Chapter 1: Operations strategy – Developing resources for strategic impact
Input-transformation-output model: Transforming inputs into outputs to satisfy some customer need.
Some inputs are changed (materials), while other inputs do the transforming (physical facilities such as
buildings, machines and equipment, and people with skills, knowledge and experience).
Operations managers are responsible for two interacting sets of issues: Resources & Processes.
So in a question, do we have the right resources and are we using them appropriately?
All parts of the business and all functions of the business are, in a sense, operations (thus also marketing,
finance, information systems and HRM, next to operations).
There are three levels of analysis, called the hierarchy of operations:
1. The level of the process (a network of individual units of resources).
2. The level of the operation (a network of processes).
3. The level of the supply network (a network of operations).
Demand has four characteristics, sometimes called the Four Vs. They have a significant effect on how
processes need to be managed. The four Vs act as a link between strategic and operational aspects of
operations management.
1. Volume. A high volume of output means a high degree of repeatability making a high degree of
specialization both feasible and economic. This allows the systemization of activities and specialized
technology that gives higher processing efficiencies.
2. Variety. Producing a high variety of products and services must involve a wide range of different
activities, changing relatively frequently between each activity. It must also contain a wide range of skills
and technology that is sufficiently ‘general purpose’ to cope with the range of activities and sufficiently
flexible to change between them.
3. Variation. Processes are generally easier to manage when they only have to cope with predictably
constant demand. Resources can be geared to a level that is just capable of meeting demand. All
activities can be planned in advance.
4. Visibility. Process visibility is a slightly more difficult concept to envisage. It indicates how much of the
value added by the operation is ‘experienced’ directly by customers, or how much it is ‘exposed’ to its
customers. Generally processes that act directly on customers (such as retail processes or health care
processes) will have higher visibility than those that act on materials and information. However, even
material- and information-transforming processes may provide a degree of visibility to the customers,
e.g. track and trace for parcel companies.
What is the difference between operations strategy and operations management?
- Operations strategy is longer term. Operations management is largely concerned with short to
medium time-scales while operations strategy is concerned with more long-term issues.
- Operations strategy is concerned with a higher level of analysis. Operations management is largely
concerned with managing resources within and between smaller operations (departments, work units,
etc.) whereas operations strategy is more concerned with decisions affecting a wider set of the
organization’s resources and the supply network of which they are a part.
- Operations strategy involves a greater level of aggregation. Operations management is concerned
with the details of how products and services are produced. Individual sets of resources are treated
separately, as the component parts of the operation. Operations strategy, on the other hand, brings
together and consolidates such details into broader issues.
,- Operations strategy uses a higher level of abstraction. Operations management is concerned largely
with what is immediately recognizable and tangible. Operations strategy often deals with more abstract,
less directly observable, issues.
There are four perspectives on operations strategy:
1 Operations strategy is a top-down reflection of what the whole group or business wants to do.
2 Operations strategy is a bottom-up activity where operations improvements cumulatively build
strategy.
3 Operations strategy involves translating market requirements into operations decisions.
4 Operations strategy involves exploiting the capabilities of operations resources in chosen markets.
None of these four perspectives alone gives the full picture of what operations strategy is, but together
they provide some idea of the pressures that go to form the content of operations strategy.
Top-down perspective: an operations strategy must reflect the decisions taken at the top of the
organization, which set the overall strategic direction of the organization.
Bottom-up perspective: shape the operation’s objectives and action, at least partly, by the knowledge it
gains from its day-to-day activities. The key virtues required for doing this are an ability to learn from
experience and a philosophy of continual and incremental improvement that is built into the strategy-
making process.
Market requirements perspective: what is required from the operations in order to support the market
position?
The operations resource perspective: Starting point is to understand ‘what we have’, that is the totality
of the resources owned by, or available to, the operation. Next, one needs to link the broad
understanding of resources and processes with the specific operations strategy decisions: ‘what actions
we are going to take’.
The environmental view sees companies as seeking to protect their competitive advantage through
their control of the market, e.g. by creating barriers to entry through product or service differentiation.
The Resource based theory sees firms being able to protect their competitive advantage by building up
difficult-to-imitate resources.
Extended resource based theory (ERBT) assumes that even strategic resources that are outside the
boundaries of the firm can still be used to generate strategic advantage for the firm.
Resources can be classified as strategic if they exhibit the following properties:
- They are scarce.
- They are imperfectly mobile. Meaning, some resources are difficult to move out of a firm. For example,
resources that were developed in-house, or are based on the experience of the company’s staff, cannot
be traded easily.
- They are imperfectly imitable and imperfectly substitutable. If a competitor can copy these resources
or, less predictably, replace them with alternative resources, then their value will quickly deteriorate.
Operations strategy is the total pattern of decisions that shape the long-term capabilities of any type of
operation and their contribution to overall strategy through the reconciliation of market requirements
with operations resources.
Content is the collection of decisions that are made deliberately (or by default) within the operations
strategy domain. Content is concerned with the strategic decisions that shape and develop the long-term
direction of the operation. It is the outcome of the reconciliation of market requirements and operations
resource capabilities.
,Process means the way in which operations strategies are (or can be) formulated. It is a reflection both
of what operations managers should do and what they actually do in practice. It is the reconciliation of
top-down and bottom-up perspectives.
The content of operations strategy is the interaction between the operation’s performance objectives
and the decisions that it takes concerning resource deployment. There are five generic performance
objectives: (1)Quality, (2)Speed, (3)Dependability, (4)Flexibility, and (5)Cost.
Decision areas are the sets of decisions needed to manage the resources of the operation.
(1)Capacity strategy: this concerns how capacity and facilities in general should be configured.
(2)Supply network strategy (including purchasing and logistics): this concerns how operations relate to
the interconnected network of other operations, including all tier suppliers. All operations need to
consider their position in this network, both to understand how the dynamic forces within the network
will affect them, and to decide what role they wish to play in the network.
(3)Process technology strategy: this concerns the choice and development of the systems, machines and
processes that act directly or indirectly on transformed resources to convert them into finished products
and services.
(4)Development and organization: this concerns the set of broad and long-term decisions governing
how the operation is run on a continuing basis.
In operations strategy a difference can be made between two kinds of decisions/issues:
- The strategic decisions/issues that determine an operation’s structure;
- The decisions/issues that determine its infrastructure.
The structural issues primarily influence the physical arrangement and configuration of the operation’s
resources. The infrastructural strategy areas influence the activities that take place within the
operation’s structure. However, it is a mistake to categorize decisions areas as being either entirely
structural or entirely infrastructural. In reality all the decision areas have both structural and
infrastructural implications.
The operations strategy matrix describes operations strategy as the intersection of a company’s
performance objectives with its decisions areas. It emphasizes the intersections between what is
required from the operations function (the relative priority given to each performance objective) and
how the operation tries to achieve this through the set of choices made (and the capabilities that have
been developed) in each decision area.
The process of operations strategy are the procedures that are, or can be, used to formulate operations
strategy. ‘Process’ determines how an operation pursues the reconciliation between its market
requirements and operations resources in practice. Four stages of the process of operations strategy:
1 Formulation 2 Implementation 3 Monitoring 4 Control.
Operations strategy as supply strategy mans that operations strategy is indistinguishable from supply
strategy.
Operations as functional strategy means that all functions deliver service externally or internally using
their resources and processes, and just like the operations function. Every function has a responsibility
to make sure that the way they develop their resources and processes contributes to overall strategy.
Therefore, the application of operations strategy should be central to senior managers in any function.
,Operations strategy as the firm’s operating model consists of two concepts. The business model and the
operating model.
The business model is the plan that is implemented by a company to generate revenue and make a
profit. It includes the various parts and organizational functions of the business, as well as the revenues
it generates and the expenses it incurs. In other words; what a company does and how they make money
for doing it. Business models have a number of common elements: (1)Value proposition, (2)Target
customer segments, (3)Distribution channels, (4)Relationships, (5)Core capabilities, (6)Configuration of
activities, (7)Partners, (8)Revenue streams, and (9)Cost structure.
The operating model is a high level design of the organization that defines the structure and style which
enables it to meet its business objectives. It should provide a big picture description of what the
organization does, across both business and technology domains. It provides a way to examine the
business in terms of the key relationships between business functions, processes and structures that are
required for the organization to fulfil its mission. An operating model normally includes the following
elements: (1)Key performance indicators, (2)The core financial structure, (3) The nature of
accountabilities for products, geographies, assets etc., (4)The structure of the organization, (5)Systems
and technologies, (6)Processes responsibilities and interactions, (7)Key knowledge and competence
Two important characteristics of an operating model: 1. It does not respect conventional functional
boundaries as such, and 2.There are clear overlaps between the business model and the operating
model but the main difference is that an operating model focuses more on how an overall business
strategy is to be achieved.
Operations strategy as a strategy execution means that strategy can be distinguished between strategy
formulation and strategy execution. Simply, strategy formulation is deciding what to do, and strategy
execution is deciding how to do it.
The decision areas of operation strategy can be seen as a checklist for the practical changes that
executing any strategy implies. After all, any topic that deals with operations, whether at an operational
or strategic level, must be concerned with practical issues. Operations is about doing stuff, getting things
done, making things happen. It is about how we deal with the reality of creating services and products. It
is about execution.
Operations contributes to the success of any organisation by providing what the business needs to
survive and prosper and by satisfying its customers through the management of its resources and its
networks at all levels of operations management. It does this by achieving five broad objectives:
(1) It can reduce the costs of producing products and services by being efficient in the way it transforms
inputs into outputs.
(2) It can increase revenue by promoting outstanding customer satisfaction through its ability to provide
exceptional quality, responsiveness, reliability and flexibility.
(3) It can reduce operations-related risk and promote resilience (the ability to recover after operations
failure).
(4) It can reduce the amount of investment (capital employed) that is necessary to produce the required
type and quantity of products and services. It can do this by increasing the effective capacity of the
operation and by being innovative in how it uses its physical resources.
(5) It can provide the basis for future innovation by building a solid base of operations based capabilities,
skills and knowledge within the business.
, Chief officers are often called C-suite managers. They have acquired a reasonable competence in there
are of technical expertise. Also they should reflect their undoubted leadership responsibility. And have
process expertise.
In order to build a more comprehensive picture of operations strategy related skills, it is helpful to turn
to the Competing Values Framework. This model identifies a range of generic leadership characteristics
that underpin organisational effectiveness set against the specific challenges of any particular set of
circumstances. The framework is defined by the intersection of two dimensions:
- The first dimension distinguishes between an emphasis on internal and external focus. Some
organisations are effective in their set of circumstances because they have established robust internal
business processes and developed cohesive working relationships. Others are effective if they emphasise
competition and differentiation from external rivals.
- The second dimension distinguishes between different approaches to control and flexibility. Some
organisations are effective in their set of circumstances because they can be highly adaptable and
transformational. Others are effective because they provide stability and dependability.
The ‘operations’ is the part of the organisation that creates and/or delivers its products and services.
Every organisation, no matter in what sector, has an operations function (even if it is not called by this
name) because every organisation produces some mix of products and services.
Chapter 2: Operations performance
Operations strategy, and the resulting performance that it brings, can either make or break any business.
Not just because the operations function is large and in most businesses represents the bulk of its assets
and the majority of its people, but because the operations function gives the ability to compete by
providing the ability to respond to customers and by developing the capabilities that will keep it ahead of
its competitors in the future. For operations strategy to be effective, performance must be assessed in
some way. This can be done in several ways:
- Stakeholder perspective. Stakeholders are the people and groups who have a legitimate interest in the
operation’s strategy. The dilemma with using this wide range of stakeholders to judge performance is
that organisations, particularly commercial companies, have to cope with the conflicting pressures of
maximising profitability on the one hand, with the expectation on the other hand that they will manage
in the interests of (all or part of) society in general with accountability and transparency.
- Corporate social responsibility perspective(CSR). CSR is essentially about how business takes account
of its economic, social and environmental impacts in the way it operates – maximizing the benefits and
minimizing the downsides. Specifically, we see CSR as the voluntary actions that business can take over
and above compliance with minimum legal requirements, to address both its own competitive interests
and the interests of wider society.
There are five generic performance objectives: (1)Quality, (2)Speed, (3)Dependability, (4)Flexibility, and
(5)Cost. Each can be perceived in different ways, depending on the context.
Quality can be defined as ‘specification’ usually meaning high specification. Quality can also mean
appropriate specification, meaning that the products and services are ‘fit for purpose’; they do what they
are supposed to do. One is the level of the product or services specification; the other is whether the
operation achieves conformance to that specification. Specification of quality is multidimensional. The
dimensions can be separated into ‘hard’ and ‘soft’ aspects of specification quality.
