Deming, Systems Thinking, Organizational DNA and Putting America First – Part I

31 10 2010

Meteora Monastery

Abstract:

A new theory on organizational success claims that certain combinations of leadership, strategy, culture, and structure have an evolutionary advantage over others. While organizations that do not develop the right organizational DNA may have short-term success, they cannot sustain competitive differentiation in the long run in an open globally connected environment where communication, collaboration and commerce are conducted at the speed of light. In a two-part blog, we examine the ramifications and ask if our nation can adopt same strategies to sustain a long-lasting competitive differentiation to keep our position as Number One in creating both GDP and GDP per capita. According to Deming’s teachings and the organizational DNA Theory, our congress, the executive branch and the citizens must become an integral part of the total system by putting “America First” and developing appropriate national DNA with the right combinations of leadership, strategies, culture and structure to gain an evolutionary advantage.

Deming, Systems Thinking and Organizational DNA

It is true that world-class businesses with appropriate strategies have proven that they can successfully balance their customer, employee and shareholder interests without compromising on ethics, profits, legal obligations and harmony with the communities they belong to and serve. It is also true that the companies that exploit circumstances in the short-term to gain profits at any cost, without regard to the impact on their customers or the communities they interact with, have in the short run benefitted from their non-ethical or even criminal behavior. However, in the long run some strategies have proven to assist in developing sustainable world-class organizations. Other strategies, even if they work well in the short-term, have proven not to be helpful in the long run to develop world-class organizations in an open global environment. Why do some businesses survive the economic cycles well while others ride high in good times but fall by the wayside in bad times?

“A system is a network of interdependent components that work together to try to accomplish the aim of the system. A system must have an aim. Without the aim, there is no system.” With these words, Deming [1] brought systems thinking into the affairs of commerce, and made an impact not only in transforming the way companies operated their factories but also how nations established global business dominance [2, 3]. Deming’s teachings today are applied to a variety of independent components spanning from widgets to human beings. More than anybody else who have developed the theory and practice of quality, Deming recognized the value of human element in the quality equation. He goes on to say “It is important that an aim never be defined in terms of activity or methods. It must always relate directly to how life is better for everyone… The aim of the system must be clear to everyone in the system. The aim must include plans for the future. The aim is a value judgment.”

Ford Motor Company was the first among the American companies to seek help from Deming at a time when Japanese car companies were eating their market share by adopting many of Deming’s teachings. When Deming arrived at Ford, the management at Ford resembled today’s U S Congress and the Executive Branch – highly polarized, bickering, undermining each other’s efforts and totally ignoring what their customers were saying. To Ford management’s surprise, Deming did not focus on quality but scolded the management for being mainly responsible for 85% of the problems in developing better cars. Before Deming, Ford management paid only a lip service to quality [4]. The incentives and appraisal systems, which were intended to motivate people to do a good job, were cost-oriented, not quality oriented. As a consequence, people who wanted to be successful had no reason to collaborate across divisions and focus on end-to-end process and product quality. At the top levels, the bickering, back-biting and self-promotion were so prevalent that they had to bring in a facilitator to mediate at management meetings and to bring focus back to issues on hand. Deming’s success at Ford is well documented [4, 5] in the literature and “the system of profound knowledge” describing the fourteen key principles for management and the “Seven Deadly Diseases” which must be addressed by the management are well articulated in Deming’s book [6].

However, the “Quality is Number One” philosophy that brought some gains in Ford’s market share could not in the long run create competitive differentiation and the company along with other US auto manufacturers narrowly escaped bankruptcy. What went wrong?

The answer may lie in the emerging organizational theories that throw new light and extend Deming’s systems thinking. These theories attempt to identify an organizational DNA [7, 8, 9 and 10] and its impact on business success. They claim to determine the DNA fingerprint of an organization using various measurements and can genetically re-engineer it to meet the evolving business needs. While each theory attempts to claim their model identifies the patterns that have evolutionary advantage, one stands out [8]. According to their model, the organizational DNA consists of the four base elements, leadership, strategy, culture and structure, and certain combination patterns of these elements have evolutionary advantage over others in establishing market dominance with competitive differentiation. These elements assist in developing and executing the “aim” that Deming identified as pivotal in systems thinking. Four key strategies are identified that provide competitive differentiation:

Customer intimacy
Operational excellence
Product leadership
Disruptive innovation

Companies that have developed customer intimacy and are in tune with their customer’s mood and circumstance are better able to react to changing circumstances with operational excellence which requires dynamic process management. They will be able to create new products and services mobilizing their innovative R&D teams and Product Development organizations with product competencies. Companies not only need to continuously improve their current product lines to meet existing demand but also must exploit disruptive innovation to change the game and establish leadership over their current and potential future competitors.

It is claimed that certain combinations of culture and structure of the organization are more successful to execute different strategies. Organizational DNA theory suggests that following patterns have an evolutionary advantage compared to others as shown in Table 1:

This theory has some profound implications on how leaders develop their strategies and shape the culture and structure of the organization to create the right organizational DNA. For example if an organization randomly choses its employees to execute the four strategies mentioned above the resulting DNA patterns will have an evolutionary disadvantage compared to the same organization choosing the employees and policies to craft an organization that matches the patterns with evolutionary advantage. Figure 1 shows a hypothetical organization with a DNA with random combination of patterns and specially designed DNA mimicking the patterns with evolutionary advantage.

In this figure, the matrix strength represents organizational structure where a hierarchical pyramid organization has matrix strength of zero and a full matrix-organization structure has matrix strength of one. Of course, the theory is in a nascent stage and there is a lot of work that is required to map current world-class organizations to identify their fingerprints and the patterns with evolutionary advantage.

To understand where Ford’s DNA went right and where it went wrong, we must examine how Ford fares with respect to the four strategies. Obviously, the quality effort helped in developing product leadership in their existing product line with improved quality. They also seemed to have developed a certain degree of customer intimacy to understand that the SUVs are liked by their customers and took advantage. They certainly had issues with operational excellence. Their unions behaved in a way that they were not part of the total system and wanted to benefit at the expense of the whole system. The management also benefitted from unreasonable salaries and bonuses even when the company was not doing well. In addition, lack of disruptive innovation blindsided them when Toyota introduced a Hybrid model and started to eat their market share. According to Deming, disruptive innovation comes from the producer – not from the customer, while customers can help in identifying current product improvements.

Examples of successful companies who have established competence in all four strategies are Apple and Intel. Apple has established market dominance in product leadership with disruptive innovation in mobile computing while it continues to maintain their MAC customer loyalty through their customer intimacy and operational excellence. Intel has created a revolution with their new class of enterprise servers with multi-core servers, management at the chip level technology breakthroughs and hardware assisted virtualization. Their penetration into the enterprise with energy, space and cost saving enterprise-class servers with a 10X performance advantage has driven to extinction, hither-to well-established RISC based server companies. Other companies such as Cisco, Hewlett-Packard and IBM have settled to excel in executing one or more strategies (operational excellence, customer intimacy and or product leadership). They depend on disruptive innovation on other companies and acquire it through partnership or acquisition. The acquisitions have sometimes proven to be wise and other times have wreaked disaster [11].

With technology enabling communication, collaboration and commerce at the speed of light, global corporations now are competing to develop same strategies and are in a race to outperform each other. This offers a hope that finally, Deming’s system view will prevail and the strategies with concrete aims that foster the well-being of the system as a whole will have an evolutionary advantage compared to the strategies that favor short-term benefits to one part of the system or the other.

Can our nation inject Deming’s systems view and evolve right strategies to govern ourselves and sustain our position in the world as number one? What are the similarities and differences between how a nation is governed and a business is managed? Who are the stake holders and how does systems thinking apply to a government? What would Deming say to the US Congress and the Executive Branch? Will he ask them to put America first as he admonished the Ford management to fix themselves first? What is the DNA of our nation? It is important to note that each strategy requires a different combination of culture and structure for its successful execution. If this is true, it has profound implications with respect to the leadership and governance of the execution of different strategies. In the next blog, we will examine the issues, options and ramifications of systems thinking, National DNA, and putting America first.