Occasionally you come across a term that you are sure at one point meant a lot. Yet it has been used so widely, in so many contexts that it has become just a white noise statement. What I mean by this is the idea has been overused, twisted and applied without too much understanding of what this actually means. Despite this confusion or misunderstanding leaders, managers, owners are quick to jump on the bandwagon, not fully understanding what they are getting themselves in for. As a result it doesn’t always go to plan, not because it wasn’t the right thing to do, but rather the team was not ready because of the lack of understanding and appreciation of the effort required.
Business Excellence or Operational Excellence (the term used in more formal approaches as you will see shortly) is just one of those terms. So where did it come from? What is actually meant by Business and Operational Excellence?
Origins of Business and Operational Excellence
The most common definition of business excellence describes excellent organisations as those that attain and keep exceptional levels of performance that meet or go beyond the expectations of different groups of stakeholders.
The common connection for Excellence is founded in the work initially done by Dr Joseph Juran focusing on quality. The initial concepts of Quality by Design based on three core principles (The Juran Trilogy):
This was further developed into the Juran Model and Excellence Framework. The Juran Model is made up of five key components, when applied together it has been shown to deliver better results while creating a culture of excellence.
Understanding the Guiding Principles that lay the foundation for excellence
Improving the customer experience
Creating an infrastructure that engages employees to make improvements using the right methods and tools
Process improvement teams to drive process efficiency
Leadership and workforce engagement
There are now additional models that share close similarities. These include the work of Dr Edwards Deming and his key 14 key principles for management, Shingo and the guiding principles of organisational excellence. Even the work described in the book “Good to Great” by Jim Collins breaks these principles into the themes of
Work and focus on all three and you are taking steps towards Business / Operational Excellence.
Over the past few decades, there have been formal “self- assessment" types of frameworks created, based on the research into quality and excellence to help guide companies through the minefield of expectations and what / how to do ‘excellence’. Examples of such frameworks include the International Organisation for Standardisation (ISO) which facilitates the popular ISO 9000 framework for Quality. The Malcolm Baldrige National Quality Award was created to acknowledge American based businesses on the achievements based on Total Quality Management (TQM). This is now an internationally recognised framework to help support and guide businesses to achieve performance excellence. Locally to New Zealand, many of the business awards conducted through the regional Chamber of Commerce’s are also based on the foundations of performance excellence beginning with the work started by Juran.
Through this very brief history of Business or Operational Excellence, it is founded on strong compelling evidence and research on quality, quality management and performance excellence. Focus on quality throughout every aspect of a business's operations and you can find excellence.
The popularity of business excellence models have enabled organisations around the world to operationalise these concepts and provide a structured implementation roadmap that can be applied to any type of business. This has helped leadership teams organise themselves and structure the implementation process. It also supports companies to set appropriate budgets to adequately support the implementation. Organisations that have adopted business excellence models have usually done so by using initiatives, tools, and techniques (such as Lean, Six Sigma, Kaizen) to support their journey and to achieve the desired outcomes.
So now we know what Business Excellence is, what is in it for SMEs or any business?
The Outcomes and Payoffs?
Those who are looking for that direct and immediate payoff through starting a Business Excellence journey will be bitterly disappointed. This is all about the long game. It requires patience from the leadership to keep pushing the standards and expectations with the team. More often than not there will be a mid- long time period to see the true benefits from taking a quality approach, particularly the financial outcomes because of its evolutionary and delayed nature of this work. Impact on performance can be difficult to measure and intangible.
But let’s take a close look at what we know through improved business performance, productivity and profitability. The cost of non-quality. Beginning with the accepted productivity factor of 3. When there is an error made (factor 1), it requires rework (factor 2) and the company could have been producing the next widget or service (factor 3). So if it costs $100 to produce something, poor quality actually costs the business at least $300.
With continued problems and issues, this will decrease customer loyalty by 15% to 30%. This can creep up on a company, not seeing what can be a slow decline. This is why it is super critical to have at least one metric on customer experience. Based on a variety of companies, industries and situations, the cost of quality (or to be more precise the cost of not getting it right the first time) ranges from 5% to 25% of an organisation’s annual turnover or annual operating costs in service-type situations. When an average turnover for a medium sized SME in New Zealand is around $850,000 - this can be at least $212,500 impact to the bottom line. This is very similar to figures highlighted in previous blogs.
So what happens when a company front foots quality and excellence? Kano et al. (1983) carried out an examination of 26 companies which won the Deming Application Prize (this is a prize awarded to companies for their effective implementation of company-wide quality control). They found that between 1961 and 1980 the financial performance of these companies far exceeded the average of other organisations in similar sectors. In a similar finding, those organisations which set themselves the goal and won the Baldrige Award, the median growth in jobs for these companies was nearly 20 times greater than matched industries.
Additional research has shown other benefits for businesses. Letza et al. (1997), found in what is called The Bradford study, revealed the following benefits for those organisations investing in creating a culture of excellence and quality:
81% of companies are above the industry median for turnover per employee.
81% of the companies provide a higher salary to turnover ratio than their peers.
74% of the organisations pay their employees above the median for the industry.
65% of the organisations produce above-median profit per employee for their industry.
62% of the organisations have a higher net asset turnover than their peer group.
The consistent factor amongst those businesses employing Business / Operational Excellence they measure a combination of the following critical success factors:
Reduced staff turnover
Return on assets
Overall, quality means improved business performance. Improved business performance means better profitability and a more sustained growth path for businesses.
Further readings / Links for Operational Excellence
Smith, S. (1988), "Ten compelling reasons for TQM
Operational excellence through lean manufacturing: Considerations for productivity management in Malaysia’s construction industry
Abdul Razak Ibrahim,Ghaffar Imtiaz,Bahaudin Mujtaba,Xuan Vinh Vo & Zafar U. Ahmed
Pages 225-256 | Received 28 Feb 2020, Accepted 28 Mar 2020, Published online: 13 May 2020
James Martin 2021. Operational Excellence: Breakthrough Strategies for Improving Customer Experience and Productivity.
A. J. L. Lee; R. Y. G. Lim; B. Ma; L. X. X. Xu. Improving productivity of the SMEs in Singapore — Case studies