Just a few years ago, seduced by visions of limitless growth, many companies gave limited attention to operational excellence. Acquisitions, alliances, and Web-based strategies were far more alluring. Today, with a focus on fundamental strength and bottom-line results, 60 percent of CEOs surveyed by McKinsey say that achieving operational excellence is their top priority.

Of course, manufacturers of steel, paper, and other basic materials have long stressed operations (even if the industry struggled to improve them). But for most service industries, including retail, telecom, insurance, and financial services, CEOs' attention to the nuts and bolts of their business infrastructure marks a turning point.

"A lot of companies made promises to customers during the dot-com era, and found they couldn't deliver," says Philippe Bideau, a director in the Paris office, "Those were failures of execution, not of strategy. What drives bottom-line performance in most industries is quality, cost, and service – and those are all operational issues."

In a changing economic environment, two forces, in particular, have led companies to rethink their operational capabilities:

	Customer sophistication. Customers in every market have become better informed, more demanding, and more selective. They can readily compare prices and assess many aspects of vendors' performance before they buy. The Internet, which once diverted attention from operations, now has underscored their importance. With greater transparency, companies that cannot leverage their operations to provide superior service or value will lose.
	Competitive pressure.  As globalization brings low-cost competitors to the market, incumbents have squeezed obvious inefficiency from their systems – often by restructuring, outsourcing, or offshoring pieces of the business. Significant performance-improvement opportunities remain, but are harder to achieve. Retailers, for instance, could cut inventory costs by up to 50 percent, and boost sales volume by 14 percent, by reducing overstocks and stock-outs, respectively. Likewise, consumer electronics makers, whose products may have less than a six-month life cycle, can improve their returns by reducing their time to market.
	The move to services. Lean manufacturing techniques, which have helped automotive and other manufacturers reduce costs by 30-40 percent, are now showing similar results in other sectors. But there are no silver bullets; lean transformation affects almost every business activity, the management systems that support those activities, and the mindsets and behaviors of the people who perform them.

"Executives are trying to understand the limits of operational performance, and are pushing those limits," says Raimund Deiderichs, a director in the Vienna office. "Many healthcare and telecom providers, for instance, are for the first time developing standard operating procedures – benchmarks for every service they provide – rather than responding to problems on an ad hoc basis. Every company has a production system, and cracks in that system can be disastrous – operationally and strategically."