Taking Your Eye Off the Ball

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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.

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.

The Importance of Purpose

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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 passé 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.