New research suggests a surprisingly high number of managers make business decisions based on assumptions

Many managers do not know the real reasons why their business is failing or succeeding, according to a study from Warwick Business School.

Some of the core assumptions about what drives financial performance have become so widely accepted that they are often viewed as facts, but this study reveals that it may be time to reassess the yardstick.

Assumptions and common sense

Investing in employee benefits, for example, is often encouraged on the assumption that well-rewarded and engaged employees are more productive and delivery higher levels of service.

Almost like lined up dominoes, the next assumption is that good service is directly proportional to customer loyalty.

The assumption following that is customer loyalty boosts financial performance.

These three assumptions are deceptively ingrained in the way in which we approach business, but this study suggests what seems like common sense may not always work.

Rhian Silvestro, associate professor of operations management at Warwick Business School, has found some managers do not actually apply ideas on financial performance to their own organisation, instead operating on the assumption their strategies are correct.

“The danger is that unless the core assumptions are sound and relevant to your own circumstances, you run the risk of developing wrong-headed strategies that will lead you astray,” he explains.

A tale of two retailers

Dr Silvestro researched two well-known British retail organisations, a superstore and a home improvement retailer, to see if management assumptions aligned with actual results.

The superstore study was based on a sample of 15 stores spanning 12 months, while the home improvement retailer study assessed data for 75 stores over 10 months.

Both firms were organisationally similar, with strong brand identities and were geared to selling a wide variety of products to the mass market through large numbers of stores.

Similarly, the store layout was exactly the same across all the locations, and staff cost was a relatively small percentage of the companies’ total cost.

With the superstore, as expected, Dr Silvestro found the the assumption that productive employees boost customer satisfaction to be true. 

“However, there were also negative correlations between employee satisfaction and sales growth, and between employee loyalty and both profit and productivity,” he says, suggesting counterintuitively that a happy workforce doesn’t necessarily mean a profitable or productive workforce.

“In fact, the most productive, profitable and highest growth stores were those where employees were least satisfied and least loyal,” according to Dr Silvestro.

To confuse things further, in the case of the home improvement retailer, the data revealed that greater labour productivity did not lead to greater employee satisfaction, and neither did greater benefits and employee loyalty.

What went wrong

In both cases, the management teams acknowledged they were facing issues, but employee or customer satisfaction had nothing to do with their bottom line. 

A happy workforce doesn’t necessarily mean a profitable or productive workforce.

Bigger stores tended to be the most profitable, but at the same time stressful places to work, adding strain on staff satisfaction and hampering productivity. However, by virtue of size, sales at these stores managed to increase.

Both companies had training programmes in place under the assumption that satisfied loyal employees would have a positive effect on financial returns, rendering these costly staff programmes essentially useless, and just another mandatory thing foisted on to disgruntled employees.

Do what’s best, ignore the rest

Instead of accepting untested hypotheses about performance links that may not apply to their organisations, Dr Silvestro believes managers should use a more rigorous analytic approach.

Not every business needs to instil flexible working, or have a foosball table and hammocks in their office.

Assess what actually motivates your staff and what keeps your customers coming back, addressing both equally instead of assuming one will lead to the other. 

Essentially, stick to what works and ditch the rest, even if this means going against popular opinion.