Evolving Excellence

Net Nonsense - hilarious commentary

By Kevin Meyer

My Net Nonsense post from a couple weeks ago on the evils of large companies trying to force long payment terms on suppliers received considerable coverage, including being reposted in Quality Digest this week.  However the best - and funniest - commentary was by the editors of Quality Digest in their Quality Digest Live video.

For ten minutes, beginning at about the 13:20 point, they savage some well-known companies like DuPont, Procter & Gamble, Kimberly Clark, JC Penney, and more.  Check out their review of the hypocrisy of the mission statements of these companies.  Ha!  No kidding.  Actually rather sad.

Enjoy!

A Lesson on Leadership from Marrakech

By Kevin Meyer

My wife and I are currently in Marrakech, Morocco, on one of our increasingly frequent trips to explore new locales.  Truly a remarkable place, and with the tall snowcapped Atlas Mountains only an hour away in one direction, and the ocean in another, I'm convinced it's destined to become another mecca for sports enthusiasts similar to Queenstown, New Zealand.  The people are exceptionally friendly - just three weeks ago CNN ranked it the third most welcoming country to visitors, coincidentally right after New Zealand.  The craziness of the souks in the medina provide an interesting diversion.

One of the reasons my wife and I enjoy traveling so much is because we've become convinced of the importance of first trying to understand differences before making judgments.  I guess we're sort of going to the gemba on our worldview.  One example from right here in Morocco is how Islam is practiced as a positive, inclusive, compassionate religion - and they are appalled at how it has been corrupted to the contrary by the fringe fundamentalists.  Gee, sounds familiar.  As a side note, I've found the djellaba robe to be exceptionally comfortable, and I even bought one.  Not sure I'll wear it to Walmart when I get home though.

The influence of Islam is pervasive, and one way it's readily apparent is through the Adhan, the "call to prayer" that you hear the Muezzins chant five times a day, usually via loudspeakers high on the minaret in every mosque.  You might think that's a bit annoying, but aside from issues resulting from poor amplification, it's actually quite beautiful.  Here's a YouTube version with English subtitles.

But think about this from a leadership perspective (yes, I finally got around to that...).  Five times a day Muslims are reminded of their faith and are asked to reflect on it.  And practicing Muslims will, whenever possible.  Upon hearing the call at one point yesterday, our tour guide asked for a moment, found a corner in a private room, and performed the ritual.  It only took a couple minutes.  Five times a day the distraction of daily chaos (especially in a place like Marrakech!) is realigned to a larger ideal and purpose. 

Leadership can be tough.  Lean transformation and hence lean leadership even more so.  One of the greatest difficulties is keeping both the leader and the team focused on what can be counterintuitive goals.  Moving forward while grenades and distractions are being lobbed from all sides, trying to pull you back into a short-term mindset.

Take the time to discover and define the true purpose of the organization.  Translate that into a long-term strategy with short- and intermediate-term objectives.  Then communicate and reinforce that purpose, strategy, and thinking... over and over and over. 

At least five times a day.

Results... Not Personality

By Kevin Meyer

A couple of articles in The Wall Street Journal last week made me think a bit about how we should look for and evaluate results and experience when choosing a leader... not just personality.  And no, I'm not thinking about our favorite community organizer from Chicago.  The articles, interestingly enough, had to do with our mess of a health care system.  Having just spent the last three weeks dealing with a very difficult family medical situation, the topic is close to my heart.

The first is a great read on the impact of medical errors.  As interesting as that is in itself, the few statements on how we tend to choose doctors is what stood out for me:

I've asked patients how they decided to come to the hospital where I was working (Georgetown, Johns Hopkins, D.C. General Hospital, Harvard and others). Among their answers: "Because you're close to home"; "You guys treated my dad when he died"; "I figured it must be good because you have a helicopter." You wouldn't believe the number of patients who have told me that the deciding factor for them was parking.

A survey of New Yorkers found that approximately 60% look up a restaurant's "performance ratings" before going there. If you won't sit down for a meal before checking Zagat's or Yelp, why shouldn't you be able to do the same thing when your life is at stake?

You might be surprised at the different quality levels of doctors and hospitals - which we apparently select with no meaningful data.  Just one example from the article:

In 1989, the first year that New York's hospitals were required to report heart-surgery death rates, the death rate by hospital ranged from 1% to 18%—a huge gap. Consumers were finally armed with useful data. They could ask: "Why have a coronary artery bypass graft operation at a place where you have a 1-in-6 chance of dying compared with a hospital with a 1-in-100 chance of dying?"

No kidding.  The second article is an interview with Leslie Michelsen, who runs Private Health.  His firm basically does very deep, and very expensive, data analysis on physicians, facilities, and treatments to provide the ultimate in healthcare for those that can afford it.

"People do not know how to choose doctors. It's one of the most important things you can do to promote your own health and that of your loved ones, and it's: 'My friend's cousin's relative went to Dr. Smith, and he was terrific.' Well, how do you know he's terrific?"

Once again, with some of the most important decisions we make, we resort to hearsay and personality, not results-driven analysis.  Not that we're necessarily to blame - obtaining that data is difficult, which is why companies like Private Health exist.

So Mr. Michelson built a series of proprietary algorithms to distinguish "the few who are the very best" from "the many who are very good," based on "the factors that predict excellence." For example, the premier caregivers for metastatic cancer are usually academic researchers on the cutting edge, not general oncologists. The best orthopedic surgeons perform many procedures as they master the clinical learning curve, ideally for a single injury.

That's one solution - one that most of us don't have access to.  The first article promotes greater transparency.  Remember the difference in heart surgery death rates in NYC?

Nothing makes hospitals shape up more quickly than this kind of public reporting.  Instantly, New York heart hospitals with high mortality rates scrambled to improve; death rates declined by 83% in six years. Management at these hospitals finally asked staff what they had to do to make care safer. At some hospitals, the surgeons said they needed anesthesiologists who specialized in heart surgery; at others, nurse practitioners were brought in. At one hospital, the staff reported that a particular surgeon simply wasn't fit to be operating. His mortality rate was so high that it was skewing the hospital's average. Administrators ordered him to stop doing heart surgery. Goodbye, Dr. Hodad.

Earlier in that article you learned that "Dr. Hodad" was what other professionals in that hospital called a particular surgeon that was exceedingly popular, a shortened version of "Dr. Hands of Death and Destruction."  Popularity with patients didn't equate to quality.

His operating skills were hasty and slipshod, and his patients frequently suffered complications. This was a man who simply should not have been allowed to touch patients. But his bedside manner was impeccable (in fact, I try to emulate it to this day). He was charming. Celebrities requested him for operations. His patients worshiped him. When faced with excessive surgery time and extended hospitalizations, they just chalked up their misfortunes to fate.

So, finally, to my point.  How many of us have a "Dr. Hodad" in our organization?  A supposed leader that talks a good talk,  is loved by many, but is simply ineffective?  Why?  Why does he still have a seat on the bus?  How do we make it obvious that he should get off the bus?  The first article talks about the power of visibility and transparency - recording results and making them public.

Do you measure the results of your leaders?  Do you make them public?  Then what do you do when those results aren't what you expect - or need?  Even when the leader is popular.  Popularity and personality do not improve an organization.  Results do.  Yes, even if you're a community organizer from Chicago.  Or a venture capital vulture from Michigan for that matter.

Organization Structure Change Doesn't Solve Leadership Issues

By Kevin Meyer

So how many of you are in the middle of an org change?  I'm guessing about everyone, as it seems to be the common knee-jerk response to organizational issues.  The topic came up last night as I was having a conversation with a couple friends of mine that I have a lot of respect for - and it hit a nerve.

First off, I do want to say that there are many valid reasons for changing an organizational structure.  My organization happens to be embarking on one now, with the purpose to eliminate arbitrary site- and silo-based structures to align around cross-site value creation processes.  Keep that in mind as it will become one of my main points.

A typical overly-simplified corporate organization looks something like the following:

Of course would usually include functions like HR and such.  But a CEO would typically have five or six reports.  Yes, plus a bevy of admin assistants with questionable roles.  Usually in such traditional organizations considerable friction exists between various functions, such as Sales and Development, or Operations and Development. The knee-jerk reaction is to then bridge the functions by adding a new layer, such as a COO.

Voila!  Problem solved, right?  Of course not.  Yes Ops and Dev are now aligned (if the COO has any leadership juice at all), but new problems are created.

First off, what about the conflict between Ops or Dev and Sales?  Or the frequent conflict that exists between Ops and the CFO/Finance?  Still there.  And probably heightened as concerns from the Dev group have to go through another layer before being addressed between the COO and CFO.

But also think about this from a "respect for people" perspective.  The heads of Ops and Dev no longer receive the mentoring of the CEO, they have been diminished in stature, and their voices and concerns have to go through another layer to be heard.  If I was the head of Ops I'd be demotivated and my performance would suffer.  I've become another cog in the wheel instead of a key member of the CEO's staff.  If I was an engineer in the Dev group I'd feel similarly.  Should I?  Perhaps not, but I bet I would.

It's time to take a look at the root cause of the underlying situation.  Groups, and their chiefs, aren't communicating effectively.  They aren't leading, and they aren't aligned.  Changing the organizational structure will not change that one iota - it will just shift the problem around and probably create new problems.

Years ago I was having similar issues in my company.  Leaders weren't leading, they weren't talking, and they weren't aligned.  So one very powerful thing we did was drag the entire extended executive leadership team through Patrick Lencioni's 5 Dysfunctions of a Team book and accompanying workbooks.  It took a year, but we addressed absence of trust, misalignment, communication, and the like.  Sometimes it was very difficult, like the exercise where each member of the leadership team stood up and listened while the others openly and candidly discussed their "areas for improvement."  We nearly lost a couple team members that day.  But in the end our leadership team learned how to openly and honestly communicate, and be aligned.  We have recently found we need to work hard to sustain this improvement, otherwise we lapse into traditional silo politics.

The second thing we did was by accident.  We had to demolish one of our new buildings to make room for a new facility.  During the two year construction period I moved most my leadership team into a triple-wide trailer.  Uncomfortable, and the walls were paper thin.  We had to learn to live together, and deal with the conversations we heard on the other side of the walls.  But again, it helped us improve.  The daily executive leadership team standup meeting, where we also videoconferenced in the leadership of our other sites, also helped.

One side note on that last point: as we were designing our new facility we had a lot of debate about where the senior leadership team members should reside.  Initially I favored an approach that is common in lean environments: the leadership team member is with his or her team.  We've all heard the stories of company presidents that use a mobile office, sometimes even on the factory floor.  And I once visited a company in Japan where the entire team sat at a single conference table in the middle of a huge room with 1,000 employees - and no walls.

We decided to go against lean convention and locate the senior leadership team together, on the second floor.  Horrors?  Nope.  One big reason is that we noticed that when a senior leadership team member spent too much time with his team, the supervisory and decision-making capability of junior leaders suffered.  As much as we tried, it was just too easy to revert to the senior guy making the decisions.  But more importantly we found that it was easier to focus the senior leadership team on forward, future strategy rather than the day-to-day mayhem.  This does not mean that those senior team members don't spend a lot of time mentoring, teaching, and helping their teams.  But the small change in physical location, and thereby focus and perspective, has been important.  And our junior leaders have stepped up and added a lot of leadership bench strength to our company.

So where did we end up?  A flatter organization, similar to the following:

In fact, this doesn't begin to describe it.  In addition to key functions and value stream managers, I also have QA, Supply Chain, Facilities, Customer Care, and Marketing managers.  A total of 14, believe it or not.  And it works just fine and I do not feel overworked.  And it really is a lot of fun - that's what happens when great leaders work together to do great things.

There are some caveats.  For an executive staff of 10 or even 14 to work, the team must be comprised of very capable leaders.  Creating that competency takes a lot of work and a lot of training - not to mention the right kind of people.  There must be a very high level of organizational focus and alignment.  Daily, open, trusting communication is key.  And it also requires an experienced CEO or President that is comfortable delegating, has a broad knowledge to enable that span of control, and can be a good mentor.  Obviously as you flatten organizations you reach a point where the span of control and responsibility may be too wide to be effective.  14 works for me, 10 might be optimal for another, perhaps 20 for some CEO lucky enough to have an incredible leadership team.

Simply changing the structure of an organization doesn't create excellence and effectiveness.  You have to dig deep to improve the underlying leadership competence.  As you do that the organizational structure takes on less and less meaning.

One last note.  As we embarked on our current change to improve our alignment to value creation processes, I came across a great article by Pete Abilla on "customer journey maps."  Looking at the parts of your organization - and processes - from the perspective of the customer is interesting, and we're using the concept as an input to our changes.  I recommend you take a look at it.

My bottom line points:

1.  Align organizations around customer value creation processes.

2.  Respect the managers by providing training, mentoring, and feedback to improve their leadership skills.

3. Respect the managers by allowing them to interact across a wide span, and be mentored by senior leaders.

4.  Respect others in the organization by reducing layers and barriers to communication.

5.  First look to solve conflict issues by improving leadership capability - not adding a new layer.  In fact flattening might actually improve communication and lessen the issue.

 

A Fire Truck When an Ambulance Would Suffice

By Kevin Meyer

An article in today's Wall Street Journal made me think a bit about organizational scope creep.

It takes twice as many firefighters to put out half as many fires as it did 30 years ago. Fewer fires because of better fire safety is one reason, but another is the dispatch of overqualified firefighters and their vehicles to things that aren't fires.

In Orange County, Calif., only 2% of responses involve fires. In Massachusetts the figure is 5%—only because Massachusetts doesn't count emergencies that don't result in injury or property damage.

The Orange County Grand Jury, an official watchdog agency, is the latest to plumb this phenomenon: "This transition from fire emergencies to medical emergencies has not generated major changes in the operation model. . . . Each emergency call generally results in both fire trucks and ambulances being dispatched to the site of the emergency regardless of the type of emergency."

What would really make sense, of course, is properly manned fire trucks responding only to fires, leaving other emergencies to one- or two-person police or ambulance crews.

The article describes several similar situations, and provides a lot of fodder for those that believe government has become too large or that there's an alternative to raising taxes.  But that's not my point and I won't go there.

It's not just big cities.  Here in my small central coast beach town, I regularly see ambulances go up the street to check on my plethora of retired elderly neighbors... followed by a couple of large fire engines.  Of course the police blotter in this town is filled with such nepharious activities as "Mildred heard a noise but it ended up being her gate swinging in the wind."  Or something mischievious happening at the local "medical" marijuana dispensary.

The scope of the fire department has changed over the years, and now includes responding to medical emergencies.  Perhaps that's entirely appropriate as firefighters have EMT training.  But as noted above the operational model hasn't changed, so unnecessary equipment and personnel also respond, therefore the response cost has increased.

We could identify innumerable other examples of this in government - safety nets that have become entitlements provided to 100 million citizens, intelligence strategies that have become "proactive" offensive missions (see!  I covered both sides!), etc.  All requiring more money - more taxes - to provide a skewed but now expected level of service.

But my point is that the same happens in business.  How many bandaids upon bandaids of "quality checks" or "signature approvals" get added because managers don't have the guts (ok, "no time") to attack the root cause of a problem or issue?  How many non-value added admin groups expand and expand thanks to managers focusing on power instead of what's best for the organization?  How many times does a senior manager have to get involved to make very small decisions because the folks that actually own and run the process aren't empowered - or trained - to make the decision.

When do you use a fire truck when an ambulance would do just fine?

Ideas... are Just Ideas

By Kevin Meyer

So the year is 2002.  A team of designers and engineers shows their executives "a phone with a color touch screen set above a single button. The device was shown locating a restaurant, playing a racing game and ordering lipstick."  It was based off of another idea worked on a few years earlier - a "secretly developed alluring product: a tablet computer with a wireless connection and touch screen."

Apple is amazing, right?  Yes, but this was Nokia, seven years before Apple launched the iPhone.

"Oh my God," [Nokia Chief Designer] Mr. Frank Nuovo says as he clicks through his old slides. "We had it completely nailed."

I may have given Apple considerable grief over the last few weeks with regard to their supposed manufacturing and supply chain prowess, but I will give the company kudos here.  The company has incredible focus and they execute.

And Nokia? 

Consumers never saw either device. The gadgets were casualties of a corporate culture that lavished funds on research but squandered opportunities to bring the innovations it produced to market.  Nokia is losing ground despite spending $40 billion on research and development over the past decade—nearly four times what Apple spent in the same period. And Nokia clearly saw where the industry it dominated was heading. But its research effort was fragmented by internal rivalries and disconnected from the operations that actually brought phones to market.

Whereas RIM lacked the right product, Nokia actually developed the sorts of devices that consumers are gobbling up today. It just didn't bring them to market.

Well ideas alone do have a little inherent value.

Instead of producing hit devices or software, the binge of spending has left the company with at least two abandoned operating systems and a pile of patents that analysts now say are worth around $6 billion, the bulk of the value of the entire company.

So Nokia has about $6 billion, and Apple is sitting on $100 billion actually in the bank plus an incoming tide of high margin sales.

Right there, my friends, is the value of focus and execution. 

Nokia had great ideas, great design, and even solid lean manufacturing initiatives. But they also had - and perhaps still have - a culture that focused efforts and funding on the front end of the product realization process and often changed direction on the back end.

Apple had Steve Jobs, who for all his tyrannical faults set a direction, made quick decisions, stretched his teams (sometimes in a questionable manner), and drove incredible focus on the target: a superior product actually in the market.

Ideas are just ideas.  To be successful those ideas have to be turned into products - faster and better than anyone else.

Howard Schultz's Call to Action on American Manufacturing

By Kevin Meyer

Starbucks CEO Howard Schultz is one of those guys you like, even if you sometimes you may not agree with him completely.  A few months ago I saw him speak at the World Business Forum in New York City, my notes here, where he expounded on the importance of authenticity in leadership and focusing on value from the perspective of the customer - concepts those of us in the lean world can related to.

He has another passion: taking control of your destiny instead of waiting for others to do it for you.  As The New York Times put it last week:

Mr. Schultz, disgusted with the political standoff in Washington over raising the debt ceiling, called on business leaders to stop making donations to politicians and start doing something themselves to address the country’s woes.

That's similar to what we've said over the years - stop complaining and start competing.  Schultz takes it a step further and calls on business leaders to help others compete - or just survive.

Schultz's comments weren't just words.

Last month, Starbucks announced it would build a factory in Augusta, Ga., that would employ 140 people and make the company’s Via instant coffee and the ingredients for its popular Frappuccino drinks. About half of Starbucks’s new employment overall will come in the United States, the rest internationally.

“We are on the hunt for other domestic opportunities for products we sell and other things we do,” said Howard D. Schultz, chief executive of Starbucks. “There has to be a sense of urgency about action, and since we’re not likely to find it in Washington between now and the election, it’s time for companies and businesses to step up and find a balance between profitability and responsibility.”

There is some operational logic behind the decision - it's not purely altruistic.

Chinese labor has become more expensive, and Starbucks and other companies are looking at their supply chains more holistically. A Chinese supplier is also likely to require an order in the hundreds of thousands, increasing the risk that Starbucks will get stuck with inventory. And then there is the difference in shipping costs.

Schultz's comments also resonated with a supplier to Starbucks.

American Mug and Stein Company, was on the verge of closing last fall. Then Ulrich Honighausen called. Mr. Honighausen, the owner of a tableware company, Hausenware, in Sonoma County, Calif., which supplies retailers like Crate & Barrel, Pottery Barn and Fred Meyer with ceramics and glassware from producers all over the world, had a plan to revitalize American Mug and create jobs in an industry that had all but died. What if American Mug were to make mugs for Starbucks?

He [Mr. Honighausen] found American Mug last fall after having heard an interview with Mr. Schultz.  “It was a good kick in the pants for me,” Mr. Honighausen said. “I thought, ‘Let’s just do it.’ ” American Mug can deliver to Starbucks in four days, while Chinese suppliers may take three months.

And thus a few more jobs were saved, and a small amount of manufacturing competency retained - in a low technology and high labor content industry no less.  If it makes sense for Starbucks and American Mug, imagine how it could be for a higher technology area.

What can you do with your own supply chains?  How can you directly, even in a small way, help revitalize domestic manufacturing?

The Opportunity of the Gemba

By Kevin Meyer

An article on CNN this morning gave me some pause: Fareed Zakaria wondering whether Russia should move its capital from Moscow to Vladivostok - 4,000 miles east.  There are several reasons, here are a couple:

Well, the person who proposed the idea, Sergei Karaganov of Moscow's Higher School of Economics, wrote in a state-run newspaper that a capital in the far east would make Russia part of what he calls "the rising world" — closer to dynamic Asian economies and further away from an aging Europe.

Moscow has 78 billionaires — more than any other city in the world. Those billionaires, along with others in the rest of the country, account for 20% of Russia's GDP. Far higher than any country.  That doesn't leave much of Russia's economy for businesses and the other 141 million people in the country.

In typical Zakaria style over 90% of the article has nothing to do with the premise suggested by the title, but those two tidbits are worthy of some thought.  Fundamentally to shift the perspective of the country, to level certain key demographics, and to develop new opportunities.

It's not the first time something like this has been tried.  Turkey moved the capital from Istanbul to Ankara, India's capital moved from Calcutta to Delhi, and Brazil created the inland city of Brasilia - specifically to focus on the untapped opportunity of the area.  Most seem to have had some success, although Brasilia is an interesting case.  Our friend Tyler Cowen over at Marginal Revolution wrote about it a year ago.  From an opportunity standpoint it was a positive, from a physical layout and architectual standpoint it left some things to be desired.

Corporations do the same - Halliburton moving from Houston to Dubai and Boeing moving from Seattle to Chicago, for example.  Every now and then there are rumors of Microsoft moving from Seattle to Vancouver, Canada to free itself from tax, visa, and judicial issues in the U.S.  In the article linked above, Phil Condit believes the Boeing move was a success in both expected and unexpected ways.  One interesting tidbit, albeit a little outside what I'm discussing, is this:

One of the big surprises from the move, he said, was the cohesiveness of the Chicago business community, where Condit encountered CEOs frequently gathering to nail down civic goals ranging from landing new companies to building world-class parks.

“I was surprised by how much that happened,” Condit said. “For whatever reason, Seattle does that way, way less. A meeting in which Starbucks, Microsoft, Costco, Boeing and Weyerhaeuser and a bunch of small businesses are all in the same place — rarely happens in Seattle,” he added. “It happened all the time in Chicago.”

Lean folks understand the concept of the gemba - where value is created.  Generally that means the factory floor, and we encourage spending as much time as possible at the gemba to truly understand - and improve - the value creating process.  We decry executives that never visit a factory and never dive into learning the root cause of problems - let alone lead by example to teach others how to correctly go about seeing and improving value at the gemba.

At the medical device company I run we leverage the quick daily stand up meeting to accomplish some aspects of this.  Shop floor and department level daily meetings roll up to an 8:20 standup by our executive staff, which is videoconferenced to include staff members at our other major facilities in southern California and northern Michigan.  We have a set agenda of WOW moments, safety, visitors, key metrics, key projects, monitoring leader standard work, and issues that rolled in from other stand up meetings that day.  Yes we do it in under ten minutes, and the level of communication, understanding, and sharing between facilities has improved dramatically.

But where should executive staff - or the heads of governments for that matter - be located?  The traditional gemba where value is being created every day?  A potential new gemba where opportunity for new value exists but isn't being exploited or managed properly such as moving from Moscow to Vladivostok?  Close to the customer?  A central location to all facilities and customers as Boeing did?

We wrestled with that issue in a much smaller way when we built our new northern California facility.  Should the executive staff and value stream managers be spread out in each of their operations to provide immediate feedback, teaching, and understanding?  Or should they be co-located - upstairs from the actual manufacturing floors due to the nature of the footprint we had - to improve communication to create a common long-term strategy?

We actually agonized over it.  I had visions of my president's office being a podium on wheels on the manufacturing floor.  Remember this example of a cosmetics company from my lean tour of Japan a few years ago?  The leaders were literally in the middle of the mayhem, completely connected to the value-creation process.

But our organization had a couple other issues. Our value stream managers and executive staff were strong, and by being embedded with their operations they naturally made a lot of decisions.  The leadership growth of next level supervisors and team leaders was being stunted by this.  In addition, the executive staff was often sucked into a short-term mindset by focusing so much on the issues of the factory floors, and intra-executive communication was too infrequent and ineffective.

During the building construction we were forced to move several people into a triple-wide trailer.  We decided that should be our executive staff and value stream managers.  Now co-located, still close to their operations, but far enough away that continual contact wasn't possible.  At the same time our staff went through the exercises proposed by Patrick Lencioni's The Five Dysfunctions of a Team.  Phenomenal book and if you take a year or so to take a team through each dysfunction - and really work on it - you'll be amazed at the results.

By the end of the two or so years of construction we had a very cohesive executive team that worked better together and focused more on the long term, and a stronger leadership bench of team leaders, supervisors, and managers.  So we decided to co-locate the executive team upstairs and not right on the shop floor, with the understanding and commitment that we would go to the gemba, and folks from the gemba would not have to come up to see us.  We have been in the new building just a few weeks and so far it's working.  And we're happy to be out of a no-frills triple-wide.

So whether you decide to locate an executive team on the existing gemba, into a new potential opportunity gemba, or close to customers it really comes down to leadership.  All sources of value, potential value, suppliers, or customers are important.  All have innovation, customer, human, and operational processes that can be developed or improved. 

You just have to figure out what the problems and opportunities are, go directly to where those situations are and really dig into what is happening, and develop and execute a plan to create as much value, from the perspective of the customer, in the most efficient way possible.

Management Improvement Carnival #168

By Kevin Meyer

Evolving Excellence is pleased to once again host the Management Improvement Carnival.  Blog posts of note from the last couple weeks include:

• As noted in the last Carnival, several bloggers including yours truly took an appropriately harsh look at an article in Harvard Business Review titled It's Time to Rethink Continuous Improvement.  One of the best responses was by Jon Miller of Gemba Panta Rei with a post titled How is PDCA Inimical to Innovation?  "A few simple ways to successfully integrate continuous improvement to innovation are to lay bare our assumptions (visual management), seek out the voice of the customer (management by fact) and learn from experimentation (kaizen)."
• Jamie Flinchbaugh has a thought-provoking post asking Are You Working on the Right Problems?  Probably not, especially if you're a manager.  "The manager’s problems are why those problems exist. The manager’s problems are why we can’t solve those problems faster."
• John Hunter's post on Curious Cat titled Customers Are Often Irrational hit home for me today as I was dealing with a doozy of a poster child.  I'll spare you the details, but it could be a great case study on how to screw up a very profitable product line.  As John noted, "The problem is not in thinking the customers are being irrational for not buying what you are selling. The problem is in thinking the customers will behave rationally. Your theory should not expect rational behavior."  
• We continue a rough focus on problem-solving with Mark Graban's post on A Hard Habit to Break.  We're all busy, so the temptation to quickly jump into "solutions mode" is great - even if most of us know that's wrong.  "Immediately jumping into solutions brainstorming can really short circuit good problem solving. We can waste time going down rat holes, discussing ideas that don’t address the root cause and won’t really address the issue we’ve come together to discuss."
• Similar to jumping into solutions mode, Matthew May reminds us in a short video that Doing Something Isn't Always Better than Doing Nothing.  Or as he says, quoting National Geographic journalist Boyd Matson, "when the hippos charge, stand still."
• In a post titled Quality Improvement in Government? Tim McMahon takes on a topic that befuddles many of us in the lean leadership world - there is so much opportunity for improvement and savings in government, it is known how to do it, but it doesn't happen.  "Most elected officials and government executives didn't join government to manage. Instead, they are driven by a deep desire to advance a cause, a policy issue or a political agenda."
• In More Learning from an Elementary School, Matt Wrye digs into some observations on learning made at his kids' school.  As we transition into professional roles, especially in management, we tend to shift our focus onto execution.  "When do we lose that learning zone?  When do we switch from learning being the most important to execution being the most important and forget all about learning?"
• And finally, I can't resist poking at the Facebook debacle by reminding people how prescient, ok at least for a couple weeks, my Evolving Excellence co-blogger Bill Waddell was with Why Facebook is a Sucker's Bet.  Bill and I may disagree on some issues - which livens up the blog just a tad (cough, Steve Jobs, cough) - but on this topic we're in complete agreement.  Some of us learned a painful lesson with the dot-com bubble of 2000 - business value still all about real customers and real cash flow.  Not "$1B for Instagram because it's cool."

Until next time...!

Silly CEO, Pricing is for Customers

By Kevin Meyer

Probably the biggest hurdle for ops guys when they transition into general management roles is learning about sales, marketing, and especially pricing.  At first glance it doesn't appear to be scientific and it is filled with extraneous inputs - like emotion.  Yuck.

I know as a young engineer I used to roll my eyes at my friends in sales who traveled around to great places, entertained constantly, and were rewarded with lavish meetings in Hawaii.  Actually "roll my eyes" was being polite.  How hard of a job is that?  One of my roommates back then was a marketing guy fresh out of MBA school whose job it was to scout out the location for the next annual sales meeting for our 500 sales reps.  He spent the entire year traveling around being wined and dined and drooled over by the best resorts in Hawaii, Mexico, and the Carribbean.  Yes, that's supposedly a "job."

A decade later I started my own contract manufacturing company with a great operations infrastructure designed from the ground up with lean in mind.  Incredibly simplified processes, people-oriented, agile beyond all get out.  We could do anything, cheaper, faster, better.  And we sat and waited for the sales.  And waited, and waited.  I guess "build it and they will come" isn't exactly a sales and marketing strategy.  So my partners and I went out and began banging on the doors of potential customers.  And banged and banged.  Long story short, it took a long time before we learned the hard way about the science of marketing and the effort in sales.  And, looking back on my early career, I decided those sales guys can have their expense accounts and lavish tropical meetings - the work really was hard.

Between that experience and running my current medical device company I learned a lot, and especially learned how lean can factor into various functions.  And one thing I learned was that price is a reflection of value, and value is determined by the customer.  As much as we'd like to price products at "cost plus" it will simply fall prey to market dynamics, which are driven by customer perceptions of value.

Apparently I, as well as pretty much every other lean leader, knows more than Proctor and Gamble CEO Robert McDonald understands.  Yes, that preeminent marketing powerhouse of P&G no less.  See he somehow thinks he can control prices in a competitive market.  Really.  In an investor conference call discussing P&G results, where did he place the blame for his company's poor relative performance?

P&G blamed weak developed markets and competitors' failure to follow its lead on price hikes.

Seriously.  He expected to be able to raise prices and have his competitors simply follow suit.  What happened?  His competitors didn't raise prices, and they ate P&G's lunch.

P&G's sales rose 3%, which looked skimpy against an 8.5% rise for rival Unilever PLC and a 6.5% increase for Colgate-Palmolive Co.

Of course the analysts were none too happy, and if you've ever sat in on an investor conference call you'll know that serious analyst critique is a rarity on such calls.  Not this time.

"Good quarter, guys" wasn't the message Procter & Gamble Co. Chief Executive Robert McDonald got when he dialed in to his company's earnings conference call Friday. Instead, he confronted an unusually angry barrage from Wall Street analysts over the latest in a string of weak results from the world's largest consumer products company. The analysts showed little restraint in venting their frustration after P&G lowered its profit outlook and said it would roll back recent attempts to raise prices in key markets.

Sure those analysts usually have a ridiculous short-term perspective, but in this case they were properly venting about a lack of basic competence.

But there's more! And like a set of ginsu knives, it gets worse.  Apparently Robert McDonald's P&G doesn't understand how pricing is both a reflection of customer value - but also influences the perception of value by the customer.

The consumer products giant cut prices aggressively in recent years in a world-wide battle for market share. More recently, it has tried to roll back some of those cuts as input prices have risen. Those moves cut into P&G's market share, which fell in 55% of the categories and countries where it competes.

Most of us have learned that the hard way.  Apparently it has taken Mr. McDonald just a little longer than the rest of us.

Prices are a reflection of value from the perspective of the customer.  But if you cut prices beneath that value point, it also changes the perception of value.  Two related things happen: the actual perceived value of your product goes down and/or the price associated with that value gets adjusted.  Either way you lose.  It becomes virtually impossible to later raise prices in the face of that changed perception of value. 

Companies fall into that trap all the time when they chase market share and the siren song of increased cash through volume instead of simply focusing on delivering increased value.  Just ask GM.  Winemakers have known that for generations - a lower price leads to a lowered perception of value which leads to a lower price.

A huge company built on marketing is learning a lesson on value.  A lesson many of us learned long ago.