Alcoa, ranked as the 79th largest firm in the 2005

Alcoa, ranked as the 79th largest firm in the 2005 Fortune 500, employs approximately 129,000 people worldwide and had 2004 annual sales of $23.96 billion. Alcoa has been known for progressive, innovative management. It treats its employees well, tries to avoid layoffs and plant closures unless forced to make changes as a result of continued negative results, and has unions at only about 15 of its 47 locations. Nevertheless, at Alcoa’s industrial magnesium plant in Addy, Washington, a crisis of epic proportions rocked the plant and rattled the company, leading to some key leadership changes that ultimately resulted in dramatic improvements in safety, productivity, and profits.

At the time of this case (in the late 1980s) the plant was facing two severe problems: an unacceptable rate of serious injuries that averaged 12.8 per year, and five years of unprofitable operations. No clear, easily-implemented solutions were apparent for the first problem, but corporate management had suggested that layoffs of 100 or more employees were all but inevitable in order to stem the tide of red ink. Operating statistics bore out the depth and breadth of the problem. Prices of magnesium had dropped, and units selling for $1.45 on the open market cost $1.48 to make at Alcoa’s plant. Quality control was below what was needed to counteract market forces, with magnesium recovery at only 72 percent of the raw material being processed.

The apparent causes of plant problems consisted of a complex mix of lack of accountability, poor quality control, inadequate leadership, and low morale, especially among hourly employees. Corporate management stressed safety above all, and profitability second. The death of an employee, who was related to seven other employees, and the unacceptable financial losses led senior corporate management to decide that a change in plant management was essential. Don Simonic, a former college football coach, with Alcoa experience, was tapped for the job of plant manager. His turnaround team members included the then-personnel manager, Tom McCombs, and outside consultants Robert and Patricia Crosby. If the new leadership team could not turn the plant around, plant closure or sell-off were the only remaining options.

Since its construction, the plant had been designed with an open-systems, team-based culture, adapted from socio-technical systems theory. It was structured similar to the way that Procter and Gamble had set up its soap plants, and was considered a leading-edge organizational design. The process for producing the industrial magnesium was highly advanced and technical, and the innovative work team structure seemed to fit the technical systems characteristics. The plant attracted visitors from inside and outside the company who wanted to benchmark the operation and talk to team members. The organizational structure included:

• Autonomous, self-directed teams with no immediate supervisors. Teams were responsible for their own work areas.

• Hourly employee leadership that consisted of a team coordinator, safety person, training person, and team resource (internal facilitator) on each team.

• Supervisors, called shift coordinators, with four or five teams reporting to them, who were connected to the team coordinators. Shift coordinators generally stayed at arm’s length, because if they intervened in team operations, they would get in trouble. The teams would say, “Leave us alone. We know what we’re doing.” If they didn’t intervene, upper management would say that the teams weren’t doing what they should be. The supervisors were caught in the middle.

Employees were empowered, but unable to face critical decisions that needed to be made to stem the crisis. The Crosbys identified lack of clarity in decision making and authority as the main culprit in the plant’s environment. The new leadership model, conceived by the Crosbys and the plant leaders, involved major changes in goal-setting and decision-making practices. It required:

• New clarity in goal-setting.

• A consultative, instead of a pure consensus approach to decision making.

• Coming to grips with the need to cut costs pragmatically.

As the turnaround proceeded, Simonic decided that cutting staff was essential to meeting the new goals. First, all temporary and contract workers were laid off. As leaders were explaining the facts that had led to a decision to lay off an additional 100 workers, an hourly worker revealed a breakthrough that his team had made to significantly reduce the downtime required to turn a magnesium smelting furnace around. This process involved switching over to a new crucible once the other was filled (a form of the Japanese manufacturing technique called SMED—single minute exchange of dies). The new team approach required more labor, but cut the downtime from the usual one-and-a-half-hour turnaround time to just one hour. Simonic called off the impending layoffs. When the new process was implemented on all nine furnaces in the plant, the savings reached $10 million. This was more than the wages of the 100 employees, who were allowed to keep their jobs.

Simonic held strategic meetings where he engaged salaried and non-salaried employees in intensive dialogue. His objective was to align all parts of the system, clarify who would be making what decisions, explain how decisions could be influenced, and communicate why decisions were made. Simonic then set the goals. Simonic made clear statements like, “These are the goals. You and all our employees have firsthand knowledge of how things work around here. I don’t care how you get there. I will support you in making choices about how to get there. And, if you can’t get there, I will step in and decide how we will get there.” McCombs, the personnel manager, remembered how they developed a matrix reflecting what kind of decisions team members and supervisors would make. Supervisors would still retain authority over all decisions, if needed. Before Simonic’s arrival, decisions had been made largely by consensus.

As a result of this process, one person was made responsible for every project or task, known as singlepoint accountability. This proved to be a critical change that was used instead of the consensus (team) approach, which was previously the only way to perform projects. McCombs and Simonic believed that for single-point accountability to succeed, it was necessary to establish the “by whens”—when particular tasks would be accomplished. After making clear to the teams and employees what was expected, they started achieving goals better.

Eighteen months after Alcoa’s brought Simonic in as plant manager, the change efforts had produced impressive results: Unit costs had been reduced from $ 1.48 to $1.18, recovery of magnesium increased by 5 percentage points (worth $1.3 million per point), and the serious-injury frequency fell from 12.8 to 6.3 per year. Although positive signs appeared throughout the process, the incident in which the layoffs were averted proved to be the most critical, because employees subsequently had taken responsibility for applying their own creativity to meeting plant goals. Over the next two years, the plant became the lowest-cost producer in the world, and shortly afterward had boosted productivity by 72 percent. The president of Alcoa even asked all of the plant managers to visit the site and learn from Addy’s turnaround.

One decision-making technique that was practiced at Addy and several other Alcoa plants was consultative decision-making, where the manager makes the final decision but consults with the team first. For example, McCombs recalls an incident requiring disciplinary action on several teams: “The teams would have 24 hours to give their recommendations to management on how the discipline should be handled-up to and including termination- and management would administer the discipline. At least 95 percent of the time we took the team’s recommendation and moved on,” says McCombs.

The consultative method was also used to make hiring decisions. For example, the boundaries laid out for a team might concern Alcoa’s desire to hire minorities. Typically, “the team would present their selection of who to hire to the manager, and often they would do such a good job the decision was just “‘rubber-stamped,’” explains McCombs.

Another successful approach was called the “cadre.” During the turnaround, Simonic and the Crosbys would work with the cadre, a group of key people, chosen from a vertical slice of the employees, who engaged in two specific roles: (1) observing and evaluating the change process as it played out while (2) simultaneously participating in the process. The cadre became a skilled resource for the plant on leadership development, change management, conflict management, quality, and work processes.

In reflecting on Simonic’s impact on the organization, McCombs noted: “Don had a dynamic personality and was very charismatic. He possessed a very strong leadership style and was very clear. But you also must work with the intact families in the organization—one of Simonic’s own beliefs. That’s where change happens—in the small groups. You must work with that supervisor and that crew and get them aligned with the organization and work out any conflict.” According to McCombs, Simonic was guided by four clear principles: “Leaders have to lead, make decisions, have a clear vision, and set direction. Once leaders set direction and get a breakthrough goal in mind that people can rally around, then people can tell the leader how they are going to get it done. A leader shouldn’t tell how to do it, but he or she needs to set that direction. And that’s what Simonic did very well,” insists McCombs.

Unfortunately, Addy didn’t sustain the momentum of the turnaround. In 1992, Simonic and McCombs left to help turn around other Alcoa plants. Corporate management continued to reduce the workforce. They eliminated all the department heads and everybody ended up reporting to the shift supervisor or plant manager. This caused lack of clarity about leadership and authority in decision making all over again, and as McCombs explained, “They stripped away the leadership that could have supported the change efforts afterwards.”

Perhaps because of the previous successes and the skills gained in the previous turnaround, Crosby believed that the second recovery that occurred some time after Simonic and McCombs left was going to be much easier. The plant appeared to be back on track and headed for success again, but the fortunes of business intervened. There was another drop in the price of magnesium, and the Addy plant lost its competitive edge. In fall of 2001, the plant was closed down and approximately 350 employees lost their jobs.

From a strategic management standpoint, why do you think that corporate management at Alcoa delayed taking action for five years as the plant continued to lose money and deteriorate in other operational measures?