DENNISWRIGHT
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the_principle_of_leverage.pptxThe Principle of Leverage
When we create our own “Market Limitations”
Often leverage follows the principle of economy of means
The best results come not from large scale efforts but from small well focused actions
The System Archetypes help us see this
Story time
The Principle of Leverage
New electronic company, mid 80’s
Engineering know how = niche lockdown
New computer entry to market
First 3 years
Sales doubled annually
Backorders in year 2
Steady Mfg. growth wasn’t offsetting the demand
Originally promised to deliver machines within 8 weeks
However, with pride, top Mgt. tells customers…
WonderTech
Top Mgt. knew they had to add production capacity
Six months of study tell them to expand
To ensure continued growth revenue was pumped back into Sales and Marketing
Direct Sales force doubled in number in year 3
Hiring
Training
WonderTech
Yet, sales started slumping at the end of year 3
Year 4, revenue tanks, but the factory comes on-line
What to do with all the new people???
So… who comes under fire?
VP of Marketing and Sales
Actions?
Sell! Sell! Sell! Fire low performers, increase sales incentives, special discounts, new advertising!
WonderTech
Sales rise again!
Hero time! The Golden Boy!
Rapidly rising orders again!
Discussion begins on expansion… again.
Mgt.’s decision is?
So the wait is on. Again…
Result?
Orders build, deliveries are delayed, orders plummet… again.
WonderTech
Top Mgt. started to worry about competitors now entering the market
Introduction of ill conceived improvements
Hard push on marketing
But the “Wonder” was now gone
WonderTech collapsed
WonderTech
What happened? (Rhetorical)
For every 10 start-up companies half will disappear in the first 5 years, 4 survive into he 10th year, 3 into the 15th
And whenever a company fails people point to events to explain the “causes”
Product, management, loss of key people, competition, economy..
WonderTech
The deeper systemic causes are not seen
WonderTech, like you, had all the information they needed
As a Systems thinker you look for clues to any of the Archetypes
Start with the obvious;
Growth
Eventually though the growth slowed and even halted
“Limits to Growth”?
WonderTech
There were many possibly reinforcing processes that could have produced the rapid growth; such as?
Investment in products, advertising, word of mouth
But one was critical
The reinforcing process created by reinvesting revenues into the Marketing and Sales force
More sales, more revenues, more hiring, more training, more sales
WonderTech
Of course there also has to be a Balancing Loop (force)
Something had to slow sales
Sales only slow when a market is (3 Scenarios):
Saturated
Competition grows
Customers are disenchanted
What was the deciding factor here?
Long delivery times
WonderTech
As backlog increased, based on production times, delivery times increased
Limits to Growth….
And the worst thing you can do is?
Push harder on the reinforcing process
But that’s what they did!
They tied to ignite the “Engine of Growth” through sales, marketing and improvements
None of which had any leverage
WonderTech
Why wasn’t the balancing process noticed?
Sales, profits, ROI, market share
Top Mgt. never paid attention to the customer delays
Delivery times had been getting longer for a year and a half
8, 9, 10, 12 weeks!, and the sales persons simply acknowledge the delay
Word of mouth travels FAST
WonderTech
Classic learning disability of being unable to detect the cause because of the time delay
If you wait until the demand falls off, you’re too late
Through sales and marketing pushes and minor improvements in the product, orders would increase temporarily
Then go worse with each downturn
WonderTech
Gradual decline in health of the “system”
Gradual decline in profits
Crazy money losses during downturns
Workers felt like victims
Classic “Shifting the Burden” Archetype
Who did WonderTech make bear the burden?
As a Systems thinker you first identify the key problem in the system, then the symptomatic and fundamental responses to it
WonderTech
In this instance, WonderTec’s managers didn’t solve the problem of?
Long delivery times. Why how come?
Added manufacturing capacity too slowly
Disgruntled would-be customers “solved” the problem by?
Walking away
And at every upturn that ensued with orders, so did word of mouth as to poor delivery times and customer support
WonderTech
As the “disgruntled customer” process went on, the symptomatic response got stronger and stronger (Shifting the Burden!)
Having been stung by adding capacity in the past they took longer and longer to bring new capacity on-line
By the time Mgt was ready to add to capacity, marketing and sales had relieved the stress for new orders
WonderTech
It was a horserace between two solutions
Symptomatically:
Sell! Sell! Sell!
Fundamentally:
Appease the customer with on-time delivery
And here then is he final resultant:
WonderTech
As delivery times worsened the customer base eroded to those people less sensitive
This meant however they were more sensitive to?
Price!
These customers are less loyal and easily lured away
WonderTech fell to a low-quality, low-price supplier
WonderTech
How could WonderTech have survived?
Where was the original fundamental leverage point?
Eight week delivery time standard!
After 3 years the standard fell to 10 weeks
And continued on this track
WonderTech
If standards are allowed to drift, the firms response is weakened and “the burden shifts” to the disgruntled customers.
The company unwittingly becomes addicted to the limiting of it’s own growth.
You have to, as a Systems Thinker, see the forest AND the trees
WonderTech
