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'.

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Hayes and Wheelwright's four-stage Model

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.

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.

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 ...