Operations Strategy 9 - Formulation Strategy

Introduction

• FIT - FITTING MARKET REQUIREMENTS TO OPERATION RESOURCES
• SUSTAINABILITY- FIT OVER TIME
• RISK - COPING WITH UNCERTAINTY

Of the three levels of analysis in operations strategy formulation, Fit 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.

Note. Moving up the line of fit is the improvement path

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 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).

It is worth noting 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".

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.

Operations Strategy can be used to identify how fit can be described at four levels (it 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.

Two particular formulation models of fit can be analyzed presented; the Hill framework and the Platts Gregory procedure. These are not the only two. In fact there are hundreds of different published methodologies, many academics and all consultancy companies tend to have their own. 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.

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.

You can 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; - Hurricanes, flooding
• mitigation - reducing the consequences when something happens; Economic, cotainment spatial (space) and temporal (time), loss reducrtion and substitution.
• recovery - changing the perceptions of something going wrong. Disaster Recovery, learn from failures

Also think that it has a three step process (above)

Operation Strategy Matrix and Criticality, Coherence and Correspondence

The Crtical elements are the decision areas with the performance objectives 09nb the performance objectives QFSDC are market requirements) Coherence is across the deciosn area - Supply/Capacity/Developmentp and Process Technology

Strategy formulation and Operations

Planning strategy is largely discredited in favor of emergent but planning tools can be useful •Provides disciplined approach •Enforce communications •Enables long-term thinking •Provides basis for evaluating plans

Hill Framework Fit framework

• Step 1 what are the Corporate objectives?
• What are the market requirements?
• How do we develop produst services to server markets
• Operations strategy / Process Choice
• Infrastructure

• Not supposed to be necessarily sequential
• It is an outside-in approach
• Does not distiguish between external competitive factors and internal performance objectives

Platts Gregory Framework - Fit Framework

• Develop understanding of firms market position
• Assess the capabilities
• Review various improvement options

• Good use of Project Management techniques and worksheets
• Out-ise in view
• The what happens next is a weak part of the analysis

e.g. Delivery lead time - short..............................................not significant Relaibility - varaible.............................................................critical

on each compare market requirements v achieved performance

Again you can use the Performance Importance matrix

Difficulties in formulating operating strategy

• Operations managers focussed on delivery
• Operations managers are dispersed
• Culture of organizational bias against operations managers and strategy

Should they be

• Implementors?
• Drivers ?
• Supporters of strategy?

TQM- Total Quality Management

• Demings 14 point quality programme
• Plan for long-term commitment - Development and organization
• Quality must be built in every stage - PT, Supply , Organization
• Cease mass inspection - PT, Sup, OD
• Eliminate quality performance measures based on output (all 4)
• Stop demanding higher productivity without the means of achieving it

• use SWOT
• Understand the resistance to change
• The dangers of tight fit - Leonard/McDonnell "It may be difficult to change a struggling organizations it is virtually impossible to change an organization with outwards sign of success"
• Investment bias - political forces, history

e.g. IBM lost leadership in PC's while sticking to the Server market - Did not see potential of operating systems. Their fit was too tight to change - Now elephants can be nimble

Porter's Generic Strategy and implication for operations - low cost, efficiency, or quality and variety

Implications of Volvo's attempts at strategy changes

• 1. Kalmar - created small focussed fatories - attract staff
• 2. Uddevalla - staff build complete cars - quality
• 3. Gent - Lean production - Inter-plant competition
• 4. Born - Uniqueness around conformity - World Class Operations

It was trying to fit with its environment