‘. . . most managers will readily admit that there are compromises or trade-offs to be made in designing an airplane or truck. In the case of an airplane, trade-offs would involve mat- ters such as cruising speed, take-off and landing distances, initial cost, maintenance, fuel consumption, passenger comfort and cargo or passenger capacity. For instance, no one today can design a 500-passenger plane that can land on an aircraft carrier and also break the sound barrier. Much the same thing is true in . . . [operations].’
But there is another view of the trade-offs between performance objec- tives. This sees the very idea of trade-offs as the enemy of operations improve- ment, and regards the acceptance that one type of performance can only be achieved at the expense of another as both limiting and unambitious. For any real improvement of total performance, it holds, the effect of trade-offs must be overcome in some way. In fact, overcoming trade-offs must be seen as the central objective of strategic operations improvement.
These two approaches to managing trade-offs result in two approaches to operations improvement. The first approach emphasises ‘repositioning’ per- formance objectives by trading-off improvements in some objectives for a reduction in performance in others; the second one emphasises increasing the
‘effectiveness’ of the operation by overcoming trade-offs so that improvements in one or more aspects of performance can be achieved without any reduction in the perfor- mance of others. Most businesses at some time or other will adopt both approaches. This is best illustrated through the concept of the ‘efficient frontier’ of operations performance.
OPERATIONS PRINCIPLE In the short term, operations cannot achieve outstanding performance in all its operations objectives simultaneously.
OPERATIONS PRINCIPLE In the long term, a key objective of operations strategy is to improve all aspects of operations performance.
Case example
customer service. Tesco’s relationships with its suppliers, which had been described as toxic, were overhauled.
largely by empowering existing teams to make better decisions. The directive was that the suppliers and Tesco should imagine they were all one company and work out
together the most efficient supply chain. The turnaround worked. When the company’s trading stabilised, Tesco was able to focus on other priorities. One of these was sustainability: Tesco became a pioneer in reporting and measuring food waste.
Trade-offs and the ‘efficient frontier’
Figure 2.12(a) shows the relative performance of several companies in the same industry in terms of their cost efficiency and the variety of products or services that they offer to their cus- tomers. Presumably all the operations would ideally like to be able to offer very high variety, while still having very high levels of cost efficiency. However, the increased complexity that a high variety of product or service offerings brings will generally reduce the operation’s ability to operate efficiently. Conversely, one way of improving cost efficiency is to severely limit the variety on offer to customers. The spread of results in Figure 2.12(a) is typical of an exercise such as this. Operations A, B, C and D all have chosen a different balance between variety and cost efficiency. But none is dominated by any other operation in the sense that another opera- tion necessarily has ‘superior’ performance. Operation X, however, has an inferior performance because operation A is able to offer higher variety at the same level of cost efficiency; and operation C offers the same variety but with better cost efficiency. The convex line on which operations A, B, C and D lie is known as the ‘efficient frontier’. They may choose to position themselves differently (presumably because of different market strategies) but they cannot be criticised for being ineffective. Of course, any of these operations that lie on the efficient frontier may come to believe that the balance they have chosen between variety and cost efficiency is inappropriate. In these circumstances they may choose to reposition themselves at some other point along the effi- cient frontier. By contrast, operation X has also chosen to balance variety and cost efficiency in a particular way but is not doing so effectively. Operation B
Figure 2.12 The ‘efficient frontier’
A
X C
D
Cost efficiency
Variety
B
The ‘efficient frontier’
A
X C
D
Cost efficiency
Variety
B
The new ‘efficient frontier’
B1
(a) (b)
OPERATIONS PRINCIPLE Operations that lie on the
‘efficient frontier’ have
performance levels that dominate those that do not.
2.7 Diagnostic question: Does operations strategy set an improvement path?
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71 has the same ratio between the two performance objectives but is achieving them more effec- tively. Operation X will generally have a strategy that emphasises increasing its effectiveness before considering any repositioning.
However, a strategy that emphasises increasing effectiveness is not confined to those opera- tions that are dominated, such as operation X. Those with a position on the efficient frontier will generally also want to improve their operation’s effectiveness by overcoming the trade-off that is implicit in the efficient frontier curve. For example, suppose operation B in Figure 2.12(b) is the metrology company described earlier in this chapter. By adopting a modular product design strategy, it improved both its variety and its cost efficiency simultaneously (and moved to posi- tion B1). What has happened is that operation B has adopted a particular operations practice (modular design) that has pushed out the efficient frontier. This distinction between position- ing on the efficient frontier and increasing operations effectiveness to reach the frontier is an important one. Any operations strategy must make clear the extent to which it is expecting the operation to reposition itself in terms of its performance objectives and the extent to which it is expecting the operation to improve its effectiveness.
Improving operations effectiveness by using trade-offs
Improving the effectiveness of an operation by pushing out the efficient frontier requires dif- ferent approaches, depending on the original position of the operation on the frontier. For example, in Figure 2.13(a) operation P is originally resourced and designed to offer a high level of variety of products or services at the expense of low-cost efficiency. It has probably reached this position by adopting a series of operations practices that enable it to offer the variety, even if these practices are intrinsically expensive. For example, it may have invested in general- purpose technology and recruited employees with a wide range of skills. Improving variety even further may mean adopting more extreme operations practices that emphasise variety.
For instance, it may reorganise its processes so that each of its larger customers has a dedicated set of resources that understands the specific requirements of that customer and can organise itself to totally customise every product or service it produces. This will probably mean a fur- ther sacrifice of cost efficiency, but it allows an ever-greater variety of products or services to
Figure 2.13 Operations ‘focus’ and the ‘operation-within-an-operation’ concept illustrated using the ‘efficient X
Cost efficiency
Variety
Improvement through increasing
‘focus’ on cost efficiency Improvement
through increasing
‘focus’ on variety
Improvement through overcoming
the trade-off between variety and
cost efficiency P
Q P1
Q1
High-variety operation-within-an-operation producing for the professional market
The original paint manufacturing
operation
High cost efficiency operation-within-
an-operation producing for the
domestic market
(a)
Cost efficiency
Variety
(b)
Y
Z
be produced (P1). Similarly, operation Q may increase the effectiveness of its cost efficiency, by becoming even less able to offer any kind of variety (Q1). For both operations P and Q, effectiveness is being improved through increasing the focus of the operation on a very nar- row set of performance objectives and accepting an even further reduction in other aspects of performance.
The same principle of focus also applies to organisational units smaller than a whole opera- tion. For example, individual processes may choose to position themselves on a highly focused set of performance objectives that match the market requirements of their own customers. So, for example, a business that manufactures paint for interior decoration may serve two quite dis- tinct markets. Some of its products are intended for domestic customers who are price-sensitive but demand only a limited variety of colours and sizes. The other market is professional interior decorators who demand a very wide variety of colours and sizes but are less price-sensitive.
The business may choose to move from a position where all types of paint are made on the same processes (position X in Figure 2.13(b)) to one where it has two separate sets of processes (positions Y and Z) – one that only makes paint for the domestic market and the other that only makes paint for the professional market. In effect, the business has segmented its operations processes to match the segmentation of the market. This is called the ‘operation-within-an-op- eration’ (or ‘plant-within-a-plant’, ‘shop-within-a-shop’, etc.) concept.
Improving operations effectiveness by overcoming trade-offs
This concept of highly focused operations is not universally seen as appropriate. Many com- panies attempt to give ‘the best of both worlds’ to their customers. At one time, for example,
a high-quality, reliable and error-free automobile was inevitably an expen- sive automobile. Now, with few exceptions, we expect even budget-priced automobiles to be reliable and almost free of any defects. Auto manufacturers found that not only could they reduce the number of defects on their vehicles without necessarily incurring extra costs, but also they could actually reduce costs by reducing errors in manufacture. If auto manufacturers had adopted a purely focus-based approach to improvement over the years, we may now only be able to purchase either very cheap low-quality automobiles or very expensive high-quality automobiles. So, a permanent expansion of the efficient frontier is best achieved by overcoming trade-offs through improvements in operations practice.
Even trade-offs that seem to be inevitable can be reduced to some extent. For example, one of the decisions that any supermarket manager has to make is how many checkout positions to open at any time. If too many checkouts are opened then there will be times when the check- out staff do not have any customers to serve and will be idle. The customers, however, will have excellent service in terms of little or no waiting time. Conversely, if too few checkouts are opened, the staff will be working all the time but customers will have to wait in long queues.
There seems to be a direct trade-off between staff utilisation (and therefore cost) and customer waiting time (speed of service). Yet even the supermarket manager deciding how many check- outs to open can go some way to affecting the trade-off between customer waiting time and staff utilisation. The manager might, for example, allocate a number of ‘core’ staff to operate the checkouts but also arrange for those other staff who are performing other jobs in the supermarket to be trained and ‘on-call’ should demand suddenly increase. If the manager on duty sees a build-up of customers at the checkouts, these other staff could quickly be used to staff checkouts. By devising a flexible system of staff allocation, the manager can both improve customer service and keep staff utilisation high.
OPERATIONS PRINCIPLE An operation’s strategy improvement path can be described in terms of repositioning and/or overcoming its performance trade-offs.
Summary checklist
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Critical commentary
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Starting any discussion of strategy from a stakeholder perspective is far from undisputed. Using so many criteria is too complex. If one needs to dictate the criterion to be maximised by operations, what exactly would it be? In other words, how do we want performance to be measured? How do we want opera- tions to determine what is worthwhile versus what is not? It could also be argued 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, which undermines the core importance of value-seeking behaviour.•
Similarly, the idea that operations strategy could ever become the driver of a business’s overall strategy, and the associated concept of the resource-based view of the firm, are both problematic to some theo- rists. Business strategies and functional strategies were, for many years, seen as first market driven and second planned in a systematic and deliberative manner. So, it became almost axiomatic to see strat- egy as starting from a full understanding of market positioning. In fact, the main source of sustainable competitive advantage was seen as unequivocally associated with how a business positioned itself in its markets. Get the market proposition right and customers would respond by giving you business. Get it wrong and they would go to the competitors with a better offering. Strategy was seen as aligning the whole organisation to the market position that could achieve long-term profitable differentiation when compared to competitors. Functional strategies were simply a more detailed interpretation of this overall imperative. Furthermore, strategy must be something that could be planned and directed. If managers could not influence strategy, then how could business be anything other than a lottery?•
The idea that sustainable competitive advantage could come from the capabilities of one’s resources was a clear threat to the established position. Furthermore, the idea that strategies emerged, sometimes hap- hazardly and unpredictably over time, rather than were deliberate decisions taken by senior managers was also seemingly counterintuitive. Yet there is now considerable research evidence to support both these, once outrageous, propositions. However, widely practised approaches to developing operations strategies are still ignoring (or downplaying) the idea of resourced-based strategic advantage. For example, the business-model/operating-model idea is predominantly a ‘top-down’ philosophy that relegates operations capabilities to a ‘supporting’ rather than ‘driving’ role. The position we have taken in this chapter is one of blending some aspects of the traditional view with the more recent ideas. Nevertheless, it is important to understand that there are still different views on the very nature of strategic management.SUMMARY CHECKLIST
Does the operation have a fully articulated operations strategy?
Does it include a vision for the role and contribution of the operations function?
Does operations strategy take significant stakeholders into account?
What position on the Hayes and Wheelwright Four-Stage Model are your operations?
Is there a recognised process for translating business strategy ‘top-down’ into operations strategy?
Does operations strategy demonstrate both correspondence and coherence with business strategy?
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Does the organisation’s business model fit with its operating model?
Are the operation’s performance objectives fully articulated?
Are performance objectives understood in terms of whether they are order-winners or qualifiers?
Do different parts of the operation (probably producing different products or services) have their own relative priority of performance objectives that reflect their possibly different competitive positions?
Is there a recognised process for bottom-up communication on strategic issues?
Are the main strategic decisions that shape operations resources fully identified?
Is the idea of operations-based capabilities fully understood?
What capabilities does the operation currently possess?
Are these operations and/or resources scarce, imperfectly mobile, imperfectly imitable or imperfectly substitutable?
Are the logical links established between what the market requires (in terms of performance objectives) and what capabilities an operation possesses (in terms of the major strategic decision areas)?
Where would you put the operation in terms of Figure 2.11, which describes the ‘line of fit’ between market requirements and operations capabilities?
Have the key trade-offs for the operation been identified?
What combination of repositioning, in order to change the nature of trade-offs and overcoming the trade-offs themselves, is going to be used to improve overall operations performance?
Case study: IKEA looks to the future
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For decades, IKEA has been one of the most successful retail operations in the world, with much of its success founded on how it organises its design, supply and retail service operations. With over 400 giant stores in 49 coun- tries, IKEA has managed to develop its own standardised way of selling furniture. Its so-called ‘big box’ formula has driven IKEA to the global number one position in furniture retailing. ‘Big box’ because the traditional IKEA store is a vast blue-and-yellow maze of a showroom (on average around 25,000 square metres) where customers often spend around two hours – far longer than in rival furniture retailers. This is because of the way it organises its store operations. IKEA’s philosophy goes back to the original business, started in the 1950s in Sweden by the late Ing- var Kamprad. He was selling furniture through a catalogue operation, and because customers wanted to see some of his furniture, he built a showroom on the outskirts of Stock- holm and set the furniture out as it would be in a domes- tic setting. Also, instead of moving the furniture from the warehouse to the showroom area, he asked customers to pick the furniture up themselves from the warehouse. This approach became fundamental to IKEA’s ethos – what has been called the ‘we do our part you do yours’ approach.
Ikea’s ‘big box’ stores
Ikea offers a wide range of Scandinavian designs at afforda- ble prices, usually stored and sold as a ‘flat pack’, which the customer assembles at home. ‘It was an entirely new con- cept, and it drove the firm’s success’, says Patrick O'Brien, Retail Research Director at retail consultancy GlobalData.
‘But it wasn't just what IKEA was selling that was differ- ent, but how it was selling it.’ The stores were located and designed around one simple idea – that finding the store, parking, moving through the store itself, and ordering and picking up goods should be simple, smooth and prob- lem-free. Catalogues are available at the entrance to each store showing product details and illustrations. For young children, there is a supervised children’s play area, a small cinema, a parent and baby room and toilets, so parents can leave their children in the supervised play area for a time.
Parents are recalled via the loudspeaker system if the child has any problems. Customers may also borrow pushchairs to keep their children with them.
Parts of the showroom are set out in ‘room settings’, while other parts show similar products together, so that customers can make comparisons. Given the volume of customers, there are relatively few staff in the stores. IKEA says it likes to allow customers to make up their own minds.
If advice is needed, ‘information points’ have staff who can help. Every piece of furniture carries a ticket indicating its location in the warehouse from where it can be collected.
displayed that can be picked directly, after which they pass through the self-service warehouse where they can pick up the items they viewed in the showroom. Finally, customers pay at the checkouts, where a conveyor belt moves pur- chases up to the checkout staff. The exit area has service points and a large loading area allowing customers to bring their cars from the car park and load their purchases. With- in the store a restaurant serves, among other things, IKEA’s famous Swedish meatballs. IKEA’s fans say they can make a visit to the store a real ‘day out’.
But not everyone is a fan
Yet not all customers (even those who come back time after time) are entirely happy with the traditional IKEA retail experience. Complaints include:
•
It can be a long drive to reach one of their stores (unless you are ‘lucky’ enough to live near one).•
The long ‘maze-like’ journey that customers are ‘encour- aged’ to take through the store is too prescriptive.•
There are too few customer-facing staff in the store.•
There are long queues at some points in the store, espe- cially at checkouts, and at busy times such as weekends.•
Customers have to locate, pick off the shelves and trans- port sometimes heavy products to the checkouts.•
IKEA designs can be ‘bland’ (or ‘clean and aesthetically pleasing’, depending on your taste).•
The furniture has to be assembled once you get it home, and the instructions are confusing.Although many are
However, the impressive growth and success of IKEA over the years indicates that the company is doing many things right. Among the reasons customers give for shopping at IKEA are the following: