Danone’s path to B Corporation 2
Stage 4 Give an
2.2 Diagnostic question: Does operations strategy reflect business strategy (top-down)?
A top-down perspective often identifies three related levels of strategy: corporate, business and functional. A corporate strategy should position the corporation in its global, economic, political and social environment. This will consist of decisions about what types of business the group wants to be involved in, what parts of the world it wants to operate in, how to allocate its cash between its various businesses, and so on. Each business unit within the corporate group will also need
OPERATIONS PRINCIPLE Operations strategies should reflect top-down corporate and/or business objectives.
Figure 2.3 The four perspectives on operations strategy Top–down perspective Re ect what the whole
group or business wants to do
Learn from day-to-day activities so as to cumulatively build strategic capabilities
Bottom-up perspective
Outside-in perspective Translate intended market position so as to provide the required objectives for operations decisions Operations
strategy Inside-out perspective
Develop resources and processes so that their capabilities can be exploited in their chosen markets
2.2 Diagnostic question: Does operations strategy re ect business strategy (top-down)
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51 to put together its own business strategy that sets out its individual mission and objectives. This business strategy guides the business in relation to its customers, markets and competitors, and also defines its role within the corporate group of which it is a part. Similarly, within the business, functional strategies need to consider what part each function should play in contributing to the strategic objectives of the business. The operations, marketing, product/service development and other functions will all need to consider how best they should organise themselves to support the busi- ness’s objectives. This is why it is often called the ‘top-down’ perspective on operations strategy.
Although this rather neat relationship between the levels of corporate, business and oper- ations strategy may seem a little ‘theoretical’, it is still a powerful idea. What it is saying is that in order to understand strategy at any level, one has to place it in the context of what it is trying to do (the level above) and how it is trying to do it (the level below). At any level, a good top-down perspective should provide clarity and connection. It should clarify what an operations strategy should be prioritising, and give some guidance on how the strategy is to be achieved.
Correspondence and coherence
However, developing any functional strategy from a business strategy is not a straightforward task. There are ambiguities to clarify and conflicts to be reconciled. Inevitably, business strat- egy consists of aggregated and approximate objectives. It should give an overall direction, but cannot spell out every detail of how a function should interpret its objectives. Yet, there should be a clear, explicit and logical connection between each functional strategy and the business strategy in which they operate. Moreover, there should also be a clear, explicit and logical connection between a functional strategy and the decisions taken within the function. In other words, there should be clear correspondence between a business’s strategy and its operations strategy, as there should also be between an operations strategy and the individual decisions taken within the operations function.
But although correspondence between the levels of strategy is necessary, it is not all that is required. Operations strategy must also be coherent, both with other functional strategies and within itself. Coherence means that those choices made across or within functions should not pull it in different directions. All decisions should complement and reinforce each other in the promotion of the business’s and the operations objectives. Figure 2.4 illustrates these two ideas of correspondence and coherence.
The concepts of the ‘business model’ and the ‘operating model’
Two concepts have emerged over the last few years that are useful in understanding the top- down perspective on operations strategy (or at least the terms are new – one could argue that the ideas are far older). These are the concepts of the ‘business model’ and the ‘operating model’.
Put simply, a ‘business model’ is the plan that is implemented by a company to gener- ate revenue and make a profit (or fulfil its social objectives if a not-for-profit enterprise). It includes the various parts and organisational functions of the business, as well as the revenues it generates and the expenses it incurs. In other words, what a company does and how it makes money from doing it. More formally, it is ‘a conceptual tool that contains a big set of elements and their relationships and allows [the expression of] the business logic of a specific firm. It is a description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating, marketing, and delivering this value and relationship capital, to generate profitable and sustainable revenue streams.’
The four perspectives on operations strategy
So, as an enterprise moves through each of these stages, what exactly should an operations strategy do? Different authors have slightly different views and definitions of operations strat- egy. However, between them, four ‘perspectives’ emerge (see Figure 2.3):
1. Operations strategy should reflect what the whole group or business wants to do in a ‘top- down’ manner.
2. Operations strategy should translate the enterprise’s intended market position so as to provide the required objectives for operations decisions (sometimes called the ‘outside-in’
perspective).
3. Operations strategy should learn from day-to-day activities so as to cumulatively build stra- tegic capabilities in a ‘bottom-up’ manner.
4. Operations strategy should develop its resources and processes so that their capabilities can be exploited in their chosen markets (sometimes called the ‘inside-out’ perspective).
None of these four perspectives alone gives the full picture of what operations strategy is. But together they provide some idea of the pressures that go to form the content of operations strategy. We will treat each of them in turn.
2.2 Diagnostic question: Does operations strategy reflect business strategy (top-down)?
A top-down perspective often identifies three related levels of strategy: corporate, business and functional. A corporate strategy should position the corporation in its global, economic, political and social environment. This will consist of decisions about what types of business the group wants to be involved in, what parts of the world it wants to operate in, how to allocate its cash between its various businesses, and so on. Each business unit within the corporate group will also need
OPERATIONS PRINCIPLE Operations strategies should reflect top-down corporate and/or business objectives.
Figure 2.4 Correspondence and coherence are the two requirements of the top-down perspective of operations strategy
Business strategy
Process
design Supply chain
management Capacity management Operations
structure and scope Product/service
innovation … etc.
Operations Finance IT
Marketing
HR … etc.
Correspondence between operations strategy and operations decisions
Correspondence between business and operations strategy
Coherence across functional strategies
Coherence within operations strategy
Worked example
Innovation at Micraytech (Part 1, top-down)
Micraytech is a metrology systems company that devel- ops integrated measurement systems for large interna- tional clients in several industries; it is part of the Micray Group, which includes several high-tech companies. It has grown through a strategy of providing products with a high degree of technical excellence and innovation, together with an ability to customise its systems and offer technical advice to its clients. The Group has set ambi- tious growth targets for the company over the next five years and has relaxed its normal ‘return on sales’ targets to help it achieve this. As part of this strategy, Micraytech attempted to be the first in the market with all appropri- ate new technical innovations. From a top-down per- spective, its operations function, therefore, needed to be capable of coping with the changes that constant product
innovation would bring. It developed processes that were flexible enough to develop and assemble novel compo- nents and systems, while integrating them with software innovations. The company’s operations staff realised that they needed to organise and train their staff to under- stand the way technology is developing so that they could put in place the necessary changes to the operation. It also needed to develop relationships with both existing and potentially new suppliers who could respond quickly when supplying new components. The top-down logic here is that everything about the operation – its pro- cesses, staff and its systems and procedures – must, in the short term, do nothing to inhibit, and in the long term actively develop, the company’s competitive strategy of growth through innovation.
One synthesis of literature shows that business models have a number of common elements:
1. The value proposition of what is offered to the market.
2. The target customer segments addressed by the value proposition.
3. The communication and distribution channels to reach customers and offer the value proposition.
4. The relationships established with customers.
5. The core capabilities needed to make the business model possible.
6. The configuration of activities to implement the business model.
7. The partners and their motivations for coming together to make a business model happen.
8. The revenue streams generated by the business model constituting the revenue model.
9. The cost structure resulting from the business model.
One can see that this idea of the business model is broadly analogous to the idea of a ‘business strategy’, but implies more of an emphasis on how to achieve an intended strategy as well as exactly what that strategy should be.
The concept of an ‘operating model’ is more operational than that of a ‘business model’
and there is no universally agreed definition. Here we define it as a ‘high-level design of the organisation that defines the structure and style which enables it to meet its business objec- tives’. Ideally, an operating model should provide a clear, ‘big picture’ description of what the organisation does and how it does it. It defines how the critical work of an organisation is carried out. It should provide a way to examine the business in terms of the key relationships between business functions, processes and structures that are required for the organisation to fulfil its mission. Unlike the concept of a business model, which often assumes a profit motive, the operating model philosophy can be applied to organisations of all types – including large corporations, not-for-profit organisations and the public sector.
Again, there is no universally agreed list of elements that an operating model should include and different organisations focus on different things, but many of the following elements are often included:
• Key performance indicators (KPIs) – with an indication of the relative importance of perfor- mance objectives.
• Core financial structure – P&L, new investments and cash flow.
• The nature of accountabilities for products, geographies, assets, etc.
• The structure of the organisation – sometimes expressed as capability areas rather than func- tional roles.
• Systems and technologies.
• Processes, responsibilities and interactions.
• Key knowledge and competence.
Note two important characteristics of an operating model. First, it does not respect conven- tional functional boundaries as such. In some ways the concept of the operating model reflects the idea that we proposed in Chapter 1. Namely, that all managers are operations managers and all functions can be considered as operations because they comprise processes that deliver some kind of service. An operating model is like an operations strategy, but applied across all functions and domains of the organisation. Second, there are clear overlaps between the
‘business model’ and the ‘operating model’, the main difference being that an operating model focuses more on how an overall business strategy is to be achieved. Also, operating models are rarely designed from first principles. Some kind of understood ‘way of doing things’ will already exist. This is why operating models often have an element of implied change or transformation of the organisation’s resources and processes. Often the term ‘target operating model’ (TOM) is used to describe the way the organisation should operate in the future if it is going to achieve its objectives and make a success of its business model. Figure 2.5 illustrates the relationship between business and operating models.
2.2 Diagnostic question: Does operations strategy re ect business strategy (top-down)