Creating Winning Businesses Deming’S System Of Profound Knowledge

Creating Winning
Businesses: Deming’s
System of Profound
Knowledge
PEX Network Article Compilation on
Deming’s Management Method

Creating Winning Businesses: Deming’s System of Profound Knowledge

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INTRODUCTION
When faced with challenging circumstances – declining revenue, loss of customers,
declining profits margins, etc. – it is common for business executives to focus their
attention on solving the immediate problem at hand by using standard management
tools. Declining revenue? Create incentives so your sales staff sell more products.
Losing customers? Raise targets for service levels on your customer help staff.
Declining profit margins? Set your managers stiff pay-for-performance criteria.

But what if these standard tools were actually part of the problem? What if the
actions you took to solve that one pressing problem actually created more problems
in another part of your business?

Several decades ago, Dr. W. Edwards Deming – theorist, consultant, professor –
pointed out “Seven Deadly Diseases” and argued that common management
approaches such as incentives, targets and pay-for-performance would lead to sub-
optimal results and could even destroy companies.

Today, however, many companies appear to still be using the same malpractices that
Deming identified so long ago. But what’s the problem with them and what is the
alternative?

This e-book compiles the PEX Network/Deming Files four-part column series on
Deming’s System of Profound Knowledge (SoPK), which is often referred to as The
Deming Management Method and sometimes as The New Philosophy of
Management. SoPK was explored in Deming’s second book on management, The
New Economics, published in 1993. SoPK/The Deming Management Method has four
interdependent areas - appreciation for a system, understanding human psychology,
knowledge about variation, and the theory of knowledge – to better lead and create
an environment in which people can be productive and produce quality products and
services.

It is essential reading for executives as well as all process professionals who want to
understand how to create enduring and sustainable businesses.

This series of articles, produced by independent contributors under the guidance of
The W. Edwards Deming Institute, makes for an accessible interpretation of how you
can apply the System of Profound Knowledge within your own company. Whether
you’re new to the concepts or want an engaging refresher, we hope you that you
enjoy this four-part article series.

www.pexnetwork.com / www.pexweek.com


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A special thank you to The W. Edwards Deming Institute and
contributors to THE DEMING FILES column, for sharing their
thoughts and interpretation on PEX Network.



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CONTENTS
Introduction ................................................................................................................................ 1

Systems Thinking and the Three Musketeers ............................................................................. 4

The Trouble With Motivation ..................................................................................................... 8

Variation, So Meaningful Yet So Misunderstood ...................................................................... 13

How Do We Know What We Know? ......................................................................................... 19

Learn More About Creating Winning Businesses ...................................................................... 25

About Us ................................................................................................................................... 27

About the Editors ...................................................................................................................... 28



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SYSTEMS THINKING AND THE THREE
MUSKETEERS
CONTRIBUTOR: ERIC CHRISTIANSEN, 9 AUGUST 2011

“All for one, one for all.” For
over 150 years these words
have invoked images of four
young men working together
with single minded purpose to
overcome great obstacles,
privations, injuries and loss.
(In the Alexandre Dumas
novel, The Three Musketeers,
Athos, Porthos and Aramis are
the three musketeers who
eventually befriend
D'Artagnan –thus making four companions “All for one and one for all.”) At the heart
of “Systems Thinking” is the same philosophy and call for action for the benefit of all.

Conceptually, it is often easy to grasp the concept of Systems Thinking and the
various components that go into a system (people, processes, materials,
environment to name but a few). What is much more difficult is to actually execute
from a Systems Thinking perspective. While in his seminars and publications Dr. W.
Edwards Deming took great pains to describe the typical management practices that
inhibit Systems Thinking, he also provided guidance and examples on how to create,
nurture and execute systems thinking in an organization.

The first obstacle for many organizations is the lack of a clear aim. Without an aim, a
system does not exist. Without an aim what would be its purpose in existing? How
would it fit within the market or within the greater sphere? What would it hope to
achieve in the long term? Without answers to these questions, there is nothing to be
accomplished. Dr. Deming counseled that a system must have an aim and that aim
should be a value judgment and must include the future in its scope. Think of the
effect these visions have had on the respective organization:

 Quality is Job #1- Ford Motor Company, the only American car company not
to seek government assistance in 2008.



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 Bringing the best personal computing experience to students, educators,
creative professionals and consumers around the world through innovative
hardware, software and Internet offerings. - Apple, has redefined the
personal music player, cell phone and tablet PC.

 I shall return - General Douglas MacArthur, led to eventual liberation of
Philippines after 2 years of various success and failures on the battlefield.

 Be one of the world's leading producers and providers of entertainment and
information - Walt Disney Company, customers will save for a couple of years
to have the Disney Experience, and it is a leader in various entertainment
segments including sports, news, electronic entertainment, and travel.

Each brings a clarity of purpose which, as Peter Senge details in The 5th Discipline, is
required to build a shared vision that enables an individual to commit and enrol
themselves to the success of the all rather than just compliance with the
organizational rules and expectations and a focus on the success of the self. Such
committed and enrolled people greatly help the organization be poised for success.

The 3 Musketeers' Mission: All For One & One For All

Having a mission statement with committed individuals does not mean that an
organization is working as an effective system. As mentioned earlier, Dr. Deming
detailed forces that destroy a system. The most common destructive forces include
extrinsic motivation (prizes, grades, pay for performance, sales commissions,
incentive pay, stock options), management by numbers/objectives (quotas, zero
defects, focus on hitting quarterly financial numbers, revenue targets), and
competition (individual cost/profit centers, performance reviews, group
competitions, individual group/rankings).

Adding to these forces is the use of the “pyramid” or traditional organization charts.
They do not describe a person’s job, where the person fits into the system or how
the person’s job impacts the company; rather, the traditional organization chart
shows only the reporting structure: the people an employee needs to satisfy in order
to get a good rating. The traditional organization chart fragments an individual’s view
of the system and leads to view of independent – rather than interdependent –
operation.

A better view is a flow diagram such as one that Dr. Deming illustrates in The New
Economics (p58).



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This view helps individuals see where they fit within an organization: Whom do they
depend on to succeed? Who depends on them? Where does their responsibility fit
within the overall system of the organization? With distributed, global organizations
and globally spanning supply chains, such information is invaluable not only for the C-
level executive at headquarters, but for the individual contributor in Bangladesh and
her counterparts in Europe, South America and the US Midwest. By knowing this,
true systems thinking can begin to occur as individuals/teams/departments begin
working to improve the interactions that the flow diagram will help them understand
exist within the system. It is these improvement activities that will begin to unlock
the potential within an organization.

Most organizations spend lots of time and effort to identify “winners” that will come
in and help drive success, for as Dr. Deming states “who wants to do business with a
loser?” But organizations are mystified that even though they are bringing in the best
and the brightest, their organization seems to be operating below peak efficiency. At
a minimum, an organization expects that the results of having Person A, Person B,
Person C, and Person D would be the Sum of all (A+B+C+D); what they get many
times is something less.

As Dr. Deming describes in The New Economics what organizations experience are
the sums of the various interactions between the individuals:
(AB)+(AC)+(AD)+(BC)+(BD), (ABC)+(ACD)+(BCD), (ABCD). Some of these interactions



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are positive; others are negative. The goal of management is to support and create
positive interactions and work to minimize negative interactions. It’s only through
these efforts that an organization’s true potential can be unleashed, and true system
optimization can be realized. If each person/team/department is required to
optimize itself for individual profit, performance or gain, the system will not be
optimized as these efforts lead to negative interactions with other components of
the system.

At the end of The Three Musketeers, the heroes victoriously prepare for their next
adventures after successfully accomplishing their aim in protecting the sanctity and
honor of Queen Ann of Austria against the depravations of Cardinal Richelieu, the
deprecations of Louis XIII, and assaults by Milady. So too will organizations move
successfully into the future, through the use of Systems Thinking, by providing a clear
aim that is not merely limited to profitability but to optimizing the entire
organization, removing the forces that destroy a system, and promoting the positive
interactions that create the “All for one, one for all” camaraderie found in the most
successful organizations.

Read the original article here: Systems Thinking and the Three Musketeers

About the Author:

Eric L. Christiansen is a Certified Facilitator for the W. Edwards
Deming Institute. Eric currently serves as a Senior Vendor
Relationship Manager for Rockwell Collins, Inc. and is a Lean
Associate within the organization. Eric’s previous experiences
includes being President of OmniLingua, Inc and a Managing
Director of OmniLingua Worldwide, LLC. Both organizations put the
quality and management theories of Dr. W. Edwards Deming into practical business use
both in the United States and internationally. Eric has a Baccalaureate degree from
Brigham Young University. Eric can be reached on elchristiansen@gmail.com



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THE TROUBLE WITH MOTIVATION
CONTRIBUTOR: Jussi Kyllonen, 23 AUGUST 2011

Dr. Deming’s theory of management
developed over a long period of time.
He articulated significant milestones in
this development such as via his “14
Points for Management” and “Seven
Deadly Diseases” in his 1982 break
through book Out of the Crisis. This
work is the foundation for later
development of his theories, including
the concept of Psychology of People.

He articulated his management theory
further in his 1993 book The New
Economics. He referred to the overall
theory for managing in a number of
ways including “the System of Profound
Knowledge” and “The New Philosophy
of Management”. An integral part of
the System of Profound Knowledge is
Psychology. In the System of Profound
Knowledge, Deming named four
interdependent elements; Theory of Knowledge, Appreciation for a System,
Variation, and Psychology. Dr. Deming believed the System of Profound Knowledge
to be the most important concept for any leader to know in his job.

How is Deming’s work relevant to businesses today?

The answer in a word is: survival. Let me provide a little context. One sometimes
asks: what makes the difference between ordinary people achieving extraordinary
results on one hand, and extraordinary people achieving ordinary results on the
other hand? A simple answer is that the management of people makes the
difference. Understanding the psychology of people –and psychology of people in
relation to the system in which they work, and in relation to the processes,
procedures, tools, insights that are available to them. Typically the system affects the
psychology of a person more than a person can affect a system.



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A more complex answer about Deming’s relevance is: the need to achieve
sustainable results in the ever changing world is the main reason why Deming’s New
Philosophy of Management continues to be one of the key success factors for any
organization. The future without Deming’s New Philosophy of Management (both
theory and practice) does not look appealing. Dr. Deming would sometimes say
“Survival is not mandatory”. The track record of the survival of organizations is not
one in which we can take comfort given how few companies survive for even 50
years.

Understanding the Psychology of People
Let us view in more detail the intellectual content of Dr. Deming’s element of
Psychology. His work is consistent with that of several others, most notably Maslow,
Hertzberg, and Deci and Ryan.

The main points he makes in chapter four of The New Economics, are:

#1: Human needs

Dr. Deming recognizes that we as humans are social creatures. We are born with
basic needs for love and esteem, and the need to relate to each other. We are driven
by curiosity, joy in learning, and accomplishments. In his 1943 paper “A Theory of
Human Motivation” Abraham Maslow, proposed a hierarchy of needs as a way to
explain motivation. He subsequently extended the idea to include his observations
of humans' innate curiosity. This ground-breaking work was undoubtedly known to
Dr. Deming, but he went further in his effort to understand human motivation.

Motivation is literally the desire to do things. Dr. Deming recognizes that there are
two sources of motivation: intrinsic and extrinsic. Intrinsic motivation refers to
motivation that is driven by an interest or enjoyment in the task itself, and exists
within the individual rather than relying on any external pressure. Extrinsic
motivation comes from outside of the individual. Common extrinsic motivations are
rewards like money and gold stars on the one hand, and coercion and threat of
punishment on the other. Competition is in general a source of extrinsic motivation
because it encourages us to win and beat others, not to enjoy the intrinsic rewards of
the activity. Dr. Deming discusses the results and the impact of these two sources of
motivation throughout his work. His insight to the nature of human beings and his
ability to see the long term consequences of extrinsic drivers that cause people to do
things are cornerstones of his management theory.



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#2: People are different

This concept highlights Dr. Deming’s understanding of - and a concern for - an
individual in the organization. The statement that people are different is an
application of Theory of Variation, and illustrates how the theoretical components of
the System of Profound Knowledge become interlinked in practice; in this case
Psychology and Variation.

The simple statement that “people are different” highlights many of shortcomings of
the current style of management. Typically, in most organizations Personnel
Administration and Human Performance Management emphasize uniformity of
requirements, and in most cases lead into a forced ranking and forced distribution of
what is simply a natural phenomenon – the fact that people are different. The
differences between people –instead of being used to punish and shame some and
reward and idolize others—can be put to good use to foster creativity, multiple
routes to making improvements and innovation. An organization’s policies can waste
time, money, and human differences –and thus jeopardize its own competitive
future, or accept that people are different and manage accordingly –and in so doing
unleash the intrinsic motivational desire to do things and to make a difference –and
reduce costs at the same time.

#3: Over-justification:

On occasion people act based on purely altruistic motives and simply want to help
other people and do a good deed. The target of this action may be the customer, a
co-worker or the boss. The rewards people get from such actions are intrinsic and
intangible; a warm feeling and a sense of joy. People do these type things with no
expectation of any compensation or benefit. Over-justification, then, is offering a
reward, or otherwise compensating an altruistic act –and in so doing disengage the
individual from the joy, erase the original motive of the action, and replace it with an
extrinsic motive. This is likely to lead into discontinuing the altruistic behavior.

How do you motivate people?
Contemporary management texts typically focus on the extrinsic motivators, rather
than on removing the barriers that managers erect to intrinsic motivation. If you
know of the Red Bead Experiment (sometimes referred to as “The White Bead
Factory”) you know that the Willing Workers are to produce only white beads, not
red beads. Yet, the results (which are always unsatisfactory) are pre-determined by
the fact that there are red beads in the factory. The Red Bead Experiment is an
encapsulated scene of how most organizations operate. It is an exercise filled with



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Dr. Deming’s management concepts – some more obviously displayed than others.
And although the experiment takes place in a “factory” the lessons apply in service
industries and government just as much as they do in a production environment.

Here is a summary of the Red Bead Experiment which displays the role of psychology
in management of people:

 When examining the results, it becomes clear to observers that the influence
of the system in which the Willing Workers work dwarfs the contribution of
the Willing Workers. Yet, the management of the factory fails to recognize
this. Instead managers focus on the workers and use various aspects of
psychology to try to motivate them to achieve better results. Managers set
quotas, reward good results, punish poor results, pay for performance, and
pit workers against one another in the name of “friendly competition”. The
result is mismanagement of the organization, de-motivation of the workers,
and ultimately the failure of the business. The actions the management took
to motivate the workers and to create a change in were ineffective. They are
equally ineffective in real world, yet they continue to be used for several
reasons, including the emotional default trained into our brains that we must
motivate people and pay-for-performance –despite the overwhelming
evidence to the contrary.

Conclusion
Dr. Deming articulated what he called the Forces of Destruction of individuals –and
subsequently of organizations. The Forces of Destruction include such things as
incentive pay, numerical goals without methods, and competition between people
who really need to be cooperating. [You can find a list in Figure 10 on page 122 of
The New Economics, second edition].

The Forces of Destruction have a major psychological component and cause
emotionally healthy people to want to leave the organization that uses the Forces of
Destruction to manage. Ironically, what is destroyed in such a style of management is
the intrinsic motivation and natural curiosity of the individual – the very sources of
the competitive advantage companies are desperately seeking. Thus, what such
organization end up with, under the current style of management, are the most
expensive type of workers, the ones who quit but stay after having their motivation
and curiosity driven from them.

Read the original article here: The Trouble with Motivation



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About the Author:

Jussi Kyllönen works currently as the Quality Systems Manager for
Eaton Corporation’s Aerospace Operations in Jackson, MS.
Throughout his career, Jussi has helped companies to learn how to
work as a system, reduce complexity, and improve profitability and
customer satisfaction.

Jussi’s practical problem solving methods, such as Process Analysis, Statistical Analysis,
Sampling, Advanced Mathematical Methods, and Operations Research Methods, are
founded in the teachings of well-known experts, such as Dr. W. Shewhart and Dr. W.
Edwards Deming.

Jussi has extensive experience in pumps, telecom, offshore, industrial textile, scientific
equipment, and aerospace industries. Since 1988 he has been in production and quality
related management positions in both Europe and United States. Jussi has a Bachelor of
Science in Mechanical Engineering, and earned an MBA in Management Systems from the
Deming Scholars MBA program at Fordham University. Jussi is a Deming Institute
Certified Seminar Facilitator and a member of ASQ. Jussi can be contacted on
JussiTkyllonen@Eaton.com



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VARIATION, SO MEANINGFUL YET SO
MISUNDERSTOOD
CONTRIBUTED BY Lynda M. Finn, 6 SEPTEMBER 2011

What did the unemployed mathematician say to his hungry parrot that really ruffled
the parrot’s feathers? Read on to find out the answer.

It seems that most business executives were
not trained on understanding processes and
variation. They study how to manage people
and money, but not how to listen to a
process through data, and use that data to
make improvements. Because many are not
familiar with Dr. W. Edwards Deming’s
enlightened insights on data and variation,
they are unaware of the importance of
process data and that different types of
variation exist –and that those different
types of variation require different types of
responses. Deming also said, “How would
they know?” If no one ever taught them
(even worse if they were taught approaches that seem to work –even though in
reality they sometimes do more harm than good), indeed, how would they know?

The point is this: when the wrong data is used or different types of variation go
unrecognized, undiagnosed, or are confused, the resulting decisions and actions tend
to increase costs, reduce quality, reduce productivity, and foster frustration
throughout the organization.

Simply put, Dr. Deming emphasized in his writings, that business leaders have
typically been taught to treat everything they don’t like as having a “special cause”
reason as to why it happened, and thus want to investigate what one thing or person
was responsible for causing the “aberration”. People in general, seem to be wired
and trained to go looking for THE reason that something bad or good happened. This
problematic approach is often reinforced, because we can usually find “something
unusual” associated with the thing we are investigating. Unfortunately, this
“something unusual” is rarely the cause of the problem.



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Let me illustrate some of the mishandlings of data and variation with a scenario from
a company that wanted to reduce the cost of field service:

Mistake #1: Failure to plot data over time

The monthly management reports provided the managers with performance
numbers but the reports didn’t plot the data. Without plots over time it is virtually
impossible to spot patterns and trends, and it is impossible to decide if the degree of
variation observed is typical “common cause” or atypical “special cause” variation.
Okay, so now you know the two key types of variation that exist in a process. How
do you know when you have one or the other, though? Control charts can help make
this distinction, but in most cases a plot of the data over time and some simple rules
about what constitutes a special cause (e.g. 6 points in a row heading up) can be
enough to separate common cause from special cause situations. If you see tables of
numbers instead of plots in your management reports, this is likely the case in your
organization.

Mistake #2: Neglecting to normalize

When the company’s costs were plotted over time, there was clearly an increase in
overall service costs. But in a growing nationwide business, it is not surprising that
service costs are growing, what is more of interest is the cost per unit being
maintained. Once the monthly data on costs were normalized (that is divided by the
number of units in service that month) it was clearer that the cost situation was a
common-cause problem, that is built in to the current system they currently use to
deliver field service, and not a special cause change in costs that just occurred of late.
If you are in a growing or shrinking business, and your key cost metrics aren’t looked
at on a “per unit sold” or “per unit supported” basis, you may be missing key
information.

Mistake #3: Neglecting to stratify

The company had two main classes of equipment in service in the field. When looked
at together the picture looked completely different from when the data was
separated by which type of unit. Costs, number of repairs, time to repair etc., looked
quite different from one class to the other. Once the data was divided, it was much
clearer where effort needed to be focused. If your reports aren’t broken down into
your important customer or product groups, you may not really have the real picture
of what’s going on.



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Mistake #4: Treating a continuous metric as discrete

In addition to cost, the other number reported on a monthly basis was the percent of
service calls completed in a timely manner. This figure, usually around 95%, was used
to illustrate how good a job the group was doing in rapidly servicing equipment that
failed. Here, the response time, a continuous measure, was truncated. It was turned
into one of two discrete categories, on time or late. In doing so, much of the
information necessary for analysis and improvement was lost.

One of the major problems with this approach was their fluidity with the
requirements for how soon a unit must be serviced. There were frequent changes in
how each field unit was categorized with respect to expected response time, (e.g. 4
hours, same day, 24 hours, 48 hours, etc.). As field folks shuffled equipment from
category to category, their timeliness statistic remained high. Though it made them
feel good about their performance, it became useless in understanding much about
how quickly they were really responding to outages. If instead had they been
focusing on collecting and studying the continuous data on response time, they could
more easily see where they were responding well, what the trends were over time,
and where they needed to improve. This would have increased productivity and
quality, thus reducing costs.

Oh well, sometimes it’s better to look good than to be good, right?!

Seriously, though, an organization that has managers who do not understand
different types of variation and the correct responses for each type ENSURES that
people will spend more time trying to make the numbers look good than trying to
figure out how to actually improve the processes that will consistently deliver much
better numbers. ) If your organization has many percent on-time metrics, consider
instead monitoring the measured speed instead.

Mistake #5: Not identifying key metrics

Since this company made the equipment they serviced, one of the most useful
metrics for overall system performance is mean time between failures. It reflects
how well the engineering group is doing at designing the equipment, how well the
purchasing group is doing at buying the proper parts --as well as how good the field
group is doing with installation, preventative maintenance and lasting repair.
Working on metrics such as these help encourage systems thinking and discourage
sub-optimization within departmental silos. Also this metric gave them insight into
just how often they were visiting each piece of equipment and led to some policy
changes around preventative maintenance that resulted in big savings. Do your



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metrics reflect what is really important to the organization as a whole, and
encourage systems thinking?

Mistake #6: Acting inappropriately in the face of common cause variation

When faced with a common cause
system of expensive-to-maintain
equipment, managers still tended
to favor special cause approaches
to reducing variation. Some
examples of their special cause
approaches:

 Let’s observe the best
worker (or manager, or
equipment type) and find
out what they are doing
that’s different

 There were a lot of
outages last week, let’s
figure out what happened last week

 Let’s send notices to (reps, managers, regions) with higher than average
failure rates asking them to improve

 Let’s blame the problem on a particular individual, thinking that replacing
him or her will fix the issue.

Instead it was clear that common cause issues (causes of variation that are present
for each and every field service call) were driving the frequent need for repairs and
the costliness of the site visits. Some of these common cause sources of variation
were:

 High failure rates on certain parts

 Barriers between the engineering group that designed the equipment and
field service group that installed and maintained it

 Incomplete or unclear work instructions

 Not having all needed parts available before beginning a repair or install

 Maintenance policies that drove up costs in the long term



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Identifying these problems required observation of the work and analysis of all the
service history, not just attention to the results that management liked or the ones
they didn’t. Recognizing that most problems are built into the system and not the
result of lack of effort from a particular individual is a key mind shift change to
identifying and addressing the right issues –in the right ways. In other words,
assuming an issue is the result of a special cause will send you on a hunt for the
special cause. Walter Shewhart and Deming proved that special cause thinking will
lead you astray most of the time. So, if in your company there is often a search for
whom or what is to blame before questioning whether the problem is built into the
current processes and systems, then you too are likely wasting time and
misidentifying causes.

Most companies have a wealth of data available, but are too often unable to turn
that data into helpful insights that could guide their action. Some simple steps I’ve
found particularly helpful are:

 Use a diverse group of people to brainstorm the key things you want to know
about your process.

 Narrow the list down to the top 10 or so, making sure that list is balanced,
that is includes measures that cover financial health, customer satisfaction,
internal efficiency, as well as preparedness for the future.

 Get help from someone who is good with graphing to make graphs of how
the above perform over time. Depending on the level of management
required, the time basis may be monthly, daily or even hourly.

 Identify which problems have chronic common causes, and which have
special causes, and choose the right improvement action for the situation.
Realize that the majority of problems are built into the companies processes
and systems and not the failure of one particular individual.

 Employ Pareto charts to decide how to approach a problem. Break the
problem down into categories and look for situations where just a few
categories account for the majority of the problems.

Conclusion
Bits and bites of information are not knowledge; they do not reveal what is really
going on. Making the assumption that every bad bit or good bit of data comes from a
special cause means you will be wrong quite often. Simply asking the question,
“Hmmm, is there really a special cause or is what I’m seeing built into our processes



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and systems?” will mean you are much more likely to avoid the default tendency to
jump to special cause solutions and thus be right more of the time.

Some helpful questions are:

 Could this have happened to someone else?

 Could this happen again under our usual conditions?

If the answer is yes, then treat the event as resulting from common cause. As a result
your actions are less likely to cause a witch hunt for false culprits and more likely to
help you and others understand how to improve the system. Some examples of
common cause actions are: creating better work instructions, studying the failure
rates on certain parts, and breaking down barriers between departments. With these
guidelines in mind you can keep variation from biting you.

So just what did the mathematician say to the parrot? Polynomial.

Author’s Note: Thank you to Kelly Allan and Stuart Finn for their thoughtful
comments and additions.

Read the original article here: Variation, So Meaningful Yet So Misunderstood

About the Author:

Lynda M. Finn founded Statistical Insight in 2003 to provide
consulting and training services in the areas of business process
improvement, Six Sigma implementation, Lean Enterprise, and
specialized statistical approaches such as design of experiments and
data mining. Prior to founding Statistical Insight, Ms. Finn worked for
19 years as a senior consultant at Oriel Incorporated (formerly Joiner
Associates) where she was the lead subject matter expert on all Oriel
Six Sigma programs.

For over 25 years, Ms. Finn has focused on using data and statistics to improve business
processes and achieve key business objectives. She has authored or co-authored
numerous publications including: Six Sigma Memory Jogger II -- a Pocket Guide
(Goal/QPC; Spiral edition), Plain and Simple Process Improvement Tools Series (Oriel Inc.),
and Guiding Successful Six Sigma Projects (Oriel Inc.) Ms. Finn holds an M.S. in statistics
from the University of Wisconsin-Madison (1983) and a B.S. in biochemistry from Cornell
University (1981). She has been certified as a Quality Engineer by the American Society of
Quality. She is a certified instructor for the Deming Institute.



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HOW DO WE KNOW WHAT WE KNOW?
CONTRIBUTOR: John Hunter, 20 SEPTEMBER 2011

"The greatest obstacle to discovery is not ignorance - it is the illusion of knowledge." –
Daniel J. Boorstin

What do we know that isn’t
so? How can we avoid the
mistakes we are in danger of
making in our thinking? How
can we improve the learning
process?

These are some of the
questions that led Dr.
Deming to include the
“theory of knowledge” as
one of the 4 pillars of his New Philosophy of Management, sometimes referred to as
the System of Profound Knowledge or SoPK. While many of his ideas have found
their way into other management theories (focus on the customer, variation, systems
thinking, innovation, continual improvement, data based decision making, the
importance of psychology...) you rarely hear about the importance of understanding
how people think –and act - based on what they believe they know to be true. That is
core to a theory of knowledge. To put it in the form of a question, “How do we know
that what we think we know is really so?”

There are several simple principles related to the theory of knowledge which will
help us avoid traps we often fall into because of how we think and because of what
we believe to be true.

Confirmation bias
Confirmation bias is one such important concept, and it means that we tend to latch
onto evidence that supports our beliefs and ignore evidence that undermines our
beliefs. In order to more effectively adjust our beliefs to reality we are well served to
question whether we are falling for confirmation bias. Ask: Is this new evidence
really convincing or am I just happy because it supports my existing belief? Am I
ignoring other evidence because it calls into question my beliefs?



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Experiments, Prediction and Learning
Do you subject your beliefs to tests and experiments? To the extent possible you
want to rely on evidence for supporting your theories. Well-run experiments provide
great evidence. The model used within the Deming System for Managing to gain
evidence and insight is the Plan-Do-Study-
Act (PDSA) cycle. The PDSA cycle has
incorporated within it an understanding of
the theory of knowledge.

People learn better when they predict.
Making a prediction forces us to think ahead
about the outcomes. Making a prediction
also causes us to examine more deeply the
system, question or theory we have in mind.
Also we learn about our understanding of
the management beliefs we hold as we
examine the results of our predictions.

For example from your predictions (and
from the PDSA experiments which test
them) you might discover that:

 You are often overly optimistic (or pessimistic).

 You are extremely effective at predicting change related to information
technology improvements but poor when predicting the results when
psychology (people) play a big role in the I.T. change itself.

 The impact is often as you predicted for the projects during testing (using
PDSA) but attempts to actually standardize the improvements across the
organization fail –perhaps because the test was not well designed.

Such learning is important both personally and organizationally. Self-insight is critical
to improving your own decisions as a manager, and similarly there is a multiplier
effect when people throughout the organization increase their self-insight.
Cumulatively, all those better informed decisions result in a better performing
organization.

Learning about your ability to predict (and your organization’s ability to predict) is a
key part of the theory of knowledge. Let’s face it most of us think we have a much
better ability to predict the result of proposed actions than actually turns out to be



21 | P a g e

true. A way we discover the
reality is when we require
ourselves to make a prediction
and to examine the results of
the actions.

Variation
People believe there is much
less variation in systems,
processes, actions than there is.
This underestimation of variation causes people to believe normal variation is not
normal, which in turn causes them to search for special causes for the variation.
Doing so is a very low yield strategy for improvement. (See more on Deming's view
on tampering).

Again, the Deming System for Managing seeks to avoid this trap in how we think
about variation by adopting sensible strategies. One of these strategies is to use
control charts to show exactly what is reasonable variation for a process. Another
sensible strategy is to examine the process and environment in which a person works
first, rather than to blame the person (as a special cause), first. Using such tools and
approaches helps us in a several ways:

 We acknowledge that we have biases that cause us to react in certain –and
often unproductive ways

 The tools themselves help counteract our skewed thinking that cause us to
adopt poor yield strategies, such as rating and ranking people based on a
simplistic analysis of “results.”

Psychology and the theory of knowledge
Deming’s System for Managing is based on four areas: the theory of knowledge,
understanding variation, appreciation of a system, and understanding psychology. I
want to mention the psychology component briefing because of its interrelationship
with theory of knowledge. (All four components are interrelated, in fact.)

Here is an example. The way we evaluate an idea is not based on the cold logic we
may like to believe it is. If we hear an idea from someone we don’t like and then two
days later we hear the exact same idea from a friend we respect, we tend react to
those ideas very differently.



22 | P a g e

As I started to understand the theory of knowledge and apply what I suggested
above, I began to question why I believed certain things and how I responded to
ideas that were presented. In examining my own reactions, I noticed that I far too
heavily weighed the source of the idea in evaluating the idea, myself. I wasn’t
consciously doing so, but in looking at the opinions I took, with the lens of the theory
of knowledge, I could see I was, indeed, doing so. And then I started to look at others
and it amazed me how often I would hear someone criticize an idea from one person
and then praise the same idea a week later from a friend.

This also shows one of the real weaknesses in performance appraisals. When a
manager likes a person, the manager is much more likely to appreciate the person’s
work, ideas, and contributions and thus give a higher rating to that person.

Misinterpretation and Misunderstanding
Correlation is not causation but we often fall into the belief that correlation does
mean causation. Correlation means that two or more things might be observed to
occur together. For example, a study might show that “boys who play soccer are
more likely to have unprotected sex” — a correlation between playing soccer and
unprotected sex — but then people incorrectly conclude that playing soccer causes
boys to engage in unprotected sex. That would be causation: cause and effect.

Confirmation bias helps explain why we often fall into this trap of confusing the
correlation with causation. Once again, making a prediction not only helps us
understand how we learn and how to learn better; it also helps prevent falling into
the correlation/causation trap in the first place. For example, analyzing existing
spreadsheet data can be useful but it also has dangers, and one risk is that the data
already has correlations and assumptions embedded in it. This can cause us to make
the incorrect conclusion that the correlations are causations. With an understanding
of theory of knowledge we will be more mindful of this trap of confusing causation
with correlation –and we can make better predictions and decisions.

There is no true value of any characteristic, state, or condition that is defined in
terms of measurement or observation. - Dr. W. Edwards Deming

The “value” is in the context for a given operational definition. Understanding that a
value must be interpreted via context, leads us to question any data that doesn’t
provide the operational definition for how the data was created. And this leads to
better understanding. Otherwise, without having the operational definition we are
likely to draw incorrect conclusions from data. Let’s look at a simple example:



23 | P a g e

The height of senior executives is much greater than the average population. Are tall
people inherently much better leaders in organizations? It may have made some
sense historically to have the biggest people in the group lead the hunt but it sure
doesn’t seem like there is a good reason to believe height is a great value for leaders
in contemporary society. You could take from that data about tall senior executives
that in fact height is a “value” of great value. Or you could take from it that we
continue to make judgments based on unimportant factors because unconscious
evaluation criteria (such as height is better) are baked into our psychology and those
criteria shape what we believe. Understanding the power of unconscious evaluation
criteria is a core aspect of Deming’s teachings about theory of knowledge, and why
he urged us to state a theory and a prediction, to test it, and to study the results
before we put our theory into practice (Plan-Do-Study-Act).

Some beliefs that seem to be baked in to our unconscious, and for which we tend to
have a favorable confirmation bias include management practices such as pay-for-
performance, management by fear, emphasis on short-term profits, mistaking
natural variation for special cause variation, and the use incentives and rewards.
(Deming articulated those and others.)

Next Steps
If we can break from such beliefs that are not useful in modern organizations, we can
improve our decisions. Having a Deming-based theory of knowledge will help us
break from those beliefs and it will help us be more thoughtful as we learn to
question other management beliefs we hold –many of which simply are not useful –
or cause harm.

Understanding the theory of knowledge within the context of the Deming’s System
for Managing helps us more effectively and consistently learn and improve the
processes and systems we work with.

Gaining an understanding of how the
theory of knowledge is integrated into
Deming’s System for Managing is easy for
some people, but not easy for others (ah,
variation). My intent was for this article to
get you started along the trail of discovery
but it only scratches the surface of the
theory of knowledge because theory of
knowledge is a very rich subject.



24 | P a g e

About the Author:

John Hunter combines technology with management expertise to
improve the performance of organizations. He has served as an
information technology program manager for the White House
Military Office, the Office of Secretary of Defense Quality
Management Office and the American Society for Engineering
Education.

John was one of 12 people worldwide selected by the W. Edwards Deming Institute to
reconfigure Dr. Deming's famous "Four Day Seminar" into the 2.5 day seminar “Out of the
Crisis.” John has facilitated seminars for the Deming Institute, spoken at the annual
Deming Institute conference and lectured at the Deming Scholars program at Fordam
University, as well as presenting at other management conferences to show how
technology can enhance management improvement efforts. He is currently serving as a
senior facilitator for the Deming Institute.

John created one of the first management resources online and his sites continue to be
among the most popular management resources on the internet. He is the founder and
CEO of curiouscat.com, managing over 20 web sites on management, software
development, investing, engineering, travel and other topics. He can be reached on:
JohnH@Deming.org.

See http://www.johnhunter.com for more details.



25 | P a g e

LEARN MORE ABOUT CREATING WINNING
BUSINESSES
If you’d like to continue your learning, this year’s PEX Week Orlando looks at how to
align people, processes and technology to produce successful outcomes for
customers, employees and stakeholders.

This annual event, now in its 13th year, takes place 21-25 January 2013 in Orlando,
Florida. For more information, please visit www.pexweek.com.

.



26 | P a g e

ABOUT THE DEMING FILES

The Deming Files is a column series published on PEX
Network. All columns postings published in THE DEMING
FILES have all been written under the Editorial Guidelines
set by The W. Edwards Deming Institute. The Institute
views the columns as opportunities to enhance, extend,
and illustrate Dr. Deming’s theories. The authors have
knowledge of Dr. Deming’s body of work, and the content
of each column is the expression of each author’s
interpretation of the subject matter.

The W. Edwards Deming Institute® (www.deming.org) is a non-profit organization
that was founded in 1993 by noted consultant Dr. W. Edwards Deming. The aim of
the Institute is to foster understanding of The Deming System of Profound
Knowledge™ to advance commerce, prosperity and peace. To find out more about
The W. Edwards Deming Institute® go to www.deming.org.

All of the articles in this compilation were created and written under the editorship
and guidance of Kelly L. Allan, who is on the advisory council of The W. Edwards
Deming Institute. KellyA@Deming.org



27 | P a g e

ABOUT US
What is the Process Excellence Network?

PEX Network is an online, free to join, membership portal providing process
professionals with exclusive access to a library of multimedia resources from top
executives on Lean Six Sigma, BPM, Operational Excellence, Continuous
Improvement and other process excellence related topics.

The Process Excellence Network has a subscribed membership of 90,000+ with an
additional 20,000 connected to us via our social networks and a global contact
database of over 450,000.

In addition to online resources, PEX Network organizes 30+ targeted face-to-face
events globally per year with industry specific focuses on Financial Services, Telecoms
& Utilities, and Energy. We also hold major cross industry summits on process
excellence in Orlando, FL (PEX Week) and in London, England (PEX Week Europe)
every January and April.

Contact Us

Website: www.pexnetwork.com

General Inquiries: enquire@pexnetwork.com

Telephone: +44 (0)20 7368 9300



28 | P a g e

ABOUT THE EDITORS

Kelly L. Allan is on the Advisory Council of the Deming Institute and is also the
founder and Senior Associate of Kelly Allan Associates, Ltd., (KAAL) a multi-
disciplinary company with 24 Associates that has been in business since 1974. Kelly
has published articles, commentary and letters in a variety of journals, including Fast
Company, Personnel Journal, Marketing News, INC. Magazine, Business Marketing
Association News, The Wall Street Journal, and Harvard Business Review. He has
been featured in Fast Company, The Columbus Dispatch, Sam's Club The Source,
Tanning Trends, Quality Progress, THE MASTERFUL COACHING FIELDBOOK, THE
KNOWING DOING GAP, and ABOLISHING PERFORMANCE APPRAISALS. He can be
reached on kellya@deming.org.

Diana Davis is editor of PEXNetwork.com and follows trends in process excellence
including Lean, Six Sigma, and BPM. She worked previously as a producer with
Associated Press Television News and she has also worked in marketing and business
development in the software industry. Davis holds a Master's in International
Journalism from City University, London and a BA in English from the University of
British Columbia, Vancouver. She can be reached on diana.davis@pexnetwork.com


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