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 / First Quarter 2002 / Issue 26(originally published by Booz & Company)


What Are the Measures That Matter?

Plants like Toyota’s save money in part by giving up the enormous overhead of accounting and control systems. They replace them with trust that, given the appropriate training and technological designs, people will manage production more effectively than numbers ever could. “The problem with managing by data,” Professor Johnson says, “is that it creates a mind-set that leads people to pay less attention to the day-to-day particulars of work.”

Professor Johnson has been criticized for being vague and unconvincing. But the deeper reason for the criticism (like that of W. Edwards Deming before him, who referred to goal setting as “management by fear” and called it “pointless”) is that measurements and rankings seem like the natural way to drive people to improve. Most managers intuitively believe that they can get better results only by setting goals and targets, especially the sophisticated “process drivers” of the Balanced Scorecard and similar methods. If managers, following those targets, cut costs in mechanistic or ineffective ways, then they aren’t disciplined enough. “A cost is not a natural thing to measure, like revenues,” said Professor Kaplan in an interview recently. “It’s a construct; you have to create it.” Without such constructs, he argues, even businesses that emphasize quality can fail financially.

The Amoeba vs. the Crystal
For someone like me, who writes about management without having to be accountable for results, it’s very tempting to side with Professor Johnson and Toyota. But then I think of what David E. Meador said. He is the chief financial officer of DTE Energy Co., and a former financial officer at Chrysler, where he was in charge of implementing an ABC practice. “Some people hear Tom talk and they say, ‘This sounds like taking the company off the deep end. It’s a real distraction from near-term results.’ And I know that frustrates him, because it’s not his intent. But listen, if I don’t drive some near-term results, I’m not going to be in a job. Keep the company competitive and keep me in a job, and then I can go work on some enhancements and refinements.”

In other words, to move your company in the direction of Toyota, you have to give up most of your current practices and your ingrained, habitual belief that things will get done only if they are relentlessly controlled and monitored. Toyota has been refining its manufacturing system for more than 60 years, building on its early experience as a loom manufacturer. By contrast, a viable ABC/Balanced Scorecard system can be created in a year or two.

We know that the benefits of the Johnson approach will be slow to surface, and initial resistance will be great. And we know that the Kaplan approach will catch on quickly, and benefits will surface quickly. But we don’t know the long-term dangers of the Kaplan methods. What if the constant use of “process drivers,” measurements, and stretch goals cripple organizations in the long run, by wearing down their people until they leave or their skills atrophy? This is exactly what Harvard professors Abernathy and Hayes noticed, in the article that started both Professor Johnson and Professor Kaplan on this long intellectual quest.

If Professor Johnson is right, then many of the organizations that embrace ABC and the Balanced Scorecard will exhibit the same kind of decline eventually. Indeed, some early aficionados of ABC now express disillusionment about its results. Robin Cooper recently said, “No one is negating its superior capabilities. Yet, look across all the firms that tried it, and a large number failed to take advantage of the insights it provided.”

To my knowledge, no one has yet conducted the kind of long-term in-depth analysis of various companies’ successes and failures that might help us truly judge which professor is correct. In the meantime, you can be reasonably confident that — other factors being equal — Professor Kaplan’s methods will leave you ahead of the game, able to outperform all competitors in the short run, at least. Except, of course, for those very few companies like Toyota that follow a completely different path to management success. Inevitably, they acquire the reputation of inimitable anomalies, as different from conventional business as an amoeba is from a crystal. The crystal feels like a far surer bet, but only the amoeba is poised to evolve.

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