An Introduction to Operations Strategy

The basic strategy model

Operations management and strategy requires analysis at three levels Flow between operations Analysis at the level of the supply network Strategic analysis Operational analysis Analysis at the level of the operation Flow between processes Analysis at the level of the process Flow between resources

Operations strategy is … ‘… the total pattern of decisions … … that shape the long-term capabilities … … of any type of operation ... … and their contribution to overall strategy… … through the on-going reconciliation of market requirements and operations resources … … so as to achieve a sustainable fit between the two … … whilst managing the risks of misalignment’.

The Goods – Services Continuum

How is operations strategy different from operations management? Short-term Long-term Timescale e.g. capacity decisions Demand Demand 1 – 10 years 1 – 12 months

How is operations strategy different from operations management? Micro Macro Level of analysis Concerned with the macro operation (level of the firm)

How is operations strategy different from operations management? Level of aggregation (Concerned with resources at an aggregated level) Detailed Operations management Aggregated Operations strategy ‘Can we give tax services to the small business market in Antwerp?’ ‘What is overall business advice capability compared with other capabilities?’

How is operations strategy different from operations management? Level of abstraction (Concerned with the conceptual) Concrete Operations management Philosophical Operations strategy ‘How do we improve our purchasing procedures?’ ‘Should we develop strategic alliances with suppliers?’

What is operations strategy about? The sectoral scope of operations strategy Products or services? Manufacturing or non-manufacturing? For profit or not-for-profit? What is operations strategy about?

The role of operations strategy

Hayes and Wheelwright’s Four Stages of Strategy

The importance of operations to business and market needs

The four perspectives on operations strategy – top-down, bottom-up, market requirements and operations resources Top-down Operations strategy should interpret higher level strategy Operations resources Operations strategy should build operations capabilities Market requirements Operations strategy should satisfy the organisation’s markets Operations strategy should learn from day-to-day experiences Bottom-up

Operations strategy must reflect four perspectives – top-down, bottom-up, market requirements, and operations resources Corporate strategy Business strategy Top-down Capacity Quality Supply networks Speed Operations resources Market requirements Process technology Dependability Development and organisation Flexibility Cost Bottom-up Emergent sense of what the strategy should be Operational experience

Top-down and bottom-up perspectives of strategy for the Metrology Company Corporate objectives impact on business objectives which, in turn, influence Operations Strategy Top down Corporate strategy Business strategy Operations strategy Bottom up Day-to-day experience of providing products and services to the market reveals problems and potential solutions which become formalised into Operations Strategy Emergent sense of what the strategy should be Operational experience

Top-down and bottom-up perspectives of strategy for the Metrology Company Operations must have fast and flexible technology, supply relationships, process and staff Modular strategy provides flexibility and innovation at relatively low cost Group building corporate capability in high technology products and services Metrology division competes on ‘fast-to-market’ innovations Experiment with ‘modular’ design of key products and components Customers confused by continual product innovation and costs are increasing Corporate objectives impact on business objectives which, in turn, influence Operations Strategy Bottom up Top down Day-to-day experience of providing products and services to the market reveals problems and potential solutions which become formalised into Operations Strategy

Operations strategy reconciles the requirements of the market with the capabilities of operations resources Strategic reconciliation OPERATIONS STRATEGY Operations resources Market requirements

The critical link between marketing and operations

Operations strategy is the strategic reconciliation of market requirements with operations resources Tangible and intangible resources Operations capabilities Operations processes Operations strategy decision areas Customer needs Market positioning Competitors’ actions Performance objectives Understanding resources and processes Strategic decisions Capacity Supply networks Process technology Development and organisation Required performance Quality Speed Dependability Flexibility Cost Understanding markets

British Sugar Hierarchy of Strategies

The performance measures

Quality Companies (like Bentley or Toyota) have a reputation for quality Products or services. High-quality hotels and restaurants, also luxury services such as high price hairdressers, etc. High conformance is necessary for safety reasons such as in hospital blood testing.

Speed Any accident, emergency or rescue service. Transportation examples where different speeds are reflected in the cost of the service. DHL and Blue Dart Courier service (Rs. 230/- for delivery within Delhi only) as compared to other courier services. Likewise, the fast check-in service offered to business class passengers at airports. And the exceptionally fast service of Concord which used to offer a fast service at a very high price.

Dependability Some of the best examples are those where there is a fixed ‘delivery’ time for the product or service. Theatrical performances, magic shows (P.C. Sircar Sr. and Jr.) are an obvious examples. Or the preparation and delivery of lectures in a classroom. Other examples include space exploration projects which rely on launch dates during a narrow astronomical ‘window’.

Flexibility Example would be a tailor who has to be sufficiently flexible to cope with different shapes and sizes of customers and also (just as importantly) different aesthetic tastes and temperaments. Another example would be the oil exploration engineers who need to be prepared to cope with whatever geological and environmental conditions they find drilling for oil in the most inhospitable parts of the world. Accident and emergency departments in hospitals. Unless they have a broad range of knowledge which allows them to be flexible, they cannot cope with the broad range of conditions presented by their patients.

Cost Examples of low-cost airliners in India, but only some of them survive. 21-day apex fare and other schemes of other airlines, kingfisher reducing the pouch size (or altogether no pouch at all), no toffees on flights, no free liquor in international flights run by American Airlines or Continental Airlines.

The ‘market requirements’ and ‘operations resource’ analysis of the lighting company Resources Equipment Staff Reputation Relationships (internal and external) Experience Capabilities Application of leading edge lighting and sound technology Articulation of client requirements Processes Integration of equipment supply and client requirements Design process Supplier liaison process Customers Professional theatres (static, low margins) Exhibitions (slow growth, low margins) Conferences etc. (fast growth, higher margins Market position Traditionally differentiated on high service level in theatre and exhibition markets, innovation and service in conference market Competitors Big groups dominating professional theatres In-house operations growing in exhibitions market Conference market still fragmented Performance objectives Aesthetically innovative designs Presentation advice High customisation of lighting solutions Fast and dependable supply Operations strategy decisions Location Virtual reality technology Supplier development Equipment racking system Organisational structure Staff meetings

Market-Operations Link: McDonald’s From managing a single part of the organisation (such as, a single McDonald’s store) to managing the operations for the whole of the organisation (for example, what are the key operations strategy decisions for McDonald’s in the whole of Europe?). There is a difference between the two levels of analysis. Especially how the operational day-to-day issues (such as, the way staff are scheduled to work at different times in McDonald’s stores) can affect the more strategic issues for the organisation as a whole (such as, what level of service and costs are McDonald’s franchise holders expected to work to?).

The market perspective analysis of the garment company PERFORMANCE OBJECTIVES MARKET POSITION Differentiation on: CUSTOMERS Segmentation on: Age – youth Purpose – general COMPETITORS Traditionally weak in: Innovative products Time to market Product range Coordinated launches promotion design innovation Dependability Speed of delivery Product mix flexibility Speed to market

The operations resource perspective analysis of the lighting company Resources Tangible: Equipment Staff Intangible: Reputation Relationships (internal and external) Experience Operations strategy decisions Capabilities Location Application of leading-edge lighting and sound technology Virtual reality technology Supplier development Equipment tracking systems Articulation of client requirements Organisational structure Staff meetings Processes Integration of equipment supply and client requirements Design process Supplier liaison process

What you HAVE What you NEED What you WANT What you DO in terms of operations capabilities What you NEED to ‘compete’ in the market Operations resources Market requirements What you WANT from your operations to help you ‘compete’ What you DO to maintain your capabilities and satisfy markets Strategic reconciliation

Operations strategy is ….. ‘… the decisions which shape the long-term capabilities of the company’s operations and their contribution to overall strategy through the on-going reconciliation of market requirements and operations resources …’

Decomposing the ratio profit/total assets to derive the four strategic decision areas of operations strategy Profit Total assets Output = × Output Total assets Capacity Fixed assets Utilisation Working capital Productivity of fixed assets = × Profit Output Revenue Cost Average revenue Average cost = Operations strategy decision areas Capacity Supply network Process technology Development and organisation

Operations strategy decision areas are partly structural and partly infrastructural Capacity Development and organisation Supply network Process technology Structural issues Infrastructural issues

The operations strategy matrix Resource usage Operations strategy Performance objectives Quality Speed Dependability Flexibility Cost Development and organisation Capacity Supply network Process technology Decision areas Market competitiveness

7-Eleven Japan Largest retailer in Japan Sells 15.X as much per store as nearest rival History of cautious expansion and technical and service innovation ‘Field Counsellors’ spread operations knowledge (also distance training) Expansion by territory to reduce distribution costs Early use of TIS (Total Information System) TIS controls stock replenishment by twice a day delivery (sales analysed twice a day) New systems not Internet-based New service includes: Bank terminals Downloading games Downloading music to MD Internet ordering and collection

7-11 JAPAN RESOURCE DEPLOYMENT Market Competitiveness  Pivotal Distribution centre grouping by temperature  Distribution centres and inventory management systems give fast stock replenishment  TIS allows trends to be forecast and supply adjustments made  Common distribution centers give small frequent deliveries from fewer sources Number and type of distribution centres Order and stock replenishment Information sharing and parenting system spreads service ideas  Field counsellors with sales data help stores to minimise waste and increase sales  Franchisee relationships New product/service development Approach to operations improvement QUALITY of products and services Speed and dependability combined to indicate AVAILABILITY TIS gives comprehensive and sophisticated analysis of sales & supply patterns daily  The Total Information System (TIS) Market Competitiveness FLEXIBILITY of response to sales and customer trends COST in terms of minimising… operating cost capital cost working capital Area dominance reduces distribution and advertising costs  Location of stores Size of stores 7-11 JAPAN  Pivotal  Critical  Secondary DEVELOPMENT AND ORGANISATION PROCESS TECHNOLOGY SUPPLY NETWORKS CAPACITY

Specifics of operations strategy

The Hill Framework