Profit Beyond Measure

Profit Beyond Measure

by H. Thomas Johnson

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Overview

Waste has plagued almost every industrial-age firm for the past century. In this powerfully argued alternative to conventional cost management thinking, experts H. Thomas Johnson and Anders Bröms assert that any company can avoid the waste that is generated through excessive operating costs in the short run and excessive losses from market instability in the long run. To gain more secure levels of profitability, management must simply change how it thinks about work and how it organizes work.

Profit Beyond Measure details how two extremely profitable manufacturers, Toyota and the Swedish truck maker Scania, have rejected the traditional mechanistic mindset of managing by results that generates waste. Johnson and Bröms explain how Toyota and Scania achieve their legendary cost advantage through a revolutionary concept they call managing by means (MBM). Instead of being driven to meet preconceived accounting targets, the production systems of Toyota and Scania are governed by the three precepts that guide all living systems: self-organization, interdependence, and diversity.

Amid a wealth of new insights into Toyota's vaunted system, Johnson and Bröms introduce the tools of MBM to show how design, production, and profitability analysis are done to customer order. They demonstrate that by following the principles that emulate life systems, even a lean and profitable company can organize work to greatly lessen its long-term earnings instability and sharply reduce its short-run operating costs.

Scania has achieved sixty-five years of financial stability and longevity in the face of fierce competition. Toyota has amassed a market value since 1988 that has rivaled -- or sometimes surpassed -- the American "Big Three" automakers combined. The principles that Johnson and Bröms set forth in Profit Beyond Measure can guarantee the same richer, longer life to any company that applies them.

Product Details

ISBN-13: 9781439124628
Publisher: Free Press
Publication date: 08/05/2008
Pages: 280
Sales rank: 1,174,996
Product dimensions: 6.00(w) x 9.00(h) x 0.80(d)

About the Author

H. Thomas Johnson is Professor of Business Administration at Portland State University in Oregon and Distinguished Consulting Professor of Sustainable Business at Bainbridge Graduate Institute in Washington. He co-authored Relevance Lost: The Rise and Fall of Management Accounting, which is considered one of the most influential management books of the twentieth century by the Harvard Business Review.

Read an Excerpt

Profit Beyond Measure

Extraordinary Results through Attention to Work and People
By H. Thomas Johnson Anders Broms

Free Press

Copyright © 2000 H. Thomas Johnson and Anders Bröms
All right reserved.

ISBN: 0-7432-1319-X


Chapter One

Lessons from the Rouge

It is clear that the primordial intention of the universe is to produce variety in all things ...

He who would do good ... must do it in Minute Particulars. General Good is the plea of the scoundrel, hypocrite, and flatterer.

Managers of business organizations will find as a result of reading this book that they can no longer accept without question the conventional wisdom that says an organization will reach its bottom-line goals best if it drives its employees and suppliers to achieve financial targets in their work. Given this belief, a manager's primary task is to motivate people to reach and exceed quantitative targets defined by financial measures. If you are a manager who takes pride in your ability to cause people to reach quantitative targets, read on. This chapter and the next show that your success actually creates unseen and unnecessary inefficiency and instability. The new management thinking that will help you avoid such inefficiencies and instabilities is then discussed in succeeding chapters, where you learn how to lead your organization to profit beyond measure.

Managers who adopt the new thinking offered here will accept as second nature the idea that what decides an organization's long-term profitability is the way it organizes its work, not how well its members achieve financial targets. This chapter compares the long-term records of Toyota and the American "Big Three" automakers to demonstrate the truth of this proposition. It posits Toyota's principles as an example of new management thinking called "management by means." Managing by means is the antithesis of "managing by results," practices identified in this chapter with Toyota's American competitors. Those who manage by results focus on the bottom-line target and consider that achieving financial goals justifies inherently destructive practices. Those who manage by means consider that a desirable end will emerge naturally as a consequence of nurturing the activities of all employees and suppliers in a humane manner. Managing by means requires a profound change in thinking that is a bold alternative to conventional management thinking and practice.

The alternative to managing by results which this chapter advocates requires disciplined practices, sustained attention to how work is done, and nurturing every step of the work at every moment. Managing by means requires all managers in an organization to focus, as does nature, on minute particulars. Such attention to detail involves encouraging employees to cultivate their creative talents so they may best serve a customer's specific needs. This management behavior manifests the belief, not that the ends justify any means, as conventional twentieth-century management practice holds, but rather that the means are ends in the making. The job of managers who manage by means is to cultivate and nurture conditions that bond company talents and customer needs in a profitable union, not to drive work with destructive financial targets. Instead of a quest for relentless growth of quantitative targets that burns out companies before their time, managing by means, as this book shows, can enable a company to profit beyond measure for generation after generation.

To demonstrate what this change in thinking can mean for companies today, this opening chapter tells how differences in the way people think about work actually caused a significant difference in the long-term economic performance of real companies in recent decades. The story contrasts the consequences of acting on the belief that order must be externally imposed with the consequences of acting on the belief that order self-emerges from within. Specifically, the story tells how certain automobile manufacturers between the end of World War II and the 1980s responded differently to the problem of producing vehicles in varieties at low mass-production costs. One manufacturer is Toyota Motor Corporation of Japan and the others make up the group of American auto makers known collectively as the Big Three - General Motors, Ford, and Chrysler. The three American companies' practices differed from one another in many respects. But they are grouped here to emphasize similarities in their thinking and in their consequent styles of manufacturing that contrasted markedly with the thinking and manufacturing style found at Toyota from the 1950s to the 1980s - similarities and contrasts that persist more or less unchanged to the present day.

THE STORY: TOYOTA AND THE AMERICAN BIG THREE

In the early 1950s Toyota and the American Big Three struggled independently with a problem that confronted virtually all manufacturers following World War II. How could they satisfy customer demand for an increasingly varied range of new products, yet do so at mass-production prices? Replicating mass quantities of one variety of a product - as if each item had been stamped by the same "cookie cutter" - was the way many early-twentieth-century manufacturers, including automobile makers, had provided an abundance of material goods at prices average people could afford. Indeed, the auto maker Henry Ford helped pioneer the concept of low-cost repetitive mass production before World War I. He then pushed that concept farther than anyone else before or since in the giant facility he opened in 1919 on the banks of the River Rouge in Dearborn, Michigan.

After World War II, it was obvious that great opportunities lay ahead for companies able to offer customers the widest range of styles and models at the lowest prices. The different ways that Toyota and the American Big Three addressed this opportunity between the 1950s and the 1980s epitomizes the essence of manufacturing history in the second half of the twentieth century. To understand this crucial history, and its lessons about the impact of management thinking, we must know how executives of Toyota and the Big Three after World War II perceived the remarkably low cost at which Henry Ford's River Rouge plant produced automobiles in the 1920s. But to understand those perceptions, one must know the conventional story about how work was organized at the Rouge in that decade.

Henry Ford's River Rouge Plant in the 1920s

Probably the quintessential example of successful mass production was the giant Ford Motor Company plant built during World War I at River Rouge near Dearborn, Michigan. That plant and Ford's Highland Park plant in Detroit together produced some 15 million Model T cars by 1927. Dedicated to making one model, the Rouge facility operated virtually around the clock year in and year out until it literally sated the public's first-time demand for a basic automobile. The high profits Ford earned in that setting are usually attributed to the plant's remarkable efficiency, where "efficient" is equated with low cost per unit. The principle Ford ostensibly followed to achieve low cost was to build a facility to produce one variant of a product and then run it without interruption at full capacity until demand was sated. If the variant is referred to as A, then the most efficient and most profitable schedule for producing A is AAAAAAAA etc., where each A is assembled in a continuous flow, one at a time.

A way to organize work to meet that schedule is shown in Figure 1-1, a highly simplified schematic of the flow of work in Ford's River Rouge plant in the early 1920s. An important point to observe in that figure is that the work more or less paced itself. Indeed, the schedule pushed material at a relentless pace that was sustained by having machines and workers - the people themselves being little more than "cogs in the gears" of the system - perform repetitive tasks as fast as possible. Given the simplicity of the flow and the repetitive nature of tasks at each work station it was not necessary to spend extra resources on activities to control and expedite the flow of material. In effect, the flow was dictated by the plant's initial design - a design that promoted efficiency by allowing work to flow continuously from beginning to end and by having it consume at every point only the resources needed to advance one unit of output one step further toward completion. The River Rouge plant in 1925 produced about one vehicle per minute in a total lead time of about three days and nine hours from steel making to finished vehicle.

A sign of the mechanistic roots supporting this mass-production system is the relation between information and the flow of work. The primary information influencing the flow of work originates outside the process, in the schedule and in the layout of the plant. Neither the material nor the workers who transform it supply any information to guide the process. Both material and workers respond only to outside influences, literally being "pushed" by external information. Underlying that information is a design, or abstract model, that defines the laws governing the motion of material and workers in the plant. The mass-production model features homogeneity of inputs and outputs (such as uniform material and interchangeable parts transformed by endlessly repetitive steps into identical black Model Ts), large scale, high speed of throughput, and uninterrupted flow of work. The design of the work process and the quality of incoming material insures an acceptable level of quality. The uninterrupted flow of homogeneous units at a rate as fast as possible insures the lowest possible cost per unit of output. The primary rule suggested by this mechanistic model of production - a rule enshrined in the phrase "economies of scale" - is that costs per unit fall as the speed and volume of output rise.

How Perceptions of Low Cost at the Rouge Shaped the Quest for Variety after World War II

Until the mid-1920s, Americans delighted in Ford's Model T, a private, enclosed, gasoline-powered alternative to bicycles and horse-drawn buggies. Few buyers expected or sought a variety of designs. The Model T's low price, sustained by the low costs Ford achieved at the Rouge, offset strong desires for variety, at least into the mid-decade. As time passed, however, and the car-buying public grew more sophisticated, they wanted cars with more features and styles. General Motors responded after 1920 by coordinating activities among its several divisions so as to provide a car for "every purse and purpose." But on the whole, such efforts were thwarted first by the Great Depression and then by World War II. The solution to the problem of producing variety at low cost awaited the rise of the strong postwar consumer market.

After World War II, Toyota and the American Big Three addressed differently the problem of how to produce varieties of automobiles at low cost. Their distinctive responses to that problem reflected adherence - although perhaps unacknowledged - to basic differences in thinking. To appreciate the starkly different kinds of thinking that characterize Toyota and the American Big Three, consider the following meeting in 1982 between Eiji Toyoda, then head of Toyota Motor Corporation, and Philip Caldwell, then head of the Ford Motor Company. At that time, Toyota was emerging as the lowest-cost producer of the highest quality automobiles in the world. Ford and its Big Three partners were then plagued by falling market share, rising customer dissatisfaction with the quality of their vehicles, and unprecedented financial losses. Presumably, Caldwell visited Toyota in Japan in 1982 seeking new ideas. During Caldwell's visit, his host, Mr. Toyoda, is said to have toasted Mr. Caldwell by saying, "There is no secret to how we learned to do what we do, Mr. Caldwell. We learned it at the Rouge."

It must have been obvious to Mr. Caldwell in 1982 that he and his colleagues at Ford, as well as his counterparts in the other Big Three companies, had definitely not viewed the operations at Henry Ford's Rouge River plant in the same way as had Toyota. As Caldwell surely observed, Toyota by the early 1980s was using stunningly simple means to successfully produce a diverse array of vehicles at mass-production costs, while maintaining the highest quality and earning gratifying profits. Meanwhile, Chrysler, General Motors, and Ford from the 1950s to the 1980s produced an increasing variety of vehicles by using complicated means, generated products of variable quality, and often suffered disappointing financial results. Why did the Big Three apparently not discover the same key to success at the Rouge that Toyota claimed it did? When Toyota's managers considered that facility, what did they perceive? When executives at the Big Three companies contemplated that facility, what perceptions did they share? To understand the differences in how Toyota and the Big Three interpreted operations at the River Rouge plant is to understand the difference between Toyota's distinctive thinking and the thinking that has dominated management practice in most of the world's other businesses during the past five decades. How different methods of thinking affect long-term performance is the lesson to be learned from what follows.

MASS-PRODUCING VARIETY IN BATCHES

What the American Big Three Saw at the Rouge

The AAAAAAAA mass-production schedule and the way to organize work shown in Figure 1-1 faced a challenge when companies realized that their economic survival demanded making products in more than one variety. By 1950, the growth of markets, and the even faster growth in demand for varieties of products, was convincing more and more companies that they could profit most by selling products in increasing varieties. One way to meet these demands was to build a new plant dedicated to each new variant. But the idea of replicating a plant as large and complex as the River Rouge facility for each variant seemed impractical, especially as the number of varieties increased. Therefore, companies searched for ways to make two or more variants of a product in the same plant, but do so efficiently and profitably.

In the past fifty years, most manufacturers who have strived to produce output in varieties have remained committed to the mass-production thinking that says high profits depend, ultimately, on producing at low costs by running operations without interruption at full capacity for as long as possible. But in the context of making products in varieties, they discovered that "running without interruption" and "running at full capacity" are not necessarily achieved as simply as they are when the production schedule is AAAAAAAA and work is organized in a continuous flow that consumes resources at the rate needed to produce one order at a time.

Look first at the effect variety has on the production schedule.

Continues...


Excerpted from Profit Beyond Measure by H. Thomas Johnson Anders Broms Copyright © 2000 by H. Thomas Johnson and Anders Bröms . Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

What People are Saying About This

From the Publisher

Roger Saillant, Ph.D. Vice President and General Manager, Energy Transformation Systems, Visteon Corporation Definitely a must read. Building a culture is more important than building personality cults focused on the bottom line. Nature has shown the way. Tom Johnson has identified nature's best mimics, Toyota and Scania. It's up to the rest of us to catch up. Johnson and Bröms' book gives ample insight to the rest of us about where we need to go.

Dan Saint, Partner Deloitte & Touche Fascinating...this practical alternative guided by principles of living systems may finally enable us to shed our superstitious beliefs in the efficacy of focusing on outcome and managing by fear.

Bartley J. Madden, Partner HOLT Value Associates, and author of CFROI Valuation This is a profoundly important book that lays out extraordinarily insightful ways to think about managing organizations. It will become a classic.

Richard J. Schonberger, President Schonberger & Associates, Inc., and author of World Class Manufacturing Just what the business world needs to escape from the entrenched, ineffective, backwards mode of trying to steer the ship "by watching the wake."

David S. Cochran, Ph.D., Assistant Professor of Mechanical Engineering MIT Superbly written...Johnson provides tremendous insight regarding the re-direction that is needed in business management thinking. The effect of the approach on the design and engineering of manufacturing systems is profound.

David Berdish, Corporate Governance Manager Ford Motor Company Johnson and Bröms' "management by means" provides insight and methods for us to better learn about operating within the natural system and achieving greatness.

Michael Rothschild, CEO Maxager Technology, and author of Bionomics Once again, Thomas Johnson leads the way in rethinking fundamental management systems.

Bala V. Balachandran, J. L. Kellogg Distinguished Professor of Accounting and Information Management, and Director, Accounting Research Center Northwestern University A masterpiece...With insights, imagination, and illustrations, Johnson shows how excellent businesses can be created, cultivated, nurtured, and built to last.

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