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As we start to see glimmers of economic recovery, we will soon learn which organizations have been using the economic slump deliberately to gain competitive strength. Accenture research on past economic downturns has found that high-performance businesses put a premium on operational excellence and pull ahead of their competition at the end of an economic recession. Here are the five factors that influence the creation of positive, long-term impacts in both good times and in bad.
This is an ideal time for businesses to play offenseto create more daylight between competitors and themselves. During periods of economic turmoil, the competitive landscape shifts dramatically. Studies show that during downturns, many more companies make the shift from laggard to leader than those that make the same shift during better times. Moreover, many of those "gainers" sustained their positions over time. In fact, Accentures own research1 finds that high performance is the result of actions taken across the business cycle: when companies are operationally disciplined in the good times and when they press this advantage as the cycle turns downward. (Figure 1) The research also finds that the consequences can be severe for the many companies whose leaders do not act decisively enough when trouble looms. Once a company has begun its downward spiral, the decline can persist for years. Even when its performance does eventually begin to stabilize, there is a nasty after-effect: It typically takes much longer to regain investors favor than it took those investors to notice the performance drop in the first place. The confidence of the capital markets has been lost. In some cases, it never comes back. The clear message is that the actions taken in the next twelve months as organizations make their way out of the downturn will lock in performance results for the next five or more years. In a recent Accenture poll of chief operating officers about their organizations responses to economic distress, the respondents indicated that tough times tend to provide a sense of urgency that can serve to facilitate change initiatives and motivate innovative problemsolving. Sometimes you need that external threat to make those tougher decisions you knew you had to make anyway, and also to convince others that it is time for change, said one COO. Many of these executives said they view a downturn as an opportunity to improve business performance, take market share and change competitive position. They see an opening to increase cash flow and to drive sustainable results. And they begin to see how they can establish a stronger strategic position with differentiating capabilities and through
Figure 1: High-performance businesses use operational excellence to emerge strongly from recessions.
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High-performance businesses
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deliberate selection of assets and businesses. Consequently, many COOs are making sure that they have mechanisms in place to effect positive transformationto establish operational excellence over the long term and create the base from which to weather future downturns and challenges. Accenture observes that the companies that come out ahead share these five essential characteristics regardless of their market positioning: 1. They can identify their competitive essence what we are calling their dominant vector which is the one area or process in which they perform better than anyone else in their industry in order to deliver something distinctive to their customers
2. They know what structural changes they must make to beat their competitors 3. They know what it takes to out-execute their rivals 4. They continuously find the right balance between outstructuring and out-executing their competitors 5. They choose the right change journey to keep them headed toward operational excellence. In the remainder of this paper well explore each of these characteristics in more detail. First, though, its helpful to define what is meant by operational excellence.
Accenture believes that operational excellence is a valuable competitive differentiator available to an organization because it is both a source of competitive strength and of cost and cash benefits. Managed well, operational excellence can achieve significant and measurable performance improvements by focusing on the levers that improve flexibility and speed to market, quality and reliability, and customer value. However operational excellence is not simply about doing the same things better. While it does include the disciplines of simplification and standardization as well as the elimination of waste, waiting time and rework, its important to
note that operational excellence also addresses the way the business is set up and how the work is executed on a day-to-day basis. In addition, technology is a key change factor driving the need for operational excellence. The rapid rise of e-commerce channels is just one small telltale of why businesses must build new operating models at the same time that they improve or replace old ones. The challenge is that powerful change factors such as these regularly outstrip managements abilities to respond; their organizations are not operated and governed with the focus and rigor needed to deal with the current complexities.
As a result, many leaders today find it difficult to operate their businesses effectively and efficiently. The questions tumble out: Do I have the right operating model to compete and win in a dramatically changing multi-polar world? Whats the size of the prize if we were to transform our business? How would we define success anyway? And what types of transformation journeys could and should we pursue that were not pursuing already? The five characteristics of operational excellence start to make sense of these kinds of questions. Lets examine each in turn.
Business Services
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Regional management units on top of OpCos Regional integration of supply chain/back office Key goal: Cost-cutting to deliver competitive advantage
Crafted effectively, the operating model will allow the organization to take advantage of many of the opportunities
enabled by the multi-polar world. It will help its leaders capitalize on accelerated growth openings in emerging markets. The organization will benefit from global scale while remaining locally responsive, and will be able to spread leadership talent across the enterprise to support growth in new markets. The right operating model will take full advantage of rapidly developing global talent, skills and cultural differences. And it will mitigate the rising risks inherent in an increasingly interconnected global economy.
One global consumer packaged goods (CPG) producer continuously reworks its operating model to maintain its structural advantage. The advantage is created by establishing the right capabilities with the right levels of decisionmaking power locally, regionally and globally. Three decades ago, the consumer goods giant was configured around a multilocal modeldecentralized, independent operations set up to maximize profits locally. Today, the company is clearly structured to offer global
localizationtapping the best of both global and local expertise through a networked business model designed to address the imperatives of growth, talent, securing resources, managing volatility and risk, and sustained superior economic returns (Figure 2). In effect, the CPG company has gone super global and super local, leveraging multi-tier products in all categories, lowcost operations in all areas and innovation that is rooted firmly in consumers needs.
Figure 3: Choosing the right change journey is as important as deciding what change needs to occur.
Strategy
Execution
Continuous Improvement
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Complexity reduction
Targeted Interventions
Step Change
Magnitude of Change
Here is a closer look at each journey: Continuous improvement This change journey usually involves a large number of small initiatives led by divisional or geographical leaders. These initiatives yield quick benefits, require small relative investments and tend to become a natural part of doing things. This journey best suits an organization that believes it has defined a solid target operating model and that tends toward decentralization of authority to carry out changes to its operating model. Targeted intervention This is the most common type of journey. The aim is to focus on the area that will yield the largest return on investment. There is typically a compelling reason to changea threat caused by a market or industry
discontinuity, or a new opportunity for growthalong with a sense of urgency. In this type of journey, an organization decides to make big changes to its operating model, but chooses to do it a piece at a time, often with the goal of de-risking the change initiative. For example, the company may require deep functional change such as creating a new shared services entity, pulling into shared services something that had been done in its geographies or divisions, or improving its profit equation by creating a taxefficient supply chain. Targeted interventions limit the risks of failure because management has not bet the company on a big program that has everyones attention. Transformation program Here, the journey involves change on a grand scale, almost always with complete reinvention of the
operating model and big shifts in the organizations structure to sync up with the business strategy. Where there is the right DNA in the company and the right C-level leadership to drive the program, transformation is usually the fastest way to get a big change implemented and to leapfrog the competition.
Design
Sell
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Leadership
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For many companies, adopting the five characteristics of operational excellence will be a paradigm shift and, in fact, will require adjusting existing capabilities and practices. The question for most executives is Where do I start? Indeed, determining the areas in which to invest to address the five characteristics can be a daunting challenge. To help answer this question Accenture uses a measurement that we call the Operational Excellence Index. The index reveals the overall health of a companys operational excellence capabilities and program by measuring the
companys performance across all business functions, including both structural and execution elements of each function. The exercise reveals how closely a companys operations are aligned with its vision and strategy. The Operational Excellence Index graph provides a visual representation of the existing gaps, each of the opportunity areas can be quantified to show the true business benefit of aligning reality with the vision. When the index was used by a defense contractor to measure the level of operational excellence for a new business, the graph revealed where the organization possessed the
capabilities that were required for operational excellence and also identified the shortcomings that it had to address (Figure 4). Five areas where improvements would be required were highlighted, as shown by the distance between the desired and actual performance, specifically in the areas of design, sell, leadership, performance management, and human resources areas. The index also revealed an area where the organization was over-invested. This information helped the company identify targeted programs to close the gaps and move closer to its desired level of operational excellence.
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Conclusion
History tells us that economic slumps act as positive trigger points for change, enabling businesses to create competitive advantage that lasts long after the economy has regained momentum. So this is a time for many businesses to create more daylight between competitors and themselves and to drive returns on invested capital far ahead for the entire economic cycle to come. A focus on operational excellence can also benefit companies that are struggling. It can provide breathing space for renegotiating
credit terms with lenders or with suppliers, perhaps. It can at least boost the value of the assets for sale. For the many other companies that are working hard to stay out of trouble, a focus on right-sizing and finding new ways to liberate cash can make the difference between stability and stagnation. The tools, techniques and expertise are available to help make operational excellence an everyday realityand a long-term differentiator. Whats needed now is the management intent.
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About Accenture 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.
Copyright 2009 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.
Contacts To learn more about reaching a new level of operational excellence, or how you can discover the Operational Excellence Index for your organization, contact: Asia Pacific Trevor Gruzin trevor.j.gruzin@accenture.com 61.2.9005.5353 Europe Mark Pearson mark.h.pearson@accenture.com 44.20.7844.3247 North America Matthew Reilly matthew.p.reilly@accenture.com 1-678-657-6287
References 1 Outlook Journal, May 2008, http://www.accenture.com/Global/ Research_and_Insights/Outlook/By_ Issue/Y2008/TransformationTriggers.htm 2 Weakening Global Economy and Growing Financial Pressures are Increasing CEO Concerns, The Conference Board, Dec. 2, 2008, http://www.conference-board.org/ utilities/pressDetail.cfm?press_ID=3529