openness to learn. It was something that I do not see often. I leaned forward and continued, “Getting unstuck requires the management of the Effective Frontier as a system. The metrics are interrelated. There are finite trade-offs. As you learned firsthand in your meeting the other day, the organization must resist the temptation to focus on piece parts, or a singular metric in isolation.” I shook my head, “The Effective Frontier needs to be managed as a complex system with complex processes with increasing complexity. As the business increases in complexity, the system needs to be continually redesigned.”
“As a leadership team, you must keep a focus on outputs, not just inputs. To drive change, one of the first distinctions that you need to adopt as a leadership team is the difference between functional and corporate performance metrics. This is important if you are to determine the sustainable metrics framework to improve cross-functional success.”
Joe nodded in agreement. “This is one of our major issues. We are so entrenched in functional metrics that it's hard for us to also focus on corporate performance. Our incentives are based on what is good for the function. Our sales leader, Frank, is focused on volume while I am incented on cost; and every time that I engage with Lou, our controller, the discussion is about cash. It is impossible for us to maintain a steady course and be balanced. We want to do the right thing by our corporate objectives, and we talk about these at quarterly and annual meetings, but we are not incented to make progress on what you call the Effective Frontier. Shouldn't this be cross-functional as a team?”
“Yes,” I said, “You are not that different from other companies that I work with. Trust me, I understand.”
“For best-performing companies, it is a series of conscious choices to improve capabilities and push to a new level of the Frontier. However, it happens slowly. It is only after achieving balance and resiliency in the current state that companies can push to a new level of performance. I define this as increasing ‘organizational potential.’ For this reason, the decision to move to a new level of the Effective Frontier is the last stage in the model,” I said, while pointing to what is shown in Figure 1.3.
Figure 1.3 Moving from One Frontier to the Next
“When a company moves from one frontier to another, it requires a different type of thinking. To effectively make the transition from one level to another, companies have to adopt new mental models. They have to tackle change differently. It could be a new channel strategy or embracing new technologies and processes. Currently, the options abound. The challenge is choice, and working together to build potential cross-functionally.”
Joe interrupted. “I have a question. After selecting the right path to move the company to the next frontier, how do companies manage change? The people component is the toughest for us. If others are anything like our organization, the organization is hardwired for incremental, and continuous, improvement. The adoption of a new mental model flies in the face of conventional continuous improvement programs. We are good at the process methodologies of Six Sigma and Lean because they focus on gradual continuous improvement. How do you get the leadership team to risk disruption, to break some eggs, and then put the processes back together again to move to the next level?” Joe asked. “It sounds risky, and as you know, it's hard to get people to agree to risk putting their job on the line.”
“People put their jobs on the line all the time, especially by not taking action when action is required,” I said. “That's even worse, and plenty of people have lost their jobs because they failed by not even trying. You were the victim of a layoff because the management team did not have the courage to make tough choices.”
It was obvious that this point resonated, as Joe quickly retorted, “This is easier said than done. If you are stuck in the management of vertical metrics, you cannot see the big picture.”
“This is the secret to building systems with the Metrics That Matter,” I said. “You need to engage the entire team in a manner that not only gets mutual buy-in, but paves the future to deliver success. With incremental improvement, oftentimes one metric will win over another metric. Functional areas will become winners and losers. This is the power of defining a new frontier – you are all moving toward a common horizon that you've identified is desirable and attainable. To help you, I would like to share an interview that I recently completed with Marty Kisliuk of FMC. See if this resonates with your team…”
“Good idea,” said Joe. “Why, don't we have lunch and continue the discussion?”
The Journey of Managing the Effective Frontier
As leaders, we must move the frontier. It must be done strategically. Many times we get trapped to move one or two metrics instead of the entire frontier. To do this, we must see progress in the metrics that we measure. The rest will be victims of entropy.
To make progress, we have to be good at root-cause analysis. The organization must find the root cause and act quickly.
We must resist the temptation to focus on one or two metrics in isolation. When we do this, we cannot move the frontier to the next level. Instead, as a leadership team, you must find balance and then push to the next level of the Effective Frontier. It is a strategic activity. It is not a week-to-week or a month-to-month initiative. It needs to be focused end-to-end throughout the organization from the customer's customer to the supplier's supplier on an annual basis.
I don't think that we as business leaders recognize that we are on a frontier early enough. It is a paradox. It is the AND. You must move the metrics together while in balance and then redefine the process. Most organizations are not operating at full potential on their frontier and can make continuous improvements. However, when you reach full potential on the frontier, you must force a disruption and change the mental model.
Marty Kisliuk, Director of Global Operations, FMC Agricultural Solutions
The Efficient Organization Is Not the Most Effective
Over faded gray trays in the company cafeteria, I continued. “Computing power and connectivity made greater productivity possible. Over the course of the past decade, the average global multinational company invested 1.7 percent of revenue on information technology.” I pulled a recent research study from my purse and pointed to the data (see Table 1.3). “The impact was a dramatic improvement in employee productivity, as defined by revenue per employee, in all manufacturing sectors.
Table 1.3 Industry Progress over the Past Decade
Industry Average comprised of public companies (automotive industry: NAICS 336112), (brand apparel industry: NAICS 31522 %, where % is any number from 0 to 9), (combined food & beverage industry: NAICS 3112 %, where % is any number from 0 to 9, 311320,311520,311821,311941 & 312111), (chemical: NAICS 325188 & 325998), (consumer packaged goods: NAICS 3256 %, where % is any number from 0 to 9), (grocery retail industry: NAICS44511), (hospital industry: NAICS 62211), (mass retail industry: NAICS 452 %, where % is any number from 0 to 9), (medical device industry: NAICS 339112), (pharmaceutical industry: NAICS 325412), (retail apparel industry: NAICS 44812 %, where % is any number from 0 to 9), reporting in One Source with 2012 annual sales greater than $5 billion.
″ Calculated from 2001–2012 due to data availability;
* Calculated from 2002 to 2012 due to data availability;
^ Calculated from 2003 to 2012 due to data availability;
NC = no change.
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