The Conflict in the Pyramid

April 13, 2020

An individual with certain skills and resources creates a small business. Applying his knowledge, he elaborates a process that transforms market-acquired raw materials into products he intends to sell. In the beginning, he is the do-everything. Buy, produce, sell, invoice, pay and receive. Market acceptance is good and sales grow rapidly, driven by word of mouth from satisfied customers.

The diagram below represents this stage of business, where the investor is very close to everything and everyone. It captures information directly from the process and makes virtually instant decisions, streamlining business operations. Free of distortions in information and decisions, the business is booming.

As sales increase, it needs to work harder and harder. It optimizes the process and multiplies to a certain extent. There comes a point where he realizes that he needs to change the way he works. From that moment on, the skilled investor will no longer act as before, as it becomes vital to increase control over the process.

Pyramid Expands Control

The investor alters the process and distributes tasks like purchasing, production, sale, billing and receipt among several business managers. In pyramid form, a multilevel structure establishes a hierarchy of managers. Here’s a typical diagram:

As the business grows, it is necessary to add more levels to the pyramid. Depending on the activities performed, this occurs when the human limit is reached, which usually sets a maximum of fifteen subordinates per person.

This structure has been widely employed by various types of organization throughout history. From armies to religions, the hierarchical pyramid is unanimous when it comes to management. Increasing the command power of the investor and managers requires them to relate to the next higher and lower levels. The main duties of managers are:

• Receive and relay investor orders to command the process;
• Capture process information to keep the investor updated.

The investor’s strategy is that each manager has command power over the entire pyramid of subordinates below him. The investor also needs managers to be responsible for capturing and reporting the status of the process.

Obviously, the company must continue to deal with the flow of information and decisions that circulate between the process and the investor. If this flow is interrupted, or even impaired, the company suffers serious risks. Therefore it is paramount that each pyramid manager is able to handle the two pairs of inputs and outputs listed below:

From investor training and command at the top of the pyramid, managers must fulfill their role by guiding their subordinates in conducting the process. Similarly, managers should capture process information, analyze it and inform the investor of relevant facts. Note that each manager has access to the immediate adjacent levels in the pyramid structure, that is, the boss and the subordinates.

The manager cycle

The diagram below shows in detail the flows of information, analysis, and decision to which each pyramid manager is individually submitted:

Initials	Indicator	description
Ai	Information Analysis	Manager evaluates process operation
Ad	Decision Analysis	Manager interprets command decision

• The green arrows represent the path taken by the information. The subordinates cause the information originated in the process to be propagated through the pyramid until it reaches input Iin. It is the manager’s responsibility to perform the Ai analysis of the received information, before passing it on to his/her immediate boss through the Iout exit. Accordingly, the information is expected to follow its path towards the investor, located at the top of the pyramid.
• The orange arrows express the Investor’s command to be propagated through the pyramid structure until it reaches the process. Thus, decisions made at the upper echelons of the company are expected to result in immediate management orders received at Din. The manager must perform the Ad analysis and generate a set of Dout decisions for their subordinates, following company determinations.
• The yellow arrows reflect audits performed by good managers. By reporting Iout information to the immediate boss, the manager may anticipate a future investor Din decision. Likewise, after triggering a Dout decision that affects the process, a future reflection on the Iin entry that consolidates the change is expected.

The pyramid distorts info & decisions

Undoubtedly, the hierarchical pyramid solves the investor’s problem of increasing control over the process. But at what cost? See in the example below that a three-level pyramid requires information and decisions to pass through three managers to reach the investor and the process respectively.

Consider the investor passing on to his first echelon a decision D that should be directed to the process. At the same time, information I is captured at the lowest level of the pyramid near the process. In the small startup where the investor does everything, there is no distortion in decision and information, the contact is direct.

In the hierarchical manager structure, only level 1 managers receive the “pure” investor decision D. They will then analyze and relay the D1out decision to the second level, taking into account the interpretation of how the D decision should be implemented by their subordinates. See below the equation as it looks:

D1out = D1in. A1d = D. A1d = D2in

Repeating the reasoning for a hierarchical structure of managers with n levels, the decision that will arrive at the process can be calculated as follows:

D-Process = D-Investor . A1d . A2d . A3d … And

Similarly, “pure” information is captured by the third-tier manager. It performs A3i information analysis and transmits the resulting information to its boss’s I2in input at level 2:

I3out = I3in. A3i = I. A3i = I2in

Considering the analyzes propagated by the managers of each level, the information will reach the top of a n-level pyramid with the following interferences:

I-Investor = I-Process . A1i . A2i . A3i … Ani

Then, there are interference in decisions and information, represented by A1d, A2d, …, And and A1i, A2i, …, Ani, respectively the decision and information analysis that have been applied by managers, at their respective pyramid levels.

Distortions in information and decisions are proportional to the number of levels in the hierarchical pyramid. Higher the pyramid, greater the likelihood that information and decisions will be distorted.

The conflict in the pyramid

Apparently there is a conflict in the hierarchical structure of managers:

• The pyramid extends command and information capture between the investor and the process. To enlarge, one must add levels to the pyramid;
• The pyramid distorts information and decisions that circulate between the investor and the process. To avoid, reduce the levels of the pyramid.

The conflict diagram

There is a template commonly used for conflict analysis, known by the cloud evaporating method. The name suggests that the dark clouds that float above your head just evaporate magically. Let’s apply it to the hierarchical manager pyramid conflict and deeply analyze each one of its parts.

The conflict analysis

For the investor to be successful with the process, it is necessary to increase control as well as to avoid distortions in information and decisions. Both are fundamental requirements for the intended success. Analyzing remaining components individually:

• Increasing control has as a prerequisite increasing levels in the manager hierarchy. There are no much reasons to doubt this, given the small business previous experience.
• To avoid distortions of information and decisions, you should limit the height of the pyramid, i.e. have fewer levels.
• One prerequisite is the opposite of the other, as indicated by the red arrow in the diagram.

How to solve this dilemma? Would it be better to favor one side? Or displease them both and stand on the fence? Another option would be to go for a magical solution that pleases both sides and evaporates the conflict. Is it possible to identify the weak point of the conflict by looking carefully at each arrow in the diagram?

For example, increased investor control and the absence of misstatements in manager information and decisions are vital to a company’s success. Neither of these two requirements can be waived.

Another strong arrow is that of conflict itself, as you cannot raise and lower levels at the same time. That leaves two arrows to analyze:

• increase levels to expand control
• decrease levels to avoid distortions

Which is the weakest point of the conflict? To answer that, ask yourself:

• Can you extend control without increasing pyramid levels? Difficult, given the human limitations to manage more than fifteen subordinates.
• How to avoid distortions in information and decisions without lowering the levels of the pyramid? What if there was a measure that would guide managers?

The solution of the conflict in the hierarchical pyramid is to find the right measure to help investors and managers to avoid distortions in their decisions and in the analysis of process information.

Measures evolution

Every 30 years, since the 1920s, there have been major changes in the measures that guide corporate investors and managers. See in the table below that the ranking of the measures presents differences during the evolution occurred in the western and eastern countries. Since the mid-twentieth century, due to fierce competition, the right management philosophy has determined success for the winning side.

Looking at the company’s Net Profit formula below, it can be seen that virtually all of its terms are costs, except for Product Sales.

NP: Net Profit; PS: Product Sales; RM: Raw Material; WF: Workforce; OH: Overhead

Costs also represent most of the company’s accounting entries. Cost Accounting has met challenges in two World Wars, occupying the #1 rank since the 1920s. Cost reduction was what most influenced investors and managers around the world to increase Net Profit. However, the fundamentals of Cost Accounting have been shaken over time and terms like “product profit margin” lost their meaning.

The quality revolution started by Deming in Japan in the 1950s corroborated Kaizen, a concept of Japanese culture that other languages need two words to express: continuous improvement. In the 1970s, while Toyota was evolving Just in Time at full speed, Western companies still preferred to insist on Cost Accounting, seeking sophisticated correlations between fixed costs, products and the process. The Japanese opted for Return on Investment as measure #1, highlighting the difference between Eastern and Western decision-support philosophies. The result was the Japanese buying New York in the 80’s.

“Tell me how you measure me, and I’ll tell you how I will behave.” This phrase by Israeli physicist Eli Goldratt, creator of Theory of Constraints, stressed the importance of choosing the right measure to guide investors and managers. He turned the game on Westerners after promoting Gain to Measure #1.

He used the Net Profit formula to convince everyone that managing the cost world was very information-dependent. All terms are costs, he exaggerated. What expense to cut if everything is important? We are drowning in a sea of data, complaining about the lack of information!

With the world of gains, Goldratt changed the paradigm, obsessively focusing on the analysis of product sales. It’s the only term that contributes positively to the Net Profit equation, he said. Unlike cost savings, Gain has no limits. That is, the sky is the limit.

Ampli Business

Ampli Business is an intuitive Information System Model that combines simple elements to express management best practices to guide investors and managers in their decisions towards the global optimum. It proposes a four-tiered standardization effort:

1. Company Indicators
2. Cyclo: The Gain Machine
3. bAmpli: Business Amplifier
4. bAmpli Circuits

Just looking at the following bAmpli Circuit below with 4 Cyclos, it is known that:

• The investor is represented by the green “+” at the top left of the circuit;
• He invests in a bAmpli Business Circuit, made up of Cyclos numbered 1 through 4;
• The bAmpli responsible for Cyclo 1 supports the business of Cyclos 2 and 3;
• bAmplis from Cyclos 2 and 3 share their Profit;
• And reinvest it in the Cyclo 4.

This 4-Cyclos bAmpli Circuit expects to make a profit to be returned to its investor, i.e. the green “+” at the top left of the circuit. This project expects to develop the Ampli Business components.

Published in Business Amplifier, also e-book and Amplificador de Negócios.