OPERATIONS STRATEGY



Operations Strategy 30
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After collectively considering the products and services demanded by customers, strengths and weaknesses of competitors, the environment, and the firm's own strengths, weaknesses, cultures, and resources, proficient firms can formulate their vision as expressed through the mission statement. This statement expresses the organization's values and aspirations; basically its reason or purpose for existence. Based on this mission statement the firm will formulate its business strategy. This business strategy is a long-term plan for accomplishing the mission set forth in the mission statement. Each function within the business can then derive its own strategy in support of the firm's overall business strategy (financial strategy, marketing strategy, and operations strategy).

Operations strategy is the collective concrete actions chosen, mandated, or stimulated by corporate strategy. It is, of course, implemented within the operations function. This operations strategy binds the various operations decisions and actions into a cohesive consistent response to competitive forces by linking firm policies, programs, systems, and actions into a systematic response to the competitive priorities chosen and communicated by the corporate or business strategy. In simpler terms, the operations strategy specifies how the firm will employ its operations capabilities to support the business strategy.

Operations strategy has a long-term concern for how to best determine and develop the firm's major operations resources so that there is a high degree of compatibility between these resources and the business strategy. Very broad questions are addressed regarding how major resources should be configured in order to achieve the firm's corporate objectives. Some of the issues of relevance include long-term decisions regarding capacity, location, processes, technology, and timing.

The achievement of world-class status through operations requires that operations be integrated with the other functions at the corporate level. In broad terms, an operation has two important roles it can play in strengthening the firm's overall strategy. One option is to provide processes that give the firm a distinct advantage in the marketplace. Operations will provide a marketing edge through distinct, unique technology developments in processes that competitors cannot match.

The second role that operations can play is to provide coordinated support for the essential ways in which the firm's products win orders over their competitors, also known as distinctive competencies. The firm's operations strategy must be conducive to developing a set of policies in both process choice and infrastructure design (controls, procedures, systems, etc.) that are consistent with the firm's distinctive competency. Most firms share access to the same processes and technology, so they usually differ little in these areas. What is different is the degree to which operations matches its processes and infrastructure to its distinctive competencies.

KEY SUCCESS FACTORS

Industries have characteristics or strategic elements that affect their ability to prosper in the marketplace (i.e., attributes, resources, competencies, or capabilities). The ones that most affect a firm's competitive abilities are called key success factors (KSFs). These KSFs are actually what the firm must be competent at doing or concentrating on achieving in order to be competitively and financially successful; they could be called prerequisites for success. In order to determine their own KSFs, a firm must determine a basis for customer choice. In other words, how do customers differentiate between competitors offering the same or similar products or services and how will the firm distinguish itself from these competitors? Once this is determined, the firm has to decide what resources and competitive capabilities it needs in order to compete successfully, and what will it take to achieve a sustainable competitive advantage. These KSFs can be related to technology, operations, distribution, marketing, or to certain skills or organizational capability. For example, the firm may derive advantages from superior ability to transform material or information (technology or operations), to quickly master new technologies and bring processes online (technology or organizational capability), or to quickly design and introduce new products, service a broad range of products, customize products or services on demand, or provide short lead times (skills).

The set of KSFs that are delegated totally or substantially to the operations function has been termed the manufacturing mission. It represents what top management expects from operations in terms of its strategic contribution. All decisions made relative to system design, planning, control and supervision must aim at accomplishing the manufacturing mission. As such, the manufacturing mission is the principal driver of the operations function and gives it its reason for existence. All world-class manufacturers have an explicit, formal manufacturing mission.

From the manufacturing mission the operations function derives its distinctive competencies (also called competitive priorities or competitive weapons). Distinctive competence is defined as the characteristic of a given product/service or its producing firm that causes the buyer to purchase it rather than the similar product/service of a competitor. It is generally accepted that the distinctive competencies are cost/price, quality, flexibility, and service/time. Various experts include other competencies, such as location, but these can usually be categorized within one of the generally accepted four. Some experts also feel that innovation is quickly becoming a fifth distinctive competency, if it hasn't already. It should be noted that a firm's position on the product-process matrix is a controlling factor for the manufacturing mission and the firm's competitive priority or priorities.

DISTINCTIVE COMPETENCIES

Details relative to each distinctive competency are provided, along with the implications of each and some examples.

PRICE/COST.

A firm competing on a price/cost basis is able to provide consumers with an in-demand product at a price that is competitively lower than that offered by firms producing the same or similar good/service. In order to compete on a price basis, the firm must be able to produce the product at a lesser cost or be willing to accept a smaller profit margin. Firms with this competency are generally in a position to mass produce the product or service, thereby giving the firm economies of scale that drive the production cost per unit down considerably. Commodity items are mass-produced at such volume that they utilize a continuous process, thus deriving tremendous economies of scale and very low prices Consumers purchasing commodity-type products are usually not greatly aware of brand difference, and will buy strictly on the basis of price; e.g., as long as it is a major brand of gasoline and location is not a factor, consumers will opt for the lowest price. Wal-Mart is able to offer low prices by accepting a lower profit margin per unit sold. Their tremendous volume more than makes up for the lower profit margin.

QUALITY.

David Garvin lists eight dimensions of quality as follows:

  • Performance. Performance refers to a product's primary operating characteristics. For an automobile this could mean fast acceleration, easy handling, a smooth ride or good gas mileage. For a television it could mean bright color, clarity, sound quality or number of channels it can receive. For a service this could merely mean attention to details or prompt service.
  • Conformance. Conformance is the degree to which a product's design and operating characteristics meet predetermined standards. When a manufacturer utilizing coils of steel receives a shipment from the mill, it checks the width of the coil, the gauge (thickness) of the steel, the weight of the coil, and puts a sample on a Rockwell hardness tester to check to ensure that the specified hardness has been provided. Receiving inspection will also check to see if specified characteristics are met (e.g., hot-rolled, pickled, and oiled). Services may have conformance requirements when it comes to repair, processing, accuracy, timeliness, and errors.
  • Features. Features are the bells and whistles of a product or service. In other words, characteristics that supplement the basic function of the product or service. Desirable, but not absolutely necessary, features on a VCR include four heads, slow-motion capability, stereo or surround sound, split screens or inset screens, and 365-day programming ability. Service examples include free drinks on an airline flight or free delivery of flowers.
  • Durability. Durability is defined as mean time until replacement. In other words, how long does the product last before it is worn out or has to be replaced because repair is impossible? For some items, such as light bulbs, repair is impossible and replacement is the only available option. Durability may be had by use of longer life materials or improved technology processes in manufacturing. One would expect home appliances such as refrigerators, washer and dryers, and vacuum cleaners to last for many years. One would also hope that a product that represents a significant investment, such as an automobile, would have durability as a primary characteristic of quality.
  • Reliability. Reliability refers to a product's mean time until failure or between failures. In other words, the time until a product breaks down and has to be repaired, but not replaced. This is an important feature for products that have expensive downtime and maintenance. Businesses depend on this characteristic for items such as delivery trucks and vans, farm equipment and copy machines since their failure could conceivably shut down the business altogether.
  • Serviceability. Serviceability is defined by speed, courtesy, competence and ease of repair. This is can be an extremely important characteristic as witnessed by the proliferation of toll-free hot lines for customer service. A number of years ago, a major television manufacturer advertised that its product had its "works in a box." This meant that the television set was assembled out of modular units. Whenever there were problems with the set, a repairman making a house call simply had to replace the problem module, making the product easily and quickly serviceable.
  • Aesthetics. A product's looks, feel, smell, sound, or taste are its aesthetic qualities. Since these characteristics are strictly subjective and captive to preference, it is virtually impossible to please everyone on this dimension.
  • Perceived Quality. Perceived quality is usually inferred from various tangible and intangible aspects of the product. Many consumers assume products made in Japan are inherently of high quality due to the reputation of Japanese manufacturers, whereas 50 years ago, the perception was the complete opposite. Other characteristics such as high price or pleasing aesthetics may imply quality.

Firms competing on this basis offer products or services that are superior to the competition on one or more of the eight dimensions. Obviously, it would be undesirable if not impossible for firms to compete on all eight dimensions of quality at once. This would be prohibitively expensive, and there are some limitations imposed by trade-offs that must be made due to the nature of the product. For example, a firm may sacrifice reliability in order to achieve maximum speed.

SERVICE.

Service can be defined in a number of ways. Superior service can be characterized by the term customer service or it could mean rapid delivery, on-time delivery, or convenient location.

FLEXIBILITY.

Firms may compete on their ability to provide either flexibility of the product or volume. Firms that can easily accept engineering changes (changes in the product) offer a strategic advantage to their customers. This can also apply to services. A number of years ago, a well-known fast food restaurant advertised "hold the pickles, hold the lettuce, special orders don't upset us," which meant that ordering a nonstandardized version of the product would not slow down the delivery process. Also, some firms are able to absorb wide fluctuations in volume allowing customers with erratic demand the luxury of not holding excessive inventories in anticipation of change in demand.

TRADEOFFS.

Firms usually focus on one distinctive competency (rarely more than two). For some competencies there are tradeoffs involved. An automobile manufacturer producing a product that is considered to be of high quality (leather seats, real wood trim, and an outstanding service package) will not be able to compete on a cost/price basis as the cost of manufacture prohibits it. An automotive parts house would like to keep their customers happy by offering the lowest prices possible. However, if the automotive parts house also wants to be able to fill almost every single order from walk-in customers, it must maintain an extensive inventory. The expense of this inventory could preclude the parts house from offering prices competitive with other similar firms not choosing to provide this level of service. Therefore, one parts house is competing on the basis of service (but not cost/price) while the other is competing of the basis of cost/price (but not service). The customer may have to wait a few days to get the desired part; if the customer cannot wait, he or she can pay more and purchase the part immediately from the competitor.

ORDER WINNERS/QUALIFIERS

Operations strategist and author Terry Hill introduced the terms qualifier and order winner (1989). A qualifier is a competitive characteristic a firm or product must be able to exhibit to be a viable competitor in the marketplace. An order winner is a competitive characteristic of a product or service that causes a customer to choose this firm's product or service rather than that of a competitor (distinctive competence). For example, say a consumer in the market for a new automobile has a predetermined level of quality that the automobile must possess before being considered for purchase. The consumer has narrowed his or her choice down to five models of automobile that all meet this minimum quality requirement. From this point the consumer, with all else being equal, will probably purchase the automobile that he or she can get for the least cost. Therefore, quality is the qualifier (must be present to be considered) and cost/price is the order winner (basis for the final choice).

THE NEED FOR AN
OPERATIONS STRATEGY

In too many instances, a firm's operations function is not geared to the business's corporate objectives. While the system itself may be good, it is not designed to meet the firm's needs. Rather, operations is seen as a neutral force, concerned solely with efficiency, and has little place within the corporate consciousness. Steven C. Wheelwright and Robert H. Hayes described four generic roles that manufacturing can play within a company, from a strategic perspective. While they specifically discuss the manufacturing function, the term operations can be substituted with no loss in relevance. These generic roles are labeled stages 1 to 4, as explained below.

Stage 1 firms are said to be internally neutral, meaning that the operations function is regarded as being incapable of influencing competitive success. Management, thereby, seeks only to minimize any negative impact that operations may have on the firm. One might say that operations maintain a reactive mode. When strategic issues involving operations arise, the firm usually calls in outside experts.

Stage 2 firms are said to be externally neutral, meaning they seek parity with competitors (neutrality) by following standard industry practices. Capital investments in new equipment and facilities are seen as the most effective means of gaining competitive advantage.

Stage 3 firms are labeled internally supportive, that is, operations' contribution to the firm is dictated by the overall business strategy but operations has no input into the overall strategy. Stage 3 firms do, however, formulate and pursue a formal operations strategy.

Stage 4 firms are at the most progressive stage of operations development. These firms are said to be externally supportive. Stage 4 firms expect operations to make an important contribution to the competitive success of the organization. An operation is actually involved in major marketing and engineering decisions. They give sufficient credibility and influence to operations so that its full potential is realized. Firms within Stage 4 are known for their overall manufacturing capability.

Since the bulk of many, if not all, firms have the bulk of their labor force and assets tied to the operations function, it makes sense for most firms to strive for a position in Stage 3 or Stage 4. Firms can, of course, evolve from one stage to the next with few, if any, skipping a stage. In fact, most outstanding firms are in Stage 3, as Stage 4 is extremely difficult to reach.

The need for an operations strategy that reflects and supports the corporate strategy is not only crucial for the success of the corporate strategy but also because many decisions are structural in nature. In other words, the results are not easily changed. The firm could be locked into a number of operations decisions, which could take years to change if the need arose. These could range from process investment decisions to human resource management practices. Too often, marketing-led strategies leave operations to resolve the resulting issues from their unilateral view of what is best for the business as a whole. If corporate management cannot fully appreciate the issues and consequences of relegating operations to a tactical status it could find itself needing to make structural changes that are costly, time consuming, and much too late to make the competitive impact necessary to compete effectively.

Firms that fail to fully exploit the strategic power of operations will be hampered in their competitive abilities and vulnerable to attack from those competitors who do exploit their operations strategy. To do this effectively, operations must be involved throughout the whole of the corporate strategy. Corporate executives have tended to assume that strategy has only to do with marketing initiatives. They erroneously make the assumption that operation's role is strictly to respond to marketing changes rather than make inputs into them. Secondly, corporate executives assume that operations have the flexibility to respond positively to changing demands. These assumptions place unrealistic demands upon the operations function. A recent article by Michael A. Lewis in the International Journal of Operations and Production Management warns firms a practical operations strategy is iterative and will require market compromise. While corporate management perceives corporate improvement as coming through broad decisions concerning new markets, takeovers, and so on, it overlooks the idea that building blocks of corporate success can be found in the creative and effective use of operations strategy to support the marketing requirement within a well-conceived corporate strategy.

Operations management's attention must increasingly be toward strategy. The balance and direction of its activity should reflect its impact on the firm's performance toward achieving its goals through its strategy, and on the performance of operations itself, recognizing that both need to be done well. Linda Nielsen-Englyst recommends a four-phase process for formulating and updating operations strategy: learning, reviewing, aligning, and redirecting. Phase one is a learning stage where alternatives to the intended strategy are evaluated in practice. Phase two involves reviewing alternatives over time, allowing ideas to grow and mature. Phase three, the alignment stage, is an analytical process where the firm attempts to identify and document financial rationale for changing the intended strategy. Finally, in the redirecting phase, the firm tests its ideas in practice through local initiatives.

SEE ALSO: Mission and Vision Statements ; Operations Management ; Order-Winning and Order-Qualifying Criteria ; Quality and Total Quality Management ; Strategy Formulation

R. Anthony Inman

FURTHER READING:

Garvin, David A. "Competing on the Eight Dimensions of Quality." Harvard Business Review, November-December 1987, 101–109.

Hill, Terry. Manufacturing Strategy: Text and Cases 3rd ed. Homewood, IL: Irwin, 2000.

Lewis, Michael A., "Analysing Organisational Competence: Implications for the Management of Operations," International Journal of Operations and Production Management, Vol. 23, No. 7, 2003, 731–756.

Neilslen-Englyst, Linda, "Operations Strategy Formation—A Continuous Process," Integrated Manufacturing Systems, Vol. 14, No. 8, 2003, 677–685.

Wheelwright, Steven C., and Robert H. Hayes. "Competing Through Manufacturing." Harvard Business Review, January-February 1985, 99–109.



User Contributions:

vivekananda
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Feb 20, 2007 @ 10:22 pm
It is an excellent article I have read after a long time, with more information on a specific topic like this is very useful for researchers as well as for interested readers.
nobuhle mutombeni
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Oct 11, 2014 @ 3:15 pm
what is meant by the term bottom up perseptive with an example
and also top down perseptive and its example

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