Author Archives: Andrew Reif

How To Execute on Innovation Better

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Failure to execute is a leading reason why organizations don’t gain the full benefit of their innovation initiative investments. Day-to-day business pressures quickly overcome all the good work creating an innovative idea when it comes time to execute. Something we have previously called the innovation-delivery paradox.  An ongoing challenge is how can firms execute on innovation better while still delivering on the day-to-day?

The four disciplines of execution or 4DX method developed by Chris McChesney, Sean Covey, and Jim Huling provides a solid methodology to solve this challenge.

4DX Method

The 4DX method is based on these four disciplines:

  • Discipline 1: Focus on the wildly important
  • Discipline 2: Act on the lead measures
  • Discipline 3: Keep a compelling scoreboard
  • Discipline 4: Create a cadence of accountability

Why The 4DX Method Is Particularly Well Suited To Execute on Innovation

Focus. The 4DX method helps the innovation team bring focus to the main business goal of the innovation and drive cross organizational collaboration for innovation that requires change to the firm’s business model.

Results Oriented. Most business executives are well aware that key performance metrics are usually lag measures and organizations have difficulty linking actions to lag measure results. Lead measures that are often less than obvious enable team members to link their efforts to lag measure results. The 4DX method provides a systematic method to identify and optimize lead measures unique to the innovation.

Allows Experimentation. This is perhaps the most critical reason. Experimentation, failure, and learning are central to innovation. The regular team session based on commitment, accountability, and problem solving supports fast and responsive adaption as the innovation idea is implemented. No innovation initiative can foresee all the challenges in bringing an innovation to market. The 4DX method enables teams to break down the challenges and try different approaches to learn faster.

Enables Change. All innovation requires some degree of change. Change in behaviour. Change in business model. Change in procedures. Failure to execute on innovation is closely tied to failure to change. The 4DX method provides a positive framework to help teams through the change necessary to implement innovation.

Facilitates Engagement. Innovation is a team sport.  Everyone in the firm has to contribute to achieve the full benefit from innovation. The 4DX method facilitates engagement by clarifying how each team member can contribute to success as well as how their efforts achieves results.

Builds Momentum to Success. The regular cadence of the 4DX method along with flexibility to support experimentation helps to build momentum where team members get faster feedback and short term success. Through the medium term repeated application to follow-on innovation enables the culture of innovation execution to be strengthened.

Moving Forward

Adopting the 4DX method to overcome the challenge of innovating while delivering the day-to-day requires effort, commitment, and resilience. Alopex can help you through this process and strengthen your culture of innovation execution.

 

Study Supports Value of Lean Engineering

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The Boston Consulting Group and the Laboratory for Machine Tools and Production Engineering RWTH Aachen University recently published The Lean Advantage in Engineering study of Lean Engineering methods and cost/cycle time/quality benefits achieved by adopters.  The study confirmed the value of fail-fast and short iterative cycles in lean engineering in reducing the product target costs.

The BCG have compiled a best practices model of lean engineering that entails 16 practices in four dimensions organized for effectiveness (doing the right things) and efficiency (doing things right):

  1. Product – For effectiveness use strategic positioning, holistic and detailed roadmap, and transparent product requirements. For efficiency use a modularized product design and optimized product range.
  2. Processes – For effectiveness use solutions-oriented design sets and an agile/fast cycle process. For efficiency use flexible workload leveling and sequencing to reduce bottlenecks.
  3. Leadership & Behaviour – For effectiveness use proactive uncertainty management and fact-based/fast-cycle steering. For efficiency use cross-functional collaboration and empowered project management.
  4. Enablement and Tools – For effectiveness use experience and expertise driven development. For efficiency use speed-supporting tools and single source truth.

Lean Champions – What Does Good Look Like

19% of the study participants were judged to be Lean Engineering Champions based on the following distinguishing characteristics:

  • Routinely apply lean engineering methods in most projects.
  • Established lean engineering as the new standard in engineering.
  • Succeed in decreasing development time significantly (as much as 25% faster and up to 6 months faster).
  • On average complete 71% projects within scheduled time,
  • On average complete 74% projects within budget.
  • Two thirds have full transparency into capacity utilization and specify flexible mitigation actions to avoid project disruptions in the medium to long-term.
  • 70% employ a cross-functional knowledge management system to maximize reuse in some cases on a global scale.
  • Leaders in modularization were better at shortening the duration of a development process by 15-20%.
  • Leaders use modularization with standardized interfaces across the full range of product lines and families and differentiate modular product design on the basis of customer requirements.
  • Practitioners of agile development complete 59% projects on time with 35% lower deviation from product target costs where product cost decreased as the number of gate reviews (ie. iterations) increased.

Other Interesting Conclusions

  • Most participants at least considered implementing lean engineering;
  • Participant performance was above the mean in strategic positioning, transparent product requirements, cross-functional collaboration, speed-supporting tools, and single source of truth.
  • Participant performance were below the mean in modularization, optimized product range, solution-oriented design sets, agile/fast-cycle process, sequencing to reduce bottlenecks, fact-based/fast-cycle steering, and experience/expertise-driven development.
  • High levels of maturity in diligently translating customer requirements into a full set of product specifications and early involvement of other functions in the development teams.
  • Low use of product modularization with limited reutilization of existing modules.
  • Engineering processes were typically broken up into five or fewer long phases lasting 6 months or more with feedback provided at intermediate stages as opposed to more frequent feedback iterations.
  • Engineering KPIs were usually available but were not clear or meaningful enough for steering.
  • Design reviews occurred too late to allow for effective steering.
  • Most companies do not have a design library like cross-functional knowledge management system.
  • Know-how is managed locally and lessons learned shared almost exclusively within a function.

What Is The Key Take-Away

Firms that compete in engineered product markets need to take a closer look at how they stack up against emerging lean engineering champions who are achieving  significant competitive advantages in terms of cost, speed, and quality then put in place a medium to long-term improvement program. Alopex Management Consulting can assist firms achieve this very critical strategic objective.

Why Corporate Skunk Works Need to Die

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Steve Blank

In the 20th century corporate skunk works® were used to develop disruptive innovation separate from the rest of the company. They were the hallmark of innovative corporations.

By the middle of the 21st century the only companies with skunk works will be the ones that have failed to master continuous innovation. Skunk works will be the signposts of companies that will be left behind.

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In the 20th century companies could be leaders in a market for decades by just focusing on their core product(s). Most companies incrementally improved their products with process innovation (better materials, cheaper, product line extensions) and/or through acquisitions. Building disruptive products were thought of as “risky” and a distraction since it was not “core” to the company and did not fit existing corporate structures. Why make big bets if no one was asking for them and competitors weren’t doing so.

a-12 CIA A-12 spy…

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Creativity, Inc. & The Fuzzy Front End

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iStock_000005724324MediumThe fuzzy early stages of any idea that offers the potential to create new value involves more art than science and is very difficult to achieve in business.  Ed Catmull’s book Creativity, Inc. sheds light on these early stages and provides incredible insight into how to lead a development organization’s fuzzy front end in the context of the lean engineering framework.

The fuzzy front end starts with the identification of an unmet customer need and ends with convergence on the optimum solution that a firm can repeatedly produce and sell profitably in new or competitive markets. Ideas that lead to market-creating innovation are of immense strategic importance in today’s competitive markets.  The fuzzy front end is messy, unpredictable, and highly uncertain. Start and end points are ambiguous. The process involves novelty, experimentation, complexity, creativity, and non-routine engineering work. Ed Catmull’s book provides a broad set of management tools and mindsets that every engineering leader needs to master to nurture ideas for new value creation to improve business performance in the fuzzy front end.

Protecting Ideas In The Fuzzy Front End

Catmull does a wonderful job describing the tension that exists in firms between what I call the delivery and innovation paradox. He uses the analogy of ‘The Hungry Beast and The Ugly Baby’ to describe how engineering leaders need to be mindful of the balance between day-to-day delivery and idea driven innovation. His point is the day-to-day delivery (The Hungry Beast) can quickly kill idea driven innovation (The Ugly Baby) because originality is fragile and the fully mature product resulting from the original idea do not just pop into the world as Catmull says ‘already striking, resonant, and meaningful’ to the market. New ideas need to be protected during the fuzzy front end to be developed and enable the convergence on the optimal solution (the best all around solution from among a variety of possible choices).

To create the right environment Catmull suggests several management actions:

  • Seek Balance (Continuously) – Management needs to give continuous attention to achieving strong counter balance in the face of the strong delivery desire for efficiency and consistency of workflow by: enabling give & take from parts of the business; not allowing one function to win at the expense of the whole company by seeing balance as the collective end objective; allow continuous healthy conflict; act on situations where balance has been lost; and ‘hold lightly to goals and firmly to intentions’ which permits adjustment as new information and learning comes to light.
  • Constructive Feedback Through An Advisory Team (Brain Trust) – New ideas don’t develop in a vacuum but rather need a constructive feedback mechanism to evolve, improve, and be tested as they develop through the fuzzy front end.  The Brain Trust at Pixar provided the constructive and iterative feedback system facilitated through candor, challenge,  independent and emotionally disengaged advice, all by people who ‘have been there and done that’ free from overpowering outside agendas. Catmull emphasized that to function effectively the Brain Trust had no authority avoiding negative influence on development team dynamics.
  • Trusting Culture – Management needs to continuously facilitate a culture that enables honesty and candor, accepts failure with no retribution, sees change as good, and pushes employees mindset beyond their comfort zone. Management also has to recognize that they can’t possibly have all the solutions to unforeseen problems trusting all employees to respond with solutions because they are closer to the problem and have the best information.

Engineering leaders faced with the need to continuously innovate in response to competitive pressures should read Creativity, Inc. to understand how they can manage the fuzzy front end. The book is rich with examples, methods, and advice. As Catmull observes ‘discovery means you don’t know the answer when you start’ which capture perfectly the essence of the fuzzy front end.

 

 

 

 

 

 

The Capitalist’s Dilemma Explains A Lot

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Developed economies have settled into a new normal of low growth as a result of the structural change from the recent financial crisis. Clayton Christensen and Derek van Bever recently suggested that The Capitalist’s Dilemma explains why growth hasn’t picked back up like after previous recessions and is the leading reason why “despite historically low interest rates, corporations are sitting on massive amounts of cash and failing to invest in innovations that might foster growth“. The thinking behind The Capitalist’s Dilemma also help to understand the delivery-innovation paradox, Missing M in SME, innovation investment decision risk aversion, low R&D spending, innovation investment behaviour by large firms, and Canada’s poor innovation performance. Business leaders need to understand the implications of The Capitalist’s Dilemma because it may lead to the biggest change of all in current times – the end of capitalism – if the current financial orthodoxy does not change.

The Capitalist’s Dilemma

Christensen and van Bever describe the capitalist’s dilemma as “doing the right thing for long-term prosperity is the wrong thing for most investors, according to the tools used to guide investments“. Readers should refer to their article for their complete argument but essentially they blame the confluence of supposedly success oriented finance metrics (RONA, ROIC, RORC, IRR, etc), false sense of correctness from spread sheet models, low loyalty investors, and analysts pressures to force short term business decisions that result in low returns and low growth and a bias against new value creation. Their argument is based on revisiting the basic economic assumption that capital is scarce and costly which drives the backwards looking finance metrics towards the wrong decisions for developed economies at the macroeconomic level but also for long term value creation for investors through firm level innovation.

Explains A Lot

The finance orthodoxies from before the structural change and the capitalist’s dilemma explain much of why business investment in R&D and innovation is so low, the preference for low risk investment decision alternatives, and why Canadian business leaders don’t adopt innovation as a strategy. Economic growth requires innovation but business leaders given the choice are not investing heavily in innovation or if they do are not receiving good results (in terms of top line growth) or think they are innovating a better future by investing in continuous improvement alone. How can we make sense of better outcomes from innovation investments?

Innovation Outcomes and Impact On Growth

Christensen and van Bever frame innovation in a way that helps to differentiate how different innovation activities(R&D, business model innovation, new product development) , emphasis, and investments lead to positive growth outcomes or not.  By categorizing innovation by outcome (be it top-line revenue growth or more jobs) they propose three categories and how each impact growth:

  1. Performance Improving Innovation – Innovation that replaces old products with new and better models. The impact of performance improving innovation are substitutive in the market place that don’t drive growth.
  2. Efficiency Innovation – Innovation that helps companies make and sell mature, established products or services to the same customers at lower prices. The impact of efficiency innovations raise productivity that frees-up capital for more productive uses.
  3. Market-Creating Innovation – Innovation that transforms complicated or costly products so radically that they create new classes of consumers or a new market. The impact of market creating innovation is growth from new customers. The authors also note that efficiency innovations that turn non-consumption into consumption are market creating innovation.

Using these categories Christensen and van Bever demonstrate that the way that investment assessments are made under the current finance orthodoxy lead to too much performance improving and efficiency improving innovation and with a bias against market-creating innovation. So business leaders say they are investing in innovation by investing in performance and efficiency innovations but these don’t drive growth. To drive growth business leaders need to invest in more market-creating innovation but the finance orthodoxies inhibit this choice. What will it take to change the finance orthodoxies going forward to allow market-creating innovation to flourish?

Actions Going Forward

Developed countries and Canada in particular have several options:

  1. Do Nothing – Allow existing businesses to not grow and slowly fail and the current generation of business leaders, CEOs, CFOs, financial analysts to go extinct to be replaced by a new generation of leaders and financial in those firms that manage to survive.
  2. Change The Rules of the Game –  Christensen and van Bever identify several:
  • Repurpose capital away from migratory and timid capital to enterprise capital through tax policy, loyalty shareholder investment rules
  • Rebalancing business schools away from the success financial metrics.
  • Appropriate risk adjusted cost of capital for the new structural norm enabling longer term investments.
  • Reallocate innovation pipeline emphasis for more market creating innovation rather than heavy weight emphasis on performance and efficiency innovation.
  • Emancipating management and reducing the influence of tourist (short term) investors.

The drivers of corporate change over the last several decades now themselves must change. The question is will they follow their own advice or have they become the dinosaurs. Investment in performance innovation and much of efficiency innovation is not good enough going forward.

 

SME Growth Stall – The 100 Person Ceiling

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Small firm growth tends to stall when their staff levels reach about 100 employees.  Understanding this phenomena is important because Canada’s economic growth depends heavily on creating more medium firms (2.6% of all firms) that generate 12-14% of GDP, 16% of jobs, invest more in R&D, and are better able to export and compete internationally.

Why Growth Stalls At Around 100 Employees

Many small firms are led by an owner/founder leveraging a local personal network to drive business growth. The business owner/founder is heavily involved in the day-to-day business and become overwhelmed. Churchill & Lewis explored management issues of SME growth in their seminal 1983 HBR paper The Five Stages of Small Business Growth. They explored how the demands on owner/founder become limiting as the firm grows requiring disengagement, delegation, and added systems to manage growing complexity. Owner/founders who choose not to disengage, working at their personal capacity, limit any further growth and the firm continues in a marginally surviving mode market demand conditions permitting.

Sutton and Rao have provided new perspective on the problem of growth in their book Scaling Up Excellence: Getting To More Without Selling For Less. Sutton & Rao review the key research underpinning ‘the problem of more’ driving extra burden, higher cognitive load, labour efficiency, communication, coordination, and ‘grooming’ as firms grow.  In particular they quoted work by Oxford anthropologist Robin Dunbar who determined that “when an organization reaches about 150 people the communication and coordination demand outstrips what the human mind can handle”. Sutton & Rao observe that “some leaders and teams handle growth and program expansion and others do not”.

How Can Leaders Overcome This Hurdle

Sutton & Rao provide some powerful advice with excellent examples to help small business leadership grow effectively assuming that they take the decision to disengage if they are the owner/founder. Their advice centers around building a “better organizational operating system” coined from Salesforce.com that moves accountability from the growing senior management to smaller teams that held team leaders and members more accountable. Sutton & Rao identified five tactics to employ to manage “the problem of more”:

  • Subtraction – Subtraction is the removal of “crummy or useless rules, tools, and fools that clog up the works and cloud people’s minds”. Subtraction includes simplifying standard work by working through a learning process of “simplistic-complex-profoundly simple” because to get to “profoundly simple” teams often need to understand the complexity.
  • Make People Squirm – Sutton & Rao suggest that everyone need to challenge the status quo to make subtraction work. This tactic relies on the broad field of change management.
  • Load Busters – Load busters are “simple additions of objects, activities, and technologies that cut cognitive load” by focussing on “what matters most and away from what matters least”. This tactic works when as firms get more complex staff can loose perspective on what is important for good business health.
  • Divide and Conquer – This tactic improves coordination and accountability by dividing the organization into smaller groups. This tactic relies on the benefits of teams.
  • Bolster Collective Brainpower – This tactic is based on “sticking with savvy insiders and stable teams and blending people who have worked together before” as teams are added rather than relying on outsiders.

Sutton & Rao also suggest that as the organization grows that there is a balance to be continuously managed between too much/little complexity, too much/little management, too much/little bureaucracy. They suggest give ground grudgingly adopting “the Goldilocks Theory of Bureaucracy” of “injecting just enough structure , hierarchy, and process at the right time”. Using a Salesfore.com approach of “running a little hot” giving staff the flexibility to operate more freely and accountable while not running the operation too close to 100% capacity  beyond their cognitive and emotional limits.

Founder/Owners of small firms who have reached the 100 person ceiling but are hesitant in taking the next step should read Sutton & Rao’s book.  The case examples are excellent and practical tips plentiful to provide helpful guidance to chart a way forward.

 

 

Systems Thinking For Innovation

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Firms that compete through technology based innovation strategy need to contend with how their product/service delivers value in rapidly evolving complex systems present in today’s markets. Complexity has reached the point were we now talk in terms of system of systems to describe markets.  For example, electric vehicles operating within an electrical power generation and smart grid system, advanced aircraft operating within an air traffic management system, a swipe card payment system for an integrated public transportation system, or a medical device operating connected within an electronic records management in an integrated health services system.

Firms need better systems thinking in their strategic and tactical delivery actions. The success of the firm depend on external partners, integration challenges, customer adoption, and market conditions beyond their control. Firms that apply systems thinking  can help to maximize the return on innovation investment that drives profitability, growth, and competitiveness. Engineering leaders responsible for delivering technology solutions in complex systems markets also need to develop their staff the think in terms of systems, adopt systems engineering practices, and apply better strategic tools to leverage systems thinking.

Systems

To understand systems thinking firms need to understand complex systems. A system is a set of connected things or parts forming a complex whole.  Individual systems from the examples given could include: an electric vehicle itself; a payment system; a medical device; mobile phone; or tablet. Each alone can be complex systems in their own right. The system of systems takes a wider view of all the individual systems that must operate together in the broader context. Annette Krygiel defined systems of systems as “an interoperating collection of component systems that produce results unachievable by the individual systems alone“. For example, the electric vehicle market comprises systems such as: the electric vehicle itself; electrical power grid; charging stations; electrical power generation/transmission system; and the environmental regulatory system. All of these systems in the electrical transportation system of systems are undergoing rapid transformation but provide exciting potential for innovators active in this space.

Complex systems markets are changing rapidly making it difficult for engineers to predict how their potentially novel products/services will perform in the future system. In today’s markets complex systems perform beyond the sum of the parts and often in unexpected ways with emergent properties. How future technology users will face pervasive connectivity with the evolving ‘Internet of Things’ is an excellent example. The Royal Academy of Engineering observed that “A system is a set of parts which, when combined, have qualities that are not present in any of the parts themselves. Those qualities are the emergent properties of the system. Engineers are increasingly concerned with complex systems, in which the parts interact with each other and with the outside world in many ways – the relationship between the parts determine how the system behaves. Intuition rarely predicts the behaviour of novel complex systems. Their design has to iterate to converge on an acceptable solution. That solution might not be what the customer originally envisaged – aligning expectations with what is achievable is an important part of the design of systems and the design engineer has to work closely with the customer and other stakeholders.”

Engineers also need to ensure system outcomes such as: safety; reliability; robustness; interoperability; versatility; flexibility; and future growth are delivered in complex system markets. In terms of tactical actions, systems engineering is the field of engineering that according to INCOSE (the international professional body for systems engineering) aims to enable the realization of successful systems as defined by these intended outcomes. Eisner defines systems engineering as “an iterative process of top-down synthesis, development, and operation of a real-world system that satisfies, in a near optimal manner, the full range of requirements for the system“. Systems engineering is about managing reality, complexity, uncertainty, and increasingly innovation within budget, schedule and other project specific outcomes. ISO 15288 is the recognized standard for the systems engineering. In fact project management and systems engineering are becoming increasingly integrated as evidenced by the closer cooperation between PMI and INCOSE.

Formal systems engineering methods are described in INCOSE’s Systems Engineering Handbook employing processes, methods, and tools have evolved since the end of WWII to apply systems thinking initially in complex cold war military systems.  Firms in aerospace, defence, nuclear, and transportation regularly use systems engineering to manage complexity, safety, interoperability, and performance but as the world becomes more connected other industries need to learn and adopt these methods. It has only been recently though that other industries have become exposed to systems engineering methods.  Some industries have been more proactive than others but some like construction are finding it increasingly difficult to deal with complex infrastructure projects that involve novel technologies and system of systems. Unfortunately there has been limited talent transfer from the traditional systems industries in many jurisdictions, non-system industries adoption has been slow if there is little need to connect, some see the methods as too costly or difficult to apply. Most university engineering and management programs do not cover systems engineering leaving industry to learn and often relearn lessons in siloes. So stand alone industries need to consider whether they need systems engineering to deliver their value proposition in an increasingly connected and complex world.

Systems Thinking

Systems thinking or ‘big-picture’ thinking, is the key systems engineering mindset that takes a holistic view of the system, its environment, its users, its stakeholders, over its life time. Peter Senge defined systems thinking in The Fifth Discipline to be ” a framework for seeing interrelationships rather than things, for seeing patterns rather then static snapshots. It is a set of general principles spanning fields as diverse as physical and social sciences, engineering and management“. INCOSE UK define systems thinking to be “a way of thinking used to address complex and uncertain real world problems. It recognizes that the world is a set of highly interconnected technical and social entities which are hierarchically organized producing emergent behaviour“.

Most engineers are functional experts but as they assume greater leadership responsibility they often have to consider design implications in a broader context and begin to recognize the importance of systems thinking. Functional point designs without consideration for the broader system often lead to inferior outcomes. Engineering leaders in industries that are becoming more complex systems of systems therefore need to develop in themselves and in succession plans how to be better systems thinkers.

To ensure present day firms develop and sustain their competitiveness in the face of an increasingly complex world, the UK Royal Academy of Engineering suggests six principles that firms who leverage engineering capabilities should adopt to apply systems thinking:

  • Debate, define, revise, and pursue the purpose;
  • Think holistic;
  • Follow a systematic procedure;
  • Be creative;
  • Take account of the people;
  • Manage the project and the relationships.

A prior post looked at methods to sustain system thinking as the baby boomer generation retire in the traditional system thinking industries.

At the strategic level how can engineering leaders deliver returns from innovation investments in applying systems thinking?

Innovating in Complex Systems Markets

Rod Adner provided a powerful strategic approach for innovating systems in his book The Wide Lens by putting systems thinking in a business context and a form more usable by industry. Adner’s method looks beyond the execution of the firm’s innovation to consider co-innovation players and the adoption chain in the complex system market.  Co-innovation players are those firms or entities that need to innovate in order for the firm’s innovation to succeed. The adoption chain considers who else needs to adopt the firm’s innovation before full value can be achieved. Adner’s wide-lens steps are:

  1. Build a value blue print that illustrates the complex system market by network mapping of the key suppliers, intermediaries, complementors all leading to the end customer;
  2. Prepare a leaders/followers diagram to illustrate who of the players in the value blue print wins (or benefits) and who loses (and could resist) the firm’s innovation;
  3. Map first mover matrix to understand if being a first mover is an advantage or not;
  4. Considering the 5 levers of complex system market reconfiguration (ie. changes to the value blue print) to facilitate value creation by the firm’s innovation: what can be separated?; what can be combined? what can be relocated? what can be added? and what can be subtracted?
  5. Taking steps to sequence successful complex system market construction through such strategic actions as: minimum viable footprint; staged expansion; and system carryover.

By visualizing the complex system market using Adner’s approach engineering leaders can apply systems thinking that drives profitability, growth, and competitiveness.

Engineering-to-Business Alignment For Profitability

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The business world and engineering world speak different languages and operate at different tempos with a shared imperative to meet the needs of customers.  Businesses that leverage technology innovation for competitive advantage need to find their ‘E2B Alignment Rosetta Stone‘ for the best results in their business context. How can the engineering leader facilitate effective alignment between engineering and the business?

Why is Engineering Work Different?

The business world operates according to the laws of social science, fraught with ‘short termism’, and the pressure to constantly perform, compete, satisfy customer needs while commercially relevant engineering work requires more time and functions in the presence of volatility, uncertainty, complexity, and ambiguity (VUCA) bounded by the laws of science. Engineering work involves solving difficult problems that arise in the business and the market place, creating new products to create new value for the firms, finding new ways to meet regulations to remain compliant and possibly creating competitive advantage, and optimizing design performance to achieve cost and quality. The answer to engineering problems is not known in advance and the time that a solution is ready is not known to any degree of certainty. Some engineering problems are simple while others are wicked and ugly problems. Engineering problems are almost always complex. While others may be unsolvable within the current state-of-the-art or beyond laws of physics. Novel solutions require creativity, experimentation, and learning that are difficult to schedule.  How can engineering leaders bridge these incongruent worlds?

 Common Goal – Increasing Profits

The answer rests in remembering the common goal.  The common goal of both business and engineering is to increase the profits of the firm.  Easily stated but accounting is the day-to-day language of business which enables them to clearly see how to increase profits through business actions with well defined measurements for feedback.  The engineering world does not speak accounting nor is it often clear how engineering decisions can increase profits.  Engineers ought to speak the language of accounting better, but practically speaking their education and professional development is often all consuming in the increasingly complex engineering world.  Apart from every engineer taking an MBA or second degree in accounting how can engineering leaders help their staff to understand how their actions increase profits? Engineering leaders need an E2B alignment Rosetta Stone to translate engineering decisions into profit impact.

E2B Alignment Rosetta Stone – Engineering Profit Decision Tool

Fortunately in all cases an engineering profit decision tool can be created to help engineers make sound business decisions and trade-offs that increase profits in terms they can understand. The problem is that most businesses don’t take the time in this fast paced world to develop one.

The engineering profit decision tool can be developed using the approach illustrated below. The resulting business model can then be the E2B Alignment Rosetta Stone to help engineers to translate engineering actions into profits.

Engineering Decision Rules

Engineering leaders need to facilitate the development of the engineering profit decision tool with help from the other business functions (marketing, finance, operations, and project management). The baseline profit/cost model is the P&L statement for the project, new product development, service line, etc. delivered by engineering.  Like any model key assumptions need to be captured. A sensitivity analysis is then performed on key cost drivers such as: time; unit cost; engineering operating expense; value; performance; and risk as appropriate for the context of the business. The sensitivity analysis can then be used to define profit impact parameters.  These profit impact parameters can then be stated in terms of engineering decision rules (that are understood by engineers).  As engineers go about their work key decisions arise that require trade-offs amongst competing alternative courses of action.  The engineering decision rules can help them to compare alternatives and decision on the best alternative that maximizes the profit to the company. Over time the results of the decisions become evident in the business results enabling feedback adjustments to the model.

The key to success is taking the time to build the first model, trial it on a pilot project, build buy-in, train the broader engineering team, and then refine and expand its use. This post has provided the high level picture and there is clearly more effort to perform each step in the process suitable for each firm.  Contact Alopex Management Consulting if you are interested in developing an engineering profit decision tool.

Top 6 Engineering Leadership Priorities

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Engineering leaders need to devote time to 6 priorities for a vibrant and sustainable engineering capability that supports the strategic ambition of the business. Engineering leaders are often so drawn into the day-to-day demands of the operation that these 6 priorities are ignored to the detriment of the business. There are no absolute right or wrong ways to meet the 6 priorities but rather each must be decided as a collective package by the engineering leadership team in the strategic context of the business. The senior engineering executive should then integrate these decisions with those of the overall business at the senior management level and negotiate and adjust as necessary bringing back the rationale for any modifications to the engineering leadership team.

Purpose

Engineering staff need to understand the purpose of the business in order to orient their efforts to support the success of the business. Engineering leaders need to clarify and communicate the purpose of the business, the purpose of engineering in the context of the business, and how individual and collective team efforts achieve the purpose.  The purpose is often expressed in the vision or expressed as the winning aspiration of the firm, as for example described by A.G. Lafley and Roger Martin in Playing to Win.

Inspiration comes from a deep connection between the purpose and meaning in engineering work. Engineering leaders need to help their staff to relate the meaning in engineering work to the winning aspirations of the firm to maximize engagement and productivity. Engineering leaders should work with the engineering supervisory team to assimilate how meaning in engineering work can be leveraged through recruitment, job assignment, and performance management.

Alignment

Engineering leaders need to align the engineering effort with the strategic choices of  the business. Continuing on from the purpose, Lafley & Martin have defined an integrated cascade of strategic choices aligning from the winning aspiration of the firm to: where the firm will compete; how will the firm win in terms of value proposition and competitive advantage; what capabilities are required to win; and what management systems are required to support these choices. In the context of the integrated cascade of strategic choices engineering may be central to a firm’s strategic ambition or play a supporting role. Engineering may be heavily integrated with other business functions or stand-alone. Engineering leaders need to deeply consider how engineering is aligned and how it meshes with the firm’s strategic choices.

Labovitz and Rosansky provide an alignment framework for engineering leaders to operationalize the cascade of strategic choices in their book Rapid Realignment. Labovitz and Rosansky’s framework separates out vertical alignment and horizontal alignment to structure actions.

  1. Vertical Alignment – The vertical alignment seeks to align employees to the strategic choices of the firm by defining critical success factors, goals, focus areas that can be owned by each business function, such as engineering, and the precise activities and tactics required to deliver the critical success factors. The role of engineering leaders in the strategic alignment exercise is to contribute to the definition of critical success factors that support the strategic choices.  Engineering leaders then need to own the creation of the action plans to deliver the critical success factors.
  2. Horizontal Alignment – The horizontal alignment seeks to align value creating processes with the needs of the customer.  Value chains are clarified for both internal and external customers.  The role of engineering leaders are to understand what the customer wants and how they prefer to be served and establish process to meet and try to exceed customer requirements.

Culture

Engineering leaders need to foster and support a culture in engineering that aligns with the strategic choices of the business and maximizes the outcome required from engineering. Culture often emerges in a business based on its history of shared experiences and is reflected in the sum of the firm’s shared values, beliefs, and norms of behaviour.  Culture can be business wide with local differences in functions, business units, and locations.  Culture is rarely homogenous as firm’s grow. Major strategic changes can bring about large dissonance between the existing and desired culture.

The competing values framework is useful for engineering leaders to understand the current culture in engineering and to identify change emphasis to align with the strategic choices of the business. The competing values framework maps organization culture in two dimensions: vertically between stability & control and flexibility & discretion; and horizontally between external focus & differentiation and internal focus & integration.  The competing values framework defines four cultures coinciding with the map quadrants:

  1. Clan Culture (Collaboration or Human Resources) – A culture high on flexibility and discretion but internally focussed. Cultural descriptors are: participation and open debate; employee concerns and ideas; human relations, teamwork, and cohesion; and morale.
  2. Adhocracy (Create or Open Systems) – A culture high on flexibility and discretion but more external focussed. Cultural descriptors are: innovation & change; creative problem solving; decentralization’ and new ideas.
  3. Hierarchy (Control or Internal Process) – A culture high on stability & control but internally focussed. Cultural descriptors are: predictable outcomes; stability and continuity; order; and dependability and reliability.
  4. Market (Compete or rational goal) – A culture that is high on stability and control but externally focussed.  Cultural descriptors are: outcome of excellence & quality; getting the job done; goal achievement; and doing one’s best.

Organizations often exhibit characteristics of each of these four culture types but typically emphasize one type for the strategic choices of the firm. Leadership often relates to the right side (direction, inspiration, change, growth, competitiveness) of the map while management relates to the left side (planning, budgeting, controlling). Firms in stable markets with little change often become internally focussed and stagnate in clan and hierarchy dominant cultures. Firms in rapidly changing markets must be externally focussed with emphasis on adhocracy and market dominant cultures.

Engineering leaders need to look deeper into the culture of their organization and reflect on these observations. Engineering leaders need to ask whether their culture is appropriate for the expectations of the business and what tangible actions are needed to bring it into line. Most actions will involve leading by example. An external change, or change in leadership, may bring about a subtle shift in culture. Engineering leaders need to facilitate discussions in engineering to help employees understand why things need to change or why their shared values, beliefs, and norms of behaviour may be incongruent with the strategic choices made by the firm.

Value Proposition

Engineering leaders need to understand how engineering capabilities create value for customers to achieve horizontal alignment as previously described. Engineering may deliver value directly to an external customer or to an internal customer before value is delivered to the external customer.  Engineering leaders need to clarify how engineering supports the value proposition of the firm – or how engineering supports how the firm will win. The two well known fundamental ways to win, based on Porter’s Competitive Strategy, are: cost leadership and differentiation.

  1. Engineering Cost Leadership – Engineering delivered cheaper than the competition enabling the business to underprice the competition or reinvest the margin differential to support other aspects of the strategic choices of the firm.
  2. Engineering Differentiation – Engineering providing a source of differentiation for the business measured in terms of solutions compared with competition that: are faster, cheaper, safer, do more, do things better, do things that no one else can do, etc.

Engineering organizations may perform more than one value added activity (product design, consulting advice, sustaining engineering, manufacturing engineering, safety compliance, detailed drawings, etc.)  so it is up to the engineering leadership to identify them and decide how to organize effort to deliver them. Engineering leaders should avoid multi-tasking engineers with activities that may support separate ways to win. The nature of each way of winning can be very different.  As Lafley and Martin emphasize:

  1. Low Cost Strategies – Based on systemic understanding of costs and cost drivers, relentless reduction of costs, sacrifice of non-conforming customers, and commitment to standardization.
  2. Differentiation Strategies – Based on deep and holistic understanding of customers, intensive brand building, jealous guarding of customers, and commitment to innovation.

Engineering leaders therefore need to think deeply of how engineering is expected to contribute to the business aspirations profitability, growth, and competitiveness. Culture also supports these strategies where low cost strategies demand more internally focussed culture such as Hierarchy and Clan, whereas differentiation strategies demand more externally focussed culture such as Market and Adhocracy. The right culture needs to match the intended way to win. Complex engineering organizations may need sub-organizations with different dominant cultures.

External Change and Innovation

Engineering leaders need to be mindful how the firm is positioned in the external environment and how the external environment is changing. Engineering leaders need to be attuned to subtle shifts and craft possible solutions to create new value for the firm through innovation.  Engineering leaders should seek opportunities for their employees to spend time with customer’s and understand their issues and needs.  Changes sensed in the external environment become the ‘Why’ in any change initiative.  Firms with hierarchy and clan cultures which are inherently more internally focussed run the risk of missing subtle shifts in the market or customer preference.

The need for change can fall anywhere along a spectrum from small to disruptive. Responses to big external changes can only be actioned through a fundamental revisit of the strategic choices of the firm. Engineering cannot act unilaterally in this case but engineering can often act as the bell weather or early alarm for the business. Engineering can also help the firm to connect the dots in the presence of market ambiguity. Firms in slow changing markets may only need to make incremental adjustments but these markets are becoming rarer in a rapidly changing world.

In almost all cases innovation is the main response to external change. Engineering leaders need to decide the degree of need for innovation in the context of their industry competitive intensity and rate of industry change then foster the required environment for innovation to respond to external change. Innovation strategy should always be devised at the company level but engineering capabilities often play a leading role in executing innovation strategy. Investment is almost always required for innovation.   Categories of innovation strategy are: do nothing; adapt/adopt; incremental; transformational; and breakthrough.

Engineering leaders need to select and propose the appropriate innovation strategy in the context of industry competitive intensity and rate of industry change. Ignoring the do nothing innovation strategy, most engineering organizations implement some form of innovation strategy for example:

  1. Adapt / Adopt Innovation Strategy – Engineering leadership may acquire new CAD, CAE, analysis, or tools to gain advantage in saving time or improve performance. Although not recognized as such capital expenditures on engineering almost always brings new innovative business processes.
  2. Incremental Innovation Strategy – Engineering leadership may implement process improvement, product upgrades, or add-ons that provide small gains in time savings, new value creation, etc.
  3. Transformational Innovation Strategy – Engineering leadership may propose a step-change to a product or process that requires investment but the return for the firm can’t be ignored.
  4. Breakthrough Innovation Strategy – Although mainly the realm of new technology start-ups engineering leadership may propose a investment project that could create a new-to-the-world market or disruption to the an existing market.

Engineering leaders then need to establish an environment suitable for the selected innovation strategy. The environment not only needs to support the generation of ideas but one that implements ideas and measures outcomes. A culture of learning and experimentation is critical to an effective environment for innovation. Firms in rapidly changing markets therefore need to move to a Market or Adhocracy culture. Sticking with a Hierarchy or Clan culture is a recipe for disaster in rapidly changing markets.

Balance

Engineering leaders need to actively manage the balance between the short term operational demands of the business and long term sustainability of the firm’s value proposition. This is the balance between delivery and innovation.  The balance between tactical and strategic.  The balance between today and tomorrow. The balance between exploit and explore. The balance between leadership and management. Engineering leaders need to make time for long term, innovation, strategic, and tomorrow in spite of the pressures of the day-to-day. As John Kotter said ‘over managed, under led organizations are increasingly vulnerable in a fast moving world’. If engineering leaders can’t make the time to focus on moving the engineering capability in response to changes in the external environment and changing customer needs then they risk becoming irrelevant or exposed to the competition to exploit.

Leadership vs Management

How do these engineering leadership 6 priorities relate to engineering management. As Kotter explains leadership is about ‘taking the firm into the right future’, ‘finding opportunity and exploiting at an accelerated pace’, ‘defining purpose for meaning and buy-in’, ‘creating the right culture and environment to thrive’, and ‘producing useful change to make the future happen’. Kotter goes onto to explain that management is about ‘making complex organizations predictable, reliable, and efficient’, ‘executing a set of well known processes’, and ‘delivering products and services as promised consistently to quality, budget, and schedule’. As Drucker said ‘ Leadership is doing the right thing, while management is doing it right’. This also tells us that too much emphasis on management can leave the firm exposed and engineering leadership has a significant obligation to ensure that the right balance is struck between short-term and long-term view.

Engineering plays a critical role in new value creation, profitability, growth, and competitiveness for the business. The entire package of the 6 priorities need to hang together and fit the strategic intent of the firm and then adjust as the external market shifts. Together these 6 priorities provide a basis for discussion, alternative selection, and decision making for a vibrant and sustainable engineering capability that supports the strategic ambition of the business.

Engineering Productivity

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Engineering leaders interested in improving their profitability need to understand how the Theory of Constraints can improve engineering productivity and perhaps most importantly under what business conditions. This post reviews the evolution of throughput methodologies from where they were first applied in the manufacturing environment to newer approaches evolving for engineering, new product development, and R&D where the business goals are improved profitability and new value creation for growth and competitiveness.

Theory of Constraints

Eli Goldratt’s book The Goal (1984) helped a generation of manufacturers understand the operational principles underlying the Toyota Production System and Lean Manufacturing.  Goldratt defined the goal as improved profits and clarified the operational rules for running a plant to be in order of priority throughput, inventory, and operational expense as opposed to pure cost cutting that lead to localized optimums and poor profitability results. He explained how the Theory of Constraints (TOCs) when applied through these operational rules can improve the profitability of a manufacturing operation with stable input demand. The TOC was first applied to manufacturing operations that can be characterized as a repeatable network of dependent events with processes that are subject to statistical fluctuations.  The TOC focusses on system constraints to improve throughput, inventory, and operational expenses in the total production system.  The key conditions that enable the TOC to achieve results in manufacturing are stable demand, moderate to high volume, repeatable processes, and a small range of products.

Unstable Production Environments

Eli Goldratt’s paper Standing on the Shoulders of Giants (published with The Goal) went on to clarify how certain production environments and conditions can become unstable leading to marginal improvement gains from applying TOC.   In this paper Goldratt described the Hitachi Tool Engineering case where the firm had limited success with lean manufacturing because of their unstable production environment conditions.

The three general conditions Goldratt identified that lead to unstable production environments are:

  1. Unstable Demand Per Product
  2. Unstable Overall Load On The Entire Production System
  3. Short Product Life

The first two unstable production environments fall within the means of a manufacturing company to manage because the production system can still be characterized as a network of dependent events with processes that are subject to statistical fluctuations.  Full productivity gains are not achieved because of how the production system throughput reacts to the unstable input demand due to dynamic mix of products, too many different products, or how dynamically the input demand of different types of products results in unstable overall load on the system. Goldratt explains how a time-based application of supply chain approach of TOC in a method called Drum-Buffer-Rope system can achieve improved performance for the first two conditions. Goldratt observed that low touch time production environments (Touch Time <<< Lead Time) provide enough margin to still exploit TOC benefits.

The third unstable production environment, short product life, emerged in the 1980s from the increased pace of technological change on manufacturing operations. The turn time (lead time) performance of engineering, product development, and R&D became a factor for product companies bringing attention to knowledge worker productivity.  Goldratt observed that product development systems do not exhibit processes that are ‘network of dependent events with processes that are subject to statistical fluctuations’. Each new product develop effort tend to have a unique network of dependent events with high variability which is consistent with a a project environment. Goldratt also observed that the project environments also exhibits time compression where touch time approaches lead time (lead time ~ 2 to 3 times touch time) of the project which degrades project environment throughput.

Unstable Project Environments

To solve the unstable project environment problem Eli Goldratt went on to develop the Critical Chain method in the 1990s.  The Critical Chain method adapts the TOC to unstable project environments with a particular emphasis on engineering development projects. In much the same format as The Goal his book Critical Chain (1997) explains how the Critical Chain method achieves improved project performance over Critical Path methods. The goal of Critical Chain method is to improve the flow (throughput) in project environments for stable and unstable project demand.  The mental jump from manufacturing production environments to project environments is helped when one considers that most project environments are multi-project environments.  Throughput in a project environment is understood to be the flow of projects (and their activities) of various degree of: sizes, durations, complexity, uncertainty and novelty.

The Critical Chain method seeks to maximize project environment throughput by managing feeding buffers and capacity buffers within the project and drum buffers and capacity buffers between projects.  The Critical Chain methods use of buffers (time & resource) to improve productivity by reducing Work In Process (Design in Process), manage bottleneck resources, not allowing multi-tasking of resources, staggering projects along the constraints, prioritizing projects, and resolve resource conflicts on the system level.

An interesting aspect of Goldratt’s Critical Chain method was how to consider behavioural issues in multi-project engineering environments. The Critical Chain method addresses:

  1. Tendency for engineers to ‘pad their estimates’ to give local safety margins that degrade the efficiency of the project environment by use lumped buffers (rather than activity-by-activity risk buffers) and focussing less on individual activity time performance.
  2. Overcome the tendency to think locally (within the project or a work area) by encouraging global thinking by avoiding multitasking.
  3. Manage ‘student syndrome’, the tendency for humans with time buffers to start their tasks later and waste safety margins.
  4. Manage ‘Parkinson’s law’, the tendency not to finish tasks ahead of time even they have a chance to by removing activity padding.
  5. Minimize the individual project owners pressure to execute first (local optimization at the expense of the global performance) by adopting a priority system.

An excellent review of the Critical Chain method can be found in a 2005 paper by Lechler, Ronan, and Stohr with some useful simplifications that make the method more practical.

Product Development Flow

Donald Reinertsen developed a parallel set of work to Goldratt that explored and clarified much of the underlying principles of lean product development from the perspective of achieving faster time-to-market in the project production environment. Reinertsen’s books Developing Products in Half The Time (1991) co-authored with Preston Smith, Managing the Design Factory (1997), and The Principles of Product Development Flow (2009) explored an economic model for design, queues in product development work, management systems, managing risk, lean engineering principles, and performance metrics more appropriate for the paradigm shift from the traditional utilization based management paradigm to a throughput management paradigm for engineering, product development, and R&D.

Reinertsen also defines Design in Process (DIP) in the project production environment since inventory is measured in terms of information in the knowledge work space. The abstract nature of information inventory and visualizing how it flows through a knowledge based work environment has probably been the single largest factor holding back the broader adoption of lean product development.

Reinertsen clarifies how the project production environment differs from the manufacturing production environment with repeatable network of dependent events with processes that are subject to statistical fluctuations to one with high variability (uncertainty, learning, experimentation), non-repetitive (every project network is different, sometimes completely), and non-homogeneous task durations (most tasks slightly different each time). Reinertsen’s most recent book Principles of Product Development Flow in particular explores the themes of cadence, synchronization, flow control, WIP constraints, batch size, exploiting variability, queue size, fast feedback, and decentralized control to maximized throughput.  Although these works provide a vast array of tools it is difficult to see the big picture framework suitable for practical implementation.

Lean Product Development

Ronald Mascitelli, Timothy Schipper and Mark Swets went onto develop fully integrated lean product development frameworks that operationalized the principles for engineering leaders who are responsible for new product development.  Most importantly they describe how to fully implement a multi-project production environment based on the all the preceding methods but appropriate for actual business environment.

Ronald Mascitelli’s Mastering Lean Product Development (2011) is perhaps the best integrated framework for the engineering, product development, and R&D leader to establish a throughput managed multi-project production environment. Mascitelli’s framework is an event-driven process incorporating practical lean methods to achieve the goals of improved profitability and new value creation for growth and competitiveness.

Timothy Schipper and Mark Swets published Innovative Lean Development (2010) to describe an equally powerful integrated framework that leverages fast learning cycles and rapid prototyping for project production environments with high uncertainty.

Agile Scrum

In the digital information age as products have become software driven and in many cases entirely software based the agile scrum methodologies have operationalized software product development emerging in early 2000s. The abstract nature of software development defied reliable engineering management methodologies before the emergence of agile scrum. With agile scrum software productivity is more manageable, efficient, and effective. Software driven products require the integration of the agile scrum methodologies within the project production environment framework just described.

The Lean Start-Up

Up to this point in the post we have looked at how established companies with existing demand can exploit the TOC for improving throughput, inventory, and operational expenses to improve profitability in knowledge work. Finally Eric Ries operationalized new-to-the world lean product development (particularly digital offerings) for start-up founders in his book The Lean Start-Up (2011). This is the extreme unstable demand case.  Ries describes how to measure productivity as validated learning for fast iteration and customer insight to find the scalable business model before cash runs out.  Application of lean principles such as small batch size in the form of minimum viable product, build-measure-learn loop for fast feedback, metrics, and adaptability to find product/market fit. Ries observes that The Lean Start-Up is also applicable within existing companies for use by intrapreneurs who may be creating new value with new-to-the-world products because this is also the extreme unstable demand case.

Productivity Methodology Selection Based On Business Environment

Selecting the right methodology to drive business productivity requires leaders to understand their business environment and the stability of their demand environment. The diagram below helps to characterize application & business environments.

Engineering Productivity TOC

The diagram illustrates that in both manufacturing and engineering that the nature of the work can fall into a range of demand conditions.

A key lesson from this review is that leaders should seek to throttle/smoothen (WIP Constrain) the input demand conditions if productivity improvements results are to be achieved.  All the available methodologies are based on the concept of flow and maximizing throughput and managing inventory (physical or information), and operational expense to achieve business the goals of improved profitability and new value creation for growth and competitiveness. As Goldratt emphasized time and again effectiveness of these methods depend the key underlying condition of stable input demand or constraining the process input demand to ensure stable flow. As demand conditions become unstable lean engineering methods have been developed by Goldratt, Reinertsen, Mascitelli, Schipper, and Swets. Ries has described how new cash flow streams can be created in a lean fashion in the extreme case where demand does not yet exist.

Finally a common theme throughout these works is the fact that cost accounting methods and data tools are ill suited to measure throughput, inventory, and operational expenses to achieve business the goals of improved profitability and new value creation for growth and competitiveness. Goldratt explores this issue at length in The Goal why a blind focus on cost reduction leads to bad performance.  This problem has continued as throughput and TOC methods have evolved in the information age as pointed out by Reinertsen of the invisibility of DIP because of how R&D expenses are recognized at the time the money is spent. Information inventory and intangible assets remain as a problem for cost accounting and business performance management. This will be a topic of future posts.