Friday, August 19, 2005

Change is Inevitable: How one company's tranformation inspire others

Blogger's Note: This article shows how an organization, no matter how old or stodgy, can still be transformed into a fleeting, flexible organization if the bosses agrees to change. Read on...

The Cat That Came Back
How the world’s largest heavy equipment manufacturer rebuilt its organizational DNA.
by Gary L. Neilson and Bruce A. Pasternack

How do you build a better organization? How do you reverse entropy and restore an organization to robust health and profitability? The ongoing research project that we call “organizational DNA” suggests an answer. To change an organization effectively, concentrate on the deliberate design of four key organizational building blocks:

Decision Rights: the rules and mechanics that govern who makes which decisions — and how.

Information: the metrics that measure performance, and the practices that transfer knowledge.
Motivators: the incentives, objectives, career alternatives, and other elements that drive people’s behavior.

Structure: the overall organizational model, including the “lines and boxes” of reporting relationships and job descriptions.

Just as an individual’s physical and intellectual qualities depend on his or her genetic code, the building blocks of organizational DNA determine how a firm looks and behaves, both internally and externally. These building blocks matter because they deeply influence everyone’s decisions — not just decisions made by people at the top of the hierarchy.

For example, if you work in middle management, which e-mails do you leave unanswered? What determines whether you offer a customer a discount to increase volume or hold the line to protect margins? How do you share information with someone in another business unit or region? These daily decisions, taken together, determine an organization’s ultimate success or failure. And they in turn are deeply affected by the decision rights people hold, the information they receive, the incentives and other motivators that reward them, and the organizational structure of formal positions and reporting relationships.

Fortunately, unlike human DNA, organizational DNA can be modified. The key to improving performance is not to blame individual performers, but to realign those building blocks to support decision making that’s more consistent with the overall strategy and performance objectives of the company.

That is exactly what happened during the late 1980s and early 1990s at Caterpillar Inc., a $30 billion global manufacturer of large construction and earth-moving equipment, engines, and power systems. “Cat,” as people call it, is a company that had enjoyed a long-standing record of profitability and market leadership until 1982, when it was almost put out of business by an unanticipated surge of competition. Caterpillar rebounded reasonably quickly and successfully at that time; it returned from near-bankruptcy to profitability in a few short years. But many companies can do that once. What distinguished Caterpillar was the moves it made afterward: The company reshaped its DNA on all four levels in a way that permanently changed the culture and capabilities of the enterprise.

“This was a revolution that became a renaissance,” says Chairman and CEO James (Jim) Owens, who was a midlevel manager at Caterpillar when the story began. “It was a spectacular transformation of a kind of sluggish company into one that actually has entrepreneurial zeal.”

Complacent to Resilient
Although it operates in many cyclical industries that have been hard-hit by recession over the last several years, Cat has delivered 12 straight years of profit, nearly tripling both its top and bottom lines since 1993. Its global markets reach from Peoria to Pretoria, with innovative products that routinely win quality awards and a dealer network that delivers some of the best customer service in the world. In 2003, its shareholder returns were the second-highest among companies in the Dow Jones Industrial Index, and the Financial Times placed Cat 27th in its list of most respected companies in the world. In 2005, Forbes listed Caterpillar as the best-managed industrial corporation in America.

We have our own term for corporations like Caterpillar: “resilient organizations.” These are highly tuned and capable organizations whose power derives from the fact that all four building blocks are well aligned with one another and with the corporation’s overall strategy. Caterpillar’s employees know the corporate objectives and how to reach them within their groups or functions; they are motivated to act, and they have the authority they need to make things happen. As a result, Cat can move decisively in its markets, establishing positions of leadership in most of them. These traits are undergirded by Cat’s organizational model, which has remained fundamentally unchanged for the last 15 years.

But Cat hasn’t always been so well designed for success. During a 50-year period of uninterrupted profits that began in the 1930s, Cat’s DNA had become so badly misaligned that its very existence was ultimately threatened. Its highly centralized decision-making process, manifested in a hierarchical central bureaucracy, resulted in a slow, inward-focused organization that was increasingly out of touch with the market. The company was organized in strong functional divisions called General Offices, or “G.O.s,” each responsible for a piece of Cat’s overall business process — engineering, manufacturing, pricing, marketing, etc. — and each with its own executive vice president reporting to the company president. Over time, the G.O.s became extremely powerful and made all the important decisions in the company. George Schaefer, the CEO of Caterpillar from 1985 to 1990, referred to the G.O.s in retrospect as “the kingpins of decisions.” Everything revolved around them, and they rarely communicated with one another. “It took a long time to get decisions going up and down the functional silos,” recalls Steve Wunning, then in logistics and currently a group president of Caterpillar. “And they weren’t always good business decisions; they were more functional decisions.”

The General Offices also were not tied together through metrics or motivators to keep them pulling in the same direction. For example, if a sales rep in Botswana wanted to give a discount on a tractor, the decision was made by the pricing G.O. at company headquarters in Peoria, Ill., frequently by relatively low-level staffers who had no accountability for market share or volume. Moreover, Cat had no visibility into its profitability by product or country; like everyone else, the pricing G.O. staff received data only on the profitability of the company as a whole. If the projections for the coming year were too low, they would simply raise prices to try to make up the difference.

Don Fites, Cat chairman and CEO from 1990 to 1999, explains that “those of us who were actually in the marketplace, who were trying to sell against Komatsu when Cat’s prices were already at a 20 percent premium — we knew we weren’t going to sell much. Pricing was always a great frustration.” He recalls the perspective of those who worked in sales: “You spent most of your time trying to get special pricing. There were forms you had to fill out and justify, and sometimes these things took weeks to turn around. And on a big deal, rather than being out there trying to sell the quality of your product, all the marketing and sales people spent a great deal of time trying to get exceptions to list prices. It came to a point where [the centrally controlled pricing] was almost self-defeating.”

This was only one example of Caterpillar’s basic problem. The four building blocks of its DNA — its centralized decision rights, missing or siloed information about such important issues as competitive position and internal profitability, weak incentives that promoted local instead of global success, and its function-dominated organizational structure — reinforced one another’s weaknesses and undermined the company’s competitiveness. But these organizational flaws and frustrations never got much attention within Cat because its product and dealer strength could effectively overwhelm any competitive threat. And, frankly, most people in the organization were pretty comfortable. “It was a lot easier for a lot of people,” says Gérard Vittecoq, then a junior marketing manager and currently a group president of Caterpillar, “because accountability was just doing what Peoria was telling them. No initiative, no risk.”

Then, in the early 1980s, the global recession and runaway inflation combined to turn Cat’s formerly cozy markets into attractive new opportunities for several competitors, key among them Japan’s Komatsu. Caterpillar posted the first annual loss of its 50-year history in 1982.
Cat’s senior management recognized that one of their company’s most important competitive assets was its distribution system, and that whatever happened, that distribution system had to be protected. So they decided to continue selling to dealers at a price that allowed the dealers to make a small profit. Although Caterpillar did not lose a single dealer, the policy was expensive. In 1983 and 1984, Cat lost a million dollars a day, seven days a week. It was “almost like hitting a wall,” recalls Group President Gerry Shaheen, who was an area manager in North America at the time. “New entrants had come into our competitive space and had changed the rules of engagement. The bad news is, it happened. The good news is, it was a wakeup call.”

The crisis brought front-and-center the fact that costs were too high. So Cat launched a massive $1.8 billion manufacturing modernization program called Plant With A Future (PWAF) that dramatically reduced manufacturing costs. In 1985, the same year that Mr. Schaefer became CEO, the rising tide of a recovering global economy lifted a lot of boats, including Caterpillar’s, and the company returned to profitability. By 1988, Cat had surpassed its then-record 1981 profit levels, and much of the organization felt relieved and perhaps a bit smug at having survived the most threatening period in its history. But some in senior management still had nagging concerns: PWAF had done little to solve the problems that made Cat internally focused, slow, and unresponsive to customers.

Upsetting the Applecart
As CEO, George Schaefer was determined that Cat would not be caught flat-footed again, at least not on his watch. He understood that the competitive pressure on Cat was likely to increase, and that others in the company needed to feel more of that pressure directly. He began informally, by inviting a rotating group of middle managers to breakfast once a week. The attendees understood Caterpillar’s weaknesses and were willing to talk about them. By contrast, as in many centralized organizations where authority is held by a small number of very senior executives, Cat’s senior management had too much vested in the current organization to be expected to share their most serious concerns with the chairman.

In 1987, Mr. Schaefer asked each of his senior managers to provide a list of their best and brightest subordinates. When all the lists were combined, “we had about 40 names, but there were one or two that I [added] because they were real renegades — they were clear thinkers, they would ‘upset the applecart.’” In the end, he chose eight young managers to form Caterpillar’s first-ever Strategic Planning Committee, or SPC, to help him chart Caterpillar’s future. Meeting for half a day each week, the SPC was charged with taking everything back to basics, figuring out where the company stood and where it was going. Everything was on the table, and the debate ranged widely for the first few meetings. Glen Barton, who was on the committee, and who would later become chairman and CEO of Caterpillar, credits Mr. Schaefer with being tolerant enough to allow this kind of free-swinging, unguarded discussion. “He wasn’t defensive,” says Mr. Barton. “He didn’t come out and say, ‘Well, you can’t do that’ or ‘That’s not what we’re here for.’ He was more receptive to hearing what people had to say and what their frustrations were than trying to give specific direction as to where we might go.”

Mr. Schaefer announced that he was meeting regularly with a team of “breakthrough thinkers.” The rest of the organization didn’t expect much to come of it, but it became increasingly clear to the SPC that a major reorganization was needed. As Mr. Barton later recalled, Cat was “just not getting the job done in terms of the final customer. We were too long to react, too long to get a price change. And we did not have clear accountability. If we were more optimally organized, we would be more responsive, more effective as an organization, more competitive.”

Seven or eight months into the initiative, Mr. Schaefer concluded it was time to get the SPC’s findings onto senior management’s agenda. But that would be no small feat, given that the findings were not particularly complimentary to senior management, and the recommendations would in large part dismantle the organization Cat’s leaders had spent their careers building. So Mr. Schaefer introduced the ideas gradually, first by inviting Don Fites and Jim Wogsland, who were then president and executive vice president, respectively, to join the SPC. Mr. Schaefer recalls that “the first couple of meetings were really tough, because when [Fites and Wogsland] heard what we were thinking about, they said, ‘You can’t do this!’ But as they got deeper into it, they quickly came aboard. Once I got those two aboard, I knew I had it made because I could bring the rest of them aboard. It was a tough road for a month there. I didn’t want to get them to just tell me they were buying in; they had to buy in.”

And buy in they did. In Mr. Fites’s words, “We just couldn’t live in this [G.O.–dominated] world. Even though we came up through operations, we knew that the frustration level of the company was very high and we had to make these changes.”

Structures for Accountability
Although all four building blocks of Cat’s organization would eventually be overhauled, Mr. Schaefer and Mr. Fites began with structure. They had initially planned to roll out a new organizational “blueprint” gradually, but they (and their fellow senior executives and board members) soon saw that reorganizing all at once, if it was handled well, would force people to wake up and realize that the future held different relationships, a different structure, and a different way of doing business. So they engineered a complete restructuring to take place virtually overnight.

On the day the restructuring was announced — Friday, January 26, 1990 — the functional General Offices were in charge of everything. The following Monday, they simply ceased to exist. Their talent and expertise, including engineering, pricing, and manufacturing, were parceled out to new “accountable” business units that would be judged on divisional profitability. Some of the leaders of the old G.O.s were demoted to division managers in the business units, expected to serve the product and marketing managers upon whom they formerly imposed rules. The old metrics and flowcharts were gone; in their place were profit and loss (P&L) statements through which the new business units reported their performance.

“And then,” laughs George Schaefer today, “I retired!” In 1990, he relinquished the corporate helm to Don Fites, who led the charge of implementing a new, reorganized Caterpillar.

The new organizational structure moved accountability dramatically downward in the organization. Business units could now design their own products, develop their own manufacturing processes and schedules, and set their own prices. They could make their own pricing decisions, develop their own product designs, and create their own manufacturing and marketing plans. They did not need permission from anyone at headquarters.

But the business units were also accountable for how well they used those decision rights. They would be judged on the profitability and return on assets (ROA) in their divisions. If a division could not achieve 15 percent ROA or higher, it could face elimination.

This represented a profound change for nearly everyone at Caterpillar. And the speed and certainty with which it was announced was every bit as surprising as the change itself. Jim Owens, who was a managing director in Indonesia at the time, recalls: “I got a phone call on January 4th, my birthday, while I was on vacation at Squaw Valley. I was told there would be a reorganization, that I would be promoted to [corporate] vice president and president of the solar business unit, and that I should just be in Peoria on January 28th for my first council meeting. At that time everything would be explained to me.

“I asked if I could talk to the guy I was replacing but was told not to talk to anybody. ‘You show up in Peoria, and don’t come early. The meeting is the morning of the 28th. You get here the night of the 27th.’ I showed up on the day of the meeting, and nobody knew who was going to be there from the executive office!”

With headquarters much leaner, its remaining executives focused almost exclusively on setting goals and measuring performance for the business units. Mr. Fites, as the new CEO, held regular meetings with each of his division vice presidents, keeping notes in a spiral-bound notebook on what the managers said they would achieve. At the next meeting, Mr. Fites would produce the notebook and review each manager’s performance against the commitments made in the previous meeting. “It worked very well,” recalls Mr. Fites. “Instead of having all this energy used internally, we focused on the end game: What are the results we want?”

For a business unit manager, the two models produced starkly different behaviors. Before the reorganization, a plant manager in, say, Grenoble, France, would be told by headquarters in Peoria to buy a particular fabrication machine from a certain supplier at a given price and to install it according to a predetermined layout in the factory. The plant manager would fabricate parts according to drawings developed in Peoria, using prescribed manufacturing processes. When the resulting parts were defective, he or she would call Peoria, complaining about the design, the machine, the supplier, or all three. Naturally, he or she would be inclined to assign blame elsewhere, because the onus was on headquarters to fix the problem that they had created with their design, their machine, their supplier.

But after the reorganization, when defective parts came off the line, there was no reason to call Peoria. Instead, the plant manager fixed the problem independently. If the supplier was the problem, the manager’s purchasing group found another. If the drawing was bad, his or her engineers redesigned it. The clear accountability of the new model forced people to focus their attention on finding a solution instead of pointing fingers.

Entrepreneurial Decision Rights
The reorganization — and particularly the shift to an accountable business unit model — dramatically decentralized decision rights. Although centralized, siloed organizations often contain very deep functional talent, they give very few managers the experience of dealing with a broad range of problems. Often, when such organizations move to a more decentralized model, long-hidden talent weaknesses are suddenly exposed.

Cat was no exception. At the time of the reorganization, very few people in the company had any previous experience in running a business. Almost everyone in senior management had grown up inside the old, functional Cat; they knew well how to operate within the silos that had just been obliterated. Now, several of them were being handed the keys to multibillion-dollar business units, with little or no formal training. Some couldn’t manage the transition and the new autonomy and had to be moved to positions with less authority. But many business unit leaders found the new decision rights invigorating and were thrilled to see their first divisional P&L.

“The most spectacular part of the job was that we really didn’t know what they expected us to do,” says Dan Murphy, currently vice president of purchasing, who became global manager of the hydraulic excavator line in the reorganization. “There weren’t a whole lot of guidebooks. We could do what we thought was right. We could make informed decisions, and we got tremendous support. And we were kings.”

A.J. Rassi, who became the general manager of the wheel loader and excavator division in Aurora, Ill., shortly after the reorganization, recalls the first time he saw his divisional P&L: “I was so excited, because I was in a very profitable business unit and I could see that we were making a lot of money for this corporation. We had meetings every month and shared the P&L statements with our top management people in the Aurora group. And, in our plant managers’ meetings, we showed every plant, profit or not. Before, there was nothing.”

Others experienced a rude awakening. When Jim Despain became vice president of the track-type tractor line — the product line on which Caterpillar was founded — he was shocked to learn that “we were losing a lot of money. We had no idea how to fix it. [And this was the] first time we realized it, because the company was profitable, and we had the best product, the original plant, the most seasoned employees.”

But resourceful, empowered managers eventually figured out how to run profitable businesses. The accountability and autonomy of the new model unleashed a vast amount of entrepreneurial energy and managerial discipline from Cat’s considerable talent pool. “People really started intensely looking at how they made money in their division,” recounts John Pfeffer, then a plant manager at Caterpillar, who has since retired. “You’d say, ‘I’ve got to take $20 million, or $50 million, out of my cost structure this year, and the only way is to identify the stuff that clearly I shouldn’t be doing. So why is my assembly and engineering plant cutting steel? I’ll outsource this to Mexico at $4 an hour versus us doing it at $45 an hour.’ That was really the catalyst. People started putting together one-year and three-year plans, and it was almost embarrassing what people could come up with,” compared with their performance in the past.

Information Heroes
At the same time, Caterpillar completely changed the information flows in the organization and the metrics used to measure performance. A high return on assets became the overall goal. ROA was correct, simple, and straightforward to use, which was particularly important for the pragmatic engineers who were mostly now running Cat’s businesses.

Only a few of Caterpillar’s divisions sold to outside customers; the rest lacked any natural measure of revenue to use as the top line of their P&L. For the profit-center model to work, Cat needed to create a measure of internal revenues. This was provided through transfer prices, at which Caterpillar divisions “bought” and “sold” intermediate goods from each other. It is easy to underestimate the importance of transfer prices. After all, they are tantamount to “trading wooden nickels,” since they only move money from one division in the organization to another.

However, because transfer prices enable organizations to re-create supply and demand economies inside their boundaries, they are the often-overlooked linchpins that hold decentralized organizations like Cat’s accountable model together.

Using market-based benchmarks, divisions would negotiate with each other to determine transfer prices. These negotiations were often contentious and protracted, and consumed a lot of management time and attention. But they were essential to making the new organization work properly.

Jim Owens recalls a meeting of the administrative council two years after the reorganization in which “a large group of vice presidents from materials purchasing and the plants gave a little presentation about all the time they spent doing commercial negotiations over transfer prices. ‘We’re too inward looking; we’re wasting our time.’ And Fites got up and said, ‘You don’t understand. Half your cost is purchases from outside suppliers. U.S. Steel didn’t have any trouble whatsoever establishing those prices. So that’s the way we’re going to run the railroad. If you can’t work that way, you can get another job.’ That ended the debate rather succinctly.”

As a Ph.D. economist and new CFO at the time, Dr. Owens recognized that the business unit structure could uncover cost problems only if transfer prices were negotiated from market benchmarks, “so the losses showed up where the cost problems were. And if you lose that discipline, you’ve lost it. I was thrilled that [Fites] took that very staunch position.”

It was no small feat to create reliable metrics that would give every division its own balance sheet and P&L. In June 1990, Mr. Fites went to the “unsung information heroes” (as one observer later called them) of the accounting division and asked how long it would take. They said they thought they could do it in three years. “I told them, ‘I want every one of these divisions to budget next year on the basis of their new balance sheets and come up with a P&L,’”
Mr. Fites recalls. “And Bob Gallagher, who was our comptroller — the blood drained from his face. I thought he was going to faint right on the spot! But you know what? They did it. And they did it well. We hardly ever had to make any changes in the balance sheets or the P&Ls. That six months was probably one of the most incredible transitions that ever took place around here.”

Motivators on Target
“The great motivator,” says Don Fites, “was survival — survival of the company, your personal survival as an important player, survival of this product that you love and that you designed, the survival of your plant.” Nevertheless, Cat’s reorganization also involved an overhaul of the compensation plan. Before the reorganization, individual bonuses were based on overall corporate performance rather than business unit objectives. After the reorganization, an employee could make anywhere from 7 to 45 percent additional salary per year based on meeting business plan targets.

These incentives cascaded through the organization and helped the business units focus on tangible, measurable outcomes that line employees could affect. For example, John Pfeffer recalls a new concetration on meeting delivery commitments: “We supplied all these little components, and prime product plants just go berserk when you shut them down because you missed a shipping date. So our incentive plans were heavily skewed [toward meeting the shipping dates]. And what happened was, we started meeting [those shipping dates without] expediting stuff all the time.”

Mr. Schaefer (who remained on the Caterpillar board for several years after retiring) credits the compensation plan with generating buy-in for the change deep down in the organization. “We had a lot of trouble in the middle and lower ranks buying into these many changes. But when we told them, ‘If you get your revenue up by 10 percent, and you get your profit up by 20 percent, here’s the amount of bonus you earn,’ they bought into that in a hurry!”

The compensation committee of Caterpillar’s board set up a long-term incentive plan for top management, and short-term incentive plans for individual units. Under the short-term plans, managers in business units who outperform their ROA targets receive bonuses even if the company does not meet an overall target. But by far the larger incentive is provided by the long-term plan, under which Cat executives can earn bonuses when the company outperforms a peer group of about 15 other companies on ROA and profitability growth targets. Glen Barton believes that the incentive plan has “caused people to work together.”

Sustainable Resilience
Cat’s timing was fortuitous. In 1993–94, the effects of the reorganization began to kick in at the same time as the economy started to recover. “The world started getting good,” recalls Mr. Pfeffer. “People started making their business plans, started getting a lot of incentive compensation, and they stopped fighting the change. They said, ‘We did the right thing, I’m happy we’re doing this.’”

The turnaround in Caterpillar’s financial performance was spectacular — and sustained. After posting a $2.4 billion loss in 1992, the company returned to profitability in 1993, and has increased its earnings ever since, reaching a record $2 billion in profits in 2004. Cat’s revenues have nearly tripled since 1992, from $10.2 billion to $30.3 billion in 2004. The results also appear in operational indicators, including dramatic increases in productivity. Cat reduced its product development cycle to roughly 36 months (from 48 to 72 months before the reorganization). Because assets were tied back to product profitability, the businesses no longer sought massive capital investments to renew manufacturing operations for every product upgrade, so capital requirements fell as well.

At the same time, everyday behavior changed focus from internal process and budget to customer satisfaction and profitability. For example, Cat started developing products more in sync with what dealers and end customers wanted. Because each product business unit now had a full complement of functional talent in its new product introduction teams, and those teams were empowered to make all product development decisions without requiring approval from any other source, they could act more quickly and responsively with more complete information. In 1995, Caterpillar introduced an updated version of its D9 tractor after just three years of development. The model was so successful in North America that in only two years, Komatsu withdrew from the market completely in that category.

Another example of Cat’s responsiveness occurred in the early 1990s, when the company bid to supply 800 pieces of road maintenance equipment to the county governments in Vancouver, Canada. John Deere, one of Cat’s main competitors, had offered a big discount and appeared to be the favorite. But Caterpillar quickly assembled an attractive lease program, creating a better deal than Deere’s, and won the entire order.

Group President Stuart Levenick, who was the district manager in Vancouver at the time, remembers that such an approach would never have been possible in the old organization. “First of all, to do that, we had to do all kinds of creative marketing and merchandising programs, and bring in Cat Finance. It was a very comprehensive approach. Second, we had to be able to ship all that stuff in two months, so we essentially took the entire production capacity of the Decatur plant for two months and devoted it to this customer. That would never, ever have happened before the reorganization. Nobody at that level would have ever had the authority to do something like that. Even to propose it would have taken a year to work through the old pricing G.O., and then to get the capacity allocated to do something that was so strategic was impossible.”

There are other examples of formerly impossible feats. In 1997, Caterpillar launched a 40-ton excavator, the 345, with an unprecedented marketing campaign that involved retraining its entire sales force — and the company nearly doubled its percentage of industry sales within two years. A Cat plant in Mexico took excess steel that was formerly sold as scrap and cut it into two-inch-square blocks that could be used for parts in heavy machinery, and then sold those blocks to other Cat plants at half the regular price. In a tractor plant in East Peoria, a team of hourly welders on the production line figured out a way to produce welding lenses for nearby robots. These parts needed frequent replacement because sparks and molten pellets would bombard them; in-house fabrication cut the cost from $62 per lens to six cents.

On a different occasion, when Division Vice President Jim Despain was visiting the East Peoria
plant, another welder showed him a striking innovation he had developed. Mr. Despain, impressed, said he wanted to show the innovation to a couple of group vice presidents the following Friday. The welder demurred. “I’m going to Cleveland Friday,” he said. “I read in a welding magazine that they’ve got something they’re trying out there and I want to go take a look at it to see if it would fit here.”

Even more impressed, Mr. Despain said he would mention to the supervisor that he appreciated the support he gave for this kind of innovation. “Oh, I haven’t told him yet,” said the welder. Here, thought Mr. Despain to himself, was a truly empowered person.
Mr. Despain’s division went from heavy losses in 1990 to significant profitability by 1995 and cut head count from 4,500 to 2,000. “We never invested a dime in more technology, never did any outsourcing,” he recalls. “We just changed the way people worked together. They were putting their own creativity into the opportunities they were provided. They forgot about themselves and started looking at the bigger picture.”

Caterpillar today looks somewhat different from when it was first reorganized, but the original principles of the reorganization are still intact: decentralization, profitability, market-based transfer prices, and accountability. There are more and different business divisions now. Some have been eliminated because they couldn’t perform (e.g., agriculture, lift trucks), and some have been split into multiple divisions (e.g., engines). But the fact that Cat has operated and thrived using essentially the same organizational model it established 15 years ago is a testament to its resilience. Cat does not reorganize every few years, as many companies do, just to “shake things up.” Such a concept would be anathema at Caterpillar.

As do all resilient companies, Cat periodically moves the goalposts to keep stretching the boundaries of what it can achieve. For example, Cat showed a profit of more than $800 million in 2001 at the bottom of the recession, and then raised the bar: The next goal was to be “attractively profitable” at the top of the business cycle, which it achieved in 2004. The next objective is to be increasingly profitable at the bottom of each successive trough.

Cat’s reorganization was deliberately designed to encourage “horizontal” thinking across silos, another trait of resilient organizations. Cat continues to build upon that horizontal emphasis when it develops its management talent, consciously moving leaders across business units, functional areas, and geographies through the course of their careers. After several years with the company, almost every manager at Cat has experience in two or three different business units. As a result, Cat has developed one of the deepest management benches in its industry. In fact, Cat’s organizational structure, with many more-or-less-complete businesses being run by essentially autonomous general managers, has “allowed us to identify people who are business leaders whom we would probably not have uncovered as quickly before,” says Glen Barton.

“People have emerged from this process very capable of leading a business, and becoming a lot more than they probably could have ever realized in the old bureaucratic organization.”
Are resilient organizations problem-free? Can they be managed on autopilot? No. Resilience is not an end state. It’s a never-ending journey. But as Caterpillar’s experience (in contrast to the plight of many other motor vehicle and heavy machinery manufacturers today) shows, it is far better to navigate that journey in a craft whose parts fit together well and make up a seamless whole.

Top 10 Traits of Resilient Organizations
1. They entertain the inconceivable, benchmarking themselves not against competitors, but against industries or categories that may not yet exist.

2. They build a culture of commitment and accountability, expecting and rewarding no less than the best from their people.

3. They move the goalposts, typically every three years, embarking on ambitious new objectives whether or not they feel the hot breath of competitors on their necks.

4. They show the courage of their convictions, charting a course based not on business fads or Wall Street fancy, but on their best instincts and judgment.

5. They bounce back from adversity, detecting setbacks early and mobilizing responses quickly.

6. They think horizontal, flattening their organizations, breaking down silos, transferring best practices, collaborating cross-functionally, and promoting laterally.

7. They self-correct, developing and institutionalizing internal mechanisms for correcting
problems before they reach profit-warning proportions.

8. They listen to the complainers, using mechanisms and processes for surfacing and addressing dissatisfaction among customers and employees.

9. They put their motivators where their mouths are, designing financial incentives (raises, bonuses, benefits) and nonfinancial incentives (promotions, transfers, exposure) to pull in the same direction and clearly point toward what is valued.

10. They refuse to rest on their laurels, resisting or even shunning media praise and hype while pursuing tangible results.

These traits are distinctive because they’re difficult to master, and resilient organizations do not necessarily pursue them directly. Rather, the traits are a natural consequence for any organization that aligns its “DNA” building blocks effectively to strategic goals.

Inside the Transformation
Caterpillar Inc. is one of the few companies anywhere that has successfully completed a revolutionary transformation. We believe that Caterpillar achieved this success because of its deliberate focus on a set of organizational guiding principles. Those principles enabled Cat’s dramatic, wholesale transformation in the early 1990s, and they continue to guide Cat’s response to changes in its competitive environment today.

Former CEO George Schaefer could easily have lapsed into complacency once Caterpillar returned to profitability in the late 1980s. But instead, he forced the question of a more robust organizational solution, and with his team searched for other companies whose examples they might follow. But there were no obvious models for Caterpillar to copy. Most high-performance companies at the time, such as General Electric Company and Hewlett-Packard Company, were made up of relatively independent businesses. Caterpillar, by contrast, was a monolithic business, making most of the components for its highly integrated product lines, all of which went to customers in partnership with its territorially exclusive dealers. So Caterpillar developed its own “first principles” of the organization, interweaving the rationale for change and the design:

• Decentralize all strategic, operational, and financial decisions as far as possible, and give managers enough authority to solve their own business problems.

• Make businesses accountable for their bottom line. Cat’s stronger product lines no longer subsidize weak ones; business unit managers are held personally accountable for results.

• Use market-based transfer prices for the (many) transactions among business units. Transfer prices based on external markets are negotiated between businesses, so that performance issues show up in the business units that are uncompetitive, rather than farther downstream.

• Establish a “single-counted” bottom line. Accrue full costs to each business unit and give business unit managers access to the metrics needed to boost productivity and manage performance. Such cost accounting combined with transfer prices provides each business unit with a P&L for which its managers can be held accountable. The sum of all business unit P&Ls adds up to the P&L for Caterpillar as a whole.

• Expect business unit managers to maintain an enterprise-wide view of Cat as well as see to the strategic, operational, and financial performance of their particular business.

• Hold no business sacred. Product lines that persistently fail to deliver are sold.

Articulating and adopting these principles allowed Caterpillar to manage its monolithic business as smaller accountable units without losing strength. To be sure, there was a frightening 18-month period, just after the company implemented these principles, when it felt like stepping into chaos. But Cat benefited from its characteristic “take responsibility and tell the truth” culture. Once these principles were adopted, the company moved without endless debate, in an orderly, expeditious, and determined fashion.

All four of Caterpillar’s CEOs since the reorganization have told us that it was the most significant event in the company’s history — and in their own professional lives. They each played an important role. George Schaefer instigated it. Don Fites carried it out, not opening the change up for debate, since he knew that would allow people to hold back and stall it out. Glen Barton and Jim Owens continued to institutionalize it, resisting any temptation they may have felt to change course just to show they were in charge. Their steadfastness means that Caterpillar has held to its fundamental principles through four generations of CEOs — a remarkable accomplishment that only a few great companies achieve.

Caterpillar continues to operate according to these same principles nearly 15 years later, even as the company faces new hurdles. Emissions regulations demand unprecedented technical prowess and resilience. China, which will soon be the largest market for construction equipment in the world, is just one of several regions demanding Caterpillar’s presence. New competitors with smaller, less durable equipment (the construction equivalent of light trucks versus semis) are challenging Caterpillar’s business model. And a plethora of new leasing, maintenance, operation, and ownership options have segmented Caterpillar customers’ buying behaviors in ways that challenge its loyal, capable, and well-respected dealer network.

Many companies would respond to such challenges with wholesale change, throwing out their principles and downplaying their existing relationships. At Caterpillar, the choice of exactly how to adapt is likely to be made by the next generation of senior executives, who will be the first group running Cat without direct experience of the Schaefer and Fites era. They are, however, already operating on a global basis, and eager to keep the freedom and accountability that the principles have provided for more than a decade. We suspect that these new leaders are up to the challenge of adapting the organization within the framework of the original guiding principles, and when they succeed it will represent the continued natural evolution of Caterpillar’s transformation.
— Paul Branstad and Jan Miecznikowski
Paul Branstad is a senior vice president and Jan Miecznikowski is a vice president in Booz Allen Hamilton’s Chicago office.
Author Profiles:
Gary L. Neilson ( is a senior vice president with Booz Allen Hamilton in Chicago. He leads the global Booz Allen team that developed the organizational DNA concept and that deploys the related “Organizing for Results” service offering, helping companies diagnose and solve problems associated with ineffective organization and strategy implementation.
Bruce A. Pasternack ( is president and CEO of Special Olympics. Before joining Special Olympics, he was a senior vice president and managing partner of Booz Allen Hamilton in San Francisco, where he specialized in building strategic agendas, developing organizations, and transforming business models.
This article is adapted with permission from Results: Keep What’s Good, Fix What’s Wrong, and Unlock Great Performance, by Gary L. Neilson and Bruce A. Pasternack, copyright © 2005 by Booz Allen Hamilton Inc. Published by Crown Business, a division of Random House Inc. Click here.
The authors wish to thank Booz Allen Hamilton Senior Vice President Paul Branstad and Vice President Jan Miecznikowski for their assistance with the research on Caterpillar, and Booz Allen Principal Karen Van Nuys for her assistance with the development of this article.

Wednesday, August 17, 2005

Maalaala Mo Kaya? The Forgetfulness of the Filipinos

Blogger's Note: This article reminds us of the short memory we Filipinos have. Astrocities committed by foreign powers to us is but a distant past now. Read on...

Memory and truth
First posted 02:13am (Mla time) Aug 17, 2005 By Michael L. Tan, Inquirer News Service

THEY seem to belong to a very distant past, these aerial photographs of Manila flattened after the American bombings in February 1945.

Until you see photographs of people moving around the smoldering ruins. There's a nun carrying a child, making her way across the rubble. There's an emaciated child clinging to her ration box.There are medics pushing a "kariton" [wooden pushcart] with a patient inside. There are the thousands of people fleeing across the Pasig River on a makeshift bridge.

I'm describing photographs from the Remedios Jubilee Mission Exhibition, which was launched in February this year to mark the 60th anniversary of what older Filipinos call Liberation, when American troops returned to the Philippines. The photo exhibit is on loan this week to the University of the Philippines (UP) campus in Diliman, Quezon City, shown at the main library's basement, part of History Week celebrations. The UP exhibit is all too short, considering Friday the 19th is a holiday, but I think the photographs will go back to the Remedios church in Malate district, where I hope the exhibit will continue and more people can drop in.

Pearl of the Orient
The photographs show how costly the Liberation was. Consider the death toll of 100,000 during the World War II battle for Manila -- that's greater than the total number of civilians who died in Hiroshima where the Americans dropped their atomic bomb. Historians estimate that for every six Filipinos killed by the Japanese, there were four killed by American Liberation bombs and bullets.

Manila, the Pearl of the Orient and one of the most beautiful cities in Asia before the war, never quite recovered. Sixty years after the end of the war, Manila remains one of the most squalid cities in the world. It was almost as if the war snuffed out our collective will to create, to live.

Last week, I got a phone call from Carlos Conde, who was doing an article on the end of World War II for the International Herald Tribune. He asked why -- compared with our neighbors -- we seem to be so much more forgiving of the Japanese. He had visited Mapaniqui, a small village in Pampanga province, where several women were raped during the war. Yet that village now sends out its residents to work in Japan, including granddaughters of the raped women who now work as entertainers.

My explanation here is that as a nation, we have not worked hard enough at memory-keeping. Our textbooks mention, only in very general terms, the atrocities we suffered during successive colonial occupations, with the Japanese Occupation receiving the least attention.

Carlos had another interesting angle, which he wrote up in an incisive piece in the International Herald Tribune last Saturday: perhaps, we forget World War II because we are so beholden to Japan, because of its "aid" and, ironically, because it is the market for our women.

Not only have we lost our memories, we've also allowed myths and lies to take over. When Japan early this year cut down its quota for Filipina entertainers from 80,000 annually to 8,000, we saw full-page ads vehemently protesting the move. Today, the government's pre-departure orientation seminars for the women emphasize they are not "japayuki" but Overseas Filipina Entertainers (OFEs), while their recruiters coach them on what to answer Japanese immigration officials. (Sample: Do you sit with your customers? No. What do you do between your performances? I wait in the dressing room.)

We are told to be grateful for the Japanese aid that poured in after the war -- to build hospitals and highways -- without realizing these were loans, many of which mainly benefited the likes of Marcos and other politicians. No wonder we agreed to the Japanese putting up a memorial to their kamikaze pilots in World War II.

One of Mapaniqui's grandmothers told Carlos: "You can't eat the past." Indeed we can't. But even beggars need some pride.

Last week, clinical psychologist Dr. Maria Lourdes Carandang spoke at the University of the Philippines on "Truth-telling and National Healing," drawing parallels between the recovery process for individual victims of trauma and a battered nation.

Dr. Carandang worries that lying may have become a way of life in the country, and this may have happened because we have become so fearful of the truth. Our fears heighten because of the current controversies, where truth-telling is parodied through political circuses. I worry about people who are genuinely concerned, but who have grown weary, and wary. We see people disengaging. Some cop out, refusing to read the newspapers or listen to the news. Others take more drastic steps, making that final decision to join the diaspora because they fear they can no longer raise their children morally in this country.

Dr. Carandang says there's still hope if people can just get together and do what they can around truth-telling; in effect, she's prescribing group therapy, getting people to reconnect and reminding us of what the anthropologist Margaret Mead once said: "Never believe that a few caring people can't change the world. For, indeed, that's all who ever have."

Memory's light
Memory-keeping and truth-telling about World War II means going beyond the facile "good guys" (Americans) and "bad guys" (Japanese) formulation of Hollywood. We all grew up hearing of MacArthur's triumphant landing at Leyte in fulfillment of his promise, "I shall return." We know little about how that return involved the destruction of Manila, or how Filipino guerrillas held the fort through the war; and how many of those war veterans died and are dying without any benefits from Mother America.

We have to recognize, too, how the Japanese suffered because of their leaders' imperial adventures. We need to look, too, at how their right-wing politicians are trying to suppress the past, revising textbooks to downplay descriptions of the Imperial Army's atrocities. Their conservatives recognize the power of memories.

Memory-keeping isn't just remembering the painful aspects of the past. During the symposium at UP, Dr. Elena R. Mirano also talked about how we forget particular moments in history where we dared to stand up. She recounted the debates around the US bases treaty. We were fearful then, that if we voted not to renew the bases, the country would die. But we dared to say "Enough. No more bases." And more than a decade later, we see we've survived. The decision on the bases was a defining moment in our long recovery process, but memories of that historic decision have faded as well.

Closing the UP symposium in behalf of the dean of the College of Arts and Letters, Prof. Joy Barrios quoted from Emilio Jacinto:

"Ang ningning ay maraya. Ating hanapin ang liwanag..."

"Ningning" is the artificial glow, the dangerous glitter and glamour of myths and lies. Emilio Jacinto says all that is illusory, that what we need to search for is "liwanag," light. A wise advice, indeed, as we embark on memory-keeping and truth-telling.

©2005 all rights reserved

Mag-library ka naman!

Blogger's Note: This article is a warning to those too dependent in the Internet. Researching in the library and using the catalog cards is a rewarding experience. It should part of the daily lives of students and researchers alike. Read on...

History and IT advances
First posted 02:04am (Mla time) Aug 17, 2005 By Ambeth Ocampo, Inquirer News Service

TEACHING my favorite nephew to count is a delightful experience. His numerical world is limited by his little fingers. Sometimes as an excuse to tickle him, we extend the counting from 10 to 20 by going from his fingers to his toes. To go beyond one's hands and feet, one needs to use the brain or, at least, pen and paper. With a calculator, one can even go further and faster than we ever can on pen and paper. All this reminds me of the raging issue in grade school: Were we to continue doing Math with our heads, or would we be allowed the use of calculators?

One school of thought rightfully asserted that the calculators would dull the mind. Just go to any department store and watch sales personnel use a calculator for things as simple as 2 + 2. On the other hand, other teachers were of the opinion that a calculator would enable students to do very big and complicated computations. If one did not know the general principles of addition, subtraction, multiplication and division, a calculator would remain useless. The impasse was broken when it was ruled that we could take Math tests with calculators provided every student in the class had a calculator.

The same can be said of computers, except that my computer use is limited to word processing.
A desktop computer or a laptop is merely a typewriter to me, and I am humbled when people a fourth my age show me other things the machine can do. When I was in college, one of my professors refused to accept my term paper because it was printed with a dot matrix printer; she insisted that the paper be typewritten. Things have come a long way since then, and watching both sides of the political spectrum commenting on the "Hello Garci" tapes, armed with the expert opinion of audio experts, made me realize that in some ways technology has made the task of the historian more complicated.

One example is the use of OPAC -- Online Public Access Catalogs -- in most libraries today. When I give out an assignment, students will rush to the OPAC to do some research, and when the result is negative, they give up. Most students have to be told that there is such a thing called the Card Catalog, or certain published finding guides, on the shelves that will direct you to the book or manuscript being sought. Worse, some students only do research on the Internet.
They make a Google search and if the result is negative, they have to be forced to physically seek out the source in a library or archive. When I give students a "bring me" quiz, I would let them look for something that is not yet on OPAC. Worse, if I know where on the shelf the book is, I would hide it just to see how far they would go in their research. What happens to research when there is no electricity?

Just recently I was reading a book that cited a source that I had used in an archive in Spain. The author was an armchair researcher who wrote the archive, requesting a copy, and was told what he was looking for did not exist. When I visited this same archive a decade after I had first done research there, the staff were bragging about their state of the art, modern search engines and their OPAC. I requested a document and got a negative reply.

I repeated the process and got the same answer. So I consulted an archivist who shrugged his shoulders and said: "Well. If it's not in the OPAC then it doesn't exist." I insisted that the document did exist because I saw it a decade earlier. The archivist just stared at me blankly. Fortunately, I had my notebook and showed him the call numbers. To humor me, he went in the stacks and came back red-faced and apologetic. The document did exist in the file, or "legajo," that I specified. Why did this escape the OPAC? This is very distressing to a historian because, if I didn't see the document earlier and relied solely on OPAC, I would never have seen this important 19th-century document.

More distressing is the news that some libraries and archives have restricted files that can only be accessed by the director or those with the appropriate clearance. What happens to researchers? What about materials that are on diskettes, on programs that are now extinct as dinosaurs? For example, if we didn't print all the files that were on earlier editions of Word or on the now-Jurassic Wordstar, wouldn't all those have been lost to us? What about materials that are on vinyl records or even on those early tape recorders or dictaphones? If you go to the Library of Congress and ask to listen to the famous Watergate tapes that got US President Nixon impeached, you will be told that these have to be run on the antiquated machines that were used to record them, and at the moment there are less than six of these machines in the universe, which are working.

History used to be simpler. You have a photograph that was good as a historical document; but with the advance of Photoshop you can manipulate, enhance or even invent photographs. A tape with a recognizable voice used to be enough to go on, but now we can edit and splice that.
The Internet is filled with a lot of unreliable information. So the historian still has to be armed with a critical and inquisitive mind. This pre-requisite has not changed no matter how advanced and complicated technology has made of the discipline.
* * *
Comments are welcome at

©2005 all rights reserved

Tubiig! Water Crisis in Central Luzon

Blogger's Note: Water crisis is looming north of Metro Manila. It affect the metropolitan area as well as nearby provinces such as Cavite and Laguna. Notice that it uses the watershed as a basic unit for planning. Soil is considered as essential component in planning also. Read on...

Plugging the water crisis in C. Luzon
First posted 01:36am (Mla time) Aug 17, 2005 By Tonette Orejas, Inquirer News Service

SCIENTISTS and government officials gathered in Pampanga for the first time last month to chart a road map to avert a looming water crisis in Central Luzon.
Metro Manila, one of the experts suggested, should start looking beyond the region as its principal source of domestic water.

The "impending serious" water shortage will likely hit Central Luzon in 2025, said Dr. Rex Victor Cruz, a forestry expert from the University of the Philippines, Los Baños (Laguna).
This is simply because the demand-supply equation is lopsided, he said.
Central Luzon, with a population of 9 million, comprises the provinces of Aurora, Bataan, Bulacan, Nueva Ecija, Pampanga, Tarlac and Zambales.

By 2025, when the population in the region would double, the demand for water would have soared twice the potential supply of 12.5 million cubic meters.

To meet future needs, Cruz urged concerted action to strengthen the region's natural systems, mainly the forests of the Sierra Madre, Bataan and Zambales ranges. He spoke at last month's Central Luzon Integrated Water Resource Management Summit.

The watersheds, or vegetation that serves as natural sponges which retain soil, hold water and feed it to rivers, should be sustained by reviving and protecting the forests. Cruz called watersheds the "best defenses" of human settlements when there's little water during dry months and when there's so much of it during rainy months.

Watersheds are the best way to prevent floods and droughts, which Central Luzon has been experiencing in the last three decades.

The region, spanning 2.147 million hectares, has a remaining forest area of 550,921 has, mainly in Aurora, Bulacan, Nueva Ecija and Zambales.

Forests are not well replenished as the amount of rainfall on the Nueva Ecija side of the Sierra Madre has decreased amid higher temperature in the area, Cruz said, citing studies.

Droughts, on the other hand, have been disastrous in the region. For instance, the 1997 and 1998 droughts, caused by the El Niño phenomenon, parched a total of 208,000 has, ruining P140.4 million worth of crops.

The heavy withdrawal of groundwater, widely used in the region through shallow and deep wells, has caused coastal areas to sink 10 times faster than the global rise of oceans, aggravating floods in Bulacan, Bataan and Pampanga, according to marine geologists Kelvin Rodolfo and Fernando Siringan.

The water-holding capacity of the Pantabangan Dam, also in Nueva Ecija, has fallen by 10 percent due to siltation. About 466,000 has of the region's land area suffer from moderate to serious erosion.

Siltation problems also plague the Pampanga River Basin and its 30 or so tributaries in the eastern half of Central Luzon.

Pollution from farms and fishponds, as well as waste from homes and factories, have reduced the capacity of the Candaba and San Antonio swamps-covering 9,759 square kilometers-to serve as a natural catchment of water.

Already, the competition for water has intensified. A case in point is the Angat reservoir system in Bulacan, said Dr. Guillermo Tabios of the National Hydraulic Research Center of the University of Philippines in Diliman, Quezon City.

Angat Dam irrigates 28,000 has, supplies 65 percent of Metro Manila's domestic needs, provides 5 percent of Luzon's power demand, and controls flood.

Water inflow has not been enough such that Angat has had to be augmented by the Umiray River at the boundary of Aurora and Quezon since 2001, Tabios said.

While water rights at Angat have been established since 1979 -36 cubic meters per second (cms) to the National Irrigation Administration (NIA) and 31 cms to the Metropolitan Waterworks and Sewerage System (MWSS) -the reallocation of NIA's water share to Metro Manila during the 1998 drought was made at the expense of Bulacan farmers. Their damage suit for crop losses is pending with the MWSS.

A similar dispute is likely to happen again.

"A concern in the future is the ever increasing demand for domestic water supply in Metro Manila, which is projected to reach as much as 60 to 65 cms by year 2010. The Angat reservoir water allocation in this case will no longer be enough unless NIA gives up its irrigation water allocation, which is possible if certain irrigated lands are retired," Tabios said.

Metro Manila, he added, should look beyond Angat and instead draw from other sources, possibly from the reservoirs in Laiban, Laguna and Umiray.

The water deficit has implications beyond the region.

In addition to providing water for Metro Manila, Central Luzon also produces 20 percent of the country's food.

If not averted, the problem can stunt the progress of the Subic-Clark growth corridor, the country's platform as Southeast Asia's leading logistic and warehousing hub.

The water crisis threatens the basics of survival-food, health, safety and jobs. his is not to say, though, that water management has been a neglected agenda, said Renato Diaz, presidential adviser for Central Luzon, who, together with the regional National Economic and Development Authority and the Regional Development Council, steered the summit to a conclusion of hope and action.

"We needed to integrate efforts," Diaz said.

The road map begins by bringing the task of managing water sources and regulating water use, including tariff-setting, down to the regional, provincial, town, city and barangay levels.

This strategy sits well with Ramon Alikpala, executive director of the National Water Resources Board. "Water is best managed by the same people who live off the resource," he said.
Complex arena

More than 100 participants got a realistic view from former economic planning chief and now Budget Secretary Romulo Neri, who said that water management and allocation covered a "complex arena."

Governance, according to Neri, will play a major role in ensuring an equitable distribution of water as a survival resource and development capital.

©2005 all rights reserved

Saturday, August 06, 2005

Biofuels: The next oil wave

The Next Petroleum
With oil prices going through the roof, so-called biofuels are at last becoming a viable alternative to gasoline and diesel.
By Stefan Theil
Newsweek International

Aug. 8, 2005 issue - A couple of years ago, when the cost of oil started to soar, Joel Rosado didn't think twice. The owner of an air-taxi service in Mineiros, Brazil, with a fleet of 12 planes, he needed to do what he could to contain fuel costs—he spends 20 percent of his revenues each year on 300,000 or so liters of fuel. So he rang up aircraft-maker Embraer, put in an order for the latest-model single-propeller Ipanema plane and tanked up—with alcohol. Flying on ethanol (a form of alcohol) distilled from sugar cane slashed the fuel bill for his Ipanema by 40 percent, at no cost to performance. Now Rosado is buying another brand-new Ipanema and plans to convert his 11 other planes to alcohol, too. The only problem: Embraer, the world's first manufacturer of ethanol-fueled planes, now has so many customers that there's a two-year wait list to convert gasoline engines to alcohol. Embraer is now looking into converting the T25, a military-training turbojet, to alcohol. "At this rate," says Embraer executive Acir Padilha, "the gasoline motor is headed for extinction."

Its demise is not restricted to the air in Brazil. The country's sugar-cane fields now feed a network of 320 ethanol plants, with 50 more planned in the next five years. Most of Brazil's 20 million drivers still tank up with fuel that is cut with 25 percent ethanol, but a growing fleet of new-generation (flex-fuel) cars can run on straight ethanol, which goes for as little as half the cost of gas at every service station from downtown Rio to the remote Amazon outback. To keep up with demand, local sugar barons and giant multinationals will invest some $6 billion in new plantations and distilleries over the next five years. And Brazilian ethanol tankers are plying the seven seas, supplying fuel-hungry countries like South Korea and Japan as they begin to diversify away from oil. No wonder there's talk of Brazil's fast becoming "the Saudi Arabia of ethanol."

Unlike oil, however, no one country dominates the market for ethanol and other so-called biofuels. In the United States, the use of ethanol made from corn has surged, thanks to new clean-air man—dates and a fat federal tax credit. Production is almost as high as Brazil's, doubling since 2001 and already replacing 3 percent of all transport fuel. The energy bill passed by the U.S. Congress last week will double ethanol production again. In Europe, Germany has become the world's biggest producer of "biodiesel," a high-performing, high-octane fuel—the German variety is made from rapeseed—that is cutting into sales of regular diesel at the nation's pumps. In more than 30 countries from Thailand to India, Australia to Malawi, crops as diverse as oil palms, soybeans and coconuts are being grown for fuel. Venezuela, Indonesia and Fiji announced biofuel initiatives just last week. They hope to emulate Brazil, which is revolutionizing both the countryside and the auto industry.

Has the inevitable transition from petroleum to next-generation fuels begun, right under our very eyes? Certainly no one expects oil to disappear overnight—or even in the next one or two decades. Even after the recent surge, farm-grown biofuels like ethanol and biodiesel still account for only a small fraction of fossil-fuel use, as do other renewables such as wind and solar power. But thanks to skyrocketing oil prices, worries about climate change and growing anxiety over the future security of the world's supply of crude, the prospects for ethanol and other biofuels to make major inroads in oil use are bright. Even as much of the world has focused on hydrogen cars, which may still be decades away, biofuels have, in the words of a Canadian report, begun to pose "the first serious challenge to petroleum-based fuel in a century."

The boom has some powerful institutions behind it. As governments across the globe come to grips with global warming, biofuels are seen as a pragmatic step toward reducing carbon emissions. A growing number of countries now require biofuels to be mixed into the fuel supply, and oil companies like Shell and British Petroleum have invested heavily in response. Already, Shell has become the world's largest distributor of ethanol through its global service-station network. Companies as disparate as Du Pont and Volkswagen are jostling for a slice of the $20 billion-plus market. Farmers worldwide are enthusiastic about a big, new outlet for their produce. Environmentalists hail the new fuel as clean and sustainable. Whereas petroleum releases carbon that had previously been trapped deep underground, the carbon in biofuels emissions has simply been captured from the atmosphere by crops. Some carbon and energy goes into production—fertilizers, transport, distilling—but the net effect, biofuel advocates say, is an up to 90 percent reduction in greenhouse-gas emissions.

Serious questions remain as to whether biofuels can be successfully scaled up to take on oil. Would there, for instance, be enough land on which to grow energy crops without putting the squeeze on food production? And will biofuels be able to take hold without tax credits and subsidies, especially if oil prices head downward? Then there's the politics of global trade.
Already, powerful rich-country farm lobbies are trying to prevent exports of biofuel from Brazil, Pakistan and other developing nations. "There's no way to say where this will go," says Paris-based biofuels consultant Christian Delahouliere. "There is too much complexity and politics involved to draw a scenario."

The politics may be complex, but the technology is straightforward. Oil, after all, is itself a kind of biofuel. When plants are put under tremendous pressure for millions of years, hydrogen and carbon atoms rearrange themselves into molecules that, when burned, release abundant energy. Oil is also extracted from most plants by pressing them—peanut oil ran German engineer Rudolf —Diesel's first eponymous engine in 1897. Plants—sugar cane, sugar beets or grapes—can also be fermented to produce alcohol. Like fossil fuels, vegetable oil and ethanol are hydrocarbons that release their energy when burned.

Indeed, what makes biofuels so compelling is that conventional engines can run on them. That means biofuels can be mixed into the existing fuel supply (gasoline or diesel) and be distributed using conventional gas stations. What's more, the biofuels component of what comes out of the pump can be gradually increased as production revs up, says Wolfgang Steiger, biofuels guru at carmaker Volkswagen. Combustion engines can run on gas "stretched" with 10 percent ethanol or less with no modifications. Higher concentrations require "flex-fuel" engines, which automatically adjust fuel injection depending on the fuel mix (more than half of all new cars in Brazil have them). Biodiesel—a high-quality, clean-burning fuel remarkably similar to petroleum diesel—is made from the oil extracted from the seeds of plants like soybeans or rapeseed, along with methanol (a type of alcohol) and a catalyst. Conventional diesel engines easily tolerate 20 percent biodiesel "stretching," and many are already warranted at up to 100 percent. Because biofuels "don't require anyone to reinvent the car," says Volkswagen's Steiger, they offer an advantage over hydrogen fuel cells, a new and infinitely more complex technology.

This compatibility is why many countries have picked up on biofuels as an easy way to reduce their import bill for oil. Thailand is building over a dozen ethanol plants using sugar cane and rice husks for supply. China has constructed the world's largest fuel ethanol facility at Jilin. It uses corn, but Chinese biofuel distillers are also experimenting with cassava, sweet potato and sugar cane. Besides very closely studying Brazil's production methods, Beijing is reported to be eying the idea of importing Brazilian ethanol as well. Japan has already gone that route, signing its first 15 million-liter deal with Brazil in May as a prelude to replacing up to 3 percent of Japan's gasoline, which would generate a demand for 1.8 billion liters of alcohol a year. Another boost to the burgeoning biofuels trade has come from the European Union, whose goal of using 6 percent biofuels by 2010 would require a fivefold increase in the production of biofuel crops—a gap other countries hope to help fill. Malaysia, for one, is expanding oil-palm plantations and setting up biodiesel plants expressly to serve the German market.

A global biofuel economy, with a division of labor favoring the most efficient producers, is key to developing biofuels as a viable alternative to oil. For many developing countries, year-round growing seasons and —cheap farm labor are a valuable competitive advantage over cold, high-cost northern countries. Super-efficient Brazil now sells ethanol at the equivalent of $25 dollars a barrel, less than half the cost of crude. What's more, because parts of the sugar-cane plant are used both to fertilize the fields and to fire up the distilleries, Brazil uses much less fossil fuel to produce alcohol than Europe and America. In those places, by contrast, ethanol and biodiesel cost $50 and up because of shorter growing seasons, lower crop yields, and higher wages.

For either the United States or Europe to replace just 10 percent of transport fuel using today's crops and technology would require around 40 percent of cropland. Southern countries growing sugar cane, on the other hand, can get up to five times as much biofuel from each acre of land. "Without too much effort, producing ethanol from sugar cane in developing countries like Brazil and India could replace 10 percent of global gasoline fuel," says Lew Fulton, biofuels expert at the International Energy Agency. Malaysia, Indonesia and Australia are well positioned to join Brazil as global suppliers of sugar-cane ethanol.

Yet this emerging global market in biofuels is running into some serious political trouble. Developed-country farm lobbies are lending biofuels a powerful momentum, but also demanding protectionist barriers. "Everyone pretends [their enthusiasm] is for the environment, but it's all about agricultural subsidies," biofuels expert Delahouliere warns. To encourage biofuels, the EU pays farmers 45 euros for each hectare of "energy crops" they grow. That gives European farmers a big incentive to keep cheap foreign ethanol from entering their market. When Pakistan got special access to EU markets in 2002 and began shipping ethanol, says Delahouliere, local farm lobbies persuaded Brussels to change course and re-establish tariffs.
The United States also has a 50-cent-a-gallon import duty on Brazilian ethanol. Even within the union, some European countries have raised subtle protective walls. Almost every country has its own biofuel standard with slightly different specifications.

The next generation of biofuels may be easier for northern countries to produce economically. Instead of getting fuel from sugar or oil—a tiny part of the total plant—upstart companies are building new factories that convert a plant's entire "biomass" into fuel. Present fermentation technology leaves the cellulose—a stiff material that gives plants their structure—as waste. (In the case of biodiesel, oil is pressed from the seeds; the rest of the plant is discarded.) Last fall, Canadian firm Iogen inaugurated the world's first commercial plant that takes leftover straw from surrounding farms and turns it into ethanol. The trick is to use genetically engineered enzymes—only now becoming cheaply available—that can convert the cellulose in straw to glucose, which is then fermented to produce ethanol. Shell Oil has invested $46 million for Iogen to complete a bigger facility that will produce 200,000 tons of ethanol a year—at an estimated cost of $1.30 per gallon—once it goes online in 2008.

In Germany, Volkswagen is financing Choren Industries, which is developing a process to synthesize a premium-quality diesel fuel from the cellulose in trees and straw. Cars at Volkswagen's Wolfsburg headquarters already use the fuel from Choren's pilot facility, and a commercial-size plant will go online in 2007. "This will drastically cut the amount of land needed to produce biofuels," says VW's Steiger.

To produce fast-growing crops—all that counts is total plant mass, not fruit size or seed count—Volkswagen is financing research on fast-growing willows and poplars, 50-headed sunflowers, and strains of corn three times as high as normal. "Growing plants for mass will change our landscape," Steiger says. According to a study released in April by the U.S. Department of Energy's Oak Ridge National Laboratory, the United States alone could use these new technologies to replace 30 percent of its current gasoline consumption by 2030—without cutting into food production or greatly changing land use.

The surprising news is that biofuels could help make hydrogen unnecessary. Already, the much-touted "hydrogen economy" looks farther away than ever—it may be 30 years before hydrogen plays any significant role, says VW's Steiger. In the meantime, Brazil dropped its alcohol subsidies in the late 1990s and now makes bio-fuel so competitive it could trump gasoline at $25 a barrel. With the rest of the world following Brazil, hydrogen is going to have to run fast to catch up. "At the very least biofuels are a bridge toward the hydrogen economy," IEA's Lew Fulton says. "But if you add increased use of biofuels, other fuels such as gas-to-liquid and coal-to-liquid, and finally add improvements in fuel efficiency, we may not ever need the fuel cell at all." That would make biofuels a convincing alternative indeed.

With Mac Margolis in Rio, Jason Overdorf in New Delhi and Sarah Schafer in Beijing.
© 2005 Newsweek, Inc.


How to Live Without Oil
New energy sources and efficiency could make petroleum obsolete.
By Amory B. Lovins
Newsweek International

Aug. 8, 2005 issue - In 1850, most homes in the United States were lit by lamps that burned whale oil. As demand rose, supply dwindled—whales became shy and scarce—and prices for whale oil climbed. Then alternative fuels such as smokeless, odorless coal-kerosene began to sweep the market. By 1859, when Edwin Drake struck oil in Pennsylvania, five sixths of all whale-oil lamps had switched to the new fuels. The astonished whalers, who hadn't heeded the competition, ran out of customers before they ran out of whales.

Oil may now be poised to repeat that history. With prices exceeding $50 a barrel, the world's oil habit now costs $4 billion a day. Some experts warn that output will soon peak and prices will reach $100, but nobody really knows for sure (94 percent of reserves are owned by governments, which generally keep the data secret). Fortunately, it doesn't matter: With cheap oil-saving technologies and alternative fuels already at our disposal, the sooner we get off oil, the sooner we'll start making bigger profits.

That's right—profits. The conventional wisdom is that $50-a-barrel oil has made alternatives to fossil fuels economically viable. But the truth is that they were viable back when oil was $25 a barrel. The arguments in favor of phasing out oil have now merely become overwhelming.

That's true everywhere—but nowhere more so than in America, the world's biggest oil consumer. It's entirely possible to cut projected U.S. oil consumption in half by 2025, and eliminate it completely by 2050, without compromising rapid economic growth. Demand could be halved simply by using oil twice as efficiently over several decades; the other half could be replaced with saved natural gas and advanced biofuels. According to a U.S. policy analysis we published last year at Rocky Mountain Institute ("Winning the Oil Endgame"), the cost of these changes would average $15 a barrel. Even if, as the U.S. government forecasts, oil comes down in price by 2025 to $26 a barrel, the net saving in the United States would still be $70 billion a year, and the rest of the world would benefit proportionally. Burgeoning economies like China and India have the most to lose from falling into a U.S.-style oil trap, and the biggest opportunity to avoid it by making their vehicles, buildings and factories efficient from scratch.

Doubling oil efficiency wouldn't be hard. A backlog of powerful ways to save and substitute for oil, amassed since the 1973 oil embargo, remains mostly untapped, even in the most energy-efficient countries. Automakers for instance could profitably increase fuel mileage to 66 mpg (3.6L/100km) for light trucks and 92 mpg (2.6L/100km) for cars. Doing so would cost an extra $2,550 for a midsize SUV, but would pay for itself in fuel savings in two years in the United States and in one year in Europe.

This would require combining hybrid-electric propulsion with new lightweight steels or, in a few years, carbon composite parts that absorb six to 12 times more crash energy per kilogram. New manufacturing processes could then make cars big, protective and comfortable with halved weight and fuel use at no extra cost. The U.S. military could pioneer such ultralight, ultrastrong vehicles to modernize its forces.

Modern aerodynamics, tires, engines and materials can cheaply double or triple the efficiency of 18-wheel heavy trucks and jetliners, too. Boeing's new 787 consumes 20 percent less fuel per passenger mile than its predecessor. Retooling the U.S. car, truck and plane industries would require a $90 billion investment. That may sound like a lot, but spread over a decade, it's worth about three weeks of U.S. oil imports a year. Other countries' retooling would typically yield at least as handsome profits in both money and security.

Once the United States has saved half its oil, it can cost-effectively replace an additional 20 percent with advanced biofuels, and the rest with saved natural gas. Biofuels (based on woody, weedy plants—not corn) will need a $90 billion investment, too, but they'll beat $26 oil, revitalize farming, protect topsoil better and preserve food crops' land and water. Harvesting biofuel crops, carbon credits and wind power all from the same land, much of it now unproductive, can also double or triple net farm and ranch income. Again, details will differ in other countries, but the opportunities are broadly similar—even in Japan, which lacks the Great Plains but is 70 percent forested and could substainably harvest both fiber and biofuels there.

Eliminating oil demand in the United States would thus require a $180 billion investment, half for efficient vehicles, half for advanced biofuels. By 2025, that would save $155 billion every year, create a million new jobs, save a million current jobs and generate 26 percent less carbon emissions. Benefits in Europe, Asia and Latin America are proportional or better. Even oil-exporting countries could benefit: oil may well ultimately be worth more for its hydrogen content than for its hydrocarbons.

Mandates, subsidies and taxes aren't needed to implement these changes. What's needed are smart business strategies and enlightened government policies that remove barriers to adopting new technology. The most important would be to offer "feebates"— a charge on inefficient vehicles that would be rebated to buyers of efficient ones, within each size class. Government would also play a role in helping retool car plants, retrain workers, scrap gas-guzzler planes and cars, and so forth. Customers would have more choices, workers more jobs, everyone more profits. In only two generations, oil—once the foundation of our strength but now a source of weakness—could become as obsolete as whale-oil lamps.

© 2005 Newsweek, Inc.
© 2005

Tuesday, August 02, 2005

Ito ang dahilan kung bakit mabaho ang Metro Manila

11M in Metro have no sewer access
First posted 11:59pm (Mla time) Aug 01, 2005 By Blanche S. Rivera, Inquirer News Service

MORE than 11 million residents of Metro Manila—or around 85 percent of the population—do not have access to proper sewerage facilities, the Environmental Management Bureau (EMB) revealed.

This makes Metro Manila the second worst Asian city in terms of sewer Connection -- worse off than even the underdeveloped city of Dhaka in Bangladesh.

Only between 12 to 15 percent of the population are connected to sewer lines managed by the Metropolitan Waterworks and Sewerage System and private concessionaire Manila Water Co.

“The other 85 percent of the population discharge their waste water directly to septic tanks that do not get cleaned up or do not undergo treatment for years,” said Marcelino N. Rivera Jr., EMB water quality management officer.

These individual septic tanks are not regulated, unlike the sewer line which has a central treatment facility that regularly treats waste water, he added.

EMB Director Lolibeth Medrano said waste water needs to be sucked out from the septic tanks and treated every five years or it gets too thick for treatment.

Those who have individual septic tanks not connected to the main sewer usually overlook this requirement, she observed.

“People do not treat waste water in their septic tanks unless the tanks are clogged,” Medrano said.

She said water suppliers are mandated to treat waste water for free because this service is included in the sewerage charge, which is incorporated in the water bill.

“The problem is that few people know it. Unless the water suppliers get a request to clean up the septic tanks, they do not do it,” Medrano said.

A 2003 report by the World Bank showed that Metro Manila was next to Jakarta among nine Asian cities in terms of lack of access to pipe sewerage.

“Household waste water or sewerage is a major source of pollution because treatment facilities are lacking,” the report said.

“Access to sewerage in Metro Manila is poor compared with other cities in Asia,” the same report added.

Rivera said the government is seeking to reverse the situation with the passage of the implementing rules and regulations of the Clean Water Act in May.

The new law requires all subdivisions, condominiums, malls, hotels and other public buildings in highly urbanized cities (HUC) to connect their sewage lines to the existing system by 2010.

Non-HUCs are mandated to employ a septage or combined sewerage-septage system to ensure sanitation.

Water suppliers like the MWSS, water districts and water concessionaires are required to coordinate with local governments for the installation of sewerage systems.

Water pollution far more dangerous than we realize
First posted 11:51pm (Mla time) Aug 01, 2005 By Inquirer News Service

WATER pollution is an overlooked yet prevalent issue in Metro Manila today. As mentioned in Blanche Rivera’s article, “Metro Manila’s ‘largest septic tank’ near death” (Inquirer, 6/24/05), Laguna de Bay, the country’s biggest lake is deteriorating due to waste from households.

Aside from the fact that the rapid urbanization caused some people to illegally set up their houses near -- or, worse, on top of -- rivers, the settlers themselves have no idea about proper management of waste—one of the major causes of water pollution. In addition, according to Water Tech Online, there are concerns that the rotting heaps of garbage deposited in Payatas, the garbage dump in the Manila suburb of Quezon City, are polluting the reservoir behind La Mesa dam, the source of drinking water for the people in Metro Manila.

However, we tend to disregard the situation, not to mention its effects—such as, groundwater contamination, breeding ground for roaches and rodents -- and the health impacts which are caused by harmful bacteria that can proliferate both in our homes and in our communities. The international environmental group Greenpeace has stated that “La Mesa reservoir now contains toxic substances due to the runoff of flood waters at the Payatas dump site caused by the recent heavy monsoon rains.” In addition to this, The Philippine Urban Sewerage and Sanitation has noted that out of 418 rivers in the country, 37 are seriously polluted and 11 are considered “biologically dead.”

As stated in the “Overview of the Ecological Solid Waste Management Act,” citing reports from the National Solid Waste Management Commission, “only 73 percent of the 5,250 metric tons of waste generated daily are collected by dump trucks hired by our respective local government units. The remaining 27 percent or about 1,417.5 metric tons of our daily waste end up in canals, vacant spaces, street corners, market places, rivers and other places.”

On the other hand, we have rules for waste management. As mentioned in the “Overview,” Republic Act 9003 strengthened the local government units’ role in the collection of both non-biodegradable and special wastes, at the same time as the "barangay" [village] units were to segregate and collect biodegradable and reusable wastes.

As we can see, water pollution is of our own making and its consequences could be much worse in the future. So what is our role here? To formulate new rules? We actually have them already; we just lack the initiative to implement them.

Ponder on this: if each and every one of us were just a tad more responsible and effective, then pollution would actually be history. Would it not be better if the words and phrases “pollution,” “diseases caused by garbage-bred bacteria,” and “biologically dead rivers” -- rather than our natural resources and who knows what else -- become extinct?

©2005 all rights reserved

Execution: The Key to Success

Three Reasons Why Good Strategies Fail: Execution, Execution...

From Vivendi to Webvan, the shortcomings of a bad strategy are usually painfully obvious -- at least in retrospect. But good strategies fail too, and when that happens, it's often harder to pinpoint the reasons. Yet despite the obvious importance of good planning and execution, relatively few management thinkers have focused on what kinds of processes and leadership are best for turning a strategy into results.

As a result, says Wharton management professor Lawrence G. Hrebiniak, MBA-trained managers know a lot about how to decide a plan and very little about how to carry it out. "Most of our MBAs receive great training in planning but far less in execution," notes Hrebiniak, author of Making Strategy Work: Leading Effective Execution and Change (Wharton School Publishing).
"Even though they are good managers, over time they really have to learn through the school of hard knocks, through experience, which means they make a lot of mistakes."

This lack of expertise in execution can have serious consequences. In a recent survey of senior executives at 197 companies conducted by management consulting firm Marakon Associates and the Economist Intelligence Unit, respondents said their firms achieved only 63% of the expected results of their strategic plans. Michael Mankins, a managing partner in Marakon's San Francisco office, says he believes much of that gap between expectation and performance is a failure to execute the company's strategy effectively.

But can better execution be taught? "I think you can at least make people aware of the key variables," says Hrebiniak. "You can develop a model.... If people know what the key variables are, they know what to look for and what questions to ask."

The Pitfalls of Poor Synchronization
While execution can go wrong for a variety of reasons, one of the most basic may be allowing the focus of the strategy to shift over time. The attempt by Hewlett-Packard, after it acquired Compaq, to compete with Dell in PCs through scale is a classic example of goal-shifting -- competing on price one week, service the next, while trying to sell through often conflicting, high-cost channels. The result: CEO Carly Fiorina lost her job and HP still must resolve some key strategic issues.

The first step is to define the challenge. Ultimately, argues Richard Steele, a partner in Marakon's New York office, the challenge of execution is mostly a matter of synchronization -- getting the right product to the right customer at the right time. Synchronization is hard for a variety of reasons, including the fact that "any large company these days sells multiple products to multiple customers in multiple geographies. In order to pursue the scale benefits of size -- those benefits of scale through consolidation -- you now have more and more complexity across the matrix." For example, Steele says, a regional manufacturing initiative in Europe may involve reconfiguring 15 different supply chains and understanding the markets of 15 different countries. "It's really tough to do."

Another classic example of mis-synchronization: United Air Lines' TED, which attempted to set up a competitive subsidiary to compete against upstarts such as Southwest. This was a good idea as far as it went, but United tried to compete using its same old cost structure -- the main reason it was losing markets to the low-cost airlines in the first place.

At other times, plans fail simply because they don't get communicated to all the people involved. "I've done consulting where a major strategic thrust has been developed, and a month or two later I go down four or five levels and ask people how they're doing. They haven't even heard of the program," Hrebiniak says.

Strategies also flop because individuals resist the change. For example, headquarters might want more standardization in a product, but a local marketing executive disagrees with the idea. "He might say, 'I need more nuts in my chocolate bar' or 'I need a different pack size,'" Steele says. "You can only get the cost benefit and you can only consolidate if everybody agrees that we are actually going to execute the strategy."

Many times, there can be sound reasons for resistance. Sometimes a strategy might make sense at the highest level, but its full impact on the whole organization has not been fully considered, according to Steele. For example, imagine that the general strategy calls for promoting one brand throughout the company while taking resources away from another brand. That might make sense in one market, yet be completely counterproductive elsewhere. Faced with the choice to promote a product that's considered an advantaged brand in one market but lags in his own, a country manager is likely to try to fight or circumvent the strategy. "Human nature will say, 'I'm not going to synchronize with you. I'm not going to spend the money where you want me to spend it. And I'm going to fight it,'" Steele says. "And that's what he does."

Cultural factors can also hinder execution. Companies sometimes try to apply a tried-and-true strategy without realizing that they are operating in markets that require a different approach. Even such a world-beater at execution as Wal-Mart, for instance, has sometimes made some missteps because of culture. One example: When Wal-Mart first moved in to Brazil, it tried to lay down terms with suppliers in the same way it does in the U.S., where it carries huge weight in the market. Suppliers simply refused to play, and the company was forced to reevaluate its strategy.

Internal cultural factors may also present problems. Steele points out that marketers typically move from brand to brand over two-year cycles. At the same time, operations executives advance at a slower, steadier five-year pace, which gives each of them very different perspectives both about the organization's past and its future. Employee incentives may create friction as well. "We hope for A but reward B. We say, 'Do this under the strategy,' but the incentives have been around for 25 years and they reward something else totally," Hrebiniak says.

Yet the biggest factor of all may be executive inattention. Once a plan is decided upon, there is often surprisingly little follow-through to ensure that it is executed, the experts at Wharton and Marakon note.

One culprit: "Less than 15% of companies routinely track how they perform over how they thought they were going to perform," says Mankins. Instead, only the first year's goals are measured -- and executives often set first-year goals deliberately low in order to meet a threshold for a bonus. He argues that this lack of introspection makes it easier for companies to ignore failed plans. And ignoring failure makes it that much harder to identify execution bottlenecks and take corrective action.

According to Mike Perigo, a partner in Marakon's San Francisco office, frequent communication is essential if plans are to be executed well. "We have found that very effective companies have regular dialogues between the leadership team and unit managers," he says.

People versus Process
What should be done? Mankins says that there are two schools of thought about the best way to improve execution.

One school emphasizes people: Just put the right people in place and the right things will get done. However, within the people school, there are also divisions. Some experts insist that the right people are hired, not made. "The idea is you get A players, you pay them a lot of money, and you pay them for the performance they generate -- irrespective of what may be happening in some other business or region," Mankins says. Others within the people camp think that the key is to improve executive performance through training, and improve the average employee's performance through the creation of a culture of accountability. For example, W. James McNerney, Jr., the chairman and CEO of 3M, argues that by improving the average performance of every individual by 15%, irrespective of what his or her role is, a company can achieve and sustain consistently superior performance.

A second school emphasizes process rather than people, Mankins says. Larry Bossidy, the CEO of Honeywell and co-author of Execution: The Discipline of Getting Things Done, is one of the leading proponents of this school. Hrebiniak is also a firm advocate of better processes. "If you have bad people, sure, you're not going to do anything well. But how many organizations go out and hire bad people? They all hire good people. So something else must get in the way," he argues. Mankins, however, believes both propositions have merit. "I don't believe those two schools of thought are competing. I think they're just two sides of the same coin," he says.

Marakon's research suggests that companies that have delivered the best results to shareholders combine both approaches. Looking at stock performance going back to 1990, Mankins says, they found that the majority of companies in the top quartile of performance combine attention to process with attention to executive development. Cisco, 3M, and GE are all companies that have emphasized both. Bossidy's Honeywell, on the other hand, has focused principally on process -- and has achieved only average performance.

Five Keys to Getting the Job Done
Whatever perspective is ultimately seen as the most helpful, there seem to be some tangible things companies can do to improve the chances of success. Experts at Wharton and Marakon agree that, like everything else in business management, improving execution is an ongoing process. However, they say there are steps any company can take that should provide some incremental gains. For example:

1. Develop a model for execution.
Strategic yardsticks are plentiful. Michael Porter's theory of comparative advantage, for instance, gives strategists a way to conceptualize market leadership goals. In the evaluation of narrower plans, William Sharpe's capital asset pricing model, or more recent schema such as real options theory, can play a similar role. But when it comes to managing change, there are few such guidelines.

Hrebiniak, who offers such guidelines in his book, notes that it's important for managers to "have a model [identifying] the critical variables that define -- at least for the manager -- the things they have to worry about when they put together an implementation plan. Without that, managers will say something like, 'We just hand the ball off to someone and let them run with it,' and that's the execution plan. That isn't going to go anywhere."

2. Choose the right metrics.
While sales and market share are always going to be the dominant metrics of business, Mankins says that more and more of the best companies are choosing metrics that help them evaluate not only their financial performance, but whether a plan is succeeding. For example, when a large cable company realized that the speed at which it penetrated a new market correlated directly with the number of service representatives it had in the field, executives began tracking the progress of how quickly representatives were being added in particular territories.

But Hrebiniak warns that it's important to choose metrics in a package so that they can change if market conditions change. For example, sales of cars might be a good metric for a car manufacturer, but if interest rates rise, sales will likely suffer. A good set of metrics takes that into account.

What should business units that don't touch customers use as a metric? Hrebiniak says he is often told by lawyers, human resource officers or information officers that the success of what they do can't be measured in numbers. His advice: Ask internal clients what would change for them if your department were good or bad -- or didn't exist? Sometimes questions like that can lead to good ideas for performance metrics.

3. Don't forget the plan.
As noted above, plans are often simply agreed to and then forgotten. One way advocated by Mankins to keep the plan on center stage is to separate executive meetings about operations from those focused on strategy. While Hrebiniak holds that strategy only succeeds when it is integrated into operations, Mankins and his colleagues argue that day-to-day concerns often so overwhelm the executive team that such an agenda management process is the only way to keep executive attention focused on the organization's progress.

4. Assess performance frequently.
Performance monitoring is still an annual affair at most companies. However, according to Mankins, plan assessments at many of the leading companies happen at much more frequent intervals than they did in the past. "The reason why Wal-Mart is so good at execution is it knows daily if what it is doing in each of its stores gets results or not," Mankins says. For example, when Wal-Mart learned this year that its Christmas sales strategy hadn't worked just eight days after the close of the season, it was able to mitigate the damage in a way it wouldn't have if results had been slower in coming. By shortening the performance monitoring cycle -- from quarter-by-quarter to month-by-month or week-by-week -- top management can get more "real-time" feedback on the quality of execution down the line.

5. Communicate.
Hrebiniak says that companies often go wrong by creating a cultural distinction between the executives who design a strategy and people lower down in the corporate hierarchy who carry it out. Asking ongoing questions about the status of a plan is a good way to ensure that it will continue to be a priority.

Meetings between the executive team and unit managers should be regular and ongoing, advises Perigo. It's that kind of "direct, demonstrated leadership," he says, that convinces an organization that commitment to a plan is real and that there will be consequences if the plan is not followed through. "It's a signal of commitment from the top that there's an expectation of commitment from below."
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