Management And Accounting Web

Johnson, H. T. 1992. Relevance Regained: From Top-Down Control to Bottom-up Empowerment. New York: The Free Press.

Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

Relevance Regained Main Page | Relevance Lost Main Page

Although this summary will give you a good idea of what this book is about, it is merely a sketch of Johnson's important contribution. I recommend this book to everyone interested in management accounting and any other area of management or leadership.

Part I. Relevance Lost in Top-Down Control

Chapter 1. Information, Action, and Business Performance

Companies must follow Deming’s transformation if American Business is to regain its competitive edge and transform the entire structure, style and philosophy of management. Many new approaches and strategies have been tried (JIT, SPC, MRP, TQM, TPM, ABC), but the successes go only so far and do not spread throughout the organization. Improvements are made using teamwork, but gains in profitability come slowly and people eventually return to business as usual. The cause of failure is the limited perspective of the company's leaders. The old principles remain where all resources must be utilized efficiency. This clashes with the imperatives of JIT and continuous improvement. Leaders must reject the traditional cost-focused principles when they make decisions.

Human relations most often are the most serious problem for businesses trying to change. The old polarities of "us and them" (Stockholders, management and workers) still exist and must be eliminated. Managing by remote control with accounting based information contradicts improvement strategies associated with competitiveness.

The problem is not managers, but management thinking that focuses on the wrong imperatives of competition. Companies must eliminate accounting-based management information that reinforces attention to irrelevant sources of competitiveness - pushing output and cutting costs. Instead they need to start talking about customer satisfaction being everyone's job. It was evident in the 1980's that management accounting information driven by the financial reporting system is too late, too aggregated and too distorted to be relevant for managers planning and control decisions. It is time for American management to change.

Chapter 2. Remote-Control Management in the Dark Age of Relevance Lost

This chapter includes a discussion of the Industrial Era (1800-1950), the Dark age of Relevance Lost (1950's-1980's), and the Global Era (1990's). "Relevance was not lost by using improper accounting information to manage. It was lost by improperly using accounting information to control business operations". Management accounting practices caused businesses to ignore new management thinking coming from outside the United States. The Japanese and some Europeans were not managing by accounting numbers with top down financial control systems that treated customers as objects of persuasion and employees and suppliers as cogs in the gears of a deterministic machine. Instead they were empowering people to control processes and remove constraints that get in the way of profitably satisfying customers.

Chapter 3. Consequences of Remote-Control Management

Management accounting practices of using accounting information to control business operations kept American management from understanding the new time-intensive, people-oriented, and resource-conserving methods developed in Japan, especially at Toyota during the 1960's and 1970's. This chapter highlights the differences between Japanese and American management practices.

To deal with the complexity of variety, American companies decoupled the production line so that different processes could operate at different rates. Each process was run to achieve economies of scale and speed. Decoupling sacrificed continuous linking and diminished cooperation among departments. This created inventory buffers and warehouses to absorb the production surpluses. But filling a warehouse to minimize cost variances does not help create harmony. Instead it distracts people from thinking about balance, harmony and economy. Standard cost performance evaluation systems motivate actions that increase complexity and overhead costs by focusing on output and prevent companies from seeing the long term benefits of continuous improvement in flexibility. Department supervisors act to keep machines and people busy producing output, regardless of demand, to minimize standard cost variances. By attempting to achieve cost targets, each department impairs the company's overall ability to compete.

Taiichi Ohno at Toyota did not accept existing ways of organizing work as given. He recognized that it was possible to achieve enormous savings in resources by adopting a goal of continuously reducing time to set up and change over and that it is often more profitable to empower workers to be flexible learning machines than to invest in new capital equipment. Like the water beetle, Japanese plants were designed to carry small loads and make frequent trips. (See MAAW's section on Japanese Management for more on how American and Japanese methods differ.)

American business leaders must recognize that a change in the fundamental ways of managing processes lies behind the dramatic success of world class companies.

Part II. Relevance Regained by Bottom-Up Empowerment

Chapter 4. Imperative of Competition – Past and Present

In this chapter Johnson discusses the imperatives of competition and the management information used to control operations in American business over the last two hundred years.

The Age of Energy: Circa 1800 - 1950. The key imperatives of competitive business in these energy-based mechanical systems were overall scale and speed.

The Dark Age of Relevance Lost: 1950's - 1980's. American business began to pursue "pseudo" imperatives defined by their new accounting-based management information systems. Accounting became the language of business where management used remote control accounting controls to trigger actions that were intended to fulfill those "pseudo" financial imperatives. In doing so, businesses lost a clear sense of purpose that was replaced by a myopic vision narrowly defined by accounting information.

The Age of Information: 1990's and beyond. The imperatives of competition in the global economy are responsiveness and flexibility. Information technology gives people power. People use to adapt to companies. Now companies have to adapt to people and need to understand what it means to have customers in charge of the marketplace and the workforce in charge of the processes. Table 4-1 looks something like this.

Characteristic Remote Control Global Excellence
Behavior Accept constraints.
Follow finance driven rules.
Manipulate output to control costs.
Persuade and sell.
Build for scale and size.
Increase speed within parts of the
Specialize and decouple processes.
Utilize resources fully.
Remove constraints.
Create an environment for learning.
Provide output as needed on time.
Build customer loyalty.
Build for flexibility.
Decrease lead time for entire system.
Link specialized parts into teams.
Keep idle resources ready.
Results Costs rise.
Satisfaction falls.
Profit declines.
Costs fall.
Satisfaction rises.
Profits increase.

Chapter 5. Becoming Responsive by Building Long-term Customer Relationships

This chapter explores three implications of building serious customer relationships:

1. Commit to building loyalty.

2. Direct every process in the company toward the goal of finding, satisfying, and keeping
loyal customers.

3. Make sure that all members of the company know how their work fulfills customer wants,
and make sure everyone shows it.

Chapter 6. Becoming Flexible by Empowering Workers

Remote control management caused businesses to ignore the competitive advantage of flexibility. Flexibility is defined as producing on the spot, or in a period of time that satisfies the customer, exactly what the customer requests - from scratch, not from stock and not by assembling to order, and selling it at a price similar to that of a mass-producer who sells it "off the shelf".

The roots of flexibility come from a concept Taiichi Ohno referred to as "limited management" and "limited production". The idea is to produce only what can be sold and no more. The key is the creation of conditions that make it economically feasible to do only as much as customers want you to do, when they want it, and then stop.

Limited production and lean production are different. By lean production Ohno meant a slimmed-down version of existing remote-control ways of doing things. Limited production is not obtained by trimming down, flattening and trimming. Flexibility through limited production is achieved by continually removing constraints. Some examples of constraints that make work necessary include: 1. long setups and changeovers, 2. poor work layout, 3. poor product design, 4. standard cost performance evaluation systems, 5. poor vendor relationships, and 6. poor employee relations.

In a flexible "limited" organization everyone is empowered to learn and innovate. This is the backbone of a strategy to create flexibility by removing constraints. Remote control management puts constraints under the heading of fixed costs. Flexible "limited production" organizations do not view any cost as fixed. The thrust of everyone's attention is locating and removing the sources of delay, excess and variation that make work necessary.

The term non-value activity is unfortunate and misleading. Activities defined as non-value added (e.g., moving, storing, inspecting, expediting, rework etc.) are necessary until the constraints that cause the work are removed. These are not non-value activities until the work becomes unnecessary. Therefore, emphasis should be on removing the constraints that cause a need for these activities.

The trade-off mindset is that there is a trade-off between improved customer satisfaction and cost. It is time to challenge this mindset. Global competitors do not optimize within constraints, they remove constraints that prevent companies from achieving higher levels of customer satisfaction without incurring higher costs.

Chapter 7. Management Information for Competitive Excellence

Businesses must eradicate all performance measures and any other management information that does not trigger behavior congruent with the imparities of global competitiveness.

What ideal information might a company want?

Measures of success at building customer loyalty such as,
    Share of each customer's purchases from your company.
    Share of revenue from repeat sales to old customers as opposed to new sales.

Performance measures that promote the imperative of flexibility such as,
    Total time/necessary time.
    Use rate/demand rate.
    Number of pieces per work station.

How does that information compare with the old tools of management accounting?

The pressure to produce output for its on sake emanates to a large degree from accountants matching rules for attaching production overhead costs to manufactured products. Smart managers who need to temporarily boost income know what to do, produce more output. Managers can also defer expenditures on research and development, postpone maintenance, encourage employee turnover, cut back on employee benefits, cut employee training and postpone capital investments in new technology. Accounting tools such as ROI and ABC do not go outside the cave in Plato's allegory to examine real processes and the people working in them and the customers being served by them. These tools analyze artificial objects that create accounting shadows.(See the summary of Johnson 1990 for more on Plato's allegory).

Is there a place for accounting and financial information outside the cave? Yes, there are several ways for companies to modify or discontinue management accounting information that motivates people to manipulate or tamper with processes and still track financial results.

Authorities such as Vollmann, Schonberger and Hall, advocate using non-financial performance indicators such as time, space, distance, and quality. One well known Japanese firm uses 12 graphs that appear on the wall that show variables such as average setup time per job, process times per minute of elapsed time, number of defects claims from next users, downtime percentages, number of line stops per day, and amount of inventory.

One idea is to systematically identify anticipated resource redundancies at the start of a process improvement program and locate the dollars related to these resources on the books. As improvements occur, the dollars related to the freed-up resources should be transferred to a "process improvement account". A key indicator of top management success should be the speed at which resources in the improvement account are redeployed to revenue-generating opportunities.

Another technique is referred to as "process control costing" used in a CIM environment. Computers collect and measure information about every possible event that affects process outcomes, and then adds economic values so that the consequences of acting on the information (by operating managers) can be determined. This is a bottom up from processes approach, not top down from central accounting.

Accounting is still important for forecasting, planning and tracking financial results and the cash implications of this information. Companies must have sound cash budgeting and cash flow tracking systems. But control information should never flow from accounting to operations. It should be used to check results, not control operations.

Other topics discussed in this chapter include target costing, capital budgeting, cost of quality, and accounting simplification.

Chapter 8. Activity-Based Cost Management: Relevance Lost Déjà vu

"The belief that activity-based cost management tools will improve business competitiveness is a dangerous delusion! No accounting information, not even activity-based cost management information, can help companies achieve competitive excellence".

This chapter describes and evaluates the two primary roots of current activity-based cost management practice:

1. The activity analysis approach developed at General Electric in the 1960's where the term "activity" was probably first used to describe and analyze work.

2. The ABC concept that developed in the 1980's independently of GE's development of activity cost analysis. Both activity cost analysis and ABC have merit in certain applications, but neither produces the information companies now require to empower workers to improve processes and satisfy customers.

Using ABC driver information to control operating activities is to commit "relevance lost" all over again. "The path to global competitive excellence is not reached by doing better what should not be done at all." Using ABC driver information will not cause managers to change the way people work from cost oriented practices to people practices that promote responsiveness and flexibility.

Chapter 9. Putting an Improvement Process in Place

This chapter provides a comparison between bottom-up empowerment and top-down control.

Bottom-up Top-down
1. Information technology empowers the customer to choose.

2. The customer's power of choice causes companies to change.

3. To change quickly, everyone in the company must continually learn.

4. Constant learning & adapting to change require the workers to have ownership of information and processes.

5. That creates empowerment.
1. Companies learn to change in big steps that draws on knowledge from outside.

2. Information is owned by top management who plan and decide.

3. Top management hands down instructions to subordinates and workers who manage results by manipulating processes.

This chapter also includes:

Eight of Johnson's observations related to implementing improvement processes in organizations.
A discussion of GE's three techniques: Work-out, Best practices, and Process mapping.
A discussion of Weyerhaeuser's quality program to deal with administrative overhead creep.
A discussion of Connor Formed Metal Product's employee ownership of information approach.
Five points about the concept of an improvement process.

Part III. Information, Empowerment, and Society

Chapter 10. New Frontiers for Business Education

Why are Business Schools so isolated from businesses and apparently unaware of recent trends in the global marketplace? Why do they focus on the wrong customer? They do not see business as their customer, but instead focus inward and serve academic customers.

Business Students

1. Business students are not taught what they must know to work effectively in quality oriented organizations.

2. They learn solutions to textbook problems, not problem solving techniques to apply to real life situations.

3. They learn how to compete as individuals, not how to cooperate in teams.

4. They learn almost nothing about the improvement processes.

5. They are indoctrinated with the principles of remote control management, not with the principles of empowerment and customer satisfaction.

How business schools can restore relevance.

1. Teach continuous improvement rather than constrained optimization techniques.

2. Teach problem solving processes rather than solutions to problems such as Motorola's Six Steps to Six Sigma, Xerox's Nine-Step Quality Improvement Process, or other variations of the Shewhart/Deming Plan-Do-Study-Act (PDSA) cycle.

3. Promote team-oriented learning rather than learning solutions individually.

4. Mix classroom and on site work experience.

5. Engage in field based research.

6. Drop courses in management accounting control systems, but keep budgeting & planning.

7. Drop courses in managerial economics.

8. Stop introducing students to business with a course in financial accounting. The language of business is now the language of processes and customers.

9. Introduce students to business by teaching the language of processes, SPC the language of variation.

Chapter 11. The Information Revolution Revisited

Information technology allows companies to create bottom-up information systems that permit everyone in an organization to participate in analysis, planning and action.


Related summaries:

Deming, W. E. 1993. The New Economics For Industry, Government & Education. Massachusetts Institute of Technology Center for Advanced Engineering Study. (Summary).

Johnson, H. T. 1989. Professors, customers, and value: bringing a global perspective to management accounting education. Proceedings of the Third Annual Management Accounting Symposium. Sarasota: American Accounting Association: 7-20. (Summary).

Johnson, H. T. and A. Broms. 2000. Profit Beyond Measure: Extraordinary Results through Attention to Work and People. The Free Press. (Summary and additional Graphics and Notes).

Johnson, H. T. 2006. Lean accounting: To become lean, shed accounting. Cost Management (January/February): 6-17. (Summary).

Johnson, H. T. 2006. Sustainability and "Lean Operations". Cost Management (March/April): 40-45. (Summary).

Johnson, H. T. 2012. A global system growing itself to death - and what we can do about it. The Systems Thinker (May): 2-6. (Summary).

Martin, J. R. Not dated. Constrained optimization techniques. Management And Accounting Web.

Martin, J. R. Not dated. Continuous improvement plan do study act graphics.

Martin, J. R. Not dated. The contribution margin controversy. Management And Accounting Web.

Martin, J. R. Not dated. What is Six Sigma? Management And Accounting Web.

Martin, J. R. Not dated. Chapter 3: Cost Behavior Analysis & Statistical Process Control - Part II. Management Accounting: Concepts, Techniques & Controversial Issues. Management And Accounting Web.