NZ businesses stuck in the past

New Zealand companies must replace the commonly used outdated business models that have been abandoned by the rest of the world to have a standing chance in competing in the global market.

Bill Waddell, a author of the award winning book Rebirth of American Industry, who has been at the forefront of driving lean business implementation for more than 30 years, told the National Business Review both New Zealand and Australia have always heavily relied on the exporting of consumable products and natural resources to feed the economy, ignoring other sectors where “a lot of money can be made” applying appropriate business techniques.

Over the past three decades, companies around the world fuelled by fierce market competition have been continuously perfecting their business models to expand their operations and maximise profits.

The majority of New Zealand businesses have been left out of the race, remaining static by re-applying old-fashioned models mainly built around cheap labour to cut costs.

This restrains businesses from growth and proves costly, Mr Waddell said.

“If that ever did work, it certainly doesn’t work in 2010.

“[Effective business models] are becoming more and more important as the world globalises and New Zealand manufacturers don’t have to just compete with other New Zealand manufacturers; today to succeed they have to compete with everybody in the world.

“In the US now virtually every manufacturer is in some stage of converting to the lean business model. It’s really understood as the only way to survive.”

The so-called lean business model’s history goes back to the days of Henry Ford. It has been extended since through thought leaders after Word War IIand underscored much of the rise to dominance of Japanese industry led by Toyota from the 1950s to today.

Through the efforts of pioneers such as the Kaizen Institute’s founder Masaaki Imai and other scholars it was “rediscovered” by the US and Europe in the 1980s and 1990s, said Mr Waddell.

Since that time, he said, it has become an “increasingly preferred”, mainstream methodology for manufacturing businesses. Over the decades, it’s proved to be so effective it is now transitioning across to other industries around the world.

“For example, lean healthcare is becoming a central theme in managing patient care to increase the quality of care and reduce the time spent in hospital, said Mr Waddell.
“Yet in New Zealand it is still largely unheard of and even less practised. However within it lies many of the answers to the often discussed productivity concerns.”

The lean business model represents a fundamentally different approach to managing all businesses, whether manufacturing, service-based or government.

This model is based on lean accounting – a financial management approach that aims directly at identifying value adding and non-value adding expenses – in order for management to create the greatest value for customers at the least cost.

Mr Waddell said the foundation of lean is to recognise that customers will only pay for what they value, so engaging in any activity that doesn't directly contribute to customer value is to create “waste”.

“The customer will tell us what they what and when they want it, and as much as possible we should aim to only create that product or service at that time. To do so beforehand means tying up precious capital and other resources in guessing what customers want.

“This thinking requires us to work out how to produce products or services in as short a time as possible, in as small a number as possible, and has significantly positive implications for the way value chains work.”

The lean business model is not aimed at reducing costs; it is aimed at expanding the business.

“The advantage New Zealand has in being late to the party is that they don’t have to go through the 20 years of misunderstanding and misapplication and confusion that the US and Europe did.

“They have the opportunity to learn from all of those mistakes and pursue lean very effectively.”

Mr Waddell said new and small companies are less bureaucratic and therefore “more lean.”

Given small and medium enterprises make up a large proportion of New Zealand businesses the challenge is to avoid becoming “non lean.”

“The problem is as companies grow and get bigger they become more bureaucratic: they add more staff positions and they get bigger computer systems, getting a lot less lean.”

To run their operations more effectively businesses should escape getting caught up in complicated accounting and finance games, he said.

“If they run their business on a common sense cash basis they’ll be doing the right thing.”

The transformation to lean requires “major rethinking” as it challenges and questions “just about everything” executives learnt in business schools about how to run a company.

“It’s not an easy transformation but it seems to be relentless and inevitable.”