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Everybody Has a System – Usually the Wrong One
By now just about everyone knows at least something about the Toyota Production System, and many have heard of the Danaher Business System, even though few seem to know much about it. In fact, Apple, Nike and Emerson Electric have their own unique business systems, as well. A common thread is that all the aforementioned companies are very successful. So exactly what is a ‘business system’ you ask? It is simply an integrated, mutually supportive set of processes that are aimed at a central goal. The Toyota Production System, for instance, was created around a focus on cycle time compression – same as Henry Ford’s ‘Ford System’. Apple’s system is focused on coming up with and rolling out a steady stream of innovative new products, while NIke has a system designed around marketing creative products. Note that none of these companies has a focus on being the lowest cost producer in the markets they serve, although they do try to keep costs under control.
The focus of these unique business systems in these high-performing companies is on their long term strategic, competitive angle – what is going to enable them to outperform everyone else? Toyota knew the answer was high quality without spending a fortune to get it. NASA and the aerospace industry prove every day that you can achieve very high quality levels if you don’t care what it costs, but Toyota knew that they could achieve very high quality if they designed a system that doesn’t have to constantly stop for inspection and rework. Ford knew the same when he said, “Profit is the inevitable conclusion of work well done”; and he famously designed a system focused on speed, and speed demanded consistency. Apple knows the most capable and versatile devices make money, and Nike knows the key to success is to sell the coolest shoes worn by the best athletes. All of their processes are designed and measured based on these objectives – how they structure and manage design, production, the organizational structure, supply chain, information systems, human resources, etc. They know that their ultimate financial success is driven by mutually supportive processes in these areas
Every company has a business system. The problem is that most have not really thought about it much, so they default to the standard system taught in business schools and is embedded in out-of-the-box ERP systems. That is the system that is focused on monthly, quarterly and annual income statements. That system is aimed at maximizing margins for each product – sales minus the cost of goods sold. With all of the processes well integrated around this focus, it has management continually pounding on direct labor and purchase prices for direct material at a detailed level. That’s all well and good if price is all that matters to customers in the market the company serves, but that is rarely the case.
Failure to appreciate the nature and the force of their default cost reduction system is why most strategic initiatives fail – the strategy calls for something grandiose, but the company in every detail within every core process continues to crank away at and be measured by cost control and reduction because that is what the processes are designed to do. And it is why most change initiatives fail, be it Lean, TOC, Six Sigma or anything else. These often try to pull one or two processes – production or supply chain most often – out of the integrated system and have it aim at something other than the monthly P&L statement. When the rest of the processes don’t support the initiative, and overall success is still measured by the monthly P&L it never takes long for the initiative to fizzle out and the processes to return to their former structure. Whether it is a strategic initiative or a change initiative, it is rather naive to think that the company can have the same managers, in the same structure, with the same metrics sit in the same meetings and then make significantly different decisions than they made in the past.
You can’t just clone someone else’s business system and think it is going to propel the company to new heights unless, of course, the key to your success is exactly the same as that around which the closed system was designed – and that just about never happens. Management needs to have clarity and consensus around the key to their success. It might be innovation, speed, a steady stream of new products, how well they manage capacity, production technology or any one of a number of things. Then the core business processes must be designed around that key. Of course, profit and loss statements must be calculated and looked at, but the monthly and quarterly measures of success should reflect performance around that critical focus. If management has done a good job of identifying and focusing on the key to success, the financials will reflect that in the appropriate time.
Perhaps the most important element is to have a ‘systems view’, or to be able to look at the business holistically. The business system is just that – a system and not just a set of individual parts that you can ‘plug and play’ however you want. Viewing the business as simply a collection of parts, and not appreciating how they are mutually supportive, is the source of all the conflicts often decried as ‘silos’, or ‘politics’ or a ‘toxic culture’. This sort of chaos is unavoidable when you are operating within a business system organized around short-term cost control, but different people within the system think they are supposed to be driving some program that is aimed at something else, such as Lean, a product innovation or some sales strategy.
A great starting point would be to think about (1) what really is the key to your company’s success, and (2) how does each core process/department in the company support that, and (3) then take a very deep dive into the financial statements and see how that success will play out by line in the P&L and the balance sheet over time. If management understands those three things, the right business system will start to take shape.