Strategy (97 page)

Businesses were now judged by their market value. This should reflect their intrinsic quality and the longer-term prospects for their goods and services, but that was not always easy to assess and all the incentives were for
those who held the stock, including managers, to talk up its current value. This made success tangible and measurable compared with the longer-term development of a business which might require patience and low returns before the rewards became evident. But assessments of market value were vulnerable to sentiment and hype, as well as downright fraud. The energy company Enron was the prize exhibit of the latter possibility. This risk was greatest in areas that were hard to grasp, whether because of the sophistication of the financial instruments or the potential of the new technologies. Within companies, any activities that might be holding down the price, not providing the value that was being extracted elsewhere, came to be targeted. Thus they encouraged remorseless cost cutting.

The Japanese success over the postwar decades could be taken as a triumph of a focused, patient, coherent, and consensual culture, a reflection of dedicated operational efficiency or else a combination of the two. Either way, the pacesetter was the car manufacturer, Toyota. Having spent the Second World War building military vehicles, the company struggled after the war to get back into the commercial market. Hampered by a lack of capital and technical capacity and by a strike-prone, radicalized work force, Toyota would probably have gone bankrupt were it not for the Korean War and large orders to supply the American military with vehicles. It then began to put together what became known as the Toyota Production System. The starting point was a solution to labor unrest by a unique deal which promised employees lifetime employment in return for loyalty and commitment. Together they would work to establish a system which would reduce waste. Ideas for improving productivity could be raised and explored in “quality circles.” As this was a country where everything was still in short supply, a visit to a Ford plant in Michigan in 1950 left an abiding impression of the wastefulness of American production methods. Toyota aimed to keep down inventories and avoid idle equipment and workers. With excess inventory identified as both a cause of waste and a symptom of waste elsewhere in the system, methods were developed to process material and then move it on “just in time” for the next operation. Within Japan, Toyota's methods were emulated and further developed by other companies. In one industry after another, including motorcycles, shipping, steel, cameras, and electronic goods, Western companies found themselves losing market share to the Japanese. Government policy, the need to start from scratch after the war, and a cheap currency all helped.

In comparison with Japanese super-managers, their American counterparts appeared as a feeble bunch. During the course of the 1970s, the management literature became more introspective as mighty American firms were humbled by the Japanese insurgency, not only losing markets to more nimble opponents but also being caught out by a business culture that was far more innovative. Although the momentum behind the Japanese advance came to a juddering halt after the hubris and boom years of the late 1980s, Western companies were determined to mimic the Japanese by radical approaches to their own operational effectiveness. These came first under the heading of total quality management (TQM) and the second as business process re-engineering (BPR). Of the two, BPR was more significant in its impact and implications. The basic idea behind BPR was to bring together a set of techniques designed to make companies more competitive by enabling them to cut costs and improve products at the same time. The challenge was posed in terms of a fundamental rethink of how the organization set about its business rather than a determined effort to make the established systems run more efficiently. Information technologies were presented as the way to make this happen, by flattening hierarchies and developing networks. A close examination of what the organization was trying to achieve would lead to questions about whether goals were appropriate and whether structures could meet the goals. The idea seemed so attractive that Al Gore sought to re-engineer government while he served as vice president.

The underlying assumption of BPR, as with agency theory, was that an organization could be disaggregated as if it was a piece of machinery into a series of component parts, to be evaluated both individually and in relation to each other. It could then be put back together in an altered and hopefully improved form, with some elements discarded altogether and new ones added where necessary, to produce a new organization that would work far more effectively. Once an organization was viewed in these terms, there was no need for incrementalism. It should be possible to start from scratch and rethink the whole organization.

Re-engineering is about beginning again with a clean sheet of paper. It is about rejecting the conventional wisdom and received assumptions of the past. Re-engineering is about inventing new approaches to process structure that bear little or no resemblance to those of previous eras.
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Thus, the history of an organization could be ignored and its old culture replaced with a brand new one. Workers would be indifferent and docile, or possibly even enthused by this process.
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At one level, BPR appeared strategic because it was demanding a fundamental reappraisal of businesses. But the main driver was not an assessment of competitive risks and possibilities or even internal barriers to progress but rather the potential impact of new technologies on efficiency. In this respect there were parallels with the coincident “revolution in military affairs.” There was the same claim that this was the start of a new historical epoch, the same expectation that affairs would be shaped by the available methodologies rather than the competitive challenge, the same presumption that technology would drive and everything else would follow, and the same tendency to take the underlying strategy for granted, assuming that opponents/competitors would accept the same path rather than starting with the strategy and working out what processes were required.

Michael Hammer, one of the figures most associated with BPR, provided the transformational tone when he explained the idea in the
Harvard Business Review
: “Rather than embedding outdated processes in silicon and software, we should obliterate them and start over. We should … use the power of modern information technology to radically redesign our business processes in order to achieve dramatic improvements in their performance.”
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Hammer teamed up with James Champy, chairman of CSC Index, Inc., a consulting firm that specialized in implementing re-engineering projects.
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Their 1993 book,
Reengineering the Corporation
, sold nearly two million copies. The rise of the concept was startling. Prior to 1992, the term “re-engineering” was barely mentioned in the business press; after that it was hard to escape it.
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A survey in 1994 found that 78 percent of the
Fortune
500 Companies and 60 percent of a broader sample of 2,200 U.S. companies were engaged in some form of re-engineering, with several projects apiece on average.
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Initial reports were also positive about success rates. Consulting revenues from re-engineering were an estimated $2.5 billion by 1995. While Champy expanded CSC Index's revenues from $30 million in 1988 to $150 million in 1993, Hammer gave seminars and speeches for high fees.
Fortune
magazine described him as “re-engineering's John the Baptist, a tub-thumping preacher who doesn't perform miracles himself but, through speeches and writings, prepares the way for consultants and companies that do.”
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There were both practical and rhetorical reasons for the success of the concept. At a time of tumult and uncertainty for industry, Champy and Hammer were able to play on the fear of being left behind, captured by Peter Drucker's endorsement on the cover of their book: “Reengineering is new, and it must be done.” Hammer, in particular, pushed forward the message that however tough and brutal it all might be, the alternative was
so much worse: “The choice is survival: it's between redundancies of 50 per cent or 100 per cent.” Senior managers must hold their nerve: “Companies that unfurl the banner and march into battle without collapsing job titles, changing the compensation policy and instilling new attitudes and values get lost in the swamp.” The anxiety generated by such language could be used to press forward: “You must play on the two basic emotions: fear and greed. You must frighten them by demonstrating the serious shortcomings of the current processes, spelling out how drastically these defective processes are hurting the organization.”
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BPR began as a set of techniques. It was soon elevated into the foundation of a transformational moment. So while Hammer claimed that “just as the Industrial Revolution drew peasants into the urban factories and created the new social classes of workers and managers, so will the Reengineering Revolution profoundly rearrange the way people conceive of themselves, their work, their place in society.”
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Champy took this revolutionary theme a step further by arguing: “We are in the grip of the second managerial revolution, one that's very different from the first. The first was about a transfer of power. This one is about an access of freedom. Slowly, or suddenly, corporate managers all over the world are learning that free enterprise these days really is free.”
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Speaking of the virtues of “radical change,” Champy described to managers the “secret satisfaction” of learning to do “what other managers in your industry thought to be impossible.” They would not only “thrive” but would also “literally redefine the industry.”
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Thomas Davenport, who had been director of research at the Boston-based Index Group, which was eventually turned into the CSC Index, was one of those closely associated with the development of the original concept. He later described how a “modest idea had become a monster” as it created a “Reengineering Industrial Complex.” This was an “iron triangle of powerful interest groups: top managers at big companies, big-time management consultants, and big-league information technology vendors.” It suited them all to make BPR appear not only essential in theory but successful in practice. The result was that specific projects were “repackaged as reengineering success stories.” Managers found that they could get projects approved if they used the BPR label, while consultants repackaged what they had to offer as BPR specialists, discarding the previous set of buzzwords.

Continuous improvement, systems analysis, industrial engineering, cycle time reduction—they all became versions of reengineering. A feeding frenzy was under way. Major consulting firms could
routinely bill clients at $1 million per month, and keep their strategists, operations experts, and system developers busy for years.

As companies made layoffs, these too were rebranded as “reengineering.” Whatever the actual relationship, staff reductions “gave reengineering a strategic rationale and a financial justification.” Meanwhile the computing industry also had a stake in BPR as it encouraged large expenditure on hardware, software, and communications products.

It did not take too long for the bubble to burst. Too many claims had been made, too much money had been spent, and too much resistance was growing—largely because of the association of re-engineering with layoffs—and it had all been accompanied, according to Davenport, by too much “hype.” “The Reengineering Revolution” took potentially valuable innovation and experimentation but added exaggerated promise and heightened expectation leading to “faddishness and failure.” The “time to trumpet change programs is after results are safely in the can.” Most seriously, the fad treated people as if they were “just so many bits and bytes, interchangable parts to be reengineered.” Dictums such as “Carry the wounded but shoot the stragglers” were hardly motivating, while young consultants with inflated salaries and even higher billing charges treated veteran employees with disdain. Whether or not this was a moment of historic change, employees were naturally inclined to think about protecting their own positions rather than enthuse about broad and expansive visions for the future of the company that could leave them without a job.

By 1994, the CSC Index “State of Reengineering Report” indicated that half the participating companies were reporting fear and anxiety, which was not surprising as almost three quarters of the companies were seeking to eliminate about a fifth of their jobs, on average. Of the re-engineering initiatives completed, “67% were judged as producing mediocre, marginal, or failed results.” As was often the fate of the examples cited in the bestselling management books, companies hailed as champions of BPR were discovered to have either gotten into serious trouble or abandoned the idea. The CSC Index itself was in jeopardy. Its credibility was not helped by revelations in
Business Week
describing an intricate scheme to promote what Michael Treacy and Fred Wiersema, two of the CSC Index's consultants, hoped to be the next big book in the field,
The Discipline of Market Leaders
. The aim was to get it on the
New York Times
bestseller list. It was alleged (though denied) that employees of CSC Index had spent at least $250,000 purchasing more than ten thousand copies of the book, with yet more copies being bought by the company. The basis of the investment lay in the fees that were expected to
come back to the company and consultants through their association with the “next big thing.” Treacy was giving some eighty speeches a year, and his fee had jumped up to $30,000 per talk from $25,000. The importance of these books was further illustrated by reports that they were ghostwritten to ensure maximum effect. The allegations backfired on CSC Index. The
New York Times
re-jigged its bestseller list and also took a contract away from CSC Index. The next year Champy, whose book
Re-Engineering Management
was also implicated in the scandal, left the company. The firm, which had six hundred consultants at its peak, was liquidated in 1999. Its rise and fall was a symptom of a business that had become dependent upon staying ahead of the latest fashion.
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