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Rock the Gemba

First Quarter 2019

Download PDFCapital Investment Services First Quarter 2019 Perspective - Rock the Gemba

Everybody talks about it. Nobody really knows how to do it. Everyone thinks everyone else is doing it, so everyone claims they are doing it.

What we’re talking about is digital transformation, the latest evolutionary (many argue, revolutionary) process in which businesses of all shapes and stripes are engaging, operating, and innovating, worldwide.

Years ago, behavioral economics Professor Dan Ariely used the tongue-in-cheek description about “big data”, a precursor and key ingredient for digital transformation.

A cartoon showing a presenter trying to appease everyone by using the most common catch phrases of the day regarding technology and business transformation

Digital transformation is real, and it’s spectacular. It is fast moving and far reaching, orderly and disruptive all at once. Innovative and value-creating concepts we have written about in the past – many of them pictured in the cloud below – are all part of it. So, too, are the people and processes behind these concepts.
A keyword/tag word cloud listing common vernacular among the topic of digital transformation
How should investors think about the opportunities digital transformation affords and the displacements it will cause? Companies that “Rock the Gemba” – that study and continuously improve the place and process of value creation for customers – could offer clues.

Turning (to the) Japanese

We have a couple of corkboards hanging in our breakroom for important notices (and the occasional coupon from a new lunch spot!). Also pinned to that corkboard for well over a decade (pictured below) is a concept called kaizen, a Japanese term that means “change for the better” or improvement.
A picture of a posted note translating a Japanese word via a quote taken from the book An Athlete's Guide to Inner Excellence
As it applies to business, kaizen is widely described to encompass a culture of continuous improvement in which all employees are actively engaged to make specific areas of a company better. Many firms take this a step further and make kaizen a fundamental way of thinking for all employees throughout the organization.1 Whenever a company refers to kaizen either in their annual report or a conference call, it piques our interest.

Gemba (pronounced like “Gamma”) is another related Japanese term meaning “the actual place”. As it applies to business, Gemba is the place where value is created. It is a term meant to emphasize fact and empiricism, where one goes to learn and understand (as opposed to criticize or dictate). Gemba and its associated “Gemba walk” are thought to be where and how well-run companies figure out how to lead.2

Undercover Boss? Not Really.

A popular TV show here and across the pond called Undercover Boss portrays a Chief Executive Officer (CEO) or principal owner in disguise oftentimes working as a new hire on the front lines of a manufacturing plant or service business. During the course of an hour we watch as this proverbial fish out of water learns of the daily struggles of his/her employees at work and sometimes at home.

By the episode’s end, the CEO has completed an empathetic journey of discovery and vows to be a better boss as a result of the experience. While entertaining and instructional, there’s a lot more to a Gemba walk than masquerading as an undercover boss.

A picture of an actor featured on the television show Undercover Boss

That said, at its core, what we’re talking about isn’t new. In the context of business and process improvement kaizen and Gemba walks can trace their origins as far back as the 1980s when U.S. firms were trying to figure out how to replicate the operational excellence of their Japanese competitors (or possibly further considering the work of quality control pioneers Walter Shewhart and W. Edwards Deming). Today, these terms can be found in many places where the concept of “lean” operation – creation of more value with less of everything – is an integral part of the organization.3

Going Digital

According to IDC (International Data Corporation), spending on digital transformation is expected to approach nearly $2 trillion dollars by 2022, as businesses upgrade their technology to compete more effectively.4 In company quarterly earnings conference calls and presentations over the last year the term “digital transformation” was used over 1,200 times.5 And those are just from publicly traded companies in the U.S. which make up less than 1% of all businesses and employ just one-third of the domestic labor pool!

So what does digital transformation mean? Broadly speaking and put very simply, it means three things:

  • Engagement with customers (e.g., from face-to-face to online)
  • Reorganization of internal operations (e.g., using software to change prices or shipping directions on the fly)
  • Innovation of services (e.g., completely new software-based businesses with little or no physical presence like Uber or Airbnb)6

The excellent illustration below may help also.
A graphic relating the various elements of digital transformation in the enterprise business space

Did you hear about McDonald’s recent acquisition of Dynamic Yield? Their aim is to be able to display on digitally-equipped drive-thru screens food based on time of day, weather, and restaurant traffic. They also want to show food that is trending and personalized for each customer.7

Recently, Adobe’s CEO agreed with an analyst who asked about the resiliency of digital spending if the macro environment were to grow more challenging (i.e., our economy slowed). It seems a “keeping-up-with-the-other-guy” mentality is influencing behavior more than a fear of falling behind.8 Concluding with the quote below, he said:

Every one of [our customers] knows that if they are not using digital as an enabler, there’s some small company out there that’s going to completely disrupt their business using a mobile app and digital technology.

–Adobe CEO Shantanu Narayan, December 13, 2018

Wasted on the Way?

A multi-trillion dollar spending tide will lift a lot of boats, but some of them will invariably sink. Companies that supply digital transformation have to spend to battle better mousetraps from the competition. Companies that consume it have to contend with integration issues, operational and cultural, which in turn could have competitive implications of their own.

But regardless of whether you’re selling it, buying it, or doing some of both, all stakeholders have to worry about excessive, unnecessary, or otherwise wasteful digital spending. On a host of different sides, suppliers, consumers, and their investors have to think about digital “waste”.

A Forbes contributor recently wrote, “Everyone is being told to go digital, and the reaction is to throw ever-growing amounts of money at technology solutions.”9 He pointed to a recent survey of senior executives about digital transformation whose authors concluded:

“When feeling the pressures to go digital it’s not uncommon for organizations to end up with technologies that don’t work, are difficult to use, or butt heads with other systems . . .

Sometimes, decision makers aren’t taking the proper steps to support new technology investments. Worse, they may be purchasing flashy solutions simply because they’ve bought into hype or a competitor’s move . . .

Decision makers are not investing in the solutions they’ve identified as most valuable. Even their understanding of what’s valuable can be called into question.”10

How can companies increase the probabilities of reducing digital waste, and create more value with less of everything? The leaders of these companies – from senior management on down – could benefit by getting involved in the processes that create real value for their customers. An effective way to do that is going to the Gemba, the where and the how of value creation.

A cartoon. Dilbert sits at his desk. The Boss enters and says, My new style of management is exhausting me. The Boss continues, I heard some people talking about MBWA or Management by Walking Around. The Boss continues, I walked all the way to the park and back. But I can't say that I see much improvement around here.

Value Creation = Purpose + Process + People

But before they go to the Gemba, managers should understand why they need to go there. James Womack, author of Gemba Walks, would probably concur. As he describes in his book:

“Simplify every process to minimize [the] need for information management (emphasis added). Compressing value streams by relocating sequential process steps from across the world to across the aisle also eliminates the need for a world of information.”11

In other words, before companies initiate the steps to transform a process digitally, they must figure out whether they actually need the process in the first place! For maximum effectiveness, this step necessarily involves all employees with hands in the process – executives, team leaders, sales folks, folks on the front lines– all the people whose contributions affect outcomes.

Writes Womack, “. . . improving a process in an organization should start with the purpose of the process from the standpoint of the customer.”12 This is one unifying concept we want to highlight between digital transformation and Gemba walks: purpose and purpose of process to the customer (Note that all three foundational elements of digital transformation referred to earlier involve value creation to the customer).

Undercover Boss mentioned before does help a little in understanding one key difference between strategies past and present. Companies used to rely on management “heroes”. These well-educated, well-trained executives, perhaps with an alphabet trailing their names on resumes and business cards would show the rest of the team “how it’s done.” That is, responsibility for the value creation/waste elimination process was handled by what Womack describes as a “top-down, command-control” process.

Today’s thinking about creating value and eliminating waste has necessarily evolved in the digital age. If you believe Adobe’s Narayan, there’s less time for processes to follow a formal chain of command. Today, more companies are using a bottoms-up approach to get better results faster.

Writes Womack:

“. . . continued high-level performance is critically dependent on continuous engagement of the entire workforce by the management team in a quest for continuous improvement.”13

Gemba Walk This Way

Traditional Gemba walks combine three steps, Go See, Ask Why, Show Respect. Every walk starts with a purpose, examines a process within the scope of that purpose, and involves all the folks who touch that process.

A graphic relating the three elements of the Japanese management model of gemba - go see, ask why, and show respect

The minutiae of go see, ask why, and show respect is beyond the scope of our purpose here, but as excerpted from Womack’s frequent “walking partner” John Shook, Chairman and Senior Advisor of the Lean Enterprise Institute:

  • Go See: Identifies purpose, considers alignment of people and process
  • Ask Why: Looks for solutions, waste, obstacles
  • Show Respect: Respect, Rely, Develop, Challenge . . . all people involved

Walks that start with the customer and work backward are considered ideal, but are currently thought to be less common.14 Even Gemba walks themselves require continuous improvement!

Where Gemba Fits in the Growth Cycle

In past editions of these pages we have tried to explain the importance of risk-taking and innovation to the health and growth of an economy. As the figure below shows, Risk Taking leads to Innovation & Value Creation. Innovation & Value Creation lead to Growth & Productivity. Growth & Productivity lead to Wealth Creation. Wealth Creation starts the whole process over again.

A graphic relating the three elements of the Japanese management model of gemba - go see, ask why, and show respect

To put a finer point to it, Wealth Creation (or more properly, Wealth) is not only the end result of the process but more importantly, the source of it. The growth cycle can’t start without it and the very-necessary, very-healthy, risk-taking activities it engenders. In that context, it may be helpful to think of Gemba walks as a fuel propellant (and waste retardant!) to the innovation and value creation parts of the growth cycle resulting from successful risk taking.

Prosperity in the long run is achieved by commercially-tested betterment, not the shovel-ready projects of bridges to nowhere.

–Prof. Deirdre McCloskey, Wall Street Journal, December 6, 2018

Effective digital transformation depends on the risk/reward, success/failure tradeoffs afforded through equity ownership. It cannot be subsidized from the top down (e.g., government); it must be driven by the risk-taking, value-creating efforts of those closest to the customer. The following examples should help to demonstrate why.

Rock the Gemba: New Business Opportunities

A slide from Danaher's 2017 investors presentation detailing how the company's embrace of certain Japanese management philosophies has created significant customer value that has translated to shareholder value

Danaher is a large, multinational company headquartered in Washington D.C.; maybe those are the only things about the company that haven’t changed in the 15 years we’ve followed them! That’s because Danaher is constantly reinventing the products and services they deliver, always in pursuit of value creation to the customer.

The slide above was presented at Danaher’s 2017 Analyst Day conference. In this example, they demonstrate how Gemba helps them identify new business opportunities. Note the emphasis on developing new solutions from the customer’s point of view.

. . . it gives us rapid cycles with customers, sprints we call them. So, we will go out and talk to customers and [ask] what is the unmet need that we can fulfill for you? [emphasis added]. And in this case, we’re starting to see customers purchase some of our Hach drinking water analyzers into the dialysis market to test for chlorine, so we went out to understand that, we bring it back to our labs, and we start innovating against it.

We leverage a concept called Obeya, which in Japanese means big room. This is where we break down the walls literally [and] cross functionally. We put the scientists of different disciplines together and we start coming up with prototypes and innovating against that customer idea.

We’re not sure we get it right initially, so we go back out to the customers and we talk to them again and we iterate those prototypes with them. And, in this case, for the Hach example, there were 15 product design sprints and loops that we did with the customer that unlock for us, a $50 million adjacency. This is going on all across Danaher.15

Rock the Gemba: Eliminating Waste

Ecolab is another large, multinational company headquartered in St. Paul Minnesota. Their water, hygiene, and energy technologies businesses serve the food service/processing, hospitality, health care, and energy markets. You’ve probably seen their trucks tooling around where you live.

Ecolab has gone all-in on digital transformation, and from the slide below you can see it’s clear the effort is all about the customer.16

A slide from an Ecolab presentation detailing how the company uses big data and digital transformation to create better outcomes and solutions for customers.

But for Ecolab, Gemba isn’t just about new business opportunities. It’s also about improving safety, containing costs, and creating a sustainable culture of continuous improvement.

For Ecolab’s Garland, Texas plant, where they make detergent blocks for commercial dishwashers, those efforts began years ago with a Gemba walk by a new VP of Operations.

At the time, Garland was Ecolab’s poorest performing location, and the plant manager was given twelve months to turn it around.17

While the team didn’t achieve all of their goals, the plant did succeed in improving safety by nearly 70% and reducing some waste metrics by 20%. Equally important, they identified even more areas for continuous improvement.

What’s interesting is that Garland tried to take steps to improve before, but nothing took hold until that Gemba walk which the plant manager later dubbed the “Day of Change”. As Jill Jusko, who reported Ecolab’s efforts for Industry Week wrote,

“Creating a lean culture requires a sustained process and consistent message, not simply a workshop — or even a series of workshops. And while the change may begin with the plant manager, it requires commitment from the entire workforce.”

“The leadership team developed a vision for the facility, bolstered by seven values. Among the values: “I have the courage to challenge the norm, provide innovation, and eliminate waste.”18

Rock the Gemba: Little Things Become Big Things

Deborah Adler, a NYC-based designer/entrepreneur believes that “if you want to change the world, go to the Gemba”.19 Her understanding and appreciation for “the real place” came from solving a problem for her grandmother who accidentally took her grandfather’s medication.

Adler’s design solution for prescription medication bottles was adopted by pharmacies at both CVS and Target. She delivered a short TED talks presentation about her experiences that’s available on YouTube.

A YouTube screen grab from a Ted Talk presentation by Deborah Adler

Her point is that big change doesn’t have to come from big ideas. Value creating ideas for one person can become value creating ideas for the world.

“In the Gemba we learn that there is no best way. There’s always a better way. But the trick is to be there to see it. Go to the real place where the work is done. Watch. Ask. Solve at human scale. The little things are the big things.”20

A YouTube screen grab from a Ted Talk presentation by Deborah Adler

Rock the Gemba: Digital Transformation & Capital

In our Perspectives, we often address Fears, Uncertainties and Doubts (FUD) “of the moment”. We try to explain why and how what’s going on with either policy makers in Washington or central banks here or around the world may offer difficult, yet conquerable challenges.

Fiscal policy and monetary policy can make the operating environment of a free economy more hospitable or formidable, but they can’t change the fundamental nature of our Gemba, the place where value is created.

And, if you’re wondering how we can avoid the fate of the Japanese – who pioneered ideas like kaizen and Gemba – but haven’t been able to free themselves from decades of economic stagnation despite a focus on value creation, it’s a bit like comparing apples and oranges. They don’t have a lot of what we have in this country. Among them are favorable demographics, a melting pot of cultures and ideas, and a system designed to protect and enforce individual property rights. In short, we have a more hospitable environment for the “Big Wheel” – the Growth Cycle – to keep on turnin’.

What gives us conviction is a deep and rich history of lessons that demonstrate these groups don’t control the American economy; only wealth creation and successful risk taking does. It’s the Danahers, the Ecolabs, and the Adlers at the Gemba that propel us forward, not Presidents, Congress, or The Federal Reserve.

The biggest risk to the long-term health of the economy and the market today is the desire of policy makers from both parties to allocate capital. This process is always best left to the collective wisdom of markets.

–Jason Trennert, Investment Strategist, Wall Street Journal, March 8, 2019

So this is where and how we spend most of our time: Trying – as that concept pinned on our corkboard reads – to learn and understand where profitable innovation and value creation will come from in the future.

Digital transformation – the latest in a long line of purpose, process, and people evolutions – won’t identify the best way to solve new and complex problems, but rocking the Gemba can help identify better ways every day. The graphic below highlights many of the digital deals we followed last year, but by no means is the list complete.

A table showing the many digital transformation mergers and acquisitions made by corporate America during 2018

This is just one of several ways we try to rock our Gemba, to better learn and understand what could add value and what could be wasteful about digital transformation. We remain focused on these kinds of fundamentals because it gives us better probabilities of success.

Sources & Notes

1 Vorne Industries Inc., www.leanproduction.com/kaizen.html (accessed December 19, 2018).

2 James Womack, Gemba Walks Expanded 2nd Edition (Foreword by John Shook) (Cambridge, MA: Lean Enterprise Institute, Inc., 2013), loc 87.
3 Ibid, loc. 2383.
4 www.idc.com/getdoc.jsp?containerId=prUS44440318 (accessed March 7, 2019).
5 FactSet search of “digital transformation” conducted on March 7, 2019.
6www.thedigitaltransformationpeople.com/channels/the-case-for-digital-transformation/what-is-digital-transformation-and-what-does-it-really-mean-for-you-and-your-organisation/ (accessed March 7, 2019).
7 www.zdnet.com/article/what-mcdonalds-acquisition-of-dynamic-yield-tells-us-about-digital-transformation/ (accessed March 29, 2019).
8 Adobe Inc., Fourth Quarter Conference Call Transcript, December 13, 2018, FactSet CallStreet, LLC, pgs. 19-20.
9 www.forbes.com/sites/joemckendrick/2018/04/10/digital-transformation-heres-the-money-well-sort-it-all-out-later/#3d4f47b8177e (accessed March 18, 2019).
10 2018 Digital Transformation Report – Strategies for Avoiding Common Mistakes and Making Smarter Technology Investments, PointSource.com (accessed March 18, 2019).
11 James Womack, Gemba Walks Expanded 2nd Edition (Foreword by John Shook) (Cambridge, MA: Lean Enterprise Institute, Inc., 2013), loc 591.
12 Ibid, loc. 3603.
13 Ibid, loc. 3558.
14 www.lean.org/shook/DisplayObject.cfm?o=1843 (accessed March 25, 2019).
15 Danaher 2017 Investor and Analyst Meeting, December 14, 2017.
16 Ecolab 4th Quarter 2018 Investor Presentation.
17 www.industryweek.com/ecolab-lean (accessed March 27, 2019).
18 Ibid.
19 Adler, Deborah, “Go to the Gemba.” TEDXRVA, March 22, 2013, www.youtube.com/watch?v=A_DGAGzyPEg.
20 Ibid.