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.

An Industry Without Direction

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Okay, here’s the scenario:

You are leading a business in a troubled industry. Rising costs, falling demand, and intense competition have been dragging profits down for years and many of your competitors are on the verge of collapse. Across the industry, customer satisfaction is low. What is your strategy?

How about pretty much continuing with the same outdated business model, while drastically cutting costs, and services to deal with the crisis.

Believe it or not, there are several companies in this situation doing just that. They are called airlines.

As a management consultant, I spend a lot of time in the air traveling between assignments, and I have to admit that I have never dreaded flights the way I do now. The service is poor (due to fewer people and improper focus – not the quality of the people), the food is awful, and even my frequent flier miles (if I get them at all) are not worth as much as they used to be.

What really does not make sense from a business perspective, however, is why, during a period of shrinking markets and increased competition, the airlines do not seem to think that increasing customer satisfaction is a way out of the crisis.

It has got to be that they are so focused on their balance sheets that they have forgotten about the customer, or still follow the belief that quality means higher costs. This is common to organizations, especially during a crisis. It is easy to get so focused on cutting costs that people begin to think of cost management as the organization’s fundamental purpose. When this type of situation occurs, employees suffer due to a stressful work environment, customers suffer because of poor service, and shareholders suffer because the fundamental problems are not effectively addressed.

If there was ever an industry in need of lean thinking, it is the airlines. As soon as someone discovers how to improve quality and costs together, and offer safe, clean, comfortable air travel to customers, they will clean up.

For now, however, I continue hoping that someone will catch on and the quality of air travel will someday improve.

GM Product Development & Efficient Cars

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GM Fallout?

BusinessWeek reported in its February 23 issue that Bob Lutz, the “legendary” product chief at General Motors will resign at the end of 2009. The report states that, “The thought of designing cars to meet Washington’s fuel economy rules – as opposed to consumer tastes,” drove him to retire.

This article once again reminded me one of the key reasons GM continues to suffer. The exercise about going to Congress to ask for billions in taxpayer aid and the scrutiny they have had to undergo throughout the process has seemingly not increased their humility one bit. They have lost the auto industry’s number one spot – a position they have held since 1931 – to Toyota (and appear primed to lose the number two spot to Honda in the not-to-distant future), and have apparently not learned anything through the process.

Maybe it’s me, but I fail to see how GM has been designing cars to “meet consumer tastes,” over the last several years anyway. If they had, they would not have lost the top spot to Toyota. And to think that it is only Washington – and not the consumer – who cares about higher fuel economy, shows the culture of hiding your head in the sand continues.

Besides higher quality, better fuel economy, lower costs, innovative production techniques, and a happier workforce, Toyota’s cars are more exciting than GM. And when I visited the Detroit-area last October, the high number of Toyotas and Hondas told me that Detroiters now feel the same way. When I think of “cool” cars for different age groups, I think of the Accord, Civic, Lexus, Prius, BMW 3-Series, Mini Cooper, Scion, and a few others, but can’t seem to recall any GM cars that fall into that group.

So, as GM moves into a new era of product design, they have got to increase the cool factor of their cars. Oh, and while doing that, it wouldn’t hurt to also work on the quality, reliability, cost, and fuel economy.

On another subject . . .

Does the Government Really Want Electric or Hybrid Cars?

Like many Americans over the last several years, I could not understand the seemingly complete lack of interest that the government has in assuring the success of hybrids or fully electric cars in the U.S. The Bush administration gave token tax breaks to purchasers of hybrids a few years back, but it didn’t make sense why the incentive was limited to only a small number of people who first purchase the cars.

The reason has recently become clear to me – and it will be tested as we watch how committed the Obama administration is to the development of high mileage or combustion-free automobiles.

The U.S. and state governments collect a great deal of tax revenue on sales of gasoline ($0.47/gallon for gasoline and $0.536/gallon for diesel). If we move away from gasoline engines to non-combustible engines, this huge source of revenue will dry up. Determining what will replace the fuel tax is destined to be a hotly debated and highly charged political issue – and probably one that politicians are not ready to tackle given the current state of mind of Americans.

Managing Costs Instead of Managing the Business

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If there is one thing certain as a result of recent events, it is that the world of business is going to change. After a fairly long period of economic growth, companies are finding themselves in the midst of shrinking markets, increasing costs, falling profits, and a highly competitive environment. The choice for a company during these times is either to be defensive by implementing cost cutting measures, laying off employees, and shrinking in size, or go on the offensive and use the slowdown to attack problems and become more focused on innovation and improvement of products, processes, and services.

An offensive strategy is actually nothing new to business. Companies like Toyota, Samsung, Honda, Apple, and Nucor Steel have used innovation and improvement for years as a way to strengthen their abilities to compete. For a variety of reasons though, most other companies have had little success with these philosophies or rejected them altogether. Over the last few decades, American business leaders have increasingly taken the easy route and implemented cost cutting moves to deal with economic challenges; announcing the layoffs as if there was no other alternative. And recent actions have shown that the response to the current recession is magnified, but no different.

One of the biggest problems with a defensive approach is, when the recovery does begin to occur, the companies that have ‘cut to the bone’ will not be able to quickly respond to the growth. When they do finally catch up with the increased level of business, they will do so with the same level of inefficiency and waste that they have in the past. Those organizations that go on the offensive, however, will be in a much better position to take advantage of the recovery to profit and grow quickly.

As an example, the U.S. automakers have been shedding massive amounts of workers in an effort to show Congress that they are managing their costs. Unfortunately, by losing tens of thousands of workers, they are also losing the experience and knowledge that the people have in these companies’ processes and how to improve them. Those who manage to keep their jobs will likely not have the time (or the enthusiasm) to work on improving operations. It is amazing that Congress has no problem giving taxpayer money to companies that manage costs instead of managing their businesses. Rewarding organizations to layoff workers only increases the number of people who will cut back on spending, thereby increasing the length and severity of the recession. If anything, bailout money should go to those companies that choose to not lay off their workers.

One of the positives that could result from the auto bailout, however, is that the Detroit 3 may be forced to reduce the current level of outsourcing work to low cost countries and bring jobs back to the U.S. If this does happen, they will have no choice but to find ways to innovate and improve in order to compete with foreign automakers.

The Difference Between Talking and Doing

Knowing that innovation and improvement are necessary for survival and actually doing them well, however, are two different things. Continual improvement and innovation require more than training people in the latest methods and then telling them to go innovate and improve. Most organizations require a drastic cultural shift in order to enable improvement to take hold and become a part of the way the company operates.

There are unfortunately very few people in business who truly understand that lean manufacturing and kaizen are business philosophies rather than sets of tools to reduce waste. Managers read about the success of the Toyota Production System and rush to copy the tools instead of looking deeper at the company to comprehend how the system was developed and why it works.

It’s In The Culture

Changing a company’s culture is a complicated process because of the psychological and sociological issues – both of which are rarely taught in any depth in business schools. When you startup a company and are the only employee, culture is not an issue. As soon as you add one person, though, the culture gets more complex and the complexity grows exponentially as more people are added.

So how can an organization’s leader change the culture to make it more likely to succeed with improvement initiatives? In effect, we need to rewire western organizations in order to continually identify and remove the barriers to improvement. And, just like changing a personal habit, once a barrier is removed, it must continue to be watched to make sure it stays removed.

There is an organized way to approach the cultural aspects of improvement. The key is for the leader to be serious about the need for improvement, and understand that it will require work on the indirect or softer issues in an organization. A leader who writes off psychology and/or sociology as too theoretical and not practical has little chance of implementing a change initiative of this magnitude.

The Necessary Elements

The elements that are necessary for initiatives like lean, six sigma, or kaizen to be successful in achieving sustained levels of improvement are listed below. Assuring that these components exist within the organization requires constant effort to prevent returning to old patterns and behaviors. You must continually strengthen and develop the elements until they get to the point where they build on themselves.

None of these elements are new to the world of business. They have been written about in one way or another for many years. Unfortunately, many leaders both don’t believe in their importance or find them to be too much work and abandoned or ignore them. It is common to write these issues off as too theoretical because they are not easy to manage. In reality, however, those companies that have been successful with improvement and innovation have spent considerable effort to align their cultures with their visions, thereby setting up the organization to succeed.

In no particular order, the items that require continual reflection and focus include the following:

• Clear Purpose An understanding of why the organization exists and what its future holds;

• Consistent Values A clear understanding of the team DNA and screening new hires to assure they share the same values;

• Enthusiasm for improvement People within the organization need to be obsessed with improvement and possess the humility to realize that there is always a better way of doing things;

• Openness A culture where people feel comfortable telling management when decisions and actions conflict with the purpose and/or values;

• Trust Workers must trust that nobody will lose their job as a result of the improvements made. Also, management must trust in the knowledge, experience and intelligence of workers;

• Focus on People/Processes/Customers More attention must be given to people, customers and processes than spreadsheets and financial reports;

• Training & Development of People and Teams Training and developing of team members must be a high priority within the organization. Leaders need to be developed from inside the company rather than hiring in from the outside;

• Pride Throughout the Organization People must be proud to be associated with the company and truly care about its success;

• Understanding Internal Customers/Suppliers Everyone must clearly understand their role in the company, including whom they serve and what these people need. Whatever the company provides its customers defines its main processes (whether it is a product or service). Anyone who is not directly involved in a main process is in a support role and his or her purpose is to serve those who are directly involved;

• Walking the Talk Improvement initiatives require attention, commitment, and involvement of executive managers;

• Aligned Measurement & Reward Systems Reward systems must support improvement initiatives. This requires rewarding teams instead of individuals, and tying promotions to success, enthusiasm and commitment to improvement and change initiatives;

• Proper Organizational Alignment The process focus required for improvement initiatives is difficult to achieve within a traditional functional organizational structure;

• Clear Objectives Without close alignment to organizational objectives,
  improvement projects will be fragmented and have very little chance of succeeding;

• Patience Changing culture takes time. People tend to want change to happen rather quickly, but in most organizations, it just doesn’t happen,

People tend to be much more open to change during a recession than at any other time. The willingness to try new things and not be looked at as standing in the way of change increases dramatically when people are worried about their jobs and the jobs of their coworkers. In other words, if you are a leader and ready to implement lean manufacturing, kaizen, or any type of improvement initiative, your chances of success may never be higher.

Do Layoffs Make Sense?

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The lead story in today’s Wall Street Journal is about companies accelerating layoffs in response to the recession. According to the story, companies have laid off about 600,000 workers since October 1. The list of companies shedding workers includes AT&T (which recently reported a 5.5% increase in 3rd quarter profit), Adobe Systems (which actually projected an 18%-21% increase in 4th quarter profit), Viacom, DuPont, Avis, Whirlpool, Motorola, GE, and many other high-profile businesses. Spokespersons for these companies blame falling revenues as the reason for the layoffs.

Looking at this situation from a macro perspective, it appears that companies are setting themselves up for a self-fulfilling prophecy by implementing layoffs. When people lose their jobs, they generally cut spending and only buy absolute necessities. They don’t buy cars, appliances, electronics, or apparel, and stop spending on services that are unnecessary or they can do themselves. When this happens, revenues for companies that produce cars, appliances, electronics, apparel, and offer services fall. These companies respond by laying off more workers, thereby increasing the number of people who reduce spending, and the cycle continues. This cycle actually worsens as it continues because people who remain employed start cutting back on spending because they are worried about eventually losing their jobs.

The problem is, by laying off workers, companies are actually adding to the problems they face. Until an executive (or board) at a major company makes a statement by not laying off workers in response to falling revenues, the situation will continue to get worse. In short, until consumers feel comfortable enough to begin buying again, the economy will continue to decline.

Our government is in the process of giving away our unprecedented amounts of money to companies in order to help them survive. Looking at the companies that have received bailout money (and those who are hoping to get some), it appears that one of the stipulations for receiving government money is to lay off workers. From this perspective, it looks like our officials are rewarding companies for firing workers (i.e., adding to the unemployment rate).

Bailout money should only go to companies that make a commitment to keep their workers employed. If a significant number of companies make this type of commitment, consumer confidence would slowly increase and buying would return, thereby increasing company revenues and preventing the need to lay off workers.

During the Great Depression, SC Johnson (makers of Johnson Wax®, Pledge®, and other household products) did not lay off a single worker. Instead of producing products though, workers washed windows, improved landscaping, and painted factories to keep busy. The courage and commitment shown by SC Johnson management by keeping their workforce intact during this rough economic time resulted in an immeasurable amount of loyalty and gratitude from their employees. Imagine how you would feel today if your company was to show you the same level of commitment.

CEOs today are like captains faced with guiding their ships through a dangerous storm. When a ship captain faces this type of situation, though, he uses the crewmembers to help guide the ship safely and does not throw them overboard in order to save the ship.

Since corporate executives are obviously not going to take on the responsibility of getting us out of the recession, it is up to the government to focus actions and bailout money on activities that will get consumers buying. Without this type of focus, the economic death spiral that we are currently in will continue well into t

Auto Industry Bailout a Good Idea?

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I have very mixed feelings about the bailout of the U.S. automakers. Besides knowing many Detroiters and automotive professionals personally, I have a lot of sympathy for the thousands of people who will lose their jobs if some sort of bailout does not occur (not to mention the retirees who will lose their pensions and benefits). Many people who work for the Detroit 3 (and its suppliers) really love the auto industry, and they (along with their parents and grandparents) have worked in the industry for so long that they can’t imagine doing anything else. Also, automobiles have been such a vital part of Detroit’s culture for so many years that losing the automotive industry could result in the city losing its identity – the effects could be devastating.

On the other hand, using government money to bail out companies that have suffered from bad management does not make me a happy taxpayer. We are already bailing out banks and investment firms for bad management practices and now homebuilders and automakers want to be bailed out as well. It’s been awhile since my college days, but I really don’t remember learning in any of my economics classes that a free market economy includes bailing out companies that have been mismanaged by their executives and boards of directors.

A bailout of the Detroit 3 should not even be considered without several stipulations, including a change at the executive and board levels, and a clear and concise plan for a fundamental change in their cultures to enable focus on continual improvements in product offering, quality, productivity, and costs. Without these types of changes, there is no guarantee that these companies won’t waste the billions given to them just as they have wasted billions of their own cash reserves over the last 10 years. And the last thing we need is to be debate this issue again 1-3 years from now . . . most likely for a whole lot more than $25 billion.

Are Legacy Costs the Problem?

All three of Detroit’s automakers are affected by the legacy costs to their retirees, and GM’s Rick Wagoner never misses an opportunity to note this as a major competitive disadvantage for the company. One thing that Wagoner never mentions, though, is the more than $1.4 billion in contractual pension obligations that GM has for its executives. I’ll have a little more sympathy for Mr. Wagoner as soon as I hear him complain about these obligations as well.

Although Toyota and Honda have the advantages of operating nonunionized plants, and having much lower legacy costs, these are not the reasons for their success. They produce great cars that people want to buy; and they do it quicker, better and at a lower cost than anyone else. Also, the people at Toyota and Honda love their jobs and their companies, and directly contribute to improving the work that they do.

Anyone who has studied business – and especially manufacturing – knows that there are huge differences in how Toyota approaches business as compared to Ford or GM. One of the most glowing differences is that they take care of their people and do not fire them whenever revenues fall. They have also been continually working to perfect their system of production for the last 60 years.

Taiichi Ohno, former Toyota executive and father of Lean Manufacturing wrote in his book, The Toyota Production System: Beyond Large-Scale Production, “hiring employees when business is good and production is high, just to lay them off, or recruiting early retirees when recession hits are bad practices.” Ohno wrote this over 30 years ago when few thought that Toyota had any chance of surpassing the Big 3 in sales. Obviously, executives at Ford, GM and Chrysler have chosen to follow a different approach and continue to undervalue the people who design and build their cars.

Funding the Business for the Long-Term

Much has been written about the profits made by Ford and GM from their SUVs and pick-up trucks over the last 10-15 years. Unfortunately, the executives chose to sit back and enjoy their success instead of thinking about the future health of the companies they were supposed to lead. Unlike Toyota and Honda, they did little to develop small, fuel-efficient models and instead chose to continue to focus on gas-guzzling, but highly profitable automobiles, all the while handing out millions in bonuses. Anyone who lived during the initial oil crisis back in the 1970s might be experiencing some very painful déjà vu from this situation.

While Toyota and Honda also did what they could to maximize profits from hot-selling SUVs and pickup trucks, they invested billions into developing hybrids and more fuel-efficient models for the future, as well as continuing to focus on updating and improving their factories.

A further important distinction with Toyota is their philosophy of building cash during the good times in order to help the company withstand the bad times. They use profits as a way to invest in the future and make sure that there is a future. At present, they are one of the few companies that have the ability to finance purchases for their customers. Any company that does not build its cash during the good times to keep it operating during the bad times is doing all of its stakeholders a disservice.

I also wonder why we are considering giving Chrysler money when their strategy seems to be to sell themselves to GM (who, according to all indications, plans to shut them down). The company announced recently that it is cutting back on product development to save money. This does not sound like a company that plans to be around for the long-term and, from my perspective, makes it a bad investment for taxpayer money.

GM is predicting that, without the bailout, a massive number of people will lose their jobs and suppliers will close down. This is a strange concern for a company that has history of massive layoffs and a reputation for apathy towards its suppliers. Why do they now care about putting people out of work and suppliers out of business when they didn’t for so many years?

Remembering When Quality Was Job 1

One of the real shames in this situation is that Ford was actually on the right path back in the 1980s when Donald Peterson was CEO. Peterson was an avid follower of W. Edwards Deming (one of the people credited with teaching Toyota how to compete), and began making progress on shifting the culture at Ford toward quality and continual improvement. Unfortunately Peterson had a very short tenure as CEO and the company quickly changed direction after he retired in 1989. One has to wonder where Ford would be today if the company continued implementing Deming’s teachings.

Maybe the answer to all of this is for the Detroit 3 to reorganize as banks. They would then have access to the $700 billion financial system bailout without the headache of developing and presenting plans to show that they intend to change.

Circuit City Unplugged

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Circuit City has now officially joined the list of faltering U.S. companies facing severe financial troubles. In a series of announcements over the last few months, the company has disclosed plans to close 20 percent of its stores and layoff thousands of workers. Increased competition from Best Buy, Wal-Mart, and others, along with a deep U.S. recession are being blamed for the company’s troubles. I don’t agree. Like so many companies that have entered a death spiral over the years, it is obvious to me that Circuit City was just another company suffering from bad management.

I truly feel bad for the workers who have lost (or will soon lose) their jobs at the company. What is really sad, though, is like so many other companies that have been in the same situation, the people responsible for the troubles - the executives – get to keep their jobs while thousands of workers lose theirs. It is not the salespeople, accountants, warehouse workers, and cashiers who led the company into decline. In fact, I cannot even think of a situation where a salesperson or cashier can cause company to go out of business.

Back in 2007, the company laid off 3400 of their higher priced salespeople and replaced them with lower-paid workers. In justifying the move, Circuit City spokesman Jim Babb was quoted as saying, “All companies at one time or another need to go through and make sure their cost structure works with market conditions.” Being the employee-focused company they are, Circuit City did allow these workers to reapply for their old jobs at a lower wage (and after a 10-week waiting period), but they were not given the option of staying at a lower wage. Just for comparison, according to the company’s 2008 proxy filed with the SEC, Circuit City CEO Philip Schoonover received in excess of $6 million in compensation for the year (and each member of his executive team received compensation in excess of $1 million). Imagine what these people would receive if the company had actually been successful this year. It is really sad that the Circuit City executive team is accepting this level of compensation while throwing thousands of people out of work – especially in today’s economic climate.

Besides the obvious morale issues caused by this type of action, the company gave up on its customers by firing their trained and experienced salespersons. Circuit City had the reputation of having among the most knowledgeable people in the retail electronics industry. By ridding the company of the high level of expertise that customers had come to expect, Circuit City eliminated the only advantage it had over companies like Best Buy and Wal-Mart. They treated the products they sold like commodities and became just another discount electronics store. The problem with this strategy is that they did not have the cost structure to compete as a discount store.

In their 2006 annual report, the company formally announced its “three parallel areas of work.” These were: UPGRADE the current business through talent, processes and systems; EVOLVE the core business to grow revenues and profits through fundamental change; and INNOVATE to grow new business with new consumer values. Like so many, the parallels comprise another very catchy and creative slogan that lacks substance. In mid-2006, the company’s stock was trading at $30.75 – it closed today (11 November) at $0.13.

Further on in the report, Schoonover writes, “I embrace the opportunity to lead Circuit City as we continue the transformation of our company to better serve our customers, Associates and shareholders.” Looking at the performance of the company since 2006, there is little evidence that Circuit City has served anyone well . . . except Best Buy and Wal-Mart.