Thursday, April 16, 2009

Business, Functional & Deployment Strategy Alignment for Supply Chains

Business strategy alone can direct, but does not deliver. It can set the direction, provide objectives, specify the desired corporate goals, but does not take you there. That important step is left to the strategy execution. What does that consist of: converting the business strategy into the functional and deployment strategies, and converting them further down to individual plans and projects that can be executed. If each of the functional strategies are aligned with the business strategy and support the goals set by the business strategy, then it becomes a powerful roadmap for achieving the desired results. The rest of the discussion deals with the functional and deployment level strategy and execution, and tries to establish the correlation and the need for alignment among these three levels of strategies.

I am using the words "functional strategy" to emphasize the fact that functional capabilities provide functional competencies that allow the corporations to achieve their strategic goals, as well as establish competitive advantage in most cases. This is also the premise of competitive advantage that Porter talks about in his strategy discussions. The "deployment strategy" is primarily a reference to technology strategy since technology has become the de-facto enabler for the business processes, and it directly affects the cost of creating, enhancing and maintaining such capabilities. This (enabling technology) is generally seen as a support activity in conventional strategy literature, but the acute dependence on technology for day-to-day operations has changed the way companies must plan for technology today.

Functional strategies most important to a retailer would be the strategies for supply chain, merchandising, and store operations. Depending on the business of the corporation, this focus may change. In retail or manufacturing industries, supply chains will remain a huge focus area for developing process competency through strategy planning, as a very large part of the corporate operations fall within the scope of supply chain management processes. Ensuring that the supply chain strategy is aligned with the business strategy not only helps reach these goals, but also provides an objective method for prioritizing the supply chain initiatives within other organizational and functional constraints. An example of such organizational constraint can be the available funds that must be spread across all functional initiatives including the supply chain. An example of a functional constraint can be the unavailability of consistent item master data across various stores, that may then constrain the ability to correctly plan for the optimal inventory across the enterprise. A functional strategy defines the guidelines for the prioritization of functional areas where the development of organizational competence will get the biggest rewards.

Consider a retailer whose business strategy revolves around providing value pricing. This strategy can be achieved through merchandising functions by changing assortments to cheaper products that functionally serve the same utilitarian function as a more expensive product, or by creating store brands where costs are closely controlled by the retailer. The same strategy can also be achieved through improving supply chain functions that reduce the cost of operations like better inventory planning, transportation optimization, cross-docking; by having a lower cost basis, the savings can then be passed on as value based pricing. The strategy objectives can also be reached through enhanced store operations like better labor planning, reducing floor associates through installation of price checking stations, product finder stations, and self-service POS lanes; again the savings can be passed to the customers in the form of value based pricing.


Which one of the above is the best course of action? This question can only be answered by rising above individual functions and considering all of the following:

  • What is the target for value based pricing? How much difference does the retailer wish to maintain with the competition?
  • Is changing assortment for pursuing the value based pricing even feasible? This could be true for commodity items, but not where consumers value the brands.
  • What is the potential of each strategy for providing the value based pricing, which one provides the largest profitability potential?
  • What is the cost and time for implementation of each of the functional strategies?
  • What other benefits each of the strategies provide? As none of these solutions work in isolation, they do have other consequences as well. For example, reducing knowledgeable store associates does affect customer service negatively.
  • What strategies produce synergies with other corporate goals? For example, improving demand and inventory planning may also support more flexibility in refreshing assortments more frequently.

A functional strategy establishes the direction for creating, enhancing, and maintaining the functional competence within the functional area. Such a strategy will not only support the business strategy, but may also provide options to consider that may not be available in absence of a specific functional competence. For example, once the competitive price collection and analysis capability is established as part of the functional strategy execution, then value based pricing may have another option of defining store specific value pricing using the regional competitive data, rather than having a chain-wide pricing strategy. Either way, the functional strategies establish the direction for the evolution of functional competence, and a functional strategy that is fully aligned with the business strategy is always most desirable.

As almost all functional processes are enabled and supported by technology, having a technology strategy that is aligned with the business and functional strategies is equally necessary. Technology strategy is driven by the business strategy, but in turn, it also drives the business strategy. For example, a business strategy for developing inventory planning capabilities drives the technology solution to be pursued, but the technology pursued may drive the need for establishing common master data across enterprise divisions to effectively deliver the inventory planning capabilities. This introduces another level of complexity in aligning the three strategies and prioritizing the investments. I call this a "process sequencing constraint" where a process capability cannot be developed without first developing another process capability. These constraints can be soft when they can be worked around, or hard when they cannot be worked around. In the above example, having a common item master is desirable, but by developing an interim solution for mapping several divisional item masters, the problem can be solved to an extent. However, if the functional strategy wanted to pursue transportation optimization, but master data on the shipping attributes of the items/orders was missing, it would almost be a hard constraint. Therefore technology strategy also affects the business strategy as much as it supports it.

In fact, as most of the investments for creating a functional capability remain in technology, it has the potential to become a real constraint, limiting the flexibility of the business, if it has not been thought through, and aligned with the other two.

Technology strategy establishes the direction for the applications (custom, packaged, SaaS, etc.), information (master data, meta-data, business intelligence, etc.), and technology (hardware, software, vendors, open source, SOA, etc.). These decisions, in turn, affect the cost of deploying functional strategies, as well as the TCO for creating and maintaining the process capabilities and organizational competence.

In summary, it pays to have functional and deployment strategies closely aligned to the business strategy. It provides a roadmap for organizational evolution, as well as a practical tool for prioritization of spend on developing process competencies mandated by the business strategy.

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