Strategic Operation Analysis

This article provides a dozen tools/approaches that can be used to understand the strategic operations of a firm. The key to strategic operations is creating a balance between a resource- & market-based view to achieve "Strategic Resonance".

It is presented as an illustrative case study to provide context on how different models can be applied while also providing a boutique of models which 'could' be applied.

Review of the Firm

Let's set the ground work and understand the basics of the firm while defining a strategic-operational problem & describing its importance.

The Company is a large distributor of software and consumer electronic accessories. Beyond simply ‘moving boxes’; it provides a range of highly specialized solutions and B2B customizations. A few of which include: sourcing new product lines of interest for key accounts, vendor managed inventory (VMI) systems, custom product information integration with customers, and highly innovative and technical digital services.

It has a workforce between 60 to 100 people, and, though no formal organizational chart exists, the structure of the organization can be understood as provided in Figure 1.

Figure 1: Firm's Organization Structure

The Problem

The various services offered by The Company have grown organically over the past 20 years of its operation into the highly complex system now in place. However, this organic growth of complexity has led to critical organizational issue that must be addressed, including:

• The Operations Director does not have time to manage new initiative focused on improving productivity.
• New projects and challenges often lack ownership and leadership from staff requiring escalation to the Operations Director for resolution – and further exasperating the above point.
• There is a lack of specialization within departments as well as siloed responsibilities resulting in frequent ‘throwing issues over the fence’ to other departments which reduces ownership on solving problems in their entirety.

These symptoms can be summarized in the problem statement:

The Company finds it challenging to effectively complete and implement new projects aimed at improving productivity.

The question we seek to answer is:

How can The Company effectively implement new projects and build specialization to remain competitive?

Importance of the Problem

This is a critical question to answer since the repercussions of not building capacity to implement new and complex projects involving customer customization will diminish The Company's value proposition over time, thereby hurting its ability to compete in the market and hold its leadership position.

What Type of Organization is this Really?

Often we accept the simple answer of what the firm does without further depth of analysis.

This case is of a distributor. OK.

This distributor offers additional services. OK.

But what are some ways we can understand and differentiate service-firms?

In defining the position of The Company one approach is to simply ask its employees, “What Business are you in", what is its core activity?”. Asking this brings forth these different responses:

“We provide a large and diverse catalog to retailers.”

“We manage relationships with vendors and retailers.”

“We ensure the correct products are shipped.”

“We help vendors get their product to market.”

“We provide data and solutions that customers need.”

There are two points which are immediately striking from these responses.

1. Employees associate the main business activity of the firm with their specific department tasks and responsibilities.
2. Except for the warehouse, who saw the core business as shipping products, all departments recognize the core business activity is related to a service; either providing information, managing relationships, helping vendors, or solving needs.

To continue with our analysis lets exclude the warehouse and its operations from the rest of the organization. Though the warehouse has the same physical location, provides a business-critical activity, utilizes the same ERP system, and has an important part to play in providing feedback to improve quality and efficiency of its operations, it plays a fundamentally different role then the rest of the organization.

This difference can be summarized as: a focus on tangible good, no customization in solutions to clients, and no contact with clients.

The first model in this article is the Schmenner (2004) matrix. Often we differentiate between products and services but don't consider "what type of service firm" an organization is.

In our case study The Company illustrates that the answer is dependent upon the individual client, the service, as well as the specific point in time (See Figure 2).

Figure 2: Company's Services on Schmenner Matrix (2004)

Stage of Connection Impacts Classification:

The Company’s 'Digital Solution' involves significant contact with multiple departments of the client. Each client has a unique organizational and infrastructure setup so although the connection remains 'constant', its implementation is a highly customized activity.

During the connection stage, the organization is best described as a Professional Service Firm. However, once in place very little labor is needed in processing orders and the firm more resembles that of a Service Shop.

The Specific Client Impacts Classification:

• Some customers order via a webshop which has no customization or personal interaction (Service Factory).
• Key accounts may receive customized catalog information delivered to them.
• Larger accounts may have a highly customized VMI integration which requires a high degree of initial interaction and customization (Professional Service).

However once these systems are in place the labor intensity declines and the organization more resembles a Service Shop again.

Classifying our Case-Study

The Company can best be described as an organization which traditionally operated as a Service Factory however now is transitioning towards a Service Shop.

Part of this transition includes an initial increase in labor intensity and move towards a Professional Service however upon completion of customization work the labor efforts are again reduce.

This transition helps explain the organizational challenges previously discussed. And, perhaps indicates that the problem isn't only a 'current capacity' issue but an issue stemming from transition of the firm itself.

Customized customer solutions are more complex to offer then standard solutions and with each new system developed the system itself becomes more complex.

This new complexity results in specialized knowledge within departments which is not shared and each party only can solve a piece of the puzzle and never the complete problem.

Understanding Strategy & Operations

Brown et al. (2012) describe that a key change has occurred in both Operations Strategy and society. They explain a shift has occurred from the Craft-Era, to the Mass-Production-Era, to the current/future Mass-Customization Era.

Where traditional Craft involved low-volume, high-skilled, high-variety work this was reversed in the Mass-production-era with a focus on high-volume, standardized products, with low-variety. Pine et al. (1993) describe the current era of Mass-Customization requires a combination of the need for volume as well as customer customization.

This transition is visible at The Company where mass-production Service Factory type functions have been transformed into customized service shop and professional service activities.

Where all respondents can provide some indication to the question; “What business are you in?”, when asked about what the corporate/business strategy is, very little, if any, response is provided.

This is the “dirty little secret” that Collis & Rukstad (2008:82) describe:

“Most executives cannot articulate the objective, scope, and advantage of their business in a simple statement. If they can't, neither can anyone else.” - Collis & Rukstad, 2008:82

Alongside this observation they provide a challenge for employees:

“Can you summarize your company's strategy in 35 words or less? If so, would your colleagues put it the same way?”

Resources-based vs Market-based Strategy

Brown (2017) describes a model for strategic operations as the reiterative process which occurs between strategic decisions based upon organizational resources and capacities against market/performance objectives based upon market position and conditions (See Figure 3)

Figure 3: Strategic Operations

Hayes and Wheelwright (1984) coined the term ‘World Class Manufacturing’ and propose a four-stage capacity-impact model to explain how operations can move from a barrier to strategic success towards an innovator which drives success (See Figure 4).

Though Company is a service organization, its focus on developing – or manufacturing – custom solutions within the ICT sector make this model applicable.

Figure 4: Hayes and Wheelwright Model (1984)

The Company can be seen to operate across the stages defined by Hayes and Wheelwright (1984).

For its Digital solutions it operates at Stage 4. It is externally supportive providing best practices, it out performs its competitors, and has a focus on innovating the industry.

In other areas it operates at Stage 1 where they are reactive and only attempt to correct the worst problems.

A large majority of the organization falls under Stage 2. Departments compare their operations to the market and implement best practices to catch-up and compete with peers.

It may be that the executive has aligned these operation strategies to business strategies placing it at Stage 3, however the ‘dirty little secret’ of a lack of articulation to staff results in a missed opportunity in increasing its strategic impact.

For The Company to increase its strategic impact and move from Stage 2 towards Stage 3, it should improve its internal and external supportive operations capabilities. One approach to do this can be found in the Platts-Gregory (1995) procedure (See Figure 5).

Figure 5: Platts-Gregory Procedure (1995)

This framework allows organizations to understand their market position and identify existing capabilities to improve or revise their operations strategy. Asking “What the Market Want’s” is critical to strategy because as Hill describes;

“Order-qualifying and order-winning criteria win orders from customers”.

The Company’s shift from a Service Factory towards a Service Shop (Schmenner, 2016) and its value-added services of offering Mass-Customization (Pine et al., 1993) indicate that price is important for order-qualifying but features, flexibility, and quality are vital for order-winning.

In terms of operations capabilities, The Company is well positioned to meet these criteria;

• Holds large span of control via integration into both customers and vendors systems.
• It’s facilities and capacity are capable to provide new features and flexibility. And,
• Business Development unit can acquire new product lines and vendors as needed.

Where improvement is needed is in organizational processes, human resources, and control policies to drive the competitive advantage and corporate strategy across the organization.

Strategic Resonance

This iterative process between market requirements and organizational capabilities is what Brown (2000) define as Strategic Resonance;

“an ongoing, dynamic, strategic process whereby customer requirements and organizational capabilities are in harmony and resonate.” (2000:6 in Brown & Blackmon, 2005)

There is a paradigm between organizations selecting a market-led versus a resource-driven approach but both have flaws which may cause strategic dissonance to occur.

The strategic fit between internal aspects of a firm and its environment determines its competitive advantage.

Market-Based

To determine its advantage, the market-led view proposes identifying external opportunities and aligning the organizations with these opportunities.

The problems Brown & Blackmon (2005) identify with a strict market-led approach is that they are developed in a stable and predictable environment but the current market is characterized as dynamic, changing markets, and technology and information.

This problem is especially relevant for The Company, which operates as a Service Shop focusing on Mass-Customization needs, with its specialization focused on technology and information.

Resource-Based

The resource-based view is focused on developing and guarding capabilities and competencies of its chosen market.

However, competitive advantage ultimately rests in meeting the needs of customers and thus following a resource-based view exclusively is inadequate. 

The Best of Both: Strategic Flexibility.

Aligning competitive strategy with the competitive environment leads to strategic flexibility.

Aligning manufacturing strategy with a flexible competitive strategy will create closer links between manufacturing and competitive strategy.

Combined. this creates ‘Strategic Resonance’.

Brown and Blackmon (2005) argue three areas that contribute to strategic resonance are;

1. Developing manufacturing capabilities, especially core capabilities related to people, processes, products and networks,
2. Increasing awareness of manufacturing capabilities in the strategic process, and,
3. Increase the influence of manufacturing in the strategic process.

They propose a framework for achieving these results requires firms to:

1. Invest in manufacturing capabilities,
2. Invest in technical expertise at the senior management level, and,
3. Increase the influence of manufacturing managers over the strategy process.

Enhancing Operational Quality

So far we have reviewed the companies structure, problem it faces, and added new dimensions to describe a "service-company". In these theories quality control emerges as an important element in value creation.

The Platts-Gregory (1995) framework included the importance of quality as an order winning criteria. Brown (2017b) explains that improving quality leads to increased profits by increasing sales as well as reducing costs (See Figure 6).

Figure 6: Quality Increases Profits (Brown, 2017b)

The importance of quality is especially true for The Company. Not only do customers measure the accuracy level and shipping time of deliveries but in its role as a service shop offering mass-customization, small errors may cause massive issues. Imagine;

• Incorrect price information fed to thousands of clients automatically causing significant losses,
• VMI systems that over or under ship products resulting in overstock or lost sale potential, or,
• A server issue causing [Digital] to cease operating, resulting in customers websites no longer functioning.

Ensuring quality must be an essential component in The Company’s strategy as the risk of not including it goes beyond missed sales opportunities but may lead to questions about the reliability of their service within the market.

An extensive literature exists on improving quality. To bring-up a few;

• Piore and Sabel (1984) discuss the importance of Flexible Specialization where firms focus on their value-adding process within networks.
• Womack et al. (1990) stress the importance of Lane Production as a method to remove all forms of waste.
• Within the Mass-Customization age, Kidd (1994) adds the importance of being Agile to ensure flexibility in switching between market objectives. And,
• Brown (1996) advances that operations must be framed in an overriding Strategic vision.

Brown (2017b:38) presents a ‘Total Quality offering to Customers’ Model (See Figure 7) based upon the continual interaction of four factors. These factors include;

• Soft factors such as commitment to TQM, understanding requirements, and training.
• Hard factors such as measurement and analytical tools like charts or Ishikawa diagrams.
• Product Quality items such as ensuring designs and specification meet customer requirements. And,
• Process Quality that ensure deliverables are correct, cost effective, speedy, and reliable.

Figure 7: Quality Offering to Customers (Brown, 2017b:38)

These factors are visible in our case study:

• When a new business opportunity, project, or issue arises there is a clear message from the directors for a process that is correct, cost efficient and reliable.
• Projects are discussed in a meeting with all stakeholders and flow charts and other metrics are determined.
• Different departments come together to understand customer requirements, how they impact each respective department, what solution matches those requirements best, and what training is needed on the final solution.

Though all four factors are present, the current structure and approach of the organization causes missed opportunities to improve quality.

Highly complex systems and solutions means understanding and translating customers’ requirements requires specialized knowledge and training. The relative independence of departments results in each group holding an important piece of the puzzle in providing the best solution. In combination, the result is a lack of process ownership which is escalated to the Director of Operations who then organizes the completion of Hard measurement factors and Process Quality.

The Deming wheel (Rampersad, 2001), provides a simple 4 step-, iterative-framework for improving quality (Figure 8).

Figure 8: The Deming wheel (Brown 2017b:46)

Perhaps this sounds familiar to your organization;

• The Company’s largest issue occurs between the ‘Plan’ and ‘Do’ step. Often, plans are designed with a focus on quality, however after the planning stage, focus shifts from providing quality to completing the project plan.
• Additionally, most projects are not viewed as a continuous improvement process. Once signed off by stakeholders they are not revisited unless an issue occurs. Correcting these two issues could assist in the further development of Soft-Factors (Brown, 2017b:46) such as commitment to TQM, cultural change, and thereby organizational change.

Where Deming’s wheel (Rampersad, 2001) can be used to improve quality on the organizational capacity side, the markets perception of services if of equal importance.

This, ‘Quality Resonance’, can be achieved by conducting a SERVQUAL questionnaire with clients and other stakeholders. An in-depth analysis of these 22-questions which would require an article to itself, So Figure 9 provides a visual to identify where key gaps between perceptions and expectations exist.

Figure 9: The Five Gaps of Quality (Parasuraman et al., 1988)

Six-Sigma

When discussing quality improvement, the most frequent discussed tool/process is Six Sigma.

Zu et al. (2008) provide an important investigation on the relationship between Traditional Quality management and Six-sigma.

They found that the difference between Traditional QM and Six-Sigma was the implementation of three practices (See Figure 10).

This framework can be valuable to building up an organizations Quality Control Systems. For our case study; The company's sales department focuses on customers, its purchasing department on suppliers, and its HR, IT, and operations department on workforce management -- it already has a basic QM infrastructure in place.

Through adding a focus on quality by top management and requiring quality controls in products and process, it can formalize a QM process which can serve as a base for future Six-Sigma implementation.

Figure 10: Six Sigma vs Traditional QM (Zu et al., 2008)

Implementation & Process Mapping

To introduce strategic operations management alongside adding a focus of quality to The Company's processes; one approach could be to introduce process mapping and work study to existing procedures to help drive strategy and quality as core values of the organization.

The SREDIM Model can be used to;

• Select a workflow to be improved,
• Record relevant data,
• Examine the information critically,
• Develop the most efficient job method,
• Install the new method as a standard, and
• Maintain by regular checks (Brown, 2017c).

Through involving staff in the process, co-production of solutions can be obtained while framing the improvements as a focus on strategy and quality. This can be achieved by focusing on The Company’s value as a Service Shop and placing the SREDIM model on top of the Deming’s Quality wheel (Figure 11) (Rampersad, 2001).

Figure 11: SREDIM & Deming Cycle (Brown, 2017c:29)

Similarly, completing a SERVQUAL questionnaire to identify quality gaps between perception and expectations can be placed in an Ishikawa diagram (Figure 12) as the final ‘effect’ the market perceives. The 4 M’s of; Manpower, Machinery, Methods, and Materials can help identify the core resource causes of the issues.

Combining these two tools allows processes and work flows to be evaluated, and improved, with a focus on both quality and cost efficiency and ultimately achieving strategic resonance as well as quality resonance.

Figure 12: Ishikawa (Cause-Effect) Diagram

Within its existing process mapping The Company makes frequent use of flow diagrams. An additional tool that would benefit the RED aspects within SREDIM would be Method Study.

In Method Study all tasks within a process and listed and a grid of symbols is provided; O, D, à, ?, ▼; representing; Operation, Delay, Transportation, Inspection, and Controlled Storage – respectively.

By listing all stages and identifying its symbol, processes can be simplified by reducing delay, transportation, and controlled storage steps or other task simplification processes which become apparent.

Benner and Veloso (2008) discuss how proponents of process-focused quality-improvement programs like TQM or ISO 9000 have promised improved efficiency and profitability but this is not always supported by research.

They find that the impact on the firm is not universal but dependent upon characteristics of the firm;

“generic organizational improvement practices may confer lasting benefits if they interact with firm-specific routines and give rise to unique capabilities that are difficult to imitate” (Benner and Veloso 2008:612)

Futhermore, when tighter linkages and coordination occur between upstream and downstream activities greater “fit” is achieved and become difficult to imitate. Moreover, advancing the breadth of a firm’s technologies allows for new, difficult to imitate, synergies.

The Company, as a distributor connected to both customers and suppliers, and operating as a Service Shop, with its core service of mass-customization technical integration, is well positioned to benefit from implementing process mapping and other formal quality standard to create competitive advantage.

Summary

How to approach a problem and a list of tools

1. Review & Describe the firm and its structure.
2. Describe the Problem and Question you want to answer.
3. Why is this problem important?
4. What type of Service Company is the Firm - or - Where do its different services fall on Shemmer's Matrix (Figure 2)
5. What Market is it operating in? (Craft, Mass-Production, Mass-Customization) Is it in transition... should it be?
6. Perhaps you've completed a SWOT analysis, but does your strategy focus stronger on market-wants or resource-capabilities? Brown's (Figure 3) model can help gain this perspective.
7. Where does the firm sit in the market? Are you always putting out fires? Or are you redefining your industry? Hayes & Wheelwright (Figure 4) can help understand position and perhaps re-frame strategy thinking to higher ambitions.
8. To identify these areas of improvement consider utilizing the Platts-Gregory framework (Figure 5)
9. Consider the importance of Quality to your product or service, is it order-qualifying or order-winning criteria and what improvement systems are in place?
10. On Quality; Brown (Figure 7) provides 4 key factors (Soft-, Hard-, Product, Process) that are in continual interaction.
11. Tools like the Deming wheel (Figure 8) are simple but may help understand where process breakdowns occur.
12. If you need to test quality from a market-perspective look to the 5-gaps presented in SERVQUAL (Figure 9). Simply reviewing this model without sending a questionnaire may bring issues to light.
13. Even if you Don't have a formal Quality Control or 6-Sigma system in place, the basis likely exists. Zu et al.'s model (Figure 10) provides a good starting point to map and progressively enhance your systems.
14. To implement change follow understand the processes your firm follows to produce value. Use models that make sense to your situation, combine different models such as SREDIM & Deming Cycle (Figure 11) or modified Ishikawa diagrams, or completely new models.

***

Sources

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