INJ. 3: Identify and Build the Decisive Competitive Edge Factor

The company uses the window of opportunity created by implementing the previous injections to identify a factor in which an order of magnitude improvement will bring a significant competitive edge, and uses its improvement efforts to achieve it. With injections 1 and 2 successfully implemented, it's possible that competitors will catch up within 2 to 3 years. This injection calls for the company to use this window to build a decisive competitive edge. The company now must identify one factor and develop it to be several times better than current performance. For example, in computers, this would be a machine that operates at 5 times the current performance or 5 times the simplicity. In air travel, imagine an airline that could get you to your destination in a quarter of the time it now takes you. It does not necessarily mean that the airplane is 4 times faster. In building a car to order, instead of 12 to 15 weeks lead time, picture such a custom-built car delivered to your door within 2 weeks. Such factors exist in every industry, but require turning a company on its head to make it a reality. It's not only a technological challenge, but also it usually means aligning efforts in engineering, production, distribution, and marketing.

Because of this step, the company now has the potential to increase revenue well beyond its current capacity.

INJ. 4: Strategic Segmentation

Within most target markets, there is a subset that values the factor you have developed much more highly than other segments. Strategic segmentation means that you can price the identical product at a premium, when adding a guarantee or service component based on the factor identified previously. Segmenting the markets and pricing services according to this customer perception of value is the key to achieving "impossibly" high profit goals. For example, take an 8 oz. envelope and ship it with guaranteed first overnight delivery, and the fee is $44.10. Take the same envelope, using the same airplanes and trucks, but choose the standard overnight service, and the fee drops to $16.55. Put the same envelope in the mail, and the fee is 44 cents. Similarly, we have proven that some customers will pay 50 percent more for the identical custom kitchen when it's delivered in 2 weeks instead of 6 weeks. A manufacturer of commercial aircraft will pay 4 times the standard price for delivery of critical items (e.g., custom painted emergency door handles) when it will help that manufacturer ship the aircraft a few weeks earlier.

From my observation, most companies have such market segments but fail to distinguish them in their service offerings and pricing. As a result, they have some customers who perceive their product to be "expensive" or too high priced, relative to their needs, while at the same time other customers consider the product to be a fantastic bargain.

How do you go about identifying such segments? The answer is that you must get to know your customer's business better than the customer themselves know it. For example, in the case of the custom kitchen manufacturer, the VP of sales and I visited several dealers, and asked them if they ever got requests for expedited deliveries. "Of course," was their answer. Sometimes, the customers (often contractors who had gotten themselves into trouble in the construction process or the dealer who took too long to finalize an order) simply tried to put pressure on the manufacturer to deliver earlier. The guilt trip of "You know how much business I give you every year?" often worked, but to the manufacturer's disadvantage. By expediting one customer's order without the proper logistics in place, it often meant making another customer suffer or incurring extra costs of overtime and expedited freight.

The revelation was that when the proper logistics and improvement on production lead times was put in place, the manufacturer could deliver 20 percent of their orders in a quarter of industry standard lead time without extra costs, and some part of the market was willing to pay a handsome premium for the shorter lead time. There is no question that these segments exist. The only question is how big they are within given target markets.

The ultimate in exploiting this strategic segmentation is in a sales strategy where salespeople are dedicated to finding these premium deals. In these cases, the manufacturer can reserve capacity for premium segments, and double or triple their profitability by concentrating on finding those prospects in the market whose perception of value for the premium service is high.

Desirable Effects of a Good Strategy

Within every TOC strategy, there is an explicit set of desired effects (DE) defined. We must achieve these results. Ideally, DEs are measurable, tangible conditions. For purposes of strategy, we want these conditions to perpetuate indefinitely.

In the TOC FRT structure, these are explicitly listed as DEs. Within an S&T structure, these are stated as strategies (what we are striving to achieve) at each level. For example, if you look at the manufacturing S&T, level 4 under the 99 percent DDP, there are three key strategies that you can consider as DEs: 1. The shop floor is populated only with orders that need to be filled within a predefined horizon.

2. The shop floor is governed by a simple yet robust priority system. For example, in one company with several hundred large pieces in WIP at any point in time, red, yellow, and green tags were placed on all pieces. The shop floor operators could choose any one of the pieces of the highest priority color to work on. When following the first principle of limiting WIP, the operator typically had a choice of only one or two pieces. The operators and their supervisors claimed that this simple visual system was the best one under which they had ever worked. Every shift, colors were changed on the few pieces that had moved from one status to another.

3. Orders are shipped on time (>99 percent, for example).

If we achieve these three DEs, and have these conditions existing on an ongoing basis, then we should have the DE shown as strategy in the next higher level 3.1-the company has very high DDP (> 99 percent, for example).

To achieve the three necessary desirable effects of a good strategy-goal units are increasing now and in the future, employee security and satisfaction exist now and in the future, and the organization is satisfying its markets, now and in the future-the following generic DEs are the stepping stones: 1. Every major change effort achieves quick, measurable results (quick implies within 8 to 12 weeks).

2. The company has a decisive competitive edge within many (>5, preferably >10) market segments.

3. The company's employees are easily shifted between market segments.

4. The market is the constraint. This statement requires some clarification. The assumption has been stated frequently within TOC conferences that there is no real market limit to company growth. The world economy (with exceptions of brief periods over the past 200 years) continues to grow. With billions of new consumers just starting to enter the market with real buying power (e.g., China and India), the world demand for goods and services will grow exponentially. Therefore, market potential is not the constraint. When we declare the market constraint to be a DE, it means that we choose not to be constrained internally. We choose to expand our organization, at our will, based on the rate of growth that we believe is good for our organization.

5. The company has no monopoly in any product or service. This gives the organization the ability to withdraw or decrease service from a market segment without doing damage to their reputation. The company does not want a situation where they have customers dependent on them, and then they drop a product where the customers have no ready alternative.

6. Layoffs are rare. Never is preferable, but if a layoff is absolutely necessary due to cash flow threat, it's not repeated within a 5-year period.

Two Forms of Strategy and Tactics-TP and S&T Trees

Several books describe TOC TP and how to construct Evaporating Clouds (ECs, sometimes called conflict diagrams) and an FRT using TOC TP (see Dettmer, 2007; Scheinkopf, 1999; Chapters 23, 24, and 25 of this Handbook). The following brief discussion assumes that you already have knowledge of this subject matter.

The two different formats of TOC strategy (FRT and S&T) have been discussed and illustrated previously. In order to construct an FRT, it's usually necessary also to construct ECs in order to better understand and overcome the root cause of major system problems. In addition, ECs provide assumptions and injections that can help lead to a direction for a solution.

Mapping: S&T Tactic = Injection in FRT S&T Strategy = DE in FRT S&T Assumptions may equate to some entities in an FRT that build sufficiency in the cause-effect logic of an FRT S&T mapping to EC: An EC is a powerful tool, which many TOC practitioners use to better understand the problems and find directions toward a good solution. Several elements of an S&T can be discovered using such a tool. For example, ECs can be used to choose a strategy in an S&T (for example, an EC about different directions for a solution may point to one strategy over another). An EC can also help identify a tactic in an S&T (for example, in a conflict related to achieving the strategy, where the strategy is the common objective of an EC, one or more of the assumptions in the diagram may lead to a tactic to overcome the assumption). S&T assumptions may also be identified directly from assumptions in the EC.

There are different perspectives on the use and usefulness of the two different formats. For example, some people believe that the logic of a strategy is best developed using the 5FS and TP, and best communicated to others using the S&T format. My personal experience is that a strategy can be developed using either tool, depending on how your mind is trained.

The free Harmony viewer introduces the S&T format and brief instructions on how to construct an S&T from the beginning.

Integrating Other Methodologies Such as Lean and Six Sigma

To sustain any organization, TOC provides a significant part of the answer. Lean, Six Sigma, and other methodologies and knowledge complete the solution. Processes are needed to provide: Flow of the product or service quickly and efficiently enough to profitably meet customer demands (TOC provides logistics for flow).

Quality sufficient to meet customer needs (Six Sigma is a common methodology used to increase quality).

Efficiency sufficient to competitively meet customer needs (Lean is the most popular methodology for removing waste from a system).

While each methodology claims to provide benefits in all three necessary conditions, the strength of each, in my opinion, is as highlighted previously. The common positioning within TOC is that the constraint should guide where to apply Lean and Six Sigma efforts. Lean and Six Sigma literature is filled with similar sentiments, that is, that those methodologies are the main ones, and any others should be subservient. The assumptions behind the TOC guidance are: 1. When other methodologies are applied everywhere, the resources needed to address a constraint end up being tied up. These actions distract from exploiting and subordinating steps.

2. When other methodologies are applied everywhere, much of it is a waste of time because benefits accrue to the company only if the actions result in increasing goal units of the company.

After over 40 years of business experience and 15 years of TOC experience, my current assumptions are: 1. We cannot predict, in advance, exactly when and where Lean and Six Sigma skills may be necessary to advance a project or help the organization to achieve its goals. These skills take time to develop and generally are not very useful without a person or group having some practical experience.

2. When there is a major increase in company flow, new challenges in quality and waste often arise, which threaten flow. This frequently happens due to hiring more new people than the company had in the past or due to exceeding the capacity to cope with quality issues. For example, if a shop floor lead hand is used to personally deal with 10 problems a shift, and flow doubles without changing quality processes, now that same individual is trying to cope with 20 or more problems per shift. As flow increases, without increasing machine capacity or work force, the ability to deal with some underlying problems can create a bottleneck. TOC suggests applying Lean or Quality techniques now to unblock the flow. However, if these skills don't exist within the company, the organization may be at the mercy of an outside consultant's schedule and expertise to address the issues or at the mercy of a training program.

Due to these issues, I believe that it's a good strategy for a company to build these skills proactively, as part of their long-term investment in their people, much as Toyota has. If this approach is integrated with a TOC strategy, the results are more predictable and sustainable. There need not be any inherent conflicts between TOC, Lean, and Six Sigma when the three methodologies are applied within an overall strategy if one follows a Throughput World focus versus the traditional Cost World focus.12 There is a great deal of potential damage (infighting, methodology zealots, and stagnation, for example) that is predictable if the organization executives don't establish such an overall, integrated approach up front.

Dealing with Human Behavior in a Strategy

What about the human side of strategy? It was stated earlier that employee security and satisfaction are a necessary condition of having an organization built to last. While important aspects of security and satisfaction can be achieved by an organization that continues to grow and prosper, there is more to satisfaction in today's knowledge worker age. While TOC has some ways to address human behavior with a set of processes called "Management Skills" (see the TOC TP books mentioned previously), there are some other necessary conditions of executing a great strategy that remain unaddressed.

In a book called The Speed of Trust, Stephen M. R. Covey (2006) describes documented cases of the tangible cost of poor people practices. The speed of making changes and executing decisions is greatly increased in organizations that have high trust, a measurable parameter. Another group of authors (Patterson et al., 2002; 2004; 2007) wrote a series of books that describe scientific research and confirmation of how to influence human behavior and the cost of poor communications.

My experience is TOC strategies can be implemented at least twice as quickly with double the success rate when the organization has excellent communications to begin with. Many organizations suffer from communications issues, especially during a transformation process or periods of high growth. I believe it's vital for an organization to include the development of these skills as part of any strategy. My suggestions for accomplishing this part of the strategy are: 1. Choose one of the science-based behavior programs (e.g., Covey, Influencer) based on the most important current company needs. Read the books to determine which program best suits the current organization needs.

2. Set a tangible, measurable goal for the behavior changes desired.

3. Pilot the program in a functional area or department where the biggest need exists. Measure the before and after parameters.

4. Assuming success in the previous step, roll out the program across the organization, in as short a time as possible, starting with the top management team. (One excellent way to kill the effectiveness of such a program is to start at lower levels and have people become discouraged because the top management is not practicing the principles.)

Summary

The real strength of TOC lies in the thinking that forces an organization to explicitly identify and focus on its biggest leverage point-the constraint of achieving the organization's goal. TOC provides a strategic tool, the 5FS, to identify the constraint, and S&T Trees to detail and communicate the detailed steps and expected results. The TOC TP provides a way to overcome problems if you get stuck at any one of the 5FS. Any strategy can be expressed using one of the two TOC formats-S&T Tree or FRT. While some elements of each format can be mapped to each other, the detailed content and organization are quite different.

Generic TOC strategic and tactical solutions exist for common industry problems. Such solutions in the public domain (see Introduction for Website reference) exist for manufacturing flow, for distribution of discrete products, and for projects. All such solutions provide three essential elements-the logistics to build a decisive competitive edge, how to capitalize on it through sales and marketing, and how to sustain it with processes that deal with capacity issues.

Other methodologies, such as Lean and Six Sigma, can and should be integrated with TOC to provide a comprehensive solution to any organization's strategic needs (See Chapters 6 and 36). The top management team must decide how to integrate methodologies to focus on Throughput, or risk confusion and in-fighting over which methodology is "best." To execute strategic changes quickly, without top management constantly force-feeding, human behavior and communication skills are essential. Today, there are proven scientific approaches to positively improve human behaviors.

TOC strategy, by itself, is not the complete answer to an organization's needs. At the same time, any organization without a TOC strategy is definitely missing a great deal.

References

Bossidy, L. and Charan, R. 2002. Execution: The Discipline of Getting Things Done. New York: Crown Publishing Group, Random House.

Bruner, R. F. 2004. Applied Mergers and Acquisitions. Hoboken, NJ: John Wiley & Sons, Inc.

Collins, J. 2001. Good to Great: Why Some Companies Make the Leap... And Others Don't. New York: HarperCollins Publishers, Inc.

Covey, S. M. R. 2006. The Speed of Trust. New York: Free Press.

Dettmer, H. W. 2007. The Logical Thinking Processes. Milwaukee, WI: American Society for Quality.

Goldratt, E. M. 1990. What is This Thing Called Theory of Constraints and How Should it be Implemented? Croton-on-Hudson, NY: North River Press, Inc.

Goldratt, E. M. 2008. Projects Company S&T, Level 5, July at: http://www.goldrattresearchlabs.com Goldratt, E. M. 2008. Retailer S&T, Level 5, July at: http://www.goldrattresearchlabs. com Goldratt, E. M. 2009. Manufacturing Make-to-Order (MTO) Reliable Rapid Response S&T, Level 5, May at: http://www.goldrattresearchlabs.com Kotter, J. P. 1996. Leading Change. Boston, MA: Harvard Business School Press.

McDonald, J., Coulthard, M., and de Lange, P. 2005. "Planning for a successful merger or acquisition," Journal of Global Business and Technology 1(2)(Fall):111.

Patterson, K., Grenny, J., McMillan, R., and Switzler, A. 2002. Crucial Conversations: Tool for Talking When Stakes are High. New York: McGraw-Hill.

Patterson, K., Grenny, J., McMillan, R., and Switzler, A. 2004. Crucial Confrontations: Tools for Talking about Broken Promises, Violated Expectations and Bad Behavior. New York: McGraw-Hill.

Patterson, K., Grenny, J., Maxfield, D., and McMillan, R. 2007. Influencer: The Power to Change Anything. New York: McGraw-Hill.

Scheinkopf, L. J. 1999. Thinking for a Change. Boca Raton, FL: St. Lucie Press.

Schneier, C. E., Shaw, D. G., and Beatty, R.W. 1992. "Companies' attempts to improve performance while containing costs: Quick fix versus lasting change," Human Resource Planning 15(3):126.

Sullivan, T. T., Reid, R. A., and Cartier, B. 2007. The Theory of Constraints International Certification http://www.tocico.org/?page=dictionary

About the Author.

Gerald I. Kendall, PMP, Senior Consultant, The Goldratt Institute, is a recognized world expert at strategic planning, Theory of Constraints (TOC), and project portfolio management, with extensive implementation experience. His clients span the globe, including engagements in Malaysia, Bangladesh, Australia, Europe, the United States, and Canada. Clients include SAP, Telstra, British American Tobacco, Raytheon, Alcan Aluminum, Rio Tinto, and Lockheed Martin, with a variety of small company clients such as machine shops and manufacturers.

Gerald began his career with IBM as a systems engineer and became an IT Director. After expanding into international sales and marketing, with global executive responsibility, he broadened his experience in strategic planning, supply chain, and operations. He has implemented TOC solutions for manufacturing, distribution, projects, marketing, sales, people management, and strategy and tactics. He currently leads several multi-million dollar transformation/high growth projects using TOC. Gerald is certified in all disciplines of TOC by the TOC International Certification Organization.