Operations Strategy Study Guide

Operations Strategy – Student Study Guide

CHAPTERS 13, 14 and 15

OPERATIONS STRATEGY AND “FIT”; OPERATIONS STRATEGY AND “SUSTAINABILITY”; OPERATIONS STRATEGY AND “RISK”

Introduction

There is a paradox in trying to study the process of operations strategy formulation. On one hand it is probably the most practical topic of direct concern to every company’s operations strategy. After all, if a company is to have an operations strategy (formal or informal), it must have put it together (formally or informally) in some way or other. On the other hand, every company is different. Each is faced with a different set of market issues and a different set of resource capabilities and the process is managed by managers with a different set of experiences. So, in spite of it being a very practical subject, it is difficult to be prescriptive on how an operations strategy should be put together. Of course, this does not stop many people attempting to prescribe various methods of operations strategy formulation. Indeed a couple of these approaches are described in Chapter 13. There is nothing wrong with these prescriptions unless managers imagine that they can simply “turn the handle” of the method and a strategy will “drop out” the other end of the process. It doesn’t work like that. Operations strategies are nebulous and dynamic entities, subject to constant debate, power politics and change. There is no right answer. Sorry, but there it is. However, this does not mean that all is lost. The approach taken in these final three chapters of the book is that there is plenty to consider, plenty to analyze and plenty to try and do in order to make the operations function a real strategic asset for the business.

Key points

·  Back in Chapter 2 a distinction was drawn between operations strategy content and operations strategy process. Put simply:

·  Operations strategy content is the set of decisions that a company makes (explicitly or implicitly) which shape its operations strategy. In other words, “what shall we do?”.

·  Operations strategy process is the method or approach they take to making these content decisions. In other words, “how shall we decide what we do?”.

·  Although the idea of operations strategy process is somewhat loose, it can be treated at three levels.

·  Fit – achieving alignment between what the market wants and what the operations resources and processes are capable of giving.

·  Sustainability – achieving fit over time, either to maintain the levels of market requirements and operations capability at the same level, or to achieve fit between the two at a higher level.

·  Risk – coping with the uncertainties and their consequences as the operation attempts to achieve alignment over time.

·  There has always been argument as to whether it is worth formally formulating strategies. Although over-rationalistic approaches to strategy formulation have been largely discredited, it is still accepted by many that some elements of rational planning can help organizations to cope with their business environment. Generally, the advantages of brining some formality to the strategy process are as follows:

·  It provides a much needed discipline.

·  It enforces communications about goals and resource allocation.

·  It stimulates longer-term analyses.

·  It generates a basis for evaluating and integrating shorter term plans.

·  It makes managers focus on the long-term.

·  It creates a repository of strategically relevant information.

Fit

·  Of the three levels of analysis in operations strategy formulation, this is by far the most frequently discussed. In fact to many authorities operations strategy process is all about fit.

·  It is a simple but fundamental concept, namely that the market position of a company must be aligned with its operations capabilities.

·  In a practical sense, this could mean one of two approaches. First, that we should understand what the market wants and then develop operations resources to supply this. Second, that we must understand what operations resources and processes are particularly good at (their capabilities) and find a market that values this.

·  Although there is some evidence that long-term competitive benefit can be associated with unique operations capabilities rather than clever market positioning, from a practical perspective most organizations would go with the first approach. Namely that we must start by understanding the market and then (over time) develop operations capabilities to match the market. There are good reasons for this, all companies have markets, but not all companies have operations capabilities worth exploiting.

·  Nevertheless, do not dismiss the resource-led approach to devising operations strategies. There is a strong argument that innovative and profitable differentiation in any market is best achieved through developing unique and difficult to imitate operations capabilities. In other words, there is a limit to where marketing can take you, beyond that limit you need to be really good at operations.

·  The example of Volvo’s operations strategy since the 1970s is a good example of how most organizations achieve fit in response to external pressures. Note that only some of these pressures come directly from the market for its products. Certainly, issues of cost and quality became more important during the 1980s, which was why Volvo changed its operations stance, however social issues also played their part.

·  The chapter uses the operations strategy to identify how fit can be described at four levels (it also uses an alliterative approach so it is often called the “four Cs of operations strategy”).

·  To achieve fit you have to be comprehensive in exploring operation strategy.

·  To achieve fit you have to have internal coherence between the different decision areas.

·  To achieve fit operations strategy decision must correspond to the priority of each performance objective.

·  To achieve fit the particularly critical intersections must be identified.

·  To particular formulation models of fit are presented; the Hill framework and the Platts Gregory procedure. Do not think these are the only two. In fact there are hundreds of different published methodologies, many academics and all consultancy companies tend to have their own.

Sustainability

·  Sustainability is “achieving fit over time”.

·  We can think about this in two ways. Either sustainability means being able to maintain the same balance between operations resource capabilities and market requirements over time, no matter what happens in the environment or within the company. Alternatively, one can see sustainability as maintaining fit while actively changing (presumably improving) the balance between resource capability and market requirements.

·  The example of the CAG Recycling Services used in Chapter 14 is an illustration of how both the operations strategy matrix and the “line of fit” model can be used to describe sustainability (as it happens, of the second type where the objective is to move up the line of fit).

·  When reading this example remember that the “line of fit” model is notional in the sense that neither of the axes are calibrated. Nevertheless, it provides a useful articulation of the company’s history.

·  Remember also what the theory box calls the “Red Queen” effect. Even in the first meaning of sustainability (maintaining the same balance between operations capability and market requirements) can involve significant operations strategy effort. As the Red Queen said, “It takes all the running you can do to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that”.

·  Moving up the line of fit inevitably implies that an organization must learn how to cope with tougher market conditions and/or learn to achieve higher levels of resource capability. The key word here is learn. This is why the discussion on single loop and double loop learning is important.

·  Operationalizing these ideas often involves significantly rethinking the way an operation organizes itself. The box on St. Luke’s, the advertising agency, is a good example of this.

Risk

·  Frankly, it is unusual for any treatment of operations strategy to include this topic. Yet we believe it is particularly important. Operations strategy means making long term and often fundamental changes. Not necessarily all at once, even a continual stream of small decisions to “do nothing” is fundamental in the sense that it dictates the organization’s position with its environment. And such fundamental decisions invariably carry risks. Again, even the decision to “do nothing” carries the risk that a failure to change will leave a company vulnerable.

·  The chapter chooses to use the “line of fit” model to describe risk. Using this model, risk is any significant deviation from the line of fit.

·  Again, the operations strategy matrix can be used to classify risks (and realized risks, in other words failure). Just as most companies have particularly important or critical intersections on their operations strategy matrix, failure and risk can be associated with a number of critical intersections.

·  It is important to distinguish between pure and speculative risk. Pure risks involve events that can produce only loss to the company, while speculative risks relate to events that could hold potential for loss or gain. Usually, the consequences of pure risk (such as disasters) are on the front pages of newspapers, while the consequences of speculative risk (a business decision going wrong) are in the business pages.

·  A useful way of thinking about risk management and control is to distinguish between,

·  prevention – stopping something happening;

·  mitigation – reducing the consequences when something happens;

·  recovery – changing the perceptions of something going wrong.

Hints on answering the Focused Bank case exercise

·  This case describes the process of operations strategy formulation and implementation with the primary focus of achieving fit. However, it also inevitably addresses some issues of sustainability and risk.

·  Think about how the corporate service offering is different from the products the company has been producing previously.

·  What do you think are the advantages and disadvantages of the corporate service offering?

·  Think about how the Focused Bank could take the next step in developing their corporate business.

·  What do you think are the critical intersections on the company’s operations strategy matrix?

Hints on answering the Clever Consulting case exercise

·  This case describes a professional service company which does not have large scale investment in capacity, process technology, supply networks and so on. This allows us to focus directly on the process of operations strategy.

·  Think about the history of the company and try and sketch it on the “line of fit” model. In doing so, consider why, at various points in its history, the company was either off the line of fit or on it.

·  What do you think are the options facing the company?

·  Try listing out the advantages and disadvantages (including the risks) of adopting each of these options.

·  Consider what is different about professional service firms like this from other types of operation.

Hints on answering the Saunders Industrial Services case exercise

·  This example describes the formulation and implementation of an operations strategy, with the primary focus on the risks associated with the process. It concerns a traditional, low volume manufacturing firm that has been operating for many years. It now faces change competitive circumstances and is under pressure to diversify. It decided to embark on a new era of high volume manufacturing.

·  In terms of what could, or has, gone wrong with the company consider the causative events. You can do this in one of two ways;

·  use the classification of human, organizational and technological variables (the HOT variables).

·  use the generic decision area categories that underpin the operations strategy matrix (capacity, supply network, process technology and development and organization).

·  Use the “line of fit” model to sketch out what happened at this company.

·  Think about how the concepts of control and coupling (described in Chapter 15) relate to this case.

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