An Article From the Archives:
In this month’s From the Archives, we learn how Herman Miller created a business within their business as a strategy to enter the discount chair market. Some two decades later, we would consider this a “Business Model Innovation;” thinking outside the confines of an existing business model to bring existing products to new markets, new products to existing markets or new products to new markets. While the term Business Model Innovation isn’t mentioned in the article, its elements of setting up a separate entity to manage the effort and having a distinct business plan, goals, metrics, and a separate P&L are covered. Originally published in our Total Employee Involvement Newsletter in January of 1998, the lessons employed by Herman Miller are still very relevant today.
Innovative research and workspace design solutions have been a hallmark of Michigan based Herman Miller for several decades. With $1.3 billion in sales, the world’s second largest office furniture manufacturer pioneered office cubicles in 1968. They produced the first ergonomic chair in 1975. But what they’ve added to the mix in recent years is the authority and expectation that their product development teams will function like small businesses, making the kinds of strategic decisions that most companies still reserve for senior managers. The payoff can be seen by a look at the recent development of their Ambi chair-an award-winning product that single-handedly allowed Herman Miller, a middle to high-end market player, to make a bold entrance into the middle to low-end market.
Notes Herman Miller senior product manager Keith McRobert: “We were a late market entrant into a segment where a lot of competitive products had been entrenched for five to eight years. But the team went in without hesitation. We figured if we drew on all the innovations based on our 25 years of ergonomics seating research, our expertise in the design and development areas, the core competencies and expertise of our team, and leveraged our leadership ability, we could come up with a new reference point that would redefine lower-priced seating.”
OPPORTUNITY AND CHALLENGE
The team knew from the outset that the opportunity was real: the seating market represents 25 percent of a $9.5 billion industry. Work chairs make up the lion’s share, 83 percent. The middle/low end share is 27 percent and growing. Market trends bolstered the certainty that this was a real opportunity. Facility budgets continue to get tighter. Employee health costs continue to skyrocket (lower back pain alone cost employers $20 billion in the last ten years). Increasingly varied office work, especially where computers are involved, calls for this kind of product. And workforce diversity, especially in body sizes, means the need for flexible chairs.
Says McRobert, “We bought five competitive products we identified as best in class. We did tear-down studies on them and focus groups. We also looked at ancillary services: their warranties, delivery programs, fabric offerings. And at the end of the day, we found that a lot of the customers said that these chairs weren’t delivering the kinds of things they wanted. They were sacrificing comfort, ergonomic support, and durability – those things they told us were most important – for affordability.”
The team’s challenge, then, was to create a superior chair at or below competitive price points, superior product differentiation, minimal cannibalization of other Herman Miller markets, and a healthy financial return. McRobert says the differentiation piece, more than anything else, is what drove the program. They focused on designing a chair that stands out on four fronts: it would accommodate a broad range of user sizes, work for people doing a variety of types of work, have a breakthrough tilt mechanism to assure comfort and ergonomic support, and be easy to understand and use.
NEW PRODUCT TEAM MODEL
Herman Miller new business development manager Brad Maclean credits success to a strong business-focused product team, whose members were dedicated to the project for at least one-year past launch. Several years ago, the company went through a major product development process redesign. Says Maclean, “We actually changed the name of the process to Product Commercialization. Instead of the emphasis being on just developing great products, we now place overall importance on making a successful business out of our new product initiatives. You can have a terrific product and still not have a success if you define success as making an appropriate return and satisfying customer needs.”
The Ambi team, then, functioned like a small business. Maclean thinks this makes sense in view of the fact that a successful new product could earn $25 to $30 million. Like a company, its leader was not biased toward any particular function, and its functional members were allowed to be dedicated to the small business, not to their functional home base. Team members were selected by senior management and given authority to make decisions in behalf of their functions without checking back with their functional bosses.
The team’s metrics were business metrics: their business plan and ten-year P&l statement provided their guiding light.
In the first year after launch, the team had the responsibility for measuring business results and making any critical decisions about changes to plan. When they launched, for instance, sales took off much faster than projected and quickly exceeded manufacturing capability. While the team scrambled to get the needed capability, it made a quick decision to control the situation during the duration by tightening up on standard discounting. The team – not senior managers – decided that people who really wanted the product would pay more for awhile!
With a product team acting like a small business, what is senior management’s role? Says Maclean, “They play very key roles in three areas. One, they select the team and team leader and get the team commissioned with a clear objective. Two, they coach and counsel.”
Three, if the Ambi Chair Company isn’t heading in the right direction, they’re the Board of Directors with the prerogative to change the president or the team.”
MAPPING THE ROAD TO THE CUSTOMER-OWNING RESULTS
Maclean says one of the team’s most illuminating practices was mapping the road to their customer. Who were all the people between the team and the end user? They identified the corporation at large, its field salespeople and distributors, and the facilities managers who would buy the chair s for the end users. Says Maclean, “This was a most useful best practice. Before we even started to design or develop the product, we gathered data from everybody in the value chain about what’s important to them, what’s key, what’s going to add value. We used that data as a common team language. Since the team owned the data, when we’d get into a conflict of opinion, we’d ask ourselves what the data tells us about what the customer thinks. This really minimized team conflict and is one of the reasons we’ve been able to stay together.”
Maclean says it was the team’s ability go where the action was that let them function as a rapid-response business team. It began with Herman Miller’s common practice of co-location-housing the team together. Remarks Maclean, “Thousands of decisions are made all the time about new products. Engineers are thinking about what screw to use, we’ re also looking at program balance, what kind of financial return we need and how we’re going to get it, what kind of product process is involved, how are we going to introduce this thing on time? It’s all about decision making. If you want to optimize, this means people need to talk with one another, not next week, or the next time we get together. Right now.”
Maclean says the Ambi team went beyond static co-location: they moved around as the situation warranted. They started in the company’s R&D facility, which gave the engineers easy access to their model shop and test lab. When they were ready to do their first prototype, they moved to the manufacturing facility. The end result: shortened product commercialization cycle time.
STRONG EXTERNAL PARTNERING
If you want to be known for innovation and rapid response, odds are you can’t do everything home-grown. Product engineer Tom Niergarth credits Herman Miller’s maintaining strong, healthy external relationships with industrial designers and suppliers with the Ambi chair’s success. Says Niergarth, “We’ll go out and try to get the best talent in the world to help us on any particular problem or program. We define the role of owning the product design in the broadest possible way. So the way we compensate designers is based on margin dollars generated for the corporation. It keeps the action holistic and pushes out the general ownership of the business.”
The proof is in the pudding. In the first year of production, revenues were 23 percent above plan, margins were 44 percent better than projected, service costs were about 15 percent below plan, and the Ambi team slashed almost 50 percent from their product development cycle time. The market loved it. The team is justifiably proud of the results.