you will be using your critical thinking skills to analyze business issues from the business novel The Goal, and you will evaluate the decisions and actions of the participants in the book—based on concepts

Week 5: What Happens When Disciplines Clash?

Weekly Briefing Background of the Book The Goal During the first half of this course, you explored a broad framework for understanding the dynamics of complex systems, and you examined various tools and techniques for identifying and diagnosing functional (or dysfunctional) systems. Your learning outcomes for this week include:

• Analyze the impact of paradigms on individual perceptions

• Evaluate key concepts from The Goal through the framework of selected course outcomes

As you move into the second half of the course, you will begin to look at a specific, large-scale case study as represented in the book The Goal. This case study shows a number of systems thinking concepts at work and introduces some new content and tools into your vocabulary of systems performance. The Goal tells the story of a hypothetical manufacturing plant (the Bearington Plant) and its associated parent division of UniWare and Unico. Inc. The fictionalized story of Unico, Inc., represents a rich and complex example of organizational change and of systems dynamics within a continuous improvement context. As such, it is an exemplary basis from which to practice the analysis of systems dynamics and performance management. Although fictionalized, those with rich organizational experience will recognize the accuracy of people dynamics and organizational inertia within the book’s "case study.”

[F]iction provides some significant advantages over a conventional business text. Strategy, technology, tangible assets, and conventional resources—all these and more are essential for a functioning business. But it can be said, with no sentimentality, that human beings are really at the core of every organization. A novel allows readers to experience business concepts as actual people might. We can reveal with fairly good accuracy where conflicts can develop, and the resolution of those conflicts. The story becomes a way to better engage the reader, and to explore the ideas as they actually might play out in the reader's own environments. (Jacob, Bergland, & Cox, 2010, p. viii)

So, although the book is a business novel, it has been written in an accessible format to help people learn about organizational change, systems dynamics, organizational conflict, continuous improvement, performance measurement, and performance management. It has also been written so that one can analyze and understand the

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ways in which specific performance management tools and techniques can be implemented and contribute to improving organizational performance. Characters in the Book This list of work-related characters should help you sort out whose who as you go:

Alex Rogo (narrator, and Bearington Plant Manager) Bill Peach (Division Vice President, p. 1) Bucky Burnside (President of UniCo's biggest customer, p.4) Bob Donovan (Plant Production manager, p.8) Johnny Jons (Division Sales Manager, p.14) Granby (Unico Owner, CEO, p.17) Ethan Frost (Division Controller, p. 25) Hilton Smyth (Assistant Division Controller, p.25) Jonah Alex's former professor (p.26) Lou (Plant Controller, p. 44) Stacey Potazenick (Plant Inventory Control Manager, p. 69) Ralph Nakamura (Plant IT and Data Processing Manager, p. 126)

Business Models and the Goals of Business One of the more interesting questions that arise throughout the book concerns the goal(s) of a business. There is a tension between how the senior leadership at Unico measures performance (a focus on cost reduction and efficiencies) and what is actually needed to be profitable and competitive over time. It is argued in The Goal that the primary goal of a business is to maximize profit, or, specifically, that "most important objective was to boost productivity, and to bring down costs” (p. 11); however, if one considers a simple definition that profit is the net between total revenues and total costs, or π = TR-TC, over time, what is the only sustainable way to maintain or increase profits? Can, or should, an organization always seek to maximize profits? Is it always in the interest of the organization to have all of its sub- elements seeking to maximize productivity? Local Maximization vs. Global Optimization This theme of local maximization versus global optimization is an important one to emphasize. Traditional performance management approaches assume that if all the individual local parts are working at maximum “efficiency,” then the whole is optimized. But can this be so? What are the implications of the traditional approach to performance management when one must account for the flow and velocity effects of activities within a complex system?

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Is there a difference between optimization and maximization? There is, and The Goal explores this difference using the theory of constraints as the primary logical framework for analysis. The significant difference between optimization and maximization also relates to the primary goals of a business in the long term. Milton Friedman (1970) argued that the primary goal of a business is to maximize shareholder return, which has been translated by many to mean "maximize profits; however, given your understanding of complex systems and interrelationships that must occur within both a business system, and within the environmental system that the business exists, is "maximization" the proper metric? What should be the goal of a business? What problems are inherent in the definition of the goal, if it is "to maximize profit"? The problem with profit maximizing as the primary goal for a business is that it is not a sufficient goal for the same reason that optimizing is more important than maximizing. Most profit-maximization points of view and measurement assessment are too “short- term.” And because they are too short-term, the proper decision-making framework for ensuring the longer-term health of the system is ignored. You can jump ahead to the definition of the goal given on page 295 of The Goal, where you will find that “he goal [of a business] “is to make more money, now, and in the future.” (That is in support of the organization's mission/purpose.) The context of this goal and business model is actually very different from just maximizing profits. The goal is also a means to achieving the organization’s mission, which must be more than making money if talented and ethical people are to remain invested in the business. This goal is systemic, long-term, and never-ending (one never reaches the end of “more”); however, it allows for the fact that there will be times where re-investment in the system (which may, in fact, minimize "profits" for some time period) is necessary and appropriate. One must balance the needs of the future against the imperatives of "now.” Performance Measurements: False Dichotomy of Efficiency vs. Effectiveness Another important theme that emerges in The Goal is that local efficiencies are not the fundamental prerequisite for optimal organizational performance. From a theory of constraints perspective, productive behavior is only that behavior or activity that leads you toward your goal. In this case, the goal is to make more money now and in the future (Goldratt, 2004). Yet, for an activity to be productive, it must affect the systems' constraint. In other words, it must touch on the "limiting factors" within the organization. As such, from a systems point of view, activities that support the flow of work within the constrained resources of the organization are considered both efficient and effective. You will see a fundamental conflict emerge between the managers at UniWare’s headquarters and the theory of constraints advocates on this very point. Nearly all of the UniWare computerized performance management systems are set up to measure local

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efficiencies, and the UniWare managers expect that as each local activity is made more efficient, total system-wide profits should be maximized. Given your understanding of complex systems, does this reasoning hold sound? Again, reflect on the fundamental equation on how profits are created over time:

π = TR-TC

Systemically, which variable above is more likely to be "systems limited"—the revenue creation elements or the cost elements? References Friedman, M. (1970, September 13). The social responsibility of business is to increase its profits. New York Times Magazine, 122–126. Goldratt, E. M., & Cox, J. (2012). The goal: A process of ongoing improvement (30th anniversary edition). Croton-on-Hudson, NY: North River Press. Jacob, D., Bergland, S., & Cox, J. (2010). Velocity: Combining Lean, Six Sigma, and the theory of constraints to achieve breakthrough performance. New York, NY: Free Press.

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