“If you don’t know where you are going, any road will get you there…”
In the game-changing business strategy book The Discipline of Market Leaders, Michael Tracey and Fred Wiersema present the concept that the best business organizations in the world choose one of three value propositions to their customers and execute it flawlessly in order to successfully compete in their market / industry.
The three value propositions are:
- Customer Intimacy
- Product Leadership
- Operational Excellence
The authors spent more than three years researching dozens of companies in different industries around the world including Southwest Airlines, Nordstrom, Wal-Mart, and Sony. At the time the book was written, Sony was considered the premiere example of Product Leadership, but as we all know Sony’s strategic mistakes enabled Apple to become the most successful and valuable company on the planet. What they discovered changed business strategy forever. They discovered that the most successful companies in the world choose and focus on one of the value propositions, and are equal to or slightly above the average of their competitors in the other two.
Operational Excellence
Too many business leaders think that Operational Excellence is all about cutting costs. They are wrong. Operational Excellence is a strategy of driving costs out of the entire business system through an integrated process of continuous improvement. Leaders executing the strategy of Operational Excellence are smart, agile, resilient, and empower their employees to optimize investments and activities to deliver to the customer the lowest possible price while maintaining reasonable margins.
There are many different methods, frameworks, and approaches to achieving Operational Excellence and many of them follow continuous improvement philosophies such as Six Sigma and Lean Management.
Wal-Mart and Southwest are typically referred to as the most successful Operationally Excellent companies in the world. Wal-Mart invested in one of the most sophisticated inventory management systems that provided them with the ability to purchase in large volumes to drive costs out of their system. Southwest only flies one type of aircraft – the 737 – and therefore only has to maintain parts and train their personnel on one type of aircraft to create their strategic advantage.
Executing the value proposition and achieving success through Operational Excellence requires the following to be flawlessly implemented:
1. Strategic Alignment
The entire organization must understand the strategy and be prepared to execute it. Leaders must create alignment through strategy deployment, communications, bold actions, and performance management systems that reward execution of the value proposition.Strategic deployment – Assessing the current state, defining objectives and goals, investing in resources to support the strategy.
Communications – Sharing the vision and listening to employees’ views and perspectives on continuous improvement.
Bold Actions – Operational Excellence isn’t for the timid and it is not gradual. Leaders must take bold actions and invest the resources to drive costs out of the system.
Performance Management – Compensation and rewards must be aligned to the strategy. Growth of volume, margin improvements, quality metrics, and customer satisfaction are just a few of the metrics that must be tailored and integrated into the performance management system.
2. Process Excellence
Process excellence is the key to driving costs out of the system. It is achieved by setting up and executing effective and efficient management processes around the complete supply chain.
Focus on volume businesses – Scalability is the key to operational success. You must choose products and markets that have large scale and volumes.
Manage suppliers – Suppliers have to be key partners and you have to negotiate long-term win-win relationships.
Optimize inventory – Nothing kills Operational Excellence by having too much inventory. You must focus on systems and processes to manage inventory effectively and make sure that you can ship and transport product to customers at the lowest cost with the relatively highest quality.
Forecast effectively – Great inventory management starts with great forecasting. Invest in systems and people who can work with sales with pinpoint accuracy to forecast production and sales.
3. Collaboration
Operational Excellence cannot be 100% successful without intense and integrated collaboration. Every part of the business system must be able to work together in seamless systems that talk to each other and present decision makers with the right data to make the best business decisions. The most important cross-functional collaboration points:
Supply Chain Management and Manufacturing – Supply Chain Management must know and understand the needs of manufacturing including raw materials quality, packaging, and transportation.
Sales and Manufacturing – Sales must provide Manufacturing with accurate forecasts.
Manufacturing and Distribution – Once products are made, they need to get to customers as quickly and inexpensively as possible. Manufacturing and Distribution must have great collaboration.
