An organization is a dynamic entity & is always on the move. Needless to say, it must have a strong underlying direction to constantly drive its business growth. In this context, ‘Vision’ is commonly perceived as an abstract level statement that strives to describe the intentions of the Organization on its plans (with its business) over the next few years.
Off late we witness sweeping changes to business grammar & hence conventional approach fails to return adequate response to business growth. Through experience we can assess that a mere extrapolation of past into future (even though we make some strong causal assumptions for growth) often results in less than satisfactory results comparing to our original business vision. Many times organizations also tend to be conservative when it makes business plans using facts from past (typically 20 to 25 percent top line growth) & many times the results are far lesser than even the conservative estimates of growth. Generically, the business plan projections would assume several extraneous factors such as government policies, CAGR, prevailing economic sentiments, competitor actions, changing customer preferences etc. As the company progresses with time, the financial results accomplished, in most cases are primarily a sum total of how the competitors have fared in the market place & how in general was the economic growth sentiments. This means to say the said company has allowed its results to be decided mostly by the extraneous factors on which it has no firm hold or influence, in which case, the chance that the company would reach its full business plan is nothing but by hope. As a standing proof, if one analyses the financial statements of a any representative company, many times, we can observe the financial performance ‘topsy turvy’.
Generically speaking, organizations adopt few conventional known ways to pursue their business plans & visions:
(The above lists of possible actions are merely indicative but not exhaustive)
While the company has the choice to decide which mode (organic or in organic or a combination) to choose, they are under a constant dilemma – Should the company adopt inorganic means OR Should the company extract more from what they have already (organic means from what they know & have already). Companies tend to undertake a compromised mid path as outcome of this dilemma, however these actions are many times adhoc & are associated with immense risks. Any plans made & actions encountered, (irrespective of the above mentioned means) to realize a particular business plan are associated with abundant risks & uncertainties to the extent, many times organizations find themselves with a huge gap between their originally conceived plan/intent & their current status, down the line. It is quite common that many companies pursue inorganic means of growth despite the real risk involved & without much logical conviction of why do they so. Probably the underlying assumption is ‘Growth comes from only from new markets, new products, higher available capacity etc’. The business results are obvious & many times the company is found journeying on a totally different direction, in relation to its original business plan & they are compelled to continue (because they might have made the necessary investments) despite their dismal performance. All these necessitate a fundamental rethinking to arrive at a holistic business model for the organization to quickly & firmly pursue its business plans/goals. In other words, there is a compelling need to obliterate the above mentioned dilemma & also due to fact that ‘compromised solution’ to overcome the above dilemma does not yield break through results.
An operational company would be encountered with several business problems such as high unneeded inventory, obsolete products, dissatisfied customers (due to chronic late deliveries made by the company, poor quality levels, inadequate product range, improper customer service levels etc), dropping profit margins, dropping sales, dropping market share, longer cash to cash cycle etc. All these business issues are definitely undesirable to have & hence let us for definition purpose tag it as ‘Undesirable Effects’ (to one’s business). These undesirable effects need to be certainly addressed for extracting more of existing business activities.
While it is common for the management team to chase these Undesirable Effects (UDE’s) with an objective of improving their current business performance & hence deal with these UDE’s through exclusive management initiatives. One can verify this fact by simply raising the following question -- How many time we come across organizations launching improvement initiatives to resolve the before said UDE’s? Most importantly organizations launch initiatives to resolve UDE’s uniquely (in isolation) through and as a result multiple initiatives exists with in an organization at any given point in time - such as TQM, TPM, BPR, Implementing an ERP / sophisticated optimization system, customer satisfaction surveys etc. On the lighter sense, the only time when organizations start rethinking about its proliferated list of initiatives is during the tough days of economic slump (that too to mainly to cut costJ). Given the complexity (considering its multiple plants, wide variety of SKU’s it manufactures, number of components raw materials etc) of a large or even a medium sized organization, it becomes a highly complex affair to chase & resolve all the possible UDEs in a given company, because of the shear involvement of infinite variables that are causing them, to identify them & later to control them.
Launching improvement initiatives across the organization (without global focus) is due to an erroneous paradigm that ‘Sum of local optima is equivalent to the global optima’, in other words ‘Save dime everywhere to save a dollar at the end of the day’. The proof of the case is despite a long list of management initiatives, companies are unable to tangibly experience the financial results (sales, profits, profitability) at the end of the day. In reality, when we introspect for the factors that messed up our overall business plan, due to the complexity involved in the business dynamics & lack of clarity on the key reasons that led to failure, general tendency is to pass the buck on to the initiatives that were undertaken to accomplish the business plans.
Is there an alternate way by which organizations can better understand their real business problems to find a way to extract more from their current business & tangibly see encouraging financial results?
Many companies strongly believe that large scale of growth can accrue only through inorganic means & as a result align their future plans/actions in line with this belief/assumption. While the rewards appear promising, the risks involved are many & need to be carefully weighed. For example, how many times we notice that companies expand their capacities way ahead even before they fully utilize their existing capacities productively. This situation compels them to utilize their new capacity (to justify the investment made - probably to see their measures such as ROCE (Return on capital employed)) appears well & subsequently sell their piled up inventories from new capacity at a lower cost (by lowering the sales price of products) as there is no immediate overwhelming demand. This obviously leads to lower margins & impacts the financial performance in an adverse manner. Probably the new capacity is designed based on an optimistic forecast which failed to happen. This situation would obviously mean that the company may struggle to even sustain the ongoing operations & it is no surprise that they can get anywhere closer to their original aggressive business plans.
Is there a better way that mitigates risks while embarking into inorganic means of growth at least to a good extent & increase the probability of accomplishing the intended business plans with higher confidence?
“Considering the enormous complexity of your system it follows that there must be only very few elements that govern the entire system. In other words, the more complex the system is, the more profound is its inherent simplicity. To capitalize on the inherent simplicity we must be able to identify those few elements that govern the system. ” – Dr. Eliyahu Goldratt
The above revelation leads to the point that there has got to be very few critical constraining factors (generically could be physical factors such as men, material, machine or mental models that lead to policy formation) that controls the behavior of the organization & hence its business results. The proof of an existence of a constraint lies in the simple fact that the financial growth of a company is normally experienced as a controlled growth (say 15% year on year). If there were no constraint(s), the company can potentially grow by infinite terms. As the common proverb goes ‘It is better manage the constraint(s) else constraint(s) will manage you (the company)’, from a strategic standpoint, when a company builds the growth plans for over few years, it is imperative that it identifies & leverages its business performance on this constraint. It is implicit that the growth plans we build are accomplished with ongoing stability, which is a mandatory condition for a sustainable growth to stay. It is not our objective to produce sensational results from time to time, but making our company deliver superior results in a stable fashion – for every jump in financial performance, the associated stability is almost guaranteed. It is also important to note that the employers, employees, stakeholders & society in large expect an organization to be growing & for growth stability is a mandatory condition (without growth there cannot be stability, but only degradation).
Identifying the Constraint & Exploiting it
Simply stated, Constraint is an entity that limits the performance of the system (in our case an organization). Since the intent of the growth plan is over a period of time & our aim is to focus on delivering superior financial results, (for a profit oriented system), ‘Customers/Market’ is the constraint. As the name signifies, a ‘Constraint’ being scarce cannot be wasted. Full efforts must be invested to extract the most of the Constraint, as Constraints limits/dictates the performance. It is sensible to first explore ways to identify if in the current ways – Is the Constraint being exploited fully? Getting more from the Constraint is akin to more sales/profitability. Going on these lines, it would be important for us to first identify what are the common ways (no need for any research work here) by which we don’t fully exploit the Constraint (Customers/Market)? By knowing to exploit the constraint well, our company would be able to gain a ‘Decisive Competitive Edge’ (DCE) in the market. Following is an indicative live example from reality
A company that manufactures 1000 plus FMCG products with annual sales of $ 150 Million distributes these products through a long supply chain consisting of distributors, dealers & retailers. Beginning of this exercise the company observed that in majority of the key retail stores, less than 5% of its products range were ‘Available’ for sale. Prima Facie all of us would agree – ‘Only when products are displayed it has a higher probability for Sale’. Even from the product range that is made available, the consistent availability of these products were less than 30%, which resulted in huge loss of sale. Not having the right product range & not making it available all the time is not fully exploiting the ‘Constraint’. Hence if the company can do the right actions to increase the availability, the growth of sales can be surprisingly higher coupled along with profits, profitability (when more sales happen with the same infrastructure, then profits/profitability soars). The above company experienced a sales growth of 80% within few months while its profitability soared. These actions result in a win win framework for both the company & its supply chain partners (distributors, retailers). Knowing (having the right processes & culture) how the constraint can be well exploited & offering this knowhow to the market enables the company to derive a DCE in the market. Having got the DCE the company can exploit it in existing markets & later on move to new distributors/new geographies successfully with much higher probability of success, since the knowhow of win win framework & the valuable experience it has gained in existing markets exists with the company.
The above is a classical example of how well exploitation (organic growth) can precede inorganic growth. (However it is important to note that the above example pertains to a particular scenario of consumer goods & different conditions exist for other types of industries). The above case study also reveals there is a huge scope for exploiting more from the existing system, release cash by getting more from what we have now, spur quantum jump in financial performance & deploy it for expansion (inorganic) at the right time, when the company is adequately poised (has enough cash, experience of win win framework etc). Needless to say the supporting processes for expanding (in terms of timing it & how much of expansion required) to be well dovetailed considering the following vital two factors:
Holistic view
It is also important not to stay at a conceptual level but translate purposeful concepts & directions into workable actions (strategies & tactics). These workable actions & associated procedures to turn into a reality is to be viewed as a comprehensively instead of evolving it functionally or through any other means.
On the other side, it becomes apparent that the business plans & initiatives required to accomplish them should also be logically based on those constraining factors as they become the “leveraging points”. Once these “leveraging points” are properly exploited through appropriate interventions & measures, that truly correlate the local actions (department level) to global results, the UDE’s evaporate (disappear) enabling the organization to make large scale improvements. With this focused approach, now it becomes easier to locate & assign the requisite improvement initiatives such as 6 sigma, TQM, TPM, SMED, investment on machinery etc at the right areas where the improvement makes the best impact to the global results (financial result). Also it is important to note this new paradigm of thinking – Focusing everywhere is akin to not to focusing anywhere”.
Needless to say that the above approach requires a paradigm change in the organizational thinking process, it also becomes all the more compelling to identify the essential building blocks for the visioning process.
The original dilemma of pursuing an organic or an inorganic means to pursue business growth, is now broken since it is not OR condition but AND condition. However the sequence by which the means will be pursued is extremely important. Also many times, companies tend to embark into inorganic means of growth much earlier even before fully extracting what they can from their existing business structure. This approach paves the way for quick spurt in financial performance & the knowhow on when to expand into other markets ensure continuity of growth that will augur stability in growth. Growth & Stability becomes are inseparable twins in business planning.
Our core experts have vast experience in managing transformational consulting projects. We have worked closely with family run businesses, large corporates and mid-sized Indian companies managed by professionals. Our core forte lies in hand holding companies towards pre-defined objectives and business results.
