By: David Winter, Columnist, International Director
A company’s competitive business strategy and its operational effectiveness are among the most important pillars of its success. Yet, the focus of each might be different. Competitive business strategy has the purpose of giving a company a competitive edge over its rivals, which often translates into positive financial results. Operational effectiveness, on the other hand, is more about producing optimal output by using the least input. It has often been argued that there is an important distinction between the two. For example, Michael Porter contends that operational effectiveness is about doing things better than rivals, whereas a strategy entails doing things differently from competitors. This distinction is important. However, it may lead to erroneous conclusions that strategy and operational effectiveness should not be aligned, when, in fact, the two should be elements of the same homogenous mix.
Operational effectiveness is a short-term solution.
In most market conditions, organizations are not entirely free to choose the strategy they want. Competitive forces in the market narrow down the plausible strategies that can be formulated and implemented. A company in conditions of nearly perfect competition cannot implement a strategy of cost leadership for any period that is longer than the short-term. Over the long-term, its only choice is to follow a product-differentiation strategy, to be able to command the price it wants and avoid the possibility of achieving zero economic profit. In other words, operational effectiveness and operational efficiency in such conditions are merely short-term solutions to a long-term problem.
For this reason, in perfect competition conditions, using technology as leverage is a valid strategy insofar as competitors cannot obtain the same technology. In other words, the best, and perhaps the only strategy, that should be followed involves some form of differentiation, be it product or service differentiation, production-method differentiation, packaging differentiation or any other form. Such differentiation requires by necessity that operations are done in different ways from those of competitors. That is to say, companies should be responsive to competitive forces to the extent that their operations remain nimble and flexible so that they don’t sway with the winds of the competition.
Convergence between strategy and operational effectiveness and efficiency
One of the pioneering companies in operational excellence is Ford Motor Company. The company paved the way for manufacturing to become what we know today. Henry Ford’s drive to push through extremes enabled the company to be one of the first companies in the world to build a mass-production plant. This is an example of operational performance, which enabled Ford to shape the automobile industry early on and prevail over its competitors. The strategy was to produce affordable cars. Such a strategy could not have been achieved without the level of operational effectiveness and efficiency that Ford managed to achieve. And the key takeaway from this example is that despite the distinction, strategy and operational effectiveness should be extensions of one another.
Another example is Motorola. Motorola devised the Six Sigma method in 1986 by the hands of one of its engineers, who aspired to address production defects. What is interesting about Motorola’s case is that Six Sigma became the foundation for the future developments and efforts of the company. The methodology was built upon to achieve innovation, and it was the seed of strategic development.
Such examples show that operational efficiency can indeed lead to successful strategic-management efforts. That is, in Motorola’s case the link between the two elements worked in the opposite direction.
Operational excellence in biotechnology
This applies in other sectors as well, such as the biotechnology sector. Amgen, a pioneering biotechnology company that develops innovative human therapeutics for addressing serious illnesses, has managed to keep strategy and operations on the same track. The company’s executive points to the fact that society needs to reconcile short-term healthcare costs with long-term health benefits of better health outcomes. A key factor in the company’s success has been its ability to deal with pressures to lower costs, which are short-term pressures, and pressures to innovate, which are long-term pressures. In fact, the company found that innovations lead to lowering costs through better treatment methods. The company’s operations are a source of its competitive advantage as the company maintains focus, agility, efficiency, reliability and differentiation, according to its vice president of operations. Both strategy and operations are elements that feed into and reinforce one another in a way that cannot be accomplished if both are considered separately.
Operational excellence as a strategy
There are indeed companies with whole strategies built on the basis of operational excellence. Walmart and McDonald’s are two examples. The way those companies streamline their processes enables their teams to achieve high efficiency that turns into competitive advantage. The two industries in which these companies work demand such a strategy. As such, in their cases, operational effectiveness is the core of the strategy, and without this level of operational performance the strategy would utterly fail. Those two examples show that convergence between the two elements here is imperative to the success of the organization.
Most business schools and executives hold the belief that strategy and operational effectiveness are two distinct elements. Yet, in practice these two elements can converge and diverge. Competitive forces often define what is the appropriate level of this convergence or divergence. Some industries require intensive focus on operational effectiveness and efficiency to maintain cost leadership in the market. The success of such an approach is often short-lived and requires continuous and relentless efforts to maintain an edge. Therefore, a strategy that is built on innovation and differentiation should be adopted over the long-term. Companies that fail to align those two elements receive the benefits of neither. For that reason, viewing them as entirely two separate elements can jeopardize the success of strategy. Companies that paid attention to this alignment saw remarkable success, raised the bar for their entire industry and taught their competitors lessons that live on today.