A couple days ago there was an interesting post on Clark Ching’s blog, which focuses on theory of constraints topics. He was quoting another guy, Steve Holt, who apparently spends his spare time browsing through old thesis papers from MIT’s Leaders for Manufacturing program, which is a dual master in engineering and MBA. I’ll pause a second to allow our friend Mark Graban at the Lean Blog to pipe in with a "hey, I went there!" Ok, time’s up.
Aside from Mark, some other bright people also went through that program including Ted Piepenbrock, who had a thesis in 2004 titled Enterprise Design for Dynamic Complexity: Architecting and Engineering Organization Using System and Structural Dynamics. Whew, now that’s a title that probably wouldn’t make it onto the beach reading list! So let’s simplify it to something like Demand Quake Isolators. Now it at least sounds like some cheesy science fiction.
Scary name aside (especially for those of us who didn’t exactly have a fun time in structural dynamics class), the premise is interesting. Simply put, Piepenbrock compares buildings to businesses, then earthquakes to sudden changes in customer demand, and finally develops an analogy to the base isolator which is used to reduce the affect of earthquakes. Let’s start with premise comparison.
Ted is a civil engineer by training and the thesis makes the parallel throughout of building design and company design. Specifically, he uses the principles of earthquake design to draw analogies and conclusions with respect to company design. Earthquakes jolt a building with random waves of energy. Similarly, customers can "jolt" a company with waves of random demand. You can design a building to resist earthquakes by making it strong, so that the energy is transferred to the building and the building can hold up to it. Similarly, a company can be designed to adapt to and follow market demands.
But analyze either situation wrong and you end up with a problem.
But, earthquakes are unpredictable. If your building is over designed it means you’re using way more material than you’d need to. If it’s undersigned it becomes rubble. Likewise, a company that tries to rapidly follow the market enters into boom and bust cycles. It is nearly impossible to accurately predict the "just enough" growth rate when times are good. He says that example companies are Ford, GM, and Boeing. All of them have had boom and bust cycles throughout their corporate histories typified by hiring and firing binges and buying and dumping assets as they alternatively over and under react to the market.
Yep, we’ve written about the problems with those companies. Chasing top line growth without focusing on the bottom line and creating bizarre supply chain contraptions. So what’s the other side of the coin?
But, what do you do if you want to have a building survive earthquakes and you don’t have a lot of extra material to use? You can build in a way to isolate it from the earthquake energy. The simplest way to do that is with the use of a base isolator, a means by which the building can transfer some of the earthquake energy into pendulum energy. It still shakes, but at a slower frequency and not as much.
Ok, that works for buildings, but what about businesses?
Piepenbrock says that you need to find a way to isolate yourself from the variation of the market so that you can always sell your product no matter what the market conditions and always provide a safe, no lay off, environment for your employees. So, you could provide a business base isolator by keeping the constraint internal to your company (always keeping a demand for the product and growing slowly primarily by internal productivity improvements), ensuring that you have a no lay off practice so that employees are dedicated to improvements, and being tightly connected to what consumers want so that your products/services are in high demand. And that’s precisely what Piepenbrock says that successful companies do. He includes on the list: Toyota, Southwest Airlines, and others.
Now keep in mind that this comes from a TOC-oriented blog. But there is a lean manufacturing component.
"It is clear that uncommon corporate performance can be achieved through the counter-intuitive enterprise designs. Toyota and Southwest Airlines have both achieved stock market capitalizations greater than the sum of all of their major competitors in recent years through the adoption of lean enterprise architecture.
Their success lies in the counter-intuitive notions of extending the boundaries of their respective enterprises to include those stakeholders which can influence shareholder value, and then work to build long-term win-win relationships with them. They have also demonstrated the courageous restraint by growing (largely) organically at the rate which can sustain learning within their core strategic assets, their people.
They have designed into their "integrated enterprise teams" (IETs) a base isolation fuse which mandates that they manage to the signal of the customer markets and not the noise of the capital markets. The irony is that they are highly valued by those same capital markets, that it is in their enterprise architecture to ignore. They recognize that maximization of shareholder value is achieved via management of stakeholder value."
I apologize for the long quote, but there’s a lot of good meat in it. Let’s review three of the most important.
… extending the boundaries of their respective enterprises to include those stakeholders which can influence shareholder value, and then work to build long-term win-win relationships…
Contrast that to how GM, Ford, and others like to bash their suppliers into submission on price reductions.
… growing (largely) organically at the rate which can sustain learning within their core strategic assets, their people…
People, and especially the knowledge and creativity of those people, are the core of successful organizations.
… they manage to the signal of the customer markets and not the noise of the capital markets…
A long-term focus on the customer, not a short-term focus on quarterly financial results. Far easier said than done, but it is critical for long-term growth.
Maybe these MIT types do know a little something. At least occasionally. Although I don’t have the attention span to read a 300-page thesis, I may have to pay more attention to Mark’s blog posts!