According to Michael E. Porter, Harvard Business School Professor and world-renowned expert on strategy, success requires both the right strategy and “operational effectiveness”.
“Managers must clearly distinguish operational effectiveness from strategy. Both are essential, but the two agendas are different. The operational agenda involves continual improvement everywhere there are no trade-offs. Failure to do this creates vulnerability even for companies with a good strategy. The operational agenda is the proper place for constant change, flexibility, and relentless efforts to achieve best practice. In contrast, the strategic agenda is the right place for defining a unique position, making clear trade-offs, and tightening fit.”[1], says Porter.
Porter is the first management guru to clearly label the domain of organisational activity that directly complements strategy. By coining the term “operational effectiveness” in this way, he opens up the possibility of exploring the other side, as it were, of the management coin in a systematic way. His purpose of course is to point up the importance of strategy because simply being good at something doesn’t guarantee you success. You must have good direction and purpose
But, as he also points out, if you are not at least as good at what you do as your competitors then the best strategy in the world won’t help you. While dealing out a critique to those who see operational effectiveness as a substitute for strategy, he also criticises those who have neglected operational effectiveness for the more fashionable pursuit of strategy alone.
Porter’s point is succinctly expressed by describing operational effectiveness as a necessary but not sufficient condition for organisational success. And, of course, the same thing can be said of strategy. So, as the diagram below illustrates, strategy and operational effectiveness sit side by side as equal partners in the game of enterprise.
The relationship between these two factors goes a little deeper than simply mutual dependency. They inform each other. Operational effectiveness is about having functions in the organisation that work well. These functions are, of course, the organisation’s skill sets or ‘core competencies’ and therefore, as Porter points out, must fit together and work together to implement the strategy. On the other hand, the possible strategies available to an organisation are constrained, at least in the medium term, by the skill sets available to implement them. A motorcycle manufacturer may pursue a strategy to diversify into car manufacture, but is unlikely to be able to, say, enter the ice cream business because the functional skills required are radically different. Strategy may demand capability, but capability in turn constrains strategy.
Operational effectiveness may also create the opportunity for strategy development by inventing new technologies or methods. For example, the experimentation to find improved glue in 3M that led to the invention of the post-it note.
By creating the strategy /operational effectiveness dichotomy, Porter has paved the way to explore operational effectiveness in its own right as the other major player in organisational success.
“It refers to any number of practices that allow a company to better utilize its inputs by, for example, reducing defects in products or developing better products faster”, says Porter.
In other words, all those things that make the organisation a master of functional efficiency and effectiveness. In the diagram below, we have grouped these into four “meta-activities” that form a virtuous cycle of supporting operational effectiveness.
OE is about continuously improving functional performance. To do this, managers lead and control the functional activities within the organisation, measure and improve the processes that they are responsible for, and leverage those processes through standardisation, communication and automation to then close the loop to provide ever increasing efficiency and effectiveness. It is strategy’s role to mould these functions into a coherent organisational whole that will succeed in the chosen markets.
The OE Cycle
The cycle starts with the organisation’s capacity to lead and control functional performance (1). Functions are the specialised units within the organisation that work together to produce, and support the production of, its outputs, whatever they may be. Typically these specialised units reflect the fundamental way in which the organisation’s activities are grouped in order to exercise control – such as sales, production, logistics, research and development, and so on. They are specialised in order to concentrate expertise, and the greater their expertise, the greater will be their effectiveness. Particularly when the expertise differentiates the organisation from its competitors. Leading and controlling functional performance covers the activities of the organisation’s people – its staff – and encompasses all the factors that lead, encourage, and support people to be more effective – factors such as leadership, training, interpersonal relationships, teamwork, etc.
Beyond the application of such personal skills are processes. These are the unit’s standard methods, and by measuring and improving them (2), operational effectiveness is consolidated, maintained, and improved through constant learning and innovation.
But it is not enough just to develop employee effectiveness, and improve processes. Operational Effectiveness also demands that the organisation constantly and systematically seeks out opportunities to leverage personal and process expertise (3) by widening their application and by constantly seeking opportunities to improve quality and efficiency via automation.
The aim, and the end result, is continuous improvement in functional performance (4). It is not enough simply to achieve a certain level of operational efficiency. Operational Effectiveness encompasses the capacity to continuously improve, leverage, and automate.
Applying the OE Cycle in practice
The next logical step in our examination of OE is to explore how the OE Cycle can be applied in practice. There are two ways to do this. The first is to look at the current conventional techniques for implementing each aspect of the cycle. The second is to look for an underlying principle by which all aspects of the cycle can be integrated into a single overall approach.
Set out in the table below are the current approaches that can be applied to each aspect of the cycle
| (1) Lead & control functional performance | There is an abundance of information available on leading and controlling functional performance. There is of course the need for a high level of expertise in the specialist area that the unit deals with, but also required are general managerial skills such as leadership, planning, training, teamwork, etc. |
| (2) Measure & improve processes | Measuring and improving processes can be achieved by the application of such well-established programs as total quality management, continuous process improvement, and Six-sigma. These all encompass the same range of analytical, testing, and innovation techniques based on quality measurement and reduction in variation. |
| (3) Leverage & automate processes | Conventional and established methods of business and systems analysis are used to support computer systems development. |
| (4) Continuously improve functional performance | This relies on the application of the above approaches and on the integration of each aspect with the others. The latter is where most organisations show greatest weakness in OE. |
It is in the integration of all the OE Cycle aspects that most organisations fall down. Processes are often measured and improved on an ad-hoc ‘project’ basis and not as part of the day-to-day running of the unit concerned, that is, as part of the routine ‘leading & controlling’ of each function. This means that improvements often don’t ‘stick’ over time and opportunities to apply innovations outside a specific local area are missed.
In addition, conventional approaches to automating processes often fail to enhance OE because they are not integrated with functional control and process improvement activity.
This view is supported by comments in a recent article in the McKinsey Quarterly[2] in which the authors point out that there “.. is the tendency to view technology, first, as a panacea and, then after the hype proves unrealistic, as anathema. The experience of the leaders shows that new technology alone won’t boost productivity. Productivity gains come from managerial innovation: fundamental changes in the way companies deliver products or services. Companies generate innovation, in fat years or lean, by deploying new technology along with improved processes and capabilities.”
Knowledge underlies Operational Effectiveness
We can uncover an underlying principle for Operational Effectiveness by starting with the idea of personal effectiveness and asking, what are the key determinants of this? The answers are such ideas as capability, expertise, know-how, talent, and skill. If we summarise all these notions in the single word ‘knowledge’, we can say that personal effectiveness is principally determined by knowledge.
We can extend this principle – that knowledge underwrites effectiveness – to organisations by elaborating on the forms that knowledge takes within an organisation and the effects that these have. The list below does just this, starting, for the sake of completeness, with the antithesis of knowledge – ignorance – and working up through the number levels at which knowledge operates within an organisation.
- Ignorance invariably means a person is incapable of performing a task satisfactorily or reliably. Ignorance is costly for organisations in many ways – time wasted, materials wasted, poor quality products or services that have to be replaced, alienated customers, etc.
- Personal knowledge is what is immediately available to a person to apply to the task at hand. It is the means by which tasks are performed satisfactorily and reliably. Personal knowledge can be extended and made more useful by being codified.
- Codified knowledge is knowledge that is written down or otherwise communicated. It extends a person’s capabilities beyond personal knowledge. In this way it leverages capabilities. It also helps to increase personal knowledge.
- Corporate knowledge can be defined as codified knowledge of standardised processes. This provides further leverage by coordinating and making consistent the productive activity of many people. Corporate knowledge also leverages knowledge by providing a ‘jump-off point’ or ‘platform’ for process improvements and the means by which process improvements are communicated and implemented.
- Embedded knowledge, or knowledge transformed into artefacts such as tools, machines, or computer programs, takes standardised processes a step further and automates them. Embedding knowledge in tools, machines and computer programs also opens up the possibility of performing tasks that cannot be performed by people. This means that the potential for leverage is almost unlimited. But, in order to control these artefacts and utilise them effectively we need to manage two complementary categories of knowledge – knowledge about how to use the artefacts, and knowledge about the artefacts themselves in order to build, maintain, and improve them. The more complex the artefact, the more leverage is gained by, in turn, codifying this knowledge in some permanent form.
Leverage and automation
By considering these types of knowledge in organisations, we can build a picture of the relationships between the various aspects of the OE cycle and how they are connected.
This is illustrated in the diagram below.
Any given organisational task may be tackled at any one of the above knowledge levels. If the is tackled on the basis of ignorance then the obvious consequences will result. The impact on Operational Effectiveness will be negative.
As the task is tackled with progressively higher levels of corporate knowledge, the potential increases for improved quality, speed, consistency, and efficiency. In this way, Operational Effectiveness is a direct function of the way knowledge is managed in order to make it as good as it can be at each level, as well as integrated into the organisation at the highest level possible level.
[1] “What is strategy?”, Michael E. Porter, Harvard Business Review, Volume 74, Number 6
[2] ‘Getting IT spending right this time’, Diana Farrell et al, McKinsey Quarterly, 2003
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