| “Productivity is the act of bringing a company closer to its goal. Every action that brings a company closer to its goal is productive. Every action that does not bring a company closer to its goal is not productive.” Eliyahu Goldratt |
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:
- A process of ongoing improvement (the organization is constantly driving towards the goal – more now and in the future)
- 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)
- Avoids operational risk (the organization offers security for their employees and stability when the market is uncertain)
- 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:
- “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?
- 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?
- 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.”
- 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.
- 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
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[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.