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

12 11 2010

Abstract:

A new theory on organizational success claims that certain combinations of leadership, strategy, culture, and organizational 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 occur at the speed of light. 

 In part I of this blog [1], we examined how Deming’s systems thinking [2 and 3] and the new organizational DNA theory [4 and 5] offer some insights into developing sustainable competitive differentiation in business.  In part II, we examine how these theories apply to our nation and in particular the implications for the congress, the executive branch and the citizens to become an integral part of the system by putting “America First”.  The main lesson from this analysis is that the leadership of a nation needs to leverage different individual characteristics that are part of different cultural behaviors and support different organizational structures to execute different strategies to gain evolutionary advantage and competitive differentiation.  Leadership, strategy, culture, and organizational structure form the four base elements of a nation’s DNA.

This theory, if it is valid, puts the burden of success on the leadership and the citizens of our nation to apply Deming’s system thinking to collectively develop and execute successful strategies by cultivating and leveraging the necessary cultural and organizational diversity of the nation.

Individualism, Collectivism, organizational DNA, and Patterns of Evolutionary Advantage:

Theories abound that analyze individualism and collectivism and their role in organizational behavior and success.  “Although societies differ along many cultural dimensions, a key distinguishing characteristic of work behavior in societies is the way in which members relate to one another as a group. The pattern of responses with which individuals relate to their groups reflects their degree of individualism or collectivism. From an evolutionary perspective, a collective orientation has permitted humans the capacity to aggregate knowledge, develop a shared history, and protect evolutionary adaptations. Sociologists and anthropologists argue that people do not exist except within a social context.”   With these words, Earley and Gibson [6] take stock of a hundred years of progress in our understanding of individualism and collectivism. 

They make an observation that while individualists operate according to a self-interest, and collectivists operate according to a group interest, it does not, however, simply imply that collectivists behave selflessly nor do individualists behave selfishly.  “For instance, collectivists pursue self-interests as well as group interests as long as priority is given to the group, and they often set aside their personal goals out of a sense of obligation and normative control. The self-interests may coincide with group interests or be instrumental in attaining them.  Rather than viewing self and group interests as opposing motives, we can view them as separately linked to knowledge structures that are evoked in a culturally prescribed fashion.”  This observation makes it very important for the leaders of the group, when they define what Deming calls the aim of the system, to consider the self-interest as well as group interest and mobilize the collective strength to accomplish the aim.

The new organizational DNA theory claims that the leadership, strategy, culture and organizational structure are the four base elements and certain combination patterns of these elements have evolutionary advantage over others.  It goes further and states that different strategies require different combinations of culture and organizational structure to have an evolutionary advantage.  What works well for one strategy may not help to execute another. 

In part I of this blog, we examined how the organizational DNA applies to business and the strategies that provide competitive evolutionary advantage.  The aim of the business is to bring satisfaction to its stakeholders and different stakeholders are satisfied in different ways.  The investors and shareholders are satisfied with profits and customers are satisfied with good products and services that meet their cost and quality constraints.  Figure 1 shows the business stakeholders and various strategies that have proven to be successful.

Business Stakeholders and Organizational DNA

The leadership has to organize the organizational structure and develop a culture that suits the strategy as shown here,  For example, in order to  succeed in disruptive innovation, leadership must support a culture of cultivation and an organizational structure that brings both business and technical organizations to work together as a matrix to exploit customer intimacy and technical leadership. 

National DNA, Full Employment, Life, Liberty and Pursuit of Happiness:

How does the organizational DNA theory apply to our nation?  As a nation, we have the aim set by our constitution.  The leadership (the executive, legislative and the judicial branches) role is to develop the right strategies and execute them by leveraging the culture and organizational structure.  Figure 2 shows a potential stake holder model.

A Nation's Stakeholders

From Deming’s system view, different stakeholders have different interests.  For example, global private enterprises have no national loyalty because they are purely driven by their own profit motives and survival.  They will go wherever the resources are cheaper and wherever consumers are willing to pay for their products and services.  Non-Partner nations have no incentive to collaborate and will compete in any manner that is available to pursue their self-interest.  Without an overall level playing mechanism that lets free markets allocate resources optimally to benefit all parts of the system, the invisible hand of the free market economics which works well in an open environment to create a natural economic equilibrium falls short in a closed and artificially constrained environment created by overt and covert competition.  The” aim” of the nation which should benefit its citizens has to take into account the inherent conflicts and use right incentives to develop right strategies and create the right DNA for the nation.

If a nation’s aim is to protect and foster the “unalienable rights of its citizens, that among these are Life, Liberty and pursuit of Happiness of its citizens,” a national DNA that promotes equal opportunity for its own citizens to engage in gainful employment and contribute productively will have an evolutionary advantage.  A DNA which subsidizes a particular group’s interest over another will in the long run introduce friction in the system and cannot sustain competitive differentiation to compete with other nations. 

Invisible Hand of Economics, Communication, Collaboration and Commerce at the Speed of Light:

In addition, as long as nations operate as loosely coupled collaborating systems putting their own self-interest first, with rigid boundaries, each nation’s DNA tends to optimize its own survival probability at the expense of the other in the short run.  Global corporations will work within these constraints with their own self-interest.  For example, while cheap labor may attract global companies to move to other nations, it leaves the citizens behind with unemployment and diminished quality of life unless they can freely migrate or find other ways to compete.  The invisible hand of economics in the long run will establish an equilibrium by fostering the evolution of a nation’s DNA that optimizes the interests of the group of nations as a whole.  But in the short run, as communication, collaboration and commerce are conducted at the speed of light, each nation is on its own to fend its self-interest without causing short-term disruption.  New economic theories have to accommodate the impact of high latency that existed in the days of Adam Smith and John Maynard Keynes in conducting a business transaction compared with today’s speed of light transcending national boundaries.  The role of government in leveling the playing field with appropriate regulation also at the speed of light becomes important to guard against “hit and run” global operators and non-partner nations who want to exploit a free market access to further their self-interest at the expense of others.

Conclusion:

Deming’s system thinking and the new organizational DNA model provide an explanation of why some organizations sustain competitive differentiation in the long run.  Businesses leaders who leverage cultural diversity and different organizational structures to execute the four strategies (customer intimacy, operational excellence, product leadership and disruptive innovation) develop an organizational DNA that provides evolutionary advantage and sustainable competitive differentiation.  The aim of the business is to be profitable while satisfying all its stakeholders interests.

A nation on the other hand has to address a different set of issues in order to ensure its aim that benefits all of its citizens.  The major concern for the leaders of a nation is to provide a level playing field for its citizens, domestic businesses and global corporations while addressing the needs of its stake holders.  In an environment where communication, collaboration and commerce are conducted at the speed of light, a nation must provide a level playing field to its citizens and businesses that operate in its boundaries and guard against “hit and run” operators who try to exploit a free market access.  This puts a burden on the ideologues from the extreme right and the extreme left to reexamine their theories in view of the new reality of real-time commerce at the speed of light that transcends national boundaries.  Without a global regulatory mechanism that levels the playing field with authority, for all participants, each nation has to fend for itself.  A nation has to deal with both partner nations who collaborate and non-partner nations who do not cooperate to address issues through negotiation.  The resulting non-equilibrium economics cannot reach equilibrium through the influence of the conventional invisible hand economics.  A national DNA must adopt to cope with this non-equilibrium by developing appropriate strategies and execute them by organizing the culture and structure of its government to gain evolutionary advantage and competitive differentiation.   The new non-equilibrium economics puts a major responsibility in the hands of our nation’s leaders to develop right strategies and execute them with right combinations of culture and organizational structure.   Unless the leadership puts America first and thinks strategically to act in the interest of everyone and changes the national DNA to adopt to the new economic reality, we may revisit the fate of Ford, before Deming admonished the Ford management, on a national scale and our nation will loose our competitive differentiation we enjoy today.

As Professor Ballon [7], pointed out in my class on current issues in Japanese management twenty years ago, waste, duplication and occasional mismanagement are of no visible consequence in a culture that promotes individualism when the resources are abundant.  When the resources start becoming less and less abundant, the group as a whole cannot afford increased entropy that waste brings.  Similarly, in a collective culture, as resources start becoming more and more abundant, the group can afford a little waste, redundancy and individualism to foster innovation.  Groups usually decide where they stand in this spectrum of possibilities from completely unbridled individualism to totally stifling collectivism and adjust to optimize their chances of success both as an individual and as a group.  Success seems to lie in the middle.   The aim for our nation is clear.  It is to provide a level playing field by putting America first so that all citizens can enjoy life, liberty and pursuit of happiness to the fullest extent.  It is up to the leadership to develop the right strategies and execute them with right combinations of culture and structure to achieve the aim of the system by “making life better for everyone”.  It is up to the citizens to put the right leadership in place by voicing their approval or disapproval at the ballot.  Thanks to the wisdom of our founders, our democracy allows a self-correction process to adjust our national DNA.  Are we wise enough to choose the right leaders who will put America first?  Recent elections seem to show that most of the citizens are fair minded and want to choose the middle path.  Now it is up to our leaders to show that they can lead by putting America first.

References:

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

[2]  W. Edwards Deming, “The New Economics for Industry, Government, Education (Paperback), First MIT Press Edition, 2000.  (Also reproduced at http://deming.org/index.cfm?content=66 )

[3]   Mary Walton, and W. Edwards Deming, “The Deming Management Method”, The Berkeley Publishing Group, New York, NY

[4]  http://www.dnaglobalnetwork.com/

[5]  Kabuki Theater, National GDP, Disruptive Innovation and Japanese Business Conundrum

[6]  Earley, P. C., and Gibson C. B., “Taking stock in our progress on individualism-collectivism: 100 years of Solidarity and Community, Journal of Management, 1998, Vol. 24, No. 3, 265-304

[7]  Robert J. Ballon, “Human Resource Management in Japan”, Issue 23 (Vol. 12, No. 1), June 2002, pp. 5-20.  Robert Ballon is a professor Emeritus in Sophia University, Tokyo.  He has written many articles and books on Japanese management, role of individualism and collectivism in business management.  His lectures inspired me to write my thesis under his guidance in 1990 titled “Current Issues in Japanese Management – “Is Japanese Software Thrust As Powerful As Their Hardware Thrust?”

[8] Chao C. Chen, Xiao-Ping Chen and James R. Meindl , “How Can Cooperation Be Fostered? The Cultural Effects of Individualism-Collectivism, The Academy of Management Review
Vol. 23, No. 2 (Apr., 1998), pp. 285-304 





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:

  1. Customer intimacy
  2. Operational excellence
  3. Product leadership
  4. 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.

References:

[1]   http://thinkexist.com/quotes/w._edwards_deming/2.html

[2]   W. Edwards Deming, “The New Economics for Industry, Government, Education(Paperback), First MIT Press Edition, 2000.  (Also reproduced at http://deming.org/index.cfm?content=66 )

[3]   Hot Springs, Hadaka no Tsukiai, Deming, and Current Issues in Information Technologies Management

[4]   Mary Walton, and W. Edwards Deming, “The Deming Management Method”, The Berkeley Publishing Group, New York, NY

[5]   Womack, James P., Jones Daniel T, and Roos Daniel, “The Machine That Changed The World”, Free Press, 1990

[6]   Deming, W. Edwards, “Out of the Crisis”. MIT Press, 1986.

[7]   http://www.yamasa.org/japan/english/destinations/mie/ise.html

[8]   http://www.dnaglobalnetwork.com/

[9]  http://www.orgdna.com/

[10]          Kabuki Theater, National GDP, Disruptive Innovation and Japanese Business Conundrum

[11]          Acquisitions, Innovation and the Economics of the Invisible Hand