Reengineering the Corporation

Michael Hammer, James Champy

• Publisher: HarperCollins e-books
• Year: 2009
• ISBN:
  9780061808647
• Topic: Business
• Subtopic: Business General
• Index: Business

The most successful business book of the last decade, Reengineering the Corporation is the pioneering work on the most important topic in business today: achieving dramatic performance improvements. This book leads readers through the radical redesign of a company's processes, organization, and culture to achieve a quantum leap in performance.

Michael Hammer and James Champy have updated and revised their milestone work for the New Economy they helped to create -- promising to help corporations save hundreds of millions of dollars more, raise their customer satisfaction still higher, and grow ever more nimble in the years to come.

---

CHAPTER 1

---

THE CRISIS THAT WILL
NOT GO AWAY

Not a company exists whose management doesn’t say, at least for public consumption, that it wants an organization flexible enough to adjust quickly to changing market conditions, lean enough to beat any competitor’s price, innovative enough to keep its products and services technologically fresh, and dedicated enough to deliver maximum quality and customer service.

So, if managements want companies that are lean, nimble, flexible, responsive, competitive, innovative, efficient, customer-focused, and profitable, why are so many businesses bloated, clumsy, rigid, sluggish, noncompetitive, uncreative, inefficient, disdainful of customer needs, and losing money? The answers lie in how these companies do their work and why they do it that way. The results companies achieve are often very different from the results that their managements desire, as these examples illustrate.

• A manufacturer we visited has, like many other companies, set a goal of filling customer orders quickly, but this goal is proving elusive. Like most companies in its industry, this company uses a multitiered distribution system. That is, factories send finished goods to a central distribution center (CDC). The CDC in turn ships the products to regional distribution centers (RDCs), smaller warehouses that receive and fill customer orders. One of the RDCs covers the geographical area in which the CDC is located. In fact, the two occupy the same building. Often and inevitably RDCs do not have the goods they need to fill customers’ orders. This particular RDC, however, should be able to get missing products quickly from the CDC located across the hall, but it doesn’t work out that way. That’s because even on a rush/expedite order, the process takes eleven days: one day for the RDC to notify the CDC that it needs parts; five days for the CDC to check, pick, and dispatch the order; and five days for the RDC to officially receive and shelve the goods, and then pick and pack the customer’s order. One reason the process takes so long is that RDCs are rated by the amount of time they take to respond to customer orders, but CDCs are not. Their performance is judged on other factors: inventory costs, inventory turns, and labor costs. Hurrying to fill an RDC’s rush order will hurt the CDC’s own performance rating. Consequently, the RDC does not even attempt to obtain rush goods from the CDC located across the hall. Instead, it has them air-shipped overnight from another RDC. The costs? Air freight bills alone run into millions of dollars annually; each RDC has a unit that does nothing but work with other RDCs looking for goods; and the same goods are moved and handled more times than good sense would dictate. The RDCs and the CDC are doing their jobs, but the overall system just doesn’t work.

• Often the efficiency of a company’s parts comes at the expense of the efficiency of its whole. A plane belonging to a major U. S. airline was grounded one afternoon for repairs at airport A, but the nearest mechanic qualified to perform the repairs worked at airport B. The manager at airport B refused to send the mechanic to airport A that afternoon, because after completing the repairs the mechanic would have had to stay overnight at a hotel and the hotel bill would come out of manager B’s budget. Instead, the mechanic was dispatched to airport A early the following morning; this enabled him to fix the plane and return home the same day. A multimillion dollar aircraft sat idle, and the airline lost hundreds of thousands of dollars in revenue, but manager B’s budget wasn’t hit for a $100 hotel bill. Manager B was neither foolish nor careless. He was doing exactly what he was supposed to be doing: controlling and minimizing his expenses.

• Work that requires the cooperation and coordination of several different departments within a company is often a source of trouble. When retailers return unsold goods for credit to a consumer products manufacturer we know, thirteen separate departments are involved. Receiving accepts the goods, the warehouse returns them to stock, inventory management updates records to reflect their return, promotions determines at what price the goods were actually sold, sales accounting adjusts commissions, general accounting updates the financial records, and so on. Yet no single department or individual is in charge of handling returns. For each of the departments involved, returns are a low-priority distraction. Not surprisingly, mistakes often occur. Returned goods end up “lost” in the warehouse. The company pays sales commissions on unsold goods. Worse, retailers do not get the credit that they expect, and they become angry, which effectively undoes all of sales and marketing’s efforts. Unhappy retailers are less likely to promote the manufacturer’s new products. They also delay paying their bills, and often pay only what they think they owe after deducting the value of the returns. This throws the manufacturer’s accounts receivable department into turmoil, since the customer’s check doesn’t match the manufacturer’s invoice. Eventually, the manufacturer simply gives up, unable to trace what really happened. Its own estimate of the annual costs and lost revenues from returns and related problems runs to nine figures. From time to time, management attempts to tighten up the disjointed returns process, but it no sooner gets some departments working well than new problems crop up in others.

• Even when the work involved could have a major impact on the bottom line, companies often have no one in charge. As part of the government’s approval process for a major new drug, for instance, a pharmaceutical company needed field study results on thirty different patients who took the medicine for one week. Obtaining this information took the company two years. A company scientist spent four months developing the study and specifying the kind of data to be collected. Actually designing the study took only two weeks, but getting other scientists to review the design took fourteen. Next, a physician spent two months scheduling and conducting interviews in order to recruit other doctors who would identify appropriate patients and actually administer the trial drug. Securing permission from all the hospitals involved took a month, most of which was spent waiting for replies. The physicians administering the one-week dose were paid in advance, so they had no incentive to accelerate their work. Collecting the forms that the doctors filled out took two months. Next, the study administrator sent the forms to data entry, where errors were discovered on about 90 percent of them. Back they went to the protocol designer, who sent them to the study administrator, who returned them to the physicians, who tried to correct the mistakes. As a result of its own field study process (not the government’s approval process), the company lost nearly two years’ profits, worth millions of dollars, on this drug, as it had on many others. Yet, to this day no one at the company has overall responsibility for getting field studies done.

These are stories taken more or less at random from our experiences; they could be replicated endlessly. These companies are not exceptions; they are the rule. This is not how corporate executives say they want their companies to behave, yet this behavior persists nonetheless. Why?

Corporations do not perform badly because, as some critics have claimed, workers are lazy and managements are inept. Our record of industrial and technological accomplishment in the last century is proof enough that managements are not inept and workers do work. Ironically, the explanation for why companies perform badly is the identical explanation for why they used to perform so well.

During the twentieth century, American entrepreneurs led the world in creating business organizations that set the pace for product development, production, and distribution. No wonder these companies served as organizational models for businesses around the globe. American corporations delivered affordable factory-made goods, built and operated railroads that spanned the continent, created technological advances, such as the telephone and automobile, that changed the way we lived, and produced the highest standard of living the world had ever known. That these same companies and their descendants no longer perform well isn’t because of some intrinsic flaw; it is because the world in which they operate has changed beyond the limits of their capacity to adjust or evolve. The principles on which they are organized were superbly suited to the conditions of an earlier era, but they can stretch only so far.

Advanced technologies, the disappearance of boundaries between national markets, and the altered expectations of customers who now have more choices than ever before have combined to make the goals, methods, and basic organizing principles of the classical corporation sadly obsolete. Renewing their competitive capabilities isn’t an issue of getting the people in these companies to work harder, but of learning to work differently. This means that companies and their employees must unlearn many of the principles and techniques that brought them success for so long.

Most companies today—no matter what business they are in, how technologically sophisticated their product or service, or where their business is located—can trace their work styles and organizational roots back to the prototypical pin factory that Adam Smith described in The Wealth of Nations, published in 1776. Smith, a philosopher and economist, recognized that the technology of the industrial revolution had created unprecedented opportunities for manufacturers to increase worker productivity and thus reduce the cost of goods, not by small percentages, which one might achieve by persuading an artisan to work a little faster, but by orders of magnitude. In The Wealth of Nations, Smith, a radical thinker and forebear of the business consultant, explained what he called the principle of the division of labor.

Smith’s principle embodied his observations that some number of specialized workers, each performing a single step in the manufacture of a pin, could make far more pins in a day than the same number of generalists, each engaged in making whole pins. “One man,” Smith wrote, “draws out the wire, another straightens it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper.” Smith reported that he had visited a small factory, employing only ten people, each of whom was doing just one or two of the eighteen specialized tasks involved in making a pin. “These ten persons could make among them upwards of forty-eight thousand pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day.”

The division of labor increased the productivity of pin makers by a factor of hundreds. The advantage, Smith wrote, “is owing to three different circumstances; first, to the increase of dexterity in every particular workman; secondly, to the saving of the time which is commonly lost in passing from one species of work to another; and lastly, to the invention of a great number of machines which facilitate and abridge labor, and enable one man to do the work of many.”

Today’s airlines, steel mills, accounting firms, and computer chip makers have all been built around Smith’s central idea—the division or specialization of labor and the consequent fragmentation of work. The larger the organization, the more specialized is the worker and the more separate steps into which the work is fragmented. This rule applies not only to manufacturing jobs. Insurance companies, for instance, typically assign separate clerks to process each line of a standardized form. A clerk completes his or her task and then passes the form to another clerk, who processes the next line. These workers never complete a job; they just perform piecemeal tasks.

Over time, U.S. companies became the best in the world at translating Smith’s organizing principles into working business organizations, even though, when Smith first published his ideas in 1776, not much of a domestic market existed for American-made goods. Americans, who numbered only 3.9 million, were separated from one another by bad roads and poor communications. Philadelphia, with 45,000 residents, was the fledgling nation’s largest city.

Over the next half century, though, the population exploded and the domestic market expanded accordingly. The population of Philadelphia, for example, quadrupled, though New York was now the largest city with 313,000 people. Manufacturing facilities sprouted around the country.

Part of this growth occurred because of innovative changes in the ways in which goods could be shipped. In the 1820s, Americans began building railroads, which not only extended and accelerated economic development but also moved the evolution of business management technology forward. It was railroad companies that invented the modern business bureaucracy—a significant innovation then and an essential one if industrial organizations were going to grow beyond the span of one person’s control.

To prevent collisions on single-track lines that carried trains in both directions, railroad companies invented formalized operating procedures and the organizational structure and mechanisms required to carry them out. Management created a rule for every contingency they could imagine, and lines of authority and reporting were clearly drawn. The railroad companies literally programmed their workers to act only in accordance with the rules, which was the only way management knew to make their one-track systems predictable, workable, and safe. Programming people to conform to established procedures remains the essence of bureaucracy even now. The command-and-control systems in place in most companies today embody the same principles the railroads introduced 150 years ago.

The next large evolutionary steps in the development of today’s business organization came early in the twentieth century from two automobile pioneers: Henry Ford and Alfred Sloan.

Ford improved on Smith’s concept of dividing work into tiny, repeatable tasks. Instead of having skilled assemblers build entire cars from parts they would fit together, Ford reduced each worker’s job to installing a single part in a prescribed manner. Initially, workers walked from one assembly stand to the next, taking themselves to the work. The moving assembly line, the innovation for which Ford is best remembered, simply brought the work to the worker.

In breaking down car assembly into a series of uncomplicated tasks, Ford made the jobs themselves infinitely simpler, but he made the process of coordinating the people performing those jobs and of combining the results of their tasks into a whole car far more complex.

Then Alfred Sloan stepped in. Sloan, the successor to General Motors’ founder William Durant, created the prototype of the management system that Ford’s immensely more efficient factory system demanded.

Neither Henry Ford nor Durant ever learned how to manage the huge, sprawling organizations that their success with assembly-line production both necessitated and made possible—the engineering, manufacturing, assembly, and marketing operations. Durant, especially, with GM’s far greater mix of cars and models, was constantly finding that the company had produced too many of one model for current market conditions or that production had to be suspended because not enough raw materials had been procured. After Sloan took over at GM, he made the system Ford had pioneered complete, and it is this total system to which the term “mass production” applies today.

Sloan created smaller, decentralized divisions that managers could oversee from a small corporate headquarters simply by monitoring production and financial numbers. Sloan set up one division for each car model—Chevrolet, Pontiac, Buick, Oldsmobile, and Cadillac—plus others making components such as generators (Delco) and steering gears (Saginaw).

Sloan was applying Adam Smith’s principle of the division of labor to management just as Ford had applied it to production. In Sloan’s view, corporate executives did not need specific expertise in engineering or manufacturing; specialists could oversee those functional areas. Instead, executives needed financial expertise. They had only to look at “the numbers”—sales, profit and loss, inventory levels, market share, and so forth—generated by the company’s various divisions to see if those divisions were performing well; if not, they could demand appropriate corrective action.

Sloan’s management innovations saved General Motors from early oblivion and, what’s more, also solved the problems that had kept other companies from expanding. The new marketing specialists and financial managers that Sloan’s system required complemented the company’s engineering professionals. The head of GM firmly established the division of professional labor in parallel with the division of manual labor that had already taken place on the factory floor.

The final evolutionary step in the development of corporations as we know them today came about in the United States between the end of World War II and the 1960s, a period of enormous economic expansion. The regimes of Robert McNamara at Ford, Harold Geneen at ITT, and Reginald Jones at General Electric epitomized management of that era. Through elaborate planning exercises, senior managers determined the businesses in which they wanted to be, how much capital they should allocate to each, and what returns they would expect the operating managers of these businesses to deliver to the company. Large staffs of corporate controllers, planners, and auditors acted as the executives’ eyes and ears, ferreting out data about divisional performance and intervening to adjust the plans and activities of operating managers.

The organizational model developed in the United States spread rapidly into Europe and then to Japan after World War II. Designed for a period of heavy demand and accelerating growth, this form of corporate organization suited the circumstances of the postwar times perfectly.

An unrelenting demand for goods and services, at home and abroad, shaped the economic environment of the time. Deprived of material goods, first by the Depression, then by the war, customers were more than happy to buy whatever companies offered them. Rarely did they demand high quality and service. Any house, any car, any refrigerator was infinitely better than none at all.

In the 1950s and 1960s, the chief operational concern of company executives was capacity—that is, being able to keep up with ever-increasing demand. If a company built too much productive capacity too soon, it could go deep in the red financing its new plants. But if it built too little capacity, or built it too late, the company could lose market share from its inability to produce. To solve these problems, companies developed ever more complex systems for budgeting, planning, and control.

The standard, pyramidal organizational structure of most organizations was well suited to a high-growth environment because it was scalable. When a company needed to grow, it could simply add workers as needed at the bottom of the chart and then fill in the management layers above.

This kind of organizational structure was also ideally suited for control and planning. By breaking work down into pieces, supervisors could ensure consistent and accurate worker performance, and the supervisors’ supervisors could do the same. Budgets were easily approved and monitored department by department, and plans were generated and pursued on the same basis.

This organizational form also made for short training periods, since few production tasks were complicated or difficult. Moreover, as new office technology became available in the 1960s, companies were encouraged to break down even more of their white-collar work into small, repeatable tasks, which could also be mechanized or automated.

As the number of tasks grew, however, the overall processes of producing a product or delivering a service inevitably became increasingly complicated, and managing such process became more difficult. The growing number of people in the middle of the corporate organization chart—the functional or middle managers—was one of the prices companies paid for the benefits of fragmenting their work into simple, repetitive steps and organizing themselves hierarchically.

Another disadvantage was the increasing distance between senior management and users of their product or service. How customers were responding to the company’s strategy was measured only in numbers, never in faces.

These, then, are the roots of today’s corporation, the principles, forged by necessity, on which today’s companies have structured themselves. If modern companies thin-slice work into meaningless tasks, it is because that is how efficiency was once achieved. If they diffuse power and responsibility through massive bureaucracies, it is because that was the way they learned to control sprawling enterprises. If they resist suggestions that they change the way they operate, it is because these organizing principles and the structures to which they gave birth have worked well for decades.

The reality that organizations have to confront, however, is that the old ways of doing business—the division of labor around which companies have been organized since Adam Smith first articulated the principle—simply don’t work anymore. Suddenly, the world is a different place. Our here-and-now crisis of competitiveness is not the result of a temporary economic downturn or a low point in the business cycle. Indeed, we can no longer even count on a predictable business cycle—prosperity, followed by recession, followed by renewed prosperity—as we once did. In today’s environment, nothing is constant or predictable—not market growth, customer demand, product life cycles, the rate of technological change, or the nature of competition. Adam Smith’s world and its way of doing business are yesterday’s paradigm.

Three forces, separately and in combination, are driving today’s companies deeper and deeper into territory that most of their executives and managers find frighteningly unfamiliar. We call these forces the three Cs: customers, competition, and change. Their names are hardly new, but the characteristics of the three Cs are remarkably different from what they were in the past.

Let’s look at the three Cs and how they have changed, beginning with customers.

• Customers take charge

Since the early 1980s, in the United States and other developed countries, the dominant force in the seller-customer relationship has shifted. Sellers no longer have the u...

Table of contents

• Cover
• Title Page
• Dedication
• Contents
• Prologue
• Chapter 1
• Chapter 2
• Chapter 3
• Chapter 4
• Chapter 5
• Chapter 6
• Chapter 7
• Chapter 8
• Chapter 9
• Chapter 10
• Chapter 11
• Chapter 12
• Chapter 13
• Epilogue
• Frequently Asked Questions (FAQs)
• Index
• Acknowledgments
• About the Author
• Praise for Reengineering the Corporation
• Copyright
• About the Publisher