THE HIGH-VELOCITY EDGE

HOW MARKET LEADERS LEVERAGE OPERATIONAL EXCELLENCE TO BEAT THE COMPETITION

The McGraw-Hill Companies, Inc.

Contents

Excerpt

CHAPTER 1

GETTING TO THE FRONT OF THE PACK

Each year, my wife, Miriam, our kids, Hannah, Eve, and Jesse, and I watch theBoston Marathon, which passes near our home. After the cacophony of the policeescort and the press teams roaring past, there is a surreal calm as the firstone or two runners fly by. Nearly two hours into the race, with just three milesto go, their form is flawless, their breathing easy, their faces calm. Then theclamor resumes.

A few dozen yards behind the leaders is a tight knot of athletes, all world-classbut not looking as good. Their rhythm is a little off; their expressionsare slightly pained. They are jostling and elbowing each other, but for all theeffort, their only hope is to be runner-up, chasing the front-running, pace-settingleaders who are pursued but never caught.

The Boston Marathon only happens once a year, but every day we can see the samekind of ferocious competition among companies fighting for a consolation prizewhile one or two firms cruise to a victory which appears to be easy. Inautomobile manufacturing, commercial aviation, metal processing, integrated-circuitfabrication, financial services, and health care, just to name a few, wecan find "fair" contests in which opponents go head to head in the same productcategories, woo the same customers, source from the same suppliers, hire fromthe same labor pools, struggle with the same dangerous conditions, and obey thesame regulations. The playing fields are so level and there is so littledifferentiation among the rivals that one should expect cutthroat, tooth-and-nail,dog-eat-dog competition, fleeting profitability, and unsustainableleadership. And for many companies, that's how it is. Yet a few leaders are wayout ahead, chased but never caught, generating a greater range and a higherquality of products and services, responding more quickly to the changingmarket, with fewer people, fewer resources, and fewer mishaps and accidents.While everyone else struggles to keep up, these high-velocityorganizations race from success to success with growing market share,profitability, and reputation. In the marathon, everyone starts together andeveryone crosses the half-way and three-quarters marks. The critical difference,of course, is that the leaders hit each milestone first and, by the time theirchallengers get there, they are well on their way to the next one. So it isamong organizations, as represented in Figure 1-1. Everyone advancesover time, improving performance along various metrics such as quality,efficiency, product or service variety, workplace safety, and time to market.The problem for the pack is that the market leader achieves a certain levelbefore everyone else and, while others close in on where the high-velocityleader was, it has darted away, still to be chased but not captured.

High-Velocity Organizations Abound

Let me offer a few examples, beginning with the automobile industry. Every majormanufacturer makes cars, trucks, SUVs, and minivans. Those vehicles come ineconomy, regular, and luxury versions and in small, medium, and large sizes. Themanufacturers contend for customers in every major market; their dealerships areoften within walking distance of each other. They have design and productionfacilities in every region, hire in all those places in overlapping job markets,and are subject to the same regional rules and regulations. They often buy fromthe same suppliers. I worked in a plant with people making parts for Toyotawhile many of the same people, using the same equipment, were also making partsfor direct competitors.

In this highly competitive environment, while General Motors (GM) and Fordstruggle from one year to the next and Daimler has shed Chrysler afterdestroying tens of billions of dollars in shareholder value in an ill-fatedmerger, Toyota roars from success to success. It raced past General Motors asthe world's production leader, ran by Ford to become the second-largest sellerof automobiles in North America, and passed Chrysler as the third-largestautomaker in North America. While Ford shed its luxury brands, Toyota's Lexus, arelatively recent entrant, pushed ahead to become the best-selling luxury brandin the United States. The Scion, an even newer introduction, is accomplishingwhat has proved to be difficult for other automakers: attracting young buyers toan established maker. Despite long-standing claims by competitors that high-mileage, high-performance, low-emissions cars are a technological and financialimpossibility, Toyota launched the Prius, built market share, and bested itscounterparts in establishing a standard for hybrid-drive technology, which nowis found across its product line. While most auto companies were shutting plantsand laying off employees, Toyota expanded, creating more opportunity to widenthe gap further.

All this has led to staggering profitability. Toyota crossed the $10billion threshold in 2003. In the fiscal year ending March 2007, its net incomewas $13 billion, compared with losses of $2 billion and $12.6 billion at GM andFord, respectively. Toyota's market capitalization of $187 billion was greaterthan that of GM, Ford, and DaimlerChrysler combined. And all this occurreddespite the fact that Toyota entered the U.S. market with few products, littlebrand-name recognition (and even less that was positive), and no manufacturingfacilities decades after its competitors were well established.

Toyota is not alone in setting itself apart in a tightly competitive market. Incommercial aviation, every major airline buys equipment from the same vendors:Boeing and Airbus for large planes; Saab, Embraer, and Bombardier for regionaljets; and General Electric, Rolls-Royce, and Pratt & Whitney for engines. Jetfuel is a commodity. The airlines use the same labor pool for pilots, flightattendants, gate agents, baggage handlers, and mechanics, and they compete forexactly the same customers flying between the same cities. This makes it hardfor most carriers to differentiate themselves, with predictable results. Year inand year out, American, United, USAir, and the others face financialdifficulties, demanding concessions from their workforces and expectingcustomers to put up with less comfort, worse service, and reduced reliability.

This is not so, however, with Southwest. Achieving a combination of lowcost and high customer satisfaction, this airline has generated an annual profitfor more than 30 years in a row, despite the spikes in fuel prices, declines intravel after 9/11, overcapacity in the industry, and price cutting by incumbentstrying to fend off entrants. Whereas the industry as a whole has had a 50percent loss in stock market value in the last decade, Southwest's valuation hasdoubled. Even since 9/11, Southwest has fared better than its competitors, withonly a 20 percent drop in value versus 70 percent for the entire segment.

Consider another way to measure Southwest's disproportionate success in itsmarket: In fiscal year 2006, the combined revenue for American, Continental,Delta, JetBlue, United, US Airways, and Southwest was $95.2 billion, of whichSouthwest accounted for 10 percent. In November 2007, the combined marketcapitalization of those airlines was $33 billion, of which Southwest accountedfor 33 percent.

How has this been possible? According to my colleague Jody Hoffer-Gittelland others, some of the intuitively obvious answers are wrong. Southwestis as unionized as the other airlines, it has competition on all its routes, andit doesn't have the advantages of monopolistic pricing that the hub-and-spokesystem gives the major carriers over some routes. So it is not succeeding thanksto some structural advantage. Rather, Southwest does the basic work of runningan airline better than other airlines do—turning its planes around at thegate in less time with less effort and greater predictability and performingscheduled maintenance with greater reliability. Its crews and equipmenttherefore spend more time aloft with paying customers rather than sitting on theground unprofitably and unproductively.

Manufacturing integrated circuits—microprocessors, memory chips,application-specific integrated circuits—can be brutally competitive. All"fabs," as the manufacturing facilities in this industry are called, buyequipment from the same vendors, make products that compete on the samedimensions of "device density" and speed, and sell them to the same electronicscompanies. Yet in this business too, some companies outrace their rivals.According to the Competitive Semiconductor Manufacturing Program at theUniversity of California at Berkeley, there are significant disparities amongcompetitors in terms of the performance levels they achieve for quality (e.g.,defects and yields), speed (e.g., throughput and cycle time), and efficiency(e.g., labor productivity) and also, more notably, the speed with which thoselevels are achieved (e.g., process-development time and ramp-up time).Christensen, Verlinden, King, and Yang, in their article "The New Economics ofSemiconductor Manufacturing," give an example of how this comes about. Theydetail how one anonymous manufacturer, through an intense focus on operationalexcellence, cut the manufacturing time for a wafer by two-thirds and the costper wafer by 12 percent. Effective capacity went up 10 percent and the number ofproducts the plant could sustain increased by half. This plant became faster atmeeting a broader range and volume of demand at a lower cost and with no extracapital investment.

Alcoa is in the business of mining, refining, smelting, forging, casting,rolling, and extrusion—all of which are inherently dangerous processes.Yet, during the late 1980s and early 1990s, a period of great business successfor Alcoa, it established itself as the safest large manufacturing employer inthe United States. According to recent Occupational Safety and HealthAdministration (OSHA) data, Alcoa's workplace injury rate is one-quarter theaverage for all manufacturers by one measure and one-twentieth by another. Thiswasn't accomplished by any competitive maneuvering. Something else enabled Alcoato just say no to work-related accidents. How this has been accomplished isexplored in detail in Chapter 4.

Not all high-velocity organizations are running for profit. Some measureperformance in other ways. For example, nearly all leading hospitals have accessto cutting-edge science, the latest technology, and intelligent, well-trained,hardworking, well-meaning employees. Yet there are large variations in safety.On the whole, hospitals are dangerous places for patients. The Institute ofMedicine estimated that up to 98,000 of the 33 million Americans who arehospitalized each year die because something went wrong in the management oftheir care. Other studies estimate that an equal number die as a result ofan infection acquired while hospitalized and that an even greater number arenonfatally injured or infected in the course of receiving care. This puts therisk of suffering harm while being hospitalized as high as one in a few hundredand the risk of being killed as high as one in a few thousand. Yet a fewhospitals have cut the risk that patients will be harmed by medical error andinfections by 90 percent and more, putting themselves in a position to providefar better care to more people at less cost and with less effort than is typicalelsewhere. These hospitals, like Alcoa, have that special "something else."

Being a crew member on board a nuclear-powered submarine might seem a riskyproposition, as it might mean sharing space with nuclear-tipped warheads, withyour ship subject to crushing pressures, while playing cat and mouse withadversaries' warships, all while operating blind and sometimes deaf. And we allhave our impressions of nuclear energy, given the events at Chernobyl and ThreeMile Island.

However, nuclear-powered warships in the United States Navy have collectivelyaccumulated over 134 million miles and over 5,700 reactor-years of nuclearreactor operation since the first nuclear-powered submarine, the USSNautilus, was launched in September 1954. In all that time, with all thatuse, there has not been a single reactor-related casuality or fatality. Incontrast, the Russian nuclear navy has been far more accident-prone. NASA, alsocharged with manned missions in a hostile environment, has had a tarnishedrecord. We'll take a closer look in Chapter 3 at why NASA has beenproblem-plagued and, in Chapter 5, will contrast this with the Navy'sapproach.

High-Velocity Competitors

What is the special "something else" that separates high-velocity organizationsfrom their rivals? There is a rich research history of attempts by practitionersand academics to answer that question. Let's look at that history to betterunderstand what The High-Velocity Edge contributes.

By the 1980s, the post–World War II political and military rivalry betweenthe United States and its allies and the Soviet Union and its allies, which haddemanded so much attention for decades, was finally quieting down. However, allwas not smooth sailing. An increasingly wide array of formerly stalwart Americanindustries and corporations faced a severe competitive threat. Foreigncompanies, many of them Japanese, were delivering higher-quality products atlower costs than seemed possible. The implications for America's economicwell-being were staggering.

Initially, this phenomenon was explained in terms of economic conflict,perhaps because the Cold War mind-set still prevailed. Books such as ChalmersJohnson's MITI and the Japanese Miracle (1982) and Clyde Prestowitz'sTrading Places: How We Allowed Japan to Take the Lead (1988) attributedJapan's success to a clever trade strategy masterminded by governmentalministries and coordinated with corporate networks (keiretsu) that outpaced thedisjointed efforts of American companies, federal agencies, and Congress.According to this view, Japan rigged the game with advantageous financingstructures, freedom from the pressures of what were characterized asshortsighted American financial markets, and a compliant population willing todelay gratification and suppress individual interests to achieve corporate andnational interests. It was a samurai culture versus a cowboy one, and withcompetitiveness defined as a contest among nations, the proper response to such"cheating" was thought to be national in scope: voluntary export restraints,domestic-content requirements, and industrywide research consortia.

Inspired by that sort of explanation, I wrote my undergraduate thesis atPrinceton on the macroeconomic determinants of exchange rates with the idea thatunderstanding why the dollar was strong and the yen was weak might offerinsights into ways to reverse the flow of goods and services. After college, mywork in investment banking in the mid-1980s reinforced the notion of nationaleconomic competition. My colleagues and I were attuned to "what the Japanesewould do" every time a new auction of government bonds took place. Later,working in Washington, D.C., for a congressional agency, I had a close view ofthe debates about restoring American competitiveness, which often focused onlegislative and executive branch responses to such perceived infringements assubsidization and trade dumping.

Arriving at MIT as a graduate student in the late 1980s was fortuitousfor me. The prevailing view of Japanese commercial ascendancy was shifting froma Cold War-style national competition to the management practices of individualmarket-leading firms. Books such as Kaisha, Made in America, DynamicManufacturing, and The Machine That Changed the World, along with aslew of articles, detailed the differences in businesspractices—particularly in design and production—between the newJapanese winners and the American firms they were displacing. This shift inemphasis proved to be extraordinarily productive.

It was observed that, at winning Japanese factories, products advanced tocompletion along simpler process flows than they did in American factories.Production was "pulled," triggered by actual customer need, rather than "pushed"in accordance with preconceived schedules. Work sites were more orderly and wereorganized according to the specific task that had to be accomplished at eachlocation. Relationships with employees and suppliers tended to be collaborative,a far cry from the antagonistic industrial relations in America.

Also observed was the relentless kaizen (improvement), a process ofengaging those closest to the direct work of the organization in the continualimprovement of that work. So it was not just the velocity of material throughthe factory that mattered; it was the velocity of improvement and problemsolving—the speed with which these factories discovered problems andsolved them.

Researchers such as David Garvin documented differences in productivityamong similar plants and found discrepancies of tenfold and even a hundredfoldin quality. John Krafcik documented extraordinary differences in productivitybetween mass producers and lean producers in the auto industry. MichaelCusumano provided a historical account of Toyota's rise to ascendancy.James Womack, Dan Roos, and Dan Jones illustrated some of the majordifferences in shop-floor management, product design, and supplier relationsbetween the auto industry's best and the rest in their landmark book, TheMachine That Changed the World. John Paul MacDuffie revealed some ofthe details of the powerful problem-solving mechanisms these manufacturersemployed.

Bob Hayes and Steve Wheelwright, with coauthor Kim Clark, put asidetheir focus on strategic decisions as the means toward Restoring OurCompetitive Edge and later wrote glowingly about the advantages of creating"the learning organization" in order to achieve world-beating DynamicManufacturing. Collectively, these and other authors conveyed the palpablesense of urgency found throughout the market-leading organizations to identifymarket needs, meet those needs, and get ever better at doing so.

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(Continues...)Excerpted from THE HIGH-VELOCITY EDGE by STEVEN J. SPEAR. Copyright © 2009 by Steven J. Spear. Excerpted by permission of The McGraw-Hill Companies, Inc..
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