The changes needed now in quality relate to how people are managed and motivated – more people must take pride in their work. The possibility to improve the future under the present system of management is slight. The present system runs by the economics of win-lose: I win, you lose. I can win only if you lose…

We need a transformation to a new economics of win-win cooperation where everyone comes out better. There will still be inequalities; some people will win more than others, but everyone will gain. Everybody loses under the system that nourishes win-lose thinking and the race to be number one. We must abolish the merit system and systems of incentive, as they choke intrinsic motivation. We must abolish annual ratings, performance appraisals, even grades in school. We must create leaders who work to help their people, who know how the work of the group fits into the aims of the company, who focus on the customers, and who understand variation and use statistical calculation to determine if there are people outside the system in need of help.

What is the heart of the transformation? It is the release of the power of intrinsic motivation. How? By creating joy, pride, and happiness in work; joy and pride in learning. What will make for quality products and services as well as renewed leadership today and in the future? The prime requisite for achievement of any aim, including quality, is joy in work. This will require change. When everyone has a part in the change, fear of change will vanish. My own estimate is that today only two in 100 people in management take joy in their work. The other 98 are under stress, not from work or overwork, but from nonproductive work—churning money, eyeing short-term (quarterly) profits, battling for or against takeover, and so on. Most of the 98 have their eyes on a good rating and don’t dare contribute innovation to their work.

Transformation Required

About 95 percent of changes made in management today make no improvement. Transformation to a new style of management is required to achieve optimization—a process of orchestrating the efforts of all components to achieve the stated aim. Optimization is management’s job. Everybody wins with optimization. Anything less than optimization of the whole system brings eventual loss to every component in the system. Any group should have as its aim optimization over time of the system that the group operates in. Time will bring changes that must be managed and predicted so far as possible. Growth in size and complexity of a system, and changes with time of external forces (competition, new products, new requirements) require overall management of components. Management of a system may require imagination. An added responsibility of management is to be ready to change the boundary of the system to better serve the aim.

Management and leaders have another job – to govern their own future, not to be victims of circumstance. For example, instead of taking the loss from spurts in production to meet demand, followed by losses from valleys from decreased demand, management might flatten production, or increase production at an economical rate. Another possibility is to become agile and efficient in meeting peaks and valleys in demand. For example, management may change the course of the company and the industry by anticipating the needs of customers for new products or new services.

Preparation for the future includes lifelong learning for all employees. It includes constant scanning of the environment (technical, social, economic) to perceive need for innovation, new product, new service, or innovation of method. A company can, to some extent, govern its own future. What business ought we to be in five years from now? Ten years from now? The components of a system could, under stable conditions, manage themselves to accomplish their aim. A possible example is a string quartet. Each member supports the other three. None of them is there to attract individual attention.

An important job of management is to recognize and manage the interdependence between components, to resolve conflicts and remove barriers to cooperation. A job description must do more than prescribe motions: do this, do that, this way, that way. It must tell what the work will be used for, how the work contributes to the aim of the system. Harm comes from internal competition and conflict, and from the fear that is generated. Competition leads to loss as people pulling in opposite directions on a rope only exhaust themselves—they go nowhere. What we need is cooperation. Every example of cooperation is one of benefit and gains to those who cooperate. Cooperation is especially productive in a well-managed system. The prevailing style of management must be transformed. The individual components of the system, instead of being competitive, will reinforce each other for optimization and accomplishment of the aim of the system.

The first step is transformation of the individual. This transformation is discontinuous. It comes from understanding the system of profound knowledge. The individual transformed, will perceive new meaning to his life, to events, to numbers, and to interactions between people. Once the individual understands the system of profound knowledge, he will apply its principles in every relationship with other people. He will have a basis for judgment of his own decisions and for transformation of the organizations that he belongs to.

We have grown up in a climate of competition between people, teams, departments, divisions, pupils, schools, and universities. We have been taught by economists that competition will solve our problems. Actually, competition is destructive. It would be better if everyone would work together as a system, with the aim for everybody to win. What we need is cooperation and transformation to a new style of management.

The purpose of a school of business should not be to perpetuate the present style of management (competition), but to transform it to one of optimization. Students of engineering may learn the new tools and theories of engineering, but their successful application requires new methods of management. In other words, the purpose of a school should be to prepare students for the future, not for the past. Most people today are still living under the tyranny of the win-lose style of management. The huge, long-range losses caused by this competitive style have led us into decline.

Win-lose is the wrong philosophy, and as a business strategy it often merely seeks to choke the competition. Although it was an efficient tactic in an ever-expanding market, the principle of I win only if you lose has run out of steam. We need to learn to live and work in the world that now envelops us. We must, if we wish to survive, change to the principle of win-win. Compete, sure, but in the framework of cooperation first so everybody wins. Business survival is dependent on transformation to the new economics of win-win cooperation.

Route to Transformation: Profound Knowledge

Transformation is not automatic. It must be learned—and led. If executives are to successfully respond to the myriad changes that shake the world, they will need to undergo a transformation to a new style of management. The route to take is what I call profound knowledge—composed of four interrelated parts: Appreciation for a system, knowledge of variation, theory of knowledge, and psychology. The System of Profound Knowledge provides a lens through which we can understand and optimize our organizations.

1. Appreciation for a SYSTEM.

A system is a network of interdependent components that work together to accomplish the aim of the system. A system must have an aim. Without an aim, there is no system. The aim proposed here for any organization is for everybody to gain – stockholders, employees, suppliers, customers, community, and the environment – over the long term. The performance of anyone is governed largely by the system that he works in. The greater the independence between components, the greater will be the need for communication and cooperation between them. Also, the greater will be the need for overall management. The obligation of any component is to contribute its best to the system, not to maximize its own production, profit, or sales, nor any other competitive measure. Optimization for everyone concerned should be the basis for negotiation between any two people, between divisions, between union and management, between companies, between competitors, and between countries. Everyone would gain.

2. Knowledge of VARIATION.

There will always be variation between people, in output, in service, and in product. What is the variation trying to tell us about a process, and about the people who work in it? Management requires knowledge about interaction of forces. Interaction may reinforce efforts or nullify efforts. Management of people requires knowledge of the effect of the system on the performance of people. Knowledge of dependence and interdependence between people, groups, divisions, companies, and countries, is helpful [Variation is the VILLIAN of Quality].

3. Theory of KNOWLEDGE.

The theory of knowledge helps us to understand that management in any form is prediction and that a statement, if it conveys knowledge, predicts future outcomes, with risk of being wrong, and that it fits without failure observations of the past. Rational prediction requires theory and builds knowledge through systematic revision and extension of theory based on comparison of prediction with observation. Information, no matter how complete and speedy, is not knowledge [to summarize: True Knowledge is PREDICTIVE in nature].

4. Psychology of LEARNING, MOTIVATION and CHANGE.

Psychology helps us to understand people, interaction between people and circumstances, interaction between customer and supplier, interaction between teacher and pupil, interaction between a manager and his people, and any system of management. People are born with intrinsic motivation, with a need for relationships with others, with a need for love and esteem, with a natural inclination to learn, and with a right to enjoy their work. Good management preserves these positive innate attributes. In the transformed organization, teams, departments, divisions, and plants do not compete. Instead, each area makes choices directed at maximum benefit for the whole organization. In an optimized system, everybody benefits – stockholders, suppliers, employees, and customers.

Quality ALWAYS Starts at the TOP

The common mistake is the supposition that quality is ensured by the improvement of process alone – that operations going off without blemish will ensure quality. Good operations are essential, yet they do not ensure quality. There are four prongs of quality and four ways to improve quality:

1) Innovation in product and service;

2) Innovation in process;

3) Improvement of existing product and service; and

4) Improvement of existing process.

Quality is made in the boardroom. A bank that failed last week may have had excellent operations–speed at the tellers’ windows, few mistakes in bank statements. But the cause of failure was bad management, not operations. A good question for anybody in business to ask is: What business are we in? To do well what we are doing? Yes, but this is not enough. We must keep asking: What product or service would help our customers more?We must think about the future. What will we be making or providing five years from now? Ten years from now?

The absence of defects does not necessarily assure quality nor build business. Something more is required. In the case of automobiles, for example, the customer may be interested in performance. He might include under performance not just acceleration but also how the car behaves on ice, how the car steers at high speed, how it rides over bumps. Does it jump and skid on a rough road? How does the air conditioner and heater work? The customer may also be interested in style – not just the appearance of the automobile, but legibility of the levers that the driver may try to read. Comfort of passengers may be important. Performance and style, whatever these words mean in the minds of customers, must show constant improvement. Everyone is in favor of improving quality, but many people misunderstand quality, as evident by looking at some of their suggestions for improving quality. Just add automation, new machinery or technology, more computers, more people, gadgets, hard work, best efforts, merit system, MBO, MBF, rankings, inspections, incentive pay, work standards, specifications, and motivation. The list goes on.

What’s wrong with these suggestions? The fallacies are obvious—every one of them ducks the responsibility of management. Quality is determined by top management. Period. It can’t be delegated. An essential ingredient, profound knowledge, is often missing. There is no substitute for knowledge. Hard work, best efforts, and best intentions will not by themselves produce quality or a market. The quality of the output of a company can’t be better than the quality at the top. Quality is made by top management. Job security and jobs are dependent on management’s foresight to design products and services that will entice customers and build a market; and their foresight to be ready, ahead of the customer, to modify products and services [always towards delighting the customer].

Present Practice vs. Better Practice

The prevailing practices of management cause huge monetary losses and huge waste whose magnitudes can neither be evaluated nor measured. These losses must be managed by replacing faulty present practices with better practices.

PRESENT:Have no constancy of purpose, no clear long-term aim. Engage in short-term thinking with heavy emphasis on immediate or quarterly results. Think only in the present tense, e.g. Keep up the price of the company’s stock. Maintain dividends. Fail to optimize over time. Make this quarter look good. Ship or deliver everything on hand – product or service – at the end of the month (or quarter). Never mind its quality. Show it as accounts receivable. Defer till next quarter repairs, maintenance, and orders for material. BETTER: Adopt and publish constancy of purpose—a clear aim. Do some long-term planning—Ask this question: Where do we wish to be five years from now? Then: By What Method?

PRESENT: Rank people, salespeople, teams, and divisions; reward at the top, punishment at the bottom. Have a merit system with annual appraisal of people, a form of ranking. Compensate people with incentive pay and pay based on performance.

BETTER: Abolish ranking. Manage the whole company as a system. Make every component and every division contribute toward optimization of the system. Abolish the merit system in your company. Study the capability of the system. Study the management of people. Abolish incentive pay and pay based on performance. Give everyone a chance to take pride in their work.

PRESENT: Fail to manage the organization as a system. Think of the components as individual profit centers. Everybody loses when individuals, teams, and divisions in the company work as individual profit centers, not for optimization of the whole organization. The various components thus rob themselves of long-term profit, joy in work, and other desirable measures of quality of life. People lose hope of ever understanding the relationship of their work to the work of others; they do not talk with each other.

BETTER: Manage the company as a system. Enlarge judiciously the boundaries of the system. See that the system includes the future. Encourage communication. Make physical arrangements for informal dialogue between people in the various components of the company, regardless of level or position. Encourage continual learning and advancement. Form groups for comradeship in athletics, music, history, a language, etc., and provide facilities for study-groups.

PRESENT: Manage by objective (MBO). Set numerical goals. Manage by results (MBR). Take immediate action on any fault, complaint, delay, accident, or breakdown.

BETTER: Study the theory of a system. Manage the components for optimization of the aim of the system. Work on a method for improving a process. Understand and improve the processes that produce defects, faults, etc. Understand the distinction between common causes of variation and special causes to understand the kind of action to take.

PRESENT: Delegate quality to someone or some group. Buy materials and/or services at lowest bid.

BETTER: Keep accountability for quality with the top management. Estimate the total cost of use of materials and services – first cost (purchase price) plus predicted cost of problems in use of them, their effect on the quality of final product.

Leading and Managing People

Transformation in any organization will take place under a leader who possesses these key qualities: Authority of office, knowledge, personality, persuasive power, and tact. How may he accomplish transformation? First he has theory. He understands why the transformation would bring gains to his organization and to all the people that his organization deals with. Second, he feels compelled to accomplish the transformation as an obligation to himself and to his organization. Third, he is a practical man. He has a plan, step by step. But what is in his own head is not enough. He must convince and change enough people in power to make it happen. He possesses persuasive power. He understands people.

One is born with intrinsic motivation, self-esteem, dignity, cooperation, curiosity, and joy in learning. These attributes are high at the beginning of life, but are gradually crushed by the forces of destruction. These forces cause humiliation, fear, self-defense, and competition for gold stars, high grades, or high ratings on the job. They lead anyone to play to win, not for fun. They crush out joy in learning, joy on the job, and innovation. Extrinsic motivation (complete resignation to external pressures, goals, etc.) gradually replaces intrinsic motivation, self-esteem, and dignity. Instead of judging people, ranking them, and putting them into slots, the aim of the leader should be to help people optimize the system and their talents so that everybody will gain.

The new role of the leader of people after transformation has 14 interdependent components (what follows are Dr. Deming’s 14 Points for the transformation of management). The leader:

1. Understands and conveys to his people the meaning of a system. He explains the aims of the system. He teaches his people to understand how the work of the group/team supports these aims.

2. Helps people to see themselves as components in a system, to work in cooperation with preceding stages and following stages toward optimizing the efforts of all stages to achieve the aim.

3. Understands that people are different from each other. He tries to create interest, challenge, and joy for everybody in work. He tries to optimize the family background, education, skills, hopes, and abilities of everyone. This is not ranking people—it is recognizing differences between people, and trying to put everybody in position for development.

4. Learns unceasingly. He encourages his people to study. He provides, when possible and feasible, seminars and courses for advancement of learning. He encourages continued education.

5. Is a coach and counsel—NOT judge and jury.

6. Understands a stable system. He understands the interaction between people and the circumstances that they work in. He understands that the performance of anyone who can learn a skill will come to a stable state-upon which further lessons will not bring improvement of performance. He knows that in the stable state, it is distracting to tell the worker about a mistake.

7. Has three sources of power: 1. Authority of office 2. Knowledge 3. Personality—persuasive power, tact. He develops the second and third, rarely relies on the first. However, he has an obligation to use his authority of office to change the system/process—equipment, materials, and methods—to bring about improvement.

8. Studies results with the aim to improve his performance as a manager and leader of people.

9. Tries to discover who, if anybody, outside the system needs special help. This can be done with simple calculations, if there are individual figures on production or failures. Special help may be a simple arrangement of work, or it might be more complicated.

10. Creates trust and removes fear. He creates an environment that encourages freedom and innovation. He ceaselessly strives to drive out both covert and overt fear in his organization.

11. Does not expect perfection. Supports its quest in the spirit of excellence vs. judgment.

12. Listens and learns without passing judgment on him whom he listens to.

13. Holds an informal, spontaneous, unhurried/NON “feedback” conversation with every one of his people at least once a year (ideally more often) not for judgment, merely to listen. The purpose would be to develop understanding of his people and their aims, hopes and fears.

14. Understands the benefits of win/win cooperation and the huge losses from win/lose competition between people and between groups.

These 14 factors follow naturally in an organization guided by the 4 elements of Profound Knowledge.