Linking strategy and operations
In other articles, we mention how a strategy that is both profitable and defendable is only achievable through a differentiated value proposition or a distinctive value chain.
In plain English, that means that your products should be different AND valuable to your target consumers, or to some extent they should have something that is difficult for your competitors to imitate.
Strategic positioning therefore demands clear decisions about the value that your products and services will offer, and how those products and services will be produced by your company profitably.
It requires a market strategy that identifies and defines opportunities, and an operations strategy that makes decisions about how your company will configure its value chain (assets, processes and human resources) to capture that opportunity profitably.
Although each case is unique and depends on the specific type of company and the industry where it operates, we could say that in
It then leads on to the definition of a target market, value proposition and business model, and from there it moves upstream to optimize the activities in the business’s value chain that will support the capture of those opportunities.
Although many rightly argue that a “forward” approach is also feasible, where an organization analyzes its capabilities and then goes out to find opportunities that fit its strengths, that doesn’t seem to be the norm, and I’d say that’s more a sales effort than a pure strategy formulation. Ideally, the process should flow from market opportunities to operations.
Once you understand your market positioning intentions clearly, you can define the metrics that will measure the performance and/or constraints of your operations.
Things like demand forecasts, seasonality and prices must be translated into capacity needs, dependability, flexibility and maximum allowed costs for the operational teams.
With that information, you can then set your operational priorities, that is, the factors that your operational teams must focus on to support your market strategy.
If the strategy is based on differentiation for example you may have to put more emphasis on the factors that make your products different.
In the case of Uber, to use a familiar example, the company must focus on developing the capabilities that supports its business model, in this case data analytics, geo-location and artificial intelligence, and leave cloud servers (the hardware where its application is run), car insurance and other non-critical businesses to third parties that can do a better job at them.
You need to have a clear understanding of your operational priorities, and put the corresponding plans in place to support, develop and invest in those capabilities.
With those priorities well established, you can do a better job at configuring and optimizing the activities in your value chain, defining more specific things like project capacity and making location decisions.
You must be extremely careful when evaluating capacity investments, since hard assets could eventually become stranded costs if your business doesn’t succeed as expected.
You should also consider how your proposed capacity plans could play out with the capacity plans of other companies attacking the same segments.
If too much capacity accumulates in a market, its players may be forced to start price wars as a way to stay in business.
Boeing and Airbus have several times engaged in races to produce the largest planes, but they both know there is not enough market capacity for two aggressive players producing huge planes.
Sometimes the numbers would suggest that very large scales are needed to turn a profit (like with Tesla’s Gigafactory), but the larger these numbers are, the higher the risks of dragging out large fixed costs for a long time (or even forever) if demand never catches up as you expect.
Other important value chain decisions involve the labor needed, in both quantity and quality. Highly skilled labor is sometimes hard to find, and so is cheap labor in high quantities, so those considerations must also be seriously pondered.
Operations is usually seen as a technical subject but it should not be. It is a fundamental component of strategic positioning and is all about making the marketing plans, hence the strategy, happen.
Without a good operations strategy, there would be no competitive advantages, superior profitability or sustainability.
In a dynamic environment, operations and marketing must be always aligned to ensure that the organization is efficient at using its resources and that profitability is always maximized.
To do that, you must have a clear understanding of the markets and opportunities you are going after and ensure that your value chain is optimized to capture them.
Any changes in the market, or in your operations, that require modifications in who you target or how you target them, must be properly addressed and looped back in.
Wu, Sun. Strategy for Executives, this book can now be downloaded for free here.
Slack, Nigel; Lewis, Michael. Operations Strategy. Fifth Edition. Pearson Education Limited.
Van Mieghem, Jan A.; Allon, Gad. Operations Strategy: Principles and Practice. Second Edition. Dynamics Ideas LLC.