Design of an operations strategy

CHAPTER 7 – ANALYSES FOR STRATEGY DESIGN

AIMS OF THE CHAPTER
The last chapter discussed the way that managers can approach the design of an operations strategy.  The main requirement for this is a detailed knowledge of higher strategies, operations and the environment.  This chapter looks at some analyses that give this knowledge.  In particular, it considers an environmental scan to collect information about the operations environment, and an operations audit to show the details of operations.  Then it outlines some further analyses that can help with strategic design.

The aim of the chapter is to review some tools for collecting and analysing information that can help design an operations strategy.  More specific aims are to:

• Discuss the types of analyses needed to design an operations strategy

There are three main areas for analyses.  Firstly, the higher strategies – particularly the business strategy – which have to be analysed from an operations perspective.  Secondly, the operations environment which is analysed using an environmental scan.  Thirdly, internal operations are analysed using an operations audit.

• Describe the types of information needed about the environment

Any information about the environment might be useful for designing an operations strategy.  The three most common areas of concern are:

• the industry that the operations work in, which is defined by organisations that use – or might start using in the future – similar resources to make equivalent products to satisfy the same customer demand
• the market for the operations’ products, which is defined by the customers who buy – or might buy – a particular type of product
• any other relevant external factors, including economic conditions, legal requirements, market conditions, etc.

• Collect data through an environmental scan

An operations environmental scan collects all relevant information about the environment that might be useful for designing an operations strategy.  It generally focuses on the three areas of industry, market, and any other relevant external factors (including economic conditions, legal requirements, market conditions, etc).  We do not want to go into the details of data collection, but common methods include observation, interviews, market surveys, literature searches, Web searches, data sampling, questionnaires, and so on.

• Outline a number of analyses for environmental factors

There are many possible analyses of environmental factors.  The chapter described industry and market analysis – followed by PEST, industry attractiveness, market attractiveness, key success factors, competitor analysis, competitor profiling, group map, driving force analysis, and any other appropriate analysis.  Within each of these, managers can do many other detailed analyses.

• Discuss the type of information needed about internal operations

Any internal information might be useful in designing an operations strategy.  The most useful types concern:

• Products, and the complete packages that are passed to customers
• Process, including details of operations, their performance, structure of the supply chain, types of raw materials, financial support, skills of employees, etc
• Resources, which are found from a resources audit
• Management, and the skills with which they control operations.

• Collect data through an operations audit

An operations audit collects all relevant information about the internal operations of an organisation and gives a detailed view of the activities, process, resources, management – and generally the way that things work. 

• Use a number of analyses for internal operations

There are many possible analyses for internal operations.  Those mentioned in the chapter are financial analysis, performance analysis, performance-importance, balanced scorecard, benchmarking, value-chain analysis and cost analysis.

• Do a SWOT analysis

SWOT analyses bring together the two types of analysis emphasised in the chapter – environmental scans and operations audits.  In particular, they list the strengths (what the operations do well and can be built into distinctive capabilities), weaknesses (problems within the operations that need improvement), opportunities (that can help the organisation) and threats (that can cause damage).  The basic analysis is to lay out these factors, and use a structured format to develop ideas for a strategy.  In practice, the identification and discussions of factors are the most important part of the analysis, rather than the presentation of summarised results.

DISCUSSION QUESTIONS

• Is management more of an art or a science?

Over the years there has been a lot of discussion about this question.  One view says that it is an art, as no formal methods can predict future conditions or performance with certainty.  Science assumes that when an experiment is repeated it gives the same results again – but when management decisions are repeated they often give completely different results.  As management decisions rely on judgement, intuition and experience there can be no scientific footing. 

The opposing view says that decisions should be made rationally, and based on the logical foundations of science.  If we look at any management problem we can do formal analyses of circumstances, compare alternatives and use rational analyses to make the best decisions.  A scientific approach is the only reasonable way of making decisions – and any problems with decisions suggest failings in managers’ analyses and implementation rather than the methods themselves.   

A reasonable view says that managers can use scientific methods to collect and analyse information, but conditions are so complex and uncertain that they need ‘art’ skills for the actual decisions.

• What do managers need to analyse when they design an operations strategy?

The three areas of higher strategies (particularly analysing the business strategy from an operations perspective), the operations environment (using an environmental scan) and internal operations (using an operations audit).  Each of these gives a complex and changing picture that contains many different features to be analysed.  

• An operations environmental scan describes the main features of the related industry and market.  Is this true?

Yes – but this is only part of its job, as it collects all relevant information about the operations environment.  Essentially, an environmental scan collects everything about the environment that might be useful in designing an operations strategy.  It allows managers to analyse the effects of the environment on current and proposed operations. 

• The operations environment is too complicated for any managers to understand properly – and they probably cannot even identify the most important features.  So what is the point of trying to use simple, standard analyses of the environment?

The first part of the question is generally true, that the operations environment is too complicated for any managers to understand properly – and it is also true that most managers would have difficulty in identifying all of the most important features.  But this does not mean that they should simply give up and not try to understand anything at all.  Some knowledge is almost invariably better than complete ignorance.  Managers might not have complete mastery of, say, economics but they can understand enough to use the rule that higher prices generally mean lower demand.  Simple analyses and models might not describe all the details of the environment, but they can certainly help with decisions. 

• What are the most widely used analyses for internal operations?

Analyses of internal operations are generally included in an operations audit, which gives a detailed description of the operations used by an organisation.  Many analyses can contribute to this, with those mentioned in the chapter being financial analysis, performance analysis, performance-importance, balanced scorecard, benchmarking, value-chain analysis and cost analysis.

• Balanced scorecards have become increasingly popular in the past few years.  Why?

They give a way of looking at four important factors for the design of an operations – or any other – strategy, but this is not new.  Many alternatives have been suggested, often using the same format and with slightly different names.  Perhaps it unfair to suggest that balanced scorecards have become popular because of good marketing.  Managers are particularly susceptible to using the latest idea or gimmick to try and get an advantage, so it is uncertain whether this interest will be sustained or whether it will die away.

• SWOT and similar analyses only describe present conditions.  They do not show whether this is good or bad, and they do not show how to improve things.  What, then, is their purpose?

Their purpose is exactly as stated in the question – which is to describe present conditions.  They give a structure for presenting current circumstances, and this allows managers to consider the ways to move forward from the current position to a desired future one.  Realistically, no analysis can either determine the best future position, or the best way of achieving this.  In practice, collecting, analysing, reviewing and discussing the information for a SWOT analysis gives the most useful part of the analysis.

• How would you start a SWOT analysis for a public company?  What type of factors would you include?

By definition, you would start by colleting information about strengths (that the operations do well), weaknesses (where there are problems within the operations),opportunities (that can help the organisation) and threats (that can cause damage).  Details of the factors to consider depend on the type of company.

IDEAS IN PRACTICE
Ratner Group
Aim: to show how a sudden environmental change can harm an organisation

The operations environment is often stable for long periods, but it can also change very quickly.  This case shows a classic example where the environment changed almost overnight, and there was little that Ratner could do to adapt.  It is particularly interesting as the company (or its dominant manager) brought much of the change upon themselves. 

Managers had spent years building Ratner into a highly successful jewellery retailer.  Customers appreciated the new methods introduced by Ratner and it had a good overall image.  Then overnight its fortunes changed.  Some misguided comments by its dominant manager completely changed its image.  He seemed to suggest that the company viewed its own products as rubbish that was not worth buying.  The implication was that customers would be foolish to buy them – so not surprisingly, they immediately stopped.  The fact that many of Ratner’s products were of high quality and gave very good value mattered little in a newly hostile market. 

Polish television
Aim: to show an outline structure for a PEST analysis

Conditions in Poland changed dramatically after 1989 when it moved from a centrally planned economy based on government ownership to a market economy based on private ownership.  These changes continued after the country joined the European Union in 2004.  A sign of these changes is the growth of television channels.  There are obvious attractions for new companies in a large and rapidly growing market – but there are also problems in an outward looking country that has a distinctive culture.  This case outlines some concerns raised by a PEST analysis.  This distinguishes a series of opportunities and threats that can also be used as part of a SWOT analysis.

mmO2
Aim: to suggest the scale of intangible assets in a mobile telephone company

Many companies have intangible assets that have far greater values than their tangible assets.  These are very difficult to value.  Most people recognise names of companies like McDonald’s and Coca Cola – but how much is this recognition really worth.  Most people also recognise names like Hitler and Stalin, but this recognition would not necessarily increase the value of any company associated with them.  

The analysis given for O2 (which in 2006 became a part of Telefonica) shows how share value gives one way of valuing these intangible assets.  As the share prices changes quickly, often for no apparent reason, and usually in line with changes in the general market, this valuation is at best a guideline.  Nonetheless, it is often the only reasonable figure that is available.

Scoring models
Aims: to show how scoring models can compare the performance of different operations

Scoring models are widely used for comparing different operations – and many other things.  This case illustrates the use of a simple scoring model, and suggests other areas where such models can be useful.  These models have the advantages of being simple, easy to use, and presenting information in a useful format.  On the other hand, they rely on subjective opinions about important factors, the relative importance of each, and actual performance.  Supporters say that they combine diverse and often qualitative information into a single quantitative measure: critics say that they give a not very convincing way of justifying decisions that have already been made.

Synergistic Consultants
Aim: to show the early stages in a SWOT analysis

This case gives a very brief view of a SWOT analysis for a new firm of management consultants.  It does little more than list some headings – but even this can suggest useful directions.  For example, weaknesses centre on their small size – and this is also at the heart of the threats.  So an obvious direction for the strategy would call for expansion.  They have some gaps in their knowledge, so these might be closed by employing appropriate new people.  At the same time, the company should develop its strengths into distinctive capabilities, and look for ways of taking advantage of its opportunities.  The discussions to get to this initial stage can start to give useful ideas for the company, and managers can expand these in more detailed considerations.

Orange River Project
Aim: to suggest how a SWOT analysis might develop more detail

This case takes the idea of a SWOT analysis to the next stage and shows the type of considerations that arise in a bigger, more complex organisation.  The Orange River Project works in very complicated conditions, trying to use a limited resource in the best way to achieve the aims of many, diverse stakeholders.  There is clearly no ‘right’ solution that everyone is trying to reach, but the aim might be to give the greatest overall satisfaction to all stakeholders.  The SWOT analysis gives a structure that allows stakeholders to agree certain fundamental features – and it shows the directions in which they might proceed in the future.

CASE STUDY – JONQUILLE BARRENBOEM
This case outlines the way that a company – in this case largely controlled by the dominant partner – approaches a strategic decision.  Jonquille has considerable experience working in major IT and financial institutions, and she uses this when making a decision for her much smaller company.  Her aim is to keep strategic management on a rational footing and move forward in a carefully planned – and justified – way.

• Why is Jonquille Barrenboem considering a move towards e-business?  What factors does she have to consider in this move?

There are three main reasons for this – and there might be several other lesser ones.  Firstly, it is very expensive to run private viewing rooms and these overheads form the bulk of her costs.  If she can move some of her existing business to a Website, she can get considerable savings.  Even though she works with very high profit margins, it is always good to reduce fixed costs.  Secondly, although she posts a catalogue to regular customers and others who may be interested in her products, the viewing rooms only really attract people who live nearby.  A Website can increase sales by attracting new customers from around the world.  Thirdly, when a Website is running it has very low overheads, so she can make a profit on lower price products.  In other words, she can expand her range into lower price items.  Although her main interest is in very expensive books, an extended range will involve little effort and could considerably increase returns.

She will have to consider many factors for this move.  Is she going to continue the viewing rooms or move completely to the Website?  Which products are best suited to each approach?  Who is going to run the Website?  Where is she going to buy the greater quantities of lower price material?  Can her company cope with the implicit expansion or does she have to introduce major changes? How does she deal with security?  What would her current customers think of the move?  These – and a whole range of others – need to be carefully considered before Jonquille makes any decision. 

• Do you think her proposed approach will work?  Can you suggest any improvements?

Jonquille plans to use a formal approach to her decision that is based on a series of connected steps.  Each step has a distinct purpose and end point, which contributes to a final strategy document.  These steps analyse the internal operations (giving an operations audit), the market (giving part of an environmental scan), an assessment of the potential for e-business (giving the aims, resources, finances and consequences for operations), comparison of alternatives (to select the best option) and plans for implementation (showing how the preferred option is going to be accomplished).  This seems a reasonable and well-considered approach, and follows the traditional pattern of ‘identify the problem, consider the alternatives, chose the best and implement it’.

However good a procedure, there are always points that might be added.  Here, for example, Jonquille does not seem to explicitly consider the purpose of the company – does the planned expansion actually fit into its overriding purpose?  Nor does she link the proposed changes to operations to the direction given in the business strategy.  And although she considers options based around e-business, she does not consider other changes to the operations that might lead in other directions.  Overall, we can say that the approach seems reasonable, but there might be other different kinds of information that Jonquille can include in her analyses.

• What will her final strategy document look like?

From the description, it seems that there are five parts to the strategy document:

•  Part 1– summary of the company’s current business (an operations audit)
• Part 2 – the business’ market position (including market analysis, competitor analysis and SWOT analysis)
• Part 3 – potential for e-business within the company (including the aims for e-business, options available, budget, investment appraisal, performance analyses and requirements)
• Part 4 – description of the e-business strategy (including a statement of the chosen e-business strategy, reasons for decisions and expected benefits)
• Part 5 – implementation plan (giving actions needed to implement the strategy, responsibilities, times, cost, risks, criteria for success, – and summary and conclusions). 

We do not know the amount of detail that Jonquille will include in her final document.  Each part can contain a wealth of information and the final report might be very thick – or she might include a brief review that gives a much slimmer document.  Even with the rigid report structure, there is a lot of flexibility in the final result.

• Are there comparable companies that already use e-business?  What lessons can Jonquille learn from them?

Yes.  Many people trade similar products on the Web, either through their own Websites, or through auction sites such as eBay.com.  It is fairly easy to see how these work, and learn lessons from their experiences.  (There are no rewards for identifying the company that Jonquille runs.)