The Theory of Constraints is a business management approach proposed by Dr. George Friedman at the University of Southern California. According to his theory, a business constraint is anything that interferes with the profitability of a company or business endeavor. Improving profitability requires the removal or reduction of business constraints. Common business constraints include time, financial concerns, management and regulations.
Time constraints include not only the amount of time required to complete a task, but also the amount of time needed to obtain supplies, hire employees and drive to meetings. Once identified as a primary constraint, management can take steps to address time factors and improve business performance. For example, larger supply orders might reduce time constraints imposed by long wait times. Similarly, allocating office space to meeting rooms might allow more meetings to be held in house, thereby reducing travel time between clients.
Financial factors are often limiting constraints for businesses. They can range from inadequate budget allocations to excessive salaries or overhead expenditures. For example, if a store does not have the money to buy more inventory, its ability to sell is constrained. Similarly, if more employees are needed, but the budget cannot accommodate additional salaries, growth is limited. Corrections for financial constraints are often complicated; however, shifts within the existing budget are often possible in the absence of increased overall allowance. For example, bonus money can be deferred in favor of increased inventory purchases. Should the increased inventory purchases relieve enough of the budgetary constraints that growth resumes, bonuses can either be reinstated or can be transformed into commission payments to reward strong sellers and further promote growth.
Company policies -- either cultural or management-driven -- sometimes act as constraints to growth or profitability. For example, a policy that establishes a dress code that is too formal for the business climate might contribute to a public perception that the company is old-fashioned, which can limit growth. This is a management policy that is easy to change. Cultural policies are often more intractable. The amount of time spent socializing, for example, might constrain productivity but enhance teamwork. Attempts to reduce time spent socializing might contribute to an angry work environment, which would also reduce productivity. Therefore, attempts to modify cultural policy constraints are often difficult and can sometimes be counterproductive.
As businesses grow and change, their staffing and management needs change, as well. This can constrain business growth and productivity when employees cannot adapt to new demands or when additional employees are needed but the capitol to pay them is not yet available. Management needs also change over time and sometimes poor management constrains growth by fostering low employee morale or allocating resources inappropriately.
Regulations sometimes constrain profitability. These can range from governmental restrictions to import and exports to environmental restrictions regulating the materials used. While regulations must be followed, their impact on growth can often be mitigated. For example, exceeding environmental restrictions can be used in marketing as a selling feature that can enhance growth and offset the expense incurred in meeting the initial regulation.