If you want to get ahead of your competitors and stay there, you must acknowledge that operational excellence is vital to executing your strategy, write Raffaella Sadun, Nicholas Bloom and John Van Reenen for Harvard Business Review.
What is the key to becoming a major player in your industry? The obvious, and most common, answer: strategy – formulating a grand plan that will ensure you are doing something different to the competition. But strategy alone is not enough.
Research conducted by the three academics suggests that operational excellence is a “crucial complement to strategy” and that investing in hiring the right people and putting in place the right processes leads to better performance.
THE RESEARCH
The study, started in 2002, looked at how more than 12,000 companies operating in a variety of industries in 34 countries measured up in terms of operations management, performance monitoring, target setting and talent management. Working with a team at the Centre for Economic Performance at the London School of Economics, the trio rated from one (worst) to five (best) how each company used 18 management practices.
THE FINDINGS
Many companies, across all countries and industries, struggle to attain operational excellence, with just 6% of the firms that participated in the study achieving an average score of four of greater.
The study clearly shows that better managed firms are more profitable, grow faster and are less likely to fail.
Moving from the bottom 10% to the top 10% in terms of management practices results in a $15m increase in profits, 25% faster annual growth and 75% higher productivity.
THE PROBLEM
So why do most companies fail to adopt essential management practices? Sadun, Bloom and Van Reenen have highlighted four reasons:
1) False perceptions. A large number of the managers interviewed were unable to objectively judge how well managed their firms were. Asked to rate their firm’s management performance on a scale of one to ten, the median answer was seven. This highlights a significant gap between perception and reality.
“This large gap is problematic, because it implies that even managers who really need to improve their practices often don’t take the initiative, in the false belief that they’re doing just fine.”
An experiment conducted with 28 Indian textile manufacturers showed that managers are prone to overestimating the costs and underestimating the benefits of introducing new management practices.
It is important to improve the quality of information available to managers so they can make objective judgements. This can be done by creating opportunities for regular candid and blame-free discussions between employees and managers.
2) Governance structure. Higher management scores go hand in hand with more decentralised decision making, but managers are sometimes reluctant to improve management practices for fear of jeopardising their own position.
This is particularly common in firms owned and run by families, like India’s largest apparel exporter, Gokaldas Exports.
Nike, a major customer of Gokaldas Exports, wanted it to introduce lean management practices, but it took rising competition from Bangladesh, multiple visits to see lean management practices in action across Asia and the United States, and persuasion from family members to persuade its CEO to make the change.
CEOs must reflect and learn to value the firm’s long-term success over their personal desire for control. The three founders of Italian notebook producer Moleskine established their company as a market leader in just a few years, then teamed up with a private equity firm and handed over control to a new CEO, allowing him to focus on growth while they focused on design and seeking out new commercial opportunities.
3) Skill deficits. Firms with better educated employees achieved a significantly better average score. Being located near a leading university or business school was also beneficial. Good managers recognise the importance of employees’ basic skills and provide internal training programmes.
4) Organisational politics and culture. You have realised the need for change and you know what changes to make, but implementing those changes still won’t be easy. Existing dynamics within your firm might hinder your attempts to get everyone on board.
In 2005, Videojet required its engineering and sales teams to work together to develop a new printer. Having recently been acquired by Danaher, the firm implemented the Danaher Business System (DBS), “a toolkit of managerial processes modelled on the Toyota Production System” that had proved successful in manufacturing, to ensure the smooth running of the product development process.
Unfortunately, pre-existing divides between the two departments meant that a problem highlighted by a member of the sales team was ignored by the engineering team and the product was a failure. Videojet worked on improving the process of collaboration between its engineering and sales teams, later launching a successful printer and proving that DBS could be used in product development as well as manufacturing.
CHANGE REQUIRES LEADERSHIP
Raffaella Sadun worked with a team of researchers from the London School of Economics and Columbia University to codify the agendas of more than 1,200 CEOs in six countries, and found that management quality was significantly higher in firms where CEOs dedicated more time to employees than to outside stakeholders.
“The successful adoption stories that we’ve encountered in our research often took place in organisations where someone very high up signaled the importance of change through personal involvement, constant communication, message reinforcement and visibility,” write Sadun, Bloom and Van Reenen. You must walk the walk.
MANAGEMENT IS KEY
Management and strategy are two sides of the same coin. You might have a world-class strategy but without the correct underlying management practices, your company will not succeed.
“Core management practices, established thoughtfully, can go a long way toward plugging the execution gap and ensuring that strategy gets the best possible chance to succeed.”