Operations Management and TQM - Lesson: 5

In this lesson, we will demystify the

concept of OPERATIONS, STRATEGY
AND OPERATIONS STRATEGY

All business organizations are concerned with how they will survive and prosper in the future. A business
strategy is often thought of as a plan or set of intentions that will set the long-term direction of the actions that are
needed to ensure future organizational success. However, no matter how grand the plan, or how noble the intention,
an organization’s strategy can only become a meaningful reality, in practice, if it is operationally enacted. An
organization’s operations are strategically important precisely because most organizational activity comprises the day-
to-day activities within the operations function. It is the myriad of daily actions of operations when considered in their
totality that constitutes the organization’s long-term strategic direction. The relationship between an organization’s
strategy and its operations is a key determinant of its ability to achieve long-term success or even survival.
Organizational success is only likely to result if short-term operations activities are consistent with long-term strategic
intentions and make a contribution to competitive advantage.

THE NATURE OF STRATEGY

The strategy is one of the most over-used words in the business dictionary. Yet, surprisingly, there is no
agreement on what the term means. No-one challenges its military origin, used with regard to how a commander
might deploy his resources (i.e. armed forces) throughout a campaign aimed at achieving a particular objective (e.g.
conquering territory or thwarting an invasion). The idea that a business organization could have a strategy seems to
have first emerged in the 1960s when the techniques of long-term business planning were first popularized. Since
then many different interpretations of the concept and practice of strategic management have been developed.
Indeed, entire books have been given over to contemplating the nature of a strategy. For example, Mintzberg et al.
(1998) characterize ten ‘schools of thought’ in their consideration of what constitutes strategy. A widely accepted
definition is offered by Johnson et al. (2005), who define strategy as ‘the direction and scope of an organization over
the long-term, which achieves advantage in a changing environment through its configuration of resources to fulfill
stakeholder expectations’.

Strategy can be considered to exist at three levels in an organization

Operations Management and TQM - Lesson: 5
Corporate level strategy is the highest level of strategy. It sets the long-term direction and scope for the whole
organization. If the organization comprises more than one business unit, the corporate-level strategy will be
concerned with what those businesses should be, how resources (e.g. cash) will be allocated between them, and how
relationships between the various business units and between the corporate center and the business units should be
managed. Organizations often express their strategy in the form of a corporate mission or vision statement.

Business level strategy is primarily concerned with how a particular business unit should compete within its
industry, and what its strategic aims and objectives should be. Depending upon the organization’s corporate strategy
and the relationship between the corporate center and its business units, a business unit’s strategy may be
constrained by a lack of resources or strategic limitations placed upon it by the center. In single business
organizations, business-level strategy is synonymous with corporate-level strategy.

Functional level strategy: The bottom level of strategy is that of the individual function (operations, marketing,
finance, etc.) These strategies are concerned with how each function contributes to the business strategy, what their
strategic objectives should be, and how they should manage their resources in pursuit of those objectives.

OPERATIONS AND STRATEGY

Strategy in a business organization is essentially about how the organization seeks to survive and prosper
within its environment over the long-term. The decisions and actions taken within its operations have a direct impact
on the basis on which an organization can do this.

How an organization secures, deploys, and utilizes its resources will determine the extent to which it can successfully
pursue specific performance objectives.

Slack et al. (2004) argue that there are five operations performance objectives:

1. Cost: The ability to produce at a low cost.

2. Quality: The ability to produce in accordance with the specification and without error.

3. Speed: The ability to do things quickly in response to customer demands and thereby offer short lead times
between when a customer orders a product or service and when they receive it.

4. Dependability: The ability to deliver products and services in accordance with promises made to customers (e.g.
in a quotation or other published information).

5. Flexibility: The ability to change operations. Flexibility can comprise up to four aspects:

i. The ability to change the volume of production.

ii. The ability to change the time taken to produce.
iii. The ability to change the mix of different products or services produced. iv. The ability to innovate and
introduce new products and services.
Operations Management and TQM - Lesson: 5
The ‘sandcone’ model of operations excellence

OPERATIONS STRATEGY

The Strategy Formation Process

Four Perspectives on Operations Strategy

Operations Management and TQM - Lesson: 5

Top-down

The top-down perspective is one in which the operations strategy is derived from, and is supportive of the
organization’s business strategy; an operations strategy that the organization uses to realize its business strategy.
This concept is in line with that of the Hayes and Wheelwright stage 3 organization. According to this perspective, 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
(2004) five operations performance objectives is one way of articulating the operations task. For example, if the
organization’s business strategy is one of offering low prices, 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, the operations task should
be one of achieving speed in operations, and so on. In a multi-business organization, the top-down.

Bottom-up

The bottom-up perspective is one that sees operations strategy emerging through a series of actions and
decisions taken over time within operations. These actions and decisions might, at first sight, appear somewhat
haphazard, as operations managers respond to customer demands, seek to solve specific problems, copy good
practices in other organizations, etc. However, they can build over time to form a coherent pattern recognizable as an
operations strategy. The actions taken within this kind of strategy are likely to be characterized by a continuous series
of incremental 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 in which the organization learns from its
experiences, developing and enhancing its operational capabilities as operations managers try new things out in an
almost experimental fashion using their workplaces as a kind of ‘learning laboratory’ (Leonard-Barton, 1992). 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.

Market-led

The market-led perspective is one in which the operations strategy is developed in response to the market
environment in which the organization operates. There are a number of approaches in the operations strategy
literature that suggest how this might be done. The best known of these is that of Terry Hill (1985). He suggests that
an organization’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 is 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 purchasing
the first place. Order winning criteria, on the other hand, are the factors on which customers ultimately make their
purchasing decision. For example, for many airline passengers, the order winning criteria is the 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 travelers, 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 operator wishes to serve.

Operations-led

The operations-led perspective is one in which its excellence in operations is used to drive the organization’s strategy.
This is in line with the Hayes and Wheelwright stage 4 organization 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)
Operations Management and TQM - Lesson: 5
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.

OPERATIONS STRATEGY

CONTEN: What then are the key decision areas of operations management that need to be considered when an
organization is developing an operations strategy?

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 organization’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 organization, 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 organization. It may be much easier to change the organization’s
marketing strategy (e.g. its target markets, or its promotional activities) than it is to change its operations strategy
concerning the structural decision areas. Infrastructure decision areas comprise:

● Planning and Control: the systems used for planning and controlling operations.

● Quality: quality management policies and practices.

● Work Organization: organizational 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.

SUMMARY OF KEY POINTS

The strategy is concerned with the actions an organization takes to survive and prosper in its environment
over the long-term.

Strategy can exist at three levels in an organization: corporate, business, and functional. An organization’s
operations strategy comprises the totality of the actions and decisions taken within the operations function. The
decisions and actions taken have a direct impact on an organization’s business and corporate strategy.
Operations Management and TQM - Lesson: 5
An organization’s operations can be a source of competitive advantage if they are managed strategically in
pursuit of a clear goal for operations.

There 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 how an organization 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, organization, human resources, new product development, and performance measurement) of
operations.

 ◆ How does technological change affect industry

evolution?
 ◆ Why do industries experience high rates of firm
entry followed by a shakeout?
 ◆ How should firms manage product adoption
and diffusion?
 ◆ Why does the s THE NATURE OF STRATEGY

Technology impacts every realm of human existence – from

harnessing the resources of Nature to contributing to it, as well as doing so in terms of society. Given that, it is only
natural that it would have vast effects on the business world as well.

Technology at a glance:

In the past few decades, technology has progressed in leaps and bounds, creating modern marvels out of
ideas considered impossible in the preceding eras. In fact, ‘technology’ has almost always been synonymous with
‘advancement,’ and has had applications in nearly every realm of human existence. From groundbreaking discoveries
to brilliant inventions in each field, the impact of technology has been immense, constant, and lasting.

The Organizational Point of View:

It is only fitting, then, that technology has a very deep impact in the field of organization and management as
well. If one looks at the overall effect of technology of any kind on management and organizations, it is understood
that it assumes a direct correlation to ease and efficiency,
as it does in every other field. Essentially, progress in
technology ensures higher efficiency when it comes to every
step of a process, from research to planning to execution.
Let us see how technology affects organizations on the
micro-level – that is, on the intra-organizational one, as well
as on the macro-level - involving global trends and
mechanisms.

Looking at the Micro Level

Human Resource, Administration and Accounts:

While HR, Administration and Accounts are considered to be the major pillars of an organization in general,
their processes must be honed to perfection and work out in an error-free manner. From basic requirements such as
Operations Management and TQM - Lesson: 5
Attendance and Salary Calculation to Employee Evaluation, to more complex systems and procedures such as Gross
and Net Income Calculation, we have information technology offering a number of options to create automatic
command-based processes to help with the same.

Through the means of the internet, which is an essential part of technology today, information gathering is as
easy as ever, especially when it comes to new and evolved systems that may be customizable according to an
organization’s needs. For small-scale organizations, then, the availability of such ready-made systems is a boom, as
their requirements usually revolve around the more basic level. We also have CRM and ERP software, which provides
all necessary data in a variety of formats, as required by different sections of the company.

Apart from that, there is the availability of a number of Head-Hunting options, what with job-related websites
taking over older methods of hiring people. This is a topic that requires further study and is an article in itself, how
the recruitment sector is changing and has changed.

Then, of course, there is the new wave of allowing employees to work from just about anywhere in the world,
so long as the usual work and time-based requirements is fulfilled. IT and other related fields of technology provide
the perfect circumstances for such flexibility.

Communication:

Imagine you want to organize a party. About twenty years back, such circumstances would have required you
to call the residence or office numbers of your invitees, ensuring that you catch them at the right time, in the right
place. Another option was to send the invites by post, which was quite cumbersome and impossible to use at a
moment’s notice. Today, all one needs to do is create a group on a particular Smartphone application, and voila! The
message reaches everyone in no more than a few seconds, wherever they are in the world. I seem to have little notes
in my post box from neighbors telling me that I should expect some noise on a certain night and by 1am this will
stop. At the same time I am informed that the police are also aware of should anything happen. I ask myself how
long before this is communicated in another form as well.

At the organizational level, it is no different. The emergence of E-mail, Instant Messengers, and of course,
Mobile Phones has changed the face of Communication today. Web Conferences, use of Smartphone Applications
such as Whatsapp, etc. provide a very conducive environment for situations such as the one mentioned above, of
‘work from home,’ or even what is generally termed as ‘offsite’ work. Today, a company can send its representative to
another branch or an associate or client company and still stay in the loop of the progress of a project through the
means of technology.

Many kinds of software have been introduced in different organizations, especially for internal communication
– the IP messenger. For external communication, from business-related topics to general Christmas greetings and
other such Brand Loyalty based activities; everything can be achieved with technology.

The number of small organizations today who are setting up shop with cloud-based tools like Office 365
allows and encourages team members to work from home. Yes, this does raise several concerns but it also allows for
flexibility.

Marketing and Branding:

The Marketing and Branding sector has gained a lot of prominence in the past couple of decades, majorly due
to the increase in means to achieve the same. Gone are the days when newspapers, or the radio, or television (which
are all, of course, extremely significant inventions) were the only means of advertising and marketing one’s brand.

Today, Social Media is one of the strongest tools to do so, what with various sites such as Facebook, Twitter,
and of course, the creator of Professional Networks, LinkedIn, all of which bring together brands and people
worldwide to not only recognize each other but also discuss various current trends in the market, as well as Best
Practices in a variety of Management and Organization-based issues.

Looking at the Macro Level

Operations Management and TQM - Lesson: 5
Technology has made a very deep impact on the more global aspects of Business and Industry and continues
to do so, with newer and more efficient methods of functioning being created virtually every day.

When it comes to the Global Economy, we see Technology as an industry in itself, with IT being highest in its
echelons. The magnitude of the effect of this particular industry on the economy is rather obvious, what with its
constant provision of solutions for every kind of organizational issues and demands.

Thanks to the IT sector, then, there has been a major shift in Global Standards and requirements as well.
Today, it is impossible to conceive any kind of business as surviving without promoting itself without IT support, or
communicating through the internet, and those that do not are considered to be lacking in some way or another. The
consensus now is that if you are a reliable company, you are supposed to have at least a website.

Technology, on the other hand, also creates higher standards for Quality, while providing viable solutions for
Sustainability, which is yet another vital aspect and responsibility of organizational functioning.

Technology and Industry Evolution

The term ‘innovation’ as used in this chapter refers to sustained product innovation in complex organizations,
not to R&D management per se, technological evolution, start-ups, IT, or networks of alliances, except as these may
be directly tied to product innovation. ‘Product innovation’ concerns bringing new products and services into
customers’ use, and encompasses the whole process of conceptualizing, developing, designing, manufacturing,
marketing, and distributing new products. Research demonstrates that successful product innovation requires
collaboration from people with diverse functional experts who are skilled at appreciating and anticipating issues and
constraints in other functions (Souder, 1987; Clark and Fujimoto, 1991). New product teams are more successful
when they have a clear product concept, strong managerial support, resources, priorities, and autonomy of action
within strategic guidelines (Adams, 2004).

There are four basic problems in innovation that need to be continually set and solved:

◆ corporate innovation strategy making that sets the direction(s) and determines the kinds of investments in
capabilities;

◆ managing businesses for profit by continually bundling firm resources into new products and opportunities;

◆ developing technological and other specialty capabilities for the long term to support innovation;

◆ managing the myriad new product development teams.

A long tradition of organizational literature has separated a firm’s activities into two distinct realms of
exploration and exploitation. On the one hand, exploration encompasses behavior that increases the variance of
organizational activity. As a result, its returns are often uncertain and distant in time. Exploration is ‘the pursuit of
knowledge, of things that might come to be. On the other hand, exploitation encompasses behavior that increases the
mean of organizational activity. As a result, its returns are more predictable and proximate in time (March, 1991).
Exploitation is ‘the use and development of things already known’.

Several studies on technology and innovation have shown that innovative firms often use some combination
of exploration and exploitation. Consequently, the balance of the two approaches has emerged as one of the key
concepts of organizational success.

Internal Motivation for Enhancing Innovative, Creative Performance

Most managers would readily agree that the benefits of having internally driven motivated professionals are
clear, but it is a very difficult thing to direct, maintain, and understand. Although the presence of motivation does not
guarantee high performance or success, its absence seems to result in long-term problems. Strongly motivated
employees and project teams push themselves to overachieve, stretching their thinking and working arduously to
accomplish considerably more than even brighter and more technically competent peers. As technical leaders gain
experience, they soon realize just how important it is to have the kind of excitement that motivates people to be
creative and move their innovative ideas and advances more quickly through the organization. They are much better
off having technical professionals with A-rated motivations and B-rated capabilities than the other way around. Or as
Thomas Edison once remarked: ‘I have more respect for the person who gets there than for the brilliant person with a
thousand ideas who does nothing’ (Israel, 1998).
Operations Management and TQM - Lesson: 5
The Importance of Standards

Today’s worldwide information infrastructure encompasses a broad spectrum of activities in which

technological standards are important. That infrastructure involves both simple and sophisticated equipment –
everything from wireless communication devices, to microprocessors, to thousands of miles of copper cables. The
rapid pace of technological change has increased the importance of this infrastructure and highlights the strong links
between technological standards, firm strategy, market performance, and economic welfare.

Definitions

Network effects

Standards are important in markets with network effects, which can be thought of as complementary
relationships in value creation among market participants. The most straightforward instances of markets with
network effects are those where consumers and firms form literal communication networks that connect consumers
and firms. Email, telephones, and fax machines, for example, are goods that involve information flows from one party
to another. In these communication networks operating on a common network allows communication with more
users, which is valuable. This is a direct network effect, in that the value of the network to any user is directly
proportional to the total number of users on the network. It can become a network externality if users do not
incorporate the effect their adoption has on the decision of others.

Another sort of network effect is an indirect network effect. This type of network effect arises in markets for
video game consoles and games, computer hardware and software, audio/visual equipment, or any market in which
buyers purchase and consume system goods. Buyers assemble these system goods by purchasing components, often
from different sellers. For example, the audio/visual system consists of components (receiver, CD player, speakers,
etc.) purchased separately and then assembled by the consumer. There are many such examples of system goods in
‘traditional’ markets – razors and razor blades, for example, is a system good. Wrenches, nuts, and bolts are also a
system good.3 System goods using electronic protocols to interoperate have become much more prevalent in high-
tech markets.

In markets with indirect network effects, the value of any component does not depend directly on the number
of other users of that component (hence the terminology), but rather on the availability of complementary and
compatible components. For example, a PC is more valuable as the set of available software for that PC grows. In this
case, adoption by other users can indirectly benefit anyone user by affecting the variety of complementary
components. For example, greater adoption of Play station consoles should generate greater variety in Play station
game titles, by allowing game producers to take advantage of scale economies.

Standards and Standardization

Economic costs and benefits of standardization Standards are interesting from an economic and strategic
standpoint because many markets face a strong trend toward standardization – the adoption of a common
specification for a standard by consumers and/or firms. Put simply, standardization.

Scale economies.

Standards may reduce the economic costs of large-scale production. For example, automobile tires are
standardized across similarly-sized automobiles produced by different firms. This reduces average production costs at
any given firm and avoids duplicate design expenditures. There are a wide variety of standards (in markets other than
automobile parts) that transparently serve this purpose. For example, this motive is a key driver of standardized IT
installations by large businesses. The standardization eliminates the differences between installations in distinct
locations, ultimately reducing the fixed costs of operation.

Network effects

Of course, regardless of scale economies, it is the case that markets with strong network effects tend toward
standardization. This operates in two ways depending on the type of network benefit. In markets with direct network
effects, there is a clear demand-side benefit to standardization on a common system because consumer surplus at
any price is unequivocally greater with full standardization. Thus, we expect that communication network-based
markets should achieve standardization, through compatibility in the technology used for communication. For
example, email systems today display near-complete standardization; senders with different email and Internet
service providers can communicate with little difficulty. The same is (almost completely) true for operating systems,
Operations Management and TQM - Lesson: 5
file transfers, fax technology, languages, and a host of other communication networks where there are large demand-
side benefits to standardization.

Product variety.

Although standardization generates benefits for consumers by allowing them to construct a wider array of
composite goods, it may also reduce differentiation between individual components and the associated composite
goods if the process of standardization restricts the dimensions of product differentiation. As an example, suppose
those razor blade manufacturers decided to standardize the production of razors and razor blades so that all blades
and razors would be fully interoperable (i.e., any company’s razor blade would fit any other razor). Doing so might
require eliminating product differentiation that consumers find valuable (such as the number of blades on the razor,
or whether the razor is disposable). In such cases, standardization might reduce consumer welfare.

The locus of competition: systems versus components.

In many markets, standardization is important because it changes the dimensions on which firms compete.
For example, Macintosh and PCs operate on different standards; one cannot use a Macintosh software program or
hard drive on a PC. This creates differentiation between the two systems, which may soften price competition. For
example, it allows Mac to target particular market segments (e.g., graphics-intensive applications) through its system
design. In contrast, within the PC system itself, there is a great deal of standardization; monitors, printers, and other
components are all fully interoperable, therefore creating competition at the component level.

The sunk costs of adoption.

Many technologies that standardize are durable goods, which provide a flow of services over time. For
example, consumers typically hold audio/visual components for several years. Operating systems (which are
components of computer systems) are another example of a good that is purchased infrequently. Product durability is
important in the adoption decision because it introduces sunk costs of adoption. Most components cannot be resold at
their initial purchase value. Another product feature in many systems market is the ‘hardware/software’ aspect of
components. Certain systems are assembled through the assembly of a durable component (hardware) and a more
frequently purchased add-on (software). Finally, some system markets are ‘subscription’ markets (e.g., credit cards
and ATMs).

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