Roland Berger Strategy Consultants

content

Continuous improvement
in growth phases | The
challenge: Keeping a lid
on costs | Driving innovation, quality and employee
development | Continuous
improvement helps you
grow without growing |
And it keeps what belongs
together together!

MARCH 2011

Fresh thinking for decision makers

CONTINUOUS IMPROVEMENT
CONSTANTLY RAISES THE BAR FOR COMPANIES
AND THEIR PEOPLE, CREATING ROOM FOR
MORE GROWTH IN THE PROCESS

THERE IS NO SHORTAGE OF STANDARD SOLUTIONS

FOR CONTINUOUS IMPROVEMENT. FEW OF THEM EVER REALLY FIT,
THOUGH. OUR NINE-POINT STRATEGY FOCUSES ON CORPORATE
CULTURE, THE RELATIVE MATURITY OF THE COMPANY AND ITS
BUSINESS OBJECTIVES.

10%

At best, 10% of all continuous improvement programs actually fit the company using them

content

Continuous Improvement

CRASH? RECESSION? DID WE MISS ANYTHING? Following on from an unprecedented

collapse in 2009, the German economy has, since mid-2010, been enjoying an unbridled
boom. And that despite Europe's alarming debt crisis. Even if the surprisingly fast pace of
growth does ease off a little, and even though skeptics continue to warn of slower world
trade and the risks of towering state debt, economists' forecasts still don't look bad at all.
The upturn will continue and unemployment will recede.
Yet danger lurks precisely in such euphoria. Companies could almost literally end up
choking on their new-found exuberance. Uncontrolled growth that happens too fast can
pose just as stiff a challenge as a sudden crisis. Having only just got out of the mire of costcutting and restructuring, shifting into top gear can be a real shock to the system.
So how are companies handling the surprisingly robust upswing? How do they rigorously
shift up from the crisis, cost-cutting and short-time work to an aggressive policy of investment and recruitment without forgetting that the next downturn is never far away?
How can companies successfully stand their ground amid such volatility? How can they
make their value chains less vulnerable to crisis? Is it at all reasonable to want to seize
opportunities and avoid risks at the same time?

CONTINUOUS IMPROVEMENT IN GROWTH PHASES: BRINGING TOGETHER

WHAT BELONGS TOGETHER
Markets have to be developed relentlessly. Investment planning must be sustainable.
Operations need to be expanded, but only as much as necessary. New recruits should
be added prudently, motivated and enabled to unfold their full potential. Such truisms
the stuff of any run-of-the-mill management seminar may not sound very spectacular.
In actual fact, however, they are essential to the high art of managing growth. The challenge? Not letting low costs stifle innovation, impair quality or hinder employee development. The solution? A new kind of continuous improvement (CI) that brings together
what belongs together and gets you in shape for growth.
Toyota once revolutionized the auto industry with this principle. Today, lean and quality
management can be found in every conceivable line of business. Rooted in the Japanese work-life philosophy of kaizen ("change for the better"), continuous improvement
enables growth, restricts the scope of organizations, encourages and safeguards efficiency and motivates the workforce. All of which adds up to ideal conditions for successfully weathering a crisis and launching into a new phase of economic prosperity.
NOTHING IS IMPOSSIBLE: EVEN PIONEERS CAN RUN OUT OF GAS
Some question the validity of this philosophy, however, seeing it as they do in the cold light
of fading glory. The dominance of Western industrialized nations, they argue, has long been
superseded by manufacturers in Asia and Eastern Europe. These days, it is scarcely possible
to compete on price. Hence it is no longer product quality but the quality of service that critically determines the long-term success or failure of a business.

V-shaped recovery

3,5%

Economic
development

Global GDP, 2010

Time

The economic recovery began in 2010

after the steep plunge witnessed in 2009

Out of reverse and straight

into top gear

How are companies coping with fast and

forceful growth?

Roland Berger Strategy Consultants

TOYOTA LEARNS THE HARD WAY

1.93 bn
USD

in costs were incurred in fiscal 2009/2010

Lego

Ironically, what happens when growth isn't managed properly and product quality falls by the
wayside is demonstrated perfectly by the very company that invented both continuous improvement and lean production. For years, the Japanese giant from Komoro in the province of Aichi
seemed to fear nothing and no one. Toyota's market capitalization grew as fast as its sales,
image and importance on the global market. Yet this growth came at the expense of quality. The
bitter outcome? Customers' trust was left shattered as millions of vehicles were recalled. Sales
slumped and the financial damage was immense. "We set too much store by growth and, in
doing so, lost sight of the need to train our people and develop our company," Toyota boss Akio
Toyoda told a hearing of the US Congress.

900 MILLION POSSIBILITIES: LEGO SHOWS HOW GROWTH CAN BE CHILD'S PLAY
Lean management, Six Sigma, kaizen, TQM/EFQM Continuous improvement takes on many
shapes and forms. The important thing in CI processes is not so much the specific application,
however, as the mentality and attitude of the employees involved. A culture of continuous
improvement will consistently deliver operational excellence in every area, while safeguarding
progress that has already been made. It lets a company grow without growing. Take Lego, for
example. Seven years ago, the maker of brightly colored plastic bricks from the small Danish
town of Billund appeared doomed. Breaking record after record, the playroom icon had quite
simply grown too fast, earned too little and run up too many debts. A radical cure was its last
hope. "Lego," says CFO Sten Daugaard, looking back, "was a fire burning itself out."
To begin with, costs were cut, employees dismissed and structures thinned out. Production
and logistics were too expensive, so plants and machinery were sold off. 70% of the company's
shares in leisure parks were sold to a financial investor, which at least brought a much-needed
injection of cash. Production was then relocated from high-wage countries such as Denmark
and Switzerland to Hungary, the Czech Republic, Slovenia and Mexico. It was not long, however,
before Lego rediscovered the value of an authentic corporate culture as well as the cost of
substandard quality and the benefits of the "family business" epithet. Continuous improvements led from outsourcing to insourcing. A 2006 announcement had said that 900 of Lego's
staff in Billund would have to go. Instead, not one of them lost their job. Lego also bought back
its outsourced production facilities. By the time its factory in Monterrey, Mexico, opened in
2009, Lego was once again building every single brick in-house. Since then, the company's
quality and culture have shot back up to the top of the league. Five years on from its near-death
experience, the "chief brickie" raked in record profits in Central Europe. The Billund facility
now employs 20% more people than before the crisis. Hourly wages in Denmark may be four
times higher than in Eastern Europe, but employees in Lego's home countries are now four
times more productive. There is only one manager for every 80 employees in the current setup.
"We are now much closer to the core of the Lego model than we were at the end of the 1990s,"
Daugaard says.

remains committed to quality

NO STANDARD SOLUTIONS
So what made-to-measure continuous improvement model can companies now use to create
the conditions for profitable growth? "It was very important to us to introduce a continuous
improvement model that was tailored specifically to Lego," Daugaard stresses. There is no such

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thing as a one-size-fits-all solution; the solution is rooted in corporate culture, the

company's maturity and the goals it has set itself. Lean management and Kaizen tend to
be better suited to less mature companies, Six Sigma to more mature ones. Six Sigma has
a much stronger focus on quality than lean management. Both strategies can be applied
across the whole organization, though, whereas Total Quality Management (TQM) and
Kaizen are more suitable for operational functions and production. Six Sigma and lean
management have the edge when it comes to major optimization projects. By contrast,
Kaizen and TQM focus more on incremental improvements. Six Sigma provides resources
that explicitly drive continuous improvement. Implementation is more formal, more strongly focused on processes and strictly hierarchical. In the case of lean management and
Kaizen, it is primarily the line organization that delivers improvements. Here, implementation is anchored more deeply in corporate culture than in a formal process.
In practice, the ideal, made-to-measure continuous improvement model will always be a
blend of different approaches. Bearing this in mind, Roland Berger Strategy Consultants
has developed a nine-point strategy that facilitates tailor-made solutions and accommodates the specific needs of the individual company.

Continuous Improvement

FOUR TIMES MORE

PRODUCTIVE

Productivity beats costs

1. CHOOSE THE RIGHT PHILOSOPHY

The philosophy is the foundation. It gives people a roadmap and puts them on the same
page with regard to solving problems and achieving improvements. It mobilizes people
and unleashes their creativity. The chosen philosophy must be rooted in the company's
values, building a natural bridge to corporate culture. Only then will it be possible to reach
the length and breadth of the company. Companies that successfully practice continuous
improvement often adopt a motto or claim that encapsulates their philosophy, communicates it succinctly and allows the work force to identify with its goals. "Only the best is
good enough," proclaims Lego although that doesn't have to happen all at once, but
"step by step". This understanding helps employees to buy into shared values and makes
the improvement process transparent. That applies not only to production, but to every
area of the company, including the administrative side.

2. SET REALISTIC GOALS

Goals are the operational expression of the philosophy. They dovetail improvement processes with corporate culture. Goals describe what the company wants to achieve and
should therefore be as specific as possible. Lego, for example, aims for competitive advantage, inspiring working conditions and a form of sustainability that creates a harmonious
balance between economics, ecology and social responsibility. Vague guidelines dilute the
strategy and unrealistic goals are counterproductive. Conversely, realistic goals can be
realized in small optimization steps, reflecting a determination to gradually improve things.
That's why the goals of continuous improvement should always be measurable. Six Sigma
shows the way: no more than 3.4 defects per million defect possibilities are permitted.

3. SET UP THE ORGANIZATION AND MONITORING SYSTEM

Whether you go for a central or decentralized organization, solid-line or dotted-line
management, the focal aim of continuous improvement is always to penetrate as much of

SHARED VALUES MUST BE

ANCHORED IN THE ENTERPRISE

Roland Berger Strategy Consultants

Clear And COMPREHENSIBLE

50
70
100

the company as possible. Successful companies use roles and tasks to embed sophisticated monitoring systems in their organization. The process always begins with top management: Continuous improvement belongs on the boss's desk. Below this level, roles and tasks
must be clearly demarcated. At times, Six Sigma is reminiscent of a martial art. The "Deployment Champion" the highest-ranking Six Sigma ambassador is a member of the top
management team, for example. "Black belts" report to him. The lower tiers are populated by
"yellow belts": trained employees who have learned to use simple quality tools and are familiar with the principles of lean management. These skills enable them to provide focused
support for lean Six Sigma projects in their field of responsibility.

4. MANAGE THE IMPROVEMENT PROCESS

Targets must be formulated within the
framework of Continuous Improvement

LITTLE STROKES ...

Though they differ widely, the individual continuous improvement models such as
Six Sigma, lean management and kaizen still share a comparable basic pattern. They all
include an analysis phase, in which the problem is identified and the desired target status
is defined; an implementation phase, in which actual improvements are made; a validation
phase, in which the outcomes are measured and documented; and, finally, a rollout phase,
in which realized improvements are applied on a broad front. Such standard processes serve
primarily to standardize improvements throughout the company. Many companies use one
or the other of them, especially if they are ISO certified. Yet there are also tailor-made processes that retain the same multi-phase model but build on improvements that have already been made. The result is a sensible distinction between smaller improvement initiatives
and large-scale optimization projects. The benefit of this kind of customizing is that improvement programs are aligned with each company's unique corporate culture. These processes are less spectacular, but they significantly increase buy-in. Setting the wrong priorities for improvement initiatives is the most common mistake companies make in growth
phases. Such errors of judgment are triggered by the manipulation of individual projects in
the battle to win resources. As a result, truly critical projects are robbed of vital resources.

5. CUSTOMIZE THE TOOLS

....fell big oaks. Improvement processes

must be managed constantly

There are all kinds of tools to get the improvement process moving and then accelerate
it. Initial toolboxes normally include simple tools such as tree diagrams, improvement
tables and "5 S", a tool to make workplaces safer, cleaner and more manageable. To handle
more complex situations, there are then Fault Mode and Effects Analysis (FMEA), network
planning and technology (a method of analyzing, describing, managing and monitoring
processes), and statistical methods such as regression analysis. As we see it, companies
should always concentrate on those actions that can be best mastered and taught during
the process. Clean, exhaustive documentation is also essential for communicating and
teaching actions. Acceptance is always highest when practical examples come from
employees' immediate work environment.

6. MEASURE PERFORMANCE
Not all improvements can be measured directly. How do you reliably quantify your image,
say, or customer satisfaction? Even so, there is truth to the adage that you can't manage
something if you cannot measure and monitor it. Calculating the value added in monetary
terms, or based on the number of successful improvements is one way of illustrating

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and communicating improvement actions transparently and successfully. Ideally, the

most important continuous improvement metrics should be integrated in regular management reporting. Top management will then always know exactly what continuous improvement is contributing to business performance and what must be done to guide and manage
the process. Monthly continuous improvement reports meticulously document the number
and quality of improvements, their influence on growth and value creation, progress in
implementation and the status of pilot projects.

7. ENABLE EMPLOYEES
Continuous improvement is not a passing fad. It is an integral component of corporate
policy, especially in relevant HR processes. Companies at which CI has become a longstanding tradition cultivate their own continuous improvement specialists. Training
courses for beginners and experts alike lend momentum to the process, whereas a lack
of CI knowledge can be a stumbling block to career development. In addition, personal
target agreements should depend on whether and how the desired improvements are
tackled or achieved. This is one of the most powerful levers to get companies back on
course for growth and profitability.

Continuous Improvement

COMMUNICATE SUCCESS STORIES

Do good and talk about it

8. COMMUNICATE SUCCESS STORIES

There has been enough complaining about the crisis. Now is the time for more positive
news. "Do good and talk about it" is the clarion call. If continuous improvement is to work,
it is vital to get the communication right. Communication is crucial to the acceptance of
improvement actions throughout the company, as well as to employee motivation.
And this too is a job for the boss. An imperative in times of crisis, communicating success
stories boosts staff motivation and dedication in upswings as well. Publications for employees, intranet pages and special publications presenting the most important success
stories support the process.

9. SUSTAIN THE CHANGES

Continuous improvement in a corporate context means leaving behind the habits and ways
of working to which people have become accustomed. Change is the rule, and Schumpeter's
notion of creative destruction is the ideal. The first step is to understand the methods and
tools that make up continuous improvement. Here, top management must both set things
in motion and stake out a clear framework. It must introduce the process, make the necessary resources available and communicate realistic goals. In a second phase, the organization must learn to appreciate the benefits of continuous improvement. Its belief and comitment must be nurtured by verifiable progress and success that benefits every individual
employee. Ultimately, continuous improvement then becomes an integral part of people's
working routine.

GROWING WITHOUT GROWING. Especially during an upturn, it is essential to chart a clear

course and lead resolutely if changes are to be sustained in the long run. This approach also
offers effective protection for the road ahead. One thing, after all, is certain: The next crisis
is only a matter of time!

IF YOU HAVE FURTHER QUESTIONS, PLEASE

FEEL FREE TO CONTACT US:
Thomas Rinn, Partner
+49 (711) 3275-7349
thomas_rinn@de.rolandberger.com
Beatrix Morath, Partner
+41 (44) 384 81-42
beatrix_morath@ch.rolandberger.com
Carsten Becker, Project Manager
+49 (711) 3275-7313
carsten_becker@de.rolandberger.com

think:act CONTENT
Publisher
Prof. Dr. Burkhard Schwenker, Dr. Martin C. Wittig
Overall responsibility: Torsten Oltmanns
Project management:: Dr. Katherine Nlling
Roland Berger Strategy Consultants GmbH
Am Sandtorkai 41
20457 Hamburg
+49 40 37631-4421
news@rolandberger.com
www.think-act.info

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