Corporate_Startegy

LEEDS METROPOLITAN UNIVERSITY FACULTY OF BUSINESS & LAW MODULE TITLE: - CORPORATE STRATEGY MODULE TUTOR: - MARIE KERR SUBMISSION DATE: - 31st March 2010 SUBMITTED BY: - ZOHEB ADIL CONTENTS Introduction & Porter`s View of Operational Effectiveness & Strategy 3 Work of Hamel`s & Prahalad 7 Distinguishing Operational Effectiveness from Business Strategy 10 Operational Efficiency & Strategy Chart 13 References 16 OPERATIONAL EFFECTIVENESS IS NOT A STRATEGY- A CRITICAL EXAMINATION OF THIS THOUGHT WITH ORGANIZATIONAL ILLUSTRATIONS & CONTRIBUTIONS FROM OTHER AUTHORS. This report critically examines Michael Porter’s school of thought that Operational Effectiveness cannot be termed as strategy. The report is divided into three chapters: 1) Introduction and understanding Porters’ view of operational effectiveness & business strategy 2) Look at contributions from authors like Hamel & Prahalad, Gerry Johnson & Kevan Scholes, etc 3) Analyse the distinction between Strategy & Operational Effectiveness. Key organisational examples would be given while explaining key variables in operational effectiveness, strategy and the defining distinction that exists between the two. CHAPTER 1 – INTRODUCTION & PORTER’S VIEW OF OPERATIONAL EFFECTIVENESS & STRATEGY According to Porter, operational effectiveness is defined as – “Performing similar activities better than rivals perform them”. Efficiency is a part of operational effectiveness and it refers to many business functions that allow a firm to better utilize its inputs. Hence, operational effectiveness is the optimum utilization of organisational resources and maintaining a standardised level of operations which is better than the rivals. Porter defines strategy as-“Performing different activities from rivals’, or performing similar activities in a different way”. However, according to Johnson & Scholes in their book Exploring Corporate Strategy – Texts & Cases (1997) have defined strategy in an elaborate way- “ Strategy is the direction and scope of an organisation over the long term; which achieves advantage for the organisation through its configuration of resources within a changing environment, to meet the needs of markets and to fulfil stakeholder expectations”. In his book Competitive Advantage, porter clearly illustrates how he views operational effectiveness and strategic positioning. This can be shown by the following diagram: High Operational Effectiveness versus Strategic Positioning ** Productivity Frontier (State of Best Practice) Non-Price buyer value delivered ** Adapted from Porter’s illustration – Competitive Advantage Page 62) Relative Cost Position Low Low High Porter says that an organisation can only outperform its competitors if it can create difference it can sustain in the long run. It should deliver and add value to the customer’s experience or offer comparable value at a low cost or do both. But Porter believes that most organisations today are competing on the basis of its operational effectiveness which they are mistaking as their strategy. And this concept of competing on the basis of operational effectiveness is described in the diagram above. The productivity frontier is the sum total of all the existing best practices or the maximum value that an organisation can create at given time at a given cost by utilizing the available technology, human capital skills, management and operational techniques and resources purchased. Hence, when the firm improves its operational effectiveness, it moves closer towards the frontier. The frontier is constantly shifting outwards as new systems and technologies, management techniques, etc are established in the market place and the firm is constantly trying to achieve that frontier by adopting different tools and techniques and constantly updating itself to the market dynamics; however even after improving on a multi dimensional platform, most firms fail to succeed on the basis of operational effectiveness over an extended period of time because rival competing firms are quickly to adopt the same practices and they also are in the race in getting closer to the frontier. Hence, differentiation based on operational effectiveness cannot be sustained in the long run as the bar is constantly being raised by the frontier moving outwards and firms trying to chase it by adopting similar practices and no one firm is clearly creating differentiated value. According to porter, “competition based on operational effectiveness alone is mutually destructive, leading to wars of attrition that can be arrested only by limiting competition” (Porters Competitive Advantage, p64) Most Japanese companies started a global revolution in the 1970s when they started competing on the basis of operational effectiveness and achieved great results but today the organizations which solely relied on operational effectiveness are struggling and facing diminishing returns, static or declining prices and extreme pressure on the costing and these factors affect the organisations’ ability to invest in the business over the long run. Porter says that “competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value” (Competitive Advantage, P.64) at the core of strategy, according to Porter is choosing to perform activities differently than rivals do. He further adds that strategy is creation of unique and valuable position involving a different set of activities. According to Johnson & Scholes (1997), strategic management can be clearly distinguished from operational management by the following figure:- STRATEGIC MANAGEMENT | OPERATIONAL MANAGEMENT | * Ambiguous * Complex * Organisation-Wide * Fundamental * Long Term Implications | * Routinised * Operationally specific * Short Term Implications | (Johnson & Scholes – Exploring Corporate Strategy (1997) – Chapter 1, pg 16) Johnson & Scholes further state that Business Strategy has three main elements within it and they provide a framework for the organisation to differentiate their strategy from their competitors. The elements are: 1) Strategic Analysis – The organisation aims to understand its own strategic position in the market 2) Strategic Choice – Establishing all the possible course of actions, their evaluation and choosing the right action. 3) Strategy Implementation – Planning how the choice of strategy can be put into action, monitoring it and reviewing it on a regular basis. Johnson & Scholes also give a basic model of the strategic management process [Johnson & Scholes – Exploring Corporate Strategy (1997), Figure 1.3, pg 17] According to Porter, strategy is all about creating a unique position in the market which differentiates you activities from the rival firms. Strategy is the value creation that an organisation offers to its stakeholders and Porter clearly distinguishes between ‘Doing different things and Doing things differently’. He argues there is a massive difference between the two and the organisations which realise the difference establish their unique position and create a value based proposition for its stakeholders, are the ones which will succeed in the long run. However, Porter mentions that to sustain a competitive advantage over a long run solely by creating a unique position as competitors over a period of time learn from their experience and reposition themselves to match the superiors’ performance or they can adopt ‘Straddling’ in which they match the benefits of a successful position while maintaining their current position. Thus, according to porter, an organisation in order to create value, succeed in a long run and offer growth and development opportunities to its stakeholders, need to clearly distinguish between operational effectiveness and strategy. WORK OF HAMEL & PRAHALAD These authors have given valuable ideas about creating strategic advantage and differentiating a firm’s activities by creating core-competencies. In a series of articles in the Harvard Business Review and following it by a best-selling book – Competing for the Future, they presented their fundamental idea that over a period of time, organisations develop key areas of expertise and competence which are distinctive to that company and critical to the company’s long term growth. The area in which the firm develops its expertise would be most likely the one in which the company adds maximum value. For example, for a software company, the expertise area would be to make the software more user- friendly so that maximum number of customers would be able to use the software with ease. For a supermarket, the expertise would lie in offering variety of products at competitive price and thereby offering its customers value for money. Hence, there are different key expertise areas in which a company can develop its core competence. And this is what Porter has suggested as to differentiate yourself from your competitors by creating value for your stakeholders. Just by creating operational effectiveness, you cannot create core competence, because it is easily imitated and implemented and cannot sustain in the long run. (http://www.cfo.com/article.cfm/3011699/c_2984350) Hence, core competence cannot be fixed and requires a change in response to changes in the macro-economic factors and market dynamics. They are flexible and evolve over time and as organisation change its strategic vision, so does the core competencies. Prahalad and Hamel suggest three factors to identify core competencies in any business by which the company can create the unique differentiation and thereby creating value and providing itself with an opportunity for success in the long run: FACTOR | COMMENTS/EXAMPLE | What does Core Competence/Strategic Differentiation Achieve' 1) Provide potential access to wide variety of markets – 2) Makes a significant contribution to the perceived customer benefits of the end product- 3) Difficult for competitors to imitate | The key strategic differentiations here are those that enable the creation of new products & services.Example: SAGA Holidays, Travel Insurance, Cruises, etcEstablished a strong leadership and market share across the travel industry domain. Core Competencies that SAGA has established: 1) Clear distinctive brand proposition that targets specifically defined customer segments 2) Direct Marketing skills & technological innovation including database management , direct mailing campaigns, contact centre sales conversion 3) Excellent skills in customer relationship managementDelivering fundamental customer benefits is the key driver behind every core competency or a strategic differentiator that an organization creates. In other words, making the customer choose your product over rival firms’ product. Establishing clear-cut parameters in identifying why and for what will the customer pay'Example: - Tesco’s successful capture of online grocery shopping market. What value factors in Tesco manage to attract the customers to their website' 1) Technological architecture and supply systems which design and effectively link existing shops with the Tesco.com website. 2) Ability to design and deliver a “customer interface” that personalizes/customizes online shopping and makes it more efficient 3) Reliable & efficient delivery structure (product picking, distribution, customer satisfaction handling and quick resolution to all the customer requirements and issues. Any strategy that is formulated should be based on its key components being unique and different and not something that can be imitated or duplicated by rival firms. In today’s globalized world, most of the industries have skills and competencies and operational procedures which are considered to be pre-requisite for participation and do not necessarily form a basis of their strategy; hence the word ‘core’ becomes an integral part of the overall strategy of an organization. To qualify as ‘core’, a competence should be something that other competitors wish they had in their own business. Example:- Dell Computers having such a strong presence in the personal computer marketStrategic Differentiation or Core Competencies that Dell has which are difficult for the competitors to imitate:- 1) Online interface where the customers can build their own customized PC. 2) Minimization of working capital in the production process 3) High manufacturing and distribution quality – reliable products at competitive prices 4) Clarity in the link between the front-end Sales-Manufacturing & back end – Distribution & Services. | A competence which is the fundamental focus of the business’s operations but is not exceptional in some way should not be confused as a core competence as it does not give any distinct differential advantage to the company and would not differentiate the business with any other business. Hence, it can be safely concluded that standardised resources or commonly available and used skills and processes will not give a competitive advantage to a business over rival companies. The most ill-perceived business strategy is operational efficiency. Most of the organization including public companies make this as their “default strategy” and commit a mistake by assuming they will compete in the market by reducing costs, employing operational enhancing processes, deploying latest methodologies in their projects and operations (Lean Six Sigma, Just-in-Time, etc). Operational efficiency is essentially a stop-gap solution for reducing process costs and overheads, but it cannot be termed as an organizational business strategy. Companies like General Motors, Chrysler and Ford are struggling today because the only strategic viewpoint they come up with is improving operational efficiency and reducing costs. When the markets are tight and demand for their products is less, most companies fall into the trap of reducing costs and increasing operational efficiency in order to survive the low-demand phase rather than being innovative and creating a strategic differentiation in their products, services and attitude. The above mentioned companies follow the same business strategy and with our definition of strategy above, it does not constitute to be a comprehensive business strategy because reducing costs and increasing operational efficiency can easily be replicated and imitated by other companies. On the other hand, companies like IKEA, Southwest airlines have created a strategic positioning in their markets by defining their core competencies and creating a unique proposition that they can offer to their customers. They have achieved this positioning by adopting three layered approach which is not mutually exclusive: 1) Variety based positioning 2) Needs based positioning 3) Access based positioning Each of these layers enables an organization to be different in their own domain and create a niche which is difficult for rival firms to follow. Pursuing operational effectiveness is easier because it is measurable in quantifiable terms and is actionable in a short term. Whereas, strategy is something which an organization can build but it can only be qualified and is measured only in long term. DISTINGUISHING OPERATIONAL EFFECTIVENESS FROM BUSINESS STRATEGY According to Porter, long term success requires both the right strategy and operational effectiveness; however, both are not mutually exclusive. A right mix of business strategy which establishes core competencies (strategic differentiation) and achieving the delivering the strategy by increasing operational efficiency forms the key to organizational success. This combination is potent enough to enable the company to differentiate itself from rivals. "Managers must clearly distinguish operational effectiveness from strategy. Both are essential, but the two agendas are different. The operational agenda involves continual improvement everywhere there are no trade-offs. Failure to do this creates vulnerability even for companies with a good strategy. The operational agenda is the proper place for constant change, flexibility, and relentless efforts to achieve best practice. In contrast, the strategic agenda is the right place for defining a unique position, making clear trade-offs, and tightening fit.” says (Porter, 1998) in his book (Competitive Advantage) Porter also emphasizes on importance of being at-least as good at what you do as your competitors or else, even the best strategy aligned with optimum operational efficiency won’t help. While Porter has stressed upon having a distinct strategy for long term organizational success, he also points out and critiques those who go for strategic initiatives alone and ignoring the importance of operational effectiveness. So, the diagram below would illustrate that strategy and operational effectiveness sit side by side as equal factors contributing to the success of any organization:- Having strategy and operational effectiveness implemented together in an organization brings a complementary relationship structure where the two factors are not only dependent on each other but they share and deliver information to each other to create a perfect synergy between operations and the top management ideas. Operational efficiency is about ensuring that different functions in an organization work to their optimum potential and productivity levels and these functions or processes are the organizations’ skills and core competencies which have been identified and established by the management and hence as Porter emphasizes they must fit together and operate together to implement the strategy. This particular business model of having a strategy in place and then having the perfect operational plan to work together is very critical for any organization as it helps in diversification. For example, in a medium term, even if the organization does not have a clear cut operational effectiveness plans and skill sets in place, but if it has a strategy that can drive the change, then the operational issues can be handled more effectively, till the functional order is restored. On the other hand, operational effectiveness enables the company to create opportunities for strategy development by creating new technologies and methodologies. For example, the experimentation to find improved glue in 3M led to the invention of post-it notes. Porter has played a pivotal role in establishing the strategy/operational effectiveness dichotomy and paved the way to explore operational effectiveness as a stand-alone player in organizational success. Porter further classifies or drills down the organizational success chart with a special focus on operational effectiveness being complementary to strategic objectives of the business. The following diagram will show the 4 levels of operational effectiveness which enable the strategic plans to be implemented in a more productive manner. In other words, in order to make the organization fully efficient in functional effectiveness, operational process is grouped into four ‘meta-activities’ that create a cycle of supporting functions. OPERATIONAL EFFICIENCY & STRATEGY CHART Operational effectiveness is essentially the continuous improvement of functional performance. To achieve this, companies need to control measure and improve processes, leverage those processes through standardization, communicating it effectively to the entire organization and achieving automation to close the gaps to ensure increasing efficiency and effectiveness. It is then the strategy’s responsibility to mould and develop these functions in a cohesive and comprehensive structure that will succeed in a given market. To further analyze what operational effectiveness is and how it differs from strategy, we can understand each meta-activity under operational effectiveness which will enable us to identify which functional activity is applied for achieving operational efficiency which further enable strategy implementation. (1) Lead & control functional performance | Plethora of information is made available on leading and controlling functional performance. There is a requirement for specific expertise in the functional area but also generic skills in management and communication are also necessary. | (2) Measure & improve processes | Various process management tools like Lean Six Sigma, TQM, Just in Time, etc can be used to achieve process measurement and improvement purposes. The key aspects of all these tools and techniques are based on measuring quality and reducing variation in the processes. A range of analytical, testing and innovative tools are also available. | (3) Leverage & automate processes | Information systems architecture is supported by traditional and proven methods of business and systems analysis. | (4) Continuously improve functional performance | All the above approaches are relied upon and the key factor here is the amalgamation of each factor with the other. The former is where most firms show greatest strength in Operational Effectiveness. | Since last 20 years, companies and managements have continued to learn the new set of rules in today’s globalized economy. Companies must learn to be flexible to be able to quickly react to market, government and other changes. Creating industry benchmarks is also one of the key to achieve best practice. Outsourcing is seen as the key to gain efficiencies but organizations should also learn to create core competencies in order to stay ahead of the race. Strategic positioning; once a key component of business strategy is increasingly been seen as a diminishing returns tool because of the constant change in market dynamics and according to the new principles, rivals can quickly replicate any market position and hence the competitive advantage becomes a temporary phenomenon. The crux of the issue is the inability of the management to differentiate between operational effectiveness and strategy. The pursuit for business bottom-line, quality and responsiveness has led to the development of several tools and techniques: TQM, outsourcing, change management, etc. However, organizations fail to translate these short-term gains into long term profitability and it is only because of their failure to identify the difference between a short term operational effectiveness measure and long term strategic vision. The day when organizations realize that strategy and operational effectiveness have a complementary relationship and both can exist as parallels in an organization; the organization will definitely have a platform for long term success. (Michael Porter, Harvard Business Review http://hbr.org/1996/11/what-is-strategy/ar/1) REFERENCES Johnson, G & Scholes, K (1997) “Exploring corporate strategy”. 4th ed. Prentice Hall Europe. Hamel, G & Prahalad, C.K (1994) “Competing for the future”. Harvard Business School in Vancouver. Porter, M (1998) “Competitive Advantage: Creating and Sustaining Superior Performance” the free press, New York CFO magazine (2010) Financial STATS & INFO [Internet]. Available from [Accessed 24 March 2010] Harvard Business Review (1996) Operational effectiveness INFO [Internet]. Available from [Accessed 23 March 2010]. Value Based Management [Internet]. Available from [Accessed 22 March 2010] Grant, R.M (2010) “Contemporary Strategy Analysis”. 7th ed. John Wiley & Sons.