Research shows that poor service is the number one reason customers leave (45%), and reliability is the most valued of the five service qualities. In retail or distribution settings, stock-outs are the leading cause of losing business. If you can’t deliver the product when the customer expects it, you will have difficulty making money now and in the future.

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The Theory of Constraints (ToC) challenges you to build your company to last – to be ever flourishing; your performance consistently improves, even during challenging times. Your people are happy in their work. Your customers are delighted with your offer. You invariably select the ‘right’ strategic goals – building a successful differentiator and a structure to capitalize on it long-term. Your organization’s people, policies, and practices are aligned with your strategic objectives. The organization is dynamic, constantly pushing to improve its performance.

The principles embodied in the Ever-Flourishing Company (EFC) are to create an organization that will endure, providing long-term security for its stakeholders and societal benefits and informing managers’ strategic thought and actions. They provide leaders with a framework that they can use to create successful strategies and tactics without compromise. Finally, it solves two of the biggest problems for strategists, picking the right objectives and resolving internal conflicts and contradictions.

The principles embodied in the Ever-Flourishing Company (EFC) go beyond mere success; they describe an enduring organization that is a beacon of long-term security for stakeholders and delivers significant customer benefits. These principles are the guiding light for visionary managers, providing a framework that empowers them to craft winning strategies and tactics without compromising their integrity. By embracing the EFC, you unlock the solution to two of the most daunting challenges strategists face: the ability to set the right objectives and the capacity to resolve internal conflicts and contradictions.

In this world of the Ever-Flourishing Company, the possibilities are infinite, and the rewards immeasurable. Escape from mediocrity by embracing the power of the EFC and transform your business into a force that shapes the future.

Four pillars support the Ever-Flourishing Company:

1. A process of ongoing improvement (the organization is constantly driving towards the goal – more now and in the future)
2. At least one Decisive Competitive Edge (the organization has an offer, difficult for competitors to copy, that creates significant and sustainable results for customers, which in turn provides them for the company)
3. Avoids operational risk (the organization offers security for their employees and stability when the market is uncertain)
4. It breaks the Engines of Disharmony (the organization actively works to align authority with responsibility, removing contradictory rewards)

Moving the Organization Closer to Its Goal – A Process of Ongoing Improvement

A ToC strategy embodies the relentless pursuit of ever-increasing performance, a concept famously coined by Eli Goldratt as the Process of Ongoing Improvement (POOGI). But this is no ordinary endeavor; it goes beyond mere operational activity—it’s a strategic imperative. With a systematic approach, visionary leaders forge ahead, developing, implementing, and measuring strategic initiatives that yield extraordinary outcomes.

The Strategic Objective of Improving Performance

Improvement is the driving force of an EFC, encompassing much more than mere efficiency and small wins. It represents a deliberate, resolute journey toward the organization’s ultimate goal. The POOGI is an unwavering commitment to identify and shatter the strategic constraints holding the organization back.

By embracing a POOGI, improvement becomes ingrained in the organization’s DNA; it becomes a way of life. It’s not about sporadic bursts of change; it’s adopting a culture of constant evolution and relentless adaptation.

Green Curve & Red Curve Improvement Paths

The EFC requires both baseline soundness and continuous improvement. The green curve symbolizes the foundation of stability and harmony, while the red curve represents continued improvement.

 The presence of the green curve is necessary for the existence of the red curve; both are essential for organizational success. The EFC strategy is to achieve significant improvement while maintaining stability.

Success requires stability; if it is not already present, the first step is creating it. If your organization’s processes are unstable, there is little room for management attention to improve; managers are caught up in the day-to-day business activity. Put another way, we can’t focus on fire prevention while we’re fighting fires.

A Decisive Competitive Edge

An organization must build a Decisive Competitive Edge (DCE) to get on the red curve. A DCE exists when a company has a decisive, sustainable advantage over competitors.

A Decisive Offer

Decisive means providing customers with unique, meaningful value that competitors cannot easily replicate. A decisive offer is not simply “better” than others; it uses an organization’s operational abilities[1]still far away, indicating that operational excellence with ToC solutions can be the DCE.

It could be changing the product (its physical characteristics or performance), how customers engage with the product, how and when you collect payment for orders, or how the customer receives the product’s benefits—for example, superior supply reliability with penalties that compensate the customer if you don’t keep your delivery promises. 

This offer is decisive in two ways; one, in some markets, few companies deliver 98% on time, and two, few managers will bet they can consistently provide that result. A decisive offer has a superior benefit while blocking competitors from duplicating it.

A Sustainable Offer

An offer is sustainable when it does not stretch or stress the organization to provide it. It can deliver the decisive offer repeatedly without sacrificing its performance in other aspects. For example, lowering prices to gain more sales could create more work with less profit. Entering a new market that requires significant additional capability introduces operational risk. 

The offer doesn’t need to be new, splashy, or expensive (although solving a significant customer problem could be considered splashy). Instead, having a decisive, sustainable offer can be (and has been) created with any of the solutions of the Theory of Constraints.

Avoiding Operational Risk

To move into the growth phase of the red curve, a company must establish operational stability by effectively managing risk. Operational risk is the potential loss due to ineffective or failed internal processes, people, systems, or external events that can disrupt business operations.

Maintaining Adequate Capacity and Reserving Capabilities

The organization’s resource demand fluctuates, causing periods of both under and over-utilization. Managers may optimize labor costs when demand is low by balancing staff levels with demand. Unfortunately, this approach often results in staff layoffs. However, the Ever-Flourishing Company anticipates market variation with strategies that eliminate the need for large-scale layoffs, retaining its skilled workforce even during slower periods. Better planning saves them from incurring the costs of rehiring and retraining new staff when demand eventually picks up again.

The Ever-Flourishing company excels at this by avoiding the trap of over-committing its resources and using its competitors as a buffer (not capturing all of any market they are in). When an organization operates at nearly 100% utilization, operational performance declines, leading to unpredictable and inconsistent outcomes. This inconsistency will negatively impact customer satisfaction, and unreliable suppliers will force customers to seek alternative sources. Even worse, switching costs can prevent customers from returning; even a short-term decline in operational performance can have a long-term effect on future sales. When the company has all (or nearly all) of a given market, any fluctuation in demand affects it.

Financial Support for Operations

If operational risk is anything that exposes an organization to loss of profits, then financial leverage would qualify as such. Debt allows for increased return on investments by increasing asset turnover. Still, it increases risk: (1) debt means future expenses and cash demands- principal and interest, (2) developing new capabilities is not free, and (3) there is uncertainty in the market’s response to a new capability. The EFC uses debt cautiously to build or acquire capabilities only after considering other ways to create new competencies.

Engines of Disharmony

In the early 1980s, Dr. Goldratt recognized a significant obstacle to improving factory performance – conflicting incentives or performance measurements. At that time, he stated, “The goal of a plant is to make money, and the measurements we are seeking should measure progress towards that goal. We have seen that cost accounting measurement [of productivity] not only doesn’t measure real progress towards that goal but provides a disincentive.” Executing the OPT (Optimized Production Technology) software schedules contradicted the commonly held beliefs about lot sizing and setup costs. Managers were often unwilling to follow the software’s recommendations. He wrote The Goal: A Process of Ongoing Improvement to overcome these widely held beliefs. “They flew in the face of accepted policies and procedures, but they were obviously correct…at least to me.”, he later wrote.

In the late mid to late 2000s, Yuji Kishira, a leader in applying and teaching the ToC, trained and led the implementation of the concepts of Critical Chain Project Management (CCPM) in many companies in Japan. He noted that managers considered the results in improving human relations and harmonious workplace culture (in Japanese, Wa) more significant than the financial results they achieved. This outcome led to the realization that the true power of the ToC is not the ToC solutions but the solution’s ability to remove the Engines of Disharmony. Goldratt then realized that the foundational element of creating the ever-flourishing company was to improve human relationships. And the obstacles to improving them were the “Engines of Disharmony.” These engines cause conflicting behaviors between individuals and between organizational units (departments).

Managers have long thought that silos in organizations are problematic, but the Engines of Disharmony go deeper than isolated information and warring departments. Silos are not the problem; they are the symptom of the problem. The Engines of Disharmony also lead to conflict between individuals inside and outside an organization. Goldratt stated, “You cannot have an ever-flourishing company with broken relationships…The most important thing in the success of the company is human relationships.”

The ToC eliminates (or reduces) significant sources of friction (the thing that drains most managers’ time) to get things done. Most managers are fighting ‘fires’ caused by friction—the friction they had (inadvertently) created.

The causes of consistent friction are compromises between seemingly necessary conditions, Core Conflicts. A core conflict is a more profound problem – beyond guidelines and methods; for example, short-term versus long-term, centralized versus decentralized, process versus results.

What Goldratt did was identify and name the engines of disharmony. He verbalized them this way:

1. “What is my contribution? Many times, an employee’s effort and its effects on the organization are not specifically connected. Where there is no vision, the people perish. People need to know that their work has value and purpose. If my work doesn’t matter, then why should I make any effort?
2. What is my peer’s contribution? Most people don’t know how many of their colleagues’ activities are essential or at least contributing to the organization. Would you be collaborative if you were in that position?
3. Conflicts. People are operating under conflicts, which may be the results of 1 and/or 2, “making the right decision for my company vs. the right decision for my measures.”
4. Inertia. Many people are required to also do tasks for which the reason no longer exists. People’s intuition is always strong enough to feel it, but not always is it strong enough to convincingly explain it to their superiors.
5. Gaps between responsibility and authority. You, like any other manager, know firsthand – how frustrating it is to have something you are responsible for accomplishing, but you do not have the authority for some of the actions that must be taken to get it done.”

The presence of these engines means that the organization needs to resolve at least one core conflict.

Improving relationships as a path to improved results may seem obvious, but collaboration and teamwork are ephemeral for those who seek measurable causes and effects (what gets measured gets managed). How do you directly measure and thus influence collaboration or better workplace cooperation? We can’t observe all behavior, but we can observe the effects of compromise.

The organization’s architects, its managers, (inadvertently) build engines of disharmony and allow conflicts to exist in their organizations. The biggest obstacle to the EFC is the acceptance of organizational conflicts.

Summary

In conclusion, the Ever-Flourishing Company (EFC) presents a robust framework for building a business that withstands the test of time. By embracing the principles of the EFC, visionary managers can craft winning strategies and tactics while maintaining integrity and creating enduring organizations. The EFC approach revolves around four pillars: a process of ongoing improvement, a decisive competitive edge, avoiding operational risk, and eliminating the engines of disharmony.

The process of ongoing improvement (POOGI) is not just about improving operations but a strategic imperative to continuously and purposefully move the organization towards its goal. It involves developing, implementing, and measuring strategic initiatives to achieve extraordinary outcomes and break through strategic constraints.

A decisive competitive edge (DCE) is crucial for sustained growth. It involves providing customers with unique, meaningful value that is difficult for competitors to replicate.

Operational disruptions can kill the business, and the EFC approach focuses on avoiding such risks. The organization can ensure stability despite market fluctuations by maintaining protective capacity, reserving capabilities, and carefully managing financial leverage.

The engines of disharmony, conflicts and contradictions within an organization, hinder success. The EFC fosters collaboration, teamwork, and harmony within and outside the organization by addressing and eliminating core conflicts.

By adopting the EFC framework, businesses can achieve continuous improvement, establish a decisive competitive edge, mitigate operational risks, and promote harmonious relationships. This approach empowers organizations to create a lasting strength that defies mediocrity.

Bibliography

Goldratt, Eliyahu, (1983), Cost Accounting: The Number One Enemy of Productivity, APICS International Conference Proceedings,

Goldratt, Eliyahu, (1996), My Saga to Improve Production, APICS – The Performance Advantage (USA) Vol. 6, No. 8, pp34-37

Goldratt, Eliyahu, (2002), TOC on Strategy and Tactics, Theory of Constraints a self-learning Program, Goldratt’s Marketing Group

Goldratt, Eliyahu, (2008), The Ever-Flourishing Company – Part One, https://www.youtube.com/watch?v=fv7SCRNZggk

Goldratt, Eliyahu, (2008), The Ever-Flourishing Company – Part Two, https://www.youtube.com/watch?v=ij71X6cxv-I&t=158s

Kishira, Yuji (2009), WA Transformation Management by Harmony, North River Press

Barnard, Alan, (2010), Continuous Improvement and Auditing, in Cox and Schleier (eds), Theory of Constraints Handbook (pp 403-454), McGraw Hill

Barnard, Alan, (2003), New Developments and Innovations in the Theory of Constraints Thinking Process, Conference Presentation at TOCIO Cambridge, UK

Holt, James R. and Boyd, Lynn H., (2010), Theory of Constraints in Complex Organizations, in Cox and Schleier (eds), Theory of Constraints Handbook (pp 983-1013), McGraw Hill

Goldratt, Eliyahu, (2011), Above and Beyond the Competition: A Conversation with Eli Goldratt, Goldratt Consulting, https://vimeo.com/169617632

Cox III, James F., Lynn H. Boyd, Timothy T. Sullivan, Richard A. Reid, and Brad Cartier, (2012), The Theory of Constraints International Certification Organization Dictionary, Second Edition, https://www.tocico.org/resource/resmgr/dictionary/tocico_dictionary_2nd_editio.pdf

S. Patrick Viguerie, Ned Calder, and Brian Hindo, (2021), 2021 Corporate Longevity Forecast, Innosight, https://www.innosight.com/wp-content/uploads/2021/05/Innosight_2021-Corporate-Longevity-Forecast.pdf

Goldratt, Eliyahu, (2011), Never Say I Know, the Tangibility of the Green Curve, The Theory of Constraints International Certification Organization 2011 Conference Proceedings Presented by Lisa Scheinkopf

[1]  Interestingly, some companies built their DCE on operational excellence (i.e., reliable delivery or quick response); years later, their competitors are still far away, indicating that operational excellence with ToC solutions can be the DCE.

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“Truth is ever to be found in simplicity, and not in the multiplicity and confusion of things.” – Isaac Newton

The Theory of Constraints. What sort of management strategy is that? Who calls a management approach a “theory”? And “constraints”; isn’t that the same thing as a “bottleneck”? If you’ve read Eliyahu Goldratt’s book, The Goal, then you know that the theory of constraints is just a dressed-up scheduling system. And a derivative one, at that.

You may have heard or thought these comments yourself.

The Theory of Constraints (ToC) might be these things, but it is more than that. ToC, while being a collection of insights and procedures, is also an approach to understanding and designing systems. From its beginnings as a shop floor scheduling system it evolved to a holistic approach to develop and implement strategies for organizations.

Let’s start with the definition; the Theory of Constraints. Often, the word ‘theory’ used synonymously with unproven. That’s not the meaning here. In the scientific realm, a theory explains how things work, as in, the Theory of Relativity. A theory is only “proven” in terms of its logic and experiments, but it’s useful – until something better is found; it generally works in the real world, not just in the abstract. The Theory of Constraints explains how systems work. All systems have constraints, yet they are often unidentified. Especially in complex systems where it seems the ‘Constraint’ is constantly on the move.

ToC processes apply the approach of the hard sciences to the “soft” social sciences. It attempts to employ scientific rigor to organizational (social) problems and behaviors to better understand how systems behave and solve long-standing problems.

In the hard sciences, the simplest solution is often the correct one. Scientists are trained to use Occam’s Razor; The principle that states that one should not make more assumptions than the minimum needed. It is the underpinning of all scientific theory building. In the same way, ToC searches for the “inherent simplicity” of system behavior; the fewest assumptions or causes, for the most effects.

In scientific inquiry, one observes a certain behavior or effect. Then, asks “why”. “Why did that happen?”. To understand the cause, the scientist creates a hypothesis that explains the effect.  Then, to test the hypothesis, predicts other effects that must also be present if the hypothesis is correct. If the other effect(s) are observed, the hypothesis is strengthened. This doesn’t mean that it is “correct”, but only “strong. Goldratt said (paraphrasing here) “The true test of a good hypothesis is, that when the hypothesis and causal linkages are presented, the audience must say ‘It’s obvious!’”.

In the same way, the Theory of Constraints is a strong theory strengthened by numerous experiments. However, just as any theory changes with new knowledge, so does ToC. This may seem unsettling for those who are looking for a recipe. Goldratt and his fellow developers of ToC never looked for a particular recipe, even though many were found. They were and are looking for something deeper. An understanding.

The germ of ToC could be found in Goldratt’s ideas for scheduling factories.  He used those concepts to build software that scheduled factory production. In the adoption of his ideas, he ran into obstacles, finding policies that were preventing successful implementation. So, he wrote The Goal, to explain the ideas behind the software (the drum-buffer-rope procedure). However, even though these were successful, they were leading to the next constraint, and the next, and the next. The theory of constraints has evolved from scheduling, to cost accounting, to performance management, to sales, to projects, to strategy.

ToC approach to systems recognizes that we do not live in a world of deterministic outcomes, but rather, of probabilities – ranges of outcomes. We recognize that “Murphy” lives (statistical fluctuations) and we make decisions with this in mind. Uncertainty surrounds us. There is a kind of randomness or chaos built into the universe. Therefore, our solutions and decisions must be characterized by the calculation of differing outcomes that are determined by circumstances beyond our control. From the random crash on the highway that makes us late to our meeting to a decision by OPEC ministers on oil production quotas that ripple through the world’s economies. We should not kid ourselves that we are fully in control of our own or our firm’s destinies. ToC provides an approach and tools to cope with that uncertainty.

There are ample documents and books on the procedures of ToC. What is not well documented is how to put them in a strategic framework. Let’s begin with the fundamental assumptions and build from there.

Strategy is Not…

Strategy is not a new idea or a product like the new iPhone or electric cars. Nor is it a list of improvement projects to reduce costs or open new markets. It’s not an aim or mission like winning the war, being the market leader, or solving world hunger.

A strategy is a theory of the organization. A statement of who is the customer (a profile of the market), their need and those that are unmet. It defines the capabilities, products and methods that will meet those needs. A strategy is not necessarily holistic, it can be narrowly or broadly defined, depending on the organization. It could be a strategy of product offerings—soda vs, “healthy” drinks or sedans vs. trucks. It could be strategic, creating a new segment as Apple did with the iPhone and Southwest Airlines did with low-cost no-frills air travel.

Strategy is not a Plan

A strategy differs from a strategic plan in that the strategy focuses on the outcomes, and the plan is how to achieve those outcomes. It helps an organization focus the energy, resources, and time of everyone in the organization in the same direction towards a common goal. It provides focus and impetus to move from idea to action. It is the formalized road map that describes how your organization executes the chosen strategy; the plan is not the end; it is the means to the end. It’s a map.

Strategy is…

Often, the term ‘strategy’ is synonymous with ‘plan’. Porter posits that strategy is a verb; the creation of a unique and valuable position, involving different set of activities. This becomes the guidance for all activities of the organization. Action, supported by solid arguments.

We can boil a reasonable interpretation of the meaning of strategy down to one thing; doing the things that increase value for the entity, however the entity defines ‘value’.

Criteria for a Good Strategy

In view of this, we can conclude that a “good” strategy:

• Drives the organization closer to its goal. There is enough “meat on the bones” to push the organization into some action towards achievement of the goals of the organization.
• Provides security for the people in the organization; the strategy should strengthen the firm’s position and security, and thus its people.
• Provides satisfaction for other stakeholders. Any strategy that violates stakeholder terms cannot be sustained, and thus violates the first criteria.
  • Customers must be satisfied with the product or service.
  • The community should be enhanced, or at least not harmed.
• Promotes sustainable results; it should build on the organization’s strengths and be self sustaining
• Is robust – allows growth even in times of volatility in the company’s domain or market

ToC verbalizes these criteria in this way:

• Build a decisive competitive edge (DCE). Decisive in that the competitive advantage is far better than other firms’ abilities or capacities. Implied is that other firms cannot or will not duplicate this unique facility. It is like the traditional concept of competitive advantage, except that the DCE is based on solving significant customer problems created by the suppliers. For example, brands dictating a minimum order quantity or full truckload shipment policies that dictate large order quantities.
• And the capability to capitalize on it. A DCE is based on operational excellence (i.e., fast delivery, high quality, low cost, etc.), but that is not enough. One must have or build the policies, systems and processes to leverage these abilities in the marketplace. You don’t have to look far to see the failure of great products done in by poor marketing.
• On big enough markets. Not to be too obvious here, but we hope that if we go to the trouble of the previous two items, we would have a large enough market to make it worth our while.
• Without exhausting the company’s resources. We don’t want to “bet the farm” on any strategy, unless we must. We must leverage our existing resources, shifting them to the DCE strategy almost without effort.
• And without taking real risks. We could substitute the word “real” with “big”. The strategy should ensure stability through volatility; it should remain profitable, even during market turndowns. There should be no sacrificing of critical resources (no mass layoffs – low cost sacrifices) or selling off assets. It should ensure asymmetrical rewards (strong profits during growth, limited losses during downturns).

A ToC Strategic Approach

A ‘ToC strategy’ is built around the organizations’ constraint(s). The strategy would explicitly acknowledge the current constraint and contain the elements to either break or elevate that constraint, including the emergence of and breaking new constraints during the execution of the strategy. For example, if the constraint is the market, we would build the strategy around growing sales, navigating the (planned) changing location of the Constraint (i.e., internal capacity, distribution, back to the market, etc.).

Secondly, a ToC strategy built with the idea that the organization’s performance should be constantly rising. That improvement is a way of life for the organization, not bursts of change, but constant change. This gives rise to the concept of the Ever-Flourishing approach.

Third, a ToC strategy relies on innovation. Innovation is in removing a significant limitation to creating value. Value for your firm, value for partners in the supply chain, and value for the end customer.

Problems with Strategy

A successful strategy has at least three problems to solve: choosing the “right” objectives, developing a plan to realize them, and successful execution of that plan.

There is significant amount of research that show many strategic initiatives do not bear the fruit envisioned. Almost half of all strategic initiatives undertaken fail.

There are significant obstacles to strategic success. Planners often have incomplete information. For example, what buyers “truly” desire and their motivations. There are entire industries devoted to just these 2 questions!  Even among the experts, you’ll find that the strategic information is still not perfect, rife with wishes and bias.  I’m reminded of Henry Ford’s quote, “If I had asked people what they wanted, they would have said faster horses.”

Many strategies fall short because it’s difficult to understand what influences system behaviors. The customer, the competitors, even the organization itself are hard to analyze because of the number of variables and their relationships are difficult to identify and quantify.

Planners themselves are subject to bias and wishful thinking. They create strategies using untested assumptions and fill them with geographical and cultural biases. They hold on to the past, when they should be embracing the future. Think of Kodak’s reliance on film, even though they invented digital photography. Or Chevrolet’s introduction of the Nova in Mexico, where Nova literally means no go (No-Va). We are all subject to the “blindness” and bias. Recognizing it is the difficulty.

Further, strategy failures are tied to the lack of a theory of implementation.  To successfully execute an organization’s strategy, it must have a singular focus of the people (every person?) in that organization. A strategy is incomplete unless there are mechanisms to create, monitor, and reward that focus as it is expressed. Critical implementation questions such as, “How do we know if we’re on track?”, “Who is responsible for each element?”, and “When should we intervene or reevaluate the strategy?” must be answered.

Complex systems hide the relationships that matter to a successful strategy. Planners and executives are often domain experts, but sometimes lack the understanding of how the “system” works. For example, how a firm interacts with its competitors or the reasons why their products are chosen over their competitors. There aren’t many people that can provide a detailed operational map of how a firm delivers its strategic choices to the customer. And understanding how these two systems interact? Most planners are relying on intuition, not a rigorous analysis.

A lot of attention is given to the planning aspect of strategy with little attention to how to manage its execution. Often, the skills to successfully implement the strategy are absent from the strategy itself.  It’s hard to know what you do not know, so sometimes strategies fail because of lack of rigor in implementation planning.

Finally, no strategy can succeed with cross functional conflicts in the organization. Any strategy that has one silo “winning” at the expense of another is doomed.  Conflicting standards of performance, compensation, and rewards (informal & formal) will break any strategy.

What ToC Offers to Strategists

ToC offers a framework that overcomes many of the obstacles that break most strategic initiatives. Whether they are “correct” is a matter of judgement. And a set of tools to overcome many of the obstacles to creating and delivering a good strategy. 

The approach to strategy, with operational excellence as the foundation, then focusing on the problems (undesirable effects) that are inherent in the “standard” way of doing business offers a fresh perspective in arriving at a strategy that will cause success.

With the Thinking Processes (TP), you can analyze and deepen your understanding of complex system behavior, highlighting the cause-and-effect relationships and revealing hidden assumptions. This can go a long way to breaking the complexity obstacle, both in understanding the existing system’s behavior and predicting its future behavior, identifying risks in new strategies. Further, a significant feature of the TP is the ability to identify and resolve cross functional conflicts and establish congruent standards of performance.

To find a “right” strategy and its potential results, ToC recommends a rigorous analysis of the market using the thinking processes of the Current Reality Tree, Evaporating Cloud and Future Reality Tree.

Using the Strategy and Tactics tool provides a theory of implementation and a roadmap to develop the supporting tactics to successfully implement a strategy.

The most important feature of a ToC-based strategy is its focus on the most critical issues—the Constraint(s) and the uncertainty that affects them. The only strategy worth implementing is one that systematically breaks the limitations of higher performance and drives the organization towards its Goal.

Bibliography

Cooper, Marjorie, ToC handbook (2010), Traditional Strategy Models and the Theory of Constraints

Goldratt, Eliyahu, ToC handbook (2010), Introduction to ToC- My Perspective

Spender, J.C., Business Strategy (2014), Oxford Press

Michael E. Porter (2000), What is Strategy, Harvard Business Review

Goldratt, Eliyahu, The Gestalt of TOC (2010), YouTube https://www.youtube.com/watch?v=DQoO8y3En3w

Boston Consulting Group, (2014), Strategic Initiative Management: The PMO Imperative

Goldratt, Eliyahu, (1996), My Saga to Improve Production

Goldratt, Eliyahu, (2011), Building a Blue Ocean Strategy, http://toc.tv

Goldratt, Eliyahu, (2011), Goldratt Satellite Program Marketing – Unrefusable Offers and Market Segmentation

Rumelt, Richard, (2011), McKinsey Quarterly, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-perils-of-bad-strategy

Edinger, Scott, (2012), Three Cs of Implementing Strategy, http://forbes.com

The post Theory of Constraints Applied to Strategy appeared first on Projects in Less Time - Mark Woeppel.

“Truth is ever to be found in simplicity, and not in the multiplicity and confusion of things.” – Isaac Newton

The Theory of Constraints. What sort of management strategy is that? Who calls a management approach a “theory”? And “constraints”; isn’t that the same thing as a “bottleneck”? If you’ve read Eliyahu Goldratt’s book, The Goal, then you know that the theory of constraints is just a dressed-up scheduling system. And a derivative one, at that.

You may have heard or thought these comments yourself.

The Theory of Constraints (ToC) might be these things, but it is more than that. ToC, while being a collection of insights and procedures, is also an approach to understanding and designing systems. From its beginnings as a shop floor scheduling system it evolved to a holistic approach to develop and implement strategies for organizations.

In the coming pages, I’ll summarize ToC, with an emphasis on strategy and the execution of that strategy.

Let’s start with the definition; the Theory of Constraints. Often, the word ‘theory’ used synonymously with unproven. That’s not the meaning here. In the scientific realm, a theory explains how things work, as in, the Theory of Relativity. A theory is only “proven” in terms of its logic and experiments, but it’s useful – until something better is found; it generally works in the real world, not just in the abstract. The Theory of Constraints explains how systems work. All systems have constraints, yet they are often unidentified. Especially in complex systems where it seems the ‘Constraint’ is constantly on the move.

ToC processes apply the approach of the hard sciences to the “soft” social sciences. It attempts to employ scientific rigor to organizational (social) problems and behaviors to better understand how systems behave and solve long-standing problems.

In the hard sciences, the simplest solution is often the correct one. Scientists are trained to use Occam’s Razor; The principle that states that one should not make more assumptions than the minimum needed. It is the underpinning of all scientific theory building. In the same way, ToC searches for the “inherent simplicity” of system behavior; the fewest assumptions or causes, for the most effects.

In scientific inquiry, one observes a certain behavior or effect. Then, asks “why”. “Why did that happen?”. To understand the cause, the scientist creates a hypothesis that explains the effect.  Then, to test the hypothesis, predicts other effects that must also be present if the hypothesis is correct. If the other effect(s) are observed, the hypothesis is strengthened. This doesn’t mean that it is “correct”, but only “strong. Goldratt said (paraphrasing here) “The true test of a good hypothesis is, that when the hypothesis and causal linkages are presented, the audience must say ‘It’s obvious!’”.

In the same way, the Theory of Constraints is a strong theory strengthened by numerous experiments. However, just as any theory changes with new knowledge, so does ToC. This may seem unsettling for those who are looking for a recipe. Goldratt and his fellow developers of ToC never looked for a particular recipe, even though many were found. They were and are looking for something deeper. An understanding.

The germ of ToC could be found in Goldratt’s ideas for scheduling factories.  He used those concepts to build software that scheduled factory production. In the adoption of his ideas, he ran into obstacles, finding policies that were preventing successful implementation. So, he wrote The Goal, to explain the ideas behind the software (the drum-buffer-rope procedure). However, even though these were successful, they were leading to the next constraint, and the next, and the next. The theory of constraints has evolved from scheduling, to cost accounting, to performance management, to sales, to projects, to strategy.

ToC approach to systems recognizes that we do not live in a world of deterministic outcomes, but rather, of probabilities – ranges of outcomes. We recognize that “Murphy” lives (statistical fluctuations) and we make decisions with this in mind. Uncertainty surrounds us. There is a kind of randomness or chaos built into the universe. Therefore, our solutions and decisions must be characterized by the calculation of differing outcomes that are determined by circumstances beyond our control. From the random crash on the highway that makes us late to our meeting to a decision by OPEC ministers on oil production quotas that ripple through the world’s economies. We should not kid ourselves that we are fully in control of our own or our firm’s destinies. ToC provides an approach and tools to cope with that uncertainty.

There are ample documents and books on the procedures of ToC. What is not well documented is how to put them in a strategic framework. Let’s begin with the fundamental assumptions and build from there.

Strategy is Not…

Strategy is not a new idea or a product like the new iPhone or electric cars. Nor is it a list of improvement projects to reduce costs or open new markets. It’s not an aim or mission like winning the war, being the market leader, or solving world hunger.

A strategy is a theory of the organization. A statement of who is the customer (a profile of the market), their need and those that are unmet. It defines the capabilities, products and methods that will meet those needs. A strategy is not necessarily holistic, it can be narrowly or broadly defined, depending on the organization. It could be a strategy of product offerings—soda vs, “healthy” drinks or sedans vs. trucks. It could be strategic, creating a new segment as Apple did with the iPhone and Southwest Airlines did with low-cost no-frills air travel.

Strategy is not a Plan

A strategy differs from a strategic plan in that the strategy focuses on the outcomes, and the plan is how to achieve those outcomes. It helps an organization focus the energy, resources, and time of everyone in the organization in the same direction towards a common goal. It provides focus and impetus to move from idea to action. It is the formalized road map that describes how your organization executes the chosen strategy; the plan is not the end; it is the means to the end. It’s a map.

Strategy is…

Often, the term ‘strategy’ is synonymous with ‘plan’. Porter posits that strategy is a verb; the creation of a unique and valuable position, involving different set of activities. This becomes the guidance for all activities of the organization. Action, supported by solid arguments.

We can boil a reasonable interpretation of the meaning of strategy down to one thing; doing the things that increase value for the entity, however the organization defines ‘value’.

Criteria for a Good Strategy

In view of this, we can conclude that a “good” strategy:

• Drives the organization closer to its goal. There is enough “meat on the bones” to push the organization into some action towards achievement of the goals of the organization.
• Provides security for the people in the organization; the strategy should strengthen the firm’s position and security, and thus its people.
• Provides satisfaction for other stakeholders. Any strategy that violates stakeholder terms cannot be sustained, and thus violates the first criteria.
  • Customers must be satisfied with the product or service.
  • The community should be enhanced, or at least not harmed.
• Promotes sustainable results; it should build on the organization’s strengths and be self sustaining
• Is robust – allows growth even in times of volatility in the company’s domain or market

ToC verbalizes these criteria in this way:

• Build a decisive competitive edge (DCE). Decisive in that the competitive advantage is far better than other firms’ abilities or capacities. Implied is that other firms cannot or will not duplicate this unique facility. It is like the traditional concept of competitive advantage, except that the DCE is based on solving significant customer problems created by the suppliers. For example, brands dictating a minimum order quantity or full truckload shipment policies that dictate large order quantities.
• And the capability to capitalize on it. A DCE is based on operational excellence (i.e., fast delivery, high quality, low cost, etc.), but that is not enough. One must have or build the policies, systems and processes to leverage these abilities in the marketplace. You don’t have to look far to see the failure of great products done in by poor marketing.
• On big enough markets. Not to be too obvious here, but we hope that if we go to the trouble of the previous two items, we would have a large enough market to make it worth our while.
• Without exhausting the company’s resources. We don’t want to “bet the farm” on any strategy, unless we must. We must leverage our existing resources, shifting them to the DCE strategy almost without effort.
• And without taking real risks. We could substitute the word “real” with “big”. The strategy should ensure stability through volatility; it should remain profitable, even during market turndowns. There should be no sacrificing critical resources (no mass layoffs – low cost sacrifices) or selling off assets. It should ensure asymmetrical rewards (strong profits during growth, limited losses during downturns).

A ToC Strategic Approach

A ‘ToC strategy’ is built around the organizations’ constraint(s). The strategy would explicitly acknowledge the current constraint and contain the elements to either break or elevate that constraint, including the emergence of and breaking new constraints during the execution of the strategy. For example, if the constraint is the market, we would build the strategy around growing sales, navigating the (planned) changing location of the Constraint (i.e., internal capacity, distribution, back to the market, etc.).

Secondly, a ToC strategy built with the idea that the organization’s performance should be constantly rising. That improvement is a way of life for the organization, not bursts of change, but constant change. This gives rise to the concept of the Ever-Flourishing approach.

The Ever-Flourishing Organization

An ever-flourishing organization is one that is constantly growing and improving (always relative to its purpose). The idea is often presented as two lines on a graph where performance is on the y axis, and time on the x axis. ToC practitioners have posited that there are two paths, a red curve, with a rapid, almost exponential growth, and a green curve, with a more linear improvement.

A high growth environment (red curve) is perilous, so stability of profit growth (green curve) is a primary consideration in formulating a strategy.  The goal is the red curve—a situation where the rate of improvement INCREASES, but for an ever-flourishing firm, you need BOTH. The strategy resolves these incongruities.

Problems with Strategy

A successful strategy has at least three problems to solve: choosing the “right” objectives, developing a plan to realize them, and successful execution of that plan.

There is significant amount of research that show many strategic initiatives do not bear the fruit envisioned. Almost half of all strategic initiatives undertaken fail.

There are significant obstacles to strategic success. Planners often have incomplete information. For example, what buyers “truly” desire and their motivations. There are entire industries devoted to just these 2 questions!  Even among the experts, you’ll find that the strategic information is still not perfect, rife with wishes and bias.  I’m reminded of Henry Ford’s quote, “If I had asked people what they wanted, they would have said faster horses.”

Many strategies fall short because it’s difficult to understand what influences system behaviors. The customer, the competitors, even the organization itself are hard to analyze because of the number of variables and their relationships are difficult to identify and quantify.

Planners themselves are subject to bias and wishful thinking. They create strategies using untested assumptions and fill them with geographical and cultural differences. They hold on to the past, when they should be embracing the future. Think of Kodak’s reliance on film, even though they invented digital photography. Or Chevrolet’s introduction of the Nova in Mexico, where Nova literally means no go (No-Va). We are all subject to the “blindness” and bias. Recognizing it is the difficulty.

Further, strategy failures are tied to the lack of a theory of implementation.  To successfully execute an organization’s strategy, it must have a singular focus of the people (every person?) in that organization. A strategy is incomplete unless there are mechanisms to create, monitor, and reward that focus as it is expressed. Critical implementation questions such as, “How do we know if we’re on track?”, “Who is responsible for each element?”, and “When should we intervene or reevaluate the strategy?” must be answered.

Complex systems hide the relationships that matter to a successful strategy. Planners and executives are often domain experts, but sometimes lack the understanding of how the “system” works. For example, how a firm interacts with its competitors or the reasons why their products are chosen over their competitors. There aren’t many people that can provide a detailed operational map of how a firm delivers its strategic choices to the customer. And understanding how these two systems interact? Most planners are relying on intuition, not a rigorous analysis.

The Project Management Institute and others give a lot of attention to the execution side of things. Often, the skills to successfully implement the strategy are absent from the strategy itself.  It’s hard to know what you do not know, so sometimes strategies fail because of lack of rigor in implementation planning.

Finally, no strategy can succeed with cross functional conflicts in the organization. Any strategy that has one silo “winning” at the expense of another is doomed.  Conflicting standards of performance, compensation, and rewards (informal & formal) will break any strategy.

What ToC Offers to Strategists

ToC offers a framework that overcomes many of the obstacles that break most strategic initiatives. Whether they are “correct” is a matter of judgement. And a set of tools to overcome many of the obstacles to creating and delivering a good strategy.  I will cover this framework and tools in detail in later chapters.

The approach to strategy, with operational excellence as the foundation, then focusing on the problems (undesirable effects) that are inherent in the “standard” way of doing business offers a fresh perspective in arriving at a strategy that will cause success.

With the Thinking Processes (TP), you can analyze and deepen your understanding of complex system behavior, highlighting the cause-and-effect relationships and revealing hidden assumptions. This can go a long way to breaking the complexity obstacle, both in understanding the existing system’s behavior and predicting its future behavior, identifying risks in new strategies. Further, a significant feature of the TP is the ability to identify and resolve cross functional conflicts and establish congruent standards of performance.

To find a “right” strategy and its potential results, ToC recommends a rigorous analysis of the market using the thinking processes of the Current Reality Tree, Evaporating Cloud and Future Reality Tree.

Using the Strategy and Tactics tool provides a theory of implementation and a roadmap to develop the supporting tactics to successfully implement a strategy.

The most important feature of a ToC-based strategy is its focus on the most critical issues—the Constraint(s) and the uncertainty that affects them. The only strategy worth implementing is one that breaks the limitations of higher performance and systematically drives the organization towards its goal.

Bibliography

Cooper, Marjorie, ToC handbook (2010), Traditional Strategy Models and the Theory of Constraints

Goldratt, Eliyahu, ToC handbook (2010), Introduction to ToC- My Perspective

Spender, J.C., Business Strategy (2014), Oxford Press

Michael E. Porter (2000), What is Strategy, Harvard Business Review

Goldratt, Eliyahu, The Gestalt of TOC (2010), YouTube https://www.youtube.com/watch?v=DQoO8y3En3w

Boston Consulting Group, (2014), Strategic Initiative Management: The PMO Imperative

Goldratt, Eliyahu, (1996), My Saga to Improve Production

Goldratt, Eliyahu, (2011), Building a Blue Ocean Strategy, http://toc.tv

Goldratt, Eliyahu, (2011), Goldratt Satellite Program Marketing – Unrefusable Offers and Market Segmentation

Rumelt, Richard, (2011), McKinsey Quarterly, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-perils-of-bad-strategy

Edinger, Scott, (2012), Three Cs of Implementing Strategy, http://forbes.com

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