Manufacturing and operations can unlock significant latent value by developing the capabilities that support a company’s strategic value proposition. Winning companies already are starting to tap into that value.
Capabilities: The Critical Choice
The new manufacturing agenda revolves around capabilities. No company can excel in every area. So executives must identify and cultivate the manufacturing and supply chain activities that serve the broader agenda, and deemphasize or outsource the rest.
These strategically important capabilities can be divided into two groups. The first are “competitive necessities”: every company needs them just to stay viable in their sector. The second are “distinctive capabilities”: those which create a competitive advantage by delivering value to customers in ways competitors can’t match. Each company bases its strategic value proposition, or “way to play” in the market, on that second group of differentiating capabilities—the unique, cross-functional combinations of processes, assets, tools, talent and culture that set the company apart in the marketplace.
For example, three companies might produce cosmetics; they all possess competitive necessities in distribution, packaging and back-office operations just to survive. But their distinctive capabilities would be very different. The first company might define itself as a value player, offering products with the features customers want most at a lower price than competitors; it needs a low-cost manufacturing footprint and supply chain capabilities that allow it to quickly move products to the right outlet stores and other centers for value shoppers. The second company might go to market as an innovator focused on technically sophisticated new products; it needs highly flexible turnarounds and the ability to add new fragrances and experiment with new packaging. The third company, a premium player, needs strict quality standards, investments in mission-critical IT, and direct links between R&D and the shop floor.
Strategically-minded manufacturing executives align their priorities in this way with the company’s way to play. They allocate resources—money, staff and managerial attention—to the manufacturing activities that enable the company to deliver on its unique value proposition. They devote less time, attention and resources to the other activities. They may choose, for example, not to purchase some types of production machines, even at the risk of being less than world-class, because those fabrication capabilities are not linked to the company’s overall strategic direction. They would provide advantage to another company, but not to this one.
Turning manufacturing into a driving force behind a capabilities-driven strategy requires an assessment of all assets, operations and processes to distinguish the distinctive capabilities—which differentiate a company—from the competitive necessities that it shares with competitors. Both of these advance the company’s strategic value proposition, but they require different types of investment.
For competitive necessities, executives should conduct a make/buy analysis. If the product or process can be obtained at a reasonable cost from an outside supplier, it’s likely an area to minimize investment and a candidate for outsourcing. By contrast, differentiating capabilities should rarely, if ever, be outsourced. Outsourcing your distinctive manufacturing capabilities, in particular, will give competitors the same edge you have, and could lead to loss of intellectual property.
Looking at manufacturing this way means making hard choices. Executives must redirect investment and other resources toward strategically relevant capabilities and away from other functions. They will need courage and perseverance to overcome the internal resistance sure to arise from areas targeted for cutbacks or outsourcing.
