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Strategy & Tactics for State Owned Enterprises. Christoph Lenhartz
1. Strategy & Tactics for
State Owned Enterprises
Vilnius, September 27, 2012
Christoph Lenhartz, Chairman, TOCICO
2. Topics
1 SOE and Their Challenges
2 The Dilemma between Obligation and Profits
3 Strategy and Tactics for Sustained Improvement
4 Examples
01.10.12 2
3. What Is an Enterprise?
Constraint
GOAL
Necessary Conditions
01.10.12 3
4. State-Owned Enterprises
SOE pursue financial, strategic, political, social goals:
•Strategic control of resources/infrastructure (Energy, forestry)
•Delivery of essential but non-lucrative services (Public transport)
•Social/political services (Registers)
10/01/12 4
5. SOE in Lithuania
• “Group 1A”: Focus on increasing returns (dividends)
• “Group 1B”: Focus on increasing returns AND securing strategic
interests
• “Group 2”: Focus on social and political objectives while ensuring
efficient operations
Value of state-owned assets: 3,053 mLTL
Performance 2011:
• Sales revenue 6 552 mLTL
• Net profit 247 mLTL
• Asset market value 13 549 mLTL
• D/E ratio 11.0 %
• ROE 1.3 %
• Employees 40.8 thousand
Source: http://www.ukmin.lt
10/01/12 5
6. A Challenge in SOE and Public Sector
• Close the large and often growing gap between service and infrastructure
levels and a growing demand
• Demand grows much faster than resources and services levels
Demand Expectations
Vicious cycles of over-
and underreactions
Services
levels
Current performance
Resources
01.10.12 6
7. A Vicious Cycle
Budget Pressure to be
decreases more efficient
Users resort to
Reduce service
alternative/
offering
private offerings
Effective Demand per
service level unit of service
decreases increases
10/01/12 7
8. TOC in ONE Word
FOCUS
•Doing what should be done
•Not doing what should not be done
9. Stakeholders and Expectations
State
Budget contribution
Service provision
Financial viability
Security High service
Satisfaction Low price
SOE
Employees Public/Users
Secure employee Customer
environment satisfaction
01.10.12 9
12. Global Metrics in Business and SOE
For-profit Business SOE Comment
Organi- Satisfied stakeholders
Satisfied stakeholders (long term
zational (long term profitable Identical
value improvement)
goal growth)
Continuously increase satisfaction
Operatio- Continuously grow
of system users while growing Different focus
nal goal profits
profits beyond minimum level
Rate at which system
Rate at which system generates Parallel definition
Through- generates money
goal units = improvement of user yet different ope-
put (T) through sales
satisfaction and financial T ratonialization
(T = Sales - TVC)
Active: Investment in purchasing assets, stock for short term
Inventory
sales (operating inventory) Identical
(IY)
Passive: customers waiting for processing (service industry)
Investment Capital base (Current captal budget plus present value of all
Identical
(IT) past capital investments)
Operating System cost of turning
System cost of creating T Identical
Expenses IY into T
Adapted from Shoemaker &
Reid, 2010 and own research 10/01/12 12
13. An SOE Dilemma… Mission or Profit?
Maximize fulfillment
Focus on increasing
of mission/special
service delivery.
obligation.
B D
A
Be a successful
SOE.
C D‘
Operate within
Focus on increasing
financial
profitability.
expectations.
10/01/12 13
14. An SOE Dilemma… Pay Dividends or Re-invest
B D
Ensure long term Re-invest profits into
growth of SOE. business of SOE.
A
Be a successful
SOE.
Contribute to the
Pay dividends to
national budget in the
shareholder(s).
short run.
C D‘
10/01/12 14
15. An SOE Dilemma… Cost of Service
B D
Ensure broad
Charge low prices.
accessibility
A
Be a successful
SOE.
Maximize profits Charge high prices.
C D‘
10/01/12 15
16. A Generalized SOE Dilemma
B D
Achieve strategic Allocate resources to
political, social goals national obligations.
A
Be a successful
SOE.
Allocate resources to
Contribute to the
profit-generating
budget.
endeavors.
C D‘
10/01/12 16
17. Direction of Solution
• Set clear and stable performance standards for the national
obligations
• Develop sound strategy and tactics as a blueprint for sustained, lng
term value increase
• Improve flow and effectiveness of national obligation and “free”
services (Operations excellence):
– Operations excellence: deliver more service with same/less resources,
faster;
– Use proven mechanisms from business world, e.g. TOC
– Implement continuous improvement (“POOGI”)
• Implement Financial excellence
• Attract and retain outstanding employees
• Address dilemmas and conflicts using Thinking Processes
10/01/12 17
18. Strategy and Tactics – Global View
Strategy The SOE is more and more adept at delivering excellent service (quality,
timeliness and customer satisfaction), while providing a rewarding work
environment (for staff and management) and significantly improving financial
performance (performance to budget, profit, spending).
Parallel • Actions taken to improve quality of service can jeopardize financial
Assump- performance, while actions taken to not jeopardize or to improve financial
tions performance can hurt quality of service.
• Financial throughput must grow faster than OE to realize growing profit.
• Exhausting the SOE’s resources and/or taking too high risks severely
endangers the chance of reaching the strategy.
• When industry applications (e.g., Lean, TOC, Six Sigma) are appropriately
adapted and effectively focused (based on customer centricity) and
POOGI is implemented, the SOE’s performance (service level, rewarding
work environment and financials) improves significantly through more
effective use of currently available resources.
Tactics The SOE successfully changes its mode of operation through effective
adaptation of industry applications and other knowledge applied (incl.
POOGI) without exhausting its resources and without taking real risks
Sufficien- The way to achieve dramatic improvements is based on knowing where and
cy Ass. how to successfully focus efforts.
01.10.12 18
19. Strategy and Tactics – Level 2: Flow
Step 2.1 Effective Flow
•Flow of work within and between departments has a significant impact
on quality and financial performance.
•The flow of information, resources and inventory affects not only the
workflow, but also the work environment and financial performance.
•Strategy: A successful mode of operation is accomplished when
effective flow is achieved within the SOE, when all other parameters
remain the same
•Tactic: Identify, prioritize and remove barriers to flow (use TOC tools
to focus and improve)
01.10.12 19
20. Strategy and Tactics – Level 2: Improvement
Step 2.2 Process of Ongoing Improvement (POOGI)
•Service delivery have an important impact on customer satisfaction
and financial performance of the SOE.
•Service defects (errors) have an important negative impact on SOE
performance.
•Applied knowledge in the public domain can be utilized to significantly
improve SOE performance..
•Strategy: Applied knowledge is utilized in the SOE to improve its
performance (excellent service, rewarding work environment and
financials).
•Tactic: The SOE implements an effective, focused POOGI
01.10.12 20
22. Expected Results
Higher value of SOE
Better quality of services and products
Lower cost/price of services and products;
Increased profitability of SOE and
contribution to budget.
DON’T FORGET TO MEASURE!!
10/01/12 22
23. The Five Focusing Steps
0. Define system & goal
1.IDENTIFY the system’s constraint(s).
2.Decide how to EXPLOIT the system’s
constraint(s).
3.SUBORDINATE everything else to the
above decision.
4.ELEVATE the system’s constraint(s).
5.WARNING!!!! If in the previous steps a
constraint has been broken, go back to
step 1, but do not allow INERTIA to cause a
system’s constraint.
01.10.12 23
24. 24 10/01/12
Quadrants of Change
Layers of Resistance,
Shoulders of Giants
Strategy & Tactics Trees
Standing on the
Change Management
Five Focusing Steps
Ongoing Improvement
Thinking Processes Performance Mgt. Operations Mgt
Effect-Cause-Effect: CRT, Operational Measure- Production:
FRT, NBR, PRT, TT ments: T, I, OE Drum-Buffer-Rope
Conflict Resolution: Financial Measurements: Project Management:
Cloud diagrams NP, ROI, CF Critical Chain PM
Audit: categories of Link Reliability: Distribution:
Legitimate Reservations TDD, IDD Replenishment
TOC – Technology Overview
25. Specific Applications
• Health Care
– Improve patient outcomes (quality, timeliness of care)
– Higher efficiency (overall resource utilization)
– Examples: NHS (UK), hospitals and practices worldwide
• Education
– Teach through the use TOC TP tools
– Learning instead of exam-focus only
– Examples: Schools worldwide, prisons
• Justice
– Increase throughput (no. of cases/time)
– Reduce duration of cases/trials
– Better quality
10/01/12 25
26. Strategic Projects of SOE
• SOE projects:
– Build & decommission nuclear power plants
– Upgrade power plants and grids
– Gas infrastructure
– Logistics
– Road, rail, airspace, port
• All companies have several additional,
internal projects
• All projects share/compete for limited resources
What is the impact of delays?
What is the value of timely/early delivery?
What is the impact of incomplete delivery?
10/01/12 26
27. A Delayed SOE Project – Airport BER
• Initial opening date: October 2011
• Current plan: October 2013
• Project turned from “green” to “red”
within short time
Damages include:
• Significant cost overrun (current estimate: 4.3 b€, overrun of 1.8b€)
• AirBerlin and Lufthansa can’t realize planned growth and expansion
• State can’t collect fees, taxes
• Airport company on the verge of bankruptcy
• Unhappy passengers
• Others: tourism, noise, congestion, reputation
10/01/12 27
28. Critical Chain Project Management
• TOC-based solution for project management
• Single & multiproject organizations
• Typical results:
– On time performance: 95%
– Lead times reduction: 25%
– Increased project throughput: 30%
• Three key interventions:
– Stagger projects
– Buffer safety
– Robust tactical priorities
10/01/12 28
29. Example: SOE Logistics Provider
Challenge:
– Provide basic national obligation service and non-regulated services
without segmenting resources
– Regulator had determined too many service failures on obligation services
(delayed deliveries)
– Need to improve flow
Solution direction:
– Improve effectiveness of uniform physical process/flow for all products
– Ensure sufficient capacity for obligation service in sorting centers, line-haul,
first and last miles
– Decide on bottleneck location: line-haul schedule
– Fill up capacity on line-haul schedule:
• First obligation service
• Then premium non-regulated products
• Then basic non-regulated products
10/01/12 29
30. Other Examples
• Ministry of Land Infrastructure and Transportation, Japan
– Critical Chain Project Management used to significantly increase
delivery of public works projects (infrastructure)
– Win-win-win Partnerships (one day response)
– Clean-up after 2011 Tsunami and Fukushima nuclear accident
– Create harmony (Wa)
• Utah Department of Workforce Services (USA)
– Case workload 2008-2012: +50%
– Operational cost 2008-2012: -25%
10/01/12 30
31. Dėkui!
Thank You! Vielen Dank!
Pinnacle Strategies Europe, Middle East & Africa
www.pinnacle-strategies.com
clenhartz@pinnacle-strategies.com
+49 175 1862047
Editor's Notes
This presentation is about all of us – you, me, and espacially about our children
A company is a system A system has a goal, the Goa is determined by the system owner!!! Necessary conditions must be satisfied in order to achieve the goal The performance of any system is limited by a constraining factor Success is defined by stability and growth Decisions/actions required for growth are often in conflict with those required for stability Common challenge: Achieve more goal units with same/less resources in less time
First understand focus relative to what…
SOE serve three main stakeholder groups Each group has specific expectations [blue text] and needs [clouds]. Although the perspectives of the state (as shareholder), the employees and the public are different, they are interdependent. Ignoring these well-established interdependencies diminishes the overall performance. An effective organization must satisfy all three perspectives simultaneously
SOE serve three main staekholder groups Each group has specific expectations [blue text] and needs [clouds]. Although the perspectives of the state (as shareholder), the employees and the public are different, they are interdependent. Ignoring these well-established interdependencies diminishes the overall performance. An effective organization must satisfy all three perspectives simultaneously
Financial Viabilty: Standard TOC global metrics applied to for-profit and for-cause organizations
Example de
Improve the quality of services provided and products developed by enterprises; Reduce the price of services provided; Improve the profitability of enterprises and increase their contribution to the budget.
Improve the quality of services provided and products developed by enterprises; Reduce the price of services provided; Improve the profitability of enterprises and increase their contribution to the budget.
A-B SOE exists to satisfy a specific goal or need which no private actor would or should not satisfy. B represents the idea that the SOE is primary there to pursue politics and regulate economic sectors B-D The obligation is required to achieve the SPS goals Service delivery is essential to achieving the mission SOE must do whatever it takes to achieve the mission Level of service delivery must be continuously increased A-C “ The target is to collect over LTL 500 million in dividends and profit payments in 2012”*; also taxes C represents the idea that the state is a shareholder in a business C-D‘ Profits don’t just happen must be generated within the SOE Personnel and leadership are not used to operating like a business SOE currently doesn’t meet profitability expectation Achieving the mission should no be founded through other sources
Is it true, that the national obligations can not be delivered in the most effective way? Is it true that there is no way to improve teir delivery? This is obviously a wrong assumption. You have seen this for instance with the significant improvements in the performance of the guarantee fund. TOC has proven ist effectiveness in the private and the public sector. Ist unique ability to analyze and resolve conflicts makes it the ideal tool for SOE and public sector reform.
PA1: . (D-D’ assumption from the core conflict / root cause of all the symptoms) 1. Why the change is needed? (Necessary Assumption) 2. What is the specific measurable objective of the change? (Strategy) 3. Why we claim the Strategy is possible and what specific requirements, potential negative branches or obstacles must be considered when selecting from the alternative ways (tactic) for achieving the Strategy? (Parallel Assumptions linking Strategy with Tactic) 4. How to best achieve the objective of the change (Tactic) e.g. what changes should be made to processes, policy or measurement? 5. What advice/warning should be given to subordinates, which, if ignored, will likely jeopardize the sufficiency of the steps they would take to implement this tactic or which is likely to be ignored (without the warning)? (Sufficiency Assumption)
SA: (the real power of TOC – focus on the constraint using the 5FS and the root cause using the TP).
Appplied knowledge: (e.g., TOC: TP, Lt. Cloud, 4 Views of Change, Organizational S&T tree, how to write Transformational S&T trees; Japan Wa), case studies, existing applications; management science
TOC’s operations management tools consist of what is perhaps the foremost working principle of TOC, the process of ongoing improvement (POOGI), as well as a suite of tools and methodologies for transferring TOC’s underlying ideas into a variety of operational contexts, such as production (e.g., DBR and buffer management), distribution (replenishment), and projects (critical chain). As TOC was originally conceived in a manufacturing environment, the tools associated with production management constitute some of TOC’s earliest developments.
