Business and Operation Strategy - Essay Example

Topic: Business and Operation Strategy Introduction A Strategy is a broad master plan for accomplishing the objectives and undertakings of a corporation (Wheelen & Hunger, 2000), defined at corporate, business and functional levels in order to succeed. Organizations usually develop strategies for all levels but the relations and more focus need to be placed on the coordination of the strategies at different levels. The success of an organization is determined by high levels of coordination among units that are involved in the strategy formulated (Kaplan and Norton, 2006). Lack of a suitable structure for transferring strategies developed at corporate levels to the functional levels, results in innumerable difficulties and indeed the operations unit as a function is usually the central core of the organization. Operations unit often needs more dedication of resources and hence raised allocation budget is placed in this area. The operations strategy has been known as a competitive weapon and is of the utmost value and hence the question arises of is the relation between business strategy and operations strategy? In other words, how can the strategic elements of operations be arranged to have the best fit with business strategies? Business strategies Business strategy is the way in which companies achieve competitive advantage and according to Ohmae (1982), it is an instrument of competition in a competitive market as what distinguishes this from other types of planning is merely competitive advantage. Porter’s (1980) main idea of business strategy is that competitive advantage in a company can be created by low cost or differentiation and these instances can become meaningful in a broad or limited market. The strategy here is in the form of a two by two matrix in internal and the market perspectives in competitive advantage of a firm where there is cost differentiation and market range. Porter (1985) believes that companies in major cases adopt one of these strategies but if a company chooses to apply more than one strategy it defeats the object due to the cost leadership and differentiation strategies are incompatible, differentiation usually increases the cost. Operational excellence describes a distinct strategic approach to production and providing services and products where the aim of this strategy is to hold price leadership in the industry. Organizations that are looking towards success look for ways to minimize overload costs but operate at optimum in business processes at functional and administrative levels. They seek to offer products and services at a competitive price as on the other hand companies which are after customer intimacy uses a constant strategy of intimacy with the customers where they coordinate and form products and customer services. This process is costly but companies which use this strategy are willing to pay the costs so as to gain customer loyalty in the long run. Companies that follow the third principle try to offer state of the art products and services. An alternative with a changed view to Porter’s competitive approach is in eight possibilities of low price and low added value; low price; hybrid; differentiation; focused differentiation; increased price/standard value; increased price/low value; low value/standard price, all in the form of a clock, (Bowman & Faulkner (1997). These options are obtained through combining the price and the added value perceived by the customer and it could be concluded that the focus of all these approaches is either cost leadership or differentiation. Therefore, in spite of several criticisms, Michael Porter’s general theory of competitive strategy is without a doubt one of the most enduring and effective viewpoints ever proposed regarding the strategic behavior of the companies and after several years, this theory is still considered the dominant paradigm in the competitive strategy. Operations strategies The main task of this department is to produce goods and provide services, in other words, this is where the realization of profitability of a firm is potentially viable (Schroeder, Goldstein & Rungtusanatham, 2011). Accordingly, in coming up with strategies, companies need to have a keen eye operations and grant it a suitable strategic role as it could be concluded that production and operations activities have not been primarily deemed to create competitive advantage. Skinner (1969) presented production and operations as a corporate strategic concern where he reflected the production unit as a competitive weapon. That is when companies cannot establish an appropriate relation between operations strategy and business strategy; they will face a non-competitive production system which will be very costly and time-consuming. Operations strategies, recently, has been a topic of interest for some scholars where the Hayes & Wheelwright’s product-process matrix has the one to be mentioned; it delineates operations decisions in terms of two priorities of process structure and product structure. The range of process structure is considered to comprise job shop to continuous production and the range of product structure is defined to cover products with low design standardization (highly customized products) to similar highly standardized products. Most industries try to align their process and product structures, a two-dimensional matrix is formed from these dimensions; the combination of the product and the process creates coordination between product requirements and process capabilities In 1985, Wheelwright & Hayes proposed a four stage model in order to explain the potential strategic role of the operations where the first stage, organization has a reactive approach and operations are not considered a competitive advantage; the second stage is external neutrality in which the company tries to gain parity with its competitors. The third stage is internally supportive where operation strategy is controlled by and linked to business strategy; the fourth stage is externally supportive in which operation strategy is used as a basis for developing the business strategy (operation-based strategy). This stage places the organization higher than the best practice within the industry. Operations strategies can be differentiated in terms of content and process where the content presents the strategic issues that management must resolve. The methods and procedures used in making such decisions reflect the process of developing operational strategies. Content strategy encompasses definite decisions and measures which control the role, aim and activities of the operations; therefore, the operations process strategy is a method for making content decisions and the model presented here deals with both process and content of strategic operational decisions, (Slack & Lewis, 2002). Operations strategy emerges from four different perspectives involving operations strategy as a top-down reflection of what the whole group in business want to do, operations strategy being a bottom-up activity where operations improvements cumulatively build strategy, (Slack & Lewis, 2011). Two other are the operations strategy involving translating market requirements into operations decisions and operations strategy involving developing the competences or operations investments in a ray of markets. Competitive priorities Porter (1980) considers organizational activities as the basis for competitive advantage and further believes that organizations must select a distinct strategic position. Strategic positioning here looks into the mode of play of competitors and designs a different strategy based on priorities. Competitive priorities are expressed as dimensions of manufacturing strategy (Swamidass &Newell, 1987), goals for manufacturing and manufacturing tasks (Skinner, 1969) In a different approach, others like Ferdows & De Meyer (1990) and Cleveland, Schroeder & Anderson (1989) have used the terms competitive capabilities and production competences as the latter approach is pretty close to resource-based and capabilities views. Wernerfelt (1984) theorized the resource-based view believing that high performance is explained by the strength of firm’s resources not by its market position; the focus is on core competency and its relation to competitiveness; capability approach for strategy formulation uses the distinctive competences of an organization, (Prahalad & Hamel, 1990). In 1969, Skinner listed areas of interest as cost, quality and delivery and in 1978, Wheelwright added flexibility as the fourth element, in 1988, Hayes, Pisano, Upton & Wheelwright, (2005) divided the dimensions of delivery into speed of delivery, and reliability of delivery. They also added innovation to the aforementioned priorities. There are two main approaches in developing rational priorities and Skinner is of the opinion that operations strategy have to identify and maintain one strategy while Ferdows & De Meyer’s (1990) in their Sand-cone model recommend that for the operations to be effective, quality, delivery (fast delivery, and reliable delivery), flexibility and finally cost effectiveness must be, respectively, fulfilled. Skinner advises managers to select a competitive priority for their companies before designing their production and operations systems accordingly since priorities of cost, flexibility, quality and delivery require different operational structures and substructures at any given time and the company should focus on a single competitive priority. More emphasis is needed on the factory and while considering all these opinions and tries are advanced to develop a trade-off attitude and bring it to competitive priorities framework, (Hayes & Wheelwright (1984) Strategic operational decisions In order to develop operations strategies, it is necessary to identify areas which require operational strategic decision-making and the examined areas in this essay are vertical integration, capacity, facilities, product technology and process technology. Vertical integration is related to the value chain and it is considered one of the most fundamental and vital operational decisions dealing with questions about ownership rate in the value chain and direction of ownership (towards customers or suppliers) (Beckman & Rosenfiled, 2008). There are several points of view regarding the relations between vertical integration and competitive priorities as Economides (1999) is instrumental in giving evidence a minimized quality and market shrink as a result of lack of vertical integration.. When a company is at a process of competing based on flexibility advantage, it may decide not to have vertical integration as this will prevent the company from having assets which cannot be used or changed when required; on the other hand competing on cost advantage may make a company choose not to have vertical integration and allow its suppliers to make scale savings which in turn contributes to cost reduction (Beckman & Rosenfiled, 2008); vertical integration accelerates and coordinates the value chain of delivery (Grant, 2008) Capacity strategy – Capacity is the volume of products or services a company or one of its units can produce during a specific period of time which in order to develop, companies must consider the amount of capacity they require to fulfill demands, (Beckman & Rosenfiled (2008) Others have presented a model for developing capacity strategy in the form of a business strategy and accordingly, capacity strategy can be developed in three ways, (Hayes, Pisano, Upton & Wheelwright, 2005). First, lead-strategy is where capacity is grounded on estimate of future demands while the second, lag-strategy the average demand is not quite fulfilled and the business supplies lower than the necessary capacity; this method is very conservative and does not have any excess capacity. Third, stay-even: in this method the average demand is fulfilled but 50 percent of the times the company has excess capacity and 50 per cent of the times it has an insufficient capacity to respond to the demands. Facilities strategy deals with the size of facilities and location of facilities (Stevenson, 2009) and with regard to quantities, small facilities and large facilities are the strategic options for any firm wishing to have an edge in the market. The study conducted by Motwani, Larson, & Ahuja, (1998) examines the relation between the size of facilities and corporate capacity for implementing key operations strategies and concludes that larger companies are more advanced in using strategies related to delivery deadline, quality, cost, customer services and technology. Large facilities have economies of scale and small facilities according to Skinner, have a more convenient management focus and higher flexibility and speed in responding to market demands; it can also adapt itself faster to new approaches and technologies It is generally believed that smaller organizations are more innovative and show faster reactions to market needs than large organizations (Brown & Blackmon, 2005; Davis & Vokurka, 2005; Porter, 1980). Looking at trends of technological change, it could be inferred that new technologies, faster computers and better communications have reduced the optimal size of many organizations. It is given a general assumption that products that have weights which tend to decrease in the production process need to be near to raw materials whereas, products whose weight and size increase during production process tend to approximate to the customers (Davis, Aquilani & Chase, 2003). In picking the locality of the facilities organizations are faced with the alternatives of nearness to raw materials, customers or work force hence in this case, facilities strategies have been considered fewer than two main types of size-based (including small or large facilities) and location-based, including source-based and market-based facilities, (Hayes, Pisano, Upton & Wheelwright, (2005). Product technology strategy: - In selecting, defining and designing products management is faced with different options and in this regard decisions would greatly affect other sections of operations. Product strategy means selecting and designing a product; Stevenson (2009) has recommended four options for changing the existing products, developing a new product line, developing product applications and offering a new product. In recent years, due to intense competition and technological advances, companies are under extreme pressure for developing new products and services. The combination of an increasing competition and access to information has led to the emergence of educated consumers who expect new products. Studying the relationship between operations strategy and product innovation, have shown that product innovation has a high relationship with quality and flexibility and less innovative companies put much emphasis on delivery (Alegre-Vidalet al., 2004) Process technology strategy is used for manufacturing products or providing services as the main part in transformation of company inputs into outputs and enables the company to distinguish its products and services from those of competitors and often requires considerable investment. Technology process is the application of science in operations and processes it is considered that technology is inevitable in connecting the various parts, (Slack & Lewis (2011); Heizer & Render (1993) consider process strategy as an approach that an organization adopts in order to transform resources into goods and services. Quite a few classifications have been made in the area of production process, for example Hayes and Wheelwright’s classification within the product-process matrix which classifies production processes into project, batch, assembly and continuous forms. Another classification defines three types of processes as: make-to-order, make-to-stock and engineer-to-order where make-to-order systems require higher flexibility than make-to-stock systems, (Konijnendijk’s, 1993). Therefore, they have lower efficiency and higher cost which in addition make-to-stock has less variety than make-to-order (Davis, Aquilani & Chase, 2003). Conclusion This essay reconfirms Porter’s (1985) view about incongruous nature of cost leadership and differentiation strategies and it is worth mentioning that companies whose business strategy had been cost leadership but their competitive priorities were differentiation have not had a considerable performance. Successful relation between business strategy, competitive priorities and operations strategies found in the sample companies were transferred into the conceptual model to devise an applied and practical model for the industries. If business strategy is cost leadership; the operations strategy comprises of non-vertical integration, lag capacity, large facilities, source-based location, standard (or automation-based) process, and modifying existing products - since the model is bilateral, the alignment could be read from the other way around, i.e. if a company is in a position to sustain, non-vertical integration, lag capacity, large facilities, source-based location, standard (or automation-based) process, and modifying existing products in its operations, it is recommended to practice cost leadership as its competitive strategy and this would maximize its performance. If the company is in a position to sustain, vertical integration, lead capacity, large facilities, market-based location, modifying the existing product, and mass customization (or standard-based) process in its operations, it is recommended to practice delivery-based differentiation as its competitive strategy as this too would maximize its performance. If business strategy is flexibility-based differentiation the operations strategy should be non-vertical integration, lead capacity, small facilities, source-based facilities location, developing new product, and mass customization; if the company is in a position to sustain, non-vertical integration, lead capacity, small facilities, source-based facilities location, developing new product, and mass customization in its operations, it is recommended to practice flexibility-based differentiation as its competitive strategy and this would maximize its performance. If business strategy is innovation-based differentiation the operations strategy should be vertical integration, lead capacity, small facilities, market-based facilities location, developing new products, and variety-based process; if the company is in a position to sustain vertical integration, lead capacity, small facilities, market-based facilities location, developing new products, and variety-based process in its operations, it is recommended to practice innovation-based differentiation as its competitive strategy for maximizing its performance. References Alegre-Vidal, J., Lapiedra-Alcami, R. & Chiva-Gomez, R. (2004). Linking operations strategy and product innovation: an empirical study of Spanish ceramic tile producers. Research Policy, 33, 5 p. 829-839. Beckman, S. & Rosenfield, D. (2008),Operations Strategy, McGraw-Hill, New York, NY. Bowman, C. &Faulkner, D. (1997),Competitive and Corporate Strategy, Irwin, London. Brown, S. & Blackmon, K. (2005). 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