3
Aligning the Organization to Be Idea Driven:
Strategy, Structure, and Goals
SEVERAL YEARS AGO, we helped a national chain of specialty stores to start an idea system. The company had been growing rapidly, doubling in size over the previous five years. But the CEO was concerned that it had also become bureaucratic and inflexible, and was losing its entrepreneurial energy and innovativeness. He believed that setting up a high-performance idea system would be a good way to start reinvigorating his organization.
Our assessment confirmed his opinion. The organization was indeed rife with constricting rules and policies that made it painful to implement even the smallest improvements. For example, a senior vice president (one of the top eight people in the company) told us that he had asked the information technology (IT) department for a set of speakers for his computer so that he could participate in an online webinar. Despite numerous reminders and follow-up phone calls, the speakers never arrived. It turned out that speakers were not part of the specified computer package for senior vice presidents. The vice president ended up having to bring in the speakers from his home computer.
This was not an isolated example. The company had created an infrastructure of tight controls that made it difficult to get anything done and would be a significant barrier to front-line ideas. For example:
The purchasing process was extremely cumbersome. Even small purchases required a series of signatures (often including a senior vice president’s), several price comparisons, and supporting documentation.
Minor changes in the company’s software, even when they would have significantly enhanced productivity, required the completion of extensive forms that justified the proposed changes and meetings with IT managers to negotiate the specifics of each change. Then funding for the programming time had to be obtained through a formal budget request process.
Staffing levels in some departments were set daily at slightly below what the work standards projected would be needed for that day’s volume of sales. The intent was to maximize productivity by having every minute of every front-line worker’s day committed to regular work. Given this practice, it was very difficult for supervisors to free up time for their employees to work on developing and implementing ideas.
The slightest change in a work procedure required extensive management review and had to be signed off by a director or vice president.
When we pointed out these and other issues to the CEO and his management team, we were surprised by their reaction. While they had long recognized the problems created by such tight controls, they were reluctant to loosen them. About eight years earlier, when the company was much smaller, its single-minded pursuit of rapid growth had led to chaos and inefficiency. To counter the resulting financial hemorrhaging, the leadership team had been forced to install draconian top-down controls that many of them believed had saved the company. Careful negotiations with top management were required to get temporary waivers from some of the more burdensome rules so that the pilot idea system could demonstrate the potential of a companywide system.
The three-month pilot, conducted in four key departments, was a resounding success. Three of the four departments averaged more than two implemented ideas per person per month, and the performance of all four improved significantly. Had the CEO not been willing to make the changes that were needed to remove critical barriers blocking the development and implementation of ideas in his organization, his idea system would not have been very successful.
A critical inflexion point occurs when a leader realizes that becoming idea driven involves a lot more than simply layering a mechanism to collect front-line ideas onto an existing organization. A host of additional changes need to be made as well. We have watched many leaders wrestle with the decision of whether to move forward. It is a big decision. They are essentially deciding whether they have the courage, energy, and even the ability to create an entirely different kind of organization, and whether their organization is ready for such substantial change. If management truly wants front-line ideas, it has to realign the organization to be idea driven. It has to create a culture where front-line ideas are valued and build management systems that are aligned to actively support their generation and implementation.
Figure 3.1 gives the framework that we use to conceptualize this alignment. Although we included this framework in Ideas Are Free, we are covering it in more detail here because we have learned that realignment plays a much bigger role in building an idea-driven organization than we initially thought. An organization faces a certain external environment. The strategy it follows must successfully draw needed resources from that environment. The organization’s structure should be designed to support the strategy, as should the policies it follows and the way it budgets its resources. The systems and procedures it deploys, in turn, should be consistent with its strategy, structure, budgets, and policies. Smoothly meshing with all this is the way people are rewarded, the skills they are given through training, and the way they are supervised. The ultimate goal is to assure that throughout the organization, individual behavior is in line with the organization’s strategic direction. The role played by the organization’s culture and its leadership is to keep all these elements aligned. If the strategy involves being idea driven, then all of these elements have to be aligned for ideas as well.
Ideas are voluntary. If people don’t feel that their ideas will be welcomed and acted on rapidly and with a minimum of fuss, they can always keep the ideas to themselves, if they even think of them in the first place. This is why the flow of ideas is very sensitive to alignment. Although alignment is conceptually simple, in practice, it is very challenging to get right, and few organizations do it well.
For an organization to be well aligned for ideas, many different elements have to work together. Even one critical element out of alignment can make implementing an individual idea challenging or even block it. Neglect of just a few elements can undermine an entire idea system. In far too many organizations, ideas are forced to run a gauntlet of misaligned elements that is often unsurvivable.
In the remainder of this chapter and in Chapter 4, we discuss how to realign an organization to promote the flow of bottom-up ideas. This chapter focuses on the alignment of organizational structure and goals; Chapter 4 discusses the organization’s management systems—the policies, procedures, and practices used to run it on a daily basis.
STRATEGY AND GOAL ALIGNMENT
Organizational structures come in a wide variety of forms—from traditional functional hierarchies to more contemporary process-based structures—but all of them have both vertical and horizontal elements. The vertical elements align top-level goals with the actions being taken at every level of the organization, while the horizontal elements assure that the different branches of the organization work well together. In this section we discuss how to align both elements in order to ensure that the ideas coming from the front lines are focused on helping the organization to achieve its strategic goals and improve its overall performance.
Vertical Alignment
While every manager knows that vertical alignment is critical, many leaders assume that their pro forma processes of cascading goals down their organizations are much more effective than they actually are. Sometimes, their goals don’t even make it one level down, to the people they work with most closely.
Take, for example, what happened at an electronics retail chain in Spain and Portugal. The CEO, who had started an idea initiative a year earlier, asked us in because he felt the effort had stalled. The ideas that were being received were light and scattershot. We began by spending several days studying the idea system, visiting stores, interviewing employees and managers, and looking through the ideas that had come in.
The CEO’s concern proved to be well founded: the ideas were indeed all over the map, on every topic under the sun, and many were of little value. Both managers and employees were frustrated with the idea system as they struggled with such basic questions as “What constitutes an idea?” or “Do changes as small as moving a wastebasket or rearranging a store display count as ideas?”
When presenting our findings to the company’s leadership team, we explained that one of the main reasons the system was getting such poor ideas was that the corporate goals had not been effectively rolled down and internalized by front-line staff. As a result, many of the ideas that came in lacked focus and were only marginally helpful. Upon grasping the significance of this point, the CEO immediately turned to his leadership team and said, “I want each of you to make sure that your people have good metrics and understand what our goals are.”
“Are you sure everyone in your leadership team understands what your company’s goals are?” we asked.
“Of course they do!” the CEO shot back.
This view was inconsistent with what we had found, so we asked everyone on the leadership team, including the CEO, to write down on an index card what he or she considered to be the top three strategic goals for the company.
One of us then stepped out of the room, compiled the managers’ stated goals, and created a chart comparing these with the CEO’s. The results were eye-opening. None of the three goals that were most frequently cited by the company’s top managers matched any of the CEO’s three top goals! He had assumed that he had made his priorities clear to the entire organization, but even his direct reports were hazy about them.
Ever since Robert Kaplan and David Norton popularized the notion of key performance indicators (KPIs)—specific measures of performance tied to goals—in their 1996 book The Balanced Scorecard: Translating Strategy into Action, many leaders have put increased emphasis on formally cascading goals and metrics down through their organizations. In practice, however, KPIs are generally used for deploying strategies and holding managers accountable for their performance rather than for encouraging front-line ideas that drive performance in a specific direction. Care is not always taken to translate top-level goals, as they are cascaded down, into metrics that front-line people can meaningfully affect through their ideas. Strategic goals such as “Increase market share to 8 percent” or “Lower operating costs to 40 percent of net revenue” have little meaning at the front-line level. Goals and measures must be properly disaggregated as they are passed down and then articulated in ways that front-line people can affect with their ideas.
We were able to demonstrate the power of properly translated goals to the CEO of that electronics retailer with an example from his own company. It turned out that the manager of the central warehouse had understood the CEO’s goals—which were high productivity, excellent customer service, and efficient use of capital—and had translated them into metrics that his warehouse workers could understand and affect with their ideas:
Shipments per week per employee (productivity),
Percentage of orders shipped same day and correctly (customer service), and
Inventory turnover (use of capital).
The manager posted the performance on these metrics on a weekly basis as a way to focus his team’s ideas. Besides, he pointed out, keeping score added a bit of challenge and fun.
Because of these clear goals, his employees had implemented hundreds of small ideas that had dramatically improved the warehouse’s performance. For example, at one point, the employees had been issued handheld scanners that wirelessly communicated with the central computer from anywhere in the warehouse. The original purpose of the scanners had been to ease the process of checking inventory in and out, by eliminating the need to use a scanner that was tethered to the terminal on the loading dock. But when the employees discovered the scanners were programmable, they came up with many ideas to increase the scanners’ capability. Now, they can be used, from anywhere in the warehouse, to change inventory locations in the system and to instantaneously display the contents of a box, a shelf, or even an entire bay by simply scanning its bar code. The employees also programmed the scanners to display optimal order-picking routes for each order.
As a result of all these ideas, in just one year the warehouse was able to double the number of orders it shipped without adding any employees, reduce the number of orders filled incorrectly or shipped late by over 90 percent, and increase inventory turnover by 30 percent. In addition, the time required to take monthly inventory was cut by over 80 percent.
This example hit home with the CEO, who now understood why the warehouse was both getting a lot of ideas and performing well. Smiling, he told us of an idea that had recently come to his attention illustrating the high level of trust that had developed between management and the warehouse team. The idea had also given the warehouse manager a chance to recognize his team’s exceptional performance. An employee suggested mounting a large flat-screen TV in the warehouse tuned to the sports channel, so people could monitor games of their favorite teams and keep up with the latest football (soccer) scores. The problem was, the suggester admitted, that whenever there were important matches, workers (even nonsmoking ones) were taking long smoking breaks to sit outside and listen to car radios during critical periods in the games. Or, they would leave early to rush home to watch the games. He suggested that a large flat-screen television in a central location would actually save time and improve productivity by eliminating the need for employees to surreptitiously leave the building to check on scores. The CEO joked to us, “With this group, I only hope the TV screen was big enough!”
Leaders are accustomed to thinking about their organizational goals in broad terms. When passing these goals down, it is easy for them to miss the importance of translating them into terms that are meaningful to the people whose actions are necessary to achieve them. Recently, for example, the chancellor of a major U.S. public university was anticipating large budget cuts due to shortfalls in state tax revenues. He set up a special website and issued a call to tens of thousands of faculty, staff, and students. “We need to find ways to save money. Please send in any ideas you have to cut costs.” In the end, he got less than a hundred ideas and implemented only a handful.
The poor chancellor never had a chance with this campaign. For one thing, at the university, “cost cutting” was historically code for laying people off or eliminating programs. His faculty and staff would never engage with an initiative framed in these terms. But had the chancellor engaged his unit heads in passing down and expressing his goals in terms that were actionable and meaningful for their people, his campaign might have had a very different outcome. Consider, for example, the athletics department. How could its staff intelligently reduce expenses? A person working in the equipment lockers in the gym might be baffled if asked for ways to save money but could think of a lot of ideas if asked how to save energy and water (he does the laundry, controls the lighting, and patrols the locker rooms and showers), how to save on supplies, or how to reduce the amount of lost or damaged equipment. Had the chancellor ensured this type of translation occurred across all campus units, his request would have been more meaningful to the university’s staff and students, and he would have received a lot more useful money-saving ideas.
The effective translation of organization-level goals into lower-level goals requires the ability to identify key leverage points, as well as the creativity to frame them in an actionable way. One of the more memorable examples of this that we have seen occurred at Fresh AB, the Swedish ventilation products manufacturer. At the time, Fresh was confronting the need to make a major strategic shift in its markets. The company sold products in three different markets: home construction, commercial construction, and consumer retail (do-it-yourself). Economic forecasts projected a significant drop in new home construction. To compensate for the expected sales drop in this market, the leadership team wanted to increase sales in the consumer retail market. The retail sales channels included hardware and home improvement stores, particularly the increasing number of “big box” retailers.
Rather than simply assigning the sales and marketing staff the “stretch goal” of doubling retail sales, Fresh’s leadership team took a different approach. Since retail display space is the primary driver of retail sales, it translated its high-level goal into one that everyone could contribute ideas toward achieving: Double the number of product displays in retail stores. If the goal had remained to double sales, it would have most likely been interpreted as “sales and marketing need to work harder.” Few people outside the sales and marketing departments would have offered meaningful ideas. But everyone could help with the display goal.
Ideas came in for more attractive packaging, enhanced display designs, displays of different sizes and configurations to better fit the needs of more retailers, eye-catching new products and color schemes, and a variety of other display-related improvements. As a result, Fresh was able to reach its retail sales expansion goal before the decline in new home construction, an impressive accomplishment that would probably have been impossible for sales and marketing to pull off alone.
Another dimension that leaders have to consider when setting goals is whether the goals are in the interests of the people who are expected to work toward them. If not, no matter how well they are articulated, few ideas will be offered. Take, for example, what happened at a Silicon Valley company that was part of a major global engineering corporation with almost a hundred business units. Shortly before our visit, this company had won the award for the best idea system in the entire corporation. Senior managers, several of whom had just returned from the award ceremony in Europe, were justifiably proud of their idea system, which had saved millions of dollars in the previous year. We reviewed the ideas this unit had received during its winning year and interviewed the groups and individuals that had been the most prolific idea generators. Some of the ideas were very creative and had saved considerable sums of money. We were particularly impressed by the company’s success with employee ideas given its recent history.
Before being purchased as a strategic acquisition by its current corporate parent, it had been a rapidly growing high-technology startup that had developed some very innovative and high-margin products. Its primary focus had been on breakthrough technology and sophisticated product engineering. Production costs had never been a priority for the company, as they had been a relatively small part of its overall cost structure. Its manufacturing operations were quite inefficient, and the new corporate parent had begun systematically shifting production offshore and had already laid off more than two-thirds of its manufacturing workforce. The message was clear. The facility had to lower its production costs further or eventually it would be reduced to only a research center. So management turned to its employees for cost-saving and productivity-enhancing ideas. At first glance, the award-winning system appeared to be a resounding success. However, management never realized what it was missing.
As we went through the ideas, a pattern began to emerge. All of the ideas involved ways to save material, shipping costs, or other non-personnel-related expenses. None of them involved working more efficiently. Yet the production floor was rife with obvious labor-saving improvement opportunities. This was puzzling until we realized that with the company steadily cutting its production workforce, ideas that saved labor would quickly result in the elimination of more jobs. Discrete conversations with several employees and front-line supervisors revealed that they were indeed focusing on cost-savings ideas that did not impact labor. Having already seen enough of their friends lose their jobs, they were not about to offer ideas that would justify any more layoffs.
The threat of layoffs does create a special dynamic when it comes to front-line ideas. Why would anyone offer ideas if it could cost them or their colleagues their jobs? Generally, idea-driven organizations do whatever they can to avoid layoffs and, in many cases, even offer some form of job security with respect to performance improvement coming from ideas. They do this because they understand the importance of front-line ideas and don’t want to cut them off. They are able to do it because the ideas they get put them in better positions than their traditionally run counterparts to respond effectively to market shocks or downturns, as they are generally more flexible and perform at much higher levels.
Horizontal Alignment
When a small East Coast specialty insurance company started an idea system, one of the early ideas came from a customer service representative who suggested an improvement to the company’s customer management software. Every time she finished talking with one customer, she had to exit the application and restart it in order to access the next customer’s data. Why not create the ability to switch between customers without exiting the software? When her colleagues discussed her idea, they unanimously agreed that it should be quickly implemented. They estimated that the problem wasted seven minutes of each of the thirty representative’s time every day, or 3.5 hours total, the equivalent of almost half a person. Moreover, the service delays irritated customers who had to wait while their information was being pulled up. But when the idea arrived at the IT department, because it would take three to four hours of a programmer’s time to implement, it was rejected. This was a classic example of horizontal misalignment.
The IT department had been tasked with three things: running the help desk, maintaining current systems, and working on large strategic software initiatives. Implementing front-line ideas was not part of its charge. Furthermore, it was under pressure to keep its costs down, and the time to implement this idea would come out of its budget.
The manager of IT was acting rationally according to his assigned goals. From the perspective of the company as a whole, however, it was silly not to implement the idea. The small sacrifice that the IT department was being asked to make—three to four hours of work, only once—was far outweighed by the improvement it would have created in the customer service department—three to four hours saved every day.
Horizontal goal misalignment is extremely prevalent. When setting goals, many leaders focus on rolling down their goals and put little thought into whether these might conflict at lower levels. And when the symptoms of horizontal misalignment emerge, they are usually attributed to other causes, such as personality conflicts between managers, territoriality, excessive personal ambition, or some other human failing. So it goes undiagnosed.
Horizontal misalignment is often rooted in the way organizations are structured. The most popular configuration is by function—that is, marketing, accounting, operations, and so on. Each of these functions, in turn, is broken down into more and more finely segmented tasks, until the department or team level is reached. But since the organization’s processes cut across these segmented tasks, many ideas that improve these processes will have cross-departmental implications. Unless great care is taken with how department-level goals are designed, many departments will end up with goals that can most easily be met at the expense of other departments or the process as a whole.
Horizontal misalignment is also costly. The following example demonstrates how the very same idea that failed after several years of trying it in a horizontally misaligned organization was quickly and successfully implemented in an idea-driven one. It offers a rare chance to quantify some of the costs of such misalignment.
A number of years ago, a global aerospace company bought a large automated storage and retrieval system for its spare parts inventory. The $2.5 million system included computer-controlled robotic technology that could store and retrieve tens of thousands of parts in more than 5,400 bins. The problems started once the system was physically installed and ready to be programmed. The IT and inventory control departments fought over who would do the programming and the system became the object of a turf war. Caught in the middle, the front-line workers operating it had to manually record the locations of parts in a spiral-bound notebook as they were moved in and out of the huge storage system. This notebook was stolen once and had to be re-created by painstakingly retrieving each of the 5,400 bins and logging its contents—some two weeks of wasted labor for six people. Moreover, the manual process of logging parts as they were loaded into and extracted from the system led to human errors. Sometimes a part was called for and was not in its documented location—it was lost somewhere in the system. Whenever this happened, the operators would have to go through the bins one by one until they found the missing part. Eventually, the problems with the system led the aerospace company to abandon it entirely and put it up for auction on the Internet.
What was particularly interesting was who ended up buying the system and how. Task Force Tips (TFT) is a medium-sized manufacturer of firefighting equipment headquartered in Indiana. In 2009, the growing company was moving to a larger facility. The plan was to maintain full production while gradually shifting it to the new facility over a three-month period. One of the last items scheduled to be moved was the old automated inventory storage and retrieval system. Moving this equipment would be time-consuming—it was heavy; had four bays that were each sixteen feet high, four feet wide, and forty feet long; and contained five hundred storage bins plus robotic lifting equipment. Until this storage system could be moved, TFT planned to purchase simple racks to temporarily store parts at the new location and handle the inventory there manually.
The engineer assigned to locate a company that could fabricate the temporary racks was shocked at their high cost. But he had an idea. Maybe, he thought, the company could buy another (and bigger) automated storage and retrieval system for not too much more money than the temporary racks would cost. This approach would simplify the move and also help with the company’s increasing need for storage. The current storage system was already nearing its capacity. It was also wearing out. The idea was quickly escalated to CEO Stewart McMillan, who told the engineer that he had a better chance of being struck by lightning than being able to find such a system for a price that would make it worthwhile, but the engineer looked into the idea anyway.
Searching on the Internet, the engineer found the aerospace firm’s storage system for sale and noticed that it would be auctioned on the Internet in just a few days. It was ideal for TFT’s needs. It was practically new and had twice the storage capacity of the company’s old system. When McMillan was informed, he invited the engineer and some others to his house for a “bid-watching party.” Early on, the group decided to submit the minimum bid of $1,000, fully expecting to be quickly outbid. But no further bids came in. With only minutes left, the group still expected to see a number of bidders jump in at the last minute. They were surprised when no bids did come in, and an e-mail arrived informing them that they had won. While the system was practically free, it had to be disassembled, shipped halfway across the country (in twenty-seven truckloads), and reassembled. In the end, TFT got the system up and running for only $600,000.
Think about what this story illustrates. The misalignment between IT and inventory control at the aerospace company rendered a $3.5 million investment ($2.5 million for equipment and $1 million for installation) worthless. On top of this loss was all the extra labor wasted on operating it manually, searching for all the lost parts, and infighting, as well as the inefficiencies that poor inventory control created throughout the company. It was interesting for us to watch a poorly aligned aerospace company being taken advantage of by a nimbler idea-driven company. Essentially, TFT was able to purchase and install a slightly used automated storage system for less than twenty cents on the dollar!
At first glance, the inability of the aerospace company to get the inventory system working properly, despite all of its resources, appeared to be the result of a political battle between the IT and inventory control departments. While we did not have the opportunity to directly investigate the underlying causes of the interdepartmental warring at this company, as we noted earlier, when departments or managers don’t work well together, the behavior is usually rooted in some form of horizontal misalignment—such as conflicting goals or performance measures, inflexible budget rules, or poorly conceived bonus or promotion systems.
Seemingly logical approaches taken to hold people accountable, or to incentivize and reward them, often create, or significantly aggravate, horizontal misalignment. Take pay-for-performance, for example. Although it may seem sensible at the individual level, it often backfires dramatically at the organizational level by creating disincentives for people to work together. One of the larger retail chains in the United States created a bonus system that all but guaranteed that if a good idea came up in one store, it would never be shared with other stores. The chain was organized into regions, and store managers’ bonuses were based on their store’s performance ranking relative to the other stores in their region. The top-ranked manager got the largest bonus, the second-ranked one got the second-largest bonus, and so on down the line. One store manager told us that if he were to share a profitable idea with another store manager, he would essentially be cutting his own bonus. The competitive bonus system completely shut down the vital sharing and cooperation that should have been occurring between stores.
Creating Horizontal Linkages
Most work in organizations requires some form of interaction between different departments or units. But the complexity of all but the smallest and simplest organizations makes it impossible to establish individual unit goals that naturally assure that everyone will work together toward the common good. Some form of linkage mechanism is needed to tie the interests and actions of the various units together. This section discusses a number of these mechanisms.
A highly visual/spatial approach is to reconfigure the physical work space. Often, simply removing physical barriers and co-locating departments that have to work together greatly improves the level and quality of cooperation and interpersonal interactions, increases trust and understanding, and facilitates joint problem solving and ideas. It often has a considerable symbolic “shock” effect as well. Recall Wilf Blackburn, the turnaround specialist at Allianz discussed in Chapter 2. By the time we met him, he already had developed a reputation within Allianz for “blowing out walls” when he was put in charge of a unit, as he did at Ayudhya Allianz. We visited him in Shanghai just five months after he had been appointed CEO of Allianz China. When Blackburn took over, he was under pressure from headquarters to cut costs and increase profitability, and to do so rapidly. But instead of simply looking for things he could cut immediately, Blackburn invested considerable money in breaking down barriers and building his organization’s flexibility and innovativeness. For him, this was one of his primary leverage points for transforming the company.
One of his first acts was to tear down the walls of his own office and replace them with floor-to-ceiling glass. Much as he would have liked a private office, he was sending a message to his organization: we will be transparent and collaborative in the way we work. A few weeks later, construction crews removed the physical walls between departments, and the high cubicle dividers were replaced by ones of waist height. This created enough new space to allow Blackburn to consolidate his two-building operation into one, further integrating his workforce while also saving money. Blackburn told us that his goal was to create a headquarters building with an open layout that encouraged people to communicate and work together, in order to create a more flexible, idea-driven company.
Another tactic that gets people to think in terms of the whole is to create an ambitious unifying vision for the entire organization—a “Big Hairy Audacious Goal,” or “BHAG,” as Jim Collins and Jerry Porras term it in their classic 1994 book Built to Last: Successful Habits of Visionary Companies. Subaru Indiana Automotive’s quest for zero landfill, discussed more in Chapters 7 and 8, is a good example of such a goal. It excited everyone, and everyone could contribute to achieving it with their ideas and actions. The horizontal alignment created by this BHAG was critical because almost every green idea requires cross-departmental collaboration. Consider, for example, the many simple ideas that came in to return packaging material to various suppliers for reuse. Who needed to be involved? The ideas originated in operations from the people who unpacked the parts, but engineering was needed to certify that the materials could be reused, and purchasing had to negotiate with the suppliers, who needed to change their processes to take back and reuse the materials. There were also cost and price implications. Transportation and logistics had to get involved in handling, packaging, and shipping the materials back to the suppliers, and accounting had to deal with any budget and control ramifications. Unless everyone shared the green vision, progress on these ideas would have quickly bogged down.
Over the years, considerable thought has been put into how to get people to think beyond their own limited piece of an operation. Take, for example, the notion of “internal customers,” popularized by the quality expert Joseph Juran in the late 1980s. The thinking was that each person (or group) in a larger process should identify his internal customers—the people immediately downstream in the process that received his output—and focus on the best ways to meet their needs. If everyone satisfies their internal customers, the quality delivered at the end of the chain should satisfy the final “external customers,” too. The internal customer concept was a way to inject awareness of the larger process into people’s thinking, and it is easy to adopt without making many additional changes in an organization or its structure. Its drawback is that it links units only with their immediate neighbors.
Performance bonuses, when properly designed, are another way to tie people directly to everyone else in a process. Nucor Steel uses a weekly bonus system, based on the previous week’s output, to focus everyone’s attention on the output of an entire steel mill. A worker’s bonus, which can more than double his or her weekly pay, is not based on individual performance or even the performance of the group, but on the output of the entire process—the work of all shifts in all departments combined. In this way, people are rewarded not only for their performance but for how much their work helps the performance of other departments and the mill as a whole.
The approaches we have discussed so far are intended to create a common purpose by making people think in terms of the impact of their ideas on the entire process. But none of these approaches offer all the advantages of fully horizontal structures that directly integrate interrelated operations into a single stream.
One of the early champions of process thinking was Henry Ford. Breaking with the scientific management tradition of his era, which focused on maximizing the productivity of individual operations and reinforcing it through the use of piece rates, Ford optimized his entire process to achieve continuous flow. Half a century later, Toyota raised process thinking to a new level. Among other things, it introduced the concept of value-stream mapping, a tool that allowed its people to graphically illustrate the structure and performance of an entire supply chain. It allowed people to easily see where improvement efforts should be focused to enhance the process as a whole.
We often think back to a comment in 1989 by Shigeo Shingo, one of the developers of the Toyota Production System. He told us that he felt that most managers around the world were continuing to miss the significance of the difference between processes and individual operations, and this lack of understanding was one of the biggest things holding productivity down. Since that time, a lot has changed. Today, while more managers recognize the importance of process and are applying many improvement techniques that do focus on the process as a whole, they are still battling organizational structures fundamentally designed around individual operations rather than the process as a whole.
STRUCTURING FOR IDEAS
Up to this point, we have discussed how to overcome vertical and horizontal misalignment in organizations with more or less traditional structures. Such problems can be avoided in the first place by designing an organization specifically for the purpose of getting and rapidly implementing large numbers of ideas. A good example is Zara, the “fast-fashion” retailer discussed in the last chapter. In the fashion industry, it normally takes a year or more to create and deliver new clothing. At Zara, it takes less than fifteen days to create a new design and deliver the finished clothing to its thousands of stores around the world. Every aspect of the company is designed to promote speed, particularly speed in getting and acting on information and ideas.
Rather than using a conventional departmental structure that would group people doing given tasks according to their specializations, Zara organizes its development process around three-person teams: a designer, who does the actual design work; a commercial, who coordinates the material and production tasks; and a country manager, who coordinates the retail operations in a particular country. These teams are responsible for developing new clothing and shepherding it from concept through design, prototyping, manufacturing, and delivery. The company’s design floor is the size of an aircraft hangar, with an open layout and no walls. One end of the floor has clusters of desks arranged by team, with the designers’ CAD systems located nearby. Founder Amancio Ortega’s desk is located here as well.
Another important component of Zara’s business model is to make clothing in small batches of only three to four weeks of demand. This means that individual design decisions do not carry high stakes, so they can be made at the team level. New design ideas for clothing or accessories are shared among team members, and the teams make their decisions quickly—usually in just a few hours. It is striking how young these team members are—most are in their twenties or early thirties. This means the people making the design decisions match the demographics of the typical Zara customer. The result is more successful design choices and reduced risk.
Compare this process with that of a typical fashion clothing company, where designs are generated by designers who have branded themselves over years in the business. Final design and purchasing decisions, which involve orders for an entire season, are made by senior vice presidents. Then the clothes are made in large batches by manufacturers half a world away. It is not surprising that the typical design-to-retail cycle is a year or more.
While new design ideas at Zara come from a wide variety of sources, including the fashion runways of Milan, Paris, and New York, most come from Zara’s front-line retail associates. Each country manager talks with every one of his or her store managers at least twice a week. The main topics of conversation are the observations made by the retail staff about which products are moving well, what the more fashionable customers are wearing, and what items are being requested that the store does not carry. For example, when employees in Northern European stores began reporting that the more fashionable customers were wearing higher boots, the message was quickly forwarded to the design teams in Spain. Both high boots and clothing that would complement them were quickly created and added to Zara’s line.
Once a design is finalized by a team, it is sent from the team’s CAD system to the prototyping area on the other side of the design floor. Within hours, samples are constructed on various sizes of manikins. Each team meets around the manikins, where any ideas for modifications or finishing touches are discussed and decided upon before the final version is sent to manufacturing. While most fashion companies source all their manufacturing from suppliers in low-labor-cost countries such as Vietnam, Bangladesh, or Sri Lanka—and Zara does this, too, for some of its staple clothing products—the company contracts all of its fast-fashion locally in northwest Spain for greater speed and flexibility. Finished clothing is shipped by truck to stores in Europe and by air to stores in the rest of the world.
Zara’s competitive advantage is its ability to provide customers with the latest fashion in clothing at a reasonable price. To do this, it has to be able to tap large numbers of ideas from customers and staff, and act on them quickly. Remember from Chapter 2 that Ortega started his business out of frustration at his boss’s unwillingness to listen. Everything about Zara is designed for ideas: the constitution of the design teams and the authority granted to them, the communication protocols with the stores, the physical layout of the design-to-prototyping facility, and the decision to source manufacturing locally.
This last point is significant. Managers at another fashion company we worked with told us that one of their biggest problems was that only one person spoke English at the Chinese factory where they sourced their product. Communication was difficult and highly error prone, and costly and time-consuming mistakes occurred every day. Zara’s suppliers, in contrast, are close by—most are in the same community—and communications are clear and simple. Literally, nothing is lost in translation.
Structure and goal alignment are the strategic aspects of realignment. In the next chapter, we turn to the operational aspects—that is, how to align an organization’s management systems for front-line ideas.
Becoming idea driven involves more than simply layering an idea process onto an existing organization. The entire organization must be aligned to support the development and implementation of ideas.
In far too many organizations, ideas are forced to run a gauntlet of misaligned elements that is often unsurvivable. While alignment is conceptually simple, in practice, it is challenging to get right, and very few organizations do it well.
Many leaders assume that their pro forma processes of cascading goals down their organizations are much more effective than they actually are. When passing goals down, it is important to frame them in terms that are meaningful to and actionable by the people on the front lines.
Horizontal goal misalignment is extremely prevalent and very costly. When setting goals, most leaders focus on rolling down their goals, with little thought about how these goals might conflict at lower levels.
Most work in organizations requires some form of interaction between different departments or units. Idea-driven organizations create mechanisms to link the interests and actions of their various units together.
Although many managers recognize the importance of taking a process-centric approach, they are still battling organizational structures fundamentally designed around individual operations rather than the process as a whole. Such problems can be avoided in the first place by designing an organization specifically for the purpose of getting and implementing large numbers of front-line ideas rapidly.