The IndustryWeek Sept. 12 column In Change, Top Management Procrastinates the Most, discussed a topic near and dear to my heart. Specifically, that executives at large corporations are reluctant to pursue significant change. And that they set tactical organizational metrics that stifle significant change.
I must admit a bias here as I have operated as a change agent my entire career. In other words, I’ve experienced the executive resistance the column talks about. And to some point, I have been successful in gaining executives’ support for change.
There are various types of change. At one end of the spectrum are incremental changes. They usually involve tweaking and/or streamlining current processes. Consequently, they seldom have a significant positive impact on a firm’s financial metrics. At the other end of the spectrum are step-function changes. Anyone who has taken calculus knows that step function implies immediate, usually large-scale deviation from the status quo.
Step-function changes can deliver significant positive impact to company financials if they are based on sound thinking and successfully implemented. And that’s the nub. Incremental changes are usually safe, while step-function changes can introduce risk.
The goal of business should be to gain a competitive advantage, and step-function change is usually the primary vehicle for doing so.
Be Aware of Pitfalls
One type of step-function change should not be considered positive, although it may produce improved financials in the short term. This is when a company is struggling and takes severe cost-reduction action, such as shutting down plants and laying off employees. While such changes can radically alter the current status, they usually do not result in ongoing competitive advantage. Further, such changes do not set the table for future success. Rather, they represent survival retrenching.
Similarly, incremental changes are usually a dime a dozen in that they don’t really move the financial needle. Unfortunately, “little step” changes make up the heart and soul of most continuous improvement programs. And their activities are seldom coordinated along the lines of a common strategic goal. In other words, they represent isolated attempts at local cost reduction that when all is said and done don’t add up to a significant impact. And even if the changes are aligned with an overall strategy, it takes an almost limitless number of them to positively impact market competitiveness.
Related to this, how many company continuous improvement programs cite “the number of continuous improvement events” as the primary metric of measuring program success? In my experience, most of them. Doesn’t it make sense that continuous improvement programs should be measured in terms of executive level financial exhibits? And, if they can’t be, shouldn’t that put up a red flag along the lines of “Houston, we have a problem”?
But the plus side—at least according to company executives—incremental changes introduce little risk such that they are considered a safe bet; i.e. likely to succeed, at least to a limited extent.
Don’t get me wrong, incremental changes are an essential part of a continuous improvement strategy. But companies also need to be working on step-function changes for a continuous improvement program to be anything but an afterthought. And, as posited above, few if any corporate resources seem to be available to work on and develop step-function proposals.
Another way to characterize the comparison between incremental and step-function changes is that the former are tactical and the later are strategic. Along these lines, I believe that a supply management focus on piece-price reduction is tactical and at best incremental. And, as such, doesn’t deliver a competitive advantage. Why? Because a truth be told, it is a dirty secret in the purchasing game that for the most part, Original Equipment Manufacturers pay much the same price for similar parts!
I believe in a work construct based on a spectrum from tactical to strategic. The lower you are in an organization, the more you focus on tactical day-to-day activities. The higher you are in an organization, the more you should focus on delivering competitive advantages to your company. Because of this, upper management should be the initiators of step-function change but, as is too often the case, it seems to be in their genetics to avoid risk.
Mixing It Up
Staying the course on an existing strategy—avoiding both incremental and step-function change—will usually deliver negative results. To illustrate this, I’ll describe a personal example from my consulting days.
A potential client brought me in to interview for a longer-term engagement. The demand for the products they sold was highly seasonal. This company purchased the bulk of the parts needed for their products and assembled them in a plant located in the U.S. Their primary sources were in China, and to get low piece-prices, they committed to a “90-day-firm” schedule. Adding an additional four to five weeks in delivery lead times meant the company couldn’t respond to variations from forecast market demand within a year’s sales season. To address this lag in supplier response, they bought and stored four months of purchased part inventory in a warehouse.
I was brought in to evaluate a price-reduction proposal from their Chinese suppliers, which stated that in exchange for a six-month firm schedule, they would give the company a 10% piece-price reduction. Hmm.
Since this would further increase the lag time between demand and delivery—and require a second warehouse to store additional raw material inventory—I was against it. I provided the company’s owners and executives with data supporting the business case that they should be sourcing only with build-to-demand-capable suppliers, which implied domestic suppliers.
My recommendation went against their current strategy, which, they made clear, wasn’t going to change. Based on that, I wondered why they had approached me in the first place, and we parted ways.
I’ll finish by relating a something a colleague once told me about change agents:
- If you’re one step ahead of a current practice, you are seen as a Leader. One-Step changes are usually incremental. Colleagues honor and otherwise laud One-Step change agents.
- If you’re two steps ahead of current practice, you are seen as a Lunatic. Two-Step changes are also primarily incremental. Colleagues usually pity and take pot-shots at Two-Step change agents. People don't understand them since they appear to be removed from current practice.
- If you are three steps ahead of current practice, you are seen as a Heretic. Three-Step changes are step-function. They provide a long-term competitive advantage because they radically change or eliminate current processes. Colleagues usually decry and otherwise play a form of whack-a-mole with Three-Step change agents, attempting to beat them down.
I relate to above not to scare anyone away from being a change agent. Rather, my intent is to give you an “anticipatory set”—a.k.a. a lesson—that you’ll need to be able to navigate through internal politics to be successful. There are a lot of strategies , but the two best I’ve seen are:
- Being able to put together a convincing business plan and gaining support for it with someone in upper management; i.e. gaining an executive-level champion. Whether you get the “green light” to proceed, then, depends largely on the credibility and/or clout of your champion.
- Conduct a low visibility (translate: don’t tell anyone about it) proof-of-concept pilot, and afterwards, parade out the results for all to see. Doing so will make it difficult for any one individual to discard the underlying approach into a circular file.
Paul Ericksen is IndustryWeek’s supply chain advisor. He has 38 years of experience in industry, primarily in supply management at two large original equipment manufacturers.