Nowadays, many managers find themselves facing a dead end when it comes to finding new ways to make their companies grow. Some executives opt for diversifying their business. Others make greater investments in marketing and go looking for a competitor to buy out. However, too often, this sort of strategy does not provide the results they anticipate. For Philip G. Moscoso, professor at the IESE Business School, the key to success lies in making operational innovations. In other words, the key is not limiting oneself to making continuous improvements but “creating completely new ways to operate.” Clearly, that means making a 180-degree turn in the way orders are managed, products are manufactured, and services are provided to customers.


In his study entitled, “Operational Innovation as a Source of Comparative Advantage,” Moscoso praises operational innovation as a strategy that has “little risk and maximum impact because the struggle against our competitors always takes place on an operational plane.”  He warns companies that they cannot ignore this source of competitive advantage because there are many organizations that are paying careful attention.


Dell, Toyota and Zara


Companies such as Dell, Toyota and Zara have written their names in the history of business success because they have made radical changes in the way business takes place in their sector. For example, Dell managed to become one of the heavyweights of the industry because of its direct sales model which is sustained by an on-demand supply chain. As in many other success stories, Dell’s competitors never thought that this strategy would work out, which provided Dell with an opportunity, says Moscoso.


Dell’s competitors, he adds, “took a longer time figuring out the potential benefits of new operational innovations than they took studying new products and business plans.” This is something that happened in the case of Southwest Airlines, a pioneer in its sector. Its competitors took more than a decade to realize that Southwest’s operational model represented a danger for them.


As for Toyota, its success is based on more than just making good products. Its operational model, known as the Toyota Production System (TPS), has long been the subject of business school case studies, and has obviously been studied by Toyota’s competitors, says Moscoso.


But he warns that it is not easy to copy the operational models practiced by other companies. There are two reasons: First, these companies have managed to achieve faster operations while lowering their costs, and they are also agile and adaptable. For example, Moscoso cites another well-studied brand, Zara. A Spanish textile company, Zara has managed to reinvent the business model in its sector by “conscientiously applying its supply chain vision to its business.” Instead of outsourcing its production to countries with low labor costs, as most of its competitors have, Zara manages to use local suppliers for part of its production. This has enabled Zara to become more agile responding to trends in the market.


There is another reason why copying other companies is a complex process. Applying innovations requires changes in the corporate DNA, such as, for example, “decentralizing decision-making or the way that the company deals with its suppliers.” If a company is not aware of that fact, its [operational innovation] efforts are destined to fail, whether or not they involve its own ideas or those ideas it has copied from others.


For those managers who are worried about the investments and costs required for such operational improvements, Moscoso says, “doing so costs less in the long run.” Those companies that operate soundly “spend a lower percentage of their sales on their supply chain operations.” As a result, he notes, the challenge of operational innovation is often less a matter of controlling costs, and more often about making changes in the attitude and culture of company operations.


Obstacles to Operational Innovation


Moscoso’s study makes it clear that, although Dell, Toyota and Zara have achieved extraordinary success because of their operational innovations, few companies have managed to imitate their success because doing so requires breaking with well-established mindsets, especially the following:


  • Operational innovation is not glamorous. According to the author’s personal experience, there seems to be a mental hierarchy among managers which places strategy and finance at the top of the pyramid, sales and marketing halfway up the pyramid, and operations at the base. Too often, says Moscoso, “I’ve seen cases in which the core tasks – the activities that create value for customers – have been assigned a low status, and are considered not very interesting.”


  • Managers do not have to know about operations.  In most cases, notes Moscoso, managers recognize that there is no one on their board who knows about operations. It’s logical that this would make it hard to gain support for operational innovations. The worst part is not that managers don’t know about operational functions in general, but that they don’t even know about their own company’s operations.


  • There is no person responsible for operations.  In most companies, there is no single executive in charge of operations. Responsibility is usually in the hands of mid-level executives, and it is distributed among several departments. That means that no one has the vision and responsibility that are usually required for making operational innovations, and there isn’t any awareness of the operational side of the business. At the very least, the author suggests, “there needs to be someone in a senior post who has a clear vision of the operational side and who has the interest in operations required for making operational innovations.” That way, companies can avoid this common pitfall: One department carries out an innovation but there is no coordination between departments, and other departments don’t even know about that innovation.


  • When a company has a single operational director, it can avoid the risk that “operational innovations get lost in a sea of initiatives aimed at improving the company. These initiatives often have their origin in technological changes, such as implementation of Enterprise Resource Planning (ERP) and Customer Relationship Management (CRM), which can wind up paralyzing operational innovations.


Turning Theory into Practice


When it comes to turning theory into practice, Moscoso notes that companies must break their traditional way of thinking. In his experience, the innovation process originates with a small group of people in the organization who agree that their innovation is really important and who look for a leader who can manage change. Because innovations can create disturbances within the company, this leader “must make the organization feel that it needs to take action.”


These dynamics need to be repeated again and again over time, says Moscoso, because no innovation lasts forever. What was innovative one day can, with the passage of time, no longer be a guarantee of profitable growth. In addition, he adds, “the goal of any company should be to make sure that this innovation remains the backbone of its corporate philosophy.” Every employee must become involved.


Moscoso concludes with some recommendations. Companies “should be concerned with making sound innovations, not worrying about whether these innovations wind up generating too much change too quickly,” he says. Above all, he adds, companies cannot afford to disregard the role of operational innovations when it comes to stimulating profitable growth. Such innovations are “relatively reliable, cost little, and carry little risk.” As a final note, Moscoso explains why he has embarked on his own personal crusade in the classroom. “I am confident that one day, in the not very distant future, some of the participants [in my class] will be able to confirm my conclusions by providing their own success stories that show that this kind of effort has been worth the pain.”

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