Theory Of Constraints (TOC) – A Case study (AOL, FCC, Verizon) based analysis

All organizations strive for excellence. The Theory of Business (TOB) of any company is considered the deciding factor, which determines the degree of excellence and ultimately defines the fundamental assumptions that the business is built on. The main thought process that leads to a well-defined TOB is an organization’s own experience and its openness to its fundamental reason for existence. It is very important for every organization to conduct systematic analysis and monitoring of the operating environments, market situations and competencies in order to identify the constraints and undertake plausible solutions to overcome them. Constraints are not static, but rather dynamic in nature. This approach is found to be very powerful since it ensures a TOB that is meaningful according to changing realities (Drucker, 1989). In this paper, we examine three organizations – AOL, FCC and Verizon, their respective TOB’s and how various constraints affect them. We conclude by doing a contrast analysis to identify those constraints that are common and those unique across them.

AOL

America Online (AOL) is the leading Internet service provider (ISP) and instant messaging network in the United States. Since America Online went public in 1992, the Company has grown from 250 employees and $30 million in annual revenues to more than 15,000 employees and over $33 billion in revenues in 2003. Despite their success, AOL recently retired its’ decade old goal of “Building a Global Medium as Central to People’s Lives as the Telephone and Television…and Even More Valuable” and established a new one as “Serving the World’s Largest and Most Engaged Community” as an acknowledgement that times had changed in their industry and that they had essentially fulfilled the original TOB overall.

In AOL’s case, several constraints were encountered, primarily market and policy related. From a market perspective, three primary constraints became evident. First, a highly competitive high-speed network based ISP landscape was emerging, specifically telecommunication providers morphing into ISP’s and providing a superior infrastructure for delivery and access, at very competitive prices. Secondly, AOL’s outdated dial up infrastructure quickly became obsolete and the low cost model was no longer successful since dozens of viable, low cost ISP’s emerged as alternatives. Finally, AOL failed to leverage the emerging technologies and competitive landscape of providers with a cross platform strategy which somewhat minimized their service offering delivery and isolated AOL as extremely proprietary and ‘closed’.

From a regulatory perspective, ISP policy began to emerge as a constraint. In the late 90’s for example, increased emphasis on copyright infringement laws for service providers involved in content development and licensing created a new sense of vulnerability for content providers, like AOL. ISP’s who, for the most part focused on data access and transport and leveraged content from third parties, were not. As a content provider, AOL realized additional constraints in the form of anti-spam and inappropriate content laws that emerged in the late 90’s and the current decade.

FCC

FCC, the largest independent US Government agency, was established in 1934 with a TOB of “ensuring that the American people have available, at reasonable costs and without discrimination, rapid, efficient, national and world-wide communication services; whether by radio, television, wire, satellite, or cable” (FCC.). Its executive board and commission staff have clearly defined responsibilities that are goal oriented rather than just used on making a profit. Looking at FCC’s TOB, its board structure and its responsibilities, it shows that FCC focuses on a meaningful societal cause. In its path to serving the American society, FCC constantly faces four major constraints.

Keeping up with the ever-advancing communication technology makes it difficult to design a standard strategy to make it universally available. This constraint is very crucial and FCC overcomes it by controlled change of its policies and regulations.  Changing economies bought by the transition to constantly changing digital delivery modes, has required significant up-front financial investment from content providers, service outlets, and equipment suppliers prior to full rollout of the technology and this delayed their ROI (FCC.). This constraint, in turn affects FCC’s TOB to reach the technology to the common man.

Constantly changing regulations often poses various legal constraints that require constant changes to the legal proceedings that implement the regulations. Congress has mandated continued review of these rules, which results in further court challenges and reduced motivation. This leads to increased operations cost and delays in policy making.  There also exist various Organizational constraints, notably, need for specialized staff to meet changing requirements backed by constant learning and training. Considering the volatility of its TOB, FCC considers redefining its mission and strategy every 5 years to accommodate for the constraint variations.

Verizon

Verizon Wireless is the joint venture of Verizon Communications and Vodafone, both large telecom companies which a large customer base worldwide. Verizon Wireless was formed in the year 2000 and has grown to become one of the largest wireless mobile service providers in the U.S.A. With a customer base of 56.7 million, Verizon has matured into the most reliable wireless network in the country.

The primary constraints that Verizon has faced have been infrastructure and resource related. Infrastructure incompatibilities between the networks of the two companies have created a dispute. The significant economic considerations, in the form of capital outlay, for making the systems compatible is prohibitive and may end up splitting the new venture. The emergence of new infrastructure capabilities, in the form of the 4G technology, only complicates the situation relative to where to invest. From a resource perspective Verizon faced a pretty significant constraint as a result of trying to drive costs out due to market pressures.

Verizon enacted policy that would cause its employees to pay much higher fees for health care services. This was responded to in the form of heavy disputes. Since the 2003, even though the employees have been guaranteed a job for the next 5 years, questions about employee loyalty still remain. From a regulatory perspective, as a wireless provider, Verizon faces a variety of legal issues when it comes to spectrum usage, wireless service areas of operation, etc., simply legal restrictions concerning network usage. From a customer facing perspective, that could translate to limitations of service. This particular constraint directly affects Verizon’s Theory of Business, which is to build a reliable, fast and trusted wireless network across the United States.

Constraint Analysis

The FCC and AOL seem to share a similar constraint, probably related to the nature of the technology sector, which is how to dynamically respond to the rapidly changing sector especially as it relates to new/emerging technologies. AOL faced this with their late entry into the high speed Internet market while FCC faces the dilemma of developing and aligning appropriate policies and strategies with rapidly evolving technologies. Verizon and AOL share a common constraint relative to the inability and lack of desire to form strategic partnerships and adapt technology offerings, which has sub-optimized their effectiveness and created lost revenues.

AOL’s failure to adopt an open systems approach and integrate and collaborate on a broader scale with strategic partners to bring more robust offerings to the marketplace has to a large extent positioned them in a proprietary ‘box’ which they are only now beginning to break down and exploit. In Verizon’s case, they had a very similar constraint to deal with. The constraint that they have regarding the compatibility or lack thereof, with their 3G network between Europe and the United States is very similar to the compatibility constraint that AOL faced with their closed systems operating model.  FCC and Verizon also appear to have similar constraints in the area of resources and the ability to re-skill to meet the demands of the rapidly changing environments that they participate in.

Changing economies seems to be a unique constraint that affects FCC’s efforts to extend technology to all classes of society. A key difference in the constraints that the 3 companies faced was related to the market. For both AOL and Verizon, the competitive nature that is prevalent in the technology sector presented constraints in the form of integration, collaboration and emerging technology, FCC, on the other hand does not have the same constraint in terms of the urgency of response in particular to remain competitive.

The concept of Goldratt’s theory of constraints is evidenced clearly in each of the companies researched. Each of the companies faced at least one significant constraint in their recent history, which had a profound impact on their stated TOB’s.  Recognizing this, each of them had to revise their TOB’s to address the constraint itself and articulate a vision for moving the business forward. The type and nature of constraints varied amongst the 3 companies, since they were experienced in very unique ways in very different environments. Ultimately, however, all of them demonstrated agility in the form of defining the constraint, determining the impact, refining the TOB and articulating the newly stated goal in an effective manner, albeit with some consequence.

References:

Manning, Gerard (2003). A Brief History of AOL-America Not Online. Retrieved January 25, 2007, from, http://www.searchengineposition.com/info/articles/historyofaol.asp.

AOL Corporate Website. (2007). Our Mission and Values. Retrieved January 25, 2007, from, http://www.corp.aol.com/whoweare/index.shtml.  Isenberg D.S. A Starting Point for the Next Telecom Act. (2004, Nov). Retrieved January 30, 2007, from, http://www.vonmag.com/issue/2004/novdec/columns/isenberg.asp

FCC. www.fcc.gov. (n.d.). Retrieved January 30, 2007, from, http://www.fcc.gov/ Drucker, P. F. (1989). What Business Can Learn from Nonprofits. Harvard business Review.

ISP Survival Guide: Strategies for Running a Competitive ISP by Geoff Huston

ISP Liability Survival Guide: Strategies for Managing Copyright, Spam, Cache, and Privacy Regulations by Timothy D. Casey Verizon, About Us. Facts-at-a-Glance. Retrieved January 31, 2007, from, http://aboutus.vzw.com/ataglance.html

Andy Moeder. Verizon Wireless – We never stop working for you. Retrieved January 31, 2007 from http://academic.udayton.edu/BradHume/phone/corp/corporations/htm/ Verizon.htm

AFL-CIO. www.aflcio.org. Retrieved January 31, 2007, from, http://www.aflcio.org/

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