System, System, System!
In the fall of 1542 Humayun, the second Mogul emperor of India, was on a military campaign, while his wife lay in bed at home expecting the birth of their first child. Humayun longed for a son to inherit and expand his empire, and he was anxious to receive news of the child's birth the moment it occurred. So he called all the ministers of the court to advise him on how the news could be sent from the city where the empress lay to his camp 100 miles away in the shortest possible time. One minister suggested sending word by the emperor's best rider on his fastest horse. But over rough terrain in the scorching heat, a journey of 100 miles would take an entire day or more. Another minister improved on this idea by suggesting a relay of horses, with each rider traveling at top speed for 5 or 10 miles and passing on the message to the next one. The emperor was not satisfied with these suggestions. The ministers were stumped.
Finally a wise old minister announced, to the amazement of the assembly, that he had found a solution and would arrange for the message to travel faster than the fastest horse, faster even than the wind. The emperor was intrigued by the minister's boast and ordered him to execute it. The minister issued instructions for tall towers to be erected every few miles between the city and the emperor's camp. On top of each tower, someone was stationed with a drum. As soon as the child was born, a drum message was relayed across the 100-mile span in less than five minutes, announcing the birth of a son, who later became known as Akbar, the greatest of all the Mogul emperors of India. A simple system made possible a feat that seemed unimaginable at the time. That is the power of a system.
Talk about systems has become so very commonplace that there hardly seems any point in discussing them further. But though the word has been severely overworked, systems themselves still remain a vastly underutilized resource. Almost everyone who wears eyeglasses has, on at least one occasion, looked everywhere for the glasses, only to discover he or she was wearing them. Our search for the secrets of the living organization is not very different. As a rule, people never understand the value of the things they enjoy. Systems are no exception. They are so pervasive, fundamental, and essential to the routine workings of business and society that we take them completely for granted—unless, of course, they break down.
The Corporate Impersonality
Let us begin with a definition and description of what systems are all about. Individual acts are the basic units of any work. Several acts occurring in succession for a particular purpose constitute an activity. In an organization there are many activities like recruitment, purchasing, sales, planning, accounting, shipping goods, receiving customers, and distribution of mail that are repeated over and over again in the same way. Every type of repetitive activity can be reduced to a system. A system is an arrangement of acts or activities into a standardized, fixed sequence consisting of a series of step-by-step procedures. Systems link activities in an orderly manner to ensure greater efficiency and a smoother flow of work.
Earlier we likened systems to the temperamental traits of an individual's personality. Each person has certain characteristic and predictable ways of behaving that tend to recur under particular circumstances. So do corporations. Systems are an organization's fixed patterns of response to recurring situations. When a handbag is lost or a child is separated from his or her parents at Disneyland, there is a system to handle the problem and set it right with a smile. When an employee at Eastman Kodak Company has an innovative idea, there is a system for receiving, evaluating, and rewarding the suggestion.
Systems are like the nerve channels of a corporation. When we accidentally place our hand on a very hot object, the hand is quickly withdrawn by an automatic nervous response, which does not require or await a conscious decision on our part. Companies have similar automatic or habitual responses to most types of recurring situations. When orders come in, they are automatically processed without requiring fresh instructions each time from the CEO. When stocks are depleted, they are automatically reordered. When sales are made, they are immediately recorded and reported to the accounting department on a regular basis. When products are manufactured, they are routinely subjected to rigorous quality-control checks. All these routine, habitual expressions of corporate behavior are made possible by systems.
Modern commercial organizations are distinguished from those of earlier times primarily by the presence of sophisticated, impersonal systems to replace functioning through personal management. This has enabled these organizations to grow to a much larger size, to function over longer distances, and to maintain greater uniformity and coordination than could ever be attained otherwise. All systems, regardless of their purpose, share several common attributes:
1. A system is a mechanism that completes a full cycle of activity. It is not uncommon to find "fragments" of systems operative in modern organizations, such as inventory records that are never examined to analyze discrepancies and errors, or personnel evaluation forms that are never utilized to improve performance or distribute rewards.
2. A system can function effectively only when it is based on a set of accepted standards and clear policy directives to handle exceptions. A mechanism that works most of the time but is often circumvented is a habit, not a system. The fixing of salaries is not governed by a system if the decision is made by different people at different times following different guidelines.
3. Systems make possible evaluation of individual or group performance against an established standard, thereby providing a work incentive for the individual and a means of monitoring and control by management. Without this element of evaluation, no system is complete.
4. Systems constitute the central nervous system of an organization. They must be fully integrated with each other and supported by subsystems that extend into all "limbs" of the organization's functioning. The health of the organization as a whole can be assessed by monitoring the performance of its peripheral subsystems. It is in the execution of small, routine matters that organizational efficiency is most easily measured.
5. Systems are creative in the sense that they make creativity possible. When appropriate systems are introduced or existing ones are perfected, the organization is able to convert underutilized and untapped resources into new growth and expansion.
People constitute the personal side of organizational life. Systems constitute the impersonal dimension of a company. Creativity, expansiveness, enthusiasm, inspiration, leadership, and human satisfaction are expressions of the personal side. Organization, productivity, order, efficiency, harmony, consistency, and stability are expressions of the impersonal side. This impersonality is embodied in the rules, procedures, and systems that an organization adopts for its functioning.
The Thinking Manager's Capital
At the turn of the century, 60 percent of the American people lived in rural areas, many of them isolated by vast distances from life in the cities, where retail merchandising was almost exclusively concentrated. With mechanization, the farming community was becoming more productive and more prosperous, yet farmers still depended almost exclusively on traveling sales reps and ill-provisioned general stores to meet their growing appetite for modern conveniences and luxuries.
Julius Rosenwald saw the growing opportunities of the rural market. When he joined Richard Sears, he brought to their enterprise an inspiring mission and new values. The mission he conceived was to become a buyer for the American farmer, to sell a broad selection of products that the rural community could not readily obtain through existing sources—clothing, dry goods, patent medicines, bicycles, musical instruments, hunting equipment, kitchenware, tools, and so on. The new values he contributed were embodied in the policy "Satisfaction Guaranteed or Your Money Back." With these basic elements as a psychic center, Sears, Rosenwald, and later Otto Doering created an organization to carry out this mission. The psychic center gave direction to their enterprise, and the organization gave it form; but in order to put their inspiring ideas and prodigious talents into practice, they required one more thing—a system.
Although 45 million Americans were residing out in the country-side at the time, 90 percent of them lived in areas with populations of fewer than 100 people. The average density of the rural population was so low that establishing retail stores to serve even half of this community would have required a prohibitive investment and yielded extremely poor returns. An alternative system was required and was already in existence—the mail-order catalog. In 1872 Montgomery Ward had established a catalog to serve the needs of the rural community, and it had grown to include some 10,000 items.
Rosenwald adopted the mail-order system and the money-back guarantee from Montgomery Ward, but he upgraded the system to reflect his own business values. By insisting on very high ethical standards in advertising and a consistently higher quality of merchandise, he in effect created the first factual mail-order catalog, the "wish book." The combination of these values and the talents of the two proprietors enabled them to surpass the performance of Montgomery Ward & Company within the first five years, using the very system that Ward had developed.
Systems are the channels through which organizations translate their ideas into actions. What a large investment of capital in retail stores could never have achieved, a system could. Systems are the thinking manager's capital. As the mail-order system enabled Sears to sell its products to an inaccessible rural market, the drive-in restaurant and the in-flight catering service enabled Marriott to sell food to mobile American travelers. In each case, a new system spanned the gap between a business and its customers.
The Golden Gap
The catalog-sales system was so successful that it brought more orders than either Sears or Rosenwald ever dreamed of—and more problems, too. The sheer volume of new orders pouring in threatened to drown the young business in a sea of paper. As one executive described it: "The whole operation became chaotic. Long delays in shipments, a rising tide of errors leading to a flood of returned goods which in turn were badly handled, absenteeism, replacement of `quitting' employees by inexperienced people—all were combining to make the place a shambles."1
Otto Doering joined the company in 1903, just in time to save the system by introducing another one—the schedule system. Doering designed and commissioned the Chicago mail-order factory, the first modern mass-production plant, covering an area of over 3 million square feet of floor space and equipped with moving conveyor belts, an assembly line, pneumatic tubes, elevators, and miles of railroad tracks.
The plant actually derived its enormous efficiency from the co-ordination of two systems: a supply system to handle the purchase, delivery, and storage of tens of thousands of items of merchandise from hundreds of vendors, and a delivery system to handle the processing and dispatch of tens of thousands of customer orders a day. The huge volume of incoming goods had to be sorted out, stocked, and matched with the orders on hand. The quantities of merchandise and paperwork were far beyond anything attempted before. Proper execution demanded strict discipline and precise timing.
When the gap between two related activities is bridged by linking and coordinating two separate systems, an enormous creative potential is unleashed. Doering's invention was so effective that "a company which had been on the verge of having to halt its growth suddenly found itself with a virtually unlimited capacity for continued expansion."2 The system enabled the company's catalog sales to grow from $50 million in 1907, the first full year of its operation, to $235 million in 1920; and they have multiplied another 20-fold since then, to around $5 billion a year.
Systems are not only the basic building blocks of an organization. They are also the bridges and bonds it uses to connect and bind its various parts into a single whole. There is gold buried in the invisible zone between two uncoordinated systems. How many such gaps are there in every company? There are as many gaps as there are systems—gaps between design, production, distribution, sales, marketing, purchasing, research, accounting, recruiting, training, planning, and countless other systematic functions of a company. Every one of them possesses a rich vein of unmined ore. Sears' example is impressive because its size is impressive. But the principle is equally true of the smallest retail store, corner restaurant, and garage-scale manufacturing firm, thousands of which are multiplying this very moment at much greater rates than Sears ever did, without fully understanding the reason for their own growth.
When Sears entered the retail store business, its mission was broadened to encompass all American households as its customer base. New systems were required to serve this wider mission. One of the most productive of these has been the Sears credit card.
The aim of most credit-card systems is to attract the higher-middle-income and upper-income families, who buy more and can afford to pay for what they buy. Since Sears' mission is to serve as many American households as possible, the aim of the system is to extend credit to the maximum number of families, including those in the lower income groups, but at the same time to keep its losses from nonpayment as low as possible. These two objectives are in direct conflict with each other, yet Sears has successfully reconciled them through a system.
Today Sears' credit card is the most widely held in the world. Approximately 40 million American families hold a Sears card. Sears receives roughly 10 million new credit applications every year and approves 4 million of them. The volume alone requires a fairly remarkable system. Sears provides credit to more households with incomes above $30,000 than does the American Express Company and more credit to lower-income households, too—about 14 percent of all households in low-income urban areas. More remarkable yet, Sears' losses from nonpayment amount to only 1 percent of credit sales, which is less than all the major bank credit cards and less than half the level of Sears' major competitors. Unbelievable as it may seem, Sears does not even have a minimum income standard for approval of credit.
How does Sears do it? That is the magic of a system. Over many years of experience, the company has developed a very sophisticated credit-approval system, which consists of 700 models, a different model for almost every geographic region in which it sells. By carefully refining the system, the company has identified the characteristics of creditworthy customers at different levels of income and in different parts of the country. The system enables it to extend more credit—$12 billion worth—to more households than any other credit-card system. Largely because of this system, Americans buy 40 percent of all washers and dryers, 40 percent of automobile replacement batteries, and an incredible 75 percent of all bench power tools from Sears. A system makes it possible for the company to achieve its mission as supplier to the mass American market.
The Technology of Organization
A common misconception of small entrepreneurial companies is the belief that today's giant corporations achieved their present status on the strength of some unique personal endowments of their founders, a brilliant idea or new technology, or a large reserve of capital it tapped for investment. In most cases, the only unique endowment of the founder was a willingness to work hard; the only brilliant idea was a commitment to quality or service; the only new technology was a knowledge of how to motivate people; and the only reserve the firm tapped was one of the many powers of organization.
In assessing the productive strength of a corporation, we naturally focus our attention on its financial, technical, and human resources—assets, cash flow, product quality, managerial abilities, technical skills, proven capacity for innovation, market position, and so on. In so doing, we tend to overlook the enormous productive power of other organizational resources. It is well known in industry that a good technology is as important to success as capital and can sometimes achieve what money alone never can. Many a poor inventor has died extremely rich. It is less commonly recognized that inventing the right system can be even more profitable than inventing the right product. As technology is the engineer's capital, systems are the businessperson's technology.
Whatever a company's financial or technological resources may be, systems possess the power to increase their productivity thousands of times. When Ford was founded in 1903, the American automobile industry consisted of several hundred small-scale assembly units, each manufacturing a few hundred or a few thousand cars a year. The cars ranged in price from $1,000 to $2,000, placing them beyond the reach of the vast majority of Americans.
Henry Ford was one among the many. His company sold 1,745 cars in its first year of operation at a little less than $1,000 each and increased the number to 9,000 in 1906. But his dream was to produce an affordable car for the masses. The two major constraints were the slow speed of existing production techniques and the high costs involved in the process. He overcame both with a system.
Five years after Doering commissioned the Chicago mail-order plant, Ford's new Highland Park factory for mass production of the Model T came into full use. There was nothing new or original about the plant, except that the proven system of a moving assembly line was employed for the first time to manufacture automobiles.
Ford's gigantic "Crystal Palace," covering some 50,000 square feet, consisted of three main assembly lines supported by an endless number of conveyors, chutes, tubes, bins, and hoists supplying components to fixed work positions along the lines in a steady stream to ensure non-stop production. These physical systems were supported by a host of administrative systems for inventory control, job routing, purchasing, shipping, and accounting. After visiting the plant, a reporter from the Detroit Journal described the operation in three words: "System, System, System!"3
Ford's systems reduced the work required for assembling a chassis from 728 minutes of one worker's time to 93 minutes and brought down the price of the Model T from $950 to $290, well within the reach of the common person. From 1906 to 1916 the company's car production increased 80-fold. Between 1908 and 1927 over 15 million Model Ts were built by these systems. During World War II, Ford employed a similar integrated production system at its Willow Run plant to produce new B-24 bombers at the rate of one an hour.
These systems not only produced cars, they produced capital, too—lots of it. In 1903 Ford started with a cash base of $28,000. By 1913, without any subsequent investment, the company had accumulated assets valued at more than $22.5 million and had paid out $15 million in dividends. By 1927 the company's cash surplus alone was nearly $700 million—a 25,000-fold increase in 24 years!
Ford applied a known organizational technology to a new field with phenomenal results. The introduction of these systems transformed the industry from a group of a few hundred small-scale units into a handful of large-scale manufacturers. In the process, he demonstrated once and for all the incredible productive power of coordinated systems.
A Distant Traveler
While many companies are alive to the potential for applying proven technologies such as the computer to new fields, how many see the far greater potential for applying proven systems to new fields as Ford has done? One example of a system that has been going places is the one developed by Coca-Cola for distribution of its soft drinks.
Until 1899 Coke was sold only through soda fountains. In that year two men from Chattanooga attending a baseball game came across a soft drink that was sold in a bottle. They approached Asa Candler, who owned Coca-Cola at the time, to suggest that he sell Coke in bottles. Candler was not interested but agreed to give the two men a perpetual franchise to sell bottled Coke throughout practically the whole United States. The franchise was awarded for $1. Legend has it that even that dollar was never paid. If so, it was the best dollar Coca-Cola never made—"a master-stroke" as Fortune called it.4 For this was the beginning of the company's franchise bottling system—the granddaddy of franchising—consisting of independent bottlers, whose entrepreneurial spirit has carried Coke to the four corners of the world. Today the system includes 1,500 bottling companies in 155 countries.
Just as people respond to personal attention by performing better, so do systems. In recent years Coca-Cola has been giving a lot of attention to its franchise bottling system to raise its performance to the highest possible level. Many of the bottlers had become so successful and so wealthy that they felt little incentive to expand further. In 1979 Coca-Cola began a major program to upgrade the system by bringing in a new generation of entrepreneurs who are raring to grow and willing to invest. Since then more than 120 franchises covering over 50 percent of Coca-Cola's business in the United States have changed hands in transactions valued at more than $2 billion. Coca-Cola's attention to the system paid off. Between 1979 and 1983 the company's operating revenues grew by 50 percent, and its share of the U.S. soft drink market exceeded 38 percent. As the president of one large independent Coca-Cola bottling company described the systems update: "Coca-Cola USA has energized the system.…The sleeping giant is wide awake."5
Following its acquisition of Columbia Pictures in 1982, Coca-Cola is in the process of taking its franchise system into an entirely new field—entertainment. It has begun test distribution of movies on videocassettes through the bottling companies to retail stores. Whatever the outcome, it demonstrates the tremendous potential for adapting systems for new applications.
A System Diversifies
The franchise system adopted by Coca-Cola in 1899 has formed the basis for many entirely new industries. In 1955, at age 66, Colonel Harland Sanders founded the business for which he has become famous. At the time the only things he had going for him were a good idea, a great system, and a $105 Social Security check. The idea and the system long outlasted the check. His idea was a recipe for frying chicken in a special high-temperature cooker. His system was to sell franchises to restaurants—leasing them the cookers, supplying napkins and buckets carrying the Kentucky Fried Chicken name along with his image, and charging $0.05 for every chicken the restaurants sold. By 1964 Colonel Sanders had granted more than 500 franchises and sold the business for $2 million. Today there are over 6,000 units in 54 countries with total sales of more than $2 billion. That is the productive power of a system!
The fast-food business actually began way back in 1921, when White Castle opened its first hamburger stand. The company had the right idea, but not the system. White Castle never sold a franchise. Sixty years later it still had only 175 units. If it had not been for the franchise system, there might only be 175 McDonald's restaurants today, too, instead of 7,500. Ray Kroc, the founder of the McDonald's Corporation, opened his first McDonald's franchise in 1955, and within five years he surpassed the level reached by White Castle over the period of a half-century. By 1982 there were McDonald's franchises all over the world, with sales of $7.8 billion.
The power of the franchise system results from combining the entrepreneurial initiative of private owners with the name, expertise, and experience of the parent company. Franchising is a system that is transforming the way retail business is done in the United States. Today there are nearly half a million franchise outlets selling goods and services for around $500 billion a year, which represents more than a third of the nation's total retail sales. The system has accommodated itself to an incredible variety of businesses, including franchise mail and package delivery, film sales and processing, dry cleaning, printing, photocopying, health clubs, home security, computers, and home renovation.
How many hundreds or thousands of systems are now being employed in other companies and other industries that could be adopted or upgraded to enrich the life of any organization? Adopting a system that is already prevalent in the field enables a company to compete with the leaders of the industry. Adapting a system to a new field enables a company to become leader of the industry.
The Values of Systems
Bill Marriott, Sr., and Tomas Bata utilized systems for more effective implementation of corporate values. Values can also be utilized to give greater effective force to systems. There is virtually an infinite scope for increasing the power of systems by a commitment to higher values in their implementation. This is what Julius Rosenwald did when he insisted on honesty and reliability in the operation of Sears' mail-order system. Merck enhanced the effectiveness of its marketing system by insisting on truthfulness with the medical community. Du Pont increased the efficiency of its operating systems by striving hard to protect its workers.
The Federal Express Corporation created a new business out of an old system based on two values: reliability and punctuality. Recognizing the tremendous importance that Americans place on time, Frederick Smith devised a system to save it. He adopted the basic elements of the system from the U.S. Postal Service and United Parcel Service, Inc.—a squadron of airplanes and a fleet of delivery vans—but brought down delivery times for a parcel from three days or more to less than 24 hours. The idea itself was not new, but the quality and reliability of service were—99 percent of packages delivered on time. Virtually overnight, Federal Express has grown into a $1.4 billion company, and the overnight-delivery business as a whole has exploded into a $5 billion industry.
There is an unlimited scope for upgrading the values of systems—quality, cleanliness, punctuality, reliability, friendliness of service, safety, job satisfaction, efficiency, productivity, and integrity—whether they are systems for serving a customer, serving food in an employee cafeteria, monitoring travel expenses or individual job performance, or delivering goods and services on time or at the lowest possible cost.
A Productive Marriage
In the case of Sears, we saw that the proper combination of two personalities or two systems generates a much greater power than the sum of the parts when they operate in isolation. The same golden gap exists for every organizational resource (such as skills, capital, technology, or machinery) and for every combination of two different resources (such as capital and technology or skills and machinery). Each enhances and multiplies the effectiveness of the other. This potential also exists when any other resource is combined with a system.
One of the most obvious present-day examples of this principle is the impact of computer technology on business systems. The marriage of systems with computers has increased the productive powers of the organization many times. Yet most companies have only just begun to explore the enormous opportunities in this area.
What would you do if you had 50,000 cars that you were trying to rent to the public from 1,000 locations around the United States and your highest priority was good customer service, which means always having a car available to the customer when he or she has reserved one? Most companies would probably go out of business. The fact that Hertz has twice that many cars, a reputation for reliable service, and a profitable business as well is primarily due to a computerized management system.
It all sounds so logical that it is easy to assume things were always this way, but they were not. When the rent-a-car business began to take off in the 1960s, computers were being used by companies almost exclusively for standard accounting purposes. Hertz and the other rent-a-car firms kept track of the supply and demand for their cars around the country on manual worksheets. In the mid-1970s Hertz introduced one of the first computer-based decision-support systems used in business.
The supply and demand for cars is influenced by such factors as day of the week, season of the year, special events, conventions, transfer of cars from other locations, impact of weather on incoming flights, and availability of cars from competitor companies. The new system takes into account these variables and enables each city manager to project the demand and availability of cars at each location on an hour-to-hour basis with 95 percent to 98 percent accuracy.
After introduction of the system, there has been a 10 percent improvement in the utilization of Hertz's fleet of cars, which represents a saving for the company of between $25 million and $40 million a year. More important, the system has enabled the company to double its size, which would have been extremely difficult under the old manual system. The quality of customer service is also significantly better.
Five years ago the operating system was integrated into an overall business planning system that enables managers to quickly evaluate the impact of any major decision concerning things like pricing, level of investment, or expenditure on advertising on overall performance and profitability. The rent-a-car business has become so competitive and complex and the margins of profit so marginal that, according to Vice-President Marty Edelstein, without the system "we probably couldn't even run the business."
There are countless other types of systems, both simple and sophisticated, that can be linked to the computer with similar results. The increased productivity arising from linking systems to a higher order of technology can be obtained by linking systems with other organizational resources as well. The introduction of higher-order skills, for instance, can raise the efficiency of a system manyfold. The opportunities are all around us.
Too Much or Too Little?
Despite the widely shared impression that American business is organized to the core and is suffering from an overdose of bureaucracy, even the best of American companies tap only 50 percent or 60 percent efficiency from their systems. On August 5, 1984, The New York Times carried an article reporting an unusual event that occurred a few months prior to the breakup of the Bell System:
The American Telephone and Telegraph Company dispatched a cadre of white-collar soldiers to its warehouses to find out why shipments of small office switchboards were running behind schedule. At one Manhatten warehouse, a group of crates that had sat ignored for no one knew how long turned out to contain 200 of the phone switchboards for which customers had been clamoring.
The Times article goes on to quote a former AT&T salesman:
Here's the largest company in the world, a company that's supposed to be so sophisticated and computerized, opening boxes to find out what it had in inventory.
The purchasing department of another large telephone-equipment manufacturer called up one of its suppliers urgently requesting a particular component to meet a production run in one of its plants. Since the supplier did not have the item in stock, it scanned its files to see if any other customer might have some extra pieces available. After a while it called back the manufacturer to report it had located a very large stock of the component just a few miles away—at another plant belonging to the same manufacturer! How is it that the purchasing department had no record of the extra inventory? It happened because each of the plants has its own inventory coding system for components, and the code numbers used by the two plants for the item were different. According to Ed Devine, who has managed the American Management Association's Purchasing Division for many years, such incidents are quite common, and the larger the company, the more common they are.
When Iacocca joined Chrysler, he discovered to his "horror" that there was no overall system for financial control or effective financial planning and projecting. Some of the bankers who reluctantly agreed to go along with the U.S. government's loan guarantees for Chrysler were not much better. One bank in Minnesota had a filing system that was so effective that Chrysler's loan agreements were put through the shredder by a cleaning lady before they could be signed. Another bank in Alaska had a dispatch system that was so well perfected that loan agreements required in Detroit to meet a government deadline were put in the postal system instead of being returned by express courier.
Until recently the accounts payable section of one of America's five largest insurance companies was run very efficiently by two women. The filing system they employed was excellent, except that no one but the two women could figure out how to use it. It is fortunate that the system was changed, because just two weeks later, the two women were involved in a traffic accident and hospitalized.
Are these examples all rare flukes or exceptions to the American rule? It is more likely that they represent standard operating procedure in many companies. Every company, even the most excellent, has dozens of experiences like these that it wishes had never happened but that always do because systems do not receive the constant and continuous attention they deserve. "Systems?" says the executive. "We've got all we need." The real issue is not how many systems a company has, but how well and appropriately it uses them. Systems do some things very well and other things quite poorly. Systems stimulate growth in some areas and prevent it in others. Systems are merely an instrument. They function productively only when guided by the right psychic direction and controlled by a strong corporate character.
Almost every problem can be solved in more than one way. A cashflow problem, for instance, can be resolved by obtaining a loan, firing staff, or selling assets. It can also be solved by an organizational innovation that raises productivity, speeds up deliveries, accelerates collection of receivables, or attracts additional business by improving the quality of a product or service. All the other solutions cost money. The organizational solution may cost nothing. Perhaps that is why it is often neglected or underestimated. Imitation of another country, like Japan, even when possible, is difficult. Why go to the trouble when there are hundreds of organizational innovations that we can make based on our own cultural heritage that will yield equal or greater results?
Have you ever noticed the impact that a small improvement in a system can make on efficiency, quality, speed, or ease of functioning? Much time and money can be saved, much irritation and confusion can be eliminated by making simple refinements in the systems we use. It has become standard practice in many companies to periodically or continuously review long-term goals, short-term objectives, plans, budget allocations, job performance, salary scales, and many other aspects of their business in order to assess the adequacy of their functioning. Adjustments are then made because of changes within the company or in its external environment. Systems are one organizational resource that is not frequently subjected to close scrutiny and review in order to update them or improve their performance. Yet the benefits that can result from regular reviews of all systems are quite substantial. Otto Doering recognized this and set up a methods department in 1906 to continuously refine and improve systems at Sears' mail-order plant.
Merck regularly reviews its system for introduction of new products to shorten the period required for research, development, clinical testing, FDA approval, training, and marketing. Every day's delay in getting a new product on the market represents not only a lost sale but also a shorter period before the expiry of patent rights on the drug or the development of a better one by competitors. For this reason, Eugene McCabe, vice-president of marketing at MSD, says, "We are constantly changing that system and constantly modifying and upgrading and improving it."
The policy-owners' services department of Northwestern Mutual is continuously reviewing its procedures for receiving and replying to customer inquiries. In 1969 a major systems update was undertaken, which brought down the time required to open a new insurance service account from six days to one. The ratio of policy-owner letters answered within five days rose from 11 percent in 1969 to 80 percent in 1970.7 Although there is a lot of research involved in responding to inquiries from customers about their policies, Northwestern Mutual is still not satisfied with its system and is continuously trying to improve it. Where payments are involved, the response time has been reduced to two days; for transactions, three days; and for all other correspondence the goal is to respond within six days. Three times a week the service representatives report their oldest pending case, and twice a month an accurate measurement is made of their response time. The representatives themselves are constantly suggesting ways to improve the system. In the new business department the face amount of new policies issued has increased by 50 percent over the last two years, but staff has increased by only 7 percent. Systems reviews are one of the reasons why Northwestern Mutual has the highest productivity in its industry. The company's operating expenses are 20 percent to 30 percent lower than those of its competitors.
Every company has recurring types of problems that crop up now and then under certain circumstances. These problems become characteristic traits of the company, just as its systems are. But at Coca-Cola, every time a problem arises, the firm not only tries to solve it, but also tries to remove its cause at the source. Coca-Cola's senior vice-president for finance remarked that confidence in the proper working of its systems is very important to the company. "We spend a lot of time when something doesn't go right, not so much to analyze the mistake but to analyze the systematic failure that caused the mistake. I'm liable to call six people together and say: `OK, we are all part of a system. Where didn't the system work?'"
General Mills is continuously striving to improve its systems. In the Grocery Products Sales Division, constant modification of the sales representatives' routing system has enabled the company to raise its sales volume by 60 percent without any increase in personnel. The Package Foods Operations Division encourages employees to suggest even minor improvements involving less than $1,000. It creates an atmosphere of participation and an urge for perfection, which has spawned a 10 percent increase in cases produced per worker-hour over the last two years, and productivity is still rising. Constant improvements in the distribution system have held costs per case to a 1 percent increase since 1979, despite a 15 percent increase in salaries. The quality of service has also improved, so that the company has moved up from No. 5 to No. 1 in customer surveys. At General Mills, systems reviews have become a regular activity. Gene Sailer, director of manufacturing, Package Foods Operations Division, says:
We've done a lot of looking at our organization. We're using outside resources to keep ourselves abreast. We're permitting employees to visit from one plant to another, so they can share ideas. To be successful in the long term, we have to institutionalize these things. It's not a program. It's a process.…And we're still not where we want to be. It's a continuing effort to get better.
Senior Vice-President and Technical Director John Luck says that in general a company can "improve its operations up to 40 percent when threatened—we try to tap that resource before being threatened."8
Have you ever wondered why telephone operators are not quite so talkative as they used to be? The reason is very simple. From about 1970 until the breakup of AT&T, the Bell System was continuously trying to improve the efficiency of its operator systems in order to keep phone rates down. Before 1970 the average time required by an operator to handle a single call was 60 seconds. By a combination of improved technology, better operator training, and constant monitoring, the average time was gradually brought down to 30 seconds, then 20, and finally 15.9. Today's operator handles nearly four calls per minute instead of one. Who ever said Ma Bell is getting old?
A periodic review of all systems can give fresh momentum to the activity of any department. Each system can be broken down into its step-by-step procedures and carefully analyzed. Then the links between systems can be studied to determine to what extent they are properly coordinated. Another proven technique is the one followed by Coca-Cola. List all problems and try to trace each one back to a defective system, or at least try to find a way to solve the problem by upgrading systems. This strategy focuses attention on the golden gaps in the existing fabric of interacting systems and highlights the points where the system itself or its coordination and integration with other systems are not adequate. As Herb Dean, a systems consultant and former director of office operations at Kodak, expressed it: "You should review everything you are doing. Systems are really the key to success."
Maximum Utilization of Systems
Systems are an invaluable resource. Like other resources, they should be fully and properly utilized. Systems are the lifelines of an organization, and the organization's efficiency is measured by the effectiveness with which it utilizes them. The most successful companies are not only the most value-driven, innovative, and enthusiastic. They are also the best organized and most systematic. Every company can profit by asking itself five simple questions.
1. Are all our systems functioning properly? If a system is occasionally inadequate to keep up with its workload or if it is sometimes necessary for a manager to interfere with a system to set things right or if unforeseen problems arise in routine areas of work, something is wrong with either the design of the system or the way in which it is being used.
2. At the points of intersection between different systems, is there harmonious coordination and integration? Managers spend a lot of time acting as informal and personal links between two or more systems that have not been properly joined. Most problems a manager is confronted with arise from systems that are poorly designed or inadequately coordinated. Both problems can be eliminated.
3. Are we fully utilizing all the systems we have introduced? Companies frequently introduce a system and then bypass it during normal operations. If a system is no good, change it or scrap it. Otherwise, use it without exception. Half-hearted implementation is a sign to the employees that management is not very serious about systematic functioning.
4. Are there any systems successfully employed by other companies that we could introduce here? Of course there are—probably dozens. Imagine how long a company could compete in today's world if it refused to employ the latest technological developments introduced by its competitors. It wouldn't last very long. That is a quick recipe for technological obsolescence. A company that fails to introduce new systems that have proved successful elsewhere is heading for organizational obsolescence or worse.
5. Can we innovate any new systems that will further improve our performance? When Hal Geneen took over as CEO of ITT in 1959, he devised a system to counteract the rigidity and compartmentalization common to large corporations. The system consisted of a team of head-quarters staff specialized in different fields, whose job it was to move throughout the company in search of new ideas and unresolved problems. The system created a supportive atmosphere for change and contributed to ITT's phenomenal growth through the 1960s.
The Acid Test
Many companies pride themselves on the efficiency of their systems for low-cost production, effective marketing, and good customer service. But the truest measure of the extent to which a company effectively utilizes systems is not in these key areas where the company focuses the bulk of its energy and attention. The acid test of efficiency is the speed and manner in which the most insignificant, routine work is accomplished.
Filing: How many executives feel lost the moment their secretary calls in sick, because they cannot find the papers they need in the filing cabinet? When files are arranged systematically, anyone who knows the system should be able to find any document with ease. This may frequently be the case for central files. But most company files maintained by individuals are kept as though they really were "personal" property and no one else's business. Trivial and unimportant, you say? There are presidents of multi-billion-dollar companies who squirm in embarrassment because their office cannot locate a letter or report sent to them. If that is the situation at the top of the organization, it should come as no surprise to learn that raw materials, products, and customer needs are misplaced or overlooked down the line. Filing papers promptly is also a difficult task for most companies. Every secretary seems to have a catchall drawer that never empties. Retrieving things quickly when they are needed is often even more difficult. When all individual files conform to a general filing system intelligible to every staff member, and when materials are filed promptly and are easily retrievable, the company passes a key test for systems utilization.
Customer inquiries: Many companies do not have a formal system for accurately determining where incoming calls should be routed. The caller gets bounced around until he or she is connected to the right party. Our personal experience with IBM indicates that it has a customer inquiry system capable of handling even unconventional inquiries smoothly and swiftly. The time required to reply to a routine letter is another index of systematic functioning. Many companies do not even have established standards for answering letters promptly. Some reply only to certain categories of letters. Those that answer all letters promptly are likely to be leaders in their field.
Accounts: A multinational company that sends out invoices 15 days after shipping orders may sound like an anachronism. So does one whose accounts are perpetually 30 days behind. Apart from the loss of interest due to delayed collection of receivables, these delays are symptoms of a deeper malady. Have you ever noticed that organizations that run into financial trouble inevitably have trouble keeping their accounts up to date, too? New York City in the 1970s was a classic example. It took months for the auditors to figure out what was really going on. Argentina, which reneged on its international financial obligations in 1984, was in a very similar position. The government did not know either how much money it had or how much it owed. Up-to-the-minute accounting systems may sound fairly easy, but they are extremely difficult to maintain—as difficult, perhaps, as enduring corporate success. Our feeling is that the two are very closely related achievements.
Test Your Systems
There is a simple technique that any manager can use to evaluate the efficiency of his or her department. Once a month, circulate a questionnaire to all department personnel to be filled in anonymously and returned. The questionnaire should contain items like the following:
A constant improvement in results on the test over three to six months will be highly correlated with improvements in other objective measures of the department's performance, such as sales or productivity.
A Trusted Servant
Systems are an essential component of the corporate personality. Through them the organization exercises its will to realize values and achieve goals. Without systems the corporate personality lacks a means of effective, coordinated self-expression. But however great their importance and their power, systems are at best only obedient subordinates, as illustrated inFigure 3 Their effectiveness depends on the direction set by the psychic center and the willpower of corporate character.
Figure 3. The role of systems in the corporate personality.
It is ironic that the man who did the most to demonstrate the value of systems also demonstrated most graphically their limitations. In spite of Henry Ford's keen insight into the power of systems, he was blind to the greater power of which they form a part. He failed to understand that systems are only one component of the organization, and not the organization itself. During the 1930s he ran Ford in the same way he had when it was a tiny proprietary concern. He refused to delegate authority, develop managers, or permit anyone else to make decisions. Those executives who tried to manage either left the company or were fired.
Ford failed to discover the very first principle of organization—creation of an impersonal hierarchy and authority independent of the proprietor. As a result, the company's share of the automobile market, which had reached about 65 percent in the early 1920s, fell to 20 percent in the late 1930s. As Alfred Chandler, Jr., wrote, "The incredibly bad management of his enormous industrial empire, which was so clearly reflected by the lack of any systematic organizational structure,…helped cause the rapid drop in Ford's profits and share of the market."9 Half a century ago Alfred Sloan, the organization man, beat Henry Ford, the engineer. GM won the battle for supremacy. That Ford Motor Company survived its founder at all is a great tribute to the staying power of systems.