Over the last few decades, countless organizations have attempted to develop Total Quality Management (TQM) systems by adopting Six Sigma, Lean, Kaizen, Just In Time (JIT) and other methodologies. Others have taken more drastic measures to radically redesign every process in their entire organization through Business Process Reengineering (BPR). Unfortunately, many of these companies, despite their good intentions, and their substantial financial investment in performance improvement efforts, have consistently failed to significantly impact overall performance. Chances are good that you have heard of companies that have implemented nothing more than confusing concepts, complex reports, cumbersome procedures and complicated software programs. In fact, even some winners of the Malcolm Baldridge National Quality Award, or the so called "TQM Companies" have suffered financial setbacks, executed layoffs and filed for bankruptcy.

In order for a company to successfully implement a Total Quality Management (TQM) system, it must first redefine how it will conduct business in the 21st Century. In other words, it must let go of the old management paradigms that have existed for the past 40 years which believe that business success solely hinges on managing "bottom-line results" and maximizing shareholder wealth. To be successful in the 21st Century, a company must undergo a "paradigm shift" which emphasizes that business success is reached when a company's employees can continually exceed customer expectations and still produce a profit. In other words, to survive in the new millennium, a company must focus on building the most talented people instead of selling the most profitable product.

Traditional, top-down management control systems, which have been in place for several decades, cause people to focus on task specific actions that undermine what a business must do to succeed and prosper in the long run. For example, a results-focused department manager would regard training as a resource-consuming activity that he or she can slash at will to control costs. Underlying this attitude toward training is top management's view that workers are simply a cost and not a valuable asset. The organization neglects to see that workers and training are the sources of competency that will, ultimately, enable the company to adapt to change and create new customer opportunities. A precondition that is necessary for long-term survival in a global economy.

Top-down department managers do not foster relationships among work groups to encourage creative problem-solving. Instead, they allow work to be performed in "silos," where, all too frequently, departments are fighting each other for resources and information. These managers view employee training, personal development, focus groups and customer surveys as a waste of time, instead of an opportunity to improve customer satisfaction.

Unfortunately, these manipulative "bottom-line target controls," are often in stark contrast to the company's published mission, vision and values statements, creating a feeling of disconnection between the employees and the organization. Even more tragic is that these short-term cost cutting maneuvers may actually improve bottom-line performance, for a while, giving managers a false sense of security that these interventions were effective. These tactics end up demoralizing employees and crippling the overall performance of the entire organization. Over the long run, these cost-cutting maneuvers may drive customers away to competitors and adversely impact employee performance. Ultimately, employees will fail to see how the work that they perform impacts the organization which results in a deficit of creativity and new ideas, both of which are necessary for survival in the 21st Century.

We are not saying that it is unimportant for companies to know their costs, nor are we saying that making a profit doesn't matter at all. Obviously, earning the market's required rate of profit is a necessary condition for long-term survival. And, having information for planning and estimating the financial consequences of actions is always vital to the success of any business. However, it is lethal to believe that it is possible to improve performance by having everyone in the organization manipulate operations to achieve planning targets for cost and margin, and to cut costs or raise revenue when results fall below a certain level. These actions do nothing to address the root causes that have created the problems in the first place, in the same way a band-aid only covers an open wound and does not actually heal it.

The old management paradigm impedes business success not only by prompting people to achieve top-down targets by manipulating processes. It also impedes success by causing managers to focus marketing decisions on cost and margins rather than on the organization's competencies and the customers' opportunities.

The old paradigm assumes implicitly that customers most want what your cost system tells you is most profitable to sell. But there may be no connection between customer satisfaction and accounting estimates of product margins. Long-term profitability is not achieved by persuading customers to take more of what is most profitable to produce. Instead, it is achieved by profitably making what customers most want and by organizing work to adapt flexibly as those wants change. That is the essence of "new paradigm" thinking.

The old management paradigm impedes business success not only by prompting people to achieve top-down targets by manipulating processes. It also impedes success by causing managers to focus marketing decisions on cost and margins rather than on the organization's competencies and the customers' opportunities.

The strong commitment of businesses to the cost-focused view of product strategy is seen today in the growing obsession with activity-based costing, or ABC. ABC arguably gives companies better product cost information by distributing indirect costs to products more reliably than traditional cost accounting systems once did.

The intent of ABC systems is to charge products with the costs of resources that they truly consume. Excitement over ABC often stems from the discovery that traditional product cost information systematically overstates or understates what ABC information reveals as the "true" cost of products. This new cost information has caused many companies to raise prices of, or drop altogether, product lines once thought to be profitable. It may also cause them to drop processes and expand capacity on lines previously thought of as losers.

But use of product cost information is problematic in any company, whether it pursues traditional batch-orientated work practices or newer flexible work practices. Whether or not ABC systems actually yield more reliable estimates of product costs may be up for debate. However, we do know that ABC does not show a company with decoupled batch-oriented work practices how it can achieve world-class performance by linking work processes to the strategic objectives that result in increased customer satisfaction. In fact, most published cases show that ABC information may prompt batch-oriented work companies to cut costs by reducing the production and sale of small lots and short runs, by curtailing orders that consume resources out of proportion to the revenue they generate.

Unfortunately scale economies are not relevant in a Just-In-Time (JIT) world. Instead of reinforcing a company's vision of producing what the customer wants, when the customer wants it, ABC costs typically encourage the traditional batch-oriented company to, make faster and produce more of, products that customers don't really want, or products that do not entirely meet customer requirements. The company then has to persuade the customer to buy what the cost system says is most profitable to produce. And, since the investment in the ABC system is pointing toward higher profitability, the company postpones making the important systemic changes it needs to make, so it can profitably produce the type of products customers actually want to buy in the first place.