Strategy & Tactics forState Owned Enterprises

Vilnius, September 27, 2012

Christoph Lenhartz, Chairman, TOCICO

Topics

10.04.23 2

1 SOE and Their Challenges

2 The Dilemma between Obligation and Profits

3 Strategy and Tactics for Sustained Improvement

4 Examples

What Is an Enterprise?

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GOAL

Necessary Conditions

Constraint

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)

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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

04/10/23 5Source: http://www.ukmin.lt

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

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Demand

Services levels

Resources

Expectations

Current performance

Vicious cycles of over- and underreactions

A Vicious Cycle

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Pressure to be more efficient

Reduce service offering

Demand per unit of service

increases

Effective service level decreases

Users resort to alternative/

private offerings

Budget decreases

TOC in ONE Word

FOCUS

•Doing what should be done•Not doing what should not be done

Stakeholders and Expectations

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State

Employees Public/UsersSOE

High serviceLow price

Budget contributionService provision

SecuritySatisfaction

Financial viability

Customer satisfaction

Secure employee environment

Equally Important Conditions

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Satisfied shareholders

Satisfied employees

Satisfied customers

SOE

Goal and Critical Success Factors

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Sat

isfi

ed S

take

ho

lder

s

Financial Viability

Satisfied Users

Satisfied Employees

Throughput

Operating Expenses

Inventory

Financial excellence (increase T, while controlling OE and reducing I)

Reliability

Responsiveness

Satisfaction

Security

Operations excellence (production, project, distribution)

Employer excellence (meaning, change, buy-in)

Global Metrics in Business and SOE

For-profit Business SOE Comment

Organi-zational goal

Satisfied stakeholders (long term profitable growth)

Satisfied stakeholders (long term value improvement)

Identical

Operatio-nal goal

Continuously grow profits

Continuously increase satisfaction of system users while growing profits beyond minimum level

Different focus

Through-put (T)

Rate at which system generates money through sales(T = Sales - TVC)

Rate at which system generates goal units = improvement of user satisfaction and financial T

Parallel definition yet different ope-ratonialization

Inventory (IY)

Active: Investment in purchasing assets, stock for short term sales (operating inventory)Passive: customers waiting for processing (service industry)

Identical

Investment (IT)

Capital base (Current captal budget plus present value of all past capital investments)

Identical

Operating Expenses

System cost of turning IY into T

System cost of creating T Identical

04/10/23 12Adapted from Shoemaker & Reid, 2010 and own research

An SOE Dilemma… Mission or Profit?

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Be a successful SOE.

Maximize fulfillment of mission/special

obligation.

Focus on increasing service delivery.

Operate within financial

expectations.

Focus on increasing profitability.

A

B D

C D‘

An SOE Dilemma… Pay Dividends or Re-invest

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Be a successful SOE.

Contribute to the national budget in the

short run.

Pay dividends to shareholder(s).

Ensure long term growth of SOE.

Re-invest profits into business of SOE.

A

B D

C D‘

An SOE Dilemma… Cost of Service

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Be a successful SOE.

Ensure broad accessibility

Charge low prices.

Maximize profits Charge high prices.

A

B D

C D‘

A Generalized SOE Dilemma

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Be a successful SOE.

Achieve strategic political, social goals

Allocate resources to national obligations.

Contribute to the budget.

Allocate resources to profit-generating

endeavors.

A

B D

C D‘

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

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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 Assump-tions

• Actions taken to improve quality of service can jeopardize financial performance, while actions taken to not jeopardize or to improve financial 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-cy Ass.

The way to achieve dramatic improvements is based on knowing where and how to successfully focus efforts.

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Strategy and Tactics – Level 2: Flow

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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)

Strategy and Tactics – Level 2: Improvement

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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

Structure of Strategy and Tactics

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Strategy

Tactic

Strategy

Tactic

Strategy

Tactic

Strategy

Tactic

Strategy

Tactic

Strategy

Tactic

Strategy

Tactic

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.

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DON’T FORGET TO MEASURE!!

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.

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TOC – Technology Overview

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Operations Mgt

Production:Drum-Buffer-Rope

Project Management:Critical Chain PM

Distribution:Replenishment

Five Focusing Steps

Ongoing Improvement

Performance Mgt.

Operational Measure-ments: T, I, OE

Financial Measurements: NP, ROI, CF

Link Reliability:TDD, IDD

Thinking Processes

Effect-Cause-Effect: CRT, FRT, NBR, PRT, TT

Conflict Resolution:Cloud diagrams

Audit: categories of Legitimate Reservations

Change Management

Strategy & Tactics Trees

Layers of Resistance, Quadrants of Change

Standing on theShoulders of Giants

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

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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?

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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

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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

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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

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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%

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Dėkui!Thank You! Vielen Dank!

Pinnacle Strategies Europe, Middle East & Africa

www.pinnacle-strategies.com

clenhartz@pinnacle-strategies.com+49 175 1862047