Operational excellence: value strategy and organisation

The Treacy/Wiersema concept starts from the premise that not all customers want the same offering. Some customers base their purchasing decision primarily on the best price-performance ratio over the entire period of use, others on the best and most innovative product, and others again on the best complete solution for their individual problem. This gives rise to three value strategies: operational excellence, product leadership and customer intimacy.

Two core statements shape the model. A company cannot be the best provider in all three areas. It has to decide on one positioning and be among the best providers in the market there. Anyone who tries to meet all three expectations will always come up against competitors who concentrate on one customer group and gain decisive advantages from doing so. At the same time, the other two dimensions must not be neglected: there, customers’ minimum expectation has to be met, the so-called threshold value.

The value proposition of operational excellence is “best total cost over the entire life cycle”. This means a combination of performance features that leads to the best costs for the customer from purchase to the end of use or to disposal. Reliability, ease of handling and durability therefore play a major role, because they reduce the buyer’s follow-on costs. Characteristic features are consistently high quality, an excellent but deliberately limited product range and easy, fast ways of obtaining products.

The best total cost is not always the lowest purchase price. It covers all costs that arise from acquisition and use: purchase price, waiting times, the inconvenience of premature repairs, maintenance costs over the service life and disposal costs. This calls for two perspectives: from the customer’s point of view on total cost, and from an internal point of view on how far the company’s own core processes can be standardised.

Each value strategy puts different core processes and core competencies at the centre and supplies decision premises for operational business, for example for production and logistics, customer management, innovation, HR and IT. If the strategy is not clear, the organisation constantly has to cope with contradictions. That ties up energy and weakens competitiveness.

Operational excellence requires that products and services can largely be delivered through standardisable processes. Delivery and basic service processes are optimised throughout, costs stay low and buyers are served without complication. Management systems concentrate on integrated, reliable and rapid transactions and on compliance with specified performance standards. The culture rewards efficiency and shuns waste. The basic attitude is: variety increases total cost. Management does not allow products and services to proliferate.

Because the most important processes are standardised, the majority of employees do not need far-reaching decision-making powers. Cost awareness is expected of everyone. What is needed across the board are people who support the principles of this business model and adhere to standards.

Measurement and monitoring procedures provide timely data on quality, costs and compliance with performance promises. This allows management to see hourly or daily when something is getting out of hand and to deal with deviations very efficiently.

Success is secured through consistent utilisation and adjustment of existing capacity and through a constant search for further uses for existing infrastructure. In service, too, the rule is: do things right the first time, and do them the way the standard prescribes. This includes the courage not to give the customer everything they want.

Operational excellence is often confused with operative excellence. Operative excellence strives for effectiveness and efficiency through process management. It is an internal view with the aim of continuously reducing the company’s own costs of value creation while maintaining the same level of quality.

The value strategy of operational excellence, by contrast, focuses on the costs incurred by the customer: the price and all further costs over the product life cycle, such as opportunity and maintenance costs. The two terms therefore lie on different levels. Operational excellence is one of three generic strategies. Operative excellence, i.e. the pursuit of cost efficiency, has to be pursued in all three strategies, because a critical look at one’s own processes and costs is necessary regardless of positioning.

Porter’s cost leader can undercut every competitor in its industry on price and still achieve adequate margins. Only one company in an industry can occupy this position. It increases the risk of constant price wars, requires forgoing other competitive dimensions such as additional service offerings and only makes sense for pure commodities. The focus is on the best costs and prices per unit at the time the deal is concluded, and the primary focus is on the competitor.

According to Treacy/Wiersema, several companies can successfully pursue operational excellence at the same time. The combination of cost-optimised differentiating features protects them from being exposed to every price war. The particular customer value justifies prices above those of the cost leader, who would destroy its business model with higher prices. The primary focus is on customer value, measured against the conditions of the industry in question.

A value contribution is a combination of value criteria with which a value strategy is put into practice. A value criterion is the part of the value contribution that influences the purchasing decision from the customer’s point of view.

Kaplan and Norton distinguish eight criteria in three categories: functionality, selection, time, quality and price as product and service attributes, service and relationship as the customer relationship, and the brand as image. Every customer segment served needs a value contribution that is unique compared with the competition, including compared with providers that follow the same value strategy.

In all criteria, a threshold value must be met that results from the minimum requirements of the customer segment. If it is not met, the customer no longer considers buying. However, the purchasing decision is not made on the basis of the threshold value, because the customer takes it for granted. A company can only differentiate itself through the criteria that belong to its value strategy. The threshold value must be set neither too high nor too low.

For working with the criteria, it is important to distinguish between selection, functionality and service. Effort needed to offer a particular functionality or selection does not count as service in this model. If a supplier meets a customer’s wish for a colour shade that was not previously in the range, it is enlarging the selection. Under operational excellence, the question is then whether such a fine gradation can be standardised at all.

A service that is sold and invoiced separately and does not change the product belongs to selection. A maintenance contract for lifts is such a stand-alone product that can be handled in a standardised way. The service criterion covers product-related services included in the price, such as ordering channels or standard advice on using the product. Under operational excellence, a threshold value has to be determined for these. If a segment above all demands customisation, this usually points to the customer intimacy strategy.

The management team of an internationally active business unit of an industrial company specified the eight value criteria for its own focus on operational excellence. For functionality and selection, it decided on a few standard products with specifications that are as broad as possible, on rule-based adding and removing of products, and against customer-specific specifications and niche products. For time, the priority is reliably keeping every commitment, without exceptions to standard procedures.

Quality is based on the industry standard, with a high level of consistency and independent of location. It is not raised for individual customers, even if they would pay for it. Prices are aligned with the market level, and there are no services outside the catalogue of offerings. Service consists of a standardised basic package, and customer contacts follow clear rules and objectives. As a brand, the unit aims to stand for the best price-performance ratio and explicitly not to be seen as a solver of every problem.

Companies with this strategy can differentiate themselves through price, quality, time, selection and functionality, i.e. offer more than the threshold value there, as long as this does not compromise the strategy. Beyond product and service attributes, the brand can be considered as a differentiating criterion.

No company can deliver the highest performance in all of these criteria. It has to decide deliberately which criterion serves differentiation and to what extent, guided by the needs of the customer segment in question. Distinction from the competition cannot be managed through individual criteria viewed in isolation. The uniqueness of the value contribution arises from the combination of different levels of the differentiating criteria and from meeting the threshold values.