It's no surprise to read that a company 'faces quality questions' with one of its most important products: or that offerings in another vital market have been 'plagued by bugs', so that a major customer experienced shutdowns of from 30 minutes to two hours. That's what you would expect from companies that haven't imbibed the lessons of Total Quality Management, as taught by such splendid examples as Motorola. The only problem is that Motorola is the guilty company.
How could this happen to a corporation whose previous chairman, Robert Galvin, was the acknowledged leader of the TQM movement in the US, and whose achievements on the golden road to 'Six Sigma' (a mere 3.4 defects per million parts) are part of the TQM gospel? Plainly more is at fault than quality alone (although that is an enormous failing in today's competitive conditions). Motorola has been beaten hopelessly in the market for digital mobile phones, where it lags years behind its rivals - and where the product faults mentioned above have surfaced. Three large phone companies are not offering Motorola digital telephones at all: one explains that none of the phones has passed its 'shake and bake test.'
Three other communications companies are allies in a wireless service that has cancelled a $500 million order for Motorola digital network equipment. That's where the second bunch of quality failures reported above have occurred. Even for a $30 billion company, half-a-billion is a grave loss - especially in its heartland of wireless technology. No wonder that an executive told Business Week that 'It's the freaking Titanic over here.' It's an apt metaphor. Champions turn to losers when they believe themselves unsinkable and ignore ominous signs that there are icebergs ahead.
TOP MANAGEMENT GOALS
In theory, TQM should protect companies from both the specific quality problems and the overall strategic setbacks. That's because the quality principles are supposed to apply to all processes, from shopfloor practices to boardroom deliberations. It only requires a small relaxation in the pressures for performance, however, for deterioration to begin. What can happen emerges from a Wall Street Journal report,commenting on the digital phone problems. These 'became so severe over the past year that Motorola has shuffled its technical management team at the unit several times. But the turnover has done little good.'
Almost certainly, the turnover did plenty of harm. Several management changes in a mere twelve months must be disruptive. They also deny the total quality process. That calls for finding the root cause of the problem, which may have little or nothing to do with the quality of the particular managers who got shuffled so often. But shuffling managers won't provide a stable team that can run through the PDCA cycle of Plan, Do, Check, Act, with its seven steps, as listed by SGS-Thomson:
1. Describe the weakness.
2. Collect and analyse data on the problem.
3. Identify the root cause.
4. Plan and implement a solution.
5. Confirm that the solution really works.
6. Standardise by incorporating the fix in the process.
7. Reflection on process and selection of next weakness.
That same cycle applies all the way from the shopfloor to the boardroom, in any size of company. The top decision-maker has to operate in the spirit of Bill Gates, who once said that Microsoft was always only two years from disaster. Every strategy has the same inherent weakness - the conditions under which it was formed will inevitably change, perhaps profoundly: witness, the switch to digital technology which caught Motorola napping.
Since such changes are bound to happen, constant monitoring of the strategy and the marketplace - the Iceberg Watch - is essential. Collection and analysis of the data will establish the dimensions of the problem and reveal the root cause. In Motorola's case, the cause almost certainly revolved round attachment, both psychologically and financially, to the old technology, coupled with refusal to take seriously enough the inroads of upstart digital competitors.
NEW PLATFORM
That leaves a company in no fit state to plan and implement a timely solution which will be truly effective and lift the business to a new strategic platform. Once there, of course, you need a new Iceberg Watch, looking out for the next weakness to appear. You ask questions such as these:
1. What is the potential impact of new developments and competition on our business?
2. What are the likely strategies of existing competitors?
3. Could we use different methods of supplying and serving the market?
4. What new customers and channels should we be serving, and how?
5. What alternative market and product strategies should we consider?
6. What investments are needed to defend and strengthen the core business?
7. In what new markets should we be investing?
These were the actual questions used by the Iceberg Watchers at Compaq, a company often praised in Thinking Managers for its brilliant management under Eckhard Pfeiffer. The CEO turned the company round after it ran into losses in 1991. Five years later, having taken Compaq's sales up five times, its profits ten times, and its stock eight times, Pfeiffer demanded a total reappraisal of 'everything about the company, especially the very strategies, operating assumptions, and business models on which we had built our industry leadership through the first half of the nineties'.
He was determined to prove a crucial point: 'Dominant firms can fight the inertia of success'. That won't happen, however, unless you attack your own business and financial models before anybody else does. Moreover, you must beware of focusing on market leaders, especially if they are losing market share (Compaq made some critical mistakes through concentrating on IBM). Finally, don't be held back by the usual inhibition, fear of resistance to change: know rather that 'Stretching the organisation brings out the best in it'.
In Straight From the CEO (Nicholas Brealey), a fascinating collection of pieces orchestrated by Price Waterhouse, Pfeiffer draws on experience when he writes: 'People respond to a bold, well-defined vision and adjust swiftly to its demands. Don't rely on incremental steps - they're just an excuse not to change. When you reach one goal, pursue an even bolder goal.' Note the close parallel with the final stage of the PDCA routine. And there's another resemblance to TQM: speed.
Typically companies take a long and leisurely look at strategy. One highly regarded group, for example, has just begun an 18-month study of its strategic options. That has one blatant drawback. Nothing will be the same in 18 months' time. Moreover, if radical change is needed, you have lost 18 months of valuable time. You can't afford that in any business, electronics above all. In personal computers, with a life-span of six months or so, 18 months is three generations - the equivalent in human terms of a century.
Pfeiffer certainly couldn't wait that long. So he gave his project, code-named 'Crossroads', just eight weeks. The technique applied is called 'project management'. Its principles are simple. You divide the task into separate components and give each to a cross-functional team. The teams are coordinated and facilitated by higher management, but are self-contained and responsible for meeting their own deadlines and targets. Compaq needed fifteen such teams for Crossroads. Their swift findings gave top management the material with which to debate and devise 'a new three-pronged strategy.'
THREE-PRONGED STRATEGY
This was designed to (1) strengthen and grow the core businesses; (2) invest in strategic new products and markets and; (3) push harder for the development and professional growth of all employees. That tells you very little, since any sensible company would obviously want to follow all three courses of action. But there were significant consequences: Compaq was reorganised into 'four customer-focused global product groups and created a world-wide sales, marketing, service and support organisation.'
However, there's a catch or two. Earlier this year, Compaq bought Digital Equipment. Once the darling of the industry, hailed as 'the next IBM', Digital has for many years been a struggling producer stranded by the relative decline of the mini-computer. At a stroke, Pfeiffer achieved his ambition of becoming one of the Big Three computer companies. But what will be the impact on the three-pronged strategy and on the new organisation? Will Pfeiffer's policy of self-renewal be able to accommodate a new and very different culture?
At the same time, unfortunately, Compaq was forced to produce a very disappointing profit forecast. Despite a great deal of effort, the Texan company has failed to match the sensationally low costs of Dell. This rival only sells direct, getting the bulk of its business from large corporations which love the low prices and high service levels. The old enemy, IBM, has also reached lower cost levels on the client-servers that have been the most sensational performers in Compaq's rise. It sounds like the Motorola story all over again - the challenge posed by Dell's cost superiority has been on Compaq's agenda for years. Why hasn't Compaq caught up? Perhaps the iceberg metaphor needs reworking. Nine-tenths of the iceberg is below the water: what can't be seen is what does the damage.
The hidden advantage at Dell (not so hidden, actually, since it's no secret) is what founder Michael Dell calls 'virtual integration.' His argument is that a normal $12 billion company - the level that Dell has reached in merely 13 years - would employ 80,000 people. That compares with an actual roster of 15,000, a mere sixth of Compaq's size. As Dell sees it, the more people you employ, the more time you spend managing them, as opposed to managing the business. Moreover, having to build your own capacity to cope with expansion is what MIT professor Peter M. Senge calls a 'limit to growth': 'If we had to build our own factories for every component of the system, growing at 57% per year just would not be possible.'
Virtual integration is more than simple outsourcing. It is finding reliable partners who act as part of your business system, though not necessarily for ever. Dell says that 'regardless of how long these relationships last, virtual integration means you're basically stitching together a business with partners that are treated as if they're inside the company.' You share information with them in real time, which is how you place your very specific orders: 'Tomorrow morning we need 8,562, and deliver them to door number seven by 7 am.' Using state-of-the-art IT, 'supplier-partners' can be incorporated into the system in a way that 'creates a lot of value that can be shared between buyer and supplier.'
THE CORPORATE MODEL
Much of that value is created by speed: that word again. Taking supplies on a daily basis, Dell fills customer orders with only five or six days of leadtime, while its on-hand inventory of raw materials is measured in a few days, even a few hours. That generates huge advantages. It doesn't get caught by falling prices or rising stocks, and it can move faster. Dell told the Harvard Business Review that if 'I've got 11 days of inventory and my competitor has 80, and Intel comes out with a new chip, that means I'm going to get to market 69 days sooner.' No matter what Compaq or any other competitor does, they won't be able to match Dell without matching its corporate model - the hidden nine-tenths of the iceberg.
The very word 'model', though, can be a trap, one which Dell is determined to avoid. He knows that people in the company talk about 'the model' as if it were 'an all-powerful being that will take care of everything. It's scary because I know that nothing is ever 100% constant, and the last thing we should do is assume that we're always going to be doing well.' That's the assumption which has helped to cause Motorola's woes. The trouble is that the cure is easier said than done. Listen to Eckhard Pfeiffer on the crisis of 1991, which 'burned itself into Compaq's collective memory as one of those events we would never forget - and never repeat. Our response to this crisis was to put even more emphasis on challenge and change at every level.'
The paramount issue is not the specific challenges and changes (which you should, of course, respectively meet and make), but whether you are prepared to alter the whole system - and when. The situation is similar to that of companies confronted by disruptive technologies (as previously discussed in Thinking Managers). They may be serving the existing customers brilliantly in every respect. There is no economic case for moving to the new technology at present: there never is until the newcomers have taken over the market. By then, of course, it's too late. Disruptive change in the system is the ultimate answer to disruptive change in the environment.
It could be that disruptive change is now heading towards every business. That statement hinges on economic forecasts, which are almost as unreliable as those of the weather. But the switch from an inflationary climate to one of stable or declining prices is a fact, at least temporarily. You can see the consequences in the current large number of missed or down-sized profit reports (including Compaq's). In Fortune magazine, Ram Charan gives six examples of areas where tried and trusted strategies and tactics need urgent revision. These Icebergs are pricing, market response, cost, resource allocation, flexibility and communication.
EXAMPLES OF ADAPTATION
• Shifting the emphasis to service. General Electric's power systems division met price pressure by asking its 100 biggest customers 'what services were most critical to them and how GE could provide or improve them' - which included halving the response time for part replacement. A third of its engineers moved from product development to new service development. The result: new long-term service contracts worth $1.4 billion.
• Shuffling the product portfolio. Ford responded to changing markets by moving to monthly evaluation of cars under two criteria, profitability and growth potential. Any product that fails on both counts is a candidate for removal and replacement.
• Reforming the supplier relationship. Charan gives two examples of companies which, to drive down costs through higher purchasing volumes, have cut the number of suppliers drastically. Couple that with Dell-style partnerships, and costs can fall dramatically.
• Switching resources to the most profitable uses. Salespeople are an example: one person selling a whole range in one city is more effective than one person selling one line in several areas.
• Break away from the annual planning cycle. To raise flexibility, GE holds strategic meetings whenever issues present themselves, rather than wait for the April planning round. Currently on the priority agenda: Six Sigma quality training, cost reduction, plant and equipment investment, and pricing.
• Network the whole business. Whether the company is large or small, and whether you go simply for universal e-mail and shared databases, or jump to an Intranet, get everybody hooked up. Whatever the task, that will increase speed of execution.
That's my third mention of speed, which is no coincidence. Another article in the HBR is entitled Time Pacing - Competing in Markets that Won't Stand Still. It advises adding speed and time measures to your existing performance metrics. Then, look at critical transitions (say, from old to new product). Can you simplify, shorten or even abolish elements? (Netscape no longer gives new products out to selected customers for pre-market testing, for instance). Then, are your 'rhythms' synchronised with those of suppliers, customers, etc? Once you start organising the business round faster execution, without loss of quality, nothing is sacred. And that includes the business system, or 'model'; the hidden Iceberg. To avoid the fate of the Titanic, get it right.
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