Take a moment to think about the United States circa 1970. The median household income was around $8,700. Richard Nixon was President. Kansas City topped Minnesota 23–7 in Super Bowl IV. The Beatles broke up. Four students at Kent State University were killed by National Guardsmen. In the business world, the Big Three automobile manufacturers dominated the American market, posting a combined market share of over 90%. Gas was around 30 cents per gallon. IBM introduced the first floppy disk, and a newly formed company named Intel introduced a new generation of computer chips that quickly elevated the company to a market leader. AT&T held a monopoly in the telephone industry. And you could buy a hamburger, french fries, and drink at McDonald’s for around $1.

The business environment was completely different than what we are familiar with today. For example, consider the nature and composition of the workforce. In 1970 employees weren’t nearly as mobile; entire careers were often spent with the same company. (In fact, the perception of someone who moved from company to company as a chosen career path was very negative.) Because changing jobs was so rare, it follows that the 1970s was an environment of heavy seniority. Process knowledge was carried around in the heads of employees, and when people retired, they passed their knowledge on to their successors. Employees were expected to be able to rely on their extensive experience within the organization to work around process difficulties as they emerged. Managers were typically selected from within and promoted up through the chain of command, so by the time an employee reached executive level, he or she had a firm grasp of the process complexities of the organization. (Of course, this was only effective if the employee in question was rotated around the organization as he or she was promoted over the course of time. Managers who had always been part of the sales chain-of-command, for example, were sometimes crowned CEO or COO and had no real experience with any of the nonsales aspects of the organization. In this case the advantage of having years of experience with the company was somewhat minimized.)

Processes were different in this era as well. It was still the age of specialization. The majority of organizations had the vertical type of organizational structure depicted in Exhibit 1.1.

Figure 1.1. Vertical Organizational Structure

The basis for this type of structure was rooted in the division of labor concepts dating back to Adam Smith in the 1700s. Each person on the lower levels was responsible for one specific task, the job of the first-line manager was to make sure these tasks were performed properly, the next-level managers made sure that the first-line managers performed their tasks properly, and so on up the ranks.

Some degree of specialization is undoubtedly necessary in any organization to ensure needed expertise is present, but this type of organizational structure can have profoundly negative effects on processes. Any process that requires even a moderate degree of cross-functional cooperation is bound to be handicapped by this type of structure. At the lowest levels, each link in the chain will only be looking out for and trying to optimize a portion of the process as opposed to the entire process. Because many companies during this era rewarded their employees based on how well they performed with regard to their own specific area, this created some very interesting behavior.

For example, a major aluminum manufacturer once paid its employees by the pound of material produced per hour. This reinforced the behavior that the heavier the job, the more important it must be. It also reinforced the behavior that changeovers and new setups were bad, so big jobs must be more important than small jobs. The employees in this department therefore paid little attention to customer needs, job due dates, or special requests from other departments. In fact, they often ran material that wasn’t even needed and stored it in inventory in order to artificially inflate their pounds-per-hour number. Because inventory management was someone else’s worry, these employees saw no negatives to this type of behavior. The paint line in this same company was paid by how many pieces they painted. There were instances when no material was ready to be painted, so they retrieved material out of the scrap heap, painted it, and threw it back on the scrap heap just to make their numbers look good. This type of behavior obviously came at a cost to the company, but in the environment of 1970 it was possible to simply pass the added cost on to the customer with minimal effect on the organization.

In addition to reinforcing counterproductive behaviors, this specialized and hierarchical organizational structure made internal communication extremely difficult. Creating silos within the company hampered cross-functional information sharing. When Chrysler wanted to develop a new model car, its process cycle time (measured from idea-to-showroom-floor) was five years. This obviously implied enormous risk, since the market and consumer preferences could change so much over a five-year period that by the time the new model was ready, it could be obsolete. The year 1970 was actually a prime example of this; most automobiles of this era were gas-guzzling behemoths with V8 engines. Any new vehicle beginning development in 1970 faced serious sales challenges in light of the impending energy crises of the early 1970s that shifted the focus to smaller, lighter cars (offered by the Japanese) that got better gas mileage.

And why did the process take five years? Because the practice was for each department to work on their portion of the process and then pass it on to the next department. There would then typically be a (sometimes large) time lag before the next department began processing its portion of the work, adding to the cycle time. And when the next department did begin its portion of the process, they often had to send things back to the first department, requesting changes, explanations, modifications, and so on. This would inject enormous amounts of lag time and rework into the process to no purpose. (Note: Chrysler recognized these shortcomings upon its purchase of American Motors Corporation and was able to reduce the idea-to-showroom-floor cycle time down to two years. This case will be examined in greater detail in subsequent chapters.) Because the U.S. economy had been so strong for so long, it was obvious that this type of process inefficiency had been camouflaged, with no real repercussions.

Another reason for process and internal communication difficulties was the lack of communication technology. There were no cell phones, e-mail systems, wireless networks, or Internet in 1970, making communication much more difficult than it is today. This phenomenon not only slowed down internal processes and knowledge sharing, but it had a significant effect on the marketplace in general as well. Lack of communication technology meant that in many cases the competition a typical company faced was more local in nature versus the global competition seen today. Therefore, the customer didn’t have as many choices, and many companies didn’t have the sense of urgency to improve. The local companies typically weren’t capitalized like global companies of today are, limiting their ability to employ different pricing and promotional strategies.

It was only possible for companies to thrive in this environment because customer expectations were also very different in 1970. It was common for an automobile manufacturer to sell a new car to a customer and say, “Make a list of all the problems you find and bring the vehicle back in a month and we’ll fix all of them.” The customer didn’t even have a “take it or leave it” option; the situation was “take it or take it!” In this environment all manner of process problems could be masked by price increases and the “find it and fix it” mentality. Process and the resultant product quality were low and prices were relatively high, but demand for products and services made everything appear all right. The auto industry is referenced throughout this text simply because for many decades it served as the backbone of the American economy and was the first to face extended and intense competition from global sources, which began shortly after the 1970 reference date. (Honda introduced the first Civic to the United States in 1972, ushering in the new age of global competition.)

Flash forward to 1985. The median household income was around $23,618, more than double what it was in 1970, although the cost of living more than kept pace with a 277% increase. Ronald Reagan was President, and Mikhail Gorbachev took over as leader of the Soviet Union. Madonna toured for the first time. Joe Montana and the San Francisco 49er’s pounded Miami 38–16 in the Super Bowl. Scientists discovered a huge hole in the ozone over Antarctica. In the business world, Coca-Cola introduced New Coke and then quickly reintroduced Classic Coke. Relatively inexpensive laser printers and computers made desktop publishing commonplace. The first mobile phone call was made in Great Britain. Microsoft introduced the first version of Windows, appropriately numbered 1.0. Global competition was transforming many industries, headed by the Big Three losing their stranglehold on the auto market. (GM lost nearly one-third of its market share to overseas competitors between 1970 and 1985.)

Practically every factor mentioned in the 1970 discussion was subject to significant change by 1985. The intensity and quality of foreign competition forced American companies to reevaluate the way business was conducted and sparked an interest in total quality management (TQM). If applied properly, the basic tenets of TQM (e.g., good processes reduce cost versus adding cost, customer focus, measurement, worker involvement in improving their own jobs) addressed most of the problems exposed in the 1970s way of doing business. For example, consider the principle that worker input was important to both improving process performance and making the employee feel like a valued part of the organization. This became critical in the 1980s in light of the fact that the workforce was becoming more mobile. Many U.S. manufacturing jobs were being lost to international competition and being replaced by service industry jobs. The nature of the work required was more cerebral than physical, and the employees filling the positions saw no need to be loyal to a company that didn’t value them or their ideas. Changing jobs no longer carried a negative stigma, which forced organizations to reevaluate their hiring practices, promotion policy, and factors leading to turnover of key employees.

Process analysis and improvement also underwent significant change in the mid-1980s. TQM begat cross-functional teams designed to improve communication and process performance across departmental lines. This was a major step forward, because it was the first attempt in many organizations to break free of the functional straightjacket in which their processes had been imprisoned for so many years. Flowcharts and process maps, which were not new tools even then, regained their importance. An executive with the aforementioned aluminum company commented that, “We found flowcharts that documented all of our processes and how they should work, and they were all dated from the late 1960s. It wasn’t that we didn’t know how to do this stuff. The problem was that things were going so well we felt we didn’t need to pay close attention to process performance and documentation, so we fell asleep.” The first wave of process improvement activities focused mainly on patching the holes in processes that had gradually become more and more broken over the years. This type of improvement strategy was known as continuous improvement and can be compared to taking a wrinkled shirt and ironing it so it is usable again. In other words, take the process and iron out the rough spots so it runs the way it was originally designed to run.

Technology also played a major role in the transformation of business in the mid-1980s, and this went hand-in-hand with process performance. Automation of sound processes enabled an organization to make major gains in operational performance, but automation of bad processes simply gave companies the capability to make bad products and deliver bad service faster. This was a painful lesson for one of the Big Three, as it spent literally tens of billions of dollars on automation in the decade leading up to 1985 and didn’t get anywhere near the projected return on investment.

Customer needs and expectations also underwent dramatic change during this time frame. Customers were now inundated with products and services from a bigger range of competitors. In fact, international competition began to dominate entire industries. Many long-standing practices were eliminated practically overnight. Quality was higher and price was relatively lower than what customers were used to, and it was easy for them to adjust. Customers expected products to work right the first time; there was no interest in taking cars back to the dealer to get problems fixed or returning clothing to the store to get buttons sewn back on. Companies in many industries were forced to become more focused on maintaining strong customer relationships, as customers had more options to select from.

The world in the mid-2000s has again undergone radical transformation. Global competition is now the norm. The Big Three automakers’ market share has dropped below 60%, with over 30% now being held by Asian companies. Gas costs more than $2 per gallon. Mergers and acquisitions have been the order of the day in many industries, creating fewer, larger, and better capitalized companies. The Internet has completely changed the way business is transacted, because companies can access customers globally with minimal cost. The workforce has become even more mobile in terms of company-to-company movement. The heavy seniority, lifetime career approach of the 1970s has been turned upside down; in today’s business environment, it seems that staying with a company too long could even be seen as a sign of stagnation. Customers are ever more demanding; the product and service features that were considered extravagant yesterday are standard expectations today. Advances in technology make the speed of conducting business increase faster and faster. The Big Blue of IBM has been challenged by the Big Green of Microsoft. The technology theme in the 1980s was about how much power could be brought to the desktop, while in the 2000s the theme has shifted to mobility and access to information from anywhere. Versatility of products is the order of the day. For example, it is now commonplace to have telephones that can send e-mails, take pictures, serve as stopwatches, and more.

All of these trends have a profound effect on the importance of having good processes. For example, consider the ever-increasing mobility of the workforce. In the 1970s companies could get away with letting their experienced employees carry all of the process knowledge around in their heads, without a lot of documentation. After all, people were in the same position for 30 years. All that was needed was to bring in a replacement a few months before the stalwart’s impending retirement, have them teach the new person the ropes, and have the new person do the job for the next 30 years. This practice cannot be followed if positions turn over every few years, as is so common today. If an organization lets its process knowledge leave every 18 months, it is constantly putting itself in a position of starting from scratch. Well-documented processes are a must to keep the organization running smoothly.

Consider the example of McDonald’s. Certainly they experience heavy turnover, as many of their employees are school-age people working for a short time by design and preference. Yet few organizations do a better job of ensuring process consistency. The french fries made by the McDonald’s in New York or London or Tokyo or Sydney will be made using a consistent process and will taste basically the same. The customer never has any question what to expect when placing an order, and the resultant food quality will always meet the customers’ preset expectations. While many organizations have processes that are more cross-functional and complicated than preparing hamburgers, the critical principle remains: processes must be documented and followed to ensure consistency in the face of a constantly changing workforce.

Mobility of the management team can also be a significant process inhibitor in today’s business culture. In the 1970s a senior executive likely had many years of experience with the organization before assuming command. With all the job-hopping and external hiring done in the 2000s, it is common for executives to be unfamiliar with the customers, workers, and processes of the organization they have been hired to run. There is no doubt that learning about the customers and the employees takes a certain amount of time, but the technical details and experience required to truly understand organizational processes can take years. While it isn’t necessary for executives to understand the complexities of every process, they do need to be familiar enough with the inner workings of the company to make proper resource allocation and strategic decisions. Many executives don’t have the time, expertise, or interest to acquire the needed process knowledge, putting their company at a (sometimes significant) competitive disadvantage.

Telecommuting can present significant challenges to process performance as well. The concept of process improvement has always involved teams of people involved in analyzing and agreeing on how to change their process for the better. The whole sense of teamwork and camaraderie is more difficult to generate when parties are working remotely. It also increases the degree of difficulty of ensuring process consistency when it is more difficult to access, measure, and monitor process participants. In this environment it is essential to have well-documented processes and to train people in how to use them as they are introduced to their responsibilities.

Process excellence is also a key to leveraging the possibilities brought on by new distribution mechanisms. Pick, pack, and ship efficiency can drive significant profits through Internet sales. Cooperation with suppliers can also yield distribution efficiencies through technology. Consider the example of Wal-Mart: The merchandising giant has relationships with key suppliers in which they guarantee a certain amount of shelf space under the condition that the supplier keeps the shelves full of merchandise. This could not work efficiently without cooperation from both parties—and some slick technology. Like most stores, Wal-Mart electronically scans products at the checkout stand to determine how much to charge. What differentiates Wal-Mart from many other chains is that this information is instantly transmitted to its suppliers to inform them that product has been purchased. In this manner the supplier can keep a running total of inventory in each one of the stores and knows when it is time for replenishment. This is truly a win-win-win situation. The supplier wins because it gets premium shelf space and doesn’t have to stock lots of excess inventory at each one of the stores. Wal-Mart wins because it avoids millions of dollars in inventory carrying costs. And the customer wins because some of the savings can be passed on in the form of lower prices.

The final trend referenced throughout this chapter that reinforces the importance of process is ever-increasing customer expectations. There is a constant drive in today’s world to do it faster, better, and cheaper. Process excellence is often the only option available to meet customer needs. Because customer expectations are not likely to stop increasing in the future, process performance will be even more critical to meeting customer needs as time passes.

A summary of the evolution of business trends is presented in Exhibit 1.2.

Companies that want to succeed in the business world of today must be prepared to face the new realities. Customers want results, the workforce wants a challenging and rewarding job experience, competition is tougher than ever before, and technology is providing unprecedented opportunities to explode forward. There is no question that success in this environment is possible only if an organization is ready to focus on using their processes as a strategic weapon to deliver world-class performance.