I recently had a conversation with a veteran operations manager about his new company and its plan to deploy a lean strategy. In fact, I often hear lean thinkers describe lean as a strategy. But is it? Lean thinking and practice certainly are strategic in the sense that they are an all-encompassing approach to running a business.
However, I recall other conversations with executives and management experts, especially those outside of operations, that suggest disagreement with this view. Instead, they assert that lean provides an efficiency edge that is great for the bottom line but generally doesn’t account for how a company approaches its market. Thus, their argument goes, lean is a supporting element rather than a strategy.
Summarizing the argument, lean thinkers believe that strategy is implicit in lean thinking and practice. To many managers and observers from outside of the lean community, most notably top executives, lean is most often a tactical means to an end.
I believe that the contrasting views point to a problem. With some notable exceptions, lean thinking and practice have not taken root in companies’ top echelons because C-suite executives generally focus on strategic concerns. So, as important as lean might be, the thinking goes, if it is not strategic, it can be managed at lower levels. Thus, by denying its strategic performance, many executives cast lean thinking and practice in a subordinate role. Allow me to explain by first outlining some strategy basics and then considering lean thinking and practice in a strategic context.
A strategy is simply a plan of action meant to accomplish a broader purpose. In that sense, lean thinking is clearly a strategy. It is a set of plans and actions aimed at systematically adding more value with less waste every day. Although there are many ways to think about business strategy, it most commonly refers to a business-level competitive system: How will the business distinguish its product or service from other offerings? Which market segments will the business target? Thus, competitive strategy is largely focused on being different from competitors in a way that is valuable to a specified set of potential customers. The alternative to offering a unique product or service is to compete based on price – and we know that is a difficult path. The most basic idea of competitive strategy is to distinguish the offering in a way that creates a sustainable advantage.
And that is the rub. A sustainable advantage is most often based on a set of capabilities that are built or acquired over time. The strategy itself exploits those capabilities if they exist in the company or calls for somehow acquiring them if they do not. Building a successful competitive strategy is challenging but much less so than building the capabilities that make it work.
…lean is not a strategy per se but can be much more important than strategy. Strategies can come and go; lean thinking and practice are constant sources of strength that can be exploited in different ways using different strategies.I argue that lean is not a strategy per se but can be much more important than strategy. Strategies can come and go; lean thinking and practice are constant sources of strength that can be exploited in different ways using different strategies.
Sustainable advantage can be achieved when the underlying capabilities are valuable, rare, and hard to imitate. I think that we can all agree that lean thinking and practice build a broad set of capabilities that include, in particular, excellence in safety, quality, delivery, and cost in varied and nuanced ways. Lean also builds dynamic capabilities through management systems that allow quick pivots in response to threats and opportunities.
For a current example, there is emerging evidence that hospitals with effective lean management systems in place are better able to pivot quickly during Covid-19 outbreaks.
Strategic exploitation of capabilities
Numerous examples exist of operational capabilities providing the impetus for strategic change that disrupts an industry. The example most familiar to lean thinkers is the end-to-end capabilities engendered by the Toyota Production System that disrupted the world auto industry, as described in The Machine that Changed the World. Even early on, Toyota’s capabilities were not restricted to production. Toyota understood what customers valued and systematically translated that understanding into a product and process design process that delivered that value to customers around the world.
We find other examples in the U.S. auto insurance industry. The industry was born and grew along with the auto industry itself, with competition based mainly on the ability of carriers to maintain a stable of independent agents to promote their products, an insurance policy that was a commodity. Pricing was complicated, and differentiation was based mostly on service – the carrier’s service to the agent and the agent’s service to the driver. The agent’s service to the driver consisted largely of timely responses, finding a good price among carriers, and advocacy with respect to claims to the carrier.
Strategy and capabilities (different and better) are inextricably linkedHowever, several insurance carriers sold directly to consumers without agents and at a somewhat lower price, generally to a niche such as government employees (GEICO) or the military (USAA). These carriers developed the operational capabilities needed to provide pricing transparency, timeliness, and fair and straightforward claims processes that obviated customer dependence on independent agents. Once established, these capabilities enabled direct carriers to find two competitive advantages. First, they eliminated the waste associated with intermediaries in the supply chain, and second, they increased the amount of customer information they could gather. In turn, the operational capabilities GEICO developed in serving its niche allowed it to pursue an expansive business strategy, offering customers a broader array of offerings at a price advantage without trading off service.
GEICO moved from a regional carrier to No. 2 nationally in terms of premiums and market share. For GEICO, the operational capabilities built over time allowed a strategy that distinguished it from its larger competitors. The price advantage associated with direct sales was only possible because of the hard-won operational capabilities related to the service that customers found acceptable or superior.
A similar story can be told about Progressive (now No. 3 in the industry), which combined operational capabilities in service with innovation in underwriting analytics that allows pinpoint pricing based on driver’s experience to achieve tremendous market share growth. An active continuous improvement culture buttresses Progressive’s effort. This disruption is also based on a strategy that was only achieved after the company had built critical operational capabilities.
Different or Better?
Sustainable competitive advantage requires being both different and better in ways that are valuable to the customer. Although the focus of a competitive strategy is on devising a distinctive way to win customers, successful strategies exploit capabilities that exist or that can be built or acquired. Strategy and capabilities (different and better) are inextricably linked.
Lean thinking and practice build capabilities and improves them every day by focusing on value to the customer and the processes that deliver that value. As such, lean provides a critical source of advantage that businesses and other organizations can and should exploit strategically.
Top executives in all organizations must be involved in molding competitive strategy and developing and acknowledging the capabilities that undergird such strategies. It would serve them well to incorporate – and leverage – lean thinking and practice in shaping their business strategy and creating competitive advantage.