2. Adopt the new philosophy. We are in a new economic age. Western management must awaken to the challenge, must learn their responsibilities, and take on leadership for change.

Point 2 of Deming’s 14 Points. This is how Deming described the new philosophy in Out of the Crisis (1983).

We can no longer tolerate commonly accepted levels of mistakes, defects, material not suited for the job, people on the job that do not know what the job is and are afraid to ask, handling damage, antiquated methods of training on the job, inadequate and ineffective supervision, management not rooted in the company, job hopping in management, buses and trains late or even cancelled because a driver failed to show up. Filth and vandalism raise the cost of living and, as any psychologist can aver, lead to slovenly work and to dissatisfaction with life and with the workplace.

It’s sometimes easy to forget how materially shabby life was in the 1970s and early 1980s. Deming certainly summed up the way many people felt. Yet the 1980s and beyond brought a stream of high quality, low cost consumer goods. Just think of motor cars and cameras. It is easy to feel that the “new philosophy” is now entrenched. But there remain vast areas of unsatisfactory customer service. I recently had some exchanges with David Gaster about problems he was having with an HP computer. Anyone in the UK who has tried to get BT Sport working knows the meaning of frustration.

Around a decade ago, W. Chan Kim promoted what he described as the Blue Ocean strategy. This turned out to be largely a repackaging of Noriaki Kano’s Attractive Quality Creation (AQC). Broadly, a business aspires to free itself of competitive pressures by developing novel products, value streams and market sectors. This represents an ambition to locate a business on the “exciter” curve of the Kano model. One of the lessons of the Kano model is that customers on the “exciter” curve are not so bothered about reliability. It’s just great to have the stuff. It is easy to see how, in 21st century tech industries surfing the blue ocean, service is not a priority. Product development reigns. Time to market may be critical.

The Kano model equally makes it clear that the customer of a product or service on the “expected” curve is intolerant of quality lapses. Performance is taken for granted and defects represent sensible pain. They are remembered and shared among sympathetic peers. This is what Kim referred to as the red ocean where sellers compete in mature markets for share by driving down costs. Kim saw this as a world of inevitable diminishing returns where corporations face the perpetual threat of extinction through failing price competitiveness. Aspirations to improving quality are inhibited by managers’ fear that they operate in a market for lemons, where such improvements are not rewarded in price or volume advantage.

Steven Denning has criticised views like Kim’s, emphasising that customer value and quality are important even in the red ocean. Denning criticises corporations, as did Deming, for preferring to cut costs rather than invest in innovation. Where there is surplus workforce, layoff is almost always preferred over redeployment in novel value creating activities. Of course, that is what we would expect from Daniel Ellsberg’s theory of ambiguity aversion.

Ultimately, innovation may not be the red ocean corporation’s comparative advantage. It may well be best for everybody that skilled people are released from the red ocean corporation so that they can resource the blue ocean corporation. It requires superb management of intangible assets for a corporation even to attempt to redeploy its own resource from growing systematic productivity to new product launch. The red ocean is not a hopeless place to be. There is always opportunity for product differentiation. When I worked in the automotive constant velocity joint business in the early 1990s we were all compelled to recite every morning “There is no such thing as a commodity product”.

Yet the reality is that there are not only two colours of ocean. Once a product is launched into the blue ocean, as Kano predicted, it starts the steady drift down the spectrum towards the red. Quality and cost become increasingly important. To a great extent, competitiveness in the, say, green ocean will depend critically on decisions made in the ultra-violet of product development.

In the present day, many gains in quality have been made. The low hanging fruit have gone. Competitive advantage is still to be had in improving quality as a strategy for reducing costs while capturing customer prestige. There is no such thing as a commodity product. Even the infra-red ocean of commodities presents opportunities to the astute. Deming’s message that understanding of variation is central to embedding quality in design and redesign, and in incremental improvement of production, remains a potent means to capture market. An opportunity that remains to be exploited by most businesses.

The doubt then arises as to why the market has not forced indefinite quality improvement on mature products to the extent that Deming advocated and envisioned. Deming certainly believed that the market itself was not enough. He believed that change would come from some movement of national renewal in the US that would then spread globally. Unfortunately no such movement has reached a critical mass and I fear that it is unlikely in the future. We must look to conventional market economics.

One economic analysis would be that the fear of a market for lemons acts as a disincentive to seek quality. However, liberal economists such as William L Anderson have emphasised the extent to which lemon markets provide opportunities for entrepreneurs. Fear of a lemon market betrays a lack of confidence in branding, marketing and reputation management. There are always business opportunities for people who pick an established market and find an excellent way to supply it. Put your sticker on the lemon and work at building reputation. The automotive industry in the 1980s and 1990s is an example of how the market forces of global over-capacity drove quality improvement and cost reduction. Deming’s insights into understanding variation provide the means. All stragglers kick themselves that they failed to take up opportunities that were there for the taking but ultimately grabbed by others.

Future blogs

There are three further things that Deming referred to under this heading that I want to blog about at a later time:

• Leadership;
• Government regulation and competition law;
• Cost of Poor Quality (CoPQ) v. Taguchi loss function.