Strategy and Operations in Supply Chain

What is Strategy?

Strategy is how the mission of a company is accomplished. It unites an organization, provides consistency in decisions, and keeps the organization moving in the right direction. Operations and supply chain management play an important role in corporate strategy. The strategic planning process involves a hierarchy of decisions.

Senior management, with input and participation from different levels of the organization, develops a corporate strategic plan in concurrence with the firm’s mission and vision, customer requirements (voice of the customer), and business conditions (voice of the business). The strategic plan focuses on the gap between the firm’s vision and its current position.

It identifies and prioritizes what needs to be done to close the gap, and it provides direction for formulating strategies in the functional areas of the firm, such as marketing, operations, and finance. Strategy in each of the functional areas must be internally consistent as well as consistent with the firm’s overall strategy.

Steps in Strategy Formulation

Strategy formulation consists of five basic steps:

• Defining a primary task.
  
• Assessing core competencies.
  
• Determining order winners and order qualifiers.
  
• Positioning the firm.
  
• Deploying the strategy.

Primary Task

The primary task represents the purpose of a firm—what the firm is in the business of doing. It also determines the competitive arena. As such, the primary task should not be defined too narrowly. For example, Norfolk Southern Railway is in the business of transportation, not railroads. Paramount is in the business of communication, not making movies. Amazon’s business is providing the fastest, easiest, and most enjoyable shopping experience, while Disney’s is making people happy! The primary task is usually expressed in a firm’s mission statement.

Mission statements clarify what business a company is in—for Google, it’s “organizing the world’s information”; for Hallmark, it’s creating a “more emotionally connected world”; for Twitter, it’s giving “everyone the power to create and share ideas and information instantly, without barriers”; and for Merck, it’s “saving and improving human life.”

Mission statements are the “constitution” for an organization, the corporate directive, but they are no good unless they are supported by strategy and converted into action. Thus, the next step in strategy formulation is assessing the core competencies of a firm.

Core Competencies

Core competency is what a firm does better than anyone else, its distinctive competence. A firm’s core competence can be exceptional service, higher quality, faster delivery, or lower cost. One company may strive to be first to the market with innovative designs, whereas another may look for success arriving later but with better quality.

Based on experience, knowledge, and know-how, core competencies represent sustainable competitive advantages. For this reason, products and technologies are seldom core competencies. The advantage they provide is short-lived, and other companies can readily purchase, emulate, or improve on them.

Core competencies are more likely to be processed, a company’s ability to do certain things better than a competitor. Thus, while a particular product is not a core competence, the process of developing new products is. For example, while the iPod was a breakthrough product, Apple can turn out hit product after hit product (e.g., iPhone, iPad, MacBook, iWatch, etc.) that gives it that competitive advantage.

Core competencies are not static. They should be nurtured, enhanced, and developed over time. Close contact with the customer is essential to ensuring that a competence does not become obsolete. Core competencies that do not evolve and are not aligned with customer needs can become core rigidities for a firm. Walmart and Dell, seemingly unstoppable companies in their field, went astray when they failed to update their competencies to match changes in customer desires.

For Dell, the low cost and mail-order delivery of computers did not match the customer’s desire to see and test computers before purchase or to receive personalized after-purchase customer service. For Walmart, their big-box retail model is being challenged by Amazon’s online shopping model.

Walmart tried smaller stores with little success and may now convert some of their larger stores into warehouses for shipping out customer orders. To avoid these problems, companies need to continually evaluate the characteristics of their products or services that prompt customer purchase; that is, the order qualifiers and order winners.

Order Winners and Order Qualifiers

A firm is in trouble if the things it does best are not important to the customer. That is why it is essential to look toward customers to determine what influences their purchase decisions. Order qualifiers are the characteristics of a product or service that qualify it to be considered for purchase by a customer. An order winner is the characteristic of a product or service that wins orders in the marketplace—the final factor in the purchasing decision.

For example, when purchasing an 8K TV, customers may determine a price range (order qualifier) and then choose the product with the most features (order winner) within that price range. Or they may have a set of features in mind (order qualifiers) and then select the least expensive player (order winner) that has all the required features.

Order winners and order qualifiers can evolve, just as competencies can be gained and lost. Japanese and Korean automakers initially competed on price but had to ensure certain levels of quality before the U.S. consumer would consider their product. Over time, the consumer was willing to pay a higher price for the assurance of a superior-quality Japanese car. Price became a qualifier, but quality won the orders. Today, high quality, as a standard of the automotive industry, has become an order qualifier, and innovative design or superior gas mileage wins the orders.

Positioning the Firm

No firm can be all things to all people. Strategic positioning involves making choices—choosing one or two important things on which to concentrate and doing them extremely well. A firm’s positioning strategy defines how it will compete in the marketplace—what unique value it will deliver to the customer.

An effective positioning strategy considers the strengths and weaknesses of the organization, the needs of the marketplace, and the positions of competitors. Let us look at firms that have positioned themselves to compete on cost, speed, quality, and flexibility.

Competing on Cost

Companies that compete on cost relentlessly pursue the elimination of all waste. In the past, companies in this category produced standardized products for large markets. They improved yield by stabilizing the production process, tightening productivity standards, and investing in automation.

Today, the entire cost structure is examined for reduction potential, not just direct labor costs. High-volume production and automation may or may not provide the most cost-effective alternative. A lean production system provides low costs through disciplined operations.

Competing on Speed

More than ever before, speed has become a source of competitive advantage. The Internet has conditioned customers to expect an immediate response and rapid product shipment. Service organizations such as McDonald’s, LensCrafters, and FedEx have always competed on speed.

Now manufacturers are discovering the advantages of time-based competition, with build-toorder production and efficient supply chains. In the fashion industry where trends are temporary, Gap’s six-month time-to-market can no longer compete with the nine-day design-to-rack lead time of Spanish retailer Zara.

Competing on Quality

Most companies approach quality in a defensive or reactive mode; quality is confined to minimizing defect rates or conforming to design specifications. To compete on quality, companies must view it as an opportunity to please the customer, not just a way to avoid problems or reduce rework costs.

To please the customer, one must first understand customer attitudes toward and expectations of quality. One good source is the American Customer Satisfaction Index compiled each year by the American Society for Quality and the National Quality Research Center. Examining recent winners of the Malcolm Baldrige National Quality Award and the criteria on which the awards are based also provides insight into companies that compete on quality.

Competing on Flexibility

Marketing always wants more variety to offer its customers. Manufacturing resists this trend because variety upsets the stability (and efficiency) of a production system and increases costs. The ability of manufacturing to respond to variation has opened up a new level of competition.

Flexibility has become a competitive weapon. It includes the ability to produce a wide variety of products, to introduce new products and modify existing ones quickly, and to respond to customer needs.

Competing on Innovation

Companies that compete on innovation establish a corporate culture that encourages risk-taking, challenges the status quo, accepts failure as part of the learning process, and celebrates successes. Three such companies are Apple, Google, and 3M.

Apple thinks differently to create incredibly fresh, beautiful game-changing designs. Google’s open culture has produced such innovations as Google Street View, Google Fiber, Google People Finder (for disasters), Google Driverless Vehicles, and Google Glass. 3M defines itself as a global innovation company that never stops inventing.

Ranging from Post-It Notes to micro-needle skin patches designed to replace hypodermic needles, 3M produces hundreds of small innovations each year that improve how products or services operate.

Like Google, 3M sets aside 20% of its engineers’ time to be spent on projects of their choosing. 3M also gives out $100,000 genius grants to its employees and has its venture capitalist program that supports disruptive, early-stage innovations outside of the company’s existing portfolio.