ABA 323: Productions and Operations Management Topic 2: Operations strategy

MASENO UNIVERSITY

http://ecampus.maseno.ac.ke/

Operations strategy In some ways the very term operation strategy 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 refer to those parts of the business which are concerned with producing products and services. Operational is the opposite of strategic in the sense that it means short term and limited in its influence. Other functions of the business such as marketing or finance have both strategic and operational activities. For example, marketing strategy covers the overall long-term approach to how the organization 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 the resources which produce products and services. The more operational subject of operations management looks at the more detailed and shop floor issues of designing, planning and contro lling, and improving the resources which produce products and services. Content and process The content of operations strategy is concerned with the specific decisions which shape and develop the 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 formulate operations strategies. It is the way we go about the activity of devising strategy. Think of operations strategy content as what the organization is deciding to do and process as how the organization 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 on ly scratches 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 organizational tree. According to this top-down approach, overall business s trategy sets the general direction of the organization; this is then interpreted by the different functional areas of the company (marketing, finance, operations, etc.) in their functional strategies. By contrast, the bottom-up view of operations strategy is to see strategic decision making as an accumulation of practical experiences. After all, organizations would find it difficult to invent
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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 rival 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 top -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 translation 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 translated into performance objectives. Different ways of competing imply diff erent competitive factors and therefore different performance objectives. Table 3.1 gives 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 off 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
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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 most 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
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While most of the western worlds airlines are trying to outdo their competitors by providing ever more sophisticated services, including excellent catering and the latest entertainment technology, one company has chosen to return to its 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 much 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 Southwests formula and price. The idea of providing air travel in the style of bus travel is certainly not unique, and there have been many 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 five 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 air lines flamboyant founder and owner, Herbie Kelleher, has achieved, often in quite unique ways. Passengers notice the difference even before they enter the plane, as Southwests numbered boarding passes are plastic and reusable. Passengers are called forwa rds 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 even 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 uniform of brightly coloured shorts and T -shirts. The companys 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 particular 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 c ost. Its service doesnt 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 matter of selecting the
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current market position and then adjusting the operations various resources and processes to fall into line with it. Operations resources are often complex to manage and have an inertia which cannot be overcome instantly in order to correspond to changes in 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, There is an attractive part of the market, lets go and compete in it. Oh, and tell the operations function it had better try and be good in the things that those particular customers want, the company is saying, We really are particularly good at doing certain things, lets try and find a part of the market that needs us to be good at those particular things, because then it will be very difficult for 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 continue. 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 in 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 more 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 hub-and-spoke arrangement of routes. This involves aircraft flying between hub 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 standardize their routes, and keep costs down.
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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 Speed Dependability Flexibility Cost New product/service development X strategy Vertical integration strategy Facilities strategy Technology strategy Workforce and organization strategy X X X X X X X X X X X X X X

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Capacity adjustment strategy Supplier development strategy Inventory strategy Planning strategy and control systems X X

X X X X X X X X X

X X X X

Improvement strategy

X X

Failure prevention and recovery X strategy

The 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 how to do it process. When reading about these two processes bear in mind that they are both primarily market requirements driven.

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