An Introduction to Operations Strategy

The basic strategy model

Operations management and strategy requires analysis at three levels

Flow between operations Analysis at the

level of the supply network

Analysis at the level of the operation

Flow between processes

Analysis at the level of the process Flow between

resources

Strategic analysis

Operational analysis

Operations strategy is …

‘… the total pattern of

decisions …

… whilst managing the risks of misalignment’.

… through the on-going reconciliation of market requirements and operations resources …

… and their contribution to overall

strategy…

… of any type of operation ...… that shape the long-term

capabilities …

… so as to achieve a sustainable fit between the two …

The Goods – Services Continuum

How is operations strategy different from operations management?

Timescalee.g. capacitydecisions D

em

and

1 – 12 months

Short-term

Operations management

Long-term

Dem

an

d

1 – 10 years

Operations strategy

How is operations strategy different from operations management?

Level of analysisConcerned with the macro operation (level of the firm)

Micro

Operations management

Macro

Operations strategy

How is operations strategy different from operations management?

Level of aggregation(Concerned with resources at an aggregated level)

Detailed

Operations management

Aggregated

Operations strategy

‘Can we give tax services to the small business market in Antwerp?’

‘What is overall business advice capability compared with other capabilities?’

How is operations strategy different from operations management?

Level of abstraction(Concerned with the conceptual)

Concrete

Operations management

Philosophical

Operations strategy

‘How do we improve our purchasing procedures?’

‘Should we develop strategic alliances with suppliers?’

Products or services?

Manufacturing or non-manufacturing?

What is operations strategy about?

For profit or not-for-profit?

The sectoral scope of operations strategy

The role of operations strategy

Hayes and Wheelwright’s Four Stages of Strategy

The importance of operations to business and market needs

The four perspectives on operations strategy – top-down, bottom-up, market requirements and operations resources

Top-down

Operations strategy should interpret higher level strategy

Operationsresources

Operations strategy should build operations capabilities

Operations strategy should learn from day-to-day experiences

Bottom-up

Market requirements

Operations strategy should satisfy the organisation’s markets

Operations strategy must reflect four perspectives – top-down, bottom-up, market requirements, and operations resources

Top-down

Bottom-up

Corporate strategy

Business strategy

Emergent sense of what the strategy should beOperational

experience

Operations

resources

CapacitySupply networksProcess technologyDevelopment and organisation

Market requirements

QualitySpeed

DependabilityFlexibility

Cost

Top-down and bottom-up perspectives of strategy for the Metrology Company

Corporate objectives impact on business objectives which, in turn, influence Operations Strategy

Top down

Corporate strategy

Business strategy

Bottom up

Day-to-day experience of providing products and services to the market reveals problems and potential solutions which become formalised into Operations Strategy

Emergent sense of what the strategy should be

Operational experience

Operations strategy

Operations must have fast and flexible technology, supply relationships, process and staff

Modular strategy provides flexibility and innovation at relatively lowcost

Group building corporate capability in high technology products andservicesMetrology division competes on ‘fast-to-market’ innovations

Experiment with ‘modular’ design of key products and components

Customers confused by continual product innovation and costs are increasing

Corporate objectives impact on business objectives which, in turn, influence OperationsStrategy

Bottom up

Top down

Day-to-day experience of providing products and services to the market reveals problems and potential solutions which become formalised into Operations Strategy

Top-down and bottom-up perspectives of strategy for the Metrology Company

Operations strategy reconciles the requirements of the market with the capabilities of operations resources

Operations resources

Market requirements

Strategic reconciliation

OPERATIONS STRATEGY

The critical link between marketing and operations

Operations strategy is the strategic reconciliation of market requirements with operations resources

Tangible and intangible resources

Operations capabilities

Operations processes

Operations strategy decision areas

Customer needs

Market positioning

Competitors’ actions

Performance objectives

Understanding resourcesand processes

Strategic decisionsCapacitySupply

networksProcess

technologyDevelopment

and organisation

Required performanceQualitySpeedDependabilityFlexibilityCost

Understanding markets

British Sugar Hierarchy of Strategies

The performance measures

Quality

Companies (like Bentley or Toyota) have a reputation for quality

Products or services. High-quality hotels and restaurants, also luxury services such as high price hairdressers, etc.

High conformance is necessary for safety reasons such as in hospital blood testing.

SpeedAny accident, emergency or rescue

service.Transportation examples where different

speeds are reflected in the cost of the service. DHL and Blue Dart Courier service (Rs. 230/- for delivery within Delhi only) as compared to other courier services.

Likewise, the fast check-in service offered to business class passengers at airports.

And the exceptionally fast service of Concord which used to offer a fast service at a very high price.

DependabilitySome of the best examples are those

where there is a fixed ‘delivery’ time for the product or service.

Theatrical performances, magic shows (P.C. Sircar Sr. and Jr.) are an obvious examples.

Or the preparation and delivery of lectures in a classroom.

Other examples include space exploration projects which rely on launch dates during a narrow astronomical ‘window’.

FlexibilityExample would be a tailor who has to be

sufficiently flexible to cope with different shapes and sizes of customers and also (just as importantly) different aesthetic tastes and temperaments.

Another example would be the oil exploration engineers who need to be prepared to cope with whatever geological and environmental conditions they find drilling for oil in the most inhospitable parts of the world.

Accident and emergency departments in hospitals. Unless they have a broad range of knowledge which allows them to be flexible, they cannot cope with the broad range of conditions presented by their patients.

Cost

Examples of low-cost airliners in India, but only some of them survive.

21-day apex fare and other schemes of other airlines, kingfisher reducing the pouch size (or altogether no pouch at all), no toffees on flights, no free liquor in international flights run by American Airlines or Continental Airlines.

The ‘market requirements’ and ‘operations resource’ analysis of the lighting company

ResourcesEquipmentStaffReputationRelationships (internal and external)Experience

CapabilitiesApplication of leading edge lighting and sound technologyArticulation of client requirements

ProcessesIntegration of equipment supply and client requirementsDesign processSupplier liaison process

Operations strategy decisionsLocationVirtual reality technologySupplier developmentEquipment racking systemOrganisational structureStaff meetings

CustomersProfessional theatres (static, low margins)Exhibitions (slow growth, low margins)Conferences etc. (fast growth, higher margins

Market positionTraditionally differentiated on high service level in theatre and exhibition markets, innovation and service in conference marketCompetitorsBig groups dominating professional theatresIn-house operations growing in exhibitions marketConference market still fragmented

Performance objectives

Aesthetically innovative designsPresentation adviceHigh customisation of lighting solutionsFast and dependable supply

Market-Operations Link: McDonald’s

From managing a single part of the organisation (such as, a single McDonald’s store) to managing the operations for the whole of the organisation (for example, what are the key operations strategy decisions for McDonald’s in the whole of Europe?).

There is a difference between the two levels of analysis. Especially how the operational day-to-day issues (such as, the way staff are scheduled to work at different times in McDonald’s stores) can affect the more strategic issues for the organisation as a whole (such as, what level of service and costs are McDonald’s franchise holders expected to work to?).

The market perspective analysis of the garment company

PERFORMANCE OBJECTIVES MARKET POSITION Differentiation on:

CUSTOMERS Segmentation on:Age – youth

Purpose – general

COMPETITORS Traditionally weak in:

Innovative productsTime to marketProduct rangeCoordinated launches

promotiondesign innovation

DependabilitySpeed of deliveryProduct mix flexibilitySpeed to market

Capabilities

Resources Tangible:

EquipmentStaff

Processes

ReputationRelationships (internal and external)Experience

Intangible:

Application of leading-edge lighting and sound technologyArticulation of client requirements

Integration of equipment supply and client requirementsDesign processSupplier liaison process

Operations strategy decisionsLocation

Virtual reality technologySupplier developmentEquipment tracking systemsOrganisational structureStaff meetings

The operations resource perspective analysis of the lighting company

What you HAVEin terms of operations capabilities

What you NEED

to ‘compete’ in the market

Operations resources

Market requirements

What you WANTfrom your operations to help you ‘compete’

What you DO

to maintain your capabilities and satisfy markets

Strategic reconciliation

Operations strategy is …..

‘… the decisions which shape the

long-term

capabilities of the company’s

operations and

their contribution to overall strategy

through

the on-going reconciliation of

market

requirements and operations

resources …’

ProfitTotal assets

OutputTotal assets

ProfitOutput= ×

Decomposing the ratio profit/total assets to derive the four strategic decision areas of operations strategy

OutputTotal assets

OutputCapacity

Fixed assetsTotal assets

CapacityFixed assets

Utilisation

Working capital

Productivity of fixed assets

= × ×

ProfitOutput

RevenueOutput

CostOutput

Average revenue

Average cost

=

Operations strategy decision areas

Capacity Supply network

Process technology

Development and organisation

Operations strategy decision areas are partly structural and partly infrastructural

Capacity

Development and organisation

Supply network

Process technology

Structural issues

Infrastructural issues

Operations strategy

Perf

orm

ance

obje

ctiv

es

Quality

Speed

Dependability

Flexibility

Cost

Development and organisation

Capacity

Supply network

Process technology

Decision areas

Mark

et

com

peti

tiveness

The operations strategy matrixResource usage

7-Eleven Japan

Sells 15.X as much per store as nearest rivalHistory of cautious expansion and technical and service innovation‘Field Counsellors’ spread operations knowledge (also distance training)Expansion by territory to reduce distribution costs

Early use of TIS (Total Information System)TIS controls stock replenishment by twice a day delivery (sales analysed twice a day)

New systems not Internet-based

New service includes:

Bank terminals

Downloading games

Downloading music to MD

Internet ordering and collection

Largest retailer in Japan

COST in terms of minimising…•operating cost•capital cost•working capital

QUALITY of productsand services

Speed anddependability combinedto indicate AVAILABILITY

FLEXIBILITY ofresponse to sales and customer trends

Area dominancereduces distributionand advertising costs

•Location of stores•Size of stores

Distribution centre grouping by temperature

Distribution centresand inventory management systems give fast stock replenishment

TIS allows trends tobe forecast andsupply adjustments made

Common distribution centers give small frequent deliveriesfrom fewer sources

•Number and type of distribution centres•Order and stock replenishment

TIS gives comprehensive and sophisticated analysis of sales & supply patterns daily

•The Total Information System (TIS)

Information sharingand parenting system spreads serviceideas

Field counsellors with sales data helpstores to minimise waste and increase sales

•Franchisee relationships

•New product/service development•Approach to operations improvement

DEVELOPMENT AND ORGANISATION

PROCESS TECHNOLOGY

SUPPLY NETWORKS CAPACITY

RESOURCE DEPLOYMENT

Mark

et

Com

peti

tiven

ess

Pivotal CriticalSecondary

7-11 JAPAN

Specifics of operations strategy

The Hill Framework