executing a strategic plan - moneta vista · ©2014 moneta vista advisors, inc. 2 contents 3...

Chris Abato

September 2011

Executing a Strategic Plan

©2014 Moneta Vista Advisors, Inc.

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Contents

3 Introduction

4 The strategic sourcing process

6 Exploring the range of sourcing decisions

7 Sourcing from another unit within the company

7 Sourcing externally

8 Internal development

10 Long-term partnership: alliances and M&A


IntroductionFor any company to achieve its goals, it must assessthe markets in which it competes, determine whatit needs to compete in those markets, understand itsstrengths and weaknesses in relation to those needs,and work to acquire the capabilities it lacks. This isthe bread and butter of strategic plans. However,companies that field large, complicated, multiyearcontracts – for example, nuclear power-plantbuilders, aerospace and defense contractors, orshipbuilders – must be open to many different waysof building capabilities. In particular, such compa-nies engage in strategic sourcing, a process thatallows them to acquire capabilities without cedingcompetitive advantage to partners or suppliers by,for example, becoming dependent, sharing toomuch intellectual property (IP), and so on.

Strategic sourcing includes sourcing from an inter-nal business unit, sourcing from an external com-pany, developing the necessary capabilitiesinternally, or partnering with or acquiring anothercompany.1 Although usually undertaken by com-plex players, companies with less complicatedproducts could also benefit from the process.

Some already do: For instance, in the automotiveindustry, deciding which components to produceinternally and which to source is vital to establishingcompetitive advantage. Toyota, the world’s mostprofitable – and nearly the world’s biggest – car-maker may now internally produce only the 30% ofits products it deems most critical to its brand.

Similarly, in technology hardware, Dell and Appleoutsource components of many of the productsthey sell. With Apple in particular, where design is

the source of its market power, the balance betweenoutsourcing pre-designed components and gettingoriginal design manufacturers (ODMs) to designand engineer components is a key source of com-petitive advantage.

However, companies must exercise caution whenworking with other parties. If companies outsourcetoo much to a single supplier, or outsource some-thing critical to the final product, the suppliermight claim a larger share of the value added in thevalue chain, attempt to become a full-fledged com-petitor, or even choose not to supply components inan effort to create a space in which the supplier canbegin to control the value chain. Companies canalso put themselves at risk by making IP visible toothers in the value chain.

What, then, is different about companies in the mostcomplex industrial settings? Simply put, they fieldsuch elaborate products that they cannot manufac-ture every necessary component. They have beendealing with this problem for a long time and havethus developed rigorous, time-tested approaches fordetermining what they should produce, what theyshould source, and what kinds of relationships theyshould strike.

This paper sets out a methodology for strategicsourcing. It offers an example from which any indus-try with complex products or multiyear develop-ment cycles can benefit. The process is scalable, canapply to business units within companies, and istransferable across industries and markets.

It can even be applied in simpler industries. Consid-er two examples in apparel: Li & Fung has thrivedby creating a network of thousands of partners tocoordinate and produce fashion designs, thus bas-ing their competitive advantage on a diversifiedsourcing strategy. Zara, in contrast, keeps most ofits design and production supply chain in-house.Which model is better? And, more to the point,which model is better for any given apparel compa-ny dissatisfied with its competitive position? Oddlyenough, lessons from shipbuilding, aerospace anddefense, and other capital-intensive industries mayhold the key to understanding how a struggling

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1 Companies are set up in different ways: Some simply have business units within companies; some have business units within companieswithin companies; and the terms “company” and “corporation” are sometimes used interchangeably. Here we have worked with a simpletwo-part structure in which we speak of companies and business units.


company on New York’s Seventh Avenue mightidentify and leverage its core competencies whileexploiting – to its competitive advantage – strengthsfrom the competition that it currently perceives asthreats.

The strategic sourcing processExhibit 1 sets out the end-to-end process withwhich strategic sourcing decisions are made once astrategic plan has been determined. Assessing mar-ket position identifies deficits, indicates a hierarchyof sourcing choices through which those deficitsmay be addressed, and, if a decision to build a newcapability is made, leads to resource allocations.

To begin, companies must identify the key successfactors (KSFs) relevant to the markets in which agiven business unit – we will call ours the ComplexProducts Business Unit, or Complex Products forshort – wishes to play. It is useful to think of thesesuccess factors with regard to their ability to influ-ence market position at three levels:

• Discriminating factors are the fundamentalelements customers use to choose betweencompeting offerings – they allow the cus-tomer to discriminate at a basic levelbetween two or more options

• Important factors are those customers useto make choices if two offerings are at parwith regard to discriminating factors

• Price-of-entry factors, as their name implies,are those a company needs simply to be inthe game. They are like silverware in arestaurant: They must be clean and bright;however, once they are clean and bright,other factors come into play, and little isgained by polishing them to a higher shine.

Complex Products must therefore grade itself onthe degree to which it and other business units pos-sess the discriminating, important, and price-of-entry factors that determine the company’scompetitiveness in the marketplace. Exhibit 2 (seenext page) offers an example of such an assessment.Here, Complex Products has determined there arefive KSFs that define a BU’s ability to compete. Twoof these (KSF1 and KSF2) are discriminating – crit-ical to the unit’s competitiveness.

Complex Products has also identified five levels ofcapability against each KSF: “leader” (purple),“topgroup” (blue), “medium” (green), “weak” (yellow),and “no capability” (gray). In this case, ComplexProducts determined that it was a leader in the firstand third KSFs, but that it was weak in the second.Fortunately, the assessment showed that anotherBU was in the top group for the second KSF, pre-senting an opportunity for Complex Products tosource from within the company. Things become alittle more complicated with regard to KSF4: Com-plex Products’ analysis determined that this is animportant factor, but the unit lacks relevant capa-bilities, and its internal sourcing options cannot

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Exhibit 1

The strategic sourcing process

Strategic plan I. Competitive market position II. Strategic sourcing hierarchy Competitive offering

A. Leverage corporationMarketoffering

B. External sourcing

D. Alliances, M&A

R&D investment

IP protection

Knowledge management

C. Internaldevelopment

KSF capability assessments

What do we need to becompetitive in each market?

What are our cross-companyde!cits?

Where’s thecustomer going?


bring it above the weak level. KSF5 presents a sim-ilar challenge. Based on this analysis, these factorsbecome either “buy” options, capacities to developinternally, or capacities that require an acquisition– respectively, the third, fourth, and fifth best choic-es one can make after “make” or “buy.” “Buy” istherefore the best option, hence the indications onExhibit 2.

Now consider the exhibit once again with ComplexProducts’ competitors and suppliers included(Exhibit 3, see next page).

Complex Products’ two main competitors (Compa-ny A and Company B) are in the top group forKSF1, but one is weak and the other medium onKSF2 – and their best available sourcing or acquisi-tion options provide only medium capabilities.Thus, if Complex Products sourced from another ofits company’s BUs, it could establish an advantageover its primary competitors in KSF2 – and thus asignificant advantage overall, as it would becomethe leading player for the two discriminating KSFs.

We have already identified KSF3 as somethingComplex Products can supply itself at a level supe-

rior to that of Companies A and B. But what ofKSF4? Exhibit 3 shows that Company C, one ofComplex Products’ suppliers, is a market leader inKSF4. As long, then, as Company C is an availablesource, Complex Products has a viable option forestablishing a leading position in KSF4. However, ifeither of the competitors forms an exclusive sourc-ing relationship with Company C, or acquires thecompany, the best Complex Products could do ispartner with Company D, which would providemedium capabilities in an important area. This sug-gests that Complex Products should lock up Com-pany C for KSF4 as quickly as it can.

Finally, there is KSF5, which is a price-of-entry fac-tor. Complex Products can source the provision ofKSF5 to Companies C or D, or even consider Com-pany A. Company A presents greater risk, ofcourse, because going to a full-blown competitorrenders an organization more vulnerable thangoing to a supplier.

Based on our analysis thus far, Complex Productsshould provide KSF1 itself, source KSF2 fromanother BU within the company, provide KSF3itself, source KSF4 from Company C, and source

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Exhibit 2

Complex Products’ capabilities and likely sourcing intention

Capability grades

Importance of keysuccess factors

Weak No capabilityLeader

Discriminating

Top group

Important

Medium

Price ofentry

Key successfactors

KSF1Discriminating

KSF2Discriminating

KSF3Important

KSF4Important

KSF5Price of entry

Make

Buyinternally

Make

Buy

Buy

Sourcingintention

ComplexProducts Other BU

COMPANY


KSF5 from Companies C or D. Thus ComplexProducts can assemble a competitive offering con-sisting only of leader and top group capabilities;it is required to look externally for only two ofthe five KSFs, and only to a supplier rather than acompetitor.

Still, Complex Products must keep an eye on whatits competitors and suppliers are up to. Exhibit 4(see next page) rolls in“team grades,”ranking Com-plex Products’ offering against that of Company A,its primary competitor. As the exhibit shows, Com-plex Products is consistently stronger, as long as itmoves quickly to lock up Company C for KSF4. Ifit fails to do this, its offer will be only marginallysuperior to that of Company A, because it will beunable to establish a better-than-medium capabilityin KSF4. It is still superior in the discriminatingKSFs, but if being competitive means never fallingtwo capability grades below the competition, Com-plex Products’ offer is actually weaker.

What emerges from this analysis is that it is crucial tomove quickly on KSF4 – a counterintuitive insight,because KSF4 is not a factor upon which customersbase purchasing decisions. One way Complex Prod-

ucts can lock up Company C is to invite them to pro-vide KSF5 as well.Consequently,we have marked theboxes that indicate the bid Complex Products wouldassemble. This is the bid reflected on the right-handside of the exhibit under “home team” and thedetailed list of sourcing intentions.

Exploring the range ofsourcing decisionsThere is one other factor we have not yet ade-quately explored – a complication with regard toCompany C that we discuss under “sourcing exter-nally” in this section.

As noted, strategic sourcing options are attractivein the following order:

• Where possible, source from another unit inthe company

• Source externally when there is adequatecompetition

• Develop internally if the above two options arenot available and time, talent, R&D resources,and PP&E requirements are sufficient

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Exhibit 3

Complex Products’ capabilities vs. competitors and suppliers,and detailed sourcing intention

Capability grades



Discriminating

Top group

Important

Medium

Price of entry

Key successfactors

KSF1Discriminating

KSF2Discriminating

KSF3Important

KSF4Important

KSF5Price of entry

Make

Buyinternally

Make

Buy

Buy

Sourcingintention


COMPANYCompany

ACompany

B

COMPETITORS SUPPLIERSCompany

CCompany

D


• Establisha long-termrelationshipwithanexter-nal partner through a merger or acquisition.

Let us consider these in turn and see how they infact lead Complex Products to a solution that dif-fers from the one already elaborated.

SOURCING FROM ANOTHER UNITWITHIN THE COMPANY

As noted, companies generally strive to sourceinternally before considering other options. Butoccasionally this approach adversely affects thecompany’s ability to win a contract or execute on aprogram. In some cases, for instance, the companymight find its internal partner possesses the neces-sary capability but has other priorities; for exam-ple, different strategies may drive each unit’s P&L.Complex Products, in such a case, should still con-sider working with the internal unit, but should useit for its expertise rather than its production capa-bility, to manage an external supplier rather thanprovide the relevant product.

Companies might also look externally for a capa-bility if the customer does not want to put so many

eggs in one basket, because of long-term detrimen-tal effects on the overall competitive state of themarket.

SOURCING EXTERNALLY

Where there is no internal sourcing option, a com-pany must consider either sourcing from a suppli-er or even a competitor. Although this is notbusiness as usual for many companies, workingwith competitors – co-opetition, as it has famous-ly been called – is becoming more common and haslong been standard practice in industries such asaerospace and defense. Here, the size of the proj-ects, the small number of players, and governmentconcerns about maintaining a viable market leadto a situation in which companies often work witha competitor on one project while competing foranother. One of the challenging features of this sit-uation is IP protection, which we discuss below. Asthis approach becomes more common in otherindustries, IP and related concerns will become anissue more broadly.

Sourcing externally is a credible option when thereis adequate competition (to minimize the risk of

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Exhibit 4

Complex Products’ offering against Company A’s bid

Capability grades



Discriminating

Top group

Important

Medium

Price of entry

Key successfactors

KSF1Discriminating

KSF2Discriminating

KSF3Important

KSF4Important

KSF5Price of entry

Make

Buyinternally

Make

Buy from Company C

Sourcingintention


COMPANYCompany

ACompany

B


CCompany

D

X

X

TEAM GRADESHometeam

Company Ateam

CompanyA

ComplexProducts

BU

ComplexProducts

BU

Otherinternal

BU

CompanyA

CompanyC

CompanyD

CompanyD

CompanyC

CompanyA

Buy from Company C

X

X

X


becoming captive to a single supplier) and no sig-nificant threat that the external company willbecome competitive with the primary company inits core activities.

Based on this definition, Company C actually pres-ents a problem. It is the only player with leader sta-tus in KSF4, and it has no serious competition. Thiscreates an issue for the whole market, as is alwaysthe case when the market failure of a single com-pany can compromise any part of a product orservice. It also makes other players vulnerable: Aslong as Company C is the only strong player inKSF4, it can extract more than its fair share of theprofitability from any value chain that requires thiscapability.

Consequently, by sourcing KSF4 from Company C,Complex Products is potentially putting itself atrisk. What should it do? It could make an appar-ently suboptimal external sourcing choice for thesake of assembling an offer without putting itself atrisk. It might source from Company D, which hasonly a medium capability in the KSF, although thiswould significantly weaken its competitive offer-ing: as noted above, Company A can then source

from Company C and put a credible offeringtogether.

Before considering this unsatisfactory possibility,then, Complex Products should mull other options:internal development and long-term alliances orM&A. Of these, internal development is preferable.Exhibit 5 thus shows a shift in sourcing intentionfrom “buy” to “make/buy,” meaning that the com-pany will, if it can, assemble its own version ofKSF4 by making and buying necessary componentsof the KSF. It can now also return to a stand-alonechoice of sourcing KSF5 from Company C orCompany D.

INTERNAL DEVELOPMENT

Developing a capability internally requires aligningR&D resources, talent, and facilities and equip-ment against the challenge on a credible timelineand at a reasonable opportunity cost – and, as weshall see, working to protect the company’s IP andreviewing, and if necessary strengthening, itsknowledge management capability.

The best way to proceed is to dissect the KSF thatthe business unit is building into its product and

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Exhibit 5

Complex Products alters its strategic sourcing decision

Capability grades



Discriminating

Top group

Important

Medium

Price of entry

Key successfactors

KSF1Discriminating

KSF2Discriminating

KSF3Important

KSF4Important

KSF5Price of entry


COMPANYCompany

ACompany

B


CCompany

D

X

X

TEAM GRADESHometeam

Company Ateam

CompanyA

ComplexProducts

BU

ComplexProducts

BU

Otherinternal

BU

CompanyA

CompanyC or D

CompanyD

CompanyD

CompanyA

X

ComplexProducts

BU

Sourcing intention

Make

Buyinternally

Make

Buy

Make

Buyinternally

Make

Make/Buy

Original Modi!ed

Buy Buy


service components. Effectively, the company isconducting the same assessment for a single capa-bility that we discussed earlier with regard to theentire competitive offering (hence the observationat the end of this paper’s introduction that themethodology is scalable).

This analysis will allow the company to determine,at a granular level, which product or service com-ponents of the KSF it should build, which it mightbe able to source from within the company, andwhich it can source externally – allowing it to focusinternal resources on developing only those ele-ments not readily available elsewhere.

Consider a breakdown of KSF4 in the example weare discussing (Exhibit 6). In this case, KSF4 disag-gregates into six products.As the exhibit shows, thecompany is strong only in Product 1; it lacks capa-bilities for the remaining five products. However,there are several credible suppliers for Products 2,3, and 6. In an environment of such robust compe-tition, the company can afford to buy these capa-bilities from the strongest supplier. It will purchaseProducts 2 and 3 from Company E and Product 6

from Company F, comfortable that the strengths ofCompany G will keep its suppliers in check.

This leaves the company with a more complicatedsituation for Products 4 and 5. It can either partnerwith Company C, with the attendant risks dis-cussed above (being held hostage or allowing Com-pany C to begin to emerge as a full-fledgedcompetitor). If it does not wish to expose itself tothis risk, or if Company C has partnered elsewhereor is demanding more for its contribution than thecompany is willing to pay, Complex Products mustset out to make these elements, even though it isstarting from a position of weakness.

If Complex Products chooses the “make” route, asindicated, it will begin to apply internal resourcesto Products 1, 4, and 5, with an emphasis on 4 and5 (where it has furthest to go). It should regularlymonitor alternative suppliers for Products 4 and 5as market conditions change. For instance, cus-tomers may be as unhappy as Complex Products isabout the scarcity of suppliers for Product 4, and somay decide to support – and even fund – other sup-pliers. If the customer is the government, this is par-ticularly likely. In such a case, Complex Products

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Exhibit 6

KSF4 Core Products

Capability grades Weak No capabilityLeader Top group Medium


COMPANY

CompanyA

CompanyB

COMPETITORS

Finalteam

SourcingintentionKSF

Coreproduct

KSF4

Coreproduct I

Coreproduct II

Coreproduct III

Coreproduct IV

Coreproduct V

Coreproduct VI

SUPPLIERS

CompanyC

CompanyD

CompanyE

CompanyF

CompanyG

Make

Buy

ComplexProducts

CompanyE

BuyCompanyE

MakeComplexProducts

MakeComplexProducts

BuyCompanyE


could itself apply to the government for funds.However it proceeds, it should monitor industrydevelopments on a schedule determined by the paceof technological, policy, and competitive change.

Beyond these considerations, however, when a com-pany decides to develop a capability internally, it mustpay special attention to three areas: R&D investment,IP protection, and knowledge management.

For R&D investments, the company must create atechnology road map that displays product devel-opment progress, technology readiness, and invest-ment dollars required for progress. This road mapmust include episodic tests that will genuinely“prove out” the technology; this helps ensure thatprogress occurs at the necessary rate, and that thereare as few misunderstandings as possible about thedevelopment schedule between the company, busi-ness units, and customers. This will also allow thecompany to compare its readiness to technologicaldevelopments in the marketplace. If an externalsource advances at a faster pace, the company canevaluate whether to abandon internal developmentor complete development to avoid sourcing a KSFfrom an external supplier.

We noted earlier that a company might settle for asuboptimal technical solution if that solutionoffered other benefits. One issue is that all externalsourcing options carry IP risks. Of course, patents,robust nondisclosure agreements, and other part-nering agreements protect IP to some extent; how-ever, once a company has had access to the IP ofanother player, it is difficult, even with the best ofintentions, not to use that acquired know-how inother areas (some might liken this to trying to“unring” a bell). In addition, there is the problemof “second-order” IP that results from such sourc-ing arrangements, such as learning how a compa-ny approaches problem solving. One way oranother, companies share a great deal of competi-tive knowledge beyond the technological IP intrin-sic to the project.

Patents in particular prove to be a double-edgedsword for companies whose customer is the gov-ernment. Because the government has the power toinfringe a patent at will, patent protection in suchcases does little more than provide marketing valueby acknowledging the originator of the know-how.

Of course, patenting provides much more powerfulprotection in commercial markets.

The best way to protect a company’s IP is to applya distributed process that drives IP protection deci-sions as near to the project technologists as possi-ble: They know best what needs to be shared, whatknow-how the supplier/competitor already pos-sesses, and where technological developments areheading. This distributed process should be pairedwith a centralized IP repository to maximize thelikelihood of cross-leveraging IP where useful.

Finally, to build a KSF successfully, a companymust align knowledge management processes withstrategic goals. To do so, companies identify posi-tions within each business unit that are alignedwith the KSFs it needs to build, prioritizing posi-tions based on whether they are related to discrim-inating, important, or price-of-entry factors.

Exhibit 7 (see next page) shows an iterative processfor managing the expertise cycle. Based on the cho-sen strategy, companies must identify currentexpertise and deficiencies, understand categoriesand skills that need to be bolstered, and institutemetrics that track hiring and knowledge transfersuch that the necessary capabilities come to existwithin the company and remain well into thefuture.

LONG-TERM PARTNERSHIP: ALLIANCES AND M&A

The fourth strategic sourcing choice can have sig-nificant consequences: forming either a long-termalliance or partnership with an external firm, oracquiring the firm. This is a choice a companyshould only make in the context of a full under-standing of the KSFs required to compete, the prod-ucts and services that make up each of those KSFs,and the supplier-competitor capability map. Forinstance, in the original example, Company Cmight have been a reasonable target for alliance oracquisition.

Using its overall assessment of the market situation,Complex Products can derive a list of target firmsbased on what it needs to do to strengthen its posi-tion and the capabilities of potential targets. This isespecially useful when a new KSF is emerging in themarketplace or if there has been a reprioritization ofKSFs based on current or expected developments.

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Companies should be clear on compelling reasonsto acquire a firm. When identifying M&A targets,the company should evaluate only the strategicvalue of the acquisition, such as controlling a targetfirm’s development in the service of the company’sstrategic goals, increasing the company’s credibilityin the marketplace, developing a particular tech-nology, or leveraging the target’s current capabilityin areas strategic to the company. Strategic valuedoes not include acquiring major suppliers toreduce costs via efficiencies, tempting though suchopportunities often are. In our experience, the oper-ational efficiencies that focused suppliers offermeans they are best left as separate entities, so longas a competitor will not lock up the supplier. Whencompanies take into account questions of culturalfit and other issues, it rarely makes sense to acquire

a supplier for reasons of cost; alliances are almostalways superior choices.

* * *

By conducting a comprehensive assessment of mar-ket requirements and internal and external capabil-ities, a company can position itself to acquire thecapabilities it needs in a well-thought-out, integrat-ed manner that leverages available resources. Oncethe company identifies its deficits, it can employone of four sourcing options: sourcing from anoth-er unit within the company, sourcing externally ifsufficient competition exists, developing the capa-bility internally, or pursuing a long-term alliance oracquisition. The company’s R&D investments, IPprotection methods, and knowledge managementmodel must all align with the sourcing decision.

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Exhibit 7

Managing the expertise cycle

Where’s ourcustomergoing?

Status of knowledge-transfer metrics

Status of hiring metrics

What coretechnical andmanagerialcompetenciesmust beembedded?

Who areour experts?

Identify gap in embeddedskills

Where do wehave expertisede!cits?

What is neededto be competitivein each market?

Develop skills internally

Hire externally


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