Building a Fast & Flexible Company

PDCA Explained One More Time

2012-01-22T08:32:00.000-06:00

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Although it’s been around for decades, the PDCA (or Shewhart) Cycle continues to be one of the simplest – and most misunderstood – concepts in business. Introduced to the masses by W. Edwards Deming, many people don’t initially see the cycle as significantly different from the way they already work. After working with the cycle for many years, however, I have found that most organizations do not even come close to truly understanding or applying a PDCA mindset.

THE PDCA CYCLE

THE PDCA CYCLE

Americans generally follow a solutions thinking, rather than a PDCA approach that attempts to find the perfect solution and a “permanent" fix to a problem. The high level of complexity among interactions within processes and systems, however, along with the fact that the world is in constant change, makes it unrealistic to think that permanent solutions to problems can be developed. The best that one can expect when facing an issue is to address it under current conditions and, once addressed, continue to look for recurrence and further improvements.

Besides the time it takes to seek the perfect solution to a problem, solutions thinking can give a false sense of security that a situation is permanently resolved. As circumstances change, a "resolved" problem can reappear without warning and cause significant damage if the team has moved on and stopped looking for the condition to recur.

By contrast, the PDCA approach addresses problems as a potentially never-ending cycle. Instead of seeking the perfect solution, one or more countermeasures are developed and implemented quickly to stop the condition from continuing to cause damage. Since it is recognized that the countermeasure may not be a permanent fix or completely solve the problem, the team continues to monitor the process to determine the effectiveness of the change. Adjustments are often made to the countermeasures – and new ones developed – to assure the situation continues to improve.

As the process stabilizes, the team looks for ways to further reduce the likelihood of the problem recurring (by addressing other potential causes) or tackles another problem plaguing the process. Each adjustment leads to another fairly quick trip around the PDCA cycle that results in a more robust process and additional learning.

SO WHAT'S THE DIFFERENCE?

The major differences between PDCA and traditional thinking include:

Scientific Approach: A conscious effort to apply a scientific approach to improvement involves developing a hypothesis, testing the premise, formally evaluating whether or not the hypothesis was correct, and acting on the results. Although the traditional approach relies on some level of hypothesis testing, the check step makes it a more conscious effort within PDCA thinking that, when applied over-and-over again, results in developing a scientific thinking mindset throughout the organization;

Countermeasures: Within PDCA thinking, there is clear understanding that, although an action is an improvement, it is not necessarily a permanent solution;

Speed: Since the effort is not directed toward the perfect solution, improvements are made much more often and at a much quicker pace. PDCA is oriented toward a just do it mindset, where ideas are tested and implemented fairly quickly, even if the resulting improvement may be fairly small.

The quickest way to determine a group’s collective mindset is to observe how it addresses problems. If discussions tend to bog down as the team searches for permanent solutions, it is a safe bet that PDCA is not the norm. Also, ideas regularly “tested” and rejected in conference rooms rather than real situations is another sign of a solutions thinking mindset.

PDCA vs Solutions Thinking

The exhibit shows another difference between PDCA and solutions thinking. Ideas and improvements occur much more quickly with PDCA than with solutions thinking. Although each improvement is generally much smaller in scope than with solutions thinking, the rapid pace of improvements when applying PDCA results in far greater improvement of the process over time.

: PDCA vs Solutions Thinking

Since processes tend to naturally deteriorate between improvement efforts, the longer the improvement cycle, the more deterioration that occurs. Because of this, the fewer number of improvement cycles, the slower overall pace of improvement that will occur over time.

THE LEARNING ORGANIZATION

Another advantage of PDCA thinking is the amount of learning that takes place about the process during each cycle. Because solutions thinking deploys fewer improvement cycles and focuses attention specifically on the problem at hand, less learning takes place about the overall process. The increased learning resulting from deploying PDCA throughout the organization further adds to the overall pace of improvement cycles.

Those who fail to recognize the true significance of PDCA often require a good deal of coaching, reflection, and experience with the cycle to truly understand why it is different and how it can benefit the organization. Without a certain level of transformation toward PDCA, however, the implementation of improvement methods like lean thinking or 6-sigma will be difficult, if not possible.

The Missing Link in a Lean Deployment

2012-01-15T08:24:00.000-06:00

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A common difficulty many companies face when embarking on a lean journey is getting people – at all levels – to buy into the philosophy and commit to a new approach to business. Lean generally follows a different way of thinking, and success often requires transformation of leaders as well as a change in behaviors across the organization. Without significant transformation, lean becomes nothing more than a short-lived effort to attack waste on a project-by-project basis.

It is not enough to say that leadership is the key to successful implementation of lean thinking. Without understanding what this means, we cannot truly transform an organization and build a sustained improvement process.

I have come to the conclusion that a critical – and often missing – component of leadership necessary to transform an organization is a deep understanding and application of the Deming system of management. Most lean deployments include training of the management team in basic lean methodology, the categories of waste, and improvement tools, but very few organizations include Deming’s system of profound knowledge as part of the roll-out.

Although there are many people over the years who contributed to the development of the Toyota Production System (TPS), W. Edwards Deming taught the managers at Toyota about leadership, which was critical to the development, success, and longevity of the system. I have been lucky enough to visit Toyota on several occasions and, although I never heard Deming’s name mentioned, his influence on their culture and systems is still readily apparent.

The System of Profound Knowledge

In his final book, The New Economics, Deming presented his System of Profound Knowledge. It basically defines the competencies required for effective leadership. Since transformation of an organization begins with transformation of the individual, a company has no chance of deploying lean thinking unless its leaders completely believe in the need to change and clearly understand what it means to the organization.

According to Deming, there are four areas that anyone in a leadership position must possess and continue to develop in order for the organization to remain competitive and continually improve performance. Being competent in – and actively practicing – these four areas is what separates leaders from bosses.

The four areas that must be part of an organization’s leadership DNA include:

Systems Thinking: A clear understanding of the organization’s overall system – i.e., the entire process for transforming materials and information into products and services for customers – and how each area (including suppliers) affects its ability to serve customers;
Knowledge of Variation: Understanding how to use metrics and data to gain insight into the causes of variation in quality and performance. Requires training in basic statistical theory and, among other things, how to separate trends and true changes in performance from normal variation;
Theory of Knowledge: Continually developing and testing assumptions to gain knowledge is a critical part of management. Applying the Plan-Do-Check-Act (PDCA) cycle improves leadership by enabling learning about the business and clarifying relationships between causes and effects – which is vital to successful planning;
Psychology: Organizations are made up of people and those in leadership positions need to understand how to hire effectively and motivate people and help them continually develop and improve.

Without a clear understanding of the company’s leadership DNA and faithfully using it to select and develop leaders, a company can end up with such a wide variation in leadership styles that attempting transformation - or pretty much anything else – will be futile. Deming’s System of Profound Knowledge gives us a foundation from which to build a company’s management system and begin the transformation toward lean thinking.

Gaining Involvement in Improvement Activities

2012-01-07T08:43:00.000-06:00

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One of the most common frustrations expressed by those involved in a 6-sigma journey is the inability to get others to participate in improvement activities. In some cases, energy levels may be high during initial projects only to have a production focus return fairly quickly. Often there is less accountability for process improvement than meeting production targets, and it becomes a battle to get managers to commit time and resources to improvement projects.

The Wrong Focus

A common reason for a lack of managerial engagement in improvement activities stems from the lack of a natural alignment between improvement objectives and a manager’s normal work – i.e., meeting production targets (production referring to any type of output for which a team is responsible). As long as improvement objectives are considered separate from production objectives, there will always be tension between the two; and when this happens, production will virtually always win.

Production is how a company makes its money, and managers are typically measured on their ability to produce. No matter how logical it may seem so some that focusing on improvement will make meeting production targets easier, others will see it as a distraction and interference to meeting production objectives.

By design, a 6-sigma process is project focused, where people identify improvement opportunities, develop objectives, and form teams to address the issues. This approach can make the job of creating and sustaining alignment between improvement and production a challenge.

Although some companies have been successful implementing and sustaining project-focused improvement, many have not. In my experience, the life of a typical 6-sigma deployment is 6 months to one year. Beyond the initial success, a lot of time and energy is required to keep the process going against the inertia of a production focus.

A Better Approach

A much better way to create a strong and natural alignment between improvement and production is to focus the effort on lean rather than 6-sigma. Companies that ignore lean and attempt to implement an isolated 6-sigma process are missing out on a perfect opportunity to connect and closely align production control and the improvement process. With lean, it is takt time that makes the need for continual improvement clear and logical.

Takt time, which can be calculated for virtually any process in any industry, defines the pace at which a process needs to operate in order to meet objectives. Once the output objectives and resource constraints are understood, the takt time of the process can be calculated with little effort.

Understanding the takt time for a process makes it clear that, in order to meet production targets effectively, improvement efforts must occur. This approach places the responsibility for initiating improvement projects with the supervisor of a process since he or she is the one accountable for consistently meeting production - or takt time - targets. In effect, takt time creates pull from those directly involved in the operation.

The PDCA diagram below identifies a basic approach for implementing and sustaining improvement-based on lean thinking. Once business objectives are understood and processes are standardized, process leaders become responsible for meeting production objectives on a continual basis. Unless the person responsible for leading a particular process drives improvement within his or her area of responsibility, the odds of meeting takt time consistently become severely hampered. Continually comparing throughput to takt time naturally drives the identification of improvement projects that enables objectives to be met.

The Improvement Process

To be successful in a lean thinking environment, very little pressure is placed on people for the current performance of the process(es) they lead. There is significant pressure, however, on leaders to demonstrate how they are reacting to current performance, and the steps they are taking to drive improvement.

Every leader must be held accountable for assuring that the overall system (i.e., production line, location, business unit, etc.) meets its takt time. Otherwise, improvement efforts may consist of pushing work or inventory to a downstream process, and when this occurs, there is little chance for the organization to meet its objectives.

Back to Basics: The Key to Improving Performance

2010-10-13T08:31:00.000-05:00

After many years of working with organizations in different industries on a variety of issues, I have discovered that the most common reason for performance falling short of expectations is a lack of attention to the basics. I have seen numerous initiatives fail because of misalignment between, or inconstancy within, a company's purpose, values, objectives, and reward systems.

Consider the following objectives:

Improve EBITDA by 20% over the next two years;
Achieve compounded double-digit revenue growth each year for the next five years;
Introduce 5 new products to the market next year.

In each of the above examples, the organizations failed to achieve the stated objectives. This was not because of a lack of talent or desire to meet the goals. In each case, managers responsible for the objectives felt extreme pressure to succeed but were handcuffed by the problems related to trust, teamwork, reward systems, and overall company focus.

An organization cannot perform at a level beyond its capabilities for a sustained period of time - and its capabilities are determined by the basics. Setting objectives that are beyond capabilities will do little more than create frustration or apathy among those assigned the responsibility to meet them. You can challenge, pressure, or cheer as much as you want but unless you deal with the fundamental roadblocks to success, you will end up sorely disappointed.

In sports, it's common for individuals and teams to address a slump by getting back to the basics. In tennis for example, correcting poor performance requires thinking about footwork, watching the ball, and focusing on each point. Attempts to ascend to a new level of performance will be fruitless without mastering these basic aspects of the game.

Getting Back to the Basics

Addressing the fundamental issues in an organization can take several different paths depending on the company's situation, but generally involves the five areas listed below.

Reaffirm & Recommit to the Purpose: Assure that the organization's purpose - including mission and vision - is absolutely clear. Obtain commitment to the purpose at all levels and develop objectives that support its achievement;
Clarify & Commit to the Values: Define the company's DNA and assure that the hiring process includes some type of assessment to assure candidates possess the desired values. It is important to understand that, regardless of how successful an individual appears to be performing - if he or she does not follow the same values as the rest of the organization, damage will occur;
Align Focus on the Customer: In relation to the purpose, assure that everything the organization does is focused on the customer. As Gene Perkins, retired Group Vice President-Flow Products at Emerson Electric Company once said to his management team, "if we're not thinking about the customer first in everything we do, we might as well fold up our tents and go home;"
Increase Understanding of the System: Especially at the management level, people must understand the company's overall system (i.e., how the company serves the customer) and work to continually improve how materials and information flow through the system. Managers must be company-focused rather than functionally-focused;"
Align Measures & Rewards with Direction: Once the direction and focus has been established, make absolutely sure that there is close alignment between them and the reward systems in the organization. Be continually on the lookout for rewards that may encourage undesirable behavior.

It is very easy for an organization to stray from the above areas. There is often so much going on and everyone is so busy that it is easy to be distracted with internal issues that do not tend to be as glamorous as improving EBITDA by 20% or achieving double-digit revenue growth. Without a strong foundation on which to build the business, however, achieving and sustaining any type of significant improvement will not happen.

Successful Job Search: Getting the Interview

2010-10-04T19:40:00.000-05:00

It's been a few years since the worst economic downturn since the Great Depression began and a large number of highly talented people remain unemployed and frustrated at their lack of success in the job search process. Many regularly submit resumes for positions for which they feel perfectly qualified and receive only electronically-generated rejections - if they receive anything at all from the hiring company.

From a pure numbers perspective, it is easy to understand why this is happening, but understanding the reasons does little to reduce the frustration and depression that many searching for jobs are feeling. It comes down to the fact that anyone applying for an open position needs to find a way to stand out from the crowd and get noticed by those doing the hiring.

Below are my thoughts on the job search process. Although I would never describe myself as an expert on the subject, I have witnessed these steps achieve a 40% success rate in getting a positive response from the hiring company. Keep in mind that these steps will only help you get a dialogue going with someone in the company - getting beyond the initial contact is up to you.

Resumes are Secondary

Most people focus on the resume or CV as the critical part of the job search. Resume writing services are booming these days with the promise of providing a CV that will set a candidate apart from the thousands of others who may be applying for an open position.

I believe that the resume is actually secondary in finding a job. Attempting to communicate the ways in which you will benefit the company through a resume puts the responsibility on the person reading it to make the connection between your background and the needs of the job. Regardless of how impressive they may be, a listing of qualifications, accomplishments, and keywords will not set you apart from others. You really need to find a clear and concise way to communicate to people exactly how you will help the company.

Your resume will come into play after you convince the hiring company that you can provide what they need. With this in mind, it is critical to have a clear and well-organized CV - and one that is specifically tailored to the open position - but it is not the most important part of the job search process.

The Critical Steps

With this in mind, a successful job search process should include the following elements:

Read the Job Description very closely to gain a deep understanding about the company's needs. Use the job description along with other information (e.g., website, annual report, etc.) to look for themes that identify what the company is truly looking for in the position. Highlight the areas that identify critical issues and those where you have particular expertise.
Develop a Plan that clearly addresses the issues identified specifically in the job description and, more generally, in your research. Present a basic overview (exhibit 1) and include a more detailed explanation of the steps that need to be taken to be successful (exhibit 2).

Sections of the plan will differ depending on the specific position. The plan shown in the example is for a Lean Director position. It would obviously need to change for other jobs (e.g., for a VP of Operations, the categories may include such things as People Development, Process Improvement, Product Development, etc.). It depends entirely on the scope of the position and the needs of the organization.
Identify the Hiring Manager. With apologies to my friends in the HR field, most of the people who screen resumes do not really understand the position well enough (or have the time needed) to look beyond what is written in the job description. In many cases, a junior person or computer filters the resumes to screen out those that don't have the correct keywords. Your chances diminish greatly if you don't send your information to the person to whom the position reports.

Depending on the level of the position, the hiring manager can be located through sources like LinkedIn, the company's website, or a web search. This can take time, but is extremely important to assure you reach the correct person. For higher level positions, don't be afraid to send the plan directly to a C- level person (i.e., CEO, COO, CIO, CFO, etc.).
Send the Plan to the Hiring Manager. This step requires patience and creativity to determine the company's email address format. In some cases, the domain name for the company's website differs from the domain for email addresses, so it may take several attempts to finally get it through.

I can't take full credit for the above approach. A friend of mine is a lawyer and told me that pursuing a position at a law firm often requires submitting a business plan to identify the target clients the candidate can bring to the firm and how much business these potential clients represent. Combining this with my own experience leading an organization, I thought that a similar approach would make sense for those in other professions as well. When I led an organization and hired for an open position, I was much more interested in how well the candidates understood our needs and how they could help than what was in their CVs.

The drawback of this process is that it takes a lot more time to apply for a position and you will probably not be able to apply for more than three or four positions per week, at best. Besides getting you an interview, however, the plan can also provide a point of reference for discussion during the interview and help you get started once you land the job.

Good luck! Everyone deserves a job that is challenging and rewarding.

Fast Does Not Mean Cutting Corners

2010-09-27T08:48:00.000-05:00

I believe that, to be successful today and in the foreseeable future, companies will need to continually increase speed and flexibility. Changes are occurring faster than ever, and those companies that are able to adapt to - and drive - changes quickly will be much more competitive than those that are not.

Whenever I mention the subject of improving speed and flexibility, however, I inevitably receive comments about the dangers of making decisions and acting too quickly. The comments often include examples where efforts to increase speed have resulted in major quality or safety problems.

In my view, however, "fast" does not mean cutting corners or operating out of control - since dealing with quality or safety issues does little to improve speed or the ability to adapt to changes int he environment. Being faster and more flexible actually requires improving focus and perfecting processes on a continual basis.

Successfully streamlining processes and systems requires understanding and continually improving the activities that add value to customers while reducing or eliminating any activities that do not. And when the focus is on customer value, cutting corners on safety or quality is not an option.

Speed Requires Stability

When driving, the more stable the car, the safer it is to drive at high speed. In business, the more stable the organization - in terms of purpose, values, leadership styles, employee turnover, and focus - the safer it is to increase speed.

The loss of control, along with the increased variability in processes and results caused by impatience and short-term thinking can quickly throw an organization off-course. These are the behaviors that drive people to think that being faster means cutting corners instead of strengthening and improving processes.

Focusing on value for the customer can speed up decision-making and processes while prventing the haphazard cost-cutting measures that too often lead to financial trouble, industrial accidents, encvironmental disasters, and deaths.

Keep the Focus Clear

Speeding up an operation requires constant vigilance for anything that interferes with processes operating perfectly every time. Interference in processes can result from design, handoffs between people, or a variety of other technical, organizational, or cultural issues. Because of this, it is important for a company to develop the ability to honestly and objectively assess itself for those things that slow it down.

When leaders maintain stability in the organization's basics, and focus attention on improving speed and flexibility, remarkable things can happen. The improvements in agility will be accompanied by reduced costs, increased customer satisfaction, and a safer operation.

Does Size Matter?

2010-09-13T09:56:00.000-05:00

Is There a "Best" Size for a Company?

I had coffee with a colleague awhile back and we got into a discussion on whether there is a "best" size for an organization. Small companies are fast and flexible but often lack the capital needed to grow. Although large companies tend to be slow and unable to deal with change effectively, they have the capital and geographic reach that small companies lack. A large company also has the ability to crush or acquire a smaller competitor that is seen as a threat, if the threat is recognized early enough.

An interesting observation about this subject is, as a company grows, it tends to become slower and less able to do many of the things that made it successful in the first place. Additional layers of management and more formalized systems can slow the decision-making process to the point where it becomes unable to respond quickly to changes in its environment. Another common characteristic of companies as they grow is a tendency to become more risk averse in an effort to meet conservative financial targets or protect share price.

Does it Matter?

So what is the optimum size for a company? Does it depend on industry? There are obviously some industries like consumer electronics where, no matter how large a company is, it can't survive without the ability to quickly adapt to, or drive, changes in the market.

These are interesting questions to debate, but I wonder if they really have answers. What if an organization can remain fast and flexible as it grows? Think about how successful a company could be if it could continue to be as fast and flexible as it was when it was small and growing. There are not many examples of large, fast-moving companies, but that does not mean that it is not possible (or important).

A Matter of Survival?

Like most aspects of leadership, it's an issue of focus. When leaders of an organization determine that speed and flexibility are competitive issues, they will give it the focus they need to make them happen.

I believe that success in the years ahead will require the ability to drive and adapt to changes quickly and effectively. The world is changing at such a rapid pace that the organizations that are unable to adapt will not be competitive. Developing the capability will require addressing areas like speed of new product development, flexibility of processes, implementing and upgrading information systems, etc.

Increasing speed and flexibility for many organizations will require transformation. For too long, we have become obsessed with the idea of growth as the focus of a business. Investors tend to lose confidence in companies that experience slowing growth [refer to Fortune magazine articles on Google and 100 Fastest-Growing Companies] which can cause problems when, in an attempt to appease the financial community, a company shifts its focus toward growth through acquisitions that are not necessarily strategic or sensible.

If the focus is on developing the ability to drive change through innovation, and respond to change by increasing flexibility, the growth can occur organically through increased competitiveness. Although organic growth in revenues does not tend to match the growth that can occur through acquisition, it can be much more profitable and less destructive to the company and its culture.

Innovation and speed do not need to be limited only to companies like Samsung, Apple, and Facebook. Every company has the ability to improve flexibility and adapt to changes in its environment. Size does not need to be a deterrent to change. It is a company's characteristics and capabilities, not its size, that determines its flexibility. All it takes is recognizing the need, being sensitive to the friction created as the company grows, and continually addressing the elements that interfere with the ability to change.

Getting Support from Support Functions

2010-09-06T10:38:00.000-05:00

"Everyone here has a customer. And if he doesn't know who it is and what constitutes the needs of the customer . . . then he does not understand his job." - W. Edwards Deming

One of the most difficult jobs of a leader is getting everyone in the organization to work toward the same objectives. The issue is especially difficult in support functions where team members are generally isolated from customers, which makes it harder to create a connection between work performed and the success of the business.

The problem is magnified even more when the company utilizes a shared services model (i.e., decentralized business units with centralized support functions). I've heard many business unit leaders over the years complain about poor quality service and lack of support from corporate functions. In many cases, business units hire their own support people - even if it results in the company doubling up in some positions - in an effort to have more control over these functions.

With the focus and pressure on reducing costs these days, more companies are implementing the shared services concept and combining support functions into a single team in an effort to reduce the company's costs of providing support. If not done correctly, though, this concept can actually increase costs due to poor quality service or slow response to operating units.

Establishing and communicating the company's purpose can help, but it's not enough. It is also important to show people how their roles align with the purpose and, without a systems thinking mindset, this can be very difficult, if not impossible.

It's About Value for the Customer

The key to reducing the total cost without sacrificing the quality of support is to continually focus on value. Focusing on value to the customer is what keeps everyone aligned on what is truly important, and helps make decisions regarding where to invest and where to cut much easier.

It is the entire company's responsibility to serve the customer, and doing it effectively requires a systems thinking mindset by those in leadership positions. But merely telling people to be systems thinkers is not going to make it happen. Increasing understanding of the company's high-level system requires education and coaching on a continual basis . . . and the value stream map is a great place to start.

A company's value stream is the chain of events that the transforms knowledge, information, and materials into goods or services to customers. The value stream is how the company serves its markets and makes its money. In theory, a company should not do anything that is not directly related to the value stream because it does not provide value to customers or bring in revenue. Even those functions that exist for purely regulatory reasons should be oriented directly toward supporting the value stream's efforts to serve the customer.

The better people understand the company's value stream (i.e., the high-level system), the better they will understand their jobs. It will become much clearer to everyone why their job exists, who they serve, and where improvement efforts need to be focused.

The Value Stream Map and Shared Services

Once developed, the value stream map (a diagram, or flowchart of the value stream) becomes the foundation to implementing an effective shared services function. The internal service providers are just as critical to the company's success as the operations functions. Without an understanding of the value stream, however, it is difficult to know exactly what value service functions provide to the organization, and particularly how to improve quality and reduce costs.

With this in mind, implementing an effective shared services function requires addressing the following:

Clarifying expectations that serving customers is everyone's responsibility, and those who do not directly serve external customers are responsible to support those who do (i.e., their internal customers);
Develop the purpose of the shared services function. Since this is most likely a new approach for the company, it is important to bring support team leaders together to develop the purpose and assure that, once developed, the purpose is clearly communicated throughout the company;
Map the company's value stream. Develop the high-level value stream map for the company and clarify how the shared services functions fit into the system. Follow up with more detailed maps to show how each support function serves the value stream, keeping in mind that support functions can also serve each other;
Understand the barriers to effective teamwork. There are likely obstacles that will interfere with getting people to focus completely on serving the value stream. These obstacles (e.g., fear, or objectives and rewards that discourage serving internal customers) need to be clearly identified and addressed.

Outsourcing services or cutting support budgets will not, by themselves, result in improving company performance. It is critical to clearly understand the interactions between functions that exist and how these relationships contribute to serving the external customer. It is only with this level of understanding that costs can be reduced while service to customers is improved.

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Hire Trustworthy People . . . Then Trust Them

2010-08-30T06:39:00.000-05:00

"Every knowledge worker in a modern organization is an 'executive' if, by virtue of his position or knowledge, he is responsible for a contribution that materially affects the capacity of the organization to perform and to obtain results." - Peter Drucker

What would happen if you offered your employees an unlimited number of vacation days? Could you trust that people would not take advantage of your generosity? Would work still get done? As crazy as it may seem to some, DVD and movie rental company Netflix did just that and, by every indication, it's working just fine.

According the a story in the August 14 edition of the Telegraph [LINK], Netflix stopped counting vacation days for its salaried employees back in 2004. Reasons given for the decision include the fact that employees regularly spend personal time (e.g., nights and weekends) handling company-related issues and responding to email. Also, since hours worked per day were not tracked, leaders decided it didn't make sense to track vacation time either. These are logical reasons, but I believe it comes down to something much simpler: Netflix hires trustworthy people and trusts them to do their jobs.

It's About Company Objectives, Isn't It?

Many managers forget that it's more about quality of work than quantity of hours that determines the value of an employee. If an individual is getting his or her job done, and is successfully contributing to the company's objectives, it doesn't matter how many hours or days is spent in the office. For some reason, though, we tend to think that if people are not putting in 40+ hours per week, they are not valuable to the company.

If a company is effective in recruiting talented and trustworthy team members who fit into the culture, it does not need tight policies and controls. In fact, the tighter the controls, the less effective creative and energetic people tend to be. When expectations are clear and barriers to success are removed, people regularly surpass objectives.

The Importance of Culture

Netflix developed a presentation to describe their culture that is widely available on the internet. As I read through the presentation - all 128 pages of it - it became clear that Netflix leaders understand the type of company they want to be and work tirelessly to develop - and protect - their culture. The presentation, titled Reference Guide on our Freedom & Responsibility Culture, is worthwhile reading for anyone in business.

It's the Overall Approach - Not the Perks

Applying the Netflix formula for success does not mean copying what is in the presentation. Unlimited vacation days only works because it is a component of the company's total approach to business. It means taking care of the things that give direction and inspire people to act. These include:

Understand the Purpose: Clearly understand why the company exists - i.e., who the customers are and what value customers get from doing business with the company. Make sure that decisions and actions support the purpose;
Set Direction: Establish a vision for the future that inspires and excites people to make the company successful;
Develop the Culture: Don't let the culture happen by accident. Create an environment that will make people, customers, and suppliers proud to be associated with the company and want to make it successful. Once the culture is established, vehemently protect it from the internal and external forces that can change its characteristics;
Hire Correctly: Recruit the type of person who will thrive in the company. Put more focus on finding someone with the right cultural fit than the correct technical qualifications and consider every hire from the perspective of bringing in someone who will be personally successful while contributing to the long-term success of the company;
Develop Individuals & Teams: Improve the ability of individuals and teams to be successful. Provide learning opportunities for everyone to assure that organization continually develops. When possible, develop future leaders from inside the company rather than hiring from the outside;
Get Out of the Way: Stay visible, but let people do their jobs. Get involved when situations call for coaching and development and remain focused on leading, rather than managing, people.

Virtually every company wants an innovative and energetic workforce but very few know how to make it happen. It comes down to taking care of the basics (above) and trusting the people you've hired to do their jobs. You can hire highly talented and qualified people but micromanagement and tight controls shows a lack of trust and leads to a group of people who are uninspired and indifferent about the company's success.

Back in 1997, very few would have thought that a tiny startup from Los Gatos, California had a chance to supplant the mighty Blockbuster in the movie rental business. As the people at Netflix have proven once again, though, the ability to unleash the talents of people is the most significant competitive weapon a company can have.

Staying Humble & Successful

2010-08-23T08:27:00.002-05:00

Arrogance diminishes wisdom. Arabian Proverb

One of the critical but rarely addressed challenges facing a leader of a highly successful company is how to keep people hungry. It is human nature for a group of people to feel invincible when they have experienced success for an extended period of time, and it is the incumbent upon the leader to fight the urge and keep the team humble.

Signs that a company is beginning to develop a superiority complex can include any of the following:

ignoring customer input when developing new products and services;
a drop in improvement activities;
increased costs through quality problems, longer leadtimes, and higher warranty expenses;
a noticeable decrease in the willingness to learn by team members.

There have been some highly publicized examples over the last several years of companies that fell from grace because they seemingly lost touch with what made them successful in the first place. The biggest problem with this type of behavior is that a decline in revenue and earnings may not show up for years after arrogance has made its way into the culture, and by the time it is realized, it may be so ingrained that correcting it becomes a major effort.

Prevention is the Key

Like many business issues, the best way to address organizational arrogance is to prevent it from occurring in the first place. Although sometimes difficult, taking positive steps to keep people humble and focused on satisfying customers is critical to remaining successful. Some of the areas to address include the following:

Customer Focus: Stay focused on the customer and coach people when they appear to lose sight of the customer's needs. Question decisions and plans to assure that they were made with the customer's needs in mind.

Purpose - Purpose - Purpose: Assure that the company continues to operate in a way that supports its fundamental purpose, including mission, vision, and values. Look for signs that the mission is becoming unclear or changing and, when necessary, take action to get it back on track. Although scaring people is not advisable, it is important to make sure that everyone realizes that the company is always vulnerable and letting up is never an option;

Continual Improvement: Make certain that improvement activities within the company never stop. At no time should people believe that a processes and systems are perfect and do not need improving. A telltale sign that improvement activity is waning is arrogance toward other divisions or companies. When people no longer feel they can learn from others, it's time to act.

Although seemingly simple, actions to keep the company humble and believing that overconfidence can be destructive is an ongoing and sometimes complex responsibility of leaders. Companies are constantly looking to exploit weakness in competitors, and if your company has been the superstar in the industry for many years, the spotlight will be especially bright on you as others look for ways to take your place at the top.

The Value of Healthy Employees

2010-08-18T09:11:00.000-05:00

Why are exercise facilities, preventive care, and nutritional counseling considered perks? We tend to treat these things as if they only benefit the employees and represent nothing more than additional costs for the company.

Consider the following:

According to a story in the May 7, 2010 Wall Street Journal (link), it is estimated that obesity-related health issues will cost U.S. businesses almost $43 billion this year;
A recent article in Fortune magazine stated that Americans will miss an estimated 6 million workdays in 2010 due to allergies compared to one million in 1995. Medical expenditures related to allergies during this period have also risen from $4 billion to $17.5 billion.

If you add to this, the costs related to other health issues, I'm guessing the amounts would be staggering.

WORTH THE COST?

Although some companies offer wellness programs, most do not. The reason many ignore the issue may be that, although high on a national level, the direct costs (including sick pay and increased insurance rates) are not high enough in individual companies to justify such a program. And since the indirect costs are not measurable, they also do not justify the investment in wellness.

This is the problem. The costs of implementing a wellness program is easy to measure and will appear as expenses on the income statement. The benefits, on the other hand, will not directly show up anywhere and therefore cannot easily be justified. Besides the fact that there will be a delay in receiving the benefits from improved employee health, there is no way to directly tie an improvement in productivity, quality, or costs to the investment in wellness.

Although not directly measurable, the benefits of an effective wellness program can include the following:

Productivity: Reduction in productivity losses caused by presenteeism (not feeling well at work) and absenteeism (paying for a worker to stay home plus the inefficiency related to work being performed by someone other than the missing employee);
Motivation: People feel more valued when the company shows it cares about their health. As a result, motivation, along with dedication from employees increases;
Creativity: People need to feel relaxed and healthy to be creative. The endorphins that result from regular exercise have been shown to increase creativity while, conversely, the distraction caused by illness decreases it.

The decision regarding the implementation of a wellness initiative comes down to whether or not the company's leaders believe that the above benefits outweigh the costs of initiating and maintaining the program. Even if they do believe in the benefits, leaders must also commit to an ongoing expenditure that the accounting system will not show adding value.

STARTING SMALL

I have spent much of my career dealing with organizational change associated with the achievement of strategic initiatives. In doing this, I have always found that, whether talking about implementing lean, integrating an acquisition, or changing an ERP system, the process is much easier when people are relaxed, well-rested, and feeling healthy. In my experience, companies that offer extensive wellness programs tend to have much more positive energy around a change initiative.

A wellness program can start small and expand as leaders gain confidence in the resulting benefits. Initial steps can include any of the following:

24-hour nurse line for people to call with questions
Annual physicals/health screens
On-site immunizations
Nutritional counseling
Improved food choices at employee cafeterias
Exercise facilities or health club memberships
Newsletters with health coaching tips
Support for smoking cessation
Reward programs for health improvement/maintenance
Stress reduction at work (meditation, yoga, etc.)

IT'S NOT ALWAYS IN THE NUMBERS

We have got to get past the idea that the return on every investment can be measured. As I have written about extensively in my book and in blog posts, there are many critical aspects of leadership where one has to understand the cause and effect relationship between an investment and the resulting benefits, even if it is not represented in the financial statements. After all, if management involved nothing more than making decisions based on numbers, it would be a much easier to do and pay a lot less.

The Smarter Company

2010-08-09T16:39:00.000-05:00

When discussing the most innovative and successful companies over the last decade, people will most likely mention names like Apple, Facebook, Google, or RIM. These companies are known for utilizing innovation in products, processes, services, and technology to give them a distinct advantage over their competitors.

But how do these companies maintain their edge? Are the people who work at Apple or Google really any smarter than those who work at other organizations? It's no secret that these companies have their pick when it comes to recruiting, but is that what keeps them more innovative and profitable than other companies around the world? In my opinion, yes . . . and no.

It Takes More Than Talent

I will never downplay the importance the talents of people to a company's success. Companies like Google and RIM are staffed with very smart and talented people which has undoubtedly helped them to introduce highly successful products year after year. But without the leadership, culture, and systems that encourage and support innovation, there would be no way to consistently turn the ideas of these people into commercially viable products.

I have worked with a number of companies throughout my career and met many highly talented people who, for a variety of reasons, were unable to utilize their talents effectively. In contrast to companies like Apple, the cultures and systems in many of the companies for which these people worked interfered with their ability to use their creativity. The really sad part of the story is, the longer this went on, the less the people were willing and able to be innovative. It's as if the ability to innovate atrophies when not used or developed over time.

It's the Company that's Smarter

The difference between the average company and a company like Apple, for instance, is that the leaders at Apple understand that innovation is a key to their success and they've created an environment that encourages creativity. They have remained focused on creating a culture that fosters the use and continual development of team member creativity, and aligned systems to quickly turn their ideas into products. In my opinion, this makes Apple a smarter company than most.

It is strange to think that a company would hire someone because of their talents and allow barriers to exist that prevent the person from utilizing these talents, but it happens fairly often. It's not intentional, but for a variety of reasons, the environment in many companies encourages behaviors that interferes with success. Mismatches in purpose, strategies, and values lead to confusion, frustration, and de-motivation of employees, interfering with sustained levels of success for the company.

Becoming Smarter

So how do leaders make their companies smarter? How do they create the type of environment that enables people to utilize and develop their talents in a way that leads to success? It obviously depends on a company's particular circumstances, but involves addressing one or more of the following areas:

Purpose: Be clear and consistent on the company's fundamental purpose. Why it exists, what need it fulfills for its customers, and why it is different than other companies that serve the same markets;
Strategies: Determine, clearly communicate, and implement the best way for the company to compete in order to be successful (i.e., achieve its purpose). Will it compete on the basis of innovative products and services? Low costs? High quality? Assure that the company's culture and systems are aligned with the chosen strategies;
Values: Identify the company's personality. Be very clear on the DNA of the type of employee who will make the company successful in the achievement of its purpose;
Hiring: Take time to hire the right people with heavy emphasis on a person's fit within the organization's culture. Make sure that, once hired, they are able to utilize their talents effectively;
Train/Develop People: Continually develop the collective skills of the company's team in support of its business strategies;
Foster Teamwork: Identify and remove the barriers to teamwork on a continual basis in order to get the organization acting as one and focusing on common objectives;
Value & Respect People: Assure that people feel respected and valued for their contributions to the company's success. Create systems and develop leaders that will encourage participation in the achievement of objectives:
Continually Refine Environment: Develop and refine the company's culture to assure it is aligned with business strategies. Assure that the environment encourages, rather than hinders, implementation of the strategies.

I don't believe that a company needs to be innovative in order to succeed. It is much more important for a company's offering to be "right" than "fast." With that said, however, the faster a company can offer a new product or service that is right, the more successful it will be. Determining the strategies and assuring that all internal systems and values support the implementation of the strategies will make the company smarter.

So to answer to the question: I don't believe that the people at Apple or Facebook are any smarter than those at other companies, but I do believe that Apple and Facebook are smarter than other companies.

Finding the Right Mix of Talent

2010-08-02T10:31:00.000-05:00

Success in Business Requires a Mix of Generalists AND Specialists

Most people understand that businesses need specialists in order to be successful. Having people with specialized knowledge in areas related to the company's products, services, processes, network infrastructure, etc. enable the ability to serve customer needs on a continuing basis. What many people don't realize, however, is that it is just as critical to success to have generalists in the organization.

What is a Generalist?

A generalist is someone who has broad knowledge and skills, and understands the organization's high level system, including the hand-offs and interactions between people and processes. A generalist is not interested in working and developing his or her skills within a single area and is much more motivated to focus on the big picture. He or she is much more comfortable learning a little about many subjects than learning a lot about a single subject.

An organization can have the most talented specialists in the industry but be completely ineffective if these people are not able to agree on what's important and work together to turn their combined talents into commercial success. By understanding the system, the generalist can bring significant value to the organization by focusing on overall company performance rather than spending time attempting to optimize any single function. For this reason, generalists often excel in leadership positions and cross-functional roles like project management and lean/six sigma facilitation.

Why Generalists Are Necessary

By understanding the company's high level value stream, the generalist is able to continually remind everyone of the importance of working in the same direction to achieve common objectives.

No matter how talented the specialists are, without a common direction and continual effort to improve the way people interact and work together, there is no "organization" - there are only individuals working on what each feels is most important.

Peter Drucker wrote that management is a liberal art in that it requires skill from many different disciplines including psychology, sociology, history, and others. W. Edwards Deming included psychology, learning, theory of variation, and systems thinking as components of leadership in his Theory of Profound Knowledge. Deming and Drucker were referring to the idea that management is a role for generalists.

Harnessing the Company's Talent

The obsession many companies have had with specialists over the last several years has created a shortage of generalists that is hampering growth and success. As a result, many companies are full of great ideas and new technologies but aren't able to transform them into commercially successful products and services. A company may be staffed with highly skilled scientists, engineers, and chemists, but if it is not turning this knowledge into viable products or services, it is wasting money (and talent) and compromising its future.

Whenever hiring or promoting someone into a leadership position, I have found that a person with a varied background tends to be more effective than someone whose experience and training is related only to the function the person is expected to lead. For example, I would tend to favor a candidate for a quality management position who has experience in procurement and/or manufacturing in addition to quality than one who only has quality experience.

It's in the Mix

Success in business requires leading people to consistently achieve high level objectives. To do this successfully requires respecting the different talents people have and understanding how best to position and organize everyone to serve the customer effectively. This means having the right mix of generalists and specialists to assure success.

Does Losing a Customer Matter?

2010-07-27T19:57:00.000-05:00

"There is nothing more vulnerable than entrenched success." - George Romney

When a company loses a customer, is it important to understand the reason? Is business ever so good that it doesn't matter? Although these seem like ridiculous questions, I've had a few instances lately where companies knew they lost me as a customer and did not ask me why I was taking my business elsewhere.

I recently switched my television service from one provider to another. When I called to cancel my service, I was told how to return my equipment but never asked why I was canceling.

In another instance, the virus/spyware subscription for my computers was within a month of expiring and the developer, for some reason, decided to renew my subscription (and charge my credit card) without my consent. I do not like this tactic and, after consistently using their product for several years, decided to call them to complain. After being on hold for about ten minutes, the recording said that any product can be refunded via their website within thirty days of purchase. I connected to a representative via the live chat link on their site, canceled my subscription, and asked for a refund. I was given the refund but not asked why I canceled.

Do They Care?

When I thought about it, there were actually several similar instances over the last few years when a company knew I stopped doing business with them but did not ask why (e.g., newspaper subscription, internet service, web hosting, etc.). The first thought that came to mind about these situations was that business is going so well for these companies that they truly don't care when they lose a customer.

Although this may be the case for some companies, I'm guessing that the most common reason for the apparent lack of concern over losing a customer is related to resources. Companies are so thin these days, and, to keep costs down, call centers are so focused on meeting volume targets and time-per-call metrics that there is no time to ask customers why they are leaving. Combined with the disconnect between marketing, sales, customer service, and quality, and the ability to collect - much less do anything with - the information becomes virtually impossible.

It's Important But Not Difficult

It's always important to know why a company loses a customer. The companies referenced above were actually lucky because they knew I was leaving. In most industries, it's difficult to know that a company is losing customers until business has dropped so much that it's difficult to turn things around.

It is absolutely critical - and not necessarily difficult - to know why customers are leaving, and the customer service representatives are in a great position to collect the information. It should not take too long to ask the question, listen to the response, and check a box on the screen to classify the issue. With little effort, a company can begin to collect extremely valuable data regarding trends and high-level issues that its customers are having.

Have companies like the ones mentioned above learned nothing from the experience of the U.S. automakers over the last 30 years or so? No company is so successful that it can afford to lose touch with its customers. Since the effort may take an extra one-to-three minutes of a call center agent's time, however, some companies may not see the value in such an exercise. And to be honest, if the company is not going to take action in response to the data collected, they're probably right.

The World of Fashion Evolves

2010-07-19T10:30:00.000-05:00

Designs Aren't the Only Thing That's Changing in the Apparel Industry

According to a story in the July 16 Wall Street Journal (link), the apparel industry is facing a number of challenges that are affecting the entire supply chain. After three years of excess inventories and idle labor, companies throughout the industry are taking steps to reduce the risk of similar exposure in the future. Instead of reinventing themselves, though, it appears that the companies are dealing with the changes by attempting to push the risk to their customers and/or suppliers.

When industries face a changing environment, companies throughout the supply chain need to work together to respond to the change in a positive manner. The immediate reaction to drive risks to customers or suppliers has effects that, although not immediately visible, have longer-term effects that are destructive to everyone involved. It does not help a company to improve its own profitability at the expense of its suppliers or customers.

The New World of Fashion

Among the issues faced by the apparel industry include:

Smaller orders placed by retailers to test demand before committing to larger runs;
Increased material, freight, and labor costs;
Delays in ramping up production capacity because of a lack of confidence in long-term demand.

If smaller runs and increased costs sound familiar, it's because these are issues that have been faced by many industries over the last 30 years. Change happens in every industry, and those companies that are flexible and able to adapt to (or drive) the changes quickly will be the most successful in the years ahead.

The Focus Still Needs to be the Customer

One of the problems I noticed from the information in the article is that the impetus for change within the industry is profitability rather than the consumer. As has been proven over and over again in business, changes made without regard to the end customer can have devastating effects. While a focus on value can increase profits for the company, a focus on profitability will not lead to increased value for the customer.

Two key areas that companies in the apparel industry need to investigate in order to survive and grow in the years ahead include:

Lean Manufacturing Smaller production runs require improvements in quality, setups, and changeovers. Lean (when done correctly) gets everyone focused on eliminating the waste that forces longer leadtimes and larger lot sizes. Lean will also address the issue of increased labor costs;
Closer Factories Increased freight costs and leadtimes will force retailers to have production capabilities closer to the point of sale. Although oil prices have leveled out since the initial drop at the start of the recession, it is only a matter of time before they start rising again. As a result, the benefits of having factories in areas with low labor costs will be offset by increased freight costs.

In an industry that thrives on change at the consumer level, one would think that the fashion retailers and producers would have no problem adapting to changes themselves. Unfortunately, this does not appear to be the case. The environment has changed and, as has been the case in so many industries over the years, it's time for a new business model. The sooner the apparel companies realize this and make the necessary changes to adapt, the sooner they can once again turn their designs into financial success.

When Cost Cutting Becomes the Focus

2010-07-12T13:02:00.000-05:00

The recent media coverage regarding the Gulf oil spill has reminded me of countless industrial accident and product recall news stories over the years that point in some way to misplaced cost-cutting as a fundamental cause of the problems. The scrutiny that results from a major incident, however, tends to highlight the companies involved as if they are the exception when, in fact, arbitrary and misaligned cost-cutting is much more common in business than many realize.

It Happens Everyday

I have seen many examples throughout my career where attention was focused much more on cost-cutting than providing value. In one instance, I was contracted by an energy company to help improve their processes for project planning and execution. After spending time with some of the people involved in projects, however, it became obvious that the problems were not related to the skills of the employees or the processes and systems used for projects. The problem was directly caused by an excessive focus on costs.

There had been so much emphasis throughout the company on cost-cutting that people worked as if the company's purpose was to control costs instead of producing oil and gas. When conflicts arose between cost and production, cost won out every time. There was virtually no analysis regarding the benefit of getting a well operational ahead of (or even on) schedule.

In another example, a plastic products manufacturer regularly missed its deadlines for new product introduction due to cost overruns. The company had strict earnings targets and had gotten into the mode of, what many in the organization referred to as counting paperclips. High-level meetings, as well as measures and rewards for managers, were heavily focused on meeting cost targets. Because of this, whenever a product development project fell behind schedule for any reason, no consideration would be given to providing additional resources to get back on track.

Value as the Driver

Several years ago, study published by McKinsey & Company showed that a new product introduced on-time but with a 50% cost overrun negatively impacted profitability from the development by 3.5% as compared to a 33% loss in profits for a product introduced six months late but within budget. There are obviously a lot of assumptions associated with the study, but the point is that getting investments - whether in new products or operations - to produce more quickly is beneficial to the company, even if it involves additional expenditures. I believe the same philosophy applies to oil and gas producers as it does to product manufacturers.

The most successful companies focus on improving the value their processes provide rather than cutting costs. Improving in this context does not mean finding shortcuts. If value is the driver, improvement refers to reducing waste (i.e., anything that does not add value). If only cost is emphasized, there will be a tendency to cut corners and implement changes that reduce costs without consideration as to the effect on quality, safety, or cycle time.

Value, Value, Value

Getting into a cost-cutting mode most likely occurs because it is much easier to focus on cost reduction than it is on increasing value. Business leaders need to remember, though, that increasing value is what leads to success. When the company focuses on continually improving the value it provides, it becomes much easier to keep costs under control.

Instead of a Layoff

2010-07-06T09:47:00.000-05:00

Those who have read my book, articles, or blog posts know that I do not believe in laying off employees to cut costs. The long-term damage to the organization resulting from a layoff often outweighs the short term savings in payroll costs (see exhibit 1)

I will admit, though, the last few years has shown that the complete collapse of a company's products or services can dictate drastic cuts as a means for survival. The questions that need to be asked before implementing something as destructive as layoffs include: (1) how long do you expect the downturn to last; and (2) has everything possible been done to prevent a layoff. In other words, a layoff should never be among the first cost-cutting steps.

Even during the last few years, the worst economic period since the Great Depression, there were several well-known companies that did not layoff employees. Scottrade, AFLAC, Devon Energy, and The Container Store are among the organizations that have never implemented a layoff. Imagine the loyalty and trust created within these companies by resisting headcount reductions during such a severe downturn in business.

Everyone has a stake in the company. When a company has a history of layoffs, though, people feel powerless, disconnected, and expendable. The organization's leaders send a very clear message that employees are not important when jobs are cut in response to a crisis.

Some of the steps every company should take before considering a layoff include:

Shortened Work Week: Although akin to a pay cut, a shortened workweek forces everyone to participate without the loss of jobs. Also, receiving time off helps compensate for the reduction in pay;
Unpaid Holidays: Similar to the shortened workweek, implementing unpaid holidays allow more flexibility in choosing the extent and timing of the cut back;
Hiring Freeze/Attrition: Although an obvious step, I have worked with companies that laid off in one part of the company while hiring in another. Any positions that are critical to fill should be done by transferring and training existing employees;
Elimination of Bonuses: Nobody should receive a bonus during a period that people were laid off. I was in a meeting several years ago with a large division of a Fortune 100 company where managers decided to implement a layoff in order to protect their bonus accruals - a totally unacceptable action;
Elimination of Dividends: In spite of what many people believe, the resulting damage to the organization caused by a layoff does not protect shareholders. By protecting its workforce, companies are actually actually protecting future returns for shareholders. Studies have shown that companies that resist deep cuts during downturns recover much more quickly than competitors (in terms of earnings and share price);
Focused Kaizen Activity: Improvement activities should be focused entirely on reducing costs (while improving or maintaining existing quality levels). Kaizen activities focused on cost reductions will prevent employees from being idle during downturns and assure that the savings achieved will be sustained once business returns;
Pay Cuts: As a last resort, pay cuts should be implemented to save jobs from being eliminated. I believe in implementing across-the-board percentage cuts with executives being asked to volunteer a larger percentage.

When people see that company leaders are doing everything possible to navigate a crisis without layoffs, they will become much more motivated and engaged in the organization. The espirit de corps that results will make the company stronger and ready to take advantage of the recovery much more quickly than others that opted to cut workers as an initial step.

The Power of Marketing

2010-06-28T14:53:00.000-05:00

Does your company have a marketing function? Do the people involved in it actually do marketing?

I continue to be amazed at how few people in business truly understand the concept and value of marketing. In many organizations, marketing activity consists of nothing more than handling the company's advertising, website, and product literature activities. This is unfortunate because of the huge potential that marketing can have on the company's overall success.

What is Marketing?

Companies are in business to create value for customers and, because of this, they can't succeed without effective marketing. Marketing enables an understanding of the customer's needs to determine the type and mix of products or services that will create value. In effect, the more effective marketing is performed, the more successful the company will be.

Marketing has the potential to have an enormous impact on the organization. It drives sales by aligning the product or service offering to the needs of the market. It drives manufacturing by providing direction on cycle times, inventory levels, and target costs. It drives new product development by providing information on what customers want and need.

Buried in the Organization

One sign that a company may not understand or value marketing is having it lumped into the sales function. Often a company will have a "Sales & Marketing" department that is mostly (if not completely) staffed with salespeople. I have worked with companies in the past where people were actually hired into "marketing" positions, only to have their responsibilities gradually shifted toward sales. This is unfortunate because marketing drives sales - it is not the other way around.

I have also worked with companies that, except for advertising or promotions, had no marketing function at all. Marketing strategy in these companies weas informal and inconstant. And these were not small companies - one in particular had revenues of almost $1 billion.

When a leader does not understand what marketing encompasses, he or she will not see the value of having one or more full-time people responsible for marketing (unless, as mentioned above, those people are involved in advertising or promotions, which can produce fairly quick results).

It could be the inability to easily measure the effectiveness of marketing that keeps it from getting the emphasis it deserves. Other functions like manufacturing, procurement, engineering, and sales are much easier to evaluate with traditional measures (although, as I have argued in previous posts, many of these "traditional" measures are ineffective and, in some cases, destructive).

A leader should never get so hung up on measures that an activity is not given proper focus.

Marketing Needs to Drive

Marketing is not just another function. In fact, it is so critical to the company's success that it really needs to be elevated above "functional" status. Rather than burying it deep inside the organization, it needs to reside at the highest level and drive the company.

Placing marketing at the organization's highest level will assure it has the authority to influence all aspects of the company's operation. Organizationally, marketing should provide direction to operations, sales, and product development because of the direct impact it has over each of these functions. Since this would be too much of a change for some companies, the idea of separating marketing from sales and elevating it to the senior executive level should at least be considered.

Continuing to ignore the importance and power of marketing will hurt the company and keep the business from ever reaching its full potential. Without the development and implementation of an effective marketing strategy, any level of success achieved will be short-lived and the company will forever be in the shadows of the likes of Apple, Samsung, Pepsi, and others who understand how to use marketing to achieve success.

Television Advertising: The Internet's Next Victim

2010-06-21T06:50:00.000-05:00

"[Companies] must be prepared for major change in the future, and you must start now. If someone else's revolutionary innovation catches you unawares, you must abandon what made you successful and take an entirely different course immediately." - Peter Drucker (1973)

I'm continually amazed at the way the internet has changed - and continues to change - the world of business. Many of the changes appear to happen fairly slowly and are not readily apparent until well after the shift has occurred and left companies that didn't see it coming in serious trouble.

Lately, I've noticed a change in advertising that is affecting ad agencies, producers of consumer products, and television networks. The internet is providing virtually free access to existing and potential customers - a situation that with the exception of a few isolated instances, had never before existed.

Seeking Out Commercials

Companies are starting to take their ads to sites like YouTube and, if successful, can reach millions of people for free. As an example, a recent Coca-Cola Happiness Machine ad has had almost 2.4 million hits since being uploaded. And since people are actually seeking out this video (and others like it), it's really falls into the category of indirect advertising, because it entertains as much as it sells.

This situation has many implications for those involved in making and airing commercials. Television networks now face a serious threat that will most likely put downward pressure on rates for air time. Advertisers now have somewhere else to go to air their commercials and, although the ads have to be creative and produced well enough that people will want to watch them, the money saved in airtime charges can more than pay for extra production costs.

For the television networks, it can mean a serious hit on revenues in the future, which is one of the reasons that has led to the battles between the networks and television subscription providers. The networks can not count on ad revenues into the future to cover their costs and meet earnings targets. To make up for lost future revenues, they are asking for more money from the subscription providers that want to carry their channels. To read a blog post on the increasing tensions between the networks and subscription providers, click here.

Length No Longer An Issue

Another result of the birth of indirect internet advertising is that it no longer limits commercials to 30 or 60 seconds (the Coca-Cola video runs 2:03). Fashion house Donna Karan has produced a "mini-film" entitled, Four-Play with Christina Ricci that is really nothing more than a 2:09 commercial. The ad, which has not (and was never intended to) run on television, has had several hundred-thousand hits on a variety of fashion websites since its "release." This type of advertising is becoming very popular in the fashion industry.

A final thought that comes to mind about this situation is the fact that it's much easier for advertisers to track the number of views its commercials are getting. Television ratings services and subscription providers can report the number of television sets that were tuned to a particular station at a particular time a commercial aired, but there is no certainty that people didn't walk off or even paid attention during the commercial. The growing use of DVRs has also made it very easy to skip ads to get back to the show. When someone hits a video on the internet, on the other hand, it is pretty well certain that they are watching it.

Staying Ahead Of The Curve

Although it has been reported recently that television ad rates have returned to pre-recession levels, there's no telling what lies ahead for the networks. One thing for sure, though, is that the television advertising industry is changing. Just like other changes that are occurring - or will occur - because of the internet, it's vital for companies to pay attention to the world around them and be extremely sensitive to the subtle shifts that without warning can turn into whole-scale changes to the business environment. And as fast as things are changing in today's world, falling behind is not something that a business wants to do.

Call Center Focus: Serving or Selling?

2010-06-17T06:58:00.000-05:00

There was an interesting article in the June 7 WSJ [link] about efforts to improve the quality of service provided by call centers. My first reaction was "it's about time" as the article described efforts by some businesses to emphasize the quality of service more, and the quantity of calls handled per agent less. As I read on, however, I concluded that some companies still don't understand the concept of customer service.

Focusing on the Wrong Lever

I spoke at a call center conference in Europe last year and was disappointed - although not really surprised - to learn that the industry's main (and virtually only) focus continued to be cost-cutting with little or no emphasis on quality. The main topic of my presentation was related to increasing competitiveness by focusing on higher quality services at lower costs than their customers (i.e., the companies that contract their services) are able to do themselves. The basic premise of the talk was, if a call center established a clear and consistent purpose, took care of and invested in its team members, continually improved its processes, and focused on its customers (those whose calls they handled), it would dominate the market. Based on my personal experiences with call centers as a consumer since the conference, however, I don't think my message was accepted.

I don't totally blame the call centers for this misplaced focus. These companies have responded to pressure from their direct customers to continually reduce the price of service, and have been forced to cut costs or die. In Portugal, for example, the entire industry has been under attack by competitors in low cost countries where wages are lower. The reduced prices offered by competitors is resulting in a loss of business for Portuguese companies on a daily basis.

Whatever internal problems the industry is facing, though, I can't think of anyone who hasn't had at least one frustrating encounter with a call center agent. In fact, according to the article, 68% of people surveyed had stopped doing business with at least one company in 2009 because of poor service.

As I read the article, I did find it refreshing to learn that some companies are starting to understand the link between customer service and increased business. As an example, in an attempt to increase customer loyalty, American Express has begun shifting the focus of its agents toward the level of service provided rather than the quantity of calls handled.

Do They Really Understand?

Most people do understand that financial benefits to a company are the result of customer satisfaction. Statements in the article about increased loyalty leading to "a bigger share of the patient wallet," and increasing call center resources to upsell or "retain customers and sell higher-priced services," however, made me realize that many companies still don't comprehend the importance of, and reasons for, taking care of customers.

Looking at it as a simple cause and effect relationship, the cause is making customers happy and the effect is increased revenue. Like any cause and effect situation, however, one cannot focus on the effect. Attempts to increase business will not lead to happier customers and, therefore, will not result in actually increasing business. High pressure sales tactics from call center agents will not satisfy customers who call, but judging by some of the comments in the article, it's clear that satisfying customers is not the objective of some of these companies anyway.

I can't imagine how angry a customer will get when an agent listens to his or her problem and responds by attempting to sell more of a company's products or services. The situation could get downright ugly.

Internal or External to the Company - It's Still a System

One of the biggest problems with call centers is that they are often operated as separate entities from the business. The producer or service provider causes the problems for customers that the call centers are expected to resolve. When I asked several people at the conference about feeding information about the problems encountered back to their customers, I was told that it was not normally done (to be fair, I only talked to a small percentage of the conference's attendees). During the discussion, I found that there is often so much pressure to process calls that no valuable information is recorded and fed back to the business to prevent similar problems from recurring in the future. This practice results in losing a significant amount of valuable information for problem-solving.

Whether a company handles its own call center or contracts it to an outside agency, it is still a valuable part of its system. Although call centers need to take responsibility for satisfying customers who call with problems, the real improvement comes from providing a higher level of quality in the first place. The better the quality of products or services provided by the producer, the lower the volume of calls to the call center, making more time available to handle those who do call (provided that lower volumes do not mean laying off agents).

If Only . . .

To be fair, some of the companies referenced in the article do seem to understand that better customer service from call center agents leads to more satisfied customers which, in turn, leads to more revenue for the company. Others seem to think that skipping steps will lead to the same results. Unfortunately, these companies will probably find out the hard way that it won't.

The more I learn about call centers, the more I wonder where we would be today if the obsession all along had been with quality improvement rather than cost-cutting. My guess is that there it would mean a significantly fewer number of people in the world needing blood pressure medication.

A Systems Approach to Business - Part 3

2010-06-14T10:55:00.000-05:00

Note: This is the third part in a three-part post on the subject of systems thinking in business. To read the first two posts, go to Part 1 and Part 2. To download the paper in its entirety, please go to the downloads section of www.praecedogroup.com.

Defragging the Company

Moving focus from individual components to the overall system requires a significant amount of commitment and patience by the company's leaders. The steps to begin the process of defragging a company include the following:

Promote the Generalists: Move leaders from specialists to generalists to increase understanding and leadership of, people, information, material, products, and services- how they flow and work together to serve customers;
Coach & Mentor: Coach and mentor people to increase the level of understanding throughout the company regarding how each job supports other areas in the achieving the fundamental purpose. Those who work in support areas need to clearly understand that they exist solely to support the company's main processes that serve customers (which, by the way, doesn't make them any less significant to the company).

When done correctly, value stream mapping (VSM) is an excellent tool to help clarify the company's high level system, including the interactions of people and teams;
Enable Relevant Feedback: Implement a feedback system (e.g., a 360° system) that includes input from a person's internal customers, and is focused on improving performance - rather than documenting and blaming for poor performance;
Clarify Expectations: Set objectives based on supporting achievement of high-level (companywide) objectives and tie incentives to company or division performance - or, if done extremely carefully, based on success in supporting improvement efforts. Clarify expectations regarding participation in change initiatives and improvement activities and focus efforts on the company's overall success - create an obsession for satisfying customers.

As an example, a reward system for the plant managers in Situation #3 from Part 1 based on companywide results rather than individual plant results can lead to improved teamwork and cooperation between plants, and improved results for the company.

It's the Big Picture that Matters

Since there are few, if any, who would argue that company performance matters more than individual or department performance, it becomes a question of whether individual performance can be accurately measured as a contributor to company performance. Although it's perfectly natural to want to evaluate how much value an individual or team is contributing, most organizations are far too complex to do it with simple, one-dimensional measures. Most people are intelligent enough to do what it takes to meet virtually any goal or make any measure look good - even if it detracts from overall company performance. There are unfortunately numerous examples over the last several years of unethical or illegal behavior driven by internal or external company measures. Putting these examples aside, however, I truly believe that most people care about the success of the organization but have learned what to do to survive in today's business world.

Fragmented thinking is one of the biggest barriers to long-term success for a company. Moving to systems thinking requires a fundamental shift that many will be unable to do. Communicating the vision, clarifying expectations, and continual coaching must replace dictating and obsessive measuring and evaluation of people as a management style. If you've hired the right people and are consistent in your approach, your move toward systems thinking - as measured by continually improving financial results - will occur.

A Systems Approach to Business - Part 2

2010-06-10T06:48:00.000-05:00

This is the second in a series of three posts on the subject of systems thinking in business. To read the first post, please click [here]

Why We Fragment

I could cite many more examples in addition to those listed in the previous post where goals set for individuals or teams resulted in fragmenting the company and compromising results. Although fragmenting is destructive to organizations, it continues to be used for a variety of reasons:

Simplicity: It's much easier to manage an organization by breaking it into components than to comprehend and manage the whole. For example, holding a supply chain manager accountable for reducing material costs is easier than setting a total cost objective (which includes accounting for factors like incoming inspection, customer returns related to supplier quality, inventory carrying costs related to increased leadtimes and late deliveries, etc.). From a systems perspective, however, total cost much more accurately measures the supply chain's contribution to the company than does material costs.
Lack of Trust: Micromanagement - which is unfortunately very common in organizations today - results from a lack of trust in people, and cannot coexist with systems thinking. Leading from a holistic perspective requires relying on vision, clear expectations, delegation of responsibilities, and encouraging people to support other areas, rather than setting easily measurable goals and dictating how work is to be done. People must be given the authority (as well as a method, training, and the responsibility) to improve processes - including the hand-offs between processes - without detailed input from supervisors.

Another factor that leads to fragmentation is a lack of trust and patience that the organization will achieve targets without knowing that the components are meeting targets. Even if there is no proven relationship between the targets set for individuals or departments and the targets for the organization, people feel like they're being proactive when they can measure something. And, as mentioned above, implementing an indicator that accurately measures a person's real contribution to the system is difficult and expensive to maintain;
Functionally-Focused Leaders: Leaders who lack experience outside of their own function have trouble clearly understanding how their areas support others in the organization. As an example, a CFO who implements a system that improves productivity within the finance team but causes additional work for other parts of the company does not understand the role of finance within the organization.
Layoffs: Nothing can make people worry less about the company and more about their own jobs than a round of layoffs. When layoffs occur, people turn their focus to pleasing the boss instead of pleasing internal and/or external customers, and will do whatever it takes to survive, even if their actions do not support the organization's performance. Unfortunately, layoffs have become commonplace in U.S. organizations and the practice continues to fragment companies.

Many people know of no other way to manage a company than to break it into "manageable" pieces, but experience continues to show that the practice leads to suboptimal results. Continual efforts throughout the organization to understand (see figure 1) and continually improve the system will yield much higher returns than worrying about measuring people and individual teams.

A Systems Approach to Business - Part 1

2010-06-08T07:55:00.000-05:00

Note: This is the first in a series of three posts on the subject of systems thinking in business. Systems thinking is an critical subject for organizational leadership that cannot be adequately covered in a single post.

"If you try to take a cat apart to see how it works, the first thing you have in your hands is a non-working cat." Douglas Adams

In the most basic sense, an organization is a continually developing system of people, processes, equipment, and sub-systems working together to achieve a common purpose (the key word for this discussion being 'system'). Like any organic system, organizations are complex and need to be managed as a whole in order to achieve the purpose. Efforts to break a company apart and focus on individual elements can negatively affect the balance and interfere with success by creating competition and fragmentation between components.

Although most people in business would agree that the performance of the company is more important than that of individuals or teams, the way many organizations are managed achieves just the opposite. For a variety of reasons, leaders inadvertently fragment organizations, and set individual or team goals and objectives that often interfere with long-term success.

Consider the following:

Situation #1
In an attempt to reduce material costs, an incentive program for the supply chain team is implemented with rewards tied to containment and reduction of costs. The program succeeds in reducing material costs but leads to increased production costs, customer returns, shipping delays, and warranty expenses due to the purchase of substandard materials and longer supplier deliveries.

Situation #2
Sales managers are rewarded based on revenues generated from the regions they manage. The sales manager in Scandinavia has a significant opportunity with a new customer but, to secure the business, needs a good deal of technical assistance from the sales manager in France - who is very knowledgeable in this customer's particular application. Although the French sales manager wants to help, he feels he can't afford to spend time on an activity that will not generate sales in his territory.

Both sales managers end up barely meeting their targets, but the company misses the opportunity to secure business from a new customer. Also, teamwork between the sales managers has been damaged.

Situation #3
Plant managers in a global manufacturing company are measured and rewarded on meeting EBIT targets for activity in their plants. Plant A has more demand than capacity, while Plant B has more capacity than demand. The manager of Plant A decides to buy products from the outside to meet demand. In order to meet the EBIT target, however, he orders product from a competitor instead of Plant B because of a lower price (the manager of Plant B priced the product high enough to assure the order wouldn't negatively affect his plant's EBIT).

As a result, the manager of Plant A met his targets and received a bonus while the manager of Plant B did not. Because Plant B did not meet its targets, the company as a whole failed to meet its targets. Teamwork between each of the plants, which was already strained, has deteriorated further.

There are numerous examples like the above where goals or measures encourage behavior that fragments the organization. Although it seems perfectly logical to evaluate performance of a team member on a measure like EBIT or sales revenues, it can easily cause someone to act in a way that is detrimental to the performance of the organization, as a whole.

Organizations are far too complex to objectively, accurately, and easily evaluate an individual's performance. Extreme care must be taken when setting objectives and basing rewards on achieving individual targets.

The more one adopts systems thinking and understands how it is important to continually focus on improving the overall system - especially the hand-offs between people and teams - the easier it is to abandon traditional measurement and reward systems and move to a more holistic approach to leadership.

Speeding Up New Product Development

2010-05-31T14:53:00.000-05:00

As we emerge from the worst economic downturn since the Great Depression, it is clear that speed will be a critical competitive advantage for businesses. Companies that are flexible and able to adapt quickly to customer demands will be the most successful as the recovery continues.

When it comes to developing new products, companies can no longer afford long cycle times or introducing products that customers do not want to buy. Quality will also be a given, as people will no longer expect or accept problems with new products. This means that companies will need to put a renewed focus on the process for developing new products. Success awaits those organizations that are able to frequently and consistently introduce high quality, reliable products that satisfy the needs of the market.

Lean for New Product Development

There are many companies that practice lean methods for product and service processes but fail to apply the same type of thinking to the development of new products. Like any process in business, attacking waste in new product development will benefit the company through increased revenues, lower costs, and higher customer satisfaction. Also, the faster an organization can turn ideas into new products, the faster its investment will produce an income stream for the company.

I have worked with many companies over the years to improve the process for developing new products and services. The approach to improve the quality, costs, and cycle times for new product development is similar to applying lean to a manufacturing process in that it requires high levels of systems thinking and teamwork, and consistent focus on the customer.

Some of the best practices I have seen from companies that have made significant improvement in new product development include the following:

Customer Obsession: The entire process is based on the customer - which, doesn't necessarily mean directly asking customers what they want and building products based on the feedback. When it comes to products, customers can only convey what they want based on what they have received in the past. Since they really do not know what is possible, they will rarely provide direct feedback for innovative products.

Understanding the customer's frustrations with your (and your competitors') products, and why and how they use the products will result in much more clarity regarding the customer's fundamental needs; and it is in the fundamental needs where the real value lies.
Team-Based Development: Representatives from every area affected by the introduction of a new product are actively involved throughout the project. In a typical company, this means, as a minimum, including people from engineering, marketing, operations, procurement, quality, and finance.

Having all areas involved throughout the project helps avoid potential problems by discussing and addressing concerns as the work progresses. It also helps each area assure the necessary processes are ready when the product is released, and to confirm that the processes are designed to protect the needs of the customer.
Project Management: New product development projects are led by people with project management capabilities. Typically, new product development is a cross-functional activity involving effort from marketing, R&D, engineering, manufacturing, and other areas. Because of this, the person responsible to manage the project does not need to an engineer (in fact, assigning the role to the engineer - or anyone on the team - can distract the person from performing actual design work). The project needs to be someone who is organized, able to keep the work progressing, and with enough authority to request additional resources or project scope changes, when necessary. Depending on the size and design of the organization, this can consist of a single, full-time project manager or a project management office (PMO) that can handle multiple or cross-divisional projects.
Logical Organization: To increase the focus on customers when developing new products, some companies have moved the R&D function to report to marketing. Others have combined engineering and operations to improve communication and teamwork between the two areas. The key is to understand where the current organization interferes with success and to have the courage to make changes that will improve the situation.

Some organizations physically relocate team members on a temporary basis in an effort to assure clear and continual communication throughout the project.
Knowledge Management: Systems that improve organizational memory can significantly reduce new product development time. Without a system that collects design, testing, and customer information, extra costs and delays can occur because of redoing work that has been done in the past.
Process Simplicity: The development process is simple with very few approval gates. The team clearly understands their scope and is given the freedom to develop and qualify the product within these limits;
Patience: Improving quality while reducing costs and cycle time for new product development requires consistent focus, commitment from the company's senior leaders, and a good deal of patience. It is a continual process that, similar to improving a manufacturing process, consists generally of many small improvements that add up over time to significant improvement. Conducting post-mortem reviews of projects can provide valuable feedback regarding delays, cost overruns, and problems in order to improve future efforts.

Designing a product people want to buy is only one part of the equation - doing it quickly, reliably, and assuring that problems do not occur after release makes up the rest. There is significant investment involved in attempts to turn ideas into profits, and the better this process operates, the better the return on the investment will be.

Satisfying Internal Customers: It's Still Important

2010-05-24T11:06:00.000-05:00

What everyone in a company does can be reduced to one of two functions: to serve the customer or someone who does.

W. Edwards Deming

One of the most basic but difficult philosophies to ingrain into the culture of an organization is the internal customer concept. The silo mentality is so common today that it interferes with the ability to focus on the needs of anyone who is in another part of the company. The level of distrust that exists tends to be so high that we feel others will take advantage of us if we focus on making their jobs easier (or that making others look better will in some way jeopardize our own jobs by making us look worse).

I once facilitated a lean project with a technical group in a global organization. When I asked why there were no representatives from the operations team (who directly received the output of the technical group), those in the meeting commented that the people in operations were lazy, did not understand what they needed, and would ask for anything that would make their jobs easier without regard to the effect it had on the technical group. The discussion identified a serious problem in the organization that had to be resolved before the lean initiative had any chance of being successful.

Looking at it Objectively

Since very few jobs deal directly with external customers, it stands to reason that most people only work to serve internal customers. If people are unwilling or unable to satisfy their internal customers, the organization has very little chance of satisfying its external customers on a continuing basis.

If the organization is truly committed to satisfying customers, the people in finance, IT, maintenance, human resources, and many other parts of the organization must develop a clear understanding of how the work they do impacts the external customer by serving internal functions. Without an emphasis on internal customers, these same groups can begin to think that the work they do is an end in itself. This captured market mentality - believing that others have no choice but to accept the output provided - often leads to process changes that reduce costs for these groups without regard to the effect on internal customers.

Perhaps the best example I've seen of a company that clearly understands the importance of internal customers is the inverted pyramid at Nordstrom. The pyramid (shown on the Nordstrom website) depicts the organizational structure with customers at the top and each successive layer supporting the one above it. As shown in the figure, customers are supported by sales and support people who, in turn, are supported by department managers, etc. The objective of the pyramid is to make it very clear that customers are at the top of the company's priorities and the job of everyone is to support those who directly serve customers.

Achieving an Internal Customer Focus

There are a number of steps to achieve an internal customer focus within an organization. The obvious first step is to assure that the company's senior leaders believe in its importance and are committed to making it happen. If the company has poor teamwork and/or a number of functionally-focused leaders, there is very little chance that they will understand or be concerned with those in other parts of the organization.

Beyond assuring a level of understanding and commitment from those at the top of the organization, the following steps will help institute an internal customer focus:

Encourage open communication with internal customers and suppliers on how to improve the quality of what is provided to external customers;
Talk with people at all levels to better understand the reasons why a focus on internal customers does not exist. The interviews are best conducted by someone outside of the organization if the level of fear and distrust within the culture will prevent people from openly expressing their thoughts;
Discontinue the practice of promoting people who do not understand the company's overall system and how the work performed by the teams they lead is used to help others satisfy external customers. Leaders who are generalists tend to accept and practice the internal customer concept more than those who are specialists and focus more on their functions than the company as a whole;
Include internal customer input in feedback systems and hold people accountable for continually improving the products and services they provide internally;
Continually coach team members and lead by example;
Be patient and consistent. Like any change initiative, shifting the culture to increase focus on internal customers can be a long-term process that will be tested over and over again as the change occurs.

I have found that, when facilitated effectively, value stream mapping sessions can be very beneficial in communicating how the output from one function becomes the input for another. It also provides a method for identifying the problems that occur in the hand-offs between internal suppliers and internal customers.

Shifting the culture to one that is focused on satisfying internal, as well as external, customers often results in the identification of deeper cultural issues that need to be addressed before success can be achieved. As these issues are resolved, however, the improvements in teamwork and communication will translate directly to the customer in the form of improved products and/or services.

The Revolving Door at GM

2010-05-11T14:13:00.000-05:00

General Motors CEO Edward Whitacre is at it again. Apparently frustrated with the company's lack of U.S. market share growth (it has actually fallen 0.4% since January), Whitacre replaced VP of Marketing Susan Docherty with ex-Nissan and Hyundai marketing chief Joel Ewanick [story link]. Ewanick now becomes the fourth person to lead marketing for the company in the last 12 months.

Besides the obvious effects on motivation created by demoting or firing someone, the fear that can ripple throughout the organization when it occurs over and over again can be immense. The rapid pace of changes in leadership positions can cause significant damage to an organization that is in desperate need to pull together and focus on rebuilding its health. It's important to note that executive-level replacements are the only ones reported - there may (or may not) be turnover in other positions that did not make the news.

The Destructive Effects of Fear

The potential effects of the fear created by this type of situation can include:

Teamwork: When people fear for their jobs, they tend to shift into survival mode and focus more on their own survival than the company, as a whole. When this happens, the level of political gaming within the company often significantly increases;
Risk: People tend to be much less willing to take risks if they feel that failure can cost them their jobs. And a careful approach to business and markets is definitely not what GM needs right now to resotre its competitiveness;
Creativity: People need to feel relaxed and comfortable in their jobs to develop and use their creativity, while prolonged periods of stress has been shown to have the opposite effect. Survival and growth in today's highly competitive auto industry will require GM to become much more creative and innovative in its products and processes;
Speaking Up/Voicing Concerns: Fear can crush the willingness to disagree with or questions someone higher in the organization.

I understand that Whitacre is trying to create a sense of urgency in a company that has apeared lethargic for many years. Developing a clear vision with aggressive objectives, getting in front of people to build enthusiasm and urgency around them, and removing the barriers that interfere with success, however, is much better than firing people to get this point across.

Short-Term vs Long-Term

Ewanick is apparently a highly talented marketing professional with an impressive resume. However talented he is, though, I wonder it it is possible to develop programs that will quickly increase GM's share of the U.S. market. A clever ad or marketing campaign may increase sales in the short-term, but sustaining sales and market share increases can only occur by getting close to customers and developing products that meet their needs and wants better than any other automaker. This is not something that can happen within a few months.

Don't Ignore the Culture

I once worked in an organization where the CEO regularly fired senior leaders (among others) for "underperforming." As a result, fear and backstabbing became the norm as people worried more about preserving their own jobs than they did about working together to improve the company. It was a truly bad experience.

GM has suffered from a compromised immune system for many years, and to become competitive again, it must restore its health, which requires improving its strategies, systems, processes, and culture. These things can't be done without a certain amount of stability at the top. Continuing to hire, fire, and demote senior leaders can frighten and confuse the organization, something that GM really can't afford to let happen in its current weakened state.

Supply Chain Management: Misunderstood & Misapplied

2010-05-03T17:03:00.000-05:00

Like so many excellent concepts in business over the years, supply chain management (SCM) will probably never live up to its potential. Too many people are unable to broaden their understanding beyond basic procurement and move toward a more systems approach required to truly optimize a company's supply chain.

What is Supply Chain Management?

The American Production & Inventory Control Society (APICS) defines supply chain management as the design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand, and measuring performance globally. This definition inherently assumes that a systems thinking approach is necessary to be successful.

The suppliers that provide materials, products, and services to a company should be managed and optimized just as if they were internal to the operation. Since they represent the starting point for a company's operation, they potentially affect everything throughout the value stream and ultimately what is provided to the customer.

To be truly effective, SCM should focus on improving quality, cycle times, and total costs in dealings with suppliers. In theory, the process should involve understanding and optimizing the entire value chain from the very first level suppliers (those in which the company may never deal with directly) to the end customer. Since it can be overwhelming to fully understand and take the time to build relationships with a lengthy supply chain, a more practical application of SCM involves working with a company's first tier suppliers and customers.

The way that SCM is approached in most companies, however, is to solely focus on negotiations with first tier suppliers on price and payment terms, which have very little, if any, effect on quality and cycle times, and only barely addresses the subject of total costs.

Total Costs

The total cost of dealing with suppliers involves so much more than price and payment terms. Far too often, though, companies - even those that claim they follow an SCM approach - focus only on these aspects of the relationship while virtually ignoring the other factors that can have a much greater effect on costs (see table below).

Improving the total costs associated with the supply chain involves:

building close relationships with suppliers (based on trust, mutual benefit, and clear communications);
continually working on the factors that reduce total cost (see above table);
understanding and optimizing the systems of logistics for products and services procured (inbound) as well as those provided to customers (outbound) that are consistent with the company's operational and marketing strategy;
working with customers to understand how the supply chain affects their operations.

Once the supply chain strategy is developed, implementation begins initially with the first tier and slowly and continually expands to cover more of the supply chain. How much of the chain depends on many factors, including the size and complexity of the supply chain and how much of it can be effectively managed.

A Generalist Approach

The topic of SCM is far too complex to adequately cover in a relatively short blog post. The point is, though, that effective supply chain management involves so much more than negotiating price and payment terms with key suppliers. It requires developing close relationships with customers to understand how the supply chain contributes to their needs, and systematically implementing improvements throughout the system to reduced waste and improve performance. Those directing an organization's SCM efforts need to be systems thinkers who are much more adept at leading improvement efforts than negotiating contracts with individual suppliers.

Is Comptetitive Intelligence Worth the Effort?

2010-04-26T16:56:00.000-05:00

How important is it to keep an eye on your competition? I was thinking about this question as I read an article on competitive intelligence in the April issue of Inc. Magazine [link]. Part of Inc's How To Guidebook series on business basics, the article presents several easy ways for companies to gather intelligence on competitors. As I read the article though, I couldn't help wonder if focusing on competitors is really worth the effort.

Okay, there are some obvious reasons for knowing what your competitors are doing, but I've seen many companies take it to extremes and become so obsessed with following their competitors that it took attention away from running the business.

Lead, Don't Follow

You're in business to serve customers. If you continually provide better products and services to your customers, you won't have to worry about your competitors. The key is to develop a deep understanding of your customer's fundamental needs - i.e., the value your product or service truly provides for the customer. Clearly understanding this improves your ability to create innovative ways to meet the customer's needs - something that won't happen when you spend too much time studying your competitors.

Too much focus on competitors tends to limit innovation because it directs attention toward meeting or beating what competitors do rather than finding ways to improve the value customers receive by doing business with you. There is a strong tendency toward a "me too" mentality when you worry more about what your competitors - instead of your customers - are doing.

In other words, when you focus on your customers; you lead. When you focus on your competitors; you follow.

As an example, when Saehan developed the world's first MP3 player, it did so based on the customer's fundamental need to listen to music from anywhere quickly, easily, and comfortably. Until that time, the only way to have portable music was to use a portable radio (where one can't personally select the songs) or a portable CD player (which limits the amount of music based on the number of CDs the user is willing to carry). If Saehan focused on competitors, it would have put its efforts toward developing a better or cheaper portable CD player. Instead, it focused on the customer's fundamental needs and introduced an innovative product that changed the market forever.

So, I guess I've answered my original question. Although it's probably okay to have a basic idea of what competitors are doing, it can easily get out of hand and interfere with innovation and customer-focus. Becoming obsessed with customers instead of competitors, however, can lead to the development of innovative products and services that will result in competitors following you.

Keeping it Simple: The One-Page Strategic Plan

2010-04-19T08:07:00.000-05:00

There is probably nothing in business more valuable than good strategic planning. And there is unfortunately nothing that wastes more time than bad strategic planning. Organizations often spend a lot of time working in an annual planning process only to have the plans quickly fade away until the following year's process begins. Because of this, many companies get frustrated and drop the process altogether rather than find a way to make it more effective.

An effective strategic planning process enables companies to take control of their future and remain focused on the critical areas that will result in sustained periods of growth and success.

The Basics

By definition, strategic planning is a process by which an organization's leaders define and implement the strategies to achieve the company's fundamental purpose. The output of the process is a set of high-level objectives (i.e., critical improvement areas) and initiatives (specific actions to achieve the objectives). Inherent in this definition is the ability to turn strategy into action. Although, by itself, the planning process tends to improve communication within the management team, increase knowledge of the company and its markets, and cultivate teamwork, it is the action - i.e., actually achieving the objectives - that creates value for the organization.

Elements of an Effective Process

To be effective, it is helpful to clarify and understand the expectations of the planning process. As mentioned above, the process must absolutely include a basis for action. The plan must also provide a clear and consistent focus, a platform for involvement of team members, and a method for communication.

Although the depth, frequency, and specific process used will differ for every company, there are some basic elements that greatly increase the chance for success. First of all, the organization must have a clearly defined purpose, including a mission (which, year-after, year, keeps the plan grounded) and a vision (which provides a clear direction for planning). Objectives (targets along the way) and initiatives (projects to achieve the targets) are the components of the process that bring the vision to reality.

Also included in an effective process are key indicators, which measure the organization's progress in achieving the objectives. Because of this, it is absolutely necessary for the indicators be directly linked to the high-level objectives. If the indicators are not linked to the objectives, then you either have the wrong indicators or the wrong objectives.

The Process

The basic process for creating the strategic plan is as follows:

Review/create the company's purpose;
If necessary, determine the overall focus of the plan based on the organization's most critical needs;
Develop key objectives to be completed over the following 1-3 years (depending on the organization's normal planning horizon);
Utilize (or create) key indicators to measure progress on the objectives developed above;
Identify initiatives (or projects) that will enable the organization to meet objectives developed in step 3 and assign a leader to each;
Communicate the plan throughout the organization;
Conduct periodic reviews to assure that the initiatives are progressing as expected and, if so, whether they are actually achieving the key objectives;
Take action when necessary (based on the review) to get the organization back on track toward achieving its key objectives.

The One-Page Plan

The steps presented above require a lot of reflection and discussion in order to assure that the plan and associated actions address what is critical for the company. Once the plan is developed, it can be communicated throughout the company in a one-page format (see example below). The one-page summary is a simple document that is backed by many hours of reflection, debate and discussion on the direction of the organization. As simple as it looks, though, the summary is an important step toward gaining understanding, acceptance, and involvement throughout the company.

More Trouble for France Telecom

2010-04-15T10:47:00.000-05:00

It appears that the situation at France Telecom regarding the rash of suicides over the last two years has resulted in more trouble for the communications company. Late last week, French prosecutors ordered a preliminary investigation into whether the company should be charged with involuntary homicide over its management practices, which have been blamed for 35 suicides over the past two years. [story]

Besides the obvious sadness surrounding the situation, this action by the French government opens the issue of the accountability of companies over the way its managers treat employees. In the U.S., there have been numerous trials related to harassment and mental anguish caused by companies and/or individuals in supervisory roles. To my knowledge, though, there has been none related to something of this magnitude - holding a company accountable for the suicides of its employees.

I'm sure many French companies (as well as French divisions of global companies) will be watching the progress of this investigation to better understand what effect it may have on their own situations.

There has been much written about the positive effects that management practices can have on employee productivity, absenteeism, and company profitability. We don't spend a lot of time, however, on the stress, depression, and other negative effects that company culture or management style can have on employees.

Whether or not the suicides are found to be the result of company practices (I'm sure the investigation will take years to complete), I hope that this situation highlights the need for all organizations to focus on creating a positive environment for employees and the benefits it can bring to all stakeholders.

France Telecom executives have begun to address some of the cultural issues at the company that are being blamed for the suicides. Whatever the outcome of the investigation, it is a sad situation that hopefully will never repeat itself.

Company Purpose and Shareholder Value

2010-04-12T07:39:00.000-05:00

What is the purpose of a company? It's one of those questions that has been debated since the beginning of the industrial revolution. So, is it related to shareholders? Customers? Employees?

While presenting at a conference a few years ago, I surveyed those in attendance to discover what they felt the purpose was for the companies for which they worked. 77% of the people who responded (243 of 315) chose money as the reason their companies existed (e.g., earnings, shareholder value, etc.).

The results were not really surprising since the financial side of the business often receives the most attention by senior leaders. Also, the actions taken in response to a decline in earnings tend to affect a greater number of employees than when the other parts of the business suffer.

Why it Matters

A company's purpose drives its business strategies, including direction, investment related to products and services, marketing, people development, and processes. On the highest level, the purpose drives the decisions regarding whether the company will compete on the basis of innovation, low costs, or product and service features.

A clear purpose also helps to motivate people by giving meaning to the work they do and build teamwork by providing a common focus. Without clarity, people will define the purpose in their own terms, resulting in internal battles and a breakdown in teamwork because of conflicting ideas regarding what the company is trying to achieve.

Is it Money?

Those who have read my book or other posts on this blog know that I believe a company's purpose should be focused on serving a need in society (in other words, providing something that potential customers value). Although it is important for any company to be financially successful, this is the effect - not the cause - of serving customers well.

For example, suppose a privately-held manufacturer of relief valves defines its purpose as, to help protect homes and lives by providing high-quality and reliable temperature & pressure relief protection. Further, suppose that the company's focus on offering highly reliable, easy-to-install valves at a reasonable price lead to dramatic success and growth. To grow further, though, the decision is made to take the company public.

Now that it has become a publicly traded company, does it make sense for management to change its purpose from protecting homes and lives to increasing shareholder value? In other words, should the focus now shift from customers to shareholders? Obviously not, but this is, in effect, what many companies have done over the years.

What Others Have Said

Peter Drucker wrote that the purpose of a business is to create a customer. In his book, The Practice of Management, Drucker wrote, "the profit motive and its offspring, maximization of profits, are just as irrelevant to the function of a business, the purpose of a business, and the job of managing. In fact, the concept is worse than irrelevant. It does harm. It is the major cause for the misunderstanding of the nature of profit in our society and for the deep-seated hostility to profit which are among the most dangerous diseases of an industrial society."

Many people may be surprised to learn that, during a March 2009 interview with the Financial Times, Jack Welch [link] referred to focusing on shareholder value as a dumb idea. Often considered as the creator of the shareholder value movement in business (a fact disputed by Welch), he added that, "shareholder value is a result, not a strategy," and that the main focus should be on employees, customers, and products.

Serve First, Collect Later

The point of all this is to emphasize the importance of developing (and sticking with) a clear purpose - and that it is not related to making money. Focusing on financial gain leads to short-term decisions and cost cutting that, although well-intended, tend to damage the organization's future. A focus on shareholder value may lead to satisfied stockholders (at least in the short-term), but dissatisfied customers and employees. A focus on the customer, on the other hand, can lead to happy customers, employees, and shareholders.

Fast and Flexible

2010-04-06T14:30:00.000-05:00

As we climb out of the worst economic downturn since the Great Depression, it's looking like success will come to those companies that are more flexible and can adapt to change more quickly than competitors. Although this has always been a competitive advantage for companies, it is quickly becoming a necessity for survival in the years ahead.

The problem this poses for many organizations is related to the fact that, as a company grows it tends to become slower and more resistant to change. With growth comes more people, more formalized policies and systems, and additional layers of management that all contribute to a slowdown in decision-making and interfere with the ability to do much of anything quickly.

Begin by Recognizing the Need

The problem for many companies is that they don't realize how slow they've become or that the lack of speed is affecting the ability to compete. Listed below are a number of activities where moving quicker can greatly improve competitiveness. When looking at these activities from strictly a financial perspective, it becomes clear that they actually cost the company when not addressed. Once an investment is made in a particular process - whether related to new product development, manufacturing, etc. - the company loses money everyday that the investment does not produce income.

New product development
Shipping products to customers
Building construction
Servicing customers
Integrating an acquisition
Expansion into new markets
Implementing a new ERP system

It is important to keep in mind that success in business requires more than speed. Quality of product or service must be continually improved along with improving cycle times. There are very few markets where customers will accept substandard quality even when the product or service is delivered quickly.

How?

In order to become more flexible and adaptive, companies must study their processes, systems, and cultures continually to identify where the delays and breakdowns occur.

On the process side of the equation, reducing cycle time requires mapping the value stream and identifying where the delays, breakdowns, and quality problems occur. This assumes, of course, that there is, in fact, a standard process. It is not uncommon for companies to have a variety of ways to perform similar tasks. Sometimes referred to as the "it depends" rule, improving the process first requires defining a standard approach for how the work is to be done - and making sure everyone follows the standard - before attempting to make improvements.

Working on the process issues to reduce cycle time tends to be the easy part of improvement. The culture must also be addressed to determine how open people are to changing processes, how effective communication is within the company, and basically why people do the things they do.

Removing the barriers that interfere with a company's ability to react quickly to changing market conditions will create a more flexible and adaptive - and profitable - company. The key is to keep speed and flexibility in the forefront of people's minds until it makes its way into the company's operating philosophy.

Success in this endeavor can put you in an elite group of companies that manage to remain fast and flexible regardless of how large they become.

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France Telecom & Employee Motivation

2010-03-30T08:01:00.000-05:00

France Telecom announced last week that it plans to begin basing up to 30% of a manager's bonus on social criteria, including job satisfaction of the people on the manager's team. The change was implemented as part of a plan to address the company's rash of suicides over the last two years. [story]

Many of the people at the company who committed or attempted to commit suicide blamed their actions on working conditions, forced transfers, or fear of job loss. In response to the problem, France Telecom's leaders have implemented training programs for managers and supervisors, and hired additional physicians, psychologists, and human relations personnel. Last week's decision to tie bonuses to worker satisfaction, absenteeism, and other people-oriented measures was the latest effort to deal with the problem.

Why Wait for Suicides?

My initial thought about this latest action was that it was a good move to improve the environment and working conditions at the company. In addition to stopping the suicides, it can result in improving productivity and quality of service.

Upon further consideration, however, I wonder why it would take a rash of suicides for a company to understand the need to hold managers accountable for the satisfaction of those who report to them.

It is the responsibility of anyone in a supervisory position to create a positive environment for those on his or her team. This includes coaching, motivating, and developing people, as well as creating an atmosphere that continually challenges people to improve. A good leader also has to truly like people. Although liking people does not necessarily make someone a good leader, disliking people definitely makes for a bad one.

Also, senior leaders must accept the responsibility to promote and hire only people with leadership capabilities into management positions, and commit to regularly develop the abilities of these people to become better leaders.

Remember Maslow?

Those who learned in management classes about Abraham Maslow's theory of motivation will undoubtedly remember his hierarchy of needs. In his book, Motivation and Personality (HarperCollins, 2006), Maslow theorized that people have five levels of needs, ranging from the most basic (physiological, safety, and love/belongingness) to the highest (self-esteem and self-actualization). Maslow further stated that people cannot be motivated by appealing to higher level needs when they feel their basic needs are not consistently met.

When applied to the workplace, it becomes clear that fear and other aspects of poor leadership keep people at lower levels - specifically, the need for safety and security. Change, innovation, and improving productivity, on the other hand, require people to be at higher levels. In other words, we will never achieve the type of environment that fosters quality, improvement, and dedication necessary for long-term success and growth without helping team members satisfy their lower level needs.

Unfortunately, France Telecom is learning this the hard way. Other companies can learn from their misfortune and create the type of environment that values employees. The results of such an effort will be rewarding, not only for workers, but for all stakeholders.

Is Change Management the Missing Link?

2010-03-22T06:49:00.000-05:00

I recently had lunch with a financial executive who expressed frustration with his company's lack of success with strategic initiatives. He told me that the initiatives tended to evolve from high expectations to disappointment to - in the most drastic instances, being abandoned altogether.

Among the initiatives he mentioned that had disappointing results over the last couple of years included projects related to reducing the product development cycle time, implementing lean manufacturing, and upgrading the company's ERP system.

It was very clear that the company's lack of success was not due to a lack of desire or interest. The management team spends a significant amount of time each year developing the strategic plan and creating initiatives to improve competitiveness. A manager or director is always assigned the responsibility to lead projects and a fairly detailed plan is developed for each initiative.

So What's the Problem?

The inability to successfully complete high-level initiatives is a fairly common problem for companies. Like many organizations, this company tended to approach strategic initiatives from a purely technical perspective, while ignoring the behavioral factors involved in change.

For most organizations, strategic initiatives involve a significant level of change. Whether it is a change in behavior or method of operation, success requires respecting and validating the human complexities involved, no matter how insignificant the change appears to be on the surface.

There are barriers to change in virtually every organization that interfere with successful completion of initiatives. These barriers can be personal (related to an individual's personal fear of change), political (resulting from the interactions and culture of the organization), or organizational (caused by policies and systems within the company). Recognizing the existence and extent of the barriers can greatly improve the chances to succeed with the desired change.

Planning for Change

It is important to include steps to address the barriers as part of the planning process for change initiatives. For example, if there is fear within the organization, steps must be taken to identify the causes and actions to reduce its effect on the initiative. The types of fear often associated with change include fear of job loss, fear of appearing ignorant for asking questions about the change, fear of retaliation for questioning the approach being taken, and others. Although it is virtually impossible to completely eliminate fear within any organization, it is important to understand where it can interfere with the change and minimize it as much as possible.

An Example

A global company with factories in several countries around the world created an initiative to implement a best practices process throughout the organization. The initiative included a kick-off meeting attended by the company's plant managers where the process was introduced and expectations communicated. Throughout the following year, though, very little sharing was done between plants and everyone pretty much operated as they had before the initiative was announced.

When I was called in to help with the initiative, I began with a series of interviews to identify barriers that existed within the company that could interfere with the sharing and adoption of best practices. From the interviews, it became clear that despite the importance surrounding the initiative, the company's culture actually discouraged sharing of information and accepting suggestions from people at other plants. The plant managers had been in their positions for many years and were regularly rewarded by acting independently. Many were selected for the position because of their strong, independent personalities, and had always been expected by senior leaders to be experts on pretty much everything related to the factories they led.

It quickly became obvious that the plant managers did not accept input from each other because of the fear of appearing less knowledgeable than one or more of their peers. Also, since the company's culture was highly competitive, people did not want to share information that would help improve another plant's results.

Resolving this problem required modifying the behavior of the senior leaders, coaching the plant managers, and changing the company's systems of measurements and rewards. It required a lot of effort and consistency at the senior level but eventually the initiative began to visibly progress and result in significant productivity improvement across the company.

In the above example, the process for sharing best practices and visible commitment from the top was excellent. All that was missing was a change management approach to the initiative. Once the barriers to change were identified and addressed, implementing the process became much easier.

Whether a company is implementing a best practices process, pursuing lean, or integrating an acquisition, it is vital that a change management approach is used to make sure the people issues (i.e., the barriers to change) are adequately addressed.

Change as a Competitive Weapon

As we slowly emerge from the worst economic period since the Great Depression, those companies that are able to adapt quickly to changing market conditions will be the most successful. Organizations cannot afford to waste time with initiatives that move too slowly or fail to achieve desired results. Making the effort to identify and remove the barriers to change within the company will greatly improve the level of success with initiatives while simultaneously creating more a flexible, adaptive, and profitable company.

The Future of Television

2010-03-18T08:38:00.000-05:00

Earlier this month, a number of viewers in the northeast missed the first 15 minutes of the Academy Awards broadcast because of a dispute between Disney and Cablevision Systems. The contract between the two had expired and, as the negotiation process got ugly, Disney pulled its signal from the system. After issuing statements characterizing the other party as greedy and not caring about its customers, both sides finally came to an agreement that allowed the signal to be returned just after the Oscars began.

This was the second high profile dispute between a television broadcaster and a cable provider. Fox and Time Warner had a similar battle late last year regarding the price of News Corp channels included in Time Warner subscriptions. From all indications, this is just the beginning as broadcasters watch revenue from advertisers shrink and look for ways to make up for the loss.

Is the Business Model Obsolete?

As tensions between the broadcasters and subscription providers grows, I can't help but think that the current model for the industry is quickly becoming obsolete. Broadcasters want more money for programming - subscription providers want more money for delivery of the programming - consumers want access to entertainment without paying more for their subscriptions. Something has got to give . . .

I'm definitely not a media visionary, but I'm guessing that, now that internet bandwidths are increasing, it won't be long before we start downloading our television programs from the internet and sending them to our televisions wirelessly. Although it's possible that we'll continue to pay companies like Comcast for subscription packages, it's also possible that we could end up paying the broadcasters directly through a monthly subscription or individually by the download.

The next five years will be very interesting to watch as another industry's business model becomes profoundly altered by the internet and the innovative and flexible companies take advantage of the opportunity to grow while those that don't significantly shrink or completely disappear.

Union vs Management: Who's At Fault?

2010-03-15T15:57:00.001-05:00

According to a story in Friday's Wall Street Journal, the airline industry is beginning to face another challenge to their survival. After years of concessions, union members are demanding wage and benefit increases which, according to airline executives, are going to seriously damage their ability to recover.

Same Old Story

Here we go again . . . union and management, each charging the other with being greedy and self-centered. We've seen it again and again and will unfortunately continue to see it in the future.

So which side is at fault in this situation? Who is driving down the organization's competitiveness by ignoring the other group's needs. In my opinion . . . it's both.

I'm not close enough to the airline negotiations to talk about their situation directly, so I'm going to approach the issue in a much more general sense. I have been intimately involved with several companies throughout my career that were unionized and, on one occasion, led a company where all but a very few of the workers belonged to a union.

In most cases, I have noticed that people on each side tend to approach negotiations with the objective of getting as much as they can rather than working toward an agreement that benefits both parties - in other words, the company as a whole. Throughout the process, each side tries to win while the other loses. Whatever happens in the negotiations, when the company doesn't win; everyone ends up losing.

It Doesn't Have to Be This Way

There are companies that resolved this issue and, as a result, have been very successful. After all, one of the most basic premises in business is the idea that an organization can only succeed over the long-term if everyone is focused on the same objectives. When one group is focused on its own interests, the other tends to follow suit and the company is never truly successful.

Whenever I worked in a unionized company, I spent a great deal of time on the relationship between union members and white collar workers. When I led an organization that was unionized, I invited a union representative to participate in strategic planning meetings because I felt that the person could play a big part in getting workers on-board with specific initiatives.

The benefits of including the union in the strategic planning process were huge. Besides the success achieved with initiatives that directly involved unionized workers, people felt that their opinions were respected and valued by the management team. Trust also increased because of the openness that was demonstrated by letting a union representative hear - and actively participate in - the high-level planning sessions.

It Can Work If You Want It To

To get to the point where the union vs. management situation becomes a thing of the past requires a lot of effort on both sides. It is critical that managers start making the union feel like a partner in the company, and for both sides to focus on what is best in the long run for the company as a whole. The chance for success diminishes greatly, though, if one or both groups does not truly want to improve the relationship. One act of distrust can quickly wipe out years of work to build the relationship.

With many years of concerted effort, however, it is possible to build up trust to the point where one company, instead of two sides, exists. And when the company reaches this point, great things will start to happen.

Berkshire's Future Management Tool?

2010-03-08T15:45:00.000-06:00

Projected Successor to Buffet Uses Termination List to Motivate

Every year, speculation increases as to who will one day succeed Warren Buffet as CEO of Berkshire Hathaway. According to an article in the February 27th issue of the Wall Street Journal, the most likely heir apparent at present is David Sokol, chairman of MidAmerican Energy Holdings Company and chairman/CEO of NetJets, Inc. (both are units of Berkshire Hathaway).

Mr. Sokol's record at MidAmerican has been impressive. He took over the company in 1993 and, since Berkshire Hathaway began investing in the company in 2000, earnings have increased from roughly $109 million to $1.7 billion. Results like this, along with Sokol's reputation as a deal-maker, and his close relationship with Buffet have increased the speculation that he will be the next Berkshire Hathaway CEO.

Many people wonder how the company will change when someone other than Buffet is in charge. The fact that he ahs been running Berkshire Hathaway since the mid-1960s and has built it from a small, unknown textile manufacturer to the 18th largest company in the world with 250,000+ employees makes discussion and debate about its future very interesting.

Leading Via a Termination List

With Sokol, we do get a glimpse into his leadership style through the book, Pleased But Not Satisfied, that he authored in 2007. The book presents his philosophy on a variety of business issues, including leadership. On the topic of managing people, he wrote that he maintains a notebook of the successes and failures of each person on his team. He uses the information to evaluate and rank each person in terms of whom he would terminate at any given time.

Although I've seen a number of different approaches to leadership over the years, I've never seen one that makes use of a termination list. In previous blog posts, I've written about the importance of being people-oriented when leading a company. I believe that an often forgotten responsibility of a CEO is to continually motivate, develop, and focus the efforts of people. If the leader is not fundamentally people-oriented, attempts to create the type of culture that motivates and unleashes the potential of team members will be a constant struggle.

Keeping a list of successes and failures for coaching purposes is potentially an effective way to develop people. Ranking people, based on the list, in order of expendability turns the list from a development tool into management by fear.

I'm sure that Mr. Sokol has some very talented people on his team. I can't help but think, though, that the fear created by the termination list results in burying some of the talent and motivation, discourages people from taking chances or setting aggressive goals for fear of failure, and has resulted in the loss of some potentially excellent workers.

In some way, the results Sokol has achieved at MidAmerican makes it difficult to argue with his approach. I believe a more open, servant leadership style, however, would lead to even greater results because when people are relaxed and secure in their positions, they are more innovative, less competitive with each other, and willing to strive for the impossible.

The Draw of Berkshire

It is Warren Buffet's reputation as a leader that gives Berkshire Hathaway first shot at many acquisitions - sometimes before anyone else even knows a company is for sale. Many companies actually approach Buffet when they are ready to sell because they feel comfortable with the way Berkshire treats companies (and the people working in them) after the acquisition. This gives Berkshire Hathaway the ability to target strong, well-run companies, while avoiding desperate and troubled organizations.

I'm not sure a CEO with a termination list will give an acquisition by Berkshire the same level of desirability.

An Easy Way to Reduce Corporate Espionage

2010-03-04T15:26:00.000-06:00

The thought of corporate espionage used to conjure images of insiders being paid by competitors to provide confidential information or hackers making their way into corporate intranets to gain access to cost or design secrets. Although these aspects of spying obviously exist, gaining access to privileged information is not that difficult. It may actually be as easy as hanging around a coffee shop.

When I write a blog post, article, or book, I often do it in a coffee shop (American - not Dutch). Over the last several weeks, while i was actually trying to concentrate on what I was writing, I realized how much confidential information is openly discussed over coffee. Among the surprisingly loud discussions going on nearby, I overheard the sales strategies for a pharmaceutical company, costing information for an instrument manufacturer, and exploration plans for a major gas producer. Fortunately for these companies, I believe spying is unethical, and I wasn't really paying attention anyway, but there is no guarantee that any of the other people sitting near me felt the same way.

It's a shame that we've gotten to the point where some companies would rather steal information than compete on the merits of their business strategies, but this is the reality of the world in which we live. People really need to be more aware of what they are talking about over a cup of coffee - especially when the foccee shop is near the workplace.

So for your own protection, please use coffee shops for discussions about personal topics, complaints about your boss, or politics, but keep confidential information where it belongs: behind closed doors.

Whole Grains and Happy Employees

2010-03-01T07:40:00.000-06:00

With all the recent news about layoffs, plant shutdowns, and product recalls, it's refreshing to hear a positive story from the world of business. Bob Moore, the 81 year-old founder of Bob's Red Mill, an Oregon-based producer of whole grains and related products, announced last week that he is turning the company over to the employees. [Story]

Apparently, Moore felt that the only way to maintain the focus that has made the company successful over the years was to give it to the employees rather than sell it to outsiders. He credits his success to a commitment to customers and employees and does not want that to change - even when he is no longer running the company.

Employees Really Are an Asset

Many companies talk about the value of employees, but with this decision, Moore has shown that he truly believes it. My initial thought when I read the story was how the employees must have responded when they heard that their contributions and efforts had been recognized. After further thought, however, my guess is that they already knew that they were valued and this was just another example of the type of culture Moore has created for the company.

We all need to learn from Bob Moore. People can do amazing things, but only if the company's leaders remove the barriers that interfere with motivation and action. This is not a difficult concept, but it cannot happen if the leaders do not truly value the company's employees. If respect for people is not part of the fundamental makeup of the leader, efforts to create a positive culture that motivates people will require continual effort and will never be fully achieved. And you do not need to give the company to the employees to make it happen. People know when they're appreciated - rewards are part of the equation, but money does not appeal to a person's intrinsic motivation. Appreciation, being heard, having control over the work, and contributing to something worthwhile are the things that really contribute to motivation.

I've bought Bob's Red Mill grains for many years because I like their products. From now on, though, I'll be thinking about how the product I'm buying was developed and produced directly by the company's owners.

Function Assessment: A Basis For Improvement

2010-02-22T08:16:00.000-06:00

Since becoming a consultant, I have had a number of companies ask for help evaluating an individual function or department. Whether following an acquisition or a change in executive leadership, the desire for an objective assessment of one or more functions has become a fairly common occurrence for companies.

In an effort to help with the process, I though I'd provide my basic approach for assessing the effectiveness of a department, function or team. The process can truly help with a company's internal issues, but must be done by an objective person who is not related in any way to the department being evaluated. Open and honest communication is a necessary component of the process, so it is vital that those involved feel that the person conducting the assessment does not have a personal interest in the outcome or the process will fail to achieve positive results.

It is absolutely essential to keep the process focused on improvement. Sticking to an improvement theme will help to the level of stress and resentment of those working in the function. The fact that you are dealing with human beings, however, will make it impossible to completely eliminate the distrust that is certain to exist. For this reason, it is important to spend time upfront - and throughout the process - clarifying your objectives and attempting to put those you are working with at ease.

Are Expectations Clear?

The first step in the evaluation of a particular function is to determine the level of consistency between the expectations from the organization's senior leaders and those of the local or department leaders. In many cases, I find that a gap in expectations is the cause of most of the problems. Improving a situation like this often involves improving communication through increased one-on-one meetings with the functional manager and/or formalizing some sort of personal planning process that documents objectives, planned actions in support of the objectives, and status of the actions.

Assessment Areas

After gaining an understanding of the degree of alignment between the expectations of the senior leaders and the functional manager, it is time to begin looking at other aspects of functional performance in order to gain a better understanding of the opportunities for improvement.

As mentioned above, it is extremely important to approach the assessment from the perspective of improvement rather than attempting to determine if anyone should be promoted, demoted, or fired.

With this in mind, the areas to investigate for improvement opportunities are as follows:

How is the team organized? Centralized or decentralized? What is the reporting structure inside and outside of the department? How consistent is the structure with the organization as a whole?
What systems are utilized by the function? Are the systems integrated? Is the information timely and accurate? Does it provide the type of information that will help the team meet expectations?
What type of measures are utilized by the function and how well do they describe performance in relation to expectations?
How well is the team performing with regard to the measures in place? How do the functional managers and team members feel about the department's performance?
Has the organization clearly defined its values? If so, have the functional leaders been assessed to determine that they possess and operate in accordance with the values?
Which areas of the company does the function support? How well are the function's objectives aligned with the needs of these areas? Do team members focus on meeting the needs of those in the areas the function supports?
How do those in the areas served by the function feel about the level of service they receive?
Is there an active process for training and development of team members and the functional managers? How consistent is this with the rest of the organization?

Additional questions are added based on the specific area being assessed.

Assessment Results

This is not the type of assessment that lends itself to a purely question-and-answer format. The information must be gathered and processed through a series of interviews and discussions with individuals and groups related to the function.

Staying as objective as possible requires understanding and communicating how well the function supports the objectives of the organization, as a whole. With this in mind, it may be necessary to point out when objectives drive focus on departmental results at the expense of organization results (which is a fairly common situation).

Because of the people issues related to assessment and improvement, it is not always easy to effectively evaluate a function. Remember, however, that your job is to help the organization improve, and if you avoid the difficult issues, you will have little change of fulfilling your responsibility.

Lost Jobs Never To Return?

2010-02-18T07:30:00.000-06:00

According to a story in last Friday's Wall Street Journal (click here for video report), economists expect that about 2.1 million of the jobs lost during the recession will never return. This is a scary prediction for those who lost their jobs and expect to return to the workforce as the recovery begins.

Reasons given for the permanent loss of jobs included process improvements as well as increased offshoring implemented as a means of survival during the recession.

A Normal Process?

The loss of jobs has been a normal economic occurrence for many years, but the lost jobs are usually replaced by new jobs created in new or growing industries. According to those surveyed, however, the severity and length of the recession has resulted in a loss of balance among job losses and job creation - meaning that, in this circumstance, job creation will greatly lag behind the job loss.

My Thoughts

I am a business consultant, not an economist, but I don't necessarily agree with the outlook given by many economists. There has been so much doom and gloom reporting over the last couple of years that I believe a bandwagon effect has taken place. It's much easier to report negative news than attempt to restore hope when things have been bad for so long. I see a couple of factors that, under the right circumstances, can actually lead to significant job creation.

Onshoring, or moving offshore jobs back to the U.S., is gaining in popularity. For quality and cost reasons, many companies are beginning to move jobs closer to where they can be effectively managed. Also, when fuel prices rise again - which they ultimately will - the cost of transporting materials over long distances may offset the savings in labor costs.

Another factor that can increase onshoring (or decrease the motivation to offshore) is tax breaks for companies that create jobs for Americans. In addition to reducing the cost of unemployment-related benefits, more American workers pay more U.S. taxes, which can help reduce the growing deficit. Unfortunately, the U.S. government relies so heavily on corporate taxes that giving breaks to growing companies will delay recovery in corporate taxes collected. Something like this may have to be done, however, in order to break the down cycle and discourage companies from further offshoring jobs.

Rapidly Integrating an Acquisition

2010-02-15T07:55:00.000-06:00

Note: This is a follow-up to an earlier post on preventing an acquisition from becoming a distraction (located here).

Over the last decade, acquisitions have become very common in the world of business. With all the collective experience gained from the enormous amount of M&A activity that has taken place, you would think the process of integrating a newly acquired company would have been perfected. Unfortunately, this is not the case. Studies continue to show that up to 70% of M&As fail to meet expectations in terms of financial performance.

There are a variety of reasons for making an acquisition, but all relate in some way to benefiting the acquiring organization. With this in mind, the longer it takes to integrate the newly acquired company, the longer it will take to reap the benefits of the transaction. The process of assimilating the new organization needs to be planned and executed with at least as much care as the due diligence process, and quickly enough to prevent the acquisition from becoming a distraction to the business.

The Focus of the Process

Integrating an acquisition requires focus on the technical (processes, systems, etc.) and human elements. Although the technical element often gets most of the attention, it is the human/cultural issues that cause most of the problems. In fact, the majority of technical issues could be handled much more easily if enough focus is given to the human element of the integration process.

This post will deal with the human aspects of acquisition integration with specific attention to two areas: fear and alignment. With serious and proper focus on these areas, integration can be done quickly and with surprisingly few problems.

Fear

Fear is an obvious by-product of any acquisition. Mergers almost always lead to job losses, and it is most often the acquired company that loses the most jobs. With this in mind, the integration plan needs to include honest and open communication about potential job cuts, as well as some type of bonus for those who stay until the end of the process. Ignoring this subject will serve to demotivate employees, break down teamwork, and increase the length of time it takes for full integration.

Alignment

Alignment refers to indoctrinating those in the newly acquired organization with the purpose, values, and focus of the parent company. Indoctrinating the new team members with this focus clarifies expectations quickly by communicating to the employees of the acquired company that they are now part of a new, larger, and different organization.

The Integration Plan

Just like any change initiative, integrating the acquisition needs to follow a carefully developed plan with a responsible person leading the effort. The process must include frequent reviews with senior leaders to assure that problems are addressed quickly and effectively.

Specifics of the plan will differ depending on the size, type and culture of the company, but need to include the following components:

Indoctrination with Purpose & Values (Alignment)

Time must be spent discussing the fundamental purpose of the company (mission and vision) and how they will operate (values). Every organization is different and integration will most likely involve some type of shift in purpose and values. I have found that this is best accomplished in two phases. First in a general message from a senior leader (preferably a C-level executive), and followed up by smaller group discussions led by a function leader and HR representative.
Leadership Coaching (Alignment)

To protect the organization's values, it is important to work with leaders at all levels of the acquired company to assure they possess the values of the acquiring company. A good amount of coaching will most likely be required to give those who don't display the values a chance to modify their behavior and leadership style. Obviously, some people will need to be replaced when it is determined that they are not capable, or do not desire, to change their style to fit in the new organization.
Employee Survey (Fear)

A survey of existing and new employees can provide information about the fears, concerns, frustrations, belief in leadership & direction, and confidence in the future as related to the acquisition. To be effective, however, people must believe in the confidentiality of the survey and that action will be taken based on its results.

Remember the People

The people issues increase the complexity of successfully leading an organization. It is a difficult and never-ending responsibility to keep people united toward a common purpose in a way that leads to continual growth in revenues and earnings. This complexity grows exponentially when a new group of people with a unique set of values and concerns are added to the mix.

Recognizing the complexity of the process and attending to the human elements of integration - specifically, fear and alignment - can greatly increase the speed and potential benefit of the acquisition.

Toyota Bashing

2010-02-08T07:54:00.000-06:00

It seems we have a new pastime in this country: Toyota bashing. It started when the first round of accelerator problems were announced and became a full-blown fad after the issue resulted in suspending sales of the company's most popular products.

Even Transportation Secretary Ray LaHood got into the act, saying that anyone who owns a Toyota vehicle should "stop driving it" (he later recanted his statement). Call up virtually any news site today and there's a good chance you'll find something negative about Toyota.

I'm not here to downplay the seriousness of the accelerator problem. The company deserves some of the criticism because of the massive scope of the problem. We spend a lot of money on our cars and expect them to work safely and reliably. Toyota's reputation for quality has also most likely contributed to the fallout in this situation. They have been a hugely successful company for many years now and they have to take their licks just like any other company facing a massive recall.

The problem I'm having is that some of the criticism seems to be based on politics or ignorance rather than facts.

Lean is Not the Problem

The Wall Street Journal (WSJ) ran a story last week entitled, "How Lean Manufacturing Can Fail," claiming that the Toyota Production System contributed to the accelerator problem because of standardization of parts across models and a reduced number of suppliers. I can see how someone who doesn't understand lean could think this, but the WSJ is a respected business news source and its reporters should know better.

Lean has been a key to the company's success (in terms of quality and profitability). Standardizing parts across models - which, by the way is not just a "lean" concept - is what makes cars affordable. It's the way the high volume automakers (as well as manufacturers in many other industries) do business.

Reducing the number of vendors also contributes to improved quality because it enables the company to work much more closely with each supplier. Also, more suppliers means more variation in incoming products - thereby increasing assembly time and quality problems.

CEO Visibility

Another issue that's causing problems for Toyota is the lack of visibility of Akio Toyoda, the company's CEO. Although I agree that this problem was large enough to warrant more media presence from Toyoda, it's really not how Japanese executives operate.

To demonstrate the difference between U.S. and foreign companies, how many people can name the CEO of Honda? Volkswagen? Total? ING? These are among the world's largest companies, but very few people can name their chief executives. CEOs of foreign companies don't tend to grab the spotlight the way American executives do. Toyota is learning a difficult lesson right now that Americans expect swift assurance from the chief executive that the problem is being resolved.

Japanese companies (especially Toyota) also tend to study problems methodically and do not jump to implement fixes until they feel they truly understand the causes. Unfortunately, when we're talking about an issue like this, those using the product get very nervous about their personal safety while the problem is being analyzed.

Political?

My guess is that the media bashing is also heavily political, in nature. American automakers have been beaten down so badly - mostly by Toyota - over the last several years that the buy American sentiment is driving many of the attacks. I guess we'll learn more about this when Volkswagen takes over as the world's number one automaker as a result of this crisis.

Several months ago, I wrote that Toyota had taken its eye off the ball and, as a result, problems were starting to surface (see Taking Your Eye Off the Ball). It was evident to me back then that, in its push to supplant General Motors as the world's largest automaker, Toyota seemed to forget what got them there in the first place.

I also wrote in the blog that it appeared that their problems were being addressed. They have a new CEO and he seems to be refocusing the company on its fundamental purpose (to enrich society through carmaking). I also don't believe that the bad habits the company developed had been around long enough to cause major damage to their culture.

My guess is that they will survive this slip-up and return to the number one spot over the next few years. Toyota tends to be a very long-term focused company and I'm betting that they won't take short-term action that will result in hurting their future. The company undoubtedly does not want anything like this to happen again, but if it does, they really need to channel their obsession with learning toward improving the way they deal with the American media.

Is Strategic Planning Dead?

2010-02-01T11:23:00.000-06:00

The Wall Street Journal ran a story last week on the downfall of strategic planning. According to the article, companies learned during the recession that flexibility and quick decisions are more important to a business than planning, and that strategic planning as a practice is becoming outdated. I hope anyone who decides to scrap a company's strategic planning process based on this article clearly understands the ramifications before doing so.

As I read the article, I found that the authors pointed out many of the misconceptions of the strategic planning process more than the problems with the concept itself. People often mistakenly utilize the process as solely a financial review and confuse strategic planning with budgeting. The article mentioned several examples of companies that realized during the recession that they were not reviewing sales and spending numbers often enough to react to quick changes in their markets. By itself, this realization makes perfect sense as the last two years has been characterized as the worst since the Great Depression. With that said, however, the need to stay on top of budgets has nothing to do with the value of an effective strategic planning process.

Strategic Planning 101

Strategic planning is a process by which an organization defines its strategy to successfully achieve its fundamental purpose. The outputs of the process include high-level objectives (critical improvement areas) and initiatives (action plans to address the barriers that prevent achievement of the objectives). It is a valuable process to assure the organization understands its strategies to improve its competitive position and be successful for many years into the future.

Periodic review is required to (1) assure that the initiatives are progressing as intended; and (2) assure that the initiatives - if they are progressing - are actually resulting in achievement of the high-level objectives. For example, an organization may create an initiative to change its ERP system in order to support the objective of improving inventory management. If the new system is implemented but inventory turns do not improve and stock-outs continue to delay shipments, it may be that the ERP system was not the problem and, therefore, should not have been an initiative. The management team needs to revisit the inventory management system in order to determine how to improve the situation (e.g., identify other initiatives that will result in achieving the objective).

There is no single approach for strategic planning that will work for all organizations. The process must be tailored to the specific circumstances and culture of each company. The depth, frequency, and type of review will be different for everyone, but it must still be done if the organization is to become and remain successful.

Remember the Future

Eliminating the strategic planning process will only serve to increase the number of attention deficit disorder (ADD) companies that already exist. The short-term behavior that has severely weakened so much of western business will continue, resulting in a continuation of dramatic swings in earnings and share price.

Let's be clear - I am not discounting the value of quick decision-making to a business. Problems occur, though, when "quick" becomes "careless." A company can benefit from continually focusing on speeding up decision-making without sacrificing quality. Improving information systems and training can speed up decision-making without putting the company at risk. If this is what a company needs, though, it will become evident through the planning process. Those who believe that strategic planning is a slow process that does not add value are not doing it correctly. If the process is too slow and is not helping the business grow and succeed, it needs to change.

The leader is responsible for assuring that the organization survives the short-term so it can succeed in the long-term. Quick decision-making and frequent reviews can help take care of the short-term while effective planning (and successful implementation of the plans) is the key to taking care of the long-term. Stop strategic planning and you might as well forget about the future of the company.

Being Lean is Not Enough

2010-01-25T17:32:00.000-06:00

One of the hottest trends in business over the last few years has been lean. Most of the Fortune 50 companies currently claim to be doing lean and the market is flooded with training and consulting companies touting the benefits of the approach. I recently Googled the term lean+business and received 30.1 million results. It appears that we're presently in the midst of a lean blitz.

Don't get me wrong, I think lean is a strategy from which virtually every company can benefit. It is a great way to gain control over processes and improve quality while reducing costs. Throughout my career, I helped many companies implement lean and have seen some great benefits as a result.

The problem I'm having is that lean is being oversold to business. Consultants and practitioners are promoting lean as if it is the cure for all of a company's problems. I have gotten into many discussions over the years with people who are disappointed when leaders don't place lean at the very top of the company's priorities.

Part of the Picture

Lean can be a valuable part of the company's overall strategy. The critical word here is part. There are other elements of a corporate strategy that are just as - if not more - important depending on the company's individual circumstances. In the most simple example, a company can be highly successful with lean but go out of business if it is not offering products or services that people want to buy.

However strategic planning is specifically conducted, the process should generally include an analysis of the four high-level objectives that are necessary for success: (1) People/Leadership Development; (2) Process Improvement; (3) Product/Service Development; and (4) Market Development. There are times when one or more of these areas will need extra focus, but unless all are analyzed on a regular basis, the ability to understand which areas are in need of attention is limited.

Strategic planning requires an assessment of the company's situation to understand where the current barriers are to achieving success at any given time. The barriers can be weaknesses that interfere with success, or opportunities that can help the company grow and improve performance, but they will become evident during the process of understanding and evaluating the four high-level objectives. The analysis helps senior leaders understand where the company's focus (in terms of investment and resources) needs to be in the coming one to three years (or beyond, depending on the normal planning horizon).

Let's Maintain Perspective

The point here is not to oversell the benefits of lean, and to understand why executives don't necessarily put it at the top of the company's priorities. As an initiative, lean can directly support the process improvement objective and indirectly aid product/service development, but to truly help an organization succeed, it is important to understand that it may be end up being something other than the top priority.

When an Acquisition Becomes a Distraction

2010-01-18T10:48:00.002-06:00

With business finally showing signs of recovery, the amount of M&A activity is sure to pick up again as money becomes more readily accessible. We have already begun to see the increase with large corporations including ExxonMobil's acquisition of XTO Energy, Stanley Works purchase of Black & Decker, and Google's announcement to purchase AdMob.

Small company M&A activity has also begun to increase and I expect the trend will continue as the level of confidence in the future grows. Although true of any size company, small companies must be especially careful that an acquisition does not become such a distraction that it pulls management attention away from running the organization, as a whole.

Fighting the Distraction

Since an acquisition ties up a lot of a company's capital, there is often a great deal of pressure to assure the newly acquired company becomes profitable as quickly as possible. Unfortunately, it is common for a number of problems that were undiscovered during the due diligence process to surface fairly soon after the acquisition takes place. These problems have a tendency to become a drain on management resources, and can easily pull the attention of the company's senior leaders away from running the business.

Organizations do not run themselves. Even with the most successful organizations, bad habits can creep in that will lead to long-term problems if not dealt with quickly. Since senior leaders in small companies tend to be much closer to the organization's activities than do those in medium and large companies, they often have more of a direct effect on the company's operation than they realize. A long-term distraction - like an acquisition requiring a lot of attention - can fundamentally change the parent organization before the leaders realize it has happened.

What to Do

If at all possible, attempt to understand the critical issues before the acquisition takes place. For a variety of reasons, this is not always possible, so it is important to assess the acquired company quickly to learn about the problems that can prevent or delay success.

Once the issues are understood, it is critical for the leader to assign responsibilities and clarify expectations quickly to keep from getting too wrapped up in the issues. There needs to be frequent updates about the progress in addressing the issues so action can be taken quickly to keep the changes on track.

Dealing with an acquisition without ignoring the overall business may require temporarily assigning people and/or bringing in outside help for a short period of time to help with the transition.

There will obviously be situations where additional attention is warranted by senior leaders to put the merger back on track, but it is essential to remain sensitive to the possibility of distraction in the process. Above all, never forget the company's fundamental purpose throughout the process and focus effort on integrating the acquisition in a way that does not compromise the mission and vision of the new, larger organization. Doing this will greatly enhance your ability to assimilate the acquired company quickly and successfully.

The Value of Thinking

2010-01-13T12:26:00.000-06:00

"Thinking is the hardest work there is, which is probably the reason why so few engage in it." - Henry Ford

Do we consider the ability to think critical to business success? If so, why do companies place such a low value on thinking? How many organizations today would truly appreciate an employee who takes time regularly to sit in his or her office to think?

I believe if we started to value thinking and took the time to teach our organizations how to think, we could revolutionize the world of business, leading to greatly improved performance, as well as employee satisfaction and quality of life.

Thinking in Business

When I led an organization, I encouraged team members to make decisions. I also encouraged people to think - individually and as a group - before making a decision. What I found in many cases was that a vast majority of poor decisions were the result of jumping to a solution without thinking. On the other hand, I have observed that the most creative solutions and innovative idea result from deep reflection and thought before acting.

The U.S. culture is heavily rooted in the Puritan ethic that greatly appreciates doing. This contributes to the tendency of businesses to value the person who acts quickly much more than the one to takes time to think before acting. Our organizations are fjull of people who stay very busy doing things, but rarely think about what they are doing. As a result, we face the same problems day-in and day-out and fail to achieve or sustain significant levels of improvement in productivity or quality.

This general disregard for thinking creates friction that continually pulls even those organizations that value thinking toward a culture of doing. I believe this is the reason that companies respected for creativity and innovation tend to lose their edge as they become larger and more successful. Think about how many internet startups have changed from high growth companies with imaginative offerings to stagnant, poor performing organizations. Companies like Apple
, Toyota and LG, on the other hand, are among the very few that have been able to maintain their creative edge in products, processes, and services.

Thinking Required

Organizations are very complex systems that make it difficult to clearly understand the effects that result from actions taken. To truly comprehend how a change in one part of the organization will affect another requires thought and reflection. On many occasions, I have seen a change implemented by one area of the company result in increased costs and headaches for another.

I also believe that the lack of thinking is one of the reasons lean initiatives fail. Lean requires a level of creativity and systems thinking that are nonexistent in many companies. solving a problem requires a clear understanding of the underlying causes and the creativity to develop effective solutions. Without the ability to think and reflect, improvements will tend to be short-lived.

What to Do

Because of the cultural resistance to thinking, encouraging people to reflect on issues before acting is not easy. Everybody is so busy doing things that it very difficult to get them to take time to think. Orders need to be entered, reports need to be written, customers need to be called, and deliveries need to be made. Asking people to stop and think will be seen as adding more to an already full plate of things to do.

The key is to start small. Leaders can encourage thinking as part of the coaching process to help
team members deal with problems and issues. In one company, I initiated a policy requiring people to sit and think about their jobs for ten minutes each day. Some did it and, I'm sure, others just said they did, but eventually the organization began to change because it became clear that I valued thinking.

However it is done, transforming the culture toward thinking before doing will help release the dammed up potential within the company. Eventually, the change will become evident in productivity improves, more innovative products and services are introduced, and ultimately, the performance of the organization improves.

The Price of Fear

2010-01-08T15:06:00.000-06:00

What is fear costing businesses each year? Thousands? Millions? Billions? It obviously can't be accurately measured, but when I think about some of the organizations I have worked with throughout my career, I'm guessing the figure is outrageously high.

Although th extent of fear differs for every organization, it affects virtually all companies either internally or through its supply chain. Since much of the cost related to fear is indirect and difficult to measure, most companies don't think about it or put forth the effort to reduce its existence.

The Effects

Fear is not necessarily a bad thing for the human race. It is an emotion that leads us to act when we sense danger. As a fundamental instinct, fear is a very short-term behavior that motivates us to avoid or escape from dangerous situations. Fear can lead to bursts of energy and creativity to assure safety and survival.

Within the workplace, however, fear tends to be a chronic condition that wears people down over time. Although chronic fear affects people in different ways, most psychologists agree that it is destructive. Any positive effects on motivation and action are short-term.

The common fears that exist within organizations include fear of layoffs, disagreeing with decisions and opinions, asking questions, and taking risks. In business, the areas that are negatively affected by these fears include the following:

Creativity & Innovation When people are stressed, the conscious mind blocks creativity and innovation from occurring. Fear prevents people from relaxing to the point where they can access the right brain and develop creative solutions to problems;
Goals & Objectives People will avoid committing to stretch goals and objectives when they feel there will be repercussions if the goals are not met. Fear also leads people to do whatever is necessary to meet a goal and nothing more because of the concern that exceeding a goal will result in a higher target in the future;
Customer Focus A culture of fear and blame causes people to focus on meeting the needs of their boss rather than the customer;
Health Issues There have been numerous studies on the negative affects of stress and fear on personal health. Chronic stress suppresses the immune system, leading to an increase in colds and flu, in addition to a host of potentially more serious conditions.

Taking Action

So what should business leaders do to address the problem of fear? I have talked with senior leaders who are apathetic about fear because they see no reason people should feel afraid within the organization and see it as an individual weakness. Unfortunately, company leaders do not have the perspective to judge the level of fear throughout the organization. Also, this belief basically results in writing off the potential contributions of those who are negatively affected by fear.

When I work with organizations that are attempting to improve performance or implement a change initiative, I often recommend implementing a survey to assess the level of fear that exists. The survey should enable a classification of the etent and types of fears that exist in order to develop actions to improve the situation. Of course, a survey will only be effective if the people within the company trust that the individual responses will remain confidential.

Developing plans from the highest levels of the organization to reduce fear greatly improves the chances of success. It also shows that management is concerned about the work environment and the emotional health of people. When approached in this manner, the release of human potential to improve the organization can be staggering.

World Class Suppliers Need World Class Customers

2009-12-30T14:32:00.002-06:00

As part of their effort to slash the cost of auto parts by 30% over the next three years, Toyota met with its suppliers last week to enlist their help in the process. Based on their reputation for dealing with suppliers, I'm guessing that Toyota will approach the process in a much different manner than most companies, and the process will be very successful.

Instead of squeezing suppliers by beating down prices and lengthening payment terms, companies like Toyota work with suppliers to find improvements in designs and processes that lead to real and sustainable cost reductions. When approached in this manner, the supplier and customer benefit from the process and the savings result in strengthening, rather than weakening, the supplier.

Two Glaring (and Common) Examples

I once worked with a Fortune 500 company that issued a policy for its divisions to lengthen payment terms to all suppliers. Based on the formula, the new policy could result in payment to a supplier being delayed by up to 90 days after receipt of the product or service.

Procurement professionals at a particular division for the company (Division A) implemented the policy and were praised (and rewarded) by the corporate office. One of Division A's suppliers was another division of the company (Division B). As a result of the change in policy, Division B cut off shipments of a critical component to Division A because it paid its invoices too slowly. Because of this, Division A's shipments fell because it couldn't get the component elsewhere; costs increased (due to production stoppages); and profits dropped because of its inability to ship and invoice its customers. Division B's profits also fell because it stopped shipping to Division A.

And another . . .

In another example, a friend of mine owns a company that supplies parts to the Detroit automakers. During a visit to one of the automaker's factories, he noticed a problem in the production line with the assembly of a particular model. As part of the process, the car was flipped to enable installation of a particular subassembly. Problems occurred because the subassembly could not be completed until the car was turned back upright, and it frequently fell apart before it could be secured.

On his own accord, my friend developed an inexpensive grommet that could be placed on the subassembly to properly secure the parts as the car was flipped upright. After the final assembly was bolted together, the grommet could be easily cut away, thereby completely eliminating the problem.

the customer adopted the idea and changed the process to utilize the grommet. Even though the grommet was a very low cost part, the automaker's procurement department - in an effort to further reduce the cost - decided to purchase the grommet from a competitor instead of from the company owned by the person who developed the part. In a situation where a supplier - without direction from the customer - took the initiative to solve a problem that caused delays, extra costs, and headaches for the customer, the customer displayed a lack of respect for the supplier by awarding the business to another company. Needless to say, my friend was not motivated to solve future problems for the customer.

Stop the Madness

The above examples are unfortunately fairly typical of western business. If we are to come out of the recession strong and ready to compete, we have got to learn that the relationship with a supplier is based on more than price and payment terms. A company cannot win if its suppliers lose. Besides the obvious, who wants to do business with a loser anyway?

Leaders Are Developed; Not Hired

2009-12-17T08:57:00.005-06:00

I see that Bank of America (BoA) finally decided on a replacement for CEO Ken Lewis. The board blamed the lengthy process on the compensation restrictions that pay czar Kenneth Feinberg has placed on financial institutions.

I disagree. I place the blame on the board and, more generally, on American business in general.

Companies should rarely, if ever, have to conduct an executive search. The most basic responsibility of a company's board of directors is to protect the interests of shareholders. This cannot be accomplished without continuity in leadership which requires succession planning and leadership to development at the highest levels of the company.

In my practice, I encourage organizations to always have the successors identified for each senior position within the company. Although most agree with the need for succession planning, it is too often given too low of a priority to make it happen.

There are a number of advantages to the organization of developing leaders from the inside, however, that should give it enough importance to make it a priority, including the following:

Reduced Recruiting Costs: Besides the price of retaining a recruiter to fill an executive-level position, there are internal costs associated with interviewing and screening potential candidates, as well as the costs incurred while the new leader learns about the company's processes, customers, systems, and culture;
Keeping Talent: When people see that leaders are promoted from within the organization rather than hired from the outside, they feel more valued and better about their own future with the company. This tends to increase loyalty and decrease turnover. Also, those with leadership ability can be identified early and groomed into management positions in a way that fits the company's culture and leadership style;
Reduced Compensation Costs: Promoting from within tends to keep compensation costs down because you are not competing with other companies for the same candidate. Besides the increased compensation that comes from competition, hiring a leader away from another organization can include contract buyout costs, as well as payments for bonuses, stock options, etc. that the new hire is losing by leaving his or her current position;
Continuity in Direction & Approach: One of the most damaging aspects of hiring a leader from the outside occurs when the new hire has a different leadership style than his or her predecessor or takes the company in a different direction. People become confused and fear increases, further increasing costs to the organization;
Reduced Risk of Success: No matter how careful the search process is conducted, there is a certain level of risk associated with a new hire. Promoting from inside the company reduces that risk because the person's ability, personality, character, and leadership style is already known.

The obvious downside of developing leaders from inside the company is losing someone after investing to develop his or her leadership skills. Although the lack of focus on leadership development in western business makes this a valid concern, it is not enough of a reason to ignore such an important aspect of an organization's future.

Repairing a Faulty Lean Process

2009-12-07T16:39:00.021-06:00

When I am asked to help a company with a lean implementation, it is often because the initiative has failed in some way to meet expectations. In many cases, I find that the problem is related to the company attempting to implement lean at an expert level rather than starting slowly and letting the process evolve and develop over time.

As a follow up to an earlier post on why lean fails, I will present here some of the most basic and easily correctable problems that I have seen with companies that have asked for help with their lean processes. It is important to note that correcting a "lean gone bad" situation is possible and not necessarily difficult. It usually requires stopping the process for reflection and making adjustments to put the initiative back on track to be successful.

Don't Try To Be Toyota

There has been a lot written about Toyota and how lean has contributed to their success over the last several decades. There are books, seminars, and conferences detailing exactly how Toyota uses lean, including the tools and steps they deploy (and even the words they use) to identify and eliminate waste.

Toyota is the master of lean. They invented it and have been using (and perfecting) it for the last 60 years. An attempt to copy how they use it without going through the process to learn and develop the system is akin to reading a book on skiing and heading for the black runs on your first trip to the slopes. It is dangerous and most likely will end in disappointment (or worse).

The Basics

When an organization asks for help to get lean back on track quickly, I often recommend the following basic actions:

Focus on Small Improvements Stop doing kaizen events and focus instead on small improvements. Kaizen events (covering multiple consecutive days) require a lot of focus, pre-work, and a very experienced facilitator to carry out; while small improvements can be implemented with very little training and experience.

Also, a kaizen event often requires interrupting the operation for a period of time while the improvements are being implemented. There is a much higher chance of losing the support of the person responsible for the operation if a shutdown is needed.

Small improvements also allow people to learn how to apply the tools as improvements are made with a much smaller risk of failure.

Giving team members time on a regular basis (e.g., 30-60 minutes per week) to work on improvement activities can lead to some great results, and enable the lean process to evolve and develop effectively.
Use the People Closest to the Process Western business has somehow been led to believe that lean is not possible without hiring six-sigma black belts to facilitate the improvements. Although the six-sigma methodology includes some very sophisticated statistical tools, they are not necessary to make improvements early in the process. Especially at first, it is very likely that there are significant improvements are possible with the use of only a few basic tools.

The best lean implementations I have witnessed have had those closest to the process heavily involved in the process. Projects are led by the team leader or a team member who has naturally grown into the facilitator position. I do not believe that the process works nearly as well when projects involve people who are not part of the team.
Continually Train & Develop Once the commitment is made to implement lean, people throughout the company need to be trained and developed on a continual basis, as opposed to a single, multiple-day class at the outset of the process. Workers need training in the process improvement tools; supervisors and managers need training in leadership (specifically what it means to lead in a lean environment); and executives need to be trained in the barriers to lean and what they can do to make the process successful. It is more effective when this is done over time so people can relate what they learn to the changing environment.

The above steps do not always cure all of the problems with an unsuccessful lean implementation, but I have found that they often have a positive enough impact to get the process back on track fairly quickly.

Thoughts on Job Creation

2009-12-04T14:14:00.003-06:00

The White House held a jobs summit earlier this week to discuss ideas to lower unemployment in the U.S. Several ideas were presented and discussed during the meeting - some that made sense and others that, in my opinion, will do little more than add to the deficit.

The big problem with the bulk of the proposals is how to pay for them. The deficit is out of control and literally growing every minute. And most agree that we can't afford to continue to pump money into programs that don't provide immediate results (as we have enough of those already).

Another issue with the current situation is that, until the jobless rate drops, the government needs to continue to fund unemployment and health care benefits for those who have been out of work for an extended period of time.

It's unfortunate that this problem was not addressed two years ago when the recession began. As the financial system crumbled, it was obvious that a recession was coming that it had the potential of being very long and severe. On the macro level, the increased unemployment rate reduced the amount of taxes collected on the state and national level, as well as resulting in a decrease in consumer spending - leading to further layoffs (and even lower tax collections). The death spiral that resulted has continued and worsened to the point where we now cannot afford to do much of anything to get things moving again. Although I agree that it is necessary, unemployment benefits do nothing to increase spending or economic activity.

Over a year ago, I wrote that we needed to focus on job creation and that any stimulus money should go to those companies that do not layoff workers. Unfortunately, we not only gave money to companies that implemented layoffs, it appeared that is was a prerequisite to receiving assistance. Rewarding companies that keep people working could have encouraged businesses to look for alternate ways to cut costs. This could have kept more people working - and spending - thereby reducing the effects of the slowdown.

There are a number of well-known companies that did not layoff workers during the recession. These organizations implemented a variety of actions to keep people working; including unpaid holidays, reduced workdays, focused improvement activity, and dividend cuts. Our economy would have been much better served by providing stimulus money to these companies rather than throwing it into programs that, at best, created temporary employment for a small sector of the workforce.

I would love to see congress and the administration implement an economic, rather than a political, approach to job creation. We will get through this crisis much more quickly if we work for what's best for the country than continuing to focus on what's best for the political parties or individual congressional districts.

Big Changes at GM?

2009-12-03T11:27:00.002-06:00

With the departure of Fritz Henderson, GM's board is talking as if they are taking the opportunity to kick the changes at the company into high gear. Making changes at an organization as large and complex as GM is not going to be easy. It can be done, though, with a well-focused and aggressive plan.

In my opinion, the plan to get GM on track needs to include the following:

Forget about being the number one producer of automobiles. This kind of focus can take the company away from its purpose of making cars that people want to buy. I believe that Toyota temporarily lost its focus in its drive to be number one and it got them into trouble. Make great cars and the numbers will take care of themselves.

Improve the - real and perceived - quality of products offered. This is done by working on processes and products; not advertising.

Improve relations with dealers and the UAW. The company cannot get better without everyone working together. The level of trust between management, workers, and dealers has been poor for many years, and it's up to GM management to take the responsibility to get it fixed.

Increase innovation. The company needs to begin taking chances and develop more innovative designs and features into its cars. It's time for GM to stand out because of its products instead of its problems.

The biggest barrier the company has to address is its own culture. In general, the longer a company exists and the bigger it becomes, the more risk averse the culture becomes. It is a great time, though, for GM to refocus and reinvent itself, and I'll be watching with interest as the saga continues to unfold.

Managing What You Can't Measure

2009-11-30T16:15:00.015-06:00

"Not everything that counts can be counted, and not everything that can be counted, counts." - Albert Einstein

One of the most common beliefs in western business is the idea that, if it can't be measured, it can't be managed. This saying has been around for years and the philosophy behind it has guided decisions in actions in many organizations ever since.

I don't know who coined the phrase, but I'm guessing it has its roots in the mid-1940s when the Whiz Kids introduced the practice of management by numbers at Ford Motor Company. Although the Whiz Kids may have saved Ford from bankruptcy by increasing focus on numbers at the company, I believe the widespread number-obsession that resulted from their success is one of the practices leading American business into decline. We have far too many managers today who spend more time with spreadsheets than the people who are on their teams.

What Cannot Be Measured

It would be great if everything that is critical to a business could be accurately measured - it would make the job of managing so much easier. Unfortunately, organizations are too complex to assume they can be effectively led by implementing a handful of metrics.

There are numerous elements of an organization that must be managed and continually improved for a company to be successful. Very few, if any, of these elements can be accurately measured. Included in this group are the costs and benefits associated with:

Employee morale
Poor planning
Fear in the workplace
Teamwork
Employee turnover
Customer satisfaction
Poor supplier relations

As an example, most would agree that there is a relationship between employee morale and financial performance. Although a company can implement an employee satisfaction survey and develop a measure based on its results, there is no way to measure how much (or even if) a five-point increase in morale would benefit the company. Any attempt to perform a cost-benefit analysis of an idea to improve morale would include too many assumptions and estimates to be valid.

Another example relates to the level of teamwork within an organization. Improved teamwork should lead to improved results, but how much improvement is anyone's guess.

A leader who believes in the if-it-can't be measured-it-can't-be-improved philosophy would have a tendency to ignore the above elements, although doing so would pretty much guarantee that he or she would not have to worry about leading the company for very long.

Numbers Have Their Place

I am not advocating the elimination of all key metrics for a company, because they do have their place. Besides the need to comply with legal obligations, numbers provide feedback on how the business is operating in terms of financial performance, budgeting, and cash flow. They are also very important in studying and improving the costs, quality, and cycle times of processes. It is critical, though, to understand how to gain knowledge from numbers and to realize that the numbers rarely, if ever, tell the whole story.

Organizations are highly complex, and believing that the most important aspects can be accurately measured oversimplifies and underestimates the role of a leader. If leadership consisted only of making decisions based on accurate measures, it would not be a very difficult to run a company.

Sales Goals Revisited

2009-11-25T11:56:00.004-06:00

A few weeks ago, I posted a column about the problems with goal-setting for individuals. Although I received comments from several people who agreed that the Western system of goal-setting and rewarding employees were destructive, I also received many responses from people who vehemently disagreed and felt that the process not only worked, but was necessary for success.

I'd like to revisit the subject and limit the discussion to goal-setting and reward systems for salespeople. The Stanford Graduate School of Business recently reported on a study conducted about the effectiveness of using sales quotas to motivate and reward salespeople (http://gsb.stanford.edu/news/research/Nair_sales.html). Based on an experiment at one Fortune 500 company, the researchers concluded that removing the sales quotas resulted in a 9% increase in overall revenues.

I'll agree that conducting an experiment at one company does not necessarily prove my point that setting goals is often destructive, but since the study involved salespeople - the largest group affected by goal-setting - the results merit further discussion.

When I posted the blog, I received several confidential comments from sales professionals who wrote that they disliked the system of quotas for a variety of reasons. They stated that quotas forced them to play games with the timing of orders in order to meet a target in a given period. They knew this was not in the best interests of the organization as a whole, but felt it was necessary to keep their jobs and/or achieve their bonuses.

I've never understood why we feel it is necessary to use money to motivate salespeople but don't use the same approach with accountants, receptionists, network engineers, and other positions within the company. Are salespeople lazy? Are they untrustworthy? Do we really feel that if we don't offer them carrots that they won't produce?

Gallery Furniture

Jim McIngvale is the founder of Gallery Furniture store in Houston, Texas. Many years ago, he called on W. Edwards Deming to help him improve his business. McIngvale often tells the story about Deming telling him to change his salespeople from commission-based pay to salary. After failing to convince Deming that it wouldn't work in the retail industry, he gave in and changed his pay practices and put his salespeople on salary. In The New Economics, Deming wrote about the results of the change. " . . . steady increase in sales. Older salesmen now help beginners. Salesmen no longer try to steal business from other salesmen. they now help each other . . . sales go up month by month. Moreover, profit per square foot of floor space advances even faster." McIngvale agrees.

Like so many elements in business, it goes back to effective leadership and hiring practices.

Unfortunately, I'm betting that the Stanford study will not lead to a wholesale change in Western business practices because if people don't feel there is a problem, they won't be looking for a solution or feel there is a need for change. My hope, however, is that more studies will be conducted on the subject and more examples of companies changing their practices will be publicized and, little by little, transformation will begin to occur.

The True Cost of a Layoff

2009-11-16T20:01:00.004-06:00

The world of business has become increasingly dependent on layoffs as a response to a downturn in business. There are layoff announcements virtually every day by companies, along with statements about the expected benefits of a reduced headcount.

Does a layoff really result in the savings to an organization that we think it does?

There are hidden costs that are often not considered (or are ignored) when making the decision to institute a reduction in force. These costs are difficult, if not impossible, to measure, but exist whether they are recognized or not.

Besides the severance and social charges associated with a layoff, the hidden costs show up in areas like productivity, customer service, and absenteeism. Since they are not measurable, however, they are easy to debate and not considered relevant in the number-obsessed world of business.

The hidden costs of layoffs include the following:

Increased Fear: Nothing can increase the level of fear within an organization like a layoff. Fear leads to a host of problems including reduced creativity, safe goal-setting, increased health problems/absenteeism, and a lack of willingness to take risks.

Loss of Teamwork: A layoff forces a person to worry more about his or her own situations than that of a co-worker. The atmosphere becomes more competitive as people do as much as possible to demonstrate their personal value to the company.

Loss of Customer Focus: When a layoff occurs, people turn their focus toward pleasing the boss instead of the customer. After all, it is the boss, not the customer, who makes the decisions regarding who will be released.

Drop in Morale: Layoffs make people feel expendable which, along with the loss of friends and coworkers in the organization, leads to a drop in morale. As a result, dedication is lost, and people will be less likely to contribute ideas for improvement or go the extra mile to help the company succeed.

Increased Employee Turnover: Because remaining employees will begin to worry about their own jobs, those who can find other work elsewhere will do so.

Loss of Trained/Experienced Employees: Losing employees means the loss of trained and experienced people to handle the increase in work when business returns. New employees lack experience with the process, systems and customers, and result in increased hiring and training costs (in addition to a higher incidence of quality problems).

What to Do Instead of Layoffs

Many business leaders have come to the conclusion that layoffs are necessary during a downturn in business. There are steps that companies can take to reduce the need for layoffs - even during a recession as deep as the one we've experienced over the last two years. These actions, which equate to cost management as compared to cost cutting, include the following:

Shorten the workweek and adjust pay accordingly;
Offer unpaid vacations/holidays;
Eliminate overtime;
Freeze all hiring;
Eliminate all bonuses and associated accruals;
Cut dividends;
Focus continual improvement activities on cost reductions.

In addition to the potential savings from the above actions, imagine the loyalty and dedication a company would earn from its employees if it manages to survive the recession without reducing headcount.

Sprinting Into a Death Spiral: Sprint Nextel Announces Layoffs

2009-11-13T16:23:00.005-06:00

Last week, Sprint Nextel announced plans to cut up to 2,500 jobs in an effort to - once again - reduce costs. This is the third round of layoffs since early-2008, when the company announced job cuts of 4,000 (they also eliminated 8,000 jobs in January, 2009). Employees who manage to survive this latest round of layoffs are probably thinking that it's only a matter of time before the next one occurs.

In 2008, Sprint lost 4.6 million subscribers. During the same period, AT&T and Verizon added 7 million and 5.8 million, respectively. Sprint also reported a $4.2 billion loss for the year. I'm thinking that addressing the problems at the company are going to require much more than cost cutting to resolve.

Remember that this is the company that, in 2007, made the much publicized decision to drop customers who make too many calls to customer service for help. Whether or not this decision made sense from a financial perspective, it did a lot of damage to the company's reputation for customer service.

According to their website, Sprint's mission statement is: To be No. 1 in providing a simple, instant, enriching and productive customer experience. Judging by the number of subscribers lost last year, I'm guessing that their customers do not think they are achieving their purpose.

The company needs to get back to the basics and focus on the customer instead of just costs. This means reflecting on its purpose and openly and honestly debating what it means to the company. Do they truly believe in it? Does the leadership team in place feel they can achieve it? If not, there is little chance of getting anyone else to believe in it either. Many companies, especially during the recession, have acted as if their purpose is to cut costs instead of provide value for their customers.

Once it is clear that the leadership team absolutely believes in the purpose and feels confident that it can be achieved, they need to identify the barriers that are preventing the company from being number one and start aggressively attacking them. This will require creating initiatives in critical areas like product & service offering, market development, process improvement, or people development. Chances are, there will be some pretty daunting barriers to overcome, but they need to be addressed for the company to become competitive again.

Ignoring the barriers is not an option - neither is continuing to focus on cost cutting. The company shrinks in size and the culture is damaged with each round of cuts and eventually there will be nothing left to cut without completely shutting down the company . . . which is definitely not the way to become number one.

Culture: The Critical M&A Element

2009-11-10T12:55:00.005-06:00

As we make our way to the other side of the economic downturn and confidence in the future increases, M&A activity will most likely return as a common fixture in the world of business. As this occurs, people involved in the process will make decisions like they always have, by evaluating deals in terms of market capitalization, cash flow, EBITDA, goodwill, etc. Unfortunately, many will ignore a critical element that can ultimately make or break the merger: culture.

Studies continue to show that a vast majority of mergers fail to ever achieve intended results. The intensity associated with the traditional due diligence process pretty well assures that the reason for failure does not lie in the financial analysis. Since culture is considered a subjective element, many people think it can't be effectively assessed. Whether assessed or not, though, cultural issues will appear after the deal is done, often resulting in excessive costs and stress that can greatly lengthen the time it takes for the merger to produce results - if not kill it altogether.

In my experience, I have found the cultural elements that interfere with a successful merger consist of the following:

Misaligned values between the acquirer and acquiree;
Misunderstood purpose of the new/larger enterprise;
Poor communication with team members of the acquired company;
Fear throughout the organization.

As a consultant, I spend a lot of time with companies helping to sort out problems encountered after an acquisition occurs. Too often, investors discover well after the merger takes place that there is ab enormous mismatch in culture between the acquiring company and the acquired company. And the longer these problems are allowed to continue, the more damage that is done to the organization as a whole.

What to Do

An organization, by definition, is a group of people who work together for a shared purpose in a continuing way. Along this line, a due diligence process is not diligent if it does not include a cultural assessment. Although there will never be a perfect match, an upfront cultural assessment will at least provide a picture of the issues to be faced after the merger takes place.

A cultural assessment consists of observation and a series of interviews with people at all levels of the organization to address the following topics:

Values: Determine the values that exist within the target company (or whether a consistent set of values actually does exist). The objective is to understand how aligned the values are with the acquiring company and where problems may occur;
Fear: Assess the level and causes of fear within the company. Fear will obviously exist in any organization that is being acquired, but the key is to discover whether it is a fundamental part of the organization's culture;
Leadership Style: Ascertain whether the target company's leaders use a command and control or participative style of management. This will be important after the acquisition to give an idea of how much work will need to be done at the supervisor and management level;
Teamwork: Understand the level of teamwork between people, departments, and facilities. If there are problems, it is important to understand what is interfering with people working together. Teamwork needs to be assessed at all levels within the organization;

As part of the cultural assessment process, it is also important to develop a plan to address the issues as quickly as possible after the acquisition. Cultural problems tend to grow exponentially - especially after a merger - and the longer the issues are allowed to continue, the greater the chance they will interfere with the performance of the new organization.

If a cultural assessment had not been performed before the merger, it is important to do one as quickly as possible afterward. Acquisitions generally consume an enormous amount of time and money, and the quicker the new organization begins performing as expected, the better for everyone involved. Unless the cultural issues are understood and corrected, however, the merger has no chance of living up to its potential.

Why Lean Doesn't Work

2009-11-04T11:13:00.005-06:00

Just to be clear, I am a huge fan of lean. I led lean implementations in a number of companies and have personally seen some great results from projects over the years. Lately it seems, though, that lean in the United States and Europe is turning into just another overused, misunderstood concept that everybody does but few actually do well.

As an example, during a recent flight, I had a discussion with the head of operations for the airline I was flying. He proudly told me that the airline was "doing lean" and that they had been doing it for awhile. As he was telling me this, though, it was quite clear to me that the airline was not "doing lean." They may have people working on lean projects and trying to cut costs (or I should say, slash costs), but there is so much more to lean that he obviously did not understand.

In the lean world, waste and costs are reduced as quality is improved. the noticeable drop in the quality of service from most airlines in recent years (including this one) is a sure sign that this company was not "doing lean."

In another example, a large European company spent a great deal of money on their lean implementation. they hired a coordinator for the production department in one of their regions and appointed several people to be lean facilitators. They poured a lot of money into the initiative, but the process failed to really take hold in the company. Although they had isolated projects that showed huge savings, they could not successfully replicate their results to similar processes in other parts of the company.

Why?

Like the airline example, this company's senior leaders had not bought into the concept of lean. they did not truly understand what the initiative was or what it meant to the company. They had heard about the success some companies were having with lean and decided one day to do it themselves. Instead of being involved in the process, they delegated its implementation to someone outside of the senior team and sat back expecting results. In response to a directive to add facilitators to their teams, department managers found it convenient to assign the role to people returning from overseas assignments who did not have an open position waiting for them (whether or not they had the characteristics to be successful). As a result, the people responsible for facilitating improvement projects often had no interest in lean. They did, however, have an interest in remaining employed, so they accepted the positions, considering them temporary until something more permanent came along.

The Elements of Failure

In my experience, I have found that there are common elements to failed lean initiatives. These elements all stem from the lack of understanding that it is counter to the way most companies operate and, therefore requires a fundamental change to the company's systems and culture.

What I mean when I refer to a failed lean initiative is that it never comes close to achieving the potential savings that are possible. Although the company may see financial benefits from isolated projects, it is not addressing the issues that lead to the big gains. I'm referring to the difference between eliminating 3%-5% of waste (at best) versus the 90%-95% that is possible. Basically, without a clear understanding of lean, leadership, culture, and systems, you may never even know that your initiative is failing.

Although there are a number of elements that prevent lean from being truly successful, I listed below the five most common that I've seen in organizations.

A Technical Approach
The tools of lean are easy - it is the cultural barriers that are the most difficult to address. the tools will not lead to big gains unless the cultural barriers to improvement and change have been broken down.
Lack of Top Management Understanding
You can't commit to something that you don't understand. Lean requires commitment and involvement by senior leaders. The organization's leaders must work on identifying and eliminating the barriers so others can focus on process improvements.
Fear
Fear can cripple creativity and the willingness to become involved in an improvement process. the company's leaders must continually identify and remove the causes of fear to release the potential of team members.
Distrust
People must trust in management that improvements in productivity will not lead to layoffs and management must trust in the knowledge and intentions of workers.
Short-Term Thinking
Changing the culture of an organization is a long-term process. Benefits will be seen along the way, but the large gains will only come when the cultural barriers are removed, which requires patience and consistent efforts by senior leaders. Costs are reduced as the organization's health is improved. Efforts to slash costs through layoffs, across-the-board cuts, etc. will offset any progress made through lean.

There are so many barriers to lean within the typical organization that they cannot possible be covered within a short blog post. I can only hope that, by increasing understanding of, and addressing the five elements listed above will prevent lean from being cast off a few years from now as another management fad that failed to change Western business thinking.

The Case Against Goals

2009-10-27T19:36:00.014-05:00

For years, Western management has embraced the notion that setting goals and holding people accountable to achieving them is a vital component of effective leadership. According to a BusinessWeek article published last July, goal-setting is especially important during tough economic times like we're experiencing today.

In the midst of a decade in which the world of business is undergoing significant transformation, however, I wonder why leaders still hold tightly to the traditional goal-setting process, even though it continually causes more harm than good.

Among the problems caused by assigning goals to people and tying rewards to success (and punishments to failure), include the following:

Goals set for individuals often conflict with one another. As a result, goals are not consistent throughout the organization. Even though many of these goals may be met, there is little, if any, improvement in performance of the organization;
Holding people accountable or tying bonuses to the achievement of goals results in "safe" goal-setting and mediocre results. People will resist committing to stretch goals if it means they could lose their jobs or bonuses if they fail. People will accept aggressive goals enthusiastically if they know their job or bonus does not depend on meeting them;
When money is involved, people will pretty much do whatever it takes to meet goals set for them. Whether or not their actions are in the best interests of the company is secondary;
Tying the achievement of a goal to a bonus can turn the best of team players into dictators or Lone Rangers. If you really want to transform someone into a micromanager, set a goal with a strict deadline and tie the result to a fairly large bonus.

Real World Examples

A plant manager for a small valve manufacturer was held accountable for the shipping budget and given a 10% bonus each quarter the budget was met. The budget was met every quarter during the year, but was accompanied by increases in returns, customer complaints, overtime costs, and employee turnover - all resulting from the increased pressure to ship products at the end of each quarter.

A procurement manager was given the goal of reducing the annual costs of rental equipment (the equipment was mostly used to support new gas production facilities). The operations managers, on the other hand, were given uptime goals for the facilities they managed and felt that they needed to keep the rented equipment for long periods of time after startup to handle any problems that occurred early in the process. The conflicting goals resulted in a breakdown of the teamwork between procurement and production because the achievement of the goal by one could only come at the expense of the other. Further, neither could afford to care about the other's ability to meet their goal.

A product manager was given a goal to grow the business for a certain material in Asia and South America, and was given a bonus when certain targets were hit. He met all targets during the year by lowering the price of the material, when necessary, to get orders. One of the new customers for the material was an Asian company that purchased the material at a significant discount. The VP of Procurement for a large European customer (a sister division of the Asian company) found out about the lower price and pulled the business from the supplier. As a result, the product manager got his bonus but at the expense of the European business unit's performance and the company's gross margin.

Enough Already

There are countless other examples with similar results as the above. The key is to get the entire team to focus on improvement objectives that benefit the company as a whole. In line with this, objectives should be set system wide (facility, division, company) rather than at the individual level. Also, specific targets really do not accomplish more than mediocrity when the real goal is to improve as much as possible.

Remember that it is the performance of the company - rather than the individual - that matters. Attempting to manage the company by breaking it down into components rather than focusing on the whole creates a host of problems and oversimplifies the role of a leader.

As Douglas Adams once wrote, "If you try and take a cat apart to see how it works, the first thing you have on your hands is a non-working cat." The same philosophy applies to organizations.

How Happy Are You?

2009-10-19T20:51:00.009-05:00

How happy are you? If you are an American, chances are you are not - or at least not as happy as you were 30 years ago. You're also not as happy as people in many other countries. There are actually several studies regarding happiness published around the world and most agree that Americans are generally not happy people. How can this be? After all, the term American Dream was coined to characterize the U.S. as a nation with limitless potential for a richer and better life than anywhere in the world.

We have the largest GDP of any country in the world; the dollar is generally accepted as the standard global currency (at least for now); we own 2.2 cars and 2.4 televisions sets per household; and we get pizza delivered to our door. Shouldn't all of this make us happy? Apparently not . . .

The surveys and studies on the subject attribute the lack of happiness in the U.S. to a variety of factors; many of them rooted in the workplace. According to the International Labour Organization, Americans work more hours per week and have less vacation time than those in many other industrialized nations. researchers at Siena University in Italy have surmised that this extra work time negatively impacts our social relationships - an important component of happiness. Working overtime and/or spending significant time in traffic commuting to and from work leaves little time for friends and family. In other words, our drive to succeed and stay on top has resulted in a lack of balance in our lives. People are social by nature, and a lack of interaction can lead to unhappiness and depression.

The Fear of Layoffs

Another factor contributing to the lack of happiness is increased stress in the workplace. The fear of layoffs is always present in American business (even during good economic times), which adds pressure from a lack of job security. Add to this a weak system of social programs for the unemployed and an extremely expensive healthcare system, and the result is a feeling that losing one's wealth is a very real possibility.

Workers in Europe are much more protected than American workers. Layoffs in continental Western Europe occur much less often than in the U.S. and when they do happen, require a fairly significant severance to be paid. In the U.S., these types of laws do not exist, and when severance is paid to fired workers, it is often very temporary and fairly insignificant (laws obviously differ from state to state).

To make matters worse, the current downturn has put additional pressure on those who were not laid off to demonstrate increased value in the workplace, leading to more hours and even less time for social relationships.

Remembering Maslow

Virtually every business school around the world includes a something about Maslow's hierarchy of needs in management classes. In general, Maslow theorized that people need to achieve their basic needs (physiological and safety/security) before moving up to the more satisfying needs (love/belonging, self-esteem, self-actualization). he referred to the basic needs as deficiency needs, because not achieving then can result in negative feelings (stress, depression, etc.), while satisfying them does not necessarily create positive feelings. In other words, as long as we are worried about losing our job or financial security, we will never be happy. This situation will also prevent us from striving for the higher level needs, which can lead to increased happiness.

Since we have all been educated on Maslow's theory, I can only assume that many American leaders either do not believe in it or do not see the value in having happy employees. If they did, they would stop the practices that keep people worrying about their jobs and financial security. I have actually worked a CEO who believed that the fear of losing one's job was an effective motivator. This CEO also told me that he was working to cut back on the vacation time the company offered to employees.

It's a Question of Balance

I don't feel we will ever be happy unless our culture undergoes a fundamental shift toward a better work-life balance. I also feel that unless we start valuing and focusing on increasing the level of happiness, U.S. businesses will continue to decline, eroding our standard of living in pure economic terms (leading to a further decline in happiness).

The cost of labor puts U.S. businesses at a distinct disadvantage when competing with companies that have overseas operations. We have seen hundreds of thousands of jobs move offshore for this very reason. How we can compete, however, is by continually improving the products and services we offer, and by finding more efficient methods with which to produce and deliver them. This requires a high level of innovation and motivation throughout our workforce because to succeed, everyone has to contribute ideas for improvement. People will not be creative or motivated to contribute ideas, however, when they are stressed overworked, and worried about their jobs.

Is GDP a Complete Indicator?

There has been a debate among economists regarding whether or not GDP is a sufficient indicator of a nation's success because it does not include a quality of life component. In terms of pure numbers from the IMF for 2008, the U.S. ranks number one in the world, accounting for roughly 24% of the world's GDP, and is almost triple that of Japan, which is ranked second on the list.

We have to ask ourselves, though, if being number one really means anything if we are not happy. Are we better off than The Netherlands, for example, which is ranked 16th in GDP but much higher in the happiness index than the U.S.?

I truly believe that if we don't improve our happiness in this country, it will eventually sink us. We have got to change our lifestyles, which includes improving the workplace, to enable us to become a happier nation.

Improving our level of happiness will be a long process, but we have got to start making it a priority before the situation deteriorates to the point of severely impacting our prosperity and our lives. The components of a plan to increase happiness must include, among other things, improving job security, making the workplace more enjoyable, and improving the work-life balance. We may never totally self-destruct economically because of the sheer size of the U.S. market, but that is no reason to ignore the situation.

I had a conversation with a Swedish citizen recently who, based on what he's witnessed in the news media, characterized Americans as "grumpy people." I have to admit that it was difficult to argue with him.

The Declaration of Independence states that the pursuit of happiness is an unalienable right. This does not mean, however, that it is guaranteed. That part is left up to us.

Fixing U.S. Healthcare

2009-10-13T09:19:00.012-05:00

How do we fix the U.S. healthcare system? It's an issue that has sparked a great deal of emotion and debate among people for a variety of reasons. Perhaps the most important reason is that healthcare is an issue affects virtually every American in one way or another. If you have health issues, you care about the quality, cost and availability of treatment. If you don't have any current health issues, you care about how much it will affect your taxes and insurance premiums.

Another interesting angle in this debate is that it covers all facets of the issue from how to fix the system to whether or not it even needs fixing.

What is "Fixing?"

First of all, I think the term "fixing" needs to be eliminated from the issue. Healthcare is such a large and complex system that it is crazy to think it can ever be "fixed" - especially within a four-year term of an elected official. The problems run so deep and have become so ingrained that even if they could be fixed, the actions would be so drastic that they would create a shock wave that could bring the entire system crashing down.

The system needs to be improved on a continual basis - with a large number of relatively small steps so the improvements can become standardized and actually stick. Following a continual improvement approach will also assure that actions implemented result in improving the system instead of making things worse.

Unfortunately, the U.S. government does not work this way. The legislative process tends to be an all or nothing endeavor, and revisiting an issue that was addressed in a prior session of congress is looked at by the media and much of the public as a failure. . . which brings up another problem.

Fixing the healthcare system cannot be done solely by the government. It must include all stakeholders, including doctors, hospitals, insurance companies, drug producers, and most importantly, the consumers. Unfortunately, this makes the problem exponentially more complex and difficult to resolve.

What Needs to Happen

There are several components to an improved U.S. healthcare system. It is important to note that these are long-term steps - not short-term fixes, but if we start focusing on these things now, we should begin to have noticeable improvement within the next 10-20 years. It is not necessarily the American way to think that far ahead and take steps that will not bring immediate benefit, but a problem like this requires a drastic shift in thinking and it will take time.

The items listed below address the what more than the how of healthcare reform. The reasons for this include the importance of agreeing on what needs to happen before taking action and making changes. Also, some of these thoughts require a fundamental shift in thinking that will not happen overnight or through legislation. Thirdly, I'm desperately trying to keep this article short, as it could easily turn into a 1000+ page legislative document.

1. Eliminate Waste in Healthcare Processes

This involves adopting a lean (i.e., waste reduction) strategy for all facets of healthcare in order to reduce waste in processes and systems across the industry. Hospitals, insurance companies, Medicare, drug companies, testing labs, and medical practices should all learn about lean and how to apply it within their operations. It is generally accepted that a process that has not been analyzed for inefficiencies can consist of 85%-90% waste.

2. Eliminate Duplication in Testing Procedures & Equipment

There is an unbelievable amount of duplication within the healthcare industry which is expensive and adds very little value to the patient. As an example, there is an overcapacity of expensive diagnostic equipment in many hospitals. For competitive or status/ego reasons, neighboring hospitals may each purchase new test equipment instead of sharing unused capacity. This creates a need to use and pay for tests that may not be absolutely necessary in order to prevent the equipment from sitting idle.

3. Accept and Adopt More Alternative Treatments

A fundamental shift in thinking is necessary in the medical community, the U.S. government, and the public toward adopting more alternative treatments for patients. Many other nations, including Germany, are leading the way in the research and application of alternative medical treatments that cost much less and tend to result in fewer side effects for patients. This also involves providing accurate statistical information on the effectiveness of the various treatments so the patient can decide which procedure to accept.

It is strange to me that we refer to things like massage, acupuncture, and herbal remedies as "alternative," since many have been in use for much longer than "traditional" treatments.

4. Shift Focus from Reactive to Preventive Healthcare

The U.S. healthcare system is oriented toward disease rather than health. If we are going to reduce the cost of healthcare in this country, we absolutely need to shift the focus toward maintaining health instead of merely reacting when problems occur. We are overweight, overstressed, out of shape, and eat poorly - all of which lead to a slow deterioration of our health and increased need for expensive treatments and drugs. Without a fundamental shift toward preventive healthcare - meaning better nutrition, more exercise, reducing stress, and improving our level of personal happiness, we have no chance of ever significantly reducing the cost of healthcare.

This involves much more than regular physicals - since physicals are, after all, more detective than preventive. It involves things like replacing our donuts and fries with whole grains and vegetables.

The human body is a complex system, and like any system, optimization requires maintaining balance among all components. This is counter to our current system of focusing only on treating disease. We change the oil in our cars to prevent damage to the engine from occurring, but fail to follow a similar approach with our own bodies.

Okay, Let's Hear It

Being a highly emotional subject, I fully expect to receive more comments on this blog than from anything I have posted in the past. That's okay because, as someone once wrote, the more we disagree, the more chance there is that at least one of us is right. If we are to improve things in this country, however, we need more constructive - rather than divisive - debate.

Saturn Crashes

2009-10-02T10:55:00.018-05:00

It was very disappointing to hear the news about Roger Penske pulling out of the deal to acquire GM's Saturn division. Of all American automakers, I believe Saturn had the best chance of transforming into the type of organization that could compete with Toyota, Honda, and Hyundai, and it's really too bad to watch it go down without a fight.

At one time, Saturn was a very interesting company. It started in the mid-1980s completely isolated from the poisonous culture of General Motors as a way for the company to compete with Toyota and Honda. They utilized a separate dealer network, built a new factory in Tennessee, and hired a completely new "non-auto industry" workforce. The division also focused on creating a positive customer experience - something for which GM has never been known.

It Should Have Worked

The idea was good; the implementation was mediocre; and the strategy over the last 15 or so years was extremely poor. At some point, the infinite wisdom of GM executives kicked in and interfered with the development of the company. GM management decided to virtually stop the division's development of new vehicles and bring it into the company's fold. As a result, Saturn lost any of the benefits it once had and entered a death spiral from which it had no chance of escaping. The interesting experiment quickly became the stepchild of the company, and was strategically lost among the other GM divisions.

My disappointment with the latest news is that I don't believe the bad habits that Saturn has most assuredly developed since being rolled into GM's culture have been around long enough to be ingrained into the Saturn culture. It probably would not take very long to move the company back to its roots and create the type of culture that is necessary to compete with other automakers.

To survive in today's market, an automaker must be able to quickly develop new models that people want to buy while improving quality and lowering costs on a continual basis. Given the decisions and actions over the last several years, however, I don't believe that this is possible at GM because there are just too many cultural barriers in the way. The people at Saturn should know what it's like to be a small, flexible company, though, and separating it from the mother ship would give it the opportunity to rebuild without the interference of GM management.

To succeed, Saturn would need to have a flat organization structure that is light on management and heavy on leadership, innovation, and teamwork. It is not rocket science, but is only possible if the people in charge have the vision of what a customer-focused, flexible organization looks like, and the attention span to stick with it through good times and bad. I don't think GM has such a vision - but I was hoping that the Penske Group did.

When I hear people within GM say that Saturn was never viable or necessary, I can't help but think about the parallels with Hyundai Motor Company. Originally created to build cars for Ford, company management decided in the 1970s to design and build their own cars. In the mid-1980s, the Excel became the company's first car sold in the U.S. - a small, fuel-efficient model that, to be honest, was very poor quality. But the company stuck to its vision and continually improved its product offering and quality and is now a serious competitor in the global market. This could have been Saturn had GM management been patient enough to not interfere.

Just Make It Quick

The senior leaders at GM have failed in their ultimate responsibility as stewards of the company. General Motors has a colorful and interesting history that has been a major part of Americana for more than 100 years. The company that employed hundreds of thousands of Americans (and affected exponentially more), and includes the likes of William Durant and Alfred Sloan, has steadily declined through arrogance, greed and poor decision-making. As a native of Detroit, the situation makes me very sad and very angry.

Company officials announced that, with the collapse of the Penske deal, Saturn will close its doors by October, 2010. As sad as the news is for the U.S. auto industry, a quick exit may actually be better than the type of slow, lingering death that Oldsmobile and Pontiac have experienced. As we look to the future, though, I have to wonder whether a similar fate awaits Chevrolet, Cadillac, GMC, and Buick.

The Fallacy of Across-the-Board Cuts

2009-09-22T10:12:00.013-05:00

One of the most commonly used practices by business leaders during a downturn is across-the-board budget cuts. Within the last year, a large number of public and private organizations announced comprehensive cuts in an effort to demonstrate action to address the drop in revenues. As a business tactic, however, across-the-board cuts demonstrate nothing more than an absence of imagination, a lack of control over the business, and an unwillingness to take the time to dig in and make the difficult decisions.

Implementing consistent budget cuts in every area of the company assumes the organization is running perfectly consistent across all departments, which as we all know, is never the case. Forcing cuts across all areas punishes an demoralizes those in departments that are running well. If one team has put a lot of hard work and effort into continually improving the quality and productivity of its processes while another has historically run inefficiently, both shold not be treated equally in a downturn. The leader of the inefficient area should be forced to reduce his or her budget by a larger amount and implement immediate improvements. Plus, a manager or supervisor who has resisted efforts to continually improve processes in his or her area of responsibility should be included at the top of any list of headcount reductions.

Another problem with across-the-board cuts is that there are certain products or services that, for strategic reasons, may require additional funding, thereby necessitating a budget increase. An across-the-board reduction not only consumes the attention of those leading the strategically important areas to reduce spending, but it also misses an important opportunity for the company to pull itself out of the crisis in a way that actually strengthens the organization.

What's the Alternative?

Instead of implementing across-the-board cuts, the organization's leadership team really needs to conduct a strategic planning session to establish a consistent, in-depth understanding of its current situation and develop a limited set (two or three, at the most) of critical initiatives to pull the company out of the downturn.

The entire company needs to become focused on productivity improvements - without sacrificing quality - to assure any spending that does not add value is reduced (which actually should be done whether the organization is facing a downturn or not). Some areas of the organization will undoubtedly face cuts and leaders will need to identify ways to reduce spending immediately in a way that does not negatively affect the company's overall health. As mentioned above though, some departments, locations, or projects will need to receive additional focus and investment to speed up developments or increase capacity.

Avoid the Easy Solution

It is not difficult for an organization to be profitable during the good times. The true test of leadership occurs, however, when the economy contracts and the market for a company's products or services shrinks. When a crisis does occur, leaders must mobilize their teams to analyze the situation and determine the actions necessary to pull out of the downturn as quickly as possible. Responsible leadership dictates that the plan consider the need to survive along with the need to strengthen the organization for the future. This means avoiding the temptation to implement easy solutions, including across-the-board cuts.

Taking Your Eye Off the Ball

2009-09-08T16:05:00.020-05:00

Nothing can get you back to your roots faster than a significant and unexpected drop in profits. As the worst economic year in recent history starts to wind down and companies begin to think about budgets and plans for next year, it is a perfect time to reflect on several items, including how to be ready for growth when the economy rebounds, and how to strengthen the organization to avoid significant damage when the next downturn occurs. The best way to begin assessing these issues is to return to the fundamentals and assess whether or not the organization has strayed from its stated purpose.

Many companies are finding that the success they experienced in the years preceding the recession actually led them to unintentionally deviate from their intended purpose. Some of these organizations are now refocusing on their missions as a way to emerge from the current downturn and return to long-term profitability.

TOYOTA

When people lose - or are afraid of losing - their jobs, one would fully expect a drop in automobile sales. Because of this, it is not surprising to see Toyota's revenues and profits to fall during the current recession. What is surprising, however, is the extent of the losses incurred. For a company recognized as one of the best run over the last 50 years, the large loss Toyota incurred over the last year or so has been staggering.

So what really led to Toyota's decline? How can the company that invented lean, treats its suppliers as partners, and has been so successful for so long go from earning almost $22 billion in operating income to losing more than $5 billion within one year?

I believe that the problems at Toyota resulted from the company's leaders taking their eyes off the ball over the last 1-2 years. Overtaking General Motors as the world's largest automaker seemed to become their main objective. In the race to be number one, they forgot what got them to that point in the first place: making high quality cars that people want to buy (or, as their mission states, to enrich society through car making).

I regularly read about CEO Akio Toyoda and other Toyota executives working to get the company back on track. Back on track means that they were off track - and off track means that they strayed from the path that made them successful.

For years recognized as the producer of the highest quality cars in the industry, Toyota has experienced a fairly large number of quality problems over the last few years, which may be a result of the enormous growth the company has experienced recently. In the past, managers would rise up through the ranks and be well-versed in the Toyota way, which meant they understood the systems and process for assuring (and continually improving) quality and productivity. As they battled GM for the top spot in the auto industry, however, their growth exceeded their ability to develop leaders and their quality suffered.

Recent comments made by the company's senior leaders means that they recognize the need to refocus before things got out of control. It is very common in business for companies to lose their way and not realize that anything is wrong until the organization is in severe trouble - which can take several years. Understanding the need to refocus now means that Toyota can fix things before significant damage occurs.

WHOLE FOODS MARKET

Whole Foods started as a modest grocery store in Austin, Texas and, within 25 years, grew into a major chain with more than 250 stores in the U.S. and U.K. Throughout the last few decades, the company became synonymous with healthy, organic and unaltered whole foods. Customers paid more to shop at Whole Foods, but were usually guaranteed to find a wide variety of healthy items in return.

Just like many businesses offering premium priced products over the last year two years, however, Whole Foods experienced a drop in revenues and profits. Rather than cut costs, close stores, and lay off workers, however, company CEO John Mackey decided to revisit the company's roots to return to profitability. As with Toyota, it appears that Whole Foods got caught up in its own success and strayed from its purpose during a period of high growth.

In an August 5, 2009 article in the Wall Street Journal, Mackey admitted that the company sells, "a bunch of junk." He went on to say, "we've decided if Whole Foods doesn't take a leadership role in educating people about a healthy diet, who the heck is going to do it?"

As Whole Foods grew into more of a mainstream supermarket, it replaced much of its healthier fare with gourmet foods. When the recession hit and people became less willing to pay more for gourmet foods, however, the company suffered. This, along with a few other factors, led Mackey to look closely at the reasons for the company's problems and come to the conclusion that Whole Foods had strayed from its purpose.

By definition, whole foods are foods that are unrefined, unprocessed, and resemble what they were in nature. What Mackey found when he recently walked through one of the company's stores was a large selection of white bread, gourmet desserts, and refined oils - in other words, foods that are not even close to being whole - the company's roots.

I'm betting that Whole Foods will succeed in returning to its purpose - and profitability - because Mackey realized that the company lost its focus before too much damage was done. The company has not strayed for very long and, like Toyota, can fix itself by reminding its team members why the company was created in the first place and what made it successful.

IT'S NOT ROCKET SCIENCE

The point of all this is that companies must regularly take time to reflect on their purpose to keep from taking their eyes off the ball. Consumer tastes change, technology changes, economic conditions change, but a company's fundamental purpose - it's raison d'etre - should not.

Cars will continually change in terms of technology and design, but Toyota's commitment to enriching society through car making cannot change or its employees will become confused and its customers will cease to see a difference between a Toyota and any other brand of automobile. If Whole Foods strays from its purpose of providing healthy, organic, and unrefined foods, it will lose the customers who will begin to question why they are paying more for the same products offered at Kroger or Safeway.

Do you run the risk of straying? If it can happen at companies like Toyota or Whole Foods, it can pretty much happen anywhere.

The Role of Business in the Swine Flu Outbreak

2009-08-25T11:27:00.006-05:00

With concerns over a global swine flu epidemic growing, it will be interesting to see the role that businesses take in dealing with and preventing the spread of the disease. Although there is no doubt that companies can help the situation, I am hoping that business leaders at least cease some of the common practices that encourage the spread of illness among employees.

It is not unusual for organizations to award some type of bonus to people who do not use their sick days over a defined period. the bonus may be in the form of a direct payout for not using sick days or indirectly combined with some other type of reward (e.g., a bonus which, to be eligible, requires perfect attendance during the period). However the payout is packaged, it is basically an incentive to discourage people from using (or abusing) sick days.

This type of incentive makes perfect sense when you do not trust some employees. Offering a bonus to those who do not abuse sick days seems logical because it rewards the reliable workers while punishing irresponsible employees. What I have found, however, that this type of incentive actually results in increasing - rather than decreasing - the number of sick days taken by employees; especially during cold and flu season.

Some companies distinguish between excused and unexcused absences by limiting incentives to only those who present a note from a doctor after calling in sick. Besides creating a patriarchal culture within the company where managers are believed to be more trustworthy than workers, this type of policy forces ill employees to take the time, energy and expense to see a doctor when all they may need is to rest for a day or two to recover sufficiently to return to work.

Rewarded for Spreading Colds & Flu

Rewarding people for perfect attendance encourages employees to come into work when they are sick and need to stay home and rest. This results in spreading the cold or flu to other employees, thereby increasing the number of people who either take sick days or come into work when they, like the person who first came into work when he or she was sick, should stay at home. in a small company, this can be devastating because a large percentage of the workforce can end up sick. In one large company, I witnessed infections spread quickly - even to facilities in other countries - because sick employees were encouraged to come into work instead of staying home to recover.

One can imaging the effect this type of behavior can have on a swine flu epidemic. Whether faced with a worldwide epidemic or the common cold, however, managers need to understand that encouraging sick people to come into work shows a lack of regard for the health of all employees and can result in large costs for the company.

Why We Think It Works

Over the years, this type of incentive program has been very common among American companies for a variety of reasons.

Frustration:

It is frustrating when someone calls in sick. We hire people because we need them to do a job and when they miss work without advance notice, it can cause problems with productivity, customer service, and scheduling, in addition to putting pressure on co-workers.

An incentive to reduce absenteeism is an attempt to deal with the frustration that unfortunately can make the situation worse.
School Perfect Attendance Awards:

Rewarding perfect attendance is a concept that many of us were first exposed to during our school days. Schools commonly award certificates to students who do not miss any days during the school year. As with companies, though, this type of incentive often results in sick students coming to school and spreading the sickness to other children - thereby increasing the total number of days missed by the student body (and teachers), as a whole.
Focus on Direct/Easy to Measure Costs:

Determining the cost of absenteeism by measuring the number of sick days taken is easy, but unfortunately inaccurate. It is impossible to determine the costs associated with the lower productivity that results from sick employees coming into work. When multiplied by the number of employees who were infected by a person who came into work sick, the total drop in productivity can be staggering.
Hero Worship:

Whether the result of a direct incentive or positive reinforcement, the American business culture tends to make a hero out of the employee who comes into work even when he or she is sick. We tend to look at anyone who is more committed to the company than their own health as a valued employee.

I once worked with a company where the CEO publicly praised managers in the corporate office for coming into work when they were ill. As a result, people became afraid to call in sick and only did so when they were physically unable to come into the office. During flu season, infections spread quickly through the office resulting in a number of problems for the company.
Lack of Trust:

If managers trusted the motives of the workers, they would believe them when they called in sick. This can be a reflection of the company's hiring practices and its process for screening employees. If the organization's values are clear and job candidates are carefully screened before hiring to assure they possess common values, management can trust the motives of those who are hired.

Dealing with employees who appear to be abusing the company's attendance policy should be done immediately and on a case-by-case basis rather than through company-wide policy changes.

What Can Be Done?

There are a number of things that can be done to reduce absenteeism at a company. The most obvious is proactive health planning, which includes nutritional and health counseling to help employees strengthen their immune systems - especially during flu season. In addition to reducing employee sickness within the company, this type of initiative can improve productivity (by having healthier employees) and morale (by demonstrating that management cares about employees).

Another action that has been shown to help reduce absenteeism is to offer unlimited sick days to employees. When a specific number of sick days are offered, people think of them as something they are owed by the company and tend to believe they need to use them or lose them before the end of the year. An unlimited sick leave policy does not give the impression that people will lose days that they do not take.

As an example, a company I once worked with changed its sick leave policy from 10 days per year to unlimited days. Within the first year, the average number of sick days taken per employee was significantly reduced. [As mentioned earlier, care must be taken in any measure used to evaluate results from a change in sick leave policy]

Focus on Health

Basically, the way to reduce absenteeism due to sickness - including a flu epidemic - is to focus on health instead of sickness. Attempting to improve the situation through artificial means like monetary incentives will not help people get sick less often. On the other hand, providing information, counseling, and a healthier work environment can give those who are willing to change the ability to do so, leading to sustained improvement.

Some of the steps businesses can take to help prevent an H1N1 epidemic (and reduce the financial impact if one does occur) are as follows:

Telecommuting: Encourage and help those employees who can work from home to do so. This obviously involved a certain level of trust that employees will, in fact, work when they are not in the office;
Stress Management: Implement stress management and reduction programs for employees. Studies have shown that stress depresses the immune system and anything the company can do to help employees deal with stress can help to prevent (or reduce the effects of) the flu;
Nutritional Counseling: Diet can help or hinder the effectiveness of a person's immune system. Counseling people on food choices and eating habits can help them strengthen their immune systems to fight off infections and disease, as well as improve their overall health;
Education: Educate people on the ways to prevent the spread of disease. Provide hand cleaners and anti-bacterial wipes in convenient locations throughout the workplace;
Stay at Home! Implement a policy that requires people to stay home when they are sick. Send people home when they are ill and come into work. Do not penalize people for using sick days and consider implementing an unlimited sick leave policy at least until the swine flu scare has passed. Also, eliminate the monetary incentives that encourage people to come into work when they are sick.

Executives have the responsibility to take a role in preventing the spread of swine flu - not only for the health of their employees (and themselves), but also to help reduce financial impact that a flu epidemic can have on an organization. Implementing the above actions will not be easy for American companies because they require a fundamental change in the way managers think. The fear of an H1N1 global pandemic, however, may be just the thing that stimulates this type of change in thinking.

The Role of Business in Preventing a Swine Flu Epidemic

2009-08-25T10:44:00.007-05:00

With concerns over a global swine flu epidemic growing, it will be interesting to see the role that businesses take in dealing with and preventing the spread of the disease. Although there is no doubt that companies can help the situation, I am hoping that business leaders at least cease some of the common practices that encourage the spread of illness among employees.

It is not unusual for organizations to award some type of bonus to people who do not use their sick days over a defined period. The bonus may be in the form of a direct payout for not using sick days or indirectly combined with some other type of reward (e.g., a bonus which, to be eligible, requires perfect attendance during the period). However the payout is packaged, it is basically an incentive to discourage people from using (or abusing) sick days.

This type of incentive makes perfect sense when you do not trust some employees. Offering a bonus to those who do not abuse sick days seems logical because it rewards the reliable workers while punishing the irresponsible employees. What I have found with this type of incentive, however, is that it actually results in increasing – rather than decreasing - the number of sick days taken by employees; especially during cold and flu season.

Some companies distinguish between “excused” and “unexcused” absences by limiting incentives to only those who present a note from a doctor after calling in sick. Besides creating a patriarchal culture within the company where managers are believed to be more trustworthy than workers, this type of policy forces ill employees to take the time, energy and expense to see a doctor when all they may need is to rest for a day or two to recover sufficiently enough to return to work.

Rewarded for Spreading Colds & Flu

Rewarding people for perfect attendance encourages employees to come into work when they are sick and need to stay home and rest. This results in spreading the cold or flu to other employees, thereby increasing the number of people who either take sick days or come into work when they, like the person who first came into work when he or she was sick, should stay at home. In a small company, this can be devastating because a large percentage of the workforce can end up sick. In one large company, I saw infections spread quickly – even to facilities in other countries – because sick employees were encouraged to come into work instead of staying home to recover.

One can imagine the effect this type of behavior can have on a swine flu epidemic. Whether faced with a worldwide epidemic or the common cold, however, managers need to understand that encouraging sick people to come into work shows a lack of regard for the health of all employees and can result in large costs for the company.

Why We Think It Works

Over the years, this type of incentive program has been very common among American companies for a variety of reasons.

Frustration It is frustrating when someone calls in sick. We hire people because we need them to do a job and when they miss work without advance notice, it can cause problems with productivity, customer service, and scheduling, in addition to putting pressure on other employees.

An incentive to reduce absenteeism is an attempt to deal with the frustration that unfortunately can make the situation worse.

School Perfect Attendance Awards Rewarding perfect attendance is a concept that many of us were first exposed to during our school days. It is very common for schools to award certificates to students who do not miss any days during the school year. As is does with companies, though, this type of incentive often results in sick students coming to school and spreading the sickness to other children – thereby increasing the total number of days missed by the student body (and teachers), as a whole.

Focus on Direct/Easy to Measure Costs Determining the cost of absenteeism by measuring the number of sick days taken is easy, but unfortunately inaccurate. It is impossible to determine the costs associated with the lower productivity that results from employees coming into work sick. When multiplied by the number of employees who were infected by a person who came into work sick, the total drop in productivity can be staggering.

Hero Worship Whether the result of an direct incentive or positive reinforcement, the American business culture tends to make a hero out of the employee who comes into work even when he or she is sick. We tend to look at anyone who is more committed to the company than their own health as a valued employee.
I once worked with a company where the CEO publicly praised managers in the corporate office for coming into work when they were ill. As a result, people became afraid to call in sick and only did so when they were physically unable to come into the office. During flu season, infections spread quickly through the office resulting in a number of problems for the company.

Lack of Trust Offering an incentive that discourages the use of sick days shows a lack of trust in employees because if you trust their motives, you would believe them when they called in sick. This can be a reflection of the company’s hiring practices and its process for screening employees. If the company’s values are clear and job candidates are carefully screened before hiring to assure they possess these values, you should be able to trust the motives of individuals.

Dealing with employees who appear to be abusing the company’s attendance policy should be done immediately and on a case-by-case basis and not through companywide policy changes.

What Can Be Done?

There are a number of things that can be done to reduce absenteeism at a company. The most obvious is proactive health planning, which includes nutritional and health counseling to help employees strengthen their immune systems – especially during flu season. In addition to reducing employee sickness within the company, this type of initiative can improve productivity (by having healthier employees) and morale (by demonstrating that management cares about employees).

Another action that has been shown to help reduce absenteeism is to offer unlimited sick days to employees. When a specific number of sick days are offered, people think of them as something they are owed by the company and tend to believe they need to use them or lose them before the end of the year. An unlimited sick leave policy does not give the impression that people will lose days that they do not take.

As an example, a company I once worked with changed its sick leave policy from 10 days per year to unlimited days. Within the first year, the average number of sick days taken per employee was significantly reduced. [As mentioned earlier, though, care must be taken in any measure used to evaluate the results from a change in sick leave policy]

Focus on Health

Basically, the way to reduce absenteeism due to sickness – including a flu epidemic – is to focus on health instead of sickness. Attempting to improve the situation through artificial means like monetary incentives will not help people get sick less often. On the other hand, providing information, counseling, and a healthier work environment can give those who are willing to change the ability to do so, leading to sustained improvement.

Some of the steps businesses can take to help prevent an H1N1 epidemic (and reduce the financial impact if it does occur) are as follows:

Telecommuting: Encourage those employees who can work from home to do so. This obviously involves a certain level of trust that employees will, in fact, work when they are not in the office;

Stress Management: Implement stress management and reduction programs for employees. Studies have shown that stress depresses the immune system and anything the company can do to help employees deal with stress can help to prevent (or reduce the effects of) the flu;

Nutritional Counseling: Diet can help or hinder the effectiveness of a person’s immune system. Counseling people on food choices and eating habits can help them strengthen their immune systems to fight off infections, as well as improve their overall health;

Education: Educate people on the ways to prevent the spread of disease. Provide hand cleaners and anti-bacterial wipes in convenient locations throughout the workplace;

Stay Home! Implement a policy for people to stay home when they are sick. Send people home when they are sick and come into work. Do not penalize people for using sick days and consider implementing an unlimited sick leave policy at least until the swine flu scare has passed. Also, eliminate monetary incentives that encourage people to come into work when they are sick.

Executives have the responsibility to take a role in preventing the spread of swine flu – not only for the health of their employees (and themselves), but also to help reduce the financial impact that a flu epidemic can have on an organization. Implementing the above actions, however, will not be easy for American companies because they require a fundamental change in the way managers think. The fear of an H1N1 global pandemic, however, may be just thing that stimulates this type of change in thinking.