Company leaders that embark on cost reduction programs often find themselves frustrated by the slow pace of change, on the relatively modest yields derived from such initiatives. All too often, we find that companies seeking to increase productivity and reduce operating costs take a micro-, rather than a macro-view, of where improvements can be made. They commission detailed studies of shop floor practices -- admittedly finding some ways to improve quality, reduce defects and shorten cycle times -- but miss the much larger picture related to the strategic priorities of the enterprise itself.

Companies seeking to gain real competitive advantage cannot think in terms of specific process improvements. Rather, they must think in terms of transformation, not just improvement. Transformation is the process by which companies, business units or locations make a step-change improvement in their operating performance. This, in turn, enables them to take new strategic approaches -- positioning themselves, for instance, as a premium producer, or gaining market share by becoming the low-cost player in the marketplace.

As I described in my new book, "The Lean Six Sigma Guide to Doing More with Less," a hydraulic hose company several years ago found itself operating at a negative 2% economic profit -- not even covering its cost of capital. The customer order lead time was twice that of the industry standard.

Management didn't understand that their lead time was having a negative impact on the business -- a situation aggravated by the poor quality products that were frequently being shipped to customers.

In less than two years, the company turned the situation around -- going from 2% economic profit to a positive 21% economic profit. They focused on reducing waste across and between functions to realize cost reduction and enable competitive advantage through alignment on enterprise speed and agility. To enable such a turnaround the company looked beyond process and rationalized customers and offerings that were not contributing to value creation.

The lesson: Companies must think strategically when they manage their costs down so that the actions they take are sustainable and contribute to operational excellence.

To undertake a true transformation, organizations must engage in three specific activity streams:

1. Attain a proper understanding of the extent of the opportunity;
2. Consciously choose a path to capture the opportunity; and
3. Build the continuous improvement execution capabilities needed to capture the opportunity in both the short and the long term.

While many organizations know -- or think they know -- how to build the capabilities needed to capture continuous improvement capabilities, the real opportunities are missed in the first two areas. We find that companies often fail to understand the real gaps between their own performance and that of high performers in their industry, and consequently they under-commit to making needed improvements.
 
In a recent survey, for instance, we asked more than 1500 executives in over 21 countries which operational capabilities were most critical to high performance. We found significant differences between the "masters" (those at the peak levels) and "laggards" (those with the worst performance.)

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