Profit From Constraints

When having less provides you with more

By: Andrew Cooke, Blue Sky GPS

Operating in a tight and volatile marketplace is challenging, but it is also full of opportunity.  Companies often look at the constraints on how they have to operate and how they can accommodate this situation.  This is a reactive approach, which limits your opportunities and creates a problem-solving mindset i.e. everything is a problem, rather than an opportunity.

Here we look at a more proactive approach which can create opportunities for you.

The Power of Constraints

Constraints are those factors which restrict or confine you within certain boundaries; as such they limit or regulate your business, its operations and potential results.  Constraints exist at various levels including:

  • Economic – macro-economic effects that you have to operate within, for example the exchange rate, interest rates and the cost of borrowings, trade agreements etcetera
  • Governmental – legislation and compliance regarding working conditions and practices, subsidies, insurance, government expenditure and tax regimes etcetera
  • Industrial – those factors which affect your industry including the level of capacity, industry structure (from monopolies, concentrated to distribute), supply chains etcetera
  • Business – pricing, client retention rate, capacity, employees (number, skills, experience etcetera), number of competitors, level and quality of differentiation etcetera.

Some of these you can influence others you cannot.  But with all of them you have a choice on how to respond – even if your choice is to do nothing you still have made a choice.

These constraints provide an opportunity for you to develop you, your people and your business in adapting to and capitalising on them.

Defining the Correct Constraints

Before you can determine the opportunities you need to clearly define the correct constraints. Be careful not to state the objective or problem too much in the terms of current “legacy” solution to the problem. As Henry Ford supposedly said, “If I’d asked people what they wanted, they’d have said a faster horse.” So avoid defining the problem as “a faster horse” versus “a faster way to travel.”

Types of Constraint

A constraint is anything that prevents the system from achieving more of its goal. There are many ways that constraints can show up, but there are usually only a few underlying and root constraints.  These can be internal or external to the system.

  • An internal constraint – this is when the market demands more than the business can deliver. Here you look to remove those constraints, for example:
    • Equipment: The way equipment is currently used limits the ability of the system to produce more saleable goods/services.
    • People: Lack of skilled people limits the system. Mental models held by people can cause behaviour that becomes a constraint.
    • Policy: A written or unwritten policy prevents the system from making more.
  • An external constraint – this is when the business can deliver more than the market demands.  Here you focus on creating more demand for your products or services.

Andrew’s Four-Step Process for Profiting From Constraints

Step 1: Identify the Constraint

The first step is to identify your weakest link – this is the factor that’s holding you back the most.

Start by looking at the processes that you use regularly. Are you working as efficiently as you could be, or are there bottlenecks – for example, because your people lack skills or training, or because you lack capacity in a key area?

Look at where you see the problem and ask “Why?” up to five times (the Five Whys Technique) to get from the surface problem to the root cause.  This way you can address the underlying problem, rather than dealing with the surface issue, and avoid the problem re-surfacing later elsewhere.  If you have a number of weak factors then use Pareto Analysis (also known as the 80/20 rule) to identify which one, if addressed, will have the greatest impact.

Step 2: Manage the Constraint

Once you’ve identified the constraint, you need to figure out how to manage it. What small changes can you make to increase efficiency in this area and cure the problem, without committing to potentially expensive changes?  Your solutions will vary depending on your team, your goals, and the constraint you’re trying to overcome.

Step 3: Evaluate Performance

Now review how you are performing with the simple changes you’ve put into place. Is the constraint still causing problems? If it is, you need to do whatever you can to solve the issue.  You may need to look at further changes which may take more resources, time, investment or effort to further address.  For example, using a “Magic Wand” question can help achieve this (i.e. “If I could do anything to remove the constraint(s) and improve performance what could I do?”)  Look at the ideas created and then rank them according to suitable criteria.  This will stimulate a good discussion and enable further ideas to be developed, and the most suitable decision to be made.

For instance, do you need to invest in new equipment, outsource certain tasks, or take on more ?

Step 4: Start Over

Once you’ve eliminated the constraint, you can move back to step 1 and identify another constraint. This is an on-going process, not a one-off event, which allows you to continually improve and to address and pre-empty changes in the four areas (Economic, Government, Industry and Business) as they may occur.

So what are your constraints, your priorities and what do you want to achieve?  Work through this process for yourself and see what opportunities you can develop – you will be pleasantly surprised.

To view or download a PDF version of this blog click here.

Share your thoughts and ideas here, or email me at andrew.cooke@business-gps.com.au

If you found this article of use or interest please don’t hesitate to share it with others.

Click here to find out more about Andrew Cooke and Growth & Profit Solutions.

The 7 Questions for Growing Your Business

How you can improve employee commitment and engagement demonstrate respect.

When you are looking to grow your business there are three steps involved: firstly, determining what your business will look at a given point in the future; secondly, what the business currently looks like; and finally, how you are going to bridge the gap between the two.

I always begin by looking at what I want the business to look like in the future. Why? The future does not yet exist, so I have the opportunity to create it from scratch. The future is not just an extrapolation of today – it is new and exciting! Your future can include current offerings, adapted offering, new offerings or offerings that you no longer make available.  Similarly with your customers you may be serving existing, adjacent or new customers, or you may no longer serve some of your existing customer groups. In short, starting with tomorrow frees you from the constraints of thinking of today.

At the heart of growing your business are two key outcomes you are looking for:

  • Growth – you are looking to grow and develop your business
  • Profit – you want your business to be more profitable in the future to make it sustainable

Driving these two outcomes are seven areas, the seven Ps, which surround them. This is shown below.

Th e 7Ps  Driving Growth and Profit

  1. PurposeWhat is your “Why”? – what is the reason for being for your organization that inspires and engages you and others?
  2. PatronsWho are you customers? – what customer segments do you serve and with which offerings?
  3. ProblemsWhat issues do they have? – what are the problems they need help with, or the jobs they are looking to get done?
  4. ProductsWhat are our solutions to their problems? – how do you help your customers with their problems in a way that the customers sees as valuable, which differentiates you from your competition and which will make you money?
  5. ProcessHow do we deliver the solution? – this includes everything that is involved in creating, supporting and delivering the solution. This includes everything within your business, and with the other businesses you work with or through in creating and delivering the solution.
  6. PeopleWho do we need to run the process? – what people do you need and in which positions, and what skills, capabilities and attitudes do they need to have to do the job efficiently and effectively?
  7. PromotionHow do we promote ourselves to our Patrons? – how do you reach out to your different customer groups and how do they want to engage with you, and what channels are most effective for doing this?
  8. Growth & Profit – this are the outcomes you achieve from getting the above seven factors right, and being able to leverage them effectively.

Use these questions as outlined in the table below to help you think this through in three steps:

  1. WHERE do you want to be? (future)
  2. Where are you NOW? (present)
  3. HOW will you bridge the gaps? (strategy)

So don’t wait – start this now. Share your thoughts and ideas with your colleagues and see how you can create your own future and bring it back to today!

To view or download a PDF version of this blog click here.

Share your thoughts and ideas here, or email me at andrew.cooke@business-gps.com.au

If you found this article of use or interest please don’t hesitate to share it with others.

Click here to find out more about Andrew Cooke and Growth & Profit Solutions.