Better Capabilities

Although strategists often assume that it is relatively easy to copy firm operation’s equipment and techniques, superior operating skills can only be developed with a conscious effort over an extended period of time. Although it is usually relatively easy to duplicate a mediocre operation, there are huge and competitively significant differences between mediocre and outstanding performers. Catching up quickly to the effectiveness of a first rate operation is usually very, very difficult. For example, when Kmart finally attempted to react to Wal-Mart’s attack by pouring money into new computerized scanner, procurement and inventory control systems it found that its employees lacked the skills necessary to use the new systems effectively and that the data being entered into them were full of errors. Instilling the organizational discipline required to ensure the accuracy of data, and providing the training that enabled its people to use its sophisticated systems effectively had taken Wal-Mart many years, Kmart could find no shortcut.

Again, even though Southwest Airlines initially based its low cost strategy on a no-frills approach (no meals, reserved seats, or baggage transfers) its use of secondary airports and its operation of only a single type of aircraft (Boeing 737s) soon developed organizational capabilities that created further cost advantages. One study for example found that its turnaround times were at least a third less than those of its major competitors (even after adjusting for its lack of meals, smaller airplanes etc.) and its staffing costs were less than half. Just as important was Southwest’s loyal customer base, which was willing and able to board and exit its planes just as fast as it would let them! And the quality of its service, as measured by such variables as late arrivals and customer complaints was 75 per cent better than the average of its nine major US competitors. By the time United Airlines and US Air decided  to set up subsidiaries utilizing similar strategies and operating structures, they found they simply couldn’t match Southwest’s fast turnaround times, its aircraft utilization rates, or its friendly  personal service. It is easy to eliminate meals and baggage service, use direct routes to secondary airports, and buy Boeing 737s but it is hard to buy fast turnarounds on time arrivals and cooperative customers. Superior capabilities have to be built and nurtured step by step. In thinking about how to develop such operating capabilities it is useful to break them into three types: process based systems (coordination)-based and organization based.

Process based capabilities are associated with activities that transform material or information and tend to provide advantages along such standard competitive dimensions as low cost and /or high conformance quality. An example, is the manufacturing process developed by IBM and Toshiba for their joint venture’s large liquid crystal computer displays. The ability to ramp up quickly to produce large displays with high yields allowed them to attack existing competitors with larger and brighter products, guarantee availability early in the product life cycle, and defend against competitors products as each wave of technology matured.

While process based capabilities are usually associated with manufacturing industries, service companies also use process technologies to achieve operating advantages. McDonald’s meticulously researched and documented procedures for producing fast food, for example have been its primary defence against attackers that were unable to replicate the high level of product and service consistency that McDonald’s maintained throughout its network. Similarly, Fidelity Investments invested millions of dollars in developing state of the art image and audio capture technology, so that transactions made by its customers could be rapidly and accurately entered and verified. This accuracy made it possible to provide superior service for example, to retrieve information instantaneously when responding to customer inquiries or requests.

Systems based on operating capabilities underpin such competitive advantages as short lead times, a broad  range of products or services, the ability to customize on demand, and fast  new product development. Such capabilities require broad involvement throughout the entire operating system.

For example, the Steel Company, became  one of the most profitable US producers of specialty steel as a result of a long effort to improve the way it coordinated the complex steps involved in making small batches of customized steel. It also developed a model of the steel making process that allowed it to recognize and respond to specific processing patterns. Over a period of six years, it was able to substantially reduce the per cent of defective steel it produced, double the effective  capacity of its melt shop ( with the same  equipment),and increase its tons per worker by 40 per cent . Moreover, it developed an intricate cost accounting system, based on its own carefully documented experience that allowed it to estimate precisely the cost of any grade width, and gauge of steel. The system that the company built its capabilities that enabled it not only to survive an industry bloodbath, but also to show a profit every year.

Organization based  operating capabilities are broader still in nature, and underpin the ability to master new technologies, design and introduce new products, and bring new plants  on line significantly faster than one’s competitors. As they are even more difficult to replicate such capabilities are among the most powerful in the operating arsenal.

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