One way firms can build value is through kaizen, a Japanese management concept that focuses on making small, continuous improvements to processes, systems, and practices. After contrasting two value-creation approaches, this article explores how companies can apply kaizen to increase operational efficiency, remove barriers to growth, and strengthen their competitive position.

Two Value-Building Approaches

All firms are focused on building value. Failing to do so can lead them into a value trap, a downward spiral where the less value a firm creates, the more challenging it becomes to generate future value. This trap weakens, and can ultimately destroy, a firm’s ability to innovate, expand, and compete.

A value trap is a situation where the less value a firm creates, the harder it is to create value in the future.

There are several ways firms can create value, which can be categorized by:

• Area of value creation focus. Value-building efforts can be focused on every area of a business, including strategy creation, product development, operational efficiency, and risk management;
• Value creation method: Value creation methods can include increasing sales, shifting organizational resources to higher value-generating activities, expanding market reach, and lowering costs;
• Value creation time frame: Value creation time frames can include the short, medium and long term.

Value Leap Approaches

One value-creation approach focuses on seeking outsized gains through bold moves and shifts that are often difficult to replicate under typical market conditions. These large, rapid value jumps can be pursued through:

• Joint ventures, acquisitions, and major investments that significantly increase a firm’s size or reach;
• Innovative technological or operational breakthroughs that dramatically change the structure of markets, available products or ways of doing business;
• Strategic financial transactions, like debt restructuring or public listings, that give companies increased financial flexibility or substantially lower their costs of capital;
• Entering blue ocean markets, where competition is low and untapped potential is high.

These approaches tend to be heavily influenced by external conditions, like market dynamics, economic shifts, or product obsolescence horizons. For instance, a company’s opportunity to acquire a competitor may arise due to a short-lived combination of industry trends and financial conditions. Firms using “fail fast” strategies, like many Silicon Valley startups, attempt rapid cycles of experimentation, adapting quickly to success or failure. Apple exemplifies this with its periodic product reinventions, like the iPhone, which disrupted the mobile phone market and created enormous value in a short time.

Incremental Value Creation Approaches

In contrast, incremental value creation is a slower, steady approach. Instead of pursuing large leaps, firms that follow this path work on improving processes and gradually removing barriers to growth. The focus is on:

• Optimizing existing products or services rather than inventing entirely new product or service categories;
• Eliminating inefficiencies in operations, like refining supply chains, accelerating response times or improving customer service experiences;
• Building long-term trust and customer loyalty through continuous product refinement and personalized service.

For instance, rather than developing a revolutionary new product, a food company might improve existing recipes to make them healthier or more appealing to a wider potential product audience. This approach has been used by Nestlé, which continuously refines its product offerings based on evolving consumer preferences and Intel, whose incremental improvements to microprocessors have consistently advanced computer technology.

Amazon is another company that has successfully implemented an incremental value increase approach. Rather than disrupting markets overnight, Amazon has continuously refined its business model, from improving its logistics network to gradually expanding the services offered on its platform. This step-by-step approach has allowed it to become one of the most dominant players in both e-commerce and cloud computing.

The Practice of Kaizen

One value creation model focused on incremental, long-term gains is kaizen. The word “kaizen” comes from two Japanese characters: kai, meaning “change,” and zen, meaning “excellence” or “good.” Together, the term is commonly interpreted as “continuous improvement.”

Kaizen originated in post-World War II Japan, during the country’s efforts to rebuild its economy. Drawing from several influences, including process control, quality management theory, and Japanese culture, Japan developed a systematic approach to making continuous, incremental improvements. This scientific approach to improvement became widely known through companies like Toyota, which implemented it as part of the Toyota Production System (TPS). The TPS became a global benchmark for efficient manufacturing, helping Toyota achieve dominance through continuous refinement rather than relying on disruptive innovation.

The Kaizen Value Creation Approach

Although there are several variations of kaizen, several core principles are fundamental to its practice:

Identifying Areas for Improvement. The first step in kaizen is to identify areas that can be improved. What sets kaizen apart is its reliance on input from all levels of the organization. Everyone, from senior leadership to frontline workers, is encouraged to highlight problems and offer suggestions as to how those problems can be eliminated. This bottom-up approach leverages the insights of employees who are closest to the daily operations and problems, making them more likely to identify inefficiencies and propose practical solutions.

Improving Processes and Procedures. Once areas for improvement are identified, the next step is to implement small, targeted improvements. Kaizen doesn’t focus on major innovations but rather on progressively eliminating roadblocks and inefficiencies through continuous, minor adjustments.

One of kaizen’s most famous methodologies is the elimination of the seven wastes:

1. Unnecessary transport – Excessive movement of materials or information between locations.
2. Inventory – Storing more materials than needed, tying up capital.
3. Excessive Motion – Excessive movement of people or equipment, leading to wasted effort.
4. Excessive Waiting – Time lost while waiting for resources, decisions, or inputs.
5. Overproduction – Producing more than is needed, leading to waste.
6. Overprocessing – Doing more work than necessary to meet customer needs.
7. Defects – Expending organizational resources on fixing errors or redoing work.

These wastes are particularly common in manufacturing, but they can apply to other industries as well. For instance, in healthcare, reducing unnecessary movement of patients or excessive inventory of medical supplies can lead to significant cost savings and improved patient care.

Measuring and Tracking Improvements. Given its focus on gradual progress, measuring and tracking improvements is a crucial aspect of kaizen. By continuously collecting data, companies can objectively assess whether small changes are generating value.

Standardization. Once improvements are made, standardizing them is key to ensuring the new processes become permanent. By documenting and formalizing these changes, companies create a new baseline for performance, reducing the likelihood of a return to old, inefficient practices. This not only sustains improvements but also serves as a baseline for targeting future incremental gains.

Implementing a Kaizen Framework

Any company can apply kaizen to create value by following these steps:

Step 1: Determine the Target Improvement Area

The first step in applying kaizen is to identify the specific area of the company’s operations that needs improvement. This could be in hiring, product development, capital raising, or any other business function. Ideally, the selected area should have a direct and significant impact on the company’s ability to create value. For example, if a company’s growth is constrained by a lack of skilled employees, improving the hiring process may offer the greatest potential for value creation.

Step 2: Break Down the Target Area into Specific Processes

Once the target area is identified, break it down into smaller, manageable processes. This helps to isolate specific activities that can be improved. For instance, in the hiring process, the steps might include:

• Writing and refining job descriptions,
• Posting job advertisements across multiple channels,
• Screening candidates,
• Scheduling and conducting interviews,
• Extending offers and managing onboarding.

By breaking down the process, it becomes easier to pinpoint which parts are inefficient. For example, if last year a company interviewed 16 candidates but hired none, that number could serve as a baseline. The company might then set a goal to interview 100 candidates as part of its improvement plan.

Step 3: Make Incremental Improvements

Next, focus on making small, incremental changes to the identified processes. In the case of hiring, improvements could address the roadblocks that are hindering success:

• No dedicated hiring manager – Assign someone to oversee the hiring process.
• Poorly written job postings – Create a process for revising postings to better reflect the role and attract top talent.
• Low visibility of job ads – Increasingly post on more relevant or high-traffic job boards and track ad responses.
• Slow candidate response time – Keep records of and continuously improve response times with candidates to keep them engaged.
• Unstructured interview process – Standardize interview protocols to evaluate candidates more effectively.

By targeting these specific issues, the company can remove inefficiencies and steadily improve the overall process.

Step 4: Track Progress and Align with Value Creation Goals

Tracking changes is critical in the kaizen framework. After implementing incremental improvements, continuously monitor the results. For instance, if the number of candidates interviewed increases as expected, evaluate whether this leads to the ultimate goal of hiring better-quality candidates.

If the number of interviews is increasing but the quality of hires remains unchanged, adjustments need to be made. This could mean changing the criteria for screening candidates or revisiting the job description to better target the right applicants. The key is to align short-term progress with long-term value creation objectives.

A crucial component of kaizen is to align short-term progress with long-term value-creation objectives.

Step 5: Standardize and Scale Successful Changes

Once successful changes are identified, they should be standardized and used as the benchmark for all future activities in that area. For example, if revising job postings and streamlining the interview process leads to better hires, these practices should be codified and applied across the organization. This ensures that improvements are sustainable and can be scaled as the company grows. Further, approaches that help generate improvements in one firm activity should be evaluated to see if they can be applied to improve other areas of firm operations. This allows kaizen-generated gains to be expanded vertically and horizontally throughout an organization.

Kaizen Implementation Challenges

Market State Matching. While kaizen is a highly effective organizational practice, it does have some limitations. Kaizen tends to work best for companies that have already reached a certain level of operational maturity—those with high efficiency, strong operating margins, or firms competing in red ocean markets where competition is fierce and incremental gains are critical for survival. In these environments, small, steady improvements can provide a competitive edge.

However, for companies in blue ocean markets—industries with little competition and significant room for growth—kaizen may not be the most suitable approach. These companies may benefit more from value-leap strategies, focusing on rapid innovation, market expansion, or disruptive moves to capture value quickly.

Quantification Challenges. Another challenge in implementing kaizen is that it works best in areas where processes can be easily quantified and broken down into smaller, measurable tasks. For example, industrial operations or manufacturing are well-suited for kaizen because their processes are repetitive and can be optimized through continuous improvement.

However, not all value-creation initiatives can be measured this way. Areas like major innovations, cultivating a company’s culture and values, or enhancing workplace satisfaction can be harder to quantify using traditional kaizen metrics. These qualitative aspects of a business often require different methods of assessment, such as employee feedback or customer sentiment analysis, making it harder to apply kaizen in these domains.

Value-Creation Walls. A third challenge in kaizen is the potential to hit “value-creation walls”. Just like a professional athlete experiences diminishing returns as they reach peak performance, companies can encounter diminishing value gains over time. While kaizen may lead to significant improvements, as an organization becomes more and more efficient, finding new areas for improvement becomes more difficult.

Kaizen can lead to value-creation walls where value gains are diminished and innovation is required.

At this point, companies may need to explore more innovative solutions or disruptive approaches to break through these performance plateaus. While kaizen focuses on refining existing processes, innovation is often needed to drive the next phase of growth when incremental improvements are no longer enough.

Key Article Points

Firms can build value through value leaps or incremental improvements.

• Kaizen is an incremental value creation approach that identifies areas for improvement, implements small changes, and systematizes them across the organization.
• A core principle of kaizen is eliminating wasteful practices in order to streamline operations.
• Kaizen requires defining processes quantitatively and carefully tracking improvements.
• Kaizen may not be optimal in fast-growing blue ocean markets or in areas of a business that are difficult to quantify.

People interested in learning more about kaizen may wish to read the books of Masaaki Imai, including “Kaizen: The Key to Japan’s Competitive Success” and “Gemba Kaizen.”

Interested in how other Japanese concepts can be applied to make your business stronger? These articles discuss the concepts of omotenashi, kyudo and swordsmanship applied to business.

The photo for this article was taken by Matteo Vistocco and is available on Unsplash.