Manufacturing Excellence: Massive Mismanagement

April 29, 2009
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It is a given that U.S. corporations are struggling-be it manufacturing, finance or service organizations-with multiple diseases because of innumerable bacteria. The business bacteria strain keeps getting bigger and so do the business diseases.

We started with outsourcing manufacturing processes due to the problems that we did not want to solve, and this trend was followed by service, design, research and development, and new products.

Thinking about reasons for such a trend, diffusing businesses from developed to developing economies, I question management education. If the struggles were exceptions or pockets of failures, I would say the problem could be the local strategy and its execution. However, today businesses have failed in all sectors, and catastrophically. There must be some common causes.

Studies show that cost of goods is a less significant factor than the other costs associated with sales, general and administrative expenses in the financial success of a corporation. Our businesses have become top heavy.

Considering that we have bright executives, good people and great institutions, I wonder why we did not get advance signals of potential failures. If we did get advance signals, why did we not respond and take remedial actions? If we did take action, then why did we not verify the solutions worked? Were we pursuing the right strategy?

Conventionally, businesses start with an innovation, grow with merger and acquisition, operate with management systems, monitor with scorecards, ensure with audits and face challenges from the board of directors. It appears that the entire system-all pieces-failed.

I have been questioning the various tools used for running a business.

When we launch a business and external financing is sought from venture capitalists, the expected success rate is 10%. When we grow the business through mergers and acquisitions, the rate of success is 11%.

The management systems used for running operations drove acceptable performance rather than perfection. Acceptable performance is considered to be about 70% good.

Then, most companies used balanced scorecards that claim that strategies are deployed successfully only about 10% of the time.

Finally, nobody knows how the board of directors renders its duties in guiding businesses to success and value for shareholders. How do the directors measure their success rate besides short-term share value?

One can see we have been working with processes with success rates in the ballpark of 10%. What should we expect? The conventional strategic planning, balanced scorecards, merger and acquisitions, and operations management methods taught in business schools for decades have become visibly outdated in the Internet and knowledge age. How long will our business schools continue to teach the decade-old administrative methods that led to the current economic mess because of the total mismatch with business needs?

It certainly did not occur overnight. Some may argue that businesses did grow during the past several years, but one can see it was all mortgaged. When corporations focus on profit, it means pulling the future in; when corporations focus on growth, they are building the future. Lately, corporations have been pulling the future in the immediate fiscal quarter without really thinking about the future.

Our business schools need to teach how to build for the future and create jobs rather than banking on the future and cutting jobs. Business schools need to teach business engineering-not business administration-in the current knowledge age. Our managers need to learn how to build businesses for creating jobs and create opportunities for employees.

Someone said the purpose of a business is not to make money, instead the purpose of a business is to provide a product or service to meet customer needs, and if done well, businesses will make money.

I hope business schools learn, innovate and renew so they may serve their customers well. Otherwise, business schools also will be asking for a bailout. That would be a sad day.

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