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Stewart Anderson

Quality Insider

Reconnecting With Strategy

Continuous improvement needs a strategic context.

Published: Monday, August 17, 2009 - 05:00

Today, more than ever, the quest for productivity, quality, and speed has spawned a significant number of techniques and tools: lean manufacturing or service, business process improvement; Six Sigma, total quality management, and so forth. Although the operational improvements resulting from these practices have often been dramatic and impressive, many companies remain frustrated by their inability to translate those gains into superior profitability and growth.

“Determine value from the perspective of the customer,” is the oft-heard mantra from adherents of lean, Six Sigma, and other quality improvement programs. Yet, how often do we really do this? Many times, when we start drawing our value stream or process maps, after we place that customer box in the top right corner of the map, we then go right to the process flow, begin mapping the system, and then start applying tools to it. But, the system serves the customer—indeed it must include the customer—and is the reason why the system exists in the first place.

There seems to be a tacit assumption with many continuous improvement efforts undertaken today: namely, that a company understands what the customer wants—that it knows its markets and customers so well that the capabilities and outputs of the system are indeed those needed and valued by customers. In other words, the company assumes that the right things are being done, that the right capabilities are in place, and that the right outputs are being produced.

In actual fact, though, this is often not the case. If it were, many more companies would be seeing stronger growth resulting from their continuous improvement activities. The root cause of this dilemma, I believe, is that the difference between strategy and operational effectiveness is neither fully appreciated nor understood.

Operational effectiveness relates to how an organization chooses to leverage its capabilities and perform the activities needed to create and deliver value to the customer. (Note: I am using the word “activities” in this context to describe the fundamental processes, operations, and actions that a company must carry out to serve its customers.)

By focusing on improving operational effectiveness through approaches such as lean and Six Sigma, a company chooses to perform key activities better than competitors perform them. Implicit in the notion of operational effectiveness is the concept of efficiency, or doing more with less. However, operational effectiveness is not strictly limited to efficiency—it may also refer to how well a company utilizes its inputs by, for example, reducing supply chain defects, or by developing and bringing products to market faster.

In contrast, strategy is how a company creates a unique, valuable, and sustainable position for itself in the marketplace—a position which, by its very definition, requires a different set of activities. Strategic positioning means performing different activities than competitors, or performing similar activities in different, but not necessarily more efficient, ways. If operational effectiveness refers to how well things are done, strategy is the driver for what should be done in the first place. What a company should be doing is a strategic question; how it should be doing them is an operational effectiveness issue. Most important, the tactical how, or the operational effectiveness, should always be subordinated to strategy. If it is not, a company runs the risk of improving processes and developing capabilities which don't necessarily allow it to compete effectively in the marketplace.

This brings us to the key reason why pursuing operational effectiveness alone is not enough to assure the future of a business: by ignoring or subordinating strategy to determine what activities should be done, an organization runs the risk of investing significant time, money, and resources into improving operations and processes which aren't necessarily the ones needed to create a differentiated competitive position in the marketplace.

Companies implementing lean manufacturing today are concerned with applying the tools of the Toyota Production System (TPS). However, this common approach to lean implementation overlooks the strategic context that required Toyota to develop its production system in this way. As Taiichi Ohno, the inventor of the TPS, stated in his book Toyota Production System (Productivity Press, 1988), TPS was “born of the need to make many types of automobiles, in small quantities, with the same manufacturing process.” This is a statement of strategic intent and necessity. With its emphasis on small-lot, flexible production, zero defects, team-based problem solving, and close supplier relations, Toyota’s approach to production gave it a significant advantage in small-lot/variety-based manufacturing over competitors who were achieving scale-based economies of production.

Thus, the principles and tools of TPS were grounded in strategy—the set of actions that Toyota determined it needed to pursue to grow and prosper as a company. Most important, lower-cost production was a byproduct of TPS, not its primary aim: the key goal was to assure the company’s growth and sustainability by enabling the unique mix of capabilities needed to allow it to compete effectively in the marketplace. In Toyota’s case, enabling and continuously improving its core capabilities was (and remains today) linked to, and driven by, strategy.

While the principles and techniques of the Toyota Production System have been widely understood and disseminated, the strategic foundation described by Ohno on which they are based has been largely ignored or downplayed. In the worst case, this can cause a firm to blindly apply the same principles and techniques without first determining how it will differentiate itself in the marketplace through strategic positioning. Simply put, strategy becomes subordinate to tactics.

To compete successfully, companies must develop differences that can be preserved. These differences are the unique core of a company. They are what allow it to compete effectively in the marketplace and establish a competitive advantage. The goal must be to identify and develop the hard-to-imitate organizational capabilities that distinguish a company from its competitors in the eyes of customers. Once these capabilities are identified, they must be enabled and continuously improved at the process level.

But, you may say, we need to be doing lean, Six Sigma, and so forth, just to keep up with our rivals and compete effectively. While that may be true, remember that if all competitors in the same industry pursue the same things to same degree of effectiveness, then no competitive differentiation is achieved. The more companies pursue the same things, the more they begin to look alike—the very opposite of what strategic positioning seeks to achieve. As rivals imitate one another’s improvements in quality, speed, or supplier partnerships, operational effectiveness strategies converge and competition becomes a series of races down identical paths that no one can win. Lacking a strategic vision and context for change, competition based on operational effectiveness alone results in wars of attrition that can only be slowed or arrested by limiting competition.

Another word of caution: undertaking customer value surveys aren't an effective substitute for strategy. Competitive strategy is a complex and difficult subject. Top corporate planners develop sound competitive strategies from far-reaching and deep analysis of industries, markets, customers and end-users, products, competitors, and suppliers. Winning strategies are always the products of deep thought and analysis; they are also evergreen, and are continually reviewed and adjusted as circumstances change. While customer value surveys may reveal useful information, they aren't the same as a mature process for developing a coherent competitive strategy. At best, customer value surveys may be a tactic to be employed within a strategy development process.

To compete effectively and link and drive continuous improvement from strategy, companies may want to remember these important principles:

• Appreciate that strategy must be the driver for tactical improvement actions taken at the process level. Tactical improvement actions aren't an effective substitute for the lack of an overall guiding strategy.

• Begin continuous improvement by focusing outside your business, not inside the company. Instead of asking what processes need to be improved, ask how the company can grow, what needs must be filled, what markets and customers must be served, where the pockets of opportunity are, what products and services should be offered, and what capabilities your company needs to have to differentiate itself from the competition. These are strategic questions that must be answered through a thorough analysis of industries, markets, and competitors.

• Continuous improvement alone doesn't assure sustainability. Continuously improving and perfecting processes, products, and services is necessary and desirable, but shifts in markets, customer tastes and preferences, competition, and technology can rapidly render the most advanced processes and products obsolete. Neither is sustainability about staying the same—i.e., merely sustaining the status quo of the business. Rather, sustainable growth should be the goal—progressively developing and growing the business through strategies and capabilities designed to create, secure, and develop healthy revenue streams.

• Continuous improvement activities must be linked to strategy. Strategy defines the overall direction and scope of the business, and how the growth direction will be achieved. Continuous improvement activities are tactical actions that determine how capabilities will be enabled and supported through processes. A key role of continuous improvement is to operationalize strategy by establishing and perfecting the needed capability at the process level. Because of this critical linkage, top management and corporate planners with responsibility for developing strategy must not do so in isolation from those with responsibility for enabling capabilities operationally. Similarly, continuous improvement at the operational level should not take place in a vacuum isolated and divorced from strategy.

• A capability is a set of business processes strategically understood. Almost every company has business processes that create and deliver value to customers. However, few companies think of their processes as the primary objects of strategy. Rather, they tend to see their processes as established ways of operating that should be improved through the application of tools. In contrast, capabilities-based companies manage their processes strategically—they identify their growth direction, craft the necessary strategies for attaining it, and identify the capabilities needed to support the strategy. Having done this, they then develop and improve their processes to enable and perfect the needed capabilities.

• Because they enable capability, processes are the building blocks of corporate strategy. It isn't enough to have process excellence—you must have the right processes producing the right products and services that customers and the marketplace need and value.

• Competitive success requires a company to transform its key processes into strategic capabilities that produce superior value for customers. Strategic investments may be required to enable the needed capabilities and develop an integrated infrastructure and way of functioning.

• Because capabilities are cross-functional in nature, the CEO and his or her top leadership team must be the champions of capabilities-based strategy.

Discuss

About The Author

Stewart Anderson’s picture

Stewart Anderson

Stewart Anderson is a partner with Anderson Lyall Consulting Group, a Toronto-based consulting and advisory firm that helps firms develop their competitive advantage. Anderson’s background and expertise includes competitive strategy and value chain engineering. He has advised companies in the manufacturing, service, and contract manufacturing industries. Anderson is completing his bachelor of arts in economics and he is a certified trainer in lean manufacturing principles and techniques.