Dow Corning’s operations strategy 3
4. Is the firm organised to capture the value of the resource? Do you have within your business the systems, culture, capacity and motivation to exploit any capabilities embedded in your
resources and processes? A firm must have the formal reporting and control mechanisms, leadership, and the informal and cultural environment that allows the strategic resources to develop.
There are two important points to remember about the VRIO framework. First, all these factors are time dependent. A capability may be valuable now, but competitors are unlikely to stand still. In addition, rarity and inimitability are not absolutes and, with time, can be undermined by competitor activity. Even the ability to exploit capabilities can erode if operations leadership is lacking. Second, although the conventional order in which to treat each of these elements is as we have done here (which is why it’s called the VRIO framework), it maybe is best to think of the ‘O’ of ‘organisation’ as a necessary prerequisite. Without the ability to exploit strategic resources, they are of little use. However, with effective organisation there is the potential for operations resources to contribute to competitiveness. If their capabilities are also valuable, then parity with competitors should be possible. With the addition of rarity, a short- to medi- um-term competitive advantage is possible. With the addition of inimitability, competitors will find it difficult to match capabilities in anything but the long term. This sequence is shown in Figure 2.8.
Figure 2.8 The four features of Barney’s VRIO framework
Source: From Slack, N. (2017) The Operations Advantage, Kogan Page, reproduced by permission.
Are your capabilities
valuable?
Are your capabilities
rare?
Are your capabilities inimitable?
Is operations organised to exploit your capabilities?
Operations contributes to
sustainable competitive advantage
Organisation = potential to contribute to competitiveness
Organisation + value = at least parity with competitors
Organisation + value + rarity = short-/medium-
term competitive advantage
Organisation + value + rarity + inimitability = long-term competitive
advantage
2.6 Diagnostic question: Are the four perspectives of operations strategy reconciled?
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2.6 Diagnostic question: Are the four perspectives of operations strategy reconciled?
As we stressed earlier, none of the four perspectives alone can give a full picture of any organi- sation’s operations strategy. But together they do provide a good idea of how its operations are contributing strategically. For example, Figure 2.9 brings together the four perspectives of the Micraytech operations strategy. For Micraytech, the four perspectives seem to be reasonably compatible, with its operations strategy fitting together from whichever perspective is chosen.
In other words, each perspective is ‘reconciled’ with the others. This is one of the conditions for an effective operations strategy – the four perspectives must be reconciled.
The operations strategy matrix
The operations strategy matrix is one method of checking the reconciliation between the inside-out and outside-in perspectives. It brings together (a) mar- ket requirements and (b) operations resources to form the two dimensions of a matrix. It describes operations strategy as the intersection of a company’s performance objectives and the strategic decisions that it makes. In fact, there are several intersections between each performance objective and each deci- sion area (however one wishes to define them). If a business thinks that it has an operations strategy, then it should have a coherent explanation for each of the cells in the matrix. That is, it should be able to explain and reconcile the intended links between each per- formance objective and each decision area. The process of reconciliation takes place between what is required from the operations function (performance objectives), and how the operation tries to achieve this through the set of choices made (and the capabilities that have been devel-
Worked example
Innovation at Micraytech (Part 4, inside-out)
The modular approach to product design proved to be a big success for Micraytech. However, it posed two chal- lenges for the company’s operations. First, the technical aspects of integrating some of the more sophisticated modules proved difficult. This affected only a small pro- portion of customers, but they were the ones that were willing to pay premium prices for their systems. The only potential solution was to attempt to develop the interface modules that would allow previously incompatible mod- ules to be integrated. When this solution was first pro- posed the relevant skills were not present in the company.
It had to recruit specialist engineers to start on the design of the interfaces. During this design process the company realised that it could potentially open up a new market.
As the firm’s chief operating officer (COO) put it, ‘If we designed the interfaces carefully, we could not only integrate all of our own in-house modules, we could also integrate
other firms’ instruments into our systems’. This led to the sec- ond set of challenges: to develop relationships with possi- ble suppliers, who might very well be competitors in some markets, so that they were willing to supply their equip- ment for inclusion in Micraytech’s systems. Not only this, but the firm also had to ensure that the internal processes, of its sales engineers consulting with clients, its design department designing the system to clients’ needs, and its procurement managers negotiating with equipment sup- pliers, all operated seamlessly. ‘The success that we have enjoyed can be put down to two key capabilities. The first was to buy-in the engineering skills to create technically dif- ficult interfaces. That led to us understanding the value that could be gained from a seamless internal and external supply chain. Both of these capabilities are not totally impossible for other firms to copy, but they would be very difficult for them to get to our level of excellence.’ (COO Micraytech)
OPERATIONS PRINCIPLE An operations strategy should articulate the relationship between operations objectives and the means of achieving them.
Figure 2.9 Top-down, outside-in, bottom-up and inside-out perspectives of the Micraytech operations strategy
Group building corporate capability in high- technology products and services
Micraytech business grows through systems-based innovations
Experiment with ‘modular’ design of key products and components Customers seem to be confused by continual
system innovation, also costs increasing Top-down
Bottom-up
Growth market is
in
‘integrated metrology systems’
Maintain technical skills, increase software development,
data exchange and client liaison skills.
Maintain position in
‘individual metrology devices’
Outside-in Inside-out
Not all modules can be integrated
Need to buy- in technical capabilities for interface
modules
Develop supply capability to include suppliers’
equipment for client
needs
Operations develops modular-based hi- tech systems that provide highly customised exibility and innovation at
relatively low cost through close relationships with both clients and
suppliers
Figure 2.10 shows a simplified example of how the operations strategy matrix can be used.
A parcel courier service competes primarily on its quality and dependability of service, with price (cost) and innovation also being fairly important. The range of services offered is not unimportant, but not of prime concern. Figure 2.10 illustrates that the company believes its quality of service is going to be influenced largely by investment in ‘track and trace’ technol- ogy (which allows customers to check where their delivery is) and its knowledge management system (which allows improvements in its processes to be recorded and shared). Other key intersections are as illustrated in the figure. Note that not all cells are occupied. This is not because there is no relationship between the performance objectives and the decisions that these cells represent, it is rather that the decisions are not seen as being particularly important in the context of the whole strategy.
Reconciling market requirements and operations capabilities over time – the
‘line of fit’ model
The operations strategy matrix is a good model for testing whether market requirements and the operations capability perspectives fit together. It makes explicit the specific aspects of mar- ket requirements (quality, speed, dependability, flexibility, cost, etc.) and the decisions that support operations capability (design, delivery and development). The disadvantage is that it gives little sense of the dynamics of reconciliation – how the balance between market require- ments and the operations capability changes over time. This is where the ‘line of fit’ model is useful. It is based on the idea that, ideally, there should be a reasonable degree of alignment, or
‘fit’, between the requirements of the market and the capabilities of the operation. Figure 2.11 illustrates the concept of fit diagrammatically. The vertical dimension represents the (outside-in) nature of market requirements either because they reflect the intrinsic needs of customers, or because their expectations have been shaped by the firm’s marketing activity. This includes such factors as the strength of the brand, or reputation of the degree of differentiation, or the
2.6 Diagnostic question: Are the four perspectives of operations strategy reconciled?
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extent of market promises. Movement along the dimension indicates a broadly enhanced level of market ‘performance’. The horizontal scale represents the (inside-out) nature of the firm’s operations resource and process capability. This includes such things as the performance of the operation in terms of its ability to achieve competitive objectives, the efficiency with which it uses its resources and the ability of the firm’s resources to underpin its business. Movement along the dimension broadly indicates an enhanced level of ‘operations capability’.
If the market requirements and operations capability of an operation are aligned they would be positioned diagrammatically on the ‘line of fit’ in Fig- ure 2.11. ‘Fit’ is to achieve an approximate balance between ‘market require- ments’ and ‘operations capability’. So when fit is achieved, firms’ customers do not need, or expect, levels of operations capability that cannot be supplied.
Nor does the operation have strengths that are either inappropriate for market needs or remain unexploited in the market.
Figure 2.10 The operations strategy matrix defines operations strategy by the intersections of performance objec- tives and operations decisions – in this case for a parcel delivery courier
How market requirements are met
Quality of service Track and trace
technology Knowledge
management system
Vehicle maintenance programme Customer service centre feedback Location Sorting systems
Variety of vehicles
Demand–capacity management
Route scheduling system
Process standardisation Location of depots Range of services
Delivery dependability
Innovation
Cost
Operations performance objectives
Strategic ‘design’
decisions
How operations resources are used
Strategic ‘delivery’
decisions
Operations strategy decisions
Strategic ‘development’
decisions
Figure 2.11 The ‘line of fit’ model shows how operations strategy attempts to reconcile market requirements The inside-out
perspective
The outside-in perspective
What the operations resources and processes
are particularly (or uniquely) good
at doing
What the market position of the business requires the operation to be
good at
Market requirements (Outside-in)
Operations capabilities (Inside-out)
C D
A B
Line of fit OPERATIONS PRINCIPLE
An operation positioned on the ‘line of fit’ has operations capabilities that match its market requirements.
A company that has position A in Figure 2.11 has achieved ‘fit’ in so much as its operations capabilities are aligned with its market requirements, yet both are at a relatively low level. In other words, the market does not want much from the business, which is just as well because its operation is not capable of achieving much. Over time its ambition is to move to position D, where it has also achieved ‘fit’, but at a much higher level. Other things being equal, this will be a more profitable position than position A.
However, like most strategic improvement, the company cannot always guarantee to keep on the ‘line of fit’ as it moves from A to D over time. In this case, it first improves its operations capability without exploiting its enhanced capability in its market (position B). This could be seen as a ‘waste’ of its potential to adopt a more ambitious (and possibly profitable) market position. Realising this, the company revises its marketing strategy to promote itself as being able to maintain a much higher level of market performance (position C). Unfortunately, these new promises to its market are not matched by its operations capabilities. The company is again away from the line of fit. In fact, position C is possibly even more damaging than position B.
The risk now is that the company’s market reputation will erode until it can improve its opera- tions capabilities to bring it back to the line of fit (position D).
The issue that is highlighted by positioning operations strategy relative to the line of fit is that progress cannot always be a smooth trajectory that achieves perfect balance between market requirements and operations capability. Furthermore, when an operation deviates from the line of fit there are predictable consequences. A position below the line of fit means that the operation is failing to exploit its operations capabilities. A position above the line of fit means that it risks damaging its reputation or brand by failing to live up to its market promises.
2.7 Diagnostic question: Does operations strategy set an improvement path?
An operations strategy is the starting point for operations improvement. It sets the direction in which the operation will change over time. It is implicit that the business will want operations to change for the better. Therefore, unless an operations strategy gives some idea as to how improvement will happen, it is not fulfilling its main purpose. This is best thought about in terms of how performance objectives, both in themselves and relative to each other, will change over time. To do this, we need to understand the concept of, and the arguments concerning, the trade-offs between performance objectives.
An operations strategy should guide the trade-offs between performance objectives
An operations strategy should address the relative priority of operations performance objectives (‘for us, speed of response is more important than cost efficiency, quality is more important than variety’, and so on). To do this it must consider the possibility of improving its perfor- mance in one objective by sacrificing performance in another. So, for example, an operation might wish to improve its cost efficiencies by reducing the variety of products or services that it offers to its customers. Taken to its extreme; this ‘trade-off’ principle implies that improvement in one performance objective can only be gained at the expense of another. ‘There is no such thing as a free lunch’ could be taken as a summary of this approach to managing. Probably the best-known summary of the trade-off idea comes from Professor Wickham Skinner, the most influential of the originators of the strategic approach to operations, who said:4
‘. . . most managers will readily admit that there are compromises or trade-offs to be made in designing an airplane or truck. In the case of an airplane, trade-offs would involve mat- ters such as cruising speed, take-off and landing distances, initial cost, maintenance, fuel consumption, passenger comfort and cargo or passenger capacity. For instance, no one today can design a 500-passenger plane that can land on an aircraft carrier and also break the sound barrier. Much the same thing is true in . . . [operations].’
But there is another view of the trade-offs between performance objec- tives. This sees the very idea of trade-offs as the enemy of operations improve- ment, and regards the acceptance that one type of performance can only be achieved at the expense of another as both limiting and unambitious. For any real improvement of total performance, it holds, the effect of trade-offs must be overcome in some way. In fact, overcoming trade-offs must be seen as the central objective of strategic operations improvement.
These two approaches to managing trade-offs result in two approaches to operations improvement. The first approach emphasises ‘repositioning’ per- formance objectives by trading-off improvements in some objectives for a reduction in performance in others; the second one emphasises increasing the
‘effectiveness’ of the operation by overcoming trade-offs so that improvements in one or more aspects of performance can be achieved without any reduction in the perfor- mance of others. Most businesses at some time or other will adopt both approaches. This is best illustrated through the concept of the ‘efficient frontier’ of operations performance.
OPERATIONS PRINCIPLE In the short term, operations cannot achieve outstanding performance in all its operations objectives simultaneously.
OPERATIONS PRINCIPLE In the long term, a key objective of operations strategy is to improve all aspects of operations performance.