Last year, while devising a nationwide network of distribution centers for deliveries, one of the leading U.S. pharmacy chains realized that it has an advantage neither its retail rivals nor delivery apps could match: its 8,700 stores. So, the retail giant put its distribution center plans on hold as it switched to fulfilling orders for toothpaste and nail polish from nearby stores instead. Given that 78% of Americans already live within five miles of one of its stores, the average delivery time promptly plummeted from two or three days to less than an hour.
In explaining this pivot, company executives clearly understood two things. First was the need to deliver an experience rather than a service. While its customers craved seamless, speedy delivery, they didn’t necessarily want to order it from yet another app (much less have it arrive days later). Second, delivering this experience required leveraging the brand’s existing operations—its stores, supply chain, and underlying systems—to not only ship faster than its competitors but also to rapidly scale online sales without having to invest in new distribution. You can’t have the first without the second.
In this regard, the business is an exemplar of what might be called strategic operations. The modifier is needed because, all too often, operations are seen as a necessary evil—or at least a cost center—rather than an engine for innovation. While most organizations continually reinvest in customer-facing roles, such as sales and marketing, while ruthlessly optimizing back-office functions, operations have typically been left to languish. But that can be a fatal mistake in a market where experience rules, says Duncan Avis, the Americas customer and growth leader at Ernst & Young LLP.
“How do I use my operations to create strategic advantage by delivering all of the options available to customers while creating new ones?” Avis asks. “Because it’s way easier to design new experiences than it is to deliver on them. Organizations that incorporate operations into experience design up front have a much higher chance of delivering it profitably.”
A NEW STARTING POINT FOR STRATEGY
To illustrate both the importance of experience design and the difficulty of doing so without strategic operations, consider the explosive growth of food-and-retail delivery platforms and their struggles to achieve consistent profitability. Rather than simply delivering food from local restaurants, they envisioned an end-to-end “at-home dining experience” (in Avis’s words) and mapped both the operations they had and the operations they needed to realize it—inventing “dark stores” and “ghost kitchens” along the way. Although their asset-light business models made it relatively easy to launch and expand new offerings, taming unit economics has been far more challenging.
Most organizations would be better served by reimagining their operations as a starting point for strategy, Avis argues. “Can I use this to produce something else?” he asks. “Innovation doesn’t always start with the customer; it can come internally as well as externally.” For example, China’s electric vehicle industry—described by a top American executive as a “colossal strategic threat”—is led by companies that have spent more than a decade expanding into new markets from their base in battery development and manufacturing. Other global automakers have applied their expertise in materials to develop new products and experience in B2B, as well as B2C.
A SEAT AT THE C-SUITE TABLE
But where to start? A necessary first step, Avis says, is to break down the functional silos between operations and the front, mid, and back offices and realign them around serving experiences rather than stand-alone efficiency. “A good example is the airline industry,” he says. “They’ve organized themselves around the core experiences they deliver to customers, from booking to the flight.” This will, in turn, require giving operations leaders a seat at the C-suite conference table, accompanied by a change in mindset that sees “the organization as a collection of building blocks rather than a bundle of functions,” Avis adds. “What blocks do we have that we do really well?”
The person in that seat would typically be the COO, but, given the critical importance of syncing operations from end-to-end, it might also be the CIO or the CTO. Avis has another suggestion: “I believe a role like chief digital officer is the way to go, because you need someone who doesn’t have a dog in the hunt,” he says. “Their role is to disrupt and digitally transform the business, and if their function changes or goes away, that’s okay.”
While only a handful of companies have managed to fully actualize operations as truly strategic, they are some of the most valuable and profitable in the world—alternately offering their capabilities as external platforms for others or internalizing them to develop unique offerings. Given those facts, and given the growing importance of delivering an experience versus selling a product, Avis says that leaders must ask themselves, “Do I want to win, or am I just playing defense?”
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The views expressed by the author(s) are not necessarily those of Ernst & Young LLP or other members of the global EY organization.