Corporate America is losing its competitive edge. The problem is serious enough for some to suggest that the present state of the U.S economy indicates not a recession but a regression to a level more compatible with the country's present state of competitiveness. "The game is already over, " says Paul Kennedy, author of the best-selling book The Rise and Fall of the Great Powers. "The question is, can we bow out gravcefully as Great Britain did?"
It was only in the early sixties that the famous French author Jean-Jacques Servan-Schreiber, in his best-selling book, The American Challenge, issued a warning to his fellow Europeans: "Swallow your pride and imitate America or accept her dominance forever." Twenty-five years later, however, the same author, in his latest book, The World Challenge, is urging everyone to imitate Japan.

WHAT WENT WRONG?

America still generates new knowledge at a rate faster than the rest of the world combined, the problem must be in the failure to operationalize new knowledge.
Despite the urge to blame "incompetent managers" for the failure, one must admit that the problem is much more profound. Inability to operationalize new knowledge has much more to do with serious flaws in the prevailing mode of organization than in the inadequacies of individual performers per se. According to counterintuitive principles of systems dynamics, successful playing of the game changes the game. Failure to appreciate the significance of this change converts success to failure.
Henry Ford's phenomenal success in creating the mass-production process based on interchangeability of parts and labor marked the beginning of the end of the Production Era. The once-unique ability to mass-produce lost its advantage through widespread duplication. And so the competitive game changed from concern for production to concern for market, which required an ability to manage diversity and growth. Henry Ford's refusal to appreciate the implication of his own success and his unwillingness to play the new game ("They can have any color as long as it is black") gave Alfred Sloan of GM the opportunity to dominate the industry. Sloan's concept of product-based divisional structure, combined with the planning paradigm of Predict and Prepare, turned out to be an effective design for managing growth and diversity. The new game, artfully learned and played by corporate America became the benchmark for the rest of the world to follow.

A postwar environment characterized by growth, stability, and predictability provided an ideal condition for the success of the American mode of organization. However, effective commercial use of organized research, which evolved during World War II, accelerated the rate of change. Unpredictability associated with this rate of change undermined the usefulness of the core concept of Predict and Prepare. In addition, the R&D Era had generated explosions of new knowledge. This knowledge, where successfully operationalized, radically changed the competitive game.
Unpredictability of demand, the increasing rate of product differentiation, and the shortening of the product life cycle called for a new level of flexibility and readiness to periodically redesign the product and redefine the market. This requirement, however, was incompatible with a mode of operation heavily dependent on reliability of forecasts and economy of scale. The successful divisional structure, artfully designed to prevent change and stay the course, had tied the fate of product divisions to the life cycle of a single predefined product.

Once again, success had transformed the game. This time the differentiating factor turned out to be flexibility and control. The new generation of winners were those players with the ability to change quickly from one product to another and to reach the break-even point with much smaller quantities.

But Corporate America was too overjoyed by its success to even notice the emergence of a new game. This provided Japan with an opportunity to launch a slow but effective challenge. The imperceptible manner in which the new game evolved underscores an important principle of systems dynamics: passive adaptation to a slowly deteriorating environment is a recipe for disaster. Recall the story of the frog that boiled to death, while sitting happily in gradually heated water.

However, the sleeping giant is now waking up. Impressed by the phenomenal success of Japan and searching for an answer, corporate America has singled out Total Quality Management (TQM) as the panacea: the vehicle for regaining its competitive position. And yet despite all the time and resources allocated to this program during the last 10 years, the result has been less than desired. Let us examine why.

THE TQM CHALLENGE

TQM as it is known today has gone through three evolutionary stages during its 40 years of development and practice in Japan. It evolved in response to the challenges dictated by the necessities of the lean production process.1

Ohno, the Chief Engineer of Toyota, in an attempt to duplicate the American mass-production system, encountered four major obstructions: (1) not enough money to buy the necessary number of presses and finance the level of inventory necessary for mass production; (2) not enough space to create multiple production lines and store the in-process and finished-goods inventory; (3) not enough market to sell the mass-produced goods; and (4) not enough immigrant workers who could be laid off at will.

To dissolve these obstructions, Ohno had to redesign the production process in such a way that the same production line could produce a variety of products at smaller batch sizes. This would be a design for flexibility aimed at the ideals of zero defect and just-in-time inventory and other imperatives of a controlled process. Successful redesign and implementation of this process converted the above obstructions to opportunities and provided the platform for further development of TQM.

In its first stage of development, TQM essentially focused on throughput. It relied heavily on statistical process control, emphasizing attention to detail, generation of date, and implementation of measurement system. Employing a series of simple techniques for identification of problems and solutions followed by mass training, TQM created a unified culture, especially with regard to desired work habits among production workers. The Compatability of these elements with a production process already redesigned for flexibility and control led to an effective bottom-up process of continuous improvement.

Ability to control a flexible process served as a foundation for the development of the second stage of TQM. TQM embarked on a design course when it was realized that a quantum jump could be achieved by redesigning the product for manufacturability. Design for manufacturability is the most significant step in TQM's development. It has become an effective vehicle for operationalizing new knowledge and creating competitive advantage. For instance Toyota, by capitalizing on existing knowledge, successfully redesigned Clark's lift truck with 1000 fewer parts. The total number of parts was effective reduced from 2800 to 1800. This move alone was enough to create a 40 % cost advantage for Toyota over Clark.

The success of stage two in applying new knowledge gave TQM the ability to address consumers' concerns by defining quality in terms of customer preferences. And so evolved the third stage of TQM development: redesigning the product for functionality by involving the consumers and suppliers in the development of the next-generation products. The ability to translate and incorporate customer preferences into the new design has transformed the dominant characteristic of Japanese industry from mere imitators to leading innovators.

OBSTRUCTIONS TO TQM'S POTENTIAL

Despite its fascination with TQM, corporate America has not yet come to terms with the obstructions that are frustrating its effectiveness in the U.S. The first obstruction stems from a failure to appreciate that TQM and its continuous improvement process have been most successful within the context of a throughput process already redesigned for flexiblity and control. Ironically, the need to redesign the process beforehand contradicts the reason for TQM popularity in the U.S. This is so because we have been taken by the illusion that somehow a magical process will produce real change without the pain of change. The most popular version of TQM seems to be the slow, bottom-up process of continuous improvement, but within the framework of the existing system with no disruption to the power structure.
The second obstruction is the challenge of managing interactions between increasingly independent members of a highly interdependent social system. Dissolving this dilemma requires a systems approach, which would supplement the TQM tradition.

TQM has its origins in analytical thinking. Its strength is in developing simple problem-solving algorithms that can be easily disseminated for mass use. Its diagnostic methods are based on linear- cause-and-effect relationships. This makes TQM most effective in dealing with physical properties and the types of problems that can be isolated.

However, TQM encounters enormous difficulty with social phenomena especially in dealing with an interrelated set of problems and handling the interactions between "purposeful" members of a social system. This, of course, would not be a major concern as long as the dominant feature of a culture is paternalistic, where loyalty, conformity, and commitment are reinforced by the security of belonging to a nested web, which in turn protects and provides for its members. For example, in Japan, the country that most closely approximates the paternalistic, uni-minded system, Dr. Deming's challenge was not how to use statistical process control to create teamwork among the Japanese, but how to utilize the existing strong sense of membership and cooperation to implement statistical process control.

To appreciate the power of a paternalistic, uni-minded system, recall that such American corporate giants as Ford, Du Pont, General Motors and IBM owe much to their paternalistic founding fathers.

That was then. The present realities of a highly developed multi-minded America are fundamentally different. Members of societies that have gone past the secure and unifying web of a paternalistic culture display real choice, both of means and ends. Of course, the price to be paid for this level of choice is a greater sense of insecurity and higher levels of conflict.

Ill-equipped to deal effectively with the consequences of its members' increasing independence amid a highly interdependent system, corporate America is finding itself increasingly paralyzed. Significant part of its energy is lost in internal conflict. Frustration associated with excessive conflict reinforces the inability of existing organizational structure to change. This creates a feeling of impotency and alienation detrimental to the American way of life.

WHAT'S TO BE DONE?

Playing the old catch-up game is not the answer. We have simply lost the lead time. While we are still struggling with the first phase of TQM, the competition is running away with the third phase. Imitation, even if feasible, is no longer desirable. The only way to regain competitive advantage is to go beyond, rather than to follow, the leader.
To work for America, TQM needs to be synthesized with systems thinking. Only then will it be able to cope with the implications of a strong multi-minded tradition in America.

Interactive design 2 is a sytems methodology to redesign a system free of all constraints. It assumes the system to be redesigned was completely destroyed while its environment remains intact. Starting with a clean slate, relevant stakeholders participatively produce a design of their desirable system, one that could replace existing system and be capable of operating in the current environment. Successive approximations to this design identify the means, skills, and resources required to implement the design.

An integral part of interactive design is a comprehensive learning and control system aimed at creating not only first-order learning (continuous improvement within a given framework), but also second-order learning (redesigning the framework itself). The learning and control system required developing a dynamic model of the system for understanding interactions between an interdependent set of variables, a measurement system to monitor performance indicators, and a diagnostic system for early detection of problems and opportunities.

Adding the interactive design methodology to the powerful tools of TQM, we can effectively deal with interrelated sets of problems, dissolve structural conflicts, and create membership n the post-paternalistic culture.

Furthermore, as indicated by Toyota's experiment with redesigning the lift truck with 1000 fewer parts (referred to earlier), most of the cost of a product or operation is design-driven. This puts the design approach at the core of any attempt to achieve a new plateau of competitiveness.

But redesign of the process, though necessary, is not sufficient to achieve total quality system. Also required are redesigns of the output and the organizational structure. Structure, process, and function (output) are interrelated and complementary. Together they define the whole. Each involves different aspects of the competitive game. Redesign of the process is to increase throughput; redesign of the output is to add value for the user; and redesign of the organizational structure is to best utilize the values generated by different activities of the organization (value chain).

REDESIGNING THE PROCESS

The process is a set of interrelated activities designed to produce an explicit output. Redesigning the process is to reduce complexity and increase throughput. This, in turn, will enhance the ability to operationalize new knowledge.

The present mode of operation, with its heavy emphasis on specialization, simplifies the generation of knowledge but seriously obstructs its implementation. A multitude of independent solutions, generated by variety of specialized functions, compete to be incorporated into the throughput process independently. For example, each one of the functional units responsible for safety, quality, cycle time, reduction of waste, inventory and so on, has a separate and urgent solution for the operation. Although each solution, taken separately, is feasible and proper, the aggregate overwhelms the throughput process.

Integration of these independent, incompatible, and often conflicting solutions into a coherent and workable whole at the lowest level of operation is virtual impossibility. Therefore discrete solutions are patched one by one into the throughput process. The waste and duplication of the effort associated with patching overload the system and frustrate the chance of real improvement.

Ironically, the simplification achieved by excessive differentiation of knowledge is more than offset by the emergent complexities involved in integration -- so much so that inability to cope with increasing levels of complexity is, more than anything else, responsible for widespread operational paralysis.

This is where the systems approach can be effective. After all, its claim to fame is in meeting the challenge of complexity. System design is the methodology by which we can deal with an interdependent set of variables to reduce complexity and increase throughput.

Instead of generating a host of discrete solutions to a set of interrelated problems, the systems approach produces a single design to satisfy several functions, in effect killing several birds with one stone. This is what doing more with less is all about.

The power of the design approach to increase throughput is illustrated by the experience of a client who had divided the task of producing the output (design of environmental systems) among the four departments of mechanical, electrical, chemical and process engineering. It was only natural that each group try to maximize its own performance at the cost of the other, with no regard to throughput. Major bottlenecks and conflicts were encountered at the interface between activities. Repeated intervention from top management was required to keep the process going. Nevertheless, a cycle time of 24 weeks and a cost of $500,000 were recorded before an acceptable design was produced. However, when it was realized that the world competitive benchmark for producing similar designs was six weeks at the cost of $100,000 all hell broke loose. The performance which was good enough relative to domestic competition was no longer acceptable.

Initial experimentation with cross-functional teams produced improvement, but the results were a far cry from the benchmark.

The process was then redesigned in its totality with throughput in mind. A single design was produced to eliminate waste, reduce cycle time, and create a controlled, flexible process. The responsibility for producing the output with a time and cost target was then given to semi-autonomous modular teams with the authority to manage the process. Modular teams, in contrast to cross-functional teams, were required to use a common language -- a methodoloy -- to define the problems and generate solutions. They were encouraged to develop a working understanding of each other's discipline and were rewarded for doing so.

Working interactively with their respective clients, the modular teams produced more-than-encouraging results: cycle time was reduced to eight weeks and the costs fell below $125,000. The benchmark was now within reach.

REDESIGNING THE OUTPUT (PRODUCT)

The output is redesigned to create value for the user and competitive advantage for the producer. Competitive advantage is defined in terms of significant properties and the value of an output compared with alternative sources of supply. The difference between the alternatives should be significant enough to make a difference for a given class of users to affect their choice.

The competitive advantage is a dynamic and relative property, different in different contexts and in reference to different classes of users. For example, in a supermarket, the element of time, as a basis for competition, does not have the same significance for the morning shopper and the afternoon shopper. The forming is after spending time, and the latter is interested in saving time. What might be an advantage in one context can be a disadvantage in another.

The basis for competition changes with time. Therefore output ought to be redesigned periodically in response to the following questions: How is the competitive game evolving? What are the drivers for change? And, what are the new bases for competition?

The traditional bell-shaped distribution curve conveniently assumes that the overwhelming majority of consumers in a given market fall into one category. The behavior of this single group (considered typical) is then used to define the basis for competition.

Challenging this assumptions -- that is, differentiating the base of consumers and targeting and understanding their behavior -- is the key to defining quality in terms of consumer's preference and creating value for both user and producer.

There are many different ways to segment a market. Each segmentation reveals something new about the nature of the market and the behavior of the target customer. The most useful segmentation for a given producer is the one that identifies the group of customers for whom the desired properties of the product are more compatible with the intended capabilities of the producer.

The value of an output in a market economy ultimately is defined by the customer. This value is distorted if what the buyer is buying does not mach what the seller is selling. The discrepancy has to be minimized to make the output competitive. Neither an overdesigned nor an underdesigned product is a competitive one.

Furthermore, each product, in addition to its explicit function, satisfies a host of implicit functions. A car, in addition to its transportation function, can serve as an identification tag, representing a specific style of life. An education system fulfills the implicit functions of a babysitter as well as a buffer to the labor market, in addition to the explicit function of disseminating knowledge.

The multi-functionality of the product makes it very risky to define the output independent of its target customers. Therefore, the interactive model seeks to create an interactive relationship with customers and other stakeholders. Customers and suppliers, along with product designers, are jointly involved in a participative process of designing the desired output. Successive approximation of this design leads to a product designed for manufacturability and functionality at the same time.

Furthermore, ability to transfer knowledge from one context to another is a critical design capability. This capability adds a new dimension to the concept of the experience curve. The experience curve is volume-based learning. It takes considerable time and resources to achieve competency in production in a given context. The ability to make this know-how context-free and to transfer it to different applications without having to invest the same time and resources becomes a key competency. Achieving this competency required multiple source of learning and application.

REDESIGNING THE ORGANIZATION

The organization is redesigned to create a new platform for effective interactions among the "purposeful" members of the organization. It is to produce a shared understanding and commitment to a collective vision of a desired future. By dissolving paralyzing conflicts, this vision empowers the members to pursue their desired ends and help them redefine, as needed, the operational targets.

Redesign of the structure is to create a multidimensional(3) network of internal and external producers, designers, and marketers for multiple utilization of the value chain and key competency. The multidimensional network can become a vehicle for sharing and managing the capacity within the system and its environment to minimize vulnerability.

Design of the organization will not be complete without redesigning the measurement system. After all to win, one needs to keep score, but the way one keeps score defines the game. Design of the new measurement system starts with developing an operational definition of success. It incorporates a throughput accounting system based on an internal market mechanism, target costing, and variable budgeting.

With the internal market mechanism(4) the critical organizational units such as design, manufacturing, and marketing become profit centers with freedom to buy and sell. This unifies the performance criteria across the organization and internalizes market orientation by making everyone live with the marketing consequences of his/her actions.

Target costing directly relates the cost of each products to its market price. Each element of the cost (cost of selling, cost of goods, cost of development, etc.) is explicitly stated as a precentage of the selling price. Designers have to design their output so it can be produced within the limits of the target cost and time benchmarked for that activity.

And, finally, a variable budget directly links the income of each unit of the organization to the throughput. This will minimize bureaucratic tendencies and make the organization self-correcting.

STRATEGIES FOR INTERVENTION

Clearly process, output and organization are interrelated and complementary. Their compatability removes major obstructions and creates resonance for a quantum jump toward creating quality organizations. Therefore, the best strategy for start-up and turn-around situations is to redesign the system in its totality Intervention would then be a top-down redesign of the organization, the outputs, and the relevant processes. However, implementation of all the three designs should be carried out concurrently. To avoid aborting the process of implementation requires an assurance that: (1) the design is genuinely owned by the critical actors; (2) The design meets the conditions for operational viability; and (3) adequate system-wide training is provided.

The majority of firms do not have the energy level and excitement of the start-up operations, nor do they face the urgency and challenge of the turn-around situations. Most likely, they would be looking for leverage, the point of intervention wit highest impact. In these cases, finding the most appropriate level(s) of intervention requires obstruction analysis.

Obstruction analysis identifies major bottlenecks and defines the set of interrelated problems that could be converted to opportunities. This, in turn, would identify the proper strategy for intervention.

After all, as Russell L. Ackoff, the founding father of interactive planning, puts it, "We fail more often not because we fail to solve the problem we face, but because we fail to face the right problem".


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