| The Local Optimization
Fallacy |
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One of the practices of a traditional management system is to divide an
organization into departments, profit centers, or cost centers and measure
the performance of the company by measuring the performance of each of
these individual sub-units. It is commonly believed that if you maximize
the output of each of your profit centers, you will then achieve a global
maximization of the profits for the whole organization. |
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This belief seems intuitively obvious and is easy to accept. Unfortunately
it is patently false. It simply is not true. In any number of simulation
studies and in many real world examples it is easily demonstrated that
this is a false belief. |
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It is only under extremely rare and unrealistic assumptions that local
maximization will lead to global maximization. Indeed it is generally just
the opposite. The more you succeed in local maximization, the worse the
global results will be. An entertaining book partially demonstrating this
is The Goal by Goldratt. |
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This is a very non-trivial and profound insight into the way organizations
work. One of the things we attempt to do in the QPI training is give examples
of this that are relevant to the specific businesses involved that will
help you recognize the truth of this fallacy in situations you are involved
in. Also, we provide basic simulations that demonstrate this. |
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Related to this issue is the idea that one stakeholder group can gain an
advantage over other stakeholder groups without a long-term deterioration
to the health of the organization. This is also untrue. |
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While any given stakeholder group, for example the employees, can gain
a short-term advantage to the detriment of other stakeholder groups (for
example the investors, suppliers, or customers), the entire organization
will suffer. |
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In the long run even the advantaged stakeholder group will suffer. In the
United States the most favored stakeholder group in large companies tends
to be "top management". Theoretically the shareholders are the group in
power, but as a practical matter it is usually top management. There are
many things that top management can do to advantage itself at the expense
of shareholders and other stakeholders such as employees, customers, and
suppliers. All too often this happens. |
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In other situations the shareholders dominate. This is particularly true
in privately held companies and takeover situations and greenmail situations.
It is often possible to literally dismantle a company to the advantage
of the shareholders while destroying the company in terms of its benefits
to all of the other stakeholders. |
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The QPI Management System adopts the view that the appropriate goal of
management of the company is to cause the company to be healthier in a
long-term sense to the ultimate benefit of all stakeholder groups. Any
management system which tends to favor a particular stakeholder group will
not be practicing the QPI model. |
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2004 Info Product Sites, Inc.
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