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Strategy vs Operations Cases

CHARLES asked on May 01, 2019 - 2 answers

When setting up your structure, how should you approach operations cases (and pricing cases) versus more traditional strategy cases (market/product entry, profitability, M&A, etc)? Should you approach them differently? Thanks!

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Vlad
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replied on May 01, 2019
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Hi,

First of all, you need to clarify the objective and the context of the case. A good objective is measurable (has some metric and timeline) E.g. for pricing it may be - "What should be the price for the new product?" or "What should be the pricing strategy for the portfolio of products?" or "Our competitors increase the price, what should we do". As you can see all these cases will have a different structure.

The general framework for pricing a new product is: Cost base - Value based - Competitor based - pricing strategy

1. Cost based - you actually check what are the costs and apply standard industry / target markup

2. Value based pricing can be done in 2 ways:

  • You compare the value proposition and features of your product vs. the VP of the closest product of your competitors. If you have a significant difference in value prop - you have to define how much value you propose to the customer in $ terms.
  • Another way is to calculate the closest alternatives and think how much additional value we provide by replacing them. Think of the discount airlines compared to trains or buses

3. Competitor based pricing - basically it's benchmarking against competitors if you have a product with a very similar value prop. Make sure you take into account the segment (i.e. in premium higher price may be the proxy for quality).

4. Pricing strategy - here you define how you will price the product taking into account 1,2,3 and your company strategy. Maybe you decide to have a zero margin if you can crossell other services. Or maybe you would like to subsidize to win the competition. Also, think of price differentiation and having different pricing tiers (e.g. basic, premium or even freemium) and how it helps to drive price perception and fulfill strategic goals

There are several types of operational cases that you have to master:

1) Operational math problems. (e.g. Should we increase the speed of the elevator or just buy a second one? How should we reduce the queues? How should we increase the output of a factory?).

Structuring:

  • Usually, you have to look at the process. Even the most complicated systems have the inflows and outflows

The key concepts that you have to learn:

  • Capacity and utilization (both machine and people)
  • Cycle time, Throughput time, Little's Law
  • How the does lowest cycle time influence the production? (Lead time = cycle time of the slowest process)
  • How can we mitigate the bottlenecks with low cycle time? (Buffer, Parallel process, speeding up)

2) Cost cutting cases

Structuring:

  • What is the cost composition and what are the biggest costs
  • Benchmarking of the biggest costs to find the improvement potential
  • Process improvements to meet the benchmarks
  • Costs and benefits of the proposed initiatives

The key concepts that you have to learn:

  • Internal / external benchmarking
  • Idle time
  • Core processes (usually are optimized) and the supporting processes (usually are cut)
  • Math structures (Frequency of operations * time per operation)
  • Other useful structures (e.g. people - process - technology)

3) Bottleneck cases (e.g. Huge write-offs in the meat store or bottleneck on the bridge)

Structuring:

You draw a value chain and go through it to find a bottleneck.

E.g. for the meat write-offs it will be:

  • Supplier issues (packaging, meat quality, warehousing)
  • Transportation (Length, fridges)
  • Store (Refrigerators in the warehouse, in-store fridges, demand for the meet)

Feel free to reach me for further help with these cases.

Best

Sidi
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replied on May 01, 2019
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Hi! In essence, operations cases should be tackled just as profitability cases. Both belong to the same category of situations, i.e., diagnostic scenarios. (and by the way, these diagnostic scenarios are very different from what you call "traditional strategy cases - hence it is worhtwhile to highlight that typical profitability cases do not belong into the same category as market entry, product launch, M&A etc. it is a completely different question!)

Back to your question... A very quick and high level thinking approach:

1. Run diagnostic to isolate the root cause of the problem (always start with a numerical analysis first to narrow down the quantitative driver of the problem, before asking qualitative "how" and "why" questions to uncover the underlying reasons). Contrary to profitability cases (where you use a numerical driver tree to do the first part of the analysis), operations cases are best tackeled by scrutinizing each step of the process chain.

2. Based on the diagnostic findings (the "what" and the "why"), outline specific measures which address the identified root causes - and only these causes!

3. Qualify these measures by meaas of a pragmatic risk assessment

Hope this helps!

Cheers, Sidi

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