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.
The 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.
- 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.
Strategy is really all about making choices and it’s not as complex as people think. In truth, there are only 3 basic strategies to choose from.
Where most people go wrong is not sticking to a single strategy or not aligning the other elements of their business plan around a single strategic principle. Another trap is focusing on tactics rather than strategy. Your tactics may be sending mixed messages to your customers because they are drawn from multiple types of strategy instead of consistently following a single strategic direction.
A concept I learned from some of the sales people who worked for me – the 3-legged stool – shows how simple it can be to apply strategic principles. They offer the customer a choice of three things: Product, Price and Service. The customer can only have two of those three things, and the third they have to concede to the sales person. For example, if a customer wants great products and excellent service, he will have to accept that he will have to pay a premium for these. If it’s price and service, the customer will have to make some concessions product quality or features.
- Product Leadership – sometimes known as innovation
- Operational Excellence – sometimes referred to as “low-cost producer”
- Customer Intimacy
This is the final post in our series on employee engagement. We hope you’ve found the posts helpful and insightful.
We know Employee Engagement is a hot topic in the business community, and we think it’s more than just a passing fad. There are some fundamental things in the concept of employee engagement that can help you save money and make more of it.
If you’ve been following this series, then you’ll know we posted articles about each of the 12 questions in Gallup’s Q12 employee engagement assessment. That can be overwhelming.
To help make it easier to understand, we created an infographic to help illustrate the relationship between the 12 elements of employee engagement and four key dimensions of business performance.
The vertical axis is composed of the 12 Gallup questions. Gallup organized these into groupings.
Base Camp represented the very basics of employee engagement – providing employees the information and tools to do their jobs.
Camp One was grouped around questions that reflected what employees could give back to their employers.
Camp 2 deals with questions about employees having a sense of belonging.
The Summit is comparable to the peak of Maslov’s hierarchy of needs: self-actualization. In fact, the whole Gallup Q12 has many parallels with Maslov’s model in that it is essentially a spectrum from basic needs (to do the job right) to more emotional or intellectual needs that make the job resonate with the employee.
The horizontal axis is composed of four dimensions that measure success in an organization: Productivity, Profitability, Customer Satisfaction and Employee Turnover.
According to Gallup’s research, Employee turnover is really driven by the first six questions. If you don’t do the basics, you will lose employees. We included question 12 as well, because we feel employees will leave when they no longer see opportunities to grow in an organization. It may be a bit of a gray area, because it may be something beyond the control of the company.
Productivity is influenced by all but 2 of the 12 factors. What seems to be important is having the right tools/technology, recognition, feedback and having a sense of belonging.
Profitability appears to be impacted by management style. When employees have clear direction and feel they have support, perhaps they’re more willing to take calculated risks that positively impact the bottom line. Also, when they have opportunities to grow and develop, they can bring new skills to the organization that can help improve processes and grow profitability. We added in “right tools” because we felt, intuitively, that technology contributes immediately to productivity, but ultimately to productivity.
When employees perceive themselves as treated fairly, Customer Satisfaction is positively affected. Sometimes employees have to go outside procedures to ensure customers are looked after and, when they do so, and feel they will be supported for doing what’s right for the customer, they’ll continue to take those risks. We added “opinions” because we feel it’s an indicator the company is paying more than lip service to employee ideas. This could include input that some company procedures do not support customer satisfaction.
What You Can Do
If you really want to assess the level of engagement among your employees, the Gallup Q12 is a very simple tool to administer. You might want to consider bringing in a consultant to oversee the project and to act as a buffer between employees and management to help ensure employees open up.
What is your management team saying are the main issues in the organization?
Use the dimensions from the Q12 to explore where you might be lacking and where you can implement some changes.
Make a point of regularly getting out of your office to connect with employees and listen to their views. They’ll be more likely to come to you when they see problems and you may find they have some valuable suggestions to offer. Face-to-Face interaction is so much more effective than the traditional suggestion box.
As we said last week, we’ll be compiling all the posts in this series into a White Paper so you can have the entire series in a single document. Watch your email to find out when it will be available. Like all our White Papers, they’re complimentary.