How Smart Companies Get Smarter: Seek and Solve Systemic Deficiencies

At Toyota, as cars roll off the assembly line, they go through a final inspection station staffed by astute visual and tactile inspectors.

At Toyota, as cars roll off the assembly line, they go through a final inspection station staffed by astute visual and tactile inspectors. If these inspectors spot a paint defect, they don’t just quietly fix the problem merely by touching up the paint to satisfy the customer or their plant manager.

As part of Toyota’s famed kaizen continuous improvement system, floor workers identify the systemic causes that led to the specific defect on the specific car. They then remedy the root cause of the problem so it won’t happen again.

Fostering an atmosphere of continuous improvement and learning

Most companies cherish employees who are watchful of problems and take it upon themselves to detect and solve problems without criticism or complaint. A software company, for example, may treasure a programmer who observes an unforeseen coding mistake, and swiftly develops a patch to keep her project moving forward.

In contrast, companies like Toyota who are obsessive about quality improvement, organizational learning, and developing collective intelligence don’t reward or tolerate such quiet fixers.

Taiichi Ohno - 'Having no problems is the biggest problem of all.' At companies that have adopted the kaizen philosophy, continuous improvement originates from the bottom up through suggestion systems that engage and motivate floor employees to look out for systemic problems, raise quality concerns, and help solve those problems. These companies encourage their employees to actively seek small, simple, and incremental improvements that could result in real cost savings, higher quality, or better productivity. According to Taiichi Ohno, the legendary Japanese industrial engineer identified as the father of the Toyota Production System, “Something is wrong if workers do not look around each day, find things that are tedious or boring, and then rewrite the procedures. Even last month’s manual should be out of date.”

Idea for Impact: To develop collective intelligence and build smarter organizations, discourage employees from heroically patching up recurring problems. Instead, encourage them to find, report, analyze, experiment, and fix systemic problems to prevent their recurrence.

Three Leadership Lessons from Ron Johnson’s Debacle at J.C. Penney

Ron Johnson's Debacle at J.C. Penney

Monday’s dismissal of J.C. Penney CEO Ron Johnson comes as no surprise.

In late 2011, J.C. Penney had hired Ron Johnson from Apple to revive the sagging fortunes of the storied retailer. He was deemed as a retailing genius who had proved himself by creating Target’s hip-yet-inexpensive cachet and then by leading Apple’s highly lucrative retail stores.

During his 17-month tenure, Ron Johnson had poured hundreds of millions into rapidly remaking the retailer. Mostly, his attempt at the high-stakes makeover of J.C. Penney hadn’t worked. Revenue deteriorated sharply, feedback from customers and employees was persistently negative, and the J.C. Penney share price declined by over 50%.

Lesson 1: Don’t disenfranchise your traditional customer base

Over the years, J.C. Penney’s economic moat had declined considerably. J.C. Penney lost customers to higher-end retailers and specialty stores who had started to offer better value at lower prices. At the other end, Wal-Mart and Target wooed price-sensitive customers with better-than-basic goods.

When retailing relatively undifferentiated merchandise, one of the key levers to revenue is discounts and promotions. Like other retailers, J.C. Penney had trained its customers to buy largely when its stores had a sale. Shoppers recognized that J.C. Penney’s tag prices were made-up to be marked down during sales events and were fixated on coupons, discounts, and promotions. Shoppers had come to regard of shopping at J.C. Penney as a treasure hunt for significantly marked-down merchandise.

Discounts and Promotions at J.C Penney

Within weeks of joining J.C. Penney, Ron Johnson observed that three-quarters of everything sold had been discounted by at least 50% from list price. Instead of marking up the tag prices and then using deep discount sales to attract customers, he initiated a new “fair and square every day” pricing strategy. By offering good prices every day he attempted to change customer bahavior and dissuade them from waiting for markdowns. Further, by minimizing sales, promotions, and coupons, Ron Johnson eliminated the thrill of pursuing markdowns, a key characteristic of J.C. Penney’s conventional customer. When the pricing strategy flopped, Ron Johnson reinstated sales and coupons, and even brought back “fake prices.” The successive changes confused employees and customers. Additionally, J.C. Penney stopped carrying some traditional brands that many of its long-time customers had favored and injected trendy brands to appeal to younger customers. Ron Johnson’s team created exciting marketing and advertising that was seen as too edgy and further confused traditional customers.

Lesson 2: Don’t be so hubristic as to wager big on hunches without prototyping

At Apple, Steve Jobs frequently shunned extensive consumer research because he had the exceptional genius to introduce the right products, with the right features, at the right time. Drawing from his success at the helm of Apple stores, Ron Johnson was perhaps overconfident that he had all the right answers and could therefore forego the crucial feedback from employees and customers before embarking to “revolutionize retailing” by “teaching people how to shop on their terms” and “fundamentally disrupting the traditional retailing paradigm.”

The gravest error Ron Johnson made at J.C. Penney was not testing his new pricing strategy in a handful of stores. According to this WSJ article, when a colleague proposed a limited store-test of the new pricing strategy, Johnson allegedly responded, “We didn’t test at Apple.”

Ron Johnson's Debacle at J.C. Penney Clearly, what Ron Johnson thought of value was not what its customers saw as value. As a result, J.C. Penney overlooked the reality that, for its customers, pursuing discounted goods on sale was part of the fun of shopping at J.C. Penney. Ron Johnson set about to tear down an old business model before he had switched over to a new business model without prototyping.

Ron Johnson possibly had a compelling out-of-the-box vision for J.C. Penney. However, he did not stay closely connected to J.C. Penney’s customers and employees before the launch of a radical strategic change. It is challenging to be an effective leader when customers and employees don’t understand and buy major changes.

Incremental improvements to J.C. Penney’s merchandising strategy through extensive prototyping and measured makeover could have provided the opportunity to learn through trialing and encouraged ownership of the strategy by employees, especially those in customer-facing roles.

Lesson 3: Beware of the “Halo Bias” in rating leaders

Halo Bias We tend to attribute a manager/leader’s success to his apparent genius and we overlook the role of the context (team, product, industry, timing, and luck) in his success. Thus, we come to expect him to have the same success in a different context. We anticipate that the very tactics and devices that proved successful in the past would work for him in the new context. (See my earlier article on the halo and horns biases in rating people.)

Ron Johnson certainly proved his retailing genius by first creating Target’s hip-yet-inexpensive brand image and then, for ten years, by leading Apple’s highly lucrative retail stores where he most famously introduced the Genius Bar concept. Nevertheless, his experience with selling premium-priced products at full price all the time with no promotions at the Apple stores did not translate well to J.C. Penney’s undifferentiated merchandise and its customer base of bargain hunters.

In June 2011, J.C. Penney stock spiked by 17.5% when the company announced Ron Johnson’s appointment as CEO. Wall Street saw in him a proven leader with the silver bullet. Investors got overly optimistic that he would remake the embattled retailer and overlooked the fact that J.C. Penney lacked the brand image of Apple and its most-sought-after products. Alas, J.C. Penney stock slid by over 50% during Ron Johnson’s 17-month tenure. The golden boy of retail never hit his stride.

How to Think and Perform like a CEO: Link the External World with the Internal Organization


A.G. Lafley on the Unique Work of CEOs

A G Lafley Chairman CEO Procter & Gamble In this article (PDF of full article) in the May 2009 issue of the Harvard Business Review, Proctor & Gamble’s Chairman and outgoing CEO, A.G. Lafley reflects on the unique responsibilities of CEOs. What makes this article engaging is that A.G. Lafley uses the context of his commendable achievements at the helm of Proctor & Gamble to elaborate on the teachings of management guru Peter Drucker.

“The CEO is the link between the inside and outside. He alone experiences the meaningful outside at an enterprise level and is responsible for understanding it, interpreting it, advocating for it, and presenting it so that the company can respond in a way that enables sustainable sales, profit and total shareholder return (TSR) growth.”

Drawing from Peter Drucker’s teachings, A.G. Lafley identifies the four fundamental tasks of a CEO. Here is a summary:

  1. Defining and interpreting the meaningful ‘outside.’ Identifying which external stakeholders matter the most. Recognizing where results are most meaningful. Clarifying and communicating the priority of external stakeholders.
  2. Identifying and focusing on the competitive spaces where the organization can win. Inquiring, “What is our business? What should it be? What is not our business? And what should it not be?”
  3. Balancing the present and the future. Determining the optimum balance between yield from present activities and investment in a highly uncertain future. This involves, (1) defining realistic growth goals, (2) creating a flexible budgeting process, and (3) allocating human resources in a way that identifies and develops good people for today and tomorrow.
  4. Shaping the values and standards of the organization. Winning with those who matter most and against the very best.

Think like a CEO, Focus on Organizational Performance

Think and Perform like a CEO I believe that everybody is a CEO. Whatever your span of responsibilities — supervisory, managerial or leadership — you are accountable to the external stakeholders. These stakeholders measure you purely by your ability to identify opportunities and get things done through the resources you have. Here are five essential initiatives to help you think and act like a CEO.

  1. Understand the context of your organization or project. Change your perception away from the minutiae of your organization and seek to understand what your organization means in the broader context and how it fits into the external world. Draw from this external perspective to establish the right directions and align the work of your entire organization with these organizational goals. Differentiate between short-term and long-term opportunities.
  2. Identify the primary external customers — these could be higher-level managers, other groups within your company or a consumer who uses your products. Use this customer standpoint to make every strategic decision and choose the right actions. Connect each initiative to its beneficial results to your customers.
  3. Communicate your direction and priorities to your organization. Help your employees determine where to focus their own efforts and how they eventually fit in the broader context of the external world.
  4. Focus on execution and achieving results. Introduce a culture of accountability. Ensure that each employee actually does live up to the values and goals of the organization.
  5. Coach your employees and develop them. Understand and align their personal values and aspirations to those of the organization, to the extent possible. Per Peter Drucker, “make sure that the performing people are allocated to opportunities rather than only to ‘problems.’ … Make sure that people are placed where their strengths can become effective.” Plan for succession.

On Recruiting from a Competitor

On Recruiting from a Competitor

In response to my statement on prohibiting current employees from disclosing proprietary information from their former employers, blog reader Alberto from Sao Palo, Brazil, questioned me on the ethics of hiring from a competitor.

Competitors are the principal, sometimes inevitable, source for talent with industry-specific skills and relevant experiences. At first sight, the proposition of hiring from a competitor sounds quite rational: the recruit may be well-trained at the competitor; he/she may be able to jump-start a new venture and establish a customer-network readily. However, depending on the position your recruit held at the competitor, this attempt might be fraught with problems–ethical and legal.

In today’s competitive marketplace for talent, an employee has a fair right to seek employment with competitors of his/her current employer. However, the loss of a key employee and the fear that the former employee may reveal trade secrets to a new employer may lead to contention between the new and former employers. A recent example: the bitter dispute between Google and Microsoft when Google recruited a Microsoft executive to lead Google’s research initiatives in China.

Essential Considerations for Recruiting from a Competitor

Here are three important guidelines to consider when recruiting from a competitor.

  • Take into account the costs of hiring and retaining your new recruit. The recruit is likely to command a premium over his/her benefits with the former employer. Further, if your new recruit will leave a competitor to join your organization, he/she could leave your organization in the future and return to the former employer or transfer to a third organization. What will motivate him/her to continue to stay with your organization on the medium- and long-term?
  • During the recruiting process, understand any non-compete or non-disclosure agreements your recruit may have entered with the former employer. Abide by any such commitments—for the duration of the non-compete or non-disclosure agreements, if possible, assign responsibilities that do not conflict with terms of these contracts. Consult legal experts to weigh any potential risks.
  • If the recruit had held a key position in the competitor, he/she likely has access to proprietary information or trade secrets of your competitor. Do not solicit any proprietary information about the former employer—this is unethical and may expose you to liability.

Virus on iPods: Apple blames Microsoft Windows

Virus on iPods: Apple blames Microsoft WindowsOn Wednesday, Apple’s iPod support website acknowledged that a small number of video iPods were infected with a Windows virus. In addition to describing the scale of infection and providing instructions to remove the virus, the website blamed Microsoft Windows for the glitch.

“As you might imagine, we are upset at Windows for not being more hardy against such viruses, and even more upset with ourselves for not catching it.”

Apple’s “114,000 viruses? Not on a Mac” advertisements have lately targeted Windows users to ‘Get a Mac’. Presumably, someone at Apple [AAPL] believed that blaming Microsoft Windows for viruses on the iPod could extend its ‘Get a Mac’ campaign. The outcome is a cheap shot at the competition.

The iPods were apparently infected with the virus at one of Apple’s contract manufacturers. There is no reason for Apple to be “upset” at Microsoft for not being more hardy against such viruses.” Microsoft [MSFT] has invested significant resources (money and talent) fighting hackers and improving its software development process. As Jonathan Poon of the Microsoft virus-scanning group pointed out on his blog, Apple should blame its own manufacturing system.

“It’s not a matter of which platform that the virus originated. The fact that it’s found on the portable player means that there’s an issue with how the quality checks, specifically the content check was done.”

Apple should also blame hackers, who were creative enough to get malicious code embedded on an Apple product while it was connected to a Windows machine on Apple’s manufacturing line.

The take-away lessons: (1) possess a healthy respect for the competition, and, (2) blaming the competition without cause constitutes poor taste.

Philanthropy: Collaborative Initiatives to Transfer Corporate Values to the Social Sector

Collaborative Initiatives to Transfer Corporate Values to the Social Sector Traditional philanthropy, whether personal, institutional or corporate, takes three forms: cash capital, volunteer-time in programming support, and cause-related sponsorship. I believe a fourth avenue, corporate and non-profit collaboration, can make an important difference in the society.

Following last year’s Katrina hurricane, Wal-Mart [WMT], Home Depot [HD] and FedEx [FDX] reached out to vulnerable victims by providing hundreds of truckloads of vital supplies, thanks to their immense supply chain infrastructures. These companies highlighted one promising area of effective corporate outreach and community collaboration. Can the corporate sector transfer logistical knowledge to relief agencies and aid them to set-up an infrastructure to support nimble disaster planning in the future?

One of the most significant characteristics of successful corporate leaders is their ability to clearly recognize new social, political and economic influences and to adapt their enterprises to developing circumstances rapidly and economically. These corporate leaders possess the dynamism, the ability to innovate and the mechanisms for spurring efficiency and allocating resources in entirely new channels.

Non-profits have limited access to such visionary individuals and the expertise necessary for social investments to overcome barriers in resources and operational efficiencies. Therefore, there is a pressing need for corporate leaders from all levels to collaborate with the social sector. I expect innovative corporations to launch and expand their philanthropy programs to create partnerships for sustainable initiatives and transfer corporate practices, values, oversight and accountability measures to non-profits.

*Keyword(s): Philanthropy, outreach, non-profits, Katrina, Wal-Mart, Home Depot, FedEx

Respect the Competition

In business, as in sports or work-life, it is essential to possess a mature sense of respect for the competition. The recent arguments between US Airways [ LCC] and JetBlue Airways [ JBLU] form a case in point.

JetBlue recently announced services between New York JFK and North Carolina in direct competition with services offered by US Airways. As part of this announcement, JetBlue’s CEO David Neeleman commented, “… until now, the people of North Carolina have overpaid for sub-standard service.” This was a direct attack on US Airways, which has a strong presence in these routes.

In response, Doug Parker, the CEO of US Airways, addressed employees “upset by these remarks” as follows; read the full response here.

First, I know David pretty well and I can assure you he is a genuinely good person. That he chose to make such a remark is probably indicative of the stress that JetBlue is under and we should not take his remarks personally.

He then explained the problems JetBlue faces and compared JetBlue’s offerings with his company’s.

It doesn’t appear that our customers are overpaying; rather it appears that passengers aren’t willing to pay JetBlue enough for them to be profitable.

JetBlue is struggling mightily and the hard working employees of US Airways are a big reason why. Rather than get upset by their comments we should keep them in context … US Airways is going to be here long after JetBlue.

… we will compete aggressively, we will focus on running our own race and we will win. Thanks so much for taking care of our customers and please keep it up.

When faced with a competitor’s unfavourable remarks, it is tempting to confront and bad-mouth the competition. In such circumstances, employees look forward to directions from a company’s leadership. Often, blowing out the competition’s candle to make one’s shine brighter can backfire, create ill will among employees and lead to loss of customer respect. In his message, Doug Parker sets a clear competitive tone by first uttering words of respect for the competition and then explaining the circumstances involved.

In the intensely competitive airline industry, front-line customer service is a critical differentiator. Customer service consists of a series of interactions that customers have with employees: ticketing agents, gate agents and flight attendants. Evidently, JetBlue has a reputation for better customer service. Doug sends a clear message to boost the morale of his employees and motivating them to deliver superior customer experiences.

Clearly, Doug Parker’s respectful and pragmatic approach exudes a winning attitude. The trust and confidence in his message appeals to employees, customers and the competition.