Business Strategy and Capabilities

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The concept of business strategy has existed for a very long time. Pinning down the exact date may be difficult – from The Art of War written about 2,500 years ago to the invisible hand of Adam Smith in the mid-eighteenth century – however, that is not important. The most important part in the continuum of strategy is the actual execution of strategy, because that alone produces the advantages theorized by a strategy. But the execution of a strategy does not produce advantages directly, rather it simply creates business capabilities that in turn creates the competitive advantages enabling a corporation to win.

While a lot has been said on business strategy since Michael Porter came up with his three generic strategies, most of the later concepts  are simply variations of these three. The three generic strategies of cost, differentiation, and focus  continue to be the true basis of all competitive advantage simply because these are the three lowest common denominators of all business activity that consists of selling (hence the cost) product and services (hence the differentiation) to customers (hence the focus).

The ability of a business strategy to drive the required business capabilities is the key to creating successful functional strategies such as the strategy for supply chains. While the concept of a functional strategy is not quite well main-stream yet, it happens to be the missing link in the strategy continuum for a long time – and this is the crux of my book on supply chain strategy, though lately some other people have also started talking about how capabilities mandated by the business strategy can drive the competitive advantages. 

imageIn the winter 2010 issue 61 of the strategy+business magazine, in an article titled, “How The Top Innovators Keep Winning”, the authors argue that it isn’t the amount of money companies spend on research and development that makes them successful, rather it is the particular combination of talent, knowledge, team structures, tools, and processes — the capabilities — that successful companies put together to enable their innovation efforts, and thus create products and services they can successfully take to market. I fully agree with this view point, the capabilities of a corporation are really the only distinct advantages over the competition – specially when seen in their broader context, and these capabilities are created only through a relentless pursuit of understanding what the business strategy mandates and a continuous assessment of “capability gaps” compared to the mandate.

While a lot of supply chain strategy thinking is stuck around the keywords like lean, agile, postponement, speculation, and so on – the real advantages from a supply chain can only be created after a thoughtful assessment of the business mandate and an assessment of existing capabilities. How can one go about doing that? Explore several practical methodologies and real deliverables in my book on supply chain strategy.

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© Vivek Sehgal, 2011, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my books on Supply Chain Management at Amazon.

Connecting Strategy to Supply Chain

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Going from business strategy development to creating tangible competitive advantages is a long journey. Because no strategy, however brilliant, produces results unless executed.

Therefore, to be useful, a strategy must be implemented. This means that the strategy that establishes the business goals, through which competitive advantage will be created, must then be expanded to articulate actions that will take the business toward its strategic goals. This whole process can be thought of as consisting of three basic steps:

1. Strategy development, that is, the process of evaluating the internal and external imperatives, analyzing the industry, products, and customers, and defining an overriding principle of how the company will try to grow. This is equivalent to defining the ‘‘what’’ and ‘‘why’’ of the problem.

2. Strategy planning is the process of assessing the current state of the corporation and evaluating various alternatives that can be potentially considered to achieve the stated imperatives of the business strategy. This step consists of analysis, evaluation, articulation, and prioritization of these alternatives, in effect defining the ‘‘how’’ of the problem.

3. Strategy implementation is the process of starting and managing the individual projects to implement the favored alternative from step two.

image While most companies have some level of formally defined process for developing a business strategy (step 1 above) and an ongoing slew of projects (step 3 above) creating new capabilities and enhancing existing ones, most do not have a formal process for the activities identified in the strategy planning step. Strategy+business, a management magazine also recognized this gap in a recent article, even though they did not distinguish between the planning and execution phases as above. While the planning phase focus on gap-imageassessment of a firm’s business capabilities, therefore determining what must be done, strategy execution emphasizes the actual execution activities: program management, project management, change management, communication, training, and all other organizational aspects for successful execution. While that is important, the intermediate analysis provided by strategy planning is the missing link in most modern corporations in any recognizable formal fashion. In absence of this planning step, corporations fail to establish and prioritize the execution efforts that are aligned with the goals of the business strategy, and fail to identify and prioritize the filling of specific capability gaps.

This middle step of strategy planning, is what I call functional strategy. This is the step where firms must assess their business capabilities and determine (1) what capabilities they must build that are aligned to their business strategy and (2) how they must build them to create differentiators to create competitive advantage. This is where the business functions such as supply chain fit-in. This is where a firm needs to assess their current and required supply-chain capabilities to identify the gaps and prioritize their investments in building those missing capabilities. This also gets emphasized in the quoted article above.

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Joining the business strategy to the functional strategy by assessing your supply-chain capabilities is the key to building successful supply chains. The final piece of execution is what I call deployment strategy falls into place when real projects enabling specific process are planned, budgeted, spun off, and executed. Understanding this continuum from the business strategy to functional to deployment is key to successfully creating competitive advantages to support your business objectives. For more on the process of building effective supply chains, read my latest book on supply chain strategy.

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© Vivek Sehgal, 2011, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my books on Supply Chain Management at Amazon.

Effective Supply Chains and the Organization

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In a recent article, McKinsey argues that to be successful, future supply chains will require a rethinking of the internal organizations – where the focus is on collaboration rather than competition. I could not agree more.

The conventional departmental silos in the companies were originally a simple outcome of complex business processes without any intelligent system support. As computer systems evolved, the gap between the complexity of a process and the ability of a technology solution to support the process has narrowed consistently. This has provided businesses with new opportunities to break-down these silos and create nearly integrated (and automated) processes with real-time feedback among processes. Starting with the ERP systems in 1980s, this trend has continued with systems like MRP, DRP, and the current supply-chain systems that have the ability to provide an end-to-end automation of most complex business processes to reduce costs, increase efficiencies and enrich information quality that improves the overall experience for everyone involved in the process – employees, customers, vendors, and service providers.

However, the organizational change to leverage such powerful integrated process capabilities has somewhat lagged behind. Modern supply chains can cover a very large scope of the operations – from demand forecasting through purchasing and manufacturing to the distribution and service of a firm’s products and services. Unfortunately, a large number of companies still view these through the conventional silos of departmental thinking and in doing so, potentially sacrificing some of the efficiencies possible through such systems, though the trend is encouraging. An AMR survey (Supply Chain Gets a Promotion by Kevin O’Marah) found that the number of respondents who said that their supply chain reports to the president/CEO/GM, who owns overall P&L responsibility rose from 51% in 2009 to 62% in 2010. While the integrated view is evolving, 62% is still a long ways to go!

imageIn the referenced article, Is your top team undermining your supply chain, McKinsey makes similar arguments and primarily lists three tensions among organizational silos, supply chain versus sales, supply chain versus service, and supply chain versus product proliferation. I agree with this view – while the availability of packaged software solutions and technologies brings capability parity to an extent, the true competitive advantage is generally a result of a complex interplay of business capabilities, process superiority, and organizational capabilities. To be truly effective, supply chains of the future will not only have to design and build effective capabilities to address ever-evolving business needs, but also effective organizations to leverage such capabilities.

 

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© Vivek Sehgal, 2010, All Rights Reserved.

Want to know more about supply chains? How they work, what they afford, and how to design one? Check out my books on Supply Chain Management at Amazon.

Book Review: Supply Chain as Strategic Asset

Excerpts from Husdal.com: “Is there something like a Supply Chain Nirvana, where it all comes together and where a firm’s supply chain  is perfectly aligned with its business strategy, thus creating the competitive advantage the firms needs to stay ahead of its rivals? Vivek Sehgal may have found the recipe in his latest book, Supply Chain as Strategic Asset. In this tightly packed 300-page volume Sehgal shows how important it is to have a top-down-driven approach to supply chain management and how important it is to link strategy and execution, from the board room to the  very last delivery guy.  The supply chain is a firm’s core asset, and perhaps its most important asset, and a firm is only as good or as bad as its supply chain. While a bit overwhelming at first, this book is filled with many important real-life lessons, and K-Mart versus Wal-Mart seems to be one of Sehgal’s favorite subjects.”

 

Read the complete book review by Jan Husdal on the book titled: Supply Chain as Strategic Asset – Key to Reaching Business Goals.

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© Vivek Sehgal, 2011, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my books on Supply Chain Management at Amazon.

Advantage: Bar Codes (for now)

Supply Chain Digest’s series on Supply Chain by the Numbers for Week of Jan. 13, 2011 cites a Kroger pilot with read rates exceeding 98.5%. The pilot is built around reducing the manual imagetouches during the check-out process. As the products move through the tunnel, their bar-codes are read and accounted for, an OCR (optical character recognition) system supports the bar-code reader by identifying products where the bar-codes may be unreadable. Any items that could not be “read” using the bar-code reader or the OCR device are handled manually at the end of the tunnel to finish the check-out. This was showcased in the recently concluded NRF 2011.

The system can potentially reduce billions of manual touches during the check-our process as well as provide substantial improvements in loss-prevention and inventory accuracy processes. All of which should provide Kroger with definite cost-savings and a much improved replenishment capability in its stores.

Another possible inference? SC Digest says that, “the development of the system is obviously a bet that item-level RFID tags capable of being read en-masse or at high speeds are not coming to the grocery industry any time soon – else Kroger or any retailer would not have made the investment in this UPC-based technology”. This view is corroborated by Kroger’s CEO as well.

Where does that leave RFID at least for now? Well, RFID is in a great revival as well – with a host of retailers adopting RFID technology to manage their store replenishments from their back-rooms as well as to manage their receiving and shipping operations in the warehouses by adopting RFID tags at case, pallet, and/or LPN levels, in addition to renewed efforts to kick-start the item-level tagging.

American Apparel reports 99+% inventory accuracy in their store pilots, Wal-Mart re-launched its RFID efforts at item-level with apparel. J.C. Penney has been another big retailer actively toying with the RFID tags to better manage its supply chain as well as stores. Once the technology matures and item-level tagging becomes mainstream, the POS & check-out processes should also be able to leverage RFID tags!

 

© Vivek Sehgal, 2011, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my books on Supply Chain Management at Amazon.

New Supply Chain Design Imperative

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If you have been following along this series on supply chain strategy so far, you would have gone through the conventional supply chain strategies of Lean, Agile, Speculation, and Postponement. In each one of these strategy reviews, I explained why they fall short of guiding a supply chain design in any meaningful way, finally introducing the supply chain sphere of influence and the need to identify what drives your supply chain.

With that context, let me introduce the new imperative for designing effective supply chains. This is based on recognizing the two basic facts about designing supply chain strategy:

  1. Supply chains can only manage demand, supply, inventory, and resources. Therefore, any strategy mandating supply chains to do anything else is not going to help. The supply chain driver is largely determined by the characteristics of the industry, products, and customers. The combinations of these attributes establish the basic nature and constraints of the supply chain capability requirements and therefore, it is largely not an option to be selected.
  2. Supply chains exist only to support a business, therefore, a supply chain strategy must sub-ordinate to the business strategy. This means that supply chain strategy cannot be designed in a vacuum, but must be aligned with an explicit business strategy. This is an explicit choice on behalf of the business and depends on the business model that a firm wants to pursue.

These two principles are shown graphically in the picture below. On the horizontal axis, identify the main supply chain driver from the supply chain sphere of influence. On the vertical axis, identify the main business driver (I have shown only cost or differentiation) that defines your business strategy/model. Remember these two align with the two core principles above. The business strategy driver helps in designing the main supply chain process orientation, for example, a cost-driven business will drive supply chain processes designed for asset-efficiency and high resource-utilization. The supply chain driver helps in designing how the exceptions will be handled within the supply chains – what happens when supplies don’t match demand, or enough inventories don’t exist within the network. Together, these drivers help design processes that match the organizational business objectives while simultaneously addressing the operational needs. And that together creates competitive advantage.

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For example, if you selected a demand driven supply chain with cost as business strategy (cell 1 above, think of a typical retail supply chain), you would be designing processes with the intent of creating operational efficiencies while a supply chain with inventory as a driver and differentiation as the business strategy (cell 2, think of a typical aircraft maintenance supply chain) will focus on processes to provide flexibility in quick inventory deployments within the network. These characteristics are shown the picture below.

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Of course, the supply chain design in the other cells intersecting at other possible combinations will follow their own prominent characteristics to suit the combined effect of business driver and the nature of supply chain operations mandated by the industry, product, and customer characteristics. These are discussed in detail in my book on supply chain strategy.

This is a new design imperative, a new concept, for designing effective supply chain strategy and building processes that create competitive advantages aligned with the needs of the business strategy of the firm – that is the basic theme of leveraging supply chains as an asset. While the conventional supply chain strategies will give you all the buzz-words, it is only through understanding the business goals and operational requirements, that you can actually build a supply chain strategy that is effective.

Next, I will cover some of the key characteristics of supply chain processes that must be designed for building competitive advantage and reaching your business goals.

 

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© Vivek Sehgal, 2010, All Rights Reserved.

Want to know more about supply chains? How they work, what they afford, and how to design one? Check out my books on Supply Chain Management at Amazon.

What Drives Your Supply Chain?

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The objective of presenting the supply chain’s sphere of influence was to establish a very basic, though often missed, fact that supply chains can directly affect only these four components that they directly control. Therefore, any strategy we formulate for supply chain design must directly establish the behavior of one or more of these four components. Of course, one of these four components must be identified as the primary driver to resolve plan conflicts and to establish the pecking order among the supply chain processes.

image Which one of the four components should ideally drive the supply chain in a firm? Should it be demand, supply, inventory, or resources? The answer depends on a number of factors, some of which we have seen in the review of the existing supply chain strategies. The industry segment, types of products, attributes of demand, attributes of supply, and finally, the selected business strategy are all factors that need to be analyzed to answer the question of what must drive a supply chain. A grocery firm with cost as the business strategy will have a dramatically different supply chain compared to that of a grocery store that selects differentiation as its business strategy. Both supply chains will have some common characteristics because they are both in the same industry segment (retail, grocery). For example, they will both require the ability to replenish their stores frequently for fresh produce and perishables, they will both have to develop temperature controlled distribution capabilities, and so on. However, the grocer with differentiation as its business strategy may decide to differentiate itself by developing a supply chain for its produce that tracks its whole life cycle from the farm-to-the-shelf and provides this visibility to the customers to verify the claims of freshness, organic growth, sustainable farming, fair labor, or any similar differentiators that the customers may pay for. While development and maintenance of such capabilities will add supply chain costs for this grocer, it would also create a passionate and loyal customer base for them. In contrast, the supply chain capabilities for the grocer with the cost-based strategy may simply focus on more traditional ways of sourcing from the cheapest suppliers, optimizing inventories and shipping costs, and discounting products near their expiration dates.

The differentiation based business strategy, therefore, drives its own requirements for the supply chain capabilities that are different from those of the cost based business strategy, while both the firms must also have a basic set of common capabilities. In this example, what is driving the two supply chains? While both of the grocery retailers need to be demand-driven, the one with differentiation as their business strategy must balance this against the supply driven aspects, simply because they will have to manage many more constraints on the supply side, controlling quality through the assortment they carry, the sourcing that must support their policy of freshness, fair labor practices, organic fertilizers, and so on.

Unlike the current strategies that tend to conclude that the supply chain must be lean or agile, speculation- or postponement-oriented, thinking through the core sphere of supply chain influence generally points to a process group belonging to one of the four components, which becomes the focus for creating competitive capabilities. This allows a specific guidance from the strategy to design, rather than providing a high-level general directive of being lean or agile. By process group, I mean the collective supply chain processes that are used to manage any one of the four components of the supply chain sphere of influence. In the example of the two grocers, the grocer with the cost-based business strategy will likely focus on inventory and resource process groups to leverage cost advantages, while the grocer with the differentiation business strategy will focus on supply process group. Remember though that these process groups only identify where the firm has the most potential to create advantages, even though they will have to develop capabilities in all process groups that bring them up to par with the competitors.

In this view of supply chain strategy, one of the four core spheres of influence is identified to be the primary sphere. This helps the firm identify where they can derive the most competitive advantages and operate optimally. For example, the demand-driven supply chain will evaluate all alternatives in response to a change with the view of minimizing their impact on the demand plans, a supply-driven supply chain will do the same to minimize their impact on the supply plans, and so on.

Retail supply chains are great examples of demand-driven supply chains. Examples for supply-driven supply chains would be in industries where supplies are limited or controlled tightly by a small set of suppliers – for example, Toyota’s manufacturing plan in China making batteries for their hybrids that needs rare-earths which are controlled by the Chinese government. Resource driven supply chains are those where the resource skills are rare or capital costs are high (requiring very high utilization) or set-up changes very expensive – for example a steel manufacturer with blast furnace whose supply chain will be managed around the furnace utilization and set-up changes. A good example of inventory driven supply-chains will be an airline’s maintenance operations where the availability of critical spares for their planes can impact their profitability in a substantial way by keeping their productive assets out of service.

In one of my next posts, I will explain how the main supply chain driver (from its sphere of influence) must be leveraged to align with the business strategy of the firm to create a practical supply chain strategy that can actually support your business requirements while simultaneously creating competitive advantages.

 

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© Vivek Sehgal, 2010, All Rights Reserved.

Want to know more about supply chains? How they work, what they afford, and how to design one? Check out my books on Supply Chain Management at Amazon.