Arguably we live in a complex world. Competition is rife across all industries, rich countries are losing their leadership in innovation and breakthrough ideas because emerging markets are competing on creativity as well as cost. Our political and macro-economic environment is influenced by rapidly changing events.
Much is being written about sustainability and continuous profitability of businesses. However, little is understood about the ingredients of continuous success. Today, however, there is an understanding of many problems being networked, being interrelated. Finding answers in such environment requires totally new approaches to traditional thinking. Cause and effect thinking does not work with complex problems. System Thinking is one of the probable approaches.
It is my observation that on one hand the fundamental theory to understand such systems of interrelated problems is well-founded. Early studies, before, during and after World War II, recognizing the trans-disciplinary nature of all relationships in nature were later translated into operations research models.
On the other hand, I am recognizing that especially in the West, we have not fully adopted nor understood holistic (systems) thinking. What we have missed is to establish a different mindset in business. A thinking approach that focuses on understanding the whole and not dividing the separate elements. Fittingly systems thinkers like Ackoff and Addison note “You rarely improve an organization as a whole by improving the performance of one or more of its parts” (Ackoff and Addison, 2007).
In this article, I will focus on highlighting the weaknesses of today’s common management practices, especially in context with the alternative approaches offered by systems thinking and specifically W. Edward Deming’s “System of Profound Knowledge”. I will further look at systemic conditions and fundamentals of (better) decision making.
Standard Management Practices in today’s corporate environment
Comparing systems thinking with traditional management techniques is attempted in the following table (adapted from Seddon, 2005):
Over the past century of industrialization and the establishment of management as a discipline in an organization, the prevailing mode of thinking in typical organizations is management by results – MBR, aka management by objectives – MBO. Deming has been an outspoken critique of MBO, he saw in MBO arbitrary motives, not directly related to business purpose and customer value creation. Deming perceived MBO as “an attempt to manage without knowledge of what to do”, ultimately leading to distortions when focusing only on outcomes instead of looking into the processes that produce them (Baudin, 2012).
In the following two paragraphs I will highlight two of the most prominent aspects of how today’s common business practices differ from Deming’s System of Profound Knowledge.
Typically, most organizations assign responsibility to achieve specific results to specific individuals and components of the organization. Most organizations see the inherent risks of such individual focus, such as there are requirements to consult with those who are impacted. But most often these efforts to have people cooperate outside of what they are held accountable for are weak and the primary focus is on optimizing what they are accountable for.
Deming’s view differs in this regard as the organization suffers even while improving results of components because the most significant gains are to be made in managing the organization as a system not in optimizing components within the system.
The management system will nearly always determine how the individuals working within it manages. The lack of teamwork is not something that the individuals bring to the workplace. Failure to work together is the result of how the organization has been set up. To change such behavior the management system must be changed.
The element of trust
In Deming’s view, every individual is naturally inclined to do good and meaningful work. His belief was that intrinsic human nature unfortunately is bent by society, forcing it into an unnatural competition that ruins us. Peter Senge quoted the following correspondence between Deming and him in his book The Fifth Discipline: “Our prevailing system of management has destroyed our people. People are born with intrinsic motivation, self-respect, dignity, curiosity to learn, joy in learning. The forces of destruction begin with toddlers—a prize for the best Halloween costume, grades in school, gold stars—and on up through the university. On the job, people, teams, and divisions are ranked, rewarded for the top, punished for the bottom. Management by Objectives, quotas, incentive pay, business plans, put together separately, division by division, cause further loss, unknown and unknowable” (Senge, 2006).
In this context Deming’s views were humanistic, most likely influenced by thinkers like Friedrich Nietzsche, Jean-Jacques Rousseau and others which much earlier in history were recognizing flaws in societies and education and believed in the human good and criticized the materialistic and individualistic tendencies above the true search for truth, beauty and perfection.
In point 1 of Deming’s 14 points, he talks about constancy of purpose, the aim of the organization with an emphasis on purpose (Deming, 1993). A missing link that is of paramount importance in a working organizational system is trust between management and staff. This view fundamentally differs in the manner that the element of predictability is increasingly jeopardized in today’s business environment. Driven by competition and technological change a corporation’s performance seems more and more like Deming’s Red Bead experiment, it’s random (Deming, 1993).
The results are devastating, the staff does not trust they will not be replaced by a machine, robot or software or another worker in a low-cost country. The investor or shareholder or financial analyst will not trust the enterprise will be able to achieve a return on their investment, the management no longer trusts they will have employment after a bad quarter or two.
Deming’s System of Profound Knowledge and System Thinking
Dr. Deming’s 14 points for transformation of management (Deming, 1986) define the transformational foundation of the System of Profound Knowledge. In the same book, Deming further lays out seven deadly diseases of management which describe common symptoms of bad management (Deming, 1986). These seven diseases are:
- Lack of constancy of purpose to plan products and services that will have a market and keep the company in business and provide jobs.
- Emphasis on short-term profits: short-term thinking (just the opposite from constancy of purpose to stay in business), fed by fear of unfriendly takeover, and by push from bankers and owners for dividends.
- Evaluation of performance, merit rating, or annual review.
- Mobility of management; job-hopping.
- Management by use only of visible figures, with little or no consideration of figures that are unknown or unknowable.
- Excessive medical costs. As reported by Dr. Deming in Out of the Crisis (pages 97-98), executives shared with him that the cost of medical care for their employees was among their largest overall expenses, not to mention the cost of medical care embedded in the purchase price of what they purchased from their suppliers.
- Excessive costs of liability, swelled by lawyers that work on contingency fees.
Out of these seven deadly diseases of management Dr. Deming’s efforts culminated in defining a comprehensive theory of management, commonly known as “System of Profound Knowledge”.
Dr. Deming’s holistic approach to leadership and management encompasses seminal theories in four interrelated areas:
- appreciation for a system,
- knowledge of variation,
- theory of knowledge
- psychology (human behavior)
The System of Profound Knowledge provides a view that emphasizes the importance of the interdependence of the above areas within the entire system of management.
Deming certainly had a very holistic view of how companies should operate, but how does his System of Profound Knowledge approach interrelate with Systems Thinking?
Systems thinking recognizes the principle that each organization is composed of a system of interrelated processes and people which define its components. It asserts that systems are dynamic, complex and interactive. The success of a system is in direct correlation to the management’s ability “to orchestrate the delicate balance of each component for optimization of the system” (Berry, 2011).
Understanding of systems is required to achieve quality in an organization in Deming’s view. As elaborated about a system is composed of interrelated components. Quality is the optimization of performance of the components relative to the aim of the system. Most crucial is acquiring knowledge to understand the individual components of the system, so that they will reinforce, not compete with each of the other components of the system to accomplish the aim of the system. Taking action without understanding the system leads to wrong results.
To summon it up, Deming’s System of Profound Knowledge is a management philosophy grounded on systems theory.
Common predisposition dictates human behavior to the extent, that we want to take apart what we cannot understand at first sight. Corporations generally are complex entities, thus we generally try to analyze it by taking its pieces apart, by reducing it to individual pieces – (reductionism vs holistic thinking by Pan, Valerdi and Kang, 2013):
As Russell L. Ackoff states “a system is a whole that cannot be divided into independent parts without the loss of its essential properties or functions” (Ackoff, 1999). Further, he recognizes “when the performances of the parts of a system, considered separately, are improved, the performance of the whole may not be (and usually is not) improved” (Ackoff, 1999).
This recognition of the systems thinker Russell L. Ackoff is hardly revolutionary, but its implications are. Considering them in context of organizations and the management of corporations also Deming has recognized the “appreciation of a system” as a pillar of the System of Profound Knowledge.
Today’s common practice in management however is vastly different, short-term, bottom-line thinking is the norm. Long-term plans do not work on their own as short-term thinking prevails, continuously creating a distraction from long-term behavior towards real solutions.
Apart from this as mentioned in the previous paragraph, the aim of an organization is a crucial element of trust, of defining purpose for an organization. Likewise, a system (an organization) has to develop its aim. Standing in the way of developing and recognizing the value of a system are typical management characteristics. Management characteristics define the management approach in terms of attitude towards time and change in a system (an organization). Essentially it establishes the ability of an organization to transform and adapt to change, to determine its actual state and its future. The ultimate purpose of management is to define a system which includes the future of an organization (Deming, 1993).
The management thinker Russell Ackoff (Ackoff, 1999) believed that traditional management can be classified into the categories reactive and inactive and preactive management.
In reactive management, the desired attainable state is the way things once were. The present situation is considered unsatisfactory; therefore, the previous state is selected as objective. If the reversal change is executed successfully, the problem causing change is undone and the system returns to the state before the problem arose. This process is commonly referred to as problem resolution.
Inactive managers consider the present state as satisfactory. The situation may not be perfect but “good enough”. Founded on the beliefs of philosophers e.g. Leibnitz or Voltaire, inactivists conclude that if nothing were done, nothing would happen, and this would be considered as fine. Only in very serious situations (e.g. survival of business is threatened) inactive management responds by doing as little as possible to remove the crisis. Inactivist Managers, therefore, are only suppressing symptoms and are considered “antiplanners”, practicing crisis management.
Preactive managers think the past was, the present is and look at the future with ideal attainable objectives (visions). Preactive management focuses on plans, prediction and preparation. Creation of plans and forecasts is a major preoccupation of preactive managers. Preactive management is embedded in the belief that the accelerating rate of change makes experience literally obsolete, instead readiness and ability to adapt to quickly changing conditions is a prerequisite. Rapid response to change aided by decentralized decision-making are the key success factor.
- Appreciation of the organization as a system, is an organization that governs its own future. It is not only focusing on staying alive and being the victim of circumstances, it attains to shape its future.
Russel L. Ackoff has formulated an approach of systems thinking that describes an “end state”, a projected future of an organization. He has recognized that predicting the future for an organization is very difficult. Therefore, his concept of “Idealized Design” is an evolutionary systems design methodology which is based on Interactive Management (Ackoff, Magidson and Addison, 2006).
Interactive Management is based on the reflection that generally what happens to a corporation is a direct consequence of what it does and not what external influences may do to it. Therefore, interactive management is focusing on the creation of the future of a corporation. In other words, it aims at designing the desired present state, the interventions and means required to approximate to this aim as best as possible. Because of the nature of the process, design and intervention, the ultimate objective is to create or at least influence the future. Further, this approach is influencing behavior, as the focus is constantly lying on closing the gap between present state and desired state.
What is interesting about today’s shining stars amongst globally leading tech corporations like Google, Twitter, Adobe, Dropbox, etc. is the sense of mission that these corporations emanate. Most of these companies appear to have values that appear to be for the common good. Are these corporation’s followers of Deming’s System of Profound Knowledge philosophy? I do assume that the leaders of these companies are very well aware of Deming’s philosophies. What is more striking is that performance and efficiency of these companies improve naturally, without the management by results/objectives methods other more established companies typically pursue.
Personally, I am wondering why these rare examples of System of Profound Knowledge in action are not proliferating. Also, Peter Senge laments in The Fifth Discipline about the “New Frontiers” and the fact that it might take generations for Deming’s way of thinking to ever take hold.
Very fittingly Joshua Macht describes in Harvard Business Review (Macht, 2016); “Perhaps the answer lies deeper in what Deming was trying to say about “profound knowledge.” As Deming implied, we work in complex systems with forces of good and evil always in play, and it may just be that the single most important responsibility of our top leaders is to artfully mold and shape this dynamic in a way that best suits their organizations — and produces a self-selecting ecosystem of workers, partners, customers, and shareholders who naturally align.
All of this implies a more progressive approach to leadership. And yet we all too easily succumb to our Taylor-like impulses that assume the worst about workers — using automation to track productivity down to the nanosecond, if possible. Unfortunately, this tends to exacerbate the growing trust gap between workers that festers between our corporate silos and stymies the very productivity that we seek to enhance.
None of this is easy. And many of us will surely struggle with these issues throughout our entire lives. But in a world where the stakes appear to be getting higher by the minute, building lasting trust and cooperation across companies and communities — binding together people and long-calcified silos — may be the only way for the corporation to survive”.
Deming’s method’s in today’s business environment
Deming’s teachings spanned over a period of almost 50 years. His true recognition Deming earned in Japan in the 1950s and 1960s, presenting his theories to the top tier managers of Japanese corporations. These initiatives made him a national hero in Japan. Since 1951 the Japanese have awarded top quality achievements of Japanese companies with the “Deming Prize”. Japan attributes its industrial rebirth to Dr. Deming, which culminated in the awarding of Japan’s Second Order Medal of the Sacred Treasure in 1960. At that time, outside of Japan, Deming and his methodologies were literally unknown.
It took another 20 years until the corporate world in the West started to recognize the value of his teachings. Under pressure from Japanese competition, US and European companies began looking at Deming’s statistical quality methods. He was quickly recognized as a “Quality Guru”. In the last years of his life, Deming’s teachings widened to topics like cooperation between buyer and supplier, win-win, was a term that he coined. His work expanded further into the formulation of the System of Profound Knowledge in the beginning of 1990s as an inclusive philosophy of management, focusing on understanding how many individual components are fitting together, recognizing the system behind it (Neave, 2000).
Looking at today’s corporate world, 25 years after the passing of Dr. Deming, in my opinion, the transformation has stagnated, apart from maybe a few shining examples like the companies mentioned earlier. The following observations lead me to this conclusion:
- Authoritarianism is still widespread. Proof of this are leaders like Elon Musk, Jeff Bezos and others. Companies known for their iron-fist leadership style like Amazon are continuing to be very profitable. Are we equating this leadership style as successful?
- Disruptive technologies as a strategy for success? In too many companies the prime focus is on permanent innovation instead of becoming more efficient. This breathless preoccupation with innovation distracts from holistic thinking and a sustainable outlook.
- Individualism over Systems: Our corporate world stresses the individual’s contribution, we believe if there is progress and success, we can attribute it to an individual or small group of individuals. Likewise, if things go wrong, who is to blame? The System? No, it is typically an or several individuals that are charged.
- Short term vs long term results. Deming’s philosophy is long term oriented, sustainable success is only attained after several years of understanding, gaining knowledge and reflection of the system. In contrary, a common belief is that with the right tool you can fix any problem, quickly. Deming stresses the use of theory first and then use the theory for the right tool. However, theory is often discounted, nowadays action is valued much higher, “just do whatever works”.
- Deming died, his legacy has not survived the rapid changes in our economy. Deming is maybe still recognized as a “Quality Guru”, however, his in-depth philosophy of System Thinking, Theory of Knowledge, Understanding of Variation and related human behavioral aspects has largely been buried.
- Last but not least: Japan’s once stellar corporate performance has suffered some cracks in recent years. The economy in Japan hit an economic slump after the millennium, in recent years the countries economic growth has leveled off. Japan’s reputation for quality excellence has taken a serious blow in recent years due to quality scandals linked to companies like Takata or Kobe Steel and with that the global beacon of quality has gone into oblivion.
Further reading & sources
- Ackoff, R. 1999. Re-creating the corporation. New York: Oxford University Press.
- Ackoff, R. and Addison, H. 2007. Management f-Laws. Axminster: Triarchy Press.
- Ackoff, R. et al. 2006. Idealized design. Upper Saddle River: Prentice Hall.
- Baudin, M. 2012. Deming’s Point 11.b of 14 – Deming versus Drucker. Available at: https://michelbaudin.com/2012/08/26/metrics-in-lean-deming-versus-drucker/
- Berry, B. 2011. Summary of Deming’s System of Profound Knowledge. Available at: http://www.berrywood.com/wp-content/uploads/2011/08/demingpaper.pdf
- Deming, W. 1993. Out of the crisis. Cambridge: Cambridge University Press.
- Deming, W. 1993. The new economics for industry, government, education. Cambridge, MA: The MIT Press.
- Macht, J. 2016. The Management Thinker We Should Never Have Forgotten. Available at: https://hbr.org/2016/06/the-management-thinker-we-should-never-have-forgotten#
- Neave, H. 2000. THE DEMING DIMENSION: Management for a Better Future.
- Pan, X. et al. 2013. Systems Thinking: A Comparison between Chinese and Western Approaches. Procedia Computer Science 16, pp. 1027-1035, doi: 10.1016/j.procs.2013.01.108.
- Seddon, J. 2005. Freedom from command and control. Buckingham: Vanguard Education.
- Senge, P. 2006. The fifth discipline. 2nd ed. London: Random House Business.