Chapter 2: Operations Strategy and Productivity

Business Strategy

‘Strategy’ could be defined as long term decisions that shape the direction of the organizations. However, the term ‘operations’ used in ‘operations strategy’ is thought as operational at first glance, it is not the same as ‘operational’. Since operations mean the resources used in creating the products and/ or services, it has a strategic role (Slack, Chambers, & Johnston, 2013, p. 70). Business strategy is based on the strategic decisions of managers who are responsible for considering many factors. These decisions include (1) defining a mission, (2) making environmental scanning, and (3) identifying and developing the company’s core competencies which are also called as the company’s strength.

Misson

A company’s mission is the reason or purpose of its existence. Mission statement basically has to answer three questions which draw the boundaries and focus of the organization (Stevenson, 2014, p.47; Reid and Sanders, 2012, p.32). These questions are:

1. What will be the business of the company? (“selling smartphones”, “producing goods” etc.)
2. Who are the consumers and what are their known habits for buying? (“graduates”, “undergraduates” etc.)
3. How will the company contribute to the business? (“by providing the highest customer service” etc.)

Environmental Scanning

The second vital factor for business strategy is environmental scanning. Environmental scanning could be defined as the process of monitoring the environment in which the company operates (Reid & Sanders, 2012, p.33). External environment includes economic trends, technological changes, and political and social changes (Krajewski, Ritzman & Malhotra, 2015, p.29; Reid & Sanders, 2012, p. 34). To remain competitive companies have to be ready to update their business strategy in the light of environmental scanning, because it allows them to identify the opportunities and threats. If there is a gap between the needs of the customers and the offers of our competitors, this gap will be an opportunity for our company and we can change our business plan accordingly. In today’s highly competitive environment, it is obvious that just because a company is the leader of its industry does not mean it will continue to be a leader in the future (Reid & Sanders, 2012, p. 33). To have and/or maintain their competitiveness, companies must consider the changing trends and patterns in the environment.

Core Competencies

The third important factor in business strategy is the understanding of the company’s strengths (Reid & Sanders, 2012, p. 35). In order to define a long- term plan, good managerial skills are not enough; companies also need to take the advantage of what they do well when compared with their competitors. That is called the organization’s core competencies, in other words, unique strengths of organizations (Krajewski, Ritzman, & Malhotra, 2015, p.30) Core competencies include workers, facilities, market and financial know-how and systems and technology.

SWOT

In order to formulate an effective strategy, companies need to make a situational analysis that examines the internal and external environment of the company. They must consider all the factors that could have either positive or negative impacts. Forexample, they have to question what the competitors are doing, or planning to do, and how they could respond to these plans with their strengths and weaknesses. This approach is called ‘the SWOT approach’ which is the acronym of strengths, weaknesses, opportunities, and threats (Stevenson, 2014, p. 47).

Operations Strategy and The Relationship Between Operations Strategy and Business Strategy

Business strategy provides a broad scope for the entire organization which provides an overall direction for the organization. Operations strategy has a narrow scope since it relates primarily to the operations of an organization (Stevenson, 2014, p.51). Once a business strategy has been developed, an operations strategy must be formulated. Operations strategy could be defined as a plan that is designed for operations function that supports the business strategy (Reid & Sanders, 2012, p.31). The term ‘operations strategy’ sounds at first like ‘operational’ which emphasize day-to-day activities while ‘strategy’ is usually regarded as the opposite of daily routine activities. But operations is not the same as ‘operational’, operations have a strategic role (Slack, Chambers, & Johnston, 2013, p.70). Operations strategy deals with products, processes, methods, resources, quality, cost, lead time and scheduling (Stevenson, 2014, p. 51).

The Role of Operations Strategy in the Organizations

Operational efficiency could be defined as performing operations well when compared to the competitors. But a strategy is a plan for competing in the market. Operational efficiency and strategy must be linked; otherwise the company could be very efficient but perform the wrong task. Operations strategy assures that all the tasks performed by the operations function are the right tasks.

The Relationship Between Operations Strategy and Business Strategy

In practice, many of the companies consider that the operations strategy will improve their operations performance over time. In order to do this, companies should change their position where they contribute very little to competitiveness of the business to the point where they are directly responsible for the competitiveness of the company. This change could be defined as changing the master skills to first ‘implement’, than ‘support’, and then ‘drive’ the operations strategy.

Implementing Business Strategy

The main and the basic role of operations function is to implement the business strategy. You know there is a strategy, but you cannot touch it and you cannot even see it; all you can see is how the operation behaves in practice. For instance, just think an insurance company whose business strategy is moving to an entirely online service; the operations function of this company will have to support the design of all the processes which allow customers to access online information, issue quotations, request further information, check credit details. Send out documentation etc. If the implementation process is inefficient; even the most original and brilliant strategy will be failed and totally ineffective.

Supporting Business Strategy

Supporting strategy allows the organization to improve and achieve its strategic goals by developing their capabilities. For example, if a mobile phone manufacturer aims to be the first in the market with new product innovations, it needs to improve the capability of coping with instant innovation. To provide novelty, the organization must develop flexible processes, hire workers who understand new technologies, and improve supplier relations in order to supply new parts to the customers as quickly as possible.

Driving Business Strategy

The third and the most difficult strategy is driving business strategy. In this strategy, the role of operations is to drive strategy by giving it a unique and long-term advantage. For example, if a specialist food service company supplies restaurants frozen fish and fish products, it has to build up close relations with the customers and suppliers around the world. Besides, it has a small factory in which it develops and produces exciting new products. In this case, the success of the company is derived from its unique operations capabilities and it means the operations drive the business strategy (Slack, Chambers, & Johnston, 2013, pp. 70-71).

The Contribution of Operations to Business Strategy: Hayes and Wheelwright’s Four Stages of Contribution

Harvard university professors Hayes and Wheelwright proposed a four stage model for evaluating the role and the contribution of the operations to business strategy

• Stage 1: Internal Neutrality: In this stage, the contribution of operations function is at the poorest level. The contribution of operations function to competitive success is very little or it is holding the company back from competing well. It is inward-looking which means the main goal in this stage is being internally neutral. It only attempts to improve competitiveness by ‘avoiding making mistakes’.
• Stage 2: External Neutrality: In this stage, the operations function begins comparing itself with similar organizations in the outside market. Therefore it is called as ‘external neutrality’. By comparing itself against its competitors’ performance, operations function tries to implement best practice.
• Stage 3: Internally Supportive: However the operations are of the best among the others in the market in Stage 3, they are not the very best. Stage 3 operations are trying to use a clear view of the organization’s competitive and strategic goals, and develop appropriate operations resources.
• Stage 4: Externally Supportive: In stage 4, operations are seen as the source of the company’s competitive success. Operations look to the long term, they forecast the changes in the market and supply, and based upon these future conditions they develop operations-based capabilities. Hayes and Wheelwright are calling this stage as ‘externally supportive’ because the operations are innovative, creative and proactive, and driving the company’s position one step ahead of its competitors (Slack, Chambers, & Johnston, 2013, p. 71-72.)

Perspectives on Operations Strategy

Different authors proposed different perspectives on operations strategy. Between them four perspectives emerge: top-down perspective, bottom-up perspective, market requirements perspective, and operations resources perspective.

Top-down Perspective

For a multi-business organization, the top-down perspective advocates that operations strategy is linked to corporate strategy via the business strategy of each business unit (Barnes, 2008, p. 32). Based upon the topdown perspective, operations strategy need to consider what part each function should play in contributing to the strategic objectives of the business (Slack, Chambers, & Johnston, 2013, p.73).

‘Bottom-up’ Perspective

In the ‘bottom-up’ perspective, the organization learns from its experiences, develop and enhance its operational capabilities (Barnes, 2008, p.32). The organization may also incorporate the ideas which come from Daily operations (Slack, Chambers, & Johnston, 2013, p. 74).

Market Requirements Perspective

In this perspective, operations strategy is developed for responding to the market requirements in which the organization operates. Understanding the market requirements makes it possible to achieve the right priority between the operational performance objectives such as cost, quality, time, flexibility. These objectives are defined as competitive factors or competitive priorities (Slack, Chambers, & Johnston, 2013, p. 77).

The Operations Resources Perspective

In this perspective operations strategy fits with the resource-based view (RBV) of the organization and it is in line with Stage 4: externally supportive (Barnes, 2008 p. 33). In RBV, it is believed that firms with an ‘above average’ performance gain competitive advantage from their resources. In other words, the operations resources are effective on the organization’s strategic success so understanding the importance of developing the capabilities of operations resources will be an important perspective on operations strategy (Slack, Chambers, & Johnston, 2013, p. 82).

Developing an Effective Operations Strategy

Skinner (1969) identified four main competitive priorities. These are cost, quality, delivery, and flexibility.

1. Cost: It is important to rate that low cost does not mean high profit and it does not imply low quality. In this type of competition, the operations function must focus on cutting costs such as labor costs, material costs, facilities costs, etc. Also, companies that compete on cost must carefully eliminate the waste in the system. They have to train their employees in order to maximize their productivity and minimize waste.
2. Quality: As a precondition of competitiveness in global markets, quality can be generally defined as satisfying the requirements of the customers with the launched product, conformance to specifications and being free of error
3. Time: The ability to provide high-quality products in a short time as possible. Time is one of the most important competitive priorities today since today’s customers can’t wait. In this type of competition all-time related issues have to be satisfied such as rapid- delivery and on-time delivery. Rapid delivery refers to how quickly an order is received, and on time delivery refers to how often deliveries are made on time. Speed, another time related to competitive priority is the time needed to take an idea to the marketplace. Speed is an important priority for information technology.
4. Flexibility: Flexibility is defined as adapting to the changes occurred in the preferences of the customers easily and quickly (AmoakoGyompah, 2003). There are two dimensions of flexibility. One is product flexibility which is defined as the ability to offer a wide variety of goods or services and customization of them to the requirements of the customers. Another one is called volume flexibility which means the ability to change the amount of production according to demand changes.

Productivity

As a basic measure, productivity is used in evaluating economies, industries, firms and processes. If a company wants to improve its processes and supply chain in order to compete against their competitors, operations managers have to consider improving the productivity (Krajewski, Ritzman, & Malhotra, 2015, p.36). roductive companies are using their resources effectively (Stevenson, 2014, p.56). Productivity is measured by a ratio of outputs (goods and services) divided by the inputs (labor, materials energy, capital, etc.) (Heizer, Render & Munson, 2017, p. 51; Stevenson, 2014, p. 56). It is usually expressed as the ratio: Productivity=Output/Input

Productivity Measurement

Productivity measures can be based on a single input (partial productivity) , more than one input (multifactor productivity), or on all inputs (total productivity) (Stevenson, 2014, p. 57).

Total Productivity = Output/Input

Total Productivity: The ratio of output to all inputs.

Partial Productivity: The ratio of output to only one input.

Multifactor Productivity: The ratio of output to several, but not all, inputs.