Operational Excellence as a Competitive Advantage

If your company has sales, your company has a competitive advantage. There is something that you offer to the marketplace that your competitors don’t, otherwise, your sales number would be a big goose egg.

However, just because you have a competitive advantage does not mean that it is well understood or defined.

Unfortunately, it is not uncommon for senior leadership to rattle off a series of buzzwords in response to the very simple question: “What is your competitive advantage?”

In my opinion, competitive advantage - along with the company’s values - tops the list of things that a company must communicate effectively and simply down the chain of command. There is a substantial benefit for everyone - from senior management through to the newest worker on the factory floor hundreds of miles away from corporate headquarters - to understand the company’s competitive advantage.

At the risk of oversimplifying the concept, competitive advantage is typically one or more of better, faster, cheaper. At a minimum, these descriptors are a good place to start. It is worth noting that understanding what your competitive advantage isn’t is just as important as knowing what it is. We must understand why our customers buy our goods and services and why they don’t.

What creates a competitive advantage? One of two things: luck or strategy. Let’s assume that luck is a losing long-term alternative and therefore, we will focus on strategy. Strategy creates a vision that when executed creates, hopefully, a competitive advantage that leads to sales.

Executing a strategy, any strategy is risky. Even with the most disciplined execution, not all strategies are successful in creating a competitive advantage, in fact, some strategies result in a competitive disadvantage despite the best efforts of that company’s strategists. I’m sure the folks working on Blockbuster’s strategy were very intelligent and experienced professionals.

So if strategy creates a competitive advantage, what maintains that advantage?

Assume that the strategy is to offer the lowest cost option of microwave ovens. Further, assume that this strategy is effective in earning the company 45% of the market share and making them the market leader. If the company does nothing to strengthen this competitive advantage, what will happen over time?

You know, as well as I do, that competitive advantage will erode and then vanish. In a competitive marketplace, there is no standing still. You are either growing or shrinking.

If a company does nothing to increase the size of the mote around the castle, it will in time, shrink. That is just the nature of the competitive marketplace. When a company’s market share is threatened, what typically happens? We rely on strategy to create a new competitive advantage. It could be a small tweak – sell high-end microwave ovens instead of cheap ones, or a significant course change – sell refrigerators instead of microwaves.

After we execute the strategy, we create a new competitive advantage (hopefully), which then erodes over time and we continue the cycle of implementing a new strategy when that new competitive advantage erodes due to competition. Recall, strategic shifts come with an associated risk of being unsuccessful. Therefore, it would be wise to minimize the number of strategic shifts that are required to create a new competitive advantage because of an eroding existing one. Strategic moves are best for charting a course into the future rather than swerving to avoid an iceberg. Easier said than done, right? Of course, but that is where operational excellence makes its entrance into the discussion.

Hold the thought about competitive advantage, we will come back to it. For a moment, let’s shift our attention to operational excellence.

It has been my observation that many companies have operational excellence initiatives for the same reason that they have Keurig coffee makers in the break room: they are kind of sexy, everyone else has them, and it is expected. But unlike the coffee maker whose use is obvious, operational excellence is often misunderstood and shrouded in an academic and esoteric definition.

In the mood for a brain aneurysm? Google “definition of operational excellence.” There are as many definitions of operational excellence as there are people willing to define it. To some, operational excellence is a culture of operating excellently. To others, it is a series of continuous improvement efforts. To others, it is the efforts required to prevent an untoward event that would threaten a company’s social license to operate. To others is a bolt-on to their existing Environmental, Health, and Safety (EHS) program.

I suppose there is nothing wrong with varied definitions across companies and industries; however, a company with an operational excellence program must have a laser-like focus on the program’s utility or it will devolve into an expendable overhead expense.

I would like to propose for your consideration another definition of operational excellence that I believe if implemented shifts operational excellence from a “nice to have” program to a program that is essential to the survival and success of a company. Specifically, operational excellence is “the incremental increase in a competitive advantage unrelated to a shift in strategy.” This definition serves to focus our efforts to continuously improve and operate excellently on variables that are related to our competitive advantage. It is my experience and observation that absent a very deliberate effort to the contrary most operational excellence initiatives focus on areas that are not an existing competitive advantage. More specifically, the tendency is to focus on areas that are definitely not a competitive advantage because they are weaknesses. This is a tendency that appears, at first blush, to make sense. If we are going to dedicate resources to improve an area of the company’s operations why not focus on the weak areas? I appreciate the thought process, but I disagree with it.

We live in a world of limited resources. If we didn’t then I would fully support tackling the improved performance of every assessed weak area of the company’s operation and for that matter, while we are at it, every area of the company’s operations. However, our resources of time, money, and people are constrained so we must be thoughtful and deliberate on how to invest these resources.

Consider the perennial all-star and future hall of fame basketball player, Steph Curry. He is known for his ability to sink the three-pointer (long-range shot at the basket). In the off-season, what should his limited resources be focused on? Rebounding (the capturing of missed shots, usually by out jumping your opponent)? After all, he ranks near the bottom of the league in rebounding. Wouldn’t it be wise for him to try to improve this?

I would contend that the answer is absolutely not. Although, he is arguably the best three-point shooter in the game, there are literally thousands of people working their butts off in the gym with the stated aim of surpassing Steph as the three-point king. To keep his competitive advantage, he must continue to hone his craft by finding and leveraging every single advantage towards his three-point shooting. Put another way, the team doesn’t pay him to rebound. The fans don’t buy tickets to watch him rebound. His competitive advantage is his three-point shooting and he needs to scratch and claw for every incremental improvement he can find to remain at the top. Imagine how difficult it would be for him to shift strategies if his competitive advantage starts to erode.

I think this is a fair analogy; however, remember – all models are wrong and some are useful. In this case, the analogy is wrong because there is a limited lifespan for a basketball player based on the harsh realities of the ageing process. This stands in stark contrast to our organizational goals. We want to ensure that we are doing the right things to ensure survival and success for decades into the future. Companies that find a competitive advantage only to watch it erode and along with it their survival are a dime a dozen (think Blockbuster, Blackberry, Tivo, et al).

Just as common are companies that respond to an eroding competitive advantage with a shift in strategy followed by another eroding of the newfound competitive advantage. As mentioned earlier, each shift in strategy carries with it the risk of failure. Therefore, operational excellence efforts should be applied to maintain and strengthen an existing competitive advantage using the power of compound interest.

Yes – compound interest.

The most impactful mathematical expression related to maintaining a competitive advantage is a simple one. Specifically, 1.01³⁶⁵ = 37.8 and 0.99³⁶⁵ = .026. Think about this, the difference between a daily improvement of one percent is nearly 38 times greater than the status quo and nearly 1500 times greater than a one percent daily degradation. If I thought I could gain traction with it, I’d suggest a definition of operational excellence as simply: 1.01³⁶⁵ = 37.8 where 1.0 equals the status quo and 0.01 represents operational excellence results.

To me, this is the perfect response to the age-old thought process of “If it’s not broke, don’t fix it.” When viewed through the competitive advantage lens, I would agree with this expression if the “it” is an element that your customers are not currently paying for.

Good is good enough when it is not a competitive advantage (think Steph Curry’s rebounding ability). This, in my opinion, is not true for your competitive advantage. Unfortunately, many companies have the precise opposite viewpoint – they leave their strengths alone and shore up their weaknesses through operational excellence initiatives.

Some big questions remain: How do we defeat the gravitational pull of the status quo to achieve incremental improvement in our competitive advantage? What type of cultural values should we be developing to allow our operational excellence efforts to be successful?

But I believe that I am reaching the limit of your attention span so I’ll leave those questions for another day. Stay tuned for my next piece. 

In the meantime, what do you think? Should operational excellence be focused more on shoring up competitive advantage than addressing weakness? Let us know by leaving a comment!