274 CHAPTER ◆ 3 0 Kaizen: Continuous Improvement
Innovation is discontinuous improvement. Innovations appear when process variation
is low. In K|V, product teams focus on innovation. After Gate 3, a product team should be
freed to focus their efforts again on discontinuous innovation, on finding new strategies for
new trading/investment systems. Risk managers and kaizen teams should be responsible
for continuous improvement of existing systems, for uncovering root causes of variation,
and new technologies that will extend the maturity stage of a trading/investment system.
In the hypercompetitive financial markets, where the importance of technological supe-
riority is increasing, the speed at which firms develop and roll out new trading/investment
systems is becoming an increasingly critical competitive issue. Shorter product cycles
mean that firms have less time to recoup their investments and be first to market with the
right trading/investment system and quality confers major competitive advantage.
The question is the following: can continuous improvement and systematic innova-
tion, which appear to require elaborate steps, exist in a speed-driven world? Competitive
advantage is built through innovation. Nevertheless, continuous, incremental improve-
ments are necessary to defend existing strategies against competitor ’ s new systems and
digest changes to the economic environment. In our view, the product team should focus
on innovation, not monitoring or looking from incremental improvements to existing sys-
tems. Speed of product development is most often found where management emphasizes
concurrent engineering of many trading/investment systems involving staged develop-
ment. The focus of these efforts is on streamlining and simplification.
When applied to a trading environment, a continuous improvement strategy involves
management, kaizen teams, and reformulated product teams, working together to make small
improvements continuously. It is top management ’ s responsibility to cultivate a professional
environment that engenders kaizen. A culture of sustained continuous improvement will
focus efforts on optimizing trading/investment systems and, furthermore, processes of a trad-
ing or money management organization. Intelligent leadership should guide and encourage
firms to continuously improve profitability, to increase efficiency and reduce costs.
Through small improvements and innovations from research and entrepreneurial activ-
ity, financial firms can discover breakthrough ideas. This includes, among other things, the
creation of new trade selection algorithms, application of existing systems to new markets,
and the implementation of new technologies for more efficient trade execution.
During a trading/investment system ’ s maturity stage, the available funds are fully
invested and performance should conform to test results and/or the benchmark. Maintaining
maturity requires continuous improvement to prevent decline. During the decline stage,
trading/investment system performance fails to conform to test results and/or the bench-
mark. Continuous improvement measures may not be effective and the trading/investment
system may be shut down.30.5. In Conclusion
The trade selection, the order management, and the risk management processes as well as
the technology can be enhanced or improved over time, until the useful life of the trading
system is over. As you define all control metrics in Stage 1, and build them to monitor,
review, and understand the system that you built, we gently pointed you in the directionToyota, GE, 3M, Apple, SAS, and Honda all confirm that it is the reduction of variation that allows a firm to
find breakthrough innovations and new processes.