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Strain of Change

By Andrey Shapenko and Marina Filippova
As published in “Harvard Business Review – Russia”, October 2017
http://hbr-russia.ru/management/upravlenie-izmeneniyami/p23471/

“Change or die!” this famous rule of Jack Welch is often quoted by CEOs of Russian big production companies. After the 2008-2009 financial crisis, prices for their products (such as oil, steel, nickel, iron ore, etc.) were similar to those in the mid-2000s and have not returned to the peak level. Another period of low prices for resources coincides with the global economic slowdown and Russian stagnation. If earlier economic growth was determined by new industrial capacities and takeovers, today these strategies no longer work. Company leaders seek internal reserves and start the transformation process. However, most attempts to transform a company fall flat, which was proved by multiple foreign studies (McKinsey, Deloitte, PWC) and based on DuPont experience in implementing corporate transformations around the world and in Russia.

Not all transformations are equal

Over the years of operating in Russia, DuPont has observed transformations being implemented in more than 20 industrial companies. It turned out that within several years and with minimum financial expenses, it was possible to reach a 5% rise in production per year, a 3% decrease in production costs per year, and increase labor productivity and EBITDA by tens of percent even in Russian economic conditions. To achieve this, three consecutive steps should be taken.

Step 1. Implement instruments of lean production: production operations mapping, standardization of operating procedures (SOP), 5S methodology of organizing work areas, system of visual management, Kanban scheduling system, etc. As a rule, these tools are required for teaching operational staff to seek and eliminate any wastes (of raw materials, time, quality, energy). The lean production approach has been already implemented in such Russian companies as ChTPZ, Severstal, EVRAZ, NLMK, VSMPO-AVISMA Corporation, GAZ, and UC RUSAL.

Step 2. Implement a production system which implies not only application of lean production techniques in plant floors, but also integrated rearrangement of operational and organizational processes. According to reports, such systems have been implemented in SIBUR, Severstal, NLMK, and Rosatom.

Step 3. Change corporate culture for transformations to be self-reproducing, i.e. for operational staff to constantly propose transformations with top-level support. This approach and the traditional Russian management system are often worlds apart. This is why this stage is the most challenging for organizations.

International studies by McKinsey show that 70% of transformations fall flat. 39% of failures are explained by employees’ resistance to change, 33% - by lack of executive support of such changes, and only 14% of failures occur due to inadequate resources or for other reasons. Therefore, corporate culture is a key factor in implementing transformations. Experience of DuPont and Skolkovo in studying transformation processes in ten big Russian companies of petrochemical, chemical, oil and gas and metallurgical industries proves these conclusions and adds a few specific points to them.

Firstly, production companies in Russia are big and distributed over vast territory. The average number of employees at a Russian enterprise accounts for 10,000-15,000, while the biggest companies may employ up to 30,000 people. By European and American standards, a company is considered big if it employs 2,000-3,000 people. For example, Sabine River Works in Texas, the biggest DuPont plant, has about 2,700 employees.

Secondly, an overwhelming majority of big production companies are backbone enterprises, which is associated with a whole range of social and cultural challenges. Companies have to bear responsibility not only for plant assets, but also for a significant number of service facilities, including social infrastructure like schools, kindergartens, and medical institutions. In such conditions, it is very hard to make decisions regarding transformations and optimization.

Thirdly, Russian management has a specific nature: a hierarchical structure and directive management style results in production staff showing little interest in enhancing efficiency. For instance, foremen in most cases know what they have to do in their shop area in order to reduce losses and increase work throughput. However, they are either not willing to be proactive (since usually no initiative goes unpunished) or leave this initiative “for a rainy day” when the employer may urgently require reduction of costs by the end of the year to meet or exceed the target numbers.

Finally, a production company leader plays a crucial role in this process in Russia. In most cases, a plant director is more than just an employed manager who may be easily replaced. That is why the idea of transformation should be “sold” to him in the first place.

These peculiarities may be best demonstrated by two cases that reflect typical mistakes and challenges in implementing transformations in Russia.

CASE 1. A threat from transformers

A big Russian production company, a leader in the market and one of the biggest enterprises in the sector globally, faced a global drop of prices for its products. By 2014, they sank to their 2004 level. Losing profit and realizing that a continuous period of low prices had begun, the company management team raised the question of cost reduction. Primary optimization resulted in a few percent savings following decisions to cut workforce, optimize raw material resource base, reduce capital costs, and repair budgets. The next step was to implement a production system that implied, among others, transformation of the corporate culture. Many Russian and foreign competitors have already launched transformation programs in their companies and were announcing their results out loud at industry conferences and in the media, which spurred on company senior managers even more.

In the first place, Department of Business Process Transformation was created. Its staff (around 20 employees) took a special course in lean production techniques and were to implement these tools in the entire company afterwards. To do this, they conducted on-site training. In each plant floor, Department of Labor Productivity Enhancement was established with aim to support production staff in implementing their ideas. Many thought that the training would be enough for the employees to instantly start applying lean production techniques to company resources and propose improvements. Adhoc, globally renowned foreign experts in lean production techniques were also involved in the training.

In the meantime, the company established new, more ambitious KPIs (for instance, the number of new ideas per a plant floor or new quality standards of products). They were to serve incentives for new decisions, since meeting them implied big bonuses. Seemingly, coupled with mass employee training on principles of lean production, they were supposed to result in a drastic increase in the number of rational proposals from personnel. However, the reality turned out to be different from the expectations.

Having concluded that changes do not happen overnight, senior managers had waited for results for more than two years. However, eventually they found that transformations took place in the Transformations Department alone and did not impact the overall operational results. The employees took mass courses in tools of production organization, hung on every word about “gemba” and “muda” (Japanese equivalents for “work place” and “wastes”), but almost nothing changed. New lean production approaches were applied in practice only in presence of special training teams. When such teams left, all employees sighed with relief and got back to their usual work manner.

What mistakes did the company make?

Firstly, the Transformations Department was functionally subordinate to the HR Department, which, by default, decreased its significance in the eyes of employees. Since the workers heard about changes and new approaches from visitors from headquarters, who were often lower in the company hierarchy, they turned a deaf ear and took training as a mere formality. The volume of reporting increased, but the behavior did not change. Moreover, in the eyes of employees, any HR-related projects were often associated with “staff optimization”, which implied a risk of being laid off.

Secondly, too great emphasis was placed on directive learning. The employees passed tests and checked their knowledge of 5S methodology and Kanban, learned new terms, but did not realize their value and continued to work in their conventional manner. Line managers, in turn, did not become “change agents”, who could successfully implement them in work areas. Selecting and “converting” such “agents” is a separate and difficult task, since such people are usually not top managers or those who underwent specialized training. Most commonly, they are unofficial leaders, such as foremen who have been working at the plant for many years and are respected by everyone.

Thirdly, a new system of KPIs and bonuses was built around individual and functional efficiency, which means that individual goals and results did not correlate with the corporate ones. Consequently, every leader focused on attaining goals of his or her department by any means, paying no attention to the corporate objectives. Work of cross-functional teams was not well organized, so the so-called “productivity war” began, in which every department longed for improving their KPIs at the expense of other divisions. For instance, the repair shop sought to decrease the number of repairs, despite the fact that it could negatively affect KPIs of the production shop and increase the risk of accidents.

Fourthly, common corporate goals were not delivered to the employees on site. Machine operators and foremen did not know how their individual performance indicators influenced the company profit. Thus, they did not stick to optimal equipment modes, which are more energy- and material-effective. Eventually, neither corporate nor local EBITDA goals were attained.

Last but not least, no measures were taken to change cultural patterns of line managers and production staff. For many years, the company had been working in conditions of resource abundance, and nobody was thinking about saving them. Besides, the company employed the so-called labor dynasties, in which foremen have been working almost in the same manner from generation to generation. It was extremely hard to change their behavior patterns and make them treat wastes as a personal task.

Many employees considered “transformers” to be a threat to them and their workplace, so they merely sabotaged changes. Line managers, in turn, joined the fashionable trend and started using transformations as a chance to climb the career ladder. Visits of headquarter managers to the plants were routinely accompanied by demonstrations of tools that neatly hung under glass and were never used, and talks about 5S methods which were not applied in practice.

Transformation occurred mainly on paper. The best foreign practices were implemented through orders. During one of the senior management visits to the production site, line managers were telling about the results of the transformation process, placing an emphasis on the number of efficiency-enhancing activities. Top managers asked a lot of questions, but in reality, they were only willing to back transformation if the plant demonstrated its efficiency (“First you should prove that the company can work better, and then we will support you.”) Then, one of the principal specialists of the plant asked a question that drastically changed the situation of transformation in the company. He asked senior managers: “Are you personally going to change according to the principles you’re describing?” The affirmative answer of the company Vice-President became a turning point for many employees.

Currently the company is going through the second stage of transformation, which is being implemented with account of previous unsuccessful experience.

CASE 2. Everybody wants changes, but only a few are ready to change

A big production company launched the transformation process in 2010, having hit the growth ceiling in Russia and trying to gain competitive advantage at the international level via transformation. A decision on the need for transformation was made personally by the company CEO, who made it clear to top management at the first briefing that changes are inevitable and they would have to adopt new rules if they want to keep their jobs.

The company leader understood  that the key links were directors of more than 20 affiliated plants and that is why interaction with them required special attention. In Russian reality, a regional plant director is often an authoritarian manager who follows his own rules and meets the target KPIs appointed by the headquarters without allowing drastic outside interventions in company internal affairs and operational activity.

Senior managers were satisfied with the situation, as long as EBITDA grew and the plants met the KPIs. However, as soon as the growth rate slowed down, a productivity issue came up, followed by a reasonable need for a new production system with significant alteration of the status quo. Obviously, not all directors agreed with this. However, each of them was given an opportunity to launch controlled transformations. The question was posed: either the system would be implemented in full or the directors would seek new jobs inside or outside the company. With such options at stake, most regional top managers supported the transformation process, but a few were still transferred to other positions or laid off.

Similarly across the globe, the major problem with transformation in Russia was employees’ resistance to change. In order to detect potential “change agents”, every key specialist was interviewed, often with participation of an outside consulting firm. The “agents” were sought among unofficial leaders who have been working in the company for a long time and held sway over other company employees. After this, they all took the same course in principles of transformation implementation, HR and effective team work. Some employees had to be transferred to other positions, which helped them accept the changes at the end of the day, since many people had no other job opportunities in a single-industry town. Constant training was considered not as a goal in itself, but as a way to promote lean production approaches to company resources among employees.

For top managers to be able to influence their subordinates, the company sent the former to coaching courses, and for many managers, coaching tools became a real breakthrough. After completing the course, many senior managers chose another strategy for interaction with their employees, involving them in work more effectively and striking the balance between the directive and the democratic management styles.

The company CEO regularly spoke at general meetings, appeared unexpectedly at production sites, personally monitored the behavior of Vice-Presidents, and controlled the effectiveness of cross-functional projects, which dramatically increased in number. For example, common goals of the repair and maintenance shop staff resulted in reduced maintenance downtime. The company CEO required similar behavior from other top managers.

It turned out that transformation is not so expensive and not so hard. Many leaders think that the production system and transformation implies complex tools, processes, practices and approaches to implement, and that it is necessary to study specific terms and read many books. In reality, productivity may be attained with minimum expenses and using the simplest tools: vision boards, simplified processes, goal cascading, and daily communication of line managers and employees. Often, such simplification seems insignificant to workers in Russian companies.

Here is the situation that we observed. The company described arranged a visit of several senior managers from outside production companies to one of its plants. After visiting the production sites, taking pictures of all stands, talking to production employees and discussing the methods, all the visitors came to a common conclusion: “It is too simple. We have all of this in our companies at a higher and more complex level.” Naturally, they were too far from the results the company achieved after implementing.  As the visitors said, “primitive” approaches. For this case company, several years of transformation resulted in significant savings from improvements and increased marginality by 10%.

Habit of changing

Transformation always goes sideways. From the outside, it will seem ill-organized. And from within, you perceive it as a reasonable state of affairs. For this reason, it is difficult to overestimate the role of a leader, who can translate the occurring changes through his own behavior. The most successful leaders seek to develop the habit of transformation in their company. It will allow the company to adequately address challenges of the external environment and significantly enhance its stability and productivity.

Bruno Peyron, a famous French yachtsman, used to say that you can’t escape the storm being the same man you were when you got into it. A leader who found himself in a transformation storm should be willing not to change somebody, but to change himself. Only in this case will other people follow him since a personal example is the strongest motivation.

Authors.

Andrey Shapenko, Professor of Business Practice, Moscow School of Management SKOLKOVO.
Marina Filippova, Principal at DuPont.