Wednesday, August 25, 2010

Best Practices: Not Good Enough

Are best practices enough to create competitive advantage? What about adding business capabilities when you need it – the organically growing business function capabilities that most firm subscribe to? My contention is that both of these practices, though wide-spread, do nothing toward creating competitive advantages, because both of them are reactive in nature. To create real advantage, firms must be pro-active and must design their capabilities to forge ahead, to pioneer, to create advantages that are not yet “best practices”. This is one of the takeaways from my upcoming book on supply chain strategy.
Listen to my audio blog below supported with real examples from the industry or read below to see why. Part of my ongoing interviews with Logipi: Supply Chain Intelligence.

Vivek Sehgal Best practices & organic evolution of business functions
Last time, I spoke to Dustin about my upcoming book on supply chain titled, “Supply Chain as Strategic Asset: The Key to Reaching Business Goals”. We spoke about the main takeaways from the book. The first takeaway we talked about was how best practices can only lead to parity and not competitive advantage. And that is the subject for today -- I will explain it further and provide some examples to support the concept.
First and foremost -- the best practices are based on an industry’s general idea of handling an existing process that is considered optimal. This has two consequences -- first, this is not a forward-looking exercise, but reactive -- the best practices are based on what the industry does today and not focused on the future, it misses on innovation. Second, since these practices already exist, pursuing them can only bring parity with the generally acceptable business capabilities in an industry. To create competitive advantages, the firms must create capabilities that are better, superior, and go beyond the “generally acceptable business capabilities” within an industry.
Consider what would have happened to Dell in mid-80s, if it had decided to pursue the so called industry best practices. The best practice for the personal computer manufacturers, at the time, was to take large orders and make quarterly deliveries to the intermediaries. Dell’s “configure-to-order” model was definitely not a “best practice”, but a mere novelty. But for Dell’s business model based on providing differentiated products and experience, it made the most sense. There were other innovations as well, that Dell started which were definitely not the industry “best practices” at the time. Consider the fact that Dell set-up manufacturing factories close to the customers so that they can ship the machines faster, or the fact that the end-consumer could configure the exact specifications they wanted on a machine and track the status of their order as it was being built, or the fact that Dell started a substantial vendor-owned-inventory practice in the manufacturing industry -- and did it to their advantage. None of these were anywhere the “best practices” at the time -- had Dell fallen into the trap of following “best practices”, chances are they would have gone the Compaq way. Instead, Dell planned their own supply chain evolution, their own “best practices” by aligning their supply chain to their business strategy that was based on providing a differentiated product and a differentiated experience to its customers. This meant that Dell wanted to provide the customers the ability to configure their own machine, track their orders, build them fast so they can be shipped faster to their customers, and so on. And instead of looking to the “best practices” to help them, Dell analyzed the business requirements and pro-actively created what worked for them.
That brings me to the secondary point that business functions that grow organically -- simply don’t deliver any competitive advantages. Again, the underlying reasons are similar -- the model of organic evolution of business processes is reactive by design and therefore, it is like building fire-fighting infrastructure when the house is already on fire. To be successful, you must be pro-active, to build competitive advantages, you have to plan ahead and build capabilities that you will need to grow and be competitive -- instead of simply reacting to the business needs of the time to build capabilities.
Another great example is Wal-Mart. During Wal-Mart’s early years, the best practices in Retail were defined by companies like Kmart -- there were not many retailers with their own distribution network, not many retailers who had cut-out the wholesalers and bought directly from manufacturers, and not many retailers who had real-time data communication with their stores! Wal-Mart created these capabilities, not by looking at the industry “best practices” and not through organic growth, they created these capabilities pro-actively and by following their business strategy of becoming and staying the price-leader. And of course, Wal-Mart continues to innovate -- the latest innovations being the cross-docking operations, real-time demand sharing with vendors, RFID…. the list continues, and once again, Wal-Mart is defining these “best practices” that work for them, pro-actively creating business capabilities and building competitive advantages rather than simply reacting to the business needs of the moment.
So, that is what I mean when I say that pursuing the best practices is just not sufficient, nor is organic evolution -- if you wish to create competitive advantages, you must pro-actively design superior capabilities to create those advantages.
Next time -- I will talk about the next takeaway of why the existing supply chain strategies don’t deliver and why is it necessary for the firms to deliberately design their supply chain rather than pursuing concepts that are just not relevant.
© Vivek Sehgal, 2010, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my books on Supply Chain Management at Amazon.

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