Friday, February 25, 2011

Cost as the Dominant Business Strategy

Reducing costs as a strategy has become a primary strategy for many businesses in recent years. I believe that this trend will continue over the fore-seeable future.

image There are several reasons for this, but the most important reason is that the increasing globalization results in more and more commoditization of products that deteriorate the brand premiums and indirectly deal a blow to differentiation as a strategy. The face of this commoditization in America is Wal-Mart and its assortment of cheap functional products that address the utilitarian functions without the brand premium. But this process is not limited to America: it is widespread across the globe, with the growth of the middle class in China and India and their aspirations to match the lifestyles of developed countries at a fraction of the cost. Both of these phenomena, that of Wal-Mart driving down costs to expand its market share and of developing countries providing new markets for cheaper utilitarian products, have propelled cost as a strategy to the forefront of the three fundamental strategies suggested by Porter.

If cost is the core strategy of choice, then supply chain becomes the core business function that can help corporations realize that strategy. Examples of creating and maintaining competitive advantage through supply chain capabilities abound, with Wal-Mart being the most obvious and visible. Due to the large scope of business operations controlled by the supply chain processes, they directly control the cost of goods and hence the ability of a company to deploy cost as a strategy.

Strategy+Business published a Data-Points study, A Big Change in Emerging-market Spending showing the above trend clearly. It projects that in emerging markets percentage of total spending on essentials (food, beverages & tobacco) decreases from 61% in 1990 to 25% in 2012. During the same period, the total spend increases from a mere 823 billion dollars to 6.1 trillion dollars! That is a lot of money chasing the utilitarian products to raise the quality of life for the newly emerging middle-classes in the emerging economies (Brazil, China, India, Indonesian, Malaysia, and Thailand). And a lot of opportunities for businesses everywhere to leverage using a cost-focused strategy.


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Thursday, February 24, 2011

What is Your Strategy Doing for You?

Around half the executives believed that their strategies simply were directed at matching industry best practices & delivering operational imperatives – that is the finding from a McKinsey survey conducted online in November 2010.
Matching industry best practices is not quite the realm of strategy – since the most it can do for you is to bring you at par with what the industry is already doing or what is generally an expected capability in the industry. That does not create any competitive advantages nor does it guarantee long-term survival/growth and it definitely does position any company for a long-term leadership position.
imageThe second aspect of delivering operational imperatives is even more immediate from the focus point of view and can hardly be seen as strategy. With the increasing advent of computerized systems and automated processes, operational excellence also has become more of “must have” capability to compete rather than a capability to provide any distinct competitive advantage. 
Part of the reasons behind such short-term focus on business has to be the recent recession which had everyone focused on short-term survival, but another part could very well be the Wall Street culture of focusing on the next quarter! On the other hand, however, just over half of the executives (53%) did emphasize that their strategies were based on creating advantages over their competition – which is the core domain of strategic planning in business. That is good news for these companies since these will be the leading corporations of tomorrow.

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© Vivek Sehgal, 2011, 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.

Wednesday, February 23, 2011

Improvising on Drucker: Measure What Matters

Peter Drucker famously gave us the quote, “what gets measured, gets managed”. That is precisely why companies must carefully plan what they measure. Measure the wrong thing and you will soon have a company with poor performance but very successful individuals performing their best.

Michael Hammer’s (co-author of Reengineering the Corporation) new book, “Faster, Cheaper, Better” now officially lists the seven sins of (performance) measurement. This book is really about lists – there are 9 levers for changing how work gets done, there are 7 principles of process design, there are 5 key values for a process culture, and so on. There is all kinds of advice – some practical, some philosophical, but I liked the following list of seven sins of measurement the best. Here is a quick summary, but you can read a more comprehensive report in this article from Strategy+Business magazine.


  1. Vanity. Don’t measure what you know will make you look good and that has no other relevance to the business.
  2. Provincialism. Don’t measure the departmental efficiency, measure the efficiency of the whole business. Optimize, don’t sub-optimize!
  3. Narcissism. Measure from the customer’s point of view, not from your own!
  4. Laziness. Don’t assume you know what should ne measured, establish what is truly relevant and then measure it, not what is easy or what has always been measured. (Of course, that means you must first analyze your business to establish what is relevant).
  5. Pettiness. Don’t measure the parts, measure the efficiency of the whole – as in measure how effective the end-to-end process is, rather than measuring how effective individual parts of a process are.  
  6. Inanity. Measure what matters because metrics drive behavior. (This seems to me similar to the one above under Laziness).
  7. Frivolity. Take it seriously, if you don’t like what the numbers tell, find out why rather than ridiculing or questioning the exercise.

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© Vivek Sehgal, 2011, 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.

Tuesday, February 22, 2011

Taking a Pulse of Wal-Mart’s Suppliers

Wal-Mart’s promise of “always low prices, always” is partly based on the volume of its business with its vendors and hence its ability to command prices that no other retailer can command. This has always created the perception of Wal-Mart squeezing their suppliers to drive the costs out of the system. Myth or reality?

Retailing Today recently released the first ever “2010 Walmart Supplier Survey”. On what makes it so special, Mike Troy, the editor writes, “Well, aside from the fact that it’s never been done before, the opinions of suppliers are particularly relevant at this point in time because Walmart is looking to restore momentum to its business in 2011, and, for the past six months, has sought to re-engage with its supplier community in order to do so”. In part, this fits well with Bill Simon’s strategy to re-engage with suppliers that he articulated after taking over as the CEO of its US operations.

CPFR (collaborative planning, forecasting, and replenishment) and supply chain are among the top concerns of Wal-Mart suppliers. Some highlights:

  • On “Suppliers’ greatest concerns regarding managing their business with Walmart during the next five years”: In the first place, 69% of the suppliers listed “driving profitable sales growth” as their top-most concern. This is followed by “store–level execution” (50%) in third place and “joint business planning and collaboration” (42%) in fourth place.
  • On “Walmart suppliers’ greatest need in the coming year”: In the first place, 46% selected “shopper insights/market research”, followed by 33% selecting “Supply chain management/replenishment”.
  • On “Retailers that suppliers believe represent the greatest competitive threat to Walmart U.S. in the next five years”: “Dollar General/Family Dollar” won the top spot with 63% suppliers votes with “Target” in second spot with 54% suppliers, followed by Kroger (33%) and Amazon (30%).

The report is full of data and charts that would be interesting to those who follow retail/Wal-Mart.

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© Vivek Sehgal, 2011, 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.

Monday, February 21, 2011

If It does not Work, Blame the Technology?

Today, most business processes are enabled through technology. That should ideally put technologists (read CIO and their teams) in an enviable position. But the reality is far from it – technology actually gets a pretty bad rap when it comes to such assessment from the business. Most often, from the business’s point of view, technology fails to create significant value, fails to deliver the promised efficiencies and the desired value on the investments. This is true for most major corporate IT initiative, whether they were a result of business driving technology or the other way around. Most supply chain initiatives have a large functional and organization footprint and therefore, often fall into a similar trap. But is technology really to blame for the low returns or is there more to it?


When firms invest in packaged business solutions, one of the most common and misguided expectations is that the solution will fully enable their existing processes. This is misguided because the packaged software solutions are built to provide only a certain amount of process support that is (1) common across industries and (2) generally considered the best practice in an industry/segment. None of which ensures that the solution will fully enable their existing processes. To make matters worse, such business initiatives generally do not involve any planned changes in the business process even when the existing processes do not fully support the needs. In fact, most of the initiatives do not involve any capability assessment to ensure that the business processes are designed to support the business strategy and the advantages it seeks to create.

No wonder, a large number of such ill-planned initiatives fail to produce the expected results. Jim Shepherd of Gartner (First Thing Monday column, 2/21/2011) estimated that 30% to 50% of ERP projects are thought to be “failures” by the people who were thinking of implementing one. But he says that this may just be another “urban myth” – because of the unrealistic expectations of the organization from a technology. He think that an ERP should be seen more like an “infrastructure” (enabling transaction processing, data management, process integration and information access) rather than the “streamlined (business) processes”. To quote him, “ERP should be viewed as the stable infrastructure that allows an organization to create and deploy the kind of innovation and differentiation that drives real business improvements”.

That is a view I fully support – technology is simply an enabler. The differentiation and hence the competitive advantages can be created only through business capabilities that are superior to others. Such superiority is never an accident, but must be a result of deliberate design of business processes that support your strategy. To learn about how you can assess your supply chain capabilities and drive competitive advantage by designing the right supply chain capabilities, continue reading on the subject in my book on supply chain strategy.


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© Vivek Sehgal, 2011, 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.

Friday, February 11, 2011

Building Capabilities to Win

image The concept of business strategy has existed for a very long time. Pinning down the exact date may be difficult – from The Art of War written about 2,500 years ago to the invisible hand of Adam Smith in the mid-eighteenth century – however, that is not important. The most important part in the continuum of strategy is the actual execution of strategy, because that alone produces the advantages theorized by a strategy. But the execution of a strategy does not produce advantages directly, rather it simply creates business capabilities that in turn creates the competitive advantages enabling a corporation to win.

While a lot has been said on business strategy since Michael Porter came up with his three generic strategies, most of the later concepts are simply variations of these three. The three generic strategies of cost, differentiation, and focus continue to be the true basis of all competitive advantage simply because these are the three lowest common denominators of all business activity that consists of selling (hence the cost) product and services (hence the differentiation) to customers (hence the focus).

The ability of a business strategy to drive the required business capabilities is the key to creating successful functional strategies such as the strategy for supply chains. While the concept of a functional strategy is not quite well main-stream yet, it happens to be the missing link in the strategy continuum for a long time – and this is the crux of my book on supply chain strategy, though lately some other people have also started talking about how capabilities mandated by the business strategy can drive the competitive advantages.

imageIn the winter 2010 issue 61 of the strategy+business magazine, in an article titled, “How The Top Innovators Keep Winning”, the authors argue that it isn’t the amount of money companies spend on research and development that makes them successful, rather it is the particular combination of talent, knowledge, team structures, tools, and processes — the capabilities — that successful companies put together to enable their innovation efforts, and thus create products and services they can successfully take to market. I fully agree with this view point, the capabilities of a corporation are really the only distinct advantages over the competition – specially when seen in their broader context, and these capabilities are created only through a relentless pursuit of understanding what the business strategy mandates and a continuous assessment of “capability gaps” compared to the mandate.

While a lot of supply chain strategy thinking is stuck around the keywords like lean, agile, postponement, speculation, and so on – the real advantages from a supply chain can only be created after a thoughtful assessment of the business mandate and an assessment of existing capabilities. How can one go about doing that? Explore several practical methodologies and real deliverables in my book on supply chain strategy.

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© Vivek Sehgal, 2011, 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.

Friday, February 4, 2011

Connecting Strategy to Supply Chain

Going from business strategy development to creating tangible competitive advantages is a long journey. Because no strategy, however brilliant, produces results unless executed.

Therefore, to be useful, a strategy must be implemented. This means that the strategy that establishes the business goals, through which competitive advantage will be created, must then be expanded to articulate actions that will take the business toward its strategic goals. This whole process can be thought of as consisting of three basic steps:

1. Strategy development, that is, the process of evaluating the internal and external imperatives, analyzing the industry, products, and customers, and defining an overriding principle of how the company will try to grow. This is equivalent to defining the ‘‘what’’ and ‘‘why’’ of the problem.

2. Strategy planning is the process of assessing the current state of the corporation and evaluating various alternatives that can be potentially considered to achieve the stated imperatives of the business strategy. This step consists of analysis, evaluation, articulation, and prioritization of these alternatives, in effect defining the ‘‘how’’ of the problem.

3. Strategy implementation is the process of starting and managing the individual projects to implement the favored alternative from step two.

image While most companies have some level of formally defined process for developing a business strategy (step 1 above) and an ongoing slew of projects (step 3 above) creating new capabilities and enhancing existing ones, most do not have a formal process for the activities identified in the strategy planning step. Strategy+business, a management magazine also recognized this gap in a recent article, even though they did not distinguish between the planning and execution phases as above. While the planning phase focus on gap-imageassessment of a firm’s business capabilities, therefore determining what must be done, strategy execution emphasizes the actual execution activities: program management, project management, change management, communication, training, and all other organizational aspects for successful execution. While that is important, the intermediate analysis provided by strategy planning is the missing link in most modern corporations in any recognizable formal fashion. In absence of this planning step, corporations fail to establish and prioritize the execution efforts that are aligned with the goals of the business strategy, and fail to identify and prioritize the filling of specific capability gaps.

This middle step of strategy planning, is what I call functional strategy. This is the step where firms must assess their business capabilities and determine (1) what capabilities they must build that are aligned to their business strategy and (2) how they must build them to create differentiators to create competitive advantage. This is where the business functions such as supply chain fit-in. This is where a firm needs to assess their current and required supply-chain capabilities to identify the gaps and prioritize their investments in building those missing capabilities. This also gets emphasized in the quoted article above.


Joining the business strategy to the functional strategy by assessing your supply-chain capabilities is the key to building successful supply chains. The final piece of execution is what I call deployment strategy falls into place when real projects enabling specific process are planned, budgeted, spun off, and executed. Understanding this continuum from the business strategy to functional to deployment is key to successfully creating competitive advantages to support your business objectives. For more on the process of building effective supply chains, read my latest book on supply chain strategy.

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© Vivek Sehgal, 2011, 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.

Tuesday, February 1, 2011

Effective Supply Chains and the Organization

In a recent article, McKinsey argues that to be successful, future supply chains will require a rethinking of the internal organizations – where the focus is on collaboration rather than competition. I could not agree more.
The conventional departmental silos in the companies were originally a simple outcome of complex business processes without any intelligent system support. As computer systems evolved, the gap between the complexity of a process and the ability of a technology solution to support the process has narrowed consistently. This has provided businesses with new opportunities to break-down these silos and create nearly integrated (and automated) processes with real-time feedback among processes. Starting with the ERP systems in 1980s, this trend has continued with systems like MRP, DRP, and the current supply-chain systems that have the ability to provide an end-to-end automation of most complex business processes to reduce costs, increase efficiencies and enrich information quality that improves the overall experience for everyone involved in the process – employees, customers, vendors, and service providers.
However, the organizational change to leverage such powerful integrated process capabilities has somewhat lagged behind. Modern supply chains can cover a very large scope of the operations – from demand forecasting through purchasing and manufacturing to the distribution and service of a firm’s products and services. Unfortunately, a large number of companies still view these through the conventional silos of departmental thinking and in doing so, potentially sacrificing some of the efficiencies possible through such systems, though the trend is encouraging. An AMR survey (Supply Chain Gets a Promotion by Kevin O’Marah) found that the number of respondents who said that their supply chain reports to the president/CEO/GM, who owns overall P&L responsibility rose from 51% in 2009 to 62% in 2010. While the integrated view is evolving, 62% is still a long ways to go!
imageIn the referenced article, Is your top team undermining your supply chain, McKinsey makes similar arguments and primarily lists three tensions among organizational silos, supply chain versus sales, supply chain versus service, and supply chain versus product proliferation. I agree with this view – while the availability of packaged software solutions and technologies brings capability parity to an extent, the true competitive advantage is generally a result of a complex interplay of business capabilities, process superiority, and organizational capabilities. To be truly effective, supply chains of the future will not only have to design and build effective capabilities to address ever-evolving business needs, but also effective organizations to leverage such capabilities.
This article is adopted from my book, Supply Chain as Strategic Asset: The Key to Reaching Business Goals. You can continue reading more about the subject in the book.
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© Vivek Sehgal, 2010, All Rights Reserved.

Want to know more about supply chains? How they work, what they afford, and how to design one? Check out my books on Supply Chain Management at Amazon.