Manufacturing Strategies under Stagnation. Networks

Table of Contents

List of Figures

List of Tables

List of Abbreviations

1. Introduction

2. Conceptual Framework
2.1 Operations Strategy
2.2 Networks
2.3 Stagnation

3. Literature Review on Stagnation
3.1 Methodology
3.2 Findings
3.2.1 Causes and Consequences of Stagnation
3.2.2 Strategies for Competition under Stagnation

4. The Supply Network’s Environment

5. Strategic Implications for Networks
5.1 Cost Leadership
5.2 Differentiation
5.2.1 Product Quality
5.2.2 Delivery Performance
5.3 Responsiveness
5.4 Innovativeness
5.5 Volume Flexibility
5.6 Discussion

6. Implications for Theory and Practice
6.1 Implications for Theory
6.2 Implications for Practice

7. Conclusion

Attachments

I. Zusammenfassung des Werks in deutscher Sprache

Bibliography

List of Figures

Figure 1: Structure of the Work

Figure 2: Perspectives on Operations Strategy

Figure 3: Supply Network

Figure 4: The Value Net

Figure 5: Framework for Network Strategies

List of Tables

Table 1: Summary of Search Strategy

Table 2: Causes of Stagnation

Table 3: Consequences of Stagnation within a Market

List of Abbreviations

Abbildung in dieser leseprobe nicht enthalten

1. Introduction

Even though most of the literature dealing with the topic of stagnation originates from the 70s and 80s of the last century, stagnant industries are still a phenomenon today.^[1] In the meantime, since the literature has generated the strategies, the concept of “outsourcing” has become popular across many firms. The content of this idea is basically dealing with the question whether a firm should make certain components or products by itself or buy them from external suppliers and by that outsource a part of an operation.^[2] This decision determines a firm’s boundaries to other firms and also effectively determines its vertical integration.^[3] Having decided not to produce certain goods by itself, a firm must also determine the number of suppliers it wants to buy from and the relationships towards these. Extending this mention by the customer-side of a firm leads to the perspective of the “supply network”. Decisions that change the structure of this network will have significant effects on an operation’s performance in terms of quality, speed, dependability, flexibility and cost. Thus, Slack and Lewis hold that nowadays, it’s not single operations that compete, but whole networks.^[4]

While researching for literature on stagnation and operations strategy, not one source coud be identified that links both subjects. In fact, literature on operations strategy generally seems to lack more concrete implications for turbulent situations. Therefore, this work addresses this gap and suggests that literature on strategies for stagnation needs to be extended by a network perspective. Concretely, the question, how a firm should configure its supply network depending on varying causes and consequences of stagnation will be answered.

Figure 1 illustrates the proceeding of the work. Chapter 2 will establish the conceptual framework for the subsequent parts. In chapter 2.1 the reader will be introduced to the notion of “operation” and “operations strategy”. Based on these notions, chapter 2.2 will explain the network view of operations strategy. The last section of the framework will clarify the term “stagnation”. Next, the third part of this paper will take a review on previous works dealing with causes and consequences of stagnation, as well as ways to compete under such a situation. Chapter 4 will deal with the environment of a supply network and identify concrete actions that can be taken to reconfigure it. Based on the earlier chapters, chapter 5 will first isolate the issues of stagnation that are relevant for the network strategy and then develop contingent strategies for these issues. These strategies consist of cost leadership (5.1), differentiation (5.2) with the sub terms product quality (5.2.1) and delivery dependability (5.2.2), responsiveness (5.3), innovativeness (5.4) and volume flexibility (5.5). The discussion (5.6) will illustrate the connections between the strategies and issues and summarize the results. Chapter 6 shows implications for theory (6.1) and for practice (6.2). Finally, the results of the thesis will be summarized in chapter 7.

Figure 1 : Structure of the Work

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2. Conceptual Framework

This chapter presents the work’s underlying key aspects. First, the terms “operation” and “operations strategy” are explained. Based on that, a description of the term “networks” will follow. Lastly, the matter of “stagnation” is defined.

2.1 Operations Strategy

The term “operation” includes all the activities that are necessary for creating or delivering a product or service that give value to a customer. These activities include procurement, conversion, and distribution.^[5]

While traditionally the operations function was considered an exclusively operating business area, Wickham Skinner proposed that the operations function also has strategic impact.^[6] Skinner’s works later gained popularity and soon led to the term “Operations Strategy” (O.S). The mention of O.S. is that the operations function can provide substantial competitive advantage to a firm, if the firm accomplishes to design and manage it properly.^[7] O.S. mainly deals with the alignment of a firm’s processes with its resources on a level of long-term, high aggregation, high consolidation and high abstraction. Resources can be types of materials, information, people, technology, buildings, and other objects of value that are in the firm’s direct area of influence. Processes describe the way those resources are organized and used.^[8]

Although there is no universal definition of O.S., its content can be approached by mapping the area of conflict between four perspectives that is illustrated in figure 2. On the one hand, O.S. needs to intermediate between the top-down and the bottom-up view: According to the top-down view, at first the corporate strategy determines the markets that are entered by a company, corporate structures and the allocation of resources.^[9] Then, the individual business units of the company define their own functional strategy of individual objectives that determines, respectively, how they want to compete in their specific markets.^[10] Finally, the operations function must build a coherent strategy which translates the intended competitive advantage from the business unit strategy into decisions “actually made”.^[11] However, there is also an emergent flow of information deriving from the operations function. This can illustrate new business opportunities, for which the required capabilities might even already be provided.^[12] This is what is called the bottom-up perspective.

Looking at the horizontal level of figure 2, there is also an apparent tension between the resource perspective and the market requirements. The resource perspective is looking at existing resources and processes within a company. Its goal is to investigate on the interactions between the resources. These interactions would cause the operation’s processes and show how things within the operation are done. According to this view, resources are not restricted to tangible assets, but may also include aspects like supplier relationships, knowledge and experience in dealing with technology sources, process knowledge, new product development skills, as well as contracts and relationships that identify market trends and individual customers’ needs.^[13]

This perspective is tightly connected to the “Resource Based View of the Firm”, whose main statement is that a competitive advantage mainly is the result of capabilities that come with firm-internal resources. According to the “Extended Resource-Based Theory” resources are not even limited to the firm’s boundaries. Implying that the firm’s operations have strong and collaborating relationships and resources of direct or indirect partners within the supply networks can be accessed, these resources can generate a strategic advantage to a firm.^[14]

The market requirement perspective is looking at the nature of the market and tries to understand how strategy can support the strategic business unit’s market position. Positioning in the market is influenced by customers and competitors who both for their part have influence on operation strategy.^[15] For a company it is substantial to achieve consistency of their product and customer focus as otherwise it risks a serious loss of market share.^[16]

The crucial impact of this is that companies need to make decisions on how to differentiate their products and services from other market participants. Customers have varying preferences for product properties. In order to achieve conformity to specific customer requirements, operations managers need to choose one or two performance objectives, as trying to be the best in all is likely to lead the company to not being best of any of these objectives.^[17] Slack and Lewis have subsumed these performance objectives under the five categories of quality, speed, dependability, flexibility and cost.^[18]

This tension between market requirements and operations resources is the main challenge of O.S. Obviously, operations need to make sure that market requirements are satisfied. However, solely following the market requirements is not going to build any competitive advantage. Therefore, operations need long-term capabilities that are difficult to imitate. So, the main task of O.S. is to align the capabilities of its operations resources to the market requirements. As markets are dynamic and consisting of partly unpredictable competitors and customers while the values of resources are not always evident, this task can be very complex.^[19] Therefore, the task of O.S. is to develop plans for the effective usage of organizational resources that support the firm’s long-term competitive strategy in the best way^[20]

Figure 2 : Perspectives on Operations Strategy

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Adapted from: Slack and Lewis (2015), p.10

2.2 Network s

“No operation works in isolation”^[21] – Every operation is part of a greater value network either directly or indirectly. Hence, in order to make favorable decisions concerning an O.S., it is crucial to know the operation’s role within its supply network.^[22] An operation is, on the one hand, typically related to other operations providing the products and services needed for the transformation of inputs into outputs. On the other hand, it has customers being supplied. If the customers are not end customers, they themselves supply other customers. Each operation might have numerous suppliers and customers and may be in competition with further operations that produce similar products or services.^[23] This results in the idea of the “supply network”, as illustrated in figure 3.

The figure is drawn from the perspective of company A, having company B and company C on the same level of a supply network. Processes that occur inside of company A’s boundaries form its internal network and those related to direct suppliers and customers constitute the immediate supply network. If connections of supplier’s suppliers and customer’s customers are added to this, it results in company A’s total supply network. Whereas direct customers and suppliers, respectively, are also referred to as “first-tier customers” and “first-tier suppliers”, the further customers and suppliers of the total network are termed as “second-tier customers” and “second-tier suppliers”. Depending on the network structure, this perspective can be expanded to various tiers of suppliers and customers. While the total network’s supply side is called “upstream”, the direction towards the customers is called the “downstream”.^[24]

Looking at the figure’s flow of goods, described by the arrows, it becomes obvious that companies are not necessarily restricted to a single supplier. Company A may possibly multi-source an identical good from several suppliers. Company A’s customers, in turn, might also get the product form another company. The linkages between the operations result in several supply chains.^[25]

Figure 3 : Supply Network

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Adapted from: Slack and Lewis (2015), p. 150

2.3 Stagnation

The term “stagnation” refers to a phenomenon of a certain variable of quantity or value that is staying on a relatively constant level for an ongoing period and variations are levelling off.^[26] As this definition determines the phenomenon very broadly, it leaves quite a lot of space for interpretation in an economic sense. The diverse academic approaches include, amongst others, stagnation of a company’s size concerning revenues, stagnation of the number of workers, or the amount of total capital, stagnation as a stage within the company’s life cycle, and stagnation of a certain market’s volume.^[27]

Whereas the other approaches mentioned above are concerned with individual and firm-specific aspects leading to a form of stagnation, the special characteristic of a stagnant market is the fact that it has an inherent nature of competition strategy and is thus not restricted to a single company.^[28] Also usually internal stagnation, in a sense, is a consequence of a company’s adaption to a stagnating market.^[29] Therefore, this work focuses on the idea of stagnant markets within a certain industry.

In order to make proper decisions, firms need to segment markets by distinguishable product categories and the underlying factors that cause the stagnation.^[30] Therefore, chapter 3 will outline factors that cause stagnation and their consequences that have been found in literature.

3. Literature Review on Stagnation

This section of the work serves to give a brief overview of the research on causes and consequences of stagnation within an industry, as well as of approaches of strategies for competing under stagnation that have been explored.

3.1 Methodology

For a systematic research through all identified databases and the network of the academic libraries in southwestern Germany (SWB), string combinations of the words “stagnation”, “stagnating”, “stagnant” and “saturated” with the terms “market”, “industry” and “strategy” in English, as well as in German language, were used. As this approach provided a strongly limited amount of relevant literature, the research was expanded towards backward and forward searching methods. Inspired by the first findings that led to the notion that there exists parallelism between stagnant and declining businesses, the research was also extended by the term “declining”.

Table 1: Summary of Search Strategy

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3.2 Findings

Even though the research was extended as described above, the relevant literature found was still limited. However, two works that dealt with reasons and consequences of stagnation within an industry were found. These include Göttgens (1996) and Meffert and Walters (1984). For the issue of how to compete in a stagnant industry four papers from the end of the 1970s and the 1980s that seem to have a concrete and promising strategic impact were found. These include the works of Meffert (1984), Hall (1980), Hamermesh and Silk (1979) and Harrigan and Porter (1983).

3.2.1 Causes and Consequences of Stagnation

Major factors causing the stagnation are shown in Table 2. As a result of one or several of these factors, competition in stagnant markets increases significantly.^[31] Typical symptoms are shown in Table 3.

Additionally, the review provided two crucial characteristics of stagnant industries. The first is that since there is no more overall growth within a market, a company can basically only grow at the expense of another’s market share.^[32] Secondly, there was found that, by a further intensification of the competition, the number of companies in the market declines which results in fewer larger companies owning larger market shares.^[33]

Table 2: Causes of Stagnation

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Table 3: Consequences of Stagnation within a Market

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Adapted from Meffert and Walters (1984), p. 142

3.2.2 Strategies for Competition under Stagnation

As discussed above, in a stagnant industry, an actor can only grow within its market by taking market share from a competitor. Therefore, it is obvious that an actor needs some kind of competitive advantage. In this competition context, based on the generic strategies of Porter, Meffert’s approach differentiates between two generic strategies for leadership and two for niches as the alternatives for competing in stagnating environments.^[35] The first is the strategy of focused leadership. This strategy’s goal is to attain relative cost leadership by consequently using learning curves and economies of scale. Secondly, he mentions the strategy of differentiated leadership, which aims to reach leadership by addressing the specific market segments with custom-tailored products in terms of technology, design, service or quality. As this proceeding leads to small batches, the products need to be quite beneficial for customers so that high production costs can be covered with higher prices. The focused niche strategy – the third one mentioned – reaches for cost leadership in a certain segment as its competitive advantage that shall be protected by high specialization as a barrier against the competition. Finally, the differentiated niche strategy serves a specific segment with a wide variety of products, requiring a highly flexible operations function.^[36]

[...]

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^[1] see Reuters (2016), n. pag.

^[2] see Slack and Lewis (2015), p. 159 et seqq.

^[3] see Barney (1999), p.140 et seqq.

^[4] see Slack and Lewis (2015), p. 159

^[5] see ibid., p. 2 et seqq.

^[6] see Skinner (1969), p. 138

^[7] see Hayes et al. (2005), p. 33

^[8] see Slack and Lewis (2015), p.2

^[9] see Hayes et al. (2005), p. 35

^[10] see Slack and Lewis (2015), p. 11

^[11] see Hayes et al. (2005), p. 35

^[12] see Chatterjee (1998), p. 78 et seqq.

^[13] see Slack and Lewis (2015), p. 10 et seqq

^[14] see ibid., p. 16 et seqq.

^[15] see ibid., p. 14

^[16] see Chatterjee (1998), p.78 et seqq.

^[17] see Hayes et al. (2005), p.39 et seqq.

^[18] see Slack and Lewis (2015), p.43 et seqq.

^[19] see ibid., p. 21 et seqq.

^[20] see Hines (2013), p.40

^[21] Slack and Lewis (2015), p.148

^[22] see ibid., p.148

^[23] see ibid., p.3

^[24] see ibid., p. 149 et seqq.

^[25] see ibid., p. 149 et seqq.

^[26] see Trummer (1990), p.30

^[27] Göttgens (1996), p. 8 et seqq.

^[28] see Harrigan (1989), p.193 et seqq.

^[29] see Welge, et al. (1992), p. 329

^[30] see Meffert (1983), p. 193

^[31] see Göttgens (1996), p.10

^[32] see Porter (1979), p. 117

^[33] see Hamermesh and Silk (1979), p. 162

^[34] see Wirtschaftslexikon24 (2017a), n. pag.

^[35] see Porter (1980), p. 34

^[36] see Meffert (1984), p. 56 et seqq.