Servitisation and circular design at Philips lighting 4
1.3 Diagnostic question: Does operations and process management have a strategic impact?
One of the biggest mistakes a business can make is to confuse ‘operations’ with ‘oper- ational’. Operational is the opposite of strategic; it means detailed, localised, short-term, day-to-day. ‘Operations’, on the other hand, is the set of resources that produce products and services. Operations can be treated both at an operational and a strategic level. We shall examine some views of operations strategy in the next chapter. For now, we treat a funda- mental question for any operation – how does the way we manage operations and processes have a strategic impact?
The operations function of an organisation is clearly significant strategically, if only because it often represents the bulk of its assets and the majority of its people. Yet its true value is more than ‘bulk’. It can ‘make’ the business in the sense that it gives the ability to compete, through both the short-term ability to respond to customers and the long-term capabilities that will keep it ahead of its competitors. But if an operations function cannot produce its products and services effectively, it could ‘break’ the business by handicapping its performance no matter how it positions and sells itself in its markets. In addition, all the processes within an organisa- tion, irrespective of which function they support, can help (or hinder) it in achieving its strategic objectives.
1.3 Diagnostic question: Does operations and process management have a strategic impact?
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Three levels of operations performance
Operations performance can be assessed at three different levels. At its broadest, operations can be judged on how it impacts on long-term societal issues. At the level of the individual firm or enterprise, it can be judged on how it supports (or not) their strategic aims. At its more operational level, the individual processes within an operation can be judged by how well they serve their (internal and external) customers and improve the efficiency with which they do it.
In the rest of this section we will look at each of these three levels.
Operations performance at a societal level
Operations decisions affect a whole variety of ‘stakeholders’ – the people and groups that have a legitimate interest in the operation’s activities. These include the operation’s employ- ees, its customers, its shareholders, its immediate community and society in general. But although each of these groups will be interested in an operation’s performance, they are likely to have very different views of which aspect of performance is important. Nevertheless, if one is to judge operations at a broad societal level, one must judge the impact it has on its stakeholders.
The triple bottom line
One idea that tries to capture the idea of a broader approach to assessing an organisation’s performance is the ‘triple bottom line’6 (TBL, or 3BL), also known as ‘people, planet and profit’.
Essentially, it is a straightforward idea simply that organisations should measure themselves not just on the traditional economic profit that they generate for their owners, but also on the impact their operations have on society (broadly, in the sense of communities, and individually, for example in terms of their employees) and the ecological impact on the environment. The influential initiative that has come out of this triple bottom line approach is that of ‘sustainability’. A sustainable business is one that creates an acceptable profit for its owners, but minimises the damage to the environment and enhances the existence of the people with whom it has contact. In other words, it balances economic, environmental and societal interests. This gives the organisation its
‘license to operate’ in society. The assumption underlying the triple bottom line (which is not universally accepted, see the critical commentary at the end of the chapter) is that a sustainable business is more likely to remain successful in the long term than one that focuses on economic goals alone.
However, the idea of triple bottom line performance does have its critics. It is unrea- sonable, some say, for operations managers to have to cope with the conflicting pressures of maximising profitability as well as managing in the interests of society in general with accountability and transparency. Even if a business wanted to reflect aspects of performance beyond its own immediate interests, how is it to do that? According to Michael Jensen of Harvard Business School, ‘At the economy-wide or social level, the issue is this: If we could dictate the criterion or objective function to be maximized by firms (and thus the perfor- mance criterion by which corporate executives choose among alternative policy options), what would it be? Or, to put the issue even more simply: How do we want the firms in our economy to measure their own performance? How do we want them to determine what is better versus worse?’7 He also holds that using stakeholder perspectives gives undue weight to narrow special interests who want to use the organisation’s resources for their own ends.
The stakeholder perspective gives them a spurious legitimacy that ‘undermines the founda- tions of value-seeking behaviour’.
OPERATIONS PRINCIPLE Operations should judge themselves on the triple bottom line principle of ‘people, planet and profit’.
Operations performance at the level of the enterprise
The ability of operations and process management to impact the strategic success of any kind of enterprise is being increasingly recognised. When compared with only a few years ago, it now attracts far more attention and, according to some reports, accounts for the largest share of all the money spent by businesses on consultancy advice. This may be partly because the area has been neglected in the past. But it also denotes an acceptance that it can have both short-term and long-term impact. This can be seen in the impact that operations and process management can have on the business’s costs, revenue, risk, investment and capabilities:
• It can reduce the costs of producing products and services by being efficient. The more productive the operation is at transforming inputs into outputs, the lower will be the cost of producing a unit of output. Cost is never totally unimportant for any business, but generally the higher the cost of a product or service when compared to the price it commands in the market, the more important cost reduction will be as an operations objective. Even so, cost reduction is almost always treated as an important contribution that operations can make to the success of any business.
• It can increase revenue by increasing customer satisfaction through quality, service and inno- vation. Existing customers are more likely to be retained and new customers are more likely to be attracted to products and services if they are error-free and appropriately designed, if the operation is fast and responsive in meeting their needs and keeping its delivery promises, and if an operation can be flexible, both in customising its products and services and intro- ducing new ones. It is operations that directly influence the quality, speed, dependability and flexibility of the business, all of which have a major impact on a company’s ability to maximise its revenue.
• It can reduce the risk of operational failure, because well-designed and well-run operations should be less likely to fail. All failures can eventually be traced back to some kind of failure within a process. Furthermore, a well-designed process, if it does fail, should be able to recover faster and with less disruption (this is called resilience).
• It can ensure effective investment (capital employed) to produce its products and services.
Eventually all businesses in the commercial world are judged by the return that they produce for their investors. This is a function of profit (the difference between costs and revenues) and the amount of money invested in the business’s operations resources. We have already established that effective and efficient operations can reduce costs and increase revenue.
What is sometimes overlooked is the role of operations in reducing the investment required per unit of output. It does this by increasing the effective capacity of the operation and by being innovative in how it uses its physical resources.
• It can build capabilities that will form the basis for future innovation by building a solid base of operations skills and knowledge within the business. Every time an operation produces a product or a service it has the opportunity to accumu- late knowledge about how that product or service is best produced. This accu- mulation of knowledge should be used as a basis for learning and improvement.
If so, in the long term, capabilities can be built that will allow the operation to respond to future market challenges. Conversely, if an operations function is simply seen as the mechanical and routine fulfilment of customer requests, then it is difficult to build the knowledge base that will allow future innovation.
OPERATIONS PRINCIPLE
All operations should be expected to contribute to their enterprise by controlling costs, increasing revenue, reducing risk, making investment more effective and growing long-term capabilities.
Operations performance at the level of an operation’s processes
Operations and process management can also be judged at the more operational level. This is how well the network of processes within an operation serves its internal, and eventually its external, customers. There are five aspects of operations and process performance, all of which to a greater or lesser extent will affect customer satisfaction and business competitiveness:
1. Quality – doing things right, providing error-free goods and services that are ‘fit for their