Operations Management: A supply chain approach

Dr. Patricia Deflorin

University of Zurich Institute of Strategy and Business Economics Services and Operationsmanagement

Overview

1. 2.

Operation Strategy: Origins and New Directions Part 2 Determining Organizational Boundaries: Vertical Integration and Outsourcing

3. 4. 5.

Designing and Managing Operating Networks Creating an Edge through New Process Development Sharpening the Edge: Driving Operations Improvement

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Summary

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3.4. Key decisions in operations strategy implementation

Implementing operations strategy needs adaptation in various dimensions:

Structural decisions Capacity Sourcing and vertical integration Facilities Information and process technology

Infrastructural policies and systems Resource allocation and capital budgeting systems Human Resource systems Work planning and control systems Quality systems Measurement and reward systems Product and process development systems Organization

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3.4. Key decisions in operations strategy implementation

Structural Decisions (1/2) Capacity For example, the amount of capacity depends on whether it is operated one shift a day, five days a week or around the clock. Sourcing and vertical integration Some companies choose to be more vertically integrated while others prefer to purchase most of their needs to limit their capital investment and amount of internal processing.

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3.4. Key decisions in operations strategy implementation

Structural Decisions (2/2) Facilities One must decide how total operating capacity is to be broken up into individual operating units. Such decisions often are less pertinent for services that require a high degree of direct interaction with customers, since that kind of capacity cannot be stored or transported. Information and Process Technology Concerns the selection of information and process technologies. Such decisions require choices among different types of equipment and should specify how this equipment is to be located, connected together, and coordinated.

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3.4. Key decisions in operations strategy implementation

Instrumental Decisions (1/4) Is composed of policies and systems governing a number of activities, from capital budgeting and equipment selection to organizational structure. Organizational design is also highly dependent on vertical integration decisions, as well on decisions regarding how various facilities are located, specialized, and interconnected.

A companys infrastructure is at least as critical to its success but the impact of infrastructural choices is often underestimated. The majority of the performance differences should be attributed to differences in policies, procedures, and systems.

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3.4. Key decisions in operations strategy implementation

Instrumental Decisions (2/4) The choices made for each different types of decisions have varying effects on a companys operation costs, quality, dependability flexibility, speed/ responsiveness, and new product capabilities. Companies that continually adjust their production rates so as to chase demand, dent to have higher production costs and less consistent quality. Companies that try to maintain a level rate of production and absorb demand fluctuations through inventories.

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3.4. Key decisions in operations strategy implementation

Instrumental Decisions (3/4) The structural and infrastructural decisions made by many companies tend to exhibit consistent patterns. Therefore structural and infrastructural decisions must fit to create a desired set of specific capabilities. However, achieving this fit between strategy, structure and infrastructure in a organization is much more difficult and complex than designing a product.

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3.4. Key decisions in operations strategy implementation

Instrumental Decisions (4/4) Structural and infrastructural decisions are usually made at different points in time by different groups of people who often are physically separated and may seldom interact in the normal course of business. Therefore, the companys competitive priorities and operations strategy need to be clearly communicated to all these groups And their structural and infrastructural decisions monitored for consistency. Otherwise, unintended drifting may occur.

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3.4. Key decisions in operations strategy implementation

Focus: Fit in the Small (1/6) As a company must choose, train and manage a sales force differently if its primary task is to sell expensive capital equipment or inexpensive disposables to consumers, a single operations organization is unlikely to be equally effective for business that compete in markedly different ways. Different operations structures and infrastructures are required for different missions. A single facility will tend to experience both irreconcilable conflicts and low overall effectiveness if it attempts to serve multiple markets that demand different competitive strategies.

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3.4. Key decisions in operations strategy implementation

Focus: Fit in the Small (2/6) Therefore, one cannot expect an organization to perform both tasks equally as each focused its attention on the needs of a specific type of product/service, customer, and form of differentiation. multiple facilities usually require duplicate floor space, equipment investment, and overhead structures. multiple facilities lack scale of economies.

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3.4. Key decisions in operations strategy implementation

Focus: Fit in the Small (3/6) However, many companies have found just the opposite to be true focusing their facilities often causes operating costs to decrease. Equipment that is specialized to the needs of a specific kind of product or service is often less expensive and easier to operate than multipurpose equipment. Companies that break up a big, complex organization into more focused smaller ones often find that their total overhead costs go down.

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3.4. Key decisions in operations strategy implementation

Focus: Fit in the Small (4/6) Another substantial advantages of focus can often be obtained through less drastic means. by eliminating products or options that are seldom requested by customers. by segmenting its operations and dividing a given facility into separated work areas (plants within a plant).

A manufacturing cell is an example of this approach. The manufacturing cell is a relatively small group of people who are given responsibility for a related group of products or services.

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3.4. Key decisions in operations strategy implementation

Focus: Fit in the Small (5/6) The principle of focus is easier to explain than it is to implement. Companies need to decide on which dimension they want to focus, as they cannot focus along several dimensions at the same time. product lines process stages/ technologies geographic areas markets/ customer groups Companies needs to decide how much focus is desirable. Should each product, part or component service be assigned to a separate organization? Or should all operations be performed at the same location?

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3.4. Key decisions in operations strategy implementation

Focus: Fit in the Small (6/6) Once the desired focus has been achieved, the company must guard against losing it. As organizations are continually buffered by new demands and opportunities, business organizations tend to become more complicated over time.

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3.5. Responding to evolving Strategies, Markets, and Technologies

Since the ongoing task for an operations organization is to structure and manage itself as its environment and strategy evolve, it usually becomes necessary to make changes in a number of the operations decisions categories. Root cause of an operations crisis is that a companys operations policies and people over time have become incompatible with its facilities, technology, sourcing and system choices. Even though its structure may be consistent with its infrastructure, the operations organization may no longer be serving the operating priorities demanded by the companys evolving competitive strategy.

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3.5. Responding to evolving Strategies, Markets, and Technologies

Dr. Patricia Deflorin Source: Hayes and Wheelwright (1979)

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3.6 Strategy as a Art Form

Understanding the basic concepts of strategic fit and focus does not by itself ensure an effective solution to a specific competitive problem. None of the structural and infrastructural decisions has a clear delineated impact on all the different competitive dimensions. While certain choices may have quite clear-cut implications for specific performance measures, they may have relatively little effect on others. The adoption of an MRP-System is unlikely to have much impact on the trade-off between innovativeness and defect rates. It is possible, to achieve a given performance level along any dimension despite the fact of different combinations of structural and infrastructural decisions.

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3.6 Strategy as a Art Form

Different companies that are trying to achieve similar sets of competitive priorities may make different design choices as they configure equally effective operations organizations. One may rely primarily on structural elements while other may emphasize infrastructural elements. Similarly, German companies might configure themselves very differently from the Japanese companies even though they compete against each other.

Designing an effective operations strategy is somewhat of an art form, constrained here and there by technological and organizational possibilities and guided by informed guesses.

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4. Challenges to the operations strategy framework

Up to this point, our discussion has been dominated by the notion of strategic fit, to reflect the competitive position and strategy through the companys operating system. This Focus provides both a means to achieve this fit and a discipline for maintaining it in the face of the continual barrage of potentially distracting opportunities that confront most business organizations. But the success of a company is not necessarily built around notions of fit and focus.

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4.1. Challenging the necessity of trade offs

First Challenge The mass production paradigm held that economies of scale and long production runs were the key to low cost, consistent quality and dependability. The contingency approach to operations strategy argued that managers had to decide which competitive dimensions were most important, and if conflicts arose among them they had to make choices based on a careful analysis of the trade-offs involved. The flexible manufacturing systems (FMS) challenged the elements of the contingency approach, as it appeared to promise both great flexibility and low cost.

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4.1. Challenging the necessity of trade offs

A second and more serious challenge Was presented by the success of elite Japanese companies. They acted, as though economies of scale and long runs were not important, nor were trade-offs necessary. Indeed, many Japanese factories appeared to surpass their American counterparts in several competitive dimensions (lower cost, higher quality, greater flexibility and faster product introductions). In future the manufacture will therefore be based on the premise that you not only can have both (low cost and flexibility) but that you must have both.

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4.1. Challenging the necessity of trade offs

An organization that operated within the limits of its capabilities, therefore, might be able to improve its performance along several dimensions until it reached those limits. Three types of trade-off decisions: Optimization moves combined performance from A to B at the trade-off frontier. Repositioning from B to C raises objective 2s performance at the expense of objective 1s performance. Enhancement from C to D simultaneously improves performance of objectives 1 and 2, moving to a new trade-off frontier.

Objective 2
new trade-off frontier current trade-off frontier enhancement C repositioning B A optimization D

Objective 1
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4.2. Challenging the importance of focus

Among western operations managers, there was a growing sense that Japanese companies had made the mass production paradigm and the contingency approach to operations strategy obsolete by showing that their way of configuring operations was uniformly superior. However, as more companies adopted these approach, they found that success was elusive, and even successful implementations did not necessarily lead to financial rewards. Even more disturbing is that a number of Japanese companies began to question many of these same approaches. They find that many of the practices regarded as central to lean production were not equally effective in every situation. They discovered that widespread use of some of them could create problems for society as a whole.

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4.2. Challenging the importance of focus

Some of the criticisms of the contingency approach to operations strategy appeared to be valid. called for a reevaluation of its basic principles. a strategy based solely in such static concepts as fit, trade-offs and focus seemed lacking in important respects.

A more dynamic framework was needed for the rapidly changing global competition.

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5. Dynamic organizational capabilities

Up to the mid-1980, the dominant paradigm had been based on the idea that a firm could achieve an enduring competitive advantage by entering industries that were structurally attractive by creating an advantageous position for itself within an industry through deliberate action.

However, despite the insight this positioning framework provided scholars and practitioners, it was essentially static in nature.

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5. Dynamic organizational capabilities

Throughout the 1980s, a growing body of opinion felt that the solution lay in the fact that many successful companies tended to focus more on building basic internal operating capabilities than on achieving market positions of financial goals. Such capabilities, could either be very general or quite specific, such as a highly responsive and efficient distribution system, or developing experience in particular technologies or markets.

Being able to do certain things better than their competitors!

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5. Dynamic organizational capabilities

Fundamental principle of the RBV is that the basis for a competitive advantage of a firm lies primarily in the application of the bundle of valuable resources at the firms disposal. To transform a short-run competitive advantage into a sustained competitive advantage requires that these resources are heterogeneous in nature and not perfectly mobile.

VRIN criteria: Valuable Rare In-imitable Non-substitutable

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(Source: Barney 1986)

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5. Dynamic organizational capabilities

Improving an organizations competitiveness involves more than simply improving its performance along specific competitive dimensions, such as cost, quality and flexibility. It also incorporates the possibility of developing new capabilities that provide specific operating advantages.

This more operations-based and dynamic view of competitive strategy elevates the importance of the operations function and raises new issues about the nature of its strategic management.

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5. Dynamic organizational capabilities

Dynamic capabilities
adaptation and change

Operational capabilities

effect

Performance

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5.1. Path dependencies

Until now we did not take into account the fact that a company can proceed along different paths, were each path may both create new capabilities and impair existing ones. Different choices not only affect operations today, but also have important consequences for the kind of operating capabilities one will be able to acquire in the future.

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5.1. Path dependencies

Facility Focus A focus choice also has dynamic implications in that it shapes the directions a company can take in the future (e.g. fragmenting its core operating skills). As a facility accumulates specialized expertise, it may lose its understanding of how different process steps fit together. Over time, the facility focus may reduce the ability to introduce new products. Trade-offs Neither the fit and focus approach to operations strategy nor the lean production paradigm considers the possibility that decisions designed to help the firm compete one way may induce it over time to develop capabilities that encourage it to compete in a different way.
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5.2. Strategic Choice in Operations

The transition from the static positioning-based approach to the dynamic capabilities-based approach not only encourages to consider a much richer set of alternatives and opportunities, it alters the approach to strategic planning. The capabilities-based concept of strategy also suggests that a companys strategy may lock it into certain modes of behavior. A sequence of strategic choices may limit its ability to change its strategy in the future (path dependency). Infrastructural elements, have long lasting effects as they become deeply embedded in peoples behavior and profoundly affect what they become good at doing.

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6. Attacking and defending through operations

The role of the operations function expands from being simply the implementer of strategy to providing the foundation for successful strategic attacks and defenses.

Companies that fail to exploit the strategic power of operations will be hampered in their own attacks. vulnerable to competitors that do.

The key to success is often an operations-based advantage, because this sort of competitive advantage tends to be less visible to competitors than one that is based on staking out differentiating competitive positions.

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6.1 Attacking through operations

Successful attackers adopt an operations strategy that gives them a competitive advantage along dimensions or in locations that, were not emphasized by competitors (e.g. differentiating competitive position). Or they reinforce the alternative way of appealing to customers with the development of a tightly integrated system of supporting values, facilities, technologies, capabilities, supplier/customer relation, human resources and approaches to motivation that could not be easily copied by other organizations. Two approaches to strategy:

positioning
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capability-based
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6.1 Attacking through operations

Positioning: Appealing to a different customer need A company that decides to pursue a certain form of differentiation cannot gain any long-term advantage if it continues to use the same operations structures and infrastructure as the competitors. Strategic fit requires that, having decided what kind of superiority it wants to achieve, it must configure and manage its operations organization so as to provide that form of advantage most effectively. Once a company has configured its operating system with the goal of achieving superiority along certain competitive dimensions, it becomes very difficult to match the performance that a new competitor has been able to achieve along other dimensions through an operating organization that was expressly designed with those other dimensions in mind.

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6.1 Attacking through operations

Capabilities: Being better at the same game Superior capabilities have to be built and nurtured. In thinking about how to develop such operating capabilities, we can break them into three types: 1. Process-based - are associated with activities that transform material or information, - tend to provide advantages along such standard competitive dimensions as low cost and/or high conformance quality.

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6.1 Attacking through operations

Capabilities: Being better at the same game 2. System-based - underpin competitive advantage as short lead times, a broad range of products or services, the ability to customize on demand, and fast new-product development. - Require broad involvement throughout the entire operating system.

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6.1 Attacking through operations

Capabilities: Being better at the same game 3. Organization-based - are broader and underpin the ability to master new technologies, design and introduce new product, and bring new plants on line significantly faster than ones competitors. - As they are even more difficult to replicate, such capabilities are among the most powerful in the operating arsenal.

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6.2. Sustaining an operations edge

Successful attacks are not based on programs of indiscriminate continuous improvement: the attackers methodically developed operating capabilities and consciously seek out opportunities to exploit them. operations-based advantages turn out to be surprisingly robust. Innovations in operations are inherently difficult to replicate and slow to diffuse. Ongoing invention is at the core of the most effective operations organizations. Although some individuals learn and adapt easily, organizations rarely do. They must be structured and managed in a way that facilitates learning and change.

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6.3. Defending through Operations

A Company can defend itself against operations-based attacks using one or more of the following approaches. It can exploit its own strengths Pouring resources into improving its competitive advantage and marketing that advantage more aggressively to customers. It can attack its attackers operations-based weaknesses When attackers configured their own operations so as to offer superior performance along certain dimensions, they had to make hardware and software decisions that constrained their performance along other dimensions (vulnerability). It can recognize the seriousness of the attack quickly Emulate its attackers strategy before the attacker is able to get too far ahead in the learning curve.

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6.4. Lessons in Attacking and Defending trough Operations

Companies that base their attacks on operations capabilities understand that such capabilities rarely can be developed quickly. Sometimes companies are not even aware of the full potential of the capabilities they are developing until a sudden insight or fortuitous incident reveals how they can be exploited. New operating capabilities often arise in ways and from sources that are difficult to predict. This is particularly true in the case of capability pairing, where previously unconnected capabilities are cultivated and combines in a unique way. Effective defenders are quick to recognize latent threats. They understand that developing new operating capabilities takes time They are constantly scanning the horizon of their markets and technologies for companies that might combine unconnected skills.
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Dr. Patricia Deflorin

7. Conclusion

Operations strategy requires more than simply choosing which currently fashionable improvement technique to adopt or trying to copy the best practices of other companies. Long-term success requires that a company to differentiate itself from its competitors by offering something unique and valuable products to customers. Rather than confining their improvement efforts to finding and emulating best practice, companies should seek out new practice, continually asking themselves how would a competitor attack us? If we were subjected to such an attack, how would we respond?

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Assignments

Date

Topic

Literature

Handouts

Presentation

CoPresentation

10.3.
Operations Strategy
Dr. Patricia Deflorin

Barney (1991);
Skinner (1974); Ferdows (1990) Roth (1992) Teece (1997)

Group 1 and 7
Group 2 and 8 Group 3 and 11 Group 4 and 12 Group 5 and 9

Group 1
Group 2 Group 3 Group 5

Group 7
Group 8 Group 11 Group 9

Please send all handouts and presentations to patricia.deflorin@isu.uzh.ch until March 8, 2010.
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Thank you for your attention! Questions?

Dr. Patricia Deflorin patricia.deflorin@isu.uzh.ch

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