It’s the Economy Stupid! The Five Myths of Capitalism – Part 4 of 5

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I stated in my three previous blogs that unless we change our attitudes and policies regarding Corporate Capitalism, it will destroy our country, our way of life, our freedoms, and our environment.  Furthermore, we will undoubtedly take some of the rest of the world along with us.  This is a serious accusation and one I do not take lightly.  I have been a business educator in higher education and a management consultant to some of the top corporations in the world.  My opinion is not based just on theory or observations.  It is based on the in-depth work that I did with over 32 companies during the time I was actively consulting.  There are many good people working in corporate America but as Dr. Deming once said “You put a good person in a bad system and the system will win every time.  There are Five Myths of Capitalism that are largely responsible for the mistaken policies and laws that have allowed Corporate Capitalism to become a dangerous disease infecting our way of life and causing untold damage to our country.

In my previous blogs, I described the first three myths.  In this blog, I will describe Myth #4 and how it contributes to the destruction of our country.  Myth #4 is:

4.  Corporations are Efficient and Always More Efficient than the Government

In 1986, I was hired by Process Management Institute (PMI) to help merge organization development with statistics.  I had just finished my Ph.D. degree in Training and Organization Development from the University of Minnesota.  Lou Schultz, the CEO of PMI had started the company about three years before I joined.  The company was founded on and sold the methodology and philosophy of Dr. W. Edwards Deming.  Lou had met Dr. W. E. Deming when Lou worked at Control Data (CD).

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Lou was a manager at CD when sometime in the early 80’s Control Data hired Dr. Deming to help them implement his famous quality improvement process.  Lou realized that Dr. Deming had something that America needed, and he decided to leave Control Data and start a consulting firm.  The focus of this firm would be to help bring the Deming Philosophy to businesses in the USA.  Dr. Deming helped Lou in many ways by encouragement and referral of potential clients.  Lou assisted at more than 60 of the 4-day seminars that Dr. Deming had started after he was featured prominently in a TV documentary on quality.  Dr. Deming’s popularity soared after the NBC White Paper TV documentary called “If Japan Can, Why Can’t We” was broadcast.

“If Japan can … Why can’t we? was an American television episode broadcast by NBC News as part of the television show “NBC White Paper” on June 24, 1980, credited with beginning the Quality Revolution and introducing the methods of W. Edwards Deming to American managers that was produced by Clare Crawford-Mason[ and reported on by Lloyd Dobyns.

The report details how the Japanese captured the world automotive and electronics markets by following Deming’s advice to practice continual improvement and think of manufacturing as a system, not as bits or pieces. Crawford-Mason went on to produce; in collaboration with Deming, a 14-hour documentary series detailing his methods through lecture excerpts, interviews, practical demonstrations, and case studies of companies that adopted his methods.”  — Wikipedia

Dr. Deming started a series of four-day seminars to teach his philosophy and methods.  These seminars were a mixture of experiential activities, teaching, discussion, lectures and always Dr. Deming talking about what management did not do right and what they should be doing.  At the time, he had created his famous “14 Points for Management” which together with his statistical philosophy formed the basis for the four days of activities.

IMG_8176-540x405Dr. Deming would do two or three of these a month all over the USA.  He continued these four-day seminars until about six months before he died at the age of 93 in 1993.   Dr. Deming always required help at these seminars since as many as 500 people would usually attend.  I was fortunate enough to help out at four of these seminars.  After getting to know Dr. Deming fairly well, I brought several consulting clients to his home in D.C. to discuss with him personally his ideas on what we were doing right and wrong.  Dr. Deming was always very candid and blunt.  This endeared him to some people, while it turned other people off.

But it is time to get back to the point on corporate efficiency.  I worked with over 32 different clients in my years at PMI and my later independent consulting work.  I worked with clients in government, in military, in non-profit and in for-profit sectors of the economy.  I worked with industries in mining, trucking, healthcare, manufacturing and education.  I published two books on quality and over fifty papers for seminars, journals and presentations.  I did a monthly column for a noted quality journal and did some pro-bono work for various organizations.

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The crux of my client work was to facilitate what we called a quality transformation.  From a system that emphasized production quantity and inspection to a system that emphasized process improvement and quality.  Quality was never a final end state but always a quest for continuous improvement.  Improvement not to meet client expectations but to exceed them.  Deming often pointed out that clients and customers often did not know what they wanted.  “No customer” he would say “was clamoring for a handheld calculator in the seventies.  You must always innovate and delight the customer with new products and new features as well as meeting existing expectations for quality products.”  Dr. Noriaki Kano summarized some of these quality ideas in his famous “Kano Model.”  I had the good fortune to attend one of his seminars in Tokyo while I was on a two-week study mission to Japan in 1993 to visit Japanese companies and study their methods firsthand.  My trip was a joint venture between PM and Komatsu Corporation.  I brought along several clients and we had about 15 participants in all.

“Customer expectations?  Nonsense.  No customer ever asked for the electric light, the pneumatic tire, the VCR, or the CD.  All customer expectations are only what you and your competitor have led him to expect.  He knows nothing else.” — W. Edwards Deming at his Seminars

Later on when I left full-time consulting and went into college teaching, I started using a variety of models to educate my MBA students.  One I was fond of using was a metaphor of a coin to emphasize what a business must do to be successful.  “On one side of the coin is efficiency and on the other side is effectiveness.  An organization must deliver both of these elements to prosper and be successful,” I would preach.   I would then go on to say that traditionally, we think of businesses as being efficient but not necessarily effective.  Efficiency is doing things right while effectiveness is doing the right things.  In other words, business strives to use inputs as efficiently as possible to create a product or service where the value added is greater than the combination of inputs used.  If it does this and has a product or service that is wanted or needed by customers, it will make a profit and stay in business.

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When it comes to “effectiveness” or doing the “right” things, we have a concept here with highly subjective connotations.  “Right” for a business might be doing what they think is best for their customers or their bottom line.  However, doing what is best for a customer, might not meet the needs of other stakeholders.  For instance, customers may desire cigarettes but the negative impact to society as reflected in externalities can be very “un-right” to the rest of the population.  An externality is any difference between the private cost of an action or decision to a business or agency and the social cost.  In simple terms, a negative externality is anything that causes an indirect cost to society.  In the case of cigarettes, this cost is reflected in a number of ways including lost wages, medical costs and insurance costs.

maxresdefaultBy the way, when we think of government organizations it is usually as being much less capable in the efficiency area and much more focused on effectiveness or doing the right things for society.  I suppose that is one of the reasons why it is so easy to ridicule government.  Senator Proxmire was famous for his “Golden Fleece Awards “in which he belittled government agencies for their waste and lack of efficiency.  I have worked or consulted in many government agencies and I have to admit that “efficiency” was often sorely lacking.

Some critics point out that there are negative repercussions from too much emphasis on efficiency.  (HBR, January-February 2019 Issue: Rethinking Efficiency) They argue that organizations need to balance efficiency with resiliency.  One critic noted the problems with Deming’s emphasis on efficiency could lead to sub-optimization of the organization.  It is clear that this critic never read much of Dr. Deming who always emphasized that an organization needed to be looked at as a whole and not piecemeal.  Over emphasis on any one part of an organization could result in a decline in another part.

“Management of a system requires knowledge of the interrelationships between all of the components within the system and of everybody that works in it.” — Dr. W. E. Deming, “The New Economics”

Now you might be agreeing with me that business is not always effective.  However, you may still want to know why (or prove my claim) I say that business efficiency is a myth?  What do I base this assertion on?  I am going to provide three reasons for my claim and explain each of them.

  1. Most corporations do not understand or pursue continuous improvement

For a business to be truly efficient it must focus on the continuous improvement of all operations including people, materials, methods, equipment and information.  The cost of all inputs continually rises and when costs go up and other factors of production stay the same then efficiency declines.  The core of the Deming Philosophy was “Continuous Improvement.”

“Improve constantly and forever the system of production and service, to improve quality and productivity, and thus constantly decrease costs.”  — W. Edwards Deming, “Out of the Crisis”

Many of my clients understood this basic message of the need for continuous improvement, but as I was told by one Japanese management consultant, “You Americans are short-term thinkers.  You worry about the quarterly dividend, the daily stock price and your quarterly financial reports.  In Japan, we do not think quarterly, we think centuries.”  Thus, it was easy for US companies to embrace this message in the late eighties and early nineties when it seemed that everywhere you looked, they were losing market share to the Japanese.  The “Japanese Miracle” was eroding the economic competitive of US business and companies in the US flocked to Dr. Deming to tell them how to emulate the Japanese.

“The pay and privilege of the captains of industry are now so closely linked to the quarterly dividend that they may find it personally unrewarding to do what is right for the company.”  ― W. Edwards Deming, “Out of the Crisis”

The Japanese had assimilated the continuous improvement message of Dr. Deming since it was not really that foreign to their basic worldview.  So what if it took a few years or even decades, the Japanese could be patient.  Unfortunately, American management did not have the same patience.  Quality went gung-ho throughout the US in the nineties.  American corporations bragged about reaching or nearly reaching parity with the Japanese on many measures of the exalted Six Sigma standard of quality.  But Americans have always adored technology and the quick fix over labor inputs and long-term improvements.  The steam engine, the assembly line, the computer and robotically automated processes were all technological advances that have helped the United States become the major economic power in the world.  There is no doubting the positive advances that technology has made in terms of productivity and efficiency in the US.

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The trouble with only relying on technological advances for the next leap forward is similar to a ball team that only relies on home runs rather than base hits.  The base hits may not be as grand as hitting a home run, but they are the key to winning the game.  When computers, automated processes, robots and the Internet started to really proliferate in the US business world, you could start to see the fascination with continuous improvement wane in the eyes of many managers.

In its 2018 Human Capital Trends report, Deloitte found that 47% of business and HR leaders were concerned that modern collaboration tools weren’t actually helping businesses achieve their goals. Between chat windows, project management tools, meeting alerts, and emails, workers find themselves in a constant state of reactive busyness—rather than proactively focusing on meaningful work.” — The Productivity Myth by Ben Taylor, March 19, 2019

O, they still have their quality departments and their six-sigma training but too many companies have gone back to the old standard of “Its good enough” or “Well, we are meeting expectations.”  The drive for continuous improvement has slowly but inexorably dissipated since the early nineties.   US Corporations have once again gone back to the idea of looking for the home run.  Too many hope to find this home run in mergers and acquisitions with new companies that display the dynamism lacking in their older established corporations.

“Since 2000, more than 790,000 transactions have been announced worldwide with a known value of over 57 trillion USD.  In 2018, the number of deals decreased by 8% to about 49’000 transactions, while their value has increased by 4% to 3.8 trillion USD.”  — Institute of Mergers and Acquisitions.

You may well ask then, “How successful are these mergers and acquisitions in terms of adding value for the corporation or even more so for the customers?”  One study done by the Harvard Business School in 2015 found that between seventy to ninety percent of all M&A’s failed.  In my opinion, too many companies want to grow quickly hoping either for an increased economy of scale or to obtain the creativity that has been weaned out of their now bloated bureaucracy.  Too many US companies have abandoned the idea of continuous improvement as too time consuming or too slow.  Hoping to hit more home runs, they would rather focus on a spectacular breakthrough rather than on a slow incremental improvement strategy.  It is strange and sad, that US companies feel it is an either-or trade off.  Either we work on continuous improvement or we work on hitting home runs.  The best strategy is to focus on both.  Few games are ever won by simply using a single strategy.

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2. Goals of short-term profits often lead to long-term losses

For the sake of so-called efficiency, employees are laid-off, training budgets are cut, salaries are frozen, pensions are renegotiated, employee perks are downsized, key processes are outsourced, and supplies are purchased on the basis of low bidder.  My sister always says, “Buy cheap and weep.”  Too much of American industry assumes that cutting costs in the short-term will lead to long-term profits.  Nothing could be further from the truth or more short-sighted in thinking.

Minimizing costs in one place can often lead to maximizing costs in another. Only management is responsible, and I mean top management, for looking at the company as a whole, to minimize total cost and not the cost here or there or there… must get departments to work together. That is difficult in the face of the annual rating… because they get rated on their own performance. — Dr. W. E. Deming

One of Dr. Deming’s 14 Points called for eliminating performance measures for employees and MBOs for management.  I have seen little evidence since Dr. Deming died that companies have made much effort in either area.  Admittedly, you can go on line and find dozens of companies that claim to have streamlined or improved their performance management/appraisal systems but they are still useless since they measure the wrong thing.  Dr. Deming taught that 90 percent or more of the problems in a system or variation in any process are caused by the system and not by the individuals.  Managers work on the system and are thus responsible for making changes and taking out barriers to efficiency that prohibit work from being more productive.  Unless these changes to the system are made, any attempt at measuring or encouraging worker performance or goal setting are ludicrous.  Goals should be set for the system based on realistic measures of its capability but not on individual employees.

 “People with targets and jobs dependent upon meeting them will probably meet the targets – even if they have to destroy the enterprise to do it.”  — W. Edwards Deming

3. Inefficient business practices are epidemic in most organizations

When I started consulting in 1986, it was not unusual to find corporations with 10 or more levels of management.  The chain of command was epidemic in most US companies.  The old idea of “span of control” was imbued in the management practices that guided most businesses.  This large bureaucracy of span of control and chain of command rivaled the inefficiency found in most government organizations.  I could go into dozens of other examples of inefficient business practices, but one will suffice.

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In 1998, I was hired by the Metropolitan Council in Minnesota as a Principal Strategic Planner.  The Metropolitan Council was a regional government agency and planning organization in Minnesota serving the Twin Cities seven-county metropolitan area.  This area accounted for over 55 percent of the state’s population.  My job was to help streamline processes at the Metropolitan Council Division of Environmental Services (MCES) and to help the division improve its delivery of key services.  The MCES was responsible for the management of eight wastewater treatment plants in the seven-county metropolitan area.

Over the years, various teams that I established undertook many processes and successfully improved them.  Always looking for new ideas and areas to improve, I struck upon the idea of doing more on-line meetings and also allowing more employees to work from home.  Both of these ideas were fully supported by existing technology in 2000, but I made little headway in establishing these ideas.  These two ideas ran counter to traditional management philosophies of command and control.  We had entered the 21st Century, but our work processes were still dictated by 20th Century ideas and beliefs.

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When I left the Met Council in 2001, I joined the American Express Technology Division (AET) of American Express Corporation.  I literally jumped out of the frying pan and into the fire.  I had wrongly assumed that they would be more progressive than the Met Council and much to my dismay they were even less progressive.  It was difficult to get my manager to allow either myself or co-workers to work from home since “How would I know what you are doing” was a prevalent theme.  I gave notice only six months after joining American Express.

So now we are in the middle of a world-wide crisis caused by a virus.  The internet has allowed millions of workers to “work from home.”  Many of these Gig workers had been allowed some latitude in working from home but for many of the new Internet workers it was a new and pleasant experience.  However, it took a Pandemic catastrophe to free up the thinking of too many managers in terms of “How will I know what they are doing.”  Such a thought seems ludicrous in the extreme to anyone with a half grain of common sense.

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Unfortunately, many work processes in organizations are still mired in 20th and even 19th century beliefs of how work should be done.  These inefficient and archaic ideas stop many corporations from being nearly as efficient and productive as they could be.  The bottom line is that the vaunted supremacy of private for-profit corporations over government entities is vastly exaggerated and overrated.

I want to end this long blog with a stern reminder.  Few companies have demonstrated any ability to take on the “effectiveness” dimension of government agencies with better results than the government has shown.  Private for-profit charter schools and colleges have been disasters.  Private run prisons are not fairing much better.  They have continued to show a propensity for a lack of cost-effectiveness, security and safety concerns, poor health conditions, and the potential for corruption (see “The Problem with Private Prisons”).  In terms of the privatization of wastewater and water treatment plants, one study of household water expenditures in cities under private and public management in the U.S., came to the following conclusion, “Whether water systems are owned by private firms or governments may, on average, simply not matter much.” — Wikipedia

It hardly seems likely that many people in the US would like to see fire departments, police departments, the military and many regulatory agencies turned into for-profit entities regardless of how efficient they may claim to be.

 

9 Comments (+add yours?)

  1. Jane Fritz
    May 08, 2020 @ 19:36:41

    I get sad (and mad) reading these well-done posts. It should be possible to have capitalism with enlightened leadership and empowered employees, but instead too much of it is about greed, profit, and management living a bubble at the expense of employees and customers, and in the end their bottom line as well. It just doesn’t have to be that way. Grrr.

    Like

    Reply

    • Dr. John Persico Jr.
      May 09, 2020 @ 10:17:49

      Yes, I agee Jane. You have become my most stalwart commentator. I always look forward to your comments. Are you on Facebook? It does seem like life would be a great deal easier for us if there was less greed and avarice. I know it has always been there but I think the magnitude is much greater today than ever.

      Liked by 1 person

      Reply

      • Jane Fritz
        May 09, 2020 @ 16:49:10

        I think it’s that there’s no filter on the greed, avarice, racism, or sexism. No barriers. The leader of the most powerful country in the world, that used to be considered “the leader of the free world”, has removed the need for any pretence. I guess the corporate greed was there, with some exceptions of enlightened leadership, but there was a veil of corporate responsibility. Bye bye, veil. So sad. It could be different. Yes, I’m on Facebook. My profile pic is an avatar with glasses and shortish hair. See if you can find me! 😏

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        Reply

    • Dr. John Persico Jr.
      May 09, 2020 @ 19:00:37

      I think you have a page with the world and people circling it? But how do I send you a link to friend? We are not connected?

      Like

      Reply

    • Dr. John Persico Jr.
      May 09, 2020 @ 22:09:52

      Wow, that is really strange. I don’t know why I would have only a follow me button. I will have to check my settings. I do not see a friend me button on your site. I found a message spot but when I tried to send one it said I was not friends we you. I will try to research this tomorrow.

      Liked by 1 person

      Reply

  2. Vic Nurcombe
    May 08, 2020 @ 22:47:56

    revelatory stuff, some of which confirms my prejudices!!

    Like

    Reply

    • Dr. John Persico Jr.
      May 09, 2020 @ 10:14:59

      Hi Vic, I guess my prejudices are pretty clear. I always wonder and wonder and then wonder some more. Life seems so clear sometimes and I wonder if I am really the blind one.

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