4 ways Eli Goldratt’s business novel ‘The Goal’ can help start-ups

In my third year of Industrial Engineering, one of the recommended books was a novel called: The Goal by Eli Goldratt. A novel? You heard right. I certainly wasn’t expecting to read a novel during my engineering studies.

But the novel shifted my worldview.

People don’t learn when you just give them facts, data and results to memorise. They learn when you give them a story that helps them deduce answers.

You see, it’s a business book disguised as a novel. You are reading a story while you are learning real business principles. The book was published in 1984 and is still extremely relevant, because it introduces you to the Theory of Constraints.

When I first read the book, I didn’t really know how to apply the Theory of Constraints to my start-up world (the theory is based in a manufacturing world), until I reread it recently.

I work with early stage start-ups, and in this article, I will share how some of the lessons from The Goal can be applied to building start-ups.

The Plot Overview

Alex Rogo and his team are given a three-month deadline to turn around their failing plant. At the same time, his relationship with his wife is falling apart. This is the story of how he saves the plant and his marriage, with help from Jonas, his high school physics teacher, who guides him through the Theory of Constraints.  The story follows how he unravels what is happening in his plant, and eventually ends up with an innovative way to run his plant and do business. And by taking back control of his plant, he has more time to be with his family. For a full summary of the book click here.

Theory of Constraints

"The  Theory of Constraints is a methodology for identifying the most important limiting factor (i.e. constraint) that stands in the way of achieving a goal and then systematically improving that constraint until it is no longer the limiting factor. " ~ Lean Production

One of the main elements of TOC is that it focuses on improving a system. The highest priority is always the current, biggest constraint in the system. TOC helps to focus. Instead of trying to solve 20 problems at the same time, you identify the biggest constraint and solve that first. Traditionally, TOC is used to identify bottlenecks and constraints in a manufacturing environment and reorganise the flow of the plant to reduce the pressures of bottlenecks and constraints.

After reading the book for the second time, I started thinking how the principles can be applied in other industries. Here are some lessons that can be applied for start-ups.

Lesson 1: Ask the right questions

Alex doesn’t know where to begin. He randomly meets Jonah, his high school physics teacher at the airport. Alex shares his plant’s troubles, and Jonah starts asking him difficult questions, challenging the way he thinks about his plant, and gives clues about where to start digging. Jonah becomes a Socratic type mentor who guides Alex through the process of finding the truth, by asking questions.

What can start-ups learn from Alex and Jonah’s interactions?

1) The value of asking the right questions to get valuable feedback:

• Understand the core of the problem and dig deeper

2) Check your assumptions:

• Assumptions are just guesses. You need to identify the assumptions your start-up makes
• Be careful of: “But we have always done it this way!”  - Ask “Why?”
• Test your assumptions through well- thought out, logical experiments

3) Solving the right problem and breaking it down:

• Elon Musk is a big proponent of Reasoning from First Principles, which means “to break down complicated problems into basic elements and then reassemble them from the ground up.”
• Start-ups should make sure they understand the core of the problem before they start solving it.

Lesson 2: The Goal of Business

It takes a while for Alex to realise that the goal of his business isn’t to hire the right employees, to reduce inventory, to satisfy his customers’ needs, or to make everything more efficient.

Alex learns that his goal is to make a profit, to make more and more money.

"Every action that brings a company closer to its goal is productive. Every action that does not bring a company closer to its goal is not productive. " ~The Goal

The eventual goal of a start-up is to make a profit. But there are various sub-goals in the stages of a start-up:       

1.  Initially, the goal of a start-up is to search for a repeatable and scalable business model (Finding product/market fit).
2. Once the start-up has product/market fit, the goals becomes to Scale and Systematise the business.
3. Then the goal becomes to make Profit

Anything that the company does that brings them closer to eventually making more money is productive, but how do you know?

This brings me to the next point.

Lesson 3: Measurement affects behaviour

One of the tools of the Theory of Constraints is Throughput Accounting. It is the alternative to cost accounting, which can be misleading.  

The Goal: Increase throughput while simultaneously reducing both inventory and operating expense.

Throughput Accounting identifies three elements that express the rules of making money:

• Throughput: Throughput is the rate at which the system generates money through sales. Increase throughput.
• Inventory: Inventory is all the money that the system has invested in purchasing things which it intends to sell. Decrease inventory.
• Operating Expenses: Operational expense is all the money the system spends in order to turn inventory into throughput. Decrease Operating expenses.

Profit = Throughput – Inventory – Operating Expense

There are three important questions you must ask:

1. Did our business sell more products?
2. Did our expenses decrease?
3. Did your inventory go down?

Traditional business measurements are quite deceptive for an early stage start-up. That is where Innovation Accounting comes in:

" Innovation Accounting is a way of evaluating progress when all the metrics typically used in an established company (revenue, customers, ROI, market share) are effectively zero. " ~Eric Ries

Measuring a start-up is tricky. Each start-up has to come up with their own metrics. Some questions you can ask are:

• Did we do what we said we were going to do?
• Are our people working differently?
• Do customers (internal or external) recognize an improvement?
• Are we unlocking new sources of growth as a company?

Lesson 4: Constraints are opportunities

 “A bottleneck is any resource whose capacity is equal to or less than the demand placed upon it. And a non-bottleneck is any resource whose capacity is greater than the demand placed on it. ” ~The Goal

As an entrepreneur, you need to find your customers’ problems, or constraints. Constraints are some of the biggest opportunities in business to make more money. Look for wasted time, frustrations, slow processes, inefficient wasteful systems and you might find a great problem to solve.

Conclusion

I think this is a great book for anyone interested in business, it gets my 5-star rating. Not only does it force you to think, it also teaches you to ask questions, apply logic and build something better.