INFORMATION, ACTION, AND BUSINESS PERFORMANCE
The basic cause of sickness in American industry and resulting unemployment is failure of top management to manage....[Reform requires] transformation of the style of American management...a whole new structure, from foundation upward....Long-term commitment to new learning and new philosophy is required of any management that seeks transformation.
W. Edwards Deming
The transformation of modern management exhorted by W. Edwards Deming must take place at once if American business is to regain its competitive edge in today's global economy. The question confronting CEOs is not whether they must change, but rather, what kind of transformation must occur to revitalize American companies. Deming postulates a need to transform the entire structure, style, and philosophy of management -- "from foundation upward." Undoubtedly one of the most wrenching changes CEOs face is to realize that goals formulated from accounting information no longer permit them to manage companies effectively.
For the past three decades -- a brief period in the history of business -- American business has behaved as if the pursuit of accounting goals were the underlying force driving business competition. However, that belief has been a primary reason for American business losing its competitive edge. Goals reflecting only accounting information constrict managements' thinking, eliminating companies from global competition.
Only if CEOs rely on information that is relevant to the goals of global competition will their firms survive in the 1990s and beyond. This book explains why conventional management uses of accounting information are a major cause of the current predicament in American business, and it articulates the information and thinking companies must adopt to become world-class competitors. A key message is that the current revolution in information technology -- based on the computer and the microprocessor -- requires and enables CEOs to bring about the transformation in management practices called for by Deming.
The coming of the computer, the transistor, and the integrated circuit after World War II put in motion forces that gave the customer enormous power of choice. With customers able to choose the best of what they want, wherever it is in the world, competitiveness now means that companies must be responsive to customer wants and be flexible: able to learn and adapt quickly to changes in those wants. Top-down command and control information does not motivate the work force to take actions that make companies responsive and flexible. Adapting flexibly to change requires constant learning and prompt action by those people in a business who are closest to the customer.
Traditional accounting control systems assume that learning takes place at the top -- far away from customers and processes -- and that new knowledge is transmitted down in the form of instructions. The information revolution has turned that assumption on its head. In competitive companies today, the entire work force must be empowered to learn and to act quickly. That power derives from ownership of "bottom-up" information about customer wants and about the processes people perform to satisfy those wants. To facilitate learning and change, companies must respond to real-time information from customers and processes. Fortuitously, modern information technology can give workers and managers ownership of the processes they perform, at all levels, and thereby empower them to constantly improve at satisfying ever-changing customer wants.
The two concerns of this book are to articulate the shortcomings of traditional accounting control information and to suggest how new information can motivate behavior that fulfills the imperatives of competitive excellence. The next sections of this chapter highlight the major themes the book develops as it discusses the shortcomings of the past and the promise of changes to come. First we describe new customer-focused approaches to doing business that require new information. Then we turn to the impediments to change created by existing accounting-based control information. We conclude this chapter by discussing the crucial role of top managers in leading the changes in information and behavior that will restore competitiveness to American business.
NEW APPROACHES TO DOING BUSINESS
"To survive in the global economy, change must become your way of life." Today's CEOs have heard this message and recognize the need for change. Moreover, most businesses are striving to meet this need. They are adopting new management practices at unprecedented rates. Unfortunately, these changes are not improving competitive performance nearly as much as hoped. The reality is that the changes needed are of a different sort -- much more than even the most forward-looking CEOs realize.
For nearly fifteen years American businesses have tried a succession of strategies aimed at restoring markets and profits lost to foreign -- mostly Japanese -- competitors. Well-known acronyms denominate these strategies, most notably JIT (just-in-time), SPC (statistical process control), MRP (material requirements planning), TQM (total quality management), ABC (activity-based costing), TPM (total preventive maintenance), and QFD (quality function deployment). These strategies have helped countless companies improve performance. But the improvements generally seem to go only so far, and then taper off.
This problem appears most often in either of the following two cases: (1) A firm identifies new strategies for organizing work -- usually associated with JIT (just-in-time) -- which produce breakthroughs that generate substantial one-time gains in productivity, and then stop. Delighted with the results achieved by adopting Kanban-style production systems or by linking people and machines in focused work cells, managers attend seminars and call in consultants in a search for more such breakthroughs. Seldom, however, do they replicate their initial successes, and almost never do the new ideas spread throughout the organization. (2) A company discovers improvement strategies involving team-building and problem-solving processes -- usually associated with TQM (total quality management). These strategies boost morale and generate excitement, at least for a while. But the gains in profitability often take a long time to appear. Pressure to get on with achieving bottom-line financial results diminishes enthusiasm for devoting time to the new improvement processes, and people return to business as usual.
What Are JIT and TQM?
JIT. Today, "just-in-time" usually refers to any improvement program that reduces the time needed to get a job done (i.e., lead time) by simplifying work. Once thought to be the exclusive domain of manufacturers in factory settings, JIT now is pursued avidly in service companies and in all parts of organizations, from white-collar functions in the back office to research and design laboratories. In its current guise, JIT originated at Toyota in the 1950s, in factory efforts to produce exactly what the customer wants, when the customer wants it. Many American exponents of JIT stress external features and results of early Japanese JIT, such as Kanban scheduling systems, reduced work-in-process (WIP) inventories, and reduced numbers of vendors. Japanese authorities, however, emphasize American scientific management influence on JIT and they stress the importance of its less visible features, such as the flexibility that follows from lead time reduction.
TQM. "Total quality management" refers to company-wide programs to empower workers and managers to solve problems scientifically with an eye to constantly improving customer satisfaction. Driven by a strong customer-focused mission, all personnel in a TQM environment pursue a well-defined improvement process, such as the highly publicized strategies articulated by Motorola and Xerox. TQM should be seen as a people-oriented way of running business, not just another way to achieve better results by pursuing business as usual.
The crucial cause of failure in these two cases is the limited perspective of company leaders. In both cases some change occurs, but nothing changes the basic principles that define a company's fundamental response to business problems. In the first case, company personnel may adopt JIT initiatives to improve productivity, and yet ignore the impact of those initiatives on the company's results-oriented, hierarchical principles of control. Therefore, when top management insists that all resources be utilized "efficiently," this demand clashes with the imperatives of JIT. In the end a few important gains take place, but not the sustained and continuous improvement achieved by a world-class competitor.
In the case of a company practicing TQM, managers introduce team-oriented, self-management techniques in a few processes. However, unless they reject the company's traditional, cost-focused principles when they make decisions, eventually they lose momentum. Problem-solving teams examining processes do in fact implement changes, but the changes often are designed simply to increase efficiency or reduce cost. This short-sightedness unconsciously guides the organization farther and farther away from achieving world-class performance.
In the United States we see a great many examples of companies incorporating JIT with diminishing returns. Most American companies that have tried to develop strategies to compete globally did so first with JIT-oriented initiatives, beginning in the late 1970s and early 1980s. Relatively recently they have used TQM-style quality improvement strategies. The successful impact of TQM and JIT has often been acknowledged. Laudable efforts to eliminate waste by simplifying work flows, by focusing, and by linking processes, however, have been followed with alarming regularity by new obstacles. Most often human relations constitute the most serious problem for businesses trying to change. Stressed-out and alienated workers and suppliers remain -- despite JIT or TQM.
Consider examples of problems created when companies move to JIT. Suppliers invited by their customers to attend JIT-training programs often feel they are receiving a hidden message: "We're shifting to JIT and you are responsible for the changes that will let us make the shift." Workers who have contributed time, energy, and brainpower to a workplace improvement campaign aren't given credit for success when the company flourishes. Typically in American firms dividends climb and top managers' salaries and bonuses soar into the stratosphere while "redundant" or "overly costly" workers are laid off or have wages scaled back. In other words, the old polarities of yesterday's business world -- us and them -- still exist in spite of the reduced WIP, the reduced lead times, and the higher customer satisfaction indexes. Top management must eliminate these polarities.
Whereas firms using JIT often face serious obstacles imposed by their hierarchical, top-down control systems, companies using team-focused TQM problem solving often pursue top-down accounting imperatives that cause them to implement solutions to problems that are antithetical to competitiveness. TQM teams frequently recommend solutions that are designed to achieve efficient use of resources by cutting costs. Problem-solving teams in a TQM company, in other words, seek old cost-focused solutions to problems, addressing imperatives of competition that were popular before anyone heard about Pareto charts and fishbone diagrams. Moreover, solutions designed to cut costs and maximize use of resources often use off-the-shelf management accounting tools for capital budgeting, make-buy analysis, or cost-volume-profit analysis.
For example, I once saw a "TQM guide for team leaders and facilitators" which contained a section on American-style cost-volume-profit break-even analysis juxtaposed to a section on the Seven Statistical Tools (Pareto diagrams, histograms, control charts, etc.) that are basic to Japanese quality programs. This bizarre mismatch is comparable to placing a recipe for Molotov cocktails among recipes for health breads. An equally bizarre mismatch of intentions and tools occurs when quality teams advocate spending time and resources on activity-based costing, an avant garde tool used to compile better product cost information. Activity-based product costs ostensibly focus a company's marketing strategy on profitable high runners rather than costly cats and dogs. This approach seems sound until customers reject the company's "most profitable" products. Eventually the company "efficiently" making "profitable" products must unload them at a discount.
To pursue JIT while keeping hierarchical financial controls in place or to implement TQM-style self-managed processes while equating improvement with cost reduction or increased margins makes no sense. To follow old management principles is incompatible with using well-designed, new strategies to improve performance and quality. Old management principles, left intact, drag down improvement initiatives from one side or the other: top-down hierarchical cost controls drag down JIT initiatives; cost-focused preferences for scale and speed drag down TQM initiatives.
Certainly, initiatives aimed at simplification of work or empowerment of workers will to some extent improve competitiveness. To become truly world-class competitors, however, businesses must simultaneously adopt both new ways of organizing work and new ways of organizing people. Unwavering devotion to cost-focused and adversarial management principles thwarts efforts to fulfill simultaneously both the time-focused and the team-oriented imperatives of competition in today's global economy. Hence, we see companies that know how to simplify and streamline work flows (i.e., JIT) or those that know how to lead people into creative, long-lasting relationships (i.e., TQM). But almost never do these companies seem to understand how their continuing attention to obsolete cost-focused imperatives of traditional competition impedes their efforts to achieve global competitive excellence -- a state that I define as completely satisfying customers, creating growing opportunities for associates and suppliers (including suppliers of capital), and imposing no undue burdens on third parties in society -- while continuously reducing time and resources.
If businesses in the 1990s are to compete, they must not allow misplaced loyalty to obsolete management principles to impair their performance. Companies that adhere to such thinking will follow the cost-focused imperatives that have guided American managers' actions for over forty years -- especially the imperative to produce more, faster. Competitive firms, by contrast, will build relationships, empower people to solve problems, and provide satisfaction.
Companies will not follow today's imperatives of competition unless top managers are persuaded to stop using accounting-based information, especially costs, to control people, organizations, and work. Companies need accounting systems, surely, to provide information for financial reporting and planning. But the role of accounting systems must not be to supply information to control the work of operations personnel. "Managing by remote control" with accounting-based information perpetuates practices that contradict improvement strategies associated with competitiveness.
Competitive excellence requires constantly improving the ability to satisfy customers and constantly reducing variation in process outcomes. Accounting systems not only provide no information about either customer satisfaction or process variation; as I demonstrate later, cost accounting control targets trigger actions that in fact increase process variation and reduce customer satisfaction. Only companies that replace accounting-based management control information with problem-solving information that focuses on customers and processes will find it natural to adopt practices that fulfill the imperatives of competitive excellence in the global economy.
MANAGEMENT ACCOUNTING DOES NOT SUPPORT NEW APPROACHES TO BUSINESS
Management information affects business performance by shaping a company's goals and by influencing the actions people take to achieve those goals. If being responsive to customer wants and adapting flexibly to changes in those wants are deemed the relevant imperatives of competitiveness today, then management information in today's companies must prompt behavior that satisfies those imperatives.
For forty years accounting systems have provided the critical management information that determines goals and actions in American companies. Most companies today use accounting information to motivate actions that are intended to achieve an accounting goal, usually return on investment. But this goal misleads managers into chasing false imperatives. When management accounting information directs businesses, invariably two imperatives of competition emerge: always sustain output at a level to cover all costs, and always persuade customers to buy output at prices high enough to earn the market's required rate of return. A business governed by these two imperatives is misguided. It is comparable to a driver steering a car through the rearview mirror, or to a navigator piloting a ship by looking at its wake.
The point is, quite simply, that excessive reliance on management accounting information inevitably triggers actions antithetical to responsiveness and flexibility -- the imperatives of success in the global economy. In pursuit of accounting results, management accounting decrees actions designed to push output and to cajole customers. However, this is not management's proper role today, and this book is intended to help managers reassess how accounting information leads them into such a role. Management information's true function, today, must be to help companies become responsive, by building relationships with satisfied customers, and flexible, by reducing variation, delays, and excess in processes.
Management information from customers and processes helps companies achieve these imperatives by empowering employees to solve problems and to improve constantly the output of customer-focused processes. Companies need information designed to empower employees to think and act decisively, using their own expertise and experience. Empowerment in this context means simply giving people "bottom-up" problem-solving information and asking them to continuously improve the output of processes. But instead of doing this, accounting controls used by most American businesses in the last forty years encourage people to manipulate (or tamper with) processes in order to achieve accounting cost and revenue targets that are dictated by "top-down" command and control information. These businesses view accounting return as their primary goal, not simply as a market-determined constraint they must satisfy by achieving the hallmark of global competitive excellence -- exceeding expectations of customers, suppliers (including suppliers of capital), workers, and society at large.
Two premises underlie the use of information that has governed American business practice in recent decades. One is the premise that only managers know enough to translate information into competitive action. For the work force, information consists of instructions and evaluations of performance received from above. The second premise holds that key information to guide actions comes from the centrally-controlled accounting system. Cost and margin information provide both goals and feedback to control people's actions. In the global economy, however, two quite different premises must underlie the information used to guide business practice. The first premise must be that all management control information comes from below, from customers and processes, and it is provided real-time to people who carry out actions. To delay information by compiling and transmitting it through accounting channels is antithetical to the imperative of responsiveness. The second premise will be that everyone in a company understands how to translate information into competitive actions. To wait for instructions from above is inimical to flexibility.
People motivated by information that responds to the imperatives of global competition will remove delay, excess, and variation from the output of all processes. Their behavior will be quite unlike that of employees in the average American company of the past forty years who have been kept busy meeting monthly production targets at any price, and who have suffered the effects of a policy that cuts costs by cutting spending -- especially spending on wages and salaries.
Companies need management information that will help them capitalize on their two most important resources -- people and time. No accounting system is capable of considering either of those assets. On the contrary, when accounting information is used to control business operations, companies lose sight of people and time. The ills of stagnant productivity and shrinking economic opportunities for American workers will be cured only if companies remove accounting information from their operational control systems and relieve their accounting departments of responsibility for providing information to control business operations.
MEMO TO TOP MANAGEMENT: TRANSFORM!
Today's top managers must insure that their companies' management information and management practices fulfill the people-oriented and time-based imperatives of competitive excellence. Otherwise, top management will continue to be, as W. Edwards Deming has said so often in the past, the number one problem in American business. Deming's remark always has been quite appropriate. Unfortunately, few people seem able to correctly define the problem with management. Most see it as the dedication or style of individual managers. I do not believe the management problem is the people who work as managers. The problem is top management's perception of the imperatives that should guide their actions.
An erroneous view of the "management problem" is held by those who say giving free rein to the "market for corporate control" will improve corporate performance. These people clearly see managers, not management thinking, as the problem in American business. They advocate using hostile takeovers or leveraged buyouts to improve laggard corporate performance. Their improvement strategy for American business is quite simple: oust incumbent managers whose dedication to achieving profit seems diminished by a lust for power and perks; replace those incumbents with other managers who will attend ruthlessly and single-mindedly to what stockholders feel is important.
In a recent Fortune magazine poll, nearly 70 percent of U.S. corporate chief executives said they think the wave of hostile takeovers in American business during the 1980s hurt the economy. Some might say that this is a self-evident and self-serving opinion, coming as it does from top executives of the companies most likely to be targeted for takeovers. However, I believe their opinion is a correct view of the situation. Changes of leadership can not resolve the management problem that prevents countless American businesses from achieving competitiveness and long-term profitability. Sometimes such changes can wreak chaos and turmoil that drive a company's performance even lower. At best, turnover of top personnel can intensify a company's focus on profit improvement and produce short-term gains in the bottom line. But turnover does nothing to transform the fundamental management thinking adhered to by virtually every business person in our society. Until that thinking changes, there is little reason to hope for long-term improvement in competitiveness and profitability merely by changing personnel at the top.
Management thinking affects business performance just as an engine affects the performance of an aircraft. Internal combustion and jet propulsion are two technologies for converting fuel into power to drive an aircraft. New recipes for internal combustion can improve the performance of a propeller-driven airplane, but jet propulsion technology raises total performance to levels that internal combustion engines can not achieve. So it is with management thinking. Globally competitive businesses require jet (even rocket!) management principles. Unfortunately, internal combustion principles still power almost all American management thinking.
American business people today tend to share similar (and largely obsolete) ideas about how to make a business competitive and profitable. Although individuals differ in the discipline and dedication with which they apply those ideas, all seem to share the same fundamental notions of how people and work should be organized to accomplish the goals of business. Hence, while new, more ruthless managers often generate short-term bottom-line improvements through focusing and winnowing, long-term competitiveness in most cases still eludes their grasp. Managers are not the problem. The problem is management thinking that focuses on the wrong imperatives of competition.
To correct management's focus, I believe companies must eliminate accounting-based management information that reinforces attention on irrelevant sources of competitiveness -- pushing output and cutting costs. Indeed, erroneous use of accounting information to control business operations since the 1950s has prevented American companies from understanding and adopting the management principles adopted by our leading overseas competitors. It has taken Americans a long time -- over twenty years -- to realize the profound difference between our management thinking and the thinking of our overseas competitors. The difference between our approach to business -- optimizing costs and maximizing profits within constraints -- and their approach -- continuously removing constraints to profitably satisfy customer wants -- is the difference between success and failure in an economy where the customer is in charge of the marketplace and the work force must be in charge of processes. It has taken us so long to understand this difference in large part because our management accounting tools keep our top managers from understanding what it means to run a competitive enterprise in the global economy.
Some people may dispute, of course, the claim I make that information affects business behavior. They might say, "There's nothing wrong with the management accounting information companies use. Problems are caused by the people who misuse that information." I could accept that idea if I saw any evidence that customer satisfaction resulted from improved financial results. In fact, the connection seems to go the other way -- satisfying customers leads to improved financial results. I believe that business performance would improve dramatically if top managers eliminated all existing management accounting control systems and, instead, started people talking about "customer satisfaction being everyone's job" and about "new ideas for customer satisfaction being everyone's responsibility."
Businesses use information to communicate activities in one part of an organization to decision makers in another part. But information does more than just communicate. The type of information communicated triggers actions that determine a company's performance.
For example, decisions on employee training will be very different if they are based on cost information rather than information about customer satisfaction. If performance evaluation systems put a heavy emphasis on achieving cost targets, of course efficiency-minded managers will attempt to cut costs by spending less on training. If performance evaluations stress customer satisfaction indexes, however, then quality-oriented managers will strive assiduously to increase spending on training.
Whether more or less spending on training will improve performance depends on the imperatives of competition. In a protected market controlled by companies that all do things the same way, such as the American economy for twenty-five or more years after World War II, cutting training costs may improve performance. But in an open and competitive market controlled by customers -- the global economy we live in today -- improved performance may call for more spending on training.
Whenever a sharp, discontinuous change occurs in the underlying terms of competition, companies must reconsider how information triggers actions that shape business performance. When triggered by management information that no longer fits with the market's terms of competition, actions are likely to impair a company's long-term economic performance. Actions to cut training may improve performance when low cost is a key to competitiveness, but may impair performance later, if customer satisfaction (hence, employee flexibility) becomes the key to competitiveness.
American businesses in the 1970s and 1980s experienced a sharp discontinuity in the terms of competition. Comfortably ensconced before the 1970s in an enormously wealthy domestic marketplace of familiar competitors and captive customers, they were buffeted in the 1980s by new and unprecedented global competitive forces. Unfortunately, the management information in most American companies today still triggers actions that are not relevant to this new competitive environment.
Management accounting information, in particular, is not relevant to today's new terms of competition. Indeed, it was evident by the mid-1980s that "management accounting information, driven by the procedures and cycle of the organization's financial reporting system, is too late, too aggregated, and too distorted to be relevant for managers' planning and control decisions." Actions triggered by management accounting information have impaired the long-term competitiveness of countless American businesses in recent years. It is time for American companies, and top managers in particular, to base their decisions on truly useful information and to stop depending on accounting information that deflects them from a competitive course.
Copyright © 1992 by H. Thoman Johnson
In Relevance Regained, Johnson shows exactly how "managing by remote control" through results-oriented accounting information has obstructed the real business objective: to reduce process variation and lead times for the purpose of obtaining and keeping satisfied customers. The failure of most American businesses to be competitive and profitable, he contends, is their reliance on management accounting information to control people's actions and productivity.
Cost-focused imperatives from on high must be replaced, Johnson asserts, with information systems that link actions with imperatives of global competition. Self-managing work teams, according to Johnson, must own problem-solving information to reduce variation, delays, and excess in processes.
Johnson prescribes the necessary changes in management principles that must replace the outdated style associated with the industrial revolution. Responsiveness to customers—not accounting costs—and flexibility—reducing lead times and removing constraints—are necessary for sustained competitive excellence and long-term profitability.
Johnson discusses the radical overhauls of companies, such as General Electric's work-outs/"best practices" program and Harley-Davidson's work simplification programs, and shows how these strong commitments to new strategies maximize a company's most important assets: people and time. To be globally competitive, he claims, a company's work must be directed toward selling to customers, not just selling products.