Saturday, April 11, 2009

Re-purpose Before You Re-structure

I signed up on a few months ago to get mailing letters. This one comes from the man himself Jim Womack. Jim Womack actually coined the term lean in his book "The Machine That Changed The World" and is probably the leading author and expert on lean and continuous process improvement. His letter is pretty interesting and I think it illustrates a very insightful point. When times were booming everyone's mission statement became making money. But the customer does not pay you to make money. The customer pays you because they value the product or service your company provides. This message is very simple and seems intuitive, but obviously keeping it on the forefront of company priorities is something that many struggle with. My favorite quote is below.

The natural instinct of senior managers in any crisis is to restructure and downsize. But the question is always, "Restructure and downsize toward what?" No customer cares about a company's structure. No customer cares about downsizing. Customers only care about a company solving their problems along life's path.

My lean mentor and friend always talks about the difference between real lean and fake lean. He says the difference between real lean and fake lean is a respect for people. Sometimes the numbers work out in a manner that you have improved your process and need less manpower to accomplish the same task. Fake lean would fire those people based on health care costs, salary cost, etc. Real lean would free those people up as change agents working on continuous process improvement and lean in other areas of the organization. Downsizing without a purpose does nothing.

I also think his message bypasses all the ideological battles (that I get sucked into quite often) about the bailouts and government stimulus packages. We as a nation get so caught up in acting that we haven't defined what the purpose of our action is. If we continue to throw money and provide aid to GM, what is the end state? What are we helping them strive towards? Can anyone answer this question? Or more importantly has anyone asked? This lesson can be applied to your own life and personal finance journey as well. What is your purpose for saving, for getting out of debt, for wanting to become a millionaire? What is your mission statement? Enjoy Jim Womack, the godfather of lean, and the powerful message he delivers below.

One of my favorite questions when meeting with senior leaders of enterprises is, "What is your organization's purpose?" The typical and immediate response is, "To make money and grow." "But," I respond, "this answer has nothing to do with your customers, who provide the money your organization needs to profit and grow." I then repeat my question, but elaborate, 'What does your organization do to solve customer problems better than competitors so that customers old and new will pay good money for your services and goods and buy more over time?'"

In recent years a fashionable alternative to "make money and grow sales" was that organizational purpose was to steadily grow shareholder value. But now the king of shareholder value, General Electric's retired chairman Jack Welch, has acknowledged – thank goodness – that this is a result, not a strategy for achieving this result. Now that investors as well as customers are on strike during the great financial crisis, the whole management world is being forced to rethink purpose from the standpoint of the customer.

Confusion about purpose is particularly painful to watch in the collapse of General Motors because this organization was so brilliant for so long in clearly defining its purpose. On June 9, 1921, GM's great leader Alfred Sloan produced a simple memorandum on the topic of "Product Policy" that defined General Motors’ purpose for generations to come.

Sloan stated that General Motors would provide a carefully configured range of products for "every purse and purpose", from used Chevrolets at the lower end of the market (with dealer financing on these traded-in vehicles) to a "fully loaded" Cadillac at the top end. This simple memo rationalized GM's chaotic product line-up so its vehicles would not overlap in the market. Instead, they would each have a clearly defined place in a status hierarchy and would always be more refined, a bit "classier" with a higher price, than competitor products in each market segment.

This memo about market policy was much more than the now familiar market segmentation and value proposition for each segment. Sloan did something much more important by defining GM's central purpose as creating an aspirational escalator for every customer through the life cycle, from the used Chevrolet as their first purchase to the fancy Cadillac as their last (often concluding with a Cadillac hearse on the way to the cemetery!) And it worked brilliantly. General Motors was probably never as efficient in production as Ford and it was rarely a technology leader. But it provided a clear product pathway on the customer's life journey. Customers embraced this purpose and opened their wallets to pay higher prices for more refined products within each market segment. Within a few years of Sloan’s memo GM had became the largest and most successful corporation in the world and in the history of the world.

Moving forward to the present moment, it is saddening to read the viability plan GM recently proposed to the US Automotive Task Force. With the exception of the plug hybrid Volt (an unproven technology for an unproven market to be produced at tiny volume in the early years), the plan is entirely about "restructuring" and shrinking, about what General Motors isn't. It isn't Saab or Hummer or Saturn. It won’t have nearly as large a dealer network. It isn't a manufacturer with a significant North American footprint outside of Michigan and Ohio. Etc.

The natural instinct of senior managers in any crisis is to restructure and downsize. But the question is always, "Restructure and downsize toward what?" No customer cares about a company's structure. No customer cares about downsizing. Customers only care about a company solving their problems along life's path.

So here's my advice to new GM CEO Fritz Henderson or whoever may follow after him. Before you restructure, restate GM's purpose. Today no one knows. Do it in a simple memo. Indeed, do it in a single-page A3 format. Sloan needed three pages in 1921, so practice continuous improvement to get down to one! And remember that no amount of restructuring without a clear and compelling purpose will save this stricken giant (or any other failing enterprise.)

Best regards,

P.S. Toyota has gotten off lighter than GM in the current crisis, but it faces the same confusion about purpose. Until the mid-1990s the clear purpose of Toyota was to be the best organization in the world at providing refined, durable "value" products in all market segments with few delivered defects to customers. The assumption was that growth would naturally follow, and it did. But then the purpose seems to have shifted to becoming the biggest auto company as rapidly as possible by adding capacity everywhere, a purpose that no customer cares about. At the same time competitors, led by Hyundai, have closed the gap on Toyota's original purpose and everyone is doing hybrids where Toyota initially took the lead. An A3 on re-purposing Toyota is surely what new president Akio Toyoda needs as well. My fear is that he will only focus on cost reduction and restructuring.

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