The Power of Process
SAB was a “small” 26 million hectolitre beer brewery when it acquired Miller in the USA in 2002. Miller was more or less double the size of SAB, at 52 million hectolitres brewing capacity. Normal tenets in the field of acquisitions will tell you that the joining together of 2 disparate size companies seldom works. In this case, however, the new SABMiller was a raving success.
For me there are two reasons for the phenomenal success SABMiller has been experiencing since it ventured into the international arena the early 1990’s:
- The great quality of its people
- The efficiency and effectiveness of its operating model
As for the quality of its people, a lot has already been said. SAB was fortunate that they had independent thinkers as general managers at the time when they changed their strategy to look for market share abroad. These GM’s were used to running their regions in South Africa as autonomous businesses. When SAB went abroad and needed business savvy managers who were able to call the shots on the ground as they saw them, they had a pool of great quality people readily available. This was due, amongst others, to their stringent recruitment and people development policies. When I think about one of the tenets of Jim Collins in his one masterpiece, “Good to Great”, I tend to think first about SABMiller!
As for the efficiency and effectiveness of its operating model, SABMiller is universally known as the global beer brewer with the lowest cost operating model by far. It is not only the lowest cost, but also the most efficient. This is not by accident. Senior executives at SABMiller will tell you they consistently do their best to drive down the cost base of their operating model, whilst ensuring that it is effective and efficient. I recently heard that SABMiller had “taken out” quite a few million rand out of their distribution model to provide more funding for the marketers to enhance the brand even more.
In this operating model, it is essential that the processes are aligned and integrated. The last thing you need is a “silo situation”, where the functions each believe they are great on their own. It is also essential that the operating model and its processes are integrated and aligned with the other forces at work within the systemic view of the organization:
- It needs to be aligned with the ethos of the organization. If the culture of the organization is not characterised by a set of 3 to 6 core values that are held in a “cult-like fashion”, the processes would be characterised by silos and lack of team work. I frequently feel that the prevalence of silos is more a cultural thing than a process design issue.
- The processes also need to be aligned and designed with the needs and requirements of the customer as the driving force. The last thing you need are processes that anger and confuse your customer. But we frequently make the mistake of designing these processes with our comfort as the point of departure! And then we are surprised that the customers prefer our competitors!
- In addition, the processes need to be designed from a strategy implementation point of view. The processes need to implement the strategy. Once we have changed our strategy, we need to ask ourselves whether our current operating model would suffice to implement our new strategies, and whether we would need to change our operating model.
As a management construct, the operating model focuses on the following delivery areas (based on BCG Research):
- Value chain – how is the business configured to deliver on the customer demand, and will it deliver these processes or activities in-house or will they be outsourced? We do find that more and more of the value chain elements are being eliminated, either due to outsourcing and even off-shoring, or digitization. The efficiency of the value chain has become a crucial source of competitive advantage.
- Cost model – how do we configure the usage of assets and the managing of costs to deliver on the value proposition profitably? We need to ensure that our operating expenses are such that our revenue model can cover our operating costs. Off-shoring and outsourcing is driven by a need to retain efficiency, but at a lower cost base. As such, Adidas has stopped to manufacture their own products, and have outsourced this function to outside contractors. The operating model of the music industry has undergone dramatic changes in the past decade or two, especially since Steve Jobs redesigned the business model of Apple to include iTunes and music purchases.
- Organization – how does the company deploy and develop its people to sustain and enhance its competitive advantage? Our internal competencies should be such that we can out-compete the competitors.
An organization that constantly reviews its operating model is Backsberg, one of my favourite wine estates. Clive Trent, the viticulturist and general manager at Backsberg, will show you exactly how they are consistently streamlining their operating model. This entails, amongst others, the following:
- Do they need to plant the grapes themselves, or can they buy good quality grapes in the market at a lower price?
- Can they upgrade the quality of their soil to enhance the yield of higher quality grapes? It is no longer sufficient to bet your money on high quality grapes – you need high yields as well, and these two aspects are no longer mutually exclusive!
- Can you increase the yield by going high density? This can be done by planting the vines closer to each other. Backsberg is using the lyre production system, which at a given level of maturity, has the potential to increase grape production by more than 30 per cent over the classic wide-row training systems. In addition, it will be equal to or better than the traditional narrow-row training systems.
According to Dr Alain Carbonneau, of the Institut National de la Recherche Agronomique (INRA) Bordeaux, France, the savings of the lyre production system are as follows:
- Compared with the traditional narrow-row training systems, the lyre system reduces production costs, particularly for those labour inputs used in maintaining the vineyard. The estimated savings are from 20 to 40 per cent for maintenance and about 20 per cent for the establishment of the vineyards.
- Compared with the standard wide-row trellised training systems, the lyre is more expensive to set up, has similar maintenance expenses, but hand-picking costs can be reduced by 20 to 30 per cent. In the long term, the lyre system is less expensive.
- The cost of picking the lyre system, using vertical shaking mechanical harvesters, should be between that of picking traditional narrow-row and wide-row trellised or free-standing plantings.
- All the other vine operations such as pre-pruning, trimming, pinching (foliage wire placement), spraying, and soil management, can be mechanised with the lyre system.
Backsberg is able to tap into these advantages because they are consistently researching better ways of producing their grapes. They are not afraid of learning form others, and to take calculate risks where it has the potential of unlocking great value. As it is, they do not follow all the practices mentioned above, as they choose to not to mechanise too much and rather use manual labour.
Other possible ways Backsberg has to enhance the efficiency and effectiveness of its operating model, are as follows:
- Optimise its wine making processes. How can they drive down costs and yet raise efficiencies in this vital activity? How can they manage downwards the energy costs, as well as enhance the efficiency of the grape delivery process during harvesting time? How can they manage the tannins of the wine, by ensuring, amongst others, that no unnecessary leaves and stems are present in the process?
- Optimise its delivery model. How can they get their wine to consumers in Europe in ways that are effective, yet cheap? How can they ensure that their products are in the right supermarket in the right quantities and with the right cultivars?
- How can they ensure that the optimal number of consumers visit the estate to buy their wine there, as it would be the point where the largest margins are made, and the most number of customer touch points exist? The latter creates the opportunity to enhance the customer value proposition in a number of ways, such as providing restaurant facilities, venues for conferences and weddings, etc.
The combination of both aspects I identified upfront, i.e. great quality people and a lean and efficient operating model, are a requirement. The one without the other is meaningless, and even probably not possible:
- If you do not have great quality people, you would not have a lean and productive operating model.
- If you do not have a lean and productive operating model, someone is lying about having great quality people!
- You had better be very good at one or more of the important elements of your operating model, in comparison to your competitors.
For some companies, operating model is strategy! SABMiller will tell you straight that for them strategy is about operations. You may question this from a purist point of view, but the point remains that their operating model is crucial in the greater scheme of things. The same could be said for companies in the wine industry, the financial services industry, and even the retail environment.
The previous CEO of Pick ‘n Pay, Sean Summers, told my MBA students in no uncertain terms that for them at Pick ‘n Pay, strategy was about people – getting the best people on board and getting them to operate efficiently and effectively. This obviously requires an organizational culture that allows these great people to function optimally!
You ignore this caveat at your own peril.