This principle answers the question: “Which initiatives will keep a revenue generating unit on course to its goal?”.
Agile business management is based on the assumption, that we will achieve our goal by sustaining the flow in our ecosystem. Therefore, the right initiatives focus on removing anything that blocks or hinders that flow.
Eliyahu Goldratt, founder of TOC, called such blocks constraints, because they constrain, or limit, the performance of a business.
To focus on resolving constraints for reaching the goal is a different frame of mind than we use for traditional daily management
Before you go on, a reminder: This is NOT a course in TOC. To become truly knowledgeable, you MUST attend an intensive course, of which many are available from TOC experts all over the world
Goldratt defines a constraint as something that hinders to achieve the goal.
Physical – like lack of capacity or lack of speed. Financial – like lack of funding. Emotional: like insufficient motivation. Rule – like a company policy.
Like in our own business functions. Or with a supplier. Or with a supplier´s supplier. Or with a customer. Or with a business partner. Or imposed by a competitor.
A limiting factor. Blocking the entire ecosystem. Like the weakest link in a chain.
Like in road traffic, where the narrowest road defines total flow.
Fixing anything else in the flow is a waste of time and money.
Many books have been written on this subject. If you have not read one we recommend to start with the original: Eli Goldratt´s book THE GOAL, which laid the foundation of what he called theory of constraints.
we need a well-defined terminology and methodology.
abbreviated as UDE. For a business company a UDE becomes visible in the drop of performance in the flow of revenue.
Our example illustrates this - by the way a real case of a large global enterprise.
After years of happy growth suddenly a constraint kicked in. This enterprise´s, growth in revenue suddenly stopped.
These we must aim at the root cause of the UDE – which Goldratt called the constraint.
This root cause causes symptoms – often in multiple elements of the ecosystem, which to cure does not result in getting back to the goal.
In sales for example, if our performance of bookings drops we might see a symptom like “sales rep performance drops”. From this we might conclude that our commission scheme for sales reps is not challenging enough. However, the real constraint might be that our product pricing as fallen out of customer favor. – Therefore, upgrading the commission scheme could be without effect on our sales results.
Goldratt´s conclusion was that we need to perform a rigorous causality analysis for all elements of the ecosystem to make sure that we find the true, underlying constraint.
For planning how to resolve a constraint again we need a robust causality analysis of the entire ecosystem, a "logic tree" in TOC terms.
This logic tree starts from the goal backwards and its first element is
In the next step of causality analysis, we then identify the obstacles we expect to meet when moving to that state, and then, how we plan to overcome these.
This we describe in “DoDs”, (done on delivered) or results to be achieved and again assign an owner to these.
To better illustrate, our example also contains the situation that we need two DoDs to overcome an obstacle. It shows how to map such a situation.
The assumption for this tool is “If all DoDs are delivered then the constraint to the goal will be resolved”
For going deeper in the methodology of logic trees for TOC we recommend the book THE LOGICAL THINKING PROCESS by Bill Dettmer, world leading expert in this field.
The book is available both in a short executive summary version and an extensive detailed version.
In traditional daily management we select initiatives by the assumption: “If we improve everything, meaning every process, the business will be improved in its entirety”
Compare this to Eli Goldratts quote: “To improve anything but resolve a constraint wastes time and money – without any effect on the goal”
This approach results responding to change of circumstances much more focused and faster, even preventively, so copes better with the requirements of agility.
For agile business management each revenue generating unit establishes its own operational plan, comprising its initiatives to resolve its own constraints – both existing and foreseen.
This way, the operational plan contains the optimal portfolio of initiatives for that unit. Other initiatives add no value – even more so in our times of acceleration. Any initiative which does NOT resolve a constraint is not optimal, instead wastes resources, time and money.
With this approach we also recognize that constraints differ between revenue generating units. Constraints for achieving the goal for product A in California will certainly be different from the constraints for that product in Europe.
This way, a unit´s operational plan will consist of the optimal set of initiatives.