TEC – Managing Change Part 1 – Peter Schutz
Managing Change Part 1: The Porsche Story Getting Things Done!
Management has three major components: people, process, and structure. Success does not consist of finding and hiring a group of superstars and turning them loose. Rather, success depends on getting extraordinary results from ordinary people — because that’s what you’re going to have in your organization. The key to making that work is getting the process and structure of the organization appropriate for what you are trying to accomplish. Until and unless you do, people simply cannot perform.
The management process can be broken down into two basic functions. First, you have to make decisions that are timely and of high quality. Second, you have to implement those decisions. If you implement well, your business will be efficient, which means you are doing things right. But in order to succeed, you have to do the right things, which means being effective.
Your business must be effective and efficient at the same time, even though these two things are not compatible. Just about the time you get things working efficiently, it’s time to do something different. When you do things differently, efficiency drops off sharply.
Management is necessary because things change. If there is no change, you keep doing things the same. But as soon as anything changes inside or outside the business, there is an immediate need to decide what to do. Recently, the rate of change has accelerated dramatically, and it will continue to do so. Managing change is not as easy as it once was. If you expect to succeed, you will have to become much more effective at managing change. The role of management will become increasingly pivotal and the penalty for mismanagement will escalate.
Making decisions is easy; getting them implemented is the hard part. Implementation is the deciding element; nobody ever took a decision to the bank. If you expect to succeed in business, the key is to make decisions like a democracy but to implement like a dictatorship. Making decisions democratically gets you the support of the people who have the power and authority to get them implemented. The democratic process takes into account all the diverse interests of everyone involved or affected by the decision.
Most managers get the process backwards. They decide dictatorially and implement democratically because dictatorial decisions are usually quicker and more timely. They are often of higher quality because you don’t have to take into account all the diverse interests of those whose cooperation you need.
POUR DIMENSIONS OF MANAGEMENT
Four key elements determine the quality of management and the quality of decisions you make:
P DIMENSION: Everything you undertake must produce results that add value. Using tennis as an analogy, to produce results you must hit the ball over the net and have it land inbounds. In order to do that, you must keep your eye on the ball. In business, the ball is the customer. To produce results, you have to keep your eye on the ball, not on the scoreboard.
Producing results in business requires total concentration. People engaged in P activities, such as selling, servicing the customer, building or shipping the product, have to do these things one at a time. Producing results will make you effective in the short term.
A DIMENSION: You must also administer the business, which means to get things organized and systematized. You need procedures that allow you to do things efficiently. The P dimension focuses on what you do; the A dimension focuses on how you do it.
In tennis, how you hit the ball is important because you don’t have unlimited resources and capabilities. If you use all your energy chasing the ball, the competition will soon eat you alive. The A dimension makes you efficient (for the short term) so you can produce results with minimum effort.
Because there is change, you must continually review and update your procedures. If you allow them to become obsolete, procedures become the problem.
In the old days, when the rate of change was slow, business was all about the P and A functions. If you were good in those, you were successful in the long run. But as the rate of change increases, these aren’t enough anymore.
E DIMENSION: To succeed in the long run, a business must entrepreneur, which means to become proactive instead of reactive.
When you play tennis, you have to do more than watch just the ball. You also have to watch your opponent and the environment you are playing in. In business, the environment is new technology, changing laws, and changing customer expectations. You also have to be very aware of your own capabilities.
The key to entrepreneuring is to get into position to hit the next ball. But you can’t get into the right position by watching the ball. You have to pay close attention to everything else going on in the environment.
To succeed in business you have to do four things at the same time:
- Create something that adds value
- Interface with customers to deliver or service the value
- Manage your material resources
- Manage your human resources
The primary P activity is selling. Selling is all about exceeding the expectations of your customer. Selling is very customer-focused; you must always keep your eye on the ball. To stay in touch, you must ask your customers questions and then listen. If you listen closely enough, your customers will tell you your business.
The B activity that interfaces with customers is marketing. This has to do with where customers’ expectations will be after change has occurred. If there is little or no change, selling and marketing become one and the same. That’s the way it used to be. But the greater the rate of change, the greater the difference between a P and an B activity.
In a P activity, you always keep your eye on the ball. In an B activity, you can’t tell where the next ball is going by watching the ball. Marketing is not customer-focused. You can’t do your marketing by asking questions of your customers and listening to the answers.
I DIMENSION: The I dimension involves integrating the business, which means to create a set of shared values that pull the organization together so it functions as a living organism.
THE TYPICAL ORGANIZATIONAL STRUCTURE
The following activities must take place for an organization to function effectively:
Activity Management Dimensions
Sales (and service) P, A
Production P, A
Personnel P, A
Accounting A, B
Legal capabilities A, E
Management information A, B
Product development B
Human resource development I
In the classic organizational structure you have the following:
- VP of Sales and Marketing
- VP of Production and Product Development
- VP of Personnel and Human Resource Development
- VP of Accounting and Finance
- VP of MIS and Legal
Sales and marketing both have to do with the customer. Production and product development both have to do with value added. Personnel and human resource development both have to do with people. Accounting, finance, MIS, and legal all have to do with administration. So these activities get lumped together, even though they are actually engaged in different and conflicting activities.
This structure represents the typical organizational chart. It is called a functional organization because it is organized by function. It is also a very deficient way of grouping the activities. Any time you put a PA activity with an B activity, the B will get squeezed out.
For example, any time you have sales and marketing lumped together, you will have no real marketing. In this type of organization, marketing will consist of shows and exhibits, brochures and literature, advertising and promotions, sales training, and customer service. All of these are sales-support activities. They will make you a sharp sales organization, but there will be no marketing.
In this organizational structure, product development will degenerate into process improvement, cost reduction, materials research, and quality improvement. You will make a high-quality, low cost product, but it will soon be obsolete. Human resource development will degenerate into an occasional seminar and teambuilding. In this organization, the only place any B activity will occur is at the CEO level. Typically, here’s what takes place:
When the CEO brings a new idea to his management team, he is surrounded by PA people who are all focused on getting things done today. They don’t have time to deal with new ideas. So the CEO brings in a bright young star and makes him or her the custodian of corporate strategic planning, a small B who reports directly to the CEO.
This individual then becomes responsible for bringing new ideas to the management team. But when he or she does, the PA people nod their heads and say “great idea” and then do nothing about it. This type of organizational structure is incapable of dealing with real change because everybody is too busy doing jobs that require their total concentration. As soon as the first crisis occurs, the B function disappears altogether.
This is not a bad organization. In fact, it does the short-term activities very well. If there is little or no change, it is the ideal structure. It’s also the perfect structure for a turnaround situation. When survival is the main issue, you need all the P and A activity you can get. You focus on the here and now because there is no tomorrow. This structure is also good for start-up businesses or for selling the business.
This organization does not reinvent itself well. It can get left in the dust when change occurs because it has two main weaknesses:
- This structure can’t deal with real change. New ideas don’t get filtered up to the top because people are too busy focusing on the day-to-day stuff (which is their job). So when real change is necessary, nobody knows how to deal with it.
- People with new ideas get frustrated and leave the company to start their own businesses or join the competition. Really good people have two objectives: to run their own show and have a piece of the action. Both of these things are very difficult to accomplish in the typical organizational structure.
THE NEW ORGANIZATIONAL STRUCTURE
Being in business is not just about making a profit. It’s about making money, which is more complicated than making a profit. The way to make money in business is to become the market leader. If you aren’t the market leader, you won’t make money.
If making money is the objective, then your mission is to exceed the expectations of your customer. Success in business is a result of focusing on the expectations of your customer. But before you can identify expectations, you have to identify who the customer is.
Leadership has a great deal to do with being credible. If you tell people it is your mission to meet (instead of exceed) the customer’s expectations, you will lose credibility. Customer expectations don’t exist with the precision that is inferred by being able to meet them. Customer expectations are not like a line, they are a band. If you are going to meet a scatter, it means hitting the middle, which means you have just foregone half the market.
People understand that. They may not be able to articulate it but they know something is wrong when you try only to meet expectations. Plus, the boundaries of a band are not well-defined. If you are going to cover the whole band, you have to exceed expectations.
To become the market leader, you first have to decide what a market is. A market consists of a group of customers with similar expectations for whom you contract your revenues and your costs. A market can be large or small. If it’s small, it’s a niche. A market niche is bounded. The boundaries can be geographic, demographic, or based on some product component.
To become the market leader, it isn’t enough to exceed customer expectations; you must redefine those expectations. Once you become the market leader, it’s a lot easier to stay there. And once you get there you must continually raise the expectations of your customers. That way, anybody who wants to do an end-around and redefine the market has a constantly higher level to hit.
You also need to manage risk. When you walk through your business and ask people how things are going, no matter what they answer, your next question should be, “How do you know?” If they can’t answer that, the risk is becoming unmanageable. If you are going to do new and innovative things, if you are going to redefine customer expectations, you have to know those things. You have to have the data that tells you things are on track. You can have the best plan in the world, but if you can’t track the plan, it’s useless.
Total quality management, in essence, is using some sort of tracking system to help you focus in on things that are key to customer expectations. For the most part though, total quality programs have fallen short of expectations. The reason for the failure relates to the I dimension of management.
The I dimension focuses on getting the organization to see itself as a family. In a family, no one person ever has a problem; if there is a problem, everybody has it and they deal with it together. A family consists of a group of people who have a commitment to each other and a set of shared values. Values are very different from procedures. Procedures can and do change over time; values don’t. In fact, everything else in the business will change except the values.
Procedures tell you what to do and how to do it. Values tell you how not to do it. If somebody willfully violates the values, you have to get that person out of the system. If you don’t, he will destroy the values, which are the soul of your organization. Your values make your organization unique. Values are free. Nobody can give them to you and nobody can take them away from you. They are the single most important element in managing a business.
You may have a plan and a way of tracking things, but if you don’t have values and principles in place, people will run off in all directions. If you have the wrong value system operating, the organization can’t work. For example, assume the value system in your organization says, “you either perform or you are history.” When you assign a major project to someone and he realizes he’s not getting the job done, he won’t tell anybody. In fact, he will introduce data that prevents others from knowing he’s not getting the job done.
When that happens, the risk has become unmanageable. Instead, you need a system of values that says, “In this organization, failure is viewed as an opportunity for learning, not punishment.” If you are going to undertake new and different things, people aren’t going to have the right skills. So you can’t punish failure. Instead of firing people for failure, you need a value system that fires people for covering up failure. When things aren’t working, you need to know about it immediately, so everyone can work on it together. That takes an integrated organization in which people are mutually supportive.
Most managers grew up in an environment that rewarded independence, but in this new era, the key to success is going to be interdependence. If you can set the value system so that people support each other and work together instead of shooting each other down, you can think of the following organizational structure:
The CEO is still at the top. Then you decide how many market niches the company is active in. In a small business, it might only be one, but as you grow, chances are you will be in more than one.
PA OPERATIONS: For every market niche you identify, put one of your best and most experienced people in charge. His or her job is to make money in that specific market niche. This person, who might be called a Chief Operating Officer, is in charge of sales, production, personnel and administration (all PA activities) for the specific market niche. In essence, each of these units is a mini-business in its own right.
This type of structure gets people focused on making money. It makes it easier to retain good people because they are running their own shows. It’s also easier to let them have a piece of the action.
AE OPERATIONS: Accounting, administration, legal, and MIS are AE operations. Their mission is two-fold. One is to consolidate all the activities of these operating units for the purpose of reporting to the owners, shareholders, and IRS. The other is to make sure the PA activities are
done with the least possible effort. These business units would be headed up by Chief Administrative Officers.
E OPERATIONS: Marketing, product development, and finance are B operations. They should be headed up by a Chief Development Officer.
The I function should remain at the top of the chart with the CEO.
With this type of organizational structure, the roles of COO, CÁO, and CDO are not career jobs. Instead, you generally keep a person for 24 months in each role. Any longer and they get out of touch with what is new.
A major problem with most organizations is having a new CEO take over without having filled all these roles. In this new structure, a person moves from one operating unit to the other and gains experience throughout the business. In this way, the organization grooms the next CEO. Without this structure, the company must go outside to find the next CEO because the people within the organization are too narrowly focused.
The two key elements of this structure are:
- Your best people are focused on market niches with the objective of making money.
- The B role is separated from the PA roles.
In a fully-developed company with this structure, the CEO’s most important job is public relations, the image the company has with the outside world, and the development of the management team. The CEO has to make sure that the future managers are exposed to the various parts of the organization long enough to develop the necessary skills.
This structure doesn’t have to be cut and dried. In fact, there are very few organizations that follow it to the letter. But the key is to find a way, any way, to get your best people focused on a market niche with the job of making money and give them the tools to get the job done. The other thing you must do is to separate the E activity from the P and A activities. There are many ways to do this. You can separate them chronologically and geographically by taking your management team away for a couple of days and getting them focused on where the company is going.
How do you tell if your organization is sufficiently integrated to attempt these kinds of things?
- If your senior managers can come to you and say, “I’m in trouble; I need help,” without fear of losing points or jeopardizing their careers, then your organization is ready.
- If most or all of the people in your organization can answer the following questions:
- What is expected of me?
- How am I doing?
- What’s in it for me?
- Where can I get help?