(upbeat drum music)
-: Every company should in theory
aim for operational effectiveness.
It simply means that you aim to maximise your profitability
by ensuring that you generate your revenue
using the lowest possible cost to do so.
But in order for a company to grow
and increase profitability in a competitive market,
they should look to implement competitive strategy.
Let's look at an example, Great Style Furniture
competes in the retail furniture segment
against Australian companies like Freedom Furniture,
Fantastic Furniture and IKEA.
Great Style's 2015 business plan
has the following three key initiatives,
implement a new purchasing system
to reduce order turnaround times from eight weeks to five.
Open two new mega stores and close down four small stores.
Reduce colour options across all leather
upholstery from five to three.
The first initiative is aimed to reduce the net cash cycle
as Great Style pay their suppliers 35%
deposit on the purchase order,
and the rest once their product
is delivered to the docks.
The second initiative should result
in a reduction in cost per unit sold
with reduced labour and overheads, to run
two larger stores over four smaller ones.
The third initiative should reduce the level
of working capital in Great Style's warehouses.
As such, we would say that Great Style's business plan
involves delivering operational effectiveness,
because they are focused on improving the same activities
that their rivals also perform.
Let's look at some other examples.
If you manufacture computer keyboards,
then you will aim to reduce the cost per keyboard.
If you operate gyms you want to increase your signup
and retention rates with targeted marketing campaigns.
If you are a petrol distributor,
you might be focusing on how your tank fleet operates.
The common theme here is that you will be performing
similar activities to your competitors,
but looking to perform them better than they can.
Companies focused on operational improvement
will be constantly reviewing their industry value chain
to search for activities that they can get more value from.
They will spend time benchmarking themselves
against their industry across various indicators,
to try and pinpoint where the competitors
weaknesses could be exploited.
Competitive strategy is about performing activities
in a different way from your rivals.
Let's go back to Porter's graph of operational
effectiveness versus strategic positioning.
And look at our previous three examples.
The keyboard manufacturer decides to develop
a new product line of completely customised keyboards
produced using 3D printers.
Their relative cost position will increase,
but so will their product value to the customer.
The gym looks to distribute a range of nutritional products
and meal supplements from their front counter.
Again, they are using complementary products
to improve the value proposition to the customer.
The petrol distributor enters a joint venture
with an engine supplier to move their entire fleet
to new engines that run on liquefied natural gas.
This has an element of improving operational efficiency,
but they are also investing in doing something
that their competitors aren't,
and improving part of their value chain
to be able to offer the petrol at a lower cost
and increase their margins.
Let's recap.
Operational effectiveness is performing the same activities
as your competitors do in a more efficient way.
Competitive strategy is performing new activities
or activities in a different way from your competitors.
We can see that increasing effectiveness
will help reduce costs,
but we also know that our competitors can
and will quickly copy that.
A more strategic approach is to look at the value chain
and identify activities that we could
do differently from our competitors
that might not be so easy for them to replicate.