Revolutionize the way you think about business

Two years in business school and stints as an entrepreneur and business consultant had mostly convinced me that all management theories are basically a crock. The technical tools I learned in business school, such as accounting and financial analysis, were quite useful in the real world. But the abstract theories I was taught were rarely superior to good old-fashioned commonsense.

But there was one exception, which no one in business school told me about, but which I discovered through a friend who advises entrepreneurs on their business strategy: the theory of constraints (TOC).

TOC is the brainchild of an eccentric Israeli physicist, Eli Goldratt (now deceased), who produced the business novel The Goal, which became an underground bestseller and allowed him to devote himself fulltime to consulting and elaborating on his theory. Once I understood TOC’s power, it came as no surprise to find out that Jeff Bezos, the greatest CEO alive today, makes all his senior executives read The Goal.

TOC is based on a very simple, yet very profound and powerful insight: In any complex system, the output is determined by one limiting factor. In other words, a chain is only as strong as its weakest link. Any complex system of production is made up of multiple linked activities, and one of them will be the bottleneck that determines the output of the whole system.

The reason why this is so profound is that most managers spend their time trying to improve every part of the system they oversee, often with very mixed results. But if the output of the whole process — even an improved process — is still limited by the bottleneck, then any effort spent optimizing anything else is basically wasted (and can even be counterproductive).

The theory of constraints therefore says that the manager’s job is to identify what the bottleneck is, and then systematically improve it until it is no longer the bottleneck — at which point, something else will be the bottleneck, and the job of identifying and optimizing the bottleneck starts over.

Written by: Pascal-Emmanuel Gobry, November 2014