Absorption Costing is the Enemy of Lean

ron palinkas lean manufacturing“Using absorption costing to monitor efficiency can lead companies to make poor production decisions,” says Ranjani Krishnan, professor of accounting at Michigan State. “A company that does this could seem to be growing less efficient when demand decreases. If a factory makes fewer cars this year than last year, for instance, its cost per car will look higher, and it may then overproduce in order to present itself more favorably to shareholders, consumers, and analysts.”

Not only can absorption costing lead to poor decisions, that is exactly what happened at Chrysler and General Motors in the months leading up to the recession in 2008. Professor Krishnan and his co-author Alexander Brüggen recently published their research paper on the causes of the demise of these two car companies. Their paper* shows that all the “big three” US automakers consistently overproduced their cars and created massive excess inventories in dealers lots across the country. The primary reason for this excess production was the need to absorb overhead costs delineated in their standard costing system. Everyone knew the demand for their automobiles was drifting down but they continued to push production through the factories owing to the pressure to absorb overheads. If you absorb overheads – even by making cars no one wants to buy – your company can show increased profits that are not really there. This is not fraudulent practice; it is a pernicious side-effect of standard costing.

I work with a lot companies in the area of accounting, measurement, and decision making processes within manufacturing, distribution, and the supply chain. All these companies are involved in a “lean journey or transformation” and have recognized the need for new approaches to accounting, control, and measurement. There is often some push-back when we suggest the elimination of standard costing and I cite (among other things) these over-production issues caused by overhead absorption. The operations people state firmly that they would never over-produce just to keep monthly profits high!! They are a sophisticated company. And yet, I see evidence of this in most companies we work with.

It is common to see production and output increase towards month-end. You often see the planners building up extra inventory and sales people offering generous incentives for customers to take more deliveries by month-end or quarter end. This is specially true when the inventory is (poorly) controlled by two-bin or max-min replenishment instead of pull systems or kanban.

IMHO overhead absorption is a very dangerous habit within manufacturing companies. It creates huge amounts of waste. The waste of over-production. The waste of inventory. This leads to large batches and long lead times.

But there is an underlying and more serious problem. This practice leads to the attention of the managers being focused on short-term profit and stock-price rather than value for the customer. According to Krishnan and Bruggen, in the case of Chrysler and GM, this was exacerbated by a bonus system that rewarded executives for achieving padded profits on the income statements. This contributed to both companies bankruptcy and “bail-out” by the hardworking US tax-payer.

Absorption costing viciously violates all five of the principles of lean thinking & practice. Art Byrne, in his new book “The Lean Turnaround”, asserts that “absorption accounting … twists behavior by making shop-floor managers more interested in hitting absorption goals than [in] making what the customers want.”

* Ranjani Krishnan and Alexander Brüggen and Karen Sedatole
Drivers and Consequences of Short-Term Production Decisions: Evidence from the Auto Industry
Contemporary Accounting Research
Volume 28, Issue 1, pages 83–123, Spring 2011

Posted in https://maskell.com/absorption

Research: To Be a Good Leader, Start By Being a Good Follower

There is no shortage of advice for those who aspire to be effective leaders. One piece of advice may be particularly enticing: if you want to be a successful leader, ensure that you are seen as a leader and not a follower. To do this, goes the usual advice, you should seek out opportunities to lead, adopt behaviors that people associate with leaders rather than followers (e.g., dominance and confidence), and — above all else — show your exceptionalism relative to your peers.

But there is a problem here. It is not just that there is limited evidence that leaders really are exceptional individuals. More importantly, it is that by seeking to demonstrate their specialness and exceptionalism, aspiring leaders may compromise their very ability to lead.  The simple reason for this is that, as Warren Bennis has observed, leaders are only ever as effective as their ability to engage followers. Without followership, leadership is nothing. As one of us (Haslam) observed in a 2011 book coauthored with Stephen Reicher and Michael Platow, The New Psychology of Leadership, this means that the key to success in leadership lies in the collective “we,” not the individual “I.”

In other words, leadership is a process that emerges from a relationship between leaders and followers who are bound together by their understanding that they are members of the same social group. People will be more effective leaders when their behaviors indicate that they are one of us, because they share our values, concerns and experiences, and are doing it for us, by looking to advance the interests of the group rather than own personal interests.  This perspective identifies a major flaw in the usual advice for aspiring leaders. Instead of seeking to stand out from their peers, they may be better served by ensuring that they are seen to be a good follower — as someone who is willing to work within the group and on its behalf. In short, leaders need to be seen as “one of us” (not “one of them”) and as “doing it for us” (not only for themselves or, worse, for “them”).

In a recent paper, we set out to test these ideas through a longitudinal analysis of emergent leadership among 218 male Royal Marines recruits who embarked on the elite training program after passing a series of tests of psychological aptitude and physical fitness. More specifically, we examined whether the capacity for recruits to be seen as displaying leadership by their peers was associated with their tendency to see themselves as natural leaders (with the skills and abilities to lead) or as followers (who were more concerned with getting things done than getting their own way).  For this purpose, we tracked recruits’ self-identification as leaders and followers across the course of a physically arduous 32-week infantry training that prepared them for warfare in a range of extreme environments. This culminated in the recruits and the commanders who oversaw their training casting votes for the award of the Commando Medal to the recruit who showed most leadership ability.  So who gets the votes?  Marines who set themselves up as leaders, or those who cast themselves as followers?

In line with the analysis that we present above, we found that recruits who considered themselves to be natural leaders were not able to convince their peers that this was the case. Instead, it was the recruits who saw themselves (and were seen by commanders) as followers who ultimately emerged as leaders. In other words, it seems that those who want to lead are well served by first endeavoring to follow.

Interestingly, though, alongside these results, we also found that recruits who saw themselves as natural leaders were seen by their commanders as having more leadership potential than recruits who saw themselves as followers. This suggests that what good leadership looks like is highly dependent on where evaluators are standing. Evaluators who are situated within the group, and able to personally experience the capacity of group members to influence one another, appear to recognize the leadership of those who see themselves as followers. In contrast, those who stand outside the group appear to be most attuned to a candidate’s correspondence to generic ideas of what a leader should look like.

This latter pattern tells us a lot about the dynamics of leadership selection and helps to explain why the people who are chosen as leaders by independent selection panels often fail to deliver when they are in the thick of the group that they actually need to lead.  It also has the potential to complicate the picture for aspiring leaders. The reason for this is that in organizations that eschew democratic processes in their selection of leaders, employees who are seen as leaders (by themselves and by those who have the power to raise them up) may be more likely to be appointed to leadership positions that those who see themselves as followers.However, as our Marines data suggest, this elevation of those who seek to distance themselves from their group may actually be a recipe for failure, not success. It encourages leaders to fall in love with their own image and to place themselves above and apart from followers. And that is the best way to get followers to fall out of love with the leader. Not only will this then undermine the leader’s capacity to lead but, more importantly, it will also stifle followers’ willingness to follow. And that can only ever be a path to organizational mediocrity.

Originally posted: http://www.hbr.org

Why Companies Are Creating Their Own Coworking Spaces

Nestled in the Silicon Sentier district of Paris, the Villa Bonne Nouvelle (“House of Good News”), or VBN, initially appears to be another new coworking space. But what sets it apart is that only half of its 60 occupants are freelancers. The remainder work for Orange (née French Telecom), which launched VBN in 2014 to teach its programmers and engineers how to work with and learn from people outside of the company. The experiment succeeded: Teams temporarily stationed there worked better and faster than colleagues elsewhere, and they reported greater satisfaction and engagement (along with bouts of depression upon returning to the office). Even the HR executives managing the space were surprised by their bonhomie. More villas are now in the works.

Orange describes its approach as “corpoworking,” a cousin to coworking. It’s not alone in trying to jump on the trend of shared workspaces, of which there are now around 19,000 worldwide. Dozens of companies, ranging from telcos (SprintAT&T), to tech giants (SAP, IBM), to automakers and insurance companies (MINI, State Farm) have launched similar experiments. The real revolution in coworking may have less to do with freelancers or startups than with employees of large companies working beyond the boundaries of their organizations.

A case in point is WeWork, the provider of coworking spaces, which has grown its enterprise customer base in the last year by 370%. As of June 2018, corporate occupiers make up roughly one-quarter of WeWork’s members and revenues. It’s also creating stand-alone locations for individual clients such as IBM, UBS, and Facebook. It’s typically assumed these companies are seeking a jolt of hipness. But our research and reporting show this isn’t the case. We’ve separately toured and interviewed principals in more than a dozen corporate coworking spaces in the U.S., South America, and Europe over the last three years. We’ve found that these companies and their employees are searching for the same qualities freelancers and entrepreneurs report from their experiences in shared workspaces — learning skills faster, making more connections, and feeling inspired and in control.

In addition to coworking spaces for individuals and those that partner with employers, we’ve identified two types of corporate coworking. One is what we call open houses, in which companies offer workspace as a public amenity, typically for brand-building. In Brooklyn, for example, MINI, where one of us works, runs A/D/O, a combination coworking space, café, concept store, and fabrication lab. Its mission isn’t to sell cars, but to attract and learn from local designers. The other type we call campsites — internal, invitation-only spaces where teams from one company co-locate with peers from another. Campsites are temporary, affording coworkers stationed there opportunities to learn, ignore org charts, and collaborate across corporate boundaries. Orange’s VBN is one example; another belongs to a large telco in Silicon Valley, where its teams huddle alongside those from customers to prototype products and services. Projects that would have taken months of calls are finished in weeks, demonstrating the importance of co-location in innovation. Some companies are aggressively testing both. SAP’s HanaHaus in downtown Palo Alto is an open house that charges walk-ins $3 per hour, or roughly the cost of their Blue Bottle coffee. (Notable visitors include Mark Zuckerberg.) A few miles away, at its Silicon Valley campus, is AppHaus, one of five such campsites worldwide, where SAP engineers work with local customers and startups to explore consumer software.

But what are the goals of these corporate coworking spaces? Who uses them? And what do they look like? Here’s what we’ve learned.

The purpose of these spaces can vary widely, but they typically fall into one or more of three groups: transformation, innovation, and future-proofing. In the case of transformation, the space is designed to be a Trojan horse, sneaking new ways of working into an otherwise staid organization. This is explicitly the goal at Orange’s VBN, which Ava Virgitti, an employee experience lead for Orange, describes as an “HR lab” to test and learn how teams behave in the presence of leaner and meaner startups.

Innovation is the goal at other campsites, where diverse stakeholders are assembled with specific tasks and equipped with special facilities and methodologies (say, design thinking) to achieve them. Future-proofing is more open-ended; these spaces are designed to generate new contacts or ideas, which seems to be the thinking behind HanaHaus.

For these reasons, users are typically quite diverse in rank, role, and affiliation, and are present for only a few months before rotating out or back into the company. This is a critical feature of campsites in particular — a revolving door means a constant stream of fresh insights and expertise. Orange’s VBN uses nine-month “seasons” to reset the space; others switch participants as necessary.

The role of community managers in fostering this culture can’t be overstated. Traditionally nonexistent in corporate America, they typically help select, vet, onboard, and connect new users with existing ones while organizing the space, arbitrating conflicts, and hosting events. User satisfaction surveys consistently rank them as the favorite aspect of corporate coworking.The other important aspect in creating these spaces is their physical design. Like the culture, which the design complements and enhances, the layout and amenities of these spaces are a far cry from cubicles. Nothing is stationary — whiteboards, movable walls, and flexible furniture are common. Amenities and kitchens are strategically positioned to “engineer serendipity” and conversations across organizations. And writing on the walls or floors is encouraged, as making a mess is considered a precursor to innovation.

Now, do these spaces work in promoting innovation? This seems to be the case, although, as with coworking in general, their effectiveness is difficult to measure and only quantifiable indirectly, through user satisfaction surveys and interviews. A few companies we spoke with also offered examples. Orange’s VBN reported a 92% user approval rating of the space, and pointed to the long waitlist for future seasons. At Grid70, one tenant reported a 30%–40% reduction in product development time after a redesign of their workspace. According to researchers at the University of Michigan, the most common reasons people seek coworking spaces are interaction with people (84%), random discoveries and opportunities (82%), and knowledge sharing (77%). Corporate coworkers seek the same.

As one might imagine, demonstrating the ROI of this is difficult — most don’t even try. Some eschew metrics altogether, gambling they will learn as they go when it comes to measuring what’s important. Many prefer the soft metrics, such as satisfaction and engagement mentioned above, and still others defer measurement into the future, minimizing expenses while awaiting a business case to emerge.

For this reason (and others), strong executive sponsors are crucial for corporate coworking. HanaHaus was instigated as the personal urging of SAP cofounder Hasso Plattner; Grid70 was conceived by a cluster of local CEOs. Orange’s VBN has the firm backing of senior HR executives, and so on. With the metrics so hazy, the decision as to whether these spaces are worth it is being made on a case-by-case basis.

Just as coworking was seen as a fringe phenomenon less than a decade ago, its corporate variant risks being perceived as a vanity project. But in light of the trends animating creative work today — increasingly flexible arrangements, cross-firm collaboration, and employees’ thirst for agency and authentic connections — these spaces hint at a future far beyond WeWork.

We’ve identified a few principles to keep in mind if your company is interested in exploring corporate coworking.

Be clear about your goals at the outset. Is it a Trojan horse for corporate culture, a cross-firm skunkworks, or a public branding exercise and serendipity engine? This decision will drive every facet of the project going forward, including participants, design, sponsorship, and ROI.

Community managers are the key to success. Hire carefully at the outset, involve them at every step of the design and recruitment process, and give them broad latitude in shaping the culture and programming of the space. Your project will likely fail without a strong community manager, and learning how their role could scale elsewhere in the organization is an incredible opportunity.

Don’t overthink the design. Focus less on foosball or Ping-Pong tables, and more on good overall layout principles. Co-locate teams in adjoining spaces for easy conversations; centralize amenities such as kitchens to increase serendipitous encounters (yes, even the unplanned can be planned for!). Empower users to make the space their own, and cut through red tape during construction — no one wants to spend nine months in just another project team room.

 

Originally posted at: https://hbr.org

Teams and Team Building

Many companies, when they decide to invest in team building, decide to do offsite events like bowling nights or ropes courses. Sometimes these events get really elaborate. One sales and marketing executive I know told me how he was flown to London with 20 of his colleagues, put up in a pricey hotel, and then trained to do the haka, a traditional war dance, by a group of Maori tribe members from New Zealand. This exercise was supposed to build relationships and bolster team spirit, and, by extension, improve collaboration. Instead, it fostered embarrassment and cynicism. Months later, the failing division was sold off.

Mars was not immune to the conventional wisdom. Before making the commitment to study collaboration intensively, we also did things like this. Once, we spent thousands of dollars to hire an orchestra to spend an hour with a group of senior leaders at an offsite retreat and help them work together in harmony. It was a nice metaphor and an interesting experience. It did nothing, though, to change how that group of leaders worked together.

Events like these may get people to feel closer for a little while; shared emotions can bond people. Those bonds, though, do not hold up under the day-to-day pressures of an organization focused on delivering results.

In 2011 senior HR leaders at Mars decided that we would study our global workforce and try to crack the code of how to maximize team effectiveness. The resulting research, which I led, revealed that most of what we — and others — thought about team building was wrong. Most important, we learned that quality collaboration does not begin with relationships and trust; it starts with a focus on individual motivation.

Our research drew on data from 125 teams. It included questionnaires and interviews with hundreds of team members. We asked, among other things, how clear people were about the teams’ priorities, what their own and others’ objectives were, and what they felt most confident about and most worried about. If there was one dominant theme from the interviews, it is summarized in this remarkable sentiment: “I really like and value my teammates. And I know we should collaborate more. We just don’t.”

The questionnaires revealed that team members felt the most clarity about their individual objectives, and felt a strong sense of ownership for the work they were accountable for. To further investigate, we turned to another source and analyzed several years of data from Mars’s 360-degree leadership surveys. The two top strengths identified in those surveys were “action orientation” and “results focus.” The picture was getting clearer: Mars was full of people who loved to get busy on tasks and responsibilities that had their names next to them. It was work they could do exceedingly well, producing results without collaborating. On top of that, they were being affirmed for those results by their bosses and the performance rating system.

It occurred to us that their failure to collaborate was, ironically, a function of their excelling at the jobs they were hired to do and of management reinforcing that excellence. Collaboration, on the other hand, was an idealized but vague goal with no concrete terms or rules. What’s more, collaboration was perceived as messy. It diluted accountability and offered few tangible rewards.

Based on that insight, we developed a framework to make collaboration clear, specific, and compelling — to make collaboration something to be achieved. At the core of this framework are two questions to pose to any team. The first: Why is their collaboration essential to achieving their business results? And second: What work, which specific tasks, would require collaboration to deliver those results?

We had a chance to test our framework in early 2012 with the Mars Petcare China leadership team. Over two days we posed our questions and hashed out specifics. We spent the entire first day wrestling with the answers to our two questions. Initial reactions were bemusement and frustration: What did I mean by “essential to business results”? We restated the question as: Why is your working together, as a team, more valuable than just the sum of your individual efforts? That got the conversation going, and we spent three hours discussing and debating what we called their “team purpose.” They finally agreed that their purpose would center on people development and deployment of their new strategy throughout the business.

The second question, the one about which specific pieces of work required collaboration, was more contentious. One leader in particular felt that he needed to be left alone, that none of the work he was responsible for should include any of his peers. The debate became heated, but eventually his peers won him over. Eventually we were able to sort our list of projects into those that could be handled by individuals and those that really would be improved by collaboration.

Our second day focused on accountability. They agreed to build their collaborative commitments into their individual performance objectives. Then they cocreated a list of the behaviors they expected of each other in support of those commitments and agreed on how they would hold themselves accountable for them. (At one point we compared and discussed their Myers-Briggs types. That discussion about relationships lasted 15 minutes before they urged me to take them back to discussions about how they were going to work together. I thought that was remarkably telling.) We ended by creating a plan for how they would sustain the progress we had made during our two days together.

I spoke with the general manager of Mars Petcare China a few times over the next year. During our final conversation I learned that their growth had rocketed up 33% — a stunning achievement. Their primary dog food brand alone was up 60%. It was the first time in eight years that they had met their financial commitments to the larger corporation. How much did our work together contribute to those outcomes? “Massively,” the general manager told me. Their team purpose had focused their collaboration on the things that mattered most to the results they planned for. The sense of accountability for their work together, based on the agreements they forged, made their working relationships far more productive than they had been.

At Mars, we learned that to get people to work together, we had to let them figure out how that would actually improve results.

We officially deployed our fully developed and tested framework later in 2012, embedding it in a single management development program. Within two years, the Mars High Performance Collaboration Framework had gone viral throughout the company.

Strong relationships and trust do matter to collaboration, but they are not the starting point. They are the outcomes of dedicated people striving together. Connecting collaboration to the motives of success-minded team members is what unlocks productive teamwork.

 

Posted from: http://www.hbr.org

What Transformational Leaders Do

Companies that claim to be “transforming” seem to be everywhere. But when you look more deeply into whether those organizations are truly redefining what they are and what they do, stories of successful change efforts are exceptionally rare. In a study of S&P 500 and Global 500 firms, our team found that those leading the most successful transformations, creating new offerings and business models to push into new growth markets, share common characteristics and strategies. Before describing those, let’s look at how we identified the exceptional firms that rose to the top of our ranking, a group we call the Transformation 10.

Whereas most business lists analyze companies by traditional metrics such as revenue or by subjective assessments such as “innovativeness,” our ranking evaluates the ability of leaders to strategically reposition the firm. Some companies that made the list were obvious choices; for example, the biggest online retailer now gets most of its profit from cloud services (Amazon). But others were surprising, given their states before embarking on transformation. The list includes a health care company that was once near bankruptcy (DaVita), a software firm whose stock price stagnated for a decade (Microsoft), a travel website that faced overwhelming competition (Priceline), a food giant that seemed to lose its focus (Danone), and a steel company that faced new pressure from lower-cost rivals (ThyssenKrupp).

The team began by identifying 57 companies that have made substantial progress toward transformation. We then narrowed the list to 18 finalists using three sets of metrics:

New growth. How successful has the company been at creating new products, services, and business models? This was gauged by assessing the percent of revenue outside the core that can be attributed to new growth.

Core repositioning. How effectively has the company adapted its legacy business to change and disruption, giving it new life?

Financial performance. How have the firm’s growth, profits, and stock performance compared to a relevant benchmark (NASDAQ for a tech company, for example, or DAX Index for a German firm) during the transformation period?

We recruited a panel of expert judges (see the list below), who evaluated the companies through the lens of their own expertise and gauged which transformations were most durable and had the highest impact in their industries. (For more on our methods, see the sidebars below.) With these criteria in mind, our final list is as follows:

Our analysis revealed characteristics shared by the winning firm’s leaders as well as common strategies they employed.

Transformational CEOs Tend to be “Insider Outsiders”

The list is topped by companies headed by visionary founders with no prior experience in their industries; Jeff Bezos came from the world of finance, and Reed Hastings from software. As it turned out, having no predetermined way of doing things turned out to be an asset when it came to reinventing retailing and television, and these leaders kept that outsider’s perspective even through waves of growth.

We see an interesting pattern across the professionally managed companies, those whose CEOs were hired by the board. These CEOs are what we call “insider outsiders.” Make no mistake, they have substantial relevant experience. They had 14 years of tenure on average before getting the top job. That knowledge helped them understand how to make change happen inside an organization. Yet these executives also had an outsider role where they worked on an emerging growth business or consciously explored external opportunities, giving them critical distance from the core. After becoming CEO, that insider-outsider perspective helped them explore new paths to growth without being constrained by yesterday’s success formula.

Satya Nadella, for instance, joined Microsoft in 1992 and worked his way up to running its cloud computing effort, building that business unit into a viable new growth platform before becoming CEO, in 2014. He got the top job because of that, and then as CEO he accelerated cloud-business development to make it the company’s primary strategy.

The same was true of Adobe’s Shantanu Narayen. He joined the creativity applications vendor in 1997, and got the CEO job a decade later largely because he was able to articulate a vision for pursuing digital marketing services as the new growth path.

At Priceline, Glenn Fogel joined in 2000 and became head of strategy. Long before becoming CEO, in 2016, he was searching for new growth in the hypercompetitive travel reservations market, coming across a pair of small European startups with a business model opposite to Priceline’s in two key ways: Instead of taking an up-front 25% commission on a hotel reservation, the startups charged only 15% after check-out. Instead of focusing on major hotel brands, they pursued the long tail, engaging with more than 1 million inns, B&Bs, and apartment buildings in 200 countries. The result was the Booking.com platform. What started with a $200 million investment a decade ago now accounts for most of Priceline’s new growth as well as its rise past $80 billion in market valuation.

And at Danone, Emmanuel Faber, an insider for 17 years, won the CEO job, in 2014, because he was one of the architects of the firm’s 2020 vision to transform from a food and beverage conglomerate into a family health and medical nutrition company that emphasized sustainable agriculture. That vision prompted Danone to divest product lines such as biscuits and beer while broadening its core dairy franchise. For new growth, in 2007 Faber helped form a new business unit called Nutricia, anchored off a $17 billion acquisition, to pursue baby foods, protein bars, and health shakes. Today this unit accounts for 29% of revenue.

They Strategically Pursue Two Separate Journeys

Many firms that have tried to transform have failed. A common reason why is that leaders approach the change as one monolithic process, during which the old company becomes a new one. That doesn’t work for a host of practical reasons. An organization that grew up producing newspapers, for instance, not only lacks key skills to build a digital content company but also might actively resist embracing the new in order to protect the business it knows and loves.

Success requires repositioning the core business while actively investing in the new growth business.

Apple serves as the classic model of such “dual transformation.” With the iMac and iBook, Steve Jobs reinvigorated the core Macintosh franchise by injecting a new sense of design and rethinking what computers would be used for in the age of the internet. On a separate track, he launched the device and content ecosystem, starting with iPod and iTunes, that would become the company’s new growth engine.

It’s a strategy that has also worked for others on the list. While Amazon has expanded its core retailing platform into new categories, such as food and streaming content, in parallel it has built the world’s largest cloud computing enterprise. Amazon Web Services CEO Andy Jassy has been with the effort since it began as an internal challenge to scale IT infrastructure. Established as a separate division in 2006, AWS ultimately addressed a long-standing analyst complaint about Amazon — that its core was only barely profitable. Today AWS accounts for just 10% of Amazon’s $150 billion in revenue, but generates close to $1 billion in quarterly operating profit.

German steel maker ThyssenKrupp, facing pricing pressure from Asian competitors, likewise embraced a dual transformation strategy. In 2011 the board selected as the new CEO one of its own members, Heinrich Hiesinger, a Siemens executive with experience supplying technology to many industries. From day one, Hiesinger began executing a plan for repositioning the declining core of steel manufacturing by divesting less profitable product lines, focusing on higher-margin custom manufacturing, and even opening 3D printing centers to fashion components such as parts for wind turbines. For new growth areas that now make up 47% of sales, it moved into industrial solutions and digital services, creating systems such as internet-connected elevators.

They Use Culture Change to Drive Engagement

Microsoft is a case in point. In the four years since Satya Nadella came on as CEO, he has been credited with transforming Microsoft’s cautious, insular culture. In the old world, large teams would work for years on the next major version of a franchise program like Windows and Word, leading to a risk-averse environment. In the new world of “infrastructure on demand,” dozens of new features and improvements would need to be introduced per month — and no one would fully know ahead of time what they might be. This required a culture of risk taking and exploration.

In this way, Nadella was unlike his predecessors, in that he built his reputation as a hands-on engineer, not as a visionary like Bill Gates or a Type-A salesman like Steve Ballmer. Instead, Nadella was known for listening, learning, and analyzing. His idea of how to engage and motivate employees wasn’t by making a speech but rather by leading a company-wide hackathon, and empowering employees to work on projects they were passionate about. This new level of employee engagement has helped drive Microsoft’s expansion into cloud services and artificial intelligence, areas that now account for 32% of revenue.

He chose the name DaVita, Italian for “giving life,” and settled on a list of core values that included service excellence, teamwork, accountability, and fun. As any manager knows, a generic-sounding list of values won’t move the culture needle unless leadership brings it to life. To that end, Thiry and senior managers performed skits in costumes — for instance dressing as the Three Musketeers and leading call-and-response chants of “All for one, one for all.” To honor employee heroism, he became the emcee of awards banquets that had all the music, stagecraft, and emotional speeches of the Oscars, and he celebrated “village victories” around milestones like achieving a five-star quality rating for dialysis delivery from the Centers for Medicare and Medicaid Services.

The success in turning around DaVita’s core business caught the attention of Warren Buffett, whose Berkshire Hathaway became DaVita’s largest shareholder. But it was DaVita’s move into new growth areas that earned it a spot on our list. Starting with an acquisition of 50 physician offices, DaVita worked to build an “integrated delivery network” that contracts for the full spectrum of care, using the value-based care model of being paid to keep patients healthy rather than accepting fee-for-service — resulting in new growth that now represents 30% of revenue.

They Communicate Powerful Narratives About the Future

To change the culture and move into new growth areas, the CEO needs to become “the storyteller in chief,” says Aetna’s Mark Bertolini. That means telling different aspects of the same transformation narrative to all the constituencies and stakeholders in the company.

“The CEO’s responsibility is to create a stark reality of what the future holds,” says Bertolini, “and then to build the plans for the organization to meet those realities.”

In Aetna’s case, this meant building a narrative of how the move away from fee-for-service reimbursement to the new business model of value-based care would change the nature of health insurance, and one day possibly render it obsolete. Instead of simply reinforcing the story about strengthening Aetna’s current businesss, Bertolini developed a narrative about building new skills to help consumers make better health choices — and about building a new organization that can make money doing so.

Telling that kind of story about the future is not a one-time event. “It’s easy to underestimate the amount of communication that is needed,” he adds. “You have to be tireless about it, consistent and persistent, and keep battering the core messages home week after week. Your leaders have to as well, and they have to tailor the message so it has the appropriate level of fidelity relevant to each part of the organization. A person working in a call center might need a different set of messages than a line manager does to understand how he docks into the big picture.”

They Develop a Road Map Before Disruption Takes Hold

Because dual transformations typically take years, we used a 10-year time frame in our analysis. Indeed, transformations often can’t be completed during the average tenure of a CEO. These long time horizons mean that there’s no time to waste in getting started. Many of the most notable disrupted companies — from Blockbuster, to Borders, to Blackberry, to Kodak — ran into their deepest troubles a decade or more aftersome of the first warning signs appeared. None of their leaders developed effective transformation plans in time to halt the decline.

At the other end of the spectrum is Reed Hastings of Netflix. Even as the original DVD-by-mail business grew quickly to dominate the industry, Hastings believed that a new wave of disruption could be rolling in. “My greatest fear at Netflix,” he says, “has been that we wouldn’t make the leap from success in DVDs to success in streaming.”

That’s why he laid the groundwork for a transformation as far back as 2007, when he started negotiating deals with Hollywood to test online streaming of movies and TV shows. Famously, Hastings moved too quickly to spin off the core and focus only on streaming, when Netflix announced plans in 2011 to create a stand-alone mail-based DVD company called Qwikster. This prompted a backlash from angry customers — and triggered a humbling apology from Hastings.

But the mistake he made was preferable to waiting too long. He reformulated his plan, this time to extend the life of the core DVD business while aggressively rolling out the new streaming service in parallel. It proved to be such a winning strategy that it funded a big move into original content. Now, with membership of 100 million homes in 190 countries, Netflix is the leader of a reconfigured movie and television landscape that it helped shape.

As all these cases show, transformation is not just about changing an enterprise’s cost structure or turning analog processes into digital ones. Rather, it’s about pursuing a multiphase strategy to reposition today’s business while finding new ways to grow. That’s why we believe the companies that made the Transformation 10 list deserve to be seen as models to help other leaders create the future.

 

Originally posted at: http://harvardbusinessreview.org

Matrix Management: Not a Structure, a Frame of Mind

Top-level managers in many of today’s leading corporations are losing control of their companies. The problem is not that they have misjudged the demands created by an increasingly complex environment and an accelerating rate of environmental change, nor even that they have failed to develop strategies appropriate to the new challenges. The problem is that their companies are organizationally incapable of carrying out the sophisticated strategies they have developed. Over the past 20 years, strategic thinking has far outdistanced organizational capabilities.

All through the 1980s, companies everywhere were redefining their strategies and reconfiguring their operations in response to such developments as the globalization of markets, the intensification of competition, the acceleration of product life cycles, and the growing complexity of relationships with suppliers, customers, employees, governments, even competitors. But as companies struggled with these changing environmental realities, many fell into one of two traps—one strategic, one structural.

The strategic trap was to implement simple, static solutions to complex and dynamic problems. The bait was often a consultant’s siren song promising to simplify or at least minimize complexity and discontinuity. Despite the new demands of overlapping industry boundaries and greatly altered value-added chains, managers were promised success if they would “stick to their knitting.” In a swiftly changing international political economy, they were urged to rein in dispersed overseas operations and focus on the triad markets, and in an increasingly intricate and sophisticated competitive environment, they were encouraged to choose between alternative generic strategies—low cost or differentiation.

Yet the strategic reality for most companies was that both their business and their environment really were more complex, while the proposed solutions were often simple, even simplistic. The traditional telephone company that stuck to its knitting was trampled by competitors who redefined their strategies in response to new technologies linking telecommunications, computers, and office equipment into a single integrated system. The packaged-goods company that concentrated on the triad markets quickly discovered that Europe, Japan, and the United States were the epicenters of global competitive activity, with higher risks and slimmer profits than more protected and less competitive markets such as Australia, Turkey, and Brazil. The consumer electronics company that adopted an either-or generic strategy found itself facing competitors able to develop cost and differentiation capabilities at the same time.

In recent years, as more and more managers recognized oversimplification as a strategic trap, they began to accept the need to manage complexity rather than seek to minimize it. This realization, however, led many into an equally threatening organizational trap when they concluded that the best response to increasingly complex strategic requirements was increasingly complex organizational structures.

The obvious organizational solution to strategies that required multiple, simultaneous management capabilities was the matrix structure that became so fashionable in the late 1970s and the early 1980s. Its parallel reporting relation-ships acknowledged the diverse, conflicting needs of functional, product, and geographic management groups and provided a formal mechanism for resolving them. Its multiple information channels allowed the organization to capture and analyze external complexity. And its overlapping responsibilities were designed to combat parochialism and build flexibility into the company’s response to change.

In practice, however, the matrix proved all but unmanageable—especially in an international context. Dual reporting led to conflict and confusion; the proliferation of channels created informational logjams as a proliferation of committees and reports bogged down the organization; and overlapping responsibilities produced turf battles and a loss of accountability. Separated by barriers of distance, language, time, and culture, managers found it virtually impossible to clarify the confusion and resolve the conflicts.

In hindsight, the strategic and structural traps seem simple enough to avoid, so one has to wonder why so many experienced general managers have fallen into them. Much of the answer lies in the way we have traditionally thought about the general manager’s role. For decades, we have seen the general manager as chief strategic guru and principal organizational architect. But as the competitive climate grows less stable and less predictable, it is harder for one person alone to succeed in that great visionary role. Similarly, as formal, hierarchical structure gives way to networks of personal relationships that work through informal, horizontal communication channels, the image of top management in an isolated corner office moving boxes and lines on an organization chart becomes increasingly anachronistic.

Paradoxically, as strategies and organizations become more complex and sophisticated, top-level general managers are beginning to replace their historical concentration on the grand issues of strategy and structure with a focus on the details of managing people and processes. The critical strategic requirement is not to devise the most ingenious and well-coordinated plan but to build the most viable and flexible strategic process; the key organizational task is not to design the most elegant structure but to capture individual capabilities and motivate the entire organization to respond cooperatively to a complicated and dynamic environment.

Building an Organization

Although business thinkers have written a great deal about strategic innovation, they have paid far less attention to the accompanying organizational challenges. Yet many companies remain caught in the structural-complexity trap that paralyzes their ability to respond quickly or flexibly to the new strategic imperatives.

For those companies that adopted matrix structures, the problem was not in the way they defined the goal. They correctly recognized the need for a multi-dimensional organization to respond to growing external complexity. The problem was that they defined their organizational objectives in purely structural terms. Yet the term formal structure describes only the organization’s basic anatomy. Companies must also concern themselves with organizational physiology—the systems and relationships that allow the lifeblood of information to flow through the organization. They also need to develop a healthy organizational psychology—the shared norms, values, and beliefs that shape the way individual managers think and act.

The companies that fell into the organizational trap assumed that changing their formal structure (anatomy) would force changes in interpersonal relationships and decision processes (physiology), which in turn would reshape the individual attitudes and actions of managers (psychology).

But as many companies have discovered, reconfiguring the formal structure is a blunt and sometimes brutal instrument of change. A new structure creates new and presumably more useful managerial ties, but these can take months and often years to evolve into effective knowledge-generating and decision-making relationships. And because the new job requirements will frustrate, alienate, or simply overwhelm so many managers, changes in individual attitudes and behavior will likely take even longer.

As companies struggle to create organizational capabilities that reflect rather than diminish environmental complexity, good managers gradually stop searching for the ideal structural template to impose on the company from the top down. Instead, they focus on the challenge of building up an appropriate set of employee attitudes and skills and linking them together with carefully developed processes and relationships. In other words, they begin to focus on building the organization rather than simply on installing a new structure.

Indeed, the companies that are most successful at developing multi-dimensional organizations begin at the far end of the anatomy-physiology-psychology sequence. Their first objective is to alter the organizational psychology—the broad corporate beliefs and norms that shape managers’ perceptions and actions. Then, by enriching and clarifying communication and decision processes, companies reinforce these psychological changes with improvements in organizational physiology. Only later do they consolidate and confirm their progress by realigning organizational anatomy through changes in the formal structure.

No company we know of has discovered a quick or easy way to change its organizational psychology to reshape the understanding, identification, and commitment of its employees. But we found three principal characteristics common to those that managed the task most effectively:

1. They developed and communicated a clear and consistent corporate vision.

2. They effectively managed human resource tools to broaden individual perspectives and to develop identification with corporate goals.

3. They integrated individual thinking and activities into the broad corporate agenda by a process we call co-option.

Building a Shared Vision

Perhaps the main reason managers in large, complex companies cling to parochial attitudes is that their frame of reference is bounded by their specific responsibilities. The surest way to break down such insularity is to develop and communicate a clear sense of corporate purpose that extends into every corner of the company and gives context and meaning to each manager’s particular roles and responsibilities. We are not talking about a slogan, however catchy and pointed. We are talking about a company vision, which must be crafted and articulated with clarity, continuity, and consistency. We are talking about clarity of expression that makes company objectives understandable and meaningful; continuity of purpose that underscores their enduring importance; and consistency of application across business units and geographical boundaries that ensures uniformity throughout the organization.

Clarity

There are three keys to clarity in a corporate vision: simplicity, relevance, and reinforcement. NEC’s integration of computers and communications—C&C—is probably the best single example of how simplicity can make a vision more powerful. Top management has applied the C&C concept so effectively that it describes the company’s business focus, defines its distinctive source of competitive advantage over large companies like IBM and AT&T, and summarizes its strategic and organizational imperatives.

The second key, relevance, means linking broad objectives to concrete agendas. When Wisse Dekker became CEO at Philips, his principal strategic concern was the problem of competing with Japan. He stated this challenge in martial terms—the U.S. had abandoned the battlefield; Philips was now Europe’s last defense against insurgent Japanese electronics companies. By focusing the company’s attention not only on Philips’s corporate survival but also on the protection of national and regional interests, Dekker heightened the sense of urgency and commitment in a way that legitimized cost-cutting efforts, drove an extensive rationalization of plant operations, and inspired a new level of sales achievements.

The third key to clarity is top management’s continual reinforcement, elaboration, and interpretation of the core vision to keep it from becoming obsolete or abstract. Founder Konosuke Matsushita developed a grand, 250- year vision for his company, but he also managed to give it immediate relevance. He summed up its overall message in the “Seven Spirits of Matsushita,” to which he referred constantly in his policy statements. Each January he wove the company’s one-year operational objectives into his overarching concept to produce an annual theme that he then captured in a slogan. For all the loftiness of his concept of corporate purpose, he gave his managers immediate, concrete guidance in implementing Matsushita’s goals.

Continuity

Despite shifts in leadership and continual adjustments in short-term business priorities, companies must remain committed to the same core set of strategic objectives and organizational values. Without such continuity, unifying vision might as well be expressed in terms of quarterly goals.

It was General Electric’s lack of this kind of continuity that led to the erosion of its once formidable position in electrical appliances in many countries. Over a period of 20 years and under successive CEOs, the company’s international consumer-product strategy never stayed the same for long. From building locally responsive and self-sufficient “mini-GEs” in each market, the company turned to a policy of developing low-cost offshore sources, which eventually evolved into a de facto strategy of international outsourcing. Finally, following its acquisition of RCA, GE’s consumer electronics strategy made another about-face and focused on building centralized scale to defend domestic share. Meanwhile, the product strategy within this shifting business emphasis was itself unstable. The Brazilian subsidiary, for example, built its TV business in the 1960s until it was told to stop; in the early 1970s, it emphasized large appliances until it was denied funding, then it focused on housewares until the parent company sold off that business. In two decades, GE utterly dissipated its dominant franchise in Brazil’s electrical products market.

Unilever, by contrast, made an enduring commitment to its Brazilian subsidiary, despite volatile swings in Brazil’s business climate. Company chairman Floris Maljers emphasized the importance of looking past the latest political crisis or economic downturn to the long-term business potential. “In those parts of the world,” he remarked, “you take your management cues from the way they dance. The samba method of management is two steps forward then one step back.” Unilever built—two steps forward and one step back—a profitable $300 million business in a rapidly growing economy with 130 million consumers, while its wallflower competitors never ventured out onto the floor.

Consistency

The third task for top management in communicating strategic purpose is to ensure that everyone in the company shares the same vision. The cost of inconsistency can be horrendous. It always produces confusion and, in extreme cases, can lead to total chaos, with different units of the organization pursuing agendas that are mutually debilitating.

Philips is a good example of a company that, for a time, lost its consistency of corporate purpose. As a legacy of its wartime decision to give some overseas units legal autonomy, management had long experienced difficulty persuading North American Philips (NAP) to play a supportive role in the parent company’s global strategies. The problem came to a head with the introduction of Philips’s technologically first-rate videocassette recording system, the V2000. Despite considerable pressure from world headquarters in the Netherlands, NAP refused to launch the system, arguing that Sony’s Beta system and Matsushita’s VHS format were too well established and had cost, feature, and system-support advantages Philips couldn’t match. Relying on its legal independence and managerial autonomy, NAP management decided instead to source products from its Japanese competitors and market them under its Magnavox brand name. As a result, Philips was unable to build the efficiency and credibility it needed to challenge Japanese dominance of the VCR business.

Most inconsistencies involve differences between what managers of different operating units see as the company’s key objectives. Sometimes, however, different corporate leaders transmit different views of overall priorities and purpose. When this stems from poor communication, it can be fixed. When it’s a result of fundamental disagreement, the problem is serious indeed, as illustrated by ITT’s problems in developing its strategically vital System 12 switching equipment. Continuing differences between the head of the European organization and the company’s chief technology officer over the location and philosophy of the development effort led to confusion and conflict throughout the company. The result was disastrous. ITT had difficulty transferring vital technology across its own unit boundaries and so was irreparably late introduc-ing this key product to a rapidly changing global market. These problems eventually led the company to sell off its core telecommunications business to a competitor.

But formulating and communicating a vision—no matter how clear, enduring, and consistent—cannot succeed unless individual employees under-stand and accept the company’s stated goals and objectives. Problems at this level are more often related to receptivity than to communication. The develop-ment of individual understanding and acceptance is a challenge for a company’s human resource practices.

Developing Human Resources

While top managers universally recognize their responsibility for developing and allocating a company’s scarce assets and resources, their focus on finance and technology often overshadows the task of developing the scarcest resource of all—capable managers. But if there is one key to regaining control of companies that operate in fast-changing environments, it is the ability of top management to turn the perceptions, capabilities, and relationships of individual managers into the building blocks of the organization.

One pervasive problem in companies whose leaders lack this ability—or fail to exercise it—is getting managers to see how their specific responsibilities relate to the broad corporate vision. Growing external complexity and strategic sophistication have accelerated the growth of a cadre of specialists who are physically and organizationally isolated from each other, and the task of dealing with their consequent parochialism should not be delegated to the clerical staff that administers salary structures and benefit programs. Top managers inside and outside the human resource function must be leaders in the recruitment, development, and assignment of the company’s vital human talent.

Recruitment and Selection

The first step in successfully managing complexity is to tap the full range of available talent. It is a serious mistake to permit historical imbalances in the nationality or functional background of the management group to constrain hiring or subsequent promotion. In today’s global marketplace, domestically oriented recruiting limits a company’s ability to capitalize on its worldwide pool of management skill and biases its decision-making processes.

After decades of routinely appointing managers from its domestic operations to key positions in overseas subsidiaries, Procter & Gamble realized that the practice not only worked against sensitivity to local cultures—a lesson driven home by several marketing failures in Japan—but also greatly under-utilized its pool of high-potential non-American managers. (Fortunately, our studies turned up few companies as shortsighted as one that made overseas assignments on the basis of poor performance, because foreign markets were assumed to be “not as tough as the domestic environment.”)

Not only must companies enlarge the pool of people available for key positions, they must also develop new criteria for choosing those most likely to succeed. Because past success is no longer a sufficient qualification for increasingly subtle, sensitive, and unpredictable senior-level tasks, top management must become involved in a more discriminating selection process. At Matsushita, top management selects candidates for international assignments on the basis of a comprehensive set of personal characteristics, expressed for simplicity in the acronym SMILE: specialty (the needed skill, capability, or knowledge); management ability (particularly motivational ability); international flexibility (willingness to learn and ability to adapt); language facility; and endeavor (vitality, perseverance in the face of difficulty). These attributes are remarkably similar to those targeted by NEC and Philips, where top executives also are involved in the senior-level selection process.

Training and Development

Once the appropriate top-level candidates have been identified, the next challenge is to develop their potential. The most successful development efforts have three aims that take them well beyond the skill-building objectives of classic training programs: to inculcate a common vision and shared values; to broaden management perspectives and capabilities; and to develop contacts and shape management relationships.

To build common vision and values, white-collar employees at Matsushita spend a good part of their first six months in what the company calls “cultural and spiritual training.” They study the company credo, the “Seven Spirits of Matsushita,” and the philosophy of Konosuke Matsushita. Then they learn how to translate these internalized lessons into daily behavior and even operational decisions. Culture-building exercises as intensive as Matsushita’s are sometimes dismissed as innate Japanese practices that would not work in other societies, but in fact, Philips has a similar entry-level training practice (called “organization cohesion training”), as does Unilever (called, straight-forwardly, “indoctrination”).

The second objective—broadening management perspectives—is essentially a matter of teaching people how to manage complexity instead of merely to make room for it. To reverse a long and unwieldy tradition of running its operations with two- and three-headed management teams of separate technical, commercial, and sometimes administrative specialists, Philips asked its training and development group to de-specialize top management trainees. By supplementing its traditional menu of specialist courses and functional programs with more intensive general management training, Philips was able to begin replacing the ubiquitous teams with single business heads who also appreciated and respected specialist points of view.

The final aim—developing contacts and relationships—is much more than an incidental byproduct of good management development, as the comments of a senior personnel manager at Unilever suggest: “By bringing managers from different countries and businesses together at Four Acres [Unilever’s international management-training college], we build contacts and create bonds that we could never achieve by other means. The company spends as much on training as it does on R&D not only because of the direct effect it has on upgrading skills and knowledge but also because it plays a central role in indoctrinating managers into a Unilever club where personal relationships and informal contacts are much more powerful than the formal systems and structures.”

Career-Path Management

Although recruitment and training are critically important, the most effective companies recognize that the best way to develop new perspectives and thwart parochialism in their managers is through personal experience. By moving selected managers across functions, businesses, and geographic units, a company encourages cross-fertilization of ideas as well as the flexibility and breadth of experience that enable managers to grapple with complexity and come out on top.

Unilever has long been committed to the development of its human resources as a means of attaining durable competitive advantage. As early as the 1930s, the company was recruiting and developing local employees to replace the parent-company managers who had been running most of its overseas subsidiaries. In a practice that came to be known as “-ization,” the company committed itself to the Indianization of its Indian company, the Australization of its Australian company, and so on.

Although delighted with the new talent that began working its way up through the organization, management soon realized that by reducing the transfer of parent-company managers abroad, it had diluted the powerful glue that bound diverse organizational groups together and linked dispersed operations. The answer lay in formalizing a second phase of the -ization process. While continuing with Indianization, for example, Unilever added programs aimed at the “Unileverization” of its Indian managers.

In addition to bringing 300 to 400 managers to Four Acres each year, Unilever typically has 100 to 150 of its most promising overseas managers on short- and long-term job assignments at corporate headquarters. This policy not only brings fresh, close-to-the-market perspectives into corporate decision making but also gives the visiting managers a strong sense of Unilever’s strategic vision and organizational values. In the words of one of the expatriates in the corporate offices, “The experience initiates you into the Unilever Club and the clear norms, values, and behaviors that distinguish our people—so much so that we really believe we can spot another Unilever manager anywhere in the world.”

Furthermore, the company carefully transfers most of these high-potential individuals through a variety of different functional, product, and geographic positions, often rotating every two or three years. Most important, top management tracks about 1,000 of these people—some 5% of Unilever’s total management group—who, as they move through the company, forge an informal network of contacts and relationships that is central to Unilever’s decision-making and information-exchange processes.

Widening the perspectives and relationships of key managers as Unilever has done is a good way of developing identification with the broader corporate mission. But a broad sense of identity is not enough. To maintain control of its global strategies, Unilever must secure a strong and lasting individual commitment to corporate visions and objectives. In effect, it must co-opt individual energies and ambitions into the service of corporate goals.

Co-Opting Management Efforts

As organizational complexity grows, managers and management groups tend to become so specialized and isolated and to focus so intently on their own immediate operating responsibilities that they are apt to respond parochially to intrusions on their organizational turf, even when the overall corporate interest is at stake. A classic example, described earlier, was the decision by North American Philips’s consumer electronics group to reject the parent company’s VCR system.

At about the same time, Philips, like many other companies, began experimenting with ways to convert managers’ intellectual understanding of the corporate vision—in Philips’s case, an almost evangelical determination to defend Western electronics against the Japanese—into a binding personal commitment. Philips concluded that it could co-opt individuals and organizational groups into the broader vision by inviting them to contribute to the corporate agenda and then giving them direct responsibility for implementation.

In the face of intensifying Japanese competition, Philips knew it had to improve coordination in its consumer electronics among its fiercely independent national organizations. In strengthening the central product divisions, however, Philips did not want to deplete the enterprise or commitment of its capable national management teams.

The company met these conflicting needs with two cross-border initiatives. First, it created a top-level World Policy Council for its video business that included key managers from strategic markets—Germany, France, the United Kingdom, the United States, and Japan. Philips knew that its national companies’ long history of independence made local managers reluctant to take orders from Dutch headquarters in Eindhoven—often for good reason, because much of the company’s best market knowledge and technological expertise resided in its offshore units. Through the council, Philips co-opted their support for company decisions about product policy and manufacturing location.

Second, in a more powerful move, Philips allocated global responsibilities to units that previously had been purely national in focus. Eindhoven gave NAP the leading role in the development of Philips’s projection television and asked it to coordinate development and manufacture of all Philips television sets for North America and Asia. The change in the attitude of NAP managers was dramatic.

A senior manager in NAP’s consumer electronics business summed up the feelings of U.S. managers: “At last, we are moving out of the dependency relationship with Eindhoven that was so frustrating to us.” Co-option had transformed the defensive, territorial attitude of NAP managers into a more collaborative mind-set. They were making important contributions to global corporate strategy instead of looking for ways to subvert it.

In 1987, with much of its TV set production established in Mexico, the president of NAP’s consumer electronics group told the press, “It is the commonality of design that makes it possible for us to move production globally. We have splendid cooperation with Philips in Eindhoven.” It was a statement no NAP manager would have made a few years earlier, and it perfectly captured how effectively Philips had co-opted previously isolated, even adversarial, managers into the corporate agenda.

The Matrix in the Manager’s Mind

Since the end of World War II, corporate strategy has survived several generations of painful transformation and has grown appropriately agile and athletic. Unfortunately, organizational development has not kept pace, and managerial attitudes lag even farther behind. As a result, corporations now commonly design strategies that seem impossible to implement, for the simple reason that no one can effectively implement third-generation strategies through second-generation organizations run by first-generation managers.

Today the most successful companies are those where top executives recognize the need to manage the new environmental and competitive demands by focusing less on the quest for an ideal structure and more on developing the abilities, behavior, and performance of individual managers. Change succeeds only when those assigned to the new transnational and interdependent tasks understand the overall goals and are dedicated to achieving them.

One senior executive put it this way: “The challenge is not so much to build a matrix structure as it is to create a matrix in the minds of our managers.” The inbuilt conflict in a matrix structure pulls managers in several directions at once. Developing a matrix of flexible perspectives and relationships within each manager’s mind, however, achieves an entirely different result. It lets individuals make the judgments and negotiate the trade-offs that drive the organization toward a shared strategic objective.

 

Originally posted: https://hbr.org/matrix

3 Transitions Even the Best Leaders Struggle With

We love to read about the dynamics of success. We study it, celebrate it, and try to emulate how successful leaders rise to the top. I’m no different: I’ve spent my career helping executives succeed, either through coaching and development or assessments of their strengths and opportunity areas to identify the development work they need to do to take their careers to the next level. But even as I’m drawn to success stories, I have found that the greatest lessons come from examining failure.  For instance, my last research effort looked into how elite executives make a successful transition to the C-suite. As I worked through the interviews, I found that executives whose careers had been derailed shared many commonalities. Specifically, I found that C-suite executives are vulnerable to career failure when they are in the midst of one of three common transition scenarios.

1.The leap into leadership. The transition to the top team is demanding, with 50% to 60% of executives failing within the first 18 months of being promoted or hired. For instance, Gil Amelio was Apple’s CEO for less than a year in 1997, and General Motors’ chief human resources officer decamped in 2018 after just eight months in the job.  For some, this high-profile leadership transition is more than they bargain for. They are unprepared for the frantic pace or they lack the requisite big-picture perspective. (Sixty-one percent of executives can’t meet the strategic challenges they face in senior leadership.) This is an especially common risk for leapfrog leaders — executives one or two steps down in the organization who skip levels when they are elevated a top spot. But even the most seasoned executives have little transparency into looming team dysfunction or insurmountable challenges until they are actually in the role.

One veteran executive I know accepted a job reporting to the CEO only to find that her functional area had been mismanaged and was in serious financial disarray. She started to turn around its performance in year one, but her reporting structure was altered mid-stream, and she found herself accountable to the CFO. The new situation left her feeling “micromanaged,” and she moved on two years later.  The single best thing a new executive can do to avoid a brief tenure is to actively pursue feedback. Most undergo rigorous executive assessments prior to receiving an offer, but soon they are too occupied with the demands of the job to be introspective. Many benefit from in-depth 360-degree reviews at six to eight months and then again at 18 months. One division president I interviewed learned in her 360s that board members were skeptical of her abilities. To her credit, she did the difficult work of getting to know the board members better and put together a plan to actively win them over.  Overall, knowing the areas others think you need to grow allows you to get the support you need — executive coaching, finding a peer-mentor, or adjusting your team to round out your development areas. It also helps you assess whether you are fitting onto the culture or if you need to strengthen key relationships internally and externally.

2. The organizational transition. I would argue that nearly every organization today is either considering or enacting a transformation of some type. Even in this “change is the new normal” reality, high stakes transformations are highly risky for executives who fail to reinvent the organization or themselves fast enough.  Mergers, for instance, create instant overlap in executive roles, and redundant leaders can be swept out in waves. Just as often, leaders fail to read the tea leaves before a surprise executive succession and are left vulnerable when their allies exit. But by far the biggest derailer for executives during this transition is misinterpreting the need for change or getting on the wrong side of it. For example, Durk Jager stepped down as CEO of Proctor & Gamble in 2000, just a year and a half into the job, after roiling P&G’s conservative culture by taking on “too much change too fast.” More often, leaders are too slow to act or unwilling to get on board as a change effort gets underway. In 2009, for instance, GM removed its CEO, Fritz Henderson, because he was not enough of a change agent.  To survive organizational and industry shifts, leaders need to get ahead of change. They need to think about where they fit into the new order and find a way to have an impact. They also must overcommunicate with the CEO or board to make it clear where they stand on the need for change and how they will lead its implementation.

3.The pinnacle paradox. The last tricky transition that derails executives is the career pinnacle. C-suite leaders are at the apex of their careers. They have competed for years and achieved what they have been striving for: a spot on the top team. As a result, many experience a type of paradox: They are working harder than ever to succeed, but they don’t know what’s next in their career. In time, this uncertainty, combined with job stress, can lead to burnout. Executives I have coached sometimes hit the ceiling and feel “stuck” at the top. Whether they experience burnout or move on for another reason, the average tenure of C-suite leaders has been declining in recent years. According to one study, the median tenure for CEOs at large-cap companies is five years. The tenure for CMOs is even less: 42 months, according to Spencer Stuart.

Executives can take steps to either extend their tenure or prepare for what’s next in their career. As part of that, they need to rethink their relationship with sponsors. At this stage in their career lifecycle they may not need sponsors to create new opportunities for them, but they do need advocates, supportive peers, and career role models. C-suite executives can move on to lead in other organizations or they may eventually retire and do board work. Others may find like-minded partners and investors to launch their own venture. I’ve worked with younger executives, as well, who accept global assignments or move down in the organization to gain new experience — they move down with a plan to move up again later in a different functional role. Regardless of their future plan, C-suite executives who surround themselves with support and have a clear vision of their future, are more likely continue to succeed.

The capacity for reinvention is the single-most-important career attribute for executives today. Successful reinvention may look different for each of us, but if we do not attempt it, we are sure to fail.

 

Originally posted at  http://hbr.org/transition

“Thanks, but no thanks!”

 

Friends and family thank me during Memorial Day weekend (I served six years in the Navy.)  I have started responding “Thanks, but no thanks!”  The response probably seems a little strange, but on Memorial Day we honor those who died serving in the Armed Forces, on Veterans Day we honor those have served in the past, and on Armed Forces Day we honor those who are currently serving.

 

 

 

Here is an example of a service member who died in combat while serving others:

William H. Pitsenbarger wouldn’t receive the Medal of Honor until 2000, about 34 years after his death. Pitsenbarger joined the Air Force in 1962 and qualified for Pararescue. Eventually flying over 300 rescue missions in Vietnam, Pitsenbarger risked his life almost every day to save fellow service members.On April 11, 1966, Pitsenbarger was part of an operation involving two Huskies to rescue roughly half a dozen soldiers near Cam My. Pitsenbarger was lowered onto the ground and secured the wounded. Six soldiers were loaded and flown to an aid station, and the crews returned to evacuate the rest of the men. Pitsenbarger had remained with 20 who were left over, and when the returning helicopters took damage under small arms fire, Pitsenbarger waived them off.

For about 90 minutes, Pitsenbarger tended to the wounded with splints made out of vines and stretchers made out of saplings. He policed ammunition and dispersed it to the active survivors, then joined them with a rifle to fend off Viet Cong.  Later that night, Pitsenbarger was taken out by an enemy sniper. His body was found with a rifle and medkit still clutched in hands. Nine more soldiers made it back to safety that day.

 

“Courage is almost a contradiction in terms.  It means a strong desire to live taking the form of a readiness to die.” — G.K. Chesterton

Crayola and Minitab

The Color of Quality: How Crayola Uses Data to Deliver the Perfect Crayon

Here’s a brand-new box of 64 crayons. Pick your favorite shade, then color for as long as you like—and don’t be gentle! Now, look at the crayon. It’s still in one piece, and it even retains a decent tip. But that’s no surprise: it’s a Crayola crayon.

Crayola has been making crayons at its facilities in eastern Pennsylvania for more than 100 years, during which they have become the undisputed leaders in providing crayons and other colorful items children use to express their creativity. Everyone knows the name, but few recognize Crayola’s dedication to ensuring that the 2.2 billion crayons they make every year meet the highest standards.

Crayola relies on a data-driven culture of continuous improvement to enhance the quality of their crayons—not to mention their markers, paints, modeling clay, and other products—and they trust Minitab Statistical Software to analyze that data. “We start with the assumption that everything we do, we can do better,” explains Gary Wapinski, vice president of manufacturing. “And that’s why Minitab is key—it helps us understand the statistical analysis and lets the data reveal where we need to go.”

Crayola’s data-driven approach to solving problems really took off in 2007. That’s the year Pete Ruggiero, executive vice president of global operations, encountered an issue while visiting one of the company’s overseas locations. “I went into a shop and opened a box of our crayons, and some of the labels were coming off,” he recalls. “When I got back, I said ‘We’ve got to get this fixed,’ but there was a dispute about the source of the problem. We wound up doing an elementary Six Sigma project to resolve it.”

Data analysis showed that the adhesive didn’t consistently set properly when the labels were dry. Misting crayons as they went through the labeling machines solved the problem, and that project’s success prompted Crayola to expand the use of statistical methods. In 2008, the company’s initial wave of Six Sigma projects saved more than $1.5 million. Since then, 7 waves of Six Sigma green belts and 3 waves of black belts have completed projects, and all of them have analyzed their data with Minitab.

Hands-on Commitment—from the Top

Rich Titus, a Lean Six Sigma consultant and adjunct faculty member at Lehigh University, trains Crayola’s green and black belts and helps them keep projects on track. He credits Crayola’s leadership with providing the support necessary to initiate and sustain a successful continuous improvement program. “Executives are actively involved in selecting and approving projects, and we gather with project leaders to review their progress every few weeks,” Titus notes. “And even though those review sessions can last up to three hours, the executives aren’t replying to e-mails or stepping out to take phone calls—they’re engaged and asking questions about every project.”

Knowing their leaders take it seriously helps teams appreciate the importance of this data-driven methodology, says James Collins, manager of continuous improvement and Six Sigma at Crayola. “Project leaders need to be able to support their recommendations with data. Having an idea to make something better is great—but when you can prove it with charts and graphs and statistics, then you’ve got the foundation to make a change.”

Crayola’s rigorous, data-driven improvement projects help the company maintain and enhance the quality of their crayons—and they trust Minitab Statistical Software to analyze that data.

But Crayola’s leaders don’t just review improvement projects—they do their own. Wapinski’s most recent project saved a quarter of a million dollars. When the project began, highly experienced workers were assigned to oversee small teams of less experienced employees who placed arts and crafts components into kits. “I used Minitab to compare lines led by veteran employees with lines led by the less experienced workers themselves,” he says, “and found no differences in safety, efficiency, or quality. Paying skilled employees to lead these teams gave no benefits because the kit-assembly process is so limited. So we were able to move these skilled employees to areas where their experience has a real impact.”

Not surprisingly, many projects at Crayola contribute to the goal of making the perfect crayon. Company engineers used Minitab’s Measurement System Analysis (MSA) and Design of Experiments (DOE) tools to study the breaking strength of crayons—efforts that ultimately led to new standards and even the creation of a new crayon break-testing machine.

“We’ve made crayons for more than 100 years, but we didn’t have a reliable, consistent crayon strength measurement until now,” says Bonnie Hall, vice president for global quality and continuous improvement. “Every time we tested a formula change, we needed to break tens of thousands of crayons to know if we’d made a difference or not. Now it’s much faster and easier to evaluate how strong our crayons are.”

Root Causes and Real Solutions

Gary Wapinski witnessed many poor examples of data analysis before he joined Crayola. “I saw people spend more time trying to figure out how to come up with data that supported their thesis rather than letting the data reveal where they needed to go,” he says.

“Many people do not want to do the hard work of getting to the root cause of a problem. If a piece of equipment shuts down every three minutes, they’d rather just believe that we can buy a new machine to solve the problem. But if the root cause has to do with our processes, materials, or training our people, then a new machine won’t fix anything. I want to make real improvements, not fake ones, so combining disciplined problem solving with a powerful tool like Minitab is something I naturally gravitate toward.”

Analyzing data with Minitab helped Crayola engineers visualize how color and position within a mold affected the strength of their crayons’ tips.

Using Minitab sometimes turns conventional wisdom on its head—like the time a process was improved by reducing the line speed and cutting the crew from 10 people to 5. “Some people were convinced those changes would mean less output, but the capacity study in Minitab showed that we got the same output at a lower speed with half the labor,” says Wapinski. “Running the machine faster just introduced more downtime and scrap. What’s more, the people working the line were much happier, because they weren’t fighting to keep up with the machine at those higher speeds.”

Although their work may change, no one at Crayola has lost a job as a result of a quality project. “When we started this, employees wondered what we were doing, and whether their jobs would be going away,” Ruggiero says. “Now everyone understands that we’re investing in continuous improvement to increase our competitiveness and preserve jobs.”

Sustaining Improvements

Crayola wants these improvements to be sustainable, and project savings are rolled into the budget. “You can’t just make a PowerPoint and cite the dollars you’ve saved,” says Ruggiero. “We recalculate the standard cost of that process based on those savings, and then we deliver on those savings.”

The use of data also affects Crayola’s suppliers. For instance, the company partnered with a supplier to reduce the amount of defects in corrugated shipping cartons. “We really need perfect cartons,” says Hall. “If they have any warp at all, they don’t run through the automatic case packers.”

That project slashed $56,000 worth of defects to nothing in a single year—and when defects began to reappear, another benefit of paying close attention to the data became evident. “Routine analysis gave us a clear warning as soon as quality started failing, and we worked with the supplier to solve the problem much more quickly as a result.”

Crayola’s quality teams frequently turn to the Assistant menu in Minitab Statistical Software, which guides users through their analyses and provides clear, easy-to-understand results and graphs

A Culture of Data Awareness

Those involved in Crayola’s quality initiative know it’s a long-term effort. “You don’t flip a switch and suddenly you’re a great company,” says Wapinski. But data analysis using Minitab already is a part of everyday operations. Pareto charts, boxplots, hypothesis tests, control charts, and capability analyses are common sights.

“Minitab is a daily tool for managing and exploring our data,” says Hall. “And because we’re using Minitab, it’s much easier to communicate about business problems. There’s an expectation that you have a good understanding of your data, and that gets us to the root of the problem more quickly.”

Being able to analyze and act on data has transformed the way Crayola does business, and it benefits the entire operation. “It’s allowed us to concentrate resources where we can get the most bang for our buck,” Ruggiero says. “We’ve moved our culture from ‘When you have a problem, bury it,’ to ’We have a problem and we need to make it visible so we can solve it.’”

 

 

 

From Minitab Case Studies http://www.minitab.com/en-us/Case-Studies/Crayola/