Illustration by Craig Frazier

Survival of the Smartest

Managing information is key to a company's survival in the information age. Two consultants, one a GSB professor, measured the organizational IQ of a modem manufacturer and found it wanting. But in six months, they turned the company around. Here is their story.

BY HAIM MENDELSON & JOHANNES ZIEGLER

IF YOU FREQUENTLY ACCESS THE INTERNET FROM YOUR HOME, you want a fast modem. With a slow modem, an image can take forever to appear on your screen, turning the fascination of the information superhighway into the dullness of the "World Wide Wait."

Modem makers have taken notice. One of the participants in this race for speed is a company we'll call Modex. Overall, Modex is a successful company, known for both its technical skills and management savvy. Its vision statement reads, "We deliver the power of the Internet to your desktop," and its past products did deliver. Sales from the 33.6Kmodem line have grown rapidly, gradually replacing the more mature 28.8K modem.

But Modex was about to lose the 56K modem race, so its management came to us for help. Like its competitors, Modex had been working on the 56K modem, but the development effort had somehow faltered, and Modex needed to recover. Almost one full year had passed since the start of the 56K project, and Modex was still struggling with issues that should have been resolved within the first six months.

Was the problem the 56K development process or something deeper within the organization? Our guess was that it was the result of low "organizational IQ" practices (see "What's Your Company's Organizational IQ?"), and our suspicions were confirmed by some telltale signs. Our first visit to the company required coordination with three functional managers, and it took six weeks to arrange a short meeting. Richard, the marketing manager who had first approached us, had difficulties making commitments without checking with his peers first. We could not get hold of project documentation in advance. If our initial experience was any indication, it was no wonder the 56K development process was not as fast as it should have been.

We suggested Modex use our Quick Scan survey to quickly identify where the problem areas were. A Quick Scan requires fewer resources than conducting a thorough quantitative benchmarking, but it still provides valuable insights. The IQ Quick Scan is a three-step process.

• Key individuals from all functions and levels of management fill out a short questionnaire ranking the organization along the dimensions of high-IQ management.
• The responses are discussed in confidential one-on-one interviews.
• Survey responses and the interviews are used to compile an IQ profile of the organization. The entire process can be conducted in less than two weeks. The IQ Quick Scan results for Modex are shown in the sidebar below.

QUICK SCAN REVEALS PROBLEMS
Modex's IQ profile confirmed our initial suspicions. Modex was far from being a high-IQ organization, especially in light of the fast-moving modem market. On the positive side, Modex had a high score in the Information Age business network dimension. The company was well ahead of its industry in forging strong links with its suppliers and sales partners and in managing its alliances on the basis of cooperation, information sharing, and trust. These alliances first developed when Modex was a small, entrepreneurial niche player, vying for recognition and using all available means to move forward--fast.

On the negative side, Modex exhibited a less-than-effective decision architecture, with a score of 2.7 on a 0 to 10 scale, and a lack of external information awareness, with a score of 3.2.

The small company spirit apparently went underground as Modex grew and became an industry leader and as emphasis shifted from speed to formal management and control. Management had gone overboard in trying to control the apparently chaotic processes at Modex, and the result was slow decision making and frustration on the part of employees. But the entrepreneurial spirit was not totally lost. We could sense in the interviews that people wanted to revive the old entrepreneurial way of doing business. They felt that things had gone astray, but different people had different opinions on what went wrong and what they could do about it.

DECISION ARCHITECTURE. Modex's first problem was that people did not feel empowered to make decisions. The decision to start a new product development project was made by the CEO, about one or two levels of management higher than at other high-tech companies. Detailed operational decisions were routinely escalated up to top management. The vice president of marketing decided, for example, on the launch date and the areas for test launches, and the VP of engineering determined technical details of new products.

While the top management at Modex was busy micromanaging, little time was left to do its real job: developing a vision, strategy, and clear priorities for the organization, as well as coaching people to do their jobs better. Indeed, in our interviews, nobody--including top management--could clearly articulate Modex's strategy. Another problem was the lack of clarity in the decision-making process. When we asked several members of the 56K team who makes the decisions on price/performance tradeoffs during new product development projects, the answers were all over the map.

ENGINEERING ORIENTATION. Modex was an engineering-driven company. Its past success was widely attributed to its technologically advanced products. The company's motto was "If we build great technology, people will buy it." Marketing was less valued than engineering, and most engineers just wanted to be left alone to develop new products.

As a result of this technology-oriented mindset, most people were removed from the reality of the market. Engineers hardly ever talked to their peers at Compaq, Dell, and other PC vendors who built Modex modems into their PCs. They had little understanding of what these core customers cared about. And product managers who were supposed to bring a marketing perspective into product development teams had little involvement in the product development process. Other sources of market information weren't readily available to the teams either. Most development team members said that they didn't know where to find information on customer preferences or competitive analyses.

Not surprisingly, market information didn't play a role in day-to-day decision making. For example, hardly anybody knew when competitors were going to release a new product, let alone what the expected specifications of competitive products looked like. Competitors weren't perceived as a reality at Modex.

And while Modex was busy developing "great technology," it was caught time and again by surprise by competitive moves--most notably by the announcement of a competing 56K standard that was expected to come to market long before Modex was ready to ship its product.

NEEDED: A SENSE OF URGENCY. The Quick Scan had identified external information awareness and decision architecture as the weakest dimensions in Modex's IQ profile. These two dimensions, in turn, determine the speed of decision making and execution in the following ways.

• External information awareness drives a strong sense of urgency. Everyone must internalize the fact that time is the most precious asset. It must be clear that if we don't quickly bring a product to market that satisfies customers' needs, our competitors surely will. This sense of urgency in an organization is driven by a deep understanding of what customers want as well as what competitors can offer to fulfill these needs.
• While a strong sense of urgency ensures that people want to be fast, it won't lead to fast decision making unless people are able to act quickly. An effective decision architecture allows people who have the relevant information to act on it without having to waste time relaying information up and down the hierarchy.

It became obvious why earlier attempts to increase the clock speed at Modex had not led to tangible results. Simply imposing more aggressive deadlines did not work. Deeper changes were necessary. Rather than working on the symptoms, Modex management now was determined to alter the root causes that made for sluggish decision making. External information awareness needed to be raised, and the decision architecture had to be redesigned. Here's how this was done at Modex.

MAKING THE CUSTOMER REAL
The company took two basic steps to increase customer awareness throughout the organization. The first step was to strengthen the marketing function and its involvement in the development process. Full-time product marketing managers were assigned to each product development team. Some of the new product marketing managers were former project managers who came from the engineering function. They were experienced team leaders and accepted among the engineers.

In their new roles as product marketing managers, they worked hard to align the efforts of the development teams with external requirements. They broadened the teams' customer understanding and explained that Modex's customers were not only end users who would buy modems in the store but also PC manufacturers who built Modex products directly into PCs. In order to convince both categories of customers to buy Modex modems, Internet service providers had to be secured as alliance partners as well. The challenge was to develop a new product whose specifications and pricing would appeal to all groups of customers and alliance partners at the same time.

The second step was to have engineers perform tasks that were previously marketing's domain. For example, all engineers had to discuss the products they were working on with their lead customers at least once a year and then report back to their development teams. Development team members took this exercise seriously--their yearly bonuses were tied to the market success of their products. Previously, salespeople were considered responsible for selling the product. Engineers perceived no link between the success of their product in the market and their personal success in the company. Under the new paradigm, people in all functions learned that it was theirtask to make Modex products successful in the market and that they would be held accountable for contributing to the success.

RAISING COMPETITIVE AWARENESS
Nothing teaches the reality of the competitive threat better than the strong personal experience of lost sales. Such an opportunity soon arose at Modex. John, the head of sales, reported that two key customers--PC manufacturers who had formerly incorporated Modex's 28K and 33.6K modems in their PCs--were strongly considering other companies' products for the 56K modem. The following week, engineering members of the 56K team were dispatched to talk to engineers and purchasing agents at these customers' sites.

They quickly found out why major PC companies preferred products that had been announced by competitors. The PC vendors did not care about the add-on features Modex was planning to implement in the next product generation. Instead, PC manufacturers wanted standard, low-cost modems with a zero failure rate. Furthermore, customers were worried about Modex's ability to ramp up mass production of 56K modems on time.

As a result of these talks, the 56K development team refocused its development activities on the core functionality of the product. Previously, the team had had no thorough understanding of what really mattered to this important group of customers. Nor had there been any awareness of what products competitors were developing to meet these needs.

This is not to say that nobody at Modex knew anything about the competition. Quite the contrary. Charlie, the marketing manager,had hired a competitive analyst two years earlier who painstakingly collected competitive information citing publicly available sources and industry rumors. Trouble was, nobody cared. Engineers were busy implementing features that they felt were most relevant. Looking outside the company was considered a distraction from doing the real work.

The analyst had set up a Web site on Modex's intranet that summarized information about competitive moves and cross-company product comparisons. As it turned out, the salesforce was the only group within the company that made use of that rich information. They used it to argue against competitive products in the field. But when we asked engineers about their use of competitive information provided on the intranet, most didn't even know it existed.

Personal experience with the threat of losing business to the competition was an important first step in raising competitive awareness. The second step was to tie the yearly bonus of engineers to the market success of the products they had launched within the previous 12 months. Developers understood that the success of their product was determined to a large degree by how favorably it was perceived compared to competitive products that hit the market at a similar time. Not surprisingly, the intranet site that had information on expected costs, specifications, and release dates of competitors' products quickly became a popular site among engineers at Modex.

The way successes and failures at the sales front were communicated at Modex changed as well. Traditionally, only good news made its way beyond the sales and finance functions. No-excuse analyses of Modex's strengths and weaknesses relative to its competitors replaced propaganda. Reports about the reasons for lost sales were widely communicated, and there was an increasing eagerness to learn the lessons needed to do better next time.

Illustration by Craig Frazier

REVAMPING THE DECISION ARCHITECTURE
As we pointed out earlier, many members of the organization felt they had no decision-making authority at all. To change this, employees and managers on all levels had to take on new roles. We helped the management design a new decision architecture that reflected the second high-IQ management principle: matching information with decision-making authority.

Under the new model, top managers provide a framework of strategic priorities, manage strategic partnerships, and mentor middle managers. Middle managers, in turn, enjoy a large degree of freedom in running their "businesses" within the framework that is set by top management. They decide on the product road map that describes the types of products that are to be developed within the next 18 months. Based on these plans, they commit to revenue goals for their products and are held accountable for achieving these results. First-line managers are now responsible for managing individual projects. When projects are running behind schedule, they have to decide which features to cut and which to pursue. These managers are in the best position to make tactical decisions because they have the best knowledge of what it really takes to implement them. Finally, individual contributors were assigned a larger degree of decision-making authority within their areasof expertise.

PROJECT REVIEW PROCESS. In the past, prior to any resource commitment to a development project, the development team would make a detailed presentation to top management, which would decide whether to commit the requested resources to the project. The progress review process was used at least four times in the life of each project: at project initiation, before commitment of R&D personnel, before the initial commitment of manufacturing resources, and before the product was released to the marketplace. For each review, the development team went through a 9-step process. By the time the "official" progress review took place in front of top management, there were hardly any open questions left.Usually, the recommendations were accepted without change.

The presentations became a platform for exposure for middle managers rather than a forum for decision making. Projects could not move on to the next phase without getting top management approval, and top management was booked out for months. Project managers tried to gain favor with Susan Smith, the administrative assistant to the CEO, who was in charge of scheduling project reviews. As one frustrated project manager told us, "You want to know who really runs the company? Susan Smith!"

The new streamlined progress review process now takes place within the product groups, and it consists of only three steps. The project team prepares a recommendation based on a cross-functional discussion within the team, conducts a presentation in front of a "team coach"--a senior manager, most likely a vice president, who helps the team focus the presentation on issues that are most relevant to managers--and then presents an improved version of the package to the extended project team, which includes second-level managers from marketing and R&D as well as project managers from other product development teams. After an intense discussion, the second-level managers decide on the continuation of the development project as well as a set of priorities and action items for the next phase. Under the new model, top management no longer participates in the progress review process.

When we first proposed this radically new approach, the top management at Modex was concerned that it was far too hands-off. How could upper-level managers know what was going on if they didn't even participate in progress reviews? Given the knowledge dissemination practices at Modex, this was a legitimate concern. For most managers and employees, being physically present in the progress reviews was the only way to find out what was going on in product development. Indeed, only after bottlenecks in disseminating information were removed was it feasible to implement the new progress review process.

INFORMATION BOTTLENECKS
Poor to nonexistent information dissemination dated back to the beginning of the company. Modex had started as a small, cohesive team of engineers who worked together on a single project. Documenting knowledge was a waste of time that the company could not afford in its fast-paced environment. As the company grew, its management did not realize the importance of internal knowledge dissemination. Managers said that they were sitting through many meetings just to be in the loop. It was true that some groups within marketing and engineering had documents online. But the information was not organized in a consistent manner.

For example: An important reason for the delay in developing the 56K modem was a new piece of code that consumed more resources to develop than expected. As we found out, however, a related technology had already been implemented in an earlier Modex product. Reusing and adapting the existing code to the specifications of the 56K modem line would have required less than half the effort needed to write the code from scratch, thus considerably speeding up the 56K development process. The 56K modem developers did not know that the code existed because this was not documented in a meaningful way.

THE INTRANET. The key to more effective knowledge dissemination at Modex was to make better use of the intranet. The technical infrastructure already had been in place for several years. However, there were no processes for systematically gathering information and making it available in a structured way. In order to develop these processes at Modex, management took a three-step approach:

• They organized the intranet around products. The market requirements document that described a product's specifications from a user's point of view was the core document placed on the intranet for each product. All relevant product and process information was linked to it, including up-to-date sales and customer service information for those products that already had been released.
• They made existing documents available on the intranet. Virtually all documents at the company were in electronic form. However, many were kept as electronic files on the PCs of the authors. Individuals were now required to post these documents on the intranet.
• They defined clear processes, including what information had to be posted at what time in the product life cycle and who would be held accountable for it. Beyond this list, people were also encouraged to post additional information if they thought this was of value to others. There was a straightforward way to foster a high degree of accountability. Each page showed the name of the person who posted the information as well as the last time the page had been updated.

Within a few months, the new intranet at Modex triggered significant changes in the way people worked together. Everyone was more aware of issues that used to be in the domain of "the other function." There was no longer a need to sit through meetings just to find out what was going on. Everyone, in particular middle managers, enjoyed more time to do their real jobs.

SHARPENING ORGANIZATIONAL FOCUS
But what exactly were their real jobs? Traditionally, Modex R&Dconsisted of a cohesive group of engineers, project managers, and second-level managers who had been in charge of development efforts from the company's early days. While individual contributors and project managers focused on different product lines, second-level managers were responsible for the entire range of products.

When we talked to project managers of different teams, it became apparent that the operational requirements for the 56K project were fundamentally different from those of the other development efforts. The 28.8K modem line was in the maturity phase, requiring only little attention from R&D. The 33.6K line was in the rapid-growth phase, whereas the 56K modem line was still in the innovation phase. For the 33.6K line, maintaining flawless execution, fixing any bugs as quickly as they were discovered, and keeping a sharp focus on getting products out the door were critical. Since this product line was Modex's main revenue-growth generator, any problems had to be solved immediately, whereas any 56K issues were just a fuzzy cloud on an uncertain horizon.

In this environment, having the same second-line managers responsible for both was devastating for the 56K product line. When a bug was discovered in the 33.6K code, managers "borrowed" 56K resources because it needed an immediate fix. To break the natural tendency to sacrifice long-term success for short-term revenues, the 56K product line was broken out as a separate organizational entity, with dedicated managers and engineers who were fully accountable for the success of the 56K line.

THE RESULTS
The results were felt immediately. People in the new 56K organization finally could focus on developing "their" product. Although on paper the total number of people who worked on the 56K modem remained constant, it felt like manpower had increased dramatically. For the first time, the 56K team consistently stuck to its schedule. Modex was able to launch its 56K modem in the same quarter as its main competitor. And, what was even more important, the product exactly met the needs of core customers. The dreaded decline in revenues never occurred. The 56K modem hit the market before sales from the 33.6K modem started to decline, and Modex continued to grow profitably at double-digit rates.

The turnaround of the 56K development effort brought new confidence and optimism to Modex. Management took courage to expand into an exciting new business opportunity: the cable modem business. Modex managers had been aware of this opportunity for some time, but not until an effective decision architecture was in place did they have the time to seriously evaluate the opportunity.

The new cable modem product group was built as a high-IQ organization from scratch. The lessons learned with the 56K team helped management to avoid the pitfalls into which Modex had fallen earlier. It is too early to write about the success of Modex's cable modem business. As we write these lines, the product is still in the prototyping phase, and the entire cable modem market is not yet well established. But it looks like a safe bet to predict exciting new products and high growth rates for the "new," high-IQ Modex.

Excerpted from SURVIVAL OF THE SMARTEST: MANAGING INFORMATION FOR RAPID ACTION AND WORLD-CLASS PERFORMANCE,©1999 by Haim Mendelson and Johannes Ziegler. Excerpted with permission of the publisher, John Wiley & Sons, Inc.

ABOUT THE AUTHORS: Haim Mendelson is the James Irwin Miller Professor of Information Systems at the Business School, leader of the technology, organizations, and markets area of the Stanford Computer Industry Project, and codirector of the executive program on Strategic Uses of Information Technology.

Johannes Ziegler is cofounder of Synesis Management Consulting, which helps senior executives in leading high-tech companies measure and improve their organizational IQs. He was formerly a consultant at McKinsey and Company.

To order a copy of Survival of the Smartest: Managing Information for Rapid Action and World-Class Performance, call 1-800-CALL WILEY or visit the Wiley Web site at http://www.wiley.com. For further information about the research process that underlies the book and its conclusions, email Haim Mendelson at haim@haim.stanford.edu.

While the top management at Modex was busy micromanaging, little time was left to do its real job: developing a vision, strategy, and clear priorities for the organization, as well as coaching people to do their jobs better.

Modex management now was determined to alter the root causes that made for sluggish decision making. External information awareness needed to be raised, and the decision architecture had to be redesigned.