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    The Five Hallmarks ofOperational Excellence

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    This is an ideal time for

    businesses to play offensetocreate more daylight betweencompetitors and themselves.During periods of economicturmoil, the competitivelandscape shifts dramatically.Studies show that duringdownturns, many morecompanies make the shift fromlaggard to leader than thosethat make the same shift duringbetter times. Moreover, many ofthose "gainers" sustained theirpositions over time.

    In fact, Accentures ownresearch1 finds that highperformance is the result ofactions taken across the businesscycle: when companies areoperationally disciplined in thegood times and when they press

    this advantage as the cycle turnsdownward. (Figure 1)

    As we start to see glimmers of economic recovery, we will soon learn which

    organizations have been using the economic slump deliberately to gaincompetitive strength. Accenture research on past economic downturns hasfound that high-performance businesses put a premium on operationalexcellence and pull ahead of their competition at the end of an economicrecession. Here are the five factors that influence the creation of positive,

    long-term impacts in both good times and in bad.

    The research also finds that the

    consequences can be severefor the many companies whoseleaders do not act decisivelyenough when trouble looms.Once a company has begun itsdownward spiral, the declinecan persist for years. Even whenits performance does eventuallybegin to stabilize, there is a nastyafter-effect: It typically takesmuch longer to regain investors

    favor than it took those investorsto notice the performance dropin the first place. The confidenceof the capital markets has beenlost. In some cases, it nevercomes back. The clear messageis that the actions taken inthe next twelve months asorganizations make their wayout of the downturn will lock inperformance results for the nextfive or more years.

    In a recent Accenture poll of

    chief operating officers abouttheir organizations responsesto economic distress, therespondents indicated that toughtimes tend to provide a senseof urgency that can serve tofacilitate change initiatives andmotivate innovative problem-solving. Sometimes you needthat external threat to makethose tougher decisions you knew

    you had to make anyway, andalso to convince others that it istime for change, said one COO.

    Many of these executives saidthey view a downturn as anopportunity to improve businessperformance, take marketshare and change competitiveposition. They see an openingto increase cash flow and todrive sustainable results. And

    they begin to see how they canestablish a stronger strategicposition with differentiatingcapabilities and through

    2

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    deliberate selection of assets and

    businesses. Consequently, manyCOOs are making sure that theyhave mechanisms in place toeffect positive transformationtoestablish operational excellenceover the long term and createthe base from which to weatherfuture downturns and challenges.

    Accenture observes that thecompanies that come outahead share these five essential

    characteristics regardless of theirmarket positioning:

    1. They can identify theircompetitive essence whatwe are calling their dominantvector which is the onearea or process in which theyperform better than anyoneelse in their industry in order todeliver something distinctive to

    their customers

    Figure 1: High-performance businesses use operational excellence to emerge strongly from recessions.

    Exit from Recession

    AverageROICrelative toindustry

    High-performance businesses

    Followers

    -15

    -10

    -5

    0

    5

    10

    15

    -20

    1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

    2. They know what structural

    changes they must make to beattheir competitors

    3. They know what it takes toout-execute their rivals

    4. They continuously find theright balance between out-structuring and out-executingtheir competitors

    5. They choose the right change

    journey to keep them headedtoward operational excellence.

    In the remainder of this paperwell explore each of thesecharacteristics in more detail.First, though, its helpfulto define what is meant byoperational excellence.

    3

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    4

    The Relevance of Operational Excellence

    Accenture believes that

    operational excellence isa valuable competitivedifferentiator available to anorganization because it is botha source of competitive strengthand of cost and cash benefits.Managed well, operationalexcellence can achieve significantand measurable performanceimprovements by focusing onthe levers that improve flexibilityand speed to market, quality andreliability, and customer value.

    However operational excellenceis not simply about doingthe same things better.While it does include thedisciplines of simplification andstandardization as well as theelimination of waste, waitingtime and rework, its important to

    note that operational excellence

    also addresses the way thebusiness is set up and how thework is executed on a day-to-daybasis. In addition, technology isa key change factor driving theneed for operational excellence.The rapid rise of e-commercechannels is just one small tell-tale of why businesses must buildnew operating models at thesame time that they improve or

    replace old ones.

    The challenge is that powerfulchange factors such as theseregularly outstrip managementsabilities to respond; theirorganizations are not operatedand governed with the focus andrigor needed to deal with thecurrent complexities.

    As a result, many leaders today

    find it difficult to operatetheir businesses effectivelyand efficiently. The questionstumble out: Do I have the rightoperating model to compete andwin in a dramatically changingmulti-polar world? Whats thesize of the prize if we wereto transform our business?How would we define successanyway? And what types of

    transformation journeys couldand should we pursue that werenot pursuing already? The fivecharacteristics of operationalexcellence start to make senseof these kinds of questions. Letsexamine each in turn.

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    5

    The Essential Characteristicsof Operational Excellence

    1. Naming the companys dominant vectorEvery company hasor shouldhavea competitive essenceor dominant vector. This isdefined as something thatthe organization does betterinternally than any of itscompetitors do in order todrive value for customers.The dominant vector is the

    mechanism by which theorganization best createseconomic profit. It is a long-term characteristicsomethingthat should change only whenthe companys underlying valueproposition changes. It can besummarized simply and clearly;its a statement that everyonein the organization can holdon to. A great example is whenPresident John F. Kennedyfamously asked a janitor atthe National Aeronautics andSpace Administration what hedid, and the janitor replied: I

    help men get into space. Adominant vector works best whenit is communicated tirelesslyand articulately not only by acommitted and enthusiasticleadership team but when itis constantly reinforced bythe managers who report tothe C-suite.

    Translating such a clearunderstanding into practice isboth an art and a science in anyorganization. Some companiescan point easily to theirdominant vectors. At Apple, forinstance, it is speed to market,rooted in delivering constantinnovation (think iPhone) andcool products. Walgreensexcels at site selection, offering

    convenient locations as a centralplank of its value to customers.IKEA can point to designerproducts at mass-market pricing

    in order to offer customersinnovative yet functionalproducts at modest prices. And atSouthwest Airlines, high-qualitycustomer service is the dominantvector which drives all internaldecisions affecting employeeengagement and empowermentas well as operational decisions

    that drive quick turnaround time.The dominant vector is muchmore than a question of brandlabeling or an exercise increating a clever tagline. Italso transcends ideas of brandperception and brand equity.Its fair to say that a measure ofwhether or not a company has aclear dominant vector is whetheroutsiders can easily sum up the

    companys uniqueness.

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    The emphasis on how everydaywork is carried out can obscurethe importance of attending tohow the business is organized.While senior managers frommany business sectors havebecome familiar with thetenets of kaizen, the ToyotaProduction System and Lean SixSigma methods, fewer are ascomfortable with rethinkingthe structure necessary toexecute well.

    When managers do drivestructural change, it oftenmaterializes in hybridapproachesfor instance, globaloperating models that emphasizeLean Six Sigma disciplines

    combined with approachesthat tackle organizationaland process complexity at thesame time. Different businessneeds and priorities drive theapproach to structural changethat is appropriate for eachcompany. The challenges promptmany tough questions: What

    capabilities do we need toachieve a competitive advantage?Where should we source theseactivities? Who should performthese activities?

    Competing through structuraladvantage begins with a clearlydefined operating modelthatis, the way a business organizesand assembles its capabilities to

    execute its business strategies.Aligning people, process,technology, and organizationstructure, the operating model isdesigned and developed based onexternal and internal prioritiesfrom regulatory trends andlong-term supply-chain costs tochanging skill sets and improved

    technology capabilities. It relieson strategic decisions aboutcustomers, products and routesto market, and serves to deliverthe capabilities that match the

    dominant vector.

    Crafted effectively, theoperating model will allow theorganization to take advantageof many of the opportunities

    2. Establishing the right structure

    Figure 2: Globalization is one factor forcing operating models to change.

    1980s

    Performance

    Multi-Local Model

    Decentralized,independentlyrun markets

    Key goal: local profitmaximization

    Regional/Functional

    Regional managementunits on top of OpCos

    Regional integration ofsupply chain/back office

    Key goal: Cost-cuttingto deliver competitiveadvantage

    Global Model

    Global operating modeland business functions

    Standardized globalprocesses

    Global brands andinnovation

    Key goal: Revenue andcost synergy throughleveraging global

    Global Localization

    Simplified aroundcategory, market andbusiness service outcomes

    Super local and superglobal

    Key goal: Total systemprofit maximization

    Vertically IntegratedBusinesses

    Front End Businesses

    Global Brands

    Market TeamsMarket Units

    Category Units

    Global

    Business Services

    LocalGlobal Supply

    Global F&A

    Global IT

    Global HR

    Leveraging RegionalShared Services

    1995 2000 2006-2007

    Global Local

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    enabled by the multi-polar world.It will help its leaders capitalizeon accelerated growth openingsin emerging markets. Theorganization will benefit fromglobal scale while remaininglocally responsive, and will be

    able to spread leadership talentacross the enterprise to supportgrowth in new markets. The rightoperating model will take fulladvantage of rapidly developingglobal talent, skills and culturaldifferences. And it will mitigatethe rising risks inherent in anincreasingly interconnectedglobal economy.

    One global consumer packagedgoods (CPG) producercontinuously reworks itsoperating model to maintainits structural advantage.The advantage is created byestablishing the right capabilities

    with the right levels of decision-making power locally, regionallyand globally. Three decadesago, the consumer goods giantwas configured around a multi-local modeldecentralized,independent operations setup to maximize profits locally.Today, the company is clearlystructured to offer global

    Excellence in executionrevolves around drivers ofsimplification, standardizationand the elimination of waste.The emphasis here is on how theright day-to-day work processescan help an organizationachieve significant measurableperformance improvements in

    cash flow and cost efficienciesby improving flexibility and speedto market, quality and reliability,and customer value. It remainsa hot issue: Polled recently byThe Conference Board, chiefexecutives rated excellenceof execution as their topchallenge for the second year ina row. Nearly half of the surveyparticipantsup from roughly a

    quarter just six months earlierwere also concerned about theirorganizations speed, flexibilityand adaptability to change2.

    Accenture observes thatcompanies that out-executetheir rivals excel in five areas.To begin with, they have a cleargrasp of what customers valueand what they are willing topay for. They push hard on assetproductivity and use return oninvested capital (ROIC) as a guide

    to value creation. They stressprocess excellence, emphasizingcontinuous improvementtechniques and processdiscipline. The best performersbuild enduring capabilities andensure that best practices areproliferated across the enterprise.And they ensure the closealignment of business strategy,goals, metrics, and initiatives

    through rigorous performancemanagement.

    In short, the implementationstars blend speed of responsethe ability to respond rapidly tomarket shiftswith flexibilitybeing able to adapt processes,organizations and assets to meetchanges in customers demandsand with discipline in terms ofthe rigorous adherence to

    process that ensures thatimplementation practices can

    last across the enterprise.

    3. Out-executing: The path from strategy to action

    localizationtapping the best ofboth global and local expertisethrough a networked businessmodel designed to address theimperatives of growth, talent,securing resources, managingvolatility and risk, and sustained

    superior economic returns(Figure 2).

    In effect, the CPG company hasgone super global and superlocal, leveraging multi-tierproducts in all categories, low-cost operations in all areas andinnovation that is rooted firmlyin consumers needs.

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    If identifying and clearlyarticulating the dominant vectoris a critical differentiator inachieving operational excellence,then an equally defining challengeis determining the right balancebetween structural alignment andexcellence in execution.

    The need for equilibrium is alltoo apparent in the strugglesof some Japanese corporations.Although they have outperformedat managing the details ofexecution and developing robustprocesses to drive steady gains in

    product quality and productivity,they are beginning to grasp theconsequences of paying lessattention to the benefits thataccrue from an effective globaloperating model. Companies thatunderplay the need for structuraladvantage lack the agility, theglobal knowledge ecosystems and

    the resource flexibility to be ableto respond easily to new marketopportunitiesand to threatsarising from previously dormantcorners of the multi-polar world.Given the opportunities and threats

    presented by the global financialcrisis, we are now seeing manycompanies in Japan, Korea, India,and China seeking to place muchgreater emphasis on regional andglobal operating models and betterbalancing their efforts acrossexecution excellence and operatingmodel changes. At the same time,we are also seeing many companies

    in developed economies focusing onexecution excellence while evolvingtheir operating models to bettercompete in a changing world.

    By contrast, the world-classCPG producer cited earlier is a

    master of balance. Although thecorporation is constantly realigning

    its operating models, it is alsointensely focused on metrics andanalysis of those metrics in a never-ending effort to accomplish morewith less. The concept of balancebetween structure and execution iswoven deeply into the companysmanagement philosophy.

    It is important to note thatthe balance between structureand execution is not an either/or decision. A case in point: byacquiring some of its bottlers, alarge beverage company is makinga huge structural bet that opens up

    many new execution options becausethe company essentially owns thedistribution channel. Structure andexecution must not be consideredindependent of one another. Businessleaders have to know how structureaffects execution, and how superiorexecution enables a leaner structure.

    4. Balancing structure and execution

    It is not enough for executivesto know where they plan to taketheir organizations; how theymake those journeys will alsohave a significant bearing on theircompanies eventual positioning.Choosing an appropriate change

    journey is non-trivial because eachcompany has a different contextfor change, a unique starting pointand its own corporate DNAallof which influence the type of

    journey that will work best forthe organization. The task, then, isfor business leaders to select theappropriate change journey withcare, and to embark on it withwholehearted commitment and fullpreparation.

    For every company and every

    leadership team, there will be, intheory, one optimal response todiscontinuityone journey that

    best suits the companys cultureand that positions it for survivaland/or leadership. Accenture hasidentified three change journeys:continuous improvement thatfocuses on building excellence inexecution; targeted interventionsthat span structure and executionin a key functional area; andtransformational initiatives

    that are top-down and largelystructural in emphasis (Figure 3).

    In practice, the complexities ofmarkets, customers, business units,and departments mean that mostcompanies try more than oneapproach at the same time. A LeanSix Sigma improvement initiativemay be in place company-wide,but it may be prudent to launch

    an end-to-end transformation of aparticular business unit.

    But given the breadth of possibleresponses, how do senior managersdetermine which will work bestfor their companies? There willbe many who argue persuasivelyfor discrete incremental efficiencyprograms while others pressequally powerful arguments indefense of wide-ranging, highlypublic, multi-year transformation

    initiatives. The uncertaintiesaround which journey to chooseare compounded by the myriadother priorities competing forC-suite executives time and bythe array of conflicting advice theycontinually receive. More than afew executives, concerned aboutmaking the wrong decision, defaultto launching many small programsin a bid to make something work.

    Others end up analyzing endlessly.Most, when asked later, concedethat they wish they had madefirmer decisions earlier.

    5. Choosing the right journey

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    9

    Here is a closer look at each

    journey:

    Continuous improvementThis change journey usuallyinvolves a large number of smallinitiatives led by divisional orgeographical leaders. Theseinitiatives yield quick benefits,require small relative investmentsand tend to become a naturalpart of doing things. This journeybest suits an organization thatbelieves it has defined a solidtarget operating model and thattends toward decentralization ofauthority to carry out changes toits operating model.

    Targeted interventionThis is the most common typeof journey. The aim is to focuson the area that will yield thelargest return on investment.

    There is typically a compellingreason to changea threatcaused by a market or industry

    discontinuity, or a new opportunity

    for growthalong with a sense ofurgency. In this type of journey, anorganization decides to make bigchanges to its operating model,but chooses to do it a piece ata time, often with the goal ofde-risking the change initiative.For example, the company mayrequire deep functional changesuch as creating a new sharedservices entity, pulling into shared

    services something that hadbeen done in its geographies ordivisions, or improving its profitequation by creating a tax-efficient supply chain. Targetedinterventions limit the risks offailure because managementhas not bet the companyon a big program that haseveryones attention.

    Transformation program

    Here, the journey involves changeon a grand scale, almost alwayswith complete reinvention of the

    operating model and big shifts

    in the organizations structure tosync up with the business strategy.Where there is the right DNA inthe company and the right C-levelleadership to drive the program,transformation is usually thefastest way to get a big changeimplemented and to leapfrog thecompetition.

    OperationalExcellence Lever

    ContinuousImprovement

    TargetedInterventions

    TransformationalProgram

    StrategyFinding new profit pools

    Super global, super

    local operating model

    Morphing to adigital bank

    Optimized supply chain

    Global/Regional operations optimization

    Waste reduction

    Precision operations management

    Complexity reduction

    Customer centricorganizational alignment

    Execution

    Incremental Step ChangeMagnitude of Change

    Figure 3: Choosing the right change journey is as important as deciding what change needs to occur.

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    10

    For many companies, adopting

    the five characteristics ofoperational excellence will bea paradigm shift and, in fact,will require adjusting existingcapabilities and practices. Thequestion for most executivesis Where do I start? Indeed,determining the areas inwhich to invest to addressthe five characteristics can bea daunting challenge.

    To help answer this questionAccenture uses a measurementthat we call the OperationalExcellence Index. The indexreveals the overall healthof a companys operationalexcellence capabilities andprogram by measuring the

    companys performance across

    all business functions, includingboth structural and executionelements of each function. Theexercise reveals how closely acompanys operations are alignedwith its vision and strategy.The Operational ExcellenceIndex graph provides a visualrepresentation of the existinggaps, each of the opportunityareas can be quantified to show

    the true business benefit ofaligning reality with the vision.

    When the index was usedby a defense contractor tomeasure the level of operationalexcellence for a new business,the graph revealed where theorganization possessed the

    capabilities that were required

    for operational excellence andalso identified the shortcomingsthat it had to address (Figure 4).Five areas where improvementswould be required werehighlighted, as shown by thedistance between the desired andactual performance, specificallyin the areas of design, sell,leadership, performancemanagement, and human

    resources areas. The index alsorevealed an area where theorganization was over-invested.This information helped thecompany identify targetedprograms to close the gaps andmove closer to its desired level ofoperational excellence.

    The Operational Excellence Index

    Figure 4: Results of the Operational Excellence Index at a defense contractor.

    Desired structure and execution Actual structure and execution

    Design

    3

    +1x +1x

    +1x

    -1x

    -1x

    +1.5x

    +2x

    +2x+2x

    2

    1

    0

    3

    2

    1

    0

    Sell Market Buy Make Distribute Transact Service Collect Leadership Perf.Mgmt IT HR Finance

    OE Index = 35.5 (range: poor 0 to excellence 50)

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    History tells us that economic

    slumps act as positive triggerpoints for change, enablingbusinesses to create competitiveadvantage that lasts long afterthe economy has regainedmomentum. So this is a time formany businesses to create moredaylight between competitorsand themselves and to drivereturns on invested capital farahead for the entire economiccycle to come.

    A focus on operational excellencecan also benefit companies thatare struggling. It can providebreathing space for renegotiating

    credit terms with lenders or with

    suppliers, perhaps. It can at leastboost the value of the assetsfor sale. For the many othercompanies that are working hardto stay out of trouble, a focuson right-sizing and finding newways to liberate cash can makethe difference between stabilityand stagnation.

    The tools, techniques and

    expertise are available to helpmake operational excellence aneveryday realityand a long-termdifferentiator. Whats needednow is the management intent.

    Conclusion

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    Copyright 2009 Accenture

    All rights reserved.

    Accenture, its logo, and

    High Performance Delivered

    are trademarks of Accenture.

    About Accenture

    Contacts References

    Accenture is a global management

    consulting, technology services

    and outsourcing company.

    Combining unparalleled experience,

    comprehensive capabilities across

    all industries and business functions,and extensive research on the worlds

    most successful companies, Accenture

    collaborates with clients to help them

    become high-performance businesses

    and governments. With approximately

    177,000 people serving clients in more

    than 120 countries, the company

    generated net revenues of US$21.58

    billion for the fiscal year ended

    Aug. 31, 2009. Its home page is

    www.accenture.com.

    To learn more about reaching a newlevel of operational excellence, orhow you can discover the OperationalExcellence Index for your organization,contact:

    Asia Pacific

    Trevor [email protected]

    Europe

    Mark [email protected]

    North America

    Matthew [email protected]

    1 Outlook Journal, May 2008,http://www.accenture.com/Global/Research_and_Insights/Outlook/By_Issue/Y2008/TransformationTriggers.htm

    2 Weakening Global Economy andGrowing Financial Pressures areIncreasing CEO Concerns, TheConference Board, Dec. 2, 2008,http://www.conference-board.org/

    utilities/pressDetail.cfm?press_ID=3529