Ferrari + hoshin kanri = lean enterprise

As I watch Toyota's leadership go through its latest bout of hansei (deep reflection), I am struck again by how conservative Toyota is. Compare Toyota's apology for it floormats to how Ford swept the Pinto's exploding gas tanks under the carpet!

Is this profoundly conservative attitude rooted in Japanese culture? Well, maybe. Or maybe it's rooted in modern portfolio theory.

All of us have retirement accounts and most of them are managed by brokers who have been trained to do one of two things, depending upon our appetite for risk. 1. Our brokers can maximize the return on our portfolio for a given level of risk preference; or 2. They can minimize the risk that we will fail to achieve a given rate of return.

When we are young masters of the universe, we tend to prefer risky investments that maximize our return, because if we experience losses we still have time to start over. But our appetite for risk diminishes as we get older and acquire more obligations to family and business partners. At some point we may pile up enough money and then we ask our brokers to minimize the risk for a given rate of return.

So what does this have to do with running a business? We can easily view a business organization like Toyota as a portfolio of "real" (as opposed to financial) "investments" in people, processes, and relationships. Just like stock broker, what a business does with those investments is governed by the risk/return tradeoff discovered by Markowitz in the 1950s.

At the same time, however, this is inconsistent with the microeconomic theory of the firm, which states that businesses maximize profits. What gives?

I'm going with Markowitz.

Toyota, it seems to me, behaves like a good family man--maybe even like a grandfather. Toyota is not a profit maximizer! Instead, Toyota is a risk minimizer. Indeed, properly understood, the 7 Deadly Wastes are sources of risk, and that is why Toyota strives to eliminate them. And the method of hoshin kanri? It is essentially a method of portfolio selection and management.

That explains Toyota's dull styling. Or does it? Actually, even Ferrari can be explained by the same theoretical idea. Ferrari is the young man who stands in contrast to Toyota's grandpa. Both are governed by the risk/return tradeoff.

No one would ever call Ferrari lean*, but the analogy raise an interesting possibility. Ferrari could well employ lean techniques--in particular the technique of hoshin kanri--to tweak its portfolio of real investments. While Toyota uses hoshin to minimize the risk of hitting a target profit--and thus builds dull but reliable cars, Ferrari could take on more risk and maximize its return by building sexier cars. It makes sense, surely. If Ferrari did not take risks, we would not love their cars, nor would we be willing to pay so much for them! The question is: Precisely how much more risk can Ferarri take on?

Modern portfolio theory tackles just this sort of question. And the portfolio theory of lean enterprise suggests that there is an answer to Ferrari's question. The benefit to Ferrari of employing hoshin kanri would be to calibrate its risk/return tradeoff scientifically to please its customers as well as its bankers.

And, dear reader, if Ferrari did this, we might just have to call Ferrari a lean enterprise, despite having much more "waste" in its processes, relative to Toyota. Why? Because Ferrari would have optimized its portfolio of investments in people and processes to provide the best value for its very particular clientele. With higher risk, there will tend to be more waste. But there will also be more daring curves, more moving parts, more sex appeal. After all, Ferrari's customers are not shopping for a ride to the grocery store.

* Deming Prize-winner Ryuji Fukuda once visited Ferrari and offered to help them reduce rework, lead time, and cost. Ferrari's response was: Why? Fukuda opined that, "If there is a more expensive way to do something, Ferarri will find it."