How's my Luck now?

Reflections, views and descriptions during my stay at IIM Lucknow from July 2004 to March 2006

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Location: India

Friday, May 06, 2005

'It's not Luck'

This is the fourth Eliyahu Goldratt novel (Gower, 1994) that I completed a couple of days ago. It is advertised as "a sequel to 'The Goal'", but it is one only insofar as it retains many of the characters of 'The Goal'. Alex Rogo, the protagonist of 'The Goal' is now executive Vice-president of a diversified group of three companies inside UniCo - a printing company, a pressure-steam equipment company and a cosmetics company. Rogo's companies are once again on the block for sale at a pittance, even though, using TOC techniques, the companies have turned around from big losses to break-even or small profits.

Rogo is not convinced that the companies should be sold and reluctantly accompanies two board members - Trumann and Doughty - to Europe to negotiate with prospective buyers. On the trip, Rogo uses Goldratt-developed Thinking Processes to come up with the reality faced by businesses in today's competitive environment. According to him, the one major cause for all
the problems of businesses and their customers is that: Managers make decisions to achieve
local optima.

So what are these Thinking Processes? These processes use tools using which one can verbalize common sense. Normally, something that is 'common sense' is actually very difficult to express in words. These tools help you do that.

The tools include: the Current Reality Tree (which I've referred to in an earlier post) helps to connect all problems of every stakeholder in an industry (called Undesirable Effects or UDEs) to one or two major causes by a tree of cause-effect relationships; the Cloud, which graphically depicts a conflict encountered in achieving an objective and helps one decide how to break the conflict (which is never by compromise, according to Goldratt); the Future Reality Tree, which maps a desired future scenario and involves generation of negative branches (possible obstacles) which can then be trimmed by appropriate steps; the Transition Tree, which maps the steps to be taken for moving from the Current to the Future Reality Tree; the Prerequisite Tree, which depicts the absolute prerequisites for a particular desired situation to occur.

These tools are used, then, by Rogo and each of his company presidents and people, and they are able to generate breakthrough marketing solutions for their respective companies, which
can help them generate substantially higher profits, and be sold for a much better valuation.

The book ends with Goldratt's view of strategy (verbalized through Rogo): strategy consists in developing a decisive competitive edge (using the Thinking Processes) in a chosen market, and then segmenting the market, entering these segments so as not to penetrate them fully and using these segments as a hedge against market risk. That is, if one market segment goes down, the organizational resources can be diverted to serving the segment that is peaking. Quite intriguing. But what happens if there is a depression and the whole market goes down? This remains unaddressed. Also, one will have to be constantly on the watch for fundamental
market changes which might need us to develop new competitive edges from time to time.

Intriguing as this might seem, actually the concept of developing organizational resources to enter a set of similar markets or segments is the same as the idea of a 'core competency' propounded by Prahalad and Hamel. And also, as the book shows, the real increase in profits for the companies came when they changed their view of the market, their strategic positioning, and not just by the operational improvements carried out earlier. This is consistent with Michael Porter's statement that 'operational effectiveness is not strategy'. So, to me, Goldratt's views on strategy do not seem as unconventional as his views on operational effectiveness. But the way Goldratt has put it, it seems he believes his ideas are very novel. Perhaps I haven't understood his views fully.

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