In the book Repeatability authors Chris Zook and James Allen take dead aim at one of the sacred shibboleths of business—that companies must change or die
From the way professional tennis players prepare for big matches to the business processes around product feedback in an Apple store, some of the most consistent behaviors often turn into routines. Ultimately, the nonnegotiables must be embedded into the most important core processes that drive the business.
The story of the creation of the largest beer company in the world, AB InBev, illustrates the origins and ultimate competitive power of such routines. In 1999, Interbrew, the foundation for what is now AB InBev, was a regional beer company with more than 50 percent revenue coming from European operations, totaling 3.2 billion euros in revenues, with about 16 per cent operating profit margin. Today, following the mergers with Ambev, the leader in South America in 2004, and with Anheuser-Busch, the leader in the United States in 2008, the company has grown by eight times and increased its operating profit margin to an industry best of 31 percent while becoming the world leader in beer-about 40 percent larger than its nearest competitor.
The success of AB InBev has been its ability to build leadership positions in its major brand and geography combinations and to be the low-cost producer in most of those markets. The engine of the approach to becoming the world’s lowest-cost beer company is a set of three repeatable systems, called WCCP (world-class customer processes), VPO (Voyager Plant Optimization), and ZBB (zero-based budget process).
Take ZBB, for instance, to see how a set of nonnegotiables (low-cost-producer status, pursuit of best practices, treating expense money as your own, and always zero basing expense levels) is driven into frontline routines, in one element of cost such as travel and expenses. This is one of sixteen “packages” of cost that the nonmanufacturing part of the P&L statement is divided into. Each of the packages has a global “owner” at the management level as well as regional owners. They are charged with driving a well-defined process each year to set benchmark targets, zero base these parts of the budgets, identify best practices to become more cost effective, create completely transparent metrics across the company, and be part of the ZBB team to communicate these globally.
Most of these nonnegotiables and routines trace their roots to earlier years-as is so often the case. In this instance, many of these practices originated with the founders of Ambev, which was one of the great business success stories in South America at the time it combined with Interbrew. Ambev transformed itself from a marginally profitable company with a high cost structure acquired by a private equity firm in the 1980s to a highly profitable business with more than 70 percent of the Brazilian beer market and low-cost-producer status across South America. Ambev acquired and improved brewers throughout South America using its repeatable model. After the merger, the system was extended globally and further codified in the form of these three cost-oriented programs-the epicenter of the company’s strategy and differentiation. These repeatable routines were introduced into Anheuser-Busch, providing a key reason why AB InBev is on target for aggressive postmerger cost improvements.
Routines are the “habits” of an organization. Yet, as with people, these are not easy to change. For instance, only one person in seven after a heart attack actually makes a lasting change in diet, exercise, or lifestyle. The average person makes the same New Year’s resolution ten times in a row without lasting change. No wonder that more than 70 percent of organizational change initiatives in companies fail completely. This is why change programs need to take special care to be highly specific and to focus energy on those most critical routines that need to change, and to persist in driving that change through deeply.
“State-of-the-Core” Metrics
Parallel to the nonnegotiable principles in Great Repeatable Model companies were usually an equally small number of state-of-the-core measures of the health of the core model with relevance down to the front line of the company.
Peter Drucker has also emphasized this point throughout his writings: “I have found it practicable and effective to provide even a foreman with a detailed statement of not only his own objectives, but those of the company... Even though the company is so large as to make the distance between the individual foreman’s production and the company’s total output all but astronomical, the result has been a significant increase in production. Indeed, this must follow if we mean it when we say that the foreman is part of management. For it is the definition of a manager that in what he does he takes responsibility for the whole—that, in cutting stone, he ‘builds the cathedral’.”
| THE OTHER SIDE... those who advocate radical change |
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Dell created one of the greatest repeatable formulas in business during the 1990s, when Dell was the best-performing large company stock in the world for a decade. Though failure to adapt has befallen the company during the following decade, there are still lessons to learn from the breathtaking speed of global deployment of the Dell model, and the use of a few state-of-the-core metrics to drive behavior and consistent focus. When Dell was entering a key stage of its growth- designing its model to reproduce and adapt the formula to other countries (starting with the six major markets), to other products (from personal computers to servers and beyond), and to other segments (from business to consumer, to education, to government etc)—the management team did something that proved to be extremely insightful. It decided to highlight massively at all levels of the organization (including extensive bonus linkages) a small number of physical measures—different from the normal accounting numbers-that represented the state of the core, the deep health of the direct model.
There were five such measures, and everyone knew them. Two related to product failure rates and incidences of successful repair. One was product fill rate—ship to order. So, three were directly focused on the customer experience, which, at the time, was one of the great advantages of the direct (speaking directly to customers and shipping directly to customers) model. The others were the cash conversion cycle (a measure of the inventory and velocity through the supply chain) and growth relative to the market. During that period of explosive growth and profitability, these measures were central to every product, geography, and segment review as the company grew along these three vectors, constantly cloning and adapting to new segments and markets.
Our two hundred—company database probed such simple state-of-the-core metrics. We asked, (1) Is the business managed with a few, specially well-recognized key metrics that stand out above the others? (2) Is the state of the core monitored with a simple dashboard? (3) Are these most important metrics visible and cascaded down the organization? and (4) Do changes in these metrics drive strong actions and decisions? We found strong relationships between the best-performing companies and the clarity and simplicity of the metrics. The best performers, on the 5-point scale for each question, were rated nearly a point higher, on average.
REPEATABILITY
AUTHOR: Chris Zook, James Allen
PUBLISHER: Harvard Business Review Press
PRICE: Rs 995
Excerpted with permission from the publisher, from Repeatability: Building Enduring Businesses for a World of Constant Change by Chris Zook, James Allen. Copyright 2012 Bain & Company, Inc. All rights reserved.
