Supply Chain, People, and Knowledge
Over the years, the common understanding of world-class operations has evolved from the simplistic, focused management of functional silos of isolated knowledge islands to a comprehensive approach to supply network management as the driver to orchestrate fluid and complex environments to deliver the ultimate shareholder and stakeholder value.
Numerous approaches have attempted to describe this evolution, but none has properly addressed the supply chain’s fundamental building block: the management of knowledge. Therefore, previous works have also missed adequately referring to the only element capable of delivering long-term sustainable shareholder and stakeholder value: people.
The idea that “every firm is a collection of activities that are performed to design, produce, market, deliver, and support its product” was presented in (Porter, 1985) and illustrated as shown in Figure 1.1. Porter explains the design and performance of a firm’s value chain “are a reflection of its history, its strategy, its approach to implementing its strategy, and the underlying economics of the activities themselves.”
Figure 1.1 The generic value chain
Porter’s Five Competitive Forces Model1 defined one of the most important moments in strategic thinking. This model has a deep adherence to some microeconomics principles, such as the supply and demand theory, cost and production theory, price elasticity, customer behavior, market structures, number of players, market size and growth rates, substitution effects, and market entry barriers, as cited by Recklies.2 Objectively stated, Porter explained the dynamics of a theory based on five forces that allegedly shaped strategy and industry competition:
- The threat of new entrants
- The threat of substitute products or service
- The bargaining power of customers (buyers)
- The bargaining power of suppliers
The intensity of competitive rivalry (as illustrated in Figure 1.2)
Figure 1.2 Porter’s forces
The Five Competitive Forces Model provides a snapshot of the business environment, but it does not establish a long-term active connection with factors internal or external to this environment. The “five forces” theory does not address any cultural aspects of the organization that may influence the competitive strategy definition, implementation, and execution. The way people do things is disregarded. Even less does it address the culture and behavior of the supply networks formed by other noncompeting companies, service providers (different from suppliers), government, political groups, and other external elements. This theory is based on an economic model of imperfect competition and suggests that the market winner is the best competitor among all existing in a dynamic and competitive environment. It expects limited volatilities and believes a periodic snapshot of the business environment is sufficient to assess risk and create a consistent strategy for competitiveness.
Porter’s value chain theory indicates two attributes that define a firm’s competitive strategy:
- Long-term profitability
- The relative position within an industry
This statement is guided by the premise that the Five Competitive Forces Model is applicable only at the line-of-business industry level, which inhibits industry group or industry sector level analysis. This guideline is crucial to determine the obsolescence of Porter’s theory. Long-term profitability and relative position within an industry are extremely sensitive to different economic horizons. If economic stability horizons shorten, the risk that a given strategy becomes obsolete increases dramatically.
Supply Chain Networks
As fluid and complex business environments replaced the traditional dynamics experienced over the past few decades, the management of products/services offered has changed in many ways (for example, lifecycle, image, profitability, shelf life, value, and volume). The deep changes have impacted on the relationships within firms in a supply network, including suppliers, customers, service providers, other competitors (allies or not), and other noncompeting firms (allies). These actors, although external to the firm, are now stakeholders of the network in a period when there is no winning competitor, just a winning supply network.
This environment accepts that the strategy developed for the competition of a firm will last long enough to pay back all investment related to the effort required for its implementation. This is possible only if the business scenario assessed by the Five Competitive Forces Model is sustained without significant change for a long period. This mechanism creates a period when a firm’s strategy does not adhere to business needs and the substitute strategy has not been implemented yet. The reason why the disruption valley (see Figure 1.3) occurs is the organization’s inability to perceive business environment changes soon enough. The disruption valley is an acceptable collateral damage only if it represents a very small period in relation to the strategy’s lifecycle (Oliveira and Gimeno, 2014).
Figure 1.3 Traditional strategy lifecycle
The global economy has increased the pace of change within factors external to each firm to the point that a new business environment has replaced/altered traditional dynamics present in the mid 1980s. The closeness of these elements defined a new balance in forces that govern the organizations. The corporate governance structure responsible for delivering shareholder value on the one side and stakeholder expectations on the other usually offer a clear imbalance in favor of the stakeholders. A dramatic change in these relative forces is one of the most perceivable effects of the creation of fluid and complex supply networks. This is a consequence of the deep business environment transformation that destroyed the fundamentals of value chain management and the very basic principles that supported previous strategic thinking.
Figure 1.4 Governance relative forces
By transforming the dynamics of both supply-side economy and demand-side economy, technology omnipresence has altered the dynamism of the business environment and shrunk both the economic and industry cycles. Barriers to entering new markets have reduced, new entrants have multiplied, and substitution of products/services is a customer expectation in most industries. This has reduced the importance of the rivalry among existing competitors as these have developed external alliances to survive. Companies no longer compete; supply chains do. In fact, as you will learn from this book, supply chain networks compete with each other. This scenario has made the Five Competitive Forces Model less applicable because it reduces the effects of each of the forces. Technological expansion and diversification have reduced development costs and cycle times, thus enabling multiple offers and reducing product/service introduction cycle times, making them available almost immediately to clients without geographic barriers. This new environment faces numerous shorter industry cycles and creates an equally new economic order. The alternative is to adapt strategic thinking to these shorter business cycles.
Organizations must now conduct in-depth strategy reviews often. The effort to move constantly from a strategy designed to last to a new and allegedly long-lasting strategy is prohibitively costly to the organization. The ability to design businesses capable of elasticity, resilience, and responsiveness requires an environment triggered by constantly updated market knowledge. The only asset that matters is people. The only strategy that delivers long-lasting shareholder value is the innovation-enabled knowledge leadership. The only business model that enables a truly innovative environment is the management of supply chain networks.
Figure 1.5 Value network strategy lifecycle
It is necessary to perceive (sense based on knowledge) the next market changes and anticipate the new strategy. The quality of being able to sense is known as wisdom. Excellence in managing supply networks creates wise competitors—a conglomerate of complementary businesses that work together to win in the market and deliver value to shareholders and stakeholders.
The challenge is then to identify the mechanisms that enable market changes’ responsive strategies for fluid and complex supply networks. This new business environment has no longer the premises that sustained the arguments for the value chain. A new paradigm exists. Previous dynamism and volatility has been overcome by market fluidity, complexity, and unpredictability. Forecasting as a single planning strategy is unacceptable because business resource planning must create a resilient environment capable of sensing every recently networked-market trend. The only relevant long-term strategy capable of creating and sustaining shareholder value is knowledge management.
Whereas the traditional value chain approach prepares for competitiveness, the value network prepares for innovation. Innovativeness is the consequence of the wise application of knowledge accumulated over the time. The ability to change and simultaneously add value represents the ultimate competitive leadership. Note that this approach is the opposite of that suggested by the Five Competitive Forces Model, which focuses on business practices.
The organization must be able to concurrently deliver a groundbreaking cost-benefit environment to shareholders and stakeholders. Some firms previously ignored during strategic thinking are now influential stakeholders. The governance structures that balance shareholder value and stakeholder interest need to review their policies because their relative importance is now very similar. Once the single firm no longer has the resources to compete in its industry sector, and given that only through alliances will this firm shape high-performance supply networks capable of beating other equally designed supply networks, then it is possible to understand the power these elements external to the firm have.
Figure 1.6 From value chain to value network
Given the multiplication of players that influence the supply network of which a firm is a part, and because many of these players are influential enough to be considered stakeholders, there is a multiplying effect of externalities within the wise competitors. This massive effect of externalities is associated with the reduction of suppliers’ bargaining power, the reduction of barriers to entry in the markets, and the reduction of barriers to create substitute products/services, as explained previously, thus disabling any competition theory (perfect or imperfect) from explaining the new economy business environments.
Figure 1.7 New governance balance
Supply Network Alignment Reference Model
The Supply Network Alignment Reference Model (SNAR Model) organizes all knowledge areas that influence the management of supply chains networks. The SNAR Model is structured into several knowledge areas that are grouped in three levels:
- Supply chain building blocks: Planning logistics and synchronous operations
- Governance levels: Tactic integration, supply chain governance, and business integration
- External relationships: Selected supply chain, extended supply chain, and supply network
The SNAR Model is a tool developed by the authors to provide a structured approach to understanding and managing the extended supply network from different perspectives. These perspectives may vary both in scope (number of functions) and in depth (functional details). Figure 1.8 illustrates the correlations represented in the SNAR Model.
Figure 1.8 SNAR Model diagram
A specific code system supports this reference model, thus enabling its use for various applications. For instance, the SNAR Model coding system enables the management of supply chain strategies, process mapping techniques, and the use of performance indicators, customer service management, and the management of fluid and complex supply networks through knowledge management. The coding system is very simple. It has two major categories:
- Internal network (1)
- External network (2)
Then it follows the structure already presented in this book. For the internal network, the model builds five categories (from 01.01 to 01.05). For the external network, the model defines the other three categories. Each of the eight categories that form the SNAR Model is detailed into a third level.
Figure 1.9 SNAR Model: Coding system