Introduction.

After being exposed to writing a strategic plan using the application of the Strategy and Tactics (S&T) tree (a Thinking Processes tool of TOC), a Fortune 500 executive referred to his company's past planning efforts as "amateurish." How can organizations be much more effective in strategic planning and execution of that plan? This chapter explains why the S&T tree is the tool for achieving this.

In order to address how to improve strategic planning, let's first discuss the purpose of a strategic plan. This plan provides an explanation of the specific actions to be implemented over the next several years to achieve the high-level strategy or goal of the organization. Strategic plans are divided into the necessary strategies and tactics that have been agreed upon by top management.

We tend to think that strategy is what the top level of the organization focuses on, while the tactics are what the lower level of the organization implements. How do we move from strategy to tactic in our planning process? The literature does not provide clear answers on this subject. To find the answer, it is helpful to understand how this type of obstacle has been overcome successfully in the past. When Einstein came up with his Theory of Relativity about time and space, he first had to begin by defining time. Once he realized that there was no agreement in the literature on a definition of time, he came up with his own: Time is what is measured by a clock. With this definition, he was able to develop his theory. Dr. Eli Goldratt (founder of TOC) followed Einstein's example in order to develop a theory and application for strategic planning. He defined strategy as the answer to the question "What for?" and tactic as the answer to the question "How?" With these definitions, we realize that for every action, both of these questions can and should be answered.

Strategy (S): Answer to the question "What for?"

Tactic (T): Answer to the question "How?"

Copyright 2010 by Lisa A. Ferguson.

The S&T tree is the name of the theory and application of strategic planning in TOC. The purpose of this chapter is to provide an understanding of various applications of the Viable Vision S&T trees for organizations. A Viable Vision (VV) is a plan for how to become an "ever-flourishing" organization. An ever-flourishing organization is one that continues to grow exponentially, while maintaining stability at the same time.

S&T trees are a powerful tool for synchronizing all the actions needed to achieve the high-level strategy of an organization and for communication of this detailed plan to all within the organization. S&T trees can be used by any organization to achieve its strategy, not just ones focused on achieving a VV.

On Becoming an Ever-Flourishing Organization

The top strategy of the VV S&T trees is: The Company is solidly on a Process of Ongoing Improvement (POOGI). For a company to prosper it must be on POOGI; otherwise, competitors will just wipe out the company (eventually). What is the meaning of POOGI? Performance of the company must improve over time. Under this definition, two conceptually different curves exist-the red and green as shown in Fig. 34-1. Note that each curve represents a concept and that there are multiple possibilities for each curve.

Both show performance improving. Which curve looks more realistic to you and to the people in your company? Most will answer that the green curve looks more realistic and believe that a red curve may only be possible for a short period of time for an organization. What is the real difference between the green and red curves? In a green curve, the increment in improvement each year is less than the increment the year before. The increment in absolute terms continues to increase on a red curve. Have you ever seen a company grow 5 percent (or more) year after year? This level of growth is not uncommon. Which curve demonstrates 5 percent growth per year? A red curve; the absolute growth is higher each year than the year before-5 percent of $2 million is smaller than 5 percent of $10 million. If you plot the performance of the U.S. economy over time, you will see that it is also a red curve. Companies traded on Wall Street must grow faster than the economy-this means that they must grow faster than a red curve, regardless of the size of the company.

FIGURE 34-1 Process of ongoing improvement. ( E. M. Goldratt used by permission, all rights reserved. Source: Modified from E. M. Goldratt, 1999) Why does the majority of top management surveyed think that a green curve is more realistic? This is an example of an inconsistency. The red curve represents growth. The green curve has something important for people as well-stability. People do not want the company to grow so quickly that they are spending more than 50 percent of their time putting out fires. We cannot achieve collaboration of our people without giving them what they want. People resist change only if they perceive that the change will not be beneficial. In order to not only survive as an organization, but also, more importantly, to flourish, we must achieve growth and stability at the same time.

The best proof of the need for growth and stability was written in the book Built to Last (Collins and Porras, 1994). Collins and Porras studied 18 highly visionary companies, also referred to as gold medalists. Some of the criteria for selecting the companies to research included being the premier institution in its industry, being widely admired by peers, having a long history of significantly affecting the world, and being founded before 1950. They plotted the performance of those companies over time. Was it a red or green curve? It was perfectly a red curve. They discovered that the industry type does not determine whether a red curve can be achieved. Collins and Porras also compared the visionary companies to the bronze or silver medalists in their industry. Their level of growth was significantly lower than that of the visionary companies. The authors point out that two of the common factors (among others) of these visionary companies was culture and clock. A unique culture was evident in each case; after working in one of these companies for a few months, people would not consider leaving the company. Clock building is about creating a company that will continue to flourish regardless of who is leading it or the product life cycles. For each organization, you can hear the clock ticking no matter where you are in the organization-it is not about promotions or what will happen next quarter. The clock is different; the mere fact that there is a clock is obvious.

Can we ensure that our organizations are "built to last"? Ways for achieving the objectives of both red and green curves (growth and stability) at the same time were developed by Dr. Goldratt. Five different alternatives are in the public domain for achieving this objective; five generic cases of VV S&T trees cover more than 70 percent of industries that involve physical products in some form. This chapter explains the logic of the solution for each-a practical solution. The starting point is to achieve growth and stability at the same time-to build an ever-flourishing organization, not just to have a good next quarter or next year, but also to build an organization that will outlast the lifetime of a person. The top strategy of the VV S&T trees is: The company is solidly on a POOGI. "Solidly" means that we have achieved both the red and green curves together. The deeper meaning of POOGI is that the goal and necessary conditions are achieved. All three are requirements for success. They are: Make more money now and in the future.

Satisfy the market now and in the future.

Satisfy employees now and in the future.

One of these three is the goal for an organization, while the other two are the necessary conditions (requirements) for achieving the goal. The S&T tree ensures that the actions needed to achieve all three are taken.

The Basic Structure of an S&T Tree

The structure of an S&T tree will now be explained to provide clarity before presenting a specific S&T tree. For each strategy (S), there must be a tactic (T). An S&T tree consists of a number of S and T pairs, each presented in a step. The top of an S&T tree consists of one step. Then the next level of the S&T tree below presents at least two steps (horizontal entries on the same level) further detailing the specific S and T pairs needed to achieve the higher level S and T pair, and so on until the lowest level of the S&T tree has been presented. At each level, more detail is provided about how to achieve the higher level. This is why the structure is referred to as an S&T tree. Figure 34-2 provides a visual representation of the generic structure of an S&T tree.

FIGURE 34-2 The generic S&T tree structure ( E. M. Goldratt used by permission, all rights reserved. Source: Modified from E. M. Goldratt, 2008).

Here is the big picture regarding the different levels of the VV S&T trees for organizations: Level 1 presents the pot of gold (very ambitious objective) strategy (overall).

Level 2 presents the heart/essence of the competitive edge.

Level 3 presents the heart of the change in mode of operation-the broad changes needed in operations and the logic regarding these changes.

Level 4 presents the details regarding the change of mode of operation and the reasons for the change in mode as well.

Level 5 is about how to implement the changes. It does not include the logic regarding the need to change the mode of operation; it is just about how to do the tactics we already agreed to in Level 4.

Within each step, the logic is presented connecting the parts of the S&T tree. Three types of assumptions are needed to provide the logic.1 One is a parallel assumption (PA), the fact(s) of life, presented in logical sequence, which leads us from the strategy (S) to the unavoidable conclusion of what the tactic (T) must be. The S and T are, in effect, parallel or a match to each other. The way to read the connection is, if S and PAs, then the resulting tactic is T.

Parallel Assumption (PA): The fact(s) of life, presented in logical sequence, which lead us from the strategy (S) to the unavoidable conclusion of what the tactic (T) must be.

S II T: (Parallel Assumption Symbol).

Another type of assumption is the necessary assumption (NA). The NA is the fact(s) of life that explain why a specific S&T pair is needed to achieve the corresponding higher level S&T pair in the S&T tree. The NA is based on necessity-based logic, meaning that something is necessary in order to achieve something else. The NA presents the current damage of not taking the action described in the step and/or the benefits of taking the action in the step. The NA provides clear motivation for the need to take the step. The way to read the connection is, In order to achieve the higher level step, we must achieve the step below because of the NAs listed in the step below.

Necessary Assumption (NA): The fact(s) of life that explain why a specific S&T pair (step) is needed to achieve the corresponding higher level S&T pair (step) in the S&T tree.

The final type of assumption is the sufficiency assumption (SA). The SA is the fact of life that are common sense and commonly ignored, which if ignored will not result in all the steps below being sufficient to achieve the corresponding step above them. An SA is based on sufficiency-based logic. With sufficiency-based logic, we need to verify that all of the components listed are sufficient or enough to achieve the result desired. However, the only way to check for sufficiency is through reality. Once all the actions have been taken, we will know if the actions were sufficient to achieve the desired objective. What we can present as an SA is guidance on what should be considered when reviewing the next level of the S&T tree as it connects to the level above. The way to read the connection is, The SA is the fact we should take into consideration when evaluating whether the group of steps below, the ones that directly connect with this step, are sufficient to achieve this step.

Sufficiency Assumption (SA): The fact(s) of life that are common sense and commonly ignored, which if ignored will not result in all the steps below being sufficient to achieve the step above them.

The Top of the VV S&T Trees

The top of the VV S&T trees, which is shown in Table 34-1, is the same for the five generic S&T trees that will be discussed in this chapter. The highest-level strategy of the S&T tree is: The Company is solidly on a POOGI. The next strategy in Level 1 of the S&T tree is that the VV is realized in four years or less. The VV target for the annual net profit (NP) in four years is set to be extraordinarily challenging based on current thinking in business. It is believed within TOC that four years is long enough to change the culture of the company if an extraordinarily challenging target is achieved. This can be validated as more and more companies achieve their VVs. Setting a high target of NP is consistent with the research of Collins and Porras (1994), which indicated that the visionary companies set "big hairy audacious goals." This exponential level of growth needs to be achieved only with actions that all the stakeholders (such as shareholders and employees) of the company will agree with and support-ones that will also result in stability. This high NP target is shown to be realistic and achievable with the actions in the S&T tree and the understanding of how these actions will result in a much higher NP than previously thought achievable. For example, we can show through logic that a small increase in sales for a retailer does not increase NP at the same percentage of NP to sales ratio the retailer currently has, but rather that most, if not all, of the sales increase becomes NP because costs do not increase much, if at all.

TABLE 34-1 Top of the VV S&T trees ( E. M. Goldratt used by permission, all rights reserved. Source: Modified from E. M. Goldratt, 2008).

The next part of this step (Table 34-1) is the parallel assumptions (PAs)-these are facts of life. PAs present the logic that demonstrates that the strategy and tactic are in essence parallel to each other. An assumption is not considered a fact of life until the people in the company agree that it is currently a fact. We read each element of the S&T tree aloud to check its validity since hearing allows us to verify the logic using another part of our mind beyond seeing it with our eyes. The first PA is (read aloud): For the company to realize the VV, its T must grow (and continue to grow) much faster than OE. Throughput (T) is the rate at which the company generates goal units (i.e., the rate at which the company generates money through sales, which is equivalent to sales minus the totally variable costs [TVC], such as the cost of raw materials). In essence, this PA is stating that the company's sales must grow and continue to grow much faster than costs. The term cost creates confusion because the word is used with different meanings.2 That is why cost has been defined in TOC. Investment (I) is the money tied up in the company, while Operating Expense (OE) is all the money the company spends to generate goal units (turn Investment into Throughput). Therefore, the cost to buy a machine is I, while the cost to run the machine is OE.

One more dollar in sales and one less dollar of costs have the same impact on NP. However, are changes in costs and sales really equivalent in the long run? The amount by which sales can increase is not intrinsically limited, while cost reduction is limited. Costs can only be reduced to zero; closing the company tomorrow will cause this to happen. Remember that we need to have the green curve (stability) as well. The two major categories of costs are employees and suppliers. Cutting costs means layoffs. Will you get the collaboration of those who remain in the company? If you lay off people after they have improved, how successful will other improvement efforts be? The other major category is the cost of purchasing raw materials for production of the physical product that is sold. It is not uncommon for a company to squeeze lower prices from its suppliers. The result is that the gross margins of the supplier are quite low-so low in fact that your supplier (which is typically small) can go out of business when the market conditions become bad. The impact of squeezing lower prices is that the relationship between the company and its supplier is not good, but rather can be contentious. What if we instead focused on finding a way for the company and its suppliers to get both their needs met-to find a win-win solution for both companies? The result would be a better relationship and if the solution is effective, both companies will have much higher profits.3 The only way to achieve a very ambitious NP target is by significantly increasing sales. All our efforts should not be focused on reducing costs, but rather on increasing sales much faster than OE increases.

The second PA in Step 1 (Table 34-1) is not just about exhausting the cash resource. A more significant concern is about not exhausting management. Special efforts exhaust people. The result will be the inability to stay on the red curve. We also cannot afford high risks-a 20 percent risk for a decision is high if this type of risk is taken more than once. Do companies build a new plant without knowing the company will sell its capacity? Management does not know they will sell it all. Yet, they put all their cash and credit on the line. This is like playing Russian roulette with more than one bullet in the gun.

Notice how the tactic is a direct logical derivative of the PAs and the strategy. There are five components to this tactic. First, we must have (1) a decisive competitive edge (DCE); an edge is not based on color. Exponential growth in T cannot be achieved without a DCE. Is this enough? Technology start-ups have a DCE-they have a much better product. However, most fail within two years because they did not have the ability to (2) capitalize on their DCE. The third component is (3) competing in a big enough market. It must be large enough to sustain the growth needed to reach the VV target. Therefore, it cannot be a niche market. The last two components are about (4) not exhausting our resources of cash and management (5) without taking real risks.

What we need to do is figure out how to achieve these five components of the tactic. The SA is also a fact of life. It is a fact, which is common sense, that most people will ignore, which if ignored will not result in all the actions being implemented that are required to achieve sufficiency. The meaning of the DCE is described in the SA of Step 1. If a significant competitor has the same DCE, you are in a price war.

After we seriously accept the definitions of strategy and tactic, we realize that we can ask these questions for every action. This means that strategies and tactics must be defined for all levels, not just at the top and the bottom of the organization. As we go down the S&T tree, more and more details for how to achieve the higher-level strategies and tactics are provided. All of the logic for the actions required to achieve the goal is provided within the S&T tree in the three types of assumptions.

There are five major splits below Level 1 of the VV S&T tree, resulting in different generic S&T trees (a generic S&T tree may need to be customized for a specific organization). Each one applies to a different environment: Retailer: sells end products directly to the client from its shelves. This type of environment is business-to-client.

Consumer Goods: produces end products, but does not communicate with the client; sells through distribution networks and retailers to the client. This is a business-to-market type of environment.

Make-to-Order, also known as Reliable Rapid Response (RRR): produces the end item and does communicate directly with its clients; sells to another manufacturer that uses this end item as a part of their product. This is known as business-to-business.

Projects: sells to client and may or may not communicate with them; what is being done is somewhat unique, though, such as a lab producing drugs or a construction company producing houses.

Pay per Click (PPC): sells final products to the client; these products, such as machines, are used by the client.

Each of these five generic S&T trees will be briefly discussed in this chapter. A full discussion of each is not possible because explaining one S&T tree fully would require many pages. Note that the full S&T trees are available in different places.4

The Retailer S&T Tree

We will begin by discussing the Retailer S&T tree because this S&T tree is one to which most people can relate. This S&T tree will be discussed in the most detail for that reason. This discussion will also explain generic S&T tree concepts.

All of the steps in the S&T tree below Level 1 also have an additional assumption: the NA. As noted earlier, this assumption explains why this step is required for achieving the corresponding step in the level above.

Level 2 of the Retailer S&T Tree

The NAs of Step 2.1 are shown in Table 34-2. Each one is read aloud to verify whether it is fact in the particular retailer's environment. The first NA is read aloud: "Better availability is a consumer's significant need." Then we verify that all agree to this. Next, the second NA is read aloud: "Expecting to find an SKU and being disappointed severely erodes the consumer's impression of good availability." Then, we can think of an example, such as a woman who finds a dress she wants but not in her size. We refer to this as a shortage. Most retailers have shortages between 5 and 30 percent of the specific products or stock-keeping units (SKUs) that are supposed to be available in the shop. How many sales are lost due to unavailability? Do you realize that the shortages are of the products that are the high runners-the ones that are selling well? In some cases, the customer will buy an alternative product for the one that is unavailable and may be disappointed that they had to buy a substitute. When the item is not on the shelf, sales are being lost. Retailers cannot know how many customers would have bought the SKU of which they were out of stock. Therefore, it is difficult to know how many sales are lost. After reading the third NA aloud, we point out that the forecast is not good. This results in wasting the constraint by having surpluses of SKUs. The shelf space is what limits how many different products are in the portfolio of SKUs to sell. After reading the fourth NA, we point out an additional fact not in the S&T tree, which is that a high percentage of products with a short market life are sold at markdown prices. When we present an S&T tree, we commonly provide additional information and explanation. These facts are not required to be part of the written S&T tree to reach the conclusion that the strategy that will be presented next is needed, but rather just adds to it. This NA does not apply to supermarkets. The DCE we want to achieve is to have all the products that are on the shelves be the ones that the market really wants. After reading the fifth NA, we point out that examples of this are produce, milk products, soap, and fish. Even if these items are available on the shelf, they may not be considered to be available in the mind of the customer when they are close to their expiration date. If the customers do buy ones close to the expiration date, they may decide after using or eating the product that it was not of good quality.

Notice that after reading the five NAs, it becomes clear that the resulting strategy must be the one that is stated in this step. It is important to note that there is a limit to how many times a customer will keep coming back to the same shop the more they are disappointed. The NAs in Step 2.1 (in each VV S&T tree) lead us to understand how the particular type of company addressed can achieve a DCE. The word "knowing" in the strategy is important here. It is not enough for the availability to be high; customers must be aware of the remarkable level of availability. The best kind of "advertising" in retail is word of mouth. The last part of the strategy means that parameters such as price, quality, and product selection (to name a few) must not change from their current levels. Their current levels were sufficient to be competitive until now. Therefore, not changing them, while remarkably improving availability, will result in a DCE.

TABLE 34-2 Step 2.1 of the Retailer VV S&T tree ( E. M. Goldratt used by permission, all rights reserved. Source: E. M. Goldratt, 2008).

Now that we agree on the strategy, the question is how to achieve it. The tactic tells us how. Next, we validate whether the PAs are currently facts of life for the particular retailer. The second PA needs to be explained more. The replenishment time includes the order lead time (the time between when the first unit of an SKU is sold after an order of that SKU is received and an order for that SKU is placed again) and the supply (production and transportation) lead times. The retailer places orders with their suppliers based on the forecasted level of demand of the SKUs. Chaos theory tells us that it is theoretically impossible to forecast accurately on the SKU level at each retail shop. We need to find a way to ensure that we do not have shortages and surpluses. The answer is quick reaction to what is selling, which is measured by inventory turns. Let's consider an example to understand the meaning and impact of inventory turns. If a retail shop currently has four inventory turns per year, then they are in essence selling what they hold on the shelves and the back storeroom in entirety four times a year. Since there are 12 months in a year, they must be holding, on average, three months worth of inventory. If we can manage the supply chain effectively to react to changes in demand, we can reduce both shortages and surpluses and significantly improve the inventory turns.

The third PA should be explained as well. The NP to sales ratio in retail ranges from 2 to 3 percent for grocery retailers to as high as 5 percent for fashion goods. The average markup on retail products from the purchase price is 100 percent. The markup is much higher for jewelry and much lower for furniture and some other types of products, such as commodities. Based on these numbers and the typical shortage statistics, we can determine how much of an impact significantly reducing the shortages would have. If shortages are 10 percent, the markup is 50 percent, and the NP to sales ratio is 2 percent, what will the NP to sales ratio become if shortages are reduced to zero? Let us assume for the moment that the costs are not affected. If sales are 100, then the TVC is 50 and T is 50. If NP is 2, then OE must be 48. If sales increase by 10 percent, then 5 more will be added to NP (half was TVC, while OE did not increase). Thus, the NP to sales ratio increases from 2 percent to over 6 percent. However, since the shortages are of high runners, it is likely that the sales will be much higher when shortages are reduced because we cannot really know how much sales of high runners are lost when shortages occur. We will only know how much sales increase once the shortages are reduced. Even if OE does increase some, the impact on NP is still significant.

Reducing surpluses has a significant impact on investment. If up to 30 percent of the SKUs have shortages, then it is likely that more than 50 percent of the SKUs have surpluses. It is not uncommon for a retailer to have four inventory turns a year. This means that the shop is holding, on average, 3 months of inventory. If 30 percent of the SKUs are not in stock, then a high percentage must be in surplus for us to have such a high level of inventory in stock on average. The experience within TOC implementations in retailers indicates that it is not uncommon to have such a high percentage of SKUs in surplus. Reducing the surpluses affects the level of investment needed in inventory. Thus, significantly reducing the surpluses and shortages dramatically improves the inventory turns, NP, return on investment, and cash flow.

The last PA, which is shown in Step 2.1 (Table 34-2), will probably not be accepted as fact when it is read. We will ask those validating the S&T tree to accept this as fact for the time being until we can prove that it is. Assuming all of the PAs are facts, the resulting tactic must be to switch to a consumption-driven mode of operation.

The next step is to validate the SA. This type of assumption is also referred to as "Confucius says" because of the powerful common, yet uncommon, sense that is presented. What we cannot ignore when we are evaluating the next level of the S&T tree is that we not only need to focus on building a DCE, but also on how to sustain it. Therefore, Level 3 of the S&T tree needs to include one or more steps for building the DCE and one or more steps for sustaining it.

Normally, we would proceed next to validating Level 3 under Step 2.1 of the left side of the S&T tree (the left side includes Step 2.1 and all the steps under it). Instead, we are now going to review Step 2.2, as shown in Table 34-3, so that we can better understand Level 2 of a VV S&T tree.

After validating the NAs of this step, we can agree that the resulting strategy must address how to expand rapidly without taking real risks or exhausting resources. The PAs in this step become facts of life after the left side of the S&T tree has been successfully implemented-meaning that all levels of the S&T tree on the left side have been achieved. In the third PA, TPS stands for Throughput per shelf space. The fifth PA was proven to be correct by Starbucks. They did not invest money in advertising to create a brand name. After accepting the PAs as facts, the resulting tactic must be about planning and executing a prudent expansion plan. "Prudent" is an important word here-the expansion must be done effectively without taking real risks.

TABLE 34-3 Step 2.2 of the Retailer VV S&T tree ( E. M. Goldratt used by permission, all rights reserved. Source: E. M. Goldratt, 2008).

The SA in Step 2.2 points out that only real obstacles should be considered when developing this expansion plan. Notice that many of the real obstacles to expansion have already been overcome once the left side of the S&T tree has been successfully implemented. The assumptions in Step 2.2 specifically address how these obstacles have been overcome. The right side of the S&T tree (which includes Step 2.2 and all the steps below it) needs to address any other real obstacles that still need to be overcome.

Overview of Level 2 of VV S&T Trees

Level 2 of a VV S&T tree explains how to achieve the DCE. Step 2.1 is focused on achieving the base growth needed to reach the VV target, while Step 2.2 is focused on achieving enhanced growth. Base growth alone should achieve the NP target of the VV. To build an ever-flourishing company, more than this level of growth is required. The base growth is like getting a cake, while enhanced growth is putting the cherry on the cake; however, this cherry is much bigger than the cake itself. When the people in the organization realize that the actions implemented resulted in continued exponential growth and that these actions did not change over time (thus resulting in stability), the culture will have changed. All of the actions that are included in the S&T tree are ones that will remain in place over the long-term. For example, a change made regarding how inventory is replenished will continue in place, although more actions can be added over time to modify how replenishment is done.