Think Supply Chain

Think Supply Chain

Leading the supply chain conversation

Join the supply chain conversation with Sharon Rice, executive director of the APICS Educational and Research (E&R) Foundation. Explore topics including the role of supply chain planning in corporate success, how sustainability and corporate social responsibility enable the bottom line, global supply chain risk management, and more. Comments are welcome. 

Built to Last?

by Sharon Rice, APICS E&R Foundation Executive Director | Mar 07, 2013

Winning, earning profits, or creating customer value: What is the best focus for developing supply chain strategy? Commenting on my last post, Joe Wikowski points out Michael Porter might disagree with A.G. Lafley and Roger Martin’s emphasis on winning as the foundation for developing strategy. Witkowski writes, “winning, or beating your rivals, in the context of Porter’s 5 forces framework, is too narrow.” He says, according to Porter, customers, suppliers, substitutes, and potential and existing rivals all impact a company’s ability to earn profit.

Intrigued by the distinction and wanting to know more, I came across an interesting, albeit biting, Forbes article written by contributor Steve Denning. The article, "What Killed Michael Porter’s Monitor Group? The One Force That Really Matters,” appeared November 20, 2012, and is packed with provocative comments designed to incite conversation. Decide for yourself whether Denning’s commentary is fair or not. However, citing Apple, Amazon, Salesforce, Costco, Whole Foods, and Zara, Denning makes the interesting point that the purpose of the successful firm today is to deliver “more value to customers through innovation.” Focusing strategy on driving profit for profit’s sake will not lead to sustained success, Denning suggests.

If a firm is successful at creating and delivering customer value, it is more likely to create more profit and win over time. But if the focus is on profit or winning for its own sake, customer value through innovation is not guaranteed. Denning recognizes this, and sees continual innovation as the only means to sustain success in today’s global marketplace.

Consider the focus of your supply chain strategy. What is the balance between creating profit and delivering customer value?

 

9 Comments

  1. 1 Gisele 09 Mar
    After reading a book some time ago, I would say that the balance of this equation is the tradicional sales process, that trends to be a war about price and deliver customer value. The new equation is re-create the sales process, understand the customer, what are their goals, key factors that differentiate their products from competitors and work together to identify where you and your customer can work together and change the game in your customer's industry baseo on the value you can help provide. While the retailers have a fearsome reputation of extracting the last cent of suppliers, seems that one producer was able to increase its gross marging over 20 year period from 40 to 60% while selling products to Wal-Mart and Target. The key difference: they were creating value. What is this about supply chain?  In the value creation sell in the interaction is among the various teams in the organization with customer's team
  2. 2 Martin Norris 08 Mar
    I agree with everyone's comments on innovation.  Except that the word is not overused because it is what leads to competitive advantage.  Also, from the supply chain side and everything else in your organization as well, lean is also quite important.  Practicing lean methodologies the right way, naturally leads to creating customer value (by cutting down on all waste as defined by anything that does not create customer value), and by extension leads to better competitive advantages.
  3. 3 Bob Trent 08 Mar

    This is a complex topic with no easy right or wrong answer.  I would like to focus on one part of what appears in Sharon's blog:

    "Denning recognizes this, and sees continual innovation as the only means to sustain success in today’s global marketplace."

    I am starting to cringe when I see the word innovation.  I have placed this word on a list of terms that I maintain that are so overused that they begin to lose their meaning.  (Think of other terms like empowerment, strategic, and core competency).  We toss some terms around so freely that they become almost irrelevant.  One person reported that  a word search of a major company's annual report found the word innovation used over 400 times!  We are fascinated by this term.

    I agree that innovation is the lifeblood of success for many companies today.  However, not all innovation is valued by customers.  We must be very careful to avoid the trap where we think that anything that is new (i.e., innovative) brings value to the firm.  We must understand this concept fully and direct our efforts toward innovation that is valued by the marketplace.  Innovation for innovation's sake does not guarantee value growth.

  4. 4 Joe 08 Mar

    Porter (or at least Joan Magretta in "Understanding Michael Porter" ) does repeatedly invoke uniqueness, with respect to mutually-reinforcing unique value chain activities, which I think we would agree embodies Apple, Amazon, Zara, et al.  So it may be implicit, but Porter never completely dismisses or ignores the lifeblood of innovation, uniqueness, for creating value and sustainable profits.  In the end he is saying it is the difficult-to-impossible-to-imitate value chain, a set of mutually-reinforcing activities, and not the single core competency, that should be the bedrock of strategy.  I agree that emphasizing Five Forces analysis as an end rather than a means to an end can risk losing the necessary and sufficient condition of uniqueness.  

    Despite Porter's seminal thinking and legendary status, getting multiple perspectives even on his work (like Joan Magretta's terrific "hands on" book) and even 20-30 years later is making us all think critically about what strategy really is.  I would call that both an enduring "enduring" and "sustainable" contribution to our quest to understand and exploit competitive strategy and competitive advantage.  It also highlights the value of teams in developing strategy.

  5. 5 Chet Frame 07 Mar

    Great conversation.  Thank you.

    The answer isn't the single point innovation.  The answer is the development of a process or a program or a corporation that can create a stream of innovative products or programs.  Apple has the iPod, iPhone, and iPad, blended with iTunes and retinal display.  There are a few others, but most companies manage one innovation and then they relax or they don't have anything more in the pipe and they can't continue to move forward.

    How can you and your suppliers develop a pipeline of innovative products, services or ideas?  Work with your supply chain to develop a pipeline of great innovation and you will have a growing clientele, a growing investor following, and a growing number of articles about how you did it.  In the end, you will have very good profit line for a longer time.  That will all end when your pipeline runs dry.  How do you continue the flow?

  6. 6 Chuck Nemer 07 Mar

    I found myself stumped on this one so I went to the internet and looked up the definition of balance.  Here's what I got ( I just grabbed the first definition that popped up- nothing scientific) 

    Noun:An even distribution of weight enabling someone or something to remain upright and steady.

    Verb: Keep or put (something) in a steady position so that it does not fall:

    I lean towards Robert's assertion that it's cause and effect  and Preston's comment that genuinely determining unsatisfied needs are what drive value. In both Preston's and Robert's comments, they make me think of complex adaptive systems(CAS) and the work of John Holland.  Please don't think I'm weird but I come out of a science background and Holland argues that agents in a CAS find connections with other agents in the system and when one agent has something the other needs, they connect and the system self organizes into a successful state with not the guarantee of success but the potential to keep growing.  So I wonder while unsatisfied needs are one strong point of connection, what other points of connection are there?  Because people innovate even though there's no need yet

  7. 7 Robert Vokurka 07 Mar
    Longer-term there is no sustainable competitive advantage; Porter's five forces shape the extent and length of competitive advantages. There is not a balance of profit and delivering customer value, but a cause-and-effect relationship of customer value leading to profit. As customer needs change, firms need to continue to deliver value (spurred by innovation), leading to continued profitability.
  8. 8 Bill Leedale 07 Mar

    I always thought of Porter’s 5 forces were useful for being paranoid about the market place.  And in many respects the forces still are important considerations.  There is certainly a threat of completion, substitutes, customer power,  supplier power, and the intensity of the completion.  So, not as much prescriptive versus descriptive.   Ignoring Innovation is never a good idea.  

    Is there such a thing as sustainable competitive advantage?  Well there is competitive advantage as that is an economics concept this includes such things as are barriers to entry, availability of resources, etc.  But providing value, perceived (the cool factor) or real (food to eat), to the customer has always fundamentally what gets you in business and keeps you in business.  

    One reason companies go out of business is the patent expires and there was nothing new to replace it (I like to think of certain drugs here, I have my favorite antihistamine that is still the best, but is now very generic,) or the market gets saturated (how many cars can you really drive or collect), or the next big thing comes along (buggies versus autos). In the
    March HBR it has several interesting points (again looking backwards) one major change in the market place now impacting many firms is how “Crossing the Chasm” has changed.  The authors maintained that the adoption curve is now much shorter and there are now really only two groups, earlier adopters and the rest. With this comes a lifecycle adjustment as well.  Many great products fade when the next generation hits the market (think RIM to iPhone and now perhaps Android devices.)  Some products get blindsided.  Consider, the GMO backlash and now how certain markets put up the barrier of not allowing GMO products, and that was in a commodity product where a company attempted an innovation, who would of thought?  
     
    One could argue that someone should have thought.  Innovative products have the highest margins,  but also the highest risks in general.  Functional products tend to have lower margins and usually lower risk,  but this is where efficiencies matter.   In the Apics CPIM and CSCP reference, “Designing and Managing the Supply Chain,“ the authors make a distinction on how one should think about the Supply Chain based on the type of markets you are in and the type of goods and services you provide (innovative or functional).

    Hindsight is always better than forecast, and so we are pretty good at describing what happened and not very good at prescribing what one should do, this fits in the famous economics concepts of “it depends” and “ceteris paribus,” and of course how nimble or agile you can stay with your supply chain in the face of a rapidly changing world.

  9. 9 Preston W Blevins 07 Mar
    Determining genuinely unsatisfied customer needs is the
    starting point; if they aren’t satisfied and clearly communicated, the profit
    will be elusive.  After an understanding
    of these needs is developed it gets a bit complicated because there are a
    number of variables:

    1 - Does the company have the core competence to satisfy the needs, if they lack it can they develop it?     

    2 - Can the competition respond quickly and shorten the life-cycle of the advantage? 

    3 - Can the new or enhanced product or service development and launch be financed without putting the company in a difficult financial bind?

    History has shown that the consumer (both industrial and retail) will pay more for useful products, which can translate into good profit margins.  There are many more variables,balancing value delivered with profit isn’t easy, that is why most corporations under perform.

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