Historic Overview

 

To understand where things come from is crucial in order to appreciate and realize their potential and avoid potential pitfalls. This we can see in countless organizations where new ideas have been implemented only to end in problems and utter failure.  I believe that in order to go in the right direction, it is vital to know where you come from.

Below, some major management milestones along with the most prominent proponents are presented. The timeline is only approximate and so is the following discussion. The point is simply to discuss the rapid development of methods and approaches in the 1980s and 1990s and try to identify some connections that can be useful in understanding why the same method can be successful in one company but a failure in another.  There are more than 9,000 theories on leadership and management so a complete review and discussion is beyond my scope, tpo put it mildly…

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But if we start from the beginning, it is important to remember that when Drucker presented Management By Objectives (MBO) – a system that was originally conceived at DuPont and General Motors in the early twentieth century under the name “MBO and self-control” –  managers were used to tell people what to do in detail. Drucker, however, turned it around and said that if people were told what was expected (an objective) they would themselves find out how to achieve the goal. Hence, MBO was quite a revolutionary idea in that sense.

Deming and others, on the other hand, was more concerned with how things were done and how to ensure total customer satisfaction (quality) and did not approve of MBO in the extreme case, i.e. that anything works as long as you reach the goal. But for Drucker MBO was only the first step on the path towards better management practices, something most practitioners forgot or were simply unaware of.

As time went by, however, it became increasingly clear that Deming indeed was right – how things were done did matter for both costs and quality – Japanese industry was the rising proof of that – and when Deming published his book Out of the Crisis in the early 1980s US industry finally listened.

But by the early 1980s there were more problems on the horizon for managers. The increasing competition as the world economy stagnated and the increasing automation-, sales and marketing-, product development and overhead costs in general lead to the development of Strategic Management  and Activity-Based Costing (ABC). The notion of the value chain as discussed by Porter further emphasized the need for cost management approaches that took the process view into account and this opened the way for ABC further.

The purpose of Strategic Management is to aid organizations in identifying, developing and defending their Sustainable Competitive Advantage (SCA). The work of Porter is today common curriculum in most management schools. So is ABC, but for some strange reason it has not caught on in organizations as the logic of ABC implies. One important reason is that although the logic of ABC is clear and convincing, the quality of the implementations can vary greatly because the art of ABC is the art of simplicity versus reliability. Also, many practitioners do not link ABC to Total Quality Management (TQM) and MBO – links that are crucial in order to realize the highest potential of ABC, TQM and MBO – because they simply view ABC mostly as a more clever way to assign costs;

ABC needs TQM to avoid the business as usual syndrome – to ensure that continuous improvement takes place. ABC is after all mostly an attention directing tool and not a miracle cure.
ABC needs MBO to ensure that the management process works, because even the results from a world class system are useless unless they are managed properly.
TQM needs ABC to establish the vital link between quality and costs, because as Vice-Chairman of Chrysler Robert Lutz said “too much quality can ruin you”.
MBO needs ABC to ensure that the management process can be guided by timely and relevant information and not by too aggregated, too late and too distorted information that characterizes most management systems.

But as Hegel pointed out – any system will eventually undermine itself. Hence, once in a while it is necessary to realign processes and refocus the organization towards its purpose. For this we can use Business Process Reengineering (BPR) which is a complementary aspect to TQM, because TQM efforts will sooner or later need an innovative push forward that BPR can provide concerning the business processes. But how to perform the BPR is a topic of much discussion probably since it is essentially an innovative and creative approach often powered by information technology, but what is sure is that ABC can be useful in the early stages of BPR to identify areas of improvement and critical success factors.

As ABC developed it became clear that ABC was much more than a new cost accounting system because although it is important to assign costs correctly, it is equally important to identify the causes of costs – the critical success factors. Thus, Activity-Based Cost Management (ABCM) was born, i.e., how to improve the organization based on ABC results. But soon it because clear that many of the causes of costs were non-financial and hence non-cost metrics were introduced, such as cycle time, quality and so forth. The new approach was termed Activity-Based Management (ABM) and it integrates ABC and ABCM with non-cost metrics. One of the last developments in this area is the new approach of integrated Activity-Based Cost and Environmental Management.

But these metrics (both financial and non-financial) are not of equal importance. In fact, Kaplan and Norton have shown that organizations can be managed well and kept focused on their strategies with a small set of metrics as long as they are chosen wisely. Hence, the notion of a Balanced Scorecard was born. These metrics must, however, measure performance and not be subject to counting. The difference is that measures have their origin in a strategy and its goals and actually measure what they are supposed to measure while counting is reported numbers that are either irrelevant for the success or too aggregated and distorted to be relevant.

Since most organizations are plagued by massive amounts of information – mostly irrelevant – it is clear that although the Balanced Scorecard is implemented in numerous organizations, only a fraction of the organizations will actually improve their SCA. The reason is that the method is implemented in a ‘knowledge void’, that is, the organization has little understanding of the underlying assumptions that the method relies upon. When these assumptions are violated, the method will ultimately fail.

Thus, as written in the Maitri Upanishad VI 34.3;

One becomes like that which is in one’s mind – this is the everlasting secret.