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Page 1: Sustained growth through operational excellence … › assets › wp_downloads › pdf › ...Sustained growth through operational excellence Spotlight on operations Operational excellence:

An Economist Intelligence Unit report sponsored by SAP

Sustained growth through operational excellenceSpotlight on operations

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© The Economist Intelligence Unit Limited 2008 1

Sustained growth through operational excellenceSpotlight on operations

Sustained growth through operational excellence is an Economist Intelligence Unit report sponsored by SAP. The Economist Intelligence Unit bears sole responsibility for this report. The Economist Intelligence Unit’s editorial team conducted the interviews and wrote the report. The findings and views expressed in this report do not necessarily reflect the views of the sponsor. Ken Waldie was the author of the report and Dan Armstrong was the editor. Mike Kenny was responsible for layout and design. Our thanks are due to all of the survey respondents and interviewees for their time and insights.

March 2008

Preface

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Sustained growth through operational excellenceSpotlight on operations

Operational excellence: Spotlight on operations

perations executives are different from their counterparts in other functions. Their intimate knowledge of the processes from start to end of the value chain gives them a perspective that other functions lack. It is no surprise that when CEOs of mid-sized companies are asked which functional role they most identify with, they tend to choose operations. Operations is where value is created.

Of the 946 executives who participated in the 2008 Economist Intelligence Unit operational excellence survey sponsored by SAP, 216 (23%) come from the operations function. This paper—one of four function-specific papers—is based on the operations responses and follow-up interviews with operations executives. The other function-specific papers focus on finance, IT, and sales and marketing.

Integrating across the value chainThe perspective of operations executives comes out in two areas. First, operations have a more nuanced view of the effects, benefits and barriers to integration. Second, they are more agnostic in their views on the best kinds of integration technology.

The need to integrate multiple processes across the value chain explains small but important differences in the perspectives of operational executives. For example, operations executives who responded to the survey are:● more positive about improvements in production

processes and reductions in costs than they are about improved customer insights to facilitate the development of new products and services

● more likely to cite lack of agility and time-to-market delays in launching new products as barriers to growth than their counterparts in other functions

● more likely to cite geographical dispersion as an obstacle to achieving operational excellence

This passion for integration also colours the responses of operations executives when asked how they support growth. When operations people are asked how they can help their companies grow, over 60% point to integrating processes in sales, marketing, manufacturing, product development, customer service and other functional areas. This integration has tangible results: Over three-quarters of operations people say that it has helped to increase revenues, and slightly less than three-quarters point to higher levels of customer satisfaction.

O

About the surveyIn a survey completed in January 2008, the Economist Intelligence Unit surveyed operational, financial, IT, and sales and marketing executives around the world on the role of operational excellence in their business strategies. The survey yielded 946 responses from mid-sized companies with annual revenues of $20m-$500m. Nearly one-third of respondents were from the Asia-Pacific region, followed by 28% in Western Europe and 26% in North America. Approximately 34% of the respondents worked in finance, 24% in marketing and sales, 23% in operations and 19% in IT.

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© The Economist Intelligence Unit Limited 2008 3

Sustained growth through operational excellenceSpotlight on operations

How operations executives are supporting growth

Encouraging visibility into operations Operations executives cite end-to-end visibility into processes as the second most important way that operations can support growth. However, operational visibility is difficult to achieve. More than any other function, operations involves multiple elements along the value chain, including facilities of different types in different locations. Each of these value centres has its own distinct processes and objectives. Therefore, many different performance metrics need to be aligned to provide an integrated view.

“We use a scorecard that integrates different performance indicators across our organisation’s operations”, explains Kris Wiluan, CEO of KS Energy, which sells equipment and services to oil and gas producers. “This is a way of aligning components of the organisation even though each of them has ownership of their own set of objectives”.

Mr Wiluan gives the example of warehousing, which operates according to a set of specialised goals and

AdoptingMost important

What is your company doing to ensure that your operational systems can support your organization’s growth strategy? Select all that apply.

Integrating processes in sales, marketing, manufacturing, product development, customer service and other functional areas

Establishing end-to-end visibility of processes throughout the organisation

Improving visibility into customer demand, including what, where and why

Improving visibility into the supply chain, including suppliers and partners

Other

Not applicable/Don’t know

39%

61%

26%52%

24%

49%

11%

0%

0%

35%

2%

1%

Source: Economist Intelligence Unit survey, January 2008.

In its simplest terms, operational

excellence means consistently doing things

well across the value chain as a way of gain-

ing competitive advantage. In its broadest

terms, it is a discipline that drives corporate

strategy. In their book The Discipline of

Market Leadership, Michael Treacy and Fred

Wiersema suggest that operational excel-

lence is one of three “value disciplines” that

a successful organisation must chose from

as its underlying operational model.

In practice, operational excellence is a

means to achieving the other value disci-

plines: product leadership and customer

intimacy. Doing things well across the

organisation is fundamental, but most suc-

cessful companies do one thing exceedingly

well and identifying and reinforcing core

competitive strengths is part of operational

excellence.

The defi nition in this paper has three

elements:

● superior performance and visibility

across the value chain

● value-added delivered to customers

● effective integration with external

partners.

While the concept of operational excel-

lence is simple enough, execution is another

matter. A drive for effi ciency is implicit, but

this must be achieved in a coordinated way

by building links across the organisation so

that all functions share a harmonised set

of performance metrics. The ultimate goal

is a “single source of truth” where senior

executives have shared visibility into all

parts of the organisation, enabling manage-

ment by facts. The ideal result is a high-level

dashboard for senior executives with the

ability to drill down into different business

functions, including operations, fi nance, IT,

and sales and marketing. ■

What is operational excellence?

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Sustained growth through operational excellenceSpotlight on operations

best practices. “We need to be certain”, Mr Wiluan stresses, “that operations are maximising the value of storage spaces to support the overall objectives of the company, and also that environmental impacts do not adversely affect their surroundings.”

The challenge of execution: the people factorNearly every executive with experience in operational excellence says that designing a strategy is much easier than executing it. More than any other function, operations executives say that no operational excellence initiative can be successful unless people are aligned with strategy across the organisation.

In many mid-sized corporations the job of aligning key operations people falls on the CEO, who often doubles as the chief operations executive. Nearly 20% of survey respondents who reported their role as operations were CEOs, compared with 6% of marketing/sales respondents and only 3% of IT and finance respondents.

One example is Hong Kong-based Computime, a technology and manufacturing company, where CEO Bernard Auyang Pak Hong keeps operations VPs aligned with strategy by tracking key performance indicators both internally and against competitors. Computime has established three centres of excellence—engineering, manufacturing operations, and systems improvement—to link best practices across the organisation.

“The centre of excellence in manufacturing is led by the vice presidents of operations from the company’s four operations in China,” says Mr Auyang. “They take turns as chair, and meet every month to share best practices and improvement plans. Once they agree on what improvements are needed, they document their findings and distribute an implementation plan for all of our operations.”

Operational excellence specialists also point to the people factor when asked about the challenges of execution. LaBarge Inc’s Mark Teubert explains it this

way: “In our annual report for 2007 our CEO outlined five fiscal-year initiatives, one of which is operational excellence. So we have support from the CEO, and all the executive vice-presidents and general managers also support it. Getting support from the top is not the issue. The biggest hurdle is communications. Getting people engaged, helping them to see the benefits, and feel that they’re empowered to make changes. The solution is to get down into the trenches and engage the middle managers and the folks on the floor. The people who are actually living with inadequate processes today need to see the benefits.”

How operational excellence drives performanceIf operational excellence is indeed a path to growth, companies that embrace operational excellence strategies should grow faster than those that don’t. The operational executives who responded to the survey provide evidence that this hypothesis is true.

The survey asked operational executives about actions that their companies had taken to promote operational excellence. Follow-up questions focused on each company’s performance. When the relationship between actions and performance was examined, the companies fell into three groups: leaders, middle-of-the-pack firms, and laggards.

● The leaders stood ahead of the other companies in the sample in every measure of operational excellence implementation. They also led the way in every measure of performance.

● The leaders ranked higher than other companies in anticipating customer needs, improving management visibility into supply chain and operational activities, transforming raw data into useful information, improving agility to adapt to business cycles, investing in ERP, inventory and demand management systems, and implementing efficiency initiatives.

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Sustained growth through operational excellenceSpotlight on operations

● Respondents from leader companies were far more likely to say that their actions to promote operational excellence led to higher growth in revenues and margins, more product launches, and increased levels of customer satisfaction, acquisition and retention.

● The leaders tended to be in a class by themselves, while the difference between middle-of-the-pack firms and laggards was less distinct. In other words, there was a big difference between firms that embrace operational excellence whole-heartedly and those who embrace it half-heartedly or not at all. There was far less difference between those who take halfway measures and those who do nothing.

Charts showing the actions and performance of the three groups of companies—leaders, middle-of-the pack and laggards—are in Appendix 1.

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Sustained growth through operational excellenceSpotlight on operations

perations executives are closest to the processes along the value chain, and as a result are best positioned to drive operational excellence initiatives. However, collaboration with other functions is essential. IT can surface the data required to make production processes visible. Finance, with its expertise in measurement, can establish metrics and translate them into financial terms. Sales and marketing, with its connection to customers, has

insight into changing demand and the operational agility necessary to meet it.

Ultimately, though, it is the operations function that needs to be responsible for implementation. Says Mr Teubert at LaBarge: “Ownership of execution and responsibility for achieving continuous improvement throughout the value stream—as well as in support functions—is pushed back to the general managers and the functional managers at each of our facilities.”

Conclusion

O

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Appendix 1: Actions and performance of leaders vs laggards Sustained growth through operational excellence: Spotlight on operations

Appendix 1 In the survey, 216 operational executives were asked what actions their companies had taken to promote operational excellence. Follow-up questions focused on how these actions had affected performance. Using a clustering algorithm, the companies were divided into three groups: leaders (strong commitment to operational excellence and strong performance), middle-of-pack (moderate commitment to operational excellence and moderate performance) and laggards (weak commitment to operational excellence and weak performance). The charts show the actions taken and levels of success reported within each of the three groups.

Actions of leaders vs laggards

Yes No

Anticipating customer needs as they emerge

Leaders

Middle-of-pack

Laggards

74% 26%

64% 36%

33% 67%

Focusing on faster time-to-market when launching new products

Leaders

Middle-of-pack

Laggards

67% 33%

32% 68%

27% 73%

Yes No

Yes No

Improving visibility into the supply chain, including suppliers and partners

Leaders

Middle-of-pack

Laggards

61% 39%

24% 76%

25% 75%

Yes No

Transforming raw data into useful information

Leaders

Middle-of-pack

Laggards

73% 27%

39% 61%

30% 70%

Yes No

Improving agility to adapt to business cycles, shifting customer demand and the actions of competitors

Leaders

Middle-of-pack

Laggards

62% 38%

40% 60%

10% 90%

Yes No

Implementing scalable production processes

Leaders

Middle-of-pack

Laggards

47% 53%

26% 74%

9% 91%

Yes No

Innovating to create new products or services

Leaders

Middle-of-pack

Laggards

68% 32%

31% 69%

31% 69%

Yes No

Investment in inventory management systems

Leaders

Middle-of-pack

Laggards

72% 28%

26% 74%

43% 57%

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Appendix 1: Actions and performance of leaders vs laggards Sustained growth through operational excellence: Spotlight on operations

Yes No

Investment in demand planning systems

Leaders

Middle-of-pack

Laggards

47% 53%

20% 80%

15% 85%

Yes No

Existence of efficiency improvement initiatives

Leaders

Middle-of-pack

Laggards

88% 12%

83% 17%

47% 53%

Performance of leaders vs laggards

Very successful Moderately successful Not successful

Effect of primary operational excellence initiative on revenue growth

Leaders

Middle-of-pack

Laggards

40% 50% 10%

14% 66% 19%

10% 58% 31%

Very successful Moderately successful Not successful

Effect of primary efficiency initiative on revenue growth

Leaders

Middle-of-pack

Laggards

38% 49% 13%

6% 70% 24%

11% 46% 44%

Very successful Moderately successful Not successful

Effect of primary efficiency initiative on margin growth

Leaders

Middle-of-pack

Laggards

20% 67% 14%

10% 56% 35%

13% 49% 38%

Very successful Moderately successful Not successful

Effect of primary technology initiative on customer satisfaction

Leaders

Middle-of-pack

Laggards

23% 65% 13%

9% 65% 27%

8% 51% 42%

Very successful Moderately successful Not successful

Effect of primary technology initiative on margin growth

Leaders

Middle-of-pack

Laggards

23% 71% 6%

4 53% 43%

4 50% 46%

Very successful Moderately successful Not successful

Effect of primary technology initiative on customer acquisition and retention

Leaders

Middle-of-pack

Laggards

22% 62% 16%

17% 56% 27%

4 22% 75%

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© The Economist Intelligence Unit Limited 2008 9

Appendix 2: Survey results Sustained growth through operational excellence: Spotlight on operations

Appendix 2: Survey results—operations functions only Between November 2007 and January 2008, the Economist Intelligence Unit conducted a global online survey of 946 senior executives from various industries, of which 216 were from the operations function. Please note that not all answers add up to 100% because of rounding or because respondents were able to provide multiple answers to some questions.

North America 33%

Asia-Pacific 26%

Western Europe 22%

Middle East and Africa 11%

Latin America 4%

Eastern Europe 4%

In which region are you personally based?

Financial services

IT and technology

Energy—oil & gas

Logistics service providers

Professional services

Government/ Public sector

Healthcare

Manufacturing

Pharmaceuticals

Transportation and travel

Construction, engineering, operations

Chemicals

Education

Apparel and footwear

Entertainment, media and publishing

Mill products (including fabricated metals, packaging, paper)

Consumer products—non-durables

Industrial machinery and components

Retail

Wholesale distribution

Consumer products—durables

Agriculture and agribusiness

Telecoms

Automotive

Energy/natural resources—non-oil & gas

Other

What is your primary industry?

11%

8%

7%

7%

6%

6%

5%

5%

4%

4%

4%

3%

3%

3%

3%

3%

2%

2%

2%

2%

2%

1%

1%

1%

1%

3%

Manager

SVP/VP/Director

CEO/President/Managing director

Head of Department

Head of Business Unit

Other C-level executive

Board member

CFO/Treasurer/Comptroller

Other

What is your title?

23%

20%

20%

11%

10%

7%

5%

1%

4%

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Appendix 2: Survey results Sustained growth through operational excellence: Spotlight on operations

6. How does your company plan to grow during the next two to three years?

Organically (by entering new markets, by increasing capacity, by acquiring new customers or by selling more to existing customers) 53%

Both organic growth and M&A 29%

Growth is not a priority for our company 11%

Through mergers and acquisitions 5%

Don’t know 2%

2. What are your company’s annual global revenues in US dollars?

US$20m to US$50m 26%

US$50m to US$100m 32%

US$100m to US$250m 28%

US$250m to US$500m 13%

3. Which of the following statements best describes your company’s approach to operational excellence?

We have implemented a formal operational excellence strategy 26%

We are in the process of developing a formal operational excellence strategy 36%

We recognise the concept of operational excellence in our strategy or planning, but do not have a formal operational excellence strategy 32%

We do not include operational excellence in our strategy or planning 6%

Don’t know 1%

4. Which of the following do you consider the most important component of operational excellence?

The ability to have end-to-end visibility into financial performance, operational activities and customer relationships across all business units and geographies 47%

The ability to add value for customers through the entire product lifecycle 38%

The ability to integrate quickly with external systems and partnersto facilitate collaboration and exchange 14%

Other 1%

Reduced operating costs

Greater efficiency

Increased revenues

Improved customer service

Faster responses to changing demand

Improved regulatory compliance

Improved ability to expand into new markets

Improved customer insights to facilitate development of new products and services

Faster responses to the actions of competitors

Other

5. Which of the following statements best describes your company’s view of the perceived benefits of operational excellence? Select up to three.

57%

57%

51%

40%

15%

12%

10%

8%

2%

27%

1. What is your principal functional role in your organisation?

Operations 100%

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Appendix 2: Survey results Sustained growth through operational excellence: Spotlight on operations

Lack of essential people skills in critical operational areas

Lack of end-to-end real-time visibility into operational processes for senior management

Inadequate linkages among internal departmental systems

More complexity in products, manufacturing and/or service operations

Shortened product life cycle and time-to-market delays in launching new products or brands

Inadequate integration/collaboration with external partners

Increased geographical dispersion of internal operations

Delays and/or inability in carrying out financial analysis to support new investments

Other

Don’t know

7. What are the biggest obstacles to your company in achieving operational excellence, in your view? Select up to three.

53%

36%

28%

28%

24%

21%

18%

3%

1%

25%

8. What are the biggest obstacles to your company’s ability to grow organically, in your view? Select up to two.

Inability to move quickly enough to exploit market opportunities and challenge competitors

Time-to-market delays in launching new products and services

Lack of scalability of operational systems

Difficulty in integrating and/or expanding legacy systems

Lack of capacity for product-line growth and expansion into new geographical areas

Other

Don’t know

32%

48%

25%

24%

8%

1%

27%

9. How is your company enabling future organic growth? Select all that apply.

Identifying core people assets that contribute to competitive advantage

Anticipating customer needs as they emerge

Adding functionality to existing systems to support growth

Supporting idea development to identify, assess and execute opportunities for innovation

Providing individual employees with role-based information that allows them to continuously innovate within their own space

Focusing on faster time-to-market when launching new products

Providing integrated, single-view data reporting for management decision making

Other

Don’t know

58%

61%

46%

33%

32%

31%

2%

1%

46%

Inability to quickly integrate acquisitions into existing operations

Inability to identify and assess acquisition opportunities before competitors

Inability to manage acquisitions in unfamiliar business lines or geographical areas

Inability to obtain sufficient value from acquisitions after they are assimilated

Other

Don’t know

10. What are the biggest obstacles to your company’s ability to grow through acquisitions, in your view? Select up to two.

48%

37%

36%

25%

1%

7%

Identifying gaps in product/service offerings that can be filled by acquisitions

More efficient processes for due diligence of proposed acquisitions

More efficient processes for integration of systems of acquired companies

Implementing systems easily adapted to different currencies, regulatory regimes or business models

Other

Don’t know

11. How is your company enabling future growth through acquisitions? Select all that apply.

58%

40%

38%

26%

7%

1%

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Appendix 2: Survey results Sustained growth through operational excellence: Spotlight on operations

Improving management visibility into operational functions

Increasing operational flexibility and agility

Creating organisational efficiencies to meet customer demand

Integrating processes across the value chain

Planning for additional operational resources needed to meet customer demand

Building new systems with scalability in mind

Ensuring that the growth strategy is supported throughout all company entities

Other

12. How is your operational function aligning to support the organisation’s strategy for growth? Select up to two.

40%

35%

29%

28%

20%

10%

1%

26%

Integrating processes in sales, marketing, manufacturing, product development, customer service and other functional areas

Establishing end-to-end visibility of processes throughout the organisation

Improving visibility into customer demand, including what, where and why

Improving visibility into the supply chain, including suppliers and partners

Other

Not applicable/Don’t know

13. What is your company doing to ensure that your operational systems can support your organisation’s growth strategy? Select all that apply.

61%

52%

49%

35%

1%

2%

Integrating processes in sales, marketing, manufacturing, product development, customer service and other functional areas

Establishing end-to-end visibility of processes throughout the organisation

Improving visibility into customer demand, including what, where and why

Improving visibility into the supply chain, including suppliers and partners

13a. In the previous question, you checked the following actions your organisation is taking to ensure that its operational systems can support its growth strategy. Which one of the actions you chose is the most important?

39%

26%

24%

11%

Promoting growth in revenues

Promoting growth in margins

Increasing launches of new products and services

Promoting higher customer satisfaction

Questions for operations respondents only14. What was the effect of your first-ranked choice from the previous question in the following areas?

Very successful

Successful

Neither successful nor unsuccessful

Unsuccessful

Very unsuccessful

Don’t know

Key

20% 58% 20% 2 1

12% 49% 35% 3 1

13% 45% 34% 5 1 3

19% 55% 21% 3 1 2%

Evaluating and improving overall business processes (HR, Finance, Operations and IT)

Improving internal systems/processes so our employees can be more efficient in their daily activities

More effective alignment of people skills with emerging business needs

Transforming raw data into useful information

Improving systems to make it easier for customers to work with us

Improving systems to make it easier for external partners to work with us

Improving agility to adapt to business cycles, shifting customer demand and the actions of competitors

Other

Not applicable/Don’t know

15. What is your company doing to improve efficiency? Select all that apply.

69%

62%

57%

46%

38%

37%

1%

1%

43%

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Appendix 2: Survey results Sustained growth through operational excellence: Spotlight on operations

Evaluating and improving overall business processes (HR, Finance, Operations and IT)

Improving internal systems/processes so our employees can be more efficient in their daily activities

More effective alignment of people skills with emerging business needs

Improving agility to adapt to business cycles, shifting customer demand and the actions of competitors

Improving systems to make it easier for external partners to work with us

Transforming raw data into useful information

Improving systems to make it easier for customers to work with us

Other

15a. In the previous question, you checked the following actions your organisation is taking to improve its efficiency. Which one of the actions you chose is the most important?

29%

20%

19%

12%

7%

6%

1%

7%

Promoting growth in revenues

Promoting growth in margins

Increasing launches of new products and services

Promoting higher customer satisfaction

16. What was the effect of your first-ranked choice from the previous question in the following areas?

Very successful

Successful

Neither successful nor unsuccessful

Unsuccessful

Very unsuccessful

Don’t know

Key

15% 55% 26% 2 3

12% 52% 28% 3 1 3

10% 46% 36% 5 1 2

17% 58% 21% 2 1 3

Overall aggressive cost control

Innovating to create new products or services

Expanding into different market areas

Reducing staff while retaining core competencies

Aggressive pursuit of market share from competitors

Increasing customer share of wallet, up-selling/cross-selling to existing customers

Implementing scalable production processes

Other

Not applicable/Don’t know

17. What strategies has your company established to maintain profitability during periods of slow economic growth? Select all that apply.

64%

44%

43%

38%

29%

26%

1%

4%

36%

Overall aggressive cost control

Innovating to create new products or services

Expanding into different market areas

Aggressive pursuit of market share from competitors

Implementing scalable production processes

Increasing customer share of wallet, up-selling/cross-selling to existing customers

Reducing staff while retaining core competencies

Other

17a. In the previous question, you checked the following strategies your company established to maintain profitability during periods of slow economic growth. Which one of the strategies you chose is the most important?

35%

17%

15%

10%

9%

4%

1%

9%

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Appendix 2: Survey results Sustained growth through operational excellence: Spotlight on operations

Very successful

Successful

Neither successful nor unsuccessful

Unsuccessful

Very unsuccessful

Don’t know

Key

Promoting growth in revenues

Promoting growth in margins

Increasing launches of new products and services

Promoting higher customer satisfaction

18. What was the effect of your first-ranked choice from the previous question in the following areas?

16% 52% 26% 4 2

13% 57% 23% 5% 3

11% 36% 41% 9% 4

12% 46% 37% 3 3

Inventory management systems

Integrated ERP system (Finance & HR)

Customer Relationship Management (CRM) system

Business intelligence or analytics systems

Production planning systems

Demand planning systems

Other

Not applicable/Don’t know

19. Has your company invested in the following technologies to achieve its operational excellence goals? Select all that apply.

44%

42%

40%

39%

26%

4%

8%

33%

Integrated ERP system (Finance & HR)

Customer Relationship Management (CRM) system

Business intelligence or analytics systems

Inventory management systems

Production planning systems

Demand planning systems

Other

19a. In the previous question, you checked the following technologies in which your company has invested to achieve its operational excellence goals. Which one of the technologies you chose is the most important?

25%

21%

21%

14%

7%

3%

10%

Very successful

Successful

Neither successful nor unsuccessful

Unsuccessful

Very unsuccessful

Don’t know

Key

Promoting growth in revenues

Promoting growth in margins

Increasing launches of new products and services

Promoting higher customer satisfaction

Promoting/Increasing customer retention

20. What was the effect of your first-ranked choice from the previous question in the following areas?

12% 58% 26% 2 1 2

9% 53% 31% 3 1 4

7% 35% 50% 5% 1 4

13% 52% 30% 2 1 3

14% 46% 36% 2 1 2

Yes, we have initiatives underway to improve efficiency and drive down costs 69%

No, we do not have any initiatives for improving efficiency and driving down costs 25%

Don’t know 6%

21. Does your company have initiatives underway to improve efficiency and drive down costs in your functional area?

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© The Economist Intelligence Unit Limited 2008 15

While every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd. nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in the report.

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