Beauty and the Beast, Part 2: The Beauty
The Shapes of Things to Come
There are two curves that changed my mindset on strategic operational management and caused me to question my organization’s senior leadership. I call them The Beauty and The Beast.
Part 1 covers The Beast. Part 2 covers The Beauty. Part 3 discusses what these curves mean.
The Beauty
When I first laid eyes on McKinsey & Co.’s Power Curve I was immediately struck by the beauty of its shape. I had seen that shape before, but where? Oh, yes! From benchmarking.
When I see one thing of interest, all I can say is interesting. When I see two things of interest aligning, I can say it is relevant. This is one such occasion.
Adaption of McKinsey & Co. Power Curve
The wonderfully serpentine shape of the power curve inspired me to name it The Beauty. It is indeed beautiful. McKinsey describes it is as a power curve of economic profit. In a competitive landscape, the top performers reap the vast majority of the profit while poorer performers fight for the remaining scraps. To the winner go the spoils. This is the Pareto principle in action.
McKinsey often presents this curve in the context of a retail business. Hugely profitable companies like Amazon, Walmart, Costco, etc. take the lion's share of the profits in what amounts to a zero-sum game for all competitors. This curve also fits for industrial sectors but the zero profit line is considerably lower on a relative basis as more market participants make some degree of money. This is particularly true in regulated industries like utilities.
The curve implies it pays handsomely to join and remain in the top quartile (or top quintile). McKinsey's insight suggests there’s only a 10% chance of an ambitious company joining that top zone. Of course, that means 10% also falls out of that same zone. Business is tough and competitive.
There’s another feature of this curve that doesn’t get as much attention — that flatter, middle part of the curve. That part appears to be a plateau but it does have a positive slope. This slope suggests there is always a benefit to improving performance. A measurement of the slope suggests an implicit hurdle rate for the cost benefits of such an improvement.
This begs the question — where is your organization on the power curve?
This is where benchmarking comes in.
To its credit, my organization did extensive benchmarking to understand how its performance compared to its peers. We used the reputable Solomon Associates Comparative Performance Analysis benchmarking service. Every two years for a decade we would perform a ritual of data collection, submission, and analysis. I was responsible for a large portion of the inputs. I got to know the benchmarking methodology inside and out. I concluded — if you were trying to compare yourselves in a meaningful way to others in your industry you couldn’t do better than the system and service Solomon Associates provided. Further, I got to know the principal consultants really well. Over some beer, I received fantastic insights as to what they thought really drove operational excellence.
It didn’t strike me at the time, but this is when I first observed The Beauty in action. Solomon had developed a sound methodology to normalize different companies and plants on a variety of dimensions. Then they plotted where on this curve our performance was relative to our peers. It was the same serpentine shape as seen in McKinsey’s Power Curve.
I was awestruck but not at the beautiful shape of the curve. I was awestruck at our mediocre performance, in what should have been my company’s shame.
Our operational performance was good in production and availability in the second-quartile. Our costs to achieve that production was poor in the third-quartile. You put those two together in terms of a productivity number expressed as cost per unit production and we were decidedly mediocre. Year after year it was the same result.
The results were not encouraging but what was worse was how our senior operational leadership reacted. First, they would question the data input — garbage in and garbage out, right? We were able to show sources of data input and the quality checks that went along with it — nothing to see here. Then they would inevitably cherry-pick metrics that 1) showed them in a good light, and 2) fit a pre-existing narrative of where they were already trying to make improvements. My leadership never used the insights provided to move the dial in a positive and meaningful way. I tried various ways of surfacing our problems and solutions but it fell on deaf ears. Opportunity lost, I would come to realize, is a defining characteristic of mediocre organizations.
Let’s get back to The Beauty. There are common characteristics of organizations who consistently reside in Q1 or even first-decile (D1) which is the top 10%. Besides being very profitable these organizations have excellent management systems, they believe strongly in continuous improvement, they empower their employees at lower levels to make decisions and their leadership culture fosters creativity and innovation along with accountability at all levels. Top performing organizations already have very good asset management and operational excellence practices but continue to work hard to find inefficiencies and ineffectiveness they can route out to improve their business results with durability and resiliency.
On the other end of the spectrum are those organizations who find themselves in the fourth quartile. Very often these organizations have a structural market challenge with cultural and leadership issues. Better asset management and operational excellence aren’t enough to save these organizations from themselves. It is usually a matter of time before they go under or get snapped up by a bigger, better fish.
That brings us to the pudgy middle where by definition half of all organizations lie. The asset owner I used to work for and many others like it, is somewhere in Q2 and Q3 performance.
These organizations hold a mixed bag of practice maturity, have underdeveloped management systems, carry a “results or else” management by objectives (MBO) culture, and have leadership with attitudes that either won’t change or don’t know how to do it successfully. Each one is a bit unique but not special in that they all fail to maximize value from their assets.
There are two types of organizations with middling results I’ve observed. Everyone wants great business results, but few are willing to do what it takes to achieve them. There are those who are very accepting of their mediocrity despite their messaging and intentions — those will remain stuck in the middle. Then there are those courageous leaders in organizations who are genuinely willing to see, think, and decide to take different actions for a better result. Those organizations have a chance.
Where are you on The Beauty? What are you doing about it? Is what you’re doing getting you out of the gravity suck of mediocrity because for many it is not. Maybe you should try something different. We offer different.
Scio Asset Management empowers operational leaders to See. Think. Decide. Act.