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Continuous Improvement Revisited:
Organization Design as the Last Stepin Gaining the Full Competitive
Advantage of Kaizen
Shumpei Iwao, Keio University

By strategically choosing to adopt organizational design, firms will gain a greater
competitive advantage than ever from kaizen. Shumpei Iwao argues that, contrary
to common practice, the top-down approach to continuous improvement issometimes much more powerful than the bottom-up approach.

I

In the 1980s, Kaizen, or continuous improvement,1 was considered to be the primary competitive advantage of Japanese firms.
In the forty years since then, thedeterioration of these firms’ per-

MBR | Winter 2022 | Volume 02 | Issue 01

formance has caused many to lose
interest in the strategic value ofcontinuous improvement. Yet if weapproach its management from theperspective of organizational design, continuous improvement once

again springs to the forefront of
the study and practice of strategic­management.
In recent years, the number of
papers published in the US, UK,
India, and beyond on the subject47

of continuous improvement has
ous improvement are different. The
has made by pursuing continuous
grown.2 Yet these papers tend tochain reactions rooted in continuimprovement.
treat continuous improvement as
ous improvement can sometimes
These data were collected froma series of incremental and indelead to large-scale innovation. Top
Toyota’s annual financial reports.
pendent events. As a
Toyota has been publishing its
result,management
calculations of the economic
researchers and practieffects of continuous improvement
tioners view seamlessin those reports since 2000. The
teamwork and strong
firm’s conclusion is that continuskills and knowledge at
ous improvement has contributed
production and service
several hundred billion yen, orsites as the key factors
billions of dollars,5 to its annual
in managing continprofits.
uous
improvement.
Toyota’s
consolidated
net
From this perspecincome ranges from several
tive, the role of top
hundred billion yen per annum
management is limited
to more than two trillion yen.
to supporting workers
Continuous improvement activand their teams.
ities produce about ten percent
This
misunder- FIGURE 1: Toyota’s Annual Profit from Continuous Improvement4of that. Toyota also publishes thestanding about the
cost-saving effects of its valuerole of top management may be aanalysis and value engineering
managers must therefore be readyresult of the erroneous association(VA/VE) activities, such as improvto decide where to make and breakof “continuous” with “incremental.”
ing finished product designs, parts,
such a chain. Some organizational
Yet certain organizational designs
and raw materials. According tostructures are more compatible
can cause continuous improvement
than others with eachto produce large or radical improveof three approaches toments or breakthroughs. When top
managing continuous
managers understand how organiimprovement:
aimingzational design shapes the manageto develop most of thement of continuous improvement
chain reactions, aiming
and commit to applying it, their firms
to develop none ofare likely to become more competthem, or developing
some on a case-byitive.3 We must therefore revise theconcept of continuous improvementcase basis. And only
so that we can understand its full
top management canstrategic value.
design such organizational structures. It istherefore vital that top FIGURE 2: The Cost-saving Effects of Continuous Improvement
management oversee at Toyota
Top managers should
continuous
improvealways be attentive to thement so as to maximize the orgaToyota Motor’s Securities Reports,
chain reaction of problem
nization’s competitive advantage.
the company has been able to distinguish between the effects of VA/VE
solving which continuous
How Continuous Improvement
and those of continuous improveimprovement can create.
Contributes to Competitive
ment at production/manufacturing
Advantagesites since 2015. The reports state
Top managers should always
To begin with, is continuous
that, separate from VA/VE, continbe attentive to the chain reaction
improvement
necessary?
Doesuous improvement has saved 45-70
of problem solving which continit contribute to a firm’s competibillion yen per year (Figure 2).
uous improvement can create.
tive advantage? If not, research on
The firm, then, draws a considAlthough other innovations cancontinuous improvement has very
erable portion of its profits fromalso touch off problem solving
little value. Figure 1 shows the profcontinuous improvement. Toyota,
chains, those caused by continuits that the Japanese firm Toyota
and others like it, also draw other48 Volume 02 | Issue 01 | Winter 2022 | MBR

tangible benefits from continuous
improvement, honing management
functions like product development,purchasing, and production engineering.
For example, the developmentof new products requires support
from the production departmentin producing prototype models,jigs, molds, and so on. Continuous
improvement can increase the efficiency of research and development,
shortening product development
lead-times.6 Likewise, consultingwith component suppliers about
applying continuous improvement
to their processes may enhance thecompetitiveness of the entire supply
network. I conducted a one-monthparticipant observation in Toyota’s Takaoka factory and found that
continuous improvement spurred
practical development in both product design and production equipment.
So why have we been overlooking the potential advantages ofcontinuous improvement? Perhaps
because we did not fully grasp thenature of the chain reactions ofproblem solving it produces.

Continuous Improvement as
a Chain Reaction of Problem
Solving

The continuous improvement
undertaken at factories in the Japanese auto industry creates chain
reactions of problem solving. This
term describes a phenomenon inwhich, when one process or task ischanged, it causes an unexpected
effect elsewhere. It then becomes
necessary to make more changes
in other areas or tasks, creating asequence of changes and effects. For
example, suppose changes to thelayout of a factory floor opened up
more workspace, creating room for arobot. This robot was better able tohandle large and heavy parts thanhuman workers, making it possible
to assemble several vehicles, eachwith large and heavy parts, at the
MBR | Winter 2022 | Volume 02 | Issue 01

same time and on a single production line.
Innovations such as productand equipment development are
fueled by chain reactions of problem solving. Product development isusually coordinated company-wide
in advance and according to a set
routine. Almost all functional units
participate in developing a product,
including marketing, design, trial
production, purchasing, and mass
production preparation.
Many researchers and practitioners have assumed that continuous improvement was unrelated
to this coordination. In the existing
research, problem solving throughcontinuous improvement is often
assumed to take place only withinteams at the manufacturing site. In
fact, continuous improvement, likeother forms of innovation, causes
chain reactions of problem solving, but ones which stem from adifferent logic than those driven
by product development. Thisdifference is caused by continuous
improvement’s positive feedback
loops, which emerge from a complex
system. In continuous improvement,
an improvement plan is developedand implemented in the same physical place, while the production siteis also where stakeholders’ ideas areborn and put into use. The initialassumptions made during planning
may therefore change as the projectis carried out. Enacting the planned
project will reveal additional problems to be solved, and so forth.
These positive feedback loops makeup a complex system which spurs
chain reactions.
The Toyota Motor Corporation saw continuous improvement
result in major/radical innovation
with both the QR code and themulti-product line. The developmentof the QR code began when Toyota’s
first tier supplier DENSO7 adopted
continuous improvement. DENSO
initially automated the processingof Kanban8 component identifica-tion slips for Toyota.9 Meanwhile,
the multi-product line allows Toyota
Motor’s Takaoka Plant to simultaneously produce five to six models
on one assembly line.10 Both were
continuous improvement initiatives
at Toyota Group’s production sitethat were ultimately incorporated
into the factory’s strategy. Using
O’Reilly and Tushman’s11 definition,these are categorized as radical
innovations or explorations.
Continuous improvement at
Toyota and DENSO, from small-scale
operational changes to large-scaleequipment development, are implemented simultaneously. As Toyota
plant engineer Nobuaki Murai put it:“My impression as a practitioner,at least at Toyota, is that there is noclear distinction between improvement and other capital investment
projects. Both can be accompaniedby small operational improvements
at the time of equipment installation, or it can evolve from an operational improvement to equipment
installation.”12
According to a survey about
continuous improvement investment which I sent to Toyota in
November 2016 and June 2017, about
0.1 percent of continuous improvement projects at Toyota end up costing 100 million yen or more.
Both Toyota, which created themulti-production line, and DENSO,
which invented the QR code, put
manufacturing engineers, or in-line
staff, at all their production sites.
These in-line staff, most of whom
have master’s degrees or PhDs inengineering or science, control thebudget for continuous improvement projects. The budgets for
specific factories range from under
one hundred million yen to several
hundred million yen per year. The
in-line staff select ideas generated
by the workers and other staff
members by considering their probable financial performance, theirtechnological implications, and thecurrent policies of top management.

49

Toyota and DENSO often launch
continuous improvement projects
from the bottom up, using the ideas
of individual workers or teams.
When technical problems arise,such as changing the plant’s layout
or funding new equipment, the workers can immediately consult with thein-line staff. Members of the in-line
staff work in every department,such as body, molding, painting, andassembly, and are a visible presenceon the production site every day, sothat workers can easily and comfortably consult with them.
The top management of Toyota
and DENSO took care to establish
an organization design which allows
their network of in-line staff to linkorganizational changes together,touching off chain reactions of problem solving.
Both incremental and radical
innovations emerge gradually fromthe same small seed of continuous
improvement.
The large-scale and majorinnovations that chain reactionsof continuous improvement create
tend to take months or even years tocome to fruition. As a result, whenobserved in the short term, these
innovations appear to be clearly
separated into two groups, incremental and radical. Longer observation, however, reveals that bothincremental and radical innovations
emerge gradually from the same
small seed of continuous improvement.

Organization Design as an
Innovation Incubator

But
remember,continuous
improvement projects have only thepotential to cause chain reactionsof problem solving. For continuous
improvement to spur both incremental and radical innovations, top
management must cultivate thosechain reactions, which may require
the interest, involvement, andresources of various actors, both
inside and outside the company.

Top management should also be
prepared to implement the innovations produced by these bottom-up
efforts, transitioning seamlessly
to a top-down approach. They
may then choose to: (1) implement
most of these chain reactions fromthe outset, (2) implement none ofthem, or (3) implement selected
chains after considering each individually. In comparing these three
options and strategically choosing
one, managers should consider the
resources that will be required, as
well as which organizational functions will be affected, since bothquestions bear on the project’s
impact. The broader success ofcontinuous improvement projects isthus dependent upon the organization’s resource allocation structure
as well as on the distribution of its
in-line agents.
In 2017, I sent a questionnaire
to a variety of Japanese automobile firms. Four responded. The
combined sales of these four firms
accounts for more than 65 percent
of Japanese automobile production.
Their answers revealed that someJapanese automobile firms have
only a modest range of continuous
improvement projects, while others
have a much wider range, andothers, of course, fall in between.
Each responding firm had a different organizational structure, be it
decentralized organization, centralized organization, or in-line staff
organization. The relevant difference between a decentralized and acentralized structure lies in whether
the budgetary authority for continuous improvement is at a lower orhigher level. In-line staff organization, by contrast, relies on engineers
who assist line workers in factories
to connect the production site withthe firm’s headquarters.
The survey’s results describedboth differences in the scale ofcontinuous improvement between
firms and in the process of obtaining the necessary resources. Orga-nizations which allocated resources
directly to their workers tended
to generate only small continuous
improvement initiatives. Those
which concentrated their resourceson the technical department at
headquarters usually generated
relatively large continuous improvement initiatives. But those whichused in-line staff organization could
generate both small and large continuous improvement projects simultaneously. This information suggested
that the design of an organization
may well influence the scale of its
improvement initiatives.
I was not able, however, toprove the above causal relationshipthrough comparative case analysis.
I therefore created an artificial society and conducted a simulation totest my findings. The efficacy of such
multi-agent simulations in the field oforganizational change has recently
been confirmed.13 My simulation,
based on Toyota’s average factorysize, consists of three types of
agents: 2000 workers, 200 engineers,and 100 members of in-line staff.
All three groups are guided by thesame algorithm and produce ideasof a size that conforms to a uniform
random number. These ideas arethen realized only when they arelinked to sufficient resources.
This is a simplified version of theplan-do-check-act (PDCA) cycle.
Its steps are: finding problems in
the workplace (the random occurrence of ideas), proposing solutions(aligning ideas with resources andconsulting others), and expending resources to enact those ideas(replacing resources and ideas withtokens representing the projects’
outcomes).
The three types of agents differ
in the size of the ideas they generate and organizational networks. I
adopted a uniform random numberthat uses values from 0 to 1 for workers’ ideas and 0 to 10 for those ofengineers and in-line staff. In-line
staff members are characterized by

50 Volume 02 | Issue 01 | Winter 2022 | MBRhow they are perceived by workers, and they thereby maintain awider network among workers than
do engineers. The overall expectation for both ideas and resources
was 1000 for all models. The simulation ended when all resourceswere exhausted, with the fixed seednumber “1.”If an agent does not have enoughresources to realize their idea, they
will delegate the idea to surrounding
agents. In this context, at the beginning of the simulation, the workers
at the decentralized organization
own all the resources. In the centralized organization, the engineers at
headquarters own all the resources.
In the in-line staff organization,either the workers or the engineers
own all the resources, but the in-line
staff coordinate the two using theirwide network.

A firm’s organizational
structure influences thepotential of its continuous
improvement projects
and the direction andsuccess of the resulting
innovations.
Using these multi-agent simulations, I successfully replicated theresults of the questionnaire and thecase study (Figure 3).14 I can therefore confidently say that a firm’s organizational structure influences thepotential of its continuous improvement projects and the direction andsuccess of the resulting innovations.
Firms which do not want to launch
any chain reactions should use adecentralized structure. While somechain reactions can begin at lower
levels, those chains are shorter andsimply will not have wide-reachingeffects. Firms which want to create
broad-reaching chain reactions, bycontrast, will do best with a centralMBR | Winter 2022 | Volume 02 | Issue 01

FIGURE 3: Results of Multi-Agent-Simulation Modeling of Continuous Improvement

ized design. Firms which plan toconsider each chain individually
before putting it to use will find thatan in-line staff design will allow themthat flexibility.
In figure 3, the x-axis of eachgraph represents the different sizes
and values of continuous improvement projects. The y-axis is a scaleof 0 to 1 representing the percent of
total continuous improvement projects in each category.
In the simulation of a decentralized organization (top left),about 66.53 percent of continuous
improvement projects had a valueof 1 or less. Only 0.7 percent had avalue of more than 10. Decentralized
resource allocation thus generates
relatively small-scale innovations.
The centralized organization(bottom-right), which allows engineers at headquarters to monopolize resources, produced about 33.33
percent projects with a value of 1 orless. Meanwhile large-scale improvement projects with a value of 10 ormore were also 33.33 percent.
When I added in-line staff tothedecentralizedorganization(top-right), large-scale continuous
improvement projects with a valueof 10 or more increased from 0.70
percent to 6.67 percent. Likewise,
when I added in-line staff to thecentralized organization (bottomleft), its continuous improvement
projects valued at 1 or less reachedabout 54.07 percent, while 14.07
percent had a value between 1 and
2, 11.11 percent had a value between
2 and 3, and 12.59 percent had avalue of 10 or more.
The average size of continuous improvement projects for thedecentralized organization (top-left)
was 1.202, and for the centralizedorganization (bottom-right) 33.159.
The scale for the centralized organization is relatively high because
projects with a value of more than
100 were included (value of over 10).
When the in-line staff organization isadded to the decentralized organization (top-right), the average continuous improvement size was 4.492,
while for the centralized organization (bottom-left), it was 6.649.
These simulations showed
that, even when the workers were
engaged in the same continuous
improvements and generated similar ideas, the allocation of resources
and the organization’s structure51

would generate variation in the
success of continuous improvement.
That more large-scale projects
are produced by centralized organizations may seem to be a naturalconsequence of the monopolizationof resources by engineers at headquarters. However, deploying in-line
staff allowed the simulation to replicate Toyota and DENSO’s continuous
improvement trajectory. Even whena decentralized organization uses
bottom-up continuous improvement
methods, in-line staff will allow it togenerate large-scale projects. Similarly, even a centralized organization
which concentrates its resources on
the engineers at headquarters cangenerate more small-scale continuous improvements by using in-line
staff. Unlike centralized engineers,
in-line staff have networks among
workers and are recognizable andaccessible to them.
Toyota and DENSO, therefore,
had good reason to assign staff with
graduate degrees the seemingly trivial task of patrolling the factory floor
each day. Lean production, which
generates a diversity of large andsmall continuous improvement projects, required these seemingly fatorganizations to efficiently manage
their chain reactions of problem
solving.

Author Bio

Endnotes

Shumpei Iwao is anassociate professor oftechnology and operations management at
Keio University. He
earned his Ph.D. in
Management from the
University of Tokyo. He was awarded
the 73rd Keio Award from Keio University, 37th Susumu Takamiya Book
Award and 36th Susumu Takamiya
Publication Award from the Academic
Association for Organizational Science (Japan), and 22nd JSPM Book
Award from the Japan Society for Production Management.

1. In Japan, continuous improvement is called Kaizen.
The concept of Kaizen has become popular in business
communities all over the world and even appears in the
Oxford English Dictionary.
2. Gonzalez Aleu, F., & Van Aken, E. M. (2016). Systematic
literature review of critical success factors for continuous
improvement projects. International Journal of Lean Six
Sigma, 7(3), 214-232.
3. Original data and analysis for this article appeared firstin Iwao, S. (2019). Innovation wo umu Kaizen: Jidoshakojo
no Kaizen katsudo to zensya no soshiki sekkei [KAIZEN
activities revisited: Organizational structures andinnovation strategies in the Japanese auto industry]. Tokyo:
Yuhikaku (in Japanese).
4. Data from 2009 is not available due to the financial crisis.
5. In 2020, 1 dollar 100 yen.
6. Clark, K. B., & Fijimoto, T. (1991). Product development
performance: Strategy, organization, and managementin the world auto industry. Boston, MA: Harvard Business
School Press.
7. Nomura, M., Sawada, Z., Hoshino, Y., Masuzawa, Y., &Fujimoto, Y. (2002). Development of the QR-code (Two-Conclusion: Toward a
Paradigm Shift for Continuous
Improvement

Is continuous improvement
always incremental? No. Earlier
studies on continuous improvement are misleading because they
confuse the process with the result.
In fact, the innovation process andits result are not the same. Continuous improvement is one component of the innovation process that
influences whether each particularinnovation is incremental or radical.
Either major or radical innovations
may be generated through continuous improvement.

Continuous improvement
is a process, not a static
outcome.
Continuous improvement is aprocess, not a static outcome. Yet theresults of continuous improvement

have often been erroneously characterized as incremental innovations. Scholars have also paid little
attention to continuous improvement
outside the realm of production,
focusing largely on workers at thelower levels of the organizational
hierarchy. I urge you to reconsider
how you think about continuous
improvement. In practice, continuous
improvement projects can be characterized as chain reactions of problem
solving, driving changes in productdesign and involving many different
departments within an organization.
These chain reactions can even leadto major innovation. It is up to managers to decide how long a chain theywant or are prepared to deal with,and to establish the appropriate organizational structure for their particular purpose.
Firms that do not use a top-down
approach to continuous improvement are likely to miss out on radical innovations which span theorganization. Such broad effects aremuch less likely with a bottom-up
approach. In either case, placing
in-line staff in all departments will
increase the firm’s flexibility andrange.

dimensional Symbol), and application to a production
management system, Production Management:
Transactions of the Japan Society for Production
Management, 8(2), 107-112.
8. Kanban is one element of the Toyota Production System; itis used for parts supply management.
9. Ogawa, S. (2020). QR code no kiseki: Mnonozukuri syudan
no hassousenkan ga kakushin wo unda [The miracle of QR
code]. Tokyo: Toyokeizai (in Japanese).
10. Iwao, S. (2017). Revisiting the existing notion of continuous
improvement (Kaizen): Literature review and field researchof Toyota from a perspective of innovation. Evolutionary
and Institutional Economics Review, 14(1), 29-59.
11. O’Reilly III, C. A., & Tushman, M. L. (2013). Organizational
ambidexterity: Past, present, and future. Academy ofManagement Perspectives, 27(4), 324-338.
12. The interview data is recorded in Iwao (2019).
13. Miller, K. D., Pentland, B. T., & Choi, S. (2012). Dynamics
of performing and remembering organizationalroutines. Journal of Management Studies, 49(8), 1536-1558.
14. Simulation program code is available at Harvard Dataverse(https://doi.org/10.7910/DVN/UN14B7).

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