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TODAY’S BUSINESS WORLD
This is the age of information excess. Anybody can obtain information from the internet. However, gaining access to the real information is difficult for anyone.
Overcapacity of the Production System
Today’s business world is characterized by overcapacity of the production system as a result of rapid development in the latest technologies and tools like AI, smart factory, industry 4, and digital technology. Yet CEOs seem to pursue the same old legacy of past centuries, which is the speed and the volume of production, which ends up in colossal waste.
Meeting Shareholders’ Delight Versus Customers’ Delight
Another past legacy in today’s CEOs’ behaviors is the inclination to pursue shareholder delight and give only slight attention to the other principal stakeholders of the company, the customers.
This book has been written primarily to wake up those CEOs and the board who can make or break the destiny of their companies.
Ever since I wrote my first book, Kaizen, and the second book, Gemba Kaizen, and promoted the kaizen concept and lean strategy, a gnawing question has remained: “Why have so many companies failed to embrace the lean strategy in spite of its well-proven advantages?”
The lean strategy is known as the Toyota Production System (TPS) in Japan and as lean strategy elsewhere. In my interpretation, the three words TPS, Toyota, and lean are one and the same. TPS represents the philosophy and strategy of Toyota Motor Corporation, and lean is the practical application of TPS in production gemba.
In my search for the reasons why so many companies have failed to employ the lean strategy, I have uncovered the root causes of the problem: first, CEOs’ lack of understanding that the operational flow is the foundation of both the TPS and the lean strategy, which aims at improving the operational strategy of the company to enhance customer satisfaction and improve the company’s financial status.
Second, universal criteria to assess and audit the operational status of a company have not existed. Currently, the financial reporting system is the only publicly recognized means to assess and audit every company’s business performance.
As the saying goes, “Where there are no criteria, no judgment can be made.” For instance, we can compare the financial performance of companies A and B based on their financial reports. However, how can we compare the operational status of companies A and B without any common frame of reference?
In my search for the answers, I have come to realize that the financial reporting system has been the only available means to assess and audit today’s corporate performance up to now. This system is based on the century-long practice of employing financial data as the only means to review corporate performance. Over time, this system has been institutionalized into legal, public, and administrative frameworks, and it is now audited for justification and authenticity by CPAs.
I recognized that under the current system, nonfinancial information that cannot be reduced to numbers can find no place in the financial report. As a result, no public means have been developed to assess and audit companies’ total corporate performance up to this day.
Institutions Providing Awards and Certifications
Aside from the financial reporting system, the following institutions have been known to provide awards and certifications to companies that have achieved a high level of operational status based on the criteria developed by each institution:
1. Deming Prize (Union of Japanese Scientists and Engineers/JUSE)
2. TPM Prize (Japan Institute of Plant Maintenance)
3. Shingo Prize for Operational Excellence (Utah State University)
4. ISO Certifications (International Organization for Standardization)
5. EFQM Excellence Model and Prize (European Foundation for Quality Management)
6. Malcolm Baldrige National Quality Award (National Institute of Standards and Technology)
The financial reporting system has been practiced as the only universal means to be applied in all companies as long as it is prepared by the certified accountants or accounting companies, and it has been the reason why the financial report has become the only universal means to review and audit every company in the world.
On the other hand, those institutions mentioned above providing awards and certifications, on their own, have been unable to extend their systems in the same manner as the financial reporting system has been developed.
These institutions have one common feature among them: none of them assess the inner operational status in the company as the criteria for granting their awards and certifications since their goal is not to assess the lean operational status of the company. Therefore, it is likely that recipients of their awards and certifications have not yet initiated their journey to adopt lean strategy based on the flow concept.
In fact, I have visited many shop floors of these recipient companies and observed their operations from the standpoint of the lean flow and found that many of them are far from practicing the lean flow operations throughout their entire processes.
The Achilles’ Heel of Modern Capitalism
Financial reporting is like a shadow of daytime operations. Real operations are carried out in the daytime. “Bean counting” starts at night, calculating how much came in, how much went out, and how much remains. Daytime work is the process, and nighttime counting is the result. Daytime work is light, and nighttime counting is shadow. Should those who do the counting take the credit when good numbers are achieved? We need to review both daytime operations and nighttime counting to make a fair balance between the two.
Thinking up to this point, I came to realize that no criteria have ever been developed to assess and audit the internal operational status of every company. Even though the lean approach may be superior to the traditional approach, nobody would become serious about embracing such a strategy as long as there are no neutral criteria to measure improved status of the company’s internal operations.
How can we arrive at the top management decisions in the financial report if the criteria cannot be reduced to numbers?
Shareholder Delight Versus Customer Satisfaction
Under the Western corporate management systems, CEOs’ role is to provide “shareholder delight” and not “customer satisfaction.”
Why? Because the term customer does not appear in the financial report in the first place and because it is impossible to show customer satisfaction in numbers. As a result, today’s corporate governance has been dwarfed.
The aim of the lean strategy is to improve the internal operational systems of the company to assure long-term customer satisfaction as well as long-term sustainability of the company. Putting it differently, there are two ways to evaluate a company’s performance: financial performance and internal operational performance.
Under the current practices of presenting financial reports on a monthly, quarterly, and annual basis, CEOs cannot escape from the temptations of short-termism and favor short-term results even at the risk of hurting the long-term sustainability of the company.
On the other hand, the lean introduction is a strategy to improve the inner operational systems of the company to satisfy customers on a long-term basis. The lean strategy is a long-range project taking many years and decades to build and sustain an ever more robust operational framework, while the current financial reporting system aims at maximizing shareholder delight on a short-term basis.
At the present moment, the financial reporting system is the only means to report CEOs’ financial performance to the shareholders. Therefore, as long as the current financial reporting system is the only means to disclose the company’s financial status to shareholders, CEOs will be unable to escape from the temptations of short-termism.
Modern Corporate Governance
Today’s financial reporting system is unfit to hold corporate CEOs to account. Financial reporting boils down all corporate activities into numbers and excludes nonfinancial activities that cannot be reduced to numbers. It drives the CEO and the board to short-termism.
For a long time I have been searching for global criteria to assess and audit both financial and operational conditions of companies that can produce a balanced picture of them. With the current financial reporting system, no piece of information, no matter how important, timely, and urgent it may be, can reach the ears of the CEO and the board as long as it cannot be broken down into numbers.
Then, one day, it suddenly dawned on me that the lean strategy I have pursued for years aims at improving the operational framework of the company and does not engage in numbers games. Since a majority of today’s companies are engaged in traditional operations, one of the most pressing strategies for them must be to adopt the lean strategy to make drastic improvements in their operations to produce products and services that satisfy their customers.
The problem is that, while the current financial reporting system is the only instrument to assess and audit the CEOs’ performance, CEOs can stay safe from any accusations for their negligence. The obvious conclusion is to develop new criteria to assess and audit the operational status of every company aside from the financial report.
This book introduces such criteria, based on the principles of strategic kaizen.