Case Studies

THE NUMMI EXPERIMENT

In the early 1980s, General Motors, battered by Japanese imports, realized a need
in learn new ways to boost productivity and product quality. Many GM executives
believed that they could learn much from the Japanese approach to making cars;
however, they wondered whether the techniques would work with a unionized
work force, and American managers and suppliers. Toyota wondered the same
thing. Under protectionist pressure to make cars in the United States, Toyota was
actively considering building manufacturing facilities in America. However, it first
wanted to learn whether its techniques would work in the United States before
taking such a giant step.

In 1984, these two companies combined resources to create New United Motor
Manufacturing Inc. (NUMMI), a joint venture established to build subcompact
cars. The venture is a bold experiment—to determine whether Japanese
management works in the U.S. auto industry. If the experiment succeeds, both
parties will gain, and the result could be a revolution in the way auto plants are
managed and cars are made in America.

At the beginning of the venture, the challenge of achieving success was

considerable. NUMMI is located in Fremont, California (near San Francisco), in an
old GM plant that had been shut down in 1982 due to poor productivity and labor
problems. At the peak of the discontent, daily absenteeism averaged 25 percent
of the work force, and over 1.0C0 employee grievances were on file.

When NUMMI reopened the plant, 85 percent of the 2,500 employees were
rehired from the plant's previous work force. NUMMI was faced with managing a
once-hostile work force to meet a substantial challenge: produce a subcompact
Chevy Nova that matches Toyota's Corolla (an almost identical model) in
production cost and quality. Meeting the challenge would require new inventory
and quality control methods, a new teamwork approach to assembly, and highly
motivated American Workers supervised primarily by Japanese managers. At
NUMMI, Toyota is responsible for the daily management of the company; Toyota
managers fill 35 of the company's 63 management positions. Sixteen slots are
held by GM managers and 12 managers were hired by NUMMI. Eight of the 10
top-level managers come from Toyota. Toyota also performs all product
engineering while GM handles marketing and distribution.

In 1985, Toyota, General Motors, and the United Auto Workers negotiated a
unique labor contract for NUMMI. In the contract, the UAW made some
considerable concessions. It agreed to reduce the number of job classifications
from more than 80 to just 1 classification for production employees and 3 for
skilled tradesmen. The union also committed to improving product quality. The
employees received competitive pay.

In exchange, management agreed to a virtual guarantee of no layoffs.

Management also agreed to consult with the union before suspending or firing an
employee. Employees were also provided a greater involvement in decision
making. Management thus received the work force flexibility (via few job
classifications) it needed to implement the Japanese techniques. Workers
obtained the decision-making involvement and job security needed to ensure
that, in helping to boost productivity, they would not work themselves out of a
job.

Employees were organized into work teams comprised of six to eight members.
Each team is led by a team leader who is selected by management, for his
performance, communication, and teaching abilities. Hourly paid, team leaders
receive about 50 cents more per hour for their extra responsibilities. Three teams
comprise a group who is led by a salaried, supervisor.

Each team's members were intensively trained in how to perform all of the jobs in
the group's work area and in the techniques of quality control. Over 200 Toyota
employees in Japan traveled to Fremont to train the employees; All team and
group leaders also spent three weeks in Toyota's Corolla plant in Takoaka, Japan,
learning the concepts and techniques of Japanese production management.

This intensive training enabled a team's members to rotate jobs, which they do
frequently. It also provided teams with the authority to determine their work
place and solve production problems. Importantly, ten members also were given
the power to stop the production line if they spot a problem. Much of the in-
process quality checking is done automatically by sensors on production
equipment that shut the machine down when a defect is detected (the Japanese
call this line-stop concept Jidoka). However, the workers also serve as the plant's
quality inspectors. While the typical GM plant has more than 80 quality engineers,
NUMMI has none.

Ropes are hung throughout the plant. When an employee sees a problem, he tugs
the rope, and electronic music begins playing to alert other workers. A red light
on an overhead board illuminates the number of the employee's work station.
The team leader goes to the trouble spot and often assumes the employee’s
work. while he solves the problem. This situation occurs about 400 times each
shift. About 200 times, the workers solve the problem fast enough to keep the
line going (the line stretches about 1.3 miles); the remaining 200 times, the line
stops but usually for no more than five seconds.

Besides superior quality control, the plant also focuses on superior inventory
management. NUMMI maintains a just-in-time styled approach to inventory
control. However, providing supplies "just-in-time" is quite demanding because
some 1,600 of the 2,250 different parts needed to make Novas are shipped to
Fremont from Toyota's plants and suppliers about 10,000 miles away. Toyota
makes about 300 of these components; the rest are provided by its 70 suppliers
located in or near Toyota City.

Toyota goes to great lengths to ensure parts arrive when needed. NUMMIs pro-
duction schedules arc set 12 weeks in advance. In Japan, parts from Toyota's
plants and suppliers arrive hourly at Toyota's Kamigo Vanning Center where they
are packed for shipping overseas to NUMMI. The most important component
provided by Toyota in Japan are the engines which are assembled at Toyota's
Shimoyama engine plant about 20 minutes from the center. Truckers make 16
trips to the center each day to meet their 900 engine delivery quota. What is the
total time required to assemble an engine, transport to the center, pack the
engine, take it to the Port of Nagoya, and load it on a ship? About six hours.

However, NUMMI's inventory system falls somewhat short of being truly JIT.
The reason: severe weather sometimes delays the ships' deliveries of parts from
Nagoya to the Port of Oakland in California. NUMMI thus holds two days' supply
of inventory at the port and one day's supply at the NUMMI plant, just in case.
When parts arrive at the Oakland port, truckers on average take about 10
minutes to enter the loading area, obtain a container's worth of cargo and leave
for the 31 mile trip to NUMMI. The company is working to reduce that average
time to less than five minutes.

NUMMI's 75 American suppliers who deliver 650 types of parts are provided
with a seven-week advance schedule which is confirmed or revised daily. Parts
are delivered by truck usually requiring a three-day trip from vendor to NUMMI's
door.

Once at the plant, all parts—Japanese and American—are inspected and

shipped to work teams hourly.

Has the NUMMI experiment worked? So far, signs spell success. Worker morale
is high; absenteeism has dropped to about 3 percent. Management works to keep
it that way by minimizing worker-management status differences. There is one
parking Jot (no executive parking spaces), one cafeteria, and with the exception
of the president, all open offices for executives.
 Auto experts consider the Chevy Nova to be the highest quality car that GM
makes. The plant has come very close (within .25 defects) to achieving its goal of
1.5 defects per car. The Nova has the best ratings in consumer satisfaction and
repair rates. The quality also matches Toyota's comparable Corolla produced in
Japan; however, the plant's productivity is about 10 to 12 percent less than the
productivity of Toyota's Corolla plant. NUMMI makes about 62 cars an hour. Yet,
considering the plant's older condition and the workers' lesser experience, Toyota
executives estimate that the productivity rates are about the same. These
accomplishments have come without large-scale automation.

However, questions remain concerning whether this impressive record can

continue. A projected worldwide glut in auto supply could spell problems in terms
of employee layoffs and morale. The joint venture is scheduled to end in 1994.

Questions

1. Of the different techniques used by the Japanese in quality and inventory

control, which do you believe are most useful? Explain.

2. Can these techniques be transferred beyond auto manufacturers to Indian

industry at large? Discuss.

3. What are the major obstacles in making this transfer? How could the barriers
be alleviated?
HAIR, INC

Janet Hoover and Rob Hundley opened their first design shop 10 years ago. With
two other haircutters, the two of them began what was to become a very
successful organization.

Both Jan and Rob keep up date on the latest hairstyling techniques. They attend
international schools and seminars on hair design and transmit the knowledge
they acquire to their employees through training sessions. Every new employee
must be trained by Jan or Rob. HAIR, Inc. promotes quality delivery of the latest in
hairstyling. Modern music is played in their shops, and their haircutters are
dressed in the latest fashions to promote the image that HAIR, Inc. represents the
latest in hair fashions.

HAIR, In., appeals equally to men and women and to all age-groups. Occasionally,
a visiting rock become very popular with teenagers who come to get their hair
styled but also hoping to see a current rock star.

HAIR, Inc., has been so successful that there are now HAIR, Inc., shops in five
major cities. This expansion has caused Jan and Rob some concern. Their concern
centers on maintaining effective performance with a growing number of
employees.

After considerable thought, they decided that they were going to have to become
more concerned about managing the performance of their business. Both Jan and
Rob had been reading a great deal in their trade publications about effective
management, and more recently they had been reading about the importance of
maintaining control.

Jan and Rob knew that they could not develop a standardized performance
control system for the entire organization because different employees
specialized in different activities, for example, cutting and styling, colouring,
permanents, hairpieces. In addition, some employees were classified as
apprentices cutters and others as master cutters. Jan and Rob therefore
concluded that their first step should be to try to identify performance criteria
that they should expect and incorporate these criteria in a control document.
They would then begin training sessions on the philosophy and process of
management control with groups of employees. This would be followed by
sessions with each employee during which the level of expected performance on
each criteria would be set for each employee.

The performance control document shown in Exhibit 1 is a first draft that Rob
developed. After examining Rob’s form, Jan observed that quantity of work
completed should certainly be an expected result and an important performance
variable.

Exhibit - 1

HAIR. Inc.
Performance Form Name : __________________________
Responsibility Minimum Average Maximum Actual
Cut and Style ________ Daily Daily Possible Performance
Coloring___________ Performance Performance Performance
Permanents__________
Hairpieces __________
Apprentice________
Master ___________
Expected Quantity

Being quantitative, this criterion was easy to measure. However, in their business,
customer satisfaction was absolutely critical. In fact, HAIR, Inc., had a policy that a
customer who for any reason was not satisfied with the work could return and
have additional work done free of charge. Jan noted that most people's self-
image, was closely tied to their appearance and that poorly performed hairstyling,
hair coloring, and permanents could be extremely upsetting if they did not make
people look as they thought they should look or as they wished to look.

Thus, Jan suggested a qualitative performance criterion that would, focus on the
result of customer satisfaction. She believed that such a criterion could be
measured by the percentage of jobs that were, acceptable to the customer when
completed. For example, a-minimum expected level of performance might be to
have 90 percent of all cuts and styles acceptable to the customer; an average
expected level might be 98 percent. This, she believed, would enable her and Rob
to monitor performance toward achieving their objective of customer
satisfaction. "In addition," she said, "a qualitative objective will help the
employees focus on how they perform their work and not solely on the quantity
of their output." With these ideas in mind, Jan developed the version of Rob's
performance form shown in Exhibit 2.

Exhibit 2
HAIR. Inc. Name :
Performance Form
Responsibility. Minimum Average Maximum Actual
Cut and style_______ Daily Daily Possible Performance
Coloring __________ Performance Performance Performance
Permanents _______
Hairpieces ________
Apprentice ________
Master __________

Results expected
(quantity)
Results expected
(quality)
Questions

1. Why do the problems faced by HAIR, Inc., o appear to lend themselves to

the application of organisation control practices?

2. What is your opinion of Jan’s and Rob’s potential as managers? State your
reasons.

3. Are Jan and Rob implementing pre control, concurrent, or feedback control
methods? Explain.

4. Can the application of control practices used by Hair Inc be transferred to

an Indian Hotel?
THE RESPONSIVE ORGANIZATION

In the past, a corporation was structured much Iike the military, with a formal
chain of command and division of labor. Over time, many companies came to
realize that the bureaucratic structure of the traditional corporation can often
cause breakdowns in communication and lower efficiency.

Manufacturers of products in relatively unchanging environments often take

a mechanistic approach to production. In such environments, employees strictly
adhere to their job descriptions. However, companies that depend on their ability
to continuously introduce new innovations usually take a more organic approach,
giving employees more room to make decisions and communicate outside the
chain of command. Some companies may choose to radically modify or
reengineer their structure.

Big Apple Bagels and St. Louis Bread Company are two rapidly growing
businesses that share a similar market. However, each organization is structured
quite differently. Whatever the structure, for an organization to be successful, it
must be responsive to its customers. This operating principle runs a lot deeper
than just making sure the right kind of cheese gets put in a turkey sandwich.

Many companies are finding that changing the way in which they are
organized improves their responsiveness. For example, they may choose to
simplify their structure and reduce the layers of management, thus reducing the
layers in the chain of command. Another option is to widen the spans of control.
The traditional organization has a tall structure and a narrow span of control. This
means managers have few subordinates who report directly to them. A company
with a fiat organizational structure has a wide span of control with fewer
reporting levels.
 Many companies are empowering their employees and allowing them to make
decisions on their own rather than insisting that they report to various levels of
management. When Paul Stolzer opened the first Big Apple Bagel store in 1985,
he had no idea that in the short span of seven years his small store would grow
into a franchise that boasts 75 stores with more opening all the lime. Stolzer said,
"The stores-have changed quite extensively over the years. -We are actually a
fourth or fifth generation store right now. Initially the stores were set up as
strictly bagel bakeries with the predominant product being bagels and cream
cheese. We've progressed to a more aggressive stature; adding a few more
dimensions to our operation in that we have dine-in facilities, a more extensive
sandwich menu, and a very, very strong coffee program. We're still progressing.
That's one thing that never ends."

One thing that hasn't changed is Big Apple Bagels' open-door policy. From top
management to line workers communication channels are wide open. Jim Lentz.
director of training for the company said. "At Big Apple Bagels we have an open-
door policy between the franchisee and the franchisor, and between the ultimate
consumer and the franchisor, in that we encourage people to come up with
suggestions, new products, new ideas. We're never further than a phone call or a
stop away. We're continually in the franchisees' stores to make sure that their
operation meets our specifications."

In 1987, Ken Rosenthal opened his first St. Louis Bread Company store in
Kirkwood. Missour, with used baking equipment. Today, St. Louis Bread company
operates over 50 stores in the St. Louis area, with stores opening in other
midwestem markets as well. The growth happened quickly, forcing the company
to change its organizational structure. Originally, it was a small store with 17
employees. When it became a large chain, employing over 1,000 people, a more
traditional organizational structure was needed.

When a company is growing, it may need to use some of the concepts of

reengineering. Reengineering entails the radical redesign of business processes to
achieve major gains in cost, service, or time. For example, by mid-1992, St. Louis
Bread was growing at a frantic pace. The partners decided it was time to slow
down and take a breath. They began to realize that the opportunistic approach
wouldn't work anymore.

They had reached a point where the controls and information systems they
had in place were inadequate for a larger operation. New equipment was
purchased to automate processes on the line. Thirty thousand dollar point-of -
purchase cash registers were installed to .track everything from sales per hour to
sales per stock keeping unit to sales by stores.

Doron Berger said, "The organization at St. Louis Bread Company is probably
not atypical of many organizations. While we have a hierarchical structure in
terms of someone is" ultimately accountable for the results of the business. We
do fight vigorously to maintain a flat organization. In other words, there aren't a
lot of layers between the president CEO and the people who are on the front
lines. I think we have succeeded because of the effort we have put into that."

In November of 1983, Au Bon Pain, the dominant bakery/cafe chain in the

country, acquired St. Louis Bread Company. Au Bon Pain's stores were all in urban
areas. St. Louis Bread would enable them to lap into the suburban market. David
Hutkin said, "Our organizational structure has not changed dramatically. It really
hasn't changed since the acquisition. We've continued to run the company very
independent of the parent company, and we're still building stores and expanding
the concept. As far as the organization, basically we're still doing the same things
as we were doing before."

A company like Big Apple Bagels is considered to be a boundary less

organization. In such an organization, the corporate structure is more horizontal
than vertical. Boundary-less businesses are typically organized around core
customer-oriented processes, such as communication, customer contact, and
managing quality. In order to enjoy the benefits a horizontal organization offers,
four boundaries must be overcome:

 Authority
 Task
 Political
 Identity

Even a relatively boundary less company has an authority boundary. Some

people lead, others follow. To overcome problems that may arise, managers must
learn how to lead and still remain open to criticism. Their "subordinates" need to
be trained and encouraged not only to follow but also to challenge their superiors
if there is an issue worth considering. As one Big Apple executive said, "I think
there are some natural boundaries that occur between a franchisor and a
franchisee, or an employee and an employer. What we try to do at Big Apple
Bagels is to eliminate those boundaries by keeping the phone line open at all
times as well as the fact that a lot of us have been franchisees as well as now
being a franchisor so we know what it's like to sit on both sides of the table and
to be able to talk to the franchisee from the standpoint of when we were there at
one time as well and we have that empathy for their position."

The task boundary arises out of the "it's not my job" mentality. A task
boundary can be overcome by clearly defining who does what when employees
from different departments divide up work.

The political boundary derives from the differences in political agendas that
often separate employees and can cause conflict. This is closely related to the
identity boundary. The identity boundary emerges due to an employee tendency
to identify with those individuals or groups with whom they have shared
experiences, or with whom they share fundamental values.
To overcome the identity boundary, employees and management need to be
trained to gain an understanding of the business as a whole and avoid the "us
versus them" mentality. A good way to do this is by forming cross-functional
teams, in which tasks arc shared and cross-training simply happens as a result of
employee interaction.

The new boundary less organization relies on self-managed work teams. It

reduces internal boundaries that separate functions and create hierarchical
levels. A horizontal corporation is structured around core, customer-oriented
processes.

Lines of communication are very open, allowing line-level employees to

communicate their questions and concerns directly to those at the management
and executive level. Not all organizations are structured the same way. There are
factors to consider such as organizational size, culture, and production volume.
These factors may indicate that under some circumstances, a tall organizational
structure may be more appropriate than a flat structure. Companies in the future
may change or alter the way they operate but customer satisfaction, quality, and
efficiency will always be the primary goals.

Critical Thinking Questions

1. If companies today are working so hard to break down boundaries, why is it

that there are boundaries in the first place?

2. Would you consider Infosys in India a responsive organization earlier? Why?

Why not?At present?
Cracking the Whip at Wyeth

When Robert R. Ruffolo Jr. signed on at Wyeth in 2000, his mandate was simple;
shake up the drugmaker’s mediocre research and development operation. He has
certainly succeeded. One of Ruffolo’s first moves as executive vice president for R
& D was conducting a top-to-bottom review of Wyeth’s pipeline.

Shredding It Up

Since jumping ship at SmithKline Beecham (GSK) in 2000, the 55 year old Ruffolo
has ripped apart and reassembled Wyeth’s 2.7 billion research operation. Among
his controversial changes; a series of quotas for how many compounds must be
churned out by company scientists. For some of them, having to hit a hard and
fast number seemed an athema to the complex and at times serendipitous drug
development process.

But, Ruffolo held bonuses hostage to manager’s meeting that goal. More recently
he began studying industries from aerospace to computer hardware
manufacturing in a bid to better manager innovation. But don’t expect him to
steal from the playbooks of Industry rivals. ‘Until recently, this industry didn’t
have to focus too much on productivity,’ he says. ‘The solutions to our problems
aren’t going to come from our competitors.’

Wyeth’s efforts to energize its labs reflect a major challenge in the drug business.
In recent years the output from big pharma R & D has been almost universally
disappointing. According to the Tufts Centre for the Study of Drug Development,
only 58 new drug were approved by the Food & drug Administration from 2002 to
2004, down 47% from the peak of 110 from 1996 to1998. The reasons are myriad,
including a wealth of good treatment that are already available for many diseases
and increased vigilance from regulators and physicians on safety. But with
financial pressures building as more drugs go off patent and as payers push back
against rising drug costs, pharma companies can’t afford to battle that problem
by simply throwing bigger bucks at research.

That’s why Ruffolo, who took over all of Wyeth R & D in mid-2002, is looking
for ways to bring greater efficiency to the innovation process.His goal may not be
unusual, but his hard-nised approach to getting there is.

After signing on at Wyeth, Ruffolo followed Wyeth CEO Robert A. Essner's

charge to "rattle the cage." Ruffolo moved quickly to instill discipline. With the
help of outside consultants. 70 scientists at the company took a hard look at
recent projects that had succeeded and failed. They came to a stunning
conclusion: Often, drugs with the lowest chance of paying off ended up with the
most resources. Why? Scientists continued to plow money and staff into troubled
projects in an attempt to rescue them.

So Ruffolo instituted the review process that sent everyone scrambling. Under
that system, a value is determined for every project in the pipeline based on a
host of factors, including the cost of developing it, the likelihood of success, and
expected future sales. That. culminates in an annual review that determines
which projects move forward, which get put on the back burner, and which are
killed. That new rigor made people more willing to terminate troubled projects.
That's critical in the drug business since late stage human trials are so
expensive.

Smart Decisions

Brenda Reis, an assistant vice president in Wyeth R&D, had to make one of those
tough calls. In 2004 her group was developing a new oral contraceptive. As part of
Ruffolo's portfolio-review process they determined what sort of safety and
effectiveness they would need from the drug in order to make it a hit.

In late summer of 2004, Reis recalls, the group of 12 people leading the project
sat in stunned silence as they digested disappointing data from midstage human
testing of the drug. The product was triggering a side effect that would seriously
limit its potential. A few weeks later the group recommended the development of
the compound be drop. Her team was given an internal company award for
stopping the project a move that sent a clear signal that the company would
reward good decision making.

Ruffolo has set firm targets for how many compounds need to move forward at
each stage of the development process. Take discovery scientists, the group that
identifies new ways to attack diseases and creates compounds to be passed on
to another group for more extensive testing. When Ruffolo came in, that group
was moving just four drug candidates out of its labs every year. Ruffolo set the
new target at 12 – with no increase in resources or head count. The target has
been met every year since its 2001 implementation. This year, the bar has been
ralised to 15.

Too Much Pressure?

Those targets forced big changes in the R&D operation. For one thing scientists
needed to standardize more of what they did in an effort to move compounds
more quickly through their shop. Case in point: At the old Wyeth, researchers
could design, the early human safety studies—known as Phase I trials—in- almost
any way they wanted. Under the new regime, researchers pick from four or five
standardized formats. That helped cut the time for a Phase I trial from 18 months
to six.

The approach has critics. Some former executives say he seemed out of touch
with the anxiety his new demands created among scientists. Dr. Philip Frost,
chief scientific officer at biotech lmClone Systems (IMCL), describes Ruffolo as a
"bully" at times. Ruffolo doesn't agree with that characterization, but he
acknowledges that when it comes to the targets, "I forced it on them."
Critics also argue that Ruffolo went too far in trying to boost output. VVilliam J.
Weiss, who left Wyeth in early 2004 and is now director of drug evaluation at
biotech Cumbre in Dallas, says quotas like those set by Ruffolo can prompt
scientists to "overlook problems with some compounds" in order to make their
numbers. In fact, Wyeth has seen an increased failure rate for compounds in mid-
stage testing recently. Ruffolo says that this has occurred throughout the
industry. Still, even supporters such as C. Richard Lyttle, CEO at pharmaceutical
company Radius health in Cambridge Mass, point out that those sorts of
productivity pressures can also force people to zero in on the projects that are the
safest gambles. Ruffolo says he specifically put fewer controls in at the so-called
exploratory phase, when scientists tend to have eureka moments of, say,
spotting a new cellular target they want to hit with a drug. “I don't think you can
manage creativity," he says. "But i t think you can manage the outcome after you
have that creative effort."

Has RuffoIo's prescription worked? UBS Investment Research analyst Cart

Seiden says Wyeth's pipeline has shown major improvement, with a number of
potentially hot-selling products likely to hit in the next few years. Among them: a
new antidepressant based on its current blockbuster Effexor and a new
schizophrenia treatment.

Questions

1. What kinds of control systems tend to be used to measure the performance

of R&D scientists?
2. What kind of control system did Ruffolo institute? What are the various parts
or measures of the control system he instituted?
3. What are the pros and cons of his system? Does it seem to be working?
4. Choose any Indian Pharma Company. What are the controls exercised in its R
& D.
Tom LaSorda is Close to Chrysler Employees

In the past, Chrysler (part of DaimlerChrysler's global empire) was often criticized
for its managers' failure to get close to employees and effectively communicate to
them its current problems and future plans. Its top decision makers were often
isolated from what was going on in its car plants; they looked to the measures of
the output controls coming in. Also, employees often felt they were kept in the
dark; they had little idea of how well their plants were performing or where their
company was going or how they could help Chrysler and themselves. Managers
and employees were not sharing information about the company's performance
and what might he needed to improve it, and this contributed to Chrysler's
deteriorating performance during the 1990s.

In the 2000s, Chrysler has taken many steps to remedy this communication
problem and bring managers and employees, at all levels of the company, closer
together to deal with the major problems it faces. Chrysler's top executives
recognized that only intense cooperation between employees and managers
could produce the efforts needed to turn around its performance. A major step
Chrysler took to encourage cooperation was to promote managers who
understand die concerns and problems facing its employees and how to talk to
them. And, who better could speak to workers than managers whose parents had
worked in Chrysler plants and who were raised in homes where events at the
company were a major topic of conversation?

One of these managers is Tom LaSorda, Chrysler's current CEO, whose father was
the United Auto Workers (UAW) president of one of Chrysler's Canadian auto
plants and whose grandfather was also a union leader at that company. With his
union roots, LaSorda has firsthand knowledge of what issues concern
autoworkers at a time when thousands of them are losing their jobs because of
intense global competition. LaSorda remembers from his childhood the time that
his father was laid off for six months when the economy collapsed; he also knows
what it is like to live from paycheck to paycheck, as most American families do.
Dieter Zetsche, the German born former CEO of Chrysler who engineered its
recent turnaround, recognized LaSorda's unqiue skills. The background and
experience that enables him to effectively communicate with employees, as well
as his proven management skills. Zetsche mentored LaSorda, and when his own
success resulted in his being promoted to CEO of the whole of Daimler Chrysler,
he decided down to earth LaSorda, who is at his best when interacting with
ordinary people, was the best choice as Chrysler’s next CEO. LaSorda spends a lot
of time walking around Chrysler’s plants, making direct contact with workers and
UAW executives, and is the first Chrysler CEO to ever address union members at
their annual meeting.

How have LaSorda's skills in talking and relating to union employees and
officials paid off? Analysts say that Chrysle has enjoyed more conciliatory dealings
with employees and the UAW than has GM or Ford. Not only has the UAW agreed
to a painful 24,000 layoffs in the last five years; it also has agreed to change work
practices that resulted in high operating costs, and it is working with the company
to find ways to lower health care costs. These are all major factors that have been
hurting the competitiveness of Chrysler and the Big Three U.S. carmakers. In
return, LaSorda has worked to improve the future prospects of the laid-off
workers. Chrysler has provided major funding to allow new companies to open up
car-parts operations near Chrysler's plants to provide new jobs, and it provided
new training, education, and severance benefits to laid-off employees. It has also
behaved fairly to current employees. As he says, "When you're running a
business, you do what's best for all,” and he hopes that in the long run this will
translate into thousands of new, well-paying auto jobs.

Question:

1. What are the problems associated with direct supervisions?

2. In the Indian scenario, can direct supervision be made successful?

 Reengineering at Barr & Stroud

Reengineering represents the ultimate in control practices. Today, the trend

toward reengineering is so in vogue that the label is being used to describe
diverse actions ranging from mundane requests for new chairs to across-the-
board organizational layoffs. However, true reengineering entails the radical
redesign of business processes to achieve major gains in cost, service, or time.
The goal of business process redesign (BPR) is to change the fundalmental way
the work of the organisation is done in order to achieve dramatic improvements
in speed, cost, and quality.

Reengineering, unlike automation, does not simply speed up an existing

business function. Instead, it completely recasts or reengineers the core system
or process. Computers and other information technology play an integral role in
BPR by empowering management to exercise greater, unobtrusive control in all
facets of business activity. Reengineering efforts are not limited to domestic
companies; they have gained a large following in the international Business
arena. Barr & Stroud is a Canadian company that has recently utilized
reengineering processes to its advantage.

For defense contractor Barr & Stroud, the decline of the Soviet Union was bad
news. With the perception in the West of a lessening of the threat from the
former Soviet Union, demand for military periscopes, the main product
manufactured by the company, faltered. Rather than idly sit back and watch the
demise of the company, executives at Barr & Stroud began radical change to
regain profitability.

The end results for Barr & Stroud of undertaking BPR include a flattened
organizational structure through removal of five levels of management reporting;
a single employee negotiating body instead of the previous seven equal sickness
and holiday entitlements for all employees; elimination of special perks formerly
accorded to management; and the formation of highly efficient work teams,
which are organized by business and product. To achieve these gains, both
management and employees, had to buy; into the critical notion that BPR
doesn't just incrementally improve, it dramatically, changes former ways of doing
business.

In addition to merely cutting costs through use of BPR, Barr & Stroud has also
employed information technology to better monitor and thus regain control of its
manufacturing operations. The outcome has been almost 100 percent on-time
delivery of products, leading to higher customer satisfaction and increased
revenues and profits. For Barr & Stroud, the use of BPR has certainly led to a
peacetime dividend.

Question :

1. Why should a case of reengineering be included in the study of control?

Justify

2. What can business reprocess do?

3. Mahindra and Mahindra claims to have done BPR. Verify and cite
advantages accrued to the company.
A STRATEGIC CONTROL DECISION TASK

The plant manager of a major electronics manufacturer called a meeting with his
immediate subordinates to discuss a major strategic control decision. The issue to be
resolved concerned whether to go into the full scale production and marketing of a
new product, a miniature thermostat. The miniature thermostat, MT had been under
development for the past three years, and the manager believed that it was time to
make a decision. The meeting was to be attended by the marketing manager, the
production superintendent, the purchasing manager, and the plant cost accountant.
The plant manager instructed each official to bring appropriate information and to be
prepared to make a final decision regarding the MT.

Prior to the meeting the plant manager noted the following facts concerning the MT:

1. Developmental efforts had been undertaken three years ago in response to the
introduction of a similar product by a major competitor.

2. Initial manufacturing studies had indicated that much of the technology and
know-how to produce the MT already existed in the plant and its work force.

3. A prototype model had been approved by Underwriters’ Laboratories.

4. A pilot production line had been designed and installed. Several thousand
thermostats already had been produced and tested.

5. Market projections indicated that a trend toward miniaturization of such

components as thermostats was likely to continue.

6. The competitor who had introduced the product was marketing it successfully
at a price of $0.80 each.
 7. The cost estimates derived by the cost accountant over the past two years
consistently indicated that the firm could not meet the competitor’s price and
at the same time follow its standard markup of 14 percent of the selling price.

Because of his concern for the cost of the MT, the plant manager asked the cost
accountant to brief the group at the outset of its meeting. The accountant’s data are
shown in the following table.

Actual Standard
Costs$ Costs$
Direct Labor $0.059 $0.052
Direct Material 0.340 0.194
Manufactured overhead (438% of 0.228 0.228
Standard direct labor) -------------- ---------------
Total manufacturing cost $0.627 $0.474
Spoilage (10%) 0.063 0.047
Selling and administrative costs (40% 0.115 0.112
Of direct labour and overhead) --------------- -----------------
Total cost per MT $0.805 $0.663
Required price to achieve 14% markup
On selling price $0.936 $0.736
-------------- --------------

The accountant noted for the group that the firm would not be able to
manufacture and sell the MT for less than $0.805 each, given the present actual
costs. In fact, meeting its markup objective would require a selling price of
approximately $0.94 each, but that would be impossible, since the competitor
was selling the same product for $0.80. She explained that if the MT could be
manufactured at standard costs. She could compete successfully with the
competitor’s thermostar. She said that the company should abandon the MT if it
could not be made at standard costs.
The marketing manager stated that the MT was an important product and that it
was critical for the firm to have an entry in the market. He said that in a few years
the MT would be used by all of the company’s major customers and that the
competition had already moved into the area with a strong sales program. He
added that he did not place too much reliance on the cost estimates, because the
plant had so little experience with full scale production of the MT and that in any
case, standard cost though appropriate for cost containment were inappropriate
for decisions of this type.

The manufacturing superintendent stated that he was working with engineers to

develop a new method for welding contacts and that if it proved successful the
direct labour cost would be reduced significantly. This would have a cumulative
effect of costs, since overhead, spoilage and selling and administrative expense
were based on direct labour. He also believed that with a little more experience
the workers could reach standard times on the assembly operations. He said that
much progress in this direction had been made in the past four weeks.

The purchasing manager stated that material costs were high because the plant
had not procured materials in sufficient quantities. She said that with full scale
production material, costs should decrease to standard.

Questions :

1. If you were the plant manager, what decision would you make regarding
the MT?Why?

2. If you decided to manufacture the MT, would your decision indicate that
the standard of 14 percent markup was not valid?

3. Trace the relationships between precontrol, concurrent control and

postcontrol as revealed by the facts of the case.
How Failure Breeds Success

Even heard of Choglit? How about OK Soda or Surge? Long after ‘New Coke’
became nearly synonymous with innovation failure, these products joined Coca-
Cola Co.’s graveyard of beverage busts. Given that history, failure hardly seems
like a subject CEO E, Neville Isdell would want to trot out in front of investors.
But Isdell did just that, deliberately airing the topic at Coke’s annual meeting in
April. “You will see some failures,” he told the crowd. “As we take more risks, this
is something we must accept as part of the regeneration process.”

Warning Coke investors that the company might experience some flops is a little
like warning Atlantans they might experience afternoon thunderstorms in July.
But Isdell thinks it’s vital. He wants Coke to take bigger risks, and to do the, he
knows he needs to convince employees and shareholders that he will tolerate
the failures that will inevitably result. That’s the only way to change Coke’s
traditionally risk averse culture. And given the importance of this goal, there’s no
podium too big for sending the signal.

While few CEOs are as candid about the potential for failure as Isdell, many are
wrestling with the same problem, trying to get their organizations to cozy up to
the risk-taking that innovation requires. A warning: it’s not going to be an easy
shift. After years of cost-cutting initiatives and growing job insecurity, most
employees don’t exactly feel like putting themselves on the line. Add to that the
heightened expectations by management on individual performance and it’s
easy to see why so many opt to play it safe.

Indeed for a generation of managers weaned on the rigors of Six Sigma error-
elimination programs, embracing failure-gasp! Is close to blasphemy. Stefan H.
Thomke a professor at Harvard Business school and author of Experimentation
matters, says that when he talks to business groups, “I try to be provocative and
say : ‘Failure is not a bad thing,’ I always have lots of people staring at me,
(thinking) ‘Have you lost your mind?’ That’s O.K it gets their attention. (Failure) is
so important to the experimental process.”
Granted, not all failures are praiseworthy. Some flops are just that : bad ideas.
The eVilla, Sony Corp’s $500 “Internet appliance.” The Pontiac Aztek, GM’s ugly
duckling ‘Crossover’ SUV. But intelligent failures-those that happen early and
inexpensively and that contribute new insights about your customers-should be
more than just tolerable. They should be encouraged. “Figuring out how to
master this process of failing fast and failing cheap and fumbling toward success
is probably the most important thing companies have to get good at’ say Scott
Anthony, the managing director at consulting firm Innosight.

Perhaps most important it means designing ways to measure performance that

balance account ability with the freedom to make mistake. People may fear
failure, but they fear the consequences of it even more. “The performance
culture really is in deep conflict with the learning culture,” says Paul J. H.
Schoemaker, CEO of consulting firm Decision strategies International Inc. “it’s an
unusual executive who can balance these.”

Some organizations have tried to measure performance in a way that accounts

for these opposing pressures. At IBM Research, engineers are evaluated on both
one and three year time frames. The one year term determines the bonus, while
the three year period decides rank and salary. The longer frame can help
neutralize a year of setbacks. “A three year evaluation cycle sends an important
message to our researchers, demonstrating our commitment to investing in the
early, risky stages of innovation,” says Armando Garcia, vice president for
technical strategy and worldwide operations at IBM Research.

In addition to making sure performance evaluations take a longterm view,

managers should also think about celebrating smart failures. (Those who repeat
their mistakes, of course, should hardly be rewarded.) Thomas D. Kuczmarski a
Chicago new-product development consultant, even proposes “failure parties” as
a way of recognizing that it’s part of the creative process. “What most companies
do is put a wall around a failure as if it’s radioactive,” says Kuczmarski. Most
companies don’t spend enough time and resources looking backward. General
Electric Co. (GE) is trying to do just that. The company, which is well known for
sharing best practices across its many units, has recently begun formally
discussing failures, too. Last September the company set up a two-hour
conference call for managers of eight ‘imagination break throughs’ that didn’t
live up to expectations and were being shelved, or ‘retired’, in GE’s parlance.
Such discussions can be nerve-racking especially in companies where failure has
traditionally been met with tough consequences. That was the case at GE, which
is now three years into the effort spearheaded by Chairman and CEO Jeffrey R.
Immelt to make innovation the new mantra at the $150 billion behemoth.

Some companies have gone even further, taking a comprehensive look at all
their previous failures. That was the case at Corning Inc., which found itself
teetering on the brink of bankruptcy after the once red-hot market for its optical
fiber collapsed during the telecom bust. Following that debacle, then –Corning
CEO James R. Houghton asked Joseph A. Miller Jr. executive vice president and
chief technology officer, to produce an in-depth review of the company’s 150-
year history of innovation, documenting both failures and successes.

That’s why W.L. Gore & Associates Inc. in Newark, Del., makers of the waterproof
fabric Gore-Tex, recognizes outsiders-people within Gore but not on the product
development team-who make the call on projects that need to be pulled. When
Brad Jones led Gore’s Industrial Products Div. which makes sealants and filtration
systems, he handed out ‘Sharp Shooter’ trophies to these outside managers
when a project was effectively killed. These marksmen, so to speak, freed from
the trappings of familiarity, can identify potential snags that the team may have
overlooked. “We’re effusive in our thanks for that contribution,” says Jones. “We
ask them to write up with they learned from it, and how we could have made the
decision (to kill the project) faster.”

A company’s reaction in the face of intelligent failures can send tremors or thrills
through a culture. It top executives are accepting, people will embrace risk. But if
managers react harshly, people will retreat from it.
Questions :

1. Why can studying failure help managers to better manage the control process
and improve performance?

2. What kind of specific changes in control systems would studying failure lead
to?

3. It is reported that Ratan Tata the chairman emeritus of Tata groups celebrates
failures publicly. Comment
Is Your Airline Out of Control?

Like many people, Paul Reutlinger has a Saturday morning ritual: He goes to a
neighborhood cafe, where he's greeted as a regular, orders coffee, and reads the
local paper. The routine doesn't vary— only the country. Moving from his native
Switzerland to Belgium and now to France, Reutlinger is a traveling Mr. Fix-It for
ailing airlines.

In an industry where national pride and politics still hold sway, Reutlinger is a
professional outsider. A Swissair marketing executive who has lived all over
Europe and in Latin America, he was recruited in 1996 to head Belgium's Sabena
after Swissair's parent, SAirGroup, took a 49% stake in the former state-run
Belgian carrier. Within two years, he engineered a turnaround that put Sabena in
the black for the first time in 40 years. Now, Reutlinger has come to France as
CEO of Air Liberte, Air Littoral, and AOM, three carriers in the midst of a difficult
merger.

Reutlinger, 57, combines a hard-nosed management style with the skill of a

diplomat. After arriving at Sabena, he immersed himself in local culture, making
friends with politicians and journalists over leisurely lunches and hanging art by
the Belgian surrealist Rene Magritte in his office. Despite this, Reutlinger also
slashed costs and, by taking a more conciliatory tone, extracted concessions from
labor unions. "I had an advantage because I didn't have a history in Sabena and
was seen as more or less a neutral person," he acknowledges.

Reutlinger's task in France looks even more difficult. He enjoys strong backing
from SAirGroup, which holds minority stakes in the three regional carriers and
wants to merge them to strengthen its hand against Air France, but all three
companies are losing money and have been plagued by worker strikes in
opposition to the merger. Reutlinger also has the delicate task of cohabiting with
Alexandre Couvelaire, the French former chairman of AOM and Air Liberte, who
could chafe at relinquishing management control. But Reutlinger is confident he
can pull the group out of the red by 2003 by negotiating new labor deals and
taking advantage of operating efficiencies from the merger.

Questions :

1. How does Paul Reutlinger do it? What is his secret for turning around an airline
that's in a nosedive?

2. How does Reutlinger harness the talents and energies of employees to make
certain they are working to make the organization successful?

3. Left on their own, people may act in ways that they perceive to be individually
beneficial but that may work to the detriment of the organization. Without some
means of regulation the organization can literally fall apart. In this regard, what
are some of the more important managerial activities that define control?

4. Do you think Reutlinger can apply some of these control activities to Air India if
he were entrusted with the job of Chairman?Explain

5. Do you think Reutlinger can apply some of these control activities to Air India?
BENCHMARKING PRACTICES AT XEROX

Benchmarking deserves credit for inspiring some legendary corporate

turnarounds; Ford's resurgence with the Taurus and Sable models and
Motorola's dramatic improvements, in quality and cycle times are just two
examples. Benchmarking has become a mainstream tool, used by many
organizations to remain competitive in the-global marketplace. To be effective,
benchmarking not only needs solid support from lop management, but must also
become an integral part of the entire organization, cascading down to every
employee.

In today's business environment, benchmarking projects are numerous and

cottage industries have sprung up to support them; in the last year alone, over
half a dozen books on benchmarking have hit the stands and the number of
benchmarking consultants has grown considerably.

The formal definition of benchmarking is the continuous process of measuring

products," services, and business practices against those of the toughest
competitors or companies" renowned as leaders. Xerox pioneered benchmarking
in the late 70s when it suddenly found that the Japanese had more than a 40
percent cost advantage in copiers and that Xerox's own market share in copiers
had severely declined. Xerox CEO David Kearns initially launched the successful
"Leadership through Quality" program to boost product quality and reduce
manufacturing costs. Since then, Xerox senior management has required, all
organizations within Xerox to pursue benchmarking.

There are four major types of benchmarking activities pursued at Xerox:

internal, functional, generic, and competitive. The theory behind internal
benchmarking maintains that, because large organizations have multiples of the
same units set up to perform similar activities, information can easily be shared
among similar units to the company's advantage. At Xerox, the company utilizes
internal benchmarking as a device to transfer opinions, ideas, and information
(regarding best internal practices) among its divisions. In keeping with this idea,
for example, the US customer operations division chose its sister affiliate in
Canada as the benchmark for improving its customer service process.

Functional benchmarking is the story of Xerox's learning ' relationship with L L

Bean. In the early 1980s, the members of Xerox's benchmarking review team
asked, "Who's the best external benchmark for customer order processing?"
Surprisingly, the answer was not other high-tech companies such as IBM,
Cannon, or Minolta. Rather, it was L L Bean, which picked its orders manually as
did Xerox. The big difference was that Bean was three times faster. Thus, Bean
became Xerox's functional benchmark in the area of order processing. In essence,
functional benchmarking focuses on determining and subsequently implementing
best practices, regardless of the industry they are found in.

Generic benchmarking has become one of Xerox's most important focal

points. Xerox identified numerous basic business processes, such as order taking,
in which they sought improvement. One individual was assigned to oversee
improvements in each of 10 areas encompassing the 67 identified processes.
These process owners became responsible for documenting specific means of
improving processes, overseeing implementation of organizational
benchmarking activities regarding the individual processes, and resolving cross-
functional disputes arising from resource allocation.

Finally, competitive benchmarking entails uncovering competitor practices

that can then be implemented and improved upon within an organization. For
example, prior to benchmarking, Xerox had four places where it stored and
handled material. After reviewing top-competitor practice, Xerox changed its
materials management structure to be more in line with that of its competitors.
As a result, materials-handling operations have been significantly streamlined
without any accompanying loss of service quality.
 In total, has benchmarking paid off for Xerox? Well, consider this. Since
embarking on its benchmarking, quest, Xerox has been able to cut manufacturing
costs in half, reduce inventories by two-thirds, increase overall organizational
productivity significantly, and achieve almost 100 percent parts acceptance from
customers. As a result, Xerox has been able to reclaim the market leadership
position that had once been threatened.

Questions for Analysis

1. Can benchmarking be used successfully by all businesses, both large and small?
Why or why not?

2. A critical component of functional benchmarking is identification of companies

that employ best practices. How would an organization go about finding such
companies?

3. What incentives exist for an organization like L L Bean to share the secret of its
"best practice" with Xerox?

4. Provide examples of how one or several actual companies (besides those

mentioned in the case) could employ each of the four types of benchmarking
activities to improve operating results.

5. Why should a case on benchmarking be a part of the topic of management

control?