Transformation Issues in Small Manufacturers

D. Ryan Underdown, Ph.D., D.H. Liles, Ph.D., P.E.

Automation & Robotics Research Institute
The University of Texas at Arlington
runder@arri.uta.edu/(817)272-5917/(817)272-5952 (fax)

Abstract
In the fall of 1996, nine case studies (theory building) were conducted to determine activities
required for transforming small companies. These activities were combined with those found in
the literature and those from earlier implementation experiences of the authors to develop a
methodology for transforming small companies. During this research, many issues prohibiting
transformation were also discovered. The most prevalent and limiting of these issues in regard to
transformation is the lack of formal systems. This paper will discuss the lack of formal systems
issue and the activities included in the transformation methodology to address it.

Keywords
Small business, transformation, processes

1. Introduction
Small companies face a difficult road to success. Pressures to produce products better, faster and
cheaper are greater now than ever before. Large companies are reducing their supplier base and
demanding quality certifications for those companies that remain. At the same time, large
companies are also outsourcing more products. Foreign competition is becoming a popular
alternative for these products. To compete in this environment, small companies must continually
transform how they do business. Small companies that thrive in this environment are transforming
themselves to develop a competitive advantage.

In the fall of 1996, nine case studies (theory building) were conducted to determine activities
required for transforming small companies. These activities were combined with those found in
the literature and those from earlier implementation experiences of the authors to develop a
methodology for transforming small companies. During this research, many issues prohibiting
transformation were also discovered. These issues include inherent disadvantages of small
enterprises, entrepreneurial mindsets and dilemmas, and a lack of formal systems. The most
prevalent and limiting of these issues in regard to transformation is the lack of formal systems.
This paper will discuss the lack of formal systems issue and the activities included in the
transformation methodology to address it.

2. Lack of Formal Processes in Small Businesses

2.1 Formal and Informal Processes
A formal process is a sequence of activities performed according to an established set of rules.
Process rules describe the activities involved in a process and how they should be performed.
Process rules include an overall description of the process and step by step instructions and
metrics for each activity. Process rules can be in the form of flowcharts, procedures or other

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established documentation format. The overall description of the process depicts the process at a
macro level. It describes the linkages between a given process and other processes in the
enterprise. The overall description is typically a high level flowchart displaying only major
activities in the process. Step-by-step instructions are strictly defined micro-level actions that
prescribe how an activity should be performed. Step-by-step instructions are typically in the form
of detailed written procedures. Process metrics are attributes of a process to be measured.
Process rules typically specify metrics to be measured and standards to which results can be
compared. As a result of process rules, formal processes are characterized by consistency and
predictability. Process rules ensure that a process is performed consistently over time. Process
rules increase the probability that process performance will be consistent regardless of who is
operating it. With process rules, operators have a guide to performing the process. Thus,
variation attributed to the operator is greatly reduced. A formal process is measured and
compared to an established standard of performance. Thus the operator has feedback about the
process and can make adjustments to improve performance.

Informal processes are not performed according to an established set of rules. They are not
documented, or consistent. The activities of an informal process are performed according to the
preferences of the individual enabling the process. Thus, an informal process is characterized by
large and frequent variation. The rules one individual uses to conduct the process are not the
same as another individual, which produces vastly different end conditions or products. Informal
processes are typically not measured or compared to an agreed upon standard of performance.
Thus operators do not have any feedback about their performance. The lack of information
concerning informal processes often leads to blaming operators for poor process performance.

2.2 Evolution of Process Formality

Process formality evolves. In most cases, small companies start with a set of informal processes,
which eventually evolve into semi-formal processes over time. When a small company begins, it
has relatively few customers and products. At this state, the company is in its infancy. Customers
are known on a first name basis. All employees know the product construction and assembly
processes. Only a few employees are responsible for all processes. Each person develops his or
her individual method of performing activities. These individual methods or rules work because
other people are not required to perform the same process. Process repeatability is not an issue.
If another individual performs the process, it is on a temporary basis. In addition, the person
performing the process may be an expert who does not need process instructions. In many young
companies, the entrepreneur or founding members performs manufacturing or assembly
operations on a daily basis. These people are the innovators and knowledge experts. They
typically have years of experience in the industry and are considered experts in their field. Formal
process documentation is not needed for these people. They know the product intimately. In
some cases, they helped design it. Developing formal process procedures is not an immediate
concern. The customer does not require formal processes. At this stage, customers are hard to
find. Those who conduct business with the company are typically looking for an alternative
supplier or are trying a new product. Detailed process specifications are not important. At this
stage in the life of the enterprise, attracting customers and building the business is more important
than developing formal processes. Unfortunately, these informal processes that were satisfactory
in the early stages of a business remain in place long after they have exhausted their usefulness.

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Over time, the company gains more customers and product variations. Customer needs grow and
innovative new products are offered. New employees are hired and process complexity increases
substantially. The informal processes that once satisfied the needs of the customer are no longer
operating effectively. Shipments are late and quality begins to deteriorate. In some cases,
customers are lost over broken promises or product failures. The symptoms of a major problem
has emerged: the lack of formal processes.

3. Introduction of the Transform Enterprise Methodology

The scenario presented above is typical of many small companies the authors have worked with
over the past six years. These problems may be viewed as "growing pains" of a small company,
but they can be very difficult problems to solve. A lack of formal systems was observed in all nine
companies involved in this research. The problems associated with developing formal processes
was included in the Transform Enterprise Methodology (TEM) developed by the authors
[Underdown 1997].
Environment
C1

Vision & Integrated

Motivation Transformation
to Improve Develop Plan
I1
Vision & O1
I2
Existing Strategy Vision, Commitment to
Strategic Excellence & Integrated
Steering
Direction A1 Transformation Plan
Team

Competent
Culture
Create
Existing Culture Desired O2
I3 Technology Competent Culture
Culture Development
Feedback
A2 Involved
People
Feedback From Feedback To Customers/
Customers/Suppliers/ Suppliers/ External Processes
External Processes Integrate & O4
I4
Improve
O3
I5 Enterprise
Existing Processes/ Integrated & Improved
Products/Technology A3 Processes/Products

Technology
Needs
Available Develop
Technology Technology
Solutions O5
A4 Implemented
Technology
Solutions

M1
Management

Figure 1: Transform Enterprise Methodology (TEM)

The TEM is a guide for transforming an enterprise from a current state to a desired future
condition. It is an organized collection of activities that describe “what” must be done to change
entire enterprise, see figure 1. The TEM is composed of four primary activities: Develop Vision
and Strategy, Create Desired Culture, Integrate & Improve Enterprise and Develop Technology
Solutions. The TEM begins with developing a vision of what the enterprise aspires to become
and a plan to achieve it. Vision is a statement of what the enterprise aspires to become in the
distant future. Strategy is the transformation plan to achieve the vision. The transformation plan

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is composed of cultural, process and technology strategies as illustrated by the subordinate
activities of the TEM. Cultures are those norms, attitudes and beliefs exhibited by the people
involved in the process. Processes are those organized sequences of activities that transform
inputs into an outputs, provide direction for the enterprise or gather resources for the enterprise
to operate. Technologies are the scientific devices that enable processes to perform. Once the
vision and transformation plan has been completed, the next activity, Create Desired Culture
begins. Create Desired Culture is the process of creating a culture that has the competencies to
transform the enterprise [Flanagan 1995]. A competent culture has the knowledge, attitude and
skills to facilitate transformation. This culture is characterized by the constant desire of people to
learn and develop critical thinking skills. Once cultural strategies are in motion, the next activity,
Integrate and Improve Enterprise begins. Integrate and Improve Enterprise transforms how
work is accomplished. This activity focuses on increasing the efficiency and effectiveness of all
enterprise processes. As process improvement strategies are implemented, the final activity,
Develop Technology Solutions begins. Develop Technology Solutions enables process
improvements. Technology is any scientific device that enables a process to operate. As process
improvements are made in the Integrate & Improve Enterprise activity, technologies are identified
and implemented that enable the improvements to become reality.

4. Process Formality and the TEM

Transforming an enterprise requires a high degree of process formality. To satisfy this need, the
TEM specifies several processes to be formalized. The first TEM activity, Develop Vision and
Strategy, specifies the development of a formal plan for transformation. During the early stages
of transformation, planning was found to be an informal process in all nine participants.
Companies tended to use an ad hoc collection of strategies crafted in meetings of the top
executives. Goals and strategies were loosely tied together and the end conditions to be achieved
were often fuzzy. Most companies considered planning to be an important enabler of successful
transformation and often formalized the planning process after the majority of the transformation
process was complete. To address the need for a formal plan, a planning methodology is
provided in the TEM. The methodology helps executives develop a transformation plan by
decomposing the vision into goals, strategies and objectives. Once the strategic level
transformation plan is complete, the planning methodology is used to develop supporting plans in
lower levels of the enterprise. Using the planning methodology at all levels of the enterprise
ensures that an integrated plan for transformation will result. A plan for change typically
increases the probability of success, therefore a formal plan is desirable for all companies
attempting to transform.

Formal human resource processes are needed to develop a workforce with the competencies to
enable a transformation. Human resources is an area often ignored by growing small companies.
It is viewed as a necessary function that does not add value to the enterprise. Companies
attempting transformation in this study began to formalize their human resource processes in the
later stages of their transformation process. The most popular processes to formalize were
measurement and reward processes, hiring and firing processes, and command and control
processes. These needs are addressed in the Create Desired Culture activity of the TEM.

Measurement and reward processes guide behavior of employees. Measurement and reward

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processes guide and compensate individual performance by establishing measurements that are
important to the enterprise. They indicate to people those performance measurements that are
critical to transformation by rewarding them for excellence in those measurements. Measurement
and reward processes guide behavior and therefore must be designed to encourage behavior that
is desired in the transformed enterprise [Flanagan 1995, Goffee 1996, Belasco 1994, Kotter 1995,
Talwar 1993, Ettorre 1995, Hall 1993, Steininger 1994, Spitzer 1994, Stayer 1990, Davenport
1990, Guha 1993, Harrington 1993, Senge 1990]. Measurement and reward processes in small
companies are often non-existent or ad hoc. Formal performance reviews are often not held.
Employees are not measured against standards of performance or goals. Instead, raises are given
periodically based on the perceived value of an individual from the perspective of a supervisor or
owner. Employees do not know what they have done right or wrong to receive the raise. In
many cases, employees will not receive a raise or review for long periods of time while the
company struggles to survive. As a company matures through a transformation process, they
realize the importance of measuring employees against standards of performance and goals. This
realization stems from the need to raise the performance of all employees. To successfully
transform an enterprise, people must have a high level of knowledge and skill combined with a
positive attitude. A formal measurement and reward process that promotes the attainment of
knowledge and skills with the winning attitude can cultivate a workforce of this nature.

Hiring and firing processes are vital mechanisms for creating a workforce of people who facilitate
transformation. In growing small companies, hiring new employees is an informal process of
interviews and paperwork. Background checks and skills testing are usually not part of the
process. Most of the companies who participated in this research formalized their hiring and
firing process during the fourth or fifth year of their transformation. These companies realized
that their people provided their competitive advantage and were the most important mechanism
for making the transformation successful. People in transforming companies must have the
knowledge, skills and attitude to facilitate success. Hiring and firing was viewed as a method for
creating the desired culture. Old cultures can be removed if new leaders are hired and undesirable
leaders are fired. In fact, five of nine companies participating in this research fired or lost people
during their transformation process to facilitate the desired culture.

Command and control processes are the organizational structures that facilitate transformation.
Organizational structure defines the chain of command within an enterprise. It represents the
formal path of decision making, authority, and responsibility over given areas. Organizational
structure dictates how decisions are made on a daily basis. In most companies involved in this
research, the organizational structure was changed in the later stages of a transformation. In a
growing small company, the organizational structure is a loose designation of reporting
relationships that often changes depending on the subject matter of the decision to be made.
Typically, a formal organizational structure does not exist. The process for making a decision
regarding various subjects and severity are known by the employees, but rules are not established
to handle these situations. The path of decision making has a significant influence on the
transformation process. Transformation requires decisions to be made at all levels of the
enterprise in a timely manner. The organizational structure controls decision making and must be
designed to serve the decision making needs of the transformed enterprise [Belasco 1994,
Davenport 1990, Ettorre 1995, Flanagan 1995, Goffee 1996, Guha 1993, Hall 1993, Harrington

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1993, Kotter 1995, Stayer 1990, Senge 1990, Spitzer 1994, Steininger 1994, Talwar 1993].
According to Randolph, “structure involves much more than the organization chart. The
parameters in which people will operate must be clarified. Structure affects how the
organizational vision is defined, how goals are set, how decisions are made, how performance is
appraised, and how people are trained” [Randolph p.25 1995]. Management must design and
implement a structure that serves the needs of the customer and facilitates the transformation
process. In most cases, a company's organizational structure changes from one that is very
hierarchical to one that is very “flat” to facilitate decision making and to encourage ownership at
the lowest levels of the enterprise [Belasco 1994]. Flat structures encourage people to take
control over their areas and become accountable for their performance.

The TEM does not designate a specific process for measurement and rewards, hiring and firing, or
command and control. These processes must be customized to the needs of an individual
company. The TEM indicates the need for formalization in these processes and cites resources
for further research.

Formal problem solving processes promote teamwork and continuous improvement. Teams are a
widely recognized mechanism for involving people in the transformation process and improving
processes. Teams need a formal process for problem solving to ensure that the optimal solution is
developed and that everyone is involved in the decision. In teams without a formal problem
solving process, people tend to jump to conclusions or overlook solutions that are not obvious.
Formal problem solving forces people to systematically arrive at a solution. In the TEM, the
Integrate and Improve Enterprise activity provides a systematic process for problem solving and
process improvement. The activities of this process include: Understand the Customer,
Understand and Improve the Product, Understand and Improve the Process and Design and
Implement Effective Controls. These four activities are also decomposed into more detailed
activities and problem solving algorithms. The intent of the Integrate and Improve Enterprise
activity is to provide companies attempting transformation a set of guidelines for analyzing,
designing and implementing improved processes for their transforming enterprise. If this problem
solving process is used universally by all teams in the enterprise, a common vocabulary for
problem solving will develop which will facilitate communication and continuous improvement.

Formal technology adoption processes are needed to enable process improvement solutions
developed during the Integrate and Improve Enterprise activity. Once teams have arrived at a
solution, they need a process for determining the technology required to make the solution a
reality. The Develop Technology Solution activity of the TEM provides a decision making
process designed to utilize the synergy of teams. Using this process, teams can avoid costly
mistakes. In teams not using a decision making process, strong personalities and perceived
technology experts tend to dominate the discussion concerning a technology solution. A formal
process for decision making reduces the influence of these people and provides everyone an
opportunity to contribute to the decision.

5. Conclusion
Formal processes enable enterprises to transform. They provide consistent and predictable

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performance that can be measured and continuously improved. The TEM recognizes this need
and provides methodologies for developing formal processes. Companies who use the TEM can
develop formal processes during their transformation and avoid problems experienced by those
companies who participated in this research. Further research is needed to determine how formal
these processes should be during each stage of transformation.

Acknowledgement
Research for this paper is funded in part by the National Science Foundation sponsored Agile
Aerospace Manufacturing Research Center.

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