Strategy Implementation Session 4 – Processes

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Strategy ImplementationSession 4 Processes
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Agenda

• Admin - Online grading tool should be up to date
  with case assignments by Thur.
• Strategy Processes
• Zara Discussion
• Zara Update
• Break
• Processes

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Where are we?
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Process Topics

• Why are processes such an important building
  block for strategy?
• How do firms typically manage processes?
• How can firms manage processes to support typical
  competitive positions (i.e. cost or
  differentiation)?

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I. Why are processes the next building block for
strategy implementation?

• Organizations shared activities

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Processes build excellence through links between
activities, functions people.
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Activity systems show the fit between processes
at a firm.

• Operational effectiveness is not enough for
  strategy.
• Too easy to imitate
• Activity systems that fit are greater than the
  sum of their parts.
• Fit 1 Consistency -gt no conflicts
• Fit 2 Mutually reinforcing -gt each activity
  makes the other more valuable
• Fit 3 Optimized effort -gt organizations
  substitute activities across the value chain.
• An activity system that fits requires tradeoffs
  firms cannot do all things and maintain fit.
• This can support positions that other firms
  cannot imitate because of the tradeoffs.

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Organizationally-embedded Southwest Airlines
Activity System
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Southwests tradeoffs make it difficult for
competitors to imitate.

• Southwest Airlines
• Low Price
• Short Routes
• No Frills
• Activities
• Point-to-Point
• One Aircraft - Boeing 737
• High of Aircraft per Route
• No Meals
• Flexible/ Lower Staffing

• American Airlines
• Premium Priced
• Short, Long, Intl
• Variety
• Activities
• Hub Spoke
• Multiple Aircraft
• Low of Aircraft per Route
• Meals Service
• Higher Staffing

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Linked activities more likely to support VRIN
capabilities.

• Valuable
• gt Shared activities must be designed to deliver
  a cost or differentiation advantage.
• Rare
• gt Most firms and managers neglect linkages
  between activities.
• Difficult to Imitate
• gt Imitating isolated best practice wont
  deliver close to the value of the system, and
  prior commitments may make wholesale adoption
  impossible.
• Non-substitutable
• gt Take time and history to build, not generally
  available on product markets, service providers
  will tend to capture value

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Zara Questions

• How sustainable do you think Zaras competitive
  advantage will be? How might it fail?
• How well does Zaras advantage travel globally?
• What is the best way to grow the Zara chain?
• What other strategic recommendations would you
  make to the Inditex CEO?

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Zara My Take
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II. How do firms typically manage business
processes?

• Six Sigma
• Increase quality by driving down variance.
• Best Practice
• Look to match competitors.
• Business Re-engineering
• Remap activities from scratch. Eg credit quotes
  for IBM sales.
• Focus efficiency reliability

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Some Shortcomings of typical approaches.

• Six Sigma
• Exclusive focus on reliability.
• Diminishing returns.
• Best Practice
• Inherently low target matching not surpassing
  competitors.
• Invisible complements practices are less
  valuable in isolation.
• Business Re-engineering
• Often miss difficult links.
• ? Strategic reasoning suggests that firms neglect
  approaches that introduce variance (innovation)
• Firms need to focus on linkages between
  processes, not just reliability of isolated
  processes.

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III. How do firms build strategic capabilities
from processes?

• Value Chain
• Map and analyze your firms processes
• Coherent systems
• Reconfigure the value chain for new game
  strategies
• Support Strategic Positions
• Typical positions Generic Strategies
• Cost Advantage Differentiation

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Identify Resources Capabilities Through Value
Chain Analysis

• What Sequence of Activities Are Involved In
  Creating Value?

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• Value Chain analysis is a useful tool to
  decompose high level capabilities, such as
  innovation at 3M or low-cost operations at
  Walmart to specific practices.
• Beyond simply using a value chain analysis to
  map out the sequence of activities, we need to
  ask the following
• What is the cost structure of each of these
  activities?
• How do these activities link to the value chains
  of our suppliers customers?
• What are our strengths and weaknesses?

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Reconfiguring the value chain for new strategies.
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Generic Business Level Strategies
Source of Competitive Advantage
Cost
Uniqueness
Cost Leadership
Differen- tiation
Broad Target Market
Breadth of Competitive Scope
Focused Differen- tiation
Focused Low Cost
Narrow Target Market
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Build advantages through linkages in the Value
Chain
Channel VC
Supplier VC
Firm VC
Buyer VC
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Linkages within the Value Chain

• Lead to competitive advantage through
  optimization or coordination
• Optimization reflect tradeoffs among different
  activities to achieve the same overall result at
  lower cost or higher differentiation for
  customers
• Eg More costly product design may reduce service
  costs
• Coordination the ability to coordinate linkages
  often reduces cost or differentiates product
• Eg Reduce inventory through coordination
• Common linkages
• Between support and primary activities
• Eg product design affects manufacturing
• More subtle ones between primary activities
• Eg Inspection of incoming goods can reduce
  quality assurance costs later in production
• Linkages arise from 4 basic causes
• The same function can be performed in different
  ways conformance through purchasing, manuf,
  inspect
• Primary activities can be improved by support
  activities better scheduling reduces sales
  force travel time
• Activities inside the firm reduce costs in the
  field demo, sales, or servicing
• Quality assurance can be performed in many
  different ways.
• External Linkages with suppliers customers or
  channels
• Suppliers possible to benefit both the firm and
  the supplier by jointly optimizing activities
• Eg delivery, stocking, coordination, electronic
  interface, assembly
• Channel similar coordination can enhance both
  firms performnace

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Applying the Value Chain to Cost Analysis
--Plant scale for each --
Level of quality targets -- No. of dealers
component -- Frequency of defects
-- Sales / dealer -- Process
technology -- Level of
dealer -- Plant
location support
-- Run length -- Frequency of
defects -- Capaciity utilization
under warrenty
IDENTIFY COST DRIVERS
PARTS INVEN- TORIES
RD DESIGN ENGNRNG
TESTING, QUALITY CONTROL
GOODS INVEN- TORIES
PURCH- ASING
COMPONENT MFR
SALES MKITG
ASSEMBLY
DISTRI- BUTION
DEALER CUSTOMER SUPPORT
Prices paid --Size of commitment -- Plant
scale --Cyclicality depend on
--Productivity of -- Flexibility of production
predictability of sales -- Order size
RD/design -- No. of models per
plant --Customers --Putchases per --No.
frequency of new -- Degree of automation
willingness to wait supplier models --
Sales / model -- Bargaining power -- Wage
levels -- Supplier location -- Capacity
utilization
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Applying the Value Chain to Cost Analysis
IDENTIFY LINKAGES
PRCHSNG PARTS RD
COMPONENT ASSMBY TESTING GOODS
SALES DSTRBTN DLR
INVNTRS DESIGN MFR
QUALITY INV
MKTG CTMR


Designing different models around common
components and platforms reduces manufacturing
costs
Consolidation of orders to increase discounts,
increases inventories
Higher quality parts and materials reduces costs
of defects at later stages
Higher quality in manufacturing reduces warranty
costs
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Identifying Differentiation Potential
MIS that supports fast response capabilities
Training to support customer service excellence
Unique product features. Fast new product
development
FIRM INFRASTRUCTURE HUMAN RESOURCE
MANAGEMENT TECHNOLOGY DEVELOPMENT INBOUND
OPERATIONS OUTBOUND MARKETING SERVICE LOG
ISTICS LOGISTICS SALES
Customer technical support. Consumer credit.
Availability of spares
Quality of components materials
Defect free products. Wide variety
Fast delivery. Efficient order processing
Building brand reputation
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Linking the Value Chains across Firms
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Service technical support Sales Distribution Inv
entory holding Manufacturing Design
Engineering Inventory holding Purchasing
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2
3
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Distribution Marketing Canning Processing Inventor
y holding Purchasing
Supplies of steel aluminum
CANNER
CAN MAKER
1. Distinctive can design can assist canners
marketing activities. 2. High manufacturing
tolerances can avoid breakdowns in customers
canning lines. 3. Frequent, reliable delivery can
permit canner to adopt JIT can supply. 4.
Efficient order processing system can reduce
customers ordering costs. 5. Competent technical
support can increase canners efficiency of plant
utilization.
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Questions to ask when youve identified a
valuable linkage

• What will support learning and improvements with
  this coordination?
• Each link should be a key locus of learning and
  improvement.
• eg Store design team in Zara, JIT logistics
  and lean manufacturing at Toyota
• What other distant practices would support this
  linkage and further learning/optimization?
• eg Pilot practices support gate crews and
  turnaround at Southwest Jetblue, Logistics and
  flexible manufacturing support design practices
  at Zara.

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Risks from Processes ? Inertia and
Inflexibility

• Core capabilities become core rigidity.
• Inertia
• Prior strategic commitments
• Competency traps
• When a child learns to use a hammer, everything
  looks like a nail.
• All the dominant approaches to process management
  reinforce rather than reduce this tendency.

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Wrap-up on Processes

• Processes are the foundation of capabilities
• Shared activities are the essence of organization
  and a powerful source of VRIN capabilities (that
  is, activities leading to economic rents)
• Dominant approaches to processes focus on
  reliability and imitation.
• Very effective at driving out variance
• but this can inhibit innovation, and doesnt
  tend to lead to unique strategic positions
• Do not put the focus on valuable linkages between
  different processes
• Linked processes support valuable strategic
  positions
• Cost advantage linkages within the value chain
• Differentiation advantage linkages across the
  value chain

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Common Missteps with Processes

• Effectiveness is not a strategy.
• Entirely focused on initiatives that develop
  efficiency and reliability.
• Do not enable feedback and learning that lead to
  valuable links across the value chain.
• Failing to create a consistent system that
  embraces tradeoffs.

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Next up - People

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• Lehman Questions
• How does Rivkin define his goals for equity
  research at Lehman?
• Does Rivkin target or avoid hiring outside stars
  for the group?
• What were some of the key moves that catapulted
  Lehmans research group up the rankings?