Ch. 2: Strategy
The setting of broad policies and plans that guide the use of the firm's resources to implement its corporate strategy. A central element is operations effectiveness: performing the core business processes in a way that best implements strategic priorities at minimum cost.
Initiatives aimed at operational effectiveness (quality programs, process redesign, planning and control systems, technology) can show results within 12 to 24 months. Strategy making is itself a repeating process: a strategic analysis at least yearly (forecasting customer preferences, technology, demographics, competitors), translated into initiatives that are reviewed up to four times a year with budgets and measures, and implemented through carefully planned projects.
Competitive dimensions
| Competitive dimension | What it means |
|---|---|
| Cost or price | Producing the product or providing the service cheaply. Mostly found in commodity-like markets; since only one company can be the lowest-cost producer, many fail. |
| Quality | Design quality (the features offered, matched to customer requirements without over- or underdesign) and process quality (reliable, defect-free output that conforms to specifications). |
| Delivery speed | Delivering more quickly than rivals (e.g. repairs on site within 1 to 2 hours). |
| Delivery reliability | Delivering by the promised date or earlier (e.g. a tire supplier serving an assembly line). |
| Coping with changes in demand | Being able to raise and lower volume. |
| Flexibility and new-product introduction speed | A broad product variety plus fast development and launch of new products. |
| Other product-specific criteria | E.g. technical liaison and support, hitting a launch date, after-sale support, environmental impact, colors, size, customization. |
Trade-offs and straddling
The logic of operations focus and trade-offs is that one operation cannot excel on every dimension at once. Management must choose the critical performance parameters and concentrate resources on them. Examples: focusing on delivery speed limits product variety; low cost conflicts with speed and flexibility; high quality is often seen as a trade-off with low cost. An airline can serve meals or turn planes around fast, but doing both is inefficient.
Straddling is when a firm tries to match a competitor by adding features, services or technologies on top of its existing activities while keeping its current position (for example BMW targeting both luxury and performance segments). Because trade-offs still apply, straddling firms often lose share in both segments.
Order winners and order qualifiers
Order qualifiers are screening criteria a product must meet to be considered at all. Order winners are the criteria that differentiate the product from the qualified alternatives and win the sale. A firm must "requalify the order qualifiers" every day.
Example from the book: for a notebook computer, screen size, weight, operating system and price below a limit are qualifiers; battery life is the order winner among the laptops that qualify. For a flight, date, route and nonstop status qualify; the lowest price wins.
Implementing strategy through activities: IKEA
Strategy is delivered through a set of activities that fit and reinforce each other. IKEA targets young buyers who want style at low cost and are willing to trade service for price. Instead of large showrooms, salespeople and third-party manufacturing with 6 to 8 week delivery, IKEA uses roomlike self-service displays, designs its own low-cost ready-to-assemble furniture, has a self-serve warehouse so customers take products home the same day, and sells extra services (delivery, assembly, kitchen planning) separately. An activity-system map shows how higher-order strategic themes are implemented through clusters of tightly linked activities; competitive advantage comes from the fit among activities.
Risk in operations and supply chain strategies
Supply chain risk is the likelihood of a disruption that would impact a company's ability to continuously supply products or services. Risks fall into two groups: coordination risks from day-to-day management (handled with safety stock, safety lead time, overtime) and disruption risks from natural or man-made disasters (earthquakes, strikes, pandemics, a blocked Suez Canal). Specialization with few, geographically concentrated suppliers lowers cost but raises disruption risk; some of the most cost-effective strategies (sole sourcing, lean) are also the riskiest.
The risk management framework has three steps:
- Identify the sources of potential disruptions (natural disasters, local failures, infrastructure failures, economic failures).
- Assess the potential impact (probability and consequence), then sort into high, moderate and low impact events.
- Develop plans to mitigate the high and moderate risks using four strategies: avoid (high probability of loss), accept (mitigation costs more than tolerating), transfer (low probability, high impact: insurance, partnership, outsourcing) and limit (most common: take action to manage exposure).
Examples of matched mitigation strategies: supplier failures, use multiple suppliers; country risks, currency hedging or local sourcing; inventory risks, pool inventory and safety stock; natural disaster, contingency planning and insurance.
Productivity measurement
Productivity = Outputs / Inputs. Partial measure: output / one input (for example output / labor). Multifactor measure: output / (a group of inputs, such as labor + material + overhead). Total measure: all outputs / all inputs.
Productivity is a relative measure: 8.4 customers per labor hour means nothing until it is compared with similar operations (for example stores in a franchise) or with the same operation over time. Partial measures can use natural units (meals per labor hour, sales per square foot, kWh per ton of coal), while multifactor and total measures require a common unit such as dollars.
Worked example (solved problem): a furniture maker had output of $22,000 (x1,000) last year and $35,000 this year, with total inputs of $20,900 and $33,500. Total productivity: 22,000 / 20,900 = 1.05 and 35,000 / 33,500 = 1.04, so total productivity fell slightly, even though labor productivity rose from 2.20 to 2.33.
Sustainable strategy
A sustainable strategy meets current needs without compromising future generations and considers stakeholders (everyone influenced by the firm), not only shareholders (legal owners). The triple bottom line evaluates the firm on three criteria (also called People, Planet, Profit):
- Social responsibility: fair practices toward labor and community (no child labor, fair wages, safe workplace).
- Economic prosperity: competitive return for shareholders and lasting economic benefit to society.
- Environmental stewardship: reduce the ecological footprint, for example with cradle-to-grave assessments.
Critics argue that conflicting criteria reduce efficiency and that such goals may be affordable only for rich societies.