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 / Winter 2009 / Issue 57(originally published by Booz & Company)


An Essential Step for Corporate Strategy

Though often missing, a formal operations strategy can guide the crucial decisions that build competitive advantage.

After more than a decade of writing articles on strategic operational issues for strategy+business, I realized that this column, despite its name, has never defined the essence of an operations strategy. When pressed to articulate their own company’s operations strategy, most executives will talk about efforts to reduce costs or improve quality, such as Lean or Six Sigma. Though important, such programs alone rarely produce a competitive advantage by aligning the physical assets and organizational resources in the operations domain to support the overall corporate strategy.

Seeking inspiration, I turned to a Harvard Business Review article published in the fall of 1996 by Michael Porter with the provocative title “What Is Strategy?” Porter, creator of the famed “Five Forces” model of corporate strategy, taught in every business school and applied by corporations worldwide, feared that companies had lost sight of the importance of strategy altogether. He argued that a decade of unrelenting pursuit of operational effectiveness, aimed at closing the cost and quality gap to catch up with an array of Japanese competitors, had set many industries on a path of competitive convergence. This single-minded pursuit of operational effectiveness would lead to mutual destruction, he said, culminating in industry consolidations in which the survivors were companies that merely “outlasted others, not companies with real advantage.”

Porter was so concerned about this trend that he opened his article with a bold-type heading that was intended to grab the attention of every operating executive: “Operational Effectiveness Is Not Strategy.” He added sacrilege to provocation by including a sidebar titled “Japanese Companies Rarely Have Strategies.” Though Porter never cited the Toyota Motor Corporation by name in the sidebar, it was pretty clear he was attacking that catalyst of the operations revival, the company that institutionalized such vaunted concepts as total quality management, just-in-time production, and kaizen (continuous improvement). Could Porter really be so dismissive of the much-admired operations revolution inspired by this paragon of manufacturing excellence?

Yes, he could. Because Porter defined strategy in a way that reinforced its separation from operations, as if the quality of operations could simply be taken for granted in any effective company. Strategy was “the creation of a unique and valuable position, involving a different set of activities.” He also noted that “strategy is making trade-offs in competing” — including “choosing what not to do.” Finally, he emphasized the importance of fit among a company’s activities: “The success of a strategy depends on doing many things well — not just a few — and integrating among them.”

Though operations practitioners and academics bristled at Porter’s trivializing of operations, a closer examination of his arguments actually suggests that strategy and operations had more in common than either Porter or his critics were willing to admit. Effective overall strategy, by Porter’s own definition, reinforces the critical need for an operations strategy. Porter dismissed the Japanese focus on cost and quality improvement, but he failed to appreciate the richness of the operations strategy of a company like Toyota in creating a differentiated position, the essence of strategy in Porter’s model. Admittedly, Toyota’s product positioning may not be distinctive from that of the rest of the industry. But the Toyota production system stems from a revolutionary view of the function of a supply chain: It could produce the car that a customer wanted “just in time” rather than “push” cars onto dealer lots and count on dealer financing and haggling to convince customers to buy them. That vision led to the series of operational innovations that allowed Toyota to easily respond to changing customer demands.

Instead of trivializing operational effectiveness and Japanese manufacturers like Toyota, Porter should have explained the critical need for an operations strategy in enabling the overall corporate strategy to succeed. After all, who designs and performs the bulk of a company’s activities and seeks to integrate among them (to quote Porter)? Although he mapped the “activity systems” for leaders like Ikea, Vanguard, and Southwest Airlines, he offered little guidance about how to create these self-reinforcing systems that displayed good “strategic fit.” That, however, is the essence of operations strategy.

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