Western managers loathe and fear failure. They dread and hate poor results so much that often they inadvertently create the very object of their loathing. Every time a business is closed, a project is cancelled, or a product is withdrawn from the market, the management responsible has slammed the door on the possibility that, tackled differently, the business might have flourished, the project might have made a money-spinning breakthrough, or the product might have become market leader. The failure is a self-fulfilled prophecy.
That self-defeating process can start long before the end. Damned as a no-hoper, the victim is starved of funds and eyed with increasing contempt. The people in charge become disheartened - and the low morale spreads. Demoralised managers and staffs tend to deteriorate in performance, which reinforces the case against their enterprises. Yet these disregarded lumps of coal have often become jewels in the crown - like the Dundee plant which made NCR world leader in automatic teller machines.
RISING FROM FAILURE
Never forget the immortal words of Thomas Watson, the founder of IBM: 'That's where success lies - on the far side of failure.' Thinking Managers has previously recounted the tale of Windows NT, which looked to be Microsoft's largest and most visible flop, but was turned round to become its flagship product in the booming client-server market. But the NT triumph doesn't mean that failure is always reversible. Watson's giant, after all, persisted for years in wasting billions on developing its own operating system, in a futile attempt to shake clear of Microsoft's monopoly. IBM's mistake wasn't to stop, but to have launched the venture in the first place.
Still, the contrasting stories raise a fundamental and taxing problem. How do you decide when to persist, keeping the patient alive, and seeking a radical cure, rather than letting nature take its course? You start with a basic question. What action would you take, ideally, if the business, project or product were all your very own, and the only one in your proud possession? Without doubt, closure would be the very last alternative - unless lack of funds forced the issue. In better financial circumstances, you would strive with might and main to find a successful solution.
That process must start with analysis, establishing what the real difficulties are, and why they have arisen. If it's a whole business that's under scrutiny, six basic questions have to be answered:
1. Are the products/services the right ones for the markets being supplied?
2. Are the products/services being provided in the most effective possible manner?
3. And at the lowest possible cost?
4. Is the business tackling the right markets?
5. On all key indicators, is it as good as or better than the best competitors?
6. Is there a clear reason for customers to choose this company and its products/services, rather than somebody else's?
The answers will almost certainly be negative on most counts. That raises the question which strikes to the heart of the matter. Can the negatives be turned into positives? That is nearly always possible, with one proviso: that the right leadership can be found. Fortunately, that's not so hard as it sounds. The people with the necessary drive, skill and enthusiasm are very often available in the most convenient possible place - the business itself.
That's what happened at the NCR plant at Dundee, where James Adamson was the man in charge. The same scenario was enacted at the General Electric Company when the future Lord Weinstock, previously heading only the consumer electronics side, took control of the entire electrical group in the mid-1960s. Both Adamson and Weinstock began their drives to turn failure into success by tackling the six basic questions listed above with great vigour. That meant, first and foremost, setting new, far higher and exacting standards.
For NCR, the selected criteria were customer satisfaction and engineering quality. The key to setting standards has to be effective benchmarking - none of the six questions can be answered satisfactorily without uncovering the truths (usually hard ones) about relative performance. Adamson investigated the reliability of the competition in ATMs and insisted that his engineers should do twice as well. After first ridiculing the idea, they actually trebled the reliability through a complete redesign of the machines.
LOOKING FOR BENCHMARKS
Weinstock had used a similar approach at Radio & Allied, the family TV business that had merged with GEC. As he told the Financial Times, he brought down the price of larger-screen TVs by methods which included asking 'our few but highly competent and practical engineers to reduce the number of electronic valves from potentially 20 to 12. We eventually got down to 14.' At GEC, which 'was in a real old mess - everything was done wrong', Weinstock lacked the detailed control he enjoyed at R&A: so he turned to the US for his benchmarks.
'We had to develop a set of efficiency criteria quickly, which could be applied generally. The figures did not have to be exactly right, just so long as they were adequate to show up the tendencies of the different elements of the business.' A GEC man was sent to the US to identify 'best practice' in the industry, and came back with the basic material for key ratios (for instance, of inventory turnover, debtors and margins). With other statistics, these were consolidated into a famous management reporting and control system - still working fine after more than 30 years.
Every business, whether or not it's attempting to rise from failure, needs the same primary tools: key data that can be rapidly mined to give speedy information about the significant dimensions of the business; and key targets whose achievement will transform its performance. The same requirement also applies to products and projects. Managing them effectively demands swift and regular information, plus targets for progress and exacting ambitions - as Adamson saw at NCR, there's no point in aiming to outdo the competition by small increments. Aim for real breakthroughs and you have a real chance of breaking through.
The corollary is that small ambitions beget small results. The hallmark of the rescued businesses is that they aim far beyond survival. The Wall Street Journal tells the story, as remarkable as that of NCR's Dundee plant, which is still unfolding in North Berwick, Maine. The factory makes jet engine components for Pratt & Whitney: after 17 years of life, it was facing the death penalty as the company sought to slash costs in face of severe competition from Rolls-Royce and General Electric. The nearly condemned plant, though, has since become one of Pratt's best peformers, cutting operating costs by 20% in two years as defect rates fell by 30%.
The pattern is again instructive. (1) Leadership was provided from within, by the existing plant manager, Robert Ponchak. (2) He insisted on winning complete commitment from management: 145 of 325 salaried jobs went as Ponchak proceeded to remove 'naysayers'. (3) Best practice methods were introduced, with the aid of a young expert wished on Ponchak by his superiors - despite friction between the two men, lean production techniques freed floor space, cash and manpower. But the improved methods required decisive help from (4) the enlistment of all staff, not by exhortation, but by practical means.
Of these, the most important is reward. What you pay for is what you get: it follows that, to get what you want, the payment system must be aligned with the need. Ponchak achieved this alignment by an approach that killed two birds with one stone. He took 22 people from both the factory and the office staff and gave them the task of devising a new pay and job-classification system. Not only did he get the desired result, but he established the vital point that management is not just for managers. In proof, the new structure is elegant and ingenious.
CREATIVE REWARDS
Master the basic job requirements, and the employee gets basic pay: these are 'automatic' rewards. This inner 'red ring' is surrounded by a 'yellow' concentric circle, 'conscious', which gives further reward for maintaining the work flow through machining centres. The third circle is 'green' or 'creative' - and you can only enter this ring and its rewards by showing initiatives in cost-cutting or quality improvement. Nobody is suffering a pay cut as a result, but automatic pay increases have been abolished.
Interestingly, the same approach is being used at two European giants, Royal Dutch-Shell and Siemens, in drives to raise profitability. To persuade managers to improve the corporate results, their own pay has been tied to personal performance. Pay rises linked to seniority and the mere passage of time are inimical to a dynamic business system. They are well suited to bureaucratic hierarchies - but these lead to nonsenses like those at North Berwick, which before the reforms boasted 129 job classifications: 90 of these covered only one or two people.
Like the Siemens plan, which calls for pay to be fixed after annual appraisals of performance (with subordinates appraising their bosses as well as being appraised), the Pratt plan is new and its outcome remains to be seen. Progress through the red, yellow and green circles is linked to training which will be rolled out over a two-year period. But financial incentives have already worked well. If the plant does better than target on costs, deliveries, etc., cash goes into a 'results-sharing' account. The consequences have been so good that the fund is likely to pay a $1,633 bonus to each employee in the first year of operation.
The basic ideas applied at all the cases mentioned, and no doubt at all other examples of failure turned into success, are so obvious and powerful that they raise a penetrating question. Why did it take the threat of closure, at both Dundee and North Berwick, to stimulate management into reforming, not only the operations, but the ethos of the plants? The same question applied at New Mather Metals, an automotive components plant in Toledo, Ohio, whose managers, according to the Financial Times, could expect 'an obscene gesture' as they passed the workers in the bad old days. The two sides only started to cooperate, turning bad into good, when they realised that the only alternative was collapse.
OFFERING THE CHANCE
An important factor is that New Mather was taken over by a Japanese firm, NHK Spring, whose influence has obviously been a powerful catalyst. But Toledo also makes the Jeep in 'the oldest continuously operating motor plant in the US'; here Americans woke up to the meaning of Japanese-stye management without Japanese intervention. As a union official tells it: 'We were making rocker bars for $5 each, and the company could outsource them for $4 each. They offered us the chance to do the job cheaper than the outsourced company - or lose 140 jobs. In the end, we were making rocker bars for $3 each.' And Chrysler's Toledo plant now exports Jeeps to Japan.
Note the crucial phrase: 'They offered us the chance.' That also happened at Compaq Computer, where the new broom management led by Eckhard Pfeiffer originally expected to make the low-cost ProLinea PCs in the Far East. The head of the project, though, responded to a challenge laid down at the meeting called to tell the Texan employees why offshore production was required: 'With all due respect', he was told, 'you're kind of new at this, and you don't know what we can do.' Offered the chance, Houston proved that it could compete: but (another crucial phrase) only by radically changing the manufacturing rules.
The essence of salvation doesn't lie in the threat to jobs, but in giving people command of their own destinies and being prepared to accept radical and innovative departures in order to achieve quantum leaps in performance. If the company needs to cut PC assembly costs, find a new and more effective payments system, slash the cost of rocker bars, or anything else, the people in the front line are potentially the best source of the solution - not only because of their experience and expertise, but because their own plan is far more likely to be acceptable, and to engage their commitment, than one imposed from above or outside.
While the job threat was catalytic in all the cases mentioned, there's no reason why the same principles can't be applied in companies which are in comfort rather than in crisis. The status quo must always be subject to challenge if progress is to be achieved. The good can be the enemy of the better, and will rapidly cease to be the best without continuous challenge. Exactly the same approach as that adopted in the saved plants and businesses will work equal wonders: check everything - the products, the methods, the costs, the marketing, the ratios and the differentiation - against the best competitive benchmarks, and set targets which are much higher than the highest in sight.
That's the answer to the conundrum which so greatly concerns Western management at present: how to shift decisively from downsizing to real growth. The strategies described in Thinking Managers were not mere exercises in cutting costs and eliminating jobs. They led to new expansion. The Pratt plant at North Berwick, for example, cut the costs of a component called a brush seal by 80% and then found that it could sell them, not just for the company's exclusive use, but to outside firms making electric turbines: sales are rising by 30% annually, employing 40 staff. Overall, 200 jobs have been added since 1995.
That's useful: but the results of turning failure into success can be stupendous. The Jeep plant in Toledo recently passed the 2 million mark. Compaq's achievement in trebling its global market share and easily passing IBM to become world No.1 in PCs has become the stuff of legend - though in the ATM market the success of Dundee in humbling NCR rivals like IBM is equally remarkable. While cost control is a sine qua non in all these companies, it has been exercised, not through crude use of the axe, but through radical reworking of designs and processes to act as a springboard for growth.
FAILED COST-CUTTERS
If that was the purpose of 131 cost-cutting companies surveyed by Mercer Management Consulting, it certainly wasn't achieved in most of the cases. After determined programmes over the 1985-90 period, a mere 27% had reached the goal of profitable growth; 26% more were increasing their revenues, but not making profits; 10% were still - six years on - trying to cut their costs significantly; while 37% were notably smaller. They had been 'Dunlapped'. The name refers to Albert J. Dunlap, who personally earned $100 million from a rapid turnround of Scott Paper in which 11,200 jobs were lost as managers were sacked, offices closed, R&D cut, suppliers crushed and unwanted businesses sold off.
So was Scott, after 15 months of this Draconian treatment. As a technique for extracting short-term improvements in the share price, Dunlapping can work miracles. In fact, the Sunbeam price doubled on the mere announcement that Dunlap was moving in: his slash-and-burn operation is now well under way. In his book Mean Business, however, he claims to be more than a turnaround artist; 'I save bad companies and make good companies great.' That claim is not supported by the evidence. But it is a succinct description of what can be achieved by realising the truth of another Dunlapism: that messes like Scott Paper are common.
As he says, 'a similar situation faces every company, every day.' One of the businesses, or part of the business, is being wrongly managed at excessive cost; a product or service is wrong for the market and has the wrong cost and pricing structure; a project is aiming for the wrong targets and missing them because of wrong approaches. Most important of all, the wondrous ability of people throughout the company to right these wrongs is not being tapped on a daily basis. One Pratt executive says of the new cost-cutting ethos that 'We've got 1,500 people looking at what managers used to look at.' That's the near side of success.
