Driving Operational

Innovation Using
Lean Six Sigma
Businesses today face mounting pressures to innovate, yet
enabling innovation remains a challenge for many. Lean Six
Sigma, a well-known approach for achieving operational
excellence, can help executives create an organization that has
an inherent inclination toward innovation.

I
by Dave Lubowe
& Amy Blitz n today’s marketplace, increasing globalization, continuous technological
advances, and other competitive pressures are accelerating the pace at which companies
Dave Lubowe is the
need to change. Executives have placed innovation near the top of their priority lists, yet in
global and Americas
operations strategy
many organizations, innovation success has been sporadic at best.
leader for IBM Global At IBM Global Business Services, our research and experience show that the right
Business Services. You operations strategy can help companies make innovation a regular occurrence. Such a strategy, if
can contact him at dave. focused not just on efficiency but also on growth, can serve as a foundation for innovation through-
[email protected]. out an organization — far beyond operations to products, services, markets, and even a company’s
underlying business model. Simply put, this sort of strategy is not about doing things better; it is about
doing better things.
Amy Blitz is the
strategy and change
As part of a recent
leader at the IBM analysis of innovation, we
Institute for Business examined several lead-
Value. You can contact ing companies that have
her at ablitz@ implemented operations
us.ibm.com. strategies based on a rela-
tively well-known man-
agement philosophy that
we call Lean Six Sigma.
It is also sometimes
referred to as Six Sigma
Lean. At some of the
companies we studied,
leaders still refer to their
initiatives as Six Sigma
or 6 Sigma, even though
(from our perspective)
they have moved past Six
Sigma’s original defini-
tion and scope by incor-
©2008 phil bliss/the ispot.com

porating Lean features

as well. Regardless of
the terminology it uses,
each of the companies
that we included in this
research has established
a corporate environment

10 Business Performance Management September 2008

 that promotes a disciplined focus on customer needs; detailed data analysis; and facts — not theories. Although CEOs
The results are remarkable.
At Caterpillar Inc., stagnant revenue growth prompted the company to undertake a massive trans- might instinctively
formation in January 2001. Through a Lean Six Sigma initiative, the company developed a strategic think of Lean Six
vision and a road map for change guided by fact-based analysis. The initiative led to product innovations,
like Caterpillar’s phenomenally successful low-emissions diesel engine, and to redesigned processes, Sigma in terms of
including a streamlined supply chain. By 2005, the company’s revenues had grown by 80 percent. process improvement
The subject of our second case study, Korean steelmaker POSCO, faced fierce competition as it
privatized in 2000. With the help of Lean Six Sigma, the company escaped its competitive position as and cost reduction,
a regional, low-cost provider and elevated itself onto the global stage as a premier provider of innova- this perspective is
tive steel products and services. Fact-based analysis brought to light high-potential markets and unmet
needs, which led the company to introduce differentiated products with entirely new applications. In shortsighted.
just a few years as a private enterprise, POSCO has become the world’s third-largest steelmaker.
Finally, ScottishPower began losing customers when its market was deregulated. Determined to
reverse the trend, the company used Lean Six Sigma to identify its problem areas and reinvent its cus-
tomer service function. By innovating based on facts rather than assumptions, ScottishPower halted a
steady decline in its customer base and increased its market share by 60 percent in four years.
As we analyzed the ways in which these three companies used Lean Six Sigma to achieve broad-
based innovation and superior financial performance, we identified distinguishing characteristics
of each organization’s approach that set it apart from companies with a traditional operational-
improvement mind-set. All three of our case study companies share four characteristics that helped
them use Lean Six Sigma to embed an innovation mind-set into the fabric of their organization: an
innovation vision based on factual customer and market insights, a leadership team that is committed
to perpetual innovation, alignment across the extended enterprise, and organizational capabilities that
have made innovation habitual.

Lean Six Sigma: A Foundation for Innovation

Although CEOs might instinctively think of Lean Six Sigma in terms of process improvement
and cost reduction, our case studies suggest that this perspective is shortsighted. As its name suggests,
Lean Six Sigma is a combination of Lean methods, which focus on reducing costs through process
optimization, and Six Sigma approaches, which are about meeting customer requirements and stake-
holder expectations and about improving quality by measuring and eliminating defects. Lean Six
Sigma draws on the philosophies, principles, and tools of both.
In the past, companies used Lean Six Sigma primarily for operational improvement, for refining
existing processes to reduce costs, improve performance, and provide better customer value. However,
dramatic upheavals in the competitive marketplace are prompting business change on a much more
massive scale than in the past. Companies today must innovate, not just improve. Around the world,
CEOs are searching for blockbuster products and services, making major operational changes, and
even redesigning their fundamental business models. IBM’s conversations with 765 corporate and
government leaders worldwide, conducted as part of the 2006 IBM Global CEO Study, found that
chief executives’ innovation priorities are spread across all of these different dimensions. And yet
CEOs ranked an “unsupportive culture and climate” as their biggest obstacle to innovation success.
Their organizations lack the processes, discipline, and organizational mind-set to foster meaningful
innovation on a continuous basis.
Despite its heritage, Lean Six Sigma is well-suited to help. Because of its focus on fact-based
analysis and direct customer input, the methodology is equipped to facilitate a broad corporate trans-
formation, helping a company rethink its entire business and create a more innovative climate. The
leading companies we examined in depth as part of our recent innovation research are proving that
Lean Six Sigma has applications far beyond process improvement. They have deliberately expand-
ed the scope of the methodology, using it to surface significant innovation opportunities that have
impacts well beyond operations. Doing so has enabled these companies to improve performance and
establish an organizational culture with an inherent inclination toward innovation.
In virtually every industry — and across the public sector — Lean Six Sigma has served as a cata-
lyst for broad-scale innovation. Though the organizations we studied in detail vary in terms of size and
mission, all have realized substantial benefits and even earned positive responses from the sometimes
fickle financial markets. These organizations’ experiences provide valuable lessons for firms that want
to cultivate an innovation mind-set.

September 2008 Business Performance Management 11

 Innovation Has Legs at Caterpillar
Strong leadership In 2000, Caterpillar found itself stalled: Four years of flat revenues and intense competition showed
support of a no signs of letting up. Determined to regain its industry leadership position and to jump-start growth,
the company’s executives deployed a Lean Six Sigma approach, which they refer to as “6 Sigma,” in
Lean Six Sigma January 2001. Caterpillar wanted to revolutionize not only the way its employees work, but also their
initiative can mind-set. The goal was continuous, customer-driven innovation, and the magnitude of the planned
transition was staggering. The Lean Six Sigma initiative involved 27 business units and more than
yield effective 72,000 employees located on six continents.
strategic alignment, The launch began with a nine-month training period for 4,200 employees. Then these trained
professionals — with backgrounds ranging from engineering to finance — led their own projects and
even in the largest served as mentors to the rest of the organization.
of companies. Perhaps the most far-reaching transformation came from Caterpillar’s application of 6 Sigma
approaches to strategy development. Using Lean and Six Sigma disciplines to collect and analyze
hard data on customers, markets, and the company’s capabilities, the CEO and a strategic planning
committee crafted a detailed vision for where Caterpillar should be in 2020. The vision was sub-
divided into three five-year plans. The immediate plan set out specific, measurable targets for mar-
ket position, quality, order-to-delivery performance, safety, and other critical success factors. The
plan’s scope was companywide, spanning all lines of business and cascading down through the orga-
nization. Because of the rigor and discipline enforced by the initiative, the entire company aligned
behind the same specific objectives.
The initial 6 Sigma launch spawned more than 1,100 projects. Some generated subtle (though
financially beneficial) operational improvements, while others resulted in innovative new products
and radically different ways of working.
One of the first process changes involved revamping R&D to include more direct interaction with
the customer. Engineer to engineer, employees and clients began working collaboratively to pinpoint
problems and develop solutions, steadily building closer relationships. Through alliances it built with
Canadian mining customers, for example, Caterpillar learned about the nuances involved in extracting
oil from sand. These application-specific insights led the company to develop a completely different
kind of mining truck. Instead of being one-size-fits-all, the new mining truck is available in five
unique configurations, each suited to a particular type of terrain and haul profile. Now customers in
extremely cost-sensitive industries, such as oil sands mining, can select the configuration that offers
the best blend of price and productivity.
The 6 Sigma approach also led to major operational changes, particularly in Caterpillar’s supply
chain. Caterpillar has, in its own words, “systematically de-bottlenecked” its order-to-delivery pro-
cess. For example, teams redesigned the production scheduling process at Caterpillar’s manufacturing
facilities, which cut lead times by more than 50 percent. The company has also reduced delays caused
by supplier-sourced pumps. Historically, if a pump failed during initial testing, Caterpillar had to take
time to fix the pump or else wait for the supplier to send someone to repair it. Now, based on sug-
gestions from the 6 Sigma team, the Caterpillar supplier has its own pump test cell, and it breaks in
new pumps before sending them to Caterpillar plants. The supplier faces a financial penalty if it fails
to meet specific quality goals.
Overall, the results from Caterpillar’s Lean Six Sigma initiative have been phenomenal. Within
the first year, the benefits from the company’s global 6 Sigma project surpassed implementation costs.
Since then, 6 Sigma has become a critical component of Caterpillar’s success. The rigor and discipline
of Lean Six Sigma enabled the company to achieve record profits and have helped the company move
toward its 2010 strategic goals. According to Caterpillar’s vice president and CFO Dave Burritt,
“Caterpillar’s competitiveness has improved. ... 6 Sigma has been applied to increase our percent of
industry in all of our principal lines of business. The machine, engine, and financial products busi-
nesses have all benefited from the rigor of 6 Sigma. Without question, we are in the best of times at
Caterpillar, and the improvements would have been much less without 6 Sigma.”
What can other businesses learn from the Caterpillar experience? One key takeaway is that strong
leadership support of a Lean Six Sigma initiative can yield effective strategic alignment, even in the
largest of companies. In Caterpillar’s case, strong leadership prompted strong participation, unifying 27
disparate organizational units around common strategic goals. Teams saw how their efforts were linked
and how they contributed to the whole. Results were measurable and visible to all. And Caterpillar’s
story is not an isolated case. Applying Lean Six Sigma to strategy development sends a clear message
that management teams are serious about making an enduring change. IBM Global Business Services

12 Business Performance Management September 2008

 has analyzed the performance of many of our past clients to determine the impact that a company’s
deployment model and executive sponsorship have on overall results. We’ve found that most Lean Six
Sigma programs demonstrate solid results, and those with a high degree of CEO commitment and a
top-down corporate deployment approach experience a much faster transformation.

POSCO Is Strong in the Lackluster Steel Industry

After decades of government ownership, the Korean steel company POSCO was privatized in
2000. Long sheltered from market forces, the company suddenly faced serious competitive pressures.
Its positioning as a low-cost provider was challenged as cheaper competitors emerged from other
regions — notably, China — and its limited regional footprint left the company exposed to a declin-
ing Korean economy. Yet POSCO was determined to remake itself, to shift from a local, low-cost
producer to a global, value-added steelmaker. To enact such a dramatic change, the company had to
fundamentally change its entire way of working. POSCO decided to use a Lean Six Sigma approach
to transform its business and create a market-driven mind-set throughout the enterprise. (Because
POSCO launched its transformation efforts before the term Lean Six Sigma came into common use,
it continues to refer to its initiative simply as “Six Sigma.”)
The POSCO management team relied on Lean Six Sigma to develop a strategy for becoming a
value-added, rather than low-cost, steel provider. First, it enlisted its R&D division to gather data on
customer needs. Initially, R&D resisted the Lean Six Sigma approach, feeling it was too Western to be
practical for an Asian company. But after special training sessions designed just for them, these engi-
neers’ opinions began to shift. Instead of sending marketing or salespeople to research customer needs,
senior management sent engineers. This empowered the people who were making pivotal design deci-
sions to talk directly with key customers and make recommendations. It enabled the engineers to learn
directly from customers and to pinpoint several product areas in which customers were looking for
more innovative solutions. Using the engineering team’s input on customer needs, senior management
analyzed market potential and the company’s capabilities in specific product and service areas. The
optimal strategy seemed to revolve around two high-potential markets: shipping and automotive.
Senior managers aligned the entire company behind strategic priorities in the shipping and
automotive markets. R&D concentrated on these areas, and pet projects that did not contribute
to the vision were cancelled. The resulting shift in POSCO’s business model led to major product
innovations. For example, the company invented steel that remains rust-free in salt water, creating
significant opportunities in shipping and floating-dock construction. And through interactions with
global automakers that were driven by Lean Six Sigma, POSCO developed 21 varieties of high-grade
steel designed to meet special industry needs, such as coated steel that paint adheres to more easily.
Lean Six Sigma analysis soon led POSCO to another realization: In order to expand its products
and markets, the company would have to expand
its operations. Although China is the world’s big-
gest producer of steel, and therefore a competi- Lean Six Sigma:
tive threat to steel manufacturers, the expanding
Does Your Company Have What It Takes?
gap between China’s production capabilities and
rapidly rising demand provided a growth oppor-
Companies adopting Lean Six Sigma in hopes of becoming more innova-
tunity for POSCO. To fill this gap, the company
tive can improve their chances of success by addressing the following
has orchestrated 14 joint ventures and invested
key issues:
US$780 million in China. Just a decade ago, that
investment figure was zero.
Using Lean Six Sigma’s relentless focus on • Leadership. Lean Six Sigma programs with a high degree of CEO com-
mitment generate a much faster, and more effective, transformation.
customer demands, POSCO developed process
and IT innovations that dramatically reduced
finished steel inventories and cut lead times from • Scope. Broadly applying Lean Six Sigma increases its impact; success
often stems from using Lean Six Sigma to align disparate business units
28 days to just 14 days by 2003. At the same
and to influence relationships with both customers and suppliers.
time, however, the company’s focus on custom-
er needs created new challenges. For example,
POSCO found that filling orders faster left too • Strategic linkages. Applying Lean Six Sigma as part of corporate
strategy development processes sends a clear message that manage-
many partly used steel slabs, which hurt margins.
ment teams are serious about making an enduring change.
Determined to meet customer needs profitably,
POSCO developed sophisticated production
scheduling algorithms that enabled it to pack

September 2008 Business Performance Management 13

 multiple orders on a single slab. This allowed the company to optimize slab utilization, and profitability,
Through Lean Six while still responding rapidly to customer demand.
Sigma, POSCO As the Lean Six Sigma way of thinking spread across POSCO, virtually no area of the busi-
ness was off-limits. The company was equally comfortable (and confident) applying the approach
has produced over to corporate strategy and budgeting as manufacturing and logistics. And it’s important to note that
$1 billion in the company’s strategic priorities did not stay static after the first Lean Six Sigma-inspired strategic
planning effort. POSCO uses the methodology to maintain a perpetual watch over customer needs
financial gains, and market opportunities. Since initially identifying shipping and automotive, the company has added
including strong construction to its list of strategic priorities.
Through its Lean Six Sigma efforts, POSCO has produced over US$1 billion in financial gains
savings and record to date, including strong savings and record sales volumes. Even in 2001, the first year of its Lean Six
sales volumes. Sigma initiative, when 25-year-low prices hit other steelmakers and their investors hard, POSCO
achieved double-digit profitability. By 2005, in less than four years, the company had transformed
itself from a regional, low-cost producer into a global, value-added provider of high-quality steel.
POSCO is now the third-largest steelmaker worldwide. It also ranks high in terms of efficiency and
profitability and has been selected as “the world’s most competitive steel firm” for three consecutive
years in a global study conducted by World Steel Dynamics.
For POSCO, the domino effect of innovation led to a wholesale corporate transformation. As
Lean Six Sigma steadily infiltrated the thought processes of employees and company leaders, innova-
tion in one area triggered transformation in another. For example, the business-model decision to
focus on high-potential segments such as the auto industry inspired new, innovative steel products.
These new products, in turn, led to new processes to produce higher-grade steel. The ripples of innova-
tion created through the Lean Six Sigma program enabled POSCO to accomplish a top-to-bottom
transformation — from government-owned business to profitable private enterprise, from low-cost
producer to value-added provider, and from regional player to global competitor.

Market Share and Margins Surge at ScottishPower

In 2001, ScottishPower found itself losing market share in the recently deregulated U.K. retail
energy marketplace. In addition, regulators who were responsible for maintaining a safe, reliable
energy supply were beginning to express concerns over recurring customer service complaints about
the company. ScottishPower needed to reverse the trend quickly. It decided to try to regain a mar-
ket-leading position by radically overhauling its customer service and sales operations. Defying the
notion that Lean Six Sigma works primarily for manufacturing firms, ScottishPower decided to use the
approach to drive innovation in its services-based business. It launched Lean Six Sigma by establish-
ing a “business transformation” function and training hundreds of employees.
Very quickly, the Lean Six Sigma approach alerted ScottishPower that its initial assumptions about
why customers were leaving were off-base. As it turned out, many of the company’s customers were
departing when they moved from one home to another. When they called to cancel their service, Scot-
tishPower customer service representatives followed their scripts precisely but never inquired whether a
caller might need service elsewhere. They were extremely efficient, but not effective.
Once Lean Six Sigma exposed this market-share leak, ScottishPower instituted a “hot key” process
by which callers who were changing residences were transferred to advisers who could offer service
at the new home. The company also began offering financial incentives to customer service reps to
encourage the transfers. Because Lean Six Sigma forced an end-to-end inspection of the customer
life cycle, ScottishPower was also able to design a new process that notified a salesperson that the new
inhabitant at a customer’s recently vacated address might need utility service. So instead of losing one
customer when someone moved from one home to another, the firm turned the event into an oppor-
tunity to end up with two customers.
In its initial wave, ScottishPower launched 130 Lean Six Sigma projects. In addition to the proj-
ects related to customers who were moving, the company initiated a targeted marketing campaign
that boosted use of direct debit payments by 14 percent, a simplified sign-up process for business
customers that led to a 20 percent increase in acquisition, and new meter-reading processes with lower
costs and higher accuracy. All together, the Lean Six Sigma projects helped ScottishPower expand
from 3.2 million to 5.1 million customers in just four years. This contrasts sharply with the trend of
declining market share for many of the energy providers with which ScottishPower competes for a
relatively stable number of households. To date, ScottishPower has realized a total of US$170 million
in additional revenue and cost savings through its Lean Six Sigma initiatives.

14 Business Performance Management September 2008

 Although it is not a manufacturing company, ScottishPower used the specificity and data it
generated through Lean Six Sigma to turn its business around. Instead of blindly marketing to
Industry leaders are
enhance its corporate image, ScottishPower was able to identify the real reasons for its customers’ using Lean Six Sigma
dissatisfaction and defection, then redesign those processes that actually impacted its customer rela-
tionships. The company no longer needed to rely on guesses or assumptions; it had facts. In the end,
to bring to light
the cost of regaining its market share through Lean Six Sigma was much lower than a traditional innovation
mass-marketing approach.
opportunities that
Assessing Your Own Innovation Climate have far-reaching
The successful companies we studied took a deliberate detour from the traditional approach
to operational improvement. By using Lean Six Sigma in a broader, more strategic fashion, they
impacts on
uncovered innovation opportunities across their business — not just in operations. In the process, their business.
they were able to improve business performance and establish an organizational culture that was
more naturally inclined to innovate.
As we analyzed these Lean Six Sigma efforts, we identified four shared, distinguishing fea-
tures that set their approach to the methodology apart from those with a traditional operational
improvement mind-set. All of our successful innovators had:

An innovation vision based on factual customer and market insights. In our case study com-
panies, leaders crafted a compelling vision based on a keen understanding of market demands and of
their own capabilities. Their objectives were explicit and were few enough in number to enable focus.

Leadership committed to perpetual innovation. CEOs and business-unit leaders played

active, enthusiastic roles in Lean Six Sigma. They were clearly committed to making an indelible
organizational change, not just launching another initiative.

Alignment across the extended enterprise. The strategic innovation vision was used as a
unifying force to align disparate business units and influence supplier and customer relationships.

Organizational capabilities that made innovation habitual. At the outset, these companies’
Lean Six Sigma initiatives involved a period of intense training, dedicated resources, and a bubble
of projects that jump-started organizational transformation. But over time, as the mind-set became
more mainstream, these companies established enduring processes that helped drive continuous
innovation throughout the organization.

The challenges these companies faced are not unique. Their peers around the world are feeling
similar pressure to innovate. The pivotal question is whether your organization is equipped to do so
— and to do so in a sustainable manner. A company that wants to assess its preparedness for devel-
oping an innovation culture must answer several questions: Do you have a clear vision of where you
want your company to be in two years, in five years, and in 10 years? How closely is this vision tied
to the needs of your current and target customers — and is your understanding of these needs based
on actual assessments or assumed information? Will your vision require innovations in your business
model, in your products or services, or in your markets? What will you need to do at the opera-
tional level to enable and drive innovation? And what changes will be required for your management
approach, organizational structures, metrics, and skills to support innovation? How are you making
innovation happen more systematically; are you establishing the right environment?
CEOs might be tempted to downplay the importance of operations strategy and related manage-
ment approaches such as Lean Six Sigma, thinking of them in terms of process improvement and
cost reduction. But this perspective is competitively shortsighted. Industry leaders — such as the
companies in our study — are using Lean Six Sigma approaches to bring to light significant innova-
tion opportunities that have far-reaching impacts on their businesses. Certainly their operations are
changing dramatically, but so are their products and services; their target markets; and, in some cases,
even the fundamental design of their business model.
The successes of the companies we researched are not anomalies. Through the discipline of Lean
Six Sigma, the CEOs and business-unit leaders in these organizations have substantially improved
business performance and permanently reoriented their organizations’ mind-set, creating the type of
environment where innovation can flourish.

September 2008 Business Performance Management 15