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1. What is OperationStrategy?
Operations strategy is the pattern of decisions and actions that
shape the long-term vision,objectives, andcapabilities of the
operation and its contribution to overall strategy. It is the way
in which operations resourcesare developed over the long term to
create sustainable competitive advantage for the business.
Increasingly,many businesses are seeing their operations strategy
as one of the best ways to differentiate themselves
fromcompetitors. Even in those companies that are marketing led
(such as fast-moving consumer goods), aneffective operations
strategy can add value by allowing the exploitation of market
positioning.
2. Does the operationhave a strategy?
Strategies are always difficult to identify because they have no
presence in themselves, but are identified by thepattern of
decisions that they generate. Nevertheless one can identify what an
operations strategy should do. First, it should provide a vision
for how the operation's resources can contribute to the business as
a whole. Second, it should define the exact meaning of the
operation's performance objectives. Third, it should identify the
broad decisions that will help the operation achieve its
objectives. Finally, it should reconcile strategic decision with
performance objectives.An operations Strategy should articulate a
vision for the operations contribution
3. An operationsStrategy shouldarticulate a vision forthe
operationscontribution
So, what should an operations strategy do? First, it should
articulate a vision of how the business's operationsand processes
can contribute to its overall strategy. This is something beyond
the individual collection ofdecisions that will actually constitute
the strategy.The 'vision' for an operation is a clear statement of
how operations intend to contribute value for the business. Itis
not a statement of what the operation wants to achieve (those are
its objectives), but rather an idea of what itmust become and what
contribution it should make.A common approach to summarizing
operations contribution is the Hayes and Wheelwright Four-Stage
Model.The model traces the progression of the operations function
from what is the largely negative role of 'stage 1'operations to
becoming the central element of competitive strategy in excellent
'stage 4' operations. Figure 2.2illustrates the four steps involved
in moving from stage 1 to stage 4.
4. Hayes andWheelwright's four-stage model
ofoperationscontribution seesoperations as movingfrom
implementationof strategy, throughto supportingstrategy, and
finallydriving strategy
Stage 1 : Internal neutralityThis is the very poorest level of
contribution by the operations function. The other functions regard
it as holdingthem back from competing effectively. The operations
function is inward-looking and at best reactive with verylittle
positive to contribute towards competitive success. Its goal is to
be ignored. At least then it isn't holding thecompany back in any
way. Certainly the rest of the organization would not look to
operations as the source ofany originality, flair or competitive
drive. Its vision is to be 'internally neutral', a position it
attempts to achievenot by anything positive but by avoiding the
bigger mistakes. Stage 2 : External neutralityThe first step of
breaking out of stage 1 is for the operations function to begin
comparing itself with similarcompanies or organizations in the
outside market. This may not immediately take it to the 'first
division' ofcompanies in the market, but at least it is measuring
itself against its competitors' performance and trying to
be'appropriate', by adopting 'best practice' from them. Its vision
is to become 'up to speed' or 'externally neutral'with similar
businesses in its industry by adopting 'best practice' ideas and
norms of performance from others. Stage 3 : Internally
supportiveStage 3 operations have probably reached the 'first
division' in their market. They may not be better than
theircompetitors on every aspect of operations performance but they
are broadly up with the best. Yet, the vision ofstage 3 operations
is to be clearly and unambiguously the very best in the market.
They may try to achieve this bygaining a clear view of the
company's competitive or strategic goals and developing
'appropriate' operationsresources to excel in the areas in which
the company needs to compete effectively. The operation is trying
to be'internally supportive' by providing a credible operations
strategy. Stage 4 : Externally supportiveStage 3 used to be taken
as the limit of the operations function's contribution. Yet the
model captures thegrowing importance of operations management by
suggesting a further stage - stage 4. The difference betweenstages
3 and 4 is subtle, but important. A stage 4 company is one where
the vision for the operations function isto provide the foundation
for competitive success. Operations looks to the long term. It
forecasts likely changesin markets and supply, and, over time, it
develops the operations-based capabilities that will be required
tocompete in future market conditions. The operations function is
becoming central to strategy-making. Stage 4operations are creative
and proactive. They are innovative and capable of adaptation as
markets change.Essentially they are trying to be 'one step ahead'
of competitors in the way that they create products and servicesand
organize their operations - what the model terms being 'externally
supportive'.
Chapter 2 - Operation Strategy ...Study online at
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Hayes and Wheelwright's four-stage Model
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5.
Anoperationsstrategyshoulddefineoperationsperformanceobjectives
So, what should an operations strategy do? Second, it should
translate market requirements into a message that will havesome
meaning within its operations. This means describing what customers
want in terms of a clear and prioritized set ofoperations'
performance objectives.Operations adds value for customers and
contributes to competitiveness by being able to satisfy the
requirements of itscustomers. There are five aspects of operations
performance, all of which to a greater or lesser extent will affect
customersatisfaction and business competitiveness. Quality - doing
things right, providing error-free goods and services that are 'fit
for their purpose'. Speed - doing things fast, minimizing the time
between a customer asking for goods and services and the
customerreceiving them in full. Dependability - doing things
on-time, keeping the delivery promises that have been made to
customers. Flexibility - changing what you do or how you do it, the
ability to vary or adapt the operation's activities to cope
withunexpected circumstances or to give customers individual
treatment, or to introduce new products or services. Cost - doing
things cheaply, producing goods and services at a cost that enables
them to be priced appropriately for themarket while still allowing
a return to the organization (or, in a not-for-profit organization,
that give good value to thetaxpayers or whoever is funding the
operation).
6. The exactmeaning ofperformanceobjectives isdifferent
indifferentoperations
Different operations will have different views of what each of
the performance objectives actually means. Table 2.1 looksat how
two operations, an insurance company and a steel plant, define each
performance objective. For example, theinsurance company sees
quality as being at least as much about the manner in which their
customers relate to theirservice as it does about the absence of
technical errors. The steel plant, on the other hand, while not
ignoring quality ofservice, emphasizes primarily product-related
technical issues. Although they are selecting from the same pool of
factorsthat together constitute the generic performance objective,
they emphasize different elements.The interpretation of the five
performance objectives will differ between different
operations.
7. The relativepriority
ofperformanceobjectivesdiffersbetweenbusinesses
Not every operation will apply the same priorities to its
performance objectives. Businesses that compete in different
waysshould want different things from their operations functions.
In fact, there should be a clear logical connection betweenthe
competitive stance of a business and its operations objectives. So,
a business that competes primarily on low pricesand 'value for
money' should be placing emphasis on operations objectives such as
cost, productivity and efficiency, onethat competes on a high
degree of customization of its services or products should be
placing an emphasis on flexibility,and so on. Many successful
companies understand the importance of making this connection
between their message tocustomers and the operations performance
objectives that they emphasize.
8. Anoperationsstrategyshouldidentify thebroaddecisionsthat will
helptheoperationachieve itsobjectives
So, what should an operations strategy do? Third, it should
identify the broad decisions that will shape the
operation'scapabilities, and allow their long-term development so
that they will provide the basis for the business's
sustainableadvantage.Few businesses have the resources to pursue
every single action that might improve their operationsperformance.
So an operations strategy should indicate broadly how the operation
might best achieve its performanceobjectives.
9. Anoperationsstrategyshouldreconcilestrategicdecisions
toobjectives
So, what should an operations strategy do? Finally (Fourth), it
should explain how its intended market requirements andits
strategic operations decisions are to be reconciled.We can now
bring together two sets of ideas and, in doing so, we also bring
together the two perspectives of (a) marketrequirements and (b)
operations resources to form the two dimensions of a matrix. This
operations strategy matrix isshown in Figure 2.3. It describes
operations strategy as the intersection of a company's performance
objectives and thestrategic decisions that it makes. In fact there
are several intersections between each performance objective and
eachdecision area (however one wishes to define them). If a
business thinks that it has an operations strategy, then it
shouldhave a coherent explanation for each of the cells in the
matrix. That is, it should be able to explain and reconcile
theintended links between each performance objective and each
decision area. The process of reconciliation takes placebetween
what is required from the operations function (performance
objectives), and how the operation tries to achievethis through the
set of choices made (and the capabilities that have been developed)
in each decision area.
Table 2.2 illustrates some of the broad operations strategy
decisions that fall within each category.
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10. Doesoperationstrategymake sensefrom the topand thebottom of
thebusiness?
Operations strategy can been seen both as a top-down process
that reflects corporate and business strategy through to
afunctional level, and as a bottom-up process that allows the
experience and learning at an operational level to contributeto
strategic thinking. Without both of these perspectives, operations
strategy will be only partially effective. It shouldcommunicate
both top to bottom and bottom to top throughout the hierarchical
levels of the business.
11. Bottom-up-operationsstrategyshould
reflectoperationalreality
Although it is a convenient way of thinking about strategy, the
top-down hierarchical model does not represent the waystrategies
are always formulated in practice. When any group is reviewing its
corporate strategy, it will also take intoaccount the
circumstances, experiences and capabilities of the various
businesses that form the group. Similarly,businesses, when
reviewing their strategies, will consult the individual functions
within the business about theirconstraints and capabilities. They
may also incorporate the ideasthat come from each function's
day-to-day experience. In fact many strategic ideas emerge over
time from operationalexperience rather than being originated
exclusively at a senior level. Sometimes companies move in a
particular strategicdirection because the ongoing experience of
providing products and services to customers at an operational
levelconvinces them that it is the right thing to do. There may be
no formal high-level decision-making that examinesalternative
strategic options and chooses the one that provides the best way
forward. Instead, a general consensusemerges from the operational
experience. The 'high level' strategic decision-making, if it
occurs at all, may simplyconfirm the consensus and provide the
resources to make it happen effectively. This is sometimes called
the concept ofemergent strategies.
12. Top-down-operationsstrategyshould reflectthe needs ofthe
wholebusiness
A top-down perspective often identifies three levels of
strategy: corporate, business and functional.A corporate strategy
should position the corporation in its global, economic, political
and social environment. This willconsist of decisions about what
types of business the group wants to be in, what parts of the world
it wants to operate in,how to allocate its cash between its various
businesses, and so on.Each business unit within the corporate group
will also need to put together its own business strategy that sets
out itsindividual mission and objectives. This business strategy
guides the business in relation to its customers, markets
andcompetitors, and also defines its role within the corporate
group of which it is a part.Similarly, within the business,
functional strategies need to consider what part each function
should play incontributing to the strategic objectives of the
business. The operations, marketing, product/service development
andother functions will all need to consider how best they should
organize themselves to support the business's objectives.
13. Doesoperationsstrategy
alignmarketrequirementswithoperationsresources?
The most important short-term objective of operations strategy
is to ensure that operations resources can satisfy
marketrequirements. But this is not the only objective. In the
longer term, operations strategy must build the capabilities
withinits resources that will allow the business to provide
something to the market that its competitors find difficult to
imitateor match. These two objectives are called the market
requirements perspective and the operations resource
capabilityperspective. The latter is very much influenced by the
resource based view (RBV) of the firm. The objective of
operationsstrategy can be seen as achieving 'fit' between these two
perspectives.
14. Operationsstrategyshould reflectmarketrequirements
A particularly useful way of determining the relative importance
of competitive factors is to distinguish between whatProfessor
Terry Hill has termed 'order-winners' and 'qualifiers'.
15. Order-winners
Order-winners are those things that directly and significantly
contribute to winning business. They are regarded bycustomers as
key reasons for purchasing the product or service. Raising
performance in an order-winner will eitherresult in more business
or improve the chances of gaining more business. Order-winners show
a steady and significantincrease in their contribution to
competitiveness as the operation gets better at providing them.
16. Qualifiers Qualifiers may not be the major competitive
determinants of success, but are important in another way. They are
thoseaspects of competitiveness where the operation's performance
has to be above a particular level just to be considered bythe
customer. Performance below this 'qualifying' level of performance
may disqualify the operation from beingconsidered by customers. But
any further improvement above the qualifying level is unlikely to
gain the company muchcompetitive benefit. Qualifiers are those
things that are generally expected by customers. Being great at
them is unlikelyto excite customers, but being bad at them can
disadvantage the competitive position of the operation.
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17. Differentcustomer needsimply differentpriorities
ofperformanceobjectives.
If, as is likely, an operation produces goods or services for
more than one customer group, it will need to determine
theorderwinners and qualifiers for each group. For example, two
'product' groups (Retail banking and Corporatebanking) in the
banking industry require different performance objectives. Here the
distinction is drawn between thecustomers who are looking for
banking services for their private and domestic needs and the
corporate customers whoneed banking services for their (often
large) businesses.
18. Theproduct/servicelife cycleinfluence
onperformanceobjectives
One way of generalizing the market requirements that operations
need to fulfill is to link it to the life cycle of theproducts or
services that the operation is producing. The exact form of
product/service life cycles will vary, butgenerally they are shown
as the sales volume passing through four stages - introduction,
growth, maturity anddecline. Introduction stage. When a product or
service is first introduced, it is likely to be offering something
new in terms ofits design or performance. Few competitors will be
offering the same product or service, and because the needs
ofcustomers are not perfectly understood, the design of the product
or service could frequently change.Given the marketuncertainty, the
operations management of the company needs to develop the
flexibility to cope with these changesand the quality to maintain
product/service performance. Growth stage. As the volume of
products or services grows, competitors start to develop their own
products andservices. In the growing market, standardized designs
emerge. Standardization is helpful in that it allows theoperation
to supply the rapidly growing market. Keeping up with demand could
prove to be the main operationspreoccupation. Rapid and dependable
response to demand will help to keep demand buoyant while ensuring
that thecompany keeps its share of the market as competition starts
to increase. Also, increasing competition means thatquality levels
must be maintained. Maturity stage. Eventually demand starts to
level off. Some early competitors will have left the market and
theindustry will probably be dominated by a few larger companies.
The designs of the products or services will bestandardized and
competition will probably emphasize price or value for money,
although individual companiesmight try to prevent this by
attempting to differentiate themselves in some way. So operations
will be expected to getthe costs down in order to maintain profits
or to allow price cutting, or both. Because of this, cost and
productivityissues, together with dependable supply, are likely to
be the operation's main concerns. Decline stage. After time, sales
will decline and competitors will start dropping out of the market.
To the companiesleft there might be a residual market, but if
capacity in the industry lags demand, the market will continue to
bedominated by price competition. Operations objectives will
therefore still be dominated by cost.
19. Operationsstrategy shouldbuildoperationscapabilities
Building operations capabilities means understanding the
existing resources and processes within the operation,starting with
the simple questions, what do we have, and what can we do? However,
trying to understand anoperation by listing its resources alone is
like trying to understand an automobile by listing its component
parts. Tounderstand an automobile we need to describe how the
component parts form its internal mechanisms. Within theoperation,
the equivalents of these mechanisms are its processes. Yet, even a
technical explanation of an automobile'smechanisms does not convey
its style or 'personality'. Something more is needed to describe
these. In the same way,an operation is not just the sum of its
processes. It also has intangible resources. An operation's
intangible resourcesinclude such things as: Its relationship with
suppliers and the reputation it has with its customers Its
knowledge of and experience in handling its process technologies
The way its staff can work together in new product and service
development The way it integrates all its processes into a mutually
supporting whole.These intangible resources may not be as evident
within an operation, but they are important and often have
realvalue. And both tangible and intangible resources and processes
shape its capabilities. The central issue foroperations management,
therefore, is to ensure that its pattern of strategic decisions
really does develop appropriatecapabilities.
Table 2.3 shows two 'product' groups in the banking industry
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20. Theresource-based view(RBV)
The idea that building operations capabilities should be an
important objective of operations strategy is closely linkedwith
the popularity of an approach to business strategy called the
resource-based view (RBV) of the firm.This holds that businesses
with an 'above average' strategic performance are likely to have
gained their sustainablecompetitive advantage because of their core
competencies (or capabilities). This means that the way an
organizationinherits, or acquires, or develops its operations
resources will, over the long term, have a significant impact on
itsstrategic success.The RBV differs in its approach from the more
traditional view of strategy which sees companies as seeking to
protecttheir competitive advantage through their control of the
market, for example by creating barriers to entry through
productdifferentiation, or making it difficult for customers to
switch to competitors, or controlling access to
distributionchannels (a major barrier to entry in gasoline
retailing, for example, where oil companies own their own
retailstations). By contrast, the RBV sees firms being able to
protect their competitive advantage through barriers to
imitation,that is by building up 'difficult-to-imitate' resources.
Certain of these resources are particularly important, and can
beclassified as 'strategic' if they exhibit the following
properties: They are scarce. Scarce resources, such as specialized
production facilities, experienced engineers, proprietarysoftware,
etc., can underpin competitive advantage. They are imperfectly
mobile. Some resources are difficult to move out of a firm. For
example, resources that weredeveloped in-house, or are based on the
experience of the company's staff, or are interconnected with the
other resourcesin the firm, cannot be traded easily. They are
imperfectly imitable and imperfectly substitutable. It is not
enough only to have resources that are unique andimmobile. If a
competitor can copy these resources, or replace them with
alternative resources, then their value willquickly deteriorate.
The more the resources are connected with process knowledge
embedded deep within the firm, themore difficult they are for
competitors to understand and to copy.
21.
Reconcilingmarketrequirementsandoperationsresourcecapabilities
The market requirements and the operations resource perspectives
on operations strategy represent two sides of astrategic equation
that all operations managers have to reconcile. On one hand, the
operation must be able to meet therequirements of the market. On
the other hand, it also needs to develop operations capabilities
that make it able to do thethings that customers find valuable but
competitors find difficult to imitate. And ideally, there should be
a reasonabledegree of alignment or 'fit' between the requirements
of the market and the capabilities of operations resources.
22. Doesoperationstrategy setanimprovementpath?
The purpose of operations strategy is to improve the business's
performance relative to those of its competitors in thelong term.
It therefore must provide an indication of how this improvement is
to take place. This is best addressed byconsidering the trade-offs
between performance objectives in terms of the 'efficient frontier'
model. This describesoperations strategy as a combination of
repositioning performance along an existing efficient frontier, and
increasingoverall operations effectiveness by overcoming trade-offs
to expand the efficient frontier.
23. Anoperationsstrategyshould guidethe
trade-offsbetweenperformanceobjectives
An operations strategy should address the relative priority of
operation's performance objectives ('for us, speed ofresponse is
more important than cost efficiency, quality is more important than
variety', and so on). To do this it mustconsider the possibility of
improving its performance in one objective by sacrificing
performance in another.But there isanother view of the trade-offs
between performance objectives. This sees the very idea of
trade-offs as the enemy ofoperations improvement, and regards the
acceptance that one type of performance can only be achieved at the
expense ofanother as both limiting and unambitious. For any real
improvement of total performance, it holds, the effect of
trade-offs must be overcome in some way. In fact, overcoming
trade-offs must be seen as the central objective of
strategicoperations improvement. Most businesses at some time or
other will adopt both approaches. This is best illustratedthrough
the concept of the 'efficient frontier' of operations
performance.In the short term, operations cannot achieve
outstanding performance in all its operations objectives
simultaneously.In the long term, a key objective of operations
strategy is to improve all aspects of operations performance.
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24. Trade-offs andtheefficientfrontier
Figure 2.9(a) shows the relative performance of several
companies in the same industry in terms of their cost efficiency
and thevariety of products or services that they offer to their
customers. Presumably all the operations would ideally like to be
able tooffer very high variety while still having very high levels
of cost efficiency. However, the increased complexity that a
highvariety of product or service offerings brings will generally
reduce the operation's ability to operate efficiently. Conversely,
oneway of improving cost efficiency is to severely limit the
variety on offer to customers. The spread of results in Figure
2.9(a) istypical of an exercise such as this. Operations A, B, C
and D have all chosen a different balance between variety and
costefficiency. But none is dominated by any other operation in the
sense that another operation necessarily has 'superior'performance.
Operation X, however, has an inferior performance because operation
A is able to offer higher variety at the samelevel of cost
efficiency and operation C offers the same variety but with better
cost efficiency. The convex line on whichoperations A, B, C and D
lie is known as the 'efficient frontier'. They may choose to
position themselves differently (presumablybecause of different
market strategies) but they cannot be criticized for being
ineffective. Of course any of these operations thatlie on the
efficient frontier may come to believe that the balance they have
chosen between variety and cost efficiency isinappropriate. In
these circumstances they may choose to reposition themselves at
some other point along the efficient frontier.By contrast,
operation X has also chosen to balance variety and cost efficiency
in a particular way but is not doing soeffectively. Operation B has
the same ratio between the two performance objectives but is
achieving them more effectively.Operation X will generally have a
strategy that emphasizes increasing its effectiveness before
considering any repositioning.
Chapter 2 - Operation Strategy ...