May 16, 2005
A food company plans a business strategy as a road map to success. However, a good strategy does not guarantee success. A requisite for successful implementation is the presence of business processes suited to the goals of the strategy. In today’s automated world, these business processes rely on business systems. A direct link exists between the success of a business strategy and the business systems utilized. While great systems do not guarantee the success of a business strategy, poor systems are a frequent cause of failure.
Business Systems in the Food Industry
How does the food industry see business systems? What are the motivations for the implementation of systems?
There are three strategies driving the implementation of business systems in the food industry: Survival, Improvement, and Competitive Weapon. The figure below shows the level of business function implemented under the three different strategies.
A survival strategy focuses on the cost reduction. Labor savings are the typical justification for this strategy. While the implementation of a new system does result in labor savings initially, over time, these savings tend to erode, or the system falls into disuse because adequate people are not available to support the system’s use. If not carefully monitored, the reason for the system’s implementation can be its ultimate downfall—the system reduces a company’s personnel needs, but without the proper personnel, the system cannot continue to function.
An improvement strategy utilizes business systems to improve the business. Implementation is justified mostly through reductions in inventory, increased customer satisfaction, warehouse efficiency, etc., although labor savings may be a secondary justification.
By considering business systems as competitive weapons, systems and processes are directly connected to the business strategy. Systems become a key part of reducing cost, bringing new products to market faster, etc. Systems are no longer justified by their return-on-investment but rather as a requirement for the company to be successful. For example, unless a company can reduce its time to market for new products, it can never compete for market share.
The COO of a pet food manufacturer stated his company’s justification for a major investment in manufacturing systems this way: “It is all about share. If we upgrade our operations and the competition does not keep up, we gain share. However, we have good competitors so we assume they are doing the same thing, so we will only maintain share. If we do nothing, we will lose share. Justification is simple, maybe we gain share, maybe we maintain share, but at least we will not lose share.”
Studies by AMR Research show a correlation between strategy and investment. Kara Romano, Senior Research Analyst for the food industry at AMR tells us, “Our research shows that food manufacturers invest an average of 2.8% of revenue in IT. Inspecting our research relative to strategy reveals that companies with a survival strategy spend less than the 2.8% average, while improvement companies spend slightly more. Companies looking for competitive advantages spend even more, closer to 3.5%, with some even exceeding that figure.”
Data from the IFDA (International Foodservice Distribution Association) indicate food distributors spend approximately 0.4% of revenue on IT. Distributors following the survival strategy spend less that average or less than 0.4%. Those distributors following the improvement strategy spend slightly more than average and those seeking a competitive advantage spending nearly twice the average or 0.8%.
Of special interest are those distributors who have some processing activities, for example many meat distributors. We would expect these companies to fall between the distribution and manufacturing ranges.
Romanow also points out that, “We see a strong correlation between company success, strategy and IT spending.”, “Systems as a competitive weapon calls for aligning systems to support business strategy. The business strategy comes first, then the IT strategy.”
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