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To achieve quality, you must think quality.

Chances are you've seen stories in the business press recently suggesting that quality programs in American business are failing. These stories usually emphasize that many total quality management (TQM) programs have failed to produce significant financial results despite substantial investments in employee training and process improvement efforts. Most dramatic, perhaps, are stories of Malcolm Baldrige National Quality Award winners that have experienced financial setbacks, executed layoffs and even suffered bankruptcy.

The conclusion many people draw from these stories is that quality, after all, is just another management fad that now has run its course.

I disagree. In fact, I believe that most American businesses have not really started on the road to quality. Most companies that claim to be on the path to quality simply have extended old bottom-line-focused ways of doing business under new names.

The results of quality initiatives are so often disappointing because few companies have achieved the transformation in thinking that must occur if American business is to rise "out of the crisis," to use the title of Dr. W. Edwards Deming's best-selling book. Most companies that espouse TQM have not come to terms yet with the new ways of thinking and new ways of doing business frequently described as a "paradigm shift." They hold on to old ways of thinking and try to build a new world in the present by extrapolating from the past. Seldom do these so-called TQM companies try to create the present as the past condition of the future.

But that is exactly what it takes to adopt a new management paradigm. When paradigms shift, you must build backwards from a vision of what you intend to be, not build forward from the bedrock of the status quo. TQM initiatives too often pile new icing on top of a stale cake. They do not begin, as they must, with a new cake made from a new recipe.

What is this new recipe? It is a new vision of what business is and why it does what it does.

In the management paradigm of the past 40 years, business exists primarily to grow return on investment in order to maximize shareholder wealth; success hinges on managing bottom-line results, primarily by controlling consumption of resource inputs and the profit-mix of product outputs. In the new paradigm, however, business exists primarily to create fulfilling jobs in learning organizations that continually enhance people's capacities to profitably exceed customers' expectations. Business success in the new paradigm does not hinge on controlling resource consumption and product mix; instead, it requires companies to build resource capabilities and customer satisfaction -- in other words, to build people.

Contemporary business literature and discussions I have had with scores of executives in dozens of companies around the world convince me there is a lack of understanding in most companies' efforts to shift management paradigms. Their failure to change to what many people refer to as the learning organization can be traced largely to one cause: top management's entrenched belief that business success hinges on improving product margins and controlling cost, particularly by slashing resource inputs.

No company ever will achieve quality excellence as long as its top managers believe they improve long-term performance by cutting costs or by selling higher-margin products. They must become firmly convinced that long-term business success results only from investing in people's abilities to improve customer-focused processes. And ability to improve processes rests on creative problem-solving (i.e., identifying root causes), not on reacting to problems with solutions (i.e., attacking symptoms of problems). In other words, the old paradigm that drives operations managers to focus on cost and margin targets would have us succeed by shooting alligators, when the real approach to long-term success is to start draining the swamp.

I am not saying it is unimportant for companies to know their costs, nor am I saying that making a profit doesn't matter. Obviously, earning the market's required rate of profit is a necessary condition for long-term survival. And having information for planning and estimating the financial consequences of actions is always vital to the success of a business. What is lethal, in my opinion, is to believe it is possible to improve performance by having everyone in the business manipulate operations to achieve planning targets for cost and margin. We tell people to monitor results and, if results fall below a certain limit, do something to cut costs or raise revenue. Don't search for root causes, we say. Just do it.

Consequently, our traditional top-down management control systems cause people to focus on actions that invariably undermine what a business must do to succeed and prosper in the long run. For example, a results-focused department manager would regard training as a resource-consuming activity that he or she can slash at will to control costs. Underlying this attitude toward training is top management's view that workers are simply a cost. Neither workers nor training are seen as sources of competency that enable a company to adapt flexibly to and even create change in customer opportunities, a precondition for long-term survival and prosperity in the global economy. Were top managers to see relationships with and among workers as a source of competitive advantage, surely they would never encourage subordinates to improve performance by cutting training costs.

Similarly, most top managers treat basic research, customer intelligence-gathering, preventive maintenance and community relationship-building as categories of discretionary spending, to be slashed if necessary to achieve cost targets. Seldom are these activities defended and nurtured as well-springs of long-term excellence.

MANAGING OF PARTS IMPAIRS THE WHOLE

Driving people to manipulate ongoing work in order to achieve bottom-line targets encourages everyone to think of work as disconnected, decoupled sources of bottom-line results. What they do not see is the larger system from which bottom-line results flow. By ignoring the systemic impact of cost-cutting, these interventions often hinder long-term performance. Cutting budgets for training and research, for example, will reduce certain costs and may even raise bottom-line results -- for a while. But that cutting is almost certain to impair resource competencies and thereby impair the company's performance in the long term.

Top-down management control creates the antithesis of the learning organization. Top-down controls drive the view that overall performance of a business is the sum of independent results in numerous discrete parts that are held together by plans and instructions from the top. People who view business in that way do not see a company, in Peter Senge's words, as "a |learning organization~ where people are continually discovering how they create their own reality." Instead, people see "reality as a set of conditions created by somebody else ... ." In this top-down world, subordinate managers, other employees and suppliers are expected to produce local results, not contribute to understanding the system that generates overall performance. Not surprisingly, top-down demands to achieve cost and financial targets cause people to manipulate processes, not work to improve capabilities of resources and processes.

The old management paradigm impedes business success not only by prompting people to achieve top-down targets by manipulating processes. It also impedes success by causing managers to focus marketing decisions on cost and margins rather than on the organization's competencies and the customers' opportunities.

The old paradigm assumes implicitly that customers most want what your cost system tells you is most profitable to sell. But there may be no connection between customer satisfaction and accounting estimates of product margins. Indeed, I argue that long-term profitability is not achieved by persuading customers to take more of what is most profitable to produce. Instead, it is achieved by profitably making what customers most want and by organizing work to adapt flexibly as those wants change. That is the essence of "new paradigm" thinking. Unfortunately, very few companies view their product mix decision from this perspective.

ABC ENHANCES FOCUS ON COSTS

The strong commitment of American businesses to the cost-focused view of product strategy is seen today in the growing obsession with activity-based costing, or ABC. ABC arguably gives companies better product cost information by distributing indirect costs to products more reliably than traditional cost accounting systems once did. The intent of ABC systems is to charge products with the costs of resources that they truly consume. Excitement over ABC often stems from the discovery that traditional product cost information systematically overstates or understates what ABC information reveals as the "true" costs of products. This new cost information has caused many companies to raise prices of, or drop altogether, product lines once thought to be profitable, and it causes them to drop prices and expand capacity on lines previously thought of as losers.

But use of product cost information is problematic in any company, whether it pursues traditional batch-oriented work practices or newer flexible work practices. Whether or not an ABC system yields more reliable estimates of product costs, the new cost information does not show a company with decoupled, batch-oriented work practices how it can achieve world-class performance by linking work in continuous, flexible flows. In fact, most published cases show ABC information prompting batch-oriented companies to cut costs by reducing the production and sale of small lots and short runs by curtailing orders that consume resources out of proportion to the revenue they generate. This time-worn strategy increases order sizes and production runs so as to achieve scale economies in setting up, parts ordering, invoicing and so forth.

But scale economies are not relevant in a just-in-time world. Instead of reinforcing a company's vision of producing what the customer wants when the customer wants it, ABC costs typically encourage the traditional batch-oriented company to do faster and more of what it should not do in the first place. The company then has to persuade the customer to buy what the cost system, now turbocharged with ABC power, says is most profitable. Assured that its investment in an ABC system is pointing toward higher profitability, the company postpones making the long-term changes it needs to produce profitably what the customer wants.

BUSINESS CAN MAKE A BETTER FUTURE

Much is at stake in the direction that business takes in this country in the next five to 10 years. In the last few decades large corporations did much to betray the promise of American democracy when they moved toward top-down, remote-control management-by-the-numbers and shunned serious concern with building human relationships or human competencies. Although government and educational institutions played no small role in the unraveling of our society's social and moral fabric that is so evident wherever Americans live and work today, business contributed its part to this decay.

Just as it contributed to decay, business can help to heal our social malaise. If businesses succeed in becoming genuine learning organizations, they can point the way to overcoming the rift between the individual and the community that is at the heart of so much of the violence, alienation and poverty we see in American cities.

W. Edwards Deming unambiguously defines the purpose of business as the creation of jobs that fulfill intrinsic human longing for joy in work. Peter Senge quotes a former CEO of Hanover Insurance Company, William O'Brien, who says: "Mankind's nature is to ascend to greater awareness of our place in the natural order -- yet, everywhere we look we see society in a terrible mess of self-centeredness, greed, and nearsightedness. In modern society, business has the greatest potential to offer a different way of operating. The potential of business to contribute toward dealing with a broad range of society's problems is enormous. But we must show the way by example not by moralizing. We must learn how to harness the commitment of our people--then our commitment to building a better world will have some meaning."

Finally, I never tire of quoting Johnsonville Foods' CEO Ralph Stayer when he said: "The objective of most corporate leaders is to use people to make a great company. My objective is to use the company to make great people."

Reaching for such a vision is the promise the new management paradigm and new management thinking bring to our world. To what grander cause can we all harness our energies?

EQUITY STRATEGY TO LONG-TERM SUCCESS

1. Improve quality to make customers happier.

2. Always charge prices as high as customers will bear.

3. As satisfied customers spread the word, meet sales growth by redeploying resources freed up by ongoing quality improvement efforts.

Professor Johnson, the Retzlaff Chair in Quality Management at Portland State University's School of Business Administration, was co-author (with Robert S. Kaplan) of Relevance Lost: The Rise and Fall of Management Accounting. In his latest book, Relevance Regained: From Top-Down Control to Bottom-Up Empowerment, published last year, Professor Johnson challenges some of his earlier conclusions.

Dr. Johnson's comments are excerpted from a lecture he delivered at Drake University in Des Moines, Iowa.
COPYRIGHT 1993 Financial Executives International
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Viewpoint
Author:Johnson, H. Thomas
Publication:Financial Executive
Date:May 1, 1993
Words:2131
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