The Theory of Constraints for Startups: A Prioritization Mechanism

“The Goal” by Eli Goldratt is a classic business fiction book that came out in the mid-80s. The hero of the story, Alex Rogo has 90 days to turn around a manufacturing plant before corporate HQ closes it down. He learns from his professor the Theory of Constraints.

“The theory of constraints (TOC) is a management paradigm that views any manageable system as being limited in achieving more of its goals by a very small number of constraints. There is always at least one constraint, and TOC uses a focusing process to identify the constraint and restructure the rest of the organization around it. TOC adopts the common idiom “a chain is no stronger than its weakest link”. This means that processes, organizations, etc., are vulnerable because the weakest person or part can always damage or break them or at least adversely affect the outcome. (Source: Wikipedia)

The idea is you need to have some source of metrics and measurement in place. Once you have that, you can use this to identify what your constraint is and fix it.

In Startup parlance, it’s about figuring out the one metric that matters. I still like using the very simple AARRR Metrics framework which can help you figure out what the biggest issue is. A=Acquisition, A=Activation (Onboarding), R=Retention, R=Revenue, R=Referral in case you don’t know it. It’s a very valuable framework to diagnose what your immediate problem is. It’s a way for a startup founder to focus all their time and energy to fixing this.

To go back to Constraints, here is the definition from the book.

“A constraint is anything that prevents the system from achieving its goal. There are many ways that constraints can show up, but a core principle within TOC is that there are not tens or hundreds of constraints. There is at least one, but at most only a few in any given system. Constraints can be internal or external to the system.”

It is very relevant for Startups to help them focus on the area that is holding them back from growing. What is the biggest constraint in growing the business. Ie. what is the choke point? In some cases, it could be a Product issue. If so, do you need to hire more engineers & then build. Or maybe you are getting a ton of leads but you can’t close any of them. Then the issue is a sales team quantity or quality issue. Or perhaps business is coming in and you cannot keep up with demand. The constraint could be a money issue to hire people, so fundraising may be key. Or maybe you have the money and then it’s an actually hiring issue. And by the way, the constraint will change all the time. It’s like whack a mole but that is the game of startups.

I found this framework to be a really helpful one whenever I talk with startup founders who have a hard time prioritizing. Once you use this lens it does help clarify what they should be focusing on. This focus is what will allow you to win.

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Ever curious: Tsundoku, Reader, Aspiring Shokunin, World traveller, Investor & Tech/Media exec interested in almost everything! www.marvinliao.com