This well researched article from Harvard Business Review turns what students are taught at Business School on its head, at least to some extent.
It has been accepted in Business School circles for a long time that operational effectiveness – doing the same thing as other companies but doing it better – is not a path to sustainable competitive advantage. Good management is too easy to copy.
Michael Porter articulated the difference between operational excellence and strategic positioning in his 1996 article ˜What is Strategy?
When I attended a lecture by Porter he asked the question “How long does a competitive advantage need to last for before it can be regarded as sustainable?” His view was it had to be more than one economic cycle, a period of about 10 years. He gives examples of companies that have achieved above average returns for a period at least as long as this by adopting strategies different from their competitors, which their competitors were unable to copy. These include IKEA and SouthWest airlines.
SouthWest, for example, focussed on point to point airline flights so was able to use smaller airports which were less crowded. This led to less time on the ground and therefore more flying hours per plane per day. The cost per flying hour was therefore lower. Full service airlines were unable to copy as they needed their short haul flights to fly into busy hub airports so that passengers could transfer between local flights and international flights.
Porter’s work meets the test of good strategic analysis – the successful businesses identified continued to be successful for a significant period. Many people write about what makes a company successful only to find, a year or so later, that the company is much less successful. I remember when I was a young teacher at Business School, when In Search of Excellence was published, only a year later some of the companies identified (Levi Strauss, for example) had fallen from grace.
However, at MTP we have long held the view that is possible to achieve a sustainable competitive advantage through operational excellence. Two examples of companies who have done this are Toyota and Singapore Airlines. Both have achieved above average returns in their industries by doing essentially the same thing as their competitors but doing it better. Every book on manufacturing that I have read explains how total quality management (or the Toyota manufacturing system) results in a combination of higher quality and lower cost. It wasnt a secret. It was competitors’ inability to copy the operational excellence which was missing.
This new article goes some way to explaining how this can happen. The authors argue that achieving managerial competence takes effort and requires sizeable investment. Their view is based on the results of a significant amount of research. They conducted more than 20,000 interviews and surveyed companies in four sectors: Manufacturing, health care, retail and higher education.
The results showed significant differences in scores for management quality between countries but there were also major differences between companies within countries. One finding that may be surprising is that differences show up within companies. This is particulaly true in large companies where practices can differ across plants, divisions and regions.
There is also a bias in managers perceptions of how well their firms were run. On a scale of 1 to 10 the average self-assessment score was 7. This is similar to results in other areas. 70% of students, 80% of drivers and 90% of university teachers rate themselves as ˜above average”. More worryingly, perhaps, there was zero correlation between perceived management quality and actual quality.
This is a much needed article arguing that operational excellence is not easy to achieve and deserves more attention than it has received in recent years.