Strategic Alignment of Information Technologies – Part 3

The Income Statement

A company’s income statement[1] is a financial report that tells us what transpired over a range of dates that led to either profit or loss for the organization. Just like we have laid out balance sheet numbers side-by-side for easy comparison, we can do the same thing with income statement figures, as well.
By looking at ABC Widgets Manufacturing’s Income Statements spreadsheet, one might immediately note that year 2004 was a very good year for the company. The firm made PBIT (profit before income taxes) of $126,000 on sales of $8.1 million. Revenues for 2004 were nearly $850,000 more than the average in years 2005 through 2008.
Of course, one cannot help but notice that NPAT (Net Profits after Taxes) declined dramatically between 2004 and 2007, where it reached its nadir of only $2,000. Things were not much better in 2008 where it rebounded to only $9,000 on more than $7 million in revenues.
Once again, these are interesting observations, but it is still hard to tell – at a glance – the management implications of some of these numbers. What might help us would be looking at some of the working relationships (ratios) between various numbers supplied to us from this historical data.

Ratio Analysis

Ratio analysis allows us to look at a set of calculated values – calculated from the underlying data we have just reviewed – in order to assess more quickly our organization’s positions and trends relative to

1. Solvency
2. Safety
3. Working Capital
4. Profitability
5. Asset Management

Solvency Ratios

Current Ratio = Current Assets / Current Liabilities  Interpretation: Higher is better

This ratio simply tells you, at a glance, how many dollars your organization has available in “current assets” to meet the demands of “current liabilities.” As we can see, in 2004, ABC Widgets had a little over $2 ($2.05) in current assets to satisfy every dollar in current liabilities. However, by 2008, that number had dwindled to only $1.35 to cover every dollar in current liabilities.

Quick Ratio or “Acid Test” Ratio = (Cash + AR + Marketable Securities[2]) / Current Liabilities  Interpretation: Higher is better

The Quick Ratio is referred to as the “acid test” of solvency because it looks only to the firm’s most liquid assets to meet the requirements of current liabilities. In 2004 our sample company had nearly 80 cents to satisfy every dollar in current liabilities. By 2005 that number had fallen to only about 50 cents for every dollar in current liabilities and has remained almost unchanged since.

Safety Ratio

Debt-Equity Ratio = Total Liabilities / Equity  Interpretation: Lower is better

The intent of this metric is to indicate the ability of the firm to withstand adversity (from a financial perspective only, of course). It may be understood as the “risk” metric, so the higher the value, the higher the risk. Over the five years we are considering here, this firm allowed its Debt-Equity (D-E) ratio to drift well above 1.30 at times, but has recovered to the present 1.37. The “1.37” means that the firm owes $1.37 for every dollar it has in equity. Therefore, in the midst of adversity, even if the company could not meet its obligations from current assets, the firm’s equity could likely step up to help meet the challenges.

Working Capital

Working Capital = Current Assets – Current Liabilities  Interpretation: Lower is better
Working Capital is the spread (in dollars) between current assets and current liabilities. It measures how many dollars the firm has tied up in its supply chain. In general, it is better to reduce this number. Organizations with higher cash velocities tend to have less cash tied up in their supply chain.[3]
Cash Conversion Cycle = Inventory Days + AR Avg. Days – AP Avg. Days  Interpretation: Lower is better
An organization’s Cash Conversion Cycle measures how long – how many days – cash is tied up in the supply chain on average. Again, fewer days in a firm’s Cash Conversion Cycle is better because it is indicative of one or more of the following:

• More rapid inventory turnover
• Improved AR average days-to-pay
• Faster payment of AP vendors[4]

[To be continued]
©2010 Richard D. Cushing

---

[1] Sometimes referred to as a “Profit and Loss Statement”
[2] In our examples, the firms have no marketable securities.
[3] Some speed-demon companies even manage to have “negative” Working Capital through special supply chain arrangements.
[4] Only vendors that supply inventory or other product-related services should be included in calculating AP Average Days to Pay.

Strategic Alignment of Information Technologies – Part 2

Setting Strategic Goals

Leveraging Technologies for Sustained Competitive Advantage

What makes new technologies valuable to a business?

• Answer: In general, the ability of the technology to contribute to a sustained competitive advantage[1] is what makes it valuable to an enterprise.

What about a new technology allows it “to contribute to a sustained competitive advantage”?

• Answer: Scarcity – the less available it is to your competitors, the larger will be your advantage in leveraging it
• Answer: Innovation – the more innovatively your organization applies specific technologies, the less likely your competitors will be able to achieve the same results or benefits

Consider the example of steam engines. When steam engine technology became available, for those that had direct access (e.g., they could afford to buy steam powered equipment), steam engine technology gave them a significant advantage over competitors that could not pay the entry costs to gain access to that technology. Similarly, those that did not have or did not require direct access, but could benefit from indirect access (e.g., they could afford to ship goods faster on steam ships or by steam locomotive), also had a significant and sustained competitive advantage over their competitors that had no such access to the new technology.

Basic Information Technologies

Today, information technologies provide only the following basic services:

• Data capture
• Data storage
• Data processing
• Data retrieval
• Data transportation (communications)

Since none of these basic IT services is any longer scarce, simply applying the technology in a routine sort of way – as a “copy cat” – cannot provide any long term competitive advantage to your organization. In all likelihood, applying IT in typical fashion will provide no competitive advantage at all.
At best, applying non-scarce technologies in a way that simply matches your competition might help you take your firm from “failing” to “competing” (see accompanying diagram), but such an application of technologies could not, in itself, take your business from “failing” to “leading.”

Strategic Planning Begins with Understanding Where You are Today

Since most organizations begin planning their strategies based on where they have been and what they already know, they generally turn to their in-house history-keeping systems – that is, their accounting applications.[2] We, too, will begin our journey by looking at a sample company’s historical information and considering some of the implications of the data presented.

The Balance Sheet

As many of you already know, the Balance Sheet is a “snapshot” of a firm’s financial position with regard to three categories: 1) Assets – what the company owns, 2) Liabilities – what the company owes, and 3) Equity – the difference between the value of its assets and its liabilities or what it owes to its investors.

In preparing our strategies for fiscal year 2009, our company “ABC Widgets Manufacturing” is looking back over five years of history. The organization has a balance sheet with a little less than $3.7 million in assets, about $2.1 million in liabilities, and $1.55 million in equity. With a quick glance over the spreadsheet we’ve laid out, one might notice the following:

• While total assets have remained fairly steady over the last five years, cash has shrunk by about 15% (down from $102,000 to $85,000) and accounts receivable are also diminished slightly.
• The company has invested significantly in the following assets over the five years we’re reviewing:
  
  • $590,000 in land and buildings
  • $354,000 in equipment
  • $97,000 in furniture and fixtures
• Short-term bank notes payable have zoomed from $211,000 to $589,000, an increase of $378,000 or about $95,000 per year (average).
• Accounts payable have also increased about 34% between 2004 and 2008, moving from $558,000 in 2004 to $750,000 in 2008.

While these are interesting facts in themselves, they really tell us very little about what might be good or bad about operations in general. So, let us turn to the same company’s Income Statements between 2004 and 2008.

---

[1] “Sustained competitive advantage” is a relative term. In some rapidly evolving industries an advantage of six months or a year may be enough. In other industries, perhaps “sustained” would be an advantage lasting a year, two years, or even longer.
[2] We call accounting systems “history-keeping systems” simply because that is what accounting really is – it is the fiscal record of your organization’s historical transactions. While the historical data may be used to produce forecasts and budgets of various kinds based on purely historical data or upon a combination of history and “forecasting parameters,” the accounting system is useless in actually connecting “forecasts” with the actions required to achieve those forecast results.

[To be continued]

©2010 Richard D. Cushing

Strategic Alignment of Information Technologies – Part 1

The Changing Role of Information Technologies

Fewer than 50 years ago (in 1965), U.S. firms were investing less than five percent (5%) of their capital budgets in information technologies (IT). By the early 1980s, about 15% of capital expenditures in U.S. companies were going toward IT. A decade later (the 1990s), U.S. firms had doubled that number and were making capital investments in information technologies at a rate of about 30%. By 1999, in fear of significant failures due to the feared “Y2K problem,” U.S. firms were investing in IT at a rate approaching 50% of all capital expenditures. Even today, due to the challenges of competing in an unmistakably global economy, U.S. companies continue to invest huge dollars (about $2 trillion every year) in new information technologies.

By the mid-1980s, the increasing power of the (then) new Personal Computer (PC) was putting computing power within the reach of the pocketbook of even the smallest “mom-and-pop” operations. There seemed to be a growing consensus amongst managers of every ilk and in every trade and industry that, “If I could just get my computer systems to collect enough data about what my business is doing and how it’s doing it, I could manage flawlessly.” Some companies have been investing in information technologies, sometimes without much more thought about the investment than the underlying fear that if they did not invest in technology, they would somehow be left behind entirely.

Underlying Assumption

As the power and pervasive presence of information technologies have increased, many executives and managers have simply made the assumption that the strategic value of IT has increased right along with it. Some have made this assumption based more on what they see everyone else doing than upon any actual analysis within their own organization or upon any actual effort to align IT spending with strategic or tactical gains.

This willy-nilly approach to IT investment has been somewhat underwritten by the fact that many small businesses have no actual strategic planning mechanism in place anyway. The organization’s planning about the future or thoughts about how to attain certain future goals may still be contained wholly or in substantial part solely in the head of the owner (and maybe a handful of key managers).

Making the Leap from Entrepreneurial to Enterprise

One of the things that occurred in the late 1980s and through the 1990s was a relatively sustained period of economic growth in the United States. Fed directly or indirectly by the rapid opening of both domestic and global markets accessible via the Internet, there were thousands of new start-ups. Many of these new entrepreneurial organizations found rapid acceptance and grew at startling rates from miniscule one or two person operations to firms that employed hundreds or even thousands.

One of the challenges faced by owners and managers in organizations that find themselves forced to transition from entrepreneurial to enterprise is the discovery that what worked effectively when managing an organization with 15 or 20 employees in a single office may not be effective in an enterprise with 1,500 employees scattered geographically. Entrepreneurial managers were finding themselves forced to somehow capture the “tribal knowledge” resident in key personnel who still carried the vision that had led the organization to its initial success. Many times, the “tribal knowledge” was most easily captured and codified into “business rule” within new IT systems.

This series is intended to help executives and managers – whether or not your organization presently has a standard method for setting strategic goals – to establish some effective operational goals; to quantify the expected results as forecasts based on the goals; and in the final step, to offer some ideas about how budgets might be established and new technologies engaged to help achieve the firm’s goals.

[To be continued]

©2010 Richard D. Cushing

Business Processes and Real Management – Part 3

Simply put: If there is no process, it – whatever “it” is – cannot be managed.

The key point here is to separate mere intuitive decision-making from the act of “management.”

Management implies the existence of “a process,” – that is, an understood cause-and-effect relationship in a sequence of dependent events leading to a predetermined goal. There are three critical elements to this definition of “management” and “a process”:

1. The “process” must have a goal or outcome. If there is no goal or outcome that can be stated in advance, then there is no point in attempting to “manage” it, for to manage it would be to somehow affect the outcome of the process (e.g., improvement). If the goal or outcome of the process is not understood or has not been articulated, then there is little need for the act of “management.”
2. The “process” must include more than one step or event, and the steps or events must be related by their sequential dependence. One cannot manage, for example, “the big bang.”
3. The “manager,” in order to manage effectively must understand both the goal of the process and the process itself.

If we return to the examples given, whenever an executive must deal with sales operations as mystical mojo that is carried out in some seemingly inexplicable way by certain persons who were hired because they have a demonstrated facility for working this “mojo,” then that executive cannot be said to be “managing” the “sales process.” He or she may be managing many things related to sales, like the expenses related to sales, the number of salespeople, the sales territory assignments, and more. But he or she cannot be managing “the sales process” any more than he or she would be said to be managing a group of witch doctors in the work they do.

Let me go further to say, that even though the executive may have a “prescribed sales process” that includes a number of “steps,” even if those “steps” are canonized in some CRM (customer relationships management) or other software application; and even if the salespeople are required to “check-off” against these prescribed “steps”; if such “steps” are subject to frequent manipulation by the salespeople or sales managers or if a near-constant series of concessions are being made to the demands of salespeople or sales managers in accommodation to their claims of “mojo,” (or something equally nebulous) then no real “sales process” exists in such an organization. Also, if management is repeatedly kowtowed by what amounts to little more than “threats” that “bad things will happen” if salespeople’s and sales managers’ demands are not met in this matter or that, then I would allege that no “sales process” exists.

Now, I hear you asking: “What difference does it make if we have a ‘sales process’ as long as we are making sales and surviving?”

To that question, too, there is a simple answer: If, as an executive, you do not have a real and manageable “sales process,” then you are at the mercy of the economic winds and the fickleness of fate. In the absence of a manageable process, you cannot know what actions will lead to improvement. Despite your title as “executive,” your only recourse is to try this or try that, because you have no comprehension of the actual cause-and-effect dependencies that lead to more sales or better sales.

Is that really how you want to run what is arguably the leading edge of your business enterprise?

Suggested Reading:

Reengineering the Sales Process

©2010 Richard D. Cushing

Surviving the recession with breakthrough thinking - Part 2

[Continuation]
Thinking should be a process
Now that your management team is has identified a goal and they have a theory by which to consider the data they might collect, they are far better situated to determine what information might be valuable to them. If your team is focused on gathering relevant information where the goal is making more money, and the framework or theory tells us that there must be at least one bottleneck or constraint in our system (the whole enterprise), your team now knows the very first question to ask and answer. That question is: “What is our constraint or bottleneck to making more money tomorrow than we are making today?”
 
While we might find some hints in the data stored within your existing ERP database and other computer systems, it is far more likely that what is really valuable in finding the answer to this critical question is presently being held in the minds of your own firm’s managers and leaders all across the organization. We call this kind of undocumented information consciously or subconsciously filed away by the organization’s people day by day “tribal knowledge.” Tribal knowledge is what they have learned through facts and circumstances accompanied by their subjective intuition about what they have garnered objectively.
 
The relatively limited amount of information that is required to soundly answer the key question we have identified is actually better defined from probing the staffs’ intuitions – tribal knowledge – regarding the context of the organization, the uniqueness found in it and its products, and how it works or does not work in delivering value to its customers.
 
In almost every problem, the value of the factual details pales in significance when compared to the framework and setting in which the details transpire. Breakthrough thinking comes from the application of intuition that gives meaning and cohesiveness to the observations made.
 
Traditional information-gathering efforts focus on the past (historical data captured in computer systems or elsewhere) or the present failings. Unfortunately, since these cannot – by their nature – be an effective guide for the future, the real breakthroughs emerge from the intuition of those closest to the workings of the “system” – the organization taken as a whole.
 
You and your management team might begin by gathering a cross-functional team of staff whom you deem to be trustworthy and experienced in their functions within your enterprise. Then, simply commence by asking this simple question: “What small handful of things do each of you see as keeping our firm from making more money tomorrow than we are making today?”
 
 Give each of them several three-by-five cards or large stick-notes and ask them to jot down these factors for you. Before they begin writing, give them the following guidelines:

• State each thought as clearly as possible 
• Include an “actor,” as in “Our vendors provide us with too many defective components for Product Line A.”
• Do not include assumed cause-and-effect statements. For example, do not say “Competition is driving prices down, so our salespeople offer too many discounts to make sales.” Instead, make each of these comments stand on their own if you believe them to be true. Write them as separate items thus: “Our competitors are driving prices down,” and “Our salespeople offer too many discounts in order to make sales.”
• Put each statement on a separate card or stick-note.

You should refer to these as undesirable effects or UDEs (pronounced: YOU-dee-ees) as did Eli Goldratt when he first promulgated the Thinking Processes. Naturally, some of the participants will have more ideas to jot down than others. Your object in this part of the exercise is to come up with roughly 20 unique UDEs with which to begin creating your organization’s Current Reality Tree – a logical tree that will depict what is not working – what is keeping your organization from making more money tomorrow than it is making today.
 
You can learn more about Eliyahu Goldratt and the Thinking Processes, including Current Reality Trees by doing an Internet search on any or all of these terms, or review this and related Wikipedia articles. You will also find additional references and application of the Thinking Processes right here at GeeWhiz to R.O.I.
 
Every problem is unique and is likely to require a unique solution
A wise man once said, “No man crosses the same river twice: for both the man and the river have changed with each crossing.” The must be said in the realm of business problem-solving.

One of the most frequently occurring and devastating errors executives and managers make in problem-solving and planning is that one problem or situation is identical to another. Fads in management come and go, but no fad or prior experience can take into account fully the differences in time, place, people involved, surrounding conditions, and the present purpose of reaching a breakthrough. The Thinking Processes, however, are able to leverage the “tribal knowledge” and intuition available within your organization to discover unique responses to unique situations even when they may appear (on the surface) to be “just like” what you faced last month or last year.
 
Furthermore, the Thinking Processes are able to decipher and disarm cultural differences and conflicting values within your organization without compromise – which is nothing more than accepting the best of the worst options and blending it with the worst of the best solutions.
 
Far too many managers and executives go out of the way to draw comparisons between their present reality and some other situation believed to be similar. These similarities may be expounded to great length even though the two situations may be separated by miles, years and even involve entirely different companies and personnel. This propensity stems from a desire to reach an “efficient” solution while feeling some satisfaction about being “objective,” as well. It also reduces or eliminates much of the requirement for actually thinking about the uniqueness of the organizations present situation. The Thinking Processes’ Current Reality Tree (CRT) simplifies that while providing management with a truly objective and rational view of what is keeping the “system” from achieving more of its goal.
 
[To be continued]
©2010 Richard D. Cushing

Surviving the recession with breakthrough thinking - Part 1

If there is one thing you need to survive and thrive during a recession, it is a competitive advantage. And if there is one thing that can help you and your organization discover and secure a sustainable competitive advantage, it is breakthrough thinking. But how do you and your management team go about conjuring up a breakthrough? After all, the very word "breakthrough" indicates that there is a barrier between you and "the other side" of the breakthrough. How will you break through?

Become an expert on "the solution," not "the problem"
Over my career of more than 25 years in consulting and senior management, I have met lots of executives and managers that believe that "data" is central to improving a company. They did not have this same thought before computers became widely available to small-to-mid-sized business enterprises (SMEs). It seems that as PC-based computing and storage became faster and cheaper, managers' and executives' hunger for data grew. If some data was helpful, then (it seems they reasoned) all the data would make them infallible in their management actions.

The data are not right
What many of these executives and managers fail to understand, however, is that it is impossible for the data they collect to be right all of the time. To paraphrase P.T. Barnum: Some of the data will be right all of the time, and all of the data will be right some of the time; but, all of the data will never be right all of the time.

You will never possess all of the data
Of course, we need to add to that the fact that no one will ever possess all of the data in any given situation, if for no other reason than that there are hundreds of data elements affecting any given situation that are not quantifiable and cannot be reduced to empirical data points in a computer.

The data are not objective or impartial
Even the data that is collected may not be objective. How the data is collected, the programming that went into the computer application that collects it, the operator who enters it, the people making the measurements, and even the staff that categorize, select and report on the data are all potential influencers of the end result. The reports, dashboards or presentations that many executives will consider as being "neutral," "objective," and "impartial" really may have none of these attributes.

You are wasting time, energy and moneyFor all of these reasons and more, executives and managers that seek to amass volumes of data in order to solve problems are wasting the three things most companies can least afford to use unwisely: time, energy and money. Not only so, but too much data is more often a hindrance than a benefit to breakthrough problem-solving. The executives seeking a solution are more often than not simply buried in the minutia - much of it being unmanageable and irrelevant to the underlying core problem. The result is "paralysis by analysis."

Data-gathering is not accomplishment
Sadly, far too many executives and managers equate information gathering with actually accomplishing something that benefits the organization even though the act cannot be linked to increasing Throughput, reducing Inventories or demand for new Investment, and/or cutting or holding the line on Operating Expenses while sustaining significant growth. This approach to problem-solving frequently reports "progress" without any real accomplishment leading to improvement - short-term or otherwise.

Missing the goal and a frameworkIn management's misplaced attempt to become an expert on "the problem" through data-collection, they have already taken a wrong turn. Management should not be in the business of becoming expert on "the problem." They should be seeking to become expert on "the solution." However, their mistaken belief is that the data will lead them to a solution. This, however, is highly unlikely.

Data is nothing more than documented experience - the organization's history having been captured as data. However, as W. Edwards Deming told us so clearly:

• "Information is not knowledge. Knowledge comes from theory." 
• "You should not ask questions without knowledge."
• "There is no knowledge without theory."
• "Experience teaches nothing without theory."
• "If you do not know how to ask the right question, you discover nothing."

Managers busy amassing and combing through data frequently have neither a goal nor a theory in mind. They are, as Deming would say, "Asking questions without knowledge." They are seeking to be "taught" by the firm's experience (as captured in the data) without a theory about what the data should be showing them.

Begin with a goal
It is the awareness of a goal or purpose that will enable managers to determine what data might really be relevant to achieving a breakthrough.

Firefighting does not qualify as a goal
Firefighting might be a requirement, but it cannot qualify as "a goal." I say this because - like real, honest-to-goodness firefighting - the most it can do is minimize damage and restore the "normal condition" of "no fire." It cannot bring progress, let alone lead to breakthrough thinking and competitive advantage for your company.
 
If your executive team is going to achieve breakthrough thinking, then the breakthrough better be about something more important to your organization's success than how to put out - or even prevent - the next fire in department X. Your thinking had better be focused on the critical matters of achieving more of your goal - and, in a for-profit enterprise, that goal should be how to make more money tomorrow than you are making today. Any other goal is short-sighted: improving quality, improving customer service, and even making happier, more satisfied employees are require making money if they are to be done well and for very long.
 
So, if the goal is making more money tomorrow than you are making today, what are the right questions to ask and what is the theory (or framework) in which to ask those questions in order that you and your management team might come away with real and practical knowledge leading to breakthrough improvements?

The theory and the goal
Let us begin with this hypothesis: Every for-profit organization has at least one constraint to making more money. Of course, the evidence supporting this hypothesis is that if at least one for-profit organization existed with no constraint, its profits would be approaching infinity. The resulting theory - set forth by Eliyahu Goldratt more than 25 years ago - is called the theory of constraints, or TOC.

There are many nuances to understanding all of the implications of this theory and it is beyond the scope of this present writing to discuss them all. However, it seems simple enough as a concept: the organization - the "system" - is, in a for-profit situation, nothing more than a "money-making" or "profit-making" machine. Therefore, the following two statements should be considered:

1. The "system" - the entire organization - should be considered as a whole and not managed piecemeal by department and function. It is the "system" that produces profit, not the individual products, processes, departments or functions. The constraint is - or constraints are - related to the "system" and should be addressed in the context of the "system." 
2. In order for the "system" to make more money tomorrow than it is making today, it is important that the following occur:
1. IDENTIFY the constraint(s)
2. EXPLOIT the constraint(s) - i.e., take steps to get the most Throughput available under the current constraint(s)
3. SUBORDINATE to the constraint(s) - i.e., subordinate all other decision-making across the organization to the governing factors surrounding the constraint(s)
4. ELEVATE the constraint(s) - i.e., take steps to expand the capacity(ies) of capacity-constrained resources (CCRs)
5. CHECK to see if the constraint has moved - i.e., see if you now have a different constraint or set of constraint(s)
6. GO BACK to the first step - do not let inertia set in; enter into a POOGI (process of ongoing improvement)

Now you can start thinking - wisely
Now, with a theory in-hand (the theory of constraints) and a goal in mind (making more money tomorrow than you are making today), you and your management team are actually ready to begin "thinking" toward a breakthrough.

[To be continued]
 
©2010 Richard D. Cushing

The New ERP - Part 5

Thinking Processes to the rescue

Dr. Eliyahu M. Goldratt introduced the Theory of Constraints (TOC) to the world in his book entitled The Goal, back in 1984. In the 25 years since its introduction, TOC has been applied successfully in a vast array of businesses, industries, not-for-profit organizations and government entities.

Too many executives and managers are stumbled by the use of the word "theory" in TOC. Unfortunately, this is something you'll likely have to just "get over." Dr. Goldratt was a physicist before becoming involved in the world of business, so he calls it a "theory," under the assumption that someone, someday may prove it wrong -- that an exception may be found. To date, however, no such exception has been discovered.

The "Thinking Processes" are five interrelated methods to allow the rational analysis of any system in support of focused improvement leading to ongoing improvement. By applying these tools, it is possible for an organization to construct a rational framework that accurately describes how an organization works and interacts within its industry and the economy in general. The primary Thinking Process to be applied in mapping the system's (organization's) current state is the Current Reality Tree (CRT). The accompanying figure is an example of such a logical tree.

The Current Reality Tree (CRT)
The CRT is predicated upon the fact that, in most organizations or "systems," the many factors that may be identified as "problems" really arise from a relatively small number of "roots" or "root causes." Applying the CRT Thinking Process allows executives and managers to capture and decode "tribal knowledge" about how their organizations function, and what is or is not working in a logical, re-readable written form.

Once placed in the CRT form, using rules of logic, this written document may be used by the entire management team to read, re-read, discuss and modify the logic until everyone is certain that the logic presented in the CRT reflects the "reality" expressed within the organization's operations. Hence, the tool's name is the "Current Reality Tree."

Constructing a Current Reality Tree
While experience in guiding a team through the Thinking Processes is beneficial, there is no magic in creating a CRT or applying any of the other TOC principles. You do not need me or any other consultant to do this. There are a number of good resources available online and in print that may be used to guide your firm through the effort. However, if you want a short-cut to effective, first-time application the Thinking Processes -- if you'd like to make real progress in the first day of your effort -- then using an experienced consultant may be the most cost-effective way of getting there.

Nevertheless, here are the basic steps:

STEP ONE
To begin constructing a CRT, executives should gather a cross-functional team of ten or 15 key people from across the organization. This team should be briefed on the goal of creating a CRT and why it is important to the organization.

Having gathered the team, the members of the team should be asked select a single "goal" for the system (organization). In a for-profit organization, and where working on the "big picture" for the entire system, we recommend a goal similar to "To make more money -- both today and in the future." (While this is likely not something you want to put on company brochures as a mission statement, it is the true goal of every for-profit organization and every other goal is subsidiary to it. Quality, customer service, market leadership, or any other goal cannot be maintained for long in the absence of making money.)

With the single goal in mind, the next question to set before the team is this: "What is keeping us from reaching this goal?"

Naturally, when this question is asked, you are likely to get different responses from the sales and marketing folks than you will get from accounting or the production department. Ask them to jot down their responses as simple, clear sentences. Generally, I ask them to do so on 3"x3" sticky-notes. Ask them to include an "actor" in each sentence. Also, ask them to NOT include any "because" statements. Simply state the hurdle or blockage to achieving the goal.

Examples might be:

• Salespeople spend too much time in the office doing paperwork
• Our prices aren't competitive
• The warehouse has too many out-of-stocks
• Our lead times aren't competitive
• ... and so forth

In working with the Thinking Processes, we stop referring to these as "problems," right away. We call these "Un-Desirable Effects" or "UDEs" (pronounced: YOU-dee-eez), for short. The reason we do this is because when we have "problems" we want to solve them. But, as we will see, all of these cannot be "solved" by addressing them directly. They are caused by occurrences elsewhere in the "system."

[To be continued]

Getting more of what you want - Part 2

So, what is happening when successful entrepreneurial organizations find increasing challenges in what used to be intuitively easy for them -- namely, making more money tomorrow than they are making today?

Consider this: When the organization was purely entrepreneurial, likely it was small, had few employees, and operated in a relatively simple (unsophisticated) way. There were fewer things to touch and change -- fewer levers to push or pull -- to reach the desired result. Whatever management did produced nearly immediate reactions -- either good or bad. Feedback was frequently direct to the entrepreneurial leadership -- few or no layers of management or complexity, and fewer "dependencies" in the customer-to-cash stream.

In short, the entrepreneurial leadership was managing the organization as a single integrated "system" with a single goal -- to make more money tomorrow than it is making today!

However, with growth and (possibly) geographical expansion, the organization evolved from being integrated and homogeneous to being composed of departments -- the accounts payable department, the accounts receivable department, the production department, the shipping department, the receiving department, the sales department, ad infinitum. Of course, with departments came also department managers and maybe even layers of middle management.

More significantly, however, came a creeping mindset -- a mindset in executives and other managers that the sensible way to manage this growing organization is "by department." Instead of continuing to see the whole organization as one integrated "system" with a singular goal -- i.e., making more money tomorrow than it made today -- management began to set differing goals for different parts of the organization.

The production department's goals were all about quantities and quality; the sales department's goals were all about prospects, customers and orders; the accounting department's goals were tied to profits and cash flow; and so forth. Everyone was concentrating on managing their individual functions, but the "system" view that had brought early entrepreneurial success had almost entirely vanished from sight and memory.

Management had come to the (wrong) conclusion: That the way to optimize the "system" is to make sure the each individual part (department or function) is optimized. Unfortunately, without seeing this in the context of the "system" as a whole, this conclusion led to spending precious time, energy, and money on portions of the enterprise that did not add new profits and, in many cases, add operating expenses rather than decreasing them.

[To be continued...]

Contact me!