So You Want to Reduce Your Costs? Don’t Focus on Cost Reductions

May 21, 2012

By Lonnie Wilson   Article

“If the title of this article sounds odd, don’t be surprised. The implementation of a lean initiative will teach you about a whole litany of paradoxes. There is the jidoka paradox: Shut down the system so the system will run continuously. There is the standard-work paradox: Standardize the work so you can change it. The production paradox: Slow down the machine so you can speed up the process. And my personal favorite, the Toyota success paradox: Toyota has been very successful because they tolerate failure.

Paradoxes abound and the one about cost reductions is particularly interesting. Most plant managers seek to reduce their operating costs and, regrettably, most of them go about it by implementing a “cost-reduction program.” And guess what? Two predictable things happen. First, they reduce costs. Second, … all the costs come back and usually with a vengeance. …

A Taiichi Ohno Lean Initiative

Well, if you don’t implement a “cost reduction program” to reduce costs; what should you implement? Simple. Implement a lean initiative …

“Establishing the flow is the basic condition.”

“All we are doing is looking at the time line…..And we are reducing that time by removing the non-value added wastes.”

“After World War II, our main concern was how to produce high quality goods … After 1955, however, the question became how to make the exact quantity needed.””


The Good, Bad and Ugly of Capitalism

April 2, 2012

By    Article

“On Wednesday, Howard Schultz, the chairman and chief executive of Starbucks, will take the podium at his company’s annual meeting and talk about the importance of morality in business. Yes, morality. I don’t know that he’ll use that exact word. But there can be little doubt that in recent years, especially, Schultz has been practicing a kind of moral capitalism. Profitability is important, he believes, but so is treating customers, employees and coffee growers fairly. …

In the speech, Schultz plans to make a direct link between Starbucks’s record profits and this larger societal role the company has embraced. He will make the case that companies that earn the country’s trust will ultimately be rewarded with a higher stock price. “The value of your company is driven by your company’s values,” he plans to say.

I bring up Schultz and Starbucks because this week we saw a different kind of American capitalism on display — the “rip your eyeballs out” capitalism of Goldman Sachs. In the corporate equivalent of the shot heard round the world, Greg Smith, a former Goldman executive, wrote anOp-Ed article in The Times as he was walking out the door in which he described a corporate culture that values only one thing: making as much money as possible, by whatever means necessary. According to Smith, Goldman views clients as pigeons to be plucked rather than customers to be valued. Goldman traders vie to see how much profit they can make at the expense of their clients, even if it means selling them products that are sure to “blow up” eventually. “It makes me ill how callously people talk about ripping their clients off,” Smith wrote.”

Does “maximize shareholder value” really make sense?

February 13, 2012

Posted by    Article

“Don’t get me wrong. I believe maximizing shareholder value is a lovely result — but I also believes it’s a lousy goal.

Think about it this way. What happens when you give your employees a rousing speech about maximizing shareholder value? Once they wake up from their boredom-induced nap, they’ll go back to doing exactly what they had been doing before. After all, what can they do that will raise earnings per share? It’s like you’re asking them to count all the stars in the sky.

In other words, maximizing shareholder value — a mantra made popular in 1976 by the most-cited academic business article of all time, Jensen and Meckling’s “Theory of the Firm”— is just too vague and uninspiring to move employees to action. This viewpoint was also expressed by Peter Drucker, who insisted that the primary purpose of a business is to acquire and keep customers.

People need something tangible and actionable to focus on — something that will result in maximizing shareholder value. Tell an employee to increase shareholder value, and he’ll struggle. Tell him to increase customer value, and he can think of a dozen things to do, many of them actionable, measurable, and beneficial to your bottom line.

The uninspiring nature of the “shareholder value” mantra is only one reason I suggest you consider embracing a new one. The whole notion of shareholder value is built on a foundation of failed logic. Here are five reasons why it’s time to focus instead on understanding and meeting the needs of your customers: ….”

Creating shared value

January 16, 2012

By Michael E. Porter and Mark R. Kramer    Article

“… A big part of the problem lies with companies themselves, which remain trapped in an outdated approach to value creation that has emerged over the past few decades. They continue to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their longer-term success. How else could companies overlook the well-being of their customers, the depletion of natural resources vital to their businesses, the viability of key suppliers, or the economic distress of the communities in which they produce and sell? How else could companies think that simply shifting activities to locations with ever lower wages was a sustainable “solution” to competitive challenges? Government and civil society have often exacerbated the problem by attempting to address social weaknesses at the expense of business. The presumed trade-offs between economic efficiency and social progress have been institutionalized in decades of policy choices. …

The purpose of the corporation must be redefined as creating shared value, not just profit per se. …

Moving Beyond Trade-Offs

Business and society have been pitted against each other for too long. That is in part because economists have legitimized the idea that to provide societal benefits, companies must temper their economic success. In neoclassical thinking, a requirement for social improvement—such as safety or hiring the disabled—imposes a constraint on the corporation. Adding a constraint to a firm that is already maximizing profits, says the theory, will inevitably raise costs and reduce those profits.

A related concept, with the same conclusion, is the notion of externalities. Externalities arise when firms create social costs that they do not have to bear, such as pollution. Thus, society must impose taxes, regulations, and penalties so that firms “internalize” these externalities—a belief influencing many government policy decisions.

This perspective has also shaped the strategies of firms themselves, which have largely excluded social and environmental considerations from their economic thinking.”

A wake up call

December 12, 2011

by Josh Bernoff   Article

Welcome to the Age of the Customer. Invest accordingly.

“Everyone has a different wake up call. Maybe it was the day you heard Amazon is selling more books on Kindle than on paper. When was the last time you talked to a travel agent? Or maybe you realized the world had changed when you whipped out your iPhone in Home Depot and checked the ratings before buying that air conditioner. Disruption is rampant, it’s hitting every single industry, caused by customers with powerful technology on their side. The question is not whether your industry will be disrupted. The question is when.

We took a close look at Michael Porter’s five forces, the definitive framework businesspeople use to analyze competition. There’s no longer any barrier to potential entrants or substitutes — in a digital world, competition can come from anywhere. Customers have real-time information about pricing, product features and competitors; they hold all the advantages. And the key source of supply now is talent — and talent can get up and leave. The competitive barriers that Porter defined matter far less now. The only sustainable source of competitive advantage, the only defensible position, is to concentrate on knowledge of and engagement with customers. (Scroll down for video.)”

How to avoid irrelevance, guaranteed!

November 28, 2011

by Dan Rockwell   Article

““Customers are the boss.” A.G. Lafley.

Customers determine what you must do well. You may be the world’s best pickle packer. But, if the world doesn’t value perfectly packed pickles, you are tragically irrelevant. …

Drucker said, “The purpose of a business is to create a customer.” It doesn’t take a genius to understand the value of understanding customers.

P&G got it right because the only way to deliver valuable-value is to deeply understand customers. You must understand their aspirations, needs, wants, and desires. Understanding them is the only way you can deliver meaningful solutions, services, and products.

Good but off target:

You might think your core strength is innovation, efficiency, communication, leadership development, or organization. All of these are important, even necessary, but not first.

On target:

The center of your business, leadership, or management is your customer. Without a customer you’re irrelevant. The only way to create, serve, and retain customers is to deeply understand them. P&G nailed it. …

Choose your core competency carefully. Every list of core strengths must begin with, “Deep understanding of the customer.””

First, let’s fire all the managers

November 28, 2011

by Gary Hamel   Article

“How essential is it to have layers of executives supervising workers? Managers are expensive, increase the risk of bad judgment, slow decision making, and often disenfranchise employees. Yet most business activities require greater coordination than markets can provide.

Is there a way to combine the freedom and flexibility of markets with the control of a management hierarchy? Economists will tell you it’s impossible, but the Morning Star Company proves otherwise. It has been managing without managers for more than two decades.

At Morning Star, whose revenues were over $700 million in 2010, no one has a boss, employees negotiate responsibilities with their peers, everyone can spend the company’s money, and each individual is responsible for procuring the tools needed to do his or her work.

By making the mission the boss and truly empowering people, the company creates an environment where people can manage themselves. …

Your organization probably wasn’t built around the principles of self-management. It’s most likely a bureaucracy—with a thicket of policy rules, a multilayered hierarchy, and a host of management processes—built to ensure conformity and predictability.

Control is the philosophical cornerstone of bureaucracy, as Max Weber pointed out nearly a century ago. In a bureaucracy managers are enforcers who ensure that employees follow rules, adhere to standards, and meet budgets.

Bureaucracy and self-management are ideological opposites, like totalitarianism and democracy. To build a self-managing organization, you can’t just prune the brambles of bureaucracy—you have to uproot them. The founders of the United States didn’t set out to temper the excesses of a monarchy; they sought to supplant it. In the same way, if you don’t make an unequivocal commitment to self-management, you’ll content yourself with easily reversed half measures when you should press for more.

Nevertheless, no one is going to just give you permission to blow up the old structures. You will have to demonstrate that self-management doesn’t mean no management and that radical decentralization isn’t anarchy. Here’s how to get started.”