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Sustained Growth through Operational Excellence: Spotlight on Operations
Operational Excellence is also known as :
Operational Excellence,
Practical Opex Programs,
Operational Excellence Prior,
Enhance Operational Excellence,
Mastering Operational Excellence,
Establishing Operational Excellence Program,
Operational Excellence Definition,
Operational Excellence Tools,
Culture of Operational Excellence,
Operational Excellence Program,
Defined as Operational Excellence,
Operational Excellence Using Lean,
Capture Operational Excellence,
Operational Excellence Pursuit,
Optimising Operational Costs,
Incentives and Operational Excellence,
Operational Excellence Means,
Book Building Operational Excellence,
Drives Operational Excellence,
IT Operational Excellence,
Best Practices for Operational Excellence,
Operational Excellence Using,
Operational Excellence Knowledge,
Operational Excellence Quality,
Business Excellence,
Achieve Operational Excellence,
Striving for Operational Excellence.
Preface
Sustained growth through operational excellence 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. Richard Zoehrer was
responsible for layout and design. Our thanks are due to all of the
survey respondents and interviewees for their time and insights.
February 2008
The power of visibility
Operational excellence is a simple concept with complex
implications. Consistently doing things well across every element of
the value chain is clear enough in principle. But it is a moving
target: To maintain their competitive advantage, successful enterprises
must constantly adapt to new situations. Traditional competitors
consolidate just as unfamiliar ones arrive on the scene. Customers
discover new needs as they come to expect better quality and lower
prices. New markets emerge in a shrinking world. These dynamics do not
alter the fundamentals of operational excellence. But they do force
companies to be excellent at doing different things.
Regardless of where a company focuses its operational excellence
strategy, successful execution requires connecting long-term goals with
short-term management control. This means aligning and linking
performance measures across the organisation and beyond. Ideally,
senior executives would be able to monitor financial performance,
operational activities and customer relationships in real time, from
one end of the value chain to the other, across all business units and
locations.
While operational transparency is a fundamental goal of operational
excellence, the pay-off is much broader. As the connections between
strategic objectives and day-to-day operations become more transparent,
everyone in the organisation can see how his or her efforts contribute
to the big picture. And if visibility into operations can be translated
into customised role-based dashboards, employees can be motivated to
innovate within their own space. Moreover, the demonstration of links
between operational performance and strategy encourages the building of
collaborative solutions.
Transparency also benefits customers and external partners.
Visibility into customer relationships empowers the business to develop
a deeper understanding of customer needs, and to rapidly perceive and
act on changing patterns of demand. Another key operational excellence
benefit is the ability to collaborate more easily with external
partners and systems (including regulators).
In practice, operational excellence may serve as a company"s
principal strategy driver, encompassing other tools such as total
quality management and Six Sigma. Or it may be part of an even broader
game plan. For example, Arjan Kaaks, CFO of the Dutch brewing company
Grolsch, says that his company includes various aspects of excellence
in its business strategy and planning processes. "In particular" he
says, "we use the balanced scorecard to ensure that we consider every
aspect of excellence in our operations including both financial and
non-financial elements. The balanced scorecard provides the framework
to implement operational excellence principles."
Regardless of how operational excellence is implemented, visibility
into operations is its most fundamental contribution to business
results. In a survey of 946 executives in mid-sized companies around
the world conducted by the Economist Intelligence Unit, the "ability to
have end-to-end visibility into financial performance, operational
activities and customer relationships across all business units and
geographies" was the top-ranked component of operational excellence.
What is operational excellence?
In its simplest terms, operational excellence means consistently
doing things well across the value chain as a way of gaining
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
excellence is one of three "value disciplines" that a successful
organisation must choose from as its underlying operational model.
In practice, operational excellence is a means to achieving the
other value disciplines: product leadership and customer intimacy.
Doing things well across the organisation is fundamental, but most
successful 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 excellence 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 management 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.
Experience matters
Operational excellence strategies are delivering competitive
advantage for a growing number of mid-sized companies around the world.
Nearly 90% of survey respondents say their companies recognise
operational excellence as a strategy and planning tool. More than half
say they have implemented a formal operational excellence strategy or
are in the process of developing one. Another third say they have
integrated the principles of operational excellence into other strategy
and planning instruments.
These different levels of experience with operational
excellence shape executive opinions about its most important components
and benefits. The more operational excellence experience they have, the
more likely respondents are to rate end-to-end visibility as its most
important element. Respondents with less experience tend to give the
top ranking to the ability to add value for customers.
This is not to suggest that experience with operational excellence
diverts focus from customer value. On the contrary, it indicates that
within an established operational excellence strategy, customer value
is likely to be addressed by improving visibility into customer
relationships, as part of a broad and systematic effort to achieve
excellence across the entire value chain.
The more experience executives have with operational excellence
strategies, the more benefits they see. Over three-quarters of survey
respondents with operational excellence experience cited lower costs or
improved efficiency as among the top three benefits, and half of them
cited increased revenues. About 22% of companies with formal
operational excellence strategies had both reduced costs and improved
customer service, compared with 20% of companies that had recognised
operational excellence principles and only 16% of those still the
process of developing an operational excellence strategy.
Agility is another important operational excellence benefit. About
one-third of respondents with operational excellence experience said
that their companies were able to respond faster to customer demands,
competitor actions or both. Other agility-related benefits included
improved customer insights to facilitate development of new products
and services and improved ability to expand into new markets.
About the survey
Between November 2007 and January 2008, the Economist Intelligence
Unit conducted a large survey of operational, financial, sales and
marketing, and IT executives throughout the world. The survey yielded
946 responses from senior executives of mid-sized companies with annual
global revenues between $20 million and $500 million, with 81% over $50
million. (Sub -$50 million companies were permitted in some countries
where smaller firm sizes are the norm.) Nearly one-third of respondents
were based in Asia-Pacific, followed by about 28% in Western Europe and
26% in North America. The rest were situated in the Middle East/Africa,
Eastern Europe and Latin America.
The challenge of execution
Every executive wants his or her company to do things well.
Systematically achieving this in every corner of the organisation is
another matter, and few executives claim to have reached this goal.
Responses to the EIU 2007 operational excellence survey and in-depth
interviews with business leaders provided insights about the tools
companies are using to implement operational excellence strategies.
Visibility in the real world
Senior executives generally agree that they are aiming for real-time
end-to-end visibility into operations across the entire value chain.
But this is often infeasible and is rarely achieved. Innovations like
RFID chips and wireless technology would appear to make real-time
product tracking and record entry effortless. However, it is often
difficult to extend the reach of corporate IT systems to end users,
especially where personalised services are involved. While this limits
the scope of real-time performance monitoring, it does not preclude it.
Morrison Healthcare Food Services, for example, provides meals to
thousands of hospital patients and residents of seniors" homes across
the US every day, and it also operates retail dining facilities in many
of those institutions. CEO Scott MacLellan says the first step in the
journey towards real-time visibility was to standardise point-of-sale
systems. "That is giving us literally real time information," he says.
"We"re seeing what"s selling, what it"s selling for, what"s not
selling, and so on. We can spot trends as they happen."
But he goes on to say that understanding the needs and satisfaction
of the client is much more difficult. "We can"t be surveying our
patients and our residents every day," MacLellan points out, adding
that "also, for those metrics to be credible, they need to be
third-party sourced." While this makes real-time end-to-end visibility
impractical, it doesn"t stop Morrison from keeping a sharp focus on the
customer experience. "We visit our patients every day, and in that
respect we"re getting real time information," MacLellan says. "Every
single person in our company, me included, is required to visit
patients or residents when they go into one of our units. So I will go
up and say, "how"s your food? Is there anything we can get you?" And we
get immediate feedback: "it was great; it was not great; I need this; I
need that". And we"ll fix that on the spot."
The survey revealed that companies are advancing the quest for
visibility into operations by investing in a variety of information
technologies. At the top of the list is integrated enterprise resource
planning (ERP) systems. More than half of respondents said their
companies had invested in this technology, and one-third rated it as
most important.
Other companies have focused on smaller-scale systems that provide
visibility into segments of the value chain or that provide integrated
business analytics. The most important investments are those designed
to increase visibility into customer relationships. Although slightly
more companies have invested in inventory management systems than in
customer relationship management (CRM) systems, the latter was rated as
most important by nearly twice as many respondents. More than
one-quarter of respondents" companies have also invested in production
planning and demand planning systems.
Companies with a formal operational excellence strategy are the
heaviest investors in all of these technologies. More than 30% of
companies with a formal operational excellence strategy reported
investing in four or more of them, compared with 20% of those with some
operational excellence experience and less than 10% of those with no
operational excellence experience.
Moreover, substantial majorities said that their top-priority
technology had been successful or very successful in promoting revenue
growth, wider margins, improved customer satisfaction and greater
customer retention. Success in new product development was not as
robust, with a majority reporting success only for investments in
demand planning systems.
More than 75% of respondents who reported demand planning,
production planning and business intelligence or analytic systems as
their most important investment said the investment had promoted
revenue growth. CRM was the most effective in promoting consumer
satisfaction and in increasing customer retention, while inventory
management systems were rated best for increasing margins.
The drive for efficiency
Companies with a formal operational excellence strategy are
distinguished by their broad-based approaches to efficiency
improvements. Of course, firms that fail to adopt an operational
excellence strategy want to improve efficiency as well. But they tend
to take less systematic approach. More than 40% of survey respondents
whose companies had formal operational excellence strategies reported
that they had adopted at least five of the seven efficiency-improving
strategies shown in the chart on page 10. This compares with about
one-quarter of firms with some operational excellence experience and
only 8% of companies with no experience.
By far, the top-ranked approach is to carry out systematic
efficiency evaluations and improvements at the business process level,
encompassing functions such as finance, IT, operations and
marketing/sales. More than two thirds of respondents said that all
seven efficiency-improving strategies had proved successful.
Economic downturns as an opportunity
Companies with formal operational excellence strategies are more
likely than other businesses to confront economic slowdowns with by
simultaneously controlling costs and gaining market share. Operational
excellence helps them build the agility that is crucial for success in
both areas. But in practice operational excellence tends to be more
powerful for leveraging strengths than for controlling costs. Companies
that recognise this are often able to seize market share from
competitors who are pre-occupied with cost-cutting during periods of
slow growth.
Respondents who said their firms are pursuing a formal operational
excellence strategy were more likely than others to report downturn
strategies that included increasing customer share of wallet and
aggressive pursuit of market share from competitors. Moreover,
companies that had or were developing an operational excellence
strategy were the only groups where a majority reported innovating to
create new products or services during downturns.
The degree of experience with operational excellence also correlates
strongly with the probability that a company includes five or more of
the seven strategies shown in the chart on page 10 in its game plan for
managing periods of slow economic growth.
This broadly-based approach also applies to cost reduction. More
than three-quarters of respondents from companies with formal
operational excellence strategies reported that their downturn
management plans included overall aggressive cost control, and 38% said
this included reducing staff while retaining core competencies.
Companies with no operational excellence experience, on the other hand,
were almost as likely to say they would reduce staff (35% of those
respondents), while they were significantly less likely to engage in
aggressive cost control (just 54% of those respondents).
Respondents were asked to rate the success of their most important
strategy for managing economic downturns. Overall, initiatives that
leverage competitive advantage are considered more effective than those
focused on cost control. Aggressive pursuit of market share from
competitors received the highest overall success ranking (91%) for
increasing revenue. Close behind was innovating to create new products
or services, which outperformed all of the other strategies for
successfully widening margins (74%), increasing product launches (84%)
and improving customer satisfaction (75%).
Cost-focused strategies were much less successful. Overall
aggressive cost control was rated highly (72%) only for increasing
margins, which was also the only category where a bare majority
reported success from cutting staff.
The growth imperative
Operational excellence has traditionally been associated most
strongly with efficiency and competitive advantage. Increasingly,
however, agility and visibility into operations have also been
recognised as drivers of sustained growth. In particular, end-to-end
visibility is a critical tool for recognising core competitive
strengths and aligning all business functions to strengthen them.
The survey shows clearly that mid-sized companies see growth as
imperative. More than half of respondents said their firms planned to
grow organically, and more than 29% planned to grow both organically
and through mergers and acquisitions. Another 8% planned to grow
through M&A alone. Another 8% "a minority which tended to have
little interest in operational excellence"said that growth was not a
priority for their company.
Senior executives with operational excellence experience strongly
agree that it can support both organic and acquisition-led growth. The
obstacles to growth"as well as the solutions provided by an operational
excellence strategy"differ depending on whether the growth is organic
or comes from acquisitions.
Organic growth
Companies pursuing organic growth say the most important obstacle is
the inability to move sufficiently quickly to exploit market
opportunities and to challenge competitors. Many see operational
excellence as an effective strategy for overcoming this challenge,
because it provides the visibility into operations needed to become
more agile. In particular, operational excellence supports the two most
important organic growth strategies named by respondents: anticipating
customer needs as they emerge and identifying core people assets that
contribute to competitive advantage.
Senior executives stress that keeping existing customers satisfied
can also be a growth driver. Scott MacLellan, CEO of Morrison
Healthcare Food Services sees this in terms of differentiation:
"Operational excellence helps us to differentiate ourselves from our
competition. We need to make our existing clients thrilled with us, to
the point where we have a reference list that can"t be matched in the
industry. We can also refer happy customers to associated companies for
some of their other needs. As a result, operational excellence becomes
a primary driver of growth."
Growth through acquisitions
When it comes to growing through mergers and acquisitions, an
inability to quickly integrate acquisitions into existing operations is
seen the biggest obstacle. Key solutions are identifying gaps that can
be filled by acquisitions and more efficient processes of integrating
acquired companies, both of which can be achieved through operational
excellence strategies.
"If you"re looking at organic growth, you"re working off of a
platform," says Marsulex CEO Laurie Tugman. "You"ve established a
standard within the company, and you"re levering off of that. You can
sometimes do that with acquisitions, especially if they"re "tuck ins","
he adds, "but in the end you"re acquiring a group of employees with a
different culture." He goes on to say that while there"s no question
that an operational excellence strategy will help in this setting, it
is more difficult than organic growth: "You"ve still got to make sure
that the people understand and believe why it is that we"re going to
approach things differently and with an operational excellence point of
view."
Aligning business functions to support growth
Different functions drive growth in different ways. Each brings its
own expertise to bear in a shared effort that spans every part of the
business. How they do so is the subject of a series of forthcoming
short papers focussed on four functional areas: operations, IT,
finance, and marketing and sales. The most common actions they take to
support growth are briefly summarised in an accompanying table.
Good is the enemy of great
Implementing an effective operational excellence strategy requires
strong senior management support combined with the right resources and
tools at every level. Few companies claim to have achieved complete
success. Real-time end-to-end visibility across the value chain is
widely seen as the ultimate goal. Yet most respondents say this goal
remains elusive.
The single most important obstacle is the lack of people skills in
critical operational roles and across the enterprise. While many
companies have succeeded in establishing operational excellence as a
guiding force in parts of their organisations, close to one-third of
survey respondents cited inadequate linkages among internal
departmental systems as a principal hurdle.
Operational excellence and shareholder value
Does the pursuit of operational excellence improve financial
performance? Both interviewees and survey respondents associated
operational improvements with a range of financial benefits, from wider
operating margins to faster revenue growth. But a better test may be
what investors think: As independent third parties putting their money
on the line, equity investors have a big incentive to scrutinize
companies carefully in order to pick those that will yield
higher-than-average returns.
To find out whether a focus on operational excellence leads
investors to evaluate firms more favorably, we looked at the one-year
total return on equity among public companies in the survey. Because
the survey focused on small- to medium-sized firms"no companies with
more than US$500m in revenues were accepted "most were privately held.
The 170 public companies in the sample were ranked by return on equity
and divided into quartiles. Then the companies in each quartile were
grouped by their progress in implementing operational excellence
strategies.
The results, while not definitive, suggest that there is a link
between operational excellence and stock price returns, at least in the
short term. The companies with the highest stock price returns"those in
the first quartile"are also most likely to have implemented an
operational excellence program. About 36% of the first quartile
companies have already implemented an operational excellence strategy,
versus 24% of second and third quartile companies and only 22% of
fourth quartile firms. Meanwhile, only 2% of first quartile companies
say that they do not recognise the concept, versus 9% of
fourth-quartile firms.
For companies in the middle quartiles in terms of equity returns,
and who fall between the two extremes of embracing and ignoring
operational excellence, the picture is less clear. Perhaps equity
investors are only willing to invest in companies that have already
implemented a program, rather than simply expressing their intent to do
so. If so, companies in the process of developing an operational
excellence program may offer investors an opportunity to buy before the
market recognises their value.
Corporate culture also plays an important role. Marsulex CEO Laurie
Tugman puts it this way: "It"s always easier to strive for operational
excellence when people can see the immediate benefit and need"because
the customer values it or it"s essential to getting the next contract."
It"s more difficult, he says, in situations where "you"ve got an
operation that has been moving along and by their definition they"ve
been successful, but they aren"t necessarily excellent in their
operations." Those people, he says, are inclined to ask ""why do we
need to become world class", and I think resistance to change is often
the biggest factor."
Morrison CEO Scott MacLellan agrees: "Good is the enemy of great. We
have done a very good job for a long time. So to get people to go from
what has already been successful to challenge and in some cases to
completely deconstruct and rebuild some of our standards and our
systems has been difficult for all of us. Because if you"ve got a
formula that works, it"s hard to break it and rebuild it. That cultural
success has been the obstacle of getting ourselves to the next level."
Conclusion: Putting operational excellence in action
Embarking on an operational excellence strategy should not be
undertaken lightly. As with most fundamental, organisation-wide
initiatives, success requires planning, commitment, measurement and
continuous follow-up. The key questions to ask are:
- Do we really need to be great? An operational excellence
strategy begins with a commitment to excellence and continuous
improvement across the organisation. This thinking must be embedded in
the corporate culture. In many cases this requires breaking with past
thinking"especially if performance is already good.
- What do
we need to excel at doing? Vision from the top is required to identify
areas of core competitive strength where the organisation has the
potential to become truly outstanding and build market-disrupting
strengths.
- How can barriers to execution be overcome?
Execution requires the systematic function-by-function assessment of
visibility, efficiency, competitive strengths, and the contribution of
every corporate component towards creating customer value. There must
be a relentless effort to link strategic objectives with day-to-day
operational decisions.
- How should results be measured? Above
all, operational excellence must be focussed on achieving measurable
results. This means harmonising performance metrics across the
organisation, and integrating operational excellence with other
business strategy and planning instruments either as an umbrella
strategy or a component of a broader game plan.