Business Strategy Execution-Agile Organization System Design

The Conference Board in their survey of CEOs, has said that strategy execution is both the number one and number two problem they face. This course is designed to provide a specific set of actions to execute strategy by designing and deploying the capabilities and culture that will lead to strategic success.

This lecture lays out the basic premise of this course: External strategy, our position in the market, rates of growth and financial performance, are only achieved by effective Internal Strategy - the culture and capabilities - technical and social, that will enable us to achieve the external or business strategy.

Why is strategy execution such a problem for our organizations? In this lecture I define the basic reasons for the problem and the most essential components of the solution.

The Problem:

• Only senior leaders involved. The plan is not “owned” by those who must implement the plan.
• Strategy often defines the future business and economic performance, but not the means to get there – the future processes, culture and capabilities.
• Strategy execution is too often a vertical, silo-ed, MBO process and does not create horizontal alignment.
• It is too often not “agile”, dynamic, responsive to changes on the landscape. Not viewed as a whole-system.

The Solution:

• Most important – have an ongoing process of culture and capability building.
• Be agile in adapting to external threats and opportunities.

• Strategy execution must be horizontal and vertical to create alignment.

• Deliberately and systematically design the system to be “capable” – the processes and social systems.

• Engage everyone in the process of executing the strategy. Form strategy design and deployment teams. .

Agile Strategy Execution is based on an understanding of the organization as a "whole system" and the interactions of that system with its environment and the interdependence of the sub-systems of the organization.

The system of every organization is comprised of a technical system (the work process, tools, computers, etc.); the social system (skills, motivation, decision-making); and the economic system (the flow of money through the organization.

Agile Strategy Execution is "systems thinking", it is system design, organization design, and design of the culture.

In this lecture I review a number of definitions of strategy, including Michael Porter's.

Strategy…

§..”defines and communicates an organization's unique position, and says that it should determine how organizational resources, skills, and competencies should be combined to create competitive advantage.” Michael Porter

§A master plan, a plan of action or policy designed to achieve a major or overall aim.

§"Strategy is the direction and scope of an organization over the long-term: which achieves advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholder expectations". Johnson and Scholes

My Definition:

Strategy is the long term purpose, goal and plan to achieve sustained business success.

§Strategy must take into account the changing landscape or environment.

§It must take into account current and possible organizational capabilities and weaknesses.

§It must recognize both threats and opportunities.

§It must design the technical and social systems and processes to achieve economic performance.

Culture is often defined in a very fuzzy way that does not lead to action. I have attempted to define culture in a way that is actionable. I also describe a model of the influences on culture that you can manage in order to make the organization more capable of achieving its strategy.

What is Culture?

• The beliefs, values, stories or myths that define ideal behavior.
• The normative habits of the members of the organization.
• Those habits may be…
  
  • Patterns of Overt Behavior
  • Emotional Habits
  • Habits of Thought
• The Systems, Structure, Skills, Style, Symbols and Stories that reinforce cultural beliefs and behavior.

Capability is found in the core work processes of the organization and the competencies of people. You can not execute a strategy unless you know which capabilities are required to perform.

• The people, processes and technologies that enable an organization to achieve its strategic goals and meet customer requirements.
• The stuff that lies between strategic goals and performance.
• The human competencies and the ways of doing things that create unique advantage in your market.
• Capabilities reside in the core processes and in the core competencies of the organization.

Adaptation and Alignment are what all living organisms do to survive. Organizations are no different.

• Is your organization aligned to changing market preferences?
• Adapting cutting edge technologies?
• Are skills, systems and structure aligned internally?
• Are the different organs of the body changing together (structure, systems, skills, style & symbols)?

The Law of Adaptation

Organizations progress and are sustainable to the degree that they are capable of sensing shifts on the landscape – (economic changes, technology changes, regulatory or political shifts, and changes in social or customer preferences) and then capable of developing those capabilities that will satisfy the market on the future landscape.

The Law of Alignment

The degree to which all of the systems, structure, skills, style and symbols of the organization are aligned to the same principles and purpose they are aligned with each other and friction (wasted energy) is minimized and sustainability is enhanced. The degree to which there is misalignment there is wasted energy and the organization is less sustainable.

“We have thousands of guides about developing a strategy, but very few about how to actually execute one. And the difficulty of achieving executional excellence is a major obstacle at most companies." Why Strategy Execution Unravels, Donald Sull, et al., HBR, p.61, March, 2015

Research shows that...

• Executives attribute poor execution to lack of alignment and week performance culture.
• It is wrong!
• “Studies have found that two-thirds to three-quarters of large organizations struggle to implement their strategies.”

Myths

1.Execution equals alignment (vertical). 84% can rely on boss and subordinates. Only 9% say they can rely on colleagues.

2.Execution means sticking to the plan.

3.Communication Equals Understanding

4.A performance culture drives execution

5.Execution should be driven from the top down.

Recommendation from the HBR Article:

To execute their strategies, companies must foster coordination across units and build the agility to adapt to changing market conditions.

Five Principles of Agile Strategy Execution

1. Execution requires the “whole-system” in motion, aligned, and interacting.

2. Initial plans last as long as the first contact with reality.

3. Motivated people make more progress than any goals. We are committed to that which we create!

4. Adaptation to the landscape must be frequent and result in frequent re-alignment. The organization is an “open-system.”

5. Leadership must be on-the-spot and learning from the world’s greatest experts.

This lecture describes the Agile Strategy Execution process that includes the work of a steering team, which is the senior management team; a design team which includes individuals from various levels and departments; and implementation teams.

I know that most of my audience have little interest in theory and are more interested in action. So, you can skip this if you like. However, it may be worth understanding where the Agile Strategy Execution process comes from. It draws upon several different planning and change models:

1. Inter-Active Planning (Russell Ackoff)
2. Socio-Technical Systems (Fred Emery and Eric Trist)
3. Hoshin Kanri (Toyota)
4. Systems Thinking (Russell Ackoff, Peter Senge and others)
5. Re-Engineering (Mike Hammer and Jim Champy)
6. High Performance Organization Design

This is an introductory chapter to my book, Getting to Lean. Numerous other chapters are included at other points in this course.

This is a case study of a lean implementation at VON Canada using many of the methodologies described in this course. It was a large system change based on an understanding of customer requirements.

To develop an agile execution process you need inputs to the process. Those include the following:

1.A Business Model: Strategic business targets.

2.Landscape Analysis

3.Customer (Kano) Analysis

4.Capability Planning Matrix

5.Life Cycle Assessment

6.Assets & Liabilities

7.Lean Self-Assessment

This lecture focuses on a "Kano Analysis" that creates a matrix of those features of your product or service that are most important to the customer, and those that they rate you as performing best or worst. This helps you prioritize capabilities.

All strategies should be a response to changes on the landscape that present both threats and opportunities. This lecture presents a model to identify the changes on the landscape that may require you to develop or improve capabilities that reside within your sysems and processes.

Please see the attached PDF file that is a chapter from my Getting to Lean book on scanning the environment.

A business model defines the key financial metrics that measure the health of your organization. In this lecture I propose a way to develop and articulate a business model, but more importantly, to engage everyone in "playing the business game."

This lecture provides a way to identify current human and technical capabilities as well as future desired human and technical capabilities.

This and the next two sections are three different ways to assess the culture of your organization and identify changes that are needed. These will contribute to the capability planning matrix. Please see the PDF files in Lecture 19, 32, 40 and 46. There is a lot there!

In the life cycle of civilizations and companies there is a twin-fold process of integration and disintegration. Civilizations or companies, when growing, expand their borders and are integrating different people, ideas, competencies, and cultures. When they cease the process of integration and expansion, they start defending their borders and building walls to keep out the energetic barbarians, and the process of internal disintegration begins. As the focus shifts from offense to defense, the focus of energy is increasingly internal rather than external. The spirit of unity of purpose increasingly becomes the spirit of self interest and internal division. Soon the body of the culture is engaged in internal warfare and self-mutilation, and the enemy does not so much conquer as to march in to fill the void created by the impotence of the old culture. Toynbee concluded that the decline of every civilization was not at the hands of an external enemy but rather an act of suicide, the loss of will, and the disintegration of the culture. Whether or not you accept Toynbee's analysis of the rise and fall of civilizations, there are clearly lessons for leaders of companies and countries. You can see these in the emerging periods of the Prophet, Barbarian and Builder and Explorer. You can also see the decay and decline beginning the dominance of the Administrator, the Barbarian and the Aristocrat. You can only hope to see an age of the Synergist, when the best qualities are held in balance.

“Reasonable men adapt themselves to their environment; unreasonable men try to adapt their environment to themselves. Thus all progress is the result of the efforts of unreasonable men.” George Bernard Shaw

“Lean Start-Ups: Human institutions designed to create something new under conditions of extreme uncertainty.” Entrepreneurship is a management science.

Those that succeed are those who can pivot, within every bad idea is the kernel of a good idea, waiting to be recognized. Most ideas are bad ideas, but move in a direction of what works in the marketplace. “Pivots” are the key. “We achieved failure.”

1. They reality distortion field that convinces people that they know what customers want. It is usually wrong.
2. That we can accurately predict the future. This causes you to fail the test of flexibility or adaptation.
3. Success is following the plan.

In the beginning is the word, the creative act, the spirit of renewal. Creative personalities, including religious prophets, seem to follow a pattern of withdrawal-and-return. They disappear into the mountains or desert. They remove themselves from the distractions of the current order and seek some vision of a better future. Their power to inspire others is only seen on their return when they are intentionally disruptive. A revolution begins and their followers can hardly be called an organization, more a group of disciples. It is disruption, not order. It is the nature of creative personalities. The vision of these prophets is like a rocket blast, a surge of energy that disturbs the old and propels movement toward something new. Often these prophets are incapable of doing their work within the framework of the old order, but must but be exiled to a new land. As new wine must be put in new bottles, so too, may the new wine of innovation require the new bottle of new organization, (Mar 2:22 And no man putteth new wine into old bottles: else the new wine doth burst the bottles, and the wine is spilled, and the bottles will be marred: but new wine must be put into new bottles.)

You may be a Prophet if…

• Your ideas are long range and visionary.
• You are willing to make great sacrifices in time and energy to see your ideas realized.
• You tend to withdraw for long periods to work through your ideas.
• You see challenges others don’t see.
• Others see you as a bit “different,” (You were not most popular in high school!)
• You’re probably not very well organized, and you are impatient with details and administration.

Your organization may be in the Prophet stage if…

• Your leader is a visionary and creative person on whose ideas the company was founded.
• Your organization is at risk because it has not yet proved its product’s viability in the marketplace.
• There is more chaos than organization, with things changing daily, reporting relationships unclear, and processes undefined.
• There is an excitement and deep belief in what you are trying to accomplish.

“To be a successful soldier, you must know history… What you must know is how man reacts. Weapons change, but man, who uses them, changes not at all. To win battles, you do not beat weapons – you beat the soul of the enemy man.” George S. Patton IV

The prophet founders of companies are soon followed by, or become themselves, barbarians, the commanding generals whose strength of will focuses energy in crisis. The idea and inspiration is not enough. Decisive action is now required to build a company. Every new company is in a crisis, a fight for survival. When business is in a fight for survival it has more in common with war than many managers realize. The ability to move quickly, with discipline and unity of energy and effort, is the key to victory.

You may be a Barbarian if…

• Your mission is clear and urgent. Conquer or die is the priority.
• You are in charge and very comfortable making decisions.
• Others accuse you of being authoritarian and not consulting them on decisions.
• You are very action-oriented and have little patience with planning and administration.

Your organization may be in the Barbarian age if…

• It is rapidly expanding, taking in new territory and integrating the conquered.
• Decisions are made quickly and the leader may only consult a small group of associates.
• Growth in products and markets is far ahead of the growth in administration, processes and organization structure.
• The demand for performance is high and those who can’t are left behind or expelled.

The period of the Prophet may be a brief moment in the history of the corporation. The age of the Barbarian should also be short. If an organization’s leadership remains in the Barbarian Age, its growth will be arrested. It must move on and enter a period of specialization, a time when systems and structure take form, and the organization matures.

Now leadership has to take on a different character. It must be shared, delegated, and increasingly collaborative. While the leaders must continue to be creative and fast moving, they must also develop increasingly specialized competence in production, service, marketing, and sales. If they do, this third stage may last for centuries in the life of civilization and decades for a corporation.

The primary leaders in this period of specialization are the Builder and Explorer. The Builders will construct the internal capacity of efficient production, while the Explorers continue the push outward, expanding the boundaries of the developing corporation or culture. In civilization the Builders are literally building cities, roads, reservoirs, libraries and stadiums; the Explorers are conquering new territory to expand the scope and influence of the culture by integrating diverse people. In corporations the Builders are creating the means of production, they are making production efficient. The Explorers are out conquering new customers and territories, seeking to dominate their competition.

In the first two stages of development, growth is highly dependent upon the individual leader, the Prophet and the Barbarian. But in the third stage, the environment – both internal and external – is becoming too complex for such centralized decision making.

You may be a builder if…

• You enjoy the “real work” of your company, making the product or delivering the service.
• You enjoy measuring the results of your work.
• You like to make decisions quickly, take action, and see results.
• You know you are not a visionary and don’t waste a lot of time dreaming about the future.
• You don’t like committees or sitting around wasting time talking.

You may be an Explorer if…

• You are a convincing and enthusiastic communicator.
• You sometimes feel that you work for you customers and others in your own company often seem to be obstacles to your goal of serving your customers.
• You believe your company should place a high priority on expansion.
• You are curious and you naturally explore for new opportunities for your company.
• You love to keep score, and you are competitive by nature.

Your organization is in the Building and Exploring Age if…

• Your products or services have proven to have a competitive advantage and you are growing rapidly.
• You are now profitable and you can add needed staff to develop management systems and to make processes routine and stable.
• You are hiring more, and the jobs are becoming more specialized.
• There is a high confidence in the future.

“Whenever an individual or a business decides that success has been attained, progress stops.” Thomas Watson, Sr. (Founder, IBM)

“The arrested civilizations have achieved so close an adaptation to their environment that they have taken its shape and colour and rhythm instead of impressing the environment with a stamp which is their own. The equilibrium of forces in their life is so exact that all their energies are absorbed in the effort of maintaining the position which they have attained already, and there is no margin of energy left over for reconnoitering the course of the road ahead, or the face of the cliff above them, with a view to a further advance.” Arnold Toynbee

Increasingly the challenge is within, not from the external environment. Increasingly the leaders are seeking to bring order to the chaos of differentiated organization created in the previous stage. Counting and recording, systems and structure, are now important. And increasingly the processes of administration become dominant in their minds, and the leaders are drawn from the administrators. In time, with Administrators in charge, counting and recording become more important than the substance and spirit of creativity, the response to the external challenge that was the source of initial growth. Increasingly the focus is on internal, rather than external, challenges. The unchecked priorities of administration will soon lead to bureaucracy.

It is difficult to accept that chaos is good. But growth, in people or cultures, implies some degree of chaos. If you want a perfectly clean and orderly house, do not have children. Children, in their most rapid periods of growth, are a mess, and create a mess around them. Mess is good. In old age, the personality becomes obsessed with order and control. Just as the bones become brittle, so too does the mind become intolerant of innovation. But, there is a middle ground, a balance between the disorder of growth and innovation and needs of administering differentiated organization.

Initially administration serves the needs of those producing and selling, building and exploring. To manage a large manufacturing or selling organization you must know where things are, how many you have, and what they cost. Initially, to “take account” is to assist those engaged in the work that serves customers. But it shifts, and it gradually appears that those producing and selling increasingly come to serve those administering. It is the turning of this tide that signals the entry into the Administrative stage.

In this fourth stage, the corporation is holding its ground, creating and maintain order. And now the successful leaders face their single greatest test. Are they able to maintain forward motion, continue to be creative, decisive, and develop increasing competence, while at the same time administering secured territory? If they can, the organization will break through to that ideal balance that assures continued health. If they can’t and the Administrator becomes the dominant leader, imposing his cultural priorities, decline will begin.

You may be an Administrator if…

• You developed your career in the corporation’s staff functions.
• You consider yourself expert at the procedures, processes and systems of management.
• Order, consistency, and smooth operations are high priorities for you.
• You devote more time to checking on what has happened, as reflected in financial and other reports, than you spend focused on future growth in products, services, or customers.

Your organization may be in the Administrative Age if…

• Much of the energy of the managers is devoted to streamlining and improving procedures.
• You are well established in your market and feel confident that customers will continue to buy from you.
• There is little sense of urgency or crisis.
• Your organization is investing in expensive offices and staff headquarters.
• New products or services are expected to come from the staff research and development group.

“The piper who has lost his cunning can no longer conjure the feet of the multitude into a dance; and if, in a rage and panic, he now attempts to turn himself into a drill sergeant or a slave-driver, and to coerce by force a people whom he feels that he can no longer lead by his old magnetic charm, then, all the more surely and more swiftly, he defeats his own intention; for the followers who had merely flagged and fallen behind as the heavenly music died away will be stung by a touch of the whip into active rebellion.” Arnold Toynbee

The transition from the Administrative Stage to that of the Bureaucrat occurs without any plan or intention. Old age happens. It needs no encouragement. No one in the history of organization ever created a design team to design and implement bureaucracy.

As soon as the leader imposes increasing levels of control in his love for order, he becomes a bureaucrat and loses understanding of the original organizing principle that was the energy created by the “word,” the creative act that was the reason to unite and sacrifice. Now the lack of creativity leads to impotence in the marketplace, and survival is dependent on cost cutting and control and anyone with the creative spirit, potential Prophets who possess the very cure that is so needed are driven to exile or crucified for their violation of order. The decline will soon lead to death. The bureaucracy causes the exile or execution of those who are creative but unable to conform to the required order. With the departure of creativity, the fate of the company is sealed

You may be a Bureaucrat if…

• You spend most of your time in meetings reviewing what has already happened or should have happened.
• You cannot remember when you last participated in the development of a new product or service… and, you don’t think that’s your job.
• You are more concerned with how you and your company are viewed by Wall Street analysts than by your customers.
• You believe tighter control will solve many of your organization’s problems.
• You spend more time with central staff managers than with line sales and production managers and workers.

Your organization may be in the Bureaucratic Age if…

• Your company is growing more by acquisition than by internal new product creation.
• Your company has reorganized more than once in the past three years.
• You are more interested in the internal challenges of the organization than the external marketplace.
• Employees and managers alike feel that they can do little to alter the company’s fortunes.
• Managers and employees tend to talk about the “good old days” when things were exciting and fun.
• Managing or fixing the systems and structure receives more time and attention than selling and producing.

Management derives its power from its legitimacy, and in the Aristocratic Age legitimacy is lost. It is lost because the managers have stopped doing their job, that of leading, creating vision, and building unity of energy and effort across diverse people and interests. Peter Drucker said:

“Power has to be legitimate. Otherwise it has only force and no authority, is only might and never right. To be legitimate, power has to be grounded outside of itself in something transcending that is accepted as a genuine value… If power is an end in itself, it becomes despotism, both illegitimate and tyrannical.”[1]

Legitimacy is a matter of perception, and it is the perceptions of the constituent groups that matter. In every relationship there must be a balance of power, a mutual concern, and respect. When these mechanisms break down, leadership acts on its own interests, and contrary to the interests of its followers; rebellion inevitably results.

The disintegration of culture may appear as either an internal revolution or an attack by a competing Barbarian. In either case, the cause is the same: the loss of social unity brought about by alienation of the leaders and their loss of legitimacy. It is not employees who become alienated from the leaders. It is leaders who have divorced their followers. They have moved to the 48^th floor of the office tower and spent too much of their time surrounded by others who are striving to achieve the same level of detachment from workers and customers. The more detached are the leaders, the more incapable they are of recognizing challenges and issuing forth a creative response to challenge. Woodrow Wilson understood:

“I do not believe that any man can lead who does not act, whether it be consciously or unconsciously, under the impulse of a profound sympathy with those whom he leads – a sympathy which is insight – and insight which is of the heart rather than of the intellect.”

At this stage, the leader’s focus, his motivation, has shifted from serving others to serving self. In the later days of a society, the leaders become obsessed with material self-gratification. This obsession is largely due to the loss of gratification normally derived from productive work. There is satisfaction to be derived from sawing and sanding wood into a piece of furniture, from designing, testing, and watching a mechanical object come to life, from listening to a customer and sincerely striving to meet his or her needs. All of these pleasures are lost to the Aristocrat. Now, the rewards come from the appearance of wealth. The irony is that the Aristocrat is not achieving greater satisfaction than a productive individual of modest resources. The supervisor whose team sets a new production record is undoubtedly achieving a higher level of satisfaction than the Aristocrat purchasing the Gulfstream IV or the new limousine or conducting grand meetings at a country club. The Aristocrat has been so long removed from productive work that he or she no longer remembers their satisfactions.

You may be an Aristocrat if…

• You manage an organization that has not successfully developed and marketed a new product or service for several years, and your only expectation for growth is through acquisition.
• Most of your time is spent on financial matters, strategic planning, and restructuring the organization, not with those who have their hands on producing or selling products or services.
• Your offices are plush with expensive artwork, you have limousine service, and you spend a lot of time at expensive social gatherings, for business, of course.
• You feel that only you and a small circle of advisers are capable of understanding the strategy of the corporation.

Your organization may be in the Aristocratic Age if…

• There is a complete separation in perception, expectations, and communication between those workers and managers who produce and sell and those who claim to be the leaders of the corporation.
• The leader thinks of himself (herself) as indispensible and almost synonymous with the company.
• A great deal of the time and energy is spent in internal warfare, both between horizontal units and vertical “classes.”
• There is an almost constant process of reorganizing.
• There is a continual effort to cut costs, hold down wages, and the leaders are constantly warning of the gravity of the situation, yet their own compensation is increasing with no apparent relationship to the fate of the business.

[1] Drucker, Peter. The Frontiers of Management: (New York: Truman Talley Books, E. P. Dutton, 1986), p. 180.

Achieving Balance – The Search for the Fountain of Youth

Is it inevitable that growth and expansion are followed by bureaucracy and decline? If you study the course of civilization you might reach that conclusion as the long march of cycles appears as an inevitable pattern. But Arnold Toynbee asked himself this question some years after he wrote A Study of History. His answer was “no”. He said that he believed in free will. He believed that if we understand the causes of integration and disintegration, of emergence and decline, we can alter our behavior and achieve an ever-advancing civilization. It is the failure to recognize and respond to new challenges that leads to a condition of ease, to the loss the power of self-determination, the loss of will.

In human aging there are chemical biological processes over which we have no control. Of course, we can greatly influence human aging with diet, exercise, and our own social and mental activity. Organizations, on the other hand can be influenced even more. They are inherently capable of regeneration. Managers change, products change, the market changes, and all of these are opportunities for adaptation, and for adjusting the style, culture, and processes to prolong the life of the organization. The 3M Corporation has been through numerous periods of refocus, redefining its product portfolio, constantly innovating and maintaining its social capital within the organization and its brand equity. It is an “old” corporation that can act young. There are many other examples. And, of course there are examples of organizations that fail to adapt to new markets and technologies and become rigid and lose their ability to innovate within a very short period.

Revolution is the transformation brought about by leaders who recognize new challenges, acknowledge the failure to adapt to a changing landscape, and promote a new outlook, a new spirit, and new strategy. Corporations have proven that there is no fixed time frame of life cycles. The key to this success is always the ability to create synergy of the different styles or capabilities of leadership and to maintain a healthy balance of the five forms of wealth.

What are the lessons of this story? I think there are several. One is the diversity of leadership styles that are needed to fulfill the potential of any organization. As companies mature, the need for the creative Prophet does not disappear; nor does the need for the conquering spirit of the Barbarian. But what is needed is balance and the creation of synergy or harmony between the diversity of talents, each put to work on the challenges appropriate to the type of temperament. The most difficult of all tasks of leadership is to create unity from diversity. It is the purpose of a leadership team. On a leadership team you do not want ten Administrators who will create excellent and orderly plans but never have the energy to go anywhere. Nor do you want ten Barbarians, each with the strong will and singular focus to fight a battle. You also need the Builders, the engineers and specialists who know how to make complex things work and Explorers to expand the territory. And you need Administrators who bring order to complex organizations and tasks through counting and recording. But you do not need the excess of administration that is bureaucracy. You need leaders, or you need to become a leader, who can bring these personalities together in a harmonious orchestra.

Another lesson regards the role of personalities versus process and principles. Civilizations, when they have been at their peak, have had senates, election processes, systems of law, and separation of powers. When Rome was being born it was highly reliant on principles. This was the period, generally regarded as the peak of the civilization, when the Roman senate was supreme and the acceptance of Roman law and order prevailed. It then was overcome with cults and clashes of personality and the law became subservient to the personalities. The process of disintegration exactly paralleled the decline of the reliance on principles and process and the return of dominance of personalities.

It is time to rethink the meaning of wealth or capital. What is it and how is it achieved? Is our purpose in life to accumulate as much financial wealth as possible or is our purpose to create other forms of wealth that have greater meaning? Is the economy improved by simply pursuing financial profit or would we be better off by recognizing and investing in other forms of capital?

This book is about wealth that will endure and not vanish with the winds of unpredictable storms. It is about the assets, of a person, a company, or a country. It is an effort to redefine capitalism.

In the “good old days” of capitalism (or the bad old days, if you prefer), the days of J.P. Morgan, Carnegie, and Karl Marx, capital was money. If you had money, you had the power to create and control enterprise. Money is great, but it is not what it used to be.

The meaning of wealth changes over time. The possession of land was once considered the most important measure of wealth. The size and shape of your body was once viewed as your measure as a man or woman. Financial assets and cash flow were considered the primary measure of corporate value. And, the military might of a country was once considered the primary asset of a country. Times have changed. We must re-think wealth, capital, and the process of capitalism.

Creating sustainable wealth is about character and culture, a truth proven at all points in history. And, whether in ancient Egypt or Rome, and particularly in the period of decline of any civilization, the people suffer delusions of value and once again we must be reminded: “But God hath chosen the foolish things of the world to confound the wise; and God hath chosen the weak things of the world to confound the things which are mighty; And base things of the world, and things which are despised, hath God chosen, yea, and things which are not, to bring to nought things that are.”[1]

By losing sight of what is truly important companies, countries and individuals lose their ability to arise to current challenges with a creative response and rather rely on mechanically pulling the lever of yesterday’s successful response but in the presence of new challenges. And, that loss of creativity is the certain sign of decay. It is the loss of self-determination, the loss of competition that is not a defeat by a superior competitor, but rather the suicide of lost will. As Arnold Toynbee wrote in his classic A Study of History, his application of the empirical method to the rise and fall of twenty three civilizations, “It looks as though it were uncommon for the creative responses to two or more successive challenges in the history of a given society to be achieved by one and the same minority or individual. So far from this being the rule, the party that has distinguished itself in dealing with one challenge is apt to fail conspicuously in attempting to deal with the next.” [2]

In other words, it is often the mistaken lesson of success, that what worked in the past must surely work in the future, that is the cancerous cause of failure. It is an irony of the human condition that we are deceived by our own success to rely on the lessons of our own history and fail to be creative in the present. But, this loss of creativity in a company or culture has antecedents in the loss of other virtues. One virtue leads to another and a failure to understand these relationships is the cause of almost every corporate failure, is similar in individuals and is certainly mirrored in the decline of nations.

Stephen Covey wrote that “If you want to make minor, incremental changes and improvements, work on practices, behavior or attitudes. But if you want to make significant, quantum improvements, work on paradigms.”[3] In Sustainable Wealth I am proposing a change in how we think about value or wealth. To be successful in the coming decades we must adopt new ways of thinking about personal, corporate and national assets.

[1] Corinthians, i. 27-29.

[2] Toynbee, Arnold. A Study of History, Volume IV, Oxford University Press, London, 1939. P. 245.

[3] Covey, Stephen R. The 8^th Habit. Free Press, New York, 2004. P. 19.

Spiritual Capital:

To the degree that an organization can enable, support, or encourage a depth of personal morality and dedication to a noble purpose, it possesses spiritual capital. I sincerely believe that this form of wealth accrues both to the organization and to the individual. It will interact and support every other form of capital and ultimately will have its effect on the financial bottom line. In many ways it is the first cause.

Shared values are the basis for trustworthy relationships and sociability. Belief systems have enormous impact on the culture of organizations, and it is the function of leaders to exert efforts to intentionally shape these beliefs. A common set of values is the lubricant of fluid associations. It is the basis of unified action and trustworthy behavior.

Social Capital:

Social Capital is the value of trust. The degree of trust you engender in others will determine the likelihood of being hired, customers purchasing your products or services, or, employees working, even sacrificing for your company. It defines the likelihood that others will engage you in solving problems. It is a key to the effectiveness of all teams, families or communities. It determines brand equity and market capital. Entrepreneurs often begin their business within a small circle of trust and gradually expand the radius of trust, increasing the scope of their network and their business.

To analyze the current state of social capital and plan the future, it is important to drill down to a more functional level. There are two types of social capital that may be assessed: internal sociability or trust, and external relationships or brand equity.

Internal social capital is the level of trust within the organization. Trust operates both horizontally and vertically within the organization and is critical to the ability to solve problems, innovate, and satisfy customers.

Internal sociability may have the most significant impact on the ability to solve problems. All organizations are a continual stew of problem solving. Whether it is solving the problems presented by a customer, a new technology, or a competitor, business is a game of constant adaptation to a changing environment. The apparently small act of walking down the hall to an associate’s office and sharing a problem, casually brainstorming without regard to who gets credit, or who bears what responsibility, is the most frequent, and probably the most effective way to solve problems. These encounters may escalate into a formal meeting or problem solving process. Whether the interaction remains highly informal or becomes more formal, the critical ingredient is the simple willingness to be engaged, to care about the problem, to listen deeply, think together, and brainstorm solutions.

External brand equity is the recognition and respect given to your firm by the market place. Just as the quality of an individual’s life is largely determined by the quality of their social relationships, the same may be said of a company. The value of a company is directly related to its brand equity.

Human Capital:

Human capital is the sum of all of the competencies and motivation of the people within the organization. Human capital has always been a critical component of the performance of any business, but today’s entrepreneur is likely to bring with him, not money, but competency and motivation, the two key ingredients of human capital.

Motivation has been the subject of hundreds, if not thousands of books for managers. When all is said and done, the keys to motivation are relatively simple: work that is interesting and ennobling; sincere recognition by peers and superiors, opportunities for career advancement, positive feedback that can guide performance, strong and supportive social interaction by a team, and, oh, did I forget? – fair and attractive financial rewards. There is little reason to waste time in the endless debates about which is more important: money, recognition, or enriching work. They are all motivating and different personalities are more or less influenced by different types of incentives. The job of designing an organizational system is to optimize all of the various forms of motivation. Over-reliance on any one form is a prescription for poor performance.

Human competence is the only modern parallel to production technology of the past century. Modern production most often occurs in the mind, or the collective mind of a small work group. If you have highly trained marketing professionals, skilled sales men and women, great engineers and brilliant financial managers, you have an important form of capital. These competencies are a foundation of performance. Investment in these assets is likely to pay off in the creation of other classes of assets.

Those organizations that have exhibited the greatest dedication to the development of human competence have consistently outperformed those who have only given lip service to training and development. General Electric, Microsoft, Toyota and other companies that have grown into great economic powers have done so as a result of both attracting and developing the most competent people.

Innovation Capital:

Innovation grows in the soil of spiritual, social, and human capital. To the degree to which there is commitment to a worthy purpose, spiritual capital, members of the organization will engage in the discretionary effort of thinking, exercising their brain on a problem or opportunity. Many creative ideas occur on the weekend or in the evenings, when a member of your team is choosing, even unconsciously, to think about a problem at work or a customer’s needs. This is discretionary effort, effort that cannot be forced, measured, or required. It only occurs when employees genuinely care about the success of the organization.

Innovation thrives in an environment of high trust, social capital. Most innovations are not the product of one person thinking alone. Rather they are the result of thinking together, sharing ideas, brainstorming and allowing your idea to be criticized by your associates. High trust cultures, in the larger economy and in companies, are high innovation cultures. If you examine low trust cultures, such as in the Middle East, you will find very low rates of innovation. Companies in which there is a culture of fear, rather than a culture that celebrates successes, will have low rates of innovation.

The degree of competence, the continual education of employees, lays the foundation for high innovation. When an individual is continually seeking the latest knowledge, the latest experiments, the latest inventions or theories, his or her mind is playing in the intellectual waters in which innovations float to the top.

The success of Honda and Toyota over U.S. automobile companies was the result of their fanatic dedication to process, manufacturing and product or technology innovation. The success of Wal-Mart, Home Depot, L. L. Bean or McDonald’s is all about process innovation in their industries. Processes either create or minimize cost. They assure either consistency and reliability or the unfortunate alternative. Like other forms of capital, the quality of the work process and technological innovations that create an advantage for customers is a significant asset.

Lean Culture is...

• Lean is a culture of continuous improvement practiced at every level of the organization and by every team.
• Lean is the application of the scientific method of experimentation and study of work processes and systems to find improvements.
• Lean is respect for people. It is respect for the voice of the customer and it is respect for those who do the work, who are “on-the-spot” and are, therefore, the “world’s greatest experts” in their work.
• Lean is the elimination of waste in all its forms. Lean is the ability to distinguish between work that actually adds value to your customers and work that does not. By eliminating waste, you free resources to devote to value-adding activity that serves your customers.
• Lean is a work environment that assures the quality and safety of all work for both customers and staff.
• Lean is a focus on improving the work process and not on blaming people or creating fear.
• Lean is a culture of teamwork, shared responsibility and ownership that cuts through organization walls or silos.
• Lean is a culture that returns the joy to work. Honda speaks of the three joys of buying, selling and making the product. We do our best work when we have joy in our work.
• Lean is flow. Lean is an interruption free process that flows from beginning to end without interruption.
• Lean is a work environment that assures quality and safety of all - both customers and staff.

Lean Culture is...

• Lean is a culture of continuous improvement practiced at every level of the organization and by every team.
• Lean is the application of the scientific method of experimentation and study of work processes and systems to find improvements.
• Lean is respect for people. It is respect for the voice of the customer and it is respect for those who do the work, who are “on-the-spot” and are, therefore, the “world’s greatest experts” in their work.
• Lean is the elimination of waste in all its forms. Lean is the ability to distinguish between work that actually adds value to your customers and work that does not. By eliminating waste, you free resources to devote to value-adding activity that serves your customers.
• Lean is a work environment that assures the quality and safety of all work for both customers and staff.
• Lean is a focus on improving the work process and not on blaming people or creating fear.
• Lean is a culture of teamwork, shared responsibility and ownership that cuts through organization walls or silos.
• Lean is a culture that returns the joy to work. Honda speaks of the three joys of buying, selling and making the product. We do our best work when we have joy in our work.
• Lean is flow. Lean is an interruption free process that flows from beginning to end without interruption.
• Lean is a work environment that assures quality and safety of all - both customers and staff.

Lean Culture is...

• Lean is a culture of continuous improvement practiced at every level of the organization and by every team.
• Lean is the application of the scientific method of experimentation and study of work processes and systems to find improvements.
• Lean is respect for people. It is respect for the voice of the customer and it is respect for those who do the work, who are “on-the-spot” and are, therefore, the “world’s greatest experts” in their work.
• Lean is the elimination of waste in all its forms. Lean is the ability to distinguish between work that actually adds value to your customers and work that does not. By eliminating waste, you free resources to devote to value-adding activity that serves your customers.
• Lean is a work environment that assures the quality and safety of all work for both customers and staff.
• Lean is a focus on improving the work process and not on blaming people or creating fear.
• Lean is a culture of teamwork, shared responsibility and ownership that cuts through organization walls or silos.
• Lean is a culture that returns the joy to work. Honda speaks of the three joys of buying, selling and making the product. We do our best work when we have joy in our work.
• Lean is flow. Lean is an interruption free process that flows from beginning to end without interruption.
• Lean is a work environment that assures quality and safety of all - both customers and staff.

The Steering Team is comprised of the senior managers of the organization that is being design to achieve its strategy. Here are the specific functions of the steering team.

1.Become educated champions. Develop knowledge of lean management and culture so you can be a model and know it when you see it.

2.Develop and communicate the business strategy and financial results.

3.Write and communicate the charter.

4.Meet as a team, practice team skills, and improve your own work.

5.Meet regularly with design team(s).

6.Serve as boundary managers for the transformation process with the rest of the organization.

7.Accept, reject, or modify recommendations from design teams.

8.Provide support, resources, and guidance throughout the WSA process.

9.Appoint implementation teams to carry out the implementation of the design.

10.Communicate regularly with the organization.

11.Provide positive reinforcement for positive efforts.

The Design Team will do the detailed work of analyzinng the current state and designing the future state of the technical and social systems. The following are their specific functions.

Be an active, responsible member of the team.

Do benchmarking.

1. Communicate with other employees.
2. Define current state work and human systems.
3. Analyze variances and data.
4. Define the future or ideal state for work and human systems.
5. Consider the economic consequences of their design and decisions.
6. Make presentations.
7. Be a change champion.

There are several reasons for writing a design charter:

• To create the vision for the design team to understand what they are trying to achieve.
• To be sure that the design is clearly linked to strategy and business goals.
• To clearly state boundaries: what may be designed and what must remain beyond the design team’s scope.
• To share any expectations regarding the nature of the process to be used by the design team.
• To share any expectations that the steering team may hold regarding the final product in terms of the work process or culture of the organization.
• To clarify expectations for time and deliverables.

Most management teams have written some mission, vision, and values statements. Or, there may be a corporate-level statement. Many management teams have not given a great deal of thought to what capabilities, competencies, or technologies they believe will result in competitive advantage in the future. This thought process should be the basis of developing the organization architecture.

Once the charter has been written, the steering team meets with the design team and they read the charter together. It is important for the design team to look the steering team in the eye and see that they are serious about considering an entirely different type of organization, culture, or strategy. The design team is likely not to believe that, “We can actually change this....” unless they have this direct communication with the steering team. They may also ask clarifying questions such as, “Do you mean we can actually change the compensation?” A clarification may be, “We do actually want your recommendations to change the compensation system but not actual compensation levels.” This clarification at the beginning of the design process is a simple matter, but the failure to obtain this clarification can result in wasted effort.

Components of a Charter

Generally, effective charters contain the following components:

• Purpose Statement
• Values, Vision, and Mission
• Business Strategy and Scorecard
• Organizing Principles
• Project Boundaries and Scope
• Reporting Expectations

This lecture is addressed to the Design Team and explains their purpose and challenge.

Value Stream Mapping or Simply Process Mapping

The plan is this…

• You will now map the current state of your work process, your “value-stream.” If you are like most design teams, you will immediately connect some of the dissatisfactions of customers and employees with the characteristics of the process.
• From this and the other discovery you have done, you will then develop your “dream” of the ideal future state – both technical and social.
• Then you will do some more analysis of the work process. You will also be asked to study variances in the process. You will examine and seek to improve cycle time and efficiency by finding and eliminating waste.
• Then, with all that analysis, discovery and dream, you will take a clean sheet of paper and design the ideal future state process.
• Then you will design the social system – the organization of people, job descriptions, and competencies, how decisions are made, and how people are motivated.
• Then you will examine the economic implications of the design you have created. That economic analysis may cause you to re-examine some elements of your design, or it will help you develop the business case for implementing the design.
• Finally, after approval by the steering team, you will develop an implementation plan and start the implementation with an open mind to learning and modification as you go.

Most of these remaining steps will take less time than some of the preceding ones because much of it has already been created in your collective intelligence.

You have done enough discovery - you are ready to burst! And, you work in the system and you have your own experience to guide you in defining the ideal future system. It’s time to create the dream!

You may remember that when you began the discovery process it was recommended that you create a “Future State Wall” where you put Post-it-Notes with ideas for the future technical and social system of the organization. So… you probably already have many dozens of ideas.

It is important that the design team recognize the value in thinking about the “ideal” versus the “practical.” It is common for people to say, even to themselves, “Well, it would be great if we could have that decision made immediately by the people on the line; but, they don’t have the knowledge or skills to make that decision, so that won’t work.” They then give up on the idea and do not allow it to be considered. A better response is to say “It would be ideal if they could make that decision, and in order for them to do that we will need to provide them with training and information that will allow them to make good decisions.” This is thinking about the whole-system rather than fragments of the system. Every ideal state element has dependencies. This is the nature of all human systems.

When you imagine the ideal process you may find that it requires new technology, new skills, new decision-making processes, or new organization structure to enable that new element of a design. While some of these may at first seem impossible obstacles, it often turns that they are not impossible and simply require an investment that needs to be evaluated relative to its potential positive impact.

Now that you have created your dream and your current state map you are probably anxious to start mapping the details of your future work process. However, there are two additional types of analysis that are worth doing before mapping the future. These will help you refine your dream. These are an analysis of variances and a search for waste in your process. Both will help you design the leanest possible process.

As you go through both of these analyses you will be asking, “So, if this is a cause of a variance or waste, then how can we change the process to eliminate that variance or waste?” Answering this will help define the future process. It might even cause you to revise your dream. Remember that this process is not entirely linear. In other words, there are no rigid silos between the 4D’s of this process. It is normal to modify your dream as you are designing, and as you are designing you may recognize the need for additional discovery.

Principles of Social System Design

The following principles have proven helpful to design teams as they design the human systems.

1.Design from the Bottom-Up and Around the Work: Too often organizations are designed from the top down. The CEO hires a consultant and he starts with some macro theory and soon the organization is designed to meet the needs of executives and not the needs of those doing the value-adding work.

The principle of whole-system architecture that should be the first principle of organization design is this: The only reason organizations exist is to facilitate the work that adds value to customers. Design to optimize this work. The design of organization structure should begin on the frontline, where the work is done, to create the structure that will optimize the performance of those doing the work.

James P. Womack and his associates at MIT spent five years and five million dollars studying the differences between auto assembly plants in the U.S., Japan, and Europe to identify the key differences in the systems that were the cause of different levels of quality and productivity.

“What are the truly important organizational features of a lean plant - the specific aspects of plant operations that account for up to half of the overall performance differences among plants across the world? The truly lean plant has two key organizational features: It transfers the maximum number of tasks and responsibilities to those workers actually adding value to the car on the line, and it has in place a system for detecting defects that quickly traces every problem, once discovered, to its ultimate cause….So in the end, it is the dynamic work team that emerges as the heart of the lean factory.”[1]

Just as the family unit is the bedrock structure of every society, the first learning organization; the work group or team is the foundation structure of every organization. It is where learning and innovation will occur. It is the structure that will have the greatest impact on daily performance. Get this right and other things become easy.

2.Minimize Walls, Divisions, Hand-offs, and Levels. Each of these represents an interruption in workflow and a possible source of variance. Each division creates work for managers and tends to diminish the work of those creating value for customers. Where walls or divisions are necessary make the walls as “porous” as possible so the work can flow easily and quickly, and learning can occur easily, through those walls.

3.Make Chairs, Not Legs. To the degree possible design the organization so employees can have pride and joy in their work. Pride and joy come from “whole” work – making an entire piece of furniture, for example, not a piece that has no use by itself. Pride of ownership comes from completing a whole work process resulting in a complete product. Craftsman made complete chairs. People will make furniture, whole furniture, as a hobby. No one goes home on Saturday and makes legs. In mass production hourly factory workers were organized into leg, seat, back, and assembly departments. This destroyed their pride and ownership, and it destroyed the quality of products. Create teams to increase intimacy with the product and pride of ownership.

4.Each Level of the Organization Must Add Value That is Unique. The first level of teams is responsible for doing and managing the day-to-day work process. The next level is responsible for managing and coordinating the decision-making and process boundaries of teams. The top management team is concerned with strategy and the overall performance of the organization. Be clear about the value-adding work of each team or level. If they do no value-adding work they are waste.

5.Design Competencies for Future Performance: People perform, not organizations. There is no such thing as a competent organization; there are only competent people. Different types of performance require different competencies, and the design team must design the structure and systems that will build and reinforce required competencies.

6.Design for Continuous Learning: Design feedback loops and shared learning mechanisms to ensure continuous improvement. The design team should ask how they will maximize learning, not only within teams, but across teams and across organizational units.

7.Create an Intelligent Network: Design your organization for the realities of the Internet age, social networks, and networked learning. Create collective intelligence through formal and informal networks, interaction, and communication systems. Design in virtual meeting platforms and processes when appropriate. All deliberations will not be face-to-face.

8.Reinforce Superior Performance: People perform when it matters. Make performance matter. Design the systems to recognize and reinforce superior performance. Design multiple systems of reinforcement.

9.Design Symbols to Reinforce Values and Behavior: Change necessary symbols to support the new culture, work system, and human system. New symbols indicate a new culture.

10.Design the House, but not Where the Furniture Goes: There is always a question as to how much detail to go. A good way of thinking about it is to think about an architect designing a house. He has to decide where the walls go. He has to decide where the kitchen and bathrooms will be. And, he has to layout where electricity, plumbing and cables will flow through the walls. But, he doesn’t have to decide what carpet will go in or what color the walls will be. And, he definitely does not have to decide what furniture, or where the furniture will be placed. Of course, you will then ask “What is furniture and what are walls?” That is something you will have to decide as you do your design work. But simply asking the question will help your team to not waste time debating where the furniture goes.

[1] Womack, J.P., Jones, D.T. and Roos D. The Machine that Changed the World. New York. Free Press, 1990. P. 99.

The design team should be well organized, clear and rehearse your presentation. A few tips:

• Be a good team! Share the design as a result of consensus, even though you may have individual opinions.
• Expect tough questions.
• Ask your team members for help if you don't know the answer.
• Be willing to say "That's a good question. We need to discuss that and come back to you with an answer."
• Share the presentation among the team members.

How the steering team receives and listens to the presentations by the design team is critical. A few key tips:

• Be a good team! Don't make judgements as individuals.
• Ask tough questions. Your job is to inquire and understand.
• Immediately after the presentation meet as a team and honestly, openly, share your reaction.
• Reach consensus as a team and present your consensus judgement to the design team.
• Reinforce the design team for their hard work.

I have added this and the following lecture on objective setting because much of strategy deployment is setting objectives. However, the process of objective setting in many companies does more to destroy motivation than to increase motivation. I hope that these two lectures can provide some guidance to make objective setting productive.

Dr. Deming said to "eliminate management by objectives." Why? The clue can be found in Peter Drucker's 1954 book on the Practice of Management.