First Europe-wide study on business profit in the Continuous Improvement Process (CIP)

Scientific Study , 2009 , 81 Pages

Business economics - Business Management, Corporate Governance

7,000 executives in the five largest European economies Germany, United Kingdom, France, Italy and Spain was asked about the business profit in the Continuous Improvement Process (CIP). There was the perception, likewise in the wake of the financial crisis, that organic growth strategies are gaining traction. This is of interest because efficient CIP is a crucial success factor in organic growth.
For this reason, the aim of this Europe-wide study is to find out:
- whether CIP is viewed by executives as a sensible long-term basis for profitable growth,
- the present status of CIP implementation in the chief European economies,
- what experience companies have gained with CIP,
- whether investment in CIP is paying off, and
- in which areas CIP can be usefully applied.

An absolute majority of the respondents (62,8 %)spoke out in favour of CIP as a target-oriented tool.
In this study, the dominant corporate strategy was chosen as a basis for differentiated statements. In fact, 69 % of the executives assess the importance of organic growth strategies as high or very high. By contrast, the significance of company acquisitions was rated high or very high by 42 %.

This study can deliver an initial indication of the level of penetration in companies that is needed for CIP to generate the greatest possible benefit.

The study has furnished evidence that an appreciable number of companies apply CIP and obtain considerable benefit from doing so. CIP offers an outstanding opportunity for further developing core competencies and improving performance in an entire company - unnoticed by competitors - and for sustainably defending such advances. The object of optimization is a whole enterprise - let the best show the way.

Contents

1 Foreword

2 Executive summary

3 Introduction
3.1 Objectives of the study
3.2 Study method
3.3 Participation
3.4 Basic data of the participating companies
3.4.1 Number of employees
3.4.2 Sector membership
3.4.3 Legal forms
3.4.4 Corporate strategy and market assessment

4 Results of the CIP clusters
4.1 Implementation
4.1.1 Degree of implementation in companies
4.1.2 Current scope of CIP as applied
4.2 Organization
4.2.1 Responsibility for CIP
4.2.2 Efficacy of CIP organization
4.3 Methods
4.3.1 Systematics of the methods employed
4.3.2 CIP methods
4.3.3 Culture of change, willingness to embrace change
4.3.4 Role of information technology
4.3.5 Including customers and suppliers in CIP
4.4 Results
4.4.1 CIP results
4.4.2 Penetration in companies
4.4.3 Measurability and transparency of the CIP results
4.4.4 General acceptance in companies
4.4.5 CIP deployment areas
4.4.6 Matching market situations with CIP options
4.4.7 The basis: willingness to embrace change, culture of change
4.4.8 CIP – An overall assessment

5 Information on the author

6 Bibliography

7 Tables

8 CIP examples

9 Figures

10 Index

Annex A: The management-geared CIP approach

1 Foreword

Dear reader, many experts I know say that CIP is currently in hibernation. In many companies and sectors, it is said, CIP is not being used at all or only on a small scale. In the automotive industry – say the experts – the optimization potentials in final assembly, for instance, are so low that CIP is, or has allegedly reached, the end of its useful life. Frequently, CIP is also buried under the dust of a misunderstood or wrongly applied ISO 9000 standard. So, we may wonder: Where does CIP really stand in today's business practices?

The fundamental problem has to do with deficiencies in introducing CIP, at least as far as Germany is concerned. The Japanese adapted the American W. Edwards Deming's ideas to suit their own circumstances and made a great success of them. When the Japanese methods were adopted in Germany, however, no adaptation took place. So, since Germany's corporate management and work culture differs from the Japanese situation, the efforts made have often come to nothing. The launch focused too much on operative employees and took no or only very little account of executives with P&L responsibility.

In the management-geared CIP approach (Annex A) that I presented in 2005, I classify CIP as a normal executive task whose application must be initiated by executives who also bear responsibility for it. Compared with the "old CIP way", this approach goes much further. Day-to-day business has to do with offers and bids, order negotiations, material sourcing, the production and assembly of parts, final inspection and shipment. All the activities involved in optimizing these primary tasks as well as the supporting processes are included in the continuous improvement process. The CIP object model is a crucial component in this view of things. This model systematically allocates measures to objects for optimization. There are now over 740 different detailed optimization approaches.

This study is a personal initiative. Support and sponsoring on the part of RWE AG in the person of Ms Henriette Viebig (Corporate Communication, RWE AG), Dr Jürgen Riehn and Klaus Sulimma (RWE Power AG) with the backing of the competent translation service were very constructive and made quite a few things easier. Discussions with Dr Nina Skorupska (Director Performance Improvement at the RWE Group) were very rewarding.

A special word of thanks goes to my wife Isabel. She freed up my time and dealt with our four sons on her own for hours on end (a task that is itself a development subject of the special kind...).

I wish the reader profit and many new insights in reading this study.

Kind regards,

Frank Alexander Reusch

European Initiative Continuous Improvement (EICI)

Chairman

2 Executive summary

In the period from 14 March to 18 April 2009, 7,000 managers in the five largest European economies – Germany, the UK, France, Italy and Spain – were polled on business profit in the continuous improvement process. After initial scrutiny and validation of the returned questionnaires, 789 executives took part in this study. This is equivalent to a net response rate of 11.37%.

The object of the study was a ground-covering examination of how business is applying CIP today, what results are being obtained, and what methods are being used to improve competitiveness.

Organic growth strategies on the rise

In this study, the dominant corporate strategy was chosen as a basis for differentiated statements. In fact, 69% of the executives assess the importance of organic growth strategies as high or very high. By contrast, the significance of company acquisitions was rated high or very high by 42%.

Companies posting good results thanks to CIP

6.3% of the executives reported a result of over € 10m per year thanks to CIP measures, and 18.2% a result of over € 5m. However, when a mere 20.5% of the executives find their current CIP organization to be efficient or very efficient, this points to considerable growth potential for the results to be obtained using CIP. Overall, 72.4% of participants have implemented CIP in various forms. 27.6% operate no CIP. Companies aiming at cost leadership and with no CIP in place account for 37%. Quality and innovation leaders are in a much better position and also obtain higher CIP results.

Leadership under fire – A lack of self-image?

Although CIP can demonstrably yield good results, what we often miss in companies is general acceptance. This is very low among board members and managing directors. The respondents believed acceptance there to be very good in 3.7% of the cases, and good in 8.6%. In firms with very high acceptance values in top management, the CIP results are 14 times better on average. Acceptance in divisional management is even lower than among board members. Only departmental management is given a good or very good acceptance value, viz. 26.3%. When asked about the reasons for the poor acceptance, 25.5% of the respondents name a lack of sponsors in management and 13.9% a missing role-model function as the two main reasons. Only 8% of the executives believe CIP to be a normal component in their managerial remit. This result is very sobering and raises many issues about management philosophy and self-image. Besides shaping and designing day-to-day business, an executive's tasks also include the further development of that business. Apart from the requisite self-image, this also calls for argumentation skills, persuasive powers and self-assertion. After all, not all employees jump automatically and with gusto on to the CIP bandwagon. This management dilemma poses many questions and appears to be one of the biggest problems in deploying CIP and in improving competitiveness.

Upward of 27% employee involvement, CIP will bring no additional benefits

This study can deliver an initial indication of the level of penetration in companies that is needed for CIP to generate the greatest possible benefit. The level of penetration defines the number of staff involved in CIP measures. Upward of a level of 9.1%, the CIP result rose disproportionately. Upward of 27.5% employee involvement, no better results worth mentioning were obtained.

Scale of CIP activities and methods employed

For 3% of the executives, all corporate functions are in the focus of the continuous improvement process. Of the 24 executives cited here, 17 report the highest CIP results. The preferred uses are for a spontaneous selection of specific topics (31.4%), individually selected processes (21.0%), systematic selection of measures with the greatest leverage (19.6%) and a look at all core business processes (15.9%).

COO responsible for CIP – A model for the future

On average, the COO is cited as being responsible for CIP by only 5.3% of the respondents. Yet, where some 80% of companies obtain a result of over € 5m from CIP, 58% with COO responsibility reported a result of over € 10m. Since the COO is responsible for the entire operative business, it is only logical if he assumes responsibility for the continuous improvement of business operations as well.

IT an important prerequisite for CIP

The role of IT in connection with the continuous improvement process is clearly emphasized by the respondents, with 9.5% stating that IT is a prerequisite for the success of CIP activities. A further 52.7% believe that IT is important for CIP success, whereas 8.5% of the executives take a neutral stand on the subject or see no significant link between use of IT and CIP success (29.3%).

Via the present study, executives are also sending a clear message to the IT industry to the effect that IT innovations must be better communicated – and more comprehensibly so – for business.

CIP enhances competitiveness

Specifically when it comes to long-term cost cutting and improved productivity and quality, many firms are making successful use of CIP. Yet the fourth dimension – optimizing sales revenue – is hardly widespread as yet in practice as an essential component among CIP measures.

The study has furnished evidence that an appreciable number of companies apply CIP and obtain considerable benefit from doing so. CIP offers an outstanding opportunity for further developing core competencies and improving performance in an entire company – unnoticed by competitors – and for sustainably defending such advances. The object of optimization is the whole enterprise – let the best show the way.

Executives setting more store by CIP in future

Finally, the study has established that the importance of CIP is said to be very high. An absolute majority of the respondents (62.8%) spoke out in favour of CIP as a target-oriented tool. Spanish executives give the highest assessment with a surprising 71.3%, confirming that for them CIP will be of great interest in future.

3 Introduction

3.1 Objectives of the study

Since the financial crisis in 2008 started spreading, many firms have been focussing on brisk cost cutting in an effort to go on working profitably against a backdrop of falling demand from the world economy. Such measures quickly deliver the required leeway for action. For the long haul, however, they have their limits and cannot be repeated ad libitum on a large scale.

There is also the perception, likewise in the wake of the financial crisis, that organic growth strategies are gaining traction. This is of interest because efficient CIP is a crucial success factor in organic growth.

For this reason, the aim of this Europe-wide CIP study is to find out

- whether CIP is viewed by executives as a sensible long-term basis for profitable growth;
- the present status of CIP implementation in the chief European economies;
- what experience companies have gained with CIP;
- whether investment in CIP is paying off; and
- in which areas CIP can be usefully applied.

3.2 Study method

The participating countries were selected using OECD data.

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Fig. 1: Gross domestic product, US$ trillion, OECD 2009

Owing to the number of companies in Europe's five most important economies examined here (Germany, UK, France, Italy, Spain), only a partial poll could be considered for this study.

To ensure high representativity, the parent population was established using a combined method. First of all, a concentration or cut-off process (non-random samples ) was used to reduce the number of firms in accordance with the criteria of company size and membership of 15 defined sectors. Next, a simple random selection established the sample size of 7,000 executives or 1,400 participating managers per country. These can be assigned to the first three management levels.

To improve the substantive quality of the statements made and to avoid unclear formulations, misunderstandings and other errors, the questionnaire had been subjected to a pre-test mounted by experts from RWE Power AG in Cologne.

The offline data poll was on the basis of the questionnaire emailed to those taking part. For Germany, a questionnaire in the German language was used. All other countries received the questionnaire in English. The data collection took place in the period from 14 March to 18 April 2009.

All participants were assured of complete data privacy, of course. All email addresses, emails and questionnaires which might be used for personal traceability, were deleted in full after completion and quality assurance of the analysis. Guaranteed data privacy is a self-evident precondition, but an explicit remark to that effect also served to ensure a high response rate. No prizes or benefits of any kind were offered, however, since the integrity of this study ought not to be influenced by irrelevant considerations.

Once the responses were received, an initial inspection was made to ensure the quality of the results, so that no account was taken, for example, of questionnaires with a share of over 10% unanswered questions. Nor were missing or implausible data replaced with estimates or projected values¹. To enable multi-dimensional analyses, a data cube was used for the evaluation.

3.3 Participation

The unadjusted response rate was 836 questionnaires or 12.05%. After initial inspection and error adjustment, a net response rate of 11.37% was obtained. All further details may be gleaned from the following table. illustration not visible in this excerpt

Table 1: Study participation

The contacted executives participated to a very different degree in the various countries (for details, see Fig. 2).

Germany United Kingdom France Italy Spain returns quote (%)

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Fig. 2: Participation / Net response rate per participating country

The net response rate is very gratifying for an offline scheme. Following analysis of the data, the high interest can be explained in three ways:

- The executives involved assess the significance of organic corporate growth to be very high (cf. chapter 3.4.4).
- At the same time, the shareholder-value approach is being viewed more critically in the five leading economic nations in Europe (cf. chapter 3.4.4)
- CIP is felt by an absolute majority of the executives (62.8%) to be a target-oriented tool.

From this follows the realization that companies are willing to work more vigorously on the substance of their business; hence the high interest in CIP.

3.4 Basic data of the participating companies

The questionnaire started with basic data. This was to permit a differentiated view of the use of CIP. Do cost leaders employ CIP differently than quality or innovation leaders? Are there differences in CIP deployment that have to do with company size? As the results showed, it was possible to address these and other issues in great detail.

3.4.1 Number of employees

The number of employees in the companies of the participating executives varies greatly in the countries concerned. The companies most strongly represented in this study have a headcount of 500 to 1,000, closely followed by firms with more than 1,000 employees. illustration not visible in this excerpt

Table 2: Participation of executives relative to company size

The participation of smaller companies with up to 50 employees was very low. This is particularly true of France and Spain. There, the focus was on firms with more than 100 employees.

employment structure

size range companies

Source: OECD 2009

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Fig. 3: Company-size range

Some of the structural characteristics of the participating countries can be found in this table. In Germany, medium-sized companies in the upper employment ranges, for example, were much more common than in France. In the range upward of 1,000 employees, however, France has the highest number of participating executives.

Eighty-five per cent of the executives involved work in companies with at least 100 employees. By contrast, only 14.7% of the executives participating in this study came from firms with fewer than 100 employees.

illustration not visible in this excerpt

Fig. 4: Number of executives involved relative to company size

The motivation for joining or not joining in a study as participant is assumed to be invariable, i.e. irrespective of company size. It is possible that the general acceptance of studies and taking part in them is more marked in larger companies. For reasons of time, this point was not examined in greater detail.

On this basis, it can be said that larger companies are much more interested in CIP. All the same, a number of smaller firms, too, have scored considerable success with CIP, though without deliberately ascribing the measures taken to any particular CIP programme. Other studies have identified the personality of the company as the relevant success factor in such cases.

Labour productivity, likewise measured by the OECD, is an economic yardstick that also contains continuous improvement effects. This enables an initial assessment to be made of the overall state of the economies examined here. Labour productivity is a key ratio for the performance of an economy and a yardstick for a country's international competitiveness.

Source: OECD 2009

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Fig. 5: Labour productivity in the five economies

Matching labour productivity and the CIP results obtained is difficult since, e.g., no multi-year CIP results were queried. Despite the negative trend in labour productivity in Italy and a significant fall in Germany and France (2007), the study shows that there are many highly profitable companies operating in these countries. Spain and the UK were able to gain perceptibly in labour productivity.

3.4.2 Sector membership

The participation of managers in this study is proof of CIP's importance both in the executives' companies and in their sector. Logically, the sectors that most executives assign themselves to are those that have been engaged in CIP for a long time now: mechanical engineering, automotive component suppliers and carmakers proper. The chemical, pharmaceutical, food-production and logistics sectors are likewise strongly represented. The difference between the automotive sector and its component suppliers may, on the one hand, be due to quantity effects, since the supplier industry consists of many more companies while, on the other, it also demonstrates that carmakers' high requirements have a sustainable impact on interest in CIP.

For banking, insurance and commerce, CIP does not seem to be a big issue at present.

Question 2: Please indicate the sector in which your firm operates. illustration not visible in this excerpt

Fig. 6: Participating sectors

3.4.3 Legal forms

Question 3 established the undertakings' legal form. This showed that 72% of the executives came from incorporated companies . Partnerships have a 28% share in this study. In Germany, the three main forms are the stock corporation (AG), the private limited-liability company (GmbH), and the limited commercial partnership with a private limited-liability company as general partner (GmbH & Co. KG). In the UK, the private company limited by shares and the public limited company (PLC) are virtually the only company forms represented. The société anonyme is represented most frequently among the French participating executives. Also involved are the simplified stock corporation, the société par actions simplifiée (S.A.S) and the société à responsabilité limitée (SARL) as a company form with limited liability. In Italy, most executives have the legal form of a società per azioni (S.p.A.), while most Spanish executives come from a sociedad anónima (S.A.).

3.4.4 Corporate strategy and market assessment

The point of this question was to establish the dominant strategy in order to identify links between strategy and application, and the results of CIP.

Question 4: What strategy is your undertaking pursuing as focus? (1 option)

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Fig. 7: Growth strategies

The clear majority for cost leadership comes as no surprise, since this was a crucial strategy component in many firms even before the financial crisis.

The executives had to opt for only one of the strategies shown. In practice, of course, differentiated strategies, too, are used, e.g. containing cost, market or innovation components.

What is important for this study is the link between dominant strategy and effective application of CIP and/or the CIP results obtained. One issue was whether cost leaders post higher CIP results than quality and innovation leaders.

Also, interesting findings emerge from a comparison with the importance of shareholder value and the preference for organic growth strategies.

Question 5: What importance has the shareholder-value approach in your undertaking? (1: very important – 6: completely unimportant)

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Fig. 8: Importance of shareholder value

The shareholder-value approach and further development toward value-driven company management have many advocates, but are also criticized by many as being the wrong way ahead. Sceptics point out that they take no account of a company's competitiveness and criticize the short-term alignment to financial targets. Such problems would be an ideal subject for a separate study. What concerns us here, however, is not an appraisal of these approaches, but their impact on operative strategies.

The result is surprising: Whereas in the UK 48.7% and in Germany 42.1% of the executives consider the shareholder-value approach to be important or very important, much less agreement is discernible in France, Italy and Spain.

[...]

¹ Cf. Runte, M.: Missing Values – Konzepte und statistische Literatur. University of Kiel, chair of marketing; on the cause, analysis and treatment of missing data.

• College: European Initiative Continuous Improvement
• Author: Diplom-Betriebswirt (FH) Frank Alexander Reusch (Author)
• Publication Year: 2009
• Pages: 81
• Catalog Number: V138376
• ISBN (eBook): 9783640472635
• ISBN (Book): 9783640472284
• Language: English
• Tags: First, Europe-wide, Continuous, Improvement, Process