Operational excellence : Enabling Sustained Growth Spotlight on the Americas

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Preface

Operational excellence: Enabling sustained growth is an Economist Intelligence Unit report sponsored by SAP. The Economist Intelligence Unit bears sole responsibility for this report. The Economist Intelligence Unit's editorial team conducted the interviews and wrote the report. The findings and views expressed in this report do not necessarily reflect the views of the sponsor. Ken Waldie was the author of the report and Dan Armstrong was the editor. Mike Kenny was responsible for layout and design. Our thanks are due to all of the survey respondents and interviewees for their time and insights.

May 2008

Operational excellence : Enabling sustained growth Spotlight on the Americas

The Americas should be a hotbed operational excellence activity. The scientists and businessmen who first applied statistics to process improvement Deming, Taylor and others hailed from the United States. In the 1980s, Royal Bank of Canada pioneered the use of customer relationship management (CRM) software, while Procter & Gamble rolled out an early business intelligence (BI) system. In the 1990s, Dell, Southwest, Amazon and Wal-Mart achieved dramatic growth by making their operations world-class. Companies in the Americas should lead the world in growing through operational excellence.
But they don't at least not among the universe of firms with US$20m through US$500m in revenues highlighted in this study. Mid-sized companies in the Americas are as focused on growth as those anywhere in the world, yet they lag their counterparts in achieving growth through operational excellence. Less than half are promoting visibility into operations by investing in enterprise resource planning (ERP) and Customer Relationship Management (CRM) software, while more than half are doing so in the rest of the world. Mid-sized companies in the Americas also lag Asia-Pacific firms in revenue growth, margin growth, customer satisfaction and new product launches. This is despite the fact that companies in the Americas are more likely to say they recognise operational excellence principles in their strategy and planning.
Of the 946 executives who participated in the 2008 Economist Intelligence Unit operational excellence survey sponsored by SAP, 264 (28%) were located in the Americas. Among the Americas respondents, 235 (89%) came from the US and Canada, while 29 (11%) came from Latin America. This paper one of three regional papers is based on their responses as well as follow-up interviews with senior executives in the region.

How to build an infrastructure for growth

Mid-sized companies in the Americas are inclined to make bold statements about their commitments to operational excellence. But many executives admit that they have failed to back up these commitments with consistent action. As a result, their Asia-Pacific competitors have already left them behind, and now they risk being eclipsed by firms in Eastern Europe. Mid-sized Americas companies lag Asia-Pacific in actions taken on every one of 11 strategies for driving growth included in the survey. And the EMEA region is rapidly overtaking the Americas, which leads it by very slight margins in only two of the 11 strategies.

In interviews, executives of companies in the Americas described their operational excellence strategies as works in progress. Many said that while they recognised the value of end-to-end visibility, they had not yet fully achieved it. Others pointed to cultural factors as impediments to rapidly rolling out their strategies. They provided frank insights into the obstacles they face and advice about how these hurdles might be overcome.

Taking an enterprise-wide approach Operational excellence works best as a growth driver when it is implemented across the enterprise. But less than two-thirds of Americas survey respondents said that their companies are taking an enterprise- wide approach to evaluating and improving business processes, compared with almost 80% in Asia-Pacific.

Recognising the unique role of IT and finance Enhancing visibility into the value chain often requires investments in building and integrating ERP, CRM other technologies. And establishing performance metrics requires expertise that often resides in the finance function. Yet functional specialists in IT and inance complain that organisational silos limit their scope, preventing them from pushing for innovations outside of their own turf.

Making continuous change the new status quo The Americas ranks last among the three global regions in the use of operational excellence to drive growth. Yet senior corporate leaders say it is difficult to promote continuous improvement among employees that consider their processes to be quite successful. Some executives say that the problem lies in a general tendency to resist change and a failure to recognise that the status quo is not an option.

Promoting ownership and accountability Operations specialists say that empowering people to innovate is difficult in a setting where they see waste in their own processes but have not traditionally been expected to do anything about it. The solution lies in setting up appropriate incentives and giving employees necessary information and control to improve their own processes.

Embracing integration and scalability The Americas ranks last of the three regions in terms of IT investments to support growth. As the chart at right shows, companies in the Americas lag Asia- Pacific in all six categories of operational excellence technology, and lag EMEA in five out of six. To remain competitive, greater focus is needed on the areas with the biggest deficits: aligning systems with business needs, working to ensure legacy systems can be easily integrated with those of acquisitions and partners, and building scalable systems from the ground up. About a quarter of Americas mid-sized companies say their operational systems are not sufficiently scalable, and the same proportion say that legacy systems represent a constraint on growth.

Adopting common data standards Enterprise-wide data standards are essential for breaking down silos, building linkages among departments and creating end-to-end visibility for senior management. However, some IT executives say that they cannot manage their exponentially-growing data holdings because data ownership and therefore the right to set standards is spread across the organisation. Often finance (which owns management reporting) sets standards for both financial and operational data. But regardless of who owns it, the standards should be publicised and enforced. Then people will accept the information even come to rely on it and use it to make decisions.

How Latin America is different

Latin American firms have an aggressive, but so far underdeveloped, approach to operational excellence.
While North American firms are nearly four times as likely to have a formal operational excellence strategy, Latin America is catching up quickly. More than 43% are in the process of developing a strategy, compared with 27% in North America.
North American companies have more experience with operational excellence than their southern counterparts. But Latin American firms report greater success in each of the four performance indicators: revenue growth, margin expansion, launches of new products and customer satisfaction. One explanation for this unexpected result is that Latin American firms operate mainly in developing markets where operational excellence pays off even more than in mature markets. Similar differences are seen between Western and Eastern Europe.
More specifically, Latin American mid-sized firms are aggressively investing in technology to support operational excellence:

• They report more investment than North American companies in integrated ERP systems, production planning systems and business intelligence or analytics systems. They are also much more likely to say they are improving tracking and analysis of customer purchase patterns.
• At a much higher rate than in North America, Latin American firms are refining systems to align more closely with business needs, reducing total cost of technology ownership, and improving IT training systems.
• Two-thirds say they are improving management visibility into operational functions and integrating processes in sales, marketing, manufacturing, product development, customer service and other functional areas. And half say they are establishing end-to-end visibility of processes throughout the organisation.
• Latin American companies are nearly twice as likely as their northern counterparts to cite integration with outside partners as a key to growth. And they say their marketing/sales teams are devoting more effort to building both external collaboration and internal integration of sales, production and delivery systems.

What is operational excellence?

In its simplest terms, operational excellence means consistently doing things well across the value chain as a way of gain- ing competitive advantage. In its broadest terms, it is a discipline that drives corporate strategy. In their book The Discipline of Market Leadership, Michael Treacy and Fred Wiersema suggest that operational excel- lence is one of three "value disciplines" that a successful organisation must chose from as its underlying operational model.
In practice, operational excellence is a means to achieving the other value disci- plines: product leadership and customer intimacy. Doing things well across the organisation is fundamental, but most suc- cessful companies do one thing exceedingly well and identifying and reinforcing core competitive strengths is part of operational excellence.
The definition in this paper has three elements:

• superior performance and visibility across the value chain
• value-added delivered to customers
• effective integration with external partners.

While the concept of operational excel- lence is simple enough, execution is another matter. A drive for efficiency is implicit, but this must be achieved in a coordinated way by building links across the organisation so that all functions share a harmonised set of performance metrics. The ultimate goal is a "single source of truth" where senior executives have shared visibility into all parts of the organisation, enabling manage- ment by facts. The ideal result is a high-level dashboard for senior executives with the ability to drill down into different business functions, including operations, finance, IT, and sales and marketing.

Conclusion

Growth is a priority among companies in the Americas, just as it is elsewhere in the world. And when asked about the impact of operational excellence initiatives, American executives admit that they do help to drive growth. Over 60% say, for instance, that investments in ERP, CRM or other software to streamline and expose business processes have been successful or very successful in driving growth in revenues, margins and customer satisfaction.
The problem is that mid-sized companies in the Americas are falling behind those in the rest of the world. This is particularly true for North America, which lags Asia-Pacific on nearly every indicator and manages to outperform EMEA on only a few more. Latin America does better, exceeding world averages on three of four performance indicators, while still lagging Asia-Pacific.
The key to better performance lies in more consistent enterprise-wide execution of operational excellence. Companies in the Americas say they recognise operational principles, but in interviews executives point to myriad cultural and practical problems. These hurdles stand in the way of driving operational excellence principles into every corner of the value chain.
Companies in the region need to more aggressively attack these obstacles if they want to avoid being left behind as companies in the rest of the world especially in the Asia-Pacific region entrench operational excellence in their corporate cultures.
More bluntly, corporate leaders need to drive the message through their organisations that doing one thing well isn't good enough anymore.

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