Chapter 3 Operations strategy
Source: courtesy of Justin Waskovich
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Key teaching objectives
What is strategy and what is operations strategy? What is the difference between a top-down and a bottom-up view of operations strategy? What is the difference between a market market requirements and an operations resources view of operations strategy? How can an operations strategy be put together?
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Introduction
All organizations need some strategic direction:
Some idea of where they are heading and how they could get there
Once the operations function has understood its role in the business and after it has articulated its performance objectives, it needs to formulate:
a set of general principles which will guide its decisionmaking
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Strategy
the Greek word strategos meaning leading an army Both military and business strategy include:
Setting broad objectives that direct an enterprise towards its overall goal. Planning the path (in general rather than specific terms) that will achieve these goals. Stressing long-term rather than short-term objectives. Dealing with the total picture rather than stressing individual activities. Being detached from, and above, the confusion and distractions of day-to-day activities.
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
strategic decisions
those decisions which are widespread in their effect on the organization:
defining the position of the organization relative to its environment moving the organization closer to its long-term goals
Strategy is more than a single decision:
the total pattern of the decisions and actions that influence the long-term direction of the business.
Observing the total pattern of decisions gives an indication of the actual strategic behaviour
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Operations strategy
Operations strategy concerns the pattern of strategic decisions and actions which set the role, objectives and activities of the operation. Operations is not the same as operational Operations are the resources that create products and services Operational is the opposite of strategic, meaning day-to-day and detailed So, one can examine both the operational and the strategic aspects of operations
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Operations strategy is the decisions which shape the long-term capabilities of the companys operations and their contribution to overall strategy through the on-going reconciliation of market requirements and operations resources
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
What is the role of the Operations function?
Operations as implementer Operations as supporter Operations as driver
Operations
Strategy
Strategy
Operations
Operations
Strategy
Operations implements strategy
Operations supports strategy
Operations drives strategy
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
From implementing to supporting to driving strategy Implementing business strategy:
The most basic role of operations is to implement strategy. Most companies will have some kind of strategy but it is the operation that puts it into practice. You cannot, see the strategy; all you can see is how the operation behaves in practice For example, if an insurance company has a strategy of moving to an entirely online service, its operations function will have to supervise the design of all the processes which allow customers to access online information, issue quotations, request further information, check credit details, send out documentation and so on.
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
From implementing to supporting to driving strategy Supporting business strategy:
It means developing the capabilities which allow the organization to improve and refine its strategic goals. For example, a mobile phone manufacturer wants to be the first in the market with new product innovations Its operations need to be capable of coping with constant innovation. The better the operation is at doing these things, the more support it is giving to the companys strategy.
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
From implementing to supporting to driving strategy Driving business strategy :
The most difficult role of operations is to drive strategy by giving it a unique and long-term advantage. For example, a specialist food service company over the years has built up close relationships with its customers (chefs) as well as its suppliers around the world (fishing companies and fish farms). The company has a unique position in the industry because its exceptional customer relationships, supplier relationship and new product development are extremely difficult for competitors to imitate. In fact, the whole companys success is based largely on these unique operations capabilities.
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
The strategic role of the Operations function
The 3 key attributes of Operations
Implementing
Operations contribution
Be dependable Operationalize strategy Explain practicalities
Supporting
B e appropriate
Understand strategy Contribute to decisions
Driving
Be innovative Provide foundation of strategy Develop long-term capabilities
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
The four-stage model of operations contribution
A model devised by Hayes and Wheelwright that categorizes the degree to which operations management has a positive influence on overall strategy
Redefining industry expectations
STAGE 3 Link strategy with operations p STAGE 2 Adopt best practice STAGE 1 problems STAGE 4 Give an operations advantage
Increasing strategic impact
Clearly the best in the industry As good as the competitors Holding the Correct the organization back worst
Internally neutral Externally neutral
Internally supportive
Externally supportive
Increasing operations capabilities
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
The four-stage model
Stage 1: Internal neutrality.
the very poorest level of contribution by the operations function. holding the company back from competing effectively inward-looking and, at best, reactive with very little positive to contribute towards competitive success. It attempts to improve by avoiding making mistakes.
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
The four-stage model
Stage 2: External neutrality
The first step of breaking out of stage 1 is for the operations function to begin comparing itself with similar companies or organizations in the outside market This may y not immediately y take it to the first division of companies in the market, but at least it is measuring itself against its competitors performance and trying to implement best practice.
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
The four-stage model
Stage 3: Internally supportive
Operations are amongst the best in their market. Yet, operations still aspire to be clearly and unambiguously the very best in the market They achieve hieve this his by b gaining i i a clear l view i of f the h companys competitive or strategic goals and supporting it by developing appropriate operations resources. The operation is trying to be internally supportive by providing a credible operations strategy.
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
The four-stage model
Stage 4: Externally supportive
The company views the operations function as providing the foundation for its competitive success. Operations looks to the long term. I It forecasts f likely changes h i markets in k and d supply, l and d it i develops the operations-based capabilities which will be required to compete in future market conditions. Operations are innovative, creative and proactive and are driving the companys strategy by being one step ahead of competitors.
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
The four perspectives on operations strategy
Top-down perspective
What the business wants operations to do
Operations resources perspective
What operations resources can do d
Operations strategy
Market requirement perspective
What the market position requires operations to do
What day-to-day experience suggests operations should do
Bottom-up perspective
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
The four perspectives on operations strategy
Operation strategy is a top-down reflection of what the whole group or business wants to do. Operations strategy is a bottom-up activity where operations improvements cumulatively build strategy. Operations strategy involves translating market requirements into operations decisions. decisions Operations strategy involves exploiting the capabilities of operations resources in chosen markets.
None of these four perspectives alone gives the full picture of what operations strategy is. But together they provide some idea of
the pressures which go to form the content of operations strategy
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Top-down strategies
The corporate strategy consist of decisions about what types of business the group wants to be in, what parts of the world it wants to operate in, how to allocate its cash between its various businesses, and so on. Each business unit within the corporate group will also need to p put together g its own business strategy gy in relation to the strategy of the corporate group which sets out its individual mission and objectives.
Similarly, within the business, functional strategies need to consider what part each function should play in contributing to the strategic objectives of the business.
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Top-down strategies
The operations, marketing, product/service development and other functions will all need to consider how best they should organize themselves to support the businesss objectives. So, one perspective on operations strategy is that it should take its place in this hierarchy of strategies. Its main influence, therefore, will be whatever the business sees as its strategic direction. The role of operations is therefore largely one of implementing or operationalizing business strategy.
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
The strategy hierarchy
Key strategic decisions
Corporate strategy What business to be in? What to acquire? What to divest? How to allocate cash?
Influences on decision making
Economic environment Social environment Political environment Company values and ethics
Business strategy
What is the mission? What are the strategic objectives of the firm? How to compete?
Customer/market dynamics Competitor activity Core technology dynamics Financial constraints
Functional strategy
How to contribute to the strategic objectives? How to manage the functions resources?
Skills of functions staff Current technology Recent performance of the function
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Top-down strategies
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Bottom-up strategies
many strategic ideas emerge over time from operational experience Sometimes companies move in a particular strategic direction because the ongoing experience of providing products and services to customers at an operational level convinces them that it is the right thing to do Strategy is gradually shaped over time and based on real-life experience rather than theoretical positioning (emergent strategies) The key virtues required for shaping strategy from the bottom up are an ability to learn from experience and a philosophy of continual and incremental improvement
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Bottom-up strategies
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Market-requirements-based strategies
One of the obvious objectives for any organization is to satisfy the requirements of its markets. Understanding markets is usually thought of as the domain of the marketing function, it is also of importance to operations management. Understanding market requirements are needed to achieve the right priority between operation performance objectives (quality, speed, dependability, flexibility and cost).
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Competitive factors
The factors which define the customers requirements are called competitive factors Different competitive factors imply different performance objectives A useful way of determining the relative importance of competitive factors is to distinguish between order-winning and qualifying factors
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Different competitive factors imply different performance objectives
Competitive factors If the customers value these ...
Low price High quality Fast delivery Reliable delivery Innovative products and services Wide range of products and services Ability to change the timing or quantity of products and services
Performance objectives Then, the operations will need to excel at these ...
Cost Quality Speed Dependability Flexibility (products and services) Flexibility (mix) Flexibility (volume and/or delivery)
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Order-winning and qualifying objectives
Order-winning factors are those things which directly and significantly contribute to winning business. They are regarded by customers as key reasons for purchasing the product or service. Raising performance in an order-winning factor will either result in more business or improve the chances of gaining more business. Qualifying factors are those aspects of competitiveness where the operations performance has to be above a particular level just to be considered by the customer. Performance below this qualifying level of performance will possibly disqualify the company from being considered by many customers. Any further improvement above the qualifying level is unlikely to gain the company much competitive benefit. Less important factors do not influence customers in any significant way. They may be of importance in other parts of the operations activities.
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
worth of the order-winning, qualifying and less important factors to the competitiveness of the organization
Competitive benefit +ve
Order-winning factors
Neutral
ve
Performance
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
worth of the order-winning, qualifying and less important factors to the competitiveness of the organization
Competitive benefit +ve
Qualifying factors
Neutral
ve
Qualifying level Performance
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
worth of the order-winning, qualifying and less important factors to the competitiveness of the organization
Competitive benefit +ve
Less important factors
Neutral
ve
Performance
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Different customers require different performance objectives Example of banking services
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Worked example
It is about four years now since we specialized in the small-to-medium firms market. Before that we also used to provide legal services for anyone who walked in the door. So now we have built up our legal skills in many areas of corporate and business law. However, within the firm, I think we could focus our activities even more. There seem to be two types of assignment that we are given. About forty per cent of our work is relatively routine. Typically these assignments are to do with things like property purchase and debt collection. Both these activities involve a relatively standard set of steps which can be automated or carried out by staff without full legal qualifications. Of course, a fully qualified lawyer is needed to make some decisions; however, most work is fairly routine. Customers expect us to be relatively inexpensive and fast in delivering the service. Nor do they expect us to make simple errors in our documentation, in fact if we did this too often we would lose business. Fortunately our customers know that they y are buying y g a standard service and dont expect p it to be customized in any y way. y The problem here is that specialist agencies have been emerging over the last few years and they are starting to undercut us on price. Yet I still feel that we can operate profitably in this market and anyway, we still need these capabilities to serve our other clients. The other sixty per cent of our work is for clients who require far more specialist services, such as assignments involving company merger deals or major company restructuring. These assignments are complex, large, take longer, and require significant legal skill and judgement. It is vital that clients respect and trust the advice we give them across a wide range of legal specialisms. Of course they assume that we will not be slow or unreliable in preparing advice, but mainly its trust in our legal judgement which is important to the client. This is popular work with our lawyers. It is both interesting and very profitable. But should I create two separate parts to our business, one to deal with routine services and the other to deal with specialist services? And, what aspects of operations performance should each part be aiming to excel at? (Managing Partner, Branton Legal Services)
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Worked example - Analysis
Below table has used the information supplied above to identify the order winners, qualifiers and less important competitive factors for the two categories of service. As the Managing Partner suspects, the two types of service are very different. Routine services must be relatively inexpensive and fast, whereas the clients for specialist services must trust the quality of advice and range of legal skills available in the firm. The customers for routine services do not expect errors and those for specialist services assume a basic level of dependability and speed. These are the qualifiers for the two categories of service. Note that qualifiers are not unimportant. On the contrary, failure to be up to standard at them can lose the firm business. However, it is the order winner that attracts new business. Most significantly, the performance objectives which each operations partner should stress are very different. Therefore there does seem to be a case for separating the sets of resources (e.g. ( g lawyers y and other staff ) and p processes ( (information systems y and p procedures) ) that p produce each type ype of service. Competitive factors and performance objectives for the legal firm
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
The product/service life cycle influence on performance objectives
product/service life cycles are shown as the sales volume passing through four stages:
Introduction Growth Maturity decline
products and services will require strategies in each stage of their life cycle
operations
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
The product/service life cycle influence on performance objectives
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
The product/service life cycle influence on performance objectives
Introduction stage.
A product or service is first introduced, It is likely to be offering something new in terms of its design or performance. Few competitors p offering g the same p product or service. The needs of customers are unlikely to be well understood. The operations management needs to develop the flexibility to cope with any changes The operations management should be able to give the quality to maintain product/service performance.
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
The product/service life cycle influence on performance objectives
Growth stage
As volume grows, competitors may enter the growing market. Keeping up with demand could prove to be the main operations preoccupation. Rapid and dependable response to demand will help to keep demand buoyant Quality levels must ensure that the company keeps its share of the market as competition starts to increase
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
The product/service life cycle influence on performance objectives
Maturity stage
Demand starts to level off. Some early competitors may have left the market and the industry will probably be dominated by a few larger companies. Operations will be expected to get the costs down in order to maintain profits or to allow price cutting, or both. Cost and productivity issues, together with dependable supply, are likely to be the operations main concerns
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
The product/service life cycle influence on performance objectives
Decline stage
After time, sales will decline with more competitors dropping out of the market. There might be a residual market, but unless a shortage of capacity develops the market will continue to be dominated by price i competition. tition. Operations objectives continue to be dominated by cost
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
The operations resources perspective
is based on the resource-based view (RBV) of the firm theory The RBV holds that firms with an above-average strategic performance are likely to have gained their sustainable competitive advantage because of the core competences (or capabilities) of their resources. The way y an organization g inherits, , or acquires, q , or develops p its operations resources will, over the long term, have a significant impact on its strategic success. So understanding and developing the capabilities of operations resources is a particularly important perspective on operations strategy.
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Intangible resources
An operation is not just the sum of its processes. An operations intangible resources include such things as its relationship with suppliers, the reputation it has with its customers, its knowledge of its process technologies and the way its staff can work together in new product and service development. Intangible resources may not always be obvious within the operation but they are important and have real value.
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Structural and infrastructural decisions
An operations structural decisions are those which we have classed as primarily influencing design activities Infrastructural decisions are those which influence the workforce organization and the planning and control, and improvement activities This distinction is comparable to that between hardware and software in computer systems The best and most costly facilities and technology will only be effective if the operation also has an appropriate infrastructure which governs the way it will work on a day-to-day basis
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Structural strategic decisions
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Infrastructural strategic decisions
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
The process of strategy formulation
How operations strategies are put together the process of operations strategy should both satisfy market requirements and also develop resources in the long term so that they can provide competitive capabilities that achieve sustainable competitive advantage. Most consultancy companies have developed their own frameworks, as have several academics.
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Elements of strategy formulation
A process which formally links the total organization strategic objectives (usually a business strategy) to resource-level objectives. The use of competitive factors (called various things such as order winners, critical success factors, etc.) as the translation device between business strategy gy and operations p strategy. gy A step which involves judging the relative importance of the various competitive factors in terms of customers preferences. A step which includes assessing current achieved performance, usually as compared against competitor performance levels.
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Elements of strategy formulation
An emphasis on operations strategy formulation as an iterative process. The concept of an ideal or greenfield operation against which to compare current operations. Very often the question asked is: If you were starting from scratch on a greenfield site, how, ideally, would you design your operation to meet the needs of the market? A gap-based approach. This is a well-tried approach in all strategy formulation which involves comparing what is required of the operation by the marketplace against the levels of performance the operation is currently achieving.
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
A strategy can checked it out in advance for some attributes that could stop it being a success
Comprehensive: Many companies have failed to notice the potential impact of all aspects of operation. Also, many strategies have failed because operations have paid undue attention to only one key decision area. Coherence is when the choices made in each decision area d not pull do ll the h operation i in i different directions Correspondence the strategies pursued in each decision area should reflect the true priority of each performance objective Criticality: Although all decisions are important, some resource or requirements will be more critical than others
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
The five Ps of operations strategy implementation
Purpose a shared understanding of the motivation,
boundaries and context for developing the operations strategy
Point of entry the point in the organization where the
process of implementation starts
Process how the operations strategy formulation process
is made explicit
Project management the management of the
implementation
Participation who is involved in the implementation
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Key Terms Test
Strategic decisions Decisions that are widespread in their effect, define the position of the organization relative to its environment, and move the organization closer to its long-term goals. Top-down Top down The influence of the corporate or business strategy on operations decisions. Bottom-up The influence of operational experience on operations decisions.
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Key Terms Test
Market requirements The performance objectives that reflect the market position of an operations products or services; also a perspective on operations strategy. Operations resource capabilities The inherent ability of operations processes and resources; also a perspective on operations strategy. Business strategy The strategic positioning of a business in relation to its customers, markets and competitors; a subset of corporate strategy.
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Key Terms Test
Functional strategy The overall direction and role of a function within the business; a subset of business strategy. Emergent strategy A strategy t t that is gradually shaped over time and based on experience rather than theoretical positioning. Competitive factors The factors such as delivery time, product or service specification, price, etc. that define customers requirements.
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Key Terms Test
Order-winning factors The arrangement of resources that are devoted to the production and delivery of products and services. Qualifying factors Aspects of competitiveness where the operations performance has to be above a particular level to be considered by the customer. Less important factors Competitive factors that are neither order-winning nor qualifying; performance in them does not significantly affect the competitive position of an operation.
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Key Terms Test
Product/service life cycle A generalized model of the behaviour of both customers and competitors during the life of a product or service; generally held to have four stages: introduction, growth, maturity and decline. Resource-based view (RBV) The perspective on strategy that stresses the importance of capabilities (sometimes known as core competences) in determining sustainable competitive advantage. Intangible resources The resources within an operation that are not immediately evident or tangible, such as relationships with suppliers and customers, process knowledge, new product and service development.
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
