Pulling Away: Managing and Sustaining Change
By Miles Cook
The Vendée Globe sailing race, which started in November 2008 and just
wrapped up in March, is one of the most brutal in the world. Competitors sail
around the globe, single-handedly, without assistance and without touching
land, starting and ending on the coast of France. The fastest path is straight south
to Antarctica, around that continent and back north to the finish. Each
competitor spends months in the southern ocean dodging mountainous waves,
icebergs, tornadoes and gale-force storms. The fastest sailors in the calmer
northern waters are often not the same ones in the lead after the turbulence of the
Antarctic seas. In fact, 64 percent of the competitors who started the most recent
race never even finished.
That’s not a bad metaphor for the current economic climate, except that the
severe turbulence has lasted a lot more than 4 months. Almost every forecast
update has extended the projected duration of the recession, and the depth. The
best current guesses anticipate no real recovery until 2010. That would make this
downturn the longest since the 1930s.
Figure 1: We are facing the worst recession in recent
history, with a base case estimate of 5% decline in GDP
GDP (Real) avg annualized % change
'60
0%
'01
'69
'45
48
'73
'08-09 (Base)
'90
• Base case: -5%
'08-09 (Downside)
'81
'80
GDP, cumulative decline*
• Down side: -7%
'08-09 (Worst case)
53
• Worst case: -9%
'57
-10
0
6%
cumulative
GDP
contraction
'29-'33
25
Months
50
* Total aggregate decline from maximum GDP expansion to the end of contraction
Note: NBER recorded current recession as starting in December 2007; Projection updated as of March 23, 2009
Source: NBER; Bureau of Economic Analysis; "The Current Economic Recession: How Long, How Deep, and How Different From the Past?“, Marc Labonte; "Monetary Policy in
the Great Depression: What the Fed did, and why", David Wheelock; Bain Analysis February 16, 2009
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Pulling Away | Managing and Sustaining Change
As with the Vendée Globe, some companies in promising up front positions may
end up trailing—or, in some cases, not even finishing—the competition. Figure 2
lays out the fortunes of public companies in the 2001 recession. Surprisingly, the
chances of a market leader ending up trailing its competitors were greater than
remaining in the lead. On the other hand, many companies in the second and
third tiers of their industries moved up to the top. The reshuffling in the
downturn period was much more significant than in normal times—in fact about
twice as many companies in the group of top performers lost their leadership
position during the 2001–2002 downturn compared with the subsequent boom
period.
Figure 2: In the last recession, more than 50% of top
performers “fell” to the average and bottom buckets
Number of companies
Color represents 2000 performance
100%
80
782
782
Top
2002
performance
Top
60
40
20
0
Average
Average
Bottom
Bottom
2000
2002
Source: Sustained Value Creator Database/Worldscope; Bain Analysis
Much of this share change happened toward the end of the downturn, when
healthier companies started taking steps to gain altitude faster than their
competitors, or where investments sustained through the downturn started to
pay off in improved customer revenues. That is what makes the end of a
downturn an excellent time for companies to be thinking about performance
improvements and preparing themselves to gain position in the recovery.
Supply chain improvements are powerful ways to make gains both in the short
term and the long term. Since a huge amount of cost and capital is usually tied
up in supply chain activities, any improvements drive cash savings in the short
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Pulling Away | Managing and Sustaining Change
term. At the same time, leaner supply chains should lead to faster growth later
due to better in-stock positions and less diversion of potential growth capital into
unnecessary inventory and facilities.
Hard to Improve
Obviously, a company must know what to attack in order to make gains, and
most supply chain executives probably have a good idea about areas where
savings need to come from—if not, 6 to 8 weeks of diagnostic work usually can
flag the biggest opportunities. A less discussed but often harder problem for
many supply chain leaders is capturing the savings they have identified. In one
survey, executives reported that their average cost reduction project only
returned 56 percent of the estimated savings, a pretty disappointing statistic.
Most executives say the savings estimates up front were fine. They blame the gap
on a failure to execute the required changes.
Figure 3: Most change initiatives fail to achieve the results
identified upfront
Analysis of change initiatives shows that
most fall short of achieving target results
Percent of identified full
potential actually achieved
Implementation shortfalls are the main reason
initiatives fail to reach targeted results
Reasons for not achieving
full potential
100%
100%
80
80
60
40
56%
Implementation
fell short
60
40
Opportunity not
pursued
20
0
20
0
Opportunity
smaller than
believed
Note: N=96
Source: Bain analysis
Even when companies manage to implement some changes, the biggest
challenge remains: making them stick. The CFO at one large company kicked off
a recent efficiency project saying, “We’ve had three major efficiency programs in
the last 10 years. Each was ‘successful.’ In fact, if you added up the claimed
savings, our company would have negative costs. But our costs are higher than
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Pulling Away | Managing and Sustaining Change
ever.” Can supply chain leaders take steps to make improvements stick, instead
of seeing excessive inventories, out of stock items and costs creeping back?
There must be, since some companies are able to hold onto their winnings and
deliver impressive gains, year after year. Their reward is improved performance
that far surpasses gains by the average company. Not 5 to 10 percent better
performance, but 50 to 100 percent better. In fact, we have found in almost every
industry at least one runaway supply chain leader—a company that has opened
up an overwhelming gap in performance versus their average competitor. The
figure below highlights standout examples in inventory conversion.
Figure 4: Most industries have a runaway performer
Inventory conversion period (days)
Runaway performer
100
Sector average
89
78
80
72
60
53
37
40
57
48
32
31
23
21
20
9
0
Dell
Cisco
Target
Whole
Foods
Food
Computer Communication General
hardware
equipment
merchandise retail
average
average
average
average
CVS
Drug
retail
average
PACCAR
Construction
and farm
machinery
average
Note: Inventory conversion period = inventory/(COGS/365); Based on Bain benchmark database of ~1000 US companies. Sector
average does not include the “best in class” benchmark (e.g.: Computer HW average does not include Dell)
Source: Company financials; Capital IQ 2008 data
Three Strategies for Managing Change and Pulling Away
Without pretending to capture every action that helped these companies “pull
away” from the industry average, here are three things we have found to be
important:
1. Set improvement targets that are both competitive and strategic
An amazing number of companies set fairly arbitrary performance targets each
year. Maybe they are based on percentage improvements over last year’s
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Pulling Away | Managing and Sustaining Change
numbers. Or, they pick a goal that sounds ambitious, but essentially is pulled
from thin air, such as double-digit revenue and earnings growth. That doesn’t
work in sports competitions like the Vendée Globe, and it doesn’t work
particularly well in business either. Such targets are often demotivating if leaders
can’t provide context on why they are necessary or should be achievable.
Moreover, if they are not anchored in competitive and external realities,
organizations can mistake forward progress—or partial success—for victory.
Planning to pull away from the pack requires a different approach—knowing
your competitors and setting targets based on external performance standards
and a clear view of what has to be achieved to beat competitors.
Two highly effective tools can help set these targets: the experience curve and
returns earned relative to competitive position. The experience curve tracks
improvements in cost performance, over time and relative to total units
produced. Bain has found that in almost every industry, competition drives
down inflation-adjusted prices and costs every year. Two classic examples are
shown below.
Figure 5a: Experience curves can be used to set realistic
targets
US DRAM example
Figure 5b: Understanding changes to the experience curve
helps to keep ahead of competitive trends
WIRELESS OPERATOR example
Price per MOU
DRAM Price per bit (2005 Millicents)
$4
100
10
15% price reduction
for doubling of MOU
85
Slope = 57%
R² = 0.96
1983
1987
86
88
89
87
1988
1985
1
84
2
90
91
1
1990
93
92
1993
1992
2 Players
0.5
94
95
96
97
1996
0.1
38% price reduction
for doubling of MOU
98
99
00
1998
0.01
0.001
0.01
0.2
2000
2002
0.1
1
10
100
01
6 Players
2004
1,000
10,000
0.1
100
200
500
1,000
2,000
5,000
10,000
20,000
02
50,000
200,000
1,000,000
100,000
500,000
2,000,000
Cumulative minutes of use (MOU) in millions
Cumulative Experience (Cum. Bit Volume 10^15)
Source: IC Insights (2004); ICE Status (1992)
Note: R squared is 98% for 1984-1997 and 96% for 1997-2001.
Source: Analyst reports
As a manager, if you collect this information on your own industry, and assess
your company’s rate of efficiency gains versus the industry trend, you will be
able to set targets that are both realistic and aggressive enough to keep up with
or beat your competitors. This approach can be used to set goals for inventories
(days of inventory on hand), asset productivity, logistics spend per unit, and
many similar supply chain metrics. For instance, one of our clients, a market
leader in specialized apparel, projects industry cost and price declines and sets
targets for sourcing costs to stay ahead of this competitive trend.
Plotting returns earned versus your market position is another way to use
external competitive data to set performance targets. Returns earned need to be
in line with relative scale. In most industries, relative market share—your market
share divided by the share of your largest competitor—has a high correlation
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Pulling Away | Managing and Sustaining Change
with profitability. (It is important to define markets properly; for retail and
distribution, it usually is share by city, while for manufacturers it may be
national or global market share. See the figures below for examples.)
Figure 6a: Returns vs. Relative Market Share analysis helps
determine “should be” performance level in line with your
market position
High
Figure 6b: Example of Returns vs. Relative Market Share
analysis
US FOOD STORES example
EBIT Margin
2
1
Over-performers
(leaders or followers)
In-band leaders
15%
Company 10
10
Company 9
Company
4
3
In-band followers
Returns
earned
4
Company 11
5
Company 6
Below-band leaders
Company 7
Company
8
Company 2
0
Company 5
5
-5
0.1
Distant or below-band followers
Low
Weak
Relative Market
Share
Strong
$20B
Sales
Company 3
Company 1
0.2
0.5
1
2
5
Sales Weighted Local RMS for U.S. retail grocery (2006)
Note: Includes all major public grocery chains except for one that does not break out its pure grocery EBIT.
Company 2 EBIT margin is estimated.
Knowing your company’s relative market share should give you a good idea of
your performance level target. Such target setting keeps market leaders honest
and helps them avoid the trap of satisfactory underperformance.
Once these strategic targets are set, we have found it is critical to detail three to
five initiatives that allow a company to move from point A to point B. The key is
to keep it simple: limit the number of initiatives and communicate them, again
and again, across the organization. Then typical goal deployment tools can be
used to implement them in specific functions and assign direct accountability to
individual managers for targeted performance gains. Functional staff should find
these goals much more meaningful, since they are based on hard facts about the
market and competition, not just management intent.
2. Use left-brain tools to spot right-brain barriers
For the supply chain, a major challenge in managing change is maintaining both
momentum and focus among individuals who are scattered throughout the
company. After all, most major supply chain initiatives affect distribution,
sourcing, finance, marketing and sales, manufacturing, and IT at a minimum.
Many critical staff members don’t report to the project sponsor, and efforts to
win hearts and minds and manage details can quickly consume a normal work
schedule. Obviously it won’t work to spread leadership time evenly.
But it is essential to do more than just putting out the biggest fires and dealing
with squeaky-wheel employees. Some employees may not speak loudly, but may
passively undermine progress. And some have more of an impact on gains than
others, making their commitment to change more important.
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Pulling Away | Managing and Sustaining Change
To help our clients, we have created some “left-brained tools” to figure out
which parts of the organization will have the hardest time changing. Executive
sponsors can then focus their leadership energy in these areas. We call this a
“readiness to execute” diagnostic. Think of it as creating the equivalent of some
good sailing charts, instead of simply setting sail and dealing with whatever you
encounter.
The diagnostic accomplishes two things: on the one hand, it surveys a range of
current employees on such issues as perceptions, concerns and beliefs, and it
plots the results to flag major areas of disconnect with top management. Those
areas require more substantial intervention. On the other hand, analysis is done
to understand who is forced to change more, based on factors like level of
compensation change, shift in their time allocation or changes in their
performance metrics and standards. People that are affected the most by these
changes are the most likely to resist. The same approach often uncovers
corporate cultural challenges that affect communications content and strategies.
A sample output is included below. The core idea is to not leave culture and
motivation issues to the corporate psychologists, but instead to use objective
facts to measure where the risk is greatest, so managers know where their time
will have the highest performance payback.
Figure 7a: Sample readout of a “Readiness to Execute”
survey—comparison to external benchmarks
Benchmark: High performers n=151
Benchmark: Low/average performers n=610
Company X average responses
Under-
Figure 7b: Sample readout of a “Readiness to Execute”
survey—internal distribution of responses
Out-
1 performing 2 Satisfactory 3 performing 4
Clarity on priorities and principles
Priorities
“We have clear roles and authorities for critical decisions”
% of respondents
Cohesive leadership team aligning full org
Clear roles & authorities for critical decisions
100%
83
Software
Roles
Decision disciplines that make roles work
75
Effective, integrated management processes
Processes
Superior operational and support processes
People
Right people in right jobs – will and skill
Objectives & incentives focused on performance
Culture
Winning culture – values and behaviors
50
25
Hardware
56
Agree
0
-25
Individuals who personally engage
Structure
67
Strongly agree
Structure aligned with sources of value
-50
Detailed structure as lean & simple as possible
-75
Disagree
Strongly disagree
-17
-33
Executive team
-44
Directors
Managers
Note: High performers = top quintile of ‘decision multiplier’ scores
Source: Bain/eRewards decision and org effectiveness survey 2008 (n=761); Client survey (n=20)
3. Decide “who decides”
Most supply chain leaders hate bureaucracy, but they live with it every day.
Simple decisions like whether to add or remove a SKU, what products to stock
where, or setting production forecasts can paralyze progress. This decision
congestion is one of the key reasons change initiatives have such a low rate of
success. For example, a supply chain manager in one Global 50 company
complained about a non-decision regarding a new replenishment system,
estimated to have a three-month payback. After a year of discussions, he threw
up his hands: “I can’t even get someone to say ‘no,’” he said. “I spend all my
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Pulling Away | Managing and Sustaining Change
energy debating, and none of it doing.” He ultimately left to take a job with a
more dynamic company.
One of the best tools used to zero in on this problem and create higher-yielding
change programs is a decision management tool we call RAPID. The idea is to
clearly map out who plays what role in each critical decision and use that to
enable swift decisions, without endless debates, second-guessing or pocket
vetoes. It determines the captain of the boat, so to speak, but in a more nuanced
way that deals with the different teams needed for different problems.
To try this approach, start by writing down 10 to 20 of the critical decisions that
have to be made on a regular basis and that are fundamental to supply chain
performance. It can include questions like: “Should we introduce a new SKU?
What is our forecasted volume for next month? or What level of product Y
inventory should I carry in facility X?” Then, use a grid to identify all the
management positions that touch that decision and assign a letter indicating
their role today. R = recommend, A = approve/veto, D = decide/choose, I =
inform, P = perform/execute after the decision. (The figure below illustrates an
example).
Most companies find that the RAPID process is a stunning way to highlight the
problem we call “Who has the D?” On many important decisions, there typically
is either no one with formal authority to decide, or more often several people
who each think they get to choose and who end up interfering with each other.
The result is endless meetings, decisions that are delayed or don’t stick and a
slow pace of change.
The solution is simple: Rewrite the map, and for every decision, make sure there
is no more than one D and no more than one A. Eliminate any unnecessary
input. Then publish this document and distribute it throughout your
organization.
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Pulling Away | Managing and Sustaining Change
Figure 8: Clarifying decision-making roles materially
improves execution capability
Drivers of decisionmaking complexity
RAPID roles and responsibilities
n6
n7
Pers
o
I
I
D/A
I
D
R
2. Next month’s
R
I
D
D
I
I
3. carried in Facility X?
R
I
D
A
A
I
I
4. Vendor selection?
R
I
A
A
I
I
I/P
forecasted volume?
Level of inventory
Pers
o
Pers
o
1. Introduce new SKU?
Sample decisions:
Pers
o
Pers
o
Pers
o
n4
n1
ILLUSTRATIVE
• 1 & 2: Multiple Ds: Too
many felt they had
decision rights
Recommend
Approval
Perform
Input
Decide
D
n5
I
Pers
o
P
n3
A
n2
R
• 3: Too many As: Veto
rights across multiple
groups for each
decision
• 4: No D: Nobody was
taking accountability for
the decision
The positive reaction that many companies have to this process is amazing. They
find that suddenly meetings disappear as large groups are pared down to the
few who really need to be involved in key decisions. Those who are assigned the
“D” (decision authority) know it and can act quickly without worrying about
being second-guessed. One client told me that the single-best thing that came out
of a project together was the concept of RAPIDs, which dramatically accelerated
actions and, frankly, took a lot of pointless meetings off of his calendar.
Conclusion
Over the next year or two, companies will face substantial challenges. As the
recession deepens, the battlefield will shift from great ideas and strategies to
strongest execution. Like competitors in the Vendée Globe race, some companies
accustomed to swiftly navigating calmer waters won’t rise to the occasion.
They’ll fall back in the pack, be acquired or face bankruptcy. But companies that
are able to stay the course will be equipped with action plans grounded in
practical targets and tools to overcome key obstacles and inefficiencies. Being
well prepared not only improves their chances of making it to the finish line, it
allows them to emerge from the turbulence stronger than ever.
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Pulling Away | Managing and Sustaining Change
Miles Cook is a partner at Bain & Company in Atlanta and a leader in the firm’s Global
Performance Improvement practice. He can be reached at miles.cook@bain.com.
Suggested additional reading
The Breakthrough Imperative; How the Best Managers Get Outstanding Results
(HarperCollins, 2008), by Mark Gottfredson and Steve Schaubert,
Bain & Company
Who Has the D? How Clear Decision Roles Enhance Organizational Performance,
(Harvard Business Review, 2006), by Paul Rogers and Marcia Blenko,
Bain & Company
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