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Strategy and PerformanceStrategy and Performance
K Pl tt d D i i O htKen Platts and Dominic Oughton
IfM Briefing Day, Tuesday 15 May 2012
AgendaOverview of the Centre for Strategy and Performance
Approaches to strategic analysisApproaches to strategic analysis
An example of a tool - Make vs Buyp y
Aims of the CentreAims of the Centre• to develop effective research-based
techniques for strategy-making andtechniques for strategy-making and performance measurement system design
• to develop practical tools for industrial• to develop practical tools for industrial managers and consultants
• to interpret and disseminate research• to interpret and disseminate research findings
• to support and provide an industry academic• to support and provide an industry-academic community focused on strategy and performance
• to deliver educational and training materials
St t i D i i M ki
ThemesStrategic Decision MakingBuilding structured approaches that support strategy making
St t M d lli d Vi li tiStrategy Modelling and VisualisationDeveloping visual approaches to support strategy development
Competence Capability and Resource AnalysisCompetence, Capability and Resource AnalysisStudying the way companies create and exploit competences
Performance MeasurementPerformance MeasurementDesigning, developing and implementing performance measurement systems
ServitizationServitizationDeveloping tools to support servitization
Strategy Options for Start-upsgy p pExploring the strategic challenges for start-up companies
Taking a Process View
• Aims to understand ‘how’ operations management activities are carried out, with a view to improving them
i ll ‘hi h’ l l t t f l ti– especially ‘high’ level processes - e.g. strategy formulation, performance measurement design
Output• Processes and tools which will help managers manage their
operations better
Typical output - workbooks
Competing through competences Getting the measure of your businessCreating a winning business formula
Wi i d i i t l ti Make-or-BuyCompetitive ManufacturingWinning decisions -translating business strategy into action plans
St t D l t P dStrategy Development ProcedurePart 1Grouping ProductsGrouping Products
Stakeholder Requirements
Market and Company Constraints
Part 2What are our business
P t 5
Requirements
objectives? Part 5Navigating toward business objectivesCustomer
Requirements
Part 4Can current strategy achieve our
Part 6Again and again
Part 3What is our current strategy?
objectives? and .............
A Procedure
is a sequence of
Steps
involving the use of
Tools
th t li d i t
Techniques
that are applied using correct
Techniques
Make vs. Buy Strategy: Example of a tool y gy pand case studies
Dominic Oughton, Principal Industrial Fellow
Positioning the boundaries of thePositioning the boundaries of the business is a strategic decision….
Suppliers Customers
? ?Business
?Make-or-buy?
• How big should our enterprise be?• What to in-source, what to outsource?• How much to buy?• What is important to keep in house?• What is our real strength?
DEFINING MANUFACTURING AS A BROADER VALUE CHAIN
“The full cycle from understanding markets through product
design production distribution and related services within andesign, production, distribution and related services within an
economic and social context”
ServiceDistributionProductionDesignResearch ServiceDistributionProductionDesignResearch
This makes it possible to be in manufacturing without owning a factory!y
CISCO – NETWORK EQUIPMENT
ServiceDistributionProductionDesignResearch
Degree of shading represents relative focus
• Moving to become “lifestyle” brandM i f ti t t ff• Manage information not stuff
• From transaction to interactionM i l it diff ti t• Managing complexity as differentiator
• 100% outsource visionF d i d d• Focus on design and new product introductionO i ti t hi• Open innovation partnerships
HON-HAI – ELECTRICAL MANUFACTURING SERVICES“the biggest electronics company you never heard of”
ServiceDistributionProductionDesignResearch
• Make PDAs, consoles, computers
Degree of shading represents relative focus
computers• Supply Apple, Cisco, Dell,
SonySo y• Global production capability• Acquisition & integrationAcquisition & integration• Value capture via scale• Moving to design and service $2,000
$M/year$0.5bn $28bnMoving to design and service
-$2,000
-$1,000
$0
$1,000
Hon-Hai Flextronics Jabil Solectron Sanmina-SCI Celestica
Hon-HaiFlextronics
$$400$500$600$700$800$900
$M/year
-$4,000
-$3,000
$ ,Jabil
SolectronSanmina-SCI
Celestica $0$100$200$300
FY01 FY02 FY03 FY04 ESTFY05 SWAG
ZARA - CLOTHES
ServiceDistributionProductionDesignResearch
Degree of shading represents relative focus
• Spanish clothes maker Zara owns all production capability (or has close-knit local partners)local partners)
• Products in own shops change every 2 weeks2 weeks
• Production can be flexed to respond to demandto demand
• Competitors can’t follow!
LLOYDS TSB – FINANCIAL SERVICES
ServiceDistributionProductionDesignResearch
• 2004: The Lloyds TSB Mumbai call centre was opened l i 700 t ff Ll d h t ll t i N tl
Degree of shading represents relative focus
employing 700 staff. Lloyds shuts call centre in Newcastle with the loss of 968 jobs.
• “Lloyds TSB's reputation has been seriously damaged because of customer dissatisfaction with having to deal withbecause of customer dissatisfaction with having to deal with the India call centre, with customers and staff unable to understand each other.”
• 2007: Lloyds TSB, the UK's biggest provider of current y gg paccounts, is bowing to customer demands and moving calls back to the UK from a service centre in India.
• Sally Jones-Evans, managing director, telephone banking f Ll d TSB d th t it h i it li
Norwich Union:of Lloyds TSB, argued that it was changing its policy because of the introduction of an automated voice-recognition answering service
• Rivals suggested the change would cost Lloyds up to £30m
• “We have moved certain calls back to the UK, like household claims," • Indian call centres now deal with things such as changing the address on a policy. • Customer satisfaction levels are roughly • Rivals suggested the change would cost Lloyds up to £30m the same for centres in the UK and in other countries
Thoughts from earlier in the day...
Cisco – Hon Hai – Lloyds – Zara
ServiceDistributionProductionDesignResearch
No single right answer• No single right answer
• Some outsource, some make process-ownership a virtue
• Some offshore, some go close to customer or ‘knowledge’
Make or Buy MatrixMake or Buy Matrix
Strategic Core Strategic DeficiencyStrategic Core CompetenciesMake
Strategic DeficiencyManage risk /
Acquire
Hig
hpo
rtan
ceat
egic
Imp
Non-StrategicC t i
Common KnowledgeS St t i ll
Stra
Company Supply Effectiveness Supplier
CompetenciesExploit / Migrate
Source StrategicallyQuick WinLo
w
Make or Buy MatrixMake or Buy Matrix
Strategic Core Strategic Deficiency C t S iStrategic Core CompetenciesMake
Strategic DeficiencyManage risk /
Acquire
Hig
h
M B BB
Current Sourcing
: Bought
port
ance
MM
: Bought
: Made
ateg
ic Im
p
Non-StrategicC t i
Common KnowledgeS St t i ll
Stra
M MB
Company Supply Effectiveness Supplier
CompetenciesExploit / Migrate
Source StrategicallyQuick WinLo
w
Make or Buy Matrix
C t S i
Make or Buy Matrix
Strategic Core Strategic DeficiencyDanger!Or Strategic
B
Current Sourcing
: Bought
Strategic Core CompetenciesMake
Strategic DeficiencyManage risk /
Acquire
Hig
h
M B B
g
M MConsider
Acquisition
Or StrategicAlliance
M
B : Bought
: Madeport
ance
MFine Oops!In-source
BM
ateg
ic Im
p
Exploit?
Develop
Non-StrategicC t i
Common KnowledgeS St t i ll
Stra
M MB B
Divest? Out –source
BB
DevelopSupplier
Company Supply Effectiveness Supplier
CompetenciesExploit / Migrate
Source StrategicallyQuick WinLo
w
Background
• European Capital good manufacturer• Serving global market• Serving global market• Highly-engineered / bespoke core product• Entered related market for “commodity product”
– Full product line offering– Customer service
S t & h l– Same customers & channels• Sourced product for market entry from Chinese manufacturer• 3 years on3 years on
– Number 2 in commodity market– Price pressure– Time for review…
Make v Buy – Processes
Source Form PackPost-Pre- StockSourceraw
material
Form Pack&
Ship
PostProcess
PreProcess
Stock
Make v Buy – strategic analysis
Process strategic importance
• Brand & customer relationships
Process supply base effectiveness compared to us?
•Quality
• Profit Generation• Margin (Price – Cost)• Customer order winning
•Delivery
•Costgcriteria
• Intellectual Property
Cost
•Flexibility
Make or Buy Matrix
Strategic Core Strategic Deficiencyh
CompetenciesMake
Manage risk / Acquire
e
Hig
h
Source
mpo
rtanc
eS
trate
gic
Im
FormStock
Pack & Ship
Non-StrategicCompetencies
Common KnowledgeSource Strategicallyow
S
Pre-process
•Company Supply Effectiveness Supplier
pExploit / Migrate
g yQuick WinL Post-process
Outcomes
• In-source:– Raw material sourcing is critical competence– Raw material sourcing is critical competence– Remaining processes are necessary to enable strategic sourcing
• Quality & Delivery benefits from in-sourcing• Network approach to optimisation
– Shipping costs v labour costsB fit f b i l t t– Benefits of being close to customer
• Regional service centre network– China / South America / CIS / MEChina / South America / CIS / ME
• 17% reduction in costs = Euro 3.4 million annual saving
Case Study 2 IMI plc• A dynamic, international business delivering innovative, knowledge-
based engineering and system solutions for global customers
Case Study 2 – IMI plc
based engineering and system solutions for global customers• Focused on strong niche markets• Quoted on the London Stock Exchange• Turnover £1.9bn , recent market cap approximately £1.6bn• 19,000 employees in more than 35 countries
C &• Two core business areas: Fluid Controls & Retail Dispensing
Context
International business expansion requiring linkage between business, customers manufacturing a supply chaincustomers manufacturing a supply chain
Significantly high value of manufacturing output, IMI has manufacturing sites in 2 i25 countries
Considerable part of manufacturing in high cost countries, however major p g g jbusiness expansion in emerging regions
Many activities considered non-coreMany activities considered non core
Significant shift in manufacturing strategy processes
Need for Strategic Manufacturing Decisions Linked With Business Strategy
IMI Identified the need for a structured approach to manufacturing decisions
“We need to be in China”
“We can make it internally much more efficiently”
“Labour in Asia is much cheaper”
more efficiently
“Eastern Europe seems to be better
“Why don’t we
tbe better solution” go to
Mexico?”
Need for a structured approach to manufacturing decisions
IMI: Benefits of a structured approach
• A holistic understanding of strategic manufacturing decisions
pp
• Alignment with business strategy• A review of the relevant factors to be taken into account• An improved understanding of internal capabilities• An improved understanding of internal capabilities• A more informed understanding of key costing issues• A team committed to implementing the decisionp g• An opportunity to record the rationales behind the decision so that
lessons learned can be applied in the future
IMI: Benefits of sourcing in Eastern Europe
Total savings in CEE based on significantbased on significant differences in labor costs can reach up to
• 20% on sourcing• 50% on production • 60% on engineering60% on engineering
Setting the scene g
• Huge competitive cost pressure upon European manufacturing base, mainly from the Far East sources with low cost and acceptable quality productsp
• European manufacturing has a high fixed cost base and structure• The global economic market has created new threats and opportunities,
l di t t titi d l ileading to greater competition and lower prices• The cost of labour can be circa 80% cheaper in Far East, in part off-set by
supply chain complexity/constraintspp y p y• New sources of supply identified in Eastern Europe• Need to really understand and challenge why we should ‘make’• Key is to understand the customer needs and then determine the best
way to satisfy them, in some instances the customer will be totally indifferent to who makes the productp
Common Mistakes when OutsourcingCommon Mistakes when Outsourcing
• Underestimating the skills required
• Having a poor understanding of the supplier capabilities
• Overlooking transaction costs
• Decision making by single individuals without input from other areas of the organisationfrom other areas of the organisation
Novar evaluation of IfM ProcessNovar evaluation of IfM Process
• Very good basis to start the detailed evaluation process• Provides a structured approach and greater objectivity• Provides a structured approach and greater objectivity• Cross functional team approach is essential• The methodology is an important element of a bigger• The methodology is an important element of a bigger
picture, it cannot stand however as the only element of the evaluation process.evaluation process.
• A good facilitator is required to process manage and ensure objectivenessj
• The 2 supporting books are very good
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