One of the most useful tools for good strategy analysis is systems thinking. Some people think this means you have to treat your business like a computer program, but really it’s simply a way to think through all of the connections that affect your business and how it both operates and competes in the marketplace. It doesn’t hurt to understand computers, but systems thinking can be used by anyone.
The basic concept of systems thinking is that we can understand complicated systems by learning how the pieces of the system connect to each other and change the behavior of the system. Let’s use a simple example. If you go to a restaurant, sometimes they may be able to seat you right away and some
times you may have to wait for a table. This is the result of a fairly simple system. There is a finite pool of resources – tables – which can be used to convert customers from one state – “waiting for a table” – to a second state, “seated at a table”. If all the tables are empty, this process takes very little time – you speak to the host or hostess and are seated at an empty table. If all of the tables are full, it will take longer, as you wait for the current occupants of a table to finish their meal and leave, and then wait for the server to prepare the table for the next set of guests.
So what determines whether you have to wait for a table? There are several variables and processes that will affect this system. First, the number of tables is important. If you have a thousand tables, it will take a lot of customers to fill your restaurant, while if you have just two tables, your restaurant will be full as soon as the second customer group arrives. Clearly, the rate at which customers arrive is also important. When customers arrive faster than existing customers can finish their meals, the restaurant will start to fill up. When the restaurant is full, a line for tables will form, and it will increase in length as long as new customers are willing to wait in line. Another key variable is the rate at which customers finish their meals and leave the restaurant. For a restaurant owner, it’s very important for customers to finish and leave quickly during busy periods, because otherwise the restaurant fills up and a line forms. Unfortunately for most restaurant owners, many customers like to sit around after a meal, especially if the restaurant environment is pleasant. Benihana tackled this issue by making the meal a show with a clear beginning and end, which creates the expectation that guests will leave shortly after the chef finishes. This clever approach allows Benihana to turn their tables more quickly, and has generated above average profits for the chain over the years.
It’s clear that a business situation like a restaurant can improve its efficiency and profitability by tuning the processes that fill up the restaurant and create lines for tables. For example, one simple way most restaurants can reduce lines is by raising prices. As a result, it makes sense for a popular restaurant to have a more expensive menu – especially during busy hours. This has two beneficial effects: it reduces the aggravation of waiting for tables for the customer, and it increases the profit of the restaurant. Of course, if all of the customers disappear, it may be that prices have been raised too much, but this, too can be tuned by a smart, attentive manager.
Can you use this type of thinking in your own business? I’ve seen many situations where customers ask a company to do difficult and sometimes expensive services to support customers. If you don’t charge a premium for such services, you will, of course, tend to see an increasing demand for such services. If, on the other hand, you charge for such services, you may put a damper on demand for those services. If a product line, for example, is unprofitable because of expensive customer demands, pricing may be used to bring demand into line with your capacity to serve such customers. At the same time, increased pricing will improve the profitability of sales to those customers who are willing to pay the higher price.
Naturally, we sometimes see a terrible situation where using pricing to manage demand is very difficult, because some competitors may not charge for the same service. In such situations, the behavior of competitors may well drive down profitability for the entire market, and a different set of strategic responses may be in order.
In my next article, I’ll look a little more closely at some kinds of processes that we can think about when using systems thinking to assess our strategy. If you would like to learn more about strategic thinking please listen to my webinar by clicking here.