“The Battle for Change”

Mortgage Banking Magazine, January 1997

by Jeffrey R. Lefebvre, Ph.D.
PriSim Business War Games Inc.

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War is hell, but so is change for businesses used to doing things a certain way. Selling the troops on a new approach is often a losing battle for top managers. Using a business war game approach can make a campaign for radical change work

Companies grow and companies shrink. Senior executives leave and new ones arrive with fresh strategic perspectives. Competitors and the economy are a constant thorn in your side, and this thing called information technology will not stop reeking havoc on your business and processes.

With each shift in their competitive environment, organizations must either adjust to the new realities or risk business failure. The speed of adjustment often impacts success. Move too slowly and once again you’re a standing target.

Change Happens!

International Business Machines (IBM), a pioneer of personal computing, failed to recognize the sea change to client/server computing in time to capitalize on the growing business opportunities. Today IBM is far less dominant in the client/server computing arena than it could have been had it made adjustments and embraced the new technology sooner. In 1980, Kmart was the nation’s largest retailer. By 1991 Kmart experienced a full-court competitive press from Wal-Mart and Target. In the last few years, Kmart has been balancing on the brink of bankruptcy.

When organizations find themselves in new competitive situations, they oftentimes must radically change their approach to business to remain competitive. In the face of change, organizations furthermore will discover that what was their greatest strength, has become their greatest weakness for the new competitive realities. IBM’s strengths in mainframe, “big iron” computing and marketing were of little use and, in fact, a distraction when it came to smaller, more powerful computers sold through mail order and retail-store fronts. Kmart’s strategy of size and “efficient” operations located predominantly in urban centers was challenged (and some argue, defeated) by Wal-Mart’s move to distribution competencies, state-of-the-art inventory management techniques and rural, small-town positioning for market entry.

The mortgage banking industry has not been immune to competitive shifts either. An analysis conducted for the mortgage banking industry reveals
stunning movements in leadership positioning. Figure 1 compares the top lenders from 1986 with those of 1996. The “leader board” of top mortgage lenders has been dramatically rewritten (see Figure 2 for a similar comparison of servicers). These shifts can be partially explained by the dramatic consolidation occurring within the mortgage banking community. In 1993 there were more than 80 mergers and acquisitions, and of the top 20 producers in 1993, half no longer exist. Financially, the mortgage banking industry has been squeezed. Profit margins for mortgage banks have dropped from 14% to 5.9% in the period from 1993 to 1996 (Source: MBA).

Given this history and what we know about the mortgage banking industry, it is no surprise that organizations must change to remain competitive. The old adage proclaiming, “One must lead, follow or get out of the way,” hints at the level of competitiveness in all industries, not just mortgage banking. Joseph Schumpeter eloquently summarized the highly competitive nature of business when he warned that if you fail to reinvent yourself and make your own assets obsolete, someone else surely will. Schumpeter refers to this as the creative destruction of capital.

Our Dilemma – Direction versus Action

Look no further than the local bookstore to find scores of books and articles on how your organization should change to remain competitive.
Management consultants have preached how core competencies, value disciplines, re-engineering, strategic intents, downsizing and business process redesign can “save” your organization and make you an industry leader.

All this literature indicates that we are not failing in defining where we want our corporations to go. Our dilemma is how do we get there. There was and continues to be a lack of assistance in helping organizations successfully answer this question. Michael Dell, the founder of Dell Computer, summarized this dilemma
when he proclaimed that, “ideas are a commodity, execution of ideas is not.”

One explanation for this difficulty with action and execution is that a change required to remain competitive directly questions an organization’s key strengths. In essence, change challenges the skills and experience of the members of that organization. Not surprisingly, this challenge of competency elicits significant resistance to the change.

This article proposes no new strategic paradigm or direction to “ensure” success. Instead, this work will focus on action and in particular, will attempt to answer the question, “How do we get there?” To accomplish this, the following pages investigate one model which highlights those elements required to overcome resistance to change, as well as one methodology to implement this model. Combined, the model and methodology enable strategic change within organizations.

A Model for Overcoming Resistance to Change: DVF> R

How can an organization change strategically, regardless of direction, when few members of that organization really understand that there is a need for change; when a vision is not clearly articulated or when the root problems of the business are poorly understood? Achieving radical change is not easy. Organizations resist radical change with every organizational chart and standard operating procedure manual they can muster. Therefore, to effectively execute a strategy, one must enable change, as well as overcome resistance to change. One successful model used by a Fortune 100 company recognizes that the following three items are necessary for achieving radical change.

  • Dissatisfaction with an existing situation will create a need to change.

  • Clearly communicating a strategic vision will provide a goal for change.

  • Teaching and practicing the first change steps will lead to an execution orientation within the organization.

At a basic level, a dissatisfaction with the existing environment, a vision for what a future environment might look like and an articulation of the first steps needed to move to the environment of the future will overcome resistance to change and enable strategic implementation. Thus, the model for change can be expressed as: D V F > R. Dissatisfaction, vision and first steps overcome, or are greater than, resistance to change.

Dissatisfaction: DVF>R

Fear is at the heart of successful strategic change and implementation: Fear that you will become second best, fear of potential marketplace
fluctuations, fear that you might not be good enough for continued success. Nothing motivates like fear. But how many organizations truly feel that fear? According to a Chief Executive / Arthur D. Little Poll from April 1994, 73% of senior executives “think their firms have an edge on their competitors.” The study of statistics tells us that in reality, 73% of a population cannot all be “leaders” within their population.
However, this number does provide an indication of the current state of mind of some of today’s corporate leaders.

Communicating dissatisfaction with a current environment is nothing more than motivating change, but three obstacles need to be addressed.

  • How do an organization’s members know when to be dissatisfied (particularly given a pervasive lack of understanding of basic knowledge on business “success”)?

  • How does an organization convince its members they are at risk from competitive pressures, given a certain level of complacency within the
    organization?

  • What is the current level of frustration with past strategic change initiatives and the success or failure of these initiatives?

Lack of Understanding. This author’s experience, as well as more quantified studies, suggest a pervasive lack of understanding of basic financial fundamentals within the ranks of many U.S. corporations. According to a February 1996 Training Magazine article, over a third of surveyed Fortune 1000 managers did not know profit was reported on an Income Statement. This fact should lead one to the conclusion that if your management does not understand basic finance, the odds are they do
not understand how their actions financially impact the bottom line and operations. Without this basic understanding of where they fit in, management is less likely to:

  • Understand the need for any strategic change

  • Comprehend where they fit into the solution (if they have little idea of where they fit in today’s environment, how can we ask them to understand their role in tomorrow’s environment?)

Providing an organization with a shared model of the business and the skills necessary to understand this model is no simple task. To build the
shared model, the members of your organization will need to understand basic strategy, business planning, financial ratios, financial reporting, your firm’s operational model and perhaps the competitive intelligence process. Once this has been accomplished, a significant step will have been taken towards overcoming one of the key reasons why individuals often resist change – a lack of understanding.

Complacency. “A history of long and effortless success can be a formidable handicap.” (The Economist, September 16th, 1995). Oftentimes, the most difficult task to accomplish in any change initiative involves convincing the members of the organization that the status quo is no longer acceptable. This is true even if those members share a common model of operations and performance. Recall the Chief Executive/Arthur D. Little poll and the large number of
executives (73%) who felt they were leaders in their respective industries. This study directly demonstrates the prevalence of complacency in senior executives. If the executives are content with business as usual, imagine how sanguine the rest of the organization is with respect to business outlook and competition.

Oftentimes, individuals do not have the skills necessary to know when to be dissatisfied with a given situation (what return on equity would make you dissatisfied, what is ROE, how do you calculate my firm’s economic value added, how does this performance stack up to the competition?). However, even with the “skills,” many individuals simply do not have the time to examine their organization from such a high level. Given the necessity to be expert at “our jobs,” it is difficult for all of us to disengage ourselves from our daily activities and engage in a thoughtful, informed analysis of competitive and organizational positioning.

Various techniques can be effective in confronting complacency. Leader boards (as seen in figures 1 and 2), competitive benchmarking examinations or basic analysis of routine financial reports (your organization’s as well as competitors) are all effective at overcoming complacency.

Recently, I had a conversation with a client who was attempting to figure out how to instill an orientation towards strategic execution into
her organization. During the discussion, the topic turned to the need to create dissatisfaction in order to motivate change. To demonstrate one approach to accomplish this, I showed the client a snapshot of her company’s financial performance for the last several years (see figure 3). The financials clearly showed increasing sales; however, return on sales had dramatically decreased. Following a discussion of exactly what the numbers meant, and a reiteration that the numbers were indeed her own organization’s, the client became visibly shocked. She quickly understood that for a
non-financial individual, even a rudimentary understanding of basic finance, coupled with some well presented financial analysis, can accomplish a lot in terms of motivating an individual. In order for an individual to feel a need to change, they must comprehend those indicators of poor organizational performance.

The longer an organization has been successful and the longer the average tenure of the work force, the higher the level of complacency and
hence the indifferent attitude toward competition. Successfully implementing change requires that an organization appreciate the need for change and that the complacency inside the organization is directly addressed.

Frustration. Finally, success in communicating a disappointment with the status quo and subsequently, a need for change will be influenced by how your company has implemented change in the past. Organizations which have historically progressed from one change initiative to the next, never really completing any initiative through to fruition or success, will find it difficult to convince the masses that there should be dissatisfaction. “Flavor of the day” organizations have significant challenges creating a need for change.

In summary, the degree of effort required to motivate an organization to change depends upon past experience with change initiatives. To foster
motivation, one requires an educated workforce with the skills to recognize where they fit (financially as well as operationally), as well as a workforce no longer satisfied with business as usual.

Vision: DVF>R

Do you know your organization’s vision and mission? Are you aware of the specific strategies your organization has developed to implement that vision or mission? Not surprisingly, many employees do not. Lack of knowledge of corporate missions and strategies does not mean they do not exist, rather that they are not shared or not communicated to those individuals who must implement them (in this article we will not distinguish between mission and vision and they will be used interchangeably).

Missions and strategies change from time to time. Sometimes this change is initiated by existing senior management, or more typically, by a
change in senior management. When these changes occur, it is necessary to communicate the shift in direction to the organization. In addition, the change MUST be perceived to have commitment from the top.

When attempting to engender a strong commitment to any vision, new or old, three items should be addressed:

  • Broad communication of the vision throughout all levels of the organization

  • Joint development of the strategies to achieve the vision by staff, line and senior management

  • Clear articulation of those measures which are indicative of success as well as the gap between your current position and the goal.

Communication to All Levels. Why is it so difficult to communicate change? Why is it that most of those responsible for strategic implementation are not clear on their organization’s own strategies? One answer to questions such as these is that most people do not comfortably operate at the strategic level. They do not understand what a strategy and mission are, they are not aware of what these items communicate, and most of all, they do not believe that these items are even necessary (they are viewed as too ethereal and nebulous). A common reaction may be, “Why do I need to know our strategy when I am solely focused on bringing new mortgage applications into the organization and when my compensation is primarily based upon production volume?”

What many individuals fail to understand, through no fault of their own, is that at an aggregate level they can and do have a significant impact on the success of their organization’s strategy. At a recent School of Mortgage Banking Course III lecture, Leilani Allen summarized this notion well. In her analogy, Allen described a simple problem – moving a stalled car. She asserted that if the class were to attempt to move the car as a team, they would be much more effective if they all pushed in the same direction. She then contrasted this solution with an image of the team pushing in several different directions. Obviously, running a business represents a much more complex task than moving a car. However, if a little coordination and direction can have significant benefit for a simple problem, imagine the impact for a more complex problem.

Joint Development. If your key resources do not know what your strategy is, they are unlikely to become involved in the strategic planning process. This situation is analogous to you as an individual ignoring your eyes and ears as you proceed to walk down the street.

The most valuable resource an organization has is its key personnel. This resource needs to be feeding information and insights into strategic
development. These people demand an understanding of strategic thinking. They need to know about your company’s strengths and weaknesses, opportunities and threats. They must comprehend the potential impact on your organization from customers, suppliers, competitors, substitutes and new entrants (i.e., the five forces impacting an organization as articulated by Harvard University’s Michael Porter). They need to know how the economy, technology, and government influence the profitability of your organization. Only then can they participate in the development and execution of strategic implementation, and only then will they buy-in to the implementation.

Measuring Success. Finally, to assist your key personnel in fully grasping their role and your strategies, one must address the last reality of business – finance. Finance is the language of business and, as we’ve already seen, many of those on our management teams do not speak the language. The objectives laid out during any strategic planning process are ultimately expressed in some numerical form. A basic understanding of finance and accounting, as in the creation of
dissatisfaction, is mandatory for fully understanding a corporate vision.

In summary, an organization needs to know where it is going. To accomplish this, its members must understand strategy, participate in the
strategic development process and have the skills necessary to measure and monitor success.

First Steps: DVF>R

Many companies fail in strategic implementation. All too often at the end of “planning” strategy, the plans, nicely documented in multiple three-ring binders, take a wrong turn and end up on a manager’s bookshelf as a “credenza trophy.” More often than not, the breakdown is not in the strategy itself, but in the overwhelming breadth of the plan. Strategies are typically generated with time horizons of three to six years (this number is shrinking). Given this scope, and given the inherent limitation of human ability to deal with complexity and ambiguity, strategies need to be decomposed into more manageable blocks.

Identifying what the organization and the individuals need to do on Monday morning to achieve the strategy is mandatory. Most strategic planning
methodologies recognize this requirement and hence promote the steps necessary to decompose the “grand” strategy down to actionable chunks (a good example can be found in Jones, “Strategic Planning for Mortgage Lenders”). In the end however, this refinement process is an art form and the more one is allowed to participate in the process, the better one’s skills become.

Executing DVF > R: A Methodology

As you have seen, the model for enabling strategic implementation is relatively straightforward, DVF>R. However, execution of the model
requires more thought. The DVF>R model is sequential in that a dissatisfaction must exist within an organization prior to the communication of a vision, which must be articulated prior to defining and understanding first steps. Given an acceptance of the model, one must address the methodology through which the model will be implemented.

Recognize that the classical implementation methodology for strategy involves many single dimensional solutions. The classical process
might involve a high-priced consultant’s study which creates a strategy, a human resource/change management team to provide training to fill the skills gap and finally a project team (most often heavily dominated again by outside consultants) to implement the solution. If an organization is “sophisticated,” these separate initiatives are coordinated and integrated, but more often than not they are disjoint and dysfunctional mostly due to a lack of preparation on the part of the project team. Coordinating and integrating an implementation on a Pert chart (a project planning tool used to identify critical paths and bottleneck tasks) is not enough to ensure cohesion. Success depends upon how well you execute the steps DVF > R. In other words, how effective you are at
motivating, leading and moving your organization towards the strategy.

Educational Interventions

Cohesion must be built into those responsible for strategic implementation with a shared experience – shared dissatisfaction, shared vision
and shared first steps. An educational intervention is defined as an educational event, sponsored through senior management and coordinated across functional boundaries, with a goal of fundamentally reshaping one’s model of business as usual. A model much like the mental models discussed in Senge’s “The Fifth Discipline.” According to Senge, mental models are “the images, assumptions, and stories which we carry in our minds of ourselves, other people, institutions, and every aspect of the world. Like a pane of glass framing and subtly distorting our vision, mental models determine what we see” and how we make decisions and handle problems. Accomplishing a shared model of the business enables and eases those efforts required to coordinate and integrate a
strategic implementation.

Imagine taking an organization through a strategic implementation “experience” without risking any real-world or competitive impacts (like riding a bike, first with training wheels, then on your own). An educational intervention allows one to create just such an experience. Through the process of education, members of your organization can practice implementation in a risk-free simulated environment. In addition to the practice, they can enhance their appreciation for what will occur during the implementation process. And finally, they can become exposed to the critical elements of DVF>R in such a way that their resistance to change is diminished, and hence their motivation to implement is heightened. One such educational intervention is a business war game.

Business War Games: Enabling Strategic Change

Simply defined, a business war game is a model of your business placed within a simulated, competitive environment. War games may focus on
specific functions and processes within the business or they may be designed to be holistic – encompassing all functions and processes. They may or may not be computerized. They may be focused on the individual as the player or on group decision-making. The objectives for the application of war games are diverse. Some games are used to teach deep technical or functional skills (e.g., underwriting, effective selling), while others focus on business strategy, finance and cross-functional relationships and trade-offs within the business.

Strategic implementations, by definition, involve or at least impact the whole business. They tend to cut across organizational boundaries and
success often depends upon involvement from multiple departments within the business. Given this nature of strategic implementations, those war games which focus on the business as a whole are best used as the tool for the educational intervention.

The War Gaming Process. You are the leader of your division. Imagine assembling 16 of your best and brightest employees into a room. Next, you divide your employees up into teams (perhaps four teams of four individuals each) taking special care to compose each team with as many diverse skills as possible (i.e., you strive for cross-functional teams versus a team of underwriters and a team of servicers, etc.). Now that you have your teams identified, you present them with a
challenge. You give each team a separate and distinct company to run for a period of four years and ask them to compete against one another for market share and profitability. In essence, you have asked each team member to think and act as the chief executive of their own organization. And now the play begins.

If you did the above, you would find that over the course of competition, your employees would grapple with many of the same issues and trade-offs you find yourself wrestling with. They would have to discuss strategy for their organization (e.g., who are our customers, what products do we offer them and why will they buy from us), they would have to comprehend financial implications of decisions within each department, and they would have to incorporate a keen understanding of the marketplace into their decision-making. Obviously, you would need to coach them in this process by providing them with the theory and models of strategic and business planning, ensuring they truly understood finance and how your company “makes” money. They would need to develop a true understanding of the business as a whole and the trade-offs made between each of the key functions in the business (much of this will happen in the
team setting as each employee educates the other concerning their job, their issues). In essence, for the four years of simulated competition, they would be you.

Ask yourself what it would be like to work with employees who have accomplished all that which is described above. When people have a
holistic understanding of the business, they are much more likely to think beyond their own turf and “functional silo.” Sales people will begin to understand why
increasing volume may not be the best tactic. Underwriters may promote relaxing credit standards (given pricing assumptions or savings in underwriting effort). Those in finance
may advocate lowering prices for volume, and servicing employees will push for closer contact with customers (even if it means an increase in servicing expense) in an effort to
curb prepayment behaviors.

In essence, upon completion of a business war game, participants have a greater understanding of the business. They appreciate why it is not
feasible to stand still as an organization. They acknowledge the necessity of vision, and they will be able to articulate those first steps which are necessary to make the vision
real. In essence you would have motivated your employees to action, provided them a direction, and educated them to the point where they can take the first steps towards
moving your organization in a new strategic direction.

Furthermore, throughout the intervention your key employees have surfaced and articulated the assumptions that underlie the major issues you
face day-to-day. If done correctly, a common language will now exist enabling quicker and more effective communication. Participants in the war game now see the issues from the
same perspective as top management and the important interfaces within the organization have been identified and the barriers between them have been lowered.

Now ask yourself how easy would it be to accomplish your re-engineering project, to add a new distribution channel or to refocus your
organization in a new strategic direction. Answer: hard, but not as hard.

Implications and Opportunities for the Mortgage Industry

The mortgage industry is competitive and cyclical. Many argue that mortgages have become a commodity. If this is true, then mortgage products
are only differentiated in the marketplace by price. However, competing on price is the last place where one wants to compete. The mortgage industry should learn from the airline industry which went through their price wars in the early 90s. During this price war, from 1990 to 1993, the airline industry lost more money than they had made since Wilbur and Orville Wright.

However, remember that the classical marketing equation gives us four key attributes upon which a company can compete and differentiate.
These attributes are known as the Four P’s – price (the amount charged), place (or distribution strategy such as retail branches, telemarketing), promotion (advertising, publicity, branding) and product (positioning).

These classical marketing concepts can be extended to incorporate additional requirements for the customers of the 1990s. A study conducted by
Dick Berry of the University of Wisconsin – Madison surveyed a number of marketing managers and executives to determine which marketing variables were deemed most important (Marketing News, December 24, 1990). In addition to the Four Ps, the study concluded that at least three new elements need to be considered – customer sensitivity (employee attitude, customer treatment, customer response), customer convenience (product availability) and customer service (post-sale service, pre-sale service and service convenience).

Given these seven ways to “compete” from a marketing perspective, opportunities exist for those mortgage organizations that can figure out how to compete on more than just price. Doing this will require great thought, but also significant implementation effort. Once an organization has figured out how to compete, i.e., the vision and strategies, the next hurdle will be rolling the solutions out into practice. The model, DVF>R, and the methodology, business war games, presented here provide one means of enabling this strategic change.