COMPETITIVE AND SUPPLY CHAIN

STRATEGIES
• 2.1 Competitive and Supply Chain Strategies
• 2.2 Achieving Strategic Fit
• 2.3 Expanding Strategic Scope
• COMPETITIVE AND SUPPLY CHAIN STRATEGIES
• A company's competitive strategy defines the set of customer needs
that it seeks to satisfy through its products and services. For example,
Wal- Mart aims to provide high availability of a variety of reasonable
quality products at low prices. Most products sold at Wal-Mart are
commonplace (everything from home appliances to clothing) and can
be purchased elsewhere. What Wal-Mart provides is a low price and
product availability. McMaster Carr sells maintenance, repair, and
operations (MRO) products. It offers over 200,000 different products
through both a catalog and a Web site. Its competitive strategy is
built around providing the customer with convenience, availability,
and responsiveness. With this focus on responsiveness, McMaster
does not compete based on low price. Clearly, the competitive
strategy at Wal-Mart is different from that at McMaster.

• Dell and HP Example

• To see the relationship between competitive and supply chain strategies,
we start with the value chain for a typical organization.

• The value chain begins with new product development, which creates
specifications for the product. Marketing and sales generates demand by
publicizing the customer priorities that the product and services will
satisfy. Marketing also brings customer input back to new product
development. Using new product specifications, operations transforms
inputs to outputs to create the product. Distribution either takes the
product to the customer or brings the customer to the product. Service
responds to customer requests during or after the sale. These are core
functions that must be performed for a successful sale. Finance,
accounting, information technology, and human resources support and
facilitate the functioning of the value chain.

• To execute a company's competitive strategy, all these functions playa role

and each must develop its own strategy. Here, strategy refers to what each
function will try to do particularly well.
• A product development strategy specifies the portfolio of new
products that a company will try to develop. It also dictates
whether the development effort will be made internally or
outsourced. A marketing and sales strategy specifies how the
market will be segmented and how the product will be positioned,
priced, and promoted.

• A supply chain strategy determines the nature of procurement of

raw materials, transportation of materials to and from the
company, manufacture of the product or operation to provide the
service, and distribution of the product to the customer, along
with any follow-up service. From a value chain perspective, supply
chain strategy specifies what operations, distribution, and service
will try to do particularly well. Additionally, in each company,
strategies will also be devised for finance, accounting, information
technology, and human resources.
Our focus here is on supply chain strategy, we define it in a little
more detail. Supply chain strategy includes what many
traditionally call supplier strategy, operations strategy, and
logistics strategy. Decisions regarding inventory, transportation,
operating facilities, and information flows in the supply chain are
all part of supply chain strategy.

The value chain emphasizes the close relationship between all

the functional strategies within a company. Each function is
crucial if a company is to profitably satisfy customer needs. Thus,
the various functional strategies cannot be formulated in
isolation. They are closely intertwined and must fit and support
each other if a company is to succeed.
ACHIEVING STRATEGIC FIT
The idea that for any company to be successful, its supply chain
strategy and competitive strategy must fit together.

Strategic fit means that both the competitive and supply chain
strategies have the same goal. It refers to consistency between
the customer priorities that the competitive strategy hopes to
satisfy and the supply chain capabilities that the supply chain
strategy aims to build.
All functions that are part of a company's value chain contribute
to its success or failure. These functions do not operate in
isolation; no one function can ensure the chain's success. Failure
at anyone function, however, may lead to failure of the overall
chain. A company's success or failure is thus closely linked to the
following keys:

1. The competitive strategy and all functional strategies must fit

together to form a coordinated overall strategy. Each functional
strategy must support other functional strategies and help a firm
reach its competitive strategy goal.
2. The different functions in a company must appropriately
structure their processes and resources to be able to execute
these strategies successfully.
A company may fail either because of a lack of strategic fit or
because its processes and resources do not provide the
capabilities to support the desired strategic fit.

In thinking of the major tasks of a chief executive officer (CEO),

there are few greater than the job of aligning all of the core
functional strategies with the overall competitive strategy to
achieve strategic fit. If this alignment is not achieved, conflicts
between different functional goals arise. Such conflicts result in
different functions targeting different customer priorities.
Because processes and resources are structured to support
functional goals, a conflict in functional goals leads to conflicts
during execution.
Consider, for example, a situation in which marketing is
publicizing the company's ability to provide a large variety of
products very quickly; simultaneously, distribution is targeting
the lowest cost means of transportation. In this situation, it is
very likely that distribution will delay orders so it can get better
transportation economies by grouping several orders together.
This action conflicts with marketing's stated goal of providing
variety quickly.
To elaborate on strategic fit, let us return to the example of Dell
Computer. Dell's competitive strategy is to provide a
large variety of customizable products at a reasonable price;
customers can select from among thousands of possible PC
configurations.

In terms of supply chain strategy, a PC manufacturer has a range

of options. At one extreme, a company can have an efficient
supply chain with a focus on the ability to produce low-cost PCs
by limiting variety and exploiting economies of scale. At the
other extreme, a company can have a highly flexible and
responsive supply chain that is very good at producing a large
variety of products. In this second case, costs will be higher
• Both supply chain strategies are viable by themselves. Both do
not fit, however, with Dell's competitive strategy. A supply
chain strategy that emphasizes flexibility and responsiveness
has a better strategic fit with Dell's competitive strategy of
providing a large variety of customizable products.

• How Is Strategic Fit Achieved?

To achieve strategic fit, a company must ensure that its supply
chain capabilities support its ability to satisfy the targeted
customer segments
• 1. Understanding the customer and supply chain uncertainty.
First a company must understand the customer needs for
each targeted segment and the uncertainty the supply chain
faces in satisfying these needs. These needs help the company
define the desired cost and service requirements. The supply
chain uncertainty helps the company identify the extent of
disruption and delay the supply chain must be prepared for.
• 2. Understanding the supply chain capabilities. There are
many types of supply chains, each of which is designed to
perform different tasks well. A company must understand
what its supply chain is designed to do well.
• 3. Achieving strategic fit. If a mismatch exists between what
the supply chain does particularly well and the desired
customer needs, the company will either need to restructure
the supply chain to support the competitive strategy or alter
its strategy.
• Step 1: Understanding the Customer and Supply Chain Uncertainty
• To understand the customer, a company must identify the needs of
the customer segment being served. Let us compare 7-Eleven Japan
and a discounter such as Sam's Club (a part ofWal-Mart). When
customers go to 7-Eleven to purchase detergent, they go there for
the convenience of a nearby store and are not necessarily looking for
the lowest price. In contrast, a low price is very important to a
customer going to Sam's Club.

• This customer may be willing to tolerate less variety and even

purchase very large package sizes as long as the price is low. Even
though customers purchase detergent at both places, the demand
varies along certain attributes. In the case of 7-Eleven, customers are
in a hurry and want convenience. In the case of Sam's Club, they
want a low price and are willing to spend time getting it. In general,
customer demand from different segments may vary along several
attributes as follows:
• Step 1: Understanding the Customer and Supply Chain Uncertainty

• The quantity of the product needed in each lot: An emergency order for
material needed to repair a production line is likely to be small. An order for
material to construct a new production line is likely to be large.
• The response time that customers are willing to tolerate: The tolerable
response time for the emergency order is likely to be short, whereas the
allowable response time for the construction order is apt to be long.
• The variety of products needed: A customer may place a high premium on the
availability of all parts of an emergency repair order from a single supplier. This
may not be the case for the construction order.
• The service level required: A customer placing an emergency order expects a
high level of product availability. This customer may go elsewhere if all parts of
the order are not immediately available. This is not apt to happen in the case of
the construction order where a long lead time is likely.
• The price of the product: The customer placing the emergency order is apt to be
much less sensitive to price than the customer placing the construction order.
• The desired rate of innovation in the product: Customers at a high-end
department store expect a lot of innovation and new designs in the store's
apparel. Customers at Wal-Mart may be less sensitive to new product
innovation.
• Step 2: Understanding the Supply Chain
• After understanding the uncertainty that the company faces,
the next question is: How does the firm best meet demand in
that uncertain environment? Creating strategic fit is all about
creating a supply chain strategy that best meets demand that
a company has targeted given the uncertainty it faces.
• We now consider the characteristics of supply chains and
categorize them.

• First we provide some definitions. Supply chain

responsiveness includes a supply chain's ability to do the
following:
• Step 2: Understanding the Supply Chain
• Respond to wide ranges of quantities demanded
• Meet short lead times
• Handle a large variety of products
• Build highly innovative products
• Meet a very high service level
• Handle supply uncertainty

• Responsiveness, however, comes at a cost. For instance, to

respond to a wider range of quantities demanded, capacity
must be increased, which increases costs. This increase in cost
leads to the second definition: Supply chain efficiency is the
cost of making and delivering a product to the customer.
Increases in cost lower efficiency. For every strategic choice to
increase responsiveness, there are additional costs that lower
efficiency.
• Step 3: Achieving Strategic Fit
• The third and final step in achieving strategic fit is to ensure that what the
supply chain does particularly well is consistent with the targeted
customer's needs and the uncertainty of the supply chain. The degree of
supply chain responsiveness should be consistent with the implied
uncertainty.

• Consider again the example of Dell Computers. For Dell, the competitive
strategy targets customers who value having the latest PC models
customized to their needs. Further, these customers want the PCs delivered
within days. Given the vast variety of PCs, the high level of innovation, and
rapid delivery, demand from Dell customers can be characterized as having
high demand uncertainty. Some supply uncertainty also exists, especially
for newly introduced components. Dell has the option of designing an
efficient or responsive supply chain. An efficient supply chain may use slow,
inexpensive modes of transportation and economies of scale in production.
If Dell made both of these choices, it would have difficulty supporting the
customer's desire for rapid delivery and a wide variety of customizable
products. Building a responsive supply chain, however, will allow Dell to
meet its customers' needs. Therefore, a responsive supply chain strategy is
best suited to meet the needs of Dell's targeted customers.
• Step 3: Achieving Strategic Fit
• To achieve complete strategic fit, a firm must consider all
functional strategies within the value chain; it must ensure
that all functions in the value chain have consistent strategies
that support the competitive strategy. All functional strategies
must support the goals of the competitive strategy and all
substrategies within the supply chain such as manufacturing,
inventory, and purchasing must also be consistent with the
supply chain's level of responsiveness.

• Changing the strategies to achieve strategic fit may sound

easy enough to do, but in reality it can be quite difficult.
• 1. There is no right supply chain strategy independent of the
competitive strategy.
• 2. There is a right supply chain strategy for a given
competitive strategy.