Energising strategy through effective operations management
May 2019 | SPECIAL REPORT: BUSINESS STRATEGY & OPERATIONS
Financier Worldwide Magazine
May 2019 Issue
The strategy of any business can be thought of in practical terms as defining what it does and what it does not do. But there is much more to it than that. Strategy defines our competitive position, our intent going forward, and the means for how we intend to improve our organisation’s activities and performance outcomes. Having an explicit strategy that is carefully formulated and then implemented helps with organisational alignment, prioritisation of actions and decisions and, importantly, good strategy provides focus.
Strategy ultimately takes effect through being enacted substantially in the operations function of an organisation, for it is in the operation that the goods and services are produced, the bulk of the assets are deployed and most of our employees do their work: making ‘the stuff’. Strategy also impacts on marketing, financial and other functions, of course. But the bulk of where competitive advantage comes from is likely to be in the operations function, where the bulk of costs, quality outcomes and delivery performance will be experienced and determined.
So, the first key aspect of strategy is to define the positioning of the firm in its market, relative to its competitors, and in responding to specific customer requirements, meaning it prioritises the ‘order winning criteria’ to specialise in prioritising low cost, or superior quality, or delivery reliability, or technical superiority, or flexibility, or some other elements that will be the fundamental reason for customer expenditure.
We will configure our operational resources very differently depending on the answer to the ‘how do we compete’ question. For example, a low-cost airline arranges its resources very differently to a full service airline, and similar will apply in every industry. Direct competition mostly occurs within market segments, much more than across them, which means that within any market segment we see companies with similar strategies and offerings striving to outcompete on similar competitive profiles in terms of their offerings. This is where the winners and losers will be decided, by which one implements its strategic position most effectively such that it can deliver best value (meaning benefits per unit of price) to the customer, of course while still making a profit and reaching its own organisational goals.
When considering our organisation’s operations, there are a set of structural decisions that must be made, as well as what we might call ‘softer’ variables that make the difference as to whether we will be on the ‘efficient frontier’ of competitiveness and effectiveness or behind it. These include the capacity of the operation, its utilisation rate, facility location, distribution arrangements, technology and process design, as well as the production approach, such as make-to-order versus make-to-stock. A key question is how the operations function can best support what marketing and sales need to satisfy the customer, hopefully at a healthy margin. There are many decisions that must be made and in the best of organisations, strategy is enacted through the joint optimisation of the marketing mix, product and service designs and the operations systems that produce them.
Aside from the primary set up and design of the business strategy and the productive operations function and activities that must work every day, there is the extremely important matter that faces every organisation: of driving forward on improvement and innovation. No matter the industry, if an organisation is not improving, then it is going backwards in relative terms, which means that the operations function must be reducing costs, improving quality and customer service, typically by 3 to 5 percent each year just to keep up.
This requires an active and systematic set of improvement initiatives to be enacted. In the best organisations, the majority of employees will be doing their primary job, and will also be generating improvement ideas and working in project teams to implement the best of them. Small improvements, often called Kaizen, can add up to a lot when they are being advanced all over the operation, and indeed the organisation. And the best firms also have some larger improvement initiatives and innovations they are working on. These innovations can be related to products and services, but also to processes, organisation design and business models.
One of the best ways to drive improvement and innovation is ‘Lean’. There are many other approaches, such as Six Sigma and Total Quality, all of which have been tried many times, with mixed success. When these initiatives are implemented by managers looking for a quick fix, they rarely succeed, yet when they are implemented as longer term ‘business improvement strategies’, they can bring marvellous benefits.
Perhaps the best-known example is from Toyota, which has been implementing Lean (Toyota calls it the Toyota Way) consistently for decades, to great effect. It is deeply built into the philosophy and practices of that company, and it rests on the foundational pillars of respect for people and continuous improvement that pervade every process, relationship and transaction in Toyota, both inside the company and with external stakeholders. The core difference between Toyota and its major competitors is not so much the product designs and the manufacturing and operations structure, but very much the differentiation it achieves through employee engagement that results in high levels of involvement in employee participation in improvement initiatives of every imaginable kind.
Toyota has been refining its approach for many decades with great energy. That explains why its profitability and market capitalisation is so much higher than most of the rest of the industry. Toyota’s market capitalisation is about double that of GM and VW, each of which produces approximately the same number of vehicles as Toyota. One of the many benefits of a consistent application of Lean principles and the humanistic foundations of Lean, is the pursuit of waste reduction. Research has shown that on average, organisations waste fully one-third of their resources, such as employee time, due to process ineffectiveness, and the best of organisations can be much better than this once they have thoroughly implemented Lean approaches.
For those of us who do not have decades to spend pursuing such a systematic capability as Toyota, there are systems and frameworks that can be effectively used by managers to comprehensively assess their organisational quality, then from that baseline, drive forward the key elements of it, that will result in a lifting of performance. The best of these are the ‘Business Excellence’ frameworks. Many organisations have achieved great benefits from such approaches, which all include the factors of leadership, people development, customer focus as core ingredients, as well as operations and process management, planning and evidence-based decision making. Organisations from manufacturers to hospitals, large and small, have used these approaches to good effect all over the world.
These business and operations improvement approaches are based on some deeper elements that must be in place for improvement to take effect and remain effective. These are the alignment of all employee efforts, the respect and dignity afforded to all, the measurement and reporting of outcomes and performance information, and the direct connection between what is good for the organisation and the rewards and recognition for those employees. This creates the energy that employees can bring to both their daily work and their improvement initiatives, or ‘discretionary work effort’. When employees are provided with good systems for doing their daily work, and support and knowledge for their improvement initiatives, then the operations function can become a truly powerful competitive weapon.
Danny Samson is professor and director of the Master of Enterprise and Master of Supply Chain Management degrees at the University of Melbourne. He can be contacted on +61 (3) 8344 5344 or by email: email@example.com.
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University of Melbourne