1

Rock the Gemba

Everybody talks about it. Nobody really knows how to do it.

Everyone thinks everyone else is doing it, so everyone claims they are

doing it.

What we’re talking about is digital transformation, the latest

evolutionary (many argue, revolutionary) process in which businesses

of all shapes and stripes are engaging, operating, and innovating,

worldwide.

Years ago, behavioral economics Professor Dan Ariely used the

tongue-in-cheek description about “big data”, a precursor and key

ingredient for digital transformation.

A Quarterly Publication March 31, 2019

Capital Investment Services of America, Inc.

111 E. Wisconsin Avenue, Suite 1310 Milwaukee, Wisconsin 53202

414/278-7744 800/345-6462

info@capinv.com www.capinv.com

In This Issue . . .

Digital transformation is a

multi-trillion dollar evolution

occurring worldwide.

Companies that “Rock the

Gemba” can increase

probabilities of effective

digital transformation.

Gemba walks promote value

creation with less waste.

Value creation = Purpose +

Process + People.

At the Gemba: Go See, Ask

Why, & Show Respect.

Gemba walks fit in the Value

Creation & Innovation part of

the growth cycle.

Focusing on the Gemba

provides a way to navigate

through Fear, Uncertainty, &

Doubt (FUD).

2

2

Source: vinodsblog.com/2019/01/01/2019-year-of-ai-digital-

transformation-performance-then-just-chatter-box/

goo.gl/images/KpAa8U

Digital transformation is real, and it’s spectacular. It is fast moving and far reaching, orderly and disruptive all

at once.

Innovative and value-creating concepts we have

written about in the past – many of them pictured in

the cloud nearby – are all part of it. So, too, are the

people and processes behind these concepts.

How should investors think about the opportunities

digital transformation affords and the displacements it

will cause? Companies that “Rock the Gemba” – that

study and continuously improve the place and process

of value creation for customers – could offer clues.

Turning (to the) Japanese

We have a couple of corkboards hanging

in our breakroom for important notices

(and the occasional coupon from a new

lunch spot!). Also pinned to that

corkboard for well over a decade (pictured

nearby) is a concept called kaizen, a

Japanese term that means “change for the

better” or improvement.

As it applies to business, kaizen is widely

described to encompass a culture of

continuous improvement in which all

employees are actively engaged to make

specific areas of a company better. Many

firms take this a step further and make kaizen a fundamental way of thinking for all employees throughout the

organization.1 Whenever a company refers to kaizen either in their annual report or a conference call, it piques

our interest.

Gemba (pronounced like “Gamma”) is another related Japanese term meaning “the actual place”. As it applies

to business, Gemba is the place where value is created. It is a term meant to emphasize fact and empiricism,

where one goes to learn and understand (as opposed to criticize or dictate). Gemba and its associated “Gemba

walk” are thought to be where and how well-run companies figure out how to lead.2

1 Vorne Industries Inc., www.leanproduction.com/kaizen.html (accessed December 19, 2018).

2 James Womack, Gemba Walks Expanded 2

nd Edition (Foreword by John Shook) (Cambridge, MA: Lean Enterprise Institute, Inc.,

2013), loc 87.

3

Undercover Boss? Not Really.

A popular TV show here and across the pond called Undercover Boss portrays a Chief Executive Officer (CEO)

or principal owner in disguise oftentimes working as a new hire on the front lines of a manufacturing plant or

service business. During the course of an hour we watch as this proverbial fish out of water learns of the daily

struggles of his/her employees at work and sometimes at home.

By the episode’s end, the CEO has completed an empathetic journey of discovery and vows to be a better boss

as a result of the experience. While entertaining and instructional, there’s a lot more to a Gemba walk than

masquerading as an undercover boss.

Sources: cnbc.com & edge.slashgear.com

That said, at its core, what we’re talking about isn’t new. In the context of business and process improvement

kaizen and Gemba walks can trace their origins as far back as the 1980s when U.S. firms were trying to figure

out how to replicate the operational excellence of their Japanese competitors (or possibly further considering the

work of quality control pioneers Walter Shewhart and W. Edwards Deming). Today, these terms can be found

in many places where the concept of “lean” operation – creation of more value with less of everything – is an

integral part of the organization.3

Going Digital

According to IDC (International Data Corporation), spending on digital transformation is expected to approach

nearly $2 trillion dollars by 2022, as businesses upgrade their technology to compete more effectively.4 In

company quarterly earnings conference calls and presentations over the last year the term “digital

transformation” was used over 1,200 times.5 And those are just from publicly traded companies in the U.S.

which make up less than 1% of all businesses and employ just one-third of the domestic labor pool!

So what does digital transformation mean? Broadly speaking and put very simply, it means three things:

Engagement with customers (e.g., from face-to-face to online),

Reorganization of internal operations (e.g., using software to change prices or shipping

directions on the fly),

Innovation of services (e.g., completely new software-based businesses with little or no

physical presence like Uber or Airbnb)6

3 Ibid, loc. 2383.

4 www.idc.com/getdoc.jsp?containerId=prUS44440318 (accessed March 7, 2019).

5 FactSet search of “digital transformation” conducted on March 7, 2019.

6 www.thedigitaltransformationpeople.com/channels/the-case-for-digital-transformation/what-is-digital-transformation-and-what-

does-it-really-mean-for-you-and-your-organisation/ (accessed March 7, 2019).

4

“Every one of [our customers] knows that if they are not using digital as an enabler,

there’s some small company out there that’s going to completely disrupt their business

using a mobile app and digital technology.”

Adobe CEO Shantanu Narayan, December 13, 2018

The excellent illustration below may help also.

Source: happiestminds.com. goo.gl/images/1zxb6m

Did you hear about McDonald’s recent acquisition of Dynamic Yield? Their aim is to be able to display on

digitally-equipped drive-thru screens food based on time of day, weather, and restaurant traffic. They also want

to show food that is trending and personalized for each customer.7

Recently, Adobe’s CEO agreed with an analyst who asked about the resiliency of digital spending if the macro

environment were to grow more challenging (i.e., our economy slowed). It seems a “keeping-up-with-the-

other-guy” mentality is influencing behavior more than a fear of falling behind.8 Concluding with the quote

below, he said:

Wasted on the Way?

A multi-trillion dollar spending tide will lift a lot of boats, but some of them will invariably sink. Companies

that supply digital transformation have to spend to battle better mousetraps from the competition. Companies

that consume it have to contend with integration issues, operational and cultural, which in turn could have

competitive implications of their own.

But regardless of whether you’re selling it, buying it, or doing some of both, all stakeholders have to worry

about excessive, unnecessary, or otherwise wasteful digital spending. On a host of different sides, suppliers,

consumers, and their investors have to think about digital “waste”.

7 www.zdnet.com/article/what-mcdonalds-acquisition-of-dynamic-yield-tells-us-about-digital-transformation/ (accessed March 29,

2019). 8 Adobe Inc., Fourth Quarter Conference Call Transcript, December 13, 2018, FactSet CallStreet, LLC, pgs. 19-20.

5

A Forbes contributor recently wrote, “Everyone is being told to go digital, and the reaction is to throw ever-

growing amounts of money at technology solutions.”9 He pointed to a recent survey of senior executives about

digital transformation whose authors concluded:

“When feeling the pressures to go digital it’s not uncommon for organizations to end up

with technologies that don’t work, are difficult to use, or butt heads with other systems . . .

Sometimes, decision makers aren’t taking the proper steps to support new technology

investments. Worse, they may be purchasing flashy solutions simply because they’ve

bought into hype or a competitor's move . . .

Decision makers are not investing in the solutions they’ve identified as most valuable.

Even their understanding of what’s valuable can be called into question.”10

How can companies increase the probabilities of reducing digital waste, and create more value with less of

everything? The leaders of these companies – from senior management on down – could benefit by getting

involved in the processes that create real value for their customers. An effective way to do that is going to the

Gemba, the where and the how of value creation.

Source: https://dilbert.com/search_results?terms=mbwa, January 16, 1993

Value Creation = Purpose + Process + People

But before they go to the Gemba, managers should understand why they need to go there. James Womack,

author of Gemba Walks, would probably concur. As he describes in his book:

“Simplify every process to minimize [the] need for information management (emphasis

added). Compressing value streams by relocating sequential process steps from across the

world to across the aisle also eliminates the need for a world of information.”11

9 www.forbes.com/sites/joemckendrick/2018/04/10/digital-transformation-heres-the-money-well-sort-it-all-out-later/#3d4f47b8177e

(accessed March 18, 2019). 10

2018 Digital Transformation Report - Strategies for Avoiding Common Mistakes and Making Smarter Technology Investments,

PointSource.com (accessed March 18, 2019). 11

James Womack, Gemba Walks Expanded 2nd

Edition (Foreword by John Shook) (Cambridge, MA: Lean Enterprise Institute, Inc.,

2013), loc 591.

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Gemba Walk

Show Respect

Ask Why

Go See

In other words, before companies initiate the steps to transform a process digitally, they must figure out whether

they actually need the process in the first place! For maximum effectiveness, this step necessarily involves all

employees with hands in the process – executives, team leaders, sales folks, folks on the front lines– all the

people whose contributions affect outcomes.

Writes Womack, “. . . improving a process in an organization should start with the purpose of the process from

the standpoint of the customer.”12

This is one unifying concept we want to highlight between digital

transformation and Gemba walks: purpose and purpose of process to the customer (Note that all three

foundational elements of digital transformation referred to earlier involve value creation to the customer).

Undercover Boss mentioned before does help a little in understanding one key difference between strategies

past and present. Companies used to rely on management “heroes”. These well-educated, well-trained

executives, perhaps with an alphabet trailing their names on resumes and business cards would show the rest of

the team “how it’s done.” That is, responsibility for the value creation/waste elimination process was handled

by what Womack describes as a “top-down, command-control” process.

Today’s thinking about creating value and eliminating waste has necessarily evolved in the digital age. If you

believe Adobe’s Narayan, there’s less time for processes to follow a formal chain of command. Today, more

companies are using a bottoms-up approach to get better results faster.

Writes Womack:

“. . . continued high-level performance is critically dependent on continuous engagement

of the entire workforce by the management team in a quest for continuous improvement.”13

Gemba Walk This Way

Traditional Gemba walks combine three steps, Go See, Ask Why, Show Respect. Every walk starts with a

purpose, examines a process within the scope of that purpose, and involves all the folks who touch that process.

The minutiae of go see, ask why, and show respect is beyond the scope of our purpose here, but as excerpted

from Womack’s frequent “walking partner” John Shook, Chairman and Senior Advisor of the Lean Enterprise

Institute:

12

Ibid, loc. 3603. 13

Ibid, loc. 3558.

7

“Prosperity in the long run is achieved by commercially-tested betterment, not the shovel-

ready projects of bridges to nowhere.”

Prof. Deirdre McCloskey, Wall Street Journal, December 6, 2018

Risk Taking

Innovation & Value Creation

Growth & Productivity

Wealth Creation

Go See: Identifies purpose, considers alignment of people and process.

Ask Why: Looks for solutions, waste, obstacles.

Show Respect: Respect, Rely, Develop, Challenge . . . all people involved.

Walks that start with the customer and work backward are considered ideal, but are currently thought to be less

common.14

Even Gemba walks themselves require continuous improvement!

Where Gemba Fits in the Growth Cycle

In past editions of these pages we have tried to explain the importance of risk-taking and innovation to the

health and growth of an economy. As the figure below shows, Risk Taking leads to Innovation & Value

Creation. Innovation & Value Creation lead to Growth & Productivity. Growth & Productivity lead to Wealth

Creation. Wealth Creation starts the whole process over again.

To put a finer point to it, Wealth Creation (or more properly, Wealth) is not only the end result of the process

but more importantly, the source of it. The growth cycle can’t start without it and the very-necessary, very-

healthy, risk-taking activities it engenders. In that context, it may be helpful to think of Gemba walks as a fuel

propellant (and waste retardant!) to the innovation and value creation parts of the growth cycle resulting from

successful risk taking.

Effective digital transformation depends on the risk/reward, success/failure tradeoffs afforded through equity

ownership. It cannot be subsidized from the top down (e.g., government); it must be driven by the risk-taking,

value-creating efforts of those closest to the customer. The following examples should help to demonstrate

why.

14

www.lean.org/shook/DisplayObject.cfm?o=1843 (accessed March 25, 2019).

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Rock the Gemba: New Business Opportunities

Danaher is a large, multinational company headquartered in Washington D.C.; maybe those are the only things

about the company that haven’t changed in the 15 years we’ve followed them! That’s because Danaher is

constantly reinventing the products and services they deliver, always in pursuit of value creation to the

customer.

The slide above was presented at Danaher’s 2017 Analyst Day conference. In this example, they demonstrate

how Gemba helps them identify new business opportunities. Note the emphasis on developing new solutions

from the customer’s point of view.

. . . it gives us rapid cycles with customers, sprints we call them. So, we will go out and

talk to customers and [ask] what is the unmet need that we can fulfill for you? [emphasis

added]. And in this case, we're starting to see customers purchase some of

our Hach drinking water analyzers into the dialysis market to test for chlorine, so we went

out to understand that, we bring it back to our labs, and we start innovating against it.

We leverage a concept called Obeya, which in Japanese means big room. This is

where we break down the walls literally [and] cross functionally. We put the scientists of

different disciplines together and we start coming up with prototypes and innovating

against that customer idea.

We're not sure we get it right initially, so we go back out to the customers and we

talk to them again and we iterate those prototypes with them. And, in this case, for

the Hach example, there were 15 product design sprints and loops that we did with the

customer that unlock for us, a $50 million adjacency. This is going on all across

Danaher.15

15

Danaher 2017 Investor and Analyst Meeting, December 14, 2017.

9

Rock the Gemba: Eliminating Waste

Ecolab is another large, multinational company headquartered in St. Paul Minnesota. Their water, hygiene, and

energy technologies businesses serve the food service/processing, hospitality, health care, and energy markets.

You’ve probably seen their trucks tooling around where you live.

Ecolab has gone all-in on digital transformation, and from the slide nearby you can see it’s clear the effort is all

about the customer.16

But for Ecolab, Gemba isn’t just about new business opportunities. It’s also about improving safety, containing

costs, and creating a sustainable culture of continuous improvement.

For Ecolab’s Garland, Texas plant, where they

make detergent blocks for commercial dishwashers,

those efforts began years ago with a Gemba walk by

a new VP of Operations.

At the time, Garland was Ecolab’s poorest

performing location, and the plant manager was

given twelve months to turn it around.17

While the team didn’t achieve all of their goals, the

plant did succeed in improving safety by nearly

70% and reducing some waste metrics by 20%.

Equally important, they identified even more areas

for continuous improvement.

What’s interesting is that Garland tried to take steps to improve before, but nothing took hold until that Gemba

walk which the plant manager later dubbed the “Day of Change”. As Jill Jusko, who reported Ecolab’s efforts

for Industry Week wrote,

“Creating a lean culture requires a sustained process and consistent message, not simply

a workshop -- or even a series of workshops. And while the change may begin with the

plant manager, it requires commitment from the entire workforce.”

“The leadership team developed a vision for the facility, bolstered by seven values. Among

the values: “I have the courage to challenge the norm, provide innovation, and eliminate

waste.”18

16

Ecolab 4th

Quarter 2018 Investor Presentation. 17

www.industryweek.com/ecolab-lean (accessed March 27, 2019). 18

Ibid.

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Rock the Gemba: Little Things Become Big Things

Deborah Adler, a NYC-based designer/entrepreneur believes that “if you want to change the world, go to the

Gemba”.19

Her understanding and appreciation for “the real place” came from solving a problem for her

grandmother who accidentally took her grandfather’s medication.

Adler’s design solution for prescription medication bottles was adopted by pharmacies at both CVS and Target.

She delivered a short TED talks presentation about her experiences that’s available on You Tube.

Her point is that big change doesn’t have to come from big ideas. Value creating ideas for one person can

become value creating ideas for the world.

“In the Gemba we learn that there is no best way. There’s always a better way. But the

trick is to be there to see it. Go to the real place where the work is done. Watch. Ask.

Solve at human scale. The little things are the big things.”20

19

Adler, Deborah, “Go to the Gemba.” TEDXRVA, March 22, 2013, www.youtube.com/watch?v=A_DGAGzyPEg.

20 Ibid.

11

“The biggest risk to the long-term health of the economy and the market today is the

desire of policy makers from both parties to allocate capital. This process is always best

left to the collective wisdom of markets.”

Jason Trennert, Investment Strategist, Wall Street Journal, March 8, 2019

Rock the Gemba: Digital Transformation & Capital

In our Perspectives, we often address Fears, Uncertainties and Doubts (FUD) “of the moment”. We try to

explain why and how what’s going on with either policy makers in Washington or central banks here or around

the world may offer difficult, yet conquerable challenges.

Fiscal policy and monetary policy can make the operating environment of a free economy more hospitable or

formidable, but they can’t change the fundamental nature of our Gemba, the place where value is created.

And, if you’re wondering how we can avoid the fate of the Japanese – who pioneered ideas like kaizen and

Gemba – but haven’t been able to free themselves from decades of economic stagnation despite a focus on

value creation, it’s a bit like comparing apples and oranges. They don’t have a lot of what we have in this

country. Among them are favorable demographics, a melting pot of cultures and ideas, and a system designed

to protect and enforce individual property rights. In short, we have a more hospitable environment for the “Big

Wheel” – the Growth Cycle – to keep on turnin’.

What gives us conviction is a deep and rich history of lessons that demonstrate these groups don’t control the

American economy; only wealth creation and successful risk taking does. It’s the Danahers, the Ecolabs, and

the Adlers at the Gemba that propel us forward, not Presidents, Congress, or The Federal Reserve.

So this is where and how we spend most of our time: Trying – as that concept pinned on our corkboard reads –

to learn and understand where profitable innovation and value creation will come from in the future.

Digital transformation – the latest in a long line of purpose, process, and people evolutions – won’t identify the

best way to solve new and complex problems, but rocking the Gemba can help identify better ways every day.

The back cover highlights many of the digital deals we followed last year, but by no means is the list complete.

This is just one of several ways we try to rock our Gemba, to better learn and understand what could add value

and what could be wasteful about digital transformation. We remain focused on these kinds of fundamentals

because it gives us better probabilities of success.

Established in 1981, Capital Investment Services of America, Inc. is a Milwaukee, WI-based independent investment

counsel providing custom-tailored portfolio management to individuals, businesses, and charitable institutions.

If you would like to be added to our mailing list, email us at: info@capinv.com or call us at 1-800-345-6462.

For additional information, visit our website at: www.capinv.com

The information contained in this report is based on sources believed to be reliable, but we do not guarantee its accuracy or completeness. The information is published

for informational purposes. This paper is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to

buy or sell any securities or to adopt any investment strategy. The opinions expressed herein may change as subsequent conditions vary.

January Microsoft Buys Avere Systems Hybrid cloud storage

Red Hat Buys CoreOS Kubernetes development

February Oracle Buys Zenedge IT systems security

March Cognizant Buys Bolder Healthcare Solutions Revenue cycle management for healthcare

Ansys Buys Optis Physics-based visualization software

April Booking Hldgs Buys FareHarbor Experience & activities booking software provider

Oracle Buys Grapeshot Brand safety solutions

Oracle Buys Vocado Cloud-based financial aid solutions for higher education

May Ansys Buys OPTIS Autonomous vehicle simulation

Oracle Buys DataSciences.com Machine-leaning solutions for digital transformations

PayPal Buys iZettle Payment platform in Europe and Latin America

Roper Buys PowerPlan Software for financial and compliance management

Microsoft Buys Semantic Machines Conversational AI developer

Adobe Buys Magento Commerce Digital commerce, order management and predictive intelligence

ResMed Buys HEALTHCAREfirst Software for home health care and hospice

June Microsoft Buys GitHub Software development platform

Microsoft Buys Bonsai Machine teaching: builds brains for autonomous systems

PayPal Buys Simility Fraud prevention and risk management platform

PayPal Buys Hyperwallet Global payout platform

July Fortive Buys Gordian Construction cost data, software and service

Booking Hldgs Buys HotelsCombined Metasearch site w/strong presence in APAC

Fortive Buys Accruent Facilities and asset management software

August Cognizant Buys SaaSfocus Sales force cloud consulting

September SS&C Buys Intralinks Capital markets deal-making and communications platform

Cognizant Buys Advanced Technology Group Revenue management consulting

Adobe Buys Marketo Cloud platform for B2B marketing engagement

Microsoft Buys Lobe Artificial Intelligence Deep learning app augmenter

October Google Buys Onward Natural language processing and machine learning

Cognizant Buys Softvision Digital engineering and consulting

Oracle Buys goBalto Cloud solutions for clinical research

IBM Buys RedHat Open source hybrid cloud provider

ResMed Buys MatrixCare SaaS in long-term, post-acute care

November Microsoft Buys XOXCO Conversational AI and bot development

Microsoft Buys FSLogix Enhances Office365 physical and virtual desktops

PTC Buys Frustum Adds AI and Design Generative capabilities to Creo

December ResMed Buys Propeller Health SaaS for COPD patients

ResMed Buys Apacheta Saas for sales, field marketing, transportation services

Sample of 2018 Digital Transformation Deals