Chapter 1

Operations Strategy
Sixth Edition
Chapter 1
An introduction to operations
strategy
Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved
The fundamentals of operations strategy
Overview of The ‘content’ of The ‘process’ of

• Operations excellence operations strategy operations strategy operations
and strategic success strategy
• How is operations
strategy different from
operations Capacity strategy
• Top-down operations
strategy An introduction to
• Outside-in operations operations strategy The process of
Purchasing and operations strategy –
strategy supply strategy
• Bottom-up operations formulation and
strategy implementation
Operations’ strategic
• Inside-out operations Process technology
performance
strategy strategy
• ‘Content’ and process The process of
• Operations strategy operations strategy –
Socially responsible Improvement
decision making monitoring and
operations strategy strategy
control
Product and service
development
strategy
Why is operations excellence fundamental
to strategic success?
• Operations is the part of an organisation that creates and/or
delivers its products and services.
• Every type of organisation, whether a hotel, hospital,
supermarket, games developer, government department, has
an operations function, even if it is not called that.
• The ‘input-transformation-output’ model
• Transformed resources move through these activities until
they become a mix of products and services. The arrangement
of transforming resources and the way in which transformed
resources move through them, are called ‘processes’
Operations managers are responsible for managing two
interacting sets of issues:
• Resources – what type of materials, information, people (as
customers or staff), technology, buildings, and so on, are
appropriate to best fulfil the organisation’s objectives.
• Processes – how resources are organised to best create the
required mix of products and services.
Or, to put it more succinctly, do we have the right resources and
are we using them appropriately?
All operations transform input resources into
products and services
Transformed resources (materials, information
and customers) have value added as they
move through the operation’s processes
Materials
Information
Customers
Transformed resources
Products and services
Transforming resources
People
Facilities (technology,
buildings, etc.)
Transforming resources (people and
facilities) are organised to form processes
• Most operations produce both products and services. But some,
such as an aluminium smelter, mainly produce products with only
a peripheral service element. Others, such as a psychotherapy
clinic, produce almost pure services.
• Yet, the idea of the transformation model applies to all types of
operation, manufacturing and service, for-profit and not-for-profit,
those with external customers and those with internal customers.
• Marketing, finance, information systems and HRM all transform
inputs into outputs to satisfy customer needs. Sometimes these
customers are external, sometimes internal. But the principle holds
true: all parts of the business and all functions of the business are,
in a sense, ‘operations’.
Operations, networks and levels of
analysis
• A ‘network’ simply means a group of two or more sets of
resources linked together. All operations are formed of
networks: of individual staff with their technology
(computers, for example), through which information flows;
of work centres or departments moving physical products
between them; and networks of businesses trading a complex
mix of services.
• The important point here is that, at each level of analysis,
operations managers must understand the capabilities of the
resources that form each element of their network, and how
effectively they are linked together as networks.
Operations management and strategy requires
analysis at three levels
Flow between operations Strategic
Analysis at the level analysis
of the supply network
Flow between processes

Analysis at the level
of the operation
Analysis at the level

of the process
Flow between resources Operational
analysis
Not all operations are the same
• All operations and processes differ 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 products or services.
• Four characteristics of demand, sometimes called the ‘Four
Vs’, have a significant effect on how processes need to be
managed
Not all operations are the same
1. Volume – A high volume of output means a high degree of
repeatability, making a high degree of specialisation both
feasible and economic.
2. Variety – Producing a high variety of products and services
must involve a wide range of different activities, changing
relatively frequently between each activity.
3. Variation – Processes are generally easier to manage when
they only need to cope with predictably constant demand.
4. Visibility – Process visibility is a slightly more difficult
concept to envisage. It indicates how much of the value
added by the operation is ‘experienced’ directly by
customers, or how much it is ‘exposed’ to its customers.
The Four Vs analysis for the changing emphasis of retail
banking services from branch-based to online
Shift from ……..
Branch banking To Online banking
Implications Implications
Low repetition High repetition

Individuals perform more of job Four V’s analysis for some retail banking processes Specialisation
Low Volume High Systemisation
Less systemisation
High unit costs Capital intensive
Low unit costs
Well defined
Flexible
Routine
Complex
High Variety Low Standardised
Match customer needs
Regular
High unit costs
Low unit costs
Changing capacity Stable

Anticipation Routine
Flexibility High Variation Low Predictable
In touch with demand High utilisation
High unit costs Low unit costs
Short waiting tolerance Time lag between
Customer perception important production and
Customer contact skills needed High Visibility Low consumption
High unit costs Standardised
High utilisation
Low unit costs
Operations, networks and levels of
analysis
• The importance of the Four Vs is that they are the result of
strategic decisions that have been taken by an operation.
• The types of products and services it chooses to develop, and
the type of markets that it chooses to enter, will define the
volume, variety, variation and visibility with which the
operation needs to cope.
• At the same time, all four Vs will affect the way that the
operation’s processes are managed.
• The Four Vs act as a link between the strategic and
operational aspects of operations management.
What is a strategy?
Linguistically, the word derives from the Greek word strategos,
meaning ‘leading an army’, although there is no direct historical link
between Greek military practice and modern ideas of strategy. Both
military and business strategies can be described in similar ways as
follows:
 Setting broad objectives that direct an enterprise toward its overall
goal;
 planning the path (in general rather than specific terms) that will
achieve these goals;
 stressing long-term rather than short-term objectives;
 dealing with the total picture rather than stressing individual
activities;
 being detached from, and above, the confusion and distractions of
day-to-day activities.
What is a strategy?
Later views of strategy have introduced some of the practical
realities of business, based on observations of how organizations go
about making (or not making) strategic decisions. These include the
following.
• Business objectives may never become ‘clear’. In fact, most
organizations will have multiple objectives that may conflict.
• Markets are intrinsically unstable in the long term, so there must
be some limit to the usefulness of regarding strategy as simply
planning what to do in the future.
• Many decisions are far less formal than the simple planning model
assumes. In fact, many strategic decisions ‘emerge’ over time
rather than derive from any single, formal senior management
decision.
• Organizations do not always do in practice what they say they will
do, or even what they want to do.
Operations strategy and how is it
different from operations management
• One of the biggest mistakes a business can make is to confuse
‘operations’ with ‘operational’. The meaning of ‘operational’
is the opposite of strategic; it means detailed, localized, short
term and day-to-day. And operations management is very
much like this.
• Operations strategic is the strategic perspective on how
operations resources and processes are managed.
How is operations strategy different from
operations management?
Operations management Operations strategy
Short term Long term
Demand
Demand
Timescale
e.g. capacity decisions
1–12 months 1–10 years
operations management? (Continued)
Micro Macro
Level of analysis
Concerned with the
macro operation
(level of the firm)
Detailed Aggregated
Level of aggregation
‘Can we give tax ‘What is overall business
Concerned with
services to the small advice capability
resources at an
business market in compared with other
aggregated level
Antwerp?’ capabilities?’
Concrete Philosophical
Level of abstraction ‘How do we improve ‘Should we develop

Concerned with the our purchasing strategic alliances with
conceptual procedures?’ suppliers?’
• However, operations strategy is not simply a blend of the
subjects of operations management and strategic
management.
• It is an operations-based subject that is concerned with
operations issues and its feet are firmly in the operations
‘camp’, even if its direction and purpose are strategic.
• More significantly, it believes that many of the businesses
that seem to be competitively successful and appear to be
sustaining their success into the longer term have a clear (and
often innovative) operations strategy.
Four perspectives on operations strategy
Just as there is no overall agreement about what ‘strategy’ means, there is
no universal agreement on how ‘operations strategy’ should be described.
Between them, four ‘perspectives’ on the subject emerge.
1. Operation strategy is a ‘top-down’ reflection of what the whole group
or business wants to do.
2. Operations strategy involves translating ‘market requirements’ into
operations decisions (the outside-in perspective).
3. Operations strategy is a ‘bottom-up’ activity where operations
improvements cumulatively build strategy.
4. Operations strategy involves exploiting the capabilities of ‘operations
resources’ in chosen markets (the inside-out perspective).
None of these four perspectives alone gives the full picture of what
operations strategy is but together they provide an idea of the pressures
that form an operations strategy.
The four perspectives on operations strategy – top-down,
bottom-up, market requirements (outside-in), and operations
resources (inside-out)
Top-down
perspective
Operations strategy
should interpret
higher level
strategy
Operations resources (inside- Market requirements

out) perspective OPERATIONS (outside-in) perspective
Operations strategy should STRATEGY Operations strategy should
build operations capabilities satisfy the organisation’s
markets
Bottom-up
perspective
Operations strategy
should learn from
day-to-day
experience
How should operations strategy reflect
overall strategy (top-down)?
• An operations strategy must reflect the decisions taken at the
top of the organization, which set the overall strategic
direction of the organization. This is called a ‘top-down’
approach to operations strategy.
• So, if the organization is a large, diversified corporation, its
corporate strategy will consist of decisions about what types
of business the group wants to be in, in what parts of the
world it wants to operate, what businesses to acquire, and
what to divest, how to allocate its cash between its various
businesses, and so on.
Correspondence and coherence
• However, developing any functional strategy from a business
strategy is not a straightforward task.
• There should be a clear, explicit, and logical connection
between each functional strategy and the business strategy in
which they operate. Moreover, a clear, explicit, and logical
connection should also be between a functional strategy and
the decisions taken within the function.
• In other words, a clear correspondence between a business’s
strategy and its operations strategy should exist.
Correspondence and coherence
• Operations strategy must also be coherent, both with other
functional strategies and within itself.
• Coherence means that the choices made across or within
functions should not pull in different directions.
• All decisions should complement and reinforce others in the
promotion of the business’s and the operation’s objectives.
• And, although coherence is clearly important, it often
requires some strong top-down direction, or at least a strong
planning process, to make sure that it happens.
Correspondence and coherence are the two requirements of
the top-down perspective of operations strategy
Business strategy
Correspondence between business

strategy and operations strategy
HR Marketing Operations Finance IT

… etc.
Coherence across functional strategies
Correspondence between operations

strategy and operations decisions
Product/service Operations Process Supply chain Capacity

innovation structure and design management management … etc.
scope
Coherence within operations strategy
How do the requirements of the market
influence operations strategy (outside-in)?
• Operations exist to serve markets. Indeed, a sensible starting
point for any operations strategy is to look to its markets and
ask the simple but important question, ‘How can operations
help the organization to compete in its marketplace?’
• Therefore, by choosing to inhabit a market position, the
organization is, to some extent, influencing how easy it is for
the operations function to support the market position.
• This opens the possibility that, in some circumstances, it may
be sensible to shift the markets in which the organization is
trying to compete in order to reflect what its operation is
good (or bad) at.
Performance objectives
• This is the stage that identifies performance objectives for the
operation; that is, the aspects of operations performance that
satisfy market requirements and therefore that the operation is
expected to pursue.
• Here, we will use a set of five performance objectives that
have meaning for any type of operation:
1. quality;
2. speed;
3. dependability;
4. flexibility;
5. cost.
The outside-in element of operations strategy translates
the requirements of the market into a set of operations
performance objectives
Outside-in perspective
The operations Understanding the

performance market through, for
objectives required to example.
support market
positioning Select intended • Market
Operations • Quality market segmentation
Strategy • Speed positioning(s) • Competitor
• Dependability analysis
• Flexibility
• Cost
Translating between markets and operations objectives
• The essential point of the outside-in perspective is that
operations strategy must reflect an enterprise’s intended
market position.
• The problem is that the concepts, language, and, to some
extent, philosophy used to help marketing people understand
markets are not always useful in guiding operations. The
result is that descriptions of what markets need often need
‘translating’ before they can be useful to operations.
How can operations strategy learn from
operational experience (bottom-up)?
• The bottom-up perspective stresses how strategic ideas
emerge over time from actual experiences.
• Companies adopt strategies partly because of their ongoing
experience, sometimes with no high-level decision-making
involved.
• The idea of strategy being shaped by experience over time is
also called the concept of emergent strategies.
• Shaping strategy from the bottom up requires an ability to
learn from experience and a philosophy of continual and
incremental improvement.
The bottom-up element of operations strategy is to
learn from day-to-day experiences and converting
the knowledge gained into strategic capabilities
Operations
strategy
Convert knowledge
into capabilities
Knowledge
building
Learning
Day-to-day operational
experience
Bottom-up perspective
How can operations strategy learn from
operational experience (bottom-up)?
• And, for businesses operating in unstable or unpredictable
environments, this can be particularly important.
• The other three perspectives of operations strategy can take
time to detect trends in how markets are moving.
• The bottom-up element is more ‘plugged in’ to everyday
experience.
How can the intrinsic capabilities of an
operation’s resources influence operations
strategy (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. No surprise,
then, that the long-term management of resources and
processes is often regarded as the underlying rationale for
operations strategy
• A useful starting point is to understand ‘what we have’ – that
is, the totality of the resources owned by, or available to, the
operation. Next, one needs to link the broad understanding of
resources and processes with the specific operations strategy
decisions: ‘What actions we are going to take?’
How can the intrinsic capabilities of an
operation’s resources influence operations
strategy (inside-out)?
• Over time, an operation may acquire distinctive capabilities,
or competencies, based on its resources and the accumulation
of its experiences.
• These capabilities may be embedded within a company’s
intangible resources and its operating ‘routines’. So, they
concern both what the operation has and what it does.
• Operations shape these capabilities (consciously or
unconsciously) through the way it makes a whole series of
decisions over time.
• These decisions can be grouped under the headings of
capacity, supply network, process technology, and
development and organization.
The inside-out element of operations strategy develops the
capabilities of the operation’s resources and processes
Inside-out perspective
The key decisions that support and

develop operations capabilities
• Performance measurement
An • Capacity strategy
understanding of Operations Operations
the operation’s • Supply network strategy
capabilities strategy
resources and • Process technology strategy
processes
• Product/service development
strategy
• Improvement strategy
Operations resources, processes, routines,
and capabilities
• Listing its resources provides a first step in understanding an
operation, but this is rather like describing an automobile by
listing its component parts. To understand how an operation
works we need to examine the interaction between its
resources.
• For example, how different resources, such as processing
centers, are positioned relative to each other, how the staff is
organized into units, and so on. These arrangements of
resources constitute the processes of the operation that
describe the way things happen in the operation.
and capabilities
• To return to the car analogy, processes are the mechanisms
that power, steer and control its performance.
• Yet even this technical explanation of a car’s mechanisms
does not convey either the full extent of how it performs on
the road or its style, feel, and ‘personality’.
• Similarly, any view of an operation that limits itself to a
description of its obvious tangible resources and processes
fails to move our knowledge of the operation beyond the
most basic level.
• Any audit of a company’s resources and processes needs to
include the organization’s intangible resources.
and capabilities
These are the factors that may not be directly observable but are
significant in enabling any company to function:
 supplier relationships, contracts, and mutual understanding of
how suppliers are managed;
 knowledge of, and experience in, dealing with technology
sources and labor markets;
 process knowledge relating to the day-to-day production of
products and services;
 new product and service development skills and procedures;
 contacts and relationships in the market that enable an
understanding of market trends and customer needs.
The resource-based view of the firm
• The concepts of intangible (or invisible) resources and of
routines are central to what is sometimes called the ‘resource-
based view’ (or RBV) of strategic management.
• The resource-based view is based on the notion that most
companies consider themselves to be particularly good at
some specific activities but try to avoid head-to-head
competition in others.
• It has its origins in early economic theory.
• Some of the initial works in strategic management also
included consideration of the firm’s internal resources.
• The ‘SWOT’ (strengths/weaknesses/opportunities/threats)
approach saw competitive advantage as exploiting the
opportunities raised in the competitive environment using the
firm’s strengths while neutralizing external threats and
avoiding being trapped by internal weaknesses.
• While one school of thought, the ‘environmental’ school,
focused on a firm’s opportunities and threats, the other, the
‘resource-based’, focused on a firm’s strengths.
• The two schools of thought differ in the way they explain
why some companies outperform others over time – what
strategists call a ‘sustainable competitive advantage’ (SCA).
The resources that a firm possesses are closely linked to its
ability to outperform competitors. Certain of these resources are
particularly important and can be classified as ‘strategic’ if they
exhibit the following properties.
 They are scarce. Unequal access to (or information about)
resources can lead to their uneven distribution among
competing firms. In this way, scarce resources such as
specialized production facilities, experienced engineers,
proprietary software, etc. can underpin competitive
advantage.
 They are imperfectly mobile. Some resources are difficult to
move out of a firm. For example, resources that were
developed in-house, or are based on the experience of the
company’s staff, cannot be traded easily. As a result, the
advantages that they create are more likely to be retained over
time.
 They are imperfectly imitable and imperfectly substitutable.
These critical dimensions help to define the overall
sustainability of a resource-based advantage. It is not enough
only to have resources that are unique and immobile. If a
competitor can copy these resources or, less predictably,
replace them with alternative resources, then their value will
quickly deteriorate.
The VRIO Framework
• The most common (and useful) way of evaluating potential
strategic resources is what has become known as the VRIO
framework.
• In this framework, the resources must be valuable (V), rare
(R), imperfectly imitable (I), and the firm organized to
capture the value of the resources (O).
Using this framework, the four questions to ask about any
potentially strategic resource are:
1. Is the resource valuable? Is it possible to identify specific
and definable competitive value from the resources? Do they
help to exploit opportunities in the market, or defend against
threats from competitors, and, if so, exactly how?
The VRIO Framework
2. Is the resource rare? Do you have, or have access to,
resources that your competitor does not? Some theorists define
the idea of ‘rarity’ as when a business has a resource that is
unequivocally unique, but for all practical purposes, a resource
is ‘rare’ if it is at least, in short supply and likely to remain so.
3. Is the resource costly to imitate? Do you have resources
that competitors cannot imitate, purchase or find a suitable
alternative to, at a realistic cost or in a realistic time frame?
Note that ‘imitability’ may be either because competitors can
copy your resources and processes directly, or because they can
find an acceptable substitute for them.
The VRIO Framework
4. Is the firm organized to capture the value of the resource?
Do you have within your business the systems, culture, capacity,
and motivation to exploit any capabilities embedded in your
resources and processes? Even if a firm has valuable, rare, and
inimitable capabilities, it may not be able to exploit them. A
firm must have formal reporting and control mechanisms,
leadership, and an informal and cultural environment that
allows strategic resources to develop.
The VRIO Framework
• There are two important points to remember about the VRIO
framework. First, all these factors are time-dependent. A
capability may be currently valuable now, but competitors are
unlikely to stand still. Neither are a rarity and inimitability
absolutes and, with time, can be undermined by competitor
activity. Even the ability to exploit capabilities can erode if
operations leadership is lacking.
• Second, although the conventional order in which to treat
each of these elements is as we have done here (VRIO
framework), it maybe is best to think of the ‘O’ of
‘organization’ to be a prerequisite. Without the ability to
exploit strategic resources, they are of little use.
The four features of the VRIO framework
Organisation + value + rarity

Organisation + value = short-/medium-term
= at least parity with competitive advantage
competitors
Are your Are your

capabilities capabilities
valuable? rare?
Operations
contributes to
sustainable
competitive
advantage
Is operations
Are your
organised to
capabilities
exploit your
inimitable?
capabilities?
Organisation = Organisation + value +
potential to contribute rarity + inimitability =
to competitiveness long-term competitive
advantage
Extended Resource-based Theory (ERBT)
• In recent years, resource-based theory (RBT) has been
developed by some theorists to include the influence of the
wider supply network of which the firm is a part. This idea is
termed the ‘extended’ RBT (ERBT). It assumes that even
strategic resources that are outside the boundaries of the firm
can still be used to generate strategic advantages for the firm.
• Of course, this assumes that these strategic resources beyond
the boundaries of the firm can be readily accessed. In other
words, the relationships between operations within a supply
network are suitably strong and/or collaborative, and the
synergy between resources within each firm is sufficiently
close, to make access to another firm’s resources valuable.
Top-down, outside-in, bottom-up, and inside-out perspectives
of the Heftexx operations strategy
Top-Down
Visual Spectacular Group building capability in high

technology entertainment services
Outside-In
Inside-Out
Heftexx lighting solutions business grows through high-
Shift market
Many new tech LED lighting and digital control systems innovations
emphasis to
clients run
Increase ‘event’ and high-
events in
Open Barcelona software margin clients
southern
Europe site, work Operations invests in hi-tech lighting and control development,
closely with systems that provide innovative designs but data exchange
suppliers, educate clients to recognise potential, set up new and client liaison,
organise ‘state site to ensure close and dependable service and skills and aim for Specialise in
Longer journey of play’ absolute innovative
develop close relationships with suppliers
times to service conferences dependability . technically
’event’ clients sophisticated
pushing up costs lighting solutions
Offer simplified ‘pre-designed’ lighting packages
and run training workshops for clients
Customers seem to be confused by the capabilities

of the new lighting and control technologies
Bottom-Up
So, what is Operations Strategy?
• The four perspectives on operations strategy that we have
outlined are not ‘alternative’ views of what operations
strategy is. Operations managers can (and should) hold all
four views simultaneously.
• They simply represent alternative starting points for
understanding the nature, scope, and rationale of operations
strategy. Bringing all four views together can even expose the
dilemmas inherent within an operations strategy.
• In fact, operations strategy is the attempt to reconcile all four
perspectives: the top-down with the bottom-up view, and the
market requirements (outside-in) with the operations resource
(inside-out) view. But there can be tensions between the
perspectives.
So, what is Operations Strategy?
• 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.
• An operations strategy refers to the system an organization
implements to achieve its long-term goals and mission. It
involves decisions based on multiple factors, including
product management, supply chain, inventory, forecasting,
scheduling, quality, and facilities planning and management.
What is the difference between the ‘content’
and the ‘process’ of operations strategy?
• The ‘content’ of an operations strategy is the building block
from which any operations strategy is formed. This includes
the definition attached to individual performance objectives,
together with prioritization of those performance objectives.
It also includes an understanding of the structure and options
in the four decision areas of capacity, supply networks,
process technology and development, and organization.
• The ‘process’ of operations strategy is the procedures that are,
or can be, used to formulate operations strategy. It determines
how an operation pursues the reconciliation between its
market requirements and operations resources in practice.
What constitutes the ‘content’ of operations strategy?
• Operations strategy is concerned with the reconciliation of
market requirements and operations resources. It attempts to
influence the way it satisfies market requirements by setting
appropriate performance objectives. It attempts to influence
the capabilities of its operations resources through the
decisions it takes in how those resources are deployed.
• So, the content of operations strategy is the interaction
between the operation’s performance objectives and the
decisions that it takes concerning resource deployment.
The content of operations strategy involves the strategic
reconciliation of market requirements with
operations resources
The Operations Resource The Market Requirements

Perspective Perspective
…. define the requirements for
Tangible and the business’s market position Customer
Intangible Needs
Resources
Operations Operations
Operations Strategy Content of operations Market
strategy performance Positioning
Capabilities Decision Areas Objectives
Operations Competitors’
Processes …shape the capabilities of which Actions
operations resources are capable
Strategic Decisions Required Performance

Understanding Understanding
• Capacity • Quality
Resources and Markets
• Supply networks • Speed
Processes
• Process technology • Dependability
• Development and • Flexibility
organisation • Cost
Operations strategy performance objectives
• The market requirements’ perspective on operations strategy
is often summarised in terms of five generic performance
objectives: quality, speed, dependability, flexibility, and cost.
Their purpose is to articulate market requirements in a way
that will be useful to operations.
• However, before we can pursue the idea of performance
objectives further, we must take a step back in order to
consider market positioning and how competitive factors are
used to describe positioning. A company may try to articulate
its position in the market in several ways. It might compare
itself with a competitor.
Decision Areas
• Also, in Figure 1.12 is a set of ‘decision areas’; these are the
sets of decisions needed to manage the resources of the
operation. Again, various writers on operations strategy use
slightly different groupings and refer to them collectively in
slightly differing ways, such as ‘operations policy areas’,
‘sub-strategies’, or ‘operations tasks’.
• We shall refer to them throughout this book as ‘operations
strategy decisions’ or ‘decision areas’, and the groupings of
decision areas that we shall use are as follows.
• Capacity strategy: this is about how capacity and facilities,
in general, should be configured. It includes questions such
as: What should be the overall level of capacity? How many
sites should the capacity be distributed across, and what size
should they be? Should each site be engaged in a broad
mixture of activities, or should they specialize in one or two?
Exactly where should each site be located? When should
changes be made to overall capacity levels? How big should
each change in capacity be? How fast should capacity
expansion or reduction be pursued?
• Supply network strategy (including purchasing and
logistics): this is about how operations relate to the
interconnected network of other operations, including
customers, customers’ customers, suppliers, suppliers’
suppliers, and so on. All operations need to consider their
position in this network, both to understand how the dynamic
forces within the network will affect them and to decide what
role they wish to play in the network. Decisions here include
answers to questions such as: How much of the network do
we wish to own? How can we gain an understanding of our
competitive position by placing it in a network context?
• Process technology strategy: this is about the choice and
development of the systems, machines and processes that act
directly or indirectly on transformed resources to convert
them into finished products and services. Decisions here
include answers to questions such as: How should we
characterise alternative process technology? How should we
assess the consequences of choosing a particular process
technology?
• Development and organization: this concerns the set of
broad and long-term decisions governing how the operation is
run on a continuing basis. Decisions here include answers to
questions such as: How do we enhance and improve the
processes within the operation over time? How should
resources be clustered together within the business? How
should reporting relationships be organised between these
resources? How should new product and service development
be organised?
Decomposing the ratio profit/total assets to derive
the four strategic decision areas of operations strategy
Profit Output Profit
Total assets = Total assets × Output
Profit Revenue Cost

= −
Output Output Output
Average Average
revenue cost
Output Output Fixed assets Capacity

= × ×
Total assets Capacity Total assets Fixed assets
Utilisation Working capital Productivity of
fixed assets
Operations strategy Capacity Supply Process Development

decision areas network technology and organisation
Structural and infrastructural decisions
• Structural issues primarily influence the physical arrangement
and configuration of the operation’s resources. Infrastructural
strategy areas influence the activities that take place within
the operation’s structure.
• This distinction in operations strategy has been compared to
that between hardware and software in a computer system.
The hardware of a computer sets limits to what it can do.
Some computers, because of their technology and their
architecture, are capable of higher performance than others,
although those computers with high performance are often
more expensive.
What constitutes the ‘process’ of operations strategy?
• The ‘process’ of operations strategy is the procedures that are
or can be, used to formulate operations strategy. ‘Process’
determines how an operation pursues the reconciliation
between its business (and therefore, operations) strategy and
the day-to-day running of its resources and processes in
practice.
• While the overall operations strategy will (or should) set the
general purpose and objectives for how an operation develops
its knowledge and capabilities, it is the extent of this
knowledge and capabilities that will determine how well the
operations strategy will be achieved.
The process of operations strategy reconciles the
top-down and bottom-up perspectives
Corporate strategy
Top-Down
Business strategy Perspective
Operations strategy
Process of
….sets the overall purpose operations ….determine how well the
and objectives for .. strategy operations strategy will be
achieved
Operations knowledge and capabilities
Bottom-Up
Perspective
Day-to-day operational experience of
running resources and processes
• However, few organizations have discovered how to make
strategy work reliably – the failure rate of planned strategies
remains remarkably high. We use a simplified stage model to
identify some of the key issues.’ The model that we use later
in the book is shown in Figure 1.15 and distinguishes four
stages: formulation, implementation, monitoring, and control.
• The second point is that the success of an effective operations
strategy ‘process’ is closely linked to the style and skills of
the leaders who do it.
The stages of the process of operations strategy
Operations strategy Operations strategy

formulation implementation
Operations strategy Operations strategy

control monitoring
How are operations strategy decisions
made?
• Throughout this book (in line with most treatments of any
strategy related subject), we look not only at the factors that
influence operations strategy decisions, but often indicate
approaches to handling data in a way that can derive the
‘best’ option to some decisions.
• Some of these approaches are qualitative in that they specify,
in largely non-quantified terms, the types of factor to take
into consideration when making decisions, and sometimes the
order in which to consider them. Others are quantitative,
involving the manipulation of numerical data. But, whether
qualitative or quantitative, almost all approaches to strategic
decision-making assume that decision-makers are rational.
made?
• That is why we start this section of this introductory chapter
by looking at a caveat to all operations decision-making: what
has become known as ‘behavioural operations’.
• After that we look at three other useful approaches: the
operations strategy matrix, decision-making under
uncertainty, and strategy mapping.
made?
• A behavioral view of operations strategy
• Operations strategy is sometimes seen as a technical issue. It
is not of course. Operations commentators have always
recognised that ‘superior performance is ultimately based on
the people in an organization.
• The right management principles, systems, and procedures
play an essential role, but the capabilities that create a
competitive advantage come from people—their skill,
discipline, motivation, ability to solve problems, and their
capacity for learning’.
made?
• A behavioral view of operations strategy (contd.)
• At the same time, most operations professionals would also
recognize that the practical task of designing and
implementing an operations strategy is very much about
having to deal with the way people behave and how they
think; and people do not always act rationally.
• At best we often act with what has been called bounded
rationality, because ‘the capacity of the human mind for
formulating and solving complex problems is very small
compared with the size of the problems whose solution is
required for objectively rational behavior in the real world –
or even for a reasonable approximation to such objective
rationality’. Copyright © 2020, 2017, 2015 Pearson Education, Inc. All Rights Reserved
made?
• A behavioral view of operations strategy (contd.)
Human psychology cannot be changed; but strategies and
operating systems can be understood, designed and
implemented differently. Here are some examples:
1. Capacity strategy. Deciding how much capacity to provide
when demand is uncertain can be reduced to a mathematical
formulation incorporating the chances and financial
consequences of capacity remaining underutilised or demand
not being met. But laboratory and empirical research has
repeatedly found that people make biased decisions depending
on, for example, their individual attitude to risk.
made?
2. Purchasing and supply strategy. There is a well-known
phenomenon among supply chain managers called the
‘bullwhip’ effect. It means that variation in orders and stock
levels increases along the supply chain the further each stage is
from ‘end demand’.
3. Process technology strategy. Technology projects require
managers to make estimates about how long an implementation
process will last. These estimates are often based on past
performance or information about other developments.
made?
4. Improvement strategy. Different individuals have different
tolerance for risk and ambiguity. This can significantly affect
how willing we are to accept (or not) that there are quality
problems, even when the evidence is relatively slight.
5. Product and service development. Almost all products and
service development take place under conditions of uncertainty.
And like all uncertainty-related decisions, a range of behavioral
factors affects them. These include what is known as the
‘planning fallacy’ (where predictions about how much time will
be needed to complete a task underestimate the time needed)
and the ‘overconfidence bias’.
made?
• The operations strategy matrix
• This ‘operations strategy matrix’ describes operations
strategy as the intersection of a company’s performance
objectives with its decision areas.
• It brings together the two perspectives of market
requirements and operations resources to form the
dimensions of a matrix. By doing this it can emphasise the
intersections between what is required from the operations
function (the relative priority given to each performance
objective) and how the operation tries to achieve this through
the set of choices made (and the capabilities that have been
developed) in each decision area.
Operations strategy matrix for Pret A Manger
Resource development
Quality • Small sites promote • Partnerships with • Standard • Customer service

(Product conformance teamwork suppliers to increase processes training
and specification and • On-site kitchens for quality together with (photos for • Teamwork
Market competitiveness
service quality) fresh food strict quality standards workstation) incentives and pay
*** ***
Speed • Many small sites at • On-site production • Standardised • Training for fast
(Customer throughput convenient locations means short internal process across service
time) • Number of service supply chain all stores
points
*** ***
Dependability • Standardised store • Quality raw materials • Standardises in- • Pret ‘values and
(Consistency of product design supplied/delivered on store technology behaviours’
and service) *** time
***
Flexibility • Partnership with • Customer feedback
(New product availability suppliers to meet varied used to inspire
and range of products) menu innovation
• Supplier partnerships
encourage innovation
***
Cost • Centrally located in • Low staff turnover
(Cost of producing densely populated
products and services) areas increases
‘footfall’ volume
***
Capacity Supply networks Process Development and
Technology organisation
*** Critical
made?
• Operations strategy decision-making under conditions of
uncertainty
• When faced with the decision that is clearly to be made under
conditions of uncertainty there are only three possible ways
to proceed.
 Take a single point estimate. In other words, make the best
possible guess, on the strength of the information available,
and carry on with the evaluation as though uncertainty does
not exist.
 Proceed as above but build in a contingency allowance to
account for the possibility of estimates being optimistic.
 Incorporate uncertainty into the evaluation approach.
made?
uncertainty
• The decision matrix
• The decision matrix is a method of modelling relatively
straightforward decisions under conditions of uncertainty in
such a way as to make explicit the options open to the
decision-maker. The options and the things that are uncertain
can then be incorporated into the matrix. A simple example:
The expected profit if strategy A is chosen = (310 * 0.5) + (240 * 0.5) = 275
The expected profit if strategy B is chosen = (330 * 0.5) + (200 * 0.5) = 265
A simplified decision matrix, and a decision tree for a
strategy choice decision
310
h
hig
m and )
De (0.5
Option Demand Demand Expected (0.5
high low profit e )
oos A Dem
Probability Probability Ch tegy and
a low
= 0.5 = 0.5 str 240
Strategy A 310 240 275
C 330
str hoos hig
h
Strategy B 330 200 265 ate e d
gy man )
B De (0.5
(0.5
Dem )
and
low
200
made?
uncertainty
• The decision tree
• The decision matrix can be represented as a decision tree.
Take the matrix shown in Figure 1.17(a); described in another
way, it has two options, each of which is followed by an
uncertain event (demand) which can take two possible forms
(high or low). Figure 1.17(b) shows the matrix in the form of
a decision tree. This tree represents a simple single stage
decision. However, the decision tree can overcome one of the
limitations of the decision matrix.
made?
• Operations strategy mapping
• Operations strategy mapping is a procedure that attempts to
clarify the cause-effect relationships in a firm’s (or part of a
firm’s) operations strategy.
• Based on the ‘strategy mapping’ approach, first popularised
by Kaplan and Norton, it is a set of cause-effect relationships
that identify not only what needs to be done to move the
operations function forward, but also why it should be done.
• As with many techniques of this type, the process of debating
and drawing the strategy map can be as valuable as the
finished result.
made?
• Operations strategy mapping (contd.)
• The map itself connects the four perspectives on operations
strategy and makes sure that the logic underlying a strategy is
aligned. Looking at the links between the four perspectives
will pose the right questions and should expose the
contradictions and paradoxes that need to be overcome within
the operations strategy.
• The challenge is twofold. First, each perspective must be
thoroughly thought through to make sure that it is coherent.
The second, and probably more difficult, challenge is to make
sense of how the four perspectives fit together.
Operations Strategy Map for an airline fuel supply company
Top-down – What does the business want? Outside-in – What do customers want?
Lower total Simple,

Maintain/grow dependable More flexible Global account
supply costs market share service delivery management
Inside-out – How do you organise resources and processes?

Outsource Upgrade ERP
delivery fleet system
Flexible Globalise
pricing account
function
Bottom-up – What capabilities do you need to develop?

‘Supplier’ Enhance
relationship system skills
skills Develop customer
relationship
strategy
made?
• Operations strategy mapping (contd.)
• More importantly, the diagram also shows how the various
operations development work streams should contribute to
business and customer objectives. That is what the arrows
indicate. Each arrow is, in effect, an assumption in this
operation’s strategy. The bottom box represents what the
business is going to have to be better at if it is to succeed in
satisfactorily completing the work streams in the middle box,
again with the arrows indicating the main cause–effect
relationships.

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Operations Strategy

Overview of The ‘content’ of The ‘process’ of

Products and services

Flow between processes

Analysis at the level

Low repetition High repetition

Changing capacity Stable

Operations management Operations strategy

Short term Long term

1–12 months 1–10 years

Operations management Operations strategy

Operations management Operations strategy

Operations management Operations strategy

Level of abstraction ‘How do we improve ‘Should we develop

Operations resources (inside- Market requirements

Correspondence between business

HR Marketing Operations Finance IT

Correspondence between operations

Product/service Operations Process Supply chain Capacity

Coherence within operations strategy

The operations Understanding the

The key decisions that support and

Organisation + value + rarity

Are your Are your

Visual Spectacular Group building capability in high

Customers seem to be confused by the capabilities

The Operations Resource The Market Requirements

Strategic Decisions Required Performance

Profit Revenue Cost

Output Output Fixed assets Capacity

Operations strategy Capacity Supply Process Development

Operations knowledge and capabilities

Operations strategy Operations strategy

Operations strategy Operations strategy

Quality • Small sites promote • Partnerships with • Standard • Customer service

Lower total Simple,

Inside-out – How do you organise resources and processes?

Bottom-up – What capabilities do you need to develop?

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