Using Operational Excellence to Boost Shareholder Returns

When CEOs think about creating shareholder value, they usually focus on increasing revenues—either through organic growth or M&A. However, because the growth rates in developed markets are low, companies are devoting even more attention and resources to pursuing the limited growth opportunities that exist. This focus can distract them from fully exploiting another critical lever for creating shareholder value: operational excellence.

Although many companies recognize the importance of operational excellence for improving margins and meeting asset turnover targets, often their efforts are not explicitly designed to create shareholder value. As a result, they may actually destroy value by limiting a company’s growth opportunities or eroding its competitive position.

Well-designed efforts to improve operational excellence create shareholder value through a combination of growing profits, raising or sustaining investor expectations concerning the company’s value, and increasing the cash available for distribution to investors. Superior operating capabilities can also help a company unlock greater value from acquired assets and thereby significantly improve the economics of acquisitions.

Even companies that are leaders in operational excellence today cannot rest on their success. A company’s stock price today reflects investor expectations for how well its operating capabilities will allow it to generate profits in the future. To raise its stock price, a company must exceed those expectations through continuous improvement.

Which approaches for achieving operational excellence will create superior and sustainable value? Some companies have exhausted levers applied to improve each function individually (such as optimizing procurement of direct and indirect materials), making it harder for them to beat investor expectations. Cross-functional initiatives, such as collaboration between the operations and marketing functions to manage complexity, offer the potential for a step change improvement in TSR.