Systemic Change Management: The Five Capabilities for Improving Enterprises

By G. Roth and A. DiBella

Weaving together prescriptions with a series of cases, Systemic Change Management describes the value and how-to of a systemic or enterprise approach to organizational change. Each capability presented here promotes change, but when used together create synergies that magnify their individual impact within and between collaborating organizations.

• Language: English
• Publisher: Palgrave Macmillan
• Release date: Jan 12, 2016
• ISBN: 9781137412027

Book preview

Systemic Change Management

The Five Capabilities for Improving Enterprises

George L. Roth and Anthony J. DiBella

SYSTEMIC CHANGE MANAGEMENT

Copyright © George L. Roth and Anthony J. DiBella, 2015.

All rights reserved.

First published in 2015 by

PALGRAVE MACMILLAN®

in the United States—a division of St. Martin’s Press LLC,

175 Fifth Avenue, New York, NY 10010.

Where this book is distributed in the UK, Europe and the rest of the world, this is by Palgrave Macmillan, a division of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS.

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Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries.

ISBN: 978–1–137–41201–0

Library of Congress Cataloging-in-Publication Data is available from the Library of Congress.

A catalogue record of the book is available from the British Library.

Design by Newgen Knowledge Works (P) Ltd., Chennai, India.

First edition: April 2015

10  9  8  7  6  5  4  3  2  1

To Linda and Margie

The book cover displays a photograph of the Yuanyang Rice Terraces in Yunnan, China, a natural system cultivated by the Hani people for over 2,500 years. Rice fields are unique in agriculture where continued care produces ever increasing yields, contrary to the diminishing returns of other types of farming. In a comparable way, Systemic Change Management describes how to promote improvement across inter-dependent organizations that rely on each other to achieve and sustain enterprise excellence.

Contents

List of Figures and Tables

Preface

Notes

Index

Figures and Tables

Figures

1.1 Comparative Spindle Bearing Costs

1.2 Overcoming Differential Wage Disadvantages

1.3 Timeline of Changes at Ariens Company

1.4 Systemic Changes Enabled by the Five Enterprise Change Capabilities

2.1 NUMMI Performance Comparisons

3.1 An Organization and Its Processes

3.2 Organizations and Enterprises

3.3 Causal Loop Diagram Beer Game Illustration

3.4 Company Supply Chain Diagram

3.5 Three Types of Network Configurations

3.6 From Managing an Organization to Cultivating Value Streams to Facilitating Enterprises

4.1 Example of ESAT Workshop Flow and Steps

6.1 Progression of Lean Activities at Warner Robins ALC

6.2 Seven-Week Lean Event Process

7.1 Push Change Models and Their Stages

7.2 Learning and Changing Processes

7.3 Balancing Push and Pull Change

8.1 Paveway System and Its Elements

8.2 Timeline of Raytheon Missile Systems and Paveway Program

8.3 Timeline of the Paveway Program’s Events, Production, and Competition

8.4 Raytheon’s Revenue, Debt, Income, and Operating Ratios

9.1 Reinforcing Improvement Cycle

9.2 Alternative Task Redistribution Scenarios Following Changes

9.3 Reinforcing Growth Processes in Organizational Learning

9.4 The Challenges for Sustaining Learning and Change

9.5 Change Valence

10.1 Timeline of Rockwell Collins’ Changes

10.2 Rockwell Collins’ Performance

11.1 Leading Activities for doing what we know best

11.2 Leading Activities to be an efficient producer

11.3 Leading Activities for pioneering new ways

11.4 Leading Activities for fragile excellence

11.5 Distributing Leadership through a Peloton

12.1 UTC’s Performance Improvements, 2000–2011

12.2 Timeline of Activities and Accomplishments in UTC’s Development of ACE

Tables

1.1 Summary of the Five Enterprise Change Capabilities

2.1 Comparison of Robust and Fragile System Designs

3.1 Alignment Mechanisms in Different Network Structures

5.1 Dimensions of Mass and Lean Production

7.1 Six-Block Change Project Template

7.2 Approaches for Communicating Push and Pull Changes

7.3 Excerpts from Ohno’s writing on Toyota Production System

8.1 Focus for Raytheon Six Sigma Program

10.1 Rockwell Collins Acquisitions

11.1 Improvement Approaches at Unit and Enterprise Levels

13.1 Comparing Organizational and Enterprise Change

14.1 Architecting and Orchestrating Systemic Change Capabilities

Preface

Managers face multiple challenges when they implement changes to improve their organizations. The challenges become even more daunting when managers realize that their organization’s performance depends as much upon the workings of their suppliers, partners, and customers, as it does on their own operations. Through our research we identified the skills and methods to execute change across organizations and came to a fundamental understanding of how managers can achieve the results they desire when also managing change within their own organization.

This book explains what’s required to promote change across organizations that depend on one another. Weaving together prescriptions with a series of short and lengthy vignettes and cases, we explain the value and how-to of a systemic approach to enterprise change. Five capabilities that promote systemic change are described and explained. The reader will come to understand that performance improvement requires internal change as well as collaboration with suppliers and other organizations functioning within their enterprise.

Writing this book has been a collaborative effort undertaken by colleagues who met in 1987 in the MIT Sloan School’s Organizational Studies PhD program. Anthony DiBella and George Roth continued their careers with a focus on learning and change in various venues. Throughout this book, they have drawn upon not only their long-standing relationship but also their research, writing, teaching, and consulting experiences.

Support for the research that led to this book materialized nearly a decade ago when George Roth began working with the MIT Lean Advancement Initiative (LAI). This consortium was created in 1993 after the US Air Force decided to learn and adopt the principles that distinguished successful Asian automotive companies from their struggling North American and European counterparts. The consortium included government agencies, private corporations, including manufacturers and their suppliers, labor unions, and academic organizations – essentially all the stakeholders in the aircraft industry.

The first ten years of LAI focused on developing and adapting methods, which had transformed high-volume mass production in the automotive industry, to the medium-volume, craft-production and maintenance demands of the aircraft industry. In 2004, Roth developed and led an enterprise change research agenda. Support from many individuals in the US Air Force (through the Air Force Research Laboratory under agreement FA8650–05–2–5706), US Army, Department of Defense, and sponsor companies was essential in preparing many of the cases in this book. Debbie Nightingale, MIT Professor-of-the-Practice and director of LAI, provided guidance throughout. Other MIT faculty and LAI researchers, including Earll Murman, Joe Sussman, Donna Rhodes, Kirk Bozdogan, Jayakanth (JK) Srinivasan, Alexis Stanke, Josef Oehman, Tom Shields, and Ricardo Valerdi, also participated.

The onset of LAI’s research engaged MIT students and faculty working with government and industry leaders to identify enterprises that successfully made and sustained changes. The individuals actively involved in the group that studied organizations making enterprise changes were Jan Klein and Joel Cutcher-Gershenfeld, both of whom are colleagues, mentors, and friends. LAI provided the sponsorship to form a team of students and researchers at MIT, which included Jennifer Hartwell, Phech Colatat, Chester Labedz, Betty Barrett, Lydia Fraile, Jessica Cohen, Justin Hemann, Vikram Mahidhar, and Henrik Bresman. They all contributed to the framing of concepts and preparing case studies, along with other working papers and presentations now accessible in an archive at http://lean.mit.edu (LAI’s funding ended in 2013). We are deeply grateful for the many people, some named but many not, who provided access to their work settings and spoke of their experiences in the enterprises we studied.

Two individuals engaged with LAI deserve special mention beyond their participation and support of the enterprise change research. John Carroll, who has been a mentor and colleague, was involved in framing the research agenda and reading early drafts of this book. Eric Rebentisch, who participated in this research and shared his work on product development, has been a sounding board for many ideas and a supportive friend.

Many friends and colleagues provided us feedback and contributed helpful ideas, among them Phil Mirvis, Jean Paul MacDuffie, Hilary Bradbury, Ram Tenkasi, and Henrik Bresman. Others who commented on earlier versions of various chapters include Eric Grosse, John Lewis, Maury Peiperl, and members of the Rhode Island Writer’s Circle.

Like any effort of substance, this project has benefited from a firm foundation and a supportive environment. Faculty and staff at MIT and the Sloan School of Management have offered an encouraging setting to explore the unknown. Significant direction for Roth’s research came in 1991 from Edgar Schein, who guided his dissertation by suggesting that to focus on change as learning was too complicated in organizations. His advice was to make learning a career focus; and this book is a fulfillment of that guidance. Robert McKersie has been a helpful colleague and source of encouragement, including detailed comments on sections of this book. Long-time coauthor and friend Art Kleiner provided thoughtful comments and opportunities for applying and extending these ideas, which included introductions to his colleagues and support from Booz & Co. Perhaps the most important foundation has been the work in organizational learning and the many colleagues at the Society for Organizational Learning. From there, MIT, and most recently the Academy for Systemic Change, Peter Senge has been a friend, mentor, and colleague, providing ideas, insights, aspirations, and opportunities to study and write about learning and change.

Finally, we knowledge the support of our families in allowing us the time and attention required in the writing of this book. Our wives, Linda and Marjorie, and children, Ana, Erika, Maggie, and Sam, are part of our enterprise.

PART I

The Challenges in Excellence

CHAPTER 1

Systemic Change

What Is Systemic Change?

It was 5 a.m. on March 15, 1998, at the start of the first shift when Dan Ariens, son of the chairman and great-grandson of the founder of Ariens Company, walked through the main factory greeting employees.¹ Ariens is a mid-size manufacturer of outdoor power equipment for consumer and professional use, producing snow removal and lawn care products while employing over 1,000 people. Dan was taking over as president, and everyone knew him. He had grown up and gone to high school with most of the workers, labored on the production floor during his college vacations, and held several positions in management. Five years earlier, he had moved to Indiana to run the Stens company, a division of Ariens and an international supplier of parts for outdoor power equipment. While he was gone, the company had been through a series of changes led by a new president who brought with him a team of senior managers that aggressively ramped up production and dealer bookings. Unfortunately, Dan Ariens’ homecoming was not the story of an heir returning to take over a profitable, privately owned business.

Family members had always led Ariens Company until Dan’s father, Michael Ariens, himself an excellent craftsman and manufacturing engineer, stepped aside as its president. Ariens was a vertically integrated company, established over a hundred years earlier as a metal foundry and subsequently extending its business into farm, garden, and snow removal equipment not just in its home state of Wisconsin but nationally. In 1992, after several years of losses, Michael had hired a president to be a turnaround manager and put the company on a firm financial footing. All had gone well. Sales hit new highs, and factories were running at full capacity. While the turnaround president met sales, production, and financial goals, how he did so bothered Dan. Bookings had grown, and production was at record levels, but there was too much inventory. Unit costs had improved, but quality was not where it should have been. Dan was concerned about the company’s finances; and many workers in the plant, while busy, were unhappy with how they were treated.

The troubles that had concerned Dan from a distance turned out to be much worse when he looked more closely. Per unit costs had dropped by the company’s producing at record levels and spreading out fixed, overhead expenses. The volume of finished goods filled the company’s factories, warehouses, and dealer pipelines, and Ariens Company was now choking on that inventory. Costs were too high to profitably sell products, like their snow blowers and lawn mowers, through large big box retail stores, and distributor fees ate much of what were slim profit margins. On top of it all, the turnaround president, whom Dan was now replacing, and his senior management team were owed large bonuses based on exceeding performance targets.

To this point, the Ariens Company story is a familiar one in American manufacturing. It was a medium-sized company that had a long and proud history, was an anchor in its local community, and played an important economic role in its region, employing over 800 people at four facilities. Located in America’s heartland, Ariens made products needed by farmers, gardeners, contractors, and homeowners, while providing jobs for local residents and work for its suppliers. Over the last two decades, the globalization of business and the need to compete with companies in low-labor cost and environmentally unregulated countries has required firms to operate in new ways. Ariens did the best that it could with what it knew, but that best was no longer sufficient. What remained were the ideals and values of its founders, and a need to find ways to improve, compete, learn, and change. The changes needed to be significant, and they needed to happen quickly.

No significant change is completed overnight, but the basis for an organization’s future operations is laid down by the way in which immediate actions are managed. Significant changes were required at Ariens to address multiple challenges. The series of changes Dan Ariens initiated took place within the company and involved reaching out to its suppliers, creditors, and partners. In his first month, Dan terminated three vice presidents and twelve directors, while forming a new management team. Failure to meet loan covenants required negotiations with bankers, and high costs and the low value of reaching Ariens’ dealers and customers through distributors required eliminating them. All the products in Ariens’ inventory had to be inspected and many required refurbishing. For the next year, nothing would be manufactured in several product lines because there was already so much inventory.

Inventory and how to avoid the same problems with it in the future became Dan’s overriding focus. He had to ensure that the company’s future would never be like the past, and that he would never again suffer from excess inventory. What he knew about lean as a production approach was promising because it required little to no inventory. The concepts—just-in-time inventory management, single-piece flow, value stream mapping, and process integration—helped Ariens improve its inventory problems and better its operations. The approach and associated methods were needed but were not sufficient. Broader changes were required to both focus inward and extend outward.

It was fortunate that Dan’s concern went beyond just profitability and included employees. Ariens was his family’s company, and he had grown up with many of its employees, not just working beside them on the assembly line but attending the same schools and playing on sports teams together. The company that bore his family name was a testament to his great-grandfather’s legacy in the early 1900s. Dan’s loyalty and reputation were important considerations as local bankers adjusted loan conditions that kept the company out of default on its credit line and loan covenants. Dan wanted to do more than merely fix the company’s current problems. He wanted to put in place a new foundation upon which a high-performing entity that lasted for decades would be built.

Within the next nine months, Dan had a new management team in place, and the company a new strategy. Ariens started investing in its workforce and did so with trainers hired through the Wisconsin Manufacturing Extension Program. By 2000, one hundred employees had been trained in lean methods. Ariens held its first kaizen event, but it did not succeed. The workforce was skeptical, and several employees began a unionizing effort. Not enough people understood why changes were needed. Dan treated this setback as a learning opportunity and took to the factory floor to promote continuous improvement techniques and demonstrate learning-by-doing.

Dan also sought help from a consulting firm. Its consultants were experienced managers who had led changes in their own companies and worked by teaching improvement methods to teams that determined what to do, where to do it, and then implemented the changes. Over the next three years, the combination of teaching new methods and making improvements empowered Ariens employees. For a week out of each month, Ariens formed employee teams that used those five days to select an area, identify new approaches, design improvements, and by Friday, or over the weekend, implement changes.

Examples of the changes included shifting production from assembly lines to autonomous work cells that were colocated, cross-functional units that completed an entire operation. Each of these cells made subassemblies that flowed into finished products. The cells required teams of workers who were cross-trained in all needed skills and involved in assessing and improving operations. The pattern was to periodically conduct events that improved their work cell’s quality and performance. Over time, as individual cells gained experience, they identified other cells with which they worked that were limiting their improvement efforts. Internal cells began working together and subsequently recognized that external suppliers, partners, dealers, and customers were potential sources for additional improvements. What people learned in their cells, and then in working across cells, was the basis for their working with other organizations.

An example of an improvement, one that was both symbolically and operationally important, occurred when a purchasing department manager proposed buying an important part, a spindle bearing, from a supplier in China. The bearing was being produced internally using a specialized machine at a calculated cost of $31.47. A Chinese supplier offered the same part at a price of only $19.30. Before making the outsourcing decision, several leaders worked with the operators making the spindle bearing. They formed a team to carry out a rapid improvement event that redesigned, reorganized, and improved the production approach. The team’s redesigned spindle and production process reduced the cost to $15.72. Figure 1.1 illustrates the different production costs.

A similar challenge was addressed, with many other parts, subassemblies, and processes required to design, produce, ship, and service Ariens products. To compete with international manufacturers, Ariens had to make many, many small improvements like the redesigned spindle bearing. How could such efforts be substantial enough to overcome what most managers see as insurmountable labor cost disadvantages? As shown in Figure 1.2, there are significant differences in average hourly wages between Chinese ($.53) and American ($20) assembly workers. Where US companies can overcome the difference is by increasing the percentage of value-added work, calculated to be an abysmally low 5 percent.

Figure 1.1   Comparative Spindle Bearing Costs

The sum of improvements within and outside of Ariens went beyond production upgrades and technical issues. Dan modeled a fundamental new style of leadership and management thinking. Most organizations today choose the easy path by deciding to outsource production. Managers can quantify the savings in materiel, and then add in manpower, equipment, and facility savings from operating a smaller organization. In reality, a typical organization does not have managers with the leadership skill, involvement, and gumption needed to teach, engage, and support the changes to be made by an empowered workforce. That lack of leadership and an inability to promote change become detriments to long-term success. The company’s leaders and managers do not understand and never develop the skills to diffuse their efforts in working with their partners, suppliers, or customers.

Figure 1.2   Overcoming Differential Wage Disadvantages

What Ariens diffused was the leadership skill to understand, make, and sustain needed systemic changes. These abilities were developed by holding to some of its initial guiding principles. From the start of Ariens’ turnaround, every manager from every function was involved. Sales, marketing, customer service, engineering, product planning, purchasing, and finance and administration, led by the managers of those functions, learned new methods, formed teams, and developed and implemented changes. As they made improvements in their areas, they learned new techniques and lived through change processes. When subsequent improvement opportunities required changes across functions, the managers and their subordinates could draw upon similar language, methods, and a shared experience to leverage what was a common understanding that guided them in making sweeping gains.

The results from improvement and change efforts accelerated over time as new behaviors and ways of thinking prevailed over the whole system of cells, departments, and units of various organizations contributing to products and services. In 2004, after three years and over 400 kaizen events, Ariens Company began another wave of change. Production organization and its improvement efforts were restructured. Reporting relationships went from departments to product value streams. On the production floor, assembly lines were converted into manufacturing cells, and the operations between them were further streamlined. Internal changes diffused to external partners. Ariens shared what it learned and how it operated with its suppliers and dealers, teaching them their new approaches, helping them learn these methods to implement changes beneficial to their operations. Since managers from all functions, including finance, administration, engineering, customer service, and human resources planned, learned about, led, and participated in these efforts, they could show their improvements and teach these methods to their counterparts in other organizations. In 2005, as a result of many changes, Ariens profits had improved tenfold. Figure 1.3 shows the sequence of events within Ariens that spread to the network of organizations it depends upon.

Systemic Change

Ariens is like other companies that we profile in this book. The company made changes that took it from worse-than-average results to achieving and sustaining high performance. Their process involved not only changing themselves but extending improvements to other organizations. While it might seem ancillary to help other organizations, we found what we call a systemic approach to change as essential to achieving, and more importantly, sustaining high performance. Systemic change involves efforts by companies to change not only themselves but the system of which they are a part. For industrial companies, we refer to the system as the enterprise, or the network of firms supplying parts and services on which they depend in providing what their customers value. Systemic change encompasses the enterprise, the larger set or system of organizations that depend upon each other and make improvements in ways that produce enduring rather than ephemeral value. If you only improve your operations, not only are your changes limited by your suppliers, partners, and customers, but those same stakeholders will impose numerous forces at multiple levels to constrain and resist what you instituted. Other enterprise members unwittingly limit or reverse your changes. Your ability to sustain change requires you to influence and engage others by extending to them benefits from your efforts.

Figure 1.3   Timeline of Changes at Ariens Company

How you manage your own changes affects your ability to influence that system or others in your enterprises. A company’s systemic change abilities are formed and develop in the ways the company changes itself internally and then diffuses those changes beyond its borders to other organizations. Basing efforts on methods that extend to external entities improves the success of internal improvements. The low success rates consistently found across organizational change initiatives, where less than one-third meet expectations or succeed, happen because managers have only used traditional organization change methods, or what we see as an incomplete subset of the larger systemic change approach.² A systemic change approach enables improvement across organizations as it strengthens the success rate and impact of changes within organizations.

Cornerstones of a Systemic Change Approach

Managers do not suffer from a lack of ideas, approaches, frameworks, or methods to bring about change, but there is an absence of theories that actually work reliably and consistently. Ariens returned to not only profitability but prosperity by doing more than implementing lean methods, a new vision, and leadership changes. Ariens developed a systemic change approach, which differs from traditional change management theories and techniques, and is based on the following fundamentals.

Improving at an Enterprise Level: The Systemic Perspective

More so than ever before, the welfare of one organization is dependent on that of many others. The reason is simple. Organizations function in a network or system of interdependent organizations. System-level changes are as vital to organizational success as changes within the organizations themselves.

Coupling Traditional Change with Enterprise Practices

Change management theory has traditionally focused on ways to promote and manage changes internal to organizations. Organizational change coupled with enterprise change leads to better outcomes than either type of change alone. A more complete and more effective approach to change management takes into account changes within, between, and across organizations.

Focusing on Means to Achieve the Ends

It’s important to understand your goals, and many approaches to management and organizational effectiveness emphasize the need for firms to be goal driven. Setting goals and working toward them is viewed as a key to success. Our research indicates that focusing on means produces better outcomes than focusing on the ends or the goals themselves.

Accepting Dependence over Striving for Independence

The cultures of industrialized societies, especially in the United States, value freedom and independence. This orientation encourages separation from others. On a corporate level it leads managers to isolate their operations from those of other firms and promote redundancy by increasing available resources or slack. This isolationism breeds insularity, reduces creativity, increases groupthink, and lowers profitability. Companies would be better served if they recognized their vulnerabilities and built stronger networks of relations with suppliers and other stakeholders.

Valuing Fragility over Promoting Robustness

People associate lean management practices with the capacity to do more with less. Lean management requires working smarter because it creates conditions that eliminate waste and rely more on people, their skills, and team abilities to understand and solve problems. That reliance on people creates a culture of continuous change and improvement. Many companies attempt to reduce uncertainty by building robust systems that are insulated from error, perturbation, or deviation. A major concern is that people are themselves unpredictable. In manufacturing firms, this concern leads to the increased use of automation and robotics. Customarily, automation provides reliability and consistency but results in inflexible performance. In minimizing a reliance on people, managers miss out on their regenerative capacities to learn, improve, and adapt to new circumstances.

Outcomes of Systemic Change

What can managers expect to gain for themselves, their companies, and their enterprises by learning and following systemic change practices? We have consistent evidence from specific improvements like Ariens’ spindle gear in which the cost of the redesign was 18 percent lower than the Chinese-sourced component and a 50 percent improvement over the original internal design. Overall, for the six-year period of our study of Ariens, productivity doubled, inventory utilization improved threefold, safety incidents were halved, and profits increased tenfold.³ These improvements continued as changes within Ariens reached into enterprise operations, including acquisitions of competitors and complementary businesses.

While remarkable, the magnitude of our findings is consistent with more precise and broader measures. Comparisons of over 70 automotive operations found differences between traditional and systemic approaches. The latter required half the human effort in the factory, half the manufacturing space, half the investment in tools, half the engineering hours to develop a new product in half the time . . . less than half the needed inventory . . . many fewer defects and . . . a greater and ever growing variety of products.⁴ A 30 to 50 percent gain across a broad set of measures is consistently the result of appropriately managed systemic changes. These gains move the needle in a positive direction for employees and their unit, the organization and its partners, owners, and customers. In other words, there need not be a trade-off between what is good or profitable for the company and what is good for its people, benefits the local community, or delights customers.

In talking about its abilities to manage systemic changes, George David, the CEO of United Technologies (UTC) at the time, said they expected to double capacity and halve costs,⁵ and had gone from operating margins for UTC’s businesses [that] were 5% in the early 1990s, [then] 14%, and headed to 17 or 18% . . . ⁶ With initiatives across all of its nearly 1,000 worksites, UTC employees maintained statistics for improvements over the period when they began measuring and organizing their sites to when they achieved and were certified for effectively making changes. At one point in time, their findings were a 35 percent increase in sales, 60 percent inventory turnover improvement, 24 percent on-time delivery improvement, 35 percent customer satisfaction score increase, and a significant percentage point increase for return on sales.⁷ Through systemic changes, UTC operational and financial gains did not require sacrificing the well-being of its people, suppliers, or customers. For system achievements to be recognized at UTC, managers had to sustain similar improvements in employee attitudes and enthusiasm for change, customer satisfaction, and environmental, health, and safety measures. These are results that leaders and managers of all companies seek, and the systemic approach to change is, as yet, the only known way to reliably and consistently achieve these outcomes. (The case of systems change at UTC is described in chapter 12.)

Developing Five Enterprise Change Capabilities

Each of the five cornerstones of the systems change approach runs in some way counter to prevailing strategic management practice. The foundation for systemic change and its ability to enable external diffusion resides in the concept of a capability. Analogous to what is a skill or discipline for an individual, capabilities are collective actions, or organizational routines, developed and practiced by a group to produce the results they desire. As people use their capability, they identify with it, gain further skill, and teach it to others, who in turn learn and use it to achieve complementary outcomes.

In researching and writing cases, consulting with companies, reading the literature on management, and teaching these concepts, we were surprised to find a common pattern for the set of practices that enabled companies and enterprises to excel. That pattern, which is the basis for systemic change, fits into five categories, or what we call the five enterprise change capabilities. All five capabilities—promoting enterprise awareness, installing innovation sets, balancing push and pull change, seeking growth, and distributing leadership—were found within and across the organizations and enterprises with which we worked. These enterprise change capabilities helped achieve and sustain high performance both within organizations and across the enterprise of organizations that depend upon each other. These capabilities influenced how individuals thought and acted and were embedded in organizational culture.

Establishing Honda’s North American Automotive Suppliers

When we looked, we found these capabilities for systemic change in more than the companies we initially sought out. For example, these were capabilities that explained the success of Honda’s North American automotive operations. In the late 1980s, after building a motorcycle plant in Marysville, Ohio, Honda established its first automotive plant in the United States. As the facility began producing automobiles, it started with subassemblies and parts from Japan and Japanese suppliers. Approximately 65 of Honda’s Japanese suppliers set up manufacturing facilities in nearby North American plants. Honda’s managers, following their philosophy to produce where they sell, sought out local companies to become its suppliers. The way that Honda developed its relationships with North American suppliers is an insightful example illustrating the prescience and forethought of a systemic change approach.

We sought to understand how these relationships were established by reading about, visiting, and talking with people involved in Honda’s efforts to develop its American suppliers in the late 1980s. Honda was a relative newcomer to automobiles—the company started in Japan in 1948 as a motorcycle manufacturer and only began producing cars in the 1960s. In the United States, it started to manufacture motorcycles in 1978 and so had some experience in developing suppliers. Following its strategy to locally build or buy (outsource) components, Honda faced a choice as it started to manufacture cars in the United States. It could work with the same large firms that supplied the Big Three automakers (Chrysler, Ford, and General Motors), firms that had advanced technologies and superior production capabilities. Unfortunately, these suppliers were inflexible and not responsive to customer needs, possibly due to commitments and entrenched ways of operating with the Big Three. In contrast, smaller suppliers were eager to work with Honda but would need considerable assistance in meeting cost, quality, and delivery requirements.

Honda started by placing ads in trade magazines soliciting firms with appropriate locations and abilities to become its suppliers. Responses were followed up with an extensive questionnaire asking about the firm’s history, equipment, and production approaches. For the companies identified, the next step was visits from Honda’s management, which included discussions of improvement methods and business philosophy.

What surprised the managers at these smaller firms was that these discussions brought senior managers from Japan to visit with them rather than just Honda’s purchasing people based in the United States. Counter to American companies that sought competitive bids for specific products and chose the lowest price among qualified bidders, Honda leaders first sought to understand the supplier and develop a relationship before determining the specific product they would provide. The conversations with owners and managers extended from the state of their plant and equipment and production experiences to their business approach, attitudes, values, and even management philosophy. By talking about such topics, Honda’s leaders could assess and project how each firm would respond if problems occurred and whether Honda and supplier owners and managers could work together to solve them. This approach reflects a systemic, enterprise-wide perspective of Honda’s leaders, one that it had gained