A Blog by Jonathan Low


Mar 11, 2019

Why Successful Companies Are Rethinking Efficiency

Enterprises are inherently complex and the bigger they are, the more they must content with complexity.

Efficiency addresses but one set of issues. Successful organizations recognize that optimizing the interplay of multifarious factors rather than just one is more likely to produce the desired outcome. JL

Harvard Business Review interviews Ford CEO Jim Hackett:

Winning isn’t just about efficiency. A species evolves to be more competitive. We win or lose on the basis of better system design. A system needs to have efficiency built in, because if it uses too many resources, it can’t survive. Businesses win by having a combination of the right people and the right design. With disruption you probably don’t lose to the standard competitors; it’s the mutation coming at you that matters. During the Great Recession, Ford brought its breakeven down significantly. But the costs all came back, because the company didn’t change the design.
In the lobby of Ford Motor Company’s headquarters, in Dearborn, Michigan, sits a replica of a Model T. The car—the first to be produced on a moving assembly line, and available for many years in only one color, black—provides a reminder that efficiency can propel a company to industry dominance. But upstairs on the 12th floor, president and CEO Jim Hackett is leading the firm toward a different goal: what he calls corporate fitness. Hackett, who led the office furniture company Steelcase through an IPO and championed its shift from selling cubicles to selling collaborative open workspaces, joined Ford’s board in 2013. He left that post in 2016 to become the chairman of Ford Smart Mobility. In May of 2017 he was named CEO by executive chairman Bill Ford. In a recent conversation with HBR senior editor Daniel McGinn, Hackett—who has worked for many years with the strategy adviser—discussed the difference between efficiency and fitness, how he communicates complex ideas to his workforce, and the challenge of convincing Wall Street that he is succeeding at moving the company forward. Edited excerpts follow.
HBR: Automobile manufacturers are obsessed with efficiency. Isn’t Roger Martin’s argument, that a company can be too efficient, sort of heretical?
Hackett: There’s always been a meme that goes: “Do you want speed, quality, or low cost? You can afford only two of the three.” Efficiency is a balance of all three. But today we win or lose on the basis of better system design. A system needs to have efficiency built in, because if it uses too many resources, it can’t survive. But winning isn’t just about efficiency.
Is it about what you’ve termed “corporate fitness”? What do you mean by that?
People ask, “Why don’t you just say, ‘Let’s reduce costs’?” But when I say “fitness,” I’m thinking about what Darwin learned about survival of the fittest—that a species evolves to be more competitive. Being competitive now is about a lot of factors. How long does it take an order to be delivered? How many products does a company offer? Do you have the right or the wrong people? Businesses win by having a combination of the right people and the right design.
Your ideas about how organizations evolve stem from Darwin?
Yes. Years ago a professor gave me a bunch of white papers written by physicists at the Santa Fe Institute, and I became voraciously interested in them. I began to learn about complex systems theory, which holds that evolution isn’t just a biological process; it can apply to social organizations as well. I found myself asking, “If Darwin’s ideas exist in nature, who am I to say they don’t apply in business? What if they apply everywhere?”
How did you apply them at Steelcase?
I was the CEO at Steelcase for 20 years, so like Darwin with biology, I got to see the company evolve over time. I found myself in a wave pattern, where I was shrinking the company during recessions, then growing it, then shrinking it, then growing it. That’s not healthy. We needed to design the company for all states, by lowering our average costs. That’s part of what I mean by fitness.
It sounds as though you define fitness as the ability to deal with a shifting landscape. So if a marathoner is good at long races, that’s efficient, but a decathlete can tackle a variety of events, so he or she is fitter. Is that it?
That’s close. Let me use a different analogy. Imagine you and I are racing up a big mountain. I beat you, but only by a nanosecond. Imagine I show up the next year for the race and say to myself, “I’ve got to do better than I did last year.” I start off the race, and I’m winning—my time is better. But the environment on the mountain has changed, so I need to perform much better than last year to win again. That’s what makes this hard—it’s dynamic. That’s the Darwinian part. Businesses typically look at market share, profits, and earnings per share. Those are important things. But it isn’t just our earnings per share versus those of other auto manufacturers that count. It’s our cycle time versus Amazon’s, for example. Amazon doesn’t make cars, but it could sell them, or it could sell auto parts. That’s what happens with disruption. You probably don’t lose to the standard competitors; it’s the mutation coming at you that matters. You can’t count on the mountain you’re climbing to stay the same.
Your efforts to make Ford fitter include building your models on fewer platforms and reducing the number of options and configurations consumers can choose from. Ford made a big push in that direction during the 1990s. Why didn’t it work?
Complexity creeps in over time. In nature, forest fires actually help forests thrive, by burning away the underbrush. At Ford we’re right in the middle of that work of eliminating complexity. We’re getting really great results. My concern is that the gestation period in the auto industry is longer than in the industry I came from. I don’t want people to lose confidence; I know these theories work. People say, “We haven’t seen it yet.” They will. The costs of complexity are hard to see until they’re gone.
You have an affinity for very complex ideas, and you describe them in complicated ways. As a leader, does that create challenges?
Unquestionably. The good news is, I’ve been through this before, at Steelcase. My job is to help paint a picture people can understand. I’m purposely using different language. Why say “fitness” instead of “reduce costs”? Because the solution to reducing costs is to hold your breath. And when you hold your breath but don’t change anything else, the costs come back. During the Great Recession, Ford brought its breakeven down significantly. But the costs all came back, because the company didn’t change the design.
I’m working on the communication part. One way is by delegating some of it. Another is by boiling down our plan so that people can follow it.
Back in 2012 or 2013, near the end of Alan Mulally’s time as CEO, what could have been done differently to put Ford in a better position today?
I always start by saying the management team in place was really smart. So what did it miss? In my assessment, it missed that our competitors were all bankrupt when our strategy emerged. Ford was the stronger, fitter player, which allowed it to avoid bankruptcy—and on one level, that was an advantage. The negative was that competitors came out of bankruptcy stronger and fitter. Bankruptcy forced them to redesign their businesses. What Ford missed was that competitors were getting fitter while we were on a trajectory we could celebrate, so we didn’t change enough.
Does Ford’s status as a family-controlled company make it easier to pursue large-scale change?
The Fords are what we call long-arc shareholders. They have been owners since 1903, and they retain 40% of the general voting power. That tells you they’ve got a deep commitment. Bill Ford wants to win. He’s proud of Ford’s forward-leaning attributes—the way the company treats its people, the way it affects the environment. But his eyes get really big when he drives a Mustang; the vitality of the product matters deeply to him. We had long talks before I took this job. I told him he had a bunch of people he could choose from and that I might not be the best guy. I wasn’t selling myself, because I was being asked to consider the job.
Why might you not have been “the best guy”?
It relates to something you asked about earlier: communication. Was the nature of the transformation going to be really simple and well understood in the early periods? I told him it would take a while for the internal organization to get traction. We’re going to get results, and then Wall Street will follow.
Since becoming CEO, you’ve announced that Ford will stop selling most models of cars in the United States. How did you conclude you can’t play to win in that segment?
If you drew an outline around the Model T, you’d have a silhouette. I ask people, “Where is that silhouette today? Is it still on the market?” No. Over time that silhouette—the shape of the car—has changed, because the world, the markets, and the size of people have changed.
Sedans mutated because buyer preference turned to larger silhouettes, such as sport utility vehicles. In the past, automakers were reluctant to stop selling small cars, because they were afraid that if fuel prices went up, they’d get nailed. Low fuel prices teach us what people really prefer: They prefer larger silhouettes. But now we have new forms of propulsion—battery electrics and hybrids. We’re designing vehicles that will deliver a larger silhouette without a penalty in fuel efficiency.
Roger Martin argues that efficiency increases risk by reducing redundancy and resiliency. Is Ford less resilient because of its reliance on the F-150 pickup truck, which is responsible for all the company’s profits?
We’re actually in a really favored place with the F-150, where we play to win. We can take more risks with it. We have other silhouettes with properties of the F-150 that we get to exploit. The Super Duty—a pickup with more horsepower and higher torque—grew faster than the F-150 this year. In meetings we talk about what makes the pickup truck so fit today. Why is it so popular? It’s because buyers have jobs that have to be done that the F-150 is very good at. So we ask: Do we really understand its performance? And how can we support those jobs even better in the future?
“Evolution isn’t just a biological process; it applies to organizations, too.”
Ford, like other carmakers, is investing a lot in autonomous vehicles. When will they hit the market?
My optimism about that future is really high. It’s probably just further out than people realize. There’s a quote that goes something like this: People overestimate the impact of technology in the short run and underestimate its impact in the long run. That’s probably true in this area. When those vehicles do arrive, they’ll be a dramatic disrupter.
Is corporate fitness especially important for a global manufacturer during an era of political uncertainty and shifts in trade policy?
Trade systems are best for us when they’re in equilibrium. You can design your business around equilibrium. We don’t want to be in a trade war; that’s a bad idea. We don’t need certainty—we can deal with the ups and downs of weather or raw materials shortages. But it’s hard to prepare for a sudden decision to put a 25% tax on something.
You use the word “teach” more than most other CEOs do. Is that an important part of the way you lead?
In a job like this, you have high-powered people working for you. They don’t need you to wind them up every day. So the role I have to play is, rather than tell them what to do, help them see how wisdom and curiosity can help us design better. I’ve asked employees to let me play that role and to have patience with it. We’re getting into a rhythm together.
In your industry there’s a lot of focus on Tesla, which built a product people love but has struggled to scale up production. What do you make of its challenges?
People sometimes say something isn’t rocket science. I actually have a competitor, Elon Musk, who is a rocket scientist. I have tremendous respect for him because of the way he questions the design of the system.
Ford builds a vehicle every four seconds. So there’s something about the fitness of our system that those who are starting out can’t yet equal. How it all gets choreographed is a really hard physics problem—just as hard as putting a rocket into space. But there’s no question the fitness of the system has improved because of Tesla’s arrival. Customers now expect over-the-air updates of automobile software [because Tesla provides them]. That will be a table stakes thing in the car business that can be attributed to Musk.
Does Tesla’s presence help you convince employees that they need to look beyond GM and Toyota and imagine new kinds of competitors?
When a car company gets 400,000 or 500,000 preorders for a vehicle, you have to pay attention. The humility here is what Darwin taught us: There’s no guarantee for your future. That doesn’t mean we can’t be optimistic. It just means the design probably won’t stay the same.


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