Managing External Constraints – Marketing and Sales

A constraint is labeled “external” when we realize that the demand for our products is fundamentally lower than what we could physically produce. In other words, it is external when what constrains us is “sales”.

The book that is companion to this website has one of its longest chapters dedicated to Marketing and Sales. There, it is explained, with as much detail as possible, the logic and the tools to build an offer to a well identified set of customers, as well as the organizational set up needed to treasure on this acquired ability. See ‘Sechel: Logic, Language and Tools to Manage Any Organization as a Network‘.

Over the years, it has become increasingly clear how the activities of Marketing and Sales are conceptually intertwined with economic paradigms built into the accounting and measurement system. Until we truly understand the systemic ramification of Throughput it will be difficult to fully embrace this approach to the market.

Throughput measures a pace, a rhythm; it tells us how much units of our goal (often dollars/euros/yen) are entering our bank account in a given unit of time. It is not a GAAP accounting measure; it introduces a concept of speed that is unknown to accounting.

Throughput is a “rate of cash” generation and, as such, is determined by what limits our system from producing that rate. We call it constraint. In the systemic approach we preach all through this website (and the companion book) no economic consideration is relevant to the goal of the system other than this rate.

The Economics of Throughput is then entirely dictated by the rate of cash generation. Not by accounting margins, not by earnings, not by market share, not by cost savings and not by efficiencies. Throughput is not gross, net, pre or after tax profit, it is not EBITDA and it is only in part connected with contribution margins.

So, if the Economics of Throughput is dictated only by this rate of cash generation, how should we go about selling? What considerations should we have in mind in designing a marketing campaign aimed at maximizing this rate of cash?

We can only sell what the organizational system can realistically ship; hence, as we are managing a system where we have strategically chosen a constraint, we can only sell what the constraint can produce. The rate of cash generation will be dictated by the speed at which we can move our products through the constraint.

Marketing and Sales then become that part of the organization that maximizes the cash entering the company’s bank account by designing an implementing a strategy aimed at optimizing what goes through the constraint. We call this optimization Optimal Throughput Mix (OTM). The goal of Marketing and Sales is to sell what optimizes the rate of cash generation through the constraint.

Indeed, this is not always possible and several other strategic considerations should dictate the OTM; however, each and every time we “strategically” decide to sub-optimize our OTM we have to have clearly in mind the money we are leaving on the table.

Embracing this economic approach to sales is possible only if we design an organization around a strategically chosen constraint and if this constraint is statistically stable and supported in its functioning by equally stable (and, of course, more “capable’) subordinating processes. This is precisely the Economics of the Decalogue approach to system management and the inspiring principle for the optimal deployment of Operating Expenses.