Business Best Practices

For many businesses, our current knowledge of computing technology, manufacturing processes, machine capabilities, and integrated information systems, will be outdated in a few years. “The only constant we face,” said an ancient philosopher, “is change.” For top management, success depends on more than merely being able to articulate a vision of where and what the organization needs to be. Top management must develop a solid approach and methodology that managers will use for fostering and implementing positive change throughout the organization. Process-oriented leadership is what organizations need today.

The clear delineation of a vision for the organization’s future is a key role for top management. But all too often, this vision has focused mainly on achieving certain financial results such as gaining market share, return on investment, and inventory to sales ratios. Envisioning what the business needs to be requires that the vision be aligned foremost with customer requirements and an assessment of the organization’s current status and overall ability to achieve its long term objectives. If top management is to successfully manage change, what needs to be developed is a description of issues such as:

• What the company will look like when working inventory turns are increased by 90%?

• What will be required of self-directed, small work groups to achieve throughput reduction targets?

• How will we interact differently with suppliers and distributors after integrating our information systems and business functions?

• How will management processes change?

• What skills will our workforce and managers need?

• How will people be measured and rewarded when goals are achieved?

Asking these kinds of questions will help top management better define the vision of what things the organization will need to do and how it will have to do them. This is the basis on which a solid methodology for managing change depends, and leadership rests.

Whether you are implementing Lean Operations, Six Sigma, Supply Chain Management (SCM), Enterprise Resource Planning (ERP), or some combination of these management philosophies, you are introducing a major change into your organization, and it must be consistent with—and support—the firm’s overall strategy. There are three steps–critical to achieving lasting performance improvements–that are preconditions to successfully bringing about any major change:

1) evaluate the environment

2) Develop the Organization’s mission

3) Originate a strategy

Southwest Airlines has followed the process, as described above. At its inception in 1971, Southwest surveyed its environment and targeted an underserved market segment: short hop flights in Texas.

Realizing that the firm had to keep its costs down to compete against its full service competitors, Southwest’s operations strategy included use of secondary airports and terminals, first come first serve seating, few fare options, smaller crews flying more hours, snack only or no-meal only fights and no downtown ticket offices.

As result of its experience in Texas, Southwest developed the capability to wring-out costs from its airline operations. This capability—competing on the basis of being the low cost provider—continued to fuel its growth. For example, Southwest designed a route structure that matched the capacity of the Boeing 737, the only aircraft in its fleet. The use of only one plane minimized the costs of pilot training and aircraft maintenance. Superior leadership, strategic planning and execution on the part of top management has enabled Southwest to be a consistent money maker while other airlines have lost billions.

Top management is ultimately responsible for the positive changes that can transform the organization. Regardless of the changes being undertaken, they ought to be understood clearly within the context of the organization’s strategy. In our next post, we will describe another ingredient that must be present for change to take root, namely, instituting a change management  process.

Unethical mortgage origination practices precipitated a $25 billion settlement with banks over alleged foreclosure abuses, including the use of forged and shoddy paperwork, a practice known as “robo-signing.” The deal will provide financial relief to an estimated one million at-risk borrowers, as described in today’s Wall Street Journal. This is a step in the right direction:  holding the financial institutions accountable for the dubious practices that they perpetuated. However, millions of mortgages owned by Fannie Mae and Feddie Mac are not covered under the deal, thereby excluding more than half of the nation’s mortgages. Moreover, the real culprits in causing the worst economic crisis since the depression are not just the banks. The government, non-bank lenders, and Wall Street are also responsible.

Paying money—rather than aggressively prosecuting wrongdoers—is never a good idea. Specifically, the settlement is poor compensation to the public for the unethical practices and crimes that were committed against it. In 2001 and 2002, members from senior management at Enron and WorldCom were prosecuted and convicted for performing various criminal acts against their stakeholders. Why have we not prosecuted the wrongdoers who precipitated the current financial crisis?

The immoral acts that I am referring to are well documented in the book Reckless Endangerment, written by Gretchen Morgenson and Joshua Rosner. Since today’s settlement pertains to mortgages, let’s look at some of the shenanigans that surrounded these products. In 2004,  lenders came up with two new types of toxic loans:

1) interest only mortgages, where borrowers simply had to pay off interest, but not principle. As a result, borrowers didn’t build up any equity.

2) negative amortization loans where the borrower paid as much interest as he wanted—any amount not paid off was simply tacked on to principle.

These two products accounted for just 6% of loans in 2003, but by 2005 they represented 29 percent of the market. They were particularly profitable for the lenders: Countrywide made 5% profits on every interest only loan between $100,000 to $200,000. Wall Street’s investment banks made even more money, by subsequently packaging them into investments called CDOs (collateralized debt obligations). Ratings agencies—such as Moody’s and Standard & Poors—then rubber stamped the securities as being AAA rated; however, they didn’t look under the hood to see what was really there. Moody’s could earn as much as “$250,000 to rate a mortgage pool with $350 million in assets, versus $50,000 in fees generated when rating a municipal bond issue of a similar size.”

Morgenson & Rosner described the entire process as being akin to a drug deal where the mortgage originators were drug pushers hanging around the school yard. The ratings agencies were the narcotics cops looking the other way. And the brokerage firms were the overseers of the cartel providing the capital to the “anything goes” lenders.

A coke dealer—who cuts their product with impure substances—knows the harmful effect that the drug will have on clients. Similarly, wall street firms that packaged impure, sub-prime loans into mortgage pools knew, well before their customers did, that the loans inside the CDOs had begun to go bad. The authors describe how in the third quarter of 2006, the traders at Goldman Sachs made bets against the same securities that their brokers were selling to their clients!

It has almost been four years since Bear Stearns fell, only to be followed six months later  by the denouement of Fannie Mae, Freddie Mac, Lehman Brothers and the American International Group. The settlement announced today represents progress, but it is inadequate recompense to the taxpayers. The leadership of the institutions that engaged in unethical practices must be held accountable. After all, they were primarily responsible for creating the current, financial morass that we are struggling to work ourselves out of.  Justice will be served only when the government redresses the larger wrongs that were committed against society.

How do you weigh in on this issue?

When a creative individual masters one field, and then uses what they know to think about another, often truly original ideas–or mind-bending products–are the result. The story of Steve Jobs is a case in point.

A Woman Reading an ebook on an Ipad 2

The Apple CEO dropped out of Reed College, but he hung around campus for 6 months, often sleeping on the floors in dorms where his friends lived. Jobs used the time to attend classes that interested him.  During one term, he took a calligraphy seminar, a subject wherein Reed College excelled.

Years later, when Jobs oversaw the design of the first iMac computer, he commented that all of the calligraphy instruction came back to him, so much so that he incorporated it into the iMac’s software. The end result was the development of the first computer to contain a variety of typefaces and proportionately spaced fonts, a hallmark of the Apple brand. Because Windows PC manufacturers’ copied many of Apple’s designs, had Jobs not dropped in on that class, none of today’s computers would have all of the exciting multiple typefaces.

Job’s innovativeness is shown in the progression of breakthrough Apple products: iMac, iPod, iTunes, iPhone, and now, the iPad. The original iPad came to US stores on April 3, 2010. In less than a year, it has reached $1 billion in revenue, an achievement that few products have ever attained.

Not content with resting on his laurels, Job’s spearheaded the re-design of the iPad. The new version, known as the iPad 2, is being released in stores today. As described in the New York Times, the salient design improvements include more thinness, less weight, more integration, greater beauty—and over 65,000 apps.

In conclusion, technological companies like Apple do require engineers who are experts in science and math. But creativity in product innovation is not based on science and math alone. As described in the book The World is Flat, creativity is about making connections between history, art, politics and science.

Are you a creative manager, designer or executive? How do you connect the dots?

Fail to honor people

They fail to honor you;

but of a good leader, who talks little,

When his work is done, his aim fulfilled,

They will say, “We did this ourselves.”

Lao Tzu

On 2/5/2010, Akio Toyoda, CEO and grandson of Toyota’s founder, broke his almost total silence in response to the safety crisis that confronted his company. In Japan, an apology is considered an art form. Although he apologized before and after the press conference, his apology was widely criticized by the press.

For example, Mr. Toyoda began and ended the press conference with a bow, but it was not the customary Japanese-style deep long bow of contrition.( Toyota Apologizes for Massive Recall) Mr. Toyoda bungled his apology in the same way that his company has bungled quality control. Furthermore, upon being asked a couple of questions, Mr. Toyoda appeared to be in denial that his company had any safety problems, as shown in the following clip:

How did Mr. Toyoda’s assertion that “Believe me, Toyota car is safety…” relate to the fears of Toyota’s customers who were being subjected to harrowing news stories of Toyota vehicles accelerating out of control?

In the above video clip—as well as in his tangled apology—Mr. Toyoda failed to honor the company’s millions of stakeholders:   dealers, employees, suppliers, and customers.

How to Lead Toyota Out of Crisis

There are literally hundreds of definitions of leadership. In the context of Toyota’s problems, I suggest that Mr. Toyoda heed the words of Warren Bennis. In the book Leaders: The Strategies for Taking Charge, Warren Bennis and Burt Nanus interview 90 leaders in their day, from Neil Armstrong to Ray Kroc, founder of McDonalds.

Leadership is a complex issue as there are many aspects to it. In this post, I will discuss only a couple of behaviors that the CEO of an organization must demonstrate.  Here is one thing. Bennis indicated that the job of the leader is to instill vision, meaning and trust in his followers. The leader has to be a good listener, showing sensitivity to the needs of the organizations’ many constituencies. For example, former US President Clinton famously stated “I feel your pain” when looking at an unemployed man in a town hall debate forum. This empathetic phrase was a crucial moment in his campaign for the Presidency of the U.S.  Mr. Toyoda must empathize with his customers, employees, dealerships and suppliers much in the same way that candidate Clinton empathized with the  electorate during the 1992 campaign. By listening to the “voice of his customers,” Mr. Toyoda will probably be able to regain their trust.

Furthermore, what Mr. Toyoda must provide is a vision of how Toyota’s will look, five years in the future, its future state. Inventing images, metaphors and models, Mr. Toyoda must depict a company that stands for quality. This vision is necessary to possibly regain the support of Toyota’s employees, dealers, suppliers and customers. The methods and strategies required to achieve this vision must also be laid out in the months to come.

This will be the first of several posts about leadership at Toyota. Although leadership at the top is crucial, there are three other issues that top management must address to restore Toyota to its former glory. For details, read the post: Troubles in Toyota City

A project manager must be capable of demonstrating two different skills sets. For routine projects, such as the construction of an apartment building, the project manager should focus on managing the project to achieve the triple constraints of cost, schedule and performance goals. Good management also entails the ability to

*Create plans and objectives *Develop  procedures *Monitor results against plans *Take corrective action

*Marshall resources to meet performance requirements

However, there are other circumstances which call for leadership on the part of the project manager. In effect, project managers must often be able to deviate from what was planned, and introduce significant changes.

For example, a video game developer in Chicago was in the process of designing a new game when–in the middle of the project–a competitor totally leapfrogged the company in terms of technology. As a result, the project manager of the video game company had to go back to the sponsor of the project and get approval to come up with a totally revamped game-design which delayed the completion date. In this case, the project manager realized that existing plans had to be scrapped. Leadership involves recognizing and articulating the need to significantly alter the direction of a project, and then aligning the team to that direction.

If a project is well defined and no surprises are encountered, then the project manager can focus on managing the project. When there is great uncertainty that calls for a change in direction, the project manager must demonstrate leadership skills.