MMVA ZG512 Manufacturing

Strategy
Rajiv Gupta
BITS Pilani
Session 11
 Session 11
• Module 1
– Recap of Session 10
• Module 2
– Strategic Fit, Focus and Trade-offs
• Module 3
– Ikea
• Module 4
– Competitive Edge
• Module 5
– Summary and Wrap-up

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 Session 11
• Begin Module 1
– Recap of Session 10

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 Recap of Session 10
• In the last class we discussed the case of GE’s
Dishwasher SBU
• We saw how the senior managers at GE saw an
opportunity to take the SBU beyond their initial
aspirations and move toward a much higher,
Level 4 manufacturing capability
• We also discussed the concept of Strategic Fit
• Strategic Fit ties the various activities that a
company performs into a mutually
interdependent structure to support its overall
goals 4
 Recap of Session 10
• We discussed the three types of Strategic Fit as
enunciated by Michael Porter
• The degree of interdependence among the
activities and their contribution to the goals
varied based on the type of fit
• We saw an example of Southwest Airlines that
showed how a company uses Strategic Fit to get
advantage over its competitors

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 Session 11
• End of module 1

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 Session 11
• Begin Module 2
– Strategic Fit, Focus and Trade-offs

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 Strategic Fit
• Ref: “What is Strategy” by Michael Porter,
Harvard Business Review, Nov-Dec1996
• In the last class we considered the question of
strategic fit
• Strategic fit deals with how the activities of a
company work in combination with each other
• By getting the activities enmeshed, the company
is best able to deliver value to the customer
• We saw this with the help of the Southwest
Airlines example
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 Strategic Fit Example
• Southwest designed its system with the following
components
– Point to point flights between airports. No hub and spoke system
– Fly from nearby smaller airports when one exists
– All seats of one class
– Staff and crew well paid
– Short aircraft turnaround time
– Efficient boarding procedure
– Restricted the route length and the use of standardized Boeing
737s

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 Focus and Trade-offs
• According to Porter, in addition to fit, there
are two other elements to Southwest’s
strategy
– Focus
– Trade-offs

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 Focus
• Before designing the strategic fit, Southwest had
to decide what business it wanted to be in – it
needed to develop a focus
• The way in which Southwest developed its focus
was by defining the type of customer it wanted to
serve and by understanding his needs and
limitations
• Then it designed its activities focused on those
needs

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 Focus
• The typical traveler targeted by Southwest was
one who was conscious about ticket prices and
was looking for direct travel, point to point.
• This was in contrast to the full-service airline that
was designed to meet the needs of the general
traveling population

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 Focus
• A typical full-service airline
– Serves a much broader market using a hub and
spoke system
– Used to offer meals (they have eliminated meals on
domestic flights in the US)
– Has baggage transfer facilities for connecting flights
– Has business and first class sections for people who
want it
– Offers assigned seats and frequent flier benefits
– Works with travel agents to get business

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 Focus
• Southwest Airlines
– Services limited routes and flies point to point
– Offer a restricted snack and soft drink
– Has no baggage transfer facilities for connecting
flights
– Has a single class of seats and no assigned seats
– Offers no frequent flier benefits
– Does not work with travel agents to get business

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 Trade-offs
• Porter argues that in order to have a strategy, a
business has to make trade-offs, i.e., it chooses
to do somethings and, by definition, that choice
prevents it from choosing other things
• For example, Southwest chose to only serve a
limited set of traveling customers, and not the
general flying public
• It chose airports, routes, aircraft types, services
and procedures that met the needs of the limited
population it chose to serve
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 Trade-offs
• We also saw the example of what Continental
tried to do to imitate Southwest.
• Continental tried to maintain its full-service
operation while trying to copy some of the things
that Southwest was doing.
• The reason why Continental was unsuccessful in
challenging Southwest is because it attempted
to avoid making a choice or trade-off

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 Trade-offs
• By trying to be a full-service airline for some
passengers and a limited service airline for
others, using common equipment and systems,
ended up not meeting the expectations of
anyone
• Porter argues that trade-offs become necessary
in strategy formulation because of three reasons
– Inconsistency in image or reputation
– Different activities require different configuration
– Limits of organizational priorities and control
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 Session 11
• End of module 2

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 Session 11
• Begin Module 3
– Ikea

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 Ikea Furniture
• Ikea is a well-known furniture store ,
originating in Sweden, but with sores in
several countries, including the US
• Ikea also illustrates the three aspects of
strategy as stated by Porter in his article
“What is Strategy?” i.e., Fit, Focus, and
Trade-offs

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 Typical Furniture Store
• A typical furniture store in the US has:
– A small sample of the range of furniture
– A catalog of fabrics, styles, woods, finishes,
etc. that can be ordered to customize needs
– A big salesforce eager to help (sell) the
customer make a choice
– Order placement with outside manufacturer
and delivery within 4-6 weeks
– Higher prices
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 Ikea
• Ikea focuses on the customer with a “thin
wallet” who is willing to away with some of
the features of a traditional furniture store.
• They figured that young customers, who
are looking for relatively inexpensive, but
stylish furniture, do not necessarily care
for customized fabrics and styles, and are
unwilling to wait 4-6 weeks for delivery.

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 Ikea
• Therefore in Ikea’s stores:
– Furniture designed by Ikea, modular, ready to
assemble, is all displayed in a huge store
– The furniture is arranged as it would be in a typical
home, so people can visualize how it would look
– There are no sales people chasing after people. The
store operates in a self-service mode with people
available to help, when needed
– Adjacent warehouse has the products in boxes on
pallets. Customers pick up their products. There is no
delivery.
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 Ikea
• Therefore in Ikea’s stores:
– The entire range of the furniture is displayed. No
customization is available
– There are additional services such as in-store child
care. This is targeting the needs of the young couples
who form the largest single segment of Ikea’s
customer base
– You find economical, functional, stylish furniture

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• The previous slides showed how Ikea is
able to provide a unique value proposition
to its customers by focusing its offerings,
product designs, store design, services
which makes it unique compared to other
furniture sellers
• Let us see how it attains fit and trade-offs

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 Trade-offs
• In choosing its approach Ikea obviously had to
make several trade-offs
– By focusing on the needs of young working
professionals and students, Ikea had to select a
limited range of products that was easily put together
– The young people do not typically use decorators to
help them match furniture pieces. Therefore they
need to see the furniture in typical room settings.
Therefore the store design had to be one with such a
layout.

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 Trade-offs
– Ikea wanted to focus on the product and its sales.
They did not want to get involved in complex delivery
services that would have added cost and caused
frustration to the customers when the deliveries were
delayed, wrong furniture delivered, or furniture was
damaged. So people do their own pick up and
delivery. The modular furniture is boxed for ease of
handling. Also, Ikea rents car roof racks in case
people need them.

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 Trade-offs
– By not having salespeople, Ikea not only saves on
cost, but also does not have customers feel
overwhelmed by aggressive selling. Even if a
salesperson is subtle and knowledgeable, not all
customers like one to trail them in the store. In this
case the talents of the salesperson will be
underutilized.
– By choosing to have a limited range of products, self-
service by customers, etc., Ikea has deliberately
chosen to not serve the high-end customers. This is a
conscious trade-off

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 Fit
• In the case of Ikea, all their activities are
geared to ensure low cost, high quality
furniture that meets the needs of their
target customer base
• So which order of fit would this be?

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 Session 11
• End of module 3

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 Session 11
• Begin Module 4
– Competitive Advantage

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 Competitive Advantage
• We will revisit the whole idea of competitive
advantage by briefly reviewing some of the topics
we have discussed
• We started with Porter’s 5 Competitive Forces and
3 Generic Strategies.
• The conclusion of the 5 Competitive Forces and
the Generic Strategies was that if you position
yourself correctly with regard to the rest of the
market and develop a focused strategy, you
should be able to earn above average returns on
your invested capital.
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 Competitive Advantage
• Next we saw Wickham Skinner’s work and his
recommendation of a Focused Factory which was
tailored toward the needs of a limited number of
products.
• His argument was that if we tried to accomplish
many varied tasks using the same equipment and
operating policies, we will not do any of the tasks
well
• The traditional approach tried to add products in an
effort to spread overhead costs across a larger
number of products
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 Competitive Advantage
• Next we considered the manufacturing
outputs such as cost, quality, delivery,
flexibility, performance, innovation
• It was stated that to be successful, a
company needs to focus on one or two
outputs.
• This called for trade-offs

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 Competitive Advantage
• Next we discussed the product-process
matrix which indicated that for a particular
combination of product variety and
volume, a particular configuration of
manufacturing system was suitable.
• Using a different configuration would prove
to be a disadvantage for the company

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 Competitive Advantage
• So what does all of this tell us?
• It appears that the entire activity of developing a
manufacturing strategy revolves around understanding a
somewhat static competitive structure, choosing a
particular approach, choose an appropriate configuration
of our resources based on our product (or service), i.e.,
the strategy is a static decision.
• This information, the equipment, the people who work in
these factories, can all be employed by any rival
• Then what is the source of a company’s competitive
advantage?

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 Competitive Advantage
• Earlier Japanese companies used to be known for
low end products
• Initially, US auto manufacturers did not choose to
consider the Japanese manufacturers as serious
competition
• In the late 1970s, and thereafter, when US car
manufacturers found that the Japanese car
companies were becoming a serious threat, they
blamed it on low wages, subsidies by the Japanese
government, and dumping practices

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 Competitive Advantage
• With the passage of time, Japanese
companies became known not just for low
cost, but also for consistent quality, new
and innovative products, performance, fast
and flexible, dependable delivery.
• Whatever happened to the need for focus?
• How were the Japanese able to achieve
high levels of multiple outputs with
common factories?
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 Competitive Advantage
• Finally, the equipment in the Japanese factories
was no different than that in any US or European
factories.
• The product range produced and sold by the
Japanese was not new, patented technology
that provided any product-based advantage
• The techniques such as Kanban, Kaizen, quick
set-ups, Jidoka, Poka Yoke, etc. were all known
to the Americans and Europeans during the
1980s
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 Competitive Advantage
• Why then were the Big 3 auto
manufacturers of Detroit not able to
defend their once dominant position in the
US domestic market?
• Why did GM have to file for Chapter 11
bankruptcy in 2008 in spite of having a
joint venture with Toyota since 1984 in an
effort to learn the Toyota method of
production?
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• Stay tuned

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 Session 11
• End of module 4

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 Session 11
• Begin Module 5
– Summary and wrap up

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 Summary
• In this class we added two more requirements to
a strategy beyond Strategic Fit, i.e., Focus and
Trade-offs
• We saw how we can focus on a narrow set of
objectives and ensure that all activities are
configured to achieve these objectives
• We also saw that in making several choices
related to strategy, we are faced with Trade-offs
• Trade-offs are choices we need to make to have
a clear, unambiguous strategy
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 Summary
• We demonstrated how Fit, Focus and Trade-offs
were evident in two cases, one involving
Southwest Airlines and the other Ikea Furniture
stores
• Finally we presented a divergent view which
seems to challenge several of the topics
discussed so far in the course.
• The answer(s) to the final questions will be
developed in the next several lectures

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 Session 11
• End Module 5
– Summary and wrap up

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