Strategic Operations Management.
Strategic Operations Management
In today's fiercely competitive environment many companies that use only these tools are merely keeping pace with the competition. Many companies are no longer viewing environmental management solely as a cost, looking for new competitive advantages, focused on achieving compliance. Most of them now are also developing long-range strategies that linking the organizations to its external environment. As we know, strategy is a field that has been extensively studied, mainly due to its captivating interest to Chief Executives and to others in central management. In military matters, strategy has been around for many years - for instance, Caesar's strategy for driving a wedge of his infantry through enemy ranks, Rommel's "pincer" strategy, and the successful British "search and destroy" strategy used to counter the Communist insurgency in (then) Malaya illustrate the military notion of strategy being the means employed to achieve a goal. And yet, Toyota, GM, BMW, Volvo, Hilton, and Motel 6 have survived and achieved a fair degree of success (GM's recent problems notwithstanding). In fact, over a period of time, organizations may come to depend upon the activities on which their past strategies were based to be the driving force for their strategies of the future. Pirelli and Starbucks are good examples when strategy helped companies to become successful.
However, let's first analyze theoretical background of Strategic Operations field. Production, in its general definition, is the creation of goods and services. Operation, on the other hand, is a set of organized activities that transform various inputs into goods and services, or outputs.
The outputs could be in the form of tangible goods, such as a piece of shirt in the case of General Electric, or in the form of intangible service, an example of which would be a financial advisor providing financial consultancy to a client. In any case the goods or products must fulfill the needs and wants of the customers.
Operations management, in short, is the use of various management processes and techniques to increase the value and worth of the goods or services produced by an organization in order to fulfill the requirements of both internal and external customers, at an acceptable cost. It actually manages, in a coherent and systematic manner, a complex wed of different operations, systems and processes, in the most economical and efficient ways as illustrated in the following simple model:
Operation management, hence, is an integral function of any organization. In a manufacturing concern, it would be the management of the production division that produces the end products. For service-oriented companies, it is less obvious but an example would be the management of staff and processes in a commercial bank that provides financial services to it clients. By managing resources effectively to transform inputs into outputs, operations management strikes a balance between strategic targets, such as increasing output by 10% within 2 years, and operational capabilities.
By efficiently and effectively transforming inputs into outputs that meets customers needs and wants, operations management ensures that the company strategies are met.
The strategic planning process that may be applied is strongly influenced by the following elements:
. Micro-environments-the global markets are sensitive to the micro-environment factors. These factors include politics, social, economic, legal, technology, environments and commercial. Some examples would be government stability, income distribution, waste disposal policy, inflation, employment law, etc.
2. Resources and Competence-the strengths and weaknesses of the company, the resources available and the competency of the staff and system ...
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By efficiently and effectively transforming inputs into outputs that meets customers needs and wants, operations management ensures that the company strategies are met.
The strategic planning process that may be applied is strongly influenced by the following elements:
. Micro-environments-the global markets are sensitive to the micro-environment factors. These factors include politics, social, economic, legal, technology, environments and commercial. Some examples would be government stability, income distribution, waste disposal policy, inflation, employment law, etc.
2. Resources and Competence-the strengths and weaknesses of the company, the resources available and the competency of the staff and system would determine how the company make strategic choices.
3. Expectations and Purposes-expectations of different stakeholder or cultural influences within the company dictate the objective of the company.
4. Demand of the products.
All these factors influence the strategic choices of the company. The company may choose to differentiate by making its products superior or different from its competitors. It may want to increase its market share by reducing price but enjoying a larger slice of the pie. Or it may simply have no other option but to response and adjust to the slightest of markets whims.
Often, in the current highly competitive and at times cut-throat global business environments, companies often have to continuously strive to cut a competitive edge over their competitors, neutralize competitive threats, exploit opportunities and strengths while avoiding weaknesses, and stay many steps ahead. Whatever strategic choices a company chooses to adopt, it involves changing its transformation process and system to adapt to the new targets. It may have to increase productivity and efficiency, maximize limited resources, re-engineer production processes to redesign and enhance products to even or seize the advantage in the playing fields.
Operation management helps to maintain the delicate cycle of supply and demand partnership between the organization and customers by reconciling resources and operations system to meet the company's strategic objectives. Hence the purposes of the operation management are to make an organization better, cheaper and faster in response to strategic objectives of the organization that are dependent on a variety of external and internal influences.
To make a product more superior than those of the competitors, lowest in costs in the markets and more responsive, with shorter lead-time, to change in market variations, operations managers specifically employ the best operation systems and processes to transform limited resource into the finished products determined by market and external forces.
RESOURCES
It is the responsibility of the operations management to interpret marketplace needs into realistic output objectives and define the resources needed.
Resources needed to transform into finished products can generally classified as follows:
. Equipment-machinery, air-conditioners, office furniture, transportation vehicles, etc
2. Materials-raw materials
3. People-employees and staff
4. Fixed Assets-factory premises, offices, warehouses, etc
5. Systems-production system, operation processes, etc
6. Finance-budgets, cash flows, wages for employees, etc
OUTPUT
This refers to the final products transformed through the operation process. These products must meet the needs and wants of the customers.
PROCESS
The typical roles of operations management are to plan, organize, staff, influence and control the operations process. Specifically, operations managements:
. Turns company strategy into reality
2. Serves as tools to monitor and control processes
3. Maximize resources
4. Ensure customers needs are met
5. Plan and execute continuous improvement
6. Means of communication between different functions and departments
In the current era of doing business, operations management has expanded its boundaries and not simply confined to efficient and effective management of resources, production, capability, quality, process or customers' needs. In addition to the core objectives of operations management, the following areas:
* Maintenance. To achieve high utilization of facility and equipment by effective preventive maintenance and prompt repair of facility and equipment. Decision must be made regarding desired levels of reliability and stability. Preventive systems must be established to maintain reliability and stability.
* Creation of value for stakeholders (customers, employers, shareholders)
* Occupational safety and health-in the current production environment, occupational safety and health must be built into the processes and system. Costs of accidents or even near misses can be translated into lost productivity and unwarranted costs. New statutory laws require employers to self-regulate to ensure the safety and health of the employees. Some of these laws include Factory 7 Machinery Act 1967, Occupational Safety and Health Act 1994, Fire Services Act & Regulation and Environmental Quality Act 1974.
* Community services-to re-channel some of the profits back to the local community, for example donations to the needy, setting up of scholarships, etc.
The objectives of operation management are to make the product better, cheaper and faster through differentiation, cost leadership and response. If a product is cheaper than the competitors but cannot be marketed in time, opportunity is lost. If the product is cheap but does not satisfy customers requirement, customers will not buy it. A cheap and superior product, if takes time to manufacture, will be obsolete when marketed.
And now I would like to analyze experience of Starbucks and GE and why those companies are so successful?
Starbucks key of success is the ability to change the concept consumers had about drinking coffee. With more than 6000 outlets across the world (2003 numbers) and the intention of increasing them in the near future and considering international expansion, the company has transformed coffee into a lifestyle accessory with as much elegance as the latest fashion. However, their way to success was not so easy and if we go back in 1971, we will find that coffee didn't look like it was a great business. There were no signs of getting better, either. Coffee consumption in the United States had peaked in the 1960s, but by 1971 it was on the decline. Most Americans drank something called "coffee" that came ground up very finely in vacuum-sealed tins. Nevertheless, there was appeared tiny Seattle based chain with innovative idea of how to do business that in a few years changed the vision about the process of drinking coffee not only in USA but worldwide.
To finance the ambitious growth plans, Starbucks adopted a capital intensive strategy. In order to maintain its quality and service standard it choose to own majority of its stores and raised capital by selling shares at the stock market. Starbucks opted for licensing rather than franchising its stores to be able to control all its operations. According to Johnson & Scholes (Exploring Corporate Strategy, 6th editions, 2002, pp504 - 505) the type of strategy pursued regarding capital is important since this shifts the mix of cost and value needed to support a competitive product or service. The book also highlights the reason why sources of capital are important to a firm. The cost of capital could be a major cost driver and varies with source. Both equity and debt financing have different levels of risk involved, therefore it's an important strategic consideration to choose equity financing as opposed to bank loans.
Originally Starbucks' strategy in store locations was to expand in urban areas, clustering in prime location. First of all, they started in the major urban areas. Secondly, they clustered stores in the prime locations, placing outlets across one another in the same block, which allowed them to maximize their market share in the areas with highest volume potential, as well as building Starbucks a regional reputation. Starbucks is very aggressive in implementing its location strategy and uses lobbying to change city regulations in order to get the best places in town. Though Starbucks locates its store in affluent areas only, low-profiles regions and rural areas are demanding for Starbucks to be placed there as a status symbol, which will upgrade areas' image. Recently Starbucks started licensing its name to other coffee houses and restaurants in order to further penetrate various regions. Under these licensing agreements, local coffee houses get to keep their locally established names, but all coffee products are made using Starbucks coffee. In this way, Starbucks had made the agreement with Albertson's Inc. to open more than 100 Starbucks coffee bars in Albertson's supermarkets across the US.
Recognized as one the world's leading cable manufacturers, Pirelli has stayed ahead of the pack by anticipating changes in the business. Based in Milan, Italy, the 130-year-old corporation is in fact the top player of the Energy Cables and Systems market, holding ten percent market share. Pirelli is also a leading provider of telecommunications cables and systems.
One of cornerstones of Pirelli success was their e-commerce strategy. In 2000-2003 Pirelli group invested 2 billion dollars into the development of extremely high transmission capacity optical elements and systems. Company uses the speed and flexibility to both manage internal processes and develop innovative businesses. The company is facilitated in this by investments already made in recent years to create one of the most advanced internal networks in Europe. A company
that uses the speed and flexibility of the Network to both manage internal processes and develop innovative businesses. The company is facilitated in this by investments already made in recent years to create one of the most advanced internal networks in Europe, for which it received the Gartner Group's prestigious EIT award for Excellence in Information Technology. "Internet is an opportunity to radically transform all company processes", said Marco Tronchetti Provera, CEO of Pirelli Group, "and this strategic choice confirms the Group's firm intent to operate as a leader in the world of hi-tech and the new economy, with the enhancement of competitive-ness and the creation of value for the shareholders well within its sights"
So, we see that in the current jittery global market that could easily throw ups a tantrum for even slight political agitation or economic hiccups, effective and efficient management of operations in tune with the changing business climates is crucial in reconciling resources and operation process to maintain the delicate cycle of supply and demand partnership between organizations and the global customers. Great marketing efforts that create demand is nothing if the process cannot churn out the products. On the other hand, a dip in demand due to competition will result in the demise of an organization if it cannot fine-tune its operations to be more competitive. Hence operations management is the core ingredient in any organization.
Bibliography
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6. Suzanne Carpenter (Kellogg School of Management, 2001) and David Kletter (Booz Allen Hamilton, 2001)
7. Gregory Carpenter, Northwestern University's Kellogg School of Management
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9. www.pirelli.com, 2003
0. www.starbucks.com, 2003
