Introduction to operations management #2

2Operations Strategy

Alex Hill and Terry Hill

Learning objectives

• Understand LEVELS of strategy within business• Distinguish between day-to-day and strategic ROLES• Identify how different levels of strategy INTERFACE

with each other• Appreciate importance of understanding MARKETS• Understand different strategic APPROACHES• DEVELOP and IMPLEMENT an operations strategy

Lecture outline

• INTRODUCTION• What is STRATEGY?• LEVELS of strategy within a business• DEVELOPING a strategy• IMPLEMENTING a strategy• Critical REFLECTIONS• SUMMARY

What is strategy?

DIRECTION

WHAT to do

What is strategy?

HOW to do it

IMPLEMENTATION

DIRECTION

WHAT to do

> KEY IDEAOperations strategy concerns developing the CAPABILITIES of an organisation to reflect the NEEDS of its customers and markets

FUNCTIONAL

BUSINESS UNIT

Levels of strategy

CORPORATE

•Where to INVEST or DIVEST•SALES REVENUE priorities

Corporate

DIRECTION OF TOTAL BUSINESS

IMPLEMENTATIONAllocation of investment FUNDS

Levels of strategy

•MARKETS in which it competes•Where to GROW its business•Nature of COMPETITION•Relevant COMPETITIVE CRITERIA

DIRECTION OF BUSINESS UNIT

IMPLEMENTATION

•WHICH functional tasks to invest in•HOW to invest in these tasks

Levels of strategyBusiness unit

DIRECTION OF FUNCTIONSupport COMPETITIVE DIMENSIONS

within a market for which it is solelyor partly RESPONSIBLE

Levels of strategyFunctional

IMPLEMENTATION•Meeting competitive REQUIREMENTS•Selecting APPROACHES to attain improvement goals• Implement the PLAN


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segments. One outcome of this is that strategy development now takes place at three levels – corporate, business unit and functional.

Levels of strategy

For most businesses, strategy needs to be developed in a different way at each of the three levels:

Corporate At this level, companies decide where to invest or divest in terms of the overall business mix they wish to develop both today and in the future. Such decisions relate to where to allocate investment funds and the buying and selling of parts or all of the company.Business unit For each business unit, identifying the current and future markets in which to compete is an essential strategic task and one in which all relevant functions have to be involved. It is in these debates that functional differences need to be recog-nized and strategic direction needs to be decided. In this way, appropriate decisions on the markets to compete in are taken at the business rather than the functional level. On the basis of the markets it has identified, the business as a whole discusses and agrees which customers it wishes to gain and retain, with which to grow (as well as the competitive factors involved in retaining and growing these customers), and the increased market share that would result.Functional After the markets and customers have been agreed and the competitive factors involved in retaining and growing market share have been identified, functional strategies aim to:

Assess how well each function currently provides those competitive factors for which it is solely or jointly responsibleAgree their relative importance in chosen marketsAssess the gap between the provision of these factors and the level required to retain and/or grow the company’s share of the marketEstablish how to close the gap (the investments and timescales needed)Implement the resulting plan.

The role of functions in supporting the needs of customers and markets differs from market to market in terms of their scope (the aspects involved) and level of importance. Thus, working within the context of the business as a whole, functions will agree priori-ties, the levels of investment involved and the timescales needed to complete the process.

Figure 2.1 provides some examples of functional strategic responsibilities.

Figure 2.1 Examples of functional strategic responsibilities

Function Examples of criteria for which it is solely responsible

Research and development Product and service designa

IT System developments

Marketing Brand name, customer relationships and pricing

Operations Delivery reliability, quality conformance, price (in terms of cost reduction) and delivery speed

Note: a In a service company the design function is typically part of marketing’s strategic responsibility.

Functional strategyWithin each function, executives must balance their strategic tasks against their or ‘operational’ or day-to-day tasks.The area of operational tasks within operations manage-ment is covered by the rest of this book but, in simple terms, these involve managing and controlling those wide-ranging tasks necessary to provide services or make products and

Divest – to sell all or part of a business

Competitive factors – factors such as price, delivery speed, delivery reliability and specification that will influence the purchases customers make

Delivery reliability – providing a service or product by the agreed delivery date

Strategic tasks – involve developing a functional strategy in line with those needs of agreed markets for which that function is solely or jointly responsible

Day-to-day tasks (or operational tasks) – involve managing and controlling the range of activities that fall within the function executive’s area of responsibility as well as the crossovers between functions. It is important to note that ‘operations’ and ‘operational’ are two distinct ideas. Whereas operations is a function whose task is to provide services or make products, operational is a term applied to the tasks carried out by functions, and means ‘day-to-day’


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any business – the sale and delivery of services and products. On the surface, it would seem simple to unite their efforts to meet the needs and expectations of customers, but the reality is often far removed from what should be the desired goal This is well illus-trated by Figure 2.5, which lists the different, often opposing, views held by operations and sales/marketing on a range of issues.

Figure 2.5 Operations and marketing perspectives on key issues

Issues Perspectives and goals

Operations Sales and marketing

Services/products

RangeRestricting range enhances volumes, helps reduce cost and simplifies control

Customers typically seek variety. Restricting range reduces segment coverage and sales revenues

Standardization vs. customization

Lack of change reduces uncertainty and room for error. Limiting server discretion (see Chapter 1) maintains cost and throughput targets

Customization is often important, particularly in mature markets. Server discretion personalizes service, often at little cost, and enhances customer retention

Costs and profit

Measured on meeting cost budgets. Resists orders that increase costs. Has no control over pricing

Sales revenue is the key performance measure. Profit implications are not part of the decision or evaluation. Higher costs are not part of its budget considerations

Productivity improvements Reduce unit costs May cause a decline in the provision of quality conformance

Location of facilitiesConsiderations relate to costs and the convenience for suppliers and staff

Customers may find it unattractive, undesirable and, for a service business, inaccessible

Managing capacity

High utilization of capacity has an effect on costs and assets. Pressure to manage capacity and thereby keep investment as low as possible

Service/product may be unavailable when needed. Quality compromised in high demand periods

Job design

Oriented to minimizing errors and waste. Simplify tasks and use technology where possible

Employees are oriented to operations task and not customer need. Restricts the ability to meet changing requirements as they occur

Queues

Optimize the use of available capacity by planning for average throughput

Increases customer lead-times. Customers facing long lead-times or queues may go elsewhere

As you can see from Figure 2.5, there are inherent tensions, concerns and rivalries that characterize the marketing–operations relationship, but the question is, how can these be solved? The way forward is to resolve interfunctional differences not at the level of the function, as is often the case now, but at the level of the business. Given the critical nature of strategy development, what then needs to happen to bring the parts back together in order to forge a unified business unit strategy? The first and most critical step involves all functions, including marketing and operations, agreeing on which markets to focus their attention. The next section of this chapter deals with the process

Mature markets – refers to the stage in the life of a service or product where demand starts to level off and where the range of services and products promoted by competitors is similar. To enhance sales, companies often differentiate their service or product offerings by customizing items to specific customer needs or preferences

Customer lead-time – the length of time a customer expects or is prepared to wait for a service or product from the point of making an order


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Services/products






Costs and profit






Managing capacity



Job design



Queues





Customer lead-time – the length of time a customer expects or is prepared to wait for a service or product from the point of making an order40





Services/products






Costs and profit






Managing capacity



Job design



Queues







40





Services/products






Costs and profit






Managing capacity



Job design



Queues






40





Services/products






Costs and profit






Managing capacity



Job design



Queues






Developing a strategy




> KEY IDEAUnderstanding MARKETS is the FIRST step in strategy development

Developing a strategyUnderstanding customer requirements

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related criteria such as those listed above, and is illustrated in Figure 2.7 below. The criteria and their relative importance in securing the sale will differ from one service/product to another and from customer to customer.

Figure 2.7 The purchase: the make-up of customer choice

The purchase

The service/product specification

Examples of related criteria

Price Delivery speed

Quality conformance

Customer relationship

Delivery reliability

The business task

Meet/better the design of competitors

Reduce costs

Shorten lead-times

Meet the specification

Develop customer relations

Deliver on time

Function responsible

Marketing for services, research and development for products

Operations Operations Operations Sales and Marketing

Operations

> KEY IDEACustomer purchases are rarely made solely on the basis of the specification of a service or product, but are often also influenced by a mix of other related criteria, such as quality conformance, delivery speed and price

Order-winners and qualifiersOne way to classify the criteria that are important to customers when purchasing serv-ices or products is to divide them into order-winners and qualifiers:

Qualifiers These criteria get a service or product onto a customer’s shortlist and keep it there. They do not in themselves win orders but provide the opportunity to compete. Conversely, the failure to provide qualifiers at an appropriate level will lead to a loss of orders. In this way, qualifiers are order-losing in nature, as a failure to provide a quali-fier results in not being on the list – so the opportunity to compete is not in place. In such situations, competitors do not win orders from a rival; instead, the rival loses orders to its competitors.Order-winners Gaining entry to a market is, however, only the first step. The task then is to know how to win orders against competitors who have also qualified to be in the same market. With qualifiers, you need to match customers’ requirements (as do competitors), whereas with order-winners you need to provide them at a level better than that of your competitors.

Having determined which criteria are relevant, as well as the relative importance of these as order-winners or qualifiers, providing them will form the strategic task of different functions (see Figure 2.7).

Market-driven and market-driving strategiesBefore we look at methods for understanding markets in more detail, it is important to understand the difference between market-driven strategies and market-driving strat-egies, as well as how they relate to some of the criteria that affect a customer’s purchas-ing decisions.

Examples of market-driven strategies, necessary to compete in a chosen market include:

Meeting the delivery lead-times that customers require or expect (such as keeping queue lengths in a bank to, say, three minutes or less, or delivering a product within 24 hours)

Market-driven strategies – aim to provide the criteria that enable the company to compete in its chosen markets

Market-driving strategies – involve proactively seeking ways to change the competitive norms and hence create a situation where a company can influence its market position in relation to those of its competitors

> KEY IDEACustomer PURCHASES are not only based on the service or product specification, but also a wide RANGE of CRITERIA such as price, delivery speed and quality conformance


QUALIFIERSGet and keep a service or product on

a customer’s SHORTLIST

ORDER-WINNERSWIN you the order onceyou are on the shortlist

> KEY IDEAUnderstanding CUSTOMER requirements:• AVOID general descriptions• IDENTIFY and WEIGHT order-winners and

qualifiers

> KEY IDEAAll functions must be involved in the discussion on HOW to GAIN, RETAIN and GROW CUSTOMERS and MARKETS

Factory RestaurantPit stop


Slack et al (2004)

ENVIRONMENT

ENVIRONMENT

GOODSAND

SERVICES

Figure 1.5 - Overview of operations process - transforming inputs into outputs

14 Essential Operations Management Managing Operations 15

ENVIRONMENT, NATIONAL/WORLD ECONOMY

OPERATIONS

OUTPUTS

People

Materials

Energy

Capital

Information

SERVICES/

PRODUCTS

INPUTS

People

Materials

Energy

Capital

Information

RESOURCES

AND GOVERNMENT REGULATIONS

PERFORMANCE MEASUREMENT AND CONTROL

PROCESS

Essential Operations Management Managing Operations 15

ENVIRONMENT, NATIONAL/WORLD ECONOMY

OPERATIONS

OUTPUTS

Services

Products

Information

SERVICES/

PRODUCTS

DATA

People

Materials

Energy

Capital

Information

RESOURCES

AND GOVERNMENT REGULATIONS

PERFORMANCE MEASUREMENT AND CONTROL

PROCESS

Operations processOperations process Pit stop Factory Restaurant

TRANSFORMED resources

MaterialsInformationCustomers

TRANSFORMING resources

FacilitiesStaff

OUTPUTS GoodsServices

Developing a strategyOperations process


Key market requirements Pit stop Factory Restaurant

ORDER-WINNERS

QUALIFIERS


> KEY IDEAUnderstanding CUSTOMER requirements:• AVOID general descriptions• IDENTIFY and WEIGHT order-winners and

qualifiers

Developing a strategyThe process of strategy development


Essential Operations Management Operations Strategy 49

customers to gain, retain and grow, as well as the order-winners and qualifiers that need to be supported and provided to achieve these outcomes. This is a business-based activity involving all functions to ensure that:

All insights and perspectives on markets are identified and discussedThe outcomes are agreed at the level of the business and not the level of the functionThe mix of roles in implementing strategy and the resources needed and timescales involved are agreedAll functions are pointing in the same strategic directionFrequent discussion about markets and customers is necessary, and must be underpinned by data and not fuelled by opinion. Without this, outcomes are based on unsubstantiated arguments and, in such scenarios, functions typically compete for their own perspective to be the one adopted by the business overall. Deflecting rather than embracing insights that provide a fuller picture is often both the intent and the outcome.

Phase 2 – translate these reviews into strategic tasks. For example, if price is an order-winner, the task is to reduce costs; similarly if on-time delivery is a qualifier, improving the reliability of meeting customer due dates is the task. A more comprehensive list of such factors will be given in a later section.

Figure 2.9 Translating qualifiers and order-winners into actions

Relevant qualifiers and order-winners

Typical areas for review and improvement

Price Reduce costs in all areas, particularly regarding materials and overheads, which can make up to 70–90% of total costs

Quality conformance Provide services or make products to specification. Build quality into the process and delivery system rather than checking conformance after the event. Improvements here also impact costs

Delivery reliability Assess on-time delivery performance by service/product and customer. Review current approaches to meeting orders – this will involve discussions on the extent to which services and products can be or are made to order, and the role of activities and investments such as scheduling and inventory in meeting these requirements

Deliver speed Review the elements of the operations process with the purpose of reducing the lead-time of the various steps making up the service delivery system or manufacturing process

Service/product range Review the process capability and staff skill base in relation to current and future service/product range requirements. Identify and supplement capabilities in line with current and/or future needs

Demand spikes Assess current capacity provision in terms of the ability to rapidly increase output in line with known or anticipated changes in demand. Approaches include short-term capacity and inventory-holding alternatives

New services/products – time to market

Identify the elements of lead-time within the new service/product development process for which operations is responsible. Assess the tasks involved and the opportunities to reduce the work content, bring forward the start times in relation to the overall procedures, and identify the possibility of completing part or all of the task in parallel (rather than in sequence) with other elements of the process

Meeting specific customer needs

Assess current approaches to identify how standard services and products can be modified in line with specific customer requirements and the impact on costs, lead-times, quality conformance and the overall schedule







































and extensive analysis of one key customer segment – recruiting students at the begin-ning of their study course and retaining them at the end.

Based on a recognition that many customers stay loyal to a bank unless there is a serious mishap, recruiting customers is an important aspect of retaining and growing a bank’s market share. There are a number of key times at which potential and/or existing custom-ers make or can make a decision about which bank to use, two of these being:

1 At the time of going to college or university2 At the point of leaving college or university and starting a job.

Figure 2.13 Student banking qualifiers and order-winners in two key phases

Criteria Recruitment- non-customers

Retention

Ease and speed of opening an account QQ –

InfluencersNegative QQ QQ

Positive 60 –

Location ofATMs Q –

Branches 10 20

Overdraft facilities

Level permitted QQ QQ

Cost Q 25

Flexibility in terms of permitted level 20 40

StaffEmpathy to students Q Q

Providing dedicated banking managers 10 15

Notes: Order-winners have a weighting, the total of which is 100.Q, a qualifier; QQ, an order-losing-sensitive qualifiers; –, aspect not relevant.

Figure 2.12 Phases and characteristics of strategy development and implementation

Source: Adapted from Hill, A. and Hill, T. (2009) Manufacturing Operations Strategy, 3rd edn, Palgrave Macmillan


Phase Action Level of difficulty

Definingthe problem

Marketunderstanding

Difficult

Identifyingthe solution

Actionsto take

Easy

Implementingthe solution

Makingit happen

Difficult

> KEY IDEAUnderstanding MARKETS is DIFFICULTIdentifying SOLUTIONS is EASYMaking it HAPPEN is DIFFICULT



and extensive analysis of one key customer segment – recruiting students at the begin-ning of their study course and retaining them at the end.

Based on a recognition that many customers stay loyal to a bank unless there is a serious mishap, recruiting customers is an important aspect of retaining and growing a bank’s market share. There are a number of key times at which potential and/or existing custom-ers make or can make a decision about which bank to use, two of these being:

1 At the time of going to college or university2 At the point of leaving college or university and starting a job.

Figure 2.13 Student banking qualifiers and order-winners in two key phases

Criteria Recruitment- non-customers

Retention

Ease and speed of opening an account QQ –

InfluencersNegative QQ QQ

Positive 60 –

Location ofATMs Q –

Branches 10 20

Overdraft facilities

Level permitted QQ QQ

Cost Q 25

Flexibility in terms of permitted level 20 40

StaffEmpathy to students Q Q

Providing dedicated banking managers 10 15

Notes: Order-winners have a weighting, the total of which is 100.Q, a qualifier; QQ, an order-losing-sensitive qualifiers; –, aspect not relevant.


Source: Adapted from Hill, A. and Hill, T. (2009) Manufacturing Operations Strategy, 3rd edn, Palgrave Macmillan


Phase Action Level of difficulty

Definingthe problem

Marketunderstanding

Difficult

Identifyingthe solution

Actionsto take

Easy

Implementingthe solution

Makingit happen

Difficult


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At these points, there is or can be a more conscious decision about where to bank, so recruiting and/or retaining these customers (and their future worth to the bank in terms of revenue from banking and other products) becomes an important dimension of retain-ing and growing the company’s share in the personal banking segment.

The outcome of this major bank’s discussions is shown in Figure 2.13, and some comments can be made here:

When opening an account, potential customers (who bank elsewhere or are new to banking) may choose from a number of providers – any failure to make this process easy and quick can lead to a bank not qualifying when this decision is taken.Influencers include features such as family’s/friend’s advice or preferences, with cash and non-cash incentives on the one hand, and horror stories on the other. Negative influencers can be order-losing in nature, while positive ones at the point of beginning a course have been identified as the most significant order-winner.Location of ATMs at convenient sites was perceived to be a qualifier when a student but was not considered a factor with the greater mobility that comes with working. Being able to get to a branch when necessary was, on the other hand, seen as having an order-winning, albeit small, role in both instances. Overdraft facilities were seen as a significant factor at both points, more so in the work phase of a person’s life.Dedicated help from staff was considered important at each stage as a person moved towards greater independence.

The criteria listed in Figure 2.13 are the sole or joint responsibility of several functions of the company and would need to be reflected in each function’s development and invest-ment priorities. Figure 2.14 highlights those criteria which operations have to support.

Figure 2.14 Operations actions arising from Figure 2.13

Criteria Some key aspects of operations’ performance and development that may result

Ease and speed of opening an account

Simplifying the account-opening process, advising any checks ahead of time to avoid delays and revisits, and monitoring the success rate of discussions and applications

Overdraft facilities Although principally a decision taken by several functions, clear explanations and an understanding attitude on the part of operations would form part of managing this key dimension

Staff Allocating staff, ensuring that the background details and history of customers are known, together with an understanding approach, would be key operations’ tasks


Alternative APPROACHES

•TOP-DOWN vs BOTTOM-UP•MARKET-DRIVEN vs MARKET-DRIVING

BUSINESS UNIT

Developing a strategyTop-down approach

FUNCTIONAL

CORPORATE

Day-to-day EXPERIENCES and LEARNING

EMERGING sense of what strategy should be

Consolidated into formal STRATEGY

Developing a strategyBottom-up approach

Developing a strategyMarket-led orientation

MARKET

MARKET DRIVES OPERATIONS

OPERATIONS

Developing a strategyMarket-driving orientation

MARKET

OPERATIONS DRIVES MARKET

OPERATIONS

Developing a strategyAlternative approaches

Developing a strategyAlternative approaches

Aspect Prison Camp Restaurant

Strategic OBJECTIVES

STRATEGY for meeting these objectives

PROCESS of developing and implementing strategy

Critical reflections

• Operations helps gain FIRST sale whilst also securing the SECOND sale

• MARKET or marketing-led?• Moving to a BUSINESS-LEVEL strategic debate

Critical reflections


Critical reflectionsDeveloping an operations strategy involves a number of phases, the first of which is the most critical; it is one in which operations must be involved, ensuring that its perspec-tives on and insights into customers and markets are taken into account and form part of the discussion and agreement. Being proactively part of and contributing to the ongoing debate about markets, agreeing the order-winners and qualifiers involved in current and future markets, and being party to market-driving opportunities comprise the first critical step.

Operations helps gain the first sale while also securing the secondAn important strategic task for operations concerns its role in retaining customers. As Figure 2.15 shows, although sales and marketing will have the principal role in gaining the first sale, fulfilling the order or contract and thereby securing repeat business prin-cipally falls within the remit of operations.

Figure 2.15 Operations’ role in gaining the first sale and securing the second

Task Gaining the first sale Fulfilling the order or contract

Securing the second sale

Function(s) responsible

Sales and marketing

Through customer contacts and relationships, advertising, promotions and selling

Operations

Operations fulfils a mix of requirements such as meeting the service/product specification, delivering on time and supporting the relevant degree of price sensitivity

Operations

Operations – as a consequence of fulfilling an order and meeting customers’ needs, customers typically return and repeat their purchase. If operations fails to meet customer orders and needs, it is likely that customers will go elsewhere – and may tell others!

Operations

Creating a good business reputation based on past performance in meeting customer orders and customer needs leads to existing customers recommending a business to others

Let’s explain with an example. Wishing to eat out one evening on some special occasion and not knowing where to go, you ask a friend for suggestions. The restaurant suggested is duly booked, but the reality of the evening doesn’t match your expectations – your table isn’t quite ready, the service is slow, and the food is nothing special. So next time you wish to celebrate, where will you go? While your first visit to the restaurant arose from it being recommended (the reputation it had established), any subsequent visits will be based on your own experience of the delivery of the service. In this way, how well a service is delivered results in:

Creating the reputation ( the equivalent of a brand name) that leads to customers’ recommendations to others ( the first sale)Customers returning to repeat-buy (the second sale).

> KEY IDEAOperations help GAIN first saleWhilst SECURING second sale

Summary

•What is STRATEGY?- Direction and Implementation

• LEVELS of strategy- Corporate - Business - Functional

• Strategy DEVELOPMENT- Understand market- Develop capability to support or drive market

•Market REQUIREMENTS- Order-winners and Qualifiers

• APPROACH to developing strategy- Top down vs Bottom up- Market-led vs Resource-based

Revision questions

1 Strategy embodies the aspect(s) of:Strategy embodies the aspect(s) of:

a) Direction (what to do)

b) Implementation (how to do it)

c) Both a) and b)

Revision questions

2 The strategic role of executives concerns:The strategic role of executives concerns:

a) Managing and controlling the range of activities that fall within their area of responsibility

b) How to support the competitive criteria in agreed markets and determining development and investment priorities

c) Both a) and b)

Revision questions

3 A market-driven strategy is based on:A market-driven strategy is based on:

a) Exploiting the potential of existing resources and capabilities within the business

b) Identifying where advantage can be gained by outperforming current market norms on one or more competitive driver

c) Understanding current and future markets and their competitive drivers

Revision questions

4 Discussion and agreement about current and future markets:Discussion and agreement about current and future markets:a) Is the sole responsibility of the marketing function

in a business

b) Is the responsibility of all functions within a business

c) Is a corporate, not a functional responsibility

Revision questions

5 Market order-winners and qualifiers are:Market order-winners and qualifiers are:

a) Time specificb) Market specificc) Both a) and b)

Revision questions

6 A typical area of improvement if delivery speed is a market order-winner is:A typical area of improvement if delivery speed is a market order-winner is:a) Reducing costs in all areas particularly materials

and overheads

b) Reviewing the elements of the operations process

c) Reviewing current scheduling methods

CASE FOR TUTORIALAPPLE

Documents

Introduction to operations management #2