Thursday, March 10, 2011

Understanding Advantage

imageIn several of my articles on supply chain strategy, I have emphasized that capabilities are the origin of all competitive advantages. So what must a capability deliver to create such competitive advantage and contribute towards achieving the goals of the business strategy?
In simple terms, a firm will have a competitive advantage, if its products are superior or if it provides superior customer service and so on.
If the advantage comes from superiority, then what makes something superior to another? What creates superiority in a product or service or process? Let us review the question from the point of view of supply chain processes,  assuming that superior supply chain processes will create competitive advantage for a company. Between two business processes enabling an identical function, when is one business process superior? I contend that a business process is superior to another when it has at least one of the following advantages over the other:

Time Advantage

Time advantage is created when one of the business processes is faster than the other in achieving the same result. Time advantage is best exemplified with the time to market examples. Time advantage is typically created through careful analysis of all the activities supporting a process and elimination of those that don’t add any value to the process, but only add lead time.
Time advantage can create product premiums, increased revenues, longer product life cycles, and intangible differentiator levers (such as brand value or an image of being innovative or agile). It becomes a competitive advantage when the firm develops processes that will enable it to quickly introduce new products in the market and portray the company as a pioneer and when the firm’s business strategy leverages such differentiation through a premium brand image to grow market share and increase revenues.

Cost Advantage

Cost advantage is created when the superior business process is cheaper to operate than the inferior other. Cost advantage can be created through elimination of waste from the process, but also by optimizing the process within the process constraints. A lot of supply chain processes fall in this category and can provide finite cost advantages when implemented correctly. Inventory planning processes within the supply chain function is a good example in this category.
Or, in a manufacturing industry, cost advantages may arise from better manufacturing process, cheaper inputs, or higher levels of automation that increase efficiency. Reducing set-up change time, reducing the frequency of such changes, and increasing batch sizes are several commonly used methods to reduce per unit manufacturing costs. However, a superior manufacturing process will potentially have a comparable cost structure, but allow for short batch sizes to enable flexible factory schedules.
Every revised iteration of the original business process can potentially improve the existing cost structure and provide a continued superiority afforded by the process. These improvements are necessary to sustain the advantage over time. Cost advantage allows the company to become more profitable or expand its market share.

Efficiency Advantage

Efficiency advantage is created when the superior business processes provide higher throughput. Throughput measures the output of a process per unit time. Sometimes, efficiency may mean asset utilization, such as the utilization of the assembly line in a manufacturing context, blast furnace utilization in steel production, or a jockey’s utilization in the warehouse of a retailer. Assets in the context of efficiency can be people, machinery, or technology, anything that it costs to maintain and provides a useful function in the business process. The efficiency advantage can be created by automating, simplifying, or expediting a process. Efficiency advantage normally results in more favorable cost structure and supports a cost-based business strategy.
Think of the flexibility as part of the efficiency advantage. After all, there is no point in efficiently building widgets that no one wants. Therefore, flexibility of a process to change and adapt in response to the changes in the business environment is an advantage that should be built into the process. This flexibility in manufacturing environments typically shows up as set-up change time, while in nonmanufacturing industries, it may be the time required to respond to changing demand.

Quality Advantage

Quality advantage is created when the superior business process creates fewer defects than the inferior one. Quality advantage is generally a result of standardizing, automating, or simplifying a process. In the manufacturing context, a statistical process control (SPC) that allows companies to monitor the health of the process to reduce defects is a good example of this advantage. When compared to the conventional quality control processes that detect the defects after the product has been manufactured, the SPC-based approach prevents production of defective products by monitoring key process parameters. Quality advantage in the nonmanufacturing context relates to the ability of a process to consistently produce the same result (dependability and repeatability), and this definition can be applied to any business function, such as processing customer orders, fulfilling orders from a warehouse, creating replenishment demand, customer service, and so on. Quality advantage can reduce costs by preventing defects or introduce produce differentiators through better quality, such as increased customer satisfaction, customer retention, brand value, product durability, and so on. In all these cases, the quality advantage can support a business strategy by creating a differentiator with a potential value for which the buyer is ready to pay a premium.
Finally, for any process or capability to be able to create a real competitive advantage, the following two conditions must be fulfilled:
1. The value created through the superior process must be valuable enough to the buyer that she is ready to pay a premium for the differentiator created by this process or move her business to the firm to take advantage of this differentiator.
2. The cost of creating the process superiority must be less than the premium generated through the differentiator advantage created by the process.
Unless these two conditions are met, no advantage can be realized. If the cost of creating the differentiation is more than the premium it generates, then the system as a whole becomes less cost competitive, which is not desirable. If the differentiation, whether cost- or feature-based, is not valuable to buyers, then buyers will not pay any premium for the differentiator, which makes for a wasted investment. Therefore, when firms decide to invest in creating business capabilities, they must spend time to analyze the cost-benefit equation and clearly understand the differentiator created and the value generated through this differentiator from the point of view of the buyer. This is easier said than done. However, good analysis and logical inferences always help.
The article has been selectively reproduced from my book titled “Supply Chain as Strategic Asset: The Key to Reaching Business Goals”.
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© Vivek Sehgal, 2011, All Rights Reserved.

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