Wednesday, April 22, 2009

The modern corporation is dead

General Motors reinvented the modern corporation in the 1920s. Today, GM is facing the end of business as usual, to put it mildly.

Many people think that Toyota’s famous just-in-time production system is to blame. And it is a fact that GM, Ford, and Chrysler never implemented just-in-time completely, except in a few of their factories. I should know. I was a member of Ford’s Lean Advisory Board, together with a bunch of Shingo Prize winners that included the venerable John Shook. We watched in horror as Ford, under CEO Jacques Nasser, swerved sharply from its commitment to its new Ford Production System (shaped in the image of Toyota) and turned to the false God of Six Sigma.

Frankly, even if the American automakers had implemented the Toyota Production System—or, for that matter, Six Sigma—in every one of their plants, they still would not have been able to beat Toyota, with or without all their extra healthcare costs. The reason is Toyota’s secret weapon: it’s management control system.

The history of management control is fascinating, and necessary to understand before one can make any sense at all of Detroit’s meltdown. The first such system we normally learn about is the Division of Labor, in which individual entrepreneurs controlled production by farming it out in pieces to relatively unskilled workers, who displaced more highly skilled and expensive craftsmen. The Division of Labor underpinned the so-called Factory System, which began in Great Britain in the 1700s and became a linchpin of America’s meteoric economic growth.

The Factory System persisted until the mid-1800s, when the challenges of building of the transcontinental railroads necessitated a new control system, one based upon the military command-and-control model of the Prussian General Staff. In 1844, the longest railroad line operated by individual entrepreneurs in the United States, was a mere 50 miles long. After the adoption of the Prussian line-and-staff model, railroads grew to 5,000 miles long. What made the difference was not a leap in railroad technology, but a leap in management control. Big Business could operate at a great distance because of the telegraph, of course, but mainly because of standardization enforced by a Chief Executive Officer and a staff of specialists that we still rely on today: marketing and sales, finance, production, engineering…. The CEO and his staff had displaced the humble entrepreneur, and the modern corporation was born.

General Motors’ brilliant CEO, Alfred Sloan, displaced the Prussian model between 1921 and 1927 with a model of decentralized corporate divisions (Chevrolet, Buick, Pontiac, Oldsmobile, Fisher Body, Cadillac) each under the control of its own, Prussian-style leader and supporting staff. How did Sloan control his new generals? Around the CEO, Sloan installed a large staff of financial experts, who managed the divisional presidents through a system of financial targets and internal audits that evolved into today’s management accounting.

Sloan’s innovations were surprisingly powerful. Consider poor Henry Ford, who was the very image of a Big Business CEO. Ford was so busy personally controlling his famous production system that he did not have time to notice that his increasingly affluent customers were asking for more speed, more luxury, more choice—to which Ford is said to have answered, “Give them any color they want, so long as it’s black.” Sloan’s slogan was “a car for every purse and purpose.” Sloan, with his new, decentralized system and tight financial controls, had more knowledge of his customers, and more operational flexibility. Ford Motor Company nearly went out of business in 1927, and didn’t recover until after Henry Ford died over twenty years later.

Which brings us back to Toyota. Toyota’s just-in-time production system is extremely decentralized, much more so than GM’s divisions. Every worker on Toyota’s lines has the responsibility—and the power—to prevent defects from getting to the customer, even if it means stopping an entire factory! Some people say that Toyota is radically decentralized. Most people in business prefer the term “empowerment” and stay away from “radical” or “decentralized.” Just the same, Toyota’s system seems to have many more decision-makers in it than GM or Ford. That accounts for Toyota’s flexibility. But how do they keep all those newly empowered decision-makers under control?

In 1963, the Toyota Motor Company won a Deming Prize for its implementation of Total Quality Management. As a result, the company’s employees are scrupulous in their observance of detailed work standards, which results in superb operational control. As part of its TQM implementation, Toyota also implemented hoshin kanri, or policy deployment—the main subject of the website,, which hosts this blog. Inspired in part by Peter Drucker’s Management by Objectives, hoshin kanri was originally intended to ensure that quality was treated as a matter of strategic importance, which is still a very good idea. But Toyota used it in a new way: to manage its finances as well as its quality, thus inventing a new control system that integrated quality and financial management—at every level of the organization. Indeed, according to Prof. H. Thomas Johnson, Toyota doesn’t permit accountants on the shop floor. In other words, Toyota’s control system has made Sloan’s management accounting obsolete!

The modern corporation is dead, and has been for some time. Its burial is a lamentably slow process, one that will take decades—Sloan’s innovations of the 1920s did not become standard business school fare until the 1950s! It is a comprehensive process, one that affects not just the automotive industry, but every manufacturing and service industry—including, notably, healthcare. And it’s a complicated process, one that involves players in business, government, influential not-for-profits like Jim Womack’s Lean Enterprise Institute, and schools of business. Finally, it’s a fascinating process that has kept me entertained for years. I plan to share the fascination, the horror, and mirth, with my readers in my future posts.

Tom Jackson
Portland, Oregon

No comments: