I may get drummed out of the Quality business for disagreeing with Taiichi Ohno, but I can't let this pass. A few days ago, someone published a post on LinkedIn that quoted Ohno as follows:
“I will say this again: the only way to generate a profit is to improve business performance and profit through efforts to reduce cost. This is not done by making workers slave away […] or to generate a profit by pursuing low labor costs, but by using truly rational and scientific methods to eliminate waste and reduce cost.”
Then the OP* went on to talk about Lean.
I have nothing against Lean, and I'm no particular fan of waste. I also recognize that Taiichi Ohno was a very smart man, so I hope this quote was taken out of context. But saying that the only way to make a profit is to cut costs is false. It is foolishness. It is dangerous rubbish.
Here's the problem in three words: costs are finite. Therefore you can only reduce them so far; and soon after you have used all your "rational and scientific methods to eliminate waste and reduce cost," your competitors will do the same thing and you will lose your advantage. Maybe you can eke out a temporary edge doing the things Ohno says to avoid: "by making workers slave away ... [or] pursuing lower labor costs."** But your competitors can do that too. There's no way to win a race to the bottom.
The only guaranteed way to generate a profit is to create value. Offer your customers something they are willing to pay for. Make it different from what the other guy is offering. Make it better. Do something extra, or something new. Whether you are making a product or offering a service, make sure your work has high quality—objective, indisputable Quality—and then charge a fair price for the quality that you are offering.
This is the only side of the equation that is potentially unlimited.
Of course cost-reduction matters. I'm not denying that. And if Lean helps you make sense your operations, don't let me hold you back. You want to do the most with what you have, and that means working efficiently. Efficiency and systematic methods are good things, to be sure.
My only point is that they are limited. They can only get you so far. Failure to implement efficient methods can keep you from profitability; but efficiency by itself can never make you profitable.
Only value can do that. So create value.
__________
* Original Poster
** The temptation to do exactly this—and thereby to force inhuman conditions on your workers—is specifically why I used the word dangerous in calling this thesis "dangerous rubbish."
I take the quote as published and similarly take your views as such.
ReplyDeleteYou are acknowledging the aspects in quoted and your aspect is not denied in the quote.
I think both are complementary to each other profits are sustainable if both value and cost are balanced. Customers are sensible!👍
Taichung Ohno may not be totally wrong. He was commenting based on the premise that a company already has an existing product or service. Since it is the consumer that determines how much he is willing to pay (price) then the only way to make profit (margin) is to reduce the cost.
ReplyDeleteIf you assume that the product, its features, and its applications are all fixed, then yes, the next step to increasing profit is to decrease costs. And I certainly agree that it is good to eliminate waste wherever it is reasonable. My only point is that there are strict limits to how far you can reduce costs. But if you can add features, or open a new market (a new use or application) for an existing product, then the opportunities are more open-ended. And all of these are ways of creating additional value.
DeleteI thought this was pretty interesting and you are correct that eventually reducing cost will see diminishing returns, allowing for the competition to do the same until you've hit a stalemate. With that said, you're equally right that offering more value to the customer in combination with reducing cost is necessary to stay ahead of competitors and continue to make a profit. One thing that I think that gets overlooked is the concept of economies of scale. Eventually as you see diminished returns and have hit a stalemate, there may be technological breakthroughs, or major improvements in supply chain or logistics that allow for greater gains to be made, even when it was previously thought impossible to make any additional cost improvement. I think all of these things are necessary: we would be foolish to not use scientific techniques to try to reduce waste and cost in our processes, but I wholeheartedly agree that the focus is to create value for the consumer. The real challenge of that argument is that creating more value than the next guy may see just as many limits as a firm's efforts to reduce cost and increase efficiency.
ReplyDeleteThanks for the detailed feedback! I'm glad you found the post interesting. And it's hard to disagree with any of your detailed remarks: of course it's true that we need to work both ends of the equation.
DeleteAnother way to make money is through Mergers & Acquisitions. IF you have a crappy product, then purchase your competitors before they take a significant portion of your market.
DeleteIt's the Microsoft way...
https://en.wikipedia.org/wiki/List_of_mergers_and_acquisitions_by_Microsoft
Replying to "Anonymous" on January 16, 2023: I have to admit I totally didn't think about that when writing the post. (Oops?)
DeleteThe rationale behind the quote is not wrong, that would be the same as saying that Newtonian physics is wrong. However, there are areas of reality where it doesn't work. The rationale behind the quote sees customers as a homogeneous whole who thinks that price is the only variable customers use to make purchasing decisions. Michael Porter's old article, "What is Strategy?" published in HBR in 1996 criticizes this Japanese posture. The rational belongs to the 20th century in which increasing productivity focused on the denominator of the equation (assuming the output remains the same) and did not realize the tremendous potential of increasing the numerator. In "The Momentum Effect" by JC Larreche he mentions three types of value creation: value extraction (efficiency), value capture (market skills) and value creation (innovation, or design, or brand)
ReplyDeleteCarlos
Hi Carlos, I'm not sure I quite agree with the comparison to Newtonian physics, because my criticism of Ohno's point isn't just about context.
DeleteTo start with, of course I concede that there is often a lot of room to cut costs, and doing so can be important. That's clear.
But beyond that, the key to my criticism is based on simple arithmetic: costs are finite. Even if you reduce your costs to the theoretical minimum—to zero, or as close to zero as you can achieve—your competitors will do the same thing and you will end up where you were before. Optimizing in that direction has an endpoint beyond which you can go no farther. Only in the other direction (creating value) is the potential for optimization unlimited.
You may be absolutely right about the approach or mindset of Japanese companies in the previous century. I won't argue there. But the point I am trying to make is one which—in theory—they should have been able to see for themselves even then. Because it's just math.