Getting past the obstacles to successful reengineering

Business Horizons, May-June, 1995 by W.E. Holland, Sanjiv Kumar

* an aggregation of numerous "small decisions" rather than one "big decision"; and

* socially complex resources rather than tangible or intangible resources.

The success of companies like Home Depot, which has become the nation's largest home center retailer in less than 12 years, is not due to one "big decision" but to numerous "small decisions." These small decisions integrated Home Depot's competencies in (1) advanced inventory management, (2) excellent customer service, (3) high operating efficiency, (4) a culture that emphasizes individuality, informality, and nonconformity, and (5) an organization structure that allows considerable store autonomy while maintaining corporate cooperation.

Management systems, teamwork, and culture are examples of socially complex resources, which focus on the coordination and control of tangible and intangible resources. These coordination and control capabilities are more valuable than are the tangible and intangible resources themselves. Focusing exclusively on tangible resources (pieces of equipment, information systems) or intangible resources (employee skills) alone is of little use for maintaining competitive advantage.

For example, if the primary source of competitive advantage for a firm were the skills of its employees, the firm might have only an elusive advantage. These skills are primarily the property of individuals and not the organization. As such, employees can either bargain for higher compensation or be lured away by competitors. If, however, the firm has developed a capability for managing groups of individuals, it might be harder for competitors to develop or replicate this capability. The management system--rewards, structure, values, roles, and skills--that provides this capability serves as a more lasting source of competitive advantage.

Rubbermaid successfully introduces more than 365 new products each year. Most ideas for new products come from a single source--teams. This team-based organization structure, along with a culture that fosters "looking for new ideas everywhere," pervades the entire organization. If a competing firm were to imitate Rubbermaid's success, it would have to replicate this spirit of teamwork and the various elements of culture, as well as Rubbermaid's tangible and intangible resources. The path to replicating this socially complex resource would be difficult and fraught with many uncertainties. The fact that Rubbermaid relies on a socially complex capability for developing new products instead of a discrete tangible or intangible resource provides it with a less imitable and more lasting source of competitive advantage.

How broad is the impact of resources on the value-adding activities of the firm? If reengineering targets a resource that positively affects several parts or activities of a company, the chances for significant return may be greater than if a single activity were affected. In a McKinsey study (Hall, Rosenthal[TM], and Wade 1993) of 20 companies that had undergone reengineering, only six had reduced their business-unit costs substantially (by more than 18 percent). The other 14 did not achieve a substantial reduction in their total business costs. A crucial reason common to the success of the six companies was that they had all sought process improvements with sufficient breadth to encompass several interrelated activities. For substantial gains, reengineering should focus on broad-based resources that can affect multiple functions or businesses.