What is operational effectiveness?
For more than a century, the world of business has been on a transformational journey. This revolution in commercial business practices is known as operational effectiveness – the ability of a company to perform activities better than its competitors.
Operational effectiveness is the capability of producing results according to specifications in a timely fashion. It is about using the people, the physical environment, and the methods of the workplace to improve products and processes, and to eliminate defects and delays. Operational effectiveness works in the present and involves continuous improvement.
The Industrial Revolution of the nineteenth century was the birthplace of the concept of operational effectiveness. Large factories with mass production created a need for effective and efficient management. The initial approach relied on the measurement of productivity using time and movement studies of factories and workers. The goal of this early foray into operational effectiveness was to determine the best method for performing tasks in the least amount of time, using a stopwatch as the main measurement tool.
In the early twentieth century, automaker Henry Ford’s adaption of the principles of efficiency set the pace for the rest of the manufacturing world. Ford claimed that with his use of the production line, he was able to reduce the time it took to produce a car from 12 hours and 30 minutes, to 2 hours and 40 minutes.
For the last forty years, businesses have placed increasing emphasis on operational effectiveness through the systematic evaluation and improvement of their operations.
The approach is popular for good reason. Productivity, cash flow, and short-term profitability are enhanced by operational effectiveness. The value is easily understood – cost is generated by performing activities, and performing those activities more efficiently than a competitor generates a cost advantage.
There are many differences in the way organizations apply operational effectiveness. Some organizations concentrate on the elimination of wasted effort. Others look to improvements in technology, or to new advances in the management of activities.
The quest for operational effectiveness has spawned a number of management tools and techniques such as
- total quality management (TQM) – Total quality management (TQM) is the application of quantitative methods to improve products and services. TQM is driven by an analysis of customer requirements, using measurement and statistical techniques to improve and maintain processes.
- time-based competition – The first producer to get a product to market has a significant market advantage. Time-based competition minimizes the time it takes to develop a product to exploit this advantage. Activities focus on time and its relation to quality, cost, delivery, safety, and satisfaction.
- benchmarking – Benchmarking is a systematic method of measuring processes against those of recognized industry leaders. These comparisons are used to establish priorities and targets for process improvement.
There are few business managers who would argue that operational effectiveness is not an essential part of superior performance. But operational effectiveness alone is not enough to sustain growth. Increasingly, organizations are finding that the gains they have made through implementing operational effectiveness are not sufficient to sustain profitability.
There are fundamental distinctions between strategy and operational effectiveness:
- Operational effectiveness creates value through cost reduction. Strategy creates value through performing unique activities.
- Operational effectiveness means performing activities more efficiently than competitors perform those same activities. Strategy is about performing activities in a different way than competitors, or doing different activities.
- Operational effectiveness is about working quickly and efficiently. Strategy is about the creation of a long-term competitive advantage.
- Operational effectiveness is about making incremental improvements to procedures. Strategy is about improving the organization as a whole.
In 1996, the Harvard Business Review published a landmark article by renowned strategic thinker and Harvard professor Michael E. Porter. In the article, entitled “What is Strategy?” Porter argued that the key to profitability and growth was the ability to distinguish between operational effectiveness and strategy. He noted that gaining competitive advantage does not require rejecting efficient business practices, but rather it requires building strategy supported by the principles of operational effectiveness.
There are reasons why operational effectiveness alone is insufficient for organizational success. Those reasons are competitive convergence and the rapid diffusion of best practices.
Superior operational effectiveness is a source of short-term competitive advantage, but it does not always result in long-term profitable growth. This is due to the rapid diffusion of best practices.
Organizations that gain a competitive advantage from operational effectiveness do so because they have achieved a low-cost position relative to their competitors. In business, the best known methods for consistently and effectively achieving objectives are known as “best practices.” To achieve cost leadership, an organization must apply best practices in the sourcing, creating, selling, and distributing of its product or service. Diffusion is the process whereby a practice or other innovation spreads to other users in an industry. However innovative these best practices are, they have the disadvantage of being easily imitated by competitors. The more easily applicable the practice, the more quickly it will diffuse through the industry and become standard practice. While still valuable for cost-savings, the practice loses any position of advantage it may have once had for any individual organization.
The use of tools, such as benchmarking, and the rapid adoption of standardized business practices result in competing organizations becoming more and more alike. This is known as competitive convergence – as rival companies imitate each other’s improvements in defect reduction, time, management techniques, and technology, the industry becomes homogeneous and competition stagnates. Companies become even more generic as they outsource activities to third parties, often the same ones used by their competitors. Viewed individually, each organization’s operational changes seem important, but viewed collectively, any competitive advantage is neutralized. When companies cannot differentiate themselves by operational effectiveness, the only choice left is to compete by reducing prices. This has the effect of diminishing profits and choking reinvestment in the business.
The development of sustainable competitive advantage is crucial to the long-term success of any organization. Operational effectiveness is not a driver of long-term growth as it is easily replicated by competitors.
What is important is building on operational effectiveness by concentrating on the strategic issues of making the organization effective in the marketplace, rather than focusing solely on applying stringent cost control to operational activities.
It is a fundamental part of human nature that people constantly seek to discover and understand their place in the world. Businesses also profit from a sense of who they are, and where they are going. A clear and articulated strategy for envisioning, achieving, and keeping an optimal position of value is called strategic positioning.
Strategic positioning is the conception of a desired future position for an organization, and the devising of a journey to realize that position. Put simply, it is a means of placing a particular organization in a desired environment at a specific time.
To gain competitive advantage, strategic organizations differentiate themselves and their products by how they position themselves in the marketplace. Competition is viewed as the process of perceiving positions that attract new customers, or that draw customers into a new market. Many managers view their competitive position in terms of customer value – the profit a customer generates for the company. But the essence of strategy is how an organization gets to that customer – the ways it differentiates itself from its competitors.
Strategic positions emerge from three sources, which may be pursued independently or which may overlap.
- Variety-based positioning provides varieties or features of a product or service that no other organization is providing.
- Needs-based positioning meets the needs of a customer group no other organization is meeting.
- Access-based positioning uses different ways to reach customers, or to make customers more accessible to the organization.
Operational effectiveness is about working quickly and efficiently. Strategy is about the creation of a long-term competitive advantage by anticipating, driving, and capitalizing on change. Both approaches are important for company growth. Without strategy, managers may become too enmeshed in daily operations to look to the future of the company. Without operational effectiveness, there would be no solid base from which to implement strategy.