Asia Logistics Wrap

Reflections on Transitions in Japanese Business Practices from the Bubble Era to Today (Part II)

Part B: Overestimating Japan in its Rise, Western Business Underestimated Japan in its Descent

After graduating from college and entering the workforce in the summer of 1998, I discovered that Japan’s leading companies were learning to adapt in markets outside of Japan quicker than many might have realized, or wanted to believe, in the Western business community. What opened my eyes was a four-year stint working for Denso Corporation as a production engineering liaison. Denso is arguably the world’s current leader in the auto parts industry and Toyota’s lead supplier. I worked in Denso’s Battle Creek, Michigan plant, Denso Manufacturing, MI (DMMI), where approximately 2600 American employees are currently led by a mix of American and Japanese management. The facility was the first established in the USA by Denso in response to Toyota’s own venture into Kentucky, and began production in 1986. A book titled “Small Town, Big Corporation” about the story of DMMI’s establishment is an excellent case study to read, but unfortunately is out of print and difficult to find. However, the point I want to make is that even while the Japanese corporate system was being advocated during the 1980’s and oppositely criticized throughout the post-bubble period, Denso was already establishing a hybrid of American and Japanese best practices at Battle Creek that would become the foundation of its strong business success and resiliency across North America throughout the 90’s and into the 21st Century.

As a liaison, I witnessed on a daily basis the tension of such a hybrid management system, but at the same time observed the characteristics that made the company quite adaptive and competitively stronger than American suppliers, such as Visteon and Delphi. This can be seen in the firm’s resilience and upward trajectory throughout the automotive industry’s struggles post-IT bubble and the 9/11 terrorist attacks?a period during which its customer base was almost 50% non-Toyota auto makers. Steeped in the principles advanced by Toyota via the Toyota Production System, Denso’s management succeeded in bringing about a culture where the predominantly American workforce adopted Japanese best practices and vocabulary in terms of team-driven, quality management and continuous process improvement. For example, words like kaizen, genba and heijunka do not need translation (continuous improvement, work floor, and leveling, respectively). Americans work alongside Japanese peers for every production line start-up and regularly participate in global innovation and quality circle tournaments sponsored by Denso Corporation headquarters.

At the same time, the predominantly Japanese management developed the ability to lead with the performance-based incentives and directness desired by American employees. Every Japanese president has been known to make regular visits to production lines to converse with employees; management feedback forums are held once per month so that employees can directly bring concerns from the genba to DMMI executives; and a famous process improvement incentive program supports individual kaizen suggestions that save DMMI money, but also over time provide employees with increasingly bigger rewards?the largest prize being a completely new, personally selected automobile via a DMMI customer. DMMI was able to do this through a unique co-management system where American managers pair up with Japanese transplant managers up to the vice president level (the president is always Japanese). Despite regular, ongoing tension regarding information sharing between Japanese and American managers, DMMI has been able to capture the strengths of both cultures in a management system that provides regular reviews, transparency, and a dedication to employee development and empowerment that has made the firm truly a model place to work.

Stepping back to the see the bigger picture, however, these advances by Japanese firms operating abroad often face barriers toward being modified and adopted, even partially, for Japan’s domestic business environment. My next post will look at some of the key challenges domestic Japanese operations face and provide some thoughts to remember for future discussion.

Reflections on Transitions in Japanese Business Practices from the Bubble Era to Today (Part III)

Highly Adaptive Abroad, Japanese Firms Struggle to Integrate Global Best Practices at Home

Fast forwarding from my departure from Denso in 2002 to today, and I currently have spent just over one year employed with a Japanese logistics provider based in Tokyo. Operating in the middle market and family-owned since 1924, this firm’s work environment illustrates the fact that the majority of Japanese companies?primarily the 2nd and 3rd tiers?have been heavily insulated domestically from learning the lessons that firms like Denso have by venturing abroad in the late 1980’s. Especially in the Japanese trucking industry, which is fragmented amongst approximately 60,000 firms, the traditional approaches to strategy management and human resource management remain entrenched.

This traditional style of strategy management possesses a decision-by-committee orientation that encourages highly iterative versus transformative initiatives. By iterative initiatives I refer to activities that seek to improve upon past practices without a significant change in management structure, systems and philosophy. Transformative initiatives on the other hand typically require a paradigm shift where the perceptions of and approaches to a firm’s current business realities experience foundational change. In the iterative environment, improvements can “get by” through reliance on the homogeneity of the Japanese workforce to bond together towards a common goal. This approach doesn’t employ communication tools that explicitly link a pronounced strategy or policy to individual objectives?it is assumed “the group” collectively understands their role in relation to policy announcements.

Obviously, such an iterative approach requires a longer time horizon to effect change; in this context, human resource managers can feel at ease with the traditional seniority-based system that defers to length of employment or age level. Training in such an environment also follows an iterative approach?absent any external effort, employees learn at the pace of the firm. In the past, when Japanese firms could rely on a lengthy if not lifetime period of loyalty from their employees, this system made sense or at least was sufficient. But the Japanese employment picture of today has changed dramatically, and Japan’s 2nd and 3rd tier firms along with the Japanese tertiary educational system are struggling to keep up. Data released earlier this year on the program “Up Close” via NHK, Japan’s public broadcaster, showed that more than 30% of all new employees freshly graduated from college quit their job within three years.

From my experience working in my current firm and discussing this trend with our own new employees just out of college, as well as with friends working in other companies, it seems that the following conditions generally exist:

1. Lack of fundamentals upon university graduation: The majority of university students in Japan graduate with very few of the skills necessary to be successful employees via their own resources. The university system is such that it is still generally based on the old system of deferring to companies to train and educate the workforce to be productive and successful.
2. Poor utilization of new human capital on-the-job: Since a significant number of graduating students no longer enter companies with the expectation of seeking lifetime employment or with the loyalty traditionally expected of new recruits, a mismatch between training and employee placement occurs. The result is many university graduates learn on the job at a pace below their abilities?I estimate anywhere from only 30-50%?and quit the firm before the company is able to maximize the contribution of that employee?this in a period of 3-5 years. As an example, one ex-coworker of mine spent three years in the finance department but, after leaving the firm, realized in later interviews that his knowledge of financial management and financial tools significantly lagged his peers of the same age.
3. Death spiral of low expectations hindering corporate performance: With a significant number of new employees lacking the discipline and resourcefulness to self-educate and the majority of Japanese firms lacking the training systems to maximize employee contribution, there is an increasing trend of looking outside the firm for managerial talent. Often, these management hires are older workers forced into retirement in their 50’s and 60’s by larger firms restructuring or descending from the hiring firm’s own customers. In this case, the often lack of knowledge of the firm and its services/products upon employment ensures at least a short-term drop in corporate performance. At the same time, lower-level employees become more and more discouraged with a system that fails to provide dynamic personnel development and promotional opportunities that match pace with the challenges of today’s rapid globalization. A death spiral ensues where the firm continues to rely on older employees with a lack of practical and current business knowledge for management positions while these managers are considerably negligent in developing younger employees to eventually replace them.

The top-tier firms manage to hold their own in terms of training and have done a great deal to adapt to globalization and the use of global best practices. As the first and only Westerner to be hired in my firm, I am attempting to change the approaches and perceptions described above one step at a time. But these types of firms can hire the best talent in the world and they will be relatively marginalized or fail because they work in a system that does not identify, maximize and reward talent. Rather, a system that does cultivate talent in the appropriate manner can turn ordinary employees into stellar performance contributors.

Even being constrained by the type of system described above, I feel my Western education has cultivated in me the resourcefulness and discipline necessary to educate myself as needed to reach my professional goals. I honestly believe that one reason Westerners excel in innovation and leadership more quickly upon entering the workforce than many Asian employees is due to the Western tertiary education system. Although the students of Asian countries excel at the high school level in the testing of math and science knowledge, the majority of these students fall far behind at the tertiary level?in essence, the critical thinking and intensive focus on individual excellence that drives Western education is very absent in Japan’s universities. The difference can be clearly seen when comparing Japanese who have studied overseas at the university level versus the majority of their peers back home. So as a Japanese university student, if the first firm I work for upon graduation is not going to provide the foundation for success, it is up to that student to make-up the gap in moving along the learning curve. Unfortunately, from my experience so far, this perspective and skill set is difficult to transfer to my co-workers without being in a position as their direct superior.

Gradually, as more and more Japanese domestic firms realize that having a domestic-only business doesn’t exclude them from responding to the demands of globalization, those firms are demanding more from their management systems?especially such tools as metric-based performance measurement. This change will be painful and those Japanese firms that don’t initiate such a transformative effort will find themselves acquired by companies that will force it upon them, or gradually fall into bankruptcy, ceasing to exist. The strength of Japanese companies overseas, especially in the automotive industry, illustrates that it is possible for Japanese firms to succeed when the environment demands it. For Japan’s numerous domestic companies, it is of great importance to benchmark these success stories towards transforming their employee management system.

Discussing Japan at Asia Business Intelligence Blog

The final installment of my article on changes in Japanese business practices from the Bubble Era to today is posted Asia Business Intelligence (ABI). Because my experience isn't necessarily indicative of all Japanese companies, I am interested in any differing perspectives that can positively contribute to the discussion initiated by my article. I am also interested in any comparisons with China and South Korea.

I will post each installment of the article here next week for future reference at this site. In the meantime, I suggest interested readers look back to the following two posts:

Chinese Market, Japanese Company, American Methods

Approaches to HR in Japan's Logistics Sector

People Power in Logistics

The first two are similar to case studies and the last one is generally about HR in logistics, with some additional thoughts on my own experience.

Tools You Can Use

I want to point out a couple links provided recently by Rob at Riskape. Both can be discussed under the "enterprise resilience" umbrella.

The first link directs us to a global economic/political risk map published by Aon. This map is very interesting and breaks down the key elements of economic/political risk for each continent's state entities. Since symbols are used, the map can be very concise and able to provide a big-picture feel for where the pockets of risk are most concentrated. When considering the keys to strengthening resilience for specific operational environments, this type of overview is helpful in reviewing a company's enterprise resilience systems--not just internally, but across its extended enterprise, which includes the supply chain architectures linking suppliers, partners, and customers with the company.

The second link directs us to process mapping software that is downloadable for free from Savvion. Actually, I had been looking for this type of free software in preparation for an activity-based costing project I am working on. This type of free resource is especially great for small- to medium-sized firms like the one I work for, lowering the cost of modeling processes towards strengthening such firms' resilience.

Discussing Japan at Asia Business Intelligence Blog

Continuing on my previous post, Rich at Asia Business Intelligence has posted Part II of my reflections on changes in Japanese business. I really enjoyed writing these posts for ABI, so please take a chance to visit the site and browse the number of posts and podcasts Rich has put together.

From here on, I will continue to cover topics and articles from the Japanese press on logistics and other peripheral topics of interest. This is the result of me wanting to "drill down" lately in terms of the Japanese market, but I will also occasionally bring in some commentary on China and South Korea. If there are any particular topics in regards to Asia logistics you happen to be interested in, please let me know!

Discussing Japan at Asia Business Intelligence Blog

Courtesy of Rich Kuslan, creator of the Asia Business Intelligence blog (ABI), I was invited to do a post on my impressions over the years working with Japanese companies, specifically in regards to the successes and failures of their business practices. After writing the post, I realized I had written six pages worth of material and thus decided to create a three-part series per Rich's suggestion. The first post is linked below:

Part I: Overestimating Japan in its Rise, Western Business Underestimated Japan in its Descent

The following posts will be launched over the next two weeks. By no means do I feel that my impressions are definitive of Japanese business practices, but I am sure that others with experiences in Japanese companies will find aspects of my post that resonate. Those that feel my impressions are off-base are encouraged to comment at Rich's site.

Also, I encourage readers to take look at Rich's many other quality posts.

I will re-post the content here under "Enterprise Resilience" following its run at ABI.

Resiliency Lessons from China: A Look at Carrefour

It is pretty fun when I can post here on a topic with which I have had some personal experience. During my first trip to China, doing an internship in Beijing during the summer of 2004, I had the chance to experience Carrefour, the hypermarket giant that is #2 in the world behind Wal-Mart. There was one near my office in Zhongguancun and also near my dormitory in the Fengtai district and the number of people swarming in to shop was always incredible--my feeling was the Chinese had energetically latched onto the superstore shopping experience.

Fast forward to today, and there is a very cool interview in the McKinsey Quarterly with the president of Carrefour China. I won't break down the interview in depth here, but it offers several lessons in resiliency learned throughout Carrefour's history in China, and as far back as to their experience in Taiwan that preceded China. There is even a nice little exchange on logistics towards the end which I will reproduce here:

The Quarterly: Given China's size, how have you handled distribution with your suppliers?

Jean-Luc Chéreau: There is really no network yet for logistics systems in China. The highways, the railways, and so on are not very well developed. To receive or to send merchandise from Beijing to Urumqi takes seven days by truck, and it takes four days from Shanghai to Kunming, close to Vietnam. You have to work with local distributors, and the power in this case belongs to them.

So we decided from Day One to use local networks. Some competitors have said, "No, we want to be advanced and construct our own platform and systems." Some of those networks are on sale today. There might not be a direct correlation, but maybe the companies that built them made a mistake and the cost to deliver that kind of platform was too high.

I don't think a national network is the best way to do business. But we are thinking that maybe tomorrow we'll want to organize a platform and a network for large cities like Shanghai, with 10 or 15 stores, but only for those stores. Stores that are 100 or 200 kilometers away would not be connected to a central network.

One of the comments that Mr. Chereau often makes is not to expect successful deployment of Western management methods and systems in places like Europe or the United States to carry over to Asia. In fact, he implies that these could in many cases be completely irrelevant after hitting the ground in Asia. Although I agree with this for the most part, it is also the case that globalization is slowly requiring Asian firms to diversity not only their products but also the ways they manage their organizations and develop their employees. Hybrid systems are becoming increasingly popular where work environments attempt to blend the best of both worlds through a series of trial and error. That is evident in the interview with Mr. Chereau and his emphasis on the ability to adapt through and after setbacks while absorbing lessons learned and improving the firm's constitution post-crisis is a nice illustration of resiliency's importance in being a socially and economically value-adding, lead business.

Resiliency Lessons from China

Today there was an excellent op-ed in the Wall Street Journal on multinational, high-tech firms operating in China. I think this is an excellent spin-off piece from a recent op-ed in The Financial Times by IBM's Chairman and Chief Executive Officer, Samuel Palmisano, and discussed extensively at the Enterprise Resilience Management blog by Steve DeAngelis.

The op-ed is titled, "Middle Market Kingdom," and written by Ingo Beyer Von Morgenstern and Xiaoyu Xia, both of McKinsey & Co., and much of what they write indicates the need for a higher-level of resiliency--a transition to Palmisano's "globally integrated enterprise."   

"If you can't beat them, acquire them." This has become the mantra favored of late by multinational high-tech firms in China as they face fierce competition from Chinese firms. Our research into 1,000 Chinese high-tech firms shows them to be growing on average three times as fast as multinationals. So what are multinationals doing wrong?"

The above opening lead to the editorial reminds me of a comment that Viveca Chan, CEO, Grey Global Group, China/HKSAR, made at the 2004 Asia Business Conference at the University of Michigan Business School, paraphrased by me as: "In the past, the ruling phenomenon in business was that "the big fish eat the little fish;" however, in China, it is "the fast fish eat the slow fish." By this, she explained that "size and scale prevails" is not the rule of strength in the Chinese market. The authors go on to explain the failure of large multinationals:

"By sticking too rigidly to product specifications for developed markets, and high prices, multinationals in many sectors have squeezed themselves into the thin, high-end market in China. To succeed in China, these firms would do better to focus on the faster-growing mid-range segment of the Chinese high-tech market, where products cost an average of 20% to 30% less than their high-end counterparts."

Rigidity is a killer of resiliency. Basically, there is a specific phenomenon of smaller, agile Chinese firms quickly working their way up the value chain from the lower tiers of technology while large multinationals linger at the high-end, making themselves susceptible to losses in overall market share:

"Take electrical equipment, a $60 billion industry comprising sectors such as automation and power generation. While multinationals focused almost exclusively on the high end of the market, mid-range Chinese players -- led by emerging contenders such as Chint, a maker of low voltage electronics, and Shanghai Electric, maker of power generation products -- have expanded their share of the overall market to 65% from 55% over the past five years. This segment is growing almost twice as fast as the market for electrical equipment as a whole. As a result, multinationals as a group saw their share of the market drop to 35% from 45% since 2001."

Exclusivity is also a killer of resiliency. On their current pace, smaller agile Chinese firms--the fast fish--will be overwhelming the larger multinationals--the slow fish--in a very short time frame:

"Local firms such as auto-electronics-maker Hangsheng Electronics or medical-equipment-maker Shinva may not yet be household names, but such enterprises are sweeping to dominance in their industries. By 2010, we estimate Chinese companies will hold as much as 80% (worth about $260 billion) of China's high-tech market, up from 67% in 2004."

Without the management systems in place to instill the resiliency necessary for China, the large multinationals resort to "eating the little fish" to recapture lost market share:

"Some multinationals have responded to the erosion of their market share by buying into the new breed of mid-range Chinese winners in order to quickly build up a competitive mid-range product line for the Chinese market."

However, this acquisition strategy does not work towards adapting the multinational's foundations for resiliency. In fact, conditions on the ground in China illustrate the limits of this strategy:

1. The multinational out shopping faces a number of obstacles in its path. First, there's the question of what they should be looking for. Simply spotting a suitable company is a challenge in a market characterized by a lack of transparency.
2. When a multinational tries to buy a local company, it may find Chinese competitors, which have been fiercely battling each other for survival, close ranks against a perceived foreign threat. The local companies may enlist the support of government officials to require foreign players to find a local partner before bidding for a project, or to require a certain amount of locally made components.
3. Chinese companies can also squeeze foreign competitors out by pushing down prices. Chinese companies are used to operating on very thin margins: last year, the top 1,000 electronics firms in China earned an average net margin of only 2.5%.

Companies that can acquire the smaller, more agile Chinese firms and integrate them successfully into a more resilient enterprise will succeed, although current examples have not had a long enough track record to judge long-term success:

"...some foreign companies are overcoming these hurdles. For example, one multinational maker of industrial electronics last year bought a Chinese company with a 30% share of the mid-range segment and 25% annual growth. To ensure that customers and employees didn't flee post-merger, the acquirer enticed key management to stay put by allowing the Chinese firm to maintain day-to-day management control. While it's too early to judge the outcome of the deal, initial signs look positive: in the first quarter of this year, sales increased by over 60%."

The authors conclude with the following:

"That is a trend which other multinationals can be expected to follow. China is becoming an increasingly competitive market, and the route to success for foreign companies will lie in eschewing their past preference for the high-end in favor of carving out stronger positions in mid-range products."

I would go further in saying that the route to success for foreign companies will lie in eschewing such old paradigms as "succeeding by acquisition" and adopting the new paradigm of succeeding through enterprise resilience management systems. In this way, acquisitions become simply one option and foreign companies will have in place the ability to adapt earlier and more appropriately to competitive threats within and across markets and products.

NOTE: For always excellent, running commentary on foreign firms operating in China, visit China Law Blog.

Chinese Market, Japanese Company, American Methods

In the past, I posted on the China logistics frontier and how Japanese models have been used, or at least highly referenced, in the establishment of supply chains in China. However, highly global companies in particular have the opportunity to create more hybrid systems based on the best practices established in operations across the world. The need for these hybrid systems typically reflects the market variety faced in a particular country or region. As explained in my recent post on resilience, valuing variety is essential for a country to overcome the challenges of a market such as China. Repeating from that post, "extremely diverse environments require an equally diverse set of strategies and tactics towards becoming resilient; "if the range of strategic alternatives your company is exploring is significantly narrower than the breadth of change in the environment, your business is going to be a victim of turbulence.""

Thus, the logistics professional must consider whether the supply chain architectures in use for a particular market comprise of the modules best suited for resilience. In other words, can a base set of architectures from the US be implemented in whole in China? Or, should a new base set of architectures be composed from systems established worldwide? The sign of supply chain resiliency is being able to quickly recognize the right answer to the above questions.

A really excellent example of this concept is covered in this weeks Wall Street Journal via the article, "In Chinese Market, Toyota's Strategy Is Made in U.S.A.," written by journalist Norihiko Shirouzu. Toyota's position in the Chinese automotive market is relatively weak when compared with its global operations, a situation originating both in its slow start and inability to adapt to China's market conditions. But as this article points out, that is changing and I believe it can be attributed to tapping Toyota's global resilience.

Although not necessarily at the point of requiring a "turnaround," the author explains the backdrop behind Toyota's lack of success so far:

"Toyota got a late start in China. It took until 2002 for it to start building cars in a joint venture with China's First Auto Works Group. (China requires foreign companies to team up with a local company in making cars.) GM, Volkswagen AG, Honda Motor Co. and other global companies had already been manufacturing in China for years by that point. FAW-Toyota's first big offering, a family sedan called Vios, got off to a slow start. It was three times the price of Chinese rivals without offering any obvious styling or design advantages."

Having explained the "power of people" before, Toyota turned to its global portfolio of experience managers to attack its problems in China:

"To turn the performance around, Toyota called on Mr. Inaba, a 60-year-old graduate of Northwestern University's business school. He is a native of Japan but has served many stints overseas in his 38-year career at Toyota.

"The day after he took over Toyota Motor Corp.'s struggling China business last year, Yoshi Inaba decided to visit some dealers here. He learned that Chinese car salespeople earn most of their income from commissions -- just like in the U.S., but unlike in Japan.

"It planted the seed of a key insight: Toyota couldn't treat China like its home market of Japan. But it could draw on its success in the U.S., where Mr. Inaba oversaw a doubling of profits between 1999 and 2003. "I had an inkling right from the start that Japanese experience was irrelevant in China," says Mr. Inaba.

"To retool Toyota's China strategy, Mr. Inaba has called on some unlikely lieutenants: two Americans who used to work for him in California. Today, the Americans are bringing a U.S.-style dealer organization to China and helping Toyota seem less Japanese in a country with bad memories of World War II.

These Americans, Ed Ohlin and Bob Maling, quickly recognized that Toyota was trying to tackle market variety with a one-size-fits-all approach:

"One of the first things that caught Mr. Ohlin's eye at FAW-Toyota was a sometimes incoherent advertising strategy. To illustrate a sport-utility vehicle's rugged all-wheel-drive capabilities, the company was running national print advertisements showing the vehicle fighting steep stairs. The ads were fine for inland parts of China where roads are rough, and the country's snowy northeast. But they were out of place in developed southern cities.

""It was like advertising big, workhorse pickup trucks in New York City," Mr. Ohlin says.

"The root of the problem was obvious to Mr. Ohlin: FAW-Toyota didn't have regional dealer associations, which in the U.S. pool resources to plan advertising and marketing events tailored to local tastes. Toyota-FAW was handling all its advertising from its national office in Beijing. In effect, Toyota treated China, a culturally diverse continental market, as if it were Japan, an island nation the size of California where consumer tastes are relatively uniform."

The rest of the article goes on to detail the approaches and methods employed to retune Toyota's dealer networks in China, but for this post, the point is made: being able to respond to variety with variety is a trait of a resilient system. Toyota's weakpoint in this case is the speed at which it deployed its resiliency tools, suggesting that it has yet to advance far enough in the integration of best practice sharing and global benchmarking into the process of market entry. If one considers the five supply chain architectures I have discussed before, what we are really discussing here is the innovational architecture that Toyota deploys to reinvent itself when the market environment demands reinvention.

Reversely, domestic firms in China, Japan, and even the USA are facing the difficult task of becoming resilient in the face of globalization. Why? Because these firms lack the resiliency tools to respond to the variety of competition and systems being faced. These firms will respond in different ways, for example by hiring foreign nationals, adopting new management tools, and reinventing their strategies and processes. However, if unsuccessful, they will fall victim to acquisition by a firm that has the resiliency tools or simply die via bankruptcy. Even international firms unable to utilize global resources and best practices to build resiliency tools (General Motors, for example) will face difficulties.

The domestic, middle-market layer of the Japanese logistics industry is in a similar position, facing the question of how to build resiliency in a traditionally homogenous market that is rapidly being influenced by globalization's variety, or hybridization--either via changes in a client's competitive landscape or via changes in a logistics firm's own competitive landscape. Those who have the will to change and adapt will be able to weather the most adverse conditions.

The Quest for Resilience

"In a turbulant age, the only dependable advantage is a superior capacity for reinventing your business model before circumstances force you to. Achieving such strategic resilience isn't easy. Four tough challenges stand in the way." The Quest for Resilience, by Gary Hamel and Liisa Valikangas

Since my earlier posts engaging the nexus of "flows, architectures, and resiliency," there has been a great deal of "cross-blogging" regarding resiliency with some nice tie-ups at The Enterprise Resilience Management Blog:

- Resilience and Organizational Culture--engages Marc Safranski at Zenpundit by making the key point that "the resilience of an organization depends only in part on its willingness to adopt new technologies.  Resilience also depends on the ability of people--leaders, line managers and staff--to create a resilient culture."

- Service-Oriented-Architecture (SOA)--engages with Tom Barnett in delving more deeply into how SOA will be a critical component in enabling resiliency, with Tom quoted as writing "...perhaps the most compelling impact of SOA is how it stands to rewrite the rules on IT governance and organisational structure. In most organisations, IT managers tend to be linked with the specific applications they support. Because SOA delivers the promise of solutions that transcend lines of businesses--and the organisations themselves--IT managers , newly decoupled from applications they manage, will have a broader view of the potential they can deliver."

- Institution Building vs. Nation Building--emphasizes that the "Development-in-a-Box" solution-delivery vehicle transcends a singular description, such as an either institution-building or nation building argument. As the site comments, "this is really a false dichotomy and trying to make the distinction is unhelpful in achieving the goal of increasing development and improving lives."

- SOA, Resiliency and Consiliency--makes a point that discussions of resiliency theory can quickly escape what is practical in terms of a deliverable resilience management framework. At this blog, when discussing logistics, my intention is also to remain within practical territory.

The FAR matrix I created some time ago reflects my personal effort to provide some practical frameworks and information that business professionals, primarily logistics professionals, can apply to their everyday work environment.  I hope that the many people who downloaded the matrix have found it useful in framing their work in new ways. Of course, such frameworks and ideas don't have to be my own and I am glad to pass on information regarding other people's work--such as that by Tom Barnett, Steve DeAngelis and Dr. Cavinato.

In this post, I want to discuss the "essence of resilience" via a Harvard Business Review article from 2003 titled, "The Quest for Resilience," and written by Gary Hamel and Liisa Valikangas. Although I obtained this article via a leadership and change management course at Michigan State's Broad School, the article is available for download at a cost of $6 in PDF format. I am sure that Mr. DeAngelis and his team are familiar with this article, but if they are not, I believe they will really appreciate its content along with the rest of my readers.

The article starts off by reflecting on the state of industry and why resilience management is necessary, noting that "in the past, executives had the luxury of assuming that business models were more or less immortal. Companies always had to work to get better, of course, but they seldom had to get different--not at their core, not in their essence. Today, getting different is the imperative."

The authors here argue that changes in the environment should not only trigger changes in the tactics of a business model, but also trigger transformations in the business model strategy itself. In this sense, "continued success no longer hinges on momentum," but "rides on resilience--on the ability to dynamically reinvent business models and strategies as circumstances change." Furthermore, "it is about continuously anticipating and adjusting to deep, secular trends that can permanently impair the earning power of a core business."

Zero Trauma (or weathering the system perturbation)

In today's many industries, it is common to find "the turnaround" and "turnaround artists" worshipped for their successes and methods--in Japan, the example is Carlos Ghosn, who is lionized in books, magazines, TV shows and even comics and was a recipient of the Japan Medal in 2004. However, as Hamel and Valikangas note, "however celebrated, a turnaround is a testament to a company's lack of resilience. A turnaround is transformation tragically delayed."

They suggest that, "to thrive in turbulent times, companies must become as efficient at renewal as they are at producing today's products and services; renewal must be the natural consequence of an organization's innate resilience."

By using the term innate resilience, Hamel and Valikangas are targeting the essence of firms and thus, in their view, "the quest for resilience can't start with an inventory of best practices...Instead, it must begin with an aspiration: zero trauma." For the purposes of linking this article's concepts to that of Mr. DeAngelis and Mr. Barnett, I would equate "trauma" for an entity as a "system perturbation," which is defined by Mr. Barnett as:

"A system-level definition of crisis and instability in the age of globalization; a new ordering principle that has already begun to transform the military and U.S. security policy; also a particular event that forces us to rethink everything. The terrorist attacks of 9/11 served as the first great "existence proof" for this concept, but there have and will be others over time (some are purposeful, like the Bush Administration's Big Bang strategy of fomenting political change in the Middle East by toppling Saddam Hussein's regime in 2003, but others will be accidents, like the SARS epidemic or the Asian tsunamis of December 2004). As a system perturbation, 9/11 placed the world's security rule set in flux and created a demand for new rules. Preemption is the big new rule. By creating that new rule, 9/11 changed America forever and through that process altered global history."

For Hamel and Valikangas, "in a truly resilient organization, there is plenty of excitement, but there is no trauma," no system perturbation. In other words, when system perturbations occur they will be weathered by the resilient while sending non-resilient entity into a tailspin.

The Four Challenges in Reaching Resilience

The authors emphasize that an entity seeking resilience should be familiar with vocabulary appropriate for turbulent times: revolution, renewal, and resilience.

Revolution: Whether newcomer or old timer, a company needs an unconventional strategy to produce unconventional financial returns.

Renewal: Strategic renewal is creative reconstruction. It requires innovation with respect to one's traditional business model.

Resilience: Resilience refers to a capacity for continuous reconstruction. It requires innovation with respect to those organizational values, processes, and behaviors that systematically favor perpetuation over innovation.

With these in mind, the rest of the article addresses overcoming the following four challenges, whose definitions are repeated in full here:

Cognitive: A company must become entirely free of denial, nostalgia, and arrogance. It must be deeply conscious of what's changing and perpetually willing to consider how those change are likely to affect its current success.

Strategic: Resilience requires alternatives as well as awareness--the ability to create a plethora of new options as compelling alternatives to dying strategies.

Political: An organization must be able to divert resources from yesterday's products and programs to tomorrow's. This doesn't mean funding flights of fancy; it means building an ability to support a broad portfolio of breakout experiments with the necessary capital and talent.

Ideological: Few organizations question the doctrine of optimization. But optimizing a business model that is slowly becoming irrelevant can't secure a company's future. If renewal is to become continuous and opportunity-driven, rather than episodic and crisis-driven, companies will need to embrace a creed that extends beyond operational excellence and flawless execution.

Posing the question, as the authors do, of "Why care to become resilient?" the authors allude to several reasons but point out a concept similar to Barnett's "a future worth creating:"

"There is a final, noneconomic, reason to care about institutional longevity, and therefore resilience. Institutions are vessels into which we as human beings pour our energies, our passions, and our wisdom. Given this, it is not surprising that we often hope to be survived by the organizations we serve. For if our genes constitute the legacy of our individual, biological selves, our institutions constitute the legacy of our collective, purposeful selves. Like our children, they are our progeny. It is no wonder that we hope they will do well and be well treated by our successors. This hope for the future implies a reciprocal responsibility--that we be good stewards of the institutions we have inherited from our forebears. The best way of honoring an institutional legacy is to extend it, and the best way to extend it is to improve the organization's capacity for continual renewal."

The authors qualify this sentiment by stating afterwards that "institutions deserve to endure only if they are capable of withstanding the onslaught of new institutions." Of course, in the conversation driven by Steve and Tom, the focus is on a range of entities and not just institutions. However, a word substitution in this case does not diminish the sentiment.

The Threat of Denial

Denial inhibits leaders from responding to the signs that all is not well with an organization or entity. The longer the denial takes root, the more likely an entity is headed towards a turnaround scenario versus weathering a particular system perturbation. In the authors' words, "denial puts the work of renewal on hold, and with each passing month, the cost goes up. To be resilient, an organization must dramatically reduce the time it takes to go from "that can't be true" to "we must face the world as it is."

To reduce this time lapse, there are three things leaders should make a habit of doing:

• Visit the places where change happens first.
• Filter out the filterers.
• Face up to the inevitability of strategy decay.

I recommend reading the article for a deeper discussion of each, but it is strategy decay where the authors place most of their focus. They list four reasons, summarized here, for why strategies decay:

1. Over time they get replicated:
   - Does your strategy defy industry norms in any important ways?
   - Do we possess any competitive advantages that are truly unique?
   - Is our financial performance becoming less exceptional and more average?
2. Good strategies get supplanted by better strategies:
   - Are there discontinuities (social, technical, or political) that could significantly reduce the economic power of our current business model?
   - Are there nascent business models that might render ours irrelevant?
   - Do we have strategies in place to co-opt or neutralize these forces of change?
3. Strategies get exhausted as markets become saturated, customers get bored, or optimization programs reach the point of diminishing returns:
   - Is the pace of improvement in key performance metrics (cost per unit or marketing expense per new customer, for example) slowing down?
   - Are our markets getting saturated; are our customers becoming more fickle?
   - Is our company's growth rate decelerating, or about to start doing so?
4. Strategies get eviscerated:
   - To what extent do our margins depend on customer ignorance or inertia?
   - How quickly, and in what ways, are customers gaining additional bargaining power?
   - Do our productivity improvements fall to the bottom line, or are we forced to give them back to customers in the form of lower prices or better products and services at the same price?

Valuing Variety

The essence of the authors' point in this section is that extremely diverse environments require an equally diverse set of strategies and tactics towards becoming resilient; "if the range of strategic alternatives your company is exploring is significantly narrower than the breadth of change in the environment, your business is going to be a victim of turbulence."

Liberating Resources

The authors' emphasize that "institutions falter when they invest too much in "what is" and too little in "what could be." Basically, this is a result of firms' "persistent failure to distinguish between new ideas and risky ideas that reinforcing their tendency to overinvest in the past." Thus, "allocational rigidities are the enemy of resilience."

One of the keys is for leaders to not mistake operational efficiency for strategic efficiency--"a company can "maximize the efficiency of its existing programs and processes and yet fail to find and fund the unconventional ideas and initiatives that might yield an even higher return."

A nice wrap-up for this section of the article is in the authors' words that "to be resilient, businesses must minimize their propensity to overfund legacy strategies."

Embracing Paradox

This section is dedicated to dispelling the notion that optimization is a satisfactory end-state, stating that "an accelerating pace of change demands an accelerating pace of strategic evolution, which can be achieved only if a company cares as much about resilience as it does about optimization." The authors further go on to describe what an instilled sense of resilience means, writing that "resilience will become something like an automatic process only when companies dedicate as much energy to laying the groundwork for perpetual renewal as they have to building the foundations for operational efficiency." At this point, please refer back to Steve's points on resiliency and organizational culture which I feel reflect the authors' points.

Cultivating the Ultimate Advantage

The authors wrap-up their article with some final sentiments that deserve repeating here in full. I am sure the Enterra team will appreciate the military reference:

"Battlefield commanders talk about "getting inside the enemy's decision cycle." If you can retrieve, interpret, and act upon battlefield intelligence faster than your adversary, they contend, you will be perpetually on the offensive, acting rather than reacting...Any company that can make sense of its environment, generate strategic options, and realign its resources faster than its rivals will enjoy a decisive advantage. This is the essence of resilience."

COMMENTARY: One thing for me to note: the FAR matrix in and of itself has no strategic direction; it is only a framework integrating other frameworks. Personally, I am fond of the strategy map formulations related to Drs. Robert Kaplan and David Norton's work on the Balanced Scorecard in providing a framework for developing strategic direction and targeting strategic resilience.

This will hopefully be an ongoing discussion, and as Steve DeAngelis has alluded to before, this cross-blogging on resilience that Enterra has engaged in is a form of developing resilience in the deployment of their DiB framework. Practices and input will, and must, continue to be captured and cultivated on the web and off the web, and although I feel I have contributed to Enterra's discussion on resilience, they have contributed just as much if not more to my discussion and thinking on logistics. As a result, my own personal resilience in terms of navigating my career and life is strengthened--a very cool aspect of blogging here that I never fully expected.

Cheers to cross-blogging!

NOTE: For some more on SOA and other firms' approach to the product, see the articles below:

Business Integration and Customer Focus: The Force Multipliers

Service-Oriented Enterprise: The Future of Tomorrow's Company

BPM and SOA: Are the Communities Starting to Merge?