Chapter 1

The Coordination Imperative

Coordination as organizational foundation

Ours is the era of “co-“ words, that mean “with” and “together”: collaboration, cooperation, community, co-ventures, co-hosting, co-design, and co-sourcing. All of these depend on another “co-” term that is increasingly fundamental to both organizational efficiency and effectiveness: Coordination. Coordination is the management of interdepedencies in an environment of complexity, via interlinking processes, via sourcing and synchronization of capabilities, and above all via the harmonization of the different values, priorities and self-interests of the actors involved. The greater the variety of interdepedencies, complexity and actors that an organization can coordinate, the larger and more powerful the value web – its space of relationships and resources – that it can grow.

Conversely, the weaker its enterprise coordination, the more fragmented it will be and the more the blockages that will impede strategy, process and all the “co-“ words. These words – especially “collaboration” – have grown in frequency of use and importance in the vocabulary of management for the obvious reason that just about every major economic, competitive, demographic and financial force today is extending the limits of the organization: its relationships, customer service demands, geographic space of operations, and competitive pressures. There is more to coordinate and the stakes are ever larger.

What is your own organization’s enterprise coordination design? It probably does not have one. It will of course have a formal strategy, process management priorities, new service initiatives, incentive and control systems, and investments in many other elements of business efficiency and effectiveness. But it is unlikely to have an explicit set of policies, blueprints and methods that ensure that these mesh at all levels of the organization, from high level business planning to everyday operations – enterprise coordination.

As a result of that lack, in many large organizations strategy is again and again undermined by blockages to collaboration across business units. “Fiefdoms” thrive. Decentralization of decision-making encourages local innovation at the frequent cost of integration. Centralization conversely imposes burdens of bureaucracy. Individual process improvements do not translate to overall enterprise performance gains, and in many instances are based on efforts to repair the miscoordination that is the historical product of a morass of procedures, parties and tasks that have accumulated their own identity and power. In the area of information technology, organizations are burdened with incompatible and duplicate systems that block information-sharing and cross-functional processes. And at the everyday working level, substantial resources are wasted in handling delays, miscommunications, conflicts, and errors created by miscoordination. Many of these problems are summarized as “politics” – a shorthand term for “we couldn’t get everyone on the same page.” This is the situation in almost every large organization and it surely does not indicate incompetence, since it is so pervasive even among the most respected and productive companies and public sector agencies.

A striking example of this is the automotive manufacturing industry. Toyota is the dominant force here, to the degree that its 2003 profits were greater than the Detroit car makers’ combined income over the previous five years. For decades, it has focused on coordination, first of inventory management and lean production, then of manufacturing processes through total quality management, then on its supply chain, and most recently on global manufacturing and design and their integration. Its genchi gembutsu tradition – “ go to the spot” – moves engineers out into the field to meet customers as the starting point of designing a new product – coordination on behalf of the customer. Its flexible factory enables the firm to move manufacturing from one country to another at very short notice. It has adopted one of the most powerful and growing forces in enterprise coordination designs, the use of standardized interfaces – connections between components – to create a new level of agility and synchronization.

Toyota has increasingly left the U.S. Big Three in catchup mode, to the extent that in mid-2004 it was making ten times the profit per car of Ford, and both GM and Chysler were losing money on every car. Its flexible factory coordination design is the competitive blueprint the rest of the industry is following because it has to: Toyota’s cost advantages, profitability, flexibility and global sourcing of capabilities are leading some commentators to question the very survival of most other players. The established U.S. and European strategic business models were not coordination designs and again and again booms in design, aggressive financing and pricing plans, new concept cars and radical improvements in quality have been followed by busts. Toyota’s competitors have been unable to sustain such temporary advantages.

Much of this is directly attributable to their enterprise miscoordination. The new CEO of GM reported when he took over the position that he found five design studios, all operating independently. Each passed design proposals on to manufacturing and marketing, with lengthy iterations – and often arguments – that added several years to the design to showroom time to market. Business Week described GM as a set of “warring fiefdoms.” When Chrysler and GM rolled out “families” of cars built on the principle of shared components under the hood and different appearances on the outside – a response to Toyota – “they ended up being different underneath, because the companies’ various purchasing divisions didn’t coordinate when it came to buying parts.” One CEO of a Big Three car maker boasted a few years ago about a new car model’s innovation by holding up a paper bag and shaking out the only components that it had in common with the one it replaced: the steering wheel and door handles. Every such new model requires its own tooling, procurement, inventory and - of course – fiefdoms. Toyota looks for every opportunity to coordinate manufacturing. For example, by standardizing worldwide on a single bracket that bolts a car’s frame together, an apparently small initiative, Toyota cut by 75% the costs of retrofitting a production line. By contrast, until recently, every plant in a Big Three company was individual. Without standardized parts, coordinating purchasing and production are exponentially more complex for that firm than for the flexible factory.

So, too, is global coordination of manufacturing. Chrysler, which has chosen to compete primarily on design, lost half a billion dollars of profits when it ran out of manufacturing capacity in the Mexcan plant that made its hot new product, the PT Cruiser, which was based on another model, the Neon. There was spare capacity available in the Neon plant in Illinois but this could not be used. The paint shop was not tall enough for the PT Cruiser, which is just a few inches higher than the Neon. We could add dozens of comparable examples of how miscoordination has marked what the new Chairman of GM publicly states has been thirty years of mismanagement.

To be fair, we could also add dozens of examples of the degree to which a new generation of leaders is responding to the coordination imperative. All major auto makers are racing to adopt the basic Toyota enterprise coordination blueprint and the organizational capabilities that make it effective. An in-depth artilce in late 2004 in The Wall Street Journal both describes GM’s plans and reinforces our argument that enterprise coordination design is increasingly at the heart of “strategy.” The very title indicates the shift: “Reversing 80 years of history, GM is reining in global fiefs.” GM was explicitly built on one of the dominant historical principles of simplifying coordination: decentralization. GM is the largest automotive manufacturer in the world. It was created out of smaller firms in the 1920s. Its Chairman Alfred P. Sloan, among the most renowned and influential CEO doer-thinkers of the past century, imposed “a management discipline” that he termed “decentralized operations and responsibilities, with centralized control.” He empowered the divisions – Cadillac, Chevrolet, Buick and Oldsmobile – to work as separate entities, including operating their own manufacturing plants. As GM expanded its global reach and acquired such car makers as Vauxhall (UK) and Opel (Germany), the same philosophy was applied. Between 1923 and 1928, GM opened 19 assembly plants in 15 countries. The centralized corporate capital budget was the main coordination control in the Sloan model.

This model was the core of most large multinational firms through to the late 1990s: ABB, Unilever, Hewlett Packard and Shell were quite literally textbook exemplars of organizations built on decentralization plus a huge investment in building a unified management culture through training, job rotation, and matrix reporting structures. All four of these companies – and GM – thrived for some time, to the degree that their principles were treated as universally applicable precepts. They turned out to be situational, not universal. All four firms saw decentralization lead to cultural inertia, consensus-seeking, and lack of integration. They all have abandoned the decentralization model; it is poorly-suited to handle interdependencies, either as an opportunity or a necessity. Indeed, the very logic of decentralization is to reduce interdependencies.

The rapid growth in interpedencies and complexity has made that logic outmoded. When Carly Fiorina took over as HP’s first CEO hired from outside the firm, she found a company with 87 business units each with its own top management team, sales organization and profit and loss accounts. Its founders believed that small, semi-autonomous business units fostered entrepreneurship and innovation. The HP “Way” became legendary but time passed it by. Overhead and internal competition ate up costs and time. HP’s customers complained that the firm was very difficult to do business with; individual product units coordinated their own operations but there was no coordination of the overall customer relationship. There was constant duplication of resources and a growing lack of organizational identity; Fiorina discovered that the company had over a hundred logos and advertising slogans – for its printers, PCs, servers and services – but there was not a single standardized corporate logo and marketing message. The Financial Times quoted her goal – her enterprise coordination design – as being “to create a company that can speak to customers with a single voice while retaining a flair for innovation.” In other words, the company is now its coordination capabilities across its parts, not the parts being the capabilities.

What happened to HP has happened to many firms that built their business blueprints on the divide and conquer principles of decentralization: divide the business in order to conquer complexity. It is literally a piecemeal solution. The challenge for the firms built on the Sloan model has become how to make the whole at least equal to the sum of its parts. The Wall Street Journal article describes GM’s shift to sharing parts and designs is a “rescue strategy” for its global – i.e., interdependent – operations. It plans to tightly coordinate its standardization of parts; an example is reducing the types of radios it offers in its cars from 270 down to 50. The cost savings are estimated as 40%. That figure is a “hard” measure of the coordination edge or rather the equivalent of an inefficiency tax incurred through miscoordination; GM is eliminating that tax burden. It also aims at speeding up product design and development: “By tapping engineers in far-flung units who previously would have worked only on local models…. GM is now using engineering centers in India, South Korea and China to get work done at lower cost while American and European engineers sleep. At a command post in Warren, Mich., executives are assigning jobs world-wide, wherever staff is available.” GM’s Chairman calls the new coordination “a race to the middle in the centralization vs. decentralization debate.”

The article points out that there is nothing new in most of the GM plans and that the top Japanese and European firms have built their business models around centrally coordinated product planning and global manufacturing for years. Coming back to the title of the piece, just about every commentary on GM’s efforts to reposition its enterprise capabilities zeroes in on the issue of history and fiefdoms. GM’s successful enterprise coordination design of the past has maintained a strong cultural hold on the organization. One quote in the article from Bob Lutz, GM’s Vice Chairman is revealing in this regard: “Until a couple of months ago…. GM’s global product plan used to be four regional plans stapled together.” A couple of months ago? In late 2004, a full decade after the need for radical changes in manufacturing and supply chain coordination had become a priority for all car makers! Breaking the long hold of history will be GM’s challenge. Enterprise coordination designs are persistent in their impacts; when they wear out, as that of the pure decentralization ethos has, the shift demands plenty of leadership governance. Bob Lutz has made it clear that he owns the new design.

Meanwhile, Toyota’s design has not worn out and it is extending its blueprint. In mid-2002 it announced that it was committing $800 million to $1.2 billion to a massive IT system that will model every aspect of car production from concept to operations, from the automobile’s look to the parts that make it run, from the sequence in which components are assembled to the design of the factory itself. This system is the platform on which entirely new capabilities are being built. Many of the priorities emphasize collaboration and coordination, such as bringing suppliers into the design process, and “converse engineering.” Traditional industry practice has engineers decide on the details of a car before it goes into production, right down to every single part. The design is then sent to production for prototyping. That is a sequential chain: coordination by procedure and organizational structure.

The new process is coordination via synchronization of processes. It will enable other teams of product engineers to design parts that are not key to the car’s styling later on. Alternators are an instance. “Instead of going from concept to design and speaking of downstream processes like manufacturing, Toyota starts with the idea of manufacturing efficiency and works back towards the concept and design.” This enables reuse of parts, such as a hood, as well as speeding up time to market. Engineers will be able to search a library of existing hoods and use the software tools to make changes to the exact shape and contours. They can then automatically test it for manufacturability. The process is parallel, not sequential. It coordinates interdependencies, instead of procedures.

The role of the IT platform is to provide a coordination infrastructure. The term “information technology” is increasingly obsolescent in the “co-“ world; it is enterprise coordination technology. All large organizations have plenty of IT. Few have an enterprise coordination technology platform – very, very few. The shift in perspective is a core component of the coordination edge. Toyota is willing to commit a billion dollars on a coordination technology platform to build that edge. As design and production engineers work on the look of a new model, separate engineering teams will create a plan that specifies the order in which parts are to be installed as the car moves down the production line. That plan will then be used for software to digitally model the entire factory layout, the assembly steps, the number of people to be stationed at each assembly stop and what their tasks are.

Meanwhile, other new enterprise coordination designs are transforming the very nature of auto manufacturing to the extent that “manufacturing” may be a misnomer. Whereas as late as 1990, GM made around 90 percent of its parts in-house, now every auto maker relies on coordination with suppliers; GM is down to around 62%, very close to Honda and Toyota’s 60% and ahead of Ford and Chrysler’s 68%. This goes beyond transaction-based “outsourcing” which is little more than a purchase agreement. Consider BMW’s coordination with Magna Steyr. BMW has “outsourced” – a misleading term – all the manufacturing of its X3 SUV, saving a billion dollars and five years in capital investment for a new plant. The term is misleading because this is a highly collaborative arrangement, meticulously negotiated – the contract is 5,000 pages in length. Magna brings the highest level of production quality control to BMW, which can focus its capabilities on hiring design engineers. Magna’s teams spent six weeks on site at BMW learning the company’s processes and style. BMW is as much insourcing new production engineering capabilities as it is outsourcing manufacturing activities.

Outsourcing as a transaction is not a coordination design, which is why so many companies report disappointment with the results. Co-sourcing – working together to build a joint capability – is such a design. In the distressed auto parts business, car makers are notorious for squeezing suppliers and informing – not requesting – them that they will cut prices by 5 or 10 percent to solve the manufacturer’s latest profitability crisis. Yet American Axle and Manufacturing is, in its founder’s words, “transforming Detroit into a low cost country” (and making money at it, $170 million profit on $3.7 billion in sales in 2003). It created a value space in GM’s manufacturing via its IT platform that coordinates quality management and metrics; AAM knows more about GM’s quality than GM does and uses that information collaboratively.

Timken, which makes 90,000 types of ballbearings, “surrounds” its product with services that help carmakers coordinate their production schedules. A Timken executive comments that “There are factories around the world that are focusing on one simple product, and they’re killing us on price.” Timken is not being killed on revenues and profits because it has become a specialist resource that offers services rather than just products. It “bundles” its parts into modular integrated systems. For instance, customers used to handle friction and lubrication requirements; Timken assumes that task for them, differentiating itself from the many single product competitors in Romania, Hungary and Japan who have been accused of “dumping” goods in the U.S. market: selling them below cost, contributing to the doubling of imports in 2003.

The Timken coordination design is one that enables companies to escape the commoditization trap – the constant feedback loop of deregulation, global sourcing, overcapacity, standardization and price erosion that marks more and more industries – through coordination on behalf of the customer. This is one of the marked general trends in the new value webs of global business. It underlies UPS’s logistics strategy. UPS moved from delivering packages to building the value web of coordinated relationships and capabilities that has resulted in its handling over 60 percent of all Internet electronic commerce purchases, where “handling” includes managing order fulfilment, payment, repairs, warehousing, and inventory control. The elegant feature of this service value web design is that UPS grows by its customers growing. In some ways, Amazon, for instance is “part” of UPS and vice versa; Amazon’s excellence in “service” rests on shipping speed, reliability and cost; that is, it rests on UPS. Amazon is a coordination machine; it coordinates the customer experience through its web site platform, coordinates its offers through a host of relationships with other retailers and product manufacturers, and coordinates its operations through the standardized interfaces of its technology platform.

Startup companies frequently have an edge in such innovation via enterprise coordination designs. FedEx is an obvious example. Fred Smith took away from the airline cargo operators a whole slice of business and created a new industry, through hubbing planes into Memphis, meticulously standardizing operations, and making massive investments in IT capabilities, including but not limited to its legendary tracking systems. Amazon and eBay each exploited its start up position to build its company around a highly standardized technology platform that in turn became the base for highly standardized processes that facilitated the integration of the customer experience. Both firms add more and more varieties of services to more and more communities through more and more partnerships while preserving a common interface to all customers.

In China, SAIC is a company to watch. Many commentators expect it to become one of the top four to six carmakers in the world. Its enterprise coordination design is to share its strengths with the strengths of European, Asian and U.S. car makers and launch products suited to the Chinese market that are derived from their existing models. This is not outsourcing and not quite a joint venture; it is a collaboration between potential competitors that aims at a win-win rather than win-lose relationship.

All these examples reflect the very basis of coordination as organizational priority. This was articulated very clearly as long ago as 1938 in a book that is one of the enduring classics of organizational thought, Chester Barnard’s The Function of the Executive. He was the CEO of Western Electric and probably the most influential thinker-practitioner in business history. He expressed as the primary concern for executive leadership: “the problem of organizing, the complexities involved in coordinating numerous actors of potentially divergent interests under conditions of environmental uncertainty and instability.” The challenge he defined is to transform a potentially conflict system (political) to a cooperative one (rational).

Toyota is a highly rational system in this sense. Most of its competitors have been far more of a conflict system. But GM, Ford and Chrysler are not dumb companies. Why then have they so often snatched defeat from the jaws of victory? (In this introductory chapter we focus on the Toyota/U.S. competitive battleground but the same basic dynamics are at work with Renault-Nissan, Hyundai and Honda that have their own distinctive coordination designs – Nissan for instance has been the leader in modular production which reduces the complexity of manufacturing and has been a key element in a truly astonishing turnaround of a company that had $20 billion in automotive debt in 1999 and by the end of 2004 had none and that “has become one of the leanest, fastest-moving companies in the world.” )

Our own answer to the question we posed above is hard to get across without sounding like a cliché – it’s about leadership, vision, culture and all those other often elusive and effusive terms floating around in the management literature. But what sort of leadership, built on what sort of vision and what type of culture? Our answer begins with governance: Who owns the enterprise coordination design? Surely, that ownership is the function of the executive. A barrier to such ownership has often been leadership stability. Just about major book on the history of the automotive industry highlights CEO turnover as a core factor of success and failure. The Big Three go through top managers very fast. A new chief executive brings a new strategic focus and in many instances a new and forceful personality; there is a strong flavor of the search for a hero in the stories of the shifting fortunes of the major car makers. The Chairman of Ford points to a widely-shared perception of the instabilities this has contributed to, along with so many shifts in strategy among the large auto companies: “It’s a management problem at the Big Three. Many of us have been inconsistent over the last twenty years in pursuing our strategies.”

You cannot have coordination without consistency. You cannot have consistency without an explicit design. In this auto industry context, there has been little inheritance of any coordination design. It cannot be a coincidence that coordination designs that have been truly transformational are associated with powerful leaders who make this their vision and then ensure a culture of commitment and execution that supports it. Sam Walton created the Wal-Mart design; his successors maintained it. A quick question for our readers is can you name those successors? The answer is probably not; they were skilled executives and successful leaders whose skills and leadership were built on the foundational enterprise coordination that they inherited and enhanced.

Dell Computer’s coordination design is owned and articulated by Michael Dell; it is too early to tell how well it will be inherited, though, as Wal-Mart shows, once institutionalized it is likely to take on a life of its own that is independent of leadership personality. The risk then of course is that it may become a blockage to adaptation and change. P&G’s and IBM’s highly internalized coordination designs that worked so well in the era of value chains – company power and scale – greatly inhibited response to the new “co-“ world and a fresh generation of CEOs had to break down the axioms, fiefdoms and culture that had moved the firms from world leader to cumbersome laggard.

Toyota’s Total Production System is an enterprise coordination design that is owned by the corporate executive culture. That means that it underlies strategic moves, regardless of what those specific moves may be. It is the literal foundation of strategy. And it is the platform for growth and innovation. Earlier, we stated that “the greater the variety of interdepedencies, complexity and actors that an organization can coordinate, the larger and more powerful the value web – its space of relationships and resources – that it can grow.” As with Dell, Wal-Mart, eBay, and Amazon, the value web that Toyota’s TPS enables is very open-ended and expansive. Toyota has used it to move aggressively into Europe, rapidly growing its sales and profits through the very same platforms and capabilities that it built first in Japan and then the U.S. The TPS design is an explicit part of organizational governance: the leadership owns the design. That gives it the force, clarity of purpose and political leverage to ensure that it drives coordination and collaboration instead of the firm’s units generating sub-strategies and localized perspectives and responses.

An example of what happens when such governance and ownership are missing is the decision by the CEO of one high tech firm to implement Dell’s direct selling. This was handled as a shift in business strategy, not as a coordination design. The head of Manufacturing opposed it because it would take away most of his own authority and require major changes to production processes that rested on smooth and cost-efficient scheduling versus the build-to-demand, unit by unit process Dell relies on. The head of Marketing refused even to consider the plan because it threatened the firm’s relationships with retailers – a valid concern. As a result, the company tinkered its way into direct selling, which it later abandoned. Perhaps it might have worked – with a real coordination design and committed ownership. (It might also have avoided the many comparable failures of other Dell competitors who focused on the “strategy” – direct selling – instead of the underlying and much more far-reaching coordination design that it is built on. Dell is a process company that coordinates the demand chain from customer back to Dell back to supplier and the reverse.)

That design has fended off all Dell’s main competitors, regardless of their products, distribution, marketing, organization and competitive thrust. It has no advantage in products or technology, unlike HP and Compaq, which merged, and IBM which first exited most of the PC market and then sold off its latop business to a Chinese company that was largely unknown outside China at the time. Most eplanations of the failure of these giant firms to counter Dell and grow market share and profits over the past decade center around the commoditization of the PC business. How then does Dell make so much money? Why is commoditization its ally not the enemy it is for the other players? We leave the answer to these questions for later in this opening chapter, but highlight here that a major theme in Coordination by Design is that effective enterprise coordination designs create a new innovation space. The traditional view of business strategy is to innovate to avoid commoditization. Part of our thesis is that the evidence is very strong that companies can – and must, given the irresistible forces that add to commoditization in industry after industry – innovate through commoditization as the base for adding differentiations through coordination.

Who owns the enterprise coordination design in your organization? If there is no such design or if a new generation of top managers does not create one and ensure its inheritance, then forget about creating any coordination edge. And resign yourself to the constant risk of being caught in the commodity trap.

The alchemy of coordination

That coordination edge is more and more essential in a world of globalization, deregulation, commoditization, customer power, technology, time-paced everything, and political, economic and social uncertainty, because all these can be classified under a single heading: complexity. Coordination is the battle against complexity. As complexity increases, whether complexity of environment, market, organization, or relationships with customers, partners and suppliers, coordination gaps translate to service breakdowns, cost inefficiencies and process muddle. Conversely, effective enterprise designs become a source of sustainable organizational advantage because they enable organizations to handle complexity in ways and to a degree that others cannot. Their own coordination space determines their value space.

A number of business strategists, institutional economists and sociologists have commented on the power of “organization-specific” assets, “core competencies” and “organizational routines.” Jeffrey Pfeffer ascribes this to “culture” built around people power and states that “that is what provides….. competitive leverage, the ability to almost literally make gold out of lead – exceptional returns in highly competitive, almost mundane industries.” Note the analogy with alchemy here – “turning lead into gold.” Alchemy was a mixture of pragmatics – alchemists were often brilliant technicians lacking theory rather than frauds or fools in search of Pfeffer’s transmutation – and limited knowledge.

Pfeffer is admitting here to the general status of our understanding of organizational advantage: pragmatics and limited knowledge and hence a constant churning of ideas, experience, experiments, surveys, frameworks and theories in management thought and practice. Coordination by Design aims at contributing to a shift towards chemistry rather than alchemy. Our claim is that organizational performance fundamentally rests on how components – basic elements and compounds – of work and relationships are explicitly brought together through coordination designs. The pragmatics of experience and strands of theory and conceptualization point to common principles and patterns of such designs; they may look different but Amazon, FedEx, Wal-Mart, Dell, Toyota and other exemplars are very much the same in their basics. Coordination designs are built on (1) governance, (2) value webs, (3) modularity, (4) standardized interfaces and (5) negotiation.

This list obviously sounds academic but as we examine individual organizations and historical trends in our book, it will become clear that there is nothing abstract about them. They clarify the foundational rather than the surface issues of organizational innovation and effectiveness. They provide a clearing in the forest of ideas, claims, anecdotes and rallying cries – the alchemy of business. That is surely needed. There is a sense of mystery today about efforts to explain the factors that underlie the striking successes of some organizations and failures of others that previously were leaders or that seemed better positioned than the winners. The quotation below applies as much to management alchemy as chemical alchemy:

“The idea of a living substance – known to be there though concealed from the senses – is at the core of Medieval alchemy….. It was an incredibly patient, systematic attempt to conjure up that living substance and use it as a kind of amorphous raw material for the creation of utterly unheard-of new elements…. Nature was alive with gigantic powers waiting to be freed from their slumbers and put to practical use. But what they contributed was an exhaustive testing of every conceivable alternative approach, till only the proper solutions were left.”

Take any list of strategies and methods for innovation, growth and profitability in the past twenty years and two features stand out: alchemy (meant as a compliment not a putdown) and newness. (Two scholars neatly summarize management concepts as “Desperately Seeking Newness. ) Here are just a few examples: time-based competition, core competencies, outsourcing, the wisdom of teams, customer focus, customer intimacy, the value chain, the shamrock organization, reengineering, knowledge management, the innovator’s edge, transparency, the networked/hybrid/postmodern organization, six sigma, built to last/flip, workouts, balanced scorecard, etc. The “living substance” and gigantic power that they all seek to release is the social power and energy that enables innovation and effectiveness in organizations. Their agenda is that of Chester Barnard almost seventy years ago: to turn potential conflict into cooperation.

On the surface, the items on the list all look very different just as – switching the metaphor from alchemy to chemistry – books, wooden tables, and human tissue appear different but all are built on compounds of carbon, oxygen and hydrogen. Look at the wonderful variety of human forms – race, gender, size, shape, etc. That variety is built on the very same chemical elements; of every 200 atoms in our bodies, 126 are hydrogen, 51 oxygen and 19 carbon. (the other four are nitrogen (3) and “other” (1) ) What if all the wonderful organizational varieties of structure, process, culture, and strategy are built on comparable basic compounds? What if they are new phenomena that rest on very old principles that are the equivalent of chemical engineering? What if organization fundamentally rests on coordination designs? The answer to the “what if” questions is resonant in its implications: coordination can then be handled as a systematic discipline that helps make the transition from management alchemy to scientific method.

It is the combination of the theoretical foundations of coordination as the very core of organization, the enterprise as the base for coordination designs, and the insights of management alchemy that leads us to choose chemical engineering as our overall framework for helping managers develop the discipline that can help their organizations gain the coordination edge. Chemists rearrange molecules to create new compounds; chemical engineers “take chemistry out of the laboratory and into the factory and the world around us.” Making innovation, productivity, growth and organizational culture a source of sustainable organizational edge increasingly rests on the ability to fit together business modules, more and more of which are standardized in their interfaces – how they connect to other components – and are often individual commodities that are available to every player in a business ecosystem and that thus remove any potential proprietary advantage. The compounds that this chemistry creates show up as process excellence in supply chain management, customer service, quality, time to market, operational efficiency and organizational agility.

The coordination edge: evidence and examples

Coordination is the ability to bring together processes, people, technology and organizational structures to build capabilities that go well beyond what localized combinations of these resources can achieve alone; fitting the enterprise pieces together then outperforms what an organization can do by focusing on individual activities, organizational units and operations. The classic example of the difference is the literal transformation of supply chain management over the past decade. Previously, this was a set of pieces: procurement with its own authority, responsibilities, culture and systems, and the same for production scheduling, warehouse management, distribution, and accounts payable/receivable. Customers and suppliers were disconnected from the company. Purchasing, production, sales and customer service often were marked more by inter-unit conflict than cooperation.

That has changed dramatically in the past decade. This has largely come from brilliant alchemists at work. Sam Walton, for instance, recognized that each of his stores was very different in terms of customer demographics and buying patterns and that he needed to offset Sears’ and Kmart’s massive centralized buying power and standardization by creating a supply chain agility that matched central supply to local demand. Circuit City’s CEO equally saw a new landscape for business innovation via information technology as the coordination base for getting the right goods on the right shelf in the right amount at the right time; he had started out in the company as a computer programmer. Cisco’s leaders moved in parallel with Dell, GE, and others to exploit the opportunity of the Web to coordinate the links between customer demand and supply chain. (Cisco’s plunge from being being the cover page of Fortune magazine as “Is this the World’s Best Company?” was basically caused by a later coordination gap; it neglected the coordination of its demand forecasting chain and was stocking up $2.2 billion in excess inventory as its dot com and telecommunications industry customers were cutting back on purchases.) As mentioned earlier, UPS along with FedEx made customers’ supply chain needs its new services base.

The impact of such enterprise coordination of supply chains has been profound. It is summarized in Table 1.1 below.

Table 1.1 Examples of the impact of supply chain management coordination

The top 10 percent of SCM performers in any industry use half the working capital per unit of sales than their median competitors (Source: University of Maryland Supply Chain Management Center)

The fraction of U.S. GDP tied up in inventory and SCM costs has dropped by 40 percent (The Economist). The amount tied up in distribution and transportation has halved, from 19% to 9% of GDP.

“Supply chain excellence” companies use 15% less inventory, have 35% shorter cash-to-cash cycle times and 60% higher margins than the average large firm. (AMR Research)

The profiles of companies that have made SCM and enterprise coordination priority show on average (Source, Keen et al):

• Reduction in inventories as number of weeks sales: a factor of 3
• Reduction in order administration costs: a factor of 4
• Improvement in procurement costs: 30%
• Price reductions for supplies: 3-5%
• Reduction in number of orders with errors: from 20% to 0.1%

The impact of enterprise supply chain coordination is easy to measure in “hard” financial and operational terms, as shown above. In other areas, such as customer service coordination, knowledge mobilization, collaborative alliances, or strategic innovation, the payoff is harder to quantify. There is no reason to assume that it will be less in scale than that for supply chain coordination. There, the leaders use half the working capital per unit of revenue than their average competitor, have half the overhead and operate at at least twice the speed. In the auto industry, the coordination of the highly complex value webs involved in designing and launching a new model indicate the scale of opportunity. For Toyota, the time from concept to showroom is now under two years versus the industry average of three. Case studies of nine business process transformation initiatives explicitly built on a theory of coordination and supporting technology that helps coordinate flows of requests and commitments shows a reduction in cycle time of 40-70% with improvements in cost, productivity and error reduction of 15-40%.

Extend such gains across customer service, time to market and organizational agility and enterprise coordination designs open up obvious and significant advantages. For executives searching for the elusive Return on Investment for such coordination initiatives as enterprise IT architectures, supply chain excellence, accelerated time to market and knowledge coordination, we suggest that all the evidence shows it averages 40 percent. This is what the coordination edge is worth in short-term results. That is a better payoff than for most localized investments. When the enterprise coordination design generates a long-term sustainable edge, the payoff is incalculable except through the flow of earnings it creates.

Three exemplars: Dell, Southwest and Wal-Mart

Today, we see the evidence of the power and reach of coordination as competitive edge and long-term payoff in the continued success of such firms as Dell Computer, Wal-Mart and Southwest. These are companies that logically should never, ever have been able to achieve their sustained revenue growth, cost advantage and profitability. Each is in a commodity industry dominated by price erosion and growing competitive intensity. None has any proprietary source of product advantage, and they themselves drive increased commoditization through their aggressive price-cutting. Wal-Mart passes on the price reductions that it demands from suppliers to the customer, and Southwest has been the price killer in the airline industry. Dell is in a sector where component prices typically drop one percent per week. Not one of the three offers a single special product that stands out in its features from the competition.

Yet for several decades they have consistently grown revenues, profits and returns to shareholders at a rate well above even the leaders in industries that have enjoyed proprietary sources of advantage, such as pharmaceuticals, software and luxury cars. In the 1970s through the 1990s, Wal-Mart and Southwest produced shareholder value returns of over 16,000 percent. Southwest has been consistently profitable for over thirty years in an industry where not a single competitor has ever been in the black for five continuous years. Dell has routinely earned 100-200 percent return on its invested capital. Even in recessionary periods the three firms grew and grew and left their competitors at a loss.

Those competitors have included strong companies with advantages of scale, history, and in many instances products, research and development, and marketing. Sears, Kmart, HP, Compaq, United, US Airways, and IBM are not lightweights and yet they were consistently beaten in every competitive ecosystem in which they came directly up against one of these three firms, to the degree that more and more of their business strategy was defined less by their own ambitions than the need to find a way to counter the threat from the coordination leader. They could not sustain any offsetting product or market edge and either sought out a safer niche and specialization or in several instances filed for Chapter 11 protection against bankruptcy. (Kmart and Sears merged in late 2004, after Kmart came out of Chapter 11; the new company is explicitly looking to follow Wal-Mart’s strategy of supply management and store replenishment coordination.)

A striking instance of how Wal-Mart forced the competitive shift from premium products to coordination as edge is the announcement by Toys”R”Us in mid-2004 that it was considering abandoning its core business of selling toys and halving the company. It had been the “category killer” in retailing in the 1990s and its premium products had pushed many competitors into bankruptcy. It looked as strong then as Wal-Mart does now. Wal-Mart took away its product edge and commoditized the toy industry. As it aggressively entered the market, within a few years first FAO Schwarz – the top of the line company – filed for Chapter 11 and then Wal-Mart killed the category killer by pushing commoditization. It could afford to do so because its drop in prices is offset by its supply chain and replenishment capabilities. It can match any retailer in the products on its shelves and outperform them in the processes that get them on the shelf; well over half of all toys sold at Christmas have been on the market for under a year, so that Wal-Mart is able to make “fastest” also equal “most up to date” and “in fashion”, leaving slower players with little room to manoeuver.

Just as Wal-Mart has pushed previous retail giants like Kmart and Sears into a copycat and catchup reaction, Southwest has similarly taken away strategic option after option from the full fare airline carriers. Its coordination capabilities have resulted in an operating cost of around 8 cents a passenger mile (its imitator Jet Blue is even lower, at 7 cents. Southwest’s most dangerous competitors are the companies that deregulation and its own success have generated). The figures for the five largest carriers are between 12 and 16 cents. How can they find and price a premium service that will offset a 50-100 percent cost difference in what is recognized as a commodity business? How can they also do so when they are either in Chapter 11 bankruptcy or rumored to be getting ready to file for it? (United, US Air, Delta, Air Canada, American Airlines; in the international sphere Al Italia, Swiss Air, Sabena, and many other carriers are either going or gone.)

The majors cannot create a product edge in this context. They have to search for a coordination edge somewhere, somehow. Our own guess is that only American Airlines stands much of a chance because it has always been a process-smart company whose many successes came from its coordination designs that drove the industry for twenty years, just as Toyota’s have: hubbing, yield management (profiting by cutting revenues), its frequent flyer program that was tightly integrated into its passenger reservation systems and its dominance in using its Sabre airline reservation system not just to handle reservations but to coordinate relationships first with travel agents, then with elite customers via the Web, and then to build a new value web on the Net, Travelocity.com. But American has just about zero chance of building any new product edge.

It is not just the majors that are dropping out of the financial skies. The Southwest competitive edge has been assumed to come from its low fare/low cost business model. But new entrants that focused just on the “low” are also going broke. In late 2004, ATA filed for bankruptcy and Independence Airlines, a startup noted for superb marketing and good service, was admitting to major financial problems. They were competing by transaction and the transaction continues to be commoditized.

Meanwhile Southwest journeys profitably on, as do Dell and Wal-Mart. The three exemplars of growth, profits and reputation have built and sustained their coordination edge rather than relying on a product advantage. For Wal-Mart, the coordination edge is its store replenishment and supplier management capabilities. Is Wal-Mart its stores or its supply chain? For Southwest the edge is its lean operational processes that translate to lowest prices and outstanding customer service. Southwest has won many industry awards for best baggage handling, best service, best on-time performance and fewest customer complaints. It has never furloughed an employee, owns one of the most modern fleets, and has a first-rate safety record. It likes to highlight the “crazy” aspects of its founder’s personality and business model, summarizes its philosophy as “NUTs!” and claims humor as one of the core aspects of its culture.

All this is part of its governance – direction-setting, policies and organizational prioritization at what we term in Coordination by Design the macro level of planning – but craziness does not create best baggage-handling performance or pay for new planes. That comes from meticulous attention to detail from the macro level of strategy to the micro level of execution. For instance, when a Southwest team was commissioned to look at other companies for lessons in how to improve the speed of cleaning and refueling airplanes, the company was already the industry leader and could afford to coast a little. Instead, it benchmarked itself against the standard set by the Indianapolis pit crews in their drills that refuel and change the tires on race cars under conditions of second-by-second time pressure, danger and competition. The team looked there for lessons to be gained and then Southwest improved its performance even more.

Dell’s coordination advantage is built on its supply chain management, build-to-order capabilities, and meticulous focus on every element of process to the degree that it routinely uses half the overhead of its leading rivals per unit of sales. It aims at middle-of-the-road products that are backed by impeccable coordination of logistics and customer service. It has tripped over its own feet a few times, but its coordination platform enables a fast readjustment and repair, as in the instance of outsourcing its help desk to India and having to bring it back to the U.S. because of customer dissatisfaction. It continues to grow, spending a third of HP’s budget for R&D per unit of sales, meanwhile forcing HP to drastically slash its own prices to match Dell. How unlikely it would have appeared just a few years ago that HP, the dominant player in printers, would now be selling a multi-function inkjet machine for around $80 with an additional $20 rebate and admitting that it is taking losses across its consumer product range in order to somehow ward off Dell. (As we discuss later, HP has adapted its coordination design for printers, though not for most of its business; it has outsourced all its printer manufacturing and also maintenance, repairs and returns which are handled by UPS. As with Dell as an enterprise and Wal-Mart, HP is the brand for its printers even though it does not handle its own product. Coordination designs and branding increasingly go together.)

Asked in an interview “Is what you are describing fundamentally different from outsourcing?” Michael Dell made it very clear that Dell is explicitly built on a coordination design: “Outsourcing…is almost always getting rid of a problem a company hasn’t been able to solve …That is not what we are doing. We focus on how we can coordinate our activities to create the most value for the customer.” [Our emphasis added.] In many ways, Dell’s strategy has been to coordinate other companies’ capabilities through a value web that limits its own capital needs and exploits their capital investments. “So companies that were stars ten years ago, the Digital Equipments of this world, had to build massive structures to produce everything a computer needed. They had no choice but to become expert in a wide array of components, some of which had nothing to do with creating value for the customer….. As a start-up, Dell couldn’t afford to create every piece of the value chain. But more to the point, why should we want to? We concluded that we’d be better off leveraging the investments others have made and focusing on delivering solutions and systems to customers.”

There is a common thread running through not just these three examples but across just about every instance of a company transforming its competitive ecosystem through a coordination design. Examples from the past decades include Toyota, FedEx, Domino’s Pizza, and McDonald’s, each of quite literally defined a new industry (FedEx, Domino’s and McDonald’s) or so redefined an existing one (Toyota) as to in effect make it a totally new competitive ecosystem. Add to the list more recent and less well known companies such as Li and Fung, TAL, and Magna, all of whom coordinate complex new value webs of relationships, plus the successful innovators in e-commerce such as Amazon, Yahoo and eBay, and the pattern remains the same. The renewal of such companies as Procter and Gamble, the shifts in GE’s strategy that have maintained its dominance, and the doubling in size plus even larger growth in profits of Shanghai Automotive Industry Corporation rest on coordination-as-strategy. (Table 1.2 summarizes the coordination designs.)

Table 1.2 Illustrations of coordination designs

• FedEx: Coordinate all a customer’s logistics needs via cross-linking of ground and air services through an integrated technology platform
• Toyota: Coordinate global manufacturing via standardized components; coordinate global product development
• Li and Fung: Act as a global “orchestrator” for thousands of specialists in apparel manufacturing, contracting to create a mutual balance in value gains
• TAL: Extend dress shirt design, manufacturing and store inventory management into the customer’s processes and take responsibility for end-to-end demand-supply coordination
• Magna Steyr: Make coordination of customer processes the differentiator of commodity parts
• Amazon: build from the customer contact point back to add new product segments and services via a modular platform that coordinates the complete customer relationship, partners, service providers, and even outside systems developers
• EBay: create and grow a set of communities, acting as relationship cooridnator
• GE: optimize process capabilities through selective standardization and global centralization and “turbocharge” innovation by internal crosslinkages and reuse
• Procter and Gamble: switch from in-house business and product development to a collaborative network of help and innovation

All these firms fuse three levels of coordination capabilities – top, middle and bottom, macro, meso and micro. At each level, they provide governance – a distinctive view of the business landscape that helps guide the organization, plus the policies and blueprints to ensure enterprise-wide coordination. They establish capability “imperatives” – the must do’s of process excellence and differentiation. They ensure that execution enablers provide the resources, incentives and – most difficult of all – the motivation and means for collaboration. Figure 1.1 shows the resulting map that, as we discuss in Coordination by Design, captures how leaders such as those listed above build and sustain their coordination edge. We term this discpline Enterprise Coordination Engineering.

Figure 1.1 The Enterprise Coordination Engineering blueprint

This blueprint is to a large degree the basis for the coordination of coordination. Looking left to right, at the macro level of the organization, landscaping – the leadership view of the business scene – must drive the principles for building new value webs, which in turn must drive the incentive structures that ensure effective cooperation and collaboration among the parties, most obviously the organization’s own employees. Looking top down, landscaping must drive the architectures and policies essential for integration of efforts, resources and technology and process platforms. Those in turn drive the financial imperatives for capital efficiency, cost structures and productivity measures.

Within the map, the choice of process clusters to invest in as priority – supply chain or customer experience design, for example – depends on policies and blueprints being in place and depend on the value principles. This choice of capability targets drives process methods and knowledge mobilization. The same “drives-depends on” dynamic applies across and down the blueprint components.

The main chapters of Coordination by Design review the components of the ECE blueprint and their interrelationships in detail and many of the terms obviously first need to be defined and justified. We highlight two points here: the heterogeneity of the components and the primacy of governance. The heterogeneity of the map’s elements in itself helps explain why enterprise coordination is so difficult to achieve. It contrasts with what we term single-strand approaches to innovation, those that, as with business process reengineering, too often ignore the governance role of enterprise incentive structures, or business strategy models that do not address the move from top level governance across to training and tools. The blueprint map requires a careful and continuing balance and even fusion of strategy, policy, human resource development, corporate finance, technology and execution at all three levels of macro, meso and micro. This is a constant management challenge. (Even mighty Wal-Mart can get out of balance. It is clear that in recent years, it has neglected its governance of reward and incentive systems. These have led to many pressures on store managers that encourage behaviors that conflict with the company’s stated values. It now faces class action suits for discrimination against women workers and a growing bad press for its labor practices. )

The blueprint highlights the primacy of governance in driving the definition and implementation of value webs (across the map) and the internal structuring of policy and financial planning. This is why we ask the question “Who owns the enterprise design?”

Our thesis that is illustrated by the blueprint is simple in its basics:

1.  Coordination can be shown at the level of both theory and practice to be the very foundation of organizational structure, process and economics. That, not business “strategy” or business “model”, is the driver of competitive edge.
2. The history of organizational and competitive transformation can equally be shown to be driven by the invention and application of new coordination designs.
3. History also shows a growing link between commoditization and coordination as the determinant of sustainable competitive differentiation.
4. Realizing the coordination opportunity rests on (1) an enterprise coordination design and (2) systematic discipline.

Coordination is not control

The last point is the driver of our analysis and recommendations in Coordination by Design. Coordination is too rarely viewed in enterprise terms but instead addressed piecemeal. Each cell in the blueprint shown in Figure 1.1 poses individual coordination challenges, many of them handled as an add on to other initiatives. For example, business leaders frequently make calls for “collaboration” to move strategy ahead. IT units struggle with how to ensure integration of individual systems. Crossfunctional teams are assembled to work on business process transformation. New roles are created to enhance customer relationships, often to handle breakdowns in coordination and problems of department barriers to communication and information-sharing. Incentive and reward systems are retooled to motivate collaboration.

These are largely reactive responses. They also too easily overlook the coordinational foundation that underlies, say, “culture” and “collaboration.” One company we surveyed is fairly typical in this regard. It is one of the largest high tech firms in the world. It has positioned its strategy to work with customers to advise them on how to integrate their IT resources and best source services and capabilities, a major shift from its historical focus on creating proprietary products at a premium price. This shift from product to service implies a coordination design but is not in and of itself such a design. Coordination is straining the strategic bounds of the firm’s operations. This is a very complex organization that is made more complex by this commitment to work with customers, outside parties and even competitors. That obvously demands a new coordination design explicitly built on meeting the complexity challenge.

Instead, it relies on the traditional vehicles for simplification: the organization chart and executive authority. The company is highly compartmentalized, with its hardware, software and consulting units almost separate firms. Internal surveys report major barriers to cooperation across units; it takes too long to assemble teams, the product and “silo” cultures impede innovations that do not fit directly into existing plans and responsibilities, there is widespread mistrust, and while employees report that there is plenty of informal cooperation – “when asked” – they see a lack of speed, trust and real empowerment.

Top management understands both the problem and its importance. Accordingly, it has launched a number of initiatives to build collaboration. These include changes to the incentive system and new management development programs. In addition, the topic of collaboration has been elevated to the main theme of key meetings that bring together managers from different regions and business units for reviews, planning and motivation. Our estimate is that well over $20 million has been committed to these efforts.

Will they work? In our view, no way. They assume that collaboration and culture exist as independent organizational features and forces that can be bolted on to strategy and structure. There is plenty of skilled alchemy at work here. The management development programs bring in noted practicioners in the pragmatics of change management and leadership development – individual consultants, academics and firms with well-proven training programs. They will certainly produce results at the individual and group level. So, too, will the strategic advisers being brought in to sharpen the firm’s marketing.

Why we say very bluntly that the initiatives will in the end have little impact comes back to our ECE map. The company’s macro level governance totally ignores coordination. It contains a built-in contradiction: focusing capabilities to meet customer needs but at the same time organizing those capabilities by product line and geography, with budgets and performance metrics tightly linked to business unit performance. The firm’s blueprints and policy drivers are fragmented, as are the financial imperatives. Falling hardware prices are putting growing pressure for immediate cost savings, which strains the unit’s ability to fund R&D. The higher margins earned by the consulting services group ironically mean that it is often more profitable for it to recommend a competitor’s products rather than its own firm’s, due to the way “profit” is calculated in the firm’s budgeting and incentive systems; senior executives are measured on a coordination basis – total account profitability – but the business units are rewarded only for meeting specific localized targets.

At the process level – meso – there are several ongoing major investment initiatives, especially in the area of supply chain management. Each of these shows substantial payoffs – hundreds of millions of dollars. Those payoffs will probably be realized. A flow of SCM projects over the past five years has produced savings of as much as a billion dollars. Yet the company’s profits have not grown by as much as those savings. Here, process coordination in one area is subsidizing miscoordination elsewhere. That is not exactly a blueprint for profitable growth.

This is a strategy-driven company. That is how it thinks about innovation, marketing and competitive positioning. Its leaders very much rely on organizational structure to support strategy. This is part of the dominant management tradition from the 1950s to 1980s, where the axiom was that structure follows strategy and that there is a “right” structure for a strategy. This has been summarized as the command and control approach to organization. The disconnect that this company has created for itself is that its structure is built on geographical, product, market segmentation and functional area units while its operational needs increasingly rely on bridging these boundaries.

The disconnect is already causing concerns and strains; hence the growing emphasis on collaboration. The strains are likely to increase because the strategy options are more and more constrained, in that every major firm in the industry has little choice but to follow the same broad principles and targets. They all face commoditization and price erosion in previously high margin businesses where premium products commanded a premium price. They all have to respond to customer demands for integrated solutions that invariably require competitors to cooperate. They all must mesh very different cultures ranging from computer scientists to software developers to business consultants. This disguised company could be any one of a dozen major IT companies; there is little way to distinguish them from each other in terms of their core strategic business model. It certainly isn’t Dell.

Without a coordination design that resolves the preceived problems of trust, empowerment and collaboration, this company will struggle in its marketplace. It is among the leaders and is likely to remain so, but its performance is way below its ambitions. As observers and advisers, it has been frustrating for us not to feel able to help. The language of management discourse is built around strategy, structure – and control. (We hope that one of the practical values of our book to our readers – and to ourselves being able to help such clients – is to provide a new language for discourse about coordination that helps create productive “co-“ dialogues.)

Historically, large organizations tried to reduce complexity and hence simplify coordination through control: organizational structure, procedures, and budgeting and reporting systems. They built value “chains” based on in-house capabilities that limited outside relationships – and hence complexity. They also aimed at developing distinctive cultures that facilitated internal cooperation. They were closed systems, often very secretive and marked by “NIH” – not invented here – that dampened innovation. Rather than opening up the organization’s value spaces by focusing on the coordination of relationships, they emphasized internal administration.

AT&T, IBM, Sears, Procter and Gamble, and General Motors built powerful value chains and for decades were as dominant a force in their industries as Dell, Wal-Mart and Southwest are today. But they were late and cumbersome in making the shift from control to enterprise coordination. They were very well-run companies. Looking back at business books and articles of the 1970s, these were the exemplars of strategic planning, innovation, marketing, human resources, training, R&D, management development, and sales. They were superbly managed, within the assumptions, axioms, and constraints of the control model. Their crash was huge. AT&T, for so long the most highly valued company in the world, was removed from the list of firms that forms the Dow Jones Index in 2004. IBM became a basket case and was in danger of being broken up and even though it has come back from the near dead, its profit growth has been anemic. P&G’s board ousted the CEO brought in to transform the ailing firm. GM, along with the other Big Three U.S. car manufacturers, continues to struggle to keep close to Toyota. Sears spent years repositioning itself, with limited growth; its 2004 sales of $41 billion were within a few hundred thousand dollars of those in 2001, 2002 and 2003. “Sears did not truly acknowledge Wal-Mart as a competitor until 1992.”

From the perspective of our book what is most striking about these companies is that their new CEOs assigned to rescue the ailing organization uniformly zeroed in on coordination as the main explanation of their erosion. They had had no coordination designs and in the end they lost control of their environment and own destiny. Table 1.3 provides sample quotations.

Table 1.3 Changing course: from control to coordination

A.G. Laffley, P&G “We [the previous CEO and himself] both felt we absolutely, positively had to get more innovation….. He tried to drive it internally. He tried to rev up the R&D organization, supercharge them, and hoped that enough would come out of there that we would achieve the goals of commercializing more of it and globalizing more of it. We got in trouble……. My hypothesis is that innovation and discovery are likely come from anywhere. What P&G is really good at is developing innovations and commercializing the, So what I said is, “We need an open marketplace…. There are a lot of good inventors out there.” In the fifteen years up to 2003, P&G had developed just one blockbuster new product. Since then, it “has rivals in a wringer: Colgate and Unilever are hurting as it rolls out creative products and marketing” (BusinessWeek, October 4, 2004)

Lou Gerstner summarizes what he found in taking over as IBM’s CEO in 1993: “Other IBMers practically had to ask permission to enter the territory of a country manager. Each country had its own independent [financial] systems. In Europe alone, we had 142 different financial systems. If we had a financial issue that required the cooperation of several business units to resolve, we had no common way of talking about it because we were maintaining 266 different general ledger systems.”

The ECE blueprint in Figure 1.1 captures the executive commonalities among coordination design leaders. At the top of the organization, strong personal leadership explicitly establishes the governance frameworks and blueprints that create the coordination edge. This is what we mean by titling our book coordination by “design.” Michael Dell, Sam Walton, Herb Kelleher, Fred Smith, Jeff Bezos, Ray Kroc and Meg Whitman saw a new business landscape that led them to a different style of business model from their competitors. At the same time, they went beyond Grand Concepts and competitive strategy to ensure that the resources of the organization were highly focused on building distinctive capabilities. They drove the policies, incentives and platforms needed for effective action at the meso level – the middle link between business model and operational execution. Each of the firms is process-driven, with four main “clusters” of investment and excellence: supply chain, customer experience design, business development, and value web relationships.

They also enabled and guided the culture, incentives, training – even indoctrination – and tools for meticulous precision in operations at the micro level. For an ECE-effective organization, no detail is too small for attention. But the choice of detail rests on the priority process clusters, which rest on governance which in turn is driven by landscaping. Strategy is supported by process, which is embodied in execution. We observe that the coordination design is communicated not just in the form of the standard vision statement but as a much more operational set of directives that fuses macro, meso and micro. This is articulated as The X Way. One outstanding example is the Cemex Way. (See Table 1.4). Cemex has received a great deal of press and many awards for its innovation in moving from the 35th largest cement companies in the world to one of the top three and the most consistently profitable. The Cemex Way is the foundation for its entire business strategy that exploits opportunistic acquisitions of companies which it integrates into its coordination design via nine standardized priority processes.

Table 1.4 The Cemex Way

Cemex’s business strategy: acquire weaker companies across the globe and integrate them within 6 weeks into the company

Standardize nine core processes that are transferred to the new firms

Build a post-merger integration team composed of high flyers with a strict tinetable and responsibility for making the integration

Quotes from Cemex managers:

“We have learned how to identify and share best practices across a global network, in part by installing common business practices and a common information technology platform throughout our system.” (Chairman, speech to financial analysts, late 2003)

“What we did over the past ten years, I believe we can do even better during the next ten years, in part because of the platform we have built and in part because of the lessons we have learned.”

“The goal was not standardization for its own sake, but rather a common platform that would enable common performance measures and the development of a common base of business knowledge.”

Each Cemex Way team “was sponsored by an Executive VP for that core process….. Their mandate was to identify the company’s best practices and incorporate them into standard platforms and to execute them throughout the organization worldwide…. A profound organizational impact of this program would be a cultural shift towards accepting information process standardization.”

“When we acquire a company, we talk cement…..We have a single platform.” (VP of Planning.)

Cemex is an innovator in a commodity industry. Innovative commoditization is not at all an oxymoron. The builders of a coordination edge constantly invest in and even invent synchronized and integrated business process capabilities. They aggressively use information technology – computers, telecommunications, the Web and data resources – to provide a platform for coordination. They explicitly build their business models, leadership messages, cultural capabilities and reward systems to ensure this integration and synchronization. This is extraordinarily difficult to achieve and sustain across the enterprise, which is why it creates what economists term an ”organization-specific asset.” Dell holds over 200 patents for business process – coordination – inventions and not a single one for technology products. Wal-Mart is the pace-setter for RFID tagging to add to its coordination of inventory management. Southwest was among the very first airlines to provide on-line self-check in. These tools are nested within the enterprise coordination design.

Such nesting is for us the key to fitting everything together. To give an obvious example, if – as is so frequent – the firm’s incentive system lags its strategic drivers, then the likely result is that of Merrill Lynch. ML invented the first IT-driven coordination design for integrating the customer relationship in financial services, the Cash Management Account, that linked all a client’s transactions and accounts to optimize returns and simplify daily life. It took away from the banks around $80 billion of deposits. But the innovation lost momentum simply because of a disconnect between the strategy and the incentive system. Merrill’s account representatives were rewarded on the basis of trades of securities in client accounts; they also viewed clients as their own relationship and wanted to be able to move their business with them if, as is common, they themselves moved on to another firm. CMA accounts often generated few trades and locked the client – or rather – the rep – into Merrill. The incentive system was not nested into the enterprise coordination design.

An outstanding instance of coordination-as-innovation is FedEx, which is basically a coordination machine; every area of planning and execution shown in the cells of our ECE blueprint is nested within the enterprise design. Its tracking systems, guaranteed on-time delivery, and flight operations hubbed into Memphis are embodiments of blueprints for explicit enterprise coordination engineering: systematic, disciplined and comprehensive infrastructures and policies. At the level of execution, the same rigor applies. FedEx’s Human Resource systems ensure collaboration and accountability. All the parts nest into the whole.

Toyota’s TPS (Toyota Production System), McDonald’s standardization of its operations, and 3M’s innovation organizational infrastructures are other examples of an inventive coordination design that was not just part of its operations but at the core of each firm’s business model and business strategy. Many organizations can match such coordination leader’ skills in handling individual elements of the enterprise coordination resource but they do not fit them together anywhere near as effectively; they are not part of its governance blueprint but sub-strategies. So, for example, they invest in business process reengineering – at the local level. They adopt TQM or Six Sigma methods. They invest in information technology for specific applications that support departmental or functional area needs. They streamline their procurement system but it does not link well with their customer service resources. They use the Web as a selling tool but it is not integrated with its other channels.

In many instances they explicitly learn from and/or copy the leaders or try to hire away key managers, as McDonald’s rivals did in the 1980s, to no effect. The whole remains just the sum of the individual parts, not the multiplicative force that the coordination design enables. Conversely, if the coordination design loses its coherence and its tight linkage to top management governance and strategy, as happened with McDonald’s, the entire business is put at risk. McDonald’s weakened its rigorous training, key to its standardization of product and process execution. It added new premium products and complex pricing schemes that reduced rather than improved coordination. Other fast-food chains began to claim back a product edge.

Déjà vu all over again: the historical pervasive of innovation and industry transformation through coordination designs

The coordination edge is nothing new. Going back through time, as Table 1.5 shows, new coordination designs have been the recognized landmarks in business evolution and often even revolution over the past two centuries; business is entirely different after a competitive leader successfully implements them. Adam Smith’s division of labor created what is still the foundational blueprint for the coordination of work. Samuel Colt, the gunmaker, invented the use of standardized and interchangeable parts that is the very base of modern manufacturing and increasingly the core of today’s interorganizational value webs; he tripled the productivity of gun making. Max Weber’s invention of the meritocratic “bureaucracy” professionalized management as coordination. Henry Ford’s assembly line as manufacturing coordination and Frederick Taylor’s effective creation of business “process” as workflow coordination basically launched the century of the Fortune 100 firm; Peter Drucker states that “All, repeat all, the productivity gains of the twentieth century are the result of Taylor’s work.” Alfred Sloan, who invented the matrix organization when he headed General Motors, and Chester Barnard, CEO of Western Electric, were among the executives who helped shape the organizational structures of large companies to handle the core dilemma of enterprise coordination: how to combine differentiation, agility and flexibility via decentralization with integration and economies of scale via centralization.

Table 1.5 Landmark coordination designs

Leader/originator Invention

Adam Smith Division of labor; still, regardless of its critics, the core of specialization and rationalization of operations; the new extensions enabled via
coordination technology ensure more and more effective coordination across the divisional boundaries

Samuel Colt Standardization of interchangeable parts: core to modern modular manufacturing, with the extensions being to standardize the interface between the modules

Henry Ford The assembly line: still the foundation of manufacturing

Frederick Taylor Scientific management; created the concept of business “process” and process methods

Alfred Sloan The matrix organization and SBUs: the breakthrough in balancing the relative advantages of centralization and decentralization

Robert Coase Transaction cost economics: the elegant underpinning of the modern theory of the organization and of the practical realities of outsourcing

Juran, Deming, Ohno, Total quality management: the foundation of process coordination and integration

Such coordination designs changed the entire rules of competition across the business landscape. Many of the names listed in Table 1.5 may appear to be only of historical or academic relevance, but their impact has been long-lasting; indeed, almost every effective design is a superstructure built on their infrastructure foundations. They are timeless. If you look at the many other influential models of business strategy and organization that did not sustain their influence to the same extent, maybe the explanation is that unless they address how to turn strategy into coordination capabilities they are likely to be just a temporary rather than permanent contribution to management practice or even just fads. Coordination designs are the embodiment and realization of strategy, structure and process.

Coordination is extremely difficult to design, build and sustain. Accordingly, most organizational practices are built in pieces. Decentralization aims at enabling action at the local level, at the cost of coordination; the pieces then drive the system. Centralization aims at reducing coordination complexity, mainly through standard operating procedures and organizational regulation, often at the cost of flexibility and innovation. The system then controls the pieces. Only rarely do we see organizations that create centralization-with-decentralization; the pieces fit into the system and the system fuses the pieces.

The key to achieving such fusion is to take an enterprise view of coordination as the foundation of the organization in action. “Enterprise” has several meanings. Most obviously, it means initiative, innovation and entrepreneurship. In the business context, it is interchangeable with the word “firm.” The main dictionary definition of enterprise is “a piece of work taken in hand, an undertaking, especially one that is bold, hazardous, or arduous….. the action of overseeing and managing.” (Oxford English Dictionary). “Enterprise” no longer reflects a distinction between the private and public sector in this regard. The main drive in government organizations is to become more enterprising and in particular to be more effective in coordinating services and interagency operations and information. In public policy, the terms enterprise “culture” and enterprise “zone” reflect a commitment to economic growth that fuses government and business. All organizations now must be enterprising.

The thesis of our book is that enterprise equals coordination. The history of business innovation has been, is and will continue to be paced by coordination designs that span the enterprise as an organization and across its wider outside relationships, not just at the business unit, team, process or project level. These designs are the core of enterprise as innovation. They have to be bold and are certainly arduous; the very source of coordination as sustainable competitive edge is that it because it is so complex to achieve it provides an organizational edge that cannot be easily copied or bought in from outside acquisitions.

About this book

This brief and discursive review of the coordination imperative provides the orientation for the rest of Coordination by Design. Our book is best described as “reflective.” We offer you, our audience of managers, consultants, researchers and educators – anyone involved in or interested in the “function of the executive” – a Grand Tour of coordination. This is not a theoretical book but we include a review of theory where that helps reflection – thinking about where what we write about stimulates your own insights or suggests new possibilities for discussion, planning and action. It is in no way yet another single idea, rallying cry, pop business book. We draw heavily on examples, as we have in this introductory chapter, and we want to make our analyses and recommendations practical and concrete. Obviously, at times we will overargue our case in the interests of sharpening our messages. But we do not in any way view our ECE frameworks as a “methodology” or Truth. They are a way of organizing a very complex topic into a coherent whole and at the same time drilling down from big picture to practical details. They are frameworks for reflection.

We begin our analysis in Chapter 2 with a review of perspectives on coordination – theory and practice. In Chapter 3, we introduce some of the key general principles of coordination, the most critical of which is business modularity and standardized interfaces. We move on to explain and apply our ECE frameworks and in doing so to focus on the very difficult issue that comes up again and again in our teaching, research and consulting: where and how can people at any level of the organization take effective action in contributing to coordination when they are not in charge of key macro level decisions. In the remaining chapters, we fill out the cells of our map.

Coordination is universal. In this first chapter we have relied on case illustrations from private business, mainly from the U.S. We chose to do so because these examples are well-documented and familiar to our intended audience. In later chapters, we include examples from across the globe from both the public and private sector. We work internationally with many government agencies, especially in the areas of e-government and regard coordination as the true crisis issue for the public sector. Citizen service, security, budget cuts and other economic, political and social pressures are forcing demands for interagency coordination in an environment where basically there are no enterprise coordination designs. We hope the reflective public sector executive and planner will find some hope in our book about how to begin to resolve this notorious problem.

The most important aspect of our book is that it is not hypothetical or about some vague future. In many ways it is in itself a reflective synthesis of a wide variety of sources and cases in order to begin the shift from alchemy to chemistry. That reflection leads us to several conclusions that surprised us, and that seem to have very substantial implications for effective organization and management. We list them tersely below and hope that you will be interested enough to read the rest of our book and that at the end you will agree with our findings and be able to make use of them. The first discovery for us is that the alchemic concepts of organizational culture are redundant and ungrounded. They assume that an organization needs to create and foster a culture in order to create collaboration. Our own conclusion from plenty of examples is that an effective enterprise coordination design in and of itself ensures the behaviors that companies strive to motivate and reward. In other words, coordination generates culture and collaboration, not the other way around.

Our second conclusion is that the forces that are driving commoditization in just about every industry are in themselves generating coordination blueprints. These all center on standardization of interfaces – how business modules connect to each other. This has long been the case in the consumer electronics market and now dominates auto making. What is new is that such modularization and linkage by interface is extending from physical parts to business processes. It is what really lies behind outsourcing: the ability to source and coordinate capabilities.

Our third surprise finding is that in a strange way the current fad popularized by an alchemist who knows very little about information technology but claims that “IT doesn’t matter” is in fact correct. But coordination technology matters very, very much. Information is part of coordination obviously but not in and of itself a coordination design. (This helps explain the disappointing results of many investments in “knowledge management.”) We show strong and consistent evidence that every leader in coordination exploits technology as a coordination vehicle via standardized interfaces and what are loosely termed Web Services. Yes, IT doesn’t matter, but the ability to use IT as a capability nested within the enterprise coordination design is a critical competence that helps explain how, where and why Southwest, Dell, Wal-Mart and other exemplars continue to thrive. Within a very few years, the current fashionable dismissal of IT will be replaced by a new rallying cry about the essential importance of coordination technology infrastructures.