Operational Excellence: what does it mean? What does it take?
To develop a sustainable competitive advantage, companies need to offer products and/or services that keep attracting customers. Focusing on operational excellence is one of the strategies companies can adopt in order to do so.
In November 2011, Prof Kurt Verweire, Jonathan De Grande and Ghita Greef (Strategy department, Vlerick Business School) published a comprehensive report in which they argue that there are certain principles that help explain why some firms consistently out-perform others over the longer term.
One of the principles is that winning companies have a focused, clear, and convincing value proposition that enables them to convince customers to buy from them and not from their competitors. At the same time, these firms have organisational capabilities that help them deliver what they promise to their customers.
“Our research shows that operationally excellent organisations have developed specific competences that allow them to offer the best price and/or convenience to their customers.”
Prof Kurt Verweire, Jonathan De Grande and Ghita Greef, Vlerick Business School
So, winning companies have made clear choices concerning their value proposition and their operating model. The authors of the ‘Operational Excellence’ report identify 3 strategic operating models: product leadership, customer intimacy, and operational excellence (based on the ‘value disciplines’ described in The Discipline of Market Leaders by Michael Treacy and Fred Wiersema). Companies that are successful over a longer period of time focus explicitly on one of these 3 operating models.
Of the 3 models, operational excellence is probably the most misunderstood. To help clarify this discipline, the ‘Operational Excellence’ report investigates what it means and what it takes to be an operationally excellent organisation.
What does Operational Excellence mean?
Prof. Verweire and colleagues define operationally excellent firms as: “companies that have a compelling value proposition based on ‘price’ or ‘access’. These companies are among the cheapest and/or the easiest to deal with in their market. That’s how they attract customers. Companies pursuing operational excellence are continuously managing their costs and, at the same time, optimising their business processes across functional and organisational boundaries to allow them to operate extremely efficiently and effectively.”
The authors identify 3 different formats of operational excellence: pure price players (e.g. Ryanair, Aldi), price-plus players (e.g. Zara, IKEA), and access-plus operationally excellent firms (e.g. Carglass).
Although they might differ in how they position themselves in the market, the operating and management models of these operationally excellent firms share a number of common characteristics. Companies that pursue an operational excellence operating model pay significant attention to principles of cost management, quality management, and process management. As a result, operationally excellent companies lead their industry in price and/or convenience.
And what does it take to be Operationally Excellent?
So, operationally excellent organisations have developed specific competences – related to cost management, quality management and process excellence – that allow them to offer the best price and/or convenience to their customers. At the same time, operationally excellent companies have created a set of systems, structures, values and cultures that support these competences.
Companies are only successful over the long term if they have the right strategy and if they take the appropriate actions to support that strategy. The authors conclude that actions should be taken in 5 broad areas of management:
The actions a company undertakes in one management area support and reinforce actions taken in the other areas. For operationally excellent organisations, this leads to a set of processes and systems that stimulate process excellence, cost consciousness and quality orientation – enabling the company to provide its customers an unmatched combination of price and/or convenience in their offerings.
The authors point out that developing operational excellence competences takes time and effort. But the stories they present to illustrate their points show that the efforts really do pay off.
Verweire K. De Grande J. Greef G. 2011. Operational Excellence: What does it mean? What does it take?