If you were a little bit better, you might have been willing to invest in a new high-performance racket. But you decide that tennis is really not for you. Besides, another friend has just given you a pair of ski boots. They’re a little beat up and a bit tight at the toes, but then again you don’t know whether you’ll like skiing….

Growth and Underinvestment

The above scenario is an example of the “Growth and Underinvestment” archetype at work. At its core is a reinforcing loop that drives the growth of a performance indicator and a balancing force which opposes that growth (loops RI and B1 in “Growth and Underinvestment Archetype”). An additional loop (B2) links performance to capacity investments, and shows how deteriorating performance can justify underinvesting in capacity needed to lift the limit to growth. This propensity to underinvest in the face of growth makes “Growth and Underinvestment” a special case of the “Limits to Success” archetype (see “Limits to Success: When the ‘Best of Times’ Becomes the ‘Worst of Times,— Toolbox, December 1990).

In the tennis example, the reinforcing process is practice, which improves performance (loop RI in “Practice Makes Perfect?”). Improvement slows, however, as you reach the point at which the equipment limits your ability (loop B1). If your decision to purchase better equipment is dependent on your past performance, you may fall victim to this archetype. Without investing in better equipment, your performance will likely plateau — or even decline as you become frustrated and spend less time practicing. The result then justifies your decision not to invest in a new racket.

Legacy of the Past

Often in a “Growth and Underinvestment” situation, ghosts of past failures remain as a systemic legacy, influencing current decisions. A classic example is the story of a capital equipment manufacturer. The company’s CEO had seen an industry downturn in which the company had been saddled with too much capacity, so he was cautious about expanding. The company’s product was selling well, however, and a backlog began to pile up — three months’ worth of orders, then four, then five. The CEO continued to believe that it was just a temporary spurt. When the backlog grew to six months, he finally agreed to expand production capacity.

It took about a year and a half for the additional capacity to come online. In the meantime, demand trailed off as people found alternative sources. The company gradually worked off the backlog, and orders started to pick up again. After a couple of years they were in a similar backlog, but the CEO was even more reluctant to invest in new capacity because of what appeared to be a continual cycle of growing and falling demand.

The “Growth and Underinvestment” archetype reveals that the company’s slow response may actually have created the cyclical demand. The reinforcing action of marketing activities, coupled with the balancing action of delivery delays, trace out a “Limits to Success” archetype, in which the limit is production capacity (loops RI and B1 in “Capacity Delays and Underinvestment”). As performance declined relative to performance standards, the perceived need to invest increased, until investments were finally made (loop B2).

Because of the delay in capacity coming online, however, delivery performance continued to decline for a while, hurting new orders. In the meantime, deliveries began to increase and the company crawled out of backlog. This led the CEO once again to question the need to invest in capacity, making him even more conservative the next time they were in a backlog situation.

Downward Spiral

If this dynamic continues through many cycles, customers are not likely to keep coming back. The result may be a downward spiral of cutting back on investments: the two balancing loops lock into a figure eight dynamic in which the effects of the reinforcing loop no longer have much impact on growth, while the combined balancing loops create a counter-reinforcing process of continual cutbacks. As demand goes down, delivery performance goes back up, creating less need for capacity investments. If capacity dips below the level needed to service incoming orders, performance will go down again, reducing demand even further. Perceived need to invest will be decreased, so investments will decrease, leading to even less capacity over time (as older equipment depreciates or is taken offline). Thankfully, the reverse situation can also be true: the two balancing loops can trace out a reinforcing loop that continues to expand demand and performance.

Breaking the Cycle

To determine whether a Growth and Underinvestment” structure is at work, start by looking for patterns of oscillations in customer demand. If you overlay that with capacity investments and find that they follow the same pattern, you’re probably in a “Growth and Underinvestment” situation.

If a company waits until it receives signals from the marketplace to invest in capacity, it may be too late to prevent some fall-off in demand that will result because of the delay between investment decisions and capacity coming online. The key is to develop a way of assessing capacity needs relative to demands before the performance indicator starts to suffer.

Take some time early in the growth phase to determine what the limits may be, especially with respect to capacity. Studying the market response and characteristics of your target customers during an upswing can help you anticipate future capacity needs.

Also make sure internal systems are set up to deal with growth: if you have an aggressive growth strategy but a sluggish internal system for responding to performance shortfalls, then you might have created a structural inability to handle continued growth.

Most importantly, explore the assumptions driving your capacity investment decisions. Past performance may be a consideration, but it should not dominate your decisions. Instead, identify the marketplace factors that are driving growth. Otherwise you may end up with investment decisions that are too dependent on past experience and not on present (and future) needs.

“Growth and Underinvestment” and other archetypes can be found in The Fifth Discipline By Peter Senge (Doubleday).

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A study by Arthur D. Little, which surveyed over 500 American companies, revealed that only a third of them felt that their Total Quality Management (TQM) efforts produced any competitive impact. According to Graham Sharman, an expert on quality with McKinsey in Amsterdam, two-thirds of quality programs that have been in place in western firms for mom than two years “simply grind to a halt because of their failure to produce the hoped-for results.” (“The Cracks in Quality, The Economist, April 18, 1992.)

What Went Wrong?

If TQM has been responsible for giving Japanese firms their competitive edge, why is it not producing results for the majority of Western firms? That’s a question many managers are confronted with today, as Total Quality Management efforts at their companies falter. “The majority of quality efforts fizzle out early, or give some improvements but never fulfill their initial promise,” Boston Consulting Group Vice President Thomas M. Hout was quoted in Business Week (“Where Did They Go Wrong?”, October 25, 1991). The TQM movement — viewed as the savior of Western industry when it was introduced in the 1980s — is losing momentum in the U.S. as many companies become disillusioned by the lack of significant progress.

That’s not to say that companies aren’t seeing any benefit from using TQM methods. Companies that have made TQM work for them have gained an edge of up to 100 on every sales dollar, according to A.V. Feigenbaum of General Systems Co. in Pittsfield, Mass.

Companies such as Motorola, Xerox, Coming, Ford, and others have benefited greatly from implementing their own quality programs. But at the same time, the number of companies reporting problems with TQM has also risen.

The problem is not that TQM methods don’t work, but that most Western companies do not fully recognize what it takes to implement the total package and sustain the effort. Many do not go much beyond implementing the statistical-based tools on the production floor. Although such tools can help pinpoint problems in a machine or a particular process and bring them under control, they do not address the larger organizational issues that need to be overcome. In fact, Dr. Edwards Deming, considered by many to be the father of the Japanese quality movement, estimates that statistics-based tools address approximately 2% of the problem. The other 98% has to do with management and systems which govern an organization’s policies and often determine its behavior.

Limits to Success

From a systemic perspective, the TQM implementation slowdowns and failures appear to be a classic case of the “Limits to Success” archetype (covered in Toolbox, December 1990, “Limits to Growth: When the ‘Best of Times’ Becomes the ‘Worst of Times”).

In a Limits to Success archetype, a growing action (e.g., marketing) drives a performance or activity (customer orders), forming a reinforcing cycle of growth. When growth slows down due to some balancing force (delivery delay or market saturation), the tendency is to push harder on the original growing action that supported the growth in the first place, rather than to try to understand the sources of the balancing forces. In the long run, this leads to diminishing returns from the reinforcing loops and increasing resistance from the balancing loops.

Most implementation plans tend to place their emphasis on managing the reinforcing loops. The “Typical TQM Implementation Model” shown below illustrates that implementation plans usually emphasize activities that will help drive the growth of TQM activities. An implicit assumption is the expectation that if one does all the things identified in the model to drive the reinforcing loops, the implementation process will be self-sustaining and growing. Evidence suggests otherwise.

Making Sense of Implementation Failures

Many reasons have been given for the failure of quality efforts to live up to their expectations. In some cases, the lack of top management commitment is cited as the problem; in other cases, it’s the resistance of front line workers and/or middle managers. Some have complained that too much focus on the process and not enough on the customer has created quality programs that are overly large and bureaucratic. Others have pointed to an overreliance on outside training courses as the simple quality “fix.”

Although each of the reasons are valid in certain cases, it is difficult to draw any general principles from them which will help one learn from the experience of others. However, many of the failures share the same basic underlying dynamics. We can begin to identify those structures by mapping the experience of other companies who have had TQM “false starts” using systems archetypes as a diagnostic tool. A study conducted by Jim Brown and Scott Tse at the MIT Sloan School of Management explored how systems archetypes can map the experience of individual companies into a common framework that can help other companies identify leverage points for their own implementations.

The study was conducted with two companies, both of whom had well-defined total quality implementation “false starts.” Through a series of interviews, key players at each of the companies were asked to outline their TQM implementation experience. Using systems archetypes, the interviews were then translated into systemic stories that captured the dynamics of each company’s experience. A look at these two companies can shed some systemic insight into why TQM implementation programs fail — and how future programs can avoid the same pitfalls.

A Tale of Two “False-Starts”

The first company, an integrated circuit producer, embarked on its total quality program in 1984. The company’s false start involved efforts to improve on-time delivery performance at the semiconductor division. Due to the fast-paced nature of their clients’ business, minimizing delivery intervals and meeting promised delivery dates were important for the company to retain its market leadership.

When it was introduced, the process improvement program was well-received by upper management. Quality improvement results were the first item on the agenda at quarterly senior management meetings. A scorecard was used to rank divisions by their results and put pressure on non-performers to “get with the program.” Over time, pressure from being in the “spotlight” and the word-of-mouth effect led to adoption of TQM among all the divisions, with noticeable results. On-time delivery performance increased from 60% in 1986 to 97% in 1990.

In 1990, however, the company experienced some severe pressures. The acquisition of another company resulted in organizational changes, while a downturn in the electronics industry produced in a sharp drop in the company’s stock price, leading to threat of a takeover. As senior management rushed to deal with these new challenges, quality improvement programs gained less and less management attention. On-time delivery performance slipped from a high of 97% in 1990 to the low 90’s in mid-1991.

The second company, a leading manufacturer of electronic systems and software, serves component manufacturers. Its “false start” took place in one of its test equipment divisions, which performs final assembly and testing of the company’s equipment. In 1989, the division was suffering a significant market share loss. At the same time, major customers were complaining about poor quality.

Under a directive from corporate headquarters, the divisional manager began a quality improvement program. A Quality Improvement Team (QIT) was set up, and members were sent to the Crosby quality college for training. Commitment to the program varied among the QIT members, however. Some never attended the college. Phone calls and other meetings were given priority over weekly QIT meetings, and action items were accomplished sporadically.

The team finally prepared a Total Quality awareness seminar for division employees. However, follow-up training was never provided, due in part to poor planning and a corporate-wide TQM program that was being launched at the same time. The effort eventually fizzed out and was replaced by the corporate-wide TQM program.

Analyzing the False Starts

Though both stories have their own unique focus, when they are analyzed using systems archetypes, the common underlying structures become evident. In the Brown and Tse study, they identified several archetypes which were common to both companies (also see “Common Implementation Themes” on page 4).

For example, both companies experienced a “Tragedy of the Commons” scenario (see “Tragedy of the Commons: All for One and None for All,” August 1991). In a “Tragedy of the Commons” structure, individuals use a commonly available but limited resource solely on the basis of individual need. At first their efforts are rewarded. Eventually, their returns diminish, prompting them to intensify their actions and leading to further erosion of the resource. At the integrated circuits manufacturer, shipping activities and TQM activities competed for a common resource — workers’ time and attention. In the electronics firm, software development and TQM activities were also adding to the total workload. In both cases, maintaining a careful balance between TQM activities and daily work would be critical in preventing overload, thereby reducing the commitment to the TQM program.

“Limits to Success” is perhaps the most pervasive archetype in both stories. Of the 13 stories identified in the study, 9 were classified as cases of “Limits to Success.” It shows up, for example, in resistance to Total Quality initiatives at the semiconductor company and the lack of training at the electronics company (see “Implementation Limits: Two Examples”). At the semiconductor firm, the adoption of the TQM initiative gradually built up resistance to the program, especially among managers who felt they were being labeled “non-performers” by the poor weekly results posted for their division in the scorecard. A continued lack of improvements, however, also led to frustration on the part of the managers. Over time, this frustration grew enough that it overwhelmed the initial resistance to the TQM efforts, thereby removing the limit.

In the electronics testing division, a lack of training capacity limited TQM improvements. The initial training session generated much interest throughout the division. After some initial success in applying the tools and theory of TQM, however, workers found that further improvements were limited by a lack of ongoing TQM training. Eventually, the TQM initiative died out, and was replaced by the corporate-wide TQM program.

Both companies also encountered other limits in their TQM efforts: a lack of trained TQM facilitators; a resistance to TQM by employees who feared losing their jobs; a need for additional capital investments; and time needed to implement TQM activities.

Lessons for other TQM Efforts

Once a Total Quality program fails, the temptation is to give up on TQM entirely. However, the “Limits to Success” archetype suggests that the problem may not be with the methodology itself, but the way it is implemented. Without an understanding of the underlying dynamics shaping any TQM program, failures can too often be attributed to individual actors or specific circumstances. Systems archetypes can help to make sense of other companies’ experience as well as one’s own by identifying common structures at work. They can do more than just categorize past experiences; they can help guide future action by mapping out potential pitfalls and leverage points. With “Limits to Success,” for example, the lesson is clear: even if you gun the engine, you won’t get very far if you don’t take your foot off the brake.

Further reading: Jim Brown and Scott S.F. Tse, “A System Dynamics Analysis of Total Quality Management Implementation False Starts,” Unpublished master’ s thesis, MIT Sloan School of Management, Cambridge, MA; Daniel H. Kim and Gary Burchill, “Systems Archetypes as a Diagnostic Tool: A Field-based Study of TQM Implementations,” Working paper D-4289, MIT Organizational Learning Center, Cambridge, MA.

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The current scenario is what U.S. government officials thought they were preventing in 1977 when they banned foreign trawlers from a 200-mile boundary around U.S. shores. The action was intended to reserve fish stocks for local fisherman. But soon local boats took the place of foreign vessels. The New England ground fishing fleet grew from 590 vessels in 1976 to more than 1,000 in the early 1980s. New, more expensive trawlers with advanced fish-fording electronics were built, making it easier to track down good fishing beds and navigate tricky waters near rocks or shipwrecks.

In 1982, under intense pressure by fishermen, the New England Fishery Management Council lifted catch quotas and trip limits. With unlimited water usage and advanced tools, fishermen saw dramatic increases in their catches. But trawler catches peaked in 1983 at 415 million pounds, then fell off sharply (see “New England Fish Catches”). Now fishermen are scrambling to bring in catches that are smaller than any in recent memory.

Not only are the numbers of fish in each catch declining, but so is the size of each fish. Smaller fish are less likely to have spawned, thus jeopardizing future fish stocks (see “Limits to Fish Catches”). Flounder and haddock are already near record lows. The cod count is down, and bluefin tuna and swordfish have been depleted. The problem is not restricted to New England. Red snapper is declining in the Gulf of Mexico, swordfish are down in the Atlantic, and salmon are under pressure in the Pacific.

Some fishermen deny that overfishing is to blame, arguing that natural cycles are at work and the stocks will rebound in time. Others contend that pollution is the culprit, although that does not explain why unpopular fish like skate and dogfish arc flourishing.

One thing is certain — fishermen, who face large mortgages on their expensive boats, feel intense pressure to fish as aggressively as they can. Many now fish longer hours in order to make up for smaller catches. Some scallop fishermen in New Bedford, for example, have begun working almost round the clock. The combination of high-tech equipment and longer working hours means “fish have no sanctuary of space or time.”

Current efforts to maintain fish stocks include setting minimum net mesh sizes and occasionally closing overfished waters. But some fishermen and conservationists are demanding stricter limits: catch quotas, trip limits, and even a moratorium on new boats. Legislation is pending that proposes reducing the fleet size by buying out boats with money from a tax on diesel fuel fishing boats use.

Discussion Questions

• How does the “Limits to Success” structure shown above play into a “Tragedy of the Commons” structure?
• What are the incentives for the fishermen to keep fishing and who controls those incentives?
• Based on your understanding of the “Tragedy of the Commons” archetype, what “solutions” would you recommend?
• Are there similar “Tragedy of the Commons” structures playing out in your organization or industry?

Although the “Limits to Fish Catches” diagram on page 7 captures the main structural elements that are responsible for the collapse of fish stocks, it lacks some key distinctions which are critical for understanding the crisis. The “Tragedy of the Commons” archetype shows how each fisherman’s actions are contributing to the declining catches (see “Tragedy of the Fishing Grounds”).

The paradoxical logic of this archetype says that each person pursuing his best interest will collectively create a future state that nobody wants. For example, if fisherman A increases his fishing trips he will increase his catch as well as his revenues (R2). The more trips he makes, the more money he makes. The same goes for fisherman B (R3). But as hundreds and hundreds of fishing boats enter the waters, the number of fish available rapidly declines, leading to smaller catches and lower revenues for everyone (B2 & B3).

The number of trips each fisherman makes is determined by his individual revenue goals. If there were other employment alternatives, the decline in revenues might actually lead to fewer fishing trips as fishermen looked for other forms of employment. For many of them, however, fishing is the only livelihood they know. Family tradition and lack of other job skills suggest that they will continue fishing. Thus as revenues sink lower, the financial pressure mounts, spurring them to increase their fishing trips. New boat and electronic equipment purchases that were made in the early 1980s only exacerbate the financial pressure (see “Incentives and Pressures”).

As fisherman B goes on more fishing trips, the amount of fish he catches will increase, thus raising the total number of fish caught. Since the number of available fish has decreased, the next time out B will catch fewer fish, resulting in lower revenues and increased financial pressure. Fisherman B will feel he has no choice but to go on even more fishing trips. Multiply that scenario by a 1000 and you have the current situation in New England — each player is being driven to fish harder, the stocks of fish are being depleted faster, and the size of the catch is growing smaller.

Altruistic Actions

Suppose in order to rectify this situation, I as an individual fisherman decide to cut back on the number of trips and dip into my savings to survive until the fish stocks arc replenished. How long would I have to wait? Probably a lot longer than my bank account could hold out. The reason is that the solution to a tragedy of the commons structure never lies at the individual level. My individual actions to stop fishing will simply leave my usual daily quota of fish for some other fishermen to catch.

To be effective, the solution must affect the actions of all the fishermen by linking more directly the long term losses with the current gains. Each of the proposed solutions — catch quotas, trip limits, a moratorium on new boats —  shows promise, but to be truly effective they will need to be used in combination. For example, instituting a moratorium on new boats without limiting catch size or number of trips would work only if the current fleet’s capacity to fish was less than the fish’s regeneration rate, which does not seem likely according to the data. Enforcing catch quotas and trip limits without providing ways to compensate for the accompanying financial hardships will be difficult. Faced with the prospect of financial ruin, most fishermen are likely to continue fishing as hard as ever.

The plan to buy back boats using funds obtained through a diesel tax shows promise. It is the equivalent of a user fee that taxes individuals proportionate to their usage of a resource or facility, similar to toll roads or gasoline taxes that compensate for the wear and tear on roadways. From a systems perspective it has several advantages: it links the individual’s actions of today with the longer implications of those actions, and it helps distribute the financial burden over the entire fishing community.

There still are problems with this solution, however. As always, the use of a tax is unpopular with voters who are affected by it, making it politically difficult to follow through with such legislation. Even if the tax went through, it is unlikely that the revenues would be large enough to pull a significant number of boats out of circulation (the market value of all the boats is in the hundreds of millions of dollars). A matching fund of some kind may be required (a haddock tax, perhaps?) to supplement the diesel tax. Again, without accompanying measures like quotas and trip limits, the tax may only serve to increase the financial pressure, forcing everyone to fish even harder.

Adam Smith’s Invisible Hand

Our free market economy is based on Adam Smith’s theory, which argues that if everyone pursues his or her self-interest, the free market system will produce the best outcome for society as a whole. But does this theory still hold true? If the “Tragedy of the Commons” structure tells us nothing else, it says that the invisible hand theory is seriously flawed. The crisis in the fishing industry and many other “Tragedy of the Commons” structures testify to the fact that the “invisible hand” works only when individual actions are pursued in an environment that is virtually limitless relative to the impact of the collective actions. In Adam Smith’s time, that may have been true. But with the world rapidly becoming a tightly-interconnected “global village,” it may be that the invisible hand is poised to give us a slap on the face.

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