chapter on strategy and tactics trees by lisa a ferguson phd

Illuminating the way to utopia for individuals, organizations and society.SM

Applications of Strategy and Tactics Trees in Organizations Chapter 34 of the Theory of Constraints (TOC) Handbook

Published by McGraw-Hill

Overview

Change is difficult to achieve. The Strategy and Tactics (S&T) tree is a powerful tool for addressing the question of “How to cause a change?” in an organization. If you are considering implementing any kind of change, you will discover why the S&T tree is a compelling enabler of change. When implementing a change in an organization, the basic requirements for success are communication and effectively synchronized actions in the plan. The S&T tree is the asset for achieving your goal because it presents all the logic of the plan and is easy to communicate to others. After writing a strategic plan using the S&T tree, a Fortune 500 executive referred to his company's past planning efforts as “amateurish.” This chapter provides an understanding of how to cause the change through descriptions of various applications of S&T trees for organizations to become "ever-flourishing." About the Author Lisa A. Ferguson, PhD, is the founder and CEO of IlluminutopiaSM, an organization that is focused on “Illuminating the way to utopia for individuals, organizations and societySM (www.illuminutopia.com). Dr. Ferguson has spent several years training consultants in different countries, as a faculty member of Goldratt Schools, to become Theory of Constraints Experts and Supply Chain Logistics implementers. Professor Ferguson has a PhD in Operations Management from Arizona State University and an MBA. Professor Ferguson taught operations management full-time in a university business school for 10 years. Dr. Ferguson is a TOCICO board member and is TOCICO certified in Supply Chain Logistics, Project Management, and the Thinking Processes (www.tocico.org).

Copyright © 2010 by Lisa A. Ferguson, PhD. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.

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CHAPTER 34Applications of Strategy

and Tactics Trees in Organizations

Lisa A. Ferguson, PhD

IntroductionAfter being exposed to writing a strategic plan using the application of the Strategy and Tac-tics (S&T) tree (a Thinking Processes tool of TOC), a Fortune 500 executive referred to his company’s past planning efforts as “amateurish.” How can organizations be much more effective in strategic planning and execution of that plan? This chapter explains why the S&T tree is the tool for achieving this.

In order to address how to improve strategic planning, let’s first discuss the purpose of a stra-tegic plan. This plan provides an explanation of the specific actions to be implemented over the next several years to achieve the high-level strategy or goal of the organization. Strategic plans are divided into the necessary strategies and tactics that have been agreed upon by top management.

We tend to think that strategy is what the top level of the organization focuses on, while the tactics are what the lower level of the organization implements. How do we move from strategy to tactic in our planning process? The literature does not provide clear answers on this subject. To find the answer, it is helpful to understand how this type of obstacle has been overcome suc-cessfully in the past. When Einstein came up with his Theory of Relativity about time and space, he first had to begin by defining time. Once he realized that there was no agreement in the lit-erature on a definition of time, he came up with his own: Time is what is measured by a clock. With this definition, he was able to develop his theory. Dr. Eli Goldratt (founder of TOC) followed Einstein’s example in order to develop a theory and application for strategic planning. He defined strategy as the answer to the question “What for?” and tactic as the answer to the question “How?” With these definitions, we realize that for every action, both of these questions can and should be answered.

Copyright © 2010 by Lisa A. Ferguson.

Strategy (S): Answer to the

question “What for?”

Tactic (T): Answer to the question

“How?”

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1016 T O C i n C o m p l e x E n v i r o n m e n t s

The S&T tree is the name of the theory and application of strategic planning in TOC. The purpose of this chapter is to provide an understanding of various applications of the Viable Vision S&T trees for organizations. A Viable Vision (VV) is a plan for how to become an “ever-flourishing” organization. An ever-flourishing organization is one that continues to grow exponentially, while maintaining stability at the same time.

S&T trees are a powerful tool for synchronizing all the actions needed to achieve the high-level strategy of an organization and for communication of this detailed plan to all within the organization. S&T trees can be used by any organization to achieve its strategy, not just ones focused on achieving a VV.

On Becoming an Ever-Flourishing OrganizationThe top strategy of the VV S&T trees is: The Company is solidly on a Process of Ongoing Improvement (POOGI). For a company to prosper it must be on POOGI; otherwise, competi-tors will just wipe out the company (eventually). What is the meaning of POOGI? Perfor-mance of the company must improve over time. Under this definition, two conceptually different curves exist—the red and green as shown in Fig. 34-1. Note that each curve repre-sents a concept and that there are multiple possibilities for each curve.

Both show performance improving. Which curve looks more realistic to you and to the people in your company? Most will answer that the green curve looks more realistic and believe that a red curve may only be possible for a short period of time for an organization. What is the real difference between the green and red curves? In a green curve, the increment in improvement each year is less than the increment the year before. The increment in abso-lute terms continues to increase on a red curve. Have you ever seen a company grow 5 percent (or more) year after year? This level of growth is not uncommon. Which curve demonstrates 5 percent growth per year? A red curve; the absolute growth is higher each year than the year before—5 percent of $2 million is smaller than 5 percent of $10 million. If you plot the per-formance of the U.S. economy over time, you will see that it is also a red curve. Companies traded on Wall Street must grow faster than the economy—this means that they must grow faster than a red curve, regardless of the size of the company.

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FIGURE 34-1 Process of ongoing improvement. (© E. M. Goldratt used by permission, all rights reserved. Source: Modifi ed from E. M. Goldratt, 1999)


A p p l i c a t i o n s o f S t r a t e g y a n d Ta c t i c s Tr e e s i n O r g a n i z a t i o n s 1017

Why does the majority of top management surveyed think that a green curve is more realistic? This is an example of an inconsistency. The red curve represents growth. The green curve has something important for people as well—stability. People do not want the com-pany to grow so quickly that they are spending more than 50 percent of their time putting out fires. We cannot achieve collaboration of our people without giving them what they want. People resist change only if they perceive that the change will not be beneficial. In order to not only survive as an organization, but also, more importantly, to flourish, we must achieve growth and stability at the same time.

The best proof of the need for growth and stability was written in the book Built to Last (Collins and Porras, 1994). Collins and Porras studied 18 highly visionary companies, also referred to as gold medalists. Some of the criteria for selecting the companies to research included being the premier institution in its industry, being widely admired by peers, hav-ing a long history of significantly affecting the world, and being founded before 1950. They plotted the performance of those companies over time. Was it a red or green curve? It was perfectly a red curve. They discovered that the industry type does not determine whether a red curve can be achieved. Collins and Porras also compared the visionary companies to the bronze or silver medalists in their industry. Their level of growth was significantly lower than that of the visionary companies. The authors point out that two of the common factors (among others) of these visionary companies was culture and clock. A unique culture was evident in each case; after working in one of these companies for a few months, people would not consider leaving the company. Clock building is about creating a company that will continue to flourish regardless of who is leading it or the product life cycles. For each organization, you can hear the clock ticking no matter where you are in the organization—it is not about promotions or what will happen next quarter. The clock is different; the mere fact that there is a clock is obvious.

Can we ensure that our organizations are “built to last”? Ways for achieving the objec-tives of both red and green curves (growth and stability) at the same time were developed by Dr. Goldratt. Five different alternatives are in the public domain for achieving this objective; five generic cases of VV S&T trees cover more than 70 percent of industries that involve physical products in some form. This chapter explains the logic of the solution for each—a practical solution. The starting point is to achieve growth and stability at the same time—to build an ever-flourishing organization, not just to have a good next quar-ter or next year, but also to build an organization that will outlast the lifetime of a person. The top strategy of the VV S&T trees is: The company is solidly on a POOGI. “Solidly” means that we have achieved both the red and green curves together. The deeper mean-ing of POOGI is that the goal and necessary conditions are achieved. All three are require-ments for success. They are:

• Make more money now and in the future.

• Satisfy the market now and in the future.

• Satisfy employees now and in the future.

One of these three is the goal for an organization, while the other two are the necessary conditions (requirements) for achieving the goal. The S&T tree ensures that the actions needed to achieve all three are taken.

The Basic Structure of an S&T TreeThe structure of an S&T tree will now be explained to provide clarity before presenting a specific S&T tree. For each strategy (S), there must be a tactic (T). An S&T tree consists of a number of S and T pairs, each presented in a step. The top of an S&T tree consists of one step.



Then the next level of the S&T tree below presents at least two steps (horizontal entries on the same level) further detailing the specific S and T pairs needed to achieve the higher level S and T pair, and so on until the lowest level of the S&T tree has been presented. At each level, more detail is provided about how to achieve the higher level. This is why the struc-ture is referred to as an S&T tree. Figure 34-2 provides a visual representation of the generic structure of an S&T tree.

Here is the big picture regarding the different levels of the VV S&T trees for organizations:

• Level 1 presents the pot of gold (very ambitious objective) strategy (overall).

• Level 2 presents the heart/essence of the competitive edge.

• Level 3 presents the heart of the change in mode of operation—the broad changes needed in operations and the logic regarding these changes.

• Level 4 presents the details regarding the change of mode of operation and the reasons for the change in mode as well.

• Level 5 is about how to implement the changes. It does not include the logic regarding the need to change the mode of operation; it is just about how to do the tactics we already agreed to in Level 4.

Within each step, the logic is presented connecting the parts of the S&T tree. Three types of assumptions are needed to provide the logic.1 One is a parallel assumption (PA),

1The S&T tree is one of a number of tools of the TOC Thinking Processes, which can be read about in Chapters 24 and 25 of this book. The S&T tree includes both sufficiency-based logic and necessity-based logic, which are described in those chapters and in more detail later in this chapter. The S&T tree should be written after the CRT and FRT have already been developed.

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FIGURE 34-2 The generic S&T tree structure (© E. M. Goldratt used by permission, all rights reserved. Source: Modifi ed from E. M. Goldratt, 2008).



the fact(s) of life, presented in logical sequence, which leads us from the strategy (S) to the unavoidable con-clusion of what the tactic (T) must be. The S and T are, in effect, parallel or a match to each other. The way to read the connection is, if S and PAs, then the resulting tactic is T.

Another type of assumption is the necessary assump-tion (NA). The NA is the fact(s) of life that explain why a specific S&T pair is needed to achieve the correspond-ing higher level S&T pair in the S&T tree. The NA is based on necessity-based logic, meaning that some-thing is necessary in order to achieve something else. The NA presents the current damage of not taking the action described in the step and/or the benefits of tak-ing the action in the step. The NA provides clear moti-vation for the need to take the step. The way to read the connection is, In order to achieve the higher level step, we must achieve the step below because of the NAs listed in the step below.

The final type of assumption is the sufficiency assumption (SA). The SA is the fact of life that are com-mon sense and commonly ignored, which if ignored will not result in all the steps below being sufficient to achieve the corresponding step above them. An SA is based on sufficiency-based logic. With sufficiency-based logic, we need to verify that all of the components listed are sufficient or enough to achieve the result desired. How-ever, the only way to check for sufficiency is through reality. Once all the actions have been taken, we will know if the actions were sufficient to achieve the desired objective. What we can present as an SA is guidance on what should be considered when reviewing the next level of the S&T tree as it connects to the level above. The way to read the connection is, The SA is the fact we should take into consideration when evaluating whether the group of steps below, the ones that directly con-nect with this step, are sufficient to achieve this step.

The Top of the VV S&T TreesThe top of the VV S&T trees, which is shown in Table 34-1, is the same for the five generic S&T trees that will be discussed in this chapter. The highest-level strategy of the S&T tree is: The Company is solidly on a POOGI. The next strategy in Level 1 of the S&T tree is that the VV is realized in four years or less. The VV target for the annual net profit (NP) in four years is set to be extraordinarily challenging based on current thinking in business. It is believed within TOC that four years is long enough to change the culture of the company if an extraor-dinarily challenging target is achieved. This can be validated as more and more companies achieve their VVs. Setting a high target of NP is consistent with the research of Collins and Porras (1994), which indicated that the visionary companies set “big hairy audacious goals.” This exponential level of growth needs to be achieved only with actions that all the stake-holders (such as shareholders and employees) of the company will agree with and support—ones that will also result in stability. This high NP target is shown to be realistic and achievable with the actions in the S&T tree and the understanding of how these actions will result in a much higher NP than previously thought achievable. For example, we can show

Parallel Assumption (PA):

The fact(s) of life, presented in

logical sequence, which lead

us from the strategy (S) to the

unavoidable conclusion of what

the tactic (T) must be.

S II T: (Parallel Assumption

Symbol).

Necessary Assumption (NA):

The fact(s) of life that explain

why a specific S&T pair (step)

is needed to achieve the corre-

sponding higher level S&T pair

(step) in the S&T tree.

Sufficiency Assumption (SA):

The fact(s) of life that are com-

mon sense and commonly

ignored, which if ignored will

not result in all the steps below

being sufficient to achieve the

step above them.



through logic that a small increase in sales for a retailer does not increase NP at the same percentage of NP to sales ratio the retailer currently has, but rather that most, if not all, of the sales increase becomes NP because costs do not increase much, if at all.

The next part of this step (Table 34-1) is the parallel assumptions (PAs)—these are facts of life. PAs present the logic that demonstrates that the strategy and tactic are in essence parallel to each other. An assumption is not considered a fact of life until the people in the company agree that it is currently a fact. We read each element of the S&T tree aloud to check its validity since hearing allows us to verify the logic using another part of our mind beyond seeing it with our eyes. The first PA is (read aloud): For the company to realize the VV, its T must grow (and con-tinue to grow) much faster than OE. Throughput (T) is the rate at which the company generates goal units (i.e., the rate at which the company generates money through sales, which is equivalent to sales minus the totally variable costs [TVC], such as the cost of raw materials). In essence, this PA is stating that the company’s sales must grow and continue to grow much faster than costs. The term cost creates confusion because the word is used with different meanings.2 That is why cost has been defined in TOC. Investment (I) is the money tied up in the company, while Operating Expense (OE) is all the money the company spends to generate goal units (turn Investment into Throughput). Therefore, the cost to buy a machine is I, while the cost to run the machine is OE.

One more dollar in sales and one less dollar of costs have the same impact on NP. How-ever, are changes in costs and sales really equivalent in the long run? The amount by which sales can increase is not intrinsically limited, while cost reduction is limited. Costs can only be reduced to zero; closing the company tomorrow will cause this to happen. Remember that we need to have the green curve (stability) as well. The two major categories of costs are employees and suppliers. Cutting costs means layoffs. Will you get the collaboration of those who remain in the company? If you lay off people after they have improved, how successful will other improvement efforts be? The other major category is the cost of purchasing raw materials for production of the physical product that is sold. It is not uncommon for a com-pany to squeeze lower prices from its suppliers. The result is that the gross margins of the supplier are quite low—so low in fact that your supplier (which is typically small) can go out of business when the market conditions become bad. The impact of squeezing lower prices is that the relationship between the company and its supplier is not good, but rather can be contentious. What if we instead focused on finding a way for the company and its suppliers to get both their needs met—to find a win-win solution for both companies? The result

2In TOC costs are classified as totally variable costs, Operating Expense, and Investment.

1 Viable Vision

Strategy The company is solidly on a POOGI.

The VV is realized in four years or less.

Parallel assumptions • For the company to realize the VV its T must grow (and continue to grow) much faster than OE.

• Exhausting the company’s resources and/or taking too high risks severely endangers the chance of reaching the VV.

Tactic Build a decisive competitive edge and the capabilities to capitalize on it, on big enough markets without exhausting the company’s resources and without taking real risks.

Sufficiency assumption The way to have a decisive competitive edge is to satisfy a client’s significant need to the extent that no significant competitor can.

TABLE 34-1 Top of the VV S&T trees (© E. M. Goldratt used by permission, all rights reserved. Source: Modified from E. M. Goldratt, 2008).



would be a better relationship and if the solution is effective, both companies will have much higher profits.3

The only way to achieve a very ambitious NP target is by significantly increasing sales. All our efforts should not be focused on reducing costs, but rather on increasing sales much faster than OE increases.

The second PA in Step 1 (Table 34-1) is not just about exhausting the cash resource. A more significant concern is about not exhausting management. Special efforts exhaust people. The result will be the inability to stay on the red curve. We also cannot afford high risks—a 20 percent risk for a decision is high if this type of risk is taken more than once. Do companies build a new plant without knowing the company will sell its capacity? Manage-ment does not know they will sell it all. Yet, they put all their cash and credit on the line. This is like playing Russian roulette with more than one bullet in the gun.

Notice how the tactic is a direct logical derivative of the PAs and the strategy. There are five components to this tactic. First, we must have (1) a decisive competitive edge (DCE); an edge is not based on color. Exponential growth in T cannot be achieved without a DCE. Is this enough? Technology start-ups have a DCE—they have a much better product. However, most fail within two years because they did not have the ability to (2) capitalize on their DCE. The third component is (3) competing in a big enough market. It must be large enough to sustain the growth needed to reach the VV target. Therefore, it cannot be a niche market. The last two components are about (4) not exhausting our resources of cash and manage-ment (5) without taking real risks.

What we need to do is figure out how to achieve these five components of the tactic. The SA is also a fact of life. It is a fact, which is common sense, that most people will ignore, which if ignored will not result in all the actions being implemented that are required to achieve sufficiency. The meaning of the DCE is described in the SA of Step 1. If a significant competitor has the same DCE, you are in a price war.

After we seriously accept the definitions of strategy and tactic, we realize that we can ask these questions for every action. This means that strategies and tactics must be defined for all levels, not just at the top and the bottom of the organization. As we go down the S&T tree, more and more details for how to achieve the higher-level strategies and tactics are provided. All of the logic for the actions required to achieve the goal is provided within the S&T tree in the three types of assumptions.

There are five major splits below Level 1 of the VV S&T tree, resulting in different generic S&T trees (a generic S&T tree may need to be customized for a specific organization). Each one applies to a different environment:

• Retailer: sells end products directly to the client from its shelves. This type of environment is business-to-client.

• Consumer Goods: produces end products, but does not communicate with the client; sells through distribution networks and retailers to the client. This is a business-to-market type of environment.

• Make-to-Order, also known as Reliable Rapid Response (RRR): produces the end item and does communicate directly with its clients; sells to another manufacturer that uses this end item as a part of their product. This is known as business-to-business.

• Projects: sells to client and may or may not communicate with them; what is being done is somewhat unique, though, such as a lab producing drugs or a construction company producing houses.

• Pay per Click (PPC): sells final products to the client; these products, such as machines, are used by the client.

3The full explanation and logic underlying finding this win-win solution is provided in Goldratt (2008a).



Each of these five generic S&T trees will be briefly discussed in this chapter. A full dis-cussion of each is not possible because explaining one S&T tree fully would require many pages. Note that the full S&T trees are available in different places.4

The Retailer S&T TreeWe will begin by discussing the Retailer S&T tree because this S&T tree is one to which most people can relate. This S&T tree will be discussed in the most detail for that reason. This discussion will also explain generic S&T tree concepts.

All of the steps in the S&T tree below Level 1 also have an additional assumption: the NA. As noted earlier, this assumption explains why this step is required for achieving the corresponding step in the level above.

Level 2 of the Retailer S&T TreeThe NAs of Step 2.1 are shown in Table 34-2. Each one is read aloud to verify whether it is fact in the particular retailer’s environment. The first NA is read aloud: “Better availability is a consumer’s significant need.” Then we verify that all agree to this. Next, the second NA is read aloud: “Expecting to find an SKU and being disappointed severely erodes the con-sumer’s impression of good availability.” Then, we can think of an example, such as a woman who finds a dress she wants but not in her size. We refer to this as a shortage. Most retailers have shortages between 5 and 30 percent of the specific products or stock-keeping units (SKUs) that are supposed to be available in the shop. How many sales are lost due to unavailability? Do you realize that the shortages are of the products that are the high runners—the ones that are selling well? In some cases, the customer will buy an alternative product for the one that is unavailable and may be disappointed that they had to buy a sub-stitute. When the item is not on the shelf, sales are being lost. Retailers cannot know how many customers would have bought the SKU of which they were out of stock. Therefore, it is difficult to know how many sales are lost. After reading the third NA aloud, we point out that the forecast is not good. This results in wasting the constraint by having surpluses of SKUs. The shelf space is what limits how many different products are in the portfolio of SKUs to sell. After reading the fourth NA, we point out an additional fact not in the S&T tree, which is that a high percentage of products with a short market life are sold at markdown prices. When we present an S&T tree, we commonly provide additional information and explanation. These facts are not required to be part of the written S&T tree to reach the con-clusion that the strategy that will be presented next is needed, but rather just adds to it. This NA does not apply to supermarkets. The DCE we want to achieve is to have all the products that are on the shelves be the ones that the market really wants. After reading the fifth NA, we point out that examples of this are produce, milk products, soap, and fish. Even if these items are available on the shelf, they may not be considered to be available in the mind of the customer when they are close to their expiration date. If the customers do buy ones close to the expiration date, they may decide after using or eating the product that it was not of good quality.

Notice that after reading the five NAs, it becomes clear that the resulting strategy must be the one that is stated in this step. It is important to note that there is a limit to how many

4The trees are available in the member section of the TOC International Certification Organization (TOCICO) Website at www.tocico.org and as part of a useful software program named Harmony for creating S&T trees at www.goldrattresearchlabs.com. Note that the most up-to-date versions of the S&T trees are automatically included in Harmony. The full Retailer S&T tree is not presented here due to space limitations. The missing steps of the full S&T tree can be downloaded at the above sites and are read in a similar manner as presented in our discussion here.



times a customer will keep coming back to the same shop the more they are disappointed. The NAs in Step 2.1 (in each VV S&T tree) lead us to understand how the particular type of company addressed can achieve a DCE. The word “knowing” in the strategy is important here. It is not enough for the availability to be high; customers must be aware of the remark-able level of availability. The best kind of “advertising” in retail is word of mouth. The last part of the strategy means that parameters such as price, quality, and product selection (to name a few) must not change from their current levels. Their current levels were suffi-cient to be competitive until now. Therefore, not changing them, while remarkably improving availability, will result in a DCE.

TABLE 34-2 Step 2.1 of the Retailer VV S&T tree (© E. M. Goldratt used by permission, all rights reserved. Source: E. M. Goldratt, 2008).

2:1 Availability Competitive Edge

Necessary assumptions • Better availability is a consumer’s significant need.

• Expecting to find an SKU and being disappointed severely erodes the consumer’s impression of good availability.

• Shelf space is usually the shop’s constraint for better availability. A significant amount of the constraint is captured by merchandise that were ordered according to an overly optimistic forecast.

• Offering many products that the market doesn’t want is not contributing to the impression of availability. When the product’s market-life is not long, the slow reaction time of the supply chain causes the offering to be based more on educated guesses, rather than on actual market preferences.

• For a short shelf-life product, for every additional day the product spends on the shelf the customer’s impression of availability deteriorates.

Strategy A decisive competitive edge is gained by the market knowing that the company’s availability is remarkably high, when all other parameters remain the same.

Parallel assumptions • Besides poor quality, shortages are the main reason for a consumer’s disappointment.

• The current mode of operation of most supply chains, a mode of operation that is based on forecast, causes the supply chain to have a long replenishment lead time. A long replenishment time causes shortages and high inventories that block the shelf space and impair the ability to adjust the offering to the actual market preferences.

• Shortages and high inventories do not only erode availability, but also (dramatically) reduce sales and increase investments.

• Using TOC pull-distribution–switching to a mode of operation that is based on actual consumption—together with a proper incentives scheme to the suppliers (or better, to have suppliers that use the same consumption-based mode of operation)—ensures very high availability coupled with surprisingly high inventory turns.

Tactic The company switches (from a forecast-driven mode of operation) to an effective consumption-driven mode of operation.

Sufficiency assumption Building a decisive competitive edge is not easy; still, the real challenge is the ability to sustain it.



Now that we agree on the strategy, the question is how to achieve it. The tactic tells us how. Next, we validate whether the PAs are currently facts of life for the particular retailer. The second PA needs to be explained more. The replenishment time includes the order lead time (the time between when the first unit of an SKU is sold after an order of that SKU is received and an order for that SKU is placed again) and the supply (production and trans-portation) lead times. The retailer places orders with their suppliers based on the forecasted level of demand of the SKUs. Chaos theory tells us that it is theoretically impossible to fore-cast accurately on the SKU level at each retail shop. We need to find a way to ensure that we do not have shortages and surpluses. The answer is quick reaction to what is selling, which is measured by inventory turns. Let’s consider an example to understand the meaning and impact of inventory turns. If a retail shop currently has four inventory turns per year, then they are in essence selling what they hold on the shelves and the back storeroom in entirety four times a year. Since there are 12 months in a year, they must be holding, on average, three months worth of inventory. If we can manage the supply chain effectively to react to changes in demand, we can reduce both shortages and surpluses and significantly improve the inventory turns.

The third PA should be explained as well. The NP to sales ratio in retail ranges from 2 to 3 percent for grocery retailers to as high as 5 percent for fashion goods. The average markup on retail products from the purchase price is 100 percent. The markup is much higher for jewelry and much lower for furniture and some other types of products, such as commodi-ties. Based on these numbers and the typical shortage statistics, we can determine how much of an impact significantly reducing the shortages would have. If shortages are 10 percent, the markup is 50 percent, and the NP to sales ratio is 2 percent, what will the NP to sales ratio become if shortages are reduced to zero? Let us assume for the moment that the costs are not affected. If sales are 100, then the TVC is 50 and T is 50. If NP is 2, then OE must be 48. If sales increase by 10 percent, then 5 more will be added to NP (half was TVC, while OE did not increase). Thus, the NP to sales ratio increases from 2 percent to over 6 percent. However, since the shortages are of high runners, it is likely that the sales will be much higher when shortages are reduced because we cannot really know how much sales of high runners are lost when shortages occur. We will only know how much sales increase once the shortages are reduced. Even if OE does increase some, the impact on NP is still significant.

Reducing surpluses has a significant impact on investment. If up to 30 percent of the SKUs have shortages, then it is likely that more than 50 percent of the SKUs have surpluses. It is not uncommon for a retailer to have four inventory turns a year. This means that the shop is holding, on average, 3 months of inventory. If 30 percent of the SKUs are not in stock, then a high percentage must be in surplus for us to have such a high level of inventory in stock on average. The experience within TOC implementations in retailers indicates that it is not uncommon to have such a high percentage of SKUs in surplus. Reducing the surpluses affects the level of investment needed in inventory. Thus, significantly reducing the sur-pluses and shortages dramatically improves the inventory turns, NP, return on investment, and cash flow.

The last PA, which is shown in Step 2.1 (Table 34-2), will probably not be accepted as fact when it is read. We will ask those validating the S&T tree to accept this as fact for the time being until we can prove that it is. Assuming all of the PAs are facts, the resulting tactic must be to switch to a consumption-driven mode of operation.

The next step is to validate the SA. This type of assumption is also referred to as “Con-fucius says” because of the powerful common, yet uncommon, sense that is presented. What we cannot ignore when we are evaluating the next level of the S&T tree is that we not only need to focus on building a DCE, but also on how to sustain it. Therefore, Level 3 of the S&T tree needs to include one or more steps for building the DCE and one or more steps for sus-taining it.



Normally, we would proceed next to validating Level 3 under Step 2.1 of the left side of the S&T tree (the left side includes Step 2.1 and all the steps under it). Instead, we are now going to review Step 2.2, as shown in Table 34-3, so that we can better understand Level 2 of a VV S&T tree.

After validating the NAs of this step, we can agree that the resulting strategy must address how to expand rapidly without taking real risks or exhausting resources. The PAs in this step become facts of life after the left side of the S&T tree has been successfully implemented—meaning that all levels of the S&T tree on the left side have been achieved. In the third PA, TPS stands for Throughput per shelf space. The fifth PA was proven to be correct by Starbucks. They did not invest money in advertising to create a brand name. After accept-ing the PAs as facts, the resulting tactic must be about planning and executing a prudent expansion plan. “Prudent” is an important word here—the expansion must be done effec-tively without taking real risks.

2:2 Expansion

Necessary assumptions • Excellent additional personnel are not easy to get.

• Major expansion requires large investments and credit is not unlimited.

• An established brand name in one market is not easily carried outside the boundaries of that market (into new regions or new product sectors). And it takes considerable time, money, and efforts to establish a significant brand name.

Strategy The company rapidly expands without taking real risks and without exhausting its resources.

Parallel assumptions • When operations follow excellent processes (simple, effective, and robust) it is relatively easy to train good personnel to become excellent personnel.

• When a retailer consistently operates with very high inventory turns, the investment to open a new shop is considerably lower.

• When a company has a recognized and established competitive edge and, as a result, all its performance (financial performance such as profit, percent of profit on sales, and ROI, as well as operational performance such as inventory turns and TPS) are much above the industry norm, the company doesn’t have real difficulties in raising investments.

• When a company has outstanding performance and excellent procedures, the company can successfully attract and operate a franchisee network.

• Opening, within a relatively short time, a large number of shops in a given region is an effective way to create a brand name.

Tactic The company plans and executes a PRUDENT expansion plan.

Sufficiency assumption Considering nonexisting obstacles is almost as bad as not considering real obstacles.

TABLE 34-3 Step 2.2 of the Retailer VV S&T tree (© E. M. Goldratt used by permission, all rights reserved. Source: E. M. Goldratt, 2008).



The SA in Step 2.2 points out that only real obstacles should be considered when devel-oping this expansion plan. Notice that many of the real obstacles to expansion have already been overcome once the left side of the S&T tree has been successfully implemented. The assumptions in Step 2.2 specifically address how these obstacles have been overcome. The right side of the S&T tree (which includes Step 2.2 and all the steps below it) needs to address any other real obstacles that still need to be overcome.

Overview of Level 2 of VV S&T TreesLevel 2 of a VV S&T tree explains how to achieve the DCE. Step 2.1 is focused on achieving the base growth needed to reach the VV target, while Step 2.2 is focused on achieving enhanced growth. Base growth alone should achieve the NP target of the VV. To build an ever-flourishing company, more than this level of growth is required. The base growth is like getting a cake, while enhanced growth is putting the cherry on the cake; however, this cherry is much bigger than the cake itself. When the people in the organization realize that the actions implemented resulted in continued exponential growth and that these actions did not change over time (thus resulting in stability), the culture will have changed. All of the actions that are included in the S&T tree are ones that will remain in place over the long-term. For example, a change made regarding how inventory is replenished will continue in place, although more actions can be added over time to modify how replenishment is done.

Level 3 of the Retailer S&T TreeNow we will briefly describe Level 3 of the left side of the S&T tree. Recall that Step 2.1 was focused on changing to a consumption-driven mode of operation and that the steps in Level 3 need to explain how to build and sustain this DCE. Step 3.1.1, as shown in Table 34-4, explains how to build the DCE.

After reading part 1 of the PA, we point out that it is a huge mistake to push inventory into the shops. The result is shortages of some SKUs and surpluses of other SKUs. After reading part 2 of the PA, we point out that holding the inventory back in the supply chain is more effective because the forecast is much more accurate at the distribution center (DC). Keeping more of the inventory at the DC would result in fewer cross-shipments such as between regional DCs (RDCs). Part 3 is about placing daily orders with the suppliers. Most retail executives would point out that the suppliers would not agree to this. In reality, most suppliers are struggling with handling huge orders and spikes in demand. Daily orders and frequent replenishment is a win-win solution for both the retailer and its suppliers.5 After reading part 5 of the PA, we point out that inventory targets should be adjusted frequently because market conditions change often.

When more than one tactic is listed, they are listed in the order in which they are imple-mented. These tactics need to be implemented in order to achieve Step 2.1, but they are not sufficient. How to achieve Step 3.1.1 is explained in the three steps (4.11.1, 4.11.2, and 4.11.3) that are below it in the S&T tree. The SA in this step points out a reality regarding getting stakeholder buy-in and support of a new initiative. We have to ensure that the first step in the next level of the S&T tree results in a significant and quick impact on the performance of the company in order to get this buy-in and support. The three steps below 3.1.1 are focused on implementing internal pull distribution (Step 4.11.1), the TOC solution for replenishment, keeping correct inventory levels (Step 4.11.2), and dealing with suppliers (Step 4.11.3).

Step 3.1.1 is focused on building the DCE by ensuring existing SKU availability. Step 3.1.2 is focused on sustaining this edge by further protecting and improving inventory turns. The

5This win-win solution is explained in The Choice (Goldratt, 2008a) in Chapters 2, 8, and 10.



last step under 2.1, Step 3.1.3, is focused on continuing to build the DCE by improving TPS by changing the product portfolio.

General Overview of the VV S&T Tree StructureLet us now discuss the S&T tree generically to Level 3. The Level 1 strategy was focused on achieving both growth and stability. Level 2 has steps for achieving both base and enhanced growth. In the Retailer S&T tree, the SA of Step 2.1 focused on building the DCE and sustain-ing it. In other VV S&T trees, the SA of Step 2.1 is slightly different from the one in the Retailer S&T tree in that it also addresses the need to capitalize on the DCE. This component was not needed in the Retailer S&T tree because it is enough for the customers to know that availability is now remarkable. In the other S&T trees, actions are typically needed to market and/or sell more effectively in order to capitalize on the DCE that has been built. Thus, Level 3 of each VV S&T tree consists of steps that are focused on building, capitalizing on, or sus-taining the DCE.

3:1:1 Ensure Existing SKUs Availability

Necessary assumption

The situation of almost all retailers is that in spite of constant efforts, for many SKUs the inventories are apparently too high, while for some SKUs there is no inventory.

Strategy The company has high inventory turns; still—for each SKU—it always has enough inventory on its shelves to satisfy immediately any reasonable demand.

Parallel assumptions

When a retailer:

1. Holds in the shops enough inventory only for proper visual display plus what is needed for the demand (optimistically) expected within the replenishment time (transportation time from the regional distribution center (RDC)), and

2. Holds in its warehouse(s) (RDCs and CDC) enough inventory for just the expected∗ demand within the replenishment time, and

3. Guides its suppliers (manufacturers) according to actual daily consumption rather than batched orders, and

4. Gives its suppliers proper (monitored) incentives to improve performance (lead time and due dates), and

5. Monitors and adjusts its inventory targets according to TOC Buffer Management,

6. The retailer is able to provide very high availability while holding much lower inventories, thus resulting in high inventory turns.

Tactics • The company switches its internal logistics from push to pull according to actual daily consumption.

• The company implements TOC BM to monitor and adjust the target inventories in its shops and its warehouses.

• The company provides daily consumption orders to its suppliers and incentives to deliver, with shorter lead time, on time.

Sufficiency assumption

To ensure an outstanding start of a major initiative, it is vital that the first substantial actions will result in immediate substantial benefits.

∗Some level of paranoia (not hysteria) is recommended.

TABLE 34-4 Step 3.1.1 of the Retailer VV S&T tree (© E. M. Goldratt used by permission, all rights reserved. Source: E. M. Goldratt, 2008).



Levels 4 and 5 of the Retailer S&T Tree Next, we will look at the first step of Levels 4 and 5 of the Retailer S&T tree in order to under-stand an S&T tree better. Step 4.11.1, as shown in Table 34-5, explains how to improve the inventory turns through the implementation of the pull distribution solution of TOC.

Notice that the number of PAs tends to increase, the lower we are in the S&T tree. It is important to note that the PAs are not written as a bullet list, but rather as a presentation of cause-and-effect logic. The SA in this step also reinforces the SA of Step 3.1.1.

TABLE 34-5 Step 4.11.1 of the Retailer VV S&T tree (© E. M. Goldratt used by permission, all rights reserved. Source: E. M. Goldratt, 2008).

4:11:1 Internal pull distribution

Necessary assumption

Having too little inventory guarantees a bad offering to clients. Having too much inventory (almost) guarantees a bad offering to clients.

Strategy The company holds, in its shops and warehouse(s), relatively small amounts of inventories, which are appropriate to ensure availability.


• The right inventory target is equal to consumption within the replenishment time, factored for variability. In addition, shops need to hold the appropriate amount of inventories for proper visual display.

• The shorter the replenishment time, the smaller the variability is. The bigger the aggregation, the smaller the variability is (the variability in a warehouse that feeds four locations is half the variability of each location).

• The replenishment time is equal to the order lead time plus supply lead time.

• The conventional practices used by most retailers cause the order lead time to be significant, thus unnecessarily inflating the inventories and limiting the ability of the retailer to immediately react to actual consumption.

• The conventional practices used by most retailers push the inventories into the shops (where the variability is the highest), thus inflating the inventories and limiting the ability of the retailer to react appropriately to actual consumption.

• Providing the daily consumption data to the previous link reduces the order lead time to just one day and helps to prevent over-pushing inventories from the CDC to RDCs and from RDCs into the shops.

• Most suppliers do not restrict the frequency of orders placed by a retailer (thus, the order lead time can be significantly reduced).

Tactics • Initial inventory targets in the shops are set according to proper visual display plus optimistic expected demand during the transportation lead time from the warehouse.

• The company replenishes the shops from its RDCs, based on actual daily consumption (pure pull).

• Initial inventory targets in the warehouse(s) are set according to replenishment time—order, (production) and transportation lead-times.

• The company replenishes the RDCs from its CDC based on actual daily consumption (pure pull).

• The company orders (more) frequently from its suppliers based on actual consumption (rather than forecast).

Sufficiency assumption

An initiative should not just deliver results, but also be perceived as the cause of the results achieved; the sooner the better.



Two more steps in Level 4 are needed to achieve Step 3.1.1. Step 4.11.2 is focused on keeping the correct inventory levels through the implementation of the Buffer Management (BM) solution of TOC (which provides an effective priority management system), and expe-diting and adjusting for peak demand (as explained in the steps in Level 5). Step 4.11.3 is focused on how to deal with the suppliers in order to achieve much more improvement in the inventory turns and the bottom line (NP, ROI, and cash flow).

Step 5.11.1, as shown in Table 34-6, is the first step that needs to be implemented in retail. Because the level of sales changes over time in retail, we must ensure that we can prove that the increase in sales is the result of our initiative.

Level 5 is the lowest level of the Retailer S&T tree. Therefore, it provides the details that are required to be implemented in order to achieve Level 1 of the S&T tree.

5:11:1 Establishing reference

Necessary assumptions

• It is not enough that the first substantial actions of the VV initiative will result in immediate substantial benefits. These benefits also have to be acknowledged as the outcome of the initiative.

• An initiative that increases sales much more than it increases expenses results in a substantial increase to the bottom line.

• The variability in sales is usually high. Therefore, an increase in sales (over a relatively short period—a few months) is not indisputable proof that the VV initiative is yielding substantial benefits.

Strategy The company realizes that the consumption-based mode of operation is a major cause of increasing profits.


• When high variability exists, the way to prove the impact of an initiative is to have a control group in which the initiative is not implemented.

• The control group must be representative of all shops for the proof to be valid, but should also be as small as possible because the control group will not be improved for a while.

• Changes not just in sales but also in OE are compared to the corresponding changes in the control group to avoid the mistake of estimating the increase in NP based on the company’s current percentage of NP on sales (the actual impact on NP is determined by the change in T minus the change in OE).

Tactics • The smallest number of shops that are representative of the chain are selected to be the control group. These shops are excluded from the implementation in the beginning of the project.

• The changes in T and OE for the control group and the shops, in which the VV initiative is implemented, are tracked.

• Periodic, frequent reports on the results (including correct calculation of the impact on NP) are presented to (top) managers.

TABLE 34-6 Step 5.11.1 of the Retailer S&T Tree (© E. M. Goldratt used by permission, all rights reserved. Source: Modified from E. M. Goldratt, 2008).

Need for Lower Levels of an S&T TreeIt is possible that for some steps in an S&T tree, Level 6 or even Level 7 needs to be written. At this time though, Level 6 has not been written for any VV S&T trees, although we believe for some steps it would probably be quite useful to write Level 6. Another level needs to be written in an S&T tree to explain how to implement the step above only if it is not clear in that



step how to achieve it. In the Retailer S&T tree, there are no Level 5 steps under Step 4.12.1 or Step 4.12.3, which are both under Step 3.1.2. In addition, there are no Level 5 steps under Step 3.1.3.

Details Regarding the Structure of an S&T Tree This section summarizes what we have covered about the structure of an S&T tree with additional content now that an S&T tree has been shown and explained. The S&T tree pres-ents the logic for how to achieve a high-level strategy. Can we agree that a strategy is an answer to the question “What for?” In other words, what is the objective? And a tactic is the answer for “How?” Brushing our teeth is an action. Can we ask what for? Yes. Can we ask how? Yes. Trying to put a strategy up high in the S&T tree and tactics all lower in the S&T tree does not make sense. In other words, it is flawed to think that strategy is for top manage-ment and tactics are for lower levels of management in the organization. Every action that we take has a strategy and tactic. Therefore, we have a number of strategy and tactic combi-nations or pairs, which we refer to as steps. In actuality, each tactic is an action.

The S&T tree is read from the top down. Level 1 is the top of the S&T tree, which is only one step. Level 2 is the level below Level 1, etc. Each level of the S&T tree corresponds to a level of management in most cases. The strategy and tactic plan provides a more detailed explanation as we progress down through the layers of management. Level 1 is related to the Chairman, while Level 2 is for the Board of Directors (including the CEO). Level 3 is for the executive vice presidents (EVPs). Level 4 is for functional departments, while Level 5 is for the head of the department in the function. Level 6 is for the managers, while Level 7 (which may not ever need to be written) is for the individual employees.

We must ensure that responsibility and authority are aligned. The managers are respon-sible for delivering on the strategy of their assigned step. They also have the authority to change the tactics in the step for which they are responsible. For example, if the PAs are not facts of life in their company, the tactics need to be changed. We have to be careful not to have idiotic Draconian rules in the tactics. In other words, we should always check to see if the tactic we intend to implement is a logical derivative of the PAs. For example, if a tactic in the S&T tree states that 25 percent of the projects should be frozen, this rule should not be blindly applied, but rather modified in some cases to achieve the logic of the step. In some cases, it would make sense to freeze more or less of the projects in a particular company.

The S&T tree also has a sequence from left to right in a level. A step that is to the right of another step in the same level of the S&T tree cannot be implemented before the step to the left of it on the same level has started being implemented. The timing of when to start imple-menting a specific tactic needs to be based on logic. In some S&T trees, there is content in the step that points out when to start implementing the tactics.

Each step in the S&T tree includes some or all of the following statements in this order: necessary assumption(s), strategy, parallel assumption(s), tactic(s), and sufficient assump-tion. The NAs explain why the step is necessary (as part of the group of steps on this level that correspond to the step in the level above) to achieve the higher-level corresponding step in the S&T tree. Therefore, there are NAs listed in each step except for the step that is Level 1 at the top of the S&T tree. The NAs need to be convincing that the action must be taken by pointing out the damage of not taking the action and/or the benefits of taking the action. The sequence of NAs is in order of the concerns that people will have. The NAs in Level 4 are focused on what is currently being done and the need to do it differently. The NAs in Level 5 are about the difficulty in doing the tactic in Level 4—the tactic we already agreed to do.

One way to better understand what an NA is results from an explanation of necessity-based logic and a visual aid. In a conflict, we understand from the Evaporating Cloud (EC) tool of Thinking Processes (TP) that a need is what is desired from a want. In other words,



an action that we want to take is really focused on achieving some need. The connection between the need and the want is a necessary assumption, the explanation why this want will result in the need being achieved. It can be read as follows: “In order to achieve the <need>, we must <want> because of <necessary assumption>.” Likewise, in an S&T tree, the NA provides the connection between one S&T pair or step and another in a S&T tree as shown in Fig. 34-3. It can be read as follows: In order to achieve Step 1, we must achieve Step 2.1 because of the NA of Step 2.1.

Step 1

Step 2.1 Step 2.2

NA of

Step 2.1

NA of Step

2.2

FIGURE 34-3 How the NA connects one step of the S&T tree to another.

D

A B C

FIGURE 34-4 Suffi ciency-based logic example.

The NAs are always generic. If the NAs we want to address are not generic, then we can devote a whole step in the S&T tree to exceptions. A step in an S&T tree can be just for a specific case. Another possible approach is to include exceptions in the PAs and the resulting tactics within a step already in the S&T tree.

A strategy is what we want to achieve. It is not stated as an action, but rather as being cur-rent reality. The parallel assumptions are for checking that the tactic will achieve the strategy. The PAs need to tell us how to do it; they are the most important part of the S&T tree because they provide the logic. The PAs explain the whole logic of the tactic—why the tactic has a real chance of making the strategy a reality. There are no surprises allowed in a tactic. The PAs must explain why the tactic is needed and will result in the strategy being achieved.

The PAs are written using cause-and-effect logic. They are written in the order that makes logical sense to reach the conclusion regarding what the tactic(s) must be. They are not written based on the sequence of the tactics. They are written so that the cause-and-effect logic is clearly presented. An entity (cause or effect) must be just one sentence. However, we can have more than one sentence in a PA when the next sentence is a comment. It is better to keep the comment as part of one PA; it will be shorter because some content will not have to be repeated. In addition, we can put both a cause and effect in a PA. In some cases, we have freedom where to put the assumption in the S&T tree; if we have a long explanation before a conclusion, it is better to put it in PAs instead of in the NAs.

A visual aid with explanations will be useful for further explaining the logic of how the PAs are written. Figure 34-4 shows a generic example with respect to sufficiency-based logic.



Within the TP of TOC, we read sufficiency-based logic as follows: If A and B and C, then D is the unavoidable result. The oval shape represents a logical “and.”

Figure 34-5 shows an example of how the PA is written. As stated earlier, the PA presents cause-and-effect logic, not a bullet list. If the logic were the same as presented in the previous generic example of sufficiency-based logic, then the PAs would appear as shown in Fig. 34-5. Often, we would verbalize D as starting with a word such as “Therefore, . . .” to indicate that it is an effect or a conclusion that results from the previous statements of A, B, and C.

Every tactic must get results and is written as an action. The tactics are written in the order in which they are implemented. Note: The logic explaining each tactic must be clearly presented in the PAs. We can write, “Vast experience shows that . . .” in a PA if it will be explained lower in the S&T tree. The tactics in Level 5 explain exactly what to do.

It is not possible to come up with an SA that proves the steps below are sufficient to achieve the step above them. The only real test is reality. The solution was to have the SA highlight a fact that, if not dealt with by steps of the corresponding lower level group of that step, would result in sufficiency not existing. The SA must be something that is common sense, but is typically ignored; that if ignored will not result in sufficiency. They are “Confu-cius says” statements, which are generic. A step has an SA only if there is another level of the S&T tree written below that step.

Figure 34-6 will be helpful for clarifying the logic. The SA is based on sufficiency-based logic, as described earlier. One way to read it is as follows: If Steps 2.1 and 2.2 are achieved, then Step 1 will be the unavoidable result because the SA of Step 1 was a fact of life (assum-ing reality verifies that sufficiency was actually achieved). Another way to read it is: If Step 2.1 and Step 2.2 are achieved and the SA of Level 1 is a fact of life, then Step 1 is the result.

When preparing to write the next level of the S&T tree, we think of the how (the titles) and the why of the steps and the sequence of the steps. The next level below a step must have a minimum of two steps for it; otherwise, the content should be within the step itself.

Parallel Assumptions:

• A

• B

• C

• Therefore, D

FIGURE 34-5 Logic within the PAs.

Step 1

Step 2.1

SA of Step 1

Step 2.2

FIGURE 34-6 Visual aid for SA connection.



When creating the steps, we do not artificially break the content into two parts, but rather divide it logically into two or more parts. When I was writing Level 5 of the Retailer S&T tree, I had to figure out how to write the steps in Level 5 below Step 4.11.2 of Keeping Correct Inventory levels. I realized the way to logically divide it in Level 5 was to have one step explaining Buffer Management (BM), the mechanism that automatically ensures correct inventory levels, and to have another step specifically focused on adjusting for peak demand, explain-ing how to adjust the mechanism for upcoming expected spikes in demand that are due to a sale or other planned or known event. Later, expediting was also added as a step.

It is much easier to write the SA for a step after we have completed writing the steps below that step in the S&T tree; then, we have enormous intuition. The SA does not have to address all the steps below it, but it is better if it does. It is especially important to address the first step (the one to the left) of the corresponding steps below. It is better to take a known phrase/quote and change it to what we need. It makes the SA verbalization more interest-ing. An NA and SA can be essentially the same.

Note: We decided not to have sequence assumptions in the S&T tree. Therefore, we have to deal with any sequence that needs to be pointed out in another way. To do so, we write within a step that this step is dependent on another specific step in the S&T tree. An example of this is in Step 3.1.2 of the RRR S&T tree. This S&T tree starts with focusing on becoming a more reliable supplier by reaching at least 99 percent due date (on time) performance. It states as a note in Step 3.1.2 that the reliability selling offer should not be given the green light to start being marketed until after 99 percent due date performance has been achieved.

Key Concepts Regarding Creation of S&T TreesWe have been using S&T trees to guide TOC VV implementations for years now. VV projects are holistic TOC implementations. These VV projects consist of multiple, synchronized TOC applications (subsystem implementations), such as operations, distribution, project man-agement, marketing, and sales. VV projects are consulting projects in which the target net profit in four years or less will be significantly higher than the best possible profit that top management of the company believes is achievable. S&T trees can be used to achieve any strategy of any system (such as any type of organization or for a person). Once an S&T tree has been developed, it is necessary to first verify that the strategy, which is one of a number of strategies we have, applies to the system (person or organization) for which the S&T tree is written. The assumptions really are facts of life. We need to validate that they are facts of life for a particular system. If they are not facts, then the corresponding strategy or tactic does not apply to the given system.

The S&T tree provides all the strategies and tactics needed to achieve the strategy in the step in Level 1. The S&T tree provides answers to the three questions in TOC regarding how to manage effectively:

1. What to Change?

2. What to Change to?

3. How to Cause the Change?

The S&T trees that were developed to guide VV implementations provided the first significant application of TOC to answer the third question above. The development of these S&T trees clarified the steps for successfully implementing TOC. The guidance provided in Level 5 of the VV S&T trees is very useful for implementing TOC in an application/sub-system (such as a function). Level 5 provides a simplified approach to implementation that ensures that only the injections (solution elements) required are implemented and provides information regarding the sequence of implementing those injections.



The project network/plan for implementing the VV project consists only of the tactics in the lowest level of the S&T tree. In other words, a network showing all the dependencies (both task and resource) will be created based on all the tactics in the S&T tree at the lowest level. Specifically, if a step does not include a Level 5 while others do, then we will have tactics in the project plan from both Levels 4 and 5. This project plan in VV implementations is created using the Critical Chain network (which includes all dependencies and appropriate buffers) and is managed using critical chain software (from Realization Technologies).

The VV S&T trees also include strategies and tactics for ensuring that significant negative branch reservations (NBRs) are trimmed, thus ensuring that any significant, potential negative consequences of implementing the solution are prevented. In addition, these S&T trees include strategies and tactics for ensuring that significant obstacles that may block or delay implementation are overcome.

The VV S&T trees are written to follow the plus buy-in process of TOC.6 The steps of the plus buy-in process are:

1. Agree on the very ambitious objective we desire to reach—a pot of gold.

2. Agree that reaching the pot of gold at the top of the cliff is much more difficult than we originally thought.

3. Agree that there is a direction for the solution, an anchor on the cliff against which a ladder can be leaned.

4. Agree on the solution details.

5. Overcome unverbalized fears, such as the potential NBRs of success.

The huge pot of gold is the strategy in Level 1. The strategy points out what the pot of gold is and that we can do it. It must be a strategy to which all would readily agree. Next we show how steep the cliff is (Step 2)—these are the PAs summarized in the tactic of Level 1. We show that we have nothing to hang on to in order get up the cliff. The PAs show how impossible it is to reach the pot of gold.

Step 2 of the plus buy-in process shows why it is not going to be easy to reach the pot of gold. The last PA of Level 1 usually shows why there is hope, but is not always in an S&T tree. The tactic states what will be done to reach the pot of gold, after establishing why this is the case in the PA’s. The pot of gold may be a target they wanted to reach before, but decided was not possible to achieve. Step 2 is for generating credibility, to bring insight to the executives about how well we understand the problem of reaching the pot of gold. They will be more inclined to listen to us because they will assume we might have found a solu-tion. The PAs establish the parameters of the solution—what the solution has to address.

The NAs in Level 2 of the S&T tree are the anchor for the ladder—the third step of the plus process. The rest of Level 2 is the silhouette of the anchor. Level 2 is about how to meet the needs of the stakeholders, such as those of the external market. We consider the purpose and essence of the organization to write this level.

Level 2 below the NAs and Level 3 (which is how to build, capitalize, and sustain the DCE in the VV S&T trees) of the S&T tree are the ladder (Step 4 of the plus buy-in process)—the major rungs of the ladder and major ways in which to break your legs (Step 5 of the plus buy-in process). First, we start with showing the rungs of the ladder to climb, and then we think of major ways in which to break our legs, especially ways that can happen when we are successful.

Level 3 provides the method for achieving the strategies and tactics, but no clue how to do it. In the VV S&T trees, Level 3 explains how to build, capitalize, and/or sustain the DCE.

6There are two buy-in processes in TOC, which are referred to as the plus and minus-minus processes.



In the VV S&T trees, Level 3 typically starts with an implementation of one of the logistical solutions of TOC (Pull Distribution, Critical Chain Project Management, or the TOC produc-tion solution of Drum-Buffer-Rope/BM). Then, if needed, a marketing or sales solution of TOC is implemented to capitalize on the DCE achieved through the logistical solution. Finally, to sustain the DCE, we are focused on how to ensure that the performance does not deteriorate as sales increase.

Every time we go down a level in the S&T tree, we are detailing the steps of the ladder. Level 4 is the level in which we are making the switch to TOC through the “golden assump-tions.” These types of assumptions of Level 4 explain what we can do. In other words, we are moving from theories into practice (the actions move from being a direction to being practi-cal actions). In reality, we tend to call everything above the golden assumptions strategy and everything below them tactics. This is why people have the belief that the strategy is for the high level of the organization and the tactics are for the low level. This explains how the S&T tree concepts fit with conventional views of strategy and tactics.

There are cases when Level 5 does not need to be written. Here are the considerations. Are there any real difficulties to do the step in Level 4? Are there fundamental concepts that must be changed? In these cases, we need to write Level 5. We should also think about typi-cal mistakes that might be made in implementation. We check to see if the conventional way of doing the step in Level 4 would result in mistakes. Level 5 is written if a change in a key belief is needed. Level 5 presents the actions and the implementation issues. Once Level 4 has been validated, management has already agreed to make the required changes. The logic of the how to do it is in Level 5.

The criteria for judging a solution listed below were kept in mind when writing S&T trees.7 These criteria are listed in the order in which they must be considered.

1. Results in excellent benefits.

2. Is win-win-win for all whose collaboration is needed. This is important because collaboration results in an increased probability of success, and a faster and more sustainable implementation. When it is not win-win-win, forces will erode it over time.

3. The risk associated with implementing the solution, multiplied by the corresponding damage, is not small relative to the benefits of implementing the solution. This is about comparing the level of risk with the level of impact. For example, if the risk is small and the potential level of damage is high, while the benefits are huge we need to consider carefully whether we should implement the solution.

4. It is simpler than what we do now. Why is it important? The more complicated it is, the higher the chances of disillusionment of those needing to implement or support the change. If it is complicated, we do not know if it will work (if there is a chance of implementing it successfully).

5. The sequence of implementation is such that each action or cluster of actions leads to immediate, significant results, thus enabling getting everyone on board (their collaboration).

6. Does not self-destruct. If the solution self-destructs (is not sustainable), the company can be in much worse shape than it was before the solution was implemented.

All of the VV S&T trees ensure that the constraint (the factor most limiting the ability of the organization to achieve its goal) is in management’s control—it is the rate at which the

7These solution elements were presented in The Goldratt Webcast Program on Project Management (Goldratt, 2008b).



company can grow. The VV S&T trees are focused on achieving a DCE based on meeting a significant need of the clients. As a result, there is no limit to growth except the rate at which management will choose to grow. The S&T tree includes actions to ensure the constraint does not become internal (such as in production or sales) or a market constraint (the level of demand).

How the S&T Tree Relates to Other Thinking Process Tools of TOCHow does the S&T tree relate to the other tools of the TP of TOC? The S&T does not replace the Current Reality Tree (CRT)—the map of all the cause-and-effect connecting the core conflict or root cause to all the undesirable effects (UDEs) in the system—and EC (conflict resolution tool) at all. The S&T tree does include some of the elements of the CRT to show why we used a dif-ferent direction of a solution than the conventional approaches. The core conflict is addressed in Level 1 of the S&T tree in the PAs. The tactic of Level 1 states that we will achieve both needs of the core conflict without a compromise. The NAs of Level 2 are the assumptions that we are invalidating underlying the core conflict. The core conflicts of the subsystems are also addressed in the lower levels of the S&T tree.

The S&T does not replace the Future Reality Tree (FRT)—the logical map connecting all the injections (solution elements) through cause-and-effect to the desirable effects (thus ensuring no UDEs of the CRT continue to occur). The S&T tree does include all of the injections that are in the FRT.

All of the assumptions in the S&T tree must be facts of life from the CRT and FRT of the system. In other words, the assumptions must be verbalized as fact based on the current cause-and-effect logic of the system. When writing an S&T tree, it is best to conduct a full TP analysis first before writing any of the S&T tree. The core conflict, CRT, and FRT are invalu-able in terms of more quickly and more effectively writing an S&T tree.

The S&T tree does replace the Prerequisite Tree (PRT) because the S&T tree addresses the obstacles and how to overcome them. The S&T tree provides much more logic and content than the PRT for causing the change. Two main advantages of the S&T tree to the PRT are the ability to distinguish between the big picture and various levels of detail and the ability to ensure that chupchik (unimportant details) are not included in the plan. This does not mean that the PRT should not ever be used. It can still be used as an effective tool for figuring out how to reach an ambitious target by determining the obstacles to reaching the target and how to overcome them. The Transition Tree (TRT) is not yet replaced by the S&T tree. The S&T tree might replace it after Level 6 has been written or sequence assumptions have become part of the S&T tree. This does not mean that we would no longer use TRTs, but rather that we wouldn’t need to use them when we have an S&T tree.

The Other Four Generic VV S&T TreesNext, we will briefly discuss some key points regarding each of the other four generic VV S&T trees without presenting the steps of the S&T trees, given the limitations on how much content this chapter can address.

Consumer Goods (CG) S&T TreeThe CG S&T tree applies to manufacturers that sell to retailers.8 Two versions of the CG S&T tree exist: one for make-to-order (MTO) environments, while the other is for make-to-stock (MTS) environments. We will first explain the MTO S&T tree and then briefly explain how the MTS S&T tree differs. Step 2.1 of the CG S&T tree is focused on achieving an inventory

8Note that the combination of the Retailer and CG S&T trees provides the win-win solution for both retailers and suppliers that is explained in The Choice (Goldratt, 2008a).



turns competitive edge, while Step 2.2 is focused on achieving a TPS competitive edge. The NA of Step 2.1 is, “When most cash is tied up in inventory and availability is still an issue, improving inventory turns is a client’s significant need.” The resulting strategy is, “A deci-sive competitive edge is gained by providing a ‘partnership’ that delivers superior inven-tory turns (better availability coupled with substantially reduced inventories), when all other parameters remain the same.”

The titles of the four steps in Level 3 under Step 2.1 are: Produce to Availability, Inventory Turns Selling, Expand Client Base, and Capacity Elevation. The first step is achieved by implementing Drum-Buffer-Rope (DBR) and BM to improve performance in the plant. Thus, this step is focused on building the DCE. The second step of Inventory Turns Selling explains how to make an unrefusable offer (URO; the marketing solution of TOC) to prospective retailers. This step is focused on aligning the marketing and sales approaches of the supplier to capital-ize on the inventory turns offer to the retailers. The third step of Expand the Client Base is about implementing the “mechanisms to generate leads, monitor, support, and effectively control their sales funnel (new clients).” Thus, these last two steps are about capitalizing on the DCE. The final step of Capacity Elevation is about ensuring that performance in the plant does not deteriorate when sales increase. Thus, this step is about sustaining the DCE.

The NA of Step 2.2 is, “When display is limited and has a major impact on sales, TPS is important to the extent that ensuring an acceptable TPS and increasing TPS are both clients’ significant needs. To rapidly achieve the VV it behooves the Company to capitalize on that fact.” The word “behoove” means that it is worthwhile to take this action although the action is not required. The resulting strategy is, “A decisive competitive edge is gained by provid-ing a partnership that secures the clients an increase in TPS and provides a realistic chance of sharing in a much higher increase.” This means that the supplier would also benefit finan-cially from the increase in TPS.

The version of the CG S&T tree for MTS explains how to shift from MTS to make-to-availability (MTA). In this S&T tree, there are three steps in Level 3 under Step 2.1: Aligning the Supply Chain, Inventory Turns Selling, and Capacity Control. The essence of the differences between this S&T tree and the one explained previously is that the changes needed in imple-mentation differ because of how production is currently managed (MTS versus MTO).

Reliable Rapid Response S&T TreeThe RRR S&T tree is for manufacturers that sell to other manufacturers. Step 2.1 of the RRR S&T tree is focused on achieving a reliability competitive edge, while Step 2.2 is focused on achieving a rapid response competitive edge. The NA of Step 2.1 is, “When the due dates of the suppliers are notoriously bad and late delivery has major consequences for the client, reliability is a client’s significant need.” The resulting strategy is, “A decisive competitive edge is gained by the market knowing that the company’s due-date promises are remark-ably reliable, when all other parameters remain the same.”

The titles of the five steps in Level 3 under Step 2.1 are: 99% Due Date Performance (DDP), Reliability Selling, Expand Client Base, Load Control, and Capacity Elevation. The first step is achieved by implementing DBR and BM to improve DDP in the plant. Thus, this step is focused on building the DCE. The second step of Reliability Selling explains how to make a URO to prospective customers (manufacturers). This step is focused on aligning the marketing and sales approaches of the supplier to capitalize on the reliability offer to their customers. The third step of Expand the Client Base is about implementing the “mechanism to generate leads, monitor, and effectively control their sales pipeline (new business oppor-tunities).” Thus, these last two steps are about capitalizing on the DCE. The fourth step of Load Control is focused on ensuring that due dates given to clients are based on actual load in the plant. Thus, the ability to continue to meet due dates does not deteriorate as sales increase. The final step of Capacity Elevation is about ensuring that the delivery lead times



are not too long as sales increase. This ensures that business is not lost due to long lead times. Thus, the last two steps are about sustaining the DCE.

The NAs of Step 2.2 (Goldratt, 2008c) are:

• To rapidly achieve the VV, it behooves the company to have the ability to command high

premiums, even on a portion of sales.

• In a non-negligible percentage of cases, the client gains heftily from rapid response.

• The client cannot get cheaper RRR (or even an acceptable alternative) from anybody except

the company.

• Clients are not dumb.

The resulting strategy is, “On a considerable portion of the sales, high premiums are gained by the market knowing that the company can deliver in surprisingly short lead time.” The right side of the S&T tree explains how to implement Rapid Response. Two speeds of rapid delivery with set lead times for each are typical, with each speed of delivery having a predetermined price that is some set percentage above standard pricing.

Projects S&T TreeThe Projects S&T tree applies to companies that make a unique product.9 Step 2.1 of the Projects S&T tree is focused on achieving a reliability competitive edge, while Step 2.2 is focused on achieving an early delivery competitive edge. The NA of Step 2.1 is, “When the due dates of the suppliers are notoriously bad and late delivery has major consequences for the client, reliability is a client’s significant need.” The resulting strategy is, “A decisive com-petitive edge is gained by the market knowing that the company’s promises are remarkably reliable, when all other parameters remain the same. In the multi-projects arena, remarkably reliable (very high DDP without compromising on the content) is defined as delivering well over 95 percent on (or before) the promised due date, while in cases of late delivery the delay is much smaller than the prevailing delays in the industry.”

The titles of the five steps in Level 3 under Step 2.1 are: Meeting Project Promises, Reli-ability Selling, Expand Client Base, Load Control, and Capacity Elevation. The first step of 3.1.1 is achieved by implementing the Critical Chain Project Management (CCPM) solution (the TOC solution for managing projects). Thus, this step is focused on building the DCE. The second step of Reliability Selling explains how to make a URO to prospective clients. This step is focused on aligning the marketing and sales approaches of the supplier to capitalize on the inventory turns offer to the retailers. The third step of Expand the Client Base is about implementing the “mechanisms to generate leads, monitor, and effectively control their sales funnel (new business opportunities).” Thus, these two steps are about capitalizing on the DCE. The fourth step of Load Control is about ensuring that the staggering mechanism of CCPM is followed even if the lead times are too long to close future deals. Following the stag-gering mechanism ensures that the DDP of projects continues to be over 95 percent as more project work is taken on. The final step of Capacity Elevation is focused on ensuring that the project lead times are not too long as sales increase. This ensures that business opportunities are not lost due to long lead times. Thus, the last two steps are about sustaining the DCE.

The NAs of Step 2.2 (Goldratt, 2008b) are:

• To rapidly achieve the VV it behooves the company to have the ability to win significant

bonuses on many projects.

9It is recommended that anyone who is interested in this S&T tree review the program that Dr. Goldratt facilitated, which provides a full explanation of this S&T tree. It is available on DVD, titled “The Goldratt Webcast Program on Project Management,” at www.toc-goldratt.com.



• For many projects (and more so for sub-projects) there is almost no gain in early delivery. Still,

for almost every environment there are large categories of projects (less so for sub-projects) in

which early delivery brings substantial gains (sometimes the gains of early delivery dwarf the

price of the project).

An example of a project that would result in substantial gains for early delivery is the opening of a retail store. The earlier it opens, the sooner revenues start coming in. The result-ing strategy is, “On a considerable portion of the projects bonuses are gained.”

Comparison of RRR and Project S&T TreesNote how similar the RRR and Project S&T trees are. The NA and strategy of Step 2.1 in each are essentially the same. The only difference is in the definition of reliability. The steps under 2.1 in Level 3 are essentially the same as well. The main difference is which logistical solution is implemented as described in the first step of Level 3. Step 2.2 is similar in that it focuses on achieving more income for faster delivery. In the RRR S&T tree, higher prices are charged based on whether the delivery is rapid or super rapid. In the Projects S&T tree, bonuses are paid based on how much earlier the project is completed.

Pay per Click S&T TreeThe Pay per Click (PPC) S&T tree is for companies that make products that clients use. Step 2.1 of the PPC S&T tree is focused on eliminating the risk to the client, while Step 2.2 is focused on eliminating the risk to the company that makes the products. The NA of Step 2.1 is, “When a good investment is regarded as too risky, eliminating the risk is a client’s sig-nificant need.” The resulting strategy is, “The company gains a decisive competitive edge in large markets by providing its equipment in a way that does not involve (almost) any risk for the client.” The titles of the four steps in Level 3 under Step 2.1 are: Market Segmentation, Market Offers Design, Pay-per-Click Selling, and Sales Funnel Management. The first two steps are focused on building the DCE, while the last two are focused on capitalizing on it.

The NA of Step 2.2 is, “Long-term profitability is not the only consideration. Additional investments and additional risks may bring a company to its knees in the short- and medium- term.” The resulting strategy is, “The additional investments needed for the PPC business are well within the capabilities of the company and the associated risks are small and man-ageable.” All of the steps under Step 2.2 in Level 3 are focused on sustaining the DCE. The first Level 3 step on the right side of the S&T tree is focused on implementing DBR/BM and CCPM to improve performance in the plant.

It is interesting to note that this S&T tree is the only generic VV S&T tree that does not include implementing a logistical solution of TOC on the left side of the S&T tree as the first step. Instead, it is the first step on the right side of the S&T tree.

Comparison of S&T Tree to Key Literature on Strategy10

Now that we understand more about S&T trees, we will compare this approach to the stra-tegic planning approach that is described in the best-selling book, Blue Ocean Strategy (Kim and Mauborgne, 2005). The authors point out that most companies are like fish that live in red oceans. It is red from the blood of competitors eating each other. They point out that there is a way to be in a blue ocean, where competitors are not a factor. The problem is that all of their examples are based on inventions—on a customer need that was not recognized

10My suggestion for learning more about the literature on strategy is to review Thompson, Strickand III, and Gamble (2008).



before. This is not an effective strategy because the risk is too high. The need may not be a real need. In addition, the process for turning a need into a recognized need is not easy to do. Many companies have gone bankrupt trying to do so. We want to be in the blue ocean with-out the high risks. The S&T tree provides a way to achieve this. The S&T trees are focused on needs that are both real and recognized. In addition, the entire plan is focused on how to achieve the goal without taking real risks.

Porter (2008) explains how five competitive forces need to be considered when determin-ing the strategy: established rivals, customers, suppliers, entrants, and substitute offerings. Both forces of customers and suppliers are about the power they have to pressure the com-pany into getting what they want. Both are not relevant with respect to the S&T tree because the S&T trees provide a way to have a decisive competitive edge that no significant competi-tor can duplicate in the short term. The S&T trees typically entail synchronizing several func-tional implementations of TOC. Each implementation consists of making paradigm shifts from the traditional ways of managing. Making just one paradigm shift is not easy to do. Therefore, making more than one would be difficult for a competitor to do. Eventually, a competitor will probably be able to do so. However, the company will be prepared because another S&T tree will be ready to implement before the four years are complete. As described earlier, the S&T tree provides the win-win solution between the different links in the supply chain—between the company and its suppliers and between the company and its customers. It is important to note that the market in which we decide to have the DCE is one in which there is significant room for growth, but also one in which the company will not have more than 40 percent of the market share. This is important because the company then has room to continue to grow even if the market is going through a down cycle. The force of substitute offerings is addressed as well with this win-win solution. Porter suggests that the way to limit the threat of substitutes is by offering better value, which is what the S&T tree does.

Porter points out that the force of established rivals can lead to price wars. The S&T trees provide a DCE that is not based on prices. In fact, in many cases the S&T trees enable charg-ing higher prices or earning more money through bonuses based on the DCE achieved. The final force of new entrants is not really a concern either because our solution is win-win for all stakeholders. The S&T trees enable the ability to satisfy the market successfully now and in the future. Therefore, the risk of losing clients is quite low.

Porter recommends using one of three strategies: cost leadership, differentiation, or focus. Cost leadership is about being the leader in the industry based on a given level of quality. The company can choose to sell at average or below-average prices. The cost advan-tages are achieved through process improvements and locking in large sources of desirable materials, to name a few. The S&T tree enables the ability to achieve this type of strategy. However, it is one that others may be able to duplicate easily in a short period of time. The differentiation strategy is about developing unique attributes for the product or service that results in the company’s customers valuing what they sell. This strategy is achieved by meeting significant needs of the customers. The VV S&T trees are in line with this strategy. Finally, the focus strategy is about using one of the other two strategies to capture a (narrow scope) segment of the market. This strategy is in line with the S&T trees as long as not more than 40 percent of the market share is captured.

Another contribution of Porter is the concept of value chain. Porter suggests that the company identify the key, interrelated (generic) activities of the chain and ensure each is focused on creating value. The generic core activities are inbound logistics, operations, out-bound logistics, marketing and sales, and service. The S&T trees specifically address the ability of these functional areas to enable building, capitalizing on, and sustaining the DCE. Porter argues that since a company’s value chain is linked to the value chains of other com-panies upstream and downstream from the company in the supply chain, then the compa-ny’s competitive advantage needs to depend not only on its value chain, but also on the



aligned efforts of this value system. The key is to ensure a win for each link in the chain. This is consistent with the approach of the S&T trees.

The VV S&T trees ensure that the constraint, which is the rate at which the company can grow, is controlled by management. The S&T trees also ensure that the constraint does not become internal (such as within a function) or the market. In other words, the S&T tree ensures that the limit to achieving more of the goal is not the capacity of a department or the amount of demand in the market. Management has the ability to take actions to ensure that a department or the market does not become a constraint. The VV S&T trees include steps for ensuring that the constraint does not become a department or the market. These S&T trees were created with the understanding that the real constraint is management time. Hav-ing too many initiatives in the organization that management has to oversee is the opposite of exploiting the constraint. The usage of VV S&T trees in organizations ensures that the only initiatives are ones that will result in a significant impact on achieving the goal.

Since the S&T tree does or can address the links in the supply chain (customers or sup-pliers), the strategy can ensure that the constraint is not within one of these links. The win-win between the various links ensures that all the links are achieving more. However, it is possible that the constraint of the supply chain can be within one of these links. In that case, the S&T tree needs to address how to ensure that the only constraint within the supply chain becomes the ability of the entire supply chain to grow. The focus is not just on win-win for all, but also on the understanding that unless the end customer has bought the product, no company in the supply chain has really made a sale.11

Hamel and Prahalad (1994) point out that companies need to identify and focus on their area of core competence—that which proves the company’s competitive strength. The crite-ria for the core competence are that it provides the company access to a wide variety of markets, it is difficult to imitate, and it contributes significantly to the end-product benefits. The S&T trees clearly meet the last two criteria. The usage of the S&T trees also enables meet-ing the first criteria as well. We have come across companies in which more than one of the generic S&T trees applies. In these cases, we can combine the S&T trees into one that is cus-tomized for them to enable achieving a DCE in more than one market and not enabling the company to have more than 40 percent market share in any one market. In any case, we usu-ally do want to ensure that the company is not just in one market long term because the company is subjected to the ups and downs of one market. In some cases, an organization can be ever flourishing without diversification. In most cases, we would recommend that an organization plan to go into more than one market in which its core competence applies in order to reduce the risks to the organization.

Hamel and Prahalad argue that the primary killer of existing core competencies is cost cutting and silos. Neither is a concern when effectively using the S&T trees. The S&T tree does not focus on cost cutting, but rather on increasing T faster than OE increases. The S&T tree also ensures that silos are no longer an issue because the actions of the functions are coordinated or aligned to achieve the goal.

Kaplan and Norton’s (1996) Balanced Scorecard (BSC) is a tool they developed that is uti-lized to translate strategy into action. It was initially developed as a way to incorporate non-financial measures with financial measures. The BSC consists of a variety of performance measures that are divided into four categories: financial, customer, internal business pro-cesses, and innovation and learning. The process for designing the BSC for a company begins by writing the mission statement and then linking it to strategic business objectives. Next, performance measures are determined, which will be utilized to track progress on the stra-tegic objectives. Johanson et al., (2006) point out that Kaplan and Norton think that “an

11Suggestions for how to implement this approach are described in the TOC Insights into Distribution and Supply Chain, which is available at www.toc-goldratt.com.



effective strategic learning process requires a shared strategic framework that communi-cates the strategy and enables all participants to see how their individual activities contrib-ute to overall strategy fulfillment.” This is what the S&T trees enable us to do.

The BSC has a large number of performance measures. We are aware that measures drive behaviors of people. The problem is that when there are a number of measures, it is likely that these measures are in conflict. In other words, an action taken that improves one measure hurts the performance on another. It is true that we need non-financial measures. That is why we have the three operational measures of T, I, and OE in TOC. We also know clearly what the priorities are for improving these measures when they are in conflict. In the S&T trees, there are few measures of performance. We have found from experience that when people understand what to do and how it is aligned with the goal, the right behaviors will result—assuming of course that we do not continue to use the wrong measures of per-formance, such as local efficiencies.12 In addition, we argue that it is important to set up a bonus structure that rewards all employees when key performance measures of the com-pany are improved, such as NP.

Execution of the S&T TreeThe S&T tree is a powerful tool for communication and synchronization of the efforts within the organization to achieve the goal. It is easy to learn how to read an S&T tree. The S&T tree is presented to everyone in the company to some degree. Top management must validate the S&T tree to Level 3. The validation process consists of reviewing the S&T tree to verify that each assumption is a fact of life and to deal with all reservations of management. Those who will lead the implementation of the S&T tree validate the S&T tree to Level 4. Between the presentation of Level 3 and Level 4 is knowledge transfer of the key concepts of TOC aligned with the S&T tree to be able to validate fully the logic in the S&T tree. Everyone in the com-pany will be exposed to at least the part of the S&T tree that directly relates to them. They will also understand how their actions support achieving the goal because the S&T tree must always be presented from Level 1 down. However, it is not necessary to present all of the content of the S&T tree to do this.

The usage of the CRT and ECs in companies led to the understanding of the impact of silo thinking (each function being managed in isolation without a clear understanding of its impact on other functions or the whole system) and the many conflicts that exist within an organization. We also understood how a conflict is addressed in one silo can have negative effects on other silos. The S&T tree successfully breaks all these conflicts and ensures that all of the actions are aligned with achieving the goal.

The benefits of using the S&T tree are:

• The plan is effectively communicated to all stakeholders.

• The full logic of the strategic plan is presented and validated by the stakeholders.

• The probability of getting buy-in and collaboration of all the stakeholders increases significantly.

• Each stakeholder understands how his or her actions are directly linked to achieving the goal.

• Authority and responsibility are aligned.

• Fast results are achieved given the way in which the S&T tree is designed.

12See the TOC Insights into Operations, which can be purchased at www.toc-goldratt.com, for a good explanation about why local efficiencies are not a good measure of performance.



A TOC expert shared a story about a TOC implementation with the author. He stated that the implementation was done without using an S&T tree. Afterward, the S&T tree was written. He realized that a number of mistakes that were made in implementation would have been prevented had the S&T tree been written before implementation.

Summary and DiscussionThis chapter provided a detailed explanation of the structure of S&T trees, with a focus on the VV S&T trees that have been released into the public domain. The discussion also cov-ered some key concepts with respect to writing S&T trees in general. This chapter provides some guidance on how to write S&T trees. I suggest reading the article written by Goldratt, Goldratt and Abramov (2002) about S&T trees as a supplement to this chapter. Fully under-standing how to write an S&T tree can be achieved through attending a workshop or read-ing a book written on the subject, which does not yet exist. It would have been useful to include part of the S&T tree for hospitals to show a different Level 1 and below. However, it was not possible to achieve that within this chapter. This S&T tree will be presented in some detail in materials I develop in the future

More development and usage of S&T trees has occurred within the past year. Currently, there are two types of S&T trees being used in combination in companies. At the TOCICO International Conference in Tokyo in November 2009, Dr. Eli Goldratt spent a significant portion of the first full day of his upgrade workshop discussing the S&T trees and ways to use them.13 The type presented in this chapter is now referred to as the Transformation S&T tree because it is effective for managing the transition of an organization from the current reality to the future reality. The second type of S&T tree, which is referred to as an Organiza-tion S&T tree, is focused on eliminating the engines of disharmony in organizations. The five engines of disharmony are:

1. Many people do not really know (cannot clearly verbalize) how what they are doing is essential to the organization. Would you be motivated if you were in that position?

2. Most people do not really understand how the work of some of their colleagues is essential to, or, at a minimum, contributes to the organization. Would you be collaborative if you were in that position?

3. People are operating under conflicts.

4. Many people are required to do tasks for which the reason no longer exists. People’s intuition is always strong enough to feel it, but not always strong enough to explain it convincingly to their superiors.

5. There are gaps between responsibility and authority. You, like any other manager, know firsthand how frustrating it is to have something for which you are responsible to accomplish, but you do not have the authority for some of the actions that must be taken.

The Organization S&T tree follows similar rules to writing the Transformation S&T tree. One exception is that each step corresponds to a person. Level 1 is the President. Level 2 includes all the people who report directly to the President, and so on. Both types of S&T trees are needed for a company to successfully become and remain ever flourishing.

13He pointed out that two additional usages of S&T trees are for project management (for choosing the project and determining its content) and as an organizer of knowledge.



ReferencesCollins, J. C. and Porras, J. I. 1994. Built to Last: Successful Habits of Visionary Companies. New

York: Harper Business.Goldratt, E. M. 1999. Goldratt Satellite Program Session 8: Strategy & Tactics. (Video series: 8 DVDs)

Broadcast from Brummen, The Netherlands: Goldratt Satellite Program.Goldratt, E. M. 2008a. The Choice. Great Barrington, MA: North River Press.Goldratt, E. M. 2008b. The Goldratt Webcast Program on Project Management: Sessions 1-5. (Video

series: 5 sessions) Roelofarendsveen, The Netherlands: Goldratt Marketing Group. Goldratt, E. M. 2008c. Retailer S&T tree Available at: http://www.goldrattresearchlabs.comGoldratt, E. M., Goldratt R. and Abramov E. 2002a. Strategy and Tactics Tree TOC Weekly.

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UK: Goldratt Marketing Group.Goldratt, E. M. and Goldratt, R. 2003b. Insights into Operations. Bedford, UK: Goldratt

Marketing Group. Hamel, G. and Prahalad, C. K. 1994. Competing for the Future. Boston, MA: Harvard Business

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January 86(1):78–93. Thompson Jr., A. A., Strickand III, J., and Gamble, J. E. 2008. Crafting and Executing Strategy.

16th ed. New York: McGraw-Hill Irwin.

About the AuthorLisa A. Ferguson, PhD, is the founder and CEO of IlluminutopiaSM, an organization that is focused on “Illuminating the way to utopia for individuals, organizations and societySM.” Our Websites are located at www.illuminutopia.com and www.illuminutopia.org. Lisa is co-author, with Dr. Antoine van Gelder, of an S&T tree for hospitals. She is currently working on writing books and papers to publish as well. Until June 2008, she spent a year working directly with Dr. Eli Goldratt (the founder of the TOC) as his technical assistant and writer (learning how to write the way he does). Since 2005, Lisa has been teaching part-time for Goldratt Schools (GS) training consultants in different countries, including India, the United States, and Japan, to be TOC Experts or Supply Chain Logistics implementers. She has a PhD in Operations Management from Arizona State University and an MBA. She taught operations management full-time in a university business school for 10 years. The last 5 years were spent teaching only MBA and doctoral students with a practical focus. Lisa has been involved with the TOC International Certification Organization (TOCICO) since its inception. She is cur-rently a member of its Board of Directors. She is TOCICO-certified in Supply Chain Logistics Project Management, and the Thinking Processes. She resides in Sedona, Arizona and enjoys spending time with horses, hiking, and playing tennis.


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