TheFireThatChangedanIndustry:ACaseStudyonThrivingina

NetworkedWorld
ByAmitS.Mukherjee
Date:Oct1,2008
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AmitMukherjeepresentsfourDesignPrinciplesthatseniorexecutivescanapplytotransformtheircompanies
intobusinessesthatwillthriveinanetworkedworld.

About8p.m.onMarch17,2000,alightningboltstruckahighvoltageelectricitylineinNewMexico.Aspower
fluctuatedacrossthestate,afirebrokeoutinafabricationlineoftheRoyalPhilipsElectronicsradiofrequency
chipmanufacturingplantinAlbuquerque.
1
Plantpersonnelreactedquicklyandextinguishedthefirewithinten
minutes.Atfirstblush,itwasclearthateighttraysofsiliconwafersonthatlineweredestroyed.Whenfully
processed,thesewouldhaveproducedchipsforseveralthousandcellphones.Asetback,nodoubt,but
definitelynotacalamity.
Atachipfactory,productiontakesplaceincleanroomconditions.Thecleanestofsuchfacilitieshaveno
morethanonespeckofdustpercubicfoot.Stateddifferently,thesefacilitiesaretenthousandtimescleaner
thanhospitaloperatingrooms.
2
Andthereinlaytheproblem.Fireproducessmokeandtriggerssprinklers.Fire
andsmoketakelives,andsprinklerssavethem,butallfire,smoke,andwaterwreakhavoconproperty.As
theydugdeeper,plantpersonnelfoundthatsmokeandwaterhadcontaminatedmillionsofchipsthathad
beenstoredforshipment.Damagethisextensivewasdefinitelyacalamity.
Fourthousandmilesaway,ataNokiaplantoutsideHelsinki,aproductionplannerwhowasfollowingawell
articulatedprocessformanagingchipinflowsfromPhilipsfailedtogetaroutineinputheneededfromPhilips.
Thefailurecouldwellhavebeenananomaly.EvensocalledSixSigmafacilities(ofwhich,despitethehype
abouttheterm,thereareveryfewanywhere)produce3.4defectspermillion.Nevertheless,heinformedthe
plantspurchasingmanager,andagainfollowinganestablishedprocess,theypassedonwordofapossible
problemtoTapioMarkki,thetopcomponentpurchasingmanager.
InAlbuquerque,Philipsengineersandmanagersgrappledwiththeaftermathofthefire.Theyrealizedthat
cleanupwouldtakeatleastaweek,whichmeantthatcustomerswouldbeaffected,atleasttemporarily.
Nokiaanditsarchrival,Ericsson,accountedfor40%oftheplantsshipments.Philipsmanagementdecidedthat
theirorderswouldbefilledfirstwhentheplantreturnedtonormal.
OnMarch20,Philipscalleditscustomers,includingMr.Markki.HerecallsthatPhilipssaidthatthedisruption
wouldlastaboutaweek.TheWallStreetJournalarticle(citedearlierandpublishedmonthslater)impliedthat
Philipshadunderestimatedtheextentoftheproblem.
Mr.Markkihad,earlyinhiscareer,workedforfiveyearsatasmallsemiconductorcompanythatsupplied
Nokia.Hetoldme,Iknewthecleanupwouldtakemorethanoneweek(but)formeitwasntspecial.
Nevertheless,inaculturethatencourageddiscussingpossibleproblemsopenly,heinformedhisbosses,
includingPerttiKorhonen,thenSeniorVicePresidentofOperations,Logistics,andSourcingforNokiaMobile
Phones.NokiasproductionplannerbegancheckingthestatusofthefivepartsmadeinNewMexicooncea
dayinsteadofthecustomaryonceaweek.Nokiahaddevelopedthisenhancedmonitoringprocessoverthe
priorfiveyears.Severalcomponentsalmostallfromnormallyfunctioningplantsreceivedthesame
treatmenteachyearifNokiabecameconcernedwiththeirmakersperformanceforanyreason.
Afewhundredmilesaway,executivesatEricssonalsogotacallfromPhilips.Untilthiscall,Ericssonsplanners
andmanagershadnotsensedanydiscrepancyinPhilipsperformance.Assuch,itsmanagementhadno
reasontodisbelievePhilipsexplanations.Theycertainlydidnotperceiveaneedforconcernorsteppedup
action.
NokiasintensifiedtrackingandcommunicationswithPhilipsdidnotraiseNokiasconfidencethatitspartner
hadtheproblemundercontrol.ItsexecutivesbeganregularlyurgingtheircounterpartsatPhilipstotake
strongeraction.Theyalsomovedtowardadoptingtheresponseroutinestheyhaddevelopedforsuch
eventualities.OnMarch31,exactlytwoweeksafterthefire,Philipsadmitteditwouldneedmoretimetofix
theproblem;ultimately,theplantremainedoutofactionforsixweeks.
RecognizingthatPhilipsproblemcouldaffecttheproductionofseveralmillionmobilephones,Nokiatook
threekeysteps:
OneteamofexecutivesandengineersfocusedonPhilips,seekingamajorroleindeveloping
alternativeplans.GuidedbyMr.KorhonenandassistedbyCEOJormaOllila,itpressedNokiascase
withPhilipsexecutives,includingitsCEO,CorBoonstra.Philipsrespondedbyrearrangingitsplansin
factoriesasfarawayasEindhovenandShanghai.
Asecondcrosscontinentalteamredesignedsomechipssothattheycouldbeproducedinother
PhilipsandnonPhilipsplants.Whereappropriate,itconsultedwithPhilipstoassessthepossible
impactofitsactions.
AthirdgroupworkedtofindalternativemanufacturerstoreducepressureonPhilips.Twocurrent
suppliersrespondedwithinfivedays.
ThemagnitudeofthecooperationbetweenNokiaandPhilipscannotbefullyappreciatedwithoutafewwords
onPhilips.Onceconsideredaleadingedgetechnologycompany,bythemid1990sPhilipswasbeingcriticized
bymanyananalyst.Mr.Boonstraignoredtheircallstodismemberthecompanyandinsteadspentthreeyears
reshapingitandrebuildingitsreputation.In2000,PhilipsSemiconductorDivisionwasfunctioningvery
well.
3
IthadacquiredseveralplantsfromIBMandboosteditsproductioncapacity40%over1999levels.Its
seventeenplantswerechurningouteightymillionchipsaday;thesechipswereusedin80%ofthemobile
phonessoldworldwide.Thatyear,chipvolumegrew33%andrevenues55%.Despitethefirewhichdidnot
meritasinglesentenceinPhilips2000annualreportdivisionaloperatingincomerose119%.
4
Thissuperb
performancemeantthatPhilipssimplyhadnosurpluscapacity.HelpingNokiarequiredmanagerialand
technicaleffortequivalenttopullingarabbitoutofahat.
Philipspredicamentwasnotunique.In2000,themobilephonemarketwasgrowingatover40%perannum,
butsowerethemarketsforlaptopsandotherelectronics.Componentmakers,rangingfromchiptoliquid
crystaldisplayproducers,wereworkingatcapacity.
5
Someconsumerelectronicscompanieswerereadytopay
virtuallyanypriceforkeycomponents.Bymidyear,Sony,MicronTechnology,Dell,Sun,andevenPhilipsitself
hadannouncedthatcomponentshortageswouldreinintheir(verystrong)financialperformances.Shortages
wereexpectedtocontinueunabatedtillyearend.
AttheendofMarch,inthismarketenvironment,Ericssonfinallycametoappreciatethegravityofitsproblem.
However,forreasonsaboutwhichonecanonlyspeculate,itstilldidnotactspeedily.JanWarby,theexecutive
whoheadedthemobilephonedivision,didnotgetinvolvedtillearlyApril.BythenEricssonhadveryfew
optionsleft.
Nokiasinitialsensingoftheproblemanditsrapidandeffectiveresponsecarriedtheday.Inthethirdquarter
of2000,itsprofitsrose42%asitexpandeditsshareoftheglobalmarketto30%.Itsquarterlystatementsand
annualreportfor2000didnotevenmentionthefire.
OnJuly20,2000,Ericssonreportedthatthefireandcomponentshortageshadcausedasecondquarter
operatinglossof$200millioninitsmobilephonedivision.Assuch,annualearningswouldbelowerby
between$333millionand$445million.
6
Sixmonthslater,itreporteddivisionalannuallossesof$1.68billion,a
3%lossofmarketshare,andcorporateoperatinglossesof$167million.Italsoannouncedtheoutsourcingof
cellphonemanufacturingtoFlextronicsandtheeliminationofseveralthousandjobs;Flextronicstookover
EricssonsplantsinBrazil,Malaysia,Sweden,theU.K.,andtheU.S.InApril2001,itsignedaMemorandumof
UnderstandingtocreateSonyEricsson;theinformalnegotiationsthatledtothisstephadstartedattheheight
ofthecrisisinJuly2000,thoughEricssonhaddenieditinpublic.ThedealwasfinalizedinOctober2001.
Ericssonswoesspreadbeyondmobilephonesandcontinuedintosubsequentyears.Itfinallyreturnedto
healthin2004,butasamuchsmallercompany.Comparedto2000,itsrevenueshadfallen52%,totalassets
about30%,andnumberofemployees52%;netincomeandoperatingincomewerealmost,butnotquite,the
same.
Thefaceofthemobilephoneindustryhadchangedforever,allbecauseofafirethathadbeencontainedin
tenminutes.
Thatwasanexcitingstory,butsowhat?
Sinceearly2001,storiesaboutthefirehaveappearedinmanypublicationsandforums.Somebutonlya
fractionofthearticlesthathaveappearedarelistedintheendnotesofthisandsubsequentchapters.
Collectively,thesestoriesperpetuatedseveralmyths:
Myth#1:Nokiasucceededbecauseitreliedonindividualeffort,whileEricssonreliedonteams.No
individualorevenagroupofindividualsactingindependentlycouldhavepulledoffthecross
continental,crossorganizationalresponsethatNokiatook.WhenIinterviewedhimattheNokia
headquartersatEspoo,Finland,inthespringof2006,Mr.KorhonenmadeitclearthatNokiasculture
didnottolerateindividualisticcowboys.
Myth#2:Nokiasucceededbecauseitusedsuperiorinformationtechnology.Severalsoftware
makersclaimedthattheirsoftwarehadhelpedNokia,andsometechnologyanalystswrotethatIT
hadsaveditfromEricssonsfate.Likemostlargecompanies,Nokiacouldnothavefunctionedwithout
IT.However,ITplayedasupportingrole,andthespecificbenefititgaveNokiawassoprosaicthatno
technologypartisanthatIknoweverwroteaboutit.
Myth#3:NokiasucceededbecauseFinnsarelesscautiousthanSwedes.Anexplanationrootedin
unfoundednationalstereotypeshaslittletoteachusandisundoubtedlywrong.Inany
case,nationalcultureplayednorole;aFrenchexecutive,JeanFrancoisBaril,whohadspentmany
yearsintheU.S.,ledthebuildingofmanyofNokiascapabilities.
Myth#4:NokiasucceededbecauseMr.Korhonenwasabrilliantcrisismanager.Mr.Korhonenand
NokiareplacedJamesBurkeandJohnson&JohnsonshandlingoftheTylenolcyanidepoisoningas
theposterchildforimpeccablecrisismanagement.Academicsusethestorytoillustratetypesof
crisesthatcompaniesmustbeabletowithstandandtocajolethemtoupgradetheirsupplychains.
Riskmanagementprofessionalsuseittoscarepotentialclientsintobuyingappropriateinsurance.In
realityanddespitethefactthattheWallStreetJournalarticlequotedMr.Korhonenascallingthe
situationacrisisNokiasuccessfullyavoidedthecrisisthatengulfedEricsson.Alongwayintoour
conversation,perhapsafterhefeltthatIunderstoodwhatNokiahadreallydone,Mr.Korhonensaid:
o Externally,thefirehasbeenamuchbiggerthingthaninternally.Forus,ithasbeenbusiness
asusual.Wehavehadtomanagemanysuchthings.
Mr.Korhonendidplayakeyrolebutmostlyduringthepriorfiveyears,whenNokiacreatedthecapabilities
thatenabledittoshrugoffachallengethathascaptivatedthebusinessworld.Thesecapabilitiesbuiltintoits
strategy,processes,andvaluesandsupportedbytechnologyenabledittoadaptrapidlytohugechangesin
theassumptionsembeddedinitsbusinessplans.Eventoday,sevenyearsafterthefireandalmosteleven
yearsafterNokiabegantransformingitself,onlyahandfuloflargecompaniescandowhatNokiadidin2000.
Suchacapabilityisexceedinglyimportant,becauseweliveinanetworkedworldinwhicheachcompany
partnerswithasetofothercompanies.Acompanysnetworkextendsfromitscustomerfacingside,through
itsproductandtechnologydevelopmentfunctions,andontoitssupplynetworkside.Whilesuchnetworksare
criticaltomodernbusinesses,theyenableshiftsinmarketoroperatingconditionstorapidlypropagatefar
beyondtheirorigins.Ifacompanyisunabletosensesuchashiftandrespondeffectively,itcanlose
tremendousamountsofvalue,seethereputationsofitsseniorexecutivestarnished,anddestroythe
livelihoodsofthousands.
CompanieslikeNokiathatcanintelligentlyandeffortlesslyadjusttomajorshiftsinmarketoroperating
conditionsareAdaptiveBusinesses.
DesignPrinciplesforAdaptiveBusinesses
ThisbookpresentsfourDesignPrinciplesthatseniorexecutivescanapplytotransformtheircompaniesinto
businessesthatwillthriveinanetworkedworld.ADesignPrincipleisaguidelineforpolicy,ratherthana
templatetostampoutidenticalsetsoftoolsandprocedures.Indeed,Idonotbelieveitispossibletoprovide
replicabletemplates;companiesmustusethePrinciplestocreatetheirownuniquesolutions.ThePrinciples
areasfollows:
1. Embedsenseandrespondcapabilitieswithinnormalplanandexecuteprocesses.Theabilityto
detectaproblem(oropportunity)earlyandcorrectlyandtheabilitytoreacteffectivelyarekey
determinantsofcompetitiveadvantage.Unlesstheseabilitiesareapartofeverydaywork,companies
willlurchfromcrisistocrisis,betheybigorsmall.
2. Adoptstrategiesthatpromotecollaborativeactionamongnetworkpartners.Astheyglobalizeand
astheirsupplyanddemandnetworksfracture,companieslosevisibilityintoaspectsoftheir
competitivelandscape.Unlesstheydevelopcooperativerelationshipswiththeirpartners,theywill
notgetpreferentialassistancewitheithercrisisoropportunity.
3. Valueandnurtureorganizationallearning.Companiesmustcollect,analyze,andshareacrosstheir
networksknowledgeaboutwhatworksandwhatdoesnot.Absentsuchintelligentknowledge
sharing,theywilllackinformationtoactdecisivelyandeffectively.
4. Deploytechnologiesthatenableintelligentadjustmenttomajorenvironmentalshifts.Toadjustto
changedconditionseffectivelyandefficiently,companiesmustapplyinformationtechnologiesthat
supportthepriorprinciples.
ThefourPrinciplesaredeceptivelysimple;statingthemisfareasierthanapplyingthemdayafterday.For
example,despiteembarkingonitstransformationin1995,Nokiahasonlyrecentlybecomecomfortablewith
theideathatitsadaptivecapabilitiesareinextricablyinterwovenintothefabricofitsorganization.Hewlett
PackardanothercompanythatIwillprofileextensivelyalsobeganchangingatthesametimeandisstill
institutionalizingthecapabilitiesithasbuilt.
ThedifficultyofimplementingthePrinciplesiswhatgivesthemtheirgreatpower;collectivelytheychange
howworkisperformedonadaytodaybasis.Forexample,tosenseandrespond,onemightneedthe
preferentialhelpofapartnercompany.Thispresumesthatthecompanieslookaftereachothersinterests.
Technologyaidstheabilitytosenseandrespond,butunlesspeoplecanmakesenseofwhattheyaresensing,
alltheeffortwillbefornaught.
Companiesalsomustconsidermajororganizationalchangesinordertomarshalanddeploypeoplewiththe
skillsneededtodesign,create,andmanagetheirnetworks.Manymaydecidetocentralizethesepeopleina
coherentgroup,whileothersmaydecidetokeepthemdispersedbutwelllinked.Ineithercase,theymust
considerappointingaseniorexecutivetogivethemavoiceintopmanagementdeliberations.Whetherornot
heorsheactuallyholdsthetitleformally,thisexecutive,theChiefNetworkOfficer,willbearprimary
responsibilityforthefourDesignPrinciples.NocompanythatIknowof,includingNokia,currentlyusesthis
title;nevertheless,acoupleofkeypeopleatNokiahaveplayedtheChiefNetworkOfficersrolewell.
SeenthroughthelensesofAdaptiveBusinessesandnetworkmanagement,NokiaandPhilipstreatedeach
otheraspreferentialpartnersandwon.Ericsson,whichhadnoonetowatchitsbackwhenthechipswere
down(literallyandfiguratively!),lost.Ironically,thelessonEricssontookawaywasnotoneofcodependence;
instead,itresolvedneveragaintobecomedependentonasinglesupplier.
OrganizationoftheBook
IntherestofPartI,WhyChange?,Ibuildthecasefortransformingthemodernenterprisebyaddressingits
keylimitationsandtheimpacttheyhaveonperformance.
Chapter2,ShadowsofthePast,firstsummarizesafascinatingpieceofhistoricalresearchthattrackshow
andwhycompanieshavechangedoverthelasttwohundredoddyears.Inresponsetoperiodicepochal
shifts,companieshavemodifiedhowworkisperformed,howtheirorganizationsarestructured,andeven
theircorporateethos.Distributedcomputernetworksaredrivingthepresentepochalchangebyfragmenting
workacrosstimeandspace,engenderingextremeproductcustomization,andblurringindustrialboundaries.
Inthisenvironment,companieswillfallintotheexecutiontrapiftheybelievethatrelianceontraditional
goodmanagementplanwellandexecutebrilliantlyalonewillhelpthemsucceed.
Chapter3,VisionsfromthePresent,advancesthecaseforcorporatetransformation.Inordertosucceedin
aworldofcorporatenetworks,companiesmustdevelopthreecapabilitiestoaugmenttheirtraditionalplan
andexecuteskills.Theymustbeabletosensechangesintheirenvironments,respondtotheseseamlessly,
andlearnfromtheirexperiencesandapplythelessonsinothersituations.Seniorexecutivesshouldtake
responsibilityforguidingthistransformation,becauseresearchshowsthatfinancialmarketsarepenalizing
companiesandexecutivesforperceivedfailuresmoreseverelythaneverbefore.
PartII,DesignPrinciplesforAdaptiveCapabilities,laysoutthefourDesignPrinciplesthatcantransforma
company.
Chapter4,TransformEverydayWork,introducesthefirstDesignPrinciple:Embedsenseandrespond
capabilitieswithinnormalplanandexecuteprocesses.Withoutembedding,acompanycannotbeadaptive;
atbest,itcanbegreatatmanagingcrises.Embeddingrequireschangingworkpractices,justasbecomingtruly
qualityfocusedrequiresmakingqualitytheresponsibilityofindividualemployees.
Chapter5,SucceedinaDogEatDogWorld,explainsthesecondDesignPrinciple:Adoptstrategiesthat
promotecollaborativeactionamongnetworkpartners.Thefragmentationofworkwillrequirecompaniesto
createwinwinpartnershipswiththeirpartners,becausenocompanycansucceedwhileitsnetworkisailing.
Researchshowsthatexecutivesrecognizetheneedforcollaboration,butthisdoesnotalwaysleadtoaction.
Understandingwhycompaniesactagainsttheirbestinterestscanhelpexecutiveschangesuchbehavior.
Chapter6,EnsureThatWorkTeaches,discussesthethirdDesignPrinciple:Valueandnurtureorganizational
learning.Thefailuretolearnkeepscompaniesfromintelligentandeffortlessadaptation.Itimpedesboththe
effectiveuseofthepriorPrinciplesandtheinterpretationofenvironmentalsignalstotakeaction.Executives
mustunderstandhowtheycanmanageculture,systems,andorganizationalstructuretoimprovetheir
companiesabilitytolearn.
Chapter7,MakeTechnologyMatter,providesfocusedguidanceonthefourthDesignPrinciple:Deploy
technologiesthatenableintelligentadjustmenttomajorenvironmentalshifts.Itassertsthatcompanies
mustinvestintechnologiesthatprovidevisibility,supportanalysis,facilitatecollaboration,orenable
mobility.Technologiesthatdonotbuildthesecapabilitiesmaybeessentialforsecurityorlegalreasons,but
theywillnotprovidecompetitiveadvantage.Thisdiscussionfocusesontechnologystrategy(what,why)and
nottechnicaldetails(how).
PartIII,GoingAdaptive,discussesthechallengingtaskoftransformingacompanyintoanAdaptiveBusiness
bysystematicallyimplementingthefourDesignPrinciples.
Chapter8,CreatetheOrganization,addressestheorganizationalchangescompaniesmustmake.Managing
internalandexternalnetworksmustbecomeafocalpointforkeydecisions.Peoplewhoaresuperbat
designing,creating,andmanaginghumannetworkswillundertakethistaskandincreasinglybecomehighly
prizedbytheiremployers.AChiefNetworkOfficer,whomayormaynotbeformallydesignatedassuch,
shouldleadthem.
Chapter9,IntroduceChangeHolographically,dealswiththegeneralmanagementchallengeofinitiatingthe
transformationandmaintainingmomentum.CompaniesmustadoptwhatIcallholographicchange
management.ThisapproachadvocatestheimplementationofallfourDesignPrinciplesinonebusinessarea
andsubsequentreplicationinotherareas.ItalsoadvisesagainstimplementingoneDesignPrincipleatatime
acrosstheentirecompany.
TheEpiloguebringsclosurebydescribingtwoperspectivesonanAdaptiveBusiness.Onecomesfromajunior
managerwhoworksatthecompany,whiletheothercomesfromthispersonsCEO.
Givenmyfocusoncorporatetransformation,manyoftheissuesIdiscussfallwithinthebailiwicksoftop
managers.StartingwithChapter2,Imakespecificrecommendationsforthem.However,becomingadaptiveis
notaspectatorsportformiddlemanagersandotherprofessionals;indeed,HewlettPackardseffortshave
beenledbysuchpeople.Mostchapters,therefore,endwithasidebartitledSoYouAreNottheCEO...,
whichaddressesthecriticalrolestheseprofessionalsmustplay.
BasisoftheIdeas
Historically,mostbigideasinmanagementaroseinthemanufacturingsectorandthenspreadtotheservice
sector.AdaptiveBusinesses,too,areevolvinginmanufacturing(andretail)companies,butwillsoonerorlater
migratetotheservicebusinesses.(Indeed,atopstrategyexecutiveofamajorBritishmanufacturerrecently
arguedcoherentlythatapremierAmericaninvestmentbankappliesallfouroftheDesignPrinciplesandisno
lessadaptivethanNokia.)
So,thisbookbuildsonarobustintellectualfoundationofresearchonmanufacturers.Ialsopresentevidence
fromastudyofoverfivehundredmanufacturingandretailcompaniesthatIconductedafewyearsagoforthe
softwarefirmSAP.Isupplementthesewithstories,somefromthemedia,butmanyothersfromovera
quartercenturyofpersonalassociationwithcompaniesinindustriesthatincludesteelwire,food,whitegoods,
glass,medicaldevices,pharmaceuticals,consumerpackagedgoods,andelectronics.Ihaveadvisedseveral
CEOsandotherClevelexecutivesofglobalfirms,ledcrossorganizationalproductdevelopmentefforts,
andworkedonthegraveyardshiftbesidelineworkerscarpingaboutmanagerialidiocies.Iprotecttheir
confidentialitybynotnamingthem,butIdoprovideenoughcontextualinformationtomakethestories
meaningful.
Mostimportantly,Idrawonmanyhoursofinterviews(andassociatedsecondaryresearch)thatIhave
conductedatNokiaandHewlettPackard.Tothebestofmyknowledge,Nokiahasnotgivenanyoneelse
similaraccesstotheexecutivesinvolved.ThesetwostoriesNokiasinparticularpresentacomprehensive
pictureofthetransformationthatcompaniesmustundergo.Icannotcrediblycallformultidimensionalchange
andthenprovidepiecemealexamplescobbledtogetherfromdifferentfirmsfacingdivergentchallenges.For
therecord,neithercompanyisorhasbeenaclientofmine.Whattheyhavecreated,theyhavedoneon
theirown.
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