Reading

Profit Beyond Measure

by Joe Kresse
(Originally appeared in Timeline #59 September/October 2001)

In Timeline, we often address the pre-eminent issue of our time: How can human activities be brought into harmony with the natural processes of the Earth? It is pre- eminent because, with our numbers and our power, humans are significantly altering those natural processes, and for the most part in an unsustainable way.

Business is one activity that obviously needs to be realigned because of its enormous impact on the environment. While a number of authors have addressed this problem from a theoretical viewpoint, few have shown how business can be realigned in a practical way. For example, see Timeline reviews of When Corporations Rule the World, The Post- Corporate World, and False Dawn.

But this book, written by a professor of management and a management consultant, is all about two vehicle manufacturers, Toyota and Scania (a Swedish heavy truck maker), who have designed their production processes in a way that mimics natural systems. The book describes how these companies have done this, and what principles of nature they have followed to do so.

Perhaps the most radical idea in the book, at least given current American management methods, is to shift from "management by results" (MBR) to "management by means" (MBM). Essentially, this means no longer managing to a set of predetermined financial results. Heresy!

To make their point, the authors quote the famous management expert, W. Edwards Deming, who said: "If you have a stable system, then there is no use to specify a goal. You will get whatever the system will deliver. A goal beyond the capability of the system will not be reached. Focus on outcome is not an effective way to improve a process or an activity....Management by numerical goal is an attempt to manage without knowledge of what to do, and in fact is usually management by fear."

Deming believed that the job of a manager is to lead people to understand the system of work in which they are involved, "a system that links each worker's capacity to serve with a specific customer's needs. The goal of a business is to nurture continually the creative talents of company members. By focusing on its members' activities, the manager will thereby improve the system's capability to serve the needs of customers."

When companies try to manage to numbers, they create instability by trying to force the system to meet goals beyond its capabilities. The authors point out many companies (Chrysler) and industries (airlines) that have gone through booms and busts attempting to meet numerical targets rather than continually improving their systems. Of course, a key part of MBM is a recognition that natural systems fluctuate-they don't grow or decline linearly, nor do they for the most part remain stable. Therefore, management has to realize that, in an MBM world, profits also will fluctuate according to the general health of the company and the economy. And rather than focusing on cutting costs (usually by laying off experienced staff who will have to be replaced later), managers must continue to work on improving the way the system works, recognizing that over the long run that will lead to maximum profitability and effectiveness in the market. This makes it difficult to adopt MBM in the U.S. because of the almost obsessive focus on improving profits quarterly in a linear fashion. Perhaps that is why the two companies described in this book are not U.S.-based.

There are three principles the authors set forth as basic to natural systems, and which Toyota and Scania embody in their production processes:

"PRINCIPLE 1: Creative energy continually and spontaneously materializes in self- organizing forms that strive to maintain their unique self-identity."

Everything has its own identity, including such things as production lines. If the people who work on a production line understand and document how it works, they can see when it is operating well and when it isn't. For example, at Toyota this information enables workers to assess their own ongoing work and easily accommodate change in design and processes.

Operating this way allows a form of standardization which makes it possible to match production rate with customer orders. Toyota can produce each model on a custom basis, as opposed to companies which produce batches of model "A," followed by model "B," etc., even if there are not enough orders for all the items produced, requiring the line to shut down in between the batches to set up for the differences between the models. Toyota has found that by knowing the process intimately, it is more effective to scatter the various models throughout the production day than to batch produce. Since different models take different times at various work stations, scattering balances out these different times without ever having to shut down the line. And at the same time, cars are only being produced to order, thus saving inventory costs.

"PRINCIPLE 2: Interdependent natural systems interact with each other through a web of relationships that connects everything in the universe."

In nature, species are forced to be in relationship to what is around them. That's why they don't continually self-organize to grow, take over, and destroy each other. This is certainly a lesson most corporations need to learn, as they tend to focus on their own growth without regard to the consequences to the larger systems of which they are a part.

The continuous flow approach that companies like Toyota use is a good example of this principle. Continuous flow makes visible the relationship between each employee's activities and the satisfaction of customer wants, facilitates the feedback necessary to keep the system running smoothly, and provides more readily the resources being consumed to fill each customer's order. Thus it provides, without any added cost, information that otherwise must be processed outside of the work stream, at great cost and delay.

"PRINCIPLE 3: Diversity results from the continual interaction of unique identities always relating to one another.

Nature shows how to make a wide diversity of organisms using a minimum of interrelated parts. As an example, the authors point out that just five chemical elements combine to form the four structures that constitute the DNA of all nature's diverse life forms. And diversity is what customers demand these days. By using nature's modular approach to its vehicles, Scania is able to offer a wide variety of models with about half the number of parts as comparable manufacturers, thus increasing efficiency, reliability, and ease of repair, while lowering costs. The cabs, engines, transmissions, and chassis are all interchangeable. In addition, many of the parts for the different engines, transmissions, etc., are common. For instance, in engines of different sizes, the pistons, valves, etc., are the same; there are simply more or fewer cylinders. In the concluding chapter, the authors emphasize that companies which manage by results (MBR) "drive people to reach planned financial results by aiming for a target, without regard for the wasteful means used to hit the target." They are able to reach targets for short periods-even several years during expansion phases of the business cycle. Invariably, however, their performance lags behind MBM (management by means) companies, and they survive for significantly shorter periods. MBR, mass production, and other practices feature growth but ignore relationships. They ignore, in other words, the fundamental principle in nature-interdependence-that exists expressly to check growth and thus to avoid destruction of the entire system.

The authors believe MBM can play a key role in reaching a future in which business activities are life-enhancing instead of life-threatening: "Managing by means may to some extent curtail this destruction....That may be reason enough for most companies to take it seriously. However, there is a far more important reason to promote MBM practices. These practices force humans in their daily lives to honor nature's principles of interdependence and diversity as well as the principle of self-articulation....The fact is, human creativity is both a grave danger and a great blessing. Balancing that twin potential for danger and fulfillment in every moment, in every act, is the essence of the human condition.

"Today's global economic activity, because it equates fulfillment too much with quantitative growth rather than qualitative enrichment, prompts humans to encroach too far, too fast on the habitats of other species. MBM practices may do more than any single thing in the next generation to reverse the deteriorating human and environmental conditions that accompany unchecked human expansion. Limiting and reducing that damage, while working relentlessly to raise living standards of the poorest third of humanity, is arguably the most pressing problem of our time. MBM calls for new thinking that may enable business organizations to lead the way toward solving that problem in the next century."

Whether Management by Means can bring forth the new thinking outlined in this book, and whether it will become widely adopted, remains to be seen. However the two companies cited are certainly excellent models, and the fact that a business book contains this wisdom bodes well.

Profit Beyond Measure by H Thomas Johnson and Anders Bröms. The Free Press (Simon & Schuster), New York, 2000. $30.00

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