Strategy

Back to Basics

Six Sigma could provide a cure for the corporate hangover.
Lisa YoonJanuary 3, 2001

Now that the bull-run party could be coming to an end, and corporate America is bracing for an economic slowdown, many companies are getting back to blocking and tackling. They are focusing on the basics, like quality control, customer service, and good old- fashioned cost-cutting. Six Sigma, a management principle that helps companies perfect these processes, could also be due for a resurgence.

In fact, new Six Sigma initiatives have been unveiled at newly-merged J.P. Morgan Chase & Co., as well as some technology giants like Toshiba Corp., and Sun Microsystems Inc. Just a few weeks ago Home Depot Inc. and Minnesota Mining and Manufacturing Co. (3M) made headlines when they appointed former General Electric Corp. executives to the companies’ respective CEO posts. GE, of course, is revered for its results-driven management practices and was one of the leaders in implementing the Six Sigma system. It’s not a question of whether or not CEOs Robert Nardelli of Home Depot and James McNerney Jr. of 3M will implement Six Sigma, but when. Both men said they will bring the management skills they honed at GE to their new companies.

But while an executive with a GE pedigree is a newsworthy coup for any management team, how relevant is Six Sigma in the post-Internet world? According to some consultants, it’s extremely applicable. As businesses buckle down after the end of last year’s tech upheaval, traditional business principles are worth revisiting, they say. The newer tech companies that are left standing must think about the next chapter in their business lives. Indeed, some smaller tech companies like Rhythms NetConnections Inc., an Englewood, Colo.-based DSL provider have already announced Six Sigma initiatives. And older, more traditional companies are also adopting Six Sigma with their own adjustments to suit their businesses.

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The Six Sigma system of quality control was first institutionalized by Motorola Inc. and popularized by companies such as GE and AlliedSignal Inc. It measures performance of each project or process by sigma, a statistical unit of measure that reflects process capability. While most companies use three or four sigma as the norm for quality control, achieving six sigma yields a failure rate of only 3.4 defects per million products, or a success rate of 99.99966%–close to perfect quality. Three sigma on the other hand allow 67,000 defects per million to slip by.

Six Sigma has been known to produce striking benefits to companies’ profits, employee productivity, and stock price. For example, between 1987 and 1997 Motorola’s sales grew at a compounded growth rate of 17% per year, profits compounded at 17.2% per year, and stock value enjoyed a double-digit growth of 16.5% per year. Additionally, Motorola’s cost of poor quality per unit has reduced by more than 84%, employee productivity has increased 204% (a 12.3% per year average), and product reliability has improved better than five fold.

Better with Age

Six Sigma may not be applicable to younger companies in the early stages of establishing the business, but as they mature and business processes take shape, it becomes necessary to measure results and improve the processes. “In the New Economy, you’ve got companies that are ramping up, and usually when you’re in a ramp- up mode, you’re moving so fast that there isn’t enough time to put disciplined management practices in place,” says Mike Burkett, a consultant at Boston-based AMR Research. “A company has to get to a certain level of maturity. But once you reach that level you start to measure it and identify opportunities for improvement. You take a new process that hasn’t been improved yet, and I can almost guarantee that there’s a ton of room for improvement.”

For example, Sun Microsystems Inc., a Palo Alto, Calif.-based computer maker began training its executives in Six Sigma principles this year. “Sun was a hot technology company. As Sun grows, [CEO Scott McNealy] is recognizing that he can’t run a large organization the way he used to run a small technology company,” says Burkett. “You have to put strategy in place and you have to measure it somehow. But the risk is you don’t want to remove that entrepreneurial spirit. He’s learned from [GE chairman] Jack Welch how to start to implement different strategies, and one of them is Six Sigma,” explains Burkett.

And though younger companies may have different priorities from those of traditional ones, there are always areas to focus improvement measures. For example, “if cost is not an issue—let’s say you’re making 40 percent margins—tweaking cost reductions out of your process is probably less important than introducing new technologies,” adds Burkett. “Nonetheless, you still may look at your time-to-market process. There are still processes that you may want to focus on that are more strategic.”

Targeted Six Sigma

To some traditional businesses, the concept of Six Sigma may seem old-hat. But many companies are examining fresh ways to use Six Sigma to improve their businesses. White Plains, N.Y.- based ITT Industries Inc. recently implemented what it calls a “Value-Based Six Sigma” program, which adds Six Sigma to a value-based management (VBM) discipline implemented several years ago at the maker of pumps, electronics, and defense equipment.

“The cornerstone of value-based management is an analytical framework that directs our investment resources to those projects that produce the highest profit,” says CFO David Anderson. The company identifies those profit- makers through a combination of market analysis and return-on-investment. While this may seem a basic tenet of business, according to Anderson, the uniqueness of ITT’s program lies in the synergy between VBM and Six Sigma, which allows the company to zero in on its most profitable areas.

The company believes the effort will afford them the ability to extract the maximum value from those areas. “By putting VBM and Six Sigma together, we’re prioritizing the projects where we’re applying Six Sigma resources and tools,” explains Anderson. “The diagnostics are being performed in our business units by the VBM-Six Sigma teams. What they’re doing is putting the output from those diagnostics in terms of the identified projects through a VBM screen so that we’re not pursuing things where the implementation benefit is low,” he says.

Benchmarking has played a key role in developing a program that combines Six Sigma with the VBM system of its own design. Anderson says ITT has examined the practices of companies such as GE, Tyco International Ltd., ITW, and Emerson as guides. “We do a lot of studying of our peer group and talk with our investors about what they see as the elements of the best-run companies in our universe, the multi-industry universe,” he says. “One of the constant refrains we receive is that the management systems that are in place at these companies continue to add and build upon existing systems.”

Anderson is enthusiastic about the returns on ITT’s program, although the results have yet to be seen. The company initiated the program in the second quarter of this year. So far, they have 92 black belts in the U.S. and some 50 black belts abroad, where the company trains in French, Italian, Spanish, and German. It is also expanding the program to Asia.

One of the results of ITT’s VBM-Six Sigma program that excites Anderson most is the empowerment of employees across the board. “I have seen work teams with machine-tool operators who are excited about the opportunity to tell management about what needs to be changed about a particular process. Everybody has a voice.”

Such empowerment, however, can present its own potential pitfalls. AMR’s Burkett and David Hodgson, a partner at PricewaterhouseCoopers LLP, say that sometimes the interests of senior management and those of lower-level employees conflict. Burkett points out that upper management’s strategic priorities don’t always coincide with the more short-term priorities of operational managers and says that senior management must be careful to align the day-to-day goals with the strategic. Hodgson goes as far as suggesting that companies assign a “risk-savvy” manager to process-improvement teams, at least in higher- risk projects. He says such internal-audit management measures bring the strategic, macro- level perspective, to which Burkett refers, to operational teams.

Still, in today’s technology-driven economy, both new and older companies can benefit from applying Six Sigma principles to newly implemented E-business processes. Six Sigma itself might not be new, but when it is put through the lens of the New Economy, it has the ability to continue bringing good things to life at any company.

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