Taiwan Semiconductor Manufacturing Company (TSMC), a manufacturing company that focuses on producing semiconductors according to the designs requested by its customers, has an operating approach known as the TSMC way. It consists of two main aspects. First, TSMC allocates an order volume from its 1,000 customers to all its factories to achieve a specific level of efficiency (use of scale). Second, TSMC operates using a unique modular design in producing these orders. This enables the company to dynamically allocate its production capacity to meet these orders.¹

In addition, TSMC has a cyber shuttle, a design verification and testing tool for chips that can accommodate customers' sudden needs. Through the TSMC way, the company can fulfill emergency orders while still adhering to rigid manufacturing operational principles. It operates on the principle of intelligent manufacturing. This is a machine learning‐assisted manufacturing process applied to optimize quality, productivity, efficiency, and operating flexibility, maximize cost‐effectiveness, and accelerate overall innovation.² As a result, TSMC can respond to a wide variety of market demands and very diverse product requirements for customers worldwide.³

Due to its ability to balance rigid processes with the flexibility that customers demand and increasingly need, TSMC has become the world's largest semiconductor manufacturer. It plays a vital role in the global supply chain. Among its most prominent clients are Apple and AMD.⁴

In this chapter, we'll discuss the element of the omnihouse model that is in the middle, namely, operations, which is a very strategic element in business (see Figure 17.1). On the one hand, operations must be able to run without significant obstacles. On the other hand, it must be capable of keeping up with a dynamic environment.

The operations element is one of the direct influences on a company's profit margin. Improving the operations aspect is essential for increasing company efficiency, reducing costs, and directly affecting the income statement's operating margin. The strength of operational processes―from production, distribution, sales, and services―will depend on the company's operational capabilities.

The operations can also affect productivity―in terms of inputs and outputs―because strong operational capabilities can convert inputs from the same number of resources into higher outputs compared to companies with similar products. Operations must be built so that everything can run flawlessly from preparation to execution. The focus of the operations should hinge on the ability to use the company's existing resources as efficiently as possible to produce products and supporting services of the highest quality while simultaneously preserving a degree of flexibility. The operations element is also an intermediary between marketing, which usually focuses on the top line, and finance, which prioritizes the bottom line in the income statement.

Rigidity Is Natural

We can find rigidity everywhere; it usually forms when a start‐up becomes more established in running its business. At this point, a firm might settle into its routines and systems. It may find comfort in maintaining the status quo. Look again in Chapter 6. The following sections delineate several factors that frequently lead to rigidity.

The Value Chain Is Not Dead

It is sometimes said that the value chain concept developed by Michael Porter in the mid‐1980s is no longer applicable. The idea surfaced during an era when digitalization was not connecting the world as it is now. Thus, the value chain concept becomes invalid when everything is increasingly digitally connected.

However, the development of digital technology enables us to simplify, combine, or even eliminate several sub‐elements that are unneeded so that they can be bypassed or outsourced to partners. Hence, the company can avoid carrying out some activities that are not adding significant value. This will speed up the ideation stage to commercialization, reduce costs, and increase the use of tangible and intangible assets.

For example, WhatsApp outsourced their engineers by contracting an IT team from Russia. The decision was made because their starting capital was very limited during their early years, and they couldn't afford engineers in the US. They decided to seek talented engineers elsewhere to get a more competitive talent rate.⁶ This scheme successfully kept WhatsApp afloat until its acquisition by Facebook in 2014. This method simplified WhatsApp's operational management and supported its competitive advantage.

Continual Adjustment of Value Chain

From the previous explanation and examples, we can say that the value chain concept is not dead and remains relevant as long as the company continues to make adjustments to facets of its value chain. All primary and supporting elements must be fully integrated digitally but at the same time can still work modularly. Companies must also have the courage to determine which activities they will ultimately carry out on their own―they will be referred to as core activities―and which ones they should hand over to partners.

Both big and small companies sometimes need to outsource in the current business situation. A common reason to outsource is to reduce cost. Another reason is that an outsourcing system can be beneficial for small‐scale companies. For start‐ups, an outsourcing plan can help the business run as usual when the internal team reaches its maximum capacity.⁷

With a more concise value chain, companies can also increase the quality of their products by focusing on areas such as creativity and innovation while reducing unnecessary costs. By creating a more efficient value chain, companies can speed up delivery processes, even for some customized products. Supporting services can be the basis for creating differentiation in the value chain.

The Supply Chain Is Even More Relevant

The role of a robust supply chain, both upstream (supply side) and downstream (demand side), grows even more relevant in this digitalized era. With the increasingly connected supply chain elements, companies can share information with the supply side to support their flexibility. Good coordination from upstream to downstream partners helps a company achieve a high level of efficiency in supply chain processes, which can meet changing customer demands―both B2B and B2C.⁸ Strong supply chain integration triggers rigidity while allowing flexibility for companies to respond to market dynamics. It also provides space for suppliers to adapt quickly to meet the demand.

Integration and Strategic Flexibility

Integrating a company with the supply chain enables the company to have strategic flexibility. Companies can become better at sensing external changes and formulate what they must do by using resources and operational activities. However, the firm does not need to own all its resources. It can outsource some of its operations.

Companies can concentrate on their core competencies while outsourcing the rest. They can also focus on activities related to these core competencies and even create a distinctive competence. This condition is in line with the sharing economy concept, which is increasingly popular in the digital era. It enables different parties to connect in a specific business domain.

Some US‐based companies, such as Microsoft, American Express, Dell, and General Electric, serve millions, if not billions, of global customers. These companies outsource their help desk services to third‐party companies in India. The country is an essential destination to outsource customer support activities because of low labor cost, IT talent, English fluency, and a 12‐hour time zone difference that can help companies provide 24/7 call center service for their customers.⁹

Integration, Bargaining Position, and QCD

If we relate these topics to Masaaki Imai's quality, cost, and delivery (QCD) concept, we see that nonideal conditions will cause QCD not to be optimized. The strength of an integration and bargaining position between suppliers and buyers will determine the level of vulnerability of the QCD (see Figure 17.2).

No matter how good the value chain is in a company, it will be challenging to provide high‐quality products and services if access to production factors is limited. In the case of B2B, for example, if the company's bargaining position as a buyer is weak and the integration is weak, then all elements of the QCD will be very vulnerable. The company will also find it challenging to reduce multiple costs because the supplier determines the prices of production factors. If the supply of production factors to the company is also not smooth, it might disrupt the delivery.

If the company's bargaining position as a buyer is strong enough, but the integration is weak, the company can focus only on the cost element, while quality and delivery remain vulnerable. However, if the company's bidding position as a buyer is weak but the integration is strong, the company has a better chance of providing quality products and services and excellent delivery to customers. However, the vulnerability remains high for the cost element. These two conditions lead to less flexibility for the company and more space to form its competitive advantage.

For example, Apple―a strong buyer for TSMC (mentioned at the beginning of the chapter)―has a vast ecosystem and demands a top‐quality chip for all their gadgets. As one of the leading brands in innovative consumer electronic goods, Apple requested a specific chip from TSMC. This particular demand of three‐nanometer production helped TSMC improve its operational experience. Given this, only TSMC could complete the chip's manufacturing process. This form of business relationship establishes a healthy interdependence between Apple and TSMC.¹⁰

Suppose the company's bargaining position as a buyer is strong, and its integration is strong with the supply chain. In that case, the company must rely only on its value chain to ensure quality products and services, keep costs as low as possible, and ensure delivery is in line with customer expectations―so that customers are satisfied―or even exceed customer expectations to delight them.

This integration and a strong bargaining position further strengthen the company's strategic flexibility, namely, the capability to respond rapidly to the fast‐changing business environment―especially market demand. Companies can adjust their resources and strategic decisions swiftly according to the changes.¹¹ The firm will have a strong competitive advantage as long as it has strong operations management capabilities to integrate all its activities with elements in the supply chain.¹²

Insufficiency of Linear Relationship

Even if the value chain is firmly integrated with the upstream supply chain—that is, the suppliers (S1 to S5), and downstream supply chain, that is, the distributors (D1 to D3)—it is still not necessarily the ideal condition (see Figure 17.3). This is the case if the firm is not yet an integrated part of a business ecosystem. Moreover, if the relationship is still linear, then the dynamics may not necessarily match the speed of change in the overall business environment, especially from the customer side.

To pursue a dynamic and often chaotic situation, a linear supply chain approach is no longer suitable, especially one that is independent or not integrated. Due to this insufficiency, there is an urgency for the value chain to evolve into a very dynamic ecosystem. This ecosystem will function as a value web that optimizes all elements involved.¹³

If companies rely on a single aspect in supply chains, such as supplies, production, sales, or distribution, it could accidentally harm a business. They might be held hostage for payments they haven't made or a price hike. For example, if an organization can't receive raw material, a machine fails, a website crashes, or it cannot find inventory in a warehouse, the entire operations may have to shut down to avoid bottlenecks.¹⁴

The Business Ecosystem Is the Ultimate Domain

According to BCG, a business ecosystem should solve a business challenge and be organized to achieve a specific value proposition. Access to a wide range of capabilities, the ability to scale quickly, and flexibility and resilience are all advantages of business ecosystems. For instance, Steve Jobs opened the iPhone to third‐party app developers, allowing for a flood of new and inventive apps.¹⁵

In the end, a company must become an active part of a business ecosystem, both conventional and digital. By connecting all elements in an ecosystem, all parties, consisting of suppliers (S), manufacturers (M), distributors (D), and customers (C), will have vast access and flexibility to collaborate and co‐create, which will provide superior performance for all parties involved.¹⁶ As part of a strong business ecosystem, there is a significant chance that a company can improve its dynamic capabilities, which are an essential foundation for building a competitive advantage (see Figure 17.4).

A company and its partners will enjoy benefits from the ecosystem, which will provide some advantages. The higher the interdependence in an ecosystem, the higher the rigidity. However, it also provides flexibility for all parties involved in the business ecosystem in dealing with swift environmental changes. This condition is in line with the principle of strategic flexibility.

Advantages of a Business Ecosystem

Business ecosystems can provide several advantages to the parties who are part of them:

• Provide a substantial entry barrier. The business ecosystem can function as a strong barrier for new entrants. It is not enough for new competitors to rely merely on their value chain's strength to win the competition. Newcomers now have to face the ecosystem as a whole, which, of course, has the collective power of all parties in it.
• Enable solutions for more extensive problems. An optimized ecosystem facilitates a company to innovate and provide solutions. This can occur both to solve individual company's problems and to collectively address social and environmental issues on a global scale.¹⁸ A dynamic ecosystem consisting of shared resources, capabilities, and competencies with increasingly blurred boundaries allows for discovering new values. It will be instrumental for companies to help them face this fierce world independently.¹⁹
• Provide versatile platforms. The business ecosystem is a platform for accelerating the learning process, developing ideas, sharing knowledge, and producing techniques and technologies for collective use. It is a catalyst for innovations, enabling multiple parties to collaborate and co‐create in a cross‐sector network to support commercialization processes. This platform can increase efficiency and effectiveness both per company and collectively due to the possibility of spreading operating and investment costs to many parties in the ecosystem.²⁰

Operations at the Center Stage

As companies become more integrated into a business ecosystem, the role of operations becomes more central, as seen in the omnihouse model. On the one hand, the marketing function within a company is primarily to understand the market and provide solutions through its various products and services. On the other hand, the financial function aims to determine whether multiple marketing innovations will provide good margins and make productive use of the company's capital. The role of the operations function is to enable the execution of value creation that can fulfill the objectives of those two functions.

Various technologies support operational functions, especially those in line with this increasingly digitalized world. This technology also allows a company to be part of a business ecosystem to share roles and burdens and support operational activities within the company. Companies can take advantage of the multiple advantages in an ecosystem to provide the best to customers, shareholders, and the community. The operations function is also an essential part of realizing the idea of technology for humanity.

New Character of Operational Excellence

In line with the increasing importance of a company's involvement in a business ecosystem, operational excellence cannot rely solely on the capabilities of the company's internal management, internal disciplines, or company values. Indeed, companies still need to pay serious attention to their internal processes. At the same time, they should find ways to align internal processes with interactions involving other parties in a business ecosystem.

In addition to maintaining existing operational excellence in the company, it is crucial to understand what conditions can improve the company's operational excellence after it has become part of a business ecosystem. The goal is to achieve optimum flexibility regardless of the rigid interdependency between companies in that business ecosystem. Here are some of the characteristics of a company's new operational excellence:

• Seamless interdependency. How much does a company cooperate with parties in the same business ecosystem? What is the extent of the interdependence between a company and other parties, and is the relationship seamless? The more parties that cooperate with a company and the higher the interdependence, and the more seamless a relationship or connection is, the higher the level of needed integration.
• Flawless compatibility. We have to see how compatible the technology used in the operational activities of a company is with other organizations in an ecosystem. It means that we have to see whether those organizations employ a similar process and methodology, whether the company uses the same protocol as other parties, whether they all refer to universal governance within an ecosystem, or whether the people's culture is consistent with other organizations. These must be completely compatible and flawless in interacting with an ecosystem. The more perfect the compatibility of an organization in a business ecosystem, the more the company shows the character of new operational excellence.
• Immediate responsiveness. Being part of a business ecosystem allows a company to maintain its relevance in an ever‐changing business environment. Companies can take advantage of the business ecosystem to quickly respond to changes even if they show discontinuous trajectories. The faster the operational responsiveness of the company supported by its ecosystem, the stronger the indication that the company performs new operational excellence.

This new operational excellence capability is what we call post‐operational excellence. Combining those three aspects of post‐operational excellence will determine a high degree of flexibility because a company can run operational processes modularly and easily adjust whenever necessary. The maximum point of the three aspects will form the flexibility frontier (see Figure 17.5).

Suppose the business environment shows dynamics that exceed the imaginary flexibility frontier. In that case, all parties in the ecosystem must work hard to jointly take advantage of their interdependence as a collective strength, improve their compatibility, and increase their ability to respond. These three efforts can push the flexibility frontier outward beyond the dynamics of the business environment so that all parties in the business ecosystem can remain relevant. However, given that the flexibility frontier is already ahead of the business dynamics, it depends on each company's efforts as part of the ecosystem to maximize the available opportunities and possibilities.

With this flexibility, management can accelerate scaling up the company. The market is becoming wide open. As long as the available logistics system can reach them, the company can certainly serve that market. Further, a company can also streamline the product development process and supporting services. The possibilities for diversification are also getting more significant. Finally, the company must answer the fundamental question again regarding its core competency and the extent to which its core competence will remain relevant, and even give it a distinctive competence.

Stretching the QCD

Companies can improve their achievements in the three elements of QCD that rely not only on internal company processes that refer to cross‐functional collaboration but also on processes that multiple partners in a business ecosystem can handle. Organizations can reduce costs by relying on efficiency from the designing phase to selling a product and depending on the collective efficiency of a business ecosystem. Firms can also deliver those products and services according to customer requests faster.²¹

Initially, QCD depended only on the company's limited value chain flexibility or, at a higher level, the relationships with upstream and downstream value chains that were linear in nature. But now, companies can have much greater flexibility if they rearrange all their operational processes to become more congruent with the ecosystem where they participate, mainly if they can position themselves closer to the flexibility frontier. In short, companies can stretch their limit of QCD (see Figure 17.6).

Managing Rigidity and Flexibility

We have indeed entered a completely different era with a new business landscape. It is full of discontinuities in trajectories in many industries. All of these affect the way a company operates. Post‐operational excellence is needed based on a more advanced business ecosystem by managing three aspects, namely, interdependency, compatibility, and responsiveness.

Although important, departmental integration is not sufficient to deal with the dynamics of the business environment now and in the future. The renowned value chain concept developed by Michael Porter will be even better if we don't see it as a one‐way process but one that also allows an iterative process and flexibility at each point of the value chain. This iterative process and flexibility will enable the company to deliver faster and continuous customer value while adapting to external changes.

The company can use its internal resources, capabilities, and competencies within the division or intra‐division to create competitiveness. However, on top of that, it should use external networks from critical partners to ensure a flexible value‐creating process. Networking with strategic partners is why integration with the value chain plays a vital role in increasing the company's competitive advantage. This integration will also affect the company's operational management in a value‐creation process.

Technology that enables connectivity with a business ecosystem enables companies to leverage the ecosystem advantages.²² Companies must transform and embrace post‐operational excellence as a new value or characteristic in their company. Organizational structures with large inertia no longer have a place. We must immediately remove the corporate culture that is not open‐minded and is resistant to new things. Connectivity with ecosystems―especially those supported by digital technology―enables companies to discover and realize new values that were previously impossible if only relying on traditional value chains.²³

In the end, a company must have the capability to manage rigidity and flexibility simultaneously. This capability―including coordination―will open up more significant opportunities to achieve economies of scope.²⁴ In short, today's companies must be able to build strategic flexibility to successfully head toward 2030, which is an important stepping stone to the following decades.²⁵

Key Takeaways

• Rigidity in a company can be caused by a weak entrepreneurial mindset, stagnation of creativity and innovation, ignoring the competition, not taking care of customers, not transforming the business model, ignoring macro‐environment changes, and weak digitalization orientation.
• Strong supply chain integration creates rigidity while allowing flexibility for companies to respond to market dynamics.
• Business ecosystems can provide a barrier to entry, solutions to extensive problems, and versatile platforms.