OPERATIONS STRATEGY STUDY GUIDE



CHAPTER 1

OPERATIONS STRATEGY – THE TWO PERSPECTIVES

Introduction

This introductory chapter could have been called, “What Is Operations Strategy?”, and it attempts to answer that question in two ways. First, it discusses operations strategy relative to some of the more common categorizations within management and business, especially operations management. It does this by trying to define what is meant by “operations” and “strategy”. Second, it sets out what is the main framework for the whole book – the idea that operations strategy means reconciling two different, but equally valid, perspectives. These are the market requirements perspective and the operations resource capability perspective. So, as you read through this chapter, try to keep in mind these two main points,

• Operations is not the same as operational, it does have an important strategic role to play in any business.

• All operations managers have to reconcile these two fundamental objectives, to satisfy their markets and to build distinctive operations resource capabilities.

Key points

“Operations” is not the same as “operational”

• This is probably the most important point made in the chapter. Many people associate the operations part of the business with creating services and creating products at a detailed and day-to-day level. Operations managers are the people who implement strategies, get things done, solve problems, cope with all the difficulties and (literally) deliver the goods. This is true of course. Operations managers do all these things and are ultimately responsible for that on-going act of value creation which is the on-going task of any type of enterprise. Yet there is much more that operations can contribute to any business. Operations also has an important strategic role to play. In the long term an enterprise has a greater chance of surviving and achieving a sustainable level of market success if it can serve its markets better than anyone else. To do this it must have the resources (people and facilities and technology) and the processes (to create services and products, develop new services and products and bring a continual stream of innovation) that competitors find difficult to imitate. A company that has an operation that both performs better than competitors and does so through using processes and resources that are difficult for those competitors to copy, is giving an almost invaluable strategic advantage to the company.

• This is not to downplay the importance of “operational” operations management. It is of course important to get the details right and do so on a dependable day-to-day basis. In fact, it is the accumulation of day-to-day experience which can build up the operations capabilities that go towards providing the strategic operations advantage. This is the paradox of running a successful operation. It has to be good at both the day-to-day details and the broader strategic issues. In fact it has to be able to connect the operational and the strategic aspects of operations together.

What are the main differences between operations strategy and operations management?

• The chapter identifies four “dimensions” on which operations strategy and operations management differ.

• Time scale – operations management is relatively short to medium term. This will include decisions that affect minute-by-minute, to month-by-month activities. Some operations management decisions will have an impact several years in advance, but most are confined to the shorter term. Operations strategy decisions however are generally focused specifically on the longer term. So whereas operations management is concerned with reacting effectively and efficiently to specific demands from its customers, operations strategy is concerned with making sure that the company has an appropriate capacity and capability to meet its market requirements years into the future.

• Level of analysis – many operations management decisions are relatively local in their effect. For example, an individual retail store could be concerned with how it manages it inventory levels within its own facilities. Operations strategy tends to be wider in its application and effect. For example, a more strategic view of thinking about inventory is to consider the whole supply network from raw materials through to end consumer and question where inventory should be held in the total network.

• Level of aggregation – operations management can be relatively detailed. Resources are treated separately and are associated with specific services or products. For example, “What kind of customer relationship skills do our checkout operators need?” is a detailed operations management decision. Operations strategy can rarely be so detailed. It tends to aggregate different types of resource into one overall unit. For example, “What are our overall human resource requirements in our larger superstores?” is an important but highly aggregated decision.

• Level of abstraction – operations management concerns itself mainly with what is immediately recognizable and tangible. So, the retail company might ask itself, “How do we improve the procedures which place orders with suppliers?” These procedures, systems, information flows and the physical inventory associated with them can all be readily observed. Operations strategy, on the other hand, deals with more abstract issues. For example, “Should we develop strategic alliances with a small number of partners?” is a question that touches on the very philosophy of the company.

Operations strategy is about service too

• In most developed economies manufacturing accounts for around 20 per cent or less of economic activity. Admittedly it is a very important 20 per cent, but the fact remains that the vast majority of business activities are concerned with trading services rather than trading products. This means of course that the vast majority of operations are concerned with producing service rather than producing products. The inescapable logic is that, if operations strategy is to be a useful concept, it must be at least as applicable to service operations as it is to manufacturing operations. Yet the history of the subject is deeply rooted in manufacturing. It is only relatively recently that books on the subject and university courses started to change their names to operations strategy rather than manufacturing strategy. Even so, a large number of these still concentrate on manufacturing concepts and examples. In fact, as Chapter 2 points out, the distinction between what is service and what is manufacturing is increasingly irrelevant. Every manufacturer should think of themselves as providing service to their customers even if much of the service is embodied within a physical product. Similarly, every service operation has something to learn from the years of systematic experience of managing operations in manufacturing companies.

• In the chapter two large companies, Nestlé (the world’s largest food manufacturing company) and Wal-Mart (the world’s largest food retailer) are compared under a series of headings. This exercise demonstrates that both companies are concerned with a similar set of operations strategy decisions. These decisions (which we shall explore more fully later) are,

• capacity

• supply networks

• process technology, and

• development and organization.

• Any type of business needs to consider these four sets of decisions, which together form what we shall later call the “content” of operations strategy. So, whether you are a hospital or a hotel, you must think about how your overall capacity needs to expand or contract over the next few years. Both profession service companies such as accountants and pharmaceutical giants are faced with the same decisions as to what they should do in-house themselves versus what they should outsource to subcontractors elsewhere in the supply network. Motor manufacturers and merchant banks both must consider how much they need to invest process technologies and what kind of process technologies they should invest in. Both laundries and law firms need to decide how best to develop their services and their processes for the future and how to organize themselves to respond to changing market needs.

• Of course there are differences between different types of business. No one is denying that running a hospital is the same as running an automobile plant. But, there are some common issues, common decisions, and common principles. It is the commonality in the approach to operations strategy analysis which is stressed throughout this book.

The two perspectives

• This is probably the key point to understand if you are going to understand the whole book. It is an issue which various chapters return to frequently. It is the simple but fundamental idea that all businesses have to reconcile two pressures or perspectives within their operations function. The first is the market requirements perspective and the second is the operations resource perspective. Operations strategy itself is defined as the process of reconciling the pressures which come from these two perspectives.

• Market requirements is a relatively simple concept to understand. It means the demands that are placed on the operations function because of the market position the company has chosen to adopt. So, for example, if a company has chosen to compete by offering low cost services or products into the market, the operations function must be able to produce and deliver those services and products at low cost. Conversely, if a company has chosen to inhabit a different part of the market, say one that emphasizes high variety and customization, then it will demand a different set of things from its operations function, in this case probably high degrees of flexibility. So, an obvious pressure on any operation is to satisfy the requirements of its markets.

• Until relatively recently the market requirements perspective was seen as the major, if not the only, driver of how operations strategy should be viewed. More recently it has become generally accepted that, by itself, this perspective is incomplete. There are very few organizations that can simply configure their operations resources to match market requirements quickly and effectively. Usually markets are capable of changing far faster than a company can reconfigure its resources. Therefore, at the very least, operations strategy must recognize the inertia and constraints represented by its physical facilities, people, technology, organizational structure and system. But the concept of operations resources is wider than this. All operations have a history and a set of experiences from which they have accumulated knowledge. This accumulated knowledge may even have formed itself into a set of competencies or capabilities that allow it to do certain things particularly well. Blindly reacting to (possibly short-term) market demands, even if it is possible, would waste these capabilities. An important responsibility for the operations function is to understand its own capabilities and attempt to build on these and develop them to a point where they provide a distinctive competitive advantage against competitors. This is what we mean by the operations resource perspective.

Hints on answering the Hagen Style case exercise

• This may be a simple case but it reflects the two pressures always present when considering operations strategy. That is, “Should we move with market and change our operations, or should we stick to what we are good at and find ways of making money with our existing expertise in other markets?”

• As is often the case, there is no clear answer to this case but it is important to marshal the arguments for the options that the company faces. This is best done by clarifying what is likely to happen in the marketplace in terms of how it affects the requirements placed on operations. Similarly, it will be necessary to understand exactly what the current operations resources can do (in terms of constraints) and what they can do particularly well.

• Try identifying the options that you believe the company could adopt and then assessing the advantages and disadvantages of each.

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