Operational Excellence

In the late twentieth century a growing awareness of the importance of management in the performance of the modern firm began to emerge as governments and cross-industry groups introduced official awards for the highest levels of management practice.^[1] Awards such as Japan’s Deming Prize (established in 1950), the United States’s Malcolm Baldrige National Award (established in 1987), the European Quality Awards (established in 1990), and the AKAO Prize (established in 1996 by the Quality Function Deployment Institute) publicly recognize either individual or whole organization-level performance.

While many firms take great pride in winning such popular recognitions and incorporate them into their marketing, others eschew them and instead pursue operational excellence for its own benefit, greater profitability. Ultimately, management is responsible for making the decisions and leading the actions that define a firm’s values and create the culture that will impact the quality of execution of all operational aspects.^[2]

World-class firms concern themselves with whether all of their various operational systems have the ability to be competitive and lead in their industry. These firms recognize that such quality is created before and during the process of implementation, not after-the-fact. Additionally, all decisions big and small incur a cost, create a benefit, or both. The simple equation, Profit = Price – Cost, captures the essence of this wisdom. Therefore, the world-class firm acts as if every single action impacts every other action whether within the firm or with its suppliers and partners. Additionally, these decisions impact the firm’s ability to charge a competitive price while incurring a best-of-class cost in order to generate above average returns.