Operational Effectiveness of Dow Chemical Co. (Dow) - Essay Example

Managing Operational Effectiveness According to business guru Michael E. Porter, operational effectiveness refers to practices that permit an organisation to utilize its outputs more efficiently. These procedures may take the form of reducing defects in products or developing better product more quickly. In this regard, operational effectiveness is deemed to go hand in hand with the corporate strategy if organisational success is desired (“Strategy is wasted without operational effectiveness” 2003). There are basically four inter-related processes in relation to the operational effectiveness cycle. The first process involves the leading and controlling of functional performance such as sales, production, logistics, research and development among others. These functions are specialised to ensure that there is focus on the organisation’s core competencies, which differentiate the company from its competitors. Aside from the functions, processes also play a vital role in the company’s operations. As such, measuring and improving of processes or standard methods follow. Operational effectiveness also requires constant and systematic search for opportunities to leverage the company’s core expertise. These processes result in the continuous improvement in functional performance. (Van Ewyk 2003) To better illustrate the concept, this paper discusses the operational effectiveness of Dow Chemical Co. (Dow), the largest chemical company in the world. This paper provides an overview of Dow’s productivity management and performance metrics. Operations Management Dow is a $33 billion enterprise, which serves customers in more than 180 countries. The company may be virtually unknown by the end-user sector since its products are not generally used by consumers. Dow provides innovative “building block” chemical, plastics and agricultural products that form part of a wide range of consumer industries. Top industries for Dow’s products include automotive and transportation, building maintenance and construction, electronics and entertainment, food and food packaging, health and medicine, home care and improvement, paper and publishing, and water purification. (“2003 Public Report”) In an interview with Mr William S. Stavropoulos, Dow Chairman and Chief Executive Officer, he admitted that the company has undergoing massive restructuring and changes in its product line. Its corporate plan is divided into two phases, the positioning stage and growth stage. For the positioning phase, Dow geared towards the improvement of quality, reduction of operating cost and change in company culture. For the growth stage, the company positioned itself for expansion. A major part of Dow’s corporate plan is the divesting of assets that are not in line with the company’s strategy and shutting down of plants that are deemed to be incompetent. (Hodgetts 1999) In this regard, to continuously improve productivity as well as control cost and product quality, Dow remains committed to the Six Sigma since its initial implementation in 1999. Through the implementation of this quality management program that is a commitment to continuous improvement (Nersesian 2000), the company has gained increasing value while equipping employees with critical problem solving skills and a mindset for reducing variation and defect. Dow believes that Six Sigma, using the Measure-Analyze-Improve-Control (MAIC) process, results in breakthrough improvement in existing products, work processes and behaviors. (2003 Public Report) To elaborate, the initial step of the Six Sigma-MAIC process involves measuring the key internal processes that is crucial to determine quality. For example, in Dow Agrosciences, a subsidiary of DOW, these processes include the procurement of raw materials and the actual manufacturing of agricultural-related products. Following this, the company analyzes the defects observed and finds ways to improve the process and control variance. (Wikipedia) Dow also applies the Six Sigma mindset to improve its social performance particularly in dealing with employee dissatisfaction and shortcomings in community relations. This is especially helpful during streamlining of operations when employee downsizing is undertaken and in facing community opposition due to the company’s waste generation. (2003 Public Report) Given these outcomes, Six Sigma has become a critical force in the business process re-engineering of the company as it encompasses innovation through the development of new designs or redesigns that result in competitively advantaged products, services, processes and systems. Dow’s Six Sigma projects have contributed productivity gains, opportunity growth and cost savings for the company. (2003 Public Report) All in all, Dow applies business process and productivity management in a more holistic manner in running all aspects of the business. With the Six Sigma, Dow focuses on the processes involved rather than on the products manufactured. Quality of its entire product line is assured if the company concentrates on how to constantly improve the processes employed. As such, guarantee of producing high-quality products does not only come during Quality Control process but right from the start of preceding processes, which are crucial to quality. Based on studies, this is a valuable perspective to adopt in order to determine organizational effectiveness. Though there is no standard way of doing it, the key is to integrate top-level business process management strategy with team level activity and establish strong link between business process management, business plan, and performance measurement and review (Pritchard & Armistead 1999). Measurement System In view of the above, Dow can be depicted as a relatively advanced company. This can be said because it adheres to modern management concepts in terms of its measurement system. As noted above, the company focuses on the aspect of processes rather than the products. In the process thinking approach, the measurement of operational effectiveness is not entirely dependent on the output but rather on value-added of the entire process provides for customers (Stevens 2005). It should be noted that the company’s line is comprised of about 70% specialized products and 30% commodity products. With this product mix, it can be seen that Dow mostly caters to specific customers who avail of specialized products (Hodgetts 1999). As such, much consideration is given to satisfaction of its customers with specialized needs such that measurement system is closely linked to customer satisfaction. Dow is concerned about operational aspects such as the quality of products and innovation. In this regard, the company, through its research efforts, has come up with performance metrics relative to quality and innovation are tied up with reputation metrics to quantify the impact of brand and performance efforts. It is through this manner that the company is able to track customer satisfaction. (2003 Public Report) Company also considers other non-financial indicators to measure the effectiveness of its processes. For example, in Dow Agrosciences, measurement of effectiveness relies on different aspects of the supply chain management and improvements in inventory utilizations. Furthermore it also considers reduction of average-days-sales-in-inventory for agri-chemicals (2004 Corporate Report). In view of its industry, Dow Agrosciences considers environment-related factors as another way of measuring process effectiveness. It considers environment, health and safety metrics such as the recordable injury and illness, incidents of leaks, breaks and spills, tons of chemical emission and efficiency of energy use. The ultimate goal of company is the attainment of its Vision of Zero, i.e. zero injuries, zero incidents, and zero environmental harm. (2004 Corporate Report) In financial terms, the company also keeps track of cost savings derived in applying the Six Sigma. In one project that focused on improving water treatment at a major manufacturing complex, the company was able to save approximately $3 million as a result of effective and efficient waste water treatment (2003 Public Report). Given the corporate report of Dow, the company can be considered as a “haven” for operational managers. This is because it aims to use a “balance scorecard” which cannot be seen in other large multinational companies. In most cases, measures of organisational performance are said to be focused on tangible as opposed to the intangible factors (“Audits for Organizational Effectiveness” 2005). Other studies show that although both type financial and non-financial measures are used to evaluate performance, financial cues may have more weight for performance judgment. Management of various companies is observed to not pay ample attention to non-financial measures of balance scorecards. (Henri 2004) It is in this regard that Dow is differentiated from other companies. Based on the discussion above, it is apparent that the company has adopted a performance measurement system that emphasizes both financial and non-financial aspects of operations. The company’s non-financial indicators are focused on the assessment of its environment, health and safety goals. In view of Dow’s industry, wherein there is high exposure to environmental and health risks, these non-financial indicators are highly relevant. A balanced operational perspective is deemed to be geared towards financial measures, customers, internal business processes, learning and growth (“Maximize Performance” 2005). As the company has addressed the financial measures, customers and business processes with its well-planned strategy, I believe that it has to improve on the learning aspect. As the company aims to continuously improve the processes it employs, Dow should be able to ingrain the process thinking approach to its employees. Since most people are more used to the conventional approach of narrowly focusing on the product rather than on the larger picture, Dow should endeavor to communicate to its employees that the company adheres to this type of systems thinking. The company should hold numerous trainings and seminars to orient the employees on the changes in how the company operates. Furthermore, it should strive to uphold good communication within the organization so that everyone becomes aware of how the company works. It should also implement human resource policies which are parallel to what the company’s operational goals. It is through these efforts that the employees may grasp the larger picture and act towards the achievement of Dow’s goals and commitment to constant process improvement. Benchmarking In connection with performance metrics, there are also standards or rules and regulations that Dow has to consider. The company undertakes benchmarking such that it identifies the highest standards of excellence for products, services or processes and adheres to “best practices.” This is an important tool for attaining and maintaining competitive edge (Elmuti 1988) It should be noted that Dow operates 165 manufacturing sites in 37 countries. Each country has its own set of rules and regulations for company operations and some are more rigorous than others. To achieve Dow’s global standards, the company may go above and beyond the rules of a particular country should it deem that Dow’s business process standards are higher. The company believes that this is the best and safest way to operate. (2004 Corporate Report) Furthermore, the company adheres to standards set by the ISO pertaining to process, products and industry. In this regard, the company considers generic standards which deal with the process system and procedures and product-related standards which deal with the quality standards involving the product. Aside from these, the company is also conscious of industry-related standards, which are related to occupational health and safety, as well as environmental standards. The company’s ability to meet high performance requirements of the ISO has become one of the basis why it has become the choice supplier of various materials to different manufacturers. Similarly, other leading companies like Ford Motor, IBM and Xerox among others also do benchmarking. Studies show that involvement in such programs is positively related to perceived changes in performance (Elmuti 1988). As benchmarking strategies are linked to improving quality, cost savings and development, Dow also relates this to how its operations comply or even exceed standards of operations in various host countries. According to studies, benchmarking is undertaken to improve production, quality, profitability and operation process, open up opportunity for growth and get a jump on competitors (Elmuti 1988). In the same way, benchmarking is one of the means by which Dow gains competitive edge. It continuously evaluates the effectiveness of its processes to ensure that its profits are maximized and operation costs are minimized. The company also undertakes massive research to be able to develop performance metric to keep the company ahead of the competition, which has substantially intensified with the advent of globalization. In this regard, the company “copies” a competitor, which is perfectly normal behavior in the free market environment (Nersesian 2000). However, the company goes beyond just copying the competitors as it strives to innovate with the use of technological breakthroughs and standards in manufacturing. This exhibits the company’s commitment to premium quality and continuous process improvement. Productivity Trend One of the main causes of productivity changes in Dow, as highlighted by its CEO, is the re-engineering of human resource. The company has substantially invested on technology to put the entire company in a one-enterprise system. Today all employees are linked to the system through the Intranet developed. (Hodgetts 1999) The company believes that with this type of process more information will be made available to more people. This results in less bureaucracy within the company so well-informed decisions can be made promptly, such is deemed critical to a globalized world. This information technology approach is enabling the company to go to the next level of strategy on productivity and growth. (Hodgetts 1999) In the same way, the company has also undergone massive laying off of thousands of employees in order to adapt to the dramatic changes in the business environment. With this it can be expected that labor turnover in the company has substantially increased since the advent of globalization. Globalized competition becomes apparent in the company’s employee evaluation system. Continued employment and receiving of incentives are based on performance and having the right skills. Demand for workers has shifted to knowledge workers with advanced skills which are in line with corporate strategy (Lawler 2005). In addition, employees are also encouraged to become more proficient at multiple skills and tasks to ensure security of tenure in the company. With this, more flexibility is allocated to human capital as required to increase output (Stevens 2005) Works Cited “2003 Public Report.” Dow Chemical Company 2003. [15 September 2005] Available at: http://www.dowpublicreport.com “2004 Corporate Report.” Dow Chemical Company 2004. [15 September 2005] Available at: http://www.dow.com “Audits for Organizational Effectiveness.” M2 Presswire 2005. [15 September 2005] Available at: http://www.proquest.umi.com Elmuti, D. 1988, “The perceived impact of the benchmarking process on organizational effectiveness.” Production and Inventory Management Journal 39 (3). [15 September 2005] Available at: http://www.proquest.umi.com Hodgetts, R. 1999, “Dow Chemical’s CEO William Stavropoulos on Structure and Decision Making.” The Academy of Management Executive November 1999. Lawler, E. 2005, “Creating high performance organization.” Asia Pacific Journal of Human Resources 43 (1). [15 September 2005] Available at: http://www.proquest.umi.com “Maximize Performance.” Impact Magazine May 2005. [15 September 2005] Available at: http://www.wipfli.com Nersesian, E. 2005. Trends and Tools for Operations Management: An Updated Guide for Executives and Managers. Quorum Books. Pritchard, J. & Armistead, C. 1999, “Business Process Management-Lessons from European Business.” Business Process Management Journal 5 (1). [15 September 2005] Available at: http://www.proquest.umi.com “Strategy is wasted without operational effectiveness.” Hci Journal of Information Development May 2003. [15 September 2005] Available at: http://www.hci.com.au Stevens, M. 2005, “Power of Process Thinking.” Impact Magazine May 2005. [15 September 2005] Available at: http://www.wipfli.com Van Ewyk, O. 2003, “Achieving Operational Effectiveness by Leveraging Knowledge.” Hci Journal of Information Development May 2003. [15 September 2005] Available at: http://www.hci.com.au Wikipedia [15 September 2005] Available at: http://en.wikipedia.org Read More