Theory of constraints and what it means to a fast growing company

I loved “The Goal by Eliyahu Goldratt”. It changed my life. This is the book that introduced me to the concept of “Theory of Constraints” and taught me how to set goals. It taught me what really mattered to a business. It unashamedly stated the objective of every business is to make money and that you make money when you do one or more of these three things. One could increase throughput, reduce inventory (or investment) and/ or reduce operating expenses. So irrespective of whether I was selling industrial rubber products or revenue cycle management or analytics, I always thought about the business value to the client in terms of these three things. Over the years, I added mitigating risk as a value driver too. One could argue that risk is about the potential impact of certain events on the other three, but I felt it useful to keep it separate.

Our consulting firm helps fast growing technology companies grow by improving their quality of execution. When I was sitting with my co-founder and discussing the different things companies need to do with people, processes and technology, it occurred to me that the difference in their needs is because the bottleneck for growth shifts at each stage. It was an “aha!” moment for us and a return to my old faithful, “Theory of Constraints”.

When a business idea is formed and a business is launched, the first constraint when you are developing a minimum viable product would be time to market. How can you develop something quickly to take to the market while the idea is relevant? Then the constraint shifts to money as you aim for an effective product-market fit. How do you check that with the minimum investment before going outside your immediate circle to raise capital? Then the constraint is access to the market as you seek your first few customers. Then your constraint is people as you need to scale. It could shift to technology or money for a while as you get more clients and are able to attract people but could quickly switch back to people as competition increases in your space. Then as you grow and keep fixing one bottleneck, another takes its place and it is a constant endeavour of every successful business to:

• Know your constraints (what or where is the bottleneck? What is the one thing that limits your ability to grow?);
• Exploit the constraint (if highly skilled people is your constraint, use them for the tasks they are hired for, ensure they are not idle);
• Subordinate all your activities to that constraint (if risk capital is your constraint, focus your energy on keeping a tight lid on spending, hire people who are willing to share the risk and can multitask;
• Reduce dependency on the constraint (if your constraint is highly skilled people, then is there a way to invest in technology and reduce the skill requirement or is there a way to invest in training more people within your team to acquire the skills);
• Repeat (as you elevate your constraint, the constraint may shift to something else and you need to determine what it is and act accordingly).

To quote my uncle who was a successful entrepreneur, “there is no one consistent approach to business strategy but one must take appropriate measures for survival and progress over time”. He called it AMSPOT. I see now it was about the shifting constraints and acting in tune with the constraints of that time.

All businesses and especially fast growing ones are well-advised to constantly be honest and aware of their constraints and regularly alter their focus in keeping with the constraint.