Chapter One

The Customer Connection:

Addressing the Problem

"Why Do They Call It an Idiot Light?"

Do you lie awake at night, as I do, worrying that someone will come along tomorrow and eat your lunch?

In the electronic '90s, knowledge is king, the Web never sleeps, and competitive challenge increases exponentially. It's easy to feel overwhelmed. Dizzied by the frenetic pace of change and confused by overwhelming choices, too many managers react with too little too late -- then sit back and watch as their companies or their careers slowly wither.

Could this be you?

Absolutely.

Does it have to be you?

Absolutely not -- if you can open your eyes to the three new imperatives of customer-focused organizational design: free, perfect, and now.

Whether we work in the glass towers of the Fortune 500 or a garage startup in Silicon Valley, all of us in business wrestle with the same intractable dilemmas. How do we compete in a networked world of mass customization,
shrinking margins, and global competition? Yesterday change came gradually; today it comes in a flood. How can we ensure that our organizations offer substantial value to our customers now -- and in the future? No one knows what the world will look like in five years or even five minutes. How can we prepare for a tomorrow that we can't predict?

I don't have an easy answer to either of these questions. If there were a pill you could take to stay ahead of the curve, I would have taken it myself long ago. What I have instead is a story of management on trial; a tale of transformation, of great risk for great reward, and of the hard lessons we have learned about inventing a new future.

As it happens, it is my own story, and that of Marshall Industries, the electronics distributor I lead, but the challenges we faced at Marshall are those confronting every organization anywhere in the world today. I'm not a consultant pretending that change is a matter of five steps and a pep talk: I've lived inside its gut-wrenching turmoil. Six years ago we bet our company on a radical experiment, tearing our healthy $500 million business down to bedrock. We threw out all of our old motivational tools, taking 1,100 managers off management-by-objectives (MBOs) plans and incentives as well as abolishing commissions for our 600 salespeople. We changed every operating system at the same time. Then we set out to reinvent ourselves. From those sleepless nights and desperate choices, I've brought back a new perspective and a new prescription, tested in a bare-knuckle business: a better way to think about designing an organization to master the currents of change.

It starts, like everything else in business, with customers. No matter what business you're in, your customers all want the same three things: They want it free, they want it perfect, and they want it now.

Impossible, you say? What do you want when you buy? Don't you think your customers want the same things?

Impossible or not doesn't matter in the end, because these three things are what the market searches for regardless. I guarantee you that as you read this, somewhere, around the corner or around the world, someone is figuring out how to sell your product or service cheaper, faster, or better than you've yet imagined. Recognizing your survival depends on your ability to create an organization that can chase those same elusive goals, only even faster -- or risk losing your customers to the competitor who does.

Look at how drastically your own day-to-day activities have changed, from the way you book your airline ticket to how you get from an ATM to shopping for car prices on the Internet. Five years ago, who had a cellular phone or a fax machine at home? Now they're everywhere, changing the way all of us connect and communicate. The business landscape has changed even more dramatically. Today, the world competes in ways we couldn't have imagined a few years ago, driven by six powerful forces: networked technology, globalization, demographics, the compression of product life cycles, mass customization, and the growing importance of supply-chain management.

"Only Connect"

Marshall Industries is a fifty-two-year-old, $1.7 billion electronics distributor, traded on the New York Stock Exchange. But we're as different today from the old seat-of-the-pants middleman as the Internet is from a cow path. Think of us as a high-speed junction box, connection between two sets of incredibly demanding constituencies. On the one side, we have some 150 suppliers, such as Toshiba, Texas Instruments, and Hitachi, all depending on us to get their products to market. On the other, we have over sixty thousand customers including IBM, Hewlett-Packard, and WebTV, who rely on to us to get them what they need. We're in the middle, thirty-seven locations and 1,600 people, 600 of them salespeople.

It can get pretty intense inside all that. Suppliers and customers measure the life cycles of successful products in months. They live or die on their time-to-market and time-to-volume, and turn to us for help with increasingly complex inventory, manufacturing, and quality-control problems.

And Marshall delivers. We still move boxes -- we ship over ten thousand cartons through our robotic warehouse each day -- but we also sell our ability to move information, the real-time business intelligence our customers need most, available twenty-four hours a day, seven days a week by phone or fax or over one of our twenty-four Internet sites. We still deliver parts -- over 250,000 different items, ranging from semiconductors and disk drives to liquid-crystal displays and programmable logic devices -- but we also sell our ability to create made-to-order solutions, our collective thinking power to anticipate the customer's business problems and to design processes to solve them.

"Virtual distribution," we call it, and it has turned our conventionally successful $500 million company into a $1.7 billion iconoclast in under six years. No less an authority than Bill Gates has decreed that in the wired world, the middleman is obsolete, but we're proving him wrong. We are becoming our customers' connection to the future, connecting people to people, people to technology, answers to questions, solutions to problems, and order to chaos.

Virtual distribution didn't spring fully formed from my head one bright spring morning. The initial vision of value-added service through a seamless and frictionless connection with each customer's infrastructure was largely mine. But the reality, however, was developed through thousands of conversations over the last six years, involving everyone in the company talking day to day with their customers and one another, taking thousands of small steps up the
learning curve.

Every day, suppliers and customers make instantaneous choices about which distributor to use. The challenge is to nurture relationships that become more meaningful as they progress. We have to be able to provide sophisticated answers to problems that customers may not even know they have. Like a furniture designer trying to create an ergonomic chair, we've tried to design our interface to fit customer needs, letting their voices tell us how our processes should look and feel. Everyone at Marshall asks the same one-on-one question: How can I serve you better? How can we more quickly achieve the goals of free, perfect, and now? We are discovering what virtual distribution can mean, together, through the answers we find.

Of course we're open twenty-four hours a day -- customers around the globe want service around the clock.

Of course we're open-book, open-architecture, open-door -- knowledge is power, and it needs to be spread, not hoarded.

Of course we're continually accelerating our investment in research and development -- technology lets us break down the walls between us and them, and helps to build the trust that deepens partnerships.

Our customers wanted a connection that was faster, cheaper, and easier to use, so we learned how to give it to them. We'd wasted time, energy, and money moving paper through a system of evaluation, sign off, or approval. Every data-collection point provided an opportunity for error. Now we move that information electronically, making it available to everyone who needs it whenever they need it, simply with the click of a mouse. Marshall's customers can monitor an individual order until the parts arrive at their assembly line; they can check backlog and inventory status electronically; they can measure their materials usage against modeled demand projections. Suppliers can watch what's moving in their markets, by part number or region, in dollars or units, then tailor their production, pricing, and forecasting against Marshall's numbers. Engineers can review the latest specifications sheets and technical information for any piece on Marshall's line card; they can order a standard sample or order a sample specifically tested for their design, whenever and from wherever they want.

We didn't just increase the quantity of information we share, though. We improved its quality too, by designing our software to analyze such competitive problems as order planning, supply managing, demand modeling, and strategic forecasting. When a customer talks with a Marshall employee, there is no need to waste time with transactional basics; they can both see the same numbers and share the same real-time picture of opportunities and trends. Thus, they can take on specific individual headaches together and tailor solutions that optimally take advantage of each company's skills. We have become supply-chain managers, connecting our business partners to the expertise and support they need to stay competitive, leading a growing global alliance that is spreading through Western Europe, the former Eastern bloc, Israel, South America, and Asia.

We don't always get it right, of course. Virtual distribution remains a work in progress. We've made some good strategic decisions and executed some of them well, but we've made some bad decisions, too, and executed them terribly. It's not the specific decisions that matter, however; no single new process or tool makes the big difference. What matters is the overall design process itself, using a method of asking questions that nurtures continuous innovation and teamwork, builds customer focus and employee involvement, and delivers ever newer ways to add value for the customer.

Every manager wants customer-focused employees and teamwork, of course, but few actually design the system necessary to create them. Instead, managers often get up on the soapbox at a meeting and announce, "We're going to be more competitive this quarter. We're going to be more flexible. We're going to improve quality and increase teamwork."

If you're just trying to make a halftime pitch, that may be a fine message, but as a strategy it won't get you any real traction. What exactly should "more competitive" mean to your organization? How can you know if you have the processes and structures in place to increase competitiveness? How do you measure it next quarter? But strategy, too, is meaningless without an operational definition. Teamwork, for example, might mean sales, marketing, and credit working together on a new project to develop a support system for the new requirements of an emerging customer. Yet even an operational definition is insufficient: we need a method to make teamwork or competitiveness happen, a way to coordinate people, material, methods, equipment, and environment, aligning them all in support of the same goal.

Business today is like a marathon race in which the runners don't know the course layout, the number of hills, or even who all of the competitors are going to be. In such a race, you don't just put on your sneakers and go out and compete -- it takes discipline and commitment, a concrete plan and a complete training regimen. Moreover it doesn't help much to have someone barking, "Run faster, faster," from the sidelines, or offering a bonus for cutting the time on the next mile. Instead, success comes from putting all the elements -- the right shoes, diet, technique, outlook, strategy, and inspiration -- together properly.

Management by method works the same way. Building a discipline, it asks the marathoner's question -- What does it take to compete? -- and tries to assemble all the necessary elements. It's a "fourth-generation language," in computerspeak, after management by doing, management by directing, and management by objective. Management by objectives focuses on each part of the organization as if it were it were independent, through numbers, then tries to coordinate the results. Management by method gets results by focusing on the
system as a whole. It teaches everyone to recognize the competitive pressures and trends facing the organization, then gives them the tools they need to respond and the training, technology, and responsibility to act as if it were their names on the door.

Asking the design questions that can move an organization forward is primarily the responsibility of senior management -- CEOs, vice presidents, CFOs, CIOs, and board members. Only they have the authority and resources to launch the strategic and structural initiatives called for, and only they have the clout to see them through. But, at the same time, men and women at every level organization can reinvent the way they do their individual jobs the same way on a smaller scale, developing the same discipline, tools, and design skills. Don't just measure yourself against competitors or industry benchmark: try to look around corners, and your future challengers, aiming at the ultimate goal -- free, perfect, and now -- and searching for the quantum leaps that make you more competitive as you move forward. If you're not learning new things every day about how the forces of change are redefining value in the marketplace, how can you possibly compete with someone who is?

Acting on this learning is not always easy, though. No one likes change, except, perhaps, a wet baby. By the time most managers reach senior leadership, they have a successful track record, a style of inquiry and problem solving, years of experience and a history of success. So they stick with what they know. But in an era of radical change, the style and tools that made you successful in the past may not work anymore. How valuable are ten years of experience if the experience is the same, repeated year after year?

It may well be, in fact, that our whole hyper-competitive global-electronic era, seemingly so ubiquitous, is still only a rambunctious pre-adolescent. Consider these items: In 1996, Americans sent over 100 million e-mails a day; within the next five years, that number is expected to exceed 5 billion. Three years ago, who knew the meaning of "www.anything"? Today, great corporations thrash about in the electronic jungle, chasing one false scent after another. Supposedly wired investors have launched scores of purportedly pioneering technocompanies, only to watch them crash and burn. And yet, consider this too: More than half the people in the world have never made a telephone call, let alone used a computer.

Do you see the risks? Tomorrow's competitor may be invisible to you today, sitting behind a terminal in Riga or Cincinnati or Shanghai. Do you see the opportunities? The only thing more breathtaking than the planet's astonishing new information infrastructure is the potential market for it: billions and billions of untapped customers in billions and billions of the earth's off-line crannies. Are you prepared to compete?

What Could the Dinosaurs Have Done?

By any conventional measure, Marshall was thriving when I assumed the president's office six years ago. Founded in 1947, the company had grown into one of the industry's top five, building a reputation along the way as a savvy and scrappy competitor. Yet we felt as if we were running on a treadmill. And while the numbers were good, our customers kept asking for ever lower prices, fewer defects, better real-time service. I was afraid -- terrified, to be honest -- that we wouldn't be able to deliver.

We seemed stuck in place. No matter what we tried, we were still out of step with our fast-paced customers and their dizzily changing needs. We talked about searching for excellence and customer-focused service, but I couldn't see what we did differently from everybody else that would win us a place in the evolving market. We moved boxes with the best of them, but we didn't do anything that made customers say, "Thank God for Marshall."

I was afraid that we were becoming a dinosaur: big, slow, and destined for extinction. However, unlike the dinosaurs, we knew we had to change. The part we didn't know was what we had to change into or what we would have to do to get there.

We couldn't shut down a $500 million operation for a month or two to consider our choices. We had to design on the fly, and fast, our urgency fueled by shared anxiety. As a first step, we dumped our old competitive model centered on MBOs and pay for performance, dispensing with all the commissions, contests, and individual bonuses that constituted our industry's standard motivators. In their place, we agreed that everyone would be paid the same way, on salary, and share a companywide bonus pool based on our common success. Then we moved to our operating system, replacing -- over one tense weekend -- the 700 different computer programs with which we conduct our 750,000 daily transactions.

Our product lines and the parts we carried stayed the same, but we changed how we sold them, refocusing our mission on customer partnerships, which would be win/win and results driven. We developed a new selling process that lets us turn one-shot customers into lifetime partners, weaning our sales staff from the temptation to compete on price, teaching them to sell Marshall's ability to add value by solving problems. Then we jumped into electronic commerce, becoming the first in our industry on the Internet.

There's no confusing Marshall with some ultra-cool Web startup in Seattle or Brooklyn. But "coolness" aside, we've built a Web site that generates real sales and profits; in fact, it's been named the number-one business-to-business Web site in the world two years running by Advertising Age's Netmarketing magazine. Marshall on the Internet (www.marshall.com) is a virtual catalogue and more. Not only does the Net provide 450,000 part numbers, 300,000 data sheets, and up-to-date inventory and pricing information, but it also features a daily broadcast of industry news, on-line chat, and a real-time individually customized headline service. The Internet lets us communicate new products to the world faster than any else in the industry. To support this, we offer translation into twenty-four languages and currencies, available from the European or the Asian/Pacific server. As of late 1998, the Web sites average more than 2 million hits a week and draw visitors from seventy countries.

Our Web sites help us generate considerable sales, and this is indeed invaluable. But it turns out that the actual sales transaction is the least important part of what our Web sites do. What really counts for customers is what happens before and after the sale, all via Marshall on the Internet. If you're an engineer designing a new piece of hardware, for example, you can visit our Electronic Center to download sample code, test it on a virtual chip, and analyze the chip's performance. If you like what you see, you can order shipments through MarshallNet, the company's secure connection with suppliers and customers, each of whom sees a Web site modified to their own specific needs. So, if you need training in a new technology, there's no need to send another team of engineers to another shabby hotel -- NetSeminar, a Web site connected to our digital studio, allows suppliers to train customers with video, audio, and real-time chat capabilities. Each site like NetSeminar -- and we connect to many -- is a different way to augment the interface with customers.

We changed our technology, but none of these innovations could have worked if we hadn't changed how we managed people, too. Out went the old pyramid that put the CEO at the top. We replaced that model with one that placed customers atop a flat matrix. The job of the front line is no longer keeping managers happy; the manager's job is to keep customers happy. Middle managers no longer simply pass along instructions and monitor performance; their job now is to train, teach, lead, and coach those on the front lines, helping them develop the skills to do their jobs better. We gave the CEO a new title, chief quality officer, and an expanded range of responsibility. The job isn't to shout out orders anymore -- "sell, sell, sell!" -- or even to set strategy. Now the job is to lead, but to build quality at the same time: banish the bottlenecks, improve the communication, and keep everyone's eyes focused on the target.

None of this came easily. Skeptics called our flipped-over organical structure a public-relations gimmick. Competitors dismissed our Internet presence as a waste of money. Our pay plan was denounced with a signed editorial in the industry press. On a few days we felt as if we could leap tall buildings in a single bound, on many more we felt that all we could do was pound our heads against the wall. But every step and misstep has taken us closer to our three seemingly impossible goals.

It's not free yet -- but changing our incentives and metrics has focused us all on the numbers that matter most, our customers' bottom lines. It's not perfect -- but changing our technology has put us at the center of the supply chain, firmly in the information business, and allowed us to develop ever more sophisticated solutions to problems that our customers hadn't even anticipated. And it's not now -- but changing the work we do and the way in which we do it has made us simultaneously more responsive and proactive, better equipped to learn from our mistakes and act on what we learn.

No one depends on customer service more than a distributor, particularly in an age of disintermediation. We don't make anything of our own; we sell only what our suppliers give us, parts that our customers can buy at the same prices from some two hundred other companies. In other ways, though, our business is like any other, large or small, in any other industry today. We worry, like everyone else, about bringing value to the changing marketplace, about sitting uncomfortably between increasingly demanding customers and suppliers, about trying to marry content with delivery, about our ability to adapt to the future, both individually and organizationally.

Free, Perfect, and Now speaks to those concerns. It is for senior executives worried about competitive differentiation, revenue growth, and share price. It describes new ways to make old buzzwords -- words like "continuous improvement," "empowerment," and "customer satisfaction" -- real again. It is for middle managers worried about performance, either individually or as part of a team, showing ways to become an effective change agent no matter where you stand in an organization. It is for business professionals of all ages and levels worried about development and growth, illustrating how to build the portfolio of skills that will keep your market value high well into the next century.

Most of all, Free, Perfect, and Now is meant to be a book of solutions, a handbook to help leaders at every level build the skills that turn ideas into results. Each chapter explains how to design a different element of the company of the future, step by step, from strategic planning and mission design to technology investments and market connections to leadership, employee buy-in, innovation, and global alliances. Chapters end with Manager's Workbooks, toolboxes detailing the key rules of competition in the electronic marketspace or the way to design a more effective compensation system.

One word of caution, though. Free, Perfect, and Now is not for the faint of heart. I'm going to show you a path to radical change, but it's not for the quick-fix, feel-good crowd.

It's not enough anymore to "reengineer a process," add a "quality circle," create a new team, or mouth the catchphrase of the month. Changing your organization isn't like changing your socks. You need to question everything: assumptions, values, and strategy; tactics, processes, and methods; hardware, software, and people. Each company -- and each manager -- must determine what will work best for them.

You can't invent a future with magic bullets or buzzwords. Radical changes start at the heart and spread outward, turning the world upside down and inside out. Who you are must change, as well as what you do. But you can't do it alone. No one is as smart as everyone. You need the hearts and minds of everyone in your organization, married to the powers of technology, all focused on the same target.

While you can't predict the future, you can prepare for it. And that, as we're learning at Marshall, can become a way to invent it.

Copyright © 1999 by Robert Rodin

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