Operations vs Corporate Strategy - the Mismatch - Literature review Example

Operations vs. Corporate Strategy: Why the Mismatch? Operations vs. Corporate Strategy: Why the Mismatch? Introduction In theory, an operations strategy, also called the functional strategy, should reflect the decisions adopted at the top of the organisation, otherwise known as the corporate strategy(Slack & Lewis, 2100). The corporate strategy defines the overall strategic direction in which the organisation is intended to move. This approach in which the corporate strategy informs the operations strategy is called the “top-down” approach to functional strategy (Slack & Lewis, 2100). The opposite is the “bottom-up” approach to operations strategy where the operations strategy informs corporate strategy. In practice, however, it has been established that this strategy is difficult to achieve. By drawing on literature, this paper seeks to explain why the “top-down” approach to operations strategy is difficult to achieve in practice. The iterative nature of the strategy formulation process (Cetinkaya , 2011)and the need to respond to market demands and organisational core competencies (Slack & Lewis , 2100)and structure (Govindarajan , 1986)make it difficult to adhere to the top-down approach to operations strategy formulation. Discussion One of the primary reasons the top-down approach to operations strategy formulation is difficult to achieve is that, in practice, operations strategy formulation is more of an iterative process than the linear “formulation and implementation” process that has tended to dominate empirical studies(Kim, et al., 2014). To better understand the difference between the two, an overview of the “formulation and implementation” will be necessary. By virtue of corporate strategy informing operations strategy, the linear process of operations strategy formulation necessarily dictates that the organization’s Board of Directors first defines the overall direction it would like the organization to take(Slack & Lewis, 2100). Thus, for a large international organisation with several business interests, its corporate strategy may comprise such decisions as what businesses the organisation should invest in, which countries to operate in and how to distribute financial and other resources among the various businesses. Each business unit within the organisation will then develop its business strategy that defines, among other things, its mission and objectives and how it intends to compete in its markets that the Board will have defined. Next, each functional area of the business unit will specify the role it will play in realization the business mission and objectives. Thus, in the "top-down" approach, there will be three levels of strategy: corporate, business and functional. The corporate strategy will inform business strategy that will in turn inform functional strategies(Slack & Lewis, 2100). The main limitation of the “top-down” approach to operations strategy formulation is that the process is paternalistic(Slack &Lewis, 2100). In essence, the Board looks outward from the organisation and guesses what it believes the organisation should do. In practice, to a large extent, what an organisation can accomplish is defined and limited by external forces, many of which are well beyond the control of the organisation. One such force is the market – later we will see how the top-down approach is rendered difficult by market forces. The top-down approach is also time-consuming and slows down decision-making as a lower entity in the hierarchy must wait for decisions at the preceding higher level before it can make its decisions(Slack & Lewis, 2100). This scenario is injurious to business especially in the face of growing competition owing to the phenomenon of globalisation. Of course, one may argue that an organisation does not formulate strategies on a daily basis and, therefore, the time lost is negligible. However, in a dynamic business environment, the organisation may now need to redefine its strategies more often than used to be case, in order to align itself with changing market realities(Slack & Lewis , 2100). Thus, in the long run, the time wasted in cascading decisions down the hierarchy can be substantial. As an iterative process, operations strategy formulation entails reconciling competing objectives, priorities and action plans and often necessitates the combination of top-down and bottom-up approaches to strategy formulation(Kim, et al., 2014). The formulation of the City of Belgrade’s road safety strategy exemplifies the iterative nature of strategy formulation(Vujanic, et al., 2013). The metropolitan city of Belgrade comprises ten urban and seven rural municipalities. Thus, there was the need to develop a strategic document that would capture not just the city’s road safety concerns, but also those of all the seventeen municipalities. Thus, an overarching strategic document was obtained by merging the so-called seventeen “overlap” action plans, one for each municipality. The figure below shows the iterative operations strategy formulation process. Even though it is biased towards a specific functional strategy – supply chain, the principles remain the same for an overall operations strategy or any other functional strategy(Cetinkaya, 2011). Figure 1: The iterative operations strategy formulation process Source: Adapted from Cetinkaya, 2011 Step 1 takes stock of the organisation in terms of its strategy, resources and practices, both current and planned. The step is mainly concerned with the organisation’s internal environment as it considers factors that are within the control of the organisation. Step 2 focuses on the external factors that affect the organisation both in the present and as forecasted. These are factors over which the organisation has no direct control. Step 3 evaluates the risks and opportunities that the internal and external factors present to the organisation and the degree to which the organisation is sensitive to these factors. Step 4 compares the new or proposed strategy with the existing one with the view of making the final strategy more sensitive to the internal and external environments. Step 5 focuses on the implementation of the strategy with the aim of striking a balance between the organisation’s economic, social and environmental objectives. Step 6 focuses on the conditions that must obtain if the strategy is to be implemented successfully. The arrows indicate that the process is a continuous and cyclic one(Cetinkaya, 2011). Another reason the top-down approach to operations strategy is difficult to attain is that, often, operation strategy is influenced by market requirements rather than corporate strategy(Slack & Lewis, 2100). Essentially, operations exist in order to serve customer needs; they are not an end in themselves. Therefore, whatever operation strategy an organisation adopts, it must, in one way or another, reflect the needs of the organisation’s customers. In fact, it would be rational that before the organisation embarks on formulating an operations strategy, it asks itself how the strategy might help it compete in its market or markets(Slack & Lewis, 2100). The preceding statement is made without prejudice to the fact that organisations usually have some influence over what its markets demand. For instance, by choosing to serve one market and not others, the organisation is in a way saying that it is more prepared and better positioned to serve that market. Part of that preparation entails having in place the necessary operations to avail its products to the chosen market. The importance of markets influencing operation strategy notwithstanding, an organisation should not base its strategy solely on market demands(Slack & Lewis, 2100). There are inherent dangers in taking that route. Caterpillar Inc. is a classic example. Benjamin Holt founded the company in 1909 as the Holt Caterpillar Company, having identified a problem with the existing tractors then: they were so bulky and heavy that they often sunk into the soft earth of farmlands(The Ohio State University, 2013). Owing to their bulkiness, they were also difficult to maintain. Initially, business was profitable for Holt. The outbreak of the First World War boosted Holt’s fortunes even further as his company won exclusive contracts to supply military tractors. Meanwhile, his main competitor, C. L. Best Gas Tractor Company, concentrated on producing smaller tractors suited for farm use. When the war ended in 1918 and the military contracts with it, Holt almost went out of business. His military tractors were unsuited for farm use and the switch was going to take time and money. Fortunately for him, in 1925, Holt was able to forge a merger between his company and that of his main competitor to for the Caterpillar Inc. we know today(The Ohio State University, 2013). Sometimes the top-down approach may not be adhered to owing to the need to exploit the core competence and or intrinsic capabilities of the organization(Slack & Lewis, 2100). This approach to operations strategy is known as the operations resource approach. An organisation’s resources and processes are assets that should be taken into account in formulating operations strategy. This is the reason that many organisations regard long-term resource management as the justification for an operations strategy. However, a practical challenge concerning this approach is the considerable difficulty organisations have in defining their resources. This statement may surprise many. While most people will have their possessions at their fingertips, the same is not always true of organisations(Slack & Lewis, 2100). The main reason for this situation is that, more often than not, organisational functions see themselves as independent, autonomous units, not parts of the whole that is the organisation(Slack & Lewis, 2100). With such a fragmented view, it is difficult for organisations to authoritatively enumerate their resources. Thus, a logical starting point in applying this approach is for the concerned organisation to start by listing all the resources owned by or accessible to the organisation. Having identified the available resources, the next step is to determine what should be done with each. There can be considerable difficulty in locating the core competence of an organisation(Slack & Lewis, 2100). Amazon is a case in point. Many people see the company as an online retailer of books. Not so with the company’s founder and CEO, Jeff Bezos. He understands and promotes Amazon as a company that sells utility computing services – cloud storage, computing capacity rental for developers and providing linkage among firms that perform specialist, hard to automate tasks(Slack & Lewis , 2100). If rightly identified, an organisation’s core competence can be a powerful tool on which to leverage operations strategy. The growing tendency of multibusiness organisations to decentralise strategy formulation to strategic business units (SBUs) makes it difficult to adhere to the top-down approach (Kim, et al., 2014). For purposes of this paper, decentralization is defined as the delegation of the authority to make decisions to the general manager by their corporate superiors. The main argument in support of this trend is that organisational structure should inform strategy. Put another way, for an organisation with decentralised business units, the managers of those units should be left to develop strategies for their units. It has been argued that the managers, not the corporate leaders at the head office, have the real experience in running their units and that there is need for strategy to be informed by day-to-day experiences(Slack & Lewis, 2100). However, for years, the main concerns over this approach have been the effectiveness of the strategies developed by SBUs and the inherent difficulties in integrating those strategies (Govindarajan, 1986). Conclusion In theory, in what is called the top-down approach to operations strategy, corporate strategy informs operations strategy. In practice, this is rarely the case. Either the organisation may deliberately opt to pursue the opposite bottom-up approach or certain circumstances may render it difficult to stick to the top-down approach. In the latter case, some of the circumstances that make it difficult to realize the top-down approach include the iterative nature of the strategy formulation process, the need to respond to market requirements, the need to exploit the core competence of the organisation and the tendency of multibusiness organisations to decentralise strategy formulation. Owing to these difficulties and the enduring popularity of the top-down approach, some scholars have suggested that organisations pursue hybrid approaches that combine elements of both the top-down and bottom-up approaches (Kim, et al., 2014). References Cetinkaya, B., 2011. Developing a Sustainable Supply Chain Strategy. Sustainable Supply Chain Management, pp. 17-55. Govindarajan, V., 1986. Decentralization, Strategy, and. Academy of Management Review Effectiveness of Strategic Business Units in Multibusiness Organizations, 11(4), pp. 844-856. Kim, Y., Sting, F. & Loch, C., 2014. Top-Down, Bottom-Up, or Both? Toward an Integrative Perspective on Operations Strategy Formation. Journal of Operations Management, pp. 1-43. Slack, N. & Lewis, M., 2100. Operations Strategy. 3rd ed. Harlow: Pearson Education. The Ohio State University, 2013. Equity Research: Caterpillar Inc., Columbus: The Ohio State University. Vujanic, M., Lipovac, K. & Jovanovic, D., 2013. "BOTTOM-UP" AND "TOP-DOWN" APPROACH FOR DEFINING ROAD SAFETY STRATEGY - CASE STUDY: CITY OF BELGRADE. International Journal for Traffic and Transport Engineering, 3(2), pp. 185-203. Read More