Aligning strategy and operations – the key to an unfair competitive advantage

Some time ago I was driving through the magnificent foothills of the Himalayas. I had been following a winding path out of a valley, which took me about two thousand metres upwards within approximately 500 metres horizontally as the eagle would fly. Not being an eagle, however, it took me about ten kilometres of exciting driving to do the same. All the time I had these magnificent views of the valley below me falling away, on the one side, and towering cliffs on the other.

At one stage the incline began to level, the road straightened out and the next moment I reached the narrow plateau along the top. Suddenly as I reached the top I could see for what seemed like hundreds of kilometres – just rolling mountains in all directions. I could only stand and look, and look, and look. There was just no way to catch this experience with any form of photography.

Of course I could not stay there forever. The family was fast asleep in the car (because when you are renting a turbo-charged two litre MG with a pretty decent computerised dual-clutch system, in the foothills of the Himalayas, in an area where the road surface is close to perfect, then the family needs some pretty hard core motion sickness tablets – the kind that knocks them out dead for the eight hour drive to cover a hundred kilometres of countless hairpin bends.) So, after appreciating this for about as long as seemed reasonable, I began the descent, and very soon the view was once again one-sided. I was now looking down a two-thousand-metre-deep valley, whilst the mountain of which I’d just scaled the other side, was turning once again into a series of cliffs and steep inclines behind me.

In my career I kind of had reached the same point when I first read Eli Schragenheim’s article on Big and Small TOC. I had done about ten years of operations management, followed by ten years of strategic management during which I always tried to keep connected to operations. Even as I was working to master the field of strategy, it was always clear to me that unless your strategy is impacting your operations, and unless your operations are directly connected to, and driving your strategy, you will never build a sustainable competitive advantage.

The problem is that, like the two sides of the mountain, it is often difficult for operations management facing daily crises, to see and understand how the strategy of the company influences their lives; and at the same time it is often difficult for the strategists – who are typically a management layer or two removed from operations (and very often physically removed from operations), to clearly see and understand (let alone help others understand) how (and if) the strategy should have an impact on operations. Don’t get me wrong. I am not saying that people in these roles are being negligent or wilfully ignoring each other (although that can, and does happen) – I am trying to make the point that it is difficult – really difficult – to see the view from both sides of the mountain at the same time.

Operational vs. Strategic TOC

In Eli’s article mentioned above, he points out that there are TOC applications that he refers to as “small TOC,” and these typically focus on specific operational environments. If it is a production line environment you may implement drum buffer rope, or if it is a project environment you may implement Critical Chain. There is the replenishment model for supply chains, Throughput Accounting to help the finance guys talk a language that operations can understand … and so on. These have been proven to be effective. They have also been proven to integrate well with Lean-Six Sigma.

This interoperability with Lean-Six Sigma makes sense, since these are all operational management methods that achieve the same fundamental goal – to increase flow, and therefore accelerate the rate at which your system generates money. All of these applications are focused on operations, so I would refer to this as Operational TOC.

On the other hand, there are applications that Eli referred to as “big TOC” such as the Viable Vision, and Strategy and Tactic trees.

These are used for formulating, communicating, and managing the execution of your strategy, and therefore it would seem to make sense to call these “Strategic TOC.”

Like a kind of common language, or a kind of interface between operational and strategic TOC sits the Thinking Processes, that are used to gain the understanding you need to design the solutions you will be implementing in Operations TOC, as well as to design the unrefusable offer on which you will build you strategy and tactic tree that will take you to achieving your viable vision.

Short interlude for non-TOC people

If you are familiar with the TOC tools you can skip ahead to the next heading. Many of my readers are not TOC people, so I just want to briefly introduce the tools mentioned above:

Drum Buffer Rope is a method of managing production, using strategically placed buffers to protect constraint resources from running out of work. It typically results in exceptionally reliable on time delivery rates and significantly reduced lead times. We decreased lead times by about 65% whilst improving on time delivery by 70% using this in one part of our production.

Critical Chain is a project management method that uses strategically placed buffers, probabilistic planning, and integrated resource planning to protect your schedule against the typical weaknesses inherent in project schedules. The results are also impressive on time delivery, within scope, and typically reduced lead times and costs.

The replenishment supply chain model is a method of replenishing stock based on usage, rather than safety stock levels. It results in smaller, more frequent shipments, which is why it seems counter-intuitive – but it also results in significant throughput increase which typically dwarfs the extra expense of smaller, more frequent shipments.

Throughput accounting is a simple accounting method using Throughput (the rate at which the system generates money through sales), Investment (the amount of money tied up in the system), and Operating Expenses, to drive financial measurement and decision making. It’s really effective and simple enough that even people with an operations background like me can understand it.

An “unrefusable offer” or “mafia offer” is an offer that is formulated, typically to help your customers solve their customers’ problems in a way that is really difficult for your competition to copy – thus giving you an unfair advantage – an offer that your customers literally cannot refuse. Hence the name “mafia offer.”

The Mafia Offer is the foundation of formulating a Viable Vision. A typical Viable Vision would turn your current revenue number into your profit number within four years – and then repeat that again, and again.

A Strategy and Tactic tree is a strategic tool that connects strategy (what you have to achieve) with tactics (what you have to do to achieve that) at every level. This is quite a departure from traditional strategic models where all the strategy is at the top, and that breaks down to tactics and operations further down.

The Thinking Processes is a set of tools to help you analyse problems, understand your environment, communicate solutions, and overcome resistance.

Back to the main story – It’s not a vs. fight

Now as far as I know, Theory of Constraints is the only management methodology that offers operational and strategic tools as part of a single coherent management framework, built on a common set of principles and assumptions.

Most strategy and tactic trees that I’ve seen, integrates operational, structural, and market-related changes so effectively with high level strategic changes, that it is virtually impossible to draw a line between “strategy” and “operations.”

To make just two comparisons: When I’ve done Balanced Scorecard implementations, it worked well to communicate through the whole organisation what should be achieved. It really succeeds in aligning everyone to the same objectives – but it left people still struggling with how to actually improve the performance. Of course, as part of the implementation you would identify improvement initiatives – but I’m just pointing out that the Balanced Scorecard framework does not include an integrated set of operational management methods to improve performance.

Lean-Six Sigma gives amazing tools for improving performance – but it is not inherently connected to the strategy and the overall system – creating the risk of local optimisation at the cost of overall profitability. I’m not saying this is always the case. Many Lean-Six Sigma practitioners do a great job of considering the whole system and delivering stellar results. I’m just pointing out that strategic planning is not inherently part of the Lean-Six Sigma toolset.

So I’m not sure that I fully realized – and maybe many others in the TOC community did not realize this either – just how true it was when Eli Goldratt told David Updegrove that the S&T trees was the most important thing he had ever invented.

A well designed strategy and tactic tree perfectly connects strategy with operations. It’s not Strategic TOC vs. Operations TOC, but it’s Strategic TOC and Operations TOC.

Ashton Fourie is a growth strategist who specialises in helping companies formulate, structure, and execute growth strategies in challenging environments and market conditions. He has more than twenty years of experience in operations and strategic management, as well as consulting, in various sectors, including finance, education, IT, health care, non-profits, large manufacturing, metal production, defence, (and even a little bit of logistics experience as he helps his wife export South African products to China.)

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