Tom Johhson in SOL Reflections

May 14, 2006

Confronting the Tyranny of Management by Numbers: How Business Can Deliver the Results We Care About Most
by H. Thomas Johnson

But, increasingly after World War II (coinciding with the growing influence of business schools and management consultancies), businesspeople came to discuss their organizations in terms of abstract quantities, not concrete human affairs. They spoke, for example, of providing for customer needs in terms of “revenue” and employing human talents in terms of “cost.” Profit, the quantitative difference between revenue and cost, was increasingly viewed as the primary goal of business, especially as more widespread share ownership steadily separated the ownership of business from the activities of running business operations. By the 1970s, maximization of shareholder wealth became widely accepted as the one and only goal of business, particularly in the large, publicly traded corporations that control the commanding heights of the economic system.

This rapid and widespread reconception of economic activity – defined exclusively in terms of quantitative abstractions – is a classic example of what philosopher Alfred North Whitehead called “the fallacy of misplaced concreteness.”1 The virtual reality of quantitative abstractions such as revenue, cost, profit, spending, income, investment, and shareholder wealth became “more real” than the lived reality of relationships, human value, and the concrete activities that provide for human livelihoods. Today, this confusion has gone so far that people speak of the “hard stuff” (the numbers) versus the “soft stuff” (human relationships and value), reifying the “lesser” reality of relationships versus numbers even though no one has ever actually seen or touched “a profit” or “a revenue.”

The consequences for managerial work of the growing abstraction of business are profound. Senior managers of large corporations now are viewed exclusively as agents of the shareholders. Their only task is to meet, at all cost, the financial targets for growth driven by the market. The financial spreadsheet has become the focal point of top management’s attention – so much so that CEOs now view the organization almost entirely through the lens of financial (and other) quantities, nearly oblivious to the concrete operations from which the financial results emerge. Indeed, “operations” in most large businesses today has come to mean the electronic coordination and integration of myriad financial and supply-chain activities around the world, including design, order fulfillment, logistics, and production. These operations do not exist primarily to produce products or services, but to meet cost and revenue targets.

When businesses regard economic activity as if it involves only the manipulation of abstract quantitative variables, they miss what is really happening to the people, the communities, and the natural world that surround them. Although activities that involve consumption and production are necessarily constrained by Earth’s finite limits, abstract quantities, by definition, can grow without limit. By viewing economic activity increasingly and exclusively in terms of abstract quantitative variables, people have come to believe that consumption and production can grow without limit, and managers have succumbed to the illusion that physical limits to economic growth do not exist. 

All natural systems operate according to three broad principles:

  • everything that exists is related, ultimately, to everything else that exists
  • everything that exists is self-organizing
  • constant interaction among all self-organizing entities produces a continual unfolding of more diversity and complexity

Key Principles of MBM

How can managers begin to apply these principles to their own organizations? I believe that an enterprise will thrive to the extent that its managers view the business as:

  • a natural system that provides for human livelihoods by linking the creative talents of suppliers with the economic needs of customers;
  • part of a web of relationships that includes other businesses, the community to which the business belongs, and the biosystem that sustains the larger social and economic systems; a system in which financial results follow from nurturing the system of relationships, not from setting arbitrary targets; and
  • maintaining a balanced energy budget over the long run. That is, energy expended on resources, measured by financial costs, must be balanced by incoming energy from customers, measured by revenue. The goal is to assure viability, not necessarily to maximize profit, which is subject to the often-unrealistic expectations of the market.

In that regard, it is interesting to note a couple of things one does not see in a Toyota plant. One is the use of quantitative targets to drive operations. The only external signal that enters a Toyota plant’s system is customer vehicle orders. Those orders are, in a sense, all that “drives” operations. Information about how material will be released to the floor and how the work will be done (to transform material into finished product) comes only from the work itself, not from any source external to the work, such as a computer information system. The material is pulled through the system one cell at a time, like the blood and the lymph flowing through an animal’s body, and it flows everywhere at the same rate, like the beat of an animal’s pulse. No material requirements planning (MRP) system directs the flow of material in day-to-day operations, nor do any standard cost targets motivate the pace and volume of that work.

In effect, a Toyota plant admits no entry to either external production controls or external financial and cost accounting controls.

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