Levels of Strategy

1. Levels of Strategy Diagram adapted from Restoring Our Competitive Edge by R.H. Hayes & S. C. Wheelwrightand from“Manufacturing Strategic Planning” by D. A. Garvin.

2. Cartoon

3. Typical Views of Manufacturing In some companies, many managers believe that there is no such thing as a Manufacturing Strategy. The quotes on the next slide illustrate the belief that Manufacturing exists to do whatever it takes to satisfy R&D and Marketing/Sales.

4. Typical Views of Manufacturing(continued) “R&D designs the product, Marketing/Sales sells the product, and then Manufacturing produces what it’s told when it’s told.” “Manufacturing is supposed to make up R&D delays and change orders and meet whatever promises are made by Marketing/Sales.” “In our top management meetings, R&D and Marketing/Sales dominate the discussion and, at the end of the meeting, Manufacturing is told what to do.” “Everything is going well in Manufacturing when you don’t hear any complaints about it.”

5. Typical Views of Manufacturing(continued) • In this session, my goals are: • To convince you that the quotes on the previous slide are wrong and that there is such a thing as a Manufacturing Strategy. • To provide you with a broad framework for thinking about a Manufacturing Strategy. During the remainder of our sessions, we will see both good and bad elements of a Manufacturing Strategy.

6. Reason #1 Why “Chipping Away” at Productivity Doesn’t Work “Chipping away” at Productivity does NOT work because: 1. It is concerned mostly with the efficiency of direct labor, which is a low percentage of total costs. In contrast to Direct Costs, Indirect Costs are costs associated with activities such as process engineering, software development, quality control, and maintenance. Direct Labor Costs as a percentage of Total Costs:

7. Reason #2 Why “Chipping Away” at Productivity Doesn’t Work “Chipping away” at Productivity does NOT work because: 2. It focuses excessively on improving workers’ efficiency. • Studies have shown that improvements that lower costs can be categorized as follows: • 40% Manufacturing Structure (e.g., the number, size, location, & capacity of facilities) and Materials Management • 40% Equipment and Process Technology • 20% Conventional Productivity Improvement • There is a higher “payoff” to focusing on the two 40% categories.

8. Reason #3 Why “Chipping Away” at Productivity Doesn’t Work “Chipping away” at Productivity does NOT work because: 3. It fails to support any other business strategy than being a “low-cost” provider. As we will see later in this session, sometimes the business strategy should place less priority on Cost and more priority on Quality, Dependability, or Flexibility. Examples: Mercedes and Ritz-Carlton.

9. Corporate Culture

10. Corporate Culture(continued) Corporate Culture is the set of guiding principles, driving forces, and engrained attitudes that help communicate to all employees at all levels of the organization goals, plans, policies, and what is right and wrong. Corporate Culture is reinforced through conscious behavior and unconscious behavior. Dress Signs Interaction Between Management and Labor Mission Statement

11. Corporate Culture at Southwest Airlines • At Southwest, there is a Culture Committee with 100+ members to reinforce the culture by: • Planning celebrations. • Ensuring that new employees understand the airline’s “underdog” origins. • Passing on to all employees extraordinary customer service by an employee that captures the “spirit” of Southwest.

12. The Best Mission Statement That I Have Ever Seen Posted throughout the plant of a Japanese shipbuilder:

13. Definition of Strategy Webster’s Dictionary defines “strategy” as follows: • “… the science and art of military command • used to meet the enemy in combat • under advantageous conditions.” • business management • “… the science and art of ^ military command • competitor in competition • used to meet the ^ enemy in combat • under advantageous conditions.”

14. Corporate Strategy

15. Corporate Strategy(continued) The Corporate Strategy: 1. Specifies the businesses in which the corporation will compete – that is, the number and type of business units and, for each business unit, the geographic and demographic markets in which the business unit will compete. • Toyota has Toyota and Lexus. • Marriott has Marriott Hotels, Courtyard by Marriott, & Fairfield Inn. • Gap has Banana Republic, The Gap, & Old Navy. 2. Acquires important corporate resources ($$$ and personnel) and then allocates these resources across the business units.

16. Business Strategy The Business Strategy specifies the priorities with which the business unit will achieve and maintain its competitive advantage.

17. The Four Major Categoriesof Competitive Prioritiesfor a Business Strategy • A customer buys a product or service because of his/her perception of • Cost • Quality • Delivery • Flexibility

18. Costand its Subcategories • Cost • Initial Cost (purchase cost of an auto) • Operating Cost (gasoline cost per mile) • Maintenance Cost (cost of a tune-up)

19. Qualityand its Subcategories • Quality • Performance (primary characteristics; e.g., picture clarity for a TV) • Features (secondary characteristics; e.g., remote control for a TV) • Reliability (frequency that repair is needed) • Conformance (to pre-specified standards) • Durability (time until replacement is needed instead of repair) • Serviceability (speed, courtesy, competence) • Aesthetics (look, feel, smell) • Perceived Quality (brand image; e.g., for Mercedes or Rolex)

20. Deliveryand its Subcategories • Delivery • Accuracy/Completeness (correct items in correct quantities) • Dependability (on-time delivery) • Availability (in-stock) • Speed (lead time; i.e., elapsed time from placement of order until its receipt) • Information Availability (use Internet for real-time order status) • Quality after Shipment (breakage) • Ease of Ordering (ability to order over Internet) • Shipment Flexibility (ability to expedite a shipment) • Ease of Return • Customer Support

21. Flexibilityand its Subcategories • Flexibility • Product Flexibility (features, innovation, and ability to customize) • Volume Flexibility (response to unanticipated demand) • Process Flexibility (adapt process to provide a variety of products)

22. Remarks about Competitive Prioritiesfor a Business Strategy 1. Within the same corporation, different business units will probably have different business strategies. 2. For a business unit, it is difficult and perhaps even dangerous to emphasize all four of C, Q, D, & F. It is best to focus on at most two of C, Q, D, & F. 3. Once a business unit chooses a competitive priority, then it is difficult and perhaps even dangerous to emphasize all subcategories within the priority. For example, if Q is chosen, then it is best to focus on just a few of the 8 subcategories on Slide #19. 4. A business unit’s management must quickly recognize when an internal decision (e.g., introduction of a new product) or an external factor (e.g., a new competitor) requires a change in the business strategy.

23. The Business Strategy Depends on the Position in the Product-Process Matrix

24. Functional Strategies

25. Functional StrategiesVertical & Horizontal Coordination Vertical Coordination. Management of the Business Unit must clearly communicate the business strategy to the managers of Functional Areas. Horizontal Coordination. Through a specific and consistent pattern of decisions, all functional strategies must support the competitive priorities of the business strategy. Which is harder – Vertical Coordination or Horizontal Coordination?

26. A “Nightmare” ofFunctional Strategies Management of the Business Unit never communicates the business strategy to the managers of the Functional Areas and is ignorant of the fact that R&D thinks that the competitive priority is Flexibility and thinks that it can demand as many change orders as it wants. Manufacturing thinks that the competitive priority is Cost and bases all its decisions on what is the cheapest thing to do. Marketing/Sales thinks that the competitive priority is Dependability and feels it can promise delivery as soon as a customer wants its.

27. Manufacturing Strategy

28. Manufacturing Strategy(continued) • The purpose of the Manufacturing Strategy is to: • Support the Business Strategy. • Complement the other Functional Strategies. For example, in many companies, there is frequently a tension between R&D and Manufacturing. R&D views itself as a collection of creative people with the role of designing the most innovative product possible, even if it means submitting to Manufacturing a continual stream of change-orders. On the other hand, Manufacturing views itself as a collection of practical people with the role of minimizing the manufacturing cost per unit. Who is right – R&D or Manufacturing?

29. Manufacturing StrategyTwo Types of Decisions

30. References Restoring Our Competitive Edge, Robert H. Hayes and Steven C. Wheelwright, John Wiley & Sons, New York, 1984. “The Productivity Paradox”, Wickham Skinner, Harvard Business Review, July-August 1986, pp 55-59. “Competing on the Eight Dimensions of Quality”, David A. Garvin, Harvard Business Review, Nov.-Dec. 1987, pp 101-109. “Manufacturing Strategic Planning”, David A. Garvin, California Management Review, Summer 1993, pp 85-106.