THE WHY OF LEAN MANAGEMENT: Connecting Strategy to Execution

by Jeffrey Liker

NOTE: This article follows an earlier excerpt and summarizes Principle 14 in The Toyota Way, Second Edition.

I have spent a good deal of my professional life trying to answer the question: What is Lean? I have drawn on studies of Toyota, the original model, to go deeper than superficial interpretations of lean as a toolkit. Recently I have gotten more interested in the question: Why Lean? What is the purpose? Is operational excellence the vision? Is eliminating waste the goal? In an earlier article in theleanmag I provided an excerpt from the Toyota Way, second edition, focused on principle 14 that connects strategy to execution. What you want to achieve is defined by your company vision and your strategy:

Principle 14: Learn Your Way to the Future Through Bold Strategy, Some Large Leaps, and Many Small Steps

I argued success requires more than continuously improving processes and even operational excellence can lead to failure. Every organization needs a strategy for the products and services that will bring in customers. And we also need a strategy for our operations—what capabilities do we need in order to deliver on our business model?

For simplicity, let’s distinguish between strategy, which is the direction and execution, which is how we actually do things. Execution can be excellent, OK, or poor. If the strategy leads to a uniquely useful product or service, or you have a monopoly on it, or it is in short supply, then execution does not have to be as great.

In other words, the why of lean is situational. It depends on the environment, market, technical capabilities, and the specific products and services of the firm. Yet, we often think of one-size fits all lean. Take out waste, increase efficiency, and reduce the time line. This can only go so far if there is a poor fit between strategy and our ability to execute. An excellent model for connecting our external strategy to our internal capabilities is the Competing Values Model.

The Competing Values Model to Connect Strategy to Capability

Robert Quinn illuminated the world of strategy and how it relates to internal culture in the 1980s with his “competing values model.” He began with two dimensions—control versus flexibility and internal versus external. The concept of control is a characteristic of a mechanistic model, while flexibility is characteristic of an organic systems model. An external focus is on the environment while an internal focus is on how a company runs its own operations. Quinn put these together into a 2 x 2 table and named the four cells (see Figure 1).

Externally, the company can focus on control (rational goals) or flexibility (open systems). Internally, the company can tend toward control (internal process) or flexibility (human relations). So which quadrant is best? The answer is, it depends. First, “best” depends on the company’s environment and strategy. Second, competition among values can be broken, leading to a paradox where an organization can be seemingly opposite things at once—this, yet that. Some of the most successful organizations are strong in multiple areas.

Think of a spider diagram giving you a profile where you can be weak in all areas, or strong

in all areas, or any other combination. I guesstimated—the profile of Toyota, Western auto companies traditionally, and Tesla (see Figure 2). Historically the Western auto industry has been preoccupied with control to the exclusion of flexibility—internally and externally. The companies in this industry want rules, structure, people obeying orders, and the freedom to hire and fire people at will, and then the goal externally is to grow, make a profit, and satisfy shareholders. To Western auto companies, lean programs have been mainly attractive as cost-reduction tools within a coercive bureaucracy. The strategy seems to be “Make money through high sales and low cost.” As I write this, there is a shift in Western auto companies toward more technological innovation in the direction of open systems.

Toyota is different and I believe has the widest range of any automaker. Internally, continuous improvement for Toyota combines high-value-added internal processes with strong human relations, thus combining high levels of control with high levels of flexibility. The control of processes is what Paul Adler called “enabling bureaucracy.” One might think that the future belongs to the purely innovative companies that do not need any bureaucracy, just brilliant teams of innovators. That misses the majority of work that a company does when it is grown up, much of which is relatively routine and needs some structure and stability.

Toyota’s global vision has three parts:

1. Toyota will lead the future mobility society, enriching lives around the world with the

safest and most responsible ways of moving people.

2. Through our commitment to quality, ceaseless innovation, and respect for the planet, we

strive to exceed expectations and be rewarded with a smile.

3. We will meet challenging goals by engaging the talent and passion of people who believe

there is always a better way.

The first two parts focus on the Open-Systems quadrant innovating on its products. It wants to be the leader not in making vehicles, but more broadly in mobility. To do this Toyota must go beyond its conservative path and develop breakthrough products, or at least keep up with innovative startups like Tesla and Rivian. There is a good deal of evidence that large legacy firms become too bureaucratic to start with the clean sheet of a startup. Separate functional units and cumbersome decision-making create compromises and delays startups do not face. The most successful large company innovators are ambidextrous which often means setting up separately managed business units, sometimes subsidiaries, to do cutting-edge development.

General Motors established Cruise LLC as a separate company with its own stock listing and Microsoft made a major investment. Toyota has set up wholly-owned subsidiaries in the Toyota Research Institute (TRI), to do advanced research on autonomous driving, and Toyota Research Institute–Advanced Development (TRI-AD), to bring that research from the prototype stage to the preproduction stage. Each of these entities are run by external CEOs with expertise in robotics, AI, and self-driving technologies and both are in the most senior executive positions within Toyota. In 2020, Toyota also created an $800 million global investment fund, led by TRI-AD, focused on growth-staged companies developing new technologies and business models.

Even innovation can benefit from lean management in order to deliver high quality products on-time. For example, TRI and TRI-AD have been applying TPS to IT development. The amount of code that needs to be written now and well into the future is overwhelming—the two colleagues cannot hire enough people to write it based on conventional models of writing a lengthy program and then spending as much time debugging it. So they are focusing on designing in quality. Similar to agile development they break the software into tiny bits and design unit tests for each bit to confirm that it works. Every night they compile and test all the coding done during the day, hoping not to find any more problems. When they do find an issue, they rely on root cause problem solving to prevent the problem from reoccurring. It seems being strong at execution is also the key to our innovative digital future—internal control and flexibility.

Externally, Toyota is very good at planning and achieving rational goals, which has fueled 70 years of profitability, including a run of record profits for the industry: the company has had only one year of loss, and that was in the Great Recession. Toyota’s strategy for the future is bold in many ways, but also pragmatic.

Toyota has its share of ventures into the open systems quadrant with the paradigm-breaking Lexus, Prius, and Mirai, and even building its “Woven City” of the future at the foot of Mount Fuji that will act as a “living laboratory” to experiment with advanced technologies. The Prius seemed like a dangerous gambit and a guaranteed money loser, but it made lots of money and changed the auto world. And at this point, major investments in hydrogen vehicles may surprise many people and be a significant part of our environmentally friendly future.

On the other hand, historically Toyota’s lean machine has been internally fine-tuned for incremental innovation on dependable new models, so I showed it as less strong in open systems. The open systems quadrant is the area Akio Toyoda is working hardest to strengthen, through TRI, TRI-AD, and various technology partnerships.

How does Tesla rank on these competing values? From my off-the-cuff assessment, Tesla is firmly ensconced in the open systems quadrant, while doing just enough to build and distribute product in the other three. It is relatively unidimensional and weaker everyplace Toyota is strong. Fortunately, or more likely by plan, Tesla is strong in the one area that really matters for Elon Musk’s strategy and style of leadership. I also give him credit in the human relations quadrant for hiring exceptional engineers who have done a good job of innovating. Elon Musk certainly thinks long term and has a vision well beyond earning a paycheck. Save the planet and colonize Mars are very long-term objectives. But long-term thinking for Toyota includes building a highly-adaptive learning organization internally at all levels. And innovative thinking at Toyota applies to everyone, even the person attaching the windshield wipers. Not every company can act like a startup, but it is critical that the internal capabilities and external challenges are well aligned.

A Scientific Approach to Learning your Way to the Future

Continuous improvement is often assumed to mean only incremental improvement at the front-line, like by team members building cars. At Toyota it means doing something to improve every day at all levels and in all functions, some large leaps, and many small steps. The improvements at the front line are mainly incremental tweaking processes toward local targets. As we move to management and executive levels and into professional roles the breadth magnitude of the changes become much larger. In Toyota breakthrough improvements are led by senior executives who are hands-on leaders.

Though the magnitude of the changes vary, the way of thinking is the same. This has been well explained by Mike Rother who from his study of Toyota developed the Improvement Kata pattern. The goal is to approach any problem or goal scientifically with a focus on learning by experimenting rather than implementing off-the-shelf solutions. This is the nature of innovation.

Many readers may be familiar with the four-step model:

1. Set a Challenge--A goal which can be a breakthrough or a target on a KPI

2. Understand the Current Condition--For innovation this can include competitive products

and how customers currently meet their needs

3. Set target conditions-- a series of short-term target conditions set one by one.

4. Experiment and Reflect—to learn your way to each target condition.

This can be interpreted as following a series of nested PDCA loops. It is about learning your way to the future, rather than trying to implement your way. Each step is an experiment with the intent of learning, from both supported and unsupported hypotheses.

The strategy provides the long-term direction which then is broken down into challenges which are reached through experimenting. As figure 3 shows, this will not be linear but will have twists and turns as we struggle to overcome obstacles. What we do not want to do is almost randomly apply lean tools to eliminate wastes which ends up being like the game of whack-a-mole.