1. Avanulo White Paper #143
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Celina, Ohio, 45922 USA
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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.