Theory Of Constraints (TOC) as a Critical Resource for Transformation
September 7, 2015
Our proposal is to present an analysis of TOC using the framework of the Resource-Based View (RBV) developed by J. B. Barney in 1991. The first part of the presentation focuses on what is RBV and where it comes from. The second part presents how TOC can be considered as a critical resource. Finally, the focus of the third part of the presentation is on how it is possible to merge the two approaches in order to optimize the use of the constraint, which can be considered as the most critical resource of an organization, in order to build a sustained competitive advantage.
Theories of distinctive competence
The first of the research traditions that underpins the modern study of firm strengths and weaknesses is work on distinctive competencies. This work falls into two broad categories. The first examines general managers as distinctive competencies; the second examines other organizational attributes as distinctive competencies.
General Managers as distinctive competencies
Much of the work begun at the Harvard Business School as early as 1911 by A. W. Shaw, M. T. Copeland, G. A. Smith Jr., and E. P. Learned with the analysis of the role of general managers in organizations.in this early work, it was assumed that decisions made by general managers had a very large impact on a firm’s performance. But they are not the only organizational strengths or weaknesses.
Institutional leadership as a distinctive competence
At the same time, some sociologists led by P. Selznick were studying the internal characteristics of organizations from a completely different perspective. In a series of articles and books, culminating in his book Leadership and Administration, Selznick (1957) examined the relationship between what he called institutional leadership and distinctive competence.
According to Selznick, institutional leaders in organizations do more than carry out the classic managerial activities of planning, organizing, leading, and controlling. In addition they create and define an organization’s purpose or mission. In more contemporary terms, institutional leaders help create a vision for an organization around which its members can rally. Institutional leaders also organize and structure a firm so that it reflects this fundamental purpose and vision. This organizational vision, in combination with organizational structure, helps define a firm’s distinctive competencies – those activities that a particular firm does better than any competing firms.
Penrose’s theory of firm growth
In attempting to understand constraints on the growth of the firm, Penrose (1959) argued that firms should be understood, first, as an administrative framework that links and coordinates activities of numerous individuals and groups, and second, as a bundle of productive resources. The task facing managers was to exploit the bundle of productive resources controlled by a firm through the use of the administrative framework that had been created in a firm. According to Penrose, the growth of a firm is limited by the productive opportunities that exist as a function of the bundle of productive resources controlled by a firm and by the administrative framework used to coordinate the use of these resources.
Basic assumptions of the resource-based view of the firm
In general firm resources are all assets, capabilities, competencies, organizational processes, firm attributes, information, knowledge, and so forth that are controlled by a firm and that enable the firm to conceive of and implement strategies designed to improve its efficiency and effectiveness. These resources can be conveniently divided into four categories:
- Financial capital includes all the different money resources that firms can use to conceive of and implement strategies.
- Physical capital includes the physical technology used in a firm, a firm’s plant and equipment, its geographic location, and its access to raw materials.
- Human capital includes the training, experience, judgment, intelligence, relationships, and insight of individual managers and workers in a firm.
- Organizational capital is an attribute of collections of individuals. Organizational capital includes a firm’s formal reporting structure; its formal and informal planning, controlling, and coordinating systems; and its culture and reputation; as well as informal relations among groups within a firm and between a firm and those in its environment.
A framework for analysis: VRIO
The VRIO framework is structured in a series of four questions to be asked about the business activities a firm engages in.
- Question of Value: Do a firm’s resources and capabilities enable the firm to respond to environmental threats or opportunities?
- Value chain analysis forces analysts to think about firm resources and capabilities at a very micro level. A firms resources and capabilities are valuable if they reduce a firm’s net costs or increase its revenues compared to what would have been the case if the firm did not possess those resources.
- Question of Rarity: Is a resource currently controlled by only a small number of competing firms?
- How many firms already possess particular valuable resources and capabilities? How rare a firm’s resource or capability must be in order to have the potential for generating a competitive advantage varies from situation to situation.
- Question of Imitability: Do firms without a resource face a cost disadvantage in obtaining or developing it?
- Firms that possess and exploit costly to imitate, rare and valuable resources in choosing and implementing their strategies may enjoy a period of sustained competitive advantage and above-normal economic profit.
- Question of Organisation: Are a firm’s other policies and procedures organised to support the exploitation of its valuable, rare and costly to imitate resources?
- In order to fully realize the potential of the valuable, rare, and costly to imitate resources, a firm must be organized to exploit them. Numerous components of a firm’s organization are relevant to the question of organization, including its formal reporting structure, its explicit management control systems, and its compensation policies.
- The questions of value, rarity, imitability, and organization can be brought together into a single framework to understand the return potential associated with exploiting any of a firm’s resources and capabilities. This is done in the following table.
Costly to imitate?
Exploited by organization?
Temporary competitive advantage
Sustained competitive advantage
Resource-based logic suggests that an organization’s structure, control systems, and compensation policies should support and enable a firm’s efforts to fully exploit the valuable, rare, and costly to imitate resources and capabilities it controls. This is what TOC is all about. The presentation will show how TOC facilitates the execution of the Barney’s VRIO model.
DR. PIERRE JAECK defended the first PhD thesis on TOC in France on July 3rd, 2014. He started his professional career as an engineer in the military industry. After his MBA, he also worked for several consulting firms (Andersen, Ernst & Young) before to join Geoservices in 2007 as Portfolio & Project Director and then CIO. Since 2013, Pierre works for Deloitte and is associate researcher at EM Strasbourg / Humanis research lab in management science.
Back to Transforming Businesses Track