Six Sigma, Lean, Operational Excellence, Turnarounds, Transformation... What's the difference?

Our view on what separates the different traditional forms of Business Improvement.

There are a lot of terms that are used in the world of Business Strategy and Improvement that have related meanings. Some people use the words 'Lean' and 'Six Sigma', others call things 'Operational Excellence', while yet others still refer to things as 'Transformation' or 'Turnaround'. What is the difference among all of these terms? Do they really all mean the same thing? Let's try to figure it out.

Note: We've had firsthand experience with most of these BI-like disciplines over the years. Admittedly, we are more experienced with some than with others, but we should have enough of a general sense to be able to articulate (at least some) of the distinctive differences.

Six Sigma

This is widely considered to be (one of the) foundations of all things related to Business Improvement. Introduced in mid-1980s at Motorolla (of all places) this discipline quickly became widespread in corporate America in 1990s and beyond. One of the most famous adopters of Six Sigma is potentially Jack Welch from GE, who built his whole management strategy around the concept.

Fundamentally, Six Sigma is an engineering-inspired discipline, which aims to reduce the number of defects produced per million opportunities. Six sigma relates to six standard deviations from the mean and corresponds to around 3.4 defects per million, which makes it an acceptable performance standard in manufacturing environments (according to Six Sigma philosophy).

Six Sigma also has an elaborate qualification system for its practitioners. It sounds similar to martial arts, where people gradually increase their qualification from beginner ('white belt'), to experienced practitioner ('yellow belt' and 'green belt'), to master ('black belt' and 'master black belt'). Progression along the qualification system corresponds to the level of theoretical knowledge and practical skills that are demonstrated by the practitioner.

Typical tools used by Six Sigma practitioners focus on standardisation of operational procedures and measurement of statistical results. The discipline also has something called DMAIC, which stands for Define, Measure, Analyse, Improve and Control. That last one ('Control') is particularly important, because it can often be the case that what you thought was going to be an improvement in theory often doesn't translate into measurable quality uplift after changes are implemented (as there can be other hidden drivers that kick in once you remove the most obvious issue).

Reason why Six Sigma was so revolutionary for its time is because of its insistence on a data-driven approach, as opposed to personal opinions or gut feel of a company's subject matter experts. Human brain has a lot of biases which might not be visible to the naked eye. Six Sigma eliminated impact of those biases by relying on cold hard facts (and numbers) in making and evaluating process improvement decisions.

Lean Manufacturing

Lean methodology is another popular (and quite foundational) concept that you encounter if you do your work in Business Improvement and related fields. It was originally developed in Japan by Toyota, but only introduced in the West in the 1990s through an MIT publication focussed on the future of automotive production.

At its core, Lean Manufacturing relies on the concept of 'waste' that exists in any manufacturing (or service) process. Lean traditionally defines 7 sources of waste: overproduction, excessive motion (e.g., people walking too much across the floor while doing their work), idle time (waiting for another process to finish), defects (which later require rework), excessive inventory (which freezes capital and can damage production discipline), over-processing (e.g., putting in features that are not needed by the customer), excessive transportation (waste of time within a process).

Lean also has a number of really cool techniques that make it into a powerful toolkit for any BI practitioner. These are all well-known to many today, but require real skill in order to apply them effectively. These include: 5S (organising an effective, efficient and safe workign environment for workers), Kanban (a system for managing a process in a just-in-time fashion, avoiding unnecessary inventory between steps), Poka-Yoke (engineering-like controls that reduce the risk of human error), Gemba (walking the floor in a purposeful way to spot inefficiencies and improvement opportunities), and others.

We've used various Lean tools in our practice over the years, and they are often very powerful despite their apparent simplicity. For example, you can always analyse any repetitive task you're doing for 7 sources of waste and be 100% sure you would find an opportunity for improvement. For example, producing monthly management reports where you often spend excessive amounts of time looking for (and verifying) input information, which happens month-in, month-out. Or how annual budgets are put together in most organisations - a process that is often ripe with inefficiency, rework and frustration.

Operational Excellence

This one is a bit harder to pin down insofar as exact definitions go. In our best understanding, OpEx is often used as a collective term for all manner of efforts and techniques that can help improve how a given process is performed. There might be more to it, but this is how we've seen the term used in our practice.

Similar to Six Sigma and Lean, OpEx is often an engineering-like discipline within most organisations. There can be whole departments and individual roles called 'Operational Excellence', and their task is to deploy all tools and techniques known to man in a quest to achieve more optimal operational processes.

In our experience, OpEx is less often used for non-tangible processes, such as within a finance function (for example). It can be applied there, no doubt, but it just more often seems to refer to core manufacturing or production processes in most organisations.

Turnaround

Turnarounds as a separate BI-like discipline seem to have originated in North America and relate to instances where companies need to be salvaged from impending bankruptcy or insolvency in a relatively quick manner. This is often something that is done by private equity firms where one of their investment philosophies is based on distressed asset investing and turnaround.

The idea here is relatively simple: you take over an otherwise promising company that is poorly managed for pennies on the future dollar. Reason for the discount in purchase price is the financial difficulty the company is in (e.g., inability to pay its debts). You often inject short-term liquidity to stabilise the ship and then begin the process of turning the company around and onto higher-performing footing.

Typical techniques (that we've seen) when it comes to turnarounds include detailed marginal profit analysis by segment, which helps you identify which segments contribute positive cash returns to the business, and which don't. Those that don't often get spun out and sold (to a buyer that is able to operate that segment in a better way), or discontinued and shut down. The trick is often in being ruthless and avoiding emotion when making difficult decisions to trim the business only to its profitable parts.

There are other techniques, of course, particularly those that focus on lowering the cost of existing products or services, or increasing the price, where it wouldn't lead to a disproportionate loss of demand. Results are often achieved through dispassionate negotiation and pitting competing vendors against one another to achieve better prices. There is often a lot of legal footwork involved as well, in analysing which (onerous) contracts can be broken, so that the company can survive until after the turnaround.

One other prominent technique involved in turnarounds involves renegotiation of loans and other forms of debt. Debt is often the reason for the turnaround in the first place, as inability to meet repayment obligations is often what triggers subsequent turnaround-like activities. Because (by definition) the company is no longer able to pay all its debtors, the rationale is that most debtors would be better off agreeing to a modified repayment schedule that meets most of their requirements, than risk getting a substantially reduced repayment amount (if any) if the company goes under.

All in all, turnarounds is quite a stressful business for everyone involved. However, there are firms and individual practitioners who make a living out of it, and become quite skilled when it comes to applying the various tools in the bag to salvage defaulting companies.

Transformation

Transformation is a modern-day favourite, a buzzword that a lot of people are using to describe their BI-style efforts. Our guess is that it just sounds quite radical, but also positive, and that makes people feel really good about what they are doing.

At its core, similar to Operational Excellence, Transformation doesn't really have a clearly defined scope, philosophy, or set of tools (at least in our practical experience). Rather, it is often a combination of multiple other philosophies and toolkits that are called upon as part of Transformation in order to improve a particular aspect of the business (e.g., reduce cost, create a new high-performing business unit, increase average prices).

McKinsey defines Business Transformation as 'designed to boost overall performance through increased revenue, lower operating costs, and better customer satisfaction and workforce productivity'. You can see how it's quite a broad definition and covers (virtually) all aspects of the business that drive profitability.

Nowadays, there are also new sub-types of Transformations being introduced across the market, including Digital Transformation (focussing on digitising the various legacy processes and systems that exist within a business) or ESG Transformation (aiming to reduce emissions and improve corporate social responsibility outcomes of how a company operates). These are all focussed on additional facets of running a well-performing business, in addition to the classic profit and loss drivers.

What's next

It is clear that there will always be a need for Business Improvement when it comes to running companies. There simply aren't business that are ideal and with no further room for improvement (yet), and so there would always be someone with ideas on what else can be improved in a given organisation.

People are likely to come up with further (trendy) names to call their particular style of BI, so as to differentiate it from all others that exist on the market. Companies will also be continually interested in the newest and freshest perspectives and approaches that might help them improve how they run their business. Saying 'we are doing the same things as before' is often not a good message to send to your investors and other stakeholders.

Perhaps there will be some form of AI-enabled Business Improvement that comes next, with neural networks analysing business processes, implementing digital changes and alerting humans of other improvements that can't be done directly by computers.

Whatever it is, our bet is that there will always be demand for highly-skilled BI practitioners and experts in most scenarios of how the future unfolds. Therefore, it seems like a good idea to master as many of the philosophies and skills that we described above, to turn yourself into a more well-rounded BI professional.