Chapter 1 - An introduction to operations strategy

Operations strategy is the total pattern of decisions that shape the long-term capabilities of any kind of operation and their
contribution to overall strategy, through the ongoing reconciliation of market requirements and operation resources.

Key questions:

1. Why are operations excellence fundamental to strategic success?

‘Operations’ is the activity of managing the resources and processes that produce and deliver goods and services. All operations
transform resource inputs into outputs of products and services and can be analyzed at three levels: that of the business itself;
as part of a greater network of operations; and at the level of individual processes within the operation. Operations management
contributes to the success of any organization by reducing costs and increasing revenue by reducing capital empowering the
basis for future innovation.

Because all parts of the business and all functions of the business are, in a sense, operations, the part of an organization that
creates and/or delivers its products and services. Every organization tries to add value by producing a mix of products and
services for external or internal customers. It does so by transforming inputs into outputs that satisfy customers’ needs. This idea
is called the ‘input-transformation-output’ model of operations. The arrangement of transforming resources and the way in which
transformed resources move through them are called ‘processes’ (see Figure 1.2). So, operations managers are responsible for
managing two interacting sets of issues:

i. Resources – what type of materials, information, people (as customers or staff), technology, buildings, and so on, are
appropriate to fulfill the organization’s objectives.
ii. Processes – how resources are organized to best create the required mix of products and services.

or answer whether we have the right resources and whether we using them appropriately.

Figure 1.2 illustrates ‘processes’ within a transformation system as a network of transforming resources. Networks can describe
many different types of operations activity at various levels of analysis. At each level of analysis, operations managers must
understand the capabilities of the resources that form each element of their network, and how effectively they are linked together
as networks.
This idea is illustrated in Figure 1.3, which shows three levels of analysis:

i. The level of the process (a network of individual units of resource),

ii. The level of the ‘operation’ (a network of processes), and
iii. The level of the supply network (a network of operations)

All operations and processes differ in some way and so will need to be managed differently. Four characteristics of demand,
sometimes called the ‘Four Vs’, have a significant effect on how processes need to be managed:

i. Volume – A high volume of output means a high degree of repeatability, making a high degree of specialization both
feasible and economic.
ii. Variety – Producing a high variety of products and services must involve a wide range of different activities, changing
relatively frequently between each activity.
iii. Variation – Processes are generally easier to manage when they only need to cope with predictably constant demand.
iv. Visibility – Process visibility is a slightly more difficult concept to envisage. Generally, processes that act directly on
customers (i.e., healthcare processes) will have higher visibility than those that act on materials and information.

The Four Vs act as a link between the strategic and operational aspects of operations management. The most obvious implication
of an operation’s positioning on the Four Vs is on processing costs. Figure 1.4 illustrates the shift in emphasis from branch to
online banking in terms of the 4Vs.

2. What is operations strategy and how is it different from operations management?

Strategic decisions are those that set broad objectives that direct an enterprise towards its overall goal, plan the path that will
achieve these goals, stress long-term rather than short-term objectives, deal with the total picture rather than with individual
activities, and are often seen as above or detached from routine day-to-day activities. However, it is not easy to characterize
strategy or strategic decisions. Some organizations make no explicit strategic decisions, as such. Rather, they develop over time,
often with strategies that ‘emerge’ from their ongoing experience of doing business. Furthermore, the strategy that is espoused
by an organization may not always be reflected in what it does. Therefore, the strategy is often taken to be the ‘pattern of decisions’
that indicate the company’s overall path.
Operations strategy is the total pattern of decisions that shape the long-term capabilities of any kind of operation and their
contribution to overall strategy, through the ongoing reconciliation of market requirements and operation resources. All
businesses have markets, and all businesses own or deploy resources; therefore, all businesses are concerned with the
reconciliation of markets and resources.

Operations strategy is an ‘enterprise-level’ issue for:

i. Setting broad objectives that direct an enterprise towards its overall goal;
ii. Planning the path (in general rather than specific terms) that will achieve these goals;
iii. Stressing long-term rather than short-term objectives;
iv. Dealing with the total picture rather than stressing individual activities;
v. Being detached from, and above, the confusion and distractions of day-to-day activities.

Operations strategy differs from operations management as it is a strategic perspective on how operations resources and
processes are managed:

o Operations strategy is long-term, while operations management is largely concerned with short-to-medium timescales
o Operations strategy is concerned with a higher level of analysis (a wider set of the organization’s resources and the
supply network of which they are a part), while operations management is largely concerned with managing resources
within and between smaller operations (departments, work units, etc.)
o Operations strategy involves a greater level of aggregation, while operations management is concerned with the details
of how products and services are produced.
o Operations strategy uses a higher level of abstraction, while operations management is concerned largely with what is
immediately recognizable and tangible.

The four perspectives of operation strategy:

i. Operation strategy is a ‘top-down’ reflection of what the whole group or business wants to do.
ii. Operations strategy involves translating ‘market requirements’ into operations decisions (the outside-in perspective).
iii. Operations strategy is a ‘bottom-up’ activity where operations improvements cumulatively build strategy.
iv. Operations strategy involves exploiting the capabilities of ‘operations resources’ in chosen markets (the inside-out
perspective).

3. How should operations strategy reflect overall strategy (top-down)?

An operations strategy will be one of several functional strategies that are governed by the decisions that set the overall strategic
direction of the organization. This is called the ‘top-down’ approach. So, a corporate strategy should be reflected in the strategies
of each business unit, which should, in turn, inform the strategy of each business function.
4. How do the requirements of the market influence operations strategy (outside-in)?

Two important elements within markets are customers and competitors. The concept of market segmentation is used to identify
target markets that have a clear set of requirements and where a company can differentiate itself from current, or potential,
competitors. Based on this, the company takes up a market position. This market position can be characterized in terms of how
the company wishes to compete for customers’ business. By grouping competitive factors into clusters under the heading of
generic performance objectives (quality, speed, dependability, flexibility, and cost), market requirements are translated into a
form useful for the development of the operation.

5. How can operations strategy learn from operational experience (bottom-up)?

An alternative view to the top-down perspective (one that is based on observing how strategy happens in practice) is the bottom-
up perspective, which stresses how strategic ideas emerge over time from actual experiences. Companies adopt strategies partly
because of their ongoing experience, sometimes with no high-level decision-making involved. The idea of the strategy being
shaped by experience over time is also called the concept of emergent strategies. Shaping strategy from the bottom up requires
an ability to learn from experience and a philosophy of continual and incremental improvement.

6. How can the intrinsic capabilities of an operation’s resources influence operations strategy (inside-out)?

Over time, an operation may acquire distinctive capabilities, or competencies, based on its resources and the accumulation of its
experiences. These capabilities may be embedded within a company’s intangible resources and its operating ‘routines’. So, they
are concerned about both what the operation has and what it does. Operations shape these capabilities (consciously or
unconsciously) through the way it makes a whole series of decisions over time. These decisions can be grouped under the
headings of capacity, supply network, process technology, and development and organization.

7. What is the difference between the ‘content’ and the ‘process’ of operations strategy?

The ‘content’ of an operations strategy is the building block from which any operations strategy will be formed. This includes the
definition attached to individual performance objectives, together with the prioritization of those performance objectives. It also
includes an understanding of the structure and options available in the four decision areas of capacity, supply networks, process
technology and development, and organization. Performance objectives and decision areas interact in a way that can be
described by the operations strategy matrix. When devising an operations strategy, it is important to ensure that, in terms of the
matrix, the strategy is comprehensive (all obvious aspects are at least considered) and has the critical intersections identified.

The ‘process’ of operations strategy is the procedures that are, or can be, used to formulate operations strategy. It determines
how an operation pursues the reconciliation between its market requirements and operations resources in practice. The practical
reality of putting operations strategies together and making them happen in practice is complex, but, at a simple level, has four
stages: formulation, implementation, monitoring, and control. The success of an effective operations strategy process is also
closely linked to the style and skills of the leaders who do it.

8. How are operations strategy decisions made?

Some of the approaches to making operations strategy decisions are qualitative in that they specify the types of factors to take
into consideration when making decisions on non-quantified terms. Others are quantitative, involving the manipulation of
numerical data. But, almost all approaches to strategic decision-making assume that decision-makers are rational. Yet, a school
of thought called ‘behavioral operations’ has questioned this. Other approaches to helping to make operations strategy decisions
include the operations strategy matrix, decision-making under uncertainty, and operations strategy mapping.