Treat Your Organization as a Prototype: The Essence of Evidence-Based Management

Design Management Review,  Summer 2006  by Pfeffer, Jeffrey,  Sutton, Robert I

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When looking for ways to enhance performance, Jeffrey Pfeffer and Robert Sutton counsel gather the facts, look for patterns, and experiment to make things better. Then keep repeating the process. Amplifying their recommendations with engaging anecdotes, they are skeptical of the "latest" breakthroughs and best practices, urging managers, instead, to study the evidence continuously as groundwork for a steady stream of incremental advances.

For the past five years, we have been studying how leaders might learn to practice evidence-based management-how they can find, face, and act on the best facts. We've found that many companies suffer because their leaders continue to do what they've always done-adopt best practices that are actually bad for their companies and then refuse to face the facts about their failures. But we've also found that the most successful leaders think hard about what they do and why they do it, which enables their companies to do a better job of evaluating and applying business knowledge. Table 1 summarizes six key guidelines they follow-from treating old ideas as if they are old ideas, to basing management practices on the best evidence rather than on what is in vogue. These leaders don't follow gurus or seek magical management breakthroughs. They are interested in what is true and not necessarily in what is new. And perhaps most important of all, they ignore conventional wisdom and taken-for-granted assumptions about what works. Instead, they seek out and act on the best evidence.

Bucking conventional wisdom

The gaming, or casino entertainment, industry is rife with conventional wisdom-some of it so commonly believed that it is known outside the industry, as well. One deeply held belief is that the key to success is the ability to attract the high rollers, rich and famous people who drop lots of money at the tables and roulette wheels. Another belief is that casinos must offer discounted hotel rooms and meals, or even give away lodging to entice people into the casino, where they will spend money gambling, at restaurants, and on entertainment. Other beliefs include the notion that building family-friendly places with rides, sort of mini-Disneylands, are useful in getting customers, particularly families, to gaming venues. Or that building lavish-and expensive-facilities that look like Venice, Paris, or the New York skyline is the best way to get people to choose your facility over others; that the "hold" (money the casino retains from slot machines) cannot be changed or people won't play your machines; that media advertising on radio and television is among the best ways to build customer traffic and revenue.

When Gary Loveman was appointed chief operating officer of Harrah's in 1998, taking a leave from his position as an associate professor at Harvard Business School, he knew little about the details of casino operations, interior design, or architecture. He had consulted for Harrah's and had studied the retail store industry. Loveman arrived with a professor's commitment to rigorous analysis and making fact-based decisions. He soon made this such a part of the company's culture that, as he commented when we talked to him, there were three ways to get fired at Harrah's: steal, harass women, or institute a program or policy without first running an experiment. Casinos produce lots of data on things like revenues, occupancy, profitability, and staff turnover. Loveman was determined to use that data and to collect more information by constantly running small experiments to uncover facts that would help the company make more money.

Loveman and his colleagues soon discovered that much of the conventional wisdom in the industry was wrong, and they changed company practice to reflect those discoveries. Rather than relying on extensive media advertising, Harrah's uses direct mail-promotions aimed at targeted customers to tempt them to spend more of their gaming dollars at a Harrah's casino and to get them to return if they haven't visited in a while. Harrah's learned that its most profitable customers were locals, often older retired or semiretired people who visited the casino frequently to play for entertainment. These people weren't as interested in discounted rooms as they were in meals and complimentary chips. In one experiment, Harrah's offered a control group the typical promotional package worth $125 (a free room, two steak dinners, and $30 worth of free chips); customers in the experimental group were offered just $60 worth of free chips. The $60 offer generated more gambling revenue than the $125 offer.

Harrah's figured out that families with small children-a target audience for many competitors-generally have little discretionary time or money, so courting them was unprofitable. The company also discovered that spending money on employee selection and retention, including giving people realistic job previews, enhancing training, and bolstering the quality of front-line supervision, reduced turnover and produced more committed employees. Harrah's was able to reduce staff turnover by almost 50 percent as a result. Loveman and his colleagues also reasoned, on the basis of academic research, that more experienced, committed, and better-led employees would improve customer service, which in turn would bolster guest satisfaction and, ultimately, willingness to return. This attention to employees, plus Harrah's investment in data warehousing and analytics, which permitted the company to track and analyze guest behavior, had a far bigger payoff than just throwing money at facilities.