A Measure of Change
The most important part of "measure what matters" is "what matters." Lean found it in one pain, long habituated away. Circularity can find it the same way.
This season is about the nature of change: what change at the level of a business is, what it does, and what it requires. It is also something of a rhetorical retreat, because intentional change, especially the self-disruptive kind, feels so rare these days.
The evidence says the feeling is accurate. Between 1980 and 2010, the average disruptiveness of US patents fell by more than three-quarters in every technology category, according to a 2023 study in Nature. Industry leaders have grown harder to dislodge, too. "The likelihood that a top firm in any industry will be displaced by a rival is less than half of what it was in the late 1990s," the economist James Bessen writes.
Circularity has not escaped the trend. The Circularity Gap Report, the movement's annual scorecard, puts the share of recycled materials entering the global economy at 6.9%, down from 7.2% three years earlier. The figure has not risen in any edition since the first, in 2018.
So the possibility of change deserves scrutiny. If there is one thing people seem to agree on when it comes to change, it is that metrics are important. John Doerr, the venture capitalist, titled his book Measure What Matters. But taking the measurements is the easy half of that advice.
A few weeks ago we promised an account of why the data we manage by favors the short term, and last week Goodhart's Law gave it form. Our hypothesis underlying each: the numbers come last. What comes first is finding the pain that people have learned to live with.
Christian Rishel
What I saw in the late days of Lean
Over the last half century, in terms of mass adoption by corporations, it is hard to overstate the success of Lean. In 2007, an IndustryWeek census found that nearly 70% of the US manufacturing plants it surveyed had adopted lean as an improvement method. By the time I was a strategy consultant in the mid-2000s, the transition was nearly complete, and it had extended beyond manufacturers to service companies like airlines, hotels and logistics.
As an outgrowth of the Toyota Production System (TPS), lean manufacturing had become known as a quality play that resulted in lower costs. For companies that weren't manufacturers, the appeal was subtler. At the firm where I worked, Lean was linked to organizational health, an index built from a survey of employees about their workplace and its practices. A high score on organizational health, in turn, correlated with higher returns to shareholders.
This concatenation of effects was enough to persuade service companies to try it. Where it was done well, it worked. Value streams were mapped, and root causes of waste were identified and systematically addressed. Service standards were codified and improved. This broader application of its principles, to every kind of value creation, is what I mean when I spell Lean with a capital L.
Christian Rishel
At the beginning, Lean measured surprisingly little. A kanban in a Toyota factory said what to pick up, where to move it, and how many to make. Taiichi Ohno liked to say that management should be done "not by arithmetic but by ninjutsu," by which he meant skill acquired through training. The measurements served a trained eye on the shop floor. The obsession with metrics came later.
What comes first
Consider the benefits Lean brought over the course of its era:
- At Toyota, it brought productivity and quality, which lowered costs and opened new markets, luxury cars among them.
- Across American manufacturing, it became the default way to improve quality and reliability.
- At the companies my firm served, it correlated with organizational health, and organizational health with higher returns to shareholders.
Of quality, low cost and higher returns, which one is the driver? Which are the corollaries?
The honest answer is none of them. Ohno had no health index and no valuation multiple. Before the oil crisis of 1973, he "found little interest" in his methods outside Toyota. What he had was one enemy. "There is no waste in business more terrible than overproduction," he wrote. His arithmetic was simple: "Present capacity = work + waste." Ohno attacked overproduction, and the gains turned up everywhere: in cost, in quality, in the way people worked.
Christian Rishel
Clayton Christensen had a parable about mistaking dividends for causes. Early would-be aviators noticed that feathers and wings were correlated with flight. So they strapped on wings, jumped off cathedrals, and flapped. Managing to any one of Lean's numbers alone would repeat their mistake. Managing to all of them at once would diffuse the focus that produced them.
The late adopters had one more advantage. For them, Lean improved the business they were already in, so its gains showed up on the dashboard they already had. In Christensen's terms, Lean sustained their value network.
A number is not a job
In working with many dozens of leaders and managers interested in circularity, I have observed the search for a meaningful, defining metric as an almost universal urge. The desire is to have a number to manage around, the way actors like Humphrey Bogart used to act around a cigarette. It gives them something around which to orient their actions.
Last week we cited Goodhart's Law in its popular form, articulated by the anthropologist Marilyn Strathern: "When a measure becomes a target, it ceases to be a good measure." What economist Charles Goodhart actually said, in 1975, was drier: "Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes." He had watched Britain try to steer its economy by controlling the money supply. Once the number became the target, its information value diminished. When it comes to metrics, observation and control are distinct functions.
Where Lean succeeded was in keeping the two apart. It treats metrics as inputs to root cause analysis, which is itself an exercise in the scientific method: a metric reveals variance, and a remedy starts as a hypothesis about it. Goals could be set for a number, but the number is not the job. The underlying process is. W. Edwards Deming put it bluntly: "Eliminate management by objective. Eliminate management by numbers, numerical goals. Substitute leadership."
The disciplines that followed Lean found the two harder to keep apart. Six Sigma is named for its own number, a defect rate of 3.4 per million. It is a fine discipline in good hands. In others, the number outlasted the goal it served. Then came objectives and key results. To his credit, Doerr warns against tying OKRs to pay. But when the job depends on hitting the key result, and the key result is a metric, the metric becomes the job.
In our summer reading, we scored Jay Forrester's predictions for modern management. Middle management improved: "We got Six Sigma, we got OKRs, we got a KPI for everything." Long-range planning, not so much. That may be the simplest reading of the evidence we started with. A firm that manages by targets gets steadily better at what it already measures. Changing what it measures is a different job, and that's the part that requires leadership and wisdom.
Christian Rishel
One pain, long endured
Which brings us to circularity, and to why it has stalled.
The natural response is a better scorecard: recycled content, virgin-material rates, utilization. Each is worth observing. Each is also readable by the business the firm is already in, and that is the trouble. Christensen showed that the way a market ranks performance "defines, in part, the boundaries of a value network." Circularity asks for a new one: different customers, a revenue model that thrives after the sale, success measured on attributes the old business doesn't rank. Run the old numbers on it, and it reads as a bad investment. By those numbers, it is one. Firms that demand those numbers first, Christensen wrote, "get paralyzed or make serious mistakes."
Christian Rishel
That is why I have come to believe the stall is, at bottom, an innovation strategy problem. It has many causes. The one that binds sits upstream of measurement.
Even the scorekeepers feel the urge. This year the Circularity Gap Report led with a new number: a "Value Gap" of €25.4 trillion a year, nearly a third of world GDP. It is a valuable observation, as long as nobody manages to it. Meanwhile, the report's own explanation for the falling circularity rate names the pain: material use is growing faster than Stahel's "Era of Rs" (reuse, repair, remanufacture, recycling) can handle. That is Ohno's old adversary: overproduction, at planetary scale.
Lean's answer still applies. Ohno organized everything around a single pain, a goal that lived above every number. A disruptor gets that vantage from a clean sheet of paper. An incumbent can get it from a named pain. Donella Meadows prescribed the same cure for policy resistance: "an overarching goal that allows all actors to break out of their bounded rationality."
If Circularity's organizing pain point is overproduction, the proper place to start the root cause analysis is the Last Moment of Truth (LMOT). Once the pain is in view, new numbers follow. One of Horace Dediu's tests for disruption asks for exactly that: "Does the new business propose a new measure of performance?"
A method that keeps one pain in view still needs someone to lead it. Who keeps a method honest after its founder is gone? That is next week's question.
The takeaway
The measure of change is the principle that motivates it. Pick one pain, manage it, and count the wins.
Next week: Keepers of Change.
💬 Discuss: mention @christian@circudyne.com on Mastodon
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