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strategy and business
 / Summer 2010 / Issue 59(originally published by Booz & Company)


Seeing Your Company as a System

Deming recognized that when it comes to the myriad processes that make up a large system, ordinary employees — including line and maintenance workers, salespeople, and technicians — know the system best. They possess the crucial knowledge that is needed to distinguish between mere glitches and systemic failures and to ensure the predictability of any given process. He argued that a predictable, stable system offers unexpectedly valuable opportunities for improvement and innovation. Companies that rely on outside “experts” to monitor their processes, in lieu of employees with day-to-day experience, lose these opportunities for gain.

In his book Out of the Crisis (MIT Press, 1986), Deming codified his management philosophy in 14 points, which emphasized the importance of a change-friendly culture and participative management, including a work environment free of fear in which employees get the training needed to analyze and improve the system.

Deming’s writing tends to be dense and difficult to read, as I discovered in researching my own book, The Man Who Discovered Quality: How W. Edwards Deming Brought the Quality Revolution to America — The Stories of Ford, Xerox, and GM (Times Books, 1990). The most accessible source for Deming in his own words is his last book, The New Economics for Industry, Government, Education. The first chapter touches on the role of management and the customer, as well as the connection between continuous improvement and innovation. The third and fourth chapters illuminate Deming’s view of systems and the context for thinking about systems within a human organization. “If Japan Can...Why Can’t We?” the 1980 NBC television documentary produced by Clare Crawford-Mason, which is credited with rediscovering Deming’s work and helping to launch the quality revolution in the United States, is a very accessible video introduction to Deming’s ideas — and surprisingly relevant to today’s businesses.

Quantitative Distractions

Any discussion of systemic visions or ideals confronts one final — and profound — hurdle: what H. Thomas Johnson, an accountant and professor at Portland State University, refers to as the “quantitative abstractions” that control most companies. “When businesses regard economic activity as if it involves only the manipulation of abstract quantitative variables,” writes Johnson, “they miss what is really happening to the people, the communities, and the natural world that surround them.”

In his books Profit beyond Measure: Extraordinary Results through Attention to Work and People (co-authored with Anders Bröms) and Relevance Regained: From Top-down Control to Bottom-up Empowerment, Johnson outlines how perverse financial incentives and the use of top-down accounting information to control operations ushered in a “dark age of American business history” between the 1950s and 1980s. He traces the mischief caused by American cost accounting back to the fall of the once-integrated production system à la River Rouge, and the rise of the multi-product production system à la General Motors which requires ever more expensive equipment to reach scale. In response to the capital investment required for this equipment, management sought to drive down unit costs by pushing output regardless of market demand — a phenomenon that led to bloated inventories and warehousing, and made it increasingly difficult to achieve systemic improvement.

Johnson found that financial systems aimed at achieving short-term, bottom-line results treat the organization mechanistically, as “a collection of independent parts.” They squeeze cost savings and profits from the system without regard to how such squeezing will impact the system in the long run. He argues that ignoring the systemic impact of financial decision making is unsustainable in the long run and will yield progressively worse results. Yet, as Johnson wrote in the March 2009 issue of The Systems Thinker, an electronic newsletter published by Pegasus Communications, “the thinking and behavior of almost all business managers in today’s world reflects a world view grounded in the whole-equals-sum-of-the-parts and win-lose competitive principles of 19th-century mechanics, not the systemic, cooperative, win-win symbiotic principles of 21st-century cosmology and life sciences.”

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Systems Thinking Resources
Works mentioned in this review.

  1. Russell L. Ackoff, Re-creating the Corporation: A Design of Organizations for the 21st Century (Oxford University Press, 1999), 348 pages
  2. Peter M. Senge, The Fifth Discipline: The Art and Practice of the Learning Organization (Doubleday/Currency, 1990), 432 pages
  3. Michael Hammer, Dorothy Leonard, and Thomas Davenport, “Why Don’t We Know More about Knowledge?” MIT Sloan Management Review, July 15, 2004
  4. Karl E. Weick and Kathleen M. Sutcliffe, Managing the Unexpected: Resilient Performance in an Age of Uncertainty (Jossey-Bass, 2007), 206 pages
  5. Mike Rother, Toyota Kata: Managing People for Improvement, Adaptiveness, and Superior Results (McGraw-Hill, 2010), 326 pages
  6. John Shook, Managing to Learn: Using the A3 Management Process to Solve Problems, Gain Agreement, Mentor, and Lead (Lean Enterprise Institute, 2008), 138 pages
  7. W. Edwards Deming, The New Economics for Industry, Government, Education (MIT Press, 1993), 252 pages
  8. NBC News white paper, “If Japan Can...Why Can't We?” first broadcast June 24, 1980, by the National Broadcasting Company. Produced by Clare Crawford-Mason and reported by Lloyd Dobyns
  9. H. Thomas Johnson, Profit beyond Measure: Extraordinary Results through Attention to Work and People (with Anders Bröms; Free Press, 2000), 272 pages; Relevance Regained: From Top-down Control to Bottom-up Empowerment (Free Press, 1992), 240 pages; “A Systemic Path to Lean Management,” The Systems Thinker, March 2009; “Toyota’s Current Crisis:The Price of Focusing on Growth, Not Quality," The Systems Thinker, February 2010,
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