An answer to a puzzle: why is that some businesses go down the Deming path, become data driven, achieve operational excellence, and die, and others acquire Process Power and win?
My instinct before reading was that operational excellence doesn’t matter when the other two parts of the business triad outweigh “supply.” When you either have no access to capital, or abundant access to capital, you can use that to solve your problems. When your market demand is huge, you don’t need operational excellence. When demand is unfavorable, operational excellence may not be enough to help. This frame seems consistent with your conclusions, though your answers are more precise and actionable!
This also sparks the question in me: which side of the triad is more important at different phases of the business? To Danaher, capital was clearly the most important when starting. Without it they wouldn’t have been able to begin acquiring companies. Whereas some other companies were started with huge demand. Supply seems like the least valuable aspect to companies that end up massive, but crucial for small to medium size businesses (a plumber who excels at plumbing can use his operational excellence to build a good plumbing business).
Thanks for the great article!
My two takeaways:
Deming companies that fail are failures of capital allocation. You can be the most efficient horse buggy manufacturer in the world in 1900 and you would still be a failed company if that is what you stuck to all the way to 1920. You need to change and become something else. Like danaher has done.
In certain intervals of profitability, return on capital employed and growth: If you improve operations as Danaher did/does it also has the implication that the improved company now can grow at a higher pace without requiring additional capital. The company starts throwing off cash while growing instead of requiring investment. This is massive for compounding.
Great thought provoking essay as always!
According to Goldratt the limits of lean are in that it focuses too much on local optima, improving performance of processes that have no impact on the overall global maximum.
He talks quite a bit about companies who improve their operations through TOC, actually ending up creating a decisive competitive edge and never capitalize on it.
When the constraint of a company is in the market and at the same time the company has a decisive competitive edge, the obvious interpretation of focus is to concentrate on capitalizing on the existing competitive edge, rather than being distracted with ongoing refinement in operations
Surprisingly, most companies that implemented TOC in operations did not move on to capitalize on the resulting competitive edge. In other words, they became totally unfocused, being satisfied with the results of improved operations and blind to the much bigger gains that were now readily available
I believe that the reason Danaher succeeded was because they slammed on the accelerator as soon as they built an edge through operations.
It’s a bit more complicated than that. Danaher was started with the goal of expanding rapidly and inorganically, using debt. The Rales brothers didn’t know about Junk bonds when they started; they didn’t even know it was possible to use Lean in this way.
It’s more accurate to say that this was an example of effectuation in practice.
Great article, and the conclusions make a lot of sense to me.
I do want to expand the notion of “operational excellence” just a bit because what we are primarily talking about here is the use of operational excellence to overcome limitations in capital. Here, lean can only do so much, so there is a sweet spot where it matters and everywhere else it is dominated by other factors.
Operational excellence, though, can also help to overcome limitations in Demand. @ergestx touched on this in his post when discussing Goldratt’s observations about capitalizing on the competitive edge that comes from TOC. The Process Power of the Toyota Production System isn’t just about Toyota being able to keep costs down, it also provided Toyota with a way to provide more options, faster, without having to tie up excessive resources in inventory to do so. This also meant that they could respond to changes in demand much more quickly than competitors.
If a buggy whip manufacturer in the 1910s was doing Lean effectively, but just focused on making buggy whips cheaper, that doesn’t work. But, if they instead are using their newly gained skills to more rapidly shift to manufacturing similar products where there was growing demand, they could make that work.
In conclusion, we have to look at all 3 legs of the triad to really get the full potential of Deming, Lean, TOC and other innovations that tend to be associated with operations.