Frustrations and criticisms from inside and outside “The Box” are forcing industry leadership to rethink such areas as value, competition, and organization

Lessons from Past, Other Industries Provide Impetus for Transformation

The critics’ messages are sharp:

The forest products industry is mature, capital intensive, and seriously affected with failing performance and returns. It is monolithic and slow to change—if change is even possible. Its assets are underutilized and under-performing. The industry, as a whole, lacks adequate vision and innovative leadership. It has a poor understanding about the character of value.

In the end, these critics, who range from the financial institutions who support us to the shareholders who invest in us and on to the employees who depend on us are losing patience and demanding change—a change to move beyond what Peter Drucker might consider our legacy.

Yet, at the same time, our industry leaders have not had their collective heads in the sand in terms of generally stating the need for change. We have witnessed a virtual conveyor belt of industry meetings, management workshops, new mission statements, and public positioning displays that address the issue of change for our industry. Why then do we seem to be largely running in place in terms of stimulation of effective major industry-wide change outcomes?

Potentially the problem lies in our lack of being able to grasp the full realization of the role that real change can play for our industry, what happens without it, and how to communicate to and motivate our respective organizations to truly strive to achieve it. To this end, if we take a look backward in time and towards other industry sectors and a history of successes and failures there, we may be able to better crystallize the true power of change and the true ultimate agony of failure to change.

JOURNEY BACK IN TIME. All are familiar with the Industrial Revolution of the 18th Century, marked by the introduction of power-driven machinery and change in the prevailing types and uses of such machinery. However, many are unfamiliar with what could be categorized as the Industry Evolution of the 19th Century, which has spilled over throughout the 20th Century. This critical and unique change process introduced a number of new organizational mantras that focused more on how industry (or a business) was to be run across time—through management structures, practices and science—instead of on what was to be operated today from a purely technical perspective¹.

Organization and Structure: In the late 1800s, Andrew Carnegie (1835-1919) recognized the need for a centralized organization structure for the U.S. steel industry. Nearly congruently, Henri Fayol (1841-1925) in France advanced a similar structural concept for Europe’s then highly fragmented coal industry. Carnegie and Fayol’s visionary organization structure change were the critical ingredients for turning around those two major and capital intensive but floundering industry sectors. Elihu Root (1845-1937), Teddy Roosevelt’s Secretary of War and Carnegie’s legal advisor, embarked on a similar major centralized organizational change process in 1901 for the highly fragmented U.S. Army, without which the Army’s effectiveness in WW I would have been greatly in doubt.

Scientific Management: Also around the turn of the century, Frederick Winslow Taylor (1836-1915) began advancing his evolutionary theories on scientific management at the Mayo Clinic and the US Army’s Watertown Arsenal. Winslow’s approach to running a business focused on activities-based efficiencies of management, wherein the (dominant) owners and their (lowly) helpers, without organizational structure, introduced with great positive effect the first wave of what we now call optimization improvement work processes.

Flowing from these early evolution changes, Herbert Hoover, then U.S. Secretary of Commerce, and Thomas Masaryk, founder of the New Czech Republic, convened the First Global Management Conference in Prague in 1922. This unique global platform’s innovative focus was on centralizing the structures of organizations and advancing Winslow’s theories of scientific management.

Decentralization and Functional Management: About this same time, Pierre S. du Pont (1870-1954) in the U.S. chemical industry and Alfred Sloan (1875-1966) at General Motors began to recognize the need for decentralized/functional organizational structures to accommodate for the weaknesses of the pure centralized concepts of Carnegie and Fayol and Taylor’s focus on work processes efficiencies. Together they were leaders in the next industry evolution step, which led to what we know today as the classical decentralized, functional manufacturing enterprise structure that was extremely effective at its first introduction.

Production Line Efficiency: Not to be overlooked in this evolution process is Henry Ford (1863-1947), who fully embraced the centralized concepts of Carnegie and Fayol plus the efficiencies concepts and the owners and their helpers context of Taylor. Within the purity of Ford’s construct, he literally autocratically willed his company to focus on top down driven operating efficiencies to produce a very narrow and defined product line, wherein Ford sold what Ford made so well, but not necessarily what the customer wanted. As an important side-note to history here, although Ford was initially highly successful in this centralized-efficiency drive, his absolute autocratic adherence to it nearly bankrupt his company in the late 1930s and early 1940s.

“Keiretsu I:” A further significant major industry evolution step emerged in the 1920s and 1930s from the efforts of William S. Durant (1861-1947) and, yet again, Alfred Sloan at GM with their introduction of what we could call Keiretsu I, the first true producer-supplier alliance joint venture structure. The Durant-Sloan initiative became the foundation of what we know today as the Japanese-based Keiretsu enterprises. This alliance endeavor, with a focus on joint planning, product development, and cost control—all meshed into a separate but linked production whole—created decisive advantages in customer responsiveness, speed, and cost, a 30% edge over everyone else, including Ford.

However, this highly effective organizational mantra at its inception turned into an albatross for GM in the late 1930s with the emergence of the United Auto Workers (UAW) union movement into GM’s alliance-based supplier chain. The lesson here for GM was that just like for Carnegie, Fayol, Taylor, Ford, and others, what worked well at the time it was needed did not represent the unchanged way for the future. Industry Evolution is constantly required, no matter how well a key change step works at the time of its innovation and introduction.

TECHNOLOGY, PRODUCT DEVELOPMENT, INNOVATION. Another unique twist to the industry evolution of the 20th Century has been the change process brought about by the roles of technology, product development, and innovation. A clear relationship of business success via this aspect of change has emerged with a rush, especially since the 1950s. Here we have some clear winners and some obvious losers.¹

ATT’s Bell Labs, with an impeccable history rich in technology-based, innovative product development, created the transistor but saw no use for it in its core industry—telecommunications. Consequently, the technology was sold at $25,000 per user to such enterprises (or their forerunners) as Sony, Intel, and Compaq. ATT’s myopia in failing to change and see new horizons for its own technology across industries instead of just within its own, fed huge successes for others.

Other clear examples abound, such as the fax machine, television, and portable calculators, all U.S. inventions for which the Japanese adopted the initiatives to develop them commercially, because these products’ values in changing market places or business approaches were not envisioned by their original developers. Conversely, an endless array of examples can be sited where whole industry structures were changed by innovations from outside the industry. Illustrative here are such massive change devices as fiber optics, which did not come from the telecommunications industry, and high-tech microprocessor chips, which did not come from the original computer industry sector.

The messages related to technology, product development and innovation are many:¹

• Change via technology, product development and innovation is all around us, from within and from without. Failure to understand this reality can be deadly.

• Looking backwards at the “lost” industries—the U.S. steel industry, the Northeast U.S. textile industry, and the once mighty U.S. coal industry—they are all a shadow of their former selves. Why? These industries had their own unique technologies, but they failed to pay attention to other industries’ technologies that broke down walls for such things as competing materials, e.g. rayon, plastics, aluminum, and petrochemicals.

• A company should reinvent its product lines regularly. Customers’ needs change constantly, and so should their suppliers. Innovate, innovate, and innovate some more; this is the key to differentiation. “Organize systematic innovation to create a different tomorrow, that to a large extent, replaces even the most successful products of today.”

• Don’t forget with whom you are competing against today. “Where once companies competed ‘within’ an industry, today, companies compete ‘with’ other industries”.

• “Technologies likely to impact your business and industry the most are technologies from outside your field — as such, a company culture founded on knowledge seeking and sharing is essential for adaptation and long term survival and success.”

• “If I have a penny and you have a penny and we exchange pennies, we still each have a penny. But, if I have an idea, and we exchange ideas, now we both have two ideas.”

THE ROLE OF MARKETING. Marketing, as a term, was coined some 50 years ago to emphasize that the essential purpose and results of a business entity lie entirely outside the business.¹ As such, effective marketing requires an understanding of the “outside”—society, economics, demographics, and the customer—so that this knowledge can be brought “inside.” Yet, in today’s business world, marketing rarely performs this grand task. Instead, it is now most often a tool used to support selling. The question should not be, “What do we want to sell?” Rather, it should be, “Who is the customer, and what does he want to buy and why?”

In this regard, the following are some important views on marketing that are clearly associated with effective change:

• Good marketing is aimed at the notion that we need to stop selling things we want to make (remember the fax and the transistor), and begin to make the things the customer wants to buy.

Consequently, in effective marketing, you do not begin with the question, “What do we want?” but with, “What does the other party want?”

• The customer rarely buys what the supplier sells. The “want” is what is unique, not the “means.”

• Understanding markets begins with understanding how consumers distribute their disposable income, not how we want them to distribute it.

• An enterprise without innovation toward its markets and understanding of its consumers will not engage in entrepreneurship and will not survive.

THE ELEMENTS AND ISSUES OF CHANGE. Change is an absolute necessity for sustained personal or organizational success. Albert Einstein had a particularly interesting view here, defining insanity as “doing the same thing over and over again and expecting different results.” Within this perspective, note that:²

• Only one original Dow Jones company, General Electric, survived to celebrate the Dow’s 100th anniversary.

• The Fortune 500 annual attrition rate is 7%.

• The list of 43 celebrated companies from In Search of Excellence already has a “lost luster” rate of one-third.

• Excellence is a constantly moving target only retained by change. Ford Motor Co. has been reinvented at least three times since the days of Henry, and it is in its fourth round today.

General Electric has a constantly evolving structure brought about by day-to-day change. The recent past CEOs of Kodak, IBM, American Express, and GM could also provide perspective on this topic.

Charles Darwin provided a particularly practical view on the necessity of the change process when he penned that, “It is not the strongest of the species that survives, nor the most intelligent; it is the one that is the most adaptable to change.”² But change is hard and not without pain. It can be categorized as:

• A mixture of bold strokes and long marches with a goal of coping with a new, constantly more challenging market environment by changing how we conduct business while we simultaneously continue to conduct business.

• Understanding the difference between what should never change and what should be immediately open for change; what is genuinely sacred and what is not. Think of Ford, Sloan, IBM, Kodak, G.E., the steel industry, etc.

• Gaining management’s understanding that its job is not to run the company, but to concentrate on what is happening outside the business, because the forces that most influence enterprises come from outside not from within.¹ This is truly very hard!

• Knowing that the single greatest obstacle to effective change is the current corporate culture, and changing this is truly a major long march.³ Again, think of IBM, G.E., Chrysler, and the steel industry.

Also important is that change is not in and of itself the sole answer to success. Change is not the ends. It is, however, a critical means. For example, the change process must be imbedded within a solid company vision regarding where the firm is headed and what its guideposts to be followed will be. For example, some companies have religiously embraced a change process driven by what has been labeled as “BHAG,” or Big Hairy Audacious Goals (and Core Values). Importantly, note that companies that have adopted a truly driving BHAG have been 12 times more likely to have lasting success since the 1920s.² A BHAG is a simple, to the point statement of the “great ambitious goal” that will truly drive the organization, such as:^4,5

• Henry Ford: “Democratize the automobile”

• NASA (under John F. Kennedy): “Land a man on the moon in the decade”

• Sony: “Become the company most known for changing the world-wide ‘Japanese poor quality’ image”

• Wal-Mart: “Become a $125 billion U.S. company by the Year 2000”

• Nike: “Crush Adidas”

• Nordstroms: “Respond to ‘all’ unreasonable customer requests”

Note that companies with effective BHAGs need not have as core values some of those that have been held up as helping generate great success, such as:^4.5

• “Know your customer.” Ford didn’t. He made what he defined as simple and efficient.

• “Be low cost.” NASA couldn’t. The cost of error for low cost was total mission failure.

• “Customer service.” Sony doesn’t. The aspect of the image of quality takes precedent.

• “Maximize returns.” Nike doesn’t. The returns will come as Adidas is crushed.

• “Quality first.” Wal-Mart doesn’t. Successful growth is the driver.

• “Teamwork.” Nordstroms doesn’t. The customers’ demands take precedence over teamwork.

In the end, as the 20th Century’s industry evolution has advanced, the need for consistent, change-driven evolution for successful enterprises and industries has become self evident. And, as we look out to the future evolutionary needs of our industry and try to draw some lessons from the past, we need to remember a few very basic points:^4,5

• We need to focus on the issues that matter. For example, listen to people in truly great companies talk about their collective achievements and you will hear little about earnings per share.

• Visionary companies (such as those with BHAGs) are much more likely to achieve sustained change and success. However, remember that building a visionary company requires about 1% unique vision and 99% alignment. Change does not mean chaos!

• Note that it makes no sense to analyze whether an envisioned future is the right one. The task is to create the future, not predict it!

A PATHWAY TO EVOLUTION. As we seek ways of learning from others’ experiences outside of our industry and begin to apply these lessons effectively going forward, we must first come to terms with what our starting point is. Briefly, in this context, our industry’s character and focus could be summarized in part as:

• Primary manufacturing, capital intensive, fragmented, technology based, and traditionally monolithic and slow to adapt

• Largely focused on better doing what we do, instead of figuring out what we should be doing in the first place

• Highly competitive, with key focuses on lower variable costs, market share percent growth, higher marginal returns, and retained independence

• Very open information flows across almost all competitor groups; unique core competencies not generally secured or protected

• Highly insular, with a key focus on looking within instead of elsewhere

• Largely reactionary and parochial, instead of proactive, visionary, and customer driven

• Blessed with a global community that has a tremendous array of wants, which is the foundation of a solid product demand structure for communications; packaging; product protection; shelter; convenience; better quality of life; sustainable, reusable resources; and

environmental protection

• Having an inherent structure with tremendous capabilities—the means—to meet these wants.

Flowing from this abbreviated characterization of the industry and seeking to learn from the industrial evolution lessons of the past—both from within and from without the industry—what then are the issues and questions we should begin to pay more attention to for stimulating our own pulp and paper industry evolution? Some of these include:

• Talk and listen to our critiques. The list is virtually endless.

• Seek survival and growth of the industry, not just individual companies. Think of the steel, coal, and textile industries.

• Learn to know the “real” customers. Do we truly know their wants, and do we fully understand that the means to satisfy their wants are highly varied?

• Seek the best means available to us to fulfill the wants we are uniquely qualified to fulfill.

• Learn to identify and know well our true competitors. Do we look outside the industry?

• Understand that marketing and selling are not synonyms.

• Do we focus too much on selling what we can make and on making what we make better and at a lower cost? That will be passed on to our price sensitive customers?

• Appreciate that to reshape our industry—to begin our own pulp and paper industry evolution—we need a totally new focus on reinvention, not on simply improving what we do now.

• Grasp the understanding that reinvention is not changing “what is” but creating “what isn’t!”

• Seek the courage and see the need to throw away the contexts of our past, without losing sight of the need for and the means to stay afloat in the meantime.

• In other words, seek a new blend of bold strokes (revolutionary measures) and long marches (evolutionary pathways) all pointed in the same direction.

The message here is that in spite of a vast array of critical structural issues and a lack of effective focus on reaching our industry’s true potential, our opportunities to do so are real and achievable. Other managers in other times and other industries have faced more seemingly insurmountable challenges and triumphed. Our industry has the means and the opportunity to transform itself. The problem is that there are no magical solutions. But there are solutions—solutions for reshaping our industry and for generating a true pulp and paper industry evolution.

A fine contemporary example can be found in the remarkable survival and revival of the Lockheed Martin Corp., nearly a “dead on arrival” casualty of the end of the Cold War and its associated huge defense industry contracts, which wiped out nearly 50% of the industry’s demand structure almost overnight. Norman Augustine, former chairman and CEO of Martin-Marietta and Lockheed-Martin, has provided an instructive and practical guide to such a successful industrial makeover (see sidebar, “Augustine’s Advice”).

Hopefully we can all learn from the past—from Carnegie, Fayol, Ford, and Sloan and from such contemporary leaders as Norman Augustine—so that we do not have to live by Peter Drucker’s admonishments or fail to understand the wisdom of Charles Darwin and Albert Einstein. The reality is that our industry has the real potential to stimulate and achieve a meaningful industry evolution. But as Linus warned Charlie Brown, “There is no heavier burden than a great potential.”

As an industry with such great potential, our real risk is in failure to reach out to achieve that potential. And our reward is the realization of fully achieving it across time.

REFERENCES:

1. Peter Drucker, consultant, advisor, and author.

2. Norman Augustine, Princeton Univ. faculty member, former executive.

3. Roger Martin, consultant and director, Monitor Co. and the Univ. of Toronto School of Business.

4. James Collins, Management Institute leader, consultant, and author.

5. Jerry Porras, Stanford Univ. School of Business.

The author would like to acknowledge the following individuals and groups from which he drew material for this article: Anthony Ethos, advisor, author and lecturer; Jeanie Duck, consultant, BCG; Tracy Goss, consultant, Goss Reid & Associates; members of the senior management team at Jaakko Pöyry Consulting; John Kotter, professor, Harvard Business School; Richard Pascale, professor, Oxford Univ.; Robert Schaffer, consultant, Robert Schaffer & Assoc.; Paul Strebel, consultant, author and advisor; Harvey Thomas, consultant, Robert Schaffer & Associates

DR. JAMES P McNUTT is a senior industry advisor based in Brookfield, Conn.