Monday, December 26, 2011

Skimming : Good to Great

Good to Great: Why Some Companies Make the Leap... and Others Don't

Good is the enemy of great

  • It is important to understand that we developed all of the concepts in this book by making empirical deductions directly from the data. We did not begin this projectwith theory to test or prove. We sought to build a theory from the ground up, derived directly from the evidence. (p.10)
  • We all have a strength or two in life, and I suppose mine is the ability to take a lump of unorganized information, see patterns, and extract order from the mess - to go from chaos to concept. (p.11)
  • In an ironic twist, I now see Good to Great not as a sequel to Built to Last, but as more of a prequel. This book is about how to turn a good organization into one that produces sustained great results. Built to Last is about how you take a company with great results and turn it into an enduring great company of iconic stature. (p.14)
  • I like to think of our work as a search for timeless principles-the enduring physics of great organizations-that will remain true and relevant no matter how the worldchanges around us. Yes, the specific application will change (the engineering), but certain immutable laws of organized human performance (the physics) will endure. (p.15)
  • That good is the enemy of great is not just a business problem. It is a human problem. If we have cracked the code on the question of good to great, we should have something of value to any type of organization. (p.16)

Level 5 Leadership

  • In retirement, Smith reflected on his exceptional performance, saying simply, "I never stopped trying to become qualified for the job." (p.20)
  • Darwin Smith stands as a classic example of what we came to call a Level 5 leader-an individual who blends extreme personal humility with intense professional will. We found leaders of this type at the helm of every good-to-great company during the transition era. (p.21)
  • It wasn't just false modesty. Those who worked with or wrote about the good-to-great leaders continually used words like quiet, humble, modest, reserved, shy, gracious, mild-mannered, self-effacing, understated, did not believe his own clippings; and so forth. (p.27)
  • It is very important to grasp that Level 5 leadership is not just about humility and modesty. It is equally about ferocious resolve, an almost stoic determination to do whatever needs to be done to make the company great. (p.30)
  • Level 5 leaders are fanatically driven, infected with an incurable need to produce results. They will sell the mills or fire their brother, if that's what it takes to make the company great. (p.30)
  • Then we began to notice a contrasting pattern in the comparison executives: They credited substantial blame to bad luck, frequently bemoaning the difficulties of the environment they faced. (p.34)
  • Level 5 leaders look out the window to apportion credits to factors outside themselves when things goes well (and if they cannot find specific person or event to give credit to, they credit good luck). At the same time, they look to the mirror to apportion responsibility, never blaming bad luck when things go poorly. (p.35)

First who ... then what

  • The executives who ignited the transformations from good to great did not first figure out where to drive the bus and then get people to take it there. No, they first got the right people on the bus (and the wrong people off the bus) and then figured out where to drive it. (p.41)
  • The good-to-great leaders understood three simple truths. if you begin with "who," rather than "what," you can more easily adapt to a changing world. if you have the right people on the bus, the problem of how to motivate and manage people largely goes away. if you have the wrong people, it doesn't matter whether you discover the right direction; you still won't have a great company. (p.42)
  • Dick Cooley and David Maxwell both exemplified a classic Level 5 style when they said, "I don't know where we should take this company, but I do know that if I start with the right people, ask them the right questions, and engage them in vigorous debate, we will find a way to make this company great." (p.45)
  • Their moral code requires building excellence for its own sake, and you're no more likely to change that with a compensation package than you're likely to affect whether they breathe. (p.50)
  • The Nucor system did not aim to turn lazy people into hard workers, but to create an environment where hardworking people would thrive and lazy workers would either jump or get thrown right off the bus. (p.51)
  • Practical Discipline #1: When in doubt, don't hire-keep looking. (p.54)
  • Practical Discipline #2: When you know you need to make a people change, act. (p.56)
  • Practical Discipline #3: Put your best people on your biggest opportunities, not your biggest problems. (p.58)
  • Adherence to the idea of "first who" might be the closest link between a great company and a great life. For no matter what we achieve, if we don't spend the vast majority of our time with people we love and respect, we cannot possibly have a great life. But if we spend the vast majority of our time with people we love and respect-people we really enjoy being on the bus with and who will never disappoint us- then we will almost certainly have a great life, no matter where the bus goes. The people we interviewed from the good-to-great companies clearly loved what they did, largely because they loved who they did it with. (p.62)

Confront the brutal facts

  • If you start with an honest and diligent effort to determine the truth of the situation, the right decisions often become self-evident. Not always, of course, but often. And even if all decisions do not become self-evident, one thing is certain: You absolutely cannot make a series of good decisions without first confronting the brutal facts. (p.70)
  • But the evidence from a slew of respectable articles written at the time suggests that Ash turned a blind eye to any reality inconsistent with his own vision of the world. (p.71)
  • If you have the right people on the bus, they will be self-motivated. The real question then becomes: How do you manage in such a way as not to de-motivate people? And one of the single most de-motivating actions you can take is to hold out false hopes, soon to be swept away by events. (p.74)
  • Like Wurtzel, leaders in each of the good-to-great transitions operated with a somewhat Socratic style. Furthermore, they used questions for one and only one reason: to gain understanding. (p.75)
  • Like Nucor, all the good-to-great companies had a penchant for intense dialogue. Phrases like "loud debate", "heated discussions", and "healthy conflict" pepperedthe articles and interivew transcripts from all the companies. They didn't use discussion as a sham process to let people "have their say" so that they could "buy in" to a predetermined decission. The process were more like a heated scientific debate, with people enganged in a search for the best answers. (p.77)
  • Another long pause, and more walking. Then he turned to me and said, "This is a very important lesson. You must never confuse faith that you will prevail in the end- which you can never afford to lose-with the discipline to confront the most brutal facts of your current reality, whatever they might be." (p.85)
  • The good-to-great leaders were able to strip away so much noise and clutter and just focus on the few things that would have the greatest impact. They were able to do so in large part because they operated from both sides of the Stockdale Paradox, never letting one side overshadow the other. (p.87)

The Hedgehog Concept

  • Hedgehog, on the other hand, simplify a complex world into a single organizing idea, a basic principle that unifies and guides everything. It doesn't matter how complex the world, a hedgehog reduces all challenges and dilemma to simple - indeed almost simplistic - hedgehog ideas. For a hedgehog, anything that doest not somehow relate to the hedgehog idea holds no relevance. (p.91)
  • More precisely, a Hedgehog Concept is a simple, crystalline concept that flows fiom deep understanding about the intersection of the following three circles
    1. What you can be the best in the world a t (and, equally important, what you cannot be the best in the world at).
    2. What drives your economic engine.
    3. What you are deeply passionate about.
  • Every company would like to be the best at something, but few actually understand-with piercing insight and egoless clarity-what they actually have the potential to be the best at and, just as important, what they cannot be the best at. And it is this distinction that stands as one of the primary contrasts between the good-to-great companies and the comparison companies. (p.98)
  • Clearly, a Hedgehog Concept is not the same as a core competence. You can have competence at something but not necessarily have the potential to be the best in the world at it. (p.100)
  • Think about it in terms of the following question: I f you could pick one and only one ratio-profit per x (or, in the sociul sector, cash flow per x)-to systematically increase over time, what x would have the greatest and most sustainable impact on your economic engine? We learned that this single question leads to profound insight into the inner workings of an organization's economics. (p.104)
  • You can't manufacture passion or "motivate" people to feel passionate. You can only discover what ignites your passion and the passions of those around you. (p.109)
  • This doesn't mean, however, that you have to be passionate about the mechanics of the business per se (although you might be). The passion circle can be focused equally on what the company stands for. For example, the Fannie Mae people were not passionate about the mechanical process of packaging mortgages into market securities. But they were terrifically motivated by the whole idea of helping people of all classes, backgrounds, and races realize the American dream of owning their home. (p.110)
  • Like scientific insight, a Hedgehog Concept simplifies a complex world and makes decisions much easier. But while it has crystalline clarity and elegant simplicity once you have it, getting the concept can be devilishly difficult and takes time. Recognize that getting a Hedgehog Concept is an inherently iterative process, not an event. (p.114)

A Culture of Discipline

  • He understood that the purpose of bureaucracy is to compensate for incompetence and lack of discipline-a problem that largely goes away if you have the right people in the first place. (p.121)
  • Avoid bureaucracy and hierarchy and instead create a culture of discipline. When you put these two complementary forces together-a culture of discipline with an ethic of entrepreneurship-you get a magical alchemy of superior performance and sustained results. (p.121)
  • On the one hand, Abbott recruited entrepreneurial leaders and gave them freedom to determine the best path to achieving their objectives. O n the other hand, individuals had to commit fully to the Abbott system and were held rigorously accountable for their objectives. They had freedom, but freedom within a framework. (p.123)
  • The good-to-great companies built a consistent system with clear constraints, but they also gave people freedom and responsibility within the framework of that system. The hired self-disciplined people who didn't need to be managed, and then managed the system, not the people. (p.125)
  • Indeed, discipline by itself will not produce great results. We find plenty of organizations in history that had tremendous discipline and that marched right into disaster, with precision and in nicely formed lines. No, the point is to first get self-disciplined people who engage in very rigorous thinking, who then take disciplined action within the framework of a consistent system designed around the Hedgehog Concept. (p.126)
  • The point is that rinsing his cottage cheese was simply one more small step that he believed would make him just that much better, one more small step added to all the other small steps to create a consistent program of superdiscipline. (p.127)
  • Yes, discipline is essential for great results, but disciplined action without disciplined understanding of the three circles cannot produce sustained great results. (p.133)

Technology Accelerators

  • In every good-to-great case, we found technological sophistication. However, it was never technology per se, but the pioneering application of carefully selected technologies. Every good-to-great company became a pioneer in the application of technology, but the technologies themselves varied greatly. (p.148)
  • This brings us to the central point of the chapter. When used right, technology becomes an accelerator of momentum, not a creator of it. The good-to-great companies never began their transitions with pioneering technology, for the simple reason that you cannot make good use of technology until you know which technologies are relevant. And which are those ? Those - and only those - that link directly to the three intersecting circles of Hedgehog Concept. (p.152)
  • One Nucor executive summed up, "Twenty percent of our success is the new technology that we embrace . . . [but] eighty percent of our success is in the culture of our company." (p.156)
  • Those who built the good-to-great companies weren't motivated by fear. They weren't driven by fear of what they didn't understand. They weren't driven by fear of looking like a chump. They weren't driven by fear of watching others hit it big while they didn't. They weren't driven by the fear of being hammered by the competition. (p.160)
  • No technology can make you Level 5. No technology can turn the wrong people into the right people. No technology can instill the discipline to confront brutal facts of reality, nor can it instill unwavering faith. No technology can supplant the need for deep understanding of the three circles and the translation of that understanding into a simple Hedgehog Concept. No technology can create a culture of discipline. (p.161)

The Flywheel and the doom

  • But what does it look like from the chicken's point of view? It's a completely different story. While the world ignored this dormant-looking egg, the chicken was evolving, growing, developing, incubating. From the chicken's point of view, cracking the egg is simply one more step in a long chain of steps leading up to that moment- a big step, to be sure, but hardly the radical, single-step transformation it looks like to those watching from outside the egg. (p.168)
  • Like the Wooden dynasty, lasting transformations from good to great follow a general pattern of buildup followed by breakthrough. In some cases, the buildup-to-breakthrough stage takes a long time, in other cases, a shorter time. (p.172)
  • "We presented what we were doing in such a way that people saw our accomplishments," said Herring. "We tried to bring our plans to successful conclusion step by step, so that the mass of people would gain confidence from the successes, not just the words." (p.176)
  • When people begin to feel the magic of momentum- when they begin to see tangible results, when they can feel the flywheel beginning to build speed-that's when the bulk of people line up to throw their shoulders against the wheel and push. (p.178)
  • Why did the good-to-great companies have substantially higher success rate with acquisitions, especially major acquisitions ? The key to their success was that their big acquisitions generaly took place after development of the Hedgehog Concept and after the flywheel had built significant momentum. They used acquisitions as an accelerator of flywheel momentum, not a creator of it. (p.180)
  • Ultimately, to reach breakthrough means having the discipline to make a series of good decisions consistent with your Hedgehog Concept-disciplined action, following from disciplined people who exercise disciplined thought. That's it. That's the essence of the breakthrough process. (p.184)

From Good to Great to Built to Last

  • It didn't really matter what the company made in the very early days, as long as it made a technical contribution and would enable Hewlett and Packard to build a company together and with other like-minded people. It was the ultimate "first who . . . then what" start-up. (p.192)
  • Hewlett and Packard exemplify a key "extra dimension ' that helped elevate their company to the elite status of an enduring great company, a vital dimension for making the transition from good to great to built to last. That extra dimension is a guiding philosophy or a "core ideology," which consists of core values and a core purpose (reason for being beyond just making money). (p.194)
  • The point is not what core values you have, but that you have core values at all, that you know what they are, that you build them explicitly into the organization, and that you preserve them over time. (p.195)
  • I like to think of Good to Great as providing the core ideas for getting a flywheel turning from buildup through breakthrough, while Built to Last outlines the core ideas for keeping a flywheel accelerating long into the future and elevating a company to iconic stature (p.197)
  • In Built to Last, we identified BHAGs as a key way to stimulate progress while preserving the core. A BHAG (pronounced bee-hag, short for "Big Hairy Audacious Goal") is a huge and daunting goal-like a big mountain to climb. It is clear, compelling, and people "get it" right away. A BHAG serves as a unifying focal point of effort, galvanizing people and creating team spirit as people strive toward a finish line.  (p.202)
  • The three circle and BHAG framework provides one powerful example of how the ideas from the two studies link together, and I'd like to offer it here as a practical tool for creating this link within your own organization. (p.204)

Thursday, December 15, 2011

Skimming : Concepts in Enterprise Resource Planning

Concepts in Enterprise Resource Planning

Business Functions and Business Processes

  • Most companies have four main functional areas of operation: Marketing and Sales (M/S), Supply Chain Management (SCM), Accounting and Finance (A/F), and Human Resources (HR). (p.2)
  • Recently, managers have begun to think in terms of business processes rather than business functions. Recall that a business process is a collection of activities that takes one or more kinds of input and creates an output that is of value to the customer. ... Thinking in terms of business processes helps managers to look at their organization from the customer’s perspective. (p.3)
  • Sharing data effectively and efficiently between and within functional areas leads to more efficient business processes. Information systems can be designed so that functional areas share data. These systems are called integrated information systems. (p.4)

The Development of Enterprise Resource Planning Systems

  • Current ERP systems evolved as a result of three things (1) the advancement of hardware and software technology (computing power, memory, and communications) needed to support the system, (2) the development of a vision of integrated information systems, and (3) the reengineering of companies to shift from a functional focus to a business process focus. (p.19)
  • The concept of an integrated information system took shape on the factory floor. Manufacturing software developed during the 1960s and 1970s, evolving from simple inventory- tracking systems to material requirements planning (MRP) software. (p.20)
  • The functional business model illustrates the concept of silos of information, which limit the exchange of information between the lower operating levels. (p.22)
  • In a process-oriented company, the flow of information and management activity is “horizontal” across functions, in line with the flow of materials and products. This horizontal flow promotes flexibility and rapid decision making. (p.23)
  • Any large software implementation is challenging—and ERP systems are no exception. There are countless examples of large implementations failing, and it’s easy to understand why. Many different departments are involved, as are many users of the system, programmers, systems analysts, and other personnel. Without top management commitment, large projects are doomed to fail. (p.30)
  • ERP packages imply, by their design, a certain way of doing business, and they require users to follow that way of doing business. Some of a business’s operations, and some segments of its operations, might not be a good match with the constraints inherent in ERP. Therefore, it is imperative for a business to analyze its own business strategy, organization, culture, and operation before choosing an ERP approach. (p.34)
  • Sometimes, a company is not ready for ERP. In many cases, ERP implementation difficulties result when management does not fully understand its current business processes and cannot make implementation decisions in a timely manner. (p.35)
  • Usually, a bumpy rollout and low ROI are caused by people problems and misguided expectations, not computer malfunctions. ... Many ERP implementation experts stress the importance of proper education and training for both employees and managers. Most people will naturally resist changing the way they do their jobs. Many analysts have noted that active top management support is crucial for successful acceptance and implementation of such company-wide changes. (p.37)

Marketing Information Systems and Sales Order Process

  • When customers place an order, they usually ask for a delivery date. To get a shipping date, the in-office clerk must contact the warehouse supervisor and ask whether the customer’s order can be shipped from inventory, or whether shipping will be delayed until a future production run is delivered to the warehouse. (p.51)
  • Next, the clerk checks the customer’s credit status. ... The form goes to Accounting, where accountants perform the credit check and then return the credit-check form showing the customer’s credit limit. (p.51)
  • The program adjusts inventory level figures on a daily basis, using production records (showing what has been added to the warehouse), packing lists (showing what has been shipped from the warehouse), and any additional sources of data (such as shipping cases that have been opened to pull display boxes). Each month the warehouse staff conducts a physical inventory count to compare the actual inventory on hand with what the inventory records in the PC database show. (p.52)
  • In other situations, the customer may want a partial shipment consisting of whatever is on hand, with the rest shipped when it becomes available, which is known as a backorder. Or, the customer might prefer to take the goods on hand, cancel the balance of the order, and place a new order later. (p.52)
  • The Accounting department loads the data into the PC-based accounting program; then, clerks manually make adjustments for partial shipments and any other changes that have occurred during the order process. (p.53)
  • When the SAP ERP system is instructed to save a sales order, it performs inventory sourcing—that is, it carries out checks to ensure that the customer’s sales order can be delivered on the requested delivery date.
  • When the sales order is ready to be processed by the warehouse, a delivery document will be created with its own unique document number, which the system will link to the sales order document. Finally, when the bill (invoice) is prepared for the customer, the bill’s unique number (called the invoice number) will be created and related to all the other numbers associated with the sales order. (p.61)
  • With the goal of providing “a single face to the customer,” the basic principle behind CRM is that any employee in contact with the customer should have access to all information about past interactions with the customer. (p.65)

Production and Supply Chain Management Information System

  • The goal of production planning is to schedule production economically, so that the company can ship goods to customers by the promised delivery dates in the most cost- efficient manner. (p.78)
  • Production planners are employees who interact with the inventory system and the sales forecast to figure out how much to produce. They follow three important principles:
    • Work from a sales forecast and current inventory levels to create an “aggregate” (“combined”) production plan for all products. Aggregate production plans help to simplify the planning process in two ways: First, plans are made for groups of related products rather than for individual products. Second, the time increment used in planning is frequently a month or a quarter, while the production plans that will actually be executed operate on a daily or weekly basis. Aggregate plans should consider the available capacity in the facility.
    • Break down the aggregate plan into more specific production plans for individual products and smaller time intervals.
    • Use the production plan to determine raw material requirements.
  • One simple forecasting technique is to use a prior period’s sales and then adjust those figures for current conditions. (p.85)
  • A sales and operations plan is developed from a sales forecast and determines how Manufacturing can efficiently produce enough goods to meet projected sales. (p.86)
  • The demand management step of the production planning process links the sales and operations planning process with the detailed scheduling and materials requirements planning processes. The output of the demand management process is the master produc-tion schedule (MPS), which is the production plan for all finished goods. (p.95)
  • Materials requirements planning (MRP) is the process that determines the required quantity and timing of the production or purchase of subassemblies and raw materials needed to support the MPS. The MRP process answers the questions, “What quantities of raw materials should we order so we can meet that level of production?” and “When should these materials be ordered?” (p.96)
  • A key decision in detailed production scheduling is how long to make the production runs for each product. Longer production runs mean that fewer machine setups are required, reducing the production costs and increasing the effective capacity of the equipment. On the other hand, shorter production runs can be used to lower the inventory levels for finished products. Thus, the production run length requires a balance between setup costs and holding costs to minimize total costs to the company. (p.104)

Accounting in ERP Systems

  • Accounting activities can generally be classified as either financial accounting or managerial accounting. (p.118)
  • Common financial statements include balance sheets and income statements. A balance sheet is a good overview of a company’s financial health at a point in time . The income statement, or profit and loss (P&L) statement, shows the company’s sales, cost of sales, and the profit or loss for a period of time (typically a quarter or year). (p.119)
  • Managerial accounting deals with determining the costs and profitability of the company’s activities. While the information in a company’s balance sheet and income statement shows whether a firm is making an overall profit, the goal of managerial accounting is to provide managers with detailed information that allows them to determine the profitability of a particular product, sales region, or marketing campaign. (p.120)
  • A manufactured item’s cost has three elements: the cost of raw materials, the cost of labor employed directly in the production of the item, and all other costs, which are commonly called overhead. Overhead costs include factory utilities, general factory labor (such as custodians or security guards), managers’ salaries, storage, insurance, and other manufacturing-related costs. (p.128)
  • Materials and labor are often called direct costs because the constituent amounts of each in a finished product can be estimated fairly accurately. On the other hand, the overhead items, called indirect costs, are difficult to associate with a specific product or a batch of specific products. In other words, the cause-and-effect relationship between an overhead cost (such as the cost of heat and light) and making a particular product (NRG-A bars) is difficult to establish. (p.128)
  • Standard costs for a product are established by studying historical direct and indirect cost patterns in a company and taking into account the effects of current manufacturing changes. At the end of an accounting period, if actual costs differ from standard costs, adjustments to the accounts must be made to show the cost of inventory owned on the balance sheet and the cost of inventory sold on the income statement. (p.129)
  • The differences between actual costs and standard costs are called cost variances. Note that cost variances arise with both direct and indirect costs. These variances are calculated by comparing actual expenses for material, labor, utili-ties, rent, and so on, with predicted standard costs. (p.129)
  • A trend in inventory cost accounting is toward activity-based costing (ABC). In ABC, accountants identify activities associated with overhead cost generation, and then keep records on the costs and on the activities. The activities are viewed as causes (drivers) of the overhead costs (p.132)

ERP and Electronic Commerce

  • When a company receives an order through its Web site, the company should not merely file or print orders for later handling. The orders should be efficiently fed into the company’s marketing, manufacturing, shipping, and accounting systems—a series of steps sometimes called back-office processing. (p.215)
  • Recent studies on back-office systems concluded that an attractive Web site does not provide enough benefit on its own for an e-commerce business to stay afloat. The conventional back-office systems must be in place and operating correctly for the business to flourish. As with any kind of business, effective infrastructure is key for e-commerce success. (p.216)