Month: February 2018

Every business area has its own “best practices” (are they really the best?) and a whole group of paradigms that are shared by everybody in this particular area. The consequence is being caught in a status-quo, where the performance of the organization is stuck and goes slowly down due to the increase in the efforts of every competitor to steal customers from others.

This day-to-day constant fighting to preserve the current state without any leap in performance is the reality of the vast majority of the organizations. It causes them to be satisfied with relatively small profit, or tolerate limited losses, with the feeling that this is the best they can do.  Such businesses succeed to be in a reasonably stable state, but without any hope for better future.

A necessary condition, though far from being sufficient, to get back to good business growth is to be able to challenge one important shared paradigm. Once this is done the organization deviates from the common way all the competitors are going, and by this establish a clear differentiation from the competition.  The risk of not challenging such a paradigm is that a competitor might do it first and this would change the false impression of stability.

However, this absolutely necessary step for growth, is very risky as being different does not mean outclassing the competition and it certainly does not mean bringing any new value to customers. Too many times being different from the standard only reduces the perceived value of the customers, who just see the difficulty to get used to something different without any benefit from it.  In other cases the new added value seems to be too expensive for the target market.

Another risk is that even if the organization succeeds to create new value to customers, it does not mean the customers are able to recognize and appreciate the new value. The difficulty is that unexpected added value might require a change in habits, and even when the customer sees the new value as something surprisingly nice (“how come we never got such an offer before”) the move raises suspicions that it is too good to be true.

The point with the risk is that it creates FEAR, which sometimes blocks any attempt to challenge a common paradigm that could lead to a breakthrough. The way FEAR should be handled is full acknowledgment that it is legitimate, but the risk can be handled by logically analyzing it, striving to reduce the risk, or its negative impact, and also creating a safe-network of control with immediate corrective actions to neutralize the negative impact on time.  When the risk is properly evaluated and controlled it is possible to overcome the fear.

Another, seemingly unrelated effect of a similar fear, is the high number of R&D projects that continue in spite of the fact that the early promise has already vanished.   The causal relation of that effect with the reluctance to challenge established paradigms that are shared within a business sector is the fear of failure and its personal impact.  The term “failure” has an especially negative connotation in the world of measurements and false accountability, and in itself is a paradigm that should be challenged.  An alternative related expression is “taking a calculated risk” that naturally leads to realization that the move might fail, but it is not interpreted with the full connotation of a “failure” because it has been considered ahead of time and the choice has been to go for it.  In the high-tech startup world the expectation of failures is so high that the damage to the pride and reputation of the individuals involved is minimal, which opens the way to many worthy efforts to do something exceptional.

Taking a calculated risk should be widely used not just for new technologies, but for every business sector, as the ways to come up with a new significant value to potential clients are diverse and only very few of them require a technological breakthrough.

But, taking a calculated risk has to be based on two necessary elements.

1. A culture that endorse taking calculated risks with the full realization that it might fail.
2. Using a valid process of analyzing the risk. Such a process should include searching for ways to reduce the potential risk, and eventually producing an analysis of both the potential damage and the potential gain.

The difficulty in the process of calculating the risk is that in the majority of the cases we don’t have good enough probability numbers. Using statistical models to estimate the probability is also frequently misleading.

Yet, the difficulty of estimating the amount of uncertainty should not cause management to ignore the notion of well calculated risks, because the future of every organization simply require taking some risks, and if you have to take risks you should better develop good-enough ways to estimate them. Developing the right culture depends on finding an acceptable way to estimate risks.  The term “estimate” is more appropriate to use than “calculate”, which seems to suggest it is the outcome of precise calculations.

There is a need to differentiate between estimating uncertainty and estimating the level of damage that would generate as a result of it. Let’s use the following example to comprehend the full ramifications of the difference.

A food company evaluates an idea to add a high level variant to its popular product line SoupOne. The new line will target the market segment that appreciates true gourmet soups. The line will be called SuperSoupOne and will cost 50% more.  This is a kind of a new paradigm, because the usual idea is that the gourmet people shy away from processed food.

Suppose that the management has enough evidence to be convinced that gourmet loving people could be tempted to try such a soup and assuming it is really up to their standard will continue to consume it. The “most likely” estimation, based on a certain market survey, is that SuperSoupOne will gain market demand of 10% of the current demand for SoupOne, but only 5% of SoupOne buyers would switch to the new product, the rest are going to be new customers.

However, one of the senior executives has raised another potential risk:

“What would SuperSoupOne do to the reputation of our most popular product line? It would radiate the message that it is a rather poor product and even the producer is now selling a much better version of it?  What would the buyers do when they cannot afford the better product?  I’m concerned that some of them will try the competitors’ products.”

The risk is losing part of the sales of the key product of the company. How much might be the impact of SuperSoupOne on the sales of SoupOne?  Actually the impact might be positive. Do we really know? We need to evaluate the possibility of having a negative effect and how it impacts the bottom-line.

Note, the risk to be evaluated is the impact of the new line on the old line – not whether the new line would generate high enough throughput to cover for all the delta-operating-expenses of launching the new line.

How such a risk could be evaluated? Suppose the current throughput generated by SoupOne is $5M.  According to the forecast for SuperSoupOne the quantity to be sold of the new line will be 10% of the current quantity sold by SoupOne.  Suppose that such sales would generate 20% of the current throughput due to the higher unit price. So, we get additional throughput of $1M from the new line, while losing only $250K (5%) from the old line.

But, the drop of 5% of the old line is only a forecast described vaguely as “most likely” and those 5% are now buying the new line. But, if the reputation will be truly harmed it might cause up to 30% less sales of the old line.  In this case the loss of $1.5M of throughput from the old line will not be compensated by the $1M “most likely” estimation of the new throughput. 

The above rough calculations help management to realize the potential risk of losing up to $.5M as a kind of reasonable worst case. Other reasonable possibilities seem much more optimistic for overall additional profit from the move. 

Can the risk be reduced? How about giving the new line of product a totally different brand name, which does not refer at all to the current popular product?  It’s probably not eliminating the full negative impact, but will significantly reduce it.

The detailed example objective was not to reach a firm clear decision. There is no claim the existing paradigm is not valid and thus can be challenged. We also don’t know whether the idea of coming up with higher level product is a good idea and what’s the actual impact on the current market is going to be.  The example has been used to demonstrate a need for getting better idea about the risk and its potential impact on the bottom line, using the intuition of the relevant people.  A certain direction of solution for estimating a risky move has been briefly demonstrated.

Such an analysis is a necessary condition for the bigger need of opening the door to a constant search for a breakthrough that has to be based on challenging an existing shared paradigm. This is the objective of this post: to claim that challenging widely shared paradigms is truly required for every organization.  You might say it also about your own desire to make a personal breakthrough -> it passes through a challenge of a common paradigm.

By Ian Heptinstall and Eli Schragenheim – a collaboration between two TOC experts

This article is broadly based on a mutual webinar at TOCICO.  We have found out that the topic is of special importance and ought to be expressed in more than just one way.

People often collaborate with each other. Family, ideology, security and business are good objectives for collaboration.  When the candidates for collaboration trust each other it makes win-win easier to achieve. Win-win is necessary for maintaining long-term collaboration.  Sometimes we have to collaborate with people we do not trust.  It happens when a mutual pressing need makes it mandatory to overcome the distrust.

Collaboration between different organizations is harder to establish. The simple straight-forward relationships like: “we buy from you and we pay according to agreed pricing and related conditions”, is more about “cooperation” than “collaboration”.  Cooperation needs to be present in most of our organizational relationships, whereas collaboration – where we have some mutual goals to achieve, and we need to ensure we both find a win in what we do – is rarer.

There are obvious difficulties in maintaining ‘trust’ between organizations. We can trust a specific person.  While any relationships between organizations are handled by people, the obvious concern is that those people might be replaced or be forced to act against the spirit of the collaboration.

However, collaboration could open the door to new opportunities, even creating the desired decisive-competitive-edge, for at least one of the sides, while improving the profitability of the other. Collaboration between competitors could strengthen the position of both towards the other competitors.  Collaboration between vertical links in a supply chain could improve the whole supply chain, and if all the links in a supply chain would collaborate effectively then the overall decisive-competitive-edge would be hard to beat.

So, we should look, first of all, on the new opportunity to be opened and only then analyze how such collaboration could be sustained, overcoming the usual obstacles.

So, a key insight is that collaboration might SOMETIMES work well, thus it should be carefully decided when it truly pays. There are two key negative branches of collaboration:

1. There are several risks in collaboration, especially between organizations, which might disrupt the positive outcomes.
2. Collaboration requires considerable amount of management attention.

An example where many efforts have been taken to establish effective collaboration is found in the area of big construction projects. A methodology called ‘A Project Alliance’, or Integrated Project Delivery has emerged to deal with the basic dilemma posed by the common contracts and basic structure for such big projects.

The problem is that the client has to come up with very detailed plan of the project, which is required to allow the competing contractors to come up with fixed-price for the whole project. The winning main/general contractor is then able to contract a number of sub-contractors.  What usually happens next is that some errors, additional requests and missing parts are revealed and then re-negotiations take place, which please the contractors, but much less the client.

The concept of cost-plus came to settle this kind of re-negotiations, but when there is no fair visibility into the true cost, the above changes to the original plan are still great opportunities to squeeze more money from the client. From the client perspective it is difficult to assess the true cost of the project and it is even more difficult to ensure the quality and duration of the project.  When we accumulate the efforts of the clients to plan in great detail and then feel helpless when errors are identified and more changes have to be introduced, the pain from running such a project is severe.

From the contractor perspective the initial bidding/competition phase forces him to reduce the price too much and by that take considerable risks, hoping to be lucky enough to gain a lot from changes in order to preserve satisfactory profitability.

A combined bad aspect of this kind of relationships is the mutual dissatisfaction from the outcome of the project. With all the changes and re-negotiations the project typically takes too long, the cost too high and the quality of the end product has been compromised.  That basic dissatisfaction has a negative impact on the reputation of all the contractors.

It could be nice for the client to have more open and collaborative dialogue with the contractors, giving them more influence on the planning and ongoing execution. It is a more effective way to handle the complexity and uncertainty of such big projects.  However, any solution has to be beneficial to every contractor.  Without win-win no alternative way would be truly useful.

How the concern of cost, from the client view, and the concern for profitability, from the contractor view, can be dealt with in a way that would also be in line with the success of the project?

The idea behind the Project Alliance is based on two elements.

One is to create a collaborative team of the key contractors that manage the project with the understanding of drawing the most of the collaborative efforts to achieve great success. This structure is different than having just one key contractor who manages the whole project and contracts several, even many, subcontractors.  Under the Project Alliance structure a consensus between the alliance members has to be achieved through active collaboration.  One consequence is far better synchronization between all the different professional aspects.

The second element is establishing a gain/pain payment that is based on achieving few targets, defined by specific measurements, which together define the success of the project. The payment to each alliance member is made of three parts:

1. Actual cost – the true cost paid by the members to suppliers and freelances, plus the salaries of the employees that are fully dedicated to the project.
2. Fixed payment to the members for their work. In this kind of project the fixed price is less than the normal expected profit.
3. Variable fee based on the agreed performance measurements for the project as a whole. The variable fee plus the fixed payment could end up with much higher profit for the contractor-member than the norm.

The variable fee and the fixed payment are not proportional to the cost!   They are defined independently of the cost and it might include ‘total cost of the project’ as one of the measurements. This split eliminates the interest of the contractors to increase the costs that pass through their books in order to make a profit.  It also eliminates the damage caused if their scope is reduced in value.  The acronym given to this payment method is ‘CFV’, for Cost-Fixed-Variable.  In TOC terms the throughput for every contractor is the Fixed plus the Variable.

The Project Alliance was used by several big projects that are considered especially successful, taking into account the lead-time from start to finish, the overall cost of the project and general satisfaction of the client. However, the vast majority of the big construction projects all over the world are still managed in the old way, despite all the predictable undesired effects.  In order to understand the fears of adopting that direction of solution, let’s point to some potential negative branches:

1. Maintaining trust between organizations is assumed to be shaky, especially without prior experience.
2. The individuals within the client organization, who are in charge of the project, may feel robbed of their power to dictate whatever has to be done in the project.
3. The contractors might find themselves in a dilemma when they see a short-term chance to squeeze more money, but feel bound by the collaboration agreement, where the variable fee is less than the opportunity they see.
4. The uncertainty of the budget due to the variable payments might seem problematic. This might be more of a bureaucratic issue as big construction projects are exposed to much higher uncertainty.
5. Many clients feel uncomfortable in selecting suppliers without having a fixed-price bid, and some formal procedures require such bids (though these are rare), mainly due to inertia and the fear of going against the current wisdom.

Another area where collaboration could add immense value is the relationships between a client organization and few of its suppliers. The regular relationships in B2B are:  the client organization tells the supplier what is required, specs, quality, quantity, delivery time and price.  Negotiations are about due-dates and price.  The underlining assumption is that the client knows what and how much is required.  In the majority of the cases that assumption is valid enough.  In many cases the client is able to generate a bid/competition in order to get the cheapest price.

There are other cases where creating longer term engagement between the client and the supplier could boost the business of both, creating win-win. In most of those cases the basic information flow is still coming from the client telling the supplier what, how much and when to supply.  The agreement covers longer time frame and exclusivity, thus ensuring availability of supply and security for the supplier.

There are fewer cases where true collaboration between client-supplier could truly enhance both organizations, creating new opportunities that cannot be achieved with the formal relationships of “we tell you what we need, you supply according to a general agreement on time and price, probably also minimum annual quantity.”

In those fewer cases the potential could be huge.  When the collaboration opens the way to reach wider demand and/or achieving higher price then the potential of significant increase in throughput, which far exceeds any possible additional cost, exists for both organizations.  Longer-term collaboration can also assist the buyer organization to simplify their purchasing processes and specification, allowing a reduction in overall purchase cost, leading each party to increased profit.

Both organizations have to invest management attention in providing true close collaboration, one may call it: partnership. Both need to earn a lot from it.  One characteristic of any on-going collaboration is not just trust, difficult as it is to maintain between organizations, but also deeper understanding of the interests, values and general culture of the two organizations.  Actually, this kind of understanding of the other side is a necessary element in establishing such partnership, because only when you understand the situation and its related effects on the other side – collaboration can truly be beneficial and far superior to the competitive common approach.

Goldratt already developed a vision connecting all the supply chain in partnership/collaboration, ensuring fast response to the taste and wishes of the market, following the insight that every link in the supply chain truly sells only when the end product is sold to the consumer. The idea was to split the throughput from every sale between all the participants, making them collaborate in order to ensure as high throughput as possible.

The vision of Goldratt raises several negative branches that need to be eliminated, like conflicting interests of a link in the chain when it partners with more than one supply chain. The collaboration along the supply chain should focus not only on the response time and lower inventory, but also actively develop new products and modifications to existing products that would capture more and more market.

All the above difficulties can be overcome with analysis and innovative thinking when the potential amount of the opportunity becomes clear. Collaboration is a means, especially for medium and small organizations, to gain extra competitive edge by becoming virtually larger with additional capabilities, capacity and more effective synchronization.  Using the right thinking, and taking win-win seriously, the potential is unlimited – even though the ultimate constraint could still be management attention.