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Avanulo White Paper #143




                                     115-117 S. Main St. Suite A
                                       Celina, Ohio, 45922 USA
                                                  567-510-5200
                                             www.avanulo.com




       Applying Operating Cost Leadership,

                 The Fourth Generic Strategy




                                              By David I. Cahill



  July, 2011
Summary of Contents


                                        Our Average Project:
The Fourth Generic Strategy             $31,000,000 USD of annual, sustainable
The most effective strategy in mature   improvement in 79 days, with the
markets is Operating Cost Leadership    people & technology in place and w/o
                                        capital investment. Our average fee is
                                        less than 0.50% of annual improvement.
The Scissors Curve
A trap for mature industries            To the reader:

                                        We hope you find this Avanulo White Paper
                                        valuable. We know that your time is precious,
Safe, Ethical Profit                    so we have structured the format of this
The Universal Yardstick                 document to accommodate your needs.

                                        For a quick read, refer to the “in a Nutshell
The Four Managerial Elements            column” on the left.
The Keys to Relentlessness
                                        For more detail, read the right hand column


The Creativity Curve
A structured way of thinking



The Hidden Factory
The source of hidden wealth


                                        About Avanulo
The Opportunity Tree
                                        Avanulo means progress, and our passion lies in
The most effective improvement tool     helping our clients progress their goals.
available
                                        Our partners all have at least 20 years of
                                        experience in their fields of expertise.
Enhancing Revenue
Using the Tree to rev up sales          Our Motto is “Enjoy the Business Result” or
                                        ETBR. We believe every improvement action
                                        should have a tangible result, and we structure
                                        our solutions to achieve measurable results
Summary                                 within a specific timeframe. We believe so
                                        strongly in ETBR that it s embedded in our logo.

                                        Our chief focus is to help our clients increase
                                        their Safe, Ethical, Profit or SEP. To us, that
                                        means to make as much money as possible
                                        without occupational injury, and without moral or
                                        physical harm to the community.
Helping you through the tough times


                                            The Fourth Generic
                                            Strategy
                                            For many years, famous authors, like Michael
                                            Porter, espoused a simple truth – there are only
                                            three generic business strategies; Segmentation
                                            Strategy (niche market), Differentiation Strategy
                                            (unique aspect), Cost Leadership Strategy (low
                                            cost producer).
In a Nutshell . . .
                                            This truth also espoused a limiting principle – to
                                            be successful, you could only apply one of these
                                            strategies at a time. In the new millennium,
                                            successful business leaders have proven this
                                            truism to be erroneous.

                                            A fourth, generic strategy has emerged and the
                                            evidence shows it to be the superior approach
What is it?                                 for mature industries. This strategy is a
Operating Cost Leadership                   combination of Differentiation and Cost
                                            Leadership. It is often referred to as the “Best
  • Avanulo’s name for the 4th              Cost Strategy”. At Avanulo, we call this
      Generic Strategy.                     strategy Operating Cost Leadership or OCL.

Why is it important?                        Applying OCL is not difficult and does not take
Strategy is paramount                       years of cultural redesign. It simply requires a
                                            new way of thinking about the Four Managerial
   • The biggest advantages                 Elements; Goal-Setting, Prioritization,
      any organization has are a            Accountability and Deployment.
      clear strategy and an
      imperative to embrace it.             As companies struggle in this tough business
                                            climate, the widely-known solutions like Lean
                                            Manufacturing and Six Sigma fall flat. They are
How do you apply it?                        too specialized, too limited in scope, and too
Fully embrace the strategy                  cumbersome. Worst of all, they don’t address
   • Explain the strategy to                revenue enhancement. Even when a company
       everyone and make it                 realizes this, it often does not ensure that
                                            employees embrace its generic strategy.
       imperative that they                 Because of this oversight, improvement tools fill
       embrace it.                          the vacuum, and become the de facto generic
                                            strategy in the minds of employees. This leads
Supporting Concepts                         to a case of “the tail wagging the dog”, and
                                            success becomes defined by how well a popular
  • Mature Industries
                                            tool is applied.
  • The Four Managerial
     Elements                               At Avanulo, we know how to help you focus on
  • Safe, Ethical Profit                    the real goal – Maximizing Safe, Ethical Profit.

                                            This white paper explains our proven approach
                                            to saving your way to stability while
                                            simultaneously enhancing revenue to secure
                                            your prosperity.
Helping you through the tough times

In a Nutshell . . .                          Mature Industries often get
                                             caught in the Scissors
                                             Curve
                                             When the cost you incur to
                                             provide products or services
                                             to your clients is going up,
                                             but the price you can charge
What is it?                                  for those products and
The Scissors Curve                           services is staying flat or
   • An unfavorable condition                going down, you are caught
                                             in the scissors curve.
      that often occurs in mature
      industries in which, cost to           This usually occurs in mature industries in which
      produce is on the rise, but            one or more of the following apply;
      the sales price of the                 • Supply exceeds demand
      product or service is on               • The market is stagnant or shrinking
                                             • The product or service is perceived as a
      the decline.                               commodity
                                             • Charging more is not an option
Why is it important?                         • Innovation is not a seemingly likely remedy
Properly addressing the
Scissors Curve requires                      Often when companies are caught in the
                                             scissors curve, they focus on cost to the
counter-intuitive thinking                   exclusion of all else, because the path to cost
   • The gut reaction is to                  optimization is more tangible and visible than the
      focus totally on cost                  path to revenue enhancement. So, in the
      optimization. This can be              pressure of the moment, the singularity of the
                                             generic strategy known as Cost Leadership feels
      devastating for you and                right and wins out. “Just get the cost down and
      your competitors.                      we’ll increase market share”. The reality is that
                                             price is not always the deciding factor, even in a
How do you apply it?                         commodity market. Additionally, because of the
Optimize revenue and cost at                 speed with which information flows today, your
                                             competitors can quickly see your strategy and
the same time                                apply it themselves, causing a death spiral.

Supporting Concepts                          Operating Cost Leadership (OCL) is a highly
  • OCL works best in                        effective generic strategy that works in most
     mature industries                       situations, but it is most advisable for mature
                                             industries that are caught in the Scissors Curve.
  • Cost optimization and                    This is true because cost optimization and
     revenue enhancement                     revenue enhancement are both required to
     can be pursued at the                   break the out of the Scissors Curve.
     same time, if you make
                                             Applying Avanulo’s approach, enables an
     them visible, tangible
                                             organization to pursue cost and revenue
     and comparable                          optimization at the same time, because it makes
  • Focus your efforts on                    both of them visible, tangible, and comparable,
     maximizing Safe, Ethical                enabling the whole organization to focus on
     profit                                  maximizing Safe, Ethical Profit.
Helping you through the tough times


                                             Safe, Ethical Profit – The
                                             Universal Yardstick
                                             Business exists to generate profit. Profit is the
                                             one universal goal we all have in common, but
                                             we rarely discuss it in an operational sense. It is
In a Nutshell . . .                          measurable, and tangible, but we seldom use it
                                             to prioritize our actions at the operational level.

                                             Once, when working with a large manufacturing
                                             business, we saw the downside of leaving profit
                                             out of daily operations. Like many companies,
                                             this one was sensitive about its financial
                                             information, and only a few key managers knew
                                             anything about cost or revenue. This forced
                                             employees to prioritize without the benefit of a
What is it?                                  Universal Yardstick, which resulted in wasted
Safe, Ethical Profit (SEP)                   effort and lost opportunity. The Production
   • Focusing the whole                      Department was trying to reduce down time.
      organization on making as              The less downtime you have the better right?
      much money as possible                 So the employees worked on reducing the
                                             percentage of down time. Machine A had 5%
      without injury and without             down time and Machine B had 9% downtime.
      harming the community.                 They worked on the machine with the highest
                                             downtime, Machine B. That makes sense right?
Why is it important?                         Wrong! The reality was that a percent of down
It is the only driving reason we             time on Machine B was only worth about $125 a
                                             day, but a percent of down time on Machine A
are in this endeavor. If profit              was worth $1,000 a day. Also Machine B was
did not occur, the endeavor                  already so optimized that it would be like pulling
would cease                                  teeth to get another percent of reduction, but
                                             Machine A often ran 3 to 4 percentage points
How do you apply it?                         better than average. Without the Universal
                                             Yardstick of profit, or at least lost sales,
Focus almost all, but not all, of            expressed in dollars, the employees could
your energy on relentlessly                  neither prioritize nor deploy wisely.
maximizing SEP
                                             When profit is the main goal for
Supporting Concepts                          everybody, there is a means to
                                             prioritize and deploy. When a
  • Employ a Universal                       Universal Yardstick is visible to
     Yardstick to rev up                     all, it promotes alignment, and
     alignment and                           cooperation. When no Universal
     cooperation                             Yardstick is visible, it promotes
                                             counter-productive efforts and
                                             hidden agendas.

                                             Avanulo teaches its clients how to install a
                                             Universal Yardstick, even if profit is too sensitive
                                             to discuss. Our approach helps you to maximize
                                             profit with only two limits; safety and ethics.
Helping you through the tough times


                                           The Four Managerial
                                           Elements
                                           Many organizations today run too near the edge.
                                           Economic pressures, a lack of talented people,
In a Nutshell . . .                        regulatory requirements, and unproductive
                                           corporate oversight (micro-management) can
                                           lock an organization into crisis mode.

                                           Over the years, Avanulo Partners have seen
                                           these stressors dramatically reduce the
                                           effectiveness of many organizations.

                                           We address these stressors by renewing focus
                                           on the Four Managerial Elements. The Four
What is it?                                Managerial Elements are those few aspects of
The Four Managerial Elements               managing a business that must be executed well
   • The essential elements of             in order to achieve Operating Cost Leadership
                                           (OCL). We relate them to the four ancient
      management that must be              elements of the universe. Goal-Setting is the life
      executed well in order to            giving force in the organization – like Water.
      achieve Operating Cost               Prioritization is the source of energy – like Fire.
      Leadership.                          Accountability is the tangible aspect that brings
                                           stability – like Earth. Deployment is the force
                                           that moves everything forward – like Wind.
Why is it important?
Because a key ingredient of                The fist managerial element is Goal-Setting.
OCL is relentlessness and the              Most organizations only establish goals two or
Four Managerial Elements                   three subsets down into their business process.
promote relentlessness                     Operating Cost Leadership requires goals 9-
                                           11 levels deep.

How do you apply them?                     The second element is Prioritization. A clear
Through the use of a few tools             system of Prioritization based on a Universal
like the Opportunity Tree                  Yardstick is essential for creating energy
                                           around what is most important.
Supporting Concepts                        The third element is Accountability. Each goal
  • The ancient elements of                and its successive sub-goals, down to the lowest
     the universe                          level, must be assigned to one clear owner,
  • The Four Managerial                    creating a stable, tangible platform for success.
     Elements; Goal-Setting,               The fourth element is Deployment. Deployment
     Prioritization,                       includes planning, communicating, executing,
     Accountability,                       and tracking. Deployment reliably ensures that
     Deployment                            the right people and the right resources are in
  • The Creativity Curve                   the right place at the right time.
  • The Opportunity Tree                   Avanulo ensures the Four Managerial Elements
                                           are working well through a few tools such as the
                                           Creativity Curve and the Opportunity Tree.
Helping you through the tough times


                                              The Counter-Intuitive
                                              Creativity Curve
                                              Improvement gurus claim that cultural transition,
                                              which takes years, is required to become world-
                                              class. At Avanulo, we think excellence is driven
                                              by the thinking style you employ, not culture.
In a Nutshell . . .
                                              There is a large organization that has been
                                              ranked best-in-class for the last 66 years. This
                                              organization has high turnover, and complex
                                              work processes. Even so, in just a few months
                                              new members go on to perform critical
                                              assignments. Have you guessed the
                                              organization? This organization is able to
                                              outperform all of its competitors, without years of
                                              cultural transition.
What is it?
The Creativity Curve                          It does this by requiring everyone to use a
   • A model for thinking the                 rigorous thought process we call the Creativity
                                              Curve. This process is an efficient way of
      right way at the right time.
                                              thinking that requires compliance and creativity,
                                              but expects everyone to apply each at the most
Why is it important?                          appropriate time.
Because there are times when
it is best to think in a                      When this organization plans a large campaign,
structured way, and times                     it uses a structured approach. This is seen as
                                              counter-intuitive, because people believe that
when it is best to think                      this is the time be creative. But the reality is that
creatively.                                   strategy formation is a finite exercise defining
                                              the high level “How-To” for your vision. In that
How do you apply them?                        context, structure is important to ensure that
Set the expectation that                      your strategy is well-conceived.
structured thinking will                      Once the plan is set in motion, everyone is
predominate at the strategic                  expected to apply creativity to get the job done.
level and the task level, and                 Only a few, well-defined rules apply – stay on
creative thinking will                        budget, remain ethical, and do not hamper the
predominate at the tactical                   missions of other teams. If you have to employ
                                              a fixed asset, like a machine or system, then you
level.                                        follow specific procedures to ensure efficiency
                                              and quality.
Supporting Concepts
  • Structuring repetitive                    In other words,
                                              the front and the
     tasks promotes quality                   back of the
     and efficiency.                          process require
  • Thinking creatively when                  structured
     striving to achieve a                    thinking, and the
     goal, promotes results.                  middle demands
                                              very creative
                                              thinking – a
                                              Creativity Curve.
Helping you through the tough times


                                             The Hidden Factory
                                             Being in business requires speedy decision-
                                             making. To extend their reach, leaders often
                                             delegate decision-making to a few players, who
                                             quickly become overloaded by the pace and
                                             complexity of the market. Assumptions replace
                                             facts. Decisions are made, and then set on auto-
                                             pilot for months, or even years, at a time. We call
In a Nutshell . . .                          such unchallenged decisions Automatic Control
                                             Points or ACPs.

                                             Most organizations are filled with ACPs. Well
                                             conceived, fact-based ACPs add great value.
                                             Poorly conceived or outdated ACPs can increase
                                             cost and reduce revenue. Over time, employees
                                             bypass ineffective ACPs, at additional expense, to
                                             get the job done. The result is “built-in” waste,
                                             which is known to some, but is invisible to decision
What is it?                                  makers. We call this waste, the Hidden Factory.
The Hidden Factory
                                             Recently at a large food plant, we observed the
   • The invisible, but very real            negative impact of an ineffective ACP. The plant
      waste and lost opportunity             ran for 20 hours and then shutdown for four hours
      generated by ineffective               every day to clean the equipment. This dally
                                             schedule had been in place for years. Demand for
      decisions and policies that            the product outpaced capacity, so even a small
      have been left on auto-                increase in daily throughput would increase profits.
      pilot for too long.                    Managers and employees struggled to increase
                                             capacity, and spent thousands of dollars on
                                             equipment upgrades. No one even considered
Why is it important?                         challenging the four-hour, cleaning ACP.
Because uncovering it and
dismantling it can dramatically              We studied this ACP. The time to clean varied
increase profitability                       from 3.25 to 3.85 hours, but the plant would always
                                             sit idle for the full four hours. 97% of the time
                                             cleaning took less than 3.75 hours. The plant
How do you apply it?                         could safely reduce its cleaning time to 3.75 hours
Make performance goals                       and increase revenue by millions of dollars a year.
visible 9-11 levels deep in your             We shared our findings. The plant reduced the
                                             ACP to 3.75 hours and made millions. Most
process and then listen to your              organizations have hundreds of ineffective ACPs
people’s explanation of the                  that will generate cost and revenue improvements,
causes.                                      if productively challenged.

                                             Effectively applying the Four Managerial
Supporting Concepts                          Elements through the use of some simple,
  • Automated Control                        practical tools like the Opportunity Tree,
     Points (ACPs).                          allows an organization to make the Hidden
                                             Factory visible - like one sees the reflection
  • Applying the Four                        of an old mill in the calm waters of a pond.
     Managerial Elements                     Once the Hidden Factory is visible, it can be
     and the Opportunity Tree                dismantled. The result is a significant
     can make the Hidden                     increase in Safe, Ethical Profit without
                                             restructuring or capital investment.
     Factory visible.
Helping you through the tough times


                                            The Opportunity Tree
                                            Making improvement is like moving down
                                            a funnel. As you go, the path gets
                                            deeper, narrower, and darker.

                                            For improvement to occur you must
In a Nutshell . . .                         finally emerge from the bottom of the
                                            funnel and cross the Line of Aligned
                                            Employee Contribution. In other words
                                            something must stop, start, or be done
                                            differently for improvement to occur.

                                            Managers often set the goals at the top of the
                                            funnel and release employees to
                                            find their own way down. This is
                                            sometimes called employee
What is it?                                 engagement, and it has limited
                                            success.
The Opportunity Tree
   • The most effective                     The further down the funnel you
      improvement tool available            take employees before releasing
      for maximizing Safe,                  them to work creatively, the less
                                            distance to the Line of Aligned
      Ethical Profit.                       Employee Contribution at the
                                            bottom. Shorten the distance
Why is it important?                        and employees will get to the bottom quicker, and
Because it enables you to                   get lost less often.
relentlessly apply the Four                 Organizations typically develop goals two or three
Managerial Elements.                        levels deep. In order to speed up the rate of
                                            improvement and increase the success rate, goals
How do you apply it?                        must be 9 to 11 levels deep.
Let Avanulo teach you in a                  The Opportunity Tree is a cascade of pre-
single session using your                   printed, post-it notes, which visually break
business data.                              every improvement area into categories and
                                            sub-categories. As employees break
                                            improvement areas into their sub- elements,
Supporting Concepts                         the same four pieces of information are
  • The funnel of                           required on each post-it.
     improvement.                                •   The current performance
                                                 •   An improvement goal
  • 3-5% reduction in                            •   The dollar value of the goal
     operating costs in 90                       •   The individual accountable
     days.
                                            By using a Universal Yardstick and pushing Goal-
                                            Setting deep into the business process in this
                                            simple, accessible way, we can make the Hidden
                                            Factory visible, establish doable projects, and
                                            reduce operating costs by 3-5% in 90 days or less
                                            without restructuring.

                                            This simple tool only takes a few hours to learn,
                                            and provides a proven venue for effectively
                                            applying the Four Managerial Elements.
Helping you through the tough times


                                            Enhancing Revenue
                                            Although significant profit can be added to the
                                            bottom line by reducing costs, organizations cannot
In a Nutshell . . .                         save their way to prosperity. To succeed over the
                                            long haul, they must also increase revenues.

                                            To capture all of the revenue, you must apply three
                                            principle tactics:
                                            1. Sell more to your customers.
                                            2. Take existing market share away from your
                                                competitors.
                                            3. Create new markets to create new revenue.

What is it?                                 Seize market share (go on the offensive) by doing
Enhancing Revenue                           the following:
  • A structured approach to                •    Actually increasing your customers’ profit and
                                                 thereby creating dependency – use your talent
      driving increased sales                    to help them improve their process thereby
                                                 creating valuable differentiation without
Why is it important?                             extensive R&D or investment.
                                            •    Really knowing and capitalizing on your
It translates the seemingly                      competitors’ strengths and weaknesses, and
intangible and creative effort of                then selling to the top.
a sales campaign into doable                •    Working against a prioritized, “Dollarized” plan
projects that are measured                       to increase revenue and market share by
                                                 making everybody accountable for a specific
against a Universal Yardstick.                   goal.

How do you apply it?                        Even if they had 100% Market Share, and operated
Let Avanulo teach you in a                  with Zero Gap between Actual Cost and Best Cost,
                                            the Brother Typewriter Company would have
single session using your                   quickly become defunct, if they hadn’t started
business data.                              making computer printers.
                                            Leverage new markets:
Supporting Concepts                         •   Study the heck out of your customers
                                                (and their customers). What do they
  • Work the three tactics;                     want? As we say at Avanulo, if our
     sell more to existing                      customers want Candy Apples, and we
     customers, take market                     can sell them safely, ethically, and
                                                profitably, we are in the Candy Apple
     share, create new                          business.
     markets.                               •   Find lateral markets in which to sell your talent
  • Translate creative                          and products by developing similar but
     thought into practical                     unheard of applications.
                                            •   Pull the canvass off an old process. One of
     projects.                                  our container clients returned an old line
  • Some things old can be                      printer to service and made nostalgic boxes
     new again.                                 adding significant revenue.
  • Realize your plan by                    Build a Revenue Tree, make everyone
     launching projects worth               accountable to enhance revenue, and establish
     200% of the revenue                    projects totaling at least 200% of the overall goal.
     goal.
                                            Use the Universal Yardstick to set the priorities.
                                            Deploy wisely, and hold everyone accountable.
Helping you through the tough times


                                                 Summary
                                                 Successful companies are now embracing the
                                                 Fourth Generic Strategy.

                                                 That strategy is a hybrid that combines
                                                 Differentiation with Cost Leadership. At
                                                 Avanulo, we call that strategy Operating Cost
                                                 Leadership.

                                                 Operating Cost Leadership works best for
                                                 mature industries caught in the scissors curve.

                                                 To achieve Operating Cost Leadership an
                                                 organization must;
                                                     • Declare the Fourth Generic Strategy
                                                         and insist that everyone adopt it.
                                                     • Focus on Safe, Ethical Profit.
                                                     • Establish a Creativity Curve.
                                                     • Optimize the Four Managerial Elements.
                                                     • Build an Opportunity Tree for cost & find
                                                         the Hidden Factory.
                                                     • Build an Opportunity Tree for Revenue
                                                     • Link the Trees, and unite the
                                                         organization.
                                                             o Revenue Opportunities become
                                                                 the branches, twigs, and leaves
                                                                 reaching up to the sky.
                                                             o Cost Opportunities become the
                                                                 deep and tangled roots, buried
                                                                 in the ground.
                                                             o The center that connects them,
                                                                 the mighty trunk, represents
                                                                 Safe, Ethical Profit.


                                                 About the Author
We want to hear from you                         Dave Cahill is the Managing Partner and Founder of
                                                 Avanulo, a unique embedded consulting firm with locations
Avanulo                                          in the US, Mexico, and Brazil. Dave is a senior
                                                 manufacturing professional who has his roots in cost control
115-117 South Main St.                           and continuous improvement. He has worked for world-
Suite A                                          class organizations like Tenneco and Groupe Danone. He
Celina, OH 45833                                 has served in general, line, and staff positions and has led
USA                                              large teams to excellence. Dave is the inventor of several
Tel: 567-510-5200                                effective business tools, like Kuplo, the 1440 Management
Skype: 567-510-0714                              System, and the Opportunity Tree. He has taught
E-mail: info@avanulo.com                         continuous improvement and revenue enhancement to
Web site: www.avanulo.com                        thousands of people in 10 countries. Dave has also
                                                 overseen the successful resolution of several large-scale,
                                                 business crises. Prior to his work in the private sector, Dave
                                                 taught college level Spanish, Russian, and German, and
                                                 served in the US military as both an enlisted person and a
                                                 commissioned officer.

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Achieving Operating Cost Leadership

  • 1. Avanulo White Paper #143 115-117 S. Main St. Suite A Celina, Ohio, 45922 USA 567-510-5200 www.avanulo.com Applying Operating Cost Leadership, The Fourth Generic Strategy By David I. Cahill July, 2011
  • 2. Summary of Contents Our Average Project: The Fourth Generic Strategy $31,000,000 USD of annual, sustainable The most effective strategy in mature improvement in 79 days, with the markets is Operating Cost Leadership people & technology in place and w/o capital investment. Our average fee is less than 0.50% of annual improvement. The Scissors Curve A trap for mature industries To the reader: We hope you find this Avanulo White Paper valuable. We know that your time is precious, Safe, Ethical Profit so we have structured the format of this The Universal Yardstick document to accommodate your needs. For a quick read, refer to the “in a Nutshell The Four Managerial Elements column” on the left. The Keys to Relentlessness For more detail, read the right hand column The Creativity Curve A structured way of thinking The Hidden Factory The source of hidden wealth About Avanulo The Opportunity Tree Avanulo means progress, and our passion lies in The most effective improvement tool helping our clients progress their goals. available Our partners all have at least 20 years of experience in their fields of expertise. Enhancing Revenue Using the Tree to rev up sales Our Motto is “Enjoy the Business Result” or ETBR. We believe every improvement action should have a tangible result, and we structure our solutions to achieve measurable results Summary within a specific timeframe. We believe so strongly in ETBR that it s embedded in our logo. Our chief focus is to help our clients increase their Safe, Ethical, Profit or SEP. To us, that means to make as much money as possible without occupational injury, and without moral or physical harm to the community.
  • 3. Helping you through the tough times The Fourth Generic Strategy For many years, famous authors, like Michael Porter, espoused a simple truth – there are only three generic business strategies; Segmentation Strategy (niche market), Differentiation Strategy (unique aspect), Cost Leadership Strategy (low cost producer). In a Nutshell . . . This truth also espoused a limiting principle – to be successful, you could only apply one of these strategies at a time. In the new millennium, successful business leaders have proven this truism to be erroneous. A fourth, generic strategy has emerged and the evidence shows it to be the superior approach What is it? for mature industries. This strategy is a Operating Cost Leadership combination of Differentiation and Cost Leadership. It is often referred to as the “Best • Avanulo’s name for the 4th Cost Strategy”. At Avanulo, we call this Generic Strategy. strategy Operating Cost Leadership or OCL. Why is it important? Applying OCL is not difficult and does not take Strategy is paramount years of cultural redesign. It simply requires a new way of thinking about the Four Managerial • The biggest advantages Elements; Goal-Setting, Prioritization, any organization has are a Accountability and Deployment. clear strategy and an imperative to embrace it. As companies struggle in this tough business climate, the widely-known solutions like Lean Manufacturing and Six Sigma fall flat. They are How do you apply it? too specialized, too limited in scope, and too Fully embrace the strategy cumbersome. Worst of all, they don’t address • Explain the strategy to revenue enhancement. Even when a company everyone and make it realizes this, it often does not ensure that employees embrace its generic strategy. imperative that they Because of this oversight, improvement tools fill embrace it. the vacuum, and become the de facto generic strategy in the minds of employees. This leads Supporting Concepts to a case of “the tail wagging the dog”, and success becomes defined by how well a popular • Mature Industries tool is applied. • The Four Managerial Elements At Avanulo, we know how to help you focus on • Safe, Ethical Profit the real goal – Maximizing Safe, Ethical Profit. This white paper explains our proven approach to saving your way to stability while simultaneously enhancing revenue to secure your prosperity.
  • 4. Helping you through the tough times In a Nutshell . . . Mature Industries often get caught in the Scissors Curve When the cost you incur to provide products or services to your clients is going up, but the price you can charge What is it? for those products and The Scissors Curve services is staying flat or • An unfavorable condition going down, you are caught in the scissors curve. that often occurs in mature industries in which, cost to This usually occurs in mature industries in which produce is on the rise, but one or more of the following apply; the sales price of the • Supply exceeds demand product or service is on • The market is stagnant or shrinking • The product or service is perceived as a the decline. commodity • Charging more is not an option Why is it important? • Innovation is not a seemingly likely remedy Properly addressing the Scissors Curve requires Often when companies are caught in the scissors curve, they focus on cost to the counter-intuitive thinking exclusion of all else, because the path to cost • The gut reaction is to optimization is more tangible and visible than the focus totally on cost path to revenue enhancement. So, in the optimization. This can be pressure of the moment, the singularity of the generic strategy known as Cost Leadership feels devastating for you and right and wins out. “Just get the cost down and your competitors. we’ll increase market share”. The reality is that price is not always the deciding factor, even in a How do you apply it? commodity market. Additionally, because of the Optimize revenue and cost at speed with which information flows today, your competitors can quickly see your strategy and the same time apply it themselves, causing a death spiral. Supporting Concepts Operating Cost Leadership (OCL) is a highly • OCL works best in effective generic strategy that works in most mature industries situations, but it is most advisable for mature industries that are caught in the Scissors Curve. • Cost optimization and This is true because cost optimization and revenue enhancement revenue enhancement are both required to can be pursued at the break the out of the Scissors Curve. same time, if you make Applying Avanulo’s approach, enables an them visible, tangible organization to pursue cost and revenue and comparable optimization at the same time, because it makes • Focus your efforts on both of them visible, tangible, and comparable, maximizing Safe, Ethical enabling the whole organization to focus on profit maximizing Safe, Ethical Profit.
  • 5. Helping you through the tough times Safe, Ethical Profit – The Universal Yardstick Business exists to generate profit. Profit is the one universal goal we all have in common, but we rarely discuss it in an operational sense. It is In a Nutshell . . . measurable, and tangible, but we seldom use it to prioritize our actions at the operational level. Once, when working with a large manufacturing business, we saw the downside of leaving profit out of daily operations. Like many companies, this one was sensitive about its financial information, and only a few key managers knew anything about cost or revenue. This forced employees to prioritize without the benefit of a What is it? Universal Yardstick, which resulted in wasted Safe, Ethical Profit (SEP) effort and lost opportunity. The Production • Focusing the whole Department was trying to reduce down time. organization on making as The less downtime you have the better right? much money as possible So the employees worked on reducing the percentage of down time. Machine A had 5% without injury and without down time and Machine B had 9% downtime. harming the community. They worked on the machine with the highest downtime, Machine B. That makes sense right? Why is it important? Wrong! The reality was that a percent of down It is the only driving reason we time on Machine B was only worth about $125 a day, but a percent of down time on Machine A are in this endeavor. If profit was worth $1,000 a day. Also Machine B was did not occur, the endeavor already so optimized that it would be like pulling would cease teeth to get another percent of reduction, but Machine A often ran 3 to 4 percentage points How do you apply it? better than average. Without the Universal Yardstick of profit, or at least lost sales, Focus almost all, but not all, of expressed in dollars, the employees could your energy on relentlessly neither prioritize nor deploy wisely. maximizing SEP When profit is the main goal for Supporting Concepts everybody, there is a means to prioritize and deploy. When a • Employ a Universal Universal Yardstick is visible to Yardstick to rev up all, it promotes alignment, and alignment and cooperation. When no Universal cooperation Yardstick is visible, it promotes counter-productive efforts and hidden agendas. Avanulo teaches its clients how to install a Universal Yardstick, even if profit is too sensitive to discuss. Our approach helps you to maximize profit with only two limits; safety and ethics.
  • 6. Helping you through the tough times The Four Managerial Elements Many organizations today run too near the edge. Economic pressures, a lack of talented people, In a Nutshell . . . regulatory requirements, and unproductive corporate oversight (micro-management) can lock an organization into crisis mode. Over the years, Avanulo Partners have seen these stressors dramatically reduce the effectiveness of many organizations. We address these stressors by renewing focus on the Four Managerial Elements. The Four What is it? Managerial Elements are those few aspects of The Four Managerial Elements managing a business that must be executed well • The essential elements of in order to achieve Operating Cost Leadership (OCL). We relate them to the four ancient management that must be elements of the universe. Goal-Setting is the life executed well in order to giving force in the organization – like Water. achieve Operating Cost Prioritization is the source of energy – like Fire. Leadership. Accountability is the tangible aspect that brings stability – like Earth. Deployment is the force that moves everything forward – like Wind. Why is it important? Because a key ingredient of The fist managerial element is Goal-Setting. OCL is relentlessness and the Most organizations only establish goals two or Four Managerial Elements three subsets down into their business process. promote relentlessness Operating Cost Leadership requires goals 9- 11 levels deep. How do you apply them? The second element is Prioritization. A clear Through the use of a few tools system of Prioritization based on a Universal like the Opportunity Tree Yardstick is essential for creating energy around what is most important. Supporting Concepts The third element is Accountability. Each goal • The ancient elements of and its successive sub-goals, down to the lowest the universe level, must be assigned to one clear owner, • The Four Managerial creating a stable, tangible platform for success. Elements; Goal-Setting, The fourth element is Deployment. Deployment Prioritization, includes planning, communicating, executing, Accountability, and tracking. Deployment reliably ensures that Deployment the right people and the right resources are in • The Creativity Curve the right place at the right time. • The Opportunity Tree Avanulo ensures the Four Managerial Elements are working well through a few tools such as the Creativity Curve and the Opportunity Tree.
  • 7. Helping you through the tough times The Counter-Intuitive Creativity Curve Improvement gurus claim that cultural transition, which takes years, is required to become world- class. At Avanulo, we think excellence is driven by the thinking style you employ, not culture. In a Nutshell . . . There is a large organization that has been ranked best-in-class for the last 66 years. This organization has high turnover, and complex work processes. Even so, in just a few months new members go on to perform critical assignments. Have you guessed the organization? This organization is able to outperform all of its competitors, without years of cultural transition. What is it? The Creativity Curve It does this by requiring everyone to use a • A model for thinking the rigorous thought process we call the Creativity Curve. This process is an efficient way of right way at the right time. thinking that requires compliance and creativity, but expects everyone to apply each at the most Why is it important? appropriate time. Because there are times when it is best to think in a When this organization plans a large campaign, structured way, and times it uses a structured approach. This is seen as counter-intuitive, because people believe that when it is best to think this is the time be creative. But the reality is that creatively. strategy formation is a finite exercise defining the high level “How-To” for your vision. In that How do you apply them? context, structure is important to ensure that Set the expectation that your strategy is well-conceived. structured thinking will Once the plan is set in motion, everyone is predominate at the strategic expected to apply creativity to get the job done. level and the task level, and Only a few, well-defined rules apply – stay on creative thinking will budget, remain ethical, and do not hamper the predominate at the tactical missions of other teams. If you have to employ a fixed asset, like a machine or system, then you level. follow specific procedures to ensure efficiency and quality. Supporting Concepts • Structuring repetitive In other words, the front and the tasks promotes quality back of the and efficiency. process require • Thinking creatively when structured striving to achieve a thinking, and the goal, promotes results. middle demands very creative thinking – a Creativity Curve.
  • 8. Helping you through the tough times The Hidden Factory Being in business requires speedy decision- making. To extend their reach, leaders often delegate decision-making to a few players, who quickly become overloaded by the pace and complexity of the market. Assumptions replace facts. Decisions are made, and then set on auto- pilot for months, or even years, at a time. We call In a Nutshell . . . such unchallenged decisions Automatic Control Points or ACPs. Most organizations are filled with ACPs. Well conceived, fact-based ACPs add great value. Poorly conceived or outdated ACPs can increase cost and reduce revenue. Over time, employees bypass ineffective ACPs, at additional expense, to get the job done. The result is “built-in” waste, which is known to some, but is invisible to decision What is it? makers. We call this waste, the Hidden Factory. The Hidden Factory Recently at a large food plant, we observed the • The invisible, but very real negative impact of an ineffective ACP. The plant waste and lost opportunity ran for 20 hours and then shutdown for four hours generated by ineffective every day to clean the equipment. This dally schedule had been in place for years. Demand for decisions and policies that the product outpaced capacity, so even a small have been left on auto- increase in daily throughput would increase profits. pilot for too long. Managers and employees struggled to increase capacity, and spent thousands of dollars on equipment upgrades. No one even considered Why is it important? challenging the four-hour, cleaning ACP. Because uncovering it and dismantling it can dramatically We studied this ACP. The time to clean varied increase profitability from 3.25 to 3.85 hours, but the plant would always sit idle for the full four hours. 97% of the time cleaning took less than 3.75 hours. The plant How do you apply it? could safely reduce its cleaning time to 3.75 hours Make performance goals and increase revenue by millions of dollars a year. visible 9-11 levels deep in your We shared our findings. The plant reduced the ACP to 3.75 hours and made millions. Most process and then listen to your organizations have hundreds of ineffective ACPs people’s explanation of the that will generate cost and revenue improvements, causes. if productively challenged. Effectively applying the Four Managerial Supporting Concepts Elements through the use of some simple, • Automated Control practical tools like the Opportunity Tree, Points (ACPs). allows an organization to make the Hidden Factory visible - like one sees the reflection • Applying the Four of an old mill in the calm waters of a pond. Managerial Elements Once the Hidden Factory is visible, it can be and the Opportunity Tree dismantled. The result is a significant can make the Hidden increase in Safe, Ethical Profit without restructuring or capital investment. Factory visible.
  • 9. Helping you through the tough times The Opportunity Tree Making improvement is like moving down a funnel. As you go, the path gets deeper, narrower, and darker. For improvement to occur you must In a Nutshell . . . finally emerge from the bottom of the funnel and cross the Line of Aligned Employee Contribution. In other words something must stop, start, or be done differently for improvement to occur. Managers often set the goals at the top of the funnel and release employees to find their own way down. This is sometimes called employee What is it? engagement, and it has limited success. The Opportunity Tree • The most effective The further down the funnel you improvement tool available take employees before releasing for maximizing Safe, them to work creatively, the less distance to the Line of Aligned Ethical Profit. Employee Contribution at the bottom. Shorten the distance Why is it important? and employees will get to the bottom quicker, and Because it enables you to get lost less often. relentlessly apply the Four Organizations typically develop goals two or three Managerial Elements. levels deep. In order to speed up the rate of improvement and increase the success rate, goals How do you apply it? must be 9 to 11 levels deep. Let Avanulo teach you in a The Opportunity Tree is a cascade of pre- single session using your printed, post-it notes, which visually break business data. every improvement area into categories and sub-categories. As employees break improvement areas into their sub- elements, Supporting Concepts the same four pieces of information are • The funnel of required on each post-it. improvement. • The current performance • An improvement goal • 3-5% reduction in • The dollar value of the goal operating costs in 90 • The individual accountable days. By using a Universal Yardstick and pushing Goal- Setting deep into the business process in this simple, accessible way, we can make the Hidden Factory visible, establish doable projects, and reduce operating costs by 3-5% in 90 days or less without restructuring. This simple tool only takes a few hours to learn, and provides a proven venue for effectively applying the Four Managerial Elements.
  • 10. Helping you through the tough times Enhancing Revenue Although significant profit can be added to the bottom line by reducing costs, organizations cannot In a Nutshell . . . save their way to prosperity. To succeed over the long haul, they must also increase revenues. To capture all of the revenue, you must apply three principle tactics: 1. Sell more to your customers. 2. Take existing market share away from your competitors. 3. Create new markets to create new revenue. What is it? Seize market share (go on the offensive) by doing Enhancing Revenue the following: • A structured approach to • Actually increasing your customers’ profit and thereby creating dependency – use your talent driving increased sales to help them improve their process thereby creating valuable differentiation without Why is it important? extensive R&D or investment. • Really knowing and capitalizing on your It translates the seemingly competitors’ strengths and weaknesses, and intangible and creative effort of then selling to the top. a sales campaign into doable • Working against a prioritized, “Dollarized” plan projects that are measured to increase revenue and market share by making everybody accountable for a specific against a Universal Yardstick. goal. How do you apply it? Even if they had 100% Market Share, and operated Let Avanulo teach you in a with Zero Gap between Actual Cost and Best Cost, the Brother Typewriter Company would have single session using your quickly become defunct, if they hadn’t started business data. making computer printers. Leverage new markets: Supporting Concepts • Study the heck out of your customers (and their customers). What do they • Work the three tactics; want? As we say at Avanulo, if our sell more to existing customers want Candy Apples, and we customers, take market can sell them safely, ethically, and profitably, we are in the Candy Apple share, create new business. markets. • Find lateral markets in which to sell your talent • Translate creative and products by developing similar but thought into practical unheard of applications. • Pull the canvass off an old process. One of projects. our container clients returned an old line • Some things old can be printer to service and made nostalgic boxes new again. adding significant revenue. • Realize your plan by Build a Revenue Tree, make everyone launching projects worth accountable to enhance revenue, and establish 200% of the revenue projects totaling at least 200% of the overall goal. goal. Use the Universal Yardstick to set the priorities. Deploy wisely, and hold everyone accountable.
  • 11. Helping you through the tough times Summary Successful companies are now embracing the Fourth Generic Strategy. That strategy is a hybrid that combines Differentiation with Cost Leadership. At Avanulo, we call that strategy Operating Cost Leadership. Operating Cost Leadership works best for mature industries caught in the scissors curve. To achieve Operating Cost Leadership an organization must; • Declare the Fourth Generic Strategy and insist that everyone adopt it. • Focus on Safe, Ethical Profit. • Establish a Creativity Curve. • Optimize the Four Managerial Elements. • Build an Opportunity Tree for cost & find the Hidden Factory. • Build an Opportunity Tree for Revenue • Link the Trees, and unite the organization. o Revenue Opportunities become the branches, twigs, and leaves reaching up to the sky. o Cost Opportunities become the deep and tangled roots, buried in the ground. o The center that connects them, the mighty trunk, represents Safe, Ethical Profit. About the Author We want to hear from you Dave Cahill is the Managing Partner and Founder of Avanulo, a unique embedded consulting firm with locations Avanulo in the US, Mexico, and Brazil. Dave is a senior manufacturing professional who has his roots in cost control 115-117 South Main St. and continuous improvement. He has worked for world- Suite A class organizations like Tenneco and Groupe Danone. He Celina, OH 45833 has served in general, line, and staff positions and has led USA large teams to excellence. Dave is the inventor of several Tel: 567-510-5200 effective business tools, like Kuplo, the 1440 Management Skype: 567-510-0714 System, and the Opportunity Tree. He has taught E-mail: info@avanulo.com continuous improvement and revenue enhancement to Web site: www.avanulo.com thousands of people in 10 countries. Dave has also overseen the successful resolution of several large-scale, business crises. Prior to his work in the private sector, Dave taught college level Spanish, Russian, and German, and served in the US military as both an enlisted person and a commissioned officer.