CHAPTER 9

Finding Opportunity in Crisis

SEPTEMBER 11, 2001, was the acid test for America’s airlines. Without warning, the industry found itself at ground zero in a crisis that shook its very foundation. Demand plummeted, setting most organizations on a course to struggle or fail. But despite the severe challenges this created, Southwest Airlines continued to profit—even finding new opportunities to advance.

The real advantage came from Southwest’s ability to sustain value across a broad range of operating conditions, a capability depicted by its flat value curve. With this, the company dodged a major challenge that undermined its peers, whose steep value curves made them ill-suited to operate within conditions that deviated even moderately beyond forecasts. The company quickly adjusted to the new environment, continuing to thrive even as others stumbled—a feat that seemed to defy conventional wisdom. While others were grounding their aircraft, Southwest Airlines kept virtually all of its planes in the air, rebalancing its routes and later adding new ones, including offering cross-country flights for the first time. And in subsequent years, while others were still shrinking, it continued purchasing planes and even hiring employees.

How was this possible? The company has a very different model for creating value. Southwest Airlines stands apart in that it is not built around the “hub-and-spoke system” that draws its efficiencies by maximizing economies of scale, an approach for optimizing internal efficiencies in predictable mass markets. Instead of fueling its need for scale, Southwest focuses on transporting its customers. In doing so, its results consistently defy conventional wisdom; the company is able to provide consistent, high-quality, low-cost service that quickly adjusts to its environment,

For Southwest and other benchmarks of lean dynamics, this very different approach seems to consistently open the doors for new opportunities—even transforming the marketplace to better suit the form of value it delivers. Yet, this is not a capability that can easily be added to a traditional approach; the means for creating dynamic customer value must be built in to its foundation.

A New Model for Creating Value

Much of the challenge in generating new opportunities from lean efforts stems from confusion as to what is meant by “creating value.” Value begins with the customer, not with the needs or desires of the corporation. This means doing far more than reducing defects, streamlining operations, or even slashing costs; it means searching beyond the business to gain a deep understanding of what customers want and need. It means innovating products and services that meet the actual, anticipated, and even unrecognized demands of the marketplace—and quickly responding beyond what the competition can deliver.

Lean practitioners seem to understand that defining value must be the starting point for their efforts, but many lean efforts gloss over this step; instead, they focus on cutting waste under the general presumption that bottom-line value will somehow result. But this may not always be the case. For instance, what if a company’s lean efforts succeed in more efficiently turning out something that customers no longer want? Moreover, what if the company succeeds in driving up efficiencies at the expense of innovation—the real value its customers might expect?

By creating a strong connection between what their customers seek and their ability to deliver it across their broad continuum of circumstances, companies and institutions can better adjust to their environment, even transforming customers’ perceptions of value to match the form their lean systems are best suited to deliver. An important focus for achieving this is solidifying the interrelationship between the internal capabilities so critical to powering this approach and reaching out and embracing fresh new opportunities for creating corporate and customer value so critical for fueling success.

Growing in this understanding seems central to advancing in lean maturity. Organizations that plateau at lower maturity levels appear to focus on lean as an internal exercise, targeting tactical fixes or solutions based on today’s understanding of their customers and environment. Advancing requires recognizing that more than simply cutting waste, speeding flow, and minimizing costs is needed. It takes gaining a deeper understanding of customers’ challenges and needs, drawing on increasing lean capabilities for developing deeper and more innovative solutions.

Building Opportunities Through Customer Relationships

Connecting capabilities with opportunities at each phase along the way is integral to the process of going lean. Doing so, however, requires becoming more in tune with the customer than ever before. It means breaking from the mindset that customers all act the same, instead seeking to better understand their wants and needs. In other words, going lean requires reaching out and creating deeper customer relationships, increasing trust and even transforming their perceptions of value.

The first step is gaining a specific understanding of who the customers are and how well the corporation or institution has been able to serve them. As fundamental as that might seem, some organizations appear to be satisfied with only a coarse understanding of even their largest customers and rely almost solely on lagging, qualitative mechanisms (such as customer satisfaction surveys and word-of-mouth feedback during meetings) that seriously limit their insight and ability to take action.

Consider how much further Procter & Gamble, a company widely recognized for its innovative methods, takes this; rather than simply analyzing existing data on customers’ stated or demonstrated needs, it seeks new ways for capturing customers’ real needs.

Great innovations come from understanding the customer’s unmet needs and desires, both articulated and unarticulated—that is, not only what they say, but, more important, what they cannot articulate or do not want to say.¹

P&G initiated a series of programs early in this decade to gain firsthand insights into the deeper factors that define who customers are and what drives their buying decisions and behaviors. “Living It,” for example, immerses employees into the day-to-day world of their customers by actually having them live with customers in their homes for several days at a time. This program, along with a companion program in which employees work behind the counter at a retailer, has paid tremendous dividends, identifying neglected market niches and previously overlooked opportunities (like the Swiffer new-age mop), generating enormous profits.²

This approach is strikingly similar to the concept described in Chapter 8 in which Toyota’s engineers begin their career by gaining a deeper understanding of what it means to create value, doing everything from building cars in a manufacturing plant to selling cars through a dealership before working as a product designer. The depth of the insight this gives them about the details of what their company produces and how customers perceive it goes far beyond traditional methods for understanding customers’ desires and what it takes to create value for them.

Progressive advancement in their specific understanding of what real customer value means is critical to guiding how companies and institutions go about developing their lean dynamics capabilities. Rather than applying lean tools and techniques to reach toward a vaguely understood destination, their understanding and pursuit of specific opportunities along the way can create greater clarity and enthusiasm for its most powerful result: creating customer solutions that build trust and transform customers’ perception of value. These organizations can progressively extend the types of opportunities they pursue as they continue to grow in lean maturity, advancing their complexity while broadening the depth and breadth of value they create.

Advancing Through Trust

What stands out the most about organizations that have moved to advanced stages of lean dynamics? Their ability to turn out solid, consistent value—a powerful means for engendering a deep sense of customer trust. Customers come back time and time again, in large part due to the consistency of what they offer; customers know they can depend on the business’s high quality, great service, and fair price every time they return. And it is this deep sense of trust that is fundamental to creating new opportunities.

Think about how Walmart’s “everyday low-prices,” along with its broad range of products, overcomes the potential for customers to perceive its large, out-of-the way stores as inconvenient. Instead, people have come to see them as a destination. Furthermore, customers’ trust in Walmart’s prices helps to make the most of stores’ already engaged shoppers, who trust that if they see something they want, they need not shop around.⁶ The result is a powerful cycle of customer trust and loyalty:

Customers will return again and again, and that is where the real profit in this business lies, not in trying to drag strangers into your stores for onetime purchases based on splashy sales or expensive advertising.⁷

Even competitors recognize the tremendous opportunity that comes from the deeply held customer trust that these companies create, which gives them a distinct competitive advantage. Jerry Grind-stein, chief executive of Delta Air Lines, noted that customers were switching to Southwest Airlines because they did not trust that they were getting a good deal from others:

Southwest succeeded so well that today customers flock to the airline’s Web site, even when Southwest’s prices are higher than other carriers’. They simply trust Southwest to be the best value around.⁸

Trust is a key outcome of going lean. Organizations that gain the ability to create consistent, strong value are able to form impeccable reputations for excellence. This reputation is powerful, in that it creates the potential for greater customer loyalty, generating opportunities for sustaining business across a range of conditions—even for attracting new business during the worst of times.

Consider the Garrity Tool Company, which produces complex and often critical items, many of which are used in military aircraft and medical systems. Like many small manufacturers, this company was initially struck by declining sales as part of the dramatic downturn during the recession in 2008. What made this company stand out was how quickly it was able to recover and pull in new business to generate banner revenues long before the recession was declared over.

How was this possible? As Don Garrity, the company’s president, put it, “by creating new opportunities that draw on our lean capabilities for quickly turning out what they need.”⁹ Don knows what his customers need from him. His company has long stood out because of its reputation for excellence; customers trust that his business will quickly and reliably respond to even last-minute demands, turn out the highest-quality parts, meet the most stringent requirements, and deliver them when the customer needs them. As demand for aerospace parts dried up, he shifted his focus to medical devices. The result was not simply greater revenues (2009 was the high watermark in company sales—a 16 percent increase over its previous record) but open doors for new business expansion into the future.

Creating Customer-Driven Solutions

Establishing a solid reputation for excellence by rapidly responding to customers’ changing needs opens the doors for reaching beyond traditional ways of thinking about products and services. This can give businesses the customer forum they require to understand these needs, including collaborating with clients to help them understand the art of the possible.¹⁰

Lion Brothers does just this; this lean producer of apparel brand identification and decoration products (logos that are recognized around the world) has begun collaborating with its customers to more precisely meet their needs, extending the art of the possible into areas that otherwise would have been considered unheard of. By leveraging its lean factories in conjunction with its rapid design capabilities and patented processes, Lion Brothers can create and produce substantial quantities of a specific product within days of finalizing the customer’s design.

The company created a culture of “structured experimentation,” drawing on its lean capabilities to reach across normal organizational lines and bring together the best ideas to create a range of solutions.

As we experimented, we realized that we needed to experiment more. That led us to increase our research and development capabilities, which, in turn, led us to commercialize more—offer more products and services. Over time this led us to swap over from being simply a manufacturer to an innovations company.

Susan Ganz, CEO of Lion Brothers¹¹

Building trust with the customer and adopting a mindset of continuous advancement and innovation is what really makes lean dynamics come together as a powerful system for doing business. This means working with customers to transform their ways of thinking and create customer solutions, with benefits far beyond the tangible product the company delivers.

Marlin Wire, a Baltimore manufacturer of industrial-grade steel baskets, demonstrates another spin on this principle. Like other lean successes, the company began its journey out of the need to overcome serious challenges that confronted its business environment. When CEO Drew Greenblatt bought the Marlin Wire company in 1992, it was simply a bagel basket manufacturer—the largest in America. But, he explained, he had to change when Chinese manufacturers targeted his niche: “They could produce and deliver these baskets cheaper than I could get the material.”¹² He quickly realized that thriving—or even surviving—would take an entirely different approach.

Like Lion Brothers, Marlin Wire goes beyond responding to customers’ stated needs; it draws on its lean capabilities to innovate solutions that never before seemed possible. Central to its approach is collaboration with customers—working to increase their understanding of how the company’s products can more effectively and completely address clients’ real needs. As part of Marlin Wire’s effort to design baskets used by manufacturers to store and transport parts, its engineers seek to improve their process efficiencies. Through data analysis, conferences with clients, and even site visits, they come up with better ways for handling parts, slashing the steps required for substantial improvement in operational flow.

For example, the company worked with a Toyota supplier of brake calipers to create an overall solution to precisely transport one “lot size” through its progression of fabrication steps, from machining to plating, cleaning, and assembly—eliminating the waste from managing parts individually as was previously necessary. Over time, such solutions can add up to huge savings (and reduced lag), making Marlin Wire’s products seem like a real bargain.¹³

Speed and responsiveness—attributes of lean operations—are now fundamental to Marlin Wire’s approach. Its ability to transform orders into designs and then deliver small and large quantities of products better and faster than competitors was key to landing substantial orders from new customers at the height of the recession. And it recently spun off its ability to rapidly design and fabricate fixtures that precisely position and hold wires for welding (an important contributor to its high quality and rapid production) into a new line of work—producing check fixtures for outside customers like Toyota, supporting their ability to manage lean operations.

Adopting such a mindset makes possible business relationships that can overcome some of the greatest challenges facing companies today. As customers feel more comfortable collaborating on solutions, they tend to overcome their sense of risk and become more confident in the possibility of stretching even further—perhaps opening the doors to innovative ways to address their deepest challenges.¹⁴ Complexity can be transformed from a challenge to a competitive advantage. The results can be astounding, extending far beyond the narrow solutions driven by traditional management methods, reaching toward a new realm of possibilities.

Leveraging Downturns for Operational Gains

Many years ago, as a long distance runner I learned that it was difficult to break away from the pack on level ground. After spending time training on hills, I found that I was able to speed ahead during a race when others struggled against these conditions. This seems analogous to what lean dynamics organizations can do; challenging conditions that cause others to struggle can actually represent opportunities for breaking away from the pack.

Lean dynamics benchmarks clearly see the importance of sustaining or even growing operational capabilities when times are toughest. In 2008, when skyrocketing gasoline prices drove down demand for Toyota’s large trucks, the company was forced to suspend production of some of these vehicles. But instead of laying off employees at its Tundra factory in San Antonio, Texas, it kept its workers on the payroll, scheduling them for training, work at other facilities, and even performing community service, like removing graffiti.¹⁵ The company did this because of the need to retain its employees’ skills and to keep from compromising their trust. Walmart has a history of hiring trained managers who become available as other companies struggling through downturns lay them off. And Southwest Airlines continued to grow after September 11, purchasing new planes, expanding to new routes, and picking up airport gates dropped by others.¹⁶

Marlin Wire shows that this works for small businesses as well. During my visit in late 2009, I watched as its factory speedily processed a new order for five thousand baskets, cutting, welding, forming, checking, and trimming a complex array of wire elements with little inventory and very short wait time between steps. “We exploit our speed,” CEO Drew Greenblatt explained. As he put it, his company lands new clients because of its consistently high quality and tremendous responsiveness to even large, short-turnaround orders. “Our revenue grows because we’re lean.”¹⁷

During the 2008–2009 recession, Marlin Wire continued to improve its efficiencies, restructuring the way it did business to reduce inventories in raw materials and finished goods. As Mr. Greenblatt put it, “We found more than $300,000 in cash during a recession,” simply by doing things better. And the company expanded, investing in new equipment, hiring new employees, and increasing year-over-year sales by 40 percent.¹⁸, ¹⁹

Cessna took yet another path. It used its reduced pace of operations (and that of its suppliers) during the recession as an opportunity to expand its lean efforts, reaching even deeper by applying new applications of these principles in preparation for the next shift in business conditions. In order to promote the efficiency of manufacturing cells (which it refers to as Centers of Excellence, or COEs, as described in Chapter 4), it expanded the concept to “process COEs,” making agreements with plating or other processing shops, leveraging the same concept of aggregating demands to slash lead times for performing these steps from weeks to only a couple of days.

Moreover, the company began including low demand items like spare parts in its COE arrangements. By leveraging its ability to quickly shift to produce any item within its dedicated product family, its suppliers demonstrated the ability to slash lead times from as many as eight months to just a couple of weeks. The result is an even broader range of possibilities for products and services that go beyond producing new aircraft.²⁰

Although these companies represent very different businesses and face very different constraints, they demonstrate the tremendous benefit of driving toward advanced lean dynamics capabilities even during an extreme downturn. Each, in its own way, seems to be on target for creating new opportunities to advance while others simply hunker down and wait.

Fostering Dynamic Customer Solutions

Henry Ford’s Model T offers a classic example of a product that became widely successful because it represented an innovative customer solution. His design stood out among hundreds of competitors’ because it represented a complete solution that satisfied the wide range of issues that drove customers’ needs.

The Model T was well equipped for dealing with the array of challenges presented by displacing the horse and buggy. For instance, its structure was highly durable and repairable—critical features, since it would have to operate on rugged roads (mostly horse trails). Its repair was fairly straightforward, its design simple, as it was made up of interchangeable parts. Each of these characteristics was important because the Model T would need to be serviced primarily by the owner (there were no service stations at the time). And its functionality was adaptable; it could even be used to drive farm equipment—a duel usage that likely appealed to a broader base of consumers. Perhaps most important of all, Ford was able to produce it in a highly efficient manner that made it widely affordable to the masses.²¹

Where Henry Ford went wrong was that he did not seem to recognize that customers’ perception of value is fleeting. He was not prepared to respond when customer interest eventually moved on—when evolving conditions, such as an increasingly saturated market for entry-level vehicles and GM’s “mass-class” market, made it possible for consumers to trade up through product lines.

Many companies and institutions face the same challenge today. Too often, they get caught up looking in the rearview mirror, producing products and services for what customers were satisfied with yesterday, simply refining the strategies they previously created in very different times. Often, even their lean efforts do not help; by honing in on waste reduction without first identifying what constitutes value, they risk focusing on changes that succeed in cutting costs but do little to further their opportunities. In addition, they risk taking actions that lock in their unpreparedness to follow new opportunities—if they could learn to see them.

Instead, lean transformation efforts need to continually revalidate what businesses and institutions create, ensuring that they continue to turn out complete customer solutions—products and services that strike to the core of what customers want even as they continue to shift directions. Organizations must progressively advance their ability to seamlessly and efficiently respond to changes rather than relegate efforts to attaining cost reduction for a static set of offerings, as so many seem to do.

And in doing so, they must continually reevaluate what they do and why they do it, challenging not only their processing steps but their structure, and even their culture, rethinking their business down to the roots of its traditions.