1: The Crisis That Will Not Go Away
There isn't any company that doesn't state that it wants to be flexible, lean, innovative, and customer-focused - yet most are rigid, flabby, sluggish, and indifferent. Even those that are earnest about wishing to achieve these qualities often find that it is easier said than done.
For example, a manufacturer set a goal of filling customer orders quickly, but was hamstrung by its logistics: its multiple factories shipped goods to a central distribution center, which supplied regional distributing centers, which supplied smaller warehouses the received customer orders. It opened up its logistics such that merchandise could be supplied to any location that needed it from any other location that had it and did not need it. The system was so chaotic that it took an average of seven days to process a "rush" order. Bad practices were partly to blame (the system to request/ship was open, but the actual handling of merchandise was still linear) as were bad management practices (the warehouses were encouraged to fill orders quickly, the DCs were encouraged to be efficient in their inventory turn and labor costs) such that the organization was at odds with itself.
Often, making a specific part of a company efficient comes at reducing the efficiency of other parts. An example is given of a crew manager who refused to send a mechanic on an overnight trip (sending him the following morning instead) to another airport to repair a plane because the cost of the hotel stay would hit his budget. Hundreds of thousands were lost in revenue as the plane sat idle, to save a hundred or so on a low-level manger's budget. The author asserts that this manager was not the problem - he was doing exactly as he had been ordered to do in controlling costs in his area of authority.
Any work that requires the cooperation of multiple departments is a potential source of major problems. Another example is the retail process for returning unsold goods for credit - it involves thirteen separate departments at the manufacturer to deal with the people, goods, and funds. It's not surprising that mistakes constantly occur. It's even worse when there is no single person who has oversight of the entire process. It's often assumed that everything will go fine, every time, if each person does their bit.
While it's commonly suggested that companies perform poorly because workers are lazy and managers are inept, what we find is that inefficient and ineffective process is often the culprit. Everyone is doing their job, and doing it will, but the system itself is designed for failure.
During the early twentieth century, American entrepreneurs lead the world in creating highly efficient and effective business organizations, optimizing the various components of manufacturing, logistics, and retail to produce the greatest volume of goods at the lowest possible costs. Other inventions such as the telephone and automobile are given credit for changing the way people live, but their influence pales in comparison to less glamorous and less visible improvements in production.
Most companies today can trace their operations back to the pin factory that Adam Smith described in 1776 to illustrate the theory of division of labor. Smith's example divided the work of creating an pin among several workers, each of whom performs a single step in the manufacturing operation. Today, steel mills, airlines, and computer chip makers have all designed their operations around Smith's central ideas. It even reaches to the service sector, in which the task of writing an insurance policy or making a meal is divided among specialized workers who perform piecemeal tasks.
Henry Ford improved on this with the concept of replaceable parts, which separated the task of installing a part on the finished product from that of creating the part itself; using standardized parts to ensure they were interchangeable; and then utilizing the assembly line to move the work to the workers rather than vice-versa.
The problem was that while great attention was paid to the work that was being done, little attention was given to the kind of management such workers need. The simpler the task of the employee, the more difficult it became to manage and coordinate employees. Doing so was the work of Alfred Sloan, whose theory of management is evident in the organization charts of modern corporations: Sloan set up divisions of labor, grouping the workers by function, and placing a manager over each function. Where a function was further subdivided into tasks, additional layers of management were added.
Sloan's division of management was similar to Smith's division of labor - though in his view, the manager did not need to have technical expertise in the task (he could rely on his lead workman to provide that support), but instead had financial expertise to understand the numbers and give guidance to the workers.
It also gave rise to specialists such as marketing managers and financial managers to take care of tasks that support production but are not directly related. In time, these tasks also became specialized, such that even white-collar workers were subdivided into highly specialized positions (typist, stenographer, and ten-key operator).
The final evolutionary step in the development of the modern corporation occurred in the 1960's, during which time senior managers sought to manage businesses in the same way one might manage an investment: the assets of a corporation could be put to a wide array of uses, and they sought to choose the most profitable use of capital to maximize performance. During this era, accounts and financiers took the reins of business from operations managers
It's worth mentioning that this model of the corporation flourished in a specific environment: one in which there was heavy demand, accelerating growth, and very little competition. As such companies could enter into whatever line of business they pleased, and they could make as much profit as their operations would permit, unopposed by any rival. To the customer, any house, any car, any refrigerator was better than having none at all and supply could not keep pace with demand. In such an environment, the primary focus was on control: building as much as possible, as fast as possible, as cheaply as possible. Any economic inefficiency represented unclaimed profits.
The standard organizational structure was a pyramid: when a company had the resources to grow, it would widen its base and add management in the layers above. Rigid chains of command were ideal for maintaining top-to-bottom control. As the number of tasks grew, however, the ability to control and manage the entire process became more difficult. At the time, the ranks of middle managements welled with individuals who had very narrowly-defined responsibilities.
Sociologically, the pyramid structure also led to dehumanization. Top managers didn't recognize their workers, workers in one department didn't recognize those in another, work was so broken down the tasks seemed meaningless, and everyone was managed and measured by the numbers, not as a person.
Ultimately, corporations evolved into massive bureaucracies out of necessity, given the climate of the time in which they arose. And they worked magnificently ... until things changed.
The author distills the shift that occurred into "three Cs": customers, competition, and change.
Customers
Because of the demands of WWII and the postwar economic boom, companies were often able to sell out all of whatever they were capable of manufacturing to customers who were begging for goods. In the 1970s this ran out of steam, and by the early 1980s the market shifted: so many suppliers sprung up that manufacturers had to compete for customers, and disposable income dropped off such that customers were more choosy. This shook the foundations of corporations who had been in a position of power.
Some sources suggest that it was compounded by the segmentation of the mass market into specialty markets of customers, but the author contends that the mass market never really existed: manufacturers produced by the most efficient process and approached the market as if it were homogenous: When Ford made his model T exclusively in black, he did not pause to consider whether anyone might want a different color, but did what he wanted, offering a take-it-or-leave it proposition to a market whose only choice was to take it or do without. That is to say that most customers weren't satisfied, they took it because there were no alternatives - and the fact that the market fragmented as soon as completion entered was evidence of long-standing dissatisfaction (or perhaps even they didn't feel dissatisfied until someone else showed them something better).
Whatever the case, once consumers were offered choices, they stopped accepting the standard product, and instead sought out options that met their unique and particular needs. Companies had to recognize that "the customer" was not a homogeneous mass. At the same time, companies were assailed from within, but employees who no longer felt content to have a standard job at a standard salary, but instead were instead considering opportunities in the market for their labor.
The author provides some examples and incidents that demonstrate competition during the closing decades of the twentieth century - while the competitiveness is familiar to the modern consumer, it is historically unprecedented on such a broad scale. Consumers demand the product they want or they will take their business elsewhere, retailers demand the same of wholesalers, who demand it of manufacturers.
In the service industry, the popularity of instructional literature (how-to books and articles) and do-it-yourself supplies sends the strong message that customers who can't get what they want and a fair price from service providers will do it themselves, even if it takes the effort of learning new skills. This is also true in the business world - consider the amount of peripheral business printing companies have lost to first that use desktop publishing software to reduce the amount of service they purchase.
(EN: There's some argument that this is generational - primarily, that Generation X are do-it-yourself and that the Millennial generation will revert to choosing the best option in spite of its shortcomings, but that seems like wishful thinking.)
The addition of technology, particularly the Internet, has further enabled self-service to reduce the cost and inconvenience of dealing with intermediaries. Given the ability to make their own travel plans, few customers still use real estate agents; given the ability to purchase securities, few customers turn to brokers and financial advisors; etc. Intermediary professionals used to have access to data and resources that were unavailable to the customer - but now that these same resources are accessible to anyone, they have lost the upper hand.
(EN: Beware of extremes. There are many who would proclaim travel agents, stockbrokers, newspaper editors, and other professions "dead," but this is not so. People still turn to intermediaries in difficult situations, and "difficult" is subjective. There is still value in convenience and expertise - but an intermediary has to provide value to justify their cost. Simply stated: such professionals must be very good at their jobs, and those that are still have a place and will likely continue to survive and prosper while the weak ones, whose services created no value, have either failed or are headed in that direction.)
For companies that have maintained a mass-market mentality, the new reality is difficult to accept. Tell a customer to take it or leave it, and he will leave it. Lose him today, and he won't be back next week, and a replacement doesn't automatically appear to buy off your inventory. Goods are no longer in short supply, manufactures can't sell as much as they can possibly make, and price-cutting doesn't create instant demand.
Given that many markets have matured and competition is global, the supply-side no longer has sustainable long-term advantage in the marketplace. Moreover, many consumers are now in replacement mode: everyone already has a refrigerator, a television set, a home computer, a washing machine, and a vacuum - so you're not offering anything they don't already have and must wait for them to replace goods when they wear out. And even then, you're not the only source that can supply one the very next day.
In short, the mass-market mentality is no longer realistic. Customers have many choices and there are many suppliers competing for their business, which puts the customer firmly in control. Moreover, customers have little tolerance for companies that don't understand and appreciate the change that has taken place - they can, and will, do without them.
Competition Intensifies
In n market where there is greater demand than supply, it's easy to do business: offer an acceptable product at a reasonable price and the sales will come rolling in. But when supply exceeds demand, customers decide among competing offers on multiple factors, often simplified as "price and quality" to determine which firm's offering to accept.
Niche competitors are a particularly difficult competitor in practically every market: a small firm, catering to the needs of a small market segment, is particularly worrisome because established competitors (nor the niche competitor itself) have no way of knowing if the niche is a segment that will remain small, or is acting as the harbinger of a broader market change. If you fail to react, the niche player may take over the market; react too quickly, and you may be making changes the mass market will reject. With trade barriers falling, a market can be served (and your established position attacked) from anywhere.
Similarly, start-up companies can come out of nowhere, and as they are small and nimble firms, they can quickly outmaneuver the existing market giants. Being a big company is no longer an asset and can often be a liability. It's also noted that not all start-ups are small - there are a few sizable firms that have been around for years that are still as nimble and innovative as small start-ups.
The chief threat posed by niche and start-up companies is that they do not play by the established rules of the industry: they have completely different ideas about how to run a business. When Wal-Mart stormed the market, it was not their intention to run their operation the same way as Sears or K-Mart - they beat them not by executing the same strategy more efficiently or effectively, but by coming in with a completely different strategy. Competitors responded by trying to do be better at working their existing models, and failed because they never did change their model.
(EN: A common principle of customer experience is that advantage goes to the firm that best serves the needs of the market - being internally efficient is a good principle from a perspective of financial management, but internal efficiency does not lead to consumer preference, hence it does not lead to success in the market. Many firms still seem to have difficulty understanding or accepting that.)
Technology changes the nature of competition in many unexpected ways - but not in the same way. Unless a technology is available only to one firm (its own invention or patent) and others are prohibited from adopting it, it is not a source of competitive advantage. Especially in situations where a firm intentionally or unintentionally adopts the same technology as competitors, it does not result in an advantage. They're merely keeping up - but keeping up is important when customer expectations are that all firms in a given industry will leverage the same tools.
Change Becomes Constant
For centuries, industries remained highly static. English farmers in 1500 AD did the same work in the same way as did Roman farmers in 500 BC. After the industrial revolution, change became far more fast-paced: industries adopted entirely new ways of doing things, and production processes were changed. At first, a change would occur every decade or so, then every year or so, then multiple times per year, and in the present day, the nature of work can change monthly or daily.
I terms of products, customers are aware that next year's model will be different to this year's. And for technology products such as computers and cell phones, the latest-and-greatest will be old within six months and obsolete within a year or two. The product life cycle in technology has become six to nine months - if a firm releases a new product a month after its competitors, it has missed 33% of its potential sales. Being competitive means moving very fast, from conceptualizing to manufacturing to sales in a very short period of time.
Traditional tools are too slow to detect changes in the marketplace. A firm that discovers what its competition is doing six months before the boxes hit the shelves has little time to react and respond. Customer opinion can turn on a dime, such that a monthly survey is not sufficient to predict changes in preferences quickly enough to be able to plan and execute a response.
Myopic Diagnosis
Some firms seek to blame external factors for their failure to remain competitive: taxes, regulations, unions, laws, foreign competitors, and whatnot. But if these factors were the cause of the dilemma, it would affect every company. Sears is dying while Wal-Mart is thriving; GM is struggling while Honda is succeeding; etc. The success of some companies rebuts the excuses presented by those that are failing.
What seems fairly clear is that managers haven't quite figured out why their firms are in trouble and have no idea what to do with it. They are panicked and flailing as they feel themselves slipping under, and are trying to stay afloat. As such, there is an air of desperation and randomness not only to the excuses they offer, but also to the tactics and strategies they adopt.
Some firms try to make better products; others try to make cheaper products; some seek to change their markets; others seek to change industries; some try to outsource operations; others seek to merge with or acquire other firms; some try to manage their finances; others are aggressive about investing in "innovation;" etc. None of it seems to work.
At its most simplistic sense, the main problem is that most companies have no idea how to be successful in the present marketplace. The few that understand what is needed have astounding success, while their competitors fumble - and if they want to become "winners" again, they will have to discover a path to success rather than implement random solutions in hope that something will happen to address the problem.
The author looks to logistics as an example. Success here is very straightforward: get the right product into the hands of the right customer as quickly and efficiently as possible. When you look to the logistics operations of companies, there is a tangled mess, and the process may include a several steps, performed in various departments, without general oversight:
- Customer service takes a phone call and keys the order into the system
- Sales must figure out the delivery charges
- Finance will check the customers' credit
- Inventory control checks to ensure the goods ordered are on hand. If so, the order goes to the warehouse; if not, it goes to production or acquisition.
- Warehouse operations pulls merchandise for shipment
- Product handling takes the goods pulled from the warehouse and packages each order for shipment.
- Quality control verifies that the package contains the right goods for each order
- Trafficking determines how many vehicles are needed and what routes they will take according to the aggregation of all orders on a given day
- Shipping stages orders and loads trucks
- Transportation moves the package from the warehouse to the customer
This seems a finicky and complicated process, but it is well suited to Adam Smith's principle of the division of labor: each of the departments involves an employee who is skilled and efficient at executing a small part of the larger task. It also is well in line with Alfred Sloan's theory of management, in that each task can be assigned to a department and information relayed up and down an orderly bureaucratic organization.
However, it also inherits the problems of those practices. Mainly, no-one in the company oversees the entire process and it is not managed as a functional unit. If the efficient operation of one unit creates difficulty for other units, it must be escalated up the tier of management before anything can be done about it. Even if each department executes its part perfectly, there are errors in each handoff - and if there is no error, any handoff entails a queue, batch, or wait time. And if an error is discovered, no-one has the authority to take action to solve it. In essence, once an order enters the machine, it becomes invisible.
Consider that the classical theories of order fulfillment were created during the previous era where customer service was not considered: only the functional efficiency of doing a task, with no consideration of the reason the task was being done. These theories coach companies to do what makes the most effective use of their resources, not what is most effective in providing service to the customer.
Merely fixing the pieces and the handoffs won't solve the larger problem - I will make the company more efficient at doing the wrong things. Yet in company after company, the author has seen this exact approach: management seeks to make employees follow the process better, never considering that the process itself might be the cause of the problem.
Holistic Diagnosis
The core message of this book is to take a holistic approach: it is no longer sufficient or practical for firms to organize their operations around Smith's and Sloan's theories of labor and management. The firm that continues to focus solely on the efficiency of its internal operations may perform those tasks better than their competitors, but it does not mean they will succeed in a market where choices are made by customers.
Specifically, the author wishes to convince managers to reconsider their processes. That is, to set aside the assumption that the process is perfected and that the people must be managed to execute it more accurately and efficiently, and consider the process itself and, where necessary, reengineer it.
This likely represents a major change: when a company is established, processes are defined and never reconsidered. That is, mangers are responsible for executing the process, but not to question or change the process. If you raise the question of the process, there are two completely opposite answers that mean essentially the same:
- No-one owns the process. This is an honest admission that, while each person is responsible for a role or set of activities, there isn't anyone who has ownership of the process itself.
- Everyone owns the process. When a firm claims everyone is responsible, it means that no-one has been assigned formal responsibility. This is no different than having no process owner.
As a result of Smith and Sloan, companies have evolved into functional silos - the people who perform a given function are organized into a unit that is grouped with similar units. Returning to the shipping example, many departments are involved: the person who takes the order is in customer service, which reports to sales; the person who checks credit is in finance, which reports to accounting; the person who drives the truck is in logistics, which reports to facilities. Each of these reports up through a chain of command to a different C-level officer ... meaning the first manager they have in common is the CEO (who likely feels that an issue with shipping a customer order is well beneath his station).
Business structures that specialize work and fragment processes become self-perpetuating: people are motivated to do what they have always done and focus on efficiency, and if someone actually has a new idea, they do not have the authority to implement it, even on an experimental basis: they must "sell" the idea to their supervisor, who must then sell it to his own supervisor, and so on up the hierarchy until it reaches a single person who has the authority to implement a change. And per above, this person generally does not exist outside of the executive suite.
Additionally, getting an idea approved means getting several people to say "yes" whereas stifling the idea requires only one person to say "no." Given corporate politics, it's generally safer to say "no" and continue doing things poorly (but by-the-book) than to say "yes" and risk that the new idea doesn't achieve the desired results. When it comes to innovation, the existing corporate organization is an effective safeguard against making any change.
The resistance to change also pertains to any change in response to the external environment. Because each job function is narrowly defined, it's unlikely that a change in the market would be noticed by anyone based on the information they receive in the context of their job. And if they happened to notice it, they would not be able to do anything about it.
Whereas Smith envisioned that specialization of labor would be economically efficient, many firms are experiencing diseconomies of scale as a result of fragmentation. Often, the labor appears to be more productive, but overhead costs increase significantly. In theory, a company that needs to increase its output by 10% can simply hire 10% more people in the needed areas - if the company needs to add 100 workers, they must also add 10 supervisors, 39 managers, 18 people in human resources, 19 in long-range planning, 22 in auditing and control, and 23 in expediting.
The author refers to this as the "Humpty-Dumpty" approach to management: a task is broken into lots of little pieces and it takes all the king's men to put the fragmented work back together again. Supervisors, managers, auditors, controllers, liaisons, and other job exist simply to oversee the work that others are doing. As a result, the per-unit cost of direct labor may stay the same or even decrease, but overhead costs are increased - such that many companies are paying more for the "glue" than for the pieces of work.
The author provides a litany of problems caused by the Smith-Sloan approach: inflexibility, unresponsiveness, absence of customer focused, preoccupation with activity rather than results, bureaucratic paralysis, innovation smothering, high overhead cost, separation of responsibility from authority, etc.
These problems have not suddenly appeared, but have been present all along - but in a non-competitive environment, it wasn't important to solve them: where demand far exceeded supply, a firm could sell its entire output a price well above its costs of production, and customers would tolerate poor quality and service or do without. But since supply has grown to exceed demand, and unhappy customers have many alternatives, these issues have become critical.