Chapter 3: Operations strategy
Study guide In some ways the very term t erm µoperation strategy¶ sounds sounds like a contradiction in terms. Operations is, after all, about the day-to-day creation and delivery of products and services. So how can it be strategic? In fact, the issue is one of distinguishing between two words which are similar but have different meanings. These are operations and operational . Operations refers to those parts of the business which are concerned with producing products and services. Operational is Operational is the opposite of strategic in the sense that it means µshort-term¶ and µlimited in its influence¶. Other functions of of the business such as marketing m arketing or finance have both strategic and operational activities. For example, marketing strategy covers the overall long-term approach to how the organisation wants to position itself in its markets. The operational side of marketing refers to the day by day tactics of how to manage things like advertising, pricing, and so on. It is just the same with operations. Operations strategy looks at the long-term issues of how to manage t he resources which produce products and services. The more operational subject of operations management looks at the more detailed and µshop floor¶ issues of designing, planning and controlling, and improving the resources which produce products and services.
Your
learning objectives
This is what you should be able to do after reading Chapter 3 and working through this study guide. y y y
y
Understand the difference between operations strategy content and operations strategy process. Understand the difference between a top-down and a bottom-up view of operations strategy. Understand the difference between a market requirements perspective and an operations resources perspective of operations strategy. Describe some of the more important steps in the process of operations strategy formulation.
Content and process The content of operations strategy is concerned with the specific decisions which shape and develop t he long-term direction of the operation. Think of content as the building blocks of an operations strategy. The process of operations strategy refers to the procedures which are used to f ormulate operations strategies. strategies. It is the way we go about t he activity of devising strategy. Think of operations strategy content as what the at the organisation is deciding to do and process as how the organisation has made that decision.
Obviously operations strategy is a huge subject. And although this textbook takes a slightly more strategic view than most books in the area, Chapter 3 only µscratches the surface¶ of the subject. The first part of the chapter (the larger part) looks at the content of operations strategy by taking four, quite distinct perspectives. The second part of the chapter looks at the process of operations strategy, mainly by describing two relatively well-known processes for devising an operations strategy.
Top-down
versus bottom-up perspectives of operations strategy
One view of operations strategy (the more traditional one) is operations strategy is one of several functional strategies which are governed by decisions taken at the top of the organisational tree. According to this µtop-down¶ approach, overall business strategy sets the general direction of the organisation, this is then interpreted by the different functional areas of the company (marketing, finance, operations, etc.) in their f unctional strategies. By contrast, the µbottom-up¶ view of operations strategy is to see strategic decision making as an accumulation of practical experiences. After all, organisations would find it difficult to µinvent¶ strategies in a total vacuum. Their ideas are formed from their previous experience of dealing with customers, suppliers and their own processes. This is the idea behind emergent strategies. These are strategic ideas which emerge over time as an organisation begins to understand the realities of their situation. When thinking about top-down versus bottom-up perspectives of operations strategy, remember that they are not µrival¶ ideas. In reality we can see both top-down and bottom-up influences on strategy making. What is important to remember is that the pure µtop-down¶ view of operations strategy is simplistic in the sense that it does not recognise the importance of learning through experience.
Market
requirements versus operations resources
The chapter goes on to propose another apparent clash of perspectives ± that between market requirements and operations resources. Again, it is a comparison between what has been the orthodox view (market requirements perspective) and what is a more recent view (the operations resource perspective). Again also, it is not a real clash in the sense that neither perspective is right or wrong. The market requirements perspective starts from the commonsense notion that any operations strategy should reflect what the organisation is trying to do in its markets. Companies compete in different ways, some may compete primarily on cost, others on the excellence of their products or services, others on high levels of customer service, others on customising their products and services to individual customer needs, and so on. The operations function therefore must respond to this by providing the capabilities which allow it perform in an appropriate manner to satisfy the requirements of its market. In some ways this is a µtranslation¶ task because the techniques and language used by marketing managers to understand the requirements of markets are different to the language and techniques used by operations managers to manage their productive resources. So, for example, Figure 3.6 shows how competitive factors can be µtranslated¶ into performance objectives. Different ways of competing imply different competitive factors and therefore different performance objectives. Table 3.1 giv es an example of how this translation process works in the banking industry. See the figure below for another example. It describes and instrument manufacturer with two product groups. The first product group is a range of standard electronic medical equipment which is sold µoff the shelf¶ direct to hospitals and clinics. The second product group is a wider range of electronic measuring devices which are sold to original equipment manufacturers who incorporate them in their own products. These electronic measuring devices often have to be customized to individual customer requirements. The analysis of the two product groups shows that they have very different competitive factors. Therefore different performance objectives are required from the manufacturing operation. Such very different competitive needs could possibly require two separate operations ± one for each product group ± each
focused on its own objectives and devoted to providing the things which are important in its particular markets.
The important issue to remember is that there must be a connection between what the market wants (market requirements) and what the operation can do well (operations resource capabilities). The box in Chapter 3 on Ryanair, one of the m ost successful European low cost airlines, illustrates this well. The box also makes reference to the original low cost airline in the USA ± Southwest Airlines. Here is some more information about Southwest Airlines.
Southwest
airlines undercuts its rivals
While most of the western world¶s airlines are trying to outdo their competitors by providing ever more sophisticated services, including excellent catering and the l atest entertainment technology, one company has chosen to return to it s core product (transportation), and cut out almost all the extras. Southwest Airlines, based in Dallas, is one of the few airlines in the US which can boast of having been consistently
profitable throughout the last two turbulent decades. Its strategy has been to compete on price, with cutprice advance booked fares as m uch as 50 per cent below those of larger competitors. Indeed some of its larger competitors have been forced to defend their markets by attempting to copy Southwest¶s formula and price. The idea of providing air travel in the style of bus travel is certainly not unique, and there have been m any failures, particularly in the US. For Southwest, however, the consistency and coherence of the operations strategy have played a big part in its survival and growth to a business that now has a fiv e per cent share of the enormous US market. To compete on price over the long term, operations costs must be the lowest in the market, and that is precisely what the airline¶s flamboyant founder and owner, Herbie Kelleher, has achieved, often in quite unique ways. Passengers notice the difference even before they enter the plane, as Southwest¶s numbered boarding passes are plastic and reusable. Passengers are called forwards in groups, but once they are in the plane they are free to sit where they wish. There is no attempt to provide the normal meals service, so passengers are just offered a bag of peanuts, a glass of orange juice, with a narrow choice of drinks available to those that wish to purchase them. Passengers, and ev en crew, often bring their own food and drinks with them. Despite the very obvious lack of conventional offerings such as in-flight films and the personal attention of the cabin crew, passengers seem impressed with the whole package, scoring the airline highly in most research surveys. The staff are renowned for their informal yet personable approach, and this is reinforced by their simple µuniform¶ of brightly coloured shorts and T-shirts. The company¶s style and culture are reinforced by the owner, who has been seen on board some flights, for example, wearing an Easter rabbit suit and entertaining the passengers in his own particul ar way. The simplicity of the entire service gives Southwest a particularly strong cost advantage on short routes, where the turnaround time at airports becomes critical. Because there are no meals, there is less mess to clear up, and so the cabin is routinely cleaned by the crew. There is also less time needed to prepare the galley, as no meals are carried, and the overhead costs of organizing meals and entertainment is eliminated. Southwest has shown that it is possible to challenge conventional ways of operating an airline and has provided value to its customers at minimum cost. Its service doesn¶t suit everyone, but those who do buy a ticket at least get what they want and expect. The operations resource perspective works the other way round from the market requirements perspective. It starts from the view that the success of any competitive strategy is not just a m atter of selecting the µcurrent¶ market position and then adjusting the operation¶s various resources and processes to fall into line with it. Operations resources are often complex to manage and hav e an inertia which cannot be overcome instantly in order to correspond to changes i n the market. But also, more positively, the resources and processes within an operation can have a set of¶ capabilities¶ which can be harnessed and exploited in the market place. The problem with just following the market in a slavish manner is that other competitor organisations will be doing the same thing. Maybe it would be better to identify the things which the company is particularly good at (its core capabilities, or core competences) and select the parts of the market in which those particular skills will be valued by customers. So, instead of saying, µ T here is an attractive part of t he market, let¶s go and compete in it. O h, and tell t he operations function it had better try and be good in t he t hings t hat t hose partic ular c ustomers w ant¶, the company is saying, µWe really are partic ularly good at doing certain t hings, let¶s try and f ind a part of t he market t hat needs us to be good at t hose partic ular t hings, because t hen it w ill be very di ff ic ult f or our competitors to copy us.¶ According to this view, the decisions taken within an operations strategy should primarily have the objective of enhancing those core capabilities of the operation which competitors will find difficult to imitate. Again, of course these two perspectives need not necessarily clash. Ideally organisations will attempt to find parts of the market which are attractive to it, which at the same time allow it to exploit its core capabilities.
Air
travel takes off
Air travel has grown substantially over the last 30 years. Although, like any industry, it has had its ups and downs ± world politics, wars and economic cycles all affect our tendency to travel ± growth in passenger miles travelled is forecast to conti nue. Increasing volume prompted changes in airline operations process technology, such as the introduction of wide-bodied aircraft. This reduced airline costs even further and has been translated into lower prices. In addition, changes in the industry, most especially deregulation of the market in some parts of the world and the privatization of some airlines, have also kept costs down. The increasing importance of price-based competition is reflected in the figure below which shows the growth in volume (and forecast volume) in the industry and the fall i n yields. Yield is the revenue which the airlines make for every mile they carry a passenger. At around 22 cents per passenger mile in 1970, yield has fallen to around 13 cents per passenger mile and is expected to continue to fall away. Because costs have also been declining, this fall in yield reflects an even m ore significant fall in real prices. Increasing volumes and increasing price competition have also resulted in a change in the way airlines organize their operations. Especially in the US, airlines have moved to a µhub-and-spoke¶ arrangement of routes. This involves aircraft flying between µhub¶ airports where passengers connect with flights to other hubs. It is the same principle which is used in mail-sorting offices. Although the system is not always convenient for some passengers, the airlines see it as the only way to µstandardize¶ their routes, and keep costs down.
Operations strategy influences performance objectives To some extent all the decisions made in all strategy areas will exert some influence on all the performance objectives of the operation. Some strategies, however, are particularly influential on certain objectives. The table below highlights those objectives which will be particularly influenced by each strategy (though remember that the important links between strategies and objectives will to some extent depend on the type of operation and the circumstances in which it finds itself).
Strategies with a
particularly significant effect on particular performance objectives Quality
New product/service development strategy
Speed
Dependability
Flexibility
X
Cost
X
Vertical integration strategy
X
X
Facilities strategy
X
X
X
X
X
Technology strategy
X
X
X
Workforce and organization strategy
X
X
X
X
X
Capacity adjustment strategy
Supplier development strategy
X
X
X
X
Inventory strategy
X
X
X
Planning and control systems strategy
X
X
X
X
X
Improvement strategy
X
Failure prevention and recovery strategy
X
The
X
X
X
X
process of operations strategy
The final part of the chapter illustrates two processes, the Hill methodology and the Platts-Gregory procedure. Both have similarities but neither claims to be a complete answer, or µhow to do it¶ process. When reading about these two processes bear in mind t hat they are both primarily µmarket requirements¶ driven.
