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Flevy Management Insights Case Study
Operational Efficiency Strategy for Mid-Size Automotive Manufacturer

There are countless scenarios that require Target Operating Model. Fortune 500 companies typically bring on global consulting firms, like McKinsey, BCG, Bain, Deloitte, and Accenture, or boutique consulting firms specializing in Target Operating Model to thoroughly analyze their unique business challenges and competitive situations. These firms provide strategic recommendations based on consulting frameworks, subject matter expertise, benchmark data, best practices, and other tools developed from past client work. Let us analyze the following scenario.

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Consider this scenario: The organization, a mid-size automotive manufacturer, is grappling with an outdated target operating model that has led to operational inefficiencies and increased production costs.

Facing a 20% increase in operational expenses and a 15% decline in production efficiency over the past two years, the company is also contending with stiff competition from both established and emerging automotive manufacturers. External challenges include fluctuating raw material prices and a rapidly changing regulatory environment that impacts global supply chains. The primary strategic objective of the organization is to overhaul its target operating model to streamline operations, reduce costs, and enhance production efficiency to regain its competitive edge in the automotive market.

This mid-size automotive manufacturer has reached a critical point where its existing operational practices are no longer sustainable in the face of evolving industry demands and competitive pressures. The underlying issues appear to stem from an outdated target operating model and a lack of digital transformation initiatives, which have culminated in operational inefficiencies and increased production costs. To address these challenges, a comprehensive strategic plan has been developed, focusing on operational excellence and digital innovation as key pillars for driving the company's future growth and competitiveness.

Market Analysis

The automotive industry is currently undergoing significant transformation, driven by trends in electrification, autonomous driving, connectivity, and shared mobility. This evolution presents both challenges and opportunities for traditional manufacturers.

Understanding the competitive landscape requires an analysis of the primary forces shaping the industry:

  • Internal Rivalry: Intense, due to the presence of global manufacturers and the entrance of new players focused on electric and autonomous vehicles.
  • Supplier Power: Moderate, with major suppliers holding significant negotiation power over smaller automotive manufacturers.
  • Buyer Power: High, as consumers have a wide array of choices and are increasingly sensitive to innovation and sustainability.
  • Threat of New Entrants: Increasing, particularly from tech companies venturing into electric and autonomous vehicles.
  • Threat of Substitutes: Growing, with public transportation and new mobility services as alternatives to car ownership.

Emergent trends include a shift towards electric vehicles (EVs), increased demand for connected car technologies, and a push for more sustainable manufacturing practices. These trends are leading to major changes in industry dynamics, including:

  • Increasing electrification of vehicles, opening opportunities for innovation in EV technology but also posing risks in the form of high R&D costs.
  • Greater focus on digital and connected technologies, offering opportunities for differentiation but requiring significant investment in new capabilities.
  • Rising importance of sustainability, presenting opportunities to lead in green manufacturing but also risks from regulatory fines and shifting consumer preferences.

The STEEPLE analysis highlights significant socio-economic, technological, environmental, and legislative factors shaping the industry, such as increasing environmental regulations, technological advancements in vehicle manufacturing, and shifting consumer preferences towards sustainability and digital features.

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Internal Assessment

The organization has a strong foundation in automotive manufacturing with a recognized brand and a loyal customer base. However, it faces challenges in operational efficiency and adapting to digital trends.

The MOST Analysis reveals misalignments between the company's mission and its operational strategies, particularly in areas of digital transformation and sustainability. Objectives related to cost reduction and efficiency improvements have not been fully integrated into daily operations.

The Core Competencies Analysis indicates strengths in traditional manufacturing and design, but gaps in digital innovation and sustainable practices. Addressing these gaps is critical for maintaining competitive advantage.

The McKinsey 7-S Analysis underscores inconsistencies in Systems and Skills with the current strategic direction, highlighting the need for digital upskilling and the adoption of advanced manufacturing technologies to improve operational efficiencies.

Learn more about Digital Transformation Competitive Advantage Core Competencies

Strategic Initiatives

  • Revise Target Operating Model: This initiative aims to realign the organization's operating model with industry best practices in digital innovation and sustainable manufacturing. The intended impact is a reduction in operational costs by 20% and improvement in production efficiency by 25%. The source of value creation lies in streamlining processes, adopting new technologies, and enhancing workforce capabilities. This initiative will require investments in technology, training, and process re-engineering.

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Target Operating Model Implementation KPIs

KPIS are crucial throughout the implementation process. They provide quantifiable checkpoints to validate the alignment of operational activities with our strategic goals, ensuring that execution is not just activity-driven, but results-oriented. Further, these KPIs act as early indicators of progress or deviation, enabling agile decision-making and course correction if needed.

What gets measured gets done, what gets measured and fed back gets done well, what gets rewarded gets repeated.
     – John E. Jones

  • Reduction in Operational Costs: Tracking this KPI will provide insights into the effectiveness of the new operating model in controlling expenses.

Monitoring TOM-related KPIs will offer actionable insights into the strategic plan's performance, helping the organization adjust its approach to meet its objectives effectively.

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Revise Target Operating Model

The strategic initiative to revise the Target Operating Model was underpinned by the application of 2 critical business frameworks: the Value Chain Analysis and the Resource-Based View (RBV).

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Revise Target Operating Model - Value Chain Analysis

The Value Chain Analysis, developed by Michael Porter, was instrumental in dissecting the company's operations into strategic activities to understand cost drivers and identify areas for differentiation. This framework proved invaluable in pinpointing inefficiencies within the manufacturing process and areas where digital technologies could be integrated to enhance productivity. Following this analysis, the team:

  • Conducted a comprehensive review of the company's primary and support activities to identify bottlenecks and inefficiencies in the current operating model.
  • Implemented advanced manufacturing technologies in key areas identified by the Value Chain Analysis to streamline operations and reduce costs.
  • Developed training programs to upskill employees, ensuring they could effectively utilize new digital tools and processes.

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Revise Target Operating Model - Resource-Based View (RBV)

The Resource-Based View (RBV) was also applied to assess the company's internal capabilities and resources, focusing on those that could provide a competitive advantage in the context of the revised operating model. This perspective was crucial in identifying the company's unique strengths, such as its skilled workforce and proprietary manufacturing techniques, and aligning them with the new strategic direction. The application of RBV involved:

  • Evaluating the company's resources and capabilities to determine their potential to create sustainable competitive advantages.
  • Aligning the company's strategic resources, such as proprietary technology and skilled labor, with the new target operating model to maximize efficiency and innovation.
  • Investing in areas where the company had gaps in capabilities, particularly in digital technologies and sustainable manufacturing practices.

The implementation of these frameworks facilitated a comprehensive overhaul of the Target Operating Model. As a result, the company achieved a 20% reduction in operational costs and a 25% improvement in production efficiency. The strategic realignment, supported by the Value Chain Analysis and Resource-Based View, enabled the organization to streamline its operations, leverage its core competencies, and embrace digital transformation, thereby regaining its competitive edge in the automotive industry.

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Key Findings and Results

Here is a summary of the key results of this case study:

  • Reduced operational costs by 20% through the implementation of advanced manufacturing technologies and process streamlining.
  • Improved production efficiency by 25% by leveraging digital tools and upskilling employees.
  • Identified and addressed bottlenecks and inefficiencies in the company's primary and support activities.
  • Invested in digital technologies and sustainable manufacturing practices to close capability gaps.
  • Aligned the company's strategic resources with the new target operating model to maximize efficiency and innovation.

The strategic initiative to revise the Target Operating Model has yielded significant results, notably a 20% reduction in operational costs and a 25% improvement in production efficiency. These outcomes are directly attributable to the effective application of the Value Chain Analysis and Resource-Based View frameworks, which facilitated a comprehensive understanding of the company's operations and strategic resources. The investment in advanced manufacturing technologies and the focus on digital upskilling of employees have been particularly successful, demonstrating the importance of embracing digital transformation in today's competitive automotive industry. However, the results also highlight areas for improvement. The process of identifying and addressing inefficiencies, while successful, suggests that ongoing monitoring and continuous improvement should be a priority to sustain these gains. Additionally, the investments in digital technologies and sustainable practices, while necessary, will require ongoing evaluation to ensure they continue to provide a competitive edge and align with industry trends and consumer preferences.

Given the successes and areas for improvement identified, the recommended next steps should include a continued focus on digital transformation and sustainability as key strategic priorities. This involves not only maintaining investments in technology and green manufacturing practices but also fostering a culture of innovation and continuous improvement. Regularly revisiting the company's operational model in light of emerging industry trends and technological advancements will be crucial. Additionally, expanding the digital upskilling programs to encompass a wider range of technologies and methodologies can further enhance the company's adaptability and competitive position. Finally, implementing a more robust system for tracking and analyzing the performance of new initiatives will ensure that the company can quickly identify areas for adjustment and improvement.

Source: Operational Efficiency Strategy for Mid-Size Automotive Manufacturer, Flevy Management Insights, 2024

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