"I'm not here to teach you anything new. I'm here to make you see things that you normally would not see." — Dr. W. Edwards Deming

In this episode, Deming educator Balaji Reddie reveals the practices that are hiding in plain sight within most organizations. Practices that feel normal. That get celebrated. And that quietly undermine everything you're building.

One example: arbitrary targets. An employee collected 2 million rupees in a single day — four times his target. He told no one and did nothing for four days. Because he knew his manager would just raise the bar. That single moment of silence cost the company a genuine breakthrough.

This is what Deming called a "faulty practice." And there are many more where that came from.

Host Andrew Stotz and Balaji dig into Chapter 2 of The New Economics — Deming's most overlooked chapter. They cover why ranking employees is built on a mathematical illusion. Why chasing quarterly results destroys long-term value. And why the best leaders, from Steve Jobs to Walt Disney, ignored the pressures that trap most organizations.

TRANSCRIPT

0:00:02.4 Andrew Stotz: My name is Andrew Stotz, and I'll be your host as we dive deeper into the teachings of Dr. W. Edwards Deming. Today I'm continuing my discussions with Balaji Reddie. He's an educator and a trainer in the teachings of Dr. Deming and quality management generally. And the topic for today is becoming aware of faulty practices. Take it away, Balaji.

0:00:26.0 Balaji Reddie: Good morning. Thank you, Andrew. So part three of our series, what we're looking at. So last time we met, we spoke about essentially Point number 14, because we outlaid his profound knowledge. And then I always said that he gave us a lot of clues as to what needed to be done. So I started out by reading some of the excerpts from the book, which we tend to ignore. And then he said, "Here's what I expect." So he expected leadership, a critical mass to be created, and then he gave attributes of a leader. So we listed 17 of those points, which we said principles of leadership. And now once you've created that critical mass and there's someone who's taken the lead and there are a bunch of leaders, maybe, so what do we do next? So when you start becoming aware that you are now in a prison, so to say, because that's what he said here, that they feel it's a fixture, and this is the way things are, this is how things always have been. So he says, "No, you need to understand that these things are wrong." Right? And you first need to become aware, and then we need to look at what needs to be done, perhaps. So he's given some suggestions, and you could always adapt and adopt this. So most of this would be taken from the book, The New Economics, chapter two, which he has titled as "The Heavy Losses." Now, remember, when he wrote this book, it was after the other book, Out of the Crisis, where he had listed his 14 Points. Yes, but he also listed diseases and obstacles. And people tend to ignore that.

0:02:18.9 Balaji Reddie: In fact, I remember having a chat with Bill Bellows on this, and I said, "Diseases and obstacles." And he said, "Obstacles?" I said, "Yes, he has listed 16 obstacles in Out of the Crisis." And he said, "Oh, wow." And he took his copy and he said, "Oh, yeah, you're right. There are 16 of them." And so sometimes you see things that you normally would not see. So when he wrote this, initially, I think many people thought that it was just an extension of those Diseases. But when you start looking deeper, you'll find that he became more elaborate in what he listed as the heavy losses. So he says here that these are things that you start observing and you say, "This is not normal." So the language that he's used is pretty, pretty clear. Present practice, so faulty practices. The present practice, and he says these are only reactive. You only need certain skills and not nearly any theory of management. Whereas when you opt to go to a better practice, you need a theory. So let's start with the very first faulty practice. And this stems from his 14 points too. He says, "Lack of constancy of purpose, short-term thinking, and emphasis on immediate results. Think in the present tense, no future tense." And then he becomes more elaborate and says, "Keep up the price of the company's stock and maintain dividends."

0:04:02.0 Balaji Reddie: Which, well, okay, it seems like you should not do that. No. He says here, you fail to optimize through time. Make this quarter look good, ship everything on hand at the end of the month or quarter, never mind its quality, mark it as shipped, show it as accounts receivable, and defer till the next quarter repairs, maintenance, and orders for material. Just a word here, in the new edition of The New Economics, there's been a spelling mistake there. So if anyone's listening, you can just correct it in the next edition that comes out. Instead of "defer till the next quarter," he's written "defer toll the next quarter." So we need to correct that in the next printing. Now he says here, a better practice...

0:04:52.1 Andrew Stotz: And before you go to there, can we just talk about this for a second?

0:04:56.1 Balaji Reddie: Sure.

0:04:57.8 Andrew Stotz: One of the things that, having been a financial analyst all my career, we get quarterly results from companies in the stock market. And in my own business, of course, I look at monthly results because we close the books every month. And it's definitely one... Donald Trump recently came up with the idea of telling companies not to report quarterly results. And I believe the Singapore Stock Exchange also came up with the idea of maybe we'll reduce the amount of reporting to maybe half-yearly, because we do have half-yearly reporting in some countries, right?

0:05:39.6 Balaji Reddie: Right.

0:05:40.9 Andrew Stotz: But having learned the teachings of Dr. Deming many years ago, long before I became a financial analyst, I always thought, I never really got this one because I thought, what an idiot you would be if you're running a company and all you could see was the market's demand for quarterly performance. And I've always admired those people, I think Jeff Bezos was one that really made it very explicit. "If you're here for quarterly performance, you're not gonna get it." And so I always have said to CEOs, having seen analysts and fund managers, I've visited, taken fund managers more than 1,000 times to meet with CEOs, and CEOs ask me, "What's your advice from seeing all that?" And I said, "Don't listen to this too much." Take it on board, what the discussions are about, but you're the CEO. Your job is to optimize the value of this business. And that means, that doesn't mean making quarterly numbers, manipulating things to make quarterly numbers. So part of what I've said to people is, "Get a backbone. Don't come and complain to me, 'Oh, yeah, but the pressure of the market's quarterly.' Come on." You know and I know that the job of a CEO is to maximize the value of the business, not the quarterly result. So anyways, that's my little pet peeve.

0:07:13.6 Balaji Reddie: Yeah. Yeah, that's right. And if you look at even Jobs, Steve Jobs, when he came back as Apple CEO, he had the nerve and the spine, like you said, to tell the board, "Don't judge me on this. It's gonna take time. And believe me," he said, "someday you will see results." Now, unfortunately, he was not there to see what he's created, but I think anyone in Apple can safely say that they're growing because of the foundation that he laid so long back, right? And I think that was one of the major reasons why he did not make Jonathan Ive as the CEO, because he wanted him to focus on the product and the customer rather than the quarterly results. And I don't think Apple ever played it by quarterly results.

0:08:04.9 Andrew Stotz: Yeah. And here's a good book called Competition Demystified by Bruce Greenwald. And there's a passage in here that's interesting because he published the book back in 2005, so it was long before Steve Jobs really made the company profitable. And he had basically gone through and explained the situation at that time as a strategist looking at the company. And what he said, it says, he just said that "Jobs had managed to restore operating margins, but Apple survived, it had hardly prospered, its future does not look bright." And I use this as an example in my strategy class to help people understand that when you're building strategy, you're thinking long term. And the ecosystem that Steve Jobs created, the value of that ecosystem didn't really truly appear until many years after he was working on it. So anyways.

0:09:06.6 Balaji Reddie: Yeah, so that's a classic case here.

0:09:11.1 Andrew Stotz: Let's keep going. You're on a roll.

0:09:14.5 Andrew Stotz: Oh, that's okay. So now better practice, he says, theory of management. Now see what he writes here. He says, "Adopt and publish the constancy of purpose." Now, that's one of the things that he also changed in his 14 points in the 1990 edition, which he never really published in a book but he gave as handouts in his seminars. Earlier on, it was "Create a constancy of purpose," but he says now, "Publish it." And it should be a proper statement, right? And he also said not just for the company, but for other organization. Now, he perhaps was envisioning or he already saw what is happening in the world today, that it's not one company against another, it's a family of companies against another family of companies, if I may say so. And these companies are globally dispersed, so there has to be something that binds them together, and that's the constancy of purpose. And purpose is why we exist, right?

0:10:13.4 Andrew Stotz: And I want to ask about this.

0:10:15.3 Balaji Reddie: Right.

0:10:16.2 Andrew Stotz: Professor, can I ask you about this?

0:10:18.4 Balaji Reddie: Sure. Right.

0:10:21.0 Andrew Stotz: Because if we go to Out of the Crisis, he has his section, and this for me is on page 24, but I don't know what edition I... Maybe I have an old edition, but it's the chapter "Principles for Transformation." He's gonna talk about the 14 Points, and I want to talk about the first point. And the first point is "Create constancy of purpose for improvement of product and service."

0:10:45.8 Balaji Reddie: Yeah. This is the old edition, 24.

0:10:48.6 Andrew Stotz: And the question that I have is that was he saying... Because now you've said in The New Economics he says constancy of purpose. He just states constancy of purpose. He doesn't say "for improvement of product and service." So my question to you is, is he saying that the constancy of purpose should be about improvement of product and service, or is he saying your constancy of purpose could be any purpose, but you just need a long-term purpose?

0:11:22.8 Balaji Reddie: Yeah. And he says that anything that help people to live better and have a market. That's on page 25. So whatever you do, your purpose should be to make life better, right?

0:11:40.2 Andrew Stotz: Right.

0:11:40.7 Balaji Reddie: And the product is just the manifestation of that. It's the outcome, correct? For example, if you talk about Walt Disney and his statement of purpose, he made a very telling statement, right? And how he came to write that down as a very fascinating tale. But he said, "I'll do anything to make a child smile. I'll do anything to make a child smile." So all that you see was aimed at the child, right? Whether it was the merchandise, whether it was the animated films, whether it was the actual non-animated films, if I may say so. And then, of course, coming out with Disneyland and then Disney World. So whatever he did was for the child. And then after he passed away, they lost that. I think they wanted to just sustain what they had attained, but there was nothing new coming out of Disney. And slowly people started encroaching on their turf, so to say. You had someone like a Steven Spielberg who made ET, and that really pulled the rug under their feet. And before they knew it, there was Goonies and Gremlins, and they were really crumbling. And they thought, "Let's join hands with the devil," and so they hired him to make a film. And that did very badly.

0:13:01.9 Balaji Reddie: We also know that Hook, which was supposed to be on Peter Pan, et cetera. And then they were in a crisis and said, "What do we do now?" And most of the top people were just washing their hands of everything. They were the employees who were left, many of them who had worked with Disney, and they said, Sony was very keen to buy them out. And they said, "We need to keep them out, and how do we do that? The only way we can do that is to make a comeback and let's make another film. And we've not been doing anything original, so let's go back to the drawing board." But they said, "We need something to guide us." And that's when they discovered what Walt Disney had written, "I'll do anything to make a child smile." And they said, "What a shame. We forgot the child. We hired the best, but we didn't do anything for the child." And they added one more sentence there. "Anything to make a child smile, and there's a child in every adult." That's how they created Honey, I Shrunk the Kids. Unique idea.

0:14:03.0 Andrew Stotz: Right.

0:14:03.9 Balaji Reddie: You can see it's a statement of purpose that brought them back.

0:14:07.6 Andrew Stotz: Okay. That helps me to understand that what he's talking about, according to what you're saying, is come up with your purpose.

0:14:14.4 Balaji Reddie: That's right.

0:14:15.3 Andrew Stotz: Okay.

0:14:15.6 Balaji Reddie: And he of course also added the word "aim" later on, which is that direction, because he says there, "Where do we wish to be? And then by what method?" So you should know whatever you do should go in the right direction. So that's the first faulty practice, and also giving us a theory of what we need to do. So go back and try to rediscover your purpose if you don't have it, or maybe just come out with something and see what really ignites you, what really drives you forward. And he's given some bullet points here. No number of successes in the short-term problems will ensure long-term. Short-term solutions have long-term effects. So that's that statement where he said cause and effect are not closely related in time and space. Of course, management must work on short-term problems as they turn up, but it's fatal to work exclusively on short-term problems. So he tells us that there has to be some place where you need to stop and start focusing on the big picture. So that's the very first faulty practice. Now the next one is a real, real bucket of water on your face. "Present practice, ranking people, salesmen, divisions. Reward at the top, punishment at the bottom. The so-called merit system." At the top and bottom. It's an artificial creation because no matter what scale of measurement you use, there will be an average measure and there will be 50% above the average and 50% below the average. That's exactly what the word average means. So making these stupid claims that this is an above-average person or a below-average person does not really mean anything.

0:16:07.8 Andrew Stotz: Because what you're really doing is rewarding or punishing common cause variation?

0:16:14.9 Balaji Reddie: Well, that's one. But when you're artificially creating something which doesn't even exist, right? You're saying top half, bottom half. In fact, that funny statement where there's a headlines in England, this happened in England, which said studies have shown, and they spent half a million pounds on carrying out the study, that 50% of the children in England are below average nutrition level. You don't need to spend half a million pounds to figure that one out. That's the law of averages. And using that to judge people is crazy on some arbitrary scale that you've invented. And he goes on to...

0:17:06.7 Andrew Stotz: So the first question I asked was, is this just a frivolous or tampering with common cause variation? Or the other question that... Or is this part of psychology and the idea of demoralizing people through this type of behavior? Where does that fall in from the System of Profound Knowledge, let's say? Is it variation, psychology, or is it both?

0:17:34.5 Balaji Reddie: It's a bit of both.

0:17:36.4 Andrew Stotz: Yeah.

0:17:36.6 Balaji Reddie: Because if you talk about understanding psychology, what he meant, I think I used the word empathy, that we need to be empathetic. When you're talking about employees, what do you mean by empathy there? Well, we need to understand their learning processes. Each one of us has a learning process, but we have a different kind of a learning process. And then when you understand the learning process of a person and then put that person in the right job, you'll have to stop that person from working. That's joy in work. He says that when you... And that takes time. And the ranking system or the merit rating system is an excuse for not having understood or making an effort to understand your employee. You're becoming lazy. You put the onus on them when actually the onus is on you. You have to find out what makes that person tick, if I may use the word resonates. What resonates with that person, right? And then put that person in the right job. He's been saying this from the beginning. It's fascinating that he said this in Japan when he was teaching the control charting there.

0:18:42.3 Balaji Reddie: He said if you draw the control chart for performance of a worker and then it's all within limits for a long period of time, despite all the training and all the lessons that he or she has been given, then he said, "I think it's time to move that person out from that job and give them some other job." Because they've reached statistical control. Any amount of effort put in will not result in a better output. You're gonna get the same thing. And if you want something else, then you need to shift them or maybe give them some better job, whatever it is. So he always had this, that we need to use these in tandem. And in any case, it's a System of Profound Knowledge, so all the four sciences work together, right? And if you want to ask me, when a person understands their purpose, I'm extending the statement of purpose here to the person, when a person understands why they're doing something, they always do the job better. So that statement of purpose needs to come in here too. Instead of ranking them, sit down with them and have a heart-to-heart with each one of them. This is back again to the 17 principles we discussed last time, that you have to spend some time with them.

0:19:57.9 Andrew Stotz: Okay.

0:19:58.3 Balaji Reddie: And understand what makes them tick. So he says "the better practice is to abolish the merit system and manage the company as a system. The function of every component, every division under good management contributes towards optimization of the system. That is, it's not compromise, it's optimize." We don't say either-or, it's and. And he says "differences there will always be, but the question is, what do the differences mean?" So that's where you can use control charting to figure that one out. And I told you how I did this in my company and I got the HR lady to finally say, "I think we need to remove performance appraisal." Performance management, yes, of course you need to have a system in place because I need to know where I am. Even when we later on come to the 14 Points, one of his most, according to me, most misunderstood points is point number three, cease dependence on inspection. But that doesn't mean you stop inspecting.

0:21:02.8 Balaji Reddie: And we will read that when we come to that as to what he meant. So you need to know what is happening, definitely. For that reason, you do need to have some system in place, but you cannot judge a person based on that. And so he says here that "ranking is a farce. Apparent performance is actually attributable mostly to the system." And a simple equation, that's my favorite, that's what we discussed last night too, Tim Higgins, when he said x + (x * y) = 8. And you've gotta solve this equation when you don't even know both. Both are unknowns. Then how can you figure out what is x and what is y? So the other factor, the Pygmalion effect, right? I think for those who are not conversant with the Pygmalion effect, the play by George Bernard Shaw, Pygmalion, which was made into the movie My Fair Lady, where he picks up a lady from the streets who was a flower seller, a flower lady, a flower girl. And he accepts the challenge of teaching her how to speak good English rather than what they call as Cockney English. And then it's like an experiment and a challenge and he starts teaching her. And then to test himself, he takes her to a party. And there she has one drink too many and she gets a little bit tipsy and then goes back to her old way of speaking, which really shocks the guests in the party.

0:22:41.5 Balaji Reddie: And he's very upset when they come back home and he said, "You'll always be a flower girl." And then she makes a statement, "Treat me like a flower girl, I'll behave like a flower girl. Treat me like a lady, I'll behave like a lady." And that's the Pygmalion effect. You start treating people that they're failures and then they have to live up to that reputation, right? So they continue being failures. You treat them well, so the Pygmalion effect comes into play. And of course, he talks about his red beads. That's an excellent experiment in bringing out many of his principles. Though he did not design it originally for this, that came much later. In fact, in Japan when he carried out the red bead experiment, it was purely for sampling. He invented that experiment for sampling. And he said that he broke down barriers and made things so simple for people. I think the lessons of management came much later at Hewlett-Packard where while he was explaining sampling and then when he went to what he was trying to teach them about management, someone jumped up, I forget the name of the person, who said, "But this is... So this is what you're trying to teach us with that sampling experiment." And then he suddenly realized he could use this. And of course, the so-called, and then raises in pay, et cetera. Yeah, whom to raise? Everybody within the system, blah, blah, blah.

0:24:13.4 Balaji Reddie: So I think last time I explained this about the roles, responsibilities and objectives, right? I borrowed this idea from another company in India where I saw this happen. When we removed the performance appraisal system, we came out with something which was quite different. We used to sit down with the people and explain to them what we intend to do as a company for the next four or five years and what their role is and what we expect them to... How do we expect them to contribute? But then came the next question. We turned around to them, "What do you expect from us as a company to help you grow in this direction or anything else?" And so they would give us certain expectations. And so we negotiated, came down and wrote things down. And then came the best part. We said we're gonna meet not once a year, but every month and as often as possible to discuss. That's why I loved it when the Deming Institute came out and were doing it, I'm sure they're doing it even now, in the two and a half day, from "me" to "we". So when we met every month, we used to ask the question, "How are we doing?" Not "What have you done?" "How are we doing?"

0:25:33.0 Balaji Reddie: And so when I heard that, I wanted to tell Bill Bellows I've been doing this since 2004. And when I heard the "me" to "we" thing, which was around 2017, '18, I think I saw that happen and I was, "Wow. All right." So thinking on the same lines. So the faulty practice, all right, when he talks about this, the second one and what needs to be done. Yeah, he gives some other advice also that if you're faced with problems, cut the dividend, cut it out. And that's, of course, when you're having hardships in the company. So he's given us a set of steps there too. And he says finally, if necessary, cut pay, but nobody loses a job. So, of course, those are extreme cases that we need to do, but he gives us advice what needs to be done. Now, the third faulty practice is incentive pay, pay based on performance. And I think that this has a lot to do with the arbitrary numerical targets that are set, right? And then, "If you do this, I'll give you that." So he says that the performance of an individual cannot be measured except maybe on a long term.

0:27:04.7 Balaji Reddie: He said reward for a good performance may be the same as reward to the weatherman for a pleasant day. He's got no control over it. And he says, "Abolish this incentive pay and pay based on performance. Give everyone a chance to take pride." I think you were talking about this last week too when we said about these arbitrary targets that lead to all of this, where somebody made a statement to me that, "The targets were a distraction to me from what my actual job was. My job is this. The target is just distracting me from my job." So very often people feel that way, right? And pay for performance, "I'm supposed to do this," right? And he gives an example. The top salesman may be a heavy loss to the company by overselling, selling to a customer a bigger copying machine than he, the customer, needs, right? And selling a bigger or fancy insurance policy than the customer can handle, promising immediate delivery, promising unauthorized discounts, et cetera, et cetera, right? It's the same thing, when one of my students was doing this, his internship project, he found that there was excessive inventories that were stocked up at an automotive company, at the authorized service stations and the sellers, and they had excessive stocks of components and that's why the sales had dipped over a period of time.

0:28:42.3 Balaji Reddie: Why were they holding so much of stock? Because the previous purchasing guy, or rather sorry, the marketing guy, forced these guys to buy extra, saying that, "I'll give you a discount," and things like that. And so they overstocked themselves to a point where they did not need anything because he had to meet a target. So he pushed it down their throat without really understanding what repercussions this would have. All right? And the problem with that pay for performance, it sounds good. Get what you pay for, pay what you get for. But the funny thing is you'll get only that much. Another case which I can tell you is how this student of mine was... His job during the internship was to collect receivables from the shops that were buying stuff. This was in the appliances, home appliances industry. And after they trained him to do that, how to call up the retail outlets and outstanding statements and then go collect the money, and his target was 500,000 rupees a day. 500,000 rupees a day collection. Now, one day he collected 2 million. My question is, do you think he reported it? Well, he did. And for the next four days he did nothing.

0:30:22.6 Balaji Reddie: Now, there's also a reason why he didn't report it. Because when you don't have Profound Knowledge, if he reported that he collected 2 million, immediately the manager would have said, "From tomorrow, your target is 2.1 million." Now, this is what happens when you don't understand variation. If you drew a control chart and you said that, "Okay, the average is so much, so I'm telling him to collect 500,000," and he's collected 2 million, he's done something special. As a manager, I'd call him and ask him, "Could you please tell me what exactly you did? Because you've not done what I taught you, otherwise you wouldn't have gone to this extent." Sometimes you don't know why you've been successful. The theory comes from the outside, right? So a manager with Profound Knowledge would sit down and have a talk and say, "Okay, you did this right. Now try doing this again." And he goes the next day and collects 2 million again, and then the next day and 2 million again. And then he comes and says, "Okay, boss, I'm ready for a new target. Raise the bar." Now what have you done? You've improved the system.

0:31:24.9 Andrew Stotz: We have new knowledge.

0:31:26.3 Balaji Reddie: We have new knowledge. And that's why, answering the same question what you asked me, it is a bit of both. So you need to understand that it's beyond... And we need to help the people understand why they've been successful. So better practice, here you go, is "abolish incentive pay, give everyone a chance to take pride." So when they start realizing, like this child, this student of mine, why he hit 2 million rupees that day, it would have been great. Instead, he just kept quiet. So see, you've lost an opportunity to really learn, to find a leverage point in a process which can take the process to another level. The next one he talks about is failure to manage the organization as a system. Instead, components are individual profit centers, everybody loses, right? And I think we have these separate business units, and he says here that they don't optimize for the aim of the whole organization. I think this is again, if you look at his Points number 9, 10, and 11, he very clearly mentions these because one thing leads to another, right? Break down the company into silos, each one focuses on what they're doing, and there's no communication, and they don't know their understanding the relationship of their work with the work of others.

0:32:54.9 Balaji Reddie: They don't even talk to each other. And he says here that "enlarge the boundaries of the system," but that comes when you understand your companies much better. And the system must include the future. Definitely, you start with theory. If this is what's happening in the world right now, this is how the world is going to change. Now he says, encourage communication. Now this part, a lot to do with Point number eight, drive out fear, where he says make physical arrangements for informal dialogue between the various components of the company regardless of level of position. That's a very telling statement. Encourage continual learning and advancement. Some companies have formed groups for comradeship in athletics, et cetera, all right, which provided facilitation for study groups. The company can well afford to underwrite the cost of social gatherings in outside locations. I can give you my personal example here. One of my college friends, and this was the time in the '90s when she came to America to do her Master's and then eventually started working in Ford, right? She did her Masters in applied electronics and she joined there as a design engineer. And that time, the world was a different place, and we Indians from India, we tend to be very, very conservative about a lot of things. We don't want to step on people's toes. So when someone says something, we, instead of opposing it, we keep our mouth shut.

0:34:32.6 Balaji Reddie: And so in meetings when they used to discuss and somebody brought up something and she said, "No, I think there's a problem," and they said, "What's the problem?" and she decided not to say anything, but eventually it turned out that she was right. And so the team members had a grouse against her that she doesn't share and she doesn't talk, she doesn't open up. Now what had happened was the HR lady in Ford, when she'd given her resume, when she asked about her hobbies and activities, one of the things she wrote there was dancing. Now she was learning a form of classical dancing here in India and obviously she could not continue pursue that in the United States at that time. So when that lady read dancing, she said, "You know, Ford sponsors ballroom dancing classes. So would you like to go for that?" So she said, "Oh wait, I learned a classical dance form in India. This has nothing to do with this." So she said, "Well, dancing is dancing. Why don't you just go? And we're paying for it, so why don't you go for it?" So she said, "I just enrolled in that class." Now, the first day when she went for the class, I don't know if you've seen the movie Shall We Dance, Andrew, but Richard Gere and Jennifer Lopez, and if you remember the first day, they tell you to hold your partner's hands and you're blindfolded and you follow your partner. It's about trusting the person in front, right? So she said when she went through that and she had to hold a stranger's hands, the whole barrier was broken.

0:36:08.2 Balaji Reddie: And she said, "I don't know, I had a different kind of a feeling when I came back to work." And she started trusting a lot more and it had an impact. Now, who would have dreamt that a ballroom dancing class could have changed my friend like this? That's Point number 13. You just have a theory that this will make that person a better person. You don't really do things to get a return on investment, but it works. So I think this is a beautiful paragraph by Deming where he says that there are ways and means of doing it and give it a shot. You have nothing to lose, right? Now he comes to the next one. Now this one, I think a lot has been spoken about this, MBO. But very clearly, he says "MBO as practiced." He does not blame Peter Drucker at all. In fact, he says Peter Drucker was clear that the objectives are interdependent and they're not mutually exclusive. He says, "Unfortunately, efforts of the various components do not add up. There is interdependence. Thus, the purchasing people may accomplish saving of 10% over the last year and in doing so raise the costs of manufacture and impair quality.

0:37:31.3 Balaji Reddie: They may take advantage of high-volume discount and thus build up inventory, which will hamper flexibility and responsiveness to meet unforeseen changes in the business." Peter Drucker was clear on this point. It's unfortunate that many people do not bother to read his work. In fact, let me just make a note that it was even Juran who said this, that having these kind of disjointed objectives can lead to a lot of problems. He said, of course, you can't be devoid. And that's why I think Deming has been very clear in chapter one of The New Economics where he says there are some things called as facts, right? Facts of life. So giving an arbitrary target is not a fact of life. He says here how he needs to improve that. So setting numerical goals, arbitrary numerical goals, I would say, right? Work on a method for improvement of a process. By what method? I think even Brian Joiner says that when you set this arbitrary goal. And now he goes on to explain that even further where setting a goal beyond the means of the process, they either distort the systems, distort the data, or distort both. Then management by results.

0:38:56.7 Balaji Reddie: Okay. Take immediate action on any fault, defect, complaint, action on the last data point. I think this again brings to the fore the understanding of variation where you need to look and ask questions and where you say, "Okay, I know this normally happens." So understand and improve the processes that produce that. Understand the distinction between common causes and special causes and understand the kind of action to take. So common causes, most of the time you need management to take action. There's a change in system. Yeah, there are some times when it is when a person close to the process can take that decision. Likewise, a special cause can be taken care of by the person closest to the process, but sometimes you need management action too. So that will always be the case, but it's rare, right? And so he talks about Sears, Roebuck, et cetera, and working on improvement of the process. The other one was buying materials and services at the lowest bid, right? Which he goes back to his Point number four, where he says here that it does not take brains to work with the cheapest. It takes brains to choose the best. Right?

0:40:23.4 Balaji Reddie: And estimating the total cost of materials and services, purchase price. Don't go by purchase price alone. And if I know right, Andrew, this was a point he was working on till the end of his life. You see the lady who was actually looking into the publication, the second edition of The New Economics, Elizabeth DiLorenzo. I was in touch with her because in my early days of my introduction to the Deming world, because I was quoting a lot from Out of the Crisis and The New Economics, and she was working for MIT Center for Advanced Engineering Study that used to originally publish his books. And she told me a very funny tale of how she was expecting her twins and at the same time she had to release this book. So the joke at MIT was, "What's gonna come out first, the twins or the book?" And since Deming was no more, she had to release that very quickly. So March '94 is when she released the book, and she said her twins were born some weeks later. So they are as old as this book. Now, she was telling me that till the end, the one aspect of what he was working on was, if you see the notes in the appendix and purchase of supplies and service. So continuing purchase of supplies and services, World 1, World 2, World 3 and World 4. He made this so clear. I think nobody has made it clearer. Okay, World 3, sorry, there's no World 4. So he talks about this and he talks about how practical you need to be about this, right?

0:42:18.7 Andrew Stotz: Yeah, and I underlined something in there from a long time ago that said, "Sudden jump to a single supplier is inadvisable."

0:42:28.8 Balaji Reddie: Right. He says there's a method of doing that.

0:42:32.5 Andrew Stotz: Yep.

0:42:33.2 Balaji Reddie: And I teach that method, by the way, where you start with the product, then go on to the process, and then go on to the system. And that takes time. You just can't get up one fine morning and say, "You're my sole supplier." It doesn't happen that way. It takes a lot of effort and a lot of doing, right? The next faulty practice is delegate quality to someone else or some group. And this is, I remember my interaction with Dr. Juran on this, right? I had just received my certificate for ISO 9000, I became a lead assessor, and I quite liked the new standard that had come out at that time in the year 2000 because it had a lot of Deming flavor to it. Plan-Do-Study-Act had come in and things like that. I was quite happy, the definitions and this. I said, "It's better than what it was." It's not, they had a long way to go, no doubt about it, but I said at least they've broken away from the defense mode where they copied the whole document from, right? And when he asked me the question that, "What's the status of quality in India?" and I said, "Well, earlier on it was a lot of standards-oriented and ISO 9000 played a huge role in that," and he just raised his hand as to tell me to stop and he said, "I am very disappointed with the ISO." And then he made this statement, "The ISO 9000 is a standard for mediocrity splendidly marketed by the ISO." And I just stared at him. I said, "What?" because I had just received my certificate, so obviously I was very touchy about it. And I said, "Dr. Juran, a little harsh." He said, "I've just begun."

0:44:26.4 Andrew Stotz: Yeah. And the problem is, is there's a lot of money to be made from it and it's an ingrained system.

0:44:30.5 Balaji Reddie: Yeah. So I just asked him, why would you say that? They made a lot of changes. He said, "Yes, but two things are missing." And one of them, he said, is something about leadership. Go back and read it. And then I went and read the standard again, and I realized what he was trying to say here. There was a lot of work that they were delegating to a person called the management representative, and he says, "Sorry, you can't delegate this to someone else. It begins at the top." Ed Deming also said that. He said, "It begins at the top. Only they can do this."

0:45:10.5 Andrew Stotz: I have a little story on that.

0:45:13.5 Balaji Reddie: Sure, sure, sure.

0:45:14.8 Andrew Stotz: In my coffee business, maybe 15 or 20 years ago, we got a big, big customer, and overall, they were a very good customer. But they picked us over all of our competitors. And then they told us, "Okay, in a month we're gonna come and inspect your factory, and if you get below 80%, then you're not gonna be our supplier." And so we said, "Well, I study with Deming, and I know quality, and we've never had a problem with quality ever." And my business partner, Dale, is very focused on the principles of quality. So they came, we were quite proud, and then by the end of the day, they had 600 questions they went through. And by the end of the day, we were like, "Yeah, what's our score?" And they said, "65. You're fired." They said, "You have 10 weeks or five weeks to fix these top 10 things." And then at that moment, we had a revelation, which is, oh, to them, paper is quality. And what I've always said, what I learned from that, was that it wasn't a big deal. We did the paperwork that they asked for, and then we got the job. And they were a customer for 16 years and a very good customer. But what we learned, one of the things I say, is that we had the heart of quality. They asked us for the paperwork that they thought represented quality. That's not such a big deal. But could you imagine having been trained that paperwork is quality, and then you have to try to develop the heart of quality? Very difficult.

0:47:01.9 Balaji Reddie: Very difficult. And now I come to this picture that he's drawn on page 37 of The New Economics, the old edition. I think the new one, let me just see what that is. Okay, that's on page 27. So he says here that unique processes that produce figures, all these principles have been applied to just 3%. Now, I have my own version of this particular picture that he's put here. Imagine an X and a Y axis, all right? And on the X axis, you can put down measures that are known. Close to the origin, you can write "known", and then as it goes away from that, "unknown", right? And then you have on the Y axis "measurable", and as you go up, "unmeasurable". So because he said that most of the things are unknown and unknowable, and among the known, you have only some fraction of those which are measurable. So the 3% deal with those factors or those parameters which are known and measurable. There are many parameters, he says 97%, which are unknown and unmeasurable, but you still need to manage them.

0:48:26.5 Balaji Reddie: And that's where he gives us a lot of advice that comes after this. Okay, when after this diagram, beautiful paragraphs in his book. "Beware of common sense," he says. And of course, he gives the example of Gallery Furniture, salary instead of commissions. Also goals, aims, hopes, facts of life, futility of a numerical goal. And a picture may help, where he talks about the goal being beyond the capability of a system. And will the goal be achieved? And he says redefinition of terms and distortion, et cetera. Gives a lot of examples there. And then he goes on to give even more examples. Okay, if you say merit pay, et cetera. Need to manage by results, wrong. And the last bit, the note where he says America 2000 was originally put together in December 1989 at the educational summit between the President and the governors of the 50 states. These goals were published in February 1990 by the White House, later incorporated into America 2000. This job may be an example of an enlargement of a committee. We shall learn in chapter four, he says, that the enlargement of a committee is not a way to acquire profound knowledge. How could they know?

0:49:57.7 Andrew Stotz: Yeah, and so what's happened to education since then in America?

0:50:00.6 Balaji Reddie: Oh, no comments. And we in India are almost going the same way. Of course, in some cases they've gone back to the roots saying that, no, we need to get back to our original way of educating people, right? We had this thing of exposing a child to all the different kinds of subjects, right? Like you have history, geography, languages, mathematics, science, just about everything. But the idea was to very quickly identify which child is resonating with what, because we need these different kind of people to work together. Some people are good at memorizing, some people are good at analyzing, some people are good at imagination. And so you throw all this out and then you cast the net and then you say the job of the teacher is to identify, okay, you're good at this, you're good at this. The problem is when you start saying if you're good at this, you are intelligent, and if you're not good at this, you're not. There are different kinds of intelligence. I would say the problem is more with the teachers and not with the system.

0:51:16.5 Andrew Stotz: We should wrap up at this point.

0:51:18.9 Balaji Reddie: Absolutely.

0:51:19.6 Andrew Stotz: How would you summarize what you want people to take away from this discussion?

0:51:24.0 Balaji Reddie: Sure. Go back and read chapter two in The New Economics. Dr. Deming has very clearly shown us why we need to do what we need to do. You're gonna be seeing things differently. As he used to say towards the end of his life, "I'm not here to teach you anything new. I'm here to make you see things that you normally would not see." And now he's just shown us what we thought was normal in the working of a company is actually detrimental to the running of a company over the long term. So my advice is go back, read this. You could watch some of the videos of the Deming Institute, especially on the 14 Points. We will be covering the 14 points later, but I would say that this is a real elaboration of his Diseases and he's given us what needs to be done. Not just pointing out what was wrong, but he tells us what needs to be done. That's why the heavy losses form an integral part of the preamble to actually what is the next step that you're taking your foot off the brake, so to say, trying to identify things that are pulling your company back.

0:52:37.8 Andrew Stotz: Well, Balaji, I want to thank you for this discussion. And recently I have been reading chapter two and I saw a lot of new stuff. It's funny how you just keep rereading. And then today you've just made me realize I gotta go back and read that chapter two because he does really the way he did the tables. I kind of forgot all about that. When I went back to it about three or four weeks ago, I was like, oh, this is really great. I kind of forgot about it. And now as you go through it, it's the tables was what I was focused on, but now I'm also seeing the text in between that you're highlighting that's valuable. So for everyone out there, grab your book, go to New Economics, go to chapter two. It's just gold. It's gold.

0:53:30.7 Balaji Reddie: It's gold.

0:53:31.0 Andrew Stotz: So, and for listeners out there, remember to go to deming.org and jump into DemingNEXT to continue your journey.

0:53:37.7 Balaji Reddie: Absolutely. Absolutely.

0:53:39.9 Andrew Stotz: Yep. And this is your host, Andrew Stotz, and I'll leave you with one of my favorite quotes from Dr. Deming, and that is, "People are entitled to joy in work."

0:53:52.2 Balaji Reddie: Absolutely.