Winning (16 page)

But you’re much better off with one.

BEST PRACTICES AND BEYOND

I’ve heard it said that best practices aren’t a sustainable competitive advantage because they are so easy to copy. That’s nonsense.

It is true that, once a best practice is out there, everybody can imitate it, but companies that win do two things: they imitate
and
improve.

Admittedly, imitating is hard enough. I remember a software company executive at one Q & A session lamenting, “My people don’t copy very well. They just don’t want to—they like the way they do it.” This reluctance to imitate is a common phenomenon. Maybe it’s just human nature.

But to make your strategy succeed, you need to fix that mindset—and go a lot further.

In fact, the third step of strategy is all about finding best practices, adapting them, and
continually improving them.
When you do that right, it’s nothing short of innovation. New product and service ideas, new processes, and opportunities for growth start to pop out everywhere and actually become the norm.

Along with getting the right people in place, best practices are all part of implementing the hell out of your big aha, and to my mind, it’s the most fun.

It’s fun because companies that make best practices a priority are thriving, thirsting, learning organizations. They believe that everyone should always be searching for a better way. These kinds of companies are filled with energy and curiosity and a spirit of can-do.

Don’t tell me that’s not a competitive advantage!

Back in the old days—after World War II and before global competition—most industrial companies, GE included, were stuck in a not-invented-here (NIH) mind-set. The focus was on their own inventors, with plaques and bonuses reserved for the people who came up with and implemented original ideas.

Once the ’80s arrived, we had no choice but to radically broaden the NIH mind-set, and we did so by celebrating people who not only invented things, but found great ideas
anywhere
and shared them with
everyone
in the company. We came to call this behavior “boundarylessness.” This awkward word basically described an obsession with finding a better way—or a better idea—whether its source was a colleague, another GE business, or another company across the street or on the other side of the globe.

The impact of boundaryless thinking on our strategy implementation was enormous. Here’s just one example:

GE was always trying to improve its working capital usage; we were always using too much, and increasing our inventory turns would help. But try as we might with all sorts of programs and tweaks, we just couldn’t seem to get our annual turns above four.

In September 1994, Manny Kampouris was scheduled to speak at a dinner for the top thirty leaders in our company. At the time, Manny was the chairman and CEO of American Standard, the global plumbing and air-conditioning supply company and one of the largest customers of our motors business.

You couldn’t help but notice that Manny wore a lapel pin emblazoned with the number “15” at its center. And soon enough, we all knew why.

For most of his talk that night, Manny regaled us with stories of how they had drastically improved inventory turns at American Standard, a company that produced a broad and varied mix of porcelain toilet bowls and sinks in factories in just about every corner of the world. Manny and American Standard were obsessed with inventory turns. The reason was simple: the company had recently gone through a leveraged buyout, and cash flow was king.
*

Our team was awestruck. You could hear people thinking, if American Standard can improve inventory turns with its product mix and complicated manufacturing processes, why can’t we? Before Manny could finish his talk, our business leaders were peppering him with question after question.

But that was just the beginning.

What followed was an avalanche of GE people visiting American Standard facilities, meeting with foremen and factory managers—all of them wearing lapel pins like Manny’s. There was the occasional black sheep with a “10,” but many more plant managers who wore pins boasting of twenty or twenty-five turns. We crawled all over their plants and picked their brains.

They were happy to help. One thing I have learned from boundarylessness over the years is that companies and their people—if they’re not direct competitors, of course—love to share success stories. All you have to do is ask.

The GE people who visited American Standard put what they had learned into practice in their own businesses. Over the next several years, these businesses adapted many of American Standard’s processes to GE, and continually innovated and shared with each other. It worked. By 2000, GE’s inventory turns had more than doubled, freeing up billions of dollars of cash.

Over the years, GE borrowed great ideas with visits to Wal-Mart and Toyota and dozens of other companies. We also borrowed ideas from one another. At our quarterly meeting of business leaders, we asked attendees to present their best practice that others could use. If a leader tried to present a practice that wasn’t applicable to the other businesses, we would give him the hook.

It was in that way that the junior military officer recruiting program, which started in Transportation and spread to every corner of the company, and Internet-selling techniques that helped Plastics reach its customers, made their way to Medical Systems and beyond. The list of these best practice transfers goes on and on.

And it’s hardly exclusive to GE. Yum! Brands Inc. is a case in point. Yum! is a 1997 spinoff from PepsiCo composed of five consumer restaurant brands—KFC, Taco Bell, Pizza Hut, Long John Silver’s, and A&W All American Food—with more than thirty-three thousand total outlets. Yum!’s CEO, David Novak, is an enormous believer in best practice transfer and considers each outlet an individual laboratory of ideas. David told me recently that he considered the major advantage to “bulking up”—in other words, adding chains and outlets—is to share learning. Otherwise, he said, size is just a drag.

Here’s what he means. A couple of years ago, Taco Bell was rated fifteenth in service for drive-in restaurants, with customer service time of 240 seconds, or four minutes, per order. The chain introduced a new process, and within two years, managed to bring that number down to 148 seconds, making it No. 2 in the drive-through industry. Immediately, the Taco Bell practice was transferred to KFC, and last year, its customer service time moved from tenth to eighth—211 seconds to 180 seconds, a full half-minute improvement.

I could tell you many other stories about how Yum!’s “laboratories” have spawned new processes, and how they have spread to improve all of its businesses. However, to make a long story short, I’ll just give you the results. Even with the tough economy, in the seven years since its spinoff, Yum!’s market capitalization has jumped from $4.2 billion to $13.5 billion. Mainly because of ideas being shared and stretched!

A focus on best practices may not sound like strategy, but try implementing strategy without it.

Best practices are not only integral to making strategy happen, they are a sustainable competitive advantage if you continually improve them, with
if
being the key word here.

That’s not just a mind-set. It’s a religion.

The other evening we were eating at Torch, a wonderful little restaurant one door down from Upper Crust Pizza, and from our seats in the window, we could see its delivery people on bikes, in cars, and on foot zipping back and forth in nonstop motion.

We started to play with the economics of the place, using rough numbers, but even with the most conservative estimates, we could only conclude that Upper Crust is very profitable.

You’ve got to believe that the people running Upper Crust have never held a strategy review session, let alone worked through five slides to reach a big aha.

Their big aha is all in the sauce.

Look, I don’t want to oversimplify strategy. But you just shouldn’t agonize over it. Find the right aha and set the direction, put the right people in place, and work like crazy to execute better than everyone else, finding best practices and improving them every day.

You may not run a corner store, but when you’re making strategy, act like you do.

N
OT TO BEAT AROUND THE BUSH
, but the budgeting process at most companies has to be the most ineffective practice in management.

It sucks the energy, time, fun, and big dreams out of an organization. It hides opportunity and stunts growth. It brings out the most unproductive behaviors in an organization, from sandbagging to settling for mediocrity.

In fact, when companies win, in most cases it is despite their budgets, not because of them.

And yet, as with strategy formulation, companies sink countless hours into writing budgets. What a waste!

I’m not saying financial planning is bad. Without question, you have to have a way to keep track of the numbers—just not the way it’s usually done.

In this chapter, I’m going to talk about a totally different approach to budgeting. It aligns employees with shareholders, puts growth, energy, and fun into financial planning, and inspires people to stretch. In fact, this approach is so unlike the typical budget process that when we started using it at GE, we stopped using the word
budget
altogether.
*

But more on that later.

The good news is that the process

I recommend is not very hard to do.

It is certainly no harder than the slogging, mind-numbing budgeting process that is the status quo.

But this new process can be practiced only if a company has trust and candor flowing through its veins. As I’ve mentioned throughout this book, that’s rare. Perhaps budgets that actually inspire creativity and growth will make the case for that to change.

Most companies use budgeting as the backbone of their management systems. And so the right budgeting process can actually change how a company functions—and reinventing the annual ritual makes winning so much easier, you just can’t afford not to try.

BUDGETS, THE WRONG WAY

Before describing how to devise budgets the right way, let’s look at the two killing dynamics that are the norm. I call them the Negotiated Settlement and the Phony Smile approaches to budgeting.

These dynamics, incidentally, aren’t only the purview of big corporate bureaucracies. No matter what size company you work in, one of these two approaches, maybe both, will probably sound very familiar to you. In my Q & A sessions around the world, I’ve heard about them in virtually every country and in companies with as few as a couple hundred employees, even in organizations that call themselves entrepreneurial. Bad budgeting is just that insidious; it creeps in everywhere and establishes itself as an institutionalized process. It’s amazing how many times I have heard audience members decry entrenched budgeting systems, only for them to wearily conclude, “But that’s just the way it’s done.”

It doesn’t have to be. But first you have to undo those killing dynamics I just mentioned.
*

SPLIT THE DIFFERENCE

Of these dynamics, the
Negotiated Settlement
is the more common.

This process begins when the ink is barely dry on the strategic plan. That’s when the businesses in the field start the long slog of constructing the next year’s highly detailed financial plans from the bottom up. These will be presented in several months’ time at the Big Budget Meeting with headquarters. The numbers cover everything—from costs to pricing assumptions.

In all their assumptions, the people in the field are operating with one simple goal, albeit unstated: to minimize their risk and maximize their bonus. In other words, their underlying, galvanizing mission is to come up with targets that they absolutely, positively thinkthey can hit.

Why? Because in most companies, people are rewarded for hitting budget. Missing your budget gets you a stick in the eye or worse. So of course people want to keep their budget numbers as low as possible. No wonder their budgets are filled with layer after layer of conservatism.

Meanwhile, back at headquarters, senior managers are also preparing for the Big Budget Meeting. Their agenda, however, is the exact opposite of the field. They’re rewarded for increased earnings, and so what they want from the budget review at every business is significant growth in sales and profits.

Now fast-forward to the Big Budget Meeting itself.

The two sides meet in a windowless room with a whole day set aside for what everyone knows will be an unpleasant wrestling match.

The field makes its presentation with a fat deck of PowerPoint slides, and the story is invariably dire. Despite reports of a pretty good economy, there are reasons to believe this particular business environment is going to be very difficult. “The competition has just brought a new plant online, and with its excess supply, there will be enormous pricing pressure,” they might say. Later in the meeting, you get: “Raw material costs and inflation pressures are severe. In order to meet these challenges, we need new cost-reduction programs that require $10 million in additional resources.”

The final pronouncement from the business managers usually goes something like this: “To be optimistic—
very
optimistic—earnings will likely grow only 6 percent.”

Headquarters, needless to say, has its own view of the situation, and it is decidedly not dire. The economy is strong. GDP is estimated to rise steadily all year. Orders are up everywhere else in the company. The main competition has a big asbestos lawsuit against it that will distract management. The business can get the cost reductions with $5 million in new programs, and earnings should grow 12 percent.

You know what goes on during this marathon—the grumbling and groaning, the probing and data quoting, the back and forth and back and forth again. On occasion, it can get contentious, especially if a senior person has worked within the business earlier in his career. He’ll throw out anecdotes about how they used to do it in the old days and accuse the field of lowballing. “I know where you’re hiding it. I used to park reserves in there too,” he might insist. “Now give it up.”

The grappling concludes—finally and inevitably—when the sides split the difference. The field gets $7.5 million in resources and a budget with a commitment for 9 percent earnings growth.

Before the field packs up to leave, everyone somberly shakes hands. The mood is resigned. For all involved, the unspoken vibe in the room is: we didn’t get what we wanted or what was right.

That pall lasts right up until the moment the field team pulls out of the driveway. Then the high-fiving begins.

“Those stiffs wanted us to deliver 12 percent, and we only have to hand them 9!” the people in the field exclaim. “Thank God we dodged that bullet!”

The headquarters team is also feeling pretty good about themselves. “Those sandbaggers only wanted to give us 6 percent,” they crow. “Did you see where they were hiding earnings? We let them off with 9 percent. They’ll deliver that, and probably more, but with their 9 and what we’ve got from the other businesses, we’ll have enough.”

Soon thereafter, the Negotiated Settlement gets officially approved, and the field and headquarters make their peace over its targets. They tell each other, “Well, we can live with the numbers this year. We guess they’re OK.”

When the end of the year rolls around, the awful ritual completes itself. Most often, the field hits or beats their targets and gets their bonuses, and of course headquarters congratulates them. Job well done!

Everyone is happy, but they shouldn’t be. In this minimalization exercise, there has been little or no discussion about what could have been.

EVERYONE MAKE NICE

The second budgeting dynamic that saps value is the
Phony Smile.

Again, people in the field spend a couple of weeks coming up with a detailed budget plan. Compared to the Negotiated Settlement approach to budgeting, the sadder part of this dynamic is that often, Phony Smile plans are filled with good ideas and exciting opportunities. The people in the field have bold dreams about what they can do—make an acquisition, for example, or develop new products—given the right amount of investment. They’re eager to expand their business’s horizons, but they need help from the mother ship.

To make their case, the managers in the field prepare the usual stacks of slides. Since retiring from GE, I’ve seen such presentations with as many as 150 pages! Every competitive angle is covered, and usually overly so. Typically, these presentations are evidence of painstaking labor, wrought with angst over minutiae and born of long nights of building spreadsheets that contain precision to the last dollar. It’s likely that nobody actually enjoys putting together these slide packs, but when they’re done, along with exhaustion, the team understandably feels an enormous sense of pride and ownership.

On the anointed day, the team, led by a leader we’ll call Sara, travels to headquarters. And there, again in a darkened room, they present their case, slide by slide, to the senior group.

When the show is over, the lights come up, and for a few minutes, the managers and the field people engage in rather pleasant chitchat. It goes like this:

“I see you expect Acme Corp. to build another plant. That’s very interesting. They almost went bankrupt in ’88,” one senior manager musters the energy to say.

“Well, they were bought two years ago, and they’ve come back strong,” Sara quickly answers.

“Very interesting. Very interesting,” comes the vague reply from a headquarters heavy.

“And I see that you’re expecting the cost of natural gas to hold steady for the first six months,” another headquarters person might offer up as evidence he was listening.

“Absolutely!” Sara responds. “We don’t see any change in that pricing.”

“Hmm…interesting.…Yes, interesting….”

Finally, after a few more perfunctory exchanges, it’s over. The top team smiles brightly and says, “Nice job! Thanks for coming in! Have a safe trip home!” And pretty convinced that they did OK, the field people smile back brightly and go away.

Then there’s the meeting after the meeting.

That’s when the members of the top team sit around talking about how much they are
really
going to get from this business. The reality is, headquarters already knows how they are allocating the company’s investment dollars, and they know exactly what revenue and earnings numbers they expect in return from each business. Those decisions, they believe, belong at headquarters, where managers can see the whole picture, pick priorities, and divvy up the goods appropriately.

A few days later, Sara gets a call from a lower-level staff person at headquarters telling her that her business will get about 50 percent of what was asked for at the Phony Smile meeting, and the earnings budget number will be 20 percent higher than the one they submitted.

What a kick in the stomach! Instantly, Sara is enraged for a slew of reasons at once: Headquarters just didn’t listen! All that work for nothing! No one explains anything around here! And worst of all, now there won’t be enough money for all the things we should be doing.

The next day, Sara goes back to her people for
their
meeting after the meeting. Together, they all rail against the injustice and mystery of the corporate edict.

And then, without meaning to, Sara makes matters worse. To appease her team, she takes the money from corporate, now much less than they had asked for, and she evenly parcels it out, a bit to manufacturing, a bit to marketing, a bit to sales, and so on. Of course, Sara would be smarter to place her bets on one or two programs, but that rarely happens in these situations. People stuck in the Phony Smile budget game get bitter. Too often, they lose their sense of commitment to the company and forget how excited they were about their original proposals. They just take the money from corporate and spread it like crumbs.

My argument here is not with a senior team allocating resources. That’s their job because they have a strong, informed understanding of what each business can realistically deliver. The trouble arises when headquarters is secretive about the process, when they don’t explain the rationale behind their decisions.

But like the Negotiated Settlement dynamic, the Phony Smile usually concludes with everyone shrugging off the whole enervating event—it’s just business, right? And the next year, they start it all over again.

A BETTER WAY

Now, you may be wondering, “If companies manage to hit their numbers and pay bonuses with either the Negotiated Settlement or Phony Smile approaches to budgeting—as flawed as they are—why mess with them? At least they deliver.”

The problem is: they often deliver only a fraction of what they could, and they take all the fun out of setting financial goals. Yes, this annual event can be fun—and it should be.

Imagine a system of budgeting where both the field and headquarters have a shared goal: to use the budgeting process to ferret out every possible opportunity for growth, identify real obstacles in the environment, and come up with a plan for stretching dreams to the sky. Imagine a system of budgeting that is not internally focused and based on hitting fabricated targets, but one that throws open the shutters and looks outside.

The budgeting system that I’m talking about is linked to the strategic planning process described in the last chapter, in that it is focused on two questions:

 

• How can we beat last year’s performance?
  
 

• What is our competition doing, and how can we beat them?
  
 

 

If you focus on these two questions, the budgeting process becomes a wide-ranging, anything-goes dialogue between the field and headquarters about opportunities and obstacles in the real world. Through these discussions, both sides of the table jointly come up with a growth scenario that is not negotiated or imposed and cannot really be called a budget at all. It is an
operating plan
for the next year, filled with aspiration, primarily directional, and containing numbers that are mutually understood to be targets, or put another way, numbers that could be called “best efforts.”