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Thursday, February 08, 2007

Hal Varian: Kaizen, That Continuous Improvement Strategy

Hal Varian takes a look at "kaizen, the practice of continuous improvement" as a business strategy for the internet age:

Kaizen, That Continuous Improvement Strategy, Finds Its Ideal Environment, by Hal R. Varian, Economic Scene, NY Times: Remember when Japanese manufacturing techniques were all the rage? You could hardly read the business press without encountering mention of “lean manufacturing,” “just-in-time inventory systems” and “total quality management.”

You don’t hear much about these ideas anymore, but not because they are no longer in fashion. Quite the reverse is true... [O]ne of the most important drivers of online business success is taken directly from the pages of Japanese management techniques. I am referring to kaizen, the practice of continuous improvement.

Kaizen ... refers to a disciplined process of systematic exploration, controlled experimentation and then painstaking adoption of the new procedures. In the original formulation, kaizen was applied to manufacturing, where experimentation could determine whether a new process resulted in quality improvements or cost savings in a matter of months.

It is much more difficult to apply kaizen to product design, since it can easily take years to design and market a new product. ... Product development can cost hundreds of millions of dollars, making it almost impossible to run a controlled experiment...

But it is simple to run a controlled experiment with a Web page. Amazon can show a different page layout to every hundredth visitor and determine in a few days whether the new design increases sales. Similarly, a search engine can run a controlled experiment to try out a new tweak to its search algorithm... On the Web, continuous improvement really is continuous. ...

Given a performance measure, be it clicks, revenue or something entirely different, a disciplined process of experimentation and evaluation can lead to rapid improvements. The easier it is to experiment and the larger the number of users, the quicker this process can work. ...

Old media just do not understand online kaizen. Their perceptions are tied to the print world, where design changes are costly. The Wall Street Journal spent years planning its recent redesign of the print edition and millions of dollars rolling it out. Yet it will be months before it becomes clear how successful these changes were.

By contrast, small tweaks in the page layout of online content can be very effective in improving user satisfaction and ad clicks. Controlled experiments can be used to determine the impact of these changes in days rather than months.

Yet how many mainstream publishers have Web page software that allows for such controlled experimentation? In most cases, there is but one layout, and experimentation is difficult if not impossible. You can’t manage what you can’t measure — and if you can’t easily experiment..., management is seriously handicapped.

Kaizen means that the companies currently in an industry have an inherent advantage over new entrants. Entrants have to guess what will work; the companies that are already operating can experiment and find out. This information advantage doesn’t preclude new entries; it just makes it more costly since the learning curve is steeper.

Amazon has some worthy competition in online department stores. But how likely is it that a new entrant will emerge from nowhere and successfully compete...? The experience that existing online retailers like Amazon, Buy.com and eBay have built up is hard to duplicate. A new entrant, even one as strong as Wal-Mart, finds the online world rough going.

This is not to say that new entry is impossible. ... New entrants have the advantage of avoiding earlier mistakes. They can copy successful operations and, in many cases, improve on them. Newer, faster and more flexible information systems can sometimes confer a competitive advantage on new entrants...

But the ability to experiment easily is a critical factor... Being able to figure out quickly what works and what doesn’t can mean the difference between survival and extinction.

    Posted by on Thursday, February 8, 2007 at 12:06 AM in Economics, Technology | Permalink  TrackBack (0)  Comments (72)

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