Organizational Effectiveness

Robert HoganHogan Assessment Systems

I often propose as a general law the view that, if you find an important problem in human

affairs, academic psychology will have nothing to say about it. This generalization is especially

true with regard to the topic of organizational effectiveness. It is hard to imagine a more

important issue, because all of us must live and work in organizations, and the success (or failure)

of those organizations has major consequences for our individual wellbeing. I have spent years

reading academic accounts of organizational effectiveness with growing impatience; it finally

occurred to me that the subject should be approached empirically—we should study effective

organizations to see what is distinctive about them.

Many people think Toyota may be the best run organization in the world. By the end of

2006, Toyota’s market capitalization was 240 billion dollars—which is larger than the market

capitalization of General Motors, Ford, Daimler-Chrysler, Honda, and Nissan combined. Toyota has

295,000 employees world wide. The industry metric for product desirability is something called

“retail turn rate”—how long does a new car sit on a dealer’s lot? The retail turn rate for Toyota is

29 days; for BMW, it is 31 days; for Daimler Chrysler, the number is 107 days.

Even Bill Gates, the founder of Microsoft, asks “What can we learn from Toyota?”Essays

on Toyota appear frequently in the popular press, the most recent of these was in the New York

Times on February 16th, 2007. Journalistic accounts are never very systematic, but read closely it

is possible to extract some useful information from them. Based on this, I think there are

nine themes that characterize the Toyota model; these themes can serve as provisional

general rules for organizational effectiveness. These generalizations are subject to future

modification, but in the meantime, they are better than no generalizations at all.

The first theme concerns Toyota’s long term perspective—which contrasts

dramatically with the “pump and dump” mentality of many U.S. organizations. Toyota plans to be

in business 100 years from now. Toyota started working on Prius, their hybrid car, in 1991—

because they understood that the world will inevitably run out of oil. They do not focus on a quick

return on investment, they focus on long-lasting returns on investment.

The second theme concerns kaizen. Kaizen refers to continuous, steady

improvement. It means never being satisfied. It means continuous improvement in processes as

well as products. If a company pursues kaizen, it will be able to produce higher quality products

for less money—in Toyota’s case, better quality cars for less money than comparable models from

their competitors. How high is the quality of Toyota’s cars? In Tulsa, there is a very skilled and

eccentric mechanic who is so well known that Ferrari hired him to build their last entry in the

annual Mexican Road Race; he is the best mechanic I know, and he says Toyota is the best built

car in the world.

For Toyota, however, being able to build cars more efficiently doesn’t necessarily mean

more profitability. In their view, savings on the assembly line means better cars without making

customers pay more for them. As they note, “If you are efficient in the things the client doesn’t

see, then you can put money into things the customer does see” and this is all part of kaizen.

Ultimately, kaizen is the antithesis of complacency; it means never being satisfied with processes,

products, or performance.

The third theme is customer service. Customer service is more than being nice to

people in a showroom. It means taking the customer into account during the product design

phase, it means not assuming that if you build it, they will come. At the February (2007) Detroit

Auto Show, Toyota introduced its new pickup truck, the Tundra. Their preparation for this roll out

was extraordinary. They developed an empirical taxonomy of pickup users which contained five

buckets or categories: hunter/fishermen; home builders; NASCAR fans; motorcycle lovers; and

country music lovers. They went to specific locations and watched people in these buckets drive

their pickups. They then designed specific Tundras for 31 different types of users. Construction

workers, for example, wear gloves while operating their trucks, so Toyota made the dashboard

buttons bigger for those users. But Toyota believes they should serve every kind of customer, so

they have pickups, entry level cars, mid-range cars, and luxury cars. The customer experience is

the primary focus for the business, from product design to car manufacturing to follow up

maintenance.

The fourth theme concerns the effort Toyota puts into Research and

Development (R&D). They understand that they must plough profits back into R&D. Toyota

spends $20,000,000 per day on R&D, and in doing so they seriously outspend General Motors.

One American industry economist noted that, if this trend continues, the U.S. car industry is dead.

Suppose, he asked that GM could make a car as good as Toyota this year; that means that GM has

finally gotten into the game, but the problem is to get ahead of the game. R&D is part of kaizen.

The fifth theme concerns organization-wide teamwork. At Toyota, there are no

silos. The marketing department drives R& D, R& D drives marketing; R& D drives production, and

production feeds back into R&D; production shapes the sales effort and the sales effort shapes

production. Teamwork is a self-conscious value: the goal is to eliminate turf wars and fiefdoms.

To create new products like the I-Pod or the Prius is much easier than developing a new

manufacturing process. The former involves a few individuals; the latter involves the entire

organization. Toyota practices teamwork better than almost anyone.

The sixth theme is an extension of the notion that Toyota should serve every

kind of customer. They believe in customization in short runs. Henry Ford once said that Ford

customers could have cars in any color they wanted as long as it was black. Toyota is the polar

opposite. There are 21 versions of the Tundra pickup. This is a very hard problem—how to

customize profitably. We (Hogan Assessment Systems) have not really figured this one out—but

we understand the problem and we are working on it.

The seventh theme concerns organic growth. Toyota wants to grow organically but

steadily. And they have—they talk about moving jojo, the Japanese term for step by step, getting

more efficient all the time. When a plant changes production to a new model, production slows

down while parts, processes, and systems are updated. In 2001, their huge Georgetown,

Kentucky plant needed 59 days to complete the conversion to the new model of Camry. In 2006,

the transition took 16 days. The extra cars they produced yielded $100,000,000 in additional

revenue—and just by improving processes incrementally. Toyota says it doesn’t want GM to

collapse, it wants GM to go away slowly so that Toyota can fill in behind in a high quality way.

The eighth theme concerns how Toyota handles mistakes. It is human nature to

cover up mistakes rather than call attention to them. Toyota has deemed it a virtue and an

achievement to identify problems, because that is the only way they can be fixed. Obviously

identifying problems publicly is a corollary of kaizen.

The final theme concerns leadership, a vastly misunderstood topic about which

academic psychology knows very little in a rigorous way. Academics define leadership in terms of

who is in charge: e.g., George Bush is the leader of the free world. I believe that leadership

should be defined in terms of the performance of the group of which the leader is in charge (and

in these terms, George Bush is a poor leader). This is a minority position, but I stand by it.

Economists, unlike psychologists, have always been interested in the performance of

organizations, and what accounts for the differences in their performance. In the early 20th

century, Alfred Chandler argued that professional management was the key to the rise of U.S.

industry relative to France or the U.K; however, he was largely ignored. Historically, economists

have explained differences in companies’ performance in terms of workers’ skills, investment in

technology, and the quality of capital markets. They called the variance in performance that is

unexplained by these factors “fixed effects”, which is a dummy variable.

Two economists (Nick Bloom & John Van Reenen) published a paper in 2006

(http://cep.lse.ac.uk/textonly/people/bloom/papers/BloomVanReenen2.pdf) which shows that the

largest part of the variance in companies’ performance can be explained in terms of the quality of

their management. They surveyed the management practices of more than 700 manufacturing

firms in the US, UK, France, and Germany. They evaluated the quality of management in terms of

four categories as follows:

Operations: process improvement, lean practices, documentation around errors, and

internal communications.

Targets: goals, the reasonableness of the goals (don’t just put numbers on peoples’

heads), the transparency of the goals (do they make sense?).

Monitoring: tracking and following up on individual performance.

Incentives: links between pay and performance, responses to poor individual

performance.

There were three key findings from this study:

Firms with high scores on these four dimensions did well; firms with low scores failed.

The degree to which these management practices were observed depended on “the

firm’s leaders”.

The quality of management through the entire organization mattered more than the

quality of the senior executives by themselves. (This suggests that talented middle

management can cover for incompetence at the top—for a while.)

Returning now to Toyota, it would score very well across the four categories of

management evaluation. Everyone says Toyota has been blessed with good leadership. The

company is very profitable, it has no unions, senior executives are paid modestly compared with

General Motors, the culture is informal and relaxed, there is minimal hierarchy, and they have a

clear philosophy: (1) enrich and serve society; (2) kaizen; and (3) plan for the long run. I seems

that Toyota is simply better led and better managed than its competitors.

How does assessment fit with all of this? The link is through the concept of kaizen. Hiring

better people is part of continuous improvement. Assessment is the key to hiring better people.

Using valid assessments will yield better results than using the DISC or OPQ. Hiring better people

means hiring better workers, better managers, and better leaders. Good workers regularly come

to work, follow sensible procedures, treat customers well, work well as part of a team, and accept

(or don’t resist) change. Good managers provide their staff with structure and direction but treat

them with respect. Good leaders are more concerned with the performance of the organization

than with the advancement of their own careers. Good leaders are not charismatic, self-centered,

self-promoters. Good leaders treat their staff with respect but hold them accountable for their

performance, promote an appropriate philosophy and vision, and have the capacity for change.

Valid assessment is the key to continuous improvement of personnel.