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Operational Efficiency Is Not Strategy

Operational excellence is many things – absolutely essential, hard work, complex for many companies, particularly manufacturing firms with global supply chains, and difficult to execute consistently.  Designing lean processes that have flexibility for both standardized and abnormal work flows can be an ever moving art form for manufacturing units, software development teams, and supply chain professionals.  Yet, even when performed with exacting precision, competing firms can replicate the exact same best practices and create parity.  Operational excellence pushes out the productivity frontier for companies, but operational excellence is not strategy.

During the 1970s and 1980s Japanese firms often set the benchmark for efficiency by providing the unthinkable –  lower prices and increases in quality.   In the 1990s, during the desktop era, Dell Computer was an efficiency powerhouse by locating component hardware companies on Dell’s premises.  Dell was able to build computers and ship them within 24 hours, including peripherals, all at the same time.  In addition, Dell was paid by customers on average 20+ days before their payments to suppliers were due.  Standardized hardware, coupled with an exceptional supply chain made this possible.  But when customer preferences shifted to laptops and their proprietary hardware, Dell’s operations no longer provided a unique competitive advantage.  Operational efficiency is at the core of competitive advantage, but operational efficiency is not strategy.

The Internet of Things is rapidly accelerating operational efficiencies across a range of activities, methods, and processes, so as to provide a seemingly unlimited set of possibilities.  But redefining the productivity frontier’s edge by combining sensors and connectivity to the “things” is not going to fundamentally change anything strategically if there is nothing to prevent a competitor from acquiring the same gear and connectivity to reach the same goal.

For example, Harley Davidson is installing sensors, wireless connectivity, and other IoT gear in its manufacturing plants.  Completed facilities have found dramatic improvements in equipment uptime, supply chain awareness, and significant cost savings.  Those cost savings have dropped right into the firm’s bottom line and made a lot of people happy in Milwaukee, WI.  Wonderful stuff.

However, the strategic differentiation Harley Davidson enjoys in the industry is due to other factors – American ethos, traditional iconic motorcycles, and lifestyle benefits.  Customers do not just buy a motorcycle, accessories, and identifying clothing.  They become members of a community and share an experience.  Organizing internal activities around the firm’s differentiated strategy with IoT solutions in their manufacturing plants and their suppliers will provide operational teams insights they never had previously. 

Over time Harley Davidson could use their emerging IoT platform to deliver new services that redefine how the firm competes with rivals and reshape the motorcycle industry.  But the driver of those solutions will be a clear focus on strategic differentiation shaped by customer demands and defined by the creation of a system of products or system of systems within the motorcycle sector of the broader transportation industry.

In the consumer retail space – food and beverage, clothing, entertainment, among others – IoT brings a host of new sensor based solutions around customer engagement.  But rivals can and will offer the same solutions and push the productivity frontier in quick order.  In too many cases, IoT technology platform solutions end up providing only short-term gains and little long-term sustainable differentiation. 

However, if an IoT platform became a catalyst for buying a channel partner or creating a new product provenance record application via an emerging blockchain platform, such as Ethereum, with a token based mechanism of smart contacts validating the authenticity of a product’s development and ecosystem, and customers placed economic value in such a system, that would not operational efficiency.  That would be reshaping industry structure.  That would be strategy. 

Improved asset utilization, productivity gains, and cost savings will always be essential and valuable.  Just make sure actions taken are part of a broader effort to reshape industry structure, reposition the firm beneficially within a changing environment for improved profitability, and differentiate based on clear trade-offs.  That is the heart of business strategy.