Capabilities, Competition & Operations
Determining Defensibility
Smart companies continuously scan the competitors landscape to assess whether any rivals are posing a threat to their established position.
Efficient Frontier
The efficient frontier is a snapshot that traces the industry’s lowest cost to product specific capability bundles of variety, quality and timeliness.
Firms that on the efficient frontier provide their good or service at the lowest cost, given their quality level, and at best quality, given their cost level. Thus, by definition, if a firm is on the efficient frontier, its position is defensible given its current operating system, at least in the short run.
Operational Trade Off
The key feature of the efficient frontier is than once firms are on the frontier, if they want to improve along one dimension, they are bound to compromise other dimensions.
A trade off is “a balancing of factors all of which are not attainable at the same time; a giving up of one thing in return for another” according to the Merriam-Webster (2007) dictionary.
Customer trade-offs are represented analytically by iso-utility or indifference curves that show the combinations of attribute levels that yield a constant utility.
Operational capabilities are governed by trade-offs that are defined by the operating system of assets and processes.
An organisation can’t have it all because its capabilities exhibit trade-offs due to the finite abilities of its assets and processes. But perhaps more importantly, the principle also says that operations strategy can shape and change the trade-offs by choosing the “right” asset portfolio and activity network.
First, such operationally inefficient firms are at risk because competitors can duplicate their value proposition at lower cost. The farther they are from the frontier the greater their risk.
Secondly, operationally inefficient firms can simultaneously improve on multiple dimensions by learning and adopting world-class operating systems.
Companies on the frontier, however, face real trade offs: there are simply no better operating systems available at this point in time to allow them to simultaneously improve on multiple dimensions without giving up on any.
Operational Trade Off Curve to analyse a competitive threat
Adjust for operating conditions different from plan
Adjust for differences in strategic positioning
Assess the threat by assessing our operational efficiency - the larger the adjusted cost advantage, the larger the competitive threat the rival poses to us. A larger adjusted cost advantage means that the rival would have a cost advantage if it entered our core market and replicated our customer value proposition using its own current operations.
Using Operational Equipment Efficiency (OEE) To Assess Defensibility
Operational Equipment Effectiveness (OEE) is a metric to monitor and improve the efficiency of a firm’s operating asset, typically a piece of equipment or a machine.
OEE = Availability x Performance x Quality
Availability = Run Time / Total Available Time
Performance = Total Count / Target Count
Quality = Good Count / Total Count
Properties of Operational Trade-offs
The most important property of an organisation’s trade-off is that they are defined by its operating system and are affected by all of its characteristics.
One can argue that the existence of trade-offs is what makes operations relevant to strategy: in the same manner that competitive strategy deals with positioning in the customer needs space, operations strategy deals with positioning in the capability space that is hard to imitate.
Trade-off curves are a snapshot of a particular instance in time.
How to Improve Operational Efficiency? Focus
A focused operation is an operation whose required capabilities are restricted to a narrow set in the capability space of cost, variety, speed, and quality. The opposite is an operation that tries to deliver many divergent capabilities.
The more homogenous capability needs are, the more efficient focus will be.
Divide and conquer. Groups should be created for products and services, which share similar:-
priority rankings of required capabilities in terms of cost, variety, timeliness, and quality.
point in their life cycle.
locations, margins & volumes. It is natural to distinguish between high-margin and low-margin products; between products with predictable demand and products with uncertain demand, so on and so forth.
This is also a good time to consider rationalising the product lines.
A tailored operating system is the value-maximising hybrid combination between two extreme: one single system shared by all groups and a separate focused system for each group.
Implementing focus this comes down to deciding, for each group, the mix of separate and shared resources and processes that maximises the value of the organisation.
A focused operation is more likely to have a competitive advantage because it would be closer to the frontier.
Operational Efficiency and Productivity
Productivity measures the efficiency of transforming inputs into outputs given a time period (monthly, quarterly or annually):
Productivity = units of outputs / units of inputs during a given time period
Total factor productivity (TFP) considers all inputs when looking at productivity and solves the additivity problem by converting all physical units into monetary units which can then be added.
GDP / Population = GDP / national labor hours x national labor hours / population
GDP / Population = labor productivity x hours worked per capita