What Is Operational Excellence? (With Core Principles)

By Indeed Editorial Team

Published November 11, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

If the productivity of an organization increases year on year, it can still encounter external challenges that can prevent it from reaching its goals. For this reason, professionals use the operational excellence technique to help them work consistently, regardless of the challenges they face. Understanding this process can help if you're in a leadership position and require a method to help the organization you work for improve its strategy and reach its goals. In this article, we discuss operational excellence, explain why it's important, explore its principles, and provide some metrics to measure it.

What is operational excellence?

Operational excellence is a process that a leadership team can implement to optimize an organization's operations. Management teams commonly use this phrase when referring to the technique of gaining an advantage over competitors. The goal here is to achieve continuous improvement that's far-reaching, actionable, and measurable. Developing excellence in a single department or team can have a beneficial impact on other areas of the organization. Managing an organization's operations is important for sustaining its longevity, and this approach works alongside the organization's business strategy to achieve significant performance.

Unlike the business strategy, the process of developing excellence can change. If an organization can learn to adapt to these developments, it can help it stay ahead. This is true for businesses operating in a competitive industry, where it's important for an organization to adapt quickly to change.

Related: Examples of Operational Strategies (With Tips and Methods)

Why is excellence in operations important?

It's important to strive for excellence in operations because this can give businesses a significant competitive advantage. An organization implementing this process can experience higher growth and productivity than competitors. Operational excellence can help an organization succeed because of the way it impacts these key characteristics:

  • Business agility: Excellence in operations focuses on ongoing adaptation, so companies remain dynamic and flexible. By applying this process, an organization adheres to a self-correcting mechanism to help growth.

  • Business strategy: When implementing excellence in operations, the organization doesn't require input from management to manage daily operations and solve low-level challenges. Instead, the leadership team can focus on developing new products and markets and considering further revenue opportunities.

  • Business efficiency: By focusing on activities with the most significant value, an organization can aim to achieve efficient operations, resulting in an increase in productivity. This approach can also deliver value to customers.

  • Business workforce: By focusing on excellence in operations, an organization can create a strong work culture by empowering employees, which can help retain and attract staff. In this environment, a team may feel encouraged to develop new ideas and discuss suggestions with management, which can create further opportunities, increase demand, and cut costs.

  • Business growth: Excellence in operations relies on implementing standard processes and improving them continuously. These strategies can provide a template for managing the company that leaders can use when creating new teams or locations, thus facilitating growth.

Related: How to Calculate Growth Rate (With Formulas and Examples)

Principles of excellence in operations

The principles of excellence in operations can help establish a productive and efficient culture within an organization. A sign that a team may not be following these principles is when members refrain from completing tasks that are essential to a company's growth. This can happen because team members responsible for such tasks lack the time to perform them, the vision to appreciate their value, or the understanding of how their work impacts the company's goals. To counteract these challenges, a manager can apply the following principles:

1. Respect colleagues

All employees in an organization have potential and value, and because of this, they deserve respect. It's important for businesses to recognize the benefits of promoting a culture of respect, both toward individuals and teams. For example, an excellent way to show respect for team members is to involve them in any departmental improvements. As they're the employees who take care of important tasks each day, it's logical and considerate to include them in improvement processes, as this can empower and motivate them to contribute.

2. Lead with humility

It's important for an organization's leadership to act with humility toward staff. A leader who can acknowledge when they're mistaken and act without bias to find a more effective solution to challenges may see their team develop similar attributes. Humility aligns with respect because it involves a leader listening to their staff's ideas and considering suggestions, no matter their position in the company. If a leader seeks input and listens to constructive criticism, their team may feel managers respect them and give their creative ideas freely.

3. Strive for perfection

Advocating a principle for aiming for perfection within an organization can often meet with resistance from employees. This is because professionals might believe that achieving perfection isn't possible. Establishing a mindset where staff aim for perfection can create high standards and a robust way of thinking when working on a challenge. Striving for perfection in operations means identifying long-term solutions to challenges and simplifying processes while maintaining quality. To encourage this approach, it can be beneficial for employees to adopt a mindset of continual improvement.

Related: What Is Process Improvement and How Can You Utilize It?

4. Think scientifically

Continuous learning and experimentation can create innovation. Following a disciplined problem-solving process can encourage team members to consider new ideas without doubting the outcome because they understand underperformance is part of the scientific method. A scientific approach uses repeating experimentation cycles and focused observation to generate new ideas automatically. For example, a leadership team can use a structured approach to encourage employees to learn from experimentation, improve problem-solving, and use consistent methods to collect and analyze data.

5. Focus on the process

If a company experiences challenging outcomes, the reason is often because of the elected processes rather than a specific individual. Even an effective team member can find it challenging to produce perfect results consistently when working with poor processes. Instead of questioning a team member's responsibility when an oversight occurs, it's preferable for a leader to assess whether the lapse happened within the process. Following this, they can make the necessary adjustments to obtain the desired results.

6. Concentrate on flow

An organization's goal is to offer the best value to its customers. It's important for a company to ensure processes and workflows are continuous because interruptions can cause inefficiencies. It's essential to assess customers' needs and ensure the organization can meet them.

7. Think systematically

There are many parts of a workflow system that interconnect. Thinking systematically means understanding the relationships between these parts. Doing this can help with better decision-making and avoid a narrow business vision. Thinking systematically can help eliminate business silos and barriers that can impair the flow of ideas and information throughout an organization. It also helps document how the value chain connects with various processes and strives for seamless cross-functional collaboration.

8. Understand the organization's purpose

It's beneficial for employees to understand why the company exists, its goals, and its mission. This information can allow a team to align its goals and actions to match those of the company. It's important for a leader to emphasize these goals regularly and for team members to understand their roles and how their work can lead to the company's success. To accomplish these aims, the leadership team can communicate the company's purpose and direction and involve their teams when creating objectives.

Related: 10 Essential Operational Management Skills (Examples)

Key performance indicators to measure excellence in operations

Key performance indicators (KPIs) can inform a company's management of how efforts to increase excellence in operations are performing. Organizations can create a dashboard of their most significant metrics to monitor. Here are some KPIs to watch:

Customer satisfaction

Regularly monitoring customer satisfaction can help an organization find gaps and lapses within its processes. It can help prioritize functions requiring attention and focus on solving the most urgent first. Examples of KPIs to measure customer satisfaction include:

  • customer satisfaction (CSAT)

  • net promoter score (NPS)

  • call pickup time

  • e-commerce abandonment rate

  • overall satisfaction

  • retention rate

Related: How to Get Customer Feedback to Improve Your Business

Culture and employee satisfaction

An organization with an engaged team can experience greater profitability. Measuring culture and employee satisfaction can improve performance by exposing the most important work factors to team members. Examples of KPIs to measure culture and employee satisfaction include:

  • number of completed training exercises

  • employee satisfaction score

  • external to internal hires ratio

  • employee retention

Productivity rate

Productivity metrics can be valuable and versatile tools. An organization can select its KPIs according to its business goals for a specific time period. It can conclude it's achieving its objectives when revenue exceeds marketing and sales expenses. Examples of KPIs to measure productivity include:

  • return on investment

  • downtime

  • capacity utilization

  • operating rates

  • operating margin

  • revenue per employee ratio

Related: The Value of Measurement of Productivity in Business

Financial health

Finance is an excellent indicator of an organization's health. Monitoring this can help a company identify operational inefficiencies and decide on strategic initiatives for investments, pricing, and sales efforts. Examples of KPIs to measure financial health include:

  • cash flow

  • gross margin

  • audit performance

  • compliance risk measure

  • asset value projections

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