Outsourcing then can be a source of competitive advantage where activities, which the company can out rightly eliminate, are excluded from the structure.
Example Unilever decided to eliminate its huge R & D department from its structure as a strategic decision. This department was later formed to be the current Research International firm, which is a world-renowned market research.
Another example could be the elimination of transport services from the USIU administration structure opting for an outside agent to offer the same service.
3.4 Strategy structure evolution
There is usually a general sequence that a firm adopts as it continues to grow and expand. The sequence may be in either of the two following ways.
Volume expansion
To
Geographic expansion
To
Vertical integration
Product diversification
Single product
To
Single dominant business
To
Related diversifies businesses
To
Unrelated diversifies businesses
In line with the above strategy evolutions, structure also follows suit in adapting to each stage of evolution.
The following structure-strategy fit is often maintained.
1. Functional structure is often used for strategies of single dominant business.
2. Divisional structure is applied where we have a strategy of several lines of business, which are somehow related.
3. The SBU structure is also applied where we have a strategy of several unrelated lines of business.
NB: Its also worth noting that the firm that achieves the first structure strategy fit will achieve the most of competitive advantage in its industry of operation.
3.5 Illustrations of potential strategic priority and critical activities
Potential strategy and priority critical activities can be classified as follows.
1. Compete as a low cost provider of goods and services.
2. Compete as a high quality provider.
3. Stress customer service.
4. Provide rapid and frequent new products.
3.5.1. Compete as low cost provider of goods and services
? Broadens Markets mainly due to the fact that more people will be able to afford the goods and services.
?
? Requires longer production runs and fewer product changes.
?
This is because of the benefits that arise from the economies of scale. The longer the production runs, the more units that are produced and the lower the cost of production per unit.
Fewer product changes would mean cost savings in terms of purchasing additional raw materials and those arising from process changeover costs e.g.
Japanese car makers (Toyota)
When Toyota mass production of its cars, it’s broadened as the cheaper vehicles were now affordable by a large market. This meant that they had to decentralize their operations and open up offices in many countries. Now we have many subsidiaries of the Toyota company e.g. Toyota Team Kenya, Toyota Team Europe.
Further in order to be allow cost provider of cars, Toyota had to produce cars en mass. This meant that they had to introduce automated production lines, which could run 24-7-365. This saw the laying off front hose personnel.
In order to save costs, Toyota makes very few changes to their vehicles. This saves on raw materials and process changeover costs.
3.5.2. Compete as a high quality provider
Example
In the early 1990s Rolls Royce produced 6 hand-made vehicles. The revenues earned from the sale of these vehicles were enough to cover the company’s costs and earn them profits.
This is because the profits obtained per unit, and from tote
? Required more quality assurance effort and higher operating costs.
The quality assurance effort had to be stepped-up as the chances of fault became increasingly higher due to human error.
Operating costs increase since the salaries and wages paid to highly skilled
Personnel are higher and much more testing has to be done to ensure that the vehicles are of quality of the cars
? Requires more precise equipment, which is more expensive.
Going back to the Rolls Royce e.g. since the cars are hand made the possibilities of human error becomes greater. Thus the testing must have a high degree of precision. This obviously results in the costs of production being very high.
Requires highly skilled workers, necessitating high wages and greater training.
In order to ensure great quality of their cars, Rolls Royce had to acquire highly skilled workers, train them further and pay them well in order to retain and motivate them.
3.5.3 Stress customer service
Example: Steers free delivery of orders
? Requires broader development of service people and service parts and equipment.
When Steers started the free delivery of orders within Nairobi, it had to train its service personnel to ride motorbikes as well as acquiring enough motor bikes for this purpose.
? Requires rapid response to customer needs or changes in customer tastes, rapid and accurate information system as well as careful coordination.
?
At Steers this is done mainly through their customer hot lines and over the Internet where customers can call in to order, complain or complement their services. All these enable them to keep up with customer’s tastes as well as to coordinate smooth delivery of orders.
? Requires high inventory investment
?
Since most of their foods are made in orders, Steers has to have high inventory of ingredients required for most of the foods ordered. This reduces delays in preparation since they store the ingredients in their proximity. This is costly to maintain.
3.5.4 Provide rapid and frequent introduction of new products
Example SmithKline Beecham:
? Requires versatile equipment and people.
SmithKline Beecham, an international pharmaceutical with a Kenyan plant is reputed to have high caliber equipment and renowned professionals in the pharmaceutical fields no wonder they are able to release new products every now and then. E.g. Coldrex,
? Requires higher R & D costs example Motorola
Motorola spends twice the industry average in R & D each year. This translates into a capability of releasing new and frequent products in the market every now and then. Their products range from Radio equipment and mobile handsets.
This is an industry that requires the release of new products every now and then for the company to survive.
4. RE-ENGINEERING STRATEGIC BUSINESS PROCESSES
Introduction
? Leading organizations throughout the world are being driven to rethink their businesses and orient towards processes. Doing this forces them to quantify the business’s efforts by the four new “value metrics’’: -
1. Improved product quality and or service
2. Reduced cycle times
3. Reduced cost to customer
4. Increasing the speed of innovation and new product development
Why BPR? (Drivers to BPR)
1. Customer demands
2. Competition
3. Demand for better cost
4. Technology shifts
5. Shareholders
? BPR was popularized by Michael Hammer and James Champy (1993) from a realization that continuous improvement cannot apply when a firm is lagging far behind the world standard. It needs a rapid, quantum leap improvement.
?
? It is one method for restructuring efforts to remain competitive that concentrates on core business processes to focus on external measures of success like improved market share.
?
? It challenges internal company rules and industry rules.
Definition
BPR has been defined as the means by which an organization can achieve radical change in performance as measured by cost, cycle time, service, and quality, by the application of a variety of tools and techniques that focus on the business as a set of related customer oriented core business processes rather than a set of organizational functions.
4.2 Characteristics of BPR
A core business process, as distinct from other processes is a set of linked activities that crosses functional boundaries and, when carried out in concert, addresses the needs and expectations of the marketplace and drives the organization’s capabilities.
Core business processes are usually limited and may not exceed more than half a dozen like reducing the Federal Drug Association’s approval of blockbuster drug for Pharmaceutical firms.
Examples of non-core business processes are monthly closing of books by the Finance Department.
It is intended to re-organize a company so that it can best create value for the customer by eliminating barriers that create distance between employees and customers.
It involves fundamental rethinking and radical re-design of a business process.
Radical – because it strives structure organizational efforts and activities around results and value creation by focussing on processes that are undertaken to meet customer needs (not specific tasks and functional areas such as marketing and sales)
It reduces fragmentation by crossing traditional departmental lines and reducing overhead to compress formerly separate steps and tasks that are strategically intertwined in process of meeting customer needs (Processes are managed not functions)
The process orientation rather than functional orientation becomes the perspective around which various activities and tasks are then grouped to create the building blocks of the organization’s structure.
A multi-dimensional, multi-level team identifies customer needs and how the customer wants to deal with the company.
Customer focus must permeate all phases.
4.3 BPR IMPLEMENTATION STEPS
1. Develop a flowchart of the total business process including its interfaces with other value chain activities
2. Try to simplify the process first, eliminating tasks and steps where possible and analyzing how to streamline the performance of what remains.
3. Determine which parts of the process can be automated (usually those that are repetitive, time consuming and requiring little thought or decision)
? Consider introducing advanced technologies that can be upgraded to achieve next generation capability and provide a basis for further productivity gains down the road
4. Evaluate each activity in the process to determine whether it is strategy-critical or not. Strategy-critical activities are candidates for benchmarking to achieve best in industry or best in world performance status
5. Weigh the pros and cons of outsourcing activities that are non-critical or that contribute little to organizational capabilities and core competencies
6. Design a structure for performing the activities that remain; re organize the personnel and groups who perform these activities into the new structure
4.4 Benefits of Implementing BPR
? 1. Gaining competitive advantage from increased sales resulting from satisfied customers e.g. Standard Chartered Bank Kenya Ltd.
? 2. Reduced cycle time and cost e.g. Accounts Payable Dept Smithkline Beecham Kenya 2000
? 3. Flat organizations – Microsoft and dotcom companies
?
? 4. Increased responsiveness to customers
NB. BPR requires maintenance of Key Performance Indicators on Quality, Lead time,
Cost and Service.
CONSEQUENCES
? As BPR efforts progress, one of the first phenomena is excess capacity. As processes are re-engineered, even more capacity is discovered. The most frequent response is downsizing.
?
? BPR suggests that old practices must be “obliterated” and new processes designed from scratch to fully leverage new technologies and business realities. In practice, few managers have the luxury of re-designing their processes or organizations from “clean sheet of paper” – people, equipment and business knowledge cannot be so easily scrapped. Furthermore, organizational change almost inevitability becomes a learning process in which unanticipated obstacles and opportunities emerge.
Bibliography
Reference:
? Pearce & Robinson – Strategic Management
? Readings on bus 6020
? Henry J. Johansson – Business Processing Engineering