New Article – Improving Profitability from a Granular Level

Posted on August 9, 2011 by Jonathan Byrnes

I recently wrote an article for Business Finance, “Improving Profitability from a Granular Level”.

I hope you find it helpful.

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Change Management: Paving the Cowpaths

Posted on July 27, 2011 by Jonathan Byrnes

Change management is one of the most difficult problems facing managers at all levels. All too often, managers focus primarily on defining the best end-state, and deal with the change process almost as an afterthought. If the end-state really is better, the logic goes, then people will find the vision compelling and migrate to it. Often this almost has the feeling of a “lay-down” hand in bridge.

This situation reminds me of the story of the math graduate student who woke up in the middle of the night and smelled smoke. He walked into the kitchen and saw that his stove was on fire. He looked at the water tap, looked at a bucket on the floor, said “a solution exists,” and went back to sleep.

Cowpaths

“Paving the cowpaths” is an expression often used to express disdain for weak change management programs.

The streets of downtown Boston are characterized by byzantine windings that seemingly defy logic – until one realizes that they trace the original cowpaths that cattle trod to skirt fields when ambling home from pasture in early colonial times. In downtown Boston, the streets are, indeed, paved cowpaths. In the newer section, Back Bay, planners had the luxury of laying out streets in a grid pattern on landfill.

The essence of “paving the cowpaths” is to point out the seemingly obvious folly of managing change by simply changing nothing of importance. Much later, the “reengineering” movement echoed this idea, noting that change managers should reengineer processes rather than simply automate them.

Yet managing programs of fundamental, sweeping change requires a unique process that is almost counter-intuitive. The reason is that change management most often takes place in a well-established organizational context.

Cowpaths revisited

I thought about the metaphor of “paving the cowpaths” this weekend, as I was reading a very interesting book, Wired For War, by P.W. Singer. This book is about the history of robotics, and the use of robots in warfare. The really interesting parts, however, are about the process of new technology adoption. This process seemingly defies logic.

For a number of years after robots were shown to be superior for certain uses, military leaders refused to embrace the new technology. For example, drone aircraft were demonstrably better at particular missions than manned aircraft. Yet because most top Air Force officers were former pilots, they rejected the new innovations and even used the new drone aircraft for target practice in training pilots.

It was not until relatively recently that external events created a situation in which the new robot technology began to be accepted. In the early 1990s, the tide began to turn. Singer notes that in the prior period, “It isn’t that the systems weren’t getting better, but that the interest, energy, and proven success stories necessary for them to take off just weren’t there.”  The situation began to change dramatically in the wake of the “Black Hawk Down” disaster, which generated a widespread public unwillingness to commit ground troops to the Balkans and Rwanda.

Not long after, the high injury and mortality rates experienced by our military personnel in Iraq caused a public outcry. The military responded in part by accelerating the deployment of robots in high-risk military missions, which enabled the new technology to break through the traditional military attitudes toward robots. This reversal led military leaders to convert the role of robots in warfare from one of “paving the cowpaths” to a much more sweeping role accomplishing powerful new activities –  like staying aloft for days doing surveillance – that simply could not have been done with manned technology.

A similar set of situations characterize the whole history of technology innovation. The moral of the story? Paving the cowpaths is often an effective first step in sweeping, paradigmatic change. The real questions are: (1) whether the initial formulation is flexible enough to support migration to a new system, and (2) whether the change managers have the vision and capability to create the conditions favorable for change, and to manage a multi-stage change process.

Business change management

Paving the cowpaths, in this context, is an important first step in major change. In fact, many successful IT system implementation projects start by mechanizing existing processes, but keep latent capabilities to support deeper change. Over time, as the organization experiences the benefits of the new system and as it becomes part of the company’s “plumbing,” change managers can roll out the more sweeping new capabilities. Because the system users experience the early benefits of the new system, they become much more willing and motivated to change their practices to take advantage of the powerful new possibilities.

The business school teaching case literature has great case examples of companies that instituted surprisingly sweeping change, by starting with piggybacking on current organizational processes and relationships. In my course at MIT, I teach one such case juxtaposed against another that features a sweeping change program implemented as a “big bang” all-at-once change. Not surprisingly, paving the cowpaths turned out to be the secret of success – enabling much more rapid and broad change when properly deployed and managed.

Profitability and change

One of the biggest problems –  and opportunities –  in profitability management is the scope and magnitude of the potential improvements. Virtually every company is 30-40% unprofitable by any measure, and 20-30% provides all the reported profits and subsidizes the losses.

Profit mapping, the core analytical tool of profitability management, shows the profitability of every product in every customer in a company. (I describe how to construct a profit map in my book, Islands of Profit in a Sea of Red Ink.) Profit maps show exactly where profit is flowing and where is it lost.  The problem is that the sheer quantity of information can be overwhelming, and often leads managers to wonder where to start.

The most effective profitability management programs start with a degree of paving the cowpaths. The key to success is to prioritize the profit opportunities against the difficulty of change, and to develop smart ways to accelerate the organization’s pace of change. I think of this as the “view-to-effort” ratio.

View-to-effort ratio

When our kids were young, we used to take them hiking in New Hampshire. They complained on the way up the mountain, but they loved the view from the top. This led us to rate hikes by their “view-to-effort ratio. By starting with small hikes with nice views, we were able over time to sharpen their interest in great mountain views, and this in turn allowed us to increase the size of the hike.

In short, we started with a “pave the cowpath” approach, and moved forward from there. Through this process, our children learned to love hiking and enjoy nature. Today, they are hiking on trails that would leave us breathless. Had we not started incrementally, we would not have experienced this result.

Smart change management

One of the most important keys to success in profitability management is smart change management. It is also the biggest stumbling block.

The well-known inventor and entrepreneur Ray Kurzweil notes, “About thirty years ago, I realized that timing was the key to success….Most inventions and predictions tend to fail because timing is wrong.” Singer observes, “Kurzweil has found that the challenge isn’t just inventing something new, but doing so at just the right moment that both technology and the marketplace are ready to support it.”

The key to success is to craft a change program that starts with “paving the cowpaths.” This essential first step allows the organization to see the power and feasibility of the new approach, which in turn creates the essential conditions for more sweeping change.

Successful managers draw on their reservoir of wisdom and experience to craft the right formulation. This critical element makes all the difference between success and failure.

Posted in Leading for Profit Tagged ,

Great Summer Reading

Posted on July 12, 2011 by Jonathan Byrnes

Here are four terrific books that you might enjoy this summer. One is an enduring classic of nature writing. Two are great management books that are not technically about management. And the fourth is a very interesting brief overview of the history of mankind.

The Outermost House: A Year of Life on the Great Beach of Cape Cod, by Henry Beston.

In 1927, Henry Beston spent a year living in a one-room house on the beach at Cape Cod. He wrote this wonderful book in longhand at his kitchen table. In it, he describes his observations about the changing moods of the beach and water, and the joy of living in solitude in a little room overlooking the North Atlantic and dunes. Beston originally planned to spend just two weeks in the house, but was drawn to stay for a whole year. Some great chapters: “Autumn, Ocean, and Birds”, “Night on the Great Beach”, and “Orion Rises on the Dunes”. How good is this book? First published in 1928, it is still on the shelves of most bookstores.

The Accidental Billionaires: The Founding of Facebook, by Ben Mezrich.

This terrific book tells the story of Mark Zuckerberg’s founding of Facebook. Ben Mezrich’s fast-paced book narrates the engaging story of how Zuckerberg translated a relatively simple idea into one of the world’s most popular websites – carving out a dominant competitive position in less than a year.  Look for the essential elements of Facebook’s positioning success: focusing on something everyone does all the time, offering a slightly more efficient solution, and network effects that spread like wildfire. Something to think about for the inner entrepreneur in all of us. This book is very well written, and much better than the movie.

Game Change: Obama and the Clintons, McCain and Palin, and the Race of a Lifetime, by John Heilemann and Mark Halperin.

This fascinating history of the 2008 U.S. Presidential election is both a great read and an insightful management study of one of the most incredible turnaround electoral victories in U.S. history. The book tells the inside story of how Barack Obama vaulted from relative obscurity to beat the clear frontrunner, Hillary Clinton. This is a story of his relentless, thoughtful management, juxtaposed against Hillary Clinton’s dithering approach. It is a study in the critical importance of management style and process. Also compelling – the story of John Edwards’s implosion, and of John McCain’s selection of Sarah Palin to be his running mate. Although Game Change is not technically a management book, it is one of the best management books written in recent years.

The Origin of Humankind, by Richard Leakey.

In this short volume, renowned paleontologist Richard Leakey systematically answers the question, “What made humans human?” Leakey surveys our knowledge of the prehistory of humankind over the past three million years. This story is fascinating. But more importantly, the book is a wonderful example of concise, insightful analytical writing: in 157 pages, Leakey frames the essential arguments over humankind’s prehistory, impartially weighs the evidence, and offers well-synthesized conclusions. It is a great example to managers of how one can systematically investigate and deeply understand a complex field. Besides, think about this: modern humans only emerged 35,000 years ago, and began to settle in villages only 10,000 years ago. Look at the technological progress all around us – it’s truly astonishing.

A Short Bonus

Check out David Brooks’s recent New York Times op-ed column, “The Unexamined Society”.

It is a great explanation of the importance of clear thinking about things that managers and policy makers all too often take for granted. Here is his lead-in: “Over the past 50 years, we’ve seen a number of gigantic policies produce disappointing results — policies to reduce poverty, homelessness, dropout rates, single-parenting and drug addiction. Many of these policies failed because they were based on an overly simplistic view of human nature.”

Marsha joins me in sending our best wishes to you and yours for an enjoyable, relaxing summer.

Posted in Thinking for Profit Tagged ,

New Article – Best Practices: Leading Profitability Turnaround

Posted on June 29, 2011 by Jonathan Byrnes

I recently wrote an article for American Executive, “Best Practices: Leading Profitability Turnaround”.

I hope you find it helpful.

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New Executive Briefing – First Steps to Profitability Turnarounds

Posted on June 29, 2011 by Jonathan Byrnes

I was recently interviewed by Lindsay Konzak, Editor of Modern Distribution Management, on managing profitability turnarounds. Here’s the 14 minute You Tube segment: “First Steps to Profitability Turnarounds”.

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Unlikely Operations Heroes – Sales Reps

Posted on June 10, 2011 by Jonathan Byrnes

A few weeks ago, I met with the top operations managers of a major multinational consumer products company. These executives were very interested in understanding how to become more innovative. What could they do? What have other companies done? What is the current best practice?

Innovation is a very broad topic that can apply to many different things, so what was their specific problem? The cause of their concern was that their production facilities were very efficient, but the company’s rate of product innovation was becoming so rapid that they were worried that they might not be able to support it without major changes. This is what they meant by innovation.

As we discussed the situation, they mentioned the company’s sales and marketing group as the source of this situation. Suddenly, the pieces fell into place.

The sales reps’ problem

A few years ago, I had an opportunity to work with one of the company’s major distributors on sales force productivity. I spent several days riding with several sales reps and understanding their situation. It turns out that these sales reps, also, were having serious problems with the company’s accelerating pace of product innovation.

How was this product innovation manifest? The sales reps were being bombarded by an endless stream of changes. A few were large, like the introduction of an important new product line. But most were small, almost trivial, like a new point of purchase display for a minor product.

What was most striking about this situation was that each innovation, large or small, was accompanied by a new sales objective that became part of the sales rep’s bonus calculation. The reps actually had 15-20 different objectives!

I knew that a sales rep can’t simultaneously maximize 15 objectives, and the customers would balk at responding to all these changes. So what did the reps do?

Each rep picked the two or three objectives that he or she thought would make the most difference, and ignored the rest – and often these varied from rep to rep. How did this crazy situation arise?

I remember talking to the sales reps and customers, and thinking about the portfolio of product innovations.  I had an image of dueling product managers at headquarters, each producing a stream of product (or packaging) changes because each had to show “progress’. Each vying for slightly enhanced revenues.

And each product manager seemingly oblivious to the big picture, including the critical second-order consequences for both sales and operations.

Who’s driving the boat?

In our meeting, I related my experience with the sales reps. I suggested that if I had a room full of their sales reps, the sales reps would have expressed the same frustration with the company’s situation.

In this company, it appeared that product management was “driving the boat”. Each product manager was focusing on only one rather narrow primary measure: his or her product revenue or gross margin – without regard to the overall effect, or to the important (but hard to measure) second-order effects on both sales and operations, and on the customers. The operations and sales groups were stuck essentially “waterskiing behind the business”.

Why was this occurring? The answer stems from the transition we have been going through from one business era to another.

What happened?

In the prior Age of Mass Markets, which occurred throughout most of the twentieth century, revenue maximization was the win strategy. Companies had relatively uniform pricing  (for much of the period, manufacturers could actually set retail prices), cost to serve was relatively uniform as the product was just dropped at the customer’s receiving dock, and economies of scale meant that large production volumes led to diminishing unit costs. And diminishing unit costs meant more profits.

In this situation, product management was indeed driving the boat. Their job was to maximize revenues. Most consumer product companies were characterized by a relatively small number of high-volume brands. In this situation, the cost of the small “tweaks” in products and packaging were small compared to the huge gains in scale.

Over the past thirty years, however, our business system has changed enormously. We have entered what I call the Age of Precision Markets. In this new era, companies have instituted complex pricing varying from customer to customer, and even product to product. Cost to serve varies again by customer, and even by product within a customer. Products have proliferated into all ecological niches, and flexible manufacturing and outsourcing have enabled many niche products to achieve minimum efficient scale.

Today, profit maximization requires a deep understanding of the interaction between pricing and cost to serve on a very granular basis (individual products within individual accounts). It also requires the tight integration of product management with the groups responsible for the second-order costs it so often produces. Chief among these are the critical costs of sales inefficiency and operations complexity – just what the top operations managers and sales reps were so concerned about.

A natural alliance

In today’s business era, sales and operations have surprisingly aligned interests. They are poised to form a natural alliance to maximize profitability, often without realizing it.

Several months ago, I wrote a widely circulated blog post, “Unlikely Sales Heroes – Supply Chain Managers”. The thrust of the post was that the traditional way to sell to important accounts – sales rep ramping up sales volume, then bringing the operations manager in at the end for a courtesy call, or “sales first, supply chain last” – is an obsolete and counterproductive approach to account development that stems from the past Age of Mass Markets.

In today’s Age of Precision Markets, all this has changed. Leading companies have found that the most effective way to develop and accelerate sales in their most important accounts, their “islands of profit”, is to introduce their operations and supply chain managers to their counterparts in the key customers early in the account development process. The operations managers naturally bond with their customer counterparts, and together they quickly develop innovative ways to work together to create new efficiencies.

This process has two very important results: (1) the customer will become much more profitable handling and selling your products, and this will create huge, rapid sales increases for your company; and (2) in the process, you will lower your own cost to serve. Think about this: your operations team creating huge new revenue increases coupled with lower cost to serve. The best of all worlds.

In my graduate class at MIT and in my executive courses, I often ask whether in a company all revenues are equally profitable to serve. The answer is “of course not”. It is clear to everyone that some revenues fit the supply chain and operations, while others do not.

This leads to a very important conclusion. The most important way to achieve quantum increases in operations productivity is for the sales force to bring in revenues that fit the company’s supply chain and operations. This means that in a well-run company, the sales reps are primary determiners of operations productivity –  the unlikely operations heroes.

Does this mean that we must turn away important new sources of revenue because they don’t fit our current operation? Of course not.

It does mean, however, that both sales and operations have to develop a deep understanding of the complex interaction between revenues and costs on a very granular basis (individual products in individual customers), and they must have highly efficient processes to coordinate and align their sales and operations activities.

When your sales and operations are fully aligned, your revenues will be maximized and operations costs will be minimized. Today, your supply chain managers should be your most important sales heroes, and your sales reps should be your most important operations heroes.

What about the product managers?

Returning to the recent meeting with the consumer product company’s top operations managers, it became clear that the company’s product managers were maximizing a small portion of the company’s profit picture. They were not aligned with either sales or operations.

In the past, this was not a big problem, but today it was causing enormous headaches.

This led to a very important question. How could the operations managers (and sales force) change position from “waterskiing behind the business” to helping “drive the boat”.

The answer was that they had to shift their activities from a focus on finding ways to cope with an untenable situation (which they saw as a need for innovation), to a new focus on developing effective ways to partner with their counterparts in sales and product management in order to create alignment.

And this was nearly impossible to do when everyone was so busy fighting the fires caused by the counterproductive, over-rapid pace of product innovation.

The key to gaining alignment was to open a parallel discussion on how to work together over the next few years in order to maximize profitability and profitable growth. This would surely involve new coordinative mechanisms, new metrics, and new incentives.

The net result, the true definition of success: all three key groups “driving the boat” together.

Unlikely heroes

In the Age of Precision Markets, the key to long-term success is to develop effective processes to tightly align your key functional areas – sales, operations, and marketing – in both your company’s day-to-day activities and in its positioning for the future.

In this new era, your supply chain and operations managers should be sales heroes, and your sales reps should be operations heroes – all working together to raise your company’s performance through the roof.

Posted in Operating for Profit Tagged , , ,

New Article – The Use and Misuse of Business Cases

Posted on May 23, 2011 by Jonathan Byrnes

I recently wrote an article for Business Finance, “The Use and Misuse of Business Cases”.

I hope you find it helpful.

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New Article – Getting Under the Hood of a Flawed Budgeting Process

Posted on May 4, 2011 by Jonathan Byrnes

I recently wrote an article for Business Finance, “Getting Under the Hood of a Flawed Budgeting Process”. In the article I explain why most budgeting processes are inherently backward-looking, so companies wind up investing in yesterday, instead of tomorrow.

I hope you find it helpful.

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