The Concept of Leverage

This is the sixth of a series of 12 articles by guest blogger Bill Dettmer on systems thinking, a way of understanding complex organizations and society offering significant promise for improving the leadership and management of commercial companies, not-for-profit organizations, and government agencies. Perhaps this article alone highlights the immeasureable benefits of the Constraints Management Method (CMM). Worthy of study until its message becomes absolutely and perfectly clear.

PART-6

Systems and Constraints: The Concept of Leverage By H. William Dettmer

"Give me a lever long enough and a place to stand, and I can move the world." --Archimedes, 287-212 BC

If he didn't actually discover it, Archimedes certainly popularized the concept of leverage. In the third century BC, he designed war machines exploiting the lever for the armies of Greece in their pursuit of empire in the Mediterranean. As the quotation above implies, an understanding of leverage can enable one to apply force to something far out of proportion to one's individual strength.

The concept of leverage applies to systems, too--particularly to organizational systems. But before we see how, let's revisit the concept of a system.

Deming characterized a system as a network of interdependent components that work together to accomplish the aim of the system. [1:50] As soon as we acknowledge the idea that a system is composed of multiple component parts, a question immediately arises: Are all the components equally important, or are some more instrumental than others in striving for the goal of the system? In most organizations, people act as if all components are equivalent. For example, everybody is considered an "equal member of the team." But is this really the case? Does every component contribute equally to the system's success? As George Orwell observed in his classic allegorical novel, Animal Farm, "all animals are equal---but some are more equal than others." [5:Ch.10]

The Pareto Principle

In 1906, Vilifredo Pareto, an Italian economist, observed that 80 percent of Italy's wealth was owned by 20 percent of its population. [6] In the 1930s, Joseph Juran observed a similar relationship--what he referred to as "the vital few versus the trivial many." Though he didn't cite Pareto in particular, his observation of the "80/20 rule"--meaning 20 percent of a system is responsible for 80 percent of its results---became known as Pareto's Principle. Howard Gardner uses the Pareto Principle as a teaching example, and in the process, he points out that "it is important to be judicious about where one places one's efforts..." [2:9]

The wisdom of the Pareto Rule is generally accepted. What is less commonly understood is the key underlying assumption behind it, which Gardner hinted at and Orwell said somewhat more explicitly: not all of the system's components are equally important in achieving its goal.

The Concept of a System Constraint

All systems, whether open or closed, are limited (or constrained) in some way. Organizational systems are no exception. What, exactly, is a system constraint? It's some factor that limits what the system can achieve. Were it not for this limiting factor, the rest of the system might be able to achieve much more in realizing its goal. The limiting factor may be internal or external to the system. It may be a physical component, a condition, or an imposed policy of some kind. Whatever it is, however, it does frustrate efforts from within the system to achieve better performance.

Goldratt has characterized constrained systems as chains, and a system's constraint as the “weakest link” in that chain. [3:53] Conceptually, this is an adequate analogy, but it does tend to imply a linear nature of processes that might oversimplify some systems. The important point of the analogy, however, is that some identifiable factor or component restricts the system's ability to perform.

The System Constraint: An "Archimedes Point"

Let's synthesize a few concepts. The first is the idea of a system constraint, or limiting factor. The second is the Pareto Principle--20 percent of the system is responsible for 80 percent of its results. And the third is the mental model of a system as a chain with one weakest link. (By definition, there is only one in a chain, or we'd have to call it only a weak link, not the weakest link.)

The hybrid result might be something like this. Since systems are composed of many interdependent parts, all working toward a common goal, and since the 80/20 rule generally applies to most systems, it follows that not all system components are equally capable--or equally crucial to the success of the system. And since the least capable part of the system--the "weakest link"--determines the maximum performance of the whole chain, it follows that this weakest link (the system constraint) should represent an "Archimedes Point"--a leverage point that, if force is properly applied, offers the greatest potential for system performance improvement.

The Myth of Efficiency

According to the Pareto Principle, 80 percent of a system's performance results from only 20 percent of the system. But E.M. Goldratt, widely credited with conceiving constraint theory, suggests that the ratio might be more like 99-to-one. [3:53] In the early 1980s, when he was focusing almost exclusively on the application of constraint theory to manufacturing, Goldratt articulated nine principles for optimizing production technology (OPT). [4] While they refer to bottlenecks rather than constraints, three of these principles have significant implications for systems thinking:

1. The level of utilization of a non-bottleneck is not determined by its own potential but by some constraint in the system.
2. An hour lost at the bottleneck is an hour lost for the total system.
3. An hour saved at a non-bottleneck is a mirage.

If we substitute the word constraint for bottleneck, these three principles make a powerful statement about efficiency in systems. Recalling that the system's constraint--the "Archimedes point"--represents Pareto's critical 20 percent (or, as Goldratt maintains, the critical one percent), the implication of the first principle, above, is that efficiency really doesn't matter much in 80 percent (or 99 percent) of the system! The third principle, concerning the insignificance of saving time at a non-constraint, reinforces this point. The second principle, concerning the criticality of efficiency at the system constraint, is the converse of the first and third--it emphasizes the importance of ensuring efficiency at the system constraint.

The conclusion we can draw from this discussion of the Pareto Principle, leverage points, and non-constraints is crucial in simplifying management's primary job: ensuring overall system success. It's that we must worry about efficiency really at only one point in the system: the constraint or leverage point. The efficiency at non-constraints--almost all of the rest of the system--matters only when a non-constraint's inefficiency puts it in danger of becoming the system constraint.

Consider how important this could be for overstressed managers. It's not necessary to watch everything in the system with equal attention or intensity. In other words, when the system constraint is known, only a very few key metrics must be closely monitored to ensure system success. And by extension, only a few key nodes of the system--in most cases just one--require rapid response to deviations or variances. By focusing on the critical few at the expense of the trivial many, the quality of management improves and the probability of system success increases.

Breaking Constraints: How Much Improvement?

What is required to actually increase the performance of a system? Clearly, based on what we've seen so far, efforts to do this should be aimed at the "Archimedes point"--at least in the short term, or it's likely they'll be wasted. But how much system improvement can we expect?

Say, for example, we know that our system constraint is the capability of the sales department. If we double the size of the sales force, can we expect to see overall system performance double? Possibly in some circumstances, but only up to the level of the next constraining factor. If the production process had been only 80 percent utilized before the sales force was doubled in size, the increase in system performance could be no more than 20 percent, at most. The production process capacity would constrain system performance before all of the added sales capability could be effectively used.

So there's another lesson here: when a system constraint is broken, the system's performance improves, but only up to the level of the next most restrictive factor. That factor becomes the new system constraint, which brings up still another lesson: it's not possible to completely eliminate all constraints, so the system's leverage point moves every time a constraint is broken. Consequently, it's crucial for system leaders to know where the system's leverage point lies, where it will move to when the system's constraint is broken, and what the best choices of action are for maximizing the leverage at that new point.

Five Focusing Steps: A Prescription for Maximizing System Performance

E.M. Goldratt created a five-step process for managing system constraints: [3:58-63]

1. Identify the system constraint. Determine the factor that most limits the system's ability to perform. This factor could be internal (a resource, knowledge or competence, financial condition, or policy). Or it could be external (market demand, competitive environment issues, materials and suppliers, or government regulations and laws).
2. Decide how to exploit the current constraint. What action is required to wring the most efficiency and effectiveness from the current leverage point? This action will differ depending on what that limiting factor is. Sales constraints require different actions to break than production or supply constraints.
3. Subordinate all other parts of the system to the exploitation of the current constraint. This is a short- or medium-term tactic. The objective is to maximize system performance while working on a longer term strategy to break or eliminate the constraint from its current location. It requires all non-constraints--all elements of the system other than the leverage point--to subordinate (or sacrifice) their own efficiencies in the interest of maximizing the efficiency of the leverage point. In other words, this is the tacit recognition that the Pareto Principle applies to all systems. It's pertinent to mention that exploitation and subordination normally don't require the expenditure of more money--usually the only thing required is to change the way current assets or resources are used.
4. Elevate the constraint. "Elevation" in this case means to increase capacity. Whether that means purchasing more equipment, hiring more people, or expanding facilities, elevating the capability of the leverage point requires spending more money. But notice that this does not happen until after maximum system performance has been realized through exploitation and subordination. This is where many (most?) organizations make a serious mistake of omission: they ignore the opportunities to wring the maximum performance out of their existing leverage point before they run out and spend more money (sometimes a lot of money!) on more physical capacity.
5. Go back to the first step. It's possible that the exploit and subordinate steps may change the leverage point. But if they don't, the elevate step certainly will. Thus, leaders must be constantly on watch for a shift in the leverage point from one point in the system to another. Knowing that in different locations, the leverage point requires different tactics for exploitation and subordination, it's absolutely critical for leadership to actively search for a shift in leverage point location and change their system improvement tactics accordingly.

Cycling through these five Focusing Steps should be a continuous process for all systems--a never-ending systemic continuous improvement process. This is the only way to ensure that a system is performing to its highest potential levels.

Summary and Conclusion

All systems--whether commercial, government agency, not-for-profit, or social--are constrained in some way. That constraint represents a leverage point in each system, a point at which a measured amount of effort will produce a disproportionate benefit to the system. But a system constraint exists with non-constraints in a Pareto Principle-type relationship: there are far fewer leverage points (probably only one) than non-constraints. Capitalizing on this knowledge requires the application of a structured, repetitive continuous improvement process --the Five Focusing Steps.

In our next installment, we'll begin a systematic approach to system management by exploring a logical way to analyze complex systems.

"The only things that evolve by themselves in a organization are disorder, friction, and malperformance." --Peter Drucker

ENDNOTES 1. Deming, W. Edwards. The New Economics for Industry, Government, Education. Cambridge, MA: MIT Center for Advanced Engineering Study, 1993. 2. Gardner, Howard. Changing Minds: The Art and Science of Changing Our Own and Other People's Minds. Boston: Harvard Business School Press, 2004. 3. Goldratt, E.M. The Haystack Syndrome: Sifting Information Out of the Data Ocean. Great Barrington, MA: The North River Press, 1990. 4. Robert Lundrigan, "What is this thing called OPT?", Production and Inventory Management, Second Quarter 1986. 5. Orwell, George. Animal Farm. (http://www.online-literature.com/orwell/animalfarm/) 6. http://management.about.com/cs/generalmanagement/a/Pareto081202.htm

(c)Copyright 2005,2006, H. William Dettmer. All rights reserved. Permission granted to Jeff 'SKI' Kinsey to reprint on SKI's Throughput on Command.

Jonah3+3(TM) Course in May 2006

Location on Hilton Head Island, SC to be determined. May 10 through May 17, 2006 In the world of Constraints Management, we call an expert a "Jonah." Why? The name comes from the best seller, "The Goal -- A Process of On-Going Improvement" by Eliyahu M. Goldratt. The problem solving professor, Jonah, teaches uncommon common sense. The best instructor for this material? H. William Dettmer. He wrote the book on "Goldratt's Theory of Constraints" and the Logical Thinking Process. Individual attendance: $4400.00USD, two from the same organization, $4000.00USD per person. Details may be found on the Applying Common Sense web site: www.ApplyingCommonSense.com/jonah Please contact me immediately to reserve a seat... class size limited to six students. -ski

Learning Organization

This is the fifth of a series of 12 articles by guest blogger Bill Dettmer on systems thinking, a way of understanding complex organizations and society offering significant promise for improving the leadership and management of commercial companies, not-for-profit organizations, and government agencies. PART-5 The Learning Organization: Adapt or Die! By H. William Dettmer "How can a team of committed managers with individual IQs above 120 have a collective IQ of 63?" ---Peter Senge [7:9] An interesting question Peter Senge poses. I've seen the phenomenon myself, and other prominent instances abound. For example, consider an excerpt from a recent article in USA Today about Delta Airlines: On Monday [Delta] will launch an updated Delta.com [web]site that has streamlined features, including a focus on core consumer services such as booking trips, checking flight information, viewing itineraries, and monitoring frequent flier mileage..."This is our primary focus of our marketing for the second half of the year," chief marketing officer Paul Matsen said...The troubled airline hopes to cut costs by luring more travelers to its website---and away from its telephone reservations lines. [2] If Delta is fishing for more customers, they're not using very persuasive bait. The day before, Delta's chief executive officer, Gerald Grinstein, warned employees that cost-cutting efforts so far are not enough to keep Delta out of bankruptcy. Wall Street was so thrilled at this news that Delta's shares immediately plummeted 26 percent. [1] This isn't a unique situation. Delta has had hard times before. Other airlines (United comes to mind) have had worse. Still other airlines (Eastern, Braniff and Pan American) have even failed to survive. In other words, there is no shortage of lessons out there about how not to run an airline, and at least one example (Southwest) of how to do it right. As Yogi Berra once said, “You can observe a lot just by watching.” You'd think that airline executives would learn something. But apparently, you'd be wrong. As George Santayana once said, those who cannot learn from history are condemned to repeat it. (There's that word “learn” again!) The Learning Organization In The Fifth Discipline: The Art and Practice of the Learning Organization, Peter Senge defined a learning organization as one that is continually expanding its capacity to create its future. That's an intriguing definition, but one that says more about the outcome than the process. Senge suggests that organizations aspiring to create their futures need to be able to learn in ways that Delta and the other airlines in financial trouble obviously haven't. The airlines are trying to survive. But survival learning, also referred to as “adaptive learning,” while necessary, is reactive rather than proactive. Creating futures requires what Senge calls generative learning\a horse of a distinctly different color. According to Senge, a successful learning organization satisfies five indispensable criteria: [7:6-10]

1. It practices system thinking.
2. Individual employees and leaders strive for personal mastery in all their activities.
3. Employees and leaders alike have a shared mental model of the world---the organization, its markets and competitors, and environment.
4. Its leaders have a vision of where they want the organization to go.
5. Team learning is central to its activities and success.

Senge maintains that systems thinking and team learning are incomplete without shared vision, personal mastery, and mental models. I can't dispute that. But for the purposes of this discussion, we'll acknowledge the importance of the middle three and focus on the first and last. Team Learning: What is it? The concept of teams inherently assumes that the coordinated efforts of many are more effective than the isolated effort of any individual---or even a collection of individuals. Anyone who has listened to a good symphony orchestra or watched a world-championship sports team intuitively understands this. Organizations are composed of teams. In small companies, a single team may be the organization. Larger organizations may be comprised of many discrete teams. Either way, the concept of “team learning” is somewhat of a non sequitur. Since team is an abstract classification of a group of individuals, it's a little difficult to understand how learning can occur at an abstract level. Individuals can learn, and if a group of individuals that don't constitute a team learns the same lesson, it's difficult to justify that “team learning” has occurred. I submit that the concept of team is inherent in how its members operate and interact with one another, not in how they learn. Senge himself makes the following observation: "Team building" exercises sent colleagues whitewater rafting together, but when they returned home, they still disagreed fundamentally about business problems. Companies pulled together during crises, and then lost all their inspiration when business improved. [7:15] When individual faces on the team (or in the company) change, expertise---previous learning---is resident only in the remaining individuals, whether they are executives, managers, supervisors, or line employees, not in the team. Any learning subsequently transferred to new team members comes from individuals, not "the team." Collective learning occurs at multiple hierarchical levels: individual, group, organizational, societal. With each increasing level of complexity, the challenge of learning (and institutionalizing that learning) becomes more difficult. It requires more conscious, concerted effort, and sustainability at the organization level is uncertain at best. This kind of learning is usually driven by one person (or a few committed individuals). Individual learning becomes team or organizational learning only when leaders institute a conscious effort---either by personal example or by directed policy---to seek out new information that could potentially change the nature of the operating environment, or the interactions of those who operate within it. In other words, establishing effective organizational learning is a responsibility of leadership. Team Learning Versus Teamwork The point here is that the operative word is “learning,” not “team.” The important activities associated with learning are capture, retention, recall, and application---in other words, how the learning is used to enhance teamwork. The distinction is important, because in the final analysis, all that is important from the team perspective is that team members recognize the need to aspire to learn (individually), to share what they've learned with other members of the team, and to internalize themselves the learning of others that is shared with them. So, if learning occurs at the individual rather than at the team level, where does the “team” concept fit into the scheme of things? Effective teams are like well-oiled, finely-tuned machines. The various members work “seamlessly” with one another---virtually without friction. This doesn't happen naturally. It requires concerted effort and practice, practice, practice. In 1645 Miamoto Musashi, the prototypical samurai warrior, wrote A Book of Five Rings in which he described what it took to become a samurai: "Practice is the only way that you will ever come to understand what the Way of the warrior is about...Words can only bring you to the foot of the path."[5:94] The team learning that Senge refers to [7:9] is not functional expertise. It's composed of two distinctly different domains: teamwork and systems thinking. We've already touched on the idea of teamwork in this installment, and if you recall, we've seen it earlier, too, in the second installment, “Business and the Blitzkrieg.” Remember the essential tenets of the blitzkrieg: Einheit (mutual trust), fingerspitzengefuhl ("fingertip feel"), auftragstaktik (moral contract), and schwerpunkt (focus point)? [6:52-58] Trust and the moral contract are the bedrock upon which effective teamwork is built, and they must be learned. They may be introduced to individuals, but they can only be learned as a team. What about fingertip feel and the focus point? The former is equivalent to Senge's criterion of personal mastery. And the focus point---schwerpunkt---requires a systems thinking perspective, another key Senge criterion. Systems Thinking: The Key to Effective, Efficient Teamwork Systems thinking must also be learned on an individual basis, but it must be applied by teams to be effective. Whether that team is a small, cohesive unit or a large organization, or even society as a whole, systems thinking is a team function in successful organizations. (Refer to the first installment, “Systems Thinking” for a more detailed review of systems thinking.) How does one (or an organization) apply systems thinking? In the last installment, “Sun Tzu and the O-O-D-A Loop,” we examined the maneuver warfare philosophy of John Boyd and its elegantly simple expression, the O-O-D-A loop. [3:190] The O-O-D-A loop has direct impact on both individual and organizational learning. Observation and Orientation Recall that the first two O's in O-O-D-A stand for observe and orient. [3:163-164] Their relationship to organizational learning is crucial. According to Boyd, the observation step is a process of gathering information, from both within and without. This information can come from a variety of sources: the media, research, direct observation, experimentation, or clandestine intelligence activity, to name just a few. What are the potential targets of these activities? Generally, they fall into three classifications: our own operations, the actions and activities of others (e.g., competitors), and the external environment (e.g., politics, economics, international developments, technology advances, catastrophic events, etc.). Observation might be characterized as “situational awareness”---an aviation term that means paying attention to everything that's going on around you. But obviously at some point paying attention to everything indiscriminately can lead to sensory overload. Leaders and teams need a way of separating what's important from what isn't; otherwise, they can drown in data. This is where orientation comes in. The orient step can be described as a process of interpretation and synthesis. (Refer to the third installment, "Analysis and Synthesis.") By analysis and synthesis, the separation of the important from the trivial---and the integration of the important parts into a useful whole---takes place. Boyd described orientation as one's "world view," or how we visualize what's going on around us. In other words, our understanding of the world, how it affects us, and how we affect it. To the extent that our perception of the world actually matches reality, we're confident in our ability to function effectively in it. To the extent that reality diverges from our view of how things are, or ought to be, we experience difficulty and confusion, which normally show themselves as failures. How do we come to our orientation (world view)? Boyd suggests that it's the integration of many factors: cultural traditions, previous experiences, our own analysis and syntheses, new information, and even our genetic heritage, from which we derive our psychophysical skills. [3:189] The chief problem: people's world view becomes entrenched---static---while at the same time reality is anything but static. To the extent that there is a mismatch between an organization's orientation and reality, policies or practices based on that orientation become increasingly invalid or even irrelevant. Performance deteriorates and failures occur. Such failures are hard to miss, even by busy leaders and manages. And naturally, they try to correct these problems. In other words, they react to a deteriorating situation. But inevitably, without a systems thinking perspective, these reactions are based on the aforementioned invalid policies or procedures---the result of an entrenched world view---so those reactions are often not effective. They may even exacerbate an already unfavorable situation. As reality diverges further from the organization's orientation, reactions become progressively less effective. The Solution The solution should be obvious: make a concerted effort to seek out new information (observe), then try to fit it into our world view, adjusting (orient) the world view as required to logically accommodate the new information. Done properly, effective orientation reduces the mismatch between perception and reality, pointing leaders toward revising policies and procedures that are more effective in the real, competitive world. Richards points out that “since what you're looking for is mismatches, a general rule is that bad news is the only kind that will do you any good.” [5:63] What this means is that we must be actively gathering information, looking for mismatches between it and our orientation, and adjusting our world view, and the policies that spring from it---and do this faster than our competitors---in order to gain tactical or even strategic advantage. Thinking about all this "learning business," is it clear now how Delta, United, American, and the other airlines have failed to observe and orient properly? So, how is your organization doing at learning? "You live and learn. Or you don't live long." --Lazarus Long [4] "The ability to learn faster than your competitors may be the only sustainable competitive advantage." --Arie de Geus [7:4] ENDNOTES 1. “CEO's cost-cutting memo sends stock into dive,” USA TODAY, Thursday, July 28, 2005, p. 3B. 2. “Delta hopes fliers will flock to new web site,” USA TODAY, Friday, July 29, 2005, p. 6B. 3. Hammond, Grant T. The Mind of War: John Boyd and American Security. Washington, D.C.:The Smithsonian Institution Press, 2001. 4. Heinlein, Robert A. The Notebooks of Lazarus Long (illustrated by D.F. Vassallo). San Francisco: Pomegranate Artbooks, 1995. 5. Musashi, Miamoto. A Book of Five Rings (Victor Harris translation). London: Allison and Busby, 1974. 6. Richards, Chet. Certain to Win:The Strategy of John Boyd Applied to Business. Xlibris Corporation, 2004. 7. Senge, Peter. The Fifth Discipline: The Art and Practice of the Learning Organization. NY: Doubleday, 1990. (c)Copyright 2005,2006, H. William Dettmer. All rights reserved. Permission granted to Jeff 'SKI' Kinsey to reprint on SKI's Throughput on Command.