Analysis and Management

of Production System
Lesson 18: Operations Strategy

Alberto Faveto

Department of Management and

Production Engineering

alberto.faveto@polito.it
Operations Strategy

● What is Operations Strategy?

Operations Strategy

● What is Operations Strategy?

The term operations strategy seems to be a

contradiction. The strategy is the direct
opposite of those detailed activities
associated with operations.
Operations Strategy

Before defining OS we have to do a step

backward… what do operations and
strategy mean?
Operations

“Operations” is the part of an organization that creates and/or

delivers products and services. A company transforms inputs
into outputs that satisfy a customer need.

An Operations Manager is responsible for managing two

crucial sets of issues:
- Resources: what type of materials, information, people,
technology, etc. are appropriate to best fulfil the
company's objective
- Processes: how resources are organized to best create
the required mix of products and services
Operations

Transformed resources

Products and Services

Transforming resources

Operations
Transformed resources (material, information, etc.) have value
added moving through the operation’ process

Transforming resources (people, facility, etc.) are organized to form

processes
Level of Analysis

strategic
A firm can be considered as a
network of transforming resources.
By a network we can considered a
set of resources linked together.
Network can be described in many
different levels of analysis:

- Supply network Level

(flow between operations)
- Operational Level
(flow between processes)
- Process Level

Operational
(flow between resources)
Level of Analysis

An Operations Manager must understand the capabilities of

the resources that form each element of their network, and
how effectively they are linked together as networks.
Four Vs Model

All operations and processes differs in some way and so will

need managing differently.

Some differences are “technical” in the sense that different

products and services require different skills and
technologies to produce them.

However, processes also differ in terms of the nature of

demand for their product. We can describe processes trough
4 characteristics of demand with the 4Vs Model
Four Vs Model

The 4 Vs of Demand are:

● Volume
● Variety
● Variation
● Visibility
Volume

A high volume of outputs means a

high degree of repeatability. This
allows the standardization of
activities that gives higher
processing efficiencies.

A low-volume process with less

repetition cannot specialize to the
same degree. Staff performs a
wider range of tasks.

High volume results in lower unit

costs than low volume.
Variety

Producing high variety of products

and services must involve a wide
range of activities, skills, technologies
and inputs.

Mass customization or one-of-a-kind

products easily reach customer
needs, so they are usually more
appreciated by the market.

Generally, variety means higher costs

than low variety.
Variation

Processes are generally easier to

manage when they only need to cope
with predictably constant demand.
Resources ca be geared to a level
that is just capable to meeting
demand, all activities can be planned.

In contrast, when demand is variable

and unpredictable, resources will
have to be adjusted over the time,
this generally causes extra costs.
Visibility

Process visibility indicates how much

of the value added by operations is
“experienced” directly by customer, or
how much it is exposed to customer.

Generally, processes that act directly

on customer will have a higher
visibility, and so there are some
value-added activities more important
than others.

Hight visibility activities must be

efficient, and staff needs contact skill.
Implications of 4Vs

The typology of operations depend

on the strategic decision:
Operational
Management
The type of product or services it
chooses to develop, the type of
customer and market it decides to
serve will define the volume, 4Vs
Model
variety, variation and visibility with
which the operation needs to cope Firm Costs
Strategy
Positioning

The 4Vs model act as a link

between the strategy positioning,
the operational management and
defines the general firm costs.
Branch vs Online Banking

Low volume High

High variety Low

High variation Low

High visibility Low

Traditional Branch Banking

Low volume High

High variety Low

High variation Low

High visibility Low

Online Banking

Low volume High

High variety Low

High variation Low

High visibility Low

…and what is strategy?

Strategy
The word strategy derives form the Greek word Strategos, that means “leading
an army”, company’s army is the business and its resources.

A. Setting board objectives that direct an enterprise towards its overall goals
B. Planning the path to reach these goals
C. Stressing long term rather than short term objectives
D. Dealing with the total picture
OS vs OM
Difference between OS and
OM
Longer Time Scale
Higher Level of Analysis
Higher Level of Aggregation
Higher Level of Abstraction
Operations Management ex
What demand fluctuations do
we have to deal with over the
next few months?
Where should we position each
product category within our
department store?
How do we provide tax advice
to the small business sector in
Genova?
How do we improve our
purchasing procedures?
Operations Strategy ex
When should we plan to add
further capacity so that we can
meet rising forecast demand?
How many stores should we
have, where should we locate
them and how should we supply
them?
What is overall business advice
capability compared with our
other European Activities?
Should we develop strategic
alliances with selected medical
products suppliers?
Four Perspective on OS

Different authors have differing views and definitions of Operations

Strategy

1. Operation Strategy is a Top-Down reflection of what the whole

group or business wants to do

2. Operation Strategy involves translating “market requirements”

into operations decision (Outside In perspective)

3. Operation Strategy is a Bottom-Up activity where operations

improvements cumulatively building strategy

4. Operation Strategy involves exploiting the capabilities of

operations resources in chosen markets (Inside-Out
perspective)
Four Perspective on OS
Top-Down

An operations strategy must

reflect the decisions taken at the
top of the organization, which set
the overall strategic direction of Corporate
the organization.

In the top-down view, three levels

of strategy, corporate strategy,
Business
forms objectives for business
strategy. Business strategy
guides functional strategy.
Functional
At any level, an excellent top-
down perspective should clarify
what should be prioritizing and
how the strategy is to be
achieved.
Outside-In

Operations exist to serve markets. A starting point for any operation

strategy is to look to its market and ask the simple but important
question:

“How can operations help the organization to compete in its

marketplace?”

Customers and Competitors have a great impact on market

positioning, and both influence operations strategy

Operations
Customers Market
Performances
required to
Positioning support Market
Competitors Positioning
Bottom-Up

The bottom-up perspective should

involve:
Knowledge
and company’s
● Capturing the learning that capabilities
should come from routines, and
day-to-day activities

● Transforming that learning into

strategically valuable knowledge
Day-to-day
In unstable and unpredictable operational
environments, trends and general experience and
insights become evident in the day- routines
to-day experience instead of a
higher perspective.
Inside-Out

The resources and processes within an operation are not simply

passive elements. They have an existence and a role that should be
part of any operations strategy.

The concept of intangible resources and routines is central to the

Resource Based View (RBV) of strategic management.

The RBV sees firms being able to protect their competitive

advantage by building up “difficult to imitate” resources.

- Resources are scarce

- Resources are imperfectly mobile
- Resources are imperfectly imitable and imperfectly substitutable
RBV and ERBT

The most common way of evaluating potential strategic resources is the VRIO
framework:
1. Is the resource valuable?
2. Is the resource rare?
3. Is the resource costly to imitate?
4. Is the firm organized to capture the value of the resource?

All these factors are time dependent. The organization (O) is a prerequisite for
the exploitation strategic resources.

In recent years, Resources Based

Theory has been extended (ERBT).

Even the strategic resources that are

outside the boundaries of firm can still
be used to create strategic advantage.
VIRO Framework

3. Organization + Value + Rarity

Short/Medium term competitive
advantage
RARE?

2. Organization + Value
At least we are at parity
with competitors
Operations
contributes to
VALUABLE? sustainable INIMITABLE?
competitive
advantage

4. Organization + Value
ORGANIZATION + Rarity + Inimitability
EXPLOIT
1. Organization CAPABILITIES? Medium/Long term
competitive advantage
Potential to contribute to
competitiveness
Operations Strategy Definition

Finally, we can try to define Operations Strategy, According to Slack

et al.:

“Operations strategy is the total pattern of decisions that

shape the long-term capabilities of any type of operation and
their contribution to overall strategy, through the reconciliation
of market requirements with operations resources.”
Decision Areas

It is possible to group Operations Strategy decisions in four different areas:

- Capacity Strategy, this is about how capacity and facilities in general

should be configured

- Supply Network Strategy, this is about how operations relate to the

interconnected networks of other operations including customers,
customers’ customers, suppliers, suppliers’ suppliers and all stakeholders

- Process Technology Strategy, this is about the choice and development

of machines and processes that act directly or indirectly on transformed
resources to convert its in final products or services.

- Development and Organization, this concerns the set of broad and long-
term decisions governing how the operation is run on a continuing basis.