Chapter 7: The Principle of Leverage Senge, Chapter 7 THE FIFTH DISCIPLINE

Seeing the Forest and the Trees SENGE: Chapter 8 The Fifth Discipline

1 June 2002 CHAPTER 8: The Saga of Jimmy Carter Immersed himself in detail Quality of decision making? We need ways to know what is important and what is not important, what variables to focus on, and which ones to ignore

1 June 2002 The Saga of Peoples Air A totally different airline Founded in 1980 to provide low-cost, high-quality airline service to travelers in the Eastern U.S. Grew to nation’s 5th largest carrier Brought in a host of innovative human resource policies In 1986 lost $133M in first six months, and was taken over by Texas Air

1 June 2002 What brought PEOPLES down?? Many explanations Some blame Burr’s “soft” people-oriented management policies Some blamed the unions Others blamed the use of Americans’ Sabre Reservation system –Load management could offer a limited number of low- cost seats while others were “full coach”

1 June 2002 What variables to blame? Fleet variables Human resource variables Competitive factors Financial variables Policy Levers

1 June 2002 Fleet variables Planes Capacity of aircraft Routes Scheduled flights Competitor routes Service hours per plane per day Fuel efficiency

1 June 2002 Human resources Service personnel Aircraft personnel Maintenance personnel Hiring Training Turnover Morale Productivity Experience Team management Job rotation Stock ownership Temporaries

1 June 2002 Competitive Factors Market size Market segments Reputation Service quality Competitor service quality Fares “load Management” Competitor fares

1 June 2002 Financial variables Revenues Profit Cost of plane operations Cost of service operations Cost of marketing Wages Stock price Growth rate Debt Interest Rate

1 June 2002 Policy Levers Buying planes Hiring people Pricing Marketing expenditures Service scope

1 June 2002 Enormous detail complexity We could build a model that contained all of this detail Or we could use the systems archetypes to disentangle this parable of complexity

1 June 2002 What do we have in terms of loops? A growth loop certainly (reinforcing) –The airline, unlike WonderTech was investing in its capital equipment infrastructure –It was buying planes to accommodate the growth A balancing loop

1 June 2002 What archetypes? LIMITS TO GROWTH SHIFTING THE BURDEN –Erodiing goals (standards) The combination of these produces a third archetype –The Growth and Underinvestment Archetype –This was first seen in the WonderTech Scenario

1 June 2002 The Simplified Structure--p. 133

1 June 2002 The Simulation Structure-- Reinforcing Loop

1 June 2002 The Simulation Structure-- Balancing Loop one

1 June 2002 The Simulation