Friday, July 2, 2010

New Management: The new model company needs a new management style

The new kind of company not only runs to a pervasive, expanding extent on silicon chips: it mimics key aspects of the new Silicon Valley management style. The old-style hierarchy is dying or dead. That is not only because electronic communication dispenses with the need to employ many human relays for command and control. Hierarchic systems are simply inimical to the needs of the new model company.

In the electronics industry, where progress has been demanded by the frenetic, hectic, heaving pace of change, the new model is running through the stages of the managerial revolution well ahead of all other sectors. But the underlying forces of change are the same everywhere. And the most forceful among those factors is unpredictability. Would you, for instance, have bet on any of the following events?

• Hewlett-Packard, worried by poor performance in electronics (especially in Internet-related technologies), decides to spin off its original instrumentation business
• Sony announces that it will close eleven plants round the world in an attempt to cut costs and align the company more closely to the Information Revolution
• Levi Strauss decides to cut half its US workforce because of a global fall in demand for itsblue denim jeans

Now that these events have taken place - and others no less dramatic happen every week - they make sense. With the founders no longer around to force through change, HP had lost touch with its entrepreneurial origins. Levi Strass had become conservative and slow-moving in a clothing market where fashion has been moving faster. Sony's core businesses needed to be reshaped and realigned towards IP technology and the other developments that threaten its product line with obsolescence.

The awful events are logical in hindsight. All three managements had allowed a dangerous gap to open between new realities and present performance. But foresight demands that, in a world of such shattering discontinuities, companies should not bet on a single outcome. Plan A must be backed up by Plan B - if not Plans C and D - to insure against unwelcome and potentially catastrophic events. But what about trends? Surely managers can be more certain about major developments which must, to a significant extent, already be under way?

Don't you believe it. In 1997, asked by Andersen Consulting to predict the future of the network data structure in 2005, half of a distinguished bunch of electronic firms opted for intelligent terminals - and the other half for terminals that are relatively dumb. In other words, nobody knew. How can you engage in intelligent, long-term strategic planning in these circumstances? You can't, and in the new model of management, you don't even try.

That's why, Andersen's electronics leaders now plan 18 to 14 months ahead (against the conventional three to five years) and regard forecasting errors as inevitable. Their strategy successfully hinges on strength of vision coupled with rapid adaptation and iconoclastic execution. For example, they are tackling three key areas in ways that flout the old conventional wisdom: product development, customer relationship management and supply chain integration. To give examples of the new behaviours:

• Take more time over deciding to enter a new market: the best performers deliberated an average 5.7 months over both new products and new technology, while the low performers gave the decision process only three months.
• Best performers name customer focus as the most important factor in seizing competitive advantage - though only 40% yet made it an integral part of their strategy (at 20%, low performers are markedly worse).
• To integrate the supply chain and achieve huge economies and increased speed, best performers re-engineer, make only against orders, rely on supplier-owned and managed inventories, employ third party logistics, exploit the Internet and engage in heavy outsourcing - including manufacture.

MANAGEMENT BY CHAOS
It all sounds more orderly and well-planned than real life. In reality, the new kind of company tolerates a degree of chaos and inefficiency as part of the price of making breakthroughs and billions. Look at one such management-by-chaos company in detail - Intel, say - and you hardly know whether to rejoice over its brilliance or cry over its incompetence. The former must far outweigh the latter. After all, this is the company that gave the world the memory chip, the dynamic random access memory chip (or DRAM), the erasable, programmable read-only memory chip (EPROM), and the microprocessor.

That not only represents unbeatable management of technological creativity, but a formidable straight business performance. Intel has used every available means to dominate its markets: hence its near-monopoly in microprocessors, the most influential and indispensable devices ever made. Its hard-driving chief executive, Andy Grove, created that monopoly by ruthless methods like Operation Crush, which crunched the competition before the PC era - even though the Intel product was technically inferior.

So where has Intel failed? According to Inside Intel, by Tim Jackson, the company ignored the potential of the mighty microprocessor for years and woke up to the prospects only when two of its best engineers set up in competition. Worse still, Intel lost so much of the memory chip market to the Japanese that it could have gone under. Instead, the American company abandoned its original business, and poured resources into microprocessors to fabulous effect.

The management lesson from this episode is powerful. When in trouble, ask yourself, what would I recommend if I were a stranger to this business, brought in to turn it round? Grove and his chairman, Gordon Moore, did exactly that before deciding to exit from memory chips. But other lessons are just as indicative of new model management. Early in the company's history, in 1968, a new recruit asked about the organisation chart. Co-founder Robert Noyce, an acknowledged genius of technology, smilingly 'picked up a piece of chalk and drew a small X' on a blackboard.

Around it, Noyce 'swept a circle, and along the circle he added six or seven more Xs. Then he drew a spoke connecting each of the Xs outside the circle to the X in the centre' - which represented the new recruit. The other Xs were Noyce, Moore and 'the other people you'll be dealing with. That's what our organisation chart looks like.' The new model company cares nothing for hierarchies and strict reporting relationships, and everything for swift access, accessibility and flexibility. Instead of the pyramid, Noyce had drawn a doughnut.

Whatever the cost in untidiness, the benefits are shown by constant examples of turning failure into success. For instance, the microprocessor sprang from a design done for Busicom, a Japanese calculator company. When its top engineer arrived to inspect the device, there was nothing to see (producing yells of 'You bad! You promised! You said design done! No design!', etc). The Intel engineers, led by a recent Italian import, calmed the Japanese down and produced a working design in record time.

The Intel culture has consistently nurtured people capable of such extraordinary technical feats, often taken on their own initiative. The high standard of a continuing inflow of skilled recuits has enabled Intel to escape from initial failures like the Busicom job and turn them to advantage. The Japanese market worsened during the delay, and Noyce, faced with the demand for a price cut, artfully exchanged a $60,000 refund to Busicom for the right to sell the device to other customers - hence the bulk of today's $20.8 billion of sales and $5.2 billion in profits.

Typically, at first the Intel marketing people couldn't see any worthwhile market for the new product. This was a 'disruptive technology', in the phrase coined by Clayton M. Christensen in his book, The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail. Had the mainframe makers looked at this market, given that only 20,000 computers were being sold in a year, they would have agreed with Intel's marketers. The first customers were screwballs like a young Seattle freak called Bill Gates, who first used an Intel chip in an unsuccessful traffic light system. Then the PC boom, unforeseen, changed everything.

Just as the microprocesor had sprung from failure, so did EPROM. The phenomenon involved was spotted in correcting a design fault, and the eventual product was expected to have only limited sales for engineering purposes. But customers' engineers started installing the costly device into high-tech equipment on a large scale - and another profitable monopoly was born. The EPROM saga fits beautifully with the new model as described by the Andersen report.

THE INTERNAL START-UP
Inside a big, established company you manage as if you were a start-up brandishing a disruptive technology. That's why you break up the company into autonomous business units (as do 50% of the report's high performers, against only 29% of the low). That's why you don't ask those units to share resources - because you don't want, to quote one executive, 'to stifle creativity. The more people you have to ask permission from, the longer it takes to get things done.'

This doesn't mean that the new model company is undisciplined. Grove at Intel does push 'constructive confrontation': but managers are actually trained in how to fight over issues in the open, with force but without animosity. There's also a tough budget process, whose detailed cost and revenue predictions are updated regularly, complete with explanations of the changes. 'Management by objectives' is also big at Intel. Everybody, including Grove, has medium-term aims, plus key results by which performance is judged.

Then there are the meetings, starting with one-on-ones, in which every subordinate talks to a superior every week or fortnight, and key results and written performance reviews are discussed. Also, a process called 'ranking and rating' marks you as 'superior', or 'exceeds expectations', or 'meets expectations', or 'does not meet expectations' and ranks you against others doing similar jobs. Rewards, including stock options, are determined by 'ranking and rating'. Woe betide the 'does not meet's', by the way. They don't last long.

At MOMAR, the monthly management review, divisions run through a SWOT analysis (strengths, weaknesses, opportunities and threats) for the benefit of their peers. What Intel offers, therefore, is the musculature of a rather heavily managed, traditional company, with the brains and blood of a disruptive start-up. The tough discipline and the free-style creativity exist side-by-side. The new model company, in other words, is not so much paranoid (Grove's latest book is entitled Only the Paranoid Survive) as schizophrenic. Chaos and order, success and failure, are built into the formula.

Another split of the mind is between fierce competition and close collaboration. Here the difference between high performers and low is startling. The former have almost three times the number of alliances as the low-rankers - or the medium performers, for that matter. Much of the partnering is that between customers and suppliers, on which the new supply chain economies are based. But 'complementors' and outright competitors are also being enlisted by high performers. They take their time over picking their partners, too, half as much time again as the low people.

COLLABORATIVE STRATEGIES
The leading collaborative strategies are joint developments of new products, marketing alliances and licensing agreements, any of which can bring deadly rivals together. As another executive told Andersen: 'I would give equal emphasis to competition and collaboration. So it is as important for us to work with the competition as it is to beat our competition.' Intel and Hewlett-Packard, for example, collaborated to produce a new wonder-chip for a joint assault on the high-end of the market for client-servers, etc. If this technological leap succeeds, the partners will have obeyed another of the new model precepts: keep the competition at a disadvantage.

Intel is a past master at this strategy. For a striking example, it suddenly plunged into production of the motherboards into which its microprocessors were fitted. This not only won a greater share of added value, but brought any new processor to market much faster than before. PC makers who wanted an early supply of the new chip (which meant all of them, since to lag here is fatal) had little choice but to buy Intel motherboards. Output of the latter multiplied tenfold in two years, as all but 20 of Taiwan's 300 motherboard makers went to the wall.

In effect, every new generation of chip has forced the PC firms to dance to Intel's command. As Andersen puts it, 'best performers look to change the basis of competition by creating a new de facto technology or by significantly differentiating their products.' This isn't the prerogative of high-tech firms alone. As with all the other features of the new model company, it applies to every business: for example, razors.

HIGH-ROAD BRANDS
Gillette rejoices in what a Harvard Business Review study calls a 'high-road brand', whose return on sales exceeds 20%. Gillette's initial reaction against cheap disposable razors was to descend into their arena. It switched, however, to changing the basis of competition. By investing $200 million in the Sensor shaving system, it increased the desirability of its product, which established a 25% price premium over the most expensive brand on the market. In 1998, Gillette repeated the winning gambit with the still higher technology of Mach3. Wrong-footing the competition successfully always depends on innovation, either in technology or the use of market power or both.

The Americans are proving more adept at this strategy than the Europeans, for a simple reason: they use it more. Only some 25% of the European respondents told Andersen that they ever changed the basis of competition. That compares with 90% of the North Americans. The lag is plainly a disability. The correct response means looking at the industry and the business system with the eyes of a belligerent outsider. Which part of the system can you change to your advantage? Get the right answer and you may win a breakthrough. Don't ask, and you will be beaten by those who do.

The essence of the new model company is its drive for success. Everything is subordinated to outcomes, and the culture continually mutates to meet new circumstances. You have to question strategy and tactics all the time. • Are we changing the basis of competition in our favour?
• Does our competitive advantage (if any) arise evenly from cost, technology and differentiation, and not just a single source?
• Are we planning for a disruptive, shorter-term future?
• Is the business organised into viable, agile units that run themselves?
• Does it form many effective partnerships?
• Is it focussed on improving the supply chain, customer relationships and new product development?
• Can it find new customers for new products with new specifications, launched on hunch and faith outside the existing business?

These seven questions lead to another. Are we using the technology of information and communication in optimal ways to get the seven answers? If not, the answers are highly unlikely to be correcttly implemented. That eighth question is the ultimate test of the new model. More and more companies are learning how that test can be passed - not just once, but again and again.

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