How to achieve operational excellence and outstanding leadership - part one

In part one of this two-part series, I’ll share information that shows strong core management practices are less common and more difficult to implement than thought. So they provide significant competitive advantage in executing strategy. In part two, I write about ways weak core management practices might show up in your organization, and tools you can use to pinpoint deficiencies and improve. You can read part two here.

At a business school reunion, besides catching up with classmates, I attended sessions presented by professors about their cutting-edge research on a wide variety of business challenges. My favorite was Management and the Wealth of Nations, presented by Professor Raffaella Sadun (Harvard).

Professor Sadun demonstrated that operational excellence, previously thought to be easily imitated and therefore of little competitive advantage, has a major, sustaining impact on organizational productivity and overall performance. As a COO and CFO, I’ve focused on driving operational and financial effectiveness, linking both back to strategy. The session reinforced my experience of the impact of these practices on organizational performance.

"Effective leaders are strategists and administrators"

Studies of productivity across nations, industries and firms have shown significant productivity differences across and within countries and industries. The gap between the most productive firms and the rest is growing. After controlling for the impact of differences in technological innovation, most productivity differences had been unexplained. That is, until recent, large-scale research demonstrated that the advantages of operational excellence achieved through core management practices is more important, more difficult to attain, and longer-lasting than previously thought.

Most senior leaders like to think of themselves as strategists. Strategy is where the big, bold thinking happens. Strategy is sexy, strategizing is fun. But, as the presentation concluded, "Effective leaders are strategists and administrators"

Each organization - for profit, nonprofit, informal community, social and volunteer groups - has finite resources to achieve its mission. How much more impact would be achieved if those resources were optimally productive? Without operational excellence, how can strategy be effectively executed?

What drives operational excellence?

Professor Sadun, based on work with Professors Nick Bloom (Stanford) and John Van Reenen (MIT) described the first, large scale, global study conducted on a variety of companies for the impact of core management practices on productivity. Core management practices were evaluated based on 18 elements across these four dimensions considered proxies for most of the key management practices:

·       Operations management, such as lean practices, strong information flow across functions

·       Performance monitoring, including process documentation, use of KPIs, accountability

·       Target setting, including connection to strategy, linkage to work at all levels

·       Talent management, including stretch goals, development, managing low performance

Key findings

·       The use of core management practices accounts for most of the difference in performance among organizations. Only 6% of the firms studied scored high, while 11% of firms scored very low

·       Core management practices are really hard to implement effectively

·       Differences in the use of core management practices persist over years, suggesting a sustained return on investment

·       Besides the impact on productivity, strong core management practices were also correlated with operating profit

·       The organizations that scored high also spend a lot more on R&D and have more patents, so they’re not giving up innovation for efficiency

What gets in the way of adopting core management practices?

·       Lack of management awareness, not of the practices themselves, but of the success with which they’re actually used at one’s own company. The vast majority of study participants rated their organizations’ management as well above-average; but the self-scores didn’t sync with actual organization performance

·       Lack of motivation, due to costs and concern that management practices will lessen direct, personalized control. But strong management practices enable delegation and free leaders to focus on other value-add work they’re uniquely qualified to do

·       Skills and silos: deficient analytical and communication skills as well as information exchange across functional areas

·       Culture: no pervasive buy-in and commitment, starting from the top, for the time and costs to implement

In part two, I share examples of problematic practices and approaches for diagnosing weaknesses and ways to improve.

I'm curious - do you agree with the importance of leaders being great managers and strategists? What have you seen that gets in the way of adopting strong practices?

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