Customer value: The linchpin of organizational change

If you’re going to reengineer a process,do it to build customer loyalty, not just for efficiency.

&stomer

Vahe:

The Linchpin of OrganizationalChange LEONARD D. GOODSTEIN rganizational change is pandemic, not just in the U.S., but throughout the industrialized world. But to what end? What is the desired future state to which all this organizational change is supposed to lead? Most managers, when asked these questions, typically come up with the response of “efficiency,” or “cost reduction,” or “lean production.” While we would be the last to argue for inefficiency, or cost inflation, or fat production, we do not believe that any of these answers provide adequate rationale to drive and sustain organizational change. Corporate anorexia is hardly a solution to today’s problems. Moreover, organizational efficiency is not a strategy; it is a necessary but not a sufficient condition for long-term, sustained organizational success. Consider the hypothetical example of the symphony orchestra. Instead of paying 80 to 100 musicians, you can reduce the personnel costs by eliminating enough players to make it a chamber orchestra of approximately 40 players. Better, you can cut the personnel costs even more by reducing it to an octet. Still better, try a string quartet or a trio. Why not a solo violin or the old-fashioned “one-man band”? Ludicrous? Perhaps, but such mindless, across-the-board downsizing is not unknown in the corporate world. The danger, in the case of the symphony orchestra as well as in many other instances, is that as a consequence of

0

HOWARD E. BUT2 downsizing and cost containment the product is so dramatically changed that it no longer retains its competitive advantage, loses its distinctive competence, and fails to provide customer value. The production problems experienced by Seattle-based Boeing Aircraft in late 1997 is but one real-life illustration of the consequences of such downsizing. Customer value is rooted in the belief that price is not the only thing that matters. Focusing on the cost of production and price to the customer leads to managing the business as though it were providing a commodity differentiated only by price. In contrast, businesses that provide customer value believe that many customers will pay a premium for superior customer service. Sir Colin Marshall, chairman of the board of British Airways (BA), is explicit about his commitment to this latter approach, insisting that BA can succeed onIy by meeting all of its customers’ value-driven needs, not just price. In a highly competitive industry, BA, using this customer-value based strategy, has become the world’s most successful airline, at least insofar as profitability is concerned. What happens when a business fails to attend to customer value? The recent experience of a small publisher specializing in materials for the training and development industry is a case in point. The training and development company sold primarily through direct mail and prided itself on filling SUMMER

1998

21

Leonard D. Goodstein, a consulting psychologist headquartered in Washington, D.C., specializes in the formulation and implementation of strategic plans based on the enhancement of customer value. He consults widely in the United States, Europe, Asia, and South Africa. After a 30-year academic career that included professorships at the Universities of Iowa, Cincinnati, and Arizona State, he served as president of University Associates-an international publisher-and as CEO of the American Psychological Association. He has published widely, including several prior articles in Organizational Dynamics, and has served as editor of Journal of Applied Behavioral Science (1974-79) and as consulting editor of Organizational Dynamics (1980-85). His two most recent books are Applied Strategic Planning: How to Develop Plans that Really Work (McGrawHill, 1993) and Personality Assessment, 3rd ed. (John Wiley, 1997). He also serves as an adjunct faculty member at Georgetown University. Goodstein holds a B.S. from the City College of New York and an M.A. and Ph.D. from Columbia University, all in psychology. He is a Distinguished Practitioner in Psychology from the National Academies of Practice and is a diplomate in clinical psychology from the American Board of Professional Psychology.

22

ORGANIZATIONAL

DYNAMICS

all customer orders in less than 24 hours. This speed of response was among its distinctive competencies, one highly prized by its longterm customers. Impressed with the firm’s reputation, a major publishing house made a successful acquisition bid and, as one of its first actions after the acquisition, merged the two order fulfillment departments. The new owner, accustomed to marketing its books through distributors, had limited capacity for directly filling customers’ orders, especially those that required immediate attention. The company’s management didn’t recognize that speedy delivery was an important component of success; trainers frequently find that they need materials for a workshop tomorrow, or the day after at the latest. Nor was the company prepared to change its fulfillment process until the long-term impact on sales became evident. By then the company had lost a significant segment of the customer base it had paid dearly to acquire. The cost containment achieved by merging the fulfillment departments was foolishly expensive.

CUSTOMER

VALUE

What is the alternative to simple cost containment or efficiency as a guide to organizational change? We believe it is customer value. By customer value, we mean the customers’ perceptions of how well their needs are met. This approach to customer value, which was presented in the Winter 1996 issue of Organizational Dynamics, focuses on providing the outcome the customers seek, not the product or service they purchase. It should be clear that providing consistent customer value has enormous implications for how organizations are structured, operated, and managed. In most traditional organizational structures, the responsibility for providing customer value is delegated to the marketing function. A true focus on providing customer value, however, requires a more integrated commitment throughout the entire organization. The Seattle-based Nordstrom department stores, for example, have developed an exceptional reputation for providing this level

of value with unusual frequency. Consider an example from our own experience: A small hole, of unknown origin, appeared in the shoulder of a suit coat purchased from Nordstrom. We returned the suit with the hope that the store would offer to have the hole rewoven. Instead, the salesperson insisted on replacing the suit, without additional costthis more than a year after its purchase. Such unanticipated levels of value produce strong customer bonding.

Customer

Satisfaction

Many businesses argue that they already track customer satisfaction, often with some form of rating scale. Increases in the ratings, they feel, are desirable because they lead to an increased probability of repeat purchases and thus increased profits, and therefore are a measure of competitive advantage. It is our belief, however, that customer satisfaction and customer value are distinct (although related) concepts, and that the latter is more strongly linked to and predictive of customer behavior. Indices of customer satisfaction are about attitudes, while customer value is about behavior. Satisfaction measures indicate how customers feel about products and services, while measures of customer value are indices of how customers will act. General Motors’ Cadillac Division, for example, was quite pleased that more than 90 percent of its customers reported that they were either “satisfied” or “highly satisfied” with their recent purchase of a new Cadillac, figures comparable with those reported by purchasers of Japanese automobiles. But Cadillac was quite dismayed to learn that only 30 to 40 percent of these new Cadillac owners would buy another Cadillac, compared with more than 80 percent of Japanese auto purchasers. GM had simply been asking about customer satisfaction, not about customer value-about attitudes, not about behavior. As we move away from simplistic measures of customer satisfaction to the imperatives of providing customer value, the potendesign and tial impact on organizational

Howard E. Sotz, Jr., is the director of total quality for AAI Corporation, a defense contractor in Hunt Valley, Maryland. His background includes managing MIS and major defense programs. He received his B.E.S. in electrical engineering from Johns Hopkins University and his M.S. in administration from George Washington University. He is the founder of the Maryland-based TQM Directors Network and co-founder of TQM/lOO, a strategic benchmarking alliance of Aerospace and Defense contractors. His current work is in the areas of quality, process reengineering, and strategic planning. His publications include “Strategic Planning: the Missing Link in TQM” in Quality Progress (May, 1995), “Managing for Customer Value: Integrating Quality and Productivity Strategies to Achieve Sustained Business Success” (with T. C. Tuttle and W. D. Leach), and “Measuring Customer Value: Gaining the Strategic Advantage” with L. D. Goodstein in Organizational Dynamics (Winter, 1996). Mr. Butz is a frequent speaker on the subjects of TQM and strategic planning. He serves on the boards of directors for the MidAtlantic Planning Association and the Baltimore County Chamber of Commerce.

SU~R1998

23

function is enormous. Quite simply, providing and maintaining customer value needs to be the primary driver of most organizational decisions-a state of affairs realized in too few organizations. Providing customer value requires changes in the way a company conceptualizes and implements business process redesign, how it focuses information technology, how it practices organizational development, and how it integrates these three primary change processes. Organizing to provide customer value shifts the organization’s focus from internal to external-to a concern with how to better serve the customer. All organizational change efforts must

Envisioning

what

customer

value

planning

for

business

system

can be done

should

SYSTEM REDESIGN

ORGANIZATIONAL

DYNAMICS

to increase all strategic including

redesign.

Organizations function on two levels, the operational and the strategic. The goal at the operational level is to produce and market products or services at a reasonable profit. The operational level is all about organizational effectiveness at the present time. On the other hand, the strategic level is about growth and development-about designing the infrastructure to accommodate the future and about creating new products 24

drive

the organization,

be evaluated against the criterion of providing increased customer value. We are not arguing that the customer is always right; rather, that the customer is all there is. It is in this sense that we regard customer value as the linchpin of organizational change. Customer value determines customer behavior, and changing or cementing customer behavior should lie at the root of all organizational change efforts.

BUSINESS

and services to meet emerging customer needs. In other words, this second level is about the future and strategic planning. Organizational change efforts frequently flounder because of three failures to manage the interface between the operational and strategic levels. First is a failure to understand that these two levels coexist in organizations; second is the failure to maintain clear communication between the two levels; third is the failure to properly balance the two levels with clear lines of responsibility and authority. These failures often bedevil organizational change efforts, and all too often it is unclear which of these two levels the change

effort is intended to address. Envisioning what can be done to increase customer value should drive all strategic planning for the organization, including business system redesign. Instead, what frequently serves as a template for such reengineering efforts is benchmarking. While benchmarking identifies “best practices,” these frequently become a substitute for developing any real understanding of customers and their needs. This has led us to regard benchmarking as a kind of “industrial tourism” that has little utility; in-depth, open discussions with customers are far more likely to identify ways to increase customer value than visits to L. L. Bean, Nordstrom, or Disney World. Benchmarking, like measures of customer satisfaction, is another example of a potentially good idea implemented in a superficial manner. Outcomes. The typical approach to business system redesign or reengineering reveals why so little is typically accomplished. While some business-system redesign efforts have attempted to listen to the “voice of the cus-

tomer,N most focus on eliminating unnecessary personnel, reducing cycle time, or developing lean production methods-a preoccupation with the operational level. The results are mixed at best, and the reasons for this are clear. In one report on reengineering efforts in 20 different companies, researchers identified six factors associated with successful implementation. These included managing changes in: (1) roles and responsibilities; (2) organizational structure; (3) measurements and incentives; (4) shared values; (5) necessary skills; and (6) information technology. Work redesign efforts that did not attend adequately to these factors were unsuccessful. Most organizational problems occur at the boundaries between the traditional functions-in the “white spaces” between the boxes on the organizational chart. Unless these problem areas are addressed directly in any work redesign effort, no real improvements will emerge. What must be done. In a recent book, Michael Hammer, America’s reengineering guru, argues that business process redesign should lead to a radical new organizational structure, one based on horizontal, end-toend processes carried out by teams, and that such teams should be dramatically different from today’s traditional functional departments. These teams take complete responsibility for such processes as new-product development, production, and customer management, tasks now assigned to departments composed of workers who perform similar tasks with no one having accountability for the final outcome. Hammer further points out that this horizontal process-based structure allows everybody in the organization to concentrate on delivering value to the customer. He defines a process as a group of related tasks that together create a result of value to the customer. So, unlike the traditional functional department, the customer-management process involves quite dissimilar tasks-selling, credit analysis, picking, packing, and shipping, as well as ongoing customer service. In contrast, consider the structure of a

typical advertising agency. The client may have some “face time” with the account manager, but the account is serviced by a variety of functional departments-art, copy writing, design, and so on. Each functional unit may have its own concepts, all too often resulting in divisiveness, conflict, and a failure to provide customer value. Commercial banking suffers from many of the same problems by forcing the customer to deal separately with the different parts of the bank to lease equipment, establish a line of credit, apply for a construction loan, and so on. What the customers of both the ad agencies and banks, and the rest of us, require is seamless service, with a single interface: a provider that integrates resources to provide comprehensive customer service and yields a high level of customer value. British Airways found that its traditional hierarchical structure was a major factor in limiting customer value. The traditional structure consisted of a group of functions: reservations, sales, airport services (check-in, baggage handling, and boarding/disembarking), in-flight services (cabin staff), and food services, each with a director-and each with the usual frictions and territorial disputes. Once these functions were integrated into a single, horizontal process-based organization, it became possible for BA to realize its mission of becoming “The Worlds Favourite Airline.” If, however, a seemingly outstanding business systems redesign does not also change the traditional hierarchical organization, it will produce only modest improvements. On the other hand, even an average redesign effort that also changes the organizational structure to a process-centered one will likely produce very good outcomes. And if high quality reengineering is combined with the development of a truly process-centered organization, spectacular results follow. These results occur because the process teams have developed high level skills enabling them to carry the process further on a continuing basis. Thus we can see why most of the business redesign efforts to date have produced such modest results: They typically maintain the traditional organizational structure and SUMMER

1938

25

Creating Greater Customer ValueMayRequire a lot of Changes AndersenWindowsof Bayport,Minnesota-a $1 billion manufacturerof windows for the home buildingindustryoffers a usefulexampleof how providingcustomervalueimpacts an organization.Untilabout 15 yearsago, Andersen was a mass producerof a varietyof standardwindows in largebatches.In an effort to meet customerneeds,Andersen keptaddingto its product line,which led to fatter cataloguesand a bewilderingset of choicesfor both home owners and contractors.In a six-yearperiod,the number of productsalmost tripled.The order systemsbecame so complexthat calculatinga price quote for windows in a new home couldtake severalhours and run over a dozen pages. Furthermore,this complexityalmostdoubledthe errorrate, which beganto damagethe company’sreputationfor superior quality. In orderto bring order out of chaos, Andersendevelopedan interactivecomputerversionof the papercatalogues it soldto distributorsand retailers.With this system,the outlet salespersoncan help customerscustomizeeachwindow to meet their needs,checkthe designfor structuralsoundness,and generatea price quote. The system reduces the time involvedby more than 75 percentand is virtuallyerrorfree. And of course,customersget preciselywhat they want, promptly,and without hassle-true customervalue. But these accomplishmentshavebeen costly in both effort and money. Eachof the showroom computers-there are now 650 of them-are connectedto the factory, Eachcustomeris assigneda code numberthat allowsthe order to be trackedthroughthe productionprocessand assuresan error-free,on-timeorder.Further,Andersenhadto develop a manufacturingsystemthat used somecommon finishedparts (suchas mullions,the verticalor horizontalstripsseparatingwindow panesand sashes)but which also allowedconsiderablevariabilityin the final products.Thiswas a far cry from the old batch manufacturingprocess. Andersen’snext step was to developa “batch of one” manufacturingprocessin which everythingwas made to order,thus reducingits finishedparts inventory(a major cost to the company). Makingthese changeswas expensive and requiredprofound changesthroughoutthe organization,but Andersenregardedthe changesas necessaryto retain its image and market share. thus impact only the organization’s operational level. To have any influence on both the operational and strategic levels, the basic organizational structure must be changed. People who work in traditional organizational silos hear the voice of the boss, not the voice of the customer. The process-based organization. The process-based organization shifts employees’ focus away from internal relationships (and the need to defend either themselves or their functional areas), and toward the customer. Building this kind of focus should be the goal of organizational redesign efforts. But since this requires a sharp departure from our traditional, functional organizational structures, it will likely encounter strong resistance. One reason for this resistance is that 26

ORGANIZATIONAL

DYNAMICS

power in the process-centered organizations is horizontal, not vertical. Power is in the hands of the process managers who will be held responsible for results, for outcomes, not for functions. Since these managers have (or should have) the resources to manage the process, the buck stops with them-a scary prospect for many managers reared in traditional organizations. Such managers may lack the skills or the desire to tackle such new and complex challenges and will be serious obstacles to implementing such changes. And many organizational power brokers will resist any loss of their traditional power bases. None of these sources of resistance should prevent the creation of a process-based organization, but they wilt make it difficult. Quality function deployment. The analytical process known as quality fu~~ction deploy-

meni (QFD) provides an approach to deploying the voice of the customer through all aspects of the product development process. Using QFD for development of a new product always involves a cross-functional team with the skills necessary for designing the product, writing engineering specifications, purchasing materials, and planning the tooling and production work. Such development teams eliminate rework and typically reduce development time by at least 50 percent. QFD teams tend to involve many fewer people than the traditional departmentalized design process, and the involvement of customers throughout the process increases customer value. This participation involves a great deal more than asking a focus group to approve the final design of a product. Rather, QFD requires the design team to obtain an indepth understanding of what customer needs are to be met by the product, how the product is to be used, and what “noise factors” (i.e., factors outside the customer’s control) need to be considered. One objective is to make the product sufficiently robust or insensitive to these noise factors. Product development. One of the important consequences of adopting QFD is that it moves the organization from a reactive to a proactive product development process, one that front loads its efforts by focusing on organizational consensus, rigorous planning, and problem prevention. These efforts result in bringing products to market earlier with fewer production problems, thus reducing the resources needed for resolving production problems and handling customer dissatisfaction. A study by the American Supplier Institute compared the results of two companiesone with a proactive product design process and the other with a reactive one, but both producing virtually identical products. Both companies kept records of the number of design changes underway at any time during the product development cycle. While the proactive company had fewer total design changes, another issue-the timing of the changes-emerged as the more critical factor. More than 90 percent of the changes were

Talking withCustomers at EveryStage At Wiremold,a West Hartford, Connecticut,electrical goods manufacturer,product designteams consist of only three members-a marketer, a design/productengineer,and a productionengineer. The teams routinely interview the architects and electricalcontractorswho aretheir customersabout their needsin orderto reacha preliminarybroaddefinitionof the product.This definitionis refinedagain and againthrough interviewswith other customers as the product gradually takes shape in the team members’minds and on their computer screens,At first, the designersobjectedto the notion of having a production engineerparticipate in these discussions. In time, the virtue of havingthe entireteam see the product through the eyes of the customer became apparent. The QFDapproachenabledWiremoldto reduce the design processfrom three yearsto lessthan six months. Customers’ acceptance of new products climbed. Salesincreasedby 150 percent, both by creatingnew marketnichesand by capturingsales from Wiremold’scompetitors,handicappedwith traditionalsluggishproduct developmentcycles.

made more than a year before production actually started. In contrast, the reactive company was still making a significant number of changes during production. This means that the changes that were made after production started required expensive and time-consuming retooling as well as a stopping of the production process. The study concluded with the observation that the relative payback for eliminating these design changes was lO:l, a substantial gain by any reckoning. But beyond the cost savings and increased profitability, QFD should be seen as a highly useful technique for ensuring that the customer’s voice is being heard and that producing customer value is the organization’s focus. SUmR

1998

27

INFORMATION TECHNOLOGY Information technology (IT) is not typically considered to be an agent of change. From its beginnings as a means of increasing the speed and accuracy of data analysis, IT has focused on operational efficiency-on improving the quality of the products (information) produced for its customers. But IT typically used its own (not the customers’) measures of that quality. Senior IT managers often expressed disdain for customers, especially internal ones. We actually had the experience of one senior IT manager for an international airline telling us, “We’re simply too good for the rest of the people who work around here!” Such attitudes are unlikely to generate value for any customers, internal or external. Facilitating an IT component’s change of focus from internal to external is an element of business process redesign that frequently requires an extensive amount of intervention by OD specialists. These changes do not come easily. But changes are essential if IT is to serve the organization. As we noted earlier, true customer value is most likely to be produced by a processbased organization, one that is both structured and managed for that purpose. And such a process-based organization requires continuous access to information, any time and any place. The role of IT in such an organization should be that of a process enabler, one that facilitates the organization’s ability to serve the customer. The development of systems that allow prompt and effective customer service has become an absolute necessity. Witness how Hertz and Avis have battled for customers, initially using systems that bypassed the counter check-in and allowed renters to go directly to the lot to pick up their preassigned cars. Later both companies introduced lot attendants with hand-held computers to allow curbside check-in at the end of the rental period, with both processes providing true customer value through reduced cycle time. A similar example of using reduced cycle time to produce customer value is found in 28

ORGANIZATIONAL

DYNAMICS

Pizza Hut, Malaysia. When home delivery was first introduced in Malaysia-an innovation at the time-customers had to determine which Pizza Hut was closest, find the telephone number, call the order in, and wait for delivery. To meet customer demands for a better system, Pizza Hut developed an ITbased ordering system with a single toll-free number for the Kuala Lumpur metropolitan area. After an order is placed through the centralized service center, it is transmitted to the Pizza Hut unit nearest to the customer with delivery promised in 30 minutes. The system not only transmits the order but also automatically checks credit information and provides road-map grid coordinates. Further, Pizza Hut maintains a customer database that allows the order taker to quickly identify each customer, his or her location, and the customer’s favorite toppings, reducing cycle time while allowing for up-selling. This database is also used for mailing of promotional coupons as well as for inventory control and marketing analysis. In a recent trip to Malaysia, we were impressed that every single manager in attendance at our seminar, none of whom had ever worked for Pizza Hut, knew the Pizza Hut toll-free number, a triumph of marketing that enhances customer value. The changes at Andersen Windows discussed earlier simply would not have been possible without the IT support being in place. At Andersen, this not only involved developing a software package that enabled customers to design and price their choices, but also required a system that provided instantaneous communication with the factory. Neither of these is an easy task, but clearly a customer-based organization requires both. Providing true customer value is now redefining IT’s customer. More and more, that customer is the end-user who needs or desires direct access to the data, not access through some intermediary. Initially, both FedEx and United Parcel Service (UPS) offered continuous tracking of customers’ shipments through a toll-free number, one that allowed a customer service representa-

tive to check the shipment using the waybill number. While this system provided the necessary information, customers wanted more control. Both quickly provided customers with the capacity for directly accessing the information desired-either through the Internet or through a PC-based software package furnished free of charge. Once the proper menu is displayed, customers can enter the waybill number and learn the status of their shipment immediately. Not only did this new process enhance customer value, but in its first year of operation the new system saved FedEx over $16 million!

tomers and the more frequent customers of tomorrow, we regard these changes in IT as strategic rather than merely operational. These are changes that prepare organizations to accommodate the future. Measurements. Assessing the success of this new approach requires the development of a better measurement system. A traditional IT system depends on transaction-based measurements in which the customer, even an internal one, is not directly involved and thus does not care. A process-based IT system focuses instead on cycle time, how promptly and well the customer is being served. All

A process-based organization requires continuous access to information.. .. l%e role of IT in such an organization should be that of process enabler. Airlines are moving in a similar direction by providing opportunities for obtaining flight information, pricing, and reservations directly, either through the Internet or by using special PC-based software furnished by the airlines. While the development of such programs is clearly costly in both money and time, they are regarded by these businesses as important investments in providing customer value. And since they eliminate the need for involvement by an even more costly human representative of the company, there will be eventual cost savings. Similar developments are already well established in retail banking through automatic teller machines (ATMs) and PC-based computer banking. Unquestionably, however, these innovations in IT do not provide increased value for all customers. Many customers remain uninterested or even antagonized by these new technologies, but a growing number of customers-educated, computer-literate, and technically oriented-do find increased customer value in these new applications. Given that these are today’s most profitable cus-

such customer-value measurement systems must be based on a comprehensive understanding of customer needs. MBNA, a Wilmington, Delaware, credit card company, provides a useful example of how such a specially designed measurement system can track customer value, which in this case involves speed of response. MBNA had 24-hour service representatives available on a toll-free number as early as 1986, the first in the industry. But to ensure prompt customer service, more recently the company developed a series of 15 cycle-time measurements, including a “two-ring pickup,” which tracks how often phones are answered within two rings. MBNA has a requirement that 98.5 percent of calls be answered within two rings, an increase from 90 percent just 10 years ago. As service performance has improved over time, so have their customers’ expectations. Thus, the bar is raised regularly. It is interesting to note this focus on cycle time has not eliminated an equal commitment to quality. MBNA’s customer retention SUMMER1998

29

rate of 98% of profitable customers, its profitability, and its stock price all attest to the positive impact of this focus on customer value. And it should be noted that none of this would have been possible without extensive attention to the use of IT. Nor would any of the other organizational change efforts that we have discussed earlier been possible without the commitment and technology of the organization’s IT group. As we have previously observed, one of the six critical areas on which the success of change efforts depends is IT. Thus IT becomes an agent of change.

ORGANIZATION

DEVELOPMENT

Organization development (OD) is the last of the three primary change technologies that we intend to address, and it is the one that traditionally has had the strongest internal focus. While most definitions of OD involve such statements as “organization development is a process of fundamental change in an organization’s culture,” the direction of such changes is rarely articulated or specified. And even in the most recent writings on OD, there is little or no focus on the customer, nor can one find the term “customer” in the index of any of the leading OD texts. An implicit set of values has traditionally driven most OD efforts, values that the principal writers on OD have made explicit. These are: (1) the growth and development of employees is as important as meeting organizational goals, including making a profit; (2) equal opportunity and fairness must characterize the way people deal with each other in an organization; (3) participative management is preferable; (4) cooperation rather than competition should characterize internal relations; (5) open communications should predominate; (6) widespread ownership of the organization’s missions and goals is necessary; (7) conflict is openly managed; (8) rewards are based fairly upon contributions; and (9) workers are given as much autonomy as possible to do their jobs. While these are laudatory goals, they all 30

ORGANIZATIONAL

DYNAMICS

are internal. Organization development must become far more externally focused if it is to aid and abet the creation of a true customer focus in the organization, one that consistently produces customer value. One important role that OD must embrace if it is to continue to be an important agent of organizational change is that of advocating, supporting, and facilitating the transformation of the organization from a traditional hierarchical organization to a horizontal, process-based structure developed through business systems redesign. Such reengineering efforts should have two primary goals-massive increases in organizational effectiveness and the provision of significantly enhanced customer value. Fidelity Investments, a Boston, Massachusetts money-management company, provides a good example of how such a process is implemented. Most organizations tend to consider such tasks as mail and telephone service as well as IT to be back office functions, necessary but mundane. Fidelity takes a very different tack, seeing these functions as an additional way of producing customer value in a highly volatile business. In 1994, Fidelity opened a $100 million, 18%acre office park in Covington, Kentucky, a Cincinnati, Ohio suburb. The facility includes a mail warehouse as well as two office buildings in a park-like environment with jogging trails, streams, and waterfalls. The bucolic setting belies the high tech printing and mailing operation housed there, one that operates 24 hours a day, seven days a week and uses the most advanced machines to print, sort, stuff, and stamp the prospectuses, brochures, and other materials necessary to run a $400+ billion investment firm. In one study, a Wull Street Jo~ournal reporter called six different mutual fund companies and requested a prospectus from each. Fidelity’s arrived first and was the only one followed by a phone call from a salesperson, both of which build customer value. But the technical operational systems only partially account for such successes. Fidelity’s attention to its people is another key component. The site communicates a

Even in the most recent little

or no focus

find

the term

leading

texts.

writings

on the customer,

‘kustomer”

on OD, there nor can one

in the index

OD must become

is

more

of the externally

focused. message that is echoed by an above-market compensation system with bonuses and other perks. Employees’ pride in their work and in their organization are concomitants of high productivity and low error rates. All of these changes are the natural activities of the competent OD practitioner and none would have occurred without OD involvement in the process. OD itself needs to be more open to integrating IT into its tool kit. Poor communications regularly top an organization’s tenmost-serious-problems list. Yet even when management begs its employees for feedback, the silence is deafening. What can OD do to break this impasse? Pillsbury, the Minneapolis-based bakery products manufacturer, provides an example. Pillsbury, at the recommendation of its human resources group, adopted InTouch, a third-party, voice-mail system that allows employees to give management anonymous feedback, with verbatim transcripts of every call forwarded to management, including the CEO. The system exposes inefficiencies and identifies brush fires that need immediate attention. And since each transcript is actually read by the chief executive officer, the system motivates employees to keep calling. Over time, the frequency of constructive criticism has increased and InTouch is now seen as a valuable management tool, despite the uneasiness that its adoption caused among many top managers. While anonymous telephone calls are a far cry from the open communications that are part of the OD credo, the system can be used as a beginning wedge in

opening up internal communications. Realizing OD values. It is most important to recognize that a significant outcome of changing from an internal to an external focus is an enormous increase in autonomy and responsibility for all workers. Expecting workers to do whatever it takes to deliver value to a customer inevitably leads to a professionalization of those workers-including those wearing the traditional blue collarsbecause the true hallmark of a professional is someone who is responsible for achieving a result, not merely completing a task. What could be more congruent with the traditional values of OD? But there is even more. It should be clear that successful business systems redesign demands a widespread ownership of the organization’s missions and goals. Such techniques as quality function deployment require teamwork, high levels of participation, and a foundation made from internal cooperation rather than competition. Naturally, conflict must be openly managed. Also these business systems redesigns will change the nature of work and jobs, from narrow task specialists to more broad-based process owners. The traditional corporate ladder environment will no longer exist; there will be fewer managerial steps to which to aspire. What will matter is how well one functions in a team to produce results for customers-to enhance customer value. Growth and development of individuals through cross-training is essential if such process-based organizations are to be created and rewards must be related to contributions. The process-based organization suMMER19ps 31

demands open communications and can only be managed through genuine participation of those involved. The development of process-based organizations involves a fundamentally different way of thinking about work-one that is much more rewarding than the present way. We are not suggesting that work will be less demanding; indeed, assuming responsibility for achievement increases pressure rather than decreases it, but it does make work more purposeful and more intrinsically rewarding. To be sure, some organization members will not or cannot accept such responsibility. But this will not be true for the overwhelming majority of employees who will be delighted by these opportunities to move beyond Dilbert’s cubicle-dominated environment. Thus, we strongly believe that, as organizations become more external in concentrating on the customer and producing customer value, the explicit values on which OD has been based are more likely to be realized, not less likely. An interesting paradox, at least to some of us. The continued need for OD. Not only do we insist that business systems redesign will actually lead to a world dominated by the humanistic values of OD, but we also see this new world as increasing the need for OD. In our earlier discussion of business system redesign, we raised the issue of the strong resistance that implementing such changes would engender. In recent years, change management has become a core OD skill, one vitally needed as organizations move into a process-based mode of operations. The participation of OD in facilitating this change would be an important step in demonstrating the commitment of the OD function to operate on the strategic as well as the operational level. Another important area for OD is in helping the members of process-based teams work more effectively. Such an intervention, however, must be on other than the operational level. It is not enough to provide training and facilitation for the teams themselves; on the strategic level, OD 32

ORGANIZATIONAL

DYNAMICS

also must assist the organization in understanding that this new management approach needs new processes for recognizing and compensating team members. The traditional, individually focused reward system is inadequate to support a process-based organization. Finally, each of the other factors that are vital for the success of these changes, clarifying roles and responsibilities, creating an appropriate organization structure, developing appropriate measures, facilitating the creation of shared values, and learning the necessary skills, are all within the competent OD practitioner’s tool kit. What seems to be necessary is a realization that focusing on these issues within the context of creating a process-based organization is an appropriate and important direction for OD to move.

CONCLUSIONS The critical factor distinguishing the organizations of today from those of the past is the level and diversity of the external pressures they face-pressures from stockholders to raise share prices, pressures from old and new competitors determined to increase their market share at the organization’s expense, pressures from the ever-changing world of technology, pressures from growth in product liability claims, pressures from society to be that undefined “good corporate citizen,” and the pressures of employee malcontents. Responding to these pressures in a piecemeal fashion will not produce organizational success. Alternatively, reactive management, in an attempt to satisfy these constituents usually turns to such quick fixes as reorganization, merger, downsizing, and isolated reengineering projects. The results have not been dazzling. More than ever, this turbulent environment requires a different approach, one that can reliably increase organizational effectiveness and enhance customer value, and one that can produce sustainable competitive

advantage while still satisfying those stakeholders crying for more. Strategy development must begin with a deep understanding of what customers value today and how these values might change in the future. That understanding is the foundation on which strategy implementation and organizational redesign must rest. Moreover, it allows the organization to identify those key processes that provide customer value and become the basis for the new organization structure-one that requires OD participation to succeed fully. The long-term success of this structure, however, requires the integration of the three elements of change-business system redesign, IT, and OD-into a seamless whole. Then, process can replace function as the primary producer of customer value within the organization. Achieving this integration requires a new role for information technology. IT must move from a supportive to an enabling role. IT is essential in erasing the white space between functions, and it must translate its explosive capabilities into organizational imperatives. Challenging the organization in the continual search for more effective technology adoption is a radical departure from the traditional role of IT. Michael Hammer perhaps puts it best, “It is time to stop paving over the cow paths. Instead of embedding outdated processes in silicon and software, we should obliterate them and start over.” But this radical change required of IT is

no more difficult than the issues the organization, steeped in functional hierarchies, will encounter in moving to process-based management. Facilitating this metamorphosis in established organizations will require a proactive OD role not usually encountered. And this need will outlive the transition period. Changing customer values, new developments in technology, and continuous improvement will keep this structure in flux well into the future. Should an organization freeze, even in this new model, it will soon be outdistanced by more nimble competitors. OD practitioners must be ready to step up to these challenges and senior management must welcome those practitioners to the board room. OD can become strategically important to organizational success only if it too adopts the new focus on customer value and helps facilitate organization-wide commitment to customer value. The temptation to try the quick fix may seem overwhelming. It must be resisted. To tinker with the organization without a firm grasp of what the customer sees as valuable and without a detailed understanding of the processes that produce that value has little chance of producing more than a short spike in performance and may very well contribute to ultimate collapse. To order reprints, call 800-644-2464 (ref. number 9581). For photocopy permission, see page 2.

SUMMER

1998

33

SELECTED BIBLIOGRAPHY Michael Porter (“What Is Strategy?“, Harvard Business Review, 1996, Vol. 74, No. 6, pp. 61-78) is one of many who makes the point that strategy and effectiveness are different concepts. An earlier version of our ideas, “Measuring Customer Value: Gaining the Strategic Advantage,” appeared in the Winter, 1996 issue of Organizationlzl Dynamics (Vol. 24, No. 3, pp. 63-77). We based our ideas of levels of customer value on N. Kano, N. Seraku, and S. Tsuji’s “Attractive Quality and Must-Be Quality,” Quality, Vol. 14, pp. 4-17. The issues involved in using customer satisfaction measures are covered by T. J. Jones and W. W. Sasser, Jr., in “Why Satisfied Customers Defect,” in the Nov.-Dec. 1995 issue of the Harvard Business Review, Vol. 73, No. 6, pp. 88-99. Betsy Sanders’ Fabled Service: Ordinary Acts, Extruordinavy Outcomes (San Diego: Pfeiffer & Co.) is a well-documented insider’s report on Nordstrom. Michael Hammer’s 1996 Beyond Reengineering (New York: Harper Business) provides the most up-to-date overview of business systems redesign. K. S. Cameron reports on several studies of the results of redesign efforts in “Techniques for Making

34

ORGANIZATIONAL

DYNAMICS

Organizations Effective” in D. Druckman, J. E. Singer, and H. I’. Van Cott’s Enhancing Organizational Effectiveness (National Academy Press, 1996). G. Hall, J. Rosenthal, and J. Wade report on the reasons for the failures of reengineering in “How to Make Reengineering Really Work,” Harvard Business Review, July-August 1990, Vol. 71, No. 6, pp. 119-131. An in-depth study of the success of British Airways in organizational change is found in L. D. Goodstein and W. W. Burke’s 1991 article, “Creating Successful Organizational Change,” Organizational Dynamics, Vol. 19, No. 4, pp. 5-17. Quality Function Deployment: Executive Briefing, Version 3.0 (American Supplier Institute, 1992, Allen Park, MI) provides a useful overview of this process. J. I’. Womack and D. T. Jones’s Lean Thinking: Banish Waste and Create Wealth in Your Covpovation (New York: Simon & Schuster, 1996) provides further elaboration and examples of quality function deployment. Warner Burke’s recent (1997) overview of OD (“The New Agenda for Organization Development,” Organizational Dynamics, Vol. 26, No. 1, pp. l-20) addresses the tasks of OD.