Monthly Archives: June 2016

Operational Excellence. More than just lowest-cost.

Operational Excellence, as a strategy, involves supreme efficiency in product or service delivery.

The traditional way this strategic option is taught is called “Low Cost Producer”; however, we find this limits thinking too much and we prefer to talk in the broader context of efficiency.

Operational Excellence, Efficiency, Cost, SpeedThe diagram to the right represents a trinity of trade-offs. A company may produce a product at the lowest cost among its competitors but it may have to compromise on speed or quality to do so. Similarly, a company may focus on fastest order turnaround, but it may require extra costs or lower quality standards to accomplish this consistently.

Let’s focus in the main axis of efficiency: cost and speed. Along the way, we’ll show how quality is impacted.

This is an especially important strategy to use in commodity markets, where there is little product differentiation. Cost (price) and Turnaround are key differentiators. Similarly, this is a good fit for distributors, who have little control over the products they market (other than the assortment) but much more control over fulfillment and price.

  1. Low-Cost Producer

We’re starting off with Low-cost producer because it’s the most familiar way Operational Excellence is used in practice.

PRODUCT.  You probably have a standardized product with relatively few options so you can source raw materials more cost-effectively.

OPERATIONS. Your plant usually has specialized production equipment or is built to produce high volumes that allow you to realize economies of scale. You probably have a very limited range of raw materials you work with.

INNOVATION.  Your focus is on process development more so than product development. You’ll be looking for ways to reduce labor and/or materials.

PROFITABILITY. You may realize higher profit margins than your competitors because your specialized production equipment or plant scale allow you to be the most efficient.

SELLING. You focus on value selling. It may not necessarily be by securing business with the lowest price.  It could be that you can demonstrate how your product can be used more cost-effectively overall than your competitors’.  

PEOPLE. Your employees are dedicated to identifying improvements to your process to maintain your edge over the competition. Engineers and accountants are your key hires.

QUALITY. The quality of your products is comparable to your competitors’, but rarely lower than your competitors’. You might offer a high quality and a lower quality version to give your customers some degree of choice.

YOUR EDGE. Price. You have the potential to squeeze out competitors with higher cost structures.

 

In an industry (restaurants) known for low margins, McDonald’s has been extremely successful with this strategy by offering basic fast-food meals at low prices. They offer a relatively limited selection of standardized products (don’t think of asking for no mustard on your Quarter Pounder) for which they can source ingredients efficiently. They are able to keep costs low by hiring and training inexperienced employees rather than trained cooks. They also rely on few managers, who typically earn higher wages. These staff savings allow the company to offer its foods for bargain prices.

 

2. The Fastest

 This sub-strategy focuses on being the company that can fulfill a customer’s needs in the shortest time. It’s premised on time being of greater value to some customers than money.

Without a primary focus on product, this is, in essence, a strategy founded on service. In fact, this is a strategy that lends itself well to services or distributors.  For example, the fastest oil change, the quickest insurance quote or the fastest way to get from A to B.

PRODUCT.  As with the low cost producer, you may have a standardized product that allows you to fulfill orders from inventory or straight from the line. If you are a service provider, your secret may lie in the technology you use to process information.

INNOVATION. The source of innovation is likely to be technology. It could be more efficient information systems so you respond faster to customer needs than your competitors. It could be your manufacturing process involves fewer steps.

PROFITABILITY. You may be able to charge a premium price to some consumers in return for rapid fulfillment and, though you may not have the lowest product cost, your margins are probably above average for your industry.  

SELLING. Case studies can demonstrate to potential customers how you’re your service is, without giving away any secrets to your competitors. Help customers understand how your fast turnaround can be a source of competitive advantage for them in their businesses. Focus on industries and customers where there frequently are deadlines to be met: your fast turnaround could be the difference between winning and losing a piece of business.  

PEOPLE. Your employees like winning races. You hire engineers or invest in IT business analysts to simplify processes and eliminate unnecessary steps. 

QUALITY. Your primary KPIs are probably OTD (On-Time Delivery %), some form of measurement of fulfillment time, and Perfect Order Rates.

YOUR EDGE: Speed.

FedEx is a company that promises faster delivery of packages than anyone else. The pioneered overnight next-day delivery – something the postal system was never able to do consistently. FedEx charges more for delivery than the postal service, but by appealing to the generation of instant gratification, customers are more than willing to pay those premiums because FedEx also has an enviable record for reliability.

 

Next week, we’ll cover Customer Intimacy, providing an overview of what Customer Intimacy is and how it looks in practice.

Product Leadership

Product Leadership is all about designing and delivering superior products to customers.

In some cases, it could be as simple as continually making incremental improvements to a product so it can sustain a claim as being superior to its competitors. A more extreme approach involves leadership via innovation – developing breakthrough or disruptive products.  Note you could just as easily substitute “Service” for product when Service is what you deliver to customers (or clients), not service as in how you deliver the service to the customer.

Product LeadershipI liked the photo you see at the right because it seemed to give the clearest idea of what product leadership is all about.

A company that practices Product Leadership as a strategy is known by its customers as a company whose products are one or more of the following:

  • Best-in-Class. They perform better than any competitor’s product.. They may be of the highest quality.
  • The Latest. Their products are considered trend-setters.  They may have innovative features.
  • Most trusted. This probably applies most to Services, which may rely on integrity to be sold.

1. Best-in-Class

We’re starting off with Best-in-Class because it’s the easiest and most cost-effective way to get into Product Leadership.

PRODUCT.  Your product consistently outperforms your competitors’ products on multiple dimensions

INNOVATION.  Instead of R&D, your focus is on product development: working with existing technologies in new ways.

PROFITABILITY. The perceived value of your superior performance by customers is significantly greater than the cost of imparting the features into the product.

SELLING. Demonstrations are the best way to show your customers how much better your product is than your competitors’. 

PEOPLE. Your employees are dedicated to identifying improvements to your product to maintain its edge over the competition. Problem-solving is probably one skill common to them all.

YOUR EDGE. Keeping ahead of competitors with a steady stream of product improvements.

An example of a company that is based on product leadership via having products that are consistently best in class would be Procter & Gamble. Whether it’s laundry detergent (TIDE) or hair care products (HEAD & SHOULDERS), P&G has always sold products that outperform competition.  For that performance, they also charge a premium price.

The Latest

Being first with a new product has advantages – especially if your product is a breakthrough and you are, in essence, defining the market. This approach requires more investment and risk than “Best-in-Class”, but can also yield higher profit margins.

PRODUCT.  You consistently introduce the newest products in your category. You’re first with new features or breakthrough technologies.

INNOVATION. The Latest approach requires investment in R&D to drive innovation and discover those new features or breakthrough products. You probably support these innovations with patent protection.

PROFITABILITY. Don’t be afraid to charge a very high price at launch. Pricing will only go down as competitors try to imitate you. For trend setters, money is no object; having the latest thing is everything to them.  Maintain a premium to competitors’ entries at all times.

SELLING. Show People. Focus on trend setters and early adopters. Demonstrations are a great way to show your customers your new gotta-have product.  Social media can also be a powerful driver when your product launch goes viral.

PEOPLE. Your employees have inquiring minds.  You hire the best and brightest throughout the organization because scientists don’t have a monopoly on innovation. You probably have a strong marketing team to complement R&D by identify trends and consumer issues your company can address.

YOUR EDGE: Constant innovation.

A good example of a company focused on leadership by being first is Apple. The iPod was a breakthrough in making music portable. Similarly, iTunes was the first (legal) way people could download music. The iPad made computers truly portable.

Most Trusted

This is not an approach new companies can take. It takes time to cultivate the trust of your customers.

I think this approach applies well to mature categories where innovation and new products are not seen often.

PRODUCT. Your product is probably known for quality and reliability more than innovation and your leadership is based on the quality of your products.

INNOVATION. As with Best-in-Class, your focus will be more on product development – incremental improvements, but always thoroughly tested before being made available to customers. Innovation could also focus on the operations side to develop improved ways of manufacturing to guarantee better quality.

PROFITABILITY. Don’t be afraid to charge a very high price at launch. Pricing will only go down as competitors try to imitate you. For trend setters, money is no object; having the latest thing is everything to them.  Maintain a premium to competitors’ entries at all times.

SELLING. Remind people about your reputation for quality. Position your product as a safe purchase because your product is more reliable than your competitors’. Showing off awards for product quality can help.

PEOPLE. Your employees reflect your trustworthiness in the market. They’re not the best nor the brightest, but they take pride in their work.

YOUR EDGE: Your reputation. Being around longer than your competitors. Very few complaints.

For a variety of reasons, I’m using IBM as an example of a company with product leadership on the basis of being a trusted brand. They weren’t seen as the innovators in computer hardware (that was Apple). They’ve moved on from focusing on products to being a service provider.  They certainly are not the lowest-priced provider of software services, but they are one of the most trusted, In the world of information technology it’s said, “No one ever got fired for buying IBM”.

 

There’s plenty more that could be said about product leadership.  If you’d like to learn more, a good book to read is “The Discipline of Market Leaders” by Michael Treacy and Fred Wiersema.

 

Next week, we’ll introduce you to Operational Excellence., providing an overview of what Operational Excellence is and how it looks in practice.