Operational Excellence:
A Visit To An Operationally Excellent Company

In the mid-1990s, two colleagues of ours, Michael Treacy and Fred Wiersema, created the concept of customer value disciplines. (See companion articles on this site on the Value Disciplines topic. Article 1. Article 2) A quick distillation of their thesis was “find out what the customer wants and give them more of it than competitors.” But, as we know, this is hard to do and many companies miss the mark.

The Treacy-Wiersema book, The Discipline of Market Leaders, identified three distinct types of customers: those who wanted a best total cost, those who want best solution, and those who want best product. Customers’ values in each value discipline direct the type of performance a company needs to develop and excel in. Specifically, companies need to become operationally excellent to deliver the best total cost, customer intimate to deliver the best solution or a product leader to deliver the best product.

Many companies thought they should become customer intimate and invested a lot of time and effort in developing such services - a waste of time and money if that was not what their customers valued. Fred Wiersema has written several excellent books in this area and continues to research this area.

Other companies have pursued product leadership by investing heavily in their product development process. There have been a number of good books written about excelling in the concept-to-customer process.

Little, however, has been written about companies that pursue operational excellence in order to delight customers that demand a best total cost solution to their needs. There have been books on ‘operational excellence’ but not as defined by Treacy and Wiersema.

The purpose of this article is to highlight some of the characteristics internal to an operationally excellent company. Achieving market leadership requires the development of an operating model that pervades their entire organization. Thus, becoming operationally excellent is not just a job for the manufacturing department, but also work for the entire corporation. The remainder of this article explores many perspectives of an operationally excellent company.

Misconceptions

The opinion that an operationally excellent company is fixated on costs and cost cutting, has a rigid command and control organization, and is focused on plant and internal efficiencies is a limited view that seriously mis-states the intent and goals of operational excellence.

As you will see, there are other ways to state these goals that provide considerably more latitude of action and impact on the customer. By the way, note that we have not and will not use the phrase “lowest cost” organization or lowest price supplier. While nice to have, both may ignore other areas a customer values in doing business with you. In addition, it is most likely that a competitor will soon offer a lower price or cost than you are providing.

Common Elements Across the Three Value Disciplines

Regardless of which value discipline you adopt to delight your customers, there are some elements that are common to all three disciplines.

First and foremost, everyone in your company must be passionate about your customers and delivering on your value proposition. Everyone understands the value proposition and is committed to doing their part to deliver on it.

Your company must be a learning organization – one that searches for and adopts best practices from across all industries. You are always searching for a better way to do what you do so that you can provide better value to your customers.

In addition to excelling in the area your customers value most, you also want to ensure that you are competent in the other two value disciplines. Thus, an operationally excellent company will also be competent in developing and providing customer solutions and state of the art products. (Note: companies that try to excel in all three areas will fail.)

All value discipline leaders have a supply chain orientation. People in the company understand the entire value chain from raw material suppliers all the way to the end customer. Further, they are constantly looking for ways to rearrange these building blocks in a new, more efficient and effective manner. In addition, most people in the company will know about and be studying the company’s competitors in order to identify ways to become more competitive.

Operating Model for an Operationally Excellent Company

The operating model of company is a description of its key activities to conduct its business. It consists of five major elements:

These elements and their interaction describe how a business operates and prospers. Each value discipline requires a different model. This model is a convenient construct for looking at an idealized operationally excellent company.

Business processes

An Operationally excellent company will proactively design its business processes for its targeted customer segments, paying particular attention to speed, efficiency and cost. These processes will span the supply chain, reaching out to suppliers, distributors and customers to create a larger more integrated approach to meeting customer needs.
Information and information systems are critical in an operationally excellent company. Systems enable business processes. Without these systems, business processes could not function and operationally excellent performance objectives could not be met. Employees are superb users of information systems.

Operationally excellent companies are seldom satisfied with the status quo. They always feel there is a better way to do a process, and they are on a continual quest to find and adopt operational improvements.

Within an Operationally excellent company, there is both a sense of order and control as well as a sense of empowerment and experimentation in order to improve how business is conducted. Everything is measured and studied in detail! These measurements are used to identify additional areas of improvement and to compare the business processes to known best practices. It is everyone’s responsibility to make improvements in performance.

The value proposition that is the company’s unique definition of operational excellence directs how the entire company will operate. Every employee knows and understands the value proposition and his/her part in delivering it. Building the capabilities to deliver the value proposition is a multi-year endeavor and requires the expenditure of time and money. Inevitably, that value proposition of an operationally excellent company will emphasize efficiency, speed, cost management and standardization, in ways that the targeted customers uniquely value. The company that creates the best performance for that value proposition will win customers loyalty and business.

Thus, operationally excellent companies design standard and seamless channels to their customers. Channels enabled by information technology are favored in operationally excellent companies because of their low cost, speed and efficiency. Customer information is captured at each “touch point” to measure each aspect of the customer’s experience and ensure customers value what products and serviced that are provided.
Further, the employees of an Operationally excellent company have a deep understanding of customers’ business and processes so they can proactively anticipate customers’ needs. Employees aim to continually reward their customers with products and services that better meet their needs.

Details of some common business processes in operationally excellent companies are described below in 7 processes:

Marketing and Sales is a key information source for the organization since they have relationships with customers and knowledge of the marketplace. Rather than hoard this information, they will have systematic and efficient ways to rapidly disseminate the information throughout the company so that everyone in the company can utilize this information to find ways to better serve the customers.

Customers are frequently analyzed – individually and in groups – to identify common themes and needs. Using this information, Marketing and Sales can help migrate customers to a standard set of products and services.

Marketing and Sales will work closely with customers to develop their demand patterns. They will have systems that allow them to access details of a customer’s history and past demand. They will also have systems that allow them to construct and make the best deals with customers. Those deals will be based on facts and not just gut feel.

Order placement, payment and issue resolution processes will be fast, efficient and inexpensive for both the company and their customers. Customers may be incented to self-select and self-serve their products and services, for instance, ordering over the Internet.

Customer Service is provided with the information and systems so that they can make the best deals with the customers that call in their orders. Customer Service reps can make the right tradeoffs between customer requests, and the response time and price of a product or service.

Product development processes become tightly coupled to the customer in an operationally excellent company. A standard set of products with broad appeal are designed and developed. Products are also designed for cost reduction, efficiency and speed across the supply chain. Industry standards are promoted or adopted wherever possible. The company will aim for early adoption of relevant technologies developed by other companies.

The product development portfolio is constantly evaluated in terms of its speed from concept to market, its results and return on investment. There is no feeling that we have to invent our own products - quite the opposite in fact. Operationally excellent companies will aggressively look for products or ideas they can license or acquire rather than developing them themselves, providing that the cost-value-speed of the effort is optimized.

Technical service processes again are aimed at the selected customer segments with great care. Several choices of technical service may be available, but priced differently. Customers are incented to self-serve, using a robust technical information database available at the company’s website. The information data base is often the data base that had been developed and used by the tech service staff. Once the data base is made available to customers, it is updated and enhanced with all the answers provided to customers’ questions.

Technical service staff who are no longer needed for basic customer service are re-directed to higher value add services. Further, the technical service staff are empowered to reach across the entire company to obtain help on behalf of a customer. Cross-functional teams work on behalf of the customers.

Purchasing in an operationally excellent company is an important process. Operationally excellent companies look globally to find the best suppliers and the best deals. They choose a small number of the best suppliers and develop in-depth relationships, even partnerships, with those suppliers. They work with their suppliers to improve the quality, and reduce the complexity and cost of their products. In addition, they help their suppliers become operationally excellent, and closely measure their performance. When problems occur, they work with their suppliers to identify and correct the source of the problem.

Operationally excellent companies act as their customers’ advocates. They capture customer information on the suppliers’ performance and quickly inform the suppliers about how they are doing. In fact, they share most information readily with suppliers. They share their customers’ and their own forecasts, delivery schedules and even information from point-of-sale for automatic replenishment.

Manufacturing operations are lean, fast, and numbers-driven in an operationally excellent company. Operations are simplified, standardized, optimized to meet customer performance requirements, and continuously measured. The cost structure is carefully examined and leveraged. Changeovers are minimized. Preventive maintenance is scheduled. The cost and profit of everything produced is known.

Logistics can be described as fast, accurate, reliable and a seamless part of an operationally excellent company’s operations. Delivery times are scheduled and promised at the time of order commitment. Logistics providers are then measured and held accountable for precise results. To enable this performance, the information systems of logistics providers must be integrated with those of the manufacturer.
Returns and recycling are handled by specifically designed business processes. These processes are designed for speed, efficiency and low cost. Sometimes the processes are outsourced to be more efficient and economical. Customers are incented to use the internet to request and track a return or recycling.

The operationally excellent company also has a process and a discipline to analyze the returns they receive and quickly identify and correct the source of the problems.

Management Processes

In an Operationally excellent company, the management team points the way for the rest of the company. Alignment between team members is crucial. Strategies and performance goals are set at the top and cascaded down through the organization. Management invests time and effort into communicating its strategies and goals throughout the organization. Departments and individuals have performance targets and incentives that are tightly tied to top-level performance goals. Everyone in the organization understands how their work contributes to the organization’s goals.

Decisions in an operationally excellent company are fact-based, fast, broadly considered across the organization and always customer-and shareholder-oriented.
Operationally excellent companies pay careful attention to employee development and succession planning. Many companies make it each person’s job to seek out and develop their successor.

When optimum processes are developed, they are institutionalized with methods and procedures. However, nothing is cast in cement. Employees are encouraged to examine existing processes to determine if they can be improved. Self-examination and rapid change are essential to an operationally excellent company. These companies promote organizational learning as part of their normal activities.

Information and Information Systems

Information systems form the backbone of an operationally excellent company. These companies require quick and easily accessible information in order to run their operations. There is little paper used in the operations as everything can be accessed in the systems.

Employees in these companies are savvy and enthusiastic users of information technology. As a group, they seek out, collect and help build a rich information base on customers, suppliers, operations, products, and every other part of the business.

Everything and everyone is measured on their performance. These measurements help drive performance improvements, work innovations and adoption of best practices s. Particular attention is paid to process quality, reliability, speed and cost.

Customers are migrated to the most effective information channels as soon as possible. Today, the Internet offers a wide variety of options for customer interaction for an operationally excellent company. Steps from product selection, through ordering, order status tracking, payment, and technical support are “online” for many such companies.

Organization, Skills and Jobs

There is no single “right” structure for an operationally excellent company. Such companies do, however, share some common traits regarding their structures. They seldom have a multi-layered hierarchy. In fact, most operationally excellent companies have a “flat” structure. Cross-functional teams are often used to perform key business processes. Operations are integrated or tightly coupled and focused on providing the best total cost to its customers.

Customers and suppliers are usually tightly connected to an operationally excellent company. Supplier and customer teams are often part of the operations of an operationally excellent company.

Strong financial leadership will also be an integral part of such a company. This group will guide the management team in the economics of the business help establish performance targets, and contribute to the design of performance measurement and tracking systems.

Culture, Values, Beliefs and Norms

The last element of a business model addresses how an operationally excellent company thinks about itself and the outside world. Such a company is passionate about delivering value to its customers in terms of speed, efficiency and best total cost.
Employees in such a company manage by fact and numbers. They believe they can prove they are better than competitors or even substitute products or services. They have a passion for excellence in their individual jobs and on the teams they serve on. They constantly examine their own work for ways to improve their performance. They despise inefficiency, errors and waste. They love speed, efficiency and quality.

People visiting an Operationally excellent company are often struck with the attention to discipline and standardization. Yet, this focus does not stop the company from making operational improvements if they are warranted. Employees in such companies have a supply chain focus versus a narrow departmental or functional view. They see the big picture and understand how all the pieces of the supply chain work together to add value to the customers.

Everyone in an operationally excellent company shares information. Communications is a top priority especially when it involves the customers.

Summary

There are a number of well-known operationally excellent companies that epitomize the characteristics noted in this article:

These companies are committed to delivering value to their customers as best total cost suppliers. Their goal is to exceed a customer’s cost expectation with a limited number of standard products in a fast, easy and error-free manner. Each has a unique value proposition, but their execution of the proposition puts them in the top class of performing companies in their industries.

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