps emerge in the system. It is called disintegration, manifested in what we call problems. All problems, whether you have a problems in personal life, whether you have a problem in your marriage, whether you have a problem in your company, whether you have a problem in a country... Hello, Israel, are you hearing me? Comes from disintegration caused by change. So what do we do? Stop change. And that's what some fanatic religions try to do. Some fanatic Orthodox Jews still live in the Middle Ages. Same thing with the fanatic Muslims, fanatic Christians. They say, "Stop change." Does it work? It doesn't work. You don't have a choice. We need to change. We need to learn how to manage change. If all problems are caused by change, causing disintegration, what's the solution? Real solution, not band-aid solution like change the product, raise the price, give a discount, do more advertising, fire the president, have another president. These are all band-aids. The real solution, strategic solution: If all problems are caused by disintegration, what's the solution? Integration. Align the subsystems, subsystems alignment... By the way, go to adizes.com website and find out testimonials. A company by the name Wonderful that owns FiJi water, 60% of the pistachio market, biggest farm in the United States, they went from $12 million sales to $4 billion sales and the owner is still 100% owner, organic growth. Look at their website. It says thanks to the Adizes methodology and when you ask him, "What is the secret?" He says, "Alignment." Because whenever you change, you start falling apart. The trick is not to fall apart as you change. Some of you probably are in fast growing companies. Beware, beware. I'm going to say it three times. Beware. No company should grow like this. (Hand moving up in a 45% angle) Because if you grow like this, there is only one way eventually. Down. You will fall apart. The question is not IF but only When. The franchisees will sue you, the licensees will sue you, the government will sue you, the clients will sue you, something will happen. I don't know what but something will happen. Quality control of the product is no good. Something will happen.
To manage change, you need to decide and to implement a decision. You have uncertainty, and you have risk. Who will win? Those that can better decisions and minimize risk. In order to make a good decision, you have to take into account the subsystems and to align them. You have a subsystem that deals with effectiveness, a subsystem that deals with efficiency, subsystem that should deal with the long-term effectiveness, subsystem that should deal with integration.
Short-term effectiveness, who does that? Sales. They have to satisfy present client needs. Production, produces present client needs. Who takes care of efficiency? Accounting, human resources, the right people at the right jobs and the right compensation with the right quality control. Who takes care of long term effectiveness? Marketing. Looking at the long run. Where are we going? What's happening in the market? What's changing? What should we be doing? Strategic planning. Product development, R&D, systems design, not help desk, system design. Who does the integration? Most companies have nobody doing that. They hire some OD consultant or coach. Don't have a short-term solution to a long-term problem because that's a long-term problem. Why? Because change is ongoing. You need to have somebody ongoing doing the integration and that's Adizes Institute if I can give you a commercial. We do that for the companies. Keep it continuously aligned, continuously aligned, so you can grow from $12 million to $4 billion.
So what do you need? A diversified organizational structure. In Adizes, we give a lot of emphasis to structure. For instance, do not have marketing reporting to sales. If I look at a company and see VP for sales and marketing it is sick. Why? Marketing cannot report to sales. Marketing should focus on the long run, sales on the short run, and we know short run usually takes precedence over the long run. Sales will suffocate marketing. What happened? They're doing sales support. Sales dominates. Don't put engineering under production. It's called engineering, but you know what they're doing? Maintenance. Why? Because they're serving the production, the long term is serving the short run. The long run dies. We succeed to split sales from marketing. We succeed to split production from engineering or R&D. The one that we recommend and we usually rarely succeed because they are very powerful, we cannot break them, we cannot split finance from accounting. Accounting data is from the past to the present. Finance should look from present to the future. The finance is creative. Where do we get the money? Where do we invest the money? Financial engineering you can call it. Accounting has to be precise and conservative. So if you have that together, who wins? If financial orientation wins, you have very creative accounting, you don't know what is going on. If you have an accountant CPA control the top of finance, you will be liquid like fish. They will not let you use any money because they're conservative. Split the two. And split human resources development from human systems administration. And human resources development, outsource it because it's very difficult to integrate from the inside because you will get in cross fire of the political interests within the company.
Structure is very important. Structure has to be good. You cannot have a short, five foot two guy playing basketball. The task calls for a tall guy. Diversity, working together. Remember this symbol, an extended hand with five fingers together. What do you see? Four different fingers together. This symbol you will find in any house of prayer. What are they telling you, the saints, in all religions is be different together. Hello, Israel, do you hear me? Be different together.
And in the middle east, when we curse each other, we extend the fingers in the face of the one being cursed. What does it tell you? Be different not together. You'll waste all the energy. You will die. America is on the decline. Used to be different together. Live and let live. Not anymore.
Next question. Why we should be together? Some political ideologies, religions say, "We should be together, but not different. The same.” Communism, fascism, and fanatic religions, inquisition, present time Muslim, fanatic Muslims. If you are not a Muslim, we behead you. Middle ages, if you're not Christian we kick you out of Spain or put you in inquisition. And what happens? Without cross pollinating diversity paralysis, that's what happens. Spain got paralyzed from the middle ages because they kicked the Jews out. Now, they want them back. Need smart diversity. But why should we be together? Okay. Be together. Why? Because there should be symbiosis. We benefit from being together. There's a benefit. I'm not just joining it because I'm in love. There's a benefit to joining. There is self-interest. But now watch it: I'm going to contribute to the system, believing that the system is going to give me back. Would you give money to a corrupt government? Would you pay taxes? Honestly. In a corrupt government probably not. If they're corrupt, I'll be corrupt too. But if you believe in the system and you benefit from education and health and security or whatever, gladly I will pay my share. So in order to have symbiosis, you need mutual trust. In order to have synergy and growth full diversity, you need mutual respect. I accept your differences. You don't have to be the same and I trust you we will all benefit from our interaction. So, a healthy system is symbiotic and synergistic. Diversity that works together with mutual trust and respect. If there is no symbiosis, the human body will fall apart. If there is no synergy, it will not be growing. Same thing for a company, same thing for a country, same thing for a marriage, all systems. And what makes it symbergetic, symbiotic and synergetic? What makes it synergetic is mutual respect. You don't have to be like me. You don't have to be the same. The kidney does not interfere with the heart and the heart don't interfere with the lungs and the lungs don't interfere with whatever. Who interferes? Cancer. It does not have respect for the other organs. You have to be like me. Cancer wants to monopolize the whole body and in doing so, kill the body. Fanatic exclusivity is cancerous. You want diversity which is growthful, synergetic because it has mutual respect of differences. I respect your difference. You don't have to like me. Live and let live. And for symbiosis, you need mutual trust. Why? I'm contributing to a system I trust. If I don't trust it, why the hell am I doing it?
So, what is a healthy company, my friends? A healthy company is one that has a culture of mutual trust and respect. This is the essence. All the rest is commentary.
Why did Yugoslavia, where I was born, disintegrate? I cry for that country that disappeared. What a beautiful country with a beautiful diversity in music, in ethnic, in food, gone. Why did not Switzerland disappear? Can you imagine French, Italian, and Germans together. I mean, they've been at each other's throat every war. What's the difference between Yugoslavia and Switzerland? A culture of mutual trust and respect. Why did the company I told you that had the market, had the technology, had the money go bankrupt? Because it had no mutual trust and respect or it didn't have a complementary team. Right now, I'm consulting to some startup company in Israel which I love dearly. They have the technology. They have an incredible patent, really incredible, and the market is there. What's the problem? No complementary team. Chief Technology Officer, genius. Understands business? Nada.
It cannot raise any money. He talks to investors about the technology and the investor look at him and say, "I won't give money to this guy. He's a genius but I don't trust him to manage my money." What do you need? Diversity, complementary team. All the four roles have to be there. Someone that takes care of the short run, someone of the long run, someone of the integration, for the long... And you need a complementary structure for a complementary team to be working together. Diversity that complements each other like a marriage. Look whom did you marry. I promise you, you married somebody who complements you. You fell in love with somebody who is strong in what you're weak. That's why they drive you crazy. And what's the problem? You want them to be strong in what you are strong but they cannot be because what you are strong in, they're weak in. Why you are not like me? Because I'm not you. Complementary team, complementary structure, working with mutual trust and respect, that is the secret.
What makes a company successful, what makes a country successful is not the resources you have. What made America successful? It's not the resources. Other countries have more. It's not size. Other countries maybe are bigger. What was it? Diversity with mutual trust and respect. The moment America loses it, it's on its way down. It is on its way down.
What destroys a marriage? It's not when you get divorced. You're thinking about the divorce much earlier then when you file the papers of divorce. When do you start thinking about the divorce? When you don't trust and you don't respect your partner, it's over. The biggest asset a company can have is an asset it cannot sell. Let me repeat it. The biggest asset a company can have, should have, can have, is what it cannot sell.
You cannot sell your culture. You can buy it though and I offer you the Adizes Institute's services to do that for you. We build a culture of mutual trust and respect. How?
Mutual trust and respect is a function of, to start of common vision and values? If the partners have different vision and different values, there's going to be no mutual and respect. Same in a marriage, in a company, in a country. We are different but we have a common vision and we have common values. For America that's what the constitution all about. America is integrated by the constitution not by an individual... Not a person that integrates but a system of values documented in the constitution. Israel doesn't have it. We don't have a constitution. We have the religious people with one system of values. The secular people, another system of values. It's all good to have left and right parties but have a common vision, common mission, common values. I hope I have a lot of Israelis listening to me here. I have difficulty to watch Israeli news. I have the channel at my home in Santa Barbara. Every night, I watch it. I go crazy. You know why? Anytime they have a discussion, they're shouting at each other. Nobody's listening. They're all interrupting each other and calling each other by name including in the Kneset. There is no mutual respect. There's no mutual trust. Nada. This is what the problem is. It's not going to work. Cannot work. Same thing with a marriage. Same thing with your own personal career. How much self respect and trust do you have? It's called self-esteem. If you don't trust yourself, if you don't respect your own decisions, how the hell are you going to build a career? So, you need common vision and values, one. Two, you need a diversified, correctly diversified organizational structure. Correctly diversified organizational structure.
Next, a disciplined decision making process. How to run meetings? How do you correctly run a meeting so that you avoid management by committee? Because you can have a diversified structure, diversified styles of people and when they get together, you'll get management by committee and it becomes a mess. Why? Because they are different, there's going to be conflict and the conflict can become destructive. They interrupt each other. They get upset with each other. The voices get raised and that creates distrust and disrespect and you are going south.
We have a course online or live, how to run meetings correctly, how to run diversity to come to conclusions together and agree on a decision and feel good about it. So, we capitalize on diversity. We don't reject diversity. We create a synergetic environment where we learn from each other by exchanging views and learning from each other. There is a whole methodology, how you run a meeting correctly. So you need, common vision and values, diversified structure, diversified team, managing meetings in a disciplined way based on mutual trust and respect. What else do you need? The right people. And what is the right people? It is not what you know, it's what you are. There was an interview with Musk, Elon Musk, and when asked, "What is the biggest mistake you did?" He said, "I pay too much attention to people's competencies not enough about their personality and attitude." What people know, becomes obsolete over time. You can buy knowledge. It is only money. Personality, you cannot buy. Pay attention to what kind of people to have. Do they command and grant respect and trust? Like in the Israeli Air Force, would you fly with them? Would you trust him to fly with you? Would you turn your back to them? Do you work with people you trust and you respect? They know how to disagree without being disagreeable. Like a good wife. What is a good wife? In the jewish religion a valiant wife is ezer keneged , helpful against. How can she be helpful if she is against? By being against, telling you where are the holes in your argument respectfully. It's not respectful if you have a spouse who pushes you with a finger in your chest, "You're doing it wrong. You never do it right. You don't know what you're doing. Why did you do this?" It's not helpful. You want somebody that does it lovingly, respectfully, exchanging. It has to be a mutual. I learn from you, you learn from me. The personality that make decisions with faith rather than from fear.
So, if you have the right people and the right structure with a common vision values, making decisions with a disciplined way that nourishes mutual trust and respect, you have a healthy organization and you will probably be sustainably successful. That has to be established. It does not happen by itself. Nothing good happens by itself by the way. The bad things happen by themselves. Why? Because change is destructive by nature. You remember? It disintegrates. You don't have to do anything, just do nothing. A friend of mine his wife asked for a divorce and he came to me upset. He says, "I don't know why she wants to divorce. I did not do anything." I say, "Schmuck, that's why she wants a divorce. Because you didn't do anything." You cannot rely on being in love forever. Change happens and things start getting broken up. You have to bring them back again, you have to bring them back again, you have to bring them back again. It's work. You have to give it attention. You want to pay attention to what undermines trust and what undermines respect. Not only with your spouse, with your children. Raise children that have respect and trust which unfortunately we are losing with the computer games and with the television, with all that. We're losing the kids. They're losing respect for the parents because they know more than the parents. How to manage a TV and how to manage a telephone.
Here is a formula of success. Formula of success and then you have 15 minutes for questions. Success is a function of external integration/internal disintegration. Success of any system, marriage, person, company, country is a function of external integration divided by internal disintegration. Let me explain. What is external integration? You know it. Strategic planning, marketing, and what is strategic planning and marketing? If you summarize all the books on strategic planning and marketing and summarize the summary of the summary of the summary of the summary to get to the kernel of what is it all about, it's really integration: What are the opportunities in the market? What are the capabilities of the company? How do you bring them together? That's what strategic planning is all about. That's what marketing is about. What are we capable of, what are the needs, and how do we manage them. With the right product, with the right channel, with the right promotion, with the right support, with the right service, to bring together. External integration. For a country, it's called the balance of payments. How much we're exporting versus how much we're importing and our economic strength versus the world market. Same thing. Personal life, it's called career planning. What am I good at, what does the market want, and how do I match my capabilities to what the market wants, external integration. Internal disintegration is how much energy is being wasted on fights, on rumors, on backstabbing or misunderstanding or miscommunication, misalignment, wasted energy which comes from lack of mutual trust and respect.
Now, why does this formula predict success? Because we know from physics that energy is fixed at any point in time. That fixed energy, first of all goes to deal with internal disintegration and only the surplus left, if any left, goes for external integration. That's why the company I told you, the startup that went bankrupt, all their energy went to internal disintegration and they missed on external integration.
Adizes' methodology for helping companies grow from $12 million to $4 billion is to minimize internal disintegration. Common vision values, the right organization structure, the right decision making process, the right people. It reduces internal disintegration which gets freed for external integration. That is the whole secret. Thank you.