A New Strategy for Digitt

Digitt, a leading technology manufacturer, which was considered one of the world’s best companies and one of the best places to work, shifted its strategy. Responding to increasing global competition and revolutionary technology, the company decided to base all new products on digital technology.

Digitt’s new focus on digital technology made it possible to develop and launch a steady stream of new products built on a core technology platform. That stream of new products stood in contrast to the very stable product line that had characterized the company over the previous decades. The new strategy was the result of careful planning by senior executives and R&D, marketing, and manufacturing managers. The early results were promising: The new equipment produced by Digitt received high marks from users. The only things the company strategists had not considered were the company employees responsible for sales and service. The new product line seemed to call for employees with different skills.

The Problem

Digitt relied heavily on its teams of highly trained service personnel, who understood the company’s limited product line down to the smallest component. Turnover was low, and that was a good thing for the company since it invested heavily in formal and on-the-job training. Incentives favored business units or groups over individual performance, fostering teamwork. The organization defined itself as having a team culture.

The company’s strategic shift to digital technology had implications for the workforce—and vice versa—that no one had anticipated. In the past, human capital practices had rewarded what the company needed most: a stable workforce, teamwork, and deep firm-specific skills. However, those qualities mattered much less in the new era of digital equipment. Here’s why:

• The company’s new digital equipment was much more reliable than its old products, making the fix-it mentality less important.

• Mastery of digital technology and emerging technological areas superseded the value of expertise in the old-line analogue systems.

• Individuals, not teams, were given responsibility for specific accounts as part of the new strategy.

• With a broader product line it was more important to help customers identify which equipment would solve their problems than to demonstrate a depth of knowledge about any single product. This required an understanding of a customer’s business and a different balance of firm-specific and general know-how.

Like many companies, Digitt had launched its strategic shift without making changes in the workforce charged with executing it. It clearly needed new skills, new behaviors, and new attitudes in its workforce but did little to create those changes. It had stepped into the future with one foot while leaving the other firmly rooted in the past. Deeper study revealed the extent to which that clash was undermining the success of the new strategy.

Although the strategy encouraged reps to act as individual entrepreneurs and look for cross-selling opportunities in their assigned accounts, the reward system sent a different set of signals. The lion’s share of pay continued to be based on years of service, a legacy of the old system that was intended above all to retain the training and experience needed to service a complicated but unchanging product line. Bonuses had been aligned effectively to encourage teamwork by basing awards on the group one was in. Individual performance mattered very little when bonus checks were passed around: A poor performer in a high-performing group would receive a much larger bonus than would a high-performer on a low-performing team. Those high performers, who often worked in newer businesses in the ramp-up stage, had to rely on the unit’s ability to fund the bonus pool. Under the existing reward system, the best strategy for low-performers was to attach themselves to a high-performing group and “hang in there” for as many years as possible. That practically would guarantee an annual pay raise and a good bonus. In effect, high performers in the up-and-coming business units were subsidizing poor performers in the traditional businesses.

Not surprisingly, Digitt got more of what it subsidized—low performers—and less of what it effectively taxed: top performers with the newly required capabilities. An analysis of performance indicated that Digitt was retaining low-performing employees at an alarming rate. While many of the best employees in the new areas moved on to greener pastures, the worst employees wisely stayed put until retirement. Who else would hire and reward them so generously? Thus, at a critical time in the firm’s evolution, marginal performers in the cash-cow businesses were taking home bundles of cash, but the best people in the new ventures—the future of the company—were receiving little or nothing. That practice strangled the motivation of Digitt’s best and brightest. Also, since the low performers stayed put, Digitt had few opportunities to reshape its workforce through recruiting because there weren’t many vacancies to fill.

Investors eventually figured out what was going on, and the company’s stock price took a big hit. All those things happened because the organization clung to the old ways and missed new opportunities. In short, its human capital strategy badly lagged its business model. A company that wouldn’t dream of allowing its technology to lag behind that of competitors inadvertently was allowing obsolescence to affect critical parts of its workforce. Its historical emphasis on teams, loyalty, and longevity had served it well but now was causing stagnation, inhibiting the acquisition of the new talent that its technology shift required.

The Solution

Using data obtained through Internal Labor Market analysis, Digitt’s executives eventually developed a plan to harmonize their human capital practices with their new business strategy.

Recognizing that some employees would not choose to develop the new skills they needed and that subpar performers would have to make way for new blood, those executives removed the incentives historically passed along to everyone regardless of skills or performance. Their approach was to establish a minimum individual performance threshold for participation in team-based rewards. In other words, simply being a team member did not create an entitlement; anyone not pulling his or her weight no longer would share in team rewards. That change did not scuttle the team concept: It simply meant there were now minimum membership requirements to share in a team’s rewards. That solution had the secondary aim of encouraging voluntary turnover among low-performing employees. Each vacancy created through turnover created an opportunity for Digitt to hire a person with the right stuff for the new strategy.

The new human capital strategy was aimed at complementing the business strategy. It enabled workforce transformation over time and created a performance system that saved the company over $150 million each year.

Myth Buster: A Strong Culture Is Always Desirable

A company’s culture identifies what the leadership and workforce value and how people at all levels approach organizational goals. A strong culture is an important component of organizational success, but only when it is compatible with strategy. For example, a business strategy based on product innovation for a volatile market would be well served by a culture of entrepreneurship and employee empowerment, but a culture of entitlement would not support that strategy. The annals of business contain many examples of organizational cultures that have undermined good strategies or blocked efforts to pursue strategic change.

Consider the case of Encyclopedia Britannica, whose venerable history goes back more than two centuries. Its 32 volumes were considered the ultimate repository of knowledge from art to zoology. When digital technology emerged in the early 1980s, the company began experimenting with educational software, and in 1989 it introduced one of the earliest multimedia CD-ROM encyclopedias, Compton’s MultiMedia. Thus Britannica was well positioned to make the strategic transition from bound books to knowledge software.

The culture of the company, however, stood in the way. That culture was dominated by a nationwide force of direct-to-home salespeople, the very force that had made Britannica a trusted household name. No one dared to tinker with the traditional sales format on which his or her livelihood depended. The sacredness of the direct sales force business model was the company’s Achilles’ heel.^[6] As a result, Britannica failed to develop a serious strategy for electronic products until it was too late. Annual unit sales collapsed from a high of 117,000 to about 20,000. It took the intervention of an outside investor and the abandonment of the direct sales approach to save what was left of the company.

^[6]Richard Melcher, “Encyclopaedia Britannica’s Trip to the Brink—And Back,” BusinessWeek Online, October 15, 1997. Go to http://www.businessweek.com/ bwdaily/dnflash/oct1997/nf71015c.htm.