The Difference Between Operational Excellence and a Low-Price Strategy

There is significant confusion in the business world between Operational Excellence and a Low-Price Strategy. Based on our years of experience designing, developing, and implementing simulation-centric business acumen learning journeys, I want to share some insights and ideas about the differences and how these differences can be used for better strategic execution and decision-making.

The Confusion

Part of the confusion is simply a matter of semantics and wording. In the game-changing book, “The Discipline of Market Leaders (Tracey & Wiersema),” the authors propose there are only 3 different “Value Propositions” that a company can offer to its customers; Product Leadership (building and selling the most innovative products), Customer Intimacy (developing a strong relationship with the customer and offering world-class service and customization), and Operational Excellence (driving costs out of the system of business so you can complete on low price).

In the meantime, companies like Toyota, General Electric, Ford, and Intel have been using concepts of “Lean Thinking” for decades to drive waste out of their systems of business through increased efficiencies. At some point, the lean movements turned into “CEO-speak” and the idea that organizations must focus on “Operational Excellence” no matter what they started to enter the lexicon of business.

Here is the issue: good, smart lean thinking is an operational tactic to make sure an organization is producing and selling its products and services as efficiently as possible and taking waste out... no matter what the strategy (Best Product, Best Service, or Lowest Price)!

Unfortunately, the terms have become "confused," but it is critical to understand the key differences.

Details

An operational excellence strategy and a low-price strategy are both approaches aimed at achieving a competitive advantage in a market, but they focus on different aspects of business operations.

A Pure Operational Excellence Strategy:

• A pure operational excellence strategy emphasizes efficiency and productivity within the organization's operations.
• It involves streamlining processes, reducing waste, and optimizing resources to deliver high-quality products or services at competitive prices.
• The goal is to excel in operational metrics such as speed, flexibility, quality, and customer service.
• Companies implementing this strategy often invest in technologies, lean methodologies, continuous improvement practices, and employee training to enhance operational performance.

A Pure Low-Price Strategy:

• A pure low-price strategy focuses primarily on offering products or services at the lowest possible prices in the market.
• The primary objective is to attract price-sensitive customers and gain market share by undercutting competitors on price.
• This strategy may involve cost-cutting measures such as minimizing overheads, sourcing materials at lower costs, and optimizing distribution channels to reduce expenses.
• Companies adopting this strategy often prioritize cost reduction and economies of scale to maintain profitability despite lower margins.

Summary and Take-Aways

While there can be overlaps between the two strategies, they differ in their core emphasis. Operational excellence seeks to improve overall operational effectiveness and customer value proposition, whereas a low-price strategy centers on offering products or services at the lowest prices possible to attract price-conscious customers.