Articles / Operational effectiveness
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.",
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
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
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
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
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 &
established methods of business and systems analysis are used to
support computer systems development.
(4) Continuously improve
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 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
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
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.
 "What is strategy?", Michael E. Porter, Harvard Business
Review, Volume 74, Number 6
 'Getting IT spending right this time', Diana Farrell
et al, McKinsey Quarterly, 2003
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