Operational Excellence: Unlocking the Benefits
For today’s companies, operating environments are more competitive than ever. Globalization and technology are two large factors that are increasing the competitive environment, allowing customers to choose the best, most affordable products and services from anywhere in the world. In order to remain competitive, companies have had to reduce their operating costs, rationalize investment budgets, and boost operational efficiency.
Many efforts to address these issues focus on reducing short-term expenditures by cutting nonessential costs, postponing projects, and renegotiating service contracts. These efforts, however, are only useful in the short-term, cash-constrained environment. Companies often fail to assess longer-term opportunities for sustainable operational effectiveness. Achieving operational excellencewill improve the value of a company’s products and/or services and will create additional shareholder value.
Operational Excellence: Strategy
Operational excellence strategies will differ based on industries and types of companies. For example, operational excellence, as well as the process for assessing how to achieve this excellence, will be vastly different for an oil company than for an internet service provider. If a company is experiencing declining competitive advantage, a number of things should first be assessed before determining what strategy to implement to attain excellence:
- Market strategy and competitive operating environment
- Competitors and benchmarking metrics
- Historical, current, and forecasted financial performance
- Financial, social, and environmental practices
- The product or service value chain
Once the core problems or weaknesses are identified, the solutions can be tailored to meet the needs of the company. A recent study analyzed a medical device manufacturer that was experiencing increased competition and slow market growth. The company struggled with poor capital market performance and low valuation compared to its industry, as well as a decline in previously high margins.
Further analysis showed that that declining margins and increased competition were not counterbalanced by an increased focus on operational excellence. Six months after implementing a value agenda, emphasizing operational excellence, and redefining the company’s investment thesis to represent its maturing business model, the company out-performed the relevant market index by more than 25% and sustained positive performance while the index experienced negative returns.
This is just one example of how a proper strategy and focus on operational excellence can make a company more competitive and able to capture greater value for its shareholders.
Operational Excellence: What areas to focus on?
How does a company decide what areas to focus on in these initiatives? Operational excellence should involve identifying a company’s most important and value-creating activities, then ensuring they are executed well and in a cost-efficient manner. We typically recommend focusing on 3-5 core activities. Some examples of potential value creating activities are:
- Total reliability
- Lean- process execution
- Superior management
- Client excellence
- Streamlined organization
- Strong underlying capabilities
Ultimately, there is no one-size-fits-all strategy to achieving operational excellence. Each company must assess its own operating environment, strengths and weaknesses. Operational excellence does not mean improving upon all weaknesses, but rather identifying a few key activities and ensuring they are executed flawlessly. Attaining operational excellence is an often overlooked way to gain competitive advantage over competitors.