The casual business observer might conclude that after a decade devoted to re-engineering, restructuring and realigning, CEOs must have achieved their ideal business models.
But in truth, a great deal of painful work lies ahead. The ultimate goal is an agile organization with the flexibility to quickly read and heed shifting competitive signals while also delivering solid financial performance. That agility is suddenly more important than size. Even in industries where size once mattered, nimble upstarts-think JetBlue, Capital One and Whole Foods-are edging out behemoths by identifying and responding to changing consumer needs more efficiently than industry powerhouses.
When it comes to winning the race to capitalize on change, pointed out Mitchell Modell, CEO of New York City-based Modell’s Sporting Goods, speed is essential. “The big never eat the small-the fast eat the slow,” Modell told CEOs gathered for a recent roundtable discussion on agility held in partnership with Unisys.
Unfortunately, the hurdles facing large, established companies on the path to agility are many and varied, the roundtable participants agreed. “Culture is one of the biggest challenges,” said Wallace Parker, president of Brooklyn-based KeySpan Energy Delivery, who pointed out that success breeds complacency. “It’s almost easier if you’re a company that’s going out of business. If you’re meeting earnings targets, your employees will ask, ï¿½ï¿½Why are we doing this? I thought we were okay.’ You need that burning platform.”
Disconnects among an organization’s departments, divisions or global operations can further complicate a firm’s pursuit of agility, added Joe McGrath, executive vice president of Blue Bell, Pa.-based Unisys. “Achieving alignment is tough enough in large enterprises,” he pointed out. “When you give a direction to your teams and finally get them aligned, how do you quickly realign them in a new direction?”
And yet, any company with a history must, by definition, also have a history of reinvention, argued Farooq Kathwari, chairman and CEO of Ethan Allen Interiors, a furniture business with a 72-year legacy. “You cannot stay in business that long without reinventing periodically,” said Kathwari.
Unfortunately, that track record doesn’t necessarily mean the reinvention process is baked into a company’s culture. In fact, when Ethan Allen faced a seismic shift in the home furnishings market 15 years ago, steering the necessary image and attitude overhaul proved challenging. “We had done a number of reinventions previously, some unconsciously, but over the last decade we had to do it consciously,” said Kathwari, describing the company’s effort to counter flagging consumer interest in its mainstay product-Colonial American furniture. “That required creating a culture of change.”
Often, that’s a tricky proposition. “We were fortunate to be running one business,” he explained, adding that sales doubled after the transition. “For the CEO of an operating company, steering that kind of change [across divisions] would be much more difficult.”
The more complex an organization, the harder the task, agreed Ralph Welborn, a managing partner at Unisys, who describes a “semantic disconnect” between employees from different divisions or departments. “There are the T-shirts (operations), the turtlenecks (marketing), and the suits (executive management),” noted Welborn. “The language they use, their perspectives and how they prioritize is fundamentally different. So you’ve got to bridge that disconnect to get the alignment and executional consistency critical to agility.”
For Modell’s Sporting Goods, instilling a simple and direct corporate mission, “listen, respect, and respond,” in the retail chain’s 4,700 employees is the key. Once a year, 900 employees gather in New York to hear senior executives discuss the company’s accomplishments over the previous year and its goals and objectives for the next. “It forces us to raise the bar-to think about what we can do differently,” said Modell, citing the company’s new “48-hour rule” as an example of its commitment to both agility and the “listen, respect, respond” mantra.
“Any manager who can’t get a problem solved within 48 hours, has the right to go over that person’s head,” he explained. “If we listen to our associates and to customers, and respond to what we hear, we can never go off the path.”
The commodity question
Currently, Modell is looking for ways to be viewed by his customer base as more than simply a competitively priced retailer of sporting goods. Even as margins get squeezed by a tight market and intensifying competition, he hopes to stave off commoditization by building loyalty through frequent shopper programs for adults and kids. “We don’t want to compete strictly on price,” he said.
Modell is not alone. Margins in the cutthroat paper industry are so narrow that when Gould Paper used a new software system to take a hard look at its customer base, the company found that customers accounting for $150 million worth of its sales were actually costing the company money. Small orders coupled with slow payment and frequent demand for customer service translated to orders that just didn’t pay, explained chairman and CEO Harry Gould, who quickly dispensed with the costly clientele by raising prices and “giving someone else the opportunity to lose money.”
Losing unprofitable business proved easy enough, but with prices the key ingredient for most customers, offering the kind of differentiation that would lure new, profitable business presented a bigger challenge. For Gould that meant information technology that would enable customers to see the exact status of their orders. And both efforts, in turn, meant re-educating the company’s sales staff. “We needed them to sell that value- add, and to worry about things like late payments,” explained Gould, who found that part of the process most problematic.
Incentives that shared the pain of late payments or customers taking price deductions for arbitrary reasons helped get salespeople on board, he reported. “Before that, salespeople would say, ï¿½ï¿½Hey, I’m there to get the order. Things like whether it’s a profitable order or when you collect payment are not my problem.'”
But for many companies, often-shifting competitive landscapes complicate the picture. In the satellite industry, for example, both fiber-optic connectivity and competition from newly privatized government agencies are poised to flood the market with excess capacity. Rivals from these unexpected quarters are introducing price pressure to a business once known for its healthy margins, said Joseph Wright, president and CEO of Wilton, Conn.-based PanAmSat, who notes that while the threat is emerging, his business model has to adapt now.
“I’ve got 73 percent Ebitda margin, $820 million in revenues and $400 million in free cash flow-but now I’ve also got this huge competitor heading into my marketplace, which has way too much capacity and is just cheap as hell,” said Wright, who plans to fight back by adding fiber-optic capacity to his arsenal. “So you’ve got to look and think ahead, because the need for change might not be that obvious.”
The ability to continually identify and adapt to market opportunities is a crucial characteristic of agile organizations, agreed McGrath. “Pattern recognition, being able to connect the dots within a segment and spot the next big thing that will occur is one of the keys,” he said.
Ripples and tidal waves
Yet often companies making a conscious effort to reorganize to address market shifts miss a fundamental aspect-inculcating the effort throughout the organization. “We’ve been through re-engineering, through process improvement, but it’s not enough,” pointed out Parker. “We had done those things in isolated areas of the company when what we needed was a sea change. So we’re taking a clean white sheet approach to enterprise-wide business transformation, doing a basic review of everything we do and asking, ï¿½ï¿½Where is the value added in each activity?’
“If you can answer that question, then you move on to step two-how to do it quicker, better, smarter, cheaper. If you can’t immediately answer the question, you have to ask why that activity is there and look at eliminating it.”
“We have to think more holistically,” agreed McGrath. “Rather than a piecemeal approach, we have to think about every area-culture, strategy, values, process, information systems-to really make change happen.”
Ultimately, that type of cohesive leadership comes from the top, added Kathwari. “A good enterprise is like a great orchestra-it has to work together,” he says. “And the CEO is the conductor.”
An Agility Epiphany
In the following excerpt, Harman explains how a personal epiphany led his audio equipment company to a bottom-up leadership model that encourages innovative thinking and a team approach at every level of the organization.
In the early ’70s, I was running my company while also deeply involved with Friends World College, a Quaker college that turned the traditional model of education upside down. At Friends World, instead of the teachers pouring their knowledge into the empty heads of students, the students were responsible for their own education, and the faculty members were viewed as friendly, available resources. I found it a wonderful concept, since you tend to learn best the things you go after on your own initiative.
But at the same time, I ran my company in the old top-down traditional way. Then one day, there was a problem at our plant in Bolivar, Tenn. [Editor’s Note: When plant managers rescheduled a coffee break due to a broken buzzer, an impromptu walkout ensued.] When I went down to straighten things out, I had an epiphany-I realized that the way that plant operated was the direct opposite of the model I so admired at the college.
I decided to apply the principles that were so productive in the college to the plant. So I significantly altered operating relationships. We set up a school on company time where the emphasis was not on skills training. Instead, the curriculum was shaped by what some of our employees thought they could teach and that other employees in the plant found interesting. If we could match the two, we had a classroom.
A lot of people were interested in music. We had an old upright piano that one of the foremen knew how to play, so he taught 15 people to play using cardboard keyboards. Then they took turns transferring what they learned to the piano. We also started a company newspaper, the Bolivar Mirror, that was unlike any of its kind at the time. In it, employees shared stories about their families, their feelings and their aspirations-as well as criticisms of company practices or management. Management responded to those in the following issue, but we didn’t censor them.
Over time, people’s lives changed and as they did productivity soared. The rate of alcoholism, drug addiction and suicide-once very high in the area-plummeted. As we shifted from seeing people as replaceable parts in the machine to respecting them as individuals, we found that the factory floor became a place of new ideas and innovation. People who built the product would use it at home and come back with suggestions and ideas.
That experience reshaped my approach to leadership. I’ve applied the principles of valuing people and bottom-up leadership to my business ever since.
When Ethan Allen Interiors, a premier supplier of Colonial American furniture, spotted a style shift on the horizon, CEO Farooq Kathwari knew the company was at a crossroads. Stay true to its specialty and Ethan Allen risked losing market share as its customers sought new looks in home furnishings. But drastically altering its product line would be a formidable undertaking for a 72-year-old company whose product line had gone unchanged for about 40 years and whose longtime employees were comfortable with the status quo.
The result? Employees at all levels of the organization became change agents helping the company overcome internal resistance to the reinvention process. “Sometimes leadership feels that people won’t understand or be capable of the changes,” says Kathwari. “So when you create an environment where people throughout the company are on board, it creates a change in attitude across the company.”
Ethan Allen has since changed nearly 100 percent of its product line, relocated 50 percent of its stores and cut plant locations nearly in half while boosting production by 300 percent. Recognizing the competitive challenge facing a national home furnishings chain, Kathwari also nurtured an internal culture of entrepreneurship that enables the company to both meet the demands of local customers and benefit from the economies of scale and operational discipline of a large chain.
“We have a 50-50 mix of company-owned and licensed stores, but all of our stores are run as if they are entrepreneurial businesses.”
It’s a winning mix, says Kathwari. “Today, our stores are doing two and half times as much volume, and we’ve gone from very little profit to consistently being the most profitable company in our industry for the last five years.”
It’s with Part Two of the equation that KeySpan has been able to identify and develop a solution for changing consumer needs, says Wallace Parker, president of the KeySpan unit. “Our customers have been telling us, ï¿½ï¿½This is great, but boy, conversion was a hassle. We’re a dual income couple and we can’t be home to meet with plumbers and contractors to get bids. There should be an easier way.'”
And now there is. Through the company’s MyQuotes Web site (www.myquotes.keyspan.com), customers can now respond to a dozen simple questions designed to help contractors determine their fuel needs and collect customized bids online without having to schedule meetings.
Sound simple? Developing the service was anything but, recalls Parker, who says the company had to convince plumbers, builders and installers to provide quotes without visiting the building. “Finally, we held a meeting and got one plumber to stand up and say, ï¿½ï¿½I’ve been in the business 25 years and if you give me the size of the house, the number of people who live there, I can tell you what kind of heating equipment it will need because I know my business,'” Parker says. “After that, the rest got onboard.”
KeySpan customers are now able to conduct an online auction from their homes, specifying the number of bids they want. The company also posts profiles of each contractor on its Web site, so consumers can view information-such as the company’s size, services offered and KeySpan quality rating-that will help them choose an appropriate vendor.
Currently using a direct mailing program to market the site, KeySpan now does approximately four conversions per day online. While that represents less than 6 percent of its total conversions, KeySpan plans to ramp up the online conversion arm of its business, says Parker, who points out that the added consumer value goes hand in hand with cost savings for the company. “We paid off the cost of the system in the first seven months,” he says. “Now we’re making these conversions with no salespeople, which means the customer acquisition cost is dramatically lower.”
When CureMD, a health care information-management systems provider, launched its business in 1997, the company thought it had a defined target market. But sometimes targets move.
While Hashmat concedes that’s far from the worst problem to have, the shift has presented some new challenges for the growing company, which markets Internet-based technology that streamlines health care administrative tasks, from registration through the clinical encounter and the entire billing cycle. “Our delivery mechanism is very cost-efficient, so technically it’s very efficient for us to deliver products and services to a wide range of clients,” says Hashmat. “But if you’re deploying a system in a very large hospital, you need an army of implementation people to help you support its introduction to the existing work flow.”
Happily, CureMD has a sophisticated customer relationship management system that enables clients to instantly access support over the Internet via email or instant messaging. Less happily, the service demands of CureMD’s large-scale customers can overtax the system.
“When you build customer service to a level where you’re very reactive to needs, sometimes you overreact,” explains Hashmat. “For example, a few residents might call from a hospital and report that the system has crashed because they can’t log in-when actually they’ve just forgotten their passwords. That will create a big issue with our service people, who will overreact, thinking that the system has crashed.”
CureMD is taking a divide-and-conquer strategy to address both problems. “We’re breaking implementation down into small pieces for our larger customers,” says Hashmat. “Rather than taking on a whole hospital at once, we’ll set up one department as our poster child and ramp up from there.”
Over time, the company also plans to develop the ability to deploy a large-scale system-and cope with the subsequent service demands, he adds. “We have the technology and we’re working on the infrastructure.”