Topic 3 Driving Operational Innovation


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ACPS 2010, Module 6, Services Innovation
Topic 3
Driving Operational Innovation
Lean Six Sigma and its limitations in driving business model innovation

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  • In response to economic shifts and global connectedness, the Globally Integrated Enterprise a fundamental change in how the corporation works. Contemporary corporations are locating operations and functions anywhere in the world based on the right cost, the right skills and the right business environment. Integration is taking place horizontally and globally with benefits to companies of every size, age and reach. Massive economic shifts – last year the GDP of major emerging economies (India, China, Latin America and Russia – outpaced worlddwide growth by significant margins. India’s growth, 8.7%, was double the rest of the world’s, 3.7%; China’s nearly triple at 10.5%. In China, the lower-middle class (household income of US$3000-$6000) is expected to grow to 41% of all households by 2008. Multinationals seeking revenue growth, profit growth, or market share, will need new approaches to win in price-sensitive mass markets while maintaining leadership in higher-margin premium market segments. They will also need to venture out of major cities and into “emerging” cities that collectively accounted in 2005 for 43% of GDP and 39% of total urban population.
  • Lean Six Sigma is a set of operational approaches that enables continual improvement and innovation toward growth, not just cost-cutting, throughout an extended enterprise As the Lean Six Sigma approach is implemented, organizations acquire an inherent inclination to innovation. Operational discipline enables collaborative innovation. If you’re going to open your organization to customers and partners, you need to be in decent shape.
  • It takes a tightly packaged, disciplined approach to operational innovation to identify and remove root causes of customer dissatisfaction. The “voice of the customer” is key to prioritizing process decisions at every level and function of the value chain. When customer needs are quantified, attainment of goals can be monitored and measured at key process points. By quantifying process results it’s possible to establish leading indicators that can predict outcomes before it’s too late to take corrective action. Examples: “You are finding it too hard to start the lawnmower? How many yanks would be acceptable? We will commit to delivering a product that meets that standard.”
  • Sporadic programs will not make an enduring impact. Operational innovation through Lean Six Sigma is characterized by speed, urgency, rigor, structure and senior management support.
  • Operational innovation gives companies an inside track for product and services innovation. Disciplined attention to the customer’s voice reveals what customers “want to have” as well as what they “need.” Today’s wants become tomorrow’s needs – and competitive differentiators for companies that successfully identify and deliver them.
  • Establishing a common language about operational processes makes it possible for senior executives and employees at any level to have substantive discussions with each other. Also, employees in disparate functions are able to have meaningful conversations about their activities. Some companies are requesting suppliers to adopt Lean Six Sigma in order to make operational boundaries seamless.
  • Globalization created a crisis for steel companies and POSCO faced the challenge with operational innovation. Engineers were trained to work with customers and identify needs in new markets. In less than four years this regional producer became the third largest steelmaker worldwide. It expanded globally with 14 joint ventures and US$780 million in China. With increasing emphasis on social responsibility, it’s interesting to see how POSCO drove innovation in that arena as well. Using the Lean Six Sigma approach introduced many environmental management programs and processes, including an iron-making approach that eliminates processes that create pollutants. The Lean Six Sigma way of working became pervasive across all areas of the business -- product engineering, corporate strategy and budgeting, manufacturing and logistics.
  • UK retail energy marketplace deregulated in 2001 and ScottishPower needed to overhaul customer service and sales operations to regain its leadership position. Trend reversal needed Lean Six Sigma is not just for manufacturing… it’s big in financial services and hot right now among energy and utility companies Fact –based evidence from Lean Six Sigma approach revealed marketplace “leak:” customers who were moving would call to cancel service. Reps were efficient at the cancellation, but never inquired about need for future service. Process/tool was developed to make it easy to sign up customer at new home and to sign up new residents at vacated address.
  • An on-site Lean Sigma Kaizen workshop brought experts together in a concentrated face-to-face workshop. In a week's time, the team eliminated a vast number of processes, and this improvement is continuing. In addition, the team developed solutions to problems in the billing and end-of-lease processes that customers had identified.
  • The Global CEO Study 2006 explored areas of innovation seen as necessary for competitive advantage and growth in immediate future. Results were based on interviews with 765 CEOs, large through one-on-one interviews. Financial data for 220 respondents was peer-benchmarked against publicly available data on peer groups based on industry revenue and size. Efficiency and effectiveness are two sides of one coin required to sustain operational innovation. Overly lean operations can lead to erosion in customer satisfaction. Overly customer-centric operations can lead to erosion of margins. Lean Six Sigma, as you’ll see later in this presentation, balances both sets of requirements through an efficiency methodology (Lean) and an effectiveness one (Six Sigma).
  • Clients seek operational innovation when they want growth in combination with cost reduction. When driven by senior management, specific improvement goals can be achieved in 4-6 months, making it possible to open new opportunities with customers. Exclusive emphasis on quarterly numbers diminishes the likelihood of success. Consistency in operations means employees don’t spend all their time running down problems. And that means more time for innovation.
  • Six Sigma and Lean Manufacturing proved to be the science behind product development and manufacturing. But with the new services economy, these techniques may be used in the back stage or production stage of services, but the customer experience is the new focal point of services. Keep in mind that customer experience science is in its infancy. We can only learn at the moment from best practices. We have a long way to go with developing the science behind successful and profitable services.
  • Topic 3 Driving Operational Innovation

    1. 1. Module 6 - Services innovation Driving Operational Innovation
    2. 2. A global economy demands operational innovation… <ul><li>Consumers are less willing to pay for product advances </li></ul><ul><li>Market saturation reduces effects of new offerings, resulting in oversupply and commoditization </li></ul><ul><li>Product lifecycles and time to market are getting shorter </li></ul><ul><li>Convergence of products from different industries e.g. mobile phones providing television, reduces competitive value of incremental improvements on existing products </li></ul><ul><li>Success in emerging growth markets such as China will require mass market, low-cost products* </li></ul><ul><li>In today’s global economy “the best option </li></ul><ul><li>will be to innovate the way business is done”** </li></ul><ul><li>*IBM study, Winning in China's mass markets: New business models, new operations for profitable growth </li></ul>
    3. 3. Successful innovators of service operations work through a four of stage maturity model Stage 0: Establish Baseline Stage 1: Integrate the Service Chain Stage 2: Achieve Service Chain Proficiency Stage 3: Optimize the Operating Model Innovation Stages for Service Operations Source: IBM Strategy Consulting 2006 <ul><li>Adopt Service Chain framework as scope </li></ul><ul><li>Establish Cost of Quality metric </li></ul><ul><li>Establish primary data on Customer Service Satisfaction </li></ul><ul><li>Identify key process integration points </li></ul><ul><li>Identify key systems integration points </li></ul><ul><li>Integrate the service chain </li></ul><ul><li>Adopt horizontal service metrics </li></ul><ul><li>Align service levels with customer experience plan for service </li></ul><ul><li>Apply performance management to service processes </li></ul><ul><li>Identify enterprise integration requirements </li></ul><ul><li>Identify metrics conflicts non-service between functions </li></ul><ul><li>Optimize service model at the enterprise level </li></ul><ul><li>Achieve permanent and repeatable cross-enterprise service process optimization </li></ul>
    4. 4. Why Lean Six Sigma for operational innovation? <ul><li>To follow up on the CEO Study, we took a closer look at operational innovation* </li></ul><ul><li>Lean Six Sigma is a methodology for continual improvement of operations in terms of both quality and efficiency </li></ul><ul><li>New approaches to operational innovation, we found, can create new organizational capabilities, including continual innovation </li></ul><ul><li>Lean Six Sigma supports collaborative innovation : entirely new ways of operating are identified and launched across the enterprise and with external collaborators </li></ul><ul><li>Important dimensions of business model innovation include innovation across the enterprise and innovation with external collaborators – and Lean Six Sigma innovation enables both. </li></ul><ul><li>*Results published in white paper: Driving Operational Innovation with Lean Six Sigma </li></ul>Context
    5. 5. Lean Six Sigma adds customer focus to optimization <ul><li>The Lean Six Sigma approach is based on relentless focus on customer needs, creating an inside track that… </li></ul><ul><ul><ul><li>… yields continual improvement and innovation in products, services, markets, as well as business models. </li></ul></ul></ul><ul><li>Operational Indicators are captured and monitored to drive customer-centric change that… </li></ul><ul><ul><ul><li>… drives differentiation and engenders customer trust about opportunities and ideas for the future. </li></ul></ul></ul>
    6. 6. Lean Six Sigma succeeds in all processes… <ul><li>A set of operational approaches that enables continual improvement and innovation toward growth, not just cost-cutting, throughout an extended enterprise </li></ul><ul><li>A system that balances efficiency and effectiveness, costs and customer satisfaction </li></ul><ul><li>A data driven, fact-based method that combines the best of Six Sigma, Lean, TQM, and BPR into a rigorous approach to problem solving. </li></ul><ul><li>A method that analyzes and focuses on root causes that yield significant, tangible bottom-line results in a relatively short period. </li></ul><ul><li>Typical results include: </li></ul><ul><li>Gains in innovation in operations, products, services and even underlying business models </li></ul><ul><li>Improvements in customer satisfaction </li></ul><ul><li>Increased efficiency and consistency </li></ul><ul><li>Increased value to the customer </li></ul><ul><li>Growth in revenue </li></ul><ul><li>Reduction in costs (inventory, waste, defects, etc.) </li></ul><ul><li>Improvements in productivity </li></ul><ul><li>Organizational focus on customers, value and processes (not silos) </li></ul>Lean Six Sigma
    7. 7. … it balances efficiency with customer needs and growth versus Vs. Lean Six Sigma Traditional <ul><li>By focusing on inefficiencies in the system, improvements can be made in speed, cost of delivery, and other elements. </li></ul><ul><li>However, this internal focus may just facilitate faster and cheaper delivery of something that doesn’t meet customer needs. </li></ul>Lean Six Sigma <ul><li>By focusing on customer needs, the efficiency and effectiveness of the system can be assessed and continually improved or redesigned. </li></ul><ul><li>Specific operational improvement and innovation initiatives can then be launched to deliver the most “bang for the buck.” </li></ul>
    8. 8. Caterpillar: everyone talking the same language <ul><li>From plant floor to executive offices everyone began talking “6 Sigma” </li></ul><ul><li>27 organizational units came together around common goals </li></ul><ul><li>R&D interaction with clients, engineer to engineer, led to development of specialized mining truck to extract oil from sand </li></ul><ul><li>Manufacturing lead times cut by 50% </li></ul>“ ..rigor and discipline have enabled the record profits of the past few years and are helping the company achieve its 2010 strategic goals”
    9. 9. POSCO responds to global competitive threat <ul><li>With Lean Six Sigma, engineers were empowered to make recommendations based on their meetings with customers </li></ul><ul><li>Engineering input identified high-potential markets in shipping, automotive and construction </li></ul><ul><li>For selected markets the steelmaker pursued value-add instead of low-cost strategy… leading to new products such as rust-resistant steel for ships </li></ul><ul><ul><li>“ You can’t make these kinds of changes overnight…we are using Six Sigma … to do this gradually and continuously.” --Ku-taek Lee, Chairman and CEO </li></ul></ul><ul><li>-- </li></ul>
    10. 10. Scottish Power expands customer base 59% in 4 years <ul><li>.. the methodology is robust and transferable – it enhances the customer experience, develops my staff and improves the bottom line.” – William MacDiarmid, Director of Energy Retail, ScottishPower </li></ul><ul><li>Recurring customer complaints were leading to declining market share in de-regulated marketplace </li></ul><ul><li>Lean Six Sigma reality check about customer attrition identified leakage point: when customers moved from current home </li></ul><ul><li>Appropriate process and tools were developed to make service reps effective as well as efficient . Able to grow business as well as meet customer need. </li></ul>
    11. 11. IBM Global Financing applies Lean Six Sigma in UK <ul><li>IBM sellers and clients have more time solving business problems together, less time with administrative hassles </li></ul><ul><li>Small ticket financing in UK burdensome </li></ul><ul><li>Lean Six Sigma eliminated 60% of process steps </li></ul><ul><li>Improve customer experience for billing and end-of-lease processes problems </li></ul>
    12. 12. … but operational innovation alone is not enough <ul><li>IBM Global CEO study 2006 showed that operational innovation must be linked to other types of innovation to foster growth </li></ul><ul><li>Underperformers were more likely to focus solely on operational innovation. </li></ul><ul><li>A concentrated focus on operational innovation alone can lead to stagnant or declining growth </li></ul>“ While the main focus is revenue generation.…we first need to create an operational foundation for that growth so that product and customer strategies are sown on fertile ground” CEOs say: Context
    13. 13. CEO Study found that optimization is just the beginning <ul><li>Those that outperformed their peers: </li></ul><ul><ul><li>Focused on integrating their business processes and functions </li></ul></ul><ul><ul><li>Aimed at responding to customer needs </li></ul></ul><ul><ul><li>Applied new science and technology </li></ul></ul><ul><ul><li>Were more likely to integrate business and technology </li></ul></ul>All companies that innovate their operations consolidated their product portfolios and operational facilities
    14. 14. <ul><li>Six Sigma Thinking </li></ul><ul><li>Eliminate variability (reductive) </li></ul><ul><li>Eliminate waste </li></ul><ul><li>Minimize cost </li></ul><ul><li>Map processes </li></ul><ul><li>Test hypotheses </li></ul><ul><li>Rely on large numbers to create certainty </li></ul><ul><li>Use process capability as final arbiter for decision making </li></ul><ul><li>Customer-Experience Led Innovation </li></ul><ul><li>Introduce variability when it creates preference </li></ul><ul><li>Allow the customer to judge what is waste </li></ul><ul><li>Tolerate additional cost when it creates preference that outweighs it </li></ul><ul><li>Map customer journeys </li></ul><ul><li>Explore important questions to make new hypotheses </li></ul><ul><li>Rely on small numbers to uncover new possibilities </li></ul><ul><li>Use demonstrated customer behavior as the final arbiter </li></ul>Where does Six Sigma Falls Short in Service Innovation