Strategy Deployment: Linking Lean to Business Strategy
The first in a series of six articles on Lean Tools examines the relationship between Strategy Deployment and Lean Manufacturing
By George Koenigsaecker
President - Lean Investments, L.L.C.
Strategy Deployment is a process that ties senior leadership into enterprise-wide business-improvement practices. Strategy Deployment originated with “Hoshin Kanri” which was a core part of the leadership-control practices of TQM (Total Quality Management). The name Hoshin Kanri is variously translated as Hoshin Planning/Policy Deployment/Management-by-Policy. At its core it is an annual planning process that develops enterprise-improvement plans, and then includes a monthly review process.
In the late 1980s, when I first learned about Hoshin Kanri, I thought it should be broadened from just planning and controlling the quality improvement process, to focusing on doing that for all dimensions of improvement—what Toyota refers to as their “True North” metrics.
Over the ensuing years, Hoshin Kanri has evolved further to become the most important linkage between improvement philosophies/practices and the enterprise business strategy.
A lean firm generates a different set of capital costs than a firm that is not lean.
There is a great deal of discussion of what to measure/how to measure (we all know our accounting systems are not very helpful—and even misleading—when it comes to cost management, for instance). Some of this effort has led to the balanced scorecard approach. During my career, I was often working in a corporate system that seemed to measure so many things that it tended to ensure you did not go backwards. But it also tended to make it difficult to go forwards. These complex measurement approaches consumed a tremendous amount of management time and focus (preparing for monthly operations reviews/conducting reviews, etc.), but resulted in a kind of measurement gridlock, where you were concerned that focusing on one measurement would lead to the deterioration of some other measurement. This consumed lots of time but resulted in little to no actual improvement.
Toyota has demonstrated an exceptional ability to differentiate between the forest and the trees, and the company’s approach to measurement is typical and innovative. Other than measures relating to totally new products or services, Toyota’s True North metrics cover all aspects of improvement—and impact all the key lines on income statements and balance sheets—while focusing on only four key metric areas. The four key areas are: Human Development, Quality, Cycle Time, and Cost/Productivity. Human Development (HD) is encompassed in the Toyota phrase “we build people, before we build cars.”
The foundation for success is the skill and motivation of the human resources of any organization. In a manufacturing operation, the HD measurements might include safety performance. For any organization on a lean path, HD measurements would include measuring the breadth and depth of week-long Jishukin improvement events (also called kaizen events). The Quality metric is driven by customer-based measures—customer quality issues and customer-loyalty measures. The Cycle-Time metric is built around how long it takes to provide enterprise-wide capability to customers—end-to-end cycle-time improvement. And the Cost metric is primarily focused on Productivity improvement. The assumption about cost is that the organization should first be focused on improving its own value-added cost (total cost less outside purchased material), over 90% of which is driven by how many people it takes to deliver value to customers.
Within the four True North metric areas, Toyota typically has a hierarchy—HD is first, Quality next, Delivery/Cycle Times after that, and Cost/Productivity, last. On any given decision, a manager knows that he will give up his cost performance to sustain HD, Quality, and Delivery performance. If he still is unable to meet his metric goals, he would sacrifice Cost and Delivery to sustain HD and Quality. On the other hand, Toyota would expect countermeasures to be taken so that, over a year’s time, all four metric areas would show double-digit improvement rates (typically 10–30% every year).
Now consider the income-statement impact of a lean transformation. The top line of the income statement—sales growth—is driven upward by improvement in quality and responsiveness (including new-product development times). Studies by George Stalk and Thomas Hout (Competing Against Time, published by the Free Press) have shown that for most businesses, if you can consistently reduce your customer lead time by ¾ (75%), you will grow at 2–4× your industry growth rate. This is a blind spot for most management teams. I assume that it’s due to the belief that they cannot fundamentally improve their responsiveness. But the net outcome is that management focuses on the inventory reductions that result from flow, while missing the really big impact that comes from growing at 2–4 times your normal growth rate.
During the 1990s, the HON Company (Muscatine, IA) grew its office furniture business at an average 15% per year rate—2–4 times the industry’s annual growth rates—almost entirely by shortening its lead times to 1/5 the industry norm. The PIMS database (Buzzell and Gale, The PIMS Principles, published by the Free Press) demonstrates that, regardless of market share levels, any firm that has sustained higher relative quality levels (quality compared to competition as reported by customers) has higher ROI performance.
For high-market-share firms, with quality performance in the top third of their market, ROI is 80% higher than that of firms in the lower third of quality performance. In lower-market-share firms the contrast is even more dramatic—the top third firms exhibit an ROI three times that of firms in the lower third of quality performance. Quality is a second area where management often really does not seem to understand the financial driver that they can build from a consistent focus on product and service quality (speaking of blind spots, what is your assessment of airline service quality performance?)
Moving down the income statement, you see gains in cost of goods sold due to productivity gains. You also see gains in S, G, and A (selling, general, and administrative) costs due to productivity gains. Another management blind spot is the fact that 90% of S, G, and A costs are driven by the number of people that it takes to deliver the corporate value streams—and that enterprise lean transformations also drive waste reduction in the S, G and A levels.
As you move further down the income statement, you get to costs to finance a business. A lean firm generates a different set of capital costs than a firm that has not undergone a lean transformation. Lean typically reduces inventory levels dramatically. This reduction frees up cash to pay down debt, which reduces the financing cost on the income statement. Also, lean typically gets more output from the fixed investment base—it frees up lots of floor space, and also gets more out of the company’s investment in equipment. Thus it allows rapid growth from improvements in quality and delivery performance to happen without the traditional level of incremental capital per dollar of new sales—again reducing financing costs.
What all this yields is the potential, through focus on the four True North metrics, to drive a major shift in the financial structure and performance of a business. Toyota is a good example—it has over $30 billion in cash, it is growing market share every year, and its market capitalization (total value of the firm based on stock price, etc.) is greater than that of the next seven largest car companies combined!
The best way to start a lean transformation journey is to conduct an Enterprise Value Stream Assessment (EVSA) with senior leadership. This is the 50,000-foot-level of value stream analysis. It looks at the total enterprise from a customer view, and begins to focus on improvement opportunities. In the course of the analysis, the True North metrics are identified in the total enterprise value stream, and issues that involve human development, quality performance, lead times/response times, and costs are identified.
At this level, the linkage between the lean transformation effort and corporate strategy begins to form. A rule of thumb with lean transformation is that the first complete improvement pass of a value stream will reduce total lead times by about one-half. And future complete improvement passes through the value stream will reduce the remaining lead time by half. Thus two thoroughly done, complete lean-improvement efforts will hit the 75% reduction that typically builds competitive advantage. At this point, the math of what the lean transformation can do for increased sales, reduced obsolescence, and reduced facility footprint will begin to show the strategic impact that such improvement will have.
Another rule of experience with the True North metrics is that you get the most gains by improving them simultaneously. And alternatively, if you do not include one or more of them, this omission will come back to cause you significant issues in a year or two. So a lean transformation should include improvement targets for HD (say a 20% reduction in accident rates), Quality (say a 20% reduction in customer complaint rates), Delivery (if this is the breakthrough target for the firm, an annual 50% reduction target), and Cost/Productivity (say a 10% enterprise productivity gain). This is the point where Strategy Deployment comes into play.
The Strategy Deployment process is led by senior leadership and has two basic components. The first is an annual planning process. The annual planning process would outline what value streams would need to be improved during the next 12 months, what pace of improvement effort would be required to get the work done, and what human-resources support would be appropriate to achieve this objective. This is what the originators called a “catch ball” process, where the goals are “deployed down” from corporate strategy, and the actual work plans to achieve them are developed at the level of the value-adding work. Then there is some adjusting to ensure that the plan is achievable with the resources committed. The annual plan would also include evaluation of the lean maturity of the organization, and evaluation of the tasks that must be completed to take this stage of maturation to the next level as part of the longer-term transformation process.
The second component is a monthly Strategy Deployment meeting. In most firms, we spend a lot of time at monthly review meetings that, when you step away from them, are really meetings focused mostly on ensuring that we do not lose ground, and that we maintain business performance at current levels. The Strategy Deployment meeting is intended to have its focus on improvement. Meeting time is spent reviewing progress against the overall improvement plans.
Did we achieve the monthly increment of improvement on each of the True North metrics, if not, what is our corrective action? If we did achieve our goal, what did we learn that we can share with the rest of the organization to accelerate the learning curve on lean improvement? Then the second task is to look at the current month. Based upon the improvement efforts on-going this month, do we expect to achieve each of our improvement targets? If not, what must we do to do so? Although this does not sound like breakthrough stuff—it actually is. The meeting brings all leadership together to focus on improvement, pulling time away from “maintenance” and putting that leadership time into “improvement” and “learning” that will build the firm’s future.
There is a tremendous discipline that comes from setting improvement targets on the four True North metrics, and striving to meet them every month. The knowledge that improvement is expected pushes everyone to seek ways to increase focus on improvement tasks, increase use of new lean tools to get to the next level of performance, and share learning about what is working and what is not. One of the most difficult aspects of a lean transformation for leadership is that, at any point in time, it is impossible to paint an accurate picture of what the organization will look like in a year with another year of lean learning and lean improvement under its belt. (After all, no one in the organization has been “there” before—you must create your own future state). One of the things that helps leadership achieve the future state is the push provided by the challenge of meeting the annual improvement goals.
If all of this sounds like a lot of work—it is! But it will also typically drive a firm to the top of its industry in a few years. The payback is well worth the work.
George Koenigsaecker is a principal investor in several lean enterprises, and is President of Lean Investments, LLC. Lean Investments LLC is a Private Equity organization with an emphasis on manufacturing. Koenigsaecker is a Board Member of the Shingo Prize, the international award for “lean enterprises,” and is a board member of The Association of Manufacturing Excellence, Ariens Outdoor Power Equipment, R W Baird Capital Partners Advisory Board, Simpler Consulting, Watlow Electric Corp., and Xaloy Inc.
From 1992 until 1999, he led the lean conversion of the HON Company, a $1.5-billion office-furniture manufacturer. During this period, his efforts resulted in a tripling of volume, and culminated in HON Industries being named by Industry Week magazine as one of the “World’s Best Managed Manufacturing Companies.”
Prior to joining HON, Koenigsaecker was with Danaher Corp., where he was President of the Jacobs Vehicle Equipment Co. (whose lean conversion is featured in the book Lean Thinking by Jim Womack and Dan Jones), and Group President of the Tool Group, the largest business unit of Danaher. In addition to leading the lean conversion of these operations, Koenigsaecker developed and implemented the “Danaher Business System,” a comprehensive lean-enterprise model.
In addition, Koenigsaecker has held senior management positions in Finance, Marketing, and Operations with Rockwell International and Deere & Co. He is a graduate of the Harvard Business School.
This article was first published in the March 2006 edition of Manufacturing Engineering magazine.