All companies are management academies, good or bad. Very few concerns see themselves in this light. But companies of all sizes inculcate methods, judge managerial performance, seek to improve it, provide specific training, develop concepts – and, above all, provide an endless stream of real-life case studies.
The more deliberately a company marries its educational role to the business needs, the likelier it is to succeed: witness, apparently to the power of n, America's General Electric.
In the past 17 years, GE has increased its market value from $12 billion to some $280 billion. For all that time of stupendous enrichment, the management training centre at Croton-on-Hudson (known as Crotonville) has been central to the company's vaunted management system. The three-week development course for high-fliers is so important in GE's scheme of things that CEO Jack Welch (who is even more vaunted than the system) goes to Crotonville every month to teach its70-odd students. His presence, of course, is no less important than what he teaches and preaches – and 'being there' helps him to solve six of the perennial problems of organisations.
1. How do you achieve visiblity, so that the leaders and the led really know each other?
2. How do you promote and promulgate a common set of ideas and principles?
3. How do you identify and bring forward the brightest and best of your people?
4. How do you get feedback and contributions from all layers of management?
5. How do you create an outfit that's open to change and development – the so-called 'learning organisation'?
6. How do you transfer 'best practice' between different parts of the organisation?
In most companies, these questions are not asked, let alone answered. Even in companies which have in-house campuses like Crotonville, the linkage between the business and the academy isn't strong enough to get the right answers. This irrelevance explains why so many of these centres have been closed down. GE, though, uses Crotonville as an integral part of the management system. In addition to its development work, it's also the site for quarterly meetings at which the top 30 executives meet as the 'Corporate Executive Council'; and where, in October, 140 leaders get together to plan the 500-strong Florida gathering which starts off every year.
INSISTING ON PERFORMANCE
Cynics will (rightly in most cases) scoff at a system that runs on formal meetings. As with any management method, though, it depends on how the mode is used. The same stipulation applies to teaching: in the right approach, the teaching and the doing are inextricably linked. What ties them together is the insistence on performance. As Thinking Managers has often urged, the essence of excellent management is closing the 'management gap' between potential and actual achievement. You can always 'talk' a great company. But delivering greatness is another matter – witness the case of another American company, Cummins Engine.
After fighting back vigorously against Japanese competition, Cummins was sandbagged by price cuts that struck 30% below its own new, reduced levels. In this terrible bind, only revolutionary change would do. To quote one executive, 'We saw people at different places doing truly wonderful things… But they were islands, unconnected. There was no systemic approach'. Teams went to Japan to study at the feet of the masters, and the 'Cummins Production System' was devised, to focus on 'customer-led quality' by model means:
1. Put the customer first
2. Synchronise flows
3. Build in quality
4. Involve people through teams
5. Ensure equipment is available and capable
6. Create functional excellence
7. Establish the right environment
8. Treat suppliers as partners
9. Use seven steps for problem-solving
10. Follow the continuous improvement process
That sounds perfect. In late May, though, Cummins announced its second wave of job cuts in three years. In that period it has closed eight plants and quit eight businesses. In the latest purge, it is exhorting managers to cut back on 'nonessential spending' like travel – always a sure sign of desperation. Much of its trouble stems from the crisis in Asia. But the Wall Street Journal also reports that 'More recently, it has also weathered larger-than-expected costs related to coverage of its engine warranties'. In other words, the 10-point programme has failed to deliver that 'customer-led quality'.
The consequences can be seen in a startling statistic. At the present, ravaged share price, you can buy Cummins for half its revenues – a derisory valuation for a company with global spread, a vast customer base and technical expertise. GE, on the other hand, sells at an astounding three times sales. You might think this just reward. After all, which of the companies has the higher return on assets and the fastest growth in earnings per share? The answer is even more astonishing: Cummins is well ahead. In the past decade, its eps growth has averaged 34.9%, while its return on assets in 1997 was 5.6%. The comparable figures for GE are 11.9% and a mere 2.7%.
True, GE leads on margins. But the crucial advantage is plainly in reputation. Because GE under Welch is perceived as a giant corporation which knows how to grow, large investors pour money into its stock. That creates a self-fulfilling prophecy. The more they buy, the higher the stock rises, which is just what the institutions need – an easy, rewarding home for all the billions upon billions they need to invest. Putting $2.8 billion into GE (which would buy you all of Cummins) only represents a nice, safe-sounding 1% of the equity. But is there a more solid basis for the investment reputation?
It lies in that combination of theory and action. Welch, like all his predecessors, set a new agenda for the corporation, based on new concepts. Before his day, for example, GE was the arch-exponent of centralised corporate strategic planning. That technique spread throughout US business, because of GE's enormous influence. That makes it certain that 'Six Sigma' will now be echoed on all sides – for such is Welch's latest crusade. It refers to a level of no more than 3.4 defects per million parts or operations. Like the Cummins Production System, Six Sigma is the pure dogma of Total Quality Management.
The difference between Six Sigma and GE's current efficiency is worth up to $12 billion a year ( a mind-boggling 13% of sales), according to Business Week. Since 1995, when 200 projects and training programmes began, the total has soared to 9,000. The costs are not revealed: but the 1997 benefits are reported to be $320 million in 'productivity gains and profits', which compares with a Welch target of $150 million. The expectation for 1998 is $750 million. Six Sigma no doubt has worked mightily, although the bracketing of 'productivity gains and profits' reads strangely. A quality drive cannot produce one without the other.
MASTER BLACK BELTS
Another peculiarity is that Six Sigma, which Welch borrowed from a friend at Allied-Signal, was pioneered years ago by Motorola. That company, in turn, picked up its quality ideas from far earlier work by the Japanese. The Japanese connection is evident at GE , which trains Six Sigma leaders in TQM's statistical methods to the status of 'master black belt', 'black belt' or 'green belt'. Why has a company so tuned in to education and productivity improvement taken so long to get the quality message? The famous documentary that introduced America to the quality ideas of W. Edwards Deming went out 28 years ago. It was produced by NBC – now, as it happens, a GE subsidiary.
The answer is partly that GE likes to invent (or re-invent) its methodologies. Welch attracted much favourable publicity earlier in the 1990s for a TQM-like initiative called 'process mapping', in which you follow an activity from end to end and find ways to streamline the process by eliminating or reforming stages. And then there's 'Work-Out'. Over three days, away from the site, large groups of people form into teams to tackle issues and come up with solutions. Of the scores of proposals, most are accepted. The exercise is both participative and practical. But like 'process mapping', it's something which a top-class management academy could have picked up long before Welch cottoned on.
You can look at the turnround of GE's industrial diamond business, with its fourfold rise in return on investment and halving of costs, in two ways. The managers concerned believe that Six Sigma has ruled out any need for investment in plant and equipment for the next ten years. Does the spectacular improvement deserve huge rounds of applause? Or does it really measure the gross ineptitude with which the plant had previously been run? That plant and equipment must have been hideously under-employed.
At a European multinational, likewise, consultants discovered that 'up-time' at a key plant – a 'centre of excellence', no less – was only around a third of available hours. The issue is not how to halve the downtime (and thus, in all probability, the costs), but to discover why the appalling under-use (a) developed initially and (b) was allowed to continue. In GE'c case, the evidence suggests that the 'academy' is too inward-looking. It may be no coincidence that the industrial diamonds boss, William Woodburn, came to the company from McKinsey.
Moreover, Welch's bursts of enthusiasm for new methods, however inspirational, are not built into the system. That is founded, not on Six Sigma or Work-Outs, but on a question. 'No matter how many records are broken in productivity or profits', complains a union leader, 'it's always "What have you done for me lately?''' Crotonville is used to press home Welch's insistence on performance. When 29 managers are picked to sing their Six Sigma successes before 471 peers, it's less to encourage the propagation and sharing of quality ideas than to sustain the top-down pressure for bigger and better figures. Welch uses the academy as a power message centre. His skill and force as an internal communicator have been consistently, ruthlessly applied. But that doesn't answer all management needs.
GE's evident failures to learn and apply obvious lessons of practical management result from defective systems thinking. The businesses have not integrated their processes into a system which feeds from top to bottom and back again, and which continually renews and reforms its strategies, sub-systems and operations in a never-ending virtuous circle. The systemic defects have not prevented financial progress only because of constant pressure for performance, the periodic renewals of focus (Six Sigma being the latest), and the strong strategic foundations.
THE ROOT CAUSE
Despite its Six Sigma achievements, Motorola is in worse trouble than Cummins, forced to lay off one employee in ten because of weak underpinnings. Its lapses from quality standards were described in recently in Thinking Managers. Any TQM expert would at once look, not at the lapses, but for the root cause. That's been attributed to the division of the corporation into separate businesses that are encouraged to battle each other in the cause of creative tension. The result is overlaps and in-fighting, rather than effective competition with formidable foes such as Nokia and Ericsson in mobile phones and Intel in microprocessors.
A Jack Welch would neither have understood nor allowed the humiliation of Motorola in the PC market. Against much internal scepticism, Welch began his transformation of GE by insisting that no business would be kept unless it was first or second in the market. The concept isn't exactly academic, although it gibes with Heller's Law: that in most markets only the leader, a strong runner-up and a specialist will be profitable. Left a clear run in chips for MS/DOS machines, Intel powered to 90% of sales. Motorola's challenge grew weaker and weaker as it put all its money on Apple, and thus tied itself to another strategic loser.
Why do such horrors happen? How did General Motors allow its pre-tax profits per car, $613 lower than Ford's in 1993 (which was bad enough), to become $978 lower in 1997? Success bears a major part of the blame. Short-term success (fuelled at GM by a strong North American car market) combines with long-term historical strength to draw internal eyes away from weaknesses. Lags in competitive performance are ignored or explained away because their examination would thrust executives into the firing line and demand uncomfortable action. The genuine total quality company isn't driven by the pre-tax profit, but by all the factors that go towards building that bottom line.
At GE, Welch partially fills the quality gap by intensive personal intervention – for example, after finding that customers for tubes used by GE's own X-ray and CAT-scan machines were objecting to poor quality. The tubes were doing only 25,000 scans, half the performance of competitors. According to Business Week, Welch demanded 100,000 scans and nagged away for four years until 150,000 to 200,000 were achieved. Once again, though, why were the managers concerned not themselves benchmarking the competition and reacting to the findings? It's an inefficient system, to put it mildly, that relies on one man, however brilliant, to spot such serious defects and ensure that they are cured.
MISSING THE HORRORS
Apart from anything else, in a company with 250,000 employees, innumerable products, a dozen massive global businesses, thousands of managers and countless operations, for every tube horror that's caught, many equal or worse failures must be missed. If Six Sigma is truly successful, the chief executive will be replaced by a system in which everybody constantly seeks for ways to raise performance at all levels until the non-financial performance of competitors is left well behind. The company then becomes a management academy tied to real performance, in which every decision, product, service and operation becomes an opportunity for learning on the job by doing it much better.
There are signs that management at large is heading in this constructive direction, and away from corporate deconstruction. In his early 'Neutron Jack' days, Welch nuked a quarter of GE's labour force: Woodburn, the industrial diamond star, lost a third of his people, including half the salaried staff. But it's what you do after the cutbacks that counts: witness the case of Al Dunlap, a famous, or infamous, downsizer. Half the jobs at the Sunbeam appliance business went as the stock multiplied fourfold – only to plunge as Dunlap, unable to sell so costly a company, could not resolve its marketing, manufacturing and management problems.
Maybe he will, probably he won't. But a fund manager's comment rings true: 'slash-and-burn strategy only works so far, so long. Then you come back to what's the inherent growth rate of the business. That leaves a lot of questions'. Just like Six Sigma, the company as management academy should teach people how to find the answers by proven methods and practical application under tutelage. The academy should also develop the habit of challenge: the right targets are not only your own assumptions and practices, but those of colleagues, including those at the summit. Who in Motorola could persuade the leaders to change their lethargic approach to digital telephony – and in good time?
In one European giant, with a 20% share of the installed market, nothing has been done, despite expressed internal disquiet, to uplift an uninterrupted fall to a single-digit proportion of new business. Again, success enables managers to put off an evil day which always arrives. In a company which is collegiate in both senses (an academy and a bunch of genuine colleagues), such blindness is much harder to sustain. At Intel, Andy Grove, a boss as intense and driving as Welch, has moved from an enclosed office to a cubicle: so has the CEO of Alcoa. That is not only symbolic, but practical. The boss becomes a visible part of a true team, not the demigod who descends from on high. Then, the corporate academy can proceed to ascend from any level.