Viable Vision

Transforming Total Sales into Net Profits

Gerald Kendall

• Publisher: J. Ross Publishing
• Year: 2004
• Print ISBN: 9781932159387
• eBook ISBN: 9781604276169
• Edition: 1
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

Developed by industry guru and mega best-selling author Eli Goldratt, Viable Vision is a proven strategic plan and approach that lays out the steps to transform an organization's current total sales into net profits within 4 years. This book explains the Viable Vision concept and provides readers the proven frame of reference and roadmap for achieving exponential growth in profits, without relying on minor miracles such as a new product breakthrough.Supported by significant testing and proven results in real companies, it is now conceivable that even large companies can grow profits at double digit rates. Concisely packed with the proven principles of 25 years of scientific research and real-life application, readers will learn about the holistic implementation of constraints management in strategic planning, operations, supply chain/logistics, sales and marketing, project management, technology, metrics and finance. Whether or not you are one of the millions of people who have read "The Goal" or other fine books on the Theory of Constraints, you will gain enormous benefits from reading this book. Viable Vision is a must read for anyone interested in rapidly increasing their company's net profits.

Part I

The Premise for
a Viable Vision

1

Improve!

“We want to put our organization
on a process of ongoing improvement;
we cannot do that while allowing
common nonsense to govern people.”

“When I do an analysis of a company, I am satisfied only when I clearly see how it is possible to bring the company to have, in less than four years, net profit equal to its current total sales.”

I know of just one person in the world who would not only make such an arrogant statement but also mean it, and he was sitting in my hotel room in New York City. Dr. Eli Goldratt,* an innovative thinker who is known to have invented breakthrough solutions to industry problems, is someone I deeply respect. But even smart, respected people sometimes make totally outrageous statements.

Eli and I spent the entire week in New York to discuss how to move companies much more quickly towards exponential improvement using a powerful concept that he termed “Viable Vision.” During the week, my emotions bounced between skepticism and excitement. My excitement took over when I realized that even if I could not bring every organization to have net profit equal to sales within four years, the premise was sound. Viable Vision, with its unique approach to customers and markets, would move any organization towards an improvement level that was beyond anything I had ever thought possible before. It reminded me of what the quality movement had done for Japanese companies in the 1980s, except this concept went even further.

But here I was, two weeks later, facing someone far more skeptical than I was. Jordan is a senior manager at one of the world’s largest consulting firms. His company once had a huge practice in implementing technology (mostly enterprise resource planning systems), but over the past few years, the practice slid rapidly downhill. Even worse, many of the clients complained that their tens of millions of dollars spent on consulting and technology had failed to yield any bottom-line benefits.

Jordan’s job was to find new ways for the worldwide practice to deliver real bottom-line value to clients. His initial response to Eli’s premise was, “For the average company, you are talking about more than doubling profits every year! Most CEOs I know would laugh at such a statement. A lot of companies that I’m working with today are thrilled when they get a 10 percent increase in profits. Is Goldratt serious?”

“Yes,” I said calmly. “He is 100 percent serious.”

“He must be working with companies that have a cure for cancer or some revolutionary new technology,” Jordan offered, but I just shook my head.

“Jordan, he is talking about doing this even in smokestack industries.”

We both sat silent for a couple of minutes. I knew that Jordan could accept what Eli said in the context of one company with some unusual breakthrough, but not as a generic approach. Finally, Jordan asked me for an example. “But Gerry,” he cautioned, “Please make it a struggling company.” He was obviously not interested in hearing about a case where the answer was obvious.

I understood his concern, but at the same time, I was a little annoyed by his motherly warning to use a generic example. I began with the first real case that Eli had described to me, “OK, let’s take a case that Eli has just finished analyzing. It’s a Spanish company that produces power cables and sells them to major clients, like a railroad or an electric utility. In fact, they find most of their business by bidding on major projects.”

Jordan said dubiously, “It sure doesn’t fit every case I know. But we have some clients that sell to projects.”

Undisturbed by Jordan’s doubts, I continued: “The competition in this industry is fierce. This company has suffered tremendously in the past two years from prices going down, to such an extent that they are barely breaking even.”

Jordan told me that in the past few years he had heard these same complaints repeatedly from many of his clients. During the long cycle of economic prosperity in the 1990s, companies within a growth industry built additional capacity, to satisfy not just current demand but also future growth. Then the bottom fell out. The economic downturn resulted in a tremendous excess capacity that forced a price war between competitors.

I paused to check. “Tell me. Is this case good enough for you?”

“Yes and no,” he answered. I could tell that Jordan felt uneasy about the example. He continued: “I agree that there are many companies like the one you described. But if Eli substantiates his claim that these companies could double their profit every year by some major new invention or by replacing bad management, then I don’t think that the example would be relevant to our clients.”

I was not offended by Jordan’s skepticism. “Jordan, you’ve known about Goldratt and about my work using his methodology for many years. You know that the methodology is intended for any company, not special cases. I’ll tell you exactly what Eli found in his analysis and you’ll be the judge. This company has good management. They have succeeded in cutting costs. They have put improvement initiatives everywhere. They have achieved shorter product lead times than their competitors. They knew that they needed to find more customers, so they bid in more regions than ever before, even when their chances of winning were relatively low. By the way, they were not the cheapest solution in the market and they were still winning 30 percent of all their bids.”

“What about new products?” Jordan inquired.

“They put some effort into developing new cables, but this is not an industry like high technology where you are likely to hit some major breakthrough. With power cables, a success story is a new cable that generates another 2 or 3 percent in revenues. And with all their efforts, they were still barely breaking even, which was better than some of their competitors who were losing their shirts.”

After covering every other improvement approach Jordan could think of, he said, “I can’t see any apparent way out for this company, other than hanging on and waiting till the economy comes back. But you’re telling me that with this company, Eli proved his claim? You’re going to show me how Eli found a practical way to make their net profit equal to total current sales in four years, without the economy getting better? OK, I’m listening.”

At this point, I could tell that Jordan was sincerely willing to hear Eli’s analysis. But Jordan also told me that he was hoping that there would be something very unconventional or very unique about this company. Otherwise, the implication was that his firm and many of the CEOs they had worked with over the past ten years might have missed a major opportunity to improve.

I explained how Eli began his search for a solution. “Any company that has only 30 percent market share and excess capacity should first look in their current markets to increase sales. The answer has to come from providing more value to the customer. But the big question is: With a product like power cables supplied to projects, where is this value? It can’t come from reducing prices.”

A price cut is the easiest thing for a competitor to copy, provided that the competition has the margins and cash flow to sustain the war. But Jordan wanted to understand why Eli was so sure that reducing prices wouldn’t help at all.

I explained, “What do you think the cost of the power cables is, relative to the cost of construction of the new train line or putting electricity into a whole neighborhood?”

Jordan guessed, “Probably a small fraction of the total project cost?”

“Precisely,” I responded. “In fact, this is true for many customers in any industry who purchase materials for a project. If several suppliers have equivalent products at almost the same price, what impact does the price of your product have on winning a deal?”

“For the purchasing agent it could be a factor, but as far as the project manager is concerned, unless there is a huge difference in price, it doesn’t help,” Jordan answered.

“Correct!” I exclaimed. “So if you rely on winning many bids only by being cheaper than the competition, your chance of doubling your profits is about as great as the chance of finding a snowflake in hell. But in your answer, you did identify the right focus - the project manager. Many project managers complain bitterly about lead time, especially for products where the specifications often change at the last minute.”

Jordan interrupted, “Gerry, wait a minute! You told me before that the cable company already had excellent product lead times. Don’t the project manager complaints contradict what you said?”

“C’mon, Jordan. You know that every project suffers from last-minute changes. In large projects, the project manager comes under tremendous pressure to renegotiate delivery schedules and sometimes even specification changes with their vendors. At the same time, management is still holding the project manager accountable to the due date.

“Even though this cable company is above the industry average in lead time performance, we’re still talking months. But changes in cable specifications happen shortly before the cable delivery is due. No cable company in this industry can turn its operation on its head every time a customer calls with last-minute order changes. So order changes are accepted, but with a long delay in the delivery. Now can you imagine what the project manager has to contend with?”

“I know from my own experience,” Jordan interjected. “If the power cable is critical and it is delayed, the entire project is delayed. My clients, like shipbuilders and steam generator manufacturers, tell me that such material delays can easily cost a project a delay of weeks and millions of dollars in terms of lost revenue or cost overruns.”

“Correct,” I said. “So what must the cable company tell their project management customers to close this deal?”

Jordan offered, “The project manager must be allowed to finalize the cable specifications a short time before the delivery due date without any penalty whatsoever. Of course, the cable company must commit to delivering within a much shorter lead time.”

“You are so right,” I exclaimed. “And if you go and promise this to the customer, will they buy from you with no reservations?”

I had learned from Eli that simply solving a customer issue, even with a breakthrough, is not enough to close a deal. If the supplier’s promise is to cut lead time by 10 percent, the buyer probably would not have serious second thoughts. But this commitment to deliver in less than half of the industry standard lead time lacked credibility. Jordan answered, “No, Gerry. Any salesperson can promise an aggressive due date with good intentions, but as a project manager, I would not put my credibility on the line strictly on a salesperson’s promise.”

I was pleased with Jordan’s answer. “True, so what must you do, over and above your promise, if you want to make this offer compelling?”

Jordan was stumped, so I revealed Eli’s answer, one that I had used successfully in other cases. “You must offer, in writing, to pay your customer penalties if you are late on delivery. But there is a big catch!”

I remembered how uneasy I was when Eli shared the rest of this answer, so I watched carefully for Jordan’s reaction as I spoke. “If you offer to pay a 10 percent penalty based on the cost of the cable, it will show very little commitment to the project manager. Remember, the damage to the project is not according to the cost of your material, but rather according to the delay of the project. So you must offer to pay a much larger penalty, recognizing the damage to the project. Offer to give up 100 percent of your profit on the order and the project manager will believe you are serious.”

Jordan speculated that to any project manager such an offer is probably like a dream come true! This company would win many more bids with this approach and doubling profits was a definite possibility. Even better, the company could take the same successful offer and use it in other geographic areas. He could see the probability of meeting Eli’s claim, but he also suspected the same huge financial risk that I saw initially.

“Gerry, the only way that such an offer is possible is to figure out how to address the lead time issue. And that is far from a triviality.”

“Fine,” I concluded. “I agree. The logistics must work perfectly the vast majority of the time. I will show you all that. But first, I have a question about this case: Why couldn’t this company find the answer for themselves? The answer does not rely on anything unconventional. Yet so many companies look at their situation as tremendously complex. The key…”

“Gerry,” Jordan interrupted, “Before we get into all that, I must tell you that I’m not yet convinced that Eli’s claim can be applied to most companies. I admit that you’ve given one generic example for companies that sell to projects. True, there are many companies like that, but I have many clients that don’t fit that mold. Do you have another case?”

“Of course!” I answered. “I have several. But I will only share another case if you promise to discuss my question after that!” Jordan also wanted to understand why his clients and his firm of thousands of management consulting experts overlook such opportunities, so he agreed.

---

* Goldratt is the author of the multimillion-copy bestselling book The Goal and several others, including Critical Chain, Necessary But Not Sufficient, It’s Not Luck, The Haystack Syndrome, and The Theory of Constraints.

This book has free materials available for download from the Web Added Value™ Resource Center at www.jrosspub.com.

2

Viable Vision

“Within any complexity,
there is an inherent simplicity
that governs the throughput of any organization.”

I started to describe the second company as a different power cable company.

“Gerry,” Jordan immediately interjected. “Please don’t give me another story about a cable company.”

Ah, I thought, ...

Table of contents

• Cover
• Read the Reviews
• Title
• Copyright
• Table of Contents
• Preface
• About the Author
• Acknowledgments
• Web Added Value™
• Part I: The Premise for a Viable Vision
• Part II: The New Frame of Reference
• Part III: The Components of a Viable Vision
• Part IV: Making It Happen, Now and in the Future
• Bibliography
• Appendix A: Viable Vision Financial Examples
• Appendix B: More Viable Vision Examples
• Appendix C: Other Mini Examples
• Appendix D: Companies Using Goldratt’s Theory of Constraints