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Attacking...Attacking...

and Defendingand Defending

 through

OperationsOperations

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“Operational Effectiveness

Is Not Strategy”Michael Porter, Harvard Business Review: November-

December 1996 (pg. 61)

Is he right? If so…

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WeWe Have AHave A Puzzle...Puzzle...

Why are small companies sometimes able to“come out of nowhere” and, without the benefit ofeconomies of scale and market power, successfully

attack large, entrenched competitors? Why didn’t those powerful competitors react more

promptly and vigorously to such attacks - even

after extended periods of time? How have some companies, in contrast, been able

to defend themselves successfully?

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the Surprising Power ofthe Surprising Power ofOperationsOperations--Based StrategiesBased Strategies

1. they reinforce a company’s chosenapproach to differentiating itself from

its competitors

2. they are inherently difficult (and timeconsuming) for others to imitate...and

impossible to “buy”

3. they are less visible to outsiders, andtherefore less likely to trigger

immediate counter-attacks

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 the case of... the case of...

Australian Paper ManufacturersAustralian Paper Manufacturers

• 1986: entered the fine paper market in Australia

• its domestic competitor, APPM, had a 75% SOM,

a low cost position, owned two of Australia’s

three largest paper distributors. and was backed by

a big conglomerate

• 1990: APM had taken a third of the domestic

market, was operating its newly rebuilt paper plant

at capacity, and had announced plans to expand 

• 1993: APPM capitulated--selling all its paper

operations to APM and exiting the business

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 the case of... the case of...

Crown Equipment Corp.Crown Equipment Corp.

• entered the fork lift truck business in 1957 (totalsales <$1 mill.), with a small, manual model

• thereafter, entered segment after segment, each time

taking on larger competitors and winning substantialmarket shares

• each time it differentiated itself with superior design

(aesthetics and ease of operation), at a premium price• today is the third largest producer in the U.S.

(even though it only produces electric trucks)

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 the case of... the case of... WalWal--MartMart

• Went public in 1972, when it had only 30 discountstores in rural Arkansas, Missouri & Oklahoma

• Steadily expanded around that base, emphasizing

low cost operations, egalitarian workforce policies,and a tightly integrated supplier/logistics system

• Built state-of-the-art I.T. sytems and capabilities

• By 1987 had 1200 stores (~ half as many as Kmart),and was approaching its strongholds in major cities

• By 1993 was “in Kmart’s face” and half again as big

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 the case of... the case of...Southwest AirlinesSouthwest Airlines

• 1971: Began in Dallas, with “a wing and a prayer”

• Began service outside Texas at end of 1970s

• 1980s: Steady expansion, emphasizing direct, “nofrills” service and egalitarian workforce policies

• 1992: 7th largest (and only profitable) U.S. airline

• 1996: “Competitors QuakeQuake as Southwest Air Is Setto Invade Northeast ” (WSJ : Oct. 23, pg. 1)

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The Obvious Questions:The Obvious Questions:

• Why did the large, powerful, entrenchedcompetitors prove to be so vulnerable?

• Why didn’t they react faster when the threat

became clear?

• Why were they apparently unable to mount an

effective counterattack?

• Why weren’t they able to learn from--or even

copy--the innovative practices of the “upstart”?

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in contrast, the case of...in contrast, the case of...A Successful CounterA Successful Counter--AttackAttack

• American Connector Co.* learned that DJC*, a Japanese

competitor, was planning to build a new factory in the U.S.• DJC’s factory in Japan had, through a series of innovations,

reduced the cost of making comparable products by ~35%

• ACC immediately began planning a counter-attack: – initiated a major cost reduction program in the U.S.,

using DJC’s example as a source of new approaches

 – “sold” its customization capabilities and problem-solving

services to customers

 – reduced prices of products directly competitive with the

ones DJC had tooled up to build, “starving” its new plant

* Disguised name

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AttackingAttacking through through OperationsOperations

• Positioning: Addressing the needs of adifferent market niche, and/or

using a different process technology

vs.

• Execution: Competing within an existing

niche, and using known processes, butdoing it more effectively than your

competitors can

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OperationsOperations--Based Strategy:Based Strategy: Positioning Positioning

• Each business unit has its own strengths & weaknesses,and may choose to compete in a different way

• An operating system/organization’s design enables it

to deliver particularly strong performance along certaindimensions, but limits its performance along others

• Therefore, an operating system should be configured

and managed so that it provides superiority alongdimensions that are competitively important, while

accepting lesser performance along those that aren’t

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OperationsOperations--Based Strategy:Based Strategy: Positioning Positioning

• Seek competitive superiority through: – lower cost, better quality (performance), more

flexible/responsive, more dependable, etc.

• Operating System Decision Categories:Structure Policies & Systems

Capacity Work schedulingFacilities Quality systems

Equip. Technology Human Resource PoliciesSourcing/”Make Measurement & Reward systemsvs. Buy” Product/process development

Resource Allocation & Organization

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Every operating source of strength...has an associated Weakness

 By making a series of such structural and infrastructural choices, you

• foster an ability to do certain things well, but

• reduce your effectiveness at other things

so

• a smart competitor can build an attack around your

strategic vulnerabilities

(as long as there’s a market for those capabilities!)

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OperationsOperations--Based Strategy:Based Strategy: Positioning Positioning

 Examples:• Austr. Paper Mfgers.: Higher quality/faster response

• Crown Equipment: Better design/customized prods.

• Southwest Airlines & Wal-Mart: Low cost

• Amer. Conn. Co.: Higher performing, customized

 products

• Japanese auto mfgers.: Fewer defects, more reliable

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OperationsOperations--Based Strategy:Based Strategy: Execution Execution

Being able to extract higher performance from

a given operating system in a given market

 niche than can your competitors,

through the cultivation of  superior organizational capabilities superior organizational capabilities:

e.g. “getting down the learning curve” –  Southwest Airlines fast aircraft turnaround times

 –  Boise Cascade’s fast plant build & start

 –  APM’s high quality and fast delivery times

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The sustainability ofThe sustainability ofExecution/CapabilitiesExecution/Capabilities--Based StrategiesBased Strategies

• Less Visible to/Underestimated by competitors• Difficult to imitate, replicate, or purchase

 – complex systems of people and organ. processes

e.g. Japanese TQM and Fast Product Development – often involve combinations of capabilities

e.g. FedEx: Hub-and-Spoke pickup/delivery system

Real-time package tracking system

Direct access (via Internet) customer checking“Virtual Order” ( elec. catalog & shipping)

• Dynamic in nature (leaders keep advancing)

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Defending through OperationsDefending through Operations

1. Exploit (and “sell”) your own strengths(but not beyond the point of diminishing returns)

2. Attack the inherent weaknesses in your

opponent’s operations strategy(e.g. Amer. Connector Co. and John Crane, Ltd.)

3. React so quickly to a competitor’s attack, that

it isn’t able to get too far ahead of you “down the

learning curve”(e.g. Microsoft vs. Netscape)

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The Role of Operations in CompetitiveThe Role of Operations in CompetitiveStrategy has Changed DramaticallyStrategy has Changed Dramatically

• Operations management used to be about – Being a good custodian of “industry standard” equipment

and methods

 – Not messing up too badly (or without warning)

• In such situations, the most important thingswere: – One’s competitive positioning in the marketplace

 – The relative power of suppliers, customers, substitutes,other competitors, and new entrants (firms who mightdecide to do what you do and take a share of your market)

 but not any more….

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What is different today?What is different today?• Today’s competitive landscape is

characterized by: –  Ongoing, relentless innovation

 –  Rapid changes: new niches, new tools, new players

 –  Not just random “benchmarking” or continuousattempts to improve - but focused, re-invention of

one’s business

• A more complicated game of chess… –  Where the players can invent new regions of the

board and new pieces, as well as the moves they are

able to make with them!

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Different types of capabilities:Different types of capabilities:

• Process-based (e.g. Australian Paper,Toshiba)

• System-based (e.g. Alleg. Ludlum, Frito-

Lay)• Organization-based (e.g. Lincoln Electric,

Wal-Mart, SouthWest Airlines)

• Paired (e.g. Federal Express)

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 Implications:

• You must identify & assess threats early

 –  emulating “world class” practices is not enough

 –  the most dangerous threats often come not from your

larger, more visible competitors, but from smaller onesin other countries and, often, in adjoining industries

• Begin experimenting with, and developing

capabilities before you really need them –  e.g. Federal Express, Hitachi Seiki (“mechatronics”)

 Building superior capabilities requires time Building superior capabilities requires time

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Some Common Lessons inSome Common Lessons inOperationsOperations--Based Attacks and DefensesBased Attacks and Defenses

Vulnerable Defenders tended to....Vulnerable Defenders tended to.... – View their competitor’s capabilities through

the distorting lens of their own operating

approaches – Put too much faith in the power of static assets

• size, patents, and asset base

• reputation, brand name, and ind’y “tradition”

 – Assume that required new capabilities could

be bought, licensed, or copied easily

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Some Common Lessons inSome Common Lessons in

OperationsOperations--Based Attacks and DefensesBased Attacks and Defenses

While Effective DefendersWhile Effective Defenders......

 – Recognized that it takes a long time to developmajor new capabilities

 – Were constantly scanning the horizon for

potential competitors and new operatingapproaches

 –  Understood that “winning the game” is not

enough...one must also be able to spot, andquickly master, the introduction of a new game

e.g.: Federal Express and Microsoft confront the Internet