Value Chain Management
Value Chain Management
Explain how operations strategy is influenced by customer and business prospective and where in a standard value chain you would expect to see your chosen topic addressed.
Every organization’s operations strategies are concerned with getting things done; ie producing merchandise for customers. However, most people believe that operations management is only concerned with short-term, day-to-day issues. In essence, all business organisations are concerned with how their business will survive and prosper in future. In contemporary terms, most business strategies are recognised with a plan as part of or a set of intentions that will set theirr long-term directions of their actions that are needed to ensure future organisational success. Thus, no matter how strong their plan is or how noble their intentions, are, any organisation’s strategy can only become a meaningful reality, in practice, if it’s operationally instigated. Every organisation’s operations are equally important because most organisational activity comprises the day-to-day activities within the operations function. It’s the process of daily actions of operations, when considered in their totality that constitute the organisation’s long-term strategic direction.
The relationship between an organisation’s strategy and the operations involved is a key determinant of its ability to achieve long-term success or even survival. Organisational improvement is only likely to result if short-term operations activities are consistent with long-term strategies and hence, make a contribution to competitive advantage. The relationship between corporate operations and the other business functions is similarly important. The objective of the operations function is to produce goods and services required by customers whilst managing resources efficiently. This can then lead to conflicts within an organisation. Conflicts between operations and selling functions are likely to centre on the marketing aspect to ensure that operations concentrate on satisfying customers.
Whilst this may seem enduring, marketing will usually want operations to suit customer needs under usual circumstances. Therefore, this is likely to lead to demands to produce bigger volumes, more varieties, better quality, a faster response, and so on, all of which are likely to lead to less efficient operations. Conflicts within the operations, the accounting and finance functions, on the other hand, are likely to centre on the desire of accounting and finance to want operations to manage resources as efficiently as possible. This will pull operations in exactly the opposite direction of that desired by marketing. Conflicts within operations and the human resource management function are likely to centre on issues of recruitment, selection, training, management and the reward of those employed within operations.
For example, operational managers may want to vary organisation-wide policies in order to meet local needs; a move likely to be resisted by human resource managers. The operations function lies at the heart of any organisation and interacts with all the other functions. As such, achieving agreement about what decision areas lie within the remit of operations, and what should be the basis of decision-making within operations is an essential part of ensuring the consistency of action over time necessary for a successful organisational strategy.
My introduction towards operational strategic purposes has highlighted the strategic importance of operations to organisational performance. The importance of operational strategy is essential to an organisation as this will determine the extent to which its business strategy can be implemented, but also as its operations can be a source of competitive advantage within any businesses value chain. First I will outline what exactly is meant by the term operations strategy. Slack et al, argues that an operations strategy concerns the pattern of strategic decisions and actions which set the role, objectives and activities of operations. His use of this term ‘pattern’ implies a consistency in strategic decisions and actions over time. This concept is consistent with a theorist guru, Henry Mintzberg’s view of strategy as being a ‘pattern in a stream of actions’ (Mintzberg and Waters, 1985).
Henry Mintzberg, views strategy as being realised through a combination of deliberate and emergent actions. An organisation can have an intended strategy, perhaps as a set of strategic plans. However, only some of his intended strategy may be realized through deliberate strategy. Some of the intentions may be unrealized. Strategies which take no regard of operational feasibility are more likely to have low marketing prospects, remaining merely as a set of intentions. Strategies may also emerge from actions taken within the organisations functions, which over time form a consistent pattern. Actions of this kind will, almost inevitably, arise from within the operations of the organisation. So, whether intentionally planned or otherwise, the business operations are bound to have a major impact on the formation of organisational strategy.
It’s often said that strategy is an issue which is somehow separate from day-to-day organisational activities. If taken to extremes, this can result in strategies being regarded as some kind of cerebral activity performed by superior’s who need to be removed from day-to-day operational pressures. Theorists such as Mintzberg is amongst those who point out to the dangers of managers becoming detached from the basics of the enterprise. Mintzberg and Quinn (1991) call this the ‘don’t bore me with the operating details; I’m here to tackle the big issues’ syndrome. They caution that, ‘the big issues are rooted in little details’.
Operational strategy, the processes and content:
A. Operational strategy processes: How an organisation sets about developing appropriate operation strategies and B. Operational strategy content: What the key decision areas are and what needs to be addressed in developing any operational strategy.
OPERATIONS STRATEGY PROCESS
As discussed above, operational strategies have a vertical relationship in the corporate hierarchy within business and corporate strategies, and horizontally with the other functional strategies, mostly recognised within marketing strategies. Operations strategy might come about in a top-down or a bottom-up process with regard to business and corporate strategies. Similarly, an operations strategy might be developed in response to market requirements (i.e. market-led) or be based on the capabilities of its operational resources (i.e. operations-led). As this gives rise to four perspectives on operation strategy (Slack and Lewis, 2002). Each perspective places a different emphasis on the nature of the operations strategy process.
The top down perspective is the operations strategy which it comprises of, and is supportive of the organisation’s business purposes; an operations strategy that the organisation uses to realise its business strategy within any value chain. This concept follows in line with the perspective of the Hayes and Wheelwright stage 3 organisational strategy process. According to this theory, the process of developing an operations strategy would follow Skinner’s approach of identifying an operation’s ‘task’ (Skinner, 1969). The task for operations would be determined logically from the business strategy. Using Slack et al.’s, five operations performance objectives theory, as one way of articulating the operations task. For example, if the organisation’s business strategy involves the offering of low pricing, then the operation’s task should be one of achieving low costs in operations.
If the business strategy is based on offering customers fast delivery, then the operations task should be one of achieving speed in operations, and so forth. In a multi-business organisation, the top-down perspective emphasises operations strategy being linked to corporate strategy via the business strategy of each business unit. This then raises the question of whether it is possible to talk of ‘corporate’ operations strategy. If corporate operations strategy means commonality, in all aspects of operations, then this would only be possible if each business unit has similar business strategies and similar operations tasks. (Johnson and Scholes, 1999) However, some theorists such as Hayes et al would argue that any corporate operational strategy does not mean that every facet of operations must be the same in each business unit.
Rather, operations decisions are considered enormously at the corporate level with a view to meeting corporate strategic objectives. A failure to do this means that operations decisions are taken only at the level of the business unit, with a view to meeting needs of that business unit. The dangers of doing this have been pointed out by theories, who caution against letting the needs of the business unit dominate strategic thinking. This can lead to operational competences being confined within individual business units, thereby restricting their future development, which includes preventing their spread to other business units and limiting opportunities for synergistic developments across the corporation. This can be particularly important in multi-site, multi-national enterprises. ( Prahlad and Hamel, 1990)
The bottom-up perspective is one which sees the operations strategy as an element emerging through a series of actions and decisions taken over time within operations. These actions or decisions might at first seem to appear to be somewhat risky as operations managers respond to customer demands, seek to solve specific problems, copy good practices in other organizations, etc. However, they usually coincide over time to form a coherent pattern recognisable as an operations strategy.
The actions then taken within this kind of strategy are likely to be characterized by a continuous series of sporadic improvements rather than the large one-off technologically led changes that require large capital investments in new plant and machinery. The bottom-up perspective is one where the organisation learns from its experiences, developing and enhancing its operational capabilities as operations managers try new things out in an almost experimental routine using their workplaces as a kind of ‘learning laboratory’ (Leonard-Barton, 1992).
Easy Jet Case Study
Although EasyJet only undertook its first flight in 1995, when it operated two routes (London Luton to Glasgow and Edinburgh), ten years later, the budget airline offered 212 routes to 64 European airports and transported over 29 million passengers in 2005. EasyJet now carries more passengers within Europe than British Airways. Analysts expect EasyJet and its Irish based rival Ryanair, to both overtake all traditional airlines to become the largest short-haul operators in Europe by the end of the decade. The Luton based airline is known as continuously expanding, recently announcing the purchase of a further 20 Airbus A319 planes to service the ever increasing number of routes it operates.
In 2005 EasyJet carried up to 30 million passengers, up from 25.7 million in 2004, making it a £1.3 billion business! Despite record high fuel level costs, profits were up and around 10 per cent to £68 million. Passenger numbers rose 21 per cent to 29.6 million and the load factor, indicating how many seats are filled, was 85.2 per cent, reflecting the airline’s popularity. The low cost lines like EasyJet have revolutionised the airline industry in Europe.
Modelled on South West Airlines in the USA, these airlines have not only helped create a whole new market of cost-conscious travellers but have taken market share from established operators like British Airways and become the most profitable airlines in Europe. To be profitable, these airlines have to achieve low costs to match the low fares, which are the main attraction to their passengers. With its head office as a large tin shed adjacent to the main taxiway at unfashionable Luton Airport, all of EasyJet’s operations are aimed at minimising costs. This is done in a number of ways:
Use of the Internet to reduce distribution costs.
EasyJet sells around 95 per cent of all seats over the Internet. Its online booking system uses a variable pricing system to try to maximize load factors.(Prices start very low – sometimes free, and rise as seats are filled.) The fuller the aircraft the lower the unit cost of travel. (Scholes and Johnson,1999, pg12)
Passengers are emailed with their travel details and booking reference numbers. This helps reduce significantly the cost of issuing, distributing, processing and reconciling millions of tickets each year. Neither does EasyJet pre-assign seats on board. Passengers sit where they like. This eliminates an unnecessary complexity and speeds up passenger boarding. No free on board catering. Eliminating free catering on board reduces cost and unnecessary bureaucracy. Passengers can purchase food and refreshments on board.
Efficient use of airports.
EasyJet flies to the less crowded airports of smaller European cities and prefers the secondary airports in the major cities. These also have lower landing charges and normally offer faster turnarounds as there are fewer air movements. EasyJet’s efficient ground operations enable them to achieve turnarounds of less than 30 minutes. This means EasyJet can achieve extra rotations on the high-frequency routes, maximising the utilization of aircraft. EasyJet’s ability to offer point-to point travel means that it does not have to worry about onward connections for passengers and their baggage, further simplifying its operations.
EasyJet have embraced the concept of their paperless office, with all its management and administration undertaken entirely on IT systems. These can be accessed through the use of servers from anywhere in the world thereby enhancing flexibility in the running of the airline. (Scholes and Johnson,1999, pg12)
Many of the manufacturing practices that are now considered leading edge such as JIT, TQM, Statistical Process Control, were developed in just; such a fashion by Japanese manufacturers responding to the constraints placed upon them in the aftermath of the Second World War. One of the problems associated with this perspective is that the organization may not recognize what its operations strategy is. Mills et al. (1998) have developed a technique that aims to overcome this by enabling managers to construct a visual representation of operations strategy as realized. It does this by tapping into the organization’s collective memory, whether written or verbal, to map all of their most significant events in operations over the previous number of years. This should enable managers to recognise the patterns that now make up the existing operation’s strategy.
The market-led perspective is one where the operations strategy is developed in response to the market environment in which the organisation operates. There’s a number of approaches within operations strategy that suggest how this might be done. The best known of these theorists is that of Terry Hill (1985). He suggests that an organisation’s operations strategy should be linked to its marketing strategy by considering how its products and services win orders in the market place. He believes it’s possible to identify two types of competitive criteria in any market. Market qualifying criteria are those factors that must be satisfied before customers will consider making a purchase in the first place. Order winning criteria, on the other hand, are the factors in which customers ultimately make their purchasing decision.
For example, for many airline passengers, the order winning criteria is price, with criteria such as destination city, time of flights and convenience of travel to and from airports being market qualifying criteria. For others, notably business travellers, the order winning criteria may be factors such as in-flight service or total travel time. Consequently, an operations strategy should be developed which will satisfy market qualifying criteria, but excel at order winning criteria for the market segment that the operation wishes to serve. Platts and Gregory 1990, use an approach that audits the products or groups of products that the organisation offers to its markets.
The aim is to identify any gaps between market requirements for particular products and services and the performance of the organisation’s operations in delivering those products and services. First the market requirements for the product or service are analysed in terms of various competitive factors (such as cost, quality, reliability). The performance of the organization’s operations against those factors are then assessed. An operations strategy should be developed which will enable operations to match the level of performance required by customers in each of the competitive criteria.
The operations-led perspective is one in which its excellence in operations is used to drive the organisation’s strategy. This is in line with the Hayes and Wheelwright stage 4 organisation and fits with the resource-based view (RBV) of strategy that currently dominates the strategic management literature. The premise of the RBV is that superior performance comes from the way that an organization acquires, develops and deploys its resources and builds its capabilities rather than the way it positions itself in the market place (Barney, 1991; Wernerfelt, 1984). Thus, the process of strategy development should be based on a sound understanding of current operational capabilities and an analysis of how these could be developed in the future.
This can then provide the basis for decisions about which markets are likely to be the best in which to deploy current and future capabilities, which competitors are likely to be most vulnerable and how attacks from competitors might best be countered (Hayes et al., 2005). Mills et al. (2002) have developed methods through which organizations can apply these ideas in practice. This involves undertaking an analysis of the resources that have underpinned the activities of a business unit over an extended period of time (at least the previous three to five years).
Six resource categories, which are not mutually exclusive, are used: tangible resources, knowledge resources skills and experience, systems and procedural resources, cultural resources and values, network resources and resources important for change. The resources are evaluated against three criteria: value, sustainability and versatility. Resources that individually or collectively score highly in these criteria are considered to be important resources. They are sources of existing or potential competitive advantage to the organization.
OPERATIONS STRATEGY: CONTENT
What then are the key decision areas of operations management that need to be considered when an organization is developing an operations strategy? Although there are a number of classifications in use, operations management scholars generally agree (e.g. Leong et al., 1990) that the major strategic decision areas in operations can be conveniently divided into ten categories under two broad headings: structure (the physical attributes of operations; the hardware) and infrastructure (the people and systems of operations; the software). The structural decision areas comprise: Facilities: the location, size and focus of operational resources. These decisions are concerned with where to locate production facilities, how large each facility should be, what goods or services should be produced at each location, what markets each facility should serve, etc. Capacity: the capacity of operations and their ability to respond to changes in customer demand.
These decisions are concerned with the use of facilities, for example through shift patterns, working hours and staffing levels. Decisions about capacity will affect the organisation’s ability to serve particular markets from a given location. Process technology: the technology of the equipment used in operations processes. For example, the degree of automation used, the configuration of equipment, and so on. Supply network: the extent to which operations are conducted in-house or are outsourced. Decisions about vertical integration are also concerned with the choice of suppliers, their location, the extent of dependence on particular suppliers, and how relationships with suppliers are managed.
Structural decisions often involve major capital investment decisions, which once made will set the direction of operations for many years to come. They invariably impact the resources and capabilities of an organisation, determining its potential future output. It may be prohibitively expensive to change such decisions once implemented, and hence these must be considered to be truly strategic decisions for the organisation. It may be much easier to change the organisation’s marketing strategy (e.g. its target markets, or its promotional activities) than it is to change its operations strategy with respect to the structural decision areas.
Infrastructure decision areas comprise:
* Planning /Control: the systems used for planning and controlling operations. * Quality: the use of quality management policies and practices. * Work Organisation: Business structures, responsibilities and accountabilities in operations. * Human Resources: recruitment and selection, training and development, management style. * New Product Development: the systems and procedures used to develop and design new products and services.
* Performance Measurement: financial and non-financial performance management and its linkage to recognition and reward systems. These issues are important to every organisation as this involves the use made up of the operating hardware as discussed above. It is possible to change aspects of operations infrastructure more quickly and easily than the case for operations structure. Nonetheless the difficulty of doing so should not be underestimated or neither should the impact of making inappropriate infrastructural decisions parallel.
Organisational strategy is concerned with the actions a company takes in order to survive and prosper within the environment it operates over the long-term. Strategy can exist at three levels in an organisation: which are; corporate, business and functional. Any organisation’s operations strategy includes the totality of the actions and decisions taken within the operations function. The decisions or actions taken have a direct impact on the organisation’s business and corporate strategy. An organisation’s operations can be a source of competitive advantage if they are managed strategically in pursuit of a clear goal for operations. These are five possible operations objectives; cost, quality, speed, dependability and flexibility.
It is unlikely that any operation can excel at all of these simultaneously, so competitive priorities must be determined on which to base the operations strategy. The process of operations strategy concerns the way in which an organisation develops its operations strategy. This might be top-down (i.e. formed in pursuit of its business and corporate strategy), bottom-up (i.e. formed from the actions and decisions taken with operations), market-led (i.e. formed in response to market requirements) or operations-led (based on the resources and capabilities within its operations).
The content of operation strategy consists of the key decision areas concerned with the structure (i.e. the physical attributes of facilities, capacity, process technology and supply network) and infrastructure (i.e. planning and control, quality, organisation, human resources, new product development and performance measurement). Through a value chain, operations strategy would be placed in line with the company supply chain strategies and perspectives where business process are involved. This concerns the pattern of strategic decisions and actions which set the role, objectives and activities of operations. (Slack et al., 2004).
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Miller, R & Jentz, G (2009) Fundamentals of Business , 2nd Edition. England: Cengage Learning
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Rush, J & Ottley, M (2006) Business for students. London: Thomson Learning
www.wikipedia.org Accessed: 15.20pm: 24.1.12
Subject: Value chain,
University/College: University of California
Type of paper: Thesis/Dissertation Chapter
Date: 28 September 2016
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