Sunday, June 28, 2009

Reinventing the Automakers

It’s refreshing to hear President Obama talk about the need for the American automakers to reinvent themselves to become more competitive. Politicians, business leaders, writers and newscasters continue to talk about the need for General Motors and Chrysler to fundamentally change in order to survive. My concern from what I have seen so far, however, is the idea that “getting smaller” is considered fundamental change.

If we look at the dictionary, the term fundamental is defined as, “serving as, or being an essential part of, a foundation or basis.” Following this definition, selling off divisions, laying off workers, closing plants, and shedding dealers does not constitute fundamental change. They are ways to cut costs, and may be necessary because of decisions made and actions taken in the past, but it has nothing to do with changing the philosophy and basic approach to business.

In my opinion, fundamental change for American automakers begins with getting back to the basics by clarifying and communicating the purpose of these companies. At one time, the Big 3 had very clear missions that involved offering safe transportation that provided value for their customers. Somewhere along the way they forgot about this and got the idea that their purpose was financial – e.g., related to profit or earnings for shareholders. When this happens in any business, decisions become much more focused on the short-term and the company’s overall health begins to break down.

Valuing Employees

Another area requiring fundamental change is the relationship between management and workers. There have been problems for years between the union and management, and it appears that the problems are still not being addressed. Unions don’t trust the intentions of management and the situation needs to be addressed immediately. And recent conversations with the union have been completely focused on concessions, with little or no discussion about improving the relationship.

If the relationship is to improve, the union needs to be involved in planning at the highest level and management needs to improve its communication with the workers throughout the company. This may work itself out because of the large stake unions are taking in the companies, but it can’t be assumed – it must be acted upon quickly.

Supplier Relationships

Another relationship that has been severely strained over the years is the one between the automakers and their suppliers. Surveys of tier 1 suppliers have shown a very small percentage of them feel they have a “good” or “very good” relationship with the Detroit 3. These surveys also show that suppliers feel that the automakers have little or no concern in the success of their supply chain. Lengthened payment terms and continual pressure to reduce prices has left many suppliers on the verge of bankruptcy and forced others into other industries because they just could not afford to continue to do business with the U.S. automobile manufacturers.

From a business perspective, it is crazy for any company to disrespect its suppliers. Unfortunately, large organizations in the U.S. and Europe have somehow come to believe that pressuring suppliers and shifting business around to keep prices down is good practice. Suppliers are a part of a company’s overall system – they just happen to be external to the organization. The effect they have on the quality, cost and delivery of the company’s products are just as important as employees inside the company. In this way, it would seem crazy to pressure employees to reduce their pay, increase the time between paychecks, and continually look for new workers in order to reduce pay by getting people to compete with each other for existing jobs. This is exactly how suppliers are treated.

Any supplier relationship must be based on mutual success. Analyzing suppliers must be done on the total cost of doing business with them; not just price and payment terms. In this way, all costs must be included – including inspection costs, inventory costs (due to defects, late deliveries and leadtimes), defects, design support, and extra labor due to variation in incoming products, in addition to price and payment terms. Unfortunately, price and payment terms seem to be the only components measured.

Better Cars

Whatever the change looks like for the U.S. automakers, it absolutely has to include offering better cars. The latest J.D. Power survey results regarding initial quality have been released and American cars are the noticeable minorities on the list. With all the publicity surrounding the improved quality of American cars, the survey results show that, unfortunately, they still lag behind those from Japan, South Korea, and Germany. This has got to change.

The processes for designing and building cars requires overhaul to give U.S. producers a better chance against foreign competitors. Anyone who has read, The Toyota Way by Jeffrey Liker has to wonder what it must be like to compete against a company like Toyota. Their methods are so different from traditional Western manufacturers, that it’s difficult to know where to start. What is important, though, is that the Detroit 3 actually “start.” They have got to start doing things differently and not believe that survival will come from cutting back.

Will it Work?

I know that something had to be done to keep the Detroit automakers afloat during the recession. Letting GM or Chrysler close down at this time would be devastating to the unemployment rate, the economy, the automotive supply chain, and the auto industry, in general. What I can’t help but wonder, though, is that giving GM and Chrysler billions is just delaying the inevitable and they are going to disappear anyway. The fundamental change that is needed to stave off closure just doesn’t seem to be happening . . . or happening quickly enough.

I hope I am wrong.

Thursday, June 18, 2009

The Importance of Purpose

Of all the reasons that an organization can fall into a death spiral, the most common and destructive is losing sight of its fundamental purpose. The Cambridge Dictionary of American English defines an organization as a group whose members work together for a shared purpose in a continuing way. Following this definition, without a shared purpose, there is no organization; there is nothing more than a group of people who come to work, put in their hours, and go home.

Whenever I bring up the subject of purpose, I get comments that it is pass√© for a company to develop mission and vision statements. It is true that this subject was addressed many years ago by W. Edwards Deming, Peter Drucker, and others, but it is also true that many organizations have not done it well and many leaders still don’t understand why it’s important.

Every organization was created for a reason – and it most likely was not to make a profit. The founders of many companies had a passion for fulfilling a need that they felt could be served better than what was offered at the time. Back in 1927, William Boeing founded The Boeing Company to, “so develop airplane design and construction that today’s spectacular feat of bravery will become tomorrow’s accepted mode of speedy transportation – inexpensive, dependable, safe!” More recently, Google was founded to, “organize the world’s information and make it universally accessible and useful.” What would happen if these companies forgot why they exist? What chance would they have to remain successful . . . or even survive?

It’s Not About the Money

A situation that is just as destructive as having no clear purpose is to define it in terms of maximizing financial gain – e.g., profits, shareholder value, stock price, etc. Although it is important for a company to earn profits over the long run, it is not a reason for its existence. Focusing on financial success above all else results in actions and decisions that drive short-term results at the expense of long-term health. Those aspects of the company that do not directly deliver profits today become seen as non-value-added and, therefore easier to eliminate. Research, new product or service development, training, and even workers become seen as interfering with success and pressure mounts on leaders to make cut.

In an interview in Quality Progress magazine many years ago, Peter Drucker was asked what he thought about the relationship between profit and purpose. His reply was, “[the statement that] the purpose of an organization is to make a profit is not only false, but is total irrelevant.” This is because the purpose is external to the business – it is in society. It is directly related to the value the organization provides to its customers. When an organization successfully accomplishes its purpose, it makes a profit. In this way, sustainable profit becomes the indicator of how well the company meets its purpose

The economic crisis we’re in today has exacerbated this problem. Companies have gotten so focused on cutting costs that many have act as if their purpose was to cut costs. In my experience, implementing across-the-board cuts is a sure sign that a company has lost its purpose. During a recession, it is critical to get back to the basics and focus on the organization’s fundamental purpose. As a result, some areas of the organization will become more critical than others and may actually need an increase in spending while others are cut back or even eliminated.

It’s About Value – Not Products

It is critically important to define the purpose in terms of the value provided to customers instead of a specific product offering. Manufacturers of typewriters, slide-rules, and carburetors demonstrated the importance of this concept. An organization that ties its purpose to a specific product offering can run into serious trouble when technology changes and their product no longer satisfies needs as well as it once did. Think about how many typewriter, slide-rule, or carburetor manufacturers are still around today. Each of these products was replaced by something that, although more expensive to purchase, met needs much more effectively than what they replaced.

Understanding the fundamental needs of customers and how a specific product or service currently meets that need can help a company change along with technology and the tastes of consumers.

I recently spoke at a call center conference in Portugal and had the chance to listen to other presentations and talk to many of the attendees. There was real concern from those in attendance about the effect low cost call centers in Asia will have on the industry in Portugal. Labor costs are much higher in Portugal than in India, China and the Philippines, and Portuguese companies do not feel they can compete with companies in these areas. If they define their companies in terms of providing low cost call center services for their customers, they are correct – they cannot compete. If they dig deeper to understand the real value they provide, however, and define their purpose in terms of helping companies serve their customers better and more efficiently than they can themselves, they have a much better chance of competing successfully. Defining their purpose in this manner can help them focus on high quality, as well as cost effective service. It can also help encourage innovation of new technology and services that can redefine what call centers provide to customers.

Practicing What You Preach

Defining your purpose is not about creating slick or catchy mission statements. It is about clarifying why the company exists and guiding team member behaviors and actions. It is critical that leaders believe enough in the purpose to stick to it – in good times and bad – and allow team members to question decisions that appear counter to the organization’s purpose.

Technology and consumer tastes will change but, when defined clearly and correctly, a company’s purpose will never change. It is the one thing that must remain constant within an organization.