Table of Contents
Title Page
Copyright Page
Introduction
Turning Up the Flame on More Burners
Easier Said Than Done
Transformation in a Nutshell
The Eleven Lessons
Lessons, Not Best Practices
Chapter 1 - ONCE UPON A TIME IN TRANSFORMATION
American Power Conversion
ALLDATA
Monsanto
A123 Systems
Summary
Chapter 2 - WHAT GOT YOU HERE MAY KILL YOU THERE
Misery Loves Company
Causes
Ambidexterity and the Challenge of Fundamental Change
Eliminate the Pathology of “Do It All”
Unravel the Metrics
Make the Whole Investment
Summary
Chapter 3 - YESTERDAY’S LEADERSHIP SKILLS MAY PREVENT TOMORROW’S SUCCESS
Leadership Lessons
Leadership Diagnostics
Summary
Chapter 4 - THERE IS NO STRATEGY IF NOBODY KNOWS WHAT TO DO
A Case in Point
Lessons in Strategy Communication
Summary
Chapter 5 - TRANSFORMING STRATEGY REQUIRES MORE THAN EXPENSIVE SOFTWARE
Educate the Executive Team on Portfolio Management
Think “Just Enough” to Prevent Overkill
Integrate Portfolio Management and Business Process Flow
Get Clear on the Real Drivers Behind the Business
Link Projects to Goals
Take Decision Making Beyond ROI
Develop Decision-Making Expertise
Create a Neutral Third Party
Summary
Chapter 6 - TRANSFORM HUMAN RESOURCES INTO A STRATEGIC ADVANTAGE
Develop HR in Two Stages
Stage One: Filling the HR Gap
Stage Two: Building HR Strength in the Long Term
Summary
Chapter 7 - YOUR CUSTOMERS ARE ALWAYS RIGHT, EXCEPT WHEN THEY AREN’T
Customers in Transformation
What to Do to “Get It Right”
Transformation Changes What Is “Right”
Summary
Chapter 8 - DON’T LET ANALYSTS RUN YOUR BUSINESS
An Example Relationship
GENCO Learns to Manage the Analysts
Putting the Idea to Work
Summary
Chapter 9 - MERGER IS NOT A FOUR-LETTER WORD
Lesson 1: Deals Come First, Cleanup Comes Second (Unfortunately)
Lesson 2: Connect the Dots Between Mergers and Transformation
Lesson 3: Watch Out for Synergies
Lesson 4: Compare the DNA of the Two Organizations Being Merged
Lesson 5: Don’t Change That Which You Do Not Understand
Lesson 6: Deal with Free Radicals Head-On
Summary
Chapter 10 - WHO MELTED MY CHEESE?
Actively Engage with People
Cultivate a New Identity and Purpose
Create a Detailed Integration Plan for Teams to Rally Around
Go Fast
Move On or Move Out
Communicate Like Crazy
Summary
Chapter 11 - SPIN IS OVERRATED FOR CREATING VALUE
Candor——the Antidote for Caveat Emptor
Recognize the Symptoms
Understand the Damage
Lead by Example
Think Long Term
Aggressively Eradicate Spin Sources
Summary
Chapter 12 - CONSULTANTS ARE NOT AN EXCUSE FOR NOT KNOWING YOUR BUSINESS
Today’s Common Consulting Model
And Your Point Is . . . ?
What the Consultant Model Should Be
Today’s Common Company Model
The Should-Be Model for Companies
Summary
CONCLUSION
Acknowledgements
About the Authors
Index
INTRODUCTION
The Transformation Challenge
Jeff sat in the conference room after the management team reviewed the performance of the organization. As he projected forward three to five years to the results that the board of directors and analysts were expecting, one thing seemed obvious: the strengths of his organization today would not deliver the results of tomorrow. Every piece of evidence told him that he couldn’t expect to grow the organization without selling more solutions along with products. Historically, selling products had been good enough for Jeff’s company, but price pressure and market saturation eroded margins and decreased available market share. Jeff’s team made reductions in costs to create a lean organization, but had run out of places to cut without hitting an artery. As a result, Jeff asked himself the question that all CEOs faced with obsolescence do: “How can I transform the organization from a seller of products to a provider of higher-value-added offerings or solutions?”
If you and your organization are facing a similar situation, you are not alone. “Jeff” is symbolic of hundreds of leaders contemplating the solution to the “solutions business,” where maintaining the relationship with the customer demands offering a greater range of options than the simple product transactions that got you where you are today. This change seems an obvious extension of an existing business model. The logic of selling more to your existing customers is not new. Studies have shown how expensive acquiring entirely new customers can be. However, the plot thickens when we explore the difference between line extension and relationship change. For example, if we are a maker of dish soap and we add another household cleaner to the mix, that is not too big of a leap. But when we are a maker of dish soap and we want to add maid services to do the dishes, it becomes a little trickier. If this scenario sounds farfetched, consider the number of companies that are attempting to do this. Best Buy acquired Geek Squad in order to move from distributing products to providing products and services. Other big companies, such as IBM, Cisco, HP, Wipro, Monsanto, APC, Schneider Electric, and AVNET, have also undertaken their own version of the move from dish soap to maid services. Transforming a products company into a solutions company can be daunting, but does not have to be a mystery.
If you picked up this book, you are certainly in the midst of some sort of organizational change. At the time of this writing, the stock market has taken a huge setback, layoffs are in full swing, the U.S. government is making a transition of power, and global bailouts are at unprecedented levels. All comparisons to prior times are useless because we are in unexplored territory. The question to ask yourself is not whether your organization is engaged in change, but rather what side of the change curve you are on. Are you ahead of the curve, which means you have some time to get things together? Or are you behind the curve, where the phrase burning platform seems appropriate? There are no other options, because change is not an option—it is a requirement. It is also the most easily predicted of all phenomena; you are 100 percent guaranteed to always need to change. If you are not changing, you are becoming irrelevant. So your concern is not whether or not to change, but rather how and how much to change.
Given that all organizations struggle with change, it is interesting to note that all organizations seem to respond in one of two ways. First, there are companies that change only when a burning platform is evident. Consider how the airline industry responded after 9/11, suddenly implementing new cockpit doors on airplanes even though the idea was twenty years old. Second are organizations that are resistant to coaching. These organizations have leaders who “already know” and are resistant to learning anything new. Yogi Berra was fond of saying that “there are some people that, if they don’t know, you can’t tell them.” In this book, we provide a set of lessons for both types of organizations. We hope to find teachable and coachable readers.
Turning Up the Flame on More Burners
Over the last two decades, there has been a greater drive among a broad range of businesses to accomplish what IBM accomplished in the 1990s: complete organizational transformation. When IBM added IBM Global Services to its brand, it engaged in a level of organizational transformation that had no contemporary equal. Today, the pursuit of organizational transformation to offer both products and solutions occurs in companies ranging from nuts-and-bolts providers to network software providers and everything in between. Whether you are SouthCo looking to create customer touch-point solutions, Wipro working to become a “trusted adviser,” APC developing data center solutions, or Monsanto seeking to add more value to your customers by helping them maximize their crop yields, the story is the same. Companies are working toward higher-value transactions with higher operating margins that cannot be reached with products alone.
But what is driving this change? Two things: commoditization and saturation. Commoditization happens because most products compete on price, and as most cost-saving and supply-chain options for exploiting low-cost labor markets are available to almost all competitors, the inevitable result is that the profit is squeezed out of products at an increasing rate. To respond effectively to commoditization, an enterprise must provide something that is difficult for its competitors to replicate. Increasingly, this means offering a unique combination of products and services that focus on solutions to business problems as opposed to product features and benefits. Offering solutions with products is not a new idea; what is new is the speed at which this change must be implemented for companies to remain competitive.
The second driver is saturation. Saturation happens when a market segment can no longer absorb more product volume. Consider Starbucks’s situation. Starbucks was expanding nonstop until companies such as Peet’s, It’s a Grind, and, most recently, McDonald’s began to penetrate Starbucks’s market share with a lower price point. McDonald’s can now offer a similar product for far less and can use its savings to take share away from Starbucks. When many people are looking for every conceivable reduction in spending and there are numerous caffeine vendors to be found, Starbucks needs to change to survive; it must consider how to expand channels, change product lines, add fractal products to the coffee offer, or become a “beverage solution provider.” In Starbucks’s case, there really is no services option readily available to it. Food, music, and other fractal products that go with the coffee experience are about as close to solutions as the company is likely to get. It is conceivable that Starbucks could expand on its core competency in environmentally conscious supply chain management and create a new consultancy called Starbucks Global Services. In any case, the Starbucks lesson allows us to see that under certain market conditions and with the expansion of alternatives, growth becomes difficult without a significant shift in the organization.
Easier Said Than Done
Although it may be easy to decide to transform into a solutions organization, few have been successful. There is an old joke about five frogs who are sitting on a log, and four decide to jump off. However, all five frogs remain on the log after making the decision because deciding to do something is very different than actually doing it. This joke seems a very appropriate analogy to organizational transformation. In our experience, it takes most organizations two business cycles after declaring the jump from the log to realize that they do not know how to change the organization. Part of the delay seems to come from a lack of understanding as to the scope of the changes that are required in making transformation happen. The broad range of decisions required for transformation results in some decisions not being made because the organization does not recognize the need for a decision. We refer to this as the “fish don’t know water” syndrome: many teams of executives simply do not see the organizational issues until they are taken out of the situation, like the fish that don’t experience the water until they are out of it and into the boat. The other reason for the delay seems to be a result of making decisions in isolation. There are many interrelated decisions required in order to make transformation work. Isolated decision making that comes from siloed thinking can stop transformation dead in its tracks. To improve decision making, an organization must understand and successfully deal with three realities of transformation: core, context, and capability.
Transformation in a Nutshell
Why didn’t railroad companies evolve into trucking and air freight? Why didn’t the U.S. Post Office evolve into UPS, FedEx, DHL, and Airborne? Why didn’t Microsoft evolve into Google, Yahoo, Netscape, Facebook, and YouTube?
Inertia.
The principle of inertia is that things at rest tend to stay at rest, and things in motion tend to stay in motion. Organizations have inertia. They tend to find a groove (say, products) and stay in that same groove. To get out of one groove (products) and get into another groove (solutions), an organization must address the three realities of all organizations. First is the organization’s foundation, which we call the organizational core. Second is the organizational building blocks on top of the foundation, which we call organizational context. Third is the fundamental abilities of the organization, which we call organizational capability.
Legacy or Leg Irons? Dealing with Core
Organizational roots run deep. Businesses constructed around a strong formative idea that resonates with both staff and customers create strong, long-lasting roots of tradition and culture. These roots, which are critical to the success of the company in its growth stages, can become a liability when the company needs to change direction. The Fortune 500 of today contains a small percentage of the Fortune 500 of twenty years ago. For example, IBM came very close to extinction. Transformation was necessary to its survival, and as part of the process of transformation, a part of IBM’s core needed to be replaced.
An organization’s core is composed of its purpose, long-range intention, and identity. Purpose is the reason why the organization exists. Long-range intention is the mission of the organization or what the organization is dedicated to in the long run, such as a cure for diabetes. Identity is who the company is. Although some of these aspects may be informal, they are always present to some degree. During organizational transformation, there is often a conflict between what needs to happen for the company to transform, and its perception of its purpose, long-range intention, and identity. Until the organization deals with the necessary changes relative to its core, the transformation will likely suffer false starts and the effects of inertia. The most difficult aspect for many organizations is identity. If an organization has historically been an efficient producer of products, it may have a difficult time overcoming the perceptions held by customers and staff. Getting the market to see you as a solution provider when it has you categorized as a product producer is no small undertaking. A huge investment may be required to shift brand perception in the marketplace.
An organization can significantly reduce transformation time by carefully evaluating how transformation relates to the existing organizational core. A company that attempts transformation through acquisition, for example, often finds out that when two companies that have different core purposes combine, the only transformation that is taking place is one of acquisition capital into wasted effort. By understanding the impact of transformation at the core, leaders will make better decisions as to the set of investments to be made. The cost of merging operations in order to extract so-called synergies is just the start of the investment stream required for transformation. Here are the aspects of organizational core, considered in terms of transformation:
• Purpose. Is the organization fundamentally dedicated to discovery of new things, doing known things in an outstanding way, serving the masses, or saving the day in heroic fashion? As Nikos Mourkogiannis pointed out in his book Purpose (Palgrave Macmillan, 2007), great companies are built on strong purpose. In transformation, you need to take into account what is kept, what is changed, and what is discarded with regard to purpose.
• Identity. If a company has been a maker of automotive mufflers for a century and leaders are now contemplating offering franchises in muffler repair as a vertical integration form of transformation, they should fasten their seat belts. As they find out that the market does not recognize them in this space and that their internal competencies do not include business management or financial and operations expertise, they will see their investment requirements explode. Many organizations discount the cost of moving away from their core identity and the strengths of their organizational DNA.
• Long-range intention. At the farthest point on the horizon, what is the organization dedicated to? This is a hard question for organizations to come to grips with and an even more difficult one in times where mere economic survival looms large. Nevertheless, answering this question is critical. A lack of long-range vision is chronic in organizations. So much focus goes to quarterly and year-over-year metrics that long-term thinking is almost a lost art. If the best way to predict a future is to create it, then we need to name what that future holds.
“We Don’t Have Time for a Blueprint! Let’s Just Start Building”: Dealing with Context
In California there is a tourist attraction called the Winchester Mystery House. Turns out that there is not a lot of mystery, but there is a lot of house. Sarah Winchester, believing herself cursed by Native Americans who had been killed by Winchester firearms, dedicated a large amount of her life and money to launching a never-ending stream of building projects for the purposes of staving off the curse and prolonging her life. Whether real or imagined, her core belief that she was cursed drove the project investments she made and the structure she created. The house, with its stairways that lead nowhere and doors that open into thin air, reflects Sarah’s unstable mind or “core.” Core drives context. Some organizations fail in their attempts at transformation because they haven’t considered how their core and context must change for the organization to transform. When core and context are out of alignment, project investments are likely to lack coherence.
To get a rough idea of how complicated it can be to transform an organization’s context, consider that all of the following aspects that create context must be orchestrated in a synchronized fashion to create organizational transformation:
• Goals. The goals of the transformed organization are often not the goals of the past or present. For example, if an organization is working on becoming a global services provider, goals that are formulated around local performance at the expense of global performance derail transformation. The odd thing about goals is that nobody can tell anybody else what they should be. In the same way that purpose, identity, and long-range intention are chosen, so too are goals. Perhaps because goals are a matter of choice and not of requirement, organizations tend to adopt a default set of goals based on standard economic factors. Without a declaration of goals, transformation is fatally wounded before it is even begun. After all, without goals, all an organization can do is shoot first and then call whatever it hits, the target. Conversely, when a company articulates its goals, leaders can begin to design the path forward and marshal the resources toward achieving them.
• Metrics. What is the driving factor? Is it regional profit, customer share of wallet, global sales, global margin, account growth, percentage of revenue generated by global accounts, service revenue, product revenue, professional service margins, professional service utilization . . . or something else? People respond to what generates results for them. Transformation requires a new metric set. Designing and implementing new metrics require investment in metric design, systems, and processes.
• Central strategy. Has the organization historically been a cost leader? A solutions strategy requires the organization to create differentiation that goes beyond cost leadership. Strategy is the path that is taken to achieve goals. The ability to change paths and operate on a new path requires new competencies, which come from focused development and investment. The embedded mentality of cost leadership may not suit differentiation very well. A focus on total efficiency may interfere with what the organization needs moving forward. Over time, an organization takes on an unconscious competence relative to its central strategy. When transformation requires that the central strategy change, the organization will not change without a sustained investment in molding new competencies. One of the ways this shift is accomplished is through modification of internal and external branding, which also entails a significant investment.
• Culture. What is the balance between control, collaboration, cultivation, and competence? And is there passive, aggressive, or constructive organizational behavior? The ability of an organization to adapt may well rest with its ability to address culture simultaneously with performance. What often gets missed in transformation efforts is that an organization’s culture undergoes change as a result of new goals based on new metrics, structure, and strategy, and changes to the organization’s core. Attempting to change culture as a stand-alone initiative without considering the organization’s new goals, structure, strategy, purpose, identity, and long-range intention not only wastes time but also sets the organization back.
• Structure. Structure is largely a tool to be used when designing transformation and becomes critical when considered along with goals and metrics, culture and strategy. For example, product companies tend to become siloed by function where the company’s strength and power reside in the functional organizations. In the solutions business, cross-functional work becomes a necessity. Without a revision and redesign of the power structure, transformation is likely to get derailed. By focusing the organization on the productive use of the matrix structure, transformation can get on track.
• Systems. In a products organization, all the systems—information, hiring, communications, recognition, performance management, portfolio management—evolve to suit a products model. When an organization transforms, all the systems have to transform with it. This is not a small investment and is one of the highest-risk areas for transformation failure.
• Markets. When a company moves from products to solutions, there is often the perception that the company is going to sell a solution to its product customers. The problem with this scenario is that the person purchasing the product is usually in a different part of the organization than the purchaser of solutions. The contacts, the relationship, the pace of the sale, and the sales cycle are all different. Investment is needed under transformation to modify or create new go-to-market strategies, people skills, capabilities competencies, and systems.
• Point of differentiation. The whole point of transformation is to secure a new strategic position that is of higher value. What may change in the process is what gets optimized for the customer. In the past it may have been purchase price or delivery speed; now the organization must be designed around total cost of ownership, which takes into account the costs over the life of the product, not just the initial cost. Product companies tend to think “product out.” “If you build it, they will come (to buy it)” is the assumption. Solution companies are “solution in” thinkers. The focus shifts from features and benefits to optimizing customer outcome, from sales as an event to sales as a system of value-added options, and from “designing a product to offer” to “offering to design a solution.”
After considering all these aspects of organizational context, the organization must then examine what its capabilities are today and compare them to the capabilities needed in the future.
Ready, Willing, and Able: Dealing with Organizational Capability
For most organizations undergoing business transformation, the marketplace and customers have forced the issue. The question is not about readiness but about obsolescence. People who aren’t willing to change need to find another bus. For the remainder, capability is the key. And developing capability is not free.
For an organization starting from scratch, such as Google, eBay, and Mozilla, the human resources side of the business is more straightforward than in situations where a company has thousands of people who are habituated into processes that must change in order to transform. Starting with a clean slate, the hiring processes can be tailored to attract the right skills, and the business processes can evolve with the business. Companies that have been around for years if not decades do not have this luxury. What is surprising to us is how early in the life of a company the patterns of behavior form. We have seen the creation of ruts in companies that are pre-IPO.
With an existing enterprise, in contrast, the inertia of the past becomes the baggage of the future. A company adopting a transformational strategy faces what we call
in-flight kite repair. Businesses, unlike a kite, cannot be brought down to earth to work on and then relaunched into flight. Transformation is accomplished on top of full agendas. So the transformation must be done in-flight. This puts enormous pressure on four aspects of capability: portfolio management, program management, project management, and process management.
• Portfolio management. The way a company decides how to allocate scarce resources is central to transformation because there are multiple areas of investment that must be simultaneously reconciled in order to keep the kite flying. The first area comprises activities related to working in the business, which are those that are associated with today’s revenue. Activities related to working on the business are those that modify existing processes and systems to improve the operation that exists today. The third area, working to transform the business, are those activities that modify the market offering, delivery processes, systems, structures, skills, competencies, and so on. Working to transform the business can get lost quite easily because the incremental investment to make it happen gets diluted or eclipsed by working in and working on the business.
• Program management. Transformation requires the integration of a large number of efforts into a coordinated set of activities. To manage the risk at critical interfaces, program management requires being able to identify the interdependency between projects that span across functions. This is an advanced skill that goes far beyond skill in project management. The requirement is to master the ability to maintain program unity while delivering complex and mission-critical initiatives.
• Project management. Transformation is ultimately delivered in work packages known as projects. Projects have a specific deliverable with a specific timeline and specific resources. The risk of transformation failure is inversely proportional to the ability to manage the projects that deliver it. There is a big difference between talking about change versus bringing it about. Projects bring it about.
• Process management. Many of the processes used today must be modified to support the transformed enterprise. An organization must be able to articulate the current process clearly enough to be able to identify required process changes. If an organization does not have process control as a mature competency today, the risk in transformation is that processes will be modified in ways that are either ineffective or damaging to the transformation effort.
Eye on the ball, shoulder to the wheel, ear to the ground, nose to the grindstone ... how can we work in that position?
Let’s recap. What we’re suggesting here is that transformation be executed in consideration of the purpose, long-range intention, and identity of the organization; it entails modification to goals, metrics, central strategy, culture, structure, systems, target market, and point of differentiation; it requires the critical capabilities of process management, project management, and program management, all under the comprehensive capability of portfolio management. You may be thinking that the kitchen sink is likely to get tossed into this discussion sometime soon. Tossing in the kitchen sink might in fact be necessary at some point in the journey toward transformation. The reality is that organizations have a tendency to enter transformation with more enthusiasm than comprehension. As a result, many struggle as they spin their wheels and become frustrated with the lack of progress.
The Eleven Lessons
What follows in this book is a set of lessons gained while working in and with organizations in the process of transformation. Our message is not prescriptive. Rather, our message is that there are specific, learnable aspects to transformation that any organization can apply. The lessons are not written in any particular order, nor are they meant to be read all at once. Some of them deal with core aspects, some with context, some with capability. The final chapter looks at the path forward in organizational transformation, where the lessons are yet to be learned. Following is a summary of what you can expect to find between the covers of this book.
Once upon a Time in Transformation—Chapter One briefly describes the companies that inspired the lessons in the book. All the companies illustrated are successful organizations that in one way or another serve as great examples of creating changes proactively.
Lesson 1 (What got you here may kill you there)—Chapter Two examines the tendency of organizations to hang on to legacy ways of doing business when the business results still look good, only to find out that they are behind the curve in terms of generating needed change.
Lesson 2 (Yesterday’s leadership skills may prevent tomorrow’s success)—Chapter Three delves into what happens when we find the enemy and it is us.
Lesson 3 (There is no strategy if nobody knows what to do)—Chapter Four offers insight into how smart-sounding, unintelligible presentations don’t add up to effective action, and what to do about it.
Lesson 4 (Transforming strategy requires more than expensive software)—Chapter Five is dedicated to the objective of bridging the gap between strategic planning and portfolio management, whereby the decision system translates transformation into investment decisions.
Lesson 5 (Transform Human Resources into a strategic advantage)—Chapter Six brings to light the central role of HR in transformation and discusses why HR is the biggest missing piece in most transformation.
Lesson 6 (Your customers are always right, except when they aren’t)—Chapter Seven deals with customer-facing issues. In transformation, the definition of the customer changes, and the role of customer feedback changes as the organization changes.
Lesson 7 (Don’t let analysts run your business)—Chapter Eight deals with the expectations game. How do you get the street satisfied and the organization transformed—and keep your job? This chapter deals with how to make decisions without undue influence from those with no accountability.
Lesson 8 (Merger is not a four-letter word)—Chapter Nine provides an unconventional and powerful way to address mergers so as to prevent the typical loss of value experienced in most company marriages.
Lesson 9 (Who melted my cheese?)—Chapter Ten examines how the heat and pressure of mergers and acquisitions have an impact on transformation. Especially when they are the transformation. The impact on people is enormous, and this chapter deals with keeping human assets intact.
Lesson 10 (Spin is overrated for creating value)—Chapter Eleven examines the effect of complete and utter candor in the face of merger—where the spin is replaced with unvarnished truth.
Lesson 11 (Consultants are not an excuse for not knowing your business)—Chapter Twelve provides information on the use of consultants and how to get a sound “return on consulting.”
Lessons, Not Best Practices
Few things cause an allergic reaction among us quite like someone throwing out the idea of adopting best practices. A best practice is what used to work for some other company in its context and in its time. Bleeding people to cure their illnesses was once a best practice. A six sigma bleeding practice will not negate the fact that the practice is flawed from the point of view of medical treatment efficacy. George Washington learned the hard way. He ultimately went into shock as a result of bleeding, while a leading practice called a tracheotomy was available but not attempted because his doctors refused to abandon best practice.
Innovation does not come from the adoption of best practice. It comes from looking upstream from best practices. Before something was a best practice, it was a leading practice. Before that it was an experiment, before that it was a theory, before that it was a thought, and before that it was an observation. What gave rise to the value of the observation was experience or wisdom or intelligence. What is contained in this book is wisdom gained through experience, given with the intention that you will form your own theories as to how it applies to your organization, set up some experiments, and develop some relevant leading practices that are best for your organization in its circumstances.
1
ONCE UPON A TIME IN TRANSFORMATION
A Learning Opportunity
Much has been written about turnarounds at places like General Electric and IBM, where heroic, high-pressure, time-constrained transformation saved the dying business. What is missing from the literature is the less-publicized but still heroic stories of organizations that changed before they got to the brink of disaster. Although studying train wrecks can shed light on how train wrecks happen and how to clean them up, the value of such study is limited if you are seeking to make changes before disaster happens. In this case, the best set of lessons comes from organizations that changed before it was too late.
American Power Conversion, ALLDATA (a subsidiary of AutoZone), A123 Systems, and portions of Monsanto represent the full spectrum of pre-IPO to large, mature companies that have been proactive in creating transformation. Although all these companies are at different stages of transformation, they have a remarkably similar set of challenges.
In this chapter, we provide a brief profile of these companies and lay out the issues of transformation they face or have faced. In each case, the company has undergone change proactively, and each has faced the issues associated with being forced “out of the box.” Table 1.1 illustrates how the level of integration of a company’s offer combines with the level of customization of an offer and suggests where incremental change stops and where transformation becomes an imperative.
In Table 1.1, box A represents companies that offer a single product or service. Their next stage of development is to sell combinations of parts, represented by box B. Companies in box B, seeking new growth opportunities, are tempted to offer assemblies, which are companies in box C. Consider Intel as an example of a company that grew from box B to box C. It started out selling microprocessors, then grew to sell chip sets and eventually motherboards for computers.
Table 1.1
Once companies grow beyond the confines of these three boxes—that is, once customization reaches the modified standard level or full customization—the business requires significant transformation. The same applies moving in the direction of subsystems and full systems. Organizations will find that many of the success factors that made them a high performer in box A will become limiting factors as they attempt to take the company outside the box. In other words, the core competency of the original product-focused company isn’t the same competency needed for system-level thinking and consultative market approaches. Although transformation is sometimes difficult and problematic, it is necessary for companies that have run out of market to capture or that are facing commoditization of their products. American Power Conversion is one example of a company faced with this scenario.
American Power Conversion
American Power Conversion (APC) started the way that many companies do: a collection of brilliant technical minds began to explore how to convert a technology into a useful product. In APC’s case, Neil Rasmussen, Emmanuel Landsman, and Irving Lyons got together to develop solar power conversion products. When the market for solar power products failed to materialize the way they envisioned, they orchestrated their first transformation. Their company produced a set of technologies used to create products for protecting computing devices, such as the personal computer, from suffering data loss as a result of power loss. Their basic product is known as an uninterruptible power supply (UPS).
A small New England-based company, APC grew from making a limited number of power-related products to providing a wide range of power solutions ranging from mobile power to data centers. Its transformation was enabled by its ability both to deliver a broad range of high-volume standardized products and to bundle products into solutions for highly complex enterprise applications. Critical to its success was its creative use of supply-chain design, sourcing strategy, global manufacturing capability, and the management of channel conflict in an all-channels strategy.
By 2003, the time had come for APC to get out of the box. Growth in the organization required a shift from its being a products-based company to one focused on bundled solutions. APC wanted to be ambidextrous, able to deliver both discrete products and bundled solutions. This goal threatened the organization’s DNA as a products company—its roots, goals, metrics, structure, culture, and brand. Initial attempts to define a strategy for achieving such ambidexterity left the organization in a two-year stalemate.
What affected APC—and other companies in its situation—is that transformation required the company to continue to function productively in its base business while simultaneously building capability in other areas. APC’s challenge was to take a company of thousands of employees distributed across sixty-seven countries, with expertise in volume production, and transform it into a company that could maintain this business while also providing systems made up of power conditioning subsystems, cooling subsystems, and software. In addition, the company had to respond to the concerns raised by analysts, customers, and consultants, and successfully manage its subsequent acquisition. The opportunity for confusion to take over was growing, people’s cheese was being melted, leadership skills were being tested, and the HR people had their hands full, just to name a few challenges. Three of us worked inside APC, and one of us worked as a consultant. Our firsthand experience of assisting APC through its transformation inspired many of the lessons in this book.
ALLDATA
ALLDATA is an independent business unit owned by AutoZone, one of the largest distributors of automobile parts in the United States. ALLDATA creates repair information for the use of service personnel when making repairs to automobiles. When you take your car into a service center, the technician can use the ALLDATA subscription service to look up the part content and repair action for your specific car. This in turn allows for better service by repair facilities as well as greater confidence in estimating the time and cost of the repair.
ALLDATA’s core business is acquiring data, arranging them in searchable fashion, and selling subscriptions to the database. There is limited bundling required, and it is not a subsystem or system-level sale. Aside from the occasional modified standard or custom application, the company’s business model is primarily that of a product line.
ALLDATA’s advantage is the quality of its data. It provides data that are true to the original equipment manufacturer (OEM), and has also developed the same service for companies that do body and frame repairs. The company has been very successful in the automotive repair world, and owns a large percentage of the market. Its share is so strong, in fact, that there is limited access to greater share. In order to grow, ALLDATA will need ongoing transformation. It will either have to find new markets for its existing model or move into products and services that are closer to a subsystem or system-type sale.
Luckily, ALLDATA’s offerings for shop management software and shop marketing applications can aid the company in its transformation. The shop management software allows businesses to integrate the repair order, work order, service record, and invoicing functions; the shop marketing applications can be used for client acquisition and retention. But even though shop management and marketing complement ALLDATA’s central business of repair data offerings, the latter is sold and serviced very differently. It is a big step to move from supplying a standard product to every customer to offering a solution that is dependent on the specific customer. As is true for many companies there are changes required in every aspect of the organization: the core, context, capabilities, capacities, competencies, and customer outcome.
Monsanto
Suppose you have a tomato farm that has a 1 percent slope with a 23-degree south-by-southwest exposure at 14 degrees north latitude with semialkaline soil and water that contains a large amount of sulfur. Monsanto probably has a tomato seed for you. Or what if you have a weed problem, and you are seeking not more plants but fewer? Monsanto can also help you with that—its Round-Up™ is an iconic brand in the herbicide market.
Monsanto enjoys a level of differentiation from other plant seed and herbicide producers in that it has developed food seeds that are resistant to Round-Up. This allows entire crops to be sprayed, killing the weeds without affecting the crop. These seeds are such a unique differentiator for Monsanto that the company is currently suing DuPont for allegedly violating Monsanto’s patents in this area. Without this advantage, Monsanto faces commoditization of its seeds and would need to find other sources of competitive advantage.
But Monsanto is ahead of the curve. The company has begun to create a system-level consultancy to help farmers maximize crop yields. It may sound simple to leap from selling seeds to helping farmers increase yield, but the business model required to make that happen is anything but simple. This is what makes Monsanto a prime example of transformation. The organization that is designed to optimize research and development for producing seeds is not the same organization that is designed to work collaboratively across business functions and agricultural systems and to develop a profit value chain based on services. Monsanto is about as far from APC, A123, and ALLDATA as can be, yet it faces the same questions about what to do about getting out of the box.
A123 Systems
A123 at the time of this writing is a pre-IPO company that has a phenomenally bright future in the business of producing products and systems based on a battery technology known as Nanophosphate™ lithium ion. A123 describes it this way:
A123 Systems is now one of the world’s leading suppliers of high-power lithium ion batteries using our patented Nanophosphate™ technology designed to deliver a new combination of power, safety and life.
Our breakthrough technology, innovative multinational manufacturing model, team of tier-one investors, and experienced executives are providing the power to change the game for today’s Transportation, Electric Grid Services and Portable Power manufacturers.
For larger projects that require volume manufacturing, we operate state-of-the-art manufacturing facilities in Asia which have the capacity to scale to millions of battery packs per year, and we are currently expanding our manufacturing capacity in the U.S.
Origin of Our Name
A123 Systems owes its name to the Hamaker force constant which is used to calculate the attractive and repulsive forces between particles at nano dimensions, and which begins “A123 ... ”
The scope of applications for this technology ranges from power tools to automobiles to buses to power grid applications. Because of the vast array of opportunities for a company with disruptive technology such as A123, the company needs to decide whether or not to change its business model—and it hasn’t even gone public yet. The lesson here is that transformation is an imperative not just for mature companies but for any company that faces the challenge of either moving on to something else or becoming irrelevant.
Summary
Business books are often written in an opportunistic way. At the time of this writing, there are countless books on how to cope with hard times, coinciding with current economic woes. Chances are, the titles would be different if the economy were in different shape. How convenient it is to jump on a bandwagon and ride as far as possible. This is not an opportunistic book. Nor is it the spinning of some business fable about a grand savior or a flaming defeat. The companies we refer to here are examples of transformation that provide valuable insight if viewed constructively and in their context. We intend none of the companies used here as illustration to be a subject of criticism or praise necessarily. They are all respected and respectable enterprises and, when taken collectively, represent examples of transformation that in our opinion form a valuable basis for learning. Although there are huge differences between the companies we discuss, there are similarities in the underpinning issues they face. That is the key to understanding transformation. Although businesses may differ in market, product, or service, they all share a set of common lessons that can be of use to many companies because of the universal nature of the problems organizations face in transforming themselves.
2
WHAT GOT YOU HERE MAY KILL YOU THERE
Nothing fails like success.
—Gerald Nachman
During its development as a products producer, CanCo was one of the few companies to find a way to master the go-to-market process using multiple channels with minimum channel conflict. In addition to developing systems to source product production cheaply and globally, CanCo also created sophisticated ways of determining optimum order quantities and the most efficient way to ship the finished products. This allowed it to serve large-volume direct customers, its distributors, and its internal sales organization. All this process and system development work, combined with CanCo’s leading-edge technology, made the company a tough competitor in its market.
Unfortunately, after two decades as a successful products producer, CanCo’s product was suffering from commoditization, so the company decided to move toward more integrated solutions. However, this proved difficult for CanCo, as its strength was in producing large, efficient volumes of products in a wide mix of models and features. Producing extremely small volumes tailored for integrated solutions was not its forte.
In keeping with customer demand to enter the “solution space” while responding to emerging opportunities, CanCo decided to enter into a deal with a longtime product customer to create custom solutions. The customer, Tellcomm, engaged CanCo to build a large installation with CanCo’s products integrated with products from other producers. Tellcomm benefited from this arrangement because working through CanCo allowed for a single point of contact rather than multiple interfaces. Tellcomm liked the arrangement of having a single supplier with broad accountabilities because it created “one throat to choke.” It was CanCo’s job to handle coordination, communication, and all other interface issues for the Tellcomm project.
A number of problems began to surface as CanCo began to serve Tellcomm’s multifaceted needs. First, CanCo’s ordering systems were not designed for small-volume orders, so a large amount of manually generated orders needed to be placed and tracked outside the basic systems. CanCo also ended up paying more for these smaller orders, and so lost the advantage of ordering larger volumes at lower costs per unit. In addition, CanCo had no way to reserve inventory for a future use, so parts were often not available when they were needed. Parts found to be out of stock in the United States often had to be shipped at a premium to fill a need, or a small quantity had to be produced in a very short time, which resulted in additional costs.
CanCo also lacked the required project management processes; in fact, the ability to lay out project plans and manage in accordance with the plan was nonexistent. The company had no system for ordering and tracking multiple interrelated parts that could then be put together in a kit arrangement, and there was no activity-based costing system for the overall effort, so capturing revenue based on nonproduct cost became impossible. Essentially, the Tellcomm project ran on an ad hoc basis with the project manager simply coping with the complexity of the task at hand.