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Sustaining Alignment of Operations Strategy

 

Most new business ventures fail to make it past their first year. The obvious explanation is that firms fail to reconcile market requirements and operations resources because it is all too easy either to misinterpret customer requirements or fail to develop the requisite operational capabilities. At the same time, history is littered with companies that had their moment of competitive glory but then faded or disappeared for ever.

They may have effectively reconciled operational resources and market requirements to achieve alignment at one point in time. Yet, subsequently they failed to sustain this position. And while many other factors, such as macroeconomic shifts and exchange rate fluctuations, have a huge influence on the success of organizations, the ongoing battle to reconcile resources and requirements to achieve sustainable alignment is clearly of great importance. This emphasizes the idea that operations strategy formulation should not be a one-off event. Strategies will be formed repeatedly over time in order to take into account changes in both operations resources and market requirements. At each of these ‘formulation episodes’ (which may be both frequent and informal), a key objective is likely to be the retention of ‘alignment’. Sometimes this will mean maintaining alignment during an increase in both operations resource capabilities and market requirements. More realistically, even the most successful long-run firms will experience differing degrees of alignment between market requirements and their operational resources.

For 20 years Dell had exhibited remarkable growth in the PC market. Yet, by the mid 2000s, although still the largest seller of PCs in the world, growth had started to slow down and the company’s stock market value had been downgraded. The irony of this is that, what had been one of the company’s main advantages, its direct sales model using the internet and its market power to squeeze price reductions from suppliers, were starting to be seen as disadvantages.
Some commentators claimed that, although the market had changed, Dell’s operating model had not. Over the 20 years Dell had developed a radically different and very successful set of operations based on an extremely efficient supply chain, low inventories, modular product designs that allowed it to customize to its individual customer requirements, and a direct link to customers. All of this allowed it to sell robust computers at low prices. Some of the questions raised by commentators focused on Dell’s size. Perhaps it had grown so big that its lean supply model was no longer appropriate? How could a $56 billion company remain lean, sharp and alert? Other commentators pointed out that Dell’s rivals had also now learnt to run efficient supply chains. (‘Getting a 20 year competitive advantage from your knowledge of how to run supply chains isn’t too bad.’) However, one of the main factors was seen as the shift in the nature of the market itself. Sales of PCs to business users had become largely a commodity business with wafer-thin margins, and this part of the market was growing slowly compared with the sale of computers to individuals.

Selling computers to individuals provided slightly better margins than the corporate market, but they increasingly wanted up-to-date computers with a high design value, and most significantly, they wanted to see, touch, and feel the products before buying them. This was clearly a problem for a company like Dell who had spent 20 years investing in its telephone and later, internet-based sales channels. Also, Dell’s early attempts to move into products other than PCs, such as televisions, were also hindered by its lack of physical stores. What all commentators agreed on was that in the fast moving and cut-throat computer business, where market requirements could change overnight, operations resources must constantly develop appropriate new capabilities.

‘Static’ and ‘dynamic’ sustainability
The two basic models for assuring sustainability are:

  •   the use of ‘static’ mechanisms which defend a given position;
  •   the use of ‘dynamic’ mechanisms which encourage innovation and change.

‘Static’ or defensive approaches to sustainability
‘Static’ mechanisms for achieving sustainability are concerned with preventing competitors from attacking existing market and resource positions, rather than trying to move to an entirely new position. So to some extent, it is a defensive rather than offensive approach. An operation can seek to identify the market isolating (barriers to entry) and resource isolating (barriers to imitation) mechanisms that minimize change and act to keep a lock on a specific resource/requirement position. It can do this using internal and external approaches.

Internal approaches exploit the idea that we have used before; that operations resources can be considered particularly valuable if they are scarce, difficult to move, difficult to copy or difficult to find substitutes for. Because they are difficult to replicate, such resources act to sustain competitive advantage by preventing competitors replicating their advantage. External mechanisms are based on the idea that the overall performance of a firm will depend on how well its strategy and its actions take into account the specific structure of the industry in which it is competing. In particular, the work of Michael Porter has been hugely influential in understanding this view. The forces Porter refers to can be summarized as:
(a) the bargaining power of suppliers and buyers;
(b) the threat of potential market entrants;
(c) the threat of substitute products/services; and
(d) the challenge from existing competitive rivals.

‘Dynamic’ or offensive approaches to sustainability
Ultimately, even in the most isolated of market niches, customer requirements evolve and, as a result, operational capabilities also need to evolve. So, in addition to exploiting existing barriers to entry and imitation, operations can raise their game through innovation and change in order to achieve sustainability. Doing this involves the operation actively moving up the line of alignment and achieving a balance between market requirements and operations resources at a higher level.

For instance, prior to the launch of the Federal Express ‘next day’ delivery service (‘for when it absolutely, positively has to be there overnight’) market analysis suggested that few organizations needed such a fast and dependable service. Once launched, however, early adopters of the service, such as global industrial firms and professional and financial services, obtained competitive advantage from the speed and dependability benefits of overnight mail. As a result, increasing numbers of firms began to use the service. Although rivals eventually began to imitate the services, for a number of years this radical operating innovation proved to be hugely profitable for Federal Express, which, in effect, had gone to market with an entirely new set of capabilities delivering significantly improved speed and dependability performance.

The strategy that proves the most effective is the one that people will try to block or imitate. Innovations are soon countered in response by others that are stronger. The quality revolution in manufacturing industry, for example, is widely accepted, but most firms that have survived the past 15 years (in the automotive sector, for example) now achieve much higher levels of quality performance, reflecting greater depth of operational capability. Yet, their relative position has in many cases not changed. Their competitors who have survived have only done so by achieving similar levels of quality themselves.

Learning, appropriation and path dependency
For any operation to achieve ‘dynamic’ sustainability, its operations strategy needs to address three important issues:

  •   How can an operations strategy encourage the learning necessary to make sure that operations knowledge is carried forward over time?
  •   How can an operations strategy ensure that the organization appropriates (captures the value of) the competitive benefits which are derived from any innovations?
  •   How can an operations strategy take into account the fact that innovations have a momentum of their own and are strongly path dependent (they are influenced by what has happened before)?

Organizational learning
In uncertain environments any organization’s ability to pre-plan or make decisions in advance is limited. So, rather than adhering dogmatically to a predetermined plan, it may be better to adapt as circumstances change. And, the more uncertain the environment, the more an operation needs to emphasize this form of strategic flexibility and develop its ability to learn from events. Generally, this strategic flexibility depends on a learning process which concerns the development of insights and knowledge, and establishes the connections between past actions, the results of those actions, and future intentions. The crucial issue here is an essentially pragmatic and practical one, ‘How does an operations strategy encourage, facilitate and exploit learning, in order to develop strategic sustainability?’ Initially this requires us to recognize that there is a distinction between single- and double-loop learning.

Single- and double-loop learning
Single-loop learning occurs when there is repetitive association between input and output factors. Statistical process control, for instance, measures output characteristics from a process, such as product weight, telephone response time, etc. These can then be used to alter input conditions, such as supplier quality, manufacturing consistency, staff training, with the intention of ‘improving’ the output. Every time an operational error or problem is detected, it is corrected or solved, and more is learned about the process, but without questioning or altering the underlying values and objectives of the process.

Single-loop learning is of great importance to the ongoing management of operations. The underlying operational resources can become proficient at examining their Sustainable operations strategies therefore also need to emphasise learning mechanisms that prevent the operation becoming too conservative and thereby effectively introduce delays and inappropriate responses to major change decisions. Double- loop learning, by contrast, questions fundamental objectives, service or market positions or even the underlying culture of the operation. This kind of learning implies an ability to challenge existing operating assumptions in a fundamental way, seeking to re-frame competitive questions and remain open to any changes in the competitive environment. But being receptive to new opportunities sometimes requires the abandonment of existing operating routines at certain points in time – sometimes without any specific replacement in mind. This is difficult to achieve in practice, especially as most operations tend to reward experience and past achievement (rather than potential) at both an individual and group level.

An operation needs both the limited single-loop learning, so it can develop specific capabilities, and the more expanded experience of double-loop learning. Single-loop learning is needed to create consistency and stability.At the same time, operations need double-loop learning for continual reflection upon their internal and external objectives and context. There has to be a continual balancing act if a sustainable position is to be  developed. Anoperation may even have distinct phases or locations where it emphasizes single- or double-loop learning, where companies will periodically engage in double- loop learning, searching to challenge accepted values and objectives while at the same time maintaining some (single-loop) operational routines. Inevitably perhaps, this means a degree of tension between preservation and change. For an operations strategy this tension is particularly keenly felt. The need for managers to question and challenge what is currently practized is clearly important but at the same time, operations are largely responsible for delivering the already established organzational mission.

Appropriating competitive benefits
One of the most surprising aspects of innovation is that, even if change works, and even if a market is created for a new product or service, there is no guarantee that the innovating operation will benefit commercially from the results. A critical question to ask in all strategic decisions is, ‘who actually captures the profits?’ Powerfully innovative firms like Xerox in the US (who invented many of the core personal computer and interface application concepts) and EMI in the UK (who developed one of the most widespread medical revolutions – magnetic resonance imaging) both failed to gain full competitive benefit from their efforts. The issues of appropriation (i.e. getting the benefit from innovation) are particularly significant for operations strategy because, ‘partnership’ relationships have become more important. Products and services are often developed jointly with customers, and companies are increasingly actively sharing knowledge with suppliers. For example, firms such as Bose have adopted particularly close relationships with suppliers, often involving exchanges of key staff. It is argued that the benefit for the customer is instant access to ‘rich’ supplier expertise on a range of current and future product issues. The main benefit for the supplier is the ‘opportunity’ to learn of ‘potential’ new contracts. Issues of long-term intellectual property rights can become very difficult to manage in such circumstances.

Path dependencies and development trajectories
History matters when it comes to operations strategy. Very few operations have a completely blank sheet (or ‘greenfield’ scenario) when it comes to options and choices.
Current resource and requirement positions act to constrain the future development paths, or trajectories, of the operation. In other words, operations capabilities are path dependent. For example, when chemical giant Monsanto first embarked upon their strategy to develop a biotechnology business, they had great difficulties in hiring new staff because they had no pre-existing capabilities for new staff to join, hence no visible career path, no guarantee of appropriate facilities, rewards and recognition and so on.

The influence of path dependency on sustainability is best summed up by the idea of capability and market trajectories. An operation may have been pursuing a particular strategy in each of its decision areas over a period of time. The pattern of these decisions will have become well established within the decision-making culture of the operation to the extent that the pattern of decisions may have established its own momentum. The organization may have developed particular skills at making decisions to support its strategies and may be building upon the learning which it acquired from previous similar decisions. The decision area has developed its own trajectory. This may have both positive and negative effects. For example, a clothing retailer may have an operations strategy which includes aggressive capacity expansion. The result is that the company succeeds in capturing significant and profitable market share. For one or two years its skills at identifying, acquiring and commissioning new stores is a major factor in its ongoing success. However, its competitors soon start to adopt a similar expansion strategy and the company finds it increasingly difficult to maintain its market share. Yet, the policy of capacity expansion is so entrenched within the company’s decision making that it continues to increase its floor space beyond the time when it should have been consolidating, or even reducing, its overall capacity. The trajectory of its capacity strategy, which was once a significant advantage, is now in danger of undermining the whole company’s financial viability. What was once a core capability of the company has become a core rigidity.

The same idea applies to the performance objectives which reflect market requirements. If an operation is used to thinking about quality, or speed, etc. in a particular way it will find it difficult to reconsider how it thinks about them internally and how it communicates them to its customers.

Again, there is a momentum based on the trajectory of previous decisions. And again, this can have both positive and negative effects. Strong market-based trajectories can both lead to market success and expose companies to market vulnerability when challenged by radically new products and services. For example, Digital Equipment Corporation once dominated the minicomputer market. It was renowned for understanding its customers’ requirements, translating these into products which matched its customers’ requirements, and developing operations to support its product/market strategy. But eventually it was its very expertise at following its existing customers’ requirements that caused it to ignore the threat from smaller and cheaper personal computers.
Clayton Christensen, of Harvard Business School, has studied companies which found themselves in this position precisely because these firms listened to their customers, invested aggressively in new technologies that would provide their customers with more and better products of the sort they wanted, and because they carefully studied market trends they lost their positions of leadership; there are times at which it is right not to listen to customers …

The innovator’s dilemma
Both market and capability trajectories are brought together in what Christensen calls the innovator’s dilemma, the dilemma being that, especially when faced by radical shifts in the technological or operating model of a product or service, meeting long established customer needs can become an obstacle, rather than an enabler, of change. Christensen divides technologies into sustaining and disruptive technologies. Sustaining technologies are those that improve the performance of established products and services along the same trajectory of performance which the majority of customers have historically valued.

Disruptive technologies are those that, in the short term, cannot match the performance that customers expect from products and services. They are typically simpler, cheaper, smaller and sometimes more convenient, but they do not often provide conventionally enhanced product or service characteristics. However, all technologies, sustaining or disruptive, will improve over time. Christensen’s main point is that, because technology can progress faster than the requirements of the market, disruptive technologies will eventually enter the zone of performance which is acceptable to the markets.

One example Christensen uses is that of the electric car. At the moment, no electric car can come close to the performance characteristics of internal combustion engines. In that sense, this technology is not an immediate threat to existing car or engine manufacturers. However, the electric car is a disruptive technology in so much as its performance will eventually improve to the extent that it enters the lower end of the acceptable zone of performance. Perhaps initially, only customers with relatively undemanding requirements will adopt motor vehicles using this  technology. Eventually, however, it could prove to be the dominant technology for all types of vehicle. The dilemma facing all organizations is how to simultaneously improve product or service performance based on sustaining technologies, while deciding whether and how to incorporate disruptive technologies.

 

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