Delayering Toyota Motor Sales Reducing bureaocracy, Increasing agility Jeremy S. Pomp: Leading Organizational Change, MOD 2, 11.29.10
TASK Select a major change initiative (e.g., downsizing, re-engineering, de-layering, etc.) and research the antecedents, components, implementation aspects, and known consequences of that strategy. In the form of a position paper/consulting report, write a summative report to a client that considers adopting such an initiative. On the basis of your research, recommend why such an initiative is likely to (i) succeed or (ii) fail. Please use empirical rather than anecdotal evidence to support your position and set of recommendations.
Introduction to the report: During the summer of 2010, I interned for 12 weeks at Toyota Motor Sales (TMS), the U.S.A. Sales and Marketing division of Toyota Motor Corporation (TMC), in the North America Planning Department (NAPD) in a “Corporate Strategy” role. The catalyst for this report is based on my experience at TMS; however the analysis may be applicable for any hierarchically structured organization considering delayering. It should be noted that the time of my internship coincided with possibly the most difficult point in TMS’ history, and certainly the most public ordeal to date. Internally, the 10 million recalls associated with Toyota vehicles from 2009-2010 caused an organizational “crisis”. The issue culminated with Akio Toyota, CEO of TMC, and Jim Lentz, President of TMS, being called to a hearing on Capital Hill to address the recall in front of the general public and leaders of the U.S. Congress. It was clear to me, watching the hearings live that part of the reason the recall situation became exacerbated was due to insufficient communication between TMC and TMS as a result of its tall and siloed hierarchical organizational structure. My personal experience at TMS confirmed that these barriers exist and spawned my interest in writing this report. I. Executive Summary It is my opinion, that in order for TMS to: react more quickly to market conditions, communicate internally and externally more effectively, increase productivity among employees, train managers to teach others through autonomous relationships, and ultimately ensure longterm success in creating and retaining talent, it should delayer its hierarchical employee structure. I recognize that delayering has potential and consequential weaknesses. However, the weaknesses often associated with delayering, which include job loss, either perceptional or actual power shifts within the organization or among employees, and organizational cultural impacts, may actually be beneficial to TMS at this point in time. TMC CEO, Akio Toyoda, stated recently when commenting on the reason for TMC’s $50 million investment in Tesla Motors, saying, “The speedy decision-making that's part of its (Tesla) makeup is what we really want to absorb. Toyota began as a venture. I think this will give us an opportunity to bring back that spirit." Therefore, I think that if we can take Mr. Toyoda at his word, he too would recognize that delayering his organization would increase decision-making speed. Of course, with the backing of the CEO, TMS’ implementation of delayering would have a greater opportunity for success. However, it should be noted that this decision couldn’t be made in isolation. If implementation of delayering is going to be successful, HR and Executives must have the opportunity to investigate potential changes to company culture, strategy, vision, and mission in order to ensure that harmony among them is not negatively impacted. II. Origins of Delayering Delayering is a reduction in the number of levels in an organization’s hierarchy. Classically, it has referred to the trimming of the dozen or so layers of management that were typical of the large corporation in the 1950’s down to the five or so that by the end of the 20th century were deemed to be the maximum with which any large organization could function effectively (Lashley, 2001). CEO of GE, Jack Welch, became synonymous with delayering as this was an initial step in the turnaround process for the firm.
Delayering does not necessarily involve stripping out jobs and cutting overhead. It does typically mean increasing the average span of control (the number of subordinates associated to a manager) of senior managers within the organization. This can, in effect, reduce the number of layers without removing a single name from the payroll (Lashley, 2001). It involves a radical redesign of an organization’s structure to take account of late 20th century developments in information technology, education and consumer demand based on advances from the Internet. Essentially, there is a flattening of the organization from a giant pyramid into something more horizontal but not a denial of structure altogether (Hindle, 2008). Gaining prominence in the 1990’s as globalization and increased competition from international firms became more pronounced, Western firms saw delayering as a way to restructure labor costs and become more flexible to respond to competitive threats. “The very strengths of the formal and mechanistic organization structure were now seen as its weakness in allowing firms to compete in the fast changing competitive international market. There has been a recognition that the downside economies of scale adopted by massive commercial organizations, which dominate production, and distribution in many Western economies is the growth of inflexibility and as sense of powerlessness among managers. The diseconomies of scale resulting form the growth of bureaucracy, longer lines of communications, a lack of customer orientation, and organizational atrophy can limit the benefits enjoyed by large organizations.” (Lashley, 2001) III. Benefits of Delayering an Organization As mentioned previously, delayering does not necessarily result in job cuts, however there are potential benefits from cutting jobs as a result of the delayering process. Oftentimes, it is middle managers that are let go during delayering as a result of firms requiring fewer managers. Job cuts result in less overhead costs, increasing the bottom line (Lashley, 2001). As a result of the elimination of middle management jobs, those left are given a greater span of control. This can result in a less bureaucratic organization(Hindle, 2008) that is able to make decisions more quickly(Hindle, 2008) by allowing for a faster flow of information between managers(Lashley, 2001). Information also becomes more accurate once it reaches executive management, as it has not passed through numerous filters along the way(Lashley, 2001), which often results in inconvenient messages being distorted(Lashley, 2001). More egregious, is that information may be covered up as a result of a layered management system(Lashley, 2001). A greater span of control also gives line managers greater autonomy (Lashley, 2001) and encourages managers to be more entrepreneurial(Lashley, 2001) and innovative (Hindle, 2008) and as a result often increases localized optimization(Lashley, 2001). Additionally, delayering can bring managers into closer contact with his customers resulting in a better customer relationship(Hindle, 2008). In the event that the customer has a problem, a delayered management structure response is likely to be much quicker than that of a hierarchical organization because of its flexibility(Lashley, 2001). As a result of a managers increased span of control, their role tends to transition to a more consultative therefore reducing micromanagement, which is often a complaint from employees(Lashley, 2001). IV. Negative Effects of Delayering Delayering does not come without its inherent downsides. Although the cost savings involved in cutting jobs may reduce overhead, it’s quite possible that the loss of employees can
damage the customer experience and the operational effectiveness of the organization(Lashley, 2001). Perceptions of delayering are likely to vary within the organization. New managers will likely need additional training in order to manage the increased span of control and are likely to have concerns about managerial support(Lashley, 2001). Although management may enjoy a greater span of control, it is likely that they will expect greater rewards for their increased effort, resulting in potentially greater operational costs. Management will also have concerns about a change to the power structure. Clearly, those that stand to gain from the changes are likely to support delayering, while those that stand to lose power are likely to challenge the process (Lashley, 2001). Delayering may also bring about what Lawrence refers to as “upwards and outwards” management. This idea proposes that a large gap will evolve between executive management and line managers as their work takes them both in opposite directions as a result of delayering (Lawrence, 2002). More broadly, delayering can have a negative impact on organizational culture (Lashley, 2001). Job losses of peers may reduce job loyalty from management(Lashley, 2001) to colleagues (Craig R. Littler, 2003), lowering morale, lowering job commitment, and diminishing career expectations (Craig R. Littler, 2003). Also, firms considered more communitarian (such as Toyota) might have to face a complete paradigm shift within the organizational culture as disrupting the system could have an impact throughout the rest of the organization (Morden, 1997). V. Implementation Methods Delayering can be very difficult to accomplish, as it is likely many will oppose such a large organizational change. Implementation of such a process can be reason enough for delayering’s success or failure. There are varied opinions on the best implementation practices, which likely result from the types of organizations the process will be implemented into. I will discuss a few here. In 2000, Ford Motor Company began delayering its headquarters in Dearborn, Michigan. Ford used an integrative 4-step approach that was met with approval and seen as an overall success(Cascio, 1995). First, Ford recognized that in order to get buy-in from all employees, all employees had to be represented in the process. This ties into another lesson from Ford, reorganize in the open. Employees were briefed weekly on the delayering process via company publications available to all employees. Managers that were put on the delayering task force resigned their present duties and passed them on to their subordinates, allowing them singular focus on the delayering process in order to complete the process as quickly as possible. Finally, Ford made that all parties involved knew to expect some confusion in the delayering process and advised managers to manage it appropriately. Boston Consulting Group espouses a top-down “cascading” approach, which starts from the top and works its way down through the organization by example from senior management over time(Carl W. Stern, 2006). BCG also recognizes the need for well-communicated processes because they result in better execution. Renowned strategist John Kotter’s 8-step change planning model is not specific to delayering, however it seems to capture a more holistic approach to dealing with the broad process for change, recognizing the impact delayering will have on vision and strategy (Ehap H. Sabri, 2007). 1. Establish a sense of urgency 2. Create a guiding coalition
3. 4. 5. 6. 7. 8.
Develop a vision and strategy for the specific change Communicate the vision and strategy for the specific change Empower employees for action Generate short-term wins Consolidate gains and produce more change Anchor the new changes in the culture
VI. Case Study: Jack Welch & GE When Jack Welch assumed the role of CEO at GE he quickly recognized the layers upon layers of bureaucracy that had formed in the mature organization (Krames, 2002). These layers had caused divisiveness, turf battles, red tape, and slow decision making to become the norm (Krames, 2002). With over 500 senior managers, more than 100 vice presidents, and some 25,000 managers the organization was too fat at the top (Krames, 2002). Welch proclaimed, “Every layer is a bad layer” and began to systematically remove entire layers of management in the organization and removing the walls that separated the different functions of the firm (Krames, 2002). By removing layers, Welch was attempting to change the mindset of the firm into a “learning organization” that emphasized passion, excitement, and learning (Krames, 2002). Delayering GE met with strong headwinds as entrenched employees struggled accepting these changes which shook-up the entire organization, however Welch believed that this process was critical to ensuring long-term success of the firm. As a result of the delayering, certain managers that lacked leadership were exposed and lower level managers were given greater autonomy. Welch’s example provides us with additional lessons in delayering: 1. Limit the number of layers in your organization to five (Krames, 2002) 2. Fire the strategic planners and push decision making to into the hands of managers (Krames, 2002) 3. View delayering as a prerequisite to learning and self actualization: delayering can be the first step towards developing a more open, creative, and learning culture (Krames, 2002) 4. Do not let emotions get in the way of delayering and make job cuts based on objective criteria, not relationships (Slater, 2003) 5. Information sharing is critical to breaking down silos and destroying a culture that keeps information secretive as a way to hold on to power (Finegan, 1997) (Krames, 2002) VII. Implications for TMS The recalls of 2009-2010 brought to surface the organizational structure problems TMS faces when attempting to manage problems (which it was never accustomed to doing) of significant size. What came to the surface was a systemic problem that was the result of a highly bureaucratic and layered management system. Middle managers were too far removed from the problem to realize its severity. Once they realized the problem, they attempted to hide it. When it could no longer be contained, the information took too long to reach executive management. Executive management took too long to react causing further damage inflicted by the media. The organization was not flexible enough to adapt to the changes occurring with its customers, employees, and in the media as a result of the recall. While not completely responsible for the recall (it was a TMC engineering issue), the hierarchical organization was not adept at managing the crisis. I believe that had TMS been a flatter organization it would have been able to react
more quickly to help its customers during the recall problem and prevent this issue from tarnishing the brand as much as it has. As Akio Toyoda recently stated that TMC wants to learn how to become more agile in order to make decisions quickly. Currently TMS’ process of consensus building among a broad range of stakeholders is required before proceeding with decisions. A flatter organizational structure would eliminate the number of stakeholders needed to make changes, which would result in quicker decision-making. TMS could be the testing ground for such sweeping changes at TMC. From my personal experience at TMS, middle managers have a span of control that ranges from zero and tops out at 4-5 employees. This likely stems from an organizational structure that was created during high growth years where large amounts of oversight were needed for new employees. This continues to exist during the mature phase of the organization. In the NAPD, of the four middle managers, none had more than two direct reports. Because the organization has a low turnover rate (less than 5%) most employees have been in their roles for a substantial amount of time, requiring little involvement or oversight from their superiors negating any advantages that a restricted span of control may bring. Additionally, although pay is relatively low when compared across the industry, TMS’ pay structure is heavily based on years of service versus competency at the position. The “employment for life” philosophy has eroded employee’s desire to perform at a optimal level resulting in employees content in “freeloading” or doing enough to get by. TMS has no recourse to change this within a hierarchical system, whereas delayering would give them an opportunity to assess the merits of each employee. VIII. Recommended Implementation Steps at TMS Based on the research presented in this report, it is my recommendation that TMS implement a delayering process in order to increase reaction time, decision-making, agility, and shareholder value. My research and personal knowledge of the internal workings at TMS lead me to believe that a top-down approach would work best as authority is well respected and revered in the organization and employees are more likely to follow than lead themselves. It is critical that both Akio Toyoda and Jim Lentz approve of this process to ensure success. Below are the following steps needed to delayer TMS: 1. Recognition from Toyoda and Lentz of a need for change 2. Establish a sense of urgency for delayering (falling behind, need to be more creative/entrepreneurial, quicker reaction times, etc.) 3. Develop a team of leaders responsible for the delayering process 4. Solidify the vision and strategy for delayering; include HR in this process 5. Begin the delayering at the top of the organization and advise that the process will continue to cascade down throughout the organization 6. Consolidate the gains from delayering into possible further change 7. Anchor the gains in the culture of the organization which likely has changed since the delayering process has began
Works Cited  Carl W. Stern, M. S. (2006). The Boston Consulting Group on Strategy. Hoboken, NJ, USA: John Wiley & Sons, Inc. . Cascio, W. F. (1995). Guide to Responsible Restructuring. U.S. Department of Labor, Office of the American Workplace. Craig R. Littler, R. W. (2003, April). Dynamics of Delayering: Changing Management Structures in Three Countries. Journal of Managment Studies , 225-256. Ehap H. Sabri, A. P. (2007). Purchase order managment best practices: Process, Technology and Change Management. Fort Lauderdale, FL, USA: J. Ross Publishing, Inc. . Finegan, J. (1997, December 1). Joining Forces. CIO , pp. 43-52. Hindle, T. (2008). Guide to Management Ideas and Gurus. London, England: Profile Books Ltd. Krames, J. A. (2002). The Jack Welch lexicon of leadership. United States of America: McGrawHill. Lashley, C. (2001). Empowerment: HR strategies for service excellence. Jordan Hill, Oxford, England: Butterworth-Heinemann. Lawrence, P. (2002). The Change Game: How Today's Global Trends Are Shaping Tomorrow's Companies. United States: Kogan Page Limited. Morden, T. (1997). Strategic evaluation of re-engineering, restructuring, delayering, downsizing, policies as a flawed paradigm. Journal of Management History , 35, 240-249. Slater, R. (2003). 29 leadership secrets from Jack Welch. United States of America: McGrawHill.
Exhibits Exhibit 1 Benefits of Delayering an Organization 1. Need fewer managers(Hindle, 2008) 2. Less bureaucratic(Hindle, 2008) 3. Can make decisions more quickly(Hindle, 2008) 4. Encourages innovation(Hindle, 2008) 5. Can bring managers closer contact with customers(Hindle, 2008) 6. Produces cross-functional employees(Hindle, 2008) 7. Faster flow of information (Lashley, 2001) 8. Flexibility (Lashley, 2001) 9. Minimize Cost (Lashley, 2001) 10. Increase responsiveness (Lashley, 2001) 11. Autonomy for line managers (Lashley, 2001) 12. Eliminate distortions of “inconvenient” messages from layers (Lashley, 2001) 13. Eliminate “cover-up” (Lashley, 2001) 14. Less room to hide (Lashley, 2001) 15. Better information from line managers to executive managers (Lashley, 2001) 16. Encourages middle management to be more entrepreneurial (Lashley, 2001) 17. Increase localized optimization (Lashley, 2001) 18. Managers become more consultative (Lashley, 2001) Exhibit 2 Negative Effects of Delayering 1. Cost savings may consequently dilute customer experience (Lashley, 2001) 2. Cost savings may consequently dilute operational effectiveness (Lashley, 2001) 3. Increase training costs for managers given greater span of control (Lashley, 2001) 4. More work with less reward (Lashley, 2001) 5. Changes to power structure (Lashley, 2001) 6. Less support for newer managers (Lashley, 2001) 7. Impact on organizational culture (Lashley, 2001) 8. Job losses may cause employees to have reduced job loyalty (Lashley, 2001) 9. Managers lose detailed knowledge, and must rely on others (Lashley, 2001) 10. Short-term gains produce long-term losses (Morden, 1997) 11. Low morale(Craig R. Littler, 2003) 12. Mercenary attitudes(Craig R. Littler, 2003) 13. Low commitment(Craig R. Littler, 2003) 14. Diminished career expectations(Craig R. Littler, 2003) 15. Loyalty to colleagues and not the firm(Craig R. Littler, 2003) 16. Upwards and Outwards (Lawrence, 2002)