Strategy Implementation Session 4 – Processes

1. Image not licensed for web distribution. - Link here. Strategy ImplementationSession 4 – Processes

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

3. Where are we?

4. 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)?

5. Firm Infrastructure Human Resource Management Technology & Product Development Inbound Logistics Operations Outbound Logistics Marketing/ Sales Service MARGIN I. Why are processes the next building block for strategy implementation? • Organizations = shared activities

6. Finance Strategy Oper. Mktg. Acctg. H.R. Processes build excellence through links between activities, functions & people.

7. 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 -> no conflicts • Fit 2: Mutually reinforcing -> each activity makes the other more valuable • Fit 3: Optimized effort -> 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.

8. No baggage transfers No meals Limited passenger amenities No seat assignments No connections with other airlines Frequent, reliable departures Short-haul, point-to-point routes between midsize cities and secondary airports Limited use of travel agents 15-minute gate turnarounds Standardized fleet of 737 aircraft Automatic ticketing machines Lean, highly productive ground and gate crews Very low ticket prices High compensation of employees High aircraft utilization “Southwest, the low-fare airline” Flexible union contracts High level of employee stock ownership Organizationally-embedded: Southwest Airline’s Activity System

9. 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, & Int’l Variety Activities Hub & Spoke Multiple Aircraft Low # of Aircraft per Route Meals & Service Higher Staffing Southwest’s tradeoffs make it difficult for competitors to imitate.

10. Linked activities more likely to support VRIN capabilities. • Valuable => Shared activities must be designed to deliver a cost or differentiation advantage. • Rare: => Most firms and managers neglect linkages between activities. • Difficult to Imitate: => Imitating isolated “best practice” won’t deliver close to the value of the system, and prior commitments may make wholesale adoption impossible. • Non-substitutable: => Take time and history to build, not generally available on product markets, service providers will tend to capture value

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

12. Zara My Take

13. 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 • Image not licensed for web distribution. • Link here.

14. 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.

15. III. How do firms build strategic capabilities from processes? • Value Chain • Map and analyze your firm’s processes • Coherent systems • Reconfigure the value chain for new game strategies • Support Strategic Positions • Typical positions = “Generic Strategies” • Cost Advantage & Differentiation

16. Firm Infrastructure Human Resource Management Technology & Product Development Inbound Logistics Operations Outbound Logistics Marketing/ Sales Service MARGIN Identify Resources & Capabilities Through Value Chain Analysis • What Sequence of Activities Are Involved In Creating Value?

17. 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?

18. Reconfiguring the value chain for new strategies.

19. 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

20. Build advantages through linkages in the Value Chain Channel VC Supplier VC Firm VC Buyer VC

21. 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 R&D 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 predictabilityof sales -- Order size R&D/design -- No. of models perplant --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

22. Applying the Value Chain to Cost Analysis IDENTIFY LINKAGES PRCHSNG PARTS R&D 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

23. 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 LOGISTICS 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

24. Linking the Value Chains across Firms 1 Service & technical support Sales Distribution Inventory holding Manufacturing Design Engineering Inventory holding Purchasing 5 2 3 4 Distribution Marketing Canning Processing Inventory holding Purchasing Supplies of steel & aluminum CAN MAKER CANNER 1. Distinctive can design can assist canners’ marketing activities. 2. High manufacturing tolerances can avoid breakdowns in customer’s 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 canner’s efficiency of plant utilization.

25. Questions to ask when you’ve 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.

26. 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.

27. 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 doesn’t 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

28. 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.

29. Next up - People • Image not licensed for web distribution. • Link here. 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 Lehman’s research group up the rankings?