1.0 INTRODUCTION
There is an increasing recognition that operations should assist
the firm achieve a competitive position in the market place. Hence, apart from
being a place to make the firm’s products and
services, operations should also
lead to some competitive strength to the business as well. This realization is
being encouraged by increased foreign competition, the need for improved productivity
and increased customer demands for improved quality. Gaining a competitive advantage
through improved operations performance requires a strategic response on the
part of the operations function. The focus of this note is therefore on
operations strategy, which specifies how operations can help implement the
firm’s corporate strategy. Here, you will see how operations strategy links
long and short operations decision.
2.0 OBJECTIVES
By the end of this note, you should be able to:
(i) Define the term strategy, and explain why it is important for competitiveness.
(ii) Explain how to link marketing strategy to operations
strategy, through the use of competitive priorities.
(iii) Provide example of how firms use competitive priorities for competitive
advantage.
(iv) Compare organization strategy and operations strategy and
explain why it is important to link them
3.0 MAIN CONTENT
3.1 Definition of Operations Strategy
Let us start by giving a working definition of operations strategy
as follows:
“Operations strategy is a vision for the operations function
that sets an overall direction or thrust for decision making. This vision
should be integrated with the business strategy and is often, but not always,
reflected in a formed plan. The operations strategy showed result in a
consistent pattern of decision making in operations and a competitive advantage
for the company”(Shroeder, 1993)
There are many definitions of operations strategy in the
literature, and these help to amplify and expand on the above definition. We
will examine three of such definitions: The first, by Shroeder, Anderson, and
Cleveland (1986) define operations strategy as consisting of four components:
Mission, distinctive competence, objectives and policies. These four components
assist us in defining what goals operations should accomplish and how it should
achieve those goals. The resulting strategy should then guide decision making
in all phases of operations. The second definition we shall examine is given by
Hayes and Wheelwright (1984). They define operations strategy as a consistent
pattern in operations decision. The more consistent those decision are, and the
greater the degree to which they support the business strategy, the better.
They go on to define how major decisions in operations should be made and
integrated with each other. While Hayes and Wheelwright emphasize the result of
operations strategy i.e a consistent pattern in decision making, Schroader et
al, emphasize operations strategy as an antecedent to decision making. However,
both agree that a consistent pattern of decision making must be the result. In
our third definition, Skinner (1985) defines operations strategy in term of the
linkage between decision in operations and corporate strategy. He observes that
when operations are out of step with the corporate strategy, operations decisions
are often inconsistent and short range in nature. Consequently, operations are
divorced from the business and the linkage with corporate strategy is weak. To
remedy this unpleasant situation, Skinner recommends the development of an
operations strategy, derived from the corporate strategy, which defines a
primary task (i.e. what operations must do well for the business to succeed),
and a consistent set of operations policies to guide decision making. In
addition to the three definitions just examined, Hill (1989) has also developed
an innovative approach to defining and developing operations strategy. He shows
how to link operations decisions. This is a customer-driven approach to focus
operations on what the customer requires. From this perspective, quality,
process, capacity, inventory and work-force decisions then follow from the
customer requirement. These various approaches we just examined should give us
some insight into what operations strategy is, and how the strategy can be
developed or improved.
3.2 Relationship Between Operations Strategy and Corporate Strategy
Developing a customer driven operations strategy begins with
market analysis, which categorizes the firm’s customers, identifies their needs
and assesses competitors’ strength. You should note that this analysis
accompanies an analysis of the external environment. In the second phase, the
firm formulates its corporate strategy, which constitutes the organization’s
overall goals. After the firm has determined which customers it wants to serve,
it then goes on to develop its competitive priorities, or the capabilities and
strength that the firm must possess to meet customer demand. The competitive
priorities and the future directions the form will take, such as global
strategies, and new products or services, provide input for functional strategies
or the goals and long-term plans of each functional area. By making use of its
strategies planning process, each functional area is responsible for identifying
ways to develop the capabilities it will need to carry out functional strategies
and achieve corporate goals. This input, along with the current status and
capability of each area, is fed back into the corporate strategic planning process
to indicate whether corporate strategy should be modified. (See Figure2.1).Figure
2.1: Priorities: Link Between Corporate Strategy and Functional Area Strategies
Corporate Strategy
In any business organization, it is the responsibility of top
management to plan the organization’s long-term future. In this regard therefore,
corporate strategy defines the businesses that the company will pursue, new
threats and opportunities in the environment, and the growth objectives that it
should achieve. Also addressed, is business strategy, i.e how a firm can differentiate
itself from the competition. The various alternatives could include producing standardized
products instead of customized products or competing on the basis of cost
advantage versus responsive delivery. Thus, corporate strategy provides an overall direction that serves as
the framework for carrying out all the organization’s functions. In the
sections that follow, we shall discuss the basic alternatives involved in
corporate strategy and how global markets affect strategic planning.
3.2.1 Strategic Alternatives As you already know, corporate strategy
defines the direction of the organization over the long term and determines the
goals that must be achieved for the firm to be successful. Corporate strategy
is set by management via three strategic alternatives:
(i) determining the firm’s mission;
(ii) monitoring and adjusting to changes in the environment ; and
(iii) identifying and developing the firm’s core competencies
Let us try to look into these three alternatives more closely:
(a) Determining the firm’s mission
An organization’s mission is the basis of the organization, i.e
the reason for its existence. Note that missions vary from organization to organization,
depending on the nature of their business. It is important that an organization
have a clear and simple mission statement, one which answers several fundamental
questions such as:
What business are we in?
Where should we be ten years from now?
Who are our customers (or clients)?
What are our basic beliefs?
What are the key performance objectives, such as profits, growth
or market share, by which we measure success?
The mission statement should serve to guide formulation of
strategies for the organization, as well as decision making at all levels. In
addition, an understanding of the firm’s mission helps managers generate ideas
and design new products and services. If its mission is too broadly defined,
the firm could enter areas in which it has no expertise. On the other hand, if
the mission is too narrowly defined the firm could miss promising growth opportunities.
Hence, without a clear mission, an organization is unlikely to achieve its true
potential because there is little direction for formulating strategies.
(b) Monitoring and adjusting to change in the Environment
The external business environment in which a firm competes changes
continually for this reason, an organization needs to adapt to those changes. Usually,
adaptation begins with environmental scanning. Environment scanning is the
considering of events and trends that present either threats or opportunities
for the organization. Generally, these include:
Competitor’s activities;
Changing consumer needs;
Legal, economic, political and environmental issues;
The potential for new markets; etc.
Technological changes
Social changes (such as attitudes toward work)
Availability of vital resources and
Collective power of customers or suppliers.
Depending on the nature of an organization and the locations of
its customers, the issues raised above may be looked at on global, national,
regional or local basis. A crucial reason for environmental scanning is to stay
ahead of the competition. For instance, competitors may be gaining an edge by broadening
product lines, improving quality, or lowering costs. In addition, new entrants
into the market or competitors who offer substitutes for the firms product or service
may threaten continued profitability.
(c) Identifying and developing the firm’s core competencies
Core competencies are those special attributes or abilities
possessed by an organization that gives it a competitive edge. They reflect the
collective learning of the organization, especially in how to coordinate
diverse processes and integrate multiple technologies. In effect core
competencies relate to the ways that organizations compete. Competitiveness is
an important factor in determining whether a company prospers, barely gets by,
or fails. Business organizations compete with themselves in a variety of ways.
Key among them are price, quality, product or service differentiation,
flexibility, time to perform certain activities, workforce, facilities, market
and financial know-how and systems, and technology.
(i) Price: Price is the amount a customer must pay for the product
or service.
If all other factors are equal, customers will choose the product or services
that has the lower price. Organizations that compete on price may settle for
lower profit margins. However, they must focus on lowering production costs
(ii) Quality: This refers to materials and workmanship as well as
design. Generally, it relates to the buyer’s perceptions of how well the
product or service will serve its purpose.
(iii) Product differentiation: Product differentiation refers to
any special features (.e.g design, cost, quality, case of use, convenient location,
warrants etc) that cause a product or service to be perceived by the buyers is
more suitable than a competitor’s product or service.
(iv) Flexibility: This is the ability to respond to changes. The
better accompany or department is at responding to changes, the greater
its competitive advantage one another company that is not as responsive. The
changes might relate to increases or decreases in volume demanded, or to
changes in product mix.
(v) Time: This refers to a number of different aspects of an organization’s operations. There
are at least three examples here: one is how quickly a product or service is
delivered to a customer. Two, is how quickly new product or services are
developed and brought to the market. Thirdly, is the rate at which improvements
in products or services are made.
(vi) Workforce: A well-trained and flexible work force is an
advantage that allows organizations to respond to market needs in a timely
fashion. This competency is particularly important in service organization
where the customer comes in direct contact with the employees.
(vii) Facilities: Having well-located facilities – offices,
stores, and plants –isa primary advantage because of the long lead time needed to build
new ones. For instance, expansion into new products or services may be accomplished
quickly. Furthermore, facilities that are flexible and can handle a variety of
products or services at different levels of volume provide a competitive
advantage.
(viii) Market and Financial know-how: An organization that can
easily attract capital from stock sales, market and distribute its
products has a competitive edge.
3.3 Strategies and Tactics
As you are already aware, a mission statement provides a general
direction for an organization and gives rise to organizational goals, which
provide substance to the overall mission. For example, one goal of an organization
may be to capture a certain percentage of market share for a product; another
goal may be to achieve a certain level of profitability. Taken together, the
goals and the mission establish a destination for the organization. Strategies
are plans for achieving goals. If we have already likened goals to destinations,
then, strategies may be seen as road maps for reaching the destination.
Strategies provide focus for decision making. organizations
usually have overall strategies refereed to as organization strategies
(i.e.Corporate Strategies), which relate to the entire organization. They also
have functional strategies, which relate to each of the functional areas of the
organization. Tactics are the methods and actions used to accomplish
strategies.
They are more specific in nature than strategies, and they provide
guidance and direction for carrying out actual operations, which need the most
specific and detailed plans and decision making in an organization. One may
think of tactics as the “how to” part of the process (e.g. how to reach the
destination, following the strategy road map) and operation as the actual
“doing: part of the process. Please note that the overall relationship that
exists from the mission down to actual operations is hierarchical in nature.
This is illustrated in Figure 2.2.Figure 2.2:
3.4 Operations Strategy You have seen that corporate strategy provides the overall
direction for the organization. It is broad in scope, covering the entire organization.
Operations strategy on the other hand is narrower in scope, dealing primarily
with the operations aspect of the organization. It relates to products,
processes, methods, operating resources, quality, costs, lead times and
scheduling. It is often very important to link operations strategy to corporate
strategy, so asto make it truly effective.
This means that the two should not be formulated independently. In
this regard, therefore, formulation of corporate strategy should always
consider the realities of operations’ strengths and weaknesses what is normally
done is to capitalise on strengths and deal squarely with weaknesses. Similarly,
operations strategy must be consistent with the overall strategy of the organization,
and formulated to support the goals of the organization. In conformity with the
principles above, Figure 2.3 shows that operations strategies are derived
directly form the corporate mission and business strategy. Operations strategy
can have a major influence on the competitiveness of an organization.
For instance, if it is well formulated and well executed, there is
a strong possibility that the organization will be successful. Conversely, if
it is poorly designed or excited, the chances are much less that the organization
will be successful.
Figure 2.3: Developing Operations Strategy 
3.4.1 Elements of Operations Strategy
We shall break our discussion on operation strategy under the
following notes: (1) positioning the production system, (2) focus of production
(3) product/service plans, (4) production process and technology plans, (5)
allocation of resources to strategic alternatives, and (6) facility plans:
capacity, location and layout.
Positioning the Production System
Positioning the production system in manufacturing generally means
selecting the type of product design, type of production processing system, and
type of finished – goods inventory policy for each product group in the
business strategy. With regard to product design, there are usually two basic
types: custom and standard. Custom products are designed according to the need
of individual customers. The consequence of choosing this type of product is
that there will be many products, each being produced in small batches. It
should be clear to you that flexibility and on-time delivery are the
competitive priorities needed for this type of product. In case of standard
products, only a few product models are produced, either continuously or in
very large batches. Fast delivery and low production cost are usually needed
for this type of product.
There are also two basic types of production process:
product-focused and process-focused. Product – focused production is also
called line flow production, production lines and assembly lives. Here, both
the machines and workers needed to produce a product are grouped together. This
type of product is appropriate where there are only a few standard products,
each with a high volume. Since such systems are usually difficult and expensive
to change to other product designs and production volumes, they are not very flexible.
Process-focused production is usually best when producing many unique products,
each with a relatively low volume. Each production department ordinarily
performs only one type of process, such as painting. All products that need
such services are then transported to that particular department. Custom
products usually require this form of production because process-focused
systems are relatively easy and inexpensive to change to other products and
volumes, thereby offering great flexibility.
Hence, if a business strategy calls for custom products whose
market strategy requires the competitive priorities of flexibility and on-time
delivery, then process-focused production is usually preferred. Again, there
are two types of finished – goods inventory policies: produce to –stock and
produce to order. In the case of the produce-to-stock policy, products are
produced ahead of time and then placed in inventory. Later, when orders for the
products are received, the products are then shipped immediately from inventory.
For the produce-to-order policy, operations managers usually wait until they
have the customer’s order in hand before they produce the products. With the
proper selection of an appropriate product design, production process and
finished – goods inventory policy for a product, much of the structure required
of a factory may have been established.
3.4.1.2 Focus of Production
Another important element of operations strategy is the plan for
each production facility to be specialized in some way. This idea of the
specialized factory has been labeled “focused factory” by Skinner (1974).
According to him “a factory that focuses on a narrow product mix for a
particular market niche will outperform the conventional plant which attempts a
broader mission. Because its equipment supporting system and procedures can
concentrate on a limited task for one set of customers, its costs and
especially its overheads are likely to be lower than those of the conventional
plant. But, more important, such a plant can become a competitive weapon
because its entire apparatus is focused to accompany the particular
manufacturing task demanded by the company’s overall strategy and marking
objective. How can factories and service facilities become more focused? This
can be done in two major ways: specializing in only a few product models or a
few production processes. Graither (1996) submits that it is desirable for
factories and service facilities to be specialised in some way, so that they
will not be vulnerable to smaller and more specialized competitors that can provide
a particular set of customers with a better set of cost, delivery, quality and customer
service performance. However, this is not to say that smaller facilities are
always better. Actually, economies of scale have to be considered while choosing
the size of production facilities.
3.4.1.3 Product/Service Plans
Plans for new products and services to be designed, developed and introduced
are also an important part of business strategy. Operations strategy is
directly influenced by product/service plans because:(i) As products are
designed, all the detailed characteristics of each product are established;(ii)
Each product characteristics directly affects how the product can be made or
produced; and(iii) How the product is made determines the design of the
production system, which is the heart of operations strategy.
3.4.1.4 Production Process and Technology Plans
Another important part of operations strategy is the determination
of how products will be produced. This entails planning every detail of production
process and facilities. You should note here, that the range of production technologies
available to produce both products and service is great and is continuously
increasing. For instance, combining high-technology production equipment with
conventional equipment, and devising effective overall production schemes are
indeed challenging.
3.4.1.5 Allocation of Resources to Strategic Alternative
Allocation of resources constitutes a common type of strategic
decision to be made by operations managers. For example, almost all companies
today have limited resources available for production. For instance, cash and
capital funds, capacity, research laboratories, workers, engineers, machines,
materials and other resources are scarce in varying degrees to each firm.
Shortages of these resources generally have serious impacts on production
systems. These resources must be divided among, or allocated to product,
business notes, projects, or profit opportunities in ways that maximize the
achievement of the objectives of operations.
3.4.1.6 Facility Plans: Capacity, Location and Layout
Another critical part of setting operations strategy is how to
provide the long range production capacity to produce the products/services for
a firm. Huge capital investment is required to make production capacity
available. For instance, land and production equipment may need to be bought, and
specialized production technologies may have to be developed. In addition, new
production equipment may need to be made or purchased and installed, and new
factories may need to be located and built. It is obvious that the decisions
involved here have long-lasting effects and are subject to great risk. For
example, if poor decisions are made or if circumstances change after the
company has commuted to a choice of alternatives, it has to live with the
results of such decision for quite sometime. Relevant decisions in these areas
are therefore treated under long-range planning and Facility Location.
Market Analysis
One important key to success in formulating a customer-driven operations
strategy is understanding what the customer wants and how to provide it better
than the competitor does. This clearly means that the market must be analyzed.
Market analysis first divides the firm’s customers into market segments and then
identifies the need of each segment. In the sections that follow, we shall
define and discuss the concept of market segmentation and needs assessment.
3.4.1.1 Market Segmentation.
This is the process of identifying groups of customers with similar
characteristics to warrant the design and provision of products or services that
the larger group wants and needs. In general, in order to identify market
segments, the analyst must determine the characteristics that clearly differentiate
each segment. After this, a sound marketing programme can be devised and an
effective operating system developed to support the marketing plan. Having
identified a market segment, the firm can then incorporate the needs of
customers into the design of the product or service as well as the operations
systems for its production. The following characteristics are among those that can
be used to determine market segments:
(i) Demographic factors: age, income, educational level,
occupation and geographical locations are examples of factors that can differentiate
markets.
(ii) Psychological factors: factors such as pleasure, fear, innovativeness,
and boredom can be said to segment markets. For example, people with fear of
crime constitute a market segment that has led to the creation of new products
and services for protection.
(iii) Industry factors: Customers may make use of specific technologies
(e.g. electronics, robotics, or microwave telecommunications), use certain
materials (e.g. rubber, oil or wool) or participate in a particular industry
(e.g. banking health, care or automotive). These factors are used for market
segmentation when the firm’s customers use its goods or services to produce
other goods or services for sale.
3.4.3 Needs Assessment
The second step in market analysis is to make a needs assessment. Needs
assessment seeks to identify the needs of each segment, and assess how well
competitors are addressing those needs. One important advantage of the needs
assessment is that it allows the firm to differentiate itself from its competitors.
Usually, the needs assessment include both the tangible and the intangible
product attributes and features a customer desires. The attributes and features
are commonly referred to as the customer benefit package, and they consist of a
core product or service and a set of peripheral products or services. Note that
the customer often views the customer benefit package as a whole. For example,
when you buy a personal computer (PC), the core product is the PC itself i.e.
its features and qualities.
However, the peripheral services offered by the dealer play an
important role in your decision to purchase the PC. These include the manner in
which you are treated by the sales person, the availability of credit facility,
and the quality of after-sales services at the dealership. Hence, the customer
benefit package is the PC together with the services provided by the
dealership. Generally, customers will not be completely satisfied unless they
receive the entire customer benefit package. By understanding the customer
benefit package for a market segment, management is able to identify ways of
gaining competitive advantage in the market. Each market segment has market
needs that can be related to product/service process or demand attributes.
Market needs has been grouped as follows:
(a) Product/Service needs i.e. attributes of the product or
service, such as price, quality and degree of customization desired.
(b) Delivery system needs i.e. attributes of the process and the
supporting systems and resources needed to deliver the product or service, such
as availability, convenience, courtesy, safety, delivery speed and delivery dependability
(c) Volume needs i.e attributes of the demand for the product or
service, such as high or low volume, degree of variability in volume and degree
of predictability in volume.
(d) Other need i.e other attributes not directly relating to
operations, such as reputation and number of years in business, technical after
sales support, accurate and reliable billing and accounting systems, ability to
invest in international financial markets, competent legal services and product/services
design capability.
4.0 CONCLUSION
This note has taken you through operations strategy, which is
embodied in the long-range production plan. This plan specifies positioning
strategies, focus of production, product and production process and technology
plans, allocation of resources to strategic alternatives, and facility
planning. Once these issues have been decided and set in place, the fundamental
structure of the operations function is established.
5.0 SUMMARY
Strategies are the basic approaches used by an organization to
achieve its goals. Strategies provide focus for planning and decision making. Organizations
typically have overall strategies that pertain to the entire organization, and strategies
for each of the functional areas. Functional strategies are narrower in scope
and should be linked to overall strategy.
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