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Improving market orientation: thetheory of constraints-based frameworkMahesh C. Gupta a , Gurjeet Kaur Sahi b & Hardeep Chahal ba Department of Management , University of Louisville , Louisville ,KY , USAb P.G. Department of Commerce , University of Jammu , Jammu ,IndiaPublished online: 29 May 2013.

To cite this article: Mahesh C. Gupta , Gurjeet Kaur Sahi & Hardeep Chahal (2013) Improvingmarket orientation: the theory of constraints-based framework, Journal of Strategic Marketing,21:4, 305-322, DOI: 10.1080/0965254X.2013.790467

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Improving market orientation: the theory of constraints-basedframework

Mahesh C. Guptaa, Gurjeet Kaur Sahib* and Hardeep Chahalb

aDepartment of Management, University of Louisville, Louisville, KY, USA; bP.G. Department ofCommerce, University of Jammu, Jammu, India

(Received 21 August 2012; final version received 19 February 2013)

The existing literature affirms an improved payoff in business performance when abusiness unit displays a high degree of market orientation (MO). However, theliterature is still scarce in providing market managers a systematic and effectivemechanism for implementing and improving market orientation. In this paper, wepropose a framework based on the theory of constraints (TOC) as a mechanism toachieve an optimal degree of market orientation and thereby accomplish the ultimategoal of maximising business (financial, employees and customers-related) outcomes.We discuss how three dimensions – methodology, measures and mindset – of theframework relate to market orientation using a well-known TOC case study. Finally,we conclude our paper with research directions for further strengthening therelationship between MO and TOC and making market orientation truly a firm-wideendeavour as intended and acknowledged in the marketing literature.

This paper demonstrates that TOC (1) methodology ensures that management effortsare exerted to optimise the business unit’s constraint which is limiting its ability toincrease sales and improve financial performance; (2) measures guide and rewardmanagement initiatives across the functional areas; and (3) mindset ensures thatmanagement decisions result in increased business performance without jeopardisingemployees, customer and competitor orientations.

Keywords: market orientation; theory of constraints; performance measures; cross-functional teams; continuous improvement

Introduction

Recently, business concepts such as market orientation (MO), relationship marketing,

organisational learning, total quality management and the theory of constraints (TOC) are

getting significant attention from academicians and practitioners in the contemporary

business literature. Among these, TOC is comparatively less researched and has yet to

develop its roots, specifically in the marketing literature. Through a series of business

novels, for example, The Goal, and It’s Not Luck, Goldratt has put forth his theory of

constraints (Goldratt, 1994; Goldratt & Cox, 1984), which argues that a business unit’s

financial performance is always limited by its constraint (one or at most a few). From the

TOC perspective, although such business concepts might improve business performance of

the companies, adopting any of these without having a good understanding of the location

of their constraints and how these constraints are impacted by such adoptions would result

in sub-optimal and sometimes dismal business performance (Goldratt, 1990a).

Such a contention by TOC may be discomforting for marketing scholars and

practitioners who believe that market orientation, the focus of this paper, is one of the most

q 2013 Taylor & Francis

*Corresponding author. Email: gupta@louisville.edu

Journal of Strategic Marketing, 2013

Vol. 21, No. 4, 305–322, http://dx.doi.org/10.1080/0965254X.2013.790467

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effective strategic management practices to improve business performance. Based on the

seminal work by Kohli and Jaworski (1990) and Narver and Slater (1990), a business

unit’s market orientation (MO) level demonstrates its ability to collect customers’ and

competitors’ related market intelligence, disseminate this intelligence across departments

and use this intelligence across functional areas to create distinctive value for its

customers, subsequently ensuring long-term profitability. Since then, a considerable

amount of conceptual and empirical research has been directed at understanding what

market orientation is, what it consists of and what its relationship with organisational

performance is (Ellis, 2006; Kirca, Jayachandran, & Bearden, 2005; Kotler, Armstrong, &

Cunningham, 2005; Lafferty & Hult, 2001).

However, despite significant development of the MO concept, an important question

left unanswered to the satisfaction of managers is, ‘How do we go about improving a

business unit’s market orientation?’ The need for research explaining how top

management can diffuse MO across functional areas at a firm level and how market

oriented firms identify and prioritise the areas for improvement has been widely

recognised. A few quotes are as: ‘the most important question to practitioners becomes

how does one increase and sustain a market orientation?’ (Narver & Slater, 1990, p. 34);

‘A lot more work has to be done in coming up with practical suggestions for enhancing

market orientation’ (Jaworski & Kohli, 1996, p. 131). ‘We need to develop an

understanding of what change mechanisms/interventions can be used to increase MO in

firms with a low level of it and maintain MO with a high level of it’ (Lehmann, as cited in

Deshpande, 1999, p. 5). Recently, Gebhardt, Carpenter and Sherry (2006), Lam, Kraus

and Ahearne (2010), and Van Raaij and Stoelhorst (2008) concluded that there is a dearth

of research addressing problem-driven and practical needs of managers and more

specifically, helping managers make their business unit more market oriented. In this

paper, we attempt to fill this void from a manager’s perspective, and the following lines

from Shapiro (1988, pp. 3–4) provide a glimpse into this perspective very well:

The top management team of the Wolverine Controller Company that manufactures controlequipment had gathered for a crisis meeting as market share was down, sales were off andearnings were suffering. After listening to the corporate Vice Presidents representing theirspecific functional areas of marketing, manufacturing, finance, R&D, the CEO interjected,‘You all put in a lot of time talking past each other and defending your turf . . . you have totake a more integrated, global view. It’s my job to get all of you coordinated but it’s also thejob of each of you . . .The only way we can get out of this mess is for us to become customerdriven or market oriented . . . which means that strategic and tactical decisions are made inter-functionally and inter-divisionally . . . Divisions and functions make well-coordinateddecisions and execute them with a sense of commitment’.

Finally, from a pedagogical perspective, it is marketing educators’ responsibility to

prepare twenty-first century marketers who are visionary, that is, able to look ahead with a

high degree of precision and understand target markets’ needs. We must rethink the core

concepts, that is, the four P’s (product, price, place and promotion) and the three C’s

(company, customers, and competitors) covered in our curriculum and supplement them

with more diverse concepts (e.g. market orientation) demanding synergies, alliances and

process-based skills development (Cooper & Loe, 2000; Koch, 1997; Pharr & Morris,

1997).

Thus, the purpose of this paper is to introduce a TOC-based framework that managers

can employ in their decision-making process to improve the MO of a business unit and

thereby demonstrate a complementary relationship between MO and TOC. The structure

of the paper is as follows. The next section introduces TOC concepts and an integrated

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framework. The third section introduces a company (popularly called the PQ Company in

operations management literature) and a corresponding Excel-based model that will be

used in the next section to analyse various decisions. The fourth and main section

discusses how various strategic and tactical decisions are made following the proposed

framework, which improves the level of MO more systematically and objectively. Finally,

we acknowledge the limitations of the paper and discuss future research directions.

Theory of constraints: an integrative framework

The theory of constraints, developed by Goldratt through a series of business novels, for

example, TheGoal, It’s Not Luck (Goldratt, 1992, 1994), has started gaining acceptance and

popularity among both academicians and practitioners. Besides a number of business novels

by Goldratt and books by other independent scholars (e.g. Cox & Spencer, 1998; Kendall,

1998), a significant number of journal articles relating to TOC, including its history

(Gardiner, Blackstone, & Gardiner, 1994), concepts and categorisation (Cox & Spencer,

1998; Fawcett & Pearson, 1991; Ronen & Starr, 1990; Spencer & Cox, 1995), review of

literature (Mabin & Balderstone, 2003; Rahman, 1998) and applications in areas such as

supply chain management, enterprise resource planning, sales and marketing, human

resource management, project management and strategic planning (Blackstone, 2001;

Boyd, Gupta, & Sussman, 2001; Goldratt, Schragenheim, & Ptak, 2000; Gupta, Boyd, &

Sussman, 2004; Kendall, 1988; Smith, 2000) are all seen in the management literature.

More specifically, from the service industry perspective, the TOC implementations have

been reported in a broad range of services (Ricketts, 2007), including the banking industry

(Bramorski, Madan, & Motwani, 1997; Motiwani et al., 1996; Reid, 2007), the health care

industry (Motiwani et al., 1996), the insurance industry (Eden & Ronen, 1993; Taylor &

Sheffield, 2002), the food industry (Adelman, 1995; Reid & Cormier, 2003), the retail

industry (Goldratt, 1994; Watson & Polito, 2003) and military organisations (Guide &

Ghiselli, 1995; Ronen, Gur, & Pass, 1994; Srinivasan, Jones, & Miller, 2005).

Mabin and Balderstone (2000), based on their meta-analysis, concluded that TOC

enhances business performance in terms of reduced inventory, improved production times

(leadtime) and cycle time, which subsequently improves economic/financial performance.

The basic premise of TOC is that the performance of a business unit is limited by its

constraint(s) that needs to be managed by implementing a change process at three levels

(three M’s):mindset of the business unit;measures that drive the business unit; andmethods

employed within the business unit (Goldratt, 1990b; Gupta et al., 2004; Srikanth &

Robertson, 1995).

The underlying mindset of TOC stipulates that the organisation should devote its

energy to promote initiatives consistent with the ultimate goal of making money (which is

not the same as saving money). Goldratt (1994) further clarifies that there are at least two

necessary conditions that must be adhered to: (1) providing a safe and secure work

environment for employees now and in the future, and (2) satisfying the market needs now

and in the future (Figure 1). As implied by the arrows in Figure 1, any of these can be

considered the goal (to avoid a tug of war across functional areas) as long as the other two

are considered necessary conditions. From marketing function’s perspective, the first

necessary condition is related to a body of literature termed as internal market orientation

or IMO (see, for example, Gounaris, 2006; Lings & Greenley, 2005) and the second

necessary condition refers to markets in a broader sense (including suppliers, customers as

well as competitors). By specifically acknowledging these two necessary conditions, we

believe that TOC demonstrates its compatibility with MO and IMO concepts. In TOC, the

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goal of making money is preferred mainly because it is quantifiable and importantly, the

impact of strategic and tactical decisions across functional areas is measurable.

The TOC proposes three company-widemeasures (TIOE): (1) Throughput – a measure

of money coming in; (2) Inventory – a measure of money stuck inside a company; and (3)

Operating Expenses – a measure of money going out (see Figure 2 for precise definitions).

These global measures are financial in nature relating to conventional measures such as net

profit and return-on-investment, easy to apply at any level of an organisation and ensure that

local decisions (in all functional areas or departments) can be evaluated in terms of their

financial impact on the goal of making money in an organisation (Goldratt, 1990a). As

discussed in detail later in the paper, of these three measures, throughput is regarded as the

most important measure (for this reason, TOC is termed as a throughput-world thinking

(TWT) concept). From MO’s perspective, its precise definition, ‘the rate at which a system

generates money through sales’ (Figure 2), highlights its emphasis on cross-functional/

departmental coordination. Throughput implies a product be produced (by operations), sold

(by marketing/sales) and reported in financial statements (by accounting/finance).

Operating Expenses(OE)

Net Profit (NP)NP=T-OE

Return on Investment(ROI)

ROI=NP/ICash Flow (CF)

Throughput (T) Inventory (I)

The rate at which thesystem generates moneythrough sales. It is Sales(S) minus Truly VariableCosts (TVC) e.g. rawmaterials costs,commissions, etc.

All the money that thesystem invested inpurchasing things itintends to sell.It includes allassets plus onlymaterial costsof work-in-progress andfinished goods inventory.

All the money the systemspends in order to turninventory into throughput.It includes all periodexpenses e.g. salaries,utilities, etc. (except rawmaterial costs).

Figure 2. TOC measurements and its relationship with financial measures.

Making money now as wellas in the future

Providing a satisfying workenvironment to employeesnow as well as in the future

Providing satisfaction to themarket now as well as in

the future

Figure 1. TOC mindset – the goal and necessary conditions.

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The third dimension of TOC corresponds to five focusing steps (FFS) based

methodology to manage the constraint that limits a business unit’s ability to increase

throughput. It is based on the premise that every business unit has at least one constraint (at

most a few). Further, the constraint can be physical (e.g. a machine centre capacity, lack of

material) or non-physical (e.g. a policy/procedure or market demand for the products). The

main point of this methodology is that all strategic and tactical decisions across functional

areas should be made to exploit ‘the constraint’ and to subordinate non-constraint

departments before deciding to elevate the constraint (Figure 3). Once the constraint is

elevated, the process starts over with identification of a new constraint. Inherent in these

steps are the unique dynamic capability techniques, for example, drum-buffer-rope and

buffer management, used to produce prioritised product-mix and to control inventory in

the system (Goldratt, 1990b) which support exploitative and explorative capabilities

(Yalcinkaya, Calantone, & Griffith, 2007) shown to improve the MO of the company.

To summarise, TOC-based mindset,measures andmethodology are collectively termed

as throughput world thinking (TWT). It ensures that a system’s thinking prevails in the

company and all departments work together as a whole to optimise the system constraint(s)

and thereby accomplish the company’s global goal to make money without violating

necessary conditions (satisfying market needs and providing a satisfying work environment

to employees now and in the future). Across the business unit, various decisions (including

pricing, product-mix) are evaluated in terms of their impact on throughput (regarded as

number one priority), inventory (number two priority) and operating expenses (number

three and almost discouraged because of its invariably negative impact on employees and

market satisfaction). Thus, every department is encouraged to judge the value of its local

decisions in terms of its impact on the system’s constraint using TIOE measures. Hence,

TWT has far-reaching implications across all functional areas of the company (Goldratt,

1990b) and challenges the prevailing mindset (cutting costs), measurements (local

efficiency and productivity management) and decision making (isolated decisions within

each department).

Figure 4 shows an integrated framework of commonly agreed upon elements of TOC

and MO. Information about a business unit’s customers and competitors is generated and

disseminated across functional areas which are viewed as a value chain. This framework

suggests that besides market intelligence (external), there is equally important internal

information (termed as business intelligence) about departments/functional areas

constituting its value chain that must also be generated and disseminated while making

FIVE FOCUSING STEPS:Step One: IDENTIFY the system constraint(s) (i.e. the resource or policy

that prevents company from obtaining the goal).Step Two: Decide how to EXPLOIT the system’s constraint(s) (i.e. get the most out

of it. Prioritise the work, avoid non-productive work or replace bad policies).Step Three: SUBORDINATE everything else to the above decision (i.e. use non-constraints

to help constraint by off loading its work, working at its rhythm, ensuring highestquality inputs and processing its output carefully out to customers).

Step Four: ELEVATE the system’s constraint(s) (i.e. buy more of resource capacity).Step Five: GO BACK to step 1, but DON’T allow INERTIA to cause a system constraint

(i.e. check all the previous rules and policies made if they are still needed).

Drum-buffer-rope &Buffer management

Figure 3. TOC methodology – five focusing steps.

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business decisions to fulfil business outcomes. For example, customer and competitor

orientation dimensions may assist in identifying a set of potential market segments, but a

business unit might serve only the most profitable ones at any point in time due to resource

constraint.

In the following section we introduce a case study, the PQ Company, with information

on products produced, market demand for the products, process flows, processing

requirements and so on. We then employ this case study to demonstrate how the

management team implements MO by making various cross-functional decisions to

exploit the weakest link in the value chain and subordinate non-constraint departments

with a clear impact on business outcomes measuring the MO improvement levels.

A case study: the PQ Company

Although Goldratt and Cox (1992) introduced the TOC concepts in a popular business

novel, The Goal, in the context of a complex manufacturing company, Goldratt (1990b)

also introduced a small company (known as the PQ Company) to further elaborate the

principles of TOC. Both of these references have been used worldwide in graduate and

senior level undergraduate business courses as well as numerous workshops held for

practitioners (Goldratt, 1990b). We will use this case study to explain the proposed

integrative framework.

As shown in Figure 5, the PQ Company (1) produces two finished products – P and Q,

(2) uses three types of raw materials – RM1, RM2 and RM3, costing $20 each and (3)

consists of four unique departments A, B, C and D, labelled as DTA, DTB, DTC, and

DTD. Market potentials for the products P and Q are estimated at 100 and 50 units per

week respectively. Per unit selling prices for products P and Q are $90 and $100

respectively. Product P is assembled at DTD in 15 minutes by assembling one purchased

part (PP1) at the cost of $5 and two parts that are manufactured in house. Each of the

manufactured parts for product P is processed from two raw materials (RM1 and RM2)

and goes through distinct processes in departments DTA (15 minutes), DTB (15 minutes)

InformationGeneration

CustomerOrientation

CompetitorOrientation

(Business unit as a value chain of processes/function)TOC focuses on the weakest link with unique

mindset,measurements, and methodology (3Ms)

BusinessPerformance

Financial Out comes

Employees Out comes

Customer Out comes

Inter-functional & coordinated response(Design and execution)

InformationDissemination

Figure 4. An integrative MO–TOC framework.

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and DTC (15 minutes in total) before it is assembled at DTD (15 minutes). In addition to

the cost of raw materials and purchased parts, the PQ Company incurs $6000 weekly to

operate this company. The operating expenses include salaries and fringe benefits of the

company’s employees and management as well as the money that it pays to the utilities for

energy and to the banks for interest. Each of the four departments has a unique skill set and

each is equipped with tools and equipment with assumed amortised investment of $25,000.

Figure 5 also shows weekly Net Profit and Return-on-Investment values for a given

product-mix 100P-50Q (detailed computations are shown and explained in Tables 1–3).

Each department is assumed to be available 2400 minutes (i.e. 60 minutes*8

hours*5 days per week). Table 1 shows how much capacity is used as well as left unused

(indicating the efficiency or utilisation of each department) for a specific product-mix of

100P-50Q. We note that Figure 5 and all Tables are developed using Microsoft Excel.

The Excel model also employs optimisation add-in, SOLVER, to find the optimal

product-mix and to compute updated values in these tables easily for various scenarios

described in the following section.

Amortized Inventory =$25,000

Finished Goods P Q

Weekly market potential (units) 100 50

Product-Mix (units) 100 36

Selling Price (per unit) $90 $100

PP1 DTD DT D

$5.00 15 12

DTC DT C DT C DT B

10 5 5 10

Work Stations DTA DT B DT B DT A

Min. per unit 15 15 15 10

Raw Materials RM1 RM 2 RM 2 RM 3

Per Unit Price $20.00 $20.00 $20.00 $20.00

Net Profit (NP) = $660

R OI = 3%

Figure 5. Product–process flow of the PQ Company.

Table 1. Capacity analysis (minutes per week).

ParticularsUnit sales (product-mix)

Product P100

Product Q50

Unusedcapacity Total

Utilisationefficiency

Department DTA (minutes/week) 1500 500 400 2400 83%Department DTB (minutes/week) 1500 1500 (600) 2400 125%Department DTC (minutes/week) 1500 250 650 2400 73%Department DTD (minutes/week) 1500 250 650 2400 73%

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We should point out that the operations of the PQ Company can further be simulated

using Excel Visual Basics by taking into consideration factors like demand forecast for

products, set-up times involved in switching from one product to the other, lunch hours,

processing time variations, machine breakdowns, raw material quality and availability, and

so on. However, we chose to keep our model devoid of such variations and disruptions, as

intended by Goldratt (1990b), to keep it simple and, importantly, to remain focused on

demonstrating how the proposed framework is employed by managers to integrate business

and market intelligence to make decisions, improving market orientation and subsequently,

the business outcomes.

Table 2 shows income statement computations for a specific product-mix 100P-50Q

following TOC accounting principles that is, total throughput is calculated for each product

by subtracting raw material costs from sales, and then, net profit is calculated by subtracting

operating expenses from total throughput. The major purpose of the TOC-based income

statement is to help managers evaluate the impact of their decisions on the profitability of

the business unit. Operating expenses are considered period (fixed) expenses whereas in

Generally Accepted Accounting Principles (GAAP), the accounting portion of OE (e.g.

labour and overheads) is considered variable and is allocated to products as the cost of goods

sold and to work-in-progress as value-added. We will show that such allocations may

mislead marketing managers.

Implementing and improving MO: the TOC way

In this section, we discuss a set of selected scenarios demonstrating how the proposed

framework employs five focusing steps (Figure 3) to systematise decision making and

Table 2. TOC-based income statement.

Particulars Product P Product QUnit sales (product-mix) 100 50 Total

Sales revenue costs $9000 $5000 $14,000Less material $4500 $2000 $6500Throughput $4500 $3000 $7500Less operating expenses $6000Net profit (throughput – operating expenses) $1500

Table 3. Business intelligence – the missing link in continuously improving MO.

Scenario I Scenario II Scenario II Scenario III Scenario IVProduct-mix scenarios 100P-50Q 60P-50Q 100P-30Q 100P-36Q 100P-50Q

Golobal operational measuresThroughp ut (T) $7500 $5700 $6300 $6660 $7500Inventory (amortised) (I) $25,000 $25,000 $25,000 $25,000 $75,000Operating expenses (OE) $6000 $6000 $6000 $6000 $6000

Financial measuresNet profit before taxes (T–OE) $1500 ($300) $300 $660 $1500Return on investments (NP/I) 6% 0% 1% 3% 2%

Utilisation ratesDepartment DTA 83% 58% 75% 78% 83%Department DTB 125% 100% 100% 100% 57%Department DTC 73% 48% 69% 70% 73%Department DTD 73% 48% 69% 81% 83%

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TIOE measures (Figure 2) to improve MO level and business performance. Figure 5, along

with Tables 1 and 2, contain business intelligence pertaining to the PQ Company, which is

used along with market intelligence as purported by the MO concept to evaluate various

scenarios as a part of the five focusing steps – the heart of the proposed framework. (Note:

A copy of the Excel model is available upon request.)

Next, we discuss the implications of the proposed framework from three perspectives –

a conventional company, an MO Company and a TOC Company – to highlight the

similarities and differences. We demonstrate a TOC-based approach to implement and

improve market orientation systematically with a clear eye on business outcomes, that is,

increasing financial performance while at the same time positively affecting customers’

and employees’ related outcomes. Although various scenarios were developed and

discussed with graduate students representing various strategic and tactical decisions, in

this section we will discuss a few carefully chosen scenarios.

Step 1: IDENTIFY the system constraint(s)

The first of the five focusing steps of TOC is to identify the system constraint(s), which

may be a physical resource or a policy-related issue coming in the way of shipping more

products to satisfy customer needs, and thereby, limiting the performance of a business.

This step requires value chain analysis to establish the current location of a system’s

constraint and agreement among cross-functional members regarding whether the current

location is strategic in terms of its impact on the bottom line and two necessary conditions

(satisfying market needs and providing a satisfying work environment to employees).

In the PQ Company, we note that the weekly demand for products P and Q are 100 and

50 units respectively. Table 3 (column 2, scenario I) shows the business intelligence

corresponding to this mix. The company hopes to sell 100P-50Q and thereby make a

weekly net profit of $1500 for the stakeholders. Is it possible to make such weekly profit?

Table 3 (scenario I) reflects on the business intelligence collected, specifically utilisation/

efficiency rates of various departments for such a scenario. It is clear that the company

cannot process all units of RM2 and RM3 needed to produce 100P-50Q because department

DTB does not have the capacity (125% utilisation implies that we need an additional

600 minutes).

In a conventional company, each department (or functional area) strives to be efficient

and assumes its local improvements will contribute towards global improvement. The

marketing manager is primarily interested in satisfying market demand for 100P-50Q to

retain present clientele and attract even more from competitors. The operations manager is

primarily interested in having high utilisations and ensuring that departments are busy.

The purchasing manager ensures a regular supply of raw materials (RM1, RM2 and RM3)

to meet the weekly demands for the products. Thus, it is conceivable that in the coming

weeks, if the constraint (i.e. department DTB) is not identified and managed in a timely

manner, a number of undesirable effects can be predicted (e.g. customers’ demands will

not be met; their satisfaction levels will further go down; work-in-progress inventories

will increase; losses will increase; cash flow will become a problem, etc.). The situation

will resemble that of Walvorine Company mentioned in Shapiro (1988) as well as that of

Bearington Company discussed in The Goal (Goldratt & Cox, 1984), where everyone is

busy protecting his or her turf.

From the MO perspective, we can assume that market demand to the current levels of

100P-50Q is a logical consequence of earlier efforts to increase market orientation, which

has now caused a physical constraint at department DTB. Equipped with this intelligence,

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the question asked is whether the company should continue to further increase market

orientation with a prime objective to further increase the demand for its products. It is

clear that if the PQ Company continues to focus on further improving market orientation

and thereby market demand for products P and Q, the marketing function is setting itself

up for disappointment.

From a TOC-based framework’s perspective, identification of the most dominant

constraint (i.e. department DTB) is the first step. Although the management team

recognises that the demand for 100P-50Q should be considered an ultimate constraint, yet

the capacity of department DTB is an internal constraint currently impeding the company

from achieving its goal of making money by fulfilling the current market demand.

Step 2: decide how to EXPLOIT the system constraint(s)

Exploiting the constraints such as department DTB in the PQ Company means identifying

ways to get maximum productivity from the constraint and importantly, making all

functional areas aware of the constraint’s effect on the performance of the system

(Goldratt & Cox, 1984). The focus at this step is to take advantage of the existing capacity

at the constraint without incurring any additional expenses and to make decisions (e.g. find

an optimal product-mix) ensuring optimal use of the available capacity.

In a conventional company, where everyone is aware of the constraint, all functional

areas/departments try to do their best (optimising their performance) with the operating

budget. The accounting department may calculate per unit product profitability as shown

in Table 4 using absorption costing, thereby suggesting that the management team should

prefer product Q to product P. We note from Table 4 that this is a plausible scenario across

functional areas, for example, from a sales and marketing viewpoint given a higher selling

price, from an operations viewpoint given lower total processing time investment, from a

purchasing viewpoint given lower total raw material purchasing costs for product Q. Under

this scenario, the company will push for a 60P-50Q product-mix because if the company

first produces all 50 units of product Q consuming 1500 (15 min./unit for RM2 þ 15

min./unit for RM3) out of 2400 minutes available in department B, the company can only

produce 60 units of P (i.e. (2400 2 1500)/15). Table 3 (scenario II) shows that although

constraint department is 100% utilised by this 60P-50Q scenario preferred by all

functional areas, the company as a whole is losing $300 weekly. This scenario shows the

effect of not viewing the company as a whole and not optimising the usage of constraint

capacity.

From an MO perspective, the product-mix 60P-50Q may not be acceptable. Everyone

understands the importance of fulfilling customer needs and feels increasing pressure to

fulfil the existing customers’ demand even by deploying extra resources/funds. They may

Table 4. Per unit product cost and profit using absorption costing approach.

Products P Q

Selling price (SP) $/unit $90.00 $100.00Total processing time min./unit 60 50Raw material (RM) costs $45.00 $40.00Direct labour (DL) costs (assume $10/hr) $10.00 $8.33Over heads (OH) (assume 150% of DL) $15.00 $12.50Product cost (PC): RM þ DL þ OH $70.00 $60.83Unit profit (SP–PC) $20.00 $39.17

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employ conventional tools such as cost–benefit analysis to justify strategies like overtime

or hiring people to fulfil current demands for 100P-50Q. Depending upon the amount of

additional operating expenses incurred, we note that net profit will be less than the

potential, that is, $1500. We argue that in the absence of clear identification of the most

binding constraint, it will not be clear how much and where the additional resources should

be expended. Rather, it is likely that all functional departments will present competitive

proposals to get their fair share of available funds/resources, minimising the impact of

such expenditure on the business performance of the company. Further, if the financial

resources are not available, for example, due to tough economic times, the company might

be forced to adjust its product-mix to make optimal use of the available resources (a more

realistic scenario). Since the company is not able to fulfil the market demand, all functional

areas might coordinate their efforts to brainstorm how to maintain and sustain customer

satisfaction. What are various approaches suggested in the MO literature promoting

cross-functional and coordinated response? We show that the TOC way of managing

the constraint may serve as a unique way to encourage such coordination, that is,

implementation of MO.

From a TOC perspective, the main contribution of this step is to make each functional

area/department aware of the system constraint (i.e. department DTB) and to encourage

decisions optimising the use of constraint resource. This step evaluates the decision quality

in terms of its impact on the company’s throughput (i.e. selling price minus material costs)

without incurring any investment or expense. Although numerous scenarios are possible,

we discuss one specific scenario relevant from the marketing perspective, that is,

determining the optimal product-mix. TOC argues that the optimal product-mix should be

determined based on the value of throughput per constraint minute of products. In the PQ

Company, product P is preferred over Q as its throughput per constraint value is $3/unit

($45/15) compared to $2/unit ($60/30) for product Q. Hence, the PQ Company should

produce all 100 units of P first (@ 15 min/unit) and then use leftover capacity of 900 minutes

(2400 2 1500) in department DTB to produce about 30 units of product Q (@ 30 min/unit).

Table 3 (scenario III) shows that the maximum feasible profit of $300 per week can be

earned by selling 100P-30Q product-mix over a loss of $300 by selling 60P-50Q.

Of course, from the MO perspective, we must do whatever it takes to satisfy the market

for 100P-50Q and the optimal product-mix 100P-30Q so determined may still not be as

desirable. However, we show that the 100P-30Q mix truly challenges each

department/functional area to stay focused on the constraint (wherever in the value

chain it is) that is truly obstructing the company from producing all 100P-50Q and thereby,

realising more net profit. Hence, this step puts the company on a continuous improvement

path, that is, towards implementing MO the TOC way. We point out that finding optimal

product-mix is just one example of how to exploit a capacity constraint resource. We refer

managers to read The Goal (Goldratt & Cox, 1984) and It’s Not Luck (Goldratt, 1994) for

more practical examples.

Step 3: SUBORDINATE everything else to the above decision

After the constraint resource is exploited, the third step requires adjusting non-constraint

departments/functional areas to enable the constraint to operate at maximum

effectiveness. This step implies that the rest of the system should subordinate or at least

slow down to the speed of the constraint (Goldratt & Cox, 1984). Like step 2, this step also

involves decisions rewarding behaviours to improve throughput without increasing

investments and operating expenses.

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From the MO Company perspective, this step of TOC-based decision making

accomplishes what one of the MO dimensions (i.e. inter-functional coordination) aspires to

accomplish. In general, coordinated efforts and openness in communication across

different functional areas facilitate effective responsiveness to customer needs (Homburg

& Pflesser, 2000; Kohli & Jaworski, 1990; Webster, 1993). As stated earlier, market

demand is assumed to be the ultimate constraint in an MO Company and thus, all other

functional areas are expected to subordinate their actions to the marketing functions to fulfil

market requirements better than competitors (Jaworski & Kohli, 1993). Hence, any

significant change in the market need is communicated by the marketing personnel to all

functional areas so that coordinated efforts can be diverted for necessary adjustments.

Further, adequate incentives are provided to the employees at individual and departmental

levels to coordinate their efforts and assist in achieving a high level of customer

satisfaction. Thus, in an MO Company, the finance manager will make the necessary

arrangements so that no activity responding to customer needs is delayed due to the paucity

of requisite finance. The purchasing manager will procure the specifications from the

marketing department to ensure availability of the right quality and quantity of raw

materials to the operations department. Ultimately, operations department efforts are

directed towards ensuring need-based and timely supply of products to the target market.

Therefore, in the PQ Company, it can be assumed that accounting and purchasing managers

will subordinate their respective activities to meet the demand of 100P-50Q.

From a TOC Company perspective, the PQ Company first affirms its commitment to

the two necessary conditions (employees’ security and market satisfaction) and ensures

that decisions made/actions taken by the management do not violate these conditions.

Next, it implements a performance measurement system that rewards company-wide

decisions/actions leading to increased throughput, reduced inventory and reduced

operating expenses in that order. The actions taken to exploit the system’s constraint, for

example, determining the optimal product-mix (e.g. 100P-30Q) ensure that all

departments understand the importance of optimising the system’s constraint. For

example, marketing function realises the opportunity cost of selling product P over Q and

tries to sell only 30 units/week of Q. It is even challenged to explore possibilities of

increasing the value of Q, and its price and operations manager ties the release of raw

material into the system systematically (based on the constraint) so that extra inventory

does not build up.

More importantly, we point out that the second and third steps of TOC guided by

throughput world thinking employ specific TOC production planning and control

techniques such as drum-buffer-rope and buffer management (Goldratt, 1990b; Gupta &

Boyd, 2008) that ensure raw material release to support the optimal product-mix, thereby

minimising work-in-progress inventory in the company. From the MO perspective,

reduction in work-in-progress (WIP) translates into reduced lead-time, fulfilled promised

due dates and strengthened competitive advantage.

Cross-functional coordination

The most important implication of this step is to recognise that, by definition, non-

constraint departments have more capacity than the constraint department and their

performance should be evaluated and rewarded based on their contribution towards

primarily increasing throughput. It is conceivable that the management team identifies

new ways to off-load the work from department DTB to non-constraint departments DTC

and DTD. We note that there is still unfulfilled demand for 20 units of Q that can be

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interpreted as unsatisfied customers or potential to increase MO. Let us assume that in

Figure 5 it takes 10 minutes on DTB (5 minutes less) to process RM3 but it takes

12 minutes on DTD to produce product Q (i.e. 7 minutes more). Thus, this cross-

departmental coordination made 5 additional minutes per unit available on constraint

department DTB that can now be used to make more of product Q. Table 3 (scenario IV)

shows the optimised results of this change, and we note that the maximum net profit of

$660 can be earned by producing and promoting a 100P-36Q product-mix (a return of 3%

and profit increase of $360). This serves as a good example of increased cross-functional

coordination to increase MO and thereby increase net profit.

Thus, we see that development of highly motivated cross-functional teams is a natural

outcome of implementing and/or internalising TOC concepts described earlier as 3M’s

(i.e. mindset, measurements and methodology) in a company. Such teams serve as the

foundation for a learning organisation in which everyone aligns his or her individual goals

with company goals. The team thus challenges conventional ways of making localised

decisions and finds innovative ways to increase throughput, reduce inventory and

operating expenses, in that order of priority. It also provides guidelines to the manager of

the MO Company on how to proceed to achieve cross-functional coordination

systematically.

New product introduction

Although not elaborated in the analysis presented in Table 3, another MO scenario is

conceivable where the management team is highly competitor/customer oriented, has

generated/disseminated market/business intelligence effectively across value chain and has

come up with a new product development idea satisfying a very specific market segment.

For example, it is assumed that there is a demand for 50 units/week of a new product R that

will require 5 minutes/unit of processing at each of these non-constraint departments DTA,

DTC and DTD with utilisation rates in the 80s. First of all, such a scenario is plausible under

the proposed framework and is consistent with the MO concept. Although this scenario is

NOT played out and included in our analysis in Table 3, we want to highlight an important

contribution TOC-based mindset, measures and methodology make. The decision to be

made is what should be the selling price (X) of product R (Table 5)?

In a conventional company mired with cost-world thinking, first, it will be difficult to

conceive such a coordinated team effort from non-constraint departments. Most likely,

such business intelligence (i.e., utilisation rates) will be difficult to obtain and in a worst-

case scenario, these departments will be just busy processing raw materials to increase

localised efficiencies in the conventional sense. Second, the accounting department using

conventional accounting principles might calculate the unit cost to recover material,

labour and overheads and then depending upon the desired profit margin (Y), the

marketing department determines a selling price (X) for the product R (Table 5). We note

that a selling price below $26.25 will be rejected outright. From a TOC Company

viewpoint, on the contrary, any price above $20 (the cost of raw material to be paid to

suppliers) will be permissible to introduce this product because it is using only the excess

capacity available at the non-constraint departments.

Thus, we demonstrate that focusing on steps 2 and 3 effectively integrates market and

business intelligence to mechanise exploitative and explorative (new product speed to

market and introduction) capabilities, recognised as MO enablers, by transforming the

company’s current knowledge, resources and processes, thereby adjusting or even shaping

the unique characteristics of the marketplace (Yalcinkaya et al., 2007; Zhou & Li, 2010).

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From the TOC viewpoint, the management team must evaluate the system to see if the

current constraint is still holding back the company’s performance. If it is, the company

proceeds to implement step 4.

Step 4: ELEVATE the constraint

Elevating the constraint involves decisions to increase the overall capacity of the physical

constraint resource, for example, department DTB in the PQ Company and generally

speaking, results in acquiring the constraint resource time. Under this step, various short-

term decisions (e.g. employing overtime, outsourcing) as well as long-term decisions (e.g.

capital investment, new product introduction) are evaluated for their effectiveness in

elevating the constraint and thereby, improving MO.

An investment decision

We still have an unmet demand for 14 units/wk of product B in the PQ Company. The

management team has an opportunity to make a capital investment of $50,000 and double

its capacity to serve the market. In which department should this capital investment be

made? From a conventional company and even from the MO Company perspective, it is

probable that each department is encouraged to submit competing investment proposals,

and the proposal promising the highest internal rate of return (IRR) is selected. The second

and third steps of the framework are probably unheard of and probably all out efforts are

made to meet customer needs (e.g. producing 100P-50Q in the PQ Company) at any cost.

For example, if department DTA in the PQ Company puts forth an investment proposal

with very attractive IRR as a result of process improvement initiative, it is conceivable that

such a proposal is given serious consideration.

However, under the proposed TOC-MO framework, it is clear that such investment

will not help the company produce more of product Q and fulfil unmet market demand.

Conversely, an investment to increase the capacity of constraint department DTB will

directly result in fulfilling the market demand for product Q, improving MO and

increasing weekly net profit from $660 to $1550. A simple payback period computation

suggest that net increase of $890/week is a desirable result because the $50,000 investment

can be recovered in about one year (56 wks).

Step 5: go back to step 1, do not allow INTERTIA

This last focusing step is an emphatic reminder to not let inertia stop what should be an

ongoing improvement process (Figure 6). This step is a reminder that the management

Table 5. Per unit product cost and profit (absorption costing).

Product R

Selling price (SP) $/unit XTotal processing time min./unit 15Raw material (RM) costs $20.00Direct labour (DL) costs (assume $10/hr) $2.50Over heads (OH) (assume 150% of DL) $3.75Product cost (PC): RM þ DL þ OH $26.25Unit profit (SP–PC) Y

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team must consciously and strategically elevate the constraint to have a good

understanding of the location of new constraint(s) and thus, start again from the first

step. Generally, once the most binding constraint is elevated, the constraint shifts either to

some other department (i.e. internal and physical constraint) or to the demand for the

products (i.e. external and policy constraint). This step is also a reminder that all decisions

made to maximise previous constraint should be revisited for their effectiveness and, if

needed, be changed or even abolished.

The PQ Company is currently producing a 100P-50Q product-mix. An analysis of

utilisation rates shows that all departments now have excess capacity (see Table 3,

scenario IV), suggesting that the market demand for products P and Q has now become the

new constraint for the company. The five focusing steps ought to be repeated again to

shore up the demand for products P and Q. The next cycle of continuous improvement

starts with a realisation that various departments with excess capacities can now guarantee

on-time delivery promises and zero defect rates, advantages that the marketing function

can employ to differentiate their offering.

From a conventional company and even an MO Company’s perspective, we realise

that continuous focus on increasing the product demand without regard to the proposed

framework supporting the objective identification and management of the dominant

constraint may result in lower customer and competitor orientation (because the constraint

department may not be able to meet the market demand), lower inter-functional

coordination in the long run (because departments may blame each other) and lower

business performance (because unnecessary overtime may be incurred to meet the market

demand and maintain customer orientation).

Conclusions and future research directions

The purpose of this paper is to examine the relationship between the TOC and MO

concepts and investigate how the TOC-based decision-making framework improves

Figure 6. TOC-based continuous improvement process.

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the degree of MO and business performances objectively and systematically in a

company.

In this paper, we argued that the constraint can be market demand for a product or a

particular physical resource capacity limiting us to serve the current demand and that the

five focusing steps methodology of TOC can serve as a mechanism to implement MO, that

is, to coordinate efforts systematically across functional areas to exploit and subordinate

the constraint. This coordination is only made possible when TOC measures – throughput,

inventory and operating expenses – are in place to evaluate the impact of various

decisions on system performance and reward performance accordingly. By discouraging

localised performance and primarily focusing on increasing throughput, the company may

unleash creative forces among employees to fulfil the customers’ needs and wants – the

main tenet of MO. We also point out that an argument can be made that market demand for

the company products should always be considered as an ultimate policy constraint and

hence, processes should be in place to identify and exploit such opportunities (see Goldratt

(1994) for an innovative set of such thinking processes and Cooper and Loe (2000) for an

application in marketing education).

Thus, we demonstrated that TOC and MO complement each other. While the MO

literature is craving for solid implementation processes, the TOC literature validating its

underlying theory is sparse. Boyd and Gupta (2004), following the empirical approach to

develop and validate the MO construct, proposed a construct throughput orientation

hypothesising that TOC mindset, measures and methodology may serve as its dimensions.

Such a construct must be developed and empirically validated before the relationship

between MO and TO can be further investigated.

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