A Systems Approach to Business - Part 3

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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

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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

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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.

Strong From The Start

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The Six Elements of a Healthy Organization

In my book, Avoiding the Corporate Death Spiral, I outlined the six warning signs that an organization’s leaders must continually identify and address in order to avoid a crisis. Since writing the book, I have been approached on several occasions by entrepreneurs asking what they can do during the startup phase of a company to prevent a future death spiral. In other words, can the signs of decline be reversed to become the elements of a healthy and strong organization?

It is actually much easier to do things correctly from the start than to fix problems within an existing organization. Knowing the elements of a healthy company can help many problems be avoided, which is critical during the organization’s fragile startup phase.

Along these lines, I have put a positive spin on the warning signs and revised them to become the elements of a strong organization. These elements are:

1. Clear & Consistent Purpose
2. People/Process/Customer First - Numbers Second
3. Strong Supplier Relationships
4. Valued Employees
5. Clean and Well-Organized Workplace
6. Holistic Management

Keeping these elements in mind during the startup of a business can help to embed them into the culture early on, helping to assure they last many years into the future. Although there is always a certain level of cultural drift within an organization that requires the attention and action of leaders to keep the company on-track, it is much easier to address problems before they become engrained into the culture. The key for leaders is to understand that they need to continually be on the lookout for problems – during the good times as well as the bad. Strangely enough, it is actually when the organization becomes highly successful that it becomes the most susceptible to bad habits. It is very easy to take your eye off the ball when business is good.

Focusing on the Elements

1. Clear & Consistent Purpose

The most important aspect of starting and operating a business is having a clear and unchanging purpose. This means creating a simple and clear, but detailed description of why the business was created. It describes the value provided to customers – not necessarily in terms of a product, but the specific value that the product provides (see simple examples below).

Automobile Manufacturer:
YES: Provide safe, comfortable, reliable, and efficient transportation
NO: Build and sell cars

Call Center
YES: Helping companies provide high quality service to their customers better
and more efficiently than they can themselves
NO: Provide low cost call center services

Pressure Relief Valves
YES: Provide effective protection for people, equipment and the environment
NO: Provide pressure relief valves

Focusing on the value enables the company to keep up with changes and advances in technology instead of getting stuck with an obsolete product or service (e.g., typewriter manufacturers).

Having clarity on the purpose will enable you and the others in your organization to stay focused on the market(s) you serve and products/services you offer. Without this level of clarity, you run the risk of getting into areas where you do not belong, or attempting to take on more than you are able.

2. People/Process/Customers First; Numbers Second

As the leader of a startup, it is easy to get wrapped up in spreadsheets analyzing the financial aspects of the company. Although it is important to understand the numbers, it is even more important to understand that the numbers are merely the effect of taking care of your people, processes and customers. In meetings with the people on your team, it is a good idea to start with people, process, and customer issues first and close with financial discussions.

Also, do not get caught up in the idea that everything can be measured. In fact, the most important aspects of leading an organization cannot be accurately measured, but will require a great deal of your attention. This includes the costs associated with employee satisfaction, poor planning, lack of teamwork, etc. As an example, you may be able to put some type of measure on the level of employee satisfaction, but estimating the cost of a one point increase or decrease is impossible.

3. Strong Supplier Relationships

Your suppliers are a part of your system and as such, have just as much of an effect on your success as does your own team. The key is to find suppliers who have the same philosophy on business as you do and evaluate them based on the total cost of doing business (which includes price, payment terms, leadtimes, defects/reject rate, cost of inspection/appraisal, variation in materials, level of technical support, etc.).

4. Valued Employees

Without enthusiastic and happy employees, you have no chance of having happy customers. It is the workers who provide the products and services to satisfy customers and if they are not actively engaged in the business, it will show up in the quality of the work they do. This may seem like an obvious point, but it is so often forgotten that it bears repeating. Getting the correct people on your team is a critical first step, but keeping them enthusiastic and proud of what they do is just as important.

5. Clean & Well-Organized Workplace

This element includes setting up the workplace so needed equipment and information is readily available to people. This involves regular 5S efforts (Sort, Set in order, Scrub, Standardize, and Sustain) to assure that workplace setup continues to help, rather than hinder the work being performed.

Also included in this element is putting processes in place to effectively maintain the company’s assets (i.e., preventive maintenance), so they continue to perform as intended well into the future.

6. Holistic Management

An organization is an interdependent system that works to serve customers. Every person either serves the customer directly or serves someone in the organization who eventually serves customers. Because of this, it is important to understand how the entire system operates, including how materials and information flow from concept to customer and especially how they are handed off between processes.

It is very risky to set goals for individuals or functions because it is pretty much guaranteed that people will meet virtually any goal set for them (especially when money is involved) - whether it helps or hurts the company is secondary. As an example, if you set a goal for the procurement team to keep purchased costs down and another for the production people to meet the shipping forecast, chances are that both will meet their goals. The procurement team will bring in sub-standard materials with little regard to quality, and the production team will be forced to use poor quality materials and produce sub-standard products (at a higher cost) in order to meet the schedule. Both teams have met their goals while the company and its customers suffer.

These six elements will help assure that the company starts off with a strong foundation that will help it succeed, even when faced with negative external events. This assumes, of course, that there is a market for the products and/or services offered by the company, and that the company has solid financial strength. Given these two assumptions, the organization has a much greater chance of growing and succeeding well into the future if the leader assures the six elements are present from the start.